The decision to whittle down the size of BSNLs tender for mobile phone equipment could prove costly for the company.A demonstration by
THE lone publicly owned nationwide mobile phone operator, Bharat Sanchar Nigam Ltd. (BSNL), is caught in the crossfire of a factional feud within the Dravida Munnetra Kazhagam (DMK). Two months after taking over as Union Minister for Communications and Information Technology, A. Raja announced that he was reviewing BSNLs tender for procuring equipment for 45.5 million lines. He said the lowest bidder (Ericsson) had quoted a price that was about Rs.1,000 more per line compared to the price at which Mahanagar Telephone Nigam Ltd. sourced its equipment. He argued that BSNL would unnecessarily end up paying as much as Rs.10,000 crore more. Raja sent a note asking the company not to issue the advance purchase order (APO). He also asked it to renegotiate with the lowest bidder and restrict the APO to the minimum possible quantity and then go in for a fresh tender.
Rajas move would normally have been hailed as done in the best interest of the company under his charge. But when considered in the light of two sets of issues, a different assessment of his intent would emerge. The first relates to the timing of his action, which came at a time when BSNL was facing a severe supply constraint even as the growth of the Indian mobile market was at its peak.
In 2006-07, the mobile market in India grew at close to 50 per cent compared to the previous year, with the total number of lines touching 206 million at the end of March 2007. BSNLs own performance mirrored this high growth story. It was providing new connections at the rate of about 15-20 million a month until March 2007 when the capacity constraint caught up with it. BSNLs market share fell even as the market continued to grow.
Between March and June, when the market for mobile phone connections grew at 11.49 per cent and when the number of connections increased from 166 million to 185 million, BSNL could add only a little over a million connections. In this period, the number of cell phone connections increased by 19 million, of which the top three private operators Bharti, Vodafone-Essar and Reliance Infocomm accounted for nearly 13 million.
In effect, the three private companies accounted for more than two-thirds of all new connections added in the three-month period. BSNLs market share dipped from 18.65 per cent in March to 17.31 per cent in June. BSNL, which was earlier No. 2 in the GSM segment and No.3 in the overall mobile phone market (CDMA+GSM), now slipped to the third place in the GSM space and to the fourth place in the overall mobile telephony business.
The other aspect of Rajas intervention was the perception that BSNL was the victim of factional squabbles within the DMK. It was pointed out that Raja was settling scores with his predecessor, Dayanidhi Maran. However, a more balanced assessment of Marans track record would suggest that he too had played a role in delaying BSNLs expansion plans. The tender was floated in March 2006 but was delayed because Motorola, which was disqualified on technical grounds, challenged it in court. Raja took over from Maran just before the APO was to be issued to Ericsson.
In hindsight, Rajas review had come at an inopportune moment for the company. BSNL employees felt that the review would prove too costly for the company. In fact, the widespread resentment in the organisation resulted in a one-day strike by all sections of the companys workforce on July 11. The Joint Forum of BSNL employees demanded that the size of the original tender be restored. Warning that the July 11 action was only a wake-up call, it threatened to call for an indefinite strike to save BSNL.
A senior official in Chennai Telephones said: Our customer service centres were besieged by anxious customers but we had to turn them away. Our senior executives had to watch helplessly as customers turned to private operators for mobile phone connections.
To make matters worse, the BSNL board decided to halve the size of the contract from 45.5 million lines to 22.75 million lines. Even this is to be implemented in two phases 17.5 million lines (14 million second generation, or 2G, and 3.5 million third generation, or 3G) in the first phase and 5.25 million in the second phase. A senior BSNL executive said a smaller order made little sense. For one, a larger order would have given the company greater leeway in negotiating a better price with the suppliers and would have helped avoid legacy issues arising out of fragmented contracts with different suppliers. According to sources in BSNL, although Ericsson has submitted bank guarantees, it has not yet accepted the offer made by BSNL. Once it does, an APO will be issued to the Nokia-Siemens combine for the supply of 4.3 million lines. In the short term, until the 3G policy is worked out, BSNL can actually augment capacity only to the tune of 14 million lines.
The public sector unit is also reported to have knocked down Ericssons earlier offer price of $107 per line to $80 per line. However, it appears that this reduction achieved by Raja is illusory. The original price quoted by Ericsson was for equipment meant for 2G and 3G lines. The value of the 3G lines is considerably higher, because it is of more recent vintage. It appears that the revised price applies to only the 2G portion of the order, that is, 14 million of the first tranche amounting to 17.5 million lines.
The unions wanted the company to award the contract for 45.5 million as was envisaged in the initial tender. The BSNL unions also objected to Rajas logic of stalling the roll out of BSNLs 3G capacity. The 3G networks are expected to enable mobile phone companies to offer greater value-added services. Raja had argued that since the government had not yet formulated a 3G policy and had not yet allocated spectrum for 3G services, there was no point in BSNL installing equipment for such services immediately. However, the unions, chastened by the shock of being overtaken by private operators in recent months, fear that private players will have a head start in the 3G space too if BSNL does not deploy its capacity for such services early. Raja said the strike was unwarranted. He claimed that on the eve of the strike he had agreed to meet almost all their demands.
However, V.A.N. Namboodiri, convener of the Joint Forum, said that assurances given by the Department of Telecommunications (DoT) were very vague. He pointed out that the employees made no economic demands. He observed that Raja only offered homilies about his concern for BSNL and a promise of serious efforts to ensure that BSNL is fully prepared to face the competition. In short, after the disastrous slide in the recent months, BSNL employees were aghast that there were no assurances about any immediate measures to augment capacity. We had no option but to strike work, he said.
Namboodiri said Rajas promise to issue a fresh tender for 65-75 million lines in the next two months was not credible. What is the need for another tender? he asked. He said that a contract for 50 million lines could have been issued right away. This, he said, would have been consistent with BSNLs tendering rules. With or without tendering, BSNL must make direct purchases of lines, he said. He pointed out that this could have been made on the basis of tenders floated earlier by the company.
Namboodiri disagrees with Rajas fundamental reasoning for halving the size of the contract because it rests on a comparison of the BSNLs tender with MTNLs earlier tender. He argues that they are not comparable because the costlier 3G lines accounted for only a quarter of the size of the MTNL tender offer, whereas half of the BSNL order was meant for 3G lines. Obviously, making a per line cost comparison between the two tenders is flawed, he said. Moreover, he pointed out the BSNL tender included many sub-systems, which were mainly meant to provide higher levels of value-added services. Comparing MTNLs service, which is confined to Delhi and Mumbai, to BSNLs, which has nationwide coverage across diverse topographies, would obviously result in a different set of costs. In any case, there were reports that the tender evaluation committee had scaled down the price offered by Ericsson before Raja intervened. Namboodiri also pointed out that the actual cost, spread over the three phases of the original project for 45.5 million lines, would have been closer to Rs.3,500 per line.
Although the value of a tender is important, it is not everything. In most other industries, companies that lose market share can hope to regain ground subsequently. However, this is not easy in the case of the telecom business for two reasons. Mobile customers are generally loath to changing operators every now and then because this means changing telephone numbers. But more important, if prospective customers feel that a company is unreliable because of its inability to enhance network capacity, they will flock to other service providers. This is what has happened in BSNLs case.
Indeed, if the equipment comes late BSNL may well find no takers for its service, resulting in a greater loss. Moreover, BSNLs earlier advantage of maintaining a presence across the country even in areas with low penetration of mobile telephony is fast disappearing as private operators have expanded their networks into these areas. Thus, BSNLs main USP (unique selling point) of offering the cheapest price with the best billing integrity amounts to nothing if the network keeps hitting capacity roadblocks every now and then.
In response to the innuendo that he was responsible for the tender fiasco, Dayanidhi Maran wrote to the Prime Minister seeking an inquiry into attempts by a non-resident Indian businessman to tarnish my name, plant doubts in the minds of the public regarding my integrity and the ulterior motive to destroy BSNL. He said that as a Minister, it was always my practice to stay out of the tendering process of not only BSNL but also MTNL. The tender, he maintained, was finalised by the BSNL board.
However, a more objective assessment of Marans track record would still require knowing why a tender floated during his tenure took so long to fructify. A report prepared by the Comptroller and Auditor-General (CAG) has made a severe indictment of the BSNL management, of which Maran, in all fairness, must at least bear a significant part of the responsibility. The CAG (Report 10 of 2007) observed that although the BSNL board initiated a major expansion project amounting to 64.1 million lines in January 2005, very little progress was made even though the project was to be completed by the end of 2007. But these delays, when seen in the context of other acts of omission and commission during the Maran tenure, were only part of the general scheme to rein in the telecom PSUs.
It was with great fanfare that Maran launched BSNLs OneIndia Plan, which lowered landline tariffs substantially. However, the benefits went disproportionately in favour of subscribers making long distance calls. The steep reduction in tariffs was justified by Maran on the grounds that this would be compensated by the increase in volume (minutes of usage).
It is evident that the scheme affected BSNLs profitability adversely. Meanwhile, another front was opened in the policy-led assault on BSNL. The lowering of the Access Deficit Charge (ADC) applicable on tariffs on non-landline calls, which was effectively meant for subsidising BSNLs operations in rural areas, was another aspect of this game plan. The ADC is to be eliminated in 2008, which will put BSNL on the road to ruin. It was also during Marans tenure that several private operators landed international calls in India but masqueraded them as locally originating calls in order to avoid paying ADC charges. They paid a paltry fine for these flagrant violations of licence conditions (Frontline, December 18, 2006, and March 26, 2005).
On the face of it, and this has been enhanced by the nature of the media coverage of Marans virtual dismissal from the Union Cabinet, it appears that Maran and Raja held diametrically opposed views on what to do with BSNL. Nothing could be farther from the truth. Indeed, it would appear that there is more continuity than change in the matter of how Raja handles the biggest company under his charge.