Is it too late to privatize MTNL and BSNL?

Both state-run telcos were created to increase teledensity in urban and rural India, but with this aim achieved and bottomlines plummeting, the government will find it tough to revive the two entities.

Last month, India's communications minister Kapil Sibal wrote to Prime Minister Manmohan Singh asking for the formation of a special committee to look into the revival of state-run telcos Bharat Sanchar Nigam (BSNL) and Mahanagar Telephone Nigam (MTNL).

In the letter, Sibal drew Singh's attention to his expectation that MTNL's net worth may be completely eroded in 2013-14 while BSNL is likely to post a loss of around INR 100 billion (US$1.86 billion) in the 2012-13 fiscal year. The government has convened a group of ministers to recommend possible measures for the revival of the two state-controlled telecom companies.

In fact, MTNL has asked consultant Deloitte Touche Tohmatsu to recommend ways in which its fortunes can be revived. According to news reports, Deloitte has been asked to submit a report of recommendations by July 2013, which will be taken up by an internal committee comprising of Department of Telecommunications (DoT) officials and MTNL executives.

Over a decade back, when the Indian government was in a privatization overdrive, there was a lot of talk of privatizing BSNL and MTNL. Sometime around the end of 2002, the government decided that both MTNL and BSNL would not be sold off to the private sector.

Around that time, MTNL had been given the Navratna, or "nine jewels", status by the Indian government. Navratna was the title given by the Indian government to public sector undertakings (PSUs) that have comparative advantages, giving them greater autonomy to compete in the global market so that they could emerge as global giants. To retain the coveted Navratna status, the PSU has to be a profit-making company. In case it makes losses for two consecutive years, the company loses its Navratna tag.

MTNL, which operates in Delhi and Mumbai, has been reporting losses since 2009. The telco lost its Navratna status after posting losses for more than two consecutive years. Specifically, it had posted a loss of INR 26.1 billion (US$484 million) for fiscal year 2009-10, INR 28 billion (US$520 million) for 2010-11, and INR 41 billion (US$760 million) for 2011-12.

In January 2013, MTNL hired property consultants DTZ and Feedback Infrastructure Services to help it monetize some 780,000 square feet of office space and land in Mumbai and Delhi.

As for BSNL, another report said it is expected to lay off its employees by offering voluntary retirement.

If the government bails out MTNL and BSNL, the private players are likely to cry foul. Several private players are heavily in debt and their margins have been under pressure for quite sometime now.

Kamlesh Bhatia, research director at Gartner, is of the view that market forces have done their job and communication has been made available to a vast majority of people in the country. Therefore, the two telecom companies need not be government-owned.

"Today, the role of BSNL and MTNL is diluted," Bhatia said, adding the government needs to now change their role. "There is need for development around communication infrastructure," he added.

Privatization leads to both innovation and increase in efficiency. But is today a good time to privatize MTNL and BSNL? The industry is very different from what it was a decade ago. The industry is facing several challenges such as falling average revenue per user (ARPU), fierce competition, rising debts, drooping profits and low investor interest. There is every possibility that the two PSU may go for a song, if the government decides to privatize it in the near future.

"The government needs to take a broader view. It needs to promote innovation in the telecom industry," Bhatia said. According to him, privatization is still an option for the government.

It would be interesting to see what Deloitte recommends in its report.