Can BSNL and MTNL be turned around?

Amit Gupta, Principal Analyst, Ovum

UK: While the Indian telecom industry is experiencing high growth and private sector operators are posting impressive results, performance of the two state owned operators -– namely, BSNL and MTNL -– continues to decline.

As state owned entities, these two operators get preferential treatment from the government. Nevertheless, they fail to take advantage of such a treatment. One of the recent examples is dismal uptake of 3G service launched by these two, despite being the only operators in India with 3G spectrum.

Speculations around divestment in these companies and their merger have been rife for many years. While the current government has not expressed any intention to further divest in MTNL, it has renewed its efforts to divest 10% stake in BSNL. The government plans to explore a possibility of merging BSNL and MTNL after divestment in the former is completed.

BSNL’s management and the government believe that divestment will help the company raise capital required for its long-term growth and turn around. BSNL has also laid-out a strategy to reverse the company’s declining performance. However, cure of these companies’ malaise require different medicine.

Political intervention, a bureaucratic culture and pre-liberalization mindset are the root causes for BSNL and MTNL’s poor performance. The inadequacy of a divestment solution to address these weaknesses is evidenced in the case of MTNL, which has been a listed company for many years but nonetheless continues to see declining performance.

Potential investors would need control over management and decision-making in order to turn these companies around, which is impossible while the government owns a majority stake.

Privatization will provide potential investors the required control. Even with such a control, the challenge to transform BSNL and MTNL from state owned sick companies into customer centric service providers will be daunting. Due to the size and complexity of these companies, it won’t be possible for an outsider to manage change without the cooperation of the existing employees.

At the same time, investors will have to cut the flab from a bloated workforce. Employees of these companies are likely to be strongly entrenched with a keen sense of internal loyalty, so achieving both objectives will require time as well as efforts.

Despite these challenges, privatization is the only economically viable option. Competition in the Indian telecom industry will become more intense. With their culture and mindset, along with the political baggage they come with, BSNL and MTNL as state-owned companies cannot face such a competition.

The realities of coalition politics will prohibit the Indian government from taking the radical and unpopular decision of privatizing these companies. However, if political will is there, it is still possible to save these companies from their eventual demise.