Gloom was the prevailing theme at
the press conference called by the Cellular Operators Association
of India on August 19, 2002. All the suits on stage-with the exception
of MTNL's J.M. Mishra who turned up in shirt-sleeves-reeled off
numbers and factoids painting an extremely dismal picture of the
sector. It was left to Bharti Enterprises CEO, Sunil Mittal, to
remind his brethren that the purpose of the meet was to celebrate
Mittal's Bharti Televentures is a listed company-a rarity among
Indian telcos-and that may explain his reluctance to admit that
the sector is in the throes of a crisis. A little prodding, and
he confesses that "on an accumulated basis, no cellular service(s)
company has a positive cash flow".
The numbers paint a bleak
picture: Telcos have invested close to $6 billion (Rs 29,400 crore)
in 51 cellular networks of which none has yet-some have been around
seven years now-become self-financing; the sector's accumulated
losses have increased from Rs 6,929 crore in 2000-01 to Rs 7,719
in 2001-02 and in 2001-02, the losses are expected to increase by
an additional Rs 1,000 crore; and Idea Cellular and Bharti Televentures,
two of the biggest players in the industry have totted up losses
of Rs 212 crore and Rs 140 crore. Says Hutchison Telecom Chief Asim
Ghosh, ''The entire industry is profit-negative and cash flow-negative
Subscriber-base apart, the telecom industry has little to boast.
COAI Director-General T.V. Ramachandran claims that while airtime
rates in India, at an average of Rs 1.99 a minute, are the lowest
in the world, ''the licence fee burden remains amongst the highest
in the world''. Cellular telephony companies burn between 35 per
cent and 42 per cent of their revenues on licence fee, interconnect
and spectrum-usage charges, and service tax. For all that, they
get a mere 6.2 Mhz of bandwidth. Companies in the two biggest cellular
markets in India have recently wrangled a minor increase-they now
get 8Mhz. According to a recent survey conducted by COAI, the average
spectrum allocation for 114 cellular operators across 31 countries
is 17 Mhz. And China's two cellular companies do not pay licence
fees or service tax and share 45 Mhz of spectrum between them.
The lack of bandwidth has an effect on the capital expenditure
of telcos-they need to spend more on capacity and on quality. And
in Delhi and Mumbai, despite the recent respite, no amount of investment
can improve the situation. ''My towers are within 300 metres of
each other," says Ghosh (Hutch has an operation in each of
the cities). ''They can't get any closer.''
The government's argument is that spectrum, a national resource,
can't be frittered away. We buy that; only, it will then have to
limit the number of mobile telephony companies. Instead, its decision
to allow companies with fixed-line licences to provide mobile services
will increase the number of players.
The prevailing interconnect regime, too, is stacked against cellular
service companies. BSNL charges cellular companies Rs 1.20 a minute
for calls routed to its fixed-line network; the companies providing
'limited mobile' services through Wireless-in-Local-Loop (WiLL)
on CDMA won't have to pay anything. Worse, cellular companies have
to pay the interconnect charges for calls made from their networks
to a WiLL-on-CDMA one; calls in the reverse direction don't attract
these charges. Says AT&T Managing Director Virat Bhatia, "Management
of the competitive landscape between cellular and limited mobility,
non discriminatory cost-based interconnection, and allocation of
scarce resources (spectrum) are the three biggest sources of threat
to the cellular sector.'' The industry is hoping the Supreme Court's
September 6 ruling will address some of these issues by preventing
the use of will for limited mobility. If it doesn't, some of India's
ailing cellular service companies could well go out of business.
How long will the government continue to sustain
UTI, IFCI, and IDBI, and at what cost?
|M. Damodaran, Chairman, UTI: In 1998,
the GoI effected a Rs 3,300 crore bailout of UTI's US-64 scheme;
in 2001, the government paid Rs 300 crore to UTI, again to resuscitate
the US-64 scheme; and in 2002, it has engineered a Rs 500 crore
recapitalisation package to help the Trust meet the shortfall
in its assured return (Monthly Income) schemes.
The otherwise genial V.P. Singh,
the Chairman and managing Director of the beleaguered Industrial
Finance Corporation of India (IFCI), is angry. This correspondent
has just used the word bail-out in the context of the Rs 1,000 crore
recapitalisation exercise sanctioned by the government in August
2001-money that has just flown into the institutions coffers. ''Bail-out
is a negative word,'' gripes Singh. ''I don't think the government
is bailing us out; it is only playing its role as a stakeholder
in IFCI.'' Then, to bolster his argument he refers to banks and
financial institutions in Thailand, Korea, and Indonesia that were
resuscitated by their respective governments in the wake of the
South-East Asian crisis. ''Today,'' he exults, ''they are back in
Only, there are people like Ashwani Puri, the head of consulting
firm PricewaterhouseCooper's corporate finance practice, who believe
nothing can help IFCI. Puri's argument: IFCI lacks ''a sustainable
business model'', the requisite finances to tide over its current
solvency crisis, and boasts a ''huge asset-liability mismatch''.
Then, there's the minor fact of the institution still paying a whopping
17.6 per cent interest on some bonds.
|P.P. Vohra, Chairman, IDBI: The institution
has asked RBI to extend a Rs 1,400 crore, 50-year loan to help
it raise its capital adequacy ratio to the prescribed levels.
IFCI isn't the only one. On July 31, 2002, the government cleared
a Rs 500 crore recapitalisation package for the Unit Trust of India
(UTI). The details: on July 2, 2001, the UTI froze transactions
in its flagship US-64 scheme. Courtesy its poor investments, the
fund's net asset value (NAV) had dipped to Rs 8-levels. The huge
public outcry that ensued forced the government to step in, and
the institution announced that it would repurchase the units at
an assured price. But with the NAV of the scheme still far below
the assured repurchase price, the government had to step in to meet
the shortfall. There could be worse to follow: between October 2002
and March 2006, 21 schemes will mature and UTI will need Rs 13,739
crore to meet its repurchase commitments for US-64 units. If the
government doesn't step in, the fund may have to liquidate its equity
holdings (valued at Rs 46,396 crore in June, 2002). That would be
disastrous for a market already at the nadir of sentiment.
|V.P. Singh, Chairman, IFCI: In 2001,
when IFCI defaulted on foreign debt of $450 million the government
engineered a Rs 1,000 crore recapitalisation package
UTI's problems stem from the US-64 and its choice of equities.
And, IFCI's and IDBI's (it too has asked for a hand-out) from their
choice of debt: to prevent suspect debts from turning into Non Performing
Assets, these institutions have no option but to throw good money
after bad to keep the debt, ''alive''. Report after report, commissioned
by the government, recommends that the way out for these institutions
is to become a bank (like ICICI did with a reverse merger with ICICI
Bank) so as to access funds cheap. Only, the cost of doing so will
be much too high: to meet the statutory capital adequacy norms for
banks, IDBI will have to spend anywhere between Rs 22,000 crore
and Rs 25,000 crore.
The government has a ready defence: most bail-outs have been routed
through healthier (again, government-owned) financial institutions
and banks. Quite apart from compromising the interests of shareholders
and investors (who are the key sources of funds for public financial
institutions) this pooled approach to bailouts may pull healthier
financial institutions into the morass along with the sick ones.
Why does the government continue to do so? No one quite knows, but
our guess is, it is another hang-over from India's socialist past.
Bicycles For The Ear
A West Bengal NGO boasts a unique model to bring
telephony to the masses.
1 targets: Locals armed with will mobiles, and on bicycles will
function as public call offices in 5,000 remote villages across
Phase 2 targets: Every 10 villages in a district will have an
internet kiosk and a Light Commercial Vehicle (LCV). The kiosk will
function as the information highway; the LCV will serve as the actual
transactional highway. Revenues will come from a charge on calls,
commissions on transactions, and rural distribution services rendered
to companies .
This isn't a flight of fancy, but the business model of Kolkata-based
Gramin Sanchar Seva Organisation (GRASSO). The NGO believes it can
do in WB what Grameen Phone did in Bangladesh-use connectivity to
improve lives and livelihoods. Watch this space.