Caught between a government that wants to wash its hands off business, and a private sector where commercial ends matter over social concerns, India’s IT and telecom PSUs are seeing tough times. Gaurav Patra & Shipra Arora analyse this segment, and also have details on what each PSU in this space is up to

The world over, the 1980s signalled a transition in the traditional role of the state’s participation in economic activities. Other than ideology, technological development and evolving of newer business processes accelerated this process. The traditional belief that natural monopolies such as power, telecommunications, railways, etc, would be best served by the public sector also underwent a change. Particularly in the case of telecommunications, the advent of the term ‘telephony’ changed the concept of natural monopoly. Closer home, in India, some of our public sector units (PSUs) have already witnessed disinvestment, with the government either completely getting out of these companies or bringing down its stake substantially.

The government’s inability to sustain investment to match technological progress has not helped SCL, says Ramakrishnan

The importance of PSUs
In India, PSUs laid the foundation, both in provision of infrastructure/services, and in the manufacturing of telecom and IT products. In the closed economy era (pre-1990s), it was only the PSUs who were active in the telecom sector. “The telecommunications revolution was started by PSUs. And it is the PSUs who created the infrastructure, and today the private players are just exploiting it,” feels R Suresh, general manager, GAIL-Tel, Gas Authority of India.

“Till date most of the growth in IT and telecom has been possible because of PSUs. Main connectivity has been provided by the PSU firms and private participation is only a recent development,” comments K H Khan, chief general manager, MTNL.

Of course, to be fair to private players, who have in reality done much since they came on the scene, it was because the governments of the day refused to allow private players that PSUs led the Indian telecom revolution.
In the mid-80s the country learnt the importance of communication and work began with homegrown technologies, which were not always the best, but nevertheless, a step in the right direction. “PSUs certainly played an important role and we must also thank visionaries such as Sam Pitroda for taking that initiative,” says Pradeep Joshi, business consultant, Netcon Associates.

While the debate on PSUs versus private operators, competition, etc, can go on, the truth remains that PSUs have played and continue to play an important role in the development of telecom infrastructure. Telecom infrastructure typically requires huge outlays, and a lot of money has already been pumped into this area by PSUs. Besides, private companies also fall behind because of the scale and enormity of the task. The reason here being the focus of private firms, which is more on urban customers, as compared to rural development commitments. Take village public telephones (VPTs)—as against the commitments given, private telecom firms have managed to achieve very little.
“Being a PSU, we have a sense of responsibility for projects that are for the purpose of development and in which private companies may not be interested, because of low profit margins. In this way IT and telecom PSUs have contributed much to the development of infrastructure in the country. PSUs are into generating goodwill and development, and not just profits. They have in fact laid the foundation for Indian infrastructure,” comments S K Tandon, CMD, Telecommu-nications Consultants India (TCIL).

Post-1984, when Judge Greene broke up Ma Bell in the United States, concepts such as deregulation, corporatisation, disinvestment and privatisation became common all over the world as governments wanted to spur investment and stimulate innovation. That was on the proposition that universal service goals (coverage in all areas—urban and rural) had been attained in advanced countries for POTS (Plain Old Telephone Service). However, the context was different in developing countries where telecom penetration was still lagging behind. Even in the developing nations, the winds of change began to blow in the 80s and 90s for ‘bifurcation’ of telephone and postal services into separate departments and then corporatisation came. In India, this bifurcation was done in 1987 with the setting up of the Telecom Commission and the setting up of MTNL as a corporate entity. In 1990-91, a committee was set up to reorganise the Department of Telecom. This body deliberated on many options and made its recommendations, but back then the time was not ripe for internal forces at DoT to accept changes, at least at the pace recommended.

It will take some time for the private sector to step into the shoes of the public sector and govern these companies, says Pradeep joshi

Telecom PSUs
Indian Telephone Industries (ITI) has done a good job in telecom equipment manufacturing. The company made the most of the captive market situation from the 1950s to the 70s. But the 1980s brought digitalisation of networks and two options emerged on the scene in a big way. One was Alcatel’s collaboration with ITI and direct supply of their switches, starting from 1981-82. The second was the setting of C-DOT, which brought out RAX and MAX switches for 512 lines. These products became enormously successful over a period of time and foreign suppliers couldn’t match them with any competitive product. While ITI was one of the prime licensees for the product, other companies from the private sector also managed to become licensees, and intense competition resulted, which brought down prices, much to the delight of the Department of Telecom. C-DOT gradually increased the capacity of their switches to reach MAX-XL capacity by the early to mid-90s. Meanwhile, policy changes in the 1990s enabled a large number of players to enter the market for supply of switches to DoT, though they had to manufacture them in India with a minimum value addition.

All these factors sent ITI into a tailspin by the late 90s, as the erstwhile government protection went out of the window. “I don’t know much about ITI’s latest responses to this issues, but it is unlikely to be a great attraction for the disinvestment process unless any strategic partner sees it as a route to get some assured quota of purchases from the BSNL/MTNL market. The DoT policy until recently had been to give an assured 30 percent of all equipment orders to ITI provided they matched others on prices,” says S Ramakrishnan, senior director, head-education, Research & Technology Division, Ministry of Information Technology. And when you see ITI in the global perspective, where global telecom equipment manufacturers are doing badly—Lucent, Nortel, Alcatel and Ericcson have lost heavily in terms of market capitalisation—it’s obvious that time and luck don’t seem to be in ITI’s favour either.
On the other hand, while TCIL has done a good job over a period of time, what is now needed is faster movement up the value chain to survive in the current scenario. As a consulting and project implementation agency drawing manpower and competence from BSNL (erstwhile DoT), MTNL and in-house teams, the company has not been able to make as noticeable a mark as its counterparts (like CMC, TCS or Wipro) in the computing/software field. Besides, TCIL has been heavily oriented towards basic telephony, as opposed to focusing on emerging areas like mobile/ wireless and Internet/ISPs, etc.

As mentioned before, one area where telecom PSUs (such as BSNL and MTNL) can still justify their role is that of ‘telecom network penetration’ in rural and remote areas. Being a social obligation, this has not attracted the interest of pure market forces. “The PSUs facilitate rural connectivity in India,” says Mahesh Mangal, an officer on special duty at RailTel Corporation of India. Agrees Mahesh Uppal, director at Telecommunications & Computer Information Systems (an independent telecom consultant). “The complete disinvestment of these PSUs can harm socially relevant projects like rural telephony. Any company running purely on commercial grounds will not take up projects that are not commercially viable in the long run,”

The setting up of a Universal Service Obligation (USO) fund is a welcome move in this direction. But the rest of the network and operation of the organisation(s) as a whole has to be professional and competitive. There should be no attempt to justify all the ills of the past under this garb, which is the tack being followed by some PSU employee unions, who oppose disinvestment tooth-and-nail.

Mahesh Uppal says PSUs facilitate rural connectivity in India

The IT PSUs
As far as the Indian information technology segment is concerned, Semiconductor Complex (SCL), CMC (until last year) and ET&T (erstwhile ETTDC) were the three PSUs with some presence. Of these, CMC has now been privatised (the Tatas now own the firm) and ET&T is a BIFR case.

On the other hand, SCL suffers from sub-critical volumes of production. “The government’s inability to sustain investment to match technological progress and its age-old closed market marketing strategies of the 1970s and 80s have not helped this PSU,” comments Ramakrishnan. It seems that the only solution for this company is to get a strategic partner/partners. But attempts in the past to get strategic partners have failed and today, the the only reason SCL is being kept afloat is for strategic reasons. SCL also has a gallium arsenite fab facility in Hyderabad.

CMC has been the public face of the government in IT, and has a significant domestic market presence. The success story of the Passenger Reservation System (PRS) for the Indian Railways, implemented successfully by CMC in the early 80s, port computerisation, stock exchange automation, and Indonet are some of the success stories at CMC. Its role has also been particularly noteworthy as it enabled the smooth emergence of the indigenous computer industry in late 70s and early 80s, after the withdrawal of IBM from India in 1976.

ET&T was started in the mid-70s to channelise import of items like picture tubes and act as an import channel agency for the country. The aim was to get a bargaining position when India was a closed economy. It was also supposed to use its global contacts and market intelligence to promote exports of domestic electronic equipment, especially those from SMEs. “Right from day one the company was mismanaged, and was doomed to failure the moment the canalising role was withdrawn,” says Ramakrishnan. Much later, in the late 90s it tried to diversify into sectors like education and training, with some modest success. But accumulated losses caught up with the firm and it had to shut shop.

Other factors
There is also a churning going on in the various segments of telecom services—basic and mobile/wireless, voice and data/ISP. Basic telephony services consist of local, domestic long distance and international long distance. There has been too much investment internationally, especially in laying fibre, leading to too much bandwidth and a consequent crash in prices. Telecom stocks rose sharply in 1998-99 in anticipation of broadband markets, only to crash in 2000-2002.

Even the big acquisitions and mergers that happened during that period are in serious trouble, the latest being the instances of German and French telecom operators. Internationally, 3G sems to be a non-starter, especially in Europe, because of huge amounts quoted by all players for spectrum auctioning, almost like the initial enthusiasm of private telecom entrants for local basic telephony services in India. In the case of French Telecom, it wanted to protect all jobs and apparently that is proving too costly to its competitiveness. In India, HFCL led the pack with some monstrous licensing fee bids, only to retract them later. Experts are of the view that before going for disinvestment/privatisation, the Indian government should take a lesson from these experiences, especially in the case of manpower issues.

Sameer Kochhar says the government should concentrate on social objectives and leave the profit-making objective to private players

Advantage PSU
PSUs in India enjoy certain advantages due to government backing, which lends strength to these organisations. Having this backing helps them operate on a huge scale, wherein they can also slash prices for public benefit (or to bulldoze competition), because profit margins aren’t too much of an issue for them, unlike private firms, where shareholders will haul managements over hot coals if margins aren’t maintained. But customers aren’t complaining, because in some cases, PSUs getting into price wars can result in customer-friendly regimes. This is exactly what happened when MTNL introduced its cellular operations in the two metros of Mumbai and New Delhi.

Another advantage for PSUs is that they have a large number of customers and massive networks, which will take years for private players to replicate. Manpower costs are quite low too in PSUs (though overall size of workforces is bloated in many cases).

On the technology front too, PSUs have an upper edge. If anyone needs to provide a new service over the telephone (like directory services, chat, etc.), it has to be provided over the existing network. That means one has to provide this through someone who owns the network and also has the customer base. And PSUs like MTNL and BSNL have this advantage.

Again, in the case of Net connectivity, most customers of ISPs have to access the Net through MTNL and BSNL. “Some six to seven years ago when the private sector was entering the telecom segment the government had monopolistic tendencies. Now PSUs have a virtual monopoly,” says Uppal. However, the cellular arena is one area that is still untouched by monopolies.

The PSUs have also advantages over private players in terms of enormous resource availability. They have easier access to public investment, which gives them an advantage over private players. “But instead of using these resources to develop the country’s infrastructure they are being used to strangle the private players and for indulging in monopolistic tendencies,” says Sameer Kochar, CEO, Skotch Consultancy.

Bottlenecks
But it’s not as if the PSUs have everything going for them. There are also certain problems that PSUs face. Being government enterprises, they still have to follow certain norms of the government, such as audit, vigilance and procurement. This can slow down the process of decision-making to a large extent. Also, while PSUs can leverage the advantages of both government and private firm cultures, maintaining the two at the same time can be a huge challenge. Essentially, PSUs have to maintain the procedural parts (read government red- tape) while ensuring at the same time that working efficiency is as good as private firms. Lack of commercial flexibility is another problem. And apart from these issues, huge workforces and bureaucratic set-ups also add to the problems faced by PSUs.
The most important matter of concern for government PSUs in IT and telecom is competition, which has grown manifold in the last few years. While liberalisation has seen the emergence of many private players bringing cut-throat competition to the doors of PSU firms, on the other hand, there are certain market segments that have reached a point of saturation, which has led to further intensifying of competition. So, while competition is growing at a faster pace, the availability of new business is low. What PSUs need to do is to gear up their act to counter this growing competition. There is also a need felt to bring in more professionalism within organisations, as the PSUs lag in creative marketing concepts, traditionally not part of their work culture.

Is disinvestment imminent?
Of all the measures for PSU reforms announced in 1991, PSU disinvestment has received maximum media attention. The government had then announced partial disinvestment in select PSUs in order to raise resources, encourage wider public participation, and bring in greater accountability. In the initial rounds of disinvestment, the government had to face allegations of receiving sub-optimal value in the sale of some PSU scripts. In 1996, the government constituted the Disinvestment Commission to advice on extent, mode, timing and pricing of disinvestment.

Like most phenomena in India, PSUs show tremendous variation in terms of purpose, managerial attitudes, embedded skills and knowledge, size, and mix of activities. The larger central PSUs sometimes have some of the best-qualified and skilled workforces in India. Yet, performance of some of these enterprises remains well below their potential. The so called ‘systemic constraints’ constitute a unique opportunity for the social scientist, the student of business, and those seriously concerned with inter and intra-organisational processes, to study and understand.

The constraints limiting the performance of PSUs have remained unassailable thus far. It is quite true that only large-scale upheaval can bring about lasting change. Such upheaval has begun with the liberalisation of the economy in the early 90s, and can only accelerate in the future.

“Disinvestment is happening and it’s a positive sign. Having given importance to the public sector in the past, one cannot change track instantly as it will take some time for the private sector to step into the shoes of the public sector and govern these companies,” comments Joshi. According to industry experts, the opposition to disinvestment only comes from politicians and bureaucrats who selfishly still want to retain control of these companies, and the comforts associated with control.

K H Khan says that PSU firms provide main connectivity while private participation is only a recent development

Some are of the opinion that the government shouldn’t retain any stakes in these companies. For instance, though the government still owns 26.2 percent of VSNL, its role has just reduced to that of an investor. Joshi says that he does not see any reason why the government should keep this stake—rather, they should divest the same and use the proceeds for other development programmes. He further feels that once you monitor the state of transition for some time and see that the buyer has genuine interest in running the company for development, the government should hand over everything into the hands of people who know how to do business. Profit is not a bad word but a PSU buyer should not be restricted in making this profit by indulging in activities beyond the charter of the business. A seven-year restriction on the buyer on ‘no sale’ of assets would be sufficient. The sale should also not help buyers create a monopolistic situation.

Disinvestment is imminent—that’s what everybody feels. Private companies will take over the remaining PSUs. But is this a good sign for a country like India? Our economy lies in the rural segment. Once private sector companies take over PSU units, there is less chance of them going to the grassroots level or to the village level.

The government has to choose between the social and the moneymaking objective. “The government should concentrate on the social objectives—security and development, and leave the profit-making objective to the private players. Eventually, over the next few years all PSUs are going to be disinvested,” says Kochar. The commercially viable projects should go to the private players and the projects of social relevance like rural telephony should be undertaken by the government. As far as funding of such projects is concerned it can come from taxation and a share of private player revenues, which is given to the government.

Tandon of TCIL has the final word. “Disinvestment is the future for PSUs. Ultimately they will get disinvested and it is necessary. IT & telecom PSUs have to be disinvested in order to remain competitive. A PSU has to function and work efficiently like a private company to be able to take on competition.”