The Telecom Crisis is an NPA Problem

The article originally published in Business Standard on November 7, 2019 was also mirrored on Organizing India Blogspot

The Committee of Secretaries to mitigate financial stress in telecom must act quickly on interim measures for the sector to survive. But is its mere survival sufficient for India’s development and growth? Is it possible to fix telecom in isolation?Our communications needs are very poorly served, although at rock-bottom prices. Is it even possible for our hapless citizens and enterprises to get past shoddy services and productivity foregone, to trade with other countries on a more even footing?

Yes, if we succeed at major structural changes, starting with telecom. But to transform telecom, the government and all of us have to come to the stark realisation that just as finance drives the economy, digitisation and communications have to be at the heart of production and delivery. Telecom and digitisation are strategic enablers for all infrastructure and in all sectors. Leading countries are so far ahead and functioning so effectively that it is difficult for us to imagine. We must want that path, plan for it, and put in the requisite effort.

Simply tweaking overdue payments, tinkering to reduce charges, and plugging along as before isn’t going to get us there. In this sense, the Committee’s charter is too limited. All it can do is assuage the pain, whereas our need is for a revitalised industry to serve our purposes.If the Committee’s scope were broader, could we actually adopt digitisation as our core strategy for development and growth? A study on China, “Telecommunications reforms in China”, about the transformation in policies to make digitisation its development priority, is instructive.1

Their approach to reforms was to balance the government’s aims of universal coverage, governance and control, and efficiency; industry’s profit-seeking; and the people and enterprises’ needs for freer, more rapid communications. This is what we need to do, in a way that works for us.Also, the government, the judiciary, the press and users need to understand and accept that the telecom crisis is part of the larger non-performing assets (NPAs) problem. It has systemic links to NPAs and banking, which links to real estate and construction, electricity and roads, and stable and predictable taxes. Government payment delays and tax terrorism must stop. Business as usual will not resolve NPAs soon to enable growth. These two articles explain why and deserve attention.2

Essentially, entities that take deposits need Reserve Bank of India (RBI) regulation. In a crisis, people with domain expertise and capacity must be appointed to take immediate steps to protect assets and operations, as with Satyam or IL&FS, because seizing/freezing assets often hurts depositors and creditors. A bureaucratic process as with the Punjab & Maharashtra Co-operative bank is likely to result in yet another zombie bank, burning depositors’ money just to stay alive.The Committee’s focus should be on cash flows, modelling cash flows and their timing, not just the present value of discounted flows, or other extraneous emotional, political, or judicial/administrative reasons.

Employment is a legitimate consideration, but has to be sustainable, with timely cash generation. Else, other sources of timely cash support must be arranged, because without sustained cash flows, no gambit or subsidy can succeed (and maintaining unproductive employment will not be possible). Some fixes need major legislative changes to policies.

BSNL & MTNL

On BSNL and MTNL, a recent article sets the context and explains why the revival plan is unrealistic.3 In short, these poorly supported and much-abused enterprises have so much debt that earnings before interest, taxation, depreciation and amortisation would have to be at least 35 per cent. Governments have used them as market spoilers as with Air India, precipitating unsustainable price wars that gutted the industry.An alternative is to downsize, re-skill as needed, and retain the public sector entities (as one or both) in the role of security-and-public-interest-anchors in infrastructure consortiums. These must be run by the private sector (and in strategic areas, by defence). This will facilitate policies such as assigning spectrum for payment on usage without auctions, and extending Wi-Fi to 60 GHz and 6 GHz (details at: https://organizing-india.blogspot.com/2019/10/extend-tax-cut-logic-to-infrastructure.html, and https://organizing-india.blogspot.com/2018/11/a-great-start-on-wi-fi-reforms.html).

Weak Financial Systems

The Committee needs to apprehend and convey the need to strengthen financial institutions. Financial systems provide second-order infrastructure for productive activity and wellbeing. They need an adequate underlay of first-order, basic infrastructure, comprising communications, energy, water, waste, sewerage, and transport, leaving aside housing and the basics of security, and law and order. While most of us take these for granted, there should be no doubt about how critical these attributes are, and that they are being eroded and increasingly at risk because of social disorder and economic inadequacies. In addition, basic health care and education are essential adjuncts for the supply of trainable people to operate these sectors.

Until some years ago, despite weak infrastructure, financial systems were among India’s real strengths, although eroded periodically by disruptions resulting in NPAs. However, there was strength in the professional capacity of this sector that held up in spite of the pressures. Over time, these institutions have been severely degraded, through laxity, complicity, pressures for evergreening, the abrupt imposition of credit quality and NPAs, the extent of frauds because of lax or complicit supervision and the reputational damage, the buffeting from demonetisation and pressures to cross-sell products such as insurance. Governments need to understand this and support building professionalism, avoiding melas and waivers.

The scope of the Committee could be expanded to set the objectives of telecom and digitisation in the interests of governance, industry, and users, and to outline next steps. They could consider the experience of China and others such as Sweden for this vast effort, while addressing linkages and NPA issues. Perhaps, they could be exemplars by setting the tone for a national approach that is not departmental and becomes bipartisan, and helps to move away from our abrasive, confrontational politics that leads to deadlocks.

1. Becky P.Y. Loo, October 2004: https://www.researchgate.net/publication/227426547_Telecommunications_reforms_in_China_Towards_an_analytical_framework
2. Debashis Basu, October 27, 2019: https://www.business-standard.com/article/opinion/how-to-fix-the-pmc-bank-crisis-119101400006_1.html October 13, 2019: https://www.business-standard.com/article/opinion/lessons-from-pmc-why-govt-is-responsible-for-co-operative-bank-crises-119102700620_1.html
3. Rahul Khullar, October 31, 2019: https://www.business-standard.com/article/opinion/don-t-bet-on-bsnl-mtnl-s-revival-119103100040_1.html