When the state is in the business of running business

India’s biggest problem today…
… is an interventionist State. Despite a brief start at reforms between 1991-93, the Government continues to be in the business of running businesses. Inevitably, when it is also the policy-maker, protectionist policies are bound to arise, and private players are bound to be put at a perennial disadvantage. Consider the Government’s decision on the 30th of November to deny private operators use of BSNL’s and MTNL’s “last mile” copper wire infrastructure. From the Economic Times:

On unbundling of last mile access of BSNL and MTNL Mr. Maran said the government wants private operators to build their own networks.

“If the state is not in the business of telecom, then their infrastructure can be shared and given to private players but in this case, the state is in the business and they are not in a social service segment,” said Mr. Maran at the Indian Economic Summit.

He also said both MTNL and BSNL are doing very well and there is no necessity to unbundle. “BSNL has done 2.5 lakh and MTNL one lakh in terms of broadband connections and from the peak price of Rs 5,000, today BSNL and MTNL’s connections are available at Rs 250 and Rs 199 respectively,” said Mr. Maran.

Reliance, Bharti and Tata Teleservices want DoT to allow them to use BSNL and MTNL’s last mile network for providing broadband services. BSNL and MTNL account for more than 90% of India’s fixed line subscriber base.

Maran’s quote says it all. If the state is not running telecom companies for “social service”, or it put it more correctly, “social benefit”, then what are they running it for? If profit is the only motive, then the company should be privatized, fully, and right away. Think about it: If there is no “larger good” for running BSNL and MTNL, their motives are just like any other private company. Why, then, should they be at such a huge advantage compared to a private player? First, they have access to tremendous funds (taxpayers’ money) which are not the result of revenue earned by the company. That’s what’s enabled them to build up this vast copper wire “last mile” network in the first place. Second, the parent ministry frames policy for the sector. This is almost always designed to protect the state-owned enterprises in the sector, which is but natural. But is it fair?

For instance, consider the Access Deficit Charge. This is a levy that private telecom operators have to pay when their subscribers make long-distance calls either to fixed-line telephones or to other mobile phones – basically, for any traffic that makes use of fixed-line long-distance infrastructure – and 95% of these revenues go to BSNL**, since it has a near-monopoly on fixed-line infrastructure in the country. Private operators have often suspected that the Access Deficit Charge is used to subsidize BSNL’s own cellular business. Or its International calls – just before TRAI ruled in late 2003 that all telecom operators would have to pay ADC (as opposed to only basic service providers earlier), BSNL cut its ILD (International Long Distance) call rates from Rs. 24 to Rs. 7.20 per minute***.

There is only one reason for the state to be present in any sector – for reasons of “National Security” or “Strategic Importance”. Examples of this include education and defence. The other reason offered by the Indian Government frequently is for “social benefit”. The implication here is that if the state was to exit that sector (from the business point of view), private enterprise would not run services in unprofitable (usually rural) areas, and that this would lead to unequal development.

I do not buy this argument. There are ways for the Government to ensure equal development, or at least prevent creation of a yawning gap between urban and rural areas. One of those ways is for the Government to focus exclusively on running services in non-profitable areas. The funding for such ventures would be generated using, most ironically, the Access Deficit Charge! Of course, it would be called something else!

A Solution:

Here’s how it could work: First and foremost, the Government must privatize both BSNL and MTNL, so that all telecom operations in the country are privately-owned, and there is a level playing field. It must then set up a fresh, fully autonomous company to provide services only to clearly demarcated “unviable areas”. As long as private operators and the State do not encroach into each others’ territories, there is no problem with levying a charge on private operators to fund the state’s efforts to improve connectivity in such rural or unviable areas. This “ADC” ought to be a fixed charge imposed upon every operator, regardless of their size or revenue. Since this ADC is now not based on the access of the fixed-line infrastructure owned by the state, by private operators, it would be unfair to charge the larger player more. (How the now-privatized BSNL charges other operators for use of its network is a completely different matter, and is out of the scope of this article). The only revenue for this company ought to be from the charges imposed on private operators, and 100% of the revenue from these operations must be pooled back into the company’s operations. No profits. In addition, if a private operator wishes to provide operations in a particular “unviable area”, it is free to do so, provided it satisfies certain minimum criteria for connectivity in that area.

However, there has to be a clear maximum time in which the Government must bring rural areas up to speed with urban areas in terms of communication infrastructure, hand over operations to the highest bidder among private operators. If, within this time, a private operator wishes to bid for the Government’s operations in an unviable area, it is free to do so. The more “unviable areas” a private operator takes over, lower is the ADC it has to pay. This is in line with the outcome that the Government-owned company now has that much of a smaller area to run.

Alternatively, and perhaps a more efficient scheme, would be for the autonomous Government enterprise to maintain each unviable area by forming a Joint Venture with a private operator. This would ensure that the Government enterprise yields results up to the mark, and prevents trade unionism from strangling performance. There would be a bidding process right at the start for selecting the private operator for forming a Joint Venture. As mentioned above, the Government must give up its equity after some prescribed maximum time frame to the private operator. In this Joint Venture, the role of the Government is to make sure that connectivity standards are met by the private operator, and that of the latter is to see that performance does not go down the drain.

The idea is for this Government enterprise to undertake upgrading rural telecom infrastructure in the maximum number of areas in the minimum amount of time, and then exit. At the end of that maximum time, regardless of whether or not the Government-owned company met its own targets, the ADC will be eliminated, and the whole country will be free for private players to start operations in. This will ensure performance.

This is a model that could be applied to every single sector – telecom, public transport – including railways, petroleum, electricity, and the like – where the Government is in the business ostensibly so that the poor can also avail those services. Summing up, any model for Government-private partnership in any sector has to be centered around the following tenets:

  1. The Government has to get out of “the business of running businesses”.
  2. The Government must chalk out clear policies for the sector under consideration and appoint a fully autonomous body to oversee the enforcement of these policies.
  3. Private enterprises are free to offer services in whatever areas they deem fit to.
  4. Private enterprises must fund, for a fixed amount of time, a Government programme to develop infrastructure in presently unviable areas.

At the end of the day, no model is going to be fool-proof, and cannot guarantee complete success. However, the one outlined in this article (or any one that incorporates the tenets above) has the best chance of eliminating distortionary pricing, ensuring a level playing field, and bridging the gap between urban and rural India. And that, surely, is what even the State wants.

** The Hindu Business Line, September 3, 2005.
*** Businessworld India, December 15, 2003.