India's Sticky State Phone Sell-Off
By Bruce Einhorn
Among Asia's two largest economies, India is now a distant No. 2 to China. Just why that has happened is now a favorite parlor topic among business leaders and policymakers in Bombay, Bangalore, and New Delhi. During a recent trip to India, I heard people blame India's democracy, with coalition governments unable to act quickly, and compare it unfavorably with China's authoritarianism. Other people complained about India's labor laws, its protectionist policies, its corrupt officialdom. Some Indians even told me that there was something about their national character that stops the country keeping pace with the Middle Kingdom dynamo to the north.
One of the biggest drags on India's development, though, is something very simple -- and very fixable: India has the dubious honor of having probably the worst telecommunications service of any major country in the world.
International long-distance rates are among the costliest anywhere, thanks largely to the government-owned carrier Videsh Sanchar Nigam Ltd. (VSNL), which has a monopoly. In most countries, the ratio of incoming calls to outgoing calls is about equal. Not in India, where there are five incoming calls for every outgoing one. Making a long-distance call from the subcontinent is arduous and expensive.
Sky-high rates have been of no value to investors in VSNL, which is traded both in Bombay and New York (VSL ). In the past five years, VSNL's stock price in rupees has dropped by almost 50%. The dollar-priced American depositary receipts are down by about the same amount since December, 2000, when they first started trading.
Sure, telecom shares have suffered worldwide since then. But compare VSNL with the premier telecom stock in China, cellular operator China Mobile. Even after a steep fall in the past 18 months because of increased competition and a maturing market, China Mobile's shares are still up 80% in the same five-year period.
To its credit, Indian Prime Minister Atal Bihari Vajpayee's government realizes that this is a huge drag on India's competitiveness and has been pushing liberalization (see BW, 2/11/02, "India: At Last, a Big Telecom Bang"). In early February, the Indian government is likely to take a big step by announcing the winning bid among companies vying to buy a 25% stake in VSNL from the government, which controls 52% of the company. In April, the international long-distance market will open to other players, and by yearend, rates are likely to be half what they were at the start of 2002.
Unlike most telecom privatizations worldwide, where labor tensions rise as workers lose their status as cosseted civil servants, VSNL isn't having any labor strife, since the company has never been a major employer for the state. Indeed, with only 2,000 or so workers, "VSNL is quite a lean team," says Ravi Kapoor, senior vice-president and head of investment banking at Merrill Lynch's joint venture in Bombay.
With the lifting of monopolies on domestic and international long-distance and the entrance of more private-sector cellular operators into the market, India is about to undergo a telecom boom not unlike China's, predicts Delhi-based economist Surjit S. Bhalla, managing director of Oxus Fund Management. "Basic transaction costs are going down. Landlines will become more efficient. The entire communication infrastructure is taking off," says Bhalla, formerly of the World Bank, Goldman Sachs, and Deutsche Bank. "We will soon see a flood of telephones in the market."
Lower rates. More competition. Better service. Clearly, consumers should benefit. But not everyone is happy with the plans for VSNL's privatization, including -- ironically -- some telecom execs for VSNL rivals in India. Privatization, says one executive from a big Western telecom company, "is being senselessly pursued." Because the government is so anxious to make up for past policy mistakes that prevented India's telecom market from growing, policymakers are pushing privatization at the same time as they open the market to competition.
SHORTAGE OF SUITORS.
VSNL's monopoly on international long-distance was supposed to last until 2004, but last year the government decided to accelerate the schedule and lift the monopoly in 2002. When governments elsewhere in Asia have done similar things -- in Hong Kong, for instance -- they compensated the monopoly carrier by giving it a lot of cash. But in India, the government instead gave VSNL a free license for domestic long distance. That's nice, but it's worth only about $100 million in revenues.
Since the perception is that the government isn't going to help the company enough as it privatizes and competition increases, few companies are angling to buy into VSNL. As of late January, only three bidders had appeared, with the major ones being the Reliance and Tata groups, India's two most powerful industrial conglomerates.
Telecom-industry executives expect that the government will get only $250 million or so for its stake. Back in the mid-1990s, when the New Delhi was selling 20% of VSNL in its first attempt to lower its stake in the company, bureaucrats figured that they could easily get $1 billion. That was overly optimistic, but even so, when the government finally made the sale in 1997, it was able to raise $525 million.
True, a lot has changed since the days when the Internet entranced everyone. But the big drop in value is likely to fuel accusations that the government is allowing itself to get cheated. "It's scandalous," says one top telecom executive. "Is the government's aim to sell the family silver cheap?" If that sort of sentiment catches on, India's privatization effort could suffer as politicians become wary about accusations that they're dumping national assets at a low price.
Bhalla, the former World Bank economist, refuses to be pessimistic. If VSNL's privatization goes well, he says, then privatization in other sectors such as power will get a boost. "It will be a story of success breeds success," he says brightly. Indeed, his optimism envelops every possible outcome. If VSNL's privatization is a flop, then privatization in other sectors will still get a boost, he insists. "Failure will only add to the impetus to get rid of [state assets] for whatever price you can," he says.
Surely, though, Indian consumers will benefit from lower prices, and that should help in the uphill battle to compete with China. Still, the VSNL sell-off shows just how much India is struggling as it tries to gain on the Middle Kingdom.
Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online
Edited by Beth Belton