MTNL

Of Venkaiah Naidu, Air India and Privatisation by Malign Neglect

VenkaiahNaidu

Yesterday afternoon something weird happened on Twitter.

An irate flyer sent out four tweets against Air India. No it wasn’t me. Here are the four tweets:

1) I had to travel to Hyderabad by Air India AI544 which is to depart at 1315 Hrs… was told on time…reached airport by 1230 Hrs.

2) was informed at 1315hrs that flight was delayed as d pilot had not yet come.Waited up to 1345 Hrs, boarding didn’t start. returned 2 home.

3) Air India should explain how such things are happening. Transparency and accountability are the need of the hour.

4) Hope Air India understands that we are in the age of competition. Missed an important appointment.

The tweets were sent out by senior BJP politician and the Union Minister for Urban Development, Housing & Urban Poverty Alleviation as well as Parliamentary Affairs, M Venkaiah Naidu. Naidu is a heavy weight in the Modi government. The fact that he took to Twitter to criticise the government owned airline means he must have been extremely irritated by the airline’s failure to depart on time.

Air India replied in true government style saying that the pilot was stuck in a traffic jam and an enquiry had been ordered. (I wonder why pilots of other airlines do not get stuck in traffic jams?)

Minister Naidu got a feel of what happens when people travel Air India. This is a good thing where the politicians and the bureaucrats get a feel of how the system they help build and run, actually works.

As Reserve Bank of India governor Raghuram Rajan, had said in a speech sometime back: “A lot of officials, including myself, learn the difficulties of working in India as an ‘aam aadmi’ only once we leave office, lose the assistant, the assistant to the assistant, and the assistant to the assistant’s assistant. Post retirement, and I have seen this with all the people I know, they realise the system is much harder to deal with.”

It was Naidu’s opportunity yesterday to have that kind of day. The sad part is that those who run Air India still don’t get it. The airline has managed to accumulate huge losses over the years and continues to survive on borrowing as well as equity infusion by the government (i.e. basically the taxpayer).

Anyone in their right mind, stopped traveling Air India a while back. The airline now runs simply because of government employees who when travelling officially have no other option (in most cases) but to travel in the airline and pay the full fare.

The airline now has 14.7 per cent market share. This has been a huge fall from the days when it had 100% of the domestic market share given that no private airlines were allowed to operate. (The domestic airline back then was called Indian Airlines. There was also Vayudoot, another government owned airline, which travelled to smaller locations).

This is nothing but what Ruchir Sharma calls privatization by benign neglect. As he writes in his new book The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “India…has adopted a de facto policy of what I can only describe as privatization by malign neglect. The political class can’t bring itself to sell off the old state companies, or to reform them either. Instead, it simply watches as private companies slowly drive the state behemoths into irrelevance. Thirty years ago state-owned Air India was basically the only way for Indians to fly, but the rise of agile private airlines including Jet and Indigo, has reduced its share of flights to less than 25 percent.” As mentioned earlier Air India now has 14.7% of the domestic market share.

The business flyer who is willing to pay a premium and for whom time is of utmost importance, has more or less abandoned Air India and moved on to other airlines. Guess, it’s time that minister Naidu also does that, the next time he has to reach on time for any meeting outside Delhi.

Air India is not the only example of the government not being able to withstand competition. Sector after sector has seen the government companies being decimated wherever they have had to face competition. As Sharma writes: “The same goes for telecommunications, where former state monopolies like MTNL and BSNL have been allowed to slowly wither in the face of more nimble private telecom companies, and together they now account for less than 30 million of India’s 900 million telecom subscribers.”

But the government (this government as well as the ones before it) have kept these companies going. Of course, a lot of taxpayer money which could have been better utilised elsewhere has been lost in the process. Air India has lost close to Rs 35,000 crore between 2010-2011 and 2015-2016. Last year it managed to make an operational profit primarily because of lower oil prices.

The point being that it would have been better for the government to have sold off these companies long back. As Sharma writes: “The state would have done a lot better to simply sell of these companies when they were still valuable, but now it is losing money on them hand over fist, and they are worth a pittance. This approach—refusing either to privatize or protect state monopolies—is the worst possible combination for government’s finances.”

And that is precisely what the previous governments did. The Narendra Modi government continues to run on the same principle. One doesn’t expect radical decisions from a government which couldn’t even push through a five basis points interest rate cut on the Employees Provident Fund(EPF). One basis point is one hundredth of a percentage.

The airline business is a very tough and competitive business to be in. Any airline hoping to make a profit needs to be run by a professional who has some experience in the airline business. Air India has never had that luck for a sustained period of time. No such moves have been made by the current government either. This belief that bureaucrats and not specialists, can do everything, has been one of the primary reasons behind the degradation of India.

In fact, Air India has now reached a stage where even if the government were to try selling it, there would be no buyers. As civil aviation minister Ashok Gajapati Raju said sometime back: “Its (Air India) books are so bad. I don’t think that even if it is offered, anybody would come for it.”

The more things change the more they remain the same. The taxpayer will continue paying for this national loot.

The column originally appeared in Vivek Kaul’s Diary on June 29, 2016

Why MTNL Cannot Be Turned Around

mtnl-logo-big

Normally I don’t write on individual companies, so today’s column is a bit of an exception to that. Today I plan to discuss the annual results of the government owned Mahanagar Telephone Nigam Ltd.(MTNL), and why it cannot be turned around.

The cue for this column lies in the fact that for the period of January to March 2016, the company made a profit of Rs 174.58 crore. The results were declared on May 30, 2016. On the same day, the telecom minister, Ravi Shankar Prasad, told The Economic Times, that the telecom department is “also working on to improve state-run Mahanagar Telephone Nigam Ltd. (MTNL)”.

Does that mean MTNL can be turned around? The answer is no. There is a fundamental problem with the way the company is run, and I have my doubts on whether that can be corrected. But before we get into that, let me first try and explain how did the company end up with a profit of Rs 174.58 crore during the last three months of 2015-2016.

There were basically two entries that helped the company come up with a net profit. The other income for the period stood at Rs 580.60 crore. Other income essentially means the money that a company earns from activities other than the normal business operations.

The company earned Rs 458.04 crore from surrendering the spectrum it used for its CDMA operations, back to the government. The company discontinued its CDMA operations from March 1, 2016, onwards. Further, taxes of Rs 492.96 crore for an earlier period have been written back. These two items essentially helped the firm come up with a net profit of Rs 174.58 crore.

The annual loss of the firm for 2015-2016 stood at Rs 2,012.24 crore. This is lower than the losses of Rs 2,901.16 crore in 2014-2015. This has been achieved through the surrendering of the CDMA spectrum and a tax write back. If these two things hadn’t happened, the losses of the company in 2015-2016, would have been similar to the losses in 2014-2015.

Now let’s talk about the fundamental problem that the company faces and why the telecom minister Ravi Shanker Prasad, cannot turnaround the company, despite his best intentions. Allow me to explain.

For the year 2015-2016, the company’s income from operations (which does not include its other income) stood at Rs 3,197.40 crore. Of this, Rs 2,310.76 crore went towards employee benefits. A further, Rs 343.68 crore went towards employee benefits for retirement. Hence, of the Rs 3,197.40 crore operational income of the company, a total of Rs 2,654.44 crore went towards employee benefits.

This basically means that 83% of the company’s income from operations went towards meeting employee cost. This is not an anomaly. In 2014-2015, employee cost formed around 78% of the company’s income from operations. Hence, employee cost as a proportion of income from operations has gone up by a whopping 500 basis points during the course of just one financial year. One basis point is one hundredth of a percentage.

How does this compare with competition? Let’s look at the numbers of Bharti Airtel. In 2015-2016. The income from operations of the company stood at Rs 60,300.2 crore. This is close to 19 times the total income from operations of MTNL.

And how much money did the company spend on employee benefits? Rs 1,869.3 crore. This is nearly 30% lower than the employee benefits expenses of MTNL. So what does this mean? It means that Airtel earned 19 times MTNL’s income from operations by spending 30% lesser on its employees.

Further, Airtel’s employee cost in 2015-2016 was 3.1% of its income from operations. MTNL’s was at 83%. And how did things look for Airtel in 2014-2015? The employee benefit expenses of Airtel were at 3.05% of its income from operations. For MTNL, the figure was 78%. Hence, the employee benefit costs of Airtel went up by 5 basis points, during the course of one financial year, whereas that of MTNL went up by 500 basis points.

This is what MTNL is competing against. For it to be viable, the employee cost as a proportion of income from operations, will have to come down dramatically. That can only happen in two ways—salaries being slashed or employees being fired. The first option can be ruled out. The second option will have its own share of costs.

Actually, there is a third way as well i.e. if the company manages to increase its income from operations. But given the brand image that the company has among consumers that seems to be difficult. As they used to say in the good old days when MTNL was a monopoly, MTNL equals Mera Telephone Nahi Lagta. The company had a branding problem back then as well, but the consumer did not have choice. Now he does and he has executed it.

Also, MTNL operates in Delhi and Mumbai, the two biggest and the two toughest telephone markets in the country. While it goes about restructuring (assuming that it does), the other companies won’t be sitting idle doing nothing. While excuses can still be made for keeping Bharat Sanchar Nigam Ltd(BSNL) going, there is none to keep MTNL running.

It’s time the government shuts down the company and starts monetising its assets. MTNL has offices in premier areas of Mumbai and Delhi. In Mumbai, two offices in Prabhadevi (Central Mumbai) and Cumbala Hill (South Mumbai) can be sold at a very good price. The money thus earned could be spent towards improving the physical infrastructure of the country.

It’s time the country stopped subsidising the lives of a fe

Normally I don’t write on individual companies, so today’s column is a bit of an exception to that. Today I plan to discuss the annual results of the government owned Mahanagar Telephone Nigam Ltd.(MTNL), and why it cannot be turned around.

The cue for this column lies in the fact that for the period of January to March 2016, the company made a profit of Rs 174.58 crore. The results were declared on May 30, 2016. On the same day, the telecom minister, Ravi Shankar Prasad, told The Economic Times, that the telecom department is “also working on to improve state-run Mahanagar Telephone Nigam Ltd. (MTNL)”.

Does that mean MTNL can be turned around? The answer is no. There is a fundamental problem with the way the company is run, and I have my doubts on whether that can be corrected. But before we get into that, let me first try and explain how did the company end up with a profit of Rs 174.58 crore during the last three months of 2015-2016.

There were basically two entries that helped the company come up with a net profit. The other income for the period stood at Rs 580.60 crore. Other income essentially means the money that a company earns from activities other than the normal business operations.

The company earned Rs 458.04 crore from surrendering the spectrum it used for its CDMA operations, back to the government. The company discontinued its CDMA operations from March 1, 2016, onwards. Further, taxes of Rs 492.96 crore for an earlier period have been written back. These two items essentially helped the firm come up with a net profit of Rs 174.58 crore.

The annual loss of the firm for 2015-2016 stood at Rs 2,012.24 crore. This is lower than the losses of Rs 2,901.16 crore in 2014-2015. This has been achieved through the surrendering of the CDMA spectrum and a tax write back. If these two things hadn’t happened, the losses of the company in 2015-2016, would have been similar to the losses in 2014-2015.

Now let’s talk about the fundamental problem that the company faces and why the telecom minister Ravi Shanker Prasad, cannot turnaround the company, despite his best intentions. Allow me to explain.

For the year 2015-2016, the company’s income from operations (which does not include its other income) stood at Rs 3,197.40 crore. Of this, Rs 2,310.76 crore went towards employee benefits. A further, Rs 343.68 crore went towards employee benefits for retirement. Hence, of the Rs 3,197.40 crore operational income of the company, a total of Rs 2,654.44 crore went towards employee benefits.

This basically means that 83% of the company’s income from operations went towards meeting employee cost. This is not an anomaly. In 2014-2015, employee cost formed around 78% of the company’s income from operations. Hence, employee cost as a proportion of income from operations has gone up by a whopping 500 basis points during the course of just one financial year. One basis point is one hundredth of a percentage.

How does this compare with competition? Let’s look at the numbers of Bharti Airtel. In 2015-2016. The income from operations of the company stood at Rs 60,300.2 crore. This is close to 19 times the total income from operations of MTNL.

And how much money did the company spend on employee benefits? Rs 1,869.3 crore. This is nearly 30% lower than the employee benefits expenses of MTNL. So what does this mean? It means that Airtel earned 19 times MTNL’s income from operations by spending 30% lesser on its employees.

Further, Airtel’s employee cost in 2015-2016 was 3.1% of its income from operations. MTNL’s was at 83%. And how did things look for Airtel in 2014-2015? The employee benefit expenses of Airtel were at 3.05% of its income from operations. For MTNL, the figure was 78%. Hence, the employee benefit costs of Airtel went up by 5 basis points, during the course of one financial year, whereas that of MTNL went up by 500 basis points.

This is what MTNL is competing against. For it to be viable, the employee cost as a proportion of income from operations, will have to come down dramatically. That can only happen in two ways—salaries being slashed or employees being fired. The first option can be ruled out. The second option will have its own share of costs.

Actually, there is a third way as well i.e. if the company manages to increase its income from operations. But given the brand image that the company has among consumers that seems to be difficult. As they used to say in the good old days when MTNL was a monopoly, MTNL equals Mera Telephone Nahi Lagta. The company had a branding problem back then as well, but the consumer did not have choice. Now he does and he has executed it.

Also, MTNL operates in Delhi and Mumbai, the two biggest and the two toughest telephone markets in the country. While it goes about restructuring (assuming that it does), the other companies won’t be sitting idle doing nothing. While excuses can still be made for keeping Bharat Sanchar Nigam Ltd(BSNL) going, there is none to keep MTNL running.

It’s time the government shuts down the company and starts monetising its assets. MTNL has offices in premier areas of Mumbai and Delhi. In Mumbai, two offices in Prabhadevi (Central Mumbai) and Cumbala Hill (South Mumbai) can be sold at a very good price. The money thus earned could be spent towards improving the physical infrastructure of the country.

It’s time the country stopped subsidising the lives of a few thousand individuals that MTNL employs.

The column originally appeared in the Vivek Kaul Diary on June 2, 2016

 

Air India Has Turned Profitable and That’s Got Me Worried

Air_India_001

Air India, the airline owned and run by the government, has made an operational profit of Rs 8 crore during 2015-2016.

The minister of civil aviation, Ashok Gajpathi Raju, said this in the Lok Sabha last week. The airline was able to cut operational expenses by almost 11% during the course of the year, the minister added.

For an airline which has been facing huge losses over the years, this is good news. Take the look at the following table.

YearLoss (in Rs crore)
2014-20155859.1
2013-20146279.6
2012-20135490.1
2011-20127559.7
2010-20116865.2
Source: Public Sector Enterprises Survey32053.7

Between 2010-2011 and 2014-2015, the airline faced total losses of a whopping Rs 32,053.7 crore. In fact, even in 2015-2016, the airline is expected to make a net loss of Rs 2,636 crore, though operationally it has made a profit.

Having said that, an operational profit of Rs 8 crore will now be used as an excuse to keep the airline running. In the years to come, more money is likely to go down the drain in trying to keep the airline up and running. In fact, the minister of state for civil aviation Mahesh Sharma told the Rajya Sabha yesterday that the government has no plans of disinvesting Air India.

It is important to ask here as to why Air India made a profit in 2015-2016, after having lost loads of money in the previous years. One reason as Raju pointed out in the Lok Sabha has been operational efficiency.

What the minister did not say was that a major reason for the turnaround has been lower oil prices. In May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower at $0.93 per gallon in January 2016.

A March 2016 PTI report quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs 5,700 crore, which would be lower in comparison to the Rs 8,200 crore bill that the company ran up in 2014-2015.

Further,  the Mint newspaper quotes aerospace journalist Hormuz P. Mama as saying: “I feel that Air India’s improved performance is almost entirely due to the very low jet fuel prices. There does not seem to be much of a turnaround effort in place.”

The jet fuel price is beyond the control of the Air India management. When the price starts to go up again, Air India will be back to making losses. But then the taxpayer is always there to foot the bill. Also, it needs to be pointed out here that as on March 2015, the airline already had a debt of Rs 51,367 crore. The airline was also given a lifeline of Rs 30, 231 crore lifeline by the government in 2012.

Air India is a symbol of all the taxpayer money that the government wastes to keep loss making public sector enterprises going. In fact, when it comes to the quantum of losses Air India is number two behind Bharat Sanchar Nigam Ltd, which made losses of a whopping Rs 8,234.09 crore in 2014-2015. The company has made losses of Rs 23,138 crore between 2012-2013 and 2014-2015.

As the Public Sector Enterprises Survey 2014-2015 points out: “Amongst the top ten loss making companies, Bharat Sanchar Nigam Ltd., Air India Ltd., and Mahanagar Telephone Nigam Ltd. were the top three loss making CPSEs during 2014-15. The top ten loss making companies claimed 85.45% of the total losses made by all the (77) CPSEs during the year. The top three loss making CPSEs namely, Bharat Sanchar Nigam Ltd, Air India Ltd. and  Mahanagar Telephone Nigam Ltd incurred a loss equal to 62.09% of the total loss of all loss making central public sector enterprises in 2014-15.”

These losses are borne by the Indian government. In fact, if you look at the table carefully, the fourth largest losses of Rs 2,164 crore were made by a company which makes photo films. Yes, you read it right.

Why should this government or for that matter any government lose more than Rs 2,000 crore in a year, making a product, which doesn’t have any utility left in this day and age? I really don’t have an answer for that.

It isn’t exactly that the government of India is floating around with a lot of money at its disposal. To give you a sense of comparison, India’s agriculture budget in 2015-2016 was Rs Rs 15,809 crore. This was lower than the total losses faced by the seventy-seven public sector enterprises.

In fact, it was lower than the total losses of Rs 16,987 crore faced by the top three loss making enterprises—Bharat Sanchar Nigam Ltd, Air India and Mahanagar Telecom Nigam Ltd. Now who needs more money? Indian agriculture or the few lakh employees employed by these loss making firms?

Hence, the government spends thousands of crores of rupees every year to keep running the loss-making companies, in order to sustain the livelihood of around 2.5 lakh people working in these companies.

The question is why is the government mollycoddling 0.02% of the nation’s population, when the money going towards sustaining the losses of these companies can easily be better utilised somewhere else.

This is basically a crime in a country as poor as India is. As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads To Disaster: “As a society grows richer it can afford more illusions, more entertainments, more re-distribution of wealth, more regulation, higher taxes, and more unproductive people.”

Right now India cannot afford the huge bunch of unproductive people working at public sector enterprises being subsidised by the government. Further, every rupee that goes towards sustaining these companies is taken away from something else.

Of course, loss-making or not, every minister likes a few public sector enterprises under him. Take the case of the Civil Aviation minister, how much value would he have with Air India not continuing to be government owned? Or how much value would the telecom minister have without MTNL and BSNL, the two government owned telecom companies, continuing to be government owned.

Hence, understandably there is a resistance at the level of ministers in the government as well as bureaucrats, to the entire idea of privatisation. But then in economics there are no free lunches, and someone has to pay for it.

Postscript: In the original column I had said that an operational profit of Rs 8 crore would mean that the government will not have to pump any more money into Air India. That is incorrect. The airline has made a net loss of Rs 2,636 crore in 2015-2016, which means taxpayer money will go into the airline and which actually makes the situation much worse, with almost all the drop in losses coming in from the savings on fuel costs.

The column originally appeared in the Vivek Kaul Diary on May 11, 2016