Chapter-V

Financial performance
and
pricing of BSNL
 148

CHAPTER-V
Financial Performance and Pricing of Bharat
Sanchar Nigam Limited (BSNL)

In the last Chapter, evaluation of financial performance of DoT and the

Pricing policy adopted by it have been made. In this Chapter, the financial
performance and pricing of BSNL have been evaluated

This Chapter is organized into two sections. The section one broadly
deals with the analysis of financial performance of BSNL and the section two
deals with the analysis of pricing policy adopted by BSNL.
 149

Section-1
Financial performance of BSNL
1. Introduction.

In the earlier section of this chapter we have analyzed the tariff and
pricing of DoT before its conversion as BSNL. In this sub section analysis of
the financial performance of BSNL for the period from 2001-02 to 2003-04 has
been made. The BSNL was formed with effect from 1st October 2000. As it was
formed in the middle of the year 2000-01 this year has not been considered for
the analysis. However, the 3 years selected for analysis cannot be taken as a full
and fair comparison of “Corporate” and the “Departmental structure”. The
following points are relevant to the instant study.

The BSNL was not fully functional as a company till recently except
complying with statutory requirements on maintenance of accounts, submission
of returns and payment of taxes. The Board of Directors was not constituted till
2004 with regular Directors. The employees were on deemed deputation from
the Government and could not be fully absorbed till March 2004. Many of the
policy issues on conversion of the DoT into BSNL have not been settled fully.

The BSNL was treated like a Departmental structure for its

administration, in resource allocation and personnel and HRD matters.

2. Objective of this sub-section.

This sub section broadly aimed at attempting the following.
 150

(i) To analyze the profitability of BSNL with a view to identifying the

differences with that of DoT and to explain the impact of the factors
responsible for such position.

(ii) To analyze the liquidity position of BSNL and to bring out the relative
differences if any between BSNL and DoT and also to bring out the
factors for such position.

(iii) To analyze the long-term solvency position, in order to highlight the

relative strength of the BSNL for maintaining the same

(iv) To analyze the efficiency of asset use of the BSNL and the DoT to
identify which one has used more effectively its assets and to analyze
their impact on the overall efficiency of the organization.

(v) . To summarize the main findings of the study by offering suitable

suggestion, if any for the better performance of BSNL in the relevant
chapter of this study.

The analysis has been made by using audited financial statement of

BSNL for 3 years ending 2003-04 and the published financial result of DoT for
3 years immediately preceding its conversion into BSNL. For the purpose of
comparison, the financial figures as available in the Balance sheet of DoT,
which were prepared to meet the requirements of the Government have been
restructured conforming to that of BSNL for the purpose of a meaning full
comparison
 151

3. An overview of Departmental structure and Company

structure.
Before going further in analyzing the issues it is necessary to highlight
the difference between the Departmental structure, the DoT was holding and the
Company form of structure, the BSNL is holding

Departmental structure.

The DoT, until its conversion as BSNL on 1st October 2000 remained as
a department of the Government of India, broadly functioning the same way as
any other economic and pon-economic Ministries of the Government of India
except with a difference that it prepared Profit and Loss account and Balance
sheet being a Commercial department. The departmental structure of DoT
remained substantially unchanged for a long time say about 100 years except
some minor structural readjustments within the Department like separation of
Telecom from P&T (1985), creation of Telecom commission (1989), setting up
of two corporate sub structure for services like MTNL and VSNL (1986.)

A significant strength of the Departmental structure is the high level of

internal resource conservation. It is free from two major liabilities
(i) Tax on surplus/profit.
(ii) Charge on capital assets by way of cash out flow in the form of
interest/hire purchase or lease rentals.

This is illustrated by the fact that DoT’s Plan outlay of Rs.2699 Crores
for 1989-90 was met by the internal resources to the extent of Rs 1912 Crores.
The deficit of Rs 787 Crores was financed by borrowing Rs 500 Crores from
the market and Rs 287 Crores from the Government. During 1990-91, direct
Government funding fall to a nominal figure of Rs 25 Crores out of a Plan
outlay of Rs 2875 Crores. On top of this, DoT had also paid to the Government
a dividend of Rs 178 Crores and Rs. 198 Crores for these two years. 1

Unlike any other Department of the Government of India, the DoT

prepared “Commercial” accounts, including P&L Accounts and Balance sheets.
It used accrual basis of accounting. However, it does not make a capital charge
for “share holders funds” and the contra assets.

In addition to the above the following information relation to DoT are

noteworthy.
(i) . It charged interest on market borrowings and paid a dividend.

(ii) . It provided a vast volume of information to Parliament.

(iii) It was subject to the highly independent C&AG Audit. The Telecom
Commission had been vested with administrative and financial powers
and autonomy unprecedented in the Government environment.

(iv) . It’s budget/spending were all subject to the approval of the

Parliament like any Departments of the Govt.

(v) . It followed the rules and regulations of the Government of India

in managing the organization including Human Resource
Management, Material Management etc.

(vi) It followed the Government directives/policy/and goal of the political

parties in power keeping away the main objectives of any commercial

1 GOI, DoT, Annual reports and Combined Finance Revenue Accounts of the relevant years.
 153

organization viz profit maximization or to run the organization with the

sole objective of earning profit.

In addition to the above, it carried out both the functions of policy and
regulation, which include tariff fixation for services and ensuring technical
compatibilities, apart from service provision, and this function was carried out
till the independent regulator was formed in 1997. Above all, it functioned as a
natural monopoly Department without any competitor and outside interferences
like TRAI, TDSAT etc.

Social Objectives.

All Governments have some degree or the other of social objectives. A

developing country, and a large one like India, has to blend social and economic
objectives. In the long run, these two go together and are mutually reinforcing.
It is aware of the overt as well as hidden cost of “subsidies” in the discharge of
social objectives. The target beneficiaries who have the purchasing power, they
may well be expected to pay a proper price where they do not have adequate
purchasing power and really deserve the subsidy, and the organization
providing the service may be compensated by Government. Such tariff and
compensation must be based on efficient and optimal cost of operation. Neither
the paying customers nor the general taxpayer should be expected to bear the
burden of any organizational inefficiency. The DoT was not an exception to
these objectives and principles.

Company form of structure (BSNL)

Contrast to the objectives and the working of the Government

Department (DoT) as stated above, the BSNL an entity created and registered as
 I OH

a Company under the Companies Act has got its own disadvantages and
weaknesses when compared to the Departmental structure of the Government,
the DoT. The additional cash out flow liabilities have arisen in respect of the
following items for BSNL which were not there in the Departmental structure.

(1) Payment of Corporate Tax and other taxes like property tax on
fixed Assets.
(2) Expenses on Insurance - in corporate structure all assets need to
be insured.
(3) Interest liability - this cost was hidden under the DoT set up but explicit
in the company structure.
(4) Additional payments to Employees by way of increase in salaries
and perks
(5) Retirement / pensionary benefits.
(6 Payment of licence fee and spectrum charges to the Government
like any other private operator.
(7) To function in accordance with the overall control of the regulator and to
carry out the service, following the tariff structure in accordance with
the directives of the regulator.
(8) Ensuring technical capabilities and effective inter relationship
between different service providers.
(9) To follow the regulatory arrangements amongst service providers and
sharing their revenue from providing telecom services.
(10) Ensuring compliance of licence conditions like any other
Operator.
(11) . Laying down and ensuring time frames for providing Local and
Long distance circuits between service providers.
 155

(12) Dispute settlement between service providers.

(13) . Ensuring effective compliance of universal service obligation
(14) . Levying fees at such rates and in respect of such services as may be
determined by regulations.

In view of the above differences in the organizational structure, the

BSNL is put in a disadvantageous position vis-a-vis the earlier monopoly
structure of DoT. The BSNL has to function like any other Company in the
Country following various statutory requirements. These were all not applicable
to DoT. Further, the BSNL’s power on financial and administrative matters are
controlled and monitored by the Administrative Ministry, the Ministry of
Communications and the Department of Public sector Enterprises (DPE).
Therefore, in all respect the performance of BSNL cannot be compared with
that of DoT, as these two are not a perfect match. At the most its performance
can be compared with other Telecom companies, but no such giant Telecom
Company with comparable stature is in existence in India at present.

The DoT remained as a departmental structure for about a century

enjoying the monopoly status with enormous powers and privileges as a
Government organization including the powers to fix tariffs without any
external control. The BSNL, being a Company is expected to manage and run
as one of the operators in the telecom sector and subject to control and
regulation by Government, the Telecom Regulator and is not free to fix the
prices on its own, completely. It has also to comply with various other statutory
requirements like any other company, to pay taxes, Licence fee and spectrum
charges, etc.
 156

4. Analysis of financial performance

The Main purpose of analyzing the financial performance of BSNL in

this study is to make a comparison with that of DoT on the same parameters.
The DoT remained as a departmental structure up to 2000 and the same
organizational structure has continued to function as BSNL with a changed
Character.

In the analysis we are interested to know mainly the longevity and

solvency of the BSNL as it has to confront with lot of post conversion
complications and difficulties including the problems and non-co-operations
from four lakhs of employees who were not interested in loosing their status as
Government servant. Further more, the Government is keen to disinvest the
shares of BSNL and to make further structural changes with the ultimate aim of
privatization. In order to gauge clearly its solvency, the best way for analysis is
applying various tools on analysis of financial statements and ratio analysis and
hence an attempt is made to work out relevant financial ratios and to compare it
with that of DoT.

Profitability Analysis

Profitability is the overall measure of any company with regard to

efficient and effective utilization of the resources at its command. It indicates in
a nutshell the effectiveness of the decision taken by the management from time
to time. The profitability is also known as “Return on investment/ or Rate of
return (ROI/ROR)2

2 Khan & Jain (1995) “Management Accounting” , Tata Mcgraw-Hill Publishing Company Lt, New Delhip59-
140
 157

The profitability can be calculated by using the following ratio: -

Return on investment (ROI) = Net Profit / Total Capital employed

Table V. 1.1 presents the relevant data showing the percentage of profit to
capital employed from 1997-98 to 2003-04 separately in DoT set up and in
BSNL
Table V.1.1 Table showing the percentage of Profit before tax to Capital
Employed (Rate of Return)
DoT BSNL
1997-98 1998-99 1999-2000 2001-02 2002-03 2003-04
19.67% 21.50% 19.82% 12.31% 4.87% NA
NA-] 4ot available
Source: Constructed from the data available in the Annual report of BSNL and the
Profit & Loss Account and Balance sheet of DoT of various years

It is concluded from the data given in the table above that the rate of
return was consistent, around 20 percent in DoT prior to its conversion as
BSNL in 2000. In BSNL it has come down to 12.31 percent in 2001-02 and
further steeply decreased to 4.87 percent in 2002-03. It reveals that the
resources are not utilized fully in BSNL.

Turnover and Assets efficiency.

Efficiency of generating Revenue from services can be measured with the

help of net profit margin, and the Asset efficiency/ Asset efficiency ratios.
These two ratios are components of Return on investment.(RoI).

Assets efficiency Ratio: This ratio measures the efficiency of the assets use.
The efficient use of assets will generate greater sales per Rupee invested in all
assets of a Company. The efficient use of assets will result in low sales volume
coupled with higher overhead charges and under utilization of the available
capacity. Hence the management of any organization must strive for using total
resources at optimum level to achieve Return on Investment (ROl)

Assets efficiency Ratio = Net Sales / Total net assets.

Service provided /Sales efficiency Ratio: This ratio explains per Rupee of
profit generating capacity of the service provided/sales. If the cost of service
sold is lower, then the profit will be higher and by dividing it with the net
service provided, the result is the higher sales efficiency. Normally any
company must try for achieving greater sales efficiency for maximizing the
Return on investment (Rol)

Sales efficiency ratio = Net Profit / Net Sales.

Table V.1.2 present the data of sales and assets efficiency ratio of BSNL
and DoT from 1997-98 to 2003-04 separately in DoT set up and in BSNL

Table V. 1.2 Sales and Assets efficiency Ratios. (In percent)

Items DoT BSNL

1997-98 1998-99 1999-2000 2001- 2002-03 2003-04

02

Net Revenue 8498 10849 11976 6312 1445 5977

(Net profit margin)
(Rs Crores)
Total Net Assets 39578 46434 55499 58922 63010 62861

Sales & Assets <

Efficiency Ratio 21.47% 23.36% 21.59% 10.71% 2.29% 9.50%

Source: Constructed from the data available in the Annual report of BSNL and the
Profit & Loss Account and Balance sheet of DoT of various years
 159

From the data given in the table above we can draw the following
conclusions.

(i) . The profit margin of DoT was gradually increasing in every year whereas
in BSNL it is coming down. This indicates generation of higher level of
profit margin when the organization remained as a Departmental
structure.

(ii) The assets efficiency ratio was over 21 percent in DoT during the three
years preceding the formation of BSNL. It has come down to less than 50
percent in BSNL within three years of its formation

(iii) The performance of BSNL is less than that of DoT on this score.

Return on Equity: The rate of return on equity can be calculated by

dividing profits after tax (PAT) by equity. The equity of BSNL comprises of
Government contribution for equity, all reserves and surpluses. In the case of
DoT, the corresponding figure has been arrived at by subtracting the liabilities
from the total assets, which will normally be equal to total equity. This has been
done for the purpose of comparison, because there is no element of equity in the
cases of Government Departments. The Table V. 1.3 presents the ratios of return
on equity from 1997-98 to 2003-04 separately in DoT set up and in BSNL

Table V.1.3 Table showing the ratios of return on equity.

DoT BSNL

1997-98 1998-99 1999-2000 2001-02 2002-03 2003-04

Z
>

21.99% 21.72% 19.44% 13.21% 2.99%

1

Source: Constructed from the data available in the Annual report of BSNL and the Profit
& Loss Account and Balance sheet of DoT of various years
 160

Conclusion:
(1) The return on equity was 21.99 percent, 21.72 percent and 19.44
percent in 1997-98, 1998-99 and 1999-2000 in DoT whereas it is 13.21
percent, 2.99 percent in 2001-02, and 2002-03 in BSNL, It shows that
the return on equity in BSNL is very low when compared to the same
parameters in DoT.

(2) The ratios in BSNL are quite not satisfactory by any standard. This
explains that Rs 100 invested in BSNL could generate only Rs 13/-, Rs
2/- per year during the 2 years of 2001-02 and 2002-03. This is not a
satisfactory return on equity.

Analysis of the Liquidity position: In order to highlight the relative strength

of BSNL in meeting their current obligation to maintain sound liquidity and to
pinpoint the difficulties if any in it, an attempt has been made to study the
liquidity position of BSNL and a comparison is made with that of DoT

The analysis of the liquidity position is made by using the following

Liquidity ratios.

(i) Current Ratio = Current Asset / Current liabilities.

(ii) Cash to Fund Expenditure for operations: Cash and Bank Balances /
Fund expenditure for operations.

Table V.1.4 presents the data of liquidity ratios from 1997-98 to 2003-04
separately in DoT set up and in BSNL
 161

Table V.1.4 Table showing the Liquidity ratio of BSNL and DoT
DoT BSNL

1997-98 1998-99 1999-2000 2001-02 2002-03 2003-04

5.32 7.50 9.42 0.74 0.84 0.66
Source: Constructed from the data available in the Annual report of BSNL and the
Profit & Loss Account and Balance sheet of DoT of various years

Conclusion:

(i) The current ratios of BSNL are significantly lower than that of DoT.
However, it is more than the normal industry norms of 2 : 1 (50 percent)
(indicate that for every Re 1 of current Liabilities must have two rupees
of current assets)

(ii) The current liabilities reveal that the BSNL is not able to maintain sound
liquidity position. It is really alarming that it maintains the ratio at the
marginal level. It is desirable that the BSNL maintain the sound
liquidity position by reducing the burden of excessive current liabilities
or by increasing the investment in the components of current assets
depending upon the requirement of the Company, otherwise it will face
chronic liquidity position without clearing the current maturing
obligations.

Analysis of Leverage position

The leverage ratio explains the extent to which the debt is employed in
the capital structure of the companies. Always companies use debt funds along
with equity funds, in order to maximize the after tax profits, thereby optimizing
earning availability to equity shareholders. The basic facility of debt funds is
 162

that after tax cost of them will be significantly lower, and which can be paid
back depending upon their terms of issue. Debt funds will not dilute the equity
holders control position. However, the debt funds are used very carefully by
considering the liquidity and risk factors. The debt will increase the risk of the
company. Now let us analyze the leverage position of the companies. For this
purpose we have made using the following ratios.

(i) Debt equity ratio: This ratio measures the extent of equity covering the
debt. It is computed by dividing debt by equity. Normally debt equity ratio of
2:1 (50%) is considered to be standard.

Debt Equity Ratio: Long term debt / Equity.

(ii) Interest coverage ratio: It measures the ability of the organization to

serve the debt.

Times interest earned/ interest coverage ratio :

Earnings before interest and taxes /Interest./
(iii) Total debt to total asset ratio: It measures the debts to the total assets.
More the debts the solvency position is less.

Total Debt to total assets Ratio: Total Debt / Total assets.

Table V.1.5 presents the leverage ratios of BSNL and DoT from 1997-98
to 2003-04 separately in DoT set up and in BSNL
 163

Table V.1.5 Table showing leverage ratios of BSNL and DoT

Ratio/ years DoT BSNL
1997-98 1998-99 1999-2000 2001-02 2002-03 2003-04
Interest
Earned ratio 1062 915 353 4682 3645 882
Debt to equity
Ratio 27.19 13.69 9.44 20 15 NA
Debts to
Assets Ratio 9.32 6.56 2.37 2.91 2.90 0.47
NA: Not available
Source: Constructed from the data available in the Annual report of BSNL and the Profit &
Loss Account and Balance sheet of DoT of various years

From the data available in the above table the following conclusions is
drawn.
(i) Both in DoT and in BSNL the interest earned ratio reflect greater
consistency in debt employment. However, BSNL is employing striking
higher amount of debt when compared to DoT except for the year 1997-
98. This is because, when the BSNL was formed the business was
transferred to the company by dividing partly the estimated value of the
company as Equity and Preference Shares and partly as Loans of an
amount of Rs 7500 Crores.3

(ii) Debts to Assets ratio is in the range of 2 percent to 9 percent in DoT and
up to 3 percent in BSNL. Both DoT and BSNL have maintained
satisfactory interest coverage position. Interest burden on BSNL is higher
than that of DoT. However, it shows a declining trend every year. This is
because the BSNL had not resorted to long-term borrowings to meet its
funds requirements. The BSNL has got a moratorium on payment of
Interest on the loans from the Government.

3 GOI, BSNL, Annual Report for 2000-01

 164

Activity Ratios : These ratios are also called as turnover ratios. These ratios
indicate the position of the assets usage. In order to compute these ratios, sales
are divided by various types of assets such as inventory, debtors and net fixed
assets. The ratios are expressed in number of times. The greater the ratio more
will be the efficiency of assets usage. The lower ratios will reflect the under
utilization of the resources available at the command of the companies. Always
the companies must plan for efficient use of the assets to increase the overall
efficiency. In the analysis the following ratios have been covered.

(i) Inventory Turnover ratio: This ratio denotes the speed at which the
inventory will be converted into income from services, thereby contributing for
profit of the Company. When all other factors remain constant, greater the
turnover of the inventory more will be the efficiency of its management.
Further, it will be higher when the income from services is maximum and the
average inventories is minimum

Inventory Turnover Ratio : Sales(Income from Services)/ Average

inventory.
(ii) Debtors Turnover Ratio: This ratio indicates the percentage of debtors
to income receivable in each year. The lower the value of ratios, the more is the
efficient management of debtors

Debtors Turnover Ratio : Sales(Income from Services)/ Average

Debtors.
(iii) Net Fixed Assets Turn over: This ratio shows the speed at which net
fixed assets are used to generate income from services. The optimum uses of
such assets always increase the efficiency of the companies. If higher is the
 ICO

turnover, more is the efficiency with which net fixed assets are operated. It can
be calculated dividing income from services by the net fixed assets and it is
expressed in number of times.

Net Fixed Assets Turnover = Income from services /

Net fixed assets.
Normally the inventory turnover ratio is crucial in “manufacturing
industries:” which are required to keep certain amount of inventories in the
form of work in Progress and Raw materials etc depending on the type of
industries. In our case the DoT/BSNL is service providing industries and the
question of keeping large quantum of inventories may not arise, Table V.1.5
shows all these ratios from 1997-98 to 2003-04 separately in DoT set up and in
BSNL

Table V.1.5 A Table showing the activity ratios of DoT and BSNL in various
years.
DoT BSNL
Ratio 1997-98 1998-99 1999- 2001-02 2002-03 2003-
2000 04
Inventory Turn over
Ratio (%) 3.05 2.80 2.95 15.62 12.53 7.47
Net Fixed Assets
Turn over Ratio (%) 39 39.79 35.30 41.24 40.14 49.95
Percentage of Debts
to income from 21.82 21.06 24.24 29.06 28.04 19.68
Services (%)
Source: Constructed 'rom the data available in the Annual report of BSNL and the Profit
& Loss Account and Balance sheet of DoT of various years
 166

From the data available in the above table the following conclusion have
been drawn
(i) The turnover ratio in BSNL has come down from 15.62 percent in 2001-
02 to 7.47 percent in 1993-04. However, this ratio is very low, around 3
percent in DoT and much less than that of the position existed in BSNL.
It reveals that the inventory management is better in BSNL than it was in
DoT

(ii) The BSNL has striking higher percentage of debts to income with 29.06
percent in 2001-04 to 19.68 percent in 2003-04 showing a declining
trend. This is a good symptom of effective management of debts. Lower
percentage is possible either the income from services is increased or the
debtor’s balances have reduced. However, the corresponding figure in
DoT is less when compared to that of the position in BSNL, that is the
percentage of debtor balances to the total revenue is less in DoT, though
the difference is marginal.

(iii) The net fixed assets turnover shows that in all the years it was
significantly higher in BSNL with 41.24 percent in 2001-02 to 49.95
percent in 2003-04. The corresponding figure in DoT is 39 percent in
1997-98 and 35.30 percent in 1999-2000 and shows a declining trend
every year. The trend indicates that the efficiency of BSNL on this score
is more than that of DoT.

Evaluation of other parameters.

The total income per employee and staff expenses per employee during
the period from 1997-98 to 2003-04 have been worked out and shown
separately for DoT and BSNL in table V. 1.6.
 10/

Table V.1.6. Table showing the income generated per employee, expenditure
per employee and the surplus per employee.
(Fig Rs in Lakhs)
Items/Y ears DoT BSNL
1997-98 1998-99 1999-00 2001-02 2002-03 2003-04
Income per
employee 3.86 4.62 4.90 6.07 6.32 7.85
Expenditure per
employee 0.91 1.12 1.09 1.96 2.93 3.37
Surplus
generated per
employee. 2.95 3.50 3.81 4.11 3.39 4.48

Source: Constructed from the data available in the Annual report of BSNL and the Profit &
Loss Account and Balance sheet of DoT of various years

From the above it is concluded that the total income per employee, the
staff expenses per employee and the surplus generated per employee were going
up during the period from 1997-98 to 1999-2000 in DoT. It stood higher in
BSNL when compared to that of DoT.

5. Impact on conversion of Departmental structure.

Consequent on the conversion of DoT, a departmental structure to BSNL,

a company, the BSNL has to incur additional expenditure on Corporate Tax,
Licence Fee, Pension contribution for employees to Government, Insurance
charges for the fixed assets and to incur expenditure in other areas like Auditors
Fee, Advertisement etc. At the same time it had also received grants from
Government for meeting rural telecom operations from the Universal Service
Obligation (USO) fund. It had also received re-imbursement of certain quantum
of licence fee and spectrum charges paid to Government.
 All the above elements have been assessed and adjustments made to the
Profit earned by BSNL and a comparison is made with the relevant data of DoT
and furnished in table V. 1.7.

Table V. 1.7. Table showing the comparison of performance of BSNL with that
of DOT as if the BSNL remained a Government Department.
_____________ _______________________ _(Fig: Rs in Crores)
DoT BSNL
1997-98 1998-99 1999-00 2001-02 2002-03 2003-04
Profit before 8498 10849 11979 6312 1444 5977
Adjustments
Profit after
Adjustments 8498 10849 11979 10626 6459 12921
Source: Constructed from the data available in the Annual report of BSNL
and the Profit & Loss Account and Balance sheet of DoT of various years

From the above it is concluded that the performance of BSNL in 2001-02

is lower than that of DoT in 1999-2000, the immediately preceding year to its
conversion. The performance of BSNL has come down drastically in 2002-03
and slightly improved in 2003-04.. A moratorium on payment of interest on the
loan of Rs 7500 Crores from the Government is extended during these years. It
is not known how long the BSNL is going to get these benefits of moratorium
from the Government. When the BSNL starts paying the interest, its
performance is expected to go down drastically.

6. Conclusion:

The performance of BSNL is far from satisfactory when compared to the

performance existed in the pre-conversion Departmental structure, the DoT.
The following contributes for the present state of affairs.
(i) The BSNL has to function in a competitive environment.
 169

(ii) It has no powers to alter the prices in its favour to meet its financial
requirements, rather it has to follow the guidelines of the Regulator in
price determination.
(iii) Though the structure is changed it has to function in the same way
it was functioning when it was a Government structure, which contribute
for its in efficiencies in financial performance.
(iv) It has to bear lot of hidden cost which cannot be quantifiable
 170

Section -2
Pricing in BSNL
1. Introduction
The previous section provided an analysis of financial performance of
BSNL. The principle objective of this section is to examine the pricing policy
of BSNL.

The BSNL inherited the pattern of pricing/tariff from DoT, when it was
formed on 01-10-2000. Before going in for analyzing the pricing policy of
BSNL, it is considered necessary to highlight in brief, the system of pricing in
DoT, formation of TRAI, the Regulator, its powers and functions with regards
to formulation of pricing.

Originally, the powers for fixing /revising /modifying the tariff for
telecom services were vested with Department of Telecom, Government of
India under the powers conferred on it in the Indian Telegraphs Act 1885. The
tariff fixation/revision was a sub-ordinate legislation, which was subject to the
approval of the Parliament.

Since 1999 competition has been allowed in basic services (Land line
telephone service). However, the share of BSNL and MTNL in basic services
has remained at over 98 percent of the total market. Private provision of basic
services has so far been able to create only a very limited impact, account for
not more than 1.6 percent of the total market. Further, the projections available
 1 /1

from the new entrants indicate that BSNL & MTNL will remain the dominant
operators in terms of market share in the near future4

Keeping the above-mentioned trend in to consideration, this section of

review of tariff of BSNL has been confined only to Basic services and the
analysis limited to the pricing of basic services

2. Telecom Regulator

The Telecom Regulatory Authority of India (TRAI), a statutory body was

constituted by the TRAI Act 1997. The powers for fixing tariff for various
telecom services were shifted from DoT to TRAI by virtue of section 11(2) of
the TRAI Act 1997.

The TRAI Act 1997 was amended by the TRAI (Amendment) Act 2000.
The amendments were brought about to remove certain difficulties that had
arisen. The desired objectives were to bring about functional clarity, strengthen
the regulatory framework and the dispute settlement mechanism. These were
attained by bringing about a clear distinction between the recommendatory and
regulatory function of TRAI, by making it mandatory for the Government to
seek recommendation of TRAI in respect of specified matters, by the setting up
of a separate dispute settlement mechanism etc.5

A separate dispute settlement body known as “Telecom Dispute

Settlement and Appellate Tribunal” (TDSAT) to adjudicate any dispute

4 tele.net Vol 3 Issue 10 October 2002 p 12.15

V GOI, DoT, Annual Report 2000-2001

 172

between a licensor and licensee, between two or more service providers,

between a service provider and a group of consumers and to heai and dispose of
appeals against any directions, decision or order of TRAI.6 was formed in the

year 2000.

3 Telecom Pricing by TRAI

In exercise of the powers conferred on it, the TRAI brought out the
Telecom Tariff Order (TTO), 1999 on 9th March 1999, the first Such tariff order
after it was formed and notified in the official Gazette on 15th March 1999. 7
This is also the first order of this kind by an authority other thar the DoT in the
Telecom set up in India.

The methodology and the principles adopted by the TRA[I in prescribing

the tariff in the TTO 1999 are broadly as under.

(1) To ascertain cost based tariffs for monthly rental and (jail charges and
then to determine whether these would be affordable.
(2) To aim at protecting consumer’s interest in a substantial manner,
provide financial viability to the service providers and also fostering
increased investment for rapid development of the sector.
(3) To recover access deficit that is the difference betweeii the cost based
tariff and affordable tariff from other sources such ab Inter connect
usage charges (IUC), which should be the part of long distance tariff,
(4) To begun the process of tariff rationalization with an increase in
monthly rental and decrease in STD and ISD tariffs an|d to implement
this rebalancing exercise in three stages.

7 GOI, TRAI, TTO 1999

 (5) To charge the commercial subscribers at higher level of rentals, which
should be correspond to the cost.
The TTO 1999 prescribed broad range of tariffs aimed at restructuring
the telecom tariff structure in the country and providing a transparent
framework for regulating these tariffs. Keeping in view the tariffs were
prescribed in a competitive trends seen in basic telephony market and aim to
protect consumer’s interest as well as to provide financial viability to service
providers in prescribing the tariff include a phased alignment of most prices to
reflect costs and provide a basis for enhanced competition.8

The tariff order prescribed in TTO 1999 allowed some flexibility on the
part of the operators. Keeping in view the re-balance exercise the TRAI
proposed a 63 percent rise in monthly rentals and simplification of local call
charges to a uniform unit charge as indicated in table V.2.1. The free calls are
suggested floor ie individual operators can provide for more than the indicated
free calls. The monthly rentals and usage charges are suggested ceiling with
individual operators retaining the flexibility to adjust tariff within these limits.9
Table V.2.1 Tariff fixed by TRI on monthly rentals and call charges.
Existing Revised
Monthly Rentals 190 310
Local calls 3 minutes. Further,
Pulse duration 5 Minutes proposed that this be
reduced to one minute
within 2 years of
implementation.
No. of bi-monthly 150 120
free pulse Slabbed with per pulse charge A uniform charge of Rs
allowance, Local rising with increasing usage 1.30 per pulse,
call charges (beyond the free pulses) from Rs irrespective of usage.
0.80 per pulse to Rs 1.40 per
pulse

8 GOI, TRAI, TTO 1999

9ING Barings, Asian Regional Research Telecom Review, Oct 1998, p 12.
 174

The following are other recommendations made by the TRAI in the TTO.
(1) Suggested a three-year transition period for other tariff changes with
two thirds of the overall change occurring at the beginning of the
implementation period, and the balance equally split between two
equal changes during the subsequent two years.
(2) To main the initial levels of rentals for non-commercial subscribers.
(3) Increased the monthly rental for commercial subscriber. The service
providers have not accepted this suggestion of TRAI and not
introduced higher rentals for commercial subscribers till date.

4. Alternate package adopted by DoT/BSNL

The DoT adopted an alternative tariff package on 27-03-1999 keeping in

view the overall tariff'package suggested by TRAI in TTO 1999 and the
flexibility allowed in it. The tariff adopted by DoT was consistent with the
worldwide trend and keeping in view the market reality. The following are the
salient feature of the package.

(1) No increase in rental or call charges for rural and low calling urban
subscribers. The existing tariff was allowed to continue for these
subscribers.
(2) No decrease in free call limits from the existing level for rural and
high calling and low calling urban subscribers.
(3) Long distance calls have been kept at the reduced level as per the rate
notified by the TRAI.
(4) The alternative tariff package was announced for the period upto 31-
03-2000.
 175

(5) The first phase of tariff re-balancing was made effective from May 1,
1999 when long distance STD and ISD tariff rates were reduced on an
average by about 23 percent.
(6) The second phase of tariff balancing was effected from October 1,
2000 where in tariff was further reduced for the national long distance
calls by an average of 13 percent for different slabs and for ISD calls
by about 17 percent.10
(7) The tariff was further revised with effect from Jan 26, 2001 under
which a radial distance of 200 KMs within the same circle was
brought down substantially. The subscribers can make calls within
this area without having STD facility in their telephones.10

Thereafter in 2000, the DOT decided keeping in view the objectives that
rates should move towards the actual cost in a manner that growth of tele -
density and affordability are not affected allowed that the orders issued in
March 1999 shall remain fully applicable up to 31st March 2002 except the
reduction in STD/ISD tariff. Accordingly, the DoT issued orders on 21st
September 2000 implementing the reduced charges.*11

5. Subsequent Tariff exercise by TRAI

The TRAI carried out in 2002-03 subsequent tariff exercise for

rationalizing the tariff structure, with a view to further re-balance the tariff. The
following are the features of this exercise.12
(1) Issuance of orders on inter -connection usage charges.

10 GOI, DoT, Annual Report 2000, 2001

11 GOI, DoT, Annual report 2000
12 GOI, DoT, Annual Report 02-03 pp.vii
 176

(2) Monitoring the quality of services of all service providers

(3) Conducting an objective survey on quality of services (QOS)
parameters of basic and cellular service in different circles through an
independent agency.
(4) Finalization of the system of Accounting Separation (SAS) for the
purpose of cost ascertainment.
(5) Deregulate in total the basic, NLD and ILD tariffs except for rural
subscribers considering the continued fall in tariff as a result of
increased competition. The calling Party Pays regime was also
introduced with effect from 1st May 2003.
Due to the changes in the price of basic services, the telecom sector has
experienced a decline in their revenue over the years and has felt declining
ARPUs (Average revenue per user) of (Basic service operators) BSOs over the
period. (TRAI has used changing ARPUs as an estimate of price decline of
basic services)13
6. Tariff re-balancing measure.

Consistent with the worldwide trend and keeping in view the market
reality, certain steps had been taken by DoT to rebalance the tariff structure.
The first phase of tariff re-balancing was made effective from May 1, 1999
when long distance STD and ISD tariff rates were reduced on an average by
about 23 percent The second phase of tariff rebalancing was effected from
October 1, 2000 where in tariff was further reduced for the national long
distance calls by an average of 13 percent for different slabs and for ISD calls
by about 17 percent14

1313 Tele.net, October 02 Vol 3 issue 10 p 12

14 GOI, DoT, Annual Report 2000,2001
 I / /

With effect from Jan 26, 2001 tariff were further revised under which a
radial distance of 200 KMs within the same circle was brought down
substantially. The subscribers can now make calls within this are without
having STD facility in their telephones.15

The BSNL followed a tariff that was in existence in DoT regime at the
time of its formation on 1-10-2000. Thereafter it followed various alternative
tariff packages announced by the DoT from time to time. Therefore, the BSNL
has no independence in taking its own decision in prescribing and following the
tariff policy of its own except introduction of matching tariff packages as a
marketing strategy to combat competition from Private service providers for a
limited period. Again there is also a ceiling that the number of such matching
packages should not exceed more than 30 at a time. Even when introduction of
these matching marketing tariff packages on regular basis are considered
essential by the BSNL, for its survival in the competitive market, it has to seek
the approval of the TRAI. In sort the BSNL has no independency in prescribing
and regulating the tariff except making minor adjustments within the flexibility
allowed by the TRAI.

7. A consolidation of Tariff of BSNL from 2000.

In order to bring out a clear picture, a gist of the telecom tariff that are
in vogue in BSNL since its inception in 2000 is furnished in table V.2.2

15 GOI, DoT, Annual Report 2000,2001

 178

Table V.2.2. Table showing the gist of Tariff in BSNL since 2000
Urban low calling Other Urban
Subscribers (up to Subscribers
Exchange system
200 calls monthly) Monthly
Monthly Rental Rental
(Rs) (Rs)
Rentals with effect from 01-05-1999
Measured Rate System
I Exchange system capacity less than 100 50 70
lines
ii Exchange System capacity of 100 lines 75 120
and above but below 1000 lines
iii Exchange System capacity of 1000 lines 100 120
and above but below30000 lines
Exchange System capacity of 3000 lines 137.50 180
iv and above but below 1 Lakh lines
V Exchange System capacity of 1 Lakh 180 250
lines and above but below 3 Lakh lines
vi Exchange System capacity of 3 Lakhs 190 250
lines and above
Call Charges and Free Calls.

Number of calls (Monthly) Call Rate (Rs) Duration of a Local Call

Up to 75 Calls . Free The duration of local will be 180

76 to 200 Calls 0.80 seconds (3minutes) irrespective of
201 to 500 Calls 1.00 any exchange capacity subject to
Above 500 Calls 1.20 technical feasibility

Rental Charges with effect from 01-02-2001

Measured Rate System with effect from 26-01-2001 Monthly Rental
(Rs)
i Exchange system capacity of less than 30000 lines 120
ii Exchange system capacity of 30000 lines and above but
below 1 Lakh lines 180
iii Exchange system capacity of 1 Lakh lines and above 250
 179

Tariff with effect from 01-05-2003

Particulars Standard BSNL Alternate Package Urban
Package(TRAI) BSNL
General Rural Eco Spl Super
Rural Urban Rural Urban Eco. Spl
1 2 3 4 5 6 7 8 9 10
A. Registration 500 2000 500 2000
Charge
B. Security One year rental One year rental
Deposit
C. Advance Rental/Security Deposit As per General Package
Payment
D Installation
Less than 500 300 300 300 300 300 300 300 300 300
Lines Capacity
500 Lines and 800 800 800 800 800 800 800 800 800
above
E. Billing Period One month for all the packages

Rental per Month

F.l Residential Subscribers

(i) Other than Senior Citizen

1 2 3 4 5 6 7 8 9 10
30000-99999 200 200 150 180
More than 280
100000
Plan charges 280 210 250
(including
Monthly Rental)
(ii) Senior Citizen
Exchange 70 120 50 120
System capacity
upto 999
1000 to 29999 120 120 110 120 - - - - -

30000 - 99999 180 180 150 180 - - - - -

More than 250 250 210 250 -

-
- - -

100000
Plan charges 150 650 350 750 1650
(including
Monthly Rental)
F-2 Commercial Subscribers
 180

30000 -99999 200 220 150 180 - - - - -

More than 280 310 210 250

100000
G Free Calls 50 30 75 50 150 700 150 600 1800
(Per month)
G. Unit Call Charges
First 300 MCU PM 0.80 1.00 0.80 1.00 1.20 0.00 1.20 0.00 0.00
except Free calls
> 300 to 600 MCU 1.20 1.20 1.20 1.20 1.20 0.00 1.20 0.00 0.00
>600 to 700 MCU 1.20 1.20 1.20 1.20 1.20 0.00 1.20 1.10 0.00
>700 to 1800 MCU 1.20 1.20 1.20 1.20 1.20 1.10 1.20 1.10 0.00
>1800 MCU 1.20 1.20 1.20 1.20 1.20 1.10 1.20 1.10 1.10

Local Call Charges

H. Pulse Rate (Time, duration for Local Calls)
Particulars Standard BSNL Alternate Package Urban
Package BSNL
(TRAI) General Rural Eco Spl Super
Rural Urban Rural Urban Eco. Spl
1 2 3 4 5 6 7 8 9 10
Basic to Basic 120 120 180 180 180 180 180 180 180
Basic to WLL(M) 120 120 90 90 90 90 90 90 90
Basic to Cell 90 90 60 60 60 60 60 60 60
Metro
Basic to Cell 60 60 30 30 30 30 30 30 30
(Circle)
I Timing
Peak hours 0900 0900- 0900 13 0900 0900 0900 0900- 0900
2200 hrs 2200
2200 2200 2200 2200 2200 2200

8. Comparison of Tariff of BSNL with the cost based tariff.

An attempt is made to work out the desired rate of tariff based

on actual cost and to make a comparison with that of the tariff prescribed by
TRAI and the tariff followed by BSNL, based on the following information
(a) Investment requirement per DEL
 181

(b) Operating expenses per DEL

(c) Revenue per DEL
(d) Pattern of revenue per DEL viz the percentage of rental and other
revenue to the total revenue.
For this purpose the Net Present value (NPV) method of discounted cash
flow techniques is applied. In the absence of availability of various accurate
information, the calculation has been made with assumptions, which are
explained at the appropriate places.

As the TRAI prescribed the first tariff order in 1999, the data as on 31-03-
1999 have been considered. The following are the required data to work out the
NPV. The method of applying this technique is explained in Chapter-Ill of this
thesis.
(a) Investment per DEL - Rs 22,888 (Table IV. 1.12)
(b) Operating expenses per DEL - Rs 4010 p.a (Table IV. 1.14)
(c) Revenue per DEL - Rs 7731 p.a (Table IV. 1.14)
(d) Life of the Project - 15 years.
(e) Discount rate - 22%
By applying the DCF method using the above data the required annual
and monthly revenue comes to Rs 9313 and Rs 776 respectively. This is the
revenue required from a DEL for no gain or no loss position. The actual
revenue per DEL per annum and per month as on 31-3-1999 is Rs 7731 and Rs
644 respectively. The prevalent actual revenue is less than the required revenue
of no loss or no gain position by Rs 1582 p.a and Rs 132 p.m.
From the pattern of revenue as in 31-03-1999, revenue from rental (fixed
revenue) and the revenue from call charges (variable revenue) works out to 17
percent and 83 percent respectively. The TRAI had taken measures to
 182

rebalance the tariff according to which the tariff for rental is increased and the
call charges is decreased considerably. It is expected that this changes may
bring out a change in the pattern of Telephone revenue.
An attempt is made to work out the change in pattern of revenue
consequent on the above changes made. For this purpose the data of BSNL,
Tamilnadu circle (Tamilnadu State excluding Chennai City) is consiered. This
circle is selected as it consists of a mixture of rural and urban DELs. The
figures collected is compiled and furnished in table.V.2.3
Tablle V.2.3 Comparison of cost based rental and the rental prescribed by TRAI
and the one followed by BSNL
Year Revenue per DEL Rental Percentage of Total No.of
component per rental to total DELs in the
p.m out of revenue per Circle
revenue per DEL (Lakhs)
DEL
P.a P.m
2001-02 6916 576 179 31.13 25.468
2002.03 6348 529 173 32.72 27.966

The weighted average of percentage of rental to the total revenue per

DEL works out to 32 percent. This means, out of the total revenue per DEL,
the rental component (Fixed charge) works out to 32 percent and other call
charges (variable charge) works out to 68 percent. By applying this percentage
to the required revenue as calculated above, the rental revenue works out to Rs
248 p.m and the call charges works out to Rs 528/- p.m. The call charges based
on cost cannot be worked out, as the data required for this purpose is not
available. The TRAI notified an order for accounting separation only in 1993-
94 for the purpose of cost ascertainment.
 183

The rental tariff as prescribed by TRAI, the tariff followed by BSNL

from 1-10-2000 and the required rate as calculated above are presented in table
V.2.4

Table V.2.4 Table showing the rental calculated based on cost, rental as fixed
by TRAI and the one followed by BSNL.
(Fig in Rs per mensum)
Cost basd As per TRAI As per BSNL
Rental
Rural Urban Rural Urban
Exchange capacity of

1 30000 lines & above 248 200 200 150 180

2 Above one lakh lines 248 280 280 210 250

From the above it is concluded that

(i) The BSNL is following a tariff, which may not recover even the
actual cost of providing the service.
(ii) The Tariff fixed by TRAI is almost equal to the cost based rental as
stated in TTO.
(iii) Any revenue per DEL below Rs 776 p.m may be a loss proposition for
the operation of telephone services for BSNL.

9. Comparison of tariff of various years.

The TRAI while prescribing the tariff had spelt out the principles based
on which tariffs are prescribed. They are (i) cost based tariff (ii) promote
efficiency in the supply of telecom services (iii) provide the services at
affordable prices to the consumers. The BSNL has opted to follow its own tariff
structure within the flexibility allowed in the TTO. In order to make a
 184

comparison of the tariff that were in existence prior to 1999, the tariff followed
by BSNL froml-10-2000 and the one prescribed by the TRAI , an attempt has
been made to work out the telephone bill payable by a common subscriber in
different point of time under different situation and furnished below.

Case taken for Illustration.

Description of the subscriber.

The subscriber is from the strata of middle class budgeted family, located
at Chennai City. The following additional information are considered.
The Subscriber:
(a) Type -Urban
(b) Exchange capacity - More than 3 Lakhs lines.
c) Calling pattern - per month
(i) Local calls - 150 Calls per month with a duration ranging
from 5 minutes to 7 minutes per call

(ii) STD Calls per month

-2 calls to Delhi to his son, studying there with a duration of
5minutes per call.

- 4 calls to Bangalore, to his daughter, who is also studying

there with a duration of 5 minutes per call.

- 1 Call to Tiruchirappalli,(within the state) to his father -

duration 5 minutes per call.

- 2 calls to various places with in Tamilnadu-duration 4 to 5

Minutes per call
 185

(iii) Trunk calls -Nil (All the stations he contacted were

connected by STD)

(iv) International Calls. -Nil

(d) Other information.

The subscriber is very conscious about his bill and hence makes the J >TD
calls during the concessional periods, say night or early morning

The telephone bill to be paid by the abovementioned subscriber in 19 89,

1991, 1999, 2001,2003 and 2004 (September) have been worked out based on
the tariff that were in existence in the relevant years and furnished in table
V.2.4
Table V.2.4 Table showing the telephone bill payable by a subscriber in
various years.

Particulars 1989 1991 1999 2001 2003 2004 As per

TRAI

1 2 3 4 5 6 7 8 9
1 Actual Local Calls 150 150 150 150 150 150 150
made (Numbers)
2 Local Calls 150 300 300 300 300 300 450
converted as MCU
for charging (No.
ofMCUs)
3 STD - Metered 425 575 643 641 450 75 715
call units (Nos)

Total Metered calls 575 875 943 941 750 375 1165
4
(MCUs)
5 Free Calls (Nos) .138 75 75 75 50 50 30

Telephone Bill for the subscriber for the month..

6

Rental Charges 165 165 250 250 250 250 280

 186

(Rs.)
Local & STD 350 400 482 479 480 295 762
call charges (Rs)
7 Total amount 515 565 732 729 730 545 1042
payable Rs.

For the purpose of comparison of the bill payable by the subscriber in

various years as given above, the value in various years have been converted to
the Present value (PV) as in 2004, applying the discount rate of 12 percent p.a
and furnished in table V.2.5. The discount rate of 12 percent is applied which is
correspond to the average borrowing rate of DoT during the last one decade. 16

Table V.2.5 Table showing the PV of Telephone Bill payable by the

Subscriber.

Particulars 1989 1991 1999 2001 2003 2004 As per TRAI

(2003)
1 Total amount 515 565 732 729 730 545 1042
payable
2 No. of Years 15 13 5 4 1 0 1

3 Present value 2819 2465 1295 1147 818 545 1167

From the above, it is concluded that

(1) Prior to formation of the Regulator and prescribing tariff by it, the DoT
was charging a very high tariff, which has no relevance to the cost. The
tariff prescribed by TRAI is nearer to the cost.

(2) Tariff had come down gradually ever since the TRAI started prescribing
tariff in 1999. However, the tariff applied by the DoT at the time of its
conversion into BSNL was more than the cost.

16 GOI, DoT, Combined finance and revenue Accounts 2000

 187

(3) The decline in tariff is on account of the competition in the telecom

sector as a result of the entry of private service providers.

(4) The present tariff of BSNL is not enough even to recover the cost and it is
52percent less than the cost based tariff.
10. Conclusion

We can conclude from the above that the tariff policy followed by DoT
before its conversion as BSNL has no relevance to the cost of service. The
prices are coming down consequent on the regulator prescribing tariff for the
services. The BSNL is operating in a situation of following a tariff policy,
which may not even recover the cost, save alone the profit. In the present
competitive environment the BSNL has no alternative except to follow a tariff
policy, which may not only woe new subscribers but also, retain the existing
subscribers with in their fold.