Dot Versus Vsnl: The Hidden War

On May 20, the department of telecommunications (DoT, India's telecom administration) sent out a strong signal. It would adopt all legal means at its disposal to block all future competition likely to challenge its leviathan status. That scorching day, the Rs 17,000-crore department wrote a seemingly innocuous letter to three contenders for a proposed "regional hub" joint venture _ christened Oasis _ of Videsh Sanchar Nigam Ltd (VSNL).

The contents of the letter stunned the three recipients: the British Telecom-MCI partnership, Cable & Wireless and Global One (a consortium of Sprint International, France Telecom and Deutsche Telekom). It said Project Oasis could go ahead _ but without the $500-million infrastructure planned. The Rs 2,000 crore was earmarked for setting up the infrastructure _ high capacity "pipes" (transmission circuits) and exchanges _ that would link the seven landing points on India (see map: The long-distance runners).

 

Without the infrastructure, as a VSNL official put it, the project is a "non-starter". "The project is as good as dead. Without the exchanges and the cable, the whole process of selecting a joint venture is meaningless. Even after a foreign partner is selected, the project will not be a strategic partnership. It will be just like any of the memorandum of understanding that VSNL has with operators all over the world," he said.

Asks a fuming senior executive handling the project for one of the international bidders: "It just does not make sense. Without the infrastructure, the project will cost just $5-10 million. How does the project handle regional traffic then?"

The three shortlisted bidders' disappointment with the DoT decision was evident: two of them pulled out from the final rounds of the "beauty parade"-- the process of tendering for the project -- leaving BT-MCI clutching the straws. Ironically, the government went through the nine- month rigours of the beauty parade in wake of protests against a VSNL move to partner BT-MCI without what was called a "fair and global" selection process.

Telecom experts, however, interpret the DoT move differently. They see it as a strategic move by the department to hobble VSNL, which it has clearly identified as a competitor when domestic long-distance telephony is opened up.

To understand the yet-to-erupt battle between the two telecom giants, it is important to understand the real business plans behind VSNL's regional hub project. On the face of it, Project Oasis envisages the development of India as a regional hub for voice and data telecom traffic. It was to link up a trans-Eurasian cable ending at Karachi to South Asian countries like India, Sri Lanka, Mauritius, Pakistan, Bangladesh, Myanmar and Singapore. This would be done by setting up a high-capacity fibre optic submarine cable (2.5 gigabits per second throughput) from Karachi to Calcutta which would have seven landing points (with dedicated exchanges) in the country with "spurs" or offshoots running off to neighbouring countries. A Jalandhar-to-Lahore land-cable was also proposed in the venture to route the traffic from Pakistan.

The numbers bandied around by developers of the project were impressive. About Rs 5,500 crore was projected to accrue to the joint venture over ten years. About five per cent of regional traffic was expected to be routed through this joint venture translating into cumulative revenues of some Rs 3,000 crore; while the venture was also to benefit from revenues (Rs 2,500 crore) by way of leasing or renting circuits to telecom carriers of other countries.

All these impressive figures, DoT officials and other experts recognised, were but a facade to the real intent behind Project Oasis. As VSNL insiders themselves admit, the project was not aimed so much at capturing regional telecoms traffic. It was clearly meant to target the domestic telecom long distance market _ worth some Rs 6,800 crore last fiscal year. A lucrative long distance transmission market _ in which government monopoly is coming up for review in 1999 _ with enormous voice and promising data potential has been on the sights of most telecom investors and VSNL was no different from the others.

The Indian telecom carrier's and BT-MCI's business sense was impeccable: set up the regional hub and when the domestic long distance telecoms market is opened up, apply for a licence. Once it was allowed entry, VSNL would interconnect the infrastructure of the Project Oasis eight switches and, voila, the carrier has a low-cost network with "pipes" criss-crossing the country at its disposal.

The phenomenal internal rate of return of the `real' Project Oasis prompted other telecoms carriers and domestic investors to make a pitch to participate in it. After a hue and cry in Parliament, DoT decided that VSNL could not go it alone with BT-MCI without a global tender. Also, it decided to have a domestic partner so that Indian companies could have a piece of the cake. To cut a long story short, global tenders were floated in July last year and IL&FS was asked to shortlist a domestic investor in the regional hub project last December. Seven international bidders pitched for the 20 per cent foreign equity stake, while several Indian top corporate groups _ including the Tatas, the Birlas and Reliance _ evinced interest in picking up an equivalent domestic stake.

Unsaid, of course, was that Project Oasis would give DoT stiff competition in the market. This scenario scares the department _ already under threat from basic telecoms operators in the states _ no end. Admits a retired member of the telecom commission: "When the (domestic long distance) market is opened up, the biggest advantage DoT has is a depreciated network. Giving an entrant _ that too, a strong one like VSNL _ a lead into the market would negate this advantage."

If allowed a toehold into the domestic long distance market, VSNL would have a presence in two crucial _ and, most lucrative _ links in the telecoms services value chain: national and international long distance services. Top DoT officials are also aware that a stockmarket-savvy corporation like VSNL with a listing on European bourses can raise larger amounts of funds at finer rates than itself. Although it is to be corporatised soon, the department knows it will take some years before it learns the ropes in the an increasingly customer-focused market.

VSNL's business moves have not helped restore confidence in Sanchar Bhavan, the 14-storey Delhi headquarters of DoT, either. The Rs 6,400-crore carrier recently signed a MoU with Chandigarh-based Punjab Communications Ltd to offer its entire portfolio of value-added services in Punjab. The move is to introduce international private leased circuits and Internet services to subscribers in Chandigarh, Ludhiana and Gobhindgarh. It is not coincidental that VSNL is not allowed to offer its services _ especially, Internet access _ directly in Chandigarh

DoT knows that the chips are stacked against it and is working fast towards remedying the problem. First on its pecking order of restructuring measures is strengthening its transmission backbone. It plans to string a fibre optic backbone of a 2.5 gbps capacity linking 100 towns and cities by 2002. The department has made it public that it will concentrate on transmission and long distance switching capacity in the next few years.

The aggressive pace of rollout is fired by similar backbone plans of other public sector undertakings like PowerGrid Corporation and Indian Oil Corporation, besides Indian Railways and state electricity boards. Official estimates say DoT will have total revenues of some Rs 45,000 crore, while VSNL will not be very behind at some Rs 30,000 crore by fiscal 2005.

So the next five years promise to be interesting-- at the very least -- for both DoT and VSNL. The international telecoms carrier will _ sooner or later, directly or indirectly _ gain an entry into domestic long distance services; DoT, at best, can postpone it. However, one thing's for sure: May 20, 1998 signalled the start of filial troubles between the two domestic telecom giants.