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B. O. T. - Views on News from Equitymaster
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  • Aug 15, 1998

    B. O. T.

    Over the past few years, infrastructure has been the most widely used word in speeches and talks by our respected leaders. They correctly pointed out that India lacks ports, power, roads, and telephones. And they correctly pointed out that big investments, not necessarily by the government, are required. To attract private flows into infrastructure, the government borrowed quite a few terms from my friends in the investment banking community based on the experiences of the now wounded Asian tigers. There was BOO (build own and operate) to welcome investors, not scare them, which allowed investors to continue owning the assets and making money over the years. And there was BOT (build operate and transfer) to encourage investors to invest for a few years, make their money and then transfer the assets to the government after having recovered the required returns from the investments.

    But now the government seems to have created a new kind of terminology: B. O. T. or bail out telecoms. After much controversy, the telecom tenders finally got off the ground a few years ago. My friends in the investment banking community sent their best and the brightest to spend months holed up in five star hotels of Bombay and New Delhi running all their valuation models in order to advise the Indian and foreign companies on the bids to be submitted. Much to the delight of the Indian government, many of these telecom circles went for some good valuations and over fifty thousand crores of rupees were promised in terms of fees over the next ten years.

    At that point in time (remember it was the boom days of 1995) the valuation of these telecom projects seemed feasible to the gung-ho Indian industrialists, the growth-seeking foreigners, and my friends in the investment banking business who valued all these deals. But things have not quite worked out the way the bidders anticipated. In addition to incorrect calculations on the cost of capital (fx risk and interest rate increases), that skyward-aiming demand graph for telecoms (cellular and fixed line) seems to be looking a little like the popularity graph of our nuclear tests: a spike due to the initial euphoria and then the sinking "how stupid we were" response. From expecting every Indian household to having a fixed line connection and a cellular phone, the license holders have now figured out that they cannot afford to provide the services they promised at the prices they promised without filing for bankruptcy! A newspaper article suggested that the fee some cellular licence holders pay to the government is Rs 4 per minute or about the same what they charge the cellular user for a phone call.

    The first signs of trouble came a few months ago when a newspaper story suggested that ICICI and IDBI have approached the government to support the request of the telecom companies that the fees be reduced or the licence period be extended to 15 years from 10 years. Basically, 5 years should be given free. I was very keen to write about this then, but waited to see if my prediction would come true: the government would save the industrialists. Now, it looks like a bail out is in the offing. All the risk takers of capital, have now returned to say that the risk they took was wrong so please can they not incur a loss! If the risk taken had turned out correct, would these same companies have gone back to the government and given them more money as fees? Or would they have reduced the charges to users of the telecoms so that they would only be getting a "fair" return? One of these risk takers was quoted in a newspaper article as saying: "The whole concept of licence fees as (we have) in India is counter-productive . Really? Then where was he for the past four years? And why was he holed up in a hotel room with investment bankers bidding for these licences? Another quote: "Revenue-sharing is a better approach". Just because these guys got their calculations wrong, they now want to split the risk with the government! If things go well after 5 years, the telecom operators will probably go back and negotiate a buy-back of that "revenue-sharing" agreement from the government.

    This is the kind of thing that gets me upset: we have policy makers who are changing policy to protect a few industrial and foreign groups - at the cost of consumers. This is a variation of what caused Asia to collapse: crony capitalism. The government using public money (money owed to DoT is money that belongs to the government and to us) to help the "poor" Indian corporates. Private sector liabilities become government liabilities. These telecom operators should be allowed to go bankrupt and their assets frozen to pay off the promised licence fees. And after they have gone bankrupt, the circles should be opened up for bidding again: next time around we will get sensible bids and the private sector phone connections promised for so long.



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