Vodafone to NHAI to SBI to solar power — Why ‘cheapest’ mantra is creating havoc in India

Catering to the bottom of the pyramid with ‘cheap’ services has forced many businesses in India’s infrastructure sector to go belly up.

File photo of a SBI ATM |Bloomberg

Across several sectors in India selling ‘cheap’ services to customers may have an appeal, but it is causing financial havoc for companies. The ‘low cost’ approach to economic growth is precipitating a shakedown, forcing businesses in telecom, power, roads and banking sector to go belly up.

Catering to the bottom of the pyramid has reduced telecom industry players to shrink, banking sector into forced merger and shutdown, hyper low tariff has hit wind, solar power players, and several road companies are facing a tough situation, prompting consolidation.

Telecom and ‘lowest tariff in the world’

India’s telecom sector has taken pride in the famed ‘lowest tariff in the world’. With the hyper-competition unleashed after the launch of Reliance Jio in 2016, now there are only three companies left in the fray. The entry of several companies after 2008 had caused voice call tariff to plummet. Jio’s entry did the same for data.

One of the three major telcos, Vodafone Idea, is teetering at the brink, struggling with the dues it has to pay to the Department of Telecom. As the deadline approaches this week, it is fast running out of options.

In an unusual turn of events last month, Bharti Airtel CEO Gopal Vittal said that Vodafone Idea must survive to make sure Indian consumers were served by three telcos.

There is a fourth company in the telecom sector, government-owned BSNL, which is not measured in the same breath. Despite having a healthy 11.62 crore subscribers, it is not counted as competition. The state of a fifth, government-owned MTNL, is worse than BSNL since it has presence only in Delhi and Mumbai. Both BSNL and MTNL have positioned their services cheaper than rivals as their USP in the past.

Wind and solar power tariffs

Take renewable power for instance. Despite the widespread use of solar and wind power, the hyper-competition among companies and falling tariffs have caused acute distress. As the first term of the Narendra Modi government set an aggressive target of 175,000 MW renewable power generation capacity by 2022, companies should have jumped at the opportunity.

They did. But the fall of many of those companies has been equally hard.

Solar energy was to constitute over half of the renewable power installed capacity by 2022. But it has been hit because of falling tariff and also capping of tariff by some state governments. For the year 2018, investments fell 15 per cent to $9.84 billion. The installations for the year also saw a 15.5 per cent fall to 8263 MW.

Falling prices due to aggressive bidding for solar power projects has led to tariff repeatedly challenging the lowest seen across India. Domestic manufacturing companies do not have the capacity to meet India’s demand and reach the target of 100,000 MW installed capacity for solar power by 2022.

Rapidly falling wind power tariff has, proverbially, taken the wind out of the sails for Indian companies. Little wonder, companies are wondering if the bids are sustainable and can be executed by the companies. While the bids are very aggressive, getting land for wind power, wheeling the power to the deficit states or supplying to the grid and other procedural challenges have made the wind power business a big challenge for the companies.

NHAI and toll trouble

The National Highway Authority of India (NHAI) is facing very unlikely competition. Sensing the opportunity for toll roads, some states have mooted the idea of laying their own toll plazas to add some extra revenue to their kitty. The matter then went to the courts, and now, the NHAI has been emboldened with an order in its favour.

Hyderabad-based infrastructure company IVRCL sold two of its toll roads to Cube Highways. The Singaporean company was on acquisition spree because companies that built the infrastructure could not run the toll business efficiently.

There have been multiple instances of protests against road tolls. Each revision in toll charges has also seen opposition from various quarters. While there have been other reasons, cheaper toll sometimes meant that the viability of the project was in question.

A recent report by SBICaps Securities has estimated that the increase in toll collection for the National Highways Authority of India (NHAI) in the current financial year (ending March 2020) has been a very modest 6 per cent/km. “Revenue collection barely covers the interest servicing cost of these projects, let alone project returns. Thus, there is rising concern on debt servicing,” the report said.

Banking and neo-banks

For banking, cheaper services continue to be a great opportunity. But it has come with a price. Last week, India’s largest bank, State Bank of India, decided to do away with the average monthly balance for all its 44.5 crore saving account holders. It certainly helps those at the bottom of the pyramid. The catch? The bank also cut the interest rates on savings banks deposit to 3 per cent as it tries to squeeze some more profit.

In August 2019, Finance Minister Nirmala Sitharaman had announced the amalgamation of banks, majority owned by government, into four entities. The amalgamation meant that the number of public sector banks was reduced to 12 from 27.

The Union cabinet has now approved the merger of these banks, and the amalgamation of IT systems and balance sheet is scheduled to be completed by 1 April 2020.

The Modi government wants to create stronger entities but the public sector banks’ ‘low cost’ approach to serving customers may have already taken a hit. These banks are now trying to squeeze a few rupees for every additional service. Customers who did not have minimum balance in their accounts paid public sector banks nearly Rs 10,000 crore over three years.

While these banks look to contain cost and be more nimble, neo-banks are threatening to change the game. Neo-banks are app-based banks that do not have a branch. While the Reserve Bank of India (RBI) has not permitted such banks to operate, they are tying up with existing banks to give them the online edge. The promise of neo-banks is to acquire customers at a fraction of the cost compared to traditional methods. Banks, whether in the public or private sector, which do not look to ride this opportunity may be left behind yet again.

Changing the bidding process

In popular parlance, buying products that are sasta-sundar-tikau (cheap, beautiful, long-lasting) is considered a good deal. For the infrastructure sector, it may not always be the best option.

Government contracts are typically won by companies if they are the L1 or the lowest bidder. This often makes companies cut corners, and prices, to bid too aggressively. Now, the ball has been set rolling and could lead to steps for a change. Niti Ayog recently mooted changing the lowest bidder or L1 norm for government contracts.

The Kerala government has set up a judicial commission that will draft the rules to define the processes for procurement by the state’s police department.

Could quality parameters, very soon, decide the winner for a government contract?

The author has been a business journalist, having tracked markets & economy across print & television media. Views are personal.