Date created: 12/4/07
Last modified:12/4/07
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John Quiggin

T3 will be another disaster

Australian Financial Review

4 August 2005

The recent conference of the Queensland National Party has raised the bar for the privatisation of Telstra, demanding that as much as $5 billion of the proceeds be allocated directly to rural users. The Nats have been roundly criticised, but it will be a blessing for Australian taxpayers if their demands lead to the abandonment of the whole idea.

In financial terms, the privatisation of Telstra has been a disaster for the Australian public so far. The first-stage sale of one-third of Telstra in 1998 yielded an average of around $3.40 per share or $14 billion. Most, but not all of this money was used to repay government debt. The resulting interest savings, compounded over time, amount to around $2 per share or $8 billion.

But over the same period, the government has foregone dividends with a compounded and grossed-up value of $3 per share (this assumes proceeds are allocated to debt reduction). And that’s not all. Much of Telstra’s profit has been reinvested, contributing to growing earnings, and reflected in a capital gain of around $2 per share. So the public is worse off by around $3 per share or $12 billion.

The second stage, T2 looks better, but only because Telstra’s share price was inflated by the dotcom boom in 2000. A far better return could have been obtained for the Australian public if Telstra had sold off its dotcom assets while the bubble lasted, a fact that was pointed out at the time [‘Foot in each camp untenable for Telstra’, AFR, 30 March 2000]. Instead, billions of dollars were dissipated in the pursuit of the global dreams of recently-departed Telstra CEO Ziggy Switkowski,.

The fiscal impact of T3, if it goes ahead, will be even worse than that of T1. The undervaluation of Telstra, relative to its value in continued public ownership, will be about the same. But at least $2 billion of the proceeds, and perhaps as much as $5 billion, will be used to buy off the National Party. The best that can be hoped for is that as much as possible of this sum will be handed out as lump-sum cash payments, rather than being spent in pork-barreling and white-elephant infrastructure proposals.

If the fiscal argument for privatisation has fared badly, the general policy rationale has done even worse. The government has had nearly a decade to work out a coherent set of arrangements for Telstra’s structure, regulation and community service obligations after privatisation. Yet if anything the process has gone backwards.

Telstra dominates more of its home markets, more thoroughly, than any other telecommunications company in the capitalist world: it’s the leader in local, long-distance, mobile, and ISP markets, and has a share in the dominant pay-TV firm. The obvious solution is structural separation, either divesting the Internet and pay-TV arms or a more radical separation into network and retail arms.

These options have been put in the too-hard basket, thanks to vigorous resistance from Telstra and concern that this would depress the share price. Yet Telstra’s competitors have made it clear that, without structural separation, they can only survive on the basis of regulated access to Telstra’s network.

Instead, Telstra might become even more of a monster, picking up TV stations like Channel 9, or even newspapers, as part of the impending restructuring of media ownership. Incoming CEO Solomon Trujillo has said that Telstra ‘probably’, doesn’t need to pursue such options, but there is nothing in the regulatory framework to stop him changing his mind if the occasion arises.

Coming back to regulation, we were confidently assured when the Telstra-Optus duopoly ended in 1997 that retail price caps and access pricing were interim measures, to be phased out as soon as full competition was underway. The promised era looks no closer now than it did then,. Even outgoing Communications minister Daryl Williams described competitive outcomes as ‘disappointing’ in a speech in 2004.

Even when conceding all these points, defenders of government telecommunications policy claim that, after all, consumers are better off than they were in 1997. It’s true that prices have fallen, on average, but only at the same technologically-driven rate as they had fallen for most of the previous century. And thanks to rebalancing, lots of consumers missed out on most of the benefits.

Telecommunications policy in Australia has been a mess for fifteen years or more. If full privatisation goes ahead, the failures of the past will be locked into place for the foreseeable future.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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