Date created:24 June 2002
Last modified: 24 June 2002
Maintained by: John Quiggin
John Quiggin

Stick to a few principles

Australian Financial Reviee

9 May 2002

Despite the mess that has been made of it by successive governments, telecommunications policy is not that difficult to understand. A few basic principles are sufficient to resolve the central issues. Although wishful thinking and ideology have led many to disregard these principles, the lessons of experience may be finally be sinking in

The first principle is that mixing government and private ownership of an enterprise is a recipe for bad governance. The government vigorously denied this in 1996, when it sought part-privatisation of Telstra. However, the Treasurer now endorses this principle at every opportunity (though Communications Minister Alston has been less forthright). It would be nice to think that this change reflects learning from experience, rather than the abandonment of a cynical ploy that has now served its purpose.

The second principle is that, in telecommunications, natural monopoly is never far away. During the 1990s, this principle was ignored by commentators, policymakers and investors alike. All were deluded by a mixture of wishful thinking and New Economy hype. The result has been waste and duplication on a massive scale, beginning with the $7 billion cable race between Telstra and Optus, and ending with the OneTel fiasco. If public policy and investment decisions had taken appropriate account of the natural monopoly character of telecommunications infrastructure, these disasters could have been avoided. Once again, the lessons of experience are slowly being learned.

The third principle, which is yet to sink in as widely, is that private monopolies are worse than public ones. The close regulation such monopolies require inevitably generates rent-seeking, litigation, and investment decisions designed to game the regulatory system, rather than to serve the public. The endless disputes between the Victorian government and privatised electricity distributors illustrate the point.

Telstra is behaving badly enough now, with management that seems to think privatisation is a fait accompli. It would be far worse if a low share prices represented, not merely an embarrassment but an ever-present threat of takeover.

Given these principles, it is not hard to determine the basic approach that should be taken to Telstra. The enterprise should be broken up, with the potentially competitive parts being fully privatised and the natural monopoly components returned to full public ownership.

The problems arise in determining which bits of Telstra should go where. It's easy enough to see that the physical fixed line telephone network is the core of the natural monopoly and should be fully public. Conversely, the overseas ventures and the Internet service provider BigPond should be sold off.

Perhaps the most important asset to be divested is Telstra's interest in FoxTel. Until telecommunications carriers get out of the business of selling content, the prospects for a rational media policy (limited in any case) will be close to zero. Of course, things would be far worse if the idea of Telstra buying Channel 9, widely mooted a few weeks ago, was allowed to proceed.

An idea that should definitely be rejected is that of separating Telstra's wholelale and retail operations. Given a choice, most retail consumers prefer to deal with the actual provider of infrastructure services rather than a third party. On the other hand, Telstra should adopt accounting separation and other measures to ensure that its retail operations are not subsidised out of wholesale profits.

Telstra should also remain as an integrated provider of both local and long-distance services. The distinction between local and long-distance telephone services has been breaking down in recent years. In the US, where local and long-distance services were separated in the breakup of the Bell monopoly, they are now being reintegrated, with local 'Baby Bells' serving as the core of the new enterprises.

The most difficult questions relate to Telstra's mobile businesses. On the one hand, there is significant value in the idea of a 'one-stop shop' providing a full range of telecommunications services. On the other hand, the most viable form of competition in the industry is that between mobile and fixed-line telephony. On balance, Telstra's mobile services should probably be spun off.

Is such a split-up economically feasible ? The decline in Telstra's share price means that the government could, if necessary, repurchase shares for something close to the average price for which they were sold. But this would probably be unnecessary. The split could be financed from the sale value of Telstra's peripheral assets and the capacity of the natural monopoly core to support a modest amount of additional debt.

Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.

Read more articles from John Quiggin's home page

Go to John Quiggin's Weblog