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

Crossed wires on Telstra

Australian Financial Reviee

20 June 2002

The debate over the privatisation of Telstra has taken some odd twists and turns over the years. As with much of the Howard government's economic agenda, the first real push for Telstra's privatisation came from Paul Keating. On this issue, however, the right time for outflanking opposition in the Labor Party, and even in the Cabinet, never came. The Fightback! package of 1991 included Telstra among a large group of government business enterprises which were to be sold for$20 billion. Keating was forced, as with the GST, to campaign against his own idea.

The real twists, however, began in 1996, with the Howard government's proposal to partially privatise Telstra. The proposal rested on three crucial arguments. Partial privatisation would bringing capital market discipline to bear while maintaining full public control. Second, with the advent of full competition in 1997, Telstra would rapidly become just one player in a big field, with no rationale for public ownership. Finally, there was the crucial need to reduce public debt.

None of these claims went unchallenged at the time. But suggestions that a half-private, half-public Telstra would be a recipe for poor corporate governance, that Telstra's local phone monopoly was a secure base for market dominance and that the appropriate target of public sector fiscal policy was net worth rather than debt were ridiculed.

Six years later, the government has reversed its position on every one of these issues, while maintaining the policy conclusion that it should sell Telstra as soon as possible. On partial privatisation, the government's rhetoric is now full of phrases like 'worst of both worlds', 'half-pregnant', 'neither fish nor fowl' and 'no man's land', many of them borrowed from the critics they derided a few years ago. It takes an effort to remember that this absurd policy formed a central plank of the government's 1996 and 1998 election campaigns.

Similar contradictions have emerged regarding Telstra's continued dominance of all segments of the telecommunications market. Concerns about competition have run a poor second to the need to maximise Telstra's 'shareholder value', as represented by the ambitions of its government-appointed management. Far from divesting some of Telstra's existing assets, the government appears happy to countenance such ideas as the purchase of Channel 9. Assuming 'reforms' to media ownership laws are passed, allowing the purchase of newspapers and radio stations, a fully privatised Telstra could dominate Australian public life, extending its current near-monopoly across the entire communications spectrum.

These backflips are standard political manoeuvres, reflecting the bipartisan maxim 'whatever it takes'. Arguments that were convenient six years ago are inconvenient now, and have accordingly been discarded. The really striking reversal has been the embrace of a continued role for public debt.

Although Australian governments officially embraced accrual accounting, with its focus on net worth, years ago, it has suited the Federal government until now, to trumpet the reductions in debt achieved by selling assets. In many cases, as in the sale and leaseback arrangements undertaken by the Department of Finance, assets were sold for less than their value, reducing public sector net worth. Now that we are faced with the prospect of eliminating debt, the inappropriateness of focusing on debt rather than net worth is finally being conceded.

More importantly, the demands from finance markets for the maintenance of government's traditional role as an issuer of top-quality debt undermines a central tenet of the case for privatisation, namely, that private capital markets can handle risk better than governments. Issuers of high-grade debt are like insurers, in that they provide buyers with a stream of income that is completely insulated from fluctuations in output and profitability. This function can only be performed by an institution with a very strong balance sheet and the capacity to manage substantial fluctuations in income.

According to the logic of privatisation, private issuers should be ready and willing to replace the government in this role. The fact that they are not reflects the advantages of governments in their ability to spread risk through the tax system. Given these advantages, it makes sense for governments to be net issuers of debt and net holders of income-earning assets.

Of course, this leaves open the question of which assets governments should own. But the idea that we should sell Telstra and then let Finance or Treasury play the stockmarket with the proceeds is every bit as silly as it sounds.

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

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