Date created:10/2/03 Last modified:10/2/03 Maintained by: John Quiggin John Quiggin
The problem of the ownership of Telstra has been one of the few issues to remain near the top of the Howard government's agenda throughout its six years in office, and looks set to remain there for years to come. Paradoxically, in the process of arguing for the privatisation of Telstra, the Howard government has provided some of the sharpest formulations of the case for renationalisation of Telstra's core telecommunications business.
The first element of the case for renationalisation is the observation that Telstra's current ownership structure, with the government owning a bare majority of shares and the rest in private hands is untenable. As Peter Costello observed three years ago 'Telstra should all be either privately owned, or if people really think that nationalisation and government ownership is necessary they ought to have the courage of their convictions and nationalise it'.
The second element is the observation that Telstra's corporate structure, combining the basic role of a common carrier for Australian telecommunications with a wide range of peripheral ventures in such areas as pay-TV and Internet services, is unsatisfactory. On the one hand, the potential for cross-subsidies creates problems for Telstra's own corporate governance. On the other hand, the fact that a monopoly provider of essential services is also a leading user of those services for the provision of Internet and entertainment content makes effective regulation almost impossible.
The government has now established a House of Representatives inquiry into Telstra's structure. Even if motivated in part by a desire to embarrass Labor, this inquiry should provide a valuable forum.
The third point in the case for renationalisation is that the core components of Telstra are worth more in public ownership than in private ownership. The government has accepted that, at the current share price, the proceeds from a sale of Telstra would not justify the loss of its earnings. Conversely, the cost of repurchasing shares in Telstra would be more than offset by the benefits of the associated earnings.
All of this raises the natural question - how much is Telstra worth in public ownership and why is there a difference between this value and the value attributed to Telstra by the stock market? The first question may be answered by estimating the likely growth of Telstra's earnings, and calculating the amount of debt those earnings could service. The relevant figure is Telstra's post-tax earnings, including interest and the value of dividend imputation credits.
For the last couple of years, the combined value of post-tax earnings and imputation credits has been around 40 cents per share, enough to service $6.70 of debt at an interest rate of 6 per cent. Thus, on the very conservative assumption that Telstra's profits will remain stable in nominal terms, the government ought to be looking for a share price of at least $6.70. On the more reasonable, but still conservative assumption of stable real profits, the value of shares in public ownership is around $10.
This is, close to the share price prevailing early in 2000, when some elements of Telstra, such as the dotcom activities, were valued by markets at considerably more than their value in public ownership. I suggested at the time that the government should sell off these activities 'while the New Economy bubble lasts'. (Foot in each camp untenable for Telstra, AFR March 30 2000). Had that advice been taken the Australian public would have gained billions of dollars and restored full ownership of Telstra into the bargain.
Fluctuations in share markets are one reason why the value of an asset like Telstra in public ownership differs from its market value. In addition, these very fluctuations mean that holders of equity demand a higher rate of return than do investors in government bonds, reducing the market value.
In addition, the fact that Telstra is a regulated monopoly creates externality costs that are internalised when the government is the owner as well as the regulator. The widely-held view that this situation involves a 'conflict of interest' gets things precisely back to front. Governments exist to resolve conflicts of interest like this.
Against this, private ownership tends to produce greater responsiveness to market trends and, less reliably, improved operational efficiency. For most firms, these advantages outweigh the problems with share markets, so that the firm is worth more in private than in public ownership. As the data shows, however, the reverse is true for Telstra and for most other regulated monopoly infrastructure businesses.
The government has gathered all the pieces of the case for renationalisation. It remains to put them together and draw the logical conclusion.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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