Date created:16 June 2000

Last modified: 16 June 2000

Maintained by: John Quiggin

John Quiggin

Foot in each camp untenable for Telstra

Australian Financial Review

30 March 2000

An interesting contributions to the telecommunications debate was made by a Telstra official who observed that a one cent reduction in the price of local calls would cost Telstra around $100 million or 3000 jobs. There was a time when this statement could have been taken at face value. Telecom Australia did not go in for mass sackings, but had to achieve a commercial rate of return. A big reduction in its revenue would have forced it to look harder for cost savings, including job losses. By contrast, as Ziggy Switkowski has just reminded us, the new Telstra sacks staff whenever it can gain by doing so, regardless of how high or low its profits may be.

A cut in local phone call prices would have no effect on Telstra's cost structure, so it would not create any new opportunities to sack people. The correct interpretation is that a loss of $100 million would wipe out the extra profit associated with 3000 sackings. On this basis, the latest round of cuts announced by Switkowski ought to be worth around three cents off the price of local calls.

Even more interesting was Peter Costello's recent observation that ' If Telstra' is going to be caught in a position where it is half privately owned and half government-owned, I don't think that is going to be a good outcome. 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'.

Having observed to the 1996 Senate inquiry into the first partial float of Telstra that partial privatisation was 'the worst of all possible worlds' I can only agree. The government's headkickers on the inquiry, notably Senators John Tierney and Bill 'Root my Boot' O'Chee, were far from accepting this view. Any witness who suggested that the board of a part-private, part-public company would be in an invidious position, was subjected to abusive tirades. It is good to see Costello finally admit that partial privatisation, without a binding timetable for full privatisation in the future, was a major policy mistake.

Costello's remarks were directed mainly at the Labor Party, and he is quite correct in observing that they are in a policy dilemma. The first stage of privatisation was a financial disaster. One-third of the public shareholding was given away for about half its true value, with a resulting loss of around $14 billion. Renationalising Telstra through a share buyback would crystallise that loss, something which Labor is understandably reluctant to do. Moreover, Paul Keating is far from being the only Labor figure to publicly oppose privatisation while secretly supporting it.

However, Costello's own position has a problem of use-by dates. At present, the Liberals support full privatisation, but the Nationals do not. Hence, the effective position of the Coalition is support for the status quo, which, as Costello recognises, is unsustainable. If the Nationals can be persuaded to support full privatisation before the next election, this is not such a problem. But without such a conversion, Costello will be stuck with an election platform he has already admitted to be the worst possible option. Will he then take his own advice and argue for restoration of full public ownership?

Fortunately, the 'new economy' bubble, while it lasts, provides a solution to this dilemma. Telstra's local, long-distance and mobile assets currently account for around half its market value. The other half is the 'new economy', including pay-TV and Big Pond. The incoherence of Telstra's recent management is due as much to the internal conflict associated with the combined roles of content carrier and content provider as it is to the mixture of public and private ownership.

Splitting Telstra would not only make good commercial sense, but would provide a simple route to renationalisation. Private shareholders could be offered the choice of shares in the 'new Telstra' or repurchase at a price equal to the average received by the government in its two sell-offs. After disposing of any residual holding in 'new Telstra', full public ownership of the core telecommunications network could be restored without any net public outlay.

A simultaneous decision to lower local call rates to 20 cents across the board would provide a payoff to the real owners of Telstra, the Australian public, while making it clear that 'old Telstra' would serve the national interest rather than its current objective of 'maximisng shareholder value'.

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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