Commentary

T3 will be another disaster

4 Aug 2005
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John Quiggin doubts whether further privatisation of Telstra will benefit taxpayers

THE RECENT Queensland Nationals conference has raised the bar for the privatisation of Telstra, demanding that up to $5 billion of the proceeds be allocated directly to rural users. On Tuesday, Telstra chief executive Sol Trujillo appeared sympathetic to the idea. The Queensland Nationals have been roundly criticised, but it will be a blessing for 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 public. The first stage sale of one-third of Telstra in 1998 yielded an average of about $3.40 a 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 about $2 a share, or $8 billion. But over the same period, the government has forgone dividends with a compounded and grossed-up value of $3 a 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 about $2 a share. So the public is worse off by about $3 a 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 public if Telstra had sold off its dotcom assets while the bubble lasted. Instead, billions of dollars were dissipated in the pursuit of the global dreams of recently departed Telstra chief executive 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 Nationals. The best to 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-barrelling 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 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 is the leader in local, long-distance, mobile, and internet service provider markets, and has a share in the dominant pay TV business.

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. Yet Telstra's competitors have made it clear that, without structural separation, they can survive only on the basis of regulated access to Telstra’s network.

Instead, Telstra may become even more of a monster, picking up TV stations or even newspapers as part of the impending restructuring of media ownership. 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.

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 under way. The promised era looks no closer now than it did then. Even former communications minister Daryl Williams described the competitive outcomes as ‘disappointing’ in a 2004 speech.

When conceding 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 15 years or more. If full privatisation goes ahead, the failures of the past will be locked into place for the foreseeable future.

Professor John Quiggin is a federation fellow in economics and political science based at the University of Queensland and the Australian National University. His web site is at http://www.uq.edu.au/economics/johnquiggin and his weblog is at http://johnquiggin.com

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2005
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