Home > Economic policy > The PC on the failure of infrastructure reform

The PC on the failure of infrastructure reform

April 18th, 2005

My Fin article last week (over the fold) was about telecommunications, and included the statement

It is true that prices have fallen, but … the rate of decline is no more than would have been expected from technological change…. [the outcome is] common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of ‘rebalancing’, which typically benefitted business at the expense of households.

This point is neatly confirmed by the PC report on National Competition Policy, which shows that households are paying higher prices for nearly all infrastructure prices as a result of reform, mainly because of shifts in costs from households to business.

The PC report notes declining average prices for most infrastructure services. However, as with telecommunications, there was, in most of these cases, a long-standing trend of declining prices before reform began. There’s no evidence to suggest that average prices have fallen faster (or in cases like urban transport, risen less) than would have been the case without reform.

The absence of any net change in average prices, relative to trend means that the effects of infrastructure reform have been almost entirely distributional. The losers have been household consumers of infrastructure services and workers in infrastructure industries. The winners have been senior managers and capital owners in the infrastructure sector and business consumers of infrastructure services. Presumably, businesses have passed on some of the savings to their consumers. And, in the case of publicly owned infrastructure services, households benefit in their capacity as members of the public.

Overall, though, it’s not surprising that there has been little enthusiasm from Australian households for another round of reform. The last round produced plenty of pain, and not much in the way of gain.

infrastructure

The debate surrounding the privatisation of Telstra points up the near-complete failure of telecommunications policy in Australia over more than a decade. The first proposals for privatisation were made in the early 1990s, within the Hawke Labor Cabinet by Paul Keating and in the Fightback! election manifesto by John Hewson. The atmosphere was one of naïve optimism, with the assumption that a privatised Telstra would take its place as first among equals in a competitive market, delivering lower prices and better services for all.

The reality under partial privatisation has been very different. It is true that prices have fallen, but they are still driven by regulatory constraints, and the rate of decline is no more than would have been expected from technological change. The ACCC is currently proposing a price cap for Telstra that would require real average price reductions of 4 per cent per year, and is meeting considerable resistance.

This is exactly the rate of progress achieved by the old Postmaster-General’s Department when it provided telecommunications services in the period before 1975. It is rather poorer than was achieved by Telecom Australia as a statutory authority. Yet unlike its predecessors, Telstra has the freedom to retrench workers in large numbers, rebalance prices and close off, contract out or sell off unprofitable services. And the underlying rate of technical progress has, if anything, accelerated.

The situation with new technologies is even worse. Australians are famously avid adopters of new technology, and we clearly love the Internet. Yet we now rank 20th in the OECD for the takeup of broadband Internet services, and our rank is falling.

The same lag is evident in relation to Voice over Internet (VOIP). Telstra announced in 1999 that it was moving to implement this service across the network. Six years later, we’re still waiting.

Then there’s the much-ventilated problem of services in the bush. While some complaints may be put down to rural grumbling, not all can be. It’s clear, for example, that if mobile telephony had arrived in the days of public monopoly, much more would have been done to extend network coverage. The policy regime we actually got achieved the startling feat of reducing coverage, by scrapping the (still perfectly functional) analog system, which was then expensively, and only partially, replaced by Telstra’s CDMA network.

What explains these poor outcomes? Some of the problems are common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of ‘rebalancing’, which typically benefitted business at the expense of households.

Other problems seem more specific to telecommunications. Policy has been driven by a series of fads. While the overriding theme has been a naïve faith in competition, the outcome has often been to produce competition in areas where it is not needed, but not where it is.

Our poor performance in broadband is easily explained. The service of physical connection to broadband is a classic example of natural monopoly. We only need one connection, and one service is pretty much as good as another. But thanks to the nonsensical application of notions of facility-based competition, some of us have multiple physical services on offer, while others have no adequate option at all. During the great cable race of the 1990s, Telstra and Optus laid parallel networks of optical fibre reaching about half the population. Then, with the advent of full competition in 1997, they suddenly stopped. The rest of the country has had to make do with a patchwork of more or less unsatisfactory alternatives.

On the other hand, the provision of content to be transmitted over the networks is naturally competitive, but Telstra has been allowed to act as a vertically-integrated monopolist. The result has been that Telstra not only dominates the telecommunications sector but also pay-TV and ISP services.

The government shows no desire to clean up this mess before proceeding to full privatisation, since any sensible reform would almost certainly reduce Telstra’s market value, heavily dependent on monopoly power as it is. But a privatised Telstra will be a political power to make the Murdochs and Packers look small (especially since, in most cases, it will be allied with them). If the mess isn’t fixed now, it never will be.

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  1. April 18th, 2005 at 16:25 | #1

    John – its Monday @4:20pm. Michael Duffy has just mentioned your name and URL on Counterpoint.

  2. derrida derider
    April 18th, 2005 at 17:34 | #2

    I agree with most of what you say here, John, but I’m a strong advocate of privatising Telstra ASAP, as I think its the only way that gives us some prospect of taming its power. It’ll be easier for governments to disavow responsibility for uneconomic rural featherbedding – er, sorry, “ensuring adequate services to the bush” – when they don’t own it (as the Nats are only too aware), and in time the government will be able to say they have no responsibility to boost shareholders’ dividends. True, a privatised Telstra will still be a pretty strong lobbyist, but its unlikely that it will have the government quite as tightly by the gonads as it does now.

  3. stephen bartos
    April 18th, 2005 at 19:00 | #3

    the boat has now sailed in relation to whether Telstra should be part privatised – the fact is that it has been. so the question becomes, what is the best way to handle Telstra now. I have argued previously, and repeat here, that part ownership delivers the worst of both worlds – Telstra can in effect ignore directions from the government shareholder, citing the “oppression of minority shareholders” rule under the Corporations Act 2001 to justify not acting in accordance with what government wants. So government ownership of 50.1% in practice does not confer the ability to control Telstra’s operations that advocates of retaining this remaining shareholding think it does. The best option to my mind is to go for full sale, with legislation to put in place that guarantees that post sale there would be structural separation of the Australian fixed network from the mobiles business, Sensis, overseas interests etc. – and use the proceeds of sale of the government’s share to compulsorily acquire the fixed network. The latter has all the characteristics of a natural monopoly (economies of scale increase indefinitely) and should by rights be in public ownership. The only trouble with this option is that Telstra will lobby (and has lobbied) vigourously against it. And why wouldn’t they – its great to have control over a natural monopoly. Any readers looked at your line rental prices lately? And as John points out, any move to effective regulation will actually reduce the sale price – so government has an incentive not to do it. My hope is though that the government will do the right thing, not out of altruism, but because there are enough business people, farmers and others with the ear of government who are frightened of what a lightly or loosely regulated Telstra would do to them.

  4. dc
    April 18th, 2005 at 21:54 | #4

    Professor-Doctor Quiggin said the following in the Financial Review:

    It is true that prices have fallen, but … the rate of decline is no more than would have been expected from technological change…. [the outcome is] common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of ‘rebalancing’, which typically benefitted business at the expense of households.

  5. dc
    April 18th, 2005 at 22:32 | #5

    1. Professor-Doctor Quiggin said the following in the Financial Review:
    “It is true that prices have fallen, but … the rate of decline is no more than would have been expected from technological change…. [the outcome is] common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of ‘rebalancing’, which typically benefited business at the expense of households�

    Let me get this right: The gains made by reforms in the telecommunications industry were swallowed by pay increases for the guys at the top.
    So a phone call to the UK which used to cost $1.2 in 1985 dollars and which costs about 11 cents in 2005 dollars is considered just incidental to the overall issue that a few senior guys are making some decent money. Of course, the fact that Professor- Doctor Quiggin earns probably more through his salary and other engagements on an hourly basis doesn’t really count. That’s because Professor – doctor Quiggin is in a government paid job for most of the time when he isn’t running a blog and writing for the Financial Review. Lets see a professor- Doctor’s work time in the soft sciences would be no more than about 12 hours per week for about 40 weeks per year. This should not be brought up of course because it isn’t a valid comparison.

    Lets recall what life was like when the unions ran the telecommunications industry. Getting a phone line installed took about 4 weeks and there were strikes in that sector every other month. The first time we could make a direct call to the UK without operator assistance was in 1980 or so. But this was just an improvement in technology and of course these improvements would have happened even if the Telstra were still run by the government and a monopoly still existed.
    Technological improvements, according to this professor of economics, just comes out of thin air… poooooooof… like a pigeon flying out of a magicians hat. He of course doesn’t explain how or why technological improvements occur and why potential rates of return are important in the introduction of any technical advance. It just happens…. Pooooof…. out of thin air. What the good Professor- Doctor does not explain (maybe it is beyond him) that technological improvements happen because businessman see there is a need to a product or a service that has potential profit making opportunities attached. Lets take broadband for instance. Why would anyone have ever conceived the idea and brought it to the market if they thought that no one would want the service. But…poooof out of thin air comes broadband.

    So according to this professor’s critique of the telecommunications industry, we are no better off if Telecom still existed. We would still be able to access broadband, our phone bills to the US/UK would be same as they are now and the unions would not be bothersome at all.
    So, lets just go back to the good old times. I can’t wait. Who needs Optus anyway certainly not the consumers?
    One thing the Professor- Doctor may want to explain to his audience is why are salaries of senior managers anyone’s business. I thought a free society meant that a manager’s salary only concerned the manager and the shareholders. Isn’t that how it is supposed to work. Or maybe everyone’s salary is everyone’s business. If we take it to that extent then my first concern would be why is a public university paying someone who does about 12 hours of teaching per week deserve 250k per year?

  6. dc
    April 18th, 2005 at 23:15 | #6

    Lets look at the reason why there was international reform in the telecommunications industry. I believe the first knife placed at the throat of telecom monopolies happened in the US spurred on by a famous court case that broke up AT&T. The cosy deal AT&T had prior to the brake up was that although Ma Bell was a private company it held the vast slice (about 95%) of the telecom market in the US through a government-sanctioned monopoly. The brake-up of Ma Bell was court sanctioned creating what are now called Baby Bells around the country. Part of the court settlement mandated that AT&T be only allowed to operate in the long distance sector of the market. I am not going to discuss the merits of the case because there was a great deal wrong with the decision. But what it did do was to spur on an amazing amount of technical advances across the broad landscape of the industry. In fact we could so far and say that the reason we had reforms here in Australia was not because Hawke and Keating wanted them, it was because they had no choice as reforms were forced on them by the market. It was because of the sheer breath of changes wrought by the reforms in the US and their relevant meaning for the industry that these two acted. The government saw that technological advances in the industry would require some enormous input of capital to see them through. What made it worse was that because the government operates it budget on a cash accounting basis it would not be able to capitalized these expenses like a normal business would. It would either have to allow Telecom to withhold a great portion of its retained earnings or Hawke and Keating would have to pony up with several billion or so without the promise that this capital would even get a return. In other words they would be taking a risk with budget money that would be much better spent on making sure our film business is well subsidized and the fine arts galleries would be able to exhibit paintings such as “Piss Christ “etc. So reforms, the little we have seen even at this point in time, were forced on us by the rest of the world moving towards this position.
    What needs to understood is that we would still be messing around trying to get a connection that would take four weeks rather than what we have now.
    To merely suggest rather than explain why technological advances happen without a thorough analysis flies in the face of what economics is all about. Another way of understanding technological advances is to describe what it really is, which investment. And investment comes from savings.

  7. John Quiggin
    April 19th, 2005 at 06:47 | #7

    dc, as I pointed out in the article, the same rate of tech progress (or faster) was achieved in the bad old days you are bewailing, which makes most of your subsequent argument irrelevant.

  8. Uncle Milton
    April 19th, 2005 at 09:27 | #8

    I don’t think the fact that prices in some cases have gone up to consuumers and gone down to businesses condemns infrastructure reform or NCP as bring entirely distributional. In the good old days, consumer prices were held down below costs for political reasons and it was paid for by high prices for business. The point of microeconomic reform was to align prices with costs and the reduce various inefficiencies. Now you argue with the objectives and execution of this program, but you can’t complain that consumer prices as such haven’t gone down, because that wasn’t the purpose of the exercise, at least not directly.

  9. John Quiggin
    April 19th, 2005 at 09:43 | #9

    Milton, the claim was commonly made that enough efficiency benefits would be achieved to lower prices for everyone – I can quote heaps of instances in relation to electricity, for example.

  10. dc
    April 19th, 2005 at 10:34 | #10

    Professor:
    You say the following in the above thread:
    as I pointed out in the article, the same rate of tech progress (or faster) was achieved in the bad old days you are bewailing, which makes most of your subsequent argument irrelevant.

    Would you be good enough to explain and detail this assertion as I really can’t see it? I am sure this would be a piece of cake for you.
    Let me understand this telephone were around for 90 (approx.)before the bust up of AT&T and you are saying that technical progress during that time moved at the same pace as it has since 1980?
    This is really what you are saying?

    This also applies to television, although in the differnet time frame? Really?
    Again please support your assertions through facts.

  11. Andrew Reynolds
    April 19th, 2005 at 11:05 | #11

    PrQ,
    I find myself in agreement with you. It needs to be fixed up. IMHO the best way would have been to break it up and sell it off in the first place. Governments, given their budgeting processes, tend to look at the gain or loss to the government, not to the country as a whole. In this instance, as in many others, the two were in direct conflict.
    The same thing happened in the UK when BT was sold off and it is also behaving in the same way. Selling a government owned monopoly merely creates a private monopoly with an attitude problem.
    Where to from here, though? If the government now does what it should have in the first place and breaks it up the minority shareholders will kick up an enormous stink – and rightly so. If it just goes ahead and privatises we will be left with a fully private monopolist.
    On balance, I believe that it should be privatised, but the regulation on the more ‘natural’ monopoly parts of its business increased until it breaks up, but this is bound to be messy, with shareholders being very upset. After privatisation, however, the government could be less concerned with shareholder value and getting the value up for the float and more with what it should be doing – promoting competition.

  12. dc
    April 19th, 2005 at 14:07 | #12

    what I find amazing about a lot this discourse is that it seems so 70′s. This was a time when no one foresaw what the world would look like 20 years on.
    Telstra may think and behave like a monopolist but the reality is quite the opposite. If I were the CEO of Telstra I wouldn’t be able to sleep that well at night simply because I would live in fear that the following morning I could be reading about some gadget invented by a 22 year oldin his garage that offers no fuss telephony through a land line or over a cell phone that is all web based. The moment I read this I would know that 80% of my business could be wiped out. In other words technology is moving so fast that no one’s business in the field of telcoms ought to feel safe.
    So the idea that privatisation has been wrong is to look at this from the wrong angle. It is the current level of regulation which is wrong, not privatising Telstra.
    At the moment, Australians are only able to buy their phone services from an Australian provider because the law dictates this. If the Howard government reforms correctly (which is not a done deal judging the way these guys handle things) we could soon be buying our telephony from any service provider anywhere in the world. The effect of this is that prices will come down even further. This is a great thing for the consumer.
    Another example of bad reforms is the law that only allows a restricted number of cable TV service providers to enter the market. This is a bad reform and quite rightly we ought to fight against it.
    I recall some years ago when the then Minister for communications, senator Alston said that we could not open up the airways because the government neeeded to ensure that the current participants had to have their investments protected. So Packer and his buddies need protection from competition, of course the local fishshop owner doesn’t get that because he is not Packer.
    This is the crazy reforms we get here in Australia. All this creates are rent seenking businessmen like Packer and co.

    Anyway back to the topic.

    Lets rememebr that IBM thought it had the computer business sown up during the 60s and 70′s. In fact it was the first company to come out with a desk top and felt there was only a limited number of users for this product. IBM is no longer making desk tops selling out to the Chinese.

    Things change technology changes and we should do everything we can to see the market is working properly and fight impediments placed by the Government of the day to suit their business buddies.

    These are examples of why we should not fear change and go back to the bad old days of regulation. In fact we need to make sure there are as little regulations as possible in order to ensure a proper function of the market.

    One last thing:

    I think we would all agree that Kodak at one stage had a large part of the market all tied up- near enough to 80%. Kodak is now fighting for its life because that market is shrinking fast and they in dire shap.

    This is why I strongly suggest we leave markets alone and ensure Canberra does not do anything silly to help their buddies.

  13. John Quiggin
    April 19th, 2005 at 14:14 | #13

    dc, at #10 – the data on this is in my book Great Expectations. The old PMG achieved productivity growth comparable to that of Telstra, and Telecom Australia (a statutory authority) did even better.

    on #12, Microsoft is the direct inheritor of the IBM monopoly. IBM wasn’t beaten by 22-year old innovators but by its failure to secure ownership rights over DOS.

  14. April 19th, 2005 at 15:01 | #14

    JQ, I must take issue with you over IBM v Microsoft. As much as anything IBM wanted to avoid the minicomputer problems by making sure there would be no useful margins in the microcomputer area, so keeping their market share and an IBM migration path to larger machines.

    What they didn’t foresee was the ramifications of the unbundling policies forced on the industry, that allowed a horizontal stratification to become viable – that is, that the computer sector would no longer remain vertically integrated as between hardware and software. Up until then, there had been no practical mechanisms for ownership and revenue at the software level. So their lack of insight was the prior mistake, and the lack of ownership of software a flow on consequence of the culture gap.

    But in their objective of making microcomputers low margin, of not repeating the mistake of allowing market entry that they had made with minicomputers, they succeeded admirably. That background worked across the board for the benefit of the whole software sector. You then have to add to that Microsoft’s insight was that it was better to be first than best; IBM did indeed have property stakes in the potentially best stuff, only it didn’t do them any good. You can ramp up software development and production of shoddy stuff fast, if the paying public haven’t yet developed informed judgments of what is or is not “best”. IBM just ran in the wrong race.

  15. Vee
    April 19th, 2005 at 15:10 | #15

    As I’ve said before since the privatisation of Telstra is inevitable and the sabre-rattling of the Nationals will achieve nothing the only solution is this as outlined by the TSA.

    However, it will not happen because the greatest flaw of representative democracy is that the elected do not listen to the people once they hold office. They represent nobody but themselves and their political (party) ambitions.

    I do not know who came up with this ideal solution but its the bloody beautiful and the only thing worth considering.

    It is true what Derrida derider says though that

    It’ll be easier for governments to disavow responsibility

    for a fair go for those that do not have adequate service.

    It is unfortunate that Stephen Bartos is also correct and confirms DD’s opinion

    the boat has now sailed in relation to whether Telstra should be part privatised – the fact is that it has been. … Telstra can in effect ignore directions from the government shareholder, citing the “oppression of minority shareholdersâ€? rule under the Corporations Act 2001 to justify not acting in accordance with what government wants

    What is even more unfortunate is that the city-coastal “featherbedding” ;) disadvantages anyone that does not live say within 150-200kms of the Australian coastline and they do not have a Fair Go Act 1901 to fall back upon.

    So much for the Aussie Battler, long live the Regime.

  16. dc
    April 19th, 2005 at 15:23 | #16

    Professor:
    You say:
    The old PMG achieved productivity growth comparable to that of Telstra, and Telecom Australia (a statutory authority) did even better.
    Could you please:
    1. explain how you reach the assertion that the legacy companies did better than the new one, and

    2. What criteria did you use to measure the productivity of the old to that of the new company.

    The reason is quite simple. I finding your conclusion to be astounding. The only only way to measure productivity is to calculate the number of “widgets produced”for the man hours worked.
    Telstra ,although I believe it is a rotten company, has far less employees than the old legacies and its productive capacity is greater than the legacies. I would be greatly interested in learning how you came to the conclusion that the old is better than the new in terms of productivity increases.

    I would also bear in mind that privatisation does not guarantee better management. Many firms have bad management and the reason why Optus has been able to encroach on Telstra is most certainly because of Telstra’s ineptitude in the markets.

    To your last point where you say:

    Microsoft is the direct inheritor of the IBM monopoly. IBM wasn’t beaten by 22-year old innovators but by its failure to secure ownership rights over DOS.

    I don’t quite see you point in this in how it helps you with your case. Innovation is not just sitting around a garage and creating a new toy. It is also figuring out how a product fits in to the overall shape of the market.
    Gates and Allen were able to take a product, DOS, and shape it to the market place, which is something neither IBM or Apple were willing or able to do. Gates and Allen saw the future better than the others and took advantage of the opening. In fact if my history is correct Gates and Allen took DOS to IBM sold them usage rights and the rest is history. So what is your point? I don’t quite get it?

    Gates and Allen did a wonderful thing for all of us computer users. They created a standard without government fiat. That to my mind is an amazing innovation in itself but unfortunately we thank them every time we buy a computer.

    One last thing you describe IBM as a monopoly. If I recall my old economics correctly a monopoly only exists through government fiat, that is governments are the only entities able to create a monopoly through the threat of sanction. Surely you are only kidding with the misuse of that economic definition?

    I’m sorry one very last thing, I promise.
    I have read almost all of Greenspan’s testimony to Congress and recall he talks about productivity a great deal. He has several times said that productivity in the services sector has proven to be a very difficult thing to measure. Quite often he has said that productivity in the services sector is more of a look back analysis through time. As you know the Fed has about 1,200 economists working for them and most come from the best economics schools in the US. If they find service sector productivity difficult to measure and Telstra together with the old legacies are in the services business, I would be very interested to see how you came up with the assertion that Telstra’s productivity is less than the old. I would presume that the Fed would also be interested to know if you have cracked the magical code so to speak.

    Again thank you in advance for in anwsering these assertions you make.

  17. Andrew Reynolds
    April 19th, 2005 at 15:28 | #17

    dc,
    the technology that allows free calls through a web-based architecture is already here – try googling “VoIP”. I do not see it (yet) destroying Telstra because they have a stranglehold on the broadband market and are keeping it quiet. There is also a strong resistance by the consumers to give up the certainties they have for the brave new world theat VoIP represents.
    The problem is that Canberra’s “buddies” are running Telstra. If they truly wanted to help Oz they would break it up and sell it off.

  18. Vee
    April 19th, 2005 at 15:38 | #18

    If I understand the M.O. of the NCP and PC it is economic rationalism. This has lead to privatisation, deregulation of many industries.

    The primary motivator being that electricity, water and other infrastructure can be produced at lower cost. Lower input costs, it is argued, will result in lower prices for final goods and services, increase exports and increased employment.

    However if I understand this economic razzle dazzle speech, it is based on something known as the “perfectly competitive model” which doesn’t allow for any external factors. There appears to be another theory called “second best” which allegedly shows how enhancing competition (efficiency) in one section can lead to a reduction in the country’s welfare (no I don’t mean welfare payments :P ).

    Businesses have had large price reductions in their electricity bills while residents have had an increase. Whilst rationalisation of maintenance depots has resulted in a fall in employment, some regional centres have gained extra jobs, at the expense of jobs in adjacent small towns. The capacity of country towns to absorb employment losses is generally less than in the larger cities and regional centres. Especially when such losses are added to employment reductions are added from other parts of the NCP and economic change.

    Which is what I believe the professor argues above.

    The same applies to rationalisation of water, rail, telstra.

    Telstra is a good case in point.

    Employment in Telstra declined from more than 86000 in 1987-88 to around 67000 in 1997-98. The decline in Telstra employment between 1992 and 1999 was larger in non-metropolitan than in metropolitan areas. The reduction in employment and incomes from the closure or reduced size of a Telstra depot is likely to represent a larger share of total employment and income in a country town that in a metropolitan centre or larger town. For example, the loss of 70 Telstra jobs in the town of Narrandera represented nearly 3 percent of the shire’s total workforce.

    To do any work today on Telstra cabling and creating subdivisions which is prominent in rural areas at the moment, you can’t ask your local depot to show you where the cable is, you have to ring some major city for them to fax you the plans and then when construction begins and you look for the cable it isn’t there, its three metres further away in another direction. Loss of parochial businessmen on local infrastructure hinders development and costs money. I thought economic rationalism promoted efficiency and productivity.

  19. dc
    April 19th, 2005 at 15:39 | #19

    Andrew:
    i know that web based telephony is here, but its also not really user friendly at this stage. What I am talking about is that the day will come when all telephony land based, mobile can be web enabled. When that day comes Telstra will be a done.

    If I were Telstra I wouldn’t clap my hands over broadband just yet. If you are talking about hard cabling that is one issue, but sats are encroaching all the time and getting better. Lets not forget that optus is there as well. Here is my adverisment go with Optus it’s superior.

    The last thing I would be doing is buying Telstra shares. As I said before it’s a rotten company providing a rotten service in an arrogant way. It is also in an industry where technology could ruin it in 24 hours.

  20. dc
    April 19th, 2005 at 16:09 | #20

    Vee
    Your right economic rationalism does not work. It really never has. I want to go back to the old days when we had to go and ask the Reserve bank nicely if we could convert our maney into foreign currency so I could go overseas.
    I want to go back to the times when you called Telcecom Australia, you had to please and beg them to come over and intall the phone but be told it would take 4 to 6 weeks unless there was a strike.
    I want to go back to the time when all our decsions were made in Canberra or State Parliament because they were smarter than the rest of us. I want to go back to the time when water tanks were banned because it would affect usage and therefore earnings of of State water board. I want to go back to the time when we had 5 television stations and no other choice.
    I want to back back to the time when color television was introduced 20 years after the rest of the Western world.
    I want to go back to the time when Packer, Fairfax and Murdoch told us what we could watch on televison because they held the license.

    The point is living in the country or the city has both advantages and disadvantages. I look out of my window and see a brick wall. You wake up in the morning with birds singing and the fresh air.
    In other words life is about choices.

    In 1930 Australia had the second highest income in the world. Sixty lost years later and we are 30 th ranked. Hong Kong which was a back water port in 1960 has now a higher income per capita than we do.

    Lets go back to the old regulated times. I just can’t wait.

  21. Vee
    April 19th, 2005 at 16:15 | #21

    dc,

    make no mistake, economic rationalism does have its place in my opinion but so does intervention.

  22. dc
    April 19th, 2005 at 16:20 | #22

    Vee
    Would you mind explaining this assertion? Thats is where do we need intervention?

    Thanks

  23. John Quiggin
    April 19th, 2005 at 16:33 | #23

    dc, the calculations aren’t mine, you can check the sources (Butlin et al and Arena et al) in my book. You may be surprised, but that’s commonly the case when you confront your beliefs with data.

    Telecoms and electricity aren’t “services” in the sense used by Greenspan. The difficulties with measuring output are no greater than for the market sector as a whole. In fact, these are popular areas for productivity analysis because the regulatory process often gives rises to good data

  24. dc
    April 19th, 2005 at 17:26 | #24

    Professor.
    I thought you asked me to curtail smart alec comments. Are you practising a double standard?

    Getting back to your reply professor. I strongly disagree. Utilities are categorised as service businesses.
    I will buy the book in order to understand how you measure productivity for both the new firm and the Legacies. I am sure it will be very interesting.
    But there is a problem. I would bet most of your readers wouldn’t buy the book so would you mind supporting this assertion that the old were more productive than the new for their benefit. I promise I will buy the book. My word. But the other readers also have a right to know how you reach this conclusion.

    More to the point though, you’re finding even if true does not necessarily support your thesis. Let me explain:
    The economic rationale for selling Telecom Australia was made for several reasons.

    The government could no longer afford to spend the necessary capital to pay for tech. advancements. Because of the long lead times associated with capital payback and return.

    The government had no business being in that business

    It could get a great deal of money for it and therefore continue to subsidize rotten Australian movies, help fund awful plays and support struggling leftist poets etc.

    The government wanted to insert other players in the field which would therefore make the value of the ownership very precarious in terms of valuation in the future

    However what the Government could not do is ensure the new entity was well managed etc. It could only hope to choose good management.
    Clearly, therefore even if your assertion is correct it may be actually looking under the wrong rock so to speak. Privatization does not ensure that the company is well managed going forward. This is a gamble like everything else. In a sense it is telling the firm in question that it will no longer be supported by Government fiat and it is on its own and that it will meet other players in the market in order to give consumers choices they never had before.

    Your analysis therefore may be causing the wrong dog to bark. You would also need to look at the productivity of the other new entrants in the market but for these you don’t have a past. So we reach a certain fork in the road here Professor. And this is where your strong analytical skills come in.

    We want to measure the performance of the Telco industry since the reforms. We have Telstra, which may or may not be a crappy company. I tend to believe it is a horribly run firm and would never touch the stock in a million years. But we also have new entrants without much of a footprint. So we analyze Telstra’s performance. But what does that tell us. It tells us that it has either got better, or worse since the reforms. Does that tell us anything about the industry as a whole? Well not really it only tells us about Telstra. Hence the dilemma.

    My suggestion is to to put the shoe on the other foot and ask are consumers better off having just one firm in the market, in other words lets go back to the future, or are we better off as we are now hoping that the final reforms come into play.

    So Please, Professor, educate us on how you reached you conclusions that Telstra is less productive than the golden oldies and how do you take that result to reach the assertion that the entire telco industry is not as productive.

    I eagerly await your reply.

    Thanks professor
    DC

  25. derrida derider
    April 19th, 2005 at 17:29 | #25

    I think VoIP is certainly a long-term threat to Telstra. That’s why they’re doing all they can to slow it. And yes, wireless networks (with satellites an important backbone to them) are another one – but from Telstra’s POV that can be killed stone dead indefinitely by having captive regulators.
    But I agree with dc’s point that shares in a company whose value is created by regulation are a risky investment – the regulations can be changed or cirumvented overnight (I don’t agree with most of the rest of dc’s rants tho).

  26. Nancy McIntyre
    April 19th, 2005 at 18:54 | #26

    Thanks for the opprtunity to ask a question.

    This paper on privatisation, done as a discourse on the public records of the NY City rubbish collection department, I found to be good for pointing me at a couple of the assumptions that appear to underly much of the Telstra sale debate.
    Been there, done that!
    The two which have troubled me are:

    First: That Telstra is a ‘service’ rather than a ‘public service’ – a traditional ‘utility’. I can’t get past the idea that whatever the fiscal cost, the community needs it, just the same as water and power, and rubbish and roads and ratkilling. Therefore the user pays model doesn’t apply to individual users – only to the whole society.

    Second: That creating regulations, regulatory bodies and all the other apparatus proposed for controlling a corporation in modern days will have any effect on reducing the range of unwanted behaviours anticipated. The NY study spotlights the probable reasons for failure of regulation in the City rubbish story. There are any number of public failures of regulation in the news now.

    Just mulling about whether these assumptions are agreed on in this debate.

  27. dc
    April 19th, 2005 at 20:44 | #27

    Nancy:

    Please! Don’t use the NYC garbage shenanigans as some reference point to measure success or failure of reforms. Anything, which comes out of City hall, that is described, as a reform should immediately make you alert to two things:
    1: What is the real truth behind these so- called reforms, and
    2. How are the City Unions going milk this new milk train seeing they left the last one empty?

    The truth is that whenever reforms are attempted that don’t fall under the mayor’s immediate jurisdiction you can be rest assured they will fail as it means City Hall and the unions will always strike a bad deal for NYC residents. Garbage collection reform is a perfect example of the rotten Government New Yorkers has to live through. What they did was substitute on set of regulations for another set that would allow the unions to go on milking and call it reform. Bloomberg who is of course not responsible for City Garbage but no one knows also got on the bandwagon of reform to see if he could milk a few votes. Of course very few residents would know that he has little say in this area so he puts his mug in front of the camera and says these reforms will cure all ills and make collection cheaper. Of course this is far way from the next election and when it is obvious things are not as good as they made out (in other words the union demands have again wrecked everything) who will ever remember Bloomberg’s mug shot? He of course can deny all responsibility because he can say the area doesn’t fall under his domain, but he would make it an election issue- that in fact it should fall under his responsibility. It sounds real cynical but I speak from experience because I lived there until recently and got to see the machinations at first hand

    For a real good pic on NYC governance I suggest you go and take a look at City Journal and read this story, which goes nowhere close to describing how bad City Hall, or for that matter, Mayor Bloomberg are. See link:
    http://www.city-journal.org/html/15_2_subways.html

    I worry about what you said:

    I can’t get past the idea that whatever the fiscal cost, the community needs it, just the same as water and power, and rubbish and roads and ratkilling. Therefore the user pays model doesn’t apply to individual users – only to the whole society.

    This usually worries me because it means someone is out to pick my pocket “for the
    Good of Society�.
    If what you mean is that telephony, television ought to be thought as public services I would ask why do you make such an assertion. And why should you or anyone else decide for me who I can and cannot deal with when I wish to buy a service.

    Professor Quiggin generally takes the position that markets don’t work as the premise and then contort things to prove these assertions. My assertion is fairly simply. Don’t, as we did with our telco industry, substitute one set of regulations with others and then say the market failed because this is not true. The real truth is another; newer set of regulations failed the public.

    I would love to ask you how you would decide what falls into the category of a public good and what wouldn’t. In other words what criteria would you use?

    Thanks so much

  28. John Quiggin
    April 19th, 2005 at 21:48 | #28

    “Professor Quiggin generally takes the position that markets don’t work as the premise and then contort things to prove these assertions. My assertion is fairly simply. Don’t, as we did with our telco industry, substitute one set of regulations with others and then say the market failed because this is not true. The real truth is another; newer set of regulations failed the public.”

    Can you find anything in my article that supports this claim, dc? It’s obvious that one set of regulations has been substituted for another, and I’ve made this point many times.

    But, I’d be interested to know how exactly your free, and unregulated market is going to work. I’m assuming, for example, that you won’t prevent firms from merging to create more effective monopolies, or requiring their customers to sign long-term exclusive contracts, so as to preclude any possibility of entry.

  29. vee
    April 19th, 2005 at 23:00 | #29

    I may have quoted myself out of context as we were discussing economic rationalism but the Zonal Tax Rebate is one intervention that springs to mind.

  30. dc
    April 20th, 2005 at 00:47 | #30

    Professor- thanks for asking:
    I don’t know what a market will like because I am not that good enough a forecaster. I will let the CEO”s of these firms try to figure out what is going to happen.
    What I do know is if these silly rules and regulations were put aside the market for telco services would be better than what it is now.
    Here’s why:

    Look professor, we are in a sense on the same side here. Like me you have the consumer’s interests in mind. We both see these markets not functioning well and want to see them work a lot better in the interests of the consumer. I think you would agree with me that Alston’s remarks about the need to protect investments from the “ravages of the market� are truly disgusting because all he was doing was trying to protect the narrow interests of the likes of Packer and the rest of that useless cohort who spend most of their time sucking up to whichever Government is in power in order to protect their greedy interests. Whereas the local fruit shop or fish-shop down the road is totally at the mercy of competition. I find this reprehensible and both the major parties are involved in this rort.
    Where I think we part company is how a Telco service is best delivered. I also, despite my hard view on things have a solution for the country folk. In all honesty I don’t believe they deserve the cities largesse but I am prepared to see they get a deal out of this. What we want to foster at all times is a competitive market not distorted by any rules or regulations that inhibit the delivery of services etc. The country folk could receive some type of voucher that would see them through in terms of the differential in the price of the service compared to what city people pay. I am thinking at the top of my head here but a voucher system would probably be the best way to go because it could engender some competition even out in the bush if the price was set correctly.
    That would be the only thing I would regulate in terms of Government oversight.
    Of course I would as the government ensure that the Telco system was protected from a national security point of view but that is about all I would do, as the rest would be up to the market.

    I would open the market to all comers and consumers would even be able to buy their services from overseas providers. Quite recently I received a call from an AT&T operator wanting to know if I wanted to go long distance with them as they could service me from the States. I think they got me as a potential customer because they were my long distance carrier when I lived in the US. The deal required a lot of digits input and my credit card debited in US Dollars and so I wasn’t interested. The point is that they were not too far from enticing me with a deal as their rates to the US etc. were more than half less than those offered by Telstra and Opus (who is horrible with long distance rates).

    Take television for instance, where I see really exiting innovation. I am not a tech junky so this is only my observation. Various news (Blog) sites or whatever you want to call them are now linking to stories that are visually based i.e. it’s a TV news story. Google now has Google TV just starting up or has just started, as I said I am not a tech junky and so I don’t know how long it has been in operation but seems to be a portal to the future.

    A real exiting story is that Mark Cuban, probably the smartest of all techies from the tech boom (he sold his company, Broadcast.com, to WorldCom for US$6 billion in cash) walked away and stayed out of the tech crash, has been working on what I think is an amazing product. He is working on providing web based HDTV through the web with an individualized menu of 500 movies. The implications of this are enormous because that will mean that I will no longer have to buy my TV service from Telstra or Opus, but can offer my money to anyone I choose, which is about time because the movie offering here is Australia is disgraceful. This will mean that I can finally access three great stations that I miss terribly since moving back- American HBO (has some wonderful programs) PBS (the US equal to ABC) and Cspan (the Washington national station that has amazing stuff- I used to watch a hour long book review every Sunday night). Other people have said that we are not too far away when we can watch any television station in the world over the web
    This means that I will be able to choose what I want to watch, when I want to watch it and not rely on Packer and his buddies to decide for me.
    I can understand you concerns about monopolies developing. But we had a monopoly with BHP and that didn’t seem to worry anyone.

    The most important thing we do is to ensure that people’s choices are not reduced but expanded exponentially.
    I believe your intentions are well founded as you do want the best for all Australians, but I also think your model seems very 70’s based which doesn’t really fit Australia in the 21st century. I hate Telstra and the way it deals with its customers. It deserves a great kick in the b…s.

    One last thing:

    in a fashion I kind of agree with you about monopolies and what a cancer they are to consumers. But we can’t blame the market for this, blame Canberra. Another great example of this shoddy situation is the two-airline policy setup by the Government. Think of this logic, after the fall of Ansett, the Government decided it wanted another airline to compete with Qantas and so we ended up with Virgin. But the price of having Virgin is that it came here on the understanding that the Government would protect it from the ravages of Qantas and so what do we end up with- what we had- the same little cozy arrangement when Ansett was flying. The obvious solution was to open up the market to Singapore Airlines and anyone else who wanted to come here. But the Government stopped Singapore airlines who seemed exited about operating a domestic service and was prepared to setup without handouts or under the table deals and we end up with Qantas who I absolutely detest because of the way they treat customers (in fact I hate that firm so much I will not fly if there isn’t another carrier), who are worse than Telstra. On the other hand Virgin Blue owes its existence to Howard & co. telling Qantas it wants a 50/50 split in the domestic market and not get cute with Virgin Blue.

    These are the issues we ought to be fighting against. We must ensure at all costs that the Packers of this world don’t get special deals because they “need to protect their investments�.

    so in a sense we are on the same side. I had some spare time today and visted your site after reading about it in Tim Blair’s blog. Thanks for the space.

  31. dc
    April 20th, 2005 at 01:13 | #31

    Professor
    I forgot to answer your question posed and feel you deserve a reply. Please add this reply to my post above.

    You asked:
    Can you find anything in my article that supports this claim, dc? It’s obvious that one set of regulations has been substituted for another, and I’ve made this point many times.

    I agree with you totally. One set of new regulations have been substituted the old set of regulations. This is awful policy, couldn’t agree more.

    You asked:
    But, I’d be interested to know how exactly your free, and unregulated market is going to work. I’m assuming, for example, that you won’t prevent firms from merging to create more effective monopolies, or requiring their customers to sign long-term exclusive contracts, so as to preclude any possibility of entry.
    No I would not prevent firms from merging. Never. I personally believe most mergers end up in tears anyway.
    I would never prevent or get in the way of a consumer and a service provider both entering into a long-term agreement. It is the mutual decision and one I would never interfere with. As you know, the university you work at would have numerous long-term contracts with software vendors. Would you expect the government to control this area of the university’s business? Neither would I.

  32. Nancy McIntyre
    April 20th, 2005 at 12:41 | #32

    dc, thanks for the heads up on the rotten state of NY City politics. Naturally each government is more or less corrupt in its own way, even if not the NY City way.
    However I didn’t cite the Columbia U horse puckey paper as a paradigm of scholarship on NY City doings. Rather I used it as a thinking platform which addressed the two assumptions I was questioning.

    Thanks for your vote for telephony not to be seen as a utility.
    I am still unclear about your regulation assumptions.

    >>I would love to ask you how you would decide what falls into the category of a public good and what wouldn’t. In other words what criteria would you use?< >This usually worries me because it means someone is out to pick my pocket “for the
    Good of Society�.<<
    your taxes would pay for either wouldn't they?

  33. dc
    April 20th, 2005 at 14:54 | #33

    There are two reasons why I would always use vouchers.

    1 A voucher although not exactly money has value and directly discloses what the value on exchange.
    2. although even vouchers have distorting effects on markets at the very least they would not impede competition between suppliers of goods and services. I think the model of one provider supported by government law is an example of why the Soviet system failed.
    Oh one last reason and probably the most important

    The price signal in a market is the most important determinant of what gets produced and demanded. A voucher system would not interfere with that mechanism so much.

  34. John Quiggin
    April 20th, 2005 at 15:52 | #34

    dc, the policy you favour would lead to nearly unlimited monopoly prices for network goods like water and electricity. As noted, the existence of long term contracts would preclude entry on any large scale, so the water supply price would be bounded only by competition from water carts, and the electricity price by competition from home generators.

    Do you have any reason to think this would be a good thing, or that it would in any case be politically sustainable?

    I’m not interested in arguments from libertarian first principles here – I’ve heard them all, so don’t bother with them. I am interested in arguments to suggest these policies would have good consequences.

  35. dc
    April 20th, 2005 at 18:39 | #35

    Professor:

    You say,

    Professor:
    Forgive me for asking if I misinterpreted you.
    You are criticising me because I favour private enterprise that you say would create monopolies. But your solution is to sanction a monopoly by government fiat? Is that right?

    The issue of vouchers relates to the discussion on how to meet the demanding needs of our country cousins in respect to the lack of technology service in the bush. I was not referring to water boards etc. Water is a peculiar animal, so to speak.
    I will refer you to that City Journal article which discusses solutions for the NYC subway system because as a government owned monopoly it is a mess. Honestly please read it and I am sure you will never talk about government run monopolies again. It is quite frankly what I would call a disaster.

    As I am not a practising economist, I am only thinking at the top of my head, my solution for water supply would be similar to the way the Blair Government has handled the issue. They asked for tenders to contract water supply for a long period of time and gave out the contract to the best provider. That meant all the government had to do was see the contractor kept to his legal bargain.
    Please, go read the solutions suggested for the NYC subway. Believe me it is a real mess.

  36. dc
    April 20th, 2005 at 21:58 | #36

    Professor:
    The one important thing that the Blair Government did was to at last establish a pricing system for water. In other words they allowed price mechanism to commence its work.

    I want to refer you to a recent Murdoch speech that was extremely insightful. This was not the speech of a monopolist at work, it was the speech of someone running scared. He talked about how newspaper editors, the bosses, had to embrace the web. In my mind this is a startling speech because it showed just how vulnerable newsprint or all media is at the moment.
    Look at these numbers and tell me which big US media CEO could possible sleep well at night.
    50% of people aged 15 to 30 now get their news infornmation off the web. The average age of people watching network news in America is 60.
    Three years ago people were only speculating about all this. There can be no such thing as a monopoly in media because technology and consumers are moving too quickly.

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