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yet more on Telstra

September 15th, 2005

My column in today’s Fin (subscription required) has yet more on Telstra, and the general direction of regulation. It’s over the fold

The public stoush between John Howard and newly-appointed Telstra CEO Sol Trujillo has been entertaining and in some respects informative. Above all, it has been educational, driving home a lesson that ought to have been learned a long time ago. Partial privatisation represents the worst of both worlds, having all the costs of public ownership and few of the benefits.

The central aim of governance is to provide actors with clear and direct responsibilities. In a private corporation, the directors and managers have a fiduciary obligation to act in the interests of shareholders (considered as shareholders, without regard to any other interests they may have).

In a public enterprise, the managers are responsible to the relevant ministers who, in turn, are reponsible to Parliament and the electorate.

In a partially private term of Telstra, both lines of responsibility are present, and neither works properly. The CEO of Telstra may be seen as having obligations to manage the enterprise in the interests of any or all of: the private shareholders of Telstra; the Australian public; the Commonwealth government; the relevant ministers as formal shareholders; or even the Liberal party as the effective controller of the majority stake.

As long as the position of CEO was held by Ziggy Switkowski, a direct appointee and personal friend of the Communications Minister, these conflicts did not become apparent, though they had serious implications for Telstra’s corporate governance. From Switkowski’s point of view, what was good for the Liberal Party was good for Telstra and distinctions between the Liberal Party, the government, and the Australian public were not worth making. The appointment of Sol Trujillo has brought the contradictions out into the open.

All of these points were made when the government first proposed partial privatisation, denying that this would compromise its capacity to direct Telstra to act in the public interest. As I observed at the time (Labor’s dilemma on Telstra, AFR, 31 January 1997), the continued maintenance of a private minority shareholding in an enterprise like Telstra is an untenable position. The directors of the enterprise would be in an invidious position, as would the minority shareholders. Directors responsible to a government majority shareholder can not possibly disregard public policy imperatives in an area as important as telecommunications, but in doing so they violate their fiduciary obligations to disregard the interests of everyone except their shareholders. Minority shareholders are locked into whatever services and pricing polices, and whatever pattern of dividend distribution, the government chooses to impose on them.

Of course, the government has long since abandoned the claim that partial privatisation is a sensible policy, and argued for full privatisation as a means of rescuing Telstra from the no-mans land created by its own policy. Even if privatisation does take place, however, any benefits that might arise will be more than outweighed by the costs of almost a decade during which Telstra has been neither fish nor fowl.

But at least the government has changed its mind in the right direction. Having correctly opposed partial privatisation at the time, Labor now suggests it should be maintained indefinitely, saying that it will freeze public ownership at whatever level it happens to inherit from the present government when it eventually returns to office. This is a non-policy, made worse by the fact that Labor’s spokesman on the topic, Lindsay Tanner, once advocated the correct policy of privatising the peripheral parts of Telstra and renationalising the rest.

More generally, the pugnacious approach adopted by Sol Trujillo is symptomatic of the growing self-confidence of infrastructure monopolists confronting governments and regulators. It has become increasingly clear that, faced with a threat that socially necessary infrastructure will not be built, there is little option but to meet the demands of the monopoly businesses that own them. In most cases, this involves receiving a rate of return based on levels of risk typical of the private sector while getting revenue streams that are effectively guaranteed, in large measure, by the regulatory framework established by the private sector.

Thus far, households have seen little benefit from the radical reforms imposed on the Australian infrastructure sector. Real prices for most infrastructure services have remained constant or risen. The one exception, telecommunications, is the result of a decades-old trend of technological progress rather than of well-designed public policy. With infrastructure providers becoming more aggressive, and governments increasingly unwilling to confront them, the promise of lower prices and better services is likely to remain a promise.

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  1. Peter2
    September 28th, 2005 at 15:12 | #1

    And one more thing … :-)

    Dont you think that the belief in the utility of an efficient labour market (as characterized by the typical attitude that people should be compelled to move away from family, friends, and community in order to find work) is a bit extreme? Its only got utility if you take a very narrow view…..

    I think most people would find it a bit of a harsh line to take that people should be compelled to move interstate, say, to find work…..

  2. Andrew Reynolds
    September 28th, 2005 at 15:17 | #2

    Peter,
    This discussion should be occurring in the other thread if you want to have it.

  3. Andrew Reynolds
    September 28th, 2005 at 15:22 | #3

    Sorry, it is here. My mistake.

    I do not think people should be compelled to move anywhere. If people choose to live in the middle of the desert it is fine with me. If they want to bring up their children there – no problem.
    All I am saying is that the community should not be compelled to pay for their choices. If their family wants to support them, find them work or anything else – no problem.

  4. Peter2
    September 28th, 2005 at 15:37 | #4

    Andrew,

    OK, compelled as in ‘compelled to move or else they get no welfare’. I still think it is a very hard line approach to take, and, whats more, a line that is bad for society as a whole.

    It also typifies the neo-lib concern with efficient systems over people….

    Even if you admit that it costs more to have a welfare system that doesnt force people to move for work (and I dont admit this), we are a wealthy enough nation to bear the additional burden, and I think it is a nicer society for it.

  5. Andrew Reynolds
    September 28th, 2005 at 18:44 | #5

    Peter2,
    Before we go further, perhaps I should ask you to clarify what you mean by ‘neo-lib’. James (above) seems to use it as a term of abuse. I do not call myself a ‘neo-lib’ – whatever that means – I regard myself, if any label needs to be found, as a liberal – or perhaps what a person from the US may term a libertarian. I regard John Stuart Mill as reasonably correct on the social policy outlook and David Ricardo (no, not the commenter on this blog) and Hayek as roughly correct on the economics.
    .
    To answer your specific point from a not totally uncaring point of view: I do not know if it does make for a nicer society. To me at least, people on welfare for any real length of time tend to lose hope in the future. The ‘culture’ of welfare dependency is not a good thing, long term. So, if we are talking about a ‘nicer’ society perhaps we should also be looking at what the policies we regard as being nice are actually doing – if they are assisting people to stay where they are, stay unemployed, give up hope and not do anything to fix it, then, maybe removing the support would be a good thing – leading to a ‘nicer’ society, even though the actual measure may seem harsh.

  6. MB
    September 29th, 2005 at 08:01 | #6

    I resent the fact that the unemployed have been portrayed as lazy, greedy and unwilling to work. As someone who comes from a family of modest means (who has received assistance in the past) I have some idea of the reality of welfare. Far from wanting to remain on welfare, we never viewed it as anything but a temporary means of assistance, not as a substitute for paid employment. Most of the unemployed feel this way.
    I am quite sure that anyone who thinks people actually choose idleness has never actually experienced unemployment, or the frustrations that go with it (or the stigma that is attached to it). Should one seek a more likely explanation of why people are forced to accept assistance, perhaps one should look at the lack of full-time employment, particularly outside the capital cities, and particularly among young people and older workers.

  7. MB
    September 29th, 2005 at 08:24 | #7

    I would also add that, far from being the result of individual choice (the classical liberal explanation) or a slave-like dependancy (the conservative explanation), poverty is the result of economics. In other words, people are poor because they have no money. Without it, they can’t obtain medical treatment, send their kids to school, start their own business, or even find a place to live. It therefore becomes necessary for the government to act on their behalf by providing the necessary services: employment services (the CES), free medical treatment (Medicare), access to educational opportunities (public education, HECS), social security, public housing, adequate local utilities and infrastructure, public transport, etc. This is what was meant by the “welfare state” not this notion that the state should pay people not to work.**

    ** It should also be noted that, this being designed to assist the needy, access, at least for things like social security, should be limited to the genuinely needy (i.e. means-tested)

  8. Andrew Reynolds
    September 29th, 2005 at 12:11 | #8

    MB,
    I have never portrayed the unemployed as lazy, greedy or unwilling to work. I have been unemployed in the past, so it would be a little bit too close to home.
    I would disagree with it being the result of ‘economics’ – say ‘the economic system we live in’ and I would agree. I would also argue that high taxes and other barriers to employment are the primary cause of long term unemployment (short term frictional unemployment being the result of a normal, functioning economy).
    You are right in what you seem to be saying – that those in poverty tend to suffer from a vicious circle and that some form of community help is needed. I would also argue, however, that creating a huge government bureaucracy with the resulting high tax rates is not necessarily the right way to tackle it.

  9. Peter2
    September 29th, 2005 at 13:35 | #9

    Andrew,

    I dont find the argument that removing people’s welfare is good for them very convincing. I’m happy for there to be reasonable compulsion for welfare recipients to look for and accept work within a reasonable distance, but I think a universal welfare safety net is necessary in a civil society.

    As for my definition of ‘neo-lib’, I’m not sure I can give you a concrete one. If you’ll let me be fuzzy about it, I would say that neo-libs are those who believe that manipulating various economic levers is the fix to almost any problem. Their view of the people is essentially as economic agents/consumers, not as lovers, brothers, artists, spiritual beings, friends. They attempt to reduce all other dimensions down to an economic one.

    I’m not accussing you of being a neo-lib (or anything else), by the way. I dont care to speculate about this, as I dont know you well enough and in any case, it’s not helpful. I do think we occupy very different positions on the political map though, based on what you have said. I would call myself a libertarian on non-economic issues, but it seems we differ substantially on the economic front.

  10. MB
    September 29th, 2005 at 16:27 | #10

    You say you have never portrayed the unemployed as lazy, greedy and unwilling to work, and yet you talk about a “culture of welfare dependancy” and people losing hope over time. You then advocate “removing the support”. Your underlying assumption remains the same–that people will grow accustomed to idleness.

  11. Andrew Reynolds
    September 29th, 2005 at 17:27 | #11

    Peter,
    I would not say it is an ‘accusation’ to be a neo-lib, but I would disagree with your definition. An economic libertarian believes (IMHO) exactly the reverse of what you have said. It is those who believe that governments have the solutions who believe in pulling levers and other manipulations. They are also fixated on economic gain, measuring the success of government programmes by this or that measure. As I have said above several times, a libertarian (again, IMHO) is someone who believes that people should be free to live their own lives with minimal interference from the government (or anyone else). If they choose to work hard and increase their economic welfare – great, but that is their choice. If they want to live on a commune, sharing their worldly goods with each other, also great. Their choice. The vast government infrastructure we have built up restricts us in so many ways from achieving what we want with our own lives.
    MB,
    Welfare dependency and growing accustomed to idleness are not the same as laziness. There is laziness amongst those of us in work as well.
    Moving (or any other major change) is always a wrench with uncertain consequences – all major changes to someone’s life always are, particularly if the person has a family. An open ended, poorly targeted welfare programme just makes it easier to stay and grow used to the situation. This is the typical government welfare programme.
    The psychological changes that occur to most people during a period of joblessness are well documented and I presume you do not want these re-proven. If you do I will find some links.

  12. Terje Petersen
    September 29th, 2005 at 23:54 | #12

    QUOTE:-

    a libertarian (again, IMHO) is someone who believes that people should be free to live their own lives with minimal interference from the government (or anyone else). If they choose to work hard and increase their economic welfare – great, but that is their choice. If they want to live on a commune, sharing their worldly goods with each other, also great. Their choice. The vast government infrastructure we have built up restricts us in so many ways from achieving what we want with our own lives.

    RESPONSE:-

    I think Andrew has very accurately described what it is to be a libertarian. What he describes certainly fits with my worldview.

  13. October 3rd, 2005 at 04:53 | #13

    Andrew Reynolds wrote: I will start with an apology. I was using ‘you’ in the wider sense – perhaps I should have used ‘someone’ in its place. If that has led to confusion, I apologise.I do not know who you are, just as you do not know me.

    Whatever your intentions, it was an unwarranted slur against hundreds of thousands of Australians, particularly those in their forties, fifties and sixties who are unemployed, underemployed or not employed in the vocation in which they have been trained through no fault of their own.

    If you had read my earlier post you would have read my point that anyone who works more than one hour per week is absurdly counted by the ABS as ‘employed’. This one statistical fiddle, which is only one of many, should surely cast doubt on the validity of the official unemployment statistics of today.

    And this is not the only statistical fiddle that allows Howard and his neo-liberal backers to paint an undeservedly positive picture of what his Government has allegedly achieved for all Australians. Others include :

    Removal of housing costs from ABS inflation statistics.

    The use of the Gross Domestic Product as a measure of prosperity, when it even includes economic activity necessary to fix up the consequences of natural and human caused disasters as contributing towards our prosperity. It is for this reason that Simon Kuznets the originator of the GDP measure warned the US congress in 1934 against its use in the way that it is currently being used by economists

    How ever much you try to evade my point and the points also made by Peter2 and MB above, your system of beliefs clearly has a dismal view of most members of this society. No worker will give his/her best unless driven by the fear of unemployment that would be the consequence of their business failing, and should they become unemployed, they are not even worthy of receiving unemployment benefits unless they are willing to go to extraordinary lengths of moving to the other side of the continent to find work.

    Whether or not those belief have any basis in what you say are your own observations, those are clearly your beliefs.

    Andrew Reynolds wrote: The vast government infrastructure we have built up restricts us in so many ways from achieving what we want with our own lives.

    This is nonsense. The tragic experience of Cyclone Katrina shows precisely the consequences of having the functions of Government cut back over the decades to suit the needs of a greedy selfish minority, who resent contributing any of their, quite often ill-gotten, wealth to the benefit of the overall community.

    Just imagine the headaches that would be caused by a fully privatised Telstra, if after a major coastal town were hit by a cyclone, it decided that there was insufficient money to be made by meeting the community’s needs to restore its telecommunications services.

    If our society is to stand any chance of dealing with the environmental mess mostly caused by unfettered free-market forces, then it must, as a matter of urgency, ditch the major assumptions of neo-liberal economics.

  14. Andrew Reynolds
    October 3rd, 2005 at 22:21 | #14

    James,
    Good to see you back – I thought you had given up.
    Do I really have to answer the same points again? Perhaps I will start with the question I posed earlier that you have still not answered – what do you define as ‘neo-liberal’? Unless I know what you are against, I find it difficult to fight against this straw man you are trying to construct.
    You accuse me of having a ‘dismal’ view of society, yet you are the one that seems to be arguing that compulsion, through taxation, is the only way that redistribution will work. I disagree – I think that human beings are quite capable of helping each other without the threat of force from the government to push it along. Your argument implies that ‘unemployment benefits’ (I take that to mean taxation revenue redistributed) is the only way to help. Again, if that is what you are arguing, I disagree.
    .
    If you insist on using a tragedy to make your argument, I feel I must respond in kind. The real problem with Katrina were the dams and levee systems, built by the US government, that made the low lying land habitable and the mangrove swamps that had been converted into housing, again by legislative fiat. Without that the destruction would have been much less. Or do you disagree?
    As for Telstra not restoring service, great. Their competitors in a free market would have a field day. The less we rely on the old, slow moving, dim-witted monopolies, the better. Somehow, I do not think even Telstra would be that stupid, though.
    BTW, James, even by the ILO definition of unemployment, a much more restrictive one that the ABS, Australia is doing well.

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