One of the first items of business, once the government gets effective control of the Senate (or perhaps earlier) will be the full privatisation of Telstra, ending nearly a decade in the limbo of part-privatisation. Having argued repeatedly that partial privatisation is the worst of all possible worlds and with Labor having dumped my (and Lindsay Tanner’s) preferred option of renationalisation and divestiture, I can’t really complain about this. However, the privatisation process will show some of the reasons why privatising Telstra is a bad idea.
The first problem is the fiscal impact. There’s a lot of silly talk about using the proceeds of the sale to fund all manner of current expenditure or tax cuts. I thought it had been generally realised by now that selling income-earning assets and spending the proceeds is just the same as running deficits – that’s why asset sales are excluded from measures of the ‘underlying’ cash deficit.
Slightly less silly, and likely to be influential in persuading various reluctant parties (Nats, FF, Democrats) to support the sale is the idea of undertaking various infrastructure or environmental investments ‘funded’ by the sale. At least, unlike tax cuts, the investments should leave the government’s net worth unchanged. But if they are good investments, they should be undertaken regardless of whether Telstra is sold. And in most cases, they won’t return any flow of revenue to governments to offset the loss of Telstra’s earnings.
The core issue in assessing the fiscal impact, though is whether the interest savings from using sale proceeds to repay debt can compensate the government for the loss of Telstra’s earnings. These earnings have three main components: dividends, the associated imputation credits (a claim on the government) and retained earnings. Two years ago, I estimated that the break-even price for the government was at least $6.70. The government, incorrectly, ignores retained earnings and imputation credits, and it appears to have a target price of around $5.25, compared to a current share price of about $4.70. Even on election night, Minchin was talking about pushing legislation through the Senate allowing a sale, then waiting for the market to generate an adequate price.
The next and related problem is the conditions under which Telstra is sold. Given the nasty arithmetic, the government will be keen to set conditions that yield a high sale price, and these will generally be bad for consumers, bad for competition and bad for Australia in general. The two big questions are the regulations governing pricing and access for the telephone network and whether Telstra will be permitted to continue as a media player, possibly acquiring newspapers and TV stations.
My guess is that Telstra will be privatised in its current form, without divestiture and with fairly light-handed regulation. The result will be the most powerful private monopoly in Australia’s history, with close ties to the Liberal party, and media outlets devoted to pushing its interests. The closest comparator I can think of is Berlusconi’s Italy. While there are obvious short term benefits to the government in this, I think there will be a big price to pay in the long run.
fn1. More generally, as Nick observes here, the government may find control of the Senate a mixed blessing.