My piece in Thursday’s Fin (over the fold) was about Telstra. As I result I got a call from the Age and was quoted in this report.
Comments appreciated
The recent conference of the Queensland National Party has raised the bar for the privatisation of Telstra, demanding that as much as $5 billion of the proceeds be allocated directly to rural users. The Nats have been roundly criticised, but it will be a blessing for Australian 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 Australian public so far. The first-stage sale of one-third of Telstra in 1998 yielded an average of around $3.40 per 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 around $2 per share or $8 billion.
But over the same period, the government has foregone dividends with a compounded and grossed-up value of $3 per 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 around $2 per share. So the public is worse off by around $3 per 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 Australian public if Telstra had sold off its dotcom assets while the bubble lasted, a fact that was pointed out at the time [‘Foot in each camp untenable for Telstra’, AFR, 30 March 2000]. Instead, billions of dollars were dissipated in the pursuit of the global dreams of recently-departed Telstra CEO 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 National Party. The best that can 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-barreling 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 service 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’s the leader in local, long-distance, mobile, and ISP markets, and has a share in the dominant pay-TV firm. 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, thanks to vigorous resistance from Telstra and concern that this would depress the share price. Yet Telstra’s competitors have made it clear that, without structural separation, they can only survive on the basis of regulated access to Telstra’s network.
Instead, Telstra might become even more of a monster, picking up TV stations like Channel 9, or even newspapers, as part of the impending restructuring of media ownership. Incoming CEO Solomon 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 if the occasion arises.
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 underway. The promised era looks no closer now than it did then,. Even outgoing Communications minister Daryl Williams described competitive outcomes as ‘disappointing’ in a speech in 2004.
Even when conceding all 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 fifteen years or more. If full privatisation goes ahead, the failures of the past will be locked into place for the foreseeable future.
John Quiggin 
Kevin, what you suggest is feasible in principle, but:
(1) Individuals can’t spend money directly on infrastructure
(2) National governments don’t like handing over money to shire councils or similar bodies, particularly without tight strings attached
Leaving aside who would do the spending, the idea that telcos could tender to supply services to rural areas is a live policy option.
Individuals can spend money on infrastructure in the same way that individuals can spend money buying skyscrapers.
1. Telcos say we will buy your $100 of your vouchers for $50 and we will give you the services you need if you promise to use us.
2. Given that there is money around, intermediaries will arise like property trusts who will who will take your infrastructure vouchers off your hands.
3. New ventures will arise who will ask you to invest in the telecommunications infrastructure for Dubbo and points West and you will be able to buy the shares.
The reason it does not get considered is one of control and who makes the investment decision. The people who could make it happen are those who currently control the purse strings and they will lose influence and power so why will they change the system?
By giving the control to as many people as we can create some sort of a market for the provision of infrastructure. Unfortunately it takes away the power of governments and the bureaucracy. But if we could get people talking about it …..
Actually, if you look into the history of all this, you will see that there were strategic reasons to unify telegraph systems and make them accessible and controllable in emergencies. That reasoning was entirely sound at the time, and well borne out by the events of 1914-18. As to whether that strategic exception remains in force, or whether the enforced centralisation led to positive network externalities that we might be missing when assessing proposed privatisation, that is another set of questions entirely.
QUOTE James Sinnamon: Terje, I suggest you read the Wikipedia definition of a natural monopoly:
Natural monopolies arise where the largest supplier in an industry, or the first supplier in a local area, has an overwhelming cost advantage over other actual or potential competitors.
More specifically, this means that once someone has built a telecommunications network covering a single geographic area it is stupid and wasteful to build a second telecommunications network to cover the same geographic area. (Although Telstra and Optus did precisely this when they both rolled out fibre optic cable to cover the same geographic areas in the cities in the 1990’s).
I worked for Optus in the 1990s. They did not role out much fibre in the cities. Mostly they leased it from electricity authorities that had installed if for telemetry knowing full well that it had telecommunications potential. Most of the Optus fibre roll out was for intra city capacity.
There was a dual roll out of pay TV cable technology. However this kind of disproves your basic thesis. And the fact that anybody invested in Optus in the first place discounts your argument.
I would add that it is almost as stupid to have two mobile phone networks covering the same geographic area. Having five, as we now do in Australian cities, is insane.
Insane because you think it is unnatural? And yet they still invest. Maybe you need to adjust your assesment of reality. If we had just one operator they would need nearly five times the towers anyway to deliver the same capacity being demanded. Mobile phone networks use recyled bandwidth and you need more transmitters as demand increases.
Read this history of telecommunications Our telecomunications service was government owned from well before Australia federated. If the 19th century there were many competing private telegraph operators, who were nationalised, by the British colonial office, then no reference has been made to them in this article.
I moved recently and the book I have covering the history of telephony in Australian is currently in a box. So I can’t quote directly. I will paraphrase.
The telegraphs were mostly government operatated and build. There were a few private initiatives but not so many. However the telephone was a different beast. The government owned telegraph operators saw little point in adopting the new technology and effectively left the field operators to private operators. In much the same way as the first ISPs were independent of phone companies. However the whole exercise got put to bed when the government stepped in and legislated that there would be no more private sector phone companies. All of this occured in the years after federation.
Terje wrote : In much the same way as the first ISPs were independent of phone companies. However the whole exercise got put to bed when the government stepped in and legislated that there would be no more private sector phone companies. All of this occured in the years after federation.
You may well be correct in regard to telephones, just as railways were initially privately operated in the UK. If you are, then I am happy to stand corrected,
Nevertheless, the needs of a modern economy would not have been met by a number of separate, and, most likely, incompatible, telephone networks. Either a private monopoly or a public monopoly would have been necessary. For reasons argued extensively elsewhere the public is far better served by a publicly owned monopoly.
Terje wrote : Insane because you think it is unnatural? And yet they still invest.
As I said before, the Federal Labor Government had to agree to dismantle the national analogue network, built at enormous expense to the taxpayer and to Telstra’s customers, in order to get Optus and Vodaphone to agree to invest. That is clearly stupid and unnatural.
Terje wrote : If we had just one operator they would need nearly five times the towers anyway to deliver the same capacity being demanded.
Intuitively, more towers would be needed for a single integreted network, than are necessary for any one of the five networks we have today, but you can’t possibly expect anyone to accept that anywhere near five times as many towers would be necessary.
Ultimately it is customers and taxpayers who must bear the expense of this stupid duplication whilst even some city users, as well as many rural users, have missed out altogether.
Terje wrote : There was a dual roll out of pay TV cable technology. However this kind of disproves your basic thesis. And the fact that anybody invested in Optus in the first place discounts your argument.
Whether or not the cables were primarily intended for TV is beside the point. They clearly could have been used for broadband connections to the Internet. Either both Optus and Telstra would have lost money from this idiotic duplication or else the additional costs would have been borne by their customers.
The public would have been far better served if one of the networks had instead been built to cover the other areas of Australia which missed out.