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 Telstraâ€™s corporate governance. From Switkowskiâ€™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 Laborâ€™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.