Bills Digest No.176  1997-98 Telstra (Transition to Full Private Ownership) Bill 1998

Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

Telstra (Transition to Full Private Ownership) Bill 1998

Date Introduced: 30 March 1998

House: House of Representatives

Portfolio: Communications, the Information Economy and the Arts

Commencement: Each of the five schedules to the Bill commences on a different date. The commencement dates are set out in the Main Provisions.

Purpose

To facilitate the sale, by the Commonwealth, of the remaining two-thirds of the shares of Telstra Corporation Limited (Telstra).

Background

The sale of the first third

The coalition's 1996 election policy contained a commitment to partially privatise Telstra. The major features of the policy were:

• One-third of the Commonwealth's equity to be made available through a share float, 65% of which would be reserved for Australian investors
• Foreign investors only to be allowed to subscribe to 35% of the float and no foreign investor to be allowed to acquire more than five per cent of the one-third float
• Incentives to be provided to Australian citizens and Telstra employees to encourage participation in the float
• Telstra not to be broken up
• Telstra to remain incorporated in Australia with an Australian citizen as Chairman of the Board, of which a majority will also be Australians
• The government would reserve the right to veto any excessive management remuneration
• The community service obligations (CSOs) of telecommunications carriers to be maintained, along with the requirement for such carriers to contribute to a Universal Service Levy to meet the costs of the CSOs
• The existing right to untimed local telephone calls to be maintained and guaranteed by legislation
• All existing price caps to be maintained and the price controls outlined in the Labor Government's August 1995 statement to be adhered to
• A new legislated customer service guarantee to be met by all telephone companies
• Competition regulation to be administered by a special branch of the Australian Competition and consumer Commission.(1)

On 2 May 1996, the government introduced the Telstra (Dilution of Public Ownership) Bill 1996.

The Telstra share offer opened on 15 October 1997. By the close of applications on 3 November 1997, 1.8 million Australians applied for shares. Of the employees eligible to subscribe for shares under the employee share scheme, 92% took up the offer. Shares were issued at $3.30 and that price was payable by two instalments; the first $1.95 ($2.00 for institutions) and the second $1.25 ($1.30 for institutions).

Of the one-third of shares which were sold, up to 35% (11.67% of all issued shares) could be purchased by foreign investors. At the end of 1997 the actual figure was 19.5% (6.8% of all issued shares).(2)

Telstra shares were first traded on the Australian stock exchange on 17 November 1997. At the opening of trading on 9 April 1998, the partly paid Telstra shares were priced at $3.80.

The remaining two thirds

On 15 March 1998, the Prime Minister announced the government's decision to sell the remaining two-thirds of Telstra. It is envisaged that the legislation to facilitate the sale, namely the Telstra (Transition to Full Private Ownership) Bill 1998, will be enacted prior to the next general election but the provisions in respect of the sale will not commence until after the election.

Apart from the issue of public ownership the major concerns in respect of the sale have related to the continued provision of service and new technologies to rural and remote parts of Australia and to the continued access to untimed local calls.

The Customer Service Guarantee (CSG)

In addition to providing for the sale of one-third of Telstra and imposing ownership restrictions, the Telstra (Dilution of Public Ownership) Act 1996 introduced a significant regulatory policy measure, in the form of the customer service guarantee (CSG).

The CSG provisions have been re-enacted in the Telecommunications Act 1997 and essentially provide that the Australian Communications Authority may make performance standards to be complied with by carriers.(3) Those performance standards relate to practical matters such as connection and rectification times and the keeping of appointments to meet customers.(4) If a carrier fails to meet a performance standard it is liable to pay damages to the customer in the amount specified in a scale determined by the ACA.(5) For example, where there is a delay in connecting a standard telephone service, the customer is entitled to be paid (or to have their first account reduced by) the equivalent of one month's line rental for each day of delay.

Telstra's performance in country areas

Concerns in respect of the standard of service provided by Telstra to country areas have been underscored by statistics contained in the most recent issue of the Telecommunications Performance Monitoring Bulletin.(6)

Telstra's performance in the provision of new services on or before the 'agreed commitment date' (ACD - this is the date agreed between the customer and Telstra which is acceptable to the customer and realistic in terms of available workforce) in country areas declined by 9 per cent to 66 percent during the quarter ending 31 December 1997. This was a 16 per cent reduction on the quarter ending 31 December 1996.

Telstra's performance in country areas in the number of faults cleared within one day also fell during the December 1997 quarter by 7 per cent to 61 percent. This was a 13 per cent reduction on the December 1996 quarter. The percentage of faults cleared within 2 days fell by 6 per cent to 80 per cent during the December 1997 quarter and by 10 per cent when compared to the December 1996 quarter.

The clearing of faults with payphones in country areas was even worse. The number of faults with public payphones which were cleared within one day fell by 14 percent to 47 percent during the December 1997 quarter and by 20 per cent when compared with the December 1996 quarter.

These performance indicators are summarised as follows:

Source: Australian Communications Authority, Telecommunications Performance Bulletin, issue 3 - December 1997 quarter.

Telstra explained each of these reductions in service usually in terms of organisational changes or inclement weather. Readers are referred to issue 3 - December 1997 quarter of the Telecommunications Performance Monitoring Bulletin for extracts of those explanations.

The Ministers' response to concerns for country areas

In response to the release of these figures, the Ministers for Communications, the Information Economy and the Arts and Finance and Administration jointly announced that the government was not satisfied with Telstra's existing service standards. It was also announced that the government would introduce amendments to empower the Australian Communications Authority (ACA) to direct all carriage service providers, including Telstra, to take remedial action to correct any systemic problems which arise in meeting customer service guarantee performance standards.(7)

The Ministers have also referred to the Universal Service Obligation (USO) as the overriding means by which Australians in rural and remote areas will continue to have access to a standard telephone service.

The Universal Service Obligation

The Universal Service regime is contained in Part 7 of the Telecommunications Act 1997. The USO is the obligation to ensure that the standard telephone service (STS) and payphones are reasonably accessible to all Australians on an equitable basis.(8) STS refers to a service which permits voice telephony or an equivalent service for a person with a disability.(9) Regulations may be created which extend the definition of STS.

The definition of the STS was recently reviewed by the Standard Telephone Service Review Group with a view to determining whether, among other things, the STS should include ISDN capability.(10) The STS review group recommended that digital data (i.e. ISDN equivalent) capability should be provided through the operation of the market throughout most of Australia and where the market does not operate to make this capability reasonably accessible to all people in Australia on an equitable basis, it should be provided through the USO mechanism.(11) However, in a dissenting report, Professor Henry Ergas was critical of the logic used by the group to arrive at that conclusion.(12)

The Minister for Communications is empowered to declare that a specified carrier is the national universal service provider. At present, Telstra is the declared national universal service provider. Where Telstra incurs a loss in complying with the USO it is entitled to recoup those losses. That amount is recouped by imposing a levy on all carriers in proportion to their share of total carrier revenue.

Untimed local calls

Part 8 of the Telecommunications Act 1997 deals with the obligation on carriage service providers to provide customers with an option to have their local calls charged on an untimed basis. The untimed local call option must be given in respect of:

• residential voice calls
• residential data calls (i.e. internet connection and fax calls)
• business voice calls.

There is no requirement to provide an untimed local call option in respect of business data calls.

Section 226 of the Telecommunications Act 1997 deals with the provision of comparable benefits to the untimed local call for those rural and remote customers for whom there is no such thing as a local call. The Minister is obliged to ensure that regulations are in force from 1 January 1998 to give comparable benefits to those who do not have untimed local call access. For the purposes of comparing benefits the legislation provides that regard must be had to the ability to make essential community and business calls on an untimed basis.

The insertion of section 226 into the Telecommunications Act 1997 was prompted by an Australian Democrats amendment proposed during the Senate's consideration of the Telecommunications Bill 1997. It has resulted in the Minister announcing a rebate scheme of up to $160 per year for the 17,000 or so customers who are without benefits comparable to untimed local calls.(13)

The Minister's power to direct Telstra

Section 9 of the Telstra Corporation Act 1991 (TCA) enables the Minister to give such written directions to Telstra as appear to the Minister to be necessary in the public interest. The only limitation on the power is that the Minister cannot give a direction in relation to the amounts to be charged for work done or services supplied by Telstra. If the Minister wishes to regulate Telstra's charges he must do so under the price control arrangements in Part 6 of the TCA.

In its original form, the Telstra (Dilution of Public Ownership) Bill contained a provision which repealed section 9. However, the non-government parties succeeded in retaining the Minister's power of direction through a Senate amendment. As far as the writer is aware, the Minister has never issued a direction under section 9.

A possible problem could arise on any purported exercise of this power. The problem is that by complying with the Minister's direction, Telstra's board of directors could place themselves in a position where shareholders might claim that they are being oppressed under section 260 of the Corporations Law. This could occur in circumstances where, for example, the Minister directed Telstra to engage in a substantial infrastructure development program in a non-profitable area.

Main Provisions

The amendments which are proposed to be effected by this Bill are contained in five schedules and are grouped according to the date on which they are to commence.

Schedule 1 - Amendments commencing on Royal Assent

The amendments contained in this Schedule are the response to the Ministers' dissatisfaction with Telstra's performance in meeting customer service guarantee standards.

Item 3 of this Schedule inserts proposed new section 236A into Part 9 of the Telecommunications Act 1997 (which deals with the Customer Service Guarantee). The new provision will empower the ACA to give directions to carriage service providers requiring them to:

• take specified action to ensure that the provider does not contravene a CSG performance standard, or
• take such action as will ensure that the extent of the provider's compliance with the standard reaches or exceeds a specified goal or target.

The Minister will be able to require the ACA to give directions under this provision.(14) The ACA must consult with the Telecommunications Industry Ombudsman before giving a direction unless the direction is one which the Minister has requested it to make.

The ACA's directions are disallowable instruments.

The proposed section provides 2 examples of the type of direction that the ACA may issue:

• that the provider implement effective administrative systems for monitoring compliance with a CSG performance standard
• that the provider take such action as is necessary to ensure the provider's compliance with a CSG performance standard reaches or exceeds a specified goal.

A failure to comply with a direction by the ACA may result in the provider being liable to a civil penalty of up to $10 million.(15)

Schedule 2 - Amendments commencing on the first proclaimed day

The amendments contained in Schedule 2 commence on a day to be fixed by Proclamation. That Proclamation must not be made before the return of the writs for the next election of the House of Representatives.

Schedule 2 amends the TCA.

Most of the items in this Schedule either amend the provisions which facilitated the sale of the first third of Telstra so that they apply appropriately to the sale of the remainder of the Commonwealth's interest or they clarify the legislation as a result of the experience with the sale of the first third of Telstra.

Item 18 inserts new section 8AUA into the TCA. That section will allow the Minister to amend Telstra's constitution (i.e. its memorandum and articles of association) at any time between the commencement of the section and the day on which the Commonwealth's shareholding in Telstra falls below fifty per cent. The amendment must relate to the sale of Telstra and the effect of the alteration must be to remove the requirement that a particular act or thing be done only with the consent of the Minister.

Items 26 to 33 deal with the foreign ownership restrictions. The amendments are of a technical nature and do not change the existing foreign ownership limits, i.e. total foreign ownership must not exceed 35 per cent and no foreign individual may own more than five per cent.

Item 41 creates new section 8CCA which is an anti-avoidance provision. The section will prohibit Telstra from entering into a scheme for the purpose of avoiding the application of any of the provisions of the TCA. The Explanatory Memorandum to the Bill cites examples of the types of provisions which could be the subject of avoidance through the use of a scheme as, the foreign ownership restrictions, the requirement that Telstra base its operations in Australia and the price-cap regime contained in Part 6 of the Act.

Part 2C of the TCA was inserted by the Telstra (Dilution of Public Ownership) Act 1996 immediately prior to the sale of the first third of the company. Part 2C is headed 'Re-affirmation of Universal Service Obligation' and contains a restatement of the core elements of the USO. Its insertion was intended to:

The USO at that time was contained in the Telecommunications Act 1991 and is now contained in the Telecommunications Act 1997, as mentioned above. Consequently the re-affirmation served no legal purpose but instead was intended to allay concerns about Telstra's performance of its community service obligations following its partial privatisation.

Item 47 repeals Part 2C.

Schedule 3 - Amendments commencing on the designated day

The designated day is the first day, after the commencement of Schedule 2, on which a majority of the voting shares in Telstra are owned by persons other than the Commonwealth.

Items 1 to 9 of Schedule 3 make amendments necessary to discontinue the eligibility of the Telstra employees to accrue entitlements under Commonwealth long service leave and maternity leave legislation.

Item 10 inserts new Part 3A into the TCA. Proposed new sections 9B to 9E preserve the service of employees for the purposes of accruing long service leave entitlements so that those entitlements are not lost following the sale. Following the sale, Telstra employees will no longer accrue entitlements under the Long Service Leave (Commonwealth Employees) Act 1976. Proposed new section 9G preserves employee entitlements where the employee has served the required long service leave period of 10 years.

Proposed new sections 9J and 9K preserve employee entitlements to benefits under the Defence Force Retirement and Death Benefits Act 1973 and periods of service for the purposes of that Act.

Proposed new section 9M and 9N continue the application of the Maternity Leave (Commonwealth Employees) Act 1973 for the benefit of female employees who are on maternity leave on the designated day and who commence maternity leave within twelve months after the designated day.

Schedule 4 - Amendments commencing on the second proclaimed day

The second proclaimed day is the day on which the Minister certifies that he is of the opinion that the Commonwealth no longer:

• holds shares in Telstra that carry the rights to exercise at lease one-half of the total voting rights attached to the voting shares in Telstra
• controls the exercise of at least one-half of the total voting rights attached to the voting shares in Telstra
• holds at least one half of the total paid-up share capital of Telstra
• has an entitlement to hold at least one-half of the total rights to any distribution of capital or profits of Telstra on winding-up
• has an entitlement to hold at least one-half of the total rights to any distribution of capital or profits of Telstra, otherwise than on winding-up.

Under Division 3 of Part 2 of the TCA, Telstra is obliged to provide financial information to the Minister and to notify the Minister of significant events such as disposing of a significant business or commencing or ceasing a significant business activity.(17) That Division also requires Telstra to prepare a corporate plan annually and to provide the Minister with a copy. Item 2 of Schedule 4 repeals Division 3 of Part 2.

Item 6 of Schedule 4 removes the Minister's power of direction over Telstra.

Schedule 5 - Amendment commencing at the end of the first annual general meeting of Telstra held after the second proclaimed day

Item 1 of Schedule 5 repeals section 26 of the TCA which appoints the Commonwealth Auditor-General as Telstra's auditor.

Concluding Comments

The primary concern in respect of the decision to sell the remainder of Telstra relates to the continued provision of telephone services to rural and remote areas of Australia and the progressive improvement of those services in line with the improvements to services in metropolitan areas. The suggestion appears to be that the sale of the Commonwealth's remaining interest will cause a diminution in the quality of service to those areas.

It can be argued that the proposed further sale will have no additional effect on the quality of service provision to rural and remote areas.

One-third of the issued share capital of Telstra is held presently by private individuals and corporations. The priority for the directors of Telstra is to manage the company with a view to maximising returns to those shareholders. Even with only partial private ownership it is not appropriate, within the usual confines of corporate law and practice for Telstra's directors to pursue activities, such as the expansion of infrastructure in unprofitable regions, which could result in a reduction of returns to shareholders. This is the case regardless of the proportion of Telstra which is in private ownership.

There is a possible argument that the pursuit of such other priorities could result in a claim by shareholders that the company's affairs are being conducted in a manner that is oppressive or unfairly prejudicial against them, under section 260 of the Corporations Law.(18)

It is not the case that rural and remote customers will become reliant on safeguards like the USO, the CSG, the price cap regime and provisions relating to equivalent benefits to untimed local calls from the time the remaining two-thirds of Telstra is sold. Rural and remote customers are already reliant on these measures and have been so since the sale of the first third of Telstra. The question is whether those safeguards are working.

The safeguard which will be removed is the Minister's power to direct Telstra under section 9 of the TCA (mentioned above). The rationale for the abolition of this power seems to be that it would be inappropriate for the Minister to retain such a power over a privately owned company. It may seam to some rather curious that this rationale is applied in the abolition of that power, when the price cap regime under Part 6 of the TCA which applies exclusively to Telstra, is to be retained.

Endnotes

1. Liberal Party of Australia and National Party of Australia, Better Communications, 1996.
2. Mullane, M., 'That's not all from Telstra', Australian Financial Review, 22 December 1997.
3. Telecommunications Act 1997, Part 9.
4. Telecommunications (Customer Service Guarantee) Standard 1997.
5. Telecommunications (Customer Service Guarantee) Scale of Damages 1997.
6. Australian Communication Authority, Telecommunications Performance Monitoring Bulleting, December 1997 quarter.
7. Minister for Communications, the Information Economy and the Arts (Richard Alston) and Minister for Finance and Administration (John Fahey), 'Government to get tough on telecommunications service standards', , 30 March 1998.
8. Telecommunications Act 1997, section 149. Press Release
9. Telecommunications Act 1997, section 17.
10. Department of Communications and the Arts, Standard Telephone Service Review Group, Review of the Standard Telephone Service, December 1996, Canberra.
11. ibid., 167.
12. ibid., 179.
13. Minister for Communications, the Information Economy and the Arts (Richard Alston), 'Remote Australia to receive discount on phone calls', Press Release, 14 January 1998.
14. Telecommunications Act 1997, section 242.
15. Through the operation of section 98, section 101(1), clause 1 of Schedule 2 and section 570(3) of the Telecommunications Act 1997.
16. Australia, Parliament, Telstra (Dilution of Public Ownership) Bill Explanatory Memorandum, 1996, 3.
17. Telstra Corporation Act 1991, sections 8AD and 8AE.
18. Readers should contact the writer of this Digest if they need more detail on this argument.

Contact Officer and Copyright Details

Lee Jones
9 April 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
Commonwealth of Australia 1998

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1998.

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