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Telstra: Privatisation Issues
David Richardson
Economics, Commerce & Industrial Relations Group
Major Issues
Introduction
Privatisation - Examining the Arguments For
Technological Considerations
Financial Considerations
Capital Market Impacts
Foreign Ownership
Community Service Obligations (CSOs)
Accountability of Telstra Direct to Parliament:
A Potential Change in the Relationship
Research
Conclusions
Endnotes
Attachment
This paper looks at the issues involved in taking Telstra, a commercialised
GBE, to a partially privatised entity. Telstra's revenues are about 3
per cent of national income and Telstra has been valued at about 6 or
more per cent of annual national income. Any major change is therefore
likely to involve major issues which need to be addressed.
Privatisation creates a market for shares in the privatised venture.
If management of the venture is under-performing, the value of its shares
will reflect that under-performance. That creates the opportunity for
alternative owners to purchase shares in the market, assume control and
run the organisation more efficiently, thereby improving the market valuation
and their own wealth. However, there are doubts about the force of this
argument in the context of an organisation as large as Telstra, with one-third
private ownership and, as seems likely, controls over foreign investment.
Overseas studies which look at the efficiency of public versus privately
owned telecommunications carriers find little convincing evidence one
way or the other.
Other, more practical arguments for selling Telstra have been advanced.
Privatisation may well be a solution for problems such as Loan Council
control over Telstra's borrowing and interference with dividend policy.
However, partial privatisation may not be a total solution for some of
those problems, and there are other institutional arrangements which would
overcome such problems, if indeed, such institutional features are seen
as problems.
The technology behind telecommunications has been changing rapidly.
Once on the network, the resource costs of long distance and long duration
calls has fallen away to almost nothing with modern technology. However,
the present pattern of pricing reflects earlier generation technology
and, so long as markets are imperfectly competitive, the present pattern
of pricing is likely to persist. That means the historic pricing structure
is at odds with the cost structure and competition is unlikely to be sufficient
to force prices and costs to converge. There is also a suspicion that
Telstra's pricing structure reflects the costs of rolling out of the broadband
network. These and other technology issues would have to be addressed
with or without the privatisation agenda and are not necessarily arguments
for or against private ownership. However, it may be argued that there
is a case for delaying privatisation to put in place either the regulatory
apparatus and/or market competition necessary to see the benefits of technology
flowing through into cheaper telecommunications services.
The paper does not look at the merits of the proposed environmental
package which will be made contingent on the sale of one third of Telstra.
However, government finance issues are briefly considered. While asset
sales improve the traditional 'headline' measure of the budget balance,
asset sales are excluded from the Government's preferred measure, the
budget's 'underlying balance'.
Valuing Telstra is fraught with difficulty. On the one hand the community
would hope that the Government receives full value for selling part of
Telstra. On the other hand, selling shares in Telstra at too high a price
will mean new owners, in trying to earn target rates of return, will be
putting too much by way of return of capital costs into their pricing.
The size of the proposed sale and the potential disruption to the Australian
capital market has been raised as a point of concern. Indeed, it has been
pointed out that the sale of Telstra will compete with numerous other
major international sales of telecommunications suppliers. The force of
those concerns may depend on the state of the capital markets at the time,
noting that the recent float of the final half of the Commonwealth Bank
seemed to be successful. In the meantime, it has been pointed out that
consumer protection and certain other constraints on Telstra should be
removed for the best sales result. One of those constraints concerns foreign
ownership. While the Government has envisaged strict controls on foreign
investment in Telstra, there is likely to be a trade-off against the revenue
objective. Foreign investment raises the possibility of conflict of interests
between private owners and the interests of Australian suppliers.
The need to preserve Community Service Obligations (CSOs) are an important
issue reflected in the representations to the Senate Environment, Recreation,
Communications and the Arts References Committee which is presently looking
at the Telstra (Dilution of Public Ownership) Bill 1996. Recognising
that, the Government has provided for continued Telstra commitment to
CSOs under the Telstra (Dilution of Public Ownership) Bill 1996.
At the moment, commitment to CSOs is monitored by the Australian Telecommunications
Authority (AUSTEL). AUSTEL or its successor would be expected to perform
a similar function for a part privately owned Telstra. However, commitment
to CSOs remains an issue since the commitments, though legislated, would
be requiring Telstra to act against its self interest.
Related to this is the changed accountability arrangements. Accountability
through the Parliament to the people of Australia will be replaced, to
a significant extent, by accountability and responsibility to shareholders.
Consumer concerns which are represented to Parliament may have to rely
on legal action and sanctions.
Research is the final issue examined here. There is concern that Telstra's
research effort, like its CSO commitments, might be reduced with private
ownership. There is a case for exploring in more detail the implications
for Telstra's research effort.
All of these issues are drawn together in a conclusion. It is observed
that a major change to a major part of the Australian economy is bound
to raise a number of major issues - and changing Telstra is no exception.
'I'm not sure what the Internet is good for commercially, but I don't
know why you would want to be in the long-distance market with that thing
out there.'
Bill Gates, Chairman of Microsoft (The Economist, 30 Sept 1995).
The purpose of this paper is to look at the issues that arise in the
context of the proposed one-third float of Telstra. While privatisation
of utilities such as telecoms has remained popular around the world, there
is now a good deal of critical comment available. Benefits have been claimed
but there have also been many problems suggested. While the Government's
proposal is a one third float of Telstra, the public debate in Australia
has also examined the merits of full private ownership in Telstra.
The Coalition parties put the proposed partial privatisation to the
Australian electorate in the campaign leading up to the 1996 election.
More recently the Government introduced the Telstra (Dilution of Public
Ownership) Bill 1996 to give effect to that policy. The Government
has not argued for the partial privatisation of Telstra on its intrinsic
merits alone. Instead, it is suggested that selling part of Telstra is
necessary to finance unrelated environmental policies. Under the Natural
Heritage Trust of Australia Bill 1996 provision is made for the first
$1 billion from the sale of Telstra to be spent on certain environmental
projects.
It is not the purpose of this paper to look at the merits of linking
outlays on the environment with the partial privatisation of Telstra.
Rather it seeks to examine the issues raised by the proposed privatisation
of Telstra, including the degree to which selling assets increases the
ability of governments to 'afford' other things. Earlier full and partial
privatisations, such as Qantas and the sale of successive stages of the
Commonwealth Bank, have not involved the type of complications raised
in the debate on Telstra. There were no major regulatory or community
service obligation issues raised by the earlier asset sales. For example,
competitive environments had been introduced in the airline and banking
sectors. By contrast, the proposed partial sale of Telstra would take
place without the experience of a fully competitive environment and in
the context of Telstra's major community service obligations. Much of
this paper is concerned with the complications which have been suggested
in the present debate.
The next section addresses some of the arguments put by advocates of
privatisation. The rest of the paper looks at other considerations which
have to be taken into account in dealing with the question of private
ownership in Telstra. The following section examines the technological
aspects of the telecommunications market which suggest that the cost structure
implied by modern technology is out of kilter with the existing pricing
structure. There are suggestions that the mismatch could persist with
privatisation and it may be preferable to reform the pricing system first.
Subsequent sections examine questions such as whether a fair price can
be obtained for Telstra, the likely effect on the Australian capital market,
the complications of foreign ownership, commitments to community service
obligations and the effects on Telstra's own operations. Some final observations
are then made by way of conclusion. The debate is dominated by those who
perceive problems posed by the full or partial privatisation of Telstra.
That is reflected in the weight of the submissions to the Senate Environment,
Recreation, Communications and the Arts References Committee which has
been hearing submissions on the Telstra (Dilution of Public Ownership)
Bill 1996.
The attachment to this paper contains a rationale for the partial sale
of Telstra presented in a speech by the Minister for Communications and
the Arts, Senator Richard Alston, to the annual meeting of the Australian
Telecommunications Users' Group. From that we can distil the main points:
- competitive pressures will 'test Telstra to the limit' and that Telstra
should have access to skills and capabilities required to meet that
test,
- privatisation will enable Telstra to be more responsive to consumers
and the rapidly changing environment, and
- privatisation will transform Telstra into 'a modern, lean and efficient
enterprise'.
These arguments for partial privatisation are fairly brief and the reasoning
behind the above propositions has not been articulated. However, other
participants in the debate have made substantial contributions.
To some observers, privatisation is a process which sees a government
agency, or even a department of state, or part thereof, given a commercial
charter, made subject to competition and, finally, transferred into private
ownership.(1) To others privatisation refers to the final step in that
chain, the transfer into private ownership. This paper examines only the
arguments in the context of the latter definition of privatisation and
so will be confined to looking at the consequences of introducing private
equity into Telstra. Telstra has already passed through the first two
stages to a large extent. Notice, however, that some of the arguments
against privatisation examined below are based on the idea that privatisation
may compromise the completion of the second step in the process. While
preparing for privatisation, the Government is also working on the post
1997 economic regulatory arrangements. Working on privatisation while
the new regulatory structure is still being developed can raise perceptions
of a conflict in political priorities when changed regulatory arrangements
may influence the selling price (see Capital Market Impacts below).
There has been enormous privatisation activity throughout the world,
to the extent that some in the business community are suggesting that
Australia should privatise Telstra or risk being one of the last countries
to have its main telecommunications carrier in public ownership.(2) There
does not appear to be much merit in arguing for conformity for conformity's
sake. A large part of the motivation for privatisation abroad appears
to be revenue considerations. Also a good deal of the privatisations have
occurred in environments entirely different to the Australian environment.
For example, European privatisations of telecommunications carriers are
sometimes motivated by the desire to capture new markets within the gradually
deregulating European Union. European countries are positioning their
telecommunications carriers for multinational roles. Many of the telecommunications
privatisations, such as those cited in the influential World Bank study,(3)
are taking place in countries where government administrations are under-developed
and subject to official corruption. Finally debates about community service
obligations are perhaps less relevant in the more compact countries of
Europe and elsewhere.
In the context of a country like Australia, it is certainly not immediately
obvious why a particular entity or a management team need work better
if it works for a particular set of owners. Dr Albon, an economist at
the Australian National University and long time advocate of privatisation,
recently presented a paper to a Parliamentary Library seminar putting
the argument for privatising Telstra. Albon suggests there should be concentrations
of private ownership so that '[t]hose assuming a substantial stake in
the business through privatisation will want to ensure that it runs well
and will have channels for exercising some control over management.'(4)
To achieve those strategic concentrations would imply certain selling
arrangements, such as selling a large chunk in a trade sale. That may
or may not be possible.
Albon goes further and suggests that private concentrations of ownership
mean there is a market for control of Telstra. It is argued that the discipline
imposed by the market for corporate control forces an enterprise's management
to concentrate harder on the bottom line. The threat of takeover can act
as an incentive for the management to perform. A management team which
'took its eye off the ball' would see the quoted value of the corporation's
shares fall. That would act as an incentive to potential new owners to
profit through buying shares, then assume ownership, run the organisation
better, and so improve the market quotation of the company.
While there may be some tendency such as this at work in parts of the
economy, it may not be very effective in the case of large organisations
such as Telstra. The sheer size of Telstra would give it enormous protection
against the threat of takeover by Australian interests. Foreign ownership
controls (see Foreign Owership below) limit the extent to which
large overseas interests can play a role in the market for ownership of
Telstra. It is also difficult to believe that it is only the market for
control which can be expected to offer strong incentives for management
to perform well. There is now a widespread view that it is the organisation's
competitive environment which is much more important than ownership.(5)
An international comparison of economic indicators in telecommunications
carried out by the Bureau of Industry Economics (BIE) showed no association
between economic indicators and the type of ownership of the main enterprise(s)
in the market. Examples often cited from that survey included the publicly
owned Iceland state monopoly which had the world's lowest prices for a
basket of business user charges. Likewise Switzerland's state monopoly
topped the table with revenue per line and per employee.(6) These and
other measures of performance have been studied, but without showing persuasive
evidence for or against public ownership. For example, high revenue per
employee, which might be taken as an indicator of efficiency in a competitive
market, falls down when organisations have some degree of monopoly power.
In that case a high revenue could equally be the product of a lazy monopolist
exploiting its market power. Physical measures of output have their own
problems. A high value in lines per employee would need to be strictly
controlled for any outsourcing. Also the most efficient production technique
is likely to be more labour intensive in lower wage countries. For example,
higher wages in Northern Europe is likely to imply that the most efficient
mode of service provision in the two countries involves a higher figure
for lines per employee in Northern Europe than Australia. For considerations
such as these the BIE is itself cautious about making any firm conclusions.
The Industry Commission adopts a neutral stance when it comes to the
issue of privatisation where firms face little competition - perhaps the
norm for most government business enterprises (GBEs)(7). Prof Simon Domberger,
an Australian expert on efficiency in government enterprises, cites evidence
to show that corporatisation and the competitive environment are at least
as effective as privatisation in achieving efficiency and benefits for
consumers.(8) Indeed, while the current chairman of Telstra, Mr Blount,
endorses privatisation he points out that the introduction of a competitive
environment has been by far the most important reform in the telecommunications
industry(9).
A former Telecom Chief Executive Officer (CEO) Mel Ward, recently put
what he regarded as four points in favour of privatisation.(10) These
are worth spelling out since they probably represent some of the most
articulate arguments in favour of privatising Telstra from a pragmatic
perspective. In Ward's view:
- private sector discipline is needed to meet competition, however,
Government control leads to interference with management responsibilities
- control and management need to be separate,
- Governments cannot separate ownership and policy/regulatory objectives
with the result that policy goals get mixed up in management objectives,
- Telstra is not free to raise capital where it likes while it remains
subject to Loan Council controls, and
- Government places heavy dividend demands on Telstra.
Each of these points may well represent very serious problems for Telstra
management. However, the interesting thing about this list is that each
item reflects present institutional arrangements which could be changed.
For example, Telstra could be removed from Loan Council control if that
was thought best. Also, there is often perhaps a tendency to contrast
the 'warts-and-all' present with an idealised version of private arrangements
rather than the 'warts-and-all' problems of corporate governance we find
in the private sector.
In practice perhaps the most serious of the above list of issues is
the dividend policies governments might impose on government-owned enterprises.
The influential Evatt Foundation report on capital funding of public enterprises
found that Telstra was paying out very high dividends to the Commonwealth
Government in the mid 1980s. That in turn compromised Telstra's ability
to finance its investment program, especially when combined with strict
limitations on borrowing through Loan Council controls.(11) Telstra's
dividend to the Commonwealth was still a high $944 million in 1994-95,(12)
or 53.8 per cent of after tax profit. However, Telstra still managed to
find 77 per cent of its capital expenditure of $3222 million through depreciation
and retained earnings. While high dividends were seen as a problem in
the 1980s, it is difficult to determine the extent of any current problems
in that regard. There may even be incentive to inflate depreciation charges
to fund investment - though there is no suggestion that Telstra is actually
doing that. Of course there may be analogous problems under private ownership.
For example, other owners sometimes place heavy dividend demands on management
and judgements, for example by ratings agencies, can constrain private
capital raisings.
One observer has been so blunt as to say '[t]he fact of public ownership
is probably the answer to the question of why Telstra continues to have
twice as many staff as it needs'.(13) There may well be a common perception
that public ownership has constrained staffing decisions. However, recent
decisions on the part of Telstra would suggest that public ownership is
not necessarily a barrier to 'downsizing'. There are of course, numerous
other examples of staffing reductions elsewhere in the public sector.
Nevertheless, even if it were the case and it was felt desirable that
Telstra had additional freedom in its staffing decisions, there are alternative
institutional arrangements which could cater for that.
Under partial private ownership Telstra may still be run by much the
same management team and there is little reason to suppose the existing
organisation will work differently under partial privatisation than it
does now under a more commercialised framework. However, the Industry
Commission thinks there are benefits in mixing some non-controlling private
ownership with public ownership.(14) It sees the benefits arising from
an injection of commercial and other expertise into the management, as
well as limiting the political intervention of the government in decision-making.(15)
Of course for supporters of privatisation, one third private equity may
be regarded as merely a necessary first step.
So far in the debate there has been little consideration of the technological
features of the industry and how those may impinge on policies on privatisation.
It might be thought that technological detail should not affect the case
for privatisation. Future competition might be expected to ensure that
any technological benefits will result in benefits being passed on to
consumers. However, a recent argument by Grout shows how 'inefficient
prices, by influencing investment decisions and hence costs can persist
for long periods and may inhibit product and infrastructure development.'(16)
It is more likely that the 'inherited' price structure will persist
with oligopolistic or imperfectly competitive market structures or indeed
under a duopoly. There are strong tendencies for pricing decisions to
'follow the pack' and there are limited opportunities for outsiders to
contest the market. Also, in telecommunications, new competitors have
to compete over the incumbent's network at prices charged by the incumbent,
albeit with interconnection rates regulated by Australian Telecommunications
Authority (AUSTEL). These considerations point to the persistence of the
present pricing regime and a certain 'stickiness' in prices given the
forces for uniformity in the market. The price stickiness argument is
important given that, even with the post 1997 arrangements, it seems likely
that Australia will have a market dominated by two carriers (three in
mobile) in the immediate future. By contrast, in a competitive market
with a host of suppliers there are forces set in train which will tend
to align prices with costs. Whether we end up towards the competitive
end of the range of possibilities depends on the extent to which the Australian
market is contestable. That will also depend on future regulatory arrangements.
It is always possible that the existing duopoly will persist into the
future if Telstra and Optus are strong enough and have the freedom to
fend off new competitors. Note that high entry costs in this industry
may deter new entrants if the incumbents can temporarily lower prices
to drive out the competition. The possibility that incumbents can use
such predatory pricing practices raises the question of the nature of
the regulatory regime to be put in place and the role of the existing
regulatory agencies and their successors. Also important will be the interconnect
arrangements, the charges for connecting into the existing networks operated
by Telstra and Optus.
If regulation should prove to be less than adequate and if competition
is imperfect, the existing pricing structure and profit potential could
well be retained despite the other options technology has made available.
However, those other options do contain a threat to the incumbents. Given
that technology has trivialised the cost of distance it may well be that
the duopoly is confined to activities which depend on the present local
loop and the billing system. Even then there may be technological developments
with wireless telephony which render the local loop increasingly redundant.
As The Economist magazine puts it '[f]or the big telephone operators...[t]heir
most valuable assets are not their copper wires, but their customers,
their billing ability and their brand names'.(17)
The implication of the above argument is that with or without privatisation
there may well be a tendency for an inefficient pricing structure to be
perpetuated. A future deregulated industry will not be independent of
its history. This further implies that it may be preferable to fix up
any defects in the pricing structure well before privatising. This is
not necessarily an argument against privatisation but something which,
ideally, should be addressed prior to privatisation.
This argument would appear important in the Australian context. We have
a pricing structure which reflects the history of technology but which
is out of kilter with state of the art technology. The current cost of
providing a telephone line between Sydney and Melbourne is some $500.(18)
On-going costs through maintenance etc are trivially small, as is depreciation
given that cables are long lasting assets. To earn a return of 20 percent
(for illustrative purposes) on the investment in that line, a carrier
would have to earn $100 per annum, or 27.4 cents a day, or 0.02 cents
a minute. That implies that a call between Sydney and Melbourne should
cost the value of the local call plus a mere 0.02 cents a minute. Similar
considerations apply for international calls. An analyst recently put
the cost of a line between Japan and North America at $2 000 having a
life of 25 years. At the international direct dial rate of $1 a minute,
the cost of the line is paid off in 1.5 days.(19) Again, earning a 20
per cent return on that line would imply a charge of 0.08 cents a minute.
In this context it is worth noting that Internet charges are so low because
cheap, spare international capacity is leased from one of the international
carriers at charges much closer to the real cost of providing international
calls.
In a similar way the cost of switching calls at the local exchange is
now trivially small. The same technology growth that has dramatically
increased the power of the personal computer has dramatically reduced
the cost of 'processing' calls through the telecommunications system.
Increased technological capability has increased the power of the personal
computer while prices have been (roughly) constant, at least compared
with the compound growth rates in power. However, for telecommunications
suppliers, costs have fallen while the nature of the service has remained
approximately constant. The Economist, in its survey of telecommunications,
recently pointed out:
Unlike the computer industry, which thanks to a similar increase in power
and memory has been able to offer customers more sophisticated devices
at the same price, the telecoms industry will have to offer the same product
at a small fraction of its former price.(20)
The Economist also pointed out that despite the fact that most
remaining costs to telecommunications suppliers are fixed, charges in
most countries are still based on use and tariffs on long distance calls
have been deliberately kept high.(21) Part of the reason for that, no
doubt, is the fact that existing telecommunications companies have fixed
investment which was undertaken in earlier periods when the cost of providing
telecommunications was so much higher. The telecommunications companies
are still trying to recover returns on historical costs. However, competitors
can use the most up-to-date technology with trivially small usage costs.
In most countries, including Australia, charges are based on usage to
a much larger extent than is warranted by the technology. Often this is
a product of regulation, however, there is also a strong tendency among
imperfectly competitive suppliers to stay with the pack and avoid 'rocking
the boat'. Of course Optus is at present restrained by the interconnect
charges which are determined by the AUSTEL. It remains to be seen what
arrangements are made for the post 1997 environment.
These technological considerations imply profound changes to the charging
system in Australia. A pricing structure which set prices at long run
average costs using best practice technique (rather than basing prices
on historic costs) would limit charging to a fixed cost and a zero or
very small usage charge, and a very small or zero charge for distance.
The result would be much like the usual charging arrangements for the
Internet. Competition among a large number of carriers would be expected
to produce just such a pricing system.(22)
Telstra's investment program may also be forcing high prices at the
moment. A good deal of the profit earned under the present pricing system
is likely to be put back into digitalisation and the roll out of the broadband
network to enable the development of multi-media services. Telstra has
been investing heavily in these projects, yet Telstra has limited options
for financing that investment. The broadband network will make possible
pay TV and interactive services to consumers. Given budgetary conditions
over recent years, capital injections from its owners are unlikely. That
means its choices are borrowing and/or self financing. Self financing
means pricing its product at a rate sufficient to generate the required
revenue. Without the need for Telstra to undertake and self-finance the
broadband network it is possible that prices would be significantly lower.
That of course raises interesting questions. Why should a present subscriber,
interested only in voice telephony, be required to support future broadband
services through Telstra's self-financing-through-profits strategy? It
could be argued that the cost of laying down the broadband network should
be recovered from the eventual users of the new services. Advocates of
privatisation could argue that the financial needs of Telstra, especially
the capital needed for the non-traditional services, point to the need
to put Telstra in private ownership. These considerations, especially
the need to finance the roll out of the broadband network, could also
be used as an argument for separating the telephony network from the other
Telstra activities and maintaining the former in public ownership. However,
structural separation of Telstra raises issues which are beyond the scope
of this paper and have not been a significant part of the debate in Australia.
The considerations in this section suggest that technology is driving
the system towards prices which emphasise the fixed cost of connection
to the loop rather than actual usage. The bulk of the charge would then
be by way of rental. That would have the effect of redistributing the
burden of phone charges from high to low volume users, albeit with lower
prices all round. Generally that would mean the burden moving from business
to households, and especially to low volume households. That then opens
up the question of appropriate rental subsidies under such a pricing regime.
In this area, equity considerations seem to be at least as important as
efficiency considerations.(23)
The Communications Law Centre (a public interest organisation affiliated
with the University of NSW and Victoria University of Technology) suggests
we should get all the other things right before we think about privatising
Telstra.(24) That would seem to be implied when the historic pricing structure
is at odds with the cost structure and competition is unlikely to be sufficient
to force prices and costs to converge. It may be that a close eye needs
to be kept on technological developments so that governments can be satisfied
that the market and regulatory mechanisms are put in place to deliver
the full benefits of rapid technological progress in service delivery.
That view might be paraphrased as saying that public policy in the telecommunications
sector needs to be developed prior to and independently of any privatisation
of Telstra.
Privatisation has appeal to governments wishing to show better bottom
line results - a better budget balance.(25) That inevitably gives to exercises
such as privatisation an artificial appeal which may not necessarily be
justified in terms of economic efficiency. Privatisation often looks like
a massive 'free lunch' for the budget sector. So long as the government
sells an asset for its value, there should be no change in the net worth
of the government. Nothing is gained or lost, so long as the asset is
sold at its real value. Selling a government asset neither increases the
real wealth of the government sector nor permits outlays which were not
previously possible. Starting with the 1996-97 Budget, there is less emphasis
given to the traditional measure of the budget deficit (or surplus), which
is referred to as 'headline balance'. Instead emphasis is given to the
'underlying balance' which the present Government has chosen as its preferred
measure. The underlying budget balance excludes equity asset sales, so
denying the appeal of selling Telstra or any other asset. The impact on
the preferred budget measure will therefore be confined to reduced dividend
receipts in addition to the reduced interest outlays as debt is repaid.
Not included will be the effect on increases in the net worth of the Commonwealth
sector due to the value of Telstra improving through retained earnings
and asset revaluations.
There is a line of reasoning which suggests that governments normally
come out worse off. Quiggin for example, argues that governments inevitably
sell assets below value.(26) One of the chief arguments for that proposition
is the fact that the private sector would be looking at a higher rate
of return than would the government. For example, banks are presently
earning rates of return on shareholders' funds of just under 20 per cent.
By contrast the 10 year government bond rate is around 8 to 9 per cent.
Hence the opportunity cost of capital to the government is substantially
lower than to the private sector.
The technological considerations raised in the previous section raise
another set of issues. The contemporary discussion has taken it for granted
that the Government is likely to raise $8 billion for one third of Telstra.
An analyst with merchant bank BZW recently put a figure of $9 billion
on one third of Telstra based on comparisons with telecommunications companies
in other countries and a generous allowance for the efficiency benefits
of privatisation.(27)
These sorts of exercises do not seem to have taken account of the competitive
threat which would seem to be implied by the gap between present prices
and those made possible by state-of-the-art technological solutions. This
paper opened with the views of Bill Gates on the possibly depressing effects
of new developments on the viability of long distance operators, but much
the same may be in the wind with the local loop. The Economist
suggests telecommunications carriers as we know them may go the way of
the English canal corporations.(28) Clearly current estimates of the worth
of Telstra are predicated on a view that there is no looming problem on
account of the trends we have examined here, or that any threats are manageable.
It is worth noting that if new owners or part owners pay an inflated
price for Telstra (compared with the cost of providing state of the art
technology), the new owners will want to keep prices high to maintain
target rates of return on the capital they have subscribed to Telstra.
So long as they can fend off new, low cost technology competitors there
is a strong mechanism to maintain prices well above the state-of-the-art
levels. Perhaps high valuations suggest a belief that Telstra can indeed
do that for the foreseeable future. However, the consequence of high valuations
is that there is then a private interest in keeping prices well above
those permitted by viable least cost alternatives. In an imperfectly competitive
market artificially high prices may persist indefinitely. A cynic might
suggest the Government should sell as quickly as possible in order to
realise a price which may not be sustainable with technological developments
now under way. However, under the scenario painted here, that strategy
puts government revenue objectives at odds with the desirability of cheaper
telecommunications services. In addition to that, privatisation may set
up a large imperfectly competitive market in which the main player has
an incentive to resist new lower cost technologies which would weaken
its rationale for charging high prices.
In respect of the issues examined in this section it would appear that
there are important issues for the regulator. We do not yet know how the
Government intends the present CPI minus X price capping arrangement to
work in the future. If genuine competition does not materialise in the
post 1997 environment, some form of price regulation will be needed to
emulate the effects of competition. That will be a difficult job, because
rather than focusing on financial performance, price capping should reflect
technology, given that technology is driving resource costs in this industry.
The size of Telstra and the limited funds available for investment in
Australia raise a number of issues. For the Australian share market to
absorb the float, heavy discounting of Telstra shares is likely to be
necessary to encourage take up. The alternative would be a very slow process,
a massive distraction for Telstra's management which could imply inaction
and management paralysis on the part of Telstra in other respects. Brown
makes the point that a privatised Telstra would represent from 6 to 9
per cent of the total market capitalisation on the Australian Stock Exchange,
and its float would vastly swamp the recent Australian share issues.(29)
The force of this argument may have lesser significance following the
success in selling the second half of the Commonwealth Bank in July 1996.
That was also seen as a massive undertaking with the potential to upset
the Australian capital market.
The float of Telstra needs to be put in the context of other like international
floats, since, to a large extent, other floats are competing for the same
investment dollar. An industry observer has noted that government privatisations
will be worth $US150 billion over the next three years, while telecommunications
privatisations alone will be worth $US38.9 billion in the present year.(30)
A large float is not only difficult for the Australian market to digest
but it also crowds out the floats through which other Australian companies
raise equity capital. The effect could well be to make the cost of capital
prohibitive for a good many Australian companies, thus forcing them off
shore or into debt finance. The former AMP managing director, Ian Salmon,
warned of this in discussing the Coalition's plans prior to the 1993 election.(31)
In order for the privatisation to be successful there would have to
be a number of other adjustments in the industry. The Salomon Brothers
report completed for the Coalition prior to the 1993 election advised
the then Opposition that for maximum sales proceeds the following steps
should be undertaken:
- remove regulatory impediments to Telecom realising maximum benefits
from its market position - the removal of consumer protection(32) and
pro-competition regulation would include un-timed local calls and in
other ways watering down the commitment to universal service as well
as Telecom's commitment to help Optus get a foothold,
- giving Telecom management a mandate for radical structural change
in order to reach international benchmark efficiency levels,
- securing a strategic trade sale partner prior to a public float, which
would mean selling off a substantial share to a foreign carrier, most
likely seeking to sell a big chunk to a 'baby Bell'(33) ('Baby Bells'
are the US-based multinational telecommunications corporations which
grew out of the bust up of ITT which traded as 'ell').
While the Salomon report looked at conditions necessary for maximum
receipts, each area also represents a degree of uncertainty which should
be addressed so that bidders can better factor in likely revenues without
having to plan for the worst case scenario. At the moment the Government
is working on the post-1997 arrangements which would replace the present
duopoly carrier market (with triopoly for the mobile market).(34) It is
difficult to see how Telstra could be privatised, either in whole or in
part, without pre-empting the outcome of that work to some extent. Most
of the figures in any prospectus would depend to some extent on the market
and structure of the regulatory environment post-1997. Hence it is likely
that strategic decisions will have to be made prior to the sale.
Prior to the 1993 election Mr Warwick Smith, then Opposition spokesperson
on communications, said that the Opposition was not going to be 'prescriptive
about the specific level of foreign ownership' in Telstra.(35) The Opposition
believed its policy settings then would produce an Australian market with
3 or 4 competitive carriers. The level of ownership of any one of the
competitors would be less relevant. Being prepared to allow foreign ownership,
the Coalition was able to develop policies to privatise Telecom without
concern as to whether the Australian market could absorb the float of
Telecom and the other GBEs planned for sale under Fightback.
The present proposals represent a stricter approach to foreign investment.
The Bill would limit foreign ownership to 35% of the one third being sold
and limits individual foreign holdings to 5% of the private equity. Caution
on foreign investment would appear to be warranted. Telstra is often characterised
as an essential piece of economic infrastructure and having a key strategic
role through its exports and other overseas business linkages. That gives
Telstra a central role in putting Australia at the cutting edge of the
information economy.(36) A large part of Australia's electronics industry
and much of the software industry currently depends on Telstra's commitment
to purchasing locally and developing Australian industry. Foreign ownership
of Telstra could reduce the level of business going to the electronics
and software industries. A foreign owner with links to its own or related
providers would have an incentive to bias Telstra's purchasing towards
itself and its associates. Even where there is not a related company as
a supplier to the foreign owner, there will be established supplier arrangements.
Foreign ownership often means restraints are imposed by the parent thereby
limiting the ability to export and otherwise compete outside Australia.
That would run counter to the aim of having a strong Telstra contributing
to Australia's export effort.
CSOs for Telstra relate in particular to the legislated universal service
obligations. Section 288 of the Telecommunications Act 1991 defines
the universal service obligations as the obligation:
- (a) to ensure that the standard telephone service is reasonably accessible
to all people in Australia on an equitable basis, wherever they reside
or carry on business, and
- (b) to supply the standard telephone service to people in Australia;
and
- (c) to ensure that payphones are reasonably accessible to all people
in Australia on an equitable basis, wherever they reside or carry on
business; and
- (d) to supply, install and maintain payphones in Australia.
In addition to the universal service obligations there are a number
of other CSOs undertaken by Telstra at the moment. Telstra is required
to provide standard services subject to a price capping regime. In addition,
Telstra and other carriers are obliged to provide:
- un-timed local calls and, under the Telstra (Dilution of Public
Ownership) Bill, the rights of consumers to un-timed local calls
would be extended to business and all other users.
- free directory assistance services,
- emergency service obligations, and
- industry development obligations.
At present Telstra's performance against the CSOs is monitored by AUSTEL,
as indeed is Optus's performance. The future of AUSTEL is unclear, however,
there will undoubtably remain an important role for AUSTEL or its successor.
Commercial ownership may create strong pressure for watering down a carrier's
commitment to universal service. Some commentators argue that any community
service obligations should be paid for from the budget. The intention
is that any cross subsidisation should be open and transparent and paid
for by all taxpayers rather than other telecommunications users.
That may be sound economics but, in the efforts of governments to find
budgetary savings, budget funding for CSOs could be vulnerable.
The Government has promised to retain Telstra's commitment to CSOs and
some of those commitments are reflected in the Telstra (Dilution of
Public Ownership) Bill. At the moment of course, the definition of
CSOs relates to the universal provision of voice transmission facilities
at a reasonable cost. However, in the future we may well have to consider
whether universal service should perhaps be extended to include some other
facilities which new technology may offer. It is quite possible that community
expectations of what is essential in modern Australia will evolve to include
new services. In this respect it is worth noting that, in the context
of the post-1997 arrangements, the former Government flagged the possibility
of expanding the definition of universal service to include a standard
of service capable of supporting voice telephony (as now) plus facsimile
and data.(37) The new Government has also raised the possibility of upgrading
the meaning of the 'standard telephone service'.(38) On 10 July 1996 the
Government announced a review group chaired by Mr Jock Given, Director
of the Communications Law Centre, to look into the definition of the standard
telephone service.(39)
In addition to the explicit telecommunications CSOs, Telstra, as a Commonwealth
Government Business Enterprise, is obliged to adopt a number of policies
which apply to the Commonwealth's own employment, purchasing and other
practices. A purely commercial organisation would not necessarily meet
such standards in areas such as industrial relations policies and practices,
equal employment opportunity policies, purchasing and environmental practices.
In addition to those, Telstra is subject to the Freedom of Information
legislation, the Occupational Health and Safety legislation for Commonwealth
workers, and Loan Council control.
With some private ownership, there may well arise tensions between the
private owners' interests and the Government's objectives (as the majority
owner) for Telstra. For private owners, CSOs could be seen to be merely
a nuisance in the absence of adequate compensation arrangements.(40) Private
owners will presumably want management to pursue the over-riding objective
of maximising value for shareholders. Fulfilling any community service
obligations could be seen as either a distraction from 'the main game'
or, indeed, to be in direct conflict with the aim of maximising wealth
and income for share-holders. That contrasts with historic arrangements
whereby CSOs were presumably as legitimate as any other of Telstra's goals
and there was no real need to distinguish between profit-making and loss-making
activities.
At the moment Telstra receives some contribution towards its CSO obligations
through levies on Optus and Vodafone designed to impose an equal pro rata
burden on Optus and Vodafone. If Telstra were to receive adequate budgetary
compensation for CSOs, those areas of business could be expected to generate
normal profits for the enterprise and thus become an integral part of
its operations. Furthermore, enforcement of legal or contractual CSO obligations
would ensure that appropriate resources were devoted to the subsidised
services. However, in recent years Telstra has questioned the calculation
of the value of the CSOs which presently determine the contribution from
Optus and Vodafone. On the other hand, other carriers could point to the
lack of any incentive for Telstra to deliver CSOs efficiently. These points
have recently been acknowledged by the Minister who has also floated some
reform measures for discussion.(41) Grudging acceptance of the present
arrangements could well discourage enterprises from providing more than
the most basic level of service.
British Telecom (BT) provides an instructive example of what can happen
to legislated CSOs under partial private ownership. For example, while
BT is obliged to maintain a public phone system, it seems to have been
shirking this responsibility and doing the minimum necessary with the
result that most public phones are often out of order. In 1987, after
3 years of privatisation, 38 per cent of call boxes in the greater London
area were totally out of order. BT subsequently improved this in response
to public pressure.(42) However, anecdotal reports suggest BT has gone
backwards again. In many other respects BT is reported to have performed
poorly for its individual (as distinct from business) customers.(43)
At present the Telstra Corporation Act 1991 contains a provision
at section 9 which allows the Minister to issue written directions to
the Board of Telstra concerning the exercise of powers of Telstra. This
provision is expressly there to enable the Minister to protect the national
interest. Any written document issued by the Minister to Telstra must
be tabled in Parliament as information to the Parliament. The Minister's
written direction is not a disallowable instrument. Section 9 is repealed
by the Telstra (Dilution of Public Ownership) Bill 1996, presumably
because such a direction is inconsistent with a partially-privatised Telstra
with one-third private shareholders.
If Telstra becomes a publicly-listed company it is required to observe
the continuous disclosure of information regime imposed by the Corporations
Law and the Listing Rules of the Australian Stock Exchange. This regime
requires publicly listed companies to disclose to the market, information
concerning any significant change or event which is likely to materially
affect the price of the shares. In addition, as a publicly listed company
Telstra will be required to subject itself to public scrutiny by the shareholders
at annual general meetings.
Telstra, as a majority-owned Commonwealth business enterprise, would
also table its Annual Report in Parliament. Its accounts would be subject
to audit by the Auditor-General, who in turn reports to Parliament. Telstra,
through the Department of Communications and the Arts, would still be
accountable to Parliament either through the Department's explanations
to the Senate Estimates Committee for use of appropriation contained in
the Telstra (Dilution of Public Ownership) Bill 1996, and more
directly if there is a specific Parliamentary Committee reference by either
House of Parliament.
The Telstra (Dilution of Public Ownership) Bill 1996 contains
new provisions which require Telstra to furnish the Minister with detailed
financial information, if the Minister so directs (see proposed new section
8AD). The new provision does not contain a tabling requirement, presumably
because such information may be commercial-in-confidence. This provision
raises a separate issue as to the desirability of the majority shareholder,
the Commonwealth, obtaining sensitive financial information from Telstra
under circumstances where that information may not necessarily be released
to the market and the private shareholders.
Others, however, have a concern that there would be a subtle but important
change in the relationship between Telstra and its direct accountability
to Parliament. Public evidence given to the Senate Environment, Recreation,
Communications and the Arts Reference Committee indicates that there is
a perception that '...it is inevitable that there is some compromise in
the process of accountability to the parliament itself because there are
the interests of a range of shareholders to be considered...'(44) One
area of concern may be that subscribers and consumers may have to rely
more on legal sanctions to enforce consumer interests rather than the
more flexible and direct representation to Parliament. The regulatory
body AUSTEL and the Telecommunications Industry Ombudsman would still
perform their respective roles but the privatisation process may bring
with it greater emphasis on economic accountability rather than service
provision.
Earlier this year the Community and Public Sector Union (CPSU) pointed
out that overseas experience indicates that when publicly owned telecommunications
providers were privatised their research facility were significantly cut.(45)
The CPSU cited, in particular, Telstra's Research Laboratories which employ
500 research staff in Clayton, Vic., as well as the links with Australian
universities. A lot of Telstra's research is designed to benefit Telstra's
suppliers, putting them in a better position to meet Telstra's needs.
Telstra's management is currently obliged to keep Telstra at the cutting
edge of technological developments. Telstra is obliged to maintain and
implement plans for the development of the information technology and
telecommunications supply industry. The plans outline Telstra's commercial
relations with Australian industry, R&D plans and export initiatives.(46)
Telstra's latest annual report Telstra notes progress against its five
year plan, including equity investments in companies with which it is
working to identify, develop and fund innovative research projects and
ideas which can be marketed here and overseas.(47) Telstra's research
may be important if Australia is going to remain a sophisticated buyer
of telecommunications equipment and also if we are to continue to develop
local and unique solutions to Australia's needs. The impact of privatisation
on Telstra's research agenda, and the need for any formal research obligations,
may need to be further explored.
Arguments examined here for the privatisation of Telstra rely on theoretical
considerations implied by the market for control of an enterprise, or
practical considerations reflecting the different environments. On the
former set of arguments, there is no convincing demonstration that private
ownership offers anything beyond commercialisation and competition policies.
On the other hand, the practical considerations which involve institutional
constraints, such as the constraint imposed by the Loan Council, would
appear to be amenable to other solutions, at least in principle, if they
are regarded as a genuine problem. Dividend policies in the past may have
reflected Commonwealth budgetary needs rather than the commercial imperatives
of Telstra. That particular conflict of interest would be difficult to
manage in practice.
Budgetary issues have been examined. There are considerable revenue
implications from privatising Telstra, and traditional budgetary accounting
would show a large reduction in the government deficit (increase in surplus).
However, the act of selling an asset does not increase the net worth of
the government sector and the loss of the dividend flow has to be considered
along with the reduction in interest payments on outstanding government
debt.
Investigation of the technological factors driving costs in this industry
suggest that while there are huge fixed costs in setting up telecommunications
facilities, technology has trivialised the cost of time and distance.
We would expect a perfectly competitive market to set prices which reflect
those costs. However, the pricing structure has been inherited from earlier
generations and reflects the nature of the technology in earlier generations.
Privatisation is likely to produce a large private player among a small
number of smaller competitors, each with financial interests in the present
pattern of pricing. Imperfect competition leads to 'sticky' pricing. Potential
government influence over pricing would be diminished. Of course these
considerations raise a host of other issues. A change in the pricing structure
which reflected costs would shift the relative burden of charges to low
users. There is a case for delaying any privatisation so that these and
other issues can be properly addressed.
Governments around the world have been attracted to privatisation because
of the cosmetic effects on the budget balance. However, there has been
considerable interest in whether or not governments are getting value
for their assets on the market. On the other hand there is also the concern
that if a high price is indeed raised, new owners will be forced to extract
target rates of return on their outlays through excessive charges on consumers.
Related to the government finance issues is the possible impact on the
Australian capital market. A sale of one-third of Telstra will be competing
with other Australian capital raisings and, internationally, a number
of other privatisations of telecommunications carriers. There is a well-known
trade-off between getting a good price for a government asset and achieving
a competitive policy environment. Further there is the uncertainty facing
potential investors over the post-1997 regulatory environment.
One of the complications relates to foreign ownership. Foreign investment,
by widening the net of potential buyers, improves the likely sales price.
However, selling a controlling interest to a multinational telecommunications
company could compromise the industry development and export goals that
presently depend on Telstra's operations.
Community service obligations need to be considered. Advocates of privatisation
assume community service obligations can be delivered just as easily under
private ownership so long as there is a legislated obligation for their
provision. However, that is asking a profit-motivated enterprise to act
contrary to its self interest. Managing that conflict of interest in a
privately owned Telstra needs to be thought through.
As a final observation, Telstra's annual revenues are approximately
3 per cent of Australia's gross national product. It is hardly surprising
that major changes to such a significant part of the Australian economy
have major implications which have to be addressed. This paper has attempted
to outline some of those implications.
- R Albon, 'The national interest and the sale of Telstra', Parliamentary
Library 'Vital Issue' Seminar, 22 May 1996.
- T Cutler, 'Privatising Telstra: 'the smile of the Cheshire cat'',
Privatising Telstra Conference, Savoy Park Hotel, Melbourne, 28 June
1996.
- S Kikeri, J Nellis and M Shirley, Privatisation: The Lessons of
Experience, Washington DC: The World Bank, 1992.
- R Albon, op cit, p. 5.
- A Brown, 'Should Telstra be privatised?' School of Economics,
Griffith University, Working Paper no. 8, February 1996.
- Bureau of Industry Economics (BIE), International Performance
Indicators: Telecommunications, 1995, Canberra: AGPS, 1995.
- Industry Commission, Improving the Efficiency of GBEs, Information
Paper, May 1994.
- S Domberger, ''Privatisation' What does the British experience reveal?
Graduate School of Management, University of Sydney, September 1992.
- WF Blount, 'Communications - Unlocking Australia's future', Address
to the National Press Club, 31 May 1995.
- M Ward, 'Implementing the privatisation', Privatising Telstra Conference,
Savoy Park Hotel, Melbourne, 28 June 1996.
- HV Evatt Research Centre, The Capital Funding of Public Enterprise
in Australia, Sydney: HV Evatt Foundation, 1988.
- These and subsequent figures relating to Telstra's financial flows
are taken from its 1994-95 Annual Report.
- Cutler, op cit.
- Industry Commission, op cit.
- This is of course based on the view that political interventions
reduce economic efficiency and that non-commercial (inefficient) goals
have no intrinsic value and may well represent a cost burden.
- PA Grout, 'Promoting the superhighway: Telecommunications regulation
in Europe', Economic Policy, No 22, April 1996, p. 125.
- 'Telecommunications survey', The Economist, 30 September 1995.
- A Horsley, 'How will privatisation effect (sic) telecommunications
users?' Privatising Telstra Conference, Savoy Park Hotel, Melbourne,
28 June 1996.
- P Parker, 'What will the financial community look for in Telstra?',
Privatising Telstra Conference, Savoy Park Hotel, Melbourne, 28 June
1996
- 'Telecommunications survey', The Economist, 30 September 1995.
- Ibid.
- A carrier that tried to charge prices based on earning a return on
historical costs for earlier generation technology would lose the competitive
battle to newer entrants able to exploit state of the art equipment.
- 'Second-best' pricing principles might imply that an efficient, regulated
set of prices should impose a relatively heavy burden on business users
who are likely to have relatively low elasticities of demand for telephone
services. However, confirmation of that would require further study
and is beyond the scope of this paper.
- G Goggin, 'Selling of the Telstra farm: Do consumers benefit?'
Consumers Telecommunications Group Discussion Paper, February 1996.
- Another important consideration for many governments is that the
difficult business of running a large organisation can be hived off
from others. Government can be made easier if there is less to govern
and no doubt such considerations encourage many governments to hand
over functions to the private sector.
- J Quiggin, 'Partial sale: 'Worst of all options'', Communications
Update, March 1996.
- I Martin, 'How much is Telstra worth, and why?' Privatising Telstra
Conference, Savoy Park Hotel, Melbourne, 28 June 1996
- Op cit.
- A Brown, op cit.
- J Bell, 'The competitive battleground - where does Telstra rank in
the host of international telecommunications privatisations?' Privatising
Telstra Conference, Savoy Park Hotel, Melbourne, 28 June 1996
- The Australian Financial Review, 24 December 1992.
- The main consumer protection is the legislated price cap on a bundle
of basic services of most importance to consumers.
- The Australian, 23 February 1993.
- Sen the Hon R Alston, Minister for Communications and the Arts, 'Post
1997 Telecommunications Legislation', Telecommunications Working
Forum, Discussion Paper, May 1996.
- The Australian Financial Review, 23 December 1992.
- The Australian Financial Review, 8 September 1995.
- Hon M Lee, Minister for Communications and the Arts, A New Era
in Australia's Telecommunications, December 1995.
- Sen the Hon R Alston, op cit.
- Sen the Hon R Alston, 'Standard Telephone Service review group announced',
Media Release, 10 July 1996.
- It has been suggested that the most appropriate form of 'compensation'
would involve the Government separately tendering for the delivery of
CSOs. Telstra would not have a monopoly over CSO delivery, but would
have to tender in a competitive environment, just like other players.
Albon, op cit, has suggested this approach. However, this idea has not
received a lot of support in the debate over Telstra.
- These problems were recognised in Sen R Alston, address to Telecommunications
Universal Service Symposium, July 1996.
- See Goggin, op cit.
- Ibid.
- Australia, Hansard, Senate Environment, Recreation, Communications
and the Arts References Committee, 12 July 1996: 475 and 557. See the
evidence of Mr Jock Given of the Communications Law Centre and Eva Cox
of the Women's Economic Think Tank.
- Community and Public Sector Union, Telstra privatisation could slash
telecommunications research in Australia, Media Release, no date.
- Department of Industry, Science and Technology, Annual Report, 1994-95.
- Telstra, Annual Report, 1994-95.
Extract from Opening Address by Senator Richard Alston, Minister
for Communications and the Arts, to ATUG 96, Melbourne 30 April, 1996.
'Partial Sale of Telstra
'The partial privatisation of Telstra is an essential component of this
Government's telecommunications policy.
'We recognise the efforts that have been made in recent years to improve
Telstra's performance and turn it into a world class telecommunications
company. It is also clear that more needs to be done if Telstra is to
survive and prosper in an increasingly demanding world market. Experience
and analysis shows how great a contribution the skills and disciplines
of private shareholders can make to this process. Allowing this to happen
is the central thrust of our policy.
'The stakes as far as Telstra is concerned are high. Cut off from the
capabilities it needs, Telstra will find itself relegated to the ranks
of second-rate players. Those who would condemn it to this fate are hardly
its friends: whatever they may say, they are placing at risk a vital part
of the nation's infrastructure.
'Surely even those who only a few years ago claimed that telecommunications
is a natural monopoly would not now suggest that a risk averse public
sector culture is appropriate for an enterprise that will be increasingly
under challenge in the years ahead. Once Optus enters the local call market
in a significant way we can undoubtedly expect more aggressive price competition
and product differentiation. Indeed what the economist calls 'the death
of distance' is likely to render traditionally priced call zones increasingly
irrelevant and to bring long distance and idd call charges, particularly
via the internet, under great pressure.
'In the USA, the largest users now buy STD on a deep discount basis
- often buying at 75 per cent below the going rate. A rate which in any
event is well below that here. In Australia too pricing flexibility will
be a very important component of the competitive battle ahead - not only
for new players but also for Telstra. This process will generate great
benefits in terms of demand expansion: and increasing the size of the
pie is far more important than hanging on to market share. But it will
also test Telstra to the limit - and we are determined that Telstra should
have access to the skills and capabilities which meeting that test requires.
'This is why the Government has decided to privatise one third of Telstra.
This will enable it to be more responsive to consumers and the rapidly
changing environment in which it operates.
'Privatisation is not just about selling, it is about investing in Australia's
future and increasing investment opportunities for Australians.
'The Government is strongly committed to a comprehensive and legislated
range of consumer safeguards which go beyond those established by our
predecessors. The most important of these will be reflected in legislation
to be introduced into the Parliament this week, as will a provision that
only one third of the commonwealth's equity will be for sale and that
no more than 35 per cent of that equity may be purchased or held by foreigners,
with a 5 per cent cap on individual foreign holdings.
'Along with the legislation, the Minister for Finance and I have announced
the details of a scoping study for the partial sale. A competitive process
to select business and legal advisers to assist with the scoping study
is underway.
'It should be clearly understood by potential investors that the value
of Telstra can not be fixed on snap shot basis. Just as we are determined
that Telstra should transform itself into a modern, lean and efficient
enterprise so we expect that its shareholder value will continuously improve.
I would also like to stress that John Fahey and I take the view that the
promotion of a competitive environment is of paramount importance and
must have primacy over any desire for simple revenue maximisation from
the sale of Telstra.'
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