Chapter 2
Accountability and Financial Impact
Terms of Reference (a) and (b):
(a) whether the proposed accountability regime in the Telstra (Transition
to Full Private Ownership) Bill 1998 is adequate to protect the public
interest; and
(b) the impact on public sector finance of the full privatisation
of Telstra.
The Accountability Regime
2.1 As detailed below, Telstra is subject to a variety of accountability
mechanisms. Under the Telstra Bill all of these mechanisms will continue
to apply, other than the shareholder information that the Government alone
receives, the current Parliamentary reporting requirements and the Minister's
power of direction.
2.2 The issue in regard to accountability is less an issue of who owns
Telstra, and more one of whether the accountability arrangements are sufficient.
Shareholder information and continuing parliamentary scrutiny of the agencies
(such as the Australian Communications Authority (ACA) and the Australian
Competition and Consumer Commission (ACCC)) charged with the regulation
of Telstra will ensure a high degree of accountability. The call from
witnesses for the regulatory arrangements under which Telstra operates
to be tightened is addressed in Chapters 3 and 4 of this Report.
Corporations Law and Australian Stock Exchange Listing Rules
2.3 Telstra is a company operating under Corporations Law and
therefore the activities of its Board are subject to the disciplines of
Corporations Law, including the requirements that directors act
in the best interests of the company.
2.4 The Australian Stock Exchange Listing Rules require continuous disclosure
to the market of any activity or information that is likely to have a
material effect on the price or value of shares. Annual and half yearly
reporting is also a requirement for publicly listed companies, with reports
to be lodged with the Australian Stock Exchange.
Memorandum and Articles of Association
2.5 Telstra is also governed by its Memorandum and Articles of Association
which are normally only alterable by a general meeting of the company.
Proposed New Arrangements
2.6 Under the Telstra (Transition to Full Private Ownership) Bill 1998
the reporting requirements imposed on Telstra under the Telstra Corporation
Act 1991 will cease to apply, on a date to be proclaimed, when the
Minister is satisfied that the Commonwealth's equity has declined below
50 per cent.
2.7 Similarly, the power for the Minister to give Directions to Telstra
will also cease to apply on the date proclaimed above i.e. the date proclaimed
when the Minister is satisfied that the Commonwealth's equity has declined
below 50 per cent.
2.8 Section 36 of the Telstra Corporation Act 1991 requires the
Auditor-General to be the auditor of Telstra. The Bill (Item 1 of Schedule
5) provides for the repeal of this requirement at the end of the first
annual general meeting of Telstra held after the commencement of Schedule
4. This is intended to ensure that there will be no disruption of any
audit which is only partially completed at the time the Commonwealth ceases
to have a majority equity interest in Telstra.
2.9 It is also intended that Telstra be able to appoint a further auditor.
This will enable a handover period from the Auditor-General to the new
auditor. The Bill therefore inserts a new subsection 36(3A) into the Telstra
Corporation Act 1991 which enables the Board to appoint an additional
auditor of Telstra. The Corporations Law will have effect as if the additional
auditor had been appointed to a vacancy. The Board is required to consult
with the Auditor-General before making such an appointment.
Memorandum and Articles of Association
2.10 The Bill proposes (new subsection 8AUA(1)) that the Minister be
able to alter Telstra's constitution if:
- the alteration relates to a Telstra sale scheme;
- the effect is to remove, restrict or limit any rights, privileges
or immunities of the Commonwealth or Minister or remove any requirements
for Commonwealth or Ministerial consent or direction; and
- the instrument is made before the repeal of Division 3 of Part 2 (which
contains Telstra's reporting obligations).
Discussion of Issues
Adequacy of Current Accountability Arrangements
2.11 Telstra is currently subject to the Telecommunications Act 1997,
the Telstra Corporation Act 1991, and the Trade Practices Act
1974 (Parts IV, XIB, XIC). There are also certain information requirements
imposed on Telstra that do not apply to fully privately owned companies
(e.g. submission of Telstra's Corporate Plan to the government), and the
Minister's power of direction.
2.12 The Department of Communications and the Arts in its submission
to the Committee stated that Telstra has been under increasing accountability
scrutiny since it first became subject to the Corporations Law:
Since Telstra was made subject to the Corporations Law in 1991, its accountability
regime has drawn closer to that which applies to private corporations.
Telstra's directors and management are legally liable for their actions,
and Telstra employees are not public servants. The company uses commercial
accounting methods and its performance is benchmarked against large telecommunications
companies around the world. The sale of one third of Telstra in 1997 and
the resulting investor scrutiny of its performance has placed further
emphasis on Telstra's role as a corporate entity. [1]
2.13 The argument that this accountability has increased since Telstra's
partial privatisation was also stated by Telstra and others:
Already, under partial privatisation, continuous performance assessment
has been one of the key benefits to Telstra. This is real-time feedback
from shareholders, analysts and institutional advisers on Telstra's performance.
It has led to a different level of scrutiny over Telstra's performance
by the markets and has focused management's attention on a range of growth,
resource and risk management strategies. Full privatisation is expected
to increase this level of ongoing scrutiny and pressure to maximise performance.
[2]
I think the current regulations and the current scheme is far better
than whatever existed before. It leads to transparency, open competition
and international competitiveness. The ACCC is dealing with competition.
You have the TIO who is dealing with complaint matters. You have the ACA
dealing with the regulatory matters. I think everything is covered adequately.
[3]
2.14 There are certain reporting obligations on Telstra that will cease
on the company's conversion to full private ownership. One of these is
the information the Commonwealth receives that is not available to ordinary
private shareholders (although it should be noted that the Telstra
Corporation Act 1991 authorises Commonwealth use of confidential
shareholder information obtained by the Minister under the Act only for
shareholder related issues and sale schemes). The Department of Communications
and the Arts argues that the retention of these reporting obligations
would be inappropriate for a private sector company:
If the Government ceases to be the majority shareholder it would no longer
be proper for the Government to put its interests above those of other
shareholders, nor for the Government to impose particular reporting requirements
only on Telstra where this information is not available to other shareholders.
The interests of the community are more fairly pursued through industry
wide regulation. [4]
Conclusion
2.15 The Committee considers that the public accountability mechanisms
specifically imposed on Telstra would no longer be appropriate when the
company becomes fully privately owned. Shareholder scrutiny will continue
through avenues available to shareholders of publicly listed companies.
Publicly available information on Telstra may be enhanced by the increased
investor and analyst attention it will experience given its potentially
dominant position in the share market.
2.16 The accountability debate has also focussed on whether the Minister's
power of direction should be retained. The Committee considers that it
would be inappropriate for such a power to be retained over a company
which is wholly or substantially privately owned, especially as no other
private Australian corporation is subject to such a provision. Certain
powers of direction by the ACA are also contained in the Telecommunications
Act 1997 and these will remain.
2.17 Concerns expressed to the Committee on the requirements for additional
oversight over Telstra because of its dominant position in many telecommunications
markets is an issue more of the appropriateness of the current regulatory
regime. This issue is canvassed in Chapter 4 of this report.
2.18 As a fully privatised company Telstra would no longer appear before
the Parliamentary Senate Estimates process. This process is limited to
publicly owned and publicly funded organisations. The Committee notes
however, that the Australian Communications Authority (ACA), the Australian
Competition and Consumer Commission (ACCC) and the Telecommunications
Industry Ombudsman will all continue to appear and will be available to
answer questions in relation to the regulation of Telstra and other telecommunications
carriers. The ACA and the ACCC will both have information gathering powers
and regulatory powers (under legislation) applicable to a privatised Telstra.
2.19 Further, it is important to note that it will remain an option for
any Committee of the Parliament to conduct an inquiry into a privatised
Telstra, should the public interest require such an investigation.
Impact on Public Sector Finance
2.20 In total, the Committee received fewer than 10 submissions that
objected to the sale of the remaining two thirds of Telstra on the basis
that the sale would reduce public sector finance. Even fewer of those
submissions and witnesses to the Committee discussed the public finance
implications in any detail.
2.21 It should be noted that officers from Government agencies who appeared
before the Committee declined to speculate as to the effect on public
finances owing to the sensitivity of providing a valuation of Telstra
prior to a possible share offering:
I am not going to confirm or deny figures that are floating around. I
am in a position where I may have to manage a large share offer and foreshadowing
price expectations is not in the interests of the Commonwealth, so I am
just not going to endorse a particular figure for that purpose. [5]
2.22 In trying to examine the financial impact from the privatisation
of the remaining two thirds of Telstra, two important issues need to be
examined. These are, firstly, the effect on the Commonwealth's revenues
from the sale, and secondly, the impact of a sale on the rest of the economy.
2.23 As a general statement, if perfect markets with full information
exist, the proceeds the government receives from an additional sale of
Telstra shares would be equal to the stream of dividends plus retained
earnings in Telstra. Therefore the net effect would be neutral. This view
is supported by the Office of Asset Sales and IT Outsourcing:
Other submissions have dealt with the directly quantifiable public finance
effects, but we do not seek to replicate that work within OASITO. Rather,
we make the point that the efficient pricing of a secondary public share
offer by a market that is fully informed pursuant to standard Corporations
Law requirements will reflect the currently expected present value of
both the future dividend stream and capital growth. Thus there is no loss
of presently expected future value to the Commonwealth by selling rather
than holding the equity. [6]
2.24 However, in reality there will not be perfect information and the
calculation of the net effect on Commonwealth finances depends on, for
example, the values given to market risk, changes in the market price
of Telstra or the achievable sales price, the long term bond rate, and
the value of and expected growth in Telstra's earnings and dividends,
as well as the amount of the sale proceeds used to retire public debt:
What happened in those instances [privatisation of the Commonwealth Bank
and Qantas] was that most of the revenue raised from those sales was actually
wasted to some extent on recurrent government spending, whereas after
seeing the one-third sale of Telstra take place, most of that money, $13 billion
of that money, was used to retire public sector debt. If the same process
is used with the full sale of Telstra, then I feel quite confident that
most Australians would benefit through lower interest rates and, hopefully,
better employment conditions. [7]
2.25 Estimates can be given to some of the above parameters, for example
Telstra's prospectus indicated the Director's intention to declare dividends
of at least 60% of operating profit, and on current market valuation of
the one third of Telstra shares sold, the company can be estimated to
have a total value of $48.7 to $50.4 billion. The difficulties arise
in estimating the “risk premium”, and knowing how much of the
Telstra sale proceeds will be used to retire debt with a resultant saving
in interest payments.
There is no exact science in this. It is not possible, as we have indicated
in our submission, to provide an absolute accurate assessment of the net
effect on national savings, because calculating that precise effect will
depend on both the assumptions you make and on what response people make
to that share offer. [8]
2.26 Some general statements can be made. Eventually the value of the
dividend stream will exceed the value of annual interest savings, so long
as the dividend stream continues to grow at some positive rate.
2.27 Similarly, the national savings made possible by selling the rest
of Telstra is likely to be valued at more than the estimated future dividend
stream, the higher is the risk associated with Telstra's future earnings
(and vice versa):
In broad terms the cash flow benefits to the Commonwealth will be positive
in the sense that the savings from reductions in public debt interest
will exceed the flow of dividends. [9]
2.28 As canvassed by some submitters however, the financial impact of
the sale to Telstra also flows through to the rest of the economy. Telecommunications
is a vital input to many other sectors of the economy, and a company made
more efficient by the rigours of the competitive marketplace will, through
lower prices and better service, beneficially impact upon other industry
sectors:
DoFA is of the view that the key benefit from full privatisation will
arise from the net gain to economic efficiency, as well as public sector
savings effect. There is likely to be a positive net effect on national
savings, although calculating a precise effect is difficult because it
will depend on a complex set of behavioural responses to the share offer.
The proceeds of the sale would reduce the headline Budget deficit, or
increase the Budget surplus, in the years the proceeds are received. [10]
The impetus of competitive pressure to improve performance and, in turn
lower prices, is likely to have positive flow-on effects for the economy
in general over time. [11]
2.29 A better performing economy should also increase tax receipts:
Finally, by improving overall economic performance, there are indirect
financial benefits as the improved economic performance feeds into higher
taxation receipts. [12]
Footnotes
[1] Submission No. 30 (Department of Communications
and the Arts), p. 156.
[2] Transcript of Evidence, p. 101 (Mr Rizzo)
[3] Transcript of Evidence, p. 138 (Mrs Alter)
[4] Submission No. 30 (Department of Communications
and the Arts), p.145.
[5] Transcript of Evidence, p. 217 (Mr Hutchinson)
[6] Transcript of Evidence, p. 213 (Mr Hutchinson)
[7] Transcript of Evidence, p. 206 (Mr Tolar)
[8] Transcript of Evidence, p. 202 (Mr Bartos)
[9] Transcript of Evidence, p. 201 (Mr Bartos)
[10] Submission No. 67 (Department of Finance
and Administration), p. 550.
[11] Submission No. 67 (Department of Finance
and Administration), p. 550.
[12] Submission No. 75 (Office of Asset Sales
and Information Technology Outsourcing), p. 603.