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The case for renationalisation and divestiture

John Quiggin

Ros Eason has criticised proposals for the divestiture of peripheral parts of Telstra's operation which have been made, among others, by Lindsay Tanner and me. While correctly cautious about visionary plans for broadband deployment, she argues, that the central focus of Telstra's operation should be the provision of a universal network, which will ultimately be completely upgraded to broadband.

Two things strike me immediately about Eason's argument. The first is that, in her substantive discussion, the ownership of Telstra is not mentioned, except for the acknowledgement that "a decade of policies of market liberalisation and, subsequently, privatisation have seriously compromised Telstra's capacity to perform the role it did under the period of monopoly public ownership". The natural inference is that Eason supports the status quo - 51 per cent public ownership - or at least that she prefers it to the feasible alternatives of full privatisation or renationalisation combined with restructuring.

In my view, it has become increasingly evident that partial public ownership is untenable in political terms. More importantly, in terms of governance we get the worst of both worlds. Telstra's management interprets partial private ownership as justifying the ruthless pursuit of their corporate interests (dressed up as shareholder value). On the other hand, to the extent that there is any validity in the idea that Telstra needs to compete on a global stage, ownership by a national government is a significant obstacle. The public interest role that Eason envisages for Telstra is feasible only under full public ownership.

The second point is the mismatch between the goals Eason rightly sets out for Telstra, and her unwillingness to concede any inch of territory that Telstra has ever held. The national network is urgently in need of repair, but Eason wants to hold on to the former assets of Hong Kong Telecom, and dismisses the idea of divesting these assets to raise cash.

Of course, if these ventures yielded guaranteed supernormal profits, which could be used to subsidise network expansion in Australia, holding on to them would be a good idea. But experience does not suggest that this is the case.

(Eason misinterprets my reference to 'the overseas ventures' to include the former OTC, and the infrastructure associated with the provision of international telephone and data communications between Australia and the rest of the world. I think it is clear from the context and from my previous writings that I was referring to the expansion into Hong Kong and China.)

A central feature of Eason's paper is her concern about anything that might disadvantage Telstra vis-a-vis its competitors, particularly SingTel-Optus. In my view, this concern is overstated. It is clear that competition in local telephony has been stillborn, not only in Australia but also worldwide, and that attempts to roll out duplicate networks have been a disaster for all concerned.1 As the smoke clears, the advantages of local incumbents in providing long-distance and international services will become steadily more evident. Policy should be made on the assumption that Telstra will remain dominant for the foreseeable future (given that the industry is a natural monopoly, I should emphasise that this a desirable outcome).

Some comment on specific areas of proposed divestiture may be in order. Telstra's competitors in the telephony market do not have a major presence in the provision of Internet services, and integration between local telephony and ISPs is the exception rather than the rule overseas. Particularly in the context of renationalisation, there is no need for Telstra to be in the ISP business or to be running portals, dating services and so on. (Some more complex issues arise in the case of DSL services, but there is still no need for anything more than the provision of a choice of approved ISPs.)

As regards pay-TV, Eason writes that "the requirement that Telstra sell off its internet and pay-TV operations, while its major competitors presumably continue to be able to offer (and bundle) such services in the domestic market, is another recipe for declining revenues and technological inertia". But a natural implication of renationalisation and restructuring would be the acquisition by Telstra of the Optus HFC network, a white elephant which SingTel would gladly ditch. The providers of pay-TV services would therefore not be competitors, but customers. There would be no reason not to offer bundles of telephone and pay-TV services to Telstra customers - they would simply get more choice than they do at present.

Taking the argument in the other direction, it's clear that the logic of Telstra's current strategy leads naturally to the ownership of free-to-air TV, radio and newspapers. It's also clear that this strategy would be a disaster under Telstra's current governance structure, where public ownership effectively means accountability to the Communications Minister. And, as I observed recently, a fully privatised Telstra with this kind of reach would be a monster, making the current crop of Murdochs and Packers pale into insignificance.

The public debate of the last few months, and evidence of increasing integration between local and mobile telephony has led to me to change my tentative view regarding mobile services, which I now believe should be kept within Telstra. But the more that is retained, the greater the obstacles to renationalisation. The retention of Telstra's mobile businesses strengthens the case for the sale of more peripheral assets.

The combination of renationalisation and divestiture of peripheral businesses will provide the basis for a sensibly planned telecommunications system based on social need rather than market whims. Privatisation will not, and neither will marginal tinkering with the status quo.


John Quiggin is an Australian Research Council Senior Fellow based at the Australian National University and Queensland University of Technology, and a contributor to the Evatt Foundation's new book Globalisation: Australian Impacts (UNSW Press). Visit John's new weblog.


Note 1. "End of the Telecom Turmoil?" BW Online, 29 July 2002.


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