Saturday, August 26, 2006


I have long opposed the privatisation of Telstra. There are, in my view, too many natural monopoly elements involved in the non-retail part of Telstra and the effective provision of an efficient, low cost message market in Australia is an overriding social priority. Such provision is a much more effective way of bringing together our geographically dispersed population than ad hoc regional programs based on National Party pork-barrelling.

But with the Government's current stated policy intention to sell off a further $8 billion of its 51.8% holding and to place the remaining $24.4 billion into the Future Fund no-one is now interested in arguments that involve retaining or to taking back into public ownership some of Telstra.

Telstra will become a pure regulated private firm which should mean that government policy will be primarily based on consumer interests rather than considerations of dividend income or the income to be gained by increasing the extent of its privatisation. (By the way, placing a large slab of stock with the Future Fund seems almost inconsistent with the privatisation idea and with intended non-political management of the FF).

Selling at a share price of only around $3-50 suggests that the government expects to be increasingly tough on Telstra in terms of ACCC regulatory environment. Telstra will not enjoy the types of anticipated monopoly powers it was anticipated to have when T2 was floated when shares fetched $7-40. Joshua Gans points out that purchases of shares at this price might perhaps be seen as deserving of compensation given the changed regulatory view but that this will not happen with the current moves. Telstra will now be purchased for its utility income-generating prospects not because it is seen as a vehicle for growth.

Now should I buy a few thousand Telstra shares? They are good buying if early next week an over-supply and FF-overhang panic drives the pre-issue stock price to around $3 and if Telstra maintains its current dividend payout.


Mark U said...

There was never anything wrong with privatisation per se. It is the long drawn out process where the government faces repeated conflicts between the type of regulatory environment it wants to set up and the impact this has on sale proceeeds. The big losers of this indecision, as you correctly point out, are the T2 shareholders, who have lost $8 billion in value.

The new sale announcement condemns Telstra further uncertainty as the largest shareholder (the Government via the Future Fund)still faces a conflict of interest between its role as largest shareholder and regulator.

As I commented on John Quiggin's site, the suggestion by John Humphries to simply allocate the remaining shares to the public for free is not as silly as it first sounds. It would be a quick option that would leave the Government free to decide on how to regulate for a sensioble telecomminucations framework for the 21st century.

hc said...

Mark, I think that rather few of the regulatory issues simplify if Telstra is privatised. But this is water-under-the-bridge.

T2 shareholders were sold the prospect of an effective monopoly but T3 shareholders are being offered something less than that.

I cannot see how giving away stock for free helps things unless it was to preexisting shareholders as a type of compensation. You want a mechanism ensuring that stock goes to those who value it most.

Damien Eldridge said...

Hi Harry,

If we had the entire process over again, I suspect that you would probably split Telstra into a wholesale (fixed line and maybe sattelite) company and a retail company. You could then privatise both companies and regulate the wholesale company as a natural monopoly. Regulating the wholesale compoany alone would be easier than regulating the vertically integrated company because you would not have to deal with the potential for vertical foreclosure. Of course, there is a downside to this approach. If you split the two companies, you lose the various efficiencies that may be associated with vertical integration, such as economies of scope. Nonetheless, I suspect that vertical separation along these lines would have been a better option before privatisation. Unfortunately, it didn't take place.

In terms of how the T3 shares should be allocated, reasoning similar to the strong form of the Coase theorem would suggest that it doesn't matter a great deal. If transactiions costs are sufficiently low and income effects are negligible, the final allocation of the T3 shares will be the same regardless of whether or not they are randomly allocated, given away to each Australian citizen or auctioned off.

So the real question is what gets done with the revenue? If you take the view that worthwhile public projects would get funded, either by additional taxation or by revenue from the sale, then it does not seem to matter which option is chosen.

Of course, if you are worried about transactions costs or income effects, then you might be better off auctioning T3 shares and then doing what you think is best with the revenue (fund more services, tax cuts or debt retirement).



Mark U said...


The regulatory issues are much the same whether the Government owns Testra or not. But because the Government owns part of Telstra and wants to sell it there is a conflict between two objectives - limiting Telstra's monopoly power and maximising sale proceeds.

Allocating the shares to the public for free enables each taxpayer to place their own value on Telstra by deciding whether to hold on to them or sell them at the prevailing stock market price.

I realise it is water under the bridge, but all I am saying is the latest announcement does not resolve any of the problems that have beset Telstra or telecommunications regulation, whereas giving it away would have been a start.

observa said...

The govt was right to want to disinvest Telstra on behalf of taxpayers as this sort of rapidly evolving technological threat shows
Furthermore the obfuscation by Labor and others has cost the taxpayer $8bill in lost equity in the last 12 months alone. That would have paid twice over, the $4bill price tag for Telstra's proposed fibre to the node rollout. What can you say except that the govt has been proved right about the risk to taxpayers of running a Telco in a world wide tough market environment. The public ownership fans are living in the past. Just ask Kodak shareholders about technological risk.