Tuesday, December 15, 2009

The taxpayer and the network

One of the items I wrote a Havyattogram about was a recent speech which gave as a justification for structural separation the worn out idea that "taxpayers funded the network." I resorted to the H-o-g while Kevin Morgan pointed out in Communications Day that it wasn't taxpayers who paid.

So I made my own contribution, because I agreed with Kevin about who paid and included a piece he left out. But also because who paid isn't really the argument that should be mounted about separation.

I’m pleased that Kevin Morgan has laid out the history of the financing of the telecommunications network so clearly. To summarise the APO was entirely self-funding other than loans from the Commonwealth from 1959. On vesting into Australia Post and Telecom Australia, the entire outstanding debt was transferred to the Australian Telecommunications Commission along with the telecommunications assets – Australia Post started with no debt.

Until corporatisation in 1989 Telecom paid off parts of the principal as well as paid interest due. With corporatisation the outstanding $3B of debt was converted into the Commonwealth’s equity in the Australian Telecommunications Corporation. In 1991 AOTC, subsequently Telstra, was created from the merger of Telecom and OTC. Both Telecom and Telstra paid commercial dividends to the Commonwealth.

The only part that Kevin left out was that immediately before privatization Telstra paid a “special dividend” to the Commonwealth of $3B. That is the Commonwealth recouped its equity investment. So that means the Commonwealth raised something like $80B in the three tranches for an asset the carrying value of which was precisely zero. (After I put this history on nowwearetalking Telstra put the full version there – but it has now disappeared).

So those who moan that the copper network was “funded by the taxpayer” are wrong, though John Lindsay is only slightly less wrong because he at least recognizes that it has really been customers who paid for it. But be that as it may, Kevin is correct to note that the Telstra shareholders paid for that asset with real cash, real cash that has since made its way to taxpayers.

Where I will diverge from Kevin is the idea that just because the thesis of who funded the network is wrong, that therefore there is no basis for separation.

Corporations can do bad things. No one, especially from the union movement, would suggest that existing shareholders in James Hardie have no responsibility for the compensation claims suffering from the effects of asbestos. Most in the community would not these days object to the impact on shareholder value that limiting the advertising of cigarettes resulted in.

In both the US and UK legislation exists (the Sherman Act and the Enterprises Act) under which corporations can be required to divest assets if they monopolize an industry. The first of these was what was used to break up AT&T in 1984 (and the threat of which resulted in the break-up of Boeing Airways into three companies, Boeing, United Airlines and Pratt and Whitney). They don’t have to have engaged in anything other than to have achieved that position, how they got to that point is irrelevant.

The current Government is proposing two routes. The first is that Telstra can choose not to structurally separate but then face limitations on what further assets it can acquire and to face operational separation. The second is that Telstra can agree to structurally separate, something that it can choose to do prospectively as the NBN is built.

Is this something shareholders should be surprised by? Not really. The only two former Government owned telcos that were privatized before Telstra, BT and Telecom NZ, have already been down the operational separation path. BT did so as they were threatened by Ofcom with action under the Enterprises Act that might have seen forced structural separation. Every Senate committee hearing about the stages of privatization saw witnesses arguing the merits of structural reform.

Kevin is right, shareholders own Telstra and the myth of the taxpayer funding the network should be dispelled. But just because shareholders own it does not mea it is beyond regulation, and nothing that is occurring is a risk that should not have been considered by shareholders. The constitution and protection of property rights requires compensation for “acquisition of property”, it is not the obligation of Governments to protect shareholder value.

The editor of Communications Day, arahame Lynch, helpfully corrected my error in relation to the sequence of global privatisations. He advised me before publication but I suggested he run it as is and correct me - as I said I'm not aggressively hiolding myself out to be right and everyone else wrong, I'm just trying to get people to discuss things from wider perspectives.

Grahame wrote;

Re the comment “The only two former government owned telcos that were
privatised before Telstra, BT and Telecom NZ, have already been down the operational separation path.” this is incorrect. Incumbent telcos in Mexico, Chile, Portugal, Israel, Germany, Spain, Japan, Taiwan and Israel were all privatised before or concurrently with Telstra. Few of them were or are subject to BT or TNZ-style
separation although a few—notably in Brazil and Japan—were subject to regional separation. It is probably worth noting that the functional and operational separations of Telecom NZ and BT were a response to almost negligible take-up of unbundling. In Australia, unbundling has been comparatively successful under the
current regime with nearly 19% of metropolitan lines or nearly 1.4m lines used by access seekers. Whatever arguments there may be for separation, international consensus isn’t one of them.

I should have written merely "the first two Government telcos to be fully privatised" to refer to BT and TCNZ, not the only. It was a stupid error.

But the point I was making here is not that the operational separation in those countries is an argument from international experience for separation. It was in the context of the discussion of new Telstra shareholder expectations of the regulatory future that I raised this point. Nothing about the Government being the vendor should have implied that the Government would not pursue structural reform.

For the record, my support for (forced) structural separation is for the prospective separation being effectively promoted by the Government even since the NBN tender. I had separately argued that I thought voluntary separation is actually in the interests of incumbents.

My support for separation is based on reasoning from economic principles, not precedent. However, I also note that separation alone is not a complete solution. To genuinely create a competitive services industry will also require some tighter rules about bundling as referred to in my post about layer 3 services.


Mark Robinson said...

David, I absolutely agree with your sentiment that the argument for separation has little or nothing to do with who owns the network or rather who paid for it!

There will no doubt be many who will argue that separation will be bad, from a service perspective some will experience a lower level of service and others an improved level of service. In my opinion the true value (non economic) will come from the level playing field that will be created.

I have not seen anyone discuss the mates network within incumbents, it is a real advantage to anyone who has an old school account manager. Whilst in many cases people could argue that the mates network really only runs on providing better levels of service what really happens is those not in the network don’t get the same advantages.

An example is the customer who is with the incumbent, they call their account manager to see if they can have an installation expedited. The account manager calls their colleague (mate) who happens to run some service delivery function in the local exchange area. They ask if they could do something, the mate just bumps the job up the list by a couple of days, everyone is happy right?

That is everyone except for the competition that don’t have access to the mates network, that is the customer that has just had their job pushed back a day and the impact goes on.

The same issues exist in the faults arena, people with the right contacts will get the best service and the best service is almost always going to be easier to provide when you are the vertically integrated incumbent.

I’m certain that when the sale needs to be done the incumbents can always suggest that they can get things done because they have the right contacts!

When structural separation is implemented the impact in my opinion will be an evening out of the service, I would suggest that it will gravitate down but at least it will be fair.

Best regards

Mark Robinson

ian said...

I agree that construction of the CAN/IEN was funded by the PMG/Telecom/AOTC/Telstra (through government loans).

The most valuable part of this asset has not been paid for (with the possible exception of poles for HFC). Telstra has been granted access to public space in roads and footpaths without charge, and until recently without need to obtain planning permission.