When Privatisation Fails

The Australian Labor Party's descent into perpetual opposition reflects its inability to form alternative policy and enforce government accountability on relevant issues. One such issue is corporate privatisation.

It's the economy, stupid!
It is a common misconception that Capitalism is averse to nationalisation. Basic microeconomic theory suggests that a government monopoly can most efficiently control the allocation of certain resources, such as water, by funding the initial expense through tax revenue and then charging consumers the marginal cost (variable cost) of production. Another instance of economic failure due to privatisation occurs when a government elects to cede control over a heavily regulated sector. A classic example of this is the Howard government's decision to partially privatise Telstra- Australia's largest telecommunication company.

1998 heralded a new age in Australia. Finally, the shackles of progressive socialist economics were removed and Australia was free to pursue a US-style economic reform. Well, not quite. Thanks to brilliant American economists like Milton Friedman and Americans' love of sex, the USA enjoys a relatively deregulated capitalist market with three hundred million economic agents. Indeed, the latter condition is conducive of a competitive telecommunication sector because massive initial outlays can easily be recouped and a dense population distribution ensures effective service coverage. Historically, Australia's minute population, especially in remote country areas, has necessitated regulation. The intrinsic right of all Australians, rural or urban, to enjoy telecommunication service parity is an ingrained Australian ideal. Precipitously, Telstra maintained strict obligations to service the bush and as doing so was grossly unprofitable it was wholly owned and operated by the government.

The initial public offer of Telstra shares ($6) in 1998 was marketed at "mum and dad investors". The prospectus was intentionally simple to understand; lacking verbose financial jargon, and projected Telstra as an income stock. Institutional investors were cynical about Telstra's capacity to generate substantial long-term profits and queried the government about the extent of regulatory constraints being enforced. Nevertheless, applications were received on the basis that Telstra's dividend model provided a superior return to the cash rate and it was very unlikely that the telco would suffer any significant capital losses.
At the end of trade today TLS closed at a near record low of $3.68.

I trust the government, it's the people that run the government that I don't trust
So what happened? Precisely what analysts feared would happen. Telstra gained conditional independence from the government and instantly found itself in an impossible Catch-22 scenario. On the one hand Telstra had to return profits to investors in the forms of capital gains and cash dividends; a policy that stripped the company of liquid assets, and on the other hand, Telstra had to invest hundreds of millions into improving infrastructure and servicing the bush. Under its first CEO, Ziggy Switkowski, Telstra attempted to divest out of the bush, actively ignoring rural Australia until ordered into action by the government. This strategy remained fairly latent until the 2001 election when rural voters exposed distaste in the great communications divide: limited mobile phone coverage, negligible access to broadband and unreliable service through archaic infrastructure. To compound the problem, Telstra also found itself facing menacing competition from emerging telcos stealing away some of its market share. While the legislated forfeiture of some of Telstra's monopoly benefited consumers by way of cheaper phone call rates, Australia was inevitably digging itself into a hole.

First law of holes: when you're in one, stop digging
Earlier in the week, Phil Burgess, Telstra's managing director, publicly expressed the Telstra board's frustration with the government constraints.
"We have a legal and fiduciary responsibility to protect the investment of our shareholders. And the new management is going to do that - that's what we're committed to do...So the idea that Telstra can be a magic pudding for government policy, those days are over."
Presently, Telstra finds itself in a desperate situation. The company is cash strapped and was forced to dip into reserves to sustain its dividend levels. Hundreds of millions are required to update the nation's telecommunications infrastructure. And Telstra was forced to suspend its plans to introduce higher speed broadband to consumers until "the board is satisfied that Telstra has resolved all immediate issues."

The only equitable solution is a policy of complete privatisation, complete deregulation of the telecommunications industry and the establishment of government funds in escrow (possibly from the sale itself) to ensure the interests of the bush.