THE ISSUES
Full public ownership
During the debate on the Telstra (Dilution of Public Ownership) Bill
1996 the opposition and other minority parties were opposed to any form
of privatisation of Telstra. They argued that there was no substantial
evidence to support the government's claim that the Australian economy
and the public would significantly benefit from the partial sale of Telstra.
The opposition also claimed that funding for the environmental programs
could be from recurrent expenditure or a proportion of Telstra's profits.
The government proposal for the partial sale of Telstra was so Australians
could own a direct stake in Telstra and share directly in its financial
success. The recent record of Telstra as a publicly owned carrier had
been one of underperformance. Therefore , according to the government
the partial sale of Telstra would make it more efficient, enable it to
operate with greater commercial freedom and bring about improved benefits
to consumers.
The proposal that the partial privatisation of Telstra be effected via
the issuing of redeemable preference shares was made by Senator Harradine
in the course of debate on the Telstra (Dilution of Public Ownership)
Bill 1996. [1] Senator Harradine's proposal
is based on a desire to see the underlying infrastructure assets of Telstra
remain in full public control without denying the government asset sale
funds for the retirement of debt or denying the ability of the government
to subject Telstra to investor scrutiny of management performance.
Senator Harradine formally raised his redeemable preference share proposal
with the Minister for Communications and the Arts, Senator the Hon Richard
Alston in correspondence of 2 September 1996. Subsequently the Treasurer,
the Hon Mr Peter Costello MP replied on behalf of Senator Alston, outlining
the government's rejection of the proposal. The Treasurer's correspondence
and Senator Harradine's response to it was incorporated in the Senate
Hansard of 10 December 1996 and is attached at appendix 3.
During the debate on the Bill Senator Harradine, although not totally
opposed to the partial privatisation of Telstra, was concerned that the
government was not giving enough consideration to what was the best method
of raising capital from Telstra. He did not believe that the one-third
sale of Telstra by ordinary equity shares would be an efficient or necessary
means of raising capital from Telstra. A sale of ordinary shares would
not allow the government to retain control of the underlying infrastructure
assets through the option of “buy back” or redemption of shares
if it so desired in the future.
Government control of Telstra
Supporters of the use of redeemable preference shares for the partial
privatisation of Telstra argue that this type of share issue would allow
the government to maintain ownership over Telstra's infrastructure assets
ensuring the provision of a publicly-owned core network infrastructure.
A core common access network infrastructure is seen as necessary to avoid
wasteful network duplication.
Through the use of some form of hybrid security the government may still
achieve its stated objectives without forgoing the capital appreciation
on the underlying asset (Telstra) with the shares being issued at less
of a discount to intrinsic value than ordinary shares. The use of hybrid
securities such as converting or redeemable preference shares would provide
the sort of security that investors would be interested in and may return
to the government as much capital as it had planned to raise but with
less given up in return.
By attaching voting rights and franking credits to the dividends on hybrid
securities and making the redemption optional, the retention of control
and ownership of Telstra's underlying assets in the future by the government
of the day may still be achievable.
The weight of this argument is challenged by the fact that under an issue
of ordinary equity the government would retain control of Telstra through
its majority voting rights and ability to appoint a majority of Board
members. [2] Supporters of redeemable
preference shares would object that ordinary shares, unlike redeemable
preference shares, carry rights to Telstra's underlying assets in a liquidation
or re-construction process.
Maximisation of return on partial privatisation
Telstra opposes the proposed use of hybrid securities in the company's
partial privatisation on the grounds that:
"Any security which for the purposes of analysis and credit
rating is deemed to be debt in nature will increase Telstra's gearing
and risk profile, adversely impact on performance and growth due to
the need to service the higher cost, will constrain Telstra in its push
to be competitive in the worldwide telecommunications and information
services sectors and will need to be refinanced at the end of the term
of the security." [3]
Supporters of redeemable preference shares note that optional redemption
preference shares are not debt in nature.
Tony Rumble, Senior Lecturer in Law at the University of New South Wales,
suggests that the use of converting preference shares in the partial privatisation
of Telstra would allow the government to capture some of the future value
of the enterprise. An issue of ordinary voting shares is likely to produce
a high demand for Telstra shares discounted from fair value.
Converting preference shares, on the other hand, are likely to attract
fixed interest investors willing to pay close to fair value for this type
of Telstra share on the grounds that:
a. the conversion mechanism provides capital protection;
b. the security is capable of increasing in value as the ordinary share
price rises; and
c. the yield is typically fixed and provides an attractive return when
compared to prevailing simple interest rates. [4]
The special qualities of converting preference shares is believed to
have created a demand in Australia of
"..at least $20 billion per annum, largely caused by the
reduction in government and semi-government borrowings which deficit
reduction strategies have produced." [5]
Supporters of redeemable preference shares also observe that this market
gap could be taken advantage of with redeemable preference shares.
Demand for hybrid securities in Australia
Both converting preference shares and redeemable preference shares fall
into the category of hybrid security meaning both types of security have
features "somewhere between ordinary equity and debt." [6]
Although hybrid securities are commonly used as corporate fund raising
vehicles amongst Australia's major trading partners, the market for hybrid
securities in Australia is considered by some to be poorly developed and
understood. [7] Telstra Corporation Ltd
presents this as a further case against the use of hybrid securities for
the share issue. Telstra argues that
"only a minor placement of this type of instrument is considered
possible in Australia due to the tax ineffectiveness and lack of understanding
and therefore demand for the product by investors." [8]
Furthermore, Telstra believes that from a pricing perspective
"..the domestic market would not be in a position to effectively
price such an issue due to the limited investor base, associated lack
of liquidity and the lack of comparable benchmarks and hedging instruments."
[9]
On the other hand, Tony Rumble of the University of New South Wales sees
the use of hybrid securities in the partial privatisation of Telstra as
a strong opportunity for improving the standing of Australia's financial
markets.
"In the case of the part privatisation of one of Australia's
leading corporate enterprises, the benefit to our financial markets
which would flow from an innovative financial product is incalculable."
[10]
Others have also observed that the market for hybrid securities has been
diminished since 1987 by the threat of double taxation of returns on capital
- taxed both as interest yet treated as a non-deductible dividend.
Footnotes
[1] Senate Hansard 10 December 1996 p.
6564
[2] Submission No. 1, Telstra Corporation Limited,
para. 1.1
[3] Submission No. 1, Telstra Corporation Limited,
p.14.
[4] Submission No. 4, Mr Tony Rumble, Senior
Lecturer in Law, University of New South Wales, p. 4
[5] Submission No. 4, Mr Tony Rumble, Senior
Lecturer in Law, University of New South Wales, p.6
[6] Submission No. 1, Telstra Corporation Limited,
p. 7
[7] Submission No. 1, Telstra Corporation Limited,
para. 1.2
[8] Submission No. 1, Telstra Corporation Limited,
p. 9
[9] Submission No. 1, Telstra Corporation Limited,
p.10
[10] Submission No. 4, Mr Tony Rumble, Senior
Lecturer in Law, University of New South Wales, p.7