CHAPTER 1
Introduction
Background
1.1 In May 1996, the government introduced legislation to Parliament
to sell one-third of the Commonwealth's equity in Telstra Corporation
by means of a share float. The Bill was subsequently referred to the Senate
Environment, Recreation, Communications and the Arts References Committee
for inquiry. The References Committee conducted an Australiawide inquiry
between May and September 1996 and tabled its Report in the Senate on
9 September 1996. The issues relevant to the full privatisation of Telstra
were canvassed extensively in that Report. [1]
The Bill was passed, and the one-third sale proceeded in late 1997. It
raised $14.3 billion for the Commonwealth. [2]
1.2 On 15 March 1998, the Prime Minister, the Hon John Howard MP, announced
that it was the intention of the government to seek a mandate at the next
federal elections to sell the two-thirds share of Telstra that is currently
governmentowned. The Prime Minister committed the government to using
the bulk of the proceeds from the sale to retire public debt.
1.3 Public debt stood at $96 billion when the government came to office
in 1996. Treasury projections show that with the proceeds from the sale
of Telstra that debt will be reduced to $9.6 billion by the year 2002,
a 90% reduction.
1.4 The Telstra (Transition to Full Private Ownership) Bill 1998 was
introduced in the House of Representatives on 30 March 1998.
1.5 Telstra is one of Australia's largest corporations. It has about
80 per cent of Australia's telecommunications market. [3]
In the 1996-97 financial year it had revenue of about $16 billion, profits
before tax of $3.8 billion, [4] and paid dividends
of $4.1 billion. [5] Its return on assets
(before accounting for abnormal items) was 17.7 per cent. [6]
1.6 Telstra is the descendent of Telecom, the public monopoly telecommunications
provider created in 1975 by the break-up of the former Australian Postmaster
General's Department. Telecom was corporatised in 1989. Telecom merged
with the former Overseas Telecommunications Commission (OTC) in 1992;
and it changed its name to Telstra in 1995 (in 1993 overseas). Full competition
in telecommunications was introduced from 1 July 1997 with the Telecommunications
Act 1997 and related Acts.
The Committee's Inquiry
1.7 On 1 April 1998 the Senate referred the current Bill to the Environment,
Recreation, Communications and the Arts Legislation Committee for inquiry
and report by 13 May 1998. On 12 May 1998, the reporting date was extended
to 26 May 1998 by resolution of the Senate.
1.8 The inquiry was advertised nationally in the print media during the
period 48 April 1998. The Terms of Reference were also made available
on the Internet. The Committee received 103 submissions and these are
listed at Appendix 1. One third of the submissions were one page letters
from private individuals opposing the further privatisation of Telstra.
1.9 The Committee examined 65 witnesses at three public hearings in Sydney
(29 April 1998), Melbourne (5 May 1998) and Canberra (6 May 1998).
Details of witnesses who appeared at the public hearings are in Appendix
2. A list of tabled documents and of Additional Information provided to
the Committee is at Appendix 3 and 4 respectively.
1.10 The Terms of Reference for the inquiry are:
1. That the provisions of the Telstra (Transition to Full Private Ownership)
Bill 1998 be referred to the Environment, Recreation, Communications and
the Arts Legislation Committee for inquiry and report by 13 May 1998,
with particular reference to the following matters:
(a) whether the proposed accountability regime in the Telstra (Transition
to Full Private Ownership) Bill 1998 is adequate to protect the public
interest;
(b) the impact on public sector finance of the full privatisation of
Telstra;
(c) the effect on delivery and quality of services for rural, regional
and remote areas and for smaller States and Territories;
(d) whether the provisions of the Telecommunications Act 1997
and the Telstra (Transition to Full Private Ownership) Bill 1998 provide
effective and adequate consumer protection safeguards, including:
i. access to untimed local calls;
ii. free directory assistance;
iii. public telephone facilities;
iv. customer service guarantee; and
v. price caps;
(e) the effectiveness of the standard telephone service, as guaranteed
under the Universal Service Obligation, in ensuring that rural and regional
customers have access to modern telecommunications services and whether
the standard telephone service definition needs to be expanded to take
account of rapidly changing communications technology;
(f) the impact of privatisation on employment and economic activity,
particularly in regional Australia;
(g) the impact of the privatisation of Telstra on industry development
issues, including research, development and manufacture in the Australian
telecommunications equipment and services industry; and
(h) whether the privatisation of Telstra confers an unfair competitive
advantage to it, in detriment to open competition and the involvement
of other telecommunications companies and the implications of foreign
ownership on these matters.
2. That the committee advertise for submissions in the media and conduct
public hearings as and where it deems appropriate.
1.11 The Committee expresses its appreciation to all those who made submissions,
provided additional material and information and gave evidence to the
inquiry.
Should Telstra be Privatised?
1.12 The Committee notes that no submission chose to address the extensive
Terms of Reference of this inquiry. Instead, submitters selected aspects
that were important to them. The majority of submissions were either not
concerned with ownership or were concerned with ownership only in so far
as it affected the level of regulation (and therefore consumer safeguards
and consumer benefits) that the largest telecommunications carrier was
subject to. Of those submissions that opposed further privatisation of
Telstra, one third consisted of one page letters from private individuals.
1.13 The Australian Consumer's Association's (ACA) Ms Bun was typical
of the majority view in her assertions that:
Our association is of the view that ownership is less of an issue than
full competition and full consumer protection. [7]
1.14 This was also the position of the National Farmers' Federation's
witnesses who submitted:
It is NFF's view that ownership is not the major issue for us. The major
issue is the quality and price of telecommunications services in rural
Australia. Government ownership, however, may well provide a barrier to
an effective rules based telecommunications industry….It is critical
that the government establish a regulatory environment which ensures improvement
of standards in rural Australia while encouraging competition in the market.
[8]
1.15 The majority of witnesses at public hearings either supported further
privatisation as did the Australian Telecommunications Users Group Ltd.
(ATUG) who stated:
ATUG supports the concept of the privatisation of Telstra for some specific
reasons: to deliver beneficial outcomes and because we see that it is
a sensible way forward. We also see that privatisation will better enable
Telstra to take the commercial risks that it may have to in this rapidly
developing marketplace. [9]
1.16 Or they pronounced themselves to be “agnostic” as did
the Consumers Telecommunications Network's Coordinator:
The Consumers Telecommunications Network remains agnostic about the question
of whether a utility such as telecommunications ought to be in private
or public ownership. Our principles are those of access and equity…
We are just concerned that those preconditions are set in place so that
we can be sure consumers are protected. [10]
1.17 However the Committee did receive some evidence relating to the
central issue of ownership. For example, from the Small Enterprise Telecommunications
Centre submission:
Small business supports private sector ownership and control in principle.
Small business supports private ownership of Telstra but is concerned
to ensure that there are adequate safeguards for the interests of small
business and residential consumers in the medium and long term. [11]
1.18 One of the main concerns throughout the inquiry, both in submissions
and from witnesses was the issue of regulating Telstra (and other telecommunications
carriers) in order to produce the best outcomes for customers everywhere
in Australia.
1.19 The need for government regulation was linked to two major areas
of concern:
i) Customer service; and
ii) Need for open competition.
1.20 The concern expressed took different forms, emphasised slightly
different aspects but the issue remained of primary importance in all
the evidence presented to the Committee's inquiry. The Committee will
deal with this issue in Chapters 2 and 3 of this Report.
1.21 The first area of concern is covered by Terms of Reference (c) (d)
and (e) and relates to issues of access, delivery and quality of services
throughout Australia but more particularly in rural, regional and remote
areas of the country. Those issues are addressed in Chapter 3.
1.22 The second issue (covered by part of Term of Reference (h)) was
of concern to a smaller group of witnesses including most of Telstra's
main competitors who argued that they had the potential, if given fairer
access (as they saw it) to the infrastructure to deliver a better service
to telecommunications customers.
1.23 This group included Optus, AAPT, Macquarie Corporate Telecommunications
and Global One and also representatives of the main consumer groups within
the telecommunications industry such as the Telecommunications Consumers
Network and ATUG. The regulatory issues raised by this group of submitters
and witnesses are addressed in Chapter 4.
1.24 The other issues raised in the Terms of Reference were each addressed
in only a few submissions to the Committee. They are dealt with in Chapter
5 of this Report.
The Benefits of Privatisation
1.25 The Department of Communications and the Arts considered that the
full privatisation of Telstra is a logical extension of the Government's
policy objectives in privatising one third of the company:
… the beneficial effect on Telstra's performance of market disciplines
imposed by investors' scrutiny and changes in the share price; maximising
Telstra's capacity to access capital in the private market; moving shareholder
risk to private shareholders; and enabling the retirement of significant
amounts of public debt. [12]
1.26 OASITO argued that full privatisation will bring additional
benefits to the ones already available as a result of partial privatisation
including:
- The ability for a full privately owned company to have a more flexible
and aggressive capital structure and greater access to capital.
- Making it easier for Telstra to find and develop partnerships it needs
to participate more fully in the information industry. [13]
1.27 In support of its position, OASITO cited British Telecom as a major
example of successful privatisation:
The evidence from overseas experience, in particular that of British
Telecom (“BT”) suggests that full privatisation provides a range
of benefits in terms of lower prices, improved service and reliability,
expanded customer choice and a wide range of new services. These improvements
in product service quality and customer choice have been accompanied by
improved financial performance. [14]
1.28 OASITO noted also the advantages that would result from eliminating
any perception of conflict in the roles of the Government as both regulator
and owner of the major carrier and stated that full privatisation would:
… create scope for competition to exert downward pressure on prices
to the benefit of consumers and business in general.
… produce [in combination with measures to enhance competition]
a broader range of products that consumers want and are willing to pay
for.
… where privatisation involves the proper alignment of interests
of employers and employees there is an improvement in employee relations
and productivity.
… produce economies in operating costs and also assist in increasing
revenues per employee. [15]
1.29 Over 40 major countries have privatised their previously government-owned
telecommunications companies and some of these companies have been fully
privatised. In evidence to the Committee, the Department of Communications
and the Arts's Secretary pointed out that North Korea was one of the few
countries to maintain full public ownership of its telecommunications
carrier [16] and stated that:
As competition has emerged, governments have realised that ownership
of the telecommunications carriers is not the most effective way of delivering
quality services and competition to consumers in those countries. As a
result there has been a worldwide move to privatisation of the previously
owned government owned telcos. [17]
1.30 Ord Minnett also argued that “the privatisation of public enterprises
and the trend of significant retail investment in those opportunities,
leads to more productive investment outcomes, higher levels of savings
and higher levels of net wealth over time”. [18]
1.31 In its submission, Telstra paid particular attention to the expected
benefits from full privatisation, including resolving the perceived conflict
with the government's dual role as part owner of Telstra, and the telecommunications
industry regulator. [19]
Full privatisation would bring additional benefits including the following:
allowing Telstra to move forward more strongly focused on meeting competition
from global communications companies; reducing the potential for conflicts
of interest between the government's shareholder and other regulatory
interests; improving transparency in the delivery of government objectives
under legislation; and having continuous performance assessment and greater
flexibility in accessing resources. [20]
Conclusion
1.32 It is difficult to estimate the exact effect on Commonwealth revenues
from the sale of the remaining two thirds of Telstra because of the many
variables that need to be assessed. However the Committee is satisfied
that the government's commitment to use the proceeds of the sale for the
purpose of retiring public debt will ensure that the beneficial impact
of the sale will be felt through all areas of the Australian economy and
benefit all Australians.
Footnotes
[1] Senate Environment, Recreation, Communications
and the Arts References Committee. Telstra: To Sell or not to
Sell? September 1996, Senate Environment, Recreation, Communications
and the Arts Legislation Committee. Telecommunications Bills Package
1996, March 1997, Refer also to the Senate Economics References
Committee. Inquiry into Public Equity in the Telstra Corporation Ltd,
March 1997.
[2] Submission No. 75, p. 603 (Office of Asset
Sales and Information Technology Outsourcing)
[3] Transcript of Evidence, p. 226 (Mr Suckling)
[4] Note: This figure is before accounting for
abnormal expenses, of which the biggest item was provision for redundancy
and restructuring.
[5] This dividend was not typical of the previous
years' trend. It included a `special dividend' of $3 billion.
[6] Telstra Corporation Ltd., Annual Report
1997, pp. 2, 68 and 71.
[7] Transcript of Evidence, p. 57, (Ms Bun)
[8] Transcript of Evidence, p. 247 (Mr Watson)
[9] Transcript of Evidence, p. 58 (Mr Horsley)
[10] Transcript of Evidence, p. 100 (Ms Campbell)
[11] Submission No. 65 (The Small Enterprise
Telecommunications Centre Ltd (SETEL)), p. 544.
[12] Submission No. 30 (Department of Communications
and the Arts), p. 139.
[13] Submission No. 75 (Office of Asset Sales
and Information Technology Outsourcing), p. 620.
[14] Submission No. 75 (Office of Asset Sales
and Information Technology Outsourcing), p. 602.
[15] Submission No. 75 (Office of Asset Sales
and Information Technology Outsourcing), p. 603.
[16] Transcript of Evidence, p. 191 (Mr Stevens)
[17] Transcript of Evidence, p. 189 (Mr Stevens)
[18] Submission No. 28 (Ord Minnett Limited),
p. 123.
[19] Submission No. 39 (Telstra Corporation
Ltd.), p. 278.
[20] Transcript of Evidence, p. 101 (Mr Rizzo)