CHAPTER 4
PRIVATISATION-FINANCIAL AND ECONOMIC CONSIDERATIONS
| There are significant economic and financial benefits
from retaining Telstra in full public ownership. Expert economic
evidence presented to the Committee suggested that the proposed
sale would significantly reduce the net worth of the public sector.
Moreover, international studies failed to establish a link between
the proposed change to ownership and efficiency gains. The Committee
considers that efficiency gains will flow under public ownership
from ongoing technological advances, good management, effective
regulation and competition. Finally, privatisation would have adverse
impacts on Australia's telecommunications research and development
effort and the development of our telecommunications equipment and
services industry. |
4.1 This Chapter focuses on the economic implications of privatisation.
The Government has argued that partial privatisation should be pursued
because this would result in efficiency gains, and because there is
a current international trend towards the privatisation of telecommunications
corporations. However, simply because a policy is widely adopted does
not mean it is necessarily beneficial, socially or economically. Having
examined the empirical evidence provided to it, the Committee remains
unconvinced that efficiency gains will flow from the proposed change
in ownership.
4.2 The Committee is concerned the Government has not given adequate
consideration to the budgetary implications of the proposed sale. Expert
evidence was provided which strongly suggested that the sale would result
in a significant reduction in the net worth of the public sector.
4.3 Finally, the Committee is gravely concerned about the likely impacts
of privatisation on employment levels, particularly in rural and regional
Australia. This would be exacerbated by the potentially detrimental
impacts of privatisation on the future of the Australian telecommunications
equipment industry and on Australia's research and development capacity.
4.4 Submissions in favour of partial privatisation of Telstra relied
heavily on a World Bank report published in 1992 entitled Privatization:
The Lessons of Experience, by Sunita Kikeri, John Nellis and Mary Shirley.
These submissions included:
- Department of Communications and the Arts [1]
- Department of Finance [2]
- BZW Australia [3]
- Chamber of Commerce and Industry of Western Australia [4]
4.5 The Department of Communications and the Arts referred to the World
Bank report as 'perhaps the most compelling overall review of the effects
of privatisation and its relationship with liberalisation'. [5]
In its supplementary submission, the Department noted that:
While there are many studies of various privatisations this is
the only comprehensive study we are aware of that covers a range of
privatisations and also attempts to analyse the outcomes on the basis
of comparisons to reasonable counterfactuals in each case. [6]
4.6 The Department of Finance also placed great significance on this
report, referring to it as a 'major study' and quoting at length from
the authors' conclusions [7]. In addition,
Telstra's submission relies on this report in support of its submission
that a change of ownership is necessary—'that privatisation related
efficiencies can[not] be achieved by corporatisation [alone]'. [8]
4.7 Contrary to assertions made in many of the submissions supporting
privatisation of Telstra, the 1992 World Bank report is not an empirical
analysis of the benefits of privatisation. As acknowledged in a 1994 World
Bank publication by Galal, Jones, Tandon and Vogelsang, it is a description
and assessment of privatisation policies rather than an analysis of what
happened, why it happened, and what it was worth. [9]
Parts of the 1992 report summarise the outcomes of another World Bank
study, the study which is discussed in the 1994 report by Galal et al.
Other parts of the report are little more than a series of assertions.
4.8 One part of the report discusses 'recent trends [that] show that
close to 7,000 enterprises have been privatised worldwide since the early
1980s.' [10] The report does not analyse
the circumstances of each of these privatisations in any detail. It does
not even list all of the enterprises which were privatised or each of
the industries in which privatisation occurred.
4.9 The Committee notes that of the 6 800-plus sales referred to
in Chapter 2 of the report, 4 500 were in
the former German Democratic Republic over the period of 18 months prior
to the report. [11]
4.10 The Committee also notes that 6 100 of the privatisations referred
to in Chapter 2 of the report occurred in Eastern
Europe, Latin America and the Caribbean. Just 170 of the privatisations
occurred in OECD countries. The Committee agrees with the Communications
Law Centre that:
Some caution would seem advisable in applying its conclusions
to the Telstra case. This is highlighted by the particular organisations
cited in places by the Study, as examples of the benefits accruing from
privatisation "a near moribund textile company in Niger",
"a finance company in Swaziland", "an agroindustrial
enterprise in Mozambique". [12]
4.11 As the Communications Law Centre noted, the overwhelming majority
of the cases referred to in this part of the Study are in countries which
were undergoing complete revolutions in the way their economies and societies
were organised, a far cry from Australia's position. [13]
4.12 In another part of the report, the authors summarise the outcomes
of World Bank research into the welfare consequences of the privatisation
of twelve firms in Chile, Malaysia, Mexico and the United Kingdom. The
cases cover telecommunications (three firms), airlines (four firms), electricity
(two firms), a lottery company, a port and a transport company. [14]
A number of the submissions in favour of privatisation, including that
of the Department of Finance, referred to this short summary rather than
the far more detailed report of the twelve case studies published in 1994.
[15] Other submissions selectively
quoted from the summary in some places and the more detailed report in
others.
4.13 The Committee obtained the World Bank's detailed empirical analysis
published in 1994, over 600 pages long, and compared that analysis with
the short summary in the 1992 paper by Kikeri et al. Whilst the brief
summary of the case studies in the 1992 paper caused Committee members
to have serious doubts about their relevance to the proposed privatisation
of Telstra, a close study of the methodology, analysis of the cases
and synthesis in the 1994 report confirmed that this work had little
relevance to the question of whether Telstra should be privatised.
4.14 The authors of the 1994 report themselves cautioned that:
We are less than sanguine when it comes to selection bias. Our
cases are by no means a random sample of public enterprises around the
world. [16]
4.15 As Professor Quiggin noted in his supplementary submission, most
of the analysis dealt with privatisation in less developed countries where
state-owned enterprises had been chronically unprofitable. [17]
The only major example of an OECD privatisation that was considered was
British Telecom.
4.16 The principal reason for privatisation offered by Kikeri et al
was:
evidence from a wide variety of countries shows that far too
many SOEs have been inefficient and have incurred heavy financial losses
… In many countries SOEs have been an unsustainable burden on the
budget and the banking system, absorbing scarce public resources. [18]
The Committee believes that these comments do not apply to Telstra.
4.17 The Committee accepts the view of the Communications Law Centre
that `the Study's findings on key points do not always support the stated
conclusions in favour of privatisation of Telstra.' [19]
In particular, the Committee notes the following comments in the summary
by Kikeri et al:
This is not to say that privatisation always and only produces
positive results; negative outcomes have occurred …
Mistakes are bound to occur … Experimentation with all available
privatization methods should be supported. As experience accumulates,
the methods that work best should be strengthened, and mistakes or oversights
corrected. [20]
4.18 The 1994 report notes: 'divestiture can induce changes in market
structures, and the results of these can be positive or negative.' [21]
4.19 The Committee notes that, whilst the World Bank takes a favourable
view of the outcomes of the sale of British Telecom, it is forced to concede
that, '…not much changes as a result of divestiture', that 'the main
winners were private buyers who paid £3,750 million (£1.19 per
share) for stock worth about £7,470 million (£2.85 per share)'
that 'the average residential consumer is quite possibly a net loser from
divestiture', and that there was a significant decline in quality of service
for several years following divestiture, which was only remedied by the
reimposition of regulation. [22]
4.20 Referring to the sale of the Chilean telecommunications carrier,
Compañia de Telefonos de Chile, the World Bank again noted that
divestiture caused a decline in quality of service:
The proportion of completed calls has declined, that of busy
signals has increased… [23]
4.21 The 1994 report concluded that privatisation of the Mexican telecommunications
carrier, Telefonos de Mexico, resulted in losses to consumers amounting
to $ Mex92 trillion ($ US33 billion). [24]
This was because metered calls increased by 620 per cent as a result of
a deliberate act by the Mexican Government in the year leading up to the
privatisation to enhance the value of the company:
… in an attempt to make the enterprise more attractive to
a potential buyer, the government undertook a major price and tax reform….
in which the telephone tax was scrapped and prices were permitted to
rise substantially. [25]
4.22 The report concluded that five of the 12 cases resulted in overall
losses to consumers, and in three cases these losses were substantial.
[26]
4.23 As the Communications Law Centre noted in its submission, the World
Bank repeatedly asserts that 'ownership matters' but, in fact, the case
studies highlight the importance of other factors in achieving sound policy
outcomes. [27] As the 1992 report noted:
Privatisation is a complement to, not a replacement for, the
other aspects of the development of the private sector … In many
instances privatisation will be less important for the growth of the
private sector than the emergence of new private businesses. [28]
In all but five cases, consumers were either left unaffected
thanks to competition or were considerably better off, as a result of
effective regulation. [29]
The 1994 report reinforces this, saying:
… gains are contingent on what policymakers do, especially
regarding competition, regulation and sale structure … we cannot
use the fact that our cases were on balance overwhelmingly successful
to predict comparable success elsewhere.
Success was caused, not by the simple act of divestiture alone, but
by divestiture in combination with a set of intelligent accompanying
policies, most notably regulation and sale conditions … When conditions
are not comparable, results may differ. [30]
4.24 The Committee notes that when the Department of Communications
and the Arts was asked to provide empirical evidence of the benefits
of privatisation separated out from the effects of competition, the
Department conceded that:
There are a number of examples and studies of successful privatisations
over the same period competition and/or corporatisation has also occurred.
In these cases it is difficult to separate the effects of privatisation
from the effect of competition and/or corporatisation. [31]
4.25 The only two cases to which the Department was able to refer the
Committee were two privatisations referred to in the 1994 World Bank
study. Neither of these privatisations involved a telecommunications
carrier. The first example which the Department provided was the example
of ENERSIS, a Santiago electricity distribution company. The Committee
considers that this case study is of minimal relevance to the proposed
privatisation of Telstra because ENERSIS is a monopolist operating in
an entirely different market setting to that in which Telstra carries
out business. ENERSIS was privatised during the period of the Pinochet
dictatorship. Further, one of the main welfare gains noted in the World
Bank's study of ENERSIS was a reduction in losses from theft and unbilled
use. The Committee received no evidence that Telstra suffered from inefficiencies
of this nature.
4.26 The second example offered by the Department was another Chilean
company, CHILGENER. CHILGENER was an electricity generating enterprise
which was privatised in 1987. The Committee's comments in the previous
paragraph about the irrelevance of the Chilean market setting apply
equally to this example. The Committee notes that the World Bank study
arbitrarily attributed just 1.5 per cent out of a total 6.5 per cent
productivity increase to a change in ownership. The Committee considers
that such a modest productivity increase in the case of a privatisation
occurring in circumstances wholly different to Telstra's operating environment
provides very little justification for privatising Australia's second
largest company.
4.27 In conclusion, the Committee considers that both the 1992 World
Bank report and the more detailed 1994 report fall a very long way short
of a ringing endorsement of the arguments being mounted in favour of
the privatisation of Telstra. Given the apparent lack of relevant empirical
analysis, the Committee considers the following observations by the
Communications Law Centre to be apt:
In considering the privatisation of Telstra, we are talking about
one of Australia's largest enterprises and its major participant in
arguably the most important industry for our economic and social future.
We need more than the rough confidence of a law of averages that says
privatisation is usually a good idea, but might not be in particular
instances. We have only got one Telstra to privatise and would rather
not end up as a curious exception 'a negative outcome' footnoted in
the next World Bank study, a failed experiment from which others might
learn. [32]
4.28 Apart from the World Bank report, submissions in support of privatisation
of Telstra relied on just two studies, published as:
- Megginson, Nash and van Randenborgh, Operating Performance of Newly
Privatized Firms: An International Empirical Analysis; [33]
and
- Donaldson, Privatization: Principles and Practice. [34]
4.29 The study by Megginson, Nash and van Randenborgh was relied on
by both the Department of Communications and the Arts and Telstra. Only
Telstra relied on the study by Donaldson.
4.30 The Committee considers that the study by Megginson, Nash and van
Randenborgh is of little relevance to the proposed privatisation of Telstra.
As the Department of Communications and the Arts conceded in its supplementary
submission, the study does not attempt to separate out the alleged welfare
gains from privatisation from welfare gains resulting from competition.
[35]
4.31 The Donaldson study appears to the Committee to be even less relevant.
That study, also carried out for the World Bank, is no more than a cursory
look at a large number of privatisations. The case studies include:
- The Polish Cement and Lime Sector
- Odessa Meat
- The Swarzedz Furniture Company in Poland
- The Trinidad and Tobago Methanol Company
- 'Textiles in Tunisia'
- Privatisation in Haiti.
4.32 Telstra did not attempt to explain the relevance of these case
studies to the proposed sale of one third of its shares. The Committee
rejects Telstra's description of the study as 'a major recent study
which focussed on the performance of seven international telcos'.
The British Telecom example
4.33 Many advocates of the privatisation of Telstra point to the example
of the privatisation of British Telecom as an example of a privatisation
of a telecommunications carrier in an industrialised nation that produced
benefits to consumers. These people often refer to a document entitled,
Pricing of Telecommunications Services From 1997, [36]
published by Oftel, the British regulator, in support of the proposition
that privatisation has resulted in lower prices. The Oftel document notes
that since 1984, the year the first 51 per cent of the shares in British
Telecom were sold to the public, prices have decreased by 40 per cent.
[37]
4.34 The Committee considers that such comparisons are misleading for
several reasons.
(a) There is little doubt that rapid technological change has resulted
in progressive cost reductions worldwide in key network areas such
as switching and transmission, and it is therefore reasonable to expect
significant price declines regardless of any change in ownership.
(b) Secondly, an examination of the influences on British Telecom's
prices over the period from 1984 strongly suggests regulation and
competition have had a much greater effect on the carrier's pricing
behaviour than has its change of ownership.
When British Telecom was partially privatised in 1984, the Government
set a cap for British Telecom's prices of the Retail Price Index (RPI)
- 3 per cent. Line rental charges were allowed to rise by RPI + 2 per
cent per year. This resulted in increased prices for residential consumers
throughout the remainder of the 1980s. [38]
In 1988 a new price cap of RPI - 4.5 per cent was set for the period
from 1 August 1989 to 31 July 1993. The basket of services subject to
the cap was expanded to include operator-assisted calls and any new
charged-for services. In 1991 Oftel changed the price control formula
from RPI - 4.5 per cent to RPI - 6.25 per cent. International calls
were added to the basket of services. In 1992, the price cap was changed
to RPI - 7.5% for the basket of main prices, to run from 1 August 1993
to 31 July 1997.
The Committee considers that Oftel's close monitoring of the price
cap formula indicates that privatisation has not of itself been enough
to produce an optimal result for consumers.
(c) Thirdly, the Oftel document does not attribute decreases in prices
to ownership change. There is no mention of privatisation having any
effect on prices anywhere in the Oftel study.
(d) Fourthly, the Oftel study notes that business customers benefited
most from price decreases, with residential customers receiving reductions
amounting to only 1 per cent. [39]
(e) Fifthly, the Committee notes that there is some controversy as
to whether residential customers in the United Kingdom have received
any benefits at all from overall price decreases.
4.35 The Public Sector Research Centre at the University of New South
Wales referred in its submission to a report of the National Consumer
Council in the United Kingdom which reported that:
The trends in charges for telephone services important to domestic
customers have risen over the years relative to the charges for services
used mainly by business customers. This especially applies to the cost
of local calls. [40]
The same report noted:
The cost of calls made from public payphones has increased dramatically
over the last few years. [41]
4.36 The Committee notes that these statements are consistent with
the conclusion of the 1994 World Bank report, referred to earlier in
this chapter, that:
4.37 The Committee concludes that the evidence of benefits to consumers
as a result of the privatisation of British Telecom is far from compelling.
The Committee concurs with the comments of the Communications Law Centre:
They appear to have credited everything good that has happened
to British Telecommunications consumers to privatisation, as if these
British enterprises had invented optical fibre cable. Of course, those
price reductions have been occurring everywhere in the world. In fact,
they have been occurring more slowly for most of the period of privatisation
in Britain than elsewhere. [43]
4.38 There is little doubt that Telstra has a very high degree of market
power in many markets. The Minister has referred to Telstra as 'the Australian
equivalent of the 600 pound gorilla.' [44]
This market power appears to the Committee to be a significant feature
the proposed privatisation, yet very little consideration was given in
any of the submissions in favour of privatisation to this fact. No witness
gave any evidence to suggest that Telstra's market dominance would disappear
in the foreseeable future. The Committee notes that BZW Australia is of
the view that new carriers after July 1997 and the larger service providers
will obtain increases in market share graduallyin the order of 5-10% of
the corporate, business, long distance and international markets over
five years. Telstra's own growth is likely to continue to exceed that
of these players in aggregate. [45]
4.39 As the 1994 World Bank report notes, in competitive industries privatisations
are likely to result in small welfare gains. But in monopoly industries
welfare gains are more variable, with large gains possible but also the
possibility of large negative outcomes. [46]
The World Bank report cautioned that a key feature of privatisation of
monopolies was what they termed the 'fundamental trade-off' of divestiture:
that against any efficiency improvements must be weighed the possibility
of increased exercise of monopoly power.
4.40 These cautions against privatising monopolies are echoed in the
Hilmer Report on National Competition Policy. [47]
The Hilmer Report noted that privatisation is less likely to offer significant
public benefit if appropriate structural reforms are not carried out before
or concomitant with the privatisation, possibly entrenching the monopolistic
structure of the industry. [48] The
Government may argue that it is in fact undertaking appropriate structural
reforms prior to the sale. However, as the Committee has not yet seen
the Government's package of legislation to operate from 1 July 1997, it
is not in a position to judge whether that is correct. As discussed in
Chapters 2 and 8, the Minister's
May 1996 Discussion Paper on Post 1997 Telecommunications Legislation
shows there is still considerable uncertainty on a range of important
issues.
4.41 The Committee considers the following observations of the Hilmer
Committee to be of particular significance to the current Inquiry:
The concerns in this area are more pronounced when one considers
that privatisation may be driven by budgetary goals as well as efficiency
objectives, and that businesses with a substantial degree of market
power may attract premiums on sale. These concerns have led commentators
to warn of the dangers of trading 'cash for competitiveness' when privatising
government enterprises. Governments considering privatisation must often
choose between short-run revenue objectives and longer-run costs to
the economy associated with transferring the ownership of a business
which has not been properly restructured to the private sector, where
there are fewer constraints on profit-maximising behaviour. [49]
4.42 In light of the evidence examined above, the Committee rejects the
assertion that there is a direct and inevitable link between economic
performance and type of ownership. This is reinforced by the fact that
the performance and efficiency of Government owned enterprises can and
has been extensively improved under public ownership. The significant
efficiency improvements attained by Telstra to date were outlined in Chapter
3.
4.43 The Committee further notes that the former Economic Planning Advisory
Council (EPAC) found that in the twelve years up to 1990-91, the annual
average growth in total factor productivity for all Australian government
business enterprises was 4.1 per cent compared with only 0.2 per cent
for the private sector. In the communications sector of the total factor
productivity of government business enterprises, TFP rose by 18.9 per
cent between 1991-92 and 1992-93. [50]
4.44 The Committee is of the view that the beneficiaries of a partial
privatisation of Telstra would be a few private individuals, and not the
people of Australia who are the current beneficiaries. While the Government
argues that the 'broader Australian community' will be able to buy shares
in Telstra [51], the Committee notes
that only 18 per cent of Australians own any shares and that the majority
of shareowners reside in the three eastern states of New South Wales,
Victoria and Queensland. This localised, and metropolitan, minority will
be one of the beneficiaries of the proposed Telstra sale.
4.45 The Committee concludes that the financial losers will be the
people of Australia who will no longer own a valuable public asset,
and will no longer benefit from the considerable flow of profits from
the asset.
4.46 It is commonly accepted that remuneration for senior executives
is higher in the private than the public sector, and that top executives
have done substantially better with salary packages as public utilities
are privatised. Professor Quiggin noted:
It has been typically the case that the incumbent management
has stayed in place and has received very large increases in salaries.
[52]
4.47 This same point was made strongly by the Public Sector Research
Centre:
This is borne out by British figures which have been culled from
privatised utilities' annual reports: top executives in the water, gas,
electricity and Telecom companies enjoyed pay rises averaging around
65% in the year to 1991...Two thirds of the top paid directors in each
utility company received a pay rise of 50% or more, including 5 executives
whose salaries more than doubled. These increases have considerably
widened the gap between the directors and the workers in those companies.
Average top directors' pay in utility firms increased for [UK pounds]
93614 to [UK pounds] 154,637 form 1990 to 1991 … Clarke (1993)
identifies yearly increases after privatisation in some UK industries
as being 242% (British Airways) 215% (Enterprise Oil) 93% (National
Freight Consortium) while workers annual increases were of the order
of 6 or 7% … Such disparities only serve to widen the gaps in wealth
… and inhibit industrial democracy. [53]
4.48 It was noted in Chapter 3 that the Chief
Executive Officer of Telstra already receives more than $ 1.2 million
pa in salary as well as additional bonuses.
4.49 In conclusion, the Committee is concerned that efficiency will
be measured almost exclusively in terms of the number of jobs that can
be removed and that this will be accompanied by steep rises in terms
of the salaries of senior management. The Committee notes that even
if efficiency gains are made under private ownership, there is no reason
to assume that the benefits of such gains would be passed on to consumers
in the form of lower prices. Nor does the public have any assurance
that such gains will be reinvested into the enterprise for the purposes
of job creation or fostering research and development. As Telstra possesses
a strong degree of market power, competitive pressures will not be sufficient
to ensure an optimal outcome.
Employee share ownership
4.50 Proponents of privatisation emphasise the opportunity this provides
for Telstra staff to own shares in the corporation. It is argued this
will foster a higher level of performance and efficiency. However, the
employees of Telstra, along with the Australian public, already "own"
shares in the company. The Committee notes further that when British
Telecom was privatised, all workers were issued a small number of shares.
Because the float was drastically underpriced, the value of the shares
increased markedly on the first day of the privatisation. Workers were
able to sell their shares at a profit, completely destroying the purpose
of issuing them to employees. On the other hand, senior executives are
often given very large parcels of shares at such times and can afford
to hold on to them, making large profits, free of capital gains tax
until the time of sale.
Impact of privatisation on the net worth of the public sector
4.51 Aside from a belief that private enterprise is inherently more
efficient, the sale is being driven by the fact that it provides an
immediate source of revenue for the Government.
4.52 The Government has stated the attainable sale price to be $24 billion,
[54] which means that a third of Telstra
would sell for $ 8 billion. [55]
(Refer Table 4.1). The Government has claimed it will use $7 billion of
the revenue it expects to generate from the sale to reduce its net debt,
thereby saving money on interest repayments. The remaining $ 1 billion
of the sale revenue is to fund environment programs.
Table 4.1 Estimated value of Telstra Corporation
a. Attainable sale price
| Value |
Date |
Reference |
| less than $20 billion |
1993 |
based on Fightback policy estimates |
| $24 billion |
1996 |
Government figure [56] |
| $28 billion |
1996 |
BZW Australia [57] |
| extra $5 billion |
if float delayed and regulatory risk lowered
|
Prof. J. Quiggin [58] |
| less ? $billion |
as a result of foreign ownership restrictions
|
Prof. J. Quiggin [59] |
b. Value if kept in public ownership
| Value |
Date |
Reference |
| $54 billion |
1996 |
Prof. J. Quiggin [60] |
4.53 The Committee rejects the view that this proposed expenditure
constitutes a justification for turning an enormously profitable public
enterprise into Australia's second biggest private corporation capable
of wielding tremendous market power.
4.54 Telstra currently returns significant dividends to the public
sector and the Committee notes that no persuasive evidence was put to
it suggesting that this would not continue into the foreseeable future.
If anything Telstra's profitability is expected to continue growing.
In the 1994/95 financial year, Telstra provided $944 million in dividends
to the Government. This was an increase from $738 million in the previous
financial year. Together with interest and taxes the Commonwealth Government
received $2.732 billion from Telstra in 1994/95. With record profits
foreshadowed in the press for the 1995/96 financial year, returns are
expected to increase.
4.55 The Committee notes that Telstra, contrary to the majority of
cases in the World Bank report referred to earlier, is not a burden
on the Budget. No impetus for divestiture of Telstra can therefore be
derived from the argument that this would ease any burden on taxpayers.
Far from being a burden, public ownership of Telstra is returning a
healthy dividend to the Government. The Government is able to utilise
these funds, which are returned to consolidated revenue, to fund expenditure
programs or repay interest or capital on existing public sector debt.
The Community and Public Sector Union argued on this basis that Telstra
should be retained in public ownership:
We say that Telstra should remain a wholly owned government business
enterprise because the wealth created by this successful enterprise
is used to cross-subsidise services to the general Australian community
at an affordable level and at a high standard; in particular, in relation
to the universal service obligations. We also say that Telstra's revenue
flow is used to fund government expenditure on health, education and
other government services. [61]
4.56 If, after selling a portion of Telstra as proposed, the Government
is able to reduce the stream of future interest payments on the debt
by the same amount as the income flow from Telstra which would have
been used to pay the interest on the debt, then the net worth of the
public sector would remain unaltered. The level of public debt would
fall, but so would the value of public assets.
4.57 However, expert evidence was provided to the Committee which strongly
suggests the proposed sale will result in a reduction of the Government's
net worth. This would occur if the interest saving in public debt from
selling Telstra is less than the future profit stream foregone. Professor
John Quiggin and Dr Allan Brown, who submitted detailed studies to
the Committee, argued this point. [62]
4.58 In his submission to the Senate Telstra Inquiry, Professor Quiggin
estimates that the value of Telstra in public ownership is $ 54.4
billion. This estimate is based on Telstra's after-tax profits and comparing
these with the net sale proceeds that would be required to generate
similar savings in public debt interest (Refer Table 4.1). According
to Professor Quiggin:
the appropriate valuation procedure for a publicly owned asset
such as Telstra is based on the saving in public debt interest represented
by the flow of profits of the enterprise. [63]
4.59 A fundamental error occasionally made by analysts attempting to
estimate the value of public assets is that they focus attention on
the flow of dividends remitted to the Budget sector, rather than on
the flow of profits. In doing so, retained earnings which are reinvested
in the enterprise are ignored. Professor Quiggin argues that this error
was made by the Department of Finance:
The [Department of Finance] submission makes the elementary error
of comparing the public debt interest savings arising from privatisation
with the dividends paid by Telstra rather than the earnings of Telstra
including retained earnings. This procedure is defended on the basis
of fallacies that were refuted decades ago, such as the view that retained
earnings are 'locked up' and therefore of no value. This claim is erroneous
since reinvested earnings will generate a higher stream of income in
the future, and are just as valuable as dividends. [64]
4.60 According to Professor Quiggin, while the Department of Finance
acknowledges that retained earnings will increase the value of Telstra,
they do not take into account this cost when computing the loss of income
associated with the share that is sold. He further argues that once
the error of comparing interest flows with dividends, rather than profits,
is corrected, the Department's own analysis would show a loss arising
from the partial sale of Telstra:
Once this error is corrected, the Department's approach would
yield results consistent with those in my submission. [65]
4.61 The Committee is concerned that the Government has given insufficient
consideration to the impact of the proposed sale on the net worth of
the public sector. The attractiveness of the transaction depends on
the full value of relative returns earned by the Government from its
continued public ownership, relative to the cash flows avoided by reducing
public debt interest commitments. On the basis of the evidence provided,
the Committee feels there is significant cause for concern that the
proposed sale will significantly reduce the net worth of the public
sector.
Telstra sale revenue to fund environment programs
4.62 The Government has announced that it plans to allocate $1 billion,
of the expected $8 billion in revenue from the sale, to the Natural Heritage
Trust of Australia. [66] This Trust
was outlined in the Coalition's policy document, "Saving our Natural
Heritage", issued prior to the 1996 election, and further detailed
in the Financial Impact Statement of the Telstra (Dilution of Public Ownership)
Bill 1996, and of the National Heritage Trust of Australia Bill 1996.
4.63 In accordance with the provisions of the Bill, five environment
"projects" (including research, policy and audit) would be funded
over the five-year period 1996-97 to 2000-01, at a cost of $ 700
million (or an average of $ 140 million pa). [67]
It is the belief of the Committee that these programs, which were already
in place under the previous government, and are not capital expenditure
projects, should be funded from general revenue and not from asset sales.
4.64 The remaining $300 million of the Trust would be invested in the
year 2001, and interest would be used for environmental and natural resource
management projects. Interest, after inflation, would amount to between
$10 million to $ 18 million pa. [68]
The Committee considers this is a poor return to the Australian public
compared to the $112 million pa that a $1 billion dollar "share"
of Telstra currently returns to the Government. [69]
4.65 The Committee views the Government's attempt to link the sale
with funding of their environment policy highly critically. The question
of whether the proposed environmental package is desirable or affordable
is independent of the partial sale of Telstra. Indeed, if analyses like
those of Professor Quiggin and Dr Brown (referred to above) are correct,
the Government will actually be less able to afford environment funding
if it does sell part of Telstra:
The inclusion of revenue from privatisation in measures of the
Budget deficit or surplus is misleading and deceitful. The sale of assets
has no bearing on the Government's capacity to afford current expenditure
programs, except insofar as the price received for the asset differs
from its value in public ownership. Since price envisaged for Telstra
is less than the present value of its future earnings, the sale of Telstra
will reduce the Government's capacity to fund future expenditure. [70]
4.66 The Committee is concerned that the broad Australian community
is being misled into believing the Government will not be able to afford
to meet its election commitments on the environment if it does not sell
part of Telstra. However, evidence was received by the Committee pointing
out that even if the sale of Telstra were profitable, earmarking revenue
from the proposed sale for the proposed environment programs represents
a potentially undesirable development in public policy. Professor Quiggin
stated that:
As observed by the Commonwealth Treasury in its 1996 Summer Roundup
the practice of hypothecation (linking particular sources of revenue
to particular expenditure programs) is undesirable even when there is
some apparent link between the revenue source and the expenditure area.
In the present case, where there is no such linkage, hypothecation is
even less desirable. [71]
4.67 The Committee firmly believes that the environment, like any other
portfolio, deserves to be funded in its own right from consolidated revenue,
and should not be made conditional upon exogenous policy developments,
such as the partial sale of Telstra. The Committee is concerned that the
sale of Telstra will reduce the public sector's net worth, and thereby
reduce the Government's capacity to pay for projects of national significance,
such as environmental preservation.
| RECOMMENDATION 5:
The Committee recommends the environment programs of the Government
be funded from recurrent expenditure or a proportion of Telstra's
profits, not from the partial sale of Telstra. |
4.68 The Committee agreed that it was undesirable to have Australia's
national telecommunications carrier under foreign control and recognised
the need to restrict foreign ownership. Ownership limits are found in
Divisions 4-7 of the proposed new Part 2A of the Telstra Act. The Bill
proposes that 35 per cent of the one-third share issue in Telstra can
be held by foreign investors. The 35 per cent is further diluted by
a restriction that an individual foreign investor is limited to 5 per
cent of the one-third. Overall, this means that foreign investment is
limited, at present, to 11.666 per cent of Telstra as a whole.
4.69 Two issues are of relevance here. Aggregate and individual foreign
ownership of Telstra is below the foreign investment notifications limits,
so foreign investors can simply acquire the publicly listed shares up
to the permitted levels. Individual foreign ownership is limited to 1.666
per cent (5 per cent of one third) of Telstra and therefore well below
the limit required for notification to the company of significant individual
shareholding in a publicly listed company (the threshold figure for a
'substantial interest' requiring notification is 5 per cent). [72]
4.70 The Bill allows for 35 per cent of one-third of the Telstra shares
to be bought by foreign nationals. There was concern that this control
would be unmanageable. Various mechanisms can be deployed by investors
to circumvent foreign ownership restrictions. The Communications, Electrical
and Plumbing Union noted in its submission that in the case of Qantas,
which has a nominal 49 per cent foreign shareholding ceiling, foreign
funds have used derivatives created by local financial institutions to
circumvent the restrictions. [73]
4.71 The telecommunications industry, as a result of market deregulation
and competition, is increasingly being penetrated by foreign competitors.
Optus Communications is at least 49 per cent foreign owned, and Optus
Vision at least 47.5 per cent. [74]
Vodafone is 95 per cent owned by the United Kingdom company, Vodafone
plc, (although it does have a licence condition to achieve majority Australian
ownership by 1 July 2003). There was concern by the Committee, which reflected
that widely held by the community, that Telstra, if privatised, would
follow this route.
4.72 Pressure for foreign ownership restrictions to be assessed for
the industry as a whole, and not in a piecemeal fashion, with different
conditions applying to each carrier, will continue to mount. In its
submission, Vodafone argued:
... foreign ownership restrictions on Telstra need to be assessed
in a broader context of foreign ownership limits on other carriers and
what impact this might have in the longer term on the development of
competition in the telecommunications market. [75]
4.73 The Committee noted that it would be very difficult for the Government
to retain the proposed foreign ownership restrictions for a fully or
largely privatised Telstra if the same restrictions are not imposed
on its competitors. The Committee is also aware it is extremely unlikely
that such onerous foreign ownership restrictions will be imposed on
all carriers and service providers in the post 1997 environment.
4.74 Further pressure to increase the level of foreign ownership will
arise from a recognition of the limited scale of domestic sharemarket
funds. A higher sale price would therefore be attainable by allowing
increased foreign ownership. Although the Government has announced it
will not pursue this option at present, there will be tremendous pressure
to do so in the lead up to a further dilution of ownership.
4.75 In the end, Australia is likely to find itself with largely foreign
owned and controlled telecommunications carriers. This will have a serious
impact on the viability of domestic research and product development
and procurement activities which are vitally important to the ongoing
development of Australia's telecommunications industry. Moreover, concern
was raised that if Telstra were taken over by a foreign based transnational
telecommunications company, this could result in great pressure from
the company to keep Telstra from expanding into Asian markets and competing
against it. The Public Sector Research Centre noted:
Foreign shareholders are likely to be Telstra's current competitors
in overseas markets, who would have no interest in maintaining Telstra's
successful role in exporting its services and reducing Australia's current
account. [76]
4.76 Another concern of the Committee is that foreign investment results
in dividend payments to shareholders that are repatriated, and this outflow
of Telstra's profits impacts on Australia's current account deficit. [77]
4.77 The Committee is unable to form an opinion on the part of term of
reference (m) which deals with whether
investment restrictions take account of regulation and monitoring of financial
transactions and currency flows, as insufficient evidence was presented
to the inquiry on this issue.
4.78 The Committee concludes that, in the long run, it is likely the
foreign ownership restrictions will prove ineffective. A combination
of the desire for extra revenue, rationalised by the need for uniformity
across the industry, will eventually drive the Government down the path
of easing foreign ownership restrictions.
Timing of float
4.79 All witnesses, irrespective of whether they were for or against
privatisation, recognised the fundamental importance of establishing the
post 1997 regulatory framework before the float proceeded. For example,
the merchant bank, BZW Australia, emphasised the need to clearly define
the new regulatory environment before potential shareholders are asked
to risk capital in buying Telstra shares. [78]
According to Professor Quiggin:
The critical point is, of course, that by selling before those
decisions have been made then you force private buyers to bear the risk
of how that is going to come out. [79]
All witnesses who commented on this issue agreed that to do so would
result in a lower sale price than could be attained if the Government
had waited. The ultimate cost would be borne by the Australian public
(Refer Table 4.1).
4.80 The Government's haste to sell Telstra means that long-term investment
decisions within the Corporation are being compromised by pressure for
short term returns that may appear attractive to investors in the prospectus.
The Gungahlin Broadband project, which was to have been piloted in the
ACT, appears to have been put on hold for this reason. [80]
4.81 The Committee concludes that the Government has an unworkable
timetable with regard to the float, based on 'wishful thinking'. Even
if the Bill were passed by the Senate, preparation of the prospectus
and due process of public scrutiny would mean that the float could not
be as soon as the Government proposed.
4.82 It is very unlikely that the sale could be completed by 30 June
1997, the original commitment by the Government. [81]
Department of Finance pre-election estimates, provided in response to
a recent question on notice to Senator Tierney, suggest that two-thirds
of the sale proceeds will be received by 30 June 1997 and the remaining
one-third by 30 June 1998.
4.83 These pre-election estimates are unrealistic. It now seems unlikely
that the full proceeds of the float will be available until the 1998/99
financial year. This means that the full proceeds may not be available
in this term of the Parliament—and this also means that the related
environment package may not be funded in the present term of Government.
Cost of float and other privatisation costs
4.84 The Committee is concerned at the likely high transaction costs
of the privatisation. The Department of Finance admitted to the figure
of $160 million, at 1996 costs, at a Canberra hearing early in
the inquiry:
… the scoping study itself is developing
figures for the government in the budget context for the likely cost
of the privatisation. However, on the public record was the Department
of Finance's costing of coalition election commitments. We used a rule
of thumb figure that the cost of a sale of this magnitude would be in
the order of two per cent of the sale proceeds. So the cost of the privatisation,
if the realisation was $ 8 billion, would be of the order of $ 160
million. [82]
If the sale were delayed beyond present plans, the cost would be higher
as it would be if one-third of Telstra were sold in extra instalments.
Of course, the cost to privatise all of Telstra would be at least three
times higher or more than half a billion dollars by then.
4.85 These costs include preparation of the prospectus and share registry
management. However it is unlikely that the huge cost of redundancy pay-outs,
to reduce Telstra's workforce prior to privatisation, as Senator Colston
pointed out, has been included. [83]
The Committee considered this an important omission from Telstra's evidence.
A rough estimate of redundancy pay and superannuation payouts for 30 000
retrenched workers, at an average of $40 000 each, comes to $1.2
billion.
Telecommunications equipment industry
4.86 One of the Committee's major concerns about the proposed privatisation
relates to its likely adverse effects on the telecommunications equipment
industry in Australia. Telstra stands at the heart of the Australian
electronics industry — an industry which, over the last decade,
has massively improved on its export performance and likewise on its
import replacement performance.
4.87 A wide range of telecommunications equipment is currently produced
in Australia. Major categories of locally-produced equipment include:
(a) switching systems
(b) cellular mobile base stations
(c) terrestrial cable (optical fibre and metal)
(d) submarine cable
(e) telephone handsets
(f) PABXs
(g) cellular telephones.
4.88 The Allen Consulting Group calculated that in 1991 the Australian
telecommunications equipment industry would produce $2.8 billion worth
of equipment including $250 million for export markets. By 1993, the
industry's sales in local and export markets were estimated at $3.2
billion and employment was estimated at 11 000 people.
4.89 Australian equipment suppliers fall into four main groups on the
basis of ownership and revenue:
(a) established local arms of overseas companies, such as Alcatel,
Ericsson, NorTel, Siemens, NEC, Philips, Nokia, Fujitsu, MM Cables,
GEC and Plessey Telecommunications;local companies with annual telecommunications
revenue of over $100 million, for example, Exicom, Olex Cables, Datacraft
and AWA;
(b) (c) local companies with annual telecommunications revenue between
$20 million and $100 million, such as JNA Telecommunications, Scitec
Communications Systems, MITEC, ERG Telecommunications, Jtec and Stanilite
Pacific; and
(d) about 200 small, local companies.
4.90 Exports of telecommunications equipment have increased rapidly in
recent years. The Bureau of Transport and Communications Economics noted
that data prepared by the Australian Electrical and Electronic Manufacturers'
Association showed that exports rose from $80 million in 1989 to $360
million in 1992 and $550 million in 1993. Australian Bureau of Statistics
figures show a rise in exports of telecommunications equipment from $287
million in 1991-92 to $483 million in 1992-93 and $643 million in 1993-94.
[84]
4.91 The Committee notes the achievement of export sales by Australian
telecommunications equipment manufacturers has been achieved in a number
of ways including:
(a) supply of equipment for major infrastructure projects undertaken
by Australian carriers in overseas countries, for example, a joint
venture partnership between Olex Cables and Telstra to install optical
fibre cable in Pakistan;
(b) selection of the Australian subsidiaries of several overseas
companies as suppliers of equipment for overseas affiliates, for example,
designation of Ericsson's Australian subsidiary as one of only three
suppliers of radio base station equipment for Ericsson's global network;
(c) partnership arrangements between Australian firms and overseas
companies which provide a basis for contracts to supply equipment
to the overseas affiliates of these companies, for example, Exicom's
five-year contract to supply its partner NorTel with telephones for
the senior executive market in North America;
(d) supply of equipment for telecommunications projects assisted
by government facilities such as the Development Import Finance Facility,
for example, contracts by Alcatel Australia to supply exchanges for
projects in China; and
(e) sales of equipment by Australian manufacturers to unaffiliated
suppliers or consumers in overseas countries.
4.92 A range of telecommunications equipment is exported from Australia
to a variety of regional markets of which Asia is the largest. Australian
Bureau of Statistics data indicate that the largest individual country
markets in 1993-94 were China (7 per cent of equipment exports), Hong
Kong (5 per cent), the United States (3 per cent) and Sri Lanka (3 per
cent). Major exports include:
(a) cable (optical fibre and submarine)
(b) switching systems
(c) customer premises equipment
(d) rural microwave links
(e) multiplexers
(f) power systems
(g) transmission products
(h) data communication products
(i) mobile telecommunications products.
4.93 While the equipment industry's growth and export capabilities are
impressive, they are heavily dependent on the carriers and in particular
Telstra. Telstra is committed, under its 1992 Industry Development Plan,
to spending $10 billion on information technology and telecommunications
equipment and services in the five years to 1997. [86]
On 1 July 1994 Telstra commenced its Future Mode of Operations (FMO) project,
a six year plan designed to achieve full network digitisation at a cost
of $3.3 billion. Major equipment suppliers are Alcatel, Ericsson and Siemens.
The factories of both Ericsson and Alcatel are working 24 hours a day
to keep up with the FMO project's demands. [87]
The Committee received evidence that Alcatel is receiving $1.1 billion
from this project, while Ericsson is receiving $850 million and Siemens
is receiving $500 million.
4.94 In a study of the Australian telecommunication commercial and
regulatory environment, CIRCIT concluded:
The telecommunications industry in Australia ... is heavily dependent
on carrier procurement. Telecom will undoubtedly remain the major customer
for the industry for the next few years, regardless of ... export growth.
Hence the relations between Telecom and the suppliers of its core industry
requirements remains a major determinant in the evolution of the equipment
industry. [88]
4.95 The Committee believes that privatisation of Telstra will rapidly
erode the equipment industry's achievements. It is proposed that under
the post 1997 telecommunications legislation, carriers will continue
to be subject to industry development obligations. Many witnesses who
supported privatisation made much of this fact, suggesting that this
means that industry development arrangements will remain unchanged if
Telstra is privatised. These arguments overlook the nature of the carriers'
'obligations' under industry development plans.
4.96 The carriers' industry development 'obligations' derive from clause
14 of the Telecommunications (General Telecommunications Licences) Declaration
(No 1) of 1991. That clause provides that a carrier must maintain and
implement a plan for the development of the Australian supply and information
industries in conjunction with its business and that these plans must
be submitted to the Minister (Cl. 14.2). Carriers must also report
to the Minister each year on progress made in implementing their plans
(Cl 14.6). A carrier 'must have due regard to any views of the
Government expressed to it by the Minister on its progress in implementing
the plan' and must 'notify the Minister promptly of any action it takes,
or proposes to take, in response to those views' (clauses 14.7 and 14.8).
That is the extent of a carrier's industry development obligations.
4.97 Committee members were very concerned that the Declaration does
not give rise to any enforceable obligation to purchase a specified
percentage of Australian content and is little more than a 'best endeavour'
requirement. However, Committee members noted that if the Australian
Parliament attempted to impose more binding legislative requirements
on carriers, it would run foul of the entire movement of world liberalisation
of trade over the last decade or so. It could not impose such requirements
without earning massive retaliation.
4.98 The Australian telecommunications equipment industry currently
relies on an understanding by the directors and management of Telstra
that the Government expects Telstra will acquire the bulk of its equipment
and services domestically. If Telstra is privatised, its sole focus
will be upon achieving its equipment requirements from the cheapest
possible source. It will have no alternative, given the legal obligation
of the directors of the company to have as their primary consideration
the goal of optimising the value of the operations to their shareholders.
4.99 The Committee considers that it is worth reflecting on what has
happened to the New Zealand equipment industry since Telecom New Zealand
was privatised. That industry has withered away. Alcatel and Ericsson
are now the only two telecommunications manufacturers with substantial
operations in New Zealand. GEC, Philips and Mitel have gone. The Committee
heard evidence that according to Statistics New Zealand, exports of telecommunications
equipment fell from $ 6.6 million in December 1988 to $ 5.4
million in December 1992. Network equipment imports increased dramatically
from $ 179 million in 1988 to $ 274 million in 1990. [89]
4.100 The Committee concludes that the only means of guaranteeing that
Telstra will remain committed to the local equipment industry is for Telstra
to remain in full public ownership.
| RECOMMENDATION 6:
The Committee recommends the continuation of the current industry
development arrangements, noting the importance of sustaining an export
oriented manufacturing sector to offset imports of telecommunications
technologies. The Committee notes the likelihood that the that the
value of such arrangements will be substantially eroded if Telstra
is privatised. |
| RECOMMENDATION 7:
The Committee recommends the Telecommunications Industry Development
Authority be retained and its monitoring arrangements be strengthened.
|
Research and Development in the communications industry
4.101 Australia is a highly sophisticated and intensive user of communications
and computing products. By and large, however, Australia has not been
a major producer or exporter of such hardware. Exports of computing and
telecommunications equipment increased 29 per cent between 1985-86 and
1995-95. Yet, by 1994-95, exports amounted to only about one-sixth of
imports and the trade deficit in these products was about $7 million [90]
The components in the HFC (Hybrid Optical Fibre Coaxial) cables currently
being rolled out by both Telstra and Optus, for example, are largely provided
from overseas.
4.102 Australia must develop internationally competitive industries
to reduce our excessive dependence on commodity exports and counter
the impact which increased import penetration of manufactured goods
is having on the level of employment and on our current account. While
the terms of trade in agriculture and mineral exports have effectively
stagnated, in manufacturing they have risen solidly over the last few
decades.
4.103 The Committee is of the view that the key to creating competitiveness
lies in innovation, not in reducing wages and labour standards. Research
and development plays a critical role in the innovation process and
in underpinning the competitiveness and export capacity of firms:
While the linkages are undoubtedly complex and difficult to assess
with any certainty, we conclude that there is a powerful body of evidence
linking increased investment in business R&D to increased exports.
[91]
4.104 The importance of R&D in the telecommunications industry
is furthered by ever shortening product life-cycles.
4.105 Policies of the Australian Government over the last decade, such
as the introduction of the 150 per cent tax concession, generated one
of the fastest OECD growth rates in the level of business investment in
R&D as a share of Gross Domestic Product. Yet, despite such impressive
gains, by international standards Australia retains one of the lowest
levels of business expenditure on R&D in the OECD. In 1992, Australia's
ratio of business expenditure on research and development to gross domestic
product was 0.7 per cent compared to an OECD average of 1.2 per cent.
The top ranking countries, Sweden, Japan, United States, Switzerland and
Germany had significantly higher ratios (2.1, 2.1, 2, 1.9 and 1.7 per
cent respectively). [92]
4.106 The Committee notes with concern that in the 1995-96 Budget,
the Government has announced a steep decline in assistance for business
R&D, including scaling back of the 150 per cent tax concession to
a rate of 125 per cent. The Committee is concerned this measure will
reduce Australia's appeal as an R&D investment location in the Asia-Pacific
region. At the same time, Australia's competitors are vigorously promoting
investment in research as a means of building knowledge-based economies.
Both Malaysia and Singapore, for example, offer a top rate of concession
of 200 per cent. New Zealand, by contrast, which offers a 100 per cent
concession languishes in the R&D stakes, with business spending
at only 0.29 per cent of GDP on research in 1992.
4.107 The Committee is therefore concerned about the Government's commitment
to improving Australian industry's research capacity. Moreover, the
Committee is particularly concerned that the Government has not given
sufficient consideration, if any, to the impacts which privatisation
of Telstra would have on the overall research capacity of the domestic
telecommunications industry.
Telstra Research Laboratories (TRL)
4.108 TRL is Australia's leading telecommunications research and engineering
centre and the largest telecommunications research facility in the Southern
hemisphere.
With Telstra as a government owned corporation, Telstra Research
Laboratories (TRL) has conducted and sponsored much of the R&D required
for the national interest. In effect, TRL was Australia's equivalent
to CSIRO for public R&D in telecommunications. [93]
4.109 The central role performed by TRL extends beyond the production
of world class research:
TRL also plays a significant role in the promoting, organising,
sponsoring and participating in all Australian telecommunications research
conferences. Telstra, through TRL, funds the "Telecom Undergraduate
Scholarships", has sponsored the Australian Mathematical Olympiad
Committee, provides support for many university based research activities
(mainly via the Cooperative Research Centres) and administers the Telstra
Product Development Fund. [94]
4.110 The Telstra Product Development Fund is designed to financially
support entrepreneurs and inventors in design and development of innovative
products which have the potential to advance Australia's telecommunications.
The Fund has been integral to the development of a number of new technologies.
4.111 TRL represents Australia at international telecommunications standards
meetings, which ensures that Australia's networks are built to world standards
and that there is sufficient interconnect capacity. [95]
They have formed and are in involved in cooperative research efforts with
many Australian universities, such as the University of Melbourne, the
Australian National University and the University of Sydney, and have
provided equipment to universities such as La Trobe University.
4.112 TRL is instrumental in developing uniquely Australian technologies
to enable our communications infrastructure to meet the needs of the
entire continent, including rural and remote Australia. Some examples
of the outcomes of such research which were provided to the Committee
include:
(a) the Digital Radio Concentrator System, a radio communications
system which was developed to provide telecommunications to the most
remote communities, where access by telephone cable is impractical.
The Committee heard evidence that without this system, large areas
of Australia would be out of touch with the rest of the nation and
the world.
(b) 'tension free optical fibre ploughing technique', a method of installing
optical fibre developed during the early 1980s. Standard overseas optical
cables contain a metal cable in the centre. This design was unsuitable
for Australian conditions due to the high occurrence of lightning strikes.
The solution was to use metal free optical cable and devise a method
of ploughing the cable into the ground without stretching the cable.
This technique is essential to the reliability of Australia's inter-city
optical fibre cable network. [96]
(c) customer telephone service via radio, currently being tested
in Dalby, 200 km west of Brisbane. This service will be of value
in rural areas and other areas of low population density.
(d) the Royal Adelaide and Whyalla Base Hospital "telemedicine"
video link, a two-way video link designed to allow:
(i) clinical consultation between hospitals
(ii) continuing education and training programs
(iii) general and professional meetings of staff
(iv) consultations with colleagues
(v) ordering of supplies
(vi) ordering and receipt of tests for patients.
4.113 The Committee noted the evidence of expert witnesses demonstrating
that TRL is a national asset of importance which performs a significant
role in developing Australia's high technology infrastructure and in
nurturing Australia's future telecommunications researchers.
Impacts of privatisation on the Telstra Research Laboratories
(TRL)
4.114 According to a study conducted by Coopers & Lybrand, Telstra
was ranked the largest corporate investor in R&D in Australia in absolute
terms. [98] Telstra's total commitment
to research and development for the 1994-95 financial year was $ 203
million, however only $68.1 million of this was directed to TRL.
4.115 The Committee notes, however, that Telstra's expenditure on R&D
amounts to only 0.5 per cent of revenue, which is low by world standards.
For example, Nippon Telephone & Telegraph invest 4.7 per cent of revenue
on R&D. [99] This suggests that
if Telstra is to aspire to be a leading edge telecommunications company
operating in the global economy, it needs to increase its commitment to
research.
4.116 The Committee is concerned the proposed privatisation, rather
than generating an increase in funds flowing to research, is actually
fostering a reduction in research expenditure. It is the view of the
Committee, that in the lead up to privatisation, management is intent
on cutting back expenditure to make Telstra appear more attractive to
future investors. As a part of this cost cutting strategy, TRL funds
have been cut by about $12 million.
4.117 Following the commencement of this inquiry, Telstra announced
it proposed to reduce staff numbers at TRL from the present 530 to 380
by the end of the year. This is a cut of 150 employees or 30 per cent
of the total number of employees. The Committee is astonished at the
size of the proposed cuts and notes that this comes on top of an additional
50 researchers and support staff who opted for either voluntary redundancy
or premature retirement over the past 9 months.
4.118 It has been stated that many of those staff who opted to leave
did so in response to the changing skills needed for the new directions
in which TRL was heading, that is, decreasing emphasis on hardware and
more on systems and applications. [100]The
depth of the announced staff cuts to the TRL make Telstra's stated aim
of being 'the leading provider of electronic communication and information
services in Australia and the Asia-Pacific region, and a significant global
provider', [101] a highly questionable
aspiration.
4.119 The depth of the announced staff cuts to the TRL make Telstra's
stated aim of being 'the leading provider of electronic communication
and information services in Australia and the Asia-Pacific region, and
a significant global provider', a highly questionable aspiration.
4.120 In their submission to the Senate Inquiry, the Institution of Engineers
highlighted the dangers which downsizing can have on an organisation's
capacity for research and innovation. Drawing upon the findings of their
year long inquiry into the problems associated with privatisation, corporatisation
and the contracting out of infrastructure services, the Institute argued
that loss of skilled and experienced technical staff during downsizing
can result in an excessive decline in the technical literacy of the enterprise.
[102]
4.121 As a consequence of the massive cuts, it is evident to the Committee
the research undertaken by Telstra will be increasingly focused upon short-term
objectives geared to achieving immediate commercial outcomes. Longer term,
strategic research will give way to research geared toward adapting the
technology it is supplied with to meet its operational requirements (a
trend which is already noticeable). [103]
4.122 Expert witnesses warned the Committee about the grave dangers
involved in pursuing this path - the same path which British Telecom
has followed. In his submission, Dr Kerry Hinton argued:
Evidence indicates that since the late 1980's, Telstra has been
reducing its in-house technical competence and increasing its dependence
on equipment suppliers for technical support. This approach has also
been adopted by the privatised British Telecom. If, as Telstra's trends
to date indicate, Telstra follows the British Telecom example, Telstra
will most likely significantly reduce its broader research and development
effort and refocus on a narrow range of commercially oriented software
research. Similar to British Telecom, Telstra will also likely become
almost totally dependent on its equipment suppliers for network technologies.
[104]
4.123 Following privatisation, British Telecom has adopted a policy of
focusing its R&D on the design of software services and systems to
operate on the hardware the market makes available. This technology strategy,
if adopted by Telstra, would involve little more than the purchase and
installation of equipment designed and built overseas. [105]Dr
Hinton's submission contrasts this approach with the view of some, typically
middle managers, within the organisation. The alternative is the claim
that Australia requires a research facility which will not only ensure
Telstra is an intelligent purchaser of equipment, but also capable of
providing technical leadership.
4.124 Dr Hinton's submission contrasts this approach with the view
of some, typically middle managers, within the organisation. The alternative
is the claim that Australia requires a research facility which will
not only ensure Telstra is an intelligent purchaser of equipment, but
also capable of providing technical leadership.4.125 These concerns
were reiterated strongly by Dr Mark Sceats, CEO of the Australian Photonics
CRC. Dr Sceats argued that the impact of global changes in the telecommunications
industry has resulted in a greater focus on the development of services
and network management software in Telstra, at the expense of in-house
R&D support at the components level. He argues this trend would
be exacerbated by privatisation of Telstra.
4.126 Dr Sceats stressed, however, that it is in the technology underpinning
the services, ie the core network, that the real window of opportunity
for Australian industry and R&D lies:
There are dangers associated with a sole R&D investment in
software products to manage networks, and it should be recognised that
the best investment is in the development of systems and sub-systems
which bring together state-of-the-art hardware and software. Unless
Australia develops an export oriented manufacturing sector in communications
technology, the deficit will remain high. Exports of systems and sub
systems to a global market are required to balance the imports of much
of the technology required for our communications networks. While Australia
is only responsible for 2% of innovation, and will always import key
technologies, we can leverage our innovation by exports to larger markets.
[106]
4.127 If Telstra does not undertake such research, the outcome is likely
to be an overall net reduction in the level of research conducted in
Australia. The reason being that the R&D capabilities of the domestic
telecommunications industry may not be sufficiently developed to compensate
for cutbacks in TRL research:
Telstra have stated that they expect its (sic) equipment supply
companies to perform such R&D. However, Australian industry R&D
capabilities are not particularly high except in a few niche areas,
and the net effect may be a decrease in Australia's overall investment
in R&D. Should Telstra be privatised, it is likely that commercial
forces will change TRL's role even further. [107]
4.128 The Committee is highly concerned the reductions in hardware-oriented
research by Telstra will be not be undertaken in Australia by other
companies.
4.129 The equipment supply industry in Australia is largely dominated
by subsidiaries of large transnational corporations. The Committee is
concerned that the high level of foreign ownership among equipment suppliers
actually contributes to lower business expenditure on R&D than would
otherwise be the case. This results because subsidiaries of transnational
corporations are able to source their technological requirements from
their parent companies. Given that they usually have large R&D facilities
located in their home base, they have little incentive to undertake
similar operations, or operations of much significance, Australia. For
example, Ericsson have a significant research facility in Sweden, Alcatel
in France, Nokia in Finland, Nortel in Canada, Motorola in the US, and
NEC in Japan.
4.130 The former Government attempted to address such concerns through
the Partnerships for Development (PfD) program. Companies such as Ericsson,
Alcatel, Fujitsu, Siemens and NEC are all participants in this program
and are committed to achieving an R&D expenditure of at least 5 per
cent of turnover within seven years of their undertaking. [108]
4.131 The Committee notes that while mechanisms such as the PfD program
have some merit, they cannot satisfactorily compensate for the maintenance
of Telstra in full public ownership and ensuring it acts in the national
interest.
| RECOMMENDATION 8:
The Committee recommends the commitment of Telstra to strategic research
and research sponsorship be retained. |
| RECOMMENDATION 9:
The Committee recommends the Government closely monitor Telstra management's
handling of the Telstra Research Laboratories with an eye to the fact
that they are a national asset, built up through national savings,
which provide a pivotal and strategic role in Australia's intellectual
infrastructure. |
4.132 The Committee concludes that the financial losers will be the
people of Australia who will no longer own a valuable public asset,
and will no longer benefit from the considerable flow of profits from
this asset.
4.133 The Committee concurs with community concern that massive staff
losses will have a major impact on the viability of many current Telstra
services and will have disastrous effects on regional communities and
rural communities.
4.134 Finally, the Committee notes that the proposed sale will have
negative repercussions for the domestic telecommunications equipment
and services industry and for research and development in Australia.
Footnotes
[1] Department of Communications and the Arts,
Submission Nos.188, 181A, 188B.
[2] Department of Finance, Submission Nos.131,
131A.
[3] BZW Australia, Submission No.295, Vol.
9, p.1848.
[4] Chamber of Commerce and Industry of Western
Australia, Submission No.334, Vol.12, p.2421.
[5] Department of Communications and the Arts,
Submission No.131A, Vol.16, 3137.
[6] Department of Communications and the Arts,
Submission No.131A, Vol.16, p.3135.
[7] Department of Finance, Submission No.188,
Vol.7, p.1267.
[8] Telstra Corporation Limited, Submission
No.189, Vol.7, p.1300.
[9] A. Galal, L. Jones, P. Tandon and I. Vogelsang,
1994, Welfare Consequences of Selling Public Enterprises: An Empirical
Analysis, Oxford University Press, New York, p.5.
[10] S. Kikeri, J. Nellis, M. Shirley, 1992,
Privatization: The Lessons of Experience, World Bank, Washington
DC, p.14.
[11] S. Kikeri, J. Nellis, M. Shirley, Privatization:
The Lessons of Experience, World Bank, Washington DC, 1992, p.22.
[12] Communications Law Centre, Submission
No.343, Vol.13, p.2627.
[13] Communications Law Centre, Submission
No.343, Vol.13, p.2627.
[14] Kikeri, Nellis, Shirley, op cit,
p.27.
[15] Galal, Jones, Tandon and Vogelsang,
op cit.
[16] Galal, Jones, Tandon and Vogelsang,
ibid, p.535.
[17] Professor J. Quiggin, School of Economics,
James Cook University, Submission No.192a, Vol.7, p.1357.
[18] ibid, p 1362 [SOE - State-owned
Enterprise].
[19] Communications Law Centre, Submission
No.343, Vol.13, p.2627.
[20] Kikeri, Nellis, Shirley, op cit,
pp.6, 12.
[21] Galal, Jones, Tandon and Vogelsang,
op cit, p.550.
[22] Galal, Jones, Tandon and Vogelsang,
op cit, pp.95, 530, 99, & 79.
[23] Galal, Jones, Tandon and Vogelsang,
op cit, p.278.
[24] Galal, Jones, Tandon and Vogelsang,
op cit, p.448.
[25] Galal, Jones, Tandon and Vogelsang,
op cit, p.444.
[26] Galal, Jones, Tandon and Vogelsang,
op cit, p.530.
[27] Communications Law Centre, Submission
No. 343, Vol 13, p.2629.
[28] Kikeri, Nellis, Shirley, op cit,
p.1.
[29] Kikeri, Nellis, Shirley, ibid,
p.28.
[30] Galal, Jones, Tandon and Vogelsang,
op cit, pp.294, 570.
[31] Department of Communications and the
Arts, Submission No.131A, Vol.16, p.3143.
[32] Communications Law Centre, Submission
No.343, Vol.13, p.2627.
[33] The Journal of Finance, Vol XLIX,
June 1994, p.403.
[34] The World Bank and International Finance
Corporation, Washington, 1995.
[35] Department of Communications and the
Arts, Submission No.131A, Vol.16, p.12 (para.34).
[36] World Wide Web, Oftel, http://www.open.gov.uk/oftel/pri97/contents.htm
[37] World Wide Web, Oftel, http://www.open.gov.uk/oftel/pri97/contents.htm
(para 1.42).
[38] OECD, Telecommunications Outlook,
1995, p.70 ff.
[39] World Wide Web, Oftel, http://www.open.gov.uk/oftel/pri97/contents.htm,
(para 1.43).
[40] Public Sector Research Centre, Submission
No.299, Vol.10, p.2022.
[41] Public Sector Research Centre, Submission
No.299, Vol.10, p.2022.
[42] Galal, Jones, Tandon and Vogelsang,
1994, op cit, p.99.
[43] Communications Law Centre, Submission
No.343, Vol.13, p.2627.
[44] Senator the Hon R. Alston, Opening Address
ATUG 96, Conference of the Australian Telecommunications Users Group,
Melbourne, 30 April 1996, p.3.
[45] BZW Australia, Regarding Telstra,
March 1996, p.17.
[46] Galal, Jones, Tandon and Vogelsang,
op cit, p.550.
[47] National Competition Policy,
Report by the Independent Committee of Inquiry, Australian Government
Publishing Service, Canberra, August 1993, p.226.
[48] National Competition Policy,
Report by the Independent Committee of Inquiry, Australian Government
Publishing Service, Canberra, August 1993, p.226.
[49] National Competition Policy,
Report by the Independent Committee of Inquiry, Australian Government
Publishing Service, Canberra, August 1993, p.226.
[50] Communications, Electrical and Plumbing
Union/ Community and Public Sector Union, Submission No.296, Vol.10,
p.1868.
[51] The Hon J. Howard, Prime Minister, Howard
slaps down Alston over Telstra full sale comment. Australian Associated
Press, 2 September 1996 16:22.
[52] Professor J. Quiggin, Official Hansard
Report, 10 July 1996, p.371.
[53] Public Sector Research Centre, University
of NSW, Submission No.299, Vol.10, pp.2019-20.
[54] A figure of $ 28 billion has been
proposed as potentially nearer the mark. See; BZW Australia, Submission
No.139, Vol.9, p.1851.
[55] Department of Finance, Submission No.188B,
Vol.14, p.2671. (Refer Table 4.1).
[56] Department of Finance, Submission No.188B,
Vol.14, p.2671.
[57] BZW Australia- Submission No.295, Vol.9,
p.1851.
[58] Prof. J. Quiggin, Official Hansard
Report, 10 July 1996, p.365.
[59] Prof. J. Quiggin, Official Hansard
Report, 10 July 1996, p.358.
[60] Prof. J. Quiggin, Official Hansard
Report, 10 July 1996, p.361.
[61] Mr P. De Carlo, Acting Secretary, Telecommunications
Division, Community and Public Sector Union, Official Hansard Report,
3 July 1996, p.202.
[62] Professor J. Quiggin, Professor of Economics,
James Cook University; Dr Allan Brown, Economics Department, Griffith
University. Submissions by other economists also made similar points.
See, for example, Dr F. J. B. Stilwell, Associate
Professor of Economics, University of Sydney, Submission No.164, Vol.6,
p.1112 ff. The Public Sector Research Centre, Submission No.299, Vol.10,
p.2008 ff., explore some of the more well known undervaluations of public
assets which have occurred and the reasons for this.
[63] Professor J. Quiggin, Submission No.
192, Vol.7, p.1352. Note that use of this method of evaluation is also
advocated by Dr Allan Brown, Submission No.640, Vol.16, pp.3088-3112.
[64] Professor J. Quiggin, Submission No.
192A Vol.16, p.3177.
[65] Professor J. Quiggin, Submission No.
192A Vol.16, p.3178.
[66] To be established under the Natural
Heritage Trust of Australia Bill 1996
[67] Natural Heritage Trust of Australia
Bill 1996, Explanatory Memorandum.
[68] Professor J. Quiggin, Submission No.192B,
Vol.17, not printed.
[69] The total dividend to the Government
is about $2.7 billion pa in 1994/95 of which is $900 million and a portion
is $112 million.
[70] Professor J. Quiggin, Submission No.192,
Vol.7, p.1363.
[71] Professor J. Quiggin, Submission No.192,
Vol.7, p.1363.
[72] See section 708 - 711 of the Corporations
Law.
[73] Communications, Electrical and Plumbing
Union/ Community and Public Sector Union, Submission No.296, Vol.10,
p.1901.
[74] Ms R. Eason, Senior Research Officer,
Communications, Electrical and Plumbing Union, Official Hansard Report,
3 July 1996, p.216. List ownership of Optus.
[75] Vodafone, Submission No.1, Vol.1, p.8.
[76] Public Sector Research Centre, Submission
No.299, Vol.10, p.2011.
[77] See, for example, Peter Harkness, Senior
Lecturer in Economics, Swinburne University of Technology, Submission
No.171, Vol.6, p.1174 ff.
[78] BZW Australia, Submission No.295, Vol.9,
p.1851.
[79] Professor J Quiggin, Official Hansard
Report, 10 July 1996, p.349 and 350.
[80] Official Hansard Report, 30 July
1996, p.992.
[81] Sydney Morning Herald, 13 July
1996.
[82] Mr M. Hutchinson, Official Hansard
Report, 26 June 1996, p.77.
[83] Senator M. Colston, Official Hansard
Report, 3 July 1996, p.137.
[84] Bureau of Transport and Communications
Economics, 1995, Telecommunications in Australia, Report 87,
Australian Government Publishing Service, Canberra. pp.74-77.
[85] Bureau of Transport and Communications
Economics, 1995, Telecommunications in Australia, Report 87,
Australian Government Publishing Service, Canberra. pp.78-79.
[86] Communications and Electrical Plumbing
Union, Submission No. 296, Vol.10, p.1897.
[87] R. Whittle, Telstra's New Model Network,
Australian Communications, April 1996, p.80.
[88] D. Northfield, 1994, Australian Telecommunications
Commercial and Regulatory Environment, CIRCIT, Melbourne, p.12.
[89] Communications and Electrical Plumbing
Union, Submission no 296, Vol. 10, p.1899.
[90] Sheehan, et al, Australia
and the Knowledge Economy, Melbourne: Centre for Strategic Economic
Studies, 1995, p.vi.
[91] Sheehan et al, Australia and the
Knowledge Economy, Melbourne: Centre for Strategic Economic Studies,
1995, p.v.
[92] Industry Commission Research and
Development (Canberra: Australian Government Publishing Service,
1995), pp.491-6; and, Department of Industry, Science and Technology
Australian Science & Innovation Resources Brief 1994 (Canberra:
Australian Government Publishing Service, 1994), pp.19-24.
[93] Australian Photonics CRC, Submission
no. 332, Vol. 12, p 2410.
[94] Dr K. Hinton, Submission no 143, Vol
5, p.886.
[95] Communications and Electrical Plumbing
Union, Submission no 296, Vol 10, p.1897.
[96] Dr K. Hinton, Submission no 143, Vol
5, p.879.
[97] Dr K. Hinton, Submission no 143, Vol
5, p.879.
[98] Department of Industry, Science and
Technology, 1995, Scoreboard `95: Business Expenditure on Research
and Development, Canberra.
[99] The Friends of Telstra Research Laboratories
Newsletter, 2 August 1996, p2.
[100] The Friends of Telstra Research
Laboratories Newsletter, 2 August 1996, p.2.
[101] Telstra Annual Report 1995,
p.1.
[102] The Institution of Engineers, Australia,
Submission No.305, Vol.11, pp 2076-82.
[103] Department of Industry, Science and
Technology, 1995, Scoreboard `95: Business Expenditure on Research
and Development, Canberra, p.25.
[104] Dr K. Hinton, Submission no. 143,
Vol.5, pp.878.
[105] Dr K. Hinton, Submission no. 143,
Vol.5, pp.882.
[106] Dr M. Sceats, Newsletter of the
Australian Photonics Co-operative Research Centre, June 1996,
p.2.
[107] Australian Photonics CRC, Submission
No.332, Vol.12, p.2411.
[108] Department of Industry, Science and
Technology, 1995, Scoreboard `95: Business Expenditure on Research
and Development, Canberra, p 25.