MINORITY REPORT

Consideration of the Telstra (Dilution of Public Ownership) Bill 1996
CONTENTS

MINORITY REPORT

CHAPTER 3

IMPROVED COMMUNITY AND CONSUMER SAFEGUARDS

A number of the terms of reference address community and consumer safeguards, particularly terms of reference (h) and (i):

3.1 Consumer protection safeguards will be maintained and extended

The evidence put to the Inquiry demonstrated comprehensively that the Telstra (Dilution of Public Ownership) Bill provides for the maintenance or improvement of key consumer safeguards. Key elements of the Bill include the continuation of universal service objectives (in terms identical to the current Telecommunications Act); introduction of a customer service guarantee, with provision for performance standards and penalties for non-compliance; and extension of the existing right to untimed local calls, to include business customers. We consider that these consumer protection safeguards are highly satisfactory, and go well beyond what has ever been available before.

In addition to the provisions in the Bill, the Inquiry was told that the Government has outlined its proposals for a comprehensive framework of consumer safeguards to apply under the post July 1997 telecommunications regime. [1] The overall benefits are those flowing from regulation which promotes effective competition and choice. [2] The specific elements proposed are:

The consumer service guarantee provisions received a widely favourable response. The peak body for business telecommunications users praised the provisions warmly:

Similarly, representatives of domestic consumers responded positively. For example, the Consumers' Telecommunications Network said:

Support for the proposed regime of consumer safeguards was also expressed by the Tasmanian Consumers Association. In response to a question put by Senator O'Chee as to whether one could get a stronger method of guaranteeing such obligations than by the government's legislative route, Mrs Cora Trevarthen, President of the Tasmanian Consumers Association, responded:

I do not think you can; I am not disagreeing with you. [5]

AUSTEL have also acknowledged the effectiveness of the legislative route to consumer protection adopted by the Government, particularly as regards price caps. In response to a question from Senator O'Chee as to the effectiveness of preventing price increases by way of legislation, Ms Sue Harlow replied:

Telstra, too, indicated its support for the approach:

We note that paragraph 1.26 of the Majority Report is critical of the effectiveness of the Government's proposed legislative framework for ensuring a range of customer service guarantees. We reject this criticism. The government has consistently pledged that both the Universal Service Obligation and Customer Service Guarantees would be secured within the legislation. These guarantees will give consumers greater protection and rights than they have ever had before.

A number of submissions to the Inquiry were along of the lines of “the customer service guarantee is a major improvement, but we want more”. We note, with a certain weary cynicism, the way that the Majority Report gleefully cites these submissions; for example, it cites the Communications Law Centre at paragraph 6.77. It also recommends that a working party be established “for the purpose of formulating more satisfactory legislative provisions concerning the Customer Service Guarantee.” [8]

The Majority Report is curiously silent as to why these improvements were never introduced during Labor's thirteen years in power. It is human nature to ask for more, and self-appointed advocates of the consumer interest are especially prone to do so, since they bear no part of the costs their demands entail. The difficult challenge for government is to balance up a range of competing claims. We are not surprised that there are items left outstanding on the wish lists of a number of single issue think tanks and pressure groups; but we are satisfied that the consumer service guarantee provisions are a very substantial improvement for telecommunications consumers, going far beyond measures introduced by previous governments. We are also satisfied that this Government should go ahead and deliver on this substantial advance for consumers, rather than engaging in yet another consultative exercise which will inevitably delay the introduction of this advance.

The Majority Report claims at paragraph 1.26 that the customer service guarantees are not effectively protected because they rely upon regulations, licensing conditions and the like. It is true that the detail of these guarantees will be given effect by regulation. This is absolutely standard practice in handling detailed matters of regulation across the whole range of government activities. The alternative arrangement, under which each individual customer service guarantee, referring to a specific carrier and a specific service, is spelled out in full in the legislation, is completely impractical and unworthy of serious consideration. We vigorously reject the suggestion that the customer service guarantees are in some way to be regarded as sub-standard because they are to be given effect by means of regulation rather than legislation.

 

Finding: The Telstra (Dilution of Public Ownership) Bill improves the level of consumer protection safeguards.

 

3.2 The universal service obligation

3.2.1 Existing obligations will be maintained and protected

We consider that the key principle in this area is that the ownership of Telstra is a matter quite separate from, and independent of, obligations imposed on Telstra as a carrier, such as those relating to universal service. The latter are specified in legislation (currently the Telecommunications Act and subordinate legislation, including carrier licence conditions) and administered by AUSTEL. The degree of public ownership of Telstra is not related to this regulatory framework. [9] The attempts which have been made by Opposition Senators, during the course of the Inquiry, to link together the privatisation of Telstra and the retention of the universal service obligation is quite mischievous, as they know full well that neither is dependant on the other.

The point was made well by the Western Australian Government:

As the Department of Finance pointed out, the 1991 changes to telecommunications legislation largely changed the basis of USO delivery from being Telstra-specific and ownership related to being industry wide and embedded in the regulatory regime. Mechanisms open to the Government to deliver its USO policies include:

The previous government chose the second of these approaches, by making it a condition of the carriers obtaining their licences that they bear a proportion of the cost of the universal service obligation. This approach has been maintained by the present Government, and neither the Telstra (Dilution of Public Ownership) Bill nor the post-1997 legislation will change it.

The BZW Submission expressed the view that the universal service obligation will continue to apply just as effectively with Telstra in partial private ownership:

We have also found through this Inquiry that existing legislation covers the provision of payphones and the Government's commitment to the continuation of the USO post-1997 includes the provision of payphones.

We were informed that it is likely that AUSTEL/SMA will retain responsibility for USO administration post-1997. AUSTEL's current guidelines cover what are considered “reasonable” timeframes for the delivery of the standard telephone service, in the light of community population and infrastructure availability. DOCA informed the Inquiry that these arrangements would be enhanced under the post-1997 legislation through the proposal for USO providers to submit detailed plans on fulfilment of the USO for Ministerial approval. [13]

The Majority Report's comments on the universal service obligation are incorrect.

The USO will have to be performed by the carrier with responsibility for it (Telstra, or another carrier if that other carrier has successfully tendered for it in a particular area), regardless of ownership. All carriers will be required to contribute to the cost of the USO. There will be no reduction in the performance of the universal service obligation. There is ample evidence from around the world that privately owned carriers in a competitive market are able to fund their contribution to a universal service obligation type scheme.

We are therefore satisfied that the universal service obligation will be adequately protected under both the Bill and the post-1997 legislation.

 

Finding: The Bill reaffirms the Government's commitment to the universal service obligation, an obligation which is given legislative effect under the Telecommunications Act and which is in not diminished or affected in any way by this Bill.

 

3.2.2 Is there a need to widen the universal service obligation?

3.2.2.1 Definition of the USO.

Paragraph (i) of the terms of reference raises the question of whether the current definition of the universal service obligation is adequate, or whether it needs to be broadened:

The Telstra Submission to the Inquiry addressed the issue of the definition of the USO in some detail. From the point of view of both consumers and the carriers it welcomes the fact that there will be greater clarity and certainty about what should be provided under the USO. It also puts the view that for a service to be provided under the USO the test should be how widely services are used. The Submission stated:

The same point was made in a telling fashion by Mr Peter Shore, Managing Director, Commercial and Consumer, Telstra, in oral evidence to the Inquiry:

By the way, that community does not have electricity or power but it has a telephone. They can access the Internet, if they choose to, at 2.4 kilobytes per second. To give them access at 4.8 or 14.4 or 19.6 or high speed access will cost another $60,000. The question really is whether it is widely enough required that it necessitates the spending of an additional $60,000 for all of those isolated homesteads, farms, Aboriginal communities and people. [16]

3.2.2.2 Definition of the Standard Telephone Service (STS)

As the USO covers the provision of the STS, the definition of the STS is an inter-related issue.

The Inquiry was told that in July 1996 the Minister for Communications and the Arts announced the establishment of a Review Group to undertake a review of the definition of the `standard telephone service' to determine whether it should be upgraded to a higher level. The ten member group includes representatives from academia, consumer organisations, rural organisations and the industry and is scheduled to report to the Minister by the end of November 1996. The review of the STS is intended to complement the USO machinery issues under consideration in the context of the post-97 legislate framework.

We are advised that key factors to be addressed by the Review include:

We believe this review of the STS will be an important mechanism for determining whether it is appropriate to upgrade the universal service obligation.

 

Finding: there is no sound reason for delaying passage of this Bill until completing the distinctly separate examination of the extension of USOs beyond telephony to other telecommunications services.

 

3.2.3 How the USO should be administered

Some witnesses commented in unfavourable terms about the Government's proposal that post 1997 telecommunications legislation would provide for new schemes to be used for the selection of a universal service provider to operate in different regions of Australia where appropriate. In particular, the USO could be put out to tender. We think it is unfortunate that a knee jerk hostility to change has led some to respond in this way to a proposal which in our view is likely to result in the USO being delivered more efficiently and responsively.

DOCA explained the likely operation of a tender process in its supplementary submission to the Inquiry. We understand that the USO arrangements would provide for there always to be a national universal service carrier with the obligation to serve all areas of Australia that do not have a specified regional universal service carrier.

Regional carriers would be appointed by tender. A tendering carrier would specify the subsidy it required; the carrier specifying the lowest subsidy would win the tender. The underlying purpose of the scheme would be to reduce the cost to the economy of the USO, subject to the services involved being provided at a high level of service quality. [18]

We note that Telstra has indicated its support for tendering of the USO:

So too has the National Farmers Federation:

We believe that the approach of tendering for the USO is a sensible one and should be supported.

Another issue in relation to the USO is the question of how it is to be funded. One funding option raised in submissions by WACCI and some other business groups is an explicit budget expenditure. We do not believe this approach would be preferable to the present arrangements under which the USO is funded by the carriers.

3.2.4 Assurances on certain specific services

Paragraph (h) of the terms of reference refers to certain specific services:

As discussed above, and contrary to the assertions of the Opposition, there is no inherent link between these matters and the degree of public ownership of Telstra. We are satisfied from the evidence which the Inquiry has received that both the existing and proposed regulatory frameworks make adequate provision for these services as follows:

 

Finding: The Bill will not in any way affect the existing legislative and other protection of directory assistance, untimed local calls and the provision of public telephones, all of which remains unaffected by this Bill.

 

3.3 Telstra's public accountability regime

Terms of reference paragraph (f) deals with Telstra's public accountability regime:

3.3.1 The current regime

The Inquiry heard that since its incorporation in 1991 Telstra has operated in a framework comparable to a private company under the Corporations Law. The current arrangements for accountability to the government as sole shareholder reflect the Telstra Board and management's responsibility for the day-to-day running of the company. It is required to do the following things in discharging its responsibility to report to Government:

We note that the Bill gives added support to the current reporting arrangements by inserting into the legislation obligations to provide information to the Commonwealth. This means that the Government continues to gain access to the information that it requires to assess the financial and service performance of Telstra on behalf of Australian taxpayers.

This is another issue on which the Opposition Senators have consistently attempted to distort the facts: the fact is that there will be no reduction in reporting to the Parliament and to Senate Committees. The Bill contains provisions which enable proper use and communication of information received from Telstra by Commonwealth officers and agents. These provisions in no way limit, curtail or otherwise detract from the ability of the Parliament to seek and obtain information about Telstra's operations. This was clearly demonstrated in evidence from the Attorney-General's Department, responding to a question from Senator Carr.

3.3.2 The current regime will be little affected

Evidence received from the Department of Communications and the Arts, the Department of Finance and Telstra demonstrated to our satisfaction that part-privatisation will not diminish official accountability in any practical way. Moreover, as Telstra's shares will be listed and publicly traded, the company's total accountability will be enhanced through becoming subject to the more transparent and public scrutiny applied to companies whose shares are traded.

The only noteworthy change from the current arrangement is the removal of the Minister's general power of direction to the Company under the Telstra Corporation Act, from the time of sale of the first shares. The power has never been used. Advice from the Department of Finance indicates that retention of this power when the Company is partially privatised would be inappropriate, and possibly amount to a power that could disadvantage minority shareholders in a way that would be inconsistent with provisions of the Corporations Law. [23] We are satisfied that the removal of this power is appropriate.

The Majority Report is quite inconsistent on the significance of the removal of the section 9 power. At one point it asserts that this power is very important. [24] Elsewhere, though, it admits that as the majority shareholder, the Government will still have the power to stop Telstra acting in ways it does not like:

We are also satisfied that the changes to reporting and other obligations which will arise as part of privatisation are likely to result in Telstra being subject to more effective scrutiny, by the Government and by the financial markets, and also to result in Telstra reporting at least as comprehensively and effectively as it does presently.

Telstra pointed out that the Bill also imposes additional obligations on the company and its Directors in relation to preserving a Commonwealth majority ownership. These obligations include requirements that Directors:

Directors must also assist the Commonwealth as required in connection with the sale of Telstra. [26]

The Department of Communications and the Arts Submission summarised the additional accountability benefits of market listing of Telstra's shares:

Finding: The Bill will increase the level of Telstra's accountability to and scrutiny by the public while maintaining to the full its obligation to report to Parliament, including Senate committees; the only change is removal of the never-used power of the Minister himself to “direct” the company, which has no practical significance.

 

3.3.3 Government will retain powers as two thirds shareholder

The retention of two-thirds equity in Telstra will mean that the Commonwealth will retain the rights and powers which attach to majority ownership of a company. The Commonwealth Government will therefore retain powers to influence the direction of the Telstra through the appointment of the majority of Board members, and through the voting rights attached to its two-thirds shareholding. [28]

 

3.4 Safeguards against excessive foreign ownership

Paragraph (m) of the terms of reference concerns foreign ownership:

We have heard detailed evidence on the first limb of this term of reference, and we are satisfied that the restrictions contained in the Bill are adequate and effective. The second limb of this term of reference is highly confused and we do not believe raises any meaningful issue.

While some unsubstantiated claims were made about the possibility of foreign ownership having an adverse effect on Telstra's ability to set its own strategic directions in Australia and overseas, the evidence demonstrated to us quite clearly that the limits imposed by Government and provided for in the Telstra (Dilution of Public Ownership) Bill would effectively ensure Telstra remains Australian-owned and controlled.

We were advised that the Bill amends the Telstra Corporation Act 1991 to:

We are satisfied that there can be no more than 12% foreign equity in Telstra without new legislation being passed. The passing of such legislation, of course, would require the support of the Opposition Parties, given that the Government does not have a majority in the Senate. So their repeated claims that this legislation is only a stalking horse for foreigners acquiring control of Telstra raises the question - how would that occur? Would the Opposition vote for it? If they would not, then they ought not to raise it as an issue now.

Finally, we would point out that while the Bill has recognised the importance of ensuring that Telstra remains an Australian-owned and controlled company, a degree of foreign involvement is likely to be beneficial. In the current world climate of liberalisation of telecommunications markets it would not be practicable to preclude any foreign involvement. Nor would it be desirable. The presence of foreign shareholders would be likely to assist Telstra in entering overseas markets and could help cement strategic alliances between Telstra and companies overseas. It is also likely that foreign shareholders will be a positive influence for Telstra to achieve world's best practice through their ability to compare Telstra's performance directly with its overseas counterparts.

 

Finding: The Bill maintains Australian ownership and control of Telstra of at least 88.3 per cent by restricting foreign ownership to maximum individual holdings of 1.7 per cent and to a total of 11.7 per cent, while ensuring Telstra's Chairman and the majority of its Directors are Australian Citizens.

 

Footnotes

[1] Department of Communications and the Arts, Submission No. 131, p. 701

[2] BZW, Submission No. 267, Vol 9, p. 1850

[3] Australian Telecommunications Users' Group, Submission No. 202, Vol 8, p. 1485

[4] Official Hansard Report, 12 July, p. 507

[5] Official Hansard Report, 30 July 1996, p. 953

[6] Official Hansard Report, 30 July 1996, p. 970

[7] Telstra, Submission No. 189, Vol 7, p. 1315

[8] Majority Report, List of Recommendations, p 3

[9] Department of Communications and the Arts, Submission No. 131, p. 713

[10] Official Hansard Report, 4 July, p. 241

[11] Department of Finance, Submission No. 188, Vol 7, p. 1273

[12] BZW, Submission No. 267, Vol 9, p. 1854

[13] Department of Communications and the Arts, Submission No. 131, Vol 4, p. 714

[14] Majority Report, para 1.21

[15] Telstra, Submission No. 189, Vol 7, p. 1321

[16] Official Hansard Report, 3 July 1996, p 133

[17] Department of Communications and the Arts, Submission No. 131, Vol. 4, pp. 714-16

[18] Department of Communications and the Arts, Submission No. 131, Vol. 4, p. 702

[19] Telstra, Submission No. 189, Vol 7, p. 1321

[20] National Farmers' Federation, Submission No. 133, p. 780

[21] Department of Communications and the Arts, Submission No. 131, p. 710

[22] Official Hansard Report, 26 July, p 879

[23] Department of Finance, Submission No. 188, Vol 7, p. 1281

[24] Majority Report, para 3.48

[25] Majority Report, para 3.40

[26] Telstra, Submission No. 189, Vol 7, p.1303

[27] Department of Communications and the Arts, Submission No. 131, pp. 710-711

[28] Department of Communications and the Arts, Submission No. 131, p. 711

[29] Department of Communications and the Arts, Submission No. 131, p. 722.