The Telstra challenge: Fixing the anomalies before T3

This article appeared as an opinion piece in the Australian Financial Review on 18 February 2005

The rise in the Telstra share price close to $5.25 should have the Federal Treasurer excited. The T3 sale should inject at least $30b into federal revenues, possibly $35b if Telstra sells Sensis first.

Yet once Telstra is fully sold, the government – losing annual dividends exceeding $2b – will have to find other funding sources to rectify the regional inequities in telecommunications services. Not just in the bush, but also at the fringes of Sydney and Melbourne. And no once-off investment will fix this.

Telstra is a moneymaking machine, returning 80% of its profits in dividends to its shareholders. It has achieved this by underspending on telecommunications infrastructure, especially on broadband access. A fully privatised Telstra will even more aggressively maximise its short-term profit at the expense of other goals. That expectation is already lifting the Telstra share price.

The full sale of Telstra is probably unstoppable, but it is in the national interest to improve the regulatory environment before the T3 sale. After T3, Telstra will be able to use its huge cash flow to acquire a TV network and – if cross-media ownership rules are relaxed – a newspaper chain as well. That will enable Telstra to integrate its advertising streams and content, and bundle its products. In the process, it will become Australia’s dominant cross-media player. Telstra will then have more political influence in Australia than Packer or Murdoch.

So what are the structural anomalies that need to be fixed prior to T3?

Firstly, Telstra is too large to be regulated effectively. This has long been an open secret. Telstra has far more resources to manage regulatory conflicts than does the regulator, and has far deeper pockets for litigation. But it also has a unique advantage, given that all its competitors need to use part of its infrastructure, either to access their own customers or terminate their calls. The boundaries between Telstra’s wholesale and retail businesses are not transparent, and it can always manipulate these boundaries for competitive advantage. These factors make a compelling case for structural separation of Telstra’s wholesale fixed network business – where it has absolute market dominance – from the rest of its businesses,. This must be enforced – and not on Telstra’s terms – prior to T3.

Secondly, the current regulatory framework is almost entirely focussed on eliminating anti-competitive behaviour – as though a competitive market alone will meet all of Australia’s communications needs. Yet the competition model has demonstrated that it cannot deliver in three vital areas: regional equity (accessibility and affordability of advanced services); national equity (in penetration of advanced broadband infrastructure relative to our international competitors); and community equity (of basic services within a region).

Let me give you an example of lack of community equity. In the outer suburbs of Melbourne and Sydney, neighbouring suburbs are divided into ‘haves’ and ‘have-nots’ by telephony charging boundaries that were set first in the 1960s and not revised since 1991. In one outer suburb of Melbourne, Narre Warren, the residents are automatically included in the metropolitan White Pages, and pay 22 cents to dial a Telstra local call into central Melbourne. In the next suburb, Cranbourne – also located within the Melbourne Urban Growth Boundary – the residents are not listed within the Melbourne Whiter Pages, and their cheapest calls into central Melbourne cost 25 cents.

A similar disparity occurs in Western Sydney – in fact the suburb of Werrington is split down the middle! Telstra claims it would be in breach of current legislation to move its charging zones to match the current residential boundaries of Melbourne and Sydney – and it may well be right. It is absurd that the telecommunications boundaries are not regularly adjusted to align with the planning boundaries of our major cities.

What are the best solutions?

Firstly we should institute periodic reviews and amendments of the regulatory framework, to ensure it delivers national telecommunications outcomes that are adequate for international competitiveness, regional equity and community equity.

Secondly we must ensure that Telstra’s fixed wholesale network business is structurally separated before T3. This has two advantages. It forces the wholesale business to offer the same price per product to all retail customers, including Telstra’s retail business. And it enables the government to create licence conditions for the wholesale carrier, including an internationally competitive rate of rollout of advanced services.

Ideally the government should buy back the wholesale network business for a limited period – say ten years – and give it a mandate to rollout broadband infrastructure past 96% of Australian residencies, restricting it to a wholesale role – i.e. selling only to retail carriers. This amounts to selling Telstra in two stages: retail first, wholesale later, when it has completed its national task. While this will not give Treasury its short-term windfall, it can be done without increasing government debt or disadvantaging Telstra’s shareholders.

The alternative is virtual structural separation prior to T3 with Telstra still owning both businesses. At the same time Telstra’s licence conditions must be changed to force accelerated roll-out of advanced infrastructure; and $20b needs to be reserved from the T3 sale to fund that accelerated infrastructure rollout, making it available to competitive bids. Only then can we feel reassured that Australia’s telecommunications will be continually upgraded to meet the needs – including affordability and equity – of all its citizens.

Peter Gerrand is a Professorial Fellow at the University of Melbourne, and a former independent consultant to AUSTEL and the ACCC.

Leave a Reply

You must be logged in to post a comment.