Telstra claims its cost of rural telecommunication subsidies is $1.8 billion per year. That figure creates a real second term headache for the Minister, Mr Alston, who wants to cap the costs at $253 million.
This spat on the Telstra Universal Service Obligations highlights the regulatory requirements on the industry. Lurking beneath the shadows is the currently dormant issue of Telstra privatisation.
The debate on costing rural and regional cross subsidy has been around for a decade. The estimates of the subsidy have always been controversial. In 1989 Telstra put it at some $800 million per year but $250 million was the estimate of the Bureau of Transport and Telecommunication Economics. Two years ago, the telecom firms and the Australian Communications Authority commissioned Bellcore to develop a model to offer an accurate fix on the subsidies.
Telstra, making use of that model, has estimated the actual subsidy for 1997/98 at $1.8 billion. As these costs are incurred by Telstra but shared by the other carriers, they require Optus and Vodaphone to reimburse Telstra. For Optus, that level of reimbursement would be $170 million, or almost fourfold the firm's present profits.
Telstra has announced to the Stock Exchange its view that the subsidy is $1.8 billion. That announcement creates its own momentum. The Telstra board cannot now agree to a significantly lesser sum without its directors being vulnerable to lawsuits claiming they are not acting in the best interests of the shareholders. If the Government were to seek a change of mind by the Telstra Board, it would need to indemnify the Board from legal action. Even if the Board were to agree to this, it would only shift the costs of legal damages back to the Government.
Minister Alston's fallback position of legislating to set the cap at $253 million is also problematic. Setting an arbitrary cap would appear to be a "regulatory taking" and be illegal under Section 51 (xxxi) of the Constitution, which requires the Commonwealth to pay compensation if it acquires property. And the courts have interpreted "property" very widely to include anything of value.
All this begs even more fundamental questions. First, why are we loading costs onto Telstra which is confronting a maelstrom in the global telecommunications market? Cost cutting is required as evidenced by the merger between WorldCom and MCI which creates a telecom business more than four times the market capitalisation of Telstra. Part of WorldCom's success in assuming a position of industry leadership has been its low cost structures. Australia may stunt the performance of its national champion in this dynamic market if it continues to impose handicaps like the cross subsidies.
Secondly, how long must Telstra be hampered by having the Government as its major shareholder? The recent election results might allow the Government to sell down its share of Telstra to 50 per cent. If the Government chose, it could use the revenue from the sale of the additional 16% to fund the cross subsidies. But rural populism and the dinosauric socialist residues now dominant in the ALP, One Nation, the Democrats and the Greens mean it is highly unlikely that a Senate would allow the full sale.
The time has come for a more radical approach to privatisation. The Government should return its half of Telstra free of charge to the individuals that make-up the Australian community. Such an approach was successfully followed in some East European privatisations and in AMP's recent demutualisation. With all Australians on the electoral roll allotted an equal number of shares, the government would be handing back $3,000 of shares to each of its rightful owners. More importantly, it would free Telstra from the shackles of a leading shareholder with less focused goals than maximising shareholders' wealth.
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