The Telecom Monopoly: Natural or Artificial?

While artificial and unnecessary restrictions are placed on competition in the telecommunications field, the Australian community will not be able to enjoy the improvements in efficiency that are now beginning to be enjoyed by consumers in other countries, irrespective of whether ownership of the basic telephone network is private or public.

Australian Treasury,
Treasury Economic Paper No. 10,
1983, pp. 11-12.

FOREWORD

The assumptions that Telecom's monopoly of Australian telecommunications is a "natural monopoly", and that competition should be prohibited, seem deeply engrained in Australian politics.

Spokesmen from all major political parties have lauded the virtues of this monopoly, and some have at times even evoked it in a quasi-mystical way as a manifestation of national unity.

It has, however, been deemed necessary to reinforce the monopoly allegedly conferred by nature with powers conferred by law.  That law provides heavy penalties for anyone attempting to challenge the "natural monopoly" by going into the telecommunications business for themselves.

Telecom's monopoly -- a regulated, union-dominated, government-owned monopoly -- is now much more rigid than the systems of such other major English-speaking countries as the USA, Canada or Britain.

For a long time this assumption of "natural monopoly" seemed to have little if any challenge.  It was just the way things were done in Australia and, presumably, the way things would always be done.

However, Telecom has provoked increasing doubts and scepticism about its performance in recent years.  Even so conservative a body as the Australian Treasury has questioned aspects of its operations.  Comparisons with other countries with less government control (such as Canada, which has a similarly dispersed population) do not show Telecom up in a particularly flattering light.

Telecom is now being criticised for, among other things, taking advantage of its monopoly position to charge high prices while being slow to introduce new kinds of service, and for failing to make proper use of new technology.  A recent survey of 4,000 Telecom employees indicated that they rated the provision of "excellent service" only fourth in priority, well behind their own training and career development.  Telecom is now planning to spend thousands of dollars on an in-house campaign to remind staff that customers come first, but public dissatisfaction is widespread.

Given the growing importance of telecommunications to every aspect of economic life, a second-rate system in a competitive world is something Australia cannot afford.

In this book Mr Richard Wood shows that contrary to the arguments put forward by some defenders of the status quo, Telecom is not a "natural monopoly", there is no good reason to think it is uniquely immune from the bad features of government monopolies, and there is no good reason why it should continue to have monopolistic privileges.

Telecom's "natural monopoly" is a myth, and an expensive one.  The facts Mr Wood presents are striking, and there are some surprises among them.

Vested interests are identified which are benefiting from the existing restrictive system to the detriment of the community as a whole, and which are the real obstacle to change.

Mr Wood shows why much greater liberality in the form of "marketisation" and competition should be allowed, both in ordinary telephone services and in the use of satellite and other new technology.

He also examines the consequences of privatisation, and suggests several far-reaching changes in the direction of liberalisation from today's restricted regime to improve service and increase efficiency.

He finally offers a set of suggestions for more minor changes which would at least improve Australian telecommunications within the existing system.

His economic scholarship is complemented by familiarity with the historical and political backgrounds of telecommunications policies in Australia and overseas.

Mr Wood says this study is not intended to be the last word on all aspects of Australian telecommunications policy, but it is complete in itself and surveys most of the major issues.

In a time of rapid technical change, and in an intensely competitive world trading environment where the cost, speed, capacity and reliability of communications are major factors in economic development and in achieving and maintaining competitiveness, the subject of this book is important for all Australians.

Hal Colebatch

INTRODUCTION

BACKGROUND

While the British heritage has been of immense importance to Australia's economic development, it has had its negative impacts.  We adopted Britain's system of public ownership and monopoly in postal services, and, as in Britain, extended it to include the potentially competitive telegraph and telephone in the latter half of the nineteenth century.  Despite a brief period of competition, public monopoly has prevailed in telecommunications in Australia virtually since the beginning.  The system has survived -- with no changes of substance except the splitting of telecommunications from the postal services in 1975 -- for a century.

Some would argue that the public telecommunications system has served us well by providing a constantly-improving means of communications at a falling real cost which has allowed most Australians to share in it eventually.  Australia, with its concentrations of population in the south-eastern and south-western corners and very little in between has been difficult to unite.  The telecommunications system has helped join us together.

But there are those who have been less enthusiastic about the system of telecommunications.  There have been serious complaints about the overall cost of the services, the unfairness of the distribution of the costs amongst users, and the extent to which Australians have missed out on technological changes that are benefiting users in some other countries.  The quality and reliability of the services have also been questioned.  In short, there are many who feel we can do better and that changes must be made either to improve the existing system or to replace it.  The emphasis of this study is not on further tinkering with the regulation of the public monopoly organisations, but on the more radical suggestions of permitting competition and private ownership.

Two new features have entered the debate about Australia's telecommunications industry.  Most importantly, the traditional view that telecommunications is a "natural monopoly" has come under challenge.  The implications of new technology have become evident from overseas developments, the publication of the (Davidson) Report of the Committee of Inquiry into Telecommunications Services in Australia, ⁽¹⁾ the advent of the AUSSAT domestic communications satellite and the popularisation of new developments in economic thinking about industry structure.  These events suggest that substantial competition in telecommunications is both possible and desirable.  The second new feature is the advocacy of "privatisation" to improve performance in this and other industries.

These policies of marketisation and privatisation have received growing prominence in academic circles.  This interest was sparked by the Centre of Policy Studies at Monash University, which sponsored a conference on "State Enterprise and Deregulation" in 1983, has published a special study on telecommunications in Australia, and has sponsored visits by international experts. ⁽²⁾  The Centre for Independent Studies has also encouraged research along these lines into industries such as domestic airlines, postal services and telecommunications.

The main organisation in Australian telecommunications is the Australian Telecommunications Commission (Telecom).  Telecom began life in 1975 as an offshoot of the old Australian Post Office (APO).  After the (Vernon) Commission of Enquiry into the Australian Post Office, ⁽³⁾ the APO was split into two commissions, Telecom and the Australian Postal Commission (Australia Post).  This split -- and the removal from direct departmental control -- was the first major change for nearly one hundred years.  After ten years we can now assess whether this re-organisation set the scene for reliable, cost-efficient and innovative telecommunications in Australia or whether there is need for further change.  In particular, could marketisation and privatisation improve performance?

THE SCOPE OF THIS STUDY

This study begins by examining the structure and performance of Telecom, highlighting the various failures in the current system.  Problems seem to be in statutory monopoly, public ownership and government interference with (in particular) pricing policy.

This is followed by a consideration of the scope for "marketisation".  We need to determine whether Telecom, or parts of it, has elements of natural monopoly.  Where natural monopoly is not present the appropriate policy should be to open up those areas to competition.

Advances in technology have expanded the scope for competition in telecommunications substantially.  This was recognised by the Davidson Committee, which demonstrated that areas such as long-distance communications and the supply and installation of terminal equipment should be opened up to competition if the "public interest" was foremost in the minds of decision-makers.  Part of this paper will show any sceptical readers that telecommunications are not a "natural monopoly" and that competition in telecommunications can work for the good of society as a whole, as it does elsewhere in the world.

The Davidson Report has received little attention either academically or officially.  Unfortunately, arriving as it did just before the 1983 election, it was not acted on by the Fraser Government.  While the incoming Hawke Government dealt with the (Bradley) Report of the Committee of Inquiry into the Monopoly Position of the Australian Postal Commission, ⁽⁴⁾ it has rejected Davidson's Report virtually out of hand and without argument.

The Davidson and Bradley Reports are like cheese and chalk.  While the Davidson Committee took a very open attitude to competition, the Bradley Committee broadly favoured the continuation of Australia Post's exclusive trading powers.  Neither report considered the appropriate form of ownership of the service examined, which was not part of the terms of reference in either case.  This omission is of interest because while marketisation is important, social benefits may also be expected from the transfer of a public enterprise to private ownership.  This question will be examined in the light of both theory and overseas experiences with private ownership of telecommunications.

Privatisation has since become an "issue" in Australia. ⁽⁵⁾  The Federal Opposition has raised the question and several public bodies have been considered.  One short-list of candidates for privatisation includes the Commonwealth Banking Corporation, Telecom, Australian National Lines and Trans Australia Airlines (TAA).  In the light of the British experience with privatisation and widespread disenchantment with some aspects of the operations of these bodies in Australia, the question is important.

It is interesting that Telecom has made it onto this particular list, while its old partner in the Australian Post Office, Australia Post, has not.  In my view, the case for the postal service to be on the privatisation or liberalisation schedule is at least as strong as that of telecommunications.  Both should be there for the same sorts of reasons.

Telecom and Australia Post have much in common.  Both are public enterprises under Commissions with very similar legal and financial structures and a common parentage.  Both have substantial degrees of statutory monopoly although that afforded to Telecom is far more protective.  Both have been subjected to Government pressure to maintain politicised pricing structures involving significant cross-subsidy of rural users.  Further, the two organisations have lost much of the public trust and esteem they once enjoyed.  The criticism of their performance has been widespread and strong.  Perhaps most important, neither organisation can be construed as operating in a naturally monopolistic environment requiring protection from competition.

The monopoly supplier of telephonic and related services has, for a publicly-owned enterprise, shown an inordinate amount of interest in preserving its own privileged position by political means rather than by proving its worth as an efficient, innovative and reliable performer.  This aspect of Telecom's behaviour is dealt with in a concluding section which considers the political economy of telecommunications policy-making in Australia.

CHAPTER 1:  A PROFILE OF TELECOMMUNICATIONS
IN AUSTRALIA

The importance of telecommunications to any modern economy cannot be over-emphasised.  For a country with Australia's geographical features, efficient and up-to-date telecommunications are of great importance for all economic development.

Telecommunications are far more than telephony, itself of crucial importance to business and wealth-creation.  The use of the system for data transmission has been growing at astronomical rates and illustrates how technology has changed the entire concept of telecommunications.

The telecommunications industry in this country is dominated by Telecom, its highly unionised labour force, the Overseas Telecommunications Commission (OTC) and a group of equipment suppliers.  A new, and wild, card in the pack is the AUSSAT domestic communications satellite.  The outstanding features of the industry are statutory monopoly, public ownership and political interference.

Both the Postal Services Act and the Telecommunications Act of 1975 establish significant exclusive trading powers for the respective operators, Australia Post and Telecom.  In the case of Telecom the monopoly power appears virtually absolute.  Any person or body, other than Telecom, "shall not erect, maintain or operate a telecommunications installation within Australia" or "attach a line, equipment or apparatus to a telecommunications system".  "Installation" and "system" are extremely widely defined.  There are some minor exceptions as set out in Section 94 including Telecom's right, under section 13, to authorise persons to erect, operate, install, etc.  The penalty for a breach of section 94 is two years' imprisonment.  This has meant that Telecom, unlike Australia Post, has had no effective competition at all.  Its monopoly has been as complete as one could imagine.

The exclusive trading powers under the Telecommunications Act have been vested in a 100 per cent publicly-owned commission trading under the name "Telecom".  The act requires the Commission to operate efficiently and cover its costs of operation, including financing from its surplus at least one-half of its capital spending.  Telecom also has rights to undertake public borrowing to help finance its investments, which it does on a very large scale.  The Minister (for Communications) has to approve Telecom's prices (under certain specified conditions) and has considerable powers to direct its operations.  Telecom is also obliged to notify the Prices Surveillance Authority of proposed changes in its charges.

While there has, since 1975, been an attempt to simulate the organisation of a private firm, there is not the same disciplinary and incentive structure as in private enterprise.  Ownership is diffused, management and staff tenured, and take-over impossible.  The result that may be expected is that the commission is used to at least some extent for the benefit of the operators rather than the consumers of telecommunications services.  The absolute monopoly power is an integral part of a process which can produce monopoly prices but where the consequent, profits are disguised in the form of cost-inefficiency of various kinds. ⁽⁶⁾

Monopoly power is also used to sustain cross-subsidy.  This may not be the free choice of management but the result, in part, of overt and covert pressure from Government.  The overt pressure for politicisation of pricing comes from a section (6.(2)(b)(iii)) of the Telecommunications Act requiring Telecom to cater for the special needs of people living or carrying on business outside the cities.  Covert pressure is exerted in mysterious ways.  As noted by Butlin, Barnard and Pincus, ⁽⁷⁾ the Country (now National) Party has traditionally shown great interest in the operations of Telecom, Australia Post and their predecessors.

Total cross-subsidy has been enormous, as is shown by the following table from the Prices Surveillance Authority's Report ⁽⁸⁾ showing estimates of revenues and expenses from the major services for 1984-85.  This is the picture that emerges well after the commencement of a "rebalancing strategy" in 1981.  While, in aggregate, trunk callers are taxed, there is a cross-subsidy within trunk calls which tends to favour the bush.  An STD call between Melbourne and Sydney could be expected to be much cheaper to connect than one over a similar distance between two rural locations.  The actual urban-rural cross-subsidy from all sources is large but is not known with certainty.

TABLE 1:  TELECOM'S CROSS-SUBSIDISATION
Estimated 1984-85 -- Millions of dollars

	Earnings (including depreciation)	Direct Expenses	Contributions
Access rental   - metro   - non-metro   Total	551 334 885	517 574 1,091	34 -240 -206
Local calls   - metro   - non-metro   Total	678 295 973	386 286 672	292 9 301
Trunk calls	1,469	437	1,032

Source:  Prices Surveillance Authority, Inquiry in Relation to the Supply of Telecommunications Services, (1984) Report, p. 45.

The urban-rural cross-subsidy has a surprising degree of support from various quarters.  The Federal Secretary of the Australian Telecommunications Employees' Association, Mr W. Mansfield, claims it is supported by "all three major political parties ... [indicating] an acceptance of Telecom's cross-subsidy which transcends political differences".  He also claims that the more than $300m that is transferred from STD users "to sustain the loss-making rural network is an equitable and socially-beneficial arrangement" (letter to Australian Financial Review, 1 April 85).

The Minister, Mr Duffy, is also a strong supporter of the cross-subsidy.  Telecom has embarked on a $400m project to complete the automatic network at an average cost of $20,000 per outback subscriber.  The price to subscribers will range from $150 to $1350.  The huge cross-subsidy under the "Rural and Remote Areas Programme" has been endorsed by the Minister, who referred to unspecified benefits "from Telecom's endeavours in the rural and remote areas that don't show up on its balance sheet" (Australian Financial Review, 12 September 84).  The Minister has since made numerous statements in support of cross-subsidy which, in turn, have been used to defend Telecom from threats of privatisation.

The costs of this program and other rural cross-subsidies must be met by urban consumers, and add substantially to the cost of a telephone, certainly making it prohibitive for many.  Mr Mansfield's concern that "all Australians have access to and can afford to use a telephone, wherever they may live" appears empty when it is realised that many low-income urban consumers are deprived of a telephone because of the policies he supports.  This tax is about $125 per urban subscriber per annum, being about $500m spread over about 4 million urban subscribers.

The urban-to-rural cross-subsidy should not be sacred.  I would like to see a gradual movement towards cost-related pricing in telecommunications and more explicit financing.  The method suggested by Brock and Evans ⁽⁹⁾ is for the government to levy a revenue surcharge on the suppliers of urban services which would provide a fund for subsidising rural carriers.  This suggestion was made with a competitive system such as that emerging in the United States in mind.  A competitive system of telecommunications and the maintenance of cross-subsidy are not, as is often suggested, mutually exclusive.

CHAPTER 2:  TELECOM'S PERFORMANCE

In its 1984-85 Annual Report, Telecom sets out its corporate objectives and commitments.  Among these is the following:

Telecom takes pride in being one of Australia's more efficient enterprises and is committed to continuing to improve its efficiency.

This is a claim worthy of close consideration given the importance of telecommunications to Australia's economy.

Unfortunately it is rather difficult to evaluate the performance of public monopoly enterprises, but in this section we look at ways this can be approached and find signs of performance deficiency which should be a matter of concern, and which point to the desirability of change.

PRODUCTIVITY MEASURES

Telecom, like all government monopolies, prefers to measure its performance in "technical" terms such as the extent of its network, its degree of automation and the penetration of the telephone, rather than in terms of productive efficiency.  It can point to quite impressive achievements in this regard while also being able to boast declines in its real price structure.  Consider Table 2.  Taken on its own this shows that Telecom has facilitated enormous growth in the use of the telecommunications system, especially in regard to trunk and overseas calls and data transmission, increased its productivity by percentages ranging from 66 (for services per employee) to 103 (for real earnings per worker), and reduced its real tariffs by 34 per cent.  Further, the penetration of the telephone has risen appreciably from 62 to 85 per cent of households.

TABLE 2:  TELECOM'S MAJOR ACHIEVEMENTS 1975-1984

	JUNE 1975	JUNE 1984	CHANGE
GROWTH
Telephone services in operation	3,538,948	5,850,594	68%
New services connected in the year	345,529	510,728	48%
Provision of new misc. telephone facilities	256,782	481,120	87%
Telephone calls   Local   Trunk   Overseas   Total	3,560,000,000 345,000,000 2,225,000 3,905,000,000	6,174,595,000 933,621,000 22,204,000 7,108,216,000	73% 171% 898% 82%
Data Modems in operation	6,019	83,249	1283%
PRODUCTIVITY
Total staff	88,690	88,488	0%
Telephone services per staff member	39.9	66.2	66%
Earning per staff member	$12,049	$47,698	296%
Tariff Index *	161.8	265.0	63%
CPI *	171	402	135%
SERVICE
Homes with telephone	62.0%	85.0%
STD (% customer-dialled)	74.0%	96.3%
ISD (% customer-dialled)	0.0%	83.2%
Deferred applicants	16,472	5,226

(* 1966-67 base year)

Source:  L. McPherson "Evaluation of the Economic Performance of Government Trading Authorities", Australian Accountant, April 1985.  p. 24.  Original heading retained.

This array of superficially flattering statistics is impressive until the sceptic takes a closer look.

One obvious point should be made at the outset.  Telecom has not passed on all of the increases in productivity to its customers.  Productivity (of workers) indices have gone up far more than rates have come down, even though real wage rates in the industry have not risen significantly.  However, unlike Australia Post, Telecom uses a lot of capital equipment in producing its services and we would not expect to observe the same relationship between falls in real charges and rises in real (wage adjusted) productivity as in a labour-intensive industry.  Interestingly enough, such a relationship is not observed in the labour-intensive Australian Postal Commission. ⁽¹⁰⁾

COMPARISONS WITH PRIVATE OPERATORS

Another interesting exercise would be to compare Telecom's charges with those of private telecommunications operators.  However these are forbidden to operate by statute so no such comparisons can be made.  But even if there were rival operators, as in the United States, Telecom's reluctance to disclose information might still make a fair comparison impossible.  Telecom does not use private contractors for any of its functions.  Even Australia Post makes extensive (although arguably insufficient) use of private contractors.  Several areas such as laying of cages or wiring of buildings could be contracted out, probably at a considerable cost-saving.  This has been the experience of the South-East Queensland Electricity Board since it began contracting out certain functions early in 1985.

INTERNATIONAL COMPARISONS OF CHARGES

Another way of broaching these difficult questions is to make comparisons of charges between Telecom and overseas operators.  International comparisons are fraught with difficulties but nonetheless are valuable.  Telecom itself has attempted such comparisons.  Consider Chart 1 which reproduces an item from a 1985 Telecom Topics distributed with telephone bills.

Source:  Telecom Topics chart claiming to show that Australian telephone charges are "lower than most other countries".

A subscriber confronted with these data might well wonder what comfort can be drawn from them.  My own reactions run along the following lines:

• Why is the comparison made with only four other countries, only two of which are usually credited with exemplary economic performance?  The other two -- New Zealand and the United Kingdom -- are not countries with which we usually wish to compare ourselves.
• The comparison with the United States is not complimentary to Telecom.  While there are reasons for expecting the United States to do better (because of its denser traffic), why is Canada omitted from the chart?  It has population distribution and density much more comparable with Australia.
• What is being compared?  What is "the annual cost of a telephone service of the average residential customer"?  If it means the average annual telephone bill (rental plus all call charges) why then is this relevant when it ignores what is being received for this payment?

As it turns out, the Telecom data are highly abridged and selective reproductions of results which Telecom obtained from a 1983 study it undertook and which are summarised by the House of Representatives Standing Committee on Expenditure. ⁽¹¹⁾  The full comparison is between 11 countries and is considerably less flattering to Telecom.  The cost is based on the sum of one-tenth of installation costs, total rental charges, charges for 600 local calls and fifty standardised trunk calls, as of 1982-83.  The comparison was done for both total cost (converted by the exchange rate) as well as on the "hours of work required" basis reported in "Telecom Topics".  The full figures for 1982-83 are graphed as Chart 2.

One point should be highlighted.  Three of the six countries excluded -- Canada, Japan and Sweden -- all had considerably better figures than Australia.  Canada, at 25.63, was about 19 per cent less than Australia's 31.68, and was a particularly surprising omission given, as the Davidson Report points out, its significant similarities of standard of living, population density and dispersion compared with Australia.  While Canada's overall population is larger than Australia's (approximately 25 million to Australia's approximately 15.5 million) it is spread over an area nearly a quarter larger again, so its density is comparable.  The dispersion of the population, with a major concentration in the south-eastern corner and a smaller concentration in the south-west, is also remarkably similar.  The one major difference from our point of view is that Canada's telecommunications system privately-owned.

According to the Standing Committee, "The conclusion to be drawn from these international comparisons is that continuing efforts are required by Telecom to improve efficiency and productivity in order to keep charges internationally competitive" (p. 22).  This assessment was omitted from "Telecom Topics" although it might have been of very great interest to telephone subscribers.

TECHNOLOGY

Telecom has taken an insufficiently progressive attitude towards new technology, despite its claims to the contrary.  This has probably resulted from insufficient competition and has manifested itself in various ways including Telecom's own "accord" with the unions and its restrictive policy on telephone attachments.

The accord with the unions over technology was set up after a strike in 1978 over new switching equipment.  The settlement of this strike -- discussed in Chris Trengove's Telecommunications in Australia -- provided for joint consultation between management and unions before any decision is made to adopt new technology.  This has served as a brake on new technological innovation and has retarded the development of the telecommunications system.

As with the "accord", a lack of interest in technological change was evidenced by Telecom's attitude towards a domestic communications satellite.  Seeing it as a potential competitor, Telecom conducted a campaign to kill the satellite system.  When this failed it attempted to gain control of the system and was, as we will see below, partly successful.  This approach seems to be standard amongst public monopolies faced with competition.  The British Post Office, when faced with competition from the telephone in the late nineteenth century, behaved in exactly the same way and attained control of a facility it had previously argued was unnecessary. ⁽¹²⁾

Various observers have commented on the technological problems emerging in Australian telecommunications.  Even the Australian Treasury has compared our access to new technology with that of other countries unfavourably.  Regarding telephone attachments the complaints have been many.  For example, Mr Paul Travers, Chairman of the Australian Information Industry Association, has argued that the supply and attachment of hardware to the network, and its maintenance, "must be hived off" (Australian, 28 October 85).  He added that "Australia urgently needed a telecommunications environment in which the potential of the public-switched network could be fully realised".  Telecom's move into marketing a combined personal computer and modem has been criticised in the light of Telecom's ability to knock back alternative systems.  The advent of the "ComputerPhone", claimed by Telecom as a symbol of its high-tech profile is, in fact, more a symbol of its monopoly power and its use of it to retard technological innovation:

A COSY ARRANGEMENT WITH AUSTRALIAN EQUIPMENT SUPPLIERS

Another example of Telecom's monopoly power being used to limit the introduction of new technology arises from its cosy relationship with a favoured group of Australian manufacturers of telecommunications equipment.  This rapport, explored at more length below, was recently pointed out in a long article about one of the favoured suppliers, Standard Telephones and Cables Pty Ltd (STC). ⁽¹³⁾  STC would "vigorously oppose" privatisation of Telecom because the current practice of big business subsidising the domestic subscriber would cease and the result could be "catastrophic" because of STC's "traditional strength in manufacturing for the domestic sector".  Privatisation "could only mean less manufacture in Australia".  In short, STC's impressive profitability is tied up with a relationship with Telecom based on favoured treatment and Telecom's unfair pricing policies.

A realistic overall assessment must lead to the conclusion that Telecom has quite considerable -- and growing -- performance problems with the cost, quality and range of services offered.  In its quest to protect Australian equipment manufacturers, recipients of cross-subsidies and itself, it has caused Australian telecommunications to fall behind those of a number of other countries at a very crucial time.  Telecom certainly does not have grounds for any self-congratulation, particularly not after real international comparisons of performance.

CHAPTER 3:  NEW DIRECTIONS -- MARKETISATION

Telecommunications services in Australia are dominated by a body which is publicly-owned (and therefore really owned by nobody), ⁽¹⁴⁾ has almost absolute monopoly powers and which is subject to both open and hidden government interference.  Although this system may have worked tolerably well in the past, significant performance problems are now emerging.  Economic logic and experience overseas with alternative forms of organisation both suggest that new directions should be considered.  In particular, rather than trying to make Telecom work better through bureaucratic controls, it is time to consider the scope for substituting the discipline of competition (i.e. "marketisation") and concentrated ownership (i.e. "privatisation").

It should be remembered that with the advent of long-distance competition and the divestiture of Bell's local exchanges in the United States, and the sale of just over half of British Telecom in 1985, Australia is the only major English-speaking country which has a public monopoly telecommunications system.  Private ownership prevails in the United States, Canada and Britain and each of these countries has more competitive conditions than has Australia.

We now consider in turn the two broad policy directions in which we could head, beginning with undoubtedly the most important:  greater competition and marketisation.  This is followed by a consideration of privatisation.  In each case we begin with a review of the economic theory supporting the policy and then consider the prospects specifically regarding telecommunications.  As will become clear there is considerable empirical evidence favouring these policies of liberalisation.

MARKETISATION:  THE THEORY

It used to be argued that the existence of economies of scale or scope constituted "natural monopoly" requiring protection from competition.  This argument has always been suspect but the many doubts about it have recently been brought together as the "theory of contestability".  The concept of contestability relates to the determination of the conditions under which previously-protected markets can be opened to competition with socially desirable results.  Efficiency gains may be expected from marketisation even where there are scale or scope economies of single-firm operation.

The theory of contestability is not really new.  Ideas that have been around a long time have been drawn together and elaborated by a resourceful group of economists with experience in the areas of welfare economics and deregulatory experiments. ⁽¹⁵⁾  They have drawn on various work including that of a brilliant British economist, Frank Ramsey.  The possibility of forcing operators to set "Ramsey prices" (in crude terms, average costs) in all areas by subjecting them to competition is integral to the contestability story. ⁽¹⁶⁾

Economies of scale (i.e. unit costs decrease as output rises) and of scope (i.e. total costs of producing a given bundle of outputs are least for a single firm) are the basis of "natural monopoly".  Where such economies exist it is often alleged that single-firm operation minimises costs.  However, single-firm operation, where it is protected by statutory limits on competition, involves potential monopoly power which can be used explicitly for the purposes of making profits, supporting cost-inefficiency or cross-subsidy.  Regulations preventing explicit profits may allow the organisation to hide implicit profits by feather-bedding, on-the-job consumption of perquisites and generally leading the easy life. ⁽¹⁷⁾  Politicised pricing practices (cross-subsidisation) involving taxing some users to subsidise others may also arise.  In short, absence of competition may have undesirable consequences even where there should be the economies of single firm operation.

The theory of contestability involves three conditions under which the allowance of open competition will result in pricing according to unit costs, the absence of both explicit and implicit profits and zero cross-subsidy.  The conditions for these results are:

• the absence of significant sunk costs in the industry -- that is, fixed costs incurred by an entrant can be recouped if entry into the market is unsuccessful;
• the absence of any tieing, by technological or legal means, of customers to the incumbent operator in an industry; and
• the absence of any restrictions on an entrant in having access to the most advanced technology available for use in the industry.

In addition, the outcome of allowing competition depends on the response made to a challenge by the existing operator.  Strategies involving price flexibility may be possible that thwart the intentions of new entrants.  It may be argued that prices based on average rather than marginal costs are not really "socially-optimal".  However, while this belief has some force, "Ramsey prices" are very attractive.  Where there are economies of scale or scope, marginal cost pricing will result in losses.  Where such losses are made up from taxation revenue, the raising of the revenue will itself cause inefficiencies. ⁽¹⁸⁾  That is, there is both a potential gain and loss from moving from average cost to marginal cost prices.  It must further be remembered that the divergence of average and marginal costs depends on the extent of scope-scale economies.  The less significant are such economies, the closer will be Ramsey prices to marginal cost ones.

Some may be troubled by the fact that opening up a contestable market to competition results in the elimination of cross-subsidy.  However, if it is desired to favour some users over others it is, as we have seen, possible to do this in ways that are divorced from monopoly retention.  That is, competition and cross-subsidy are separate issues in contestable markets.

Even an approximation of the above conditions may lead to gains from putting an alleged "natural monopoly" to the market test.  The only thing that can go wrong is that "wasteful competition" may occur, resulting in the wasting of scarce resources.  But the possibility of such waste depends on the existence both of sunk costs and of private entrepreneurs who are foolhardy in that they have a propensity to risk money (their own) without a good chance of retrieving it. ⁽¹⁹⁾  Those risking their own money can usually be relied upon to make sensible decisions, an attribute often missing from those spending public funds.

Social gains may also be had if only parts of an industry are contestable.  Those areas which can be thrown open to competition should be exposed to market forces, while those that are truly "natural monopolies" could be protected by a cordon sanitaire if wasteful competition may be expected.  Baumol gives the example of airline operations which are broadly contestable and airports which, arguably, are not.  Some regulation (i.e. non-market control) may be required where contestability does not apply.

The basic messages of contestability analysis are these:

• Economies of scale or scope do not, in themselves, constitute a case for statutory protection from competition.  There is a strong case for putting any alleged "natural monopoly" to the market test although it is probably wise to check whether the conditions for contestability do, in fact, appear to hold, before opening to market forces.
• Average cost prices may not be too different from marginal cost prices depending on the extent of economies of scale or scope.  Marginal cost prices are not necessarily "socially-optimal" given that losses must be financed.  Further, average cost prices are certainly better than the monopoly prices which may arise from statutory protection from competition.
• Where only part of an industry is not contestable, this does not justify failing to open up those parts that are.  Any truly naturally monopolistic bits could be quarantined and subjected to regulation if wasteful competition was a realistic possibility.

THE CONTESTABILITY OF TELECOMMUNICATIONS

The idea that telecommunications are a natural monopoly has widespread currency.  When people think of competition in telecommunications they often have a notion of duplication of wiring, switching and terminal units which, on the surface, seems ridiculous.  Surely one network is the only sensible organisation for telecommunications?  However, this "common-sense" view has a number of failings, not least of which is that it ignores the greatly expanded possibilities for competition that have resulted from technological advances in recent years.

It is local networks in particular that have traditionally been regarded as being naturally monopolistic.  This was the conclusion of the Australian Treasury in its review of the evidence on natural monopoly in telecommunications. ⁽²⁰⁾  Treasury concluded this on the basis of common-sense and its understanding of the history of telecommunications in the United States.  However, according to a very interesting paper describing the early history of competition in telecommunications in the United States, there were many instances of duplicate systems.  As Bernholz and Evans note, "In 1916, well after the heyday of independent telephony, 20% of all Bell exchanges still faced direct competition from independent exchanges".  These authors conclude that even "local telephone markets were reasonably contestable" and that sunk costs "were not effective deterrents to entry ... local exchange monopolies may never have been 'natural'. ..." ⁽²¹⁾

In contrast to its view on local networks, Treasury saw scope for competition in long-distance transmission if there was sufficient volume.  Further, it noted that "the introduction of satellite technology has made the provision of relatively small-scale, long-distance telecommunications services viable" (p. 12).  Treasury emphasises the fact that "technological advances over the last two decades have begun to change many of the basic conditions in the industry and will almost certainly continue to do so. ..." (pp. 12-13).

Telecommunications, being an industry which is constantly changing as a consequence of technological developments, is now much more than the original POTS ("plain old telephone service") and is, in fact, so broad and so complex as to defy concise summary.  Advances have occurred in regard to methods of transmission (e.g. use of microwave radio and large capacity optical fibre cables), exchange or switching of electromagnetic signals (originally through manual switchboards and now fully digital) and of end-user terminal equipment (witness Telecom's new "ComputerPhone").  The telecommunications network can be used for the sending of far more than audible messages.  Examples include telegrams, television signals, telex, data services and facsimile transmission.  The role of telecommunications in a society which wishes to remain progressive, prosperous and internationally competitive is becoming increasingly important.

Telecom serves us less well as the sophistication of the industry it dominates advances.  While having served us reasonably in the past, it has not proved itself capable of meeting all the new challenges.  It has placed great emphasis on jobs and conditions rather than technology, acted to protect the established Australian equipment industry from domestic and international competition, restricted users' connections of terminal equipment, lobbied strenuously against allowing competitive and complementary networks and generally shown a resistance to change.  Australians have, it seems, been forced to fight for the limited access to new technology in telecommunications that has been allowed.  The monolithic, union-dominated Telecom has had to be dragged, screaming and kicking, towards the new age of technology.

The Davidson Committee took an extremely enlightened attitude to new technology and competition in telecommunications.  In virtually all respects its 1982 Report contains recommendations compatible with an innovative and efficient telecommunications sector.  It highlights those areas where gains could be expected from competition.  Gains would, according to the Committee, manifest themselves in the forms of more varied and cheaper services, more rapid access to technological advances and the elimination of major cross-subsidies.

Davidson considered the extent to which the Telecom terrestrial network is a "natural monopoly" needing protection from competition.  The Committee was "satisfied that the economies of scale and scope in telecommunications are not abnormally large and do not support a 'natural monopoly'." (p. 50)  It argued that technological change was "reducing cost of entry and permitting service responses increasingly tailored to the varied needs of different customers -- hence displacing the relevance of 'natural monopoly'." (p. 48)

The Davidson strategy can be summarised as allowing the existence of alternative networks (leased or independent) and their interconnection, at cost, with that of Telccom;  the introduction of time-based local call charges;  increased private participation in the supply and installation of terminal equipment;  removal of "protection" of Australian equipment manufacturing;  and the adoption (largely through market forces) of cost-related pricing policies.  The then-proposed AUSSAT domestic communications satellite was seen as playing a major part in this very open approach to telecommunications policy.

AN OPEN APPROACH TO LEASING TELECOM'S CAPACITY

Consider first the potential benefits from a more open approach to the leasing of Telecom's capacity.  While Telecom allows the leasing of lines for certain purposes, it does not allow the 1easing of networks (i.e. switching capacity).  Further, it does not allow the use of leased lines to establish networks in competition with Telecom, restricts the attachment of terminal equipment to leased lines and does not allow resale of leased capacity.  Many have argued that this very restrictive set of policies robs the community of full potential use of the existing terrestrial telecommunications network and serves only to protect Telecom from competition.  Such views were put strongly to the Davidson Committee which gave several examples of how intra- and inter-city networks using leased Telecom capacity could work.

The Davidson Report recommended that a virtual "open-go" policy on leasing be forced upon Telecom. ⁽²²⁾  Leased capacity should not be subject to any restrictions on its use or resale and should be priced at cost-related non-discriminatory rates.  Interconnection should be allowed at the cost of a time-based local call.  Such a policy was not seen to be potentially detrimental to Telecom as long as it was able and willing to alter its own charging policies to reflect more closely the costs of providing different facilities.  Otherwise, users of leased capacity subject to non-discriminatory pricing could skim off the cream, leaving Telecom with expensive community obligation and no basis for subsidising them.

The Davidson Report also recommended that independent networks be allowed.  However, it did not feel that complete openness was appropriate and could foresee only the possibility of "specialised networks" arising.  The Report expresses some worry about the possibility of "destructive competition" and is concerned to rule out another national terrestrial network.  Further, it was not in favour of OTC establishing its own domestic network.

LONG-DISTANCE COMPETITION

Long-distance competition is now a feature of the United States system and has begun to emerge in the United Kingdom.  Consumers subscribing to a competing long-distance operator do not need a separate telephone.  They can connect with the alternative operator by dialling an access code before the required number.  Charges for such calls have been below those of AT&T and have put downward pressure on AT&T's charges.  Local exchanges in the United States have been forced to allow non-discriminatory interconnection to any long-distance firm -- companies like MCI and Sprint must have equal access with AT&T. ⁽²³⁾  The annual investment of AT&T's rivals in long-distance capacity is now significantly above that of the traditional carrier.  According to Baumol and Willig there has been an "extraordinary rise in competition". ⁽²⁴⁾  In Britain competition is far more limited -- only one rival (Mercury) is allowed and it does not enjoy the same "equal" access as do AT&T's competitors.⁽²⁵⁾

American consumers have benefited greatly from the new competition.  There does not seem to be any good reason why Australian consumers should be denied similar benefits.  If long-distance competition were allowed and non-discriminatory interconnection forced upon Telecom, operators would almost certainly enter the market.  For example, Australia's AT&T manager, Mr J. Berrier, has said that "AT&T would be in like a shot ... I'd put in a microwave link between Sydney and Melbourne and Brisbane.  We'd establish our own towers and undercut Telecom prices". ⁽²⁶⁾  As the Treasury has noted, the domestic communications satellite could also be used in making such links.  We turn now to a consideration of this satellite's actual and potential role.

THE DOMESTIC COMMUNICATIONS SATELLITE

A publicly-owned company, AUSSAT Pty Ltd, was set up in 1981, to own and operate a national satellite system.  The company is owned 75 per cent by the Commonwealth and 25 per cent by Telecom.  While attention has focussed on the use of the satellite system for the purposes of television transmission, there is great potential for its use in telecommunications as more commonly defined.  AUSSAT had, for example, seen the scope for providing "Telecom with the means to introduce telephone service to those areas of Australia beyond the reach of existing or planned terrestrial communications system". ⁽²⁷⁾

The Davidson Report saw a very important potential role for the satellite system through interconnections between it and capacity leased from Telecom or, indeed, with independent networks.  It did not see a role for AUSSAT in establishing its own local terrestrial networks although it felt that AUSSAT could lease Telecom capacity to create networks.  Most importantly, "[u]sers should be permitted to lease satellite capacity for incorporation in leased or independent networks" (Recommendation 10).

The advent of a domestic communications satellite system in Australia is the greatest-ever potential challenge to Telecom's monopoly.  The satellite provides the basis for an alternative national network in competition with the terrestrial network of Telecom.  However, maximum use of this network depends on leasing of Telecom capacity and interconnection on reasonable terms.  After years of political maneouvering on this issue, in which Telecom attempted at first to stop and later to control the communications satellite, it has attained the situation where it has partial control of AUSSAT and has announced discriminatory prices for interconnection (see articles in the Australian Financial Review, 19 March 85 and 21 March 85).  Unlike American consumers, those in Australia have no "equal access" legal protection.  This pricing policy -- described by at least one commentator as one of "charging the Earth" for inter-connection -- has upset both AUSSAT and potential business users of the system.  Telecom has accompanied this charging policy with a very heavy advertising campaign publicising the advantages to business of its system, "the network", as Telecom calls it.

Of course, the reason for part of the trouble is that Telecom uses its STD facilities as a vehicle of cross-subsidy.  There is a huge tax of over $1 billion on trunk calls to provide funds for subsidising other services.  In order to protect that ability to over-charge, Telecom has set prices for interconnection which allow cross-subsidy to continue.

Telecom also has a policy of allowing only "common interest groups" to operate a private network using leased capacity.  Such groups must have a common interest -- other than telecommunications -- and not act as common carriers.  This prevents sharing of facilities by different groups for the purposes of establishing a network competitive with that of Telecom.

In fact, what has happened is exactly what the Australian Treasury warned might happen.  It saw the satellite system as being "able to offer an alternative means of long-distance telephone communication which could be attractive to many users ..." (p. 15).  However, Treasury warned that:

If Telecom's monopoly were maintained in this area, then not only would users be denied the full economic benefits of more diverse and economically-priced telecommunications services but also the viability of the satellite system itself would be artificially constrained and/or would depend more heavily on the existence of "captive" public sector users.  (p. 15)

Telecom will be making only limited use of the satellite to offer "customised communications" anywhere in Australia using its Iterra Network Service.  Using fixed or portable network earth stations, the Iterra service offers point-to-point communications for telephone, text or data transmission.  The sort of use Iterra will make of the satellite will, of course, be denied to other users because of Telecom's policies on the basis and cost of interconnection with its terrestrial network.

Despite the difficulties, some of the promise that the Treasury and the Davidson Committee saw in the satellite may come to fruition.  The Chairman of that Inquiry, Jim Davidson, is now a director of Equatorial Satellite Systems Australia Pty Ltd, a company which plans to offer services (such as links between bank branches) now operated through leased land lines from Telecom.  The pressure from business for interconnection and leasing on reasonable terms will be immense, and ways may be found to circumvent the Telecom monopoly.  Just before its first launch, AUSSAT was perceived to be struggling a little (see, for example, The Australian, 17-18 August 85).  If AUSSAT is not a commercial success because of its bondage there will be pressure on Governments to liberalise the usage of the very expensive but potentially beneficial domestic communications satellite system.

COMPETITION IN SUPPLY AND INSTALLATION OF TERMINAL EQUIPMENT

Terminal equipment is yet another area in which Telecom currently plays a dominant and restrictive role which appears to be aimed at protecting itself and Australian equipment manufacturers rather than enhancing the interests of users of telecommunications services.  Telecom even seems to have tried to determine import protection policy affecting the telecommunications equipment segment of the Australian manufacturing sector.

Terminal equipment of many kinds is attached to the telecommunications network.  In addition to the "telephone" there are PABX systems (ie. "switchboards"), modems (devices for connecting computers via telephone lines), combined computers and modems (e.g. ComputerPhone), teleprinters, facsimile machines and small business systems (e.g. Commander).  This is one of the growth areas of new technology in telecommunications and it is vitally important that use of the network is not hindered by unnecessary restrictions on the installation of such equipment.

As we have already noted, Telecom has a virtual monopoly in the installation and maintenance of terminal equipment.  It has reserved for itself markets for some types of equipment and controlled completely what can be attached to the network.  In its own equipment purchases it favours Australian suppliers by ill-defined and almost covert preference scheme.  This scheme may not only have protected Australian manufacturers from import competition but also may have protected established manufacturers, such as STC, from new ones.

The Davidson Report was scathing in its attack on the status quo and made the following major recommendations:

• The private sector should be allowed to participate in all aspects of marketing and installation of terminal equipment.
• Responsibility for setting technical standards should be removed from Telecom and placed in the hands of an independent standards authority.
• Any support to local equipment manufacturing should be explicit and in keeping with general government policy.

These suggestions were aimed at improving the availability and lowering the cost of terminal equipment without jeopardising safety standards.

While none of the Davidson recommendations were acted upon by Government, Telecom did agree, as it is able to do under Section 13 of the Telecommunications Act, to be more permissive about the range and source of terminal equipment that could be attached to its network.  However, this slightly more liberal attitude was short-lived and attempts have been made to return to the old policy.  It seems the only way to ensure that Australia keeps up with new terminal technology is to do as suggested in the Davidson Report and to remove, by statute, Telecom's powers in this area and to make policy towards fostering the domestic equipment manufacturing industry a Government concern -- not Telecom's.  This is not to suggest that Telecom does not have a role in the supply and maintenance of terminal equipment, but interference such as that witnessed at last year's Industries Assistance Commission (IAC) inquiry into telecommunications equipment must become a thing of the past.  The IAC held an inquiry into assistance levels for a wide range of telecommunications equipment after a reference from the Minister in November 1983.  The final report went to the Government in October 1984. ⁽²⁸⁾  The report recommended reductions in the level of protection of the various items under review.

The IAC found it difficult to come to grips with the role of Telecom, stating that "Telecom's powerful influence on industry structure is very difficult to observe and quantify" (p. 3).  This difficulty was illustrated by the fact that a witness at the final hearing on the Draft Report revealed that Telecom had moved in the direction of re-establishing itself as the monopoly supplier of "telephones", a position it had given up in 1980.  Without telling the IAC, Telecom had written to equipment suppliers during the inquiry telling them that, "from September 1984, applications for permits will only be accepted for privately supplied telephones which have at least two significant facilities additional to Telecom's new standard telephone" (Letter to Permitted Attachment Suppliers, 15 June 84).  This would have the effect of switching demand back to Telecom and, thus, to its privileged suppliers.

Rationalisation for the new policy was on the grounds of safety although a Telecom witness at the IAC inquiry was reported to have said it was designed "to protect the local manufacture of the standard telephone" (Canberra Times, 21 September 84).  Given that the safety standards story seems unconvincing, this interpretation is more plausible.

This affair prompted the editorial writer of the Canberra Times (21 October 84) to make the following scathing criticism:

A Telecom witness told the commission that Telecom's failure to notify it of its new policy, which he insisted was simply a variation of existing policy, was an oversight.  Perhaps it was.  But it should entail a re-examination of those passages in the draft report which say that there is not conclusive evidence that Telecom is making monopoly profits or, alternatively, dissipating them by sumptuous consumption on a feather bed (shared with friends).  Specifically, the commission might ask itself who benefits from Telecom's decision to switch imports away from existing importers to its own preferred suppliers.  Better still, it should ask Telecom.  Twenty per cent by value of the phones sold to Telecom by its four favoured "local manufacturers" in 1982-83 were imported.  And Telecom's suppliers accounted for more than 60 per cent by value of the phones imported in 1983-84.  And they import them duty free!

The IAC also might ask just what sense its inquiry into assistance for the local industry makes when Telecom can determine by regulation who gets a licence to import what.  The IAC might also ask whether an organisation meant to run a national telecommunications grid is well-placed to determine manufacturing industry policy by deciding what to buy from whom.  Parliamentarians seeking the answers need look no further than the Davidson Committee's report.

Unfortunately, the IAC did not take up the suggestion to explore whether its Draft Report comments were still appropriate in the light of this revelation of one use to which Telecom puts its monopoly power.  In its Final Report the IAC discusses the ways "public monopolies may ... exploit their monopoly power ... [but found] no evidence to suggest that any of these apparent characteristics apply" (p. 34).

The IAC did, however, express some worry about Telecom's permit restrictions, noting:

the potential that Telecom has to provide industry assistance and thus to influence industry structure through measures which are not subject to the public scrutiny inherent in normal assistance review procedures. (p. 44)

This whole episode throws considerable light on another facet of Telecom's monopoly and of its propensity to exploit it in one way or another, and to fight for its retention in the face of challenge.  In this latter regard Telecom has shown itself to be more adept and more successful than its pre-1975 partner, Australia Post.

CHAPTER 4:  NEW DIRECTIONS -- PRIVATISATION

THE ADVANTAGES OF PRIVATE OWNERSHIP

As a result of the separate treatment of marketisation, "privatisation" is interpreted here in a narrow sense.  The term, which is still fairly new, seems sometimes to have an unclear meaning in public discussions.  Strictly it means transfer to private ownership of a public enterprise under the conditions prevailing prior to the transfer.  Others, including Littlechild, ⁽²⁹⁾ have interpreted it more widely to include changes in organisational structure and the allowance of greater competition.

Several advantages may be expected from private ownership.  Consider the following:

• Private ownership is more concentrated than public ownership -- each individual has a larger interest or stake in the efficient running of the organisation and is more likely to become involved in monitoring its performance.
• If existing operators are not performing, a privately-owned firm can be taken over by those who feel they can do better.  This possibility, unavailable with public enterprise, places an added control on management's performance.
• Share values can act as a yardstick, albeit imperfect, of the performance of a firm.  The devising of appropriate performance criteria is, as we have seen, a major problem with public enterprises.
• A private firm will be less amenable than a public one to the demands of unions interested in enjoying "feather-bedding", job security, etc.
• A private firm will feel far less obligation to practice politicised pricing or to perform  other "social obligations" not justified by commercial criteria.

For all these reasons a private firm would be expected to be a lower-cost, and more innovative, operator than a public one,.with prices set to reflect costs more closely.  This would be true even if privatisation occurred with the monopoly intact.  Private owners would use the monopoly to maximise explicit profits and not as a vehicle for the enjoyment of perquisites and slackness.

To the extent that a privatised organisation did make above-normal profits, this would be prima facie evidence that it operates in an insufficiently competitive environment and that its degree of contestability requires examination so as to determine how much competition can be allowed.  In general, this question should be considered, and acted upon, before transfer to private ownership.

PRIVATISATION OF TELECOM

The privatisation of Telecom has recently become a subject of public discussion in Australia.  While some critics of Telecom's performance have advocated either bureaucratic or market discipline as a palliative, the transfer to private ownership has been suggested less often.  One serious consideration of the privatisation option did come from the Australian Treasury which, in its submission to the telecommunications and postal inquiries, discussed the pros and cons of the sale of Telecom to the private sector.  It concluded "that the option of full or partial transfer to the private sector is not one that can be lightly dismissed" (p. 11).  However, while this "would bring worthwhile benefits" it would not "in itself ... deal with the more basic problem of the lack of effective competition ..." (p. 11).

The Davidson Report was concerned primarily with competition rather than private ownership as the means of disciplining Telecom.  It was not, in fact, asked to consider private ownership of Telecom.  While vast improvements could be expected from adopting a competitive strategy, problems could still remain as long as public ownership persisted.  In particular, Government could be tempted to support Telecom if it was unable to compete successfully and in order to sustain political favours through cross-subsidy.

Privately-owned telecommunications systems have operated successfully in the United States and Canada.  In each case these systems have performed well compared with public systems elsewhere in the world and with the publicly-owned postal systems in the two countries.

International comparisons are difficult for a number of reasons alluded to earlier, including exchange rate problems and differences in geographical conditions.  Nonetheless, the American and Canadian systems of telecommunications are at the forefront of the world in all measurable respects.  Superiority of the privately-owned U.S. system over the then public system in the U.K. was the conclusion of a specific comparative study. ⁽³⁰⁾

Privately-owned telecommunications services in the U.S. and Canada have also performed better than the publicly-owned postal systems in these countries.  While the Canadian Bell telecommunications service has been praised, the Canadian postal service is widely condemned as one of the worst in the world.  A similar picture has emerged in the United States.  As Chodorov has remarked in regard to the United States Post Office, "if the Government had kept its hands out of mail business, the pioneers would have developed a mail service comparable to the telephone system, and the taxpayer would have been saved uncountable deficit billions". ⁽³¹⁾

The telecommunications service in the United States is likely to improve now that the previously monopolistic American Telephone and Telegraph Company (AT&T) has been made subject to far greater competition.  As we have seen, this occurred firstly in regard to the long-distance market.  Then, in 1982, AT&T agreed, under pressure, to divest its local telephone exchanges by September 1984. ⁽³²⁾

Other events of relevance to Australian telecommunications policy are the partial privatisation of British Telecom and of the Japanese Nippon Telegraph and Telephone (NTT).  It is very important that the effects of these experiments be watched closely.  In both cases, elements of competition are being introduced simultaneously with privatisation.  However, the degree of competitiveness allowed is small in each situation so that the results observed will flow from privatisation per se.

The actual effects from privatising Australia's Telecom would depend on the conditions of sale.  In particular, would it be simply a sale of about 50 per cent of the shares (as in Japan and Britain), a sale of some other percentage of the shares, the sale of some or all parts of it individually (i.e. a breaking-up) or a complete sale to a private buyer or buyers?  Would the buyer then be saddled with restrictions such as maintaining existing cross-subsidies and generous conditions of tenured employment (including superannuation)?  And, most important of all, would privatisation be accompanied by an element of marketisation?

A federal Liberal MP, Mr Jim Carlton, has used Telecom as an example in painting a picture of the possible effects of privatisation (see, for example, Australian Financial Review, 29 July 85).  Mr Carlton viewed the basic telecommunications network as a "natural monopoly" which, he argued, would mean a private monopoly emerging after privatisation.  However, he also foresaw elements of competition in the supply and installation of subscriber equipment and in long-distance links between capital cities.  Cross-subsidies, if any, would be financed from explicit taxes on profit-making activities.  In short, the Carlton view is one of privatisation combined with substantial marketisation thus constituting, by Australian standards, a very radical proposal indeed.

The Australian debate is not yet clear but seems to be becoming focussed on Telecom.  The Government has made a counter-attack against the Opposition, pointing to a lack of agreement in its camp and highlighting the extent to which privatisation threatens services which allegedly have become part of the Australian way of life.  The Minister, Mr Duffy has claimed that direct subsidies to the bush of up to $500 million per annum would be required to maintain the level of subsidisation inherent in Telecom's operations (Australian Financial Review, 26 August 85).  This indicates that he views privatisation as not involving an undertaking on the part of the buyer(s) to maintain present cross-subsidies.

The situation will become clearer in time but, at present, there is a strong need for the Liberals to spell out exactly what they mean by "privatisation", rather than to assume that the electorate can practice mental telepathy (if that is not also illegal under the Telecommunications Act).

CHAPTER 5:  CONCLUSIONS AND RECOMMENDATIONS

The political forces at work in Australian telecommunications have tended to operate in favour of the maintenance of public ownership, monopoly and cross-subsidy.  Rural interests, equipment suppliers and the producers of the services have formed a tacit coalition to deny the bulk of users an efficient and innovative service.  The weak and diffused majority has, as usual, lost out to the well-organised vested interests.  The status quo has survived under both Coalition and Labor Governments, giving the impression of impregnability.

However there are forces working in the opposite direction which hold some promise of changing the balance in favour of deregulation.  Let us consider the most important of these.

First, and foremost, is the advent of new technology, the full benefits of which Australians are being denied.  The change is so rapid that it could overwhelm attempts to resist it.  Telecom is reaching the position where, unless it starts running with the new technology, it will endanger its long-term relevance.  In this regard, Telecom and Australia Post are in very similar positions.  Telecom has, so far, been able to resist change, but can it continue to do so against the interests of users who will increasingly find ways around the restrictions placed on them?  Telecom may have won a battle over AUSSAT but it certainly has not won the war against potential competition.

Secondly, there are signs that the power of the "bush" is declining. ⁽³³⁾  The present Federal Government is so unpopular in rural areas that it would not matter what it did to harm rural interests -- it could not lose any more support by deregulating telecommunications.  Further, country people must weigh up the benefits and costs of protecting Telecom and Australia Post.  The costs of losing cross-subsidies may be more than outweighed by the longer-term benefits of competition.  The alliance of rural interests with urban communications unions has never been more than a marriage of convenience.

Thirdly, there are, increasingly, examples of privatisation and marketisation taking place in other countries including those with which we have strong economic and cultural links.  To the extent that these experiments are successful, they will demonstrate to Australians that radical policies do not result in chaos and, indeed, must be adopted if we are to have a reliable, efficient, fair and innovative system of telecommunications.

Finally, there is an increasing academic interest in industry policy which does not endorse traditional approaches in the alleged areas of natural monopoly such as communications and airlines.  The theory of contestability has provided an intellectual basis for a broad-based and consistent approach to industries exhibiting statutory control of competition and public ownership.

IMPROVEMENTS WITHIN THE EXISTING SYSTEM

Even if it is at present politically impossible to change the system fundamentally, unsatisfactory and inadequate as it is, at the very least there are some obvious ways in which it could be made more cost-efficient, fairer, and technically more progressive.  The following set of proposals is similar to that made in regard to improving the performance of the Australian Postal Commission (see Albon 1985).  I suggest:

• Greater "accountability".  In particular, Telecom and OTC must disclose far more about their operations.  The excuse of "commercial-in-confidence" does not apply to a monopoly (since there are no competitors to gain from the information), which is allegedly owned by the public.  Individuals should not have to incur the trouble, expense and frustration of resorting to freedom of information legislation to find out about the financial affairs of a body like Telecom.
• Greater use of private contractors.  Even Australia Post uses private contractors for many functions.  Telecom uses none at all.  Surely there are areas where cost-savings would result from contracting-out functions to private firms?  Considerable savings have been proven in other areas and there is no reason why Telecom should be different.
• Freer terminal equipment marketing and maintenance.  The setting of standards for allowable terminal equipment should be taken from Telecom and placed in the hands of an independent body charged with establishing a competitive environment for the supply, installation and marketing of all types of terminal equipment.  Telecom would be free to participate in this market.
• Ending the relationship between Telecom and Australian equipment suppliers.  This is imperative.  Telecom and O.T.C. should be made to purchase telecommunications equipment in an open manner from least-cost suppliers.  Any support for local manufacturing should be in line with broad government industry assistance guidelines.
• More cost-related pricing practices.  As rates are well out of line with costs there should be a gradual move towards a fairer and more efficient pricing structure reflecting costs.  This should involve greater rural access rental charges, time-based local calls and the relationship of STD charges to density as well as time of day and distance.
• Removal of public-sector employment conditions.  An innovative competitive firm operating in a dynamic market cannot be saddled with nineteenth-century public service employment conditions featuring security of tenure, rigidity of wage/salary scales and promotion by seniority.  Telecom should be freed from such restrictions but only if it is prepared to accept the other changes outlined above.

CONCLUDING COMMENTS

The telecommunications industry has changed rapidly as a result of technological advance.  The availability of new technology has opened up opportunities for competition which have been grasped in other parts of the world.  Australia persists with a system of monopoly, public ownership, union domination, protectionism and politicisation.

There is no need on the grounds of "natural monopoly" to persist with such a system.  Large parts of telecommunications are "contestable" and can be opened up to competition to the benefit of society as a whole.  Cross-subsidy does not provide a valid argument for maintaining the existing system -- it can be preserved, if socially desirable, quite independently of monopoly and public ownership.

The real obstacle to change is the plethora of vested interests which benefit from the existing system to the detriment of the community as a whole.

Liberalisation of telecommunications is both feasible and desirable and deserves an important place on the agenda of any government that is genuinely seeking a freer, fairer and more productive society.

APPENDIX I

THE "GREAT AMERICAN TELEPHONE DISASTER", OR ILL-INFORMED SPECIAL-INTEREST BLEATING?

The very fact that the strongest opposition to the liberalisation of telecommunications in Australia comes from the Australian Telecommunications Employees Association (ATEA) is itself indicative of who benefits from the present system of regulated public monopoly.  The ATEA's Federal Secretary has assumed a very high profile in defending Telecom from the threat of privatisation.  Some comments have already been made on the Secretary, Mr Mansfield's, public statements.  In this appendix I concentrate on the ATEA's undated 1985 publication, The Great American Telephone Disaster:  A Lesson for Australia, which purports to show that the break-up of Bell "has led to confusion, duplication, inefficiency, lower technical standards and higher tariffs" (p. 4) and "will almost exclusively benefit business subscribers" (p. 3).  It relies almost entirely on secondary sources.  None of these seems to provide any damning evidence against the injection of competition into telecommunications.  In fact, the results it mentions are broadly those that would be expected -- temporary disruption to the market as competitors emerge, new service arrangements arise and charges vary to fall in line with sometimes changing underlying cost levels.

The ATEA begins by misrepresenting the Davidson Report which did not recommend "hand[ing Telecom's] most profitable activities to the private sector" but rather pin-pointed certain areas where Telecom could be exposed to competition.  This was quite explicit in the Davidson Report (point 13, p. 8) and it is surprising that this is not known to the ATEA.

The ATEA publication then proceeds to allege, without evidence, that the Australian media have misrepresented the events in the United States because "corporate ambition and editorial comment is directed by the same people" (p. 2).  This is not true of at least one newspaper, the Sun-Herald which, on 4 August 85 gave very sympathetic treatment to the ATEA study.

The Great American Telephone Disaster then proceeds to present the happenings in the United States in the worst possible light.  Except for large corporations and Bell's competitors, no-one benefits:  "For most citizens, especially those who are poor, divestiture means costlier and less reliable telecommunications" (p. 4).  The plight of the poor will be considered below, but first consider non-business consumers in general.

On first reading it would appear that domestic consumers have suffered only as a consequence of "marketing gimmicks", "discounts galore", "aggressive selling", "a bewildering variety of service options" and "complicated bill-paying".  These do not seem to be very serious problems -- or even "problems" at all.

In some instances local call rates and access charges have risen.  Consumers who have "lost" are those who previously benefited from cross-subsidy:  Local call rates have tended to rise -- sometimes quite substantially -- although this has been alleviated by innovative charging schemes being offered.  Access charges have also risen.  But is this any more of a move to a cost-related pricing structure than one involving a cross-subsidy?  Further, in some cases the lessening of urban-to-rural cross-subsidies has reduced some urban rates and raised rural ones (e.g. in Illinois -- see page 4).  It should not surprise anyone that changes such as these have resulted in some temporary confusion, but they are part of a fairer and more efficient pricing structure.

Further, The Great American Telephone Disaster attempts to smear the really great boon to consumers which pre-dated divestiture -- long-distance competition which is now complete with guaranteed "equal access" to local networks.  The success of this competition has been almost universally acknowledged, except by AT&T.  The ATEA's arguments against long-distance competition (p. 5) are weak and relate to lack of answerability for faults, an alleged disappearance of AT&T's expertise and a (temporary?) increase in delays.  This seems a very small price to pay for much lower long-distance charges (implicitly acknowledged but not documented by the ATEA).

Now consider the fate of the poor.  These unfortunates are alleged to have borne the heaviest burden of competition.  As usual the evidence is weak and, to some extent, supports the opposite case.  All of the data about the poor being poor in telephony relate to pre-competitive days.  There is a report of what some people said they would do if such-and-such happened and some opinions about what might happen, but nothing about what has happened or what might offset deleterious effects on some poor users.  There is also a discussion of a possible solution if problems do show up -- that is, some form of explicit subsidisation.

The Great American Telephone Disaster is itself a disaster -- it is poorly researched, superficial, and badly written and organised.  Even at the present time, so soon after the advent of long-distance competition, equal access and divestiture, the events in the United States are suggestive of a more efficient and fairer telecommunications system emerging with only a minor cost in confusion and disruption.

The real losers have been those groups who have benefited from protection from competition in the past -- employees of AT&T, the owners of the previous monopolies, favoured US equipment suppliers and recipients of cross-subsidy.  The ATEA is rightly scared of competition as it is a major beneficiary of regulated public monopoly communications.  It should come as no surprise that it is trying to disguise its self-interest as concern for users of the system.  It would be more surprising if it did anything else.  Finally, why did the ATEA neglect to tell its readers that AT&T is, and always has been, a private company which has consistently performed, according to Telecom's criteria, far better than our system?  Is it not a little incongruous that an Australian union is arguing for the continued protection from competition of a giant American multinational privately-owned monopolist?

APPENDIX II

THE TELECOM MONOPOLY'S UNIQUENESS

Of the four major English-speaking countries -- the United States, Canada, the United Kingdom and Australia -- we have the least "liberal" system of telecommunications.

The following table sets out characteristics of each telecommunications system, and an "index of liberality", which is reported in the bottom line.  The United States has a perfect score on each attribute, while Australia gets one point for having some private sector involvement in terminal equipment supply.

Attribute	U.S.A.	U.K.	Canada	Australia
Ownership   (2/10)	Private	Private/ Public	Mainly Private	Public
Long-distance Competition   (2/10)	Yes	Some	No	No
Local Exchanges Monopolised   (2/10)	No	Yes (except Hull)	Yes (minor exceptions)	Yes
Competition in Terminal Equipment   (2/10)	Yes	Yes	Limited	Limited (Controlled by Telecom)
Public Service Employment Conditions  (1/10)	No	Yes	No	Yes
Cross-Subsidy Required   (1/10)	No	Some	Yes	Yes
Index of Liberality   (Max. 10)	10	5.5	4.5	1

APPENDIX III

SOME FACTS ABOUT TELECOM

• Australia is the only major English-speaking country which has a telecommunications system that is both publicly-owned and completely monopolistic.
• Telecom's monopoly under the Telecommunications Act 1975 (and as amended) is complete.  No-one can "erect, maintain or operate" or "attach a line, equipment or apparatus to" a telecommunications system unless Telecom gives permission.
• Telecom makes a profit of over $1 billion per year on trunk calls.
• There is an urban-to-rural cross-subsidy of about $500 million per annum.  This represents an average tax of about $125 per urban subscriber.
• Telecom uses no private contractors for any of its operations.
• Canada, which has a population density and dispersion similar to Australia provided, through a private monopoly, a standard telephone service (as defined by Telecom) at a cost in 1983 of 19 per cent less than Telecom.
• Telecom must consult with its unionised labour force before making any decisions to adopt new technology.
• Telecom's record of technological advancement has been criticised by, inter alia, the Davidson Committee, the Australian Treasury and the Australian Information Industry Association.
• Telecom's policy of fostering local manufacturing of communications equipment has involved allowing some Australian manufacturers to import equipment duty-free.

BIBLIOGRAPHY

Albon, R.P., Private Correspondence:  Competition or Monopoly in Australia's Postal Service?, Centre for Independent Studies Policy Monograph No. 7, Sydney, 1985.

Albon, R.P., "The Effects of Financial Targets on the Behaviour of Monopoly Public Enterprises", Australian Economic Papers, 24, June, 1985, 54-65.

Albon, R.P. and M.G. Kirby, "Cost-Padding in Profit-Regulated Firms", Economic Record, 59, March, 1983, pp 16-27.

Allen, L., "Telecom a credible performer -- AT&T Aust. chief", Pacific Computer Weekly, 28 June 1985, 5.

AUSSAT Australia's National Satellite System:  General Information, Sydney, 1984.

Australian Telecommunications Commission, Comparison of Telephone Tariffs in Australia with Those Applying in Other Countries, Melbourne, May, 1983.

Australian Telecommunications Employees Association, The Great American Telephone Disaster:  A Lesson for Australia, Melbourne, 1985.

Australian Treasury, Public Monopolies:  Telecom and Australia Post.  Submission to the Committees of Inquiry into Telecommunications Services and into the Monopoly Position of the Australian Postal Commission.  Reprinted as Treasury Economic Paper No. 10, AGPS, Canberra, 1983.

Baumol, W.J., "Natural Monopoly and Contestable Market Analysis", in Centre of Policy Studies, State Enterprise and Deregulation, pp 1-17, 1983.

Baumol, W.J. and R.D. Willig, "Telephones and Computers:  The Costs of Artificial Separation", Regulation, March/April, pp 23-32, 1985.

Bernholz, R. and D.S. Evans, "The Early History of Competition in the Telephone Industry", in D.S. Evans (Ed.), Breaking Up Bell, loc. cit., pp 7-40, 1982.

Brock, W.A. and D.S. Evans, "Creamskimming", in D.S. Evans (Ed.), Breaking Up Bell, loc. cit., pp 61-94, 1983.

Butlin, N.J., A. Barnard and J.J. Pincus, Government and Capitalism:  Public and Private Choice in Twentieth Century Australia, George Allen and Unwin, Sydney, 1982, Chapter 11, ("Service at Any Cost:  PMG").

Canes, M., "Telephones -- Public or Private?", Hobart Paper No. 36, Institute of Economic Affairs, London, 1966.

Centre of Policy Studies, State Enterprise and Deregulation, Special Study No. 5, Monash University, 1983.

Chodorov, F., "The Myth of the Post Office", Human Affairs Pamphlet No. 34, Henry Regnery Co., Hillsdale, Illinois, 1948.

Commission of Enquiry into the Australian Post Office (Vernon Commission) Report, Parliamentary Paper No. 275, AGPS, Canberra, 1974.

Commission of Inquiry into Telecommunications Services in Australia (Davidson Committee) Report, AGPS, Canberra.

Committee of Inquiry into the Monopoly Position of the Australian Postal Commission (Bradley Committee) Report, AGPS, Canberra, 1982.

Drury, R., "STC casts off Telecom shackles", Australian Financial Review, 26 August 1985.

Evans, D.S. (Ed.) Breaking Up Bell:  Essays on Industrial Organization and Regulation, A CERA Research Study, North-Holland, New York.  1982.

House of Representatives Standing Committee on Expenditure Ringing in the Changes:  Telecom's Zonal Charging Policies, AGPS, Canberra, October, 1984.

Industries Assistance Commission, Report:  Telecommunications and Related Equipment and Parts, No. 352, AGPS, Canberra, October, 1984.

Katz, M.L. and R.D. Willig, "The Case for Freeing AT&T", Regulation, July/August, 1983, pp 43-49.

Littlechild, S.C., "Deregulation of U.K. Telecommunications:  Some Economic Aspects", in State Enterprise and Deregulation, loc. cit., 1983a, pp 113-123.

Littlechild, S.C., "Problems of Controlling State Enterprises", in State Enterprise and Deregulation, loc. cit., 1983b. pp 19-32.

McPherson, L., "Evaluation of the Economic Performance of Government Trading Authorities", Australian Accountant, pp 22-24 April 1985.

Millar, F., "The Evils of State Trading as Illustrated by the Post Office" in T. Mackay (Ed,), A Plea for Liberty, Liberty Classics, Indianapolis, 1981, pp 385-412.

Prices Surveillance Authority, Inquiry in Relation to the Supply of Telecommunications Services:  Report, Melbourne, October, 1984.

Ramsey, F.P. "A Contribution to the Theory of Taxation", Economic Journal, 37, March, 1927, pp 47-61.

Siebert, S., "Privatising British Telecom", Review, 38, 4, Summer, 1985, pp 210-213.

Trengove, C.D., Telecommunications in Australia:  Competition or Monopoly?, Centre of Policy Studies Special Study No. 4, Monash University 1982.

Trengove, C.D., "Whither Communications Policy In Australia?" in State Enterprise and Deregulation, 1983, pp 83-112.

Trengove, C.D., "Costs of the Telecom Monopoly", Review, 38, 4, Summer, 1985, pp 204-209.

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ENDNOTES

1.  See Committee of Inquiry into Telecommunications Services in Australia (Davidson Committee) Report, AGPS, Canberra, 1982.  Hereafter this is cited as the Davidson Report.

2.  Three studies by C.D. Trengove have helped change thinking about telecommunications policy:  Telecommunications in Australia:  Competition or Monopoly?  Centre of Policy Studies Special Study No. 4, Monash University, 1982;  "Whither Communications Policy in Australia" in State Enterprise and Deregulation, Centre of Policy Studies Special Study, No. 5, Monash University, 1983;  83-112 and "Costs of the Telecom Monopoly", Review, 38, 4, Summer, 1985, pp 204-209.

3.  See Commission of Enquiry into the Australian Post Office (Vernon Commission) Report, AGPS, Canberra, 1974.

4.  See Committee of Inquiry into the Monopoly Position of the Australian Postal Commission (Bradley Committee) Report, AGPS, Canberra, 1982.

5.  Privatisation, to many, means more than just transfer of ownership from public to private.  For example S.C. Littlechild ("Problems of Controlling State Enterprises" in State Enterprise and Deregulation Centre of Policy Studies Special Study No. 5, Monash University, 1983, pp 19-32) takes a wider view encompassing increased competition and deregulation.  In this study the term is generally interpreted narrowly.

6.  The behaviour of monopoly public enterprises is discussed in R.P. Albon "The Effects of Financial Targets on the Behaviour of Monopoly Public Enterprises", Australian Economic Papers, 24, June 1985, pp 54-65.

7.  N.J. Butlin, A. Barnard and J.J. Pincus, Government and Capitalism:  Public and Private Choice in Twentieth Century Australia, George Allen and Unwin, Sydney, 1982, Chapter 11 ("Service at Any Cost:  PMG").

8.  Prices Surveillance Authority, Inquiry in Relation to the Supply of Telecommunications Services:  Report, Melbourne, October 1984.

9.  W.A. Brock and D.S. Evans, "Creamskimming", in D.S. Evans (Ed.), Breaking up Bell:  Essays on Industrial Organization and Regulation, A CERA Research Study, North-Holland, New York, 1982, pp 61-94.

10.  A discussion of comparisons of changes in productivity and changes in charges for Australia Post is contained in R.P. Albon, Private Correspondence:  Competition or Monopoly in Australia's Postal Services?, Centre for Independent Studies Policy Monograph No. 7, Sydney, 1985, Chapter 7.

11.  See House of Representatives Standing Committee on Expenditure, Ringing in the Changes:  Telecom's Zonal Charging Policies, AGPS, Canberra, 1984 and Australian Telecommunications Commission, Comparison of Telephone Tariffs in Australia with Those Applying in Other Countries, Melbourne, May, 1983.

12.  This story is told by F. Millar in his illuminating early paper, "The Evils of State Trading as Illustrated by the Post Office", in T. Mackay (Ed.) A Plea for Liberty, Liberty Classics, Indianapolis, 1981, pp 385-412.

13.  See B. Drury, "STC casts off the Telecom shackles", Australian Financial Review, 26 August 85.

14.  The concept of contestability has been posited in this country by one of its American developers.  See W.J. Baumol, "Natural Monopoly and Contestable Market Analysis", in State Enterprise and Deregulation, pp 1-17.

15.  The Minister for Trade, Mr J. Dawkins, said in a speech attacking privatisation on 26 January 86 that:  "telephones ... have been provided and maintained by the collective will of the people."

16.  See F.P. Ramsey, "A Contribution to the Theory of Taxation", Economic Journal, 37, March 1927, pp 47-61.  Baumol op. cit., p. 6, n. 3, describes Ramsey prices thus:  "Ramsey prices are ... defined as those prices which are compatible with financial viability and which cause a minimal deviation in the allocation of resources from that which would occur if all prices were set equal to marginal costs.  It can be shown that Ramsay prices, for understandable reasons, will be higher than marginal costs.  Moreover, the less elastic the demand for a particular item, i.e., the more resistant consumer demand for the item is to an increase in its price, the greater, generally, will be the difference between its Ramsey price and its marginal cost.  Intuitively this is so because a rise in the price for such an item will cause relatively little contraction in its market demand, and hence will have relatively little effect on the quantity of resources it uses."

17.  The concept of "cost-padding" is explored in R.P. Albon and M.G. Kirby, "Cost-Padding in Profit-Regulated Firms", Economic Record, 59, March 1983, pp 16-27.

18.  All taxes, except perhaps lump-sum taxes and taxes on pure rents, cause distortions of economic behaviour and, thus, deadweight losses in economic efficiency.  Estimates of such costs are suggestive of large orders of magnitude at the margin.

19.  Sunk costs are those which, once incurred, cannot be retrieved;  for example, purchase of highly specialised equipment only used in a particular enterprise.  See Baumol, op. cit., for more details.

20.  Australian Treasury, Public Monopolies:  Telecom and Australia Post.  Submission to the Committees of Inquiries into Telecommunications Services and into the Monopoly Position of the Australian Postal Commission.  Reprinted as Treasury Economic Paper No. 10, AGPS, Canberra, 1983.

21.  R. Bernholz and D.S. Evans, "The Early History of Competition in the Telephone Industry", in D.S. Evans (Ed.), op. cit., pp 7-40.

22.  One of the many reforms in telecommunications in Britain has been a very open approach to leasing.  This followed a report to the Government by Michael Beesley which, in turn, influenced Australia's Davidson Committee.  The reforms in Britain are discussed in S.C. Littlechild, "Deregulation of U.K. Telecommunications:  Some Economic Aspects" in State Enterprise and Deregulation, op. cit., pp 113-128.

23.  M.L. Katz and R.D. Willig, "The Case for Freeing AT&T", Regulation, July/August 1983, pp 43-49.

24.  W.J. Baumol and R.D. Willig, "Telephones and Computers:  The Costs of Artificial Separation", Regulation, March/April 1985, pp 23-32, at p. 27.

25.  See Littlechild,"Deregulation of U.K. Telecommunications", op. cit.

26.  Quoted in L. Allen, "Telecom a credible performer -- AT&T Aust. chief", Pacific Computer Weekly, 28 June 1985, 5.

27.  See AUSSAT, Australia's National Satellite System:  General Information, Sydney, 1984.

28.  Industries Assistance Commission, Report:  Telecommunications and Related Equipment and Parts, No 352, AGPS, Canberra, October 1984.

29.  Littlechild, "Problems of Controlling State Enterprises, op. cit.

30.  This was the conclusion of a study by M. Canes, "Telephones -- Public or Private?" Hobart Paper No. 36, Institute of Economic Affairs, London, 1966.  If anything, the differences found then would have become greater since.  Telecom's 1982-83 data (see Telecom, op. cit.) find a huge difference between the American and British services.

31.  F. Chodorov, "The Myth of the Post Office", Human Affairs Pamphlet No. 34, Henry Regnery Co., Hillsdale, Illinois, 1948.

32.  The Australian Telecommunications Employees Association has prepared a critical study of the American deregulation.  This study, The Great American Telephone Disaster:  A Lesson For Australia, is reviewed in Appendix I.

33.  Further, as Wolfgang Kasper reminds me, rural interests are becoming more sophisticated and are beginning to see the advantages of competition all round.