Rudd finally out of the blocks on micro reform

Hallelujah! After almost two years in office, Kevin Rudd has at last made his first foray into microeconomic reform with his plan to break up Telstra, splitting it off from its network monopoly.
By · 21 Sep 2009
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21 Sep 2009
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Hallelujah! After almost two years in office, Kevin Rudd has at last made his first foray into microeconomic reform with his plan to break up Telstra, splitting it off from its network monopoly.

For once Rudd was prepared to do something that's unpopular with a lot of people  Telstra's shareholders  and not merely undertake "reforms" that involve spending taxpayers' money.

And this is a rolled-gold, genuine reform that will enhance competition in the telecommunications industry, to the benefit of most Australians.

What's more, it corrects errors in the reform of the telecoms industry that go right back to the Hawke government's decision in 1990 to combine the two public monopolies  Telecom and the Overseas Telecommunications Commission  before letting in Optus and other competitors, rather than evening things up by allowing Optus to buy OTC.

That was one of the few reform battles Paul Keating lost during his unparalleled period as treasurer.

The error was greatly compounded by John Howard's decision in 1996 to privatise Telstra without separating the wholesale phone network business from the retail telco business.

There was never any problem with privatising Telstra, just so long as the need to ensure effective competition in the industry was dealt with first. This meant ensuring the dominant retailer didn't also control the natural monopoly network its retail competitors would be obliged to buy access to.

Of course, selling Telstra with its monopoly intact made it a lot more valuable commercially because of the opportunity this gave Telstra to overcharge its competitors. Faced with a choice between good competition policy and maximising the sale price, Howard didn't hesitate to go for the money.

Nothing could have been more calculated to damage his self-proclaimed reputation as the father of micro reform  one he eschewed while prime minister and desperate to win elections, but now seems to want to reclaim in retirement.

Just why was Howard so keen to privatise Telstra? Could he really have believed the great reform was taking a public monopoly and putting it in private hands? If so, he was running off nothing more than the conservatives' long-standing prejudice against the public sector, with no inkling of the deeper economic arguments involved.

In theory, Howard's arrangement could have worked reasonably satisfactorily. He did appoint the Australian Competition and Consumer Commission to regulate the other telcos' access to the network and ensure they weren't overcharged.

No doubt Telstra could have got itself a nice little earner by inducing the commission to let it charge the others only a bit more than they should have been charged.

But old habits die hard and Telstra's long history as the nation's unchallenged monopolist got the better of it. It had been awarded ownership of a natural monopoly network and it intended to exploit it to the full  all in the name of benefiting its shareholders, of course.

To that end, Telstra contested and frustrated the regulator's every move to ensure its competitors got a halfway decent deal. It's to his great credit that the ACCC boss, Graeme Samuel, spent years resisting the company's unrelenting pressure to subjugate the national interest.

Here was the biggest company

in the country, with the deepest pockets, using every means, fair or foul, to defy the clearly stated will of the elected government and the Parliament.

So convinced was the Telstra board of its divine right to continue ripping off the Australia telephone user that it paid a fortune to import Sol Trujillo and his gang of American hard men to stand over the regulator and the Government and ensure the company got everything it wanted.

Trujillo's main qualification seems to have been an American executive's conviction that a "free market" means a market in which governments allow big businesses to do whatever they please, including using a natural monopoly to overcharge the electorate.

Fortunately, this was where Telstra really overplayed its hand. The notion that an elected Australian government would allow itself to be dictated to by a bunch of imported bovver boys was fanciful. Trujillo's tactics quickly got the Howard government's back up, strengthened Samuel's support and won Telstra no friends around the country.

It's no mere coincidence that the issue Trujillo chose to try to blackmail the Government on was the introduction of a high-speed broadband network. Telstra was supposed to have built this network years ago, but it refused to do so because the authorities wouldn't agree to allow it to overcharge competitors for its use.

Rudd made a promise to introduce such a network one of the highlights of his election campaign partly to make him sound young and future-oriented, but also to highlight the Howard government's failure to get something moving.

At the time I wondered whether Labor had a nodding agreement with Telstra, but no. When Labor tried to implement its promise, Telstra, an essential element in any viable scheme, still refused to play ball.

It didn't have the wit to know it, but its fate was sealed from that moment. Only by breaking up Telstra could the Rudd Government ensure its promised broadband network materialised in a satisfactory form.

I have to say I'm not convinced the National Broadband Network is the great economic reform Rudd claims it to be, so I do have to acknowledge that his underlying motive for taking the stick to Telstra may be less than pure.

But purity of motive is rare in politics. Most of the things politicians do are done because several motives point in the same direction.

It's not likely, but it wouldn't matter if the entity owning the network ended up being wholly government owned. What matters is that none of the retailers using the network is overcharged. Provided Telstra's share of the entity isn't too great, achieving that shouldn't be too hard.

As for Telstra's shareholders, they have no legitimate cause for complaint. They were made no formal or implied promise that the Government's telecommunications policy would forever preserve the monopoly position they were buying.

If they thought otherwise, they were badly advised. And for them to have been given such immunity  an eternal licence to rip off Australian phone users  would have been intolerable.

As for the Rudd Government, let's hope its first foray into controversial reform whets its appetite.

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