THE DISTILLERY: The price of Brussels

It's Telstramania today. Malcolm Maiden of The Age, Alan Jury of The Australian Financial Review and Stephen Bartholomeusz of Business Spectator agree that Telstra has stumbled badly by misjudging consumer's speed of exit from its fixed-line copper network to mobiles – a 6.9 per cent decline in revenue for the half. They also agree that Thodey missed the boat by failing to protect market share in mobiles as competitors cut prices aggressively, as well as being slow to offer smart phones. John Durie of The Australian fingers the same causes but puts greater emphasis on the failure to match price cuts.

This column can only add one point missed. Economic hardship may have played a role in boosting the wind-down of fixed line services. It makes sense when times are tough to cut one service. If the economy stabilises, the rate of migration will slow again, in this column's view.

All agree the result would have been worse without good cost control and reduced capex.

On the future, Durie is most forthright. "The fact that fixed-line customers are leaving it in droves is inconvenient when it comes to working out the value of the copper network and the price to be paid to migrate customers. February 22 is a deadline Telstra says doesn't exist – but it is when the heinous legislation governing its future is due to return to parliament, and the sooner a deal is done the better. The framework is clear – NBN will use Telstra ducts and pay for the access along with an incentive to get Telstra customers on to the NBN network. Nothing complicated except the valuations.”

Jury attempts to make another point, that "Telstra's world is changing” seemingly faster than it can change itself. His primary evidence is Google's US announcement yesterday that it will "build and test ultra high-speed broadband networks capable of ... speeds ... 10 times faster than the NBN.” It is Jury, however, that's looks ponderous, with his backup statement that "... other innovations Google has given us ... include Gmail, the Android operating system and the Nexus One smartphone”. All of which are derivations, not innovations.

The other big reporting company in the spotlight is Rio. Bartholomeusz sees Rio stabilising with "The rights issue and asset sales [slashing] net debt from a threatening and unsustainable $US38.7 billion to a significantly less destabilising $US18.9 billion.” Matthew Stevens of The Australian, however, focuses on "the problem [of] Alcan. The business built by the $US38 billion acquisition of Alcan sucked $991 million out of the net result in the form of impairments, totalling $1.57 million last year. The bulk of that, some $US687 million, was accounted for by the Alcan Engineered Products Group. That's amazing in itself given the same group of assets required a $US7.34bn impairments charge in 2008 ... All up then, Alcan Engineering Group has driven impairment of $US8.02bn over the past two years. The division, which can barely have any book value left, surely, remains in the sale yards though apparently it has been divided into three separate chunks to make it more digestible.”

Always a BHP fan, Stevens then goes on to favourably compare the BHP spot price strategy for iron ore to Rio's greater commitment to the contract system. "The current benchmark is circa $US60 a tonne, while spot tonnages of iron ore are changing hands at $US125 a tonne and heading north". Stevens then notes that BHP is "selling 45 per cent of its iron ore on spot pricing versus Rio's 90 per cent on contract".

Stevens does neither company any favours, however, when he finishes with a clanger. "That Kloppers and Albanese are taking such different courses on pricing might well be used as evidence when both present their cases for the Pilbara joint venture to the European Commission. That case will revolve around the separation of the merged production businesses from the two companies' distinctly different marketing arms. The less Rio and BHP move in concert on price, the better the prospects in Brussels.” Stevens seems to be implying that there is price collusion behaviour between the majors' marketing arms – albeit targeting regulators by keeping current pricing methods different. This is the very behaviour those same regulators fear will be later directed at steel makers, only without the different approach. D'oh.

One final point, the Baltic Dry Index continues its forlorn plunge and commodities bull, Mark Faber, is out overnight predicting a correction for base metals on slowing growth in China. This column is skeptical about large contract price increases for iron ore.

Talking of crimped returns, Adele Ferguson of The Age offers up a dissection of the new Productivity Commission report into the non-profit sector. The report recommended that the "sector fall under ASIC's supervisory tentacles. It also recommended an end to the massive tax lurks being ripped out of the system by hospitals and big sporting clubs, which enjoy almost $1 billion a year in tax breaks.” According to Ferguson the non-profit sector is "the black hole of Australia's economic system and nobody really knows how big it is. The $43 billion mentioned in the report is a stab in the dark. Even the amount of tax it is exempt from paying is impossible to track. The report says it could be $4 billion or double that.”

Ferguson offers some calculations to show non-profit organisations do not mean non-profit individuals. "For example, Peter, a doctor in a non-profit hospital, has dinner with 10 friends. The bill comes to $200 each, or $2200. Peter pays the bill with his public benevolent institution credit card and collects $2000 from his friends. Peter has a salary of $250,000. This transaction reduces his after-tax income by $1023. He received $2000 from his friends, had a free dinner and increased his after-tax income by $823.10.”

Ferguson praises the report but not the shift of supervision into ASIC, preferring "a separate regulator, or charities commission.” It's hard to disagree and the piece boosts a point made by Matthew Stevens recently, that ASIC is losing its focus. Ferguson predicts, anyway, that to follow this report "...would be political suicide in an election year. Clubs, nurses, doctors and religious groups have a lot of political clout. It is likely to be one more report to be tucked away for another year.”

On the economic front, Tim Colebatch of The Age notes that "...if the Bureau of Statistics is right, two-thirds of all jobs created in Australia in the past year – 95,000 out of 141,000 – were generated in Victoria. Alternatively, if two part-time jobs equal one full-time job, then Victoria has added 69,000 full-time jobs while the rest of Australia lost 31,000.” This is no surprise to this column, which sees the twin pillars of stimulus spending and immigration policy as the key drivers of Australian growth through the GFC. An efficient Victorian bureaucracy and strong population growth has construction going nuts in schools and homes. As Colebatch points out, "in the year to January, Victoria added 94,600 jobs, yet Queensland added 3600 and WA 2900.” It wasn't China, it was the government.

The question is, of course, what to do now? Cut spending or continue? Alan Kohler of Business Spectator has a zealous piece that in no uncertain terms declares itself for cuts. Indeed, Kohler goes further, suggesting the entire GFC fiscal boost around the world was "wild". He goes on "And unfortunately for the taxpayers who must now foot the bills, nobody knows whether that's what saved their bacon, or whether it was the monetary policy and liquidity actions of the central banks ... In fact it was probably just the central banks. It was certainly liquidity that turned the markets last March and zero interest rates that saved the banks and restored their profits." For an insight into how this debate works  between Keynsians and Monetarists, you simply must watch Joseph Stiglitz debate Hugh Henry.

While this column agrees that a reckoning is under way, Kohler is wrong to describe the fiscal stimulus as useless. In wasn't only zero interest rates that rescued US banks. It was the US Treasury nationalising Fannie Mae and Freddie Mac, as well as the TARP program, without which many more banks would have gone under. Recapitalisations also saved too-big-to-fail banks in the UK and Europe. In Australia it was government guarantees. China fired up infrastructure growth with government spending. All were fiscal measures and without them the globe would already be in Depression, in this column's view.