Unshackle Telstra now Henry Egas Tuesday, February 4, 2003
The steam seems to have gone out of the movement to privatise Telstra. The Howard Government has other priorities, including a difficult and dangerous international situation. Also, Telstra's share price remains relatively low, which provides another reason for postponing the sale of the Commonwealth's remaining holding. Yet that reason is a poor one, and the Government would do well to reconsider its stance.
Postponing a sale because the share price is low would make sense if selling a government asset were comparable with a private householder's decision to sell property. However, from an economic perspective, the current share price is not a compelling reason for choosing the date of sale.
Assume the Commonwealth simply gave away shares in Telstra, with each Australian receiving a share. Clearly, it would have disposed of Telstra at less than its market value, but would the community be any worse off?
Not by the mere fact of that asset disposal. All that would have changed is where assets appear on the community's balance sheet. Previously, people would have owned Telstra as citizens, that is, as the ultimate 'owners' of government assets. As shareholders, however, people would each hold some part of the asset in their own names. The community's capital stock - and, all else being equal, its ability to consume in future - would be unchanged.
In practice, matters are more complex. While the Commonwealth owns Telstra, it directly receives the income produced by Telstra as dividends. But if the Commonwealth sells its shares, the dividend income would go to Telstra's shareholders. To secure part of that income, the Commonwealth would have to tax it.
However, taxes are costly because they alter the incentives to work and save. As a result, the community's total income would decline by more than the taxes raised. This excess burden of taxation has been estimated at 20-40%, so that to raise $1 in taxes could cost between $1.20 and $1.40.
Because of this excess burden of taxation, the Commonwealth Government might, in theory, be better off owning assets rather than taxing them. But this assumes that different owners of assets make no difference to an asset's potential to produce income.
The income produced by assets is clearly affected by who owns them. If all potential owners were equally well placed to manage assets, or to employ and supervise managers who could do so, the substantial changes in asset ownership (through straight asset sales, mergers and acquisitions) that frequently occur in market economies would not occur. Nor would there have been the substantial shifts in forms of ownership that have occurred in all economies in the past few decades.
For example, co-operatives and mutuals were far more important 50 years ago than they are today. Why have they declined? Because the relative efficiency of managing assets through co-operatives and mutuals, compared with other forms of ownership, has declined. The owners could do better by changing the corporate form of mutuals and co-operatives.
Governments are unusually poor managers of commercial assets. Theoretically, governments can make decisions based on a long-term perspective, financing investments that are viable only in the long term. In practice, governments have extremely short-term perspectives, with their focus restricted by the electoral cycle. Such short-sightedness would shame even the most brazen share-trading screen jockey.
Political considerations play a big role in making decisions about government-owned commercial assets. In the almost 30 years that I have been closely involved with the management of government-owned commercial assets, every government has claimed that politics did not intrude on its decisions. But in every case, this claim was demonstrably false. This creates great dangers when governments are both owners and regulators - as is clearly the case with Telstra.
Combining ownership and regulation creates the risk that a government will use its regulatory powers to favor the business that it owns. But the real risk is that a government - far from favoring the business it owns - takes short-term, politically motivated decisions that destroy the value of the community's assets. If those assets were privately owned, a Government could not damage them as badly.
At Telstra, there have been many examples of counterproductive management by government. The persistent underfunding of the universal service obligations and the systematic, economically irrational increases in required service levels would, in a private firm, amount to expropriation. Anyone familiar with the history of Telstra and its predecessor, Telecom Australia, could give many similar examples.
Poor decisions reduce the income that the community can obtain from its investment in assets such as Telstra. A government that was genuinely concerned with economic efficiency would worry less about the price it gets for its assets and more about getting them owned by those who can manage them best. And the sooner that is done, the better."
Henry Ergas is managing director Network Economics Consulting Group.
The steam seems to have gone out of the movement to privatise Telstra. The Howard Government has other priorities, including a difficult and dangerous international situation. Also, Telstra's share price remains relatively low, which provides another reason for postponing the sale of the Commonwealth's remaining holding. Yet that reason is a poor one, and the Government would do well to reconsider its stance.
