January 1st 2003

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INFRASTRUCTURE: Splitting Telstra an option, academic suggests

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Splitting Telstra an option, academic suggests

by Patrick J. Byrne

News Weekly, January 1, 2003
A University of Melbourne economics professor has suggested that it might be more desirable to split Telstra with shareholders owning the potentially competitive assets while keeping the basic infrastructure in government hands.

Professor Stephen King was a contributor to Privatisation: A Review of the Australian Experience, produced by the Committee for the Economic Development of Australia (CEDA).

Professor King alternatively suggested that the Telstra network could be jointly owned by a number of telecommunications companies charged with responsibility of maintaining the network through a licensing system.

New monopoly

He argued that full scale privatisation as planned by the Federal government would replace a government owned natural monopoly with a privately owned natural monopoly.

Competition, not ownership, should be the key issue when considering privatisation.

He said that as a monopoly business, Telstra's "customer access network (CAN) ... provides the 'last link' in the telephone network between a switch and a customer's phone. Telstra owns the CAN and its private competitors rely on Telstra providing them access to the CAN in order to compete.

"Telstra could eliminate its private competitors outside the [central business district] areas of Australia if it refused them the right to either originate or terminate calls using the CAN.

"Telstra faces a wide range of regulations, including retail price controls, procedures for setting wholesale access to prices and rules to prevent any anti-competitive behaviour. This regulation has been modified over the past five years and in 2001 the Productivity Commission recommended further reform of Telstra's regulatory regime ...

"In 2002 the Federal Government investigated and rejected reforming Telstra by accounting separation to 'isolate' the CAN.

"The partial privatisation of Telstra failed to adequately recognise the source of market failure - the natural monopoly CAN. Neither did it establish appropriate procedures to deal with this problem,' Professor King said.

While most contributors to the CEDA report agreed that privatisation is beneficial when it results in private firms operating in a competitive market, contentious issues arise when natural monopoly assets are privatised.

Objectives unrealised

The report said that the crux of the privatisation debate lies in those areas where markets may not achieve the desired objectives - in some areas competition may not be viable; in other areas private incentives may not match public welfare criteria.

The report indicated that a mix of private ownership and government regulation will suit in some cases, while in others government ownership may better achieve economic and social objectives.

The report noted that with a clear majority of Australians opposed to further privatisation, the full sale of Telstra and other public enterprises may be difficult to achieve.

  • Pat Byrne

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