The Naive And Sentimental Rent-Seeker


Criticism of the Rudd Government’s proposed breakup of Telstra shares a common thread with demands by big polluters for increased levels of compensation under the Government’s ETS. Both arguments rest on the insistence that a government may not act in what it sees as the national interest when such action might lead to reduced shareholder value.

It’s a particularly volatile issue when governments themselves have been involved in selling shares which later changes in policy may cause to lose value — as has been the case most notably with the widespread privatisation of entities delivering public services. Yet such arguments ignore some very basic facts: regulation of public service provision is inevitable, the companies are subject to the law of the land, governments turn over with great regularity, and shareholders do not own rights in the economy except through the political process. In short: buyer beware.

Most investors know this, and that’s a useful thing to remember when you read opinion like that of Peter Swan in The Australian, arguing that the Mums and Dads to whom the former Howard government marketed Telstra shares bought them "in good faith". The "good faith" argument is one that appeals to inexperienced investors who want (and in some cases expect) to be treated as if they’ve bought a toaster with a lifetime guarantee.

Unfortunately for them — and as Howard knew perfectly well — that’s not how it works. What is happening now is the inevitable correction to a couple of less-than-perfect systems that have worked against the country for some time.

In response to the Government’s moves to build a broadband network and to break up Telstra’s vertical integration, an editorial in The Age on 17 September captured informed sentiment: "Australians are going to get a market structure that benefits consumers by promoting real competition. It’s long overdue." However, "Mum and Dad" shareholders flooded the media (and a Senate Inquiry) with their outrage. They also promised to penalise Labor’s high-handedness at the ballot box.

The outrage has been personalised against communications Minister Senator Conroy as an "ex-union hack", and the disgust was fueled by the Government’s Future Fund’s reporting on 20 August that it had disposed of 680 million Telstra shares to institutional investors at a 5 per cent discount (reducing its stake from 16 to 11 per cent).

What the small shareholder expected from buying Telstra shares in the first place is unknown. It is possible that they were buying them for the "brand" as a measure of national pride — Telstra and its forerunners being synonymous with the Australian state. Others may well have had the precedent of the Commonwealth Bank privatisation in mind.

The three tranches of CBA privatisation (1991, 1993, 1996) were at roughly $4.50, $9.50 and $10.00; the current CBA share price is about $55 (having bottomed at $25 from the crash, but now having recovered most of the escalation from 2000 to $61). CBA shareholders have been handed a series of gifts — underpriced share offerings, a company with a massive deposit base courtesy of its "people’s bank" status now relieved of any public obligations, exoneration from malpractice against customers, and (not least via a succession of tolerated takeovers) an oligopolistic market structure with its inherent market power.

By contrast, the three tranches of the Telstra float (33 per cent in November 1997, 16 per cent in November 1999 and 35 per cent in November 2006 and May 2008, with the remainder sold into the Future Fund) were at $3.40, $7.20 and $3.60. Telstra’s share price is heading south, currently at $3.13. The first tranche was certainly a gift from the taxpayer. The second tranche has been a disaster for the purchasers, which included over 300,000 first time buyers of shares.

Telstra shareholders have received steady dividends, but no or negative capital gains compared to the CBA bonanza. The second tranche disaster is related to the gift from the first. Alan Kohler noted during a 7.30 Report interview in July 1999: "The first Telstra float has gone down in Australian history as a huge lottery win for 1.8 million Australians," which explains why the telephones were running red hot when the second tranche was on offer.

Welcome to "shareholder democracy". The then finance minister John Fahey, during the same 7.30 Report exchange, claimed: "We’re clearly interested by way of government policy of encouraging as many Australians as possible whether they have shares now or not, to acquire shares, to invest in their own future."

The Mum and Dad investors were to be cannon fodder for the driving motives of privatisation as an ideological imperative and plugging the budgetary finances as a short-term fix. Nobody in power cared about the implications of spruiking the involvement of the unsophisticated in the stock market, least of all through glib seductive overtures to "invest in their own future".

Only a week before the second tranche offer, Telstra lost its local call monopoly. How many new investors would have known of that change or be cognisant of the broad parameters of Telstra’s competitive position? The telco analysts themselves were dispensing an optimism (imminent cost-cutting, a burgeoning free enterprise culture round the corner, etc) that lacked substance.

Then there’s the fine print of the issuance prospectuses. The first (1997) prospectus warned: "Prospective investors should be aware that an investment in Telstra is not guaranteed by the Australian Government and that the value of shares can go down as well as up." And again: "The government, or any future government, however, may change its policy as to the regulation of the telecommunications industry, which may adversely affect the competitive position or results of operation of Telstra".

A Telstra institutional shareholder, the Australian Foundation Investment Company, is weighing into the fight against the Government’s plans for Telstra. Says its chairman: "When we bought Telstra shares in T1, T2 and T3 [floats]from the government, we bought a fully integrated model that has certain value. And to take it away requires a fair commercial price." This is an instructive claim. What he’s saying is "We bought shares with the explicit expectation of monopoly profits and we demand to be rewarded on those expectations."

This stance is comparable to owners and investors in electricity and other utility infrastructure. Hence their indignation over ongoing regulation, expecting that governments and consumers will accept their own propaganda that the industries are now competitively self-regulating.

A foretaste of the tectonic clash of cultures occurred in Victoria in 2000 when the Office of the Regulator-General reduced the rates of return allowable to the five private monopoly electricity distributors issuing in 1995 from the Kennett government’s privatisation extravaganza. The distributors claimed that the Kennett government had promised them higher returns. But when Kennett lost office in 1999 those promises meant nothing.

Likewise, the demand for compensation from the coal-fired generating companies from the presumed ravages of the mooted emissions trading regime is sheer chutzpah. As the Australia Institute’s Richard Denniss points out, climate change would have been embodied in the due diligence process in purchasing privatised assets. Moreover, the carbon price embodied in the Carbon Pollution Reduction Scheme is ridiculously low and the companies have 25 years to do something. Yet they do nothing and want to be paid for it.

Ross Gittins delivered an appropriate judgment of such claims on 19 October: "No one compensated the tobacco companies when governments took to discouraging smoking, nor James Hardie when governments acted against asbestos … If the private owners paid too much for their power stations the capitalist solution is clear: cop the loss and sell to new operators at a more realistic price without the station losing an hour’s production."

Some Telstra shareholders and the blackguard electricity generators have one thing in common. As owners of essential infrastructure they demand secure returns that appropriate economic rents from captive consumers.

But the Howard government is culpable for privatising a vertically integrated telecommunications monolith that was never going to be free of heavy regulation or dismantling. The trench warfare between the Australian Competition and Consumer Commission and Telstra has been enormously counter-productive. For the sake of the economy (and to buy off the furious Mum and Dad investors), this mess needs to be sorted out by the re-nationalisation of the network component of Telstra.

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