Wednesday, November 29, 2006

Telecom - the left has won

Telecom has always been a favourite target for the left. It is the privatisation they loathed, even though Michael Cullen and Helen Clark voted for it in Parliament and in Cabinet. The privatisation used to try to buy the 1990 election with some short term social spending, instead of using it to cut debt. The privatisation that saw Telecom's market value soar - many forgetting this would hardly have happened had it remained fully state owned.
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I’ve blogged before about local loop unbundling, it is part of the tale of eviscerating Telecom’s private property rights. It is a process that began when this government started regulating telecommunications far more directly than in the past.
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Without going into much detail, at Telecom’s privatisation it agreed that it would provide interconnection to its competitors and abide by the Commerce Act. In that sense, unlike most private companies, the property rights of Telecom were limited by voluntary agreement. The government sold Telecom on that understanding, and it was a reasonable one. It meant that all new telecommunications network providers could interconnect with Telecom, so that Telecom’s customers could call the customers of competitors and vice versa, and it acknowledged that, for the time being, almost all local line customers would be using Telecom’s network. Ultimately Telecom had a court battle with the then Clear Communications about this to test this – and they came to a mutually agreeable position, and for some years Telecom negotiated interconnection agreements with competitors at prices and terms which – if the competitor was dissatisfied – could be challenged at the Commerce Commission.
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Because Telecom’s new owners agreed to this at privatisation, I have no problem with this. During this regime many new entrants emerged in the national and international tolls market. BellSouth and later Vodafone built a duplicate cellphone network, Saturn later TelstraSaturn then TelstraClear built duplicate local networks in Wellington and Christchurch. There was competition from new infrastructure and competition from reselling leased lines from Telecom.
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However, since then Labour has moved to introduce a telecommunications regulator, to regulate more directly the prices Telecom must offer its competitors and to require Telecom to resell certain wholesale products at regulated prices to its competitors. This has been the beginning of the erosion. After mandatory resale was talk of local loop unbundling, so instead of simply being able to onsell Telecom’s services, competitors would be allowed to attach equipment and onsell directly the use of the infrastructure rather than just the wholesale service. Now the Finance and Expenditure Select Committee is proposing the dismemberment of Telecom’s business into three arms. With the exception of ACT, this has unanimous support in Parliament.
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Glad you voted National now?
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David Farrar (who is out of his mind), is an enthusiastic supporter of this erosion of Telecom’s property rights quotes the select committee report saying:
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“The majority also noted that when Telecom shares were initially offered for sale the Government reserved the right introduce further regulation if effective competition did not emerge."
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I’ve not noticed the government ever surrendering its right to pass laws on anything it wants. The state is sovereign, as Helen Clark once declared proudly. Regulation is a long step away from requiring Telecom to split in three. Of course effective competition has emerged. You might ask why Telecom is not dominant in the mobile phone market, it is because a competitor built its own network and competed fair and square. The competitors moaning about Telecom are second-handers. They don’t want to make money selling something they produced, own and created through their own effort, they want to make money selling something Telecom owns, at a price that is dictated by the state.
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Telecom’s response has been to essentially say it wont get in the way of this. One way of looking at it is that Telecom has been told to take its medicine, and if it doesn’t it will be forced – so Telecom bends over drops its pants and hands the government the lube to make it less painful, instead of either running away or fighting.
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All along I have made two points. Those who want better access to Telecom’s property should either:

1. Take Telecom to the Commerce Commission and then the High Court under the Commerce Act. Telecom’s original private owners agreed to be regulated by this, the law has been substantially tightened. Make an objective case about anti-competitive behaviour under this law. I don’t agree with this law, but instead of convincing politicians, how about convincing a judicial body? It will see through the bullshit which almost no politicians could see through. Takes too long? Well, when you want the state to order about a private company then you should make your case. Other industries take cases under the Commerce Act, you're not special!
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2. Buy out Telecom. If it is soo damned important to “New Zealand” then get together with all those who care to buy out a majority shareholding in Telecom, and change it. Put your money where your mouth is and acquire Telecom’s property rights, then devalue them for your own company if you wish (you’ll probably need to buy out the whole lot otherwise you’d be breaking the law doing that, so aim for 90% of the firm to allow for compulsory acquisition of the remainder). If it is in the national interest and you are lobbying so comprehensively for it, then buy up all the shares that are of value to you. Then either change Telecom or enjoy the monopoly profits that you’d be a fool to ignore.
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No it wont happen, you see it is far too easy to lobby politicians (of whom all but two in Parliament do not believe in private property rights). Next time someone will lobby them to take something you created - then who will you cry to?
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By the way, the claim that "there are many precedents for this kind of regulatory action" is remarkable. The only one I know of is electricity, which was a Max Bradford special, against official advice and which largely enabled the SOEs to buy up the electricity retailers, while electricity lines companies were left alone. That's another story.
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On a side note, Gman noted by Not PC has proposed Kiwiblog be unbundled. Its dominant position is clearly an issue, though Public Address may need to be dealt to as well. There may be no legal barriers to entry, but hell imagine trying to get their market share given their incumbency advantages :-)

5 comments:

Gerrit said...

Wonder if the managers of the Cullen Fund sold Telecom shares before the first and now this announcement.

If they did drop large bundles of shares the question then is were they tipped off andf if so by whom.

Could be insider trader charges coming if they were notified of the unbundling announcements.

If the Cullen fund did not have an exposure to Telecom shares, were the fund managers told not to invest in Telecom because long term the government was going to shaft the shareholders?

libertyscott said...

I suspect not. Treasury is rigorous on this one. Since the same applies to other listed firms that have major government involvement in the sectors (Contact, Air NZ, Toll Rail among others), your fears are probably unwarranted. I have observed first hand the Chinese walls Treasury puts in place on this, because its reputation is critical, I believe they are pretty robust.

Kane Bunce said...

Scott, I agree wholeheartedly with the post. As I said on both PC's blog and my own:

In fact I'd threaten to close Telecom down all together. I'd say something like, "We operate with full and exclusive control of our property, with no government interference, as we have the right to do, or we don't operate at all. How will you get your intended increased investment then?"

I stand by this comment. That is what I would do if it was me in charge. Of course the government would no doubt seize the assets in "the good of the nations". But at least I would be standing up for my property rights.

Here's my proposal to improve telecommunication in New Zealand: remove all regulations that make it so hard and expensive for new networks to be installed, e.g., the RMA. They would be more inclined to create their own networks. And if not there would be nothing for iHug, Slingshot, Orcon, and co to hide behind, not even the difficulty and expense of setting up a network. I am sure we'd then get more companies like Woosh and Walker Wireless that rely not on property rights breaches, but instead on installing their own networks.

Personally I do not like the 90% compulsory acquisition thing. If I have a share(s) in a company I have property to that share(s), so the compulsory acquisition is a breach of my property rights.

libertyscott said...

I agree Kane. The 90% compulsory acquisition is just current company law, but you are correct - I just didn't bother arguing it.

I blogged on telecoms policy months ago if you do a search within the blog.

Kane Bunce said...

I think I read that. Was it the one PC linked to in his blog? If so I've read it already and agreed with it.

I also commented about the LLU on one of the New Zealand PC World blogs saying how he was wrong that the LLU was a benefit to the country and why he was wrong.