Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

Telstra: when is a subsidy not a subsidy?

By Ben Rees - posted Monday, 29 August 2005

The joint party meeting has approved the sale of Telstra on certain conditions. Primarily, the bush is required to be “looked after” through the establishment of a trust fund to augment private ownership of a vital communications network. The value and composition of the trust fund appears as confused as its intended application.

Conservative leaders are delighted that their proposal has been accepted on the grounds espoused by the prime minister that it is absurd for the government to be a major shareholder in a public company the size of Telstra. This is a pure weltanschauung (ideology). It was stated also that if a sale could not be achieved then the government's conflict of interest as part owner and regulator could be overcome by placing the shares in the Future Fund. Telstra is a public corporation with its own board of directors and CEO: operating decisions are at arms length to the government. Conflict of interest is not an issue.

The government is a major shareholder in Telstra. If that shareholding is sold, then the proceeds from the sale of a public company remain public monies. If an investment fund is established from these proceeds, then the income from the investment fund is also public monies. Should either the principle or income of the fund be applied to improve privately owned telecommunications in the bush, then it is public monies applied as a subsidy or grant under section 51(iii).


On ideological grounds the Conservatives are opposed to subsidies. In the end however, Telstra and the bush is about public provision of an essential service when faced with market failure. The debate is theoretically above ideology or weltanschauung. It should be about the theory of a public good.

Nobody has explained how the real value of the fund is to be maintained should the sale proceed. If earnings of the fund are to be applied for infrastructure maintenance or upgrading, then the real value of the fund will erode over time due to inflation. For example, assume an inflation rate of 3.5 per cent over the next decade, then the real value of the $2 billion fund falls to $1.4 billion. The notion that by placing Telstra shares in the Future Fund, a growth factor is generated in the fund is somewhat naive given the under performance of past Telstra sales. So where to over the long term?

The competition solution is as absurd as the prime minister’s objection to public ownership of Telstra. Under private ownership, some markets will be more profitable than others. In the bush, telecommunications are more likely to earn negative profits. This would mean that to maintain an equitable service, the more profitable urban markets would be required to cross-subsidise low earning or negative return rural markets. What happens also if competition in urban areas is so fierce that profits in these market are meagre; and, it is impossible to adequately cross subsidise rural markets? Can the Future Fund or Telstra fund successfully step into the gap?

In the end, it makes little difference how this is structured. Either the taxpayer will be required to subsidise rural subscribers; urban subscribers will have to provide market cross subsidisation; or, there is a mix of fund sources.

This brings into strong focus the question of infrastructure up grading. In a business structure, the shareholders accept that infrastructure must be upgraded, then it is funded from profits, equity issue, borrowings or a mix of all three. This means that if the government is aware that infrastructure in the bush is unable to support installation of a modern telecommunications system, then as a major shareholder it has a responsibility to meet its financial obligations. To argue that sole responsibility lies with Telstra is little more than politics “gilding the lily”. It is about responsibility of shareholders. More important, what is being implied in this understanding of an economic problem by a government that has exalted efficiency and productivity as the most sacred vessels upon the altar of economic theology?

There are some important questions that need answering:

  • What level of income flow is projected to meet promised objectives?
  • What type of investment will be pursued to maintain the real value of the fund and provide the required infrastructure expenditure over the long term?
  • What happens when it comes time to fund projected obsolescence?
  • What happens if cross subsidisation of rural markets by urban subscribers is not enough for maintenance and obsolescence?
  • Why is declining real value of the investment fund not being addressed? And
  • Why should rural Australia be denied the right to provision of a necessary efficient public good?
  1. Pages:
  2. Page 1
  3. All

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

24 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

Other articles by this Author

All articles by Ben Rees
Photo of Ben Rees
Article Tools
Comment 24 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy