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August 24, 2005 4:38 pm

Canberra fights back after onslaught over Telstra

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The Australian government has given substantial ground on its proposed sale of telecommunications giant Telstra, but now appears to be stiffening its resolve and fighting back against not only rebels in its own governing coalition who want more concessions, but also the company itself.

Speaking on Wednesday, Prime Minister John Howard struck back at Telstra’s attempts to change the regulatory framework, which he said had been put into place to increase competition.

“They all say they welcome competition, but when it comes to the crunch they normally find a reason to object to the instruments used by the government to deliver that competition,” he told a radio programme.

Telstra has dominated the political agenda since the newly elected government had its first sitting three weeks ago. The administration wants the sale to go ahead but hopes the newly privatised company to will operate within a tight regulatory framework.

Rebels within the coalition are not sure they want the privatisation and are insisting on strict guarantees, particularly on services to less profitable rural areas. Telstra itself wants privatisation but argues that shackling it with regulations that do not apply to its competitors will make it more difficult to make a worthwhile return for shareholders.

Each combatant has its armoury: The pressure from these separate pincer movements is clear. The government coalition may have a majority in both houses of parliament, but in the senate it has only a one-seat majority and the balance of power is held by a rebel National party senator, Barnaby Joyce. who is sceptical about the sale. And now statements by Telstra chief executive Solomon Trujillo have worried investors, depressing the share price and forcing Canberra to think about modifying its plans.

Mr Trujillo says an the government-mandated obligation to provide services to less profitable rural areas is already costing it tens of millions of dollars a year over and above subsidies, and he objects to the plan to force an operational split between the company’its wholesale and retail arms.

But Glenn Withers, professor of political science at the Australian National University in Canberra, says the government plan, steered by communications minister Helen Coonan, is coming together.

“A lot of people are praising Coonan for having got that balance right between good policy and good politics and that seems to have quietened Telstra, and the Nationals seem to be whipping their people into line,” he said on Thursday.

Mr Howard has been planning the sale of Telstra for almost 20 years and, when his coalition won With control of both houses of parliament, many observers assumed Mr Howard’s formidable political machine could produce the votes to get the enabling legislation through.

But the government has been forced on to the back foot. It has attempted to solve its problems with renegade allies in the National party by promising A$3.1bn (US$2.3bn) to improve services in the countryside.

For Mr Howard, the battle has wider implications than merely historical ambitions or ideology. Mr Withers says that Mr Howard’s electability hinges largely on his reputation as a strong and resolute leader.

“Any sign of that unravelling could well unravel the government in the end because that reduces the government’s advantage on strength, particularly on security matters, and opens up issues like heath and education on domestic issues,” Mr Withers said on Wednesday.

Although the government seems to have recovered the initiative from Mr Trujillo, shareholders have been unsettled by his concerns.

When the debate started in earnest two weeks ago, stories in the media led off with “The government’s A$32bn sale….”; last week it was “The A$30bn privatisation of Telstra…”; and, by the beginning of this week, it had become “The public float of the government’s A$29bn stake…”.

Last Friday, the stock hit an eight-month low of A$4.73 a share, down 14 per cent from its high of A$5.50 in early March.

The bickering has ensured that whenever and in whatever form Telstra finally reaches the market, it is likely to be a largely domestic issue, particularly if the government decides to transfer a substantial portion of its holding into some kind of quasi-government fund. The government has also said it will keep a 35 per cent cap on holdings of overseas investors.

The government has invested too much political capital to scrap the disposal entirely, but it is now exploring the option of selling its stake in two tranches, or delaying the sale, or even offloading its shareholding en bloc into a quasi-government retirement fund.

The question is how acceptable to the market the inevitable political compromise is going to be.

 

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