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The battle lines in the political tussle over the privatisation of Telstra hardened on Thursday with a senior minister warning the company's obligation to continue servicing unprofitable rural areas was “not negotiable”.

Mark Vaile, deputy prime minister and leader of the Nationals, the main coalition partner of the governing Liberal Party, said Australia's dominant phone company was required to provide basic services to rural areas under a policy known as the Universal Service Obligation.

“The new CEO of Telstra, Sol Trujillo, now needs to come out publicly and unequivocally state his commitment to Telstra providing adequate telecommunications services to regional Australia under the USO,” Mr Vaile said.

Concern over the provision of services to Australia's vast rural areas is one of the stumbling blocks in the government's planned sale of its 51.8 per cent stake in Telstra, which at an estimated value of more than A$30bn (US$22.7bn), could become the world's biggest share sale.

The Liberal-National centre-right coalition is expected to introduce legislation enabling the privatisation this year. The sale itself is tipped to occur late in 2006.

But the coalition only has a narrow majority in the upper house and faces opposition even from among its members if the USO is dropped.

Mr Vaile's comments were prompted by complaints from Telstra in recent days over the regulatory environment.

Kate McKenzie, Telstra's head of regulatory affairs, said this week: “Telstra is one of the only companies left expected to fund government social policy objectives from its own funds.”

In particular, Telstra is unhappy with the USO, which came into force when Telstra was a monopoly and is funded from a levy on all licensed telecoms carriers. Standing at A$171m this year, the levy is set by the Australian Communications and Media Authority.

Telstra says it recognises the need for services to rural areas, but argues the subsidy covers less than half the costs of running them.

Helen Coonan, minister of communications, has been quick to try to allay fears rural services are going to suffer, commenting on Thursday that the government had no intention of altering the broad USO framework.

But Mr Vaile said the National Party was concerned to ensure 7m regional Australians had adequate access to a standard telephone service wherever they lived. “Telstra does not have an option about providing these services; it has to provide them whether it likes them or not,” said Mr Vaile.

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