The Truth About Privatisation: Blog #6

In George Orwell’s Nineteen-Eighty Four written in 1948, Syme, the philologist, explains to Winston Smith that:

By 2020 –earlier probably – all real knowledge of Oldspeak will have disappeared – Chaucer, Shakespeare, Milton, Byron – they’ll exist only in Newspeak versions, not merely changed into something different, but actually changed into something contradictory to what they used to be.

Newspeak certainly seems to describe what has happened to Telecom.

Over the last decade the combined assaults of politicians using it as a political football, industry rivals seeking advantages through regulation, and some self-inflicted injuries of its own have virtually erased memories of the perceptions and achievements of the company in the first decade after privatisation.

Here’s the Oldspeak story of Telecom.

The company was privatised in 1990.  The price received by the government – $4.250 billion – stunned observers and the market.  No one talked about selling that piece of family silver too cheaply.

Already the company as an SOE had been transformed from the days of the overstaffed, lumbering, state monopoly post office, when subscribers took weeks or months just to get a telephone.  Under deregulation and privatisation there was an acceleration of cost reductions (that were passed on to consumers in lower prices), high rates of investment, vast improvements in services, the introduction of new technologies and vigorous competition from new entrants.

Perhaps the most interesting summary statistic generated by the changes is the rate of growth of productivity in the industry.  From 1990-2000 annual labour productivity growth averaged over 13% and multifactor productivity growth over 7%.

These rates were easily the highest of any industry in the measured sector to the economy.  New Zealand would have been a South Pacific Tiger if the productivity performance of other industries had come even close to matching them.

And how did the public view Telecom in those years?

Well, the independent polling company Insight did monthly surveys and Telecom’s favourability ratings were routinely in the top three companies, vying with Air New Zealand and New Zealand Post.  Remember the public’s love affair with Spot the Dog?

In the Corporate Management Top 200 awards, Telecom was judged to be Company of the Year in 1991 and to have the Best Corporate Strategy in 1994.

CEO Roderick Deane was judged the Best Executive of the Year in 1994 and Executive of the Decade in 1999.

The company grew operating earnings every year and its share price rose from around $2 at the time of listing to a peak of well over $9.  It was the country’s largest taxpayer and it invested millions into communities in New Zealand through arts, education, community and sports sponsorships. It had the largest capital investment programme in New Zealand apart from the government.

I will not go into the sad story of Telecom in the second half of the 2000s in detail here.  The 20 years since privatisation have been a game of two halves.  Starting with the Hugh Fletcher review of telecommunications regulation set up by the Labour government when it came to office, it has been a saga of ever-greater regulation, slower productivity growth, rapidly declining earnings, an immense hit to the sharemarket capitalisation of the company (more than $3 billion) when the government overruled the Telecommunications Commissioner’s advice and mandated unbundling, and now government involvement in the industry in the form of the broadband intervention.

The taxpayer is forking out $1.5 billion for an investment which shamefully has had no cost-benefit analysis conducted on it and where a regulatory regime is being proposed which one major player says will gag the Commerce Commission and stifle broadband competition.  Moreover, a major recent study was unable to find any significant additional economic benefit from moving to speeds higher than we have at present. That is not to say that we should not invest for faster broadband but it does indicate that we should only do so off the back of a full economic justification and not with the poor old taxpayer’s money again put at risk with a modern unjustified version of Muldoon’s Think Big projects.

Today Telecom looks like a crippled company on the verge of some sort of breakup, and public attitudes towards it are much less favourable than used to be the case.

Newspeak – the process of changing things “into something contradictory to what they used to be” – has done its malign work.

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