Spoken Word - Donald McGauchie

Telstra chairman Donald McGauchie believes that government intervention is hampering Australia’s – and Telstra’s – competitiveness in a world of ever-increasing productivity.

No more meddling please

This year marks the 200th anniversary of Australia’s first shipment of wool to the then Mother Country England – Australia’s first tentative step into the global market place. As we all know, that first sale began an industry that would for many years be Australia’s most important industry. It was also the country’s first industry to truly understand the need to be able to compete internationally. We had to be the world’s best. We had to compete on quality, quantity, cost and continuously innovate to hold our markets. Had we not learnt those lessons early, Australia would be a very different country to the one we are today.

Sadly, the wool industry and the Government forgot some of those hard learnt lessons – and the penalties have been enormous. It’s been a similar story in the wheat, sugar, auto, energy, water industries and more recently, the banking sector.

Wherever our industries have been touched by government over the decades, it seems we have made the same mistakes. Much of the history of industry policy in Australia is a story of good intentions and failed outcomes. Government intervention has done more harm than good in many strategically important industries and to the country as a whole. There is irrefutable proof that government intervention – whether it is through tariffs, subsidies or regulation – increases costs, hurts consumers with lower quality products and services, creates extraordinary and unnecessary complexity, distorts investment and stifles innovation.

Don’t misunderstand me. I am not arguing against regulation per se – governments do have a legitimate role in regulating key strategic industries. It is critical that they protect consumers and promote an environment that encourages investment and fosters real competition.

However, it is clearly not the job of a regulator to pick technologies, even by default, or to micro-manage the development of an industry, or to intrude in or pick winners and losers among individual businesses. But history speaks for itself. The infants sheltered by selective industry policies have usually failed to grow up. Companies spend unhealthy amounts of money on lobbyists to manipulate the regulatory environment rather than competing in the marketplace on the merits of their products and services.

Whether it’s securing protection from international competition, or seeking a free ride on your competitors’ infrastructure, the result is inefficient resource allocation, less product and service innovation, retarded industry growth and higher prices and fewer choices for consumers.

All have harmed the bottom line for business, but what’s more important is that it also harms real people and communities. It means people pay more than they should for products and services, they have less choice, their incomes are lower, there is less innovation and their savings get a lower return.

Policy makers mostly get it wrong when they set out to micro-manage. And we believe, from all the global experience, that government policy makers are getting it very wrong again in telecommunications.

I am dismayed when on occasions some business leader or another says something like: “Well, you have brought it on yourselves by challenging government”. What do they mean? If your shareholders and customers are being negatively impacted by government decisions and policy, you have a legal and moral obligation to get involved.

With regard to Telstra – let’s be clear: problems with the regulation of the telco industry and our company in particular began long before we started to push back. It is sometimes too convenient to forget that Telstra was the regular and silent departmental and regulatory milking cow long before some of the new members of our management team arrived in July 2005.

There is a long, long list of decisions over decades that have negatively affected the company and ultimately shareholder value, and certainly its investment decisions and services. It’s not to Telstra’s honour to say that. While it may have disagreed with various government decisions, Telstra’s approach was to compromise and ‘go quietly’ in the vain hope that it would be treated better next time. It didn’t get better – it got worse. Much worse.

Telstra had to make a basic decision. Were we to stand by and let a disaster roll out for our company, our shareholders, the industry and the Australian economy because of inappropriate policies and regulations that have passed their ‘use by date’? Of course, we cannot
– from either fiduciary or public policy points of view.

Let me add that we cannot allow ourselves to be a country where business doesn’t feel free or safe to debate serious structural and policy issues with government. It shouldn’t be seen as risky or even heroic to stand up for consumer interests or shareholder rights. It should be seen as mandatory to stand up for what you believe, especially if you are truly protecting your shareholders and customers’ interests. Surely the days of ‘Black Jack’ McEwen are over.

Talking about Telstra, what is happening before our very eyes is almost a kind of policy cataract – no one wants to look at the industry big picture or perhaps they just can’t see it. The relevant members of the Government and regulatory bodies will not consider the industry as a whole. They ignore the very real competition occurring across the many technology platforms that are increasingly integrated and therefore appear seamless to users. This is a critical point – consumers don’t care what they use. They just want it to work.

Policy-making for the telco sector doesn’t think in this way and it doesn’t think the way a consumer-centric telco business – such as the New Telstra – is thinking and creating products and services. The failure of regulation to stay aligned with changing technology and changing consumer preferences has distorted investment, stifled innovation, created unnecessary complexity and extraordinary cost anomalies. Consumers have been the losers.

Let me illustrate a point about international competitiveness and investment distortion triggered by bad policy. No one can ignore Optus’ decision to stop building out or upgrading its existing cable network. Why would it keep investing its shareholders’ money in a genuinely competitive network when it could buy access from us cheaper than it could deliver it to itself? Also think about the Government’s recent policy decision to throw $1 billion dollars of your tax money on the sub-optimal duplication of broadband infrastructure using redundant technology. I am talking about the Federal Government’s recent $1 billion gift to the Singtel Optus and Elders consortium, called Opel, to deliver what the Government calls ‘broadband’ to 99 per cent of the population. There is no way Singtel Optus and Elders would use their own money and their build will only cover the most lucrative population centres.

This was and is an appalling decision. But don’t just take my word for it. Well known business columnist, John Durie from The Australian, wrote: “On any reading, the decision based on a tender in which only one company was allowed to bid was an atrocious piece of public administration that has gone largely unnoticed. Imagine the outcry if Singapore Airlines was given a couple of the new big jumbo planes and $1 billion and told to compete with Qantas on the Pacific route.”

But it gets worse. The Australian newspaper’s national affairs commentator Jennifer Hewitt recently revealed that in fact the Government had signed over this money without there being a contract between Singtel Optus and Elders, no viable business or operating plan, no management structure, no CEO and no workable technology.

So in a sector where the economy can least afford a disaster, we have a policy failure of extra-ordinary proportions. We have – if Opel can get its act together – taxpayer funded infrastructure duplication and vastly inferior duplicate infrastructure it will be. There will indeed be competition, but it seems that the taxpayer is funding Singtel Optus and Elders to compete with Telstra… And it gets worse. The new $1 billion broadband network is delivered via WiMax – a technology demonstrably inferior to Telstra’s Next G network and already rejected by 80 per cent of the OECD as not suitable for commercial broadband usage in low density areas.

But if the new network is smaller and has performance issues, why is Telstra concerned? Won’t consumers simply vote with their wallets? Probably – but lets think for a moment why Singtel Optus and Elders would be wasting management resources on this. What if Singtel Optus and Elders uses that $1 billion taxpayer funded ‘broadband’ network to subsidise its own third generation mobile phone network? Why pay for it yourself if the Government will do it for you? Telstra’s 1.6 million taxpayers or shareholders will watch the value of their investment in Telstra’s Next G network being seriously eroded by $1 billion dollars worth of their own taxes in the form of the ‘Broadband Connect’ program. On top of that, every other investor, private equity player and telco in the world will look at the Australian telco market and see unacceptable levels of sovereign risk.

When – as it surely will in the not too distant future – the next technological advance is ready to be delivered to Australia’s telecommunications users, who would risk an investment that may be worth significantly less come the next election campaign? How likely is this scenario? Singtel Optus and Elders think it’s likely – likely enough to be telling communities around Australia that it’s a done deal. And from Canberra? Apparently meaningless assurances that nothing bad or uncommercial will happen. That doesn’t help me sleep.

This is an extract of Donald McGauchie’s speech at a recent Victoria Division Fellow Dinner.