Wednesday, 3 April 2013

NBN: Trust the Coalition, Sure Can!

What's the Coalition's agenda with their NBN policy?
  • Where do they place the National Interest viz a viz other concerns?
  • How do they regard preserving Telstra's business and the investment of the 100,000's of small shareholders that bought T1, T2 and T3 from them?
  • How might they regard the business of the government owned NBN Co?
The evidence from the Howard government is deeply disturbing and we know they both soundly rejected the warning delivered about Telstra in 2005 by Sol Trujillo and refused to act to address the challenges, though it was well within his remit:
the Coalition seem to me to be the ultimate cynics and political opportunists.
I'd like to examine three themes:
  • What happened with Sol Trujillo in 2005 prior to the final T3 sale.
  • What a reasonable course of action with Telstra, its FTTN and eventual sale would've been.
  • John Howard's personal record, as Treasurer and as Prime Minister.
Around 15 years before Howard was Prime Minister, he was Treasurer presiding over the worst recession Australia had seen since the 1930's Great Depression,  clashing heavily with Fraser as well. This is how Fairfax describes his performance, it doesn't speak of a man, or party, "good with numbers" or willing to put National Interest ahead of Party Political concerns or individual agendas [see as well the National Archives view of the period]:
The 1982-83 recession, over which Howard presided, was the worst since the Great Depression, according to former Reserve Bank governor Ian Macfarlane.

When Howard became treasurer, the budget deficit was $3.2 billion, inflation 8 per cent, the unemployment rate 6.3 per cent and the growth rate 1.6 per cent. When he surrendered the Treasury keys to Paul Keating in March 1983, the budget deficit was $4.3 billion, inflation was 11 per cent, unemployment was 10.2 per cent and growth was a negative 0.4 per cent. Not a beautiful set of numbers.

The black hole of the budget deficit forecast quickly grew to $9 billion when Hawke and Keating examined the books. The economy, moreover, was in deep freeze, though Howard never publicly admitted to a recession, unlike Keating. It coincided with a drought, for which Howard could hardly be blamed. His period of office was the relatively unproductive era of "fighting inflation first" and intractable budget deficits.

Howard notched up one record. The misery index — the rate of inflation and unemployment combined — was at its highest when he was treasurer.

The scorecard on interest rates, which Howard used in the 2004 federal election to scare voters away from Labor, is not that good either. From 1977 to 1982 the mortgage rate was set at 13.5 per cent and the average rate was 10.5 per cent, business interest rates were 17.5 per cent and the average overdraft rate was 15.8 per cent. Moreover, there were two periods when mortgage defaults hit a peak — 1978-79 and again in 1982.
Even as Prime Minister, Howard was seen by his own party, as "mean and tricky", having Shane Stone, President of the Liberal Party, write him a memo in 2001 detailing the problems and remedies, advice he somewhat followed. Nicely summarised on "7:30" as:
The Government was "mean and tricky, out of touch and not listening" and it had deserted its own voter base, especially small business and self-funded retirees.
Going forward to 2005, on the evening that the Trujillo briefing paper was released to the ASX, Howard was interviewed by Kerry O'Brien on "7:30", amply demonstrating that notorious streak of denying all problems then ducking and weaving, refusing to answer straight-forward questions.

On the day of the meeting, 11-August, Howard was reported as saying "We'll consider Telstra's bush plan".

It didn't stop there, Howard publicly turned on Trujillo and Telstra, accusing them of "disgraceful behaviour". The most interesting part of this article is the Government, in the 2005 Budget, expected $5.25/share for Telstra T3 (it got $3.60, vs $7.40 for T2). Clearly Howard is blaming Trujillo and the Telstra Board for speaking the truth and somehow that crashed the share price. An ASIC investigation ensued, directed at the Telstra executive team, but failed to find serious misconduct.

We know that Trujillo was know for being "very direct" and from a press report on the day that there was ample time for him to deliver his Bad News, Good News message, but it wasn't well received by Howard on the day, and the senior ministers with him weren't able to change the decision.
Mr Trujillo and Telstra chairman Donald McGauchie flew to Canberra for the meeting after unveiling the telco's record full year net profit of $4.45 billion in Melbourne.

Nationals leader and Deputy Prime Minister Mark Vaile, Treasurer Peter Costello, Finance Minister Nick Minchin and Communications Minister Helen Coonan also attended.

After an hour and 45 minutes, Mr Trujillo and Mr McGauchie emerged from the top-level meeting looking grim but with little to say to the waiting media throng.
We know from recent history that Trujillo's plan was a good one:
The TLS share price has boomed since Telstra agreed to the NBN Co work and Structural Separation.
The question for Abbott, Turnbull and Fletcher from this is:
Why didn't the Coalition in 2005, when it controlled Telstra and had the chance, separate it into Retail and Wholesale companies and take Trujillo up on his 3 year FTTN-based NBN? They could've sold the two entities separately in 2008, once the wholesale NBN was established.
From the recent valuation by the stock market, it's probable that the expected $5.25 price would've been achieved or even the $7.40 of T2 or better.

With more than 4 billion shares in play, the Howard Government seems to have botched a simple, clear-cut business decision worth $1.50 - $3.00/share or $6-12 billion.

Why did the Coalition deliberately ignore a very clear message of a "clear and present danger", then go onto sell to the general public an asset they knew was impaired?

In any other context, this would have attracted a very far-ranging inquiry from the Corporate Regulator and the ASX:
  • When did the managers of the business first know that the business was in trouble and unlikely to meet claims in the prospectus?
    • from the 2005 presentation, we know PSTN income was in decline in 2002, the business was meeting dividend payments from reserves and since 2000, had under-invested.
  • When did the owners selling the business know that is was impaired?
    • The most senior levels of the Coalition most clearly knew on 11-Aug-2005 after the Trujillo briefing.
    • It seems unlikely, or negligent, if they hadn't been made themselves aware of the situation sometime in 2001/2 when the share price had joined the "dot bust" and was in serious decline.
  • When did sophisticated investors understand that Telstra was an impaired asset?
    • At least in 2005, after the release of the briefing paper to the ASX.
    • Probably in 2003, when the "dot bubble" had washed through, but the core business was in serious decline.
  • When did naive, small investors  understand that Telstra was an impaired asset?
    • Obviously, NOT in 2006 before the T3 float.
    • Presumably in 2010 or 2011 when the share price hovered around $3.
In the normal course of events, owners that knew, or should've known, information material to a prospectus, would be guilty of a serious offence under the Corporations Act.

Lets put legal & regulatory niceties aside, this is not the forum for such things.

The whole of the Coalition's senior ministry knew by Sep-2005 that they had a seriously impaired asset for sale and that there was a reasonable and achievable plan to salvage it, and that proceeding with the sale to hundreds of thousands of small, naive investors would cost those people dearly.

Why did the Coalition at its most senior levels choose to screw-over both Telstra the company and the hundreds of thousands of average households who believed the Coalition promises? This was a deliberate action, consciously undertaken: the ultimate cynical, opportunistic political act.

The greatest shame is that the National Interest, for both urban and country dwellers, was sacrificed to no good end.

With this history, why should the electorate believe anything the Coalition says about an NBN now?

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