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Telstra split part of 'fundamental reforms' -

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Telstra split part of 'fundamental reforms'

Broadcast: 15/09/2009

Reporter: Tony Jones

Communications Minister Stephen Conroy joins Lateline to discuss the splitting of Telstra.

Transcript

TONY JONES, PRESENTER: A short time ago, the Communications Minister Stephen Conroy joined us from
our Parliament House studio.

Stephen Conroy, thanks for joining us.

STEPHEN CONROY, COMMUNICATIONS MINISTER: Good to be with you, Tony.

TONY JONES: OK. What do you say first of all to the $1.4 million Telstra shareholders who saw the
value of their stock plummet today $2 billion on the back of your announcement?

STEPHEN CONROY: Well, look, what I want to say is, firstly, the new Telstra leadership under
Catherine Livingstone and David Thodey are engaged in a very constructive conversation with the
Government. And we believe that, despite today's movements in the market, that the shareholders
can, with cooperation from management of Telstra, work with the Government to deliver a win-win
outcome. We've always said we believe we can get a win-win outcome. But for Nick Minchin and the
Opposition to be crying poor on behalf of Telstra shareholders; this is the same Nick Minchin that
proudly announced the appointment of Sol Trujillo when the share price was about $5.20, and on the
day Sol Trujillo left the country announced that he was pleased and thought he'd done a great job
and the share price was about $3.20. That's $2. That's around $30 billion of lost Telstra value
under the previous leadership, led and supported by Nick Minchin and the Federal Opposition. But
the new management of Telstra are taking a very constructive approach, and I believe we can get a
win-win for Telstra's shareholders and the country as a whole.

TONY JONES: So you're not saying to the shareholders who bought shares at a time when - or kept
them at least when Sol Trujillo was running the company, "It's a case of buyer beware. You bought a
bad investment; you're stuck with it"?

STEPHEN CONROY: Well it's not a bad investment. I mean, what we've seen today is a choice for
Telstra, a choice about whether it wants to stay as a company using the copper, which is coming to
the end of the copper era, or you can move to the fibre future and be part of a new
telecommunications network, a new telecommunications company and move into the exciting new
possibilities that will be available from the new spectrum which will be sold in a year or two. So
those are the choices that the Telstra board, Telstra management, are faced with, and I believe
under the leadership of David Thodey and Catherine Livingstone that we'll see a win-win for Telstra
shareholders and for the Australian economy and Australian consumers right across the board.

TONY JONES: OK. I'll come to that in a minute and what's going to happen. But you say it's only the
Opposition who are making these claims on behalf of shareholders who lost money today. It isn't the
Shareholders Association says people bought their shares in good faith from the Government and now
the situation is changing under their feet. The rules have changed and Telstra will become less
profitable as a result. So that's why the price of the shares is going down rapidly.

STEPHEN CONROY: No, well, Telstra are the most wholly-integrated, vertically-integrated company,
telco, in the world. There are few jurisdictions, if any, that have allowed a company to become so
integrated across so many platforms, and what we've said is that Australian consumers have been
getting slower broadband, a more expensive broadband, than almost anywhere else in the world. So
the competition policy rules that have been set in place, beginning back under the Hawke-Keating
Government and moving through the Howard Government have failed to deliver for Australian
consumers. And what we've put forward today is a pathway, we've put forward a choice for the
Telstra board and management to decide whether it wants to stay in its existing shape, or it wants
to move into the exciting new opportunities of the fibre future and the new spectrum which will
create enormous new wireless applications.

TONY JONES: OK. Briefly, did you anticipate that on the back of your announcement the share price
would fall?

STEPHEN CONROY: Well, look, we don't make public policy in the national interest based on a one-day
movement in the share price of Telstra. If you were to make that judgment, you'd have to say that
the previous government's entire political future should have collapsed because the Telstra share
price dropped from $5.20 to $3.20 under the Sol Trujillo regime. So, government's responsibility is
to the whole nation. We have got to provide for our children the best broadband future that we can,
the best opportunities for education. We've got to provide for small businesses the best access to
interstate, international markets. We've got to provide the best healthcare opportunities, the best
aged care opportunities for our community. The Government's job is to provide the national
infrastructure that the country needs.

TONY JONES: OK, just to finish with this issue of the fall in price of the shares. You know
there've been questions raised today about how the Future Fund managed to get ahead of the
Government decision, sell off a third of its portfolio, $680 million worth of shares, just a few
weeks ago, and not be subject, at least with those shares, to the fall in the value of the shares.
So, people are asking: did they have inside knowledge?

STEPHEN CONROY: Look, absolutely not. David Murray and the board of governors of the Future Fund
are completely independent from government. I think I've seen David Murray twice since he was
appointed. Once was a few weeks ago at a conference on a weekend, and once was when we had a
discussion some many months ago about these issues after we made our original announcement. David
Murray and I have had no conversations at any stage about the Government's plans to move in this
direction. David - and I - equally, I knew nothing about David Murray's plans to decide to move
from 15 per cent to 10 per cent. And that's the way it should be.

TONY JONES: OK. It's clear that the ASX is going to look into this as a matter of course, as they
do with all major share movements. It's possible that ASIC will also look into it. Is there
anything at all to hide from an investigation by either of those bodies?

STEPHEN CONROY: Absolutely not. ASX and ASIC are welcome to look at anything they want to around
the basis of David Murray's decision and the basis of the Government's announcements, and we are
happy to cooperate and I'm sure David Murray would be, and I'm sure David and the governors are
quite offended by suggestions that they've acted inappropriately or on the basis of some alleged
insider information. They had nothing to do with the Government's announcement today; they knew
nothing about it.

TONY JONES: Alright. Let's look closer at the deal you've done. You've basically issued an
ultimatum to Telstra. The commercial reality is they really don't have any other choice now than to
sell off or divest themselves of their fixed-line network. That's so, isn't it?

STEPHEN CONROY: Well, look, we're moving from the end of the copper age to the fibre future. And
what is going to have to happen for any telco is they're going to have to upgrade from that copper
into the fibre world. That's just a given. In Australia particularly, in a country with a climate
as diverse as ours, the copper in the ground that's been there for many, many tens of years in some
cases and longer is degrading in the ground. So, Telstra have always been faced with a point in the
future where they are going to have to make a substantial upgrade in their network. What the
Government has said is, "Look, we want to create a wholesale-only company. We want to end the
policy mistakes of the last 20 years, of both previous governments. And we believe the best way to
do that is for the Government to step into the market and provide, in partnership with the private
sector, the future upgrade." And that's what we're delivering in this package.

TONY JONES: Right from the beginning when you've talked about building the National Broadband
Network, you've talked about building a separate network to the Telstra network. Do you see a
future now where there's just one network, where somehow or other you wind in the Telstra network
into your National Broadband Network and save money and investment funds as a result?

STEPHEN CONROY: Look, we've said from day one we would welcome private sector participation, that
telcos would be welcome to vend their assets in for an equity stake or another arrangement, but
that's how we've usually described it. So we've said from the day we made this announcement on
April - ah, in April, that that would be one of the options that we would consider. And we've been
able to engage in discussions with Telstra, we've been able to engage in discussions with Optus and
other telcos who have all indicated that they're willing to consider, at the right price, and
that's always something you expect them, from a commercial perspective, to say, that they'd be
prepared to be part of this. So we envisage from the day we announce this that it would not cost
the full $43 billion that is discussed, that it would always be cheaper. And if Telstra were to be
one of the partners, we've always said: common sense says that it would be cheaper and faster to
build if Telstra were one of the partners in this build.

TONY JONES: In other words, what you'd like to do is not build two separate networks. You'd like to
use the Telstra network and upgrade it, rather than build a brand new one - is that what you're
saying?

STEPHEN CONROY: Well the backbone of Telstra's network, the big, fat pipes, if I can use that
really technical term, they're duplicated by a number of other companies already here in Australia.
What isn't able to be duplicated at the moment is there's a copper piece of wire into everybody's
home. And what we're going to be doing is put a piece of fibre to everybody's home. And that's the
big difference. And it would be a very poor outcome if there were ultimately two pieces of fibre
and the expense of that to the economy. It's very similar, as you'll remember, to the rollout of
the HSC cable, where Telstra's and Optus' vans went down the same streets, dug up the pavements
twice, strung two pieces of cable. This was a disaster. $5 billion was lost by Optus and Telstra
lost many billions of dollars but protected their incumbency at the time. So, infrastructure
competition has been the public policy since the Beazley announcements to bring together OTC and
Telecom back in 1990-'91. And unfortunately after nearly 20 years of that policy, 90 per cent of
the profits are still made by one company.

TONY JONES: But in short - just to cut you short there - just to finish or see if I can get an
actual answer to the question: in the end, what you don't want to see is two separate networks.

STEPHEN CONROY: Well we've said we want to build a wholesale-only, open access network, and I think
if you look at what's transpired over the last 15 to 20 years, the competing infrastructure model
has failed to deliver competition. And what we're looking to do is introduce a wholesale-only
company. We welcome Telstra, Optus, any of the other potential vendors to be part of our network.
And if that turns out to be a partnership with Telstra, it would see, as we lay the copper - the
fibre into the homes, we'd be taking the copper out. And we - the NBN Co. would become the sole
connection from the curb to the home. So, yes, that is one of the options that may come from the
discussions that are taking place at the moment.

TONY JONES: Well you've talked about hard-nosed negotiations; in fact, you're pretty much holding a
gun to Telstra's head because you've now got the carrot and the stick. I don't think Telstra was
expecting the stick. The stick is that you can actually stop them getting any more wireless
broadband spectrum. That's the fastest growing area of their business.

STEPHEN CONROY: Well, we believe that the Government's job is to govern in the national interest.
It's the Government's job to address policy failings of the past. And we believe the best way to do
that is to provide a choice for Telstra, they can go down one path or they can go down another
path. And if they choose to cooperate with the Government...

TONY JONES: But if they go down one - if they go down the wrong path as far as you are concerned
you can pretty much destroy their business.

STEPHEN CONROY: Well, that's a choice for Telstra and its shareholders to ultimately decide. I
mean, I know you use that dramatic language. Telstra's a very profitable company that exists today,
it's not a question of the Government's taking anything away from Telstra. We're saying Telstra can
choose to remain exactly as they are today. We're not - none of what we've proposed forces them to
lose anything if they make that choice. What we're saying though is if you're wanting to move into
the exciting, new fibre world, the exciting, new mobile world where new applications are going to
be resigned, we want to see a less vertically-integrated future, because competition policy has
failed in this area. You just got to see Graham Samuels comments today from the ACCC where he
talked about the failure of competition and why this is such a significant improvement to the
competitive regime.

TONY JONES: Right, the fundamental question here is going to be what is that Telstra network worth,
because they're going to have to divest themselves of it very likely and someone's going to have to
pay the bill. Presumably that bill will come out of the $43 billion originally estimated for the
National Broadband Network. Do you know how much their network is worth? Is that going to be the
key to the negotiations?

STEPHEN CONROY: That's certainly a very, very key part of the discussions that are taking place at
the moment. And what we're, what we're - you can be assured of is that Telstra have got their
investment bank advisors, Macquarie Bank, well known, hard-nosed operators. We've got McKinsey and
KPMG, and we've also got some other expertise. And over the course of the next three months or so,
I would hope we were able to come to an agreement about what the future shape of the sector will
be, what NBN will be providing, what assets will be vended in from all of the other potential
telcos, including Telstra, and find an outcome that is a win-win for Telstra shareholders, but a
win also for Australian small businesses, a win for Australian children and school kids.

TONY JONES: OK. But do you have a rough idea what their network is worth, because you're going to
have to pay the bill?

STEPHEN CONROY: (Laughs). Look, we're not going to be discussing the ongoing negotiations. They are
obviously already begun, and we're not going to be speculating about what the different options are
publicly. What we've been willing to do today is confirm that negotiations and discussions have
commenced. But we're not going to be on a daily basis saying, "Is it worth $10 billion? Is it worth
$20 billion? Is it worth $30 billion? Am I prepared to pay for that?" These are serious, hard-nosed
commercial negotiations. Both sides have an understanding of the relative values; both sides are
engaged in some very heavy duty negotiations, and we expect those to continue and we won't be
commenting or speculating publicly about those.

TONY JONES: Alright. Stephen Conroy, once again, we're learning more and more about this National
Broadband rollout and what it means for the whole communication industry, interview by interview.
Hopefully we'll be able to do that again sometime in the near future. Thank you very much for
coming to join us.

STEPHEN CONROY: Look forward to it, Tony. Thanks very much.