At the end of August, Telstra announced the largest after-tax profit in its history: $3.7 billion for the financial year ending June 30.
Three years ago, all of that money would have belonged to the people of Australia, through the state. Of course, commonwealth governments are not in the habit of giving us much real say in how government revenue is spent. Nevertheless, that would have been $3.7 billion available to cover expenditures, money which did not have to be raised in other ways, such as taxation.
Today, after the privatisation of 49.9% of Telstra, only half of the $3.7 billion is due to the government; the other half belongs to Telstra's private shareholders.
In the first two years after Telstra privatisation began, one-third of the shares, and therefore the profits, were private. That increased to 49.9% in the second round, 10 months ago.
Since the first round of privatisation, Telstra profits, after tax, have totalled $10.2 billion; $4 billion of that has gone to private shareholders rather than the government.
(Not all of the profit goes directly to shareholders. Only part — two-thirds in the case of the latest profits — is paid as dividends, while the rest is reinvested in the company. But shareholders still benefit from the reinvestment, since it increases the value of their shares, and the government of course loses that amount.)
The government, in privatising half of Telstra, has thus given up revenue of $2.2 billion in the first two years and $1.8 billion in the third.
The $4 billion in lost revenue compares to a total sales price for the 49.9% of about $30 billion. So it might be claimed that the government has done pretty well, giving up only $4 billion and obtaining $30 billion. But the $30 billion is a one-off: it will not increase. The lost revenue, however, will increase year after year, indefinitely, until it far surpasses the sale price.
Equally to the point, at today's prices, the shares which the government sold for $30 billion are worth more than $40 billion! Roughly $1-1.5 billion of the difference can be attributed to reinvested profits, which we should not count twice, but that still leaves the commonwealth — meaning us, the taxpayers — already with a loss of around $13 billion.
It is worthwhile taking a closer look at winners and losers in the Telstra privatisations, because the two sales had significant differences.
In the 1997 privatisation, the government greatly undervalued Telstra, offering the shares at $3.30. This provided the opportunity for huge and quick profits: writing in the Bulletin a year ago, John Lyons reported that US speculators alone had made close to $500 million within two days of the float.
Last year, the shares were put on the market at $7.40 for individual investors. Most of those who bought in the second round have little to be happy about.
Telstra stock is now trading at around $6.15 per share. Any "mums and dads" who bought during the second round and are still holding the stock are currently losers by about $1 per share.
Still, there were windfall profits available for speculators who moved quickly. Within a month of the second privatisation, Telstra shares peaked at $9.16 — a profit of more than 23% for those who sold then.
Most of the "mums and dads" would have seen their Telstra purchase as an investment, not a lottery ticket, and so would have held on to their shares, which then began their decline to their present level.
In a very real sense, their losses have funded the profits of the speculators, as well as returning to the government a little of the money it gave to its mates in the first privatisation. The "mums and dads" of the second round were treated as suckers by the Howard government.
In the week of its $3.7 billion profit announcement, Telstra shares fell nearly 7.5%. "The market makes decisions that are sometimes a little bit unfathomable by many of us", declared Telstra chief executive Ziggy Switkowski.
In fact, the mystery is not so great. The big players on the stock market — those whose decisions affect share prices — have decided that there are fewer opportunities for quick speculative profits in Telstra stock.
As Switkowski noted (as quoted in the September 4 Financial Review), a year ago Telstra shares were priced at 30 times earnings; today they're at 22 times earnings. The higher the price-earnings ratio of a stock is, the more its price is dependent on speculation.
But if the Telstra share price falls far enough, that will create the possibility of a new speculative rise and quick profits for those in the know. That's when the government and the big end of town will again crank up the propaganda machine for further Telstra privatisation.
BY ALLEN MYERS