2. Deregulation Background
2.1 Economic Background
The major oil price increases in 1974 and 1979 led to severe disruptions in the international economy, and adjustments continued well into the 1980s. For the New Zealand economy, with its heavy reliance upon export receipts from traditional pastoral products, the disruption was compounded by Britain's entry into the European Community, the slump in US beef prices, and generally weak prices for food commodities (at that time some 70%+ of New Zealand's exports comprised agricultural products).
Government policies from the mid 1970s were aimed at searching for new export markets, promoting export product diversification, increasing energy self sufficiency, and improving transport efficiency. Manufacturing exports were assisted with the conclusion of the Australia-New Zealand Closer Economic Relations and Trade Agreement in 1983.
In the 1980s, it was apparent that export diversification and import substitution, on their own, would be insufficient to restore the New Zealand economy to its former strength. In particular it was recognised that a substantial proportion of economic activity was not subject to any significant pressure to perform. Such activities could be termed 'internally protected' industries as opposed to export or import substitution oriented activities which faced very significant perform pressures. A number of studies highlighted the need for improved efficiency in such areas to assist economic recovery. A 1983 NZ Planning Council study highlighted the poor economic performance of many Government trading enterprises.
2.2 Inefficient State Owned Enterprise
The New Zealand Post Office was a key public enterprise. In 1984 it was the largest single employer with a total staff of 41,000 people. In late 1985 a study conducted by Wellington businessman, Mr R Mason, and Wellington accountant, Mr M Morris, focused on the telecommunications, postal and agency services of the Post Office (a second review examined the banking activities).
The Mason/Morris review highlighted the inadequacies of the existing organisational structure. It recommended that the Post Office be reorganised into specific business units, and argued that authority and responsibility for day to day operations should be de-centralised within each enterprise in order to ensure quick response to market conditions. The report drew a distinction between basic network telecommunications services and enhanced services, and recognised the need to open the latter sector up to market competition. It also recommended the eventual deregulation of the customer premises equipment market, and identified the need for greater flexibility in pricing and access to sources of capital. Following this report, the Government decided to establish Telecom as a distinct corporation.
2.3 Telecom's Establishment
| Telecom commenced business on 1 April 1987, with some 26,500 staff. The regulatory policy and advice functions - principally the Radio Frequency Service responsible for managing the radio frequency spectrum - were transferred to the Department of Trade and Industry (which became the Ministry of Commerce on 1 December 1988) to form the basis of a new Communications Division. | Telecom 1987:- 26,500 employees;
- engineering driven;
- poor customer relations;
- inefficient;
- 15,000 waiting for new telephone connections;
- management information systems out of date.
|
2.4 Telecommunications Services Industry Deregulation
In July 1987, Touche Ross Management Consultants were commissioned by the Government to report on whether it was in the interests of economic efficiency to introduce greater competition into the network services market; the likely economic and social impacts of introducing greater competition; and the possible phasing in of that competition.
The Touche Ross report identified the need for a considerable improvement in Telecom's operations. A survey of major users found that Telecom was "quite poor at providing services, communicating with customers, and understanding their requirements. It was engineering rather than market driven". The report went on to say that Telecom was not achieving a level of efficiency comparable to the best practice of overseas telephone companies. Telecom's management systems were outdated and grossly inadequate. Automation of clerical functions was lagging, as was investment in the network.
The report identified the existence of large cross subsidies between access (rentals) and toll charges, and between access charges for subscribers in different circumstances. Possible price reductions, in real terms, of 50 percent for domestic toll calls on most routes, and of 25 percent or more for international calls were identified. At the same time, local access charges could possibly double.
Subject to satisfactory interconnection arrangements, the report concluded that competition in network services was possible and sustainable; the resultant losses of economies of scale and scope would be small, and would be outweighed by the dynamic gains arising from the greater pressure on Telecom to be efficient, to offer better service, and to be more innovative. Overall, the national economy could only gain. In late 1987 the Government determined that competition in all telecommunication services markets would be permitted from early 1989.
From March 1988 a more commercial orientation was established. The corporation was restructured in order for it to be more customer focused, and a number of subsidiary companies were established. A number of regional operating companies (ROCs) provided basic customer services, while other companies offered value added services including international services, cellular telephony, mobile radio and directory services.
The Government recognised that the interconnection of competing networks, including international calls, domestic long distance calls, cellular and local services, with Telecom's network, was the critical competition issue. In July 1989 the Chairman of Telecom gave an undertaking that it was "Telecom's policy to ensure that interconnection will be provided to competitors on a fair and reasonable basis, and that the relationship between Telecom companies will not unfairly disadvantage competitors".
2.5 Privatisation
In September 1990 the Government sold Telecom to a consortium led by the American telephone companies, Ameritech of Chicago, and Bell Atlantic of Philadelphia. They subsequently reduced their shareholding, as required, by selling more than 50 percent of the company to private investors in New Zealand and overseas. Today, Telecom's stock highlights New Zealand as an investment destination for overseas investors. It is also listed on the New York Stock Exchange.
$4,250 million was paid for Telecom, and the entire proceeds, at the Government's direction, were used to retire Government debt.
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