ublished in the National Business Review 2 June 2006

In September 1990, the Labour government sold the Telecom Corporation of New Zealand to an American consortium of Bell Atlantic and Ameritech for $4.25 billion.

It was the single-biggest asset sale by the New Zealand government during the privatisation process.

Was the sale process a sound one? Was the price fair? And did the sale deliver a good telecommunications system to New Zealand? Arguably not, say two former senior Telecom executives involved in the sale.

Former Telecom chief executive Peter Troughton and company secretary Martin Wylie agree that the privatisation failed to deliver the best outcome because the rules of the sales process were changed at the last minute and best-practice regulation wasn't imposed at the time.

Dr Troughton, who has not lived in New Zealand since the early 1990s, spoke to NBR from Europe. Mr Wylie is now chief executive of Telecom rival CallPlus. Their criticism of the sales process focuses on four points:

• the rules of the sale changed at the last moment and this gave investors a bad signal;
• the sales price was too low, although it seemed good at the time;
• the sale handed over a monopoly with few restraints and the expected level of competition didn't eventuate;
• the absence of a proper regulatory environment encouraged the new owners to extract cash from the company quickly.

They also argued Telecom made poor investment decisions subsequently and so New Zealand failed to keep up with the rest of the world in technological developments, a failure that was an indirect cost to business and discouraged business investment generally.

The initial documents prepared for the sale sought bids for 49.9% of the company but Dr Troughton said that just a few days before the final bids were due, "I was informed that a non-conforming bid would be submitted, and that the government might be prepared to accept it."

That bid was the Bell Atlantic/Ameritech consortium, championed by David Richwhite and Alan Gibbs, who had lobbied the Palmer Labour government for a 100% sale of Telecom.

Other bidders were given 24 hours to match the bid. This was impractical and none did.

Mr Wylie said the change in the rules of the sale was a bad signal. "It was a Mickey Mouse way of doing things. I was somewhat surprised that a transaction of that size would be treated on that basis."

Yet Mr Wylie said he thought the price was fair at the time.

"At $4.25 billion the sale was a billion dollars more than Treasury originally thought it was worth.

"It was substantially above the original price paid for the assets when they were sold by the Crown to Telecom Corporation."

Now he has a different view. "Look at the cash taken out of the company with its 100% dividend policy, special dividends and the like.

"The real value of the company could be three times as much as that paid if the selldown had been better managed."

At the time Mr Wylie doubted the US owners would be able to extract much more value from Telecom, but Dr Troughton said, "it was clear to anyone with knowledge of the telecommunications sector that the industry was going to go through a period of massive growth."

Dr Troughton and Mr Wylie agreed that a sale without any significant constraints encouraged the new owners to make minimal capital investment and to extract cash as quickly as possible.

"The ownership of the network is the single most valuable business asset Telecom has absolutely. And they have done everything possible to preserve and protect that monopoly, at the expense of working out how they might compete in a truly competitive environment.

"Telecom's political lobbying has been all about preserving the status quo monopoly and their so-called property rights," Dr Troughton said.

He said that in other countries privatised telcos have been subject to proper regulation and have had to adapt their business models. "In particular they have had to invest to remain the lowest-cost provider [to retain the level of profitability and return on assets that a normal telco would expect."

In 1990, the Treasury's overriding aim was generating cash.

"The Treasury wanted to maximise the dollar value, to sell an unencumbered asset with as few imposts as possible, for the maximum, upfront amount so it could pay down national debt. I cannot emphasise that point too strongly, Mr Wylie said.

"What was sold was a private monopoly. What was overlooked was the possibility that effective competition would not emerge."

In 1990, competition was expected to keep Telecom under some degree of restraint but it didn't happen like that.

Telecom selectively reduced prices where and when it did face competition, for example when Saturn set up a residential network in the Wellington region.

"Competition didn't turn up, which enabled the owners to exploit the monopoly unmercifully. The underlying returns excluding bad investments like AAPT have been some of the highest in the industry worldwide," Mr Wylie says.

Telecom paid an interim dividend of 6.5cps in December 1991. Its final dividend in 1994 was 14.75cps and the payouts reached a peak of 17cps for the interim dividend in 1996.

The only significant restraint on Telecom in the years after its sale was the Kiwi Share provision, which Dr Troughton said he had to push to get.

"I dreamed up the restraints personally. I saw [Richard] Prebble [minister of state-owned enterprises] and told him the government should not sell unless there was at least a minimum level of regulation in place."