Bird in the Mire

Plan for the inconceivable, so you don’t get caught up the creek without a Plan B.

Listener: 12 June 2010.

Keywords: Business & Finance;

In November 1967, the inconceivable happened: the UK devalued the pound. The following weekend Leyland Motor Corporation implemented its Plan B, announcing new offshore prices for its cars. Much later, British Motor Holdings did the same. Apparently, it had had no Plan B. When the two firms merged in 1968, no one – other than those from British Motor Holdings – seemed surprised that Leyland managers dominated the new firm.

Planning for when the inconceivable occurs is an indicator of good management. A businessman I met in the early 1980s was running an import-substituting business behind import controls. I tried to talk to him about the coming changes in protection. He knew all the arguments against abolishing them, thinking them so strong that drastic change was inconceivable. A few years later he lost his job when the protection was phased out. His ideological inflexibility meant he had no Plan B.

In her autobiography, Bird on a Wire, former Telecom chief executive Theresa Gattung tells us the company had no Plan B when the Government told it in 2006 to unbundle the “local loop” – to allow other companies to access Telecom’s lines from the local telephone exchange to homes and businesses. She says there had been no hint the Government had been thinking along these lines, although there had been much discussion on the appropriate regulatory framework in the previous six years.

The story goes back to the hurried privatisation of Telecom in 1990. Unlike in the UK, there was no particular regulatory framework for the monopoly. Indeed, it was not even discussed by the Cabinet when it agreed to the privatisation. It appears that inadvertently or intentionally – and certainly hurriedly – the adopted framework reflected the New Right (or Chicago School) view that there was no such thing as a significant monopoly unless there was some public intervention. “Light-handed” regulation, where the private market participants sorted out problems themselves, would be sufficient.

Negotiations between participants dragged on and on, without a satisfactory outcome, while the smaller competitors grumbled that Telecom had an unfair advantage because it owned and controlled the local loop. (But they would, wouldn’t they?)

The alternative view, held by the majority of economists, was that the local loop was a natural monopoly, even in an entirely private market. It gave large – and easy – profits to the incumbent, but the cost was high prices, ineffective competition and poor industry performance.

From 2000, the Labour-led Government hunted around for an alternative regulatory framework. This search became increasingly intense when it became evident that the telecommunications industry performance in New Zealand was poorer than in comparable countries. Yet high performance in this area is crucial for the next stage of economic development.

Gattung is right when she says our difficult terrain and low population density make high-quality broadband rollout expensive. But the Government concluded that Telecom’s monopoly was also a hindrance, so it decided the local loop had to be unbundled, enabling all telecommunication suppliers to compete on equal terms.

Should Telecom have decided that unbundling was inconceivable? A number of commentators – including me – had discussed it, although I claim no great insight. Before the privatisation, the Government had directed the publicly owned corporation to operate its local loops independently of the rest of the business. Inconceivable?

Gattung’s account has Telecom’s management struggling with the announcement they had no plans for – no Plan B. It is possible this partly explains the continuing difficulties the corporation faces today.

She suggests the Government compensate shareholders for the collapse in the Telecom share price, which reduced its market value by billions, following the unbundling announcement. (Apparently investors thought Telecom’s monopoly was a good thing for them, even if it wasn’t for the economy.)

The notion that the Government should compensate for any fall in property rights as a result of changes in public policy is, if nothing else, an interesting suggestion, one that raises a host of problems (as well as offering lucrative prospects for lawyers and consultants in the resulting litigation). Will taxpayers receive compensation when share prices go up as a result of government policy? And will the policy be retrospective? Will my manufacturer who lost his fortune when the Government phased out import licensing also be compensated?

Theresa Gattung sent me the following on July 20, 2010, which elaborates the column:

Brian, I would like to correct some misunderstandings which may arise from your recent column..  The column refers several times to unbundling, and indeed there isn’t a mention of anything else enacted in relation to telecommunications regulation at that time. The Government’s announcement of unbundling in May 2006 was not the reason that Telecom lost a third of its value in short order – unbundling was a regular policy setting for telcos elsewhere in the world, and even though the Government had decided in 2004 not to proceed with unbundling it was not unforeseeable that they would change their mind, as they did. It was certainly not the case that Telecom thought unbundling was inconceivable. What caught the market, indeed nearly everyone, by surprise was the concurrent May 2006 announcement of the ‘separation’ of Telecom. The only ‘separated’ telco at that time was British Telecom  (BT), and that had come about through negotiation with the UK regulator, not by government decree. After careful deliberation, Telecom management at that time, did come up with a Plan B – full structural separation, as we believed that would be the ultimate end game anyway. For various reasons, some of which I cover in my book,  Bird On a Wire, this did not eventuate. It remains my view that had this course of action been pursued the company would be better positioned today.   Regards, Theresa.