Telecom pirate leader resigns

Rod Emmerson's cartoon in this mornings Herald nicely summed up my thoughts on the resignation of Telecom CEO Theresa Gatting. Even TV3 voiced one criticism of Gatting in their coverage the other night - Gatting was too focused on shareholder returns. TV3 didn't make the connection, but "shareholder returns" is a key reason few New Zealanders have decent broadband. Long John Silver would be proud.

It appears some Telecom executives are still shaking in their insecure little new right boots that the Government stepped in and finally did some long overdue regulating.

Quite frankly unbundling the local loop is hardly heavy regulation, particularly if you look at the number of other countries who have also introduced the policy (and most did so many years ago).

If the local right wing loonies and the board of Telecom are going to overreact to a moderate policy like unbundling, then perhaps we should have gone the whole hong and renationalised the local loop instead. My point is, and I think this is a worthwhile lesson for the left - the reaction would have been the same.

Christopher Niesche also calls on Telecom to stop being a company obsessed with holding back the tide of regulation at any cost and become a company seeking growth

I hope Telecom appoint a CEO who takes a longer term view of Telecom's position in the market and realises the company will be far better off to invest in itself through greater investment in infrastructure. This would involve stop giving into the demands of the short term speculators for their blood sucking dividends and putting more emphasis on the interests of their customers, staff and real investors (ie the long term shareholders).

That said it will take some time for New Zealanders to forget the number of times Spot the dog shitted inside our house. I hope Telecom improve their behaviour, but unfortunately I can't help but think they will be a naughty puppy for some time yet.

Rudman on Jenny Gibbs and Telecom

Good to see Brian Rudman in yesterday's Herald taking up a couple of points I made on Thursday last week about Jenny Gibbs and her inability to access broadband internet on the leafy Paratai Drive.

This is worth noting in the context of the venomous Herald on Sunday editorial criticising blogs for "rarely researching" their offerings, when the editoral itself was really just a poorly researched rant.

I regularly see more evidence of research on the blogs than I do in the newspapers these days. Pushed for time many journalists are forced to spout the public relations lines given to them by newsmakers. Could it be the editors of the newspapers are feeling a bit sensitive on this point as they rarely give their journos the time to adequately research their stories?

But back to Brian Rudman's column on Telecom.

A) Jenny Gibbs, former wife of Telecom privatiser Alan Gibbs, gained some of her wealth from the privatisation of Telecom

"Not until Mrs Gibbs, angered by weeks of Telecom come-on promotions for broadband, came to the Herald, with the damaging publicity for the company that ensued, did the monopoly lines provider leap into damage control and suddenly do the impossible.

Sadly for the rest of suffering humanity, Mrs Gibbs was not set on becoming the people's champion. As soon as she gained the ability to download art prints from foreign parts at high speed, it was up with the drawbridge and, "Sorry, I'm all right, Jack, I don't want to talk to the media any more."

Which was a shame. Telecom would have found it harder to flannel the rest of us with one excuse after another if one of the privileged class was there to keep them honest. It seemed so little to ask of someone whose wealth, in part at least, derives from former husband Alan Gibbs' part in the privatising of Telecom."

B) If Telecom shareholders like Ms Gibbs had taken less out of the company in terms of dividends Telecom would have had more capital to invest in infrastructure and the residents of Paratai Drive would be more likely to be able to access decent broadband services.

"One can only assume that, like the privatised rail system, Telecom has been squeezed for profits by its new shareholders, at the expense of basic infrastructural maintenance and improvement. Meanwhile, while the infrastructure groans and splutters, the Telecom sales staff are pitching away like used car salesmen, promising Rolls-Royce performance from a secondhand Lada network."

Draining dividends from Telecom can mean you don't get broadband

While I usually do not relish schadenfreude, I did enjoy reading in today's NZ Herald about poor Jenny Gibbs who cannot get broadband in at her leafy home in Paratai Drive. Who is Jenny Gibbs? She is the former wife of Alan Gibbs - a key player in the privatisation of Telecom in 1990.

In an earlier post I explained how the current parlous state of broadband services in New Zealand can be directly attributable to the sale of Telecom to the private sector. It is not often that you see a member of the new right establishment admit they have been negatively affected by the short sighted nature of their own policies. It usually hits everyone else but them.

Why can't I feel sorry for Jenny Barbara Gibbs? Because it is highly likely she (directly or indirectly) benefited from the high levels of dividends paid out to shareholders of Telecom during the 1990s. If Telecom had paid lower dividends in favour of greater investment in infrastructure, Jenny Gibbs would now be more likely to access broadband in Paratai Drive. The shareholders of Telecom asset stripped the company for their own personal benefit. She split from Alan in 1996, and stayed in the house on Paratai Drive.

Alan Gibbs was on the board of Telecom from 1990 and a director until 1999.

Also, according to the Companies Office, Jenny Gibbs has 120,000 shares (held jointly) in TeamTalk Ltd - a company which Telecom bought a 19.9% stake in 2001. In 2003 the company bought back the Telecom shares (probably with debt) and listed itself on the stock exchange with an IPO the following year, gaining a significant premium. Her holiday home has been used for a Telecom ad - one presumes they paid her for the use of the venue.

So while Jenny Gibbs can't get broadband, she has had many opportunities to directly or indirectly financially benefit from Telecom.

That said, I must congratulate Jenny Gibbs for pointing out the glaring inconsistency between Telecom's promotion of 'super fast broadband' and the service the company actually offers most of its customers. Telecom ought to realise that when their greatest ideological supporters are having trouble believing Telecom corporate propoganda, the general public are likely to see Telecom's claims for what they are - outright lies.

Telecom win the Roger Award for 2004

Just got back from the Roger 'awards' ceremony, where Telecom was proclaimed to be the worst transnational corporation operating in Aotearoa in 2004. Contact Energy was the runner-up.

Last year Telecom turned their effective monopoly of most of the NZ telecommunications market into another massive profit. The dominance of Telecom over the New Zealand sharemarket makes the Government too nervous to dismantle their monopoly, even shying away from small steps such as local loop unbundling.

New Zealand continues to suffer ongoing negative effects from the sale of this strategic asset. To give one example Telecom have used their monopoly over the local loop, to prevent other operators from offering more attractive broadband options over the New Zealand network.

From 1995 to 2004 Telecom paid out more than its net earnings in dividends, meaning that the company is effectively being cash stripped by its wealthy foreign and local owners (reported earnings of NZ$6,464 million and dividends paid out of NZ$6,698 million). CEO Teresa Gattung takes home a salary of $2.82 million, earning more in a single week ($53,270) than the average New Zealander earns in an entire year.

In a financial analysis accompanying the Judges Report on the Roger, accountancy lecturer Sue Newberry makes two worrying observations about Telecom. As Telecom also operates in the US, it also must file financial reports according to the US accounting standards, standards that have been tightened since the Enron scandal. Telecom's total reported profits for the last four years are less than half of those reported in New Zealand. Since 2001 Telecom have incurred losses of $604m in Southern Cross Cables Limited (a subsidiary registered in a Bermuda tax haven), losses they did not have to declare in their NZ results. Also the pattern of shareholding in Telecom is changing, with foreign investors selling down their shares while NZers and Aussies buy them up. While this may improve NZ current account deficit, this and the fact Telecom continues to pay more out in dividends than it makes in profits suggests Telecom is financially unsustainable and should not be touched with a bargepole.

Still, if Telecom does crash like Air New Zealand, it may provide the Government with an opportunity to renationalise Telecom at a comparatively low cost :)

More on Contact: Pocket the cash, put up power prices - Sue Newberry's analysis

Last month I wrote about the prospect of investors taking a 'capital return' out of Contact Energy and the likelihood this will lead to higher power prices. On Friday an article by Sue Newberry in the Christchurch Press reached the same conclusion (unfortunately I was unable to find an online version). Sue is a senior lecturer in financial accounting at Canterbury University.

Newberry also reports Contact plan to push through changes to corporate governance at a meeting scheduled for February 15, to remove its self-imposed restrictions on dividend payouts and capital returns to shareholders. Contact could then make a massive payout to shareholders, perhaps as large as $1.15 billion, which will be financed by the company taking on more debt.

Newberry says "Electricity Consumers should think of this massive payout as coming directly out of their own pockets. Part of this payout will have come from money already accumulated within Contact as a result of the high electricity prices domestic consumers already pay; the rest will come from increased electricity prices yet to be imposed."

To Newberry, this highlights a key problem with the current electricity pricing regime. Electricity companies are allowed to earn profits which represent an acceptable percentage return on assets. When a company revalues its assets upwards, just as Contact made a massive upwards revaluation last year, the dollar amount required to earn an acceptable percentage return rises immediately - electricity prices must rise as a result. The asset revaluation also leads to an increased depreciation costs. Electricity prices have to rise again to cover that as well.

On the back of speculation about a capital return to shareholders, Contact's share price jumped over the $7 mark to close yesterday at $7.02 (today's Press, p. C6). Good for investors, but not necessarily good for consumers. The Press also reports big industry is complaining about electricity prices as high as $1.34 a kilowatt hour in the North Island. So a privatised electricity system is kicking the private sector too. That said, the complaints of Comalco New Zealand need to be taken with a grain of salt, especially their disappointment in having to reduce power use by 5% to avoid the daily spot market. The overseas owned company running the Bluff aluminum smelter gains most of its power at far below market rates, thanks to a deal made with the Government in the 1960s to convince Comalco to set up the smelter. The details of this agreement remain secret to this day, but Muldoon did confirm in Parliament in 1968 that this deal included significant tax breaks as well.

If there is a "power crisis" this winter, higher prices will be to the benefit of Contact's Australian owners and other investors, who will be comfortable with their capital return and dividends from the company. But they have no chance of being cold as a result (but I guess NZ shareholders could complain about power prices at a shareholders meeting!)

If there is a "power crisis" this winter, while we are all being told to turn off all unnecessary power, perhaps we should consider closing down the Bluff smelter - if we are serious about electricity savings and guaranteeing supply to essential services. Closing one smelter would release around 15% of NZ total generating capacity.