JERSEY’S finance minister has mooted the possible sale of Jersey Telecoms as part of a programme that could eventually see the disposal of several other public utilities, including the island’s water and electricity companies. The States of Jersey is still the only shareholder in JT which, in turn, owns Guernsey’s Wave Telecom. The decision is therefore of pan-Channel Islands significance, with implications for thousands of consumers and businesses, Jersey’s and the local telecoms industries and hundreds of employees.

The disposal of JT will raise many millions of pounds for Jersey’s public finances as it prepares for 2008, although it will also relinquish the right to the multi-million-pound dividend it receives every year and control of the company.

Proceeds from the sale of JT may help to ease the fiscal deficit and pay for new public services and investment in the short- to medium-term, but there must also be strategic, lasting reasons for selling the company.

Jersey should sell JT only if it believes that governments should not own telecoms companies, in line with Guernsey and most of the rest of the world, because private ownership and control will bring more benefits to the island and its consumers and because its regulatory regime is robust enough to prevent the creation of, or potential market abuse from, any dominant operator that may emerge.

Indeed, JT is already very successful, having made nearly £15m. profit before tax and exceptional items in 2005. The problem is that the company has not yet experienced the full impact of competition in its domestic market, with the entry of Cable & Wireless and the award of 3G licences to two further operators happening this year.

JT’s profits are therefore in danger of being competed away, so the States of Jersey may be right to crystallise the value of its shareholding now, although it may be too late to maximise that value.

With the increasing deregulation of the market and the entry of some large players with deep pockets, JT may lack the skills and the scale to compete under public ownership. A private owner may improve efficiency, introduce new methods and services, lower prices and bring the essential investment that will not only boost the competitiveness of JT but of Jersey as a whole.

Then again, it may not and the States of Jersey should not be afraid to walk away from a deal if buyers undervalue the company, unlike in Guernsey.

C&W has already declared its interest in buying JT, which is consistent with its objective of becoming the leading telecoms operator in the Channel Islands and the strategy of its international division. The acquisition of JT would bring it more customers and revenues, greater economies of scale, increased market power and lower risk in entering the Jersey market. Profits will naturally rise, as may prices, which could lead to more investment and innovation, but also to greater returns for foreign shareholders.

The purchase of JT would be a logical strategy for C&W.

The impact on the local telecoms market will of course depend on the buyer of JT.

The Jersey Competition and Regulatory Authority has the power to consider the implications of any acquisition for consumers and the industry in terms of price, choice, service, innovation and the possible creation and abuse of a dominant market position.

If C&W buys JT, there will certainly be a reduction in competition in both islands. Other players will still be able to compete and consumers will still have some choice, but both competition and choice will be more limited and more difficult. For example, in Guernsey, Bharti Telecom will offer some competition in 3G, but it is an as yet unknown quantity, and Newtel will continue to provide certain services such as broadband and private circuits and possibly VoIP in the future.

A merged C&W/JT would be the dominant operator, however, and consumers would experience a reduction in their economic power that could lead to higher prices, inferior service and less innovation. Similarly, other operators may struggle to compete with the scale, resources and market power of C&W/JT.

The Channel Islands must therefore be wary of a takeover of JT by C&W. However, although the market is small and the capital expenditure necessary to enter the market is high, several operators have recently decided to invest heavily in the islands because they believe they can compete and make a good return.

Moreover, technology is constantly changing in the industry, which is facilitating competition by bringing down barriers to entry. Local regulation must continue to be vigorous to prevent market abuse and anti-competitive practices. And smaller operators can always differentiate themselves from the dominant operator by superior customer service and innovation.

A sale of JT to C&W would be the least desirable outcome, but there are at least some significant checks in place to counterbalance its potential power.

* Comments to rich@hemans.net Richard Hemans is a chartered accountant who works on a freelance basis.