2.1
Chapter 2 sets out the findings of the Joint Committee of Public Accounts and Audit (JCPAA) inquiry into Commonwealth procurement, based on Audit Report No. 12 (2017-18), Management of the Contract for the Telephone Universal Service Obligations. The Department of Communications and the Arts (DCA) was the audited Commonwealth entity.
2.2
The objective of the audit was to assess the effectiveness of DCA’s contract management of standard telephone services and payphones under the Telstra Universal Service Obligation Performance Agreement (TUSOPA).
2.3
TUSOPA supports the achievement of the universal service obligation (USO) policy objective of providing ‘reasonable access’ to standard telephone services and payphones on an ‘equitable basis’ to all Australians, through a 20-year contract with Telstra. Under TUSOPA, Telstra receives a fixed and unindexed annual GST inclusive payment of $253 million to deliver standard telephone services and $44 million to deliver payphones.
2.4
As the relevant regulator, the Australian Communications and Media Authority (ACMA) was included within the scope of the audit. To conduct the audit, the ANAO examined relevant documentation held by DCA, ACMA and Telstra.
2.5
The Productivity Commission, Telecommunications Universal Service Obligation: Inquiry Report (June 2017), concluded that current USO arrangements were ‘no longer serving the best interests of the Australian community’. It recommended that the Government commence negotiations with Telstra to terminate the payphones component of the TUSOPA ‘as soon as practical’, with the standard telephone services component to be terminated shortly after the National Broadband Network (NBN) is fully rolled out in 2020.
2.6
The Government response to the Productivity Commission report stated that the ‘USO is a long-standing safeguard that ensures all Australians have access to a voice only Standard Telephone Service … and payphones. However, changing consumer preferences and the rapid evolution of technology means that the mechanisms used to deliver these services are increasingly outdated’.
2.7
The Government response also announced a program of work to implement a new Universal Service Guarantee (USG), to ‘provide all Australian premises, regardless of their location, with access to both voice and broadband services delivered on a commercial basis by the market in the first instance, and where this cannot be achieved, options will be developed for targeted Government measures’.
2.8
In May 2017, DCA formed a USO Taskforce to develop advice for Government on the future of the USO and work on delivery options for the new USG.
Committee conclusions and recommendations
Committee conclusions and recommendations
2.10
The Committee notes that TUSOPA supports the achievement of the stated universal service obligation policy objective of providing reasonable access to standard telephone services and payphones on an equitable basis to all Australians, and that the agreement ‘played an important role in securing Telstra’s involvement in the rollout of the NBN’.
2.11
However, the Committee is concerned by the ANAO finding that key aspects of TUSOPA do not reflect value for money principles. Achieving value for money is expected to be a central consideration of Commonwealth procurement activities.
2.12
DCA emphasised the broader policy context for the development of TUSOPA, ‘which related to massive telecommunications reform in the sector, including the roll-out of the NBN and structural separation of Telstra’; that the agreement was ‘one element of the broader negotiations conducted with Telstra at that time’; and the difficulty of costing telecommunications networks, as well as the high fixed costs involved and the potential for increased costs. These views led DCA to consider that ‘the ANAO drew a number of conclusions that did not sufficiently take account of this policy context, nor demonstrate an understanding of how network infrastructure is costed or managed’. DCA also noted that ‘work was done in relation to an appropriate costing in terms of consultancy advice’.
2.13
However, the Committee notes that ANAO concluded the TUSOPA contract term of 20 years, with a fixed annual fee based on 2009-10 costs, does not reflect the demonstrated decline in demand for standard telephone and payphone services over the relevant period. The key issue here for the ANAO was that DCA was unable to provide evidence demonstrating that its point-in-time estimate was designed to forecast Telstra’s likely costs to deliver the services over the 20-year life of the contract, or that the department provided advice to the Government about the reasonableness of using a point-in-time estimate to set a fixed annual fee for an extended period. Further, while DCA’s consultancy advice ‘undertook a methodology to try to estimate the cost’, ANAO was not given ‘assurance through reading that report or through other records, and there was limited access to or limited availability of evidence to give us assurance that the basis of the amount that ended up being negotiated between the department and Telstra represented something that was reflective of the costs of providing a USO’.
2.14
In terms of DCA’s point about the broader policy context, the Committee notes the Auditor-General’s position that this does not ‘excuse’ the value-for-money criteria in the TUSOPA contract:
The point we were making was around the lack of evidence in the context of developing the contract with respect to cost structures and particularly the information that was used to validate the level of the payment related to [a] single-point cost structure, which seemed to be developed … without a significant analysis about the long-term changes in this cost structure over the period of the contract. So, if there isn’t that sort of base work being done with respect to the value put out of the contract, then it’s difficult to look at value for money in the context of the delivery of the service. Alternatively, to say that it was part of a larger deal, if you don’t know what the value was in one component of the deal, I’m not certain how you know the value of the totality’.
2.15
In terms of DCA’s point about the high fixed costs involved and the potential for increased costs, the Committee notes the ANAO’s position that ‘Telstra’s actual current net cost of providing the STS USO remains in dispute’.
2.16
In view of these findings, the Committee makes a number of recommendations below addressing value for money principles. In doing so, however, the Committee accepts that DCA is working on options, as discussed below, for implementing a new USG and other USO reform initiatives.
2.17
The Committee is also concerned that, due to shortcomings in records management, DCA was unable to provide evidence of what options for delivering the USO were considered as part of the policy development process from mid-2009 through to early 2010, and that the advice it did provide to the Government in April 2010 did not contain information on alternative USO delivery options or provide a rationale for the approach that was recommended.
2.18
DCA explained that, ‘in regard to the period 2009-2010, the Department was not able to locate all of the requested records’ and, while ‘consideration was given to undertaking a broad data extraction from back up tapes to identify relevant records’, this ‘would not have been completed in the timeframe requested by the ANAO’. The Committee maintains that it would be useful, in the context of Parliamentary and public accountability and possible future ANAO audits of the TUSOPA contract (noting its 20-year timeframe) and/or related matters, for DCA to provide an estimated timeframe for data extraction and review of the relevant records. The Committee may then take future action on this matter.
2.19
The Committee notes DCA’s acknowledgment at the public hearing about shortcomings in its past record-keeping practices and confirmation that it has since improved the way in which key steps in policy development processes are recorded and stored, to enable easier identification and retrieval of all departmental records. The Committee notes the ANAO’s position that these commitments to improved record keeping ‘appear to be appropriate’.
2.20
The Committee recommends that the Department of Communications and the Arts provide the Committee and the Australian National Audit Office (ANAO) with an estimate of the time it would take to locate relevant records for the period 2009-10, as originally required by the ANAO for the purposes of Audit Report No. 12 (2017-18).
2.21
The Committee is concerned by the ANAO finding that DCA has been a ‘relatively passive contract manager’ as regards TUSOPA and ‘has not actively managed the contract towards achieving value for money’.
2.22
Of particular concern was the evidence provided that, to date, DCA has not reviewed the scope of services or used flexibility mechanisms within the contract with the potential to achieve cost savings. As discussed below, the Committee further notes the ability of DCA to utilise the flexibility mechanisms under TUSOPA has been impaired by the absence of data in the current performance reporting framework that could be used to estimate the impact of any proposed changes to the scope of services.
2.23
A positive development was DCA’s acknowledgment at the public hearing that there is scope to improve management of the TUSOPA contract and that it had implemented changes to ensure more ‘effective and efficient’ management of the agreement. In particular, the Committee notes the Auditor-General’s observation that ‘the description of what the department’s doing with respect to contract management is, I would have thought, a substantial step forward on what had been the practice during the period which we audited’.
2.24
DCA agreed in principle to the ANAO’s recommendation that the department determine if any of the existing flexibility mechanisms in the TUSOPA contract could be utilised to improve value for money outcomes while the NBN is being rolled out but emphasised that ‘scope for improvement is constrained by the history and design of the TUSOPA’.
2.25
While mindful of the transitional work being undertaken by the USO Taskforce within DCA on USO reform and implementation of the new USG, the Committee emphasises the need for Commonwealth entities to achieve value for money in Commonwealth procurement, and demonstrate active contract management in this regard. Pending implementation of the new USG and noting the rapid change in communications technologies, the Committee is of the view that it would be useful for DCA to report back on whether it will be utilising flexibility mechanisms or other clauses under the TUSOPA contract (DCA can require that Telstra provide additional reports or other information where it ‘considers it necessary to investigate any possible non-compliance by Telstra … or to satisfy a Ministerial request’) in the interim, to improve value for money outcomes and better demonstrate such outcomes to the broader telecommunications sector. (The Committee also makes a related recommendation below concerning DCA’s performance reporting assurance.)
2.26
To improve value for money outcomes, the Committee recommends that the Department of Communications and the Arts report back to the Committee on whether it will be utilising flexibility mechanisms and the additional reporting clause under the Telstra Universal Service Obligation Performance Agreement to bring forward cost savings, as well as access data on the quantity of standard telephone services that Telstra supplies solely on the basis of its universal service obligations and on Telstra’s net cost in terms of supplying standard telephone services and payphones under its universal service obligation.
2.27
DCA agreed to the ANAO’s recommendation that the department develop options for an efficient transition to any potential alternative USO delivery arrangements. The Committee notes DCA’s confirmation that, in undertaking this work, a ‘guiding principle is to ensure an acceptable cost-effective alternative is available before existing arrangements are changed’, to ensure the Australian public, particularly in regional and remote areas, continues to have access to critical telecommunications infrastructure.
2.28
DCA confirmed that it had ‘now commenced work on cost and delivery options to provide for a future USG, and will work with industry stakeholders and representatives of regional and remote Australia in this effort’, with this work to be coordinated within the department by the USO Taskforce and ‘further updates’ to be provided in 2018.
2.29
Noting that this is a time of transition, with reform of the USO and establishment of the new USG, the Committee is of the view that the ANAO may wish to consider a future audit into DCA’s management of these arrangements. Such an audit might usefully follow up on a number of matters related to the current audit, including DCA’s record management, performance reporting assurance and implementation of relevant JCPAA and ANAO recommendations. It might also provide another opportunity for audit retrieval of relevant DCA records relating to TUSOPA.
2.30
The Committee recommends that the Department of Communications and the Arts provide further advice to the Committee regarding:
the transition from the Telstra Universal Service Obligation Performance Agreement to the establishment of the new Universal Service Guarantee (USG)
the department’s record management relating to policy development of the USG
2.31
The Committee notes the ANAO finding that existing performance reporting under TUSOPA provides ‘limited transparency’ as to whether contract services are achieving the stated policy objective. More specifically, as this performance reporting provides ‘no information’ on the quantity of standard telephone services that Telstra supplies solely on the basis of its universal service obligations, it is not possible to determine the extent to which TUSOPA contributes to Australians having reasonable access to such services on an equitable basis. Existing reporting also does not provide data on Telstra’s net cost of supplying standard telephone services and payphones under its universal service obligation. As discussed above, a lack of performance reporting data has impacted on DCA’s ability to use flexibility mechanisms under TUSOPA.
2.32
While DCA’s contract reporting indicated that Telstra had met all service performance benchmarks as regards service quality, the Committee further notes that DCA had not undertaken processes to verify the accuracy of the underlying performance data provided by Telstra. In addition, while ACMA amended the relevant risk register, during the audit, to explicitly recognise the risk of industry providing ‘inaccurate data’ in relation to ‘performance compliance issues’, DCA’s November 2016 contract management plan and associated risk register did not identify the possibility of inaccurate data as a risk.
2.33
The Committee is aware that TUSOPA does not require Telstra to provide information on the annual costs associated with providing USO services, that Telstra’s performance against the Customer Service Guarantee (CSG) is considered by DCA and ACMA to provide ‘proxy’ indicators of performance against its standard telephone services USO obligations, and that Telstra has advised recording of data on USO-specific standard telephone services would involve a financial cost.
2.34
However, questions remain about whether DCA has sufficiently explored if it might utilise additional reports and USO reform processes to improve performance reporting arrangements under TUSOPA, to require reporting, in a cost-efficient way, on the quantity of standard telephone services that Telstra supplies solely on the basis of its universal service obligations and on Telstra’s net cost in terms of supplying standard telephone services and payphones under its universal service obligations. The Committee emphasises the contract performance reporting framework should produce information that assists administering Commonwealth entities in monitoring the extent to which the contract continues to deliver value for money over its full term. This is particularly important for longer-term contracts.
2.35
DCA agreed to the ANAO recommendation that it review whether existing arrangements provide an appropriate degree of assurance that Telstra’s standard telephone service and payphone reporting is accurate and an appropriate basis from which to assess Telstra’s performance under TUSOPA and make annual payments, and implement revised arrangements accordingly. DCA noted that it had strengthened its contract management verification and assurance processes. The Committee is of the view that it would be useful for the department to provide further details on this matter, with specific reference to the ANAO’s recommendation.
2.36
To strengthen performance reporting assurance and improve value for money outcomes, the Committee recommends that the Department of Communications and the Arts report back to the Committee:
on whether the department’s latest Telstra Universal Service Obligation Performance Agreement (TUSOPA) contract management plan and risk register identifies the possibility of inaccurate data as a risk
with specific examples of how the department’s TUSOPA contract performance reporting verification and assurance processes have been strengthened, and how they provide an appropriate degree of assurance that Telstra’s standard telephone service and payphone reporting is accurate and an appropriate basis from which to assess Telstra’s performance under TUSOPA and make annual payments
on whether the additional reporting clause under the TUSOPA contract, and USO reform processes, can be utilised to establish cost-efficient performance reporting on the quantity of standard telephone services that Telstra supplies solely on the basis of its universal service obligations and on Telstra’s net cost in terms of supplying standard telephone services and payphones under its universal service obligation
2.37
The Committee is disappointed that in DCA’s response to the audit recommendations, as incorporated in the ANAO report at the time of publication, the department did not state whether it agreed or disagreed with these recommendations. The Committee agrees with the Auditor-General that, although Commonwealth entities are not required to indicate agreement or disagreement in this regard, this is not a ‘desirable precedent’.
2.38
A key aspect of JCPAA inquiries into ANAO audits is to hold Commonwealth entities accountable for the implementation of audit recommendations, including potential Committee follow-up of entity commitments as regards meeting any future milestones required to fully implement a recommendation.
2.39
The Committee therefore welcomed DCA’s clarification, during the inquiry, of its position on the audit recommendations. The Committee encourages DCA to clearly state its position in terms of future audit recommendations. Transparency and clarity are critical aspects in public sector accountability to the Parliament and the Australian people.
2.40
The Committee notes the key learnings on contract management identified as part of this audit as being relevant to all Commonwealth entities. The Committee strongly supports the ANAO’s continuing identification and promotion of key learnings from its audits.
Review of evidence
2.41
This section reviews the evidence received by the Committee regarding DCA’s management of the TUSOPA contract in terms of:
value for money and departmental records management
departmental contract management
the new USG and USO reform
performance reporting and monitoring arrangements
implementation of recommendations and key learnings
Value for money and departmental records management
2.42
The ANAO noted that ‘TUSOPA supports the achievement of the stated universal service obligation policy objective of providing reasonable access to standard telephone services and payphones on an equitable basis to all Australians’. The ANAO also noted that TUSOPA ‘played an important role in securing Telstra’s involvement in the rollout of the NBN’. However, the ANAO concluded that ‘key aspects of the TUSOPA do not reflect value for money principles’.
2.43
In particular, as the Auditor-General observed, the contract’s term of 20 years with a fixed annual fee based on 2009-10 costs ‘does not reflect the demonstrated decline in demand for standard telephone and payphone services over the relevant period’, and TUSOPA ‘limits flexibility’ as to how standard telephone services can be delivered in areas outside the NBN fixed line network.
2.44
In its response to the ANAO report, DCA stated:
The Department considers that the ANAO has drawn a number of conclusions that do not sufficiently take account of [the] policy context, nor demonstrate an understanding of how network infrastructure is costed or managed. For example, the ANAO has concluded that the contract does not reflect value for money principles; specifically, that the fixed annual fee based on 2009-10 costs does not reflect the demonstrated decline in demand for USO services. However, the basis for this conclusion is not apparent …
Infrastructure cost models are highly complex and comprise a range of variables … In the absence of analysis demonstrating how these factors interact and their impact on overall costs, it is not clear to the Department how the ANAO has reached its conclusion that the TUSOPA does not reflect value for money.
2.45
At the public hearing, DCA further emphasised that TUSOPA was ‘one element of the broader negotiations conducted with Telstra at that time’, and that the agreement ‘must be viewed in the context of these broader negotiations, where the government was seeking to achieve a wider range of objectives, including telecommunications reform, the implementation of the NBN and the structural separation of Telstra’. As to whether this broader policy context ‘excused’ value-for-money criteria in the TUSOPA contract, the Auditor-General responded:
I don’t think it excuses the value-for-money criteria. The point we were making was around the lack of evidence in the context of developing the contract with respect to cost structures and particularly the information that was used to validate the level of the payment related to [a] single-point cost structure, which seemed to be developed without significant interaction with the provider and without a significant analysis about the long-term changes in this cost structure over the period of the contract.
2.46
By way of further background on this point, the ANAO found that DCA had been ‘unable to provide any evidence which demonstrates that [its point-in-time] estimate was designed to forecast Telstra’s likely costs to deliver the services into the future’ or that it ‘provided any advice to the Government about the reasonableness of using a point-in-time estimate to set a fixed annual fee for an extended period’. The fixed annual fee was established based on external advice commissioned by DCA in 2011 that used assumptions provided by Telstra and data from the 2009-10 financial period. However, the ANAO found ‘no evidence that this advice was designed to provide guidance on Telstra’s likely costs to deliver the USO over the life of the contract, notwithstanding that the lack of indexation in the agreement results in the real value of the annual payments declining over time’. As the ANAO further noted at the public hearing, ‘our understanding is that that advice was provided on the basis of a point-in-time costing of services during 2009-10 but not forecast forward for the 20-year life of the contract. So we weren’t given comfort that when you look at value for money it’s not a point of time; it’s over the life of the contract’.
2.47
In terms of this external advice, in January 2011, DCA ‘instructed its commercial advisor to commission work to provide an estimate of Telstra’s likely net costs to deliver the STS [standard telephone service] and payphone USOs’:
Subsequently, a consultant was engaged to prepare a report to estimate this cost in relation to the two proposed USOs—specifically the provision of a STS for the seven per cent of Australian premises that would not be covered by the NBN, and the ongoing provision of Telstra’s payphone service.
The resulting estimate developed by the consultant relied on assumptions provided by Telstra and data from the 2009-10 financial year. This point-in-time estimate concluded that a reasonable range for the provision of STS and payphones under the USO was between $215 million and $262 million, and $35 million to $48 million respectively. The resulting range of $250 million to $310 million for STS and payphones was close to the annual payment amount proposed by Telstra in November 2010. These figures were then applied by the Department across the full term of the TUSOPA and equated to a total value of $5.94 billion to provide STS and payphone services under the USO.
2.48
At the public hearing, DCA commented that, ‘in relation to coming to an agreement on price … it was a negotiated outcome in that historical context and work was done in relation to an appropriate costing in terms of consultancy advice’. However, the ANAO again emphasised that, while they were given access to a report commissioned by the department’s adviser ‘which undertook a methodology to try to estimate the cost’, they were not given ‘assurance through reading that report or through other records, and there was limited access to or limited availability of evidence to give us assurance that the basis of the amount that ended up being negotiated between the department and Telstra represented something that was reflective of the costs of providing a USO’. As the Auditor-General emphasised, ‘if there isn’t that sort of base work being done with respect to the value put out of the contract, then it’s difficult to look at value for money in the context of the delivery of the service. Alternatively, to say that it was part of a larger deal, if you don’t know what the value was in one component of the deal, I’m not certain how you know the value of the totality’.
2.49
The ANAO also noted that ‘Telstra’s actual current net cost of providing the STS USO remains in dispute’:
Several telecommunications providers made submissions to the Productivity Commission outlining that factors like the reduction in the number of Telstra-supplied voice services in relevant geographical areas, and the lower network access prices in these areas, to suggest that Telstra’s STS USO-related net costs must have decreased over time. Conversely, Telstra advised the ANAO that it considered such submissions both understated the levels of STS usage and overlooked decreases in revenue from these services, which in Telstra’s view results in an understatement of net costs. Telstra also contends that the model used to calculate the 2011 estimate did not accurately incorporate all USO-related ‘conditioning and overhead’ costs.
2.50
In its submissions and at the public hearing, DCA pointed to the difficulty of costing telecommunications networks, as well as the high fixed costs involved and the potential for increased costs:
as noted by the Department during the October 2017 Senate Estimates process: ‘Costing telecommunication networks is really difficult because they’ve got high fixed costs and, although usage might decline, there’s an obligation on the provider to maintain the whole network. So that makes costing quite difficult.’ The Productivity Commission Inquiry into the Telecommunications Universal Service Obligation also identified that ‘Most participants [to the inquiry] considered copper to be an outdated technology and one where the costs of maintenance are likely to increase over time.’
Going to the issue of the costing itself … it’s fair to remember that this wasn’t really a clean slate in some ways. There has been a payment to Telstra for USO services at least since 1997, so there was a kind of historical context for the amount of money …
one of the problems in relation to the costing goes to this comment about it being one price at a point in time and for the whole of the country. What the USO is about doing is delivering or ensuring that everyone in Australia has access to voice services and pay phone services. That obviously requires a network able to deliver that across the country, and … the way the negotiation took [place] was to deliver that outcome as opposed to a series of per-premises connections or individual pay phones. So in some ways you might say it’s a job lot. That goes to the complexity of costing networks as well. As you will know, they are very extensive, very complex pieces of infrastructure. They are not only geographically extensive but require a lot of capability within an organisation to sustain them.
The other element to keep in mind as well is that the contract required Telstra to maintain the copper network where it was in situ and being used. That in itself is a factor that determines the costing as well. It wasn’t as if you could say, ‘Well, instead of using copper, we will use mobile technology,’ for example.
2.51
Vodaphone’s submission to the inquiry stated that the ANAO report raised ‘serious questions of transparency, accountability, efficiency and controls’ with regard to TUSOPA, and that the payments under TUSOPA are ‘excessive relative to the service that Telstra has been contracted to perform and that Telstra appears to be generating a profit at the expense of taxpayers and TUSO levy payers’. DCA’s response to Vodaphone’s submission included the following points:
The Department of Communications and the Arts notes Vodafone’s concerns about the current universal service obligation (USO) arrangements. In 2016-17, Vodafone contributed $14.747 million to the Telecommunications Industry Levy (TIL). However the Department considers the USO arrangements need to be considered in context and with regard to the important community service objectives they are directed at achieving.
The current arrangements, and particularly the Telecommunications USO Performance Agreement (TUSOPA), were put in place in 2012 by the then Government. The arrangements were directed at providing ongoing certainty in relation to the provision of standard telephone and payphone services across Australia, but particularly in areas outside the fixed line footprint of the National Broadband Network (NBN). The provision of these services outside the NBN fixed line footprint is specifically supported by the obligation on Telstra to continue to maintain its fixed line copper network (the copper continuity obligation or CCO). The arrangements deliver these outcomes on a national basis.
The USO is a long-standing consumer safeguard intended to ensure people in Australia have access to telecommunications services on an equitable basis. It is accepted that losses are incurred in providing these services in rural and remote Australia and as such there should be payment to the provider of those services to offset the cost …
More significantly … the funding pays for the delivery of a national solution for voice and payphone services. The payment is not calculated on a per premises or per payphones basis. Telstra is required to continue to offer services to all Australian premises on request, including over the NBN in urban areas, and over its copper network in regional and remote areas, where it is feasible to do so. Despite declining service numbers, Telstra still needs to maintain network assets, particularly where the copper continuity obligations applies, and other capabilities to deliver services nationally. This means Telstra still faces significant network costs, but the decline in the number of services means it is also facing declining revenue to offset these costs.
2.52
Telstra also submitted to the Committee’s inquiry that:
TUSOPA cannot be reasonably reviewed without reference to the broader context. This includes that the USO policy underpinning the TUSOPA is itself under review following the Government’s announced intention to transition to a Universal Service Guarantee policy, and that the TUSOPA was made as part of the broader agreements between Telstra and the Government for the establishment of the National Broadband Network …
Telstra has not shut down half its copper network in regional areas, and therefore is not ‘saving’ half the cost of discharging its obligations under the USO. In fact, the TUSOPA includes a requirement for Telstra to maintain copper network connections that were in place as at 1 July 2012 (subject to minor exceptions) and Telstra is compliant with this obligation …
The Government entered the USO contract with Telstra in 2012 on the basis of an economic study of the cost of providing universal voice services and payphones that was commissioned by the Government.
The current payments made under the TUSOPA are based on careful Government analysis of the costs of maintaining the network as at 2012. Since that time the extent of the network has actually increased and, if anything, unit costs have also risen as network equipment ages.
This view of costs reflects the fact that the USO is national in scope, meaning Telstra’s obligation applies to premises in every part of the country, no matter how remote and technically and physically challenging to serve. It has always been recognised that a substantial subsidy is required to enable this guarantee.
2.53
Asked at the public hearing about representations made to the department over the last five years from other telecommunications providers contributing to the USO scheme, DCA confirmed that ‘there have been a number of other industry participants who are very interested in how what is ultimately the telecommunications industry levy is spent, and a lot of the focus does fall to the universal service obligation services’.
Departmental records management
2.54
The ANAO concluded that, ‘due to short-comings in records management the Department has been unable to provide evidence of what options for delivering the USO were considered as part of the policy development process from mid-2009 through to early 2010’:
While the Department did provide advice to the Government in April 2010, which was subsequently reflected in a major policy announcement made in June of that year, the advice did not contain any information on alternative USO delivery options or provide a rationale for the approach that was recommended …
The Department was however unable to locate any records that detail what options were considered to deliver the USO or how the principles outlined in the April 2010 paper were developed.
2.55
In its submission, DCA noted that, ‘in regard to the period 2009-2010, the Department was not able to locate all of the requested records’ and, while ‘consideration was given to undertaking a broad data extraction from back up tapes to identify relevant records’, this ‘would not have been completed in the timeframe requested by the ANAO’. However, DCA conceded that ‘the information the ANAO was seeking should have been stored in its records management system to enable easy identification and retrieval’.
2.56
At the public hearing, DCA acknowledged ‘some shortcomings in its past record-keeping practices’ and confirmed that it had ‘since improved the way in which key steps in policy development processes are recorded and stored. This has enabled easier identification and retrieval of all records created and held within the department’.
2.57
The Auditor-General noted that DCA’s ‘commitments with respect to record keeping appear to be appropriate’.
Departmental contract management
2.58
The ANAO concluded that DCA ‘has been a relatively passive contract manager’ as regards TUSOPA and ‘has not actively managed the contract towards achieving value for money’.
2.59
As the Auditor-General noted, ‘the department had not reviewed the scope of services or used flexibility mechanisms within the contract, which had the potential achieve cost savings’. While DCA had established a payment process and contract management plan for TUSOPA, the plan was ‘silent on the utilisation of mechanisms in the contract which provide near-term opportunities for the Department to explore the achievement of value for money’.
2.60
At the public hearing, DCA acknowledged that ‘there’s always scope to improve the management of complex contracts such as the TUSOPA’, and emphasised that the department had ‘already implemented changes to ensure more effective and efficient management’ of the agreement. Contract management responsibilities for the agreement were consolidated in March 2017 into a single branch, and ‘oversight arrangements and verification and assurance processes have now been strengthened’. DCA’s submission further noted that its ‘strengthened contract management approach’ included:
a new engagement framework with Telstra around Module B and Module C of the TUSOPA, consistent with other public interest telecommunications contracts managed by the Department. The Department now conducts monthly operational meetings with Telstra, which include formal mechanisms to identify and resolve contractual issues … The Department has also re-established quarterly senior management meetings where any significant issues across the TUSOP Agreement can be raised with senior levels of management.
2.61
DCA observed that ‘these changes improve the management of the contract’, but the ‘scope for improvement is constrained by the history and design of the TUSOPA contract itself’.
2.62
The Auditor-General noted that the ‘description of what the department’s doing with respect to contract management is, I would have thought, a substantial step forward on what had been the practice during the period which we audited’.
2.63
The ANAO made a recommendation to DCA regarding its contract management, principally concerning the use of flexibility mechanisms in the TUSOPA contract and transition options to potential alternative USO delivery arrangements—these matters are further discussed in the section below.
New USG and USO reform
2.64
As discussed above, the Auditor-General noted that DCA ‘had not reviewed the scope of services or used flexibility mechanisms within the [TUSOPA] contract, which had the potential achieve cost savings’. As the ANAO further explained, ‘we would have expected, given … the term of the contract being so long, that there was some effort to look at those flexibility mechanisms to see whether there were any cost savings that perhaps could have been made’—for example:
whether the department could have accessed from Telstra information on the demand, perhaps, for telecommunications services through standard line or payphone, whether that demand was significantly decreasing, perhaps, and whether that was cause for a different basis, if you like, for how the contract was arranged. There was a mechanism in there that allowed for either party to bring forward proposals for cost savings, but that wasn’t exercised.
2.65
By way of background on this matter, the ANAO noted that:
The TUSOPA includes flexibility mechanisms which have the potential to improve value for money … the TUSOPA includes mechanisms allowing either party to submit a proposal for cost savings (Cost Savings) and the ability to propose a change in the scope of services (Scope of Services). The Department has not provided any evidence which demonstrates that it has sought to, or considered utilising, either of these two flexibility mechanisms which can be utilised at any time. The ANAO has observed that the ability of the Department to utilise these mechanisms has been impaired by the absence of data in the performance reporting framework which could be used to estimate the impact of any proposed changes to the scope of services.
2.66
As regards the cost savings mechanism, while annual payments under the TUSOPA are ‘ostensibly fixed’, the agreement incorporates a mechanism that enables DCA or Telstra to submit a cost savings proposal at any time for consideration by both parties, with this mechanism providing opportunities for the department to ‘explore the achievement of value for money in the context of changing technology, market competition and consumer preferences’.
2.67
As regards the scope of services mechanism, changes in scope can occur as a consequence of amendments to the USO provisions of the Telecommunications (Consumer Protection and Service Standards) Act 1999 or determinations made by the Minister under that Act:
Either Telstra or the Department can make a claim for a payment variation if the scope of the services set out in Module B (STS) or C (Payphones) changes, provided that the value of the increase or reduction exceeds $12 million per year for STS and $2 million per year for Payphones.
The Department’s ability to determine whether a proposed change in the scope of services would increase or decrease Telstra’s costs by the threshold amounts is dependent on an accurate understanding of the existing cost to Telstra of delivering the services. The current performance framework does not generate data which would enable the Department to make this assessment, and the Department would have to invoke a specific clause in the TUSOPA in order to obtain data from Telstra which would enable them to do so. This clause can be invoked to investigate possible non-compliance or to satisfy a Ministerial request. The TUSOPA also includes a clause which allows for the Department to audit Telstra’s performance, including the manner in which Telstra performs its obligations. This clause has not been utilised since the TUSOPA was established in 2012.
2.68
Accordingly, the ANAO recommended that DCA determine if any of the existing flexibility mechanisms in the TUSOPA contract could be utilised to improve value for money outcomes while the NBN is being rolled out, and develop options for an efficient transition to any potential alternative USO delivery arrangements.
2.69
In terms of the first part of this ANAO recommendation, DCA noted that it agreed in principle:
on the basis that as acknowledged in the Department’s response there is always opportunity to improve management of complex contracts such as the TUSOPA and that work to do so is well advanced, but that the scope for improvement is constrained by the history and design of the TUSOPA. As noted in its response, the Department considers that the ANAO drew a number of conclusions that did not sufficiently take account of this policy context, nor demonstrate an understanding of how network infrastructure is costed or managed.
2.70
There was interest at the public hearing in whether DCA had been able to identify any savings in the TUSOPA contract to date. DCA responded: ‘not in terms of the STS and the payphones, no … We haven’t looked at a reduction in the payments to Telstra as yet’. As to why the department had not utilised the flexibility mechanisms in the TUSOPA contract up to this point, DCA observed that:
this is a 20-year contract that was entered into in 2011-12 within the context of the rollout of the National Broadband Network. So it was envisaged that this particular contract around the USO ensured that all Australians had access to a phone service during this transition period. The contract does propose in 2021 that a major review occur … it was envisaged that the rollout would be complete or near complete at that time and … that that would be the time to assess what technologies were available, particularly for people in regional and remote areas, to deliver service.
2.71
DCA further stated that the ‘work we are doing with the USG … hopefully may pre-empt the 2021 review in some ways’.
2.72
When queried again about this matter, noting the current environment where other telecommunications providers have been publicly calling for reform and there has been rapid change in access to other communications technologies, DCA responded that the ‘mechanisms that are referred to as the flexibility mechanisms are very much about the department and Telstra negotiating revised scope or revised payments’, and that the department had ‘recognised the changes in technology and the changing environment by calling on the Productivity Commission review of the USO arrangements, which has then led to the work of the USO task force, which is looking at future arrangements, which is we think the appropriate arena for having these discussions about the future of universal service delivery’. DCA further confirmed that, in implementing the ANAO’s recommendation, it had ‘taken the intent and the purpose of those provisions around assessing the scope, how you deliver services, and possible ways of achieving savings, and that is factored into the thinking of the USO task force’.
2.73
DCA noted that it agreed to the second part of the ANAO’s recommendation—that the department develop options for an efficient transition to any potential alternative USO delivery arrangements. DCA again pointed to the work of the USO Taskforce and emphasised it was ‘already leading work to develop options regarding future delivery of USO services and that in undertaking this work a guiding principle is to ensure an acceptable cost-effective alternative is available before existing arrangements are changed’. DCA explained that ‘this is essential to ensure … the community continues to have access to critical telecommunications infrastructure’:
USO reform is an important issue that potentially affects the health and safety of Australians, particularly those in regional and remote areas. It’s important to get the right solution, one which ensures all Australian households have access to voice and broadband services as well as being cost-effective, rather than moving to a quick fix.
2.74
DCA provided further information on the USG, explaining that, in December 2017, the Government announced this initiative to ‘provide all Australian premises, regardless of their location, with access to both voice and broadband services, to be delivered on a commercial basis by the market in the first instance. Where this can’t be achieved, options will be developed for targeted government measures’. As DCA’s submission further noted:
the current Government has clearly indicated it considers there could be a better system for delivering voice (and broadband) services and announced the development of a new Universal Service Guarantee (USG). The USG will seek to leverage the significant Government investment in the NBN and extensive private sector investment in mobile coverage and mobile competition, and will be underpinned by the statutory infrastructure provider (SIP) legislation currently before Parliament. A key criterion for the USG is that it needs to be more cost-effective than the current arrangements. Because of the importance for access to telephone services for people in regional, rural and remote Australia, the Government has indicated it will keep the current USO arrangements in place until it is clear there are better alternative arrangements.
2.75
DCA also confirmed that it had ‘now commenced work on cost and delivery options to provide for a future USG, and will work with industry stakeholders and representatives of regional and remote Australia in this effort’, with this work to be coordinated within the department by the USO Taskforce and ‘further updates’ to be provided in 2018. The USO Taskforce would be ‘engaging with a range of stakeholders, including the other telecommunications carriers’:
The task force is established within the department, so we are undertaking essentially the analytical work necessary to then start a discussion with stakeholders … indeed, we already have been talking for a number of months with Optus and Vodafone as well as Telstra. Obviously the contract is with Telstra, so that relationship is different. But certainly in the development of what the future universal service guarantee could look like, in terms of how it could be delivered, that will certainly be something that we need to engage with other carriers on.
2.76
DCA confirmed that, as the new USG arrangements are developed, the ‘government will engage with Telstra regarding the provision of the existing USO services’ and that, while TUSOPA lacks a termination-for-convenience provision, ‘Telstra has indicated that it is open to working constructively on USO reform’. On this point, DCA’s submission noted: ‘Telstra has indicated, in its article USO: Keeping all Australians connected of 20 December 2017, that it is “open to working with government and regional stakeholders on the reform process”. This could include utilising the existing flexibility mechanisms within the TUSOPA’.
2.77
There was interest at the public hearing in further understand how Telstra might have demonstrated its commitment to being ‘open’ to working on USO reform. DCA responded that, ‘at this stage the process we’re undertaking is that we’ve set up the USO task force. The steps that we’re going through at present are to actually do our own internal work around what options would look like and then it would be a case of a discussion with Telstra’. Clarification was sought on whether Telstra had given a verbal commitment indicating interest in USO reform or actively put forward initiatives concerning this matter. DCA pointed to Telstra’s correspondence in response to the audit, as reprinted in the ANAO report, as follows: ‘Telstra endorses the ANAO’s recommendation that the USO Taskforce should develop options for an efficient transition to any potential alternative USO delivery arrangements’.
2.78
In terms of the USG implementation timeline, DCA explained that this work had ‘four main streams’:
The first one we are looking at is: what are alternative voice services and alternative delivery mechanisms for voice services? That obviously involves the question of how much they may cost to put in place and to operate. The second main stream of activity is in relation to what might be the impact on NBN Co’s costs if the USO was changed in a significant way and, in particular, whether or not the copper continuity obligation was lifted. The third stream of activity is really around payphones, which is a very interesting, complex area in itself. Again, that goes to what is the continuing community use of and need for payphones, what alternatives may be available there and what might be the cost of those kinds of alternative mechanisms.
The fourth main stream of activity is … about stakeholder engagement … That has two main sides to it … Obviously the whole USO, USG fabric is about making sure people across Australia, particularly in regional, rural and remote areas, have access to modern services. So we are obviously very keen to understand their views. The other side of it is obviously in relation to the delivery of solutions where industry are very well placed to give their views on that and obviously they have views in relation to the cost of that as well. All of those activities have been kicked off in one way or another. We are working towards getting some further advice to government around the middle of the year, with a view to government making some further decisions and providing some further guidance around that time.
Performance reporting and monitoring arrangements
2.79
The ANAO concluded that existing performance reporting for TUSOPA ‘provides limited transparency as to whether contract services are achieving the stated policy objective’. The ANAO further noted that, while TUSOPA has played a role in facilitating the involvement of Telstra in the rollout of the NBN, there is a ‘lack of clear evidence that a net public benefit has been realised as a direct result of the introduction of the TUSOPA’.
2.80
Under TUSOPA, Telstra must deliver USO services in accordance with a set of performance standards, benchmarks and any other requirements set out in the USO statutory regime. While the agreement provides that ‘to the extent possible … [performance reporting] … will be consistent with Telstra’s regulatory reporting obligations’, DCA can require that Telstra provide additional reports or other information where it considers ‘it necessary to investigate any possible non-compliance by Telstra … or to satisfy a Ministerial request’. Since assuming responsibility for contract administration in July 2015, DCA has not requested such additional reporting or information from Telstra, although it does receive some information beyond regulatory reporting obligations. As discussed above, the ANAO also noted that the ability of DCA to utilise the flexibility mechanisms under TUSOPA had been ‘impaired by the absence of data in the performance reporting framework which could be used to estimate the impact of any proposed changes to the scope of services’.
2.81
In particular, the ANAO found that, ‘because reporting provides no information on the quantity of standard telephone services that Telstra supplies solely on the basis of its universal service obligations, it is not possible to determine the extent to which the TUSOPA contributes to Australians having reasonable access to such services on an equitable basis’. (However, information is available on the number of standard telephone services Telstra provides that are subject to the CSG. Telstra’s performance against the CSG is considered by DCA and ACMA to provide ‘proxy’ indicators of performance against its standard telephone services USO obligations.) As the ANAO noted at the public hearing, ‘reporting was based on the timeliness of the services provided by Telstra rather than the number or the volume of services provided. So whether they were receiving value for money on an ongoing basis was questionable’. The ANAO also found that ‘existing reporting does not provide data on Telstra’s net cost of supplying standard telephone services and payphones under its universal service obligation’. DCA’s submission confirmed that ‘TUSOPA does not require Telstra to provide information on the annual costs associated with providing USO services’.
2.82
In relation to service quality, DCA’s contract reporting indicated that, with the exception of some shortcomings in the first year of TUSOPA in 2012-13, Telstra had met all service performance benchmarks. However, the ANAO noted that neither ACMA nor DCA undertake processes to verify the accuracy of the underlying performance data provided by Telstra, which is used to determine compliance with service benchmarks. DCA advised the ANAO that ‘it relies on ACMA as the regulator to provide assurance that the source data used to assess the performance of the contractor—Telstra—is free from material error’. However, ACMA advised that its assurance processes focus only on comparing Telstra’s reporting to previous years so as to identify ‘any anomalies which may indicate an error and [that they did not] have another source of information against which we check the data provided by Telstra’. ACMA and DCA therefore both independently undertake re-calculations of the data supplied by Telstra to assess its compliance with the performance benchmarks and then compare the results of the calculations to see if they are consistent, but ‘neither undertakes any assurance processes regarding the accuracy of the data itself’.
2.83
ACMA has the statutory power to commission an audit into the accuracy of the CSG and payphone performance reporting, ‘where it forms a view on reasonable grounds that an audit is necessary’, but ‘neither the data provided by Telstra nor any other developments’ to date have indicated the need for such an audit. However, the ANAO noted that, during the audit, ACMA amended the relevant risk register to explicitly recognise the risk of industry providing ‘inaccurate data’ in relation to ‘performance compliance issues’. DCA’s November 2016 contract management plan and associated risk register did not identify the possibility of inaccurate data as a risk.
2.84
Against this background, the ANAO recommended that DCA review whether existing arrangements provide an appropriate degree of assurance that Telstra’s standard telephone service and payphone reporting is accurate and an appropriate basis from which to assess Telstra’s performance under TUSOPA and make annual payments. Further, an initial review should be completed in time to allow for any resulting changes to have been implemented before making any payment for the 2016-17 financial year. DCA agreed to this recommendation.
2.85
At the public hearing, DCA provided the following details concerning its current arrangements for assurance of performance reporting under TUSOPA:
we receive specific data from Telstra related to the standard telephone service, which are essentially the same data sets that they provide to the ACMA around how Telstra meet their customer service guarantee. That is the data around the new connections made and the time taken for that and repairs, and there are different time frames required, depending on whether you are in an urban, regional or remote area. We assess that data ourselves. We then talk with the ACMA and compare the data with them. We also talk to the ACMA about any other issues that may have been raised with them in their regulatory role in terms of systemic issues in delivering service on Telstra’s part. We also speak with the Telecommunications Industry Ombudsman about any issues of complaint areas that are showing up as areas that are problematic for connections or repair times that are … Telstra’s responsibility. We use those three sources of data to assess the accuracy of what they have provided to us.
2.86
DCA confirmed that contract ‘verification and assurance processes have now been strengthened’. Further, there had been an ‘expansion of the contract management plans for Modules B and C to include transparency and reporting requirements on Telstra’s performance data and a framework for targeted performance audits, consistent with the audit programs for the Department’s other public interest telecommunications contracts’.
Implementation of recommendations and key learnings
2.87
The ANAO made two recommendations regarding DCA’s management of the TUSOPA contract, with the audit report noting that the department ‘did not state whether it agreed or disagreed’ with these recommendations. At the public hearing, the Auditor-General drew attention to this matter, observing that, while Commonwealth entities are not required to indicate agreement or disagreement with audit recommendations, ‘it is not a desirable precedent. In particular, it reduces the ability of the committee to hold the department accountable for what it says it wants to do’.
2.88
Ms Nadine Williams, First Assistant Secretary, DCA, responded that ‘certainly, we note the ANAO’s concern. I don’t think there was any particular intent behind that approach’. However, the Auditor-General emphasised that the ANAO ‘did go back to the department, so it was a purposeful decision’.
2.89
DCA was asked to clarify its position on the audit recommendations, providing the following response:
The Department provided an overarching response to the ANAO’s report as a whole. The Department acknowledges that its response did not state whether it agreed or disagreed with each of the individual recommendations. However, the Department considered that its response made clear which parts of the ANAO’s recommendations the Department supported, where measures that responded to the ANAO’s recommendations had either been completed or were in train, and where it considered the ANAO had drawn a number of conclusions that did not sufficiently take into account the policy context in which the contract was developed or how network infrastructure is costs or managed.
For clarity, we provide the following:
Recommendation 1(a). Agree in principle, on the basis that as acknowledged in the Department’s response there is always opportunity to improve management of complex contracts such as the TUSOPA and that work to do so is well advanced, but that the scope for improvement is constrained by the history and design of the TUSOPA. As noted in its response, the Department considers that the ANAO drew a number of conclusions that did not sufficiently take account of this policy context, nor demonstrate an understanding of how network infrastructure is costed or managed.
Recommendation 1(b). Agree, noting that the Department is already leading work to develop options regarding future delivery of USO services and that in undertaking this work a guiding principle is to ensure an acceptable cost-effective alternative is available before existing arrangements are changed.
Recommendation 2. Agree, consistent with the response to Recommendation 1(a) above.
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The ANAO identified the following key learnings for all Commonwealth entities in terms of establishing and managing contracts:
Contract performance reporting frameworks
The contract performance reporting framework should produce information that assists administering entities in monitoring the extent to which the contract continues to deliver value for money over its full term. This is particularly important for longer-term contracts that have been awarded through non-competitive processes.
Administering entities should ensure that the overall performance reporting framework provides for assurance over the accuracy of performance reporting information, taking into account the financial materiality of the contract and an assessment of the risks of inaccurate or incomplete reporting.
Contract management plans
Plans should identify what parts of the contract should be actively managed or utilised in order to promote the achievement of value for money. Where appropriate, timeframes for action on these parts should be included.
Records management
Documentation recording key steps in the policy development process, including advice provided to Ministers and Government and relevant decisions made should be stored in a way that enables easy identification and retrieval.