MARK GREGORY
October 11, 2017

Audit Office slaps USO contracts

Audit Office slaps USO contracts

Universal service: Telstra is still looking for the 'O' in USO

The Australian National Audit Office (ANAO) has found serious flaws with the Department of Communications’ contract management of selected telephone universal service obligations (USO).

In a report released in late September, the ANAO found that twenty year contract – called the Telstra USO Performance Agreement, or TUSOPA – between Telstra and the Commonwealth signed in 2012 “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 – specifically by establishing a contract with Telstra to deliver basic voice telephony services for a period of 20 years.”

“In addition to the stated policy objective, the TUSOPA also played an important role in securing Telstra’s involvement in the rollout of the National Broadband Network (NBN).”

The cost to the taxpayer and consumers for the USO contract with Telstra is “a fixed and unindexed annual GST inclusive payment of $253 million to deliver standard telephone services and $44 million to deliver payphones.”

The USO contact is partially funded by an annual telecommunications industry levy and in 2015-16 the industry levy raised $218 million, with $142 million coming from Telstra due to its market dominance.

What this means is that Telstra is being provided with an additional $155 million annually from its competitors, consumers and taxpayers to build and operate infrastructure that supports the delivery of the standard telephone services and payphones around the nation, typically to areas where the competitive provision of telecommunications infrastructure is prohibitive.

Having built infrastructure utilising the $297 million USO funding, Telstra can provide competitors with access to this infrastructure at a rate that it sets, except for services that have been declared by the Australian Competition and Consumer Commission (ACCC).

Ownership of infrastructure paid for by the USO industry levy gives Telstra an unfair advantage over its competitors due to the ever increasing size of its network and the revenue that this brings, both from its customers and competitors that choose to pay for access to the infrastructure.

The need for change to the USO was recently reinforced by the recommendations made by the Productivity Commission in a report released after a 12 month inquiry into the future direction of a USO in the telecommunications market.

Vodafone Australia is currently arguing before the Courts that the ACCC should declare domestic mobile roaming, and as part of the argument put forward by Vodafone the governments USO contract with Telstra has been identified as a key reason why Telstra’s fixed and mobile networks dominate its competitor’s networks in regional and remote areas.

This is in addition to the considerable mobile network blackspot funding that Telstra has received from Federal, state and local governments over the past couple of decades.

The exact amount is unknown as Telstra will not divulge this information, but it is understood to be well over $1 billion.

In a speech earlier this year, Vodafone CEO Iñaki Berroeta argued that the Telstra USO contract should be terminated as it gives Telstra an unfair advantage over its competitors.

“It’s now getting to the point where it’s become almost impossible to defend the current set up. The [Productivity Commission] report reveals that what makes reform so urgent, is the lack of transparency, accountability and controls,” Mr Berroeta said.

The ANAO has agreed with much of the criticism of the USO contract with Telstra by identifying that “key aspects of the TUSOPA do not reflect value for money principles.”

“In particular, 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. Further the TUSOPA limits flexibility in relation to how standard telephone services can be delivered in areas outside the NBN fixed line network.”

In a stunning revelation, the ANAO identified that the “contract further lacks a mechanism which would enable the Government to effectively manage the financial risks should it wish to end the contract before the scheduled 20 year term.”

The $297 million in funding for standard telephone and payphone services provided under the TUSOPA was found by the ANAO to be consistent with external advice commissioned by the Communications department in 2011.

However, “there is 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, and therefore whether the value of the fixed annual contract payments to compensate Telstra for the provision of these services is appropriate.”

This argument is consistent with the NBN taking over the provision of the standard telephone service as it is rolled out and the number of payphones in service falling annually as has been the case for the past decade.

A key concern for the ANAO is the role taken by the Communications department since it assumed responsibility for the TUSOPA in July 2015.

“The Department has been a relatively passive contract manager.”

The ANAO identified that “the Department has not utilised the flexibility mechanisms within the contract which have the potential to reduce the annual payment amounts” and that it commenced work in May 2017 “to assess whether the annual fixed payments to Telstra continue to represent value for public money in the evolving telecommunications environment” but had not completed this review.

What is remarkable is that under the contract Telstra has not provided “information on the quantity of standard telephone services that Telstra supplies solely on the basis of its universal service obligations.”

How is it possible to quantify value for money if the department is unaware of what is being provided by Telstra with the funding?

“Neither the Australian Communications and Media Authority (ACMA) nor the department undertake processes to verify the accuracy of the underlying performance data provided by Telstra, which is used to determine compliance with the standard telephone customer service guarantee and payphone benchmarks.”

The lack of any follow-up on what is being provided under the TUSOPA and the underlying performance data provided by Telstra highlights the lack of transparency and accountability surrounding the USO.

Warnings about the governments agreement with Telstra for the provision of the USO in 2012 have been given many times, I’ve written about this mess on many occasions.

But what is too coincidental to be an accident is the timing of the release of the ANAO report, which coincided with the release of the Joint Standing Committee report into the NBN, the day before a weekend of major sporting events in Sydney and Melbourne.

The government has had four years to do something about the TUSOPA but has done nothing of substance to date.

It is unacceptable that the Minister for Communications Mitch Fifield and the Minister for Regional Communications Fiona Nash found time for a media release on the ANAO’s report into the TUSOPA, but failed to respond to the damning report released by the Joint Select Committee into the NBN.

There is no doubt that the TUSOPA was a very poor contract entered into by Labor at a time when it was negotiating with Telstra over the future of the NBN.

Telstra would argue, rightly, that the contract provided some certainty for the provision of the USO until such time that an alternative could be put in place. That alternative is not likely to become evident until well into the next decade.

The Productivity Commission identified that NBN Co is unable to provide an effective alternative to the TUSOPA in regional and remote areas without substantial investment.

In the media release, Mr Fifield and Senator Nash have indicated that “the government will not make changes to the current contract and USO arrangements until it has identified an acceptable alternative way to deliver voice services.”

The government will now wait for the taskforce that it has established within Communications to respond to the recommendations of the Productivity Commission inquiry into the USO.

This taskforce, in the same department from where the TUSOPA originated, that has now been strongly criticized by the ANAO, will undoubtedly be able to find a way forward that is not politically motivated, unbiased and transparent.

The USO is too important and expensive to be a political football and it is therefore in the interest of the telecommunications industry, taxpayers and consumers that an independent body be setup to consider the future of the USO.

Dr Mark Gregory is an Associate Professor in the School of Engineering at RMIT University and is the Managing Editor of the Australian Journal for Telecommunications and the Digital Economy, which is published by the Telecommunications Association Inc.

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