Contract management lessons drawn from ‘costly and opaque’ Telstra deal

By Stephen Easton

Wednesday October 4, 2017

Government agencies should take note of how public servants in the Communications portfolio have managed the Commonwealth’s “universal service” contract with Telstra, according to the Australian National Audit Office, which has summarised several lessons that apply more broadly in the public sector.

In a new addition to its standard report template, “Key learnings and opportunities for improvement for Australian Government entities,” the auditor-general’s office has focused on contract performance reporting frameworks, contract management plans, and record-keeping.

“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,” the report advises. “This is particularly important for longer–term contracts that have been awarded through non-competitive processes.”

The audit finds the Telstra Universal Service Obligation Performance Agreement does not represent value for money. For one thing it locked in a fixed yearly payment for 20 years, based on what it cost Telstra to provide landline ($253 million) and payphone ($44m) services in 2009-10, despite a clear long-term decline in demand for both.

This was based on very basic external advice the Department of Communications and the Arts sourced in 2011. The audit suggests it did not ask the right questions when commissioning this analysis, because “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 it made sense to keep paying a fixed yearly rate until 2032.

The Productivity Commission has already found the arrangement “anachronistic and costly” in a report published in June, which notes that voice services are increasingly available as part of broadband services.

“It should be wound up by 2020,” the PC bluntly recommended, but according to the audit, the terms of the deal won’t make that easy.

“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 ANAO reports. It notes later there are ways to lower the cost to taxpayers, but they haven’t been used.

Active management

In its “key learnings” the audit office also highlights to need for contract management plans that “identify what parts of the contract should be actively managed or utilised in order to promote the achievement of value for money” with “timeframes for action on these parts” where appropriate.

“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,” it adds.

The contract was managed by a separate agency established in the Communications portfolio for that purpose alone until 2015, when the responsibility transferred to the Department of Communications and the Arts itself.

“Since assuming responsibility for the TUSOPA in July 2015, the Department has been a relatively passive contract manager,” according to the audit.

“The Department has not utilised the flexibility mechanisms within the contract which have the potential to reduce the annual payment amounts. The Department commenced work in May 2017, through the establishment of the USO Taskforce, to assess whether the annual fixed payments to Telstra continue to represent value for public money in the evolving telecommunications environment.”

The PC described the “opaque contract with Telstra” as a “fundamental roadblock” to a new, more sensible framework for universal service delivery in the broadband era. The ANAO also found “limited transparency” in the contract’s performance reporting arrangements.

“More specifically, 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.

“In relation to service quality, contract reporting indicates that, with the exception of some shortcomings in the first year of the TUSOPA in 2012–13, Telstra has met all service performance benchmarks. 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 broadband connection

Despite the poor value for taxpayers’ money, the agreement fulfills its most basic purpose in terms of procuring “reasonable access to standard telephone services and payphones on an equitable basis” for all Australians.

One big reason why the telco got such a sweet deal was that its bargaining position was quite strong in 2012 because the former government also wanted its involvement in the National Broadband Network.

The ANAO found the former Labor government’s plans to build the NBN “played an important role in the TUSOPA negotiations” — to the delight of the current Minister for Communications Mitch Fifield, who cheerfully welcomed the audit as a reflection on the opposition.

“The TUSOPA became the means through which the Government was able to deliver sufficient financial benefit to Telstra to ultimately secure Telstra’s involvement in the rollout of the NBN,” the report states.

At the time, it explains, the public service had advised that without Telstra involved, the government-owned NBN company would make less money and the then-government’s big flagship project would be less likely to succeed.

“Advice provided to the Government from the Department and NBN Co indicated that such involvement would significantly reduce the overall risks associated with the rollout and improve the financial returns generated by NBN Co.”

At the end of the day, however, the auditors could not find evidence of a net public benefit as a direct result of the TUSOPA.

Obviously a lot has changed in the past five years regarding the NBN rollout, which was heavily criticised in the first report of a year-long joint standing committee inquiry, published on the same day as the ANAO findings. Five government members, but not their Nationals colleague Andrew Broad, put their names on a dissenting report so it’s unlikely much will come of the 23 recommendations.

Fifield said the government would direct a taskforce that is working on reforms in response to the PC’s recommendations around the Telstra USO agreement to take account of the ANAO findings and the NBN rollout.

“The Government’s priority continues to be ensuring that all Australians have access to affordable and reliable phone services, wherever they live or work,” he said on Friday. “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.”

Top image: Rowan Neal

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