Time to dump ‘anachronistic and costly’ subsidy for Telstra: Productivity Commission

Report calls for 20-year government USO contract with Telstra to be renegotiated

The Telecommunications Universal Service Obligation (TUSO or USO) is “anachronistic and costly” and should be wound up by 2020, the Productivity Commission’s inquiry into the scheme has concluded.

The scheme is “a blunt instrument and is not fit for purpose against the evolution of telecommunications needs and solutions,” the PC’s final report on the USO states.

The USO was introduced in the 1990s to ensure that every Australian had access to a standard telephone service (STS) and payphones, regardless of where they lived. The USO is delivered by Telstra under a $3 billion, 20-year contract signed with the federal government in 2012. The contract is not due to expire until 2032.

The scheme is funded by the government to the tune of $100 million a year in conjunction with a telecommunications industry levy.

The commission concluded that the demand for TUSO services is “clearly falling”. “Consumer needs are instead overwhelmingly being met by a wide range of digital technologies and applications,” the report states. In addition, the scheme “effectively stymies competition”.

“In imposing this obligation, the Australian Government did not demand transparency and accountability of Telstra,” the report states. “The basis for its funding (a total of around $3 billion in net present value terms over the 20-year contract to 2032) is unclear and disputed.”

The commission estimates based on the limited evidence it was able to access that the annual USO subsidy per STS could be between $250 and $2800, with an annual average subsidy of $2600 to $50,000 per payphone.

The scheme has been criticised by Optus and Vodafone as outdated and an unfair subsidy for Telstra. Telstra itself has said the USO should be updated, but the telco has called for it to be retained at least until the completion of the National Broadband Network.

In the view of the PC, the NBN rollout and increasing spread of mobile networks provide the basis for reframing a universal service objective in terms of baseline broadband and voice services for all Australian premises.

“For the vast majority (more than 99 per cent) of premises, the combination of the NBN and mobile networks is likely to meet or exceed minimum standards for universal service delivery,” the report states.  

Once the NBN rollout is completed — which is expected to be 2020 — the USO can be dumped and replaced by targeted policy responses for the up-to-90,000 premises in the NBN satellite footprint that don’t have adequate mobile coverage and any other users with particular needs.  

“While transitioning to this new universal service framework is complex and will take a few years, the transition process needs to start immediately,” the report states. “The fundamental roadblock posed by the opaque contract with Telstra, and the surrounding legislative architecture, should be addressed promptly and systematically.”  

The recommendations of the report will “clearly require a major renegotiation” of the Commonwealth’s contract with Telstra.  

“The terms of any contract renegotiation are ultimately a matter for the Australian Government and Telstra,” the report states.  “While there will be costs to renegotiation (including a possible financial penalty to the Government), an effective transition strategy should be carefully staged against key considerations around timing, stakeholder engagement and legislative requirements.”  

Communications minister Senator Mitch Fifield said that a USO taskforce has been established within the Department of Communications and the Arts to formulate the government’s response to the PC report.

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