Maybe a 20-year government contract for landlines and payphones was a bad idea, audit suggests

ANAO says USO contract with Telstra does not reflect “value for money principles”

A decades-long contract signed with Telstra to deliver standard telephone services and maintain payphones does not reflect value for money principles, according to an Australian National Audit Office (ANAO) report released today.

The ANAO assessed the management of the contract signed between the Commonwealth and Telstra for the delivery of the telephone Universal Service Obligation (USO).

The USO is intended to ensure that every Australian has access to basic telephony services no matter where they live. It was originally introduced in the 1990s to ensure that all Australians had access to a standard telephone service (STS) and payphones.

A Productivity Commission report released earlier this year described the scheme as “anachronistic and costly” and said it should be wound up by 2020.

The rollout of the National Broadband Network and the uptake of mobile services provide the basis for reframing a universal service objective in terms of baseline broadband and voice services for all Australian premises, the PC argued.

“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 stated. “The fundamental roadblock posed by the opaque contract with Telstra, and the surrounding legislative architecture, should be addressed promptly and systematically.”  

The PC noted that its recommendations would “clearly require a major renegotiation” of the Commonwealth’s contract with Telstra.

The contract referred to by the PC, which was the subject of the ANAO audit, was signed in 2012. Under the 20-year agreement, Telstra receives close to $300 million a year.

Key aspects of the contract with Telstra — the Telstra USO Performance Agreement or TUSOPA — “do not reflect value for money principles,” the ANAO said.

“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,” the ANAO concluded.

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

Although the level of annual payments to Telstra were based on external advice commissioned by the Department of Communications and the Arts at the time, 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.”

The contract also lacks a mechanism for the government to “effectively manage the financial risks should it wish to end the contract before the scheduled 20 year term.”

Communications minister Senator Mitch Fifield seized on the ANAO report to criticise the former Labor government.

“The Turnbull Government has established a taskforce to respond to the recommendations of the Productivity Commission, and will take into account the ANAO's findings in delivering reforms,” the statement said.

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

“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's reforms will also take into account the significant investment made in the rollout of the NBN, which is on-track to make high-speed broadband services available to all Australian businesses and households by 2020.”

The full ANAO report is available online.

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Tags universal service obligation (USO)USOTelecommunications

More about Australian National Audit OfficeDepartment of CommunicationsNational Audit OfficeProductivity Commission

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