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Telstra USO contract does 'not reflect value for money': ANAO

The government should improve value for money principles and the standards by which it measures Telstra's performance under the USO, according to a report by the Australian audit office.

The Australian government's Universal Service Obligation (USO) contract with Telstra lacks transparency, has limited oversight, and does not represent value for money, according to the Australian National Audit Office (ANAO).

The report [PDF], tabled by the government on Friday, states that while the annual AU$253 million standard telephone and AU$44 million payphone payments under the Telstra USO Performance Agreement (TUSOPA) are consistent with external advice received in 2011, there is "no evidence" that the advice was intended to be guidance for the 20-year contract, and therefore whether the payments remain appropriate.

"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," the ANAO report found.

"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."

ANAO argued that the Department of Communications has been a "passive contract manager", relying simply on information provided by Telstra itself, meaning the performance reporting process has "limited transparency as to whether contract services are achieving the stated policy objective".

"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," ANAO explained.

"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."

ANAO added that while the TUSOPA helped facilitate Telstra's involvement in the National Broadband Network (NBN), it has limited flexibility in delivering standard telephone services to areas outside of NBN's fixed-line network.

"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," ANAO concluded.

ANAO made two recommendations as a result of its report, with the first stating that the department should improve value for money outcomes during the NBN rollout.

"The department should: Determine if any of the existing flexibility mechanisms can be utilised to improve value for money outcomes while the National Broadband Network is being rolled out; and develop options for an efficient transition to any potential alternative USO delivery arrangements," ANAO recommended.

The second recommendation dealt with the department reviewing the standards by which it measures Telstra's performance, with an initial review to be completed prior to TUSOPA payments being made for FY17.

"The department should review whether existing arrangements provide an appropriate degree of assurance that Telstra's standard telephone services and payphone reporting is accurate and is an appropriate basis from which to assess Telstra's performance under the TUSOPA and make annual payment," it said.

According to ANAO, the department neither agreed nor disagreed when giving statements on both recommendations.

"In the context of the recommendations of the Productivity Commission inquiry into the Telecommunications Universal Service Obligation, the department is considering options for further reform of the USO," the Department of Communications said in response to the ANAO report.

"The department has already reviewed existing arrangements and is now implementing a strengthened contract management approach, which includes an enhanced assurance regime, within the terms of the current TUSOPA."

The 20-year USO contract, which mandates Telstra as the fixed-line phone service provider of last resort, giving the telco hundreds of millions of dollars each year for the installation and maintenance of fixed-line services, is facing government reform thanks to the Regional Telecommunications Independent Review.

Signed by the Labor government back in 2012, the USO currently costs the government around AU$100 million per year, with AU$200 million funded via a levy on telcos.

The Productivity Commission published its final USO report in June, recommending that it be wound up by 2020 and the government commence negotiations with Telstra to terminate the standard telephone service USO and payphone USO contracts while amending legislation to ensure Telstra's statutory USO obligations are also terminated.

The commission's report called the current USO "anachronistic and costly" and lacking in accountability, pointing out that 99 percent of the population now has access to mobile broadband, and 100 percent will be covered by the NBN by 2020.

"The fundamental roadblock posed by the opaque contract with Telstra, and the surrounding legislative architecture, should be addressed promptly and systematically," the commission said.

"Targeted intervention" from the government should occur for the approximately 90,000 premises that do not have mobile coverage and are reliant on NBN's oft-criticised satellite service, the commission said, recommending that mobile operators work with the ACMA to identify these.

The government should then establish a funding program -- meaning the "ultimate removal" of a telco industry levy -- to deliver baseline voice USO services as well as community telecommunications projects using payphones, mobile charging stations, or public Wi-Fi, the commission added, in an independent, transparent, and technologically neutral competitive tendering process.

By mid-2018, the commission said the federal government should consult with state and territory governments on a "stocktake" of all telco programs to improve cost efficiency, as well as collaborating on an audit of all existing telco infrastructure such as fibre networks in order to use and expand these.

Communications Minister Mitch Fifield at the time said the department had established a USO Taskforce to look into the commission's recommendations.

"Targeted consultation will be undertaken over coming months to inform the government's response," Fifield said.

"Any changes to the USO regulatory environment and contractual arrangements will be implemented in a constructive, careful, and considered manner, and will be mindful of the particular needs of regional and remote communities, industry, and other stakeholders."

The government released a terms of reference statement detailing the process by which the funding and regulatory arrangements for the USO will be reviewed, followed by an issues paper published by the Productivity Commission last year.

While Vodafone Australia has been calling for an end to the USO for years, saying the funding should instead be spent on such initiatives as the mobile blackspot program, Telstra had said in October that there was "absolutely no chance" the government would remove the USO at the conclusion of its review.

"While it is easy to ... pontificate about alternative network solutions and contestability, the reality is that many people in the bush still want guaranteed access to a fixed landline," Telstra group director of Corporate Affairs Tony Warren said at the time.

"With the composition of the current federal Parliament, I see absolutely no chance at all that the government will remove the USO any time soon."