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Finance and Public Administration References Committee
FINANCE AND ADMINISTRATION PORTFOLIO
Program 11—Office of Asset Sales and IT Outsourcing
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Finance and Public Administration References Committee
FINANCE AND ADMINISTRATION PORTFOLIO
Program 11—Office of Asset Sales and IT Outsourcing
ACTING CHAIR (Senator Heffernan)
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Table Of ContentsPrevious Fragment
Finance and Public Administration References Committee
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DEPARTMENT OF THE PRIME MINISTER AND CABINET
- Program 2—Government support services
Program 1—Departmental Policy Coordination
- Subprogram 1.1—Economic, Industry and Resources Policy.
- Subprogram 1.3—International
- Subprogram 1.2—Social policy
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- FINANCE AND ADMINISTRATION PORTFOLIO
Content WindowFinance and Public Administration References Committee - 04/06/98 - FINANCE AND ADMINISTRATION PORTFOLIO - Program 11—Office of Asset Sales and IT Outsourcing
Senator SHERRY —Mr Hutchinson, could you give me a brief summary of where we are at with the National Rail Corporation and the other privatisations that are listed there?
Mr Hutchinson —The sale of the National Rail Corporation has not yet begun substantively because of an ongoing outstanding issue between the three shareholder governments—the Commonwealth, Victoria and New South Wales—concerning the finalisation of transfer of assets to complete the establishment of the National Rail Corporation. Once that matter is resolved, and work is proceeding on that resolution at the moment, we would expect to commence work on that sale. We have not yet appointed advisers for that sale.
Senator SHERRY —When is your anticipated date for completion of the process?
Mr Hutchinson —It is difficult to say because it is not clear how long the resolution of this issue will take. At the moment I would say that it would be unlikely we would expect to complete that sale until the early part of next calendar year on present expectations.
Senator SHERRY —Just going back to your earlier remark, have contracts been entered into for the various consultants, legal firms, et cetera, who will handle the sale?
Mr Hutchinson —No. The only consultants we have working for us on the sale of the National Rail Corporation are legal advisers Black Dawson Waldron, who are engaged on an ad hoc basis arising out of their former work for us on the sale of Australian National Railways. They are providing us with legal advice as we approach this issue of resolution of the shareholder issues.
Senator SHERRY —What about ADI?
Mr Hutchinson —We expect a call for expressions of interest in the acquisition of ADI by the end of this month with a view to a sale being concluded in the final quarter of this year.
Senator SHERRY —What about consultants and legal advisers?
Mr Hutchinson —Yes, there is a full array of consultants and legal advisers on ADI. Baring Brothers Burrows are our business advisers for the sale of ADI. Blake Dawson Waldron are our legal advisers. We also have Arthur Anderson working for us in an accounting and project management capacity. They are the principal advisers for that sale.
Senator SHERRY —What about the National Transmission Network?
—A short list of bidders have been invited to submit bids. We are now engaged in giving them access to due diligence. The bids are tentatively scheduled to be submitted on 14 July. That depends upon the legislation that is still before the Senate. Again,
a full set of advisers is in place for that sale. Arthur Anderson Corporate Finance are our business advisers. Gilbert and Tobin are our legal advisers.
Senator SHERRY —What about ANL?
Mr Hutchinson —We have issued information memoranda to a list of parties. Bids close on 10 July. Due diligence packs are available to those bidders. Legislation, I think, is still before the Senate.
Senator SHERRY —Perhaps we can do Telstra last. My colleague Senator Schacht will probably want to raise some issues in respect of that, and I have a couple of general issues. What about AIDC?
Mr Hutchinson —The sale of AIDC is completed. The future work here is to do with AIDC shareholding in the Australian Submarine Corporation. The sale of that has not yet commenced. The government has deferred commencing the sale of that pending resolution of some contractual issues between the Australian Submarine Corporation and the Department of Defence concerning the Collins class submarine.
Senator SHERRY —Who handled the AIDC legal work, financial advice, et cetera?
Mr Hutchinson —The principal business advisers were Phoenix Securities Limited, who were taken over halfway through the deal by DLJ of the United States. They worked with Ord Minnett in Australia. They were our business advisers. We also engaged the Australian Government Solicitor, who worked with Corrs Chambers Westgarth on the legal side. KPMG and Ernst and Young also played a role in that sale.
Senator SHERRY —You mentioned that it has been completed. Are you in a position to tell us what the sale price was?
Mr Hutchinson —It was a very complex sale. It was a simultaneous sale of the company AIDC Limited to Babcock and Brown, and the establishment of a defeasance pool covering the government guaranteed liabilities of AIDC. The simple answer is about $155 million net for the assets of AIDC that were sold. In addition, two major assets of AIDC were retained by the Australian Industry Development Corporation, the parent body—a minor equity in Optus Communications and a shareholding in the Australian Submarine Corporation.
Senator SHERRY —What was the cost of the sale?
Mr Hutchinson —To date, we have been invoiced for about $6.6 million by our advisers. If there are any outstanding bills, they will be of the order of less than $80,000.
Senator SHERRY —That is a little over five per cent of the price.
Mr Hutchinson —But it does include the establishment of a defeasance pool of $3.2 billion, which essentially removes the Commonwealth's exposure to the borrowings of AIDC. So there is a substantial overhang on top of the $155 million.
Senator SHERRY —Can you explain that in a little more detail?
Mr Hutchinson —The funding base of AIDC Limited was largely borrowings by the Australian Industry Development Corporation on behalf of AIDC Limited. The corporation's borrowings were guaranteed by the Commonwealth. At the time of sale there was a substantial borrowing pool in the marketplace. Rather than repay $3.2 billion, we have used the proceeds of the sale of the assets of AIDC Limited to establish an offsetting pool of assets, so that as the liabilities of the corporation mature an asset will mature within the defeasance pool, and it will be a self[hyphen]liquidating pool. That is the simple version. If you want the more complicated version, I will need help.
Senator SHERRY —We will see how we go. As I understand it, AIDC, using a government guarantee, borrowed money then on[hyphen]lent it.
Mr Hutchinson —They borrowed it. They on[hyphen]lent it to AIDC Limited, who, in turn, invested it in various forms of business activity.
Senator SHERRY —It seems to me to be hard for them to lose money in those circumstances, unless they were grossly incompetent.
Mr Hutchinson —They did not lose money. They may not have made as much perhaps as they should have done with the advantage of being able to arbitrage on the Commonwealth guarantee, which was essentially their core business. They were rather more competent than that, and they did make money. That is why there were some net assets left in the business at the end of the day.
Senator SHERRY —Will the AIDC be subject to a performance audit by the audit office? I did ask them about this, and they had not made a decision.
Mr Hutchinson —My recollection of the ANAO's program at the moment is that it does not include a review of AIDC. They originally foreshadowed that. While it was not on the last program, as I understand the exchange of correspondence with them, their program is not yet finalised.
Senator SHERRY —In regard to the organisations that are contracted to do the legal work and various financial work, do the contracts that are entered into or to be entered into go to the Minister for Finance and Administration for approval?
Mr Hutchinson —Not usually. We advise the Minister for Finance and Administration of who we have selected. The contracts are settled by us with our legal advisers. We have a firm of legal advisers whom we retain exclusively for contract development.
Senator SHERRY —You said, `Not usually.' What is a circumstance where you would?
Mr Hutchinson —We customarily, almost invariably, inform the minister when we have made an appointment. I cannot think of an occasion where we have asked him to approve of even major appointments. Where there is something unusual in the proposed fee arrangement, then we will consult the minister to see whether he has any views he wishes to be taken into account.
Senator SHERRY —Can you give me an example of where there has been an unusual fee arrangement?
Mr Hutchinson —Yes. The fee arrangement that Phoenix Securities sought for the sale of AIDC was principally a success fee based on the sale proceeds. The level of success fee compared with the level of retainer was outside the parameters we had previously used in asset selling. We discussed that with the minister before we decided to accept it.
Senator SHERRY —Did he give approval to that process?
Mr Hutchinson —It was not put in the terms of `Minister, please approve.' It was put in the terms of `Minister, we are thinking of doing this. Is this going to cause you any difficulty. This is innovative. We think it is the right thing to do, but do you have a perspective that you wish us to take into account?' It was that sort of discussion.
Senator SHERRY —What was indicated?
Mr Hutchinson —The indication was that he recognised that it was innovative, but the complexity of the assignment required us to get the people who appeared to be the best in the world at selling this sort of thing, and these were the terms under which those people worked.
Senator SHERRY —Just looking at the $6.6 million in the sale price: it does appear to be a little above the average ballpark in percentage terms for a sale.
Mr Hutchinson —The average ballpark has a fairly wide variance from a fairly low ballpark for a very large public share office to a fairly high ballpark for complicated or very small assets. Just looking at the breakdown of that figure, almost half the fee was legal expenses because of the complexity of the business transactions that AIDC had entered into and that we needed to undertake vendor due diligence on. We needed to establish appropriate arrangements for purchaser of due diligence. We paid the Australian Government Solicitor almost $3 million for that work.
Senator SHERRY —So the Australian Government Solicitor effectively received half the money?
Mr Hutchinson —Except that the Australian Government Solicitor in turn engaged Corrs Chambers Westgarth to support them on some complex commercial matters, so that $3 million would include whatever fees the AGS paid to Corrs.
Senator SHERRY —You do not know what the fee is?
Mr Hutchinson —That was a matter between AGS and Corrs. We may know, but I do not have it before me.
Senator SHERRY —Okay. Just looking at it in percentage terms, though, if we look at the third tranche sale of the Commonwealth Bank, that was 1.7 per cent of gross proceeds. Getting up to five in this case is—
Mr Hutchinson —It is not comparing apples with apples. If we had been able to run a public share offer for the equity in AIDC, then possibly we would have been able to get away with a much lower level of cost. The due diligence costs of going into a trade sale with the attendant risk of indemnities, warranties and guarantees by the Commonwealth justify payments of that order.
Again, I draw attention to the fact that we have also taken $3.2 billion worth of exposure off the Commonwealth books. If we, as my staff wish to do, have this credited as a $3.2 billion sale rather than a $155 million sale, then the number goes in a different direction. Again, a trade sale intrinsically is usually more expensive and a small sale is also, again, more expensive than a large sale.
Senator SHERRY —Yes, I think logically you would expect a smaller sale to be more expensive because there are certain base costs regardless of the size of the sale.
Mr Hutchinson —And each business is different and AIDC was not a single line of business; AIDC was a raft of individual, complex financial transactions.
Senator SHERRY —Turning to the sale of the Brisbane, Melbourne and Perth airports, you are aware of Audit Office report No. 38? Have you got a copy of it there? `Criticism' would not be too harsh a description of the sale process. Do you have any response?
Mr Hutchinson —Firstly, this report is due to be the subject of a JCPA hearing which is, I think, scheduled for next week. Our responses are in the report. We think that the ANAO has genuinely found some areas of weakness in aspects of our process. We would maintain, and have maintained to the Audit Office, that they were immaterial in the totality of the deal. Had they been done differently, we do not think they would have made the slightest difference to the outcome. It was, we think, an outstanding success to obtain world record prices for those three airports.
Senator SHERRY —Are you going to vary any of your approaches as a consequence?
Mr Hutchinson —Most of the recommendations made by the Audit Office reflected changed arrangements that we had already put in train for the sale of the second stage airports by the time the Audit Office had reported. To some extent, that was our own analysis mirroring the analysis of the Audit Office, and to another extent it was the Audit Office disclosing to us in advance what they were thinking, and we picked up on it at that time.
Senator SHERRY —Have any concerns been raised about the Commonwealth being liable to legal action by the unsuccessful bidders?
Mr Hutchinson —Only by one journalist, to the best of my knowledge. No concerns have been raised within the process. The risk of legal action was addressed and analysed within the sale process and we are satisfied with that analysis.
Senator SHERRY —So you do not believe that there is going to be any legal action?
Mr Hutchinson —We do not believe so.
Senator SHERRY —Turning to the proposed remaining sale of two[hyphen]thirds of Telstra, Budget Paper No. 1 at page 2[hyphen]39 estimates the sale costs as well as the net income from the sale. It says the sale costs are:
. . . highly dependent on assumptions made regarding: the structure, timing and proceeds of the sale; expected sale costs . . .
The sale costs of $580 million comprise $70 million in 1998[hyphen]99, $265 million in 1999[hyphen]2000 and $245 million in 2000[hyphen]01. What is the basis of those sale costs spread over those three years? What are the assumptions behind it?
Mr Hutchinson —The assumptions are that, if there is to be a major public share offer, we will incur some expenditure during the next year in preparing for that; that the proceeds are likely to be received over the following two financial years; and that the sale costs that are related to proceeds by way of selling commissions and the like will be paid in line with the receipt of the proceeds.
Senator SHERRY —Are the estimates based on a sale in one or two tranches?
Mr Hutchinson —The estimates are based upon the prospect of an instalment receipt structure of the sort adopted for Telstra 1.
Senator SHERRY —So it is instalment receipt rather than more than one—
Mr Hutchinson —It is Telstra 2. Just as Telstra 1 could be described as Telstra 1(a), for which you have already got the money, and Telstra 1(b), for which you get the money in November, this will be Telstra 2(a) and Telstra 2(b) rather than Telstras 2 and 3—the difference being that the costing here anticipates only one major public share offer.
Senator SHERRY —Thank you.
Senator SCHACHT —We had some discussion of Telstra in front of the Senate committee only two or three weeks ago so we may cover some of the ground again, but I do not think that does us any harm. First of all, I am wondering if, after the one[hyphen]third sale was completed, the Office of Asset Sales conducted an internal review about the process—its efficiency and its effectiveness—to learn from experience about how to do it better next time, on the basis that all agencies are looking to improve their performance and efficiency and to be quality assured, et cetera. Was any review done?
Mr Hutchinson —The answer is a review was done by way of structured discussions within the team and with all the principal advisers who had worked for the team, and that certain conclusions were drawn.
Senator SCHACHT —Were they advisers who were full employees of the Office of Asset Sales or were they the advisers employed from the private sector on some consultancy contract basis to assist, in this particular case, the one[hyphen]third sale of Telstra?
Mr Hutchinson —The latter.
Senator SCHACHT —They were?
Mr Hutchinson —The latter. When I referred to advisers, I meant the three firms who were global coordinators: the firm that was the government's business adviser and the two firms that were the government's legal advisers. Also, we discussed performance of the sale process with Telstra Corporation itself.
CHAIR —Senator Schacht, can I interrupt your line of questioning for one minute? Senator Murray wants to go to another committee and he wants to put some questions on notice. It should only take 10 seconds.
Senator SCHACHT —That is fine.
Senator MURRAY —Thank you, Senator Schacht. I appreciate that. Minister, this will have to go on notice because it is too complex to be answered on the floor, but it is very relevant to your budget—that is, the question of the Telstra sale and what it means to Australia and to your projections. My question on notice is—and I have given a copy to the secretary for you so you do not need to write it down—please provide a comprehensive balance sheet or an assessment of net present worth which compares the net Commonwealth financial position under two scenarios: selling Telstra and not selling Telstra. Such an assessment should include all relevant financial flows such as, but not necessarily limited to, the value of Telstra dividends to government foregone; the value of retained earnings by Telstra; reduced government debt interest payments; the cost of the sale of Telstra such as stockbroker and agent's fees and the costs of government administration for sale; and the effect of increased taxation foregone due to the passing of franking credits from government to private ownership. Please provide separate analyses along the above lines for the sale of the first one[hyphen]third of Telstra and the proposed sale of the remaining two[hyphen]thirds of Telstra.
Senator Minchin —I will take that on notice.
Senator MURRAY —Thank you, Senator.
Senator SCHACHT —You will get an answer in about five years time if you are lucky if this mob is still in government.
Senator MURRAY —I am sure the minister will rush away to do it, won't you, Minister?
Senator Minchin —It is unbecoming, Senator Schacht.
Senator SCHACHT —That is my experience in dealing with Mr Hutchinson in this place; that the officer's scathing answers that we will get will not, in any way, cover any of the material.
Senator Minchin —We will do our best to give you as much information as we can, Senator Murray.
Senator MURRAY —I am sure you will.
CHAIR —Senator, you should not be casting aspersions on officers, please.
Senator SCHACHT —I say to Senator Murray that I tried in the Telstra inquiry hearing to get some of these things, and I pointed out how, the last time round, the government had totally underestimated the value of Telstra so the taxpayers lost about $3 billion to $5 billion dollars in value. But, never mind, I will come back to that in a moment. There was a review done in which the consultants employed to administer and advise on the float, et cetera, were part of that process. Is that correct?
Mr Hutchinson —That is correct.
Senator SCHACHT —Were any of those consultants or any other consultants paid to be part of that review process?
Mr Hutchinson —No.
Senator SCHACHT —So they did it out of the goodness of their hearts? It must be the first thing they did for free for the float of Telstra, I have to tell you.
Mr Hutchinson —My recollection is that it would be at least implicit and possibly explicit in their contractual arrangements that they would take part in any post[hyphen]sale review, just as they are currently still supporting the ANAO in their review of the sale.
Senator SCHACHT —Do you know whether your office or any other Commonwealth government department, and which government department, employed anybody to do an external or an independent review of the process, how it was carried out and whether it was the most efficient way to float that one[hyphen]third of the company?
Mr Hutchinson —The only other review I am aware of is the one that the ANAO is presently conducting and has yet to conclude.
Senator SCHACHT —When you completed that internal review involving the consultants, was a record kept of the findings and comments of the review?
Mr Hutchinson —A record was kept of the comments put forward and of the conclusions of review meetings, but there is no internal document that I could produce and say, `This is the report on how well it was done.' We suspended work on that on a cost[hyphen]effectiveness basis when the ANAO moved in, and we stood back to allow them to carry out an objective external review. We will then revisit the matter when we see what the ANAO's views are.
Senator SCHACHT —When do you expect the ANAO's review to be completed?
Mr Hutchinson —I have not heard from them for some time, but my understanding is they are still carrying out their investigation. I do not have their timetable.
Senator SCHACHT —You have not received the first draft, which they often provide to departments for comment?
Mr Hutchinson —In audits affecting our office, it is the practice of the ANAO to issue their first draft by way of discussion papers. We have not yet received the first draft as a discussion paper.
Senator SCHACHT —Because they have not been in contact with you, they presumably are satisfied with the information you have provided them with.
Mr Hutchinson —They are in contact with us continuously—they have an office in our building in order that they can get continual access to our files, and we are in occasional correspondence with them in terms of clarifying issues. But, in terms of an audit conclusion or a draft audit finding, we have not yet seen that.
Senator SCHACHT —Would you hope that their report, at least the first draft as a discussion paper, will be available before the first stage of the process of the sale of Telstra if the government wins the election?
Mr Hutchinson —We have asked them to expedite their work with a view to the application of any lessons they think we have to learn, and they have agreed to do that. It is a similar process to the one that we applied during the review of the airports, where their draft work was completed as we were moving into the phase 2 airport sales. Even though their final report came out rather later, we were very familiar with their thinking at the time we were settling the processes for phase 2 of the airport sales. We hope to be in a similar position for any further sale of Telstra.
Senator SCHACHT —Before you suspended your own internal review involving the consultants, had you drawn any conclusions on where the relationships of the Office of Asset Sales and related agencies with the consultants and the stockbrokers, et cetera, could be improved?
Mr Hutchinson —Yes.
Senator SCHACHT —Is there any reason why that cannot be provided to this committee?
Mr Hutchinson —The conclusions have been formed, I guess, in our minds rather than in a document. So there is not really a document I can provide. If you want me to take on notice the top 10 things we might have done better, I would be happy to do so.
Senator SCHACHT —That would be a start. Don't make it sound like the Prime Minister's 10-point Wik plan—Senator Minchin might have a view about that. I will accept 10 points, but do not tell me afterwards there was an 11th and that the 11th was the most important one but you forgot to put it in the top 10. I know you would not do that to me, Mr Hutchinson, but I thought I would touch on that.
Mr Hutchinson —I will undertake to give you 10 points if there are 10 and to ensure that the cut-off does not conceal something that I believe you might want disclosed.
Senator SCHACHT —Thank you. You are extraordinarily kind today, Mr Hutchinson. You were not this kind the other day at the other hearing. If this continues, we might have to review our relationship.
Senator Minchin —Don't let him disarm you, Mr Hutchinson.
Senator SCHACHT —I have tried four years of abuse on Mr Hutchinson; that has not worked.
Senator Minchin —It is amazing how far a little kindness goes.
Senator SCHACHT —Any more kindness and I might discover a goldmine. Being good managers, are you now being put into the process of preparing for the two-thirds sale, subject to the election result?
Mr Hutchinson —The contingent planning for phase 2 of the Telstra sale is now under way. The lessons that we have already learned from phase 1 will be built into that planning process. None of these plans are operational at this stage.
—I will raise one area of public criticism which I have raised with you before and which you may tell me that has been redressed in the list of points of improvement in the process. There was criticism that a number of foreign investors took the opportunity to obtain shares on issue, which they then sold within a couple of days and made a reasonable profit, while the government was always arguing that we needed to have foreign investment
and foreign shareholders in Telstra to provide a broader base of skill, background, et cetera. Is one of the lessons you have learned to make sure that a few of the more sidelined or less well known operators in America or elsewhere do not use the opportunity just to make a quick killing on the stock market?
Mr Hutchinson —The turnover in Telstra stocks in the first few days of trading set a record low for international Telecom privatisations, so it is not the case that there was a significant turnover in aggregate.
Senator SCHACHT —No, but in the—
Mr Hutchinson —It is certainly the case that individual investors did sell at an early stage. If nobody had sold at an early stage, there would have been no turnover in Telstra shares. As to whether any foreign investors did or did not sell, we simply do not have the detailed records available to us to give the truth or the lie to the anecdotal evidence that is being peddled around the place by certain self-interested parties—that is, those who were not given a major role in selling Telstra 1 and who are now claiming that, if they had only been given that role, they would have sold it better.
That said, we do understand that some investment institutions in the United States felt that the Telstra shares were overpriced at issue. When the price rose, they sold. Others were disappointed with the size of their allocation, where they had a choice to either buy more to get an allocation that was in their terms worth holding or sell, and when the price rose they decided, rather than chase the price up, they would sell. We believe there is sufficient anecdotal evidence to say that that happened. Who did it and the extent to which it happened, we do not know.
As part of our planning for Telstra 2, we do plan to review, in much more detail than we have been able to do so far, the institutional holdings of Telstra shares at issue and currently in order that we can learn whatever lessons we can from their behaviour in the marketplace. But it is fair to say there are a number of United States investment banks treading the halls not only of Parliament House but of other institutions saying, `If only we'd sold a lot more to the United States so that a lot more United States institutions could have had a lot more shares, then the United States institutions would have continued to hold their shares.' I do not think that is a particularly relevant consideration for us, but it might be for them given their client base among major US financial institutions.
Senator SCHACHT —The allocations of the shares at the time of issue—including, as I say, in America, which we are talking about—were under the control of employed stock brokers, et cetera, both within Australia and also in the international marketplace. That is correct, isn't it?
Mr Hutchinson —No, the allocation of shares to the individual tranches—that is, the number of shares that were sold in the United States—was under the control of the government. It was a decision which the minister took on advice. The allocation of shares to institutions within those tranches was settled by formulae. The formulae were determined by the Office of Asset Sales, which had the title of the book runner. The role of the investment banks was simply to take the orders and then distribute the shares in accordance with the allocation formulae that we had put in place.
Senator SCHACHT —So you were the ones allocating the shares overseas?
—We did not say, `I think I will give this many shares to this institution.' We developed a formula that said, `An institution of this type making a bid into the book of
this nature will receive this percentage of their shares.' So we set the policies by a formula and the investment banks and stock brokers then applied those policies to individual institutions. The allocations to individual institutions were reviewed on behalf of the government by an officer of OASITO and by the government's independent advisers.
Senator SCHACHT —In view of that experience as the bookie the last time around, and you will be the bookie this coming time if the government gets it way, will you more closely look at the experience and say, `We want quality international investors to meet the demand of the government's policy'? The government wants to broaden the skill level of the shareholding and therefore reflect it in the board, et cetera. As the bookie running the list, once you get the applications coming, will you carefully look at it and say, `We might adjust this somewhat because there are some institutions here who have no record of providing any value adding to the shareholding of Telstra in terms of being a Telco, in terms of skill management level or in terms of understanding the marketplace both internationally or nationally'?
Mr Hutchinson —With Telstra 1 we paid a lot of attention to the quality of the potential investor base. With Telstra 2, having already got an investor base which I think is of better quality than you would characterise it, we will certainly seek to—
Senator SCHACHT —What I am saying is that they sold out and made a profit. The good ones probably stayed for the long haul. My argument is that those people who got in on the first day—got an allocation and sold within a few days—made a killing. As they are foreign investors, I am not overly concerned about their wellbeing; I want to make sure as much as possible, if you are going to privatise, that it is actually sold to Australians. That is my point.
Mr Hutchinson —I think the government's policy on foreign ownership is very clear, and the demonstration is that the Australian ownership of Telstra far exceeded the minimum level set in its policy. But, in terms of the quality of the foreign investment base, we think we can do more than we did in Telstra 1, and we shall certainly be doing that.
Senator SCHACHT —On the issue of the foreign ownership level, the government has announced that it is a 35 per cent maximum of 100 per cent privatisation, and no foreign investor can hold more than a five per cent shareholding. In view of the fact—according to the government's own enthusiasm—that so many Australians are willing to buy the shares, is it anticipated, and is there a formula, that if the demand in Australia is so strong the 35 per cent will be dropped to 20 per cent, to 15 per cent, to a lower level to meet the demand? The government was very happy, to use propaganda terms, with the enthusiasm of Australians to buy Telstra shares.
Mr Hutchinson —The government has not yet addressed the structure of the offer or the allocation of the shares, but I think I am fairly safe in saying that, to the extent that Australian investors remain keen to invest in Telstra shares, the government, whilst seeking a balanced register, will seek to satisfy the Australian shareholders first as they did in Telstra 1, where you will recall that, rather than the 35 per cent maximum for which we had the demand from foreign investors, the allocation was about 19 per cent to foreign investors.
Senator SCHACHT —Since the float of the one[hyphen]third, have you had any evidence or made any assessment in the Office of Asset Sales or in consultation with DoCA or with the Treasury or with the FIRB of the value that Telstra has got by having, I think, about 11 per cent or nine per cent or seven per cent now foreign owned of that one[hyphen]third privatised?
Mr Hutchinson —No, between six per cent and seven per cent is my recollection. It might have just broken seven per cent at some stages, but it is of the order of six per cent or seven per cent. It is not 10 per cent or 11 per cent.
Senator SCHACHT —Sorry, it could have been one[hyphen]third of a third, which would have been 11 per cent, but it turned out to be a lot less than 11 per cent.
Mr Hutchinson —Yes.
Senator SCHACHT —Forget that. What I want is whatever the percentage is of foreign ownership. The total at the moment is about six per cent or seven per cent of the total shareholding. Is that right?
Mr Hutchinson —Correct.
Senator SCHACHT —The government still has 66 per cent, what other Australians have brings it up to about 92 per cent or 93 per cent, and then there is seven per cent that is foreign owned. Of that seven per cent foreign owned, have you had any assessment done, or has anyone commented—even from Telstra—about the value it has brought to the company of having that foreign ownership level?
Mr Hutchinson —No, we have not had an assessment done. We have had a number of comments made to us, and we know that there is constant contact between the investor relations area in Telstra and its total investor base. The comment seems to be that the principal foreign investors are taking a very close interest in the performance of the company. They are taking every opportunity to meet with the chief executive, the chief finance officer and others. The stockbroker's analysts, who follow the company carefully, are speaking to the company on behalf of these foreign investors on a daily basis. It is observable—although I have not yet seen the financial results, of course, because the first year is not completed—that Telstra is clearly more responsive to its investors' interests in terms of financial discipline than it has been over the previous 10 years that I have dealt with the company.
Senator SCHACHT —Are you reflecting on the fact that you as a senior public servant in DoCA on behalf of the 100 per cent shareholder were not able to influence Telstra? That may reflect more on you and the department you were in than the ability that suddenly the private sector is able to achieve results that you were not able to.
Mr Hutchinson —No, Senator, I think it probably has to do much more with the fact that, instead of there being one shareholder putting one point of view—with one voice or sometimes two or three voices—to the company, there are now 1.5 million shareholders putting several points of view to the company with several voices, all of whom are far better paid than the analysts the government employs and all of whom are highly rated globally for their perception in telecommunications and investment matters.
Senator SCHACHT —How do all the mums and dads that the government skites about—being the shareholders of Telstra with 1,000 or 1,500 shares each—have their voice heard by Mr Blount; how does he regularly meet them?
Mr Hutchinson —They are investors in the company; they are owners of shares in the company; they have a vote at the annual general meeting.
Senator SCHACHT —That is a big top moment for them.
Mr Hutchinson —They have a voice at the annual general meeting; they have access through the various shareholders associations to collective action on companies; and they also have access, through their stockbrokers, to research and commentary on the company. But, just as no single one of the electors of the state of South Australia who elect you to this place can control you, no single shareholder in Telstra can control—
Senator SCHACHT —They do; they can unelect us every three or six years.
Mr Hutchinson —They can only do so collectively.
Senator SCHACHT —I can never get you unelected. Apparently I can be unelected, but you always seem to survive. Governments come and go, you are always here ubiquitous as ever.
Senator Minchin —It is called stability in government.
Senator SCHACHT —Senator Minchin, you and I come and go, but this bloke is always here. You mentioned about the AGM. Where would Telstra hold its annual general meeting in a venue big enough for 1[half ] million shareholders to turn up?
Mr Hutchinson —The answer is, I do not know, but it has been the subject of some speculation. On the weekend we priced Telstra, it happened to be the weekend of the Australian Rules Grand Final in Melbourne. I can recall sitting in the outer, looking at the crowd and thinking that there is going to be 15 times as many people as this shareholders of this company. My understanding is that large venues, and possibly simultaneous venues, are being considered by the company. But that really is a question you should put to the company.
Senator SCHACHT —So if all the 1[half ] million shareholders turned up and all wanted to ask Frank Blount one question, it will be the longest annual general meeting in Australian history. It is an absolute absurd notion that the mums and dads at the annual general meeting are going to have any influence over Frank Blount when he will have one proxy in his pocket from institutional shareholder bigger than all the mums and dads probably combined.
Mr Hutchinson —It is open to all the shareholders to lodge proxies or to cast their votes as they see fit, just as it is open to all your electors to turn up to any meeting you have in South Australia—
Senator SCHACHT —They do; they turn up every three years at a ballot box and go `tick, cross, 1, 2, 3' and you either win or you lose. I would be more than happy for Frank Blount to go through that: let us have a vote of every individual shareholder voting whether Frank Blount should continue as chief executive—
CHAIR —Senator Schacht, I am not sure of the relevance of this line of questioning to the budget estimates.
Senator SCHACHT —The relevance of this, Mr Chairman, is that we are being told consistently like some mantra that Telstra—whether partially or fully privatised—will be more sensitive, more open and more willing to take advice about being a better value company. The structures in place for 1[half ] million shareholders to do that are absurd—it is a myth; it will not happen.
Senator Minchin —They are political arguments, Senator Schacht, which you can pursue in the political arena. It is not fair to put them—
Senator SCHACHT —They are not political arguments. Mr Hutchinson listed a number of issues. I did not ask him to. One of them he listed was the AGM. I think I have just demonstrated that that is an absurd notion that Mr Blount or the senior management are going to be in any way influenced by the mums and dads turning up. That will not happen.
I want to now turn to some other suggestions you made. You said Mr Blount and senior management are willing on a daily basis to have discussions with the major foreign shareholders.
—What I said was that the leading share analysts in telecommunications are in contact with the company at varying senior levels on an almost daily basis. That doesn't
not mean to say that Frank Blount is seeing every one of them every day. His time is more limited than that. But he has a very extensive management team and the analysts want to get down to the depths of where the company is being operated and they are making themselves available.
Senator SCHACHT —Perhaps you could also encourage Mr Blount that it might be useful if he occasionally turned up to a Senate estimates hearing on behalf of Telstra, or to some of the inquiries we have. He is more than willing to meet foreign investors and have discussions with them and go to New York, but he is never willing to come to the Australian parliament and the people who represent the two-thirds ownership of Telstra.
Senator Minchin —That is not a matter for this official, that is for the Department of Communications, if you want to pursue that line of argument.
Senator SCHACHT —I am just making sure I am covering all my bases on this. I find that when I go over there they will pass it off to this bloke, and when I was here yesterday with Finance the deputy head of Finance absolutely got out of the way of any of this stuff and said, `That is all Mr Hutchinson's, it is nothing to do with me.' So I am here going through these issues that everyone else has ducked so far. I have to say that Mr Hutchinson usually does turn up and try to take the questions. Mr Hutchinson, is there yet a policy in the government of saying on a formula basis that you do not have to sell 35 per cent of Telstra to foreign owners?
Mr Hutchinson —There is an existing provision in the legislation, which the Telstra 2 legislation does not vary, that makes it illegal to sell more than 35 per cent—
Senator SCHACHT —No, less than.
Mr Hutchinson —And therefore as a matter of law the most you can sell is 35 per cent. As a matter of policy, the amount that will be sold to foreigners will depend upon the market structure and demand at the time, but the government has made it clear, I believe, in its public statements to date that it intends to satisfy the Australian investors as a priority.
Senator SCHACHT —As a priority, but we do not know whether that means that if there is demand foreigners might only get 25 per cent or 15 per cent. That is not determined yet.
Mr Hutchinson —The demand balance in Telstra 1 I think is the proof of the pudding, and that is that the government was quite happy to scale back foreign investors in the face of substantial demand in order to make room for Australian investors while still maintaining a reasonable balance in the register.
Senator Minchin —We had to make sure that Senator Crowley and Senator McKiernan could buy their shares.
Senator SCHACHT —Of course, most of the coalition and everybody else. I am not arguing about that. I just want to find out how this policy works.
Mr Hutchinson, does the government have any policy within the 35 per cent of foreign ownership, in lots of five per cent, of maximising the number of foreign telecommunications companies or companies with a telecommunications interest which can buy a shareholding in Telstra?
—The government has a policy, as I understand it, that it does not favour foreign telcos taking a strategic stake in Telstra. That is the purpose of the five per cent limit and the purpose of the associate rules that preclude multiple five per cent limits being held in any sort of collusion. I am unaware that there is any foreign telco holding shares in Telstra
and I am unaware of any interest by a foreign telco in buying shares in Telstra in the face of the 35 per cent-five per cent policy.
Senator SCHACHT —So you do not anticipate any of the foreign telcos buying a shareholding of up to five per cent?
Mr Hutchinson —I fully anticipate that the superannuation funds of the employees of some telcos will do so, but I do not expect any of the major telcos to invest in any significant way.
Senator SCHACHT —Does the government have a policy to ensure that the 35 per cent is evenly spread across a number of different countries? For example, if it turned out that the Americans or the Japanese or the English were going to end up with 80 per cent of the 35 per cent, that it was overwhelmingly held in one country, is there a policy to ensure that it is more evenly spread across citizens and funds from different countries?
Mr Hutchinson —The primary policy has to do with ensuring full and fair value for the Australian taxpayer. To the extent that there is a higher price demand in some parts of the world, then I am fairly sure the government will seek to satisfy that demand first. But, within that, the government and Telstra have expressed interest in a balanced register to ensure that there was no undue instability in the after market and, from that point of view, we would expect to see the balanced register apply. I think the circumstance you are outlining is unlikely—a circumstance in which the European institutions and the US institutions would take radically different views of Telstra as an investment proposition.
Senator SCHACHT —I used the 80 per cent as an exaggerated figure. But, say, nationals or institutions from one country had 40 to 50 to 60 per cent, would that mean that you as the bookie, as I call you, running an eye down the list would make an adjustment and say, `I think we ought to make sure that this is more evenly spread'—subject to there being demand, of course?
Mr Hutchinson —Senator, when I look at the allocations that were made in Telstra 1, almost 50 per cent of the foreign allocations were made to Europe and very few allocations were made outside of Europe and North America. But that reflected largely the demand and the pricing patterns. Almost no shareholding, for instance, was allocated in Japan—for a range of reasons which largely had to do with the fact that the bottom was dropping out of the Japanese market at the time. But that followed the demand. We see no reason why—if the United States essentially represents the large proportion of the world's capital markets—the United States institutions should not also represent a large proportion of the foreign investment in Telstra, provided that the United States institutions put an appropriate valuation on the stock in competition with European, Asian and Australian institutions.
Senator SCHACHT —It says in the budget papers that the fees for the sale of the two[hyphen]thirds is set at $580 million. The legislation sets the figure for fees at two per cent of the gross revenue—
Mr Hutchinson —Senator, there is no figure for fees in the legislation. My recollection is the figure of up to two per cent may have been mentioned in the second reading speech.
Senator SCHACHT —In the second reading speech. Are you saying that the second reading speech is wrong?
Mr Hutchinson —No, I am just saying it is not part of the legislation; it is merely an aid to interpreting the legislation.
—I see. Anyway, up to two per cent is a government policy—if the valuation even on its present value is around $40 billion—so two per cent is $800 million.
Why was it set at that figure, which gives you a latitude for another $220 million to be paid out under the government policy in the second reading speech, compared with the figure of $580 million that is in the budget papers?
Mr Hutchinson —Senator, I do not believe the government has got the latitude that you mention. The figure of two per cent was a very preliminary estimate. We were discussing a sort of rule[hyphen]of[hyphen]thumb estimate with Senator Sherry earlier today, and the figure of $580 million was a subsequent revision to that estimate based on further and better consideration. That estimate of $580 million is under continuous review as we develop the planning for Telstra 2. On the basis that Telstra 2 is run as Telstra 1 was run—that is, if the structure of the sale is broadly the same but on a larger scale—then I am presently confident that $580 million will be an upper limit, rather than a lower limit from which we will vary upwards.
Senator SCHACHT —So, when the debate takes place again in the Senate some time in the near future, the minister will correct the figure in the second reading speech?
Mr Hutchinson —I hope not, because there is no figure until the sale is designed and the structure is set. Essentially, all we are doing is providing advance estimates of what we think the out[hyphen]turn costs will be. But these are contracts we have yet to negotiate with some of the toughest negotiators in the world. I am very reluctant to spend too much time in the public arena debating what those costs might or might not be because, to do so, might inhibit our capacity to drive them down. It is not in our interest to do anything else but drive them down to a fair, efficient and lower level.
Senator SCHACHT —If I had it wrong and it is in the second reading speech and not in the bill, I accept that. There is a figure of 2 per cent—$800 million. I did make some public comment at the time that $800 million in one hit is three times more than what the government is putting into the networking the nation fund out of the first one[hyphen]third to upgrade the infrastructure in regional Australia for telecommunications. It is odd, isn't it, that regional Australia gets $250 million over five years and the stockbrokers get up to $800 million in one hit? That is not a bad idea of the proportions of this government's views of who its friends are. Anyway, you have now dropped it to $580 million. Based on the Telstra l experience, how much of the $580 million do you think will go to foreign stockbrokers, stockbroking firms, consultants and advisers to sell the remaining two[hyphen]thirds of Telstra?
Mr Hutchinson —I really would prefer not to speculate on who will get what of the fees. We have competitive selection exercises to undertake. We have very tough negotiations on fees and cost structures. But a large proportion of the eventual costs of sale—which will, I think, be well within that umbrella—will be selling commissions which will be paid to investment banks and stockbrokers. The market value of the Commonwealth equity in this company is presently in excess of $40 billion dollars. Realising that is an expensive operation; this is an expensive transaction.
Senator SCHACHT —It is pretty profitable for a number of stockbrokers.
Mr Hutchinson —The figures we are talking about are at the bottom end of the range of fees that are charged by these firms on comparable transactions elsewhere. We do not put beyond possibility—and I do not mind saying this in the public domain—the fact that Telstra 2 will set a new competitive low for these fees.
Senator SCHACHT —We certainly hope so. A group of characters are walking off with $580 million of a public asset.
Mr Hutchinson —Senator, you keep making this sort of comment, but what you are talking about—
Senator SCHACHT —It is true.
Mr Hutchinson —The $580 million is just the cost of the deal.
Senator SCHACHT —The cost of the deal, yes.
Mr Hutchinson —The comparisons you are making are irrelevant.
Senator SCHACHT —The comparison I am making is that the government said it was fantastic that it was providing $250 million over five years to try to improve telecommunications to regional Australia. If the government wins the next election, stockbrokers in Australia and overseas are at some time going to walk off with at least $580 million. It just makes a comparison of where the priorities are of who gets what of a public asset.
Mr Hutchinson —These are fees for a service that is provided. Large numbers of people work long hours over an extended period of time to actually undertake these transactions.
Senator SCHACHT —Do you mean to say that there is an absolutely proportionate increase in how much harder they work the bigger the float—whether the float is worth $1 billion or $2 billion? How much extra work would a stockbroking company have to do to be part of the float for Telstra at $40 billion than for Woolworths at $3 billion?
Mr Hutchinson —Roughly 13 times as much.
Senator SCHACHT —Thirteen times!
Mr Hutchinson —Because the pattern of investment in Australia is largely one in which the average level of investment per investor tends to be fairly predictable. Therefore, in order to place 13 times as much stock, you have to find 13 times as many people to sell it to in terms of the retail market. So for the stockbrokers selling to retail markets, it is essentially how many people they sell it to. In terms of the institutions, it is different again.
Senator SCHACHT —But the government was skiting that the mob had queued up kilometres long after the mail[hyphen]out was done, and Australia Post had to do more work on that in delivering it all around Australia. The government said that the mob queued up and sent it straight back, saying, `Give us more! Give us more!' That is what the government said was so fantastic. How much extra work did the stockbrokers have to do to get people to put the forms back in to say, `We want a share allocation'?
Mr Hutchinson —Senator, it was one of these circumstances where the harder we worked, the more successful we were. If you want to attribute it—
Senator SCHACHT —How much harder did the stockbrokers work to convince the people of Australia? Australians were mailed direct a prospectus information document. The government got lots of free publicity in the papers from all the analysts, the Terry McCranns and everybody, writing stories about Telstra. Did you pay Terry McCrann to write that?
Mr Hutchinson —No, Senator, I do not believe it is possible—
Senator SCHACHT —No, you did not. That was free publicity, but it created an environment where the community responded. The government skited about it and said, `This shows how successful it is.' What did the stockbrokers do differently to get that response, compared with a very successful response, say, when Woolworths was floated at only $3 billion or $4 billion?
—No fees at all were paid by way of selling commissions to the people who mailed their applications directly to the share application centre. One[hyphen]third of the offer was
sold without any selling commissions at all. The stockbrokers received fees only for selling to their investing clients. If the public applied directly, if they bypassed the stockbrokers, the stockbrokers did not get any fees.
Senator SCHACHT —This is something rather interesting. You are saying that, if Senator Minchin wins the election—I keep forgetting Mr Hutchinson, I am sorry, about your confusion with the government on this issue; your being a loyal independent public servant—
Senator Minchin —You made the point that he doesn't have to face the people.
Senator SCHACHT —Of course, but I accidentally called him the government before on the policy side. I presume the same practice will occur with the remaining two[hyphen]thirds—that is, you will mail out the prospectus or the document of information, people will then fill that in and get an allocation. You are saying that there is no fee paid to a stockbroker or anybody else for those people because you are running that yourself. Is that correct?
Mr Hutchinson —The organisational and financial arrangements for Telstra 2 have not been settled, but it would be a break with all past Commonwealth practice of this government, and its predecessor, were there not to be an operation whereby people could apply directly. No, they would not apply to the Office of Asset Sales; my four staff could not handle the applications. We will have to set up a processing centre which we will contract out, but it will be contracted out basically on a fee or cost plus basis.
Senator SCHACHT —On a fee basis?
Mr Hutchinson —Yes.
Senator SCHACHT —In the first one[hyphen]third sale, how many of the shares were issued under that process of people writing in and applying?
Mr Hutchinson —One[hyphen]third.
Senator SCHACHT —One[hyphen]third. Will one[hyphen]third of the remaining two[hyphen]thirds to be sold be roughly the same proportion?
Mr Hutchinson —Senator, I think the figure of one[hyphen]third was a record high for offers of this sort. It certainly is a very efficient way of processing applications. We will be encouraging as many applications through that channel as we can.
Senator SCHACHT —Even allowing for the fact that one-third is a high figure, what we are saying here is that one[hyphen]third of $40 billion, which is the rough value around the place at the moment—that is, about $13 billion—will be done on that direct mail[hyphen]out. So the stockbrokers, et cetera, will earn their $580 million not on selling $40 billion worth of shares but on selling $27 billion worth of shares. This is looking even more generous all the time.
Mr Hutchinson —There is a fixed cost in the order of between $100 million and $200 million.
Senator SCHACHT —That means they are still $380 million ahead, even on that generous assessment.
Mr Hutchinson —There is a fixed cost in that region of running the share offer in terms of the legal costs, the printing costs, the advertising costs, the due diligence work and all that goes with it. If you are dealing with any offer of over $5 billion or $6 billion, there is a fixed cost of that order.
Senator SCHACHT —There is a fixed cost?
—Above that, it is standard industry practice to pay selling commissions on a negotiated basis to the stockbrokers who sell the stock for you domestically and
internationally. All we are saying is, `We will secure the most competitive fees we can for that transaction.' We are not putting a figure on it, beyond the figures we have had to create for budget estimate purposes. We have created a conservative figure for the budget purposes—that is, we have created a figure at the high end of the envelope.
Senator SCHACHT —Mr Hutchinson, when you get the minister to adjust his second reading speech—the two per cent figure, which out of the $580 million is probably 1[frac34]per cent—why do you not get him to say that the one[frac34]per cent, or whatever it is, applies only to those shares that are directly sold by the stockbroker, not by the mail applications? Because what they are actually getting is two per cent of something they are not even earning, not even working for.
Mr Hutchinson —As I say, the figure of two per cent was a very early figure, an indicative figure. It has no—
Senator SCHACHT —I know you regret putting it in the second reading speech, but that is your bad luck.
Senator Minchin —The minister's, not Mr Hutchinson's.
Senator SCHACHT —No. It was the minister; it is his minister.
Senator Minchin —The minister has ownership of the speech.
Senator SCHACHT —Senator Minchin, you know as well as I do that Mr Hutchinson wrote the speech.
Senator Minchin —No, I do not know that for a fact.
Mr Hutchinson —I didn't, actually.
Senator Minchin —I do not think you should necessarily assume that, nor should you question him on the assumption that that is the case.
Senator SCHACHT —Did you write the second reading speech for the minister, or prepare the basis of it? If you tell me you didn't, you are not doing your job properly.
Senator Minchin —That is unfair too.
Mr Hutchinson —The figure that is in the budget is a subsequent figure, and subsequent figures update previous figures. It happens all the time.
Senator SCHACHT —I know.
Mr Hutchinson —The figure was already updated in the parliament by the budget.
Senator SCHACHT —Fine. We had to get this out of you, like a dentist slowly pulling out teeth. Nevertheless, the point I am making is that, by your own admission, which has never been said before, the stockbrokers' commissions are that $580 million for the whole 100 per cent of the $40 billion. That is really what they are earning on $29 billion to $30 billion, because the other $12 billion is going to be people filling in the form, and they do nothing for it.
—A lot depends on the role these people take. The stockbroker whom you refer to, the classic stockbroker, of whom there were about 100 involved in Telstra 1, will service his clients, provide them with advice, process their transactions and obtain a selling fee. The syndicate, the global coordinators and lead managers, who also manage the marketing effort, will manage a marketing effort which will persuade the public to lodge the applications we refer to as cleanskins—the zero fee cleanskins—but they are entitled to a fee for that effort. That is generally paid for by way of management fees out of the selling commissions on the
whole deal. These cleanskins do not arrive by accident; they arrive by a concerted marketing effort that uses all the channels you referred to, and more, but which leads to somebody just mailing in the application.
Senator SCHACHT —The punters did not have to be driven to go and get it. This is what the government kept telling us, that they queued up to buy it. They read a few articles in the newspaper and they could not wait to fill in the form once you mailed it out. You did not need JB Were or anybody trying to convince individual members of the Australian public that this was a good buy—they made up their own decision. I cannot see what value they actually added to convince all those Australians—1[half ] million mums and dads, the government tells us, and most of them had never heard of a share stockbroking company in their life. They made their own decision based on information in the press, which the stockbrokers had nothing to do with, I presume.
Mr Hutchinson —Only half a million of the 1[half ] million were first time investors and the others were repeat investors.
Senator SCHACHT —It is still a fair whack.
Mr Hutchinson —It is a very large whack because it was a very successful offer.
Senator SCHACHT —I am running out of time and I want to move on to two other matters. When the decision was taken by the government to fully privatise Telstra, did you provide coordinating comments to cabinet on that cabinet decision?
Mr Hutchinson —As we discussed in another committee the other day, I am not prepared to discuss what may or may not have gone to cabinet and what I may or may not have contributed to that process.
Senator SCHACHT —So you were not consulted?
Mr Hutchinson —I am not prepared to discuss it.
Senator Minchin —He cannot discuss matters relating to cabinet. You know that, having been a minister.
Senator SCHACHT —Minister, I put it to you that the decision to fully privatise Telstra, announced by the Prime Minister at the Liberal Party conference in Brisbane in March, I think it was, was a decision taken by the full cabinet.
Senator Minchin —I am not at liberty to discuss the decision making process. The government made the decision and the Prime Minister announced it.
Senator SCHACHT —The government made the decision, so it was a cabinet decision.
Senator Minchin —It was a government decision. I am not confirming or denying the process.
Senator SCHACHT —I do not think you can, because I think it is clear that the Prime Minister did this off his own bat.
Senator Minchin —I do not think you should assume that either.
Senator SCHACHT —I think, in view of what the opinion polls are saying about Telstra, probably a fair number of Liberals wish he had taken it to cabinet for some more considered and mature discussion.
Senator Minchin —I am sure due process was followed in the making of the decision which the Prime Minister announced.
Senator SCHACHT —In the Prime Minister's mind due process was followed, but the rest of you were not in it. Mr Hutchinson, in the Senate minority report on the sale of Telstra—I emphasise by the minority, the opposition senators—it is recommended that the clause in the bill that gives the minister the power to direct the board of Telstra in the national interest be left in the legislation, even if full privatisation takes place. This reflected a number of people from companies in the private sector competing with Telstra who said that, until competition rules are really sorted out in this country, you cannot afford to let Telstra become a privately profit driven effective monopoly in so many areas without having the recourse to both parliament, estimates hearings and the minister as a last resort. If the Senate chooses to leave that in, do you have any assessment on the impact on the sale proceeds of Telstra?
Mr Hutchinson —I think I gave evidence on this matter before the inquiry before the report was handed down. At that stage my evidence was that the effect could only be negative on value. The size of that effect is very difficult to say.
Senator SCHACHT —In view of the time, I will leave it there.
Senator LUNDY —My questions relate specifically to information technology.
CHAIR —If that is the case, we will let the staff from asset sales go. Thank you.
Senator LUNDY —There has been some speculation recently about the timing of release of the request for tenders for the range of clusters. Can you provide an updated time list on where you have come to to date and what your anticipated RFT release dates are for the remainder of the program?
Mr Hutchinson —I think this was dealt with in the last Senate estimates hearing and I think the position is exactly the same, except that since that hearing the DEETYA contract is now in the marketplace and the group 5 contract is now in the marketplace. Beyond that, there is no public position that we are free to disclose at this stage.
Senator LUNDY —What is happening with respect to Cluster 2?
Mr Hutchinson —Work on developing the remaining agencies for outsourcing is proceeding, but we are not at this stage in a position to make a timetable public.
Senator LUNDY —The Health Insurance Commission: can you advise the committee what cluster they are part of?
Mr Hutchinson —At the moment we are not in a position to disclose the clustering of the remaining agencies.
Senator LUNDY —Why not?
Mr Hutchinson —Because the minister has not yet decided to release that in the public domain.
Senator LUNDY —So the information already publicly available is incorrect? Is that what you are telling me?
Mr Hutchinson —The information that you may think is publicly available may not be the information that is accurate. This is an industry which has more rumour and innuendo and false stories than any other I have come across for some time. All I am saying is that the formal position of the government is that the clustering and timetable of agencies that have yet to be brought to market is not yet available for publication.
Senator LUNDY —When will it be available for publication?
Mr Hutchinson —When the minister decides to publish it.
Senator LUNDY —Is the minister claiming cabinet[hyphen]in[hyphen]confidence for that information, or is he just refusing to allow you to disclose it to this committee?
Mr Hutchinson —The minister is at the moment considering his course of action. To date his view has been—and it is a view that we share—that the Commonwealth's commercial advantage in approaching the market has lain in maintaining a degree of confidentiality for the future program.
Senator LUNDY —I take it from that response that the minister is not claiming cabinet[hyphen]in[hyphen]confidence of that information, so on that basis you are required to supply it to this committee.
Mr Hutchinson —I will put this matter to the minister. My understanding is that the material is not publicly available, and the unavailability of it is in the Commonwealth interest. I do not believe that the minister, at the moment, wants it released. But, again, I will put it to him.
Senator LUNDY —Perhaps you can explain why previously the minister saw no reason to withhold that information from the public. Can you explain why his position has changed?
Mr Hutchinson —I am sorry, I do not understand what you are referring to.
Senator LUNDY —There were certainly several reported schedules of the cluster arrangements, particularly when the outsourcing program was first announced in last year's budget and a time frame was indicated at that point. I am asking you: what has changed since that time frame was announced, and why has the minister now chosen not to disclose that information?
Mr Hutchinson —My understanding is that the time frame has some broad parameters, as previously indicated, such as the completion of the program by the end of next calendar year and an orderly phasing in of that program. But the tactical changes to the schedule as events unfold is not something that is in the public domain. Again, I understand the reason for you asking for it, and I undertake to put it to the minister.
Senator LUNDY —Does the minister's change of heart in disclosing this part of the information relating to the IT outsourcing contracts have anything to do with the lack of competition with respect to the DEETYA contract?
Mr Hutchinson —I do not understand what you mean by `the minister's change of heart'.
Senator LUNDY —I am referring to his reluctance now to disclose any information about the time frames in the cluster arrangements.
Mr Hutchinson —Again, I do not believe there has been any change in position on the part of the minister.
Senator LUNDY —I think we have already established that there has been. Perhaps I can ask a question then with respect to cluster arrangements, as to what the minister's intentions are in grouping the remaining departments, irrespective of the time frames?
Mr Hutchinson —My understanding is that his intention is to group them as efficiently as possible to secure the most competitive bids he can in the market circumstances.
Senator LUNDY —Can you provide information to the committee about what work has been done to date with respect to grouping the remaining government departments?
Mr Hutchinson —A number of discussions have been held and information has been exchanged with all departments. Some possible groupings have been mooted, and the matter is presently under consideration.
Senator LUNDY —Can you provide that information to the committee?
Mr Hutchinson —That is the information that I need to put to the minister before I can provide it to the committee.
Senator LUNDY —I thought that was the information about timing.
Mr Hutchinson —It is all the same information.
Senator LUNDY —Could you take that on notice also? I also note that once again, although you have claimed no cabinet[hyphen]in[hyphen]confidence, there seems to be a reluctance to supply fairly basic information to this committee. With respect to the DEETYA contract, can you confirm that only one tender was received for that contract?
Mr Hutchinson —No.
Senator LUNDY —You cannot confirm that?
Mr Hutchinson —No.
Senator LUNDY —How many tenders were received for the DEETYA contract?
Mr Hutchinson —That is a matter of some sensitivity because the tenders are presently being appraised. The Commonwealth has not made it a practice of disclosing the extent of competition in the course of tender appraisal.
Senator LUNDY —It has been widely reported in the press that only one response was received by you for the DEETYA contract. Can you confirm those media reports?
Mr Hutchinson —No, I cannot.
Senator LUNDY —Minister, can I ask you at this point whether you think there is any particular reason why that information cannot be disclosed to the committee? It is obviously in the public domain; it is quite clear that it has high relevance to the effectiveness of the government's strategy relating to information technology outsourcing, and yet the officer, I think, is refusing to be forthcoming with some pretty basic information.
Senator Minchin —I am not directly involved in this process, but I do not think you should attack the official for that. He is obviously operating under proper instructions from his minister and in a sensitive, commercial environment. Even though I am not involved, it does not seem at all surprising to me that the government would take the view that it is not at liberty to disclose the details of those sorts of tender arrangements in terms of numbers of tenders, et cetera. I am happy to take your question on notice and see if Minister Fahey wants to have another look at the matter. But, as I say, I am not at all surprised by the position that has been put to you.
Senator LUNDY —I find that very hard to believe. I certainly have not heard of any circumstances with previous questioning. There has never been any hesitancy in at least giving an indication as to the effectiveness of the government's competitive tendering strategies in relation to this project, so I cannot see any legitimate reason why you are not able to be more forthcoming with information around this matter.
With respect to the DEETYA contract, it has also been widely reported that the timing of that contract, and the imposition and burden the release of that RFT placed on the potential tenderers, was a factor in getting a limited response to the tender. Has the Office of Asset Sales received any correspondence, inquiry or complaint from industry with respect to the burden that it placed upon them by releasing that tender so close to others?
—A number of players in the IT outsourcing industry have spoken with us about the timing and phasing of tenders and their capacity problems in addressing tenders concurrently. That is not necessarily in the context of the DEETYA tender but in the context
of our program generally. We have a dialogue with those parties with a view to ensuring that the way we do business fits the way they need to do business so that we get the best outcome for the Commonwealth.
Senator LUNDY —Do you feel that that has not been the case with respect to the timing of the DEETYA RFT?
Mr Hutchinson —I do not believe the DEETYA RFT has been affected by those considerations in any material sense.
Senator LUNDY —So I take it that the considerations you are currently going through involve more than one tender?
Mr Hutchinson —The considerations we are going through involve the timing, phasing and clustering of the further agencies to ensure that we continue to get the most competitive outcomes we can.
Senator LUNDY —A good answer, Mr Hutchinson.
Mr Hutchinson —Thank you.
Senator LUNDY —I would like to turn to the construct of the DEETYA RFT. At the last estimates hearing, we canvassed several issues, including the scope of the industry development requirements of that tender and also its structure, given that it sought to cover both DEETYA's requirements and the requirements of Employment National. Can you confirm whether the contract itself or the tender went out on the basis that two individual contracts would be an outcome?
Mr Hutchinson —The structure we designed was to have a single tender process with the award of two separate contracts because of the then pending separation of Employment National from DEETYA. It was administratively convenient to run a single tender process but, for accountability reasons, for each of the two agencies to have their own separate contractual relationship with the tenderer.
Senator LUNDY —Can you provide the committee with information as to whether or not, when the RFT was advertised, invitations were also extended for tenders on the separate components of that contract, or was the RFT requirement just for one tender to cover both of those contracts?
Mr Hutchinson —My recollection is that it was one tender to cover both. We did not contemplate having separate suppliers to EN and DEETYA.
Senator LUNDY —In relation to the structure of EN and DEETYA, can you provide information to the committee as to where their business disaggregation process is up to at the moment?
Mr Hutchinson —No, I really think that is a question that would be better addressed to that portfolio, where you would get a more accurate answer. Our knowledge would have probably been current as of a few weeks ago, but I think things have moved fairly briskly. I would really rather defer to my colleagues in DEETYA for an answer on that.
Senator LUNDY —Do you think that has any relevance to the current negotiations you are conducting with the tender for the DEETYA contract?
Mr Hutchinson —We have not yet reached the stage of negotiations. We are still in the stage of tender appraisal.
Senator LUNDY —Is it your intention to at least liaise with DEETYA, given the business disaggregation of those two structures and the impact on the IT outsourcing contract?
Mr Hutchinson —DEETYA is represented, of course, as is Employment National, on our steering committee and on all the tender assessment committees, subcommittees and working parties. The carriage of those issues in the tender development phase would be the responsibility of DEETYA itself and we would only provide coordinating support, rather than carrying messages from DEETYA to the parties.
Senator LUNDY —The question was raised with the competitive tendering and contracting group within Finance estimates yesterday morning in relation to questions of probity particularly, but also of potential conflicts of interest that may exist between a former employee of Finance who transferred to IBM. Are you aware of this?
Mr Hutchinson —I am unaware of any former employees of my office transferring to IBM. I am, of course, acutely aware of the issue of probity around tender assessment and tender awards. It is a matter to which we attach a very high priority in our office.
Senator LUNDY —Yes. I am trying to recall the name—it may have been Ian Thompson, a former employee who is now employed by IBM.
Mr Hutchinson —There is absolutely nothing wrong with a former public servant leaving the employ of the Commonwealth and taking employment in the private sector. It is quite normal and quite ordinary.
Senator LUNDY —Yes. I am just raising this issue to inquire about any requirements contained within the RFTs of these particular contracts that identify or pre[hyphen]empt any potential conflict of interest between officers of the department working on the tender evaluation process who may then be subsequently employed by the successful tenderers.
Mr Hutchinson —The management of the probity of my officers is a matter for me and not for the tenderer. It would be a dereliction of my responsibilities to manage my office were I to try to impose those obligations on the tenderer. Further, there are legal doctrines governing restraint of trade, and there are recent legal cases which have struck down attempts on the parts of employers to restrict the mobility of their employees to competitors and like parties. We have not encountered, to the best of my knowledge, any material problems in the operation of my office along these lines, nor do I anticipate any.
Senator LUNDY —Do you still require everyone participating in your IT outsourcing program to sign a secrecy deed?
Mr Hutchinson —We have never actually required people to sign anything we would term a secrecy deed. We certainly require all the parties to sign a confidentiality deed to protect confidential information. It is a perfectly standard practice with all our external suppliers.
Senator SCHACHT —But material leaks anyway, so what is the point?
Mr Hutchinson —I do not believe my office has leaked any material or document at all.
Senator LUNDY —Have you instructed any of your legal consultants or advisers to take any action against signatories of your confidentiality deeds in relation to the IT outsourcing program?
Mr Hutchinson —There has been no instruction to take action. My understanding is that some considerable time ago there may have been an exchange between our legal advisers and a couple of parties to ensure that they were cognisant of their obligations. Beyond that, there has been no action instituted by way of enforcement of those confidentiality obligations.
Senator LUNDY —Without naming those people that were warned off, were they employees of your office?
Mr Hutchinson —I do not recall.
Senator LUNDY —Were they employees of any potential tenderers?
Mr Hutchinson —Senator, if you and are both thinking about the same episode, which is a bit difficult without being specific and being specific would mean disclosing identities of individuals, my understanding is that the people involved had a former contractual relationship with the IT outsourcing function.
Senator LUNDY —And you have not required your legal advisers to either formally or informally take action against anybody else?
Mr Hutchinson —There has been no need to do so. To the best of my knowledge, there have been no grounds for such action.
Senator LUNDY —Have you changed the wording of your deed of confidentiality since you started using it?
Mr Hutchinson —On the IT outsourcing side?
Senator LUNDY —Yes.
Mr Hutchinson —There may have been some refinements to it, but the basic thrust is still the same.
Senator LUNDY —Can you describe what the refinements were?
Mr Hutchinson —Not immediately. Can I take it that on notice and go back and compare a couple of document?
Senator LUNDY —If there are any officers here that could provide that information, that would be useful.
Mr Hutchinson —Rather than relying on an officer's recollection, I would like to put the two documents side by side and come back on notice.
Senator LUNDY —I am just looking for a brief description. Perhaps I can save you the trouble.
Mr Hutchinson —The speculation of my officers, without actually putting the documents side by side, is that the refinements merely had to do with the fact that some of the people involved were not formally public servants but were officers of a statutory authority or a like body, and therefore not necessarily covered by the Public Service Act.
Senator LUNDY —And there were no other changes relating to periods of time, et cetera?
Mr Hutchinson —If there were, I will come back on notice and give you the detail.
Senator LUNDY —Thank you. Further issues in relation to the DEETYA contract: I am referring to Senate estimates Hansard dated 27 February with respect to portfolio management advising and analysis, 6.1, under the Department of Employment, Education, Training and Youth Affairs. Mr Gibbons states quite clearly that the preparation of a business case would occur once the tenders had been evaluated. Can you describe for the committee, given you are currently engaged in a tender evaluation process, at what point you will have established a business case and at what point the government will be in a position to decide whether or not they should proceed with the outsourcing of IT for DEETYA?
Mr Hutchinson —As I understand it, the business case, which is the responsibility of DEETYA, will be prepared by DEETYA once the tender evaluation is completed. Once the tender evaluation is completed and the business case is prepared, the government will be in a position to decide whether to proceed.
Senator LUNDY —So your next stage is to advise DEETYA—you mentioned that you were doing that in conjunction with DEETYA, the tender evaluation process. Once that is completed, DEETYA will decide on whether or not a business case has been established.
Mr Hutchinson —I think the precision is that DEETYA will prepare the business case; the government will decide whether the business case establishes the need for further work or not.
Senator LUNDY —What do you mean, further work?
Mr Hutchinson —It is a government decision whether to accept a tender or not. Therefore, my understanding is that DEETYA will prepare the business case, the government will consider the business case and evaluation of tenders, and the government will decide what steps to take from there, for instance, to accept a tender, not to accept a tender and so on.
ACTING CHAIR (Senator Heffernan) —Can I just interrupt. As I understand it, Senator Schacht has a couple of questions.
Senator SCHACHT —Mr Hutchinson lured me into a feeling of wellbeing when I was here before—
Mr Hutchinson —It was entirely unintentional!
Senator SCHACHT —And I forgot to ask a couple of questions on a couple of enterprises you are selling. I just want to ask some questions. Mr Hutchinson, your annual report of 1996[hyphen]97 mentioned the potential sale of the Australian Multimedia Enterprises Ltd on page 226. I wondered how much you sold it for.
Mr Hutchinson —There are two answers to that question: either $29.3 million or $1, depending on the view you take of the sale structure. But the proceeds to the Commonwealth from the sale were $29.3 million.
Senator SCHACHT —Is the $29.3 million in the books somewhere as a return to assets sales, in the budget papers? In the end, does it go into the budget, overall, that we have reduced the deficit by $29.3 million?
Mr Hutchinson —Correct.
Senator SCHACHT —Can you just bring to my attention in which budget paper that line is listed? Can we find out where the $29.3 million is listed as income to the government from the sale of the asset?
Mr Hutchinson —It will appear as an asset sale proceeds item within the budget for the current year. It is not in the 1998[hyphen]99 budget but in the receipts for 1997[hyphen]98. The sale is concluded. The money is received and the money is banked.
Senator SCHACHT —You intrigue me by saying you can look at it two ways, that the Commonwealth got $1 for the company. That is a bait I know you have thrown out to me like a bit of red raw meat to a dog to chase round. I know that this is your sense of humour at work, but you had better explain yourself.
ACTING CHAIR —You should not take the bait.
Senator SCHACHT —I know. I am very cautious. It may be a poison bait he is trying to give me, so before I swallow I am going to be very cautious here with Mr Hutchinson.
Mr Hutchinson —The way the sale was structured was essentially that the capital in the company, the cash reserves in the company, were repaid to the Commonwealth by way of share buyback and the shell of the company was then sold for the nominal fee of $1. It is just a procedural matter. There is no poison on the bait.
Senator SCHACHT —So what was left out of the $45 million was $29,300,000, and that is what you got back.
Mr Hutchinson —Yes.
Senator SCHACHT —But when you sold, therefore, the shell of the company for $1, did the company have any other assets at all by that stage?
Mr Hutchinson —It had assets and liabilities. The assets were the investments that had been made and not yet written off in multimedia product, and the liabilities were contractual obligations to make further payments for multimedia product that was still in train.
Senator SCHACHT —Was there any value given to any intellectual property—patents being registered or not registered—held by the company in view of its investment in various projects in multimedia and related areas?
Mr Hutchinson —The competitive tendering process for the sale of AME indicated a value of zero for that past investment.
Senator SCHACHT —So all the tenderers said there was no intellectual property value?
Mr Hutchinson —Correct.
Senator SCHACHT —Did the Office of Asset Sales conduct any audit itself checking whether there was any intellectual property?
Mr Hutchinson —The value of that intellectual property is only capable of being assessed in a sale process by finding a willing buyer and finding out how much the willing buyer is prepared to pay. We had several parties express interest, several parties do due diligence on the intellectual property, and a universal view of the value of the investments made by AME—
Senator SCHACHT —So the winning tenderer paid $1 for the company. What did the losing tender offer: 50c?
Mr Hutchinson —My understanding is that the alternate bids were less attractive on a commercial basis to the Commonwealth.
Senator SCHACHT —Zero and 99c.
Mr Hutchinson —Some of the other bids involved the Commonwealth leaving further risk capital in the business. Not getting the $29.3 million was an option.
Senator SCHACHT —So they want to get their hands on the cash. So the winning bid was $1 and no more obligation or responsibility from the Commonwealth government?
Mr Hutchinson —Correct.
Senator SCHACHT —The Office of Asset Sales itself, in its due diligence, or in preparation for the sale, getting scoping studies done, whatever you call those things, had Arthur Andersen corporate finance were legal advisers, et cetera. That is here in the annual report of last year. They made no assessment to you that there was any value in the intellectual property?
Mr Hutchinson —At all stages in that sale, it was very difficult for anyone to assess what the value of the intellectual property, that is, the value of the investments made, might be. None of them have been brought to market in any way that indicated there was a revenue stream attached to them.
—I have heard second[hyphen]hand stories that are going around Sydney in particular that the purchaser of the show is winding up those arrangements they inherited with various investments, closing them down, declaring them bankrupt, but taking the intellectual property from them as the asset which they will reuse somewhere else. Have you had any
complaint or information on similar lines? I paraphrase that very cautiously. It is second[hyphen]hand information and it might have no validity whatsoever. But apparently there is some angst in some quarters that this is the first thing that the company which bought it for $1 did.
Mr Hutchinson —A number of parties in the so[hyphen]called multimedia industry who had been relying upon AME as a funding supply—a sort of a ready access to government funding that you can get without lobbying a minister—have obviously become dissatisfied that that funding supply has dried up. Allen and Buckeridge are taking a hard[hyphen]nosed commercial position, as I understand it, to the projects that AME had under development and are only prepared to fund projects which they think have a commercial prospect. Clearly, people who had been successful in persuading AME to fund them to date have been less successful in persuading Allen and Buckeridge to fund them. That is entirely the way the market works. Allen and Buckeridge is a venture capital company and is not prepared to put venture capital into something that it thinks is not going to work. Nor would I.
Senator SCHACHT —However, they themselves believe that for $1 they were buying a number of assets that had value.
Mr Hutchinson —They have a contractual obligation, which AME had entered into which they inherit, to provide further funding to some projects that are in train. So, if AME had entered into a contract to fund a project, provided that project remains contractually compliant, Allen and Buckeridge have got an obligation to pay the future calls. They have an obligation to put in some investment. They have the opportunity to put in other investment and they have the opportunity to find markets for the investments that no[hyphen]one else could find a market for. It is entirely a commercial matter.
Senator SCHACHT —What is the name of the company which was successful?
Mr Hutchinson —Allen and Buckeridge.
Senator SCHACHT —Did they have any association, directly or indirectly, with the Australian Multimedia Enterprises before it was sold?
Mr Hutchinson —Not to the best of my knowledge.
Senator SCHACHT —None of the individuals were involved in any of the projects that AME were investing in?
Mr Hutchinson —Not that our sales team is aware of at all. That would have been revealed by the due diligence process.
Senator SCHACHT —Yes. Allen and Buckeridge are a well[hyphen]known intellectual property developer entrepreneur?
Mr Hutchinson —Allen and Buckeridge are a very well[hyphen]known high[hyphen]tech venture capital company. They are very well[hyphen]known in the high[hyphen]tech field. Roger Allen is the former founder of Computer Power; Roger Buckeridge is the former consultant and technical adviser. You do not know them?
Senator SCHACHT —I do not know them. No, I have never met them.
Mr Hutchinson —They are very well known.
—Thank you for explaining that. I have one other question: on page 57 of the PBS say that your aim in 1998[hyphen]99 is to complete the sale of the national transmission network. It is probably an heroic assumption, even for this government, to believe that that bill will be dealt with and completed in the last two weeks of this budget session. I am not making a judgment about the chaos theory that operates in the Senate in the way the
government handles government business, but there is a fair chance it will not even be debated with all the other bills that the government may give a higher priority to. Do you still have alternate plans in place that, if you cannot get the legislation through—it is just not dealt with—you will to try to privatise the National Transmission Agency by other means?
Mr Hutchinson —I think the last word on privatisation of NTA without legislation was given before the committee inquiry into that bill by Senator Alston when he indicated that would be something we would investigate when and if the circumstance arose. That is still the case. We are still proceeding on the basis that the Senate will deal with the legislation as scheduled. It only has one stage left to go.
Senator SCHACHT —The committee stage. Do you know what committee stages are like in the Senate? Senator Minchin does. If it does not go through the parliament, for whatever reason—
Mr Hutchinson —Then, as Senator Alston made clear before the committee, the government will consider its position.
Senator SCHACHT —One last thing: have you been involved in reaching yet an agreement with the ABC and SBS over the compact for the next five years for their funding to buy the services of a privatised NTA for transmission?
Mr Hutchinson —The people in my office involved in the NTA sale process have been involved in that process, yes.
Senator SCHACHT —Has it been completed; is there a compact or agreement signed and reached?
Mr Hutchinson —There is no agreement yet signed.
Senator SCHACHT —Thank you.
Senator LUNDY —Minister, going back to the issue of the competitive nature of the IT outsourcing tenders: if it became apparent that only one tender was received for any given cluster—the DEETYA one is the example that I am referring to—would it be the government's position that that would represent an inadequate competitive tendering process; and would you either reopen the tender process or seek further submissions?
Mr Hutchinson —That is a hypothetical question.
Senator LUNDY —Yes, it is. I am asking the minister on his government's policy in relation to competitive tendering on a contract as large as this.
Senator Minchin —I was about to say that I never answer hypothetical questions of that kind, if it can be avoided, and I certainly do not intend to indulge that hypothetical question which is based on your attempt to seek an answer to the question about the number of tenders. I am not briefed and am not in a position to give you a policy response. But I am happy to make sure the minister gives you an answer as soon as he can.
Senator LUNDY —So you are not even prepared to provide a comment on what constitutes a competitive tendering process by your government and whether that, as one would assume, would involve more than one tender?
Senator Minchin —No, I am not at this stage.
—That is pretty weak, Minister. Going back to the Hansard I referred to earlier, Mr Gibbons—through the questioning about the DEETYA contract—continually refers in the plural to responses from industry, responses from tenderers, et cetera. I suppose that reinforces the point that DEETYA were anticipating more than one tender. I suppose if the
minister is not even prepared to give an indication of what constitutes a competitive tendering process at this point, it will all come out in the wash.
ACTING CHAIR —That is a statement rather than a question, isn't it?
Senator LUNDY —That is very good, Senator Heffernan. With respect to the construct of the DEETYA tender that you put out, did you anticipate the potential for any cross[hyphen]subsidisation between the two components of that tender document; for example, the EN contract and the DEETYA part of the contract?
Mr Hutchinson —We anticipated that the pricing may be complex. As to whether there would be cross[hyphen]subsidisation, that is an extraordinarily complex concept. But we did anticipate there would be some complex pricing issues, yes.
Senator LUNDY —Because of the magnitude of that particular contract, do you think that it excluded, through its size, the participation of perhaps some of the potential tenderers?
Mr Hutchinson —It did not exclude any potential tenderer who had the capacity to manage a contract of that size. That is a very smart alec answer but—
Senator LUNDY —It certainly is.
Mr Hutchinson —Clearly, a very small company would not have the slightest chance of tendering for a very large contract. Some of our contracts are, and some of the future ones will be, very large indeed. They will require very well resourced companies to manage them. That is the nature of the industry and the nature of the process. In order to achieve the economies of scale that yield the savings that are part of the rationale for this policy, we need to have large contracts. Therefore we need to have significant, substantial tenderers and that will exclude very small companies. I have just been reminded that that will exclude very small companies as prime contractors. It will, of course, still allow and indeed encourage small and medium sized enterprises to take part in these tenders as subcontractors and associated suppliers.
Senator LUNDY —There has been several media reports recently of a different structure for cluster 5. In fact, it has been quite positive with respect to the participation of smaller companies because of the absence of a mainframe system changing the nature of that contract. Has it been structured in that way to try to encourage the involvement of the smaller companies in the outsourcing process?
Mr Hutchinson —Cluster 5 is a contract that has only just been issued. Parties are presently considering the very carefully considered documentation to decide how to respond to it. I would hate for anything I said here to be taken to moderate or change in any way the nature of the documentation on which they are supposed to form the views on putting a bid together. Let me merely say that the structure of cluster 5 was a deliberate part of the structuring of the overall cluster package in order to ensure that it played its part in achieving the range of government objectives for this program.
Senator LUNDY —One of the originally stated objectives for this program was that agencies that had some similarities in their role—a natural relationship in the types of services provided—and that IT requirements would be clustered. Is that still a factor in the government's clustering modelling?
Mr Hutchinson —IT fit is still very much a factor. Sometimes agency fit and IT fit are not necessarily mapping one for one. But, yes, IT fit is an important consideration.
Senator LUNDY —In terms of the industry development provisions, are they within the cluster 5 RFT?
Mr Hutchinson —It is part of the RFT in exactly the same way as it has been for the other clusters.
Senator LUNDY —So you have not changed the wording at all?
Mr Hutchinson —There has been some change; there has been some refinement of the language. These are evolving documents.
Senator LUNDY —In what respect?
Mr Hutchinson —The RFT is not a confidential document. It is probably easiest if we provide you with that extract, rather than giving you the full document.
Senator LUNDY —Was there any particular intent behind the minor changes in the clause?
Mr Hutchinson —The scope of group 5 includes applications development. Therefore, the ID clauses needed to reflect the different scope for ID activity in applications development. This is the first cluster where we have included applications development.
Senator LUNDY —Is there any reason why you are calling that group 5 as opposed to cluster 5?
Mr Hutchinson —We have a degree of anarchy in naming of groups and clusters in the office. The people responsible for any group can call it whatever they want. It could be that the adverse media focus on the word `cluster' got to some people. That is one of the reasons why it does not necessarily go 1, 2, 3, 4, 5.
Senator LUNDY —Yes, it comes with a bit of baggage these days, doesn't it, Mr Hutchinson? In the original cabinet submission that formed the basis of the government's decision to outsource their IT, there was a high degree of specificity from each agency in that submission that excluded applications development for reasons of strategic control. Perhaps, Minister, you are the best person to direct this question to: has there been a change of heart on behalf of the government in excluding applications development from the clustered contracts; and, if so, why?
Senator Minchin —Not that I am aware of, but I will defer that to Mr Hutchinson.
Mr Hutchinson —It has always been a case under the government's policy that the government's policy is to mandate market testing of IT infrastructure but to allow the agencies, should they so wish, to add applications to the scope of that work. The group 5 agencies took advantage of that opportunity.
Senator LUNDY —Yes, Mr Hutchinson, I understand that from the technical side of it but, from the policy side of it, it was quite explicitly excluded in the original program. The government announcements at the time made the distinction of applications development for reasons of strategic control of each agency for their IT needs. I am not sure if this is an question you can answer, because it is quite specifically a policy one.
Mr Hutchinson —The distinction was to exclude applications development from an obligation to market test, but those agencies are still allowed to market test applications if they so chose. Those agencies who felt their applications were so strategically important that they should not be outsourced were not required to outsource them.
Senator LUNDY —That is not what the minister said.
Mr Hutchinson —That is my understanding of the policy position.
Senator LUNDY —Certainly, the indications and interpretation by industry and by those in the public sector was that the issue of strategic control of information technology services within agencies was highly critical to be maintained in[hyphen]house.
Mr Hutchinson —And it is in the case of certain agencies and, where applications development has those attributes, those agencies do not need to—and presumably will not—outsource. There are a number of circumstances I can envisage in which applications is strategically important and yet can still be outsourced. Strategic importance does not equal `don't outsource', it just has a different set of parameters about how you would outsource it. All I am saying is that the Commonwealth has allowed agencies, indeed encouraged agencies, that believe that they have a case against outsourcing of their applications to avoid outsourcing it. It is a question of horses for courses. If outsourcing works for your applications, outsource them; if it does not work, do not outsource them. Market testing for infrastructure is mandated.
Senator LUNDY —Seeing you are such a whiz on government policy in this area, perhaps you can explain to the committee what relevant flexibility will remain with agencies within cluster 5 as to their strategic IT development if all of those departments have outsourced their applications development to one vendor; what is the process from an agency by agency point of view on managing their applications development?
Mr Hutchinson —My understanding is that the group 5 contract includes the outsourcing of specified applications for specified agencies, not the outsourcing of all applications for all agencies within group 5. Whether the application is outsourced will depend on the responses. To the extent that an agency outsources its applications to a specific contractor in group 5, the contract will be framed to give it the necessary control it believes it needs over its applications.
Senator LUNDY —Theoretically, under the cluster 5 arrangements it would obviously be within scope, if you like, for the vendor to subcontract the applications development on an agency by agency basis anyway.
Mr Hutchinson —Yes. It could easily happen that within group 5—I would encourage you to call it group 5 because that is what we call it—the prime contractor will have a number of associated contractors, some of whom would provide application support to some agencies and some who would provide application support to others. That is an entirely commercial matter for the tenderers to bid and to offer and for us to assess and be contracted for.
Senator LUNDY —What is the point of that in the cost savings context in general?
Mr Hutchinson —Cost savings are not the only reason for outsourcing. Outsourcing shifts the burden of managing a function out of the organisation and frees up organisational management. The point of it is to secure the services that the agency needs in the most cost[hyphen]effective and responsive way, and that will vary depending on each agency.
Senator LUNDY —On the point of freeing up organisational management, my understanding, again using the DEETYA contract as an example as opposed to cluster 5, is that each agency or section head involved in a particular group would be required to have a steering committee to manage the contract anyway, given that it touches all of their areas. So how can you say that it frees up organisational management, given that it becomes a collective responsibility as opposed to a sole responsibility of a given agency?
Mr Hutchinson —Having run large operations within departments and now having run large operations by contracting them out, let me tell you that in a management sense it is a lot easier to run a responsive contracted out organisation. It does not detract from the management of the organisation nearly as much as having that large operation as a dead weight inside your organisation.
Senator LUNDY —So it is like a transfer of risk from within the smaller agencies to a larger collective?
Mr Hutchinson —It also allows the senior management of the organisation to focus much more sharply on strategic issues and on their purpose in life rather than having these in[hyphen]house empires that absorb massive amounts of management effort to provide what is often just a utility service to an organisation.
Senator LUNDY —Again, the point of applications development, being highly strategic, does not exactly fit the model you are describing.
Mr Hutchinson —Not all applications are highly strategic and, even if the application is highly strategic, it does not mean to say it has to be done in[hyphen]house; it could still be outsourced. It is a question of creating the right contractual framework.
Senator LUNDY —But also, it is a matter of: one, determining what is highly strategic in terms of applications development; and, two, of control within the given agency, surely. I will ask if you concur with my interpretation of what you said, which is that if applications development is grouped within a number of agencies and outsourced, there would be a diminution of control by an individual agency head over the strategic direction of applications development?
Mr Hutchinson —Not necessarily so. The contract management arrangements to be put in place are designed to ensure that each agency gets the degree of responsiveness in contract management that it needs, and that should be allowed for. If an agency requires an enormous level of detailed day[hyphen]to[hyphen]day control of a particular application or a particular application development, then I would be surprised if that agency would put that application into a group scope. It is the lesser order, lower criticality applications that are likely to find themselves in scope in a cluster. If an agency is dissatisfied with the responsiveness it is getting from a contractor on applications development, then they are free to take it out of scope.
Senator LUNDY —With cluster 5, all of those participant agencies have decided that, for them, they do not need to retain applications development and they are happy to have it grouped?
Mr Hutchinson —I really would have to ask you to put that again.
Senator LUNDY —How many group 5 agencies—cluster 5—are there? Six?
Mr Hutchinson —Correct.
Senator LUNDY —They all decided that they were prepared to allow their applications development to become grouped?
Mr Hutchinson —I do not believe that all of them decided that all of their applications development would be grouped. I might ask Mr Yarra, who has joined us at the table and who has the primary executive responsibility for this group, to talk a bit more about that.
Mr Yarra —I am the group 5 project coordinator. Three out of the six agencies chose to put applications development into scope. The basis on which it will go into scope is that they will be free at any time during the life of the contract, if one is signed, to take things in and out of scope as they wish. So if they see benefit in having the vendor provide the applications development, they will; if they do not, and they suspect that they are not getting a good deal, they will take it out of scope. They retain that right, and it is entirely flexible.
Senator LUNDY —Can you tell me which of those three agencies did?
Mr Yarra —They are the Department of Transport and Regional Development, ACCC and Department of Workplace Relations and Small Business.
Senator LUNDY —So they are the ones that have got their applications development in the scope.
Mr Yarra —Yes.
Senator LUNDY —You will have to assist me here because I have not read the RFT from cover to cover. Because that flexibility within the contract is being provided for, what scope is there for the successful vendor to modify their costs, based on that discretion, in the hands of those three departments?
Mr Yarra —That will be an area of their solution where they will have to be innovative and come back to us and tell us how they would cost that, and how they would deal with that. If that solution were attractive to the agencies, we would take that on board. It is hard to know beforehand what sort of arrangement you would agree to with a vendor on applications development. This is the first time we have done it; it is up to them to come back and give us a solution which we would find attractive. The agencies' main interest is to always have control and to select which is best in their interests. We would be looking for that sort of an outcome through applications development.
Senator LUNDY —Do you have a model contract that you have been working to in terms of these flexible arrangements for applications development?
Mr Yarra —When we give the committee the RFT, there is a model contract at schedule L.
Senator LUNDY —Have you based that on any experience elsewhere, or is this the first time you are attempting this style of contract?
Mr Yarra —This one is based on cluster 3 and DEETYA. It has evolved from those two.
Senator LUNDY —Cluster 3 did not specifically include applications development, did it?
Mr Yarra —No. Those bits have had to be developed.
Senator LUNDY —Does the DEETYA contract include applications development?
Mr Yarra —No.
Mr Smith —No. It did not. The group 5 tender is no different from the group 3—or cluster 3—and DEETYA contracts in terms of the flexibility across the whole of the scope to take things in and out of the requirement. It is no different.
Senator LUNDY —What checks and balances are there within all of these contracts to ensure that the government is not overexposed to variations or claims for variations on the contract by the individual successful vendors?
Mr Hutchinson —The answer is at two levels. Firstly, the structural design of the way in which the specification takes place is based essentially on work to be done rather than equipment to be provided. Therefore, we have attempted to limit the definition of the deliverables under the contract in a way that limits scope for pseudo[hyphen]arguments about whether the work is expanded or not. At the second level, there is a whole suite of contractual clauses that are designed, and hopefully designed effectively, to ensure that any claims for variation are claims that will only succeed as a result of bona fide variations. I think we are acutely aware of the risk in outsourcing—that tenderers will bid low and very high at the Commonwealth's expense.
Senator LUNDY —As international experience shows.
Mr Hutchinson —We did not come down in the last shower of rain; we have a lot of contract management and development experience within the office; and we are confident that we will do as well as can be done in that area and minimise the risk.
Senator LUNDY —So, in your attempts to specify deliverables, at what point is that done? Obviously, the RFT contains some indicative measures but, because we do not have the opportunity to scrutinise the ultimate contracts in forums such as these, can you describe the construct of how you specify those deliverables within the final contracts?
Mr Hutchinson —Mr Yarra wants to have a go at that from the group 5 contract perspective, which is the most current one.
Mr Yarra —The process is that, if you look in schedule E, the statement of work, of the RFT, that has been drafted specifically to dump straight into the contract. Schedule E is a very precise definition of what is required. A huge amount of effort has been put in over the last few months to prescribe to the nth degree precisely what the agencies want. Schedule L of the RFT describes the quality of the service they want. So E describes what is wanted; L describes in what quality. A huge amount of effort has gone into both of those.
Mr Smith —Just to answer that in a slightly different way as well: whatever is offered and accepted in terms of the solution to the agency's requirements will become the contractual requirement for the five[hyphen]year period of the contract.
Senator LUNDY —So what is in the RFT could be modified somewhat to a different degree of specificity?
Mr Smith —Yes, exactly. We are actually encouraging bidders to provide solutions to the requirements and future directions that the agencies want to go. Once they are agreed by the agencies through a negotiation process, then they become the contracted statement of work for the five[hyphen]year period.
Mr Hutchinson —But, Senator, in terms of your scrutiny to satisfy yourself that the protection is there, examining those schedules will give you a very good appreciation of the nature of what will find its way into the final contract. In terms of the protections, you will not be mislead by relying on that.
Senator LUNDY —The point is that they are subject to modification based on negotiations with the final tenderer, and we do not get access to scrutinise that. My next question goes to the sanctions and penalties that may apply to non[hyphen]compliance with those requirements contained within whatever is ultimately negotiated. First, what sanctions and penalties do apply for non[hyphen]compliance? Second, what opportunities or checks and balances exist within your office, that can subsequently be made available publicly, to apply a degree of public scrutiny to the success or failure of these companies meeting those contractual requirements—again in the context of the risk of these vendors establishing a high degree of leverage with their respective agencies?
Mr Hutchinson —The contracts contain a graduated range of sanctions from telling them to do it again or telling them to do it right—the notice provisions—through to the claiming of service credits; that is, conceptually, a deduction off the next bill because you fell short. The sanctions then range right through to termination of contract for cause with the contractor bearing the cost of putting in place a replacement contractor. There is a graduated range of provisions that are I think spelt out in the draft RFTs that are available to you. My understanding is that the one contract we have signed and the other contracts that are under development do not depart significantly in structure or in concept from the RFT.
In terms of public reporting, it is a matter for each agency or each agency group or cluster to manage these contracts going forward. It would be a matter for them to decide what reporting they may make of their use of their sanctions devices going forward. We have not yet considered a collective monitoring of these contracts—that is on our work program when we have a few in the marketplace. But, given the limited life of a project office such as ours, it may not be the responsibility of our office to administer that.
In terms of transparency to committees such as this, all I will say is that the formality of a contract between the purchaser and the provider and the accountability of the provider to the purchaser provides a framework for information to be provided to committees which far exceeds the sort of impenetrability that, in my experience, you ever got from an in[hyphen]house IT shop within the Commonwealth. Therefore, this committee is going to be able to drill down—
Senator LUNDY —That is because the right questions were not asked, Mr Hutchinson, that is all. Thank you for that. Just going to your point about the agencies' decisions to disclose—perhaps if I could direct this to the minister: is it the government's intention to make publicly available the issuing of notices, service credits or any other sanction within these contracts?
Senator Minchin —I would have to take advice on that, but that advice may be available at the table.
Mr Hutchinson —Certain of the arrangements involving minor glitches would be immaterial and would not be worth troubling people with. Others are liable to be covered by contractual disputes. Where you start to wield a big axe, the contractor wields a big lawyer and quite often you are into a sub judice situation. Beyond that, it would be my view that if an agency was in a dispute or had performance problems with a contractor that were material in the context of the agency's reporting, then it would be incumbent on that agency to include that in their annual reporting to the parliament.
Senator LUNDY —I take on board your comments about your contemplation of a group monitoring approach with all of the IT outsourcing contracts. Can you advise the committee on the outcomes of such considerations?
Mr Hutchinson —Senator, if at the end of the process we put in place a mechanism for monitoring, it would be very public.
Senator LUNDY —Yes, I am sure it would be. But I am asking for outcomes that are relevant as that process proceeds and as you come up with any determinations or guidelines, whether or not you have concluded your IT outsourcing project.
Mr Hutchinson —I am not trying to be unhelpful, but the question of cross[hyphen]agency monitoring within the Commonwealth is one of some sensitivity to agencies who guard their autonomy with some jealousy. We would probably prefer to settle what we propose to do within government before disclosing our deliberative processes simply in order to try to bed the thing down with the least controversy. But, yes, when something is developed, I am sure you will know about it.
—In terms of dispute resolutions procedures within the contracts, given we are familiar with several examples of extended litigation being applied as a disincentive for termination of government contracts, can you just take on notice to provide the disputes resolution procedures contained with the current RFTs. Can you also give some indication of whether or not such dispute resolution procedures are modified during the actual negotiations with the vendor, say, in the cluster 3 contract? I know the issue of commercial[hyphen]in[hyphen]confidence
you have claimed with respect to the actual signed contracts, but I am just trying to get an indication of to what degree of confidence we can look at the RFT in respect of the final disputes resolution procedures contained within the contracts. You were prepared to make statements about other aspects of the contract.
Mr Hutchinson —We will take that on notice and give you as much comfort as we properly can, given the stages of the documentation.
Senator LUNDY —We referred earlier to the role of subcontractors with respect to these contracts. Through several public forums, the IT industry has made it very clear that they feel at a distinct disadvantage participating in government contracts in this diminished role as subcontractors as opposed to being able to hold up, for example, in trying to establish some export credential, a contract with a government department. Given that these contracts deny those companies the opportunity to be able to hold up as a banner a contract with a Commonwealth department directly, has the government contemplated some sort of arrangement that could still provide these typically smaller Australian companies—not all Australian obviously, but smaller companies generally—with some form of credential or acknowledgment that will ensure that status is retained?
Mr Hutchinson —I do not believe the matter has been raised with us. I do, from time to time, as many of my colleagues do, sign letters to foreign governments certifying that contractor X has status Y with respect to the Commonwealth. If any of the subcontractors to one of these clusters wishes to have that representation made to a foreign government, and the representation is accurate and correct, then I see every reason why the Commonwealth would provide that. I do not recall a single request of that sort. If the industry is complaining that it cannot get something, it might start by asking for it.
Senator LUNDY —That is your job to provide these references, is it?
Mr Hutchinson —I do not know if it is my job, but it is something we do.
Senator LUNDY —It is an interesting point, because the denial of opportunities to participate in these contracts directly is an area of grave concern for industry, whereas previously they were afforded that status because their relationship was directly with agencies.
Mr Hutchinson —I also draw your attention to the small agency dimension of the strategy where, in due course, a small agency development package will be released, and the scope for the smaller IT firms to have direct contractual relations with the Commonwealth will clearly be much greater in services to smaller agencies that may be grouped differently.
Mr Smith —Senator, could I add that the people who come through my door on a very frequent basis, and they are mostly small and medium sized businesses, are quite enthusiastic about having opportunities to be significant subcontractors as well as primes. Part of our industry development requirement is that the big primes provide opportunities internationally to help open doors and so on for the small and medium sized businesses. So there is a government perspective, but the small and medium sized businesses seem to me to be quite enthusiastic about the prospects they may have, in terms of the international drive they will get through some of these big players, as a subcontractor.
It is not all doom and gloom at that level. I acknowledge that this has been a constant theme in years gone by but, in recent times, I have been getting some very positive feedback about how enthusiastic they are in that area.
Senator LUNDY —In terms of the industry development clause, though, that does not specify any reciprocal obligation, if you like, on the principal to open doors on behalf of those subcontractors; that, surely, is entirely contingent on the goodwill of the principal.
Mr Hutchinson —If the principal offers that, as part of their ID package, that is very well regarded in the assessment, and the enforcement mechanisms apply.
Senator LUNDY —How do you enforce that? How do you monitor that to ensure it is happening? How do you quantify the results?
Mr Hutchinson —If prime contractor A promises to us that it will open a door for subcontractor B, then there is an immediate self[hyphen]reinforcing mechanism. If B does not get the doors opened, B comes and complains to us and we apply the enforcement mechanisms. As soon as you have a direct beneficiary of a commitment, you have a self[hyphen]enforcing arrangement.
Senator LUNDY —So you apply it?
Mr Hutchinson —We would apply it—we, DIST, the cluster management process. I remind you that when I say `we', I mean the Commonwealth.
Senator LUNDY —This is a very important point. Would DIST enforce that provision?
Mr Hutchinson —The industry development monitoring arrangements would be prepared to enforce where necessary.
Senator LUNDY —Whom would that be referred to in DIST?
Mr Hutchinson —There is an area of DIST that deals with it. The contacts are established in the contract; the people who need to know, need to know—I do not know.
Senator LUNDY —Can you take on notice the precise procedure to be followed if a complaint were received on behalf of a subcontractor that the industry development obligations were not being adhered to—what their recourse would be, each section of what department, who would eventually apply the pressure back on the principal and what leverage would be available for them to do so?
Mr Hutchinson —We will take that on notice within the parameters of the confidentiality of the contract.
Senator LUNDY —I figured that these procedures are inherent in what you have contained in the RFT and therefore would not be covered by any confidentiality procedures that you would be able to apply to the contract.
Mr Hutchinson —We will certainly give you as much as we possibly can.
Senator LUNDY —Can you also take on notice to provide an updated report on the status of your consultants, the relative costs associated with their contracts, the duration of their contracts and the purpose for which they were contracted?
Mr Hutchinson —On the IT side of the operation?
Senator LUNDY —Yes.
Mr Hutchinson —Certainly.
—There being no further questions, that completes the examination of the Department of Finance and Administration portfolio. I note for the record that questions on notice have been received from Senator Faulkner for subprogram 5.1 of the Prime Minister and Cabinet portfolio and various subprograms of the Department of Finance and Administration; from Senator Allison for the Joint House Department; and from Senator Heffernan for program 6 of the Prime Minister and Cabinet portfolio. If any of my colleagues
would like copies of these questions, please ask the secretariat. I remind you all that the committee has set 17 July 1998 as the date by which answers are required, and I thank the minister and officers for their attendance.
Committee adjourned at 4.02 p.m.