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ENVIRONMENT, RECREATION, COMMUNICATIONS AND THE ARTS LEGISLATION COMMITTEE
DEPARTMENT OF COMMUNICATIONS AND THE ARTS
Program 4--Communications Infrastructure and Services
Subprogram 4.2--Telstra Corporation Ltd
- Committee Name
ENVIRONMENT, RECREATION, COMMUNICATIONS AND THE ARTS LEGISLATION COMMITTEE
DEPARTMENT OF COMMUNICATIONS AND THE ARTS
Program 4--Communications Infrastructure and Services
- Sub program
Subprogram 4.2--Telstra Corporation Ltd
- System Id
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ENVIRONMENT, RECREATION, COMMUNICATIONS AND THE ARTS LEGISLATION COMMITTEE
(SENATE-Friday, 9 May 1997)
- Start of Business
DEPARTMENT OF THE ENVIRONMENT, SPORT AND TERRITORIES
- Program 1--Environment
- Program 4--Sport and Recreation
DEPARTMENT OF COMMUNICATIONS AND THE ARTS
- Program 4--Communications Infrastructure and Services
- Program 3--Broadcasting, Film and Multimedia Services
- Program 4--Communications infrastructure and services
- Program 3--Broadcasting, Film and Multimedia Services
- Senator LUNDY
Content WindowENVIRONMENT, RECREATION, COMMUNICATIONS AND THE ARTS LEGISLATION COMMITTEE - 09/05/1997 - DEPARTMENT OF COMMUNICATIONS AND THE ARTS - Program 4--Communications Infrastructure and Services - Subprogram 4.2--Telstra Corporation Ltd
Senator CARR --Minister, what effect do you believe the adjustment of Telstra's AAA rating to a AA-plus rating will have on the sale price of Telstra?
Senator Alston --No-one has suggested to me that it will have any particular impact, but perhaps Mr Hambleton from Telstra can answer that.
Mr Ward --Minister, it might be best if Mr Stanhope can proceed.
Mr Stanhope --Senator Carr, perhaps I can answer that question. A single point downgrade has very little impact on the cost of borrowings. Probably around $3 million to $5 million per $1 billion of borrowings is the impact of a one point credit rating downgrade. I should point out as well that the Moody's credit rating has not moved at all. It is the Standard and Poor's domestic rating that has moved the one point. Standard and Poor's maintain Telstra's international credit rating at the same rate it was before.
Senator CARR --The Standard and Poor's rating has changed. What is the price of borrowings?
Mr Stanhope --What I was trying to point out was that a rating grade reduction of one level would have about $3 million to $5 million additional cost per $1 billion of borrowing. The point I am making is that it is quite a small impact. To answer your question of what impact therefore it would have on the value of the company, it would be very small.
Senator CARR --You cannot quantify that at all?
Mr Stanhope --No, I cannot.
Senator CARR --What do you mean by very small? What sort of dollar figure does it have?
Mr Ward --At the level the ratings are at, I would suspect it would have an absolutely negligible impact on the sale, in terms of the strong A ratings that are involved.
Senator CARR --So what--$50 million?
Senator Alston --You are talking about the proceeds that we might get from the first tranche. That could vary by $50 million on the day, depending upon the market in which the float is launched. I have not had anything suggested to me by the people who are conducting the scoping study or the global lead managers that I can recall that suggest it would have any impact at all. In other words, they have just disregarded it. It is so marginal that the effects would be negligible. Indeed, that is only one ratings agency.
Senator CARR --I will come to the global managers in a moment. I will just pursue this question of the cost of the borrowings. What do you believe to be, over a five-year period, the actual cost of the $3 billion borrowings of dividend payment? What is the cost to Telstra over, say, a five-year period? I take it that it will take you about five years to repay that amount of money?
Mr Stanhope --The borrowings that we are in the middle of undertaking have maturities of one year and up to five years. That is the maturity period of those intended borrowings. The actual syndicated loan that is currently being put together is not yet completed, so we are still in the process of that.
Senator Alston --You also cannot look at this in isolation. If the advice is that you should maintain a gearing level of close to 50 per cent, then you will not be reducing the overall level even though you might be repaying this particular loan.
Senator CARR --Yes, but this is a fairly significant loan--$3 billion. Most Australians would regard that as a significant loan off a public asset at this point. It would be interesting to know what that is costing us.
Senator Alston --But you do not apply the pub test to this. You look at whether or not it is a major corporation and whether its gearing level is in line with commercial practice. If it is, then all you are saying is that it is a big company.
Senator CARR --So would the estimate that it would cost roughly $4 billion to repay the $3 billion that you have borrowed be accurate?
Mr Stanhope --Obviously there is an interest expense on the loan. The interest rate that we are getting is highly competitive as we build this loan. That sort of number is likely to be where it might be.
Senator CARR --Likely to be where it will be.
Mr Stanhope --As I said, we have not finalised the borrowing, so I cannot be precise at this point.
Senator CARR --But that is not an unreasonable sort of estimate of the likely cost of this loan--about $1 billion?
Mr Stanhope --At current interest rates and what we are able to command as interest rates in the marketplace that is a reasonable assessment.
Senator CARR --As I understand it, to calculate what that means for people who have to repay that money--that is, the customers of Telstra--I have seen an estimate that the average cost would be about $120 per line that would have to be paid to be recover that money that would otherwise not have to be paid if this money had not been borrowed. Is that a reasonable estimate?
Senator Alston --I would query the logic of that. Clearly, it does not follow that this money would otherwise have gone into lower prices or into any particular area of activity. I think the experts would say that it may well have gone into overcapitalisation and that is why it is better to have the discipline of a normal gearing ratio. But it should not affect the prices that are being charged in the marketplace because they will be driven by their competitors.
Senator CARR --Nonetheless, to find $1 billion interest and other charges that are associated with this loan presumably the customers of Telstra will have to meet that payment. That is the source of your revenue. Is it not the case that $120 per line is a reasonable estimate of what it is going to cost customers to repay that $4 billion?
Mr Ward --I guess my comment would be pretty much along the lines of the minister's in that the prices to customers are the outcome of competition in the marketplace. The fact that we have recapitalised will not in any way change the pace and breadth and depth of that competition, nor does it change the CPI minus 7.5 price cap that applies to us, up until the end of 1998 at least. In terms of the cost to customers, I think that leap from the $120 per line to what it will actually cost customers is probably not correct at all. I think the marketplace is really going to be the place where prices are set.
Senator CARR --I understand that you are saying that competition will keep your prices down but, if you were to calculate the number of lines you have and divide by the $4 billion that is actually being required to be repaid as a result of this government initiated loan, I cannot see why $120 per line is inaccurate. Can you explain to me why that is incorrect?
Mr Ward --I am simply saying that the calculation per se is probably correct, without having done it myself, but the logic that that cost will be passed onto end customers is what I am suggesting is not the case.
Senator CARR --So the statement by Stewart Fist that appeared in the Australian that the cost of servicing at the rate of $1 billion a year will average out at $120 per line would seem reasonable?
Mr Ward --I have not done that particular calculation. If Mr Fist's article was suggesting that that cost be passed on to customers I am contesting that--
Senator CARR --Where else are the repayments going to come from?
Mr Ward --It can go into all sorts of things. It can go into lower margins and profit margins for Telstra, perhaps less dividends, plus greater productivity that we will strive for. I think a whole host of things would apply other than passing on prices.
Senator CARR --Essentially, it is either out of profits, the employees of Telstra pay for it or the customers of Telstra pay for it. It is either the shareholders of Telstra, the employees of Telstra or the customers of Telstra who pay for it.
Mr Ward --I am not quite sure how you get to the employees.
Senator CARR --You are saying that there would be productivity increases--less jobs.
Mr Ward --I am not suggesting less jobs per se from that impact at all. I am suggesting that one of the things that may be an outcome is that we will strive for greater productivity.
Senator CARR --You will strive for greater productivity. What does that mean?
Mr Ward --Again, productivity will be very much driven by where we are at in the marketplace. Market share, the scope of business that we are in, our success in the marketplace will determine how hard we have to drive the business. This factor alone, I think, cannot be used as a springboard to come to those sorts of conclusions about the cost to customers.
Senator CARR --It seems to me that the cost to customers or the employees of Telstra or the shareholders of Telstra are the only three sources of financing for this. If I am wrong, could you please tell me how you intend to finance this loan?
Mr Stanhope --It is our objective to make sure that the company runs as efficiently as possible. The way we will source the loan will be, as Mr Ward has explained, to try to drive out the costs that we have in the company that ought not be there and look at greater capital expenditure efficiencies. This is all about making sure that we have the cash flow to be able to service the financing of the company.
Senator Alston --If it leads to greater productivity gains, that means that the cost to services that Telstra would charge will be lower. That then gives them the opportunity to achieve greater market share so they could end up with much greater gross revenue as a result. Out of that, you have funds available to repay your loans without having to impact at all on your price extraction.
Senator CARR --Minister, I am having a bit of trouble following this.
Senator Alston --I can understand that.
Senator CARR --I am sure you do. Will you be able to explain to me how paying you, the government, $3 billion to fix up your budget problems increases the productivity of Telstra?
Senator Alston --I thought we had clarified that situation.
Senator CARR --You are saying it retires debt. Presumably it is still part of your budget problems.
Senator Alston --It is not being used for recurrent expenditure.
Senator CARR --No, it is not being used for recurrent expenditure. You are saying it has been used to retire debt. Presumably it is not Telstra debt that it is being used to repay; it is government debt generally--public debt. How does that improve the productivity of Telstra?
Senator Alston --That is why you need to study corporate finance--to understand the propositions that have been put. I said to you that at one level it can be counter-intuitive. If you want to simply do an arithmetic calculation and assume no changes that flow from a higher gearing level, you simply ignore the advice you get from the experts, who say that a more market related gearing level will produce greater efficiencies which are to the benefit of the company. If the company is in better shape, its prospects of earning greater revenue and earnings are increased accordingly.
Senator CARR --Perhaps, Minister, you could explain to me how you need to take a loan out to improve the productivity of Telstra.
Senator Alston --I am telling you. The advice is that Telstra will benefit from having a gearing ratio that is more in line with the market. In other words, it will force them to work harder. They will not simply be able to be awash with cash, which they can then squander on unnecessary capital investment--this is all hypothetical, Graham, of course--roll-outs and all sorts of fancy equipment and new technologies without regard to the ultimate cost to the balance sheet. If they are under pressure in the same way that other companies are under pressure, they will be much more inclined to scrutinise before they go further into debt.
Senator CARR --So you are saying that, by forcing them to impose this discipline to meet your borrowings requirements, their discretion as managers--
Senator Alston --You want to try it. Get yourself an overdraft and you will find that you are a lot more careful with your money.
Senator CARR --My personal finances are not at stake here, Minister, I hope. Certainly if this is the logic in which the world now works, I shudder to think. Can I just get this clear from you, Minister. You are saying that by forcing them to have less discretion on their capacity to make decisions in this company you will be able to improve their productivity?
Senator Alston --That's right, because they will be more judicious in the projects that they choose to fund and they will be more cautious in terms of their additional borrowings. That is the accepted wisdom in the marketplace. I am sure you would not want to quarrel with investment financiers, would you?
Senator CARR --I would be the last person to quarrel with the accepted wisdom of international telcos. Minister, would you indicate to me what the cost of borrowings would be if the government were to go out and borrow this money in its own right rather than put the heavies on Telstra?
Senator Alston --Well, look at the bond rate.
Senator CARR --What is the difference?
Senator Alston --I don't know what it is.
Senator CARR --Mr Stanhope, I am sure you would be familiar with the general rates of finance at the moment. What would it cost the government to go out into the market and borrow $3 billion in its own name rather than put the squeeze on you?
Mr Stanhope --I am not too sure what the bond rates are now, but probably the differential between government borrowing and Telstra borrowing is 0.1 or 0.2 per cent.
Senator CARR --If it costs you $1 billion--that is, it costs you $4 billion to borrow $3 billion--what would it cost the government?
Mr Stanhope --About 0.1 or 0.2 per cent difference than what it would cost us.
Senator CARR --Can you explain what that would mean?
Mr Stanhope --If it were $200 million per annum, as you have suggested it might be, for us to borrow $3 billion, it would cost whatever 0.1 per cent of $200 million is.
Senator Alston --About $2 million.
Senator CARR --This is actually costing the public a good deal more than first meets the eye, isn't it? It is not just $120 per line. It is actually more expensive for you to borrow money than it is for the government.
Senator Alston --To the tune of $2 million a year.
Senator CARR --It is still a substantial amount of money, I would have thought.
Senator Alston --Not when you are just talking about $3 billion.
Senator LUNDY --It is a lot of jobs.
Senator CARR --Mr Stanhope, what impact do you expect this restructuring of your balance sheet--extraordinary euphemism this--will have on your overall cost structures?
Mr Stanhope --I think I said that your assumption that an interest expense increase of around $200 million per annum is probably around the ballpark. I cannot be more precise because we have not closed the borrowing yet. That is the additional expense to the company in view of the borrowing.
Senator CARR --Does that affect your existing borrowings as well--the downgrading, for instance--or just this new set of borrowings?
Mr Stanhope --The credit rating downgrade of one level, as I said, would have the $3 million to $5 million per $1 billion impact.
Senator CARR --For existing borrowings as well?
Mr Stanhope --Yes.
Senator CARR --So the actual cost of this loan is more than the $1 billion that I have alluded to?
Mr Stanhope --Our current debt relationships will all have to be reviewed. If all the borrowers take the credit rating and apply that differential that I said it creates, there is a possibility that will happen. We have not yet closed this borrowing, let alone had a look at the total debt portfolio.
Senator CARR --Do you expect it to happen?
Mr Stanhope --It may or it may not. Some of our borrowers may well be prepared to leave the current rates in place.
Senator CARR --So your borrowers are fairly generous people, are they? They tend to give you these sorts of concessions, do they?
Mr Stanhope --It depends on how they view a one point movement in the ratings. It is not an automatic thing.
Senator CARR --But most lenders of money actually do expect the highest level of return they can get, don't they? Isn't that international best practice as well?
Mr Stanhope --Most lenders will look at the credit rating of the company that they are lending to, certainly.
Senator CARR --If you are saying you have not finalised your lending arrangements, when do you expect to be able to advise this committee of when you have finalised them? When do you anticipate finalising them?
Mr Stanhope --It is about a week away.
Senator CARR --Whom are you financing this loan with?
Mr Stanhope --There are two lead managers who are assisting us--JP Morgan and CS First Boston. They are managing a bank syndication. There will probably be 20 to 25 banks in the syndication.
Senator CARR --This loan is on top of the amount that you announced to the previous round of estimates early this year of some $200 million. Is that the case?
Mr Ward --That is in addition to the interim dividend.
Senator CARR --So since the last budget the government has sought some $3.2 billion from Telstra?
Mr Ward --The interim dividend is just in line with the standard arrangements that we have in place with the government in terms of the dividend payout ratios, et cetera.
Senator CARR --So what is the total amount that the government will receive from Telstra this financial year?
Mr Stanhope --They will receive the $3 billion and about $1.2 billion in normal dividend.
Senator CARR --So $4.2 billion. Are any other revenues received from you?
Mr Stanhope --Tax.
Senator CARR --What is the taxation figure?
Mr Stanhope --Around $2 billion.
Senator CARR --So $6.2 billion this year. Are there any other revenues?
Mr Stanhope --No, just taxes and dividends.
Senator CARR --It is not a bad little earner, I would have thought. Once Telstra is sold, presumably that will be reduced by one-third, will it?
Mr Stanhope --Yes, the dividends will; we will still pay tax.
Senator CARR --Of course this amount of money will have to be financed. What adjustments have you made to your strategic plans as a result of this government request?
Mr Ward --As we said at the last estimates, we have an annual cycle of business planning. That cycle is now in process. This issue along with far more significant issues in terms of what is happening in the marketplace with our products and our revenues and what is happening with competition are all being factored into revising and reviewing our business plan. That is not complete yet.
Senator LUNDY --I am sorry, could you say that again?
Mr Ward --As we have said here before, we revise our business plans annually. We monitor them through the year as well and occasionally we make adjustments through the year. We have a formal process review once a year. We look at what is happening in the marketplace with growth, our product performance, competitor pressures and our investment opportunities. Along with this issue, we will factor all that into the review of our business plan.
Senator CARR --So at what point did you factor in this increase in borrowings to your strategic plan?
Mr Ward --It is being factored in now in this round that I was just alluding to.
Mr Stanhope --Can I point out as well that we do our business planning on an earnings before interest and tax basis, so the operational impact of additional interest expenses because of the borrowings is not going to change our operational plan. We do our operational plan on an earnings before interest and tax basis. The additional expense that that will incur, as I have pointed out, is an interest expense and no other and falls through to the profit before interest--
Mr Ward --It ultimately affects our financial plan, but not the operational plan.
Mr Stanhope --That is the point I am making.
Senator CARR --Presumably that means that there will be changes to your operational plan in due course. Presumably, if there is less money available because you are paying more money for this purpose, it will affect your operational plan.
Mr Stanhope --It becomes a cash flow issue. To the extent that we require cash flow to run the business, yes.
Senator CARR --So how does it affect your investment plans, for instance? In this case now you have to find an extra $4 billion. Presumably that is $4 billion of priorities that will have to be adjusted. The minister indicated that the whole purpose of the exercise was that you would show more discipline.
Mr Stanhope --When you say we have to find $4 billion, we have to service the interest costs of the money. Whether we retire debt will depend on our cash flows throughout that period. So we do not have to find $4 billion; we have to service the financing cost.
Senator CARR --How long will this loan be for?
Mr Stanhope --It depends on the operations of the business. How long you carry your debt, refinance your debt or change the maturity of your debt will depend on the operations of the business.
Senator CARR --So this will have no impact on your investment strategies?
Mr Stanhope --It brings discipline, as the minister was saying, to where you actually spend your cash flows. You have to look harder at what you spend money on and so on. It brings an additional discipline to bear.
I guess I should also point out that we are talking about debt levels that are still lower than the debt levels of 1992-93. Through good management, I believe, of the company we have been able to retire a fair bit of that debt. Hopefully, going forward we will be able to do the same thing.
Senator CARR --The whole issue here is that it is actually bad management to repay loans. I thought this was the whole exercise that you were going through. It is international best practice to have more debt.
Mr Stanhope --Going back to that period of time, it was important, because we had so many uncertainties about competition, in the commercial judgment of the management of the board of the company to have a strong balance sheet. I guess I take some objection to the lazy balance sheet term. It was to have a strong balance sheet in order for us to make the investments we needed to grow the business.
Senator CARR --Do I assume then that the board was unanimous in agreeing to this request from the minister?
Mr Stanhope --The board did not get a request from the minister; the board was asked to have a look at its capital structure in view of the scoping study outcomes. The experts who undertook the scoping study said that we had a capital structure that had too great a reliance on equity.
The board asked management to consider that. The management put all the ramifications of it before the board, including comparisons with international peers and some commercial judgment about what sorts of funding levels the company needed to go forward in a competitive environment, and the board decided it was able to change the capital structure of the company to the extent of $3 billion.
Senator CARR --So you volunteered this money, did you? Because it was claimed that it was international best practice to have more debt, you said, `We will go for that. All our practices in the past in terms of reducing our debt were obviously wrong. Here you go. Here is $3 billion.'
Mr Stanhope --We were asked to examine our capital structure in light of the scoping study and that is what we did.
Senator CARR --Did you look upon that as a request from the Department of Finance?
Mr Stanhope --We looked at it as a request from the Department of Communications and the Arts to have a look at the outcomes of the scoping study. It was not a direction.
Senator CARR --No, we have got that established. So you had the right of refusal, did you?
Mr Stanhope --The board obviously can form its own view, and it did. The board could have easily said, `We don't agree with the recommendations of the people who did the scoping study.'
Senator CARR --So the board was unanimous in its agreement, was it?
Mr Stanhope --The board was.
Senator CARR --Unanimous?
Mr Stanhope --I was at the board meeting and there was no--
Senator CARR --I just wanted it clear. You are saying that the board was unanimous?
Mr Ward --I was there too, and I concur with Mr Stanhope.
Senator CARR --You say this has no operational impact on Telstra. I think we may want to come back and talk about this since I also understand you to say that you have not finalised your plans. I want to be clear about that. Are you saying that you are certain that this will have no operational impact on Telstra?
Mr Stanhope --What I am saying is that you have got to obviously look at the cash flows of the company. Obviously most companies will want to be in a positive cash flow position from operations and financing. In our planning process we will look to have positive cash flows. So to the extent that there is an extra interest cost and that is a cash outflow it will affect operations. The choices are to try to grow revenue, reduce expenses or reduce your capital expenditure program. They are fundamentally the options you have got.
Senator CARR --When will you be able to be in a position to finalise your response to an assessment of those options?
Mr Stanhope --We are hoping to take at least the first draft of the plan to the board meeting in May, which is two weeks away.
Senator CARR --Is it the case that this will lead to further job losses over and above the 22,000 you have already announced as part of the Mercury and other projects?
Mr Stanhope --I cannot answer that because we have not concluded the plan.
Senator CARR --So the current employees of Telstra cannot be assured that there will be no further job losses than the 22,000 already announced?
Mr Ward --We cannot give those sorts of assurances about our cost structure or our revenue streams in a very competitive market.
Senator CARR --You say you cannot be certain of the impact on jobs.
Mr Ward --We cannot also be certain about opportunities that we may pursue that may be job creating.
Senator CARR --So you are expecting a growth in employment in Telstra, are you?
Mr Ward --One of the primary drivers of our business planning is to look for growth in the business.
Senator CARR --And you anticipate a growth in employment in Telstra?
Mr Ward --We are anticipating that we will continue the planning process to look for growth opportunities.
Senator CARR --Will you be finding any is the issue. Do you anticipate a situation where there will actually be an increase in employment in Telstra?
Mr Ward --In terms of specific opportunities I would hope that we would find them every year.
Senator CARR --You would hope, but will you?
Mr Ward --Yes.
Senator CARR --So you are saying that there will be an increase in employment in Telstra?
Mr Ward --I am not suggesting there will be a net overall increase. What I am suggesting is that there will be opportunities that we will find every year to create employment opportunities for Telstra employees. That is not to say the overall level of employment will not continue to have to come down as in our current plan, as you suggest.
Senator CARR --How many more jobs in addition to the 22,000 do you anticipate may be affected by this?
Mr Ward --As Mr Stanhope said, we are still completing our plan. In a few weeks time we will have a draft plan to take to our board. It is too early to give you that information.
Senator CARR --Do you think it will be a small impact or a large impact?
Mr Ward --I cannot share with you a draft plan that we are yet to take to our board.
Senator CARR --So we will have to wait to the next round to discuss these matters?
Mr Ward --Yes.
Senator CARR --What sorts of options are you considering in terms of investment strategies?
Mr Ward --Investment strategies in our plan?
Senator CARR --Yes, as a result of having to service these borrowings. What impact will it have on your investment strategies?
Mr Ward --Just the answer Mr Stanhope gave: it will continue to be a spur to us to look very prudently at our level of capital expenditure.
Senator CARR --You cannot be any more precise than that?
Mr Ward --I certainly cannot. It is just another factor as the cash flow impacts on the business.
Senator CARR --Is it the case that this is the only request that you are likely to receive for additional borrowings from the government?
Mr Ward --Is that question to Telstra, Senator?
Senator CARR --Yes, to Telstra. Are you aware of any other requests in the pipeline?
Mr Ward --Not that I am aware.
Mr Stanhope --No.
Senator CARR --Is it the case that this is a one-off expectation from the government for a dividend payment or an extra dividend payment?
Senator Alston --We have not had any requests from Telstra to increase the level.
Senator CARR --Mr Ward, given the minister's response, are you anticipating that you will be requesting any extra payments be made to the government?
Mr Ward --I am not expecting any.
Senator CARR --Mr Blunt has not rung you up and said, `Listen, we have a few billion, we better get Alston on to this straightaway?'
Senator Alston --I think he thinks they are unlazy now.
Senator CARR --Is it the case that this debt will essentially go offshore? You are seeking to raise this loan offshore, aren't you?
Mr Stanhope --It is a mix of domestic and international.
Senator CARR --What sort of mix are we talking about?
Mr Stanhope --It has not been finalised. I expect that the large local banks will participate in a fairly large way. J.P. Morgan and CS First Boston will participate in a large way, probably around billion dollars. It is probably two to one--domestic two, offshore one; so it is probably more domestic. As I said, it has not been finalised. It may well be oversubscribed and we will have to pro rata it down and so on. It is early days.
Senator CARR --But that is the sort of proportion you are expecting--an extra billion dollars of foreign debt?
Mr Stanhope --Could be.
Senator CARR --We are actually increasing the level of foreign debt through this borrowing mechanism. How does this sit with the government's commitment that only one-third of the first tranche of Telstra will go to foreign bidders?
Senator Alston --I do not think it is just a claim. I do not think your party disputed that provision in the bill so it is now a matter of law. The difference is, of course, that if equity holders are overwhelmingly domestic then the dividend streams will remain here.
Senator CARR --But there will be a billion dollars of extra foreign debt as a result of this exercise put onto the Telstra balance sheets, won't there?
Senator Alston --Debt, yes, but equity doesn't.
Senator CARR --That is the effect of this, isn't it--a billion dollars worth of extra foreign debt?
Senator Alston --It has no bearing on the control of the company.
Senator CARR --No, but it does in the rewards.
Senator Alston --You can argue that going from naught to one-third in terms of foreign ownership is an increase in foreign ownership in equity terms. That is true. But we do not judge that to be unhealthy overall. It provides a significant stimulus to the market because you will have, we expect, a high level of demand from offshore which will help to keep the price up.
Senator CARR --Mr Stanhope, you have mentioned that you cannot assure current employees that employment levels over the 22,000 target will not be affected by this measure. Could you indicate to us whether you stand by the position that you are reported to have said that staff reduction targets were being met? When you announced this voluntary payment to the government of $3 billion you indicated that staff reduction targets were being met. Can you tell us whether that is the case?
Mr Stanhope --The company is running to its current corporate plan. The current corporate plan has over the three-year period a staff reduction target of around 22,000. That is still the formal official corporate plan and that is what we are aiming for at this point.
Senator CARR --In terms of that program, the removal of one-third of the employees from the company, what scale of job losses have occurred to this date?
Mr Stanhope --The number of exits from the company is around 10,000 at this point. That is higher than the number we had predicted in the first year of the plan because the VisionStream sale took place earlier than we had predicted. The VisionStream sale was predicted to take place in the second year of that plan, but it took place in the first.
Senator CARR --How many of those 10,000 jobs have been taken away as a result of natural attrition?
Mr Stanhope --Natural attrition is about 3,000, redundancies about 2,500 and VisionStream about 2,500.
Senator CARR --Were the 2,500 from VisionStream redundancies?
Mr Stanhope --They joined another company. VisionStream still exists as a company. It is owned by Leighton's.
Senator CARR --Were all those 2 1/2 thousand persons transferred over?
Mr Stanhope --The great majority. I cannot be sure that every single one did, but the great majority transferred over.
Senator CARR --Obviously those who were doing work for VisionStream who were formerly part of Telstra did not come back into Telstra.
Mr Stanhope --There were a small number of around 80 or 100 who worked for VisionStream who came back into Telstra because of the particular work they do. We wanted to retain that competency inside Telstra. It was a maintenance function that will be ongoing.
Senator CARR --As I read that, you are still 2,000 short. There were 3,000 through natural attrition and 2 1/2 thousand through redundancy. How much was through retirements?
Mr Stanhope --Probably the residual.
Senator CARR --I would have thought that natural attrition and retirements would cover similar areas.
Mr Stanhope --These numbers I have are as at 31 December, and that is because it is in relation to the half-year accounts, which is a sort of formal public result indicator. Redundancies then were 2,200; other separations--natural attrition, retirements and so on--were 3,000; retirements rather than resignations there were 800; VisionStream was 2,000; and there were 800 recruitments as well. So there is a turnover, as you might imagine. So that was 7,000. Since then, by about the same proportions, a further 3,000 have left up to the end of April.
Senator CARR --So is it the case that you are happy with the types of persons who are taking redundancy? How many of them are voluntary, for instance?
Mr Stanhope --A great majority are voluntary.
Senator CARR --How many forced redundancies have there been?
Mr Stanhope --I could not answer that question.
Senator CARR --Have there been none?
Mr Ward --It would be very small. In fact, we can update that analysis for you, Senator. To the end of March we can give you the breakdown of the employment.
Senator CARR --Is it the case that you have lost many of your best employees as a result of this redundancy process?
Mr Ward --That is certainly not the information that is coming through from our line managers. That is a new interpretation for me.
Senator CARR --So this discussion I see concerning the brain drain that is occurring within Telstra is not a matter that you are familiar with?
Mr Ward --That is certainly not what is coming through from our line people in terms of the experience to date. As you are aware, we are keen to pursue with the Industrial Relations Commission the issue of resource rebalancing, which is in part trying to ensure that we keep the right skills and resources for the task ahead.
Senator CARR --Have you done any analysis at all of the redundancy program in terms of the persons who are leaving?
Mr Ward --I am sure each line of business is aware of the profile of the people who are leaving.
Senator CARR --You had the rating system in place for a while. You are not using that any more, are you?
Mr Ward --That is on hold at the moment, as I understand it.
Senator CARR --How are persons selected for redundancy?
Mr Ward --I could not give you an exact description of that. It varies by the line of business, but it is a matter of looking at the workload, at the skills and at the workload into the future in that line of business and making our employees aware of where there are opportunities for redundancy. If I am right, I think the redundancy levels are less than what we had programmed for the year.
Senator CARR --Didn't you say before, Mr Stanhope, that you thought that the redundancy program was ahead of schedule?
Mr Ward --No, the total job reductions is ahead of schedule slightly, but redundancies, which are only a component of that, are less than what we had thought might pan out.
Senator CARR --So you have done no analysis at a management level--that is, at a senior management level--of the effect of these?
Mr Ward --No, I did not say that, Senator. I said I believe every line of business would have a good appreciation and analysis of the profile of their people--the people who remain and the people who leave.
Senator CARR --As senior management, you are happy with the program, are you?
Mr Ward --In terms of the feedback I get from the line, the current program is broadly on track, as Mr Stanhope said, and we are still meeting our business plan.
Senator CARR --Why then did the AIRC characterise your redundancy agreements as harsh and unjust? Is that correct?
Mr Ward --We have no-one here from our employee relations today. I would have to take that on notice, which I am happy to do.
Senator CARR --You are senior managers and you are not aware of a criticism of that nature?
Mr Ward --I am certainly not across the detail of that outcome. As I say, I am happy to follow that up and get a Telstra interpretation of that judgment.
Senator CARR --If you can, please. If the commission has in fact made this criticism, have you continued your policy in the same manner? Presumably you will be able to argue at the next committee, `We've changed our practices. We now run a just and humane program.' I have no doubt you will say that to me. But, if you have not, perhaps you could indicate to us why there have been no changes to the operations of the program since the commission made those points to you.
Could you also indicate to me what analysis has been undertaken as to the impact of the redundancies and job reductions that have occurred in terms of the capacity of Telstra to respond to the future needs of the company and whether or not a disproportionate number of highly skilled personnel are occupying strategic places or were occupying strategic places within the company? I am interested to know just how this program is working. It is one of the largest redundancy programs in corporate history. I think we would be entitled to know how it is working.
Mr Ward --I have no objections to taking those questions on notice, Senator. I would say that, from my perspective and attendance at senior management meetings, I certainly am not getting the sort of feedback that you suggest about the losses.
Senator CARR --For the record, I hope you do not misunderstand that I have not changed my view on the appropriateness of this program. As you would be well aware, I have actually been highly critical of this program because I think it is an integral part of your privatisation plans. We will not need to go over that again because invariably we will argue the same ground.
Minister, in terms of the comments that have been made regarding the increasing foreign debt as a result of this very generous offer from the Telstra board of $3 billion, how does that sit with your commitment with regard to foreign ownership of Australian media? Do you think it has any impact, any implications for policy in terms of the more general media issues?
Senator Alston --I think you have to look at these things case by case, sector by sector. That is what FIRB's general brief is. We were deliberately concerned to pitch the level of foreign ownership in relation to the Telstra float at such a level that we thought accommodated all of the important interests. That meant very significantly leaning towards accommodating the high level of domestic demand that we would anticipate. I think it is 35 per cent of one-third, which gives us just under 12 per cent of the total company with no more than five per cent being able to be held by any one individual foreigner. In the scheme of things, that is a fairly low level of foreign ownership.
Because we have not had foreign ownership in Australian telcos in this country before, we are testing the waters, but if you look around the world you will find very high levels of foreign ownership in telcos by comparison to Australia. But I think it is critically important for us that we do not find too many locals who are left lamenting. Despite the advice you are probably offering to them, I suspect that there will be a vast quantity of ordinary Australians who will want to subscribe, including many Telstra employees, and we certainly would not want a situation to arise where they missed out because foreigners were able to come in over the top.
Senator CARR --But, in terms of the more general foreign ownership of Australian media, you do not see there is any connection there?
Senator Alston --No, there is no straight line connection. I think you have to look at where foreign ownership is in print at the moment. You have different rules for the media generally. You have different rules for print compared to pay TV, free to air television. Levels of foreign ownership in print are pretty high at the moment, probably around 70 to 80 per cent, whereas with free to air television there is a limit of 15 per cent.
Senator CARR --Perhaps we will come to that in the next round. Can I just get it clear from you, Minister: can you guarantee that Telstra charges will not be increased to service this new debt that has been offered up?
Senator Alston --No-one is in the business of giving guarantees. I think we would all have a high level of confidence that after 1 July Telstra is going to be under a fair degree of competitive pressure, and I will be very disappointed if they are not. I am confident they will be able to withstand it; but, nonetheless, it will I think help to drive greater levels of productivity and that will provide the basis for Telstra to be able to service the debt without passing it on to customers.
Senator CARR --But you cannot guarantee that that is the case, can you?
Senator Alston --You cannot guarantee it any more than you can under the current regime. There would be nothing in theory to stop Telstra now acceding to your blandishments and saying, `Let's give the employees a 20 per cent wage increase and we'll pass it on to customers.' These things are all possible if you are not under competitive pressure and when you do not have a share price. But we think that post-July it will be very different.
Senator CARR --If that is the case, we cannot guarantee that there will be increases in charges--
Senator Alston --We cannot guarantee it now.
Senator CARR --We cannot guarantee that employment losses won't be greater as a result of this. We can't guarantee there won't be increased charges per line. I am just wondering, Minister, can you guarantee that increased payments of interest on debt won't lead to less earnings being distributed to government in the form of dividends?
Senator Alston --Unless you are in the business of price control and wanting to put strict statutory limits on things, there are no guarantees in the commercial sector and Telstra for some years now--ever since you opened the market up--has been under commercial pressure to perform. If it performs well, then it has a much greater capacity to deliver deep discounts to customers, better quality of service, a greater range of products and greater levels of dividend to government than it would otherwise have. There are no guarantees at the present time. One of the reasons why I think it has needed to make significant redundancy arrangements is that it did not continue with the downward slope in employment levels that we saw in the early 1990s. They basically stabilised and then went up at a time when virtually every other telco in the Western world was still shedding labour to the tune of 10 per cent plus a year.
Senator CARR --I think we have been through some of these figures at previous estimates.
Senator Alston --We probably have.
Senator CARR --And I don't think we necessarily agree with your interpretations.
Senator Alston --I don't expect you would.
Senator CARR --There are not too many positives coming out of this so far. When you wrote to Telstra requesting this balance sheet restructuring, were you aware that the actual implications of the debt levels that you were asking them to undertake are equivalent to the entire ISDN re-equipment program?
Senator Alston --I am not sure that I would have seen it in those terms, but it would not be too difficult if someone pointed it out to be able to draw a line between $3 billion here and $3 billion anywhere else. I am sure their wages bill was a lot more than $3 billion.
Senator CARR --We will have obviously more to say on these matters. If I can turn to another issue--
CHAIR --One moment, Senator Carr. Senator Allison, who has put questions on notice to the Department of Communications and the Arts on subprogram 1.1 and subprograms 2.1, 2.4 and 2.6, advised me at lunchtime that she was not coming back this afternoon. Has anybody got any questions for the Australia Council?
Senator CARR --No.
Senator LUNDY --No.
CHAIR --Are the Australia Council here, Minister, or are they going to be here this afternoon?
Senator Alston --I am sure they can be given the good news.
CHAIR --Were they going to be here for this afternoon? Have they come down from Sydney?
Ms Santamaria --I believe they have.
CHAIR --I just want to say on the public record that I express regret that a senator put a request to the committee secretariat for questions and that the Australia Council people have wasted their funding to get here only to find that the senator who asked them to be here will not be here. I as the chairman of the committee am embarrassed about that, but there is nothing I can do. I will be tougher in future. I do not know what I would do about it as chairman, but I regret the expense to the Australia Council and I suggest, if they can get on an earlier plane, that they be sent home forthwith. I apologise to the department. I hope it won't happen again and I hope that those people who put requests for people to appear actually appear themselves to ask the questions in future.
The National Gallery of Australia was also requested to be here by Senator Allison. Senator Lundy has a few questions. She will put those on notice. The National Museum also won't be required. I regret that, but fortunately we have found out now rather than later. Thank you very much.
Senator CARR --I saw a report in the press concerning Telstra spending $50,000 connecting a TV cable to Kerry Packer's apartment flat at 99 Spring Street Melbourne so that he could watch a boxing match in comfort. Is that a true report?
Mr Ward --I have not got a detailed brief or a brief at all on that, Senator Carr. But I understood that there was a connection there, yes.
Senator CARR --There was a connection?
Mr Ward --Yes.
Senator CARR --Are you able to advise the committee that the cost of that connection was $50,000?
Mr Ward --I will take that on notice. I do not have a brief on that.
Senator CARR --Would you be able to advise the committee as to the cost that Mr Packer was asked to meet? I am advised that he was required to pay $29.95 for the connection cost, for the $50,000 worth of work undertaken by Telstra. Is that true?
Mr Ward --As I said, Senator, I have not got a brief on the details of that connection. I was aware that there was such a connection, and we will take up the matter.
Senator CARR --Is it the case that 12 technicians worked for four days after Telstra's chief executive approved the special Foxtel link to the Spring Street flat of Mr Packer?
Mr Ward --My answer is the same as the previous one, Senator. I will make sure we give you a response.
Senator CARR --Is it the case that senior Telstra sources have advised media outlets that Foxtel staff were contacted by Mr Gerry Moriaty about linking the flat and he, in turn, spoke to Frank Blount after connections with Mr Packer had requested that the connection be made so that Mr Packer could watch a boxing match on Sunday, 13 April?
Mr Ward --I am certainly not aware of those sources or what they said.
Senator CARR --How many customers are provided with this sort of customer service, if I might put it in those terms? Is this the general level of customer service that is available to all the clients of Foxtel?
Mr Ward --We have no-one from TMPL, our multimedia subsidiary, here. We will take the series of questions on notice.
Senator CARR --Was there any connection with any other personnel outside of Telstra in the provision of this special customer service?
Mr Ward --I do not quite understand that question.
Senator CARR --Was there any advice tendered from within government sources?
Mr Ward --The only thing I am aware of is that there was a reference to that connection. I have no detail as to any of the circumstances that you so ascribe.
Senator CARR --Could you, in your briefing, advise me on whether or not this was a matter that simply involved Mr Moriaty, Mr Blount and office personnel from Mr Packer's office or whoever it is that has undertaken these arrangements on Mr Packer's behalf and whether there was any other advice tendered to Telstra or Foxtel regarding this connection at 99 Spring Street, Melbourne. Thank you very much.
On another matter in a similar vein--it is very disappointing really--I noticed in the press there was a report concerning an allegation that Telstra is continuing to spy on rival companies and former employees but has been forced to change the name of its weekly intelligence bulletin. Is there any truth to those claims made by Mr Clinton Porteous in the Herald-Sun on 7 April?
Mr Ward --It is highly colourful language, Senator.
Senator CARR --You think that is not true?
Mr Ward --We do lots of market surveys, we have lots of market intelligence and we have lots of reports to senior management about the environment, the economy, the market and the offshore markets. That seems to me to be very colourful language for the sort of legitimate commercial market intelligence gathering that Telstra does. It is highly offensive too, I might say.
Senator CARR --Offensive, is it?
Mr Ward --Spying.
Senator CARR --The word `spying' is offensive, is it?
Mr Ward --It offends me, Senator.
Senator CARR --So the report about the internal memorandum to all Telstra's staff instructing them to report any information or gossip on rival companies is untrue, is it?
Mr Ward --I am not aware of such a memorandum.
Senator CARR --Telstra's intelligence coordinator--who is that, by the way? You have an officer called the intelligence coordinator, have you?
Mr Ward --It sounds like an interesting job, a very demanding one. I do not know whether we have such a title as the intelligence coordinator. As I say, across the company, in all of our forms of business, we have market research activity and intelligence gathering on the market, the economy and what our customers want and think of us.
Senator CARR --And rivals?
Mr Ward --Certainly what the market is doing.
Senator CARR --And former employees?
Mr Ward --Certainly that is not relevant to understanding how we are going to go forward in the market.
Senator CARR --So you do not make any inquiries as to what--
Mr Ward --I do not think any of us would have much time, to be honest.
Senator CARR --So the document entitled `Competitive update' has never referred to the operations of other companies in the context of the behaviour, attitudes and involvement of former employees of Telstra?
Mr Ward --I am aware of that one of very many management reports about the environment and competition--
Senator CARR --So there was a management report to that effect?
Mr Ward --The heading you gave of that report I am aware of as one of many.
Senator CARR --`Competitive update'?
Mr Ward --`Competitive update'. I think that is or was a weekly update for senior management, and I certainly cannot recall all of the items.
Senator CARR --Is Mr Allan Chion your intelligence coordinator?
Mr Ward --I understand Allan does work in our retail products and marketing group, yes. He would be one of the people involved in the research that I allude to.
Senator CARR --And he is not known as the `intelligence coordinator'?
Mr Ward --He may call himself that. We have lots of titles.
Senator CARR --Lots of descriptions.
Mr Ward --And lots of descriptions.
Senator CARR --I am pleased to hear that.
Mr Ward --He would have a daunting task if he is `the' intelligence coordinator.
Senator CARR --So he did not write a memorandum indicating that the name of the weekly bulletin of intelligences reports that were put out would be changed from `Competitive update' to `Industry update'?
Mr Ward --I am not aware of any such memorandum.
Senator CARR --Are any of those memorandums available for this committee--`Competitive update' or `Industry update'--since they are just information on the current state of affairs in the industry?
Mr Ward --It would be a collection of intelligence that we have invested in for our market and competitive advantage.
Senator CARR --So you will take on notice any of the questions that you have not been able to respond to. I would be interested to know whether or not Telstra has in fact an intelligence gathering network which reports weekly to Mr Blount and other service executives about the operations of competitors and former employees and whether or not a weekly intelligence report formerly known as `Competitive update' but now known as `Industry update' continues to be circulated amongst senior management.
Mr Ward --I do understand that is one of many reports that are done.
Senator CARR --I asked at previous hearings questions relating to a $12 million underpayment to employees. You responded to me, and I must thank you for your response. However, you would not be surprised to hear that I felt further information could have been provided in that response. Why has there been no allocation for the 1996-97 financial year to meet the underpayments? I understand you still have a substantial debt--close on $11 million--outstanding to employees for underpayments. Is that the case?
Mr Stanhope --How much is owed to employees, the $12 million you referred to, was, as the response said to you, an extrapolation of a desktop study in the first place. There is no allocation specifically for payment of underpayments in the company's budget for this fiscal year. As underpayments are paid to employees, they just form part of the ongoing expenses of the business.
Senator CARR --I understand, from the import of your answer, that you really do not know how many persons are affected by these underpayments. You indicate that some 5,000 staff in Western Australia accounted for half a million dollars in terms of liabilities for underpayment. I wonder whether or not the $12 million figure--the original study was undertaken by senior industrial relations personnel in your organisation--was a sufficiently large estimate of the liability, given the current number of personnel employed by Telstra, including those employed since the study, those who have left Telstra and those who are nonetheless entitled to be paid those moneys.
Mr Stanhope --As the written answer to you states, we decided that the time to pay those underpayments was as they came to our attention through normal processes or if an employee raised the likelihood of underpayment to our attention--and that process is still in place. To provide for an estimated amount does not fit with that process. As people are being paid for any underpayment, as I said, it is part of our normal expenses.
Senator CARR --What action has been undertaken to notify the 20,000 personnel who, from my estimates, are eligible for returns of moneys which are rightfully theirs?
Mr Stanhope --As we discover any underpayments in the normal course for employees, we notify them.
Senator CARR --So you rely upon staff and former staff advising you? You do not actually go out there and say, `This is money that we owe you; here it is.'
Mr Stanhope --What I said was if, in the normal process of going through records, we discover an underpayment, we will advise the employee. With your assistance, no doubt, Senator, an article in the press appeared--
Senator CARR --I am very grateful for public communications in this matter.
Mr Stanhope --As a result of that, there has not been any increase in the inquiries from staff.
Senator CARR --To my office there have been a few.
Mr Stanhope --As I said last time, if an employee or employees believe they have been underpaid, we are only too willing to investigate that alleged underpayment and, if they have been underpaid, to pay them what is due.
Senator CARR --Are you at least prepared to advertise in your own internal publications, such as Our future? Are you willing to alert persons who are employed of the potential underpayments? Have you taken any steps in that regard? Have you told employees that there is the possibility that they have been underpaid?
Mr Stanhope --No, we have not taken any steps to advertise in Our future that anybody who thinks they are underpaid should ring in. We would probably get 60,000 phone calls.
Senator CARR --What action have you taken to alert staff to the potential underpayments? If you have not advertised in your own internal journal, what action have you taken?
Mr Stanhope --As I said, as we identify any underpayment, we will notify them.
Senator CARR --So those persons will get told directly, but you will not put out a general invitation to personnel who meet this particular criterion that they are entitled to moneys owed to them?
Mr Stanhope --I would be surprised if most staff do not realise that, if they think they are underpaid, they can ring the employee relations area and say so.
Mr Ward --I think there is something on all their pay slips regarding any inquiries they may have about their pay.
Senator CARR --That may be the case, but in this specific instance you have circumstances clearly defined and a certain category of persons employed at that particular time who were underpaid. You acknowledge that. You acknowledge the liability, but you do not actually tell people of their entitlements. That is essentially what you are saying. They are required to tell you that they have been underpaid. They have to know that that has occurred. How do they know that has occurred without your advising them that there are these circumstances? To simply read an article in the Age --is that the only way it can happen? That is terrific for the Melbourne readers, but how do the 70,000 persons currently employed or the 20,000 persons that were employed by Telstra since these underpayments were instituted know of their entitlements?
Mr Stanhope --As I said, an employee usually knows when they are underpaid and they make an inquiry.
Senator CARR --So as far as you are concerned there will be no extra resources provided in the pay area, in particular in the employee relations service operations, to manually process these claims?
Mr Stanhope --We do not intend to apply any additional resources to this.
Senator CARR --Perhaps I will take it up further. I will turn to another area. What is the current status of the Optus-Telstra negotiations on cable sharing?
Mr Ward --Senator, we have been and are in discussions with various parties around pay TV operations and associated network considerations. Those discussions are complex. Lots of parties are directly involved and third parties are involved. It is work in progress. That is about all I can say, Senator. Commercial negotiations are in place. It is a complex issue.
Senator CARR --As time is getting away from us today, I will put a series of questions on notice, given the answer that you have just given. In regard to the service provider disputes that Telstra is currently engaged in, would you like to comment on the claims by SPAN that Telstra's typical error levels in their billing is around the 30 per cent mark?
Mr Mead --The position with respect to the billing problems in relation to service providers is complex. There have been problems, primarily in the past, in relation to the billing systems in that the billing systems were not in the state that they should have been when service providers came into the sector.
Those billing related problems are now primarily historical and are not anywhere near the order alleged by SPAN. The difficulties primarily related to operational problems and have not, by any means, been the primary fault of Telstra. Some problems have related to the quality of information received from service providers which was inputted into systems to generate bills.
Senator CARR --Where are you at now in terms of your dispute with service providers?
Mr Mead --There are four pieces of litigation with service providers at the moment. Three of them have been initiated by Telstra; one has been initiated by a service provider. Those pieces of litigation are in the early stages of litigation. In relation to litigation against AAPT, no defence has yet been filed by AAPT, although the time will be shortly due for that.
A defence from Paxus in relation to litigation commenced against them is due, and similarly I think in relation to First Netcom. Litigation in relation to QAW, which is litigation in which Telstra is a defendant, is in interlocutory processes in the courts. I think there was a hearing as recently as yesterday. There is no other litigation. Also, negotiation is ongoing or shortly to be commenced with other service provider debtors.
Senator CARR --This is difficult because the litigation you are currently engaged in does restrict the sorts of questions I might otherwise ask. What was the rationale, in your view, for Austel requiring Telstra to provide accurate billing data services to providers as a precondition for relaxing the regulatory constraints on Telstra's international call pricing strategy?
Mr Ward --Austel were looking forward to the promotion of competition. It was their view that, in order to see a way forward for allowing Telstra to be deemed non-dominant in that market, there was a range of actions they wanted to ensure we complied with and to give by way of undertaking to Austel in a forward looking sense to promote competition as, in a sense, a balance in terms of deeming us to be non-dominant in that particular market, the international market.
Senator CARR --We might come back to this, I think.
Mr Ward --I might just say, leaving aside the particular debt recovery disputes which are of a specific nature, that Telstra is working very actively with SPAN, as SPAN is with us, and the industry generally in the context of both bilateral discussions and the new arrangements the government have put in place for self-regulatory mechanism. There is a lot of positive constructive work going on as the industry goes forward.
Senator CARR --I think I might return to this at the next round, given the difficulty.
Mr Ward --I look forward to it.
Senator CARR --On the call connect issue, please refresh my memory. How does the 50c call connect service differ from the 013 service that has been operating traditionally?
Mr Ward --The 013 service currently is a free service; that is an inquiry to ascertain a number. The call connect product--a product launched last year on the mobile network and recently launched in Tasmania on the fixed network--is seeking the connection of a call to a particular number. So they are quite different services. If my memory serves me correctly, I think the charge is 75c--
Senator CARR --That is going up from 1 September, is it not?
Mr Ward --With a special offer, because of the launch of the product, for 50c up until about that time. That is right.
Senator CARR --So it was introduced at 50c and it is going to 75c from 1 September?
Mr Ward --It was announced at 75c, with a special offer for 50c.
Senator CARR --And it is what--$1 a call for mobile services?
Mr Ward --Yes. I may be incorrect here, but the mobile call was launched at $1, and I think it is still $1, but I am not 100 per cent sure about that.
Senator CARR --Are you still pushing for the 50c charge on 013?
Mr Ward --I think my answer is pretty much as I answered you last time.
Senator CARR --I would like you to refresh my memory; that is all.
Mr Ward --We have floated a proposal in the community about a range of initiatives around directory assistance choices. That, if you like, `informal proposal' has undergone massive consultation with the community through our established consumer consultative processes and also individually with various groups--I think over 100 groups in the community actually.
Senator CARR --And I suppose that there is wide support for it, is there?
Mr Ward --There is a wide level of discussion about various elements of the issue. We have, through that process I think, on the one hand, outlined to communities and customers some of the issues associated with the provision of directory assistance currently and, on the other hand, we have got a lot of views back from the community to help us in our considerations.
Senator CARR --So you are continuing with your push for that charge. Is that the answer?
Mr Ward --We are continuing to consider that issue, yes, and we are still consulting.
Senator CARR --Minister, have you changed your mind on this matter? Are you still of the view that this is not going to happen?
Senator Alston --I have no idea whether a proposal will ultimately be put to government. It certainly has not been as yet.
Senator CARR --I understood that you had made a commitment that it would not occur. Have I misunderstood you?
Senator Alston --No, I think you would probably recall as well as I do that statements were made by both the Prime Minister and me on this matter. Mr Howard: `Telstra will not be doing anything in this area that is contrary to pre-election commitments.'
Senator CARR --Does that mean it will not happen?
Senator Alston --It means that we will have to judge any proposal that is put before us against that statement.
Senator CARR --I am sorry, again I am having trouble following this because of this particular style of speaking, Minister. I understood that you made a commitment prior to the election that it would not happen. Are you now saying that you are reconsidering that position?
Senator Alston --I have just told you that Mr Howard made a statement on 12 February, and I think I made a similar statement shortly thereafter. We have not had anything put to us by Telstra, so this is a hypothetical debate in any event, but if any proposal does come to us then it will be assessed against that statement.
Senator CARR --But if Telstra are actively canvassing this issue--
Senator Alston --I do not know what they are canvassing. All I have heard is that they are having active discussions with a whole range of consumer groups and other interested parties. There is not much point in me passing judgment in vacua.
Senator CARR --Mr Ward, when do you intend to put a proposal to government?
Mr Ward --We have not put a proposal to our board yet, so the timing of a proposal to the government is certainly a little time away. We have to go to our board first. When we feel that the consultative processes we are going through are at a reasonable stage where we can form a view that management can take to our board.
Senator CARR --Are you anticipating a time line on that?
Mr Ward --I think, if we are to take a proposal to our board, the consultation process that we have has now gone on for a few months and I think we have probably near to exhausted the level of dialogue we can have about one particular issue.
Senator CARR --Given that you are near to exhausting the level of dialogue that you can have on this matter, does that mean it will go to the board shortly?
Mr Ward --I would anticipate that we would be involving the board in the near term. I cannot say precisely when.
Senator CARR --So you cannot say that it will go to the board at the next meeting?
Mr Ward --It may go to the board in the next meeting; it may be that early.
Senator CARR --Or the one after. There is a meeting in May. When is the next board meeting? There is one a month, isn't there?
Mr Ward --There is one about every six weeks, so the next one may be early July. I do not know whether Mr Stanhope knows.
Mr Stanhope --I do not know the precise date.
Senator CARR --So you anticipate that, if the board agrees with your consultations, the proposition will then be put to the government?
Mr Ward --That would be the next step, should the board decide that they wish to pursue a proposal.
Senator CARR --Has there been less demand for the 013 service since you have introduced the call connect facility--less demand for 013, the free service, the free directory service?
Mr Ward --Yes, I understand the question. I do not believe so. But the national call connect service was only launched, I guess, about two weeks ago, so it is probably a bit early to judge. But I suspect that, to date, that cross-impact would be quite low--and I suspect that cross-impact would be quite low over time. There are two different services: one is a request for a number and the other is a request for a connection.
Senator CARR --What impact will the call connect service have on the operations of the 013 service?
Mr Ward --They are different services.
Senator CARR --Yes, I understand that.
Mr Ward --I do not think there will be any impact.
Senator CARR --So you say that the quality of the 013 service will be maintained?
Mr Ward --It is a very important service to us, Senator--a very important service. It is a window to the community, and our performance in that area is of extreme importance to us.
Senator CARR --But, given that it is of such importance to you and that it provides you with a window to the community, why are you not meeting the service standards that you yourselves have set?
Mr Ward --We are continually striving to meet the targets that we have set. I think our performance in directory assistance, given the growth in the service--it has been growing at something like 22 per cent or 25 per cent per annum, which is an extraordinary volume of calls--has overall been quite good. We continue to strive to do better.
Senator CARR --So when Austel, in its latest report, indicates that 60 per cent of calls to 013 were answered within 10 seconds--well below the government's and Telstra's standard of 90 per cent--what do you say to that?
Mr Ward --Is that for a particular month or quarter, Senator?
Senator CARR --No, this is a report that appeared just last month. Again, Mr Clinton Porteous seems to have done a good job here. He has highlighted this to me.
Mr Ward --Outstandingly productive.
Senator CARR --That is right--outstanding. A report appears in the Herald-Sun of 16 April. Is that inaccurate?
Mr Ward --I did not say that at all, Senator. I just do not have that report with me. We have certain months when growth may go well beyond what we expect in that service, and that may well have been a monthly point.
Senator CARR --Perhaps I should ask Austel to comment on your service quality in this regard.
Senator Alston --Feel free.
Senator CARR --That would be the way to go. Thank you very much for that. I have a number of other questions on notice, given that time is running away from us. There is a whole series of questions to do with contracting out and the like. I have some other questions as well for Telstra.
CHAIR --As there are no objections to Senator Carr's questions being put on notice, it is so ordered.
Senator LUNDY --I turn to the issue of timed data calls. I refer to the minister's statement on the Department of Communications and the Arts Web site:
The government is also aware of speculation that Telstra intends to impose time charging onto ISPs for incoming calls originated by their customers or so-called B party charging. This speculation has generated considerable uncertainty in the ISP industry, and this government believes that such charge would create unacceptable burdens for the ISP industry. Any attempt to impose B party charging regime will be prevented.
Minister, how do you plan to prevent this burden under a privatised Telstra?
Senator Alston --These are always matters that the parliament can legislate on, just as in the last package we provided for a guaranteed untimed option for both residential and business and data residential calls. If there is a necessity for further amendment to that legislation, I presume you will be in there supporting it.
Senator LUNDY --Minister, why did you not support the opposition's amendment to enshrine untimed calls for business data, given that what you essentially are saying now is that you would support a legislative change to that effect?
Senator Alston --I did not say that; I said `if the need arises'. You asked me what can be done, and I said that you could move to amend the legislation, but there may be other things that could be done as well if there were a need to do that. I cannot recall the precise wording of your proposal but, essentially, we were not anxious to take away the capacity of business to operate in a commercial fashion, which clearly is what the guarantee of an untimed data call would do. It would enable people to leave a single phone line open 24 hours a day for data transmission, when businesses, virtually by definition, have a capacity to pay something approaching the true cost of the service.
Obviously, any untimed arrangement flies in the face of the underlying cost, and that can be justified on social grounds. I think in this country there has been a tradition of guaranteeing it for voice calls. But there has never been a guarantee of untimed data calls in this country. I suppose it is only a fairly recent development in one sense. It therefore was a matter for decision. We took the view that we should continue to give residential consumers that option because many of them do not have the same capacity to pay as does business, and virtually all of them are not in the game of 24-hour data transmission. I think it is a matter of trying to balance the economics with the social implications, and we took the view that business can afford these things. If Telstra and other service providers overcharge, then I am sure they will pay the penalty.
Senator LUNDY --Putting aside the distinction between residential and business timed data calls, B party charging opens the potential for timed charges to be imposed upon ISPs. Would you be prepared to use your ministerial discretion or power to direct Telstra to ensure that ISPs specifically are protected from B party charging?
Senator Alston --You have to appreciate, firstly, that there is no underlying social reason for a blanket objection to B party charging. 1800 calls are a classic example of where the receiving party not only is happy to pay but also, in fact, initiates the whole regime and volunteers to pay.
Senator LUNDY --I am talking about data calls, primarily with respect to the Internet and Internet connections.
Senator Alston --The other thing that you have to remember is that, if you guarantee a free or an untimed call, then there is still the capacity for the service provider or the carrier to charge a monthly fee which will reflect the true underlying cost structure. I think that is largely what would happen if you put an artificial pricing scheme in place by allowing an untimed data call regime. Therefore, it makes more sense to have people paying on a user basis. In other words, the more calls they make, the more they pay for them; the longer the call, the more they pay.
Senator LUNDY --With the imposition of a B party charging system on ISPs which are providing Internet services, the imposition would be by Telstra upon the ISP from the call that is made from the ISP's client to the ISP.
Senator Alston --We are not going to allow a double charging regime to develop.
Senator LUNDY --How will you not allow it? That is what I am asking. Are you saying that you will use your power to direct Telstra, or will you legislate?
Senator Alston --I suppose we will see what emerges. I am not aware that Telstra is about to even introduce a timed regime. If they do, then we will look carefully at what impact it has. Obviously there is plenty of scope for negotiation with all parties before you resort to either power of direction or legislative amendment. I am not rushing to judgment on it or assuming that there will be a problem.
Senator LUNDY --There is, however, a lot of speculation in that particular industry about the advent of B party charging. You have given assurances, and I acknowledge those assurances, and I have also acknowledged Telstra's assurances in this respect. Given that you all have given assurances that you will not allow this, I want to clarify--perhaps Telstra can respond to this--that they will not seek to impose B party charging on ISPs for data calls either to residences or businesses.
Mr Hambleton --I think we said previously in the discussions relating to the legislation that we had no intention to put in place B party charges for access to Internet services. If you remember those discussions, Senator, I think Telstra had always expressed concerns about other unintended consequences that might come from the guarantee of untimed local calls such as bypass of the access regime either by people using voice services or by people using de facto Internet services. We have said, and I reiterate today, that we have no current plans to put in charges for access to Internet services.
Senator LUNDY --Because of the public concern about it, Minister, how much correspondence have you received on the issue of timed data calls since the passing of the legislation?
Senator Alston --Correspondence that has come to my attention--very little. I am aware there have been something like, I think, 23,000 expressions of concern on the Internet, but they all seem to be driven out of pretty much the same place. Most of what I saw was factually inaccurate. We have taken the best steps we can to correct that, including a world first audio interview that I did on the Microsoft network recently. So, to the extent that there is misinformation around, we have done our best to correct it.
Senator LUNDY --Has Telstra ever intended or ever canvassed the concept of B party charging with respect to ISPs as a general policy approach, given some of the issues you have raised previously about managing of systems, exploitation and congestion and so forth?
Mr Hambleton --At the most general level, whenever we strike a pricing regime for any sort of product, we look at different ways of recovering the total revenue on the product across a number of different aspects. That would be either a connection in the first instance, rental, A party charging or B party charging. The distribution of the revenue recovery across those different elements depends on the nature of the product and whether it is in an early promotion phase or a mature phase.
We do have a number of products that are B party charging. When we look at new products, we look at all of the potential ways in which the total tariffing regime could be struck. So I guess as a general principle, be it the Internet or anything else, we consider whether B party charging would be an appropriate element of putting that product in the marketplace. Having said that, I think we would then acknowledge that we have looked at the potential that B party charging would have on data services, be it the Internet or other types of data services.
Senator LUNDY --So can you say, for example, you will not enter into any arrangements to impose B party charging on ISPs within a certain period of time, say, 36 months or something like that? Are you in a position, given that you have obviously assessed it, to give those sorts of guarantees to allay some of the public concern about this issue?
Mr Hambleton --I do not think we are in a position to give a time frame today. We have looked at all sorts of alternatives of how we could put at rest some of the public concern. We try to do that by giving an assurance that we have no plans at the current time to put in place B party charging. We have also acknowledged, I think, in previous sessions that the network requirements to do that are not yet in the network and, in any event, will not be available for some time. So we do not have the physical capability at the present time.
Senator LUNDY --But you are not prepared to say that it will not be considered or it will not be done in the next 12, 24 or 36 months? I think it would help the situation--that is all.
Mr Hambleton --I understand it would help in giving guarantees to the marketplace, but at this stage it is just too early for me to give a guarantee of that type.
Senator LUNDY --I have a question on the products that Telstra is offering for Internet connection services. Can Telstra guarantee that there will be no conflict of interest or cross-subsidising on those services, given that you are both a supplier and a competitor in the Australian Internet industry with respect to service connections?
Senator Alston --I think you will find the ACCC will have an independent view of that.
Senator LUNDY --Minister, it is interesting that you raise that, because in placing some questions on notice to Telstra previously I asked whether or not Telstra had approached the ACCC for advice with regard to this. I cannot find a response to that question. I am yet to determine whether or not we did receive one or whether, in fact, there has been some blockage in the system. Perhaps you could advise me, Minister, whether or not you think it is a very good idea for Telstra to formally approach the ACCC for advice on this matter, given that they do both supply and compete in that market.
Senator Alston --It is a matter for Telstra.
Senator LUNDY --No, I think it is a matter for you too. It is a competition matter.
Senator Alston --No, they run the risk. If they think that there is a genuine basis for apprehending the ACCC might intervene, it would be prudent practice to explore the possibilities in advance. At the end of the day, as long as the ACCC has the power to intervene--and I think it has--everyone is on notice.
Mr Hambleton --Senator, perhaps I could add that I believe we did answer the last question on notice. Their response at that time was that we had not formally approached the ACCC for any authorisation or approval of any sort, but we do have dialogue with the regulators. In this case, it has been Austel up until now. Austel is aware of what Telstra is doing. We would expect that in the future we would also have dialogue with the ACCC. It just has not happened formally with the ACCC at this time.
Senator LUNDY --Can you explain, the competitive process, the way that ISPs on-sell bandwidth to their clients? I am aware of the pricing regime that Telstra offers through Telstra Internet for access to their Internet services and that that regime applies both to ISPs and to other customers who subscribe to Telstra Internet directly. Can you explain how you can argue that there is no conflict of interest, given that the cost per megabyte under Telstra Internet and the big pond pricing regime is 19c? Can you explain how you can on-sell that to the ISPs at the same rate--who then have all their equipment to maintain, all the loadings and the services that they supply--but you are not somehow cutting out those players in the marketplace?
Mr Hambleton --Senator, I am not absolutely familiar with the actual numerical value of the tariffs, but the basic principle is that we on-sell to other service providers at the same rates that we sell to ourselves or vice versa: we sell to ourselves at the same rates as we sell to other people. That is principally because we sell the rates under a BCS regime, where we are obliged to pass them on under identical terms and conditions with no discrimination between the acquirers. So at the present time it would be impossible for us to give a preferential or a volume discount that was not based on some demonstrable cost advantage to a service provider.
Senator LUNDY --The point I am trying to make, Mr Hambleton, is that the effect of Telstra operating as a major supplier and a competitor in the industry is effectively creating a situation where Telstra is highly competitive and that there is a genuine concern that the business of ISPs will suffer as a result.
Mr Hambleton --I would respond, Senator, that that concern is one which is monitored by Austel in the way in which we maintain the differences or the barriers between our own value added operations and what we do at the basic carriage service level.
Senator LUNDY --I have another question on Internet protocol addresses. What are the arrangements that Telstra has applied to their Internet service products with respect to an IP address, an Internet protocol address?
Mr Hambleton --I am not able to answer that question at the present time, but I do believe that the Internet addresses are administered by an independent body.
Senator LUNDY --Is it true that, if a client signs up to Telstra's Internet services, the IP address they are allocated through Telstra to that independent body is not able to be transferred if that client transfers from Telstra to another service provider?
Mr Hambleton --I am not able to answer that question. I will take it on notice.
Senator LUNDY --I have some questions on the mobile charging rate. Quite some time ago there was some media comment on Telstra's decision to charge more for calls from Telstra phones to non-Telstra mobile phones. Following on from that, will higher charges be introduced for Telstra phones calling all non-Telstra connection points on other phones, not just mobiles?
Mr Ward --Can you repeat the question, Senator? Not all of it; just the punch line.
Senator LUNDY --Will higher charges be introduced for calls from Telstra phones calling telephones that are connected to a non-Telstra carrier?
Mr Ward --For mobile services?
Senator LUNDY --Not just mobile services; other services as well.
Mr Hambleton --It is highly likely. Even the current one would reflect the different costs that would be incurred dealing with different types of carriers either in different markets because they would be fixed or mobile or because they have different volumes of business with us or different types of technical interfaces. As we go towards cost based access and interconnection principles, I think that would be an outcome which would naturally derive.
Senator LUNDY --Does the technology exist to make all of those distinguishments between services provided by different carriers for billing purposes?
Mr Hambleton --Basically, it would come down to either a commercial agreement struck between the carriers or carrier service providers or, in the case of a commercial agreement not being struck, an arbitration by Austel or, in the future, ACCC. But, either way, the outcome of the commercial negotiation or the access operation would be on a cost basis.
Senator LUNDY --You were talking about your strategic plan and business plan earlier on. With respect to the cable roll-out that Telstra has been engaging in--$4 billion worth of cable roll-out--can you give me some information about the business plan that justified that whole process?
Mr Ward --That is a big question. Obviously it involves quite a lot of commercial supporting information. I am not too sure how I can answer it in any detail in this forum.
Senator LUNDY --Was there a business plan in place that canvassed and identified all of the issues relating to that roll-out?
Mr Ward --Certainly. A business case supporting the broadband cable roll-out went to our board after a lot of consideration and was approved, and we do regularly look at the achievement of the business case parameters with our board.
Senator LUNDY --Can the minister advise the committee as to the progress of the customer service guarantee for telecommunications?
Senator Alston --As I understand it, Austel has been asked to consider a draft direction from me and to advise. On that basis we should be in a position to shortly determine what the appropriate arrangements should be.
Senator LUNDY --Can you give a time frame for that?
Senator Alston --Direction should be finalised mid-June.
Senator LUNDY --Mr Ward, could you provide an update with respect to the Phnom Penh project? Telstra had an Internet access project in Cambodia. Can you provide any information to the committee about how that is progressing?
Mr Ward --No. We have all gone to ground there. I am not aware of it. I am fascinated and I will follow it up.
Senator LUNDY --So am I. Just going back to the business plan for the broadband roll-out, is it possible for you to table that for the committee?
Mr Ward --I suspect the answer to that is that we cannot. That was very much a commercial business plan in terms of its competitive elements.
Senator LUNDY --Can you give the committee an update on how the plan is proceeding?
Mr Ward --I do not have any recent details of the performance against all the elements of the plan, but I know the board did review it some time towards the end of last year.
Mr Stanhope --It is on track with respect to the number of living units passed, and its expenditure in terms of capital and expenses. It is running in accordance with the business plan: $1.3 billion has been spent in capital and about $1.7 billion in the total spend. That is about where we expect it to be at this point in time.
Senator LUNDY --Is that being reviewed in light of the issues raised by Senator Carr earlier and the imposition of carrying a larger debt?
Mr Stanhope --Not specifically. The capital expenditure program in total, which includes the investment in the broadband network, will be viewed as a whole. It is but one part of our capital investment program. As we review the whole program in this current round, it will come under scrutiny as well.
Senator LUNDY --Given the rate of growth in the mobile phone sector per annum, what sort of capacity is Telstra's current spectrum ownership in managing your mobile network running at currently? What percentage is being utilised?
Mr Ward --I cannot answer that. Perhaps Mr Bundrock can.
Mr Bundrock --Could you repeat the question?
Senator LUNDY --With respect to Telstra's current ownership of spectrum, what percentage of that is being utilised? Can you give the committee some information about expected growth rates, given the growth of the mobile network generally?
Mr Bundrock --One hundred per cent of that spectrum we have licence to use is actually put into operation right around Australia. This includes both the AMPS spectrum and GSM spectrum that we use. The growth rate in mobiles is starting to come back from the very high levels of over 50 per cent per annum. It is more below 30 per cent now I think, and we assume this will taper off over time. It is starting to mature now that we are reaching very high levels of take-up in the population.
CHAIR --I would like to thank the officers of Telstra for their attendance today.