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Thursday, 20 June 1996
Page: 2004

Senator MICHAEL BAUME(7.34 p.m.) —On Tuesday in this chamber I raised a series of problems about the JORN project of the Department of Defence, in which Telstra is the major contractor. These concerns emerged out of an Auditor-General's report into the progress of this $1.1 billion contract. I rise again tonight to deal with it because of some matters that have been raised in the media as a result of that Auditor-General's report and the speeches made by Senator MacGibbon and me on Tuesday. I also rise because a more detailed reading of that audit report, which I have had since then, increases my concerns about the extent to which neither the defence department nor Telstra have, it appears to me, come fully clean on what the situation really is. How much of a loss does Telstra really face? What sorts of cost overruns are there really in this multi-billion dollar contract?

We are well aware of the fact that the 1994-95 annual report of the defence department was criticised by the Auditor-General for saying that JORN, the over-the-horizon radar program, design activity is nearing completion, confidence that the specifications would be met was high and the radar hardware was in production. The fact is that the situation is nothing like as cheerful as that. The matter is very much behind time, over cost and so on.

According to the Auditor-General, Defence explained that the comments made in that annual report were made on good faith on the basis of advice before Telstra's JORN technical audit report became available late in 1995. As I said on Tuesday, the audit office considers that Defence needs to pay more attention to public accountability for expenditure of public funds and the basis of its comments about JORN in its published annual report. This is evident from the fact that over previous years it was clear to Defence and Telstra that this contract was not going well and it was well behind. There were indications as early as 1992. The Auditor-General deals with that at some length.

What also concerns me—perhaps probably more than this failure by the defence department to come clean in its annual report—is the failure of Telstra to mention this $1.1 billion matter, in which it is the prime contractor to the tune of $800 million, in its annual report. It might argue that the damning remarks were made after its annual report was closed off. That is simply not so. There have been substantial comments about this matter on internal Telstra reports, which surely would have come to the attention of the people preparing the annual report and the chairman who signed it off and the chief executive who had some lengthy statements in this report. For example, the Auditor-General reports on page 22:

The lesson to be learnt from this is that risks associated with complex work handovers should have been identified and reduced long before 1995, as they were reported to the JPO in Telstra's Risk Management reports of 13 March and 1 June 1992 . . . Instead, the contracting team problems remained significant despite senior executive representations by Defence in 1993 and 1994. One of the key adverse findings in the contractor's JORN Technical Audit report in 1995 was the degree of diffused and avoided responsibility within and between the contracting teams.

What strikes me as of major concern is that the directors of Telstra state in their annual report, dated September:

The Directors are not aware of any matter or circumstance that has arisen since the end of the financial year that in the opinion of the Directors has significantly or may significantly affect the operations—

of Telstra. It continues:

. . . the results of those operations or the state of affairs of the Economic Entity—

that is Telstra—

in subsequent financial years.

Quite frankly, that is just bunkum. They knew that this potential multimillion dollar loss was there to the extent that they even described it as follows in Telstra's response to the draft of the report which the Auditor-General showed them:

Telstra's initial inexperience served only to compound this situation.

That is the problem of a badly constructed contract. Telstra continued:

As such a fixed price, fixed schedule contract was clearly inappropriate and Telstra believes it will continue to incur unreasonable losses until this issue is resolved.

Unreasonable losses, according to Telstra itself, yet there is not one mention of that in its annual report, not one mention of it to the Senate committees that have, over time, inquired either during the estimates process or in the annual report process and not one word from Telstra during the time of the previous government about the potential for multimillion dollar losses. Much to my astonishment, the Sydney Morning Herald today reports a Mr Morrison, who is apparently in charge of this project in Telstra, as saying:

Telstra remains confident that it could deliver a radar working to specifications despite the delays arising from software development.

The paper continues:

Without further technical hitches, he believed the company could also break even on the contract it won in 1991.

Either Mr Morrison, in his comments to the Herald , was being excessively hopeful and cheerful, or the Telstra response to the Auditor-General in which it said that Telstra believes it will continue to incur `unreasonable losses' was being excessively gloomy. Perhaps one of them is just plain wrong and misleading the Australian people. This sort of thing is absurd. I notice also that Defence officials, according to the Herald story, say:

Telstra could be forced to spend up to $125 million over the contract price to deliver the network that is designed to become Australia's `trip wire' over a huge arc to the north of Australia.

With all these differing views about the exposure Telstra has to this enormously mismanaged contract, I think it is about time we had some truth. It is about time Telstra came clean. I know that might be something that Telstra does not like doing much because it still has this monopolist approach and attitude to saying anything to anybody. Senate estimates committees have had great difficulty getting the facts out of Telstra. To see the dimensions of the problem, the Auditor-General's report says on page 23:

The Commonwealth has to bear the impact of this problem, the likely cost of which is partly indicated by Defence's payments to the contractors for JORN Project Management. These payments have now reached $130 million, $56 million above the $74 million target price of this component.

That is a 75 per cent blow-out of some substance. I do not know to what extent GEC Marconi is a subcontractor, but they have had to restructure Telstra and GEC Marconi have restructured themselves. It is worthwhile noting that, when he was minister, Senator Ray was not terribly convinced about the assurances he continued to get that everything was going well. In fact, at Senate estimates on 2 June 1995, when he was asked how the project was going, he said:

I have talked to GEC Marconi and I went and saw Lord Weinstock at the very top. The latest weasel words . . . are that they are running on time with it.

Obviously, Senator Ray was quite right to be cynical about whether or not this thing was going as it should and as he was told. (Time expired)