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Environment and Communications Legislation Committee
27/02/2018
Estimates
COMMUNICATIONS AND THE ARTS PORTFOLIO
Australian Postal Corporation

Australian Postal Corporation

[09:11]

CHAIR: Hear, hear. On that note, I also welcome officers from Australia Post, and in particular Ms Holgate—welcome to your first estimates. It'll be quite the experience, I'm sure. As it is your first estimates, do you have an opening statement you'd like to make?

Ms Holgate : Thank you. Yes, I would, Chair. May I start by thanking the Senate for the opportunity to be here. I feel incredibly privileged to have the honour to lead Australia Post. I take my role very importantly, and really recognise the importance that this organisation has in the community. I'd like to share with you a few of my insights and learnings since joining the organisation. It's now been almost four months since I've joined, and I've really invested this time to listen and learn, from a broad range of stakeholders and to actually commence a strategic review in partnership with the departments, at which we are two-thirds of our way through. I've met with a very broad range, from senators—as you know—to our post-people, our postmen, our mail-sorting people, our licensed post officers, our unions, our customers—large and small—members of the government.

Interestingly, I'm talking to other chief executives of international post office networks to learn what they're doing to address the challenges that we're facing. Many other people around the world are facing our challenges, and I think we can always learn from others. We've also canvassed the views of the community and of our employees and our broader stakeholder range, and have had over 10,000 people respond to surveys about our strategic priorities, which I think is pretty significant. One of the things that really pleased me was how aligned all the different feedback was from those stakeholders.

If I'd been surprised about anything, it's about understanding the vulnerability of our workforce. Many of our post-people drive motorcycles to do their duties, and this is the most dangerous form of transport. I'm working with our leadership team to make safety of our workforce the No. 1 priority. I cannot ask for our workforce to engage in transforming the organisation unless I evidence, and my leadership team does, that their wellbeing is paramount.

The community research highlights what I guess many of you already know, which is that 85 per cent of Australians believe Australia Post is either extremely or very important in their community. If we look out to regional communities, this only increases—at 91 per cent. In fact, only Medicare is viewed as more important in a community than Australia Post. Australia Post deeply appreciates this. The community see us as an important lifeline for them, particularly as populations age and as banks close down more branches. Just this morning we were told of another branch closure in New South Wales, in a community where the last bank in town closed. Inside the announcement from that particular bank, they said, 'Go to your local post office.' If the post office does not survive in that local community, the people of that community will have no way to conduct their financial affairs locally.

The respect that the Australian community has for our organisation is only matched by that of our own people. In fact, in our staff survey, 99 per cent of our employees said that the purpose of Australia Post was of paramount importance, with customers, connectivity and community being at the very heart of what we do. Their strength of conviction gives me great faith that our employees both want and are willing to go on a change journey. But, even if the community love us and our employees, we have significant challenges ahead of us, and change and transformation is urgently required. Our letters business remains very important to us. It was, last year, about $2½ billion of our $6.6 billion of revenues, but it has declined by 26 per cent in volumes in the last three years. We've always had a very successful parcel business, but it has become increasingly important. Our parcel business, though, operates in a competitive environment, with our largest competitors owned by foreign overseas companies. We need to recognise that, if we are to continue to win in this part of the market, it's important that we continue to develop our proposition, we're more timely, we introduce more tracking options and we're able to compete.

Ecommerce is booming in this country, but it's also booming in the international trade. One very interesting insight for my team and I is that inbound parcels to Australia are up 45 per cent, and 90 per cent of this growth is from China. This is a part of ecommerce that perhaps many people in Australia are not actually seeing. It reflects a significant opportunity for Australia Post, and, while we have a large market share of the inbound market, we have only a very small market share of the outbound market. It will be very important in the years ahead that we address that, not only because we don't want to make our competitors even stronger but also because it's important that we service the needs of the Australian people.

We have, as many of you remind me, an incredible network of Australia Post offices—approximately 4,400, just under 800 of which are company owned and 3,600 of which are either licensed or community agents. I am deeply inspired by our licenced post office partners. Many of them have mortgaged their homes to wear our badge and service the community. But I am concerned that 1,300 of these post office partners earn less than $50,000 a year from Australia Post. Of course, they have many other businesses, and we are often a business within a business. But the viability of these post offices is critically important if they are to remain in the community and keep servicing the people of Australia like the community has told us they definitely want us to be.

The significant decline of letters has changed what they do and how they are paid for their services, but what we have seen is that they are doing many new roles. It is of interest to me that last year this post office network that transacts over $50 billion in financial transactions sold $270 million of merchandise, processed 85 per cent of all new passports in Australia and was one of the largest sellers of mobile phones. It's a network that costs Australia Post over a billion dollars to run, and yet it is loss-making because many of the new services that we are doing at the moment do not generate a significant revenue, or enough revenue, to compensate for the fall in letters and traditional services we were once paid for.

I would put to you, Senators, that I believe that, with an ageing population and these bank branch closures, it is critically important that I work with the government to find a viable future, and I would say both our banking partners and, in fact, all members of government have been very supportive in us looking at options to do that.

The post office network does require investment, but it is, as I said earlier, essential that we create a prosperous future for it. We have conducted a detailed financial analysis of Australia Post, and this clearly indicates that, if we strip out some of the unusual and one-off items, our profitability in the last few years has declined, but we have remained profitable. We estimate that, stripping out these unusual items, our profit last year was approximately just over $35 million, which, as you can see, is less than half a per cent of our overall revenues. That, when you're faced with such significant disruption and change, puts us in a challenging position to maintain our profitability if we do not create change.

Today, later on, we will release an overview of our first half-year numbers this year. The results evidence to me the significant challenge that we have ahead of us. Our overall revenues will be up over two per cent—in fact, almost three per cent—but that masks our parcel volumes being up 11 per cent in the first half of this year, as we had a very strong Christmas trading. Parcel revenues were up eight per cent and actually grew quite far ahead of normal retail growth, which I'm sure many of you have seen from the retailers is growing around two per cent. That is really encouraging.

But our letters volumes are down 10 per cent in that period, and, although we had this incredible growth in parcels, it only just compensated for the decline that we had in letters. The reality is: 65 per cent of our business today is operating in a competitive environment. Our financial teams have worked hard with our business units and have taken out another $113 million of costs in this period. In the past three years, they have taken out $500 million from our cost base, so there is not—may I put to you—low-hanging fruit for my CFO. But, even with all of those cost savings, we are only really just marginally positive at the EBIT level.

CHAIR: I'm sorry to interrupt your flow, Ms Holgate, but we are pretty pressed for time. If you're able to conclude your opening statement, we will proceed to—

Ms Holgate : That's actually almost the end of it, you'll be pleased to know! I just wanted to thank you again for the opportunity, but I do want to highlight to you, whilst we are working very closely with all of our stakeholders, our LPO partners, our contractors, our employees, our unions and our government partners, we have challenges ahead of us, but we are working hard to ensure we have a viable future for Australia Post.

Senator URQUHART: Thanks, Ms Holgate. I've got quite a few questions, so I'm going to try and move through them really quickly and I will ask you for short, sharp answers if possible, just so that everyone gets a chance. I want to open with a brief discussion about Asia. We understand that this is an important area for the business, and some initiatives include the Alibaba partnership through Lazada, branded online storefronts for Australian products, the Aramex joint venture and so on. So I was somewhat surprised with the response to question on notice 64 from the last estimates. We asked how much revenue did Australia Post generate from Asia in the past three years. The response indicated that revenue had only grown from $65.8 million in 2014-15 to $66.5 million in 2016-17. That's about one per cent of growth over that space of three years. So can you talk me through that result and put it in context if I've misinterpreted it?

Ms Holgate : I think those figures are probably roughly correct. I think, when you look at our international revenues, what's happening—almost like the rest of our business—is that there's a significant change of the mix happening within them. It's a little bit like our trade figures, which I'm sure our minister could talk on better than me. Our trade is changing. Historically, trade was very much about the US and the UK and Europe, which actually are much more higher-generating revenue lines. In more recent periods of time, our trade is much more dominated by China and Asia. That's actually very similar to our letters and parcels, reflecting the changes in our population. So our volumes may have increased, but the revenues have held still. I would also note that inbound parcels for China are actually loss-making to Australia Post at the moment because China has successfully negotiated that they are a developing country.

Senator URQUHART: Given your experience from your previous position in Blackmores and what you've observed so far at Australia Post, what are the opportunities in Asia?

Ms Holgate : I think they're pretty incredible. We probably have 90 per cent of inbound revenues, but we have probably 10 per cent of outbound. That means there is 90 per cent of outbound traffic to these major players which are actually being serviced today by other people. I know from working with organisations like Austrade that there are many small businesses in Australia who are really asking us to step up and help Australia Post be that partner. I think if we're able to do that, and do it cost-effectively, it is an opportunity to both serve the people of Australia and to support future growth in the company.

Senator URQUHART: What's holding business back in this area at the moment? What changes do you plan on implementing to grow that presence within Asia?

Ms Holgate : The first thing is, in fairness, I think the company's had a very strong domestic focus. It is its first priority, after all. I think they've done a really good job of doing that. As you know, international trade has actually become a much larger part, even impacting our domestic partners. It will get a lot more focus under me. We are actually separating out the resources that support our international business and having them report directly to me. We are working with new partners to ensure that we can actually provide those services cost-effectively. Historically, our prices have been too high, perhaps, to actually support that. We need to look at alternative ways of doing it. Otherwise, we won't grow.

Senator URQUHART: You mentioned LPOs in your opening statement. I don't think there have been too many Senate estimates where I haven't asked about LPOs. I have previously asked about the competition between Australia Post's in-house corporate marketing and LPOs. The story on A Current Affair repeated allegations that have been previously aired in this committee that products are being sold online by Australia Post's corporate marketing staff at a cheaper rate than LPOs can actually then sell the same product. Why is Australia Post undercutting its own licensees, and what will you do to stop this? I believe that your predecessor and his management did not actually do anything to stop this.

Ms Holgate : The first thing is that the majority of the products that are sold for the post office actually have regulated prices, so we're not allowed to discount them. I'm very aware of the complaint from licensed post offices, and it's regarding our merchandise, which is about $60 million of the $500 million, just to put it in context. It is, however, important. Many licensed post offices say to me, 'Christine, we would love to have the benefit of buying your merchandise to help us with our other sales, but actually we fear that it will be discounted in your own stores as soon as we've bought it.' My personal view is that we really need to revitalise our whole merchandising strategy. We're currently in the process of doing that and working with perhaps some our biggest customers to actually look at ways we can de-risk our own business but be able offer an even broader variety of products to both licensed post offices and our own people. Consumers don't know if you're a licensed post office or a company-owned store. It's really important that we treat all our partners equally.

Senator URQUHART: How much does an LPO make to process a parcel?

Ms Holgate : It depends. I believe it's around $1.80.

Senator URQUHART: Does Australia Post consider that sufficient for an LPO to cover the costs of doing that business?

Ms Holgate : At this moment in time we are currently going—actually, we have commenced—a detailed review of all their prices and charges. I'm very aware of the feedback from LPOs raising the concern that it isn't sufficient. We are looking at that costing, as I speak. I think it would be misleading of me to make a judgement on that today, but I'm happy to take it on notice and come back to you when the outcomes of that review are completed.

Senator URQUHART: That would be great. What representations have LPOs made to you in relation to their viability in your role now as the new CEO?

Ms Holgate : I've met with both licensed post office groups—I've probably met 500 licensed post offices, and, just last week, I was at their stakeholder committee. I think it would be fair to say many licensed post offices are doing very well, but they're generally the post offices in the metro areas. It's the licensed post offices in the regional areas which are struggling. What we need to do is create a range of new and viable services for those post offices to ensure that they continue to prosper. That is exactly what we are working with, with our many partners at the moment. As I said earlier, I'm happy to come back in April, or at a later time, and share with you the outcome of that review.

Senator URQUHART: I've got a few more questions. I'll put a couple on notice. I'm interested in you taking us through increases in payments to LPOs since the Senate committee report and the feedback that you've received from LPOs on those increased payments. That may be something you can take on notice for speed as we move through the morning. Can you outline to the committee how you will consult with licensees as a part of the broader strategic review? Will that just be with POAAL and LPOG? Some licensees are not a part of those groups, so how will individual licensees be included in both the comprehensive review of the licensee payments system and the strategic review?

Ms Holgate : I have actively engaged with both of the major licensed post office groups and, as I said earlier, I have attended, last week, our licensed post office stakeholder group. I also put out on our website, which supports our licensed post offices, the opportunity for our licensed post offices to write to me and give me direct feedback. I have visited over 500 post offices since I've joined Australia Post, so I've met many people who are members and who aren't members of either of those groups. I think I do have an appreciation of their challenges. I just don't have all the answers yet in how to deal with solving them. But I'm 100 per cent committed to finding a viable future for them.

Senator URQUHART: I just want to move off LPOs, because I'll put some of those questions on notice. I want to refer to last year's sale of the Sydney GPO building by Australia Post. Are you able to confirm the sale value, or is that commercial in confidence?

Ms Holgate : Because that happened before my time, can I just ask my colleague?

Senator URQUHART: Absolutely. Yes.

Mr Blake : We can take it on notice, but we believe it was around $150 million for the residual interest.

Senator URQUHART: Has the government indicated to Australia Post that it expects to receive a larger dividend as a result of the sale of the Sydney GPO?

Senator Fifield: The dividend arrangements are agreed between the shareholder, ministers and Australia Post. Australia Post can speak to what is anticipated by way of dividends. We just need to check if that is something that is yet in the public domain.

Senator URQUHART: But my question is: does the government expect to receive a larger dividend as a result of the sale of the Sydney GPO?

Senator Fifield: How the dividend is determined—there are many factors involved. I'll happily have Post take us through that. As I say, I just need to check whether the expected dividend is yet something that's public.

Senator URQUHART: I'm not asking you as minister for the figure. I'm just asking whether you are expecting to receive a larger dividend? If you don't know, that's fine.

Senator Fifield: There are a range of factors that go into the dividend. Australia Post will be best placed to explain how the proceeds of any asset sales are deployed and whether that is relevant to dividend payments.

Senator URQUHART: Ms Holgate, I'm looking at the earnings summary for Australia Post over the last four years. If we're able to remove the one-off asset and property sales, what is the adjusted underlying earnings trajectory of the business?

Ms Holgate : We believe the trajectory for the last few years has declined, but remains profitable. Last financial year, underlying, excluding the benefit of asset sales and unusual one-of items, was approximately between $35 million and $36 million.

Senator URQUHART: Is that earnings trajectory headed up or down? Where's it headed?

Ms Holgate : It was heading down

Senator URQUHART: In what direction is it headed?

Ms Holgate : In this first half, very shortly, although our earnings will be flat we will be announcing a significant rise in our profit after tax. That significant rise in profit after tax is 65 per cent at this moment and it reflects some of the benefits from previous property sales. However, in the second half of the year, it is very typical for Australia Post to make losses, and we expect that to be the case again this year. We are working hard. We have actually put property sales on hold at this moment—

Senator URQUHART: I was actually going to ask you whether you expect property sales to—

Ms Holgate : but we are working hard to maintain a profit level in line with that reported for last year.

Senator URQUHART: So you don't have property sales on the agenda this year to prop up the headline profit figures?

Ms Holgate : There were already some property sales in the number before I joined, or in process. In the future, we still may need to do something, because buildings sometimes need repair or communities have moved, but in the main we don't want to make business dependent on that to have a sustainable future.

Senator URQUHART: Minister, do you dispute the proposition that the government has sought a higher dividend as a result of the GPO sale?

Senator Fifield: As I say, there are a range of things that go into the dividend.

Senator URQUHART: Yes, I understand that, but is the government seeking a higher dividend because of the sale of the GPO?

Senator Fifield: I can't speak to the impact of individual transactions as it relates to the dividend.

Senator URQUHART: Ms Holgate, on summary, would you provide a summary of the aggregate value of the Australia Post property portfolio each financial year beginning in the financial year 2012 to the present financial year. Based on the analysis of the strategic review that you're undertaking, is Australia Post in a position to continue paying a dividend over the next three to five years if the business model remains as it is today?

Ms Holgate : Dividends depend on making profits. If we do not transform our model, as we are today, then there is significant risk that we wouldn't make profits. I think that would suggest that we wouldn't be paying a dividend.

Senator URQUHART: When does your modelling indicate the business would begin running at a loss?

Ms Holgate : I don't want to put words into the mouth of anybody else, but I feel that it's really important that, as the CEO, I find a new path forward and actually work to transform this organisation and to grow. Unless we grow this business again, then actually we risk not only being able to support our licensed post offices but also the jobs of many of our employees, and we're one of the largest employers in Australia. Right now we are doing that work and, as I said earlier, I'm more than happy to come back in April and take you through the trajectory of how we think we can grow the business. I just want to flag, though, that it won't be plain sailing.

Senator URQUHART: You dealt with some of the questions I have in your opening statement. If there is further information I need, I'll put them on notice. Can you talk me through what the trends mean for the sustainability of local post offices around the country? You may have mentioned the number of closures over the past 12 months. If you didn't, can you tell me how many LPOs have closed over the past 12 months? And has the number of closures stabilised? That's my final question.

Ms Holgate : We can get you the exact number in a moment. It's only a handful. The number of closures has stabilised, but I would say that the licensed post offices are actively looking to me to work with them to find a way that they can have a viable future. We did $50 billion in financial services transactions but we only made $40 million in revenue from it. The banks actually want to work with us to find a way for us to help these communities. I'm encouraged, but we are not there with an answer yet. It was six.

Senator URQUHART: Thank you.

Senator CHISHOLM: I want to go to the Australia Post digital mailbox, but I'm interested in the question from Senator Urquhart around Asia. Are there any conflicts that you have to manage from your previous role to your current role around Australia Post and Asia? Do you still own shares in Blackmores? Is that something that is an issue with Australia Post, in terms of whether it delivers Blackmores into China or Asian countries?

Ms Holgate : Blackmores in China and in all of its Asian businesses has its own operations. No, there is absolutely no conflict whatsoever.

Senator CHISHOLM: On the opportunity that presents itself in Asia, is it completely outward-bound from Australia or does it mean that, potentially, you need bricks and mortar operations in Asian countries?

Ms Holgate : We have an incredible set of assets already. We have a joint venture with China Post called Sai Cheng. This is something very special. We have a bonded warehouse in south of China free trade zones which would enable us to help Australian small businesses create a passageway into China. It is far less complex than a normal business would look at doing. I don't think we need to invest lots in bricks and mortar. It's really about focus and aligning resources.

Senator CHISHOLM: On the Australia Post digital mailbox, could you explain for my benefit and maybe the committee's benefit exactly what that is?

Ms Holgate : On the digital mailbox project, I will pass on to my colleague in a moment because it was a project that was in Australia Post before I joined the organisation and, also, it was closed before I joined the organisation.

Mr Blake : The original idea for the digital mailbox was to provide a secure place for bills, receiving payment and storage. That was the original concept that was developed for the digital mailbox.

Senator CHISHOLM: I understand the project may have run at a substantial financial loss. Can you confirm whether that is the case?

Mr Blake : The digital mailbox has been built over time as a platform to attract consumers and, of course, the idea of a platform is to attract consumers to the platform so that it then becomes a mechanism or a channel through which you can communicate or provide other services. It's hard to look at that platform in isolation. Obviously, it has developed and has continued to evolve over the time that the digital mailbox was being implemented. The prospect, the actual idea of the mailbox, has continued to evolve over time.

Senator CHISHOLM: Sure. But I imagine that it has cost money?

Mr Blake : Yes.

Senator CHISHOLM: How much has it cost?

Mr Blake : We can take that on notice.

Senator CHISHOLM: How much revenue has it brought in?

Mr Blake : I'll take that on notice.

Senator CHISHOLM: Then we'd know whether it's made a profit or not—you do actually have that information?

Mr Blake : Yes, I can get that to you on notice.

Senator CHISHOLM: How does it actually generate revenue?

Mr Blake : It's a two-sided market, so the original idea is that you have a provider who would be paying Australia Post for communication in a physical form and, in simple terms, they would also be paying in a digital form. That was the original concept.

Senator CHISHOLM: So a company would contract Australia Post to use it?

Mr Blake : Yes, but digital mailbox itself has been evolving into a much broader offering from the original concept. But what we could do, Senator, is give you a description of what that product is now in a more detailed form on notice.

Senator CHISHOLM: Has technological change meant that it has needed to adapt, so it's—

Mr Blake : It was an innovation. With all innovations, you develop, experiment and evolve or pivot, which is the language often used in innovation, into something that is continually meeting what the consumers need. Indeed, there are a whole lot of things that came out of digital mailbox, including inspiration for things like digital ID.

Senator CHISHOLM: What sort of factors have contributed to its status at the moment? Were there cost overruns in its development? Was there a misalignment of implementation capabilities or a lack of demand?

Mr Blake : With all innovations, you're continually iterating the idea of, in this case, the digital mailbox. In this instance, it was an example of trying to balance whether you could have enough providers and consumers—I haven't got the number of consumers I think it was about five million at the time—sorry, it was 1.6 million consumers. We got to about 89 providers, and the question is: are you able to provide a match between the number of consumers and what they need from providers, and get the right number of providers on? That's the concept with a platform two-sided market. In any event, things like digital ID will be taken out of that, which is a product that will underpin a whole range of innovative new services for post.

Senator CHISHOLM: I imagine, when you made the decision to develop the digital mailbox project, there would have been a budget allocated towards it.

Mr Blake : Yes, but I don't have that detail with me.

Senator CHISHOLM: But I'm sure you would know whether you have exceeded the budget or it's been under budget?

Mr Blake : I don't have that detail with me, but I can provide detail on notice.

Senator CHISHOLM: But I am sure you'd know whether it went over budget or was under?

Mr Blake : I think we gave information on notice last estimates, or in a prior estimates, on how much has been spent.

Senator CHISHOLM: Was it over or under?

Mr Blake : I can get you details on the original.

Senator CHISHOLM: So you don't know off the top of your head?

Mr Blake : I don't know.

Senator CHISHOLM: Are there any decisions that the Commonwealth could have taken to better support demand for the service?

Mr Blake : As I said, it's a platform two-sided market. The demand is merely a product of whether you can get sufficient providers of both commercial and government services onto that platform. What attracts providers to a market is the same thing that attracts consumers. So, unless you have a sufficient number of providers, you don't get a sufficient number of consumers. I would say that the goal for the digital mailbox was to attract as many commercial providers as well as government services.

Senator CHISHOLM: How did you go attracting government services?

Mr Blake : Well, we obviously engaged quite widely with departments and with government more broadly, as we do on a whole range of services. Digital mailbox is just one channel to the consumer. The core purpose of Post has included, for 200 years, connecting large organisations and governments to citizens and consumers, so it was just one of the many things that we would have been discussing with our large providers—including the big banks and the other big organisations and utility companies as well as government departments providing government services.

Senator CHISHOLM: So it's relatively easy to engage. How many government departments did you actually sign up?

Mr Blake : I don't have that detail with me. I'll get that to you on notice.

Senator CHISHOLM: Minister, are you aware of how many government departments signed up to the digital mailbox?

Senator Fifield: No.

Senator CHISHOLM: What lessons or learnings has Australia Post taken from its experience with the digital mailbox?

Mr Blake : We have an innovation approach at Post. We're looking for learnings all the time from innovation. Of course, you judge what you've learnt from what has come next, and what has come next at Australia Post from innovative products like the digital mailbox includes things like digital identity. Digital identity is a fabulous innovation by Post. In fact, it is arguably world-leading. If you judge it by what has come from it, you would say that there's been an enormous learning and that that learning has been used in developing the next set of opportunities for Post in a digital world.

Senator CHISHOLM: Going back to the budget question, I understand that you're taking on notice the profit/loss aspect of it, but could you give me a ballpark figure about how much was in the budget for the digital mailbox?

Mr Blake : I think that on the question on notice the number was $23 million opex for 2015-16.

Senator CHISHOLM: I imagine there's been more in other financial years as well?

Mr Blake : That's true. But, as I say, as it was developed, it was developed into other offerings as well—or, at least, the learnings and the platform helped enable our capabilities to provide other digital services.

Senator CHISHOLM: Are there any other innovations in the pipeline which you expect will start off in a similar way to the digital mailbox?

Mr Blake : As our CEO indicated, we're going through a review at the moment and some part of that review will be looking at what the product offer is for both our large providers—government and our large enterprise customers—and also looking at what consumers and citizens require, and focusing our efforts. So, I'm sure that we will continue to innovate to make sure that we are able to provide a platform to connect those two groups.

Senator CHISHOLM: Thanks, Chair.

CHAIR: That then concludes us for Australia Post. Thank you very much all for attending, and good luck. We'll see you at next estimates. We will now move to general questions of the Department of Communications and the Arts.