Background and Context

1. In 2002, the Government commissioned the Regional Telecommunications Inquiry (RTI) to independently assess the adequacy of telecommunications services in regional, rural and remote Australia. A specific term of reference was to assess barriers to accessing higher bandwidth (broadband) services.

2. In response to the RTI, the Government established the $107.8 million Higher Bandwidth Incentive Scheme (HiBIS) in June 2003. The HiBIS program was to cover the four-year period from 2003–04 to 2006–07. The program provided registered internet service providers with incentive payments for supplying broadband services in regional, rural and remote areas at prices comparable to those available in metropolitan areas. Over 1.3 million dwellings were eligible to receive HiBIS broadband services. The minimum requirements for HiBIS broadband services were a peak download/upload speed of 256/64 kilo bits per second and usage allowance of 500 mega-bytes per month. The Department of Communications, Information Technology and the Arts (DCITA) administered the HiBIS program.

3. In response to the greater than expected demand for HiBIS services, the Government:

• allocated a further $50 million to the program in June 2005 and reduced the program's timeframe to December 2005; and
• established the $878 million Broadband Connect (BC) program in August 2005, which effectively extended the HiBIS incentives for a further three and a half years to 2008–09. The first stage of BC ran from January to June 2006 and the second stage from July 2006 to March 2007.

4. DCITA paid claims totalling over $272 million to 51 service providers for approximately 160 000 HiBIS and BC Stage 1 customers connected between the start of HiBIS on 8 April 2004 and the end of BC Stage 1 on 30 June 2006.

5. In response to the risks identified by DCITA and others in mid-2006 that the BC program may not meet its objectives in the future, the Government initiated the $600 million Broadband Connect Infrastructure Program. This program is to encourage the further take–up of affordable broadband services in under-served areas of regional Australia. A small number of major projects of significant scale and service coverage will be funded under the Infrastructure Program.

6. In April 2007, the Government also commenced the $162.5 million Australian Broadband Guarantee program to provide a smooth transition from BC Stage 2 to the BC Infrastructure Program. The Australian Broadband Guarantee program operates in a similar way to the HiBIS and BC Stages 1 and 2 programs. It makes any Australian resident or small business that is unable to access broadband services at their principal residence eligible for a subsidised broadband service.

7. The audit objectives were to examine if:

• DCITA had effectively planned and administered the HiBIS and BC Stage 1 programs; and
• the programs had achieved their objectives.

The audit focused on DCITA's activities to support the planning, implementation, monitoring and reporting of HiBIS and BC Stage 1 programs.

Overall Audit Conclusion

8. The HiBIS/BC Stage 1 programs have achieved their objective of providing broadband services to regional Australia at prices and functionality comparable to those in metropolitan areas. The programs have also promoted competition among broadband service providers and effectively targeted those areas in regional Australia with the most need.

9. DCITA established an appropriate management framework to administer the HiBIS/BC Stage 1 programs. The guidelines were comprehensive and provided a sound basis to guide the day-to-day operation of the programs. Regular data speed testing was a particularly valuable initiative to ensure that providers continue to deliver quality services to customers. However, the programs lacked a project implementation plan and risk management strategy that would have assisted DCITA to better identify and manage the programs' risks. Consequently, for much of HiBIS/BC Stage 1, a lack of administrative resources led to inadequate controls over the assessment and payment of provider claims.

10. Customers, providers and DCITA each have responsibilities for assessing the validity of HiBIS/BC Stage 1 claims. DCITA and providers rely heavily on customer attestations as the basis for determining customer eligibility and the incentives paid to providers. However, the extensive eligibility requirements of the HiBIS and BC Stage 1 programs cannot be addressed effectively by customers answering a few simple questions. DCITA acknowledges that, until recently, it was not sufficiently aware of the steps taken by providers to validate customer attestations before submitting claims.

11. The manual checking of providers' claims was DCITA's primary payment control for much of the HiBIS/Stage 1 programs. Although the vast majority of claims were valid, the Australian National Audit Office (ANAO) estimates that between $10.6 and $12.4 million has been paid to providers for invalid or inaccurate claims. The majority of these invalid claims relate to two potential frauds by three providers. In addition, the ANAO identified a number of other issues that may have resulted in providers being paid for other potentially invalid or inaccurate claims. These claims were not costed, as DCITA did not possess sufficient information to reliably quantify their impact. In 2006, DCITA automated its claims checking process and established a program of recurring audits of providers. These measures have improved the claims validation process and will help to reduce the likelihood and severity of potential frauds by providers in the future.

12. The ANAO considers that further administrative efficiencies could be gained for the ongoing Broadband Connect-related programs. A small number of major providers submit over 80 per cent of all claims. DCITA indicated that adopting a systems–based approach would complement its current method of validating claims from major providers. DCITA also advised that it would consider reducing its examination of all claims where these providers established a track record of reliable systems and processes to vet their claims before lodgement.

13. The ANAO made two recommendations to improve the integrity of DCITA's claims validation process and the management of the Broadband Connect-related programs.

DCITA's Response

14. DCITA acknowledges and accepts the overall conclusions of the audit report. DCITA considers the report to be well-balanced, acknowledging the successful achievement of a number of important objectives of the programs and making constructive observations and suggestions in relation to areas where controls over assessment of claims for incentive payments could have been improved. DCITA notes that it has addressed a number of the ANAO's concerns in formulating rules and administrative processes for the Australian Broadband Guarantee.

Key Findings

Establishment of HiBIS and BC Stage 1 (Chapter 2)

15. The need for the HiBIS program was well established by the RTI. In response to the greater than expected demand for HiBIS services, the Government extended the subsidies through BC Stage 1 until June 2006.¹ The ANAO reviewed DCITA's implementation strategy for the HiBIS and BC Stage 1 programs.

Project implementation planning and risk management

16. DCITA did not develop and implement a formal project implementation plan or a risk management plan for the HiBIS and BC Stage 1 programs. Although the program area informed DCITA's Audit, Risk and Evaluation Committee that a project implementation plan had been developed and applied for BC Stage 1, this was not correct.

17. DCITA instituted management controls over the programs to address what it perceived to be the risks facing the program. However, the ANAO considers that a project implementation plan, incorporating an appropriate risk management strategy, would have assisted DCITA to better identify and manage some of the risks facing the programs. The lack of appropriate planning contributed to DCITA having inadequate controls over the assessment and payment of provider claims for much of the HiBIS/BC Stage 1 programs.

Program resourcing

18. Resourcing in the context of the HiBIS/BC Stage 1 programs can be considered in two respects: administered (or program) funding available for incentive payments and the capacity of DCITA to administer the programs. The HiBIS and BC programs have required periodic injections of additional funding to meet providers' entitlements. Although HiBIS's original budget was $107.8 million over four years, DCITA will have paid four times this amount to providers as incentives under HiBIS and BC-related programs over the same period. The original HiBIS budget was based on predictions, most notably the take–up rate of HiBIS services by customers, which were all significantly exceeded as the program progressed. DCITA indicated that the rate of take–up of new technologies is very difficult to predict. The ANAO acknowledges these difficulties but considers DCITA's submission to the Government would have been enhanced had it included sensitivity analysis that identified the ‘alternative' budgets that would be required using different assumptions (for example, a range of customer take–up rates) and their impact on the required program budget. Such analysis can assist to inform decision makers of the range of possible outcomes.

19. An internal audit into HiBIS in mid-2005 found that the number of staff implementing the HiBIS program (six) was insufficient, given the program's size and the expected number of providers and customers. The audit report also noted that staff did not have the necessary skills, which could aversely affect DCITA's capacity to manage the program. DCITA advised that its staff administering the incentives component of BC grew from 11 in June 2005, to 25 in December 2005, to 30 in June 2006.

Funding agreements with providers

20. The funding agreements between DCITA and each provider accurately represented the HiBIS/BC Stage 1 terms and conditions published in the program guidelines. DCITA has also strengthened the funding agreements to address shortcomings concerning providers' submission of claims and the limit on funding that any one provider can receive.

Other elements of program establishment

21. DCITA had an appropriate management framework and management information system to support the administration of the programs. It also developed comprehensive program guidelines for the day-to-day operation of the programs and established performance measures to assess the programs' performance against objectives.

Management framework supporting HiBIS and BC Stage 1 (Chapter 3)

22. Customers, providers and DCITA each have responsibilities for assessing the validity of HiBIS/BC Stage 1 claims. Customers are required to provide attestations of their eligibility to providers before accessing HiBIS/BC services. Customers answer a few simple questions and make a declaration that they and their premises are eligible under the programs. Providers rely heavily on customer attestations as the basis for submitting claims to DCITA.

Customer attestations

23. DCITA considers that the attestation forms addressed the most important eligibility requirements. However, the attestations, in isolation, are not a particularly strong program management control. The ANAO found that:

• attestations did not cover some aspects of eligibility affecting a significant number of HiBIS/BC customers; and
• customers may inadvertently, carelessly or deliberately complete the attestation in a manner that makes it appear that they are eligible. The only real sanction for the customer in such circumstances is the loss of a broadband service that they would not have otherwise received.

Verification of eligibility by providers

24. DCITA acknowledges that, until recently, it has not been sufficiently aware of the steps taken by providers to validate customer attestations before they submitted claims. In addition, DCITA's audits of providers in 2006 identified a number of ad hoc and systemic issues. These included providers claiming the incorrect incentive level, and not obtaining or retaining key documentation supporting customer eligibility. Unless invalid claiming by providers is widespread or systemic, the only real sanction for providers who submit invalid claims is the loss of the incentive payments that they would not have otherwise received.

25. In December 2006, DCITA asked providers to inform it of the processes they used to assess the validity of customer attestations before claims are submitted. DCITA is currently pursuing providers who have not taken appropriate steps to validate the eligibility of customers.

Validation of claims by DCITA

26. Prior to February 2006, the primary means DCITA had to verify independently the validity of provider claims was a manual check of claims before payment. The ANAO questioned the effectiveness of the manual checking process as a claims validity control measure, given the small number of staff who examined over 7 000 claims each month (on average). For BC Stage 1, DCITA improved the controls surrounding claims processing by:

• introducing a regular program of auditing provider claims using a risk–based approach; and
• progressively introducing automated checking of customer eligibility into the claims validation process (although DCITA did not achieve full automation until September 2006 in BC Stage 2).

Other program management controls

27. In addition to the controls DCITA had in place for claims processing, the ANAO found that:

• the regular data speed testing program established by DCITA has been a valuable initiative to ensure that providers continue to deliver quality services to customers. Testing results indicated that, overall, HiBIS/BC providers meet the minimum data speed requirements of the programs. The ANAO did not identify any systemic or extended pattern of failed data speed testing results for providers over the life of HiBIS/BC Stage 1;
• providers submitted regular reports establishing their compliance with their obligations under the program. However, as at February 2007, DCITA advised that 85 per cent of 2004–05 and 2005–06 reports had been received and their assessment was well advanced. The early identification of provider issues or problems is more likely to lead to an earlier resolution; and
• DCITA began a mid-term review of HiBIS in mid-2005. The review was never finalised as it was overtaken by the development of a submission to the Government to extend the program (into what later became BC). Nevertheless, an advanced draft report identified a number of suggestions and recommendations that DCITA took into account in designing and implementing BC Stage 1.

Assessment and payment of HiBIS and BC Stage 1 claims (Chapter 4)

28. DCITA paid claims totalling over $272 million to 51 providers for approximately 160 000 HiBIS and BC Stage 1 customers connected between the start of HiBIS on 8 April 2004 and the end of BC Stage 1 on 30 June 2006. The primary HiBIS/BC eligibility requirements relate to the registration of providers and their services, the types of customers, and the location of premises. The ANAO found that:

• DCITA registered providers and services according to the requirements of the HiBIS/BC Stage 1 guidelines, except for the maximum prices providers could charge customers for their Added Value Services.² The ANAO found considerable variations in providers' pricings for the same services, which was often in the thousands of dollars. The ANAO considers that greater attention to the pricing of Added Value Services during DCITA's assessment of these services could improve the outcomes for customers and for the programs;
• the broad eligibility requirements for residential customers (who comprise over 90 per cent of all HiBIS/BC customers) mean that it is likely that the vast majority claimed by providers are eligible. However, DCITA's inability to independently verify the exclusions to eligibility for small business customers (over eight per cent) means it cannot be as certain of the proportion of these customers who are eligible; and
• analysis of HiBIS/BC Stage 1 data identified the payment of over 1 200 claims for ineligible premises. In addition, compliance audits of three providers by DCITA identified some 4 000 invalid claims and evidence of potential fraud. The ANAO considers that these potential frauds could have been detected earlier had DCITA's claims checking process been fully automated at the time the claims were lodged. This may have reduced the severity of the potential frauds.

29. The ANAO considers that the vast majority of HiBIS/BC Stage 1 funding has been paid to providers for valid claims. However, it is estimated that DCITA has paid between $10.6 and $12.4 million to providers for invalid or inaccurate claims.³ These claims are outlined in Table 1.

Table 1: Costed likely invalid or inaccurate claims

Source: ANAO analysis of DCITA data.
a – Pre-existing areas are areas that already had access to metro-comparable services at the start of HiBIS. Only premises in pre- existing areas that could not access metro-comparable services due to technical impairment were eligible. Providers are generally entitled to a standard incentive ($1 400) where the eligible premises had access to Telstra's Integrated Services Digital Network (ISDN) or a high-cost incentive ($3 000) where the premises did not have access to ISDN, at the start of HiBIS.
b – Total takes into account overlaps between the different costed issues, where possible.

30. The ANAO also identified a number of other issues that may have led to providers being paid for other potentially invalid or inaccurate claims. These claims (outlined in Table 2) have not been costed, as DCITA did not possess sufficient information to reliably quantify their impact.

Table 2: Other potentially invalid claims

Source: ANAO analysis of DCITA data.
a – DCITA's geospatial management system could not pinpoint the location of these customers' premises and instead identified a region in which they are located. Therefore, the ANAO is unable to determine whether they meet program eligibility requirements.

Funding limits to individual providers

31. The HiBIS/BC Stage 1 programs limited the amount of funding any one provider could receive to 60 per cent of the HiBIS/BC Stage 1 funding available each financial year (that is, ‘the funding cap'). DCITA anticipated that Telstra would be the only provider that the funding cap would apply to, given the size of its operations. The ANAO found that, over the life of HiBIS, DCITA was obliged to pay Telstra (under its funding agreements) $12.8 million (8.3 per cent) in excess of the 60 per cent funding cap. The ANAO considers that this occurred due to delays in Telstra lodging claims for customer connections, DCITA misunderstanding the funding cap requirements and Telstra's claims against the cap not being properly monitored. DCITA has introduced changes to tighten the funding cap provisions under BC Stage 1.

32. The funding cap control mechanism developed by DCITA does not cater for unregistered wholesale services provided to HiBIS/BC Stage 1 retail providers.⁴ While retail providers receive full incentive payments^5, they also pay fees to the wholesale provider to connect HiBIS/BC Stage 1 customers. However, the fees received by providers for unregistered wholesale services do not count towards the funding cap. DCITA is of the view that any charges paid to wholesale providers under commercial arrangements by retailers should not count towards a provider's funding cap. These charges are not known to DCITA and it would not be in a position to obtain information on them.

Incentives not to exceed providers' allowable costs

33. ‘Allowable costs' is a concept introduced into the HiBIS/BC Stage 1 programs that limits the incentive payments that providers can receive, to the costs incurred by providers to supply HiBIS/BC services. DCITA requires providers to prepare annual Statements of Allowable Costs and have them independently audited. The ANAO considers that this is a good mechanism to manage the risk of providers making windfall profits from the HiBIS/BC Stage 1 programs. However, its effectiveness has been inhibited by a failure to specify the format of the Statements and the audit opinions, a lack of follow–up on outstanding 2004–05 Statements, and delays in reconciling providers' allowable costs to their incentive payments.

Achievement of HiBIS and BC Stage 1 objectives (Chapter 5)

Comparability of prices for broadband services

34. The HiBIS/BC Stage 1 programs have realised their primary objective of achieving prices for higher bandwidth services in regional Australia that are comparable to metropolitan services. DCITA has demonstrated this through:

• benchmarking minimum higher bandwidth services against those offered in metropolitan areas at the start of the HiBIS program. There are also processes in place to maintain the quality of the services. Faster higher bandwidth services are available to customers who are prepared to pay more for them;
• using appropriately benchmarked prices for minimum higher bandwidth services, against offerings in metropolitan areas at the start of HiBIS. Prices have since been reviewed and reduced in light of downward trends in the average pricing of broadband services in metropolitan markets; and
• enabling a significant proportion of those eligible to receive HiBIS/BC Stage 1 services to have access to terrestrial broadband services under the programs. The ANAO considers that the majority of the increased access would not have been achieved without support from the HiBIS/BC Stage 1 programs. In addition, all eligible customers have access to HiBIS/ BC Stage 1 satellite broadband services.

Competition among broadband service providers

35. Further, the HiBIS/BC Stage 1 programs have realised their first supporting objective of promoting competition among higher bandwidth service providers in regional Australia. The ANAO noted:

• an increase in the number of providers in regional Australia;
• an increase in the number of HiBIS/BC Stage 1 areas where there is more than one provider of HiBIS/BC Stage 1 services; and
• some HiBIS providers reducing their prices to match those of competitors.

Targeting areas of need efficiently

36. In addition, the HiBIS/BC Stage 1 programs have largely realised their second supporting objective to ensure efficient use of funds by effectively targeting support to areas of need in regional Australia. The ANAO noted that:

• areas in need of funding support had been appropriately defined;
• controls are in place to manage the risk of providers making windfall profits from HiBIS/BC Stage 1; and
• providers generally received standard incentives for low cost service solutions and high-cost incentives for high cost service solutions.

37. The ANAO also noted that eligible HiBIS/BC Stage 1 customers included those already receiving broadband services at the start of HiBIS that were not up to the standard of metro-comparable services (that is, ‘migrating customers').⁶ However, providers were entitled to full incentive payments for the thousands of migrating customers although the cost of upgrading their broadband services (by increasing their usage allowances) would usually be significantly lower than the costs of servicing new customers. The ANAO considers that it would have benefited the program if DCITA had adopted a lower incentive payment for these customers. The potential savings to the program would have outweighed the administrative costs of establishing and implementing a differential incentive payment for migrating customers.

Reporting of program performance

38. DCITA could have enhanced the public reporting of the programs' performance by linking it to the programs' three objectives and including additional information already held by DCITA to support the programs' performance. This information includes statistics on broadband access and competition, and actions taken by DCITA and providers that have furthered the achievement of program objectives.

Footnotes

1 The subsidies have been further extended to at least June 2008 through the BC Stage 2 and Australian Broadband Guarantee programs.

2 Added Value Services are broadband services that have features or functionality above the minimum standards for HiBIS/BC services.

3 Inaccurate claims are claims that have been paid at the incorrect incentive rate.

4 The programs allow wholesale service providers to sell their services to retail providers who then supply services to HiBIS/BC Stage 1 customers.

5 Retail providers who use the services of wholesale providers share incentive payments when both are registered under HiBIS/BC Stage 1. However, retailers receive full incentive payments when they use the services of an unregistered wholesaler.

6 In most instances, migrating customers had the required data speeds, but had lower usage allowances, commonly 200 MB per month.