OTHER FINANCIAL COMMITMENTS OF THE STATE

8.131 In addition to the financial obligations commented upon earlier in this Part of the Report, public sector bodies have entered into a number of arrangements which will impact on the future financial operations of the State. At 30 June 1998, the public sector had financial commitments relating to operating leases and works not performed under existing contracts, valued at $2.9 billion (1996-97, $2.6 billion).

8.132 However, as highlighted earlier in this Report and in my October 1997 Report to the Parliament, the above amounts do not include the State’s commitments under outsourcing contracts entered into to provide services to Victorian taxpayers.

Statewide computer network

8.133 The development of a wide-area computer network (WAN) has been under consideration by the Government since 1995, with the Department of State Development proposing to establish a core telecommunications network which provides government agencies across the State with a high speed data communications network to support advanced network computer applications.

8.134 In December 1996, it was agreed by Cabinet that this project should proceed and that budget sector agencies should be encouraged to use these services. Consequently, the Department sought registrations of interest for the delivery of wide area network services to budget sector agencies, which resulted in the receipt of 10 bids from interested parties, of which 3 were subsequently shortlisted.

8.135 While the Department’s analysis of the submitted bids indicated that the proposals were marginally more expensive than the estimated costs associated with the direct provision of the wide area network by budget sector agencies, it was anticipated that, following further negotiations with the bidders, a positive financial outcome would be realised. At the same time, the Department considered that capital funding of around $30 million would need to be made available to agencies to upgrade their computerised systems in order to reduce the costs of acquiring the advanced WAN services.

8.136 The evaluation criteria applied by the Department in the assessment of the bids included the financial impact on the State, the service providers’ capability and the network coverage. It was proposed that the network would be developed and operated by the private sector and would be used by agencies on a fee-for-service basis, to be funded by individual agencies from within their current appropriations. It was also anticipated that budget savings would be derived from the re-engineering of business processes of service delivery to the public.

8.137 A Steering Committee established to conduct an investment evaluation associated with the establishment of the network determined that the preferred option would be to proceed with a whole of government approach to the development of a wide

8.138 In January 1997, Multimedia Victoria, a unit within the Department of State Development, sought a capital funding allocation of $30 million over a 5 year period, comprising $10 million in the 1997-98 financial year and $5 million for each of the following 4 years to June 2002. However, the funding actually approved for application by agencies to assist in the establishment of computing capabilities which facilitate the utilisation of the WAN services was reduced to $5 million during the 1997-98 financial year and $2.5 million for each of the subsequent 4 years to June 2002.

8.139 Following an analysis of the bids received, in August 1997, the Minister for Multimedia was advised by the lead project team comprising representatives from the Department of State Development and the Department of Treasury and Finance that AAPT Ltd should be selected as the preferred bidder to commence final negotiations, given that the pricing mechanism proposed by the preferred bidder provided for prices to fall significantly throughout the life of the contract, as new technology and competition forces the market prices down, which will in turn deliver value for money to public sector agencies.

8.140 In September 1997, the Minister for Multimedia announced that the contract to develop an advanced computer network within the State was awarded to AAPT Ltd. The company will build and own the network at a cost of between $100 million and $150 million over 5 years, with full commissioning of the network to occur by mid-1999.

8.141 A probity auditor, engaged by the Department, reported that the bidders were evaluated and ranked fairly against the selection criteria.

Contractual arrangements

8.142 In September 1997, a Heads of Agreement was entered into between the State, AAPT Ltd and QNET Communications (Australia) Pty Ltd, a subsidiary of AAPT Ltd (the contractor), for the provision of wide area network services over a period of 5 years, from October 1997 to September 2002. Under this agreement, the State has the option to extend the term of the contract for a maximum of 2 additional terms of 1 year duration.

8.143 The key terms of the Heads of Agreement are as follows:

• The State will make reasonable endeavours to ensure that the nominated budget sector agencies, including the Departments of Education (covering primary and secondary schools and TAFE institutions), Natural Resources and Environment, Human Services (including public hospitals), Justice (including Victoria Police), Treasury and Finance, State Development, Infrastructure, and Premier and Cabinet, utilise the WAN services of the preferred supplier. Agencies with existing network services are required to utilise the contractor for the provision of WAN services within 2 years of the commencement date of the agreement;

• Individual agencies are required to pay monthly service charges which are linked to pre-determined standards of service delivery and operation, in accordance with individual Service Agreements executed between the agencies and the contractor. In the event that the contractor does not meet certain performance measures, adjustments will be made to the monthly service charges payable by the agencies;

• During the term of the agreement, neither the State or any nominated budget sector agency shall seek the supply of WAN services from an alternative supplier;

• The contractor shall assume the technical and commercial risk associated with the selection of relevant equipment for the provision of services to each agency;

• The contractor will use reasonable endeavours to market the services to other Victorian government agencies, on terms similar to those available to the nominated agencies in the budget sector, agencies within the Commonwealth government and the private sector;

• The State accepts no responsibility for the costs incurred by the contractor in developing or maintaining the network;

• The contractor shall ensure that, in addition to any obligation arising under individual Service Agreements, the network shall be consistently upgraded and operated in a manner consistent with world’s best practice;

• A mid term review of the States’ requirements for WAN services and delivery of services by the contractor will be undertaken by an independent expert appointed by the Minister in April 2000;

• The State may at any time during the term of the agreement terminate or suspend the agreement in whole or in part, by way of written notification to the contractor. The State may also terminate the agreement immediately, where the contractor is in material default of the agreement. On termination or suspension of the agreement, the State will pay the contractor a specified sum for each year remaining to the expiration of the contract. However, this payment will not be made where the termination of the agreement is a result of a default by the contractor which is not capable of being remedied. In addition, at expiry or early termination, the State may request the contractor to arrange for the transfer of the WAN to alternate service provider(s) or to the State at a fair market valuation;

• If the State determines that the contractor has materially breached its obligations under the agreement, it may appoint an independent manager to assist the contractor in discharging its obligations. For the duration of the appointment of the manager, the contractor will be liable for all reasonable costs incurred by the State in order to mitigate its losses resulting from the contractor’s breach; and

• The contractor and the State have agreed to indemnify each other for any loss or liability arising from a negligent act or omission.

Overall assessment of arrangements

8.144 Under the established arrangements, the contractor will develop, own and operate a computerised wide area network for nominated Victorian Government agencies over an initial period of 5 years, with an option to extend the term by an additional 2 years. The contractor is also expected to market these services to other State Government agencies, Commonwealth Government agencies and the private sector.

8.145 The network will be utilised by the respective Government agencies on a fee-for-service basis. Where the contractor does not provide the required level of service, agencies will be entitled to adjust the service fees payable to the contractor or to terminate the service agreement. In the event of the expiry or the early termination of the agreement, the State has the option to purchase the network equipment at its fair market value. However, if the State elects to terminate the agreement without cause, it will be required to pay the contractor a sum of $4 million for each year remaining until the expiration of the agreement. Accordingly, these arrangements will form part of the State’s commitments under outsourcing contracts for services to be provided.

Accelerated Infrastructure Program 142

Asset sales 29

Asset sales program 31

Assets, financial and other non-physical,

level of 113

Assets, physical 110

Assets, State 109

Audit opinion on the Annual Financial Statement13

Australian Grand Prix Corporation 97

Borrowing composition and maturity profile 132

Borrowings 131

Commonwealth receipts 84

Consolidated Fund result for the year 23 Consolidated Fund transactions, summary of

receipts 78

Consolidated Fund transactions, summary of

payments 92

Consultancy and contractor services,

reporting of 104

Credit rating, State’s 95

Electricity industry privatisation 32

Electricity tariff arrangements 154

Employee entitlements 153

Expenditure, State 91

Financial accountability framework 13

Financial commitments of the State, other 164

Financial Management Reform 27

Gas businesses, debt allocation 138

Gas industry assets 120

Goods and services, sale of 77

Housing debt, centralisation of 139

Liabilities of the State, contingent 159 Liabilities, aggregate, of the State 129

Melbourne City Link 160

Monash Medical Centre financing

arrangements 144

Motor vehicle sale and lease-back

arrangements 141

National Competition payments 87

Newport railway site 59

Operating result and financial position 19

Payables and other liabilities 154

Port Melbourne gasworks sites 55

Public authority income 84

Revenues State 73

Roads Corporation Carlton, precinct,

redevelopment of 61

Rural Finance Corporation, loan portfolio,

transfer of 122

Sales tax reimbursements, termination of 103

SECV building, sale of former 45

SECV, financial obligations of the 145

South Melbourne tram depot site 47

Spring Street property 67

State’s financial condition, analysis of the 21

Statewide computer network 164

Streamline Australia 41

Superannuation liabilities, unfunded 149 Superannuation payments, additional 151

Taxation revenues 74

Taxation ruling, additional financing costs

associated with 95

Teachers in excess of requirements,

funding of 101

Transport Accident Commission, financial

performance of 114

Universities’ superannuation, State