A Macquarie Bank subsidiary entered into a secret side contract with our No.2 public broadcaster, the SBS, under which an “incentive payment” of $3.85 million was paid without being declared to the market or to the ABC.

The deal was cut in 2003 as SBS and the ABC negotiated their multimillion dollar long-term transmission contracts with Broadcast Australia, the wholly owned subsidiary that formed the key asset in the Macquarie Communications Infrastructure Group. Broadcast Australia is now owned by the Canada Pension Plan Investment Board.

Leaked documents from inside Broadcast Australia show that in return for agreeing to an early nine-year extension of its contract for analogue television services, Broadcast Australia agreed to pay back $3.85 million to SBS as an “incentive payment”.

The problem is that the deal was not declared to the ABC, which was also negotiating contracts at the same time, and which tried and failed to get government agreement to allow it to keep discounts achieved through bulk deals.

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It’s not clear whether the $3.85 million “incentive payment” to SBS was returned to the government, or used by SBS for other purposes. Calls to the Minister for Communications, Stephen Conroy, have resulted in a search through old documents that had not, at the time of deadline, yielded an answer. The search goes on, and we’ll keep you posted

The documents revealed in Crikey today show the largely hidden impact that having to negotiate with a ruthless monopoly has had on our public broadcasters over the past six years.

Once, the transmission business was in government hands, meaning that the contracts with the national broadcasters were negotiated together, and were transparent to government. But in what has ever since looked like a very silly decision, the National Transmission Network was sold by the government in 1999. It was acquired by the Macquarie Bank in 2002, and rebranded as Broadcast Australia.

Ever since then there has been what Department of Finance types describe euphemistically as a lack of competitive tension as the public broadcasters negotiate for transmission services. Broadcast Australia has been a monopoly business — there was nobody else who could provide the required transmission services. The international company Crown Castle briefly looked like a player but withdrew, apparently despairing of making a buck in a marketplace so sewn up by Macquarie.

Broadcast Australia types have since referred to the ABC and SBS as their “captive clients”.

With the 2003 contracts signed, Broadcast Australia became a very sweet asset indeed. By paying SBS its “incentive payment” Broadcast Australia achieved long-term certainty, with contracts worth hundreds of millions of dollars over their life. The share price rocketed following signature of the deals.

The documents revealed in Crikey today will be closely read both by the public broadcasters — which are not aware of the details of each other’s contract negotiations — and in Canberra, where the Department of Finance has recently been exerting pressure on the ABC and SBS to achieve an undisclosed level of savings in transmission contracts by negotiating together.

Several of the key contracts are now coming up for renegotiation.

At Senate estimates earlier this year, the ABC’s head of Finance, David Pendleton, was quizzed on whether or not the ABC was achieving departmental savings that had been tagged in the budget. These required savings were not published in the budget papers, and have still not been revealed, for fear of compromising the broadcasters’ negotiating position.

Pendleton replied that savings from joint negotiations were still being worked on, but that because the SBS and ABC don’t know the details of each other’s contracts: “We have yet to really identify anything that comes from working together. It is the nature of the contracts we have with the service providers and the confidentiality clauses that sit within them. But certainly the savings that we are required to find for the budget we will find from those line items.”

The documents sent to Crikey include the net order book for Broadcast Australia — including contracts for the ABC and SBS, the Broadcast Australia Consolidated Income Statement for the 2004 financial year, and the fees charged for individual digital transmission sites for the ABC and SBS.

The contractual arrangements are complex and will be opaque to the general reader, with different amounts being charged depending on the coverage required, but for the first time the bean counters in ABC and SBS will see who got the better deal.

Transmission costs are the backroom impost that has a huge impact on the amount of money available for public broadcasting in Australia. According to the most recent annual reports, the ABC spends more than a fifth of its total allocation on transmission. Over the three years of the current funding agreements,  the ABC and SBS will receive transmission funding of $546 million and $249 million respectively from the federal government.

The documents also give an idea of the scale of savings that might be available to government once simulcasting ends and digital broadcasting becomes universal. In 2009, the federal government estimated these savings to be  $11.4 million over the triennium.

But whether those savings and others are achieved depends on the contract negotiations — which highlights the importance of the public broadcasters being able to negotiate sensibly and with transparency.

This time around, as the contract negotiations get under way, Broadcast Australia is no longer in such a powerful position and the public broadcasters are no longer quite so securely captured. TXA Australia, a joint venture owned by the commercial television stations, may be a potential alternative supplier. The National Broadband Network — which will again be in government hands — may also be a long-term alternative.

Meanwhile, the idea of the SBS and the ABC negotiating together in search of a better deal is a long-running sore, with distrust between the two and the commercial confidentiality insisted upon by Broadcast Australia apparently hampering the negotiations.

In 2003, neither the ABC nor SBS knew what deal the other had struck. The ABC did not get access to the same “incentive payment” as SBS, but it did negotiate its contracts together, and achieved bulk discounts. SBS instead chose a torturous path of individual contract negotiation, which absorbed immense administrative effort. Protracted negotiations over both digital and analogue contracts were brought to a closure by the “incentive payment” arrangement.

What is not clear is whether the government clawed back the “incentive payment” or whether it was a windfall for SBS. The office of Minister for Communications, Stephen Conroy, said today:

“SBS is independent from the government, and internal SBS funding and contractual decisions are the responsibility of the SBS board and its executive. This would include contractual matters between SBS and its transmission services provider.”

Meanwhile, a spokeswoman from SBS said: “The Minister for Broadband, Communications and the Digital Economy (and his predecessors) has oversight of SBS’s contract with BA but the minister is not involved in negotiating those contracts.”

I understand, however, that the government was aware of the incentive payment. Nobody seems to know, though, what happened to it. Was it returned to consolidated revenue or used by SBS?

What is known is that the ABC wanted to be able to keep any savings they achieved from bulk discounting, but were not allowed to do so. If SBS kept their savings, then it looks as though the ABC got the rough end of the pineapple.

I understand that the SBS incentive payments were made as “service credits” — which are normally payments back to the customer given when transmission services fail. The details were contained in a separate letter linked to the two SBS transmission contracts.

Industry analysts and the ABC got wind of the SBS incentive payment deal some years ago, and rumours have been circulating in the industry for some time. But this is the first time the documents have been publicly revealed.

So will the public broadcasters negotiate together this time around, or will the process be dogged by the same kind of special deals, lack of transparency and mistrust?

SBS first suggested that savings could be achieved through joint negotiations at the 2020 summit. The idea was pursued in the 2009 federal government review of public broadcasting, but the ABC concluded  that “as a result of the ways in which the two organisations’ contracts with their transmission services provider are structured, there are few, if any, efficiencies to be gained from merging the services”.

SBS disagreed, and has told Crikey that, contrary to what I reported last week, it still strongly supports mutual negotiations — although proposals to combine a wider range of  “back-end” operations have in the past provoked an incendiary response from SBS.

The sensitivity is understandable. In the age of digital multichannels, and with the crucial federal government convergence review now getting under way, there are some in government who mutter that perhaps SBS doesn’t need to be a separate organisation. Perhaps it could simply be a collection of multichannels run by the ABC. The ABC might well be lukewarm about this idea, unless it was sure that the responsibility would be accompanied by sufficient extra funding.

Asked to comment on the leaked documents, SBS told Crikey that SBS’s contract with Broadcast Australia was “commercial-in-confidence”: “In negotiating any contract, SBS acts in good faith and regularly tests the market to ensure a high standard of service and value for money.”

The ABC declined to comment, apparently seeing no capital in getting involved.

But Broadcast Australia was less cagey, frankly admitting to the deal with SBS — while still claiming the contract with the ABC was “commercial-in-confidence” and they therefore could not reveal whether Aunty got the bum’s rush.

Broadcast Australia’s spokeswoman said:

“The transaction that BA entered into with the SBS in 2003 was to secure an early exercise by SBS of three by three-year options for the transmission of all SBS analogue TV and radio services, extending the contract expiry from June 2004 to June 2013 … BA agreed to pay $3.85 million to SBS over a seven-year period (ending 30 June 09) effectively as a discount to secure the early exercise of already existing contract service options. The arrangement between SBS and BA was documented and executed in a binding agreement that was approved by the BA board and by the SBS board. Commercially the transaction delivered contract certainty to BA.”

And the investors in Macquarie must have been very pleased indeed.