The objectives for the audit of the third tranche sale of Telstra shares were to:

  • assess the extent to which the Government's sale objectives were achieved, including maximising overall value for money;
  • assess the effectiveness of the management of the sale; and
  • identify principles of sound administrative practice to facilitate potential improvements in any future asset sales.



Telstra Corporation Limited (Telstra) is Australia's largest telecommunications and information services company. The process of disposing of the Commonwealth's Telstra shareholding occurred between April 1996, when a scoping study into an initial sale of one-third of the company was announced, and May 2008, when the final instalment for the third tranche sale of shares (Telstra 3) was payable. The privatisation involved three public share offers, with the Commonwealth's unsold shares transferred to the Future Fund.1

The three Telstra sale transactions were conducted in substantially different market conditions. Specifically:

  • the November 1997 Telstra 1 sale was an initial public offering of one third of a company (33.3 per cent of issued shares) which was seen, at the time, to have strong growth prospects. It returned gross proceeds of $14.2 billion with direct costs of $276 million (1.9 per cent of gross proceeds);
  • the October 1999 Telstra 2 transaction was a secondary sale in a sector for which there was strong demand for shares. Although the number of shares sold (16.6 per cent of issued shares) was less than half that of Telstra 1, the Telstra 2 sale returned proceeds of $16.0 billion with sale costs of $169 million (1.1 per cent of proceeds); and
  • Telstra 3 involved the disposal of control of a company perceived to be facing challenges in generating future growth. The Telstra 3 offer returned proceeds of $15.4 billion with sale costs of $204 million (1.3 per cent of proceeds). Of the remaining 6.4 billion shares held by the Commonwealth prior to the sale, 66 per cent were sold, with the residual transferred to the Future Fund.2

The Telstra 3 sale objectives agreed by the then Minister for Finance and Administration in August 2005 were as follows:

  • achieve an appropriate financial return from the sale;
  • promote orderly market trading of Telstra shares;
  • secure a timely sale process, conducted to the highest standards of probity and accountability;
  • support Australia's reputation as a sound international investment location;
  • continue to build investor support for the Government's asset sale programme and broaden share ownership; and
  • remove the Government's conflict of interest as owner and regulator of Telstra.

The Telstra (Transition to Full Private Ownership) Act 2005 was assented to on 23 September 2005, enabling the sale to proceed. In late August 2006, the Government made the decision to undertake the Telstra public share offer in October and November 2006. Following the completion of sale preparations, the Telstra 3 share offer was officially launched on 9 October 2006, with the retail offer conducted from 23 October to 9 November 2006. The institutional offer opened on 15 November and closed on 17 November 2006. Trading commenced on the Australian Stock Exchange on 20 November 2006.

The offer price was set at $3.70 per share, payable in two instalments. The first instalment amount was $2.10 per share, discounted to $2.00 per share for Australian retail investors. The final instalment amount was $1.60 per share, payable on or by 29 May 2008. The final instalment could be prepaid. After payment of the first instalment, purchasers received instalment receipts. Following payment of the final instalment, purchasers received shares.

Audit objectives

The objectives for the audit of the third tranche sale of Telstra shares were to:

  • assess the extent to which the Government's sale objectives were achieved, including maximising overall value for money;
  • assess the effectiveness of the management of the sale; and
  • identify principles of sound administrative practice to facilitate potential improvements in any future asset sales.

Key findings

Sale management and coordination (Chapter 2)

Finance was responsible for the management of the sale. Finance undertook its role with extensive support from the private sector. In total, between November 2004 and November 2005, 12 major advisory appointments were made involving total estimated contract expenditure of $32.8 million. The remaining advisers and a range of marketing and logistics suppliers (mainly under sub-contract to the Project Management Joint Global Coordinators (PMJGCs)) were subsequently engaged.

Tendering and contracting for advisers

Immediately after the 13 December 2004 Ministerial announcement that a Telstra 3 scoping study would be conducted, Finance commenced tender processes for advisers to prepare the scoping study. Finance was aware of the advantage conferred by scoping study engagements and addressed this by requiring tenderers for roles that would potentially continue through into a sale process to also include their bid for any subsequent sale role as part of their scoping study tender. Tender evaluations took into account the competitiveness of both the scoping study and sale role bids. Each of the scoping study engagements was the subject of a probity review.

The scoping study adviser contracts provided Finance with an option to re-appoint the scoping study advisers to the sale process. On 26 August 2005, the then Minister for Finance and Administration announced that Finance had exercised the respective contractual options.5 The final key adviser appointments, involving three firms as PMJGCs and an International Legal Adviser were made in November 2005. The PMJGCs were responsible for overall project management and logistics of the possible sale as well as a key role in the provision of selling services to retail and institutional investors.

Competition is a key element of the procurement policy framework as it is an important foundation in achieving value for money.6 This framework recognises that value for money is more likely to be achieved when businesses that are capable of supplying goods or services for government have the opportunity to respond to requests and to be considered on their merits.

Competitive and open tender processes were undertaken for most of the key adviser appointments, as well as being required for the appointment of sub-contractors to the PMJGCs. One of the challenges for Finance was generating sufficient competitive tension amongst potential providers for the advisory services required to complete the sale. The results of the processes employed showed varying degrees of success. Of note is that, without detracting from the importance of selecting candidates that possessed the necessary skills and experience, the open tender processes employed for the key commercial roles of Independent Business Adviser and PMJGCs gave attention to maximising competitive pressure on fees and commissions. The result was that:

  • the Independent Business Adviser fee was of a similar magnitude to Telstra 2;
  • the PMJGC's project management fee was lower than that paid in Telstra 2; and
  • institutional selling commissions were reduced but, in the more difficult marketing environment of Telstra 3, higher commissions were paid on public offer (including broker firm) sales. This was done to complement the various offer structure mechanisms that were developed to tighten the demand for shares for pricing purposes during the institutional bookbuild (and to ensure the maximum number of shares could be sold).

By way of comparison, there was less competition and reduced price pressure evident in the selection processes for Finance's in-house counsel (which occurred through a direct engagement), the Domestic Legal Adviser (where a small number of responses were received from the market with significant differences in the tendered fees) and the Communications Consultant (where key decisions concerning the number and identity of the parties invited to tender were taken by the then Ministerial Committee on Government Communications—MCGC—rather than by Finance).

In-house counsel

A competitive procurement process was not followed by Finance for the appointment of its in-house counsel, the first adviser appointed. Engagement of contract counsel services (similar to those obtained in Telstra 1 and Telstra 2) was planned in Telstra 3 preparations as a critical path activity but, in November 2004, Finance directly engaged an in-house counsel for a role that subsumed the contract counsel activity. The firm that was engaged was included on the department's legal panel.

The Commonwealth Procurement Guidelines (CPGs) that were in place at the time of the firm's engagement permitted Finance to direct source the in house counsel appointment from its Legal Panel if it could satisfy itself that the proposed arrangements constituted a value for money outcome for the Commonwealth. However, the CPGs that commenced on January 2005 were expected to result in an increase in the number and scope of procurement opportunities offered to the full market.

Domestic Legal Adviser

The firm appointed as Finance's Domestic Legal Adviser had worked on both of the previous Telstra share offers and on the sale of Sydney (Kingsford Smith) Airport. The firm's tendered fee cap for the sale process of $4.9 million (plus GST) was significantly higher than the other three firms7 but the Tender Evaluation Committee considered this was more than offset by its superior understanding of the assignment and demonstrated ability to deliver. Through negotiation, the capped sale fee was initially reduced to $4.4 million and then further to $4.2 million. The Tender Evaluation Committee concluded that the successful firm's tender presented good value for money.

Communications Consultant

The firm appointed as Communications Consultant had performed this role in Telstra 2 and for the sale of Sydney (Kingsford Smith) Airport. Under the then applicable arrangements for government advertising, a select tender process was undertaken, with the then MCGC deciding the number and identity of firms invited to tender. Fewer firms were invited to participate in the selection process than in the first two Telstra sales and two were shortlisted (the same number as had been shortlisted in the first two Telstra sales). The firm that had undertaken the role in Telstra 2 was ranked more highly in terms of its demonstrated understanding of the assignment and demonstrated ability to conduct the assignment to a high professional standard and deliver services in a timely manner. However, its tendered fees were more than double those of the second shortlisted tenderer. Although negotiations resulted in the price being reduced by 19 per cent, from $3.63 million (plus GST) to $2.95 million (plus GST), it remained considerably higher than that of the other shortlisted tenderer.


As is typically the case, an institutional and retail roadshow was conducted as part of the marketing effort. Finance has advised ANAO that the conduct of a global institutional roadshow assumed a higher level of importance than was the case during Telstra 2.8 Telstra management availability affected the duration and cost of the Telstra 3 roadshow with total expenditure by Finance being $1.7 million (plus GST).

When ANAO conducted its Telstra 3 audit fieldwork, the Joint Project Secretariat (which was established by the PMJGCs), who administered the Global Roadshow Coordinator contract, did not hold a complete set of invoices relating to underlying expenditure on the roadshow managed by the Global Roadshow Coordinator and there were shortcomings in the certification of roadshow costs (in relation to the amounts certified not aligning with the specific amounts paid). In this latter respect, Finance has advised ANAO that, subsequently, invoices were obtained for other expense items and that ‘no significant exceptions' had been identified.

Financial returns (Chapter 3)

One of the Government's key objectives for the Telstra 3 sale process was that taxpayers achieve an ‘appropriate' financial return. This objective varied from the comparable objective for each of Telstra 1 and Telstra 2, which involved achieving an ‘optimum' financial return. While a range of similar factors required consideration, Finance advised ANAO that achievement of an appropriate return for Telstra 3 required closer attention to be paid to the alternative use of the proceeds, particularly following the introduction of the Future Fund, and the trade-off between the quantity of shares sold and the price achieved.

Offer pricing

The scoping study advised that the ability to maximise proceeds in a further sale of Telstra would be determined by the ability to reduce the size of an offer (via structural mechanisms) and maximise demand. This latter aspect would in turn depend to some extent on the ability of Telstra to increase the attractiveness of its investment case.

On 25 August 2006, the then Government announced its intention to offer in the order of $8 billion of Telstra stock to retail and institutional investors through a sale by instalment mechanism, and that any remaining unsold shares would be transferred to the Future Fund.

An array of offer structure mechanisms were developed to tighten the demand for shares. These included:

  • a mechanism to increase the size of the offer should there be sufficient demand; and
  • a substantial allocation of stock to brokers through the broker firm component which, together with the conduct of a Japanese public offer without listing (POWL), resulted in 57 per cent of the base offer shares being allocated prior to the start of the Australian public offer.

In addition, an institutional entitlement offer was designed and implemented to combat the tendency for the share price to fall in the lead up to a major sale.9 The Telstra share price rose one cent over the period from the announcement of the offer launch to the end of the bookbuild, indicating the entitlement incentives assisted in preventing the share price falling. By way of comparison, in Telstra 2, the share price fell 28 cents from the offer launch to the end of the bookbuild.

The Telstra 3 bookbuild period was three days, commencing at 9am on 15 November 2006 and concluding at 6pm on 17 November 2006. Overall, 277 valid institutional bids were received, resulting in total demand for shares of 2 688.9 million shares at the strike price.

On 18 November 2006, a final strike price of $3.70 was recommended to, and agreed by, the then Minister for Finance and Administration. The available evidence is that, at $3.70 per share, the offer was fully priced. In particular:

  • the institutional bookbuild was conducted in a manner and over a timeframe (three days) that enabled an effective ‘price discovery' process;
  • based on the results of the bookbuild, the PMJGCs recommended a price of $3.70 per share. The Independent Business Adviser considered that the sale could be priced at either $3.70 or $3.75 but on balance recommended the sale price be set at $3.75. Finance advised the then Minister for Finance and Administration that the price should be set at $3.70, principally due to concerns about the aftermarket trading performance were the price set at the higher level; and
  • in the period after the listing of Telstra 3 Instalment Receipts, the Telstra share price experienced a steady increase but not of a magnitude and at a rate to suggest the offer was under-priced.

In preparing for the sale, a base offer size of 2.15 billion shares was set. Due to the success of the offer structure and pricing mechanisms, the offer size was increased to 4.25 billion shares, leading to a significant increase in cash proceeds. The Commonwealth's remaining 2.13 billion shares were transferred to the Future Fund.10

Sale proceeds and costs

The various components of the offer structure were successful in achieving a high level of demand for shares, such that the upsizing option was employed resulting in a significant increase in cash proceeds. In total, 4.23 billion shares11 were sold, realising cash proceeds of $15.4 billion with sale costs of $204 million, or 1.3 per cent of proceeds.

While less than that budgeted, the Telstra 3 sale costs represented a higher percentage of gross sale proceeds than in Telstra 2 (1.1 per cent) but remained lower than in Telstra 1 (1.9 per cent). The costs (as a percentage of gross sale proceeds) were also higher than had been expected at the time of the scoping study (which ranged between 0.8 per cent and 1.1 per cent of gross sale proceeds). In this latter respect, the increase was, to a large extent, a reflection that actual sale proceeds were significantly less than the figures used in the scoping study (of $32 billion12).

The reduced sale proceeds from those used by the scoping study were not matched by a similar reduction in aggregate sale costs. A significant reduction was achieved in sale logistics costs, an area that the scoping study saw as offering potential savings, and a number of other costs were maintained at or around the same level as Telstra 2 (including fees and expenses paid to the PMJGC's and the Independent Business Adviser). However, costs increased significantly in relation to:

  • selling commissions and fees, with lower rates on institutional sales offset by higher public offer commissions as part of the strategy to create a shortage of stock for those bidding for shares in the institutional bookbuild;
  • advertising and marketing, with Finance advising ANAO that the increased costs of delivering the advertising campaign (which comprised the largest element of advertising and marketing costs) reflected increased media rates and changes in media consumption since Telstra 2;
  • legal advice obtained by Finance, the PMJGCs and Telstra, that was paid for by Finance; and
  • the reimbursement of costs incurred by Telstra, with Finance advising ANAO that change of control issues increased the range of sale cost pressures faced by the company and that, due to the interests of other shareholders, such costs were necessarily fully passed on to the Commonwealth.

Cost of legal advice

The total cost to Finance of legal advice associated with the Telstra 3 sale was $12.74 million (plus GST), including $3.74 million in legal advice costs reimbursed to Telstra. Excluding Telstra's legal costs, on a comparative basis, the amount paid by Finance to its legal advisers and by Finance for the PMJGCs' legal advisers was $9.00 million (plus GST), the majority of which related to professional fees ($8.26 million plus GST).

The total cost of Finance's and the PMJGC's legal advisers was nearly double the equivalent costs in Telstra 2. Key factors in the overall increase in legal advice costs compared with Telstra 2 were significant increases in the amounts paid by Finance to its Domestic and International Legal Advisers (recognising that Telstra 2 involved a smaller number of shares being offered, over a shorter period of time and in closer proximity to the prior transaction) and new costs associated with the engagement by Finance of an in-house counsel (an in-house counsel was not engaged for Telstra 1 and Telstra 2, although there were costs associated with a firm being engaged following a select tender to draft contracts for all advisory engagements).13

The $8.26 million in professional fees paid for legal advice in the Telstra 3 sale was higher than the project management fee paid to the three PMJGCs ($8.18 million plus GST). The significant continuing growth in the cost of legal advice associated with asset sales is an area that warrants consideration by Finance. This would include identifying opportunities to rationalise the number of parties providing legal advice at Commonwealth expense (Finance paid for legal advice for itself, the PMJGCs and Telstra) and examination of the cost of that advice.

Agency response

Finance provided a response to the audit as follows:

Finance welcomes ANAO's conclusions that the Telstra 3 share offer employed offer structure mechanisms that were successful in achieving a high level of demand for shares, which together with an effective pricing process, enabled the offer to be fully priced.

The Telstra 3 sale process achieved the Government's sale objectives, delivering $15.5 billion in proceeds within the timeframe set by Government and bringing to an end the conflict between the Government's roles as owner and regulator of the major telecommunications company.

The sale represented a substantial challenge, including the first public share offer by the Australian Government in seven years, a business that was seen in an increasingly negative light by the investment community and a substantial deterioration in relations between the company and the Government, its majority owner. From the base of a comprehensive scoping study Finance undertook a flexible approach to sale preparations enabling it to progress the sale in a timely fashion in a highly dynamic environment. Following the 25 August 2006 Government decision to proceed with the sale, Finance completed a highly successful share offer on 24 November 2006 with proceeds almost doubling the base announced by the Prime Minister.

Finance acknowledges ANAO's recognition that overall planning and management of the sale was effective.

Finance agrees with the Recommendation that a threshold be set, above which project managers are required to obtain underlying receipts of roadshow expenditure prior to certifying that expenditure. This approach will provide clarity to all participants in relation to their obligations, noting that in setting the threshold the costs involved need to be commensurate with the risks being managed.

Overall audit conclusion

Prior to November 1997, Telstra was wholly-owned by the Commonwealth. The Telstra 1 Initial Public Offer (Telstra 1) was completed in November 1997, involving the sale of nearly one-third of the company's issued share capital. In October 1999, the Commonwealth divested a further 16.6 per cent of its shareholding in the company through the Telstra 2 share offer. The ANAO has audited each of the Telstra public share offers.3

Prior to the Telstra 3 sale, the Commonwealth held over 6.4 billion shares in Telstra (representing 51.8 per cent of the company's shares). The large number of shares to be sold presented challenges in completing the privatisation of Telstra in a single tranche whilst achieving an appropriate financial return. Finance and its advisers developed and implemented an array of offer structure mechanisms that were successful in achieving a high level of demand for shares. These mechanisms, together with an effective bookbuild pricing process, enabled more than 4.2 billion Telstra shares to be sold in November 2006 at a price of $3.70 per share. The available evidence is that, at this price, the offer was fully priced.

The Telstra 3 sale was conducted seven years after Telstra 2, in a very different market environment. Significant changes in Telstra senior management and regulatory issues also made sale preparation and marketing more difficult. Nevertheless, as well as achieving a fully priced offer, the transaction was completed in accordance with the timetable and within budget indicating that overall planning and management of the sale by the then Department of Finance and Administration (Finance)4 and its advisers was effective.

Selling commissions and adviser costs comprised a significant proportion of the Telstra 3 sale costs of $204 million. Obtaining value for money in the procurement of services requires a balancing of considerations, with the financial framework placing the obligation on the individual approving each spending proposal to undertake reasonable inquiries to be satisfied that the proposed expenditure represents efficient and effective use of public money. A range of factors, including cost, were considered by Finance when making key adviser appointments but there was limited competitive pressure for some appointments. ANAO has made one recommendation to improve probity and accountability processes for marketing roadshows in future public share offers.


1 In the 2005–06 Budget, the Government had announced that, to offset its unfunded superannuation liabilities, it would use budget surpluses to build a dedicated financial asset fund called the Future Fund.

2 Except for 93.5 million shares, which were transferred to the Telstra Sale Company Limited to be held as Bonus Loyalty Shares.

3 The report of the November 1997 first sale was tabled in October 1998 (ANAO Audit Report No.10 1998–99, Sale of One-third of Telstra, Canberra, 19 October 1998). The report of the October 1999 second tranche sale was tabled in November 2000 (ANAO Audit Report No.20 2000–01, Second Tranche Sale of Telstra Shares, Canberra, 30 November 2000).

4 The Administrative Arrangement Orders made on 25 January 2008 established the Department of Finance and Deregulation, which was previously known as the Department of Finance and Administration. In this report, both are referred to as Finance.

5 At that stage the Government had only decided to commence preparations for sale and the re-engagements were subject to the passage of the required sale legislation and the Government subsequently deciding to proceed with the sale.

Commonwealth Procurement Guidelines—January 2005, issued under Regulation 7 of the Financial Management and Accountability Regulations 1997, 1 December 2004, pp. 10–11.

7 The next highest tendered price was $3.5 million (plus GST).

8 This was due to a substantial reduction in the level of interaction by the company with institutional investors compared to that in the lead-up to and following Telstra 2 combined with substantial changes to the Telstra Board and to senior management.

9 Finance has advised ANAO that, in the lead up to a major sale, the main reason for the share price fall is supply and demand—more securities are to come onto the market and price falls in anticipation of the additional supply and a potentially discounted sale clearing price. Some investors will sell in anticipation of these price falls which may be exacerbated by short-selling. As the issue price is often based on the preceding closing price there is no incentive for investors to buy on-market if they believe they will be allocated shares in the offer.

10 The completion of the share sale and transfer of residual shares to the Future Fund was important in the context of the sale objective of removing the potential for the Government's conflict of interest as owner and regulator of Telstra.

11 The number of shares ultimately sold (4.23 billion) was less than the final offer size of 4.25 billion shares largely because, on 28 June 2007, 21.89 million shares were transferred to the Future Fund. The then Minister for Finance and Administration advised the then Prime Minister that this transfer related to some of the shares originally allocated to the buffer stock not ultimately being needed to resolve disputes arising from the retail offer.

12 Cost estimates were produced for the three demand and allocation scenarios (worst-case demand with a share buy-back, mid-case demand with a share buy-back and high-case demand with a share buy-back) together with a worst-case cost scenario which assumed a low buy-back amount with a large equity offer and high proportion of institutional allocations. Under all four scenarios, overall gross proceeds were $32 million, with different amounts for the amount (if any) of shares retained by the Australian Government, the value of the equity sell-down and the combined size of the Future Fund allocation and a share buy back by the company.

13 This firm was paid $165 739 for work on contractual matters for the Telstra 1 sale, and $225 460 for Telstra 2.