HOM Speech - Governance in Aust GBEs - Australian High Commission

Australian High Commission

Canada

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Governance in Australian Government Business Enterprises

Remarks by the Australian High Commissioner
to
Public Enterprise Governance Centre, Ottawa

20 May 2009

Context
A word first on our respective government systems. Though neither country tends to recognise the fact, there is a marked difference in the respective size of government. This implies a difference of view as to the appropriate ambit of government.

At one level, the basic structures are very similar – three tiers of government – but Australians have chosen to buy considerably less government than have Canadians. Australian Government outlays are around 30%, Canada above 40%. Conclusion is that the role of government is seen somewhat differently in the two countries.

The second point of comparison is relative power of sub federal levels of government. Federal Government in Australia holds more power relative to the States than does Ottawa relative to the Provinces. Much can be explained by the realpolitik of our countries and the pressures on Canada’s system arising from the national unity issue.

Thirdly, there have been differences in the approach to economic policy in both countries over the past decade or so. In Canada, there’s been a focus in federal-provincial relations on fiscal reform and interprovincial social equity. Fiscal reform has also been prominent in Australia, but the dominant objective has been so-called microeconomic reform and improved national economic efficiency and productivity in areas under shared federal – state jurisdiction.

GBE reform process
Prior to 1997, the Government had in place a decentralised arrangement, where responsibility for GBEs was primarily a matter for the relevant portfolio Minister.
In 1997, the Review of GBE Governance Arrangements (the Humphry Review) concluded that the Government needed to establish a more appropriate shareholder relationship with GBEs, including an effective operating, reporting and accountability framework.

The report also recommended: applying governance principles embodied in the listing rules for public companies and the Corporations Law to GBEs; establishing joint shareholder arrangements between the Minister for Finance and Deregulation (Finance Minister) and portfolio Ministers to promote the separation of the commercial functions from the regulatory and industry policy functions undertaken by the entities; and creating a central unit in the Department of Finance, with responsibility for direct shareholder oversight and administration, as well as providing policy advice on GBE governance.

Oversight framework
Following the Humphry Review, the Government adopted the Governance Arrangements for Commonwealth Government Business Enterprises 1997 (Governance Arrangements), which sets out the reporting and accountability arrangements that facilitate active oversight by the shareholder.

The Government also enacted the Commonwealth Authorities and Companies Act 1997 (CAC Act). This effectively split Commonwealth entities into the less commercial, such as the Departments of State and many Statutory Agencies which were covered under the Financial Management and Accountability Act 1997, and the more commercial entities which were covered under the CAC Act. For the first time, there was a separate statutory legislative framework for commercially focused government entities.

The CAC Act and the GBE Governance Arrangements provide a framework for GBEs to help ensure that GBEs: focus on enhancing shareholder value; are subject to normal business constraints and risks; do not receive a competitive advantage from public sector ownership; and adhere to principles embodied in the Corporations Act and public company listing rules – best practice in corporate governance.

The Federal Minister for Finance and Deregulation administers the CAC Act. The oversight of GBEs is usually jointly managed between the Finance Minister and the relevant portfolio Minister.

Shareholder Ministers exercise strategic control for GBEs, consistent with their accountability to the Parliament and public, by setting and communicating the Government’s objectives. In terms of the shareholding relationship between the Finance Minister and the Shareholder Minister, the Ministers will generally communicate jointly with GBEs. Where broader policy issues arise in relation to the functions or operations of GBEs, other ministers or departments may be consulted, such as the Department of the Treasury or the Department of Environment, Water, Heritage and the Arts.

The Board is responsible for developing business strategies and handling day-to-day management. The Board is accountable to Shareholder Ministers.

Examples of GBEs
The Australian Government has privatised publicly owned assets and businesses for many years. In the 1990s, 46 separate asset sales were completed, including: Telstra, which provides telecommunication services. It was sold off in three different stages from 1997 to 2006; Australian Technology Group, which was established in 1994 to provide funding to new technology ventures. It is now in voluntary liquidation; Sydney Airports Corporation, which operated Sydney Airport and was sold in 2002; ADI Limited, which was one of Australia’s largest defence supply and heavy engineering companies; National Rail, which was an interstate rail freight business; and the Commonwealth Bank of Australia.

Examples of GBEs that are currently kept in Government ownership include: Australian Government Solicitor, which is a legal service provider to government; Australia Post, which provides postal services Australia-wide; Australian Rail Track Corporation, which is responsible for the management of 10,000 km of rail track throughout Australia; Defence Housing Australia, which provides housing the Australian Defence Force Members; ASC Pty Ltd, which builds, designs and maintains ships for the Royal Australian Navy; Snowy Hydro Limited, which operates and maintains the Snowy Mountains hydro-electricity scheme; Medibank Private Limited which provides private health insurance to eligible members; and Health Services Australia, which provides corporate occupational rehabilitation and travel doctor services.

Performance measures
The principles of performance measures are covered in the GBE Governance Arrangements. The ultimate objective for each GBE is for it to operate at world best practice.

Other Primary objectives are: 1) to operate efficiently, 2) to price efficiently, and 3) to earn at least a commercial rate of return.

A GBE Board is required to produce a corporate plan at least once a year and give it to the Shareholder Ministers. The plan should cover a period of at least three years.

The Board is required to keep the Shareholder Ministers informed about significant changes to the plan and matters that arise that might significantly affect the achievement of objectives in the plan.

The plan will include, but is not limited to: the objectives of the GBE; the business strategies of the GBE; financial targets and projections for the GBE, the dividend policy of the GBE; non-financial performance measures for the GBE; and community service obligations (CSOs) of the GBE. The broad financial and non-financial targets are agreed on a case-by-case basis with Shareholder Ministers.

GBEs are required to set appropriate financial targets to: replicate the discipline that the threat of takeover would exert over the directors and managers of a firm owned by the private sector; and provide an environment for GBEs which is competitively neutral with the private sector.

There is also a growing recognition that the long-term success of an entity needs to be measured by more than just financial returns. GBEs are presently encouraged to adopt a balanced scorecard approach to measuring performance, which incorporates both financial and non-financial indicators to measure, among other things, the achievement of social and environmental considerations. This is generally more important to governments and GBEs than private companies.

GBEs report against the corporate plan targets and are monitored through progress reports (usually quarterly) over the course of the year.

Valuation
The share price is used to value investments in entities except where the entity is unlisted and valuation is based on net assets.

Divestment
The Government faces a number of challenges in managing GBEs given the Government is averse to commercial risk, and potential for conflicting objectives where the Government is balancing regulatory and policy responsibilities with shareholder responsibilities. Divestment can be a means of achieving a more efficient and productive economy. Accordingly, the Government has divested itself of certain commercial. activities, such as Telstra.

Divestment of the Government’s interest in GBEs is assessed on a case by case basis taking into account government policy considerations. The views of the entity will be taken into account as part of the decision-making process.

Thank you for your attention.