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NSW Government owned corporations in the electricity sector represent an investment of around $20 billion. They return dividends and tax equivalent payments to the State of around $1 billion per year.
We looked at how well the State oversights the performance of State owned corporations (SOCs) in the electricity sector to ensure that they meet its needs from an owner’s short and long-term perspective. |
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Audit opinion
The SOCs have delivered substantial dividend returns to the Government. We examined the issue, sometimes alleged as a weakness in the NSW approach, that dividend requirements may limit the ability of SOCs to fund new investment in infrastructure. The SOCs we examined clearly indicated that this was not occurring. The SOCs indicated that new investment is planned on a needs basis and that, whilst much infrastructure in this sector is now ageing, it has a considerable remaining useful life. We found that the SOCs have sound credit ratings, and we could not find evidence or available data that investment was being unduly constrained.
Whilst there is the potential for conflict between Treasury’s primary role of managing the State’s finances and its over-sighting role on behalf of shareholder ministers, we found no evidence that this conflict was in fact occurring. While some other jurisdictions include the portfolio minister as the other shareholder, in our view the current New South Wales arrangement - where the portfolio minister can exercise the regulatory role free from concerns about conflict – is the more robust model and better satisfies the ‘public interest’ test.
Our principal concern from this audit is that Treasury’s oversight of State owned corporations needs to be strengthened and refined. We would have expected Treasury to oversight performance against the State’s ownership objectives. But these ownership objectives are not clearly stated. There is no regular reporting on how well these businesses are performing against comparative private sector organisations or against their social and environmental objectives. Treasury has relatively little focus on analysing non-financial areas that may affect a shareholder.
Treasury’s task on behalf of the shareholder ministers is particularly important, as State owned corporations are not subject to the full competitive pressures of the private sector. The State needs to move to a role, without reducing board autonomy, closer to the role of the holding company that it was originally likened to. |
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We recommend that NSW Treasury strengthen and refine its oversight of State owned corporations through: |
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Understanding what the owner expects
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§ clearer identification and prioritisation of shareholders’ short and long-term objectives of ownership of each SOC, so as to better hold SOCs accountable for their performance § ensuring the objectives are public documents widely circulated amongst ministries concerned, SOC boards, management, and the Parliament, so as to improve ministerial accountability § assisting the Government to publish its reasons for ongoing public ownership of the electricity SOCs. This would help clarify the non-commercial objectives of the SOCs.
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Oversighting performance |
§ clarifying who is responsible for oversighting which aspects of SOC performance, especially who is supposed to monitor business aspects such as market share and customer service, and aspects such as social responsibility, ecologically sustainable development, and regional development § increasing shareholders’ feed-back to the SOCs in relation to their direction and performance; providing board directors with improved dialogue and access to independent analysis conducted by Treasury § strengthening the ownership monitoring function and the specialist resources available to it, depending upon the precise nature of the shareholders’ objectives.
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Representing the owner’s interests |
§ moving to an approach where shareholders formally agree to those aspects of the corporate business plan relevant to their stated objectives and require a management plan for those aspects § ensuring meetings between the shareholders or their representatives and board directors, including the annual meeting, are fully and accurately recorded § providing an opportunity for the auditor to be present at the annual meeting § increasing interaction and communication between the board, Treasury and the shareholding ministers with both a structured and informal communication program § ensuring the initial recommendation of the size of dividends and assessment of the capacity to pay is a responsibility of the board. While it would be appropriate for shareholder ministers to make the final determination, they should be required to provide reasons for doing so where this differs from the recommendation of the board § improving transparency of board appointments, arranging formal guidance and education support for board members. Boards need to better define and communicate their requirements for skills and capabilities § more consistent reporting and benchmarking of performance, and ensuring shareholders’ objectives and statements of corporate intent are made available to the public.
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Key audit findings |
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Chapter 1: Introduction |
§ Since 1988 the Government has had a policy of operating its major trading enterprises as State owned corporations (SOCs). The State Owned Corporations Act 1989 (SOC Act) established the legislative framework for the implementation of this policy. § SOCs have two shareholders: the Minister for Finance and one other minister nominated by the Premier. These in turn are supported by Treasury, which is tasked with monitoring the performance of the SOCs on behalf of the shareholders. § The largest group of SOCs is in the electricity sector. These businesses represent an investment of over $20 billion and employ almost 12,000 staff. |
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Chapter 2: Understanding what the owner expects |
§ There is no clear statement of the Government’s purpose in owning electricity SOCs. § There is no clear understanding of the overall short and long-term objectives of State ownership. Whilst the SOC Act provides high-level objectives for a SOC, the objectives do not necessarily represent or directly link to shareholders’ objectives. § The objectives of State ownership and the shareholders’ strategic concerns and broad preferences are not spelt out in any single document. The process of preparing an annual Statement of Corporate Intent does not distinguish between the requirements of shareholder ministers and the objectives set by boards. This weakens accountability § Whilst the Government has issued general policy statements for government businesses, no document directly articulates shareholder expectations or provides long-term direction to SOCs in the electricity sector, particularly in the context of the SOCs’ individual markets and circumstances § As the Government’s ownership objectives are not specific, they do not assist informative performance reporting. |
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Chapter 3: Oversighting performance |
§ The exercise of ownership rights is clearly identified within the government administration. § As SOCs are accountable to both the voting shareholders (for business performance and long term value) and the portfolio minister (for industry policy and regulatory matters), this can at times lead to the need for SOC boards to manage conflicting requirements from the Government. There is also the potential for conflict between Treasury’s primary role of managing the State’s finances and its over-sighting role on behalf of shareholder ministers, but we found no evidence that this was occurring. § Both shareholder ministers rely on Treasury to monitor the SOC’s commercial operations and performance. Treasury has a strong incentive to monitor the financial performance of SOCs because of the importance of SOC investment returns as part of the overall State finances. |
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§ Whilst Treasury analysts are conscious of the many issues affecting SOC performance, there is relatively little focus on analysing non-financial areas that may affect a shareholder. There is little evidence of feed-back to the SOCs in relation to their SCIs and little evidence of the SOCs responding to any concerns raised. |
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§ Treasury has no designated SOC monitoring unit, although it used to have a Government Trading Enterprise Monitoring Unit for this purpose. We found no charter that outlines Treasury’s monitoring objectives, functions or responsibilities on behalf of the shareholder ministers. Some other jurisdictions assign this responsibility to a designated entity in order to remove it from a purely financial focus. |
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Chapter 4: Representing the owner’s interests |
§ Treasury could take a more active role in representing the shareholders. Treasury and the SOCs have recognised that there is scope to improve their level of interaction and communication with the shareholders. § SOC boards could be given greater autonomy and held more accountable for performance if they were provided with greater strategic direction in terms of desired outcomes. § It is not clear what aspects of the corporate business plans Treasury should and should not be monitoring, as SOCs report to portfolio ministers on many aspects of their overall performance. Some corporate plans contain considerable detail. Such detail, where unrelated to the primary purposes of the accountability regime, could even be weakening accountability by obscuring the focus on performance against shareholder’s objectives. § Boards appear to have limited involvement in the appointment of new directors and limited control over the skill mix of directors, balance, and diversity of views. § Board performance needs to be reviewed annually, but there is little evidence that such reviews are conducted. § There is no comparative analysis of SOC businesses against shareholder objectives or against their private sector equivalents. Very little information is made public, largely on the grounds of confidentiality. |
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Response from the NSW Treasury |
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Thank you for your letter of 9 September 2005 providing the final draft of the Performance Audit – Oversight of State Owned Corporations in the Electricity Sector. |
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I appreciate the overall audit opinion that the monitoring of State owned corporations (SOCs) by Treasury is well organised. Importantly, the audit found no evidence of conflict between Treasury’s role of managing the State’s finances and its over-sighting role of SOCs – for example, in requiring dividends at the expense of SOC investment in infrastructure. |
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The Audit Office’s well researched observations of oversight arrangements of SOCs in other jurisdictions, both domestically and internationally is informative. It would be interesting to evaluate the overall effectiveness of oversight arrangements in other jurisdictions in light of the Audit Office’s recommendations. |
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One key focus of the recommendations and audit findings was on the need for the Government to make clear its expectations of ownership. Many of these expectations are outlined in the policies under the Commercial Policy Framework and, specifically in relation to electricity businesses, from public statements of policy such as the NSW Energy Directions Green Paper and the upcoming White Paper on energy to be released shortly. |
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Another theme of the audit findings was the need to refine non-financial performance monitoring of SOCs. Under the corporatisation model, the SOC’s managing board is responsible for oversight of operational performance. Like analysis done by and for private sector shareholders, Treasury’s oversight focuses on financial returns and long term value and sustainability of the SOC. This long term value can only be built in the context of its broader corporate responsibilities (to customers, the environment and the wider community), effective business planning and execution and competitive performance – all aspects which the board is required to manage. There requires careful balancing between external monitoring of operational details and respecting the board’s autonomy and oversight of management to ensure clear expectations and accountability. |
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A balance is also required between the need for transparency and the need for confidentiality regarding commercially sensitive issues and information. This is particularly the case for the electricity SOCs who are competing with private sector counterparts who have different standards of disclosure in releasing medium-term financial forecasts and sensitive long-term strategic objectives. |
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In relation to increased communication with the SOCs, Treasury will continue to increase feedback and interaction with the boards. This includes ensuring that the boards, through the Chairs, have input regarding the board composition and requirements for new appointments, continuing our program of annual shareholder discussions with the board and less structured ongoing communications with the Chairs and management. |
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I would like to thank the Audit Office for their professionalism, courtesy and co-operative manner in which the audit was conducted. |
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(signed)
John Pierce Secretary
Dated: 27 September 2005 |