)LQDQFLDO 3HUIRUPDQFH RI *RYHUQPHQW 7UDGLQJ (QWHUSULVHV 3HUIRUPDQFH WR 0RQLWRULQJ July 2000 Commonwealth of Australia 1999 ISBN 1 74037 005 8 This work is subject to copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from AusInfo. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra, ACT, 2601. Inquiries: Media and Publications Productivity Commission Locked Bag 2 Collins Street East Post Office Melbourne Vic 8003 Tel: (03) 9653 2244 Fax: (03) 9653 2303 Email: [email protected] An appropriate citation for this paper is: Productivity Commission 2000, Financial Performance of Government Trading Enterprises, 1994-95 to 1998-99, Performance Monitoring, AusInfo, Canberra. The Productivity Commission The Productivity Commission, an independent Commonwealth agency, is the Government’s principal review and advisory body on microeconomic policy and regulation. It conducts public inquiries and research into a broad range of economic and social issues affecting the welfare of Australians. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Information on the Productivity Commission, its publications and its current work program can be found on the World Wide Web at www.pc.gov.au or by contacting Media and Publications on (03) 9653 2244. Foreword This report is the first in a series initiated by the Productivity Commission into the financial performance of Government Trading Enterprises (GTEs). The study forms part of a continuing program of research into the performance of economic infrastructure industries and the impact of micro-economic reforms. It is the successor to a series of broader reports by the Steering Committee on National Performance Monitoring of Government Trading Enterprises with the Commission as secretariat. The results of this study indicate that the financial management of GTEs has continued to improve over recent years, resulting in higher returns to the community. However, performance varies within and across industries, with many GTEs still not achieving an adequate rate of return — despite a decade of reform. Poor financial performance of GTEs may have adverse implications for the efficient use of community resources, as well as the position of private sector competitors, suggesting the need for a closer examination of the underlying causes. Research for the study was undertaken in the Economic Infrastructure Branch, under the guidance of Commissioner Michael Woods. State and Territory governments cooperated by furnishing data collected for the Australian Bureau of Statistics Government Finance Statistics collection. The Commission welcomes feedback on this report, consistent with its objective of improving the information base on key issues affecting Australia’s economic performance and community living standards. Gary Banks Chairman July 2000 III Contents Foreword iii Table of contents v Abbreviations vii 1 Introduction and findings 1 1.1 Background 2 1.2 Data 3 1.3 Performance indicators 5 1.4 Implications of financial reporting for transparency and accountability 10 1.5 Effectiveness of financial reforms 13 2 Electricity and gas 19 2.1 Sector reforms 19 2.2 Market environment 24 2.3 Profitability 26 2.4 Financial management 29 2.5 Financial transactions 31 2.6 GTE performance reports 35 3 Water, sewerage, drainage and irrigation 83 3.1 Sector reforms 83 3.2 Market environment 87 3.3 Profitability 87 3.4 Financial management 90 3.5 Financial transactions 92 3.6 GTE performance reports 95 CONTENTS V 4 Urban Transport 121 4.1 Sector reforms 121 4.2 Profitability 123 4.3 Financial management 125 4.4 Financial transactions 127 4.5 GTE performance reports 129 5 Railways 139 5.1 Sector reforms 139 5.2 Market environment 142 5.3 Profitability 143 5.4 Financial management 145 5.5 Financial transactions 149 5.6 GTE performance reports 151 6 Ports 163 6.1 Sector reforms 163 6.2 Market environment 166 6.3 Profitability 167 6.4 Financial management 170 6.5 Financial transactions 172 6.6 GTE performance reports 173 7 Commonwealth GTEs 205 A Participating enterprises, 1998-99 213 B Definitions of financial performance indicators 217 References 221 VI FINANCIAL PERFORMANCE MONITORING Abbreviations ACCC Australian Competition and Consumer Commission AIE Australian Inland Energy AMSA Australian Maritime Safety Authority AUSTA Electric Queensland Generation Corporation BPA Bunbury Port Authority BPC Burnie Port Corporation CAA Civil Aviation Authority COAG Council of Australian Governments CPI Consumer Price Index CPSIR Common Public Sector Interest Rate CSO Community Service Obligation DBNGP Dampier to Bunbury National Gas Pipeline DNR Department of Natural Resources (QLD) DPA Darwin Port Authority DUS Department of Urban Services (ACT) EBIT Earning Before Interest and Tax FPA Fremantle Port Authority FRC Freight Rail Corporation GBE Government Business Enterprise GHz Giga (109) Hertz ABBREVIATIONS VII GPA Gladstone Port Authority GTE Government Trading Enterprise GWh Giga (109) watt hours HEC Hydro-Electric Corporation HPC Hobart Port Corporation HWC Hunter Water Corporation IPART Independent Pricing and Review Tribunal ISDN Integrated Service Data Network Kilolitres 1000 litres kV Kilo Volt kWh Kilo (103) watt hours MPC Melbourne Port Corporation MTT Metropolitan Transport Trust MW Mega (106) watts MWC Melbourne Water Corporation MWh Mega (106) watt hours NAU Network Access Unit NCP National Competition Policy NEM National Electricity Market NEMMCO National Electricity Market Management Company NPC Newcastle Port Corporation NRC National Rail Corporation NWRWA North West Regional Water Authority VIII FINANCIAL PERFORMANCE MONITORING ORG Office of the Regulator-General PBC Port of Brisbane Corporation PDC Port of Devonport Corporation PKPC Port Kembla Port Corporation PLC Port of Launceston Corporation PSA Ports Services Act 1995 PTB Passenger Transport Board QPTC Queensland Power and Trading Corporation QR Queensland Rail QTSC Queensland Transmission and Supply Corporation RAC Rail Access Corporation RAT Recoverable Amounts Test ROA Return on Assets ROE Return on Equity RSA Rail Services Australia SA Water South Australian Water Corporation SAPC South Australia Ports Corporation SAR Search and Rescue SCA Sydney Catchment Authority SCI Statement of Corporate Intent SECWA State Energy Commission of Western Australia SEQEB South East Queensland Electricity Board SEQEC South East Queensland Electricity Corporation ABBREVIATIONS IX SERC Southern Electricity Retail Corporation SEW South East Water SMHEA Snowy Mountains Hydro-Electric Authority SOC State Owned Corporation SPC Sydney Ports Corporation SRA State Rail Authority STA State Transit Authority SWC Sydney Water Corporation SWP State Water Projects Tascorp Tasmanian Public Finance Corporation TCV Treasury Corporation of Victoria TJ Tera (1012) joules TUOS Transmission use of system prices UIG Urgent Issues Group USO Universal Service Obligation VCA Victorian Channels Authority YVW Yarra Valley Water X FINANCIAL PERFORMANCE MONITORING Box 1 Key messages • There has been a steady improvement in financial performance for most GTEs. • Most GTEs are now required to recover costs and pay dividends, debt guarantee levies and tax-equivalent payments — as a means of imposing financial market disciplines for good governance and to ensure competitive neutrality. Governments generally identify Community Service Obligations (CSOs) and meet their cost. • Despite a general improvement, some GTEs are not sufficiently profitable to ensure that the community is earning a rate of return equivalent to the risk-adjusted cost of capital. This is particularly so in the urban transport and rail sectors. However, there are GTEs in most industries that are consistently under-performing. • Failure to earn adequate returns may have implications for a GTE’s long-term viability and expose governments and the broader community to additional risk. An inadequate return on assets also militates against prices providing signals for efficient investment. • Competition policy reforms have resulted in numerous structural changes in the GTE sector. Associated with these reforms have been asset transfers, asset revaluations, debt restructuring and liability transfers — many of which appear as abnormal items in the financial statements of GTEs. • Care has to be exercised when examining trends in profitability and financial management for individual GTEs because of the large number of abnormal items. • Where financial performance is unlikely to improve, there is a need to review operating costs, prices, CSO payments (where appropriate), asset values and the structure of the balance sheet. Where poor performance is industry-wide there may be a case for reviewing governance arrangements, given that reform measures have been in place for some time. • The spread of financial management performance indicators within industries suggests that the financial restructuring of GTEs may be incomplete, limiting the effectiveness of strategies aimed at replicating financial market disciplines applying to the private sector. 1 Introduction and findings This