Todays Date: May 17, 2012
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Commercial Policy Framework Introduction

Importance of the Commercial Sector

The Government’s commercial sector consists of a range of businesses which supply basic services to the community, such as electricity, water and public transport. The commercial sector is a major employer, its capital works represent a considerable portion of economic activity in New South Wales and its outputs are key inputs for many businesses throughout the State. In this way, the efficiency of government businesses has a significant impact on the health of the New South Wales economy.

Elements of the Framework

The Commercial Policy Framework consists of the following policies:

  • Financial Distribution Policy which subjects government businesses to the discipline of paying dividends and making capital repayments, in recognition of the opportunity cost associated with the Government's equity investment in its businesses.
  • Capital Structure Policy which provides an approach to determining the target capital structure (mix of debt and equity) for government businesses. The focus is on a risk-adjusted, cash flow-based analysis of the business and its capacity to service debt.
  • Reporting and Monitoring Policy which sets out the framework for the financial performance monitoring of all businesses by NSW Treasury from a shareholder perspective. Key elements include an annual agreement on financial performance targets and quarterly monitoring of results against targets.
  • Government Guarantee Fee Policy which sets out the basis for payment by government businesses of a fee for government-guaranteed debt, in order to align their cost of debt with equivalent businesses in the private sector.
  • Tax Equivalent Regime Policy which outlines the framework for exposing businesses to Commonwealth tax equivalents, for the purposes of competitive neutrality with the private sector. Note that the National Tax Equivalent Regime is administered by the Australian Tax Office.
  • Social Program Policy under which businesses are compensated explicitly for the costs associated with providing non-commercial activities on behalf of the government.
  • Treasury Management Policy which establishes a framework for the management of financial risks within government businesses (such as credit risk, interest rate risk, foreign exchange risk, etc.).
  • Financial Appraisal Guidelines which are used to evaluate the viability of a proposed project by assessing the value of net cash flows that result from its implementation.
  • State Owned Corporation Indemnity Policy provides consistency in granting indemnities to officers of state owned corporations.
  • Guidelines for Boards of Government Businesses which outline the key private sector standards of corporate governance which are most appropriate to the practices and procedures for boards of government businesses.
  • CEO Contract Guidelines for Government Businesses which provide guidance on key terms in the employment contracts of chief executives and managing directors of state owned corporations and other government businesses not covered by the Public Sector Employment and Management Act 2002 (NSW).
  • Guidelines for Assessment of Projects of State Significance which ensure a whole-of-government approach to the assessment of projects where the State may incur substantial long-term or contingent liabilities.

Five Principles of the Framework

The Framework has been developed with reference to five key principles for businesses under government ownership:

  1. clear objectives - providing management of government businesses with clear commercial objectives (i.e. removing or isolating social and regulatory objectives, which may be in conflict with the commercial objective)
  2. managerial authority - ensuring key internal operating decisions are made by managers with strong incentive to maximise the value of the firm (rather than through externally-imposed controls)
  3. performance monitoring - subjecting government businesses to rigorous, independent monitoring and assessment of financial performance
  4. rewards and sanctions - establishing managerial rewards and sanctions related to performance
  5. competitive neutrality - removing the special advantages and disadvantages that apply due to government ownership and preventing the abuse of any market power.

Meeting the first four principles above constitutes "commercialisation" of a government entity. The fifth principle is concerned with promoting competition (including through market reorganisation), and is an essential step prior to "corporatisation" of a government entity as a state owned corporation.