Todays Date: May 17, 2012
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Link to Golden Heritage - Treasury History 1824-1999

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Glossary of Terms

Commercialisation

Commercialisation refers to the first stage of reform to improve the efficiency of government businesses. The process involves administrative changes to the operation and management of businesses along the lines of the first four of the Five Principles of the Commercial Policy Framework.

Corporatisation

Corporatisation refers to the second stage of reform to improve the efficiency of government businesses. It involves the establishment of a corporate governance structure which mirrors as far as possible that of a public-listed company, essentially creating an "arm’s length" relationship between the business’ management and the Government as owner or shareholder. All of the Five Principles of the Commercial Policy Framework, including competitive neutrality in input and output markets, must be satisfied prior to corporatisation.

State Owned Corporations are established under the State Owned Corporations Act 1989.

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Company State Owned Corporation

A company State Owned Corporation is a company limited by shares and is subject to Corporations Law in the same way as an ordinary public company. Such a company becomes a company SOC by the insertion of its name in Schedule 1 of the SOC Act by an Act of Parliament. Currently there are no NSW company SOCs.

General Government Businesses

The Australian Bureau of Statistics (ABS) classifies an agency as being part of the General Government sector if they are funded in any of the following ways:

  • directly (via the Consolidated Fund) or indirectly by taxes or fees or fines
  • dependent on other agencies which are directly or indirectly funded by taxes, fees or fines
  • have regulatory functions which enable them to raise taxes, fees or fines.

The Commercial Policy Framework applies to a General Government agency which:

  • is not dependent on the Budget for funding, although its funding sources may have the characteristics of a tax
  • has external user charges as its main source of revenue
  • that revenue allows the agency to be self-supporting.

For the purposes of this policy and ease of use, these particular General Government agencies tend to be referred to as General Government non budget dependent businesses.

General Government non budget dependent businesses range from relatively autonomous authorities (e.g. Honeysuckle Development Corporation) to certain government departments (e.g. Land and Property Information NSW) that are engaged in trading activities. These activities may include social services, the provision of which could be undertaken by such units on the basis of an arm’s length contract with government. General Government businesses have undergone, to varying degrees, commercialisation reforms.

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Government Businesses

A government business is a generic term which includes:

Public Financial Enterprise (PFE)

Public Financial Enterprises (PFEs) are government entities which have one of more of the following characteristics:

  • they perform central bank functions
  • they accept demand, time or savings deposits
  • they have the authority to incur liabilities and acquire financial assets in the market on their own account.

NSW Treasury Corporation is a PFE.

Public Trading Enterprise (PTE)

PTEs are public sector entities which are principally engaged in trading activities that could, in principle, be provided through the market place without compromising the Government’s social and economic objectives. PTEs raise the majority of their income from user charges.

PTEs have undergone "commercialisation" reforms to varying degrees. They have also generally addressed issues of competitive neutrality in input markets, for example, by paying a fee for government-guaranteed debt. However, PTEs may still operate in an environment which maintains legislative or regulatory barriers to competition, and therefore they do not necessarily have competitive neutrality in output markets.

The term PTE encompasses State Owned Corporations (SOCs) however, due to their unique characteristics, SOCs are often referred to separately.

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Statement of Corporate Intent (SCI)

The Statement of Corporate Intent (SCI) is an annual agreement between the shareholders and management of State Owned Corporations. The purpose is to enhance accountability for performance and provide the business with certainty as to the shareholders’ expectations of financial performance.

The Statement contains, amongst other key matters, future financial performance targets and capital programs.

SOCs are required to produce an SCI under Section 21 and 22 of the SOC Act and under the Government’s Reporting and Monitoring Policy for Government Businesses (TPP05-2). Treasury provides SOCs with Guidelines for the Preparation of SCIs and SFPs.

Statement of Business Intent (SBI)

The Statement of Business Intent (SBI) is equivalent to the Statement of Corporate Intent (SCI), but is for non-corporatised businesses rather than State Owned Corporations. For these businesses, the contract is between the Treasurer, Portfolio Minister, Chair and Chief Executive Officer.

Non-corporatised government businesses are required to produce an SBI under the Government’s Reporting and Monitoring Policy. Treasury provides government businesses with Guidelines for the Preparation of SCIs and SBIs.

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State Owned Corporation (SOC)

State Owned Corporations (SOCs) are Public Trading or Financial Enterprises which have been corporatised. Corporatisation involves the establishment of a corporate governance structure which mirrors as far as possible that of a public-listed company, essentially creating an "arm’s length" relationship between the SOC board/management and the government as owner or shareholder.

SOCs are incorporated under the State Owned Corporations Act 1989. The Act provides for two classes of SOC, company SOCs and statutory SOCs.

Statutory State Owned Corporation

Statutory SOCs are not subject to the Corporations Law, but a number of provisions of the Corporations Law have been included in the SOC Act. A statutory SOC is established by an Act of Parliament (its foundation charter, also known as enabling legislation) and listing in Schedule 5 of the SOC Act. Currently all NSW SOCs are statutory SOCs.

Weighted Average Cost of Capital (WACC)

Both debt holders and equity holders require a minimum rate of return that reflects the risk of the business. These minimum rates of return for debt and equity are weighted according to the amount of debt and equity capital invested, thereby establishing a Weighted Average Cost of Capital (WACC) for the business.

In establishing the WACCs for Government businesses, Treasury has formulated a consistent methodology across all Government agencies. The WACC calculation itself and other input variables have been standardised, although business specific input variables such as the equity beta and target gearing ratio are the subject of negotiation. Further detail is available in the Guidelines for Financial Appraisal (TPP 07-4).

The basic WACC (excluding the effect of corporate income tax) is given by:

WACC = [Rd x (D/V)] + [Re x (E/V)] where

Rd = cost of debt
Re = cost of equity
D = market value of debt
E = market value of equity
V = D + E, ie the value of the capital base of the enterprise.