Summary performance measures
To build a consistent picture around SOE performance, SOEs have been asked to report on a standard range of measures. These measures and more detailed information on the performance of the commercial portfolio[1] can be found in the COMU APR 2010.
Briefly, the principal objective of every SOE, as laid out in legislation, is to operate as a successful business and, to this end, be as profitable and efficient as comparable businesses that are not owned by the Crown. They are also required to exhibit a sense of social responsibility and be good employers as part of their principal objective to be successful businesses.
Accordingly, in relation to operational performance, the expectation is that SOEs can at least match peers' performance on the same basis. In addition, as a judicious investor in a commercial portfolio facing competing demands on its investment capital, the Crown will be looking for overall returns greater than its cost of borrowing plus an appropriate risk premium. The average 10-year bond rate was 6%. Therefore the Crown should have a reasonable expectation of returns comfortably exceeding this amount.
The COMU APRsummarises the overall performance of the commercial portfolio. The report concludes that:
- the companies have invested heavily in new plant and other assets, mostly in New Zealand
- this investment has been funded from internally-generated cash flow and a modest increase in borrowing
- gearing has increased but is still well within reasonable bounds
- revenue and earnings have been relatively static
- dividend payments are volatile from year to year, with little discernible trend, and
- the average level of dividend payments remains low relative to comparable companies.[2]
- Figure 29 - Total shareholder returns
- Source: COMU APR
In other words, there has been a recent period of high investment by SOEs but the Crown, as owner of these assets, has yet to see returns commensurate with the value of its investments. In addition, the volatility of dividend payments makes it more difficult than it could be for the Crown to plan and finance its public-good expenditure.
Ensuring that recent and historic investments in the commercial portfolio generate appropriate returns for their owners will be a key focus in a capital constrained environment.
Shareholder return comes from the combination of dividends paid and the change in commercial value of the company. Figure 29 illustrates total shareholder returns for the COMU commercial portfolio. The volatility is largely caused by companies moving from historic cost book value to commercial valuation methods at different times.
