High-level choices in the commercial portfolio

In managing the commercial portfolio, Government has ownership responsibilities in relation to the governance and direction of the portfolio. As an owner the Crown will be interested in how it manages and achieves value from its commercial assets. This revolves around choices about what activities the commercial entities will carry out and why; and what business structures and delivery models they utilise.

This suggests that the strategic issues relating to the commercial portfolio are:

Portfolio size: The Crown currently owns around $53 billion of assets in commercial companies, just under a quarter of the entire value of assets on the Crown's balance sheet. Ensuring the performance and composition of the portfolio aligns with the Crown's overall balance sheet objectives is therefore crucial and will depend on:

• the nature of any expansion in the companies' operations domestically or globally
• the nature of the capital used to fund any expansion; for instance, Crown capital, deferred dividends or external debt funding
• any changes in ownership through new investment or divestment (in part or in full), and
• how the resulting characteristics and risk profile of the portfolio are managed, monitored and match the Crown's own capabilities and expertise.

Asset mix: The Crown's commercial portfolio in terms of equity value (rather than accounting value) is dominated by electricity generation assets, a coal mining company and an electricity transmission company and therefore is strongly weighted towards the energy sector. The mix of assets will determine the level of returns it can generate and the risks involved in generating those returns.

Organisational arrangements: The Crown can alter the organisational arrangements over these assets to meet different objectives. The SOEs are currently set up as companies with individual boards and are instructed to operate on a commercial basis under the State-Owned Enterprises Act 1986. Changes to the organisational structure and form, the allocation of control rights and stated functions and objectives could all impact on the way in which these companies operate, with an impact on returns.

Investment/ownership objectives: As suggested above, the portfolio has not been put together with specific commercial investment goals in mind. The composition of the portfolio, and the scope of activity, is a consequence of a mix of active retention of assets, some repurchases and those commercial assets remaining in Crown ownership following asset rationalisation programmes in the 1980s and 1990s.

Placing a greater weighting on commercial investment objectives may involve an increased emphasis on the portfolio's ability to generate cash from business operations, generate appropriate levels of dividend to the Crown, add value in a way commensurate with broader ownership objectives, or some combination of the above.