Productivity Commission Research Paper

The Research Paper is the first in a new program of GTE monitoring to provide information on the performance of Australian industries and the progress of microeconomic reform. It is suitable for making a general assessment of financial performance within and across sectors and for providing a baseline for measuring further improvements as reforms are implemented. The existence of the Paper also increases transparency and strengthens accountability.

Scope of the Paper:

The report covers 86 GTEs over the period 2000-01 to 2004-05. This represents the majority of the GTEs currently operating. In 2004-05 these GTEs controlled assets valued at more than $186 billon and generated $63 billion in revenue. The monitored GTEs represent the electricity, water (sewerage, drainage and irrigation), urban transport (railways and ports) and forestry sectors. Australia Post, Airservices Australia and Telstra are also analysed.

Contents of the Paper:
  • An overview of the financial performance of the monitored GTEs over the last five years;
  • Summaries of, and discussion regarding, the data and financial performance indicators used;
  • Findings of the research into capital structures and equity withdrawals; and
  • Performance reports presented by sector, with commentary on the influence of structural reforms and the market environment.

Key Findings:

2000-01 to 2004-05
  • Over the entire reporting period, overall profitability of the GTEs (excluding Telstra) improved.
  • Aggregate profitability of the 54 GTEs monitored since 2000-01 increased from 10.7 percent to 11.4 percent.
  • The return on assets for the GTEs monitored over the entire reporting period, excluding Telstra, increased to  8.0 percent in 2004-05 from 6.8 percent in 2000-01.
  • At the start of the reporting period , 52 per cent of the 54 GTEs earned a rate of return on assets above that year’s long-term bond rate (5.8 per cent). In 2004-05, 48 per cent of those GTEs achieved a rate of return above the risk-free rate.
  • The electricity sector had the strongest returns of all those monitored.
2003-04 to 2004-05
  • In 2004-05, the overall financial position of the electricity, rail and urban transport sectors generally improved. However, the results for water, forestry and ports sectors were lower overall.
  • Compared with the previous year, the aggregate profitability increased in the water, rail and urban transport sectors in 2004-05, but fell in the electricity, forestry and ports sectors.
  • In 2004-05, 47 percent of GTEs monitored earned nominal pre-tax returns on assets above the 10-year bond rate. This is marginally higher than the previous year.
Debt Levels
  • The average debt level of the GTEs monitored since 2000-01 increased by 3.2 percent in real terms over the five years.
  • The electricity, water and ports sectors increased debt by 10 percent. In contrast, the urban transport and rail sectors, Australia Post, Air Services Australia and Telstra have reduced real debt.
  • 44 percent of the GTEs monitored since 2000-01 decreased their nominal debt level. This is due to factors including debt reduction programs, reduced capital expenditure and partial privatisation of some businesses.
Government Transactions
  • In 2004-05, the 86 GTEs paid almost $3.5 billion in tax-equivalent payments to governments. Telstra contributed 52 percent of this amount. The remaining GTEs paid an average of around $20 million each.
  • In 2004-05, 64 GTEs made dividend payments to their owner governments. Total dividends paid were over $4.9 billion. Over 40 percent of this came from Telstra. Dividend payments of the 53 GTEs monitored since 2000-01, excluding Telstra, have increased by 10 percent over the reporting period.
Equity Withdrawals
  • It appears that recent government equity withdrawals have not significantly affected financial performance. However, transparency associated with the transactions remains below private sector reporting requirements.
Community Service Obligations (CSOs)
  • Current government policy is to make on-budget payments directly to the GTEs for the provision of certain CSOs.
  • In 2004-05, governments paid monitored GTEs $4 billion in disclosed CSO payments. Rail GTEs received 67 percent of this funding.
  • Total CSO payments to those GTEs monitored for the entire reporting period increased by 13 percent in real terms from 2000-01 to 2004-05.
Factors Affecting Financial Performance Specific to GTEs:
  • The emphasis that governments place on non-commercial objectives should be considered when comparing the performance of GTEs.
  • The GTEs monitored generally operate in regulated industries, where prices are largely determined by independent price regulators or require ministerial approval.

Government ownership and borrowing arrangements reduce the incentives to maximise shareholder return and operational efficiency which flow from appropriate capital structures and market engagement.