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Financial Performance of Government Trading Enterprises 2004-05 to 2005-06

Commission research paper

Financial Performance of Government Trading Enterprises 2004-05 to 2005-06 was released on 26 July 2007. It forms part of the Commission's research into the performance of Australian industries and the progress of microeconomic reform.

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  • Key points
  • Media release
  • Contents

The performance of 85 government trading enterprises (GTEs) providing services in key sectors of the economy - including electricity, water, urban transport, railways, ports and forestry - are presented in this report. These GTEs controlled about 3.3 per cent of Australia's non-household assets ($197 billion), and accounted for around 2 per cent of GDP in 2005-06.

Overall, the profitability of GTEs increased by 61 per cent in 2005-06 with improvements recorded in all sectors compared with the previous year. The largest improvements were in the electricity, railways and forestry sectors. However, profitability varied among GTEs:

  • profits declined for 37 per cent of GTEs;
  • eleven GTEs (six in the water sector) failed to report a profit; and
  • for most sectors recording a profit improvement, much of this was derived from the performance of only one of the GTEs in that sector (between 39 and 65 per cent of increased profits).

Although the return on assets improved on average, about half of the monitored GTEs earned less than the long-term bond rate in 2005-06. This implies that an even greater proportion did not earn a commercial rate of return (which would include a margin for risk).

The poor financial performance of many GTEs underscores a longer-term failure to operate these businesses on a fully commercial basis in accordance with competition policy agreement undertakings.

In total, GTEs made dividend payments to owner governments of almost $5.6 billion in 2005 06 ($3 billion excluding Telstra). In addition, tax and tax equivalent payments totalled $3.3 billion ($1.9 billion excluding Telstra).

Asset valuation methods influence capital management through their effect on performance measurement, transparency and accountability. A survey of 58 GTEs revealed that 41 per cent used an historical cost method in 2005-06, even though the optimal deprival value method has been endorsed by governments as the preferred method for valuing GTE assets.

The economic rate of return (ERR) is a measure of capital management efficiency that has regard for the capital as well as the cash streams of income. The more widely used accounting rate of return (ARR) only captures cash streams of income. Estimates for 56 GTEs over the period 2000-01 to 2003-04 indicate that:

  • many GTEs did not achieve a return on assets exceeding the risk-free rate using either the ERR (42 per cent of GTEs) or the ARR (52 per cent of GTEs); and
  • ERR estimates were higher than those of the ARR.

The Productivity Commission has released its latest scorecard on the financial performance of 85 Australian, State and Territory Government trading enterprises (GTEs). The report - Financial Performance of Government Trading Enterprises 2004-05 to 2005-06 - also examines the influence of different asset valuation methods and rate of return measures on performance comparisons and capital management.

The 85 GTEs monitored in this report control just under 3.5 per cent of Australia's non household assets ($197 billion), and account for around 2 per cent of GDP.

Although in aggregate, profitability increased in all sectors (with the largest improvements in the electricity, railways and forestry sectors), 37 per cent of GTEs recorded declines, and 13 per cent did not report a profit.

Despite some improvement, about half of the monitored GTEs did not achieve commercial rates of return in 2005-06, underscoring a long-term failure of governments to operate these businesses on a fully commercial basis in accordance with their competition policy undertakings.

Commission Chairman Gary Banks said that the efficient operation of GTEs is important both to the wellbeing of the community and to the competitiveness of Australian industry, including our export performance. He added that the Commission's continued monitoring of GTEs will assist in evaluating the progress and gains from further infrastructure reforms.

Financial performance monitoring of GTEs forms part of the Commission's research into the performance of Australian industries and the progress of microeconomic reform. The monitored GTEs provide services in key sectors of the economy - including electricity, water, urban transport, railways, ports and forestry.

Background Information

Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443

Preliminaries
Cover, Copyright, Foreword, Contents, Abbreviations

PART A

Key Points

1 Introduction
1.1 Scope
1.2 Approach
1.3 Performance comparisons over time
1.4 Capital management research
1.5 Report structure
Attachment 1.1 Data item definitions

2 Financial performance overview
2.1 Monitored GTEs
2.2 Market environment
2.3 Profitability
2.4 Financial management
2.5 Transactions with government

3 Asset valuation and capital management
3.1 How can specialised assets be valued?
3.2 Accounting standards and Treasury guidelines
3.3 How are specialised assets valued?
3.4 How do valuation methods affect capital management?

4 Rate of return measures and capital management
4.1 How can capital efficiency be measured?
4.2 Accounting and economic rate of return measures
4.3 Comparing accounting and economic rate of return measures
4.4 What are the implications for capital management?

PART B

5 Electricity
5.1 Monitored GTEs
5.2 Market environment
5.3 Profitability
5.4 Financial management
5.5 Transactions with government
5.6 Implications of the new accounting standards
5.7 GTE performance reports

6 Water, sewerage, drainage and irrigation
6.1 Monitored GTEs
6.2 Market environment
6.3 Profitability
6.4 Financial management
6.5 Transactions with government
6.6 Implications of the new accounting standards
6.7 GTE performance reports

7 Urban transport
7.1 Monitored GTEs
7.2 Market environment
7.3 Profitability
7.4 Financial management
7.5 Transactions with government
7.6 Implications of the new accounting standards
7.7 GTE performance reports

8 Railways
8.1 Monitored GTEs
8.2 Market environment
8.3 Profitability
8.4 Financial management
8.5 Transactions with government
8.6 Implications of the new accounting standards
8.7 GTE performance reports

9 Ports
9.1 Monitored GTEs
9.2 Market environment
9.3 Profitability
9.4 Financial management
9.5 Transactions with government
9.6 Implications of the new accounting standards
9.7 GTE performance reports

10 Forestry
10.1 Monitored GTEs
10.2 Market environment
10.3 Profitability
10.4 Financial management
10.5 Transactions with government
10.6 Implications of the new accounting standards
10.7 GTE performance reports

11 Australian Government Trading Enterprises

A Monitored GTEs

References

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