Owner’s Expectations Manual for State-Owned Enterprises

2. SOE FRAMEWORK

SOEs provide a significant contribution to the well-being of the New Zealand economy. They provide a range of services and products covering areas such as electricity generation and transmission, postal and meteorological services, control of air traffic movements and property valuation. Their performance is important to the Crown’s overall fiscal and balance sheet position and its capacity to meet fiscal, social and other policy goals.

Crown company model

During the 1980s, the government began using the company model as part of its broader state sector reforms.

A key principle under the company model is the separation and maintenance of a clear division between the government’s ownership, purchasing and regulatory interests.

Under the company model, Crown-owned companies:

• operate at arm’s length from the government (unlike departments, Crown-owned companies are not part of the Crown, but are owned by the Crown),
• have independent boards that are accountable for the companies’ performance,
• are separate legal entities, with directors who are responsible for overseeing the management of the business and affairs of the companies, and
• are subject to the financial reporting and other requirements applying to all companies, together with any relevant sector-specific legislation (including the SOE Act for SOEs).

SOE model

As part of the broader state sector reforms, SOEs were established as limited liability companies under and subject to the Companies Act. Until then, government departments generally undertook the trading activities that are now carried out by SOEs. Each SOE is also subject to the SOE Act. These Acts address the ownership, governance and public accountability arrangements for SOEs.

Under the SOE model:

• the principal objective of every SOE is to operate as a successful business and, to this end, to be:
  • as profitable and efficient as comparable businesses that are not owned by the Crown,
  • a good employer,
  • an organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so,
• compensation is paid to each SOE for any non-commercial activities that the Crown requires it to undertake, and
• competitive neutrality is maintained between SOEs and the private sector.

SOE governance structure

The Crown is the sole shareholder of each SOE and acts to protect its investment on behalf of the people of New Zealand.

Each SOE has two shareholding Ministers, the responsible Minister (in most cases the Minister for SOEs) and the Minister of Finance, each of whom holds 50% of the company’s shares.

Shareholding Ministers appoint a board of directors to oversee the management of the business and affairs of each SOE. Directors of SOEs are subject to a number of duties under the Companies Act, including the duty to act in the best interests of the company. The board generally delegates a number of its powers to the company’s chief executive officer (CEO) to enable him or her to carry out the tasks of managing the company.

Officials at CCMAU and the Treasury monitor SOEs on behalf of, and provide advice to, shareholding Ministers. The respective role of shareholding Ministers, boards, managers and officials is shown in Figure 1 below.

Figure 1 SOE governance framework

Government ownership policy

One of the underlying principles of the SOE model as it was conceived in the 1980s was that government-owned trading entities would operate according to normal commercial disciplines. These would include capital market disciplines in the form of an option to privatise, and an understanding that the government would exercise this option wherever the public interest was adequately protected through regulatory or other mechanisms.

In considering the current portfolio of SOEs, it is the government’s policy that an asset sale programme is not on the agenda. This is reflected in the government’s long-term hold policy. The long-term hold policy has four overarching goals:

• to be clearer with SOE boards about shareholding Ministers’ expectations of the companies,
• to provide shareholding Ministers with a greater understanding of, and therefore confidence in, the performance of SOEs, through enhanced benchmarking,
• to develop appropriate capital structures which impose financial disciplines on SOEs while ensuring they have sufficient capital to make operational investment decisions without recourse to the Crown, and
• to ensure that requests for capital are considered in line with the business needs of the SOE, while recognising the Crown’s preference that major investments are considered relative to other demands for capital across the Crown by incorporating SOE requests for equity for significant investments into the normal budget process.

Part of this policy involves each SOE undergoing a long-term hold owner’s review. The objective of each owner’s review is, in general terms, to:

• provide advice to shareholding Ministers, for discussion between Ministers and the board, on any shareholder preferences regarding:
  • the content of the Statement of Corporate Intent (SCI) for the company’s strategic purpose, scope of business, core business, consultation thresholds or investment strategy, in light of the company’s strategic direction and investment profile,
  • the company’s capital structure, in light of its scope of business and core business, its investment profile, its risk profile and the credit-rating benchmark agreed by shareholding Ministers of BBB(flat) and the criteria for exceptions,
• provide a better understanding of the company’s performance through benchmarks for measuring performance against comparable companies and/or against the company’s past performance, including a set of generic benchmarks for all SOEs,
• provide information on the company’s likely equity demands over time, given its planned investment profile and capital structure, and
• establish processes (such as, potentially, an in-depth strategic review) to look at particular aspects of the company’s business where the initial review does not allow for sufficient depth or time to examine such issues.

The terms of reference for the long-term hold review will be agreed between shareholding Ministers and the board of the SOE.

Shareholding Ministers’ expectations or preferences arising out of the review will be included in a Statement of Shareholder Preferences, which will be available to the board for its consideration. The Statement of Shareholder Preferences should be referred to by the board when developing its SCI in future business planning rounds.

The reviews are not a full examination of the strategic direction of the company. However, they may identify aspects of the company’s direction, and make recommendations on issues to be examined outside of the review.

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