Review of Commonwealth Government Business Enterprises ...

Part 4 - Financial Governance
4.1 Capital Structure and Dividend Policy
4.1.1 As is the practice in the private sector, it is important for GBEs to maintain an appropriate
capital structure, as this imposes a discipline on GBEs to both optimise effciency and to
maximise returns to the shareholder. The appropriate capital structure for each GBE is to
be determined by the board in consultation with the Shareholder Minister(s) as part of the
annual planning and reporting cycle. It is important that the capital structure of each GBE
incorporates an appropriate mix of debt and equity, as this supports shareholder objectives of
maximising the value of each GBE 42 and reduces opportunities for inappropriate goal setting.
4.1.2 Finance would like to strengthen the processes for establishing and monitoring progress
towards an appropriate capital structure in the context of the annual corporate planning
process. The proposed changes provide for increased scrutiny of capital expenditure
proposals and dividend forecasts in the corporate plan consultation process. Specifc
guidance for a suitable credit rating is also provided as an appropriate target for GBEs.
4.1.3 Please note that some of the changes proposed below in respect of fnancial governance
are taken up as proposed changes to earlier parts, particularly Part 1.8c.
Proposed Change:
1.6 1.8 A principal objective for each GBE is that it adds to its shareholder value. To
achieve this it is required to:
c. earn at least a commercial rate of return;
i. This means recovering the full cost of resources employed, including the
cost of capital; and
ii. Each GBE is to work towards a principal fnancial target and a dividend
policy, agreed in advance with the Shareholder Minister(s), with the principal
fnancial target to be set on the basis that each GBE should be required to
earn commercial returns at least suffcient to justify the long-term retention of
assets in the business, and to pay commercial dividends from those returns.
1.7 1.9 In addition to setting a commercial rate of return principal fnancial target, the
Shareholder Minister(s) may set other fnancial targets and non-fnancial targets,
for particular GBEs, on a case-by-case basis in consultation with the GBE (refer
also to paragraphs 2.2 and 3.3c).
Exposure Draft
42 Review of GBE Governance Arrangements, Richard Humphry AO March 1997, page 48.
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