GBE financial management fundamentals
The Directors are responsible for the financial stewardship and the ongoing solvency of the GBE and must ensure that its resources are properly deployed to meet its purpose.
A key objective of a GBE, like that of a private sector company, is to add to its shareholder value.
In order to add to its shareholder value, a GBE should:
- operate efficiently – minimum cost for given scale and quality of outputs
- price efficiently – have regard to market forces, recognising there may be government imposed price conditions or community service obligations and
- earn at least a commercial rate of return, given its obligations to operate and price efficiently.
(RMG-126 paragraph 1.8)
Shareholder Ministers have a strong interest in the financial performance of GBE’s and may set financial and non-financial targets.
(RMG-126 paragraphs 1.9, 4.7 and 4.13)
While a GBE can be funded in a number of ways, which may include:
- Commonwealth equity injections
- Commonwealth grants
- private debt and
- retained earnings;
- it should be viewed as a public asset of which the Directors and officers are custodians.
Additional governance and reporting obligations may be imposed on a GBE depending on its source of funding, including government equity funding agreements and commercial debt covenants.
Specific financial management issues for GBEs
The freedom of a GBE to borrow funds is tightly constrained.
Corporate Commonwealth Entities may only borrow money if it is either authorised by an Act of Parliament (e.g. through its enabling legislation) or by the Minister for Finance in writing or authorised in Rules made under the PGPA Act.
Exceptions exist in respect of credit card and voucher payment systems, provided that they are repayable within 90 days.
(PGPA Act s56 and s57, PGPA Rule s21A)
While the Minister for Finance is empowered to provide indemnities, warranties and guarantees on behalf of the Commonwealth, Directors should not expect that such Commonwealth protections would be given to a GBE or contractual counterparties.
The provision of such protections is rare and will only be considered in exceptional circumstances.