28 February 2007
The Shareholder Executive has improved government’s performance as owner of public businesses and is already producing some real financial gains for the public sector, according to a report out today by the National Audit Office. But increasing the Executive’s powers, such as expanding its remit to cover all public sector businesses and giving it greater independence, could enhance its future effectiveness.
The Executive was set up in 2003 to bring focus to shareholder issues and to improve government’s ability to act as an effective shareholder. Government owns or part owns a number of businesses, some of which provide critical public services, including the maintenance of a postal network covering the entire population. These companies in 2005 had a combined turnover well in excess of £25 billion.
Today’s report looked at the changes brought about by the Executive and whether it is on course to achieve its objective of increasing the value of six of its state-owned businesses by £1 billion between 2004 and 2007. These six businesses are BNFL, CDC, NATS, QinetiQ, Royal Mail and Royal Mint.
The report found that, midway into its three-year plan, the Executive is on track to meet this target. In the first two years of the reporting period, the increased value of the six businesses is ahead of the £1 billion mark, although the effect of this could be reversed as some of them face strategic challenges in the third year. And the Executive has made real financial gains for some departments, notably the 2006 sale of Westinghouse Electric Company by the Board of BNFL plc. Advice from the Executive helped achieve a sale price of £3 billion, three times higher than initial expectations. Key to the Executive’s success has been its ability to attract skilled and experienced staff from both the public and private sector.
But the report also highlights a number of barriers to the future development of government as a shareholder. The Executive does not cover all publicly owned businesses, currently focusing only on 27 businesses. And while its overall £1 billion target has brought about a greater focus on shareholder value, it groups six businesses together as a single portfolio. Going forward, this is no longer appropriate as the performance of one of the very large businesses can have a decisive influence on whether or not the overall financial target is achieved.
The report also found that taking on DTI policy responsibilities within the postal services market, such as the sponsorship of industry watchdogs Postwatch and Postcomm, could limit the Executive’s ability to focus on shareholder value. A further barrier to future performance of government owned businesses is that decisions on investment in companies are subject to fiscal policy constraints and compete with departmental and government-wide spending priorities. The ability to access financing for investments is critical to the success of a commercial business.
The NAO recommends that to improve performance further the Executive should amend its target for increasing value so it is based on results of individual businesses as well as being aggregated across the portfolio. The Executive should also not have responsibility for activities outside enhancing shareholder value. In addition, departments should give the Executive responsibility for managing their shareholder interests, or else explain publicly why this would not be appropriate.
Departments should also consider delegating responsibility for investment budgets to the Executive so that finance can be made available for investment that is supported by a robust business case. Greater independence could give it greater freedom to attract and retain skilled individuals, some of which will be recruited from senior positions in the financial services sector.
“Despite the Shareholder Executive’s limited powers, it has up to now provided good value for money to parliament and the taxpayer. The Executive has gone a long way in improving how government acts as a shareholder and should be commended for this. “However, a number of barriers have been identified that could lead to future inefficiencies; and improvements could be made to the way in which the Executive’s performance is measured. The Government should take on board our recommendations if it is to build on its early work and set stretching targets for increasing the value of all public sector businesses"
“Despite the Shareholder Executive’s limited powers, it has up to now provided good value for money to parliament and the taxpayer. The Executive has gone a long way in improving how government acts as a shareholder and should be commended for this.
“However, a number of barriers have been identified that could lead to future inefficiencies; and improvements could be made to the way in which the Executive’s performance is measured. The Government should take on board our recommendations if it is to build on its early work and set stretching targets for increasing the value of all public sector businesses"
Sir John Bourn, 28 February 2007