Part 8: Results of State-owned enterprise audits
8.1
In this Part, we provide background information about SOEs and report the results of our 2011/12 audits of SOEs,26 including our assessments of their management control environment and financial systems and controls.
About State-owned enterprises
8.2
SOEs are established under the State-Owned Enterprises Act 1986 (the Act), are registered as companies, and are bound by the provisions of the Companies Act 1993.27 The Auditor-General is the statutory auditor of all SOEs and their subsidiaries. In this role, she is responsible for the annual audit and other aspects of the Auditor-General's mandate provided for by the Public Audit Act 2001.
8.3
The principal objective of an SOE is to operate as a successful business and to be as profitable and efficient as comparable businesses that are not owned by the Crown. SOEs are also required to be good employers and to show a sense of social responsibility.
8.4
SOEs have some similarities. For example, they are all part of the Crown's commercial portfolio and they are all subject to the same monitoring framework. The Crown Ownership Monitoring Unit (COMU) within the Treasury monitors SOEs on behalf of the shareholding Ministers, as outlined in the Owner's Expectations Manual. However, other than their governance arrangements, there are few similarities among SOEs because of the many and varied nature of their businesses.
8.5
We audited 15 SOEs and Air NZ in 2011/12. These are listed below with a brief description of each:
- Airways Corporation of New Zealand Limited (Airways) – commercial provider of air navigation services and associated aviation infrastructure services;
- Animal Control Products Limited (Animal Control Products) – manufacturer and seller of pest management products;
- AsureQuality Limited (AsureQuality) – provider of a wide range of services to the food and primary industries in New Zealand and other countries;
- Genesis Power Limited (Genesis) – generator, wholesaler, and retailer of electricity;
- Kordia Group Limited (Kordia) – telecommunications and media business, which provides network and technology solutions;
- Landcorp Farming Limited (Landcorp) – pastoral farming, including dairy, sheep, beef, and deer;
- Learning Media Limited (Learning Media) – publisher, producer, marketer, and seller of education materials;
- Meridian Energy Limited (Meridian) – generator, wholesaler, and retailer of electricity;
- Meteorological Service of New Zealand Limited (MetService) – provider of weather information services in the form of forecasting, advice, weather graphics, and data systems;
- Mighty River Power Limited (Mighty River Power) – generator and retailer of electricity;
- New Zealand Post Limited (NZ Post) – postal and courier business, as well as banking services through its Kiwibank subsidiary;
- KiwiRail28 – operator of the rail network and Interislander ferry services;
- Quotable Value Limited (QV) – valuation and property information company;
- Solid Energy New Zealand Limited (Solid Energy) – miner of coking coal for export markets and New Zealand Steel, and thermal coal for the Huntly power station and several industrial customers;
- Transpower New Zealand Limited (Transpower) – plans, builds, maintains, and operates the National Grid, which links generators of electricity to distribution companies and major industrial users; and
- Air NZ – an international and domestic airline group, which provides air passenger and cargo services.
8.6
At 30 June 2012, SOEs and Air NZ had a combined total equity of $18.776 billion (2010/11: $27.707 billion). In 2012, KiwiRail decided to change the basis of its asset valuations to one that reflects the commercial returns generated by those assets. The change in KiwiRail's valuation approach resulted in a $7.1 billion reduction in asset value and a commensurate reduction in equity. This accounts for most of the drop of $9 billion in the combined total equity of SOEs and Air NZ in 2011/12.
8.7
Figure 9 shows the size of each SOE with total staff, revenue, assets, liabilities, and equity.29
Figure 9
Summary financial tables for State-owned enterprises, 2011/12
| State-owned enterprise | Total staff** (FTE) |
Total revenue*** $million |
Total assets $million |
Total liabilities $million |
Total equity $million |
|---|---|---|---|---|---|
| Airways | 730 | 164.2 | 143.0 | 96.2 | 46.9 |
| Animal Control Products | 12 | 6.3 | 6.9 | 1.3 | 5.6 |
| AsureQuality | 1549 | 154.4 | 73.9 | 39.0 | 35.0 |
| Genesis | 931 | 2,270.2 | 3,635.5 | 1,835.1 | 1,800.4 |
| Kordia | 1112 | 398.5 | 259.2 | 167.5 | 91.7 |
| Landcorp | 573 | 210.5 | 1,662.9 | 330.9 | 1,332.0 |
| Learning Media | 133 | 27.5 | 12.6 | 8.0 | 4.6 |
| Meridian | 775 | 2,570.2 | 8,692.8 | 3,867.1 | 4,825.7 |
| MetService | 253 | 42.2 | 39.8 | 25.1 | 14.7 |
| Mighty River Power | 802 | 1,520.6 | 5,877.4 | 2,863.2 | 3,014.2 |
| NZ Post | 8326 | 1,309.4 | 15,851.0 | 14,891.6 | 959.5 |
| KiwiRail | 4175 | 888.1 | 4,262.4 | 802.3 | 3,460.2 |
| QV | 312 | 46.0 | 32.8 | 12.2 | 20.6 |
| Solid Energy | 1656 | 980.7 | 1,165.9 | 742.6 | 423.4 |
| Transpower | 747 | 785.4 | 4,905.3 | 3,396.1 | 1,509.2 |
| Air NZ* | 7631 | 3,272.6 | 3,985.1 | 2,752.8 | 1,232.2 |
| Total | 29,717 | 14,646.8 | 50,606.5 | 31,831.0 | 18,775.9 |
* Numbers for Air NZ are expressed in proportion to the Crown's ownership interest in the company. ** Crown Ownership Monitoring Unit, 2012 Annual Portfolio Report, page 118. *** Crown Ownership Monitoring Unit, 2012 Annual Portfolio Report, page 119.
Governance and accountability
8.8
As noted, each SOE has two shareholding Ministers who hold the SOE shares on behalf of the Crown and are responsible to Parliament for the SOE's performance. The shareholding Ministers appoint the board of directors, which is accountable for the performance of the SOE. COMU monitors SOEs on behalf of the shareholding Ministers.
8.9
The main accountability documents for SOEs are the statement of corporate intent (SCI), the annual report, and the half-yearly report.
8.10
The SCI must be finalised before the start of each financial year and must include specified information, including information about objectives, activities, targets and measures, and dividends.
8.11
The annual report, which is required to be finalised within three months of the end of each financial year on 30 June, must include audited financial statements and any information that is necessary to enable an informed assessment of the SOE's operations, including a comparison of its performance with the relevant SCI.
Changes in the State-owned enterprises sector
8.12
The SOE sector is, and continues to be, influenced by the challenges faced by global market uncertainties. For example, the downturn in the New Zealand economy has resulted in the three energy generator and retailer SOEs (Genesis, Meridian, and Mighty River Power) experiencing a period of low demand for growth in electricity generation. Although there has been significant capital investment by these companies in the past five years, their forecast capital programmes have been scaled back or put on hold until such time as demand increases. COMU notes that it will be important for the companies to translate the high levels of earlier investment into stronger performance in the years ahead.30 This will continue to challenge all SOEs.
8.13
In the 2012 Budget, the Government announced its intention to sell up to 49% of the shares in the State-owned energy companies Genesis, Meridian, Mighty River Power, and Solid Energy. An ownership structure of at least 51% Crown ownership and up to 49% private ownership is commonly referred to as a mixed ownership model. Air NZ currently operates under a mixed ownership model in which the Crown owns most of the shares as well as the special rights convertible share (the Kiwi Share).
8.14
In July 2011, the Treasury appointed financial advisors to do preparatory work on applying the mixed ownership model to the four State-owned energy companies and on reducing the Crown's shareholding in Air NZ. It was proposed that the Crown would retain a 51% stake in all the companies. As a result, the entities would remain public entities and continue to be within the mandate of the Auditor-General.
8.15
The sales of shares in SOEs are proving to be a matter of significant public interest. Therefore, we are monitoring the preparatory work and considering how it affects or may affect our role.
8.16
Financial information will be included in any prospectus documents, and our auditors are likely to be asked to provide assurance over this financial information.
Audit reports 2011/12
8.17
We issued standard audit reports for 15 SOEs and for Air NZ for the year ended 30 June 2012.
8.18
Our audits of SOE subsidiaries resulted in modified (qualified) opinions on New Zealand Post Recycle Centre Limited (for the two years ended 30 June 2011 and 30 June 2012) because we were unable to obtain enough assurance over the completeness of revenue.
8.19
Other non-standard audit reports included the recognition of the disestablishment or pending disestablishment of subsidiaries and comment on the appropriate use of the "going concern" assumption by The ECN Group Limited, a subsidiary of NZ Post.
Environment, systems, and controls
8.20
As part of the annual audit, we consider the SOE's management control environment as well as the financial information systems and controls that support the management and reporting of financial information. Based on our observations, we assign grades for these.31
8.21
Our appointed auditors identify deficiencies in each of these aspects and recommend improvements. The grades assigned reflect the recommendations for improvement as at 30 June 2012. See Appendix 1 for an explanation of the grading scale.
8.22
SOEs report a range of information in their annual reports. They are required by the Act to report against their SCI, and they also provide information on corporate social responsibility and sustainability matters, some of which is reported against international frameworks. The Act does not require such additional information to be audited. However, auditors will consider the information reported against the SCI (in particular, the performance measures and targets) to ensure that it is consistent with other information disclosed in the annual report.
8.23
Some of the reported information on corporate responsibility and sustainability is also subject to independent assurance, provided at the SOE's request.
Grades for 2011/12
8.24
Figure 10 sets out a summary of the grades for the 15 SOEs and Air NZ for 2011/12.
Figure 10
Summary of grades for the 15 State-owned enterprises and Air New Zealand for 2011/12
| Number of entities graded | Management control environment | Financial information systems and controls | ||||||
| VG | G | NI | P | VG | G | NI | P | |
|---|---|---|---|---|---|---|---|---|
| 16 | 13 | 3 | 0 | 0 | 7 | 9 | 0 | 0 |
Grades used are: VG – Very good, G – Good, NI – Needs improvement, P – Poor.
8.25
Overall, the results for 2011/12 show that SOEs have sound management control environments and financial information systems and controls. The grades we issued for management control environment remain as high as they were in 2010/11. For financial information systems and controls, we assigned a "Very good" grade to seven entities (2010/11: five), with no entities receiving the "Needs improvement" grade (2010/11: two). Six of the 16 entities received a "Very good" grade for both their management control environment and financial information systems and controls. These results suggest that SOEs have made good progress during the past year in responding to our recommendations for improvement.
8.26
Figures 11 and 12 show the grades for SOEs for the six years from 2006/07 to 2011/12.
Figure 11
Management control environment – grades for State-owned enterprises, 2006/07 to 2011/12
8.27
Figure 11 shows the steady climb in the percentage of entities achieving a "Very good" grade for management control environment, which means we had no major recommendations for improvement for these entities. This rise was accompanied by a commensurate fall in the percentage of entities graded as "Needs improvement" or "Good".
Figure 12
Financial information systems and controls – grades for State-owned enterprises, 2006/07 to 2011/12
8.28
Similarly, Figure 12 shows a steady rise in the percentage of entities with "Very good" financial information systems and controls, although most remain at the "Good" standard. After some "blips" in 2008/09 and 2010/11, there are no SOEs in the "Needs improvement" category.
26: We include Air NZ with SOEs for the purpose of reporting audit results.
27: Except for KiwiRail, which is a statutory corporation established by the New Zealand Railways Corporation Act 1981. It is an SOE but not a company.
28: For more information, see Transport sector: Results of the 2011/12 audits, available at www.oag.govt.nz.
29: Crown Ownership Monitoring Unit, 2012 Annual Portfolio Report, pages 117-118.
30: Crown Ownership Monitoring Unit, 2012 Annual Portfolio Report, page 30.
31: The Auditor-General is not required to attest to an SOE's service performance. Therefore, we do not grade this aspect.
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