Part 3: Financial performance from 2006/07 to 2011/12
3.1
In this Part, we report on the financial results for CRIs for 2011/12 based on the audited financial statements. We also look at the financial performance of CRIs in the last six years, using analysis of CRIs' accuracy and consistency of budget processes, financial capacity to "bounce back" from unanticipated events, and financial capacity to manage longer-term uncertainties.
Financial results
3.2
The financial results for CRIs are positive for 2011/12, with an aggregate net profit of $21.5 million. All CRIs made a profit of between 1.1% and 5.4% of revenue, and four out of the eight CRIs achieved better results than planned.
3.3
Figure 5 shows the CRIs' financial results for 2011/12.15
Figure 5
Summary of 2011/12 financial results
| CRI | Revenue | Net profit | Planned Net profit | Variance from plan | Dividend | |
|---|---|---|---|---|---|---|
| $million | $million | %* | $million | $million | $million | |
| AgResearch | 157.6 | 4.2 | 2.7% | 4.2 | 0.0 | 0 |
| ESR | 58.6 | 2.4 | 4.1% | 2.9 | -0.5 | 0 |
| GNS | 73.7 | 4.0 | 5.4% | 2.2 | 1.8 | 0.6 |
| IRL | 67.8 | 1.2 | 1.7% | 2.2 | -1.0 | 0.3 |
| Landcare Research | 59.3 | 1.3 | 2.2% | 1.4 | -0.1 | 1.1 |
| NIWA | 121.3 | 5.5 | 4.6% | 3.0 | 2.5 | 0 |
| Plant and Food Research | 121.4 | 1.3 | 1.1% | 0.1 | 1.2 | 0 |
| Scion | 43.9 | 1.6 | 3.7% | 1.3 | 0.3 | 0 |
| Total | 703.6 | 21.5 | 17.3 | |||
* Net profit as a percentage of revenue.
3.4
Figure 6 shows the CRIs' aggregated financial results for 2006/07 to 2011/12. CRIs' aggregate net profit was more than $10 million for each year except 2009/10, and more than $20 million in 2010/11 and 2011/12.
3.5
In 2009/10, there was a negative aggregate result. This was because a change in tax law for depreciation on buildings resulted in a tax adjustment that affected the tax expense in that year.16 The total of the tax adjustment in 2009/10 for CRIs was $33.646 million. Without that adjustment, CRIs' performance would have been an aggregate net profit of around $21.6 million (see the dotted line in Figure 6).
Figure 6
Aggregated financial results for Crown research institutes, 2006/07 to 2011/12
Note: The graph uses figures for the parent CRIs from the audited financial statements for 2006/07 to 2011/12. The result is indicative of the annual net surplus/deficit. The results for 2006/07 and 2007/08 include two CRIs that merged to form Plant and Food Research in 2008/09.
3.6
Three CRIs provided a dividend to the shareholders for 2011/12: GNS, IRL, and Landcare Research. The CRIs tend to retain profits, making them available to be reinvested in the business (for example, to be applied to capital expenditure on new assets and the renewal of existing assets) rather than making a return to the shareholder, as a dividend.
Financial performance requirements and indicators
3.7
The CRI Act requires CRIs to remain financially viable. Viability is defined as:
- generating an adequate rate of return on shareholders' funds; and
- operating as a successful going concern.
3.8
MBIE monitors CRIs. To analyse financial performance and related risks, MBIE uses a set of financial performance indicators that focus on viability and sustainability. These indicators are fairly standard for Crown entities (and the private sector). They are listed in Appendix 2. MBIE also recently commissioned a "balance sheet review" of each CRI.
3.9
We reviewed CRIs' annual reports for 2011/12 and found that most CRIs publish most of the financial performance indicators required by MBIE in their annual reports.
3.10
In the following paragraphs, we look at the financial performance of CRIs by analysing some financial information from the last six years.
Understanding Crown research institutes' financial performance
Developing a new approach
3.11
In our reports on the 2012-22 long-term plans of local authorities17 and on the education sector 2011 audit results18, we noted that we are exploring ways of analysing financial statements to understand financial performance, and have come up with a possible approach. We are receiving useful feedback, which is informing how we use this approach.
3.12
We have applied the approach to the financial statements of CRIs, using indicators that seem relevant. We are open to debate and discussion about the usefulness of this approach, and the set of indicators, and welcome the opportunity to discuss them with CRIs, MBIE, and COMU.
3.13
The financial statements have an important role in assessing performance. Although they say little about many of the non-financial objectives of public entities, they describe and summarise many of the factors that reflect financial risks that might affect whether a public entity achieves its objectives (for example, through the underlying revenue, costs, liabilities, and assets).
3.14
In this section, we use the analytical approach we are developing to help understand the financial uncertainty that surrounds CRIs' capability to deliver on their objectives. We will use the results of this analysis to inform our audit teams, and look into any results that are consistently and/or materially outside of what is usual for CRIs.
3.15
Where we have identified that the results for individual CRIs sit outside what is usual, we will discuss them with individual CRIs, and encourage the CRI, where appropriate, to investigate further.
3.16
As with all analysis of financial performance, there are limitations to what can be inferred. Our approach does not provide a comprehensive assessment of a public entity's performance but focuses on the potential uncertainty of performance.
About our set of indicators
3.17
Our approach uses indicators in three areas to assess aspects of CRIs' financial performance:
- We look at the accuracy of an entity's budgeting, and consistency of budgeting for its use of financial resources. We have called this stability. For example, we compare actual performance with budget/forecast.
- We look at the entity's ability to respond to short-term unanticipated events, or how well the entity can "bounce back", without major structural or organisational change. We have called this resilience. For example, we look at "fixed costs",19 and whether current assets cover current liabilities.
- We look at how prepared the entity is for long-term uncertainties and to maintain itself in the longer-term. We have called this sustainability. For example, we focus on balance sheet items such as assets, liabilities, and debt, together with related items such as capital expenditure and depreciation.
3.18
The indicators we have used to assess these aspects of financial performance could be a useful complement to the measures MBIE already uses. Our indicators are set out in Figure 7.
Figure 7
Indicators by aspect of financial performance
| Stability | Resilience | Sustainability |
|---|---|---|
| Budget to actual cash flows applied to operations | Current assets to operating cash flows | Equity to total assets |
| Budget to actual cash flows applied to assets and other investing activities | Current assets to current liabilities | Retained earnings to total equity |
| Fixed costs* to operating and capital and investing cash flows | Capital expenditure to depreciation |
* See Footnote 19.
3.19
Appendix 3 sets out the detailed results of our analysis of each of these indicators.
What we found
3.20
In general, there was a great deal of variation between CRIs, which we outline in the following paragraphs. Although all CRIs have science research as their business, the kinds of activities each carries out, and the risks associated with them, are quite distinct, and are probably not easily managed in a uniform or consistent way.
The stability of Crown research institutes
3.21
We have looked at budget to actual cash flows applied to operations and to assets and other investing activities.
3.22
CRIs' planning and budgeting for operational activities shows budget and actual spend closely aligned.20 However, all CRIs' budgets for assets and investments were consistently a lot more than what was actually spent.21
3.23
Looking through the cash flow statements, the difference resulting from this "over-budgeting" appears to have been used variously to pay off debt, increase cash, or cover variances in other areas.
3.24
We suggest that CRIs look at the factors that have given rise to the over-budgeting and whether there are any implications in terms of quality of forecasting and cash management.
The resilience of Crown research institutes
3.25
Resilience is affected by the flexibility of a company's cost structures and the buffer that is provided through certain balance sheet items. We have looked at current assets to operating cash flows and to current liabilities. We also looked at fixed costs22 to operating and capital cash flows.
3.26
Our analysis23 shows that CRIs vary in their capability to respond to unexpected events without major structural or organisational change, or recourse to external funders.
3.27
CRIs' current assets are enough to cover current liabilities, and those assets, on average, would cover operating cash flows for about three months if, for example, there were a change in their operating environment or a significant decrease in the level of revenue received. The personnel costs, interest expenses, and depreciation and amortisation (costs that cannot be easily changed), average 57% of operating, investing, and capital cash flows.
The sustainability of Crown research institutes
3.28
We looked at equity to total assets, retained earnings to total equity, and capital expenditure to depreciation.
3.29
Our analysis shows that CRIs are managing their longer-term uncertainties with increasing levels of equity and retained earnings.24
3.30
Spending on assets is also above depreciation and amortisation estimates.25 Because this spending can include spending on new assets as well as the renewal of existing assets, it is not possible to say what the implications are for asset durability without further information from CRIs about the quality of asset maintenance.
Further development of the approach
3.31
We consider that the analysis that we have used adds a potentially useful dimension to the monitoring of a CRI's ability to manage risks to, and changes in, its operating environment. We will be discussing the approach with the CRIs, MBIE, and COMU.
15: All results have been rounded to one decimal place.
16: In the 2010 Budget Statement, the Government announced (and subsequently enacted) legislation to effectively remove depreciation deductions on buildings with expected lives of 50 years or more from the 2012 income year. This change lowered the tax base for such buildings, which created a "one-off" increase in both the deferred tax liability and tax expense in the current year. The changes were effective for years beginning on or after 1 April 2011.
17: Office of the Auditor-General (2012), Matters arising from the 2012-22 local authorities long-term plans, Wellington (see Part 4, pages 51-65).
18: Office of the Auditor-General (2012), Education sector: Results of the 2011 audits, Wellington (see Part 2, pages 9-26).
19: In fixed costs we have included only personnel costs, interest expenses, and depreciation and amortisation.
20: See Figure 11 in Appendix 3.
21: See Figure 12 in Appendix 3.
22: We focused only on personnel costs, interest expenses, and depreciation and amortisation.
23: See Figures 13, 14, and 15 in Appendix 3.
24: See Figures 16 and 17 in Appendix 3.
25: See Figure 18 in Appendix 3.
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