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Government Owned Business Framework

Legal Form

The Shareholder Executive portfolio contains a number of different types of business operating under different frameworks. There are four principal frameworks in use in the portfolio:

  • Companies Act Companies: These companies have the same standard formal governance framework as private sector companies and are required to report to the same standards. The government has a range of shareholding percentages from 100% down to 33%.
     
  • Statutory Corporations: These corporations are formed under specific legislation which, in the main, replicates the Companies Act.
     
  • Limited Liability Partnerships: LLPs share many of the features of a normal partnership, but offer reduced personal responsibility for business debts.
     
  • Trading Funds: These are executive agencies of government that, under the Trading Funds Act 1973, are allowed to net off their revenues against costs.

National Accounts Classification

Government-owned businesses are generally classified by the Office of National Statistics in national accounts as public corporations (PC). PCs are publicly-owned trading bodies that largely recover their costs from fees charged to customers.

One exception to this is British Energy Group. It is classified as a Public Corporation despite the fact that it is wholly owned by the private sector, on the basis of the control that can be exercised by Government over the company.

The Government has a strong fiscal interest in the profitability of government-owned businesses. This is because the net operating surplus of public corporations scores as a receipt in the National Accounts definition of the current balance. One of the government's fiscal rules is that over the economic cycle the current balance is in balance or surplus. Everything else being equal, a more profitable portfolio of government-owned businesses would increase the current balance surplus.

Four of our businesses in our portfolio do not impact on the government's fiscal position because they are not public corporations - they are classified by the Office of National Statistics as private non-financial corporations. These are NATS, Partnership-UK, QinetiQ and Working Links.

Impact on Departmental Resources

Government-owned businesses classified by the Office of National Statistics as public corporations can have an impact on the budgets of their parent departments in one of two ways.

  • Public Corporations
    For most PCs, HM Treasury operates a budgeting arrangement whereby departments are required to obtain a dividend from their PC to match a cost of capital charge in their Department Expenditure Limit (DEL). Any shortfall in performance by a PC, manifested by a reduction in dividend from the PC, must be covered from the parent department's Resource DEL, which has a consequent impact on the funds available to the department. The parent department may retain dividends recovered in excess of the cost of capital charge. Any lending to the PC, either Voted lending from the department or loans from the National Loans fund, score in the department's Capital DEL. Therefore, capital borrowed by the PC seen as funding provided by the parent department, which is then unavailable for other uses. As such, the PC must compete with other Vote-funded projects for any funding that is required, regardless of the financial return.
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  • Self-Financing Public Corporations. Some PCs are designated as Self-Financing Public Corporations (SFPC). SFPCs must normally trade profitably without subsidies, mainly with non-government customers, and must not perform regulatory functions. Status as an SFPC is determined by the Chief Secretary to the Treasury on a case-by-case basis.
    In contrast to a PC, a SFPC will score in Annually Managed Expenditure (AME) and is therefore more easily managed by the parent department. While HM Treasury may require a contribution from the parent department's DEL for any underperformance from the SFPC, this contribution is usually substantially less than the actual loss recorded by the SFPC and is often capped. Any overperformance does not lead to a DEL credit for the parent department

Borrowing Regime

For both PC and SFPCs, the principles of Government Accounting on commercial borrowing are the same. Other than for very short-term borrowing (i.e. overdrafts), government should provide all the external financing for government-owned businesses, and the businesses should not borrow from the private sector. This is because, unless the private sector debt provider is bearing any genuine risk (i.e. that the business will default on the loan), such lending would not offer value for money for the government, as the government is able to borrow more cheaply than the individual business.

However, the principles also state that the businesses themselves must be charged at the market rate, to ensure that they do not get any commercial advantage from the ability to borrow at below market rate. The rate of borrowing is set by reference to the market conditions and risk of the sector.