3 Performance Management
15. The Executive has set itself an objective to
increase the value of six businesses by £1 billion between
2004 and 2007. In 2006, the value of these businesses had increased
by £2.6 billion, although the Executive anticipated that
some of this increase might be reversed in 2007.[36]
This target has focused attention on shareholder value but is
not an adequate measure of the improvement that the Executive
has made to the management of government shareholdings.[37]
The performance of one or two large businesses can have a decisive
influence over whether or not it meets its target—as the
current level of achievement demonstrates.[38]
The Royal Mail's value increase alone was over £1 billion
and the Royal Mail and BNFL together accounted for 70% of the
£2.6 billion increase achieved. A further two of the businesses
covered by the target (NATS and CDC) benefited from benevolent
market conditions. Business-level performance targets would provide
a better means of measuring performance by measuring the proportion
of targets which are achieved across the businesses in the Executive's
portfolio.[39]
16. The Executive uses an Economic Profit methodology
to track changes in value to measure performance against its £1
billion target. This methodology as applied by the Executive,
however, is not able to provide an absolute value of the public
sector businesses in the Executive's portfolio[40]
and so it does not know what each business in its portfolio is
worth. Equivalent shareholders in the private sector undertake
periodic valuations of the businesses in which they have an economic
interest and this gives them an idea of where their businesses
stand in the market place and enables them to make decisions on
what to do with their assets.[41]
17. An important indication of the Executive's performance
is the value public sector businesses return to the taxpayer in
the form of dividends. Dividends paid to departments increased
from £24.3 million in 2003-04 to £45.3 million in 2005-06,
but at the same time operating profits increased from £1.1
billion to its current level of £3.7 billion, resulting in
a fall in dividends as a percentage of profits (Figure 5).[42]
The Executive does not currently set business-level dividend targets,
but instead has a broadly stated aspiration to achieve a progressive
return to dividend paying.[43]
Even though some of the businesses contributing to this increase
in profits are not required to pay dividends, the Executive recognises
that there is more it could do to ensure that the other businesses
are not keeping cash on their balance sheets.[44]
Businesses have an incentive not to pay dividends to departments
because under the current system for obtaining finance for investment,
there is a risk that future financing needs will not be met.[45]
The cost of any increased access to finance should therefore be
partly offset by an increased dividend flowback.
Figure 5: Dividends Paid and As a Percentage of Operating Profit, 2003-2006
Source: C&AG's Report
36 Q 5; C&AG's Report, paras 3.2, 3.7 Back
37
Q 5-7, 64; C&AG's Report, paras 2.3-2.4, 3.6-7 Back
38
C&AG's Report, Figure 12 Back
39
Q 128; C&AG's Report, Figure 8, para 3.7 Back
40
Qq 77-78, 95-97 Back
41
Qq 100-101 Back
42
Qq 19, 22 Back
43
C&AG's Report, para 2.1 Back
44
Qq 19, 115 Back
45
C&AG's Report, para 2.27 Back
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