Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Investment Banking > 11 - Coporatisation and Privatisation > Flashcards

11 - Coporatisation and Privatisation Flashcards

1
Q

Corporatisation

A

Transformation (by legislation) of a government entity into a corporation, with government remaining the sole shareholder

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Features which support corporatisation

A
  • trading in goods/services (can’t be just a social role)
  • meets operating costs from user charges
  • operates in competitive environment
  • operates with autonomy (BOD reports to gov)
  • has a commercial focus
  • has significant size to justify corporatisation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Key requirements of a successful corporatisation

A
  • clear and non-conflicting OBJECTIVES
  • provide managerial RESPONSIBILITY, authority and autonomy
  • independent and objective performance MONITORING
  • rewards and sanctions for performance (e.g. introduce bonuses/promotions etc)
  • competitive neutrality
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the key legal aspects for corporatisation?

A
  • Incorporatisation model
  • Involves incorporation by the government of a public company under the Corporations Law and the transfer of the commercial undertaking (assets) of the statutory authority to the company
  • Gov remains the sole shareholder however board of directors and management formed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Examples of Corporatisation

A
  • Fed Square
  • Film Victoria
  • Melbourne Markets Authority
  • Docklands Studios
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Implementing Corporatisation - Competitive neutrality (operating as part of the private sector)

A
  • Interests in government business enterprises are not transferable property rights. Hence, normal market incentives and constraints do not apply, namely:
    • threat of takeover
    • replacement of Boards
    • employee option/share schemes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Implementing Corporatisation - Competitive neutrality (political influence)

A
  • gov may impose political objectives on enterprise (eg. supporting interest groups, ALP and penalty rates)
  • use the enterprise as agent for implementing industrial relations policy
  • use the enterprise as agent for implementing economic policy
  • necessary capital funds may not be provided
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Implementing Corporatisation - Competitive neutrality (gov sponsorship and accountability)

A
  • GS: will be hidden subsidy in borrowing costs/conditions due to direct or implied gov guarantee
  • AC: flow of information from gov enterprise not subject to Corps Law standards
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Mechanisms to provide financial neutrality

A
  1. Performance targets (based on commercial benchmarks)
  2. Capital structures (similar to comm. enterprise, however no SHs - problem)
  3. Rates of return (10 yr Comm bond rate plus risk margin)
  4. Dividends (negotiated with gov, gov prefers div to cap.app)
  5. Tax equivalents (should be similar to private enterprise tax regime - difficult due to tax minimisation practices)
  6. Debt guarantee fees
  7. Community Service obligations
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Privatisation

A

“Transfer of the ownership of a service and its associated infrastructure from gov to private sector” -trade sale or public float
-eg. Telstra, Qantas, CBA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the key characteristics required and the methods for achieving privatisation?

A
  • Economic size, provision, ability to meet operating costs (as per corporatisation)
  • IPO, trade sale (sale of public assets to private owners), contracting out services
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Arguments FOR corporatisation

A
  • Competitive environments and capital market discipline increase efficiency of State owned enterprise
  • Proceeds could reduce budget deficit, Gov debt, and the burden of interest costs as a result of reduction in debt
  • Proceeds could be used to finance necessary infra structure
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Arguments AGAINST privatisation

A
  • Private ownership does no necessarily translate into improved efficiency
  • Essential services may be unavailable and unaffordable to large segments of population
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Role of the Regulator General

A
  • Authority to approve price increases in nominated industries (essential services such as electricity, water, gas, rail etc)
  • Privatisation of certain services must be approved by Reg. Gen
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Two techniques used by the Regulator General for setting price increases

A
  1. Cost of service price setting
  2. Rate of return regulation: (firms costs are reviewed and unnecessary costs are eliminated, rate of return judged to be fair for the firm is specified, prices and their structure are set to generate enough revenue to cover costs and provide fair rate of return) - key property is that profit level is limited (eliminate monopoly behaviour)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Infrastructure

A

Basic physical and organisational structures and services needed for the community. The technical structures that support a society, such as roads, bridges, water supply, electrical grids, communications etc

17
Q

Issue with infrastructure

A
  • The economy and community demand new and enlarged infrastructure facilities, however governments have extensive demands on their finite funds
  • Therefore, over time, governments have encouraged increase private sector investment in new and existing infrastructure and services
  • Eg: operating/managing contracts in areas of hospital operation, vehicle fleet management; turnkey projects such as freeway extensions, BOT/BOOT projects such as prisons and toll roads
18
Q

Public-Private Partnerships (PPPs)

A
  • Partnerships between private and public sectors for the purposes of designing, planning, financing and constructing/operating projects which would traditionally be public sector projects (infrastructure)
  • Cover economic and social infrastructure and typically include both a capital component and an ongoing service delivery component of non core services
19
Q

Features of PPPs

A
  1. Provision of a SERVICE involving the creation of an asset involving private sector design, construction, financing, maintenance and delivery
  2. Contribution by government through land, capital works, risk sharing, revenue diversion, purchase of agreed services or other supporting mechanisms
  3. The private sector RECEIVING PAYMENTS from governments (or users) once operation has commenced and contingent on the private sectors performance on supplying the services
20
Q

Benefits of PPPs

A
  • Contracting the delivery of infrastructure and non-core activities to the private sector enhances opportunity for delivery of improved public services more cost effectively
  • Ability to draw upon best available skills, knowledge and resources whether in private or public sector
  • Value for money from private sector involvement can be determined by governments through evaluating the project costs and benefits
21
Q

What is a BOT arrangement?

A

Build, operate and transfer - company builds the facility, gets to operate it for a while and is paid for that, then finally transfers i back to the public sector at the end of some time (when the construction company has been paid the satisfactory amount)

22
Q

What is a BOOT arrangement?

A

Build, operate, own and transfer - As per BOT except the company owns and operates the facility for a period of time (say 20-25 years), during which they collect revenues. Finally they hand back to government
-KEY DIFFERENCE is tax: through ownership, the company depreciates the asset and claims a tax deduction

23
Q

What is a stapled security?

A
  • Created when two or more different securities are contractually bound together so that they cannot be sold separately but instead treated as a single security on the ASX
  • E.g. A stapled security will consist of a share in a company and an interest in a trust
  • Each individual security retains its legal character but is dealt with as a whole
  • E.g. REITs and infrastructure funds
24
Q

Tax implications of stapled securities

A
  • If company has made a tax loss, they pay the investors interest and receive a tax deduction (or a unfranked dividend). Therefore the recipient (investor) is tax neutral
  • However, if the company has a tax profit, the company pays a franked dividend to the investors
  • Therefore, company is tax indifferent in both scenarios, however there are tax implications for the investors if the company makes a profit

Investment Banking (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions