6
THE RATE OF RETURN ON PUBLIC UTILITIES
WEDNESDAY, APRIL 28, 1993
14.
NECESSARY, THE
I NOW TURN, MR PRESIDENT, TO THE MAIN CONCERNS RAISED BY HONOURABLE MEMBERS IN RELATION TO THE PRINCIPLE OF THE RATE OF RETURN ON OUR PUBLIC UTILITIES. 1 PROPOSE TO DEAL WITH THESE CONCERNS UNDER THREE HEADINGS : THE REASONS WHY A RATE OF RETURN IS SIMILARITIES AND DIFFERENCES BETWEEN GOVERNMENT AND UTILITIES, AND THE SUCCESS OF THE GOVERNMENT UTILITIES ADEQUATE SERVICES TO THE PUBLIC.
PRIVATE SECTOR IN PROVIDING
THE NEED FOR A RATE OF RETURN
15.
THE GOVERNMENT FIRMLY BELIEVES THAT WHERE A UTILITY IS PROVIDED AT A COST TO THE COMMUNITY, THE COMMUNITY BECOMES THE SHAREHOLDER IN THAT UTILITY AND THEREFORE HAS A RIGHT TO EXPECT A REASONABLE RETURN ON ITS CAPITAL INVESTMENT. IT IS FOR THIS REASON THAT A TARGET RATE OF RETURN IS SET. THE DISCIPLINE IMPOSED ON DEPARTMENTS OF ATTEMPTING TO ACHIEVE THESE TARGET RATES ENSURES THAT THEY DO NOT ALLOW OPERATING COSTS то EXCEED WHAT A COMPARABLE COMMERCIAL OPERATION COULD BE EXPECTED TO RAISE, THUS ALLOWING FOR MODEST PROFIT. IN SHORT, IT SERVES AS AN ASSURANCE TO THE COMMUNITY, AS SHAREHOLDER, THAT THE UTILITY CONCERNED WILL BE OPERATED IN A PRUDENT AND BUSINESS-LIKE MANNER. AND AS I SAID IN THE DEBATE ON TUNNEL TOLLS LAST FEBRUARY, THE FACT THAT THE PUBLIC REVENUES CAN MAKE A MODEST PROFIT, THANKS TO A UTILITY BEING EFFICIENTLY RUN IS NOT MORALLY WRONG.
A
PART
INTO
THIS
16.
THE RATE OF RETURN EARNED BY A PUBLIC UTILITY ALSO IN REFLECTS THE "OPPORTUNITY COST" OF THE CAPITAL EMPLOYED, TAKING ACCOUNT ALTERNATIVE INVESTMENTS WHICH THE COMMUNITY MIGHT MAKE. OPPORTUNITY COST SHOULD BE RECOVERED FROM THE RELEVANT CONSUMERS (FOR EXAMPLE, USERS OF GOVERNMENT TUNNELS) IF THEY ARE NOT ΤΟ BE SUBSIDISED. WHILE SUCH SUBSIDY MIGHT BE JUSTIFIED WHERE A DELIBERATE DECISION IS TAKEN IN A SPECIFIC CASE, IT SHOULD NOT BE THE GENERAL RULE.
17.
I BELIEVE THAT HONOURABLE MEMBERS SHOULD ALSO CONSIDER CAREFULLY THE OTHER SIDE OF THE COIN, THEY MUST BE UNDER NO ILLUSION AS TO THE CONSEQUENCES OF ANY FAILURE TO ACHIEVE AN ADEQUATE RATE OF RETURN ON OUR PUBLIC UTILITIES. REVENUE FROM FEES AND CHARGES ACCOUNTED FOR 14% OF TOTAL RECURRENT REVENUE IN 1991-92; OF THIS, ABOUT HALF IS DERIVED FROM THE FIVE GOVERNMENT UTILITY OPERATIONS. THE RETURN ON AVERAGE NET FIXED ASSETS (OR TURNOVER, IN THE CASE OF THE POST OFFICE) ALONE ACCOUNTED FOR NEARLY $2 BILLION, DESPITE THE FACT THAT WE LARGELY FELL FAR SHORT OF OUR TARGET RATES. TAMPERING ON AN AD HOC BASIS WITH OUR ESTABLISHED POLICY OF AIMING TO ACHIEVE A REASONABLE RATE OF RETURN, FOR EXAMPLE BY REJECTING A MODERATE INCREASE IN TUNNEL TOLLS BEFORE ANY POLICY REVIEW CAN BE UNDERTAKEN THEREFORE HAS MAJOR FISCAL IMPLICATIONS. ANY REVENUE LOST IN THIS WAY WOULD HAVE TO BE MADE UP FROM OTHER SOURCES. PUT BLUNTLY, IT WOULD MEAN EITHER HIGHER RATES OF TAX, OR LESS SCOPE FOR FURTHER TAX CONCESSIONS, OR LESS FUNDS FOR SERVICES WHICH HAVE TO BE SUBSIDISED. I AM SURE THAT NONE OF THESE OPTIONS WOULD BE PALATABLE TO MEMBERS OF THIS COUNCIL.
/COMPARISON WITH