ABS public sector unit classification decision: Transport Asset Holding Entity for NSW
The Australian Bureau of Statistics (ABS) has assessed that the Transport Asset Holding Entity (TAHE) is classified as a market producer. Further, as TAHE provides non-financial services it is classified as a public non-financial corporation.
The ABS has responsibility for classifying units for the purpose of official economic statistics. For new or existing entities, classification determinations are typically initiated by the Commonwealth Department of Finance or individual state and territory treasuries. This is done via a formal email or letter to the ABS.
In 2015, NSW Treasury requested a statistical sector classification determination from the ABS for a proposed new TAHE for NSW. The ABS determination was that TAHE met the criteria for classification as a public non-financial corporation. Following transition to the final operating model of TAHE in early 2022, NSW Treasury requested a final classification determination for TAHE.
This article is a shortened version of the determination paper endorsed by the ABS Conceptual Classification Committee in July 2022. To date the ABS have not published these determinations. Going forward, the ABS will publish similar classification articles for some entities.
Determining institutional unit classification
As outlined in the ABS article on Public Sector Unit Classification Decisions, the ABS classifies public sector units into either:
- General government - government-controlled non-market producers
- Public corporations - government-controlled market producers
There are three questions that must be resolved to classify an entity:
- Is the entity a separate institutional unit?
- Is the unit under government control?
- Is the unit a market or non-market producer?
The TAHE information used in this paper is from publicly available sources and additional information provided by NSW Treasury as part of the classification process. Information provided by NSW Treasury is collected under the Census and Statistics Act 1905.
TAHE is a separate institutional unit
To be considered a separate institutional unit, an entity must meet the following criteria (para. 2.22, Government Finance Statistics Manual 2014 [GFSM 14]):
- Have the ability to own goods or assets, and exchange these in transactions with other institutional units;
- Be able to make economic decisions and engage in economic activity for which it is itself held responsible and accountable at law;
- Be able to incur liabilities on its own behalf, to take on other obligations or future commitments and to enter into contracts; and
- Be able to produce a complete set of accounts, including a balance sheet of assets, liabilities and net worth, an operating statement, and a cash flow statement.
Under NSW legislation, TAHE operates with separate legal status that enables TAHE to enter contractual relationships with third parties. TAHE is also granted the required authority to undertake the performance of its functions (supports criteria 3).
All decisions relating to TAHE operations are made by, or under, authority of the Board of Directors. Day-to-day operations are managed and controlled by the Chief Executive Officer (supports criteria 2).
TAHE is responsible and accountable under state legislation for economic decisions, including incurring assets and liabilities (supports criteria 1,2 and 3).
TAHE produces a complete set of general-purpose financial statements. These are prepared in accordance with Australian Accounting Standards and the Government Sector Finance Act 2018 (supports criteria 4).
These considerations confirm that TAHE is a separate institutional unit.
TAHE is under government control
If an entity is a separate institutional unit, the next question is whether the entity is under government control.
A unit is under government control if its operational activities and general corporate policy are determined by a government or another government-controlled unit (para. 2.68, Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2015 [AGFS 15]). This control test includes instances in which the public and private sectors share ownership of a unit (para. 2.70, AGFS 15).
Box 2.2 in the GFSM 14 manual provides eight indicators to consider when determining whether a unit is subject to government control. Although a single indicator could be sufficient to establish control, in other cases a group of separate indicators may be required to collectively indicate control (para. 2.58, AGFS 15). The eight indicators are:
- Ownership of the majority of the voting interest
- Control of the board or other governing body
- Control of the appointment and removal of key personnel
- Control of key committees of the entity
- Golden shares and options
- Regulation and control by government
- Control by a dominant public sector customer or group of public sector customers
- Control attached to borrowing from the government
The operational activities and general corporate policy of TAHE is set out in the Transport Administration Act 1988 (TAA) and the State Owned Corporations Act 1989 (SOC Act). TAHE exercises its functions pursuant to an operating licence issued by the portfolio minister. The portfolio minister has the power to grant, determine, amend, specify, enforce, or cancel an operating licence (supports indicator 6).
TAHE is governed by a Board of Directors. Powers, functions, responsibilities and membership details of the Board are outlined in the TAHE Board Charter. Directors are appointed by the voting shareholders (the Treasurer and Minister for Finance), except for the NSW Transport Secretary who is an ex-officio member. The voting shareholders may remove a director (other than the Transport Secretary), or the chairperson, at any time for any or no reason and without notice (supports indicators 1, 2 and 3).
From a regulatory perspective, Section 13 of the TAA provides that the portfolio minister may grant one or more operating licences to TAHE. This authorises TAHE to carry out the listed functions specified in the licence, and such other functions as may be conferred or imposed on it by the licence (supports indicator 6).
Section 14 of the TAA provides that the operating licence is subject to the terms and conditions determined by the portfolio minister. These may include regulatory matters like safety, compliance, and integration of transport modes (supports indicator 6).
These factors are sufficient to confirm that TAHE is a government controlled unit.
TAHE is a market producer
If an institutional unit is under government control, it is then reviewed to determine whether it is a market or non-market producer.
Units will typically be classified as market producers if they sell the majority of their output over the long-term at economically significant prices.
Economically significant prices are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts that purchasers wish to buy (para 6.95, System of National Accounts 2008 [SNA 2008]).
The ABS considers three tests, on balance, to determine whether a unit is a market or non-market producer (para. 2.58, AGFS 15).
Sales to costs ratio test
This test considers the proportion of total production costs that are covered by total sales (including particular subsidies). The higher the proportion, the more likely the unit is to be a market producer. There is no specified threshold for the sales to costs ratio which mandates that a unit is a market producer.
TAHE's revenue from sales of goods and services is predominantly derived from rail access charges and licence fees, as well as a small amount of other goods and services income.
TAHE has entered into commercial track access agreements with each of Sydney Trains, NSW Trains and third-party operators. These agreements set out the terms of the arrangement and the access charges and licence fees payable to TAHE.
TAHE also receives additional income from investment activities (including property rental and interest income) and other revenue, such as gains on disposal of assets. This income is not included in the sales to costs ratio.
Forward estimates of revenue and expenses were provided by NSW Treasury. These estimates indicate that production costs for TAHE are expected to be fully covered by revenue from sales of goods and services over the forward estimates.
The sales to costs ratio is projected to increase over the next 10 years. This is driven by projected growth in revenue from rail access charges paid by Sydney Trains and NSW Trains. Total production costs (including depreciation) are projected to stabilise over the forward estimates.
Based on this information, the sales to costs ratio test indicates that TAHE is a market producer.
Government intervention test
This test considers the extent to which the government can directly influence the prices, nature and level of goods and services provided by the producer.
TAHE has been legally established under NSW legislation to own, promote and facilitate access to transport assets, for use by government and private sector operators.
Economic decisions relating to TAHE's operations are made at arms-length from government. TAHE is not subject to the day-to-day direction and control of the Minister for Transport.
Under the SOC Act, all decisions and overall strategy are made by or under the authority of the Board. The Minister can only issue directions in accordance with the process and requirements of the SOC Act. This includes consulting with the Board and obtaining Treasurer approval.
The Australian Competition and Consumer Commission (ACCC) is responsible for regulating rail activity in Australia. A state can establish its own access regime and request a determination from ACCC to ascertain that the regime is compliant with the Competition and Consumer Act 2010. This included the setting up of the NSW Independent Pricing and Regulatory Tribunal (IPART).
TAHE access fees are informed by IPART determinations that are made at arms-length from government. IPART's independent regulation is intended to ensure that monopoly track owners provide prices and conditions of access on reasonable terms. Within these bounds, rail owners and access seekers negotiate an access agreement. If they cannot agree, either party can refer the dispute to IPART to arbitrate.
Based on this information, the government intervention test indicates that TAHE is a market producer.
This test considers the ability of consumers to acquire similar goods and services from other producers based on the prices charged, as competition can be restricted by excessive market control or government regulation. This test also considers the lack of competition when a unit is primarily supplying ancillary services to other government units.
There is limited competition and no material demand risk faced by TAHE in relation to its rail assets that support passenger rail services. TAHE operates in a monopolistic market in NSW, due to the barriers to entry arising from the high cost of owning or leasing rail assets. This is particularly the case in the same regions of NSW that TAHE operates within.
The majority of TAHE's revenue from sales of goods and services are driven by two customers, Sydney Trains and NSW Trains, which are themselves public sector entities. They are both subsidised by the NSW Government to enable the provision of efficient public transport access. Therefore, the charges paid by Sydney Trains and NSW Trains would not be possible without the subsidy payments received from the NSW Government.
The rail freight industry is more competitive in NSW relative to passenger rail services. The Greater Sydney Rail network is made up of rail lines which are either owned by the Australian Rail Track Corporation (ARTC) or owned by TAHE. ARTC is a Commonwealth entity and like TAHE, is subject to the NSW Rail Access Undertaking. Further away from Sydney, the Country Rail Network is run by the private sector.
When considering freight transport more widely than rail, TAHE’s freight customers can also choose from non-rail options. Road freight, for example, is generally more timely, less costly and more flexible. However, fees from rail freight make up a smaller proportion of TAHE’s revenue compared to the fees charged for access to rail lines which support passenger rail services.
Based on current information, the competition test is inconclusive for TAHE. There is lower competition in relation to its rail assets that support public transport passenger services and higher competition in relation to the private sector freight industry.
On balance, the above tests indicate that TAHE is a market producer.