Public sector accounting UN STATISTICS DIVISION Economic Statistics

Public sector accounting UN STATISTICS DIVISION Economic Statistics Branch National Accounts Section UNSD/ECA National accounts workshop November 2005

Introduction Taxes Transactions between government and public corporations Privatization Private/Public/Government Sector Delineation Taxes on holding gains Public-Private Partnerships

Tax revenue and tax credits n The Task Force on the Harmonization of Public Sector Accounting (TFHPA) n The definition of tax revenue n n The accrual recording of taxes n n Suggested only minor changes Gave more guidance on amounts and timing of recording The recording of tax credits n Recommended a split of tax credits between reduction of tax and government expenditure

The AEG on tax issues: n n Tax definition and accrual recording: - Broad agreement on the principles time of recording, accruals, amounts of tax revenue and to exclude uncollectible taxes - No precise recommendations in the SNA, no changes Tax credits: - AEG disagrees with the TF recommendation to split, and prefers to gross up the tax revenue for all payable tax credits

Transactions between government and public corporations Due to lack of guidance the TFHPSA investigated capital injections and super dividends Two approaches were proposed and opposed:

Transactions between government and public corporations 1. For an improved / amended SNA, to take on board some recommendations from the EMGDD and GFSM 2001 (no fundamental change to the present conceptual framework, only more precise definitions) 2. To apply the treatment recommended foreign direct investment using reinvested earnings (D. 43); to accrue the profit or loss of the public corporation in the GG account.

Transactions between government and public corporations n n n The opinion of the task force members was shared between the two main options: no overwhelming majority in favour of one approach It appeared during the discussion that some uncertainties were affecting the D. 43 recording (only 100% owned corporations? , scope of financial transactions…); situation not mature Orientation of TFHPSA: preference for the improved / amended SNA approach; the paper presented to the task force developing the D. 43 proposal will be put on the « Research agenda »

Privatisation, restructuring agencies and SPVs

PRIVATISATION n 1. 2. Definition: Giving up of control by the general government over a public corporation by the disposal of shares and other equity to private units (same basic definition in the EMGDD and GFSM 2001). The typical case of privatisation is a sale of assets, and at first the sale of shares and other equity.

PRIVATISATION The Sale of assets in the SNA 1993 n General principle: this transaction entails a restructuring / reshuffling the assets in the balance sheets of the units involved (neutral on net worth). n The sale of assets generates no flow of income (in favour of the government) n The cost of using the service of a financial intermediary for achieving the sale is to be recorded as intermediate consumption

PRIVATISATION The sale of financial assets (shares and other equity) n Direct sale of financial assets: The sale by the government of shares and other equity in a public enterprise is a financial transaction (in F. 5, with a counterpart flow in F. 2) n The associated cost of purchasing the service of a financial intermediary is recorded as intermediate consumption (P. 2)

PRIVATISATION n n n Indirect sale of financial assets: Case where the sale of shares and other equity in a subsidiary is made by a public holding corporation – or any kind of public unit: The sale itself is a financial transaction (F. 5, counterpart in F. 2) The payment of all or part of the sale proceeds to the government is a financial transaction (F. 2, counterpart in F. 5)

PRIVATISATION The sale of non-financial assets (buildings, land etc. ) n Direct sale of non-financial assets: The sale of a non-financial asset is a transaction in goods and services (or in products) recorded in the capital account: n As P. 5 if it is a produced asset (counterpart in F. 2) n As K. 2 if it is a non-produced asset

PRIVATISATION n n Indirect sale of non-financial asset: Case where the sale of a non-financial asset is made by a public holding corporation – or any kind of public unit The sale itself is a transaction in goods and services (P. 5 or K. 2) The payment of all or part of the sale proceeds to the government is a financial transaction (F. 2, with a counterpart in F. 5). Rationale: liquidation of assets, reflected in the equity.

PRIVATISATION n Special case of a « restructuring agency » : A public holding corporation (or any kind of public unit) sells assets but does not give the sale proceeds to the government: the funds are kept by the « restructuring agency » to inject capital in other enterprises in any possible way (grants, loans etc. )

PRIVATISATION Special case of a « restructuring agency » : Two main possibilities can be envisaged: 1. The unit is a real holding corporation directing a group of subsidiaries, and restructuring corporations is a minor part of its activity: Solution: to reroute the transactions made on behalf of the government through the government itself (SNA § 3. 24 or 3. 31: « recognising the principal party to a transaction » ) 2. The main function of the unit is to reorganise the public sector, redistributing income and wealth on behalf of GG: Solution: to classify the unit in the government sector n

NATIONALISATION Definition: nationalisation means the taking of control by the government over assets and over a corporation, by acquiring the majority or by acquiring the whole equity in the corporation. Two forms of nationalisation are observed.

NATIONALISATION 1. Nationalisation by confiscation: This is not recorded as a transaction, made by mutual agreement, but as an other flow: K. 8: uncompensated seizure (in OCV account) 2. Nationalisation by purchase of shares: There is a payment, in a legal context that normally guarantees some mutual agreement: this is a financial transaction (F. 5, counterpart in F. 2) NB: A combination of both treatments is possible if the price is too low (SNA, § 12. 39)

Restructuring agencies n n n Context: government rescues some banks in order to prevent a collapse of the financial system. Case of defeasance of bad assets. Setup of special units, sometimes called « bad banks » . Issue: how and when to record losses that will affect government expenditure? Government guarantees are often involved. Sectorisation: is the created entity a financial corporation (putting itself at risk) or a government unit (acting on behalf of government)?

Restructuring agencies Possible options of recording: n A: the restructuring unit is a government unit. A capital transfer is recorded at time of acquisition of the bad assets (or granting of guarantees) n B: the restructuring unit is classified outside the government. Capital transfers of government are recorded when losses are realised, at time of liquidation of assets.

Special purpose entities n n n Context: financial function, often the securitisation of assets Main issue: sector classification, in S. 12 or in S. 13 First step: as for any entity, national accountants must assess if the SPE meets the criteria for being an institutional unit. Assessment is on a case by case basis. n SPEs involved in securitisation, if they are institutional units, are to be classified in S. 123 (OFI) n Case of ancillary units (New York meeting, Sept 05)

Special purpose entities n n The case of non-resident SPEs created by the government to outsource some borrowing and expenditure, through securitisation for instance, has been discussed in a few instances TFHPSA in March 2005 and Eurostat in April asked for a classification inside the government (similarly to embassies) BOPCOM opposed this point of view (no exception for government except embassies and military) New-York and Washington proposal: possibility to consolidate some flows with the government

Privatisation, restructuring agencies and SPVs n n n Non-controversial issue of privatisation and nationalisation: for clarification of SNA only More complicated cases and issues: securitisation and SPEs, restructuring agencies (defeasance etc. ), Public Private Partnerships Case of SPEs, often created for the purpose of securitisation of assets: - mostly financial institutions, classified in subsector S. 123 (if institutional units) - but may be ancillary units, or consolidated with the government

Private/Public/Government Sector Delineation

Government / public / private sector n TFHPA n n The identification and delineation of public and private sector statistical units Whether public sector units are n n Non-market producers (general government) Market producers (corporations)

Government/public/private sectors n Delineation of public and private sector units: based on control n Delineation of non market (government) versus market units (corporations) within the public sector: based on economically significant prices (ESP) Issue: Clarify what control and ESP entail

Public sector boundary: Use a decision tree Unit A Unit B Step 1: Institutional unit? YES Step 2: controlled by government? Step 3: ESP? Unit C YES NO: Government sector YES: public corporation NO YES: private sector

Government control of corporations: 1. 2. 3. 4. Ownership of the majority of 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 5. 6. 7. 8. Golden shares and options Regulation and control Control by a dominant customer Control attached to borrowing from the government

Government control of NPI 1. Appointment of officers 2. Other provisions of enabling instrument 3. Existence of contractual agreements 4. Degree of financing by government 5. Level of risk exposure

Market and nonmarket producers ESP: Criterion to classify output, and thus producers as market or nonmarket n n Market producers: output sold at ESP Nonmarket producers: output free or at non ESP

Public sector Composition: n n n Government units Corporations controlled by government units, and Nonprofit institutions (NPI) controlled by government units. Government control entails: n n Corporations: a source of financial gain Nonprofit institutions (NPI): not a source of financial gain

Control of Corporations Definition of control: Current: ability to determine the general corporate policy Proposed: power to govern financial and operating policies so as to benefit from activities of corporations

Control of NPI Definition of control: n Current: ability to determine the general corporate policy and largely financed n Proposed: ability to determine the general corporate policy

Economically significant prices Definitions: n n n ESP are prices that have a significant influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy. Market producers: production offered for sale (on the market) at economically significant prices Non-market producers are only in the government or NPISH sectors.

Economically significant prices n n ESA 95 « 50% rule » not taken into account as a rule Recommendation 4: « although there is no prescriptive numerical relationship between the value of output and the production costs, one would normally expect the value of output to average at least half of the production costs over a sustained multiyear period. »

Economically significant prices Case of production sold only to govt: n n The public producer is the only supplier: it is non-market unless it competes with a private producer in tendering for contract It is one of several producers: it is a market producer if it competes with other producers on the market.

Definition of sales Output is measured as equal to n the business notion of sales (plus change in inventories as required) n n Excluding taxes on products and subsidies on products (except for subsidies granted to all private producers for this type of activities Excluding own account production

Definition of production costs Cost is measured as the sum of: n n n Intermediate consumption Cost of capital services Other taxes on production

Indicators to classify public producers Purchasing units Supplying public sector units Public corp. COST normally covered by SALES (CCS) Corporations and households primarily only supplier Government only one of several suppliers Government and others Govern ment only supplier no yes Other private tender no yes Competes Other private tender or CCS one of several Competes suppliers

Market & Non-market producers Control Public Private ESP Producer units Market Non Market Government Public Private (incl. NPI) Corporations corporations (incl. quasi) (incl. quasi and NPI) NPISH Hous. Enterpri ses

AEG Decisions: n n There was a broad level of support to the proposals There are still a number of questions requiring further clarifications before final decisions can be made.

Taxes on holding gains

Background n n Contradiction in the 1993 SNA in the treatment of holding gains: The holding gains are not treated as part of the income concept; but the taxes on the realized holding gain are classified as part of the taxes on income. This affects the disposable income and the savings rate.

Possible solutions (a) Reclassify holding gains and losses as part of income (all gains or only realized gains? ) (b) Reclassify taxes on holding gains as capital taxes (no impact on income) (c) Do nothing, live with the contradiction, specify holding gains taxes

Possible solutions n Classification of holding gains and losses as part of income was seen as too ambitious. Why? n It would modify significantly the income concept in the 1993 SNA and introduce more volatility into the income concept. More difficult to explain private consumption expenditure? n Holding gains are not a result of production, GDP (production approach) ≠ GDP (income approach)

Possible solutions n n n Classification of taxes on holding gains as capital taxes would be consistent with the fact that many households see both holding gains and taxes on them as exceptional. However, the governments see these taxes as current. And, the main problem may be practical. A majority of countries consulted by the OECD found it difficult to distinguish taxes on holding gains from ‘other taxes on income’.

AEG Recommendations n n n The AEG agreed to continue treating taxes on holding gains as current taxes on income and wealth (D 51). As far as possible, taxes on holding gains should be shown as a special sub-category within D 51. The possibility was considered to develop alternative concepts of household income. However, this is potentially a big endeavor and is not a priority for the present SNA review.

Public-Private Partnerships

Conclusions from Canberra II meeting in April, 2005 n n Public-Private Partnerships (PPPs) have become sufficiently important that they should be mentioned in the SNA. There are two major problems to solve.

First Problem n n Is the private unit or the public unit the economic owner of the fixed assets acquired for use in the PPP? The private unit is the legal owner and user of the assets in its production. The public unit often has a substantial residual interest and can prescribe the design, quality, capacity, maintenance, etc. of the assets.

First Problem (2) n n Several proposals on the risks and rewards and their importance should be considered. A decision on how to decide which unit is the economic owner of the assets was not reach.

Second Problem n n Depending on which unit is the economic owner and other terms of the PPP contract, there are several difficult accounting decisions, possibly involving imputing leases and other transactions. A decision was not reach on how any of these specialized situations should be treated.

Accounting Standards n The Interpretations Committee (IFRIC) of the International Accounting Standards Board is developing financial accounting standards for PPPs concurrently with the Canberra Group.

Accounting Standards (2) n The complexity of PPPs and the dependence of national accountants on government financial accounting data makes it highly desirable to have a common treatment of PPPs in the SNA and in the accounting standards.

Recommendations 1. A description of PPPs and the general principles for their accounting treatment should be added to the SNA. This recommendation is not as trivial as it appears.

Recommendations (2) 2. Determine the economic owner using the same principles as for any other asset. Statistical offices may not have the resources to evaluate each PPP. Recognize dependence on financial accountants, but be sure SNA principles are followed.

Recommendations (3) 3. Discuss the types of risks and rewards (or control) likely to be relevant when deciding economic ownership. Each contract is different. There are no general rules. However, SNA should provide a list of indicative criteria for assessing risk. Subject of written consultation.

Recommendations (4) 4. Evaluate IASB/IFRIC standards for consistency with SNA principles.

Recommendations (5) 5. Detailed rules for the transactions resulting from a PPP are not possible. Consider all of the facts and circumstances. Use a treatment that brings out the underlying economic relationships.

Recommendations (6) 6. The appropriate accounting treatment needs to reflect a government’s residual interest in assets owned by the private unit, the acquisition of operational assets taken into use by a government as economic owner and the measurement of production.

Thank You