OECD UNITED NATIONS ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC JOINT OECD/ESCAP MEETING ON NATIONAL ACCOUNTS 1993 System of National Accounts: Five Years On Bangkok, 4-8 May 1998 Title: Institutional sectoring Agenda item: 5 Author: OECD
INSTITUTIONAL SECTORING: BORDERLINE PROBLEMS Note by the OECD Secretariat 1. The 1993 SNA defines five institutional sectors : non-financial corporations financial corporations general government households non-profit institutions serving households (NPISH). In addition, there is the rest of the world. While not an institutional sector in the same sense as the five above, it is convenient to treat it a such for the purposes of this note. 2. All transactors - or institutional units - in the system need to be assigned to one, and only one, of these six sectors. The 1993 SNA tries to be much more explicit than its predecessors in defining the institutional sectors and the vast majority of units can be immediately assigned without difficulty to the appropriate Sector. At the same time, however, most countries have encountered at least a few borderline problems. That is there have been certain institutional units which could be considered candidates for more than one institutional sector. This note examines the main borderline problems that have been encountered so far in implementing the 1993 SNA and the solutions that have been adopted. 3. Table 1 gives a schematic presentation of where these borderline problems have occurred. An X indicates that there are institutional units which appear to lie on the border between the sector listed in the column and the sector listed in the row. The table shows that there are ten inter-sections which have caused particular borderline problems. 4. Three intersections are marked with a bold X indicating that OECD countries have encountered particular problems in these areas. They concern the allocation of units between nonfinancial corporations, government and non-profit institutions serving households. Discussion of these problems is delayed to the end of this note. First we consider the seven areas which are less problematical. Non-financial corporations or financial corporations 5. The 1993 SNA distinguishes between operational and financial leasing. The latter is considered to be essentially a financial transaction and corporations engaged in financial leasing are to be classified in the financial corporation sector. Financial leasing is often carried out by enterprises that manufacture machinery and equipment. Financial leasing may be organised done by a separate institutional unit within the enterprise but, if there is no clear separation between the manufacturing and leasing activities, the financial activity will have to be combined with the manufacturing activity. 2
Table 1. Borderline problems in institutional sectoring: schematic presentation Non-financial corporations Financial corporations General government Households Non-profit institutions serving households Financial Corporation X General government X X Households X X O Non-profit institutions serving households X O X O Rest of the world X X O X O Non-financial corporations or households 6. Like its predecessor the 1993 SNA requires that unincorporated enterprises be transferred from households to the non-financial corporations sector if they maintain a complete set of accounts. These unincorporated enterprises are then termed quasi-corporations. The accounts maintained by the quasicorporations must make it possible to determine the value-added, saving, withdrawals of income, and the assets and liabilities of the enterprises as units separate from the owners themselves. 7. In practice, it has proved very difficult to identify unincorporated enterprises in the household sector that qualify as quasi-corporations and very few OECD countries have tried to implement the SNA guidelines with respect to private quasi-corporations. In planning implementation of the 1993 SNA, however, some countries have looked again at the possibility of identifying quasi-corporations that could be removed from the household sector. The United Kingdom, for example, is considering whether partnerships could be treated as quasi-corporations since these generally do keep complete accounts. Another possibility might be to treat only partnerships in professions such as law, and accountancy as quasi-corporations since these will almost certainly maintain complete accounts. Non-financial corporations or rest of the world 8. Three problems may be mentioned regarding the classification of units to the (resident) nonfinancial corporations sector or to the rest of the world. 3
(i) Construction work abroad: Construction companies that undertake work in a foreign country may or may not establish a subsidiary unit, such as a site office in that country to organise the operation and maintain a set of accounts. If they do so, then the subsidiary unit is to be included in the non-financial corporations sector of the country where the work is being carried out. If the construction company does not establish a subsidiary unit in the foreign country, the value of the construction work carried out should be treated as an import of a service by the country where the work takes place and an export of a service by the country in which the construction company is resident. (ii) Mobile equipment: The treatment of enterprises that operate mobile equipment, such as aircraft, ships, railway rolling stock, and drilling rigs and platforms, raise issues concerning residence and the country to which production is attributed. When mobile equipment is used in international waters or airspace, the activity is attributed to the country in which the operator maintains residence. When the equipment is used in another country for 12 months or more, the enterprise can generally be considered to have an economic interest in that country and thus is a resident of that country, so that the activity is attributed to that country. (iii) Special economic zones: Several countries in Latin America and in the ESCAP region have established special economic zones which have customs, tax or labour regimes which are particularly attractive to manufacturing companies. The 1993 SNA makes it clear that all production that takes place in the zones is domestic in nature - i.e. the units concerned belong in the non-financial corporation sector and not the rest of the world. However, it is clear that some countries have great difficulty in collecting information on the activities of corporations in these special zones. General government or financial corporations 9. In general, all government-owned units engaged in financial intermediation and related services must be classified in the financial corporations sector provided that they maintain a full set of accounts separately from those of government. Financial intermediation involves incurring liabilities in the market (through accepting deposits, issuing securities or borrowing from third parties) in order to make loans. Borderline problems may arise with government development banks which obtain most or even all of their funds from government and which provide capital for government-supported projects. The usual practice is not to regard development banks that are mainly dependent on government funding as financial intermediaries but to classify them with general government. Financial corporations or households 10. The 1993 SNA provides for unincorporated financial enterprises to be included in the financial corporations sector if they engage in financial activities such as financial intermediation, money changing or investment advisory services and if they maintain a complete set of accounts. In the OECD area, few if any unincorporated enterprises engage in financial activities but in many countries of the ESCAP region money lending and currency exchange by unincorporated enterprises may be common. Even if these enterprises maintain complete accounts, it is unlikely that the information will be willingly divulged to the statistical authorities. They will thus end up in the household sector. 4
Financial corporations or rest of the world 11. Offshore banks have been established in many countries. These are usually financial institutions that are limited to transacting primarily with non-residents and that are not subject to most financial regulations. Output of these activities is part of the output of the country within whose economic territory production takes places and financial transactions and balances must also be associated with that country. Although the theoretical position is quite clear, there may well be problems in collecting statistical information on these activities. Households or rest of the world 12. Workers should be allocated to the economy in which they have their centre of economic interest. There are circumstances, however, in which determination of centre of interest is ambiguous. Cross border workers are those who regularly cross national boundaries from where they dwell to work, either on a daily basis or for particular periods during the year. In such cases, residence is always assigned on the basis of where the principal dwelling exists and not where the productive activity takes place. Long-term foreign workers are those who are employed for long or indefinite periods abroad. In many cases, although such workers may maintain close ties with their country of nationality and intend to return there, the one year rule-of-thumb is generally applied. Working in a country for one year or more is generally considered sufficient grounds to assign residence to that country. Diplomats and military personnel in foreign controlled bases are an exception to this rule and are considered to remain residents of the home country regardless of how long they stay abroad. Non-financial corporations, government or NPISH 13. In all OECD countries there is a group of institutional units which lie on the borders between three institutional sectors - non-financial corporations, general government and non-profit institutions serving households (NPISH). These are units providing traditional public sector services such as health, education, welfare, rail and bus transport and television and radio broadcasting. In several OECD countries these units are being privatised and this has sometimes caused additional difficulties in classifying them because, after privatisation, they are more like market producers than before but they still maintain some non-market features. 14. The correct classification of these units involves a two-stage decision process: first, are they market or non-market producers? If they are market producers they are classified as non-financial corporations; if non-market, they are non-profit institutions; second, if they are non-profit institutions do they belong in the general government or NPISH sector? 15. The 1993 SNA distinguishes market from non-market producers by specifying that the former are producers who sell goods and services at economically significant prices. The 1993 SNA explains that prices are said to be economically significant when they have a significant influence on the amounts the producers are willing to supply and on the amounts that purchasers wish to produce. (1993 SNA, para 6.45). The 1993 SNA description of an economically significant price clearly leaves considerable room for subjective judgement. In an attempt to make the definition more objective, the EU version of the SNA (ESA 1995) specifies that prices are economically significant when sales cover at least half of the unit s costs of production. This apparently simple definition does however raise the question of what constitutes a sale. In many OECD countries schools and hospitals make contracts with government to provide specified types of educational or health services to government at a negotiated price. There is much uncertainly as to whether such contracts negotiated with the government as sole purchaser of the services can really be described as involving sales. 5
16. OECD countries have devised other tests to supplement the economically significant price criterion to decide if an institutional unit is a market or non-market producer. One test used by some OECD countries is whether or not the unit competes with units that are obviously market producers. Canada, for example, defines the Canadian Broadcasting Corporation as a market producer even though most of its operating costs are funded by government because the Corporation competes with commercial services for advertising revenue. Using similar reasoning the government-owned passenger rail company is defined as a market producer because rail services compete with market activities such as bus and air travel. 17. The United States Bureau of Economic Analysis has experimented with another way of defining whether a price is economically significant. In a study of universities they calculated the ratio of university fees to the average income of the students families. Two decision rules were then tried: first, universities were deemed to be charging economically significant prices if the fees exceeded 5% of family income and second, if they exceeded 2.5%. 18. A quite different criterion that seems to be widely used is kind of activity. Some OECD countries have apparently decided that units producing certain kinds of services will always be classified as market producers, regardless of the kinds of prices that they charge. Rail and bus transport and radio and television services are activities that many OECD countries have decided to classify as market producers and therefore as non-financial corporations, regardless of their pricing policy. 19. A 1996 OECD study of institutional sectoring practices in its Member countries concluded that the 1993 SNA reference to the economic significance of prices does not seem to be widely used by countries in distinguishing market from non-market output. The 50% rule used by European countries may be a more practical way of defining economic significance, but it is unlikely that many countries will use this as the sole criterion. Kind of activity, the extent of competition, judgements about the market behaviour of the managers and whether or not output is supplied exclusively to government are all regarded as relevant in assigning units to the non-financial corporations or general government sectors. 20. Having disposed of those units which have been designated as marker producers - hence belonging to the non-financial corporations sector - the next question to decide is whether the nonmarket units remaining are non-profit institutions belonging in general government or non-profit institutions serving households (NPISH). Schools, universities, clinics and hospitals which receive a large part of their income from government are the units that most often cause problems in this connection. 21. The SNA specifies that for an NPI to be included in government it must be controlled and mainly financed by government. It goes on to explain that In this context, control is to be understood as the ability to determine the general policy or programme of the NPI by having the right to appoint the officers managing the NPI. (1993 SNA para. 4.62) 22. By requiring both funding and control by government, problems arise when only one of these criteria is met. For example In Canada, universities receive the majority of their funding from government and are classified as NPI. However, Statistics Canada explains that in their day to day operations, universities have a great deal of independence. It is difficult to argue the case that they are controlled by government outside of the funding argument. [...] Canada has chosen to let the funding criterion dominate and all universities are being placed in the government sector. In Australia, universities have also been the subject of much debate at the Australian Bureau of Statistics (ABS). It is estimated that less than 10% of their receipts comes from sales at economically significant prices so they are clearly non-profit institutions. However, while 6
over 90% of their income comes directly from government, the government does not control the universities in the sense of being able to appoint their managing officers. Nevertheless it was concluded that Government is able to exercise a significant degree of control through its funding power and they are therefore placed in the government sector. In the United Kingdom, universities are also considered to be NPIs because they receive the majority of their funding from government in what are deemed to be transfers rather than sales of educational services. As in Canada, the extent of government control is limited; The government cannot appoint their governing bodies or control their educational programmes. However, the UK office of National Statistics (ONS) takes the opposite view from Canada and concludes that universities are non-profit institutions which are financed but not controlled by government and must be classified as non-profit institutions serving households (NPISH). 23. The definition of control offered by the SNA does not always reflect the institutional arrangements in countries and a considerable degree of judgement may be called for in deciding whether a particular unit is government controlled. For example: In the United Kingdom, the governors of grant maintained schools are selected by the pupils parents and are generally answerable to them, but the government has power to intervene in order to maintain standards and schools must teach the national curriculum drawn up by government. The ONS conclusion is that these schools are not controlled by government and they are classified as NPISH. In Australia, there are a group of recognised public hospitals that treat both private and public patients and which were set up by religious or charitable foundations. Most of the funding for these hospitals comes from government. The ABS notes that governments exercise effective control by virtue of their determination of the ratio of public to private beds in each institution and therefore classifies them in the government sector. 24. In summary, countries are required to exercise considerable judgement in classifying units to the government or NPISH sectors when the joint condition of control and finance are not met. Judgement is also required when governments exercise control over some but not all areas and when they do not have - or do not usually exercise - the power to appoint managers. Points for discussion 1. Are there institutional units peculiar to the ESCAP region which cannot be easily classified by institutional sector according to the SNA rules? 2. Some of the problems encountered by OECD countries have been due to the move towards privatisation. Is this likely to cause problems in the ESCAP region? 3. Do ESCAP countries find it easy to distinguish between market and non-market producers using the criterion of economically significant prices? How could the criterion be made more operational? 4. Is it generally safe to assume that if an NPI is funded by government then it is also controlled by government? 7