Units and Sectors in SNA 2008 Workshop on the Implementation of the 2008 SNA, Kiev, 29 November – 2 December 2011 Kurt Wass EFTA Statistical Office Agenda item 6e

Units and Sectors in SNA 2008 Units and their sectors are fundamental brick stones in SNA, and there are fundamentally two types of units in the system: – Producer Units Concerned with the production activities. A production unit can be an institutional unit or a part of an institutional unit – Institutional Units Concerned with the economic agents. Important to bear in mind that institutional units are those units that can exercise economic decision making and effective ownership rights, which can be different from a legal and administrative arrangements. – The fundamental philosophy in SNA 2008 is unchanged from SNA 1993, but provides some specifications and revisions concerning units and sectors (SNA 2008, Annex 3-B) 2

Units and Sectors in SNA 2008 Producer Units - Changes: – Ancillary Activities SNA 1993, ancillary activities part of the establishment being served SNA 2008, producer unit undertaking ancillary activities to be recognized as a separate establishment in certain cases: – if statistically observable, i.e. separate accounts for the production it undertakes are available, or – if it is located in a geographically different location from the establishments it serves; – then, to be classified according to its own principal activity – valuation on a cost basis, included capital costs 3

Units and Sectors in SNA 2008 Institutional Units : ― Legal status is not a sufficient criterion to define institutional units. The decision should be based on actual economic behaviour and characteristics. ― Legal entities that fail the criteria for institutional unit should be combined with the units that control them (artificial subsidiaries) ― Parts of legal entities that are sufficiently independent and meet the criteria for institutional unit should be presented as separate units (quasi corporations) 4

Resident? No ROW Household? Yes Non-market producer? Household Yes No Government controlled? No NPISH No Government Yes Producer of financial services? Yes Non-financial corporations Financial corporations No Yes Government controlled? Public Non- financial corporations National/ Foreign Non- financial corporations Public financial corporations National/ foreign financial corporations No Yes Illustrative allocations of units to institutional sectors 5

Institutional Units / Institutional Sectors - Changes: SNA 2008SNA 1993Institutional unit / institutional sector Artificial SubsidiariesArtificial CorporationsNo, unless resident in another economy than its parent Branch owned by a non-resident institutional unit Notional resident unitYes, and in the country of residence Multi-territory enterprises - residency No explicit guidanceYes, as for branches. If lack of info, prorate the total operations of the enterprise by economic territories Special Purpose EntitiesNo explicit guidanceYes, and sector according to main activity. Some exceptions, e.g. resident SPEs set up by government not recognised inst.units. Holding companyAssigned to inst. sect main activity of subsidiaries Yes, and always allocated to financial corp. sector despite the activities of the subsidiaries Head officeNo explicit guidanceYes, inst. sector depends (non-financial/financial) on the type of activities if its subsidiaries Subsector non-profit institutionsNo explicit guidanceIn addition to assigning NPIs to inst. sect., subsectors for NPIs allowing summarizing all NPIs Nine subsectors financial corporations Five subsectors of financial corporations New subsectors reflecting new developments in fin. services, markets and instruments Definition financial servicesLess explicitEnlarged definition, more weight to financial services other than financial intermediation 6

Institutional Units in SNA 2008 The 2008 SNA provides additional guidance for the recording of special units related to complex corporate structures: Special purpose entities and artificial subsidiaries : - no employees and no non-financial assets, - little physical presence and always related to another corporation, - treated in the same way as any other institutional unit, unless belonging to one of the following categories: - captive financial institutions, - artificial subsidiaries of corporations, - SPEs of general government These 3 types of units are not treated as separate institutional units and are consolidated with the parent unless they are a resident of a different economy. 7

Institutional Units in SNA 2008 Head offices: - exercise managerial control over its subsidiaries: overseeing and managing other units of the enterprise, undertaking strategic or organizational planning and decision making, operational and day-to-day control (ISIC rev.4, 7010), - allocated to non-financial corporations sector, unless all or most of its subsidiaries are financial corporations (in this case – financial auxiliary). Holding companies: - hold assets of subsidiary corporation but do not have managerial activities (ISIC rev.4, Section K, 5420), - always treated as financial corporations in the 2008 SNA (captive financial institutions). 8

1993 SNA Central Bank Other depository corporations Other financial intermediaries except insurance corporations and pension funds Financial auxiliaries Insurance corporations and pension funds 2008 SNA Central Bank Deposit-taking corporations except the Central Bank Money market funds (MMF) Non-MMF investment funds Other financial intermediaries except insurance corporations and pension funds Financial auxiliaries Captive financial institutions and money lenders (NEW) Insurance corporations Pension funds Sub-sectoring the financial corporations sector 9

Recognising the fact that the powers, motivation and functions of government are different from those of other sectors of the economy and that it organises its operations through different institutional units, the 2008 SNA gives extra guidance for the distinction and relations between general government and public corporations in a new separate chapter. The chapter on the General Government and Public Sectors, provides another presentation the General Government more suitable for fiscal analysts and policymakers, and in line with the analytical framework of the GFSM2001 of the IMF. The notion of government control of corporations and NPIs is changed, and a list of indicators provides guidance. General Government and Public Sectors 10

The Delineation of the Public Sector To establish the borderlines of the Public Sector and the distinction between Public Corporations and Units of the General Government three tests should be performed: 1.Residency and Institutional Unit 2.Market or Non-Market Producer 3.Public Control 11

Providing financial services Financial corporations No Yes Market Producer? No General Government Yes NPISH Non-financial corporations The Delineation of the Public Sector - Market or non-market producer 12

To be considered as a market producer, the unit must provide all or most of the output to others at prices that are economically significant. Economically significant prices are prices that have a significant effect on the amount producers are willing to supply, and on the amounts purchasers wish to buy, i.e. when: 1.Producers are seeking profits or at least covering costs; 2.Consumers has the freedom to purchase or not This definition of economically significant prices is (on purpose) a bit vague. The ESA 1995 defines them as prices that at least cover 50% of the production costs. (However, output sold by households is always considered to be at economically significant prices. This avoids e.g. that subsidized farmers get classified as government producers.) In SNA 2008 it is indicated that at one would expect that the sales would cover at least half of the production costs over a sustained multiyear period. The Delineation of the Public Sector - Market or non-market producer 13

A producer that sells all or most of its output to government without competition with private producers might not be considered a market producer, even if it charges economically significant prices. Sales are to be measured before any taxes applicable to the products are added, and exclusive government payments granted exclusively to the producer. Own account production is not considered as part of sales in this context Production costs are the sum of intermediate consumption, compensation of employees, consumption of fixed capital and other taxes on production. For market producers a return to capital is included. Subsidies on production are not deducted The Delineation of the Public Sector - Market or non-market producer 14

The Delineation of the Public Sector – Public Control Financial corporation Non-financial corporation Controlled by public unit? Controlled by public unit Public non-financial corporations General Government Public corporations Public non-financial corporations No Yes PUBLIC SECTOR + = 15

The Delineation of the Public Sector – Public Control Indicators for Government control of corporations: 1.Ownership of the majority of the voting interest 2.Control of the board or other governing body 3.Control of the appointment and removal of key personnel 4.Control of key committees of the entity 5.Golden shares and options 6.Regulation and control 7.Control by a dominant customer 8.Control attached to borrowing from the government Control remains essentially a judgmental decision. The decision could be based on assessment either of single indicator or collective judgment of several indicators. 16

The Public Sector and its Subsectors Public Sector General government Central government State government Public Corporations Local government FinancialNon-financial Public monetary Corporations * Public non-monetary corporations * Including central bank 17

Reasons for compiling data for the public sector include the following: Public corporations may carry out functions of government (subsidized lending, provision at lower than market prices, hiring staff for social reasons) Detailed data on public corporations is useful for sustainability analysis Government often explicitly or implicitly guarantees the liabilities of public corporations. Many fiscal risks originate in public corporations. The Public Sector and its Subsectors 18

Some special entities In SNA 2008, guidance are provided on when certain entities created by government units are to be included in the Public Sector or not. 1. Quasi-corporations 2. Restructuring agencies 3. Special purpose entities 4. Joint Ventures 5. Supranational authorities 19

Units and Sectors in SNA 2008 The identification of institutional units is often based on legal ownership rather than on economic ownership. How do you in practise identify institutional units that are not legal entities? The delineation between government units and non-government units are based on a consideration of the so-called market test. How do you in practice distinguish market producers from non-market producers? SNA 2008 introduces several new entities like SPEs, Head Offices, Joint Ventures etc. Would you in practice have access to the necessary information and resources to apply the guidance on these new types of entities in the SNA 2008? 20