Military expenditure Chapter 11.16 9-12-2013 Military expenditure Chapter 11.16 Before the session, on the white board put up a selection of military expenditures and ask the participants how they would classify: Bullets, missiles, rockets, ballistic missiles, ships, fighter jets, satellites, docks, airports. Get them thinking about it. Assets are used continually in the production of defence services. GFS/EDP-course 2013

Military expenditure : Chapter 11.16 9-12-2013 Background 2006 Eurostat decision on recording of Military equipment expenditure Harmonisation of the time of recording of military equipment expenditure MGDD – implementation of ESA95 Military equipment is treated as intermediate consumption MGDD – implementation of ESA10 Military equipment is considered as fixed assets - treated as GFCF Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Definition military equipment/goods 9-12-2013 Definition military equipment/goods ESA95: (intermediate consumption but this changes in ESA10) Destructive weapons and equipment to deliver them Goods that are designed specifically for combat operations and are used exclusively by military forces SNA93 provided a list of good considered as military goods: rockets, missiles silos, carriers, warships, submarines, fighter aircraft, bombers, tanks Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Definition military equipment/goods 9-12-2013 Definition military equipment/goods ESA95 Military equipment is not considered as fixed assets - recorded as intermediate consumption - P.2 Fixed assets which can be also used for civil purposes are Gross fixed capital formation - P.51 (infrastructure (ports, air facilities), equipment for observation, transportation, etc). Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Definition military equipment/goods 9-12-2013 Definition military equipment/goods ESA10 makes a clear distinction between WEAPON SYSTEM and OTHER MILITARY GOODS (ESA10 created a new category – Military inventories) WEAPON SYSTEM (AN.114) – classified as GFCF: vehicles and other equipment such as warships, submarines, military aircraft, tanks, missile carriers and launchers … ARMS OF MASS DESTRUCTION - a specific case/ asset (e.g. ballistic missiles) OTHER MILITARY GOODS – ammunition, missiles, rockets, bombs and other single-use military items recorded as Military inventories (AN. 124) when purchased (impact on B.9) → when they are used, they are recorded as a reduction change in inventories and Intermediate consumption expenditure. Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Military expenditure : Chapter 11.16 9-12-2013 Changes ESA95 / ESA10 Military equipment are in ESA10 considered as ASSETS - all military equipment expenditure is recorded as GFCF (used repeatedly or continuously in the production of defense service for more than one year). Military equipment that were in ESA95 considered as INTERMEDIATE CONSUMPTION are in ESA10 considered as GFCF. The distinction between dual purpose (military / civilian) and single purpose (military) is no longer relevant. Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Time of recording of military expenditure 9-12-2013 Time of recording of military expenditure General rule: when the goods are delivered (i.e. at the change in economic ownership) Long-term contracts: Delivery of similar items over a long period of time time of actual delivery of each item → no changes Provision of services /maintenance time when the service is provided → no changes Complex systems from different suppliers (e.g. electronic system) time of delivery of the individual operational item → no changes Question over when the change in economic ownership takes place. Does this correspond to the point when contracts are signed (i.e. govt will at least fund R&D), when final delivery occurs, when cash transfers? Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Time of recording of military expenditure 9-12-2013 Time of recording of military expenditure Equipment built over several years : record at the time of the transfer of ownership, on a delivery basis ESA10 rule: unfinished goods are part of work in progress, which is recorded in the inventories of its producer and are reduced when economic ownership transfers to clients. ESA10 3.148 makes an exception for "structures" acquired under a contract of sale, agreed in advance. E.g. building, airfield Transfer assumed to take place progressively -work in progress- according to milestone payments. Rationale: it is likely that the structure will be acquired progressively by the ordering unit. NB "structures" excludes items like ships. Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Time of recording of military expenditure 9-12-2013 Time of recording of military expenditure R&D: Significant change in ESA10 ESA10 3.127 R&D is part of GFCF…. including freely available R&D Exception for R&D that will not provide a benefit to the owner: classify as intermediate consumption. R&D realised independently of the final product (not related to specific military equipment or item to be delivered) → recorded when R&D takes place or payment is made: If benefits are expected for government or to be freely available for any other unit – record as GFCF at the time of payment If no expected benefit for government – record as investment grant at the time of payment R&D strictly related to a contract foreseeing future manufacturing of identical items – expenditure to be apportioned to the deliverable goods and recorded later (i.e. R&D is ‘refundable’ later) Payments by government for such R&D recorded as a financial advance (F.8) Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Time of recording of military expenditure 9-12-2013 Time of recording of military expenditure Leasing of military equipment: → no changes always a financial lease (government is economic owner of the asset) Impact on B.9 and government debt at the time when the good is put at the disposal of the military forces → Subsequent lease payments are interest payable (impact on B.9) and repayment of loan (financial transaction). Borderline case – civilian equipment that may also be used for military support (air tankers, cargoes) – possibly recorded as operational lease Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Time of recording of military expenditure 9-12-2013 Time of recording of military expenditure Expenditure is recorded at time of delivery of military goods (at change in economic ownership). ESA10: In exceptional cases this time of recording can be in advance of the complete delivery of goods (e.g. staged payments). Pre-payments are recorded as financial transactions in F.8 financial advance / receivable (assets of government); subsequent deliveries are recorded as expenditure Post-payments are recorded as financial transactions F.8 payable (liabilities of government) while expenditure is recorded at delivery Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Military expenditure : Chapter 11.16 9-12-2013 Table 7. Military equipment expenditure (weapons and supporting equipment) Country: XXXX Date of response: xx/xx/2014 relation 2010 2011 2012 2013 source and titles reference Deliveries (positive amounts) 1 of which: Settlements in kind (positive amounts) 2 Transactions in other receivables F.81 (gov. assets) 2 3 tab 4.1.1 item (6) Transactions in other payables F.81 (gov. liabilities) 2 4 tab 4.1.2 item (6) Transactions in other financial instruments (liabilities) 1,2 5 Cash payments # (positive amounts) 6 Discrepancy 7=1-2+3-4-5-6 Stocks in other receivables AF.81 (assets of gov.) 8 Stocks in other payables AF.81 (liabilities of gov.) 9 Stocks in other related liabilities of gov. 10 Data are to be consistent with data reported in EDP T3A The sign convention applied in financial accounts is to be used here (this is for receivables the same sign, for payables the reverse sign of EDP tables) 1) credit or prepayment in the form of other instruments than "trade credits" 2 exclusive of interest accrued or interest payments unless indicated Stocks: Table 7.1. Military equipment: deliveries and cash measures in million units of national currency Flows: Comments: Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Military expenditure : Chapter 11.16 9-12-2013 relation 2010 2011 2012 2013 label (and source) reference Amounts in EDP Table 2 A working balance 12 EDP T2A Amounts in EDP Table 2 A correction line 1* 13 Amounts in EDP Table 2 A correction lines 2* 14 15=12+13+14 Data are to be consistent with data reported in EDP T2A Please add additional rows, if needed * Please indicate the label of the line Amounts in B.9 in million units of national currency Table 7.2. Military equipment expenditure as reported in EDP Table 2A Comments: Military expenditure : Chapter 11.16 GFS/EDP-course 2013

Military expenditure : Chapter 11.16 9-12-2013 3.3.1 Generally within 1 year of delivery 3.3.2 Possibly deviate from deliveries by more than 0.05% of GDP for a given year If Yes (3.4.2) If Yes (3.5.1) Do you have deliveries of military equipment built over many years delivered in the period 2010-2013, or deliverable in 2014-2018 If Yes (3.5.2) Are those deliveries susceptible to differ by more than 0.05% of GDP from the amount of cash or other considerations provided in the context of the fulfilment of such contracts, for each of the year 2010 to 2013 Indicate Yes or No 3.2 Is it current practice for military equipment contracts to include noticeable prepayments or late payments? Always, Sometimes or Never 3.3 In case noticeable prepayments or late payments exist, are cash payments (or other considerations provided): A. Cash information Yes or No; if yes indicate the amount financial lease or operating lease E. Deliveries from direct sources (MOF, MOD,…) F. Deliveries from other sources (e.g. trade statistics) G. Others B. Cash information corrected for actual data on receivables/payables D. Accrual based accounting source C. Cash information corrected for large deliveries 3.4 Leases: Do you have leases on military equipment contracted over the reporting period 2010-2013? 3.5 Equipment built over many years Comments: Table 7.3. Qualitative information 3.1 What is the main basis for recording, in national accounts, acquisitions of military equipment? Indicate A to G; specify for G Possible basis for recording, abbrev: Military expenditure : Chapter 11.16 GFS/EDP-course 2013