1. Chapter 11.7 Capital injections into public corporations
GFS / EDP course 2014

2. Overview Methodological reference Forms of capital injections
Treatment in national accounts
Injections of financial assets
ESA2010 rationale
Capital injection test
Injections of non-financial assets
Reporting of capital injections for the EDP purpose
GFS / EDP course 2014

3. Methodological reference
ESA95:
No definition & no specific guidelines
MGDD chapters:
III.2 Capital injections into public corporations,
III.3 Capital injections into public quasi-corporations,
III.4 Capital injections in kind
ESA2010 (para ) Capital injections as:
Payments to public corporations on a large and irregular basis
Aiming at capitalising or re-capitalising the beneficiary corporation
Being put at the disposal of the latter in a long term perspective
GFS / EDP course 2014

4. Forms of capital injections
In kind
Injections of non-financial assets (NFA) and of financial claims
In cash
Investment/ capital grants (transfers/ unrequited payments),
Equity injections,
Debt capital (loans*, bonds)
Debt assumption, cancellation, rescheduling (?)
*Loans are not the most common type of capital injections:
Lending is not a core activity of government
Loans have strong characteristics
(a date for repayment and a rate of interest)
GFS / EDP course 2014

5. Treatment in national accounts (1)
Economic substance over a legal form
Dichotomic nature of government interactions with public corporations:
As an INVESTOR/ a shareholder
As a public authority pursuing public policy objective
GFS / EDP course 2014

6. Treatment in national accounts (2)
Distinction between:
Financial transactions - acquisition of equity/ financial assets (Government investing)
No impact on net lending/ net borrowing
Non-financial transactions – capital transfers (Government pursuing public policy interest)
Impacting net lending/ net borrowing
An analytical tool: “capital injection test”
GFS / EDP course 2014

7. Main rationale behind the treatment
For recording of capital injections of financial assets properties of transactions set out in ESA2010 para 1.71 have to be considered – 'ESA transactions with or without counterparts':
« Something for nothing » Unrequited payments are recorded as non-financial transactions:
distributive transactions (subsidies) or capital transfers
« Something for something » Exchanges between units, e.g.:
an exchange of financial assets: cash (AF2) for equity (AF5).
GFS / EDP course 2013

8. Capital injection test
Purpose:
To determine whether a government unit transferring an asset to a public corporation:
(?) Does receive an asset in return,
(?) If yes, whether the value of the asset received is equal to or higher than the value of the asset transferred.
Approach:
Testing individual capital injections/ a case-by-case analysis
GFS / EDP course 2013

9. Recording: Government accounts
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10. Key indicators
A capital injection earmarked for acquisition of non-financial assets
Behaviour of other investors
Participation of private investors in a capital injection
Market price of the shares
Value and characteristics of the financial assets acquired (liquidity and rate of return (sufficient? contingent?))
The beneficiary corporation
Its legal status and purpose
Its financial position
Prospects of the beneficiary corporation and of its investments
Its distribution policy
GFS / EDP course 2014

11. Investment grants (D.92) ESA2010 para 4.152
A capital transfer in cash or in kind made by government (…) to another resident (…) to finance all or part of the costs of its acquiring of fixed assets.
Government expenditure.

12. Other CIs: Operational guidance
Questions to ask:
Is government acting alone (or together with public corporations), or jointly with private investors?
Is the public corporation under threat of financial distress (with possibly negative own funds), accumulated losses or made one-off losses?
Is it likely that the government will receive a sufficient rate of return on its investment?
GFS / EDP course 2014

13. A sufficient rate of return?
An economic asset is a store of value and a source of income (see ESA2010, chapter 7)
If government has acted as a shareholder there must be expectation of a sufficient rate of return
As a proxy of a  ’market rate of return’ for government, the return should be at least equal to:
Risk adjusted rates of return expected by private investors on similar investments in the same activity, or
Long-term government bond rates.
GFS / EDP course 2014

14. Private shareholders participating
Capital injection:
…in quoted shares:
record a financial transaction in equity and investment fund shares/ units(F.5);
…in unquoted shares:
record a financial transaction in F.5, if the private investors:
take a significant share in the equity during the injection;
exercise the usual influence of minority shareholders;
bear risks and rewards similar to government
(notably in the event of liquidation).
GFS / EDP course 2014

15. A new corporation benefiting
Special case: a new corporation created by government Careful economic analysis is required, based on several indicators: - If, after a normal temporary period of losses, the corporation will be profitable and generate a rate of return: record as a financial transaction in F.5 - Or, there are doubts on the long-term profitability and capacity to generate a rate of return: a capital transfer (D.9).
GFS / EDP course 2014

16. No private shareholders investing
Corporation has accumulated losses or made one-off losses: =>record a capital transfer (D.9)
Special case allowing partitioning of the transaction:
The corporation has accumulated losses, but:
capital injection exceeds the net losses and if there is evidence that the funds in excess will provide a return
a restructuring process has been launched to prevent new losses, with sufficient evidence of success.
=> Record a capital transfer up to the limit of the losses and the excess as F.5.
GFS / EDP course 2014

17. Injections through loans/bonds
Normally a financial transaction (F.4) if genuine, legal documents
specify the borrower’s obligation (redemption date of principal and
interest to be paid)
But, a government granting loan to a loss-making corporation should
be an issue if:
the corporation would not be in a position to repay most of the ‘loan’ => record a capital transfer (D.9)
If most of the loan (but not all of it) will be reimbursed
=> partition the transaction (F.4 / D.9) at the time the loan is granted.
GFS / EDP course 2014

18. Injections ahead of privatisation process
ESA2010 para
A capital injection to a corporation being privatised (within a year) should as an exception be recorded as an equity injection up to the amount of privatisation proceeds
The privatisation proceeds are deemed to repay the capital injection
GFS / EDP course 2014

19. Injections into quasi-corporations
Treatment determined by a financial position of the beneficiary quasi-corporation
A form of capital injection
Financial position of the Q-corp
Treatment in national accounts
Transfers of capital /
Cancellation of a financial claim/ debt assumption
Investment grants
Financially viable/ profit-making over a longer period
Equity injection
Running a persistent operating deficit
Subsidy
Accumulated losses on the B/S or exceptional large losses
Other capital transfers
GFS / EDP course 2014

20. Injections in kind: non-financial assets
Capital injections in kind concern the transfer of non-financial assets, fixed assets (like buildings) and/or non-produced assets (like land). No financial assets involved (cash, financial claims)
The MGDD distinguishes two cases:
1. The gift is a straightforward transfer
2. The gift is part of a package (possible restructuring) that changes the relationship with government with expectation of higher return
The recommended treatment has a neutral effect on B.9.
GFS / EDP course 2014

21. A straightforward transfer of NFA
In government accounts, record:
→ an investment grant in kind (D.92PAY)
→ a decrease of gross fixed capital formation (GFCF, P.51g) in the case of fixed assets, or non-produced non-financial assets (e.g. NFA, NP) in the case of land.
No impact on B.9
GFS / EDP course 2014

22. Transfer of NFA with expectation of higher return
The transfer changes the relationship with government:
expectation of higher return
In substance, record the exchange of a non-financial asset (AN.11) with a financial asset (equity, AF.5) through « Other flows » in the other changes in volume account
Change in sector classification and structure (K.61)
No impact on B.9
GFS / EDP course 2014

23. Reporting of CIs as non-fin. transactions
EDP T2:
WB,
NFT non included in WB,
Net lending/ net borrowing of other government bodies
Other adjustments
EDPQT8.1, QT9.1
ESA T2
If on a regular basis - within subsidies payable (D.3PAY),
One-off/ earmarked payments – capital transfers (D.9PAY)
Supplementary tables on government interventions in the context of financial crisis (Part 1, Impact on deficit)*
Capital injections recorded as deficit-increasing (capital transfer)
Others
*CIs into financial corporations, not necessarily into public financial corporations
GFS / EDP course 2014

24. Reporting of CIs as fin. transactions
EDP T2
If in WB: financial transactions included in WB
+ the detail in EDPQT2
EDP T3 within Acquisitions of equity (Increase)
Normally Acquisitions of other equity than portfolio investments
ESA T6/ T7/ 27
Stocks and transactions relating to assets in equity and investment funds shares ((A)F.5)
Supplementary tables on government interventions in the context of financial crisis (Part 2, B/S)*
Within equity and investment funds shares/units on the closing balance sheets (at market value)
*CIs into financial corporations, not necessarily into public financial corporations
GFS / EDP course 2014

25. Reporting of CIs in EDP questionnaire T10
Dedicated tables of EDP questionnaire:
T10.1 (magnitude and cross-references)
Capital injections into public corporations (item 1) as a total of:
capital transfers to public corporations (item 4) and
equity injections (item 11).
T10.2 (individual large transactions)
Capital injections exceeding 0.05% of GDP AND to existing public corporations
GFS / EDP course 2014

26. Reporting of CIs in EDP questionnaire T10
Table 10.1
Data for the consolidated general and central government
CIs as government expenditure (vs. ESA T2)
CIs within acquisitions of equity (vs. ESA T6 and vs. EDP T3)
Recording of CIs in the EDP T2(A)
Table 10.2
At the level of the consolidated general government,
For individual corporations (to specify: their name, ESA sector and activity),
Amount of CIs for a given year classified as government expenditure or acquisition of equity
(!) Source of information on:
Recent privatization operations,
Earnings/ losses of public corporations.
GFS / EDP course 2014

27. Thank you.
GFS / EDP course 2014