Issue 16:Returns to Government Owned Assets

J. Steven LandefeldApril 25, 2006

SNA Update Session, Geneva, Switzerland

Overview of AEG Recommendation and Comments

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AEG Recommendation

The existing measure of government is a cost-based measure that measures only part of the cost of government. The services of government capital includes the

depreciation in the value of government-owned assets.

It excludes the borrowing/opportunity costs associated with the public funds tied up in those government-owned assets.

The AEG has recommended that both components of the services of government capital be included.

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Motivation for Change

The need to consistently measure the contribution and cost of government to the economy: The need to measure the contributions of

government to economic and productivity growth.

The need to consistently account for the returns to public and private fixed capital.

The need to fully and consistently account for the costs of government.

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Motivation for Change Recommended measure is consistent with:

The returns to private capital

User Cost: What a renter would pay the owner private capital for the use of that capital.

Service Value = Rent = Depreciation + rNS Contribution of Capital to Growth: The portion of profits

associated the services of capital and their contribution to GDP growth.

The full cost of government capital User Cost: What the economy foregoes for the use of

government capital. Service Value = Depreciation + rNS Contribution to growth: The full cost of government

capital and its contribution to GDP growth.

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Implementation Issues: What Rate?

The rate that should be applied to the current/replacement value of a government asset should be a real rate. This will result in the appropriate nominal GDP

estimate: Depreciation + rNS, where r = i-p

Use of a nominal rate (which includes an inflation premium for the decline in the purchasing power of the face-value of the bond) and a current asset value (which is adjusted for inflation), will overstate the opportunity cost of the government asset when prices are increasing.

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Implementation Issues: What Rate?

The real rate should be the expected real rate on government bonds. This can be estimated by an average of

government bond rates over time less the average inflation rate over time.

For countries with high inflation, or wanting a more exact estimate, the expression is:

1

rateinflation1ratenominal1

rateinterestReal

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Implementation Issues: What Assets?

What government assets? Fixed assets ― Yes Land and other assets ― No Current or replacement cost value of

government fixed assets.

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Implementation Issues: Other Options

For countries without capital stock estimates Use existing depreciation estimates. Use methodology used to generate depreciation

estimates to develop approximate capital stocks and estimated rates of return to estimate services.

Experience should aid in developing more sophisticated capital stocks recommended for full SNA system estimates.

See OECD Manual, Measuring Capital, (2001) for more information.

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Appendix: Theory & Examples

Capital services in the market can be seen in rental prices Owners rent out property at a rate to cover inflation, a

normal return, and the depreciation on the rented asset Rental price also provides a “real” return to the owner

Example assumptions: 3-year useful service life Asset price = Present value of expected benefits

Beginning-of-year flows(flows in current period are not discounted)

left serviceof years

1 rate interest nominal1price rental

price Assett

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Appendix Example ― Known Nominal Rental Values

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rateinflation1ratenominal1

rateinterestReal

Period 1 Period 2 Period 3Given Rental price (current) 100 105 110

Price index (expected inflation) 100 110 124Inflation rate (expected) 10.0 12.7

Interest rate (nominal) 15.0 15.0

Solve Beginning-of-period asset price (current prices) 274.5 200.7 110.0

Rental price (constant prices) 100.0 95.5 88.7Beginning-of-period asset price (constant prices) 274.5 182.4 88.7Consumption of fixed capital (constant prices) 92.1 93.7 88.7

Consumption of fixed capital (current prices) 92.1 103.1 110.0

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Appendix Example ― Solving for Capital Services

User cost equals rental cost at current prices

045.0110.0115.01

rateinterestReal

1005.742*045.1

335.00.045costUser

335.0

5.2741.92

valueassetperiodofbeginningcapitalfixedofnconsumptio

rateonDepreciati

assetof price current*rate interest real1

rate ondepreciatirate interest realcostUser