Cost of capital services and the national accounts

1. Cost of capital services and the national accounts UN STATISTICS DIVISION Economic Statistics Branch National Accounts Section UNSD/ECA National accounts workshop November 2005 1

2. Current SNA93 treatment and critique • Services from assets used in non-market production are reflected in output only as consumption of fixed capital. • Implies no return to capital used in non-market production as against the one employed for market production • Zero net operating surplus for non-market producers as output estimated on cost basis; Output = IC+COE+COF • Implies inconsistency in capital services rendered by similar asset used in market and non-market production

3. Government and non-market producers–cost of capital of own assets • Implies different values for similar assets after initial purchase or different values of consumption of fixed capital What is the way forward? (AEG decision in 2004) • Treat similar assets as providing similar services regardless of the nature of production. Therefore, include capital services as part of output of non-market producers. • Consider four types of assets: Assets used by civil servants, assets benefit the economy at large, assets used by the community at large and land.

4. Issues • When summing costs to make estimates of output for non-market producers, what should be used to reflect the cost of using non-financial assets: • Consumption of fixed capital only, which is the current recommendation, or the full cost of capital services (approximately consumption of fixed capital plus a return to capital)? • If the full cost of capital is chosen, should it apply to all non-financial assets owned by the non-market producer or just some of them?

5. Government and non-market producers–cost of capital of own assets • In country consultation opinions were divided Against • Non-market equals non-profit, so why should the accounts include “profit” for government? • Practical difficulties for implementation • Including a return to capital for assets used in non-market production means that GDP and NDP would increase and what then would happen to the resulting government operating surplus. • What rate of return for estimating the opportunity cost of the capital (discount rate)?

6. Government and non-market producers–cost of capital of own assets For • Measure of non-market output calculated as the sum of costs, and capital services (user cost times volume of services) is a better measure of the costs incurred than is provided by the decline in asset value. • Data requirements are similar for estimating consumption of fixed capital via a PIM. • Government consumption expenditure would increase by the same amount. • Govt bond rate may be a good choice for the discount rate.

7. First type of asset: first priority • Assets used by civil servants in course of their work e.g. computer, vehicle, building • Determining capital service/ return to capital/ consumption of fixed capital straightforward

8. Second type of asset: 2nd priority • Assets bringing benefits to the economy at large e.g. roads and other infrastructure. • May be unique products so valuation may be more difficult than first type but valuation is needed for calculation of consumption of fixed capital.

9. Third type of asset • Used by the community at large e.g. recreational areas such as city parks, monuments • May be difficult to place a value on these • Lower priority to estimate • May be infeasible

10. Fourth type of asset • Land • Produced • Non-produced • As problematic as the third type

11. AEG decisions • The AEG reaffirmed the principle to include a return to capital on non-financial assets used in non-market production. • It was agreed to follow-up on a one-on-one basis the comments from the global and country consultations, including those comments on the scope, and report back to the next AEG Meeting in early 2006.

12. What is capital service? • In production process, labour, capital and intermediate inputs are combined to produce output • Employees/workers may be seen as repository of labour services • Similarly, capital goods used in the process of production are seen as carriers of capital services that constitute the actual input. • Capital service is the service provided by an asset used in the process of production. • When the Capital good “delivers” services to its owner, no market transaction is recorded.

13. What is capital service? • Measurement of this implicit transaction is one of the challenges of capital measurement for productivity analysis • Conceptually, capital services reflect a quantity, or physical concept, not to be confused with the value or price concept of capital • Service flows of an office building are the protection against rain, the comfort and the storage services that the building provides to personnel during a period • Price of the capital service is measured as the user costs or rental prices of capital

14. What is capital service? • If there were complete market for capital services, rental prices could be directly observed. • When a fixed asset such as a car is rented, rental paid is the payment for the capital service provided by the car. It is observable. • This is not the case for the many capital goods that are owned for which rental prices have to be imputed • The implicit rent that capital good owners ‘pay’ themselves gives rise to the terminology user cost of the capital

15. What is capital service? • When a fixed asset is used by its owner, the 1993 SNA record the cost of the capital only as consumption of fixed capital (CFC). • Capital service = CFC + return on capital • Capital services may be generated by fixed assets, inventories, land and other non-produced assets.

16. Capital services • Costs of capital services allow for measuring the contribution of each type of asset to value added and GOS, and makes it possible to study productivity. • However, it cannot be introduced into the national accounts in an isolated manner. • It should be compiled in an integrated and consistent manner with estimates of CFC and capital stock and an assumed rate of return.

17. Integrated system of Capital services, CS &CFC

18. AEG decisions • Confirmed the importance of including the concept of capital services in the updated SNA • Strongly supported including the estimates of capital services in supplementary tables rather than in the core accounts of the SNA • Confirmed that capital services (comprising depreciation and return to capital) and capital stock measures should be compiled in an integrated and consistent manner

19. AEG decisions • agreed that the basic concepts of the capital services approach be presented in the SNA and that the detailed recommendations would be elaborated in an updated version of the OECD manual on “Measuring Capital” • agreed that the concepts underlying the formulae presented in the paper (“Cost of capital services”, document number SNA/M1.05/04; Issue 15) are appropriate, subject to detailed checking.

20. AEG decisions • The group confirmed the importance of measuring capital services but a large majority did not favor including “of which” items in the core accounts. Instead, there was considerable support for a chapter/annex on the measurement of capital in the updated SNA.

21. Thank You