Issue 16: Returns to Government Owned Assets

1. Issue 16:Returns to Government Owned Assets Overview of AEG Recommendation and Comments J. Steven Landefeld April 25, 2006 SNA Update Session, Geneva, Switzerland

2. 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.

3. 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.

4. 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.

5. 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.

6. 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:

7. Implementation Issues: What Assets? • What government assets? • Fixed assets ― Yes • Land and other assets ― No • Current or replacement cost value of government fixed assets.

8. 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.

9. 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)

10. Appendix Example ― Known Nominal Rental Values

11. Appendix Example ― Solving for Capital Services User cost equals rental cost at current prices