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TFHPSA Working Group 2

TFHPSA Working Group 2. Capital injections / Superdividends / Reinvested earnings Philippe de Rougemont (Eurostat-C.3) drawing on presentations by T. Dobbs and B. Robinson, and by A. Harrison. Part I. Presentation of the issue. In this discussion:.

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TFHPSA Working Group 2

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  1. TFHPSAWorking Group 2 Capital injections / Superdividends / Reinvested earnings Philippe de Rougemont (Eurostat-C.3) drawing on presentations by T. Dobbs and B. Robinson, and by A. Harrison TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  2. Part I Presentation of the issue TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  3. In this discussion: • “Superdividends” refers to payments returning multi-year (operating) earnings to owners. • “Capital injections” refers to payments covering multi-year (operating) losses • Including against issuance of shares. TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  4. Guidance • GFSM 2001 – Government Finance Statistics Manual 2001 – IMF • Manual on Government Deficit and Debt (MDD) interprets ESA 1995 TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  5. Table 1 TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  6. Table 1 continued TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  7. Table 2 Criteria TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  8. Table 2 – Criteria continued TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  9. Table 3 – Criteria end TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  10. Table 3 TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  11. Table 4 - continued TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  12. Support I • TFHPSA Questionnaire – 17 responses: 13 nationals (10 countries); 4 international • Question on support of the “approach of the paper”: Support 8, partly support 4, do not support 4 • Question on support to GSFM /MDD capital injection superdividend • No 1 2 • Yes but not enough 6 7 • Yes to be in SNA 9 7 • Reinvested earnings defaults: volatility of 1st estimate, source data issues, consistency TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  13. Support II TFHPSA in Washington (and Paris): • Support reinvested earnings: USA, AUS, IMF GFD, Eurostat • Accounting? IPSASB • Oppose reinvested earnings: CAN, UNSD, ECB, FR, DE • Japan? TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  14. Part II To summarize TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  15. 3 Options • 1 SNA unaltered • 2 SNA amended for superdividends and interpreted for capital injection • 3 Reinvested earnings TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  16. SNA unaltered • Advantages • No changes to concepts or practice • Disadvantages • Inconsistent with GFSM and MDD • Capacity to game • Asymmetry between superdividends and capital transfers (income) • Lack of worldwide comparability of net lending/net borrowing TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  17. Support • First choice – small support • Second choice – small support TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  18. SNA amended for superdividends and interpreted for capital injections TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  19. Advantages • Symmetry between superdividends and capital injections (income) • Consistent with GFSM and MDD • Improves on SNA 1993, against gaming • Currently implemented by some compilers TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  20. Disadvantages • Not net worth neutral • Asymmetry between superdividends and capital injections (net lending/net borrowing) • Time of recording of the capital transfer not appropriate • Still leaves noticeable wriggle room for manipulation of S.13 data (injections) • Involve compilation difficulties To be applied to which transactions? TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  21. Support • First choice - about half • Second choice - most of the other half TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  22. Reinvested earnings TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  23. Advantages • Net worth neutral • Symmetry between superdividends and capital injections (income and net lending/net borrowing) • Reduces gaming • Comes closer to accounting (IPSAS/GAAP) TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  24. Disadvantages • Requires changes to SNA (and supporting manuals) • Allocates saving to government • Imputation • Consistency issue if not applied to all sectors • Consistency with market valuation (?) • Measurement issues TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  25. Support • First choice - about half • Second choice - small TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  26. Part III Reinvested earnings: how does it work and what proposed threshold? TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  27. How does it work? Example: Government owns a corporation that makes 15 of ‘operating’ profits during the accounting period, and distributes 5 in dividends The corporation’s assets/liabilities generate, during that period, 3 of holding gains/losses (to be excluded from operating profits) The equity stakes in the company starts at 100. It closes at 113=100+15+3-5 TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  28. How does it work? (2) TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  29. 100% Threshold is suggested • 100% is a lesser change in SNA • 100% controlled entities are un-restrictively controlled • transfer pricing; notion of savings elusive. Slightly different concept from D.43 for S.2 (influence and control) • 100% public controlled provide most scope for gaming in fiscal • 100% does not give rise to the question of the treatment of minority interest • 100% may allow a recording of losses as subsidy, instead of negative property income TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  30. Capturing quasi-fiscal operations (1) Set a market/nonmarket rule to cover all loss making corporations (2) Record as expenditure the granting of guarantees, before the call (3) Accrue profits and losses in the account of the government TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  31. Part IV TFHPSA to AEG: (1) Possible propositions of change (2) What preference TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  32. option A: GFSM2001 / MDD • Extend the quasicorporation treatment of superdividends to corporations • Clarify: capital transfer recording implemented when to cover past losses, “even when shares are issued” • Clarify this also applies to quasicorporations • Clarify capital injections can also be carried by way of debt assumption: • Change a reference in GFSM 2001 in case of public corporation • Change ESA for references to units that disappeared, at least when public corporations TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  33. Option A cont. – GFSM2001 / MDD • To which equity links to apply the superdividend treatment? • To all equity? Portfolio/Direct • thresholds? 10%, 50%, 20%, 10% • To all sectors? TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  34. Option B – Reinvested earnings • Extend the reinvested earnings treatment that exist for direct foreign investment only to 100% public owned corporations (and quasi corporation) TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  35. TFHPSA preference Slight preference for MDD/GFSM Option “as those preferring reinvested earnings are more amenable to supporting this option than the reverse”. TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  36. Some data • See Excel file TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  37. TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  38. Distribution of dividend of 10 TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  39. Earnings of profits (of 25) TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  40. The Government Finance issue: • Capital injections should generally be expensed, even though they are always net worth neutral for the corporation in question and also for government • Prudence: cover past or future losses of public corporations, which are not accrued as expenses in the books of government • Injections realized in a commercial context, with expectation of a reasonable return on investment, can be classified as transaction in equity • Distributed dividends recorded for a period should not exceed the income of the period • distributions of superdividends or lump sum payments should be classified as financial transactions (for the part in excess) • otherwise governments would be able to manipulate the timing of their revenues, irrespective of the time of the underlying event (the profit accrued) TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  41. The Government Finance issue II • In Europe: the accounting treatment of GG – Public corporations transactions the most contentious issue when EU Commission visits countries • Railways • Importance of issue largely depends on the definition of the market/non market (50% rule or 100% rule) TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  42. Guidance • SNA 1993 - ESA 1995 • Dividends / losses • Quasi-corporations • Reinvested earnings (RoW) • Eurostat’s Manual on Deficit and Debt (MDD) • Interpretation of ESA 1995, though not a legal act • 40% of the MDD (of 243 pages) is dedicated to Part II Relations between the government and public enterprises • GFSM 2001 • Compilation guide TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  43. Part II Superdividends / Capital injections TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  44. Dividends (1) • SNA - mixed message: • “it encompasses all distribution of profits by whatever name they are called” SNA 7.114 • “the level of dividend is not unambiguously attributable to a particular earning period....” SNA 3.99 • “income is often defined as the maximum amount that a household, or other unit, can consume without reducing its real net worth” SNA 8.15 • QC – “income that the owner of quasi-corporations withdraws from them is analogous to the income withdrawn from corporations by paying out dividends to their shareholder” SNA 7.89 • QC – amounts recorded under D.422 have to be explicitly identifiable (SNA 7.116) and will depend largely on the size of the entrepreneurial income (SNA 7.117) • QC – D.422 excludes withdrawal of funds realized by the sale or disposal of the quasi-corporations assets or of large amounts of accumulated of retained earnings or other reserves. SNA 7.118 TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  45. Dividends (2) • MDD II.1.2.1: • “Dividends arise from the government ownership of the unit. They, apply to payments that are funded from the unit’s income. Dividends do not apply to payments funded by asset sales, capital gains, orreserves accumulated over several years, even if they are called dividend.” • GFSM 2001 • “Dividends are payments a corporation makes out of its current income, which is derived from its ongoing productive activities. A corporation may, however, smooth the dividends its pays from one period to the next so that in some periods it pays more in dividends than it earns from its productive activities. Such payments are still dividends. Distributions by corporations to shareholders of proceeds from privatization receipts and other sales of assets and large and exceptional one-off payments based on accumulated reserves or holding gains are withdrawals of equity rather than dividends.” GFSM 5.87 TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  46. Capital injections (1) • 1993 SNA • Transfers from government units to publicly or privately owned enterprises to cover large operating deficits accumulated over two or more years are recorded as other capital transfer (D.99). SNA 10.141 • Regular transfers paid to public corporations which are intended to compensate for persistent losses—i.e. negative operating surpluses (B.2)—which they incur on their productive activities as a result of charging prices which are lower than their average cost of production as a matter of deliberate government economic and social policy, are recorded under D.319 Other subsidies on products. SNA 7.78c TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  47. Capital injections (2) • MDD • A capital injection made to cover expected future losses, as well as repetitive losses, should be recorded as capital transfer (D.9), even if shares (or equivalent) are issued. II.3.1.2.3. • GFSM • GFSM 6.60: “Subsidies also include transfers to public corporations and quasi-corporations to compensate for losses they incur on their productive activities as a result of charging prices that are lower than their average costs of production as a matter of deliberate government economic and social policy. If such losses have been accumulated over two or more years, the payments are classified as miscellaneous other capital expense (2822).” TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  48. Specific issues • Central bank lumpsums • MDD • Debt assumption / cancellation • ESA 1995 inconsistencies: 3 cases not expensed: • Quasicorporations / Privatization / disappearing entity • GFSM 2001 Appendix II inconsistencies : • Notion of effective claim • 5 cases TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  49. SNA “ambiguous” reading of some government operations Subsidies (D.3): to cover persistent losses incurred as a matter of deliberate government policy Tax (D.2):profits of fiscal monopolies Capital transfers (D.9): to cover post losses Current 1993 SNA: reference in each case to transfers, to cover losses//of profits fiscal mono.//of QC income not in line with the accrual principle TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

  50. Part III Assessment of the GFSM 2001 and MDD guidance TFHPSA - WG 2 item 1 / Capital injections, superdividends, reinvested earnings - October 12, 2005

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