Abstract
There are several cases where the general rules for revenues and expenditures may not apply directly. Public-Private Partnerships are “off-balance sheet” according to the risk allocation. The acquisition of military equipment is recorded when delivered. The creation of a guarantee does not originate any recording. If the guarantee is triggered, the value paid by the government is recorded as a capital transfer. Grants received from the European Union are recorded in the National Accounts, according to the principle of fiscal neutrality. Support from the government to the financial sector should consider whether this support should, or not, be recorded as a capital expenditure in the National Accounts or only as financial operations. Dividends from the Central Bank are recorded as capital revenues except for dividends that result from capital gains. The injection of capital by the government in state-owned enterprises may be recorded as a capital transfer or as a financial operation. Operations of securitisation are in general recorded as a financial transaction. In general, the recording of dividends is considered as capital revenue. The cancellation or reduction of debt is, as a rule, recorded as a capital transfer. The transfer of pension funds should be fiscally neutral.
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Notes
- 1.
However, the economic literature focuses on the advantage of PPPs for greater efficiency in the use of resources which is offered by private management. Although a PPP has a higher financing cost, the reduction of other costs (mainly of construction and operation) will have to be sufficient to compensate for the disadvantage related to the cost of debt. If Rf < Rd < Re, then Rf < WACC (even with the tax effect), and then PPPs can generate VfM if efficiency gains > (WACC − Rf) (Sarmento and Reneeboog 2014), where Rf is the risk-free rate, Rd is the cost of debt, Re is the cost of equity, and WACC is the weighted-average cost of capital, given that WACC = Ke × (Equity/Assets) + Kd × (Debt/Assets) × (1−t), where t is the tax rate over the corporations’ profits. The question whether a PPP generates VfM is analysed by these authors, and it is verified that, out of seven government reports, six conclude the existence of VfM in the analysed contract. On the opposite, out of 40 academic articles, 25 conclude the non-existence of VfM, with 11 being inconclusive. In other words, only four conclude the existence of VfM in the PPPs analysed.
- 2.
ESA 2010, 20.276–20.290.
- 3.
Regarding operational leasing and financial leasing, see ESA 2010, Chap. 15, Table 15.1.
- 4.
Published as Sect. 4.2, “Long-term contracts between government units and non-government partners” (Page 19).
- 5.
ESA 2010, 20.283.
- 6.
It should be mentioned that the total value of the assets under management of the PPP contract should be accounted for, given that they are not, normally, divisible. In the original, Eurostat ( 2016): “It has to be noted that these arrangements deal with a single asset or a set of assets that are not contractually divisible. Because of the features of the contracts, PPP assets should not be split in national accounts. The assets should be recorded in the balance sheet of just one of the parties’ involved, economic agent, for its total value”.
- 7.
ESA 2010, 3.148 e 3.55.
- 8.
In the original Eurostat ( 2016): “‘Construction risk’ covers events related to difficulties face during the construction and to the state of the involved asset(s) at the commencement of services. In practice it is related to events such as late delivery, non-respect of specified standards, significant additional costs, legal and environmental issues, technical deficiency, and external negative effects (including environmental risk) triggering compensation payments to third parties”.
- 9.
In the original Eurostat ( 2016): “‘Availability risk’ covers cases where, during the operation of the asset, the responsibility of the partner is called upon, because of insufficient management (‘bad performance’), resulting in a volume of services lower than what was contractually agreed, or in services not meeting the quality standards specified in the contract”.
- 10.
In the original Eurostat ( 2016): “‘Demand risk’ covers the variability of demand (higher or lower than expected when the contract was signed) irrespective of the performance of the private partner. In other words, a shift of demand cannot be directly linked to an inadequate quality of the services provided by the partner. However, the quantitative and qualitative shortfalls have an impact on the effective use of the service and in some cases exert an eviction effect, but this primarily result from a bad management of the availability risk. Instead, it should result from other factors, such as the business cycle, new market trends, a change in final users’ preferences, or technological obsolescence. This is part of a usual ‘economic risk’ borne by private entities in a market economy. Normally, the demand risk is not applicable for contracts where the final user has no free choice as regards the asset-dependent service provided to them by the partner (thus excluding ‘secondary’ services falling under the ‘third parties’ revenue). For example, this applies to assets such as prisons. It may also be the case for hospitals or schools under certain conditions and in some cases sporting and cultural infrastructures assets, but, in this case, this reinforces the required unquestionable transfer of the construction and availability risks”.
- 11.
In the original, Eurostat ( 2016): “If these conditions are met, it is also important to consider other mechanisms in place (such as a guarantee or grantor financing) in order to check whether there could be an allocation of these risks to government, in which case the treatment of the contract is similar to the treatment of an operating lease in national accounts; it would be classified as the purchase of services by government. If the conditions in 6 are not met, or if government assumes the risks through another mechanism, then the assets are to be recorded in the government’s balance sheet. The treatment is in this case similar to the treatment of a financial lease in national accounts requiring the recording of government capital expenditure and a financial liability”.
- 12.
See ESA 2010 3.148 (b) (3).
- 13.
See ESA 2010 3.55.
- 14.
Ex-Directorate-General for Transports and Energy of the European Commission, which, in 2009, during the second mandate of Barroso was object of the split, becoming DG Move, but no longer including the energy sector.
- 15.
ESA 2010 states that military goods are “military weapons of destruction and the equipment needed to deliver them” (ESA 3.70e). In addition, it is also specified that such equipment is used by “military forces” that have a mission of defence against foreign hostile forces.
- 16.
ESA 2010, 20.19.
- 17.
“A specific case is where the payment is used for R&D purposes but does not contractually oblige a definitive purchase of military goods, and instead gives a right to future purchases at a reduced price, uncertain at the time of the expenditure, and then a transfer is recorded at the time of the payment. If an eventual acquisition of military goods occurs, this is recorded at full market value, as if acquired by a third party not subject to the reduction, and a capital transfer receipt is imputed for the difference. A very specific case should also be considered when a government decides to cancel a military equipment programme for which some R&D expenditure has already been undertaken. This expenditure was recorded as financial advance, ‘amortized’ by effective deliveries. As the later will not take place (or only partially), it should be examined if the advance should be returned by the corporation to government. If this is the case, there will be a new financial transaction. If this is not the case, it should be recorded a capital transfer or an investment grant if the corporation could take some advantage of the past R&D expenditure for itself. This should be recorded at the time of the final decision of cancellation” (Eurostat 2016).
- 18.
In the original Eurostat ( 2016): “Government may provide three kinds of guarantees: in the form of derivatives (such as Credit Derivative Swaps) which fall under the normal treatment of derivatives and do not require specific provisions for government transactions on this market; in the form of standardised guarantees (new distinction in 2008 SNA and ESA 2010); in the form of “one-off” guarantees”.
- 19.
Although the recording of guarantees by the government is mandatory.
- 20.
In the original from the ESA 2010: “The liabilities are called ‘contingent’ in the sense that they are by nature only potential and not actual liabilities. Non-performing loans could imply a potential loss for government if these loans were not repaid”.
- 21.
Eurostat Manual, II.6, Page 117.
- 22.
ESA 2010, 4.123.
- 23.
ESA 2010, 4.162.
- 24.
ESA 2010, 2.55, and following.
- 25.
Eurostat defines this type of assets as “non-performing”, in that they have a negative relevant impact on the performance and stability of the financial institution. The sale of such an asset in the open market would lead to a very high level of losses to the financial institution, jeopardising its solvency.
- 26.
ESA 2010, 1.80 and 1.811, and Eurostat Manual IV.2, page 194.
- 27.
See ESA 2010, Chap. 5—Financial Transactions.
- 28.
Definition: “swaps are contractual arrangements between two parties who agree to exchange, over time, and according to predetermined rules, streams of payment on an agreed notional amount of principal. The most common types are interest rate swaps, foreign exchange swaps, and currency swaps. Interest rate swaps are an exchange of interest payments of different character on a notional amount of principal, which is never exchanged. Examples of the types of interest rate swapped are fixed rate, floating rate, and rates denominated in a currency. Settlements are often made through net cash payments amounting to the current difference between the two interest rates stipulated in the contract applied to the agreed notional principal. Foreign exchange swaps are transactions in foreign currencies at a rate of exchange stated in the contract. Currency swaps involve an exchange of cash flows related to interest payments and an exchange of principal amounts at an agreed exchange rate at the end of the contract. FRAs (Forward rate agreements) are contractual arrangements in which, to protect themselves against interest rate changes, two parties agree on an amount of interest to be paid, at a specified settlement date, on a notional amount of principal that is never exchanged. FRAs are settled by net cash payments in a similar way to interest rate swaps. The payments are related to the difference between the forward rate agreement rate and the prevailing market rate at the time of settlement. Credit derivatives are financial derivatives with the primary purpose of trade credit risk. Credit derivatives are designed for trading in loan and security default risk. Credit derivatives may take the form of forward-type, or option-type contracts and, similar to other financial derivatives, they are frequently drawn up under standard legal agreements, which facilitate market valuation. Credit risk is transferred from the risk seller, who is buying protection, to the risk buyer, who is selling protection, in exchange for a premium. The types of credit derivatives are credit default options, credit default swaps (CDS), and total return swaps. A CDS index as a traded credit derivative index reflects the development of CDS premiums. Credit default swaps (CDS) are credit insurance contracts, which are intended to cover losses to the creditor (the buyer of a CDS) when: (a) a credit event occurs in relation to a reference unit, rather than being associated to a particular debt security or loan. A credit event affecting the reference unit of concern may be a default, but also a failure to make a payment on any (qualifying) liability that has become due, such as in cases of debt restructuring, breach of covenant, and others; (b) a particular debt instrument, typically a debt security or a loan, goes into default. As with swap contracts, the buyer of the CDS (regarded as the risk seller) makes a series of premium payments to the seller of the CDS (regarded as the risk buyer). Where there is no default on the associated unit or the debt instrument, the risk seller continues paying premiums up until the end of the contract. If there is a default, then the risk buyer compensates the risk seller for the loss, and the risk seller ceases to pay the premiums” (Source: ESA 2010).
- 29.
“Financial derivatives do not include: (a) the underlying instrument upon which the financial derivative is based; (b) structured debt securities that combine a debt security, or a basket of debt securities, with a financial derivative or a basket of financial derivatives, where the derivatives are inseparable from the debt security and the principal initially invested is large compared to the prospective returns from the embedded financial derivatives. Financial instruments where small principal amounts are invested relative to the prospective returns, and which are fully at risk, and are classified as financial derivatives. Financial instruments where the debt security component and the financial derivative component are separable from each other are classified accordingly; (c) repayable margin payments related to financial derivatives are classified in other deposits or loans, depending on the institutional units involved. However, non-repayable margin payments, which reduce or eliminate asset/liability positions which may emerge during the life of the contract, are treated as settlements under the contract, and are classified as transactions in financial derivatives; (d) secondary instruments, which are not negotiable and cannot be offset on the market, and; (e) gold swaps, which have the same nature as securities repurchase agreements” (Source: ESA 2010).
- 30.
Council Regulation No. 479/2009 indicates that: “Liabilities denominated in a foreign currency, or exchanged from one foreign currency through contractual agreements to one or more other foreign currencies shall be converted into the other foreign currencies at the rate agreed on in those contracts and shall be converted into the national currency on the basis of the representative market exchange rate prevailing on the last working day of each year. Liabilities denominated in the national currency and exchanged through contractual agreements to a foreign currency shall be converted into the foreign currency at the rate agreed on in those contracts and shall be converted into the national currency on the basis of the representative market exchange rate prevailing on the last working day of each year”.
- 31.
For the CDS cases, see also ESA 2010, 5.218.
- 32.
See ESA 2010, Chap. 2, for the definition of “private investor” and Sect. 3.23 for “calculation of the private sector’s rate of return”.
- 33.
CAPM: E(ri) = Rf + Bl [E(rm)−E(rf)], where Rf is the risk-free interest rate; βl beta leverage (beta of a company resorting to leverage − debt); βl (company’s beta) = βu×[1+(1−t)*(D/E)]; E(Rm) expected market return; and [E(Rm) − Rf] the “market premium”, in other words, the market premium on the risk of that asset compared to the risk-free interest rate.
- 34.
ROE = Net income/equity.
- 35.
ESA 2010, 4.138 and 4.3.
- 36.
In the original from Eurostat ( 2016): “Eurostat therefore considers that the EFSF is an accounting and treasury tool to enable the same conditions for access to borrowing for members of the euro area, acting exclusively on behalf of them and under their total control” (Source: Eurostat, New decision of Eurostat on deficit and debt, and the statistical recording of operations undertaken by the European Financial Stability Facility).
- 37.
Securitisation of assets or of future income streams is an important financial innovation that has led to the creation and extensive use of new financial corporations to facilitate the creation, marketing, and issuance of debt securities. Securitisation has been driven by different considerations. For corporations, these include cheaper funding that is available through banking facilities, the reduction in regulatory capital requirements, the transfer of various types of risk like credit risk or insurance risk, and the diversification of funding sources (ESA 2010, 5.104 and 5.105).
- 38.
Eurostat ( 2016): “This definition of securitisation—in most cases involving government units—which has been effectively observed in EU may be considered a “narrow” (or financial-market oriented) definition of securitisation. On the one hand, there may be issuance of securities on which are attached direct rights on segregated assets by the holders of the securities (“on-balance sheet securitisation”). Such operations would not need specific guidance, as the main point is the incurrence of new liability, not the specific rights and obligations attached to the debt instruments. On the other hand, government can “monetise” (transform into liquidity, which is the same result as in the case of securitisation operations considered here) any asset (financial or non-financial) by a transaction on organised markets or over the counter. This is matter of time (anything is finally monetised) and of the degree of discount compared to the fundamental value which government would accept to endure (see the “extreme” case of “fire sales”). In the latter case, the same basic principles related to the recognition of a “true sale” should fully apply”.
- 39.
ESA 2010, 20.262–20.271.
- 40.
- 41.
ESA 2010 8.26–8.27: “8.26: The purpose of the entrepreneurial income account is to determine a balancing item corresponding to the concept of current profit before distribution and income tax, as normally used in business accounting.
8.27: In the case of general government and non-profit institutions serving households, this account concerns only their market activities”.
- 42.
ESA 2010, 20.222, 20.232, 20.225.
- 43.
ESA 2010, 4.84, for a list of the different social benefits.
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Miranda Sarmento, J. (2018). Specific Cases. In: Public Finance and National Accounts in the European Context . Financial and Monetary Policy Studies, vol 47. Springer, Cham. https://doi.org/10.1007/978-3-030-05174-7_14
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