Issues in Fiscal Accounting: an Update

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Issues in Fiscal Accounting an Update

• Adrienne Cheasty
• Fiscal Affairs Department
• IMF Santiago, January 2003

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GFSM 2001the lead-in

• CEPAL 2000
• New financial architectureemphasis on
  transparency...
• ... though fiscal transparency does not require a
  particular standard.
• New sense of market demands for standards and
  independent access/comment (post-Enron?)
• Official launch in January 2002

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One objective of new GFS

• To preclude investors unhelpful focus on a
  single deficit number...
• ... which may lead to inappropriate fiscal
  policies and creative accounting.
• Instead, see government accounts as a corporate
  balance sheet income statement (with various
  different indicators, each relevant to answer
  different questions)net worth, financing needs,
  net investment, indebtedness, leverage...

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Introduction of the new GFS will be gradual ...
an ongoing project ...

• Countries will move gradually (though many have
  balance sheets already)
• The IMF is providing training
• A compilation guide will be prepared, after we
  gain enough experience to anticipate countries
  difficulties
• A working group in the IMF will explore the
  implications for policy (e.g., in IMF programs)

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One policy decision already made

• Keep the IMFs overall balance
• The overall balance differs from net lending/
  borrowing ( the basic financial balance in the
  new GFS) because
• It records all privatization receipts below the
  line (the new GFS puts the sale of fixed assets
  above the linewhich could create incentives for
  selling enterprises piecemeal rather than as
  going concerns).
• It keeps lending minus repayments for policy
  purposes above the line useful for capturing
  (intertemporally) any subsidy inherent in policy
  lending.

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New policy issues continue to surface

• The fiscal treatment of public enterprises
• Valuation of debt
• Accrued pension liabilities
• BOTs and concessions
• The fiscal treatment of the central bank

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1. Public enterprises in the new GFS

• The new GFS recognizes that many countries
  appropriately cover a wider public sector than
  general government in their fiscal accounts.
• Last year a movement to exclude truly
  arms-length public enterprises from the coverage
  of fiscal statistics...
• ... due to concerns that targeting a broad
  deficit measure put inappropriate pressure on
  governments to restrict public enterprise
  investment.
• Argument more positive operating balances of
  public enterprises tend to be associated with
  worse overall balances, since the most profitable
  enterprises (a) have the highest rate of return
  to investment and (b) have easiest access to
  borrowing.

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1. Public enterprises in the new GFS,
(cont.)

• But...
• ... governments like fiscal reporting for public
  enterprises, including the capacity to put an
  overall limit on themsince the government, as
  owner, has portfolio-balance and aggregate
  investment choices to make
• ... investors raise questions if governments drop
  public enterprises (transparency
  matters)
• ... anyway, it has proven difficult to define
  operational criteria which distinguish
  arms-length public enterprises from those which
  are tools of government policy
• Quasi-fiscal activities (e.g., petroleum price
  subsidies)
• Impact of NPE profits/dividends on fiscal
  accounts
• Bail-outs of NPEs are more likely
• NPEs are slow to respond to indirect instruments
  of demand management (e, i, ...)

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1. Public enterprises in the new GFS,
(concl.)

• Nonetheless, the concerns expressed are valid.
  Hence
• We will use the new GFS to facilitate a more
  nuanced analysis of public enterprises
• Current and capital expenditure are shown in two
  separate accounts (as in corporate accounts)....
• ... so there are two relevant balances (change in
  net worth and net lending/borrowing)i.e., before
  and after investment
• Accrual accounting is more accurate for
  investment
• Balance sheets allow more complete consideration
  of NPEs financial options (look at total change
  in net worth)
• Also, stress that there is no necessary link
  between breadth of coverage and inappropriately
  restrictive fiscal policies (e.g., Mexico
  protects its public enterprises)

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2. Valuation of debt

• GFS does not take a categoric stance on valuation
  methods for assets and liabilities (there are
  various standards and anyway, more work is
  needed), but most of us assumed debt would be
  marked to market
• The new GFS shows valuation changes in other
  economic flowsa helpful addition to policy
  tools (e.g., Brazil has conservative government
  policy choices but rotten valuation changes)
• However, marking to market implies an anomaly
• The worse-off is a government (i.e., the less
  capable of paying its debt), the lower the market
  tends to value the debtso the debt burden drops
• E.g., how to explain Argentinas current debt
  difficulties, given the low debt burden when
  marked to market?
• So, we will probably keep records of nominal
  debt, as well as records where it is marked to
  market.

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3. Accrued pension liabilities

• The only pension liabilities recorded in the 2001
  GFS are for civil servants pensions.
• A proposal was put to the December 2002 IFAC
  meetings to include already accrued pension
  liabilities to the rest of the population. This
  is part of an effort to get a fuller picture of
  long-run pressures on governments.

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3. Accrued pension liabilities (cont.)

• The proposal is controversial.
• Objection Pensions are not liabilities in the
  same sense as debtthe government can change
  policy and thereby reduce them.
• Response (1) it is difficult for a government to
  renege on accrued liabilitiesit usually
  grandfathers (2) the balance sheet is meant to
  be a snapshot of the present situationpolicies
  wont be changed unless the cost of current
  policies is clear.
• Objection There is moral hazard to recognizing
  these liabilities.
• Response (1) The balance sheet needs to be seen
  as an analytical tool, not a legal document. (2)
  Anyway, some countries (Chile) have taken a
  related step by creating/reporting recognition
  bonds.
• Objection It is a misrepresentation to show the
  liabilities without showing what offsets them on
  the asset side (the power to tax).
• Response Good idea. Identify (part of net worth)
  either (1) assets equivalent to liabilities, or
  (2) assets equivalent to best-estimate power to
  raise taxes.

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4. BOTs and concessions

• Build-Operate-Transfer schemes
• A private firm agrees to build an asset for
  government (e.g., road, prison), operate it for
  some years, and then transfer it to government.
  Government agrees to allow the private firm to
  control the asset until it is transferred, and to
  earn income on it, usually by charging government
  or the private sector for services (e.g., tolls,
  prison management).
• Such schemes have been shown in the fiscal
  accounts only by recording an unrequited transfer
  from the private sector to government at the end
  of the contract periodi.e., essentially not at
  all, to date.

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4. BOTs and concessions (cont.)

• From an accounting perspective, and analytically,
  the lack of fiscal treatment creates problems.
• Accounting The governments capital stock rises,
  with no recorded investment or payment. Some
  subset of the public may be paying user charges
  for public goods, without these showing in the
  budget.
• Economics Though the government succeeds in
  deferring payment for the investment, it still
  (1) makes the decision to invest (2) usually
  keeps control of the specifications and (3)
  produces the same public infrastructure as it
  would have under a traditional direct investment
  arrangement.
• Conclusion excluding BOTs from the fiscal
  accounts understates the role of government in
  the economy (size of the non-market sector,
  government aggregate demand, potential for
  crowding-out...)

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4. BOTs and concessions (cont.)

• The economic effect of the BOT scheme is very
  little different from the situation where the
  public sector acquires the investment directly,
  using a private construction firm and vendor
  financing, and subsequently leases the asset to
  the same private sector corporation, using the
  lease income to pay off its debt service
  charges. (IMF WP/02/167).
• Counter-argument No, it would be wrong to
  include these and other types of public-private
  partnership in the fiscal accounts because
  private sector involvement (a) changes the goods
  from public to marketed goods, and (b)
  imports market-economy efficiency to the public
  sector. I.e., the borders between the public and
  private sectors have become fuzzy.
• Response (1) That was the plan, but sketchy but
  increasing evidence (e.g., from Britain) suggests
  that public-private partnerships have been more
  expensive than plain vanilla government
  investments, both during operations and e.g.,
  because of incentives to defer maintenance.

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4. BOTs and concessions (cont.)

• Response (2)
• Analytically why would a private firm be willing
  to build something it has to give away unless it
  earns more than via a plain-vanilla private
  investment?
• Because, (i) it gets access to government
  monopoly power (e.g., typically a BOT contract
  commits the government not to build another
  road/prison near by). Hence it can charge higher
  prices. The above-competitive prices have to be
  high enough to compensate for eventually ceding
  the asset to government (i.e., the exercise of
  state monopoly power pays for the asset).
• Moreover, (ii) contracts usually minimize the
  risk to the private firm, by requiring government
  to guarantee a certain income, etc.
• And (iii) typically the public sector retains
  most of the depreciation cost.

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4. BOTs and concessions (cont.)

• A proposal in an IMF working paper suggests
  showing the governments role in the project more
  transparently (i.e., more accurately from an
  economic perspective).
• The project is shown as government investment in
  the year(s) it is built.
• The government finances it by a loan from the
  private construction company.
• The governments debt service to pay off the loan
  is the income stream earned by the private
  company from operating the BOT (net of its
  costs).
• The point here is that the government could have
  earned the same income stream (/- differences in
  public/private efficiency), so in essence it is
  merely allowing the private sector act as its
  agent.

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4. BOTs and concessions (cont.)

• So, BOTs would increase the fiscal deficit in the
  year the resources are used to build the
  infrastructure.
• However, the proposal does not envisage including
  the BOT liability as debt, because the debt
  service payments are already inherent
  (non-separable) in the arrangement.

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4. BOTs and concessions (cont.)

• The same insightthat the government can sell its
  monopoly power to the private sectorcan also be
  applied to concessions ( like BOTs, but
  without the asset transfer).
• Concessions are contracts defining private
  participation in the development and operation of
  public works.

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4. BOTs and concessions (concl.)

• When the concessionaire pays the government an
  upfront fee, it is because the concession is
  expected to be lucrative enough to cover costs
  and make a profit (i.e., reflecting use of
  monopoly power).
• Hence, an IMF staff proposal is to treat the
  upfront payment as the purchase price of an asset
  ( the right to use monopoly power). Effectively,
  this would mean eliminating the receipts from the
  sale of the concession from revenuesince
  government net worth does not increase. Its
  financing requirement is, however, reduced.
• When the contract provides for the government to
  guarantee a minimum income to the concessionaire
  (e.g., to pay him if the volume of cars on a toll
  road falls short of projections), then any such
  payment should be treated as a subsidysince (i)
  the payment depends on the quantity of services
  and (ii) is intended to close an operating gap in
  the remuneration of the concessionaire company.
• When the contract provides for the concessionaire
  to transfer any excess profits to government
  (e.g., if car volume exceeds projections), these
  flow earnings are legitimate government revenue.

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The fiscal treatment of the Central Bank

• The shift to accrual also removes one of the main
  arguments against reporting a fiscal table for
  the central bank.
• Reasons to include the central bank in the fiscal
  accounts are
• To have a transparent record of quasi-fiscal
  activity.
• To track the aggregate demand impact of central
  bank operations (since central bank losses are in
  effect financed by money creation).
• To monitor sustainability if the central bank
  runs losses on its core activities for a
  protracted period (so that it runs down its net
  worth), government will have to bail it out.
• To remind people that there are real costs to
  monetary policy an unsustainable policy (e.g.,
  sterilization) will eventually have to be
  abandoned.
• Problem (well, ... issue ...) the central bank
  tends to use its whole balance sheet more than a
  non-financial entity does. E.g., in Chile, the
  authorities can count on near-certain capital
  gains to finance their quasi-fiscal deficit.