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

2. www.bea.gov 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. www.bea.gov 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. www.bea.gov 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. www.bea.gov 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. www.bea.gov 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. www.bea.gov 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. www.bea.gov 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. www.bea.gov 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. www.bea.gov 10 Appendix Example ― Known Nominal Rental Values

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