Transcript Issue 16: Returns to Government Owned Assets J. Steven

Issue 16:
Returns to Government Owned
Assets
Overview of AEG
Recommendation and Comments
J. Steven Landefeld
April 25, 2006
SNA Update Session, Geneva, Switzerland
AEG Recommendation
 The existing measure of government is a costbased 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 governmentowned assets.
 The AEG has recommended that both components
of the services of government capital be
included.
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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.
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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.
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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.
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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:

1  nominal rate
Real interest rate 
1
1  inflation rate
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Implementation Issues: What Assets?
 What government assets?
 Fixed assets ― Yes
 Land and other assets ― No
 Current or replacement cost value of
government fixed assets.
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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.
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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
Asset price 
years of service left

t 1
rental price
1  nominal interest rate
 Beginning-of-year flows
(flows in current period are not discounted)
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Appendix Example ― Known Nominal
Rental Values

1  nominal rate
Real interest rate 
1
1  inflation rate
Given Rental price (current)
Price index (expected inflation)
Inflation rate (expected)
Interest rate (nominal)
Solve Beginning-of-period asset price (current prices)
Rental price (constant prices)
Beginning-of-period asset price (constant prices)
Consumption of fixed capital (constant prices)
Consumption of fixed capital (current prices)
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Period 1 Period 2 Period 3
100
105
110
100
110
124
10.0
12.7
15.0
15.0
274.5
200.7
110.0
100.0
274.5
92.1
95.5
182.4
93.7
88.7
88.7
88.7
92.1
103.1
110.0
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Appendix Example ― Solving for Capital
Services
Depreciation rate 
consumption of fixed capital 
beginning  of  period asset value 
Real interest rate 
User cost 

92.1
 0.335
274.5
1  0.15
 1  0.045
1  0.10 
real interest rate  depreciation rate
* current price of asset
1  real interest rate
0.045  0.335
User cost 
* 274.5  100
1.045
User cost equals rental cost at current prices
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