2. Institutional Units and Sectors
- Sage De Clerck, and Tobias Wickens
- Published Date:
- March 2015
This chapter defines and describes the concepts of residence, institutional units, and sectors, and then uses those concepts to delineate the general government and public sectors, and to discuss practical applications of sector classification principles.
2.1 In principle, GFS should cover all entities that materially affect fiscal policies. Normally, fiscal policies are carried out by entities, established by political processes, wholly devoted to the economic functions of government (see paragraph 2.38), such as government ministries or municipal councils. The term “government” is often used as a collective noun for various combinations of entities in a country involved in the functions of government, or reference is made to the various individual governments of a country. For example, a country may have one central government; several state, provincial, or regional governments; and many local governments. Nonprofit institutions under government control may also exist. In addition to those entities, government-owned or controlled enterprises that engage in some commercial activities may be instruments of fiscal policy (see paragraphs 2.104–2.105). These government-owned enterprises, such as the central bank, post office, or railroad, which are often referred to as public corporations, state-owned enterprises, or parastatals in a legal sense, may be part of the general government or public sector, and statistics should be compiled for all of them.
2.2 Determining the coverage of the entities included in GFS requires determining economic territory, using the residence criteria (see paragraph 2.6), before considering two questions. First, what is the statistical unit for which it is feasible and meaningful to collect statistics? Second, which of those statistical units should be included in GFS?
2.3 The statistical unit employed in the institutional sector classification in GFS is the institutional unit, the same unit that is the foundation of the 2008 SNA and other macroeconomic datasets.1 This chapter therefore defines (see paragraph 2.22), and describes, types of institutional units (see paragraph 2.26).
2.4 Regarding the coverage of GFS, two principal constructs are used in macroeconomic datasets. First, the general government sector, which is primarily engaged in nonmarket activities, is defined (see paragraph 2.58). Second, the public sector is defined to also capture the market activities and the quasi-fiscal operations of public corporations (see paragraph 2.63) such as the central bank and other public corporations. Quasi-fiscal operations are government operations carried out by institutional units other than general government units. These quasi-fiscal operations have the same fiscal policy impact on the economy as those of government units (see paragraph 2.38). A number of subsectors of the general government and public sectors are also defined because of their analytical usefulness.
2.5 The remainder of this chapter defines the concept of residence to delineate an economy, and describes institutional units and the types of institutional units that exist in macroeconomic statistics before defining the institutional sectors. The chapter applies these concepts to delineate the general government sector and the public sector. Finally, a decision tree to assist with the classification of public sector entities and the application of sector classification principles to some examples are discussed.
2.6 An economy consists of a set of resident institutional units. As is the case for other macroeconomic statistics, the concept of residence is important for determining the coverage of institutional units and the classification of transactions. Also, as described in later chapters (see paragraphs 5.101–5.103, 6.93, and 7.264–7.265), some types of flows and stock positions of assets and liabilities of general government and public sector units are classified in GFS on the basis of the counterparty to a financial instrument, where one of the classification criteria is the residence of the counterparty.
2.7 The residence of each institutional unit is the economic territory with which it has the strongest connection (i.e., its center of predominant economic interest).2 According to international statistical guidelines, residence is not based on nationality or legal criteria, although it may be similar to the concepts of residence used in many countries for exchange control, taxes, or other purposes. Nonresidents are units that are resident in any other economic territory, and for convenience they are referred to as the “rest of the world.”
2.8 Economic territory, in its broadest sense, can be any geographic area or jurisdiction for which statistics are required. The most commonly used concept of economic territory is the area under the effective economic control of a single government. The concept of economic territory in GFS is the same as that used in other macroeconomic datasets. The connection of entities to a particular economic territory is determined from aspects such as physical presence and being subject to the jurisdiction of the government of the territory. However, economic territory need not be identical to its physical or political borders, and may be larger or smaller than this, as in a currency or economic union, or as part of an economy, region, or the world as a whole.
2.9 Economic territory includes:
The land area
Territorial waters, including areas over which jurisdiction is exercised over fishing rights and rights to fuels or minerals
In a maritime territory, islands that belong to the territory
Territorial enclaves in the rest of the world (such as embassies, consulates, military bases, scientific stations, information or immigration offices, aid agencies, central bank representative offices with diplomatic status).
2.10 Territorial enclaves are physically located in other territories and used by governments that own or rent them for diplomatic, military, scientific, or other purposes with the formal agreement of governments of the territories where the land areas are physically located. These areas may be shared with other organizations, but the operations must have a high degree of exemption from local laws to be treated as an enclave. Government operations that are fully subject to the laws of the host economy are not treated as enclaves, but as residents of the host economy. Conversely, the economic territory of a country does not include the territorial enclaves that are physically located within the geographical boundaries of that country that are used by foreign governments or international organizations and are not subject to the laws of that host country.
2.11 Sometimes a government has a separate physical or legal zone that is under its control, but for which, to some degree, separate laws are applied. For example, a free trade zone or offshore financial center may be exempt from certain taxation or other laws. Because of the need to view the whole economy, to have comprehensive global data, and to be compatible with counterpart data, these special zones should always be included in the economic statistics of the economy that exercises control over the separate physical or legal zone.3
2.12 An institutional unit has a center of predominant economic interest in an economic territory when there exists, within the economic territory, some location, dwelling, place of production, or other premises on which, or from which, the unit engages and intends to continue engaging, either indefinitely or over a finite but long period of time, in economic activities and transactions on a significant scale. The location need not be fixed so long as it remains within the economic territory. Actual or intended location for one year or more is used as an operational definition; while the choice of one year as a specific period is somewhat arbitrary, it is adopted to avoid uncertainty and facilitate international consistency.
2.13 A notional resident unit is a unit identified for statistical purposes to be the resident owner of immovable assets legally owned by nonresidents. Immovable assets, such as land, other natural resources, buildings, and structures, are always treated as being owned by resident units. If the legal owner of these types of assets is a nonresident, a notional resident unit is created. The notional resident unit is recorded as owning the asset and receiving the rent or rentals that accrue to the asset. The legal owner is deemed to hold equivalent equity in the notional resident unit and then receives income from the notional resident unit in the form of property income paid abroad. If a building or structure is owned in part by a resident unit and in part by one or several nonresidents, there is one notional resident unit established. Each of the owners has a proportionate share of the equity of the notional resident unit. Land and buildings in extraterritorial enclaves of foreign governments (such as embassies, consulates, and military bases) that are subject to the laws of the home territory and not those of the territory where they are physically situated are part of the economic territory of the home economy (home territory).
2.14 On the basis of the definition of residence, all general government units are considered to be residents in their own country regardless of their physical location. Public corporations, however, are considered to be residents of the economies in whose territories they operate. Thus, a general government unit resident in one country can own a corporation resident in a second country. Corporations subject to the control of a government that is resident in a different economy are not classified as public corporations; these are classified as private corporations in the economy in which they are resident. This is because they are not public corporations related to the government of their economy of residence.
2.15 The case of “special purpose entities” (SPEs), “brass plate companies,” or “shell companies” requires particular consideration. These entities may have little or no physical presence in the economy in which they are legally constituted or legally domiciled (e.g., registered or licensed), and any substantive work of the entity may be conducted in another economy. In such circumstances, residence is attributed to the economy in which the entity is legally constituted, or in the absence of legal incorporation, is legally domiciled. However, the fiscal activities of nonresident government-controlled SPEs should be reflected in GFS (see paragraphs 2.136–2.139).
2.16 The economic territory of an international organization that has all the essential attributes of an institutional unit (see paragraph 2.22) consists of the territorial enclaves over which it has jurisdiction. International organizations have the following special characteristics:
The members of an international organization are either national states or other international organizations whose members are national states; they thus derive their authority either directly from the national states that are their members or indirectly from them through other international organizations.
They are entities established by formal political agreements between their members that have the status of international treaties; their existence is recognized by law in their member countries.
Because they are established by international agreement, they are accorded sovereign status—that is, international organizations are not subject to the laws or regulations of the country, or countries, in which they are located.
They are created for various purposes, such as international financial organizations (e.g., the International Monetary Fund, World Bank, and Bank for International Settlements) or to provide nonmarket services of a collective nature for the benefit of their member states (e.g., peacekeeping, health, and governing certain aspects of the economic relationships or integration processes among the region’s economies).
As a result, international organizations are not considered residents of any national economy, including the country in which they are located or conduct their affairs.
2.17 International organizations may be global or regional. Regional organizations arise from regional arrangements such as customs unions, economic unions, and monetary and currency unions.4 Regional organizations consist of those institutions whose members are governments or monetary authorities5 of economies that are located in a specific region of the world. They can be financial, such as regional development banks, or nonfinancial, such as entities involved in the governance of economic unions. Regional organizations are not resident units of any country.
2.18 Some regional organizations have been endowed with the authority to raise taxes or other compulsory contributions within the territories of the countries that are members of the organization. These are sometimes described as “supranational authorities.” Despite the fact that they fulfill some of the functions of government within each member country, they are not resident units of any country.
2.19 Financial positions between the regional organization and resident institutional units outside the general government or public sectors are not included in the public sector statistics of a member country because these organizations are not residents of that country. When GFS are compiled for regional organizations as if they constituted a separate government, this Manual recommends that financial positions be classified according to the member country that is the counterparty to allow individual countries to evaluate the impact of regional organizations on their economy.
2.20 In contrast to regional organizations, which perform governmental functions, there may be regional enterprises that are owned by two or more governments and that operate as market producers. If the enterprise has legal entities or separate branches in each economy in which it operates, then identification of these units and determination of their residence in the host economy of each of the branches are obvious. However, if they operate as a seamless entity in several economies, then the enterprise’s operations are prorated between the economies, so that they are included in the public sector statistics in the national economies in which they operate. The procedures should be applied consistently with the recording in other macroeconomic statistics.6
2.21 A currency union central bank is an international financial organization that acts as a common central bank for a group of member countries. A currency union central bank is an institutional unit in its own right, owning assets and liabilities on own account, and is nonresident of any currency union member economy but resident in the currency union. Such a bank typically has the headquarters located in one country of the currency union and maintains national offices in each of the member countries to conduct some central bank functions. Each national office acts as the central bank for that country and is treated as a resident institutional unit in that country. The headquarters, however, is an international organization.
Definition of an Institutional Unit
2.22 An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities, and engaging in economic activities and in transactions with other entities. Some important features of institutional units are:
The ability of an institutional unit to own goods or assets in its own right means that it is also able to exchange the ownership of goods or assets in transactions with other institutional units.
An institutional unit is able to take economic decisions and engage in economic activities for which it is itself held directly responsible and accountable by law.
An institutional unit is able to incur liabilities on its own behalf, to take on other obligations or future commitments, and to enter into contracts.
Either a complete set of accounts, including a balance sheet of assets, liabilities, and net worth, exists for an institutional unit, or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts if they were required.
2.23 Identifying the institutional unit is important for GFS compilation since it allows the sectorization of the economy, the identification of the counterparty to transactions and stock positions, and consolidation.8 There are several reasons for choosing the institutional unit to work with:
Statistics for the general government or public sector can be harmonized with the national accounts, balance of payments, international investment position, and monetary and financial statistics because the institutional units and sectors for which statistics are compiled are defined identically (see Appendix 7).
These institutional units have legal responsibility for their actions, and are centers of decision-making in their own right.
Statistics can be based on information from entities for which complete sets of accounts can be compiled, including balance sheets.
The source data required for compiling statistics are usually readily available or can be made available.
2.24 An establishment is an enterprise, or part of an enterprise, that is situated in a single location and in which only a single productive activity is carried out or in which the principal productive activity accounts for most of the value added. There is a hierarchical relationship between institutional units and establishments. An institutional unit may contain one or more entire establishment(s), while an establishment can belong to only one institutional unit. The definition of an establishment implies that, at a minimum, complete accounting records about its production activities are available, including the value of its output and the cost of producing that output. An establishment can be an institutional unit if it satisfies the criteria as set out in paragraph 2.22.9 Identifying establishments may be of particular interest in determining the market production of general government units (see paragraph 2.76).
2.25 An enterprise is the view of an institutional unit as a producer of goods and services. The term enterprise may refer to a corporation, a quasi-corporation, a nonprofit institution, or an unincorporated enterprise.10
Types of Institutional Units
2.26 In compiling macroeconomic data the classification of an institutional unit is determined by its objectives and functions and cannot always be inferred from its legal status or name. It is therefore necessary to closely examine the objectives and functions of the institutional unit before deciding which type of unit it is.
2.27 There are two main types of institutional units:
Persons or groups of persons in the form of households
Legal or social entities.
2.28 A household is a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth, and who consume certain types of goods and services collectively, mainly housing and food. A household can be an individual household, or an institutional household. The latter comprises groups of persons staying for a very long or indefinite period of time, or who may be expected to reside for a very long or indefinite period of time in institutions such as hospitals, retirement homes, prisons, or religious communities such as convents, monasteries, and nunneries.
2.29 A household can have one member or could be a multiperson household. In a multiperson household, individual members are not treated as separate institutional units. Many assets are owned, or liabilities incurred, jointly by two or more members of the same household, while some or all of the income received by individual members of the same household may be pooled for the benefit of all members. Moreover, many expenditure decisions, especially those relating to the consumption of food or housing, may be made collectively for the household as a whole. It may be impossible, therefore, to draw up meaningful balance sheets or other accounts for individual members of a multiperson household. For these reasons, the household as a whole rather than the individual persons in it must be treated as the institutional unit.
Legal and social entities
2.30 A legal or social entity is one whose existence is recognized by law or society independently of the persons or other entities that may own or control it. Three types of legal or social entities are recognized as institutional units: corporations and nonprofit institutions are primarily created for purposes of production of goods or services; and government units are created by political processes.
2.31 Corporations are defined as entities that are capable of generating a profit or other financial gain for their owners, are recognized by law as separate legal entities from their owners, and are set up for purposes of engaging in market production. The key to classifying a unit as a corporation in macroeconomic statistics is not its legal status but rather the economic substance of the nature of the entity. The laws governing the creation, management, and operations of legally constituted corporations and other entities may vary from country to country, so that it is not feasible to provide a legal definition of a corporation that would be universally valid. Therefore, in macroeconomic statistics, the term corporation is not necessarily used in the same way as in the legal sense.11
2.32 The key to classifying a unit as a corporation in macroeconomic statistics is the notion of being a market producer (see paragraph 2.65). Of particular importance are the characteristics to produce goods and services for the market at economically significant prices as explained in paragraph 2.66, and the potential to be a source of profit or other financial gain to the owners. Some nonprofit institutions and government units have the legal status of a corporation, but are not considered corporations for the purposes of macroeconomic statistics because they are not market producers. Other nonprofit institutions are legal corporations that produce for the market but they are not allowed to be a source of financial gain to their owners. Conversely, some entities with different legal titles, such as partnerships or a joint-stock company, could be considered corporations for economic statistics when they satisfy the definition of corporations.
2.33 A quasi-corporation is either (i) an unincorporated enterprise owned by a resident institutional unit that has sufficient information to compile a complete set of accounts, that is operated as if it were a separate corporation, and whose relationship to its owner is effectively that of a corporation to its shareholders, or (ii) an unincorporated enterprise owned by a nonresident institutional unit that is deemed to be a resident institutional unit because it engages in a significant amount of production in the economic territory over a long or indefinite period of time.12 These entities are not incorporated or otherwise legally constituted, but function as if they were corporations. They are treated as corporations in GFS (see paragraphs 2.125–2.127).
2.34 An establishment or group of establishments engaged in the same kind of production activities should be treated as a quasi-corporation if the following criteria hold:
The establishment charges prices for its outputs that are economically significant (see paragraph 2.66).
The establishment is operated and managed in a similar way to a corporation.
The establishment has a complete set of accounts, or is able to construct a complete set of accounts, that enable its stock positions and flows to be separately identified and measured.
2.35 All corporations are part of the nonfinancial corporations sector or the financial corporations sector, depending on the nature of their primary activity. Institutional units that qualify as corporations and are controlled by government units or other public corporations are classified as public corporations (see paragraph 2.104).
Nonprofit institutions (NPIs)
2.36 Nonprofit institutions (NPIs) are legal or social entities created for the purpose of producing or distributing goods and services, but they cannot be a source of income, profit, or other financial gain for the institutional units that establish, control, or finance them. In practice, their productive activities generate either surpluses or deficits, but the surpluses cannot be appropriated by other institutional units. The articles of association by which they are established are drawn up in such a way that the institutional units that control or manage them are not entitled to a share in any profits or other income they generate.
2.37 NPIs may engage in market or nonmarket production, and may be created by households, corporations, or governments (see paragraph 2.83).
NPIs engaged in market production charge economically significant prices for their services (see paragraph 2.66). Schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are market producers when they charge fees that are based on the majority of their production costs and that are sufficiently high to have a significant influence on the demand for their services. There are no shareholders with a claim on the profits or equity of the NPI. Because of their status as NPIs, they are also able to raise significant additional funds through donations from persons, corporations, or governments. Nevertheless, NPIs engaged in market production and controlled by government units must be treated as public corporations so long as they produce goods and services for the market at economically significant prices.
Some market NPIs restrict their activities to serving a particular subset of other market producers. They consist of chambers of commerce, agricultural, manufacturing or trade associations, employers’ organizations, research or testing laboratories, or other organizations or institutions that engage in activities that are of common interest or benefit to the group of enterprises that control and finance them. These NPIs are usually financed by contributions or subscriptions from the group of enterprises concerned. Such subscriptions are treated not as transfers but as payments for services rendered, and these NPIs are, therefore, classified as market producers. These market NPIs are, like corporations and quasi-corporations, members of either the nonfinancial corporations sector or the financial corporations sector.
NPIs that are engaged in nonmarket production and are controlled by government are treated as government units (see paragraph 2.38 and Box 2.1). Therefore, schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are nonmarket producers when they charge fees that are not economically significant.
The remaining NPIs, those that produce goods and services but do not sell them at economically significant prices and are not controlled by government, are classified as a special group of units called NPIs serving households.
2.38 Government units are unique kinds of legal entities established by political processes that have legislative, judicial, or executive authority over other institutional units within a given area. The principal economic functions of government units are to:
Assume responsibility for the provision of goods and services to the community or individual households primarily on a nonmarket basis
Redistribute income and wealth by means of transfers
Engage primarily in nonmarket production13
Finance their activities primarily out of taxation or other compulsory transfers.14
A government unit may also finance a portion of its activities in a specific period by borrowing or by acquiring funds from sources other than compulsory transfers—for example, interest revenue, incidental sales of goods and services, or the rent of subsoil assets. All government units are part of the general government sector.
Application of the Definition of an Institutional Unit to Government
2.39 Depending on the complexity of a government’s organization, the identification of government units may require careful consideration. Ministries, departments, agencies, boards, commissions, judicial authorities, legislative bodies, and other entities that make up a government are not institutional units if they do not have the authority to own assets, incur liabilities, or engage in transactions in their own right. In general, all entities funded by appropriations made in accordance with a budget controlled by the legislature are not separate institutional units and are treated as constituting a single institutional unit.
2.40 The geographic location of a government unit is not always limited to one location within the economic territory—for example, individual ministries or departments of a particular government may be deliberately dispersed throughout the area of the government’s jurisdiction. They remain, nevertheless, part of the same institutional unit. Similarly, a given ministry or department may maintain branch offices or agencies in many different locations to meet local needs. These offices and agencies are part of the same institutional unit.
2.41 There may, however, be government entities with a separate legal identity and substantial autonomy, including discretion over the volume and composition of their expenditures and a direct source of revenue, such as earmarked taxes. Such entities are often established to carry out specific functions, such as road construction or the nonmarket production of health or education services. These entities should be treated as separate government units (often referred to as extrabudgetary units) if they satisfy the criteria to be an institutional unit (see paragraphs 2.22 and 2.80).
2.42 Sometimes governments establish legal entities that cannot act independently and are simply a passive holder of assets and liabilities. Such an entity is referred to as an artificial subsidiary and is not treated as a separate institutional unit, unless it is resident in an economy different from that of its parent unit (see paragraphs 2.6–2.20). Resident artificial subsidiary entities are classified as components of the level of government that controls them (i.e., as part of their parent unit or extrabudgetary units of the parent unit).
2.43 Government resident artificial subsidiaries are sometimes set up as SPEs. Although these resident artificial subsidiaries are often legally constituted corporations, to the extent that these entities are nonmarket producers and are controlled by another government unit, they should be classified within the general government sector, either as an extrabudgetary government unit, or with the parent government unit that controls the SPE. Resident SPEs acting independently, acquiring assets and incurring liabilities on their own behalf, and accepting the associated risk, are treated as separate institutional units and are classified by sector according to their principal activity. All nonresident SPEs are treated as separate institutional units resident in the economy where they are established, but the fiscal activities they carry out are reflected in the accounts of the government that controls them (see paragraphs 2.136–2.139).
2.44 Another example of a resident artificial subsidiary is where government establishes a central borrowing authority that appears to be a public financial corporation but is in fact part of a general government unit. These central borrowing authorities borrow on the market and then lend only to the parent unit or other general government units. However, because such entities are not treated as separate institutional units, and merely facilitate government borrowing, they should be classified in general government, either as an extrabudgetary unit, or with the government unit that controls the central borrowing authority. Where such a central borrowing authority is created as a resident in an economy different from that of its parent, it should be classified as a captive financial institution (see paragraphs 2.14 and 2.54) in the financial corporation sector of the host economy.
2.45 An ancillary activity is a supporting activity providing services within an enterprise in order to create the conditions within which the principal or secondary activities can be carried out.15 The type of services referred to include keeping records, managing and paying employees, cleaning, maintenance, transportation, and security. An entity undertaking only ancillary activities will, in general, not satisfy the criteria to be an institutional unit.16
2.46 Many governments allocate substantial resources to social protection through the provision of social benefits (see paragraphs 6.96–6.105 and Appendix 2), to protect the entire population or specific segments of it against certain social risks. Social risks are events or circumstances that may adversely affect the welfare of the households concerned either by imposing additional demands on their resources or by reducing their income. Examples of social benefits are the provision of medical services, unemployment compensation, and social security pensions. Because of the large scale of social protection programs in many countries and the various organizational structures of such programs, Appendix 2 describes the institutional units involved in these programs and their effects on statistics of the general government sector.
2.47 Government usually comprises two or more institutional units, and there normally is one unit that controls the other units. The controlling unit most likely includes the legislature, head of state, and judiciary. In contrast to corporations (see paragraph 2.107), one government unit controls another government unit by appointing its managers and/or determining the laws and regulations that provide its finance rather than through equity ownership. Generally, government units do not issue shares. SPEs, wealth funds, or other entities of government that are legally constituted as corporations but do not satisfy the statistical definition of a corporation should be classified as government units in one of the subsectors of the general government. As a result, a liability for equity and investment fund shares could appear in the consolidated general government’s balance sheet (see paragraphs 2.137 and 2.152–2.155).17
2.48 Public corporations, in contrast to general government units, are institutional units that are potential sources of financial gains or losses to the government units that own or control them. In some cases, the corporation issues shares, and thus the financial gain or loss is clearly allocated to the shareholders. In other cases, no shares are issued, but it is clear that a specific government unit controls the corporation’s activities and is financially responsible for it. In those cases, the responsible government unit also owns equity and investment fund shares (see paragraphs 7.164–7.177).
2.49 An economy can be divided into institutional sectors.19 It is therefore necessary to define institutional sectors and identify the type of sectors that exist.
Defining Institutional Sectors
2.50 An institutional sector groups together similar kinds of institutional units according to their economic objectives, functions, and behavior. Each sector consists of a number of institutional units that are resident in the economy and is intrinsically different from the other sectors. An economy is divided into five mutually exclusive institutional sectors. All resident institutional units are allocated to one of these institutional sectors. The five institutional sectors are:
Nonfinancial corporations sector
Financial corporations sector
General government sector
Nonprofit institutions serving households sector.
2.51 The relationship between these sectors of the economy and the types of institutional units (discussed in paragraphs 2.26–2.48) is depicted in Figure 2.1.
Figure 2.1Types of Institutional Units and Their Relation to Sectors of the Economy
✓ Units included in sector
Nonfinancial corporations sector
2.52 The nonfinancial corporations sector consists of resident institutional units that are principally engaged in the production of market goods or nonfinancial services. The sector includes public and private corporations and is composed of:
All resident nonfinancial corporations (as defined in paragraphs 2.31–2.32), regardless of the residence of their owners
The branches of nonresident enterprises that are engaged in nonfinancial production in the economic territory on a long-term basis
All resident NPIs that are market producers of goods or nonfinancial services.
Financial corporations sector
2.53 The financial corporations sector consists of resident corporations that are principally engaged in providing financial services, including insurance and pension fund services, to other institutional units. The production of financial services is the result of financial intermediation, financial risk management, liquidity transformation, or auxiliary financial activities. In addition, the sector includes NPIs engaged in market production of a financial nature, such as those financed by subscriptions from financial enterprises whose role is to promote and serve the interest of those enterprises.
2.54 Financial corporations can be divided into three broad classes: financial intermediaries, financial auxiliaries, and captive financial institutions and money lenders.
Financial intermediaries are institutional units that incur liabilities on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. The assets and liabilities of financial intermediaries are transformed or repackaged with respect to maturity, scale, risk, and the like, in the financial intermediation process. The financial intermediation process channels funds between third parties with a surplus of funds and those with a demand for funds. A financial intermediary not only acts as an agent for these other institutional units, but also places itself at risk by acquiring financial assets and incurring liabilities on its own account. Financial intermediation is limited to acquiring assets and incurring liabilities with the general public or specified and relatively large groups thereof. Where the activity is limited to small groups, no intermediation takes place. Financial intermediaries include deposit-taking corporations, insurance corporations, and pension funds.
Financial auxiliaries consist of financial corporations that are principally engaged in activities associated with transactions in financial assets and liabilities or with providing the regulatory context for these transactions but in circumstances that do not involve the auxiliary taking ownership of the financial assets and liabilities being transacted. They include brokers, managers of pension funds, mutual funds, etc. (but not the funds they manage), foreign exchange bureaus, and central supervisory authorities.
Captive financial institutions and money lenders are institutional units providing financial services other than insurance, where most of their assets or liabilities are not available on open financial markets. These entities transact within only a limited group of units (such as with subsidiaries) or subsidiaries of the same holding corporations or entities that provide loans from own funds provided by only one sponsor. Captive insurance is the exception and is classified as an insurance corporation.
2.55 Financial intermediaries can be divided into seven subsectors according to the intermediary’s activity in the market and the liquidity of its liabilities. These seven subsectors are: central bank; deposit-taking corporations except the central bank; money market funds; nonmoney market investment funds; other financial intermediaries except insurance corporations and pension funds; insurance corporations; and pension funds.
The central bank
Deposit-taking corporations except the central bank
Other financial corporations—including all financial intermediaries except deposit-taking corporations, financial auxiliaries, and captive financial institutions and money lenders.
Figure 2.2The Public Sector and Its Relation to Other Institutional Sectors of the Economy Figure 2.3The Public Sector and Its Main Components
1 Includes social security funds.
2 Alternatively, social security funds can be combined into a separate subsector, as shown in the box with dashed lines.
3 Budgetary units, extrabudgetary units, and social security funds may also exist in state and local governments.
2.57 The financial corporations sector includes public and private financial corporations comprising:
All resident financial corporations (as defined in paragraphs 2.31–2.35), regardless of the residence of their shareholders
The branches of nonresident enterprises (see paragraph 2.20) that are engaged in financial activity in the economic territory on a long-term basis
All resident NPIs that are market producers of financial services (see paragraph 2.36 – 2.37).
General government sector
2.58 The general government sector consists of resident institutional units that fulfill the functions of government as their primary activity. These institutional units perform the principal economic functions of government, as described in paragraph 2.38, in addition to fulfilling their political responsibilities and their role of economic regulator. The general government sector comprises:
All government units of central, state, provincial, regional, and local government, and social security funds (see paragraphs 2.76–2.103) imposed and controlled by those units
All nonmarket NPIs that are controlled by government units (see paragraph 2.83).
2.59 The general government sector does not include public corporations, even when all the equity of such corporations is owned by government units, nor quasi-corporations that are owned and controlled by government units. However, unincorporated enterprises owned by government units that are not quasi-corporations remain integral parts of those units and, therefore, must be included in the general government sector.
2.60 The households sector consists of all resident households (see paragraphs 2.28–2.29). Households may be of any size and take a variety of different forms in different societies or cultures. All physical persons in the economy must belong to one and only one household. Households supply labor, undertake final consumption, and, as entrepreneurs, produce market goods and nonfinancial (and possibly financial) services.
Nonprofit institutions serving households (NPISHs) sector
2.61 The nonprofit institutions serving households (NPISHs) sector consists of resident nonmarket nonprofit institutions (NPIs) that are not controlled by government. They provide goods and services to households for free or at prices that are not economically significant. One type of NPISHs is created by associations of persons to provide goods or, more often, services primarily for the benefit of the members themselves. For example, professional or learned societies, political parties, trades unions, consumers’ associations, churches or religious societies, and social, cultural, recreational, or sports clubs. They do not include bodies serving similar functions that are controlled by government units. Religious institutions are usually excluded from general government and classified as NPISHs even when mainly financed by government units if this majority financing is not seen as empowering control by government. Political parties in countries with one-party political systems that are controlled by government units by means of providing the necessary finance are included in the general government sector. A second type of NPISHs consists of charities, and relief or aid agencies that are created for philanthropic purposes, while a third type provides collective services, such as research institutions that make their results freely available, environmental groups, etc. By convention, nonmarket NPIs controlled by foreign governments are classified as NPISHs in the host economy.
The Use of Subsectors
2.62 Each of the sectors of the economy may be divided into subsectors, and the subsectors can be combined in different ways to form other sectors. No single method of combining subsectors may be optimal for all purposes. Dividing the total economy into sectors and subsectors enhances the usefulness of the data for purposes of economic analysis and enables targeted monitoring of particular groups of institutional units for policy purposes. For example, the general government sector can be divided into central, state, and local government subsectors, while social security funds could be presented as a separate subsector or could be included in the subsector that organizes and manages them. The nonfinancial corporations subsector can be divided into public nonfinancial corporations, foreign-controlled nonfinancial corporations, and national private nonfinancial corporations.20 The division of sectors into subsectors depends upon the type of analysis to be undertaken, the needs of policymakers, the availability of data, the economic circumstances, and the institutional arrangements within a country. Figure 2.2 shows the relationship between the general government sector, the public sector, and the other main sectors of the domestic economy.
Institutional Coverage and Sectorization of the Public Sector
2.63 The public sector consists of all resident institutional units controlled directly, or indirectly, by resident government units—that is, all units of the general government sector and resident public corporations. Figure 2.3 illustrates the main components of the public sector. Statistics should be compiled for the general government and public sectors, as well as for all the subsectors of the general government and the public corporations subsector.
Delineating General Government and Public Corporations
2.64 The general government sector consists of all government units and all resident nonmarket NPIs that are controlled by government units, while the public corporations subsector (see paragraph 2.104) consists of all corporations controlled by government units or other public corporations. General government also includes public enterprises, legally constituted as corporations, but that do not satisfy the statistical criteria to be treated as corporations (see paragraphs 2.31–2.35).21 To determine which public enterprises are treated as general government units and which as public corporations, it is necessary to delineate nonmarket and market producers.
2.65 A market producer is an institutional unit that provides all or most of its output to others at prices that are economically significant. A nonmarket producer provides all or most of its output to others for free or at prices that are not economically significant.
2.66 Economically significant prices are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts purchasers wish to buy. These prices normally result when:
The producer has an incentive to adjust supply either with the goal of making a profit in the long run or, at a minimum, covering capital and other costs.
Consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged.
These conditions usually mean that prices are economically significant if sales cover the majority of the producer’s costs and consumers are free to choose whether to buy, and how much to buy, on the basis of the prices charged.
2.67 A price is not economically significant when it has little or no influence on how much the producer is prepared to supply and on the quantities demanded. Economically insignificant prices may be charged in order to raise some token revenue and/ or reduce, but not eliminate, excessive demand that may occur if goods and services are provided free of charge. An economically insignificant price may be set on administrative, social, or political grounds for goods or services for which the amount to be supplied is fixed.
2.68 It can be presumed that prices are economically significant when the producers are private corporations. When there is public control, however, the unit’s prices may be modified for public policy purposes. This may cause difficulties in determining whether the prices charged are economically significant. Public corporations are often established to provide goods and services in larger quantities than a private corporation would provide at the same selling price. Even when the sales of public corporations may cover a large portion of their costs, one can expect that they respond to market forces quite differently than would private corporations.
2.69 Although there is no prescriptive numerical relationship between the value of sales (excluding both taxes and subsidies on products) and the production costs, one would expect the value of the sales by public corporations to average at least half of the production costs over a sustained multiyear period.
2.70 In principle, the distinction between market and nonmarket producers should be made on a case-by-case basis. The classification of a producer as a market or nonmarket producer should be considered over a range of years.22 Once classified, only if a change in pricing holds for several years or is expected to hold for several years should a reclassification of the entity be considered.
2.71 It is likely that corporations receiving substantial government financial support, or enjoying other risk-reducing factors such as substantial government guarantees, will respond to changes in the economic conditions differently from corporations without such advantages because their budget constraints are softer, and so are more likely to be classified as nonmarket producers.
2.72 The question arises whether government-owned entities supplying goods and services to government should be treated as market or nonmarket producers. The producer of these goods and services is not a market producer if it is a dedicated provider of ancillary services (see paragraph 2.45). These entities will, in general, not satisfy the criteria to be an institutional unit. Similarly, it can often be assumed that the producer is not a market producer if the unit provides the goods and services in the absence of competition23 with private producers, and when the choice of supplier to government is not based on price. This is true regardless of whether the supplier is the only supplier and whether the government is the only customer of the supplier.
2.73 To assess whether a producer is a market producer, it is necessary to carry out a comparison between the receipts from sales and the production costs of the goods and services sold. Sales are measured before any taxes applicable to the products are added. Sales exclude all payments receivable from government unless they would be granted to any producer undertaking the same activity. Production for own use, known as own-account production, does not generate receipts from sales, and so it is not considered as part of sales in this context.
2.74 Production costs are calculated as the sum of compensation of employees, use of goods and services, consumption of fixed capital, and other taxes on production.24 These concepts used in the calculation of production costs exclude all costs associated with own-account capital formation. Further, a return to capital is included in production costs if the unit is to be treated as a market producer. Subsidies receivable on production are not deducted from the production costs.
2.75 As a nonmarket producer, a general government institutional unit will have mostly nonmarket establishments (see paragraph 2.24), but it may have one or more market establishments.25 A market establishment is an establishment that charges economically significant prices. Where a general government unit sells some of its output at prices that are economically significant, it may be possible to identify market producers. Market establishments within government that satisfy the criteria to be separate institutional units are quasi-corporations (see paragraph 2.22), and are treated in the same way as corporations. The remaining market establishments would remain an integral part of the general government sector.
The General Government Sector and Its Subsectors
2.76 The general government sector consists of resident institutional units that fulfill the functions of government as their primary activity. This sector includes all government units and all nonmarket NPIs that are controlled by government units. For analytic purposes, it is often necessary or desirable to disaggregate the general government sector into subsectors.
2.77 Depending on the administrative and legal arrangements, there may be more than one level of government within a country, and statistics should be compiled for each level (also referred to as subsectors). However, because of these different arrangements, international comparison of data for each subsector of general government should be undertaken with some caution. In macroeconomic statistics, provision is made for three subsectors of general government: central, state, and local. Not all countries have all three levels; some may have only a central government or a central government and one level below. Other countries may have more than three levels. In that case, the various units should all be classified as one of the three subsectors suggested here. In addition to levels of government, the existence of social security funds and their role in fiscal policy may require that statistics for all social security funds be compiled as a separate subsector of the general government sector.
2.78 A full classification of the subsectors of the general government would allow for both NPIs and social security funds to be distinguished for each of central, state, and local government subsectors. In practice, though, it is usual to present social security funds in one of two alternative sets of subsectors, as illustrated in Figure 2.3.26
All social security funds could be combined into a separate subsector and all other general government units could be classified according to their level. In that case, the central, state, and local government subsectors would comprise all government units other than social security funds; or
Social security funds could be classified according to the level of government that organizes and manages them and therefore be combined with the other general government units at the respective subsectors. Thus, the general government would consist of central, state, and local governments, assuming that all three levels of government exist. To facilitate analysis of social security funds as a whole, separate statistics for them may be provided within the statistics for each level of government.
Countries may choose either presentation.
2.79 Classification problems may arise when government operations are carried out by a general government unit jointly accountable to two levels of government.27 This classification decision may be especially difficult if the agency has its own source of funding, such as earmarked taxes. In some cases, an NPI might be controlled by two or more government units at different levels of government. For example, a state government unit might have the right to appoint the majority of officers managing an NPI but the financing might be provided mainly by the central government. General government units subject to dual control should be classified to the level of government that predominates in terms of control in accordance with all the indicators of control (see Boxes 2.1 and 2.2).
2.80 The central, state, and local government subsectors of general government are each made up of institutional units. For each of these subsectors, it is often analytically useful to group its entities according to administrative, legislative, or funding arrangements. For example, governments may create specialized boards, commissions, or agencies either as part of their budgetary accounts or as separate units. It may be possible to create subsectors at each level of government based on whether the units in the subsector are financed by the legislative budgets of that level of government or by extrabudgetary sources—that is, distinguishing between budgetary and extrabudgetary units (irrespective of the treatment of social security funds—see paragraph 2.78). The budgetary component may comprise only the main (or general) budget, and the extrabudgetary component the remaining entities that constitute that level of government, excluding social security funds. Such a grouping of the subsectors allows for a more direct comparison between budget data and GFS. Whether units are classified as budgetary or extrabudgetary depends on country circumstances. What is important, though, is full coverage of the general government sector—that is, the statistics compiled for each level of government should cover all units that constitute that subsector of government (central, state, or local).
Box 2.1Government Control of Nonprofit Institutions
Control of an NPI is defined as the ability to determine the general policy or program of the NPI. To determine if an NPI is controlled by the government, the following five indicators of control would be the most important and likely factors to consider:
The appointment of officers—The government may have the right to appoint the officers managing the NPI under the NPI’s constitution, its articles of association, or other enabling instrument.
Other provisions of the enabling instrument—The enabling instrument may contain provisions other than the appointment of officers that effectively allow the government to determine significant aspects of the general policy or program of the NPI. For example, the enabling instrument may specify or limit the functions, objectives, and other operating aspects of the NPI, thus making the issue of managerial appointments less critical or even irrelevant. The enabling instrument may also give the government the right to remove key personnel or veto proposed appointments, require prior approval of budgets or financial arrangements by the government, or prevent the NPI from changing its constitution, dissolving itself, or terminating its relationship with government without government approval.
Contractual agreements—The existence of a contractual agreement between a government and an NPI may allow the government to determine key aspects of the NPI’s general policy or program. As long as the NPI is ultimately able to determine its policy or program to a significant extent, such as by being able to fail to comply with the contractual agreement and accept the consequences, to change its constitution, or to dissolve itself without requiring government approval other than that required under the general regulations, then it would not be considered controlled by government.
Degree of financing by government—An NPI that is mainly financed by government may be controlled by that government. Generally, if the NPI remains able to determine its policy or program to a significant extent along the lines mentioned in the previous indicator, then it would not be considered controlled by government.
Risk exposure—If a government openly allows itself to be exposed to all, or a large proportion of, the financial risks associated with an NPI’s activities, then the arrangement constitutes control.
A single indicator could be sufficient to establish control in some cases, but in other cases, a number of separate indicators may collectively indicate control. A decision based on the totality of all indicators will necessarily be judgmental in nature but clearly similar judgments must be made in similar cases.
2.81 In all countries, there is an institutional unit of the general government sector particularly important in terms of size and power, in particular the power to exercise control over many other units and entities. The budgetary central government is often a single unit of the central government that encompasses the fundamental activities of the national executive, legislative, and judiciary powers. This component of general government is usually covered by the main (or general) budget. The budgetary central government’s revenue and expense are normally regulated and controlled by a ministry of finance, or its functional equivalent, by means of a budget approved by the legislature. Most of the ministries, departments, agencies, boards, commissions, judicial authorities, legislative bodies, and other entities that make up the budgetary central government are not separate institutional units. This is because they generally do not have the authority to own assets, incur liabilities, or engage in transactions in their own right (see paragraph 2.42). The state or local government subsectors each have a budgetary state/local government component that includes the principal executive, legislative, and judicial powers for these levels of government.
2.82 General government entities with individual budgets not fully covered by the main (or general) budget are considered extrabudgetary.28 These entities operate under the authority or control of a central, state, or local government. Extrabudgetary entities may have their own revenue sources, which may be supplemented by grants (transfers) from the general budget or from other sources. Even though their budgets may be subject to approval by the legislature, similar to that of budgetary accounts, they have discretion over the volume and composition of their spending. Such entities may be established to carry out specific government functions, such as road construction, or the nonmarket production of health or education services. Budgetary arrangements vary widely across countries, and various terms are used to describe these entities, but they are often referred to as “extrabudgetary funds” or “decentralized agencies.”
2.83 Nonmarket NPIs controlled by government are typically classified as extrabudgetary units when they satisfy the criteria to be an institutional unit. More specifically, they are classified with the level of government that controls them—namely, central, state, or local governments. The most important and likely factors to consider in determining government control of NPIs are discussed in Box 2.1. All NPIs allocated to the general government sector should retain their identity as NPIs in statistical records, to facilitate the analysis of a complete set of NPIs.
2.84 The following sections further define the subsectors of government. These definitions apply whether social security funds are included with the level of government that organizes and manages them, or as a separate subsector of general government.
2.85 The central government subsector consists of the institutional unit(s) of the central government plus those nonmarket NPIs that are controlled by the central government. The political authority of the central government extends over the entire territory of the country. Central government has, therefore, the authority to impose taxes on all resident institutional units and on nonresident units engaged in economic activities within the country. Its political responsibilities include national defense, the maintenance of law and order, and relations with foreign governments. It also seeks to ensure the efficient working of the social and economic system by means of appropriate legislation and/or regulation. It is responsible for providing collective services for the benefit of the community as a whole, and for this purpose incurs expenditure on defense, public administration, etc. In addition, it may incur expenditure on the provision of services, such as education or health, primarily for the benefit of individual households, and it may make transfers to other institutional units, including other levels of government.
2.86 Compiling statistics for the central government is particularly important because of the special impact it has on monetary policy and economic growth. For example, it is mainly through central government finances that fiscal policy impacts on inflationary or deflationary pressures within the economy. It is generally at the central government level alone that a decision-making body can formulate and carry out public policies directed toward nationwide economic objectives. Other levels of government have neither national economic policies as their objective nor the central government’s access to central bank credit.
2.87 In most countries, central government is a large and complex subsector. Nonetheless, as described in paragraph 2.80, based on administrative arrangements in a country, it is generally composed of a budgetary central government, extrabudgetary units, and social security funds (unless a separate subsector is used for social security funds, as described in paragraph 2.78).
2.88 While the central government may also control nonfinancial or financial corporations, these corporations are classified outside of the central (and general) government sector(s), but are part of the public sector. However, if institutional units controlled by central government are legally constituted as corporations but are not market producers, they should be classified as part of the central government sector, not the public corporations sector. Similarly, unincorporated enterprises controlled by central government units that do not satisfy the criteria to be quasi-corporations (see paragraph 2.34) should remain integral parts of those units and, therefore, would be included in the central government subsector.
2.89 In some countries, central government may include units that engage in financial transactions that in other countries would be performed by central banks. In particular, units of central government may be responsible for the issue of currency, the maintenance of international reserves, the operation of exchange stabilization funds, and transactions with the International Monetary Fund. When the units in question remain financially integrated with central government and under the direct control and supervision of central government, they cannot be treated as separate institutional units. Accordingly, these monetary authority functions carried out by central government are recorded in the general government sector and not the financial corporations sector. However, because of the analytic importance of obtaining accounts covering the monetary authorities as a whole, and in order to provide links with other macroeconomic statistics such as the 2008 SNA, the BPM6, and the MFSM, it is recommended that the transactions of central government agencies carrying out monetary authority and deposit-taking functions be separately identified, so that they can be combined with those of the central bank and other deposit-taking corporations in special tabulations if desired.
2.90 State governments consist of institutional units exercising some of the functions of government at a level below that of central government and above that of the government institutional units existing at a local level. State governments are distinguished by the fact that their fiscal authority extends over the largest geographical areas into which the country as a whole may be divided for political or administrative purposes. They are institutional units whose fiscal, legislative, and executive authority extends only to individual “states” into which the country as a whole may be divided. These states may be described by different names in different countries and the subsector may consist of state, provincial, or regional governments. For ease of expression, this level of government will be referred to hereafter as state governments. In many countries, especially smaller countries, state governments may not exist. However, in geographically large countries, especially those that have federal constitutions, considerable powers and responsibilities may be assigned to state governments.
2.91 A state government may consist of many institutional units and usually has the fiscal authority to levy taxes on institutional units that are resident in, or engage in economic activities or transactions within, its area of jurisdiction (but not other areas). It must also be entitled to spend or allocate some, or possibly all, of the taxes or other revenue that it receives according to its own policies, within the general rules of law of the country, although some of the transfers it receives from central government may be tied to certain specified purposes. It should also be able to appoint its own officers, independently of external administrative control. On the other hand, if a regional unit is entirely dependent on funds from central government, and if the central government also determines the ways in which these funds are to be spent at the regional level, it should be treated as an agency of central government for statistical purposes, rather than as a separate level of government.
2.92 In a few countries, more than one level of government exists between the central government and the smallest governmental institutional units at a local level; in such cases, for purposes of sector classification, these intermediate levels of government are grouped with the level of government—either state or local—with which they are most closely associated.
2.93 If a state government exists, then its principal departments and ministries will generally constitute a single institutional unit in a manner similar to the budgetary unit of the central government. In addition, there may be extrabudgetary agencies operating under the authority of a state government with a separate legal identity and enough autonomy to form additional institutional units (see paragraph 2.39). There may also be institutional units whose authority extends over two or more states, but are responsible to the respective state governments. Such units should also be included in the state government subsector.
2.94 State governments may control corporations in the same way as central government. They may also have unincorporated units that engage in market production. Such institutional units should be treated as quasi-corporations in line with the principles in paragraph 2.33. These corporations and quasi-corporations should be classified outside of the state government subsector (and general government sector) as part of public corporations.
2.95 Local government units are institutional units whose fiscal, legislative, and executive authority extends over the smallest geographical areas distinguished for administrative and political purposes. The local government subsector consists of local governments that are separate institutional units plus those nonmarket NPIs that are controlled by local governments. The scope of their authority is generally much less than that of central government or state governments, and they may, or may not, be entitled to levy taxes on institutional units resident in their areas. They are often heavily dependent on grants (transfers) from higher levels of government, and they may also act, to some extent, as agents of central or regional governments. They should also be able to appoint their own officers, independently of external administrative control. Even when local governments act as agents of central or state governments to some extent, they can be treated as a separate level of government, provided they are also able to raise and spend some funds on their own initiative and own responsibility.
2.96 Local governments are in closest contact with institutional units occupying their localities. They typically provide a wide range of services to local residents, some of which may be financed out of grants (transfers) from other levels of government. Statistics for the local government subsector may cover a wide variety of governmental units, such as counties, municipalities, cities, towns, townships, boroughs, school districts, and water or sanitation districts. Often, local government units with different functional responsibilities have authority over the same geographic areas. For example, separate government units representing a town, a county, and a school district may have authority over the same area. In addition, two or more contiguous local governments may organize a government unit with regional authority that is accountable to the local governments. Such units should also be included in the local government subsector.
2.97 Some of the most typical functions of local governments provide services for which users’ fees are small in relation to the main costs borne by the local government. Local governments are typically involved in:
Hospitals and social welfare establishments, such as kindergartens, nurseries, and welfare homes
Public sanitation and related entities, such as water purification systems and plants, refuse collection and disposal agencies, cemeteries, and crematoria
Culture, leisure, and sports facilities, such as theaters, concerts, music halls, museums, art galleries, libraries, parks, and open spaces.
2.98 The same rules governing the treatment of the production of goods and services by central and state government units are applied to local governments. If a market producer can be identified within a local government unit that satisfies the criteria to be a corporations or a quasi-corporation (see paragraph 2.34), it is classified as a public corporation. When market establishments29 do not satisfy the criteria to be a quasi-corporation, they are included within local government. Units supplying services on a nonmarket basis, such as education or health, remain an integral part of the local government unit that controls them.
2.99 Government units serving both a state government and one or more local governments should be included with the level of government that predominates in its operations and finances. In some countries, more than one level of government exists between the central government and the smallest governmental institutional units at a local level. In such cases, these intermediate levels of government are grouped together with the level of government, either state or local, with which they are most closely associated. For some analyses, it may be useful to combine the statistics for state and local governments.
Social security funds
2.100 A social security fund is a particular kind of government unit that is devoted to the operation of one or more social security schemes.30 In macroeconomic statistics, a social security fund is recognized if it meets the criteria to be an institutional unit and if it:
Is organized and managed separately from the other activities of government units
Holds its assets and liabilities separately from other government units
Engages in financial transactions on its own account.
2.101 Social security schemes are social insurance schemes covering the community as a whole, or large sections of the community, and are imposed and controlled by government units. Social insurance schemes provide social protection and require formal participation by the beneficiaries, evidenced by the payment of contributions (actual or imputed). Participation in social security schemes is therefore also evidenced by the payment of contributions (actual or imputed) by the beneficiaries. These schemes cover a wide variety of programs, providing benefits in cash or in kind for old age, invalidity or death, survivors, sickness and maternity, work-related injury, unemployment, family allowance, health care, etc. There is not necessarily a direct link between the amount of the contributions payable by an individual and the benefits receivable.
2.102 However, not all social security schemes are organized and managed by social security funds; for example, a social security scheme for sickness may be operated by a national health ministry. If there is an autonomous employment-related pension fund (i.e., a separate institutional unit) to provide government employee pensions, this fund should be excluded from social security funds and be classified as a public financial corporation if under control of government, or otherwise as a private financial corporation (see paragraphs A2.47–A2.53). A non-autonomous employment-related pension scheme for government employees that is administered by a social security fund remains part of social security funds. However, if the conditions for participation and benefits payable, as determined by the employment contract, differ from those of the social security scheme for nongovernment employee participants, an employment-related pension scheme exists. GFS recognizes liabilities for employment-related pension entitlements. Therefore, economic flows and stock positions related to this pension scheme should be distinguished within the social security fund (see paragraphs 6.25 and 7.194).
2.103 Consistent with the 2008 SNA, this Manual allows for social security funds to be accommodated in two alternative sets of subsectors of general government, as described in paragraph 2.78.
The Public Corporations Sector and Its Subsectors
The public corporations subsector
2.104 The public corporations subsector consists of all resident corporations controlled by government units or by other public corporations. It is possible that some entities that are legally constituted as corporations may not be classified as corporations for statistical purposes if they do not charge economically significant prices. Public corporations may be involved in quasi-fiscal operations (i.e., they carry out government operations at the behest of the government units that control them—see paragraph 2.4). As such, public corporations may exist to serve as an instrument of public (or fiscal) policy for government. Most directly, a public corporation can engage in specific transactions to carry out a government operation, such as lending to particular parties at a lower-than-market interest rate or selling their product, such as electric power, to selected customers at reduced rates. More generally, however, a public corporation can carry out fiscal policy by employing more staff than required, purchasing extra inputs, paying above-market prices for inputs, or selling a large share of its output for prices that are less than what the market price would be if only private producers were involved.
2.105 Public corporations may be created to: generate profits for general government; protect key resources; provide competition where barriers to entry may be large; and provide basic services where costs are prohibitive. These public corporations are often large and/or numerous, and may have a significant economic impact—for example:
Public corporations may be of significance to government because of the effects their magnitude or strategic position may have on macroeconomic objectives, such as bank credit, aggregate demand, borrowing abroad, and the balance of payments.
Many public corporations may represent a sizeable investment of national resources, at considerable opportunity costs.
Public corporations are a potential source of fiscal risk to the extent that their liabilities could be explicitly or implicitly guaranteed by government, or may hold reputational risks for government.
Public corporations may over time become nonmarket units reclassified to the general government sector and vice versa; compilation of statistics on the public sector avoids the series breaks in general government data that may result from changes in the way they operate.
2.106 Statistics on public corporations are also likely to be needed to compile comprehensive statistics for the general government sector. GFS for the general government sector should reflect all transactions with public corporations, and changes in the net worth of public corporations are reflected in the value of the equity of those corporations owned by general government units. The accounts of public corporations will help explain the source of changes in these assets, and that information will be useful for an analysis of sustainability and other aspects of fiscal policy.
Government control of corporations
2.107 A corporation is a public corporation if a government unit, another public corporation, or some combination of government units and public corporations controls the entity. Control of a corporation is defined as the ability to determine general corporate policy of the corporation. The expression “general corporate policy” as used here is understood in a broad sense to mean the key financial and operating policies relating to the corporation’s strategic objectives as a market producer.
2.108 Because the arrangements for the control of corporations can vary considerably, it is neither desirable nor feasible to prescribe a definitive list of factors to be taken into account. Although a single indicator could be sufficient to establish control, in other cases, a number of separate indicators may collectively indicate control. A decision based on the totality of all indicators must necessarily be judgmental in nature, but clearly similar judgments must be made in similar cases. Box 2.2 presents the most important and likely factors to consider.
2.109 Because governments exercise sovereign powers through legislation, regulations, orders, and other arrangements, care needs to be applied in determining whether the exercise of such powers amounts to a determination of the general corporate policy of a particular corporation, and therefore control of the corporation. Laws and regulations applicable to all units as a class or to a particular industry should not be viewed as amounting to control of these units.
2.110 The ability to determine general corporate policy does not necessarily include the direct control of the day-to-day activities or operations of a particular corporation. The officers of such corporations would normally be expected to manage these in a manner consistent with and in support of the overall objectives of the particular corporation. Nor does the ability to determine the general corporate policy of a corporation include the direct control over any professional, technical, or scientific judgments, as these would normally be viewed as part of the core competence of the corporation itself. For example, the professional or technical judgments exercised by a corporation set up to certify aircraft airworthiness would not be considered controlled with respect to individual approvals and disapprovals. However, its broader operating and financial policies, including the airworthiness criteria, may well be determined by a government unit as part of the corporation’s corporate policy.
2.111 Corporations subject to the control of a nonresident government unit (or a nonresident public corporation) are not classified as public corporations in the host economy, but would be part of the private corporations in that economy.31
2.112 Quasi-corporations and market NPIs (i.e., NPIs engaging in market production) under the control of government are classified as public corporations.
Box 2.2Government Control of Corporations
Control of corporations is defined as the ability to determine the general corporate policy of the corporation. To determine if a corporation is controlled by the government, the following eight indicators of control would be the most important and likely factors to consider:
Ownership of the majority of the voting interest—Owning a majority of shares will normally constitute control when decisions are made on a one-share, one-vote basis. The shares may be held directly or indirectly, and the shares owned by all other public entities should be aggregated. If decisions are not made on a one-share, one-vote basis, the classification should be based on whether the shares owned by other public entities provide a majority voice.
Control of the board or other governing body—The ability to appoint or remove a majority of the board or other governing body as a result of existing legislation, regulation, contractual, or other arrangements will likely constitute control. Even the right to veto proposed appointments can be seen as a form of control if it influences the choices that can be made. If another body is responsible for appointing the directors, it is necessary to examine its composition for public influence. If a government appoints the first set of directors but does not control the appointment of replacement directors, the body would then be part of the public sector until the initial appointments had expired.
Control of the appointment and removal of key personnel—If control of the board or other governing body is weak, the appointment of key executives, such as the chief executive, chairperson, and finance director, may be decisive. Nonexecutive directors may also be relevant if they sit on key committees, such as the remuneration committee determining the pay of senior staff.
Control of key committees of the entity—Subcommittees of the board or other governing body could determine the key operating and financial policies of the entity. Majority public sector membership on these subcommittees could constitute control. Such membership can be established under the constitution or other enabling instrument of the corporation.
Golden shares and options—A government may own a “golden share,” particularly in a corporation that has been privatized. In some cases, this share gives the government some residual rights to protect the interests of the public by, for example, preventing the company selling off some categories of assets or appointing a special director who has strong powers in certain circumstances. A golden share is not of itself indicative of control. If, however, the powers covered by the golden share do confer on the government the ability to determine the general corporate policy of the entity in particular circumstances and those circumstances currently existed, then the entity should be in the public sector from the date in question. The existence of a share purchase option available to a government unit or a public corporation in certain circumstances may also be similar in concept to the golden share arrangement discussed earlier. It is necessary to consider whether, if the circumstance in which the option may be exercised exists, the volume of shares that may be purchased under the option and the consequences of such exercise mean that the government has “the ability to determine the general corporate policy of the entity” by exercising that option. An entity’s status in general should be based on the government’s existing ability to determine corporate policy exercised under normal conditions rather than in exceptional economic or other circumstances, such as wars, civil disorders, or natural disasters.
Regulation and control—The borderline between regulation that applies to all entities within a class or industry group and the control of an individual corporation can be difficult to judge. There are many examples of government involvement through regulation, particularly in areas such as monopolies and privatized utilities. It is possible for regulatory involvement to exist in important areas, such as in price setting, without the entity ceding control of its general corporate policy. Choosing to enter into or continue to operate in a highly regulated environment suggests that the entity is not subject to control. When regulation is so tight as to effectively dictate how the entity performs its business, then it could be a form of control. If an entity retains unilateral discretion as to whether it will take funding from, interact commercially with, or otherwise deal with a public sector entity, the entity has the ultimate ability to determine its own corporate policy and is not controlled by the public sector entity.
Control by a dominant public sector customer or group of public sector customers—If all of the sales of a corporation are to a single public sector customer or a group of public sector customers, there is clear scope for dominant influence. The presence of a minority private sector customer and/or open competition from private producers to supply goods and services to the public sector usually implies an element of independent decision-making by the corporation so that the entity would not be considered controlled. In general, if there is clear evidence that the corporation could not choose to deal with nonpublic sector clients because of the public sector influence, then public control is implied.
Control attached to borrowing from the government—Lenders often impose controls as conditions of making loans. If the government imposed controls through lending or issuing guarantees that are more than would be typical when a healthy private sector entity borrows from a bank, control may be indicated. Similarly, control may be implied if only the government was prepared to lend to the corporation.
Although a single indicator could be sufficient to establish control, in other cases, a number of separate indicators may collectively indicate control. A decision based on the totality of all indicators must necessarily be judgmental in nature, but clearly similar judgments must be made in similar cases.
Types of public corporations
2.113 Public corporations are classified as nonfinancial or financial corporations, depending on the nature of their primary activity.
Public nonfinancial corporations subsector
2.114 All resident nonfinancial corporations controlled by general government units or other public corporations are part of the public nonfinancial corporations subsector. Nonfinancial corporations are corporations whose principal activity is the production of market goods or nonfinancial services. Typical examples of public nonfinancial corporations are national airlines, national electricity companies, and national railways, if those entities charge economically significant prices. This category could also include public nonprofit institutions engaging in market production (such as hospitals, schools, or colleges) if they are separate institutional units and charge economically significant prices. However, entities that receive financial aid from government but are not controlled by government are not public corporations, but are classified as private corporations or NPISHs.
Public financial corporations subsector
2.115 All resident financial corporations controlled by general government units or other public corporations are part of the public financial corporations subsector. Financial corporations are corporations that are principally engaged in providing financial services, including insurance and pension fund services, to other institutional units (see paragraphs 2.53–2.57).
2.116 The financial corporations subsector can further be divided into subsectors according to the financial corporations’ activity in the market and the liquidity of its liabilities.32 However, for GFS purposes, the public financial corporations subsector can broadly be grouped into public deposit-taking corporations (central bank and public deposit-taking corporations except the central bank) and other public financial corporations. Relative to other subsectors of the public sector, public financial corporations may tend to have relatively large values of financial assets and liabilities because of their role in financial intermediation. Accordingly, separate data for public financial corporations may be useful in addition to the data consolidated with other components of the public sector.
Public deposit-taking corporations
2.117 Public deposit-taking corporations are financial corporations controlled by general government units or other public corporations whose principal activity is financial intermediation and who have liabilities in the form of deposits or financial instruments that are close substitutes for deposits. Two types of public deposit-taking corporations can be distinguished: the central bank and public deposit-taking corporations except the central bank.
The central bank
2.118 The central bank is the national financial institution that exercises control over key aspects of the financial system. In general, the following financial intermediaries are classified in this subsector:
The national central bank, including where it is part of a system of central banks33
Currency boards or independent currency authorities that issue national currency that is fully backed by foreign exchange reserves
Central monetary agencies of essentially public origin (e.g., agencies managing foreign exchange or issuing banknotes and coins) that keep a complete set of accounts but are not classified as part of central government.
2.119 As long as the central bank is a separate institutional unit, it is always part of the financial corporations subsector, even if a case can be made that it is primarily a nonmarket producer. While a central bank may have a high degree of operational independence, it is a public corporation. Supervisory authorities that are mainly engaged in supervision of financial units and are separate institutional units from the central bank are included with financial auxiliaries.
Public deposit-taking corporations except the central bank
2.120 Public deposit-taking corporations except the central bank consist of all resident depository corporations, except the central bank, that are controlled by general government units or other public corporations. Examples are commercial banks, “universal” banks, “all purpose” banks, savings banks, post office giro institutions,34 post banks, rural credit banks, agricultural credit banks, export-import banks, and specialized banks if they take deposits or issue close substitutes for deposits.
Other public financial corporations
2.121 Other public financial corporations comprise all resident financial corporations, except public deposit-taking corporations, controlled by general government units or other public corporations. This subsector includes units that raise funds in financial markets other than by deposits and use them to acquire financial assets. Examples of units in this subsector are money market funds, nonmoney market investment funds, insurance corporations, pension funds, and other financial intermediaries (except insurance corporations and pension funds). In addition, this subsector includes financial auxiliaries (including supervisory authorities that are separate institutional units), and captive financial institutions and money lenders.
Other groupings of public sector units
2.122 When compiling statistics of public corporations, various groupings—or subsectors of the public sector—may be desirable for analytical purposes. The four groupings of public corporations as illustrated in Figure 2.2 will likely form the foundation from which other groupings can be created. Other possible groupings include:
The nonfinancial public sector—The general government sector plus public nonfinancial corporations
The general government sector plus the central bank
The central government public sector—The central government subsector plus public corporations controlled by the central government.35
2.123 The term “sovereign” is often used by financial markets and fiscal analysts in the context of fiscal operations, borrowing, and debt. Unlike groupings of the public sector described earlier, which are based on institutional units, “sovereign” is defined on a functional basis and may be used in varying ways. To avoid confusion and, as a service to users, the presentation of “sovereign statistics” should indicate the institutional coverage of the statistics, and how this relates to the standard definitions of general government and/ or public sector statistics.
Decision Tree for Sector Classification of the Public Sector
2.124 Using the concepts of residence, institutional unit, control, and market versus nonmarket producers, the decision tree presented in Figure 2.4 facilitates the appropriate delineation of the public sector. In order to determine which entities belong to the general government sector and which to the public corporations subsector, the decision tree should be followed, using sequential questions:
Is the entity a resident or a nonresident? Data for nonresident entities are recorded in data for the rest of the world (see paragraph 2.7).
Is the entity an institutional unit? If it is resident but not an institutional unit, it is treated as an integral part of the institutional unit that controls it. If it satisfies the criteria to be an institutional unit, move on to the next decision point (see paragraph 2.22).
Is the institutional unit controlled by government or another public corporation? The answer to this question will place the institutional unit in the public or private sector (see Boxes 2.1 and 2.2).
Is the institutional unit a market or nonmarket producer? The answer to this question will place the institutional unit in the general government sector or the public corporations subsector (see paragraphs 2.65–2.75).
If the institutional unit is in the general government sector, could any market establishments that satisfy the criteria to be an institutional unit be identified within the general government unit? Such market establishments should be classified as quasi-corporations in the public corporations subsector (see paragraphs 2.33–2.34).
Is the institutional unit providing financial auxiliary services, such as supervisory authorities of financial intermediaries and financial markets? A positive answer to this question will place the institutional unit in the public financial corporations subsector (see paragraph 2.54).
Is the public corporation involved in producing financial services? The answer to this question will place the institutional unit in the public financial or public nonfinancial corporations subsector (see paragraphs 2.114–2.121).
Figure 2.4Decision Tree for Sector Classification of Public Entities
Practical Application of Sector Classification Principles
2.125 Quasi-corporations (as defined in paragraph 2.33) satisfy the criteria to be separate institutional units and function as if they were corporations. They are treated in macroeconomic statistics as if they were corporations—that is, as institutional units separate from the units to which they legally belong. Thus, quasi-corporations owned or controlled by government units are grouped with public corporations in the public nonfinancial or public financial corporations sectors.
2.126 The existence of, or possibility to construct, a complete set of accounts, including balance sheets, for the enterprise is a necessary condition for the entity to be treated as a separate institutional unit. Also, the government must grant management of the enterprise discretion to operate as if it were a separate corporation. In practice this should apply with respect to both the management of the production process and the use of funds, including maintaining their own working balances and business credit, and being able to finance some or all of their capital formation out of their own saving, financial assets, or borrowing. The ability to distinguish flows of income and finance between quasi-corporations and general government units implies that, in practice, their operating and financing activities must be separable from government revenue or financing statistics, despite the fact that they are not separate legal entities.
2.127 Entities such as national railways, port authorities, post offices, government publishing offices, public theaters, museums, swimming pools, hospitals, education centers, and other entities that provide goods and services on a market basis should be treated as public corporations if these units satisfy the criteria to be quasi-corporations. Similar market producers that do not satisfy the requirements to be recognized as quasi-corporations are treated as market establishments integrated with the general government unit that controls them. In cases where government producers of similar goods and services sell their products at nonmarket prices, they remain a part of the nonmarket activities of general government.
Distinguishing Head Offices and Holding Companies
2.128 Large groups of corporations may be created whereby a parent corporation (or government in the case of public corporations) controls several subsidiaries, some of which may control subsidiaries of their own. Each individual corporation that satisfies the criteria to be an institutional unit should be classified as a separate institutional unit, regardless of whether it forms part of a group. The parent corporation in such circumstances is often referred to as a holding company. There are two different types of holding companies:
The first type is the head office that is actively engaged in production by exercising some aspects of managerial control over its subsidiaries. This class of corporations includes overseeing and managing other units of the company or enterprise; undertaking the strategic or organizational planning and decision-making role of the company or enterprise; exercising operational control; and managing the day-to-day operations of their related units. Such units are allocated to the nonfinancial corporations subsector unless all or most of their subsidiaries are financial corporations, in which case they are treated by convention as financial auxiliaries in the financial corporations sector.
The second type is a unit that holds the assets of subsidiary corporations but does not undertake any management activities. This class of corporations includes the activities of holding companies—that is, units that hold the assets (owning controlling-levels of equity) of a group of subsidiary corporations and whose principal activity is to own the group. The holding companies in this case do not provide any other service to the enterprises in which the equity is held—that is, they do not administer or manage other units. Such units are allocated to the financial corporations subsector and treated as captive financial institutions even if all the subsidiary corporations are nonfinancial. However, these holding companies should be distinguished from artificial subsidiaries and restructuring agencies (see paragraphs 2.42 and 2.129, respectively).
2.129 Restructuring agencies are entities set up to sell corporations and other assets, and for the reorganization of companies. They may also serve for defeasance of impaired assets or repayment of liabilities of insolvent entities, often in the context of a banking crisis. These entities are known by various names, such as restructuring corporations, privatization vehicles, asset management companies, liquidation corporations, bridge banks, or bad banks.
2.130 Some institutional units specialize in the restructuring of corporations, either nonfinancial or financial. These corporations may or may not be controlled by government. Restructuring agencies may be long-standing or created for this special purpose. Governments may fund the restructuring operations in various ways, either directly, through capital injections (capital transfer, loan, or acquisition of equity), or indirectly, through granting guarantees. If the restructuring agency is controlled by government or another public corporation, it is classified in the public sector (see Box 2.2). Whether a restructuring unit is part of the general government sector or is a public corporation is determined by whether it is a market or nonmarket producer. Given that the economically significant price criteria may be insufficient for this purpose, the following general criteria should be considered:36
A unit that serves only government, or primarily government, is more likely to be included as a nonmarket producer within the general government sector than one that serves other units as well.
A unit that sells or buys financial assets at a value other than market values is more likely to be in the general government sector than not.
A unit that takes on low risks because it acts with strong public financial support and, by law or effectively, on behalf of the government, is likely to be included within the general government sector.
2.131 The following are two frequently observed examples that provide further guidance in the classification of restructuring agencies:
A restructuring agency may undertake the reorganization of public or private sector entities or the indirect management of privatization. Two cases may be considered:
The restructuring unit is a genuine holding company controlling and managing a group of subsidiaries, and only a minor part of its activity is dedicated to channeling funds from one subsidiary to another on behalf of the government and for public policy purposes. This unit is more likely to be a market producer and classified as a financial corporation, and the transactions made on behalf of the government rerouted through the general government unit using the service provided.37
The restructuring unit, whatever its legal status, acts as a direct agent of the government and is not a market producer. Its main function is to redistribute national income and wealth, channeling funds from one unit to the other. The restructuring unit should be classified in the general government sector.
Another example of a restructuring agency is one mainly concerned with impaired assets, mainly in the context of a banking or other financial crisis. Such a restructuring agency must be analyzed according to the degree of risk it assumes, considering the degree of financing provided by the government. Again, two cases may be considered:
The restructuring agency borrows on the market at its own risk to acquire financial or nonfinancial assets that it actively manages. In this case the unit is more likely to be a market producer and classified as a financial corporation.
The restructuring agency deliberately purchases assets at above-market prices with direct or indirect financial support from the government. It is primarily engaged in the redistribution of national income (and wealth), does not act independently of government or place itself at risk, and therefore is not a market producer and should be classified in the general government sector.
Financial Protection Schemes
2.132 The financial infrastructure of an economy may include financial protection schemes to protect the assets of financial institutions’ clients. These schemes are often referred to as deposit guarantee schemes or deposit insurance schemes. The main types of schemes provide protection of deposits or protect policyholders against failing life and nonlife insurance schemes. These entities are known by various names, but to determine their sector classification, the nature of their activities should be considered on a case-by-case basis.
2.133 A financial protection scheme is classified as part of the general government, a public financial corporation, or a private financial corporation outside the public sector according to the same sectorization principles that apply to any other entity, as described earlier in this chapter (see paragraph 2.124).
2.134 A resident financial protection scheme may or may not satisfy the criteria to be an institutional unit. If it is not an institutional unit, it is treated as an integral part of the institutional unit that controls it.
2.135 If the fees are set by government, or when the government or a public corporation has control over the financial protection scheme through other means, the scheme is to be included in the public sector. The following criteria should be considered in determining whether the scheme is part of the general government sector:
If fees payable to government for such a protection scheme are compulsory—that is, if beneficiaries cannot opt out of the scheme—the scheme is to be included in general government sector (see paragraph 5.74).
If fees payable to government are clearly out of proportion to the service provided (fees are not determined based on the associated risks covered), the scheme is to be included in general government sector (see paragraph 5.74).
If fees payable to government are not set aside in a fund, or can be used for other purposes, the scheme is to be included in general government sector.
If the fees are proportional to the cost of the service provided, and the scheme is an institutional unit, it is classified as an insurance corporation; operating a fund that functions on insurance rules may indicate proportionality and the existence of a standardized guarantee scheme.
Special Purpose Entities
2.136 While there is no internationally agreed-upon definition of an SPE, some typical features are that it has little physical presence, is related to another corporation or government, and is often resident in a territory other than the territory of residence of its parent unit.38
2.137 Governments may set up SPEs for financial convenience. For example, the SPE may be involved in fiscal or quasi-fiscal activities (including securitization of assets, borrowing, etc.). Resident39 SPEs that function only in a passive manner relative to general government and that carry out fiscal and quasi-fiscal activities do not satisfy the criteria to be institutional units and are therefore not treated as separate institutional units in macroeconomic statistics; they are treated as part of general government regardless of their legal status. Resident SPEs acting independently, acquiring assets and incurring liabilities on their own behalf, accepting the associated risk, are treated as separate institutional units and are classified to a sector according to their principal activity.
2.138 SPEs that are resident in a different country than their controlling government are always classified as separate institutional units in the economy where they are established. When such entities exist, care must be taken to reflect the fiscal activities of government accurately. All flows and stock positions between the general government unit and the nonresident SPE should be recorded in the accounts for general government and the rest of the world when they occur.40
2.139 A government may create a nonresident SPE to undertake government borrowing or incur government outlays abroad for fiscal purposes. Even if there are no actual economic flows recorded between the government and the SPE related to these fiscal activities, flows and stock positions should be imputed in the accounts of both the government and the rest of the world to reflect the fiscal activities of the government undertaken by the SPE.
2.140 Many public sector units enter into arrangements with private entities (e.g., a public-private partnership) or other public sector units to undertake a variety of activities jointly. The joint venture could be a market or nonmarket producer. Joint operations can be structured broadly as one of three types: jointly controlled units, referred to here as joint ventures; jointly controlled operations; and jointly controlled assets.
2.141 A joint venture involves the establishment of a corporation, partnership, or other institutional unit in which, legally, each party has joint control over the activities of the joint venture unit. The joint venture unit operates in the same way as other units except that a legal arrangement between the parties establishes joint control over the unit. As an institutional unit, the joint venture may enter into contracts in its own name and raise finance for its own purposes. Such a joint venture maintains its own accounting records.
2.142 The participants to a joint venture may be public sector and/or private sector units. To properly decide the sector classification of the joint venture in macroeconomic statistics, it must be determined which unit has economic control of the joint venture. Given the nature of a joint venture (created legally with joint control), the principal question to be considered here is whether the effective economic control of the joint venture establishes a public or a private unit:
If a joint venture operates as a nonmarket producer, then government is in effective control and it is classified as part of the general government sector.
If the joint venture is a market producer, it is treated as a public or private corporation according to whether it is controlled by a government unit. Normally, the percentage of ownership will be sufficient to determine control. If the public and private units own an equal percentage of the joint venture, the other indicators of control must be considered (see Box 2.2).
2.143 Joint operating arrangements can be in the form of jointly controlled operations or jointly controlled assets. When public sector units enter into joint operating arrangements without establishing separate institutional units, there are no units requiring classification; however, the recording should reflect the proper economic ownership of assets. Also, any sharing arrangements of revenue and expense should be recorded in accordance with their economic nature as determined by the provisions of the governing contract. For example, two units may agree to be responsible for different stages of a joint production process or one unit may own an asset or a complex of related assets, but both units agree to share revenue and expense.
2.144 A sinking fund is a separate account, which may, or may not be an institutional unit. A sinking fund is made up of segregated contributions provided by the unit(s) that makes use of the fund (the “parent” unit) for the gradual redemption of the parent unit’s debt. A sinking fund may also be established to provide for major repairs or replacements. Aside from eventually extinguishing all government debt in a prudent and orderly manner, sinking funds may be meant to inspire confidence, supporting the market for government securities.
2.145 Public sector sinking funds are classified to sectors according to whether they are separate institutional units41 and, if so, whether they provide their services at economically significant prices.
Sinking funds that are separate institutional units and provide services as market producers are classified as public financial corporations.
Sinking funds that are separate institutional units and provide services as nonmarket producers are classified as general government units. In particular, such sinking funds will be classified as extrabudgetary units of the unit that controls them (e.g., central government).
Sinking funds that are not separate institutional units are classified with the unit that controls them (i.e., the “parent” unit).
2.146 A variety of practices exist among sinking funds as to both their operation and the degree of control exercised by the “parent” unit (such as government):
Some sinking funds retire or purchase only the parent unit’s securities for which they are established. Such sinking funds are normally not separate institutional units and are classified with the unit that controls them.
Some sinking funds may have been assigned other responsibilities, such as the conduct of government lending programs or even the collection of earmarked taxes. Such sinking funds are normally not separate institutional units and are classified with the unit that controls them.
Other sinking funds may purchase and sell securities of other governments or institutions—domestic or external debtors and creditors—usually seeking securities that have similar maturity dates. Such sinking funds may well be institutional units providing services on a market basis and are classified as public financial corporations.
2.147 The means by which pensions are provided to persons in retirement varies from country to country. Various types of pensions are provided by public sector units to individuals via social assistance, social security schemes, and employment-related schemes other than social security. Due to the complexities involved in the classification and sectorization of these arrangements, a detailed discussion is provided in Appendix 2.
2.148 Provident funds are compulsory saving schemes that maintain the integrity of the contributions for individual participants. Some governments create provident funds rather than providing social insurance benefits. Under provident fund arrangements, the compulsory contributions of each participant and of their employer on behalf of each participant are kept in a separate account and could be withdrawn under specified circumstances, such as retirement, unemployment, invalidity, and death. These contributions are then managed and invested to obtain a return for each participant.
2.149 The establishment of a provident fund raises the issue of whether this fund is classified as a social security scheme elsewhere in the general government, as a public corporation, or outside the public sector. Provident fund arrangements as defined in the preceding paragraph are different from social security schemes insofar as for each contributor segregated assets exist and it is not foreseen for government to be able to alter the benefits. These provident funds thus are excluded from social security schemes.
2.150 The classification of a provident fund controlled by government in the general government sector or financial corporations subsector is determined by the same sectorization principles that apply to any other entity, as described earlier in this chapter:
A resident provident fund controlled by government that satisfies the definition of an institutional unit is classified as a public financial corporation. Individual contributions determine individual benefits, and the entity is involved in financial intermediation by pooling the contributions from many households and investing them on their behalf similar to the case of investment funds and defined-contribution pension funds (see paragraphs 2.53–2.54). Therefore, these units are classified in the public financial corporations subsector as market producers.
A resident provident fund controlled by government that does not satisfy the criteria to be an institutional unit is classified with the government unit that controls it.
2.151 It is possible that a provident fund may be established in such a way that it includes aspects of a social security scheme (social insurance) as well as aspects of a compulsory saving scheme. In such cases, the fund would be classified according to the scheme that predominates while still applying the sectorization principles outlined in this chapter.
Sovereign Wealth Funds
2.152 Some governments create special purpose government funds, usually called sovereign wealth funds (SWFs).42 Created and owned by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies that include investing in foreign financial assets. The funds are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatization, fiscal surpluses, and/or receipts resulting from commodity exports.
2.153 The establishment of an SWF raises the issue of whether this fund is classified as part of the general government, as a public corporation, or outside the public sector. The classification of a sovereign wealth fund controlled by government in the general government sector or financial corporations subsectors is determined by the same sectorization principles that apply to any other entity, as described earlier in this chapter (see paragraph 2.124).
2.154 A resident SWF controlled by government may, or may not satisfy the definition of an institutional unit:
If the SWF is not an institutional unit, it is classified with the unit that controls it.
If the resident SWF is an institutional unit, it is classified as:
A public financial corporation if it is providing financial services on a market basis
A general government unit (an extrabudgetary fund or social security fund43) if it satisfies the definition of a government unit (see paragraph 2.38) and is simply a passive holder of assets and liabilities (see paragraph 2.42).
2.155 If the SWF is an entity incorporated abroad or quasi-corporation located abroad, it is classified as a separate institutional unit in the financial corporations subsector of the economy in which the entity is legally constituted, or in the absence of legal incorporation, is legally domiciled. In such circumstances, all general government transactions and stock positions with the SWF should be reflected in the general government account with the rest of the world as the counterparty.
Market Regulatory Agencies
2.156 Market regulatory agencies act on behalf of a government (or a regional organization with governments as its members), and influence the market for specific goods or services directly and/or indirectly. These agencies may influence the market directly by acting as buyers and sellers of the goods or services and may influence the market indirectly through regulations, rulings, compliance laws, or standards, to impact the production, price, and marketing of specific products. The regulations may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged and/ or to whom the goods and services are distributed. It is most common for a regulatory agency to control agricultural products, monopolistic markets, or, in some cases, natural resources.
2.157 The nature of these market regulatory agencies may differ. The nature of each agency should be investigated to decide the sector classification according to sectorization principles. At one end of the spectrum, some agencies are merely distributing subsidies, while others may have an administrative, advisory, standard or price setting, or collective advertising function. At the other end of the spectrum, the agency may have total control over all aspects of the production and distribution process, including being the only legal buyer/seller of the products.
2.158 Following the residence principle, those market regulatory agencies that meet the definition of an international or regional organization are not included in the statistics of the individual member countries, but their activities should be reflected in regional data (see Appendix 5). By convention, financial regulatory (supervisory) bodies are considered as financial corporations, specifically as financial auxiliaries when they are separate institutional units. For those resident market regulatory agencies involved with nonfinancial goods and services, the following guidance applies:
Those agencies that do not satisfy the criteria to be an institutional unit remain an integral part of the general government unit that controls them. This would usually be the case for those agencies exclusively or principally involved in the distribution of subsidies on behalf of government.
Those agencies that satisfy the criteria to be institutional units, and that are mainly nonmarket producers, such as performing some administrative functions, setting standards, or overseeing and regulating the production process, should be classified in the general government sector. Although the agency may have active participation of members from the market it serves, government control is established by the enabling instruments and nonmarket nature of these entities.
Those agencies that satisfy the criteria to be an institutional unit and that are mainly a market producer should be classified in the nonfinancial corporations subsector. These market regulatory agencies’ sole or principal activity is to buy, hold, and sell the goods or services at economically significant prices.
2.159 Where market regulatory agencies are involved in a mixture of activities, such as distributing subsidies and buying, holding, and selling goods and services, the sector classification may require careful consideration. If it is possible to separately identify a quasi-corporation that is undertaking market activities, it should be classified in the nonfinancial corporations subsector. The nonmarket activities should be classified in the general government sector. If it is not possible to distinguish two institutional units, the majority of the activities of the entity should determine the sector classification.
Development Funds and/or Infrastructure Companies or Entities
2.160 Some governments create special entities/funds to finance and develop the economy in general, develop specific sectors of the economy, or upgrade specific facilities, such as infrastructure. These types of agencies/ funds may be involved in various aspects of development, ranging from only providing the finances for development activities to being involved in all aspects of the actual development and construction of the infrastructure or facilities. Various terms, such as “development banks,” “investment funds,” “fiscal stabilization funds,” or “infrastructure companies,” are used to describe these agencies. Whatever they are called, the sector classification should be based not on their description but rather on the economic nature of the entities.
2.161 Using the usual criteria (see paragraph 2.22), compilers should determine whether the entity is a separate institutional unit in the public sector, or whether it is not an institutional unit and should be classified as an integral part of the unit that controls it.
2.162 These entities may be established in the legal form of a corporation, but it is necessary to decide whether to classify them as institutional units. The financing arrangements of these entities usually involve the issuance of debt instruments, but could also include some other sources of financing. The customers that they serve, the financing arrangements, and the economic ownership of the assets created by these entities could often be indicative of the risks assumed by these entities, and could help to determine their status as an institutional unit. The following guidance applies:
If the entity cannot act independently from its parent and is a passive holder of assets and liabilities, it is an artificial subsidiary. If it is a resident unit, it is classified as a component of the level of government that controls it (i.e., as part of the parent unit). These entities are not treated as separate institutional units, unless they are resident in an economy different from that of their parent unit (see paragraphs 2.6–2.15).
If the entity borrows on the market and then lends only to general government units, it is not involved in financial intermediation and should be regarded as a resident artificial subsidiary (see paragraphs 2.42–2.44).
If government assumes economic ownership of the nonfinancial assets created, it is an indication that the development fund is just a device to borrow and acquire the assets, and the entity should be treated as a resident artificial subsidiary.
If these entities meet the definition of an institutional unit (see paragraph 2.22) and are government-controlled market producers of goods or services, they should be classified as a corporation. More specifically, they will be a public financial corporation only if they are involved in providing financial services (see paragraph 2.53).44 They will be public nonfinancial corporations only if they produce and sell the infrastructure assets at economically significant prices in market transactions.
Maintaining a list or register of these units and their sector classification will ensure consistent classification in all macroeconomic datasets.
Residence is primarily defined in the BPM6, paragraphs 4.113–4.144, and also discussed in the 2008 SNA, paragraphs 4.10–4.15, and Chapter 26.
Where analytically useful, data for these zones could be presented separately, before they are consolidated with those of the remainder of the economy.
The regional central decision-making body in a currency union is usually the currency union central bank (see paragraph 2.21). For a discussion of currency unions and other regional arrangements, see Appendix 5, and the BPM6, Appendix 3.
Monetary authorities encompass the central bank (which subsumes other institutional units included in the central bank subsector, such as currency boards) and certain operations usually attributed to the central bank but sometimes carried out by other government institutions or commercial banks, such as government-owned commercial banks.
See the 2008 SNA, paragraph 4.13, and the BPM6, paragraphs 4.41–4.44.
The definitions and descriptions of institutional units are fully consistent with the corresponding definitions and descriptions in the 2008 SNA, Chapter 4. Hereafter, “unit” is used as a short form for “institutional unit” in some instances.
Consolidation is a method of presenting statistics for a set of institutional units (or entities) as if they constituted a single unit (see paragraphs 3.152–3.168).
If the establishment charges economically significant prices and meets the criteria to be classified as an institutional unit, it would be treated as a quasi-corporation (see paragraph 2.33).
See the 2008 SNA, paragraphs 5.1–5.2, for a detailed description of enterprises.
For a full discussion on the features of corporations, also see the 2008 SNA, paragraphs 4.38–4.50.
Unincorporated enterprises, such as some post offices or national railways, may exist in government ministries. When these unincorporated enterprises produce goods and services for the market at economically significant prices, and have separate sets of accounts, they are quasi-corporations and classified as part of public corporations. If not, they may be market establishments as discussed in paragraph 2.75.
The concepts of market and nonmarket producers are described in paragraph 2.65.
The requirement of financing activities by compulsory transfers is necessary to differentiate a government from a nonprofit institution, which may carry out the same functions as a government but obtains its funds from voluntary transfers, property income, or sales. The receipt of compulsory transfers may be indirect. For example, a local government may finance its activities with grants receivable from the central government.
Ancillary activities produce mainly services, but, as exceptions, goods that do not become a physical part of the marketable products produced by an enterprise.
See the 2008 SNA, paragraphs 5.35–5.45, for more details.
Because of consolidation, GFS are not highly sensitive to the institutional unit borderline among the subsectors of the general government sector, as long as all general government units are fully covered.
The definitions and descriptions of institutional sectors are fully consistent with the corresponding definitions and descriptions in the 2008 SNA, Chapter 4.
Hereafter, “sector” will often be used as a short form for “institutional sector.”
Similarly, financial corporations can be divided into public, foreign-controlled, and national private financial corporations.
Public enterprises are often also referred to as state-owned enterprises or parastatals.
When a newly established unit needs to be classified to a sector, the classification as a market or nonmarket producer should be based on its intent regarding the prices it is to charge for its goods and services.
Prices determined in a competitive market are highly likely to be economically significant prices.
For a detailed breakdown of other taxes on production, see paragraph A7.41 and Table A7.3.
The sales of goods and services (142) include sales of market establishments and sales by nonmarket establishments, and are identified as specific categories of revenue (see paragraphs 5.136–5.141).
The alternative methods of subsector classification are designed to accommodate different analytic needs. The decision as to which method is more appropriate in a given country depends on how significant social security funds are and on the extent to which they are managed independently of the government units with which they are associated.
Also see the discussion on joint ventures in paragraphs 2.140–2.143.
These entities are institutional units if they satisfy the criteria to be a separate institutional unit (see paragraph 2.22). If an entity does not qualify as a unit, it is considered as part of the unit that controls it.
See paragraph 2.75 for a definition of market establishments.
Appendix 2 provides a detailed description of the nature of social protection, including social security.
Also see the discussion of residence in paragraphs 2.6–2.21 of this chapter and definitions of corporations in paragraphs 2.31–2.32.
See paragraphs 2.53–2.57, and in the 2008 SNA, paragraphs 4.98–4.116, for a detailed breakdown of these subsectors.
In a currency union, in each member economy the monetary authority functions may be carried out by a national (resident) monetary authority (see paragraph 2.21).
Giro institutions enable money to be transferred quickly and cheaply between accounts or between financial institutions.
GFS for the central government public sector will be comparable to the consolidated financial statements prepared in accordance with accounting standards for the central government in cases where central government does not control state and local governments.
This is because restructuring units have, by nature, little output.
Rerouting is described in paragraph 3.28.
SPEs are also discussed in the 2008 SNA, paragraphs 4.55–4.58.
For a definition of resident and nonresident units, see paragraphs 2.6–2.15.
Examples of these imputations are described in the PSDS Guide, Box 4.12.
An institutional unit is defined in paragraph 2.22.
While these funds may have various names, this section refers to them as “sovereign wealth funds” for ease of reference.
SWFs that hold and manage wealth designated to provide social benefits will be included in social security funds.
Providing concessionary loans does not necessarily mean that an institutional unit is not a market producer (e.g., some development banks are providing concessionary loans but are still considered financial intermediaries).