Part O - The treatment of government payments to NPIS and public corporations

13.146.

Because of the number of payments that a government makes to non-profit institutions (NPIs) and public corporations as part of the ordinary function of government, it can sometimes be difficult for compilers of GFS to establish whether a government payment should be classified as an unrequited transfer under current grant expenses (ETF 1251, COFOG-A, SDC) or capital grant expenses (ETF 1261, COFOG-A, SDC), or as the purchase of a good or service on behalf of households under social benefits to households in goods and services (ETF 1232, COFOG-A, SDC). The following indicators have been established to assist in the correct classification of government payments to NPIs and public corporations.

13.147.

To determine whether a payment by government should be classified as a government purchase, there needs to be reciprocity as part of the transaction entered into, that is, there needs to be an exchange of value as part of the transaction. If there is no exchange of value, then this may be an indicator that the government payment may be an unrequited transfer of funds, and may be classified under the appropriate category in current grant expenses (ETF 1251, COFOG-A, SDC); or capital grant expenses (ETF 1261, COFOG-A, SDC). If the government receives something of value in exchange for the provision of an asset (usually cash), then this may be an indicator that the transaction is the purchase of a good or service and may be classified under social benefits to households in goods and services (ETF 1232, COFOG-A, SDC). Evidence of an exchange of value may be demonstrated by the following:

• The payment is based on a government contract that:
  • Specifies prices, production quantities or other performance criteria; and
  • Has a pre-specified acquittal process.
• The government contracts are contestable (eg. providers compete to win the contract).
• A tax invoice was issued to the government.
• The government agency making the payment is accountable to government for the outcomes of the expenditure.

13.148.

Not all elements of the criteria above need to exist to establish evidence of the exchange of value and no single element is sufficient evidence (for example, there are many supply contracts that are not contestable). The classification of some government payments may require judgement, and may be made on balance to determine whether an exchange of value has taken place or if an unrequited transfer exists.

13.149.

To determine whether a government payment should be treated as the payment of a transfer under current grant expenses (ETF 1251, COFOG-A, SDC); or capital grant expenses (ETF 1261, COFOG-A, SDC), or social benefits to households in goods and services (ETF 1232, COFOG-A, SDC), please refer to the discussion on market / non-market operators in paragraphs 2.34 to 2.42 of this manual.

13.150.

To be considered a market producer, a unit must provide all or most of its output to others at prices that are economically significant. 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; and
• Consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged.

13.151.

To determine whether the unit is a market or non-market producer, it is necessary to examine the recoverability of a unit's production costs as a percentage of their sales. This will reveal whether the unit can only cover the majority of their production costs through the receipt of government transfer payments in the form of grants or subsidies (indicating the unit may be a non-market operator), or whether the level of sales and prices charged is sufficient to meet the majority of its production costs (indicating the unit may be a market producer).

13.152.

Paragraph 2.74 of the IMF GFSM 2014 defines production costs as the sum of intermediate consumption, compensation of employees, consumption of fixed capital and [other] taxes on production. Further, if the unit is to be treated as a market producer, a return on capital is included in the production costs. Subsidies on production are not deducted.

13.153.

The Australian GFS follows the definitions of market and non-market operators contained in the Standard Economic Sector Classifications of Australia (SESCA) 2008 ( Version 1.1) (ABS cat. no. 1218.0). The SESCA further indicates that the economic behaviour of non-market operators is influenced by the receipt of material financial support in the form of transfers such as grants and donations.

13.154.

ABS determines the recipients of government payments to be market or non-market operators on a case by case basis. Cost recovery is one of the indicators used by the ABS to determine whether a unit is a market or non-market operator, and is often (but not always) the primary indicator. For further discussion on the market / non-market operators, see paragraph 2.34 to 2.42 of this manual.

13.155.

To determine whether a government payment should be treated as the payment of a transfer as current grant expenses (ETF 1251, COFOG-A, SDC); or capital grant expenses (ETF 1261, COFOG-A, SDC), or social benefits to households in goods and services (ETF 1232, COFOG-A, SDC), it is necessary to examine the nature of all payments commonly referred to by Australian state and territory treasuries and the Department of Finance as community service obligations by government.

13.156.

Community service obligations are payments made by governments to deliver specific community services at below cost or no cost to final consumers or industry regardless of variations in the cost of supply. By examining the nature of these payments, evidence of an exchange of value may be determined and the payment can be correctly classified as either current grant expenses (ETF 1251, COFOG-A, SDC); capital grant expenses (ETF 1261, COFOG-A, SDC); or as the purchase of a good or service under social benefits to households in goods and services (ETF 1232, COFOG-A, SDC).

13.157.

Any payment by a general government unit to an non-profit institution (NPI) or to another government unit needs to be examined using the guidance set out in this chapter to determine if the payment is a purchase of goods or services on behalf of households, or an unrequited transfer. In the case of NPIs, if the payments received from government are considered to be government purchases, and these payments account for a considerable proportion of the unit's revenue, then the unit should be classified as a private market producer.