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Managing Government Balance Sheet: a Focus on Public Assets - Elva Bova, EC


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This presentation was made by Elva Bova, EC, at the 19th OECD Senior Financial Management and Reporting Officials Symposium held at the OECD Conference Centre, Paris, on 4-5 March 2019

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Managing Government Balance Sheet: a Focus on Public Assets - Elva Bova, EC

  1. 1. Public Assets and their management in the EU 19th Annual Meeting of OECD Senior Financial Management and Reporting Officials Elva Bova DG ECFIN, Fiscal Governance Unit OECD Conference Centre, Paris 4-5 March 2019
  2. 2. Outline • Introduction • Financial assets • Non-financial assets • Management practices • Way forward?
  3. 3. Introduction (1) Motivation: Public assets bear implications for a country's fiscal position and medium-term sustainability: • Source of public finance flows; • Source of fiscal risks; • They can be used as fiscal buffers; Background: European Parliament's initiative; tender awarded to the consortium of KPMG Advisory S.p.A. and Bocconi University in February 2016.
  4. 4. Introduction (2) Contribution: • First EU comprehensive review of public assets (all Member States, 2015 data); • Broadest dataset for public equities in companies (PSHs) based on firm-level data (Orbis database); • Novel estimation techniques for non-financial assets; • First EU wide analysis of management practices for these assets;
  5. 5. Financial assets AF.1 Monetary gold and special drawing rights AF.2 Currency and deposits AF.3 Debt securities AF.4 Loans AF.5 Equity and investment fund shares or units AF.6 Insurance, pension and standardised guarantee schemes AF.7 Financial derivaties and employees stock options AF.8 Other accounts receivable Non-financial assets AN.1 Produced assets AN.11 Fixed assets AN.111 Dwellings AN.112 Other buildings and structures AN.113 Machinery and equipment AN.114 Weapons systems AN.115 Cultivated biological resources AN.117 Intellectual property products AN.12 Inventories AN.13 Valuables AN.2 Non-produced assets AN.21 Natural resources AN.211 Land AN.212 Mineral and energy reserves AN.213 Non-cultivated biological resources AN.214 Water resources AN.215 Other natural resources AN.22 Contracts, leases and licenses AN.23 Purchases less sales of goodwill and marketing assets Public Assets in ESA 2010 Airports, ports, railways, roads
  6. 6. Financial assets
  7. 7. Financial assets (1) Note: Asset values weighted by stake(s) owned by the public sector. Source: KPMG and Bocconi University based on Orbis (BvD) Examining about 37,000 firms with public stakes financial assets are estimated at 40% of EU GDP in 2015… 0 20 40 60 80 100 120 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 DE ES IT PL BG AT HU FR RO SE FI UK CZ HR BE SI PT LV DK NL SK EE LT IE LU EL MT CY %ofGDP NumberofPSHs PSHs Assets (rhs)
  8. 8. Financial assets (2) 0% 20% 40% 60% 80% 100% Public ownership Minority (<10%) Influential (50%<10%) Control (>50%) Fully public In almost half of these firms the government has full ownership, and in more than 20% it has majority control…
  9. 9. Financial assets (3) 9 2.0% 4.2% 3.4% 19.0% 39.6% 6.3% 25.5% By number of PSHs Agriculture, forestry and fishing Financial and insurance activities Information technology Real estate Services Trade and manufacturing Utilities 0.2% 59.2% 1.5% 6.3% 4.5% 3.7% 24.6% By asset value Most firms are service and utility providers, but most assets are concentrated in the financial sector…
  10. 10. Financial assets (4)  Although they represent 0.1% of total EU firms, they employ about 1.9% of total employment.  Although high labour costs, their profitability is close to private peers.  Despite higher NPLs ratio, financial PSHs are slightly better capitalised than private firms. Their contribution to the economy is quite substantial….
  11. 11. Financial assets (5) Source: KPMG and Bocconi University calculations based on Orbis (BvD) database The contribution to public finance could be 0.4% of GDP but… - 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Austria Belgium Bulgaria Croatia Cyprus CzechRepublic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden UnitedKingdom EU28Countries Distributed income of corporations Total Profit (PSHs) Total Income (PSHs) % of GDP
  12. 12. Non-financial assets
  13. 13. Non-financial assets (1) Data on non-financial assets are scarce and heterogeneous: • Only few international databases, with gaps (OECD, Eurostat , IMF GFS) • National sources – or asset-specific sources (the EU Building Stock Observatory…) have discrepancies in accounting and valuation. • Estimation using various secondary sources (DG Move, CIA Factbook…) and valuation methods.
  14. 14. Non-financial assets (2) 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 FR DE UK IT ES SE NL BE PL AT CZ RO IE FI DK EL PT HU HR BG SK SI LU LT LV EE CY MT 0% 50% 100% 150% 200% 250% Billioneuros %ofGDP Non-financial assets Non-financial assets (%GDP rhs) 2015 Source: KPMG and Bocconi University calculations Based on Eurostat data and on asset-specific estimations, non- financial assets are about 71% of GDP in 2015.
  15. 15. Non-financial assets (3) Source: KPMG and Bocconi University calculations 0 2,000 4,000 6,000 8,000 10,000 12,000 Dwellings Buildings other than dwellings Ports Roads Railways Airports Mineral and energy reserves Other natural resources Non- financial assets Bn Eur and in brackets % of GDP (2.4%) (70.8%)(20.1%) (2.8%) (0.4%)(2.8%)(24.4%) (0.7%)(17.2%) Within this, roads and other natural resources (including land) are the largest components..
  16. 16. Management practices
  17. 17. Management and investment (1) From a review of multiple published sources, the study finds that: • For most assets, strategic decisions are at central government level. • An entity for PA management exists only for few MS and assets. • A unique, comprehensive and consolidated national public data source for all assets is missing in most MS. As regards investment decisions, the study finds… • Reduction of financial assets in most MS and of real estate assets for 1/3 MS. • Investments in airports, ports and roads involve the private sector, investments in railways the public sector only. • For MS with strategy for mineral reserves and natural resources, investments involve the private sector.
  18. 18. Management and investment (2) A review of 8 country case studies on asset sale and acquisition finds: • no substantial impact on market share and efficiency. • improved profitability after privatisation, also on account of large investments and reorganisation. • improved solvency after asset sales and acquisition, due to other changes (recapitalisation or assumption of private debt). • privatisation may increase the workforce, not immediately. Overall, the timing of the operation, transparency and a broad-based consensus play an important role.
  19. 19. Way forward?
  20. 20. Conclusion Main findings: • PSHs contribute to the economy and to public finance. • Poor data (especially for NFA). • Governance models diverse, fragmented and at times underdeveloped. Going forward: • Need for comparable databases on public assets. • Exchange of best practice in the management of these assets. • How to consider assets in assessing a country’s creditworthiness? • How can their knowledge reduce fiscal risks?
  21. 21. Thank you for your attention
  22. 22. D.42 D.43 AN.21 Natural resources D.45 Rent P.11 Market output P.12 Output for own final use P.131AN.113 Machinery and equipment Payments for non-market output Public assets Non-tax revenue AF.2 Currency and deposits D.41 Interest AF.3 Debt securities AF.4 Loans AF.8 Other accounts receivable AF.5 Equity and investment fund shares or units Distributed income of corporations Reinvested earnings on foreign direct investment AN.111 Dwellings AN.112 Other buildings and structures
  23. 23. 23 Item Source Item Source Item Source Dwellings Public dwellings (sq m) Eurostat/Entranze/EU Building Stock Observatory Price Eurostat Buildings Public buildings (sq m) Eurostat/Entranze Price Eurostat Ports Port traffic Eurostat Price Mergermarket database (from previous sale) Airports Airport traffic Eurostat Concession fees Financial statements of airport Government default- free bonds Market indicators Roads Km per type of road DG Move Cost per Km DG Regio/EIB/ECA/WB Report Country specific construction costs, road infrastructure investment & road life Eurostat-OECD, DG Move, Canning 1998 Railways Km DG Move Cost per Km DG Regio/EIB/ECA Country specific construction costs, investment & railway life EEA/UNDP/Eurost at/OECD, DG Move, Canning 1998 Mineral and energy resources Stock of proven reserves CIA Price BrentICE/Generic 1st Natural Gas Market indicators Other natural resources Land Eurostat Price Eurostat Volume Value Adjustments Non-financial assets estimation & valuation
  24. 24. Investment strategies 24 Market share Profitability Efficiency Solvency Acquisition of Valvitalia Group stake by the Italian Strategic Fund Privatisation of Royal Mail Indirect privatisation of Empresa Geral do Fomento Privatisation of Copenhagen Airports A/S Privatisation of AERO Vodochody a.s Re-municipalisation of energy grids in Germany Ràba Automotive Holding plc The re-nationalisation of Transpetrol a.s.
  25. 25. Ownership and management 25 From six case studies: Greece: the law for the HRAD Fund conferred credibility on privatisation process, enhancing transparency and accountability; France: with 4 sectoral departments, APE is a good example on how to maintain central coherence while ensuring skill specialisation. Finland: airport company Finavia Oyj is highly customer- oriented, competitive and profitable. UK: Network Rail a fully public company maintains some autonomy in investment decisions. Italy: AdD real estate management allocation between local and central governments. Poland: motorways discusses and compares a concessionary arrangement with a PPP agreement.