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Managing Government Balance Sheet: a Focus on Public Assets - Graham Prenctice & Richard Hughes, United Kingdom


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This presentation was made by Graham Prenctice & Richard Hughes, United Kingdom, 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 - Graham Prenctice & Richard Hughes, United Kingdom

  1. 1. Update on the UK’s balance sheet review Richard Hughes and Graham Prentice
  2. 2. 1. Context: the nature of the UK’s balance sheet changed substantially since the 2008/2009 Global Financial Crisis 2 UK Public Sector Assets, Liabilities, and Net Worth, % of GDP Source: IMF
  3. 3. 2. The Balance Sheet Review (BSR) was launched at Budget 2017 3
  4. 4. 3. After one year, Budget 2018 provided an update on BSR progress 4 BSR Update Budget 2018 Intangible assets Property Debt owed to Govt Asset sales and loans Balance Sheet Reporting Controlling contingent liabilities Reducing inflation exposure Retiring PFI • First-ever geo-spatial Digital National Asset Register • London estate on single balance sheet within 5 years • New debt management targets and measures on overdue debt, debt management strategies and risk to be implemented in 2019-20 budgeting guidance • continued use of central debt integrator • Reduce the proportion of index-linked gilt issuance • Interest on Index-linked Savings Certificates from May 2019 based on CPI rather than RPI • Stricter new controls over issuances of guarantees & contingent liabilities • Exploring options to improve incentives & compensation on insurance to the private sector • Stricter disclosure requirements for asset sales • Revised budgetary treatment for financial transactions • Regular statistical reporting of the entire balance sheet • Retiring the Private Finance Initiative • New centre of best practice in Health Ministry • Report: Getting Smarter about IP and other knowledge assets in the Public Sector • Estimated £150bn could be recognised
  5. 5. 5 3.1 The UK has made significant progress in reducing inflation exposure Share of Inflation-Linked Debt (G7 Countries, Latest Year) UK Inflation-Linked Debt Stock under Alternative Issuance Assumptions Source: HMT
  6. 6. 3.2 The 2018 Budget also announced the retirement of the Private Finance Initiative (PFI) 6 Source: NAO There are three main reasons to retire PFI PFI tended to be more expensive over the life of the contract. This was masked because it was off-balance-sheet. 1.Long-run cost The nature of the contracts meant less flexibility to adapt to changing service needs. 2.Flexibility The OBR described PFI as a “fiscal illusion”. Retiring it will increase fiscal transparency. 3.Transparency Comparative cost of PFI 0m 50m 100m 150m 200m 250m 300m 350m 2010 2020 2030 2040 2050 Cumulativecost(£) PF2 unitary charges Conventional financing The cumulative cash costs of a group of PF2 schools PFI is a method of providing funds for major capital investments, where private firms are contracted to complete and manage public projects.
  7. 7. 3.3.1 Under-recorded an under-exploited: knowledge assets • Less likely to be recognised under accounting definitions Software licences Patents • Know-how • Skills • Ideas • Innovation • Training Methodologies & standards Trademarks & brands Data & Analytics Development costs • More likely to be recognised under accounting definitions + UK public sector: “Net exporter of ideas” 5 offices around the world
  8. 8. 3.3.2 Knowledge assets have had limited recognition on the public sector balance sheet SPINTAN estimates: £150bnIntangibles on Whole of Government Accounts represent 2% of total assets £150bn £34bn Returns on investment @ 3%+ p.a.
  9. 9. 3.3.3 Barriers: managing knowledge assets is more complex than traditional asset classes Identification Insight Infrastructure Incentives Investment Public sector bodies often do not know what IP they hold or how it is valued Asset valuations volatile – and depend on how IP is applied Lack of technical, legal and commercial expertise to develop, protect and exploit Limited central support Limited incentives for organisations and individuals in the public sector - invest - generate - exploit Budgeting system does not always support long- term & speculative investment Next step: implementation plan to address the barriers
  10. 10. Opening Balance Sheet (bn) Transactions (bn) Other Economic Flows (OEF) (bn) Closing Balance Sheet (bn) Revenue Holding Gains Other Volume Changes - Expense = Net Worth + Net Operating Balance + Change in Net Worth due to OEF = Net Worth = = = = Non-financial Assets Non-financial Assets Non-financial Assets Non-financial Assets + + + + Net Financial Worth + Net Borrowing + Change in Net Financial Worth due to OEF = Net Financial Worth = = = = Financial Assets Financial Assets Financial Assets Financial Assets - - - - Liabilities Liabilities Liabilities Liabilities 3.4 Improving balance sheet reporting 10 • In Nov. 2018, the OBR (UK’s Fiscal Council) started publishing detailed forecast for the government’s financial balance sheet over the next five years. • The UK has committed to complying with the IMF’s Government Financial Statistics Manual, which requires regular statistical reporting of the entire balance sheet, starting in spring 2019. • Quarterly reporting of the balance sheet will help inform policy decisions. New national accounts statistical tables based on a GFSM approach