2.12.

Identifying the residence of an institutional unit is important for determining the coverage of the GFS system. Paragraph 2.7 of the IMF GFSM 2014 defines the residence of an institutional unit as the economic territory with which it has the strongest connection (i.e. its centre of predominant economic interest) rather than the legal or political territory.

2.13.

Paragraph 2.8 of the IMF GFSM 2014 defines economic territory as any geographical area or jurisdiction for which statistics are required. However, the most commonly used concept of economic territory is the area under the effective economic control of a single government. Paragraph 2.9 of the IMF GFSM 2014 states that economic territory includes:

• The land area;
• Airspace;
• 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; and
• 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).

2.14.

The concept of the economic territory of a country includes territorial enclaves in the rest of the world. The SESCA defines these as clearly demarcated areas of land that are physically located in other countries, but which are used by the government for diplomatic, military, scientific or other purposes. Therefore, the coverage of the Australian GFS system includes the overseas operations of Australia’s embassies, consulates, trade offices, etc.

2.15.

Further, paragraph 2.10 of the IMF GFSM 2014 specifies that the economic territory of a country does not include the territorial enclaves that belong to foreign governments or international organisations that are physically located within the boundaries of that country, but which are not subject to the laws of the host country. Therefore the operations of foreign embassies, consulates, trade offices, military bases, etc., within the physical boundaries of Australia are excluded from the coverage of the Australian GFS system.

2.16.

In GFS, a unit's economic activity can only be attributed to one country based on residence. Therefore, every institutional unit must have a centre of predominant economic interest within an economic territory. Paragraph 2.12 of the IMF GFSM 2014 defines a centre of predominant economic interest to be a location, dwelling, place of production or other premises from which a unit engages (and intends to continue to engage) in economic activities and transactions on a significant scale indefinitely, or over a finite but long period of time. The location itself need not be fixed in the one place, so long as it remains within the economic territory of the country.

2.17.

The IMF consider all general government units to be residents in their own country regardless of their physical location, however, public corporations are considered to be residents of the economies in which they operate. The SESCA specifies that unincorporated enterprises other than notional resident institutional units, are not separate from their owners, and therefore have the same residence as their owners. Notional resident institutional units are further discussed in paragraphs 2.20 and 2.21 of this chapter.

2.18.

The SESCA defines Australia's economic territory as the area under the effective control of the Australian government, specifically:

• Geographic Australia which includes Cocos (Keeling) Islands and Christmas Island;
• Norfolk Island;
• Australian Antarctic Territory;
• Heard Island and McDonald Islands;
• Territory of Ashmore Reef and Cartier Island;
• Coral Sea Islands; and
• Australia's territorial enclaves overseas.

2.19.

Paragraph 2.12 of the IMF GFSM 2014 states that if a unit operates (or intends to operate) in an economic territory for one year or more, it is considered to have a centre of economic interest in that economic territory (unless the unit forms part of the territorial enclave of another country). The criterion of actual or intended location for one year or more is used as an operational definition, and is adopted in GFS to avoid uncertainty and facilitate international consistency. The SESCA indicates that ownership of land and structures within the economic territory of Australia is deemed sufficient justification to record a centre of economic interest in Australia on the grounds that the property can be used for production.

2.20.

The SESCA states that where a non-resident owner does not have any economic interest within the economic territory of Australia other than ownership of land and structures, the ownership of the land and structures are treated as having been transferred to a notional resident institutional unit in Australia.

2.21.

A notional resident unit is defined in paragraph 2.13 of the IMF GFSM 2014 as being created when the legal owner of immovable assets within an economic territory is a non-resident. Immovable assets in this context refers to assets such as land, other natural resources, buildings and structures, which are usually treated as being owned by resident units. For GFS purposes, a notional resident unit is created to reflect the receipt of the rent or rentals that accrue on those asset/s. In this situation, paragraph 2.13 of the IMF GFSM 2014 specifies that the legal owner is deemed to hold equivalent equity in the notional resident unit, and receives income from the notional resident unit in the form of property income paid abroad.

2.22.

The SESCA states that international organisations such as the United Nations (and its agencies) and the International Monetary Fund (IMF), are not considered to be residents of any economy, including those in which they are located or where they conduct their affairs. They are treated as non-residents by all economies. However, persons working for these organisations are treated as residents of the economies in which they live.

2.23.

A basic statistical unit that is classified by sector is known as an institutional unit. Institutional units in the Australian GFS system are assigned a number of unit classifications. These classifications are the institutional sector classification (INST), the level of government classification (LOG), the jurisdiction classification (JUR), which are discussed throughout this chapter. Paragraph 2.22 of the IMF GFSM 2014 notes that to be considered an institutional unit in it's own right, a unit must:

• Have the ability to own goods or assets and exchange these in transactions with other institutional units; Be able to make economic decisions and engage in economic activity for which itself is held responsible and accountable at law;
• Be able to incur liabilities on its own behalf, take on other obligations or future commitments, and to enter into contracts; and
• Be able to produce a complete set of accounts, including a balance sheet of assets, liabilities and net worth, an operating statement and a cash flow statement, or it would be possible and meaningful from both an economic and legal viewpoint to compile a complete set of accounts if required.

2.24.

The SESCA states that institutional units can be established formally (such as through an act of parliament), or informally (such as a household formed by individual members sharing a dwelling), or as a specific type of unit (such as through the Corporations Act, 2001). The concept of the ABS institutional unit for GFS purposes is aligned with that of the IMF GFSM 2014 and the 2008 SNA.

2.25.

Units that do not meet all of the criteria set out in paragraph 2.23 of this chapter are treated as part of their parent entity. Included are departments and agencies operating from the public accounts of the parent government. The exception to this rule is in the case of notional institutional units. These are public corporations that do not exist as separate legal entities from their collective parent government unit, but that operate autonomously in the market. To be recognised as a notional institutional unit, a unit must:

• Have the same relationship to its owners as a corporation has to its shareholders;
• Have a full set of accounts, including a statement of financial position; and
• Be a market producer (for the definition, see paragraphs 2.58 to 2.63 of this manual).

2.26.

In practice, notional institutional units will only be created where they engage in significant market activity.

2.27.

Artificial subsidiaries are a type of government unit that is established by government, but they cannot act independently and are simply passive holders of assets and liabilities. Artificial subsidiary units are not treated as separate institutional units, but are classified as components of the level of government that controls them unless the unit is resident in an economy different from that of its parent unit (see discussion on residence of units in paragraphs 2.12 to 2.22 of this manual). Government resident artificial subsidiaries are sometimes set up as Special Purpose Entities (SPEs) which are often legally constituted as corporations. If the SPE is a non-market producer and is controlled by another government unit, the SPE should be classified within the general government sector with the parent government unit that controls it. Further information on SPEs can be found in paragraphs 2.107 to 2.110 of this manual. Further information on artificial subsidiaries can be found in paragraphs 2.42 and 2.43 of the IMF GFSM 2014.

2.28.

Another example of a resident artificial subsidiary would be a central borrowing authority (CBA) if it was established by government with the purpose of borrowing on the market and lending only to the parent unit or other general government units. Paragraph 2.44 of the IMF GFSM 2014 states that such CBAs are classified to the general government with the government unit that controls them because they merely facilitate government borrowing. However, in Australia CBAs are not treated as artificial subsidiaries, but as separate institutional units and are classified to the public financial corporations sector because their function is not restricted to borrowing and lending only to the parent unit, and they play a key part in the financial corporations sector. Please see paragraphs 2.53 and 2.54 of this manual for further discussion on CBAs.

2.29.

Paragraph 2.26 of the IMF GFSM 2014 advises that the type of institutional unit used for compiling GFS must be determined by its objectives and functions, and cannot be inferred from its legal status or name alone. Australia's standard for defining institutional sectors and subsectors is the SISCA which is contained within the SESCA. There are four types of institutional units. These are:

• Corporations;
• General government units;
• Non-profit institutions; and
• Households.

2.30.

A corporation is defined in paragraph 2.31 of the IMF GFSM 2014 as an entity that is capable of generating a profit or other financial gain for its owner, is recognised by law as a separate legal entity from its owners, and is set up for the purpose of engaging in market production. All corporations are part of either the nonfinancial corporations sector or the financial corporations sector, depending on the nature of their primary activity.

2.31.

Corporations are typically:

• Created for the purpose of market production;
• Created by processes of law that establish their existence as independent from their shareholders, including other institutional units (i.e. other corporations, household unincorporated enterprises, government units and non-profit institutions serving households) that may own shares or other equity in the corporations;
• Owned by shareholders who receive a distribution of profits in proportion to their share holdings; and
• Fully accountable at law for their actions, obligations and contracts and are liable to pay taxes (i.e. they are a legal entity).

2.32.

The primary determinant for 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. Paragraph 2.32 of the IMF GFSM 2014 notes that the key to the correct classification of an institutional unit as a public corporation is knowing whether or not the unit is a market producer (one that produces goods and / or services at economically significant prices). In the ABS, this distinction is made on a case by case basis. Institutional units that qualify as corporations and are controlled by government units or other public corporations are classified as public corporations (as either public financial corporations or public non-financial corporations based on the nature of the activity of the unit). Only corporations that are controlled by government or other public corporations are included in GFS. Government control of corporations is further discussed in paragraphs 2.68 to 2.74 of this manual.

2.33.

Paragraph 2.32 of the IMF GFSM 2014 further states that some non-profit institutions and government units have the legal status of a corporation, but are not considered public corporations for the purposes of macroeconomic statistics because they are not market producers, and so they are classified as general government units. Other non-profit 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.

2.34.

A quasi-corporation is defined in paragraph 2.33 of the IMF GFSM 2014 as an entity which is not incorporated or otherwise legally established, but functions as if it was a corporation. Note that these units need to meet the criteria of being a separate institutional unit in their own right as per paragraph 2.23 of this manual. In GFS, quasi-corporations are treated as corporations if controlled by a government unit or another public corporation. Such a quasi-corporation can be either: 

• An unincorporated enterprise controlled by a resident public sector entity that has sufficient information to compile a complete set of accounts and is operated as if it were a separate corporation and whose de facto relationship to its owner is that of a corporation to its shareholders; or
• An unincorporated enterprise controlled by a non-resident public sector entity 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.

2.35.

Paragraph 2.34 of the IMF GFSM 2014 recommends that an entity or group of entities engaged in the same kind of production activities be treated as quasi-corporations if the entity:

• Charges prices for its outputs that are economically significant (see paragraph 2.59 of this manual for the definition);
• Is operated and managed in a similar way to a corporation; and
• Has a complete set of accounts (or is able to meaningfully construct a complete set of accounts), that enable its stock positions and flows to be separately identified and measured.

2.36.

Paragraph 2.38 of the IMF GFSM 2014 describes general government units as 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 functions of government units are to:

• Assume responsibility for the provision of goods and services to the community or individual households primarily on a non-market basis;
• Redistribute income and wealth by means of transfer;
• Engage primarily in non-market production; and
• Finance their activities primarily out of taxation or other compulsory transfers.

2.37.

Paragraph 2.38 of the IMF GFSM 2014 considers the requirement of financing activities by compulsory transfers necessary to differentiate a general government unit from a non-profit institution, which may carry out the same functions as a government but obtains its funds from voluntary transfers, property income, or sales. In this context, the receipt of compulsory transfers may be indirect. For example, a local government may finance its activities with grants receivable from the Commonwealth Government. 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 general government units are part of the general government sector.

2.38.

The majority of general government units are readily identifiable as their operations are mainly financed from taxation and they redistribute income by means of transfers (e.g. subsidies, grants, welfare payments), or engage in other forms of non-market production such as the provision of government services (e.g. defence, education, health services) free of charge or at nominal prices.

2.39.

Statutory authorities and companies created by legislation or regulation which operate outside the public accounts, along with local government authorities, qualify individually as general government units.

2.40.

Statutory authorities are entities established by the Australian Constitution or by an Act of Parliament of the Commonwealth or one of the states or territories. Statutory authorities include the Governor General of Australia and the Governor of each Australian state, each house of the parliaments of the Commonwealth, each state and territory, and each court of law. Statutory authorities are not restricted to entities created as ‘bodies corporate’, but include any other entity which is described in legislation as having been established by the legislation. Included are entities established under legislation which provides for the establishment of a class of entities (e.g. government owned companies created under corporations law, and local government authorities created under local government legislation) rather than for each entity individually. The concept also includes entities which are created as statutory offices held by individual persons, or as statutory bodies comprising several statutory offices named in the legislation.

2.41.

Departmental entities include entities created as Departments of State by the instrument (e.g. proclamation, Executive Council order) required by legislation in the Commonwealth and each state or territory. However, for statistical purposes, ‘departmental entities’ exclude any statutory authorities which may be named as part of a department in the instrument of creation.

2.42.

Each statutory authority and departmental entity that is included in the public accounts of a jurisdiction is treated conceptually as part of a wider enterprise unit comprising all such units in the jurisdiction. Conversely, with one exception, each statutory authority and departmental entity that is not included in the public accounts of a jurisdiction is treated as an individual legal entity and therefore as an enterprise. The exception concerns units that operate as an integral part of another unit (e.g. they have no separate accounts and no separate employees); such units are merged with the unit of which they form an integral part.

2.43.

Non-profit institutions (NPIs) are defined in the SESCA as legal or social entities created for the purpose of producing goods and services whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control or finance them. NPIs must have an enabling instrument which includes a clause that prohibits the NPI from distributing income, profit or other financial gain to its establishing, controlling or financing unit. This includes benefitting from the sale of assets in the event of the dissolution of the unit. The productive activities of NPIs may generate either surpluses or deficits but any surpluses they make cannot be appropriated by the establishing, controlling or financing institutional unit. For this reason, they are frequently exempted from various kinds of taxes.

2.44.

The main characteristics of NPIs are they:

• Are created by processes of law that establish the NPI's separate existence from the units that establish, finance, control or manage them;
• Have purpose statements set out in articles of association;
• Are associations with members who have equal voting rights and limited liability with respect to the NPI's operations;
• Cannot distribute profits to members (the term 'non-profit institution' reflects the embargo on distribution of financial gains and is not intended to imply that NPIs cannot make a profit); and
• Are self-governing, with their direction usually vested in a group of officers, an executive committee or a similar body elected by a majority of members.

2.45.

A household consists of a person or 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 (see paragraph 2.28, IMF GFSM 2014). Individual members of households are not treated as institutional units because assets are often owned (and liabilities incurred) jointly by two or more members of a household. The income of a household is often pooled, and expenditure decisions are often made for the household as a whole. As a result, the household as a whole, including all individual members, is considered to be an institutional unit. Households fall outside the scope of the GFS system, the purpose of which is to measure government fiscal activity.

2.46.

An institutional sector groups together similar kinds of institutional units according to the nature of the economic activity they undertake. The Australian economy is divided into five mutually exclusive sectors, which are described in Table 2.1 below. Of these five institutional sectors that together make up the total economy, only some units in the first three sectors listed in Table 2.1 are part of the total public sector and therefore in scope for GFS.

2.47.

The institutional sector classification (INST) used in Australia's GFS system is a standard classification which defines institutional sectors that are also included in the SESCA. The INST is shown in Table 2.2 below:

2.48.

Non-financial corporations (INST 100) are defined in paragraph 2.114 of the IMF GFSM 2014 as all resident corporations whose principal activity is the production of non-financial goods and / or nonfinancial services at economically significant prices. These are known as market producers (see paragraphs 2.58 to 2.63 of this manual for the definition). Non-financial services are any services that do not qualify as financial intermediation or auxiliary financial services.

2.49.

All resident non-financial corporations controlled by general government units or other public corporations are part of the public non-financial corporations sector. Public non-financial corporations include corporations such as state water corporations and port authorities. This category could also include public non-profit institutions engaging in market production (such as hospitals, schools, or colleges) if they are separate institutional units and charge economically significant prices (see paragraph 2.59 of this manual for the definition).

2.50.

Financial corporations (INST 200) are defined in paragraph 2.115 of the IMF GFSM as all resident corporations that are principally engaged in providing financial services (including insurance and pension fund services) to other institutional units. These are known as market producers (see paragraphs 2.58 to 2.63 of this manual for the definition). All resident financial corporations controlled by general government units or other public corporations are part of the public financial corporations subsector. In the GFS system, the public financial corporations sector includes:

• Public deposit-taking corporations (central bank and public deposit-taking corporations except the central bank); and
• Other public financial corporations.

2.51.

Financial corporations include three types named financial intermediaries, financial auxiliaries, and captive financial institutions and money lenders. Paragraph 2.54 of the IMF GFSM 2014 identifies these as:

• Financial intermediaries - institutional units which 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 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 - 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 bureau, and central supervisory authorities.
• Captive financial institutions and money lenders - 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 corporations are the exception and are classified as insurance corporations.

2.52.

Public financial corporations include institutions that undertake a central bank role, including monetary policy development, issuing national currency, acting as custodian of international reserves, and providing banking services to government. In Australia, the Reserve Bank of Australia has responsibility for monetary policy, issuing bank note currency, holding Australia's international reserves, holding reserve deposits and providing banking services to the Commonwealth. The Reserve Bank of Australia is Australia's central bank and is therefore included as a public financial corporation for GFS purposes. Also treated as public financial corporations are various housing finance schemes established by state Governments to assist first home buyers.

2.53.

A central borrowing authority (CBA) would be a resident artificial subsidiary unit (see paragraphs 2.50 and 2.51 of this manual for the definition) established by government if its purpose was to borrow funds on the market and lend only to other general government units. Because such CBAs merely facilitate government borrowing, they would not qualify as separate institutional units and would be classified to the parent government unit in the general government sector.

2.54.

In Australia, CBAs have been established by some state and territory governments primarily to provide finance for public corporations, quasi-corporations and other units owned or controlled by the government, and to arrange investment of their surplus funds. Although the CBAs’ lending is often confined to the public sector in their jurisdiction, in Australia they also engage in financial intermediation activity for investment purposes and participate in the financial management activities of the parent government. Therefore, the CBAs of each Australian state and territory government are treated as public financial corporations and not as artificial subsidiaries in the general government sector. The exception is the Australian Capital Territory’s CBA which does not qualify as a separate institutional unit and is treated as part of the general government sector.

2.55.

The general government (GG) sector (INST 300) is defined in paragraph 2.58 of the IMF GFSM 2014 as consisting of resident institutional units that fulfil the functions of government as their primary activity. These institutional units perform the principal economic functions of government, in addition to fulfilling their political responsibilities and their role of economic regulator. The GG sector consists of all the government units at the national level of government (in Australia this consists of the Commonwealth Government and control not further defined units), each state and territory government, and all local government authorities and NPIs engaged in non-market production that are controlled by government units.

2.56.

The GG sector includes courts, government departments, and the Governor General's Office. Excluded from the GG sector are government owned corporations and quasi-corporations (see paragraphs 2.32 and 2.33 of this manual for definition) engaged in market production. However, paragraph 2.59 of the IMF GFSM 2014 states that unincorporated enterprises owned by government units that are not quasicorporations remain integral parts of those units, so they must be included in the GG sector. For further information on general government units, see paragraphs 2.43 to 2.49 of this manual.

2.57.

Using the concepts covered in this chapter of residence and institutional units, the following decision tree in Diagram 2.1 assists compilers of GFS to apply the appropriate sector classification to entities. The concepts of government control and market versus non-market production, which are used to allocate units to sectors, are also discussed in this section. The decision tree should be followed from the top and should answer the sequential questions asked to indicate whether the unit should be classified to the Rest of the World (ROW), Households, Non-profit Institutions Serving Households (NPISH), the General Government, Public Non-Financial Corporation or Public Financial Corporation sectors.

2.58.

To determine if a public sector unit is a public corporation or general government unit, it is necessary to classify it as a market producer (public corporation) or non-market producer (general government). The following indicators are useful when determining whether a government entity is a market or non-market producer. Note that macro-economic statistics are compiled using a principles based framework in Australia. Therefore these indicators are not ranked or weighted as they would be under a rules based approach. Usually two or three of the indicators are used collectively to classify units, although in some cases a single indicator could be sufficient to determine the type of producer. These indicators are designed to consider both the producer's and consumer's point of view to assess whether economically significant prices are being charged:

• What proportion of total production costs (including subsidies) are covered by total sales?
• What government interventions are in place to influence the supply of goods / services?
• Does the producer compete with other providers and/or is the consumer's choice of provider influenced by government interventions?

2.59.

A market producer is defined in paragraph 2.65 of the IMF GFSM 2014 as an institutional unit that provides all or most of its output to others at prices that are economically significant. Paragraph 2.66 of the IMF GFSM 2014 defines economically significant prices as 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.

2.60.

A comparison between the receipts from sales and the costs of production of goods and / or services sold of an institutional unit over a number of years is recommended in paragraph 2.73 of the IMF GFSM 2014 to determine whether prices charged for the production of goods and / or services can be considered to be economically significant. This will assist to determine whether the institutional unit should be classified as a market or a non-market producer. In this context, the proportion of production costs covered by sales is a strong indicator of whether the unit is a market or non-market producer. It is generally expected that market producers will cover their production costs through sales. Therefore, the lower the ratio the more likely it is that the unit is a non-market producer, conversely the higher the ratio the higher the likelihood that the unit is a market producer. Further to the production costs to sales ratio, prices are considered economically significant if consumers are free to choose whether to buy, and how much to buy, on the basis of the prices charged.

2.61.

The value of sales from sales of goods and services should be measured before any taxes applicable to the products are added (i.e. ETF 1121 to ETF 1124), less all payments received from government (i.e. revenue from current grants and subsidies (ETF 1141)) unless they would be granted to any producer undertaking the same activity (see paragraphs 2.73 and 2.74 of the IMF GFSM 2014). Own-account production is not considered to be part of sales in this context because this activity does not generate receipts from sales.

2.62.

The costs of production include superannuation expenses (ETF 1211 to ETF 1213), other employee expenses (ETF 1221 to ETF 1229), production tax expenses (ETF 1231), use of goods and services (ETF 1233), depreciation (ETF 1241 or ETF 1242). Like for sales, the calculation of the costs of production exclude all costs associated with own-account capital formation (classified to the appropriate category within ETF 76). Subsidies receivable on production are not deducted from the costs of production.

2.63.

Once it is determined that the institutional unit is indeed a market producer, then it can be further classified as either a non-financial corporation or a financial corporation based on the nature of its activity.

2.64.

A non-market producer is an institutional unit that provides all or most of its output to others for free or at prices that are not economically significant (see paragraph 2.59 of this manual for the definition). A comparison between the receipts from sales and the production costs of goods and / or services sold over a multi-year period needs to be undertaken to assist in identifying whether the unit in question should be classified as a non-market producer.

2.65.

Paragraph 2.71 of the IMF GFSM 2014 states that corporations in receipt of substantial government financial support or other risk-reducing factors such as substantial government guarantees, respond to changes in the economic conditions differently from corporations without such advantages. This is because their budget constraints are softer, and so these types of entities are more likely to be classified as nonmarket producers.

2.66.

Government owned entities supplying goods and services to government are treated as non-market producers if the entity is a dedicated provider of ancillary services. Paragraph 2.45 of the IMF GFSM 2014 defines an ancillary activity as 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. Ancillary services include keeping records, managing and paying employees, cleaning, maintenance, transportation, and security. Ancillary activities produce mainly services, but in exceptional cases they may sometimes produce goods that do not become a physical part of the marketable products produced by an an enterprise. Entities providing ancillary services generally do not satisfy the criteria to be an institutional unit.

2.67.

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 competition 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.

2.68.

A corporation is considered to be a public corporation if a government unit, another public corporation, or some combination of government units and public corporations controls the entity. Paragraph 2.107 of the IMF GFSM 2014 states that control of a corporation is defined as the ability to determine the general corporate policy of the corporation. The expression 'general corporate policy' in this context is taken to mean the key financial and operating policies relating to the corporation’s strategic objectives as a market producer, but does not necessarily include the direct control of the day-to-day activities or operations of a particular corporation.

2.69.

In some cases, the existence of government control may not be clear. In Australia, such is the case with some superannuation funds that governments have established for the benefit of their employees. Legislation places responsibility for the day-to-day operation of the superannuation funds with a board of trustees that is created as a separate legal entity. The establishing governments generally receive no monetary benefits from the funds. Although the establishing government has the power, under the legislation, to appoint and dismiss some or all of the trustees, the boards of trustees are typically not under the direction of government, and are required to act in the beneficiaries’ interests and not those of the government. Accordingly, the funds are not considered to be under government control. Although the circumstances of individual funds may vary, in the interest of uniformity, all superannuation funds with arrangements broadly similar to those described are included in the private sector.

2.70.

Instances can arise in which the public and private sectors share ownership of a corporation. In such cases, the corporation is allocated to the sector that has effective control over the determination of the activities and policy of the corporation.

2.71.

Because the arrangements for the control of corporations can vary considerably, the IMF GFSM 2014 has provided guidance to assist in determining whether government control exists over a corporation. Box 2.2 of the IMF GFSM 2014 identifies eight indicators of government control of a corporation. These indicators are not a definitive list of factors, but show the most important and likely factors to consider. Although a single indicator could be sufficient to establish control, in other cases, a number of separate indicators may collectively indicate control. Box 2.1 below reproduces the eight indicators of control which may be used in GFS to determine if a corporation is controlled by government.

2.72.

Non-profit institutions (NPIs) are defined in the SESCA as legal or social entities created for the purpose of producing goods and services and whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control, or finance them. NPIs must have an enabling instrument which includes a clause that prohibits the NPI from distributing income, profit or other financial gain to its establishing, controlling or financing unit. Paragraph 2.61 of the IMF GFSM 2014 defines non-profit institutions serving households (NPISH) as resident non-market non-profit institutions (NPIs) that are not controlled by government. These types of units provide goods and services to households for free or at prices that are not economically significant (see paragraph 2.59 of this manual for the definition of economically significant prices). It is important to note that NPISH are out of scope for GFS.

2.73.

Examples of NPISH include political parties, trade unions, consumers’ associations, churches or religious institutions, aid agencies, charities, and environmental groups. Excluded from NPISH are bodies serving similar functions that are controlled by government units. These types of entity are classified as part of the general government sector. Further excluded from NPISH are non-profit institutions engaged in market production (see paragraphs 2.58 to 2.67 of this manual for definitions of market and non-market producers). These types of entities are classified as financial or non-financial corporations depending on the nature of the business activity. Paragraph 2.61 of the IMF GFSM 2014 states that non-market NPIs controlled by foreign governments are classified as NPISHs in the host economy.

2.74.

NPIs may engage in market or non-market production (see paragraphs 2.58 to 2.67 of this manual for the definition of market and non-market producers). Paragraph 2.37 of the IMF GFSM 2014 contains the following guidance on NPIs that are involved in market or non-market activities:

• NPIs engaged in market production charge economically significant prices for their services. Schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are market producers when they charge fees that are based on their production costs and that are sufficiently high to have a significant influence on the demand for their services. Government payments to these NPIs are treated not as transfers but as payments for services rendered. 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 that are engaged in market production and are 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. These consist of chambers of commerce, agricultural, manufacturing or trade associations, employers’ organisations, research or testing laboratories, or other organisations 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 classified as market producers. These market NPIs are, like corporations and quasi-corporations, members of either the non-financial corporations sector or the financial corporations sector.
• NPIs that are engaged in non-market production, and are controlled by government. Schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are non-market producers only when they charge fees at prices that are not economically significant. These units are treated as general government units.
• The remaining NPIs, those that produce goods and services which are not sold at economically significant prices and are not controlled by government, are classified as a special group of units called NPIs serving households (NPISHs). These fall outside of the scope of the GFS system.

2.75.

In the AGFS15, there are three levels of government known as the national, state and territory, and local levels of government. The Level of Government (LOG) classification used in Australia's GFS system is a standard ABS classification that is included in the SESCA. This classification divides the total public sector into the subsectors of government on the basis of role and function and underpins the production of GFS. The LOG classification separates the total public sector to reflect the administrative and legal arrangements of government in Australia for output purposes. Although conceptually 'control not further defined' is not a level of government by convention, this has been allocated as a level of government in the Australian GFS classification system. The corresponding levels of the total public sector in Australia are described in Table 2.3 as:

2.76.

The National subsector is compiled for GFS output purposes and consists of the institutional units of the Commonwealth (LOG 1) (including the non-market NPIs that are controlled by the Commonwealth Government), and control not further defined units (LOG 4). The Commonwealth Government is Australia's central government which has the authority to impose certain taxes on all resident institutional units and non-resident units that are engaged in economic activity within Australia. The political responsibilities of the Commonwealth Government include national defence, the maintenance of law and order, making transfers to other levels of government, and providing collective goods and services for the benefit of the community as a whole.

2.77.

All public sector units that have a national role or function are classified to the National LOG. Units are generally considered to have a national role or function if the political authority underlying their functions extends over the entire territory of Australia or the functions involve policies that are primarily of concern at a national level. Currently, all Commonwealth Government controlled public sector units are classified to the National LOG. Such units include government units controlled by the Commonwealth Government, non-market NPIs that are controlled by the Commonwealth Government, and public non-financial and financial corporations (including the Reserve Bank of Australia) controlled by the Commonwealth Government.

2.78.

Units that are not controlled by the Commonwealth Government can also be classified to the National LOG. Currently, the only such cases are units that have a national role or function. These are called control not further defined units (LOG 4), formerly known as multi-jurisdictional units. These type of units are public sector units where jurisdiction is shared between two or more governments, or where the classification of a unit to a jurisdiction is otherwise unclear. The main control not further defined units currently classified to the National LOG are Australian public universities which, as described above, are mainly financed and partly controlled by the Commonwealth Government but are subject to a degree of control by the establishing state or territory government. On balance, Australian public universities are considered to be implementing policy (i.e. tertiary education) that is primarily of concern at a national level.

2.79.

The State / Territory (LOG 2) subsector consists of institutional units which exercise the functions of government directly below that of the Commonwealth Government. State or territory governments have fiscal, legislative and executive authority over areas of Australia that have been geographically divided for political and administrative purposes. State or territory governments have the authority to levy taxes on resident institutional units and non-resident units that are engaged in economic activity within their area of jurisdiction. State / territory governments also have the authority to distribute revenue from taxes or the funding from Commonwealth Government transfers, although some of the transfers received from the Commonwealth Government may be tied to specific purposes.

2.80.

All public sector units that have a state or territory role or function are classified to the State / Territory LOG. Units are generally considered to have a state or territory role or function if the political authority underlying their functions is limited to a state or territory, or the functions involve policies that are primarily of concern at a state or territory level. The fact that a unit is controlled by a state or territory government serves as evidence (but is not necessarily conclusive) that the unit has a state or territory role or function.

2.81.

Currently, all state or territory controlled public sector units are classified to the State / Territory LOG. Such units include government units controlled by a state or territory government, non-market NPIs that are controlled by a state or territory government, and all public non-financial and financial corporations that are controlled by a state or territory government. Norfolk Island is included within the scope of the State / Territory LOG, but is currently not included within the coverage of the GFS system

2.82.

The Local (LOG 3) subsector consists of institutional units which exercise the functions of government directly below that of the state or territory governments. Local governments have fiscal, legislative and executive authority over areas of Australian states and territories that have been geographically divided for political and administrative purposes. The function of local government is limited in nature and heavily reliant on transfers from higher levels of government to fund the range of services they provide to institutional units and local residents within their locality.

2.83.

All public sector units that have a local role or function are classified to the Local LOG. Units are generally considered to have a local role or function if the political authority underlying their functions is limited to a local government area or the functions involve policies that are primarily of concern at a local level. The fact that a unit is established as, or directly controlled by, a local government authority serves as evidence (but is not necessarily conclusive) that the unit has a local role or function.

2.84.

Currently, all local government authorities and the units they control are classified to the Local LOG. Such units include each local government authority constituted under one of the various local government acts (or the equivalent) in each state and the Northern Territory (for example municipal councils, land councils, counties, municipalities, towns, townships, boroughs, and districts), all non-market NPIs that are controlled by a local government unit, and all public non-financial and financial corporations that are controlled by a local government unit. The Australian Capital Territory has no separate local government.

2.85.

The jurisdiction classification (JUR) divides the total public sector into classes based on the government which exercises control over a particular institutional unit. The classes refer to the governments of the Commonwealth and the individual Australian states and territories and are called jurisdictions.

2.86.

In this context, the term 'jurisdiction' is indicative of the public sector units over which the Commonwealth Government or an individual state or territory government has direct control or (in the case of local government authorities) the government which administers the legislation under which the authority is established. The categories making up the jurisdiction classification are as shown in Table 2.4 below as:

2.87.

Although Norfolk Island is conceptually included within the scope of Australia's economic territory (for the definition, see paragraphs 2.18 to 2.19 of this manual), it is currently not included within the coverage of the GFS system.

2.88.

In most cases, classifying units to JUR is straightforward. There are units, however, for which jurisdiction is shared between two or more governments, or the classification of a unit to a jurisdiction is otherwise unclear. Such units are called control not further defined units (see paragraph 2.78 of this manual for the definition).

2.89.

Of the five institutional sectors together make up the total economy, only some units in the first three sectors listed in Table 2.1 are relevant in the GFS system. Together, the general government sector, public non-financial corporation sector, and public financial corporation sector equate to the total public sector. The NPISH sector consists of resident non-market, not-for-profit institutions that are not controlled by government, and are therefore out of scope for GFS. Households represent a group of persons who share the same living accommodation, and who pool some or all of their wealth and consume certain types of goods and services collectively (such as housing and food). Because the primary aim of the GFS system is to measure the financial activities of governments, the remainder of this chapter will focus on units that make up the total public sector. The total public sector and its relation to other institutional sectors of the economy is shown in Table 2.5 below:

Source: Based on Figure 2.2 International Monetary Fund Government Finance Statistics Manual 2014.

2.90.

The total public sector comprises:

• Government units that are legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given areas; and
• All other institutional units and notional institutional units controlled by government.

2.91.

In the GFS system, the fiscal activities of general government units, and any fiscal activities of public nonfinancial corporations and public financial corporations represent the fiscal activities of the total public sector

2.92.

In Australia, the total public sector is made up of the different levels of government including the national (made up of the Commonwealth Government and control not further defined units), state and territory, and local governments. Also included are public non-financial corporations and public financial corporations as shown below in Diagram 2.2 below:

2.93.

Paragraphs 2.125 to 2.162 of the IMF GFSM 2014 contain descriptions and practical application for the sector classification of types of units typically encountered during the compilation of GFS. Some of this guidance has been reproduced in the remaining paragraphs in this chapter below.

2.94.

Quasi-corporations (as defined in paragraphs 2.35 and 2.36 of this manual), satisfy the criteria to be separate institutional units and function as if they were corporations. In macroeconomic statistics they are treated as if they were corporations; that is, as institutional units separate from the units to which they legally belong. Quasi-corporations that are owned or controlled by government units are grouped with public corporations in the public non-financial or public financial corporations sectors.

2.95.

The existence of (or possibility to meaningfully construct) a complete set of accounts for the entity (including balance sheets) is a necessary condition for it to be treated as a separate institutional unit. Also, the government must grant management of the entity discretion to operate as if it were a separate corporation. In practice this should apply both with respect to the management of the production process and also 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.

2.96.

Entities such as national railways, port authorities, post offices, government publishing offices, public theatres, museums, swimming pools, hospitals, education centres, and other entities that provide goods and services on 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 recognised as a quasi-corporation are treated as a market establishment integrated with the general government unit that controls them. In cases where government producers of similar goods and services sell their products at non-market prices, they remain a part of the non-market activities of general government.

2.97.

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, whether or not 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 such units:

2.98.

The first type is the head office of such groups of corporations that is actively engaged in production. This class of corporations includes overseeing and managing other units of the company or enterprise; undertaking the strategic or organisational 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 non-financial corporations subsector unless all or most of their subsidiaries are financial corporations, in which case they are treated by convention as financial auxiliaries (see paragraph 2.66 of this manual for definition) in the financial corporations sector.

2.99.

The second type of corporation 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. These holding companies are classified according to the predominant activity of the corporations whose assets they hold.

2.100.

Restructuring agencies are entities set up to sell corporations and other assets, and for the reorganisation 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, privatisation vehicles, asset management companies, liquidation corporations, bridge banks, or bad banks.

2.101.

Some institutional units specialise in the restructuring of corporations, either non-financial or financial. These corporations may or may not be controlled by government. Restructuring agencies may be longstanding 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. Whether a restructuring unit forms part of the general government sector or is a public corporation is determined by whether it is a market or non-market producer. Given that the economically significant price criterion may be insufficient for this purpose because restructuring units have, by nature, little output, the following general criteria should be considered:

• 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.
• A restructuring agency may undertake the reorganisation of public or private sector entities or the indirect management of privatisation. Two cases may be considered:

1. 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 channelling 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 according to the predominant sector of the subsidiaries, and the transactions made on behalf of the government rerouted through the general government unit using the service provided.
2. 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, channelling funds from one unit to the other. The restructuring unit should be classified in the general government sector.

2.102.

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 analysed 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 non-financial assets that it actively manages. In this case the unit is more likely to be a market producer and classified as either a financial or non-financial corporation based on the nature of the assets held.
• 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.

2.103.

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 non-life 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.

2.104.

A financial protection scheme is classified as part of the general government, as a public financial corporation, or a private financial corporation outside the public sector according to the same sectorisation principles that apply to any other entity, as described earlier in this chapter.

2.105.

A resident financial protection scheme may satisfy the criteria to be an institutional unit or not. If it is not an institutional unit, it is treated as an integral part of the institutional unit that controls it.

2.106.

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;
• 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;
• 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; and
• 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 standardised guarantee scheme.

2.107.

While there is no internationally agreed upon definition of a special purpose entity (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.

2.108.

Governments may set up SPEs for financial convenience. For example, the SPE may be involved in fiscal or quasi-fiscal activities (including securitisation of assets, borrowing, etc.). Resident 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, and accepting the associated risk, are treated as separate institutional units and are classified to a sector according to their principal activity.

2.109.

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 non-resident SPE should be recorded in the accounts for general government and the rest of the world when they occur.

2.110.

A government may create a non-resident 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.

2.111.

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 non-market 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.

2.112.

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.

2.113.

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 non-market producer, then the 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 or is not 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.
• 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 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.

2.114.

A sinking fund is a separate account, which may be an institutional unit or not, that 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.

2.115.

Public sector sinking funds are classified to sectors according to whether they are separate institutional units and, if so, whether they provide their services at economically significant prices (see paragraph 2.34 of this manual for the definition).

• 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 non-market producers are classified as general government units.
• Sinking funds that are not separate institutional units are classified with the unit that controls them (i.e. the parent unit).

2.116.

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) 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.

2.117.

Market regulatory agencies act on behalf of a government (or a regional organisation with governments as its members), and influence the market for specific goods or services directly and/or indirectly. These agencies influence the market directly by acting as buyers and sellers of the goods or services and 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.

2.118.

The nature of these market regulatory agencies may differ. The nature of each agency should be investigated to decide the sector classification according to sectorisation principles. At the 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.

2.119.

Following the residence principle, those market regulatory agencies that meet the definition of an international or regional organisation are not included in the statistics of the individual member countries, but their activities might be reflected in regional data. By convention, financial regulatory (supervisory) bodies are considered as financial corporations when they are separate institutional units. For those resident market regulatory agencies involved with non-financial 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 non-market 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 non-market 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 non-financial corporations subsector. These market regulatory agencies, whose sole or principal activity is to buy, hold, and sell the goods or services at economically significant prices, are market producers.

2.120.

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 non-financial corporations subsector. The non-market 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.

2.121.

Internationally, 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 stabilisation funds', or 'infrastructure companies' are used to describe these agencies. Whatever they are called, the sector classification should not be based on their description, but rather on the economic nature of the entities.

2.122.

Using the criteria set out earlier in this chapter, 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.

2.123.

These entities may be established in the legal form of a corporation, but it is necessary to decide whether or not 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 classified as an artificial subsidiary. If it is a resident unit, it is classified as a component of the level of government that controls them (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 its parent unit.
• 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.
• If government assumes economic ownership of the non-financial 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 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. They will be public non-financial corporations only if they produce and sell the infrastructure assets at economically significant prices in market transactions.