Written evidence submitted by the House
of Commons Scrutiny Unit
GREEN INVESTMENT BANK - EFFECT OF OPERATIONS
ON NATIONAL ACCOUNTS
1. The impact of the Green Investment Bank (GIB)'s
operations depends upon:
(a) whether GIB is a separate institutional unit
for National Accounts purposes;
(b) the institutional sector within National
Accounts to which it is classified; and
(c) whether the public sector exercises control
over GIB.
2. These decisions are for the Office for National
Statistics (ONS) to take, by applying the standards set out in
the European System of Accounts (ESA95). ONS is guided
in its application of the ESA standards by a case history of previous
classification decisions. The case history is not publicly available
in an accessible form, but HM Treasury's public website does include
a guidance note for Government Departments on sector classification,
Class (2010) 1 Sector Classification (see attached link)
which sets out the relevant issues.
http://www.hm-treasury.gov.uk/d/classification_sector.pdf
The remainder of this note draws upon information
in the guidance note.
SEPARATE INSTITUTIONAL
UNIT
3. GIB needs to be a separate institutional unit
to be classified by ONS for National Accounts. It will be a separate
institutional unit if it has its own legal form and is able to
lead a separate existence, by, for example:
- making decisions in an autonomous way;
- entering into contracts;
- owning assets and disposing of them;
- employing staff;
- making payments from its own bank account; and
- drawing up accounts.
INSTITUTIONAL SECTOR
4. Assuming that GIB meets the criteria for a
separate institutional unit, it would then be classified by ONS
to one of the five institutional sectors available within ESA95,
that is:
(a) non-financial corporations;
(b) financial corporations;
(c) general government;
(d) households; and
(e) non-profit institutions serving households.
5. Given the planned scope of GIB's operations
and that it will be a market body, the expected classification
would be "financial corporation".
PUBLIC OR
PRIVATE SECTOR
6. ONS will determine whether GIB is in the public
sector, ie a "public corporation" or the private sector,
ie a "private financial corporation on the basis of "who
controls the body".
7. ESA95 defines control as the ability
to determine general corporate policy by choosing appropriate
directors if necessary. It says further that control exists through
ownership of more than half the voting shares or, in the case
of government, through special legislation or regulation empowering
the government to determine corporate policy.
8. Thus, if GIB was set up with Government majority
shareholding or under legislation that allowed the Government
to appoint directors or determine corporate policy, then it would
be classified to public sector by ONS.
9. However, control can also be exercised in
a variety of other ways. The most common are discussed below.
Appointment Rights
10. A right to be consulted over the appointments
of directors or a veto over appointments is viewed as exercising
very similar control as given by the right to make appointments.
So, if the public sector has these rights for a new body, it would
be classified to the public sector by ONS.
11. If the initial appointments to the board
of a body are made by the public sector, it will be classified
as in the public sector, and this classification will continue,
even if the body subsequently becomes operationally independent
of the public sector.
Multiple Sponsorship
12. Where a body is owned or controlled by a
number of public sector bodies, it is the overall weight of the
public sector that counts for classification purposes. So, a body
where Government bodies appoint the majority of directors would
be in the public sector even if a private sector partner appointed
more directors than any single Government body.
Special Shares/Reserve Powers
13. There is a distinction in this area between
active controls and passive controls. The existence of passive
controls, eg to prevent changes in ownership or the disposal of
assets, would not, in itself, lead to the classification of a
body to the public sector.
14. The presence of active controls, eg the ability
of the public sector to seize control of a Company or replace
the directors in the event of poor performance, would normally
lead to a body being classified to the public sector.
Special Terms in a body's constitution
15. A body's memorandum and articles may have
terms that require government consent for certain actions. If
the restrictions are time-limited, then they would not amount
to control requiring the body to be classified to the public sector.
Permanent restrictions over important areas of a body's work would
normally result in a body being classified to the public sector.
Second Tier Controls
16. Where the Government can influence the behaviour
of a body's board. eg by retaining controls over directors' pay
or dividends, this could be seen as a sign of public sector control.
Indemnities
17. The existence of government indemnities does
not, in itself, mean that a body is in the public sector, especially
if they are time-limited, narrow and unlikely to be called. Wide
ranging indemnities could be seen as evidence that the body's
functions are seen as being within the public sector.
18. Government guarantees of the borrowing of
a business would be viewed as the equivalent to shareholding if
the guarantees would be called upon before the equity of private
investors.
Funding
19. A body can be classified to the private sector
even if 100% funded by Government, provided that it is clearly
controlled by the private sector.
20. Where Government funding is by way of grant
with conditions that allow public sector control over the wider
policy of the body, including approval of the business plan, this
would be seen as a form of public sector control.
Ownership
21. Where the public sector owns the majority
of the shares, there is control and the body is classified to
the public sector. Public sector control can exist with minority
share ownership if other forms of control are in place.
22. A body not set up as a company can be classified
to the public sector on the basis of a participating interest,
defined as:
- conferring any right to share in the profits
or the liability to contribute to the losses of the undertaking;
or
- giving rise to an obligation to contribute to
the debts or expenses of the organisation in the event of a winding
up.
23. However, if the participating interest does
not give the public sector control, the body could still be classified
to the private sector.
ONS DECISION ON
GIB CLASSIFICATION
24. It is possible that GIB could be set up in
such a way that classification to the public sector was obvious
e.g. Government majority shareholding or right to appoint directors.
If this was not the case, ONS would take a decision on whether
viewed in the round, it is credible that the body should be seen
as being in the private sector or public sector. They would look
at whether the various controls discussed above were present and
attach an appropriate weighting to the control. The aim would
be the assess whether the total influence the public sector holds
over the body amounts to " control" as defined in ESA95.
25. The ONS decision on GIB would be taken on
the basis of information supplied by the DBIS that had been agreed
with HMT. The decision would be published, but is not subject
to negotiation. Classification would only be revisited in the
event of a major trigger e.g. sale of Government shareholding,
exercise of reserve powers in exceptional circumstances.
EFFECT OF
CLASSIFICATION OF
GIB ON GOVERNMENT
DEBT AND
BORROWING
26. If GIB is classified as a public corporation,
then its borrowing from the market or overseas will score in Public
Sector Net Debt (PSND), the measure used by ONS and HM Treasury
to measure the stock of public sector net debt. Any borrowing
from the UK Government would have a neutral effect on PSND, as
both sides of the transaction will be removed in the consolidation.
27. If GIB is classified as private financial
corporation, then the effect of its operations on PSND and other
measures of Government spending are confined to its transactions
with public sector organisations.
12 January 2011
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