Letter from the Chairman to Robert Chote,
Chairman of the Office for Budget Responsibility, regarding asset
sales
The OBR is required to fulfil a number of tasks.
Among these are first, a requirement to assess the likelihood
the government has achieved its fiscal mandate and second, that
it assesses the public sector balance sheet, including an analysis
of the net costs of long term liabilities. I am writing to ensure
that in all future assessments, the OBR takes full explicit account
of likely aggregate proceeds from all asset sales and privatisation
receipts. The OBR's current work largely ignores privatisation
receipts and asset sales, giving a misleading assessment.[29]
The justification for neglecting the proceeds from
financial asset sales from the forecast is set out in OBR Briefing
Paper No1. This reads:
"where firm plans are not in place, potential
exchanges of financial assets are not included in the forecast.
For example, if the Government has indicated it wishes to sell
a financial asset, but the terms of sale have not been agreed,
the sale would not be included."[30]
While the proceeds of individual privatisations may
not be known, the Government has already indicated its intention
to sell assets. The Chancellor in the June 2010 Budget announced:
"In addition to launching the sale of High Speed
1, as part of a wider programme of asset commercialisation over
the next 12 months the Government will:
- facilitate a capital injection into the Royal
Mail Group;
- resolve the future of the Tote in a way that
secures value for the taxpayer while recognising the support the
Tote currently provides the racing industry;
- announce its decision on selling part of the
student loan portfolio...;
- release the 800MHz and 2.6GHz spectrum to support
super-fast mobile services...; and
- explore with other shareholders the options for
a potential sale process in NATS."[31]
Similar commitments were made in the Comprehensive
Spending Review:
"Asset sales
1.96 The Government has made substantial progress
on the key asset sales and commercialisations announced in the
June Budget including, for example, introducing enabling legislation
for Royal Mail on 13 October. Decisions on how and whether to
proceed with sales of the Government's interests in NATS and the
Student Loan Book, and a decision on the future of the Tote, will
be taken by Budget 2011. The Government intends to hold an auction
in 2011-12 for 800MHz and 2.6GHz spectrum, suitable for delivering
the next generation of mobile broadband.
1.97 The Spending Review announces that at least
500MHz of public sector spectrum below 5GHz will be released over
the next 10 years for new mobile communication uses, including
mobile broadband.
1.98 In order to support deficit reduction, the
Government will continue to look into the potential sale of other
public sector assets, including property holdings, which could
operate more sensibly and efficiently in, and with, the private
sector."[32]
The OBR's work is based on its "central forecast".
It follows that to produce a forecast without any attempt to estimate
privatisation proceeds will result in a pessimistic forecast.
To put the point another way, the exclusion of privatisation receipts
and certain asset sales, given the Government's commitment to
obtaining them, inevitably means that the assessment you have
made is not the most likely outcome and therefore your forecast
cannot be "central".
At the second reading of the Budget Responsibility
Bill in the House of Lords, Lord Sassoon, Commercial Secretary
to the Treasury, said:
"We have removed the responsibility for forecasting
from Ministers and given it to independent experts. The independence
of the OBR's judgments will ensure that policy is made on an unbiased
view of future prospects. The establishment of the OBR is a reform
that has been welcomed by both the IMF and the OECD. In its recent
Article IV report on the UK, the IMF has said that the OBR is,
'a welcome step toward strengthening the budget process'. The
OECD has said that the OBR is an important initiative in improving
public confidence. The UK is now one of the few advanced economies
in which an independent fiscal institution produces the official
forecast".[33]
It is important that OBR figures do indeed give "an
unbiased view of future prospects", rather than being produced
in a way which omits one of the Exchequer's likely income streams.
This will mean making some estimate of the possible
proceeds of any privatisation receipts and asset sales which the
Chancellor announces at Budget 2011.
Moreover, the unbiased forecasting that the OBR should
provide, will require you to ensure that departments supply detailed
breakdowns of their spending plans for 2011-12 onwards, incorporating
their best estimate of the likely income stream from central government
fixed asset sales. Were departments to resist your requests for
information the Committee would want to be informed immediately.
It is impracticable—and possibly unwise—to
disclose the estimates of proceeds of individual sales. However,
assumptions about the aggregate annual level of privatisation
receipts have been provided in past Government planning documents.
OBR estimates of privatisation receipts may, like those assumptions,
need to be similarly aggregated.
In addition to preparing the forecast, the
OBR has the task of preparing an assessment of fiscal sustainability
over the longer-term. As the Chancellor said in his Mais Lecture
last February:
"at least once a year, the OBR will also publish
a comprehensive assessment of the true long term sustainability
of the public finances, including off balance sheet liabilities
such as public sector pensions, PFI and the likely costs of an
ageing population."
You will need to consider how best to reflect asset
sales and privatisation receipts in these assessments. It seems
clear that ignoring them is not an option and that an aggregate
number is required. We would like to see your assessment of longer-term
sustainability to cover the period from 2015.
We expect to see this information in future OBR publications.
9 March 2011
Reply from Robert Chote, Chairman of the
Office for Budget Responsibility, to the Chairman
Thank you very much for your letter regarding the
treatment of proposed asset sales and privatisation proceeds in
the OBR forecast We are very happy to explore whether and how
we could provide more information on the potential fiscal impact
of such transactions and, now that the Budget is published and
we are able to discuss the specifics of current treatment, I am
writing to set out some of the issues that arise in deciding how
to proceed.
In whatever we do, we will of course need to be guided
by the Charter for Budget Responsibility. This states that:
The OBR's published forecasts shall be based on all
Government decisions and all other circumstances that may have
a material impact on the fiscal outlook In particular:
- where the fiscal Impact of these decisions and
circumstances can be quantified with reasonable accuracy the impact
should be included in the published projections, and;
- where the fiscal impact of these decisions and
circumstances cannot be quantified with reasonable accuracy; these
impacts should be noted as specific fiscal risks.
In considering how we should apply the Charter, it
is helpful to distinguish between sales of fixed assets on the
one hand, and sales of financial assets and privatisation
proceeds on the other.
Sales of fixed assets are netted off gross capital
expenditure in the national accounts, and therefore reduce
public sector net borrowing. Our current forecasts include sales
of fixed assets where these can be quantified and forecast with
reasonable accuracy. This is possible when the assets are relatively
small and sold in quantities that follow predictable trends. So,
for instance, our forecasts reflect trends in the volume of housing
sales and sales of commercial properties.
It should be borne in mind that central government
sales of fixed assets are included within departments' capital
DELs. The DEL limits apply on a net basis, so that if department,
sell more assets this enables them to increase their other capital
expenditure, which would leave spending and the public finances
unaffected. Our forecasts reflect net DEL plans that were set
in last October's Spending Review. Departments have not yet published
detailed gross and net spending plans, but this does not affect
the accuracy of the forecast as it is based on net capital DEL
limits. We make a specific forecast for local authority asset
sales based on historical trends, including their sales of housing
from their Housing Revenue Accounts, where the latter are classified
as sales of assets by public corporations in the National Accounts.
Sales of financial assets and 'privatisation proceeds',
covering sales of company securities, are not generally scored
within the national accounts aggregate of public sector net borrowing.
Instead they are usually classified as financial transactions.
They will have an effect on-public sector net debt and will have
an indirect effect on net borrowing through their effect on debt
interest payments and if the Government loses a related income
stream.
Consistent with the Charter, we only incorporate
estimates of privatisation proceeds and financial asset sales
in our central forecast when the government has made a firm decision
to proceed and when the details and timing of the prospective
transactions are sufficiently clear to quantify the impact on
the public finances with reasonable accuracy year by year. This
is because such transactions are by their nature very lumpy and
are very difficult to quantify ahead of an announcement of a final
sale agreement.
That is why, of the Spending Review announcements
that you listed in your letter, we currently include in the forecast
only the £2 billion proceeds in 2010-11 from the sale of
High Speed One, which was completed in autumn 2010. In the case
of the other announcements, no final sale agreements have been
reached. However, In Chapter 4 of the EFO we note the Treasury's
current public position on these other prospective sales and privatisations
and point out that these could affect the outlook for the public
finances when firm decisions are made and full details are available.
Notwithstanding the possibility that the Government
will receive more privatisation and financial asset sale proceeds
than are included in the central forecast the hurdle of requiring
a firm and detailed decision from the Government before including
them is a sensible one. It is striking, for example, how successive
governments have for many years been committed to selling the
Tote without ever actually doing so. To remove the 'firm and detailed
decision' hurdle would also been an open invitation to ministerial
manipulation, potentially allowing an unscrupulous Chancellor
to flatter the outlook for public sector net debt by making a
broad commitment to asset sales or privatisations that he had
no firm intention of proceeding with.
That said, maintaining the current approach to the
central forecast need not preclude us from providing more information
on the potential impact of possible future transactions where
that information is available. This would help illustrate the
potential risks to the central forecast.
In this spirit we already present in the EFO an estimate
of the profit or loss implied by current market prices for the
Government's shareholdings in Royal Bank of Scotland and Lloyds
Banking Group. The current estimate, as of Budget 2011, is a potential
loss to the taxpayer of £1.6 billion. This would have an
impact on public sector net debt. Given that this estimate is
very sensitive to movements in market prices, and that there has
been no announcement of when and how these stakes would be sold,
it would be misleading to score this or the associated financial
transactions in our central projection. But the implications of
these potential disposals are a significant risk to the forecast
and so it is appropriate that we provide an assessment of it.
We can certainly examine how we might apply this principle more
widely.
Unfortunately, in the case of most prospective financial
asset sales and privatisations, there is no market price to provide
an objective estimate of the potential proceeds. The sale price
and terms will typically depend on the outcome of commercially
confidential negotiations and on market conditions prevailing
in the relevant sector at the time the deal is completed, Moreover,
many such assets are inherently very difficult to value, for example
rights to use part of the spectrum. Prices in the UK 3G auctions
held in 2000 were more than 100 times higher on a comparable basis
than the subsequent spectrum auctions at 3.4GHz even though the
two bands were relatively similar in their physical properties.
Judging by recent German auctions for4G spectrum, which raised
some €4.4 billion, the proceeds for the UK auctions due in
early 2012 may be substantial, but we do not yet have enough information
to make an estimate of the outcome.
Even when sale terms and prices have been agreed,
the effect of asset sales on the public finances is often far
from straightforward. It will often depend on an Office for National
Statistics classification decision that, given the complexities
involved, may not be agreed until sometime after the sale has
been completed. For example, only in January 2011 did the ONS
take the classification decisions related to the British Energy
sale made two years earlier in 2009. The ONS have not reflected
this change in the public finance statistics, and we have not
been able to reflect it in our forecasts, because there is still
uncertainty about the effect on the fiscal aggregates.
The national accounts treatment of awards of licences
to use the spectrum is another example of this difficulty. The
OBR follows the ONS practice of treating these receipts as rental
payments for the use of an asset However, Eurostat maintains that
the government is actually selling an asset and scores the receipts
as negative capital expenditure. Unlike financial asset sales,
both treatments of spectrum receipts have a favourable impact
on net borrowing. But the timing of the impact will be very different,
because the rental treatment means accruing the receipts evenly
over the whole licence period.
You suggest in your letter that the omission of potential
asset sales means that our central forecast is necessarily a pessimistic
one rather than a central one. This might be the case in respect
of the impact on financial transactions and public sector net
debt, although the current estimate of potential profits from
the public sector banks represents a downside risk to PSND. In
addition, the impact on the Government's chances of meeting its
supplementary target of having PSND falling in 2015-16 might not
be favourable, as it would be determined by the precise profile
of these transactions.
But it also is important to bear in mind that asset
sales will often have offsetting effects in different parts of
the public finances, affecting public sector net borrowing and
the current budget. The sale of a financial asset may provide
the Government with a lump sum that leads to a one-off reduction
in debt in the year the sale is made, but the Government may also
lose future flows of income from that asset (for example, the
gross operating surplus of public corporations, such as British
Energy). The net impact or the asset sale on future government
borrowing will depend on the relative size of the income foregone
and the debt interest payments saved.
In your letter you suggest that we could avoid providing
specific forecasts of the impact of particular sales by presenting
an aggregate total that is not broken down into individual items.
This would be difficult to do properly, given the
various classification issues. But one approach would be to construct
a bottom-up estimate of the aggregate impact on financial transactions
based on estimates for specific sales that we do not reveal in
public. This would still leave us with the problem of coming up
with sensible estimates on yearly year basis. More fundamentally,
presenting an aggregate figure that we were unwilling to explain
or justify with reference to its components would run counter
to our commitment to transparency and might well encourage suspicions
that the Treasury had put pressure on us to paint a flattering
picture.
An alternative would be to base an aggregate estimate
on some average of historical sales. However, financial asset
sales are by their nature very lumpy, with large sales in some
years and very little in others, In effect, we would end up basing
such an estimate on the previous Government's record of asset
sales and privatisations, which does not seem particularly appropriate.
There are clearly many practical changes involved
in providing more information on potential asset transactions,
but the goal is a worthwhile one to pursue. We will examine how
best to proceed and would be very happy to discuss any potential
improvements with you when we have done so.
23 March 2011
29 I understand that some asset sales and privatisation
receipts are included, such as the £2 billion from the sale
of the High Speed 1 operating lease, as set out in the OBR document:
Further information on asset sales, financial transactions,
and privatisation receipts, 21 December 2010. Back
30
OBR Briefing Paper No. I, Forecasting the public finances,
p 52. Back
31
Budget 2010, para 2.10. Back
32
Spending Review 2010, Chapter 1. Back
33
HL Deb, 8 November 2010, c12. Back
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