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SNA/M1.20/6.
14 th^ Meeting of the Advisory Expert Group on National Accounts,
5-9 October 2020, Virtual Meeting
Agenda item: 6.
Accounting for Economic Ownership and Depletion of Natural Resources
Introduction
So far the accounting practice in several countries has shown that the default option offered by the 2008 SNA to assign ownership of natural resources to the legal owner, in most countries government, is not satisfactory, particularly not when breaking down the natural resource accounts by institutional sector. In practice the risk and rewards of natural resource ownership are often shared between private and public parties. SEEA 2012 Central Framework (SEEA CF) seems to advocate a “partitioning” of the relevant assets. This apparent difference between two international standards and other issues raise the question on how one should account for the ownership of natural resources.
A related issue concerns the recording of depletion. While SEEA CF recommends a recording of depletion as a cost of production, the 2008 SNA ignores these costs and accounts for depletion as a so-called “other change in the volume of assets”. In this respect, depletion is often confined to the run- down of non-renewable mineral and energy resources. One wonders though whether this notion of depletion (or degradation) should not be extended to other natural resources as well.
Furthermore, related to the previous point, one should also acknowledge the longstanding discussion on advocating net instead of gross income and saving as indicators deserving a much more prominent role, certainly as compared to gross indicators, such as gross domestic product (GDP). This call for net indicators makes one wonder whether the recommended net recording in the SNA should also address natural resource depletion. In other words, should depletion (and depreciation) adjusted income and saving be introduced in the system of national accounts, and promoted as the more prominent macro- economic indicators?
The draft guidance note attached to this cover note puts forward the following recommendations in relation to the above issues:
First of all, it is recommended to apply the SNA principles of economic ownership to natural resources. Instead of simply assigning ownership of natural resources to the legal owner (i.e. the 2008 SNA recommendation), it is proposed to apply a split-asset approach, in line with the actual distribution of resource rents and sharing of operational risks.
Secondly, it is recommended to record depletion of natural resources as a cost of production in the central framework of the SNA, in line with the recommendations of SEEA CF.
Thirdly, it is proposed to extend the notion of depletion to non-cultivated biological resources, instead of restricting it to mineral and energy resources, as is currently the case in the 2008 SNA.
- Finally, as a consequence of the proposed recording of depletion, the definition of core indicators, such as Net Domestic Product (NDP) and Net National Income (NNI), are directly affected. In this respect, it is strongly advocated to do yet another effort in putting far greater emphasis on net indicators, as opposed to the current use of gross indicators. This would not only justifiably correct the most frequently used macro-economic aggregates for the consumption of fixed capital (depreciation), but also for the running down of non-renewable natural resources, and the non-sustainable use of biological resources.
The main argument against net measures is the complexity of measuring capital. For fixed assets, time series of investment data are needed to obtain, via the perpetual inventory method (PIM), numbers for the capital stocks and their depreciation over time. For countries with less developed national accounting systems, this may be demanding. However, particularly for natural resource dependent economies, net income and measures for natural resource depletion are critical, as asset stripping is not a sustainable path to economic prosperity. So, it is crucially important to complement recommendations on using net income measures with an exchange of knowledge programme to get this job done.
An example of the proposed recording is provided in Example D of Annex 1, in which the impact of introducing a split-asset approach is combined with an accounting for depletion as costs of production, including an allocation of these costs in line with the allocation of income generated by the extraction of natural resources.
Documentation
- Draft guidance note “Accounting for Economic Ownership and Depletion of Natural Resources”, as attached to this cover note.
Main issues to be discussed
The AEG is requested:
- to offer its opinion on the first three proposals for changing and/or clarifying the 2008 SNA;
- to provide its first views on the issue of net versus gross macroeconomic indicators, and to offer its opinion on the need for drafting a more detailed guidance note on this issue;
- to provide feedback on the need for further testing the feasibility of the recommendations, especially in relation to the accounting for (the value of) natural resources more generally, the application of the split-asset approach, and the accounting for depletion;
- to provide feedback on ways to further improve the guidance note.
1. Introduction to the issue
- Paragraph 13.50 of the 2008 SNA explains that “ it is frequently the case that the enterprise extracting a resource is different from the owner of the resource. In many countries, for example, oil resources are the property of the state. However, it is the extractor who determines how fast the resource will be depleted and since the resource is not renewable on a human time-scale, it appears as if there has been a change of economic ownership to the extractor even if this is not the legal position. Nor is it necessarily the case that the extractor will have the right to extract until the resource is exhausted. Because there is no wholly satisfactory way in which to show the value of the asset split between the legal owner and the extractor, the whole of the resource is shown on the balance sheet of the legal owner and the payments by the extractor to the owner shown as rent “.
- On the other hand, para. 5.217 of SEEA CF acknowledges that both the extractor and the government may have assets in the form of expected future incomes from resource extraction: “ Depending on the nature of the arrangements, often both the extractor and the government will have substantial assets in the form of expected future incomes from the extraction of the resources”. In line with this guidance, SEEA CF advocates a partitioning of depletion costs between the legal owner and the extractor.
- Recently De Haan and Haynes (2019) submitted a paper to the London Group on environmental accounting arguing that in their opinion natural gas resources in the Netherlands are in fact subject to joint economic ownership of the Dutch State and Shell/ExxonMobil. When drafting this paper they also consulted colleagues from e.g. Canada and Norway, and this confirmed that The Netherlands is probably not a unique case. This again calls for a reconsideration of the current guidance of the 2008 SNA.
- From a conceptual point of view, one could also argue that the recommendation of the 2008 SNA on the recording of natural resources in the accounts of the legal owner contains an implicit misalignment, as the allocation of the natural resource assets does not match the recording of income from these assets. Typically, not all of the income related to the natural resources is appropriated by the legal owner (in the rest of this note assumed to be government). Part of the income, and often a substantial share of this income, is retained by the extractor of the natural resource.
- Similarly, one would like to allocate the costs of depletion to the sector that receives the relevant (gross) income. Paragraph 5.218 of SEEA CF notes that “… a specific objective is to show how the incomes earned from the extraction of natural resources are impacted by the cost of depletion. In particular, the SEEA aims to define depletion-adjusted estimates of operating surplus, value added and saving at both an economy-wide level and for institutional sectors. Since there is only one amount of depletion for a given mineral and energy resource, it must be allocated between the relevant units within the accounting framework ”. However, the accounting of depletion as costs of production is not compatible with the allocation of ownership to the legal owner, as recommended by the 2008 SNA. It would lead to an inconsistency with the allocation of (the changes in) the monetary value of the asset.
- The Research Agenda of the 2008 SNA fully recognizes these apparent inconsistencies. In this respect, paragraph A4.51 states the following: “ In the case of a natural resource that is not capable of replenishment on a human time-scale and the use in production eventually exhausts it, the owner may permit the resource to be used to extinction. In this case the SNA recommends that economic ownership of the natural resource remains with the lessor while the lessee pays royalties recorded as
rent. Only the lessee and not the lessor undertakes production. This means that the reduction in the value of capital due to production is recorded in the balance sheet of the owner as an other change in volume of assets. The link between the rundown in the value of the assets and its use in production is lost. As in the previous case, the fact that part of the rent paid is compensation for the reduction in the value of the asset is not recognized ”.
- Closely linked to the above is the longstanding discussion on giving more prominence to net, instead of gross, measures of income and saving, including the most frequently used indicator of gross domestic product (GDP). As noted in paragraph 2.141 of the 2008 SNA, “ …, the concept of value added should exclude the allowance for consumption of fixed capital. The latter, in effect, is not newly created value, but a reduction in the value of previously created fixed assets when they are used up in the production process ”. This call for net indicators makes one also wonder whether the recommended net recording in the SNA should also address natural resource depletion, i.e. whether or not depletion (and depreciation) adjusted income and saving should be introduced in the system of national accounts. The latter has become even more relevant in view of the increasing attention to environmental issues, and the continuous progress in accounting for the environment. Paragraph 2.167 of the 2008 SNA already alludes to such a different treatment, albeit in the context of satellite accounting.
- When discussing depletion of natural resources, this is often limited to mineral and energy resources, thus excluding renewable natural resources, predominantly biological resources. In the latter case, a distinction has to be made between cultivated resources and non-cultivated resources. Cultivated biological resources are considered produced assets, and recorded as either changes in inventories or as fixed assets, as a consequence of which the run-down of these assets are accounted for as decreases in inventories or as consumption of fixed capital (depreciation). Non-cultivated assets on the other hand are considered as non-produced assets, of which the non-sustainable use is often referred as degradation, which according to the 2008 SNA is to be recorded as an other change in the volume of assets , similar to depletion of mineral and energy resources. Although the discussion in this guidance note is often restricted to the recording of (depletion of) mineral and energy resources, the recommendations apply to both non-renewable and renewable natural resources. In this respect, one should be aware of the issue that the 2008 SNA actually seems to recommend some kind of split-asset approach^2 , for example in the case of rights or permits to exploit a resources, e.g. fishing quota, which are transferred to the exploiter. Guidance note EA.02 contains a more in-depth discussion of the accounting for biological resources.
- This guidance note is organized as follows. Section 2 discusses existing material, among which the current guidance according to the 2008 SNA and SEEA CF. This is followed, in Section 3, by a discussion of a possible alternative treatment. Section 4 and 5 cover the conceptual and practical aspects of the proposed treatment.
2. Existing material
Recording of (depletion of) natural resources
- The 2008 SNA makes a distinction between produced assets and non-produced assets, whereby produced assets are resulting from a production process, as defined in the SNA: fixed assets;
(^2) Here, it should be noted that the guidance provided in the 2008 SNA is not entirely clear and satisfactory.
to the owner as rent and changes in the size and value of the resource as other changes in the asset accounts of the legal owner is recommended.
- In addition, the following is stated in relation to the recording of depletion:
6.241 Consumption of fixed capital is calculated for all fixed assets owned by producers … Fixed assets must have been produced as outputs from processes of production as defined in the SNA. Consumption of fixed capital does not, therefore, cover the depletion or degradation of natural assets such as land, mineral or other deposits, coal, oil, or natural gas, or contracts, leases and licenses ”.
Instead, as noted before, depletion is recorded as an other change in the volume of assets , more precisely K21 Depletion of natural resources.
- In summary, a natural resource is recorded on the balance sheet of the legal owner (in many countries the government), depletion is recorded as an other change in the volume of assets in the accounts of the owner, and the receipts of the owner from the extractor for the permission to exploit the reserves are recorded as rent. A numerical example of this recording, for both the legal owner, i.e. government, and the extractor is presented in Annex 1 to this guidance note; see example A..
- This recording poses a number of problems. First of all, part of the resource rent may be appropriated by the extractor, and this capital income is disconnected from the natural resource asset from which this income originates, as (the relevant part of) this asset is not shown in the balance sheet of the extractor. The case for recording such an asset in the accounts of the extractor becomes even stronger, if the permission to extract would be transferable. Another problem is that output, value added, and operating surplus, which includes the full value of the resource rent generated, is recorded in the accounts of the extractor, while the underlying asset, i.e. the natural resource that is being exploited, is recorded in the accounts of the legal owner^3. Moreover, although not recorded as such in the central framework of the 2008 SNA^4 , it is evident that the use of the resource, i.e. its capital service, is an input into the production of goods and services, similar to labour inputs and capital services of fixed assets.
- Chapter 5 of the SEEA CF provides much more extensive guidance on the measurement and recording of natural resources, both in physical terms and in monetary terms^5. Instead of explicitly recommending to record the asset in the books of the legal owner, SEEA CF notes the following:
5.126 A general characteristic of mineral and energy resources is that the income earned from the extraction of the resources is shared between economic units. Most commonly, part of the income accrues to the extractor of the resources in the form of operating surplus and part of the income accrues to the government in the form of rent. The government earns this income, on behalf of the society, by allowing access to the resources.
(^3) At the end of guidance note EA.02 on the recording of biological resources, a discussion is included on a possible alternative recording of the income from natural resource leases, as output instead of property income (rent). (^4) Please note that chapter 20 of the 2008 SNA deals with capital services and national accounts. This chapter also addresses the capital services derived from natural resources. (^5) In this guidance note, only the paragraphs relevant for the discussion in this guidance note are included, as it would go too far to include all relevant texts. Readers who would like to learn know more about the recording and measurement of natural resources are referred to SEEA CF.
5.217 Depending on the nature of the arrangements, often both the extractor and the government will have substantial assets in the form of expected future incomes from the extraction of the resources. … the expected incomes (which are equal in total to the resource rent) can be separated into two components: depletion and net return to environmental assets. Changes in the value of the assets for each unit will reflect declines due to depletion, while the return to environmental assets will be reflected in the generation and allocation of income accounts.
- All in all, SEEA CF explicitly recommends to allocate the costs of depletion in line with the appropriation of expected incomes by the legal owner and the extractor. It is not entirely clear, but one could interpret this recommendation as an implicit recognition of a split-asset approach. Based on this recommendation for depletion, they subsequently recommend a treatment along the following lines, as presented in paragraph 5.220 and Table 5.10:
5.220 The following accounting treatment is recommended for the SEEA: a) Record the total cost of depletion in the production and generation of income accounts of the extractor as deductions from value added and operating surplus. This ensures that the analysis of extractive activity and economy-wide aggregates of operating surplus and value added fully account for the cost of depletion. Further, since the government has no operating surplus in regard to the extraction activity, not recording depletion in the production account of the government ensures that estimates of government output (which are calculated based on input costs) are not increased owing to depletion; b) Record the payment of rent from the extractor to the government in the allocation of primary income account. This entry is the standard national accounts entry; c) Record an entry, entitled “Depletion borne by government”, in the allocation of primary income account to reflect (i) that the rent earned by the government includes the government’s share of total depletion which must be deducted to measure the depletion-adjusted saving of government; and (ii) that the depletion adjusted saving of the extractor would be understated if the total amount of depletion were deducted in the extractor’s accounts. Another way of viewing this entry is to consider that the rent earned by government must be recorded net of depletion (i.e., depletion-adjusted rent is derived) in the derivation of depletion adjusted saving for government.
of future income can be estimated and from this, using the techniques already described, a figure for the value of the stock of the resource at any point in time ”.
- SEEA CF again provides much more detailed guidance on the valuation of (the depletion of) natural resources, especially in annex A5.1, regarding the application of the net present value method, and in annex A5.2, on the choice of the discount rate. Moreover, in the recent past, research and discussions on the application of the recommended methodologies have raised concerns, both regarding the interpretation of the 2008 SNA and SEEA CF, and regarding their practical implementation in an internationally comparable way. All of this resulted in a paper with more detailed recommendations requiring changes to both the SNA and the SEEA CF, on which the Advisory Expert Group (AEG) on National Accounts was consulted, in its tenth meeting in April 2016; see AEG (2016a).
- In addition to that, there is a vast literature on valuing natural resources. Here, the references are limited to guidance note EA.04, including Pionnier et al (2018), which nicely summarise the main issues regarding the current guidance in the 2008 SNA and SEEA CF, and provide recommendations for improving the guidance. AEG (2016b) includes a summary of the main conclusions of the deliberations on the delineation of the physical stocks, the granularity of the estimation procedures, and the application of the resource rent in compiling the net present value of the resources, as follows: 49. Agreed that the SEEA classification^7 , which is aligned to the United Nations Framework Classification – 2009, is also suitable for the national accounts. 50. Expressed concerns about the practicalities to estimate the values of mineral and energy resources for classes B and C, and agreed to focus on the valuation of class A. 51. In valuing mineral and energy resources, noted that it is important to pay particular attention to the discount rate, heterogeneity of extraction costs, production constraints imposed by initial investments and commodity price volatility.
- Without having knowledge of the contents of AEG (2016a), the above conclusions are slightly cryptic, especially the last one related to the valuation of natural resources. For the purpose of this guidance note, it is important to realise that the AEG agreed on not letting the volatility of commodity prices directly feed into the valuation of the underlying assets. As stated before, natural resources are typically valued on the basis of the net present value of future resource rents. Often, the resource rents of the current year have been and are applied one-on-one as an indicator for the future pattern of resource rents. This practice leads to highly volatile asset prices; if applied in full, it could even lead to negative prices. The method was however advocated, because actual market prices were being used. Although one can indeed argue that in this case market prices are used for the commodity prices and the resulting resource rents, the result of applying this to the future pattern does not reflect the actual market prices of the underlying assets. The latter are based on the expectations of the pattern of future resource rents, and using the current resource rent for this pattern is to be considered as a quite simple and naïve method. Probably a forecast based on the past trend in commodity price developments, or a longer-term average of resource rents, trying to take into account the impact of future energy transitions, would provide a closer approximation of expectations, and therefore the market price of the asset.
(^7) Class A: Commercially recoverable resources, Class B: Potentially commercially recoverable resources, Class C: Non- commercial and other known deposits.
- Using the latter methodology for valuing natural resources has also an impact on the valuation of depletion costs. As noted before, depletion in physical terms is defined as the decrease in the quantity of the stock of a natural resource over an accounting period that is due to the extraction of the natural resource by economic units occurring at a level greater than that of regeneration. In the case of non-renewable resources, this comes down to the extraction during an accounting period, whereas in the case of renewable resources, it concerns the non-sustainable use of a resource, by having extraction levels which surpass natural growth^8.
- If one disregards new discoveries, enhancements, catastrophic losses, reclassifications, etc., the change in the value of a natural resource asset from one point in time to another point in time can be broken down into depletion and revaluations, as follows^9 :
Depletion = change in physical stocks multiplied with the average “price in situ” (i.e. the average resource rent) during the accounting period
Revaluation = change in the “price in situ” multiplied with the average stock during the accounting period
- The resulting depletion value may lead, in certain periods of low commodity prices, and thus low resource rents, to negative values of operating surplus adjusted for depreciation and depletion. Some may find this an unacceptable result. Here, it is argued that this is not that different from arriving at negative operating surplus for other economic activities in periods of downturn.
- Having said all of this on the valuation of natural resources, including depletion, it is clear that the SNA could substantially gain from more precise recommendations on these issues, either by introducing text from, or referencing to, relevant parts of SEEA CF. Furthermore, the SNA as well as SEEA CF could be further enhanced by adding more text on the measurement of natural resources in physical and monetary units. See guidance note EA.04 for further information.
List of references
AEG (2016a), “Classification and valuation of natural resources”, Paper presented at the 10th Meeting of the Advisory Expert Group on National Accounts (13-15 April 2016, Paris), No. SNA/M1.16/13. Available at: https://unstats.un.org/unsd/nationalaccount/aeg/2016/13_Natural_Resource_Valuation.pdf
AEG (2016b), “Conclusions of the 10th Meeting of the Advisory Expert Group on National Accounts (13-15 April 2016, Paris)”. Available at: https://unstats.un.org/unsd/nationalaccount/aeg/2016/Conclusions.pdf
De Haan and Haynes (2019), “About natural gas and dwellings in Groningen”, Paper presented at the 25th meeting of the London Group on environmental accounting (7-10 October 2019, Melbourne).
(^8) This is a simplification. In practice, the linear relationship between on the one hand extraction and other threats (external shocks) and on the other hand changes in biological resource stocks is slightly more complicated. (^9) With thanks to Bram Edens for his valuable comments on an earlier version of this guidance note. See also annex A5.1 of SEEA CF, for a more detailed explanation, e.g. on average in-situ prices.
- An assessment of such a practice of sharing rewards and risks associated with Dutch gas exploration is presented in Annex 2 to this guidance note. In this example, it is important to stress that the Dutch mining law, similar to practice in many other countries, identifies the government as the legal owner of all natural resources in the ground. As explained in paragraph 10.6 of the SNA 2008, legal and economic ownership are not always the same thing. Paragraph 10.7 of the SNA 2008 continues explaining: “… when government claims legal ownership of an entity on behalf of the community at large, the benefits also accrue to the government on behalf of the community at large. Thus government is regarded as both the legal and economic owner of these entities ”. However, this reasoning is inconsistent with many cases of ownership of natural resources. In this respect, paragraph 13.2 of the SNA 2008 also states that in the case of a natural resource lease the asset continues to appear in the balance sheet of the lessor even though most of the economic risks and rewards of using the asset in production are assumed by the lessee.
- Chapter 17 of the 2008 SNA, more specifically paragraphs 17.313 – 17.315, put much emphasis on the length of natural resource extraction contracts (covering the asset’s full service life or only parts of it). The entanglement between public and private parties in extraction arrangements is given less thought. So, a key question is whether or not a split-asset recording is compatible with the 2008 SNA. While paragraph 5.217 of SEEA CF is somewhat clearer on the possibility of such a recording, paragraph 17.347 of the SNA argues that “ sharing the risks and rewards of an asset between different units at a point in time is unusual ”.
- The existence of sharing assets is however less unusual than a pure national accounting point of view advocates. Paragraph 17.347 of the 2008 SNA introduces, for example, the concept of unincorporated joint ventures (UJV), where members share assets equally and ownership of the assets is shared in proportion to ownership shares of the UJV. One possible way of avoiding the recognition of this type of sharing assets could be to consider such an unincorporated joint venture as a separate institutional unit between the government and private oil companies, record an asset transfer of the natural resource from government to the UJV, and record the combined ownership of the assets including the natural resource on the basis of shares in the UJV. In the Dutch case, applying the UJV accounting option would probably be within scope of the current SNA. A perhaps undesirable consequence would be that natural resource ownership is now fully assigned to the non-financial corporations sector. And in the context of SEEA CF, such a routing still does not support the proper breakdown of natural resource depletion by sector.
- Canada has been confronted with similar accounting challenges; see Statistics Canada (2015). In the Canadian situation, the lease arrangement as proposed by the SNA 2008 does not align very well to economic reality, and would lead to a significant distortion of the government net worth. Although Statistics Canada hesitates to split the ownership of natural resources by sector in physical and monetary terms, they instead suggest the introduction of a supplementary asset category “intangible assets related to natural resources”, which allows for a breakdown of resource ownership between the mining companies and the government in the Canadian accounts for natural resources by institutional sector.
- In this context, it can also be noted that the 2008 SNA implicitly seems to favour a split-asset approach for non-cultivated biological resources. In the case of e.g. fishing quota, which are directly connected to the use of natural resources, rights or permits to exploit a resources are transferred to the exploiter. For a more in-depth discussion of the accounting for biological resources, reference is again made to guidance note EA.02.
- A final argument in favour of a split-asset approach is the problematic nature of recording the natural resources in the balance sheets of the legal owner, while the operating surplus and resulting resource rents ends up in the books of the extractor. As a consequence, accounting for depletion, as costs of capital, in the accounts of the extractor leads to an inconsistency with the accounting for the underlying asset that is being affected by the extraction in the balance sheets of the legal owner. Example B in Annex 1 shows this inconsistency, when one would record depletion in line with the guidance provided by SEEA CF. It shows that allocating depletion costs in line with the share in capturing the resource rent leads to a recording of depletion in the capital account of the extractor, without a concomitant asset being available in the balance sheets.
- A possible way-out of this apparent inconsistency would be the attribution of all depletion costs to the legal owner, via the item “depletion/degradation of natural resources”, which acts as an adjustment to the rent, in the distribution of income account. This way of recording is presented in Example C of Annex 1. This would indeed lead to an alignment of the allocation of the assets in question and the allocation of depletion costs. However, one is still confronted with a misalignment of the actual allocation of the assets and related gross income derived from these assets.
The recording of depletion
- Natural resources have substantial value, generating a future stream of income in the form of resource rents. Furthermore, it goes without saying that in the production of oil, gas and minerals, the relevant non-renewable assets are being depleted. The same holds for non-sustainable use of renewable resources. One could even argue that the relationship between the activity of mining and quarrying and the use of the relevant deposits is more direct and unambiguous than the use of fixed assets in the production of other goods and services. Yet the use of these assets is not treated as an input into the production process, with the effect that net operating surplus does not provide an appropriate reflection of the (implicit) return on invested capital. Currently, only depreciation of produced (fixed) assets is deducted, as a consequence of which net operating surplus also includes the depletion of natural resources^10.
- SEEA 2003, paragraph 10.27, also states that not accounting for depletion implies the notion that natural resources are infinitely abundant, a view which is evidently not true for a great number of natural resources. Furthermore, as noted in UNCEEA (2007): “ The relevant economic characteristic of both fixed and natural assets is that they are typically not used up in a single year but instead deliver services to their owners over a long period of time. This suggests that while natural resources are neither fixed assets nor inventories, they have more in common with the former and their treatment should follow that of fixed assets rather than inventories .”
- The current recommendation for recording natural resources, as included in the 2008 SNA, does not allow for an appropriate accounting for depletion. SEEA CF outlines this in a very clear and comprehensive way, in para. 5.129: “… accounting for these incomes (earned from the extraction of natural resources; addition by the authors) and the associated depletion is problematic in the standard national accounts framework for two main reasons. First, the income flows are recorded in different accounts with the value added and operating surplus of the extractor recorded in the production and generation of income accounts, and the rent earned by the government recorded in the allocation of
(^10) Cf. foot-note 5.
this is actually in line with economic reality, with government foregoing part of the future resource rents. Especially in the case of developing countries, where governments may be triggered by the assurance of receiving a steady flow of future rents, which actually only represents part of the potential gains from natural resources, the recording of a loss (capital transfer) would make evident that government is redistributing wealth from the society at large to private companies exploiting nation’s resource wealth. The negative acquisition of non-produced assets is also fully consistent with the changes in natural resource assets on the balance sheets.
- Furthermore, although net lending/net borrowing of government is not affected, there is a negative impact on net saving and changes in net worth due to saving and net capital transfers , consistent with the amount of depletion (30) that has been allocated to government. This again reflects the economic reality that not all receipts of rents can be considered as income. Part of the rents, in the presented examples 100%, simply represents a compensation for the rundown of assets due to depletion.
5. Recommended approach – practical aspects
- Currently, the accounting for natural resources is not that well developed. Not many countries compile and disseminate estimates for natural resources, and if they do, it shows that international comparability is seriously hampered by differences in (the granularity of) sources and the methodologies applied. In this respect, more detailed guidance has been developed, to improve the current lack of statistics on natural resources. It is clear however that countries would need to step up their efforts, if one would like to arrive at a depletion adjusted NDP/NNI. Here it is proposed that a number of resource rich countries, with a broad worldwide representation, closely co-operate in further establishing an agreed methodology for compiling internationally comparable estimates for stocks and flows of natural resources, both in current prices and in constant prices.
- Concerning the feasibility of fully accounting for depletion, and its impact on NDP/NNI, it should be acknowledged that many countries already now face major issues in compiling estimates for these netted macro-economic indicators, not being able to arrive at high-quality estimates for consumption of fixed capital (depreciation). One could thus argue that, although accounting for depletion further complicates the estimation of NDP/NNI, it does not necessarily lead to additional countries not being able to compile estimates for the relevant macro-economic indicators. On the other hand, as noted before, it is considered of paramount importance for developing countries to appropriately reflect in how far their growth of income is realised with a running down of their natural resource base, thus hampering future income growth potential. As such, one would have to balance the policy relevance and the impact of an improved accounting for depletion-adjusted numbers against the additional compilation issues.
- It is clear that in valuing natural resources one has to deal with a number of uncertainties, especially when it comes to the assessment of the future stream of resource rents. The application of a split-asset approach adds another layer of complexity to these estimates, as the distribution of resource rents between the legal owner and the extractor is not always that straightforward. Certainly at the start of a deal between the legal owner and the extracting company, it may still be rather obscure how the arrangements will work out in practice. In some cases, where a fixed percentage or a fixed amount of rent per quantity of natural resources extracted, a high quality estimate of the appropriation shares seems feasible. However, in the case of more complex arrangements, such as
shown in the annex for The Netherlands, an ex ante assessment at the start of the deal may be more problematic.
- The above makes one wonder how to deal with various changes in the distribution of (future) resource rents. A couple of examples are provided here. In the case of a reassessment of the physical stocks, including the extraction period of the resource, it looks most logical to first allocate the additional natural resources to the legal owner, and then impute a disposal of assets from the owner to the extractor, with a concomitant capital transfer, in line with the example presented in the spreadsheet. A similar recording seems warranted in the case of renegotiations of the arrangements leading to a change in the appropriation shares. It may also be the case that the appropriation share of government is dependent on commodity prices and resulting resource rents, in which case the changes may be recorded as revaluations. However, what to do in the case that circumstances have not changed, and actual practice in later years shows that the initial assessment of the distribution keys was simply inappropriate? If this is related to a misinterpretation of the arrangements, a revision of the time series seems to be the logical choice. However, if it is related to other issues, recording other changes in the volume of assets could be considered.
Example A
Recording of natural resources according to the 2008 SNA: allocation of natural resources
to legal owner, and depletion recorded as an other change in the volume of assets
Accounts for the extractor of natural resources Production and generation of income account Compensation of employees 35 Output 100 Consumption of fixed capital 20
Net operating surplus 45
Distribution of income account Rent on natural resources 30 Net operating surplus 45
Net saving 15
Capital account Acquistion of assets 0 Net saving 15 Consumption of fixed capital -20 Net capital transfers received 0
Net lending/borrowing 35 Changes in NW due to saving and CT 15
Financial account Cash 35 Net lending/net borrowing 35
Other changes in the volume of assets account Depletion/Degradation of natural resources 0 Changes in NW due to other changes in assets 0
Balance sheet Cash 0 35 Net worth 200 215 Fixed assets 200 180 Natural resources 0 0 Total 200 215 Total 200 215
Example A (continued)
Recording of natural resources according to the 2008 SNA: allocation of natural resources
to legal owner, and depletion recorded as an other change in the volume of assets
Accounts for the government Production and generation of income account Compensation of employees 0 Output 0 Consumption of fixed capital 0
Net operating surplus 0
Distribution of income account Net operating surplus 0 Rent on natural resources 30
Net saving 30
Capital account Acquistion of assets 0 Net saving 30 Consumption of fixed capital 0 Net capital transfers received 0
Net lending/borrowing 30 Changes in NW due to saving and CT 30
Financial account Cash 30 Net lending/net borrowing 30
Other changes in the volume of assets account Depletion/Degradation of natural resources -45 Changes in NW due to other changes in assets -
Balance sheet Cash 0 30 Net worth 750 735 Fixed assets 0 0 Natural resources 750 705 Total 750 735 Total 750 735
