This article provides an explanation of the ONS decision to change its treatment of the 2000 sale of 3G mobile phone licenses in Public Sector Finances and the National Accounts.
This article explains a complex classification issue, where ONS has changed its treatment of the 2000 sale of 3G mobile phone spectrum licenses in line with international guidance.
In 2000, the UK Government auctioned licenses for the period from 2000 to 2021 to five UK mobile phone companies giving them exclusive access to parts of the radio spectrum and enabling them to offer third generation mobile phone services that would allow high-speed data access to the internet on mobile phones. The auction of the licenses raised a total of some £22.5bn. Other countries took similar action at this period.
The significant sums of money raised through these auctions required consideration of how the transactions should be recorded in the national accounts.
When considering classification issues ONS follows international guidance, principally set out in the European System of Accounts 1995 (ESA95) and other documents. ESA 95 had not anticipated the issue of mobile phone spectrum sales and therefore contained no specific guidance. ONS had to interpret the existing guidance in the manuals by looking for analogous situations.
ONS decided, by analogy, that spectrum was best thought of as similar to Land, and so the payments for the use of the spectrum were analogous to contracts for the exclusive use of a piece of land for a period of time. In national accounts terms such contracts are treated as leases, and the receipts treated as the payment of Rent accrued over the length of the lease, even if paid up front in a lump sum. The consequences of this approach for the national accounts and public sector finances are to record the £22.5bn as annual income of £1.04bn per annum, rather than recording a one off receipt of £22.5bn in 2000.
Over time, international opinion has settled on an alternative approach. International guidance issued in 2010 now requires, in most cases, an approach that treats spectrum licenses as the sale of an intangible non-produced asset.
In light of the clear international consensus that now exists in this area, and despite our original view that treatment as rent is closer to the spirit of ESA 95, ONS has concluded that treating the 2000 spectrum auction as the sale of an asset is an acceptable statistical treatment. ONS will therefore amend its treatment of the 3G spectrum licenses to record a sale of an asset in 2000.
This decision has been authorised by Jil Matheson, the National Statistician.
This decision will be initially implemented in the ONS publication “Government Deficit and Debt under the Maastricht Treaty”, which will be published on 30 September 2011, and subsequently be implemented in the Public Sector Finances, and National Accounts.
The National Accounts provide a framework for describing what is happening in national economies. All institutional units operating within an economy are classified to an institutional sector and all transactions between the sectors of the economy are also categorised as part of the National Accounts framework. Work on classification of sectors and transactions is a key input in the production of National Accounts.
This is particularly relevant in the area of public expenditure, revenues, borrowing and debt. This applies both domestically, and within the European Union. For example, in the European Union statistics based on the European System of Accounts 1995 (ESA95) are used in:
the Maastricht Treaty Excessive Deficit Procedure measures, particularly of government debt and deficit, where they determine the convergence criteria for monetary union for non-members, and performance against the Growth and Stability Pact for eurozone members; and
the measurement of Gross National Income (GNI), one of the main determinants of member states' contributions to the European Union's budget.
It is a legal requirement for European Union countries to compile specified statistical returns on the basis of ESA95. The United Kingdom National Accounts are produced by the Office for National Statistics (ONS) on this basis. Further guidance is contained in Eurostat’s Manual on Government Deficit and Debt, and additional clarification is contained in the System of National Accounts (SNA) 1993.
In the UK, since 1997 the fiscal policy frameworks have also been based on the National Accounts. Fiscal policy objectives are in terms of statistics based on National Accounts aggregates. This means that key fiscal targets are dependent on National Accounts definitions and classifications.
Classification decisions for National Accounts purposes are taken by the National Accounts Classification Committee (NACC) within ONS.
This article explains a complex classification issue, where ONS has changed its treatment of the 2000 sale of 3G mobile phone spectrum licenses in line with international guidance.
In 2000, the UK Government auctioned licenses for the period from 2000 to 2021 to five UK mobile phone companies, giving them exclusive access to parts of the radio spectrum and enabling them to offer third generation mobile phone services that would allow high-speed data access to the internet on mobile phones. When the auction concluded on 27 April 2000 it had raised around £22.5bn.
The UK was amongst the first countries to auction the 3G spectrum. Other countries followed a similar path with some countries also raising large sums of money (though some countries chose to give away their licenses).The significant sums of money raised through these auctions required consideration of how the transactions should be recorded in the national accounts.
As the UK was one of the first countries to go through the auction process, we were among the first to encounter the issue of how to classify the receipts.
When considering classification issues, as discussed in Section 1 of this article, ONS follows international guidance set out in the European System of Accounts 1995 ( ESA95) and Eurostat’s Manual on Government Deficit and Debt (MGDD). Additional clarification is contained in the System of National Accounts (SNA) 1993, with which both ESA 95 and MGDD are broadly compatible.
Neither ESA 95 or SNA 93 anticipated the issue of mobile phone spectrum sales. The terms “mobile phone”, “spectrum” and “radiowaves” appear nowhere in either publication. The first edition of the Manual on Government Deficit and Debt was published in January 2000 and contained no guidance on mobile phones spectrum sales either.
Consequently, there was no clear international guidance in place to guide any classifications in this area. ONS had to interpret the existing guidance in the manuals by looking for analagous situations.
ONS decided, by analogy, that spectrum was best thought of as being similar to a tangible, non-produced asset like land. A key feature of spectrum, like land, is that it does not diminish over time, in contrast to tangible produced assets.
For example, if a company purchases a tangible produced asset, like a building or piece of machinery, over time (and without maintenance) it depreciates, until it is no longer an asset at all. In contrast land does not depreciate – the value of land as an asset is often derived from the geographic location it occupies.
Our view was that when the licenses expire in 2021, the spectrum will remain in exactly the state it was in prior to its use for mobile phone services, and so the payments for the use of the spectrum are analogous to payments for the exclusive use of a piece of land for a period of time.
In national accounts terms, a long term contract for the exclusive use of a piece of land is treated as a lease, and the receipts treated as the payment of Rent. Under the manuals payments of rent are accrued over the length of the lease, even if paid up front in a lump sum.
The consequences of this approach for the national accounts and public sector finances were to record the £22.5bn as annual income of around £1bn per annum, rather than recording a one off receipt of £22.5bn in 2000.
Eurostat is the statistical office of the European Union. Its task is to provide the European Union with statistics at a European level that enable comparisons between countries and regions. Eurostat oversees implementation of ESA 95 in the European Union.
Consequently, as the mobile phone issue emerged, Eurostat engaged statistical experts from across Europe to seek their views on the correct treatment of the sale of mobile phone licenses.
In June 2000 Eurostat formally consulted the Committee on Monetary, Financial and Balance of Payments statistics (CMFB)1 on the treatment of the sale of mobile phone licenses. CMFB published its opinion on 15 June 2000 and this can be read on the CMFB website.
The CMFB opinion showed the level of disagreement across European statistical institutions, with differences in interpretation between the type and number of assets that should be recorded (with some countries arguing for recording the spectrum and the license as separate assets and others arguing that only one asset exists – either the license or the spectrum).
Nine institutions argued for the UK approach, to treat payments as Rent payments accrued over the lifetime of the contract.
Eurostat’s decision was that, in most cases, the transaction must be treated as the sale of a non-financial asset, recorded at the time the license is allocated. Eurostat's decision allowed treatment as rent only when the contract applies to a relatively short period, defined as 5 years or less; or when the full purchasing price is not agreed in advance.
The Eurostat approach results in an immediate impact on government net borrowing / net lending. Under the alternative UK approach which we argued was the most appropriate treatment, the impact is spread over the life of the licence.
Although Eurostat reached this decision in July 2000, the international debate did not conclude at this stage. Instead the debate continued at the Inter Secretariat Working Group on National Accounts2 (ISWGNA), as 3G spectrum sales were not just taking place in Europe, but across the world.
ISWGNA released their draft report on 18 April 2001 and then the final report was released on 21 December 2001. The report reached a number of conclusions:
the spectrum is a tangible, non-produced asset
the licence is an intangible, non-produced asset
licence payments are neither taxes nor purchases of the spectrum itself
land, subsoil assets and the spectrum are similar types of assets and so are leases and licences based on the use of these assets
there is no single, universal and clear-cut criterion to distinguish between rent and asset sale – a range of criteria need considering
most criteria examined point to licence payments as purchase of an asset, not rent
The report then went on to provide a list of criteria to be used to differentiate between cases where a sale of asset had taken place, and where treatment as rent was appropriate. Considerations included the length of the license; whether or not the license was transferable; whether license payments were up-front or spread over the length of the license; costs and benefits assumed by the licensee; treatment in commercial accounts and the possibility of cancellation by the issuer. The following guidance applies:
Long term contracts, transferable licenses, upfront payments, treatment as an asset in commercial accounts and limited cancellation possibility all point towards the correct treatment being the sale of an asset.
Short term contracts, non-transferable licenses, payments spread over the term of the licenses and wide ranging cancellation options point towards treatment as rent.
In 2002 Eurostat published the second edition of the MGDD. This new edition contained a dedicated section on the sale of mobile phone spectrum. It concluded that, in the general case, the licence for using the electromagnetic spectrum (the radio waves) is to be treated as an intangible non-produced asset, and its allocation, subject to payment and over a long-term period, is to be construed as a sale of an asset.
Treatment as rent, under the MGDD guidance, was again permitted only when a contract was short term (five years or less) or when the total price of the contract was not set in advance.
The 2002 edition of MGDD chapter on mobile phone spectrum included a foreword that said that “The present paper reflects the current state of knowledge. In case that a consensus on substantial new insights would result from any further discussions at international level (notably at the level of the Inter-secretariat Working Group on National Accounts), the treatment detailed in the present paper could be revisited.”
ONS chose to continue recording the spectrum sale as rent, given the possibility of further international guidance. However, since 2007 Eurostat has amended data provided by the UK through the Excessive Deficit Procedure reporting process onto its preferred basis.
In the last two years, international manuals have moved on once more. The revised and updated edition of the System of National Accounts (SNA 2008) was published in December 2009. This included, for the first time in one of the main international manuals, a section on treatment of sales of the mobile phone spectrum.
SNA 2008 followed the ISWGNA report, and stated that treatment as rent or as the sale of an asset might be appropriate, and set out conditions that should apply to allow treatment as a rental agreement:
17.319 .........................However, in order to qualify as a rental agreement, at least some of the following sorts of conditions should hold.
a. The contract is of short-term duration, or renegotiable at short-term intervals. Such contracts do not provide the lessee with a benefit when market prices for the leased asset go up in the way that a fixed, long-term contract would. Such benefits are holding gains that typically accrue to owners of assets.
b. The contract is non-transferable. Non-transferability is a strong but not a sufficient criterion for the treatment of licence payments as rent, because, although it precludes the lessee from cashing in on holding gains, it does not preclude the lessee from reaping comparable economic benefits (for example, using the licence in their business).
c. The contract contains detailed stipulations on how the lessee should make use of the asset. Such stipulations are often seen in cases of rent of land, in which the owner wishes to retain a control over the usage of the land. In the case of licences, examples of such stipulations would be that the contract states what regions or types of customers should be served, or that it sets limits on the prices that the lessee may charge.
d. The contract includes conditions that give the lessor the unilateral right to terminate the lease without compensation, for instance for underuse of the underlying asset by the lessee.
e. The contract requires payments over the duration of the contract, rather than a large up-front payment. Although this condition is essentially financial in character and thus cannot be decisive on the type of the lease, it may indicate a degree of control for the lessor to direct the use of the spectrum. The case for a treatment as rent is further supported if the payments are related to the revenue the lessee derives from the licence.
The MGDD has also been updated, and a new 2010 edition was published in October 20103. The update of ESA 95, ESA 10, is still being finalised and is expected to be published later in the year, though the current draft includes little text on the subject (the detail will continue to be covered in MGDD).
The new MGDD edition was subject to a formal CMFB consultation in June 2010. CMFB formally endorsed the text of the MGDD. The CMFB opinion.
The new edition therefore upholds the longstanding Eurostat view, that save in cases where licenses are granted for the short term, or where payments are not fixed in advance, mobile phone spectrum receipts should be treated as the sale of an asset, at the time the license is allocated.
Although ONS took an initial view that treatment as rent is the appropriate treatment in national accounts, over time international opinion and the manuals have become clearer and consensus has developed.
SNA 2008, which will be the underlying international guidance for the revised and updated ESA 10 guidance, sets out a series of conditions for when treatment as rent is appropriate, discussed in the previous chapter. UK spectrum licenses are analysed against these conditions below:
SNA 08 - The contract is of short-term duration, or renegotiable at short-term intervals.
UK Licenses - The UK licenses were granted for 18.5 years, i.e. not short term.
This does not suggest treatment as rent is appropriate.
SNA 08 -The contract is non-transferable.
UK Licenses Although the licenses state they are not transferable, at least one of the companies that bought the licenses initially has itself been purchased (BT3G Ltd / a.k.a O2 which was purchased by Spanish Firm Telefonica in 2005) suggested that the licenses are de facto transferable.
SNA 08 - The contract contains detailed stipulations on how the lessee should make use of the asset.
UK Licenses - The main condition that appears to have been attached to the UK licenses was related to coverage. It stated that:
"The Licensee shall install, maintain and use Radio Equipment (as specified in paragraph 10 of Schedule 1) in such a way as to enable the provision of, by no later than 31 December 2007, and to maintain thereafter, a telecommunications service by means of the Radio Equipment to an area where at least 80% of the population of the UK live."
Given the importance of network effects to a business like a phone company (see http://en.wikipedia.org/wiki/Network_effects) this is arguably in the company’s direct interest.
There is no indication in the license documents that there were any requirements related to prices, or regions and types of customers.
SNA 08 - The contract includes conditions that give the lessor the unilateral right to terminate the lease without compensation, for instance for under use of the underlying asset by the lessee.
UK Licenses - There are conditions in the license that allow the lessor to terminate the lease - notably the condition relating to coverage discussed above, but the ability of government to unilaterally terminate the license appears to be somewhat limited.
SNA 08 - The contract requires payments over the duration of the contract, rather than a large up-front payment.
UK Licenses - UK License terms did not require either up front payment or instalments. ONS understands firms could choose how they wished to pay. However the price to be paid was set by the 2000 auction, and independent of any revenue or profit to be derived from the license.
Against the criteria in SNA 08, two factors unambiguously point away from treating the sale as a rental arrangement - the licenses are certainly long term and the fees were set via the 2000 action, independent of any revenue or profit to be derived from the license.
Against the other three factors, ONS consider that they are, at best, weak arguments for treatment as rent. Firstly, the licenses appear to be de facto transferable via company takeovers. Second, the UK Licenses have only limited conditions attached to them mainly relating to coverage by a certain date (which is in the firm's direct interest anyway), and none at all in relation to pricing. Third, although the licenses can be revoked, the ability of government to unilaterally terminate the license appears to be somewhat limited.
The September 2010 edition of MGDD only allows two exceptions to the treatment as sale of an asset – contracts must be short term, and prices not set in advance. Neither of these exceptions apply here.
It is worth noting also that, from the business persective, spectrum licenses are recognised as assets on the mobile phone companies balance sheets. For example Vodafone plc record "licenses and spectrum" in their balance sheets as intangible assets that they write down over the length of the license period.
Given all this, ONS has concluded that treating the 2000 spectrum auction as the sale of an asset is an appropriate statistical treatment. ONS will therefore amend its treatment to record a sale of an asset in 2000.
This is in line with the now firmly established international guidance in this area.
The impact of this decision on public sector financial statistics will be significant.
In 2000, the year of the sale, public sector finance statistics show that during the financial year 2000/01 the UK government Public Sector Net Borrowing (PSNB – often known as the deficit) was negative, meaning the government was in surplus. By accruing the entire receipt from the sale of the spectrum, the government accounts will change and record a larger surplus in 2000/01.
In contrast, in subsequent years, by treating the payments as rent, the public sector finances record annual income of approximately £1bn per annum. Treating these as a one off payment in 2000 will mean that the deficit in all subsequent years increases by the same amount (as these payments vanish back into the lump sum payment in 2000).
The impact of classification on Public Sector Net Borrowing (excluding the impacts of recent government interventions during the financial crisis) are shown in Figure 1 below:
In terms of Public Sector Net Debt (PSND), there is no impact on long run debt over the lifetime of the licenses, but some changes in the net debt figure during the lifetime of the license, caused by receipts from the sale acting to offset government liabilities in a different way than if the income is accrued over the life of the licenses. This impact is small relative to total PSND.
General Government debt, under the Maastricht criteria, published in the ONS Statistical Bulletin “Government Debt and Deficit Under the Maastricht Treaty”, will be unaffected.
This decision will be initially implemented in the ONS publication “Government Deficit and Debt under the Maastricht Treaty”, which will be published on 30 September 2011.
The change will subsequently be implemented in the Public Sector Finances, and published in the Public Sector Finances Statistical Bulletin as soon as possible, and no later than March 2012.
Implementation in the National Accounts and Blue Book will follow at a later date.
Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: firstname.lastname@example.org