## 2.1 Boundary between government-controlled nonmarket producers

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### Summary of proposed recommendations
- Adopt a more structured approach for sector classification that combines qualitative and quantitative criteria supported by decision trees.
- Update the production cost base used in the quantitative market test to include depletion and rent of nonproduced assets.
- Estimate the net return to capital using an opportunity‑cost approach, operationalized through the Weighted Average Cost of Capital (WACC) method.
- Provide clearer guidance for public utilities, emphasizing that monopoly/oligopoly conditions, tariff regulation, and public service obligations are not sufficient on their own to imply nonmarket status.
- Introduce a simple decision tree to support the sector classification of market regulatory agencies.
- Apply the standard quantitative market test to market regulatory agencies, implying no change to existing GFSM 2014 criteria.
- Ensure consistency with the 2025 SNA by excluding tax revenues (including compulsory tax revenues now considered taxes, and government compensation for tax collection) from sales in the market test.
- Not introduce additional guidance for the classification of regional regulatory agencies; maintain existing GFSM 2014 guidance for NPIs controlled by public corporations.

### Background and key issues
- GFSM 2014 paragraphs 2.64–2.75 set principles to distinguish market and nonmarket producers but can be challenging to interpret and apply, causing comparability issues across countries.
- 2025 SNA expands production costs in the market test to include depletion and rent, and includes net return to capital for market and nonmarket units; compulsory licenses reclassified as taxes and should be excluded from sales.
- Eurostat’s MGDD 2022 and IMF technical assistance have trended toward prescriptive applications combining quantitative thresholds and qualitative indicators.
- Practical uncertainties in applying the market test include:
  - Use of an implicit "50 percent" sales-to-cost threshold by many countries without precise guidance on time horizon or exact sales and cost definitions.
  - Inclusion of depletion and rent increases measured production costs for natural resource‑intensive public entities, potentially altering market-test outcomes.
  - Estimation of return to capital: GFSM 2014 gives limited guidance; MGDD 2022 uses net interest as a proxy; 2025 SNA defines return as a rate applied to nonfinancial assets used in production. Discussion considers WACC as an alternative.
- Public utilities (water, electricity, energy, postal, telecommunications) commonly face monopoly/oligopoly conditions, high fixed costs, tariff regulation, and public service obligations, but these characteristics do not, by themselves, determine nonmarket status. Classification should rest on whether prices meet the market test.
- Regulatory agencies present sectoral classification challenges where regulatory functions overlap with subsidy distribution. Eurostat’s MGDD 2022 distinguishes direct market intervention from licensing/supervision; ESA 2010 and MGDD 2022 propose activity‑based rules (e.g., an "80‑percent cost rule") as an alternative to the sales-to-cost ratio for agencies.
- 2025 SNA reclassifies compulsory nontransferable license fees as taxes; these must be excluded from sales in the market test. Agencies with authority to impose taxes may be performing inherently governmental functions.
- Some entities operate under economic ownership of economic unions, creating classification and residency questions; under BPM7 the market test outcome may determine classification and residency for such entities.
- NPIs controlled by public corporations may perform quasi‑fiscal or nonmarket activities funded largely by transfers. GFSM 2014 guidance implies that if NPIs are controlled by public units, their sector follows whether they are market or nonmarket producers.

### Findings from consultations and practice
- Most respondents supported clearer principle-based guidance combining quantitative and qualitative criteria with decision trees; strictly rules-based approaches were less favored.
- The "50 percent" threshold was generally considered suitable but not sufficient alone.
- Respondents mainly supported excluding compulsory nontransferable license fees from sales revenue to ensure consistency with 2025 SNA.
- Most respondents reported few classification challenges for long-established entities with available accounting data; difficulties arise for newly created entities, mixed activities, and data gaps.
- No respondents reported awareness of regulatory agencies under the ownership or control of an economic union that both regulate markets and distribute subsidies.

### Proposed recommendations (by issue)
- Issue A: Provide more prescriptive quantitative and qualitative guidance for sector classification based on a decision tree approach (decision tree to be included alongside updated GFSM text).
- Issue B:
  - Update production costs in the quantitative market test to include depletion and rent.
  - Apply an opportunity‑cost approach to estimating net return to capital using the Weighted Average Cost of Capital (WACC) method.
- Issue C: Provide more guidance on classification of public utility companies, clarifying that monopoly/oligopoly, tariff regulation, and public service obligations do not, by themselves, imply nonmarket status.
- Issue D: Introduce a simple decision tree to support sector classification of market regulatory agencies.
- Issue E: Apply the same quantitative market test criteria to market regulatory agencies as used for other public corporations (no change to GFSM 2014 guidance).
- Issue F: Explicitly exclude tax revenues (including payments for compulsory transferable licenses to be recorded as taxes and government compensation for tax collection) from the sales numerator in the market test.
- Issue G: For regulatory agencies controlled by economic unions, assess market/nonmarket status to guide classification as regional/international organizations (nonmarket) or public corporations (market).
- Issue H: Do not introduce additional guidance for NPIs controlled by public corporations; maintain existing GFSM 2014 guidance on control of NPIs.

### Quantitative assessment and measurement rules
- Sales versus production costs:
  - A review of sales and production costs should be conducted for the quantitative assessment.
  - Though no prescriptive numerical relationship is given, "one would expect the value of the sales by public corporations to average at least half of the production costs over a sustained multiyear period."
- Measurement rules:
  - Sales are measured before any taxes applicable to the products are added.
  - Sales exclude all payments receivable from government unless such payments would be granted to any producer undertaking the same activity.
  - Tax revenues (including compensatory license fees and government compensation for tax collection) should be excluded from the value of sales.
  - Production for own use (own-account production) does not generate receipts and is not part of sales for this assessment.
- Production costs composition:
  - Production costs = compensation of employees + use of goods and services + consumption of fixed capital + depletion + rent on nonproduced nonfinancial assets + net return to capital + other taxes on production.
  - These concepts exclude costs associated with own-account capital formation.
  - A return to capital is included in production costs if the unit is to be treated as a market producer.
  - Subsidies receivable on production are not deducted from production costs.

### Net return to capital and recommended methods
- Net return to capital:
  - Equal to the rate of return to capital multiplied by the value of nonfinancial assets used in production.
- Recommended rate estimation:
  - Use a rate of return from an opportunity cost perspective.
  - The weighted average cost of capital (WACC) is generally the preferred method for calculating the net return to capital.
  - If WACC cannot be estimated due to the nature of the unit or data availability:
    - The rate could be approximated by applying a mark-up for normal net operating surplus, or
    - Use a rate based on the interest rate paid for borrowing of funds—preferable for nonmarket producers who do not aspire to make profits.
  - The WACC is calculated as the product of the stock of nonfinancial assets and an average cost of capital; the latter combines the cost of equity and debt - proxied by the nominal net return to capital.

### Time horizon, classification practice, and stability
- Case-by-case distinction:
  - The market vs nonmarket distinction should be made on a case-by-case basis and considered over a range of years.
- Stability requirement:
  - Once classified, a change in pricing should be maintained for several years or be expected to hold for several years before reclassification.
- New units:
  - When a newly established unit needs sector classification, classify as market or nonmarket based on its intent regarding the prices it is to charge for its goods and services.

### Practical application: public utilities and regulatory agencies
- Public utilities:
  - Characteristics such as natural monopoly, price regulation, or limited autonomy are not sufficient on their own to classify a utility as a nonmarket producer.
  - Utilities should be evaluated using the same qualitative and quantitative criteria as other government-controlled units.
  - Qualitative indicators—e.g., barriers to entry beyond natural monopoly, or price controls so restrictive that corporations cannot achieve at least long-term cost recovery—are relevant signals but do not replace the market test.
- Market regulatory agencies:
  - Market regulatory agencies that are institutional units and mainly nonmarket producers should be classified in the general government sector.
  - Agencies that are institutional units and mainly market producers should be classified in the nonfinancial corporations subsector when their sole or principal activity is to buy, hold, and sell goods or services at economically significant prices.
  - For mixed-activity agencies, distinguish regulatory functions from subsidy-distribution activities; classify separable quasi-corporations as nonfinancial corporations and retain nonmarket activities in general government.
  - For regulatory agencies controlled by economic unions, nonmarket agencies should be treated as international/regional organizations, while market producers should be classified as resident public corporations.

### Rationale and expected benefits
- Enhance clarity and consistency in applying sector classification guidance for government‑controlled units.
- Reduce discrepancies in classification practices across countries.
- Improve comparability for fiscal analysis, risk exposure assessment, and sustainability analysis.

*Source: GFSM Update Discussion Note 2.1 — Boundary between government-controlled nonmarket producers engaged in nonfinancial activities (global consultation: GFSM: March 2026).*

### 2.1 Boundary between government-controlled nonmarket producers

### 2.1 Boundary between government-controlled nonmarket producers engaged in nonfinancial activities (government units) and public nonfinancial corporations

### Summary of proposed recommendations
- Adopt a more structured approach for sector classification that combines qualitative and quantitative criteria supported by decision trees.
- Update the production cost base used in the quantitative market test to include depletion and rent of nonproduced assets.
- Estimate the net return to capital using an opportunity‑cost approach, operationalized through the Weighted Average Cost of Capital (WACC) method.
- Provide clearer guidance for public utilities, emphasizing that monopoly/oligopoly conditions, tariff regulation, and public service obligations are not sufficient on their own to imply nonmarket status.
- Introduce a simple decision tree to support the sector classification of market regulatory agencies.
- Apply the standard quantitative market test to market regulatory agencies, implying no change to existing GFSM 2014 criteria.
- Ensure consistency with the 2025 SNA by excluding tax revenues (including compulsory tax revenues now considered taxes, and government compensation for tax collection) from sales in the market test.
- Not introduce additional guidance for the classification of regional regulatory agencies; maintain existing GFSM 2014 guidance for NPIs controlled by public corporations.

### Background and key issues
- GFSM 2014 paragraphs 2.64–2.75 set principles to distinguish market and nonmarket producers but can be challenging to interpret and apply, causing comparability issues across countries.
- 2025 SNA expands production costs in the market test to include depletion and rent, and includes net return to capital for market and nonmarket units; compulsory licenses reclassified as taxes and should be excluded from sales.
- Eurostat’s MGDD 2022 and IMF technical assistance have trended toward prescriptive applications combining quantitative thresholds and qualitative indicators.
- Practical uncertainties in applying the market test include:
  - Use of an implicit "50 percent" sales-to-cost threshold by many countries without precise guidance on time horizon or exact sales and cost definitions.
  - Inclusion of depletion and rent increases measured production costs for natural resource‑intensive public entities, potentially altering market-test outcomes.
  - Estimation of return to capital: GFSM 2014 gives limited guidance; MGDD 2022 uses net interest as a proxy; 2025 SNA defines return as a rate applied to nonfinancial assets used in production. Discussion considers WACC as an alternative.
- Public utilities (water, electricity, energy, postal, telecommunications) commonly face monopoly/oligopoly conditions, high fixed costs, tariff regulation, and public service obligations, but these characteristics do not, by themselves, determine nonmarket status. Classification should rest on whether prices meet the market test.
- Regulatory agencies present sectoral classification challenges where regulatory functions overlap with subsidy distribution. Eurostat’s MGDD 2022 distinguishes direct market intervention from licensing/supervision; ESA 2010 and MGDD 2022 propose activity‑based rules (e.g., an "80‑percent cost rule") as an alternative to the sales-to-cost ratio for agencies.
- 2025 SNA reclassifies compulsory nontransferable license fees as taxes; these must be excluded from sales in the market test. Agencies with authority to impose taxes may be performing inherently governmental functions.
- Some entities operate under economic ownership of economic unions, creating classification and residency questions; under BPM7 the market test outcome may determine classification and residency for such entities.
- NPIs controlled by public corporations may perform quasi‑fiscal or nonmarket activities funded largely by transfers. GFSM 2014 guidance implies that if NPIs are controlled by public units, their sector follows whether they are market or nonmarket producers.

### Findings from consultations and practice
- Most respondents supported clearer principle-based guidance combining quantitative and qualitative criteria with decision trees; strictly rules-based approaches were less favored.
- The "50 percent" threshold was generally considered suitable but not sufficient alone.
- Respondents mainly supported excluding compulsory nontransferable license fees from sales revenue to ensure consistency with 2025 SNA.
- Most respondents reported few classification challenges for long-established entities with available accounting data; difficulties arise for newly created entities, mixed activities, and data gaps.
- No respondents reported awareness of regulatory agencies under the ownership or control of an economic union that both regulate markets and distribute subsidies.

### Proposed recommendations (by issue)
- Issue A: Provide more prescriptive quantitative and qualitative guidance for sector classification based on a decision tree approach (decision tree to be included alongside updated GFSM text).
- Issue B:
  - Update production costs in the quantitative market test to include depletion and rent.
  - Apply an opportunity‑cost approach to estimating net return to capital using the Weighted Average Cost of Capital (WACC) method.
- Issue C: Provide more guidance on classification of public utility companies, clarifying that monopoly/oligopoly, tariff regulation, and public service obligations do not, by themselves, imply nonmarket status.
- Issue D: Introduce a simple decision tree to support sector classification of market regulatory agencies.
- Issue E: Apply the same quantitative market test criteria to market regulatory agencies as used for other public corporations (no change to GFSM 2014 guidance).
- Issue F: Explicitly exclude tax revenues (including payments for compulsory transferable licenses to be recorded as taxes and government compensation for tax collection) from the sales numerator in the market test.
- Issue G: For regulatory agencies controlled by economic unions, assess market/nonmarket status to guide classification as regional/international organizations (nonmarket) or public corporations (market).
- Issue H: Do not introduce additional guidance for NPIs controlled by public corporations; maintain existing GFSM 2014 guidance on control of NPIs.

### Rationale
- The recommendations aim to enhance clarity and consistency in applying sector classification guidance for government‑controlled units, reducing discrepancies in classification practices across countries and improving comparability for fiscal analysis, risk exposure assessment, and sustainability analysis.

### Extracts of proposed GFSM update text and classification principles
- Proposed GFSM text restates delineation: general government comprises all government units and resident nonmarket NPIs controlled by government units; the public corporations subsector consists of all corporations controlled by government units or other public corporations.
- Classification approach: delineation of nonmarket and market producers undertaken case-by-case, drawing on qualitative (paragraphs 2.67—x.x) and quantitative (paragraphs x.x–2.75) assessments; qualitative assessment should be conducted first.
- Definitions reiterated:
  - Paragraph 2.65: "A market producer is an institutional unit that provides all or most of its output to others at prices that are economically significant. A nonmarket producer provides all or most of its output to others for free or at prices that are not economically significant."
  - Paragraph 2.66: Economically significant 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."
    - "Consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged."
  - The text notes: "These conditions usually mean that prices are economically significant if sales cover the majority of the producer’s costs and consumers are free to choose whether to buy, and how much to buy, on the basis of the prices charged."

*Source: GFSM Update Discussion Note 2.1 — Boundary between government-controlled nonmarket producers engaged in nonfinancial activities (global consultation: GFSM: March 2026).*

### 2.67 A price is not economically significant when it has little or no influence on how much the producer is

### proposed-recommendations-gfsm-2014-update-21-boundary-between-government-controlled-nonmark - 2.67 A price is not economically significant when it has little or no influence on how much the producer is

### Definition of "economically significant" price (paragraph 2.67)
- "A price is not economically significant when it has little or no influence on how much the producer is prepared to supply and on the quantities demanded."
- Economically insignificant prices may be charged to:
  - raise some token revenue and/or reduce, but not eliminate, excessive demand that may occur if goods and services are provided free of charge;
  - be set on administrative, social, or political grounds for goods or services for which the amount to be supplied is fixed.

### Presumptions and qualitative indicators (paragraphs 2.68, 2.72, 2.75, related)
- Presumption:
  - Prices are economically significant when the producers are private corporations and their output is primarily sold to other corporations and households.
- Public control considerations:
  - Public control may lead to price modification for public policy purposes, complicating determination of economic significance.
  - Public corporations often provide larger quantities at similar selling prices than private corporations and may respond to market forces differently.
- Suppliers to government:
  - A producer supplying goods and services to government is not a market producer if it is a dedicated provider of ancillary services (see paragraph 2.45).
  - 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
    - the choice of supplier to government is not based on price.
  - This assumption holds irrespective of whether the supplier is the only supplier or whether government is the only customer.
- Market establishments within government:
  - A market establishment is an establishment that charges economically significant prices.
  - Market establishments within government that satisfy criteria to be separate institutional units are quasi-corporations (see paragraph 2.22) and are treated like corporations; remaining market establishments remain part of the general government sector.

### Quantitative assessment and thresholds (paragraphs 2.69, 2.73–2.74)
- Sales versus production costs:
  - A review of sales and production costs should be conducted for the quantitative assessment.
  - Though no prescriptive numerical relationship is given, "one would expect the value of the sales by public corporations to average at least half of the production costs over a sustained multiyear period."
- Measurement rules:
  - Sales are measured before any taxes applicable to the products are added.
  - Sales exclude all payments receivable from government unless such payments would be granted to any producer undertaking the same activity.
  - Tax revenues (including compensatory license fees and government compensation for tax collection) should be excluded from the value of sales.
  - Production for own use (own-account production) does not generate receipts and is not part of sales for this assessment.
- Production costs composition (paragraph 2.74):
  - Production costs = compensation of employees + use of goods and services + consumption of fixed capital + depletion + rent on nonproduced nonfinancial assets + net return to capital + other taxes on production.
  - These concepts exclude costs associated with own-account capital formation.
  - A return to capital is included in production costs if the unit is to be treated as a market producer.
  - Subsidies receivable on production are not deducted from production costs.

### Net return to capital and recommended methods (x.x)
- Net return to capital:
  - Equal to the rate of return to capital multiplied by the value of nonfinancial assets used in production.
- Recommended rate estimation:
  - Use a rate of return from an opportunity cost perspective.
  - The weighted average cost of capital (WACC) is generally the preferred method for calculating the net return to capital.
  - If WACC cannot be estimated due to the nature of the unit or data availability:
    - The rate could be approximated by applying a mark-up for normal net operating surplus, or
    - Use a rate based on the interest rate paid for borrowing of funds—preferable for nonmarket producers who do not aspire to make profits.
  - The WACC is calculated as the product of the stock of nonfinancial assets and an average cost of capital; the latter combines the cost of equity and debt - proxied by the nominal net return to capital.

### Time horizon and classification practice (paragraph 2.70)
- Case-by-case distinction:
  - The market vs nonmarket distinction should be made on a case-by-case basis and considered over a range of years.
- Stability requirement:
  - Once classified, a change in pricing should be maintained for several years or be expected to hold for several years before reclassification.
- New units:
  - When a newly established unit needs sector classification, classify as market or nonmarket based on its intent regarding the prices it is to charge for its goods and services.

### Practical application: public utilities (Practical Application section)
- Characteristics:
  - Public utilities (water, electricity, gas, energy, postal services, telecommunications) may operate under monopoly or oligopoly, face regulation, and have public service obligations.
- Implications for economic significance:
  - These characteristics affect revenue and cost structure but do not alone determine whether prices are economically significant.
  - Natural monopoly, price regulation, or limited autonomy are not sufficient grounds by themselves to classify a utility as a nonmarket producer.
- Evaluation approach:
  - Public utilities should be evaluated using the same qualitative and quantitative criteria as other government-controlled units.
  - Even when prices are regulated, they may still be economically significant.
  - Qualitative indicators—e.g., barriers to entry beyond natural monopoly, or price controls so restrictive that corporations cannot achieve at least long-term cost recovery—are relevant signals of nonmarket classification but do not replace the criteria in paragraphs 2.64—2.75.

### Practical application: market regulatory agencies (paragraphs 2.158–2.159, A5.22)
- Residence and sector treatment:
  - Market regulatory agencies that meet the definition of an international or regional organization are not included in individual member countries' statistics; their activities should be reflected in regional data.
  - Financial regulatory (supervisory) bodies are considered financial corporations, specifically financial auxiliaries when separate institutional units.
- Classification guidance for resident nonfinancial regulatory agencies:
  - Agencies not satisfying institutional unit criteria remain part of the general government unit that controls them (often agencies distributing subsidies on behalf of government).
  - Agencies that are institutional units and mainly nonmarket producers (administrative functions, setting standards, overseeing/regulating production) should be classified in the general government sector.
  - Agencies that are institutional units and mainly market producers should be classified in the nonfinancial corporations subsector when their sole or principal activity is to buy, hold, and sell goods or services at economically significant prices.
- Mixed-activity agencies:
  - Distinguish regulatory functions from subsidy-distribution activities.
  - If a quasi-corporation undertaking market activities can be separately identified, classify it in the nonfinancial corporations subsector; nonmarket activities remain in general government.
  - If two institutional units cannot be distinguished, classify according to the majority of activities; main activity of distributing subsidies indicates nonmarket status.
- For regulatory agencies controlled by economic unions:
  - Establish whether they are market producers; nonmarket regulatory agencies should be treated as international/regional organizations, while market producers should be classified as resident public corporations.

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_Source: https://www.imf.org/-/media/files/data/statistics/gfsm/global-consultations/proposed-recommendations-gfsm-2014-update-21-boundary-between-government-controlled-nonmark.pdf_