Part one. Introduction

CHAPTER I. CLASSIFICATIONS OF EXPENDITURE ACCORDING TO PURPOSE IN THE 1993 SYSTEM OF NATIONAL ACCOUNTS

Introduction

1. The 1993 SNA¹ includes four classifications of expenditure according to purpose.² These four classifications are included in the present publication as follows:

COFOG: Classification of the Functions of Government;
COICOP: Classification of Individual Consumption According to Purpose;
COPNI: Classification of the Purposes of Non-Profit Institutions Serving Households; COPP:
Classification of the Outlays of Producers According to Purpose.

2. COFOG, COICOP, COPNI and COPP have three levels of detail which are referred to as follows:

01. Division (or two-digit level);
01.1 Group (or three-digit level);
01.1.1 Class (or four-digit level).

3. t is at the class or four-digit level that the classifications are now defined. The 1993 SNA, however, outlines only the structures of the classifications - at the two-digit level for COPNI and at the three-digit level for COFOG, COICOP and COPP. The structures are based on previous classifications - namely, the Classification of the Functions of Government published in 1980³; the Classification of Household Goods and Services of the 1968 SNA⁴; the Classification of the Purposes of Private Non-Profit Bodies Serving Households of the 1968 SNA; and the Classification of Outlays of Industries by Purpose published in draft in 1975.⁵

4. The task of restructuring and defining the classifications was undertaken by the Organisation for Economic Cooperation and Development (OECD) and the United Nations Statistics Division. OECD, working in close collaboration with the Statistical Office of the European Communities (Eurostat), was responsible for COFOG, COICOP and COPNI. The United Nations Statistics Division was responsible for COPP. The details of COFOG, COICOP, COPNI and COPP are presented in parts two through five of the present publication.

Purpose and function

5. The terms purpose and function are used interchangeably in the 1993 SNA; the term object was used in the 1968 SNA. The three words are all used to convey the same meaning, that is to say, the socio-economic objectives that institutional units aim to achieve through various kinds of outlays.

6. The four classifications are primarily designed to classify transactions undertaken by households, nonprofit institutions serving households (NPISHs), government and producers that result in payables , that is to say, money paid or due for the acquisition of current and capital goods or of labour and other services, for the acquisition of financial assets or for the extinction of financial liabilities. More specifically:

• COFOG and COPNI are used to classify a range of transactions, including outlays on final consumption expenditure, intermediate consumption, gross capital formation and capital and current transfers, by general government and NPISHs respectively;
• COICOP is used to classify only a single kind of outlay, namely, the individual consumption expenditures of households, NPISHs and general government;
• COPP is used to classify intermediate consumption and capital outlays of mainly non-financial and financial corporate enterprises.

7. The full definitions of the institutional sectors for which the classifications are designed are given in chapter IV entitled "Institutional units and sectors" of the 1993 SNA and are not repeated here.

Uses of classifications of expenditure according to purpose

8. Chapter XVIII entitled "Functional classifications" of the 1993 SNA describes the three uses of these classifications.

9. The first use relates specifically to COFOG. Government services can benefit households either individually or collectively. COFOG is used to distinguish between the individual and collective services provided by general government. Expenditures on individual services are treated as social transfers in kind. They are deducted from the total final consumption expenditure of government to obtain actual final consumption of government (or actual collective consumption) and added to the final consumption expenditures of households and NPISHs to obtain actual final consumption of households (or actual individual consumption) (see paras. 35 and 36 below).

10. The second use is to provide a wide range of statistics pertaining to expenditures by government, households, NPISHs and producers that experience has shown to be of general interest and amenable to a wide variety of analytic applications. For example, COFOG shows government expenditure on health, education, social protection and environmental protection as well as on financial and fiscal affairs, external affairs, defence and public order and safety; COICOP shows household expenditure on food, clothing, housing, health and education, all of which are important indicators of national welfare; COPP may provide information on the outsourcing of business services, that is to say, on the increasing tendency for producers to outsource catering, cleaning, transport, auditing and other services that were previously carried out as ancillary activities within the enterprise.

11. The third use of the classifications is to provide users with the means to recast key aggregates of the System for particular kinds of analyses. For example:

• In studies of labour productivity, researchers often need a measure of human capital which is normally derived from information on past expenditures on education. The four classifications of expenditure according to purpose identify expenditures on education incurred by households, NPISHs, government and producers;
• In studying the process of economic growth, researchers sometimes prefer to treat some or all research and development (R&D) expenditures as capital formation rather than as intermediate consumption. COFOG, COPNI and COPP identify R&D separately;
• In studies of household expenditure and saving, some researchers have found it more useful to regard expenditures on consumer durables as capital rather than as current expenses. COICOP provides for the separate identification of expenditures on durable goods;
• In studies of the impact of economic growth on the environment, researchers often need information on expenditures undertaken to repair or prevent damage to the environment. Protection of the environment is identified in COFOG, COPNI and COPP.

Purposes in common

12. Table 1.1 below lists some of the socio-economic objectives that are common to two or more of the four classifications. An x means that the purpose is considered relevant to a given institutional sector and is therefore identified in the classification applying to that sector; a hyphen  means either that the purpose is not relevant to the sector concerned or that it is not identified separately, because in most countries the value of expenditures corresponding to these categories is believed to be quantitatively insignificant.

Table 1.1. Examples of purposes of expenditure common to more than one classification Purpose of

13. The purposes of expenditure identified in these classifications are those that are regarded as important in most countries in the closing years of the twentieth century. Particular countries may put high priority on purposes not listed in table 1.1 and, as time passes, some purposes identified in table 1.1 may be replaced by others that cannot now be foreseen. The need to adapt classifications of expenditure according to purpose to accommodate national requirements and to revise them to meet changing circumstances is common to all international classifications.

Related classifications

14. The four classifications of expenditure according to purpose covered in this publication are related to each other. They are also related to other international classifications which are listed in the chapters that deal specifically with COFOG, COICOP, COPNI and COPP. One international classification common to all these classifications, but not mentioned in those chapters, is the 1997 International Standard Classification of Education(ISCED-97).⁶ However, during the consultation process, many countries requested the retention of ISCED-76⁷ class Education not definable by level and it has therefore been retained in all these classifications.

CHAPTER II. CLASSIFICATION OF THE FUNCTIONS OF GOVERNMENT (COFOG)

Uses of the classification

15. A major use of COFOG is to identify consumption expenditures that benefit individual households and that are transferred to Division 14 of COICOP in order to derive the 1993 SNA aggregate of actual finalconsumption of households (or actual individual consumption) _{(see paras. 35 and 36 below). The divisions,} groups and classes covering these expenditures are clearly indicated in the classification.

16. COFOG also permits trends in government outlays on particular functions or purposes to be examined over time. Conventional government accounts are not usually suitable for this purpose, since they reflect the organizational structure of governments and time-series may be distorted by organizational changes. For example, if a government establishes a new department that brings together some of the functions previously administered by several departments or at several levels of government, it will not usually be possible to use conventional government accounts to compare expenditure on these purposes over time.

17. COFOG is also used for making intercountry comparisons of the extent to which governments are involved in economic and social functions. Just as COFOG helps to neutralize organizational changes in government within a country, so is it also indifferent to organizational differences between countries. In one country, for example, all functions connected with water supply may be undertaken by a single government agency, while elsewhere they may be distributed among departments dealing with environment, housing and industrial development. In a classification of expenditure according to purpose these various units can all be brought together under a single water supply function.

Units of classification

18. The units of classification are, in principle, individual transactions. This means that each purchase, wage payment, transfer, loan disbursement or other outlay should be assigned a COFOG code according to the function that the transaction serves. It is recommended that this principle should be strictly followed with regard to capital and current transfers and the net acquisition of financial assets. Where most other outlays are concerned, however, it will generally not be possible to use transactions as units of classification. Instead, COFOG codes will have to be assigned to agencies, offices, programme units, bureaux and similar units within government departments or ministries. All outlays by a particular unit, (other than transfers and net acquisition of financial assets) will then be given the COFOG code assigned to that unit.

19. When government bodies rather than transactions are used as classification units, it may happen that the smallest bodies that can be identified in the government accounts may perform more than one COFOG function. It may sometimes be possible to apportion outlays of multifunction bodies among COFOG functions by reference to the proportion of work-months devoted to the different functions. More often, it may be possible only to assign all outlays by multifunction units to whichever purpose appears to account for the largest part of total outlays.

Problems in identifying functions of government

20. Most government outlays can be unambiguously assigned to a single function in the classification but occasionally some judgement is called for. Particular difficulties may arise with regard to subsidies and loans of benefit to enterprises or establishments in agriculture, in manufacturing and in other categories of purpose. A main objective behind such government support may be, for example, to assure capacity to build naval vessels considered vital to national defence or to maintain living standards of important groups such as farmers or miners or to provide employment for workers in underutilized hospitals.

21. These political objectives are not to be confused with functions or purposes as the term is used in this publication. Hence, a government subsidy to shipyards is classified under Manufacturing; loans to farmers are classified under Agriculture; subsidies to coal mines are classified under Coal and other solid mineral fuels, and grants to hospitals are classified under Hospital services. Programmes, subsidies, loans or grants that are designed chiefly to increase employment opportunities in general - by removing discrimination based on gender or bias against disabled persons, for example - constitute an exception to this rule. These include programmes to increase employment in economically disadvantaged or underdeveloped regions. As such programmes do not focus on any single industry identified in COFOG, they are classified under General labour affairs.

Environmental protection

22. There will often be practical problems in identifying expenditures on environmental protection because those expenditures may appear as relatively minor items in the expenditures of administrative bodies that have quite different functions. Such problems could occur in connection with, for example, a ministry of agriculture that may have a programme to monitor the impact of chemical pesticides on the environment, a department of transport that may carry out a study of the consequences for the environment of a new road development or an energy ministry that may appoint a committee to study emissions of greenhouse gases. It is likely that in many countries total government outlays on protecting the environment are currently quite low, but as they may well grow in importance over the coming decades, compilers of COFOG statistics should make special efforts to allocate correctly all such expenditures to Environmental protection.

Treatment of ministries and administrative expenditures

23. Ministries are generally responsible for the formulation, administration, coordination and monitoring of overall policies, plans, programmes and budgets; for the preparation and enforcement of legislation; and for the production and dissemination of general information, technical documentation and statistics. Their treatment in COFOG is not uniform. Ministries concerned with finance and external affairs are assigned explicitly to a class. Those dealing with defence, public order and safety, environmental protection, housing and community amenities, health, recreation, culture and religion, education and social protection are assigned to the not elsewhere classified (n.e.c.) class of the relevant division. Ministries dealing with an industry or groups of industries are not assigned to any class. Consequently, the outlays of these ministries have to be shared across the classes for which they are responsible. For example, the outlays of the ministry of transport have to be divided between Road transport, Water transport, Railway transport, Air transport and Pipeline and other transport.

24. Administrative expenditures on general services, such as personnel services, supply and purchasing services, accounting and auditing services, computer and data-processing services, undertaken by ministries or by departments, agencies, offices, programme units, bureaux and similar units within ministries should be classified at the most detailed level possible, that is to say, at the class or four-digit level. If administrative expenditures overlap two or more classes, an attempt should be made in all cases to apportion expenditures between the classes concerned. If this approach is not feasible, the total should be allocated to that class that accounts for the largest part of the total expenditure. Administrative expenditures that cannot be allocated by class are to be included in the n.e.c. class of the division.

Outlays covered in COFOG

25. Table 2.1 lists the outlays that are to be classified according to COFOG. The classification of final consumption expenditure (P3) is a priority since consumption expenditures on individual services are to be transferred to COICOP Division 14 in order to obtain actual final consumption of households (or actual individual consumption). The classification of gross capital formation (P5) is also important.

Table 2.1. Outlays to be classified according to COFOG

26. COFOG could also be used to classify social contributions and taxes that serve a specific purpose such as those aimed at raising revenues for particular types of government expenditure or influencing behaviour in ways considered beneficial to the community, for example, by reducing consumption of tobacco or alcohol or encouraging non-polluting methods of production. The divisions of COFOG may also be useful for classifying government employment. At this stage, however, these additional uses are suggested for national experimentation and are not recommendations for international reporting.

Consumption of fixed capital

27. It is likely that many countries will have particular difficulties in allocating consumption of fixed capital according to function. Consumption of fixed capital for national accounts purposes is almost invariably estimated by the perpetual inventory method (PIM). Although in principle PIM estimates could be generated for detailed functional units, in practice most countries compile aggregated figures for government capital stock and capital consumption. In these circumstances, approximative methods will have to be used to allocate consumption of fixed capital according to function. One possibility may be to distribute consumption of fixed capital according to book value depreciation if this is available for detailed organizational units within government. Another approach would be to distribute consumption of fixed capital among functions in proportion to gross fixed capital formation expenditure made over a number of earlier years.

Social protection

28. Social protection is another difficult area to treat uniquely within the classification. The problem is that some of the social benefits in kind that appear under Social protection in this classification could also fit into other parts of COICOP. For example, food stamps are clearly to be included under Social protection. However, for some analyses, it would be useful to have the data categorized as "Food and non-alcoholic beverages" in order to estimate the total actual consumption of food and non-alcoholic beverages. The simplest means of providing the data required for this type of analysis would be to show major expenditures under Social protection as memorandum items. The classification to be used for such memorandum items would be identical to the divisions of COICOP. For example, the total value of food stamps provided could be shown as "Food and non-alcoholic beverages" within Social protection. It has to be emphasized that this would be shown as a memorandum item within Social protection even when actual individual consumption was classified under COICOP. This would not be a reclassification of food stamps from COFOG Social protection to COICOP Food and non-alcoholic beverages.

Related classifications

29. The International Standard Industrial Classification of All Economic Activities (ISIC)⁹ is a classification of production units according to their kind of activity. COFOG is in practice very similar. In principle, its unit of classification is the individual transaction, but for many types of outlays the unit will often be the same government unit as for ISIC. Moreover, the criteria of classification - function in the case of COFOG and activity for ISIC - are conceptually rather similar. However, COFOG is more appropriate than ISIC for classifying government expenditures because the COFOG list of functions is more detailed than the ISIC list of activities, having been drawn up specifically to take account of the range and diversity of government activities.

30. For certain functions, COFOG has drawn on classifications that have been devised specifically for these purposes. The breakdown of environmental protection is based upon the Classification of Environmental

Protection Activities (CEPA) as elaborated in the European System for the Collection of Economic Informationon the Environment (SERIEE).¹⁰ _{Similarly, the breakdown of social protection is based on the European System} of Integrated Social Protection Statistics (ESSPROS).¹¹ The definitions of basic research, applied research and experimental development are taken from the Frascati Manual 1993.¹²

31. It should be noted that based upon does not mean that there is a one-to-one correspondence between classes in COFOG and the related classifications. Class totals in COFOG are intended to be those that can be disaggregated in accordance with the details of the related classifications.

CHAPTER III. CLASSIFICATION OF INDIVIDUAL CONSUMPTION ACCORDING TO PURPOSE (COICOP)

Uses of the classification

32. COICOP is an integral part of the 1993 SNA, but it is also intended for use in three other statistical areas: household budget surveys, consumer price indices and international comparisons of gross domestic product (GDP) and its component expenditures. For all these uses, the basic COICOP classification will need to be made more detailed by further subdivision of the classes, but there are clear advantages, in terms of comparability between countries and between statistics in these different areas, if the basic structure of COICOP is maintained. It must be recognized, however, that COICOP follows the concepts and definitions of the 1993 SNA and these are not necessarily appropriate for other applications. For example, in household budget surveys it is not practical to ask households for expenditure on insurance service charges as required by COICOP, and in consumer price indices some countries may include interest on housing loans which is excluded from COICOP.

33. The purposes defined in COICOP are based on the classifications of consumer expenditures which national statistical offices have developed for their own use to serve a variety of analytic applications. Although COICOP is not strictly linked to any particular model of consumer behaviour, the classification is designed to broadly reflect differences in income elasticities. For example, low-income households spend relatively high proportions of their budgets on food, clothing and housing, while richer households spend more on transport, education, health and recreation.

34. COICOP classes are divided into services (S), non-durables (ND), semi-durables (SD) and durables (D). This supplementary classification provides for other analytic applications. For example, it is sometimes useful to estimate the stock of capital goods held by households; goods in COICOP classes that are identified as durables provide the basic elements for such estimates.

Individual consumption

35. COICOP is used to identify individual consumption expenditures incurred by three institutional sectors: households, non-profit institutions serving households (NPISHs) and general government. Individual consumption expenditures are those that are made for the benefit of individual persons or households. More specifically:

• All consumption expenditures by households are defined as individual; COICOP Divisions 01 through 12 identify the purposes for which these expenditures are made;
• All consumption expenditures of NPISHs are also treated, by convention, as being for the benefit of individual households; COICOP Division 13 identifies the purposes for which the expenditures of NPISHs are made;
• Only some of the consumption expenditures of general government are defined as individual. Expenditures on general public services, defence, public order and safety, economic affairs, environmental protection and housing and community amenities are considered to be for the benefit of the community as a whole rather than for individual households. They are termed collective consumption expenditures (or actual final consumption of general government or actual collective consumption ) and are excluded from COICOP. COICOP Division 14 identifies those government expenditures that are regarded as individual and classifies them by purpose, namely, health, education, social protection, recreation and culture.¹³

36. In the 1993 SNA, the individual consumption expenditures of both NPISHs and general government are termed social transfers in kind and are added to the individual consumption expenditures of households to obtain an aggregate called actual final consumption of households (or actual individual consumption ). By bringing together the relevant expenditures of households, NPISHs and general government, COICOP identifies the expenditures that make up this aggregate and classifies them according to the purposes that they are designed to achieve.

Links between COICOP, COPNI and COFOG

37. COICOP is essentially divided into three parts:

Divisions 01 to 12 Individual consumption expenditure of households

Division 13 Individual consumption expenditure of NPISHs

Division 14 Individual consumption expenditure of general government

38. The purpose breakdowns within Divisions 13 and 14 of COICOP replicate the purposes in the classifications for NPISHs and general government, that is to say, in COPNI and COFOG respectively. Thus, once the consumption expenditures of NPISHs and general government have been classified according to COPNI and COFOG, the individual consumption expenditures in these two classifications can be transferred directly into Divisions 13 and 14 of COICOP.

Presentation of COICOP statistics

39. COICOP is arranged vertically: first the expenditures of households, next those of NPISHs and finally expenditures by general government. This is done for greater convenience in compilation of the data. In presenting statistics according to COICOP, it may be more informative to display them in a matrix, as indicated in table 3.1 below. The final column shows actual individual consumption by purpose and columns 2 through 4 show the contributions to this aggregate by the three institutional sectors involved: households, NPISHs and general government.

Table 3.1. Suggested presentation of COICOP statistics in matrix format

Units of classification

40. For the household consumption expenditures in Divisions 01 through 12, the units of classification are expenditures for the acquisition of consumption goods and services. The basic data will usually come from one or more of the following sources: household expenditure surveys, statistics on retail sales, and commodity flow estimates which involve allocating the total supply of goods and services to intermediate and final uses. The important point to note is that the units of classification are expenditures on specific goods and services - they are not expenditures on purposes as such. Divisions 01 to 12 of COICOP convert these basic statistics into a purpose classification by grouping together the various goods and services that are deemed to fulfil particular purposes, such as nourishing the body, protecting it against inclement weather, preventing and curing illness, acquiring knowledge, travelling from one place to another, etc.

41. The units of classification for COICOP Divisions 13 and 14 are explained in the chapters dealing with COPNI and COFOG.

Multi-purpose goods and services

42. The majority of goods and services can be unambiguously assigned to a single purpose, but some goods and services could plausibly be assigned to more than one purpose. Examples include motor fuel which may be used to power vehicles classified as transport as well as vehicles classified as recreational, and snowmobiles and bicycles which may be bought for transport or for recreation.

43. The general rule followed has been to assign multi-purpose goods and services to the division that represents the predominant purpose. Hence, motor fuel is shown under Transport. Where the predominant purpose varies between countries, multi-purpose items have been assigned to the division that represents the main purpose in the countries where the item concerned is particularly important. As a result, snowmobiles and bicycles are both assigned to Transport because transport is their usual function in the regions where most of these devices are purchased, that is to say, North America and the Nordic countries in the case of snowmobiles, and Africa, South-East Asia, China and the Low Countries of Northern Europe in the case of bicycles.

44. Examples of other multi-purpose items include: food consumed outside the home which is shown under Restaurants and hotels not Food and non-alcoholic beverages; camper vans which are shown under Recreation and culture not Transport; and basketball shoes and other sports footwear suitable for everyday or leisure wear which are shown under Clothing and footwear not Recreation and culture.

45. National statisticians are encouraged to reclassify multi-purpose items if they consider that an alternative purpose is more appropriate in their country. Such reclassifications should be footnoted.

Mixed purpose goods and services

46. Single outlays may sometimes comprise a bundle of goods and services that serve two or more different purposes. For example, the purchase of an all-inclusive package tour will include payments for transport, accommodation and catering services, while the purchase of educational services may include payments for health care, transport, accommodation, board, educational materials, etc.

47. Outlays covering two or more purposes are dealt with on a case-by-case basis with the aim of obtaining a purpose breakdown that is as precise as possible and consistent with practical considerations of data availability. Hence, purchases for package holidays are shown under Package holidays with no attempt to isolate separate purposes such as transport, accommodation and catering. Payments for educational services, on the other hand, should be allocated as far as possible to Education, Health, Transport, Restaurants and hotels and Recreation and culture.

48. Two other examples of mixed purpose items are: the purchase of in-patient hospital services which include payments for medical treatment, accommodation and catering; and the purchase of transport services which include meals and accommodation in the ticket price. In both cases, there is no attempt to isolate separate purposes. Purchases of in-patient hospital services are shown under Hospital services and purchases of transport services with accommodation and catering are shown under Transport services.

Type of product

49. Most classes comprise either goods or services. Classes containing goods are denoted by ND, SD or D indicating non-durable , semi-durable or durable respectively. S denotes classes consisting of services . The distinction between non-durable goods and durable goods is based on whether the goods can be used only once, or repeatedly or continuously over a period of considerably more than one year (para. 9.38 of the 1993 SNA). Moreover, durables, such as motor cars, refrigerators, washing machines and televisions, have a relatively high purchasers price. Semi-durable goods differ from durable goods in that their expected lifetime of use, though more than one year, is often significantly shorter and their purchasers price is substantially less (para. 6.93 of the 1968 SNA).

50. Some classes contain both goods and services because it is difficult for practical reasons to break them down into goods and services. Such classes are usually assigned an S, as the service component is considered to be predominant. Similarly there are classes that contain either both non-durable and semi-durable goods or both semi-durable and durable goods. Again, such classes are assigned an ND, SD or D according to which type of good is considered to be the most important.

Links with the Central Product Classification

51. The Central Product Classification (CPC)¹⁴ is closely linked with COICOP since expenditures on products are the basic building blocks of COICOP classes. Thus, correspondences can be established between categories of CPC and COICOP.

CHAPTER IV. CLASSIFICATION OF THE PURPOSES OF NON-PROFIT INSTITUTIONS SERVING HOUSEHOLDS (COPNI)

Uses of the classification

52. By convention, all consumption expenditures of non-profit institutions serving households (NPISHs) are treated as individual consumption in the 1993 SNA. The main use of COPNI is to classify expenditures by NPISHs in a manner consistent with the purposes of the individual consumption expenditures of households and general government in order to obtain the 1993 SNA aggregate of actual final consumption of households (or actual individual consumption) (see paras. 35 and 36 above).

53. COPNI can also be used to facilitate international comparisons of the activities of NPISHs. In many countries, activities of these institutions are an important complement to government activities in respect of supplying education, health and social protection services to the population. In some countries, NPISHs are also becoming prominent in non-traditional areas such as environmental protection, the protection of human rights and the defence of minority groups. COPNI identifies these newer purposes as well as more traditional ones such as provision of health and education services.

Units of classification

54. In principle, COPNI classifies individual outlays of NPISHs according to the purpose they serve. In most countries, however, there is little information about the activities of NPISHs and so, for practical reasons, the NPISHs themselves will usually constitute the units of classification. Many, perhaps most, NPISHs have a single purpose and can be unambiguously allocated to one of the purposes listed in the classification. Even if a broadly defined NPISH performs two or more functions - such as a religious organization running hospitals and schools as well as organizing religious ceremonies - it will usually be possible to distinguish separate units for each function. If it is not possible to identify a separate unit for each function, or to have an estimation related to each one, then the NPISH as a whole will have to be assigned to the purpose that predominates in terms of employment or total expenditure.

55. An exception to the above concerns trust funds and charitable organizations that fund research and scientific studies in two or more functions. Outlays for such studies should be allocated separately to the relevant functions and not assigned to the predominant function.

Outlays covered in COPNI

56. Table 4.1 below lists the outlays that can, in principle, be classified according to COPNI. Because of the paucity of statistics on NPISHs in the majority of countries, it is unlikely that all the outlays listed in the table can be classified by COPNI. The main emphasis should be on the classification of final consumption expenditure (P3) since this is to be transferred to COICOP Division 13 in order to obtain actual final consumption of households (or actual individual consumption).

Table 4.1. Outlays to be classified according to COPNI

Related classifications

57. An International Classification of Non-Profit Organisations (ICNPO) has been developed at the Institute for Policy Studies of the Johns Hopkins University.¹⁶ It consists of 12 major groups such as Culture and recreation, Education and research, Health, Social services, Environment, Religion and so forth which are similar to the divisions of COPNI. However, the ICNPO is an activity classification rather than a classification by purpose. Thus in the ICNPO all research, for example, is allocated to a single subgroup rather than to the purposes it serves, as in COPNI. Data classified according to the ICNPO would therefore need some - usually minor - adjustments to convert them to COPNI.

CHAPTER V. CLASSIFICATION OF THE OUTLAYS OF PRODUCERS ACCORDING TO PURPOSE (COPP)

Scope of COPP

58. The scope of COPP, given its name, deals with expenditures of producers and in particular with market producers of the (non-financial and financial) corporate sector (para. 18.14 of the 1993 SNA). For practical reasons, COPP may not be used to classify production-related expenditures of government, non-profit institutions serving households (NPISHs) and households, as the bulk of production of these sectors is allocated to their final consumption expenditures, which are well analysed through the use of COFOG, COPNI and COICOP.

59. Outlays of enterprises by purpose may be divided into current and capital expenditures as indicated in table 5.1 below. Capital expenditures include capitalized current expenditures (treated as gross capital formation in the 1993 SNA), investment in produced fixed assets (also treated as gross capital formation in the 1993 SNA) and investment in non-produced fixed assets. Current operating expenditures include outlays on intermediate goods and services, compensation of employees, other taxes on production less subsidies, consumption of capital and operating surplus. Capitalized current expenditures are outlays of enterprises, for instance, to develop software, to construct roads or to carry out major repairs or improvement of capital goods.

60. Outlays of enterprises by purpose may overlap. In case users want to avoid multiple responses, it is recommended that the expenditure be classified according to the major objective that it serves. For example, expenditure on information management may support any function of the enterprise, be it marketing, research and development, or current production programmes, among others. Where the main objective of these expenditures is information management, it should be separated out from all functions and classified as part of Outlays on information management.

Analytical uses of COPP

61. COPP and also the other classifications of expenditure according to purpose have two distinct roles in analysis. The first one is to serve analysis of expenditures across sectors and the second one encompasses sectorspecific analysis. In the first role, classifications of purpose are used in satellite analyses of various types and applied only to non-capitalized current operating expenditures (as defined in paragraph 59 above), which are the ultimate economic responses to policy concerns. In this role, COPP would be applied to non-capitalized current operating expenditures of producers and COFOG, COICOP and COPNI would be applied to final consumption expenditure of government, households and NPISHs, respectively. Current operating expenditures of producers would include intermediate consumption of imputed output of ancillary activities, which are treated as separate establishments in satellite analyses.

Table 5.1 Outlays to be classified according to COPP

* The term commonly used in business accounting.

62. The second use of the classifications of expenditure according to purpose is in sector-specific analyses. The sector-specific classification of expenditures would show the various means through which a sector provides the economic responses to policy concerns. Thus, in the case of COFOG, the government may pursue policy objectives through final consumption expenditure, capital formation, current and capital transfers, or loans provided to other sectors. The household sector may apply COICOP in sector-specific analyses through final consumption expenditures, property income, and current transfers. Another example concerns education grants or other education support given by producers to employees; under certain conditions the latter expenses may be treated as part of compensation of employees in kind and allocated to final consumption expenditure of households. Such expenditures may be classified in COPP as part of the purpose category to which the workers' activities contribute, which in most instances would be different from the purpose category of Education to which the final consumption expenditure of households would be allocated. From the examples, it may be clear that aggregation across sectors should not be pursued, because it may lead to double counting the expenditures to be recorded by different sectors under different purpose categories.

63. In principle, COPP and other purpose classifications are applied in the sector-specific analyses to the type of expenditures identified for each sector in chapter XVIII entitled "Functional classifications" of the 1993 SNA. That this may be implemented in a flexible manner implies that under certain circumstances sector-specific analyses may also include selected items of revenues and liability items. Thus, in the case of producers, in COPP it may be interesting not only to identify expenditures such as Outlays on research and development, and Outlays on environmental protection, or expenditures on the construction of roads as part of Outlays on infrastructure, but also to classify in these categories the capital transfers and loans that producers may receive to finance these expenditures.

Ancillary activities

64. When using COPP in analyses across sectors, the classification units of COPP are either single intermediate consumption elements such as products purchased for particular purposes, or "vectors" of items that together serve a particular purpose and are included in the imputed output of ancillary activities that is allocated to intermediate consumption.

65. Ancillary activities in satellite analyses are separated out as establishments. The latter separation requires additional statistical data, as ancillary activities are not treated as separate establishments in the 1993 SNA. According to paragraph 5.13 of the 1993 SNA, "an ancillary activity is not undertaken for its own sake but purely in order to provide supporting services for the principal or secondary activities with which it is associated. Therefore, both the System and ISIC treat ancillary activities as integral parts of the principal or secondary activities with which they are associated". Typical ancillary activities that may be carried out are transporting, storing, marketing, various kinds of financial and business services, computing, communications, training, security, maintenance, etc. (Typical examples are given in paragraph 5.9 of the 1993 SNA.) Although the central framework of the SNA does not demand information about ancillary activities, it is necessary to obtain the information for specialized satellite studies in which ancillary activities of enterprises play a role. Typical examples may be studies on research and development, environment, education, health and so forth (chap. XXI entitled "Satellite analysis and accounts" of the 1993 SNA). Another example is the analysis of the impact of "information technology" on productivity when the processing and communication of information are typical ancillary activities (para. 5.16 of the 1993 SNA).

66. In principle, data on ancillary activities may be obtained directly from the accounting system of the enterprise. However, given the nature and size of ancillary activities as compared with the principal or secondary activity they support, in practice it sometimes may be very difficult to collect the data for such activities. Such separation of ancillary activities may be even more complex than the separation in input-output analysis of homogenous production units (establishments) which, as defined in paragraph 15.14 of the 1993 SNA, "is a producer unit in which only a single (non-ancillary) productive activity is carried out". Following this practice, paragraph 5.47 of the 1993 SNA suggests that ancillary activities "may have to be estimated subsequently by transforming the data supplied by enterprises on the basis of various assumptions or hypotheses", similar to those for homogeneous production units.

Specific features of COPP and its relation to other classifications

67. Two sets of criteria may be of importance for COPP. The first is based on an assessment of the type of policy studies (for example, growth studies, environmental impact studies, etc.) for which COPP may be used. In this assessment, account will be taken of the use of COPP in satellite analyses in which ancillary activities are treated as separate establishments. The second criterion responds to the guidance of the Expert Group on International Economic and Social Classifications, which in its report recommended that COPP be harmonized with other classifications, in particular with the three other classifications of expenditure according to purpose and also with activity and product classifications needed to classify ancillary activities and their output (E/CN.3/1995/16, para. 14).

68. The multiple use of objectives of the classification is to facilitate its application in a variety of studies, in which other classifications also play a role. It is recognized, however, that the use of different policy objectives may result in ambiguities in the allocation of expenditures to individual categories of COPP. To avoid this, clear accounting rules are needed to guide the user in interpreting the scope of each category in relation to others. Furthermore, detailed subcategories are required that would allow reclassification of individual purpose categories in line with the objectives of alternative policy studies. While these conditions may not be specific to COPP, they may need to be addressed more urgently, as COPP is a pivotal classification that requires links not only with other classifications of expenditure according to purpose, but also with product and activity classifications.

Purposes that may be addressed by COPP

69. Since the predecessor of COPP, the Draft Classification of Outlays of Industries by Purpose (COIP) (ST/ESA/STAT/83) was developed more than 20 years ago, much has changed with regard to economic development as well as with regard to analytical demands. Originally, the Statistical Commission at its sixteenth session in 1970 focused on the relevance of research and development to economic growth.¹⁷ Two other important issues that were identified in COIP were pollution abatement and control and social welfare.

70. When the categories of COPP were being established, the main objective was to identify expenditures that influenced enterprises' productivity and opportunities for growth. This would render COPP an effective instrument in the analysis of the dynamic economic processes in which enterprises play a role. One has to remember such terms as "product cycles", "business cycles" and "birth and death of enterprises", among others, to be aware of the process of "creative destruction" as described by Schumpeter. Producers have to be innovative, and they have to try to stay ahead of their competitors although they have an imperfect knowledge of the always changing market environment. They have to anticipate changes of the factors that determine their decisions. They have to decide about the right time to introduce new products, to conquer new markets, to apply new production technologies, to reorganize their enterprise and so forth.

71. One category of COPP that is an essential indicator for carrying out such types of tasks is Outlays on research and development. Another category of the type that captures the dynamics going on within enterprises is Outlays on infrastructure. Examples of typical areas of expenditure for this new category are (internal/external) communication, including computer networks and the corresponding software, and even expenditures for organizational changes of an enterprise. Expenditures in the category Outlays on human resource development, for example, on training and health care, aim at the improvement of an important production factor by enhancing its capabilities.

72. Other challenges or even obstacles for producers could stem from the fact that governments try to influence the decisions of enterprises through legal obligations or restrictions with regard to concerns such as pollution control or waste disposal. That the producers are then forced to fulfil legal requirements means that they will have to devote expenditures to the meeting of those requirements. However, even without legal requirements producers may decide to put more emphasis on environmental protection in order to prevent such legal obligations or because they see a marketing advantage in their contribution to a "greener" environment.

73. To say that COPP categories may concentrate on expenditures that will extend and improve the enterprise's productivity and opportunities for growth means that COPP may identify in its main categories expenditures that have, at least to some extent, less the character of intermediate consumption and more that of investment. Although the distinction between intermediate consumption and gross capital formation, as stated in paras. 6.159 and 10.46 of the 1993 SNA, "is not clear-cut", ordinary, regular maintenance and repair do belong mainly to the former and major renovations or enlargements of fixed assets to the latter, because major renovations or enlargements of fixed assets "may enhance their efficiency or capacity or prolong their expected working lives" (para. 6.160 of the 1993 SNA). The investment character may in principle be found also in expenditures on research and development and computer software, for example (paras. 6.163 and 10.92 respectively of the 1993 SNA).

COPP in relation to other purpose classifications

74. When reviewing COPP in the light of the other classifications of expenditure according to purpose, one can say that COPP categories cannot address all corporate sector concerns and need the help of the classifications of expenditure according to purpose of other sectors to address specific issues. Thus COFOG, as the classification of the government's purposes, would help to address analysis of the social concerns of workers, and COFOG would also assist in addressing infrastructural issues faced by enterprises. The same would hold for environmental protection expenses that are borne by the government as well as by households; they may be analysed jointly by COPP, COFOG and COICOP.

75. Therefore, an effort has been made to harmonize COPP with the divisions of COFOG, COICOP and COPNI that reflect policy concerns of the government and concerns related to households that overlap with those of enterprises. This applies, for instance, to Health and Education, which are concerns addressed by all four sectors. However, as the emphasis of enterprises in addressing concerns may be different from that of the government and households, those concerns need not be reflected at the same digit level of all classifications of expenditure according to purpose. Some (for example, Marketing) are reflected at the division level in COPP but not in the others. Defence, and Public order and safety, among others, are reflected at the division level in COFOG but not in COPP or COICOP. Other concerns (for example, Environmental protection) are reflected at the division level in COPP and COFOG but only at the class level in COICOP.

76. Another reason for looking at all classifications of expenditure according to purpose together is that the 1993 SNA introduced a new concept, namely, actual consumption (para. 9.72 of the 1993 SNA). The immediate consequence of the introduction of that concept for the classifications of expenditure according to purpose was that, for all expenditures related to social transfers in kind from the government and NPISHs to households, COFOG, COICOP and COPNI had to be harmonized. Within the conceptual constraints of the 1993 SNA, COPP is not affected by this new concept. However, this may change if one recognizes that not only the government and NPISHs, but also enterprises, contribute to the welfare of households.

77. Enterprises' contributions to the welfare of households are recorded in the 1993 SNA as intermediate consumption or as wages and salaries in kind. "Goods or services that employers are obliged to provide to their employees in order for them to be able to carry out their work are treated as intermediate consumption" (para.7.39 of the 1993 SNA.) Some examples of such goods and services provided to employees are given in paragraph 6.155 of the 1993 SNA. "Remuneration in kind ... consists of goods and services that are not necessary for work and can be used by employees in their own time, and at their own discretion, for the satisfaction of their own needs or wants or those of other members of their households" (para. 7.39 of the 1993 SNA). Once these expenses are treated as remuneration in kind, they end up in final consumption of households and are then classified according to purpose on the basis of COICOP. Paragraph 7.40 of the 1993 SNA lists many goods and services that may be treated as remuneration in kind. In order to capture the contributions of enterprises to the welfare of households not only through wages and salaries in kind but also through some sort of social transfers, including cultural transfers in kind, it is proposed that the categories of COPP be used in satellite analysis, to isolate expenditure categories of enterprises as ancillary activities contributing to the welfare of households. In the terminology used above, those expenditures would have the character of investments in human capital, and might include expenditures of enterprises on education or training of the employees (for example, training courses, vocational training), on health expenses (medical check-ups that go beyond the requirements of work, immunization) and so forth. (More details on the conceptual treatment of human capital can be found in a paper by van Tongeren and Becker.¹⁸) Use of COPP for these purposes requires that the categories of COPP be harmonized with those of COICOP and other purpose classifications, so that the corresponding intermediate and final consumption expenditures can be aggregated across sectors.

COPP in relation to activity and product classifications

78. In developing COPP, it has been taken into account that this classification will be used mainly to classify production cost, capital formation and other production-related data that are identified by establishments. As those data are also classified by the International Standard Industrial Classification of All Economic Activities (ISIC) categories, a close relation between COPP and ISIC, and also with the Central Product Classification (CPC) is essential. This is all the more so, as COPP would be used in particular to identify production-related data of ancillary activities of enterprises that are not treated as establishments in the core national accounts analysis, but need to be identified as separate units in satellite accounts dealing with issues such as education, health, environmental protection and R&D, among others. On the other hand, as has already been stated, COPP is not strictly a classification of production expenditures, and may also be used to classify other data such as loans, capital transfers and interest payments that are related to the funding of production activities and investments used. For these reasons, not all ISIC and CPC main categories need to be reflected in divisions of COPP, and some may be related to classes of COPP.

79. COPP categories can be easily identified with ISIC, Rev. 3, and CPC Version 1.0, categories. In many areas, CPC provides more details than ISIC. For example, research and development is sub-classified in ISIC Division 73 Research and development, according to two areas of research, namely, natural sciences and engineering, and social sciences and humanities. CPC Division 81 Research and development services, distinguishes 12 different categories for research and development. That both classifications subclassify those items by the field of research means that COPP is also subclassified by the field of research instead of by the stage of research (basic research, applied research and so forth) as was the case in COIP.

80. COPP Division 01 Outlays on infrastructure, for example, can be described by ISIC Division 64 Post and telecommunications; Division 72 Computer and related activities; and Group 742 Architectural, engineering and other technical activities. It can be described also by the respective services categories of CPC. For example CPC Version 1.0, Division 83 Other professional, scientific and technical services, groups together various services such as computer consulting services, architectural, engineering and other technical services. This COPP division can also be related to CPC Group 841 Telecommunications services.

81. As a result of the revision, COPP is subdivided into six divisions that correspond to the nine divisions distinguished in its previous version, COIP, as indicated in table 5.2 below.

Table 5.2. Correspondence between COPP and COIP

Note: An asterisk  denotes partial correspondence, meaning that the category Outlays on repair and maintenance is distributed across all six COPP divisions because it is no longer considered a purpose category.

1. ^ Commission of the European Communities, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations and World Bank, System of National Accounts 1993 (United Nations publication, Sales No. E.94.XVII.4).
2. ^ The 1993 SNA used the term functional classifications. The Statistical Commission at its twenty-eighth session recommended that in future functional classifications should be referred to as classifications of expenditure according to purpose.
3. ^ Classification of the Functions of Government, Statistical Papers, No. 70 (United Nations publication, Sales No. E.80.XVII.17).
4. ^ A System of National Accounts, Studies in Methods, No.2, Rev.3 (United Nations publication, Sales No. E.69.XVII.3).
5. ^ Draft Classification of Outlays of Industries by Purpose (COIP) (ST/ESA/STAT/83), 3 November 1975.
6. ^ United Nations Educational, Scientific and Cultural Organization, International Standard Classification of Education 1997 (Paris, UNESCO, 1997).
7. ^ United Nations Educational, Scientific and Cultural Organization, International Standard Classification of Education (Paris, UNESCO, 1976)..
8. ^ Final consumption expenditure (P3) is not necessarily the sum of costs (P2, D1 and K1) less market output (P11). It also includes goods and services purchased by government from market producers for distribution directly to households as social transfers in kind. As there is no further processing of the goods and services, such purchases are treated as final and not intermediate expenditure (para. 9.79 of the 1993 SNA).
9. ^ International Standard Industrial Classification of All Economic Activities, Third Revision, Statistical Papers, No. 4, Rev.3 (United Nations publication, Sales No. E.90.XVII.11).
10. ^ Statistical Office of the European Communities, European System for the Collection of Economic Information on the Environment (Luxembourg, Eurostat, 1994).
11. ^ Statistical Office of the European Communities, European System of Integrated Social Protection Statistics (Luxembourg, Eurostat, 1996).
12. ^ The Proposed Standard Practice for Surveys of Research and Experimental Development, in the series The Measurement of Scientific and Technological Activities (Paris, OECD, 1994).
13. ^ Paragraph 9.87 of the 1993 SNA identifies expenditures on part of the provision of housing, on part of the collection of household refuse and on part of the operation of the transport system as individual. The relevant parts of housing and transport are included under social protection. On the other hand, the collection of household refuse is now treated entirely as a collective service.
14. ^ Central Product Classification (CPC), Version 1.0, Statistical Papers, No. 77, Ver.1.0 (United Nations publication, Sales No. E.98.XVII.5).
15. ^ Final consumption expenditure (P3) is not necessarily the sum of costs (P2, D1 and K1) less market output (P11). It also includes goods and services purchased by NPISHs from market producers for distribution directly to households as social transfers in kind. As there is no further processing of the goods and services, such purchases are treated as final and not intermediate expenditure (para. 9.79 of the 1993 SNA).
16. ^ Lester M. Salamon and Helmut K. Anheier, The International Classification of Non-Profit Organisations: ICNPO - Revision 1, 1996, Working Paper, No. 19 (Baltimore, Maryland, Institute for Policy Studies, Johns Hopkins University, June 1996).
17. ^ Official Records of the Economic and Social Council, Sixteenth Session, Supplement No. 2 (E/4938) para. 10.
18. ^ Jan van Tongeren and Bernd Becker, "Integrated satellite accounting, socio-economic concerns and modelling", paper presented at the 23rd General Conference of the International Association for Research in Income and Wealth, St. Andrews, Canada, 21-27 August 1994.