11.14 Public Private Partnerships GFS course ch. 13.5.10 11.14 Public Private Partnerships Chapter 11.14: PPPs

GFS course ch. 13.5.10 PPPs - Definition Long-term contracts between government and corporations for provision of public infrastructure Construction/renovation and service Core public services Government main payer Chapter 11.14: PPPs 2

GFS course ch. 13.5.10 PPPs - Background Starting in late 1980s various partnerships between governments and private sector to build and operate assets. Usually have a contract period, at the end of this the asset becomes/reverts to legal ownership of government (or government has option to buy). Private partners set up SPV National Accounts: who’s asset is it? Chapter 11.14: PPPs 3 3 3

PPPs - background Started in late 1980s/1990s (PFI in UK) GFS course ch. 13.5.10 PPPs - background Started in late 1980s/1990s (PFI in UK) The first known “PPP” anywhere was in Ancient Greece. It concerned the drainage of a lake near the city of Eretria, where the contractor, in exchange for his services, was given the privilege to cultivate the produced land for a number of years. Chapter 11.14: PPPs GFS training course 2012 4

Eurostat decision on PPPs, February 2004 GFS course ch. 13.5.10 Eurostat decision on PPPs, February 2004 Early 2000s growing interest in PPPs Some MSs asked Eurostat for opinion No clear guidance in ESA95/SNA93 beyond finance leases Some MS own legislation February 2004 rules Still evolving MGDD chapter on leases, licences & concessions Chapter 11.14: PPPs GFS training course 2012 5 5 5

Key questions & concepts for PPPs GFS course ch. 13.5.10 Key questions & concepts for PPPs PPPs and long-term contracts National Accounts: which sector’s asset is it? NA separates out leases into ‘financial leases’ and ‘operating leases’ Legal ownership vs economic ownership Chapter 11.14: PPPs GFS training course 2012 6

Finance lease PPPs and long-term contracts GFS course ch. 13.5.10 Finance lease PPPs and long-term contracts Traditional: farmer takes bank loan and buys tractor Finance Lease: Legal form: Bank buys tractor and leases it to farmer. Farmer maintains tractor and has option to buy it at end of lease period. Economic reality – no different to traditional, bank is effectively making a loan so farmer can buy a tractor. Imputed recording to give same result. Chapter 11.14: PPPs GFS training course 2012 7 7 7

Finance leasing PPPs and long-term contracts GFS course ch. 13.5.10 Finance leasing PPPs and long-term contracts ESA95: If all risks & rewards transferred, a finance lease [legal owner, economic owner] & leasing period covers all (or most of) economic life GAAP: {substantially all} lease term >= 75% of asset life, p.v. of lease payments > 90% of original cost ESA10: just the risks & rewards Chapter 11.14: PPPs GFS training course 2012 8 8 8

Finance leasing Recording: GFS course ch. 13.5.10 Finance leasing Recording: Acquisition of asset recorded as lessee’s (farmer) imputed P.51g, matched by imputed loan liability in financial account Lessor’s (bank) financial account shows imputed loan asset, matched by reduction in cash. continued Chapter 11.14: PPPs GFS training course 2012 9 9 9

Finance leasing PPPs and long-term contracts GFS course ch. 13.5.10 Finance leasing PPPs and long-term contracts Regular payments from lessee to lessor divided into service charges (e.g. maintenance), loan repayments and interest (if bank, subject to FISIM). In accounting the amount outstanding on the loan is the “present value of the payments to be made”, therefore it is allocated using a discount approach. SNA08, if no breakdown known, repayments = K.1; interest = return on capital; service = remainder. Also, in SNA08, value of loan = value of asset plus value of service charges (usually contingent, so not an asset!). MGDD: loan = capital formation Chapter 11.14: PPPs GFS training course 2012 10 10 10

Operating lease PPPs and long-term contracts GFS course ch. 13.5.10 Operating lease PPPs and long-term contracts National Accounts: who’s asset is it? Operating lease Lessor (owner) allows the lessee to use the asset for a contract period – asset not fully used up, so can be leased out again. Asset is GFCF of lessor, capital consumption is also with lessor. Rental payments from lessee (P.2) to lessor (P.1) Chapter 11.14: PPPs GFS training course 2012 11 11 11

GFS course ch. 13.5.10 PPPs Typical PPP Partner builds, operates & maintains a hospital/school/prison for 20-30 year long lease; government pays them depending on performance of service delivered Chapter 11.14: PPPs GFS training course 2012 12 12 12

MGDD/ESA10 rules Who’s ‘economic asset’ is it? Who bears the risks? GFS course ch. 13.5.10 MGDD/ESA10 rules Who’s ‘economic asset’ is it? Who bears the risks? MGDD rules based on assessment of risks MGDD/ESA10 (20.283) has 3 risks test: Construction, Availability, Demand If C = government => government asset If A&D = government => government asset Otherwise with partner Chapter 11.14: PPPs GFS training course 2012 13 13 13

MGDD rules Classification of asset from start GFS course ch. 13.5.10 MGDD rules Classification of asset from start So imputed loan rises as asset is constructed Construction risks: late delivery, additional costs, not to quality standard etc Availability: if insufficient volume of service available due to poor management Demand: do payments compensate for lower than expected demand Chapter 11.14: PPPs GFS training course 2012 14 14 14

MGDD rules Tests based on who has majority of risks GFS course ch. 13.5.10 MGDD rules Tests based on who has majority of risks Availability risk, if service insufficient, there should be automatic penalties, which have significant impact on profit/loss (also if cuts costs it keeps profits) Chapter 11.14: PPPs GFS training course 2012 15 15 15

GFS course ch. 13.5.10 MGDD rules If automatic transfer at end, anticipated value of asset at end of contract is reflected in the rental charges (difficult to predict market value with certainty over a 30 year lease!) Termination clause, where partner at fault, if price paid = construction/operating costs rather than value of asset, then construction/ availability risk with govt [ESA10 20.284] If government finances (grants, equity, guarantees, loans) the majority of the capital cost, then construction risk with government [ESA10 20.284 says government asset]. May reclassify if circumstances change. Chapter 11.14: PPPs GFS training course 2012 16 16 16

Implementation of the decision GFS course ch. 13.5.10 Implementation of the decision Statistical Authority must make analysis of risks Needs access to contracts, no confidentiality Detailed contractual provisions must be closely considered A large variety of arrangements have been observed Chapter 11.14: PPPs GFS training course 2012 17

Implementation of the decision GFS course ch. 13.5.10 Implementation of the decision The role of Eurostat in checking is asymmetric: if “on”, decision accepted (unless opinion specifically asked) if “off”, checks and may reclassify or issue reservation Eurostat has frequently given an “on” opinion Eurostat insists that “any sub-standard performance by the private partner must have a real impact on its profits” or relevant risk is ‘on’ Chapter 11.14: PPPs GFS training course 2012 18 18 18

What was new in MGDD 2010 Clearer explanation of the criteria GFS course ch. 13.5.10 What was new in MGDD 2010 Clearer explanation of the criteria Adapted to reflect experience built up Some specific issues and implicit guarantees Eurostat specified important rules, notably: - zero availability = zero payment - 50% maximum government involvement (guarantees/grants/financing)   Chapter 11.14: PPPs GFS training course 2012 19

MGDD11 - Termination clauses Special case of early termination triggered by a default of the partner construction: must have penalty element or construction risk with government operating phase: just MV of asset as compensation otherwise on government balance sheet from inception Chapter 11.14: PPPs

MGDD11 - Termination clauses Significant amendments renegotiations → considered as early termination and new contract A specific case of amendment – move to final users paying directly → no longer PPP if final users are mainly paying (more than 50 %) Chapter 11.14: PPPs

Since then SNA08 not in line with MGDD, “flexible” GFS course ch. 13.5.10 Since then SNA08 not in line with MGDD, “flexible” ESA10 20.276-20.290 mainly reflects MGDD10 ESA10 allows choice of building up reversionary interest financial claim (impact on deficit) or capital transfer in kind (no impact) IFRS has harsher view of ‘service concessions’, virtually all ON Chapter 11.14: PPPs GFS training course 2012 22

Questionnaire table 11 Two parts Table 11.1: Financial data and national accounts information on PPPs - Total of all projects 10 most important projects Type Grantor and operator + Sub-sector classification Timing of construction Contractual capital value Investment by year and to date Chapter 11.14: PPPs GFS training course 2012 23

Questionnaire table 11 of EDP notification Table 11.1 Financial data and national accounts information on PPPs Unitary charge payments Treatment in national accounts per risk Guarantees S13 ? yes or no Chapter 11.14: PPPs GFS training course 2012 24

Questionnaire table 11 of EDP notification Table 11.2: Financial data on government payments in PPPs, other than unitary charge payments Cash / lending / in kind payments by government other than unitary charge payments Chapter 11.14: PPPs GFS training course 2012 25