1. 11.14 Public Private Partnerships
GFS course ch
Public Private Partnerships
Chapter 11.14: PPPs

2. GFS course ch
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

3. GFS course ch
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?
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4. PPPs - background Started in late 1980s/1990s (PFI in UK)
GFS course ch
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
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5. Eurostat decision on PPPs, February 2004
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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
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6. Key questions & concepts for PPPs
GFS course ch
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
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7. Finance lease PPPs and long-term contracts
GFS course ch
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
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8. Finance leasing PPPs and long-term contracts
GFS course ch
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
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9. Finance leasing Recording:
GFS course ch
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
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10. Finance leasing PPPs and long-term contracts
GFS course ch
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
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11. Operating lease PPPs and long-term contracts
GFS course ch
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
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12. GFS course ch
PPPs
Typical PPP
Partner builds, operates & maintains a hospital/school/prison for year long lease; government pays them depending on performance of service delivered
Chapter 11.14: PPPs
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13. MGDD/ESA10 rules Who’s ‘economic asset’ is it? Who bears the risks?
GFS course ch
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
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14. MGDD rules Classification of asset from start
GFS course ch
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
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15. MGDD rules Tests based on who has majority of risks
GFS course ch
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
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16. GFS course ch
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 [ESA ]
If government finances (grants, equity, guarantees, loans) the majority of the capital cost, then construction risk with government [ESA says government asset]. May reclassify if circumstances change.
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17. Implementation of the decision
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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
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18. Implementation of the decision
GFS course ch
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
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19. What was new in MGDD 2010 Clearer explanation of the criteria
GFS course ch
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
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20. 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

21. 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

22. Since then SNA08 not in line with MGDD, “flexible”
GFS course ch
Since then
SNA08 not in line with MGDD, “flexible”
ESA 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
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23. 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
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24. 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
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25. 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
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