Part E - The treatment of public-private partnerships (PPPS)
Public-private partnerships (PPPs) are defined in paragraph A4.58 of the IMF GFSM 2014 as long term contracts between two units whereby one unit acquires or builds an asset (or set of assets), operates it for a period, and then hands the asset over to a second unit. PPP arrangements commonly involve a government unit and a private corporation. However, other combinations of parties in a PPP arrangement are possible, such as a public corporation as both parties in the arrangement, or a private non-profit institution as the second unit. Governments engage in PPPs for a variety of reasons, including the expectation that private management may lead to more efficient production, or that access to a broader range of financial sources can be obtained.
In GFS, PPP arrangements are sometimes referred to by different names depending on the type of contract that is in place. The examples listed in paragraph A4.58 of the IMF GFSM 2014 include private finance initiatives (PFIs); design, built, operate, and transfer schemes (DBOT); build, own, and transfer schemes (BOTs); or build, own, operate, and transfer schemes (BOOTs).
The types of activities that involve PPP arrangements can vary greatly. Paragraph A4.59 of the IMF GFSM 2014 states that generally under a PPP arrangement, private corporations are engaged to construct and operate assets of a kind that are usually the responsibility of the general government or public corporations. These types of assets commonly include infrastructure such as bridges, water supply and sewerage treatment works and pipelines, and facilities such as hospitals, prisons, stadia and electricity generation and distribution facilities.
PPP arrangements are attractive for both the government and for private corporations (or other parties to the arrangement). Paragraph A4.60 of the IMF GFSM 2014 indicates that under a PPP arrangement, the private corporation (or other party) can expect to recover its costs and to earn an adequate rate of return on its investment. The government often makes periodic payments during the contract period, or alternatively the private corporation may sell the services to the public (e.g., a toll road), or a combination of the two. The prices involved are often regulated by the government and set at a level that will allow the private corporation to recover its costs and earn a return on its investment (benchmark price). If the regulated price is set at a level below such a benchmark price, the government will usually need to compensate the private partner, often through subsidies or other transfers. There can be many variations in PPP contracts regarding aspects such as the disposition of the assets at the end of the contract, the required operation and maintenance of the assets during the contract, and the price, quality, and volume of services produced. At the end of the contract period, the government may gain legal and economic ownership of the assets, possibly without payment.
Determining economic ownership of PPP related assets
Determining the economic ownership of an asset and whether to record PPP-related assets and liabilities in the government’s or the private corporation’s balance sheet is not always straightforward. Paragraph A4.61 of the IMF GFSM 2014 states that under a PPP arrangement, the private corporation is responsible for acquiring or constructing the non-financial produced assets, although the acquisition or construction is often supported by the backing of the government. The contract often allows government to specify the design, quality, capacity, use, and maintenance of the asset in accordance with government standards. Typically, the assets have service lives much longer than the contract period so that the government will control the asset, bear the risks, and receive the rewards for a major portion of the assets’ service life. It can be difficult to determine whether the private corporation or the government controls the assets over their service lives or which party bears the majority of the risks and benefits from the majority of the rewards. In GFS, it is prudent to examine PPP arrangements on a case by case basis to determine economic ownership of the related asset.
Because a distinction is made in GFS between legal ownership and economic ownership of assets based on risks and benefits, paragraph A4.62 of the IMF GFSM 2014 indicates that the legal owner and economic owner of the asset being acquired or constructed may be two different parties under a PPP arrangement. Box 13.2 below examines the factors that need to be taken into consideration when determining the economic ownership of PPP-related assets.
Box 13.2 - Determining the economic ownership of PPP-related assets
The economic owner of the assets related to a PPP is determined by assessing which unit bears the majority of the risks and which unit is expected to receive a majority of the rewards of the asset. The factors that need to be considered in assessing economic ownership of PPP-related assets include those associated with acquiring the asset and those associated with using the asset.
Some of the risks associated with acquiring the asset are:
- The degree to which the government controls the design, quality, size, and maintenance of the assets; and
- Construction risk, which includes the possibility of additional costs resulting from late delivery, not meeting specifications, or building codes, and environmental and other risks requiring payments to third parties.
Some of the risks associated with operating the asset are:
- Supply risk - covers the degree to which the government is able to control the services produced, the units to which the services are provided, and the prices of the services produced;
- Demand risk - includes the possibility that the demand for the services, either from government or from the public at large in the case of a paying service, is higher or lower than expected;
- Residual value and obsolescence risk - includes the risk that the value of the asset will differ from any price agreed for the transfer of the asset to government at the end of the contract period; and
- Availability risk - includes the possibility of additional costs or the incurrence of penalties because the volume and/or quality of the services do not meet the standards specified in the contract.
PPP arrangements need to be examined on a case by case basis to determine economic ownership over the associated assets. The relative importance of each factor listed above is likely to vary with each PPP. It is not possible to state prescriptive rules that will be applicable to every situation.
Source: Adapted from Box A4.4, International Monetary Fund Government Finance Statistics Manual, 2014.
If the government is identified as the economic owner of the asset(s) during the contract period but does not make any explicit payment at the beginning of the contract, paragraph A4.64 of the IMF GFSM 2014 states that a transaction must be imputed to cover the acquisition of the asset(s) for GFS purposes. The recording of this depends on the specific contract provisions, how they are interpreted, and possibly other factors. Most frequently, these contracts will be recorded as the acquisition of the asset through an imputed financial lease because of the similarity with actual financial leases.
If the private corporation is considered to be the economic owner of the asset(s) during the contract period, paragraph A4.65 of the IMF GFSM 2014 states that any debt associated with the acquisition of the asset(s) should be attributed to the private corporation. Normally, the government obtains legal and economic ownership of the assets at the end of the contract without any significant payment. However, two approaches are possible to account for the acquisition of the asset(s) by the government:
- Over the contract period, the government gradually builds up a financial claim (e.g., accounts receivable) and the private corporation gradually accrues a corresponding liability (e.g., accounts payable), such that both values are equal to the residual value of the assets at the end of the contract period. At the end of the contract period, government records the acquisition of the asset, with a reduction in the financial claim (accounts receivable) as the counterpart entry. The other unit records the disposal of the asset, with a reduction in the liability (accounts payable) as the counterpart entry. Implementing this approach may be difficult because it requires new transactions to be constructed using assumptions about expected asset values and interest rates.
- An alternative approach is to record the change of legal and economic ownership from the private unit to government as a capital transfer at the end of the contract period. At the end of the contract period, government records revenue in the form of a capital transfer which finances the acquisition of the asset and the private unit records an expense in the form of a capital transfer payable to government, financed by the disposal of the asset. The capital transfer approach does not reflect the underlying economic reality as well as the first alternative, but data limitations, uncertainty about the expected residual value of the assets, and contract provisions allowing various options to be exercised by either party makes recording a capital transfer in GFS acceptable on pragmatic grounds.