Statistical treatment of Public-Private Partnership contracts

Written on 25 Apr 2016

The 2016 edition of the Eurostat Manual on Government Deficit and Debt includes a new chapter on Public-Private Partnership contracts (PPP), which analyses in detail the regulation contained in the European System of National and Regional Accounts (ESA 2010) and establishes the criteria in order for the PPP to be considered as public expenditure.

The PPP contracts have allowed the government to control the public expenditure, facilitating the execution of infrastructure and public work by the private sector. If, under the ESA 2010 public expenditure in the execution of public work by the private sector must be factored into public accounts during the period of construction work, PPP contracts allow the government to spread the expenditure over the period of the duration of the contract, allowing the government to deal with fiscal constraints.

Despite the advantages offered by PPP contracts, certain contractual provisions may imply that the expenditure counts as public debt for the total value of the work carried out, thus losing the advantage of spreading the expenditure over a much longer period of time. The Eurostat Manual on Government Deficit and Debt regulates in detail both the features that the contract must comply with in order to be considered as a PPP, as well as the contractual provisions to be assessed to avoid accounting contingencies.

To avoid the impact of the infrastructure on public accounts, the ESA 2010 states as a key point that most of the risks and benefits of the construction, operation, and maintenance of the infrastructure should lie with the contractor. The private sector must, therefore, hold the so-called ´economic ownership of the asset`.

In order to consider a contract as PPP (1) a significant part of the investment must be assumed by the contractor, (2) the government must regularly pay the contractor through availability or demand fees and such payments must constitute the substantial part of the contractor´s total remuneration, (3) the useful life of the infrastructure must not be less than the duration of the contract and (4) in those contracts aimed at refurbishing existing infrastructures, the value of the asset after refurbishment must be at least twice the value of the infrastructure prior to refurbishment.

From the perspective of the public partner, it must be classified as within the general government sector, as defined by the ESA 2010, which implies that under normal circumstances public corporations considered as market producers would be excluded. However, the intervention and direct or indirect control of the government in the public unit will have to be analysed on a case-by-case basis to avoid fiscal contingencies. In those cases in which the contractor is an SPV jointly created by the private contractor and the government, the shareholding of the government in the SPV company must be taken into account. Even in the absence of a shareholding of the government over 50%, it will be necessary to assess whether the government holds mechanisms to control, directly or indirectly, the SPV.

As for type of contract, it should cover at least the design, construction, and maintenance, and may also include the operation. The operation can be carried out directly by the government, although it will be necessary to assess whether the revenues it receives from the users of the infrastructure is greater than the remuneration received by the contractor from the government or not, as this would affect the accounting treatment of the expenditure.

While most of the investment must be assumed by the contractor, it will be necessary to assess the existence of any form of direct or indirect funding by the government either through loans, subsidies, grants, or tax exemptions. Special attention should also be paid to the granting of guarantees by the government.

As indicated, the cornerstone lies in the assumption of risks and benefits by the contractor, both during the construction phase through deviations in cost and during operation and maintenance. During the second phase the contractor will receive payments for availability and/or demand fees assuming the risks of demand below projections, and maintaining the availability of the infrastructure to the levels stipulated in the contract. As for the benefits to be received by the contractor beyond that envisaged, they shall not be limited by the government provided that they are not the result of decisions of the government. Such benefits can derive from macroeconomic circumstances, better financial conditions, economies of scale and efficiency, etc.

Any assumption or mitigation by the government of any of the risks and benefits that must be assumed by the contractor may involve a risk from the point of view of public expenditure, excluding as one of the few exceptions those which may arise from force majeure events. The 2016 edition of the Eurostat Manual on Government Deficit and Debt will help both the government and private operators to understand the treatment of PPP contracts in the ESA 2010 and to take the necessary precautions to avoid budgetary contingencies.

Eurostat clarification note – The statistical treatment of PPP contracts 

Eurostat – Manual on Government Deficit and Debt