Budget scoring and accounting for PPPs The Eurostat approach (ESA95)

1. Budgetscoring and accounting for PPPsThe Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

2. Content • Excessive Deficit Procedure (EDP) context • European system of accounts (ESA95) principles – economic reality / risks and rewards • Manual chapter on PPPs accounting for government sector • Application in practice

3. EDP context • EU fiscal rules for the Economic and Monetary Union and the Excessive Deficit Procedure (EDP) • The EU Treaty sets governments’ fiscal targets according to national accounts rules • Deficit: net lending / net borrowing of general government • Debt: main categories of liabilities of general government • Comparability between EU Member States • The EU national accounts framework: European system of accounts (ESA95) • A legal act: EU Council and European Parliament regulation

4. EDP context • European Commission (Eurostat) legally responsible for assessing the quality of government deficit and debt data • Amendments / reservations to the notified data • Regular EDP dialogue visits to Member States • Interpretation of ESA95 rules for EDP purposes by Eurostat • ESA95 Manual on government deficit and debt (MGDD) • Provision of methodological advice on complex government transactions (advice letter published)

5. EDP context • Methodological work on PPPs • Task Force convened in 2003 (with Member States, DG TREN, EIB) • Financial Accounts Working Group • Committee on Monetary, Financial and Balance of Payments Statistics (CMFB) • Statistical institutes and central banks + ECB • Vote in 2004: 26 to 1 • Eurostat decision 11 February 2004 • News Release, including the CMFB opinion • Chapter of MGDD on PPPs, based on the decision

6. ESA95 principles • General government delimitation • Market / non-market • Very different from the concept of public sector (accounting) • Economic reality takes precedence over legal form of a transaction (substance over form) • Focus on risks and rewards • Financial vs. operating lease • Securitisation (MGDD chapter: however new chapter has slightly shifted the role of risks and rewards) • Other cases: e.g. repurchase agreements, recognition of equity stakes in entities • Who bears risks and rewards attached to the asset?

7. MGDD chapter on PPPs • Scope of the MGDD chapter on PPPs • PPP features: • New or significantly refurbished asset • Government paying operator fees for the agreed service • Service often used by other users; e.g. availability fee / shadow tolls • Variety of operators: private, but also public corporations, even SPVs • In the ESA95 meaning, in case of non-government users purchase, contracts are “concessions” instead of “PPP” • Users pay for the service, e.g. road toll • Not regulated by the PPP decision

8. MGDD chapter on PPPs • Asset on the private sector balance sheet if majority of risks and rewards have been transferred to the private partner • Three risks considered for practical reasons: • The construction risk • The availability risk • Demand risk • Private partner must bear the majority of: • The construction risk • Any of other two risks • Some further considerations might be necessary: • To whom final allocation of the asset after the PPP? • Government provides financing or guarantees?

9. MGDD chapter on PPPs • Construction risk: • “covers events related to the initial state of the involved asset(s). In practice it is related to events such as late delivery, non-respect of specified standards, significant additional costs, technical deficiency, and external negative effects (including environmental risk) triggering compensation payments to third parties”. E.g.: • Who eventually supports overruns / profits from savings on construction costs? • Are there penalties for delays / unfulfilled technical specifications? • Who pays if the asset has not been delivered?

10. MGDD chapter on PPPs • Availability risk: • “covers cases where, during the operation of the asset, the responsibility of the partner is called upon, because of insufficient management (“bad performance”), resulting in a volume of services lower than what was contractually agreed, or in services not meeting the quality standards specified in the contract”

11. MGDD chapter on PPPs • Availability risk: E.g.: • Significant financial penalties for non-availability or low level of service? Non-availability = zero fee? • Is the application of penalties automatic or are delays admissible ? • Can penalties be recovered by the partner / operator? • What procedure in place for fees adjustment? According to which cost indexes?

12. MGDD chapter on PPPs • Demand risk: • “covers the variability of demand (higher or lower than expected when the contract was signed) irrespective of the performance of the private partner. In other words, a shift of demand cannot be directly linked to an inadequate quality of the services provided by the partner. Instead, it should result from other factors, such as the business cycle, new market trends, a change in final users’ preferences, or technological obsolescence. This is part of a usual “economic risk” borne by private entities in a market economy”. E.g.: • Amount of fees / shadow tolls in function of demand?

13. MGDD chapter on PPPs • Further considerations: • Financing / guarantees by government might alter evaluation of construction risk • Transfer of the asset to government after the contract? For what price? • Partner / operator a 100% public owned corporation? Special monitoring needed

14. Application in practice • Eurostat requires Member States to follow national developments • Dialogue with National Statistical Institutes on statistical treatment of PPPs in government accounts • Large number of PPPs recorded off-government balance sheet

15. Application in practice • International comparison: • IPSASB work on service concession agreements (eventually new accounting standard?) • Focus on notion of the control of the asset during the concession period and asset reversal • IMF • Emphasis of the legal ownership of the asset