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Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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Page 1: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

Budget scoring and accounting for PPPsThe Eurostat approach (ESA95)

Marcin WoronowiczEuropean Commission, Eurostat, Unit C.3 – Public finance

Page 2: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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

Page 3: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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

Page 4: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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)

Page 5: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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

Page 6: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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?

Page 7: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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

Page 8: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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?

Page 9: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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?

Page 10: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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”

Page 11: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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?

Page 12: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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?

Page 13: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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

Page 14: Budget scoring and accounting for PPPs The Eurostat approach (ESA95) Marcin Woronowicz European Commission, Eurostat, Unit C.3 – Public finance

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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

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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