ESA95 Eurostat Principles 41274426

8/2/2019 ESA95 Eurostat Principles 41274426

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Budgetscoring and accounting for PPPsThe 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 governmentsector

Application in practice


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EDP context

EU fiscal rules for the Economic and Monetary Union andthe 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 ofaccounts (ESA95)

A legal act: EU Council and European Parliament regulation


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EDP context

European Commission (Eurostat) legally responsible forassessing the quality of government deficit and debtdata

Amendments / reservations to the notified data

Regular EDP dialogue visits to Member States

Interpretation of ESA95 rules for EDP purposes byEurostat

ESA95 Manual on government deficit and debt (MGDD)

Provision of methodological advice on complexgovernment transactions (advice letter published)


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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 PaymentsStatistics (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


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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 formof a transaction (substance over form)

Focus on risks and rewards

Financial vs. operating lease

Securitisation (MGDD chapter: however new chapter hasslightly shifted the role of risks and rewards)

Other cases: e.g. repurchase agreements, recognition of equitystakes in entities

Who bears risks and rewards attached to the asset?


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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 userspurchase, contracts are concessions instead ofPPP

Users pay for the service, e.g. road toll

Not regulated by the PPP decision


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Asset on the private sector balance sheet if majority ofrisks 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?


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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 (includingenvironmental risk) triggering compensation payments to thirdparties.

E.g.:

Who eventually supports overruns / profits from savings onconstruction costs?

Are there penalties for delays / unfulfilled technicalspecifications?

Who pays if the asset has not been delivered?


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Availability risk:

covers cases where, during the operation of the asset, the

responsibility of the partner is called upon, because ofinsufficient management (bad performance), resulting in

a volume of services lower than what was contractuallyagreed, or in services not meeting the quality standardsspecified in the contract


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Availability risk:

E.g.:

Significant financial penalties for non-availability or lowlevel of service? Non-availability = zero fee?

Is the application of penalties automatic or are delaysadmissible ?

Can penalties be recovered by the partner / operator?

What procedure in place for fees adjustment?According to which cost indexes?


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Demand risk:

covers the variability of demand (higher or lower thanexpected when the contract was signed) irrespective of theperformance of the private partner. In other words, a shift

of demand cannot be directly linked to an inadequatequality of the services provided by the partner. Instead, itshould result from other factors, such as the businesscycle, new market trends, a change in final userspreferences, or technological obsolescence. This is part ofa usual economic risk borne by private entities in a

market economy.E.g.:

Amount of fees / shadow tolls in function of demand?


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Further considerations:

Financing / guarantees by government might alterevaluation of construction risk

Transfer of the asset to government after the contract? Forwhat price?

Partner / operator a 100% public owned corporation?Special monitoring needed


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Eurostat requires Member States to follow nationaldevelopments

Dialogue with National Statistical Institutes on statistical

treatment of PPPs in government accounts

Large number of PPPs recorded off-governmentbalance sheet


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International comparison:

IPSASB work on service concession agreements(eventually new accounting standard?)

Focus on notion of the control of the asset during theconcession period and asset reversal

IMF

Emphasis of the legal ownership of the asset

Documents

ESA95 Eurostat Principles 41274426