New IPSAS Likely to Make It Difficult to Hide PPP Liabilities
Posted by Abdul Khan
Public private partnerships (PPPs) can lead to efficiencies and improved value-for-money by bringing in private sector expertise in construction and operation of assets used to provide vital public services. However, the eagerness of governments to embrace these arrangements has not always been motivated by these noble considerations. Often governments have entered into PPPs as a device to keep expenditure and debt off the budget. Hiding behind a mountain of legal and contractual obfuscations, governments have pretended that they did not have any liability for the full cost of the assets—perhaps a highway or a hospital—being built under these arrangements. This allowed them to simply include the annual contractual cash payments in their budgets and ignore all the future streams of payments required under the contract or contingent on specific triggering events. Budgets and annual accounts faithfully depicted this fiscal fiction year after year.
IPSASB’s newly issued standard—IPSAS 32, Service Concession Arrangements: Grantor—seeks to redress this situation by providing an objective framework for reporting such arrangements. A service concession arrangement is defined as a binding arrangement between a grantor and an operator in which:
- the private sector contractor (the operator, in IPSASB language) uses an asset such as a highway (the service concession asset) to provide a public service for a specified period of time on behalf of the grantor (or the government); and
- the operator is compensated for its services over the period of the service concession arrangement.
Under such a service concession arrangement the standard requires that the government recognize an asset and a liability in its financial statements when the following conditions are met:
- the grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and
- the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the asset at the end of the term of the arrangement.
These conditions are a mirror image of those set out in an equivalent pronouncement—Interpretation 12 (IFRIC 12), Service Concession Arrangements, published by the International Accounting Standards Board (IASB)—applicable to the private sector operator. This will ensure that the accounting treatment in the private and public sector are symmetrical, and avoid the situation where the asset is not recognized by either party or recognized by both parties.
It is interesting to compare the IPSAS conditions—based on a control approach— to the equivalent Eurostat rules for PPPs. Eurostat requires that the PPP asset should be reported as belonging to the operator if the operator bears the construction risk; and at least one of either availability or demand risk, and there are no other mechanisms in place (such as a guarantee or grantor financing) to return these risks to the government. Practical experience so far suggests that the new IPSAS conditions would lead to more assets and liabilities being treated as belonging to governments than would be the case under the Eurostat rules. In other words, under the IPSAS deficits and debts could be immediately affected by PPP transactions to the full extent of the value of the PPP asset.
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