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Launch of the EPEC-Eurostat Guide to the Statistical Treatment of Public-Private Partnerships
EU-Commissioner Marianne Thyssen and Vice-President Jan Vapaavuori of the European Investment Bank (EIB) have presented a new Guide to the Statistical Treatment of Public Private Partnerships in Brussels yesterday.
Why is investment important?
Investment is a key factor fostering economic growth and job creation. However, recent studies pointed out that investment in Europe has not yet recovered to the pre-crisis levels. In the framework of the Investment Plan for Europe (IPE), the European fund for strategic investments (EFSI) was created with the aim to use public funds (EU funds complimented with the MS) to mobilize private investment and by reducing the investment gap in the EU create stimulus for economic growth.
What is the European System of Accounts (ESA 2010)?
The European System of Accounts (ESA 2010) is a European accounting framework that allows a systematic and detailed description of the economy.. The structure of ESA 2010 is consistent with the worldwide guidelines on national accounting set out in the System of National Accounts (2008 SNA). ESA2010 is a legal act (a Regulation) which has been adopted by all Member States. The concepts and definitions of the fiscal indicators (deficit and debt) used in the Excessive Deficit Procedure (EDP) and for the purposes of the Stability and Growth Pact (SGP) are based on the European System of Accounts (ESA 2010).
How is investment recorded in the European System of Accounts (ESA 2010)?
In the European system of national accounts (ESA 2010) investmentis recorded as gross fixed capital formation (GFCF), which constitutes expenditure and has an impact on the deficit or surplus of a Member States' budget.
It should be noted that, in all other accounting systems, investment is also accounted for as expenditure.
What is a public-private partnership (PPP) according to Eurostat?
Public-Private Partnerships (PPPs) are long-term contractual arrangements between a government entity (the grantor) and a partner entity (the operator, usually private) mainly used for infrastructure development. The partner is responsible for building, operating and maintaining the infrastructure asset, designed to render some public services. In exchange for the services received, the government entity pays regular fees to the non-government partner following the construction of the asset.
Why are public-private partnerships (PPP) important in the context of the Excessive Deficit Procedure?
Construction projects under PPP contracts create liabilities or debt for a government, as they have to be financed. However, the financing can be recorded either on or off government balance sheet, that is, either with or without a direct impact on government debt.
In case the asset is recorded on government balance sheet, the entire expenditure is recorded for government during the period of construction. This has a negative impact on government deficit or surplus and the government debt will be increased by the same amount.
In case the asset is recorded off government balance sheet, the impact on government deficit will be limited to the regular service fees paid to the partner, which are spread over the long-term contract and no debt impact will be recorded.
The possibility of off balance sheet recording makes the use of PPP very attractive for undertaking investment, as it allows governments to invest while complying with the debt and deficit thresholds established in the Maastricht Treaty.
Under what conditions could a PPP be recorded off government balance sheet?
For a PPP to be recorded off government balance sheet, several conditions need to be fulfilled. The majority of the risks and rewards have to be borne by the private partner. In the case of PPPs, three main risks are being analysed:
- Construction risk: for example late delivery, respect of specificationsand increased costs;
- Demand risk: for example the level of use of the asset is higher or lower than expected;
- Availability risk: for example, when poor management leads to the availability of the asset for use being restricted.
The analysis is also focusing on specific clauses that might distort the risk and reward distribution in a PPP, such as clauses on government financing, the existence of government guarantees, termination clauses and allocation of the assets at the end of the contract. In addition, it needs to be checked that the partner is, for statistical purposes, classified outside the general government sector. The “Guide to the Statistical Treatment of PPPs", jointly produced by Eurostat and the European PPP Expertise Centre (EPEC), explains this in considerable detail.
Who decides on the classification of an asset built under the PPP contract?
The National Statistical Institute (NSI) of each Member State analyses PPP contracts and decides on their sector classification following the statistical rules of ESA 2010, the provisions of the Eurostat Manual of Government Deficit and Debt (MGDD) implementing ESA 2010 and Eurostat guidance notes. From 29 September 2016, the clarifications of statistical rules contained in the "Guide to the Statistical Treatment of PPPs", jointly produced by Eurostat and the European PPP Expertise Centre (EPEC) are also applicable.
What is Eurostat’s role?
In case of doubt, National Statistictal Institutes may contact Eurostat for an “ex-ante advice”, in cases when an operation in question has not yet taken place and for “ex-post advice” – in cases when there are doubts on the statistical treatment of the already recorded transactions. Eurostat provides an advice in the form of a letter to the Member State. The advice is then published it its entirety or in summarised form on Eurostat’s website.
What is the difference between a PPP and a concession for building infrastructure assets according to Eurostat?
In a PPP contract, the government is the main source of the revenue received by the partner in relation to the project (for instance, shadow tolls paid by government in a motorway project or payments related to availability of a school). In a concession contract, payments from the final users (and not government) are the main source of the revenue received by the partner in relation to the project (for instance, tolls paid by the users for the use of a motorway).
What is the main benefit of the Guide for governments facing fiscal constraints but which still need to carry out public infrastructure investments and consider doing this through PPPs?
Certain governments are withholding public investments carried out as PPPs due to uncertainties as to whether their PPPs will be on or off balance sheet and whether they will add to their Maastricht deficit and debt figures. The Guide should allow public authorities to take an informed view ex-ante (i.e. early in the project preparation process) of the possible impact of their PPP projects on the balance sheet of government. An improved knowledge of statistical treatment issues should help avoiding unnecessary delays in project preparation and cancellations of projects during their procurement phase.
Following the publication of the Guide and the potential positive implications for PPPs, is the European Investment Bank expecting to finance more PPP projects?
The European Investment Bank (EIB) is a significant lender to PPPs in EU Member States, having lent over €11 billion to PPPs over the last five years. It is important to stress that the EIB’s role is not only a financial one. The European PPP Expertise Centre (EPEC) is part of the EIB’s advisory services and works with Members States in promoting best practice, in capacity building within the public sector and in providing advice to the preparation of flagship PPP projects. EPEC services are accessible through the European Investment Advisory Hub (EIAH). The Hub was set up under the Investment Plan for Europe (IPE) and is a single point of access to a wide range of advisory services, directing counterparts to support most suited to their needs.
It is possible that some PPP programmes will be unlocked as a result of a better understanding of the rules and the stability brought about by the Guide. EIB will look at financing any PPP projects that arise from these programmes but whether a PPP project is on or off balance sheet is not part of the technical assessments by the EIB. The Guide should however help better planning and preparation of PPPs, which should help the quality of projects and their speed of delivery. These are important and positive developments that will certainly help the EIB as a lender to PPPs.
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