INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS (IPSAS) SEMINAR IPSAS 32: Service Concession Arrangements: Grantor CPA Andrew Rori Uphold. Public. Interest
Objectives Understand the scope of service concession arrangements Recognize and measure service concession assets Recognize and measure service concession liabilities Key disclosure requirements Practical applications in Kenya PPP Act 2013.
Key Definitions Grantor: the entity that grants the right to use the service concession asset to the operator. Operator: the entity that uses the service concession asset to provide public services subject to the grantor s control of the asset. Service concession arrangement: a binding arrangement between a grantor and an operator in which: i. The operator uses the service concession asset to provide a public service on behalf of the grantor for a specified period of time; and ii. The operator is compensated for its services over the period of the service concession arrangement.
Key Definitions Service concession asset: an asset used to provide public services in a service concession arrangement that: (1) Is provided by the operator which: (i) the operator constructs, develops, or acquires from a third party; or (ii) is an existing asset of the operator (2) Is provided by the grantor which: (i) is an existing asset of the grantor; or (ii) is an upgrade to an existing asset of the grantor.
Service Concession Arrangement A service concession arrangement (SCA) is an arrangement whereby a private sector entity provides assets and related services that give the public access to major economic and social facilities. Examples include roads, schools etc. Two parties: Concession operator (private sector entity) and grantor (public sector entity) Operator uses the service concession asset to provide a public service on behalf of the grantor for a specified period of time Operator is compensated for its services over the period of the service concession arrangement
Public Private Partnerships Public Private Partnerships (PPPs) can be defined as co-operative institutional arrangements between public and private actors Most common form is the PFI (Private Finance Initiative) Global interest and involvement in PPPs continues to grow: Worldwide investment in roads, rail, water & buildings Investment in energy and telecom
PPP In context Service concession arrangement: an important accounting issue for governments Accrual accounting: Should the fixed asset and the liability be on the government s statement of financial position? Off-balance sheet accounting is dangerous: Government liabilities are understated Payment burdens are shifted onto future generations - without transparency Cash accounting: Governments looking for savings want to Buy now-pay later
PPP In context
According to PPP Act 2013 Concession" means a contractual license formalized by a project agreement, which may be linked to a separate interest or right over real property, entitling a person who is granted the license(operator) to make use of the specified infrastructure or undertake a project and to charge user fees, receive availability payments or both such fees and payments during the term of the concession;(ppp Act,2013).
PPP Act guiding principle Value for money" means that the undertaking of a public function of the contracting authority by a private party under a public private partnership results in a net benefit accruing to that contracting authority defined in terms of cost, price, quality, quantity, timeliness or risk transfer.
Forms of PPP BOT Build, Operate and Transfer BOO Build, Operate and Own BOOT Build, Operate, Own and Transfer DBFO Design, Build, Finance and Operate DBOM Design, Build, Operate and Maintain (usually referred to as DBO) DBOMF - Design, Build, Operate, Maintain and Finance BOLT Build, Operate, Lease and Transfer
Scope of IPSAS 32 Service Concession Arrangements Grantor Arrangements within scope: operator (company) providing public services related to the service concession asset on behalf of the grantor (government). Arrangements outside scope: no delivery of public services asset is not controlled by the grantor, e.g. outsourcing, service contracts, privatization
Control Tests Grantor recognises the SCA asset (at fair value with corresponding liability for the same amount) provided by the operator when the following two tests are met: Grantor controls or regulates what services the operator must provide with the infrastructure/service concession asset, to whom it must provide them, and at what price; Grantor controls through ownership, beneficial entitlement or otherwise any significant residual interest in the infrastructure/service concession asset at the end of the term of the arrangement
Recognition of the asset Grantor recognizes a service concession asset if: a) 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 b) 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. For a whole-of-life asset, only the conditions in paragraph (a) need to be met.
Measurement of the asset The grantor recognizes assets provided by the operator at fair value if the recognition criteria are met. Existing assets of the grantor, meeting the conditions are reclassified as service concession assets and accounted for according to IPSAS 17 Property, Plant and Equipment or IPSAS 31 Intangible Assets
Types of service concession arrangements In case the grantor recognizes a service concession asset, the grantor also recognizes a liability. The liability initially recognized, is measured on the same basis as the service concession asset adjusted for consideration paid by the grantor to operator The nature of the liability recognized depends upon the way the grantor compensates the operator for its services The grantor may in exchange for the service concession asset - Make payments to the operator ( financial liability model ) - Compensate the operator in another way ( grant of a right to operator model ) such as: Right to earn revenue from third parties users of the asset Right to use another revenue generating asset
Liability: two models Financial Liability Model Operator Model
Financial Liability model A financial liability has to be recognized if the grantor has an unconditional obligation to compensate the operator for the construction, development, acquisition, or upgrade of a service concession asset via a predetermined series of payments. The IPSAS standards relating to financial instruments (IPSAS 28, 29 and 30) are applicable to this financial liability. The grantor should allocate and account for the payments to the operator according to their substance as a reduction in the liability, a finance charge, and charges for services provided by the operator.
Operator model Under this model the grantor does not have the unconditional obligation to pay cash to the operator. The grantor compensates the operator for the construction, development, acquisition, or upgrade of a service concession asset and related services by granting the operator the right to earn revenue from third-party users of the service concession asset or another revenue-generating asset. The grantor accounts for this liability as the unearned portion of the revenue arising from the exchange of assets between the grantor and the operator The grantor earns benefits associated with the service concession asset recognized in exchange for granting the right to the operator over the period of the arrangement. This exchange is regarded as a revenue generating exchange This revenue should be recognized and the liability reduced by the grantor according to the economic substance of the service concession arrangement
Revenue recognition: Financial Liability Model Payments to the operator are accounted for as: a reduction in the liability a finance charge expense charges for services provided by operator expense Split asset and service components of service concession arrangement by fair value (estimation techniques).
Revenue recognition: Operator Model Right granted to the operator is effective for the period of the service concession arrangement Grantor does not recognize revenue immediately Grantor earns the revenue over the period of the arrangement. A liability is recognized for any portion of the revenue that is not yet earned. Revenue is recognized according to the substance of the service concession arrangement, and liability is reduced as revenue is recognized.
Arrangements outside scope of IPSAS 32: IPSAS 13 Leases may apply Government as a lessee, if: the public sector grantor controls or regulates the services the operator provides, but the residual interest in the fixed asset goes to the private sector operator Government as a lessor, if: the public sector grantor does not control or regulate the services the operator provides, but the residual interest in the fixed asset goes to the grantor
Disclosures 1) description of the arrangement; 2) significant terms of the arrangement that may affect the amount, timing, and certainty of future cash flows (e.g., the period of the concession, repricing dates, and the basis upon which re-pricing or re-negotiation is determined);
Disclosures- contd 3) nature and extent (e.g., quantity, time period, or amount, as appropriate) of: a. Rights to use specified assets; b. Rights to expect the operator to provide specified services in relation to the service concession arrangement; c. Service concession assets recognized as assets during the reporting period, including existing assets of the grantor reclassified as service concession assets; d. Rights to receive specified assets at the end of the service concession arrangement; e. Renewal and termination options; f. Other rights and obligations (e.g., major overhaul of service concession assets); and g. g. Obligations to provide the operator with access to service concession assets or other revenue-generating assets; and 4) changes in the arrangement
Examples (1) Infra speed: operator of high-speed railway superstructure 500km from Mombasa to Nairobi (250 km/hour) DBFM (design, build, finance and maintain) 2015-2031 Availability fee (>99.46%): government pays 30 Billion Shillings annually to operator User fees: government expects to receive 48 Billion shillings annually from train company After 2031: railway reverts to government
Examples (1) Railway superstructure Is this a service concession asset?
Yes: Examples (1) a) The operator uses the railway to provide a public service on behalf of the grantor for a specified period of time; and b) The operator is compensated for its services over the period of the arrangement. Railway structure is an asset constructed by the grantor.
Examples (1) Does the railway meet the recognition criteria of a service concession asset for the grantor? Yes. Meets both recognition criteria: The grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price (free). The grantor controls through ownership, beneficial entitlement or otherwise any significant residual interest in the asset at the end of the term.
Examples (1) Railway: Financial liability model or Grant of a right to the operator model? Financial liability model, because: The grantor compensates the operator by making a predetermined series of payments to the operator. Accounting: The grantor recognizes a financial liability, i.e. a financial instrument (IPSAS 28, 29, 30). Determinable series of payments (IPSAS 32, BC4, BC25)
Examples (2) Likoni Channel Corp
Examples (2) Likoni Channel Corp.: reporting in accordance with IPSAS 32 Building costs: Sh.72.5 Billion Public corporation - objective: design, build and operate a 1.6 km bridge in the Likoni Channel All shares owned by the County Central government pays annual grants to public corporation (approximately 60% of all costs) Toll rate varies between sh.350 and sh. 2250 per vehicle (approximately 40% of all costs) After 30 years capital expenditure will have been recovered and tunnel will be free Central government will continue to pay for maintenance and management
Examples (2) Likoni Channel Is this a service concession asset? Yes: a) The operator uses Likoni Channel to provide a public service on behalf of the grantor for a specified period of time; and b) The operator is compensated for its services over the period of the service concession arrangement. Likoni Channel is an asset constructed by the operator (Corp.)
Examples (2) Does this channel meet the recognition criteria of a service concession asset for the County? Yes. Meets both recognition criteria: The grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price. 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. County controls price by regulation County controls residual value (after 30 years), even though Corp. retains ownership
Examples (2) Likoni Channel: Financial liability model or Grant of a right to the operator model? Grant of a Right to the Operator Model, because: The grantor (County) compensates the operator by granting the operator the right to earn revenue from third-party users. Accounting: The County recognizes a liability for any portion of the revenue that is not yet earned. County recognizes revenue according to the economic substance, and the liability is reduced as revenue is recognized Central government expenses annual grants to operator
Key Points to note IPSAS 32 is major improvement of government financial reporting in: Accountability, because service concession assets and liabilities are no longer off-balance sheet Decision-making, because service concession arrangements should now be justified by value-for money rather than meeting debt reduction objectives There is a need for supreme audit institutions to scrutinize complex service concession arrangements, because governments have a preference for off-balance sheet accounting
Rationale for PPP Key Drivers for PPS could be; Need for private sector efficiencies In some economies, PPPs enable debt to be kept off the public sector balance sheet Need for improved infrastructure in order to bring about economic development May be requirement in order to receive funding e.g. from WB/IMF May also be need for assistance with financial management expertise
Rationale for PPP- Contd The financing of long-term infrastructure is based upon a nonrecourse or limited recourse financial structure where the debt and equity used to finance the project are paid back from the cash flows generated by the project.
Why embrace PPP Focus on outputs PPPs make projects affordable Better value for money over the lifetime of the project More efficiency in procurement Faster project delivery with more projects in a defined timeframe Risks are allocated to the party best able to manage the risk.
Execution of PPP s in Kenya The PPP Act (2013), revised in 2015 establishes the following organs to support implementation of PPP projects in Kenya: The PPP Committee (Sec 4(1)) includes PS s for Finance (chair), Planning, Lands, County governments, Transport, Infrastructure, Energy, AG (or his nominee), 4 members (non public officers) and a director (acts as secretary) A director appointed under sec 12 (5 year term, renewable once) The PPP Unit (sec 11-15) headed by the director and acts as secretariat as well as provides technical support to the committee and contracting agencies The PPP Nodes (Sec 16 & 17) headed by the accounting officer and shall constitute of financial, procurement, technical and legal expertise. This simply the PPP committee at the contracting authority.
Initial feasibility Procurement phase Construction phase Operation phase Stages of PPP
Sustainability of PPP Embedded environmental and social safeguards Focus on longer timescales Public, business and government working in partnership Consider and manage the success factor Political will Government commitment PPP Champion Clear output specification Appropriate risk sharing Value for money Performance management
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