Headline Verdana Bold. Uganda PPP Act - Implications for Public Sector Accounting Kenneth LEGESI Deloitte (Uganda) Limited

Headline Verdana Bold Uganda PPP Act - Implications for Public Sector Accounting Kenneth LEGESI Deloitte (Uganda) Limited

About us Kenneth Legesi Infrastructure and Capital Projects / PPP Advisory Deloitte East Africa Experience in providing programme management, transaction advisory services for Lenders, Governments and Investors in Public Private Partnership (PPP) projects across different geographies and industries. Specialise in providing technical and financial advice in the infrastructure and capital projects space including economic/financial analysis and modelling, programme management and advisory. Advised public and private sector clients on both corporate and project financed transactions (including PPP/PFI projects) to prepare feasibility studies, undertake due diligence, preparation of transaction materials, develop contract documentation and gain successful financial close. Education / Training: BSc in Civil Engineering, Makerere University, Uganda MSc in Environmental Engineering & Business Management, Imperial College London, UK Completed the Chartered Financial Analysts (CFA) Program, USA 2

Contents Introduction - Background and Context - What is a PPP - Different PPP Models PPPs in Uganda - Overview - PPP Act - PPP Process - Feasibility Study PPPs Accounting treatment - Private Sector, IFRIC 12 - Public Sector, IPSAS 32 Summary Please send any questions / clarifications to klegesi@deloitte.co.ug 3

Introduction Background and Context Uganda targeting middle income status by 2020, guided by strategies and plans as outlined in Vision 2040 and NDP2 Infrastructure investment is acknowledged and recognized as a key contributor to economic growth. However, the condition and coverage of Uganda s infrastructure is not adequate to support the levels of economic growth for Vision 2040. To this end, NDP2 sets out the next major phase of infrastructure investment including the Standard Gauge Railway (SGR) at $2bn (by 2018), the Oil Refinery ($0.5bn), Oil Pipeline at $2bn, and oil exploitation infrastructure ($0.7bn in place by 2020). Roads and expressways estimated at $1.5bn. Over $12bn of infrastructure planned in 2012-2025 Currently the majority of financing for infrastructure in Uganda is through domestic borrowing and concessional financing with limited private sector investment in infrastructure Concessional finance model is seen as increasingly less important and is expected to decline. Stretched and competing budgets from different votes means funding of infrastructure through domestic borrowing alone is not sustainable Consequently, the potential for private sector investment in infrastructure via PPPs is envisaged across various sectors at national and sub-national level. 5

Introduction What is a PPP? PPP refers to a partnership/commercial transaction between a public sector institution and a private party, in which the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project in consideration for some benefit. Medium to Long Term Contractual agreement Partnership between public & private sector PPP Sharing of risks The project may be tangible (physical infrastructural development) or intangible (provision of services). Outcomes that are in the public s Finance, Sharing of benefits PPP is premised on a value for money and public interest assessment (cost, quality, quantity, risk). interest construct or manage infrastructure or provide service 6

Introduction Different PPP Models Concession: lease of the asset to the private party for a long period of time. For example, Kilembe Mines. Operation and maintenance: private party to operate and maintain a property of the contracting authority. Lease, develop and operate: long-term lease for private party to operate and expand an existing infrastructure. For example, Serena Hotel Kampala. Build, own and maintain: private party to build, own and maintain an infrastructure asset Build, own, operate and transfer: private party to finance, build, own and operate an infrastructure for a specific period and to hand-over to the contracting authority. Design, build, finance and operate: private party to design, build, finance and operate an infrastructure for a specific period and to hand-over to the contracting authority. Build, own and operate: private party to own the project in perpetuity Who pays / compensates the private sector for the risk that they are undertaking? Implications for accounting treatment 1) Government pays Availability Based; and / or 2) User pays Demand / Revenue Risk Based 7

PPPs in Uganda Overview PPPs not new TOURISM (HOTEL): KAMPALA SERENA HOTEL, 30 YRS, CONCESSION TRANSPORT (RAIL): RVR RAILWAY, 25 YRS, CONCESSION MINING: KILEMBE MINES, 25 YRS, CONCESSION ELECTRICITY: ELECTRICITY DISTRIBUTION (UMEME), 20 YRS, CONCESSION legal framework new Project Development Facilitation Fund (PDFF) Fund PPP unit and Contracting Authority (Project Development) Uganda PPP Act Legal Framework and Guidance for PPPs in Uganda PPP Committee Oversight and Regulation of PPPs PPP Unit Technical arm and secretariat of PPP Committee Ministry of Finance ELECTRICITY: ELECTRICITY GENERATION, ESKOM, 20 YRS, CONCESSION INFRASTRUCTURE: KALANGALA INFRASTRUCTURE SERVICES, 20 YRS, BUILD OPERATE TRANSFER (BOT) ELECTRICITY: ELECTRICITY GENERATION, BUJAGALI - 250MW HYDROPOWER, 30 YR, BUILD OWN OPERATE TRANSFER (BOOT) Process Auditor Assurance of alignment with PPP Act Accounting Officer Initiates and oversees the entire PPP process Project Officer In-charge of PPP project delivery Private Sector Evaluation Committee Oversee procurement process PPP Project Agreement Contracting Authority 9 Transaction Advisor Support the Contracting Authority 9

PPPs in Uganda Uganda PPP Act, Overview The PPP Act commenced on 1 October 2015 by virtue of the Public-Private Partnerships (Commencement) Instrument 2015. Regulations being developed to cover the following aspects in detail: project inception, feasibility studies, bid evaluation, bidding methods and procedures and bidding documents / forms. PPP agreements excluded from the ambit of the Public Procurement and Disposal of Public Assets Act 2003. 10

PPPs in Uganda Uganda PPP Act, Key Players 1. The Public-Private Partnership Committee: High-level committee whose members include the Attorney General, Permanent Secretary of the Ministry of Finance, Permanent Secretary of the Office of the Prime Minister and Permanent Secretary of the Ministry of Local Government as well as representation from the private sector. Principal role of the committee is to review and approve every single project agreement, as well as exercise general oversight responsibilities over the implementation of public-private partnerships in Uganda. 2. The Public-Private Partnership Unit: Unit established within the Ministry of Finance to act as the secretariat and technical arm of the Committee, and to provide technical, financial and legal expertise to the Committee. Unit to be headed by a Director. Key function of the Unit is to manage, through a transparent and equitable process, the identification, screening, prioritization, procurement, monitoring and implementation of PPP projects Unit also mandated to ensure that all projects comply with the requirements of the PPP Act. All PPP Projects in Uganda have to be registered with the PPP Unit 11

PPPs in Uganda Uganda PPP Act, Key Players 3. PPP participants: Contracting authority: role of the contracting authority is to identify, appraise, develop, procure and monitor a public-private partnership. Notably, the contracting authority shall not incur a debt or contingent obligation unless the approval of Parliament is obtained [Article 159 of the Constitution] Accounting officer: role of the accounting officer is to appoint the project team and oversee the procurement and implementation process to ensure that the value for money objective is not compromised. Project officer: role of the project officer is to manage the procurement and implementation of the project and monitor the performance of the private party. Process auditor: role of the process auditor is to ensure that the contracting authority complies with the requirements for implementing PPPs. Transaction advisor: role of the transaction advisor is to undertake a comprehensive feasibility study for a project and safeguard the interests of the contracting authority in the management and execution of a project. Evaluation committee: the accounting officer shall point an evaluation committee for each project, which shall be composed of officials with the technical skills required for the evaluation of a bid. The officials in question may also be appointed from outside the contracting authority. 12

PPPs in Uganda Uganda PPP Act, Key Players 3. PPP participants: PPP project team: every contracting authority shall establish a PPP project team to be headed by the project officer and officials of the contracting authority. The project team shall also include the project officer, process auditor and transaction advisor. Where an appropriately skilled person cannot be found to act as the project officer, process auditor or transaction advisor, the contracting authority shall procure the services of a qualified individual, firm or company under the Public Procurement and Disposal of Public Assets Act 2003. 4. Private Party: The private party shall be a special purpose company incorporated under the laws of Uganda. The private party shall not undergo any changes in the shareholding, share capital structure or other corporate restructuring without the approval of the Minister of Finance and the relevant line Minister for the concerned project. Private party s evidence of technical and financial capacity. 13

Delivery Project Preparation PPPs in Uganda PPP Process Project Inception Feasibility Study PPP Procurement Ensure project meets definition of a PPP and that the proposed project is the best option to meet services and is worth the cost Carry out a pre-assessment of needs, service delivery options and a cost-benefit analysis Test project suitability for development as a PPP Check readiness of Contracting Authority (budget and capacity) to implement Recruit a Transaction Advisor Carry out a detailed study of the Project s feasibility Identify optimal PPP procurement option, develop a first draft of procurement documents and the procurement strategy/plan Seek Ministry of Finance approval to proceed with the procurement Run a competitive tender process to select the most qualified private sector partner for the PPP Contract negotiations with the preferred bidder Seek clearance of PPP contract with the AG Contract award and signing Financial close Project Implementation Mobilisation Construction Operation & Maintenance Transfer back and Exit 14

Delivery Project Preparation PPPs in Uganda Feasibility Study - Overview Project Inception Feasibility Study PPP Procurement Project Implementation Feasibility & Due diligence Project definition and scope (components, bundling/packaging) Technical feasibility of PPP project Market assessment including scenarios Financial analysis - determining financial returns/ support requirement; VfM analysis Socio cost benefit analysis Structure backward/forward linkage Market feedback/dialogue with stakeholder PPP Design PPP contract type Project & Implementation structure Financial structuring Procurement plan Risk assessment and allocation In this phase, Accounting treatment in line with relevant guidance and recommend best practices is key from public and private sector point of view 15

PPPs in Uganda Feasibility Study - Viability, Bankability, Value for Money, Affordability and Risk Transfer 1. Project Need / Economic and Social Cost Benefit Analysis 2. Project Scope / Solutions Options Analysis 3. Project Viability 4. Financial Model 5. Financial Assumptions 6. Accounting 7. Tax 8. Affordability 9. Contingent Liabilities 10. Risk Transfer 11. Value for Money 12. Procurement Strategy 13. Procurement Documents 14. Summary 16

PPP Accounting Treatment Private Sector IFRIC 12 Arrangement between govt (grantor) and private sector (operator). Grantor regulates services of operator and controls residual interest IFRIC 12.4-5 Recognize Service concession arrangements Rights granted to operator to receive guaranteed periodic availability payments Rights granted to operator to charge end users a fee and revenue based on usage Revenue provided either from construction or operation services Financial Asset IAS 39 Intangible Asset IAS 33 IAS 11 & IAS 18 18

PPP Accounting Treatment Public Sector IPSAS 32 IPSAS 32 deals specifically with service concession agreements, focusing on their governmental accounting consequences. IPSAS 32 describes service concession agreements as long-term contracts between a government and a private party whereby: The operator uses a public asset (such as a prison, airport, or dam) to provide a public service for a specified period of time on behalf of the government; and The operator is compensated for its services over the period of the service concession arrangement. Both government-pays and user-pays PPP contracts are covered by IPSAS 32. Furthermore, IPSAS 32 states that all contracts with the following characteristics should have consequences for the governmental balance sheet in terms of gross debt. The government controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and The government also controls any significant residual interest in the asset at the end of the arrangement term. Under IPSAS 32, most PPPs are expected to have an impact on the aggregate public debt. 19

PPP Accounting Treatment Public Sector - IPSAS 32 Overview: This standard applies to entities that prepare and present financial statements under the accrual basis of accounting [IPSAS 32.2]. IPSAS 32 applies to all public sector entities other than Government Business Entities (GBEs) [IPSAS 32.3]. Key definitions [IPSAS 32.8] 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. 20

PPP Accounting Treatment Public Sector Public Sector - IPSAS 32 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. Recognition of the asset: The grantor should recognize a service concession asset if [IPSAS 32.9]: (i) 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 (ii) 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. If the asset is a whole-of-life asset (i.e. an asset used in a service concession arrangement over the entire of the useful life), only the conditions under (i) need to be met [IPSAS 32.10]. 21

PPP Accounting Treatment Public Sector Public Sector - IPSAS 32 Measurement of the asset: The grantor recognizes assets provided by the operator at fair value if the recognition criteria are met [IPSAS 32.11]. 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 [IPSAS 32.12]. Two types of service concession arrangements 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 [IPSAS 32.18-19]. The IPSAS standards relating to financial instruments (IPSAS 28, 29 and 30) are applicable to this financial liability [IPSAS 32.20]. 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 [IPSAS 32.21]. Grant of right to the 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 [IPSAS 32.24]. 22

PPP Accounting Treatment Public Sector Public Sector - IPSAS 32 Other Liabilities, Commitments, Contingent Liabilities and Contingent Assets With regard to other liabilities, commitments, contingent liabilities and contingent assets arising from a service concession arrangement IPSAS 19, 28, 29 and 30 are applicable [IPSAS 32.29]. Other revenues. Other revenues should be accounted for in accordance with IPSAS 9 [IPSAS 32.30]. Disclosures. Required disclosures for service concession agreements are: The grantor should present information in accordance with IPSAS 1 [IPSAS 32.31]. All aspects of a service concession arrangement shall be considered in determining the appropriate disclosures in the notes [IPSAS 32.32]. Following information in respect of each material service concession arrangements shall be disclosed in each reporting period [IPSAS 32.32-33]: 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., period of the concession, re-pricing dates, and the basis upon which re-pricing or re-negotiation); 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. Obligations to provide the operator with access to service concession assets or other revenue-generating assets; and 4) changes in the arrangement 23

Summary We are in post PPP world: infrastructure need vs funding crunch PPPs are not new in Uganda but the legal regime is must comply As public sector practitioners, need to know the obligations on you under Uganda PPP Act - accounting officers/project officers/process auditors/evaluation committees Feasibility study is a key milestone for the PPP Process under the Act: implications for approvals and procurement, implementation; recognition of appropriate accounting treatment, public vs private sector Private sector accounting, IFRIC 12: Financial Asset, IAS 39 Intangible Asset, IAS 33 IAS 11 & IAS 18 Public Sector accounting, IPSAS 32: mirrors IFRIC 12 Financial Liability Grantor of right to the operator model 25

Contacts Norbert Kagoro Partner, Audit and Assurance Tel: +256 41 7701 303 Mob: +256 77 2703595 Email: nkagoro@deloitte.co.ug Mr. John Ponsonby Director, Infrastructure & Capital Projects / PPP Leader Tel: +254 20 4230 182 Mob: +254 702 164 637 Email: jponsonby@deloitte.co.ke Mr. Kenneth Legesi Manager, Infrastructure & Capital Projects Tel: +256 41 7701329 Mob: +256 77 6391939 Email: klegesi@deloitte.co.ug 26

Thank you, Discussions, Q&A Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see http://www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte's approximately 200,000 professionals are committed to becoming the standard of excellence. Deloitte's professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. They enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Deloitte's professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. 2017 Deloitte (Uganda) Limited. 27