Box 2.  The potential impact of financing by government 

Financing of a project by the public sector has the potential to influence the allocation of risk between the parties to the transaction..  The MGDD guidance, supplemented by discussion at Eurostat's Financial Accounts Working Party in the summers of 2008 and 2009, concludes that where the public sector finances the capital costs associated with the asset (e.g. through loans, grant, milestone or bullet payments), or underpins the finance in the project, this would be indicative of insufficient risk transfer to the private sector.  

Financing by government - during construction 

There are two distinct scenarios to consider.  Firstly, cases where a public sector body that is not directly related to the procuring authority provides finance on commercial terms, and secondly cases where the procuring authority provides finance through milestone payments or prepayments during construction.  The potential impact on the allocation of risks in the project (at the overall public sector level) is judged as being the same in either scenario.  . 

In the first case, where a part of the public sector that is not directly related to the procuring authority provides finance on commercial terms, either in order to reduce the cost of finance to the public sector overall or as a result of turbulence in debt and credit markets, then the procuring authority is required to consider the total percentage of the finance for the project that is provided.  Where it exceeds 50% the assets should be considered to be on the public sector balance sheet for the purposes of National Accounts. 

In the second case, where the public sector procuring authority makes milestone payments, (i.e. a payment on partial delivery of the assets or when the contractor reaches set points in construction), this would be indicative that the public sector bears some or all of the construction risk, or that the assets are simply being purchased as they are delivered.  Accordingly, the assets should be recognised on the public sector balance sheet for the purposes of National Accounts.  

Where the payments during construction represent prepayments for the construction of the asset, i.e. are made in advance of the milestone being reached, then the same analysis applies.  In this scenario, the public sector is effectively financing the construction of the asset, which may suggest that either construction risk is with the public sector or that the assets are actually simply being purchased by the public sector (for example if the prepayments totals significantly all of the capital spending).  .  

Where a bullet payment, or payments in aggregate, exceeds 50% of the cost of the assets being delivered the assets should be considered to be on the public sector balance sheet for the purposes of National Accounts.  There is separate value-for-money guidance that considers the total quantum of any such payments that should be considered. 

Financing by government - post construction 

Where a bullet payment that is directly related to the asset is made post the construction phase this may also be indicative that the public sector is purchasing part of, or the entire asset, if the amount is substantially all of the capital value.  Alternatively, a bullet payment may be characterised as a prepayment of the services to be delivered over the life of the contract.  In this case it may suggest that the private sector partner does not bear the subsequent demand or availability risks associated with the asset if the public sector are unable to claw-back the monies for poor performance, or if demand is below expectation (in the case where the partner bears demand risk).  If the payment can be clawed back for poor performance (or reduced demand) then this would suggest that the bullet payment does not de-risk the project from the point of view of the private sector, although the overall quantum of the payment should be considered. 

In any case, should the payment total over 50% of the total cost of the assets then the assets should be recognised on the public sector balance sheet.  

Guarantees and other financial underpinning 

In National Accounts, the general position is that guarantees to third parties, where a call on the guarantee is considered as being remote, are classified as contingent liabilities, and as such would not be treated as an actual government liability at that point.  However, where the public sector guarantees the borrowings of the partner in a PFI or similar transaction this should be taken as evidence that the partner does not bear the risks and rewards of ownership of the asset and that the assets should be recorded on the public sector balance sheet. 

Guarantees may exist in many forms.  Special care should be given to the consideration of termination arrangements.  Where, as a result of termination, the private sector debt provider has a de-facto guarantee, either as a result of compensation arrangements in the contract, the right to 'put' debt associated with the project to the public sector, or through another route, then this should be taken as evidence that the partner does not bear the risks and rewards of ownership of the asset such that the assets should be recorded on the public sector balance sheet.  

Separate rules exist for securitisations. Where the private sector partner directly securitises government flows, or the government guarantees the flows that are securitised, then it may be that the debt should be re-routed into government and would affect the risk distribution in the project, such that the asset should be considered to be on the public sector balance sheet for the purposes of National Accounts..