UK example
This is an illustrative example to aid understanding of the issues set out in this paper.
Key facts
• Sector: Healthcare provision
• Contract period: 30 years from asset commissioning
• Build phase: 2 years
• Capital cost of asset: £200 million
• Bullet payment post construction: £20 million
• Build is on an existing public site. The private sector is responsible for costs incurred as part of the new build but not costs associated with remedial works on the site, which may be required to facilitate the new build assets
• Expected useful economic life of asset: 50 years
• Assets passed to public sector at the end of 30 years, with an expected residual value of £50 million
• Private sector responsible for all maintenance, lifecycle and 'soft' services such as security, cleaning and catering
• Soft services are benchmarked every 5 years
• Contract based on SoPC4
• A separate assessment under the FReM has concluded that the assets should be recorded on the balance sheet in the financial statements on the grounds of the control based criteria contained within IFRIC 12.
The project meets the definition of a service concession for the purposes of the production of the financial statements under the FReM, and the government is the purchaser of the services being delivered. As such, it is within scope of the guidance contained within this paper on the grounds that the private sector partner is delivering services to government on the basis of dedicated assets, and the MGDD tests must be applied.
When applying the MGDD primary risk tests, the assessment concentrates on the asset related risks only. As the soft services are separable from the contract, they are not considered to be relevant to the analysis and so are excluded.
When considering construction risk, the private sector bears construction risk on the newly created assets. The fact that the public sector retains risks associated with the ground conditions is not relevant to the analysis, as the analysis focuses only on the newly created assets.
It is then necessary to consider whether the private sector bears one of demand or availability risk. In this case, the public sector is required to pay for the services so long as they are made available. As such, the public sector bears demand risk because it will be required to purchase the capacity, regardless of whether it actually requires that capacity.
When considering availability risk, the underperformance and non-availability regime set out in SoPC4 is such that availability risk lies with the private sector. This is evidenced by the fact that if the asset is not available then the public sector will not be obliged to pay anything to the private sector.
Before concluding on the balance sheet determination for the purposes of the National Accounts, it is necessary to consider the bullet payment. In this case the bullet payment is a fixed amount that is paid post construction regardless of the actual construction cost outturn. Therefore it does not de-risk the construction phase for the private sector partner. Further, as the amount of the bullet payment is 10% of the construction costs it does not suggest that the public sector is paying for a significant amount of the asset up front and is well below the 50% threshold which, if breached, would require the assets to be accounted for as being on balance sheet for the purpose of national accounts.
When considering whether the bullet payment has the effect of de-risking the availability risk that is held by the private sector, whilst this is the case at the margin, it is not significant in the overall analysis as the private sector still bears significantly all of the availability risk. Accordingly, for the purposes of National Accounts the payment is treated as a prepayment of future service costs (see section 4.4.1). Under the current Consolidated Budgeting Guidance, the £20 million prepayment would be treated as net lending within the capital budget as it is over £20 million is long-term within the meaning of the guidance contained within the Consolidated Budgeting Guidance.
It is appropriate to conclude that the newly created assets are not on the public sector balance sheet for the purposes of the National Accounts. This contrasts to the separately performed assessment under the FReM based guidance, which concluded that the assets should be accounted for on the balance sheet of the individual entity financial statements prepared under the FReM.
Consequently, throughout the life of the transaction, for the purposes of National Accounts, the following should be recorded:
• Current expenditure equivalent to the sum of:
o the cash paid under the unitary payment; plus
o an imputed addition to the unitary payment, which represents the provision of services provided to the public sector that are financed by the amortisation of the prepayment already made by the public sector; less
o an interest receipt, calculated as the unwinding of the discount on the prepayment.
• At the point the asset transfers to the public sector, the capital account shows:
o imputed Gross Fixed Capital Formation ("GFCF") representing the acquisition of the asset as a cost to PSNI, and
o the receipt of an imputed capital grant that benefits PSNI.
For the purposes of departmental budgets, the recording follows the national accounts treatment, as follows:
• Resource DEL (near cash) shows:
o the cash paid under the unitary payment; plus
o an imputed addition to the unitary payment, which represents the provision of services provided to the public sector that are financed by the amortisation of the prepayment already made by the public sector; less
o an interest receipt, calculated as the unwinding of the discount on the prepayment.
• Capital DEL shows:
o imputed GFCF representing the acquisition of the asset as a cost to Capital DEL; and
o the receipt of the imputed capital grant as a benefit to Capital DEL.
In addition, in the example above the prepayment meets the definition of large and long-term and so should be treated in the capital budget in the manner set out in the Consolidated Budgeting guidance.