Nr | Question | YES | NO | User comments | Reference to MGDD | |
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V. Construction risk Eurostat considers the financing risk as an integral part of the construction risk. When government bears the majority of the financing risk (whether through debt, equity or direct or indirect guarantees), the PPP assets should be reported on its balance sheet. This does, however, not apply to government undertakings towards the re-financing of a PPP project post-completion as, in this case, the financing risk refers to the original financing put in place to deliver the project assets. This is clearly an important point in the context of a number of PPP support measures put in place by Member States. This risk must not be confused with the appropriateness of the "design" of the assets, where the degree of initiative of the partner may be very limited. The main point here is that a partner would not normally agree to bear risks relating to the construction, if the government's requirements are unusual and alter the commercial viability of the asset. In addition, the private partner should not be regarded as responsible in the event of a government action such as changing the specifications in the course of the construction or modifying certain standards requirements. | Eurostat | |||||
39 | Does government itself take part in the financing? |
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| Frequently a private partner is not able to borrow at the same rate of interest as government, thus increasing the cost of the project. Thus, government may offer a certain level of financing for the PPP project, to entice greater interest by private sector entities in the project, to reduce the total cost of financing, and/or simply to ensure the viability of the project. This form of government assistance is different from a possible capital injection into a given structure in the form of an equity stake to which the rules in part III.2 of MGDD apply. | VI.5.3.4/57 |
40 | Does government provide a majority financing of the total capital cost (e.g. by covering the predominant part of the capital cost at inception or during the construction phase)? | on-balance sheet |
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| This might take various forms, e.g. investment grants, loans, etc. If the answer is "yes", this means that government bears the majority of the risk. The same rule applies when government provides an upfront payment for future services. The term "capital cost" refers to the cost of construction or refurbishment of the asset referred to in the PPP project contract and includes cost of financing (cost of capital, i.e. interest). Another term used in some countries with the same meaning is "capital value". | VI.5.3.4/59 |
41 | Does government have an obligation to start making regular payments to the partner without taking into account the actual state of the assets that are delivered? | on-balance sheet |
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| If the answer is "yes", government bears the majority of the construction risk and is acting de facto as the final owner of the assets as from inception. | VI.5.4.2/79 |
42 | Does government make payments to systematically cover any additional construction cost, whatever their justification? | on-balance sheet |
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| This is a clear indication that the construction risk stays with government. | VI.5.4.2/79 |
43 | Is government obliged to pay for any event resulting from defective management of the construction phase by the partner? | on-balance sheet |
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| This applies when the private partner acts either as a direct supplier or only as a coordinator/supervisor. | VI.5.4.2/80 |
44 | Is the private partner responsible for unexpected exogenous events not normally covered by insurance companies? |
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| This risk must not be confused with the appropriateness of the "design" of the assets, where the degree of initiative of the partner may be very limited. The main point here is that a partner normally would not agree to bear risks relating to the construction, if government's requirements are unusual, and alter the commercial viability of the asset. | VI.5.4.2/81 |
45 | Is the private partner going to receive an existing government asset as a necessary part of the project? |
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| The construction risk applies only to the new capital expenditure under the responsibility of the private partner, whatever the condition of the asset transferred. Expenditure for renovation, refurbishment, modernisation, upgrading, etc. must represent the majority (over 50%) of the value of the asset after renovation, refurbishment, modernisation, upgrading, etc. | VI.5.2.2/17 |
46 | Does the private partner bear the costs due to late delivery of the asset? |
| on-balance sheet |
| The answer must be "yes" if the asset is to be regarded as a non-government asset. | VI.5.1/5 |
47 | Does the private partner bear the costs due to non-compliance with specified standards during the construction stage? |
| on-balance sheet |
| The answer must be "yes" if the asset is to be regarded as a non-government asset. | VI.5.3.2/34 |
48 | Does the private partner bear significant additional costs during the construction stage? |
| on-balance sheet |
| The answer must be "yes" if the asset is to be regarded as a non-government asset. | VI.5.3.2/34 |
49 | Does the private partner bear the costs due to technical deficiency during the construction stage? |
| on-balance sheet |
| The answer must be "yes" if the asset is to be regarded as a non-government asset. | VI.5.3.2/34 |
50 | Does the private partner bear the costs due to external negative effects (including legal and environmental risk) triggering compensation payments to third parties during the construction stage? |
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| Possible contractual arrangements due to legal or environmental issues that arise during the construction phase would need to be taken into account in the analysis, but are treated as complementary criteria due to the specific nature of these aspects of the construction risk. The private partner does not have to bear the risk itself as it can also be insured against. | VI.5.3.2/34 |
51 | Does government bear the construction risk? | on-balance sheet |
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| "Construction risk" covers events related to the state of the asset(s) in question at the commencement of services. The magnitude of the different components of this risk can be estimated by the amount that each partner would be obliged to pay if a specific deficiency were to occur, taking into account that eventuality according to the mathematical expectancy approach. This risk might be quite significant if the assets involve major research and development or technical innovation, whereas it could be more limited for conventional structures. Government bears the construction risk if the answer to questions 40 or 41 or 42 or 43 is "yes". Questions 39, 44, 45, 46, 47, 48 and 50 give additional elements to be taken into account in the risk analysis. A majority or minority of yes/no answers does not give the final answer. | VI.5.1/5 |