To determine the potential for a public private partnership, local government will need to address various considerations. These include:
• local government policy
• the legislative authority
• the taxation framework
• reporting and accounting
• financial issues
• Local government policy
As stated earlier, the local government's policy for the provision, financing and cost recovery of services will be a key factor in assessing whether public private partnerships are seen as an accepted approach to service delivery. The policies established by local government will be based on the values and objectives of the community and the elected Council or Board. They will also form the basis for the local government's plans and strategies for the provision and financing of services.
If public private partnerships are not seen as a viable or accepted approach to service delivery based on fundamental values and policies, it is clearly not in the community's best interest to proceed with individual public private partnerships. More commonly, local governments will establish policies that identify the circumstances (e.g., type of service, component of the service system) under which public private partnerships may be considered.
In addition to local government's servicing and financing policies, they must also consider the implications for other policies, including land use and development, human resources and economic development. Efforts should only be directed toward advancing proposals that are consistent with established local government policies.
• Legislative authority
The legislative framework set out in the Municipal Act provides considerable flexibility for local government to enter into public private partnerships. There are, nevertheless, constraints and procedural requirements that will impact the ability of local governments to enter into public private partnerships. (The legislative authority for public private partnerships was discussed in section 3 of this guide.) Local government must also adhere to other provincial and federal statutes.
• Taxation framework
In determining whether an opportunity is suited to a public private partnership, the local government should recognize the interests of the possible private sector partner. One of the incentives that will attract private partners is the ability to minimize the amount of tax they are required to pay.
Local government has the authority to exempt from municipal property taxes the "public use" portion of property subject to a public private partnership agreement. In cases where the local government provides an exemption, it can request a matching provincial property tax exemption.
Also to be considered is whether any or all partners are subject to the federal Goods and Services Tax (GST) and the BC Provincial Sales Tax (PST). The private sector partner will want to ensure that it is entitled to input tax credits (ITCs) for GST purposes as they relate to the project. If goods and services are for an "exempt supply," ITCs would not be available. Examples of exempt supplies, as they may relate to local government partnerships, includes certain supplies for drainage, sewage and water supply systems.
In cases where the private sector partner finances an infrastructure project, interest incurred as a result of this financing is generally deductible for tax purposes. Interest incurred during the construction period must generally be
capitalized for tax purposes. Property taxes paid are generally considered to be a component of construction period soft costs for that period, therefore requiring that those amounts be capitalized.
Financing costs, such as commitment fees and guarantee fees, are deductible on a straight-line basis over a period not exceeding five years.
If the private sector partner is the owner of the project, or has a leasehold interest in the project for income tax purposes, capital cost allowance (CCA), a form of depreciation, is likely deductible in computing income for tax purposes.
• Reporting and accounting
In addition to taxation considerations, local government should also consider accounting and financial reporting considerations that apply to public private partnerships.
Public sector accounting standards are still evolving in the area of public private partnerships. The specific accounting treatment should be determined by the entity's accountant at the time any arrangement is proposed.
For more information on financial reporting and accounting, please refer to Appendix 1. Please note that the following accounting implementation issues are current as of the date of this guide.
The Accounting Recommendations issued by the Canadian Institute of Chartered Accountants (CICA) are the primary source of "generally accepted accounting principles" (GAAP) and apply to profit oriented and not-for-profit organizations (NFPs).
The public sector (federal, provincial/territorial and local governments, and entities accountable to them and which they own or control) is expected to follow the Accounting Recommendations issued by CICA's Public Sector Accounting Board (PSAB). The Public Sector Accounting and Auditing Handbook does not yet have the authority of GAAP; but implementation of its accounting recommendations is being encouraged at the local government level by the Ministry of Municipal Affairs.
Loosely defined, public private partnership arrangements range from leases, contracts of services and infrastructure financing, to government partnerships involving jointly controlled operations, assets or organizations. The nature of the arrangements will dictate the appropriate accounting treatment in the financial statements of the local government. The specific arrangements in each case will need to be tested against the relevant accounting pronouncements to determine whether the local government's financial reporting objectives are achievable.
In structuring these kinds of arrangements, care must be exercised to ensure that there is a business purpose to involving the private sector and that the arrangements reflect substance over form.
The relevant accounting treatment for various types of public private partnership arrangements (broad definition) is as follows. Readers are cautioned that the information is general in nature and subject to the specific characteristics of the various forms of arrangements, including capital and operating leases, service contracts, government partnerships and government business partnerships. These arrangements are set out in Appendix 1.
- For executory contracts such as operating leases and build-own-operate agreements with unrelated parties, the local government's costs will be recorded as incurred without any balance sheet impact. Capital leases and certain arrangements, such as Build-Own-Operate-Transfer (BOOT) contracts, involve asset ownership that may have balance sheet accounting requirements. Commitments and contingencies associated with these arrangements would be disclosed in the notes to the financial statements.
- For exchange transactions such as management contracts, outsourcing of services and privatization, and for shared-cost arrangements, costs are recorded as incurred, with appropriate disclosure of commitments and contingencies.
- For government partnerships involving joint control by the local government, the local government will proportionately consolidate the assets, liabilities, revenues and expenses, other than for government business partnerships that will be accounted for on the modified equity basis, using the local government's share of the partnership.
Financial issues
Local government needs to consider a range of financing issues before proceeding with a public private partnership. Financial issues that should be considered prior to implementing a public private partnership project include:
- Can private sector financing compete with public sector financing for the type of service or project being considered?
- What is the effective cost of borrowing?
- Can private sector companies be bonded for a project of this type and magnitude?
- Are there any senior government grants available for projects of this type? Are partnerships eligible for such grants?
- Is the project financially self-sufficient or can it become self-sufficient?
- What support mechanisms are the public sector prepared to make available (e.g., recourse financing, subsidies, supplies, equipment)?
- Is it possible to define an equitable and appropriate rate-setting mechanism?
- Is the financing structure without recourse to the local government?