The assets involved in a PPP can be considered as non-government assets only if there is strong evidence that the non-government partner bears most of the risk related to the specific PPP project. The ESA 95 Manual specifies that the party bearing "most of the risks" attached to the execution of the contract has economic ownership of the assets involved in the PPP. The "Excessive Deficit Procedure Manual" (the EDP Manual) provides simplified criteria to determine whether the nongovernment partner is bearing most of the risks.
As explained in paragraph 1.3, the general rule is that assets should be classified as non-government assets only if the non-government partner bears both the construction risk and at least one of availability or demand risk. Risk is transferred only if the non-government partner faces sufficient financial consequences. To demonstrate a clear risk transfer, the costs that accompany a risk occurrence should generate financial consequences for the non-government partner. Such financial consequence should be sufficient to put at risk not only the non-government partner's operating margin but also expose its equity to significant losses. When a risk is also allocated to third parties (lenders, insurers, guarantors, etc), the PPP assets should be classified off the government balance sheet if most of the risk is borne by the non-government partner and the third parties together.
The risk of residual value of the PPP assets may be relevant for classification in borderline cases. Where strong evidence that the non-government partner bears most of the project risk is lacking, it is necessary to consider who bears the residual value risk of the project as this is deemed an additional indicator of economic ownership of the PPP assets. If the assets remain the property of the nongovernment partner at the end of the PPP contract period (irrespective of their economic value at the time) then they should be classified on the non-government partner's balance sheet. Similarly, the assets should not be recorded on the government balance sheet if the government has an option to purchase the asset at market value. On the other hand, if either (i) the government commits to purchase the PPP assets at a pre-determined price which is higher than their economic value or (ii) the price to be paid by the government is lower than their economic value (or even nil) but the government would have already paid an amount close to the economic value of the assets through regular payments throughout the contract life, then these assets should be recorded on the government balance sheet.
As previoulsy noted, "on-balance sheet" treatment implies the recording of expenditure in the initial phase of the project. As for "financial leases", the initial investment in PPP assets should be fully recorded from the outset as gross fixed capital formation and has an impact on government deficit. It should also have an impact on debt derived by an imputed loan for the same amount.
Off-balance sheet recording implies a delayed impact on government deficit and eventually no impact on debt. As for "operating leases", off-government balance sheet recording may imply government expenditure only at a later stage, at the time when the government pays service charges (e.g. availability payments or demand fees) to the non-government partner, with no recognition of debt. Therefore, if the government has transferred project construction risk to the non-government partner and either the project availability or demand risk, the cost of the infrastructure-related assets would be spread over the time in which assets are used, avoiding large initial capital expenditures.