As a general principle, government guarantees do not normally influence the classification of PPP assets on a government balance sheet. This is because guarantees are considered contingent liabilities which are not normally accounted for by governments unless and until they are called.
However, Eurostat considers that guarantees covering more than fifty percent of the capital cost of a given PPP project have an impact on the distribution of most of the project risk between the parties to contract. In such cases the PPP assets should be recorded on the balance sheet of the government.
In Eurostat's view, when classifying PPP assets it is necessary to look at the individual and aggregate impact of guarantees in order to test whether these cover more than fifty percent of the capital cost of the project. Relevant guarantees include:
• partial or total credit guarantees;
• minimum revenue guarantees; and
• guarantees of minimum demand provided to the non-government partner.
The aggregate impact of these guarantees will determine if the related PPP assets should be recorded on the government balance sheet, irrespective of the guarantee's probability of being called.
The same rule applies where governments commit to reimburse all or part of the project's debt service through direct or indirect contractual provisions (e.g. payment of a minimum percentage of the service charge irrespective of the non-government partner's performance, guaranteed repayment of banks at early termination).
However, as noted above, these provisions apply only to guarantees applied to the original financing. Refinancing guarantees are excluded from this calculation.
In theory, where the availability risk in a PPP project is completely transferred to the non-government partner, the government should make no payment of service charge if and when the PPP asset becomes unavailable. In practice, PPP contracts normally provide for deductions to the service charge when the non-government partner fails to meet specific service standards. Contracts often explicitly provide for acceptable levels of asset unavailability (e.g. acceptable levels of highway lane closures). When these limits are too lenient, the non-government partner will de facto rarely be liable for deductions or fines as a result of the asset unavailability. Therefore, Eurostat treats these de facto limits in the same manner as it treats guarantees. |