The objective of the current approach of Partnerships Victoria is value for money. It is not another kind of borrowing or off-balance sheet mechanism. The prime objective of this current policy is value for money. 382
Public private partnerships (PPPs) invariably take one of the following basic forms:
• the private sector provides the capital investment with the public sector purchasing specified services from the contractor that meet specified quality standards. An example includes the construction and operation of private prisons;
• the construction is undertaken by the private sector, which recovers its capital and operating costs through direct charges to users. Tollways are a common example of this type of arrangement. Public sector involvement can include land acquisition, provision of certain assets such as roadworks and planning, licensing and other statutory procedures; and
• projects are undertaken as joint ventures, whereby the cost of projects cannot be fully recovered through charges on end users. The government will provide a part subsidy, possibly in the form of a contribution of assets up-front and/or a service payment in addition to user payments.
Irrespective of the form of the arrangements, a major consideration with PPPs is how they should be accounted for and disclosed in public sector financial statements and budgets. There are no Australian accounting standards that deal specifically with accounting for PPPs. In the absence of such accounting standards, there is currently no definitive guidance available either from the government or the private sector as to how PPP assets and obligations should be accounted for, although Australian governments support the principles outlined in the United Kingdom Standard FRS5.
As an interim measure pending the development of authoritative guidance, reliance has been placed on Australian Accounting Standard AASB117 Accounting for Leases because most PPP arrangements, with the notable exception of user pay agreements, have the characteristics of a lease agreement.
Leasing arrangements are classified as either operating leases or finance leases. Depending on which party is defined as substantially having all the risks and benefits incidental to ownership, that party will record the leased asset in its financial report, offset by a finance lease liability. Where the lessor effectively substantially retains the risks and benefits, the lease will be recorded as an operating lease in the financial reports of the lessee.
The accounting standard on leases was introduced prior to the development of PPPs and does not specifically deal with such arrangements, which are often very complex in terms of identifying the extent of risks borne by the government and the operator. In the experience of the Victorian Auditor-General's Office, a number of arrangements previously classified as operating leases have subsequently been reclassified as finance leases, following detailed reviews of the accounting assumptions underlying the classification of leases. Reclassifications have also occurred since the introduction of the Australian equivalent of International Financial Reporting Standards. The reclassifications have been brought about by the inclusion in the standard of additional criteria defining a finance lease as where the lease term is for the major part of the economic life of the asset and where the leased assets are of a specialised nature suited to the needs of the lessee. This additional criteria has resulted in operating leases for various projects such as prisons, the County Court and water treatment plants subsequently being regarded as finance leases by the Auditor-General.
A range of PPP arrangements do not strictly comply with the existing definitions of operating and finance leases contained in the lease standard. Further, there is a need for the introduction of a new international accounting standard covering PPP service contracts, commonly referred to as service concession arrangements.
This situation is complicated in that the Auditor-General's Office and government agencies have adopted the principles detailed in the United Kingdom reporting standard FRS5 Reporting the substance of transactions: Private finance initiatives and similar contracts. The model financial report for Victorian Government departments for the reporting period ended 30 June 2005 endorses the use of this standard where the PPP arrangement does not fall within the scope of the Australian leasing standard AASB117.383
Substantial work to determine guidance on the accounting treatment of PPPs has been undertaken by a Sub-Committee of the Heads of Treasury Accounting and Reporting Advisory Committee (HoTARAC). The Sub-Committee included representatives from the various Departments of Treasury and Finance, the Australian Accounting Standards Board (AASB) and the Australasian Council of Auditors-General.
The Sub-Committee recommended the adoption of the United Kingdom reporting standard FRS5.384 Guidance material for government agencies on the standard was issued by HoTARAC in January 2004 - Additional Guidance on the Application of FRS5 methods to determine control (ownership) of Infrastructure Assets used in the Australian Public Sector. This information is based on FRS5 and adopts a 'risk and rewards' approach, in contrast to the 'control' approach proposed by the International Financial Reporting Interpretations Committee (IFRIC). Due to the current international uncertainty about how to account for PPPs, the Committee understands that the major accounting firms are reluctant to provide authoritative advice or guidance to the Department of Treasury and Finance on accounting for PPPs.
Subsequent to issuing the above guidance, the IFRIC, which is responsible to the International Accounting Standards Board (IASB), issued a series of draft interpretations that sought to determine the accounting model for PPPs. Comment on the proposals was sought internationally and responses were due by May 2005.385 A further draft paper titled Service Concession Arrangements - discussion summary and flowcharts, was issued by the IFRIC in December 2005. This paper sought to further clarify the IFRIC's attitude regarding the party that should recognise the infrastructure projects associated with service concessions as an asset.
The IFRIC determined at its meeting in March 2006 that in light of comments received about the initial series of draft interpretations, a revised draft would be prepared for further meetings in 2006. The eventual outcome of this exercise will be the adoption by the International Accounting Standards Board of a new international reporting standard dealing with the accounting treatment for PPPs. Under Australia's current sector-neutral standard setting regime, this new standard will become mandatory and will be implemented by the Victorian Government across the public sector.
Of some concern to the public sector is that the proposed new accounting standard focuses solely on the treatment of service concessions and PPP assets in the financial reports of the private sector operators, despite its impact on the financial statements and budgets of the public sector. The Committee is aware that the International Public Sector Accounting Standards Board is attempting to set up an international project to examine PPP accounting arrangements from a public sector viewpoint, following concerns about the IFRIC proposals on control.386 The Committee considers that such an exercise is critical to ensure that any new standard meets public sector expectations on accountability for PPPs.
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382 Mr G Maguire, Assistant Director, Commercial Division, Department of Treasury and Finance, transcript of evidence, p.2
383 Model Financial Report for Victorian Government departments for reporting period ending 30 June 2005, p.viii
384 Department of Treasury and Finance, Accounting Policy Update, edition 9, January 2006, p.2
385 International Financial Reporting Interpretations Committee Draft Interpretation, D12 - Service Concession Arrangements - Determining the Accounting Model, D13 - The Financial Asset Model and D 14 - The Intangible Asset Model
386 International Public Sector Accounting Standards Board, update 4, April 2006, p.1