There are a number of areas of risk transfer to the private sector which may no longer represent value for money and which may have been included, or retained following changed circumstances in the original contracts, principally in order to achieve off balance sheet treatment. These tend to be in areas where the contractor is not in control of the risk and is therefore likely to charge a premium. With the recent change in the approach to classification (See Box 4 below), this higher level of risk transfer is not required to retain off balance sheet treatment at National Accounts level and therefore to impact on Scottish Government capital budgets
Box 4 - Change to System of Accounting and Classification Until recently, public sector bodies were required to account for PPP transactions under UK accounting standards. Judgements as to whether the PPP contracts were recognised on the public sector body's balance sheet was made in accordance with FRS5 and whether the operator of the asset bore risk with regards to variations in profits or losses on the property. This was determined under a number of different tests - particularly important in achieving off balance sheet treatment was to demonstrate the operators was taking the risk on changes in property related costs and penalties for the unavailability of the asset. From year ended 31st March 2009, public sector bodies are now expected to account for PPP transactions under international accounting standards (IFRS). Each body needs to assess whether its PPP projects fall within the definition of a service concession under International Financial Reporting Interpretation Committee 12 (IFRIC 12). All service concessions which the public sector body controls both the services the operator must provide and the residual value of the asset must account for these assets as a tangible fixed asset on its balance sheet. In practice the vast majority of Scottish PPP projects fall within this definition. However the Scottish Government budgeting for PPP costs follows HM Treasury's consolidated budgeting guidance which follows the treatment of these assets in the National Accounts under the European System of Accounts (ESA95). ESA95 classifies PPP projects as non government assets if they have transferred construction risk and either demand risk or availability risk. The vast majority of Scottish PPP assets fulfil this criteria and are classified as non government assets. |
The main areas to review in this area are:
• Movements in the general insurance market for insurance premia
• General change in law affecting the capital costs of the PPP company
There may be an opportunity to re-negotiate this risk transfer on some existing projects in order to achieve a reduction in the unitary charge; albeit with some greater level of risk being taken by the public sector. It will be dependent upon the allowance for risk that has been made within the pricing of each contracts and how any unitary charge savings that result compare with the additional risks being assumed. The savings that result from the removal of these risks may need to be shared with the private sector. Such changes to the risk transfer are best agreed alongside other variations being made in a contract (e.g. benchmarking / market testing exercise) in order to minimise the transaction costs associated.