It is useful for the public entity to prepare and publish reports annually, reflecting the use of public finances and contingent liabilities. The report on public finances would include estimates of the maximum amount that the Government could spend on revenue guarantees and estimates of the net present value of the guarantees and revenue-sharing arrangement. The report could also estimate the present value of committed subsidies and availability payments. The report on contingent liabilities discusses not only expected cash flows from revenue guarantees but also the variability of those cash flows. It is also prudent to publish contracts and related documents, including changes made after renegotiation in any PPP arrangement.
| Practices Prevalent in Other Countries The table given below is an excerpt from the World Bank and PPIAF report on Managing Contingent Liabilities in PPPs, Practices in Australia, Chile and South Africa; Timothy Irwin and Tanya Mokdad, June 2009. | |||
| Chile | South Africa | Australia | |
| Approval | Minister of Finance must approve concession contract. Minister is advised by a Contingent Liabilities and Concessions Unit. But most PPP expertise resides in the Concessions Department of the Ministry of Public Works. | Proposed PPPs and associated contingent liabilities must be approved at four stages by the National Treasury, which contains a specialist PPP unit. The Treasury's fiscal liability committee reviews at fourth stage. | PPPs must be approved at four stages by the Cabinet, which is advised by the Department of Treasury and Finance, which has a PPP group. |
| Analysis | Ministry of Finance measures and values revenue guarantees for existing and proposed concessions. | Approval of Gautrain project was based on a 50-page report that analyzed many associated contingent liabilities, some small, others large. | PPP guidelines focus on estimating the expected costs of uncertain payments in publicly financed projects in comparisons between the costs of a PPP and a publicly financed project |
| Reporting | Government agencies include a disclosure note on PPPs in their modified-cash based annual reports. | Government agencies include a disclosure note on PPPs in their modified-cash based annual reports. | Government reports according to IFRS. Most PPP assets and associated liabilities are on the Government's balance sheet. Contracts are published |
Many sources provide recommendations on managing contingent liabilities created by PPPs. The underlying premise of all recommendations is that the rules governing PPPs should ensure that the officials in charge have incentives, information, and the capability to take account of the costs and risks of contingent liabilities. A few of the suggestions include:
1. Cost-benefit analysis should be used to select projects, and value proposition analysis should be used to choose whether a PPP is the best mode for implementation of the project rather than implementation through the conventional means of procurement.
2. Costs and risks associated with contingent liabilities should be quantified.
3. PPP arrangements would need to be approved by the Cabinet, the Ministry of Finance, or some other body with an interest in future spending. The Ministry of Finance, for instance, could review proposed PPPs.
4. Public entities should bear only those risks that they can best manage, which generally are those that they can control or at least influence.
5. Modern accrual-accounting standards should be adopted for financial reporting, to reduce the temptation to use PPPs to disguise fiscal obligations.
6. PPP arrangements should be published, along with other information on the costs and risks of the financial obligations they impose on the Government.
7. Budgetary systems should be modified to capture the costs of contingent liabilities.
8. A guarantee fund should be used to encourage recognition of the cost of guarantees when they are given, or to help with payments when guarantees are called.
9. Governments should charge fees for guarantees. Although there is no shortage of recommendations, it is hard to discover what Governments have done to improve the management of contingent liabilities associated with PPPs.
10. Carry out a Probability analysis which inturn includes the following
a. Listing out all contingent liabilities (i.e. any trigger that would entail a payment by the public entity over & above the direct liabilities, if any).
b. Assessing the monetary value of each (and arranging them in descending order).
c. Alongside assessing the monetary value of each contingent liability, assessing the periodicity of each (i.e., a particular contingent liability could arise once during the construction period, another could arise through the operations period, etc.,)
d. Then, based upon an analysis of precedence in the sector/location/ public entity's track record, etc., the probability of the risk materializing. For instance, if the delay in release of payment by the public entity by 30 days entails a penalty of x% of total project cost per day is the track record so far; probability has to be assessed on the basis of the track record and the financial amount thereof calculated.
e. Probability-wise testing is done with a broad rule of thumb, say, >75% chance of occurrence would be High Probability whereas 50 -75% is Medium Probability and so on.
f. If a 75% contingent liability has an impact of, say < [a defined amount: the threshold] it can be ignored as if negligible and then, on an increasing scale, even a rare event which may have a high contingent liability impact, could be rated as a contingent liability that needs to be addressed, even if it is at the low end of the Medium Scale
g. The contingent liability provisioning would have to be spread over the years of likely occurrence or as a lumpsum fund that is provided on a reducing balance (old risks vanishing and no new ones replacing them, etc.).
It is prudent and in the interest of any project that is being developed through a PPP format to set up a mechanism to manage contingent liabilities during drafting of agreements and also during the post award contract management stage of the project.
| Accounting Principles The International Public Sector Accounting Standards Board (the "IPSASB") has issued a consultation paper on Accounting and Financial Reporting for Service Concession Agreements. The paper proposes that the public entity which grants a concession or awards a project to be developed through PPP framework would also be in control of the property underlying a PPP arrangement and it must recognise that property as an asset in its financial statements. Given below are certain proposals made as part of the consultation paper that concern issues pertaining to the accounting of contingent liabilities: • Guarantees and commitments made in the project agreement - how would they feature in the accounts of the public entity? • Revenue from revenue-sharing arrangements in the event any contingent event is deemed to have occurred - whether such revenues are considered to be earned by the public entity? • Revenue from contractually-determined inflows - whether it would be recognised from the beginning of the agreement period on a straight-line basis or another basis that better reflects the consumption of access to the property or the time value of money? Currently, the manner in which assets created through PPP projects, revenue guarantees, revenue shares, etc. are accounted by the public entity is not clear in the Indian context. The Government Accounting Standards Advisory Board has adopted certain provisions of the IPSAS especially pertaining to adoption of cash basis IPSAS for cash transactions and corresponding accrual IPSASs for those transactions recorded on other than a cash basis. India is also witnessing a transition from the cash to accrual accounting system. The Government of India and the majority of State Governments have accepted the idea of accrual accounting. Local urban bodies are also attempting to incorporate IPSAS in their accounting. |