This section considers the impact of any NZ changes proposed by an Authority and/or Project Co and the potential impact those changes may have in respect to the classification rules under the European System of Accounts 2010 (ESA 10) introduced in September 2014.
All PPP contracts recognise a right for the Authority to propose changes to the terms of the contract (including the agreed terms of the asset's design, construction, operation and maintenance) and that Project Co is entitled to relief and/or compensation for the consequences of complying with those changes.
Most PPP contracts provide that the Authority benefits from any cost savings or increases in revenues that arise from Authority changes. Some PPP contracts provide that the Authority can require Project Co to finance the change, although it is expected that the vast majority of any proposed NZ changes will be funded through the use of Authority capital rather than any Project Co's finance.
Typically, where an Authority is proposing a NZ Change (or any Change for that matter) and the Authority is proposing to pay for the works through a capital payment to Project Co and the contract that was signed before ESA10 came into effect and the contract was assessed as privately classified / off budget for classification purposes under the old rules, it is therefore necessary to assess whether the change itself affects the original statistical treatment.
The Guide to the Statistical Treatment of PPPs (the Guide)was published in September 2016 to explain the application of the ESA10 rules and has been made available to public sector PPP stakeholders, and in particular PPP practitioners (i.e. Authorities in charge of PPP policy, decision-making and the preparation and procurement of PPP projects) and can be accessed from the hyperlink listed in Appendix 4.
The Guide says that, when a contract is changed, this requires an assessment of the change itself under the rules that exist at the time of the change and if the change itself alters the statistical treatment, the original assessment must be revised.
Subsequent clarification around the application of the Guide to projects that were signed prior to September 2016 has indicated that cumulative alterations to the risk profile of the project since financial close and since the Guide was published should be assessed and if the total of all of these changes were sufficient under the Guide to lead to a public classification, then the contract would be reclassified. Therefore, whilst the NZ changes are likely to implicate mainly capital contributions which are discussed more below, consideration will also need to be given to other changes which have transferred more risk to the Authority since September 2014 such as change in law (Theme 8) and insurance risk (Theme 9) provisions.
Payments made by the Authority for NZ alterations (or other changes) are treated as capital contributions under the Guide and hence regarded as government financing. Theme 14 of the Guide sets out how government financing influences the statistical treatment. Therefore the capital payment for the change/alteration works must be aggregated with government financing already committed to the project. In other words, the aggregation means that the capital payment for the proposed change/alteration needs to be assessed along with all the legacy or previously agreed capital funded changes, as well as any capital contributions. Therefore, if the capital payment brings the aggregate amount of government financing to 50% or more of the total capital expenditure incurred in the construction (and alteration) of the asset, this alone would be sufficient for the PPP contract to be classified as public and recorded on budget for government.
If, on the other hand, the capital payment for the change brings the aggregate of government financing to less than 50% of the capital expenditure incurred in the construction, (and assuming there are no other relevant changes to risk profile as discussed above) then the PPP will remain off budget for the purposes of classification.
In summary, it is unlikely that any capital funded NZ change will on its own bring the project close to the aggregate amount of government financing of 50% of the capital expenditure incurred in the construction, however it is important that a thorough review all legacy changes is undertaken to ensure the aggregate value of all legacy and proposed changes remains below the 50% threshold and there is no other amounts treated as government financing nor other significant changes to risk profile elsewhere in the contract since September 2016 that would contribute towards reclassification in the Guide.