The national debt and deficit treatment of a PPP is likely to be a critical issue for the Authority and government in general. The reason for this is that, given the economic convergence criteria in the “Stability and Growth Pact” and the mandatory requirements of the “excessive deficit procedure”.

Eurostat requires that the debt and deficit treatment follows the requirements of the European System of Accounts (“ESA95”). Guidance 1

Eurostat has issued several interpretations of ESA95, including a “Manual on Government Deficit and Debt”. Guidance 2

For the purposes of recording PPPs, ESA 95 requires national statisticians to look at the risk/reward balance in the underlying PPP arrangement. This balance is judged by analysing in detail the allocation of the construction risk and the market risk (i.e. availability and demand) between the Authority and the PPP Company:

• Construction risk covers events related to the construction and completion of the PPP assets on-time and on-budget. In practice, it is related to events such as late delivery, non-compliance with specified standards, significant additional costs, technical deficiency and negative externalities (such as environmental impacts) which trigger compensation payments to third parties.

• Availability risk covers situations where, during the PPP's operational phase, an underperformance linked to the state of the PPP assets results in services being partially or wholly unavailable, or where these services fail to meet the quality standards specified in the PPP contract.

• Demand risk relates to the variability of demand (higher or lower than expected when the PPP contract was signed), irrespective of the performance of the PPP Company. Such a change in demand should be the consequence of factors such as the economic cycle, new market trends, a change in final users’ preferences or technological obsolescence. Demand risk is part of the usual commercial risk borne by private businesses in a market economy.

The table below illustrates the combinations of risk allocation between government (i.e. the Authority) and the private partner (i.e. the PPP Company) which result in the PPP being classified “on” or “off” the government’s balance sheet under ESA95 rules. Guidance 3

The conclusions from the table are that:

• if the government bears the construction risk, the PPP will always be on the government’s balance sheet irrespective of the allocation of the demand and availability risks; and

• if the private partner bears the construction risk, the PPP will be classified off the government’s balance sheet unless the government bears both demand and availability risks.

It is important that the Authority and its advisers are aware that the risk allocation which they agree to in the PPP contract can have a direct influence on the treatment of the PPP arrangement on the national debt and deficit.

In addition to the construction, demand and availability risks, Eurostat also takes into consideration other ways through which governments get involved in PPPs. Where this influences the risk allocation, it may also affect the debt and deficit treatment of the PPP. Ways in which governments may become involved in PPPs and alter the risk allocation include: government financing such as capital contributions, government guarantees of some private sector risks and PPP contract termination clauses which involve relatively generous financial compensation by the government. The impact on the treatment of PPPs of such government financial involvement depends on a careful interpretation of several features including the transfer of risks and rewards that takes place and the degree of government control over the underlying PPP asset. Guidance 4

Eurostat specifically assessed the availability-based PPP contracts in which government is exposed to demand risk and perceives revenues from the PPP asset (e.g. user fees or tolls flowing to a government agency). From a statistical analysis viewpoint, such a structure is considered to be based on a revenue-generating asset exploited by government with a parallel contract for the asset management by the private partner. Guidance 5 In such cases, the balance sheet analysis concentrates on the extent to which the revenues collected by government fund the availability fees paid by government to the private partner. If the revenues collected exceed 50% of the total value of government payments to the private partner under the contract (e.g. availability payments), the project is recorded on the balance sheet of government. Guidance 6, 7 In other words, government owns an asset (and records it on its balance sheet) if a majority of government payments to the private partner for a provision of services under a contract are “funded” through revenues from this asset.

In case of doubts regarding the appropriate statistical treatment for a PPP arrangement, a Member State's statistical authority can request advice from Eurostat on a past (ex post) or future (ex ante) PPP project. Eurostat has established specific administrative rules for the provision of ex ante advice.