and publicly accessible.
91. Good practice requires making the terms of any contract open to public scrutiny through the publication of such contracts or, at a minimum, disclosure of the key terms of the contract. Some countries are moving in the direction of contracting out provision of a public good or service to the private sector. A form of contracting out that is gaining increasing popularity is public-private partnerships. As with procurement decisions, the process for determining the provider and issuing a contract needs to be open and transparent.
For all contracts, best practice disclosure requirements are as follows:
• Contracts, including any renegotiations, should be publicly disclosed. Standardization and simplification of contracts would be desirable.
• Future payments required under existing contracts should be reported and included in medium-term planning.
• Government guarantees associated with public-private partnerships (PPPs) or other contractual arrangements should be fully disclosed.
• When the government bears the majority of risks associated with a project, the assets should be considered government assets and accounted for in the fiscal accounts.
Public-private partnerships
92. Public-private partnerships refer to arrangements in which the private sector supplies infrastructure assets and services that have traditionally been provided by the government.46 PPPs are attractive because they can increase infrastructure investment, and sometimes they can add to government revenue. It is also believed that better management and greater
efficiency in the private sector can lead to better-quality, lower-cost services. Box 5 describes PPP arrangements in Chile that have been managed effectively.
46 A number of advanced economies have well-established PPP programs. The United Kingdom started its Private Finance Initiative in 1992 and it now accounts for about 14 percent of public investment. Australia and other countries in Europe, including Ireland, Finland, Germany, Greece, Italy, the Netherlands, and Spain, as well as Canada and Japan, also have PPP programs, but their share in total public investment is modest.
Countries in Eastern Europe, including the Czech Republic, Hungary, and Poland, are also launching PPP programs. Among other emerging market economies, Chile and Mexico have well-developed PPPs.
Box 5. PPP Arrangements in Chile
Chile’s PPP program covered 44 projects (valued at 6.25 percent of 2004 GDP) in 2004, mainly for highways, urban roads, and airports. Chile demonstrates a number of good practices with regard to PPPs and fiscal transparency. One important lesson for other countries is to have the institutional framework in place before launching a PPP program. In Chile this institutional framework was established with the 1991 Concessions Law, which requires competitive bidding for concession contracts and establishes the rights and obligations of each party, including dispute resolution procedures and cancellation of contracts. Another good practice is to apply the same rigorous evaluation methods, including cost-benefit analysis, to all public investment projects, whether they are undertaken by the public sector or contracted to the private sector. Furthermore, projects must also be consistent with a broad infrastructure plan and acceptable from a fiscal sustainability perspective to ensure that PPPs are not a source of unsustainable liabilities.
In Chile, PPP contracts must clearly specify the risks that are borne by the government, and since October 2003 the government’s exposure to contingent liabilities related to guarantees provided in concession contracts has been reported in the Report on Public Finances. These include the net present value of expected minimum and maximum revenue guarantee payments (net of receipts under the revenue sharing agreement). Recent reports include a detailed discussion on the analytical
approach used and its shortcomings. In addition, Chile not only reports current cash payments to and from the concession firms, but it also reports the present value of future payments for the period 2004–2030. This makes it possible to have a complete picture of the long-term costs and risks associated with the PPPs. However, transparency could be further strengthened by publishing full information on original and renegotiated contracts. A uniform template could be developed to summarize the key provisions of contracts on the Ministry of Public Works’ website and as part of budget documentation.
For additional case studies of PPPs, including a number in Eastern Europe, see the European Commission’s Reference Book on PPP Case Studies, June 2004, at
http://europa.eu.int/comm/regional_policy/sources/docgener/guides/pppguide.htm
93. A PPP typically takes the form of a Build-Operate-Transfer scheme in which the government specifies the services it wants and the private provider designs, builds, finances, and operates the facility. Typically the asset is transferred to the government at the end of the operating contract, but other options are possible. The main purchaser of the PPP services is the government in many cases, but they can sell services directly to the public as is usually the case with toll roads or railways. Investment projects, including PPPs, involve various types of risk, including construction/performance risk, financial risk (related to variability of interest and exchange rates), demand risk (whether demand for the service is estimated correctly), and residual value risk. PPPs seek to transfer some of these risks from the government to the private sector. However, contract renegotiations are common with most PPPs so that the burden of risk may change over time.
94. A concern with PPPs is that they may be used to move public investment off budget and debt off the government balance sheet, in some cases to circumvent restrictions on the overall fiscal balance or public debt. In addition, the contractual obligation to purchase services from the PPP private operator has fiscal implications over the medium term, which
reduces expenditure flexibility for the government. Furthermore, resorting to guarantees to secure private financing can expose the government to hidden and possibly higher costs than traditional public financing.
95. Government guarantees can be used to reduce or eliminate the risks incurred by the private sector in connection with PPPs. All forms of guarantees related to PPPs should be disclosed, and an assessment made of their likely fiscal cost. In addition, the public policy purpose of each guarantee, the total amount of the guarantee classified by sector and
duration, and the intended beneficiaries should be provided., Loan guarantees can reduce the private sector’s financing risks while demand guarantees or guaranteed payments for services sold to the government can reduce demand risk.47 Residual value risk is reduced through price guarantees at which the government will purchase the assets when the operating contract ends.
Accounting for PPPs
96. A fiscal accounting and reporting standard has not yet been developed for PPPs.
Statistical and accounting guidelines tend to allocate the ownership of the PPP assets to either the public or the private partner, depending on a determination of how risks are apportioned between the two sectors. Eurostat issued a decision that says a private partner will be assumed to bear the balance of PPP risk if it bears most construction/performance risk or most demand risk. This decision has often been criticized because it would allocate PPP assets too often to the private sector. The practice in a number of countries is to record PPP assets as government assets—accounting for them as public investment or as a financial lease.
97. Assessing risk transfer is a difficult exercise because the complexity of PPP contracts makes them hard to interpret. Furthermore, political pressure on the government to bail out a large (but failing) project or “essential” services means that the government may in fact bear more risk than the contract suggests.48
98. According to the GFSM 2001, PPP operations should be treated as follows:
• Operating contracts: Payments by the government under contracts for services should be recorded as expenses in the government operating statement.
• Concession fees and operating leases: Payments by private operators to the government should be recorded as revenue on the operating statement.
47 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-11022004-AP/EN/2-11022004-AP-EN.HTML
48 For example, Engel, Fischer, and Galetovic (2003) note that Mexican taxpayers spent more than US$8 billion to bail out both franchise owners and the banks that financed their projects. Other countries, such as Chile (see Box 5), have had successful and transparent PPP programs.
• Financial leases: The acquisition of an asset under a financial lease is recorded in the operating statement at cost,49 together with the incurrence of a lease liability to the private sector. These asset and liabilities would be recorded on the government balance sheet. Subsequent depreciation, interest, and amortization would then be recorded on the operating statement. As the lease liability is reduced, the asset value will build up on the balance sheet.
• Transfer of PPP assets to government: If there is provision for a PPP asset to be transferred at zero cost to the government, it is recorded as the acquisition of a nonfinancial asset at its residual value, balanced by capital transfer from the private owner. Any purchase price involved would be recorded as an expense, and the capital transfer would decrease accordingly.
99. Under cash basis accounting, the liability under a financial lease is recorded as government debt. Interest and amortization would be recorded as expenditure and financing.
When a PPP asset is transferred to the government, any purchase price is recorded as investment.
Contracts for resource development
100. Although many countries have state-owned companies to exploit natural resources such as oil, minerals, and timber, licensing to private firms is also a common practice. Production sharing contracts—whereby the company is contracted to extract and develop the resource in return for a share of the production—are becoming standard features in the oil and gas industries.50 The main parameters of production sharing contracts for oil are the cost oil retained by the contractor to cover cost; profit oil, which covers the remaining production; and an agreed upon formula for dividing profit oil between the government (or national resource company) and the contractor. However, production sharing agreements may also determine tax and/or royalty liabilities by defining individual rates, payment scales, or other variables. Although the contracts may be based on a model contract, some
parameters are individually defined and decided through either bidding or negotiation. Best practice is to publish actual contracts in addition to the publication of the model contract, which provides only limited information. Especially where production sharing contracts are the central instrument of the fiscal regime, all the key parameters should be available to the public in the same way that tax rates, exemptions, and deductions are publicly known. The Guide on Resource Revenue Transparency should be consulted for further details.
49 Under GAAP, the acquisition of an asset is not included in the operating statement, but treated as strictly a balance sheet transaction. However, under the GFSM 2001 presentation, the operating balance is arrived at in accordance with GAAP, and then the acquisition of nonfinancial assets is deducted from the operating balance to arrive at net lending/borrowing.
50 In some cases a national oil company may have a production sharing agreement with a private investor. This is just as much a granting of rights to a public resource, and hence, these contracts should be subject to the same transparency requirements.
101. Clarity and openness of licensing procedures are fundamental to transparency through all stages of resource development. Open tendering with clear procedures and sealed bids constitutes best practice, and is the basis for licensing in many advanced economies.
Negotiated deals, which are more common in the mining industry, do not have sealed bids or a firm bid deadline, and the government exercises discretion in deciding terms and awarding contracts. Fiscal transparency requires limiting complexity and full disclosure of final agreements. Good practice would at minimum include ex post publication of contract awards.51
Liability and asset management
1.2.5 Government liability and asset management, including the granting of rights to