## d8-publicprivate-partnerships

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### Background and scope of PPPs
- Public-Private Partnerships (PPPs) are defined as long-term contracts between two units, whereby one unit acquires or builds an asset or set of assets, operates it for a period, and then hands the asset over to a second unit (BPM6, paragraph 4.111).
- Typical parties and structures:
  - Usually between a private corporation (resident or nonresident) and a government; other combinations possible (public corporation as either party, or a private nonprofit as the second unit).
  - May involve Special Purpose Vehicles (SPVs) or notional units (DIEs) to construct and/or operate assets.
- Global scale and trends:
  - Number of PPP projects globally is estimated to have grown to over 6.4 million by 2020 from 1984.
  - PPPs to developing countries averaged US$79 billion per annum between 2007–2011 from about US$30 billion between 2002–2006.
  - Over 134 developing countries implemented new PPP projects in infrastructure alone.
- Key definitional point:
  - Economic ownership — assessed by which unit bears the majority of the risks and expects the majority of the rewards — determines statistical treatment and recording across frameworks.

### Current statistical treatment and practical complexities
- Frameworks referencing PPPs include BPM6, 2008 SNA, GFSM 2014, EDS Guide 2013, PSDS Guide, ESA 2010.
- BPM6 guidance:
  - Adopts treatment akin to financial leases for some PPPs and links external debt classification to economic ownership when the private partner is nonresident (EDS Guide 2013, Appendix 1).
  - BPM6 Compilation Guide (BPM6CG) offers guidance on production sharing agreements and elements for assessing PPPs and DI relationships (Chapter 10, Box 10.1).
- Role of branches, notional units, and DIEs:
  - Existence of a production unit, branch, or notional unit is important for applying BPM6 guidance to PPPs under DI.
  - If a foreign firm is not economic owner but has substantial external construction operations, those operations may constitute a resident branch (giving rise to a DI relationship).
  - If a foreign firm is economic owner of immobile nonfinancial assets, a notional unit (DIE) may be created so the notional unit owns the immobile asset and the foreign investor owns the notional unit.
  - Current statistical frameworks give limited reference to the role of DIEs in PPP arrangements despite their potential importance.
- Practical complications in assessing economic ownership:
  - Assets often have service lives much longer than contract periods, complicating assignment of ownership over service lives.
  - Contracts commonly specify asset disposition at contract end, operation and maintenance requirements, performance standards, and may allow government acquisition of legal and economic ownership at contract end, possibly without payment.
- Treatment of DI recording:
  - PPP transactions and positions in DI are not separately identified in current ESS presentations and are typically recorded in corresponding DI categories (equity and debt instruments in the financial account, and investment income in the current account).

### Key methodological issues identified for discussion
- Issue 1 — Methodological framework for recording PPPs under DI:
  - Need to incorporate concepts, definitions, and scope of PPP arrangements from GFS and national accounts into ESS/DI classification.
  - Additional elements for classification:
    - (i) sectoral classification of the government unit participating in the PPP (for instance, only units of the general government);
    - (ii) type of the asset (for instance assets that are public assets);
    - (iii) use of the asset (for example assets that will be used for public services);
    - (iv) the type of unit that will mainly cover payments for services provided by PPP assets (for example government or users);
    - (v) relevance of distinguishing PPPs from concessions;
    - (vi) presence of Special Purpose Vehicle (SPV) or other units in PPPs;
    - (vii) relevance of information in PPP contracts for adequate classification of flows and stocks.
  - Options:
    - Option A: Include an appendix in the BPM providing detailed guidance on concepts, definitions, scope of PPP arrangements and treatment of associated DI transactions and positions.
    - Option B: Maintain status quo but provide practical guidance in the BPM6CG on compiling PPP-related DI transactions and positions.
- Issue 2 — Clarification on treatment of the SPV/DIE in generic PPP models:
  - BPM6 already provides guidance on notional units (paragraphs 4.34–4.40) and branches (paragraphs 4.26–4.33), but PPPs’ long-term and large-magnitude nature makes DIEs likely to be important.
  - Options:
    - Option A: No changes to the updated BPM and explain issues in other documents (e.g., compilation guide, clarification notes).
    - Option B: Provide detailed guidance on applying existing guidance on branches and notional units in PPP arrangements; explain DI relationships using different PPP initiatives (e.g., PFIs, DBOT, BOTs, BOOTs); include explanations in the Appendix recommended in Issue 1.
- Issue 3 — Ownership of the asset: role of economic vs legal ownership under DI:
  - International standards use economic ownership (party bearing risks and rewards) to determine statistical treatment.
  - Options:
    - Option A: No changes to the updated BPM and explain issues in other documents.
    - Option B: Include in the Appendix recommended in Issue 1 a discussion of alternatives to determine which unit in PPPs under DI has economic ownership.
- Issue 4 — Recording: reporting of PPP arrangements under DI:
  - PPP-related DI currently recorded across standard DI categories; not separately identified in DI presentations.
  - Options:
    - Option A: Include a supplementary “of which PPPs” line under the DI functional classification to track PPP-related DI evolution.
    - Option B: No changes in current reporting of DI statistics in current and financial accounts.

### Outcomes, recommendations, and consensus
- Recommendation for Issue 1:
  - Recommendation: Option A — include an annex in the BPM providing guidance on concepts, definition, scope and treatment of PPP-related DI and associated transactions and positions.
- Recommendation for Issue 2:
  - Recommendation: Option B — provide detailed guidance on imputation criteria for notional units or branches (DIEs) in PPPs under DI; include discussion in the new BPM (while additional material can also appear in BPM6CG).
- Recommendation for Issue 3:
  - Recommendation: Option B — include guidance on treatment of PPP arrangements under DI depending on whether the economic owner is the government or a private corporation.
- Recommendation for Issue 4:
  - Recommendation: Option B — do not introduce a separate breakdown to identify PPPs within the DI functional classification, given data confidentiality issues and that PPPs may be large but infrequent and limited in some countries.
- Summary of DITT discussions and approvals:
  - DITT members were generally supportive of providing further guidance on PPP concepts and treatment.
  - Vast majority agreed with a detailed appendix on concepts, definitions, scope, and statistical treatment of PPPs related to DI in the BPM update; two members supported placing guidance in BPM6CG only.
  - All commenting DITT members agreed guidance should incorporate relevant PPP aspects from other statistical frameworks (such as GFS).
  - All agreed separate identification of PPPs in DI classification is not necessary.
  - Recommendations approved by the June 2021 committee meeting:
    - Provide additional guidance on concepts, definitions, scope, and statistical treatment of PPPs related to DI:
      - (i) conceptual guidance on PPPs in an annex of BPM7;
      - (ii) guidance on sources and compilation methods to be developed in the BPM7 Compilation Guide.
    - Separate identification of PPP arrangements in DI classification in the balance of payments and IIP is not required.

### Selected definitions and MGDD (ESA 2010 implementation) highlights
- MGDD 2019 definition and core characteristics:
  - PPPs are long-term contracts with “government paying to a nongovernment partner all or a majority of the fees under a specific contractual arrangement, thus covering most of the total cost of the service provided.”
  - Contract features:
    - Provision of “public assets” and related services;
    - Use of specific “dedicated assets” built by a nongovernment unit to supply public services;
    - Normally between government and one or several commercial partners, directly or through an SPV.
- Eurostat definition (A Guide to the Statistical Treatment of PPPs, 2016):
  - PPPs are “a long-term contractual arrangement for the provision of a public asset and related services in exchange for performance-based payments linked to the asset’s availability and/or use and the delivery of the related services.”
  - Authority must be part of general government; partner must be outside general government for arrangement to be a PPP.
- Payments, revenue sources, and distinction from concessions:
  - Key feature: government is the main purchaser of services from the partner.
  - If majority of partner revenues come directly from users rather than government, Eurostat treats the project as a concession.
- Determining economic ownership and risk allocation (MGDD Annex III):
  - Economic ownership determined by which unit bears majority of risks and expects majority of rewards.
  - Acquisition-related risk factors: government control over design/quality/size/maintenance; construction risk (cost overruns, delays, specification failures, environmental or third-party liabilities).
  - Operating-related risk factors: supply risk, demand risk, residual value and obsolescence risk, availability risk.
  - MGDD rule for classifying PPP assets on partner’s balance sheet requires:
    - partner bears construction risks;
    - partner bears at least one of availability or demand risk (and sometimes both);
    - risks are not transferred to government by other means (e.g., government financing, guarantees, early redemption clauses).
  - If conditions met but contractual mechanisms allocate risks to government, PPP may be treated as an operating lease for national accounts (government purchase of services).
- External sector and external debt implications (MGDD Annex IV):
  - If economic ownership remains with a nonresident private enterprise until transfer on completion, government prepayments are claims on a nonresident enterprise (external debt of the private nonresident corporation).
  - If government is economic owner during the contract but makes no explicit payments to the nonresident private corporation, an imputed financial lease arises and government external debt is recorded.
  - Lease classification (operating vs financial) depends on which party gains most risks and benefits; a financial lease for government implies external debt.
- Control, DI, and SPV classification (MGDD Annex V):
  - Examples where SPV is inside general government (and thus on government balance sheet):
    - government has 51% share in ownership and voting rights — SPV deemed controlled by government;
    - government has 25% share that gives veto rights over important decisions — SPV deemed controlled by government;
    - government has no ownership share but has veto rights over important decisions through financing agreements or contracts — SPV deemed controlled by government.
  - DI arises when a resident investor gives control or significant influence over an enterprise resident in another economy; ownership of 10 percent or more of voting power is evidence of a DI relationship.
  - If the SPV is classified inside general government, the project will be on government balance sheet.

*Guidance Note (GN), IMF — "d8-publicprivate-partnerships" SECTION I: THE ISSUE; The Manual on Government Deficit and Debt, implementation of ESA 2010 (MGDD), 2019.*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background and scope of PPPs
- Public-Private Partnerships (PPPs) are defined in international statistical guidance as long-term contracts between two units, whereby one unit acquires or builds an asset or set of assets, operates it for a period, and then hands the asset over to a second unit (BPM6, paragraph 4.111).
- PPPs are usually between a private corporation (resident or nonresident) and a government, but other combinations are possible (public corporation as either party, or a private nonprofit as the second unit).
- Global scale and trends:
  - Number of PPP projects globally is estimated to have grown to over 6.4 million by 2020 from 1984.
  - PPPs to developing countries averaged US$79 billion per annum between 2007–2011 from about US$30 billion between 2002–2006.
  - Over 134 developing countries implemented new PPP projects in infrastructure alone.
- The magnitude of PPPs in direct investment (DI) is not known.
- International statistical standards that reference PPPs include BPM6, 2008 SNA, GFSM 2014, EDS Guide 2013, PSDS Guide, ESA 2010, and others. Annex I of the GN reproduces alternative PPP definitions and a Typical PPP Project Structure and Funds Flow graphic.

### Current statistical treatment: economic ownership and recording across frameworks
- Key principle: statistical treatment of PPP transactions and positions depends on the economic ownership of the asset(s).
  - Economic ownership is determined by assessing which unit bears the majority of the risks and which unit is expected to receive a majority of the reward of the assets.
- Practical complications:
  - Assets often have service lives much longer than the contract period, making it frequently not obvious which party owns the assets over their service lives or which party bears most risks and receives most rewards.
  - The decision whether to record PPP-related assets and liabilities on the government’s or the private corporation’s balance sheet is not straightforward.
- BPM6 treatment:
  - BPM6 provides limited references to economic ownership and adopts a treatment akin to financial leases for some PPPs.
  - If the private sector corporation is a nonresident, classification as external debt depends on who is the economic owner of the fixed asset during the contract and the nature of the contract (EDS Guide 2013, Appendix 1).
  - BPM6 Compilation Guide (BPM6CG) offers guidance relevant to production sharing agreements and elements for assessing PPPs and DI relationships (Chapter 10, Box 10.1).
- Role of notional units, branches, and DI enterprises (DIEs):
  - Existence of a production unit, a branch, or another type of unit is important for applying BPM6 guidance to PPPs under DI.
  - Examples:
    - If a foreign firm is not considered the economic owner and its external construction operations are substantial, those operations may constitute a resident branch (giving rise to a DI relationship).
    - If the foreign firm is the economic owner of immobile nonfinancial assets, a notional unit (DIE) may be created so that the notional unit owns the immobile asset and the foreign investor owns the notional unit (to comply with SNA requirement that land is owned by a resident, with narrow exceptions).
  - Current statistical frameworks make limited references to the role of DIEs in PPP arrangements despite DIEs potentially playing an important role.

### Issues identified for discussion (enumerated)
- Issue 1 — Methodological framework for recording PPPs under DI:
  - Need to incorporate concepts, definitions, and scope of PPP arrangements from GFS and national accounts into ESS/DI classification.
  - Additional elements to consider:
    - (i) sectoral classification of the government unit participating in the PPP (for instance, only units of the general government);
    - (ii) type of the asset (for instance assets that are public assets);
    - (iii) use of the asset (for example assets that will be used for public services);
    - (iv) the type of unit that will mainly cover payments for services provided by PPP assets (for example government or users);
    - (v) relevance of distinguishing PPPs from concessions;
    - (vi) presence of Special Purpose Vehicle (SPV) or other units in PPPs;
    - (vii) relevance of information in PPP contracts for adequate classification of flows and stocks.
  - Options:
    - Option A: Include an appendix in the BPM providing detailed guidance on concepts, definitions, scope of PPP arrangements and treatment of associated DI transactions and positions.
    - Option B: Maintain status quo but provide practical guidance in the BPM6CG on compiling PPP-related DI transactions and positions.

- Issue 2 — Clarification on treatment of the SPV/DIE in generic PPP models:
  - BPM6 already provides guidance on notional units (paragraphs 4.34–4.40) and branches (paragraphs 4.26–4.33), but PPPs’ long-term and large-magnitude nature makes DIEs likely to be important and current frameworks give limited reference to their role.
  - Options:
    - Option A: No changes to the updated BPM and explain issues in other documents (e.g., compilation guide, clarification notes).
    - Option B: Provide detailed guidance on applying existing guidance on branches and notional units in PPP arrangements; explain DI relationships using different PPP initiatives (e.g., PFIs, DBOT, BOTs, BOOTs); include explanations in the Appendix recommended in Issue 1.

- Issue 3 — Ownership of the asset: role of economic vs legal ownership under DI:
  - International standards use economic ownership (party bearing risks and rewards) to determine statistical treatment; BPM6 bases ownership on economic ownership.
  - Options:
    - Option A: No changes to the updated BPM and explain issues in other documents.
    - Option B: Include in the Appendix recommended in Issue 1 a discussion of alternatives to determine which unit in PPPs under DI has economic ownership.

- Issue 4 — Recording: reporting of PPP arrangements under DI:
  - PPP transactions and positions in DI are not separately identified in current ESS presentations; they should be recorded in corresponding DI categories (equity and debt instruments in the financial account, and investment income in the current account).
  - Options:
    - Option A: Include a supplementary “of which PPPs” line under the DI functional classification to track PPP-related DI evolution.
    - Option B: No changes in current reporting of DI statistics in current and financial accounts.

### Outcomes and recommendations (Section II)
- Recommendation for Issue 1:
  - Recommendation: Option A — include an annex in the BPM providing guidance on concepts, definition, scope and treatment of PPP-related DI and associated transactions and positions.
- Recommendation for Issue 2:
  - Recommendation: Option B — provide detailed guidance on imputation criteria for notional units or branches (DIEs) in PPPs under DI; include discussion in the new BPM (while additional material can also appear in BPM6CG).
- Recommendation for Issue 3:
  - Recommendation: Option B — include guidance on treatment of PPP arrangements under DI depending on whether the economic owner is the government or a private corporation.
- Recommendation for Issue 4:
  - Recommendation: Option B — do not introduce a separate breakdown to identify PPPs within the DI functional classification, given data confidentiality issues and that PPPs may be large but infrequent and limited in some countries.
- Summary of DITT discussions:
  - DITT members were generally supportive of providing further guidance on PPP concepts and treatment.
  - Vast majority agreed with a detailed appendix on concepts, definitions, scope, and statistical treatment of PPPs related to DI in the BPM update; two members supported placing guidance in BPM6CG only.
  - All commenting DITT members agreed guidance should incorporate relevant PPP aspects from other statistical frameworks (such as GFS).
  - All agreed separate identification of PPPs in DI classification is not necessary.
- Recommendations approved by the June 2021 committee meeting:
  - Provide additional guidance on concepts, definitions, scope, and statistical treatment of PPPs related to DI:
    - (i) conceptual guidance on PPPs in an annex of BPM7;
    - (ii) guidance on sources and compilation methods to be developed in the BPM7 Compilation Guide.
  - Separate identification of PPP arrangements in DI classification in the balance of payments and IIP is not required.

### Annex I (selected definition excerpt)
- World Bank definition (excerpt): PPPs are long-term contracts between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.
- PPP contracts define functions for which the private party is responsible: design (engineering), build or rehabilitate, finance, maintain, and operate; transactions are commonly infrastructure projects and are likely to be classified as resident-to-resident if the private corporation creates a separate unit to construct and/or operate the asset (that unit may incur external assets and/or liabilities to its nonresident parent and other parties, which need to be recorded).

*Guidance Note (GN), IMF — "d8-publicprivate-partnerships" SECTION I: THE ISSUE.*

### 2. The Manual on Government Deficit and Debt, implementation of ESA 2010 (MGDD), 2019

### 2. The Manual on Government Deficit and Debt, implementation of ESA 2010 (MGDD), 2019

### Definition and core characteristics of PPPs
- PPPs are defined as long-term contracts with “government paying to a nongovernment partner all or a majority of the fees under a specific contractual arrangement, thus covering most of the total cost of the service provided.” (MGDD, 2019).
- The contract:
  - is for the provision of “public assets” and related services;
  - results from the use of specific “dedicated assets” built by a nongovernment unit to supply public services;
  - is normally between government and one or several commercial partners, directly or through a special purpose vehicle (SPV) established for the PPP.

### Additional characteristics from the 2008 SNA and Eurostat guidance
- During the contract period the PPP contractor may have the economic ownership of the asset(s); legal ownership commonly passes to government when the contract ends.
- Typical arrangement description:
  - A private enterprise acquires fixed assets and uses them with other inputs to produce services delivered to government either as an input to government production or for distribution to the public without payment, with government making periodic payments during the contract period.
  - Alternatively, services may be sold to the public (e.g., a toll road) with prices regulated by government.
- Eurostat (A Guide to the Statistical Treatment of PPPs, 2016) defines PPPs as “a long-term contractual arrangement for the provision of a public asset and related services in exchange for performance-based payments linked to the asset’s availability and/or use and the delivery of the related services.”
  - The authority must be part of general government for the arrangement to be considered a PPP.
  - The partner must be outside general government (in most cases an SPV created for the PPP).
    - If the partner is an SPV or non-SPV controlled by private entities, the project is a PPP.
    - If the partner is controlled by government and classified as general government, the project is not a PPP.

### Payments, revenue sources, and distinction from concessions
- A key feature: government is the main purchaser of services from the partner.
- If the majority of partner revenues come directly from users rather than government, Eurostat treats the project as a concession and applies separate statistical rules.

### Contract complexity and implications for statistical treatment
- PPP contracts vary widely; all facts and circumstances should be considered to select the statistical treatment that best reflects the economic relationships.
- Contracts commonly specify disposition of assets at contract end, operation and maintenance requirements, design/quality/capacity/maintenance standards, and may allow government to acquire legal and economic ownership at contract end, possibly without payment.
- Typical PPP structures imply direct investment (DI) relationships and associated transactions (e.g., interest, dividends, equity; loans and debt securities if equity investment is 10 percent of voting shares of the project company).

### Statistical treatment under the 2008 SNA (Annex II)
- If government is economic owner during the contract but makes no explicit upfront payment, an imputed transaction must be recorded (commonly as an imputed financial lease).
- If private corporation is economic owner during the contract:
  - Debt associated with asset acquisition is attributed to the private corporation.
  - Two acceptable accounting approaches for the government acquisition at contract end:
    - Gradual approach: government builds a financial claim over the contract; private corporation accrues corresponding liability; at contract end government records acquisition and reduces the financial claim.
    - Capital transfer approach: record change of ownership at contract end as a capital transfer (government records revenue in form of capital transfer; private unit records expense and disposal of asset). The capital transfer approach is pragmatically acceptable when data limitations or uncertainty exist but less reflective of underlying economics than the gradual approach.
- Eurostat recommends three-step assessment for statistical treatment: (i) identify contract issues; (ii) assess significance of issues; (iii) conclude statistical treatment and determine whether PPP is off-balance sheet for government.

### Determining economic ownership and risk allocation (Annex III)
- Economic ownership is determined by which unit bears the majority of risks and expects majority of rewards.
- Acquisition-related risk factors include:
  - Government control over design, quality, size, maintenance;
  - Construction risk (cost overruns, delays, specification failures, environmental or third-party liabilities).
- Operating-related risk factors include:
  - Supply risk (government control of services produced, recipients, prices);
  - Demand risk (variation in service demand by government or public users);
  - Residual value and obsolescence risk (asset value at contract transfer);
  - Availability risk (penalties or costs if service volume/quality standards not met).
- MGDD rule for classifying PPP assets on partner’s balance sheet (i.e., assets outside government) requires:
  - partner bears construction risks;
  - partner bears at least one of availability or demand risk (and sometimes both);
  - risks are not transferred to government by other means (e.g., government financing, guarantees, early redemption clauses).
- If the above conditions are met but other contractual mechanisms allocate risks to government, the PPP may be treated as an operating lease for national accounts (purchase of services by government).

### External sector and external debt considerations (Annex IV)
- If economic ownership remains with a nonresident private enterprise until transfer on completion, any government prepayments are claims on a nonresident enterprise (external debt of the private nonresident corporation).
- If government is economic owner during the contract but makes no explicit payments to the nonresident private corporation, an imputed financial lease arises and government external debt is recorded.
- Lease arrangements between government and nonresident private corporations are classified as operating or financial leases depending on which party gains most risks and benefits; a financial lease for government implies external debt.

### Control, direct investment, and SPV classification (Annex V)
- Examples of government control over an SPV that place the SPV inside general government (and thus on government balance sheet):
  - government has 51% share in ownership and voting rights — SPV deemed controlled by government;
  - government has 25% share that gives veto rights over important decisions (e.g., via shareholder agreements or company law) — SPV deemed controlled by government;
  - government has no ownership share but has veto rights over important decisions through financing agreements or contracts — SPV deemed controlled by government.
- A direct investment (DI) relationship arises when a resident investor gives control or significant influence over an enterprise resident in another economy; ownership of 10 percent or more of voting power is evidence of a DI relationship.
- If the SPV is classified inside the general government sector, the project will be on government balance sheet.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/d8-publicprivate-partnerships.pdf_