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Special Purpose Entities SPEs and PublicPrivate Partnerships PPPs


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Title: Special Purpose Entities SPEs and PublicPrivate Partnerships PPPs

Special Purpose Entities (SPEs)
and Public-Private Partnerships (PPPs)
  • Government Finance Division
  • Statistics Department
  • IMF
  • June 1-12, 2009

  • Governments often create independent
    institutions or entities to perform certain
    functions on their behalf
  • Widely used in recent years
  • From a GFSM 2001 perspective, the legal framework
    of such an entity is less important than the
    economic substance of their operations
  • Two types of such arrangements in this lecture
  • Part I Special Purpose Entities (SPEs)
  • Part II Public-private Partnerships (PPPs)

Part I Special Purpose Entities (SPEs)
Contents of Lecture
  • Definition of SPEs
  • Uses of SPEs
  • SPE measurement challenges
  • Sectorization of SPEs

Definition of SPEs (1/2)
  • An SPE is an entity that is created, through the
    transfer of assets, liabilities, or rights, to
    carry out a well-specified activity or series of
  • These activities are directly related to the
    specific purpose for which it was formed
  • SPEs can be in nonfinancial and financial
    corporate sector
  • In public sector, SPE activities are often
    instrumental to public private partnerships, BOOT
    schemes, or joint ventures
  • Securitization of assets/liabilities

Definition of SPEs (2/2)
  • SPEs often involve three groups
  • Transferor
  • The entity that transfers the assets, liabilities
    or rights
  • The entity that creates the SPE
  • Equity could be vested in transferor and/or
  • Transferee
  • The newly created SPE that receives the assets,
    liabilities or rights
  • Investors
  • Typically provide all funding requirements for
    SPE activities through loans extended to SPE or
    securities other than shares (e.g., bonds) issued
    by SPE

Some Uses of SPEs
  • Can be misused (e.g., to conceal involvement of
    transferor), but justifiable and legitimate
    business purposes exist for use of SPEs, such as
  • Securitization of assets
  • Securitization/recognition of liabilities
  • Pre-funding certain payments
  • Managing risks in financial entities
  • Facilitating market development
  • Limiting tax liabilities
  • Gaining efficiency

SPE Measurement Challenges
  • Existing financial and economic analytical tools
    do not always capture the financial and economic
    activities of SPEs sufficiently due to
  • Lack of disclosure transparency
  • What about off-balance sheet assets
  • Poorly performing assets may be hidden
  • Establishment of layers of accountabilities
  • Who are participants in SPE, and how are risks,
    rewards, and control divided among all
  • Thus, legal framework does not always reflect
    economic substance of SPEs operations

Treatment of SPEs in Macroeconomic Statistics
  • Make sure it is securitization
  • Securitization can only occur when an existing
    asset is sold
  • A future stream of revenue is not recognized as
    an asset, and is treated as borrowing by the
    creator of the SPE (i.e, NOT securitization)
  • Treat SPEs (other than future streams of revenue)
    similar to all other entities in macroeconomic
    statistics regarding
  • Sectorization
  • Recording of flows and stocks

Sectorization of SPEs in GFSM 2001 (1/3)
Sectorization of SPEs in GFSM 2001 (and other
macroeconomic statistics) (2/3)
  • For a nonresident institutional unit that
    performs fiscal (or quasi-fiscal) activities on
    behalf of government
  • Record all flows between general government
    sector and the nonresident SPE
  • If no flows occurred between general government
    and SPE, impute flows between the general
    government sector and the SPE
  • Other nonresident SPEs
  • Part of Rest of World

Sectorization of SPEs (3/3)
  • To determine control, use indicators of control
  • Ownership of majority of voting rights
  • Control of board or other governing body
  • Control of appointment and removal of key
  • Control of key committees of entity
  • Golden shares and options
  • Regulation so tight that it amounts to control
  • Control by a dominant customer (e.g., government)
  • Controls attached to borrowing from government
  • Other controls associated with entitys
    constitution and rules
  • Totality of indicators ? judgmental in nature
  • Also see Risk Transfer later in PPP lecture

Part II Public-Private Partnerships (PPPs)
Contents of Lecture
  • Definition of PPPs (or service concession
  • Reasons for establishing PPPs
  • Fiscal risks of PPPs
  • Risk transfer, leasing, and ownership
  • Managing and reporting fiscal risks of PPPs
  • Recording of PPPs in accounting standards and
    GFSM 2001

Definition of PPPs (1/4)
  • Public sector contracts to purchase quality
    services on a long-term basisprincipally
    involving the construction of new infrastructure
    to provide such services. (UK Government)
  • Contract between a public sector
    institution/municipality and a private party, in
    which the private party assumes substantial
    financial, technical and operational risk in the
    design, financing, building and operation of a
    project. (South African Treasury)

Definition of PPPs (2/4)
  • The IMF definition of PPPs
  • Arrangements where the private sector supplies
    infrastructure assets and services that
    traditionally have been provided by the
  • Main characteristics
  • Private execution and financing of public
  • An emphasis on investment and service provision
    by private sector
  • Risk transfer from government to private sector
  • Classic scheme Design-Build-Finance-Operate

Definition of PPPs (3/4)
  • PPPs have been used as an alternative to public
    procurement in different sectors
  • Education (e.g., schools, museums, libraries)
  • Health (e.g., hospitals and clinics)
  • Water (e.g., sanitation plants, irrigation
    systems, pipelines)
  • Public administration (e.g., courts, police
    stations, and prisons)
  • Transport (e.g., roads, bridges, tunnels,
    railways, airports, ports)
  • PPPs provide services to the government or
    directly to consumers

Definition of PPPs (4/4)
Uses of PPPs
  • Particularly well-suited for economic
    infrastructure, less so for social infrastructure
  • High economic rates of return of sound projects,
    that address clear bottlenecks, are attractive to
    private sector
  • Services are directly provided to final users, so
    user charges are more feasible and even desirable
  • Economic infrastructure projects have a more
    developed market for bundling construction with
    services than social infrastructure projects

Reasons for Establishing PPPs (1/4)
  • Increase efficiency
  • Benefit from private sector expertise
  • Improve timely delivery of quality services
  • Infrastructure for free
  • Tempting particularly for cash strapped
    governments trying to meet fiscal targets

Reasons for Establishing PPPs (2/4)
  • However, PPPs can be risky from a fiscal
  • Move spending off budget and can create (explicit
    and implicit) contingent liabilities for
  • Potentially threaten integrity of budget process
    and undermine efforts to safeguard macroeconomic
  • Perhaps more difficult to achieve fiscal
    discipline and good governance with PPPs

Reasons for Establishing PPPs (3/4)
  • Right Approach PPPs should provide better value
    for money
  • Responsibility for designing, building,
    financing, and operating (DBFO) an asset lies
    with private sector
  • Private sector provides service with higher
  • Efficiency gains need to make up for higher cost
    of private capital, fixed cost of administering
    PPPs, and lack of flexibility in long-term

Reasons for Establishing PPPs (4/4)
  • Wrong Approach PPPs allow investments to be
    recorded off budget
  • PPPs can circumvent fiscal constraints (e.g.,
    formal rules) for infrastructure investment
  • PPPs can, but should not, be used to solely
  • bypass expenditure controls
  • delay borrowing
  • move public investment off budget
  • move debt off the government balance sheet
  • Government can be left bearing most of the risk
    involved, facing potentially large fiscal costs
    over the medium term

Fiscal Risks of PPPs
  • PPPs entail a variety of risks
  • Construction risk, financial risk, demand risk,
    availability risk, political risk, natural
  • Who should bear the risk?
  • Public and private sector have certain advantages
    relative to the other in managing specific risks,
  • Private sector construction risk
  • Public sector political risk
  • Appropriate level of risk transfer depends on
    each project and country
  • Adequate risk sharing is essential to achieve
    value for money!

Risk Transfer, Leasing, and Ownership (1/2)
  • Risk transfer from government to private sector
    has significant influence on whether PPP is more
    efficient and cost-effective alternative to
    public investment and government provision of
  • Have to assess risk transfer and ownership by
    looking at
  • Risks in owning asset
  • Risks in operating asset

Risk Transfer, Leasing, and Ownership (2/2)
  • Leasing
  • PPPs can be set up as operating leases, unusual
    to take form of a financial lease
  • But, from GFS and fiscal risk point of view, we
    look at economic owner of asset by asking who
    bears the ultimate risk or most of the risks
    associated with ownership
  • If government, then impute a financial lease
    through which government acquires the asset
  • Often difficult to assess risk transfer
  • Full disclosure essential, but even then it may
    be problematic to assess risk transfer

Managing and Reporting Fiscal Risks (1/4)
  • Currently, significant scope to strengthen the
    environment for PPPs to mitigate fiscal risks,
    focusing on four areas
  • Good projects
  • Good laws
  • Good institutions
  • Good accounting and reporting

Managing and Reporting Fiscal Risks (2/4)
  • Good projects
  • Systematic 2-step investment process
  • Choose right projects (strategy, prioritize)
  • Do PPPs for the right reasons (value for money,
    include in medium-term budget framework)
  • Good laws
  • Legal framework for PPPs
  • Introduce a clear and consistent PPP law or
    harmonize existing laws to provide consistent
    legal framework
  • Integrate PPP proposals and guarantees with
    budget cycle
  • Clarify roles and responsibilities

Managing and Reporting Fiscal Risks (3/4)
  • Good institutions
  • Management and oversight framework
  • Clarify institutional roles and responsibilities
  • Introduce a central PPP unit
  • Implement a gateway process overseen by
    Ministry of Finance to authorize PPPs at each
    stage of project life cycle
  • Strengthen technical capacities throughout
    government institutions handling PPPs

Managing and Reporting Fiscal Risks (4/4)
  • Good fiscal accounting and reporting
  • Problems!
  • PPPs are chosen to move public investment off
    budget and debt off government balance sheet
  • Government still bears considerable risk and
    potentially faces large fiscal costs
  • General accounting and reporting standards for
    PPPs are still to be developed
  • Proper accounting and reporting of the fiscal
    implications of PPPs is essential to prevent
    their misuse, and to make increased efficiency
    their main motivation

Recording of PPPs in Accounting Standards and
GFSM 2001 (1/2)
  • Topic was extensively discussed in review of
  • Not yet reached a final outcome (as of May 2007)
  • But, already agreed to
  • Look at each PPP contract to determine recording
  • Follow the outcome of international accounting
    standards in recording of PPPs
  • In the mean time, we have fairly straight forward
    existing accounting and GFSM 2001 reporting
    standards for
  • Operating contracts concessions and operating
    leases financial leases and the transfer of PPP
    assets to government

Recording of PPPs in Accounting Standards and
GFSM 2001 (2/2)
  • Accounting for risk transfer
  • Eurostat Classify PPPs as in the private sector
    if private partner bears most construction risk,
    and either most availability risk or most demand
  • IMF Should look at all risks to determine who
    bears ultimate risk to determine control
  • If government controls, then PPP assets are
    government assets
  • IPSAS Not yet determined. Leaning towards the
    notion of who controls asset (Consistent with
  • If government controls, then PPP assets are
    government assets

IMF Operational Approach to Managing and
Reporting Fiscal Risks
  • Aims to mitigate potential moral hazard
  • Emphasis on comprehensive disclosure of known and
    potential future costs of PPPs for public
  • Incorporation of costs into Debt Sustainability
    Analysis and medium-term budget framework
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