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Critical Perspectives on Accounting 19 (2008) 963986

An example of creative accounting in publicsector: The private financing of

infrastructures in Spain

Bernardino Benito a,, Vicente Montesinos b,1, Francisco Bastida c,2

a Department of Accounting, Faculty of Economics and Business, University of Murcia-Campus

of Espinardo, 30100 Espinardo (Murcia), Spainb Department of Accounting, Faculty of Economics, University of Valencia, Avga. Tarongers s/n,

46022 Valencia, Spainc Department of Accounting, Faculty of Economics and Business, Technical University of Cartagena,

Alfonso XIII, 50, 30203 Cartagena, Spain

Received 11 January 2007; received in revised form 25 July 2007; accepted 30 August 2007

Abstract

This paper analyses some proposals forprivatefinancing of public workshaving emerged in Spain inrecent years. We show that all the new financing methods assessed are incorrectly named as private,

for the payments are finally made by the Government by means of its budgetary resources. A deferral

of accounting and budgetary recognition of these transactions, together with a false disclosure in

financial statements of the debt connected with the projects, are the main reporting consequences of

the new funding methods. In short, it is a clear example of creative accounting with the aim of

meeting the convergence criteria imposed by the European Union.

2007 Elsevier Ltd. All rights reserved.

Keywords: Public sector; Creative accounting; Infrastructures; PFI

The analysis and conclusions of this paper are part of a broader study, funded by the Spanish Fiscal Studies

Institute. Corresponding author. Tel.: +34 968 363812; fax: +34 968 363818.

E-mail addresses: [email protected] (B. Benito), [email protected] (V. Montesinos),

[email protected] (F. Bastida).1 Tel.: +34 963 828294; fax: +34 963 828287.2 Tel.: +34 968 325740; fax: +34 968 325782.

1045-2354/$ see front matter 2007 Elsevier Ltd. All rights reserved.

doi:10.1016/j.cpa.2007.08.002
mailto:[email protected]:[email protected]:[email protected]://localhost/var/www/apps/conversion/tmp/scratch_2/dx.doi.org/10.1016/j.cpa.2007.08.002http://localhost/var/www/apps/conversion/tmp/scratch_2/dx.doi.org/10.1016/j.cpa.2007.08.002mailto:[email protected]:[email protected]:[email protected]


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964 B. Benito et al. / Critical Perspectives on Accounting 19 (2008) 963986

1. Introduction

Most of infrastructures have been financed in Spain through the public budget untilthe middle of the nineties. Concessions and private financing have been scarcely used.

However, private financing of new infrastructures (private finance initiative, PFI, or more

recently named also as publicprivate partnership, PPP) is growing in recent years. These

are the main reasons for reducing the use of budgetary resources:

European Monetary Union (EMU) requirements concerning government deficit and debt

limit the amounts that public entities can borrow to finance capital assets. According to

the 1996 Stability and Growth Agreement, European Governments must reach a balanced

budget in 2001, namely, a zero deficit. This target must be achieved in spite of the social

pressure for more and best public services and benefits, making almost impossible for

the public sector to reduce current expenses and thus generate savings.

Important investment funds are searching in the financial markets for safe and steady

investments.

Rigidity of traditional Public Administration brings about high management inefficien-

cies. Financial earnings are normally improved by companies flexibility and management

skills. Investment priorities, as well as verification of public works profitability and

feasibility can be enhanced through the private business requirements if enough financial

rate of return is achieved.

Furthermore, the infrastructures still remain in Spain quite below the most advanced

countries equipments in the European Union (EU). It is generally known that endowment

for infrastructures is one of the most important conditions for economic growth in anycountry. For example, the 20052020 Infrastructures and Transports Strategic Plan of the

Spanish Ministry of Developmenthighlights that,according to recent studies, the cumulative

marginal productivity of the public capital is almost of 1.5, i.e., an increase ofD1 in public

capital investment leads, in the long term, to a GDP increase of almost D1.5.

All the arguments set out here lead to the conclusion that lots of imagination are required

when searching for new methods to fund public investments. On the one hand, a high quality

in public services must be accomplished, and on the other hand, a rigid budgetary discipline

has to be achieved. Accordingly, new funding methods have appeared in which private

partners are involved in the development of public investment projects (PFI).

Our main hypothesis is that many countries have used PFIs to defer payment and this way

control their deficits and debt without cutting investments in infrastructures and public ser-vices. Lack of a clear accounting standards on how to report PFIs has allowed governments

to do it.

The following pages analyse some proposals for private financing of public works having

emerged in Spain in recent years. After assessing all the new financing methods, we find that

they areincorrectly named as private, for thepayments arefinally made by theGovernment

by means of its budgetary resources. A deferral of accounting and budgetary recognition of

these transactions and a wrong disclosure in financial statements of the debt connected with

the projects are the main reporting consequences of the new funding methods. In short, it is


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B. Benito et al. / Critical Perspectives on Accounting 19 (2008) 963986 965

a clear example of creative accounting with the aim of meeting the convergence criteria

imposed by the EU.

The remaining of the paper is organized as follows. Section 2 presents the theoreticalbackground. Section 3 describes the main PPP contracts characteristics. Section 4 shows

the opportunities for using new financing methods of public works in Spain. In Section 5

we analyse different forms of private financing of infrastructures and their implications for

government deficit and debt. Section 6 summarizes and presents conclusions.

2. Theoretical framework

The choice between budget and PFI when financing infrastructures has to do with the

theory of propertyrights, whichstates thatownership matters whencontractsare incomplete,

thus preventing parties from stipulating all the potential eventualities in the contract (see

Hart, 1996 for an insight on this theory). Therefore, a key aspect in PFI is the appropriate

risk sharing between private and public sectors established in the contract. If adequate

risk is not shifted to the private sector, then projects become quasi public, but with the

funding removed from the governments balance sheet. A critical issue in the risk transfer

arrangements is to achieve pricing that correctly reflects the risks assumed by each party to

the transaction (Brown, 2005).

Hart (2003) developed a theoretical model of PPPs within the framework of the property

rights theory. He concluded that conventional provision is good if the quality of the building

can be well specified, whereas the quality of the service cannot be. In contrast, PPP is good

if the quality of the service can be well specified in the initial contract (or, more generally,

there are good performance measures which can be used to reward or penalise the service

provider), whereas the quality of the building cannot be.The principal rationale for the adoption of PPP is that it addresses the deficit of phys-

ical infrastructures of the countries. Since Public investment is constrained by the limits

on public spending imposed by membership of the single EU currency, PPP becomes an

attractive way of funding investments. PPPs involve contracting between government and

the private sector under conditions of imperfect information. Theoretical developments

such as principalagent theory provide an insight on PPPs. This theory focuses on the

design of optimal contracts in the face of asymmetries in the information and objectives

of contracting parties. Emphasis is placed on the optimal allocation of risk as a means of

incentivising agents to achieve principals (government) objectives. PPP contracts spec-

ify which risks are borne by the government (principal) or contractor (agent). Moreover, as

PPP contracts can connect different elements of infrastructure projects (for example, link thedesign and construction with one or all of the finance, operation and maintenance elements)

there is better scope for transferring risk compared to traditional procurement methods.

For example, payment may be withheld until assets are in operation thereby encourag-

ing contractors to complete construction on time and within budget (Hurst and Reeves,

2004).

PPPs can provide higher value for money compared with other approaches, if there is an

effective implementation structure and if the objectives of all parties can be met within the

contract. We must bear in mind that such contracts are complex to design, implement and


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manage. Sometimes they are not the best option: indeed in some cases it has been reported

that they lead to an increase in the costs of services to citizens.

From a theoretical viewpoint, the main justification for PPP is the possibility to exploitthe management expertise and the efficiency of the private sector without giving up quality

standards of outputs, thanks to appropriate control mechanisms from the public party. This

result is achieved by setting up complex contractual arrangements with the private sector

operator (agent) where the public sector acts as the principal. In principalagent rela-

tionships, the most complex issues are the precise definition of the tasks assigned to the

agent, the measurement of the agents performance, and the extent to which the principal

can control the agents performance for the whole duration of the contractual relationship. In

PPPs, the cornerstone is the allocation of risk between the two parties: well-designed PPPs

redistribute the risk to the party that is the superior insurer or the least cost avoider, i.e.,

the party best suited to control and/or bear the risk (European Parliament, 2006).

The Public Choice theory argues that taxpayers perceive debt-funded projects less costly

than tax-financed ones, since they fail to perceive the actual cost of debt (Buchanan, 1967).

Taxpayers do not properly evaluate inter-temporal government budget restrictions. When

government offers deficit-financed outlay program, taxpayers overestimate benefits of cur-

rent expenditures and underestimate future tax burden. PFI contracts allow incumbents to

invest in new infrastructures, which have a positive impact on voters opinion about them,

while deferring the payments of the infrastructure.

3. Public works funding through publicprivate partnership

In order to fill the growing gap between needed infrastructures and available resources,

a key question arises: Which is the best way to make the investment in terms of valuefor money? In this context, since the nineties, PPPs have spread in Europe in general,

and in Spain in particular. However, compared to PPPs, traditional contracts still are

more widely used, and they may be more appropriate in many projects. Even in the

UK, where PPP is frequently used, traditional contracts finance 85% of public invest-

ment (PriceWaterhouseCoopers-PWC, 2005). Thus, it is important to analyse the traditional

model of public contracting as opposed to PPP. The main characteristics of the former would

be

The public sector buys assets, not services, to the private sector.

Assets are ex ante perfectly specified: the public sector designs the asset before the

contracting process starts.

The private sector only takes responsibility for the asset construction. The private sectortakes no responsibility for the assets long-run yield after the guarantee period.

The public sector is directly involved in the management of the project contract. If

there are several companies singing the contract, the public sector usually takes the

responsibility of coordinating them.

In spite of its common use, there is neither a generally accepted definition nor a unique

model of PPP. It encompasses several relationship structures in which the private sector

provides an asset or a service to the public sector. Utilities and transport projects based in


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administrative concessions have been used since years ago in the EU, especially in France,

Italy and Spain. In this type of contracts, the company receives the payments made by

service users, as it is the case, for example, in highway tolls. PFIs, in the UK, broadenedthis concept to a wider scope of public infrastructures, and combined it with the introduction

of services not paid by final users, but by the public sector.

PFIs include several types of contract, such as

Short run management contracts with zero or small capital expenditure. Administrative concession contracts. These may involve the funding, design and con-

struction of assets, with an important investment, together with the providing of related

services.

Joint ventures and partial privatizations, with a shared ownership between the public and

the private sector (see in this respect Bult-Spiering and Dewulf, 2006; PWC, 2005).

The main difference between a PPP and a traditional contract is that in a PPP, private

holder earnings are connected to service outcomes and to asset yield during the contractual

period. The private holder is responsible not only for delivering the asset, but also for the

project management and for the appropriate provision of the service during the contractual

period. The timing of payments received by the company is completely different from

traditional contracts.

The European Commission (2004) highlights the following PPP characteristics:

The relatively long duration of the relationship, involving cooperation between the public

and the private partner on the project. The method of funding the project, partly from the private sector, sometimes by means

of complex arrangements between the various players. However, public funds in some

cases rather substantial may complement the private funds. The key role of the economic operator, who is involved in different stages in the project

(design, completion, implementation, funding). The public partner focuses primarily on

defining the objectives to be attained in terms of public interest, quality of services and

pricing, and it takes responsibility for ensuring compliance with these objectives.

The distribution of risks between the public partner and the private partner, to whom

the risks generally borne by the public sector are transferred. However, a PPP does not

necessarily mean that the private partner assumes all the risks, or even the major share

of the risks linked to the project. The precise distribution of risk is determined case by

case.

Besides, the European Investment Bank (2005) identifies these aspects in PPP:

It is initiated by the public sector. Involves a clearly defined project and the sharing of risks with the private sector.

Is based on a contractual relationship which is limited in time.

Has a clear separation between the public sector and the borrower: there must be a private

partner providing financial resources to fund the project (PWC, 2005).

PPPs introduce new elements in the relationships between public and private sector. The

financial reports must disclose the assets/rights and liabilities/commitments that arise in

the provision of services and infrastructures under PPP. PPPs, as opposed to traditional


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contracts or privatization, imply a risk sharing between public and private partners, in order

to achieve a more efficient use of resources. Risk sharing and public resources involved

determine the responsibility of the parties concerned in the project.An accounting discussion has started stemming from what we have just said. The issue

at stake is the way PPPs should be reported in the public sector financial statements. The

concrete PPP where the problem arises is the one in which the private holder is responsible

for designing, building or reforming and financing an infrastructure. The contract enables

the public partner to have the infrastructure at the citizens disposal, whereas the private

partner commits to provide the infrastructure and is entitled to be paid by the public partner.

When these new financing methods emerged, there was no clear accounting standard

providingguidance on how to reportthem. Thus, many countriesused them to defer payment

and this way control their deficits and debt without cutting investments in infrastructures

and public services. In this sense, Milesi-Ferretti (2004, p. 378) says that the imposition of

numerical rules may encourage the use of dubious accounting practices, thereby reducing

the degree of transparency in the government budget. These concerns have gained strength

with the use of creative public finance by a number of European countries in order to

facilitate meeting the budget deficit ceiling established in the Maastricht Treaty. In the same

way, Koen and van den Noord (2005, p. 7) state that creative accounting operations may

have merits of their own. PPPs for instance have proliferated in several EU countries since

the late 1990s, either at the national or sub-national level (e.g., in the form of PFI contracts in

the UK and concessions in Spain). Instead of the government buying an asset and operating

it, a private entity invests and owns the asset (at least partly and at least during the period of

exploitation), selling the corresponding services to the government. PPPs may be justified

on efficiency grounds, but from the perspective adopted here their main feature is that they

initially reduce the general government deficit and debt for a given level of investment

in publicly used infrastructure. In 1999, the Irish Government launched a programme ofPPPs, in order to address the countrys acute deficit of physical infrastructure. The first PPP

to reach the stage of operation was the contract for five secondary schools. The evidence

indicated that this PPP has not resulted in significant innovations, and the public sector has

failed to provide any evidence of value for money (Hurst and Reeves, 2004).

Within the EU, Spain has been one of the countries taking advantage of the lack of clear

accounting standard for new financing methods for infrastructures. However, as we will see

later, the last Eurostat guidance has banished all doubts, and accordingly, almost all these

new methods must be included in order to compute the public deficit and debt.

4. Opportunities for using new financing methods of public works

Soon after the Spanish Conservative Government took over in March 1996, the Minister

of Public Works considered the possibility of financing infrastructures based upon the use

of funds coming from privatizations and other methods. The aim was to avoid an increase

of government deficit and debt rates.

Besides, several circumstances did exist for resorting to private financing:

Plenty of available private savings.


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Private business licensees had at that time remarkable earnings and capitalization rates.

Therefore, they had financial resources available for reinvesting.

Considering the reduction of government investment gross fixed capital formation building firms looked to be inclined to share direct infrastructure investments, in order

to enhance certain bidding amounts in public works.

A policy of monetary stability led to reductions of interest rates and thus private invest-

ment funds started to be interested in long-term investments with satisfactory profit

margins.

All these advantageous circumstances made the Government issue several rules to boost

government investment. Thus, in December 1996 two acts were passed with the following

decisions regarding private financing of public works:

Amendment of some provisions of Governments Contracts Act, setting up the so-called

German or key on hand method (also called turnkey) for contracting investments,according to which, government investments are not paid for until they are completely

finished. The regulation of this contracting method was later developed by a Royal Decree

in May 1997. The next section will analyse in detail this type of contract. Amendment of some provisions of the General Budgetary Act, in order to allow longer

terms for payments and to ease the use of revenues from public enterprises.

Changes in the 1972 rules for building, maintenance and operation of granted highways:

Extension of concession term limit from 50 to 75 years.

Enlargement of the scope of the concession for licencees. Road maintenance and

operation are no longer the only allowed activities for these enterprises, but also other

could be carried out, such as service areas at the highways. Securities could be issued as toll rights supporting documents. Further provisions for

constitution and operations of the funds corresponding to these securities have beendeveloped by a 1998 Royal Decree.

State-controlled firms entitled to borrow money can be established with budgetary

resources. This variety has been known as Spanish method. We will be dealing with

this in more detail later on.

A public entity named Railway Infrastructures Management Entity (Gestor de

Infraestructuras Ferroviarias, GIF)3 was created with the main objective of building

and managing new railway infrastructures. This entity is a commercial corporation, not

considered as Public Administration, since its revenues come from a fee the operators4

pay for using the infrastructures. These entities will not be taken into account when

calculating the public sector deficit and net lending/borrowing, according to European

System of Accounts 1995 (ESA 95). This will be explained below.

3 Established in 1997,has disappeared and joined the Railway Infrastructures Managing Administration (Admin-

istrador de Infraestructura Ferroviaria, ADIF), which started working on 1 January 2005.4 A 1998 Royal Decree regulated the railway infrastructures operation for international transport services,

railways corporations licences and rates for the use of railways infrastructures. All theses rules were adopted

according art. no. 104 of the 1997 Spanish Act and the European Directives 95/18/CE, regulating the railways

corporations licences and 95/19/CE, regulating the concession of railways infrastructure capacities and the fees

to be paid by its use.


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The next section analyses these proposals, particularly: the full price payment con-

tract (also known as German method or Turnkey); the establishment of enterprises or

public entities building works on behalf of either the Administration or themselves (sys-tem known as Spanish method) and the shadow toll (financing method used by some

Spanish Regions). In spite of these methods being considered PPP or PFI, as we said in

the introduction, all of them are incorrectly categorized as private, for the payments are

finally made by the Government through its budgetary resources. A deferral of accounting

and budgetary recognition of these transactions and a wrong disclosure in financial state-

ments of the debt connected with the projects are the main reporting consequences of these

new funding methods. In short, it is a clear example of creative accounting with the aim

of meeting the convergence criteria imposed by the EU.

5. Different forms of private financing of infrastructures and their implications

for government deficit and debt

First, we must make clear that no standards have been developed in Spain for PFI

accounting treatment. Accordingly, we will focus on the EU regulatory framework, more

specifically, on the ESA 95 Manual on government deficit and debtissued by Eurostat. We

believe the analysis of these EU rules is of great interest, because they are legally binding in

all member countries of the Eurozone, and almost all of them have considered the financing

formulas explained in this manuscript in a larger or smaller extent (see at this respect PWC,

2005), with the purpose of fulfilling the Maastricht Treaty requirements for public deficit

and debt limits.

Fig. 1 and Table 1 show how PFI use and high government deficit have been closely

related in many EU countries. Thus, the higher the government deficit, the larger the useof PFI. This relationship makes clear, as stated above, that in most cases the aim of using

PPP or PFI has been the deferral of the payment and debt. In summary, we could label it as

creative accounting.

Fig. 1. Average 20002005 PFI activity as a percentage of mean GDP. Source: PricewaterhouseCoopers (2005).


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Table 1

General government deficit ()/surplus (+) as a percentage of GDP

Source: Eurostat.

Shaded countries are those with the highest PFI activity (see Fig. 1).

The ESA 95 Manual is the result of European Commissions concern about the need

to ensure the correct application of ESA 95 criteria to elaborate statistics and government

finance accounts. PFI are among the operations with unclear treatment. This document

supersedes other Eurostat regulations, and it is the result of some countries consultations

to Eurostat regarding the accounting treatment of some PFI operations, which were being

reported according to ESA 79. Usually, the answers to the consultations were published asNews Releases, which we will refer to in the following pages (Table 2 summarizes them).

5.1. Full price payment when public works are accepted (German method)

In this case, the Government signs a contract with the successful bidder for building and

financing the project. Building costs and interests are paid when the work is finished and

accepted by the Government. Therefore, the Government does not pay any money until the

project is finished (there are no partial payments). The contractor must finance the building,

i.e., paying costs in advance while the building project is in progress, until the work is finally


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Table 2

Main news releases of the Eurostat in relation with the treatment of PFI/PPP

News Release no. 16/97 of 21 February 1997, Treatment of Public Finance Initiatives

News Release no. 33/97 of 30 April 1997, Treatment of public finance initiatives

News Release no. 15/2002 of 31 January 2002, Treatment of the transfer of Government real estate to a

publicly owned corporation in Austria

News Release no. 80/2002 of 3 July 2002, Securitisation operations undertaken by general government

News Release no. 18/2004 of 11 February 2004, Treatment of publicprivate partnerships

News Release no. 88/2007 of 25 June 2007, Securitisation operations undertaken by general government

accepted. This method has been widely used for road building in Germany (that is why it

is known as German method) (Izquierdo and Vasssallo, p. 200).

When the public work is finished, the Government will pay either in cash or througha maximum period of 10 years. It is possible for the contractor to convert these future

payments into tolls to be paid by the infrastructure users. The following conditions have to

be met to use this financing method:

Eligible projects are: road infrastructures, water and railway equipment and environmen-

tal and coastal installations.

Total contracting price, financial costs when deferring payments not included, must be

over the following amounts: Roads, 24 million euros. Railway and water infrastructures, 18 million euros. Environmental and coastal installations, 6 million euros.

This kind of contracts is not applicable to infrastructures improvements, repairs, conser-vation and demolition works.

A specific contract will be signed for any individual work, within the abovementioned

limits. Therefore, accumulation of works in a single contract is not permitted.

Total annual amount committed using this contracting method cannot go beyond 30% of

initial budgetary appropriations for investments in capital assets during the year.

This German method has been used by the Spanish Central Administration. Although

a specific regulation of this method for Municipal Governments was supposed to be issued

more than 1 year ago, it hasnot been publishedso far. In thesame way, some Spanish Regions

planned to use this kind of contract, but no concrete regulation has yet been adopted.5

The main reason argued for using this financing method is the possibility to defer

accounting and budgetary recognition of investment expenses until the date the work is

fully executed. In the same way, the recognition of the debt connected with these trans-

actions is also deferred. Therefore, during the building period, neither budgetary expenses

nor net borrowing increase, thus making easier for the Spanish Government to meet the

5 Public sector in Spain is organized in three levels: State or Central Administration, Regions (Autonomous

Communities) and Local Entities. Out of the total government expenses in Spain, these three administrations

spend approximately 50%, 35% and 15%, respectively.


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convergence criteria (this is a patent example of creative accounting). That is to say,

the Government argues that the infrastructure is not reported until it is finished and deliv-

ered. However, the bottom line is only the deferral of recognition of expenses and debtin the accounting books. This contract makes possible to do important public works, but

at the expense of relevant commitments on future budgets and an increase of government

indebtedness.

According to the current EU accounting standard (ESA 95), in force since 1999, invest-

ment expenses must be reported along the years of construction (accrual accounting). The

previous approach under ESA79 (cash accounting). reported the expenses according to the

payments made (Luder, 2000, pp. 118122). A consequence of the taking in consideration

of these circumstances has been the suspension of the use this financing method during

several years, according to additional dispositions of the laws passing the State General

Budgets.

5.2. Constitution of public corporations and/or public entities

As previously stated, the possibility to create public firms for road and water works build-

ing and operation was created by Law in 1996. This is the case of Railway Infrastructures

Management Entity. This entity has its own legal status as a subsidiary of the Ministry

of Public Works, it is able to hire and fire its own staff and it holds its own assets and

liabilities. The entitys main activities are building the high-speed railway infrastructures

connecting MadridBarcelonaFrance, as well as the safety and control systems manage-

ment. Revenues come from rates paid by users of operated lines and by the users of its own

telecommunication networks. The entity can borrow funds by itself and the State is allowed

to give it a financial support. Similar corporations has been also established by the Ministry

of Environment, for example, Ebro Basin Waters (Aguas de la Cuenca del Ebro, ACESA).Considering the Spanish Regions, the Catalan Government was the first creating this

kind of corporations, as in 1990 it established the firm Infrastructures Management Inc.

(Gestion de Infraestructuras S.A., GISA). An agreement defines the management and

financial links between Catalan Government and GISA, which obtains revenues by the

management responsibilities for building infrastructures. Under the guarantee of these rev-

enues, the firm obtains funding in the financial markets, without any specific governmental

guarantee. When infrastructure construction is finished, it becomes a capital asset of the

Catalan Government. Similar processes are going on in other Regions: Andalusia, Castilla-

Leon, Galicia, Castilla-La Mancha or Madrid. This kind of corporations is also usual in the

local public sector, but only in the largest municipalities.

In addition to efficacy and efficiency criteria, the main advantage of these entities hasbeen that their borrowing is not consolidated when setting up public sector debt. However,

in the new ESA 95 the borders for different sectors of economy are established according

to a market criterion. Thus, if an entitys purpose is to produce goods or services for the

market and it sells its production in the market, it must be included in the corporations

sector, irrespective whether the owner is public or private (Jones, 2000). According to ESA

95 criteria, if sales are 50% or more out of the total operating expenses of an economic

unit, the production of this unit is considered as market-oriented (paragraphs 3.33 and

3.37). In order to meet this criterion, amounts paid by the Government that contracted the


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building of the infrastructure are not considered as sales. On the one hand, a consequence of

ESA 95 criteria is the non-inclusion in the consolidated accounts of Public Administrations

of market-oriented units, not necessarily with legal status. On the other hand, ESA 95simultaneously leads to the inclusion of corporations, agencies or entities mainly operating

on the base of official financial aids. This is the case, for instance, of the agent corporations

we are analysing in this section.

In the above-mentioned circumstances, newfunding and management methods arise with

the aim of establishing entities whose debt is not consolidated in public sector accounts.

Special attention must be paid to the constitution of securities funds. A securitisation oper-

ation occurs when a government transfers ownership rights over financial or non-financial

assets, or the right to receive specific future revenues, to another unit, named the securi-

tisation unit, who in exchange pays the originator. In order to finance the purchase, the

securitisation unit borrows on its own account by, typically, issuing bonds called asset

backed securities (ABS). The securitisation unit uses income generated by the transferred

asset or by the specific future flows, or by sales of the transferred assets, to service its debt.

Usually the lenders will have a direct and legal claim on those assets or on those flows, in

the event of the securitisation unit not paying the interest and principal due.

When the proceeds obtained from the sale of the assets are higher than the initial price

paid to government, and the securitisation contract includes, in addition to the initial pay-

ment by the securitisation unit, a clause on additional future payments to government, a

deferred purchase price (DPP) is said to exist and all or part of the proceeds are allocated

to government.

Fig. 2 shows the basic features of the operating mechanism of this funding method.

The key issue to be determined is whether a securitisation operation gives rise to revenue

for the government, thereby reducing the public deficit if there is one, or whether the

proceedsshould be considered as government borrowing. Eurostat has decided the following(News Release no. 88/2007 of 25 June 2007) (this decision complements and amends the

decision taken on the same issue in News Release 80/2002 of 3 July 2002):

1. All securitisation of fiscal claims by government should be treated as government bor-

rowing.

2. The existence of a DPP clause or of similar arrangements should lead to the classification

of the securitisation operation as government borrowing.

3. A clause in the contract referring to the possibility of substitution of assets (except for

marginal cases limited in scope and deriving purely from technical and material errors)

should lead to the classification of the securitisation operation as government borrowing.

4. A clause of the securitisation contract stipulating ex ante government compensation tothe unit (in case of government actions which are specifically related to the unit and

not to different economic units more generally) should lead to the classification of the

securitisation operation as government borrowing.

5. When government compensates (for instance in the form of cash, of debt assumption,

or of direct or indirect guarantee) the unit ex post for specific events, although compen-

sation was not originally foreseen in the contract, a reclassification of the operation as

government borrowing must occur, with an impact on the surplus/deficit of government

in the year in which the compensation is decided.


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Fig. 2. Operating mechanismof securities funds.(1) Public Administration asks the public entity for infrastructure

building. This request gives rise to rights in favour of this public entity. (2) Public entitys rights are handed over

to a securities fund, which pays to the entity the present value of these rights. With this money, the public entity

can afford to pay builders or financial institutions for refunding previous borrowings. (3) Public Administration

pays to the securities fund.

To sum up, when Spain has used this funding method, the aim was to hide public debt(as Koen and van den Noord, 2005 point out). Eurostat decision, however, concluded that it

was creative accounting, and therefore the balance sheet should disclose the related debt.

Something similar happened in other EU countries, such as Austria, Greece or Italy (see in

this respect Milesi-Ferretti and Moriyama, 2006, p. 3288).

5.3. The shadow toll method

Known also as DBFO (design, build, finance and operate), the infrastructure is built

and operated by the concessionaire, who usually is a private firm. Government just

pays the corresponding rates in order to get services provided using the assets con-

structed. This model is being applied for motorways, medical care in hospitals, elderlyshomes, day nurseries, sport facilities, pools, waste treatment, water desalination, etc.

The payment is made by means of periodic amounts of money that depend upon the

use of the infrastructures by citizens. In order to avoid a low-use risk for the licensee

firm, the Government guarantees the concessionaire enough revenues to achieve financial

balance.

This kind of contracts is, in short, nearly pure concessions, with the only difference that

it is not the user but the Government who pays the rates. The accounting treatment of this

funding method for infrastructures resembles the operating lease. Sometimes, infrastruc-


14/24


tures ownership transfers to the Administration at the end of the operating period, and then

the essence of the method is closer to a finance lease.

Spanish Regions legislation also labels this funding method as demand levy, and thesystem is built upon a private sector involvement in the construction projects, on the base

of foreseeable cash flows generation. Users do not pay any toll, but it is the Government

who guarantees payments to private corporations according to previously fixed rates.

The main argument Spanish Regions make for the adoption of this funding method is

to foster private involvement specially small and medium size firms in public works

projects development.

It is not hard to realize that the funding method based on the shadow toll is very similar

to the finance lease. As in the cases of Germany and France,6 when the Government uses

the finance lease, it cedes public property to a leasing corporation for some time. This

corporation constructs and finances the work and when the building process is concluded,

the construction is made over to the Government, which operates the installations as lessee,

until the date of reversion.

We think the Belgian experience on the shadow toll is worth commenting. In 1960 the

Belgian Government decided to use this way to finance its road construction. The reason

for using this method was to cope with the existing budgetary limitations and thus being

able to avoid an increase in taxes or debt. As time went by, it was clear that the only real

outcome of this policy was an increase of public financial burden. Accordingly, in 1982,

after more than 600 km of roads had been constructed (50% of total network), the Belgian

State took up again the direct management of the highways program (Izquierdo, 1992, pp.

119120).

In the United Kingdom, the 1991 Roads Act set up a new system for construction of

toll roads by the private sector. This system operates through a contractual link with the

State. On the one hand, each project must be self-financed by means of the tolls paid by theusers. On the other hand, no public guarantees or aids are allowed (this is purely the method

known as project finance). The promoter or contractor takes on the building and operation

risks; as it is not usual in UK to pay tolls by the users, it is the State which pays during

the first years the road runs (from this fact follows the famous name of shadow toll for this

method). However, the possibility exists for a financial support of the British State to these

infrastructures, using operating grants, earmarked taxes, exchange guarantees, refunding

advances, subsidized loans, fiscal benefits, etc.

Austria has also experienced this financing method. In this way, different highways

construction, operation and maintaining projects have been developed since 1982. Other

experiences using this method for financing roads or highwayswereimplemented in Finland,

Portugal and the Netherlands (Yates, 1992).Out of the PPP/PFI methods for infrastructure and public services provision, the shadow

toll technique has been the most controversial, mainly in the British accounting practice,

due to its implications in the Government financial reports (see in this respect Allen, 2001;

Broadbent and Laughlin, 1999; English and Guthrie, 2003; Froud and Shaoul, 2001; Heald,

6 In this latter country this kind of contractsis named public work management contracts (marche dentreprise

de travaux publics); see Aguila (1995) and Besancon and Van Ruymbeke (1990).


15/24


2003; Heald and Geaughan, 1997; Hodges and Mellett, 2002; Mayston, 1999; Rutherford,

2003). This is a summary of the accounting problems at stake:

(a) whether properties used in PFI contracts are assets and the amounts to be paid to

operators are governments liabilities or if, by contrast, the Government only receives

a service and pays for it;

(b) whether the operator owns an asset to deliver a service or if, by contrast, the operator

has a financial asset representing the amount of payment obligations owed by the

Government.

The solution finally adopted in the UK is that the Government must report the asset if

the Government directly assumes the assets risks and benefits. Therefore, risk is the key

element when defining the nature of a DBFO contract (Accounting Standards Board, 1994;

Treasury Private Finance Taskforce, 1997).

The first time Eurostat issued guidance for estimating PFI incidence on Government

deficit and debt was in its 21 February 1997 News Release no. 16/97, through the analysis

of two cases:

Case no. 1. A Government asks a corporation to build and finance a capital asset. Cor-

porations become the owners of these assets as the building is going on. In this case, the

gross capital formation must be included in the Public Administration sector. Investment

in this case increases government deficit but it has no impact on government borrowing,

as Council Regulation 3065/93 determines. According to this regulation, Public Admin-

istrations long and medium-term commercial commitments with corporations are not

included in debt when calculating convergence criteria accomplishment. Case no. 2. A Government asks a corporation to build a capital asset which will be

operated by this corporation right through its useful life. The corporation becomes toothe owner of the asset. In this case, gross capital formation must be included in the

corporations sector, and there is no incidence either on government deficit or debt.

Eurostat shows also concrete examples where both possibilities are simultaneously in

use: case no. 1 is the method used in Germany for building and pre-financing of roads by

public sector agents. The bridge of Oresund, joining Denmark and Sweden, is an example

of case no. 2. The construction began in 1996 by means of a Governmental Danish and

Swedish Consortium of public corporations. The consortium funded the project by issuing

government-secured debentures. The works ended in 2000 and the consortium has a license

for operating the bridge and collecting tolls. Total debt is estimated to be refunded in 2026,

while the consortium will operate the bridge indefinitely. Gross capital formation is included

in the corporations sector, with no incidence on government deficit.Other PFI contracts in UK are examples of case no. 2. Instead of buying and operating a

capital asset, the State hires the services of an operator in the private sector ( Heald, 1997;

Mumford, 1998). These operators manage to get the assets in order to provide the requested

services. Gross capital formation is included in the corporations sector, with no incidence

on government deficit. A purchase of services provided by business corporations is recorded

in Public Administrations accounts, thus increasing government deficit every year.

The Eurostat 30 April 1997 News Release no. 33/97added a new case to the previously

considered (case no. 3): a corporation builds an infrastructure and subsequently the corpora-


16/24


tion operates it during a given time period, collecting periodically certain amounts of money

paid by Government. These payments concern the acquisition of infrastructure services. At

the end of the operation time, the infrastructure comes back to the Public Administrationwith no additional payment. In this case, these rules must be taken into account:

Initial investment (gross fixed capital formation) must be recorded in the corporations

accounting books, with no incidence on government deficit. Government annual payments are services acquisitions that increase government deficit

every year.

At the end of the operating time, the reversion of infrastructures to Public Administration

does not generate a reduction in government deficit.

Considering the three above-mentioned PFI cases, we can conclude that Eurostat News

Releases presents the German method (case no. 1) and shadow toll (cases no. 2 and no.

3) treatment.

Focusing on cases no. 2 and no. 3, investment must be reported as a fixed asset by the

building corporation, with no increase of government expenses and debt. Only the amounts

paid by Government when using fixed assets are recorded as government expenses (current

expenses to be more precise).

However, as previously discussed, shadow toll method has been used in Spain, as a

licence system where private sector is engaged to build and maintain the infrastructure, and

Government pays a toll or rate for its use, until the settlement of financial commitments.

When the concession term is over, infrastructure becomes a public ownership, with no

additional cost for Public Administration. As can be observed, the Spanish implementation

of shadow toll differs a little bit of British PFI. According to British practices, any new

investment the government tries to do using budgetary resources, must be supported by a

specific study; this study must disclose that investment costs are lower than those incurredwhen using a new DBFO concession. As a result of this assessment, if PFI is preferred, a

pure-toll concession or a service management or payment for services rendered contract

will be implemented. Nevertheless, it is indeed a question of a deferred disclosure and by

instalments paymentof investment, along with maintenance costs, all throughthe concession

time.

In short, we can considered this PFI as a hire purchase, or at most a quite similar method

to a finance lease, with the only difference that no option will be paid by the lessee (Gov-

ernment) to the lessor (private corporation) when receiving the definitive ownership of the

asset. Another difference that can also be argued is that in the case of a finance lease, a fixed

amount must be paid all through the term of the contract, whereas the fees to be paid when

using the shadow toll method depend upon the use citizens make of the infrastructure(e.g., for roads fees are paid according to annual traffic). No exact previous calculation

can thus be done of the amounts to be paid every year by Public Administration with its

budgetary resources. However, Government will guarantee enough revenues for financial

balance of the concessionaire. If no guarantee existed, probably nobody would bid for build-

ing the infrastructure. Besides, the Government will also fix a ceiling amount to be paid

(for example if traffic exceeds the ceiling volume of vehicles, no more fees will be paid).

To sum up, we can say that Public Administration runs into debts that must be reported

in the financial statements by its maximum amount, as required by a conservative account-


17/24


ing philosophy. Spanish Regions PFI regulations require budgetary appropriations by the

maximum amount the Government is bound to pay to the concessionaires (according to

the foreseeable use of infrastructures), in order to guarantee both the effective operationof privately constructed works and the profitability of the investment. This fact endorses

our opinion about the accounting treatment of the commitments stemming from this PFI,

as no risks are indeed assumed by licensees. We must bear in mind that, as the theory of

property rights shows, a key aspect in PFI is the accurate risk sharing between private and

public sectors. If adequate risk is not shifted to the private sector, then projects become quasi

public, but with the funding removed from the governments balance sheet. The amount of

debt will be included in a fixed asset (a tangible asset or use duties). If the maximum amount

taken for debt evaluation remains over the effective payments done when the concession

term is over, asset and debt must be cut down by the difference. This reduction must be

done every year by the difference between the maximum estimated payments and the real

amount of commitments.

In January 2000 there was a relevant shift in Eurostat initial opinion towards a position

close to our arguments. Thus, the document ESA95 Manual on government deficit and

debt shows a clarification about accounting treatments of these PFIs by means of two

examples (which are identical to the shadow toll):

Casea. Government requiresa corporation to build a prison accordingto the governments

specifications. Government agrees to pay the corporation a certain amount for 25 years

for making the prison available for its use, provided it is adequately maintained. At the

end of the 25-year period, legal ownership of the prison is transferred from de contractor

to government.

Case b. Government signs a contract with a corporation for the design and construction of

a road. The corporation is also responsible for maintaining the road for 25 years accordingto an agreed standard. Government pays the contractor an annual fee linked to the number

of vehicles using the road.

According to Eurostat standards, the treatment for each case should be

Case a. When the corporation is exposed to most of the risk/rewards of ownership dur-

ing the period of exploitation, the infrastructure is recorded in the corporation balance

sheet. The contract between government and the corporation has the characteristics of

an operating lease. Only regular payments by government have an impact on govern-

ment net lending/borrowing. If the infrastructure is given to government at the end of

the operation period it will be presented in the government balance sheet through a gross

fixed capital formation, balanced by a capital transfer, with no impact on government netlending/borrowing.

Case b. When the government is exposed to most of the risk/rewards of ownership

during the period of exploitation, the infrastructure is reported in the government balance

sheet. The contract between government and the corporation has the characteristics of

a financial lease. The infrastructure built by the corporation is allocated to government

balance sheets through GFCF, balanced by an imputed loan of equal value. Accordingly,

there is an impact on government net lending/borrowing for the value of GFCF, and

government debt is increased by the amount of the loan imputed. During the operation


18/24


Table 3

Factors influencing the distinction between operating and finance lease

1. Who is responsible for the maintenance and insurance of the asset?Assume government organizes and pays directly for the insurance and maintenance of the asset

This suggests a finance lease since government is bearing the risk of variations in such costs

2. Who repays finance on early termination of a contract?

Assume the government is responsible for repayment of the corporation debt in the event of early

termination of the contract

This suggests a finance lease since government is bearing that risk

3. Who determines the nature of the asset?

Assume the corporation has significant and ongoing discretion on how to fulfil the contract; it makes the key

decisions on design and construction of the asset; it decides how it is operated and maintained in order to

provide the service required by the purchaser

This suggests and operating lease

4. Who bears the demand risk?Demand for services provided by the asset might be greater or less than expected. Assume the corporation

income is affected by the demand for the asset, such that government or other customers only pay for the

amount of service consumed

This suggests an operating lease

5. Are there any third part revenues?

Assume the corporation uses the asset to provide services to customers other than just government, and the

government is not exposed to the variability of third party demand, and these revenues are significant part

of the total income from the asset


6. Does government pay less if the quality of service is not good enough?

Assume government payments are reduced when the service provided by the corporation is not up the

required standard, even if this is because of problems with asset rather than how it is operated


7. Does government pay more if the corporation costs increase?

Assume government does pay more if there is an increase in the corporation costs related to the asset. For

example the corporation might have to undertake more maintenance than expected

This suggests a finance lease

8. Who bears the residual value risk?

Assume government has the option, at the end of the contract, to buy the asset at the current market price,

and that it is not bound to buy the asset at a pre-agreed price if it does not need it nor if the asset is not in

good condition


period, annual payments should be subdivided into repayments of principal and interestpayments related to the imputed loan. Interest payments have an impact on government

net lending/borrowing.

Risks/rewards of ownership should be assessed according to the factors presented in

Table 3.

In a contract, not all the characteristics have to point to the same assessment of the con-

tract, but some may lead to classify it as financial lease and some others may lead to consider

it as an operating lease. In this situation, the relative importance of each characteristic of the


19/24


project must be balanced. In order to avoid confusion regarding risks evaluation, Eurostat

issued 11 February 2004 News Release no. 18/2004 (which has been added to the ESA

95 Manual), making clear the treatment of PFI impact on government deficit (net borrow-ing)/surplus (net lending) and debt. This news release states that Eurostat decision applies

to contracts in which government is the main buyer of services provided by a private entity

and the demand comes directly from the government or from other users (as for example,

in medical and education services or some transport infrastructures). An important feature

of these contracts is that they usually require the production of several assets. These assets,

on the one hand, are specifically designed for the provision of the service, and on the other

hand, they need an initial capital outlay. The key issue is the beforehand classification of the

assets involved in the PFI contract: either as government assets or recorded in the private

partner balance sheet.

Eurostat considers the assets involved in a PFI as non-government assets only if there

is strong evidence that the partner is bearing most of the risk attached to the specific PFI.

Therefore, the analysis of the risks borne by the contractual parties is the core element

for the assessment of a PFI project, as far as the classification of the assets involved in

the contract is concerned. This analysis, therefore, is essential to ensure the appropriate

accounting treatment of PFI impact on the government deficit. However, this assessment

does not consider risks not closely related to the asset and that can be fully separated from

the main contract. This the case when part of the contract might be periodically renegotiated,

and subject to performance and penalty payments that do not significantly depend on the

condition of the main assets. Many risks may be observed in practice in such arrangements.

Eurostat has selected three main categories of generic risks. Therefore, bearing a risk

for one party means that this party bears the majority of the risk.

A first category is construction risk, covering notably events like late delivery, failure to

keep specified standards, additional costs, technical deficiency and external negative effects.Governments obligation to start making regular payments to a partner without taking into

account the effective condition of the assets would be evidence that government bears the

majority of the construction risks.

A second category is availability risk, where the responsibility of the partner is quite

clear. It may not be in a position to deliver the volume that was contractually agreed or to

meet safety or public certification standards relating to the provision of services to final

users, as specified in the contract. It also applies where the partner does not meet the

required quality standards relating to the delivery of the service, as stated in the contract,

and resulting from an evident lack of performance of the partner. Government will be

assumed not to bear such risk if it is entitled to reduce significantly (as a kind of penalty)

its periodic payments, like any normal customer would require in a commercial contract.Government payments must depend on the effective degree of availability supplied by the

partner during a given period of time. Application of the penalties where the partner is

defaulting on its service obligations should be automatic, should also have a significant

effect on the partners revenue/profit and must not be purely cosmetic or symbolic.

A third category is demand risk, covering variability of demand (higher/lower than

expected when the contract was signed) irrespective of the performance of the private

partner. This risk should only cover a shift of demand not resulting from inadequate or low

quality of the services provided by the partner or any action changing the quantity/quality


20/24


of services provided. To the contrary, it should result from other factors, such as business

cycle, new market trends, direct competition or technological obsolescence. Government

will be assumed to bear the risk where it is obliged to ensure a given level of payment to thepartner regardless of the effective level of demand by the final user. This makes irrelevant the

impact of fluctuations in demand level on the partners profitability. However, this statement

does not apply where the shift in demand results from an obvious government action, such

as decisions of units of general government (and thus not just the unit(s) directly involved

in the contract) that represent a significant policy change, or the development of directly

competing infrastructure built under government mandate.

Eurostat recommends that assets involved in PFI should be classified as non-government

assets, and therefore recorded off-balance sheet for government, if both of the following

conditions are met:

1. The private partner bears the construction risk.

2. The private partner bears at least one of either availability or demand risk.

If the construction risk is borne by government or if the private partner bears only the

construction risk and no other risks, the assets are classified as government assets. This has

important consequences for government finances, bothfor deficit and debt. The initial capital

expenditure related to the assets will be recorded as government fixed capital formation,

with a negative impact on government deficit/surplus. As a counterpart of this government

expenditure, government debt will increase in the form of an imputed loan from the

partner, which is part of the Maastricht debt concept. The regular payments made by

government to the partner will have an impact on government deficit/surplus only for the

part relating to purchases of services and imputed interest.

Finally, we must bear in mind that the concept of private entity must be interpretedas opposed to the limits of the government. Therefore, it includes public, publicprivate or

private companies providing services to the government on a market basis (Jones, 2000).

All mentioned above supports the idea of real transfer of demand and availability risks

for the not-consolidation of this kind of operations in the Public Administration sector,

discarding models of fixed and unconditional payments as those of some projects developed

by the government.

Furthermore, special attention is paid to the construction risk. This makes clear the strong

need for two elements as a previous stage before the definition of the contract or before

its bidding. On the one hand, the definition of investment costs before establishing the

conditions of the provision of services. On the other hand, a thorough financial planning of

flows the operation will generate.Provided that in the Spanish case the Government has assumed the majority of the

contractual risks, we can conclude that, once again, the aim was to defer the reporting of

deficit and debt. This deferral is no longer possible in the light of the last Eurostat guidance,

and was a clear example of creative accounting.

Renda and Schrefler (2006, p. 1) state that in the case of Spain the legislation spells out

that the State always maintains responsibility in contracts involving the public party. As a

result, when a PPP turned out to be more expensive than what had been calculated ex ante,

the government was expected to fund the project and ensure its viability.


21/24


Something similar has happened in Ireland, where Eurostat indicated that early PPP

projects involved insufficient risk transfer to the private partner, and that investment in

these projects would be classified as public investment. Until 2005, all PPP investment inIreland had been treated in this way (International Monetary Fund, 2004).

6. Concluding remarks

When PFIs described in this paper areused,it is theGovernment andtherefore taxpayers

but not users, who finally pay the public works. A common characteristic of PFI is

that private corporations construct and they (where appropriate) also operate the public

work. Business revenues come either from official aids or from periodical payments for

construction, maintenance and operation of infrastructures, the amount of which are linked

to its actual use.

Deferral of payments and instalment plans, as well as borrowing decentralization, have

made possible for Spanish Public Administrations, as well as other European governments,

to bid and contract new public works while fitting EMU requirements without a dramatic

reduction in public investment. However, PFI implementation has just been, at bottom, a

financial make-up. In other words, it has been a clear example of public sector creative

accounting. As Hart (2003) points out, policy makers argue that PPPs are good because

the private sector is a cheaper source of financing than the public sector. This reasoning is

strange since it is hard to imagine an agent that is more able to borrow than the Government

through its taxation powers.

It is important to say, according to PWC (2005), that all these PFIs are, in gen-

eral, more expensive than traditional debt operations. As Hurst and Reeves (2004) show,

PPPs implemented in Ireland have not resulted in significant innovations, failing to pro-vide value for money. PFIs are more complex operations and difficult to analyse, and

sometimes they are extremely sophisticated from a legal perspective. However, we must

bear in mind that governments must keep on investing on social centres, road infras-

tructures, water-treatment plants, etc., and therefore the first point must be whether the

investment is feasible from a traditional budgetary point of view. In case it is not viable,

other alternatives will be considered (price subsidies, refundable advances, syndicated

loans, subsidiary loans, exceptional financial aids, among others). These alternatives

should have the appropriate budgetary surveillance, so as to accurately control the vol-

ume of operations the government is able to finance. In the same way that limits upon

future expenses prevent current politicians from imposing excessive financial burdens to

future politicians, PFI use should be justified from a budgetary and economic point ofview.

The theoretical underpinnings of our assessment of PFI is twofold. On the one hand,

according to the property rights theory, a key aspect in PFI is the appropriate risk sharing

between private and public sector in the contract. If adequate risk is not shifted to the

private sector, then projects become quasi public, but with the funding removed from the

governments balance sheet. If this is the case, projects become more expensive in the

long run, while politicians have been able to present a good financial situation in the

short run. On the other hand, if we take into account the Public Choice theory, as we said


22/24


before, taxpayers overestimate benefits of current expenditures and underestimate future

tax burden. Thus, PFIs allow incumbents to create infrastructures, with an eye on winning

the next elections. However, the sad part of the story is that these PFIs are more expensivein the long run than them being financed through the traditional contracts.

In thesearch forimaginative solutions, we wouldlike to comment on a recentand interest-

ing practice used by the Austrian Government, that could be used by other European public

entities. The government establishes a new real estate company (Bundesimmobilienge-

sellschaft, BIG), which is 100% owned by the federal State. Most of the public buildings

(schools, universities, offices, etc.) have been transferred to this company for its manage-

ment and maintenance. BIG has financed this transfer by issuing securities and contracting

loans. Most of the buildings transferred to BIG are subsequently rented back to the gov-

ernment units which previously occupied these buildings, by individual contracts based

on market estimates. The BIG continues to employ all State civil servants who previously

managed the maintenance of these buildings. Their civil servant status has been maintained.

As far as government accounts are concerned, this transfer has raised three questions:

(i) whether BIG is an institutional unit in its own right or an ancillary unit of general

government, (ii) whether BIG had to be classified in the sector general government or

in the sector non-financial corporations, and (iii) whether the property transfer from the

government to BIG should be considered as a sale of property (improving the deficit) or

as other volume changes in financial assets/changes in classification and structure (neutral

for the measurement of deficit).

Eurostat decision is as follows in this respect (see Eurostat 31 January 2002 News

Release no. 15/2002): BIG is an institutional unit in its own right, should be classified

in the non-financial corporations sector, and BIG debt is not to be considered as part of

government debt. Besides, the purpose of the transfer is to improve public management

of real estate by rationalisation of buildings use, as well as management costs reduction.Moreover, because of the size of the transaction, it was not possible to organise a normal

market sale of the property on the Austrian market. In addition, Austrian State wanted to

maintain indirectly the ownership of the transferred property via the State owned company.

For these reasons, the transfer of property was arranged bilaterally between the Austrian

State and BIG. Considering these aspects, this transfer should not be treated as a market

sale of real estate property in the sense of ESA 95. In consequence, the assets transfer to

BIG has no impact on government deficit/surplus.

To sum up, PPPs are not a miracle solution and need long time to produce visible results.

Governments should allocate the risk to the party that is the least cost avoider, i.e., the

party best suited to control and/or bear the risk. Without this approach, the public sector

runs the risk of using PPPs for the wrong reasons, for example to make up public accountsin the short-term while worsening the long-term financial sustainability.

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