Special Purpose Entities
(SPEs) and
Public-Private Partnerships
(PPPs)
Government Finance Division
Statistics Department
IMF
June 1-12, 2009
Introduction
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)
Government Finance Division, IMF Statistics Department
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Part I
Special Purpose Entities (SPEs)
Contents of Lecture
Definition of SPEs
Uses of SPEs
SPE measurement challenges
Sectorization of SPEs
Government Finance Division, IMF Statistics Department
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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 wellspecified activity or series of transactions
These activities are directly related to the specific purpose for
which it was formed
SPE’s 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
Government Finance Division, IMF Statistics Department
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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 partners
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
Government Finance Division, IMF Statistics Department
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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
Government Finance Division, IMF Statistics Department
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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 & liabilities?
• 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 participants?
Thus, legal framework does not always reflect economic
substance of SPE’s operations
Government Finance Division, IMF Statistics Department
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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
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Sectorization of SPEs in GFSM 2001
(1/3)
Is SPE an
institutional unit?
No
Yes
Classify with operations
of unit that controls SPE
Is SPE resident
or nonresident?
Resident
Who controls
resident SPE?
Nonresident
Who controls nonresident SPE?
(it is always a unit)
Government  classify in
general government sector
if nonmarket activities
General government or public
corporation  mirror (impute)
operations in GG or PC sectors
Public corporation  classify
in public corporations sector if
market activities
Private sector  classify with
Rest of World (as abroad)
Private sector  classify in
private corporations sector
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”
Government Finance Division, IMF Statistics Department
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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 personnel
• 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 entity’s constitution and rules
Totality of indicators  judgmental in nature
Also see “Risk Transfer” later in PPP lecture
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Part II
Public-Private Partnerships
(PPPs)
Contents of Lecture
Definition of PPPs (or “service concession
arrangements”)
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
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Definition of PPPs
(1/4)
“Public sector contracts to purchase quality services on a
long-term basis—principally 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)
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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 government.
Main characteristics:
• Private execution and financing of public investment
• An emphasis on investment and service provision by private sector
• Risk transfer from government to private sector
Classic scheme: Design-Build-Finance-Operate (DBFO)
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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
Government Finance Division, IMF Statistics Department
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Definition of PPPs
(4/4)
Public Procurement
PPP
Government
Government
Long-term service contract
PPP-Special
Purpose Vehicle
Operating contract
Operating Firm
Financing contract
Bank
Operating contract
Operating Firm
Financing contract
Bank
Construction contract
Construction contract
Construction Firm
Construction Firm
Uses of PPPs
Particularly well-suited for economic infrastructure,
less so for social infrastructure because:
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
Government Finance Division, IMF Statistics Department
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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
Government Finance Division, IMF Statistics Department
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Reasons for Establishing PPPs
(2/4)
However, PPPs can be risky from a fiscal perspective:
Move spending off budget and can create (explicit and
implicit) contingent liabilities for government
Potentially threaten integrity of budget process and
undermine efforts to safeguard macroeconomic stability
Perhaps more difficult to achieve fiscal discipline and good
governance with PPPs
Government Finance Division, IMF Statistics Department
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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
Efficiency gains need to make up for higher cost of private
capital, fixed cost of administering PPPs, and lack of flexibility
in long-term contracts
Government Finance Division, IMF Statistics Department
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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
Government Finance Division, IMF Statistics Department
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Fiscal Risks of PPPs
PPPs entail a variety of risks:
Construction risk, financial risk, demand risk, availability risk,
political risk, natural disasters
Who should bear the risk?
Public and private sector have certain advantages relative to the
other in managing specific risks, e.g.,
• 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!
Government Finance Division, IMF Statistics Department
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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 services
Have to assess risk transfer and ownership by looking
at:
Risks in owning asset
Risks in operating asset
Government Finance Division, IMF Statistics Department
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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
Government Finance Division, IMF Statistics Department
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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
Government Finance Division, IMF Statistics Department
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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 mediumterm 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
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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
Government Finance Division, IMF Statistics Department
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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
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Recording of PPPs in Accounting Standards
and GFSM 2001 (1/2)
Topic was extensively discussed in review of SNA93
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
Government Finance Division, IMF Statistics Department
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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 risk.
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 SNA)
• If government controls, then PPP assets are government assets
Government Finance Division, IMF Statistics Department
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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 finances
Incorporation of costs into Debt Sustainability Analysis
and medium-term budget framework
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