Project Pages

Public/Private Partnerships—Project Plan

Project Description: This project will provide accounting and financial reporting guidance for public/private partnerships (PPPs). This entails determining whether existing authoritative guidance is sufficient to address the accounting and financial reporting issues resulting from PPPs, or whether new standards are necessary to address these issues.

Background: There is no single, widely-accepted definition of the term public/private partnership. However, many descriptions characterize a PPP as an arrangement between a government and a private sector entity to deliver a governmental asset (normally infrastructure or a public facility) and, often, the related public service (in some cases, the arrangement may be solely for the delivery of the public service related to an existing governmental asset). In this way, PPPs are an alternative to traditional procurement methods used by governments to accomplish a public duty or responsibility. With traditional procurement methods, most of the risks associated with the underlying project remain with the government. With a PPP, these risks generally are allocated between the government and the private sector entity. This allocation of risks to the parties involved in a PPP can be quite complex. Because of this, determining the accounting and financial reporting for the property associated with these arrangements involves the consideration of conceptual topics including control over the use of the property, the bearing of risks and rewards related to the property, and governmental accountability for infrastructure assets and the services they provide.

Though the above description of PPPs is relatively basic, individual arrangements can take on a number of forms. The various types of PPPs often are distinguishable by the extent of private sector involvement with the major phases of the underlying project. As the level of involvement of the private sector entity increases, their assumption of risk and responsibility for the project generally also increases.

As the issues involving the nation's infrastructure and public facilities continue to grow, PPPs have become more prevalent in practice. Entering into PPPs may be seen as beneficial from the point of view of the government for a variety of reasons, including the following:

• They provide the government with the ability to leverage existing infrastructure and public facility assets to generate additional available resources in the form of up-front payments from the private sector entity for the right to operate such assets.
• They may be used to facilitate construction of necessary new infrastructure and public facility assets and transfer the risks associated with their construction and maintenance to a private entity.
• They may be used to provide services to the government's constituencies on what is intended to be a more efficient and cost-effective basis.

PPPs often result in governments transferring certain rights and responsibilities associated with the underlying property (including the right to collect revenues and the responsibility of operation and maintenance) and the responsibility to provide certain services to an existing private sector entity or a new entity created especially for providing such services. Examples of PPPs include:

• A hospital authority transferring its assets, liabilities and hospital operations to a not-for-profit hospital system through a lease and management agreement, with the hospital authority's ongoing operations being limited to issuing conduit debt for the not-for-profit hospital system and serving as a "pass-through" for governmental grants.
• A university leasing land to a third-party developer for construction of a dormitory building, with the building being leased back to the university or the units being leased directly to university students and faculty by the developer.
• A state leasing a portion of its turnpike system to a private consortium in exchange for an up-front payment.
• A state entering into an agreement with a private consortium to build and then operate a tollway in exchange for an up-front payment.

Currently, PPPs often are being accounted for under existing guidance, including the lease accounting provisions found in National Council on Governmental Accounting Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, and the financial reporting entity provisions found in GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units. However, the accounting and financial reporting conclusions arrived at under such guidance may not appropriately consider the conceptual topics noted earlier.

Accounting and Financial Reporting Issues:

1. How should a government report the property associated with a PPP? Specifically, should the government report the property as a capital asset, and if so, for PPPs involving new construction, at what point should the property be recognized and how should the property, along with any related liabilities, be measured in the financial statements?
2. How should a government report inflows of resources generated through a PPP, including inflows from upfront payments made by the private sector entity and inflows from revenue-sharing provisions in the PPP?
3. How should the government report guarantees and other commitments it makes to the private sector entity, or to other parties on behalf of the private sector entity, as part of a PPP, including guarantees of the private sector entity's debt and minimum-revenue guarantees made to the private-sector entity?
4. What impact could a PPP have on a government's financial reporting entity?
5. What information should be provided in the notes to the financial statements to provide adequate information to the users of financial statements to allow them to understand the economic substance of a PPP?

Project History: This project was added to the potential project list in January 2006, and then to the GASB research agenda in August 2006. In November 2006, the International Public Sector Accounting Standards Board (IPSASB) added a project on PPPs to its agenda and requested that the PPP project staff of the GASB also serve as the project staff for the IPSASB. As part of that project, a research paper largely prepared by the GASB staff describing the nature and extent of use of PPPs around the world, as well as potential accounting and financial reporting issues to be addressed related to these arrangements, was presented to the IPSASB in July 2007.

A Consultation Paper that further explores the accounting and financial reporting issues identified in the aforementioned research paper and provides the proposals of the IPSASB to address these issues was issued in March 2008. The following areas of accounting and financial reporting for PPPs are addressed in the Consultation Paper:

• Reporting of the underlying property to the PPP, including which party to the arrangement should report the property as an asset, the timing of recognition and method of measurement of the asset, and the recognition and measurement of liabilities associated with the recognition of the property as an asset
• Recognition of revenue by the government related to upfront payments received from the private sector entity and inflows received through third-party user revenue-sharing provisions
• Financial reporting of guarantees and other commitments made by the government to, or on behalf of, the private sector entity, including minimum third-party user revenue guarantees and guarantees of the debt of the private sector entity
• Potential consolidation of the private sector entity into the reporting entity of the government
• Financial statement disclosures.

The GASB staff also served as the lead project staff for the preparation of the IPSASB Consultation Paper.

Work Plan:

Public/Private Partnerships—Recent Developments

The discussion began with an overview of public/private partnerships (PPPs), including common characteristics of PPPs, the potential benefits of these arrangements, the government sectors for which PPPs have been executed or are being considered, and the potential accounting and financial reporting issues to be addressed as part of the project for state and local governments.

The Board deliberated the scope for the project and tentatively concluded that for purposes of establishing an initial scope, the project should include arrangements between a government and a private sector entity to deliver a public asset and/or service. The Board considered narrowing this initial scope to only include those arrangements in which an operations concession is involved. The Board tentatively concluded, however, to proceed using the broader initial scope.

Finally, the Board deliberated whether “public-public partnerships,” described as arrangements similar to PPPs except that they involve two governmental entities, should be included in the scope of the project. The Board tentatively concluded to include these arrangements in the scope of the project.

Public/Private Partnerships—Relevant Links