AUTUMN 2013
FMI
*
IGF JOURNAL
25
Over the past decade in Canada, public-
private partnerships, often referred to as
P3s, have moved from obscurity to a rela-
tively common approach for governments
to procure and deliver large public-purpose
infrastructure projects. Provincial govern-
ments in BC, Alberta, Ontario, Quebec,
New Brunswick, and—most recently—
Saskatchewan, have established agencies or
departments to facilitate P3s and standard-
ize the model.
The federal government established PPP
Canada Inc. in 2009 to provide funding to
other levels of government for projects
implemented using a P3 model through
the P3 Canada Fund. This has resulted in
a number of municipalities across Canada
now pursuing or using P3s to develop
infrastructure projects.
To understand what a P3 is, we need
to understand the “traditional” way in
which governments deliver infrastructure.
Traditionally, a government starts an
infrastructure project by hiring an engineer
or architect to define the project and
develop detailed designs and specifications.
The drawings and specifications are then
“tendered,” and a contractor is selected
(usually based on the lowest bid price) to
build the project. The government pays
the contractor based on progress, and,
when the construction is complete, the
project is turned over to the government
to manage and operate the asset.
While the traditional model is relatively
straightforward, it often exposes a
government to significant risks related to
delay, cost overrun, and asset performance.
The other issue with traditional
procurement is that the focus is usually on
initial construction cost only, with scant
consideration of the cost, or funding of,
major maintenance and rehabilitation of the
infrastructure over its useful life. The result
is a chronic deferred maintenance issue with
infrastructure in most parts of Canada.
What are the benefits of P3s?
Under a P3 approach, various components
of project delivery are integrated to reduce
the risks retained by government, stimulate
innovation, and improve accountability.
The P3 models, which include long-
term financing with equity investment by
the infrastructure developer, provide an
implicit long-term warranty over the asset
and ensure that major maintenance and
rehabilitation are funded.
This type of P3 is referred to as a design-
build-finance-operate or maintain model
(referred to as DBFO or DBFM). Pension
funds and institutional investors are the
primary lenders to these projects because
of the potential for stable long-term
returns. There is a cost to private financing
compared to government cost of capital
(currently about 190 basis points), but in
cases where a government proceeds with
a DBFM, the additional cost of financing
is expected to be outweighed by the risk
transfer benefits and efficiencies provided
by the model. There are other types of
P3 models that do not include long-term
financing, such as design-build-operate.
Numerous case studies on capital
projects demonstrate that, compared to the
traditional model, P3s offer early project
completion—or, at least, significantly
reduced completion delays. Furthermore,
P3s provide cost and resource efficiencies
through innovative design solutions, which
are often leveraged by the full integration
of design, construction, maintenance, and
operational aspects during the planning
phase. These efficiencies are identified and
exploited by P3 bidders who apply life-cycle
costing analysis. This analysis considers
and evaluates the schedules and costs of
construction, operation, and maintenance,
including the expected condition of the
asset over time.
Another important feature of Canadian
P3s is government ownership of the
infrastructure asset throughout the term of
the P3 project agreement, which, typically,
is in the range of 30 years. At the end of
the term, the responsibility for the asset’s
operation and/or maintenance is “handed
back” to the government in accordance
with pre-established conditions, and with
no additional cost at the time of transfer.
Concession operator accounting under
International Financial Reporting
Standards
The infrastructure developer typically
establishes a special purpose vehicle (SPV)
to execute the P3 project agreement.
The SPV is paid for delivering the
infrastructure asset and related services
over the term of the agreement under a
performance based payment mechanism.
IFRIC 12 was created to account for these
types of arrangements and refers to the
SPV or infrastructure developer as the
“Concession Operator”.
The Concession Operator usually sub-
contracts the construction and operational
requirements to either a related party or
third party that specializes in constructing
and operating/maintaining infrastructure.
The Concession Operator agrees to
payment terms with these parties before
the project commences. The Concession
Operator typically does not own the asset
being constructed; the asset is owned and
controlled by the government entity that
will receive and pay for the benefits of the
infrastructure project. In this situation, the
Concession Operator does not account for
its construction investments as a tangible
asset, but as follows:
• If the majority of the receipts the
Concession Operator will receive from
the government entity are fixed rather
than variable, then the Concession
Operator has a financial asset.
Accounting for Public-Private Partnerships
Mark Hodgson, Tony Barke, and Shirley Wolff
