Sovereign Risk and Public-Private Partnership During the Euro Crisis 1137390808, 9781137390806

Citation preview

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Sovereign Risk and PublicPrivate Partnership During the Euro Crisis Maura Campra University of Eastern Piedmont, Italy

Gianluca Oricchio Bio-Medico University, Italy

Eugenio Mario Braja University of Eastern Piedmont, Italy and

Paolo Esposito University of Eastern Piedmont, Italy

© Maura Campra, Gianluca Oricchio, Eugenio Mario Braja and Paolo Esposito 2014 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN: 978–1–137–39080–6 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Campra, Maura, 1961– Sovereign risk and public-private partnership during the euro crisis / Maura Campra, Gianluca Oricchio, Eugenio Mario Braja, Paolo Esposito. pages cm Includes bibliographical references and index. ISBN 978–1–137–39080–6 (hardback) 1. Public-private sector cooperation – Europe. 2. Risk – Europe. 3. Debts, Public – Europe. 4. Finance – Europe. 5. Financial crises – Europe. I. Title. HD3861.E85C36 2014 338.8—dc23

2014024823

Contents

viii

List of Illustrations List of Abbreviations

xi

1

Introduction

1

2

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 2.1 Lessons learnt from the financial crisis: the strong link between sovereign risk and bank risk 2.2 Sovereign and bank rating models 2.3 Sovereign risk and corporate risk: how to improve the real economy

25

3

PPP Schemes 3.1 The genesis of PPPs 3.2 EU: no formal definition of PPP 3.3 PPP definition – form and substance 3.4 PPP in the European Commission Green Paper 3.5 PPP elements 3.6 Forms of PPP 3.7 PPP models and schemes 3.8 Elements of different PPP schemes 3.9 The PPP in Europe 3.10 Economic impacts in European countries 3.11 PFI model in the UK

27 27 30 32 35 36 36 37 42 42 49 53

4

IFRIC 12 Service Concession Arrangements 4.1 Introduction to IFRIC 12 4.2 Scope 4.3 Treatment of the operator’s rights over the infrastructure 4.4 Recognition and measurement of arrangement consideration 4.5 Recognition of consideration for construction and upgrade services

54 54 55

v

4 4 6

60 62 65

vi

Contents

4.6

Management services, redeveloping infrastructure functionality, financial charges 4.7 Recognition of elements made available by grantor 4.8 Classification of PPP sectors 4.9 Literature review: elaboration on the reference theoretical framework 4.10 Implications of the Internal Stability Pact: the Italian case 4.11 Appendix

5 Case Studies in UK: Energy Management, Transportation Management, and Water Management 5.1 PPP in UK 5.2 Genesis of PPP in Europe: first forms 5.3 The instruments of popular participation in UK 5.4 The quantity, value of PPPs in the UK 5.5 Is value for money a priority in the UK? 5.6 Some UK examples under IFRIC 12 adoption 5.7 Appendix: the multi-business companies in different PPP sectors in the UK 6 Italian Case Studies in Energy, Transport and Water Management 6.1 A brief historical description 6.2 Italian complexity and regulatory confusion 6.3 The PPP in the public contract code 6.4 Italian contractual model 6.5 IFRIC 12 in Italy 6.6 The Italian statutory profile 6.7 Network of strategic infrastructure under concession 6.8 Public works concessions 6.9 PPP, SCA and IFRIC 12: a literature survey 6.10 IFRIC 12 in Italy 6.11 The energy sector 6.12 Transport sector: Italian railways 6.13 Transport sector: airports and infrastructure 6.14 Transport sector: highways 6.15 Water sector: regulation analysis 6.16 Appendix 6.1: effect on consolidated equity and on net result 6.17 Appendix 6.2: typical case studies

74 76 77 78 79 82 86 86 90 90 94 96 100 105 115 115 115 116 117 118 119 120 124 125 126 132 135 143 146 148 151 153

Contents vii

7 Case Studies in Spain (Energy, Transporation and Water Management) 7.1 The Spanish experience of PPP 7.2 Why is the energy sector different in Spain? 7.3 Typical energy sector case studies 7.4 The transport sector 7.5 The water sector 7.6 Appendix: case studies

183 183 190 190 192 194 200

8 Sovereign Risk and PPP Schemes: Future Directions

208

Notes

217

Bibliography

220

Index

239

List of Illustrations Boxes 3.1 5.1

Basic models of PPP Generic factors driving value for money

41 99

Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 3.3 3.4

3.5 3.6

3.7

4.1 5.1 5.2

Bank–sovereign–corporate risk relationship Bank and sovereign risk are highly correlated Main steps in developing a shadow rating model Shadow accuracy ratio Parent support PD adjustment Government support PD adjustment Bank capital buffers and lending growth Credit crunch in EU peripheral countries Contractual structure: project company Evolution of PPPs in Europe for 1990–2009 PPP contracts in European transport sector (excluding UK), number (top) and value (bottom) Average size of PPP contracts by sector: in the UK (top) and in continental Europe (bottom) Government investment expenditure as a percentage of GDP PPP contracts concluded in Europe between 2007 and 2009 in comparison to the average for 2001–2006, number (top) and value (bottom) Evolution of PPPs in several European countries between 2007 and 2009, compared with the 2001–2006 average, number (top) and value (bottom) Concession services: right to charge in exchange infrastructure construction services PPP contracts in European transport sector (excluding UK), number (top) and value (bottom) Average size of PPP contracts by sector: in the UK (top) and in continental Europe (bottom) viii

5 6 8 13 22 24 25 26 40 44 46

48 49

50

51 65 95

97

List of Illustrations

5.3

6.1 6.2 6.3 6.4 6.5 6.6 6.7

Evolution of PPPs in several European countries between 2007 and 2009, compared with the 2001–2006 average, number (top) and value (bottom) The evolution of PPPs (2002–2012) The evolution of PPP contracts awarded (2002–2012) Percentage value of PPP on Public Works (2002–2012) Company structure: Ramo Milano Ferrovie Nord Milan Group – social companies Ferrovie Nord Milan Group – shareholders Ferrovie Nord Milan Group – investments

ix

98 121 122 122 140 141 142 142

Tables 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 3.1 3.2 3.3 4.1 4.2

4.3 4.4 5.1 5.2 5.3 6.1

Methodological approaches Calibration table for rating agency X Quantitative and qualitative categories for a country model long list Developed countries – an illustrative rating model Emerging countries – an illustrative rating model Example of quantitative long list for bank rating models Example of qualitative long list for bank rating models An illustrative rating model for banks in developed countries An illustrative rating model for banks in emerging countries Parent positive and negative correction matrices Government positive and negative correction matrices PPPs – a European comparison Normative references in the past 15 years Elements of different PPP schemes Objectives of the Internal Stability Pact since 2002 Summary relating to the type of data for the calculation of cash, competence and mixed competence Reconstruction and classification of literature Selected literature Cost structure of privately financed roads UK and Spain PPP framework (Acerete, Stapleton, Stafford, 2007) Comparison of accounting approaches Normative references

7 9 11 16 17 18 19 20 21 23 24 33 35 43 80

80 83 85 103 104 106 117

x List of Illustrations

6.2

6.3 6.4 6.5 7.1 7.2 8.1 8.2

Macro fields of PPP: number and amount for categories counted in 2002, 2005, 2008–2012 Italian listed companies that have adopted IFRIC 12 Italian listed companies under IFRIC 12 adoption IFRIC 12 effect on consolidated net result PPP framework in Italy and Spain Bidding models in PPP schemes PPPs – a European comparison (Italy, UK, Spain) UK, Italy and Spain PPP Framework

123 129 131 152 184 189 211 212

List of Abbreviations AR BOT CGU DBO DBFO ECB EMS ENAC

accuracy ratio build operate transfer cash generating unit design build operate design build finance and operate European Central Bank European Monetary System Ente Nazionale Aviazione Civile (National Authority for Civil Aviation) GFS government financial support IASB International Accounting Standards Board IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standards IQ investment quota LLP loan loss provision LTIC long-term infrastructure contracts LTRO longer-term refinancing operations MoD Ministry of Defence NMS New Member States NPL non-performing loans NPS National Policy Statements NTG (Italian) national transmission grid O&M operation and maintenance OIC Osservatorio Italiano Contabilità (Italian Accounting Committee) PA public administration PD probability of default PF project financing PFI Private Finance Initiative PPP public-private partnership PPPC PPP contracts PSC Public Sector Comparator PUs public utilities RFI Rete Ferroviaria Italiana (Italian Railway Network) ROSCO rolling stock company

xi

xii List of Abbreviations

RP RTN

ranking power Rete di Trasmissione Nazionale (Italian National Trasmission Grid) SAR shadow accuracy ratio SCA service concession arrangement SCDF shadow cumulative default frequency SIGAEC integrated environmental management, energy and indoor environmental quality VfM value for money

1

Introduction

The financial crisis in Europe has led to a sharp increase in the levels of both sovereign risk and banking risk. The high correlation between sovereign risk and banking risk has produced a negative effect on the general economic system in terms of (i) lower public expenditure, (ii) less credit to corporates and SMEs and (iii) reduced private and public investment. Government bond issue restrictions in Euro-periphery countries have also created negative effects on the real economy. The crisis has had a strong impact on the initiation of new infrastructure and on investments on capital intensive initiatives. Direct public intervention in the economy has declined. At the same time, the ECB’s longer-term refinancing operations (LTRO) programme has provided banks in the Euro Area with plenty of liquidity and avoided possible bank defaults. However, this liquidity has not flowed into the real economy, since the banks have invested it in either government bonds or bonds of their own (fixed income buy back). The new Targeted Longer-Term Refinancing Operations (TLTRO) effectiveness must still be verified. In the near future the Euro area’s main problem will be to avoid deflation. The ECB has an opportunity to follow the Federal Reserve, the Bank of Japan and the Bank of England in applying quantitative easing tools. Quantitative easing can be structured in (i) a government bond buy programme, (ii) a private bond buy programme (on SME plain vanilla Asset Backed Securities) or (iii) a modified LTRO programme linked to new loans to corporates and SMEs. It is important not to lose momentum, given the turning point in the Euro economy. Governments cannot pursue Keynesian policies without increasing their debt. However, we believe that public-private partnerships (PPPs) 1

2

Sovereign Risk and Public-Private Partnership During the Euro Crisis

would be a powerful tool (not yet fully implemented in the Europeriphery) in order to boost real economy without any pressure on public debt and on sovereign risk. PPPs, combined with other forms of credit mitigation or public support, would make companies creditworthy enough for banks to finance them. As a matter of fact, public-private partnerships usually have comparatively modest capital requirements, according to Basel’s current regulations. In this context, directing bank liquidity towards PPPs would produce a positive effect on the real economy and on public finance. Through PPPs countries would fail to meet the need of creating new infrastructure or investment or the need to develop innovative sectors, for which the funds and the necessary resources would not be available or for which the cost of procurement by the state would be excessive. Therefore, it becomes very important to implement the construction of public infrastructure in order to push bank liquidity towards investments with a lower degree of credit risk. A system of concessions to private operators, in agreement with public operators, can realize and manage the infrastructure until the concession expires. Therefore, governments achieve the construction of infrastructure without charge, relinquishing for a given period, short or long, any yields resulting from its management. The first part of this book focuses on the analysis and assessment of sovereign and bank risks in the Eurozone and the United Kingdom (UK) and examines the relationship between PPPs and the public debt ceiling or sovereign rating in detail. Public companies wishing to receive benefit from capital markets have to show investors that they are able to afford the debt service and pay it back in accordance with the measures taken and within the due date. A key issue in the effectiveness of PPP schemes is risk management of the timing and costs of execution. On the one hand the PPP is an excellent financing tool but, on the other hand, there is a substantial risk of requests for revision and renegotiation of agreements by the dealers. If PPPs are poorly managed the final cost to governments can be high. In this context, the International Financial Reporting Interpretations Committee 12 (IFRIC 12) on Service Concession Arrangements has taken a fresh look at how PPP investments are represented and evaluated in the financial statements of private entities. This examination by IFRIC 12 is very important and represents a good starting point for a quantitative analysis of PPPs. The second part of this book analyses three countries (UK, Italy and Spain) and the management of several utilities (energy, transportation

Introduction

3

and water) in order to find out how differently these countries cope with these issues and which practices prove to be the best among the ones put into action. In the UK the Bank of England has used quantitative easing on a large scale and there is a long experience of PPP schemes. The situation is different in Spain and Italy, where there is not an extensive experience of PPP schemes and the ECB has not yet applied quantitative easing tools. An analysis of the legislation and national regulations on the subject of concessions led us to identify a number of areas of activity covered by these aspects. For each identified sector we analysed case studies drawn from the most relevant operational realities in each country, selected as part of the companies listed on regulated markets. Our analysis showed that the highest concentrations of PPP activities are developed in the following areas: ● ● ●

Transportation management (airports, railways, highways) Energy management (gas, electricity, hydrocarbons, waste) Water management

There are other industries with a high level of PPP activity, such as the betting and gaming sector, which are not discussed this book. We believe that in the near future the number of public-private partnerships will increase in the Euro area due to the constraints of both internal stability pacts for public finance and the fiscal compact. Italy and Spain are two out of a group of countries that need to activate PPP schemes in order to help their economic recovery; while the UK is a country with an extensive use of PPP schemes and an economy strongly supported by the Bank of England. Although this book has been written with the joint contribution of all the research group members, the chapters are to be attributed to the following authors: Chapter 1: Maura Campra and Gianluca Oricchio; Chapter 2: Gianluca Oricchio; Chapter 3: Paolo Esposito; Chapter 4: Maura Campra; Chapter 5: Paolo Esposito; Chapter 6: From 6.1 to 6.10: Paolo Esposito, and from 6.11 to 6.15: Eugenio Mario Braja (special acknowledgement to Lucia Taruffo for her help in researching and processing balance data in paragraph 6.11); Chapter 7: From 7.1 to 7.2 and 7.5 Paolo Esposito, and from 7.3 to 7.4 Eugenio Mario Braja; Chapter 8: Maura Campra and Gianluca Oricchio.

2

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes

2.1 Lessons learnt from the financial crisis: the strong link between sovereign risk and bank risk The financial crisis has brought to light a strong link between sovereign risk, bank risk and corporate risk. Initially, the crisis originated in the banking sector and then spread so quickly it acquired sovereign risk status, especially in majorly indebted countries, such as the periphery countries to the euro zone (Figure 2.1). As in a chain reaction, no sooner had the crisis flowed from the banking system into financial markets than it instantly affected the real economy. Since then, banks have been registering an unprecedented increase in funding costs and capital absorption due to both the procyclical effects of Basel’s regulations and a non-stop growth of non-performing loans. Falling back on raising capital seemed to be much too dilutive a solution. As a consequence, the main trend was towards “crunching the credit” by restricting lending activities in the real economy, especially by reducing assets in general, or risk-weighted assets in particular. That was like adding fuel to the flames and triggered a downward economic spiral. So far, ensuing business bankruptcies, layoffs and profit decreases have reduced domestic demand and have had a negative impact on tax revenues and national budgets. Just like the banks, heavily indebted economies on the European periphery found it impossible to access financial markets in order to increase their debt. Despite uncertainties, all enterprises were nevertheless directed towards refinancing existing debt. A link between bank credit risk and sovereign credit risk was established at once. Many banks have since stopped working correctly, thus impeding the normal functioning of transmission mechanisms of monetary policies. The relatively helpful rescue operations actually 4

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 5

Sovereigns

Banks

Figure 2.1

Corporates

Bank–sovereign–corporate risk relationship

Source: Our elaboration on the IMF Financial Stability Report, 2013.

overburdened national budgets and the cost of government bonds reached (and sometimes exceeded) the margins of safety. Immediately, an upswing in government bonds yield spread (measured as the difference between the yield of a government bond and the yield of a bond offering the same duration) caused banks and companies to come to terms with rising financing costs. The European Central Bank (ECB) might have had to face a breakup of the euro zone. In accordance with Basel’s regulations, the ECB decided to rescue the euro by saving the banks in the first instance through a variety of tools aimed at expanding the monetary base. Most importantly, for three years long-term refinancing operations (LTRO) provided the banks with the liquidity necessary (rated at one per cent) to survive independently of the financial markets. As a result, banks in the euro zone periphery were easily able to pay back their obligations and give way to bond buybacks, which should have brought significant capital gains. However, rather than pouring money into the real economy, the high liquidity introduced into the banking system was mainly invested in the acquisition of government bonds, deemed to be not only less risky but also more remunerative than investing in companies. This tendency started a carry trade which did not prevent national economies of the European periphery from defaulting. It also did not help the real economy to recover. How memorable is the ECB president’s pledge to do “whatever it takes” to preserve the euro and price stability. Current events have been characterized by a strong connection between sovereign rating and bank rating: considerable upswings in the value of bank stocks are directly proportional to downturns in the government bond spread, and vice versa. It follows then that sovereign risk must be analysed and discussed jointly with bank risk (Figure 2.2).

6

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Sovereigns

Banks

Corporates

Figure 2.2 Bank-Sovereign-Corporate Risk Relationship: Bank and sovereign risk are highly correlated Source: Our elaboration on the IMF Financial Stability Report, 2013.

The relationship between sovereign risk and bank risk is analysed in the next section that look at a fundamental analysis of sovereign and bank rating models.

2.2 Sovereign and bank rating models There are three main methodologies which can be used to develop a PD model, as summarized in Table 2.1 and as illustrated here below: ●

●

●

good/bad analysis, applied principally to SME corporate and retail segments; pure expert ranking method, used typically for the development of large corporate models; shadow rating approach, specific to segments characterized by a limited number of defaults, but distinguished/differentiated as those given an official rating by an external agency (such as Standard & Poor, Moody or Fitch).

The most statistically robust method is the good/bad analysis, where factors can be tested for how they predict actual default patterns and an optimal combination of factors and modules can be found to predict the value of the binomial variable: “did the party default in the following 12 months?” This methodology requires a significant number of default data points for the analysis to be valid. This makes the analysis inappropriate for bank and country segments, since not enough default data are available.

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 7 Table 2.1

Methodological approaches Good/bad

Development

Validation

Data

Discriminatory power

Pure expert ranking

Shadow rating

Prediction of the Selection and Mimic external (binary) default event weighting of ratings factors based on expert judgement Preferably through logistic regression; alternatively, multivariate discriminate analysis and neutral networks Test on out of sample Comparison to expert judgement of results Alternatively, cross Compared to validation bond ratings or good/bad data, if available At development: at At development: least 30 defaults per none explanatory variable At validation: at least At validation: a 10% of development representative sample for holdout sample of sample; none for counterparts cross validation Highest discriminatory Highly dependent power possible on the quality of expert judgement Danger of overfitting Typically not better than Statistical methods

Linear regression against PDs of external ratings

Out of sample

Compared against good/bad data, if available At development: at least 100 rated counterparts At validation: at least 50 rated counterparts

Good discriminatory power Limited by the quality of External rating

Where good/bad analysis cannot be used, shadow (bond) methodology offers a less robust but statistically valid alternative. It uses a factor’s ability to predict default modelled on a proxy by measuring its ability to forecast an external rating agency’s predicted default rate. The analysis is based on the probability of default that corresponds to the bank’s (or country’s) external ratings, according to a calibration table that associates each agency’s rating grade to a precise probability of default (see Table 2.1). If two or more external ratings are available for the same enterprise (e.g. Moody, Standard & Poor and/or Fitch), the final PD is an average between the available PDs.

8

Sovereign Risk and Public-Private Partnership During the Euro Crisis STEP 1

Portfolio analysis, definitions, methodological approach, model structure

Figure 2.3

STEP 2 Sample selection, external rating gathering, variable identification

STEP 3

Univariate analyses

STEP 4

Multivariate analyses

STEP 5

Calibration, model testing

STEP 6

IT implementation, roll-out in the banking processes

Main steps in developing a shadow rating model

A shadow rating model aims to replicate external ratings by using both quantitative (financial for banks, macroeconomic or financial for countries) and qualitative factors (extracted from questionnaires filled in by internal credit analysts). In this case, also, the univariate analysis tests the forecasting capability of a factor’s long list; the selected ones (medium list) will be successively transformed and put in relation to each other by means of a multivariate regression that will determine the subset of final variables (short list) designed to constitute the forecasting model. Once the weights and final factors have been defined one proceeds with the calibration curve that will assign the score computed by the regression for a default probability. The calibration curve will be determined by means of statistical analysis techniques directed to maximizing the fit with the initial PDs, so that the credit class assigned by the model to the single sample entity will not differ more than one or two notch(es) from that determined by the external rating. In Figure 2.3 the main steps for the development of a shadow rating model are illustrated; in the two following Paragraphs we will examine exclusively the aspects which make this typology of models different from the traditional ones, based on the approach good/bad, extensively described in Chapter 2 to which the reader can refer to complete the treatment. 2.2.1

Country rating model

The credit risk relative to a sovereign is composed of two factors: the “sovereign risk” and the “transfer risk”. The sovereign risk refers to the likelihood of default by the country counterparty, while the transfer risk is relative to the unlikelihood of collecting the granted credit from a counterparty resident in a foreign country. Both aspects will have to be taken into account when building a model.

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 9

2.2.1.1 Step 1: portfolio, definitions, methodology and model structure As the chosen methodological approach is a kind of shadow rating, the first selection criterion for indentifying the development sample(s) is the existence of at least one external rating (from Moody, Standard & Poor, Fitch etc.) assigned to the selected counterparty. To increase the statistical and economic relevance of the model(s) it is appropriate to group the countries in mostly homogeneous sub-segments (according to the economic development level, political considerations, etc.) and then proceed to the construction of distinct models for each sub-segment. As an example, one can assume the need to build two distinct models: the first for developed countries, the other for emerging countries. 2.2.1.2 Step 2: developing samples and data If large portfolios are present, it is recommended that the selected development sample comes from outside the an external rating, according to a physical criterion: countries with a limit (of short or medium period)1 greater than a given amount. Then, assign to each country an external rating standardized by proper calibration tables (based on the link between each agency rating grade and a probability of default). In Table 2.2, as an illustrative example, a possible calibration of the external agency X is shown; the table permits to compare the rating assigned by the agency X with the one expressed by the agency Y Table 2.2 Calibration table for the rating agency X Rating grade PD of rating agency X 1 2 3 4 5 6 7 8 9 10 11 12

0.01% 0.03% 0.07% 0.12% 0.24% 0.40% 0.70% 1.20% 3.50% 6.10% 10.5% 20.0%

10 Sovereign Risk and Public-Private Partnership During the Euro Crisis

transformed, in turn, into default probability – obviously, with respect to the same default definition between the to considered Agencies. When two or more different external ratings are available for the same counterparty (e.g. Moody, Standard & Poor and/or Fitch), an average of the available PDs is calculated according to the formula: PDexternal =

1 n ⋅ ∑ PDi , n i =1

where n (n ≥ 1) is the number of external available PDs (for the considered counterparty), while PDi is the default probability assigned to the i-esime external agency. As the objective of an internal rating model is to estimate the default probability up to one year from the time of the counterparty evaluation by means of the available data, to the macroeconomic and qualitative factors relative to the year t, when developing, should be associated to the external PDs relative to the year t + 1. In general, for countries in the development sample, it is necessary to use data from two years before the date of default (for bad counterparts) or of the forecast (for good counterparts). A one-year time lag is caused by the fact that the model has to estimate a one-year default frequency; moreover, it is assumed that one year before the default (forecast) only the data from the year before is available, this causes the whole time lag to be two years. A list of macroeconomic or financial and qualitative factors which could be expected to be predictors of default, and hence used by rating agencies to predict the probability of default, should be drawn up. Then the quantitative and qualitative factors have to be classified into different categories to test different aspects. The main purpose of this categorization is to provide a structure when defining and working with the factor list (the so-called long list). Ideally, the final model should contain a broad representation from across the categories, with no two factors containing similar information. Table 2.3 illustrates the categorization of quantitative and qualitative factors for a country’s rating model. While the quantitative factors could be acquired from an external provider, qualitative factors need to be gathered through a qualitative questionnaire drawn up by an internal expert.

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 11 Table 2.3 Quantitative and qualitative categories for a country model long list Quantitative category

Qualitative category

Banking system Current account Debt Government finance Growth Liquidity Monetary Policy Structure

Debt servicing record Economic conditions Foreign relations Quality and stability of the financial system Social and political conditions

Because the qualitative elements are, by their nature subjective, to ensure their objectivity and consistency it is very important that: ●

●

every question is given a grade on a scale where answers are ordered by good (factor value 1) to bad (factor value 5); to ensure consistency in assigning these grades among different experts, each question is supplemented with a guideline.

2.2.1.3 Step 3: univariate analyses For high-default portfolios the first step in determining the optimal combination of quantitative or qualitative factors is to analyse each factor individually. This step has three main purposes: ● ●

●

●

data cleaning identification and removal of outliers (in this case, quantitative factors only) (quantitative) factor transformation and normalization, so that they are set to the same scale, where outliers are given less weight and scores have the same average and standard deviation. measurement of the predictive power of the factors on a standalone basis

The first three points in the list above are substantially equal to the ones already described in this chapter. But in the absence of a good/bad state, for the measurement of the predictive power of a standalone factor, or of the module score, it is necessary to adopt an adjusted accuracy ratio measure.

12

Sovereign Risk and Public-Private Partnership During the Euro Crisis

2.2.1.3.1 The shadow accuracy ratio (SAR) In relation to the traditional accuracy ratio (AR), for the evaluation of the rank ordering power, in a shadow rating approach framework the first step consists of computing the ranking power (RP), where the shadow cumulative default frequency (SCDF), represented on the y-axis in Figure 2.4 is calculated as: SCDF1 =

PDexternal , 1 n

∑ PD

external , j

j =1

PDexternal , i

SCDFi = SCDFi −1 +

n

∑ PDexternal , j

,

for i = 2, ..., n.

j =1

where n is the number of sample conterparts. By computing the shadow default rate (SDR) as: n

∑ PD

external , j

SDR =

j =1

n

,

it is possible to determine the B area depicted in Figure 2.4 and then the model ranking power (RPmodel) as: RPmode l =

Area (A) . Area (A) + Area (B )

In the shadow rating approach the ideal model, which orders the counterparts in the best possible way, is the one defined by the same external agency’s PDs and has a forecasting power lower than 100 per cent (see in Figure 2.4). To obtain a value of the examined model’s accuracy ratio, which is more comparable with the one computed with the standard approach (good/ bad sample based), it is necessary to correct the examined model’s ranking power with the ranking capability of the ideal, that is the one that exactly replicates the external agency’s judgement, using the formula: SAR = SAR mod el =

RPmod el . RPshadow rating

Shadow cumulative default frequncy

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 13 Perfect model

100% 90%

B

80%

Shadow rating model Random model

70% A

60% 50% Real model

40%

C

30% 20% 10% 0% 0%

Figure 2.4

10%

20%

30% 40% 50% 60% 70% Counterparty cumulative frequncy (from the worst to the best)

80%

90%

100%

Shadow accuracy ratio

2.2.1.4 Step 4: multivariate analyses The multivariate analyses are conceptually the same in both SME corporate and retail models. Having completed the univariate analyses, by means of which the medium list variables’ ranking powers and scores have been computed (see Step 3 for details), the next step is to order the selected factors to identify the subset capable of best replicating the judgement expressed by the agencies’ PDs (PDexternal). For each of the two modules (qualitative and quantitative) the specified model will be a combination of weighted factors to arrive at an evaluation of each country’s creditworthness (score). The score produced as an output by each module will be, successively, integrated into one unique score which, through a calibration phase, will be translated into the final output of the country model: the default probability estimated by the bank for each country. The multivariate factor analysis is carried out by means of a multivariate linear regression, in which independent variables are factors, which have been transformed and normalized, and the dependent variable is the log-odd of the judgement expressed by the rating agencies (PDexternal). Indeed, it can be empirically found that the PD tends to be distributed as a logit function with respect to the score, that is: i ⎛ 1 − PDexternal ⎞ = β 0 + β 1⋅x1i + ... + β k ⋅xki + ε i , Y i = ln ⎜ i ⎝ PDexternal ⎟⎠

∀ i = 1, ..., n,

14

Sovereign Risk and Public-Private Partnership During the Euro Crisis

{} k

where n is the sample numerosity; k the regressors number; x j j =1 the set of vectors of transformed and normalized factors, with T

x j = ⎡⎣ x1j , " , xjn ⎤⎦ for j = 1, ..., k; β 0 ,{β j }kj =1 the set of estimated coefficients (with the same sign, because of the preliminary transformations); and ε = [ε1, ..., ε n ]Τ is the forecast error. The estimate of parameters β 0 ,{β j }kj =1 can be carried out by means of the classic Ordinary Least Squares method, so as to minimize the sum of error squares: n

∑ (Y

i estimated

i − Yobserved

i =1

)

2

{}

The aggregated score relative to the factors x j

k

j =1

is the linear combina-

{}

tion of the k regressors by means of the normalized weights α j

Score i =

k

∑α

j

k

j =1

:

∀ i = 1, " , n ,

⋅ xji ,

j =1

with: αj=

βj

k

∑α

k

∑β

j

=1

0 ≤ α j ≤ 1 for any

j = 1, ..., k.

j =1

j

j =1

The omission of the intercept in the computation of the aggregated score is to avoid a disturbance effect, including it would suppose that the minimum score under examination is equal to the intercept. The selection of the optimal model is based on stepwise regressions and relies on different significance thresholds (variable, generally between one per cent and ten per cent) and on a cluster analysis. The correlation level beyond which two variables should not be included inside the same regression are not rigorously set; instead, it is necessary to distinguish whether the correlated factors belong to the same information category or whether they measure different phenomena. However, the intuitive rule holds according to which the correlation between two factors included in the model must be inferior to the correlation of the single factor with the dependent variable.

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 15

2.2.1.5 Step 5: calibration and testing Once the weights and factors of the final model are defined – including the weights for the combination of different modules, if integrated before the calibration process – proceed to the identification of the calibration curve, which is related to the integrated score (supposing the modules are combined before calibration) with the default probability. The curve is then constructed by means of the statistical analysis, finalized to be a best fit with the external PDs. Usually, logit or exponential calibration curves are tested using continuous or stepwise linear (with a common point) under the constraint that the merit class resulting for each counterpart will not differ by more than one or two notches from the one determined by the external rating. Tables 2.4 and 2.5 contain two examples of rating models for developed and emerging countries, respectively. This process is concluded by the sharing with internal experts and gaining the approval of the bank’s board, after which comes IT implementation and the roll-out of the model for management and regulatory purposes (Step 6 in Figure 2.3).

2.2.2

Bank rating model

From a methodological point of view, the development of a model for banks is not substantially different from the one for countries, (see first paragraph of Section 2.2.1). Tables 2.6 and 2.7 present two examples of long lists – one quantitative and the other qualitative – of potentially predictive credit risk indicators for banks belonging to both developed and emerging countries. By applying the techniques of univariate and multivariate analyses, as described in Section 2.2.1, to the quantitative and qualitative factors listed in the next two tables, it is possible to estimate the default probability, possibly differentiated by country typology (developed and emerging) as illustrated by Tables 2.8 and 2.9. To evaluate each bank’s credit risk it is appropriate to develop a framework to adjust the model’s PD estimate according to implicit and explicit support given by either the parent company and / or the government. 2.2.2.1

Parent support

In the case of group membership, the bank PD is calculated as a weighted average between the stand alone (bank) PD and the parent company’s PD, as described in Figure 2.5.

Table 2.4

Developed countries – an illustrative rating model

Module Quantitative

Qualitative

Module weight 70%

30%

Category

Factor definition

Current account

Exports of goods and services / GDP

14%

Structure

GDP per capita Inflation rate Unemployment rate Public debt / GDP How do you judge the country’s foreign policy and external support? How do you judge the country’s exchange rate and foreign trade policy? How do you judge the stability and enforcement power of the government? How high is the political risk in the country and are there any internal conflicts? How do you judge the country’s level of corruption, its bureaucratic quality and its legal security? How do you judge the country’s economic climate and structure? How do you judge the economic flexibility of the country? How do you judge the government’s macroeconomic policy? How do you judge the quality and stability of the financial system of the country?

19% 26% 15% 26% 5%

Debt Foreign relations

Social and political conditions

Economic conditions

Quality and stability of the Financial system

Factor weight

5% 5% 5% 25%

35% 5% 5% 10%

Table 2.5

Emerging countries – an illustrative rating model

Module Quantitative

Module weight 65%

Category

Factor definition

Current account Liquidity

Net foreign direct investments / GDP External short-term debt / Foreign currency reserves GDP per capita Inflation rate Debt service ratio How do you judge the country’s foreign policy and external support? How do you judge the country’s exchange rate and foreign trade policy? How do you judge the country’s democratic order? How do you judge the stability and enforcement power of the Government? How high is the political risk in the country and are there any internal conflicts? How do you judge the country’s level of corruption, its bureaucratic quality and its legal security? How do you judge the economic flexibility of the country? How do you judge the Government’s macroeconomic policy? How do you judge the country’s debt servicing record? How do you judge the quality and stability of the financial system of the country?

Structure

Qualitative

35%

Debt Foreign relations

Social and political conditions

Economic conditions

Debt servicing Quality and stability of the Financial system

Factor weight 12% 9% 35% 34% 10% 2% 30% 10% 15% 3% 5%

5% 5% 5% 20%

18 Sovereign Risk and Public-Private Partnership During the Euro Crisis Table 2.6

Example of quantitative long list for bank rating models

Category Capitalization

Factor Internal capital growth Tier 1 ratio Total capital ratio Total equity / total assets

External country rating funding and liquidity

Profitability

Risk profile / Asset quality

Total equity / total loans Country PD Country PD Fitch Country PD Moody’s Country PD S&P’s Interbank funding / total funding Interbank ratio: lending / borrowing Liquid assets / short-term and customer funding Liquid assets / total assets Net interest expenses / average total funding Percentage change in interbank ratio Total customer funds / total assets Total customer funds / total loans Yearly change in interbank funding / average total funding (Interest income + recurring fee income) / cost (Pre tax profit + LLPs) / number of employees Net income / total operating income Net interest income / average total assets Net interest income / total operating income Net operating income before LLPs / average total assets Net operating income before LLPs / total operating income Net trading income / operating income Non interest income / average total assets Non interest income / total operating income Non recurring fee income / total income Overheads / average total assets Overheads / total operating income Profit before tax / average total assets Profit before tax / total operating income Ratio: cost / income ROA ROE Total operating income / average total assets Total operating income / average total earning assets (NPLs – LLPs) / average total loans (NPLs – LLPs) / equity LLPs / average total assets LLPs / average total loans LLPs / total assets LLPs / total operating income LLRs / average total gross loans LLRs / NPLs Loan growth NPLs / average (total equity + LLRs) NPLs / average gross loans NPLs / average total assets Continued

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 19 Table 2.6

Continued

Category

Size

Factor Yearly change in LLPs Yearly change in LLPs / average total assets Yearly change in LLPs / average total loans Yearly change in LLPs / total operating income Interest paid Liquid assets Loan loss provisions (LLPs) Loan loss reserves (LLRs) Net income Net interest margin Net interest revenue Net operating income before LLPs Non performing loans (NPLs) Other operating income Profit before tax Tier 1 capital Total assets Total equity Total loans Total operating income

Table 2.7 Example of qualitative long list for bank rating models Category

Factor

Country

Country regulation / regulatory environment Way of building provisions / loan classification Attitude of regulators Concentration of the banking sector within the country Quality of strategic plans

Management/ organization

Business characteristics

Funding

Market / credit risk

Management integrity Management stability Credit approval process General organizational structure Risk management sophistication Transparency / reporting quality Geographic diversification Diversification: business lines / customers / products Market position (concerning key business) Market trend of the bank’s key business Sustainability of earnings performance Funding stability: deposits Funding stability: debt Foreign currency liquidity Market risk exposure: interest rate sensitivity, currency risk, trading risk Asset quality

Table 2.8

An illustrative rating model for banks in developed countries

Module Quantitative

Qualitative

Module weight 70%

30%

Category

Factor definition

Capitalization Funding and liquidity

Tier 1 ratio Liquid assets / total assets

Factor weight 13% 10%

Profitability

Cost / income

20%

Risk profile / asset quality

LLPs / total operating income

22%

Size

Total equity

35%

Country Management / organization

Country regulation / regulatory environment Quality of strategic plans General organizational structure Risk management sophistication Transparency / reporting quality Market position (concerning key business) Market risk exposure: Interest rate Sensitivity, currency risk, trading risk Asset quality

6% 4% 4% 22% 35% 5%

Business characteristics Market / credit risk

10% 14%

Table 2.9 An illustrative rating model for banks in emerging countries Module Quantitative

Qualitative

Module weight 80%

20%

Category

Factor definition

Factor weight

Capitalization Funding and liquidity

Total equity / total assets Net interest expenses / average total funding

10% 20%

Profitability

Overheads / average total assets

22%

Risk profile / asset quality

Loan growth

8%

LLRs / average total gross loans

12%

Size

Total assets

28%

Country

Country regulation / regulatory environment Concentration of the banking sector within the country Quality of strategic plans Management stability Risk management sophistication Market trend of the bank’s key business Foreign currency liquidity Market risk exposure: interest rate sensitivity, currency risk, trading risk Asset quality

5% 10%

Management / organization

Business characteristics Funding Market / credit risk

5% 15% 10% 5% 30% 5% 15%

22

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Calculate stand alone bank (PDBank) and parent (PDParent) probability of default

Is PDBank > PDParent ? Yes

No

Use support matrix

Use penalty matrix

Calculate parent weight (wParent)

adjusted PDBank = wParent* PDParent + (1 – wParent)* PDBank

Figure 2.5

Parent support PD adjustment

The weight wParent assigned to the parent’s PD is a measure of its willingness to provide support or, in the negative case, to draw profits away from the borrower (the bank). It does not measure the parent’s ability to support or drain the borrower, which is already captured in the provider’s stand alone PD. The weight that should be given to the adjustment of the provider’s PD depends on the characteristics of the parent and its relationship to the borrower, as proposed in Table 2.10. In the case of non-recourse financing, no adjustment should be applied to the borrower’s PD (wParent= 0); in addition, where a bank’s subsidiary has a ring-fenced agreement, which excludes transfer risk events, this will be captured in the transfer risk discussions. The group logic illustrated in Figure 2.5 and Table 2.10 is for local currency ratings. 2.2.2.2

Government support

Even government support can have a strong effect on a bank’s final internal rating. The approach shown in Figure 2.6 and Table 2.11 for a lowering of a bank’s PD in case of a strong Governmental supporter is differentiated between cases when Governments act as owners or have granted explicit

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 23 Table 2.10 Parent positive and negative correction matrices Support matrix (Parent stronger than borrower) Strong Is the borrower strategically important? Guarantee to meet all obligations Financial or non-financial covenants No written commitments

Yes

Medium

Weak

No

Yes

No

Yes

No

100%

95%

95%

95%

95%

95%

80%

50%

60%

20%

40%

0%

60%

0%

40%

0%

20%

0%

Penalty matrix* (Parent weaker than borrower) Strength of Parent Likelihood of weakening relationship Already exists Might exist Will not exist

Strong

Medium

Weak

50% 25% 0%

75% 50% 0%

100% 75% 25%

Notes: * The penalty matrix comes into play when the parent is less creditworthy than the borrower. In this case, the borrower may be obliged to hand over most or all of its profits to the parent, or to grant loans or offer guarantees to the parent or other related companies. The matrix also considers the strength of the parent: a strong parent will not need to draw profits from its subsidiary (the borrower); a weak parent may need to acquire the subsidiary’s profits to remain solvent itself. In the current matrix three possibilities are given: “already exists”, “might exist” and “will not exist”.

guarantees to banks and cases where there is only implicit support based on the importance of a bank for the country’s financial system. Whenever both parent and government support are present the final PD could be taken as the minimum/medium/maximum of the adjusted PDs. According the above analysis, in developed countries the PD’s relative weight contribution to an external rating is 18 per cent and bank system effectiveness is only 3 per cent; however, in emerging markets the relative weight contribution to external rating of PD/Liquidity is 12 per cent and bank system quality is 7 per cent. During the financial crisis the relative weight contribution gap between developed countries and emerging markets narrowed. Many investment grade ratings are associated with sub-investment grade spreads:

24 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Calculate stand-alone bank (PDBank) and government (PDGov’nt) probability of default Government/public support entity

is guarantor / owner of the debtor

is not guarantor / owner of the debtor

PDGov’nt < PDBank PDGov’nt > PDBank

PDGov’nt < PDBank PDGov’nt > PDBank

Decrease PDBank

Decrease PDBank

No correction or country ceiling

see Matrix 1

No correction or country ceiling

see Matrix 2

adjusted PDBank = wGov’nt * PDGov’nt + (1 – wGov’nt) * PDBank

Figure 2.6

Government support PD adjustment

Table 2.11

Government positive and negative correction matrices

Matrix 1*

Owned by government/public support entity

Full guarantee No full guarantee Matrix 2**

> 50% equity

between 30% and 50% equity

< 30% equity

100% 100%

100% See Matrix 2

100%

(implicit support)

Relative size of the bank Top 5 banks Top 6–10 banks Top 11–20 banks Top 21–30 banks

Very supportive environment

Medium supportive environment

80% 70% 50% 30%

50% 40% 30% 15%

Notes: * The risk transfer percentage that should be applied depends upon the type of guarantee and on the share the Government owns in the borrowing bank. **Government support is not always shown by an explicit guarantee. Governments can also support banks implicitly, especially when they are highly important to the country’s financial system. In general, two factors affect the likelihood of implicit Government support: (1) the relative size of the bank and (2) region specific support characteristics (i.e. when banks are significant to a country’s financial flows).

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes 25

the markets have given different valuations of credit risk in respect of external ratings. The general view is that markets are at a potential turning point and credit risk for Portugal, Italy, Spain and Ireland were converging on a “safety area” in 2013. However, as we will see in the next section, the challenge on the table is how to improve the real economy.

2.3 Sovereign risk and corporate risk: how to improve the real economy

Lending growth (percent, year on year)

We want to focus our attention briefly on the link between bank risk and business risk, before examining the relationship between sovereign risk and business risk. If we look closely at this link, we can see clearly how the contraction of bank regulatory capital (thin capital buffers) has resulted in a contraction in lending to firms (see Figure 2.7). The banks that are positioned in the fourth and fifth quintiles (i.e. 40 per cent of the banks) reduced the volume of loans to enterprises by between one per cent and three per cent. This phenomenon is strongly differentiated depending on whether one examines large companies (in which the situation is mitigated) or SMEs (in which the phenomenon of the credit crunch is clearer), and has quite an impact on the real economy of EU peripheral countries (see Figure 2.8). A serious quality review of bank assets is needed to allow healthy banks to carry out their function as a channel for monetary policy into the real economy. In parallel, it is necessary to develop a credit market for the 3 2 1 0

1st

2nd

3rd

4th

–1 –2 –3 –4

Figure 2.7

Bank buffers (quintiles) Bank capital buffers and lending growth

Source: Our elaboration on IMF Financial Stability Report, 2013

5th

26 Sovereign Risk and Public-Private Partnership During the Euro Crisis Ireland

Spain

Portugal

France

Netherlands

Italy

–0,21 –0,45

–0,37

–0,32

–0,66 –0,82 Figure 2.8

Credit crunch in EU peripheral countries (in %)

Source: IIF-Bain report on restoring financing and growth to Europe’s SMEs (October 2013)

EMS complementary to the bank market. The decline of returns means that many subjects, such as pension funds or insurance companies, could be interested in investing in a minibonds market in the search for a new and appropriate trade-off between risk and return. At government level, the way to reduce sovereign risk is embodied in the, so-called, structural reforms, that is “less current spending, lower taxes and more infrastructure and human capital” (M. Draghi, ECB Governor, January 2014). In the present economy it is interesting to focus primarily on the theme of investment in, and funding of, infrastructure. In current macroeconomic environment and financial markets it is clear that Keynesian policies cannot be pursued directly by governments, because the amount of public debt is so high that there are no buyers for government bonds. The ECB could follow quantitative easing programmes (as Fed, BoE and BoJ did) to support Keynesian policies, boost the real economy and/or launch a new LTRO/SME ABS programme. However, if we look at the constraints of public finance and monetary policy, it is clear that governments can heavily support the process of investment in new infrastructure through PPP schemes, combined with other forms of credit mitigation or public support, to make companies creditworthy enough for banks to finance them.

3

PPP Schemes

3.1 The genesis of PPPs Over the last decade the PPP phenomenon developed in many fields, falling within the scope of the public sector. Various factors explain the increased recourse to PPPs. In view of the budget constraints confronting member states, they meet a need for private funding of the public sector. Another explanation is the desire for the public sector to benefit from the know-how and working methods of the private sector. The development of the PPP is also part of a more general change in the role of the state in the economy, moving from a role as direct operator to one as organizer, regulator and controller. The public authorities of member states often have recourse to PPP arrangements to undertake infrastructure projects, particularly in sectors such as transport, energy, water, public health, education and national security. At European level it is recognized that recourse to PPPs could help put in place trans-European transport networks, which have fallen very much behind schedule, mainly owing to a lack of funding (EU, 2004). To meet a lack of infrastructure in local public services different countries have identified various forms of public-private collaboration, and in particular in PPPs, as useful tools to: ●

●

● ● ●

Implement the necessary infrastructure given a scarcity of public resources; Outsource procedures and management models in a framework of public organizational inadequacy; Reduce the cost of public infrastructure; Ensure high levels of efficiency in public services to benefit citizens; Improve the management of public services and infrastructure; 27

28 ●

●

●

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Promote free competition in the market for efficient private management of public services; Simplify and reduce the bureaucratic constraints of public procedures; Allow the control on the part of the public administration, which implies that public administration gains control over the utilities offered in concession to private operators.

The genesis of PPPs, relating to the privatization of public services and infrastructure, was already both significant and emblematic during the industrial revolution in the 1800s. In fact, after the unification of the Kingdom of Italy, in the context of profound institutional change and governance reforms, numerous attempts were made to introduce to public infrastructure what today we call PPPs. 3.1.1

Genesis of the PPP in Europe: first forms?

The earliest forms of PPP can be traced back to a public-private collaboration between Italy, France and the UK in the construction of an aqueduct for Naples, Italy, in 1877. Then, in 1878 the significant founding, again with French capital, of a British subsidiary of the Compagnie Générale des Eaux (now the Naples Water Works Company Ltd) for the distribution of drinking water to the city and surrounding municipalities. The project involved the substantial refurbishment of an ancient aqueduct, which was completed in 1885, although it left the company in considerable financial difficulties. In 1885 the heavy engineering company of Armstrong established itself in Pozzuoli, to the west of the city. The British Group (the largest in the world for war provisioning) chose the city of Naples to build the aqueduct. The main reasons were: a favourable geographical position (the proximity of the Cumana train, which was under construction); the city’s need for safe drinking water; and the availability of the land necessary to proceed with the construction. 3.1.2

The Naples Water Works Company Limited

After unification in Italy it became very clear that there was a need for an aqueduct in Naples for many reasons and particularly because the water in the old Bull and Carmignano aqueducts was completely inadequate and often polluted. Therefore, after 1861, engineers, architects and community leaders looked at possible sources and the best routes, discussed the best methods of construction and management, dealt with tenders and examined the best deals.

PPP Schemes 29

After much deliberation they chose to recreate part of the old Roman aqueduct of Claudius, which started from Serino in Irpinia, but to re-route it to a higher altitude to suit the height of many Neapolitan neighbourhoods. A huge investment would be necessary to make this approach work and it could only be accomplished by a foreign company. Hence the lengthy negotiations between the city council, engineers and financiers that took place in December 1877 to ensure a cash underwriting equal to six per cent of the capital invested to build the aqueduct, calculated as £30 million. The following year the Municipality of Naples entered into a contract with the Naples Water Works Company Limited (which operated the Parisian Compagnie Générale des Eaux), through its subsidiary Compagnie Générale des Eaux Pour Les Étrangers that had built several aqueducts in Italy. In about three years, the company had built some impressive structures: 60 km of pipeline from Serino to Gate, of which 42.5 km were in open channels, 14.5 km in tunnels, canals and bridges, and 1.7 km in 1,100 traps (large cast iron pipes); between Gate and Naples (about 20 km away), the water was divided into three traps, one with a diameter of 700 mm and two of 800 mm, for a total length of over 60 km. In Naples the water flowed into two large tanks, one at Capodimonte (Porta large), the other at Scudillo, from where it entered the city’s distribution network, initially of about 100 km but which grew rapidly and had doubled by the end of the century. For decades this aqueduct meant Naples had no problems with a water supply and was able to meet the needs of a growing population and could provide drinking water to a large number of municipalities in the province. Only after the Second World War and the huge growth in residential areas and many towns of the hinterland, did the water from Serino become insufficient and further aqueducts needed to be built. Regulation of local public services in Italy dates back to the early 1900s, conforming with the Giolitti law (Law No. 103, 29 March 1903). This law allowed municipalities and provinces to hire and manage the services deemed essential to local authorities, and to take from the market economy those goods and services that would satisfy communal needs. Municipal enterprises were therefore public enterprises operating in a single structure and acting within their own territory. Private sector entities were excluded from this field but they could still be allocated a management service concession. Municipal companies and concessions, however, were not the only way in which it was possible to manage a public service. The Giolitti law allowed local Government to directly manage a service monopoly. Besides managing a public service on the part of the local authority, law 103/1903 also supplied a list of defined services, although it did not specifically outline this notion of monopoly.

30 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Through this list it was possible to identify essential community services that needed to be returned to the authority. The Giolitti law operated until 1990, the year in which the dismantling of State-owned companies began to ensure the free market required by the European Union. Since the European Union affirmed the primacy of competition at a European level, the Italian authorities had to establish a process of privatization of public enterprises, which was a u-turn compared to activity in the early 20th century; the State basically ceased to be an entrepreneur in order to ensure the autonomy of the market, this process met strong resistance on the part of the Italian government.

3.2 EU: no formal definition of PPP The EU does not have any formal definition of a PPP. The procurement directives governing works, supply and service contracts explicitly address contracts for the provision of a service or for construction, but public service concessions have, so far, been excluded from the directives. Over the last decade in Europe there has been a significant increase in the use of public-private partnerships within the public sphere, following the example of infrastructure improvements in the United States (transport, energy, water, public health, education and security) (Giorgiantonio, Giovanniello, 2011). In Europe, statistics on PPP contracts (PPPC) show the greatest growth by the end of the 1990s in the EU, peaking in the Anglo-Saxon world (about 20 per cent of total expenditure), but with good levels in Spain (about 12 per cent), while it is still early days in France and Germany (where the level is around 5–8 per cent). Based on a rather restrictive definition of PPPC recent research shows that between 1990 and 2006 they have been used in the UK in 75 per cent of projects (60 per cent of the value), in Spain by nine per cent (13 per cent of the value), while in France, Germany, Italy and Portugal there were between 20 and 30 projects (about three to six per cent of the total value in each country). PPP operations are primarily for assignment to a private entity (usually a company formed ad hoc, a CD project company) to undertake the design, construction and operation of a given work (so-called bundling), with the operating revenues derived in a large part from the income on on invested capital (and from debt repayments, which are usually quite high). The alternative is project financing (PF), which separates out financing, construction and the subsequent operation of the work. In the case of public infrastructure, the public administration (PA) would finance the project – while possibly borrowing on the market – by resorting to a tender procedure for the construction, and would then

PPP Schemes 31

manage the infrastructure, either directly or by assignment to a dealer. In the second the case this may require and upfront fee to repay the investment or the PA may structure the fee in the dealer’s favour in order to subsidize the use of the infrastructure, reducing or eliminating tariffs charged to end users). Especially in construction contracts, the use of competitive procedures to identify the subsequent manager should reduce costs and enhance the quality of services related to the infrastructure. For the construction and management of public works PF has its advantages and disadvantages. Particular advantages are that it will: ●

● ●

●

lead to shared risks and revenues in a predetermined manner, according to the needs of those involved; allow the process of identifying investment to be streamlined; optimize the management of the various operational activities necessary to implement the project, with the involvement of specialists; reduce the PA’s tasks and costs.

The possible disadvantages are mainly related to: ●

●

●

the risk of weakening the incentives for efficiency inherent in competitive mechanisms, in particular as regards the subsequent management of the infrastructure, with the company and the project participants remaining “frozen” for long periods of time; the complexity of the relations between the different actors involved in the SP (special purpose), which makes PF generally recommended as a tool only in the case of works that are sufficiently large; the risk that this financing technique is treated as an instrument for low cost funding, with the aim of circumventing the limits imposed by the laws on indebtedness of public bodies.

PF’s operation in the field of public works is characterized essentially by the awarding of a project to a private entity (usually a company set up ad hoc, CD project company – Special Purpose Vehicle (SPV) for the management of the design, construction and operation of a given work (so-called bundling). With the revenues generated largely from invested capital and debt repayment. The private entity is responsible for all phases of the project. The use of PF, then allows for: ●

●

ensuring adequate levels of standardization and homogeneity across the contract allocating the risks in a clear and “efficient manner” (Decarolis, Giorgiantonio, Giovanniello, 2011; Giorgiantonio, Giovanniello, 2009, 2011).

32 Sovereign Risk and Public-Private Partnership During the Euro Crisis

The indications arising from the economic literature and documents of the European Commission has been supported by the experience of some European countries (UK, Italy and Spain), in which: the diffusion of formulas of public-private partnership, has gone hand in hand with an increasing focus on regulatory aspects relating to, in particular: i) the adequate allocation of administrative risk, ii) the proper design of the selection procedures of the private contractor, iii) the increasing attention to the contractual phase, iv) the preparation of principals ensuring the bankability of credits. (Giorgiantonio, Giovanniello, 2009, 2011) Conversely, in other European countries (France and Germany), in which the PPPC has not reached similar levels of development, regulatory gaps are found in relation to some of the profiles mentioned in Table 3.1.

3.3 PPP definition – form and substance There is no broad international consensus on what constitutes a publicprivate partnership (PPP) (World Bank, 2013). “The term public-private partnership (PPP) is not defined at Community level. In general, the term refers to forms of cooperation between public authorities and the world of business which aim to ensure the funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service” (EU, 2004). According to authoritative international institutions, such as the World Bank, there is no one widely accepted definition of PPPs. Broadly however, PPP refers to arrangements between the public and private sectors for managing services or works that are the responsibility of the public sector, with clear agreement on shared objectives for delivery of public infrastructure and/or public services (World Bank, 2013). While the term PPP has been in use since the 1990s, there is no single European model of a PPP (Kappeler, Nemoz, 2010); the European Report 2009 states that “the range of structures used for PPP varies widely: in some countries, the concept of a PPP equates only to a concession where the services provided under the concession are paid for by the public. In others, PPPs can include every type of outsourcing and joint venture between the public and private sectors” (EIB, 2009). As a result, the recorded number of PPP projects may vary considerably across data resources (Kappeler, Nemoz, 2010). In particular, concession–based financing of infrastructure is common in the UK, Italy and Spain, which is why we decided to study the accounting regulations and

Table 3.1

France

PPPs – a European comparison Allocation of administrative and regulatory risk

Procedures for selecting a contractor

Weaknesses in coordination mechanisms between the different levels of PA (instances of modification of the Plan Etat – Region – Communes).

In general, the system recognizes a certain degree of discretion on the part of those responsible for public contracts. Competitive dialogue introduced. Limited discretionary margins for PA management procedures (extensive use of open procedures). Competitive dialogue is limited to, so-called, complex contracts.

Germany High degree of accuracy in the design phase, Code 2006 is characterized by attention to technical and economic aspects, even before formal legal ones.

Italy

Appropriate coordination of the responsibilities of the various agencies at federal level (most recently, l. 12/2006), the most problematic link is in the decisionmaking in PA at the local level. High degree of accuracy in the design phase (VOB attaches great importance to technical aspects and design).

Limited discretionary margins for PA management procedures. Competitive dialogue not yet operational. Presence of potentially discursive mechanisms in the submission of tenders.

Predisposition and contract expectation Limited attention to the contractual phase.

Limited attention to the contractual phase.

Limited attention to the contractual phase.

Principals for the bankability of credits Protection for lenders is (mostly) left to the negotiating agreements, the keeping of which is likely to be restricted by the “rigidity” inherent in French civil law (in particular, as regards the system of collateral). Protection for lenders is (mostly) left to the negotiating agreements, which seem sufficiently workable as regards the establishment of collateral. Main problems come from how well such agreements fit the principles that govern German contract law. Failure mechanisms provided for by law to protect lenders. Lack of remedial feasibility through negotiation, given the presence of rigidities in Italian civil law (particularly as regards the system of collateral).

continued

Table 3.1

UK

Spain

Continued Predisposition and contract expectation

Allocation of administrative and regulatory risk

Procedures for selecting a contractor

Limits in the mechanisms for coordinating between the various decision-making levels of the PA (especially as regards the link between administrations responsible for the protection of specific interests). Lack of attention to the technical and design aspects. Presence of adequate coordination mechanisms between the different authorities involved (Institute of replanteo de la obra). Great attention to technical and design aspects.

Ample opportunities to concrete cases. Competitive dialogue introduced.

Great attention to the contractual phase (preparation of clauses that allow for an adequate risk allocation).

System of real and personal guarantees in terms of negotiation, the keeping of which is ensured by the principles that govern English law of contract (privity of contract).

Considerable margin of discretion for the PA in the management of procedures (extensive use of restricted procedures). Competitive dialogue introduced.

Great attention to the contractual phase (preparation of clauses that allow for an adequate risk allocation).

System of safeguards to protect lenders required by law, notwithstanding the principles governing Spanish civil law.

Source: ISAE Report, 2008.

Principals for the bankability of credits

PPP Schemes

35

business models of PPP in these three countries, and especially concessions made before and after the adoption of IFRIC 12.

3.4 PPP in the European Commission Green Paper The European Commission Green Paper on public-private partnerships and EU law on public contracts and concessions, issued on 30 April 2004, provides useful guidelines and explains the characteristics and different forms of partnership, by making a distinction based on different types of contract, between institutional and contract partnerships. Institutional partnerships entail cooperation between the public and private sectors within a specific entity, assuming the existence of a corporate or institutional structure, which, being held jointly by the public authority and the private entity, carries out the task of ensuring the delivery of a work or a service on behalf of the community. The government is geared to using this formula primarily for managing public services at local level. The legislation on the regulation of PPP different application models has grown stronger in the last decade, as shown for example in Table 3.2. The contractual partnership is based on purely formal ties between public authorities and private entities for the commission of public works. “The concession model, is characterized by the existence of a Table 3.2

Normative references in the last 15 years

2000 European Commission, communication No. 2000/121/02 of 4/12/2000 “Commission interpretative communication on concessions under Community law” 2004 Eurostat, 11 February 2004 decision “accounting treatment in national accounts of contracts signed by public undertakings in the framework of partnerships with private companies” 2005 European Commission, communication 2005/569 of 11/15/2005 “on public-private partnerships and Community law on public procurement and concessions” 2006 European Parliament, resolution No. 2043/2006 of 26 October 2006, “on public-private partnerships and Community law on public procurement and concessions” 2007 European Commission, communication 2007/616 of 10/18/2007 “communication on a European ports policy” 2008 European Commission, communication 2007/6661 of 2/5/2008 “interpretative communication of the EU Commission on the application of Community law on public procurement and concessions to institutionalized public-private partnerships” 2008 The implementing regulation and implementation of the code of public contracts

36 Sovereign Risk and Public-Private Partnership During the Euro Crisis

direct link between the private entity and the final user, providing a service to the community in place of and under the control of the public authority” (Gallia, 2008).

3.5

PPP elements

In its Green Paper on PPPs, the European Commission (EU, 2004), recognized that the following elements normally characterize a PPP: The relatively long duration of the relationship, involving cooperation between the public partner and the private partner on different aspects of a planned project ... The method of funding the project, in part from the private sector, sometimes by means of complex arrangements between the various players ... The important role of the economic operator, who participates at different stages in the project (design, completion, implementation, funding) ... The distribution of risks between the public partner and the private partner, to whom the risks generally borne by the public sector are transferred. In some jurisdictions, particularly in those countries that follow the tradition of the Code Napoléon, a distinction is made between public contracts – such as concessions where the private party is providing a service directly to the public and taking on the end user risk – and PPPs – where a private party is delivering a service to a public party in the form of a bulk supply, such as a BOT (build operate transfer) for a water treatment plant, or facilities for a fee, such as hospital facilities (World Bank, 2013).

3.6 Forms of PPP The PPP refers to a form of contract based on cooperation between a public sector entity (grantor) and a private sector entity (operator) through which their respective expertise and resources are integrated in order to perform public works or services and related management services. A PPP process, wholly or partly, embraces the following activities: ● ●

design funding

PPP Schemes ● ● ●

37

construction or renovation management maintenance

3.6.1

Service concession arrangements (SCA)

The absence of a precise definition of service concession in EU legislation was filled by Community directives No. 17 and No. 18 in 2004. They both defined the service concession as “a contract that has the same characteristics of a public service contract, except for the fact that the consideration received or receivable by the operator providing public services solely consists in the right to operate the service or in this right together with payment”. Moreover, apart from the merits of defining the provision of services, the above-mentioned directives exclude service concessions within the Community framework. In fact, Article 18 of Directive 17/2004 states that its rules do not apply to work and service concessions and Article 17 of Directive 18/2004 provides that, without prejudice to the application of the provisions referred to in Article 3, this Directive shall not apply to service concessions. The above definition of service concession was drawn from the Public Contract Code (art. 3, c. 12), which also provides, at Article 30 (“service concessions”), the regulation for the institution for ordinary sectors and, at Article 216 (“work and service concessions”) containing a reference to Article 30, the regulations for special sectors. There is no precise definition of service concession arrangements in the legislation of European Union. However, the definition solves the thorny question concerning the delineation of service contracts in relation to the contiguous notion of service concessions and similar models, which has been engaging both national and European doctrine and jurisprudence for many years.

3.7 PPP models and schemes 3.7.1

From concession to PPP

In PPPs, “ideology has been a crucial factor in these linguistic developments. Part of the ideological development of privatisation, and so have not usually been described as ‘privatisation’, although controversial. As privatisation became politically controversial, even in the UK, new terms were introduced. ‘Public-private partnership’, abbreviated as PPP, was created to present the same forms of involvement of the private sector as more a collaborative, technical exercise rather than an

38

Sovereign Risk and Public-Private Partnership During the Euro Crisis

aggressive transformation of relations. A similar term, ‘private sector participation’ (PSP) has also been widely used, especially by the World Bank and others in the context of developing countries” (Hall, de La Motte, Davies, 2003, p. 2). 3.7.2

Different types of PPP

Concessions, BOT Projects, and design build operate (DBO) projects are all types of public-private partnership. Definitions, key features and examples of each type of agreement are discussed below. A concession gives an operator the long-term right to use all utility assets conferred on them and includes responsibility for all operation and investment. Asset ownership remains with the authority. Assets revert to the authority at the end of the concession period, including assets purchased by the operator. In a concession the operator typically obtains its revenues directly from the consumer and so it has a direct relationship with the consumer. A concession covers an entire infrastructure system. A number of projects are defined as concessions, such as toll road projects, which are new build and have a number of similarities to BOTs. A BOT project is typically used to develop a single asset rather than a whole network and is generally entirely new or greenfield in nature. In a BOT project the project company or operator generally obtains its revenues through a fee charged to the utility or government rather than tariffs charged to consumers. In DBO projects the public sector owns and finances the construction of new assets. The private sector designs, builds and operates the assets to meet certain agreed outputs. The documentation for a DBO is typically simpler than for a BOT or concession as there are no financing documents and it will typically consist of a civil works contract plus an operating contract, or a section added to the contract covering operations. The operator has no financing risk and will typically be paid a sum for the design and build of the plant and then an operating fee for the operating period. 3.7.3

Concessions

A concession gives a private operator responsibility not only for operation and maintenance of the assets but also for financing and managing all required investment, the operator takes the risk for the condition of the assets and for investment. A concession may be granted in relation to existing assets, an existing utility, or for extensive rehabilitation and extension of an existing asset (although often new build projects are called concessions). The

PPP Schemes

39

duration for a concession is typically for a period of 25 to 30 years (i.e., long enough at least to fully amortize major initial investments). Asset ownership typically rests with the awarding authority and all rights in respect to those assets revert to the awarding authority at the end of the concession. General public is usually the customer and source of revenue for the operator. Often the operator will be operating the existing assets from the outset of the concession and so there will be immediate cashflow available to pay operator, set aside for investment, service debt, etc. Unlike most management contracts, concessions are focused on outputs, i.e., the delivery of a service in accordance with performance standards. There is less focus on inputs, i.e., the service provider is left to determine how to achieve agreed performance standards, although there may be some requirements regarding frequency of asset renewal and consultation with the awarding authority or regulator on such key features as maintenance and renewal of assets, increase in capacity and asset replacement towards the end of the concession term. Some infrastructure services are deemed to be essential, and some are monopolies. Limits will probably be placed on the operator – by law, through the contract or through regulation – on tariff levels. The operator will need assurances that it will be able to finance its obligations and still maintain a profitable rate of return and so appropriate safeguards will need to be included in the concession agreement or in legislation. In many countries there are sectors where the total collection of tariffs does not cover the cost of operation of the assets let alone further investment. In these cases, a clear basis of alternative cost recovery will need be set out in the concession, whether from general subsidies, from taxation or from loans from government or other sources. The concept of a “concession” was first developed in France. The framework for the concession is set out in the law and the contract contains provisions specific to the project. Within the context of common law systems, the closest comparable legal structure is the BOT, which is typically for the purpose of constructing a facility or system. (World Bank, 2013) 3.7.4

BOT projects

In a BOT project, the public sector grantor grants to a private company the right to develop and operate a facility or system for a certain period (the “Concession Period”), in what would traditionally be a public sector project. BOT relates to new build, there is no revenue stream from the outset. Lenders are therefore anxious to ensure that project assets are ring-fenced within the operating project company and that all risks

40 Sovereign Risk and Public-Private Partnership During the Euro Crisis Shareholders (Shareholders’ Agreement) Authority

Lenders Lending agreements

Operator

Shareholding

Operation and maintenance agreement

Construction contract

Concession agreement

Offtake Of ftake purchase agreement

Project company

Input supply agreement

Construction contractor

Figure 3.1

Offtake purchaser

Input supplier

Contractual structure: project company

associated with the project are assumed and passed on to the appropriate actor. In a BOT project, the operator is therefore usually a special purpose vehicle. Project company obtains financing for the project, and procures the design and construction of the works and operates the facility during the concession period. Project Company is a special purpose vehicle; its shareholders will often include companies with construction and/or operation experience, and with input supply and offtake purchase capabilities. It is also essential to include shareholders with experience in the management of the appropriate type of projects, such as working with diverse and multicultural partners, given the particular risks specific to these aspects of a BOT project. The Project company will coordinate the construction and operation of the project, in accordance with the requirements of the concession agreement. The off-taker will want to know the identity of the construction sub-contractor and the operator. The revenues generated from the operation phase are intended to cover operating costs, maintenance, repayment of debt principal (which represents a significant portion of development and construction costs), financing costs (including interest and fees), and a return for the shareholders of the special purpose company. Lenders provide non

PPP Schemes 41

recourse or limited recourse financing and will, therefore, bear any residual risk along with the project company and its shareholders. In order to minimize such residual risk (as the lenders will only want, as far as possible, to bear a limited portion of the commercial risk of the project) the lenders will insist on passing the project company risk to the other project participants through contracts, such as a construction contract, an operation and maintenance contract. (World Bank, 2013) 3.7.5

Contractual structure: BOT or concession

The chart below shows the contractual structure of a typical BOT project or concession, including the lending agreements, the shareholder’s agreement between the project company’s shareholders and the operating and construction subcontracts, which will typically be between the project company and a member of the project company consortium (Delmon, 2005). Each project will involve some variation of this contractual structure depending on its particular requirements, for instance, not all BOT projects will require a guaranteed supply of input, therefore an input supply agreement may not be necessary. The payment stream may be in part or completely through tariffs from the general public, rather than from an offtake purchaser. Basic models for the relationship between government and private sector, according to the World Bank (2013), are outlined in Box 3.1. Box 3.1 Basic models of PPP • Pure BOT type Government: ROW acquisition Private sector: design, construction and operation and maintenance (O&M); investment recovered by toll revenue; revenue risk •BOT type with government subsidy/financial support Government: ROW acquisition, upfront subsidy (50 per cent maximum of total cost) or government financial support (GFS) Private sector: design, construction and O&M; investment recovered by toll revenue; revenue risk •Segment dividing type (project divided into government and private segments) Government: ROW acquisition of both segments; design and construction of government segment; leased to private sector at lease fee of 0–100 per cent of government expenditure

42

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Private sector: design and construction of private segment; O&M of both segments; investment recovered by toll revenue of both segments; private sector pays lease fee to government; revenue risk • Service payment type Government: ROW acquisition; during O&M period government pays private sector service fee to recover its investments; toll revenue turned over to government, if it is not enough to pay the service fee government adds a subsidy and revenue risk Private sector: design, construction and O&M; annual service fee to recover investment • Lease type Government: ROW acquisition; design and construction Private sector: O&M; leases facility from government (lease fee ranges from 0–100 per cent of government expenditure; revenue risk

3.8 Elements of different PPP schemes The different forms of PPP outlined in Box 3.1 all affect the structure of public services and also “concern trade unions because the common element of private operation of services affects jobs and conditions of workers. This restructuring of their employment relationship is often a key element in generating savings to make the financial mechanism worthwhile” (Hall, de La Motte, Davies, 2003).

3.9 The PPP in Europe Recently, the use of PPP has spread from the traditional field of transport infrastructure to fields such as public buildings (schools, prisons, hospitals) and the environment (waste treatment, water). These developments have occurred in different ways in different EU countries: in the UK, France, Italy, Germany, Spain and Portugal the PPP market has grown and diversified; some countries have begun to develop programmes of investment in PPPs; other countries continue to have limited experiences of PPPs. 3.9.1

Evolution of the PPP – trends and impacts

Between 1990 and 2009 more than 1,300 PPP contracts were concluded in Europe, for a total investment of over 250 billion euros. Of these, about 369 transactions, worth approximately 70 billion euros, reached the stage of financial closure after 2007 (Kappeler, Nemoz, 2010). An increase in the use of PPPs lasted until the middle of the decade

PPP Schemes 43 Table 3.3

Elements of different PPP schemes

Operation Finance

Construction

Ownership

Transport Sector Energy Sector Water Sector Tariffs paid to market Tariffs paid to public sector Risk transfer on market Risk transfer on public Sector Risk transfer on others Contractual standardization Penalties Control IFRIC 12

Operation of service Capital investment financed by private operator Recouped by user charges Recouped by contract from municipality Construction of asset by private company Public, during and after contract Private during contract, public after Private indefinitely

Outsourcing

PFI

Concession

Lease

BOT

X

X X

X X

X

X X

X

X

X

X

X X X

X

X

X

X

X

X

X X X

X

X

X

X

X

X X X

X X X

X

X X X X

X

X

X

X X X

X

Source: Adapted from Hall, de La Motte, Davies, 2003.

referenced, then both the number and the value of PPP contracts registered declined (see Figure 3.1). Looking at the distribution of PPP contracts concluded during the reporting period between the different European countries, we note that more than two-thirds of the contracts in Europe affected the UK; then

44 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Year

Number of projects

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total

2 1 3 1 2 12 26 33 66 77 97 79 82 90 125 130 144 136 115 118 1340

Figure 3.2

Value of projects (in € millions) 1386.6 73.0 610.0 454.0 1148.0 3264.9 8488.2 5278.0 19972.4 9602.6 15018.5 13315.3 17436.2 17357.1 16879.9 26794.3 27129.2 29597.9 24198.0 15740.4 253744.0

Evolution of PPPs in Europe for period 1990–2009

Source: A. Kappeler, and M. Nemoz, (2010), public-private partnership in Europe – before and during the recent financial crisis.

Spain, with ten per cent of the total number of projects, was the second largest market in Europe; France, Germany, Italy and Portugal represented between two per cent and five per cent of the market. The UK, Portugal, France, Germany, Spain and Italy (which, alone, was worth 2.4 per cent of the total) together accounted for about 92 per cent of the total market by number of PPP projects. If you look at the value of the contracts, the UK accounted for 53 per cent of the total European market for PPPs over the period. The Spanish share of the market value of projects was higher than the share of the market number of contracts; Portugal (at seven per cent) was the third largest European market, in terms of contract value. France, Germany and Greece, together, accounted for approximately 15 per cent of the value of the PPP market in Europe between 1990 and 2009 (Kappeler, Nemoz, 2010). Italy accounted for 3.3 per cent of the total value of the European market. 3.9.2

PPPs by sector

The analysis of the evolution of the PPP market in different sectors was conducted separately for the UK and the rest of Europe. In the

PPP Schemes

45

UK, during the reference period, the dominant sectors by number of projects are represented by building schools (35 per cent of the total) and healthcare (34 per cent of the total), the number of PPP contracts concluded in these areas recorded a trend of steady growth. Also in the UK, the number of projects in the field of public housing, which accounted for 14 per cent of the total, remained fairly stable; in contrast, the transport sector experienced a decline, so that by 2009 it represented only four per cent of the total market. The number of PPP projects in the field of defence, security and public order recorded a decreasing trend. With reference to the value of projects, the transport sector progressively declined in relative importance by up to 17 per cent, however, this was a proportionally higher total incidence than the actual number of projects. In the rest of Europe, PPPs were mainly concentrated in the area of transport infrastructure. Between 2005 and 2009 transport accounted for 41 per cent of the total number and 76 per cent of the total value of the European market (excluding the UK). The construction of schools and health projects accounted for 26 per cent of the number and 11 per cent of the value of PPP contracts across the entire European market (always excluding the UK). As for the composition of intra-industry trade, in the continental European market, road infrastructure was the predominant component for the implementation of PPPs. With reference to the entire period of analysis (1990–2009) the share in urban railways grew, while contracts for bridges, tunnels and airports have declined, both in number and value (Kappeler, Nemoz, 2010). The data reveal significant differences in the number and value of PPP contracts across all sectors. The same differences apply to the average size of the projects. In the UK the average size of PPP projects in the transport sector is relatively larger than in other sectors. The recent decline in the size of contracts related to transportation may be because some major projects (e.g. the London Underground) were initiated early on in the period. In most other areas the average size of projects has grown over time. The guidelines published by HM Treasury in 2006 to promote the implementation of major projects (investment of more than 30 million euros) may have facilitated this trend (Kappeler, Nemoz, 2010). In the rest of Europe, the average size of PPP contracts is lower than in the UK for most of the sectors (the most important exception is in healthcare construction). The transport sector shows an increase in the average size of projects, bearing in mind, however, that transport is the most traditional area of application for PPPs, which has spread only more recently to other areas.

46

Sovereign Risk and Public-Private Partnership During the Euro Crisis

100 90 80 70 60 50 40 30 20 10 0 General public services

Defence

Public order

Transport Fuel and Enviroment energy

Health

Recreation Education and culture

General public services

Defence

Public order

Transport Fuel and Enviroment energy

Health

Recreation Education and culture

100 90 80 70 60 50 40 30 20 10 0

1995–1999

2000–2004

2005–2009

Figure 3.3 PPP contracts in European transport sector (excluding UK), number (top) and value (bottom) Source: A. Kappeler, and M. Nemoz, (2010), public-private partnership in Europe – before and during the recent financial crisis.

PPP Schemes 47

3.9.3

Importance of macroeconomic PPPs

In order to understand the relevance of macroeconomic PPPs a useful indicator is the comparison between the market value of the PPP and total public investment expenditure. In order to compare the two values, the value of each PPP project has been divided into five-year periods (the year of financial closure and the next four years), considered the typical duration of a contract for public works. The analysis of the aggregate value of investments in PPP and public investment expenditure, both expressed as a percentage of GDP, shows that in all European countries investment spending represents less than one per cent of GDP. Some exceptions are Greece, Portugal, UK, Spain and Ireland (Kappeler, Nemoz, 2010). The countries with the largest increase in the relative importance of PPPs in relation to GDP over the last five years are: Ireland, Spain, UK, France, Germany and Italy (see Figure 3.4). 3.9.4

PPP and the recent financial crisis

The PPP market in Europe grew substantially up until 2008, the year from which began a drastic decline in both the number and value of contracts. The number of contracts signed in 2008 and 2009, in particular, declined to values that were previously recorded only in 2004; the decline in the value of contracts during the financial crisis was even higher. In fact, during 2009 the market value of PPPs reached levels previously recorded only in 2000. On average, the value of the PPP market in 2009 was 50 per cent lower than the 2007 value (Kappeler, Nemoz, 2010). The divergence in the evolution of the number and value of contracts suggests a change in the average size of PPP contracts (see Figure 3.6). The data shown in the figure illustrate that while more than half of the projects were between 10 and 100 million euros in 2009, the trend has been for smaller operations. The average size of projects fell to 91 million euros in 2009 from 210 million euros in 2008 and 217 million euros in 2007. Even in the period marked by the financial crisis, the evolution of the market was different in different countries. The UK market almost halved both in number and value of contracts. In Spain, the second largest European market in the previous period, the value of PPPs was also reduced considerably (Kappeler, Nemoz, 2010). Against this declining trend, in other countries PPP has revived. In Germany, Portugal and also France, for example, there has been a growth in the PPP market in both the number of transactions and in their value. In summary, while the mature markets (UK, Spain) experienced a dramatic decline during the crisis, there has been some growth in emerging markets, such as

48

Sovereign Risk and Public-Private Partnership During the Euro Crisis

1200

1000

800

600

400

200

0 General public services

Defence

Public Transport Fuel and Enviroment order and energy safety

Health

Recreation Education and culture

General public services

Defence

Public Transport Fuel and Enviroment order and energy safety

Health

Recreation Education and culture

1200

1000

800

600

400

200

0

Median 95–99

Median 00–04

Median 05–09

Figure 3.4 Average size of PPP contracts by sector (in millions of Euros): in the UK (top) and in continental Europe (bottom) Source: A. Kappeler, and M. Nemoz, (2010), public-private partnership in Europe – before and during the recent financial crisis

PPP Schemes 49 6

5

4

3

2

1

0 95-00-05- 95-00-05- 95-00-05- 95-00-05- 95-00-05- 95-00-0599 04 09 99 04 09 99 04 09 99 04 09 99 04 09 99 04 09 FR

DE

EL

ES

HU

PPP (estimated investment flow)

Figure 3.5

IE

95-00-05- 95-00-05- 95-00-05- 95-00-05- 95-00-0599 04 09 99 04 09 99 04 09 99 04 09 99 04 09 IT

NL

PT

UK/1

UK/2

Public investment (flow)

Government investment expenditure as a percentage of GDP

Source: A. Kappeler, and M. Nemoz, (2010), public-private partnership in Europe – before and during the recent financial crisis.

Germany and Portugal. A high diversity between different sectors was recorded during the recent crisis. The transport sector remains dominant in terms of contract value, although in 2009 these values returned to the levels recorded between 2001 and 2006. The school building sector is the second largest in terms of number and value of transactions (Kappeler, Nemoz, 2010). The third largest sector is in healthcare construction, equivalent today to about 22 per cent of the total market in the number of transactions and about 12 per cent by value.

3.10

Economic impacts in European countries

Data on the evolution of PPPs underline how the crisis has hit the industry (and the entire economy) hard and has given rise to significant volatility in PPPs year on year, however, studying the values (Figure 3.7 in the Annex (p. 51)) shows the following: 1. UK PPPs account for about 47 per cent of the total of all 27 EU countries;

50 Sovereign Risk and Public-Private Partnership During the Euro Crisis

80

60

40

20

0 Under €10m

€10m to €100m

€100m to €500m

Over €500m

15000

10000

5000

0 Under €10m

€10m to €100m

Average 01–06

2007

€100m to €500m 2008

Over €500m 2009

Figure 3.6 PPP contracts concluded in Europe between 2007 and 2009 in comparison to the average for 2001–2006, number (top) and value (bottom) Source: A. Kappeler, and M. Nemoz, (2010), public-private partnership in Europe – before and during the recent financial crisis.

PPP Schemes 51 80

60

40

20

0 DE

EL

ES

FR

HU

IE

IT

NL

PT

UK

PT

UK

14000 12000 10000 8000 6000 4000 2000 0 DE

EL

ES

FR

HU

Average 01–06

IE 2007

IT 2008

NL 2009

Figure 3.7 Evolution of PPPs in several European countries between 2007 and 2009, compared with the 2001–2006 average, number (top) and value (bottom) Source: A. Kappeler, M. Nemoz, (2010), public-private partnership in Europe – before and during the recent financial crisis.

52

Sovereign Risk and Public-Private Partnership During the Euro Crisis

2. The development of PPPs in the UK in recent years, shows a trend similar in many ways to that in all 27 EU countries; hence the total of PPP contracts, although the trend line is neither negative nor positive; 3. If we examine the net value of PPPs in the UK, you get a positive regression (France has played a robust role in recent years); 4. The Bank of England has created an expansionary monetary policy in the UK by buying government bonds and pursuing a classic Keynesian policy. If the ECB had adopted a similar policy in the EU (but cannot because of the Treaty) it would not have benefited PPPs since public enterprises would have been funded directly by the state (producing a crowding out effect in the private and public-private sectors, which occurred conspicuously in the UK, even there is a recovery in 2012 and 2013); 5. In the euro area PPPs became a major economic stimulus precisely because of the constraints of the ECB’s monetary policy (and governments cannot finance public companies by issuing sovereign bonds underwritten by the ECB), the real issue is the ability to make full use of this lever (coordination of government/swap/banks); 6. PPPs shrank in Spain, but in the 16 years studies PPPs are worth three times as much in Italy, despite the fact that Italian GDP is higher than the Spanish; 7. In 2011 the volume of Italian PPPs is much higher than the levels for 2008, 2009 and 2010; 8. In 2012, we witnessed a fall similar to the negative dip of 2009; in 2013 the value of PPPs went up again, even excluding the UK; 9. All these concern the trend of “new PPPs that are carried out in each year” (in terms of value and number of deals); this means that the stock of PPPs (in terms of value and number of deals) actually tends to increase progressively. In summary, it is possible say that in the UK there has been a sharp fall in GDP, but the UK has used this tool a lot in the past, which represents a little less than half of all 27 EU PPPs. Conversely, if the ECB were more conservative, the upward trend in the average standard would be maintained (with an r-square of 48 per cent).

3.11

PFI model in the UK

The Private Finance Initiative (PFI) was introduced by the UK Conservative government at the beginning of the 1990s. PFI was described in a House of Commons Library Research Paper as:

PPP Schemes 53

a form of public private partnership (PPP) that marries a public procurement programme, where the public sector purchases capital items from the private sector, to an extension of contracting -out, where public services are contracted from the private sector. PFI differs from privatisation in that the public sector retains a substantial role in PFI projects, either as the main purchaser of services or as an essential enabler of the project. It differs from contracting out in that the private sector provides the capital asset as well as the services. The PFI differs from other PPPs in that the private sector contractor also arranges finance for the project.

4

IFRIC 12 Service Concession Arrangements

4.1 Introduction to IFRIC 12 IFRIC Interpretation 12 provides guidance on the accounting methods to be adopted by operators of infrastructure to deliver public services, or services operated as a concession. In Italy, these arrangements are referred to as public service concession agreements, which is the procedure through which the authority, or the administration (the grantor) entrusts an individual or an organization (the operator) with the task of setting up and managing a public service under its control. At the end of the service concession period any works constructed by the operator become the property of the grantor. Services operated as a concession are based on an agreement whose main characteristics are: ●

●

●

a three-sided relationship established between: ● a (central or local) public sector entity the grantor (the grantor can also be a private sector entity to which the responsibility for the service has been devolved); ● a private sector organization, the operator, which constructs or upgrades the infrastructure (e.g. to increase its functionality), manages and maintains it for a specified period of time (provided for in the contract). The grantor can also be a private sector entity to which the responsibility for the service has been devolved; ● the users of the service. the public service nature of the obligations undertaken by the operator; the public service agreement is governed by a contract; 54

IFRIC 12 Service Concession Arrangements ●

55

that at the end of the period (if the agreement has not been renewed) the operator must hand over the infrastructure to the grantor in a specified condition, for little or no incremental consideration.

Before the publication of IFRIC 12, there were no rules governing service concession agreements in an organized manner so operators had to work out the accounting and reporting modalities to be adopted from a multiplicity of IAS/IFRS standards. Significant examples are the IAS/IFRS standards listed under “References” in IFRIC 12: IFRS1 – First time Adoption of International Financial Reporting Standards; IFRS7 – Financial instruments: Disclosures; IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors; IAS 11 – Construction Contracts; IAS 16 – Property, plant and equipment; IAS 17 – Leasing; IAS 18 – Revenues; IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance; IAS 23 – Borrowing Costs; IAS 32 – Financial Instruments: Presentation; IAS 36 – Impairment of Assets; IAS 37 – Provisions, Contingent Liabilities and Contingent Assets; IAS 38 – Intangible Assets; IAS 39 – Financial Instruments: Recognition and Measurement; IFRIC 4 – Determining whether an Arrangement contains a Lease. This gave rise to concerns and, above all, differences between operators from different countries. Among the main problems were: ●

●

the infrastructure constructed, or acquired, or made available for the delivery of a public service; other rights and obligations arising from arrangements of this type.

To this end, IASB1 asked IFRIC to issue an Interpretation to regulate such issues.2 In reply, the IFRIC produced Interpretation 12.3 The following aspects are examined below: ● ● ● ● ●

●

scope; treatment of the operator’s rights over the infrastructure; recognition and measurement of the arrangement consideration; measurement of consideration for construction or upgrade services; management services, contractual obligations to restore the functionality of the infrastructure, financial burdens; recognition of the elements supplied by the grantor.

4.2

Scope

IFRIC 12 applies to the recognition, in the operator’s financial statements, of public-to-private service concession arrangements.

56 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Accordingly, it does not apply to: ● ●

●

private-to-private arrangements;4 recognition of concession services in the grantor’s financial statements;5 accounting treatment of infrastructure owned and used by the operator, such as “property, plant and equipment”, before the start of the service concession arrangement.

The Interpretation applies to infrastructure: ●

●

constructed or acquired by the operator for purposes of the service concession arrangement; pre-existing, which the grantor grants the operator access to for purposes of the arrangement.

Moreover, in its application IFRIC 12 requires that the following terms be closely adhered to: 1. the grantor controls or regulates the following aspects of the services that the operator must deliver with the infrastructure: ● what services must be provided; ● whom the services must be provided to; ● price at which they must be provided; 2. the grantor controls (through ownership, beneficial entitlement or otherwise) any significant residual interest in the infrastructure at the end of the term of the arrangement. 3. controlling the infrastructure and its partly regulated use. These aspects are analysed briefly below. 4.2.1

Controlling or regulating the elements of the services

The services operated as a concession, with special regard to their price, can be controlled or regulated as follows: ● ●

●

based on a contract; by a Regulatory Authority (e.g. the Electric Energy and Gas Authority, etc.); through the purchase, by the grantor or other users, of all the services delivered by the operator.

The existence of said control or regulation activities must be “verified” by considering both the grantor and their associations. Accordingly, if the

IFRIC 12 Service Concession Arrangements

57

grantor is a public sector entity, the entire public sector – including the regulatory authority – must be regarded as associated with the grantor. This means that a majority of the public services delivered (such as motorways, water distribution, electric energy distribution) come under this provision. Moreover, to come under the provisions of IFRIC 12 (paragraph 5, letter a), price control does not have to be complete, it is sufficient that the price (i.e. the amount paid by the operator to acquire the services, or the amount that the operator requests from service users, or a combination of the two) be regulated by establishing a maximum price (or price cap or price adjustment mechanism). Examples of prices that come under the scope of IFRIC 12 include: prices established contractually based on a free revision formula; prices proposed by an operator and approved by the grantor; prices for which the grantor or the regulatory authority has imposed a price cap on the service. However, the condition must be evaluated by taking into account the substance of the arrangement, as opposed to merely its form; accordingly, the following situations may occur: ●

●

an arrangement that includes a price cap does not come under the scope of IFRIC 12 if the price cap is to be applied only in rare circumstances; an arrangement whereby the operator is free to set a price comes under the scope of IFRIC 12 if extra profit is to be handed over to the grantor. In actual fact, operator revenue is regulated.

4.2.2

Significant residual interest in the infrastructure

The significant residual interest in the infrastructure is the value of the infrastructure estimated as if it had been in service and was in the condition it was expected to be in at the end of the arrangement. The control over the significant residual interest in the infrastructure must be able to: ●

●

limit opportunities for the operator to either sell the infrastructure or offer it as security; ensure that the grantor has the right to use the infrastructure continuously throughout the arrangement period.

Control extends to all replacements and/or maintenance works that may be necessary during the useful life of the infrastructure; hence, the requirement must be fulfilled for the entire infrastructure, including any replacement part.

58 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Examples of the modalities with which the grantor can control the residual interest in the infrastructure are (see Organismo Italiano di Contabilità or OIC, Italian Accounting Committee, Application no. 3 “Service Concession Arrangements”): ●

●

●

●

the grantor retains ownership of the assets granted and, until the end of the concession period, grants the operator the right of access to said assets, as necessary to provide public services; the operator constructs the infrastructure (or buys it from third parties), but in any event is required, at the end of the arrangement, to give it back or sell it to the grantor, or to a third party designated by the grantor. In this connection, the fact that the grantor must buy the infrastructure at a fair value is not grounds for exclusion from the scope of IFRIC 12, if the obligation to sell the infrastructure to the grantor prevents the operator from disposing of or selling the infrastructure during the concession period and at the end thereof; the grantor has the right to exercise an option to buy the infrastructure at the end of the arrangement; the grantor retains control, even if the operator is able to use the infrastructure during the concession period they must devolve it or sell it at the end of the arrangement on the basis of a right held by the grantor.

The grantor has control over the residual interest in the infrastructure even though the infrastructure is used throughout its useful life, meaning that it will have no significant value at the end of the arrangement, provided that all other conditions are met.6 4.2.3

Controlling the infrastructure and its partly regulated use

IFRIC 12 indicates the method to account an infrastructure when its use is only partly regulated by the grantor. In this case, the grantor has control over the infrastructure, but lets the operator use a portion of the infrastructure to carry out other services, without the obligation to apply the prices established by the grantor. Cases contemplated by IFRIC 12 are as follows: 1. where part of the infrastructure is used for unregulated purposes it must be analysed separately, provided that it: • can be separated physically; • can be used independently; • meets the definition of cash generating unit (CGU) pursuant to IAS 36.

IFRIC 12 Service Concession Arrangements

59

Example 1 Company X has constructed a hospital under a public-to-private concession arrangement. The hospital is used for public services save for one wing used for private services. The private wing can be separated physically, can be used independently (with independent access) and meets the definition of CGU. Accordingly, the private wing does not come under the scope of IFRIC 12 and must be analysed separately. Example 2 An operator has to restructure and manage a two-storey parking facility owned by the grantor, management of parking space on the first floor is regulated by the grantor (i.e. parking spaces are reserved for residents, who pay a fee established by the grantor), while parking space on the second floor can be managed by the operator according to free market. In this example, the second floor of the parking facility can be separated physically, can be managed independently and comes under the definition of CGU pursuant to IAS 36. Accordingly, the second floor of the parking facility does not come under the scope of IFRIC 12 and must be analysed separately.

2. Where an activity that is merely accessory to the regulated activity takes place in the infrastructure, it must not be taken into account in verifying the existence of control over the elements of the services operated as a concession. Example 3 Company X has constructed a hospital based on a public-to-private concession arrangement. This hospital is entirely used for public services. Company X has been authorized to manage privately a shop (such as a hairdresser or bar) within the hospital. The activity conducted therein is merely accessory to the public service activity, hence it must not be taken into account in verifying the existence of control. Example 4 The operator must construct and manage a railway station, which will be used to conduct regulated activities, the price of which is imposed by the grantor (that is to say, management of the railway services). However, part of the station will be available for use by the operator to carry out unregulated and merely accessory activities, whose price will be established by the operator according to free market (e.g. lease of commercial facilities, such as bars, restaurants, points of sale). The areas dedicated to accessory activities, provided that they can be identified physically and for accounting purposes, do not come under the scope of IFRIC 12.

In these cases, the operator has the right to use the separate infrastructure (as per 1), or part thereof (as per 2), to provide the accessory services;

60

Sovereign Risk and Public-Private Partnership During the Euro Crisis

in actual fact, there might be a lease between grantor and operator to be recognized pursuant to IAS 17.

4.3 Treatment of the operator’s rights over the infrastructure IFRIC 12 specifies that the operator is not supposed to recognize those items of infrastructure they have bought, constructed, upgraded or received for use to deliver the public services as “property, plant and equipment”, since they do not have control over such items, only the right to manage them in order to provide a public service pursuant to the terms of the contract. In this case the emphasis is on the notion of “control” as opposed to the notion of the transfer of “risks and rewards”, widely used in IAS/ IFRS7 documents. Before reaching this conclusion IFRIC determined whether, based on the nature of the rights transferred to the operator, an infrastructure should be classified as “property, plant and equipment” in the financial statements of the operator. The analysis starts from the general principle whereby an asset (the infrastructure used to provide the public services) is recognized as property, plant and equipment in the financial statements of the entity that controls its use. The general principle of control stems from the conceptual framework, which, in this connection, states: 1. An asset is defined as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”; 2. Many assets are associated with legal rights, including the right of ownership, although the right of ownership is not essential; 3. Rights are often unbundled. For example, they may be divided proportionately (e.g. undivided interests in land) or by specified cash flows (e.g. principal and interest on a bond) or over time (e.g. a lease). From the definition of asset given in the framework, IFRIC came to the conclusion that the accounting treatment of infrastructure – constructed, acquired or upgraded by the operator – depends on the control exercised over it by the grantor, according to the terms specified in paragraph 4.5. If it is so controlled (as in all the arrangements that come under the scope of the Interpretation), the infrastructure should not be recognized

IFRIC 12 Service Concession Arrangements

61

as the “property, plant and equipment” of the operator because the operator does not control its use, irrespective of which party has legal title to it during the arrangement. In the arrangements that come under the scope of the Interpretation, the operator acts as a service provider, and as such: ●

●

constructs or upgrades the infrastructure that is used to deliver a public service; manages the infrastructure used to deliver a public service on behalf of the grantor.

Accordingly, the asset recognized by the operator is the consideration received for its services, not the infrastructure for public service that the operator constructs or upgrades. This approach, in which the recognition of the infrastructure in the accounts depends solely on the “control” over its use, irrespective of the entity (grantor or operator) that bears the risks and rewards associated with the ownership, caused many objections to the draft versions of the Interpretation. Nevertheless, IFRIC confirmed the approach on the following grounds: ●

●

●

a service concession arrangement that meets the control conditions (as described above) does not transfer the right to use the infrastructure to the operator other than within the limits provided for in the contract; accordingly, the operator must not recognize the infrastructure in its financial statements whether pursuant to IAS 16 or pursuant to IAS 17; the proposed treatment conforms to the provisions of IAS 18, in that concession service arrangements do not meet the second condition provided for in IAS 18 (paragraph 14) for revenue recognition;8 the grantor, in fact, maintains an ongoing management involvement level associated with ownership of, and control over, the infrastructure; in services operated as a concession the rights are transferred for a limited time, as in a leasing contract, however, the right of an operator differs from that of a lessee, in that: ● the grantor retains control over the use the infrastructure is put to and, in fact, controls and regulates the services the operator must provide, to whom the services must be provided, and at what price; ● the grantor retains control over any significant residual interest in the infrastructure until the end of the arrangement;

62 Sovereign Risk and Public-Private Partnership During the Euro Crisis ●

the operator has no right of use over the underlying asset, only being entitled to use the infrastructure to provide a public service on behalf of the grantor.

4.4 Recognition and measurement of arrangement consideration In a service concession arrangement, the operator must act as a service provider. In this position, the services provided by the operator are: ●

●

construction and upgrade services: the operator constructs or upgrades the infrastructure used to provide the public service. The construction, or the physical upgrade, of the infrastructure may be performed by: ● the operator, if the operator is a construction company; ● a different company providing a service to the operator, if the operator does not perform the construction works; management services: the operator manages and maintains the infrastructure used to supply the service over a given time span.

The operator must recognize and measure the consideration for the services rendered pursuant to the provisions of IAS 11 and IAS 18. Hence, if a service concession arrangement provides for the supply of several services (e.g. infrastructure construction and upgrade services and management services), the consideration received or receivable must be apportioned among the services provided as a function of their fair value, as long as the relative amounts can be identified separately. Example 5 Public entity K (the grantor) and company X (the operator) enter into a service concession contract under which X undertakes to provide the following services: ● ● ●

construct a bridge (infrastructure); manage the bridge, which users pay a toll to cross; maintain the bridge (resurfacing the deck, etc.).

The consideration is established as a single amount (e.g. €300), to be paid annually to the operator, starting with the year the bridge becomes available for use by the public (for instance the fourth year). In this case, three different services may be identified, each of them with different revenue recognition times and subject to different IAS provisions:

IFRIC 12 Service Concession Arrangements

●

●

●

●

63

infrastructure construction service: revenue must be recognized for the years during which the infrastructure is constructed (e.g. the first three years), directly by the operator if they are a construction company, or by a construction company on its behalf, and the recognition and measurement of said revenue must be performed according to the provisions laid down in IAS 11; infrastructure management service: revenue must be recognized for the services during which the bridge is used by the users, and its recognition and measurement must be performed according to the provisions laid down in IAS 18; maintenance service: the revenue must be recognized for the period during which the service is supplied, and its recognition and measurement must be performed according to the provisions laid down in IAS 18. Thus, the unit consideration must be apportioned among the three services (as a function of the respective fair value) and must be recognized as a function of the applicable IAS regulations.

In particular, the provisions of IAS 11 and IAS 18 that apply to service concession arrangements may be summarized as follows: ●

●

●

revenue recognition criteria must be applied separately to identifiable different components of a single operation, so as to reflect the substance of the operation (paragraph 13, IAS 18). IFRIC concluded that this provision applies to the arrangements that come under the scope of the Interpretation. Albeit generally negotiated as a single contract, in fact, such contracts provide for separate phases or components (e.g. construction of the infrastructure and subsequent management thereof), each characterized by its own risks and requirements, for which it is usually possible to determine the amount for each individual service;9 revenues must be recognized on the basis of the progress of the contract activity (paragraph 22, IAS 11 and paragraph 20, IAS 18); revenues must be stated at fair value of the consideration received or receivable (paragraph 9, IAS 18). IFRIC pointed out that the fair value of construction services delivered, in actual practice, may be the most appropriate criterion to identify the consideration received or receivable for the service in question.

However, a concession contract providing for different types of service (e.g. infrastructure construction or upgrade and management) may establish that, in lieu of making a cash payment, the grantor must transfer an intangible asset to the operator, such as the right to charge users a fee (in other words, the grantor should transfer the right to charge a fee).

64

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Example 6 Public entity K (the grantor) and company X (the operator) sign a concession contract under which X undertakes to construct, manage and maintain a bridge. K does not pay X in cash, but transfers to X the right to charge users a fee (toll). In this case, we have an exchange of services of different types.

Accordingly, the remuneration for a concession arrangement providing for the construction of infrastructure for use in delivering a public service may consist of: 1. cash: normally, the fair value for the different services (construction and management) may be identified separately and therefore the provisions set out in IAS 11 and IAS 18 apply; 2. an intangible asset: the right to charge users, which rewards the construction, management and maintenance of the infrastructure. In this case, the fair value of the management service may prove difficult to determine and, to this end, the provisions of IAS 18 (paragraph 12) on the exchange of services of different kinds10 shall apply. In this connection (right to charge arising from the direct or indirect construction of the infrastructure), IFRIC states that: 1. does not equal total cash inflows, in that the operator receives an intangible asset (the right to charge) in exchange for its construction services; 2. thus, there are two sets of inflows and outflows, rather than one: ● in one set construction services are exchanged for the intangible asset in a barter transaction with the grantor (the right to charge the users); ● in the other set management services are exchanged for the cash flows stemming from the intangible asset (i.e. the rights/fees paid by the users for the public service). An overview of the flows originated by the granting of the right to charge the users in exchange for the infrastructure construction and management services can be seen in Figure 4.1. In service concession contracts, the consideration receivable for construction services may be defined in the following ways: ●

identified as an individual item;

IFRIC 12 Service Concession Arrangements

65

RIGHT TO CHARGE

GRANTOR

INFRASTRUCTURE CONSTRUCTION SERVICE

OPERATOR

€ public service (e.g., water)

USERS

Figure 4.1 Concession services: right to charge in exchange for infrastructure construction services ● ●

included in an overall amount; consist of receiving an intangible asset (e.g. the right to charge users).

4.5 Recognition of consideration for construction and upgrade services IFRIC 12 configures the infrastructure construction/upgrade services provided by the operator on behalf of the grantor, as work made to order and, as such, the costs and revenue thereof must be determined according to the provisions of IAS 11. According to IAS 11 the operator must recognize a margin – provided that it can be determined reliably – starting as early as the infrastructure construction stage, and said margin must be stated in the profit and loss account as a function of the work progress status. The following cases may occur: 1. the operator is a construction company: in this case, the construction of the infrastructure is accomplished directly by the operator, which therefore has a margin to recognize; 2. the operator is not a construction company: the construction of the infrastructure is accomplished by third parties on behalf of the operator, who only carries out some activities (e.g. site management and work supervision). In this case, the operator must not recognize a margin for the construction, but only a margin, as applicable, for other activities. Thus, the estimate of the margin depends on the terms set out in the specific service concession arrangements. If (see OIC): ●

●

the operator is a construction company, then estimating the margin is easy, since the operator works in the sector; the operator is not a construction company, then the overall value of the construction services is given by the sum of the following elements:

66

Sovereign Risk and Public-Private Partnership During the Euro Crisis ●

●

cost of construction paid to external contractors, this value already includes the margin charged by the contractors and the operator must not charge any additional margin; cost incurred by the operator for the activities performed (e.g. site management and work supervision) for the construction of the infrastructure, plus the margin that a contractor would have charged for those activities.

The offset entry in the balance sheet for the consideration duly estimated (for construction and upgrade services) and due to (or already received by) the operator, is obtained through one of the following modalities: ● ●

financial assets; intangible assets.

The choice of modality depends on the contractual right held by the operator and provided for in the concession arrangement. Hence, in the service concession contract the operator may be entitled to: 1. an unconditional right to receive cash (or some other financial asset), the amount obtainable is then recognized as a financial asset; 2. receive the right to charge the users for the public service (charging right), the amount obtainable is then recognized as an intangible asset. If the consideration received by the operator for providing infrastructure construction and upgrade services consists of both a financial asset and an intangible asset, the two components of the consideration must be recognized separately. The nature of the consideration received by the operator must be determined on the basis of the contractual terms and the regulations that apply to the contract, if any. 4.5.1

Financial assets

If the operator has an unconditional right to receive cash (or some other financial asset) for the construction services provided, irrespective of the actual use of the infrastructure or, in other words, if the demand risk is borne by the grantor, the service is recognized as a financial asset. If the operator has an unconditional right to receive cash (or some other financial asset) (see OIC):

IFRIC 12 Service Concession Arrangements ●

●

67

the grantor guarantees that the operator will receive a fixed amount, or an amount determinable with sufficient reliability, which is not calculated as a function of the utilization of the infrastructure by the end customer; the grantor undertakes to indemnify the operator for the difference, if any, between the amounts received from the users of the public service and the fixed or determinable amounts provided for in the concession arrangement.

The classification, recognition and measurement of the financial asset are governed by the provisions of IAS 32, IAS 39 and IFRS 7, as well as by the specific provisions laid down in the Interpretation. In particular, the amount to be paid by the grantor (or upon the grantor’s instructions) may be determined, pursuant to IAS 39, according to one of the following modalities: 1. a loan or receivable; 2. a financial asset available for sale; 3. a financial asset at fair value recognized in the profit and loss account. IFRIC 12 states that the concession right must be entered as a “financial asset at fair value through profit or loss” provided that this is the way the asset was designated upon initial recognition (according to the, so-called, fair value option), all the conditions required for this classification having been met. Finally, IFRIC 12 states that if a financial asset is classified as a “loan or receivable” or as a “financial asset available for sale” interest receivable should be recognized in the profit and loss account according to the effective interest method. IFRIC rules out that: ●

●

a financial asset arising from a service concession arrangement might be classified as an investment held to maturity; a service concession contract might include a derivative instrument embodied in it.11

Thus, the accounting model for financial assets requires: ●

during the (direct or indirect) construction of the infrastructure, the recognition of revenues from services operated as a concession and revenues from financial income accrued on the financial asset (determined

68

●

Sovereign Risk and Public-Private Partnership During the Euro Crisis

according to the effective interest method), with offset entry in the financial asset; during the management of the infrastructure, the recognition of: ● revenues from services operated as a concession and revenues from financial income accrued, with offset entry in the financial asset; ● infrastructure management costs and financial charges with offset entries in the relative trade and financial payables.

4.5.2

Intangible assets

If the operator obtains the right to charge for construction services provided, and must bear the demand risk – in that the grantor will not guarantee the financial flows of the operator, which depend on the actual use of the infrastructure – the service operated as a concession is recognized as an intangible asset (similar to a licence). Thus, the operator is engaging in an exchange between intangible assets since in exchange for the infrastructure construction services they receive the right to charge. In this connection, IFRIC 12 specifies that concession arrangements come under the scope of IAS 38, which requires that the cost of the intangible asset (right to charge) be evaluated at fair value provided that: ● ●

the exchange has commercial substance; the fair value of the asset received or exchanged can be measured with sufficient reliability.

According to IAS 38, an exchange has commercial substance if: a. the configuration of cash flows for the asset received (i.e. risks, times and amounts) differs from that for the assets transferred; b. the specific value of the company, in relation to the assets exchanged, changes due to the effects of the exchange; c. the variations as per a) or b) are significant with respect to the fair value of the assets exchanged. The fair value of an intangible asset, for which there are no comparable market transactions, is estimated reliably if one of the following conditions occurs: 1. there is not much variability in the reasonable estimates of the fair value;

IFRIC 12 Service Concession Arrangements

69

2. the probabilities associated with the various fair value estimates that fall within the variability interval can be reasonably evaluated and used to estimate the fair value of the asset. If a company can determine the fair value of an asset received or transferred with sufficient reliability, then the fair value of the asset transferred is used to evaluate the cost, unless the fair value of the asset received is more clearly identifiable. In this connection, IFRIC acknowledges that the fair value of the asset transferred (the construction services) is often the best means to evaluate the consideration for the asset received (the right to charge). If an asset acquired is not evaluated at fair value, its cost must be determined on the basis of the carrying amount of the asset exchanged (e.g. the infrastructure delivered). The elements necessary for the identification of the initial and subsequent accounting treatment of an intangible asset are described below. They are: ● ● ● ● ●

initial recognition date; initial registration value; value to be depreciated; depreciation method; subsequent maintenance works.

4.5.2.1 Initial recognition date According to IFRIC 12, the initial recognition date of an intangible asset should be based on the state of progress of the work, pursuant to IAS 11. 4.5.2.2 Initial registration value The initial registration value of an intangible asset corresponds to the fair value of the infrastructure construction services (value of the asset transferred). As mentioned, this fair value is given by: ●

●

production costs directly incurred, plus a margin if the operator is a construction company; the sum of production costs paid to the contractors, the costs incurred directly for other activities (e.g. site management and work supervision) and a margin relating to such activities, if the operator is not a construction company.

70 Sovereign Risk and Public-Private Partnership During the Euro Crisis

To this value we must add the estimate of the costs to be incurred in future for further construction services, if the concession arrangements for an existing infrastructure contemplate specific obligations to expand or upgrade the infrastructure without the operator acquiring any further specific economic benefits (see OIC). This being a legal obligation undertaken by the operator, the offset entry for this additional value of the intangible asset is a provision (or reserve) for contractual obligations. The subsequent evaluation of the reserve and the corresponding intangible asset, as well as the account treatment thereof, is worked out – by analogy – from IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (see OIC). Moreover, if the operator obtains a specific loan for the construction of the infrastructure, borrowing costs must be capitalized as part of the cost of the asset pursuant to IAS 23, borrowing costs, if the asset meets the definition of “asset that qualifies for capitalization”. 4.5.2.3 Value to be depreciated IFRIC 12 states that the operator must recognize an intangible asset as specified in IAS 38. IAS 38 specifies that the depreciable amount of an asset with a finite useful life is determined after deducting its residual value. However IAS 38 also specifies that the residual value of the intangible asset will normally be zero, unless: ●

●

there is a formal commitment by a third party to purchase the asset at the end of its useful life; there is an active market for the asset. In this case, the residual value may be determined with reference to such market, provided that such market is likely to exist when the useful life of the asset comes to an end.

In the case of public services, for which the concession arrangement contemplates a takeover value and the grantor has undertaken a formal obligation to pay the amount, the residual value of the intangible asset may be greater than zero. In particular, according to the OIC, if a service concession arrangement defines the modalities adopted to calculate the takeover value, the residual value of the intangible asset is not zero and must be taken to be equal to the indemnification amount agreed upon. The value of the right to take over may be equal to the carrying amount of the infrastructure, as calculated according to the depreciation rates specified in the concession agreement, or may correspond to

IFRIC 12 Service Concession Arrangements

71

the value of an industrial estimate, or to a value determined according to other criteria. 4.5.2.4

Amortization method

After its initial recognition, the intangible asset (right to charge) must be depreciated, since it has a finite useful life, corresponding to the concession period. As for other intangible assets, the depreciation period begins at the time when the asset becomes available for use (e.g. the infrastructure has been completed and can be used to provide the public service envisaged). IAS 38 specifies that “The amortization method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.” For example, if the infrastructure is a toll road, for which the operator has been granted the right to charge the users (and has assumed the demand risk), the amortization method should reflect the benefits arising from the tolls paid by the users, which will flow to the operator during each year of operation. Concerning amortization criteria, IAS 38 states: “A variety of amortization methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the unit of production method. The method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied in the asset and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of those future economic benefits.” In this connection IFRIC considered whether, for services operated as a concession, it might be appropriate to use an interest-based method of amortization, a method that takes into account the time value of money, besides the consumption of the intangible asset, treating the asset more as a monetary than as a non monetary item. However, IFRIC concluded that there was nothing unique about these intangible assets that would justify the use of a depreciation method different to the one used for other intangible assets. Accordingly, IFRIC does not provide for exceptions that qualify for the use of interest-based depreciation methods. Although it is true that IAS 38: ●

does not seem to indicate the depreciation method to be used on a mandatory basis;

72 Sovereign Risk and Public-Private Partnership During the Euro Crisis ●

makes it possible to adopt a method “by unit of production” such that, for example, it is plausible that a toll road be depreciated based on the number of vehicles passing through.

4.5.2.5 Subsequent maintenance works A further aspect to be considered is the maintenance to be performed on the infrastructure, whose recognition depends on the nature of the work. In particular, such works may be: 1. part of regular maintenance activities performed on the infrastructure; 2. replacement works (e.g. replacing a section of broken pipe, replacing a bridge that collapsed during a flood) and maintenance works scheduled to take place at some future date (e.g. cyclic maintenance of a technical plant or road surface). Type 1 works refer to the maintenance of the infrastructure performed on a regular basis, whose cost, also according to IFRIC 12, must be recognized in the profit and loss account when incurred. Knowing that IFRIC 12 provides for the recording of a right, not a physical asset, type 2 works must be recognized according to IAS 37, which requires: ● ●

allocating a cost to the profit and loss account; posting a liability (or reserve) on the balance sheet.

This is necessary in that: ●

●

●

the operator has an obligation to the grantor to keep the infrastructure in good operating condition; the infrastructure is not recorded under the operator’s “property, plant and equipment” item, since IFRIC 12 requires it to be posted as an intangible asset so that it is not possible to adopt the component approach; the infrastructure deteriorates as a function of the way it is used; hence, without type 2 maintenance works, it could not perform effectively.

The liability (or reserve), increased annually, shall be of an amount sufficient to cover the costs incurred for the replacement and cyclic maintenance works that are performed. Moreover, the annual increase in the

IFRIC 12 Service Concession Arrangements

73

liability must take into account the passing of time (actualization), if time has a significant effect. In short, the accounting model for intangible assets calls for: ●

●

during the (direct or indirect) construction of the infrastructure, the recognition of: ● revenue from infrastructure construction services, accrued as a function of work progress status, with offset entry under intangible assets; ● a reverse entry for borrowing costs, with offset entry under intangible assets if the operator has obtained a loan for the construction of the infrastructure that meets the definition of “asset that qualifies for capitalization” pursuant to IAS 23; during the infrastructure management period, the recognition of: ● revenue from fees charged and management costs accrued, with offset entry under sales receivables and payables; ● financial charges (if any) with offset entry under financial payables; ● amortization costs, starting from the time the intangible asset is ready for use, with offset entry under asset adjustments (either directly or through an amortization reserve); ● contractual obligation costs, with offset entry in the relative liability item.

The recognition modalities to be adopted for a public-to-private service concession arrangement are illustrated below. 4.5.3

Mixed model: financial and intangible assets

According to IFRIC 12, the financial and intangible assets must be recognized separately by the operator if the contract contextually provides for the transfer of: ●

●

an unconditional right to obtain cash (e.g. amounts received as contributions to the investment in the infrastructure); the right to charge users.

In this case, the demand risk is shared by the grantor (who undertakes to make a cash payment as partial coverage of the construction service) and the operator (who, having obtained the charging right, covers the remaining part of the construction service as a function of the way the infrastructure is used by the public).

74 Sovereign Risk and Public-Private Partnership During the Euro Crisis

IFRIC specified the separate recognition of each component of the consideration received by the operator (known as a two-pronged agreement) in reply to a doubt raised concerning the draft version of the Interpretation. The doubt was about correct behaviour when both parties to an agreement share the risk that cash flows generated by public service users would not be sufficient to repay the investment made by the operator (demand risk). IFRIC concluded that the consideration must be broken down into a financial asset, for any amount of cash (or other financial asset) guaranteed, and an intangible asset, for the residual part.

4.6 Management services, redeveloping infrastructure functionality, financial charges Further issues addressed by IFRIC 12, examined below, are: 1. management services; 2. contractual obligations to reinstate the functionality of the infrastructure; 3. financial charges. 4.6.1

Management services

IFRIC 12 specifies that the operator must recognize the revenue and costs relating to the infrastructure management services according to the provisions set out in IAS 18. 4.6.2

Redevelop infrastructure functionality

A public-to-private concession contract normally specifies that, at the end of the concession period, an infrastructure used to supply a public service and constructed by the operator must be returned to the grantor. In this case, before the delivery the operator may be under a contractual obligation to: 1. maintain the infrastructure at a given functionality level; 2. restore the infrastructure to a given condition. According to IFRIC 12, contractual obligations to maintain or restore the infrastructure must be recognized and measured pursuant to IAS 37 and such contractual obligations: ●

must be recognized from the time the current obligation stemming from past events comes into being.12 For example, a service concession contract may provide for the construction of a bridge and the

IFRIC 12 Service Concession Arrangements

●

75

subsequent management thereof through toll collection. The legal obligation to reinstate the functionality of the bridge (e.g. resurfacing the deck) comes into being the moment the bridge begins to be used; the costs that would have to be incurred to fulfil the obligation at the end of the accounting period must be evaluated according to the best estimate principle. Moreover, this best estimate must be actualized if the value of the currency over time is a significant factor.

The recognition of a provision (or reserve) for the reinstatement of assets operated as a concession (or assets that may be devolved for free) is typically required for public-to-private services. Outside this discipline, in fact, the replacement of property, plant and equipment components, whose cost is significant compared with the total cost of the element is recognized pursuant to IAS 16 (i.e. according to the so-called component approach). In other words, IAS 16 and IAS 37 do not permit the recognition of a reserve for the replacement of property, plant and equipment components. IFRIC concluded that this prohibition cannot apply to the agreements governed by the Interpretation, because the operator: ●

●

does not recognize the infrastructure as a property, plant and equipment item; has undertaken a legal obligation to the grantor, with reference to the maintenance or reinstatement of the functionality of the infrastructure.

In the balance sheet, an entry is made for a provision (or reserve) for the reinstatement of assets held under a concession arrangement only if the accounting model adopted is the intangible asset model. 4.6.3

Financial charges

IFRIC 12 specifies that financial charges incurred in connection with the construction or upgrade of the infrastructure and/or the management thereof must be recognized pursuant to IAS 23. In particular, IFRIC 12 defines the treatment in greater detail based on the service recognition modalities adopted by the operator. Various cases are possible, namely: ●

● ●

services recognized as a financial asset: final charges are costs of the period during which they are incurred; service recognized as an intangible asset: the financial charges; charges relating to the infrastructure construction/upgrade period must be capitalized on the intangible asset;

76 Sovereign Risk and Public-Private Partnership During the Euro Crisis ●

charges relating to the infrastructure management period are costs accrued during the year in which they are incurred.

IFRIC motivates the choices made by analysing both the provisions of IAS 23, which states that financial charges directly attributable to the construction of an asset that qualifies for capitalization must be capitalized, and the specific recognition modalities adopted by the operator. The reasons given can be summarized as follows: ●

●

an intangible asset (i.e. when a grantor gives the operator the right to charge the users) meets the definition of an asset that qualifies for capitalization, in that the operator can collect the fee from users only once the infrastructure has been completed, i.e. after construction or upgrade; a financial asset (i.e. when a grantor gives the operator a contractual right to receive cash or other financial assets) does not meet the definition of an asset that qualifies for capitalization, in that the operator has the right to receive cash from the grantor, irrespective of the actual use of the infrastructure.

Lastly, IFRIC noted that the financial income, if any, obtained by the operator – from a loan already obtained and not yet used for the actual payment of infrastructure construction or management costs – is recognized in the profit and loss account. In this case too, however, the accounting treatment of financial income depends on the recognition modality adopted for the services. If the services are recognized as: ●

●

financial assets: pursuant to IAS 39, financial income is recorded in the profit and loss account according to the effective interest method; intangible assets: financial income obtained during the infrastructure production stage is deducted from the intangible asset, according to IAS 23, while other financial income is recognized in the profit and loss account.

4.7 Recognition of elements made available by grantor In a public-to-private service concession arrangement, pre-existing elements of the infrastructure made available by the grantor, so that the operator can use them to provide the service operated as a concession, are not recognized as operator property, plant and equipment items (IFRIC 12). However, the grantor can make available to the operator other assets that the operator can retain and treat at its discretion. If they are part of the consideration due to the operator, such assets become assets of the operator

IFRIC 12 Service Concession Arrangements

77

and are recognized according to the accounting principles that govern each specific type of asset. The same applies to the obligations undertaken by the operator in exchange for the assets obtained in this manner. In this connection, IFRIC considered whether the assets made available by the grantor, which the operator can use at its discretion, should be regarded as government grants pursuant to IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance. This analysis is based on the definition of government grants given in IAS 20, which reads: government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity. IFRIC concluded that if the assets made available by the grantor are part of the overall consideration due for services or a consideration based on a free negotiation process, such assets cannot be regarded as assistance and therefore do not meet the definition of government grants. Accordingly, the provisions of IAS 20 do not apply.

4.8 Classification of PPP sectors From the empirical analysis conducted on the financial statements of listed companies under IFRIC 12 adoption (analysed in detail in the following chapters), we have reorganized the classification of enterprises into different sectors, according to economic activity and the company listing. We chose to analyse only PPPs made by listed companies for three reasons: 1. to allow an international comparison of the economic weight of the choice of PPP in different countries; 2. because accounting rules guiding the operation of PPPs apply only to listed companies; 3. for the economic weight of PPPs performed by the company listed on PPPs carried out by companies not listed on stock exchange . We first created three economic macro-sectors related to the type of output, which were: ● ● ●

transport; energy; water.

78

Sovereign Risk and Public-Private Partnership During the Euro Crisis

The companies in each macro-sector can be further subdivided according to their production process. For example, the transport macro-sector can be divided by: ●

●

creation of infrastructure and operation of services on the ground in a specific location (port and airport); production and management of the road network (road and rail transport).

The energy macro-sector can be differentiated by: ● ● ●

creation of infrastructure (gas, wind energy, hydrocarbons); production and management of the network (waste disposal); maintenance of networks (electricity).

Within the macro-sectors we also observed the presence of: ●

●

unlisted companies in a regulated market (e.g. ports) who still play an important role within the macro-sector, both in terms of strategic importance and level of investment in various PPPs. These companies do not fall within the scope of this analysis just because they were not listed; listed companies in a regulated market in which the shareholder is a major component and, in some cases, control a national and/or local public sector (e.g. airport, railway).

Some of these sectors, such as the ports, although they have an important role in public utility services and in terms of investment by various PPPs, are not included in this analysis because PPPs in the port sector are not characterized by the presence of companies listed on the stock market. Instead, the airport sector is characterized by Service Concession Arrangements operated by listed companies, which can be analysed under IFRIC 12 adoption.

4.9 Literature review: elaboration on the reference theoretical framework In some countries, infrastructure for services and public works (stadiums, kindergartens, roads, ports, airports, hospitals, cemeteries, prisons, parking lots, telecommunications networks, water distribution systems, networks for the supply of energy) is created, managed and controlled directly by the public sector, which takes care of the ongoing maintenance through direct financial allocations (Braja, Campra, Esposito, Ricci, 2013, 2014,

IFRIC 12 Service Concession Arrangements

79

2015; Esposito, Ricci, 2014; Esposito, 2014; and Campra, 2005, 2012; Hall, 2008). However, subsequent to the introduction of new stringent budgetary constraints in respect of general government budgetary balances (the stability pact in EU countries) and the increasing scarcity of resources, worsened by the financial crisis, over the past twenty years some governments (Borgonovi, 2005, 2006, 2009; Amatucci, Vecchi 2009, 2011) have introduced PPPs (as shown in Table 4.1), through contractual service arrangements (Robinson 2000; Hawksworth, 2000), in order to attract private sector participation in the development, financing, operation and maintenance of works and utilities (Laghi, 2010) and to keep their rising debt under control (Broadbent, 2001; Broadbent, Laughlin, 1999, 2004, 2005; Ricci, 2005; Eurostat, 2004). The agreements regulating different concession services in the recurring form of PPPs (Parker, Gould, 1999; Pisani, 2001; Grimsey, Lewis, 2005; Guthrie, Humprey, Jones, Olson, 2005) fall within the scope of IFRIC 12 (Campra, 2012: 2675) along with the different accounting treatments of operator rights over infrastructure, dependent on the different tasks of control and regulation provided to the public on behalf of the public sector in accordance with the terms specified in the contract for a specified period (Hall, 2008) and on the identification of the party on whom lies the demand risk (Campra et al., 2011). The accounting treatment of SCAs, as ruled on by IFRIC 12, represents one of the most significant and representative cases of the prevalence of applying substance over form (Meyer, 1976), to highlight the typical light and shade of a principle that is the basis of IAS/IFRS accounting models (Laghi, Giornetti, 2009; Laghi, 2010). It is significant because it falls within the definition of SCAs, all forms of PPP and PF, on which business literature has been particularly focused and has copiously debated over the past fifteen years (Amatucci and Vecchi, 2009). In the following paragraphs the business literature on different forms of PPP and SCA, before and after the adoption of IFRIC 12, will be analysed and reclassified to determine the contribution that IFRIC 12’s Interpretation produced in favour of the improvement of the conceptual vagueness characterizing such instruments, even under an increasing normative isomorphism (DiMaggio, Powell, 1983, 1991; Sullivan, Skelcher, 2002; Dickinson, Glasby, 2010).

4.10 Implications of the Internal Stability Pact: the Italian case Since 1999 the provisions for compliance with the Internal Stability Pact have had different impacts and consequences on fiscal policies and terms

80

Sovereign Risk and Public-Private Partnership During the Euro Crisis

of financing for local authorities. The mechanisms have been subject to constant change and a gradual process of refinement to increase control of the total balances of public finance (Guarini, 2008). Since the Pact’s introduction, in fact, the lack of stable rules has caused major malfunctions in local authorities, with a series of constraints and corporate autonomy on planning activities, which often resulted in evasive behaviour of various kinds. Over the years there have been obvious fluctuations in the Pact; initially based on financial balances, it was replaced in the course of 2005 and 2006, by a system based on budgetary spending limits, then returned in 2007 to a system of sales (Table 4.1). However, the mechanism of balances used since 2007 turns out to be a revival from the past (Liguori, Sicilia, Pattaro, 2008), especially with regard to the introduction of data on cash (Table 4.2). Already since 2003, the constraints useful for the determination of the internal stability pact did not take account of the principle of cash, but also the principle of accrual accounting. The two dynamics should be linked, but power is more easily controlled than cash, as the latter also acts on previous management operations through the collection and payment of residuals. The reintroduction of financial balances (through the Finance Act of 27 December 2006 no. 296, much modified by the law of 25 June 2008 no. 112, and 6 August, 2008 converted into Law no. 133) refers to the result emerging from the differences between net expenses final, and final net revenue (the first four titles of the budget revenue) and final expenditure (current and capital expenditures), with the imposition of Table 4.1 Objectives of the Internal Stability Pact since 2002 2002 Expenditure ceiling Financial balance

2003

2004

X X

X

2005

2006

X

X

X

2007

2008

2009

2010

X

X

X

X

Table 4.2 Summary relating to the type of data for the calculation of cash, competence and mixed competence

Cash Competence Mixed Competence

2002

2003

2004

2005

2006

2007

2008

2009

2010

X

X X

X X

X X

X X

X X

X X X

X X X

X X X

IFRIC 12 Service Concession Arrangements

P

W/S

PPP

P

PA part T6

PFI

T7

T17

T14

T8 ‘90s in UK

T9 T10

T11

Sovereign Risk effects

Risk Transfer /Control

T12

T15

T13

T16

P

W/S

PPP P

T4 T5 T6

PFI/BOOT/BOST /BOT/SCA/ Leasing/Sponsoring g p g

T7

T17

T14

T8 IFRIC 12

ITALY UK SPAIN

PPP/SCA

T9 T100

T11

T12

T15

T13

T16

P

W/S

PPP/SCA P

T4 T5 T6 T7

PFI/BOOT/BOST /BOT/SCA/ Leasing/Sponsoring/ Concession

T8

3 Sectors: Transport Water Energy

IFRIC 12 experiences

T9 T100

T17

T14

T11

T12

T13

ITALY UK SPAIN

T15

T16

81

82 Sovereign Risk and Public-Private Partnership During the Euro Crisis

targets for improvement compared to the balance of a base year. This mechanism was conceived to act mainly on the acquisition of new debt, a phenomenon that could be useful in explaining the significant increase in the use of PPPs since 2006, in Italy in particular.

4.11

Appendix

PPP, SCA: theoretical framework before the application of IFRIC 12 Service concession arrangements (SCAs) refer to those forms of PPP projects through which a public sector entity (grantor) entrusts to a private sector entity (operator) the concession to construct or operate a public work or infrastructure (Pivato, 1958; Amaduzzi, 1978: 227; Caramiello, 1993: 546; De Robertis, 1992; Guatri, 1992: 498; Kunz, 1997; Dell’Atti, 2001; Rijna, 2010). The operator’s consideration may consist of the right to charge users of the public services (intangible asset), or in an unconditional contractual right to receive cash or other financial asset from, or at the direction of, the grantor for construction services (Campra et al., 2011; Laghi, 2010). Table 4.3 reproduces the critical success factors regarding PPP prior to the adoption of IFRIC 12, from the international literature. In Italy the business and economic literature on the topics of PPPs and SCAs remains weak and non-systemic, there is little evidence of the application of PPPs and SCAs. This is partly compensated for by students of industrial engineering who have tried to classify standards, dimensions, variables and recurring characteristics of a number of PPP arrangements (Carbonara, Costantino, Pellegrino, Sciancalepore, 2011), reclassified on the basis of PPP legislation and of their division into contractual and institutional PPPs. These configurations are reproduced in various search models identified as distinct disciplinary sectors, even with sub-divisions within the same sector (SECS P07), similar to the pieces of a puzzle to be put together into specific interest subsets dependent on a scholar’s specializations and interests, whether in public or private companies. Professionals and operators are being given a confused interpretation without any systemic or comprehensive vision of criticality, models or configurations gathered over time.

IFRIC 12 Service Concession Arrangements

83

Table 4.3 Reconstruction and classification of literature Critical success factors

Author

Strong private consortium

Jefferies et al. (2002) Tiong (1996) Birnie (1999) Savas (1987) Savas (2000) Qiao et al. (2001) Grant (1996) Li, Akintoye, Edwards, Hardcastle (2005) (2007) Jefferies et al. (2002) Kopp (1997) Gentry and Fernandez (1997) Stonehouse et al. (1996) Kanter (1999) NAO (2001b) Qiao et al. (2001) Brodic (1995) Hambros (1999) Qiao et al. (2001) Tiong (1996) Zantke and Mangels (1999) Jefferies et al. (2002) Kopp (1997) Gentry and Fernandez (1997) Qiao et al. (2001) Frilet (1997) Badshah (1998) Bennett (1998) Boyfield (1992) Stein (1995) Jones et al. (1996) DiMaggio, Powell (1983,1991) Sullivan, Skelcher (2002) Qiao et al. (2001) Jefferies et al. (2002) McCarthy and Tiong (1991) Akintoye et al. (2001b) Qiao et al. (2001) Zhang et al. (1998) Grant (1996) Stonehouse et al. (1996) Kanter (1999) Qiao et al. (2001) Zhang et al. (1998) EIB (2000)

Appropriate risk allocation and risk sharing

Competitive procurement process

Commitment/responsibility of private/ public sector In-depth and realistic cost/benefit assessment Technical feasibility project

Transparency in the procurement process Good governance

Favourable legal framework

Available financial market

Political support Multi-benefits objectives Involvement of the government in providing guarantees

A healthy economic policy

continued

84 Sovereign Risk and Public-Private Partnership During the Euro Crisis Table 4.3 Continued Critical success factors

Author

Macroeconomic stability

Qiao et al. (2001) Dailami and Klein (1997) Boyfield (1992) Stein (1995) Jones et al. (1996) Finnerty (1996) Stonehouse et al. (1996) Kanter (1999) Frilet (1997) Qiao et al. (2001)

Well organized government

Shared authority between public and private sectors Social support Technology transfer

Source: Adapted from Li, Akintoye, Edwards, Hardcastle, 2007.

PPP, ASC: theoretical Framework after the application of IFRIC 12 The discipline of IFRIC 12 is essential and is also representative, even if partially and not very satisfactorily, of the prevalence of substance over form (Laghi, 2010). All its aspects determining the accounting treatment of SCAs – starting from the definition of the scope of IFRIC 12 and ending with the accounting models to be used for the purpose from the representation of the effects of SCA – are filled by the continuous research of the representation in the “economic substance” (Heald, Georgiou, 2011), regardless of the legal form they are regulated the transfer of risk and responsibility for the realization of the works or services under concession and the management of public services or in the public interest. The identification of the economic substance behind the Service Concession Arrangements became a crucial condition to improve disclosures financial data and to avoid distortions. Support for, and the expected effects of, IFRIC 12, published in November 2006, are also found in the literature (Laghi, 2010). They are linked to the need to frame, simplify and clarify the complexity of the accounting treatments relating to different forms of PPP and ASC, caused by a tension between orientations and operational practices and legislative hypertrophy (Capaldo, 1998; Pinto, 1996; Pisani, 2002; Laghi, 2010), and to avoid any confusion in the scope of other international accounting standards. Table 4.4 shows aspects that characterize different forms of PPP in the interest of their useful and systematic organization, in order to compare different countries or similar business models to better support the choices of public decision-makers and of concession companies.

IFRIC 12 Service Concession Arrangements

85

Table 4.4 Selected literature Anglo-Saxon

Spanish

German-speaking countries

Latin American countries

Italian

Bing, Akintoye, Edwards, Hardcastle, 2005; Treasury, 2008; McQuaid, Scherrer, 2010; Heald, Georgiou, 2010; Camfferman, Zeff, 2011; Zeff, Nobes, 2010; Heald, 2011 Acerete, Shaoul, Stafford, 2009; Rangel, Galende, 2010; Rangel, Vassallo, Galende, 2010 Budäus, B Grüb, 2007; Muller, 2008; Papenfuß, C Schaefer, 2009; Jacob, C Hilbig, D Neunzehn, T Popp, T Uhlig; Herbold, 2012; Hodges, 2013 Cruz, Silva, Rodrigues, 2009; Lima, 2010; Martins, Andrade, 2009, 2010; Costa, 2010; Paris, Rodrigues, Cruz, Brugni, 2011 Capasso, 2002; Amatucci, Vecchi, 2008, 2009; Laghi, 2010; Campra et al., 2011; Campra, 2012; Martiniello, 2008, 2012; Vecchi, Hellowell, 2012; Marsilio, Cappellaro, Cuccurullo, 2009, 2011; Cappellaro, Longo, 2011

Table 4.4 offers a selected summary of the content and variety of current international debates on the topics of PPP and the SCA.

5

Case Studies in UK: Energy Management, Transportation Management, and Water Management

5.1 PPP in UK The indications arising from the economic literature and documents of the European Commission found further support in the experience of some European countries (in particular of Italy, Spain and the UK), in which the diffusion of formulas of “public-private partnership has gone hand in hand with a growing emphasis on regulatory aspects relating to, in particular: (i) the adequate allocation of administrative risk, (ii) the proper design of procedures for the selection of the private contractor, (iii) the growing attention to the contractual phase, (iv) the preparation of principals to ensure the bankability of credits of the custodial. Conversely, in other European countries (in particular France and Germany), in which the PPPC has not reached similar levels of development, regulatory gaps are found in relation to some of the profiles mentioned above” (Giorgiantonio, Giovanniello, 2009, 2011). 5.1.1

The United Kingdom

The UK, in addition to being the first European legal entity in which the PPPC (in the form of the Private Finance Initiative, PFI) was initially applied, is also the country where it has been most used, especially in highly complex projects. The use of the PPPC for the provision of public services was made organic by the British government, which was promoted worldwide since the launch of the Private Finance Initiative in 1992 (see Cassella 2005). It should be noted, however, as the English practice considers a series of mixed contracts unnamed for the regulation of relations between the parties unknown to the Italian: for 86

Case Studies in UK

87

this comparison it necessarily reflects some margin of imprecision due to imperfect comparability of the models in use. (OICE 2007; Morbidelli 2005) This collaborative procurement approach came out of a cultural revolution in the UK in which the participating parties were seen as “partners who collaborate” rather than antagonists. This new approach was made easier by the UK’s background of common law, where the central role of contract negotiation takes precedence over civil law and in which public and private contractors are on a level footing, and that gives ample space for procedural choices and contract management. 5.1.2

The allocation of administrative risk

Special attention is given to the earlier stages of selection procedure for the private contractor, technical aspects and project management by using private consultants and, especially, the assistance of public facilities, such as the Treasury’s task force. This process identifies the objectives for undertaking the work and does a thorough technical and economic analysis of the associated costs. The various PA decision-making levels are coordinated through appropriate forms of connection where works are of joint interest and are linked to the release of evaluations on the feasibility of the intervention. In addition, to promote the use of PF, the British Government circulated information on non-binding best practices, contract clauses and technical information (guides, practice notes and recommendations), leaving the administration with the choice of whether or not to comply with them. Finally, to reduce the burden of preparing tenders and to achieve economies of scale, a robust standardization of projects and contracts was started (for example, a single model for the construction of highways). 5.1.3

Procedures for selecting a contractor

For the realization of PF works, the English practice has a particularly flexible procedure in steps (defined as competitive negotiation), characterized by a progressive reduction in the number of competitors. In practice, contracting authorities consult operators before publication of the notice to check the status of the target market and, subsequently, through informal meetings alternating with the acquisition of written bids, gradually reduce the competitors admitted to the final (usually two or three, at most five), more complex, stages. On the one

88 Sovereign Risk and Public-Private Partnership During the Euro Crisis

hand, this procedure allows the government to take advantage of individual contributions and not set ex-ante detailed technical specifications for complex projects. On the other hand, it encourages the development of a good deal, thanks to the reduced number of competitors in the final stages, which increases each one’s chances of success (as opposed to what happens, of course, in the case of merely comparing the bids from all the contestants who answer the call). The natural heir to the procedural form is clearly the competitive dialogue procedure, introduced by the Public Contracts Regulations 2006 on 31 January 2006, with which the UK commuted the European Directive 2004/18/EC and also expressed in the Office of Government of Commerce (an internal structure to the Treasury which plays an important role in assistance and orientation), which has also emphasized the need for early identification of the objectives and then proceeding to a thorough cost analysis. Hence, administrations within the UK are invited to define in advance and make notes when and how the dialogue will be conducted. (Giorgioantonio, Giovanniello, 2009). 5.1.4

Regulations

Unlike those previously in force, the 2006 Regulations apply in England, Wales and Northern Ireland but not in Scotland. With the devolution settlements of 1998 Westminster devolved to the governments of Wales, Scotland and Northern Ireland the power to legislate on certain matters, including the interpretation of Community law valid within their respective territories. While Wales and Northern Ireland have not made use of this power, Scotland has exercised it, incorporating the latest EU procurement directives with its 2006 Regulations, also very similar to those applicable in other jurisdictions of the UK. The full text of the Public Contracts Regulations currently in force is available online in the legal database of the Ministry of Justice, http://www.statutelaw.gov.uk. 5.1.5

The custody agreement

Robust attention is paid to the contracting stage through the inclusion of clauses providing for appropriate negotiating mechanisms to stimulate the timely establishment of the work and service delivery, allowing for the necessary adjustments to the changes occurring in the course of the awarding of the contract, ensuring control of the level of services and facilitating the effective transfer of the risk of demand and/or availability of the private company. Moreover, for many road infrastructures a “virtual toll” system has been established, where the remuneration paid by the grantor to the operator changes according to the volume

Case Studies in UK 89

of traffic (and therefore demand), the performance management (with particular emphasis on aspects related to security) and the availability of services. More specifically, the share of the shadow rate is determined by two elements: road safety and the partial or total closure of some sections or roads. The element of safety is considered of the utmost importance and the Highways Agency pays for materials and innovative solutions to ensure the safety of up to 25 per cent of the estimated costs for each accident avoided in the first five years of operation, linked to measures for the protection of the claims of the lenders. The protection of donors is ensured through the preparation of a complex system of collateral and guarantees (mainly, in terms of negotiations), which ensures a priority satisfaction. These agreements are ensured by the principles of private law on which the English system is based, dominated by the privity of contract, which allows the parties involved to obtain a clear identification and an equally clear definition of the risk assumed, thereby ensuring a remarkable balancing effect between all those involved, and ensuring that each activity within the project is distinctly linked to the relevant party. In particular: i) the different actors take on responsibility only for those parts of the agreement they have effectively concluded, remaining third (i.e. strangers, foreign) compared to the other contracts of the project, succeeding in this way to control the degree of risk-taking and to circumscribe it in the context of the contractual relationship; ii) the limit of the obligations undertaken by the parties for each agreement is strictly marked by the contents of the express stipulation, being strongly limited by the risk of hetero-integration by the court; iii) the levels of “communication” between the different contracts of the project are limited to the express insertion of conditions precedent and / or termination recalling events arising from other agreements, or to the qualification of certain events as a cause of exemption from liability obligor; iv) the parties may have recourse, as a general rule, to guarantee mechanisms to real effectiveness (such as mortgage or floating charge), extremely flexible, involving tangible assets (movable and immovable) and intangible assets (mainly loans present and future), which allow lenders to exercise effective control over the implementation of the project, without depriving the person with custody of the availability of such goods. In addition, to reduce the burden of preparing the tenders and to achieve economies of scale there is an application of a strong standardization of projects (for example, there is a single model project for the construction of highways) and contracts” (Giorgioantonio, Giovanniello, 2009).

90 Sovereign Risk and Public-Private Partnership During the Euro Crisis

5.2 Genesis of PPP in Europe: first forms The earliest forms of PPP can be traced back to the public-private collaboration between Italy, France and the UK for the construction of an aqueduct for Naples, Italy, in 1877. After unification a great emphasis was placed on the need to provide an aqueduct for Naples because the water of the old Bull and the Carmignano aqueducts was completely inadequate and often polluted. Therefore, from 1861 and for many years after, engineers, architects and community leaders formulated proposals looked at possible sources and the best routes, discussed the best methods of construction and management, dealt with tenders and examined the best deals. After much deliberation they chose to recreate part of the old Roman aqueduct of Claudius, which started from Serino in Irpinia, but to re-route it to a higher altitude to suit the height of many Neapolitan neighbourhoods. A huge investment to achieve the aqueduct was necessary, however, a huge investment, which can be accomplished only by a foreign company with more capital and financial strength. Hence, lengthy negotiations between the city council, engineers and financiers took place in December 1877 to ensure a cash underwriting equal to six per cent of the capital invested to build the aqueduct, calculated as £30 million. The following year the Municipality of Naples entered into a contract with the Naples Water Works Company Limited (which operated the Parisian Compagnie Générale des Eaux), through its subsidiary Compagnie Générale des Eaux pour les Étrangers that and built several aqueducts in Italy.

5.3 The instruments of popular participation in UK The United Kingdom has been a leader in modernising the way in which public infrastructure and services are delivered and finding new ways to work in partnerships with the private sector over the last twenty years. The realities of the private sector market place exert a powerful discipline on businesses to maximise efficiency and take full advantage of business opportunities. Successful Public Private Partnerships (PPP) enable the public sector to access the discipline, skills and expertise of the private sector. Not all PPPs have, however, been successful. The Private Finance Initiative (PFI), the form of PPP used most frequently in the United Kingdom, has become tarnished by its waste, inflexibility and lack of transparency. (UK Treasury, 2012) The political decisions on public-private partnerships in UK are favoured and preceded by various forms, tools and opportunities for popular participation.

Case Studies in UK 91

5.3.1

From French tools to English participatory models

In France there are two judicial instruments: the public inquiry (enquête publique) and public debate (débat public). Their procedures are very clear and conducted by impartial third-party organizations. The highest participation is ensured through easy access to information relevant to the evaluation of the project, which the proponent is required to publish in print, posters and on the Internet. The final decision is left to the proposer, who may choose to take comments from the final reports (“exploiting” the consent obtained) or depart from it in whole or in part by providing a detailed reasoning (it remains a “political” decision). They are, however, given the provisions that are intended to ensure that the results of the inquiries are thwarted. A public inquiry allows the local population: i) to refer to a file in which the administration proposer shall provide detailed information on the preliminary design and realization of the work; ii) submit their comments in writing to the commissioner appointed to lead the investigation. The latter may organize public hearings if he considers it appropriate. The object, timing and location of the procedure are set out in detail by the prefect. The report, conclusions and files are sent to the prefect, who in turn sends them to the administration proposer. A copy of the documents is available to the public for a year. The will to implement major infrastructure in the national interest, however, is subject to public debate. It is a procedure that allows a many of those involved to express their opinions, criticisms and suggestions on opportunities for achievement, methods of construction and impacts of the work by attending public hearings and meetings. Unlike the public inquiry, the hearing allows a direct comparison and dialogue between the stakeholders concerned (first and foremost, citizens) and the proponent to take place in the run-up to preparing the preliminary draft. The debate, in fact, is based on a dossier that contains the rough draft of the work (subject to change), impact studies and the documents deemed relevant for understanding the project and its economic, environmental and territorial implications. The procedure is chaired by the Commission du Débat Public, an independent administrative authority that: i) decides on whether to organize the debate on the advice of the relevant ministers; ii) ensures the widest popular participation in the process of project preparation; iii) determines whether the debate should be conducted before a committee established by it (a commission particulière du débat public), or be organized by the maitre d’ouvrage or the public body responsible for the work; iv) determines the timetable for the implementation of the debate. Within two months of the closure of the debate, the Commission has to publish a report describing its

92

Sovereign Risk and Public-Private Partnership During the Euro Crisis

development, the content of the comments received and the decisions taken. The chairman makes up a budget, formulates an assessment and highlights any conclusions drawn. Reports and financial statements are made public and subsequently included in the dossier of the subsequent investigation. (Giorgioantonio, Giovanniello, 2009). 5.3.2

The participatory English model

Even in the UK public inquiries are the main judicial instruments. Their application is being gradually reduced with the full implementation of the Planning Act (enacted in 2008, reform still pending), which provides special rules for the location and construction of infrastructure of national importance. The framework outlined in the Planning Act is based, in particular, on the National Policy Statements (NPS), documents formulated following extensive forms of consultation and participation of the people and finally approved by the minister competent in the industry. They are subject to periodic review in the event of changed conditions. The NPS indicate: i) the type and size of an intervention based on national needs or a specific area; ii) the criteria used to decide whether a site is suitable or not the location of infrastructure and the weight to be attributed to each criterion; iii) a list of sites deemed suitable and unsuitable for the location; iv) the conditions under which it is necessary to undertake initiatives to mitigate the impact of interventions. A special independent authority, the Infrastructure Planning Commission, from March 2010 rules the conformity of large construction projects and the NPS. In particular, the authorization to create the work (consent order) occurs only if the project is strictly consistent with the criteria laid down in the NPS. In the evaluation and consideration phase of the project, interested parties may submit written comments and take part in hearings (examination stage). The public inquiry, however, is part of the time in which it was already published a draft or an outline of the project and have already been collected observations and comments from interested parties. The notice of the initiation is notified in writing to each statutory objector. It contains information about the date and place of the investigation and on key aspects of the project to be examined. Notice shall be given the widest possible publicity. Interested parties may intervene. In compliance with the provisions in the relevant rules, the methods of implementation are defined by the inspector conducting the investigation, which has broad powers in respect to the admission of evidence, collection of testimonies, interviews, and site visits.

Case Studies in UK 93

After the investigation, the inspector should prepare a final report containing its conclusions and recommendations / suggestions. In the event that the minister wants to depart from the findings of the inspector must give back to the interested parties the opportunity to comment on the points not amended and may be forced to re-open the investigation again” (Giorgioantonio, Giovanniello, 2009) P

W/S

PPP

P

PA part T6

PFI

T7

T17

T14

T8 ‘90s in UK

T9 T10

T11

Sovereign Risk effects

Risk Transfer /Control

T12

T15

T13

T16

P

W/S

PPP P

T4 T5 T6

PFI/BOOT/BOST /BOT/SCA/ Leasing/Sponsoring g p g

T7

T17

T14

T8 IFRIC 12

ITALY UK SPAIN

PPP/SCA

T9 T100

T11

T12

T15

T13

T16

P

W/S

PPP/SCA P

T4 T5 T6 T7

PFI/BOOT/BOST /BOT/SCA/ Leasing/Sponsoring/ Concession

T8

3 Sectors: Transport Water Energy

IFRIC 12 experiences

T9 T100

T17

T14

T11

T12

T13

ITALY UK SPAIN

T15

T16

94 Sovereign Risk and Public-Private Partnership During the Euro Crisis

5.4 The quantity, value of PPPs in the UK The observation that the distribution of “PPP contracts concluded during the reporting period between the different European countries, we note that between 1990 and 2009, more than two-thirds of the contracts in Europe affecting the United Kingdom, and Spain, with 10 per cent of the total number of projects, is the second largest market in Europe. France, Germany, Italy and Portugal represent, respectively, between 2 and 5 per cent of the market. United Kingdom, Portugal, France, Germany, Spain and Italy (which, alone, is worth 2.4 per cent of the total) count, together, about 92 per cent of the total market by number of PPP projects. If you look at the value of the contracts, the UK accounts for 53 per cent of the total European market for PPP over the same period. The share of the Spanish market value of the projects is higher than that measured in terms of number of contracts; Portugal (7 per cent) is the third largest European market, in terms of contract value. France, Germany and Greece, together, account for approximately 15 per cent of the value of the PPP market in Europe between 1990 and 2009. Italy accounts for 3.3 per cent of the total value of the European market. The distribution in terms of project value over the past 20 years gives a similar picture. PPPs in the UK account for 53 per cent of the total value of European PPPs (58 per cent in Blanc-Brude et al. 2007). PPP market share in Spain by value is larger than by number of projects. Portugal is the third largest PPP market by value – and has become more important in recent years. This reflects mainly the completion of some large road projects such as the Douro Litoral Toll Road or the Transmontana Highway in recent years. France, Germany and Greece together represent about 15 per cent of the value of PPPs in Europe (11 per cent in Blanc-Brude et al. 2007). The PPP market in Hungary remains the largest one among New Member States (NMS). To assess the evolution of the relative size of the PPP market in the UK over time, Figure 5.1 shows the total number of deals per annum for the UK and the EU as a whole since 1990. The number of PPPs in the UK increased rapidly from the mid 1990s onwards, reaching its peak in 2004. For the EU as a whole, the number of projects continued to increase until 2006. The share of UK projects in the EU started to decline in 2001. During the recent financial crisis, this trend accelerated with the UK market share in the annual number

Case Studies in UK 95 100 90 80 70 60 50 40 30 20 10 0 General public services

Defence

Public order

Transport Fuel and Environment Health energy

Recreation Education and culture

General public services

Defence

Public order

Transport Fuel and Environment Health energy

Recreation Education and culture

100 90 80 70 60 50 40 30 20 10 0

1995–1999

2000–2004

2005–2009

Figure 5.1 PPP contracts in European transport sector (excluding UK), number (top) and value (bottom) Source: A. Kappeler, and M. Nemoz,(2010), public-private partnership in Europe – before and during the recent financial crisis.

96

Sovereign Risk and Public-Private Partnership During the Euro Crisis

of EU projects falling below 50 per cent in 2008.” (Kappeler, Nemoz, 2010) As shown by Figure 5.2, the sectorial distribution outside the UK remains concentrated in transport, but gradually diversifies. Over the past five years, the transport sector represented 41 per cent of the number and 76 per cent of the value of PPPs in continental Europe. Education and health PPPs are gaining ground, but remain less significant than in the UK. Together they constituted 26 per cent of the number and 11 per cent of the value of PPPs in continental Europe in 2005–09 (in the UK 69 per cent of the number and 51 per cent of the value). In the UK (top panel), PPP projects in the transport sector are typically far bigger than in other sectors. The recent decline in the size of transport PPPs may be due to the termination of some large PPPs related to the London underground started at the beginning of the decade. In most other sectors, with the exception of transport and public order, the typical project size has increased over time. The guidance by HM Treasury (2006) to favour larger projects (above EUR 30 million) is one reason for this trend. In continental Europe (bottom panel), the median size of PPPs is smaller than in the UK for most sectors (the main exception being health)” (Kappeler, Nemoz, 2010). Figure 5.2 shows that “in the UK PPPs represented about ten per cent of total investment in the transport sector. In contrast, transport PPPs in continental Europe played a smaller role but caught up and reached about five per cent in 2005–08. A similar comparison for the education sector is shown in Figure 5.2. The numbers in this figure are more precise than the ones for transport, as the denominator (total investment in education) is directly comparable with the nominator (estimated investment flows of PPPs in education). Again, PPPs are of significance in the UK, with their relative importance increasing from about one per cent in the period 1995–99 to almost 20 per cent in the period 2005–09. PPPs in education have emerged in continental Europe only recently, and their relevance remains small” (Kappeler, Nemoz, 2010).

5.5 Is value for money a priority in the UK? The concept of value for money (or VfM) was initially introduced in the UK and has since been used by countries such as Australia, Ireland and South Africa.

Case Studies in UK 97 1200

1000

800

600

400

200

0 General public services

Defence

Public order

Transport Fuel and Environment Health energy

Recreation Education and culture

General public services

Defence

Public order

Transport Fuel and Environment Health Recreation Education energy and culture

1200

1000

800

600

400

200

0

Median 95–99

Median 00–04

Median 05–09

Figure 5.2 Average size of PPP contracts by sector (in millions of euros): in the UK (top) and in continental Europe (bottom) Source: A. Kappeler, and M. Nemoz, (2010) public-private partnership in Europe – before and during the recent financial crisis.

98 Sovereign Risk and Public-Private Partnership During the Euro Crisis 80

60

40

20

0 DE

EL

ES

FR

HU

IE

IT

NL

PT

UK

PT

UK

14000 12000 10000 8000 6000 4000 2000 0 DE

EL

ES

FR

HU

Average 01–06

IE 2007

IT 2008

NL 2009

Figure 5.3 Evolution of PPPs in several European countries between 2007 and 2009, compared with the 2001–2006 average, number (top) and value (bottom) Source: A. Kappeler, and M. Nemoz, public-private partnership in Europe – before and during the recent financial crisis.

Case Studies in UK

99

Value for money is defined as the optimum combination of wholeof-life costs and quality of the good and service to meet the user’s requirements, which is very different from the choice of goods or services based on the lowest cost bid. A key tool in assessing the VfM of projects is the Public Sector Comparator (PSC) 29. It compares the cost of the PPP option with the risk-adjusted cost of delivering the same service by the public sector. This approach helps set the financial contribution by Government and user fees, and to select the project design with the highest VfM. Value for money is generated by several factors, including (i) optimal (not maximum) risk transfer to the private sector; (ii) careful assessment of the services to be provided; (iii) flexibility provided to the private sector for innovation and efficiency; (iv) a lean and transparent procurement; and (v) capacity in the public and private sector. Several of these requirements were missing in the early (and sometimes current) PPP projects in the region, and the focus should be to improve the value generated from PPP by focusing on these key aspects. (Giorgioantonio, Giovanniello, 2009) Box 5.1 shows the identified drivers for VfM in the UK, applicable to any country. Box 5.1 Generic factors driving value for money The optimum allocation of risks between the various parties requires that risks are allocated to the party or parties who are best placed to manage and minimize these risks over the relevant period; focusing on the whole life costs of the asset rather than only the upfront costs involved; integrated planning and design of the facilities-related services through an early assessment of whether the possible integration of asset and non-asset services (e.g. soft services) should deliver VfM benefits.

A rigorously executed transfer of risks to the responsible parties ensures that the allocation of risks can be enforced and that the costs associated with these risks are actually borne by the parties in the manner originally allocated and agreed. Sufficient flexibility to ensure that any changes to the original specification or requirements of the procuring authority and the effects of changing technology or delivery methods, can be accommodated during the life of the project at reasonable cost to ensure overall VfM. Ensuring sufficient incentives within the

100 Sovereign Risk and Public-Private Partnership During the Euro Crisis

procurement structure and the project contracts to ensure that assets and services are developed and delivered in a timely, efficient and effective manner, including both rewards and deductions as may be appropriate. The term of the contract should be determined with reference to the period over which the procuring authority can reasonably predict the requirement for the services being procured. This will require careful considerations of factors including: potential changes in end-use requirements; policy changes; design life of the asset; the number of major asset upgrades or refurbishments during the period of the contract; potential changes in the way services could be delivered (e.g. technical advancements); and the arrangements for the asset at expiry of the contracts; that there are sufficient skills and expertise in both the public and private sectors and that these are utilized effectively during the procurement process and subsequent delivery of the project; and managing the scale and complexity of the procurement to ensure that procurement costs are not disproportionate to the underlying projects(s) (HM Treasury UK, 2006).

5.6 Some UK examples under IFRIC 12 adoption From the empirical analysis conducted on the financial statements of listed companies under IFRIC 12 adoption (also analysed in detail in the chapters on Italy and Spain), we have reorganized the classification of enterprises in different sectors, according to economic activity and listed companies. In particular, we first created three macro-sectors related to the type of output produced. The choice to analyse the PPP made by the company on the basis of only the listed companies for three reasons: a. To allow an international comparison of the economic weight of the choices of PPP in different countries; b. Because the accounting rules to guide the operations of the PPP are expected to apply only to the listed companies; c. For the economic weight of PPPs performed by the company listed on PPPs carried out by companies not listed on stock exchange. In particular we first created three macro-sectors that are related on the type of output produced and distributed. The economic sectors analysed, are: • transport; • energy; • water.

Case Studies in UK

101

The companies in each macro-sector can be further subdivided according to the production process adopted. For example, in the macro-sector “transport” can be distinguished: • Creation of infrastructure and operation of services “on the ground” in a specific location (port and airport); • Production and management of the road network (road and rail transport). In the macro-sector “energy” can be distinguished: • Creation of infrastructure (gas, wind energy, hydrocarbons); • Production and management of the network (waste disposal); • Maintenance of the networks (electricity). In the macro-sectors mentioned, we observe, moreover, the presence of: • not listed companies on a regulated market (e.g.: ports), despite play an important role in macro-sector both in terms of strategic importance, both level of investments in the various PPPs. These companies do not fall within the scope of analysis of this work, just because unlisted; • listed companies on a regulated market in which the shareholder is a major component, some cases, control of the central public sector and / or local (e.g.: airport, rail). Some of these sectors, such as ports, although they have important roles in public utility services, and in terms of investment by the various public-private partnerships, even though not included in this analysis because the PPP in the port sector is not is characterized by the presence of companies listed on the stock market, in spite instead of the airport sector with presence also components and public participation in local public listed companies under IFRIC 12 adoption. 5.6.1

PPP in the UK’s water sector

Regardless of the way in which the private sector is involved – i.e. traditional construction procurement or more comprehensive PPP contracts – the degree of competition generally tends to be low in the infrastructure industry. There are a very small number of active players in each infrastructure sub-sector, presumably because of the significant complexity and value involved in the infrastructure provision. (Iimi, 2008)

102

5.6.2

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Price cap on water regulation

The England and Wales water and sewerage industry was privatized in 1989 and thenceforth has been subject to a sequence of five-year price controls in the form of price caps. Price-cap regulation is set out to be a high-powered incentive scheme. However previous empirical findings have shown that the cap introduced at privatization in 1989 had been lax (Saal and Parker, 2000), in the sense of allowing real price increases, and the evidence that the first price review in 1994 produced efficiency gains is weak (Saal and Parker, 2001 and 2004). This might be explained by the double duty of the regulator to encourage a higher level of efficiency and provide the companies with the financial resources to support their investment programmes. (Erbetta, Cave, 2007) 5.6.3

PPPs in UK transport

The UK, a global player in the PPP sector, first turned to private finance and user charges in the 1980s to build new crossings and roads. It then sought to involve the private sector in the extension and maintenance of existing roads via its Design Build Finance and Operate (DBFO) policy. It avoided the politically sensitive issue of creating tolls for existing roads by paying its private sector partners itself on the basis of traffic volumes – a shadow toll mechanism – and, in more recent schemes, a combination of shadow tolls and lane availability. Now that such arrangements have been in operation for some years, it is timely to examine the cost to the taxpayer and road user of using the private sector to finance public infrastructure. Given the increased interest in the use of private finance in transport all over the world, an analysis of its costs could contribute to a more informed debate about these and similar decisions in the future. In 2008 Acerete and Zaragoza examined empirically the experience to date, focusing on the financial costs and rewards to the various stakeholders, in order to evaluate the stated rationale for the policy, namely that the move to private finance provides additional transport infrastructure and constitutes value for money. Acerete, Shaoul, Stafford, 2009; Acerete, Shaoul, Stafford, Stapleton (2010) offer an international overview, comparing the cost structure of privately financed roads in UK and Spain, focusing on the toll roads as shown in Table 5.1. According to authoritative doctrine (Acerete, Shaoul, Stafford, 2009; Acerete, Shaoul, Stafford, Stapleton, 2010; Shaoul, Stafford, Stapleton, 2007a, 2007b, 2008a, 2008b, 2011) there is a common accounting regu-

Case Studies in UK Table 5.1

103

Cost structure of privately financed roads

Year ending Income Non-cash costs (depreciation + reversionary fund) Cash cost (other operating expenses) Total operating expenses

Spanish toll roads (euros m)

Spanish shadow toll roads (euros m)

8 DBFOs in England (£m)

% income

% income

% income

2003 from users

2003 from the state

2004 from the state

1,428 292

100% 21%

57 17

100% 30%

176 24

100% 14%

320

22%

8

14%

48

27%

612

43%

25

44%

72

41%

Returns to providers of finance

Year ending Income Interest payable Capitalized interest Total interest Profit after interest and tax Total returns to providers of finance

Spanish toll roads (euros m)

Spanish shadow toll roads (euros m)

8 DBFOs in England (£m)

% income

% income

% income

2003 from users

2003 from the state

2004 from the state

1,428 168 70 238 546

100%

100%

17% 38%

57 11 12 23 14

40% 25%

176 82 0 82 63*

784

55%

37

65%

145*

100%

47% 36%* 82%*

Note: *profit after interest and tax affected by refinancing gain in 2004. Source: Acerete et al., 2009.

latory environment between UK and Spain for PPP frameworks, best seen in Tables 5.2 and 5.3. 5.6.4

PPP in the UK’s gas sector

The overall aim of PPPs was formulated as follows: “to support national governments, development agencies and the petroleum industry in their effort to reduce the environmentally damaging flaring and venting of gas associated with the extraction of crude oil” (World Bank 2002).

104

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Table 5.2

UK and Spain PPP framework

Accounting Regulatory Environment UK

SPAIN

Common law system Self-regulating accounting profession that issues accounting standards Strong equity capital market (investor protection) Separation of tax and financial tax and accounting

Codified Roman law system Plan-based financial reporting issued by a public body Credit as main financial system (creditors protection) Tax dominated accounting system

Characteristics of PPP Roads Sector UK

SPAIN

Starting date: 1990s Shadow toll model, more recently performance mechanism and direct tolls Coordination and management by public agency (Partnerships UK) Private operators constituted in ‘special purpose vehicles’ set up by consortia

Starting date: 1960s Direct toll model, more recently shadow tolls (autonomous governments) No equivalent Operators are public limited companies (set up by or as subsidiaries of construction companies)

Source: Adapted from Acerete, Stapleton, Stafford, 2007.

Five different objectives were then set in order to reduce gas flaring and an equal number of practices in order to “overcome barriers that currently inhibit flaring reduction”(World Bank 2002). The GGFR-PPP first of all seeks to: 1. Create a forum and platform to disseminate best practices and ideas on implementing and financing gas flaring reduction efforts, 2. Improve flaring statistics and reporting; 3. Develop common technical standards; 4. Enhance World Bank mechanisms to mitigate the risk of financing flaring reductions; 5. Provide assistance in designing carbon credit schemes to unlock ‘green’ financing. 6. The practical solutions are: 7. improve the legal and regulatory framework for investments in flaring reductions;

Case Studies in UK 105 ● ●

● ●

improve international market access for gas; provide technical assistance to develop domestic markets for flared gas; disseminate information, including on international best practices; promote local small-scale use of gas (World Bank 2002).

5.7 Appendix: the multi-business companies in different PPP sectors in the UK Antofagasta PLC “Antofagasta plc is a Chilean business that operates in various sectors of the economy. It is one of the most important Chilean conglomerates with equity participation in Antofagasta Minerals, the railroad from Antofagasta to Bolivia, Aguas Antofagasta in Chile, Tethian in Australia and other investments in different parts from the world. Antofagasta is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.” It had a market capitalization of approximately £12.1 billion as of 23 December 2011, making it the 33rd-largest company on the London Stock Exchange. Antofagasta sectors: Transport Water Energy/Sustainability SCAs were adopted in 2008, which required that all infrastructure assets relating to the water concession be recorded within intangible assets. Previously, certain infrastructure assets were recorded within property, plant and equipment. Severn Trent “Severn Trent Water provides high quality water and sewerage services to over 4.2 million households and businesses in the Midlands and mid-Wales. We want to be the best water and waste water company in the UK, by providing the highest standards and lowest possible charges, through our great people.” Municipal waste Water treatment “Severn Trent Services provides a multiple barrier treatment approach incorporating filtration, disinfection and process solution technologies

Table 5.3

Comparison of accounting approaches

UK

SPAIN

IFRIC

Mercantile framework: legal and tax implications.

PPP assets and liabilities defined according to control

There has been minimum debate. Spanish accounting treatment of infrastructure and contracts fits with EMU public deficit and debt requirements. There is no consideration of the economic rationale of transactions.

Pronouncements try to determine how the details of the contract are interpreted within the control based definitions.

Specific accounting variation to the Spanish General Accounting Plan for the toll sector.

Evolution of applicable regulation from leases, going through disclosure requirements, to specific accounting treatment provided by IFRIC’s interpretation.

Basis of Accounting Treatment Economic substance over legal form of transactions. Accounting Debate Much debate between accounting regulator and Treasury about the Nature of PPP, which leads to competing views of where the assets lie in PPPs Accounting Regulation PPPs accounting followed existing regulations on leasing and substance over form with modifications.

Accounting Issues and Accountability Consequences Separability of service and property elements of contract: infrastructurebased service (off public balance sheet) or financing arrangement (on public balance sheet).

Capitalization of financial expenses once the motorway is opened to traffic as deferred expenditure: becoming mechanism for new concessionaires.

Infrastructures falling within the definition of a service concession arrangement should not be recognized in operator balance sheet. A rebuttable assumption that asset would be on public balance sheet.

Party that bears the risks and rewards of ownership (e.g. potential variations in property profits and losses) is the party owning the asset. Asymmetrical reporting between public and private agents: taxpayers face uncertainty about future liabilities. Annual tariffs may be split into two parts in the income statement and in the balance sheet: lack of comparability since companies may vary their recognition policy. Government guarantees for Highways Agency’s payments are not reflected in the public sector accounts: taxpayers face uncertainty about future liabilities. Source: Acerete, Stapleton, Stafford, 2007.

Creation of a ‘reversion fund’: protection of investors’ funds (may also protect taxpayers’ funds).

Public support (exchange rate insurance, subsidies, refundable advance payments, participative loans): boundaries between public and private sector become blurred.

Financial and intangible asset models used depending on whether the primary responsibility to pay the operator lies with the grantor or user. The accounting model is based on formal criteria, not on the economic substance: similar arrangements may be accounted for differently. IASB’s pronouncements relate to private sector companies. IFRICs exclude accounting for public sector grantors. Much criticized by commentators.

Not all public support mechanisms are adequately reflected in public accounts: taxpayers face uncertainty about future liabilities.

The scope of IFRIC’s interpretation is based on the control criteria. Eurostat uses an approach based on assessment of where risk lies for statistical purposes.

Ad hoc revaluations: to increase the value of assets and facilitate access to finance.

108 Sovereign Risk and Public-Private Partnership During the Euro Crisis

for various municipal waste water treatment applications. In addition, we provide contract operations for municipal waste water treatment facilities in the US, UK, Ireland and Italy.” Industrial “Severn Trent Services offers a range of disinfection, filtration and process solutions for a suite of industrial water and waste water applications. In addition, we provide design, build and contract operations for water and waste water treatment facilities for a variety of industrial segments in the US, UK, Ireland and Italy.” Marine “Severn Trent Services offers a range of disinfection, filtration and process solutions for marine and offshore water and waste water applications. ●

●

●

The Intellectual Property in our key products may be used by competitors. Regulatory change may lead to decreased demand for our products. Competitors may enter the market leading to decreased demand for our products and services.”

Service concession arrangements “The group’s contract to provide water and waste water services to the Ministry of Defence (MoD) is a service concession arrangement under the definition set out in IFRIC 12. The group acts as the service provider under the MoD Project Aquatrine Package C – a 25-year contract spanning 1,523 sites across England covering the Eastern sea border and from Lancashire in the North West to West Sussex on the South Coast. Under the contract the group maintains and upgrades the MoD infrastructure assets and provides operating services for water and waste water. The maintenance and upgrade services are charged at an agreed rate, adjusted for inflation, which is agreed in the contract. The operating services are charged under an agreed volumetric tariff. Since the group has an unconditional right to receive cash in exchange for the maintenance and upgrade services, the amounts receivable are recognized as a financial asset within prepayments and accrued income. At 31 March 2012 the amount receivable was £25.5 million (2011: £27.1 million). There

Case Studies in UK 109

have been no significant changes to the arrangement during the year.”

RATP Group “The RATP Group (Groupe RATP, in French), also known as the Régie Autonome des Transports Parisiens (Autonomous Operator of Parisian Transports) is a state-owned public transport operator headquartered in Paris, France, and a UK listed company. Formed in 1948, the group has its origins as the public transport operator for the city of Paris. Its logo represents, in a stylized version, the Seine’s meandering through the area around Paris as the face of a person looking up. Today RATP is still responsible for most of the public transport in Paris and its surrounding Île-de-France region, including the Paris Métro, tram and bus services and part of the Réseau Express Régional (RER) network. In the Île-de-France region, RATP carries about 3 billion passengers per year. While the RATP’s Paris operations are still a major part of the business, its operations have now extended to include businesses around the globe. These include involvement in the operation of bus, tram, rapid transit and inter-city rail services, located in Europe, Asia, Africa and the Americas. Transport RATP epic The new agreement with the Île-de-France transport authority (STIF) came into effect in 2012 and extends until 2015. The legal context has changed, with the implementation of the French ORTF law no. 2009– 1503 on public passenger transport services by rail: ●

●

●

Operating rights for transport operations are henceforth limited in duration to enable competition; based on the current status of legislation and information available, RATP has opted to apply IFRIC 12 “Service Concession Arrangements” as of January 1, 2012 to account for returnable concession assets (mainly rolling stock) and reversionary concession assets (mainly bus stations); RATP is entrusted with infrastructure management activities, which are not open to competition. The requirements under the new agreement are higher, and provide for €3.6 million in quality service incentives and €10.2 million in

110

Sovereign Risk and Public-Private Partnership During the Euro Crisis

penalties. The agreement also sets out capital expenditure governance rules, in particular with regard to RATP’s responsibilities and the procedure for approving capital expenditure by the Île-de-France transport authority. Application of IFRIC 12 SCAs As of 1 January 2012, the effective date of the first four-year agreement with the Île-de-France transport authority since the entry into force of the new legal framework set forth by the ORTF law and implemented through the ministerial orders and decrees mentioned in Note 1.1, and given the arrangement entered into with the Île-de-France transport authority in September 2012, the Group has been able to apply IFRIC 12 to RATP Epic. Other intangibles Other intangible assets are recorded in the balance sheet at their historical value. They are systematically amortized over their useful life. Software is amortized on a straight-line basis over three to ten years. Only development costs and configuration costs specific to the management systems deployed throughout RATP’s public service business are amortized over ten years. The application of IFRIC 12 for financial years beginning on or after 1 January 2012 led to the recognition of intangible concession assets for the reversionary assets relating to transport operations. Service concession arrangements SCAs fall within the scope of IFRIC 12 if infrastructure use is controlled by the grantor. The grantor effectively controls the infrastructure if the following two conditions are met: ●

●

The grantor controls or regulates what services must be provided with the infrastructure, to whom it must provide them and at what price; The grantor controls the infrastructure, which means having the right to any residual interest in the infrastructure at the end of the arrangement.

Under IFRIC 12, the infrastructure used may not be recognized as property, plant and equipment by the operator but as an intangible asset

Case Studies in UK 111

(intangible asset model) and/or as a financial asset (financial asset model), depending on the remuneration agreed with the grantor. Financial asset model For concession services, a financial asset is recognized when the operator has an unconditional contractual right to receive a determined amount from the grantor. Financial assets arising from the application of IFRIC 12 are recognized in the “Other financial assets” line item in the consolidated balance sheet. They are recognized at amortized cost. The consideration receivable is recognized in revenue. Intangible asset model The intangible asset model applies if the operator has the right to charge users of a public service. Hybrid model According to the hybrid model when only part of the investment is subject to a payment commitment from the grantor, the amount guaranteed by the grantor is recognized as a financial asset and the remaining value is recognized as an intangible asset. RATP group decided to apply IFRIC 12 to account for RATP’s transport operation arrangements and certain contracts entered into by RATP Développement’s transport subsidiaries. Transport revenue is subject to the provisions of the 2012–2015 multi-annual agreement entered into by the Île-de-France transport authority and RATP following the effective date of the European regulation on public passenger transport services and the associated French law on public passenger transport services (ORTF law). Since 1 January 2012, in accordance with IFRIC 12, the C2 contribution has been accounted for as amortization and remuneration of the financial assets recognized for the returnable and reversionary concession assets (Note 3.5, 3.7 and 14). These contributions are reviewed annually based on certain indexes. Revenue is recognized when users actually use passenger transport services. The public tariff is set by the Île-de-France transport authority. For RATP, they constitute a public service obligation. Transport-related revenue It includes: ●

Revenue from advertising and commercial leases;

112 ● ●

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Various repayments; Non-transport revenue.

Non-transport revenue consists primarily of revenue from services and work rendered to third parties, sales of goods, mobile telephony and telecommunications. Revenue from engineering and construction contracts and the associated costs are recorded under income and expense respectively, according to percentage completion at the reporting date. Percentage of completion is measured on the basis of the costs incurred for the work performed to date, based on estimated total contract costs. Service concession arrangements The Group applied IFRIC 12 SCAs to account for RATP’s returnable and reversionary concession assets since 1 January 2012, when the Île-deFrance transport authority agreement became effective, and given the September 2012 agreement with the Île-de- France transport authority, entered into on 16 March 2012, which falls within the scope of IFRIC 12 because: ● ●

●

The services rendered correspond to a public service mission; The Île-de-France transport authority determines what transport services must be provided and the pricing policy; The assets necessary for operations are returnable and reversionary concession assets and the Île-de-France transport authority controls a significant residual interest in these assets at the end of the concession period.

For rolling stock and related maintenance equipment classified as returnable assets, when the operating rights expire, the Île-de-France transport authority will repurchase the assets at their carrying amount net of grants, corresponding to the amount reported in the financial statements where the assets are recognized under property, plant and equipment. For assets necessary for operations (such as bus stations, etc.) classified as reversionary assets, the Île-de-France transport authority can exercise a reversion option when the operating rights expire. Contributions paid by the Île-de-France transport authority to RATP include the C2 contribution to fund investments. The contribution

Case Studies in UK

113

covers the cost of capital employed, including interest expense and net depreciation expense, as reported in the financial statements. The contribution is charged against financial receivables. Pursuant to IFRIC 12, concession assets cannot be recognized in RATP’s balance sheet as property, plant and equipment. Concerning the accounting treatment of returnable assets, these assets are financed through the reimbursement of their depreciation and amortization expenses and payment of the carrying amount when the operating rights expire, based on the amounts reported in the financial statements. The financial asset model is applied insofar as RATP has an unconditional right to receive cash from the Île-de-France transport authority until the end of the concession period, regardless of user traffic. For reversionary concession assets, the receivables recognized as financial assets reflected the reimbursement of depreciation and amortization expenses, based on the amounts reported in the financial statements until 2015, which is the expiry date of the current agreement with the Île-de-France transport authority, during which RATP has an unconditional right to receive cash from the Île-de-France transport authority. The residual carrying amount of the reversionary public concession assets, which was not recognized as a receivable when IFRIC 12 was adopted for the first time for reversionary assets existing at 1 January 2012, is recognized under intangible assets. Their useful lives correspond to those applied by the Group for property, plant and equipment and intangible assets (see Note 3.5). Financial concession assets reflect the carrying amount net of grants for the reversionary concession assets at the reporting date, and the reimbursement of depreciation and amortization expenses until the end of the current agreement with the Île-de-France transport authority. For RATP they amounted to €3,248 million at 1 January 2012 (recognized under intangible assets and property, plant and equipment at 31 December 2011) and €3,621 million at 31 December 2012. The portion of the receivable due within one year was recognized as “other current financial assets” and the portion due later than one year was recognized as “other non-current financial assets”. Pursuant to IAS 39, financial concession assets are measured at amortized cost and impaired if the carrying amount is higher than the present value of the discounted future cash flows. The revenue

114

Sovereign Risk and Public-Private Partnership During the Euro Crisis

related to this financial model includes remuneration of the financial asset. Pursuant to IAS 18 Revenue, acquisitions of returnable concession assets are accounted for as purchase and sale transactions in the period and are recognized under revenue and cost of sales.

6

Italian Case Studies in Energy, Transport and Water Management

6.1 A brief historical description The regulations concerning local public services in Italy date back to the early 1900s, in line with the Giolitti law (Law No. 103, 29 March, 1903). This law, which allowed municipalities and provinces to hire and manage services deemed essential to local authorities, remained in force until the end of the 1980s, and allowed local authorities to take from the market economy those goods and services required to satisfy collective needs. Municipal authorities were therefore public enterprises operating in a single production structure and acting within a geographic reference framework.

6.2 Italian complexity and regulatory confusion Unlike in other European countries, Italian regulations have focused on the procedural aspects of PPPs, with limited attention given to other relevant aspects, especially regarding the civil rules on relationships between the various actors involved in these operations. This also explains the low number of projects and little finance in relation to PPPs (Bentivogli, Panicara, Tidu, 2008, 2010). The term public-private partnership refers to all forms of cooperation between the public and private sectors for the design, construction, financing, operation and maintenance of public works or utilities, or the supply of goods or provision of services. In the Italian system, the first PPP regulations for the realization of public works was introduced by Law no. 415 of 18 November 1998, (the Merloni-ter law), which included articles from 37-bis to 37-nonies in the framework law on public works (Law no. 109, 11 February 1994, the 115

116

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Merloni law), then merged into the legislative decree no. 163, 12 April 2006, (the Public Contract Code: articles from 153 to 160). “These articles are divided into two groups, governing both logically and chronologically distinct phases: i) the first group, whose articles are mainly focused on recent reform measures, is aimed at the selection of the private contractor as well as at the commitment of the public works concession; ii) the second group relates to the implementation of the contractual relationship between the public authority and the concessionaire and provides certain forms of guarantee in favour of the funding bodies. With reference to the latter stage, the most relevant laws are related to: i) the possibility to succeed in the project company concession relationship potentially formed by the successful contractor; ii) the favour in respect of funding bodies, according to which the sums owed by the government to the concessionaire as compensation in the event of termination or withdrawal ‘are intended primarily to satisfy the claims of the concessionaire financers and are unavailable on the part of the concessionaire until full satisfaction of financers’ claims’; iii) the so-called ‘step-in right’, which grants to funding bodies the chance to appoint a substitute in the event of termination of the concession relationship for reasons resulting from the concessionaire; iv) introduction of a conventional privilege to protect claims of those financing the realization of public works or public service management” (Giorgiantonio, Giovanniello, 2009). Despite the importance of these remedial provisions for the regulation of public works in removing the obstacles to successful use of PPP, interpreters and professionals have shown their insufficiency and inadequacy. It is possible to consider, for example, the need to introduce, i) a dynamic step-in right, enabling the intervention of funding bodies before the concessionaire is in a full-blown default situation; and ii) more detailed rules on privilege, which ensure the PPP project is “locked-in”.

6.3 PPP in the public contract code In particular, article 3, paragraph 15 of the Code of Public Contracts defines PPP contracts as “contracts for one or more services such as design, construction, operation or maintenance of public works or utilities, or the provision of a service, including in all cases the total or partial financing by private entities, even through different forms, of such services, with the risk allocation in accordance with the EU regulations and

Italian Case Studies in Energy, Transport and Water Management 117

guidelines in force”. The legislation on the discipline of the different PPP application modes has been strong and has grown in the last decade, as shown in Table 6.1.

6.4 Italian contractual model The contractual partnership is based on purely formal ties between public authorities and private entities for the carrying out of the public works. In this context, one of the best known models is the concession model, which is characterized by the existence of a direct link between the private entity and the final user, providing a service to the community in place of, and under the control of, the public authority (Gallia, 2008). This model is also characterized by a specific mode of private remuneration, since the operator’s consideration comes from users of the public service (Amatucci, Vecchi, 2009). Table 6.1

Normative references

1999 Decree No. 554, 21 December, ‘regulation and implementation of the framework law on public works 11 February 1994, no. 109, as amended’ 2000 supervisor of public works, regulatory Act No. 34/2000 of 18 July ‘Project financing – business plan’ 2000 Legislative Decree n. 267 18 August ‘Consolidated local government’ 2000 European Commission, communication No. 2000/121/02 of 4/12/2000 ‘Commission interpretative communication on concessions under Community law’ 2004 Eurostat, 11 February decision ‘accounting treatment in national accounts of contracts signed by public undertakings in the framework of partnerships with private companies’ 2005 European Commission, communication 2005/569 of 11/15/2005 ‘on public-private partnerships and Community law on public procurement and concessions’ 2006 Legislative Decree No. 163 of 12 April “code of public contracts for works, services and supplies”, and s.m.i. 2006 European Parliament, resolution No. 2043/2006 of 26 October on public-private partnerships and Community law on public procurement and concessions 2007 European Commission, communication 2007/616 of 10/18/2007 ‘communication on a European ports policy’ 2007 Finance Act for the year 2008 (L.244/07) – investor companies (Article 27, paragraphs 1–32) 2008 European Commission, communication 2007/6661 of 2/5/2008 interpretative communication of the EU Commission on the application of Community law on public procurement and concessions to institutionalized Public-Private Partnerships (IPPP is set up)

118

Sovereign Risk and Public-Private Partnership During the Euro Crisis

With reference to the Italian legislation on remuneration method, the concession for public services under the Consolidated Act on Municipality, R.D. No. 2578 of 1925, is ruled by article 267 of the R.D. No. 1175 of 1931. This article provides for a participation notice to be published for concession contracts regarding local public services, in order to allow private sector entities to submit or enter into an agreement when advised of “special circumstances in relation to the nature of the services”. This legislation, referring to special and not exceptional circumstances, has effectively legitimized an interpretation and application of article 267 which allows the widespread use of private agreements, assuming a fiduciary nature in the relationship between the grantor and the concession operator and because of technical, financial and organizational requirements. The concession as a management tool for local public services was considered as an alternative model in the reform of local authorities provided for by Act No. 142 of 1990, including the innovative reliance on mainly public partnerships. Italian law envisages both institutionalized PPPs and contractual PPPs. In the Italian legal system, institutionalized PPPs are realized through: • • • •

mainly public capital partnerships; mainly private capital partnerships; public-private partnerships established according to the civil code; urban transformation partnerships.

The main forms of contractual PPPs are: • concessions for construction or upgrade of services and operation services; • sponsorship; • leasing (“leasing in costruendo”).

6.5 IFRIC 12 in Italy In Italy literature on PPP and SCA under IFRIC 12 adoption is scarce (Campra, 2005, 2012; Laghi, 2010: 26; Giussani, 2009: 180; Delladio, Gaiani, Meneghetti, Pozzoli, 2011: 168), despite its strategic importance and the interest expressed in international literature. Shown below, are the research questions we will examine in the next few paragraphs:

Italian Case Studies in Energy, Transport and Water Management 119

• Is the overview on business models and on the accounting treatment of concession services linked to PPP unclear? If yes, why? • Is the theoretical approach to service concession by Italian scholars different to the theoretical approach by scholars from other countries? If yes, why? • Do cases identified in the literature find a response in the empirical evidence offered by the selected case studies? • Do publicly owned concession companies corresponding to the grantor of functional privatization, represent further forms of PPP? After having identified the different approaches to the research themes, we will develop evolutionary profiles and any emerging experiential practice raised in the literature. Through comments, critical reflections and proactive analyses we investigate the tenuous and weak presence of Italian corporate economic doctrine within the complex and multiform rules concerning PPP arrangements and SCAs that fall within the application discipline offered by IFRIC 12, in spite of the robust and growing interest by scholars of international law and economics, particularly by scholars of public management in the field of international business economics. The systemization of the literature will detect emerging practices in business economic doctrine in order to verify, in the context of a growing scarcity of financial resources, the identification of new business models to support public decision-makers in an increasingly complex financial framework, in an effort to combine the pursuit of economic balance with a respect for rules, needs and rights. This systematization can be regarded as a starting point for developing new research on PPPs and SCAs falling within the application of IFRIC12, through international comparisons and the analysis of business models.

6.6 The Italian statutory profile In Italy regulatory commitment has mainly focused on the procedural aspects and publication concepts of PF, devoting limited attention to other profiles, however important, especially in what concerns civil law on the relationship between the various actors involved in these operations. In the Italian system, the first PF general rules for the construction of public works were introduced by 18 November 1998, Law 415 (Merloni-ter), which entered articles 37-bis, 37-nonies into the framework law on public works (l. 11 February 1994, no. 109).

120 Sovereign Risk and Public-Private Partnership During the Euro Crisis

These articles are divided into two groups, which govern two logically and chronologically distinct phases: i) the first is aimed at the choice of private contractor and the awarding of the public works concession contract, and which was the main focus for reform efforts in recent years; ii) the second is related to the performance of existing contractual relationships between administration and dealer, and provides some form of guarantee in favour of the lenders. With regard to the latter phase, the most relevant changes are related to: i) the opportunity for taking over the project company’s concession; ii) the prediction of favour towards the lenders, according to which the sums owed by the dealer by way of compensation in the event of termination or withdrawal “are primarily aimed at satisfying the claims of the concessionaire and the lenders are unavailable by the latter to the complete satisfaction of such claims”; iii) step-in right, which provides an opportunity for lenders to replace the concessionaire in the concession, in the case of contractual resolution. Despite the importance of these remedial provisions for the regulation of public works, which removed some of the obstacles to the effective use of PF, both performers and operators in the sector have highlighted their insufficiency and inadequacy.

6.7 Network of strategic infrastructure under concession Based on available data from the National Observatory of the PublicPrivate Partnership, PPPs require an information and monitoring system and forewarning of concession contracts within the entire landscape of the PPP. As the economic and financial crisis scenario continued to grow in 2012, making the path to execution increasingly difficult, developing analysis, assistance and technical knowledge programmes became a strategic variable in this difficult period, to delineate the possible effectiveness and synergies to enable the growing demand for PPPs to play a role as a driving force in the country’s revival. In 2012, 3,204 participation notices were issued for a business volume of 8,682 million euros. Compared to 2011, there was a growth in demand compared to a sharp decline in economic value subsequent to the general crisis, which made it difficult to find financial resources through funding, even for private companies. Between 2011 and 2012 the number of competitive tenders increased by 13.15 per cent, from 3,204 to 2,832 notices, while the business volume decreased by 34.7 per cent, from 13.3 million euros of amounts devoted to competition to 8.7 million euros. This remarkable decline resulted from the collapse

Italian Case Studies in Energy, Transport and Water Management 121 13.288 3.072

3.500

2.500

8.533

2.000

2.383

1.000

–

5.085

3.817 1.292 336

990 507 7

824

817

3.204 12.000 8.682 10.000

1.90 00

6.146

1.500

500

9. 4 2.832 9.92 3

14.000

974

5.951

5 7 5.90

1.322 2

8.000 6.000 4.000

Amount (minus €)

Races number

3.000

2.000 –

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 6.1

The evolution of PPPs (2002–2012)

Source: CRESME, 2013.

of over 50 million large-scale works to be realized through PPP, which, after an expansionist period, decreased by 39.7 per cent in one year. In 2013 no large-scale work was realized, such as the two public work concessions, arranged in the second half of 2011, for the strengthening and maintenance of the A22 Brennero–Modena motorway (three billion euros) and for the construction of the Rome–Latin Intermodal Corridor and Cisterna–Valmontone connection (2.7 billion euros), in addition the number of works exceeding 50 million euros significantly reduced, going from 22 annual participation notices in 2010–2011 to 14 participation notices in 2012. Demand for PPPs continued to grow in 2012, driven mainly by municipalities and local stakeholders, but they became increasingly difficult to realize. Not surprisingly, things were worse for PPP works that were adjudicated upon: from 796 participation notices adjudicated upon in 2011 to 642 participation notices in 2012 (–19.3 per cent) and from 8.3 billion euros to 3.8 billion euros (–54 per cent). The dynamics in progress are also highlighted by the importance of PPPs in the public works market. The number of opportunities have risen since 2002, when they represented less than one per cent of the opportunities, from 16.9 per cent in 2011 to 19.8 per cent in 2012 – the highest level recorded since National Observatory of the Public Private Partnerships was operational – and from 43.3 per cent to 36.2 per cent for economic value. Additionally, by aggregating the 18 identified PPP sectors into three main groups, we see an increasing emphasis on urban regeneration, meaning the set of regeneration interventions on built space, built to improve the quality of life. It is a market sector triggered mainly by municipalities, which represents approximately 70 per cent of demand

122

Sovereign Risk and Public-Private Partnership During the Euro Crisis 7.990 0 7.830 7.99

900

672

700 600 4.221

500 400

2.061 231 138 1.227 535 84

300 200 100 –

4.767 4.639

574 4

7.000 642 6.000 5.000

467 7 3.820

341 1

2.783 233 3

290 0

4.000 3.000 2.000

Amount (minus €)

Races number

8.000

796 6

800

1.000 –

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 6.2

The evolution of PPP contracts awarded (2002–2012)

Source: CRESME, 2013.

43.3 45 36.2 40 32.6 35 28.3 30 22.0 25 18.5 17.9 19.1 19.8 8 16.5 5 16.9 9 20 11.4 10.2 2 15 6.4 5.3 5.5 3.8 8 10 3.3 3.0 0 2.7 1.5 5 0.9 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 6.3

Percentage value of PPP on Public Works (2002–2012)

Source: CRESME, 2013.

and 17 per cent of the total business volume between 2002 and 2012. It was the only sector with a total positive balance sheet in 2012. Basic service sectors (transportation, health and education and social) and essential service sectors (water, energy, lighting, cemetery services, waste disposal) were the main sectors with reference to revenues, but during 2012 these sectors registered a decline in the number linked to tender notices. Compared to the size of PPPs in 2012, the number of works worth less than 5 million euros continues to grow and investments have mainly covered initiatives of higher amounts. There were 1,553 initiatives worth less than 5 million euros and corresponding to a total of 974 million euros, which is at odds with the total PPP market of 92 per cent in number and 11 per cent in amount when excluding initiatives for which we do not know the value of the contract. There were only 127 initiatives worth more than 5 million euros (only 8 per cent of

Italian Case Studies in Energy, Transport and Water Management 123 Table 6.2 Macro fields of PPP: number and amount (in millions of euros) for categories counted in 2002, 2005, 2008–2012

2002

2005

2008

Races Essential services Basic services Urban regeneration TOTAL

2009

2010

2011

2012

Total 2002– 2012

911

4,189

Number 115

207

297

372

860

662

33 188

38 745

131 894

168 1,360

175 2,037

195 1,975

212 1,150 2,081 11,439

336

990

1,322

1,900

3,072

2,832

3,204 16,778

Variation % ‘12/’02 ‘12/’05 ‘12/’08 ‘12/’09 ‘12/’10 ‘12/’11 Essential 692.2 services Basic services 542.4 Urban 1,006.9 regeneration TOTAL 853.6

340.1

206.7

144.9

5.9

37.6

457.9 179.3

61.8 132.8

26.2 53.0

21.1 2.2

8.7 5.4

223.6

142.4

68.6

4.3

13.1

Amount (millions of euros) Essential 455 services Basic services 349 Urban 488 regeneration TOTAL 1,292

3,002

1,460

1,335

4,173

3,840

2,953 21,430

1,764 1,381

3,525 966

3,162 1,410

4,751 1,000

8,277 1,171

4,524 37,627 1,204 11,951

6,146

5,951

5,907

9,924 13,288

8,682 71,008

Variation % ‘12/’02 ‘12/’05 ‘12/’08 ‘12/’09 ‘12/’10 ‘12/’11 Essential 549.2 services Basic services 1,195.0 Urban 147.0 regeneration TOTAL 572.1

–1.6

102.3

121.2

–29.2

–23.1

156.5 –12.8

28.3 24.6

43.1 –14.6

–4.8 20.4

–45.3 2.9

41.3

45.9

47.0

–12.5

–34.7

Source: www.infopieffe.it

demand), but their economic value exceeded the 7.7 billion equivalent to 89 per cent of the total market of PPPs (in 2011 there were 169 of these initiatives worth 12.2 million euro equal to 92 per cent of the market).

124

Sovereign Risk and Public-Private Partnership During the Euro Crisis

6.8 Public works concessions Public works concessions, as defined in article 3, section 11 of the Code, are “contracts for pecuniary interest concluded in writing, relating to the execution, or the executive planning and execution, which is the final design and execution of public works or utilities, and work directly and structurally linked with them, as well as their functional and economic management, which have the same characteristics as a public work contract except for the fact that the consideration for the works consists either solely in the right to exploit the work or in this right together with payment. The procedures for the award of a public work concession are grouped into two main types: • the granting of public money, or the granting of the proposed construction and operation of the contracting authority; • the granting of a private initiative, or the concession to build and operate on a proposal of the promoter, or the assignment of work by project finance.”

6.8.1

Construction and operation suggested by promoter

The procedures for awarding a direct grant for construction and management of the promoter’s proposal are: • A single race (paragraphs 1–14 of the Public Works Code), where the PA shall: • publish a notice, based on category one FS; • examine the bids received; • draw up a ranking; • appoint a promoter; • approves promoter’s preliminary draft and, where necessary, make design changes. • A double race (paragraph 15 of the Public Works Code), with planning and construction phases. 6.8.2

The public works market

The market in public works changed during the 2000s and is likely to change even more in the coming years, mainly due to the difficulties in public finance that will not be solved in the short term. It will develop

Italian Case Studies in Energy, Transport and Water Management 125

through the need to use alternative means of funding to avoid blocking public works or public interest to avoid further negative consequences on growth and development. Note that between 2008 and 2011 total investments in public works in the wider public sector were reduced by 24 per cent (in constant values), and that the percentage becomes 27 per cent if one only considers PA. Furthermore, according to the data available, investment by PAs is bound to fall still further in the coming years (the official estimates of the Ministry of Economy and Finance, updated in September 2011, speak of a reduction of investments by the PA of 18 per cent in current values, from 30.7 billion euros to 25.1 billion euros in 2012 and then a further reduction of 5.8 per cent, from 25.1 billion euros to 23.7 billion euros in 2013). In this context a collaboration between the public and private sectors becomes vital in tackling the crisis in the sector. Indeed, we could say that without PPPs public works in the coming years will suffer a further profound contraction that will hit local authorities in particular. In fact, according to initial estimates from Cresme and evaluations from MEF (the Italian Economic Ministry), any recovery of the sector in the next three years is only linked to investment by public and private operators of networks and infrastructures for transport, energy and water, as well as the private sector contribution to the realization of other public works or public interest. It is in this context that PPPs are expected to grow.

6.9 PPP, SCA and IFRIC 12: a literature survey In some countries, infrastructure for services and public works (stadiums, kindergartens, roads, ports, airports, hospitals, cemeteries, prisons, parking lots, telecommunications networks, water distribution systems, networks for the supply of energy) is created, managed and controlled directly by the public sector, which takes care of the ongoing maintenance through direct financial allocations (Campra, 2005, 2012; Hall, 2008). However, subsequent to the introduction of new stringent budgetary constraints, in respect of general government budgetary balances (the stability pact in EU countries), and the increasing scarcity of resources, worsened by the financial crisis, over the past twenty years some governments (Borgonovi, 2005, 2006, 2009; Amatucci, Vecchi 2009, 2011) have introduced PPPs (as shown in the following table) through contractual service arrangements (Robinson 2001; Hawksworth, 2000), in order to attract private sector participation in the development, financing, operation and maintenance of works and utilities (Laghi, 2010) and to keep

126

Sovereign Risk and Public-Private Partnership During the Euro Crisis

their rising debt under control (Broadbent, Laughlin, 1999, 2004, 2005; Ricci, 2005; Eurostat, 2004). The agreements regulating different concession services in the recurring form of PPPs (Parker, Gould, 1999; Pisani, 2001; Grimsey, Lewis, 2005; Guthrie, 2005) fall within the scope of IFRIC 12 (Campra, 2012: 2675) along with the different accounting treatments of operators rights over infrastructure, dependent on the different tasks of control and regulation provided to the public on behalf of the public sector in accordance with the terms specified in the contract for a specified period (Hall, 2008), and on the identification of the party on whom lies the demand risk (Campra et al., 2011). SCAs refer to those forms of PPP projects through which a public sector entity (grantor) entrusts to a private sector entity (operator) the concession to construct or operate a public work or infrastructure, in order to perform a public service in the public interest, resulting in deep functional privatization processes (Pivato, 1958; Amaduzzi, 1978: 227; Caramiello, 1993: 546; De Robertis, 1992; Guatri, 1992: 498; Kunz, 1997; Perfolini, 1999; Dell’Atti, 2001; Rijna, 2010). The operator’s consideration may consist of the right to charge users of the public services (intangible asset), or in an unconditional contractual right to receive cash or other financial asset from, or at the direction of, the grantor for construction services (Campra, 2011; Laghi, 2010; Braja, Campra, Esposito, Ricci, 2013).

6.10

IFRIC 12 in Italy

In Italy, business literature on IFRIC 12 has been developed by some scholars and a large and growing group of professionals (Campra, 2005, 2012; Laghi, 2010: 26), notwithstanding the strategic importance and interest manifested by the international literature on the one hand, and on the other, the continuing lack of an overview on accounting treatments for PPP concession services by local authorities (Ricci, 2005, 2007, 2009; Guthrie, Humprey, Jones, Olson, 2005). The interpretation of IFRIC 12 also allows researchers to avoid confusion in the classification, measurement and detection of SCAs involving public and private entities, such as outsourcing contracts, contracts of network capacity, take-or-pay contracts that are ruled on instead by IFRIC 4 (Treasury, 2008; Heald, Georgoiu, 2010; Laghi, 2010:6); or even errors in classification of PPPs, where the majority of the finance is public, as in the case study (Ferrovie Nord Milan Group (para. 6.12.2)), and therefore comes under IAS 20.

Italian Case Studies in Energy, Transport and Water Management 127

Among other positive aspects of IFRIC 12 is the attempt to improve the budgetary information for investors, clarifying the nature and risks of the ASC, recognition and measurement. The registration or cancellation of a budget can be connected to and based on the model of risk/benefit transfer and is sometimes related to the amount of control over the activity (Laghi, 2010; Martiniello, 2011; Heald, Georgiou, 2011). Complexity that recurs like a mirror (Heald, Georgiou, 2011), evaluating the adoption of IFRIC 12 compared to evaluations based on the control model, or the risk/benefit (or risk and reward) model, or new information provided by institutions such as the UTFP, which supports principle-related costs for implementation and management (Martiniello, 2011) and is not dependent on the budgetary implications of local and public finances (internal stability pact). 6.10.1

Accounting model

6.10.1.1 The Italian experience: an empirical analysis The Italian experience, as investigated in the relevant literature (Campra, 2012), is represented by different companies operating in different economic areas (transport, energy, water), for the development, implementation and maintenance of works and public utilities on the basis of their economic activity. 6.10.1.2 The adopted accounting model According to the provisions of IFRIC 12, concession infrastructure shall not be recognized as the operator’s property, plant and equipment because the contractual service arrangement does not convey to the operator the right to control the use of public service infrastructure. The operator has access to operate the infrastructure to provide a service to the public on behalf of the grantor in accordance with the terms specified in the contract (Campra, 2012). Infrastructures shall be recognized according to the following: • financial activity model; • intangible asset model; • mixed model. The prerequisite for applying the financial asset model is the operator’s right to receive cash flows from the grantor, contractually guaranteed for construction services, irrespective of the infrastructure’s actual use.

128 Sovereign Risk and Public-Private Partnership During the Euro Crisis

With reference to the intangible asset model, the grantor, in return for construction services and infrastructure improvement, acquires the right to charge users of the infrastructure and, therefore, the concessionaire’s cash flows do not result from the grantor, but are related to the actual use of the infrastructure by users so that demand risk is supported by the concessionaire. Finally, there are some cases where the concession agreement envisages that the concessionaire be paid for construction services in part by financial asset and in part by intangible asset. In such cases the accounting model is mixed and the two components of the agreement should be separated, in particular, the distinction of the financial activity fraction from the intangible asset fraction (Campra, 2012; Braja, Campra, Esposito, Ricci, 2013). 6.10.2

An overview of the sectors

From the empirical analysis conducted on the financial statements of listed Italian companies under IFRIC 12 adoption, we have reorganized the classification of enterprises in different sectors, according to economic activity. In particular, we first created three macro-sectors that are related to the type of output produced. The economic sectors analysed, are: • transport; • energy; • water. Italian companies that have adopted IFRIC 12 fall into 28 listed groups, already investigated in the literature (Campra, 2012). They are represented in the table below and in the following economic sectors (according to information from the Borsa Italiana website, www.borsaitaliana.it). The companies in each macro-sector can be further subdivided according to their production process adopted. For example, in the transport macro-sector: ●

●

creation of infrastructure and operation of services on the ground in a specific location (port and airport); production and management of the road network (road and rail transport).

The energy macro-sector can be differentiated by: ●

creation of infrastructure (gas, wind energy, hydrocarbons);

Italian Case Studies in Energy, Transport and Water Management 129 Table 6.3

Italian listed companies that have adopted IFRIC 12

Listed Companies

Economic Sector

A2A Acea Acegas APS Acque Potabili ACS AGAM Aeroporto di Firenze Ascopiave Astaldi Atlantia Autostrada To-Mi Autostrade Meridionali Edison Enel Eni Enia* Ferrovie Nord Milano Gas Plus Gemina Hera Impregilo Iride* Mediterranea delle Acque SAT Save SIAS SNAM Rete Gass Terna Terni Energia

Energy Energy Energy Water Energy Transport Energy Transport Transport Transport Transport Energy Energy Energy Energy Transport Energy Transport Energy Transport Energy Water Transport Transport Transport Energy Energy Energy

Note: * on 1 July 2010 ENIA S.p.A was merged with IRIDE S.p.A. resulting in IREN S.p.A. ● ●

production and management of the network (waste disposal); maintenance of networks (electricity).

Within the macro-sectors we also observed the presence of: ●

●

unlisted companies in a regulated market (e.g. ports) who still play an important role within the macro-sector, both in terms of strategic importance and level of investment in various PPPs. These companies do not fall within the scope of this analysis just because they were not listed; listed companies in a regulated market in which the shareholder is a major component and, in some cases, control a national and/or local public sector (e.g. airport, railway).

130 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Some of these sectors, such as the ports, although they have an important role in public utility services and in terms of investment by various PPPs, are not included in this analysis because PPPs in the port sector are not characterized by the presence of companies listed on the stock market. Instead, the airport sector is characterized by Service Concession Arrangements operated by listed companies, which can be analysed under IFRIC 12 adoption. The selected case studies show, in the first group, anomalies in the recognition and accounting treatment models of IFRIC 12 (financial model); the second group is companies that represent the analysed sample of Italian listed companies. As a test case, in Section 6.12, we describe the company Ferrovie Nord S.p.A., which operates in the field of public rail transport, whose business model emerges from the activity of financial reporting (through adopting IFRIC 12). The first group is characterized by a majority of share capital being held by the same public entity that is the grantor of the functional privatization (grant) for the realization of interests and works of public interest and utility. Therefore the grantor controls the concessionaire/operator, as the majority shareholder in the works and services. Through our methodology, we will try to answer the following questions: when the operator is essentially a private entity and equal to the grantor, does IFRIC 12 apply? Is it possible to talk about a public-private partnership or is it more appropriate to refer to public-public partnership and does IFRIC 12 apply? 6.10.3

First group: an empirical analysis

In 2009, this group of 21 Italian listed companies (Table 6.4) had already been investigated in some authoritative literature (Campra, 2012). Their activities cover the following areas (as per information from the website of Borsa Italiana – www.borsaitaliana.it): • • • •

Utilities (13 companies); Industrial goods and services (five companies); Energy (two companies); Travel and leisure (one company).

6.10.3.1 The accounting model adopted According to the provisions of IFRIC 12, concession infrastructure should not be accounted for by the grantee as plant and equipment or real estate, since the service concession contract does not confer on the grantee the right to control use of the infrastructure (Campra,

Italian Case Studies in Energy, Transport and Water Management 131

2012). This infrastructure must, however, be identified according to the following items: • financial activity model ; • intangible asset model; • mixed model. The prerequisite for the application of the financial asset model under the current law is that the concessionaire contracted for construction services will unconditionally receive cash flows from the grantor, irrespective of the actual use of the infrastructure. In the intangible asset model, dealer, construction services and infrastructure improvement acquire the right to charge users who use the same infrastructure, and therefore the dealer’s cash flows are not guaranteed by the grantor, but are related to the actual use of the infrastructure by users so that the risk of demand is supported by the concessionaire. Finally, there are some cases where the Table 6.4 adoption

Italian Listed Companies under IFRIC 12

Listed Companies

Economic Sector

A2A Acea Acegas APS Acque Potabili ACS AGAM Aeroporto di Firenze Ascopiave Autostrada To-Mi Autostrade Meridionali Edison Enel Eni Enia (*) Ferrovie Nord Milano Gas Plus Iride (*) Mediterranea delle Acque Save SIAS SNAM Rete Gass Terna

Energy Energy Energy Water Energy Transport Energy Transport Transport Energy Energy Energy Energy Transport Energy Energy Water Transport Transport Energy Energy

Note: * on 1 July 2010 ENIA S.p.A was merged in IRIDE S.p.A. resulting in IREN S.p.A.

132 Sovereign Risk and Public-Private Partnership During the Euro Crisis

grant agreement stipulates that the dealer has paid for the construction services in part by a financial asset and partially by an intangible asset. In such cases the accounting model is mixed and you must separate the two components of the agreement between that fraction referable to as financial activity and that referable to as an intangible asset (Campra, 2012).

6.11

The energy sector

After a number of regulatory interventions in the 1990s (Law 9/91 and 10/91) the energy sector, entirely monopolized by ENEL, was gradually liberalized in the production of electricity, in its distribution (with comparative competition) and in an interchange with foreign countries. The first project finance transactions in Italy were in fact realized as a result of this liberalization. According to estimates provided by Italian banking, these operations have allowed the construction of cogeneration plants for an estimated five billion euros. Among the various PPP projects, the ones that stand out are: a project in Rosignano Rosen, Livorno 1995 at a cost of 370 million euros; API Energy in Falconara, Ancona at a cost of 500 million euros; Sarlux Sarroch, Catania at a cost of nearly one billion euros in 1996; Serene, 1998, in various locations at 265 million euros; and Italian Wind Power in 1998, which distributed three hundred windmills between Puglia and Campania for 200 million euro. These early examples of PPP have employed various forms of project financing, for example Rosen is a BOT project, BOOT type of the API and the BOO type of Italian Wind Power. Other experiences relate to funding for the disposal of waste to produce electricity. In 1996, the ISAB Energy Mission promoted in Priolo (Siracusa) the ISAB Energy plan for over 900 million euros to build an incineration plant to meet two per cent of the Italian demand for electricity (in this case it is a BOO transaction type). In the first quarter of 2004, there were new calls for proposals in the energy sector, including for small works. Many municipalities, especially in the south, selected proposals for extension work, adjustment and ordinary and extraordinary maintenance of public lighting (Enna, Belper, St. Elizabeth and Belmonte Mezzagno in Sicily; Torre Santa Susanna, Poggiorsini, Tring and Monteiasi in Puglia; Volla, Vico Equense and Contursi Terme in Campania; Montesilvano in Anagni, Lazio and Abruzzi; Cadenzano in Deruta in Umbria and Tuscany). Another series of announcements concerning the design, construction, improvement, operation and maintenance of the network and distribution systems of

Italian Case Studies in Energy, Transport and Water Management 133

propane (in a score of Sardinian municipalities), natural gas (Asola, Over the Hill, Peia, Spino d’Adda, Vertova and Lonato in Lombardy; Missanello in Basilicata; Privett in Lazio) and natural gas (Sortino and Montalepre in Sicily; Orria, Aquilonia, Mojo and Omignano in Campania; Ovindoli in Abruzzo and Lazio in Fiuggi) and, finally, for a wind park (Ciro’ Marina in Calabria). Among the works on a major scale, the Consortium Asmez of Naples launched a tender for the creation of an enterprise for treatment services and energy management, energy saving systems, energy production with renewable sources or ecologically clean, remote control systems and remote control, records management and optimal maintenance of public lighting systems and land; both for the optimization of energy efficiency for environmental control and for public safety. The Fund Manager of Nuclear Power Plants, owned by ENEL, instead opened a procedure to select an operator skilled in the industrial electricity sector to purchase plant and complementary works in Latin America, for 75 million euro, with a commitment to use them for the production of electricity through combined cycle power plants. The energy sector is therefore particularly active at the municipal level for initiatives related to public lighting, the supply and distribution of natural gas. 6.11.1

Tariff regime

The classification of tariffs is one of the main aspects of regulation in the sector, particularly because the efficiency that may ensue (Roncoroni, 1999; Beccarello, 1998). The method of tariff in force until 2000 and subsequently audited had been defined in general terms during the second half of the 1970s. In 1993 a methodology for calculating price-cap regulations was introduced (Erbetta, Fraquelli, 2003). The periodic adjustment of rates was based on the coverage of the estimated costs, defined standard costs, the components of which were: • Attributed to raw materials (QM): the acquisition cost of natural gas by SNAM. The update of this component, on a bimonthly basis, was entrusted to the same SNAM; • Unit investment quota (IQ): recovery of costs related to investments. The mechanism provided a greater incentive to companies with a high rate of investment and, therefore, was characterized by a more rapid renewal of the plant (Erbetta, Fraquelli, 2003).

134 Sovereign Risk and Public-Private Partnership During the Euro Crisis

6.11.2

First application

Typical examples of the first application for the accounting regulation under IFRIC 12 adoption, as shown in the following information, was contained in the consolidated reports on the prospective application mode: • Group A2A: “in the interpretation is applicable to gas distribution activities in integrated water cycle, public lighting, votive lamps and cogeneration plants Group Coriance. The uncertainty in legislation passed in the activities in question did not allow the enforceability of the retrospective method and then proceeded with the prospective method.” • Group ACEA GAS: “the nature of the concessions, some uncertainties related to the regulatory framework, together with the fact that most of the subsequent concessions resulting from extraordinary transactions make it impossible to apply an interpretation. It then made an application perspective.” • Group ACSM AGAM: “we point out that, as a result of the enforced entry into IFRIC 12, the Group has reclassified its financial and asset situation at 31 December 2009, the net book value of assets related to gas distribution concessions, water and sewers from tangible assets to intangible assets for an amount of Euros 155,461.” • Group ASCOPIAVE: “in the balance sheet at 31 December 2009, the net book value of infrastructure relating to concession arrangements IFRIC 12 ex 294,734 thousands of euros) has been reclassified from the category ‘plant and machinery’ under ‘property, plant and equipment’ to the category ‘plant and equipment grant scheme’ under ‘Other intangible assets’.” • Group EDISON: “IFRIC 12 has been adopted in accordance with a perspective application, and not retrospective application, given the uncertainty of the rules.” • Group ENI: “in the balance sheet at 31 December 2009, the infrastructure was accounted and reclassified from property, to plant and equipment under intangible assets.” • Group GASPLUS: “in the balance sheet at 31 December 2009, the infrastructure was accounted and reclassified from property, to plant and equipment under intangible assets.” • Group IRIDE: “being also impractical a retrospective application for intangible assets to be recognized at the date of 1 January 2009 on the basis of the values previously entered as tangible assets in the balance sheet at 31 December 2008.”

Italian Case Studies in Energy, Transport and Water Management 135

• Group SNAM RETE GAS: “taking into consideration agreements in place in the group, the application of IFRIC 12 involves the classification of infrastructures in concession intangible assets; in the balance sheet at 31 December 2009, the infrastructure was accounted and reclassified from property, as plant and equipment under intangible assets.” This is the information contained in the consolidated reports on the retrospective application mode: • Group ACEA: “the application for interpretation was made retrospectively from the date of effectiveness of each of the business combinations in which the Group acquired its dealership agreements.” • Group ENEL: “the application from 1 January 2010, as a retrospective of the interpretations given in IFRIC 12 has produced consistent reclassifications between capital items to 31 December 2009 and 1 January 2009. The changes do not generate effects on economic performance in the first half of 2009 as presented for comparative purposes in this interim management report.” • Group ENIA: “Enìa examined the characteristics of concessions it owns for the purposes of appropriate accounting records: based on the analyses carried out the conditions envisaged by IFRIC 12 are there for some concessions in water, gas distribution and, marginally, in district street heating. To these concessions were applied the model of the intangible asset being retroactive as provided for by paragraph 30 of IFRIC 12. The comparative information appears to be comparable to that at 30 June 2010.” • Group TERNA: “as expected by the same interpretation, the Group has carried out a retrospective application of IFRIC 12 as from the date of 1 November 2005. The retrospective application of IFRIC 12 had no impact on shareholders’ equity.”

6.12

Transport sector: Italian railways

The liberalization of the railway sector in Italy was made from the legislative, but not the substantive, point of view. IT should be noted that the process of liberalization excludes certain sectors from competition: • rail networks intended only for the provision of urban and suburban passenger services; • isolated local and regional rail networks, designed to carry passengers;

136 Sovereign Risk and Public-Private Partnership During the Euro Crisis

• regional rail networks intended only for the provision of services for regional freight by companies of regional, local and inter-local interest; • privately owned railway infrastructure that exists solely for freight carried by the owner of the infrastructure. There were further criticisms of the railway sector, in particular: • security levels (with onerous minimum standards for a new entrant to satisfy); • network congestion in the more profitable sectors; • poor profitability on investments for new entrants compared to average retail prices; • poor availability of a wholesale market for the means of traction (locomotives) compatible with the Italian railway system. In relation to this point it should be noted that the ROSCO, market operators needed in the fully liberalized rail systems, reduced the effect of barriers to entry to the rail sector, such as the availability of rolling stock to a possible new entrant. This means the existence of ROSCO offers the opportunity for getting trains through appropriate systems of chartering (leasing). The activity of ROSCO in Italy, would not be very fluid, not only for the criticisms identified above, which affect the entire industry, but also for the fact that the authorization to use rolling stock different from that of Trenitalia is given by RFI. In addition, the design of the competition to win a train track should take into account accepted by anyone who contributes (service contract/tender for tenders). A new entrant can be put in a position to compete, but it would be necessary to solve the problem of rolling stock, which means that any entity contracting or providing the rolling stock, i.e. buying or renting it out of their own pockets and trains them in grants free (or with a fixed rent). The winner of a race must take into account of a depreciation of rolling stock, the new entrant has the option to procure the trains through direct purchase or possibly through rental schemes (leasing) from companies that own trains (ROSCO, Rolling Stock Company). So, the activity of ROSCO turns out to be decisive in both the first hypothesis (purchase of subject awarding authority) and in the second case (purchase of a new entrant). In conclusion, it should be emphasized that, in preparation for the full efficiency of the activities, ROSCO

Italian Case Studies in Energy, Transport and Water Management 137

is the solution to a number of open issues that affect the entire rail sector: • effective separation between network and service; • reshaping of long-term contracts – the ability to saturate with framework agreements to the extent of 70 per cent of the tracks assigned to each operator favours the incumbent (the goal is to limit the customary criteria – grandfather clause – that give preference to the incumbent); • award from Trenitalia for all rolling stock; • creation of a Transport Authority. From the operational point of view ROSCO in its current format may act at a regional level but not a national level. It makes sense in a competition with several participants to have the same starting conditions. In Italy it is typically easy to identify a person (the incumbent), who already operates the service (Trenitalia, for example). The presence of more participants in conditions of substantial competitive parity, is a difficult condition to guarantee. The awarding authority (contracting entity) has a duty to cancel or at least reduce the barriers to entry against competitors other than the incumbent; in the case of the railways the main barrier is the rolling stock. In any case, the notice may be directed to impose stricter conditions (i.e. more favourable to public entities and therefore the user), even in the hypothetical case that the incumbent wins or only participates.” (UTFP, 2010) In fact, when awarding a competition, the authority must determine the basic conditions necessary to a logical system, which means abandoning the customary approach that usually blocks the way into the railway market. 6.12.1

First application

Below, we present the information contained in the consolidated reports on the retrospective application mode, and typical examples of first applications for accounting regulations under IFRIC 12 adoption, which are: • Group FNM: “as a result of the introduction of IFRIC 12 in connection with the detection of sheet and income effects of railway infrastructure management headed by the FERROVIENORD, under IAS 1 par. 39 it is presented the consolidated financial position at 1 January 2009 and re-posted 30 June 2009, comparative purposes, adopting the new principle applied from 1 January 2010.” Also: “following the

138 Sovereign Risk and Public-Private Partnership During the Euro Crisis

introduction of IFRIC 12 in connection with the detection of financial and economic effects of railway infrastructure management for FERROVIENORD, entries were detected as contributions to funded and investment costs for investments financed with restatement of beginning of comparative data for the first half of 2009”. So “in short, half-yearly consolidated financial economic data and the financial statements of the semester are compared with those of the same period of the previous year indicating – limited to economic data – those of the second quarter. The net financial position is compared to the corresponding final figures to December 31, 2009, while the financial position as at June 30, 2010, is compared with the corresponding final figures to December 31, 2009, June 30, 2009 and January 1, 2009. It should be noted that the adoption of IFRIC 12 in connection with the detection of sheet and income effects of railway infrastructure management for FERROVIENORD depending on the model of financial activity, resulted in a significant impact on the financial and economic transactions linked to the financing of tangible assets included in such an agreement, resulting in the need for preparing the asset column which explained again January 1, 2009 (under IAS 1 par. 39) the consolidated assets and liabilities at the date mentioned by applying IFRIC 12; the application of that principle, however, does not affect contemporary earnings and equity. • Group SAVE: “economic and financial data contained in this document and for the comparison period have been restated following the adoption of the interpretation of IFRIC 12 service concession arrangements as detailed by the Appendix at the end of the document.” Therefore “at first adoption, the Group has applied the interpretation with retrospective method through calculation of the effects that would have had on 1 January 2009 and by attributing to equity reserves such effects.” Financial and economic effects arising from the application of IFRIC 12 have been formalized through the presentation of certain financial statements of conciliation of economic assets and ante and post application of interpretation. In detail these are: “prospects of the financial position as at 1 January 2009 with evidence of the effect of the application of IFRIC 12; comparison of the consolidated financial position at December 31, 2009 with evidence of the effect of the application of IFRIC 12; comparison of separate consolidated income statement for the financial year 2009 with evidence of the effect of the application of IFRIC 12; comparison of separate consolidated income statement for the first half of 2009 with evidence of the effect of the application of IFRIC 12”.

Italian Case Studies in Energy, Transport and Water Management 139

• Group SIAS (early application to December 31, 2009): “as illustrated in detail in the section on ‘principles of consolidation and evaluation criteria’ of the ‘explanatory notes’, the Group’s consolidated balance sheet at December 31, 2009 SIAS incorporates the effects arising from the first application of the interpretation IFRIC 12 – service concession arrangements approved on March 25, 2009 by Regulation (CE) no. 254 of the Commission of the European communities. The application of this interpretation has resulted, mainly, in the reclassification of assets for free, reversible in ‘intangible’ and the parameter setting depreciation of these goods. In order to allow the comparison of data, you have to restate the values relating to the financial year 2008.” 6.12.2

An atypical example: Ferrovie Nord Milan Group

Ferrovie Nord Milan Group is the leading integrated group in the field of transport and mobility in Lombardy as well as the most important private Italian operator in the industry. It aims to meet the needs of communication and mobility of people and businesses, and it is developing in order to meet the challenges arising from the new requirements to “move” people, goods and information, expanding and diversifying their activities in other markets of ICT, energy and sustainable mobility. The Ferrovie Nord Milan is a holding company listed on the stock exchange and serves as a strategic and operational management and coordination entity for all its subsidiaries. Lombardy Region is the reference shareholder, owning 57.57 per cent of the shares. 6.12.2.1 Company structure Ferrovie Nord Milano S.p.A is a joint stock company. It is a holding company that provides for: • an executive role, coordinating the strategies and operations of its subsidiaries, the most important of which are active in the rail sector; • an administrative role, providing the functions and support services for conducting the management that is typical of the subsidiaries. The Ferrovie Nord Milan Group represents the most important national railway company, after the Ferrovie dello Stato, and operates mainly in Ticino, Lombardia and Piemonte.

140

Sovereign Risk and Public-Private Partnership During the Euro Crisis

6.12.2.2 Business model The company is listed on the Milan Stock Exchange. The Lombardy Region holds 57.57 per cent of the share capital Ferrovie dello Stato holds 14.5 per cent and Aurelia S.p.A 3.078 per cent. The remainder is spread between individuals. In January 2010, subsequent to the sale of an 11 per cent share, DB Schenker Rail Italy S.r.l became the majority shareholder of Nord Cargo S.r.l. The Ferrovie Nord Milan Group continues to hold a 40 per cent share. Ferrovie Nord S.p.A. is the company that manages the network of regional property entrusted to railways in concession to the group. It was established in 1985 as part of the transformation of Ferrovie Nord Milano S.p.A. into a holding company. It was named Ferrovie Nord Milano and its purpose was the management and maintenance of the rail network and transport services. In 2010 the Ferrovie Nord Milano Group continued to refocus on its core business, represented by local public transport, consolidating the experiment started on 4 August 2009 with the establishment of the new company Trenitalia-LeNORD, exclusively dedicated to regional railways. A project carried out by Lombardy Region, FNM and Trenitalia S.p.A. with the objective of providing local citizens with an appropriate response to the increasingly growing demand for local public transport. The positive results achieved by this new company, both in terms of service quality and profits, have shown the effectiveness of this new management model and set the stage for the next step: on 3 May 2011

Figure 6.4

Company structure: Ramo Milano

Source: www.fnmgroup.it

Italian Case Studies in Energy, Transport and Water Management 141

Figure 6.5

Ferrovie Nord Milano Group – social companies

Source: www.fnmgroup.it

Trenitalia-LeNORD became Trenord, with a significant increase in capital, made even more relevant due to the merger with LeNORD. The new company intends to pursue the business model that has characterized the recent industrial history of FNM, budgeting to reinvest profits in innovation, in order to ensure a service more and more at the level of the best European standards. Trenord opens up a new age for regional rail transport and for the whole group, which will certainly be defining new goals and new strategies. It is a challenge that the company is ready to harvest after its 130-year history serving the Lombardy region and the capital strength that the company has been able to build up, step by step, opening itself to diversification into and exploration of new market areas, but always remaining loyal to its original mission. 6.12.2.3 Financial statements and reports The contributions for financed investments and financed investment costs, found in the application of IFRIC 12, amount to 103,459 million euros.

142

Sovereign Risk and Public-Private Partnership During the Euro Crisis Other shareholders 24,612% Lombardy region 57,57% Aurelia S.P.A (by CIV S.P.A. P and SIAS S.P.A) 3,078%

Ferrovie dello stato S.P.A 14,74%

Figure 6.6

Ferrovie Nord Milano Group – shareholders

Source: www.fnmgroup.it

300 250

Public funding Own funding

29.8 15 3 15.3 21.5

200 150

10 5 10.5

100 50

62.5 38.2 20

34.5

2001

2002

35.5

15 4 15.4 64.8

16 65

123.3

192.2

251.8

260.3

52.8

2003

2004

2005

2006

2007

2008

2009

TOTAL T INVESTMENTS IN MILLIONS OF EUROS, DIVIDED BETWEEN OWN AND PUBLIC FUNDING

Figure 6.7

Ferrovie Nord Milano Group – investments

Source: www.fnm.it

On 1 October 2011 the new contract for the management of local public rail transport was signed between Trenord and Lombardy Region and put into effect on 1 January 2012 with an end date of 31 December 2014. The shareholders meeting of Trenord, held on 26 October 2012, decided to amend article 3 of the bylaw, introducing the following second paragraph: “the company may also take equity in the company Gruppo Torinese Trasporti S.p.A”. The meeting then decided to authorize, pursuant to article 10, paragraph 5, c) of the Statute, as “preliminary and non-binding” and therefore revocable at any time, for the purchase of participation equal to 49 per cent in the social capital of Gruppo Torinese Trasporti S.p.A.

Italian Case Studies in Energy, Transport and Water Management 143

6.13

Transport sector: airports and infrastructure

Air transportation services play an important role in promoting the growth and efficiency of the economic system. For what concerns the production system, in particular, air transport, by improving accessibility to many geographically marginal areas, contributes to the location of production activities, the competitiveness of an area and the penetration of other markets (Button and Taylor, 2000). However, investments in infrastructures need of clear objectives. In Italy, there is a renewed interest in air travel, owing mainly to the vicissitudes of the flag carrier, both nationally and internationally, manifest in a rapid transformation. The process of liberalization in the EU, which started in the early nineties, has imparted a great impetus to the growth of the air system and the opening up of intercontinental traffic (with the entry into force of the Treaty on the liberalization in EU of intercontinental traffic of April 2014 open skies between Europe and the United States) will contribute to further expanding the areas of potential competition between carriers. At the same time, the pressures of a strong growth in demand exacerbate capacity constraints, increasing the already significant problems of congestion at major airports. Italy is not exempt from the problem and, indeed, it appears much more marked in the face of an airport structure that evolved without proper network configuration, which combines infrastructural deficiencies and inefficient articulation, as can be seen from the weakening of the airports and the prevailing under-utilization of smaller airports. The Italian airport system is composed of 103 civil airports of which 48 are used for commercial traffic. The infrastructure consists of two large sites of high traffic (Rome and Milan), a substantial number of medium-sized airports with a regional catchment area (with more than 100,000 square meters) and a considerable number of small airports (with less than 30,000 square meters). This structure of airports nationally is not, however, different from that of the main European countries where the proportion of regional airports is high and it has certainly favoured entry into the aviation market by new entrants with low costs and heavy competition among the different airports (Barone C., Bentivogli G., 2006). The budget airport is distributed (Baron and Bentivogli, 2006), despite critical elements in the territory: the low accessibility of airports in the south of the country, the lack of connecting roads and railway networks, the presence of interruptions significantly underutilized, and the occurrence of congestion, all call for airports of a greater size.

144

Sovereign Risk and Public-Private Partnership During the Euro Crisis

6.13.1

Regulation and competition: hub and point to point

The airport industry is divided into two segments: the supply of capacity, and the supply of services to carriers and passengers. The first includes the construction and operation of the infrastructure, the second covers the activities of assistance on the ground (so-called, handling) and commercial activities (shops, banks and so on). Handling activities are complementary to and instrumental in the provision of transport services by the carrier and constitute a specific sector of activity that fits between the aircraft and the ground infrastructure management (and includes the activities of ground handling of aircraft, passengers, baggage, cargo and mail, runway operations, cleaning and maintenance of aircraft and so on). The possibility of development of competition differs significantly between the two segments. Airport capacity (construction and operation of infrastructure) is characterized as a natural monopoly, given the minimum efficiency of scale induced by the significant fixed costs, irrecoverable (sunk costs), required for entry into the market. In this market context there are commonly two types of potential competition: competition between airports and between the number of air transport networks. Competition between airports (also known as point to point) is between direct connections between pairs of cities. The competition between networks is between different connections and is aimed at attracting transit passengers, characterizing the airport as a hub of a radial network based on indirect routes. The configuration of a monopolistic market capacity and the lack of substitutability between airports tends to give an operator significant market power in their activities. The support services on the ground do not, however, have such specific characteristics such as to justify the exclusion of competition between players, making it possible to provide competing services (within the limit of the size of the airport area). Commercial services is the sector in which it the market power of managers is historically greater, while holding monopolies in various activities (shops, businesses and so on) and as operators of such services. The industry regulatory body may be shown schematically on two levels: • The conditions for access to the market of airport management (i.e. construction of infrastructure and airports management); • Adjusting the mode of access to infrastructure (mainly through the allocation of rights to take-off and landing and fixing airport charges) and the provision of handling services and trade.

Italian Case Studies in Energy, Transport and Water Management 145

6.13.2

Access to the airport management market

The typical characteristics of a natural monopoly make the adjustment interventions determine the structure of the supply of airport capacity by establishing, through the use of grants, the number of operators authorized to operate in each geographic market. Furthermore, given the high degree of market power held by the airport operators, regulators interventions aimed at preventing such power and to ensure the adaptation capacity at its optimal level will result in excessive prices for users. In the Italian system all major Italian airports fall into case management totally, partially or directly. Total management means that the entire airport, including flight infrastructure, is entrusted to a single dealer, for a period of time that, for new concessions, shall not exceed forty years. The activities entrusted to the above management consist of, among other things, the execution of works, the ordinary and extraordinary maintenance of infrastructure (tracks, braces, aprons, terminals, offices, access roads and connections), the provision of services (supply of energy, lighting, water, heating, cooling, sewage, waste disposal, cleaning, information), the preparation of accessory structures for the convenience of users (restaurants, shops, phones). With partial management infrastructure flights remain in the state, while the concession relates to the airports and their appurtenances, and the duration of the concession is normally twenty years, based on the projections of the Navigation Code. Finally, in direct management, the CAA provides directly for the creation and maintenance of airport assets, while the ground handling is normally carried out directly by the airlines. 6.13.3

Access to infrastructure

The main service provided by the airport operators is access to infrastructure. Take-off and landing areas for aircraft are subject to availability of slots (rights of take-off, landing and parking) and the payment of airport charges related to the manager. Market power passes mainly through the control of the scarce resource (airport slots). In Italian airports, as well as in most foreign airports, slot allocation is based on the principle of the grandfather clause, i.e. on the basis of previous seasons. Airport operators are required to pay a license fee to the state (which is the main entry to ENAC) for the use of infrastructure, for which they receive income that can be divided into two categories: a. “airside” income (landing, departure and aircraft parking, passenger boarding fees, royalties for the supply of fuel);

146

Sovereign Risk and Public-Private Partnership During the Euro Crisis

b. “landside” income (revenues from commercial management, rental space and so on); handling fees may probably be considered separately, ultimately contributing to “different” corporate income (i.e. financial, equity and so on). 6.13.4

First application

The Italian airport sector is important, not only for the economic impact on Italian infrastructure companies, but also for its impact on the service concession arrangements under IFRIC 12 adoption, as shown in the example of Aeroporto di Firenze Group • Group AEROPORTO DI FIRENZE: “from the interim report at March 31, 2010, the AdF Group publishes the accounting information by applying IFRIC 12. The main effects on comparative data resulting from the retroactive application of this accounting policy are highlighted in Annex D ‘effects of the application of IFRIC 12 on the consolidated data of ADF Group’ at the end of this half-yearly consolidated financial statements, of which it is an integral part.”

6.14

Transport sector: highways

The Italian highways transport sector is very important, not only for the economic impact on Italian infrastructure companies, but also for its impact on the service concession arrangements under IFRIC 12 adoption, as shown in the next section. 6.14.1

First application

• Group AUTOSTRADE MERIDIONALI: “for Autostrade Merdionali, given the substantial lack of reliable reconstruction of historical data, it was necessary to proceed to the application perspective allowed by Interpretation.” Shows the information contained in the consolidated reports on the application mode retrospective: • Group ASTM: (early application to December 31, 2009): “as illustrated in detail in the section on ‘principles of consolidation and evaluation criteria’ of the ‘explanatory notes’, the consolidated financial statements of the Group ASTM at December 31, 2009 incorporates the

Italian Case Studies in Energy, Transport and Water Management 147

effects arising from the first application of the interpretation IFRIC 12 – service concession arrangements approved on March 25, 2009 by Regulation (EC) no 254 of the Commission of the European communities. The application of this interpretation has resulted, mainly, in the reclassification of assets for free, reversible in ‘intangible’ and the riparametrazione depreciation of these goods.” • Group SAVE: “economic and financial data contained in this document and for the comparison period have been restated following the adoption of the interpretation IFRIC 12 service concession Arrangements.” Therefore “at first adoption, the Group has applied the interpretation with retrospective method through calculation of the effects that would have had on the first January 2009 and by attributing to equity reserves such effects.” Financial and economic effects arising from the application of IFRIC 12 have been formalized through the presentation of certain financial statements of conciliation of economic assets and ante and post application of interpretation. In detail these are: “prospects of the financial position as at 1 January 2009 with evidence of the effect of the application of IFRIC 12; comparison of the consolidated financial position at December 31, 2009 with evidence of the effect of the application of IFRIC 12; comparison of separate consolidated income statement for the financial year 2009 with evidence of the effect of the application of IFRIC 12.” • Group SIAS (early application to December 31, 2009): “as illustrated in detail in the section on ‘principles of consolidation and evaluation criteria’ of the ‘explanatory notes’, the Group’s consolidated balance sheet at December 31, 2009 SIAS incorporates the effects arising from the first application of the interpretation IFRIC 12 – service concession arrangements approved on March 25, 2009 by Regulation (CE) no 254 of the Commission of the European communities. The application of this interpretation has resulted, mainly, in the reclassification of assets for free, reversible in ‘intangible’ and the parameter setting depreciation of these goods. In order to allow the comparison of data, you have to restate the values relating to the financial year 2008.” 6.14.2

A typical example: SIAS

SIAS S.p.A. is the acronym for Highway Initiatives and Services Company, which is part of the Argo Group. It is a holding company that operates in the field of motorways and, through its subsidiaries (AdF S.p.A; Autocamionale della Cisa S.p.A; Salt S.p.A.), controls about 500 miles of the Italian motorway network in the Liguria, Tuscany, Emilia-Romagna,

148

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Lombardy, Piedmont and Valle d’Aosta regions. Through the ASTM S.p.A (and from 6 July 2007 through HPVDA S.p.A), a related company from which SIAS S.p.A. split in February 2002, the holding company which includes both head. This makes it, de facto, the second financial operator within the Italian Argo in this field in order of magnitude, only after Argo Group. Consolidation principles and evaluation criteria applied are similar to those used for the preparation of the consolidated financial statements on 31 December 2008, except for the early application of the interpretation of IFRIC 12, service concession arrangements (published by IFRIC on 30 November 2006 and approved on 25 March 2009 with Regulation No 254 of the EU Commission). SIAS group application of IFRIC 12 was mandatory from 1 January 2010. However, having completed the process of renewal of the conventions for the concessionary companies in the group in 2009, the company – in the presence of a reference defined framework – felt it more appropriate to apply this interpretation with effect from 2009. The consolidated financial statements included, in addition to the budget of the SIAS, the balance sheets of companies over which it exercised control, properly adjusted and reclassified in order to make them compatible with the editorial norms laid down by the international accounting standards (IAS/IFRS). Control existed when the Group – directly or indirectly – held more than 50 per cent of the voting rights or had the power to determine the financial and operating policies of the company. The financial statements of subsidiaries were included in the consolidated financial statements with effect from the date on which it took control until the moment in which such control ceased to exist. Those companies controlled in conjunction with thirdparty partners, and on the basis of agreements with them, were consolidated by the proportional method, while those over which a ‘significant influence’ on the financial and operating policies was exercised were evaluated with the ‘equity method’. It should be noted, moreover, that the subsidiary RITES S.C.A.R.L. was evaluated with the ‘equity method’ as not relevant. Its consolidation would not have produced a significant effect on the consolidated financial statements.

6.15

Water sector: regulation analysis

The implementation of adequate incentive regulation is one of the key issues addressed by economic literature on public utilities. In general, the cornerstone of high-power incentive schemes is to set a discontinuity between the tariffs that a company can charge to end users and

Italian Case Studies in Energy, Transport and Water Management 149

its own costs. The efficacy of these regulatory schemes depends on the capacity of the regulators to predict a company’s costs (Abrate, Erbetta, Fraquelli, 2011). In a seminal paper, Shleifer argued that “the regulator uses the costs of comparable firms to infer a firm’s attainable cost level” (Shleifer, 1985, p. 320). However, incentive regulation is usually affected by considerable information asymmetries between regulators (represented by local authorities in the Italian water and sewerage industry) and firm managers, which prevents the former from having full information on the firm’s optimal costs and therefore from setting prices consistently. Furthermore, by operating in different environments, equally efficient firms may have different unit costs. Controlling for sources of heterogeneity is thus of primary importance when comparing efficiency levels, especially in natural monopolistic industries such as the water and sewerage sector. Identifying a regulatory model that is able to take into account firm heterogeneity seems to be an important issue in the water industry (Sawkins, 1995). The organization and, consequently, the treatment of firm specificities are however very different across countries. In the UK, for instance, following privatization in 1989 OFWAT (the water and sewerage industry regulator), introduced a price-cap regime whereby price reviews are defined in a flexible way by applying minimum efficiency improvement rates for each company claiming to be consistent with the operating environment (OFWAT 1999, 2004; Abrate, Erbetta, Fraquelli, 2011). The Italian Public Utility sector has lately become very complex due to the steady growth of legislation and European regulations (Ricci, Landi, 2009, 2010, 2011). Before such reforms, some public utilities (from now on PUs) have been provided by State-owned organizations with the status of ‘Azienda Municipalizzata’ (or Municipal Company), an autonomous organization created by a Government Decree, with a Board of Directors appointed by the owner (often the municipalities). Governments are responsible to take care of specific public services considered as merit goods because defined, from a social, economic and political point of view, as services of collective interest. It has never been easy to define public services as Pus (technical term) in order to apply Italian and European legislation to some specific cases. According to the article 112 of Decree n. 267/2000 (TUEL), local authorities, within their respective powers, ensure the affordability of public services (Universal Service) pursuing the following specific aim: the production of goods and services designed to

150 Sovereign Risk and Public-Private Partnership During the Euro Crisis

achieve social purposes and to promote economic development and civil growth (from Universal Service to Local Public Utility). The Italian legislation doesn’t give a particularly exhaustive definition of Public Utilities (PUs), while it highlights only the aspects mentioned below: a. PUs are activities in which the owner is a public subject such as local authorities (municipalities, metropolitan cities and Unions of Municipalities); b. the definition of PUs depends on the object (production of public goods and services) and on the public function achieved (promoting economic development and civil growth). In this way, the identification by local authorities of various productions and activities that can be qualified as PUs is uncertain, only responding to constraints and effective needs required by communities served. Taking into account the European regulation, the Italian legislator usually distinguishes regulation on economic public services and regulation on non economic public services. The only criterion able to distinguish economic and non-economic services is the presence or the absence of a relevant market of a profit target. The current debate about the definition of public services is in the agenda of the European and national legislators because it is necessary to define different grades of responsibility for each level of government. (Ricci, Landi, 2012) 6.15.1

Legislative reform

Robust legislative reform was issued on November 2009 with law n. 166, article 15 (adjustment to community guidelines in local utility economic services). While the law defined the rule (open selection), there is an exception to it, under article 3 of ‘rules for the enforcement of the law’: it allows for the awarding of public supply contracts to municipal companies, respecting the above-mentioned ‘in-house providing’ principles when, by market analysis, it emerges that private entities are not suitable and not able to provide public services in accordance with the community’s needs” (Ricci, Landi, 2012). 6.15.2

First application

The water sector in Italy is very important not only for its economic impact on Italian infrastructure companies, but also for its heavy impact on citizens and the served community; the service concession arrangements under IFRIC 12 adoption, are as outlined below:

Italian Case Studies in Energy, Transport and Water Management 151

• Group Acque Potabili: “in the balance sheet at June 30, 2009 and to compare with December 31, 2009, the net book value of infrastructure relating to concession agreements in accordance with IFRIC 12 was redesignated from the item property, plant and equipment owned under other intangible assets-property, plant and equipment under concession.” • Group Mediterranea delle Acque: “The group, in view of the impossibility of making a reliable reconstruction of historical data, proceeded to the prospective application of IFRIC 12. For the purposes of disclosure of intangible assets the existing book values at the beginning of the first exercises presented were therefore used (January 1, 2009).”

6.16 Appendix 6.1: effect on consolidated equity and on net result Effect on consolidated equity According to the restatement of the consolidated financial position up to 1 January 2009, 30 June 2009 or, alternatively, to 31 December 2009 you can quantify (value and percentage) the effect on the consolidated net equity which is derived from the application of the interpretation of IFRIC 12 to each of the above reference dates. As can be seen from Table 6.5 the effect on shareholders’ equity resulting from the application of the interpretation IFRIC 12 is due, depending on the case, more to a decrease than to an increase in consolidated shareholders’ equity. You can, however, note that in percentage terms the change in shareholders ‘ equity resulting from the application of IFRIC 12 is included in a range whose upper and lower ends are equal respectively to -2.3 per cent and +4.4 per cent, which is equivalent to the Florence airport group. Effect on the consolidated net result According to the restatement of the consolidated income statement at 30 June 2009 and 31 December 2009 or, alternatively, to 30 June 2009 you can quantify (value and percentage) the effect on the consolidated net result that is derived from the application of the interpretation of IFRIC 12 to each of the above reference dates. As can be seen from Table 6.5 the effect on the consolidated net result arising from the application of the interpretation of IFRIC 12 is due, depending on the case, as much to a decrease as to an increase in consolidated net income. In particular, you can see that in percentage terms the

152 Sovereign Risk and Public-Private Partnership During the Euro Crisis Table 6.5

IFRIC 12 effect on consolidated net result (€/mil) 30.06.09

Name

Ante IFRIC 12

Acea 59 Aeroporto di 1 firenze Autostrada 69 TO – MI Enel 3.974 Enia 23 Ferrovie Nord 7 Milano (FNM) Save 2 SIAS 68 Terna 220

Effect

Post IFRIC 12

Value

58 1

31.12.09(*)

Effect

%

Ante IFRIC 12

Post IFRIC 12

Value

%

(1) (0)

(1,0) (4,7)

n.d. 3

n.d 3

n.d (0)

n.d (2,2)

75

5

7,3

88

87(*)

(1)

(1,0)

3.974 23 7

0 0 0

0,0 0,0 0,0

n.d. n.d. n.d.

n.d n.d n.d

n.d n.d n.d

n.d n.d n.d

3 73 220

1 5 0

30,0 7,4 0,0

18 93 771

19 92 771

1 (1) 0

3,9 (0,9) 0,0

Note: * prior to the 31 December 2009 application for ASTM and SIAS (therefore profit 31 December 2008); n.d.= not available.

variation of consolidated net income as a result of the application of IFRIC 12 is included in a range whose upper and lower ends are equal respectively to –4.7 per cent and +30.0 per cent, which is equivalent to the consolidated net result at 30 June 2009 of FLORENCE AIRPORT and SAVE. With reference to groups that have adopted the accounting model of financial activity, including FERROVIE NORD whose abbreviated half-yearly consolidated financials on 30 June 2010 declares that “in particular, as provided by IFRIC 12, the financial asset model is applicable to the present case because the FERROVIE NORD operator has the unconditional right to receive cash flows that are contractually guaranteed by the guarantor of the investment subject – Regione Lombardia – irrespective of actual use of rail infrastructure. These cash flows are costs incurred for contract management. Consequently, the operator must include in their activities the infrastructure or, more generally, the well-financed, but must include in income for the year the costs related to the investment made in accordance with IAS 11. The share of such contributions not yet encased at the balance sheet date is inscribed on the short-term financial credits. As a result, as highlighted at the bottom of the income statement overview consolidated total, entries were detected as contributions to funded and investment costs for investments financed with restatement of beginning of comparative

Italian Case Studies in Energy, Transport and Water Management 153

data for the first half of 2009 for matching amounts determined in accordance with IAS 11; the application of the principle has not then resulted in changes to the value of the result for the first half of 2009, resulting from the approved interim reporting, nor to the result for the first half of 2010, where, even with reference to that period, had been applied the criteria of detection of activities financed adopted in the financial information published with respect to exercises prior to entry into force of IFRIC 12. The share of such contributions not yet encased at the balance sheet date is inscribed on the financial credits. In accordance with the interpretation IFRIC 12, revertible for free goods, are accounted and classified as intangible assets.

6.17

Appendix 6.2: typical case studies

Transport Airport Florence Airport Industry: “Service for several airlines that have operated in the Florence airport in the period under review, including: Air Berlin, Air France, Alitalia (Compagnia Aerea Italian), Austrian Airlines, Belle Air, Brussels Airlines, Carpatair, Darwin Baboo, Eurolot, Lufthansa, Meridiana, Fly Niki, Vueling and Swiss”. Shareholders: Tuscany Region has a market share of five per cent; 2i Fund (funds for Italian SGR S.p.A. Infrastructures) has an amount equal to 33.402 per cent; Ente CRF 17.55 per cent; CIAA Florence15.46 per cent; SOGIM S.p.A. 15.33 per cent: 9.05 per cent the market. Audit firm: BDO S.p.A. Supervisory bodies: – Board of Directors; – Administrator responsible for the system of internal control and risk management; – Audit Committee and risks; – Supervisory Body pursuant to Legislative Decree no. 231/2001; – Manager in charge of preparing the corporate accounting documents; – Head of the Internal Audit Department; – Board of Statutory Auditors; – Independent Auditors.

154

Sovereign Risk and Public-Private Partnership During the Euro Crisis

In accordance with IFRIC 12, “and corresponds to the costs for construction services related to assets under concession and accounted for in accordance with IAS 11, intangible assets on the basis of the progress of the works and which the Group does not control. Gemina Industry: “the construction and operation of airports or any part thereof, as well as the exercise of any activity connected with or complementary to the air traffic of any type or specialty. This object is achieved according to a report released by grant from the National Authority for Civil Aviation (ENAC). Shareholders: 35.93 per cent Line S.p.A.; 12.83 per cent Silvano Toti holding; 14.27 per cent market; 2.048 per cent Assicurazioni Generali S.p.A.; 3.055 per cent UBS AG; 3.198 per cent Unicredit S.p.A., 3.415 per cent Fondiaria Sai S.p.A.; 4.185 per cent Worldwide United; Changi Airport Group, 8.359 per cent. Audit firm: Deloitte & Touche S.p.A. Supervisory bodies: – Board of Directors; – Administrator responsible for the system of internal control and risk management; – Audit Committee and risks; – Supervisory Body pursuant to Legislative Decree no. 231/2001; – Manager in charge of preparing the corporate accounting documents; – Head of the Internal Audit Department; – Board of Statutory Auditors; – Independent Auditors. IFRIC 12 “The item ‘Grant Airport – investments in infrastructure’, in accordance with IFRIC 12, includes the value of construction services and improvements made by the Group, are intended to be handed over to the grantor at the end of the concession”. SAT Industry: “SAT, scope to minimize the risk of concentration of traffic on certain carriers, furthermore, albeit in the context of the air transport sector is characterized by processes of integration and fusion vectors, a strategy of diversification of the airlines operating in the Galileo Galilei”.

Italian Case Studies in Energy, Transport and Water Management 155

Shareholders: 16.9 per cent Tuscany Region; 15.31 per cent Finatan S.p.A.; 9.27 per cent Province of Pisa; 8.62 per cent Pisa Foundation; 8.45 per cent Town of Pisa; 17.17 per cent the market. Audit firm: Deloitte & Touche S.p.A. Supervisory bodies: – Board of Directors; – Administrator responsible for the system of internal control and risk management; – Audit Committee and risks; – Supervisory Body pursuant to Legislative Decree no. 231/2001; – Manager in charge of preparing the corporate accounting documents; – Head of the Internal Audit Department; – Board of Statutory Auditors; – Independent Auditors. IFRIC 12 “As described above, according to the dictates introduced by IFRIC 12, the dealer is not eligible to enrol in its financial statements the infrastructure as property, plant and equipment; the accounting treatment of operations that are performed on the infrastructure assumes different importance depending on their nature, in particular, they are divided into two categories: – Interventions related to normal maintenance of the infrastructure; – Replacement surgery and scheduled maintenance at a future date infrastructure. The first relates to the normal routine maintenance on the infrastructure that is recognized in the income statement when incurred in adoption of IFRIC 12”. SAVE Industry: “airport management, infrastructure, food and beverage and retail” Shareholders: Amministrazione Provinciale di Venezia 9.56 per cent; 15.03 per cent Amber Capital L; Banca Popolare di Vicenza 2.44 per cent; 2.93 per cent KAIROS; 46.68 per cent Finanziaria Internazionale Holding S.p.A.; 2.09 per cent Municipality of Treviso; 2.16 per cent Foundation Of Venice; 2.01 per cent SAVE S.p.A.; 26.66 per cent the market. Audit firm: Ernst & Young S.p.A.

156

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Supervisory bodies: – Board of Directors; – Administrator responsible for the system of internal control and risk management; – Audit Committee and risks; – Supervisory Body pursuant to Legislative Decree no. 231/2001; – Manager in charge of preparing the corporate accounting documents; – Head of the Internal Audit Department; – Board of Statutory Auditors; – Independent Auditors. The elements that unite these companies relate to the granting of airport services and related services. In the table on next page, we show the value of intangible asset, of Service Concession Arrangements, share capital, liabilities, and Total assets (distinguished in current and non current assets), for the Italian listed companies as Aeroporto Firenze, Gemina, Sat, Save.” Railways FERROVIE NORD Industry: “The FNM Group is the second largest Italian railway operator with companies operating in the areas of public transport, including road, railway engineering, services and important diversification in the sectors of information technology, energy and sustainable mobility”. Shareholders: AURELIA S.R.L. 3.07 per cent; Ferrovie Dello Stato 14.74 per cent; 57.57 per cent Lombardy Region; market 24.62 per cent. Audit firm: Deloitte & Touche S.p.A. Supervisory bodies: ● ●

● ● ●

● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

Intangible Assets

Name 2012 2012 2012 2012 2012 2012 2012

Name

AEROPORTO FIRENZE AEROPORTO FIRENZE GEMINA GEMINA SAT SAVE SAVE

Share Capital

2012 AEROPORTO 9,035,000 FIRENZE 2012 AEROPORTO 9,035,000 FIRENZE 2012 GEMINA 1,472,960,000 2012 GEMINA 1,472,960,000 2012 SAT 16,269,000 2012 SAVE 35,971,000 2012 SAVE 35,971,000

(A.I.) Service concession arrangements

64,930,000

Financial Assets

Current Assets

Non-current Assets

Total Assets

6,370,000

16,184,000

75,580,000

91,764,000

64,930,000

64,631,000

1,752,000

16,184,000

75,580,000

91,764,000

3,216,127,000

3,216,127,000

70,264,337 5,293,000 908,000

67,661,919

2,257,000 110,000 4,470,052 9,300,000 49,970,000

643,381,000 18,619,000 27,783,128 137,481,000 106,813,000

3,400,253,000 1,843,984,000 98,089,135 522,517,000 300,911,000

4,043,634,000 1,862,603,000 125,872,263 660,308,000 407,724,000

Provisions for contractual obligaProvisions tions

Retained

Profit / Loss

Equity

29,023,000

3,296,000

41,354,000

6,224,000

29,627,000

2,692,000

41,354,000

6,224,000

127,930,000 193,721,000 1,794,611,000 330,329,000 4,252,000 1,799,037,000 39,520,913 6,352,792 62,142,705 252,972,000 31,751,000 320,694,000 191,064,000 23,566,000 250,601,000

268,420,000 223,930 98,089,135 22,629,000 19,934,000

4,543,000

Current Liabilities

Non-current Liabilities

Total Liabilities

Total Liabilities and Equity

32,771,000

17,639,000

50,410,000

91,764,000

32,771,000

17,639,000

50,410,000

91,764,000

1,025,856,000 1,223,167,000 2,249,023,000 4,043,634,000 12,791,000 50,775,000 1,811,828,000 1,862,603,000 30,259,478 33,470,080 63,729,558 125,872,263 176,302,000 136,344,000 312,931,000 660,308,000 72,335,000 84,788,000 157,123,000 407,724,000

158 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Total revenue

Name 2012c AEROPORTO FIRENZE 2012s AEROPORTO FIRENZE 2012c GEMINA 2012s GEMINA 2012c SAT 2012c SAVE 2012s SAVE

Total Service Depreciation concession and arrangements Amortization Financial costs revenue intangibles

49,784,000 48,246,000 561,480,000 767,000 70,264,337 352,499,000 107,940,000

4,213,000

18,206,000

2,408,280 13,103,000 5,232,000

Profit/ Loss

831,000

3,296,000

831,000

2,692,000

73,672,000 203,986,000 2,554,000 4,252,000 933,564 6,352,792 31,751,000 23,566,000

IFRIC 12 “In particular, in accordance with IFRIC 12, the financial asset model is applicable to this case because FERROVIENORD operator has an unconditional right to receive cash flows contractually guaranteed by the guarantor of the investment – i.e. Lombardy Region – regardless of the actual use of the railway infrastructure. Such cash flows correspond to the costs incurred in administering the contract.” In the table on next page, we show the value of intangible asset, of Service Concession Arrangements, share capital, liabilities, and Total assets (distinguished in current and non current assets), for the Italian listed company Ferrovie Nord Milano. Motorways Astaldi S.p.A. Industry: “its areas of interest are the transport infrastructure (highways, railways, airport, subways, ports), energy production plants, civil construction and industrial management under concession of car parks, hospitals” (Astaldi source site). Shareholders, the shareholding structure is as follows: FIN.AST S.r.l 40.2 per cent; Finetupar International S.A. 12.99 per cent; Odin Forvaltning AS 4.906 per cent; Pictet Asset Management Ltd 2.104 per cent; the market share turns out to be 39.80 per cent. Audit firm: KPMG Atlantia Industry: “Atlantia is located between the best performers in the transport sector, as the first management company of highway infrastructure”.

(A.I.) Service Intangible concession Assets arrangements

Name 2012 c FERROVIE NORD MILANO 2012 s FERROVIE NORD MILANO

Name

Share Capital

4,473,000 2,837,523

Retained

Profit / Loss

Financial Assets 26,107,000 68,575,644

230,000,000 52,878,000 24,060,000 306,938,000 20,001,000

2012 s FERROVIE NORD MILANO

230,000,000 43,486,129 13,735,366 287,221,495

2012 s

Current Assets

Non-current Assets

Total Assets

261,050,000

261,050,000

325,883,000 278,697,574

602,952,000 451,140,188

Other Provisions Provisions

Equity

2012 c FERROVIE NORD MILANO

2012 c

Financial Assets SCA

933,464

600,000

current Liabilities

Non-current Liabilities

Total Liabilities

Total Liabilities and Equity

194,132,000 101,882,000

296,014,000 602,952,000

128,653,621

163,918,693 451,140,188

35,265,072

Name

Total revenue

Finance costs Profit / Loss

FERROVIE NORD MILANO FERROVIE NORD MILANO

327,526,000

1,521,000

24,060,000

52,675,918

1,848,214

13,735,366

160

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Shareholders: Sintonia 48.42 per cent; 6.32 per cent the CRT Foundation; 5.02 per cent Blackrock; 2.06 per cent Lazard; the market holds 38.19 per cent. Audit firm: Deloitte & Touche S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

Consistent with the accounting model adopted, according to the application of the interpretation accounting IFRIC 12, “these revenues, which represent the consideration for the activity carried out, are measured at fair value, is determined on the basis of total costs and represents the operational costs and financial expenses”. Autostrade Meridionali Industry: “The Company has identified a single operating segment in which it operates, represented by the construction and management of motorways assigned by the concession”. Shareholders: Autostrade per L’Italia S.p.A. 58.98 per cent; Provincia di Napoli 5 per cent; De Concilis Riccardo at 2.62 per cent; the market holds 33.4 per cent. Audit firm: KPMG Supervisory bodies: ● ●

● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department;

Italian Case Studies in Energy, Transport and Water Management 161 ● ●

Board of Statutory Auditors; Independent Auditors.

Autostrade To-MI Industry: The group’s activity is divided into six main areas: • Motorway sector (operational management) • Motorway sector (design and construction) • Construction sector • Engineering sector • Technology sector • Service sector Shareholders: Lazard Asset Management 9.98 per cent; 4.96 per cent Generali Assicurazioni; Aurelia S.r.l. 51 per cent; ASTM S.p.A. 2.87 per cent; 31.19 per cent the market. Audit firm: Deloitte & Touche S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

in accordance with the financial model of IFRIC 12, between the financial instruments, in fact, grants, IFRIC 12, a right to obtain a predetermined amount (financial asset) in respect to the costs incurred for the construction of the works. Impregilo Industry: “The Company’s purpose: the building, on its own behalf and for third parties, road works, port, hydraulic and hydropower, construction, rail, and in general any civil engineering construction in Italy and abroad. The company can undertake and perform all the operations for business, commercial, industrial and financial, securities and real estate deemed necessary and useful for the success of the company, including research, design and consulting services in areas where the company

162

Sovereign Risk and Public-Private Partnership During the Euro Crisis

operates. It will take, directly or indirectly, stakes or shares in other companies or businesses that are similar or related or connected to its own. Shareholders: Salini S.p.A. 89.76 per cent; 10.24 per cent the market. Audit firm: PricewaterhouseCoopers S.p.A. IFRIC 12: “Rights of concession infrastructure are dealt with in IFRIC 12, service concession arrangements, which governs the recognition and measurement of concession contracts between a public sector and private enterprise. This document was approved by the European Commission Regulation EC no. 254/2009 dated 25 March 25 2009 and is compulsorily applicable to the financial statements prepared in accordance with international accounting standards, the exercise of which commenced after that approval. Therefore, the Impregilo Group applied IFRIC 12 from 2010”. SIAS Industry: the primary sector of business of the group is the management of licensed motorways. Shareholders: Lazard Asset Management LLC 5.05 per cent; Generali Assicurazioni S.p.A. 3.63 per cent; Aurelia S.R.L. 73.45 per cent; 17.87 per cent the market. Audit firm: Deloitte & Touche S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

In the table below, we show the value of costs, revenues, profit/loss, depreciation and amortization of intangibles assets for the Italian listed companies as Astaldi, Autostrade Meridionali, Autostrada TO-MI, Impregilo, SIAS Ferrovie Nord Milano.

Name 2012 c 2012s 2012 c 2012s 2012c

ASTALDI ASTALDI ATLANTIA ATLANTIA AUTOSTRADE MERIDIONALI 2012s AUTOSTRADE MERIDIONALI 2012c AUTOSTRADA TO-MI 2012s AUTOSTRADA TO-MI 2012 c IMPREGILO 2012s IMPREGILO 2012 c SIAS 2012s SIAS

Intangible Assets (A.I.)

(A.I.) Service concession arrangements

Financial Assets

Financial Assets -SCA

Current Assets

107,523,000 193,448,000 2,919,417,000 8,215,240 119,481,868 98,307,754 2,443,367,108 20,996,841,000 16,572,730,000 1,933,979,000 1,037,731,000 5,184,986,000 233,000 10,086,939,000 739,289,000

3,000 3,426,856,000 3,360,372,000

46,861,000 32,941,195 –

12,818,000

Non-current Assets

Total Assets

829,074,000 2,919,417,000 680,538,991 3,123,906,100 25,196,637,000 30,381,623,000 16,113,095,000 16,852,384,000

27,000

378,875,000

17,408,000

396,283,000

1,052,549,000

1,420,903,000

4,701,120,000

6,122,023,000

1,782,007,000

5,631,000

1,790,591,000

1,809,764,000

16,335,000 4,959,874

3,721,476,000 2,198,691,221

614,076,000 778,060,352

4,643,140,000 2,976,751,573

2,820,048,000

149,504,000

2,820,220,000

3,403,982,000

Name 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s

ASTALDI ASTALDI ATLANTIA ATLANTIA AUTOSTRADE MERIDIONALI AUTOSTRADE MERIDIONALI AUTOSTRADA TO-MI AUTOSTRADA TO-MI IMPREGILO IMPREGILO SIAS SIAS

Provisions for contractual obligations

Current Liabilities

Noncurrent Liabilities

Total Liabilities

Total Liabilities and Equity

2,432,348,000 2,039,260,644 3,937,453,000 367,420,000

761,588,000 616,266,197 20,995,915,000 9,948,426,000

3,193,936,000 2,655,526,841 24,933,368,000 10,315,846,000

3,748,491,000 3,123,906,100 30,381,623,000 16,852,384,000

Share Capital

Retained earnings

Profit / Loss

Equity

Provisions

196,850,000 196,849,800 661,828,000 661,828,000

236,826,000 226,115,112 3,956,851,000 5,342,098,000

73,949,000 45,414,347 829,576,000 532,612,000

507,625,000 468,379,259 5,448,255,000 6,536,538,000

28,578,000 85,471,768 29,253,000

9,056,000

97,823,000

246,000

106,633,000

6,524,000

283,126,000

6,524,000

289,650,000

396,283,000

42,324,000

1,921,315,000

377,709,000

2,341,348,000

234,808,000

1,037,246,000

2,743,429,000

3,780,675,000

6,122,023,000

42,328,000

1,524,104,000

79,276,000

1,645,708,000

1,541,000

162,507,000

1,549,000

164,056,000

1,809,764,000

718,364,000 718,364,457

484,442,000 225,312,820

602,999,000 738,605,866

1,805,805,000 1,682,283,143

98,285,000 253,477,053

2,337,091,000 813,162,965

500,244,000 481,305,465

2,837,335,000 1,294,468,430

4,643,140,000 2,976,751,573

113,751,000

1,597,685,000

446,250,000

2,157,686,000

5,674,000

144,097,000

1,102,199,000

1,246,296,000

3,403,982,000

975,706,000

Italian Case Studies in Energy, Transport and Water Management 165

Name 2012c 2012s 2012c 2012s 2012c 2012s 2012c 2012s 2012c 2012s 2012c 2012 s

ASTALDI ASTALDI ATLANTIA ATLANTIA AUTOSTRADE MERIDIONALI AUTOSTRADE MERIDIONALI AUTOSTRADA TO-MI AUTOSTRADA TO-MI IMPREGILO IMPREGILO SIAS SIAS

Depreciation and Amortization Intangibles

Finance costs

Profit / Loss

2,456,897,000 1,897,750,014 5,101,249,000 801,000

559,817,000 2,000

163,681,000 179,328,896 147,168,000 562,546,000

73,949,000 45,414,347 829,576,000 532,612,000

123,182,000

13,908,000

7,492,000

246,000

109,102,000

377,709,000

Total revenue

1,294,029,000 85,834,000 2,280,991,000 1,367,003,653

79,276,000 75,032,000 39,145,798

602,999,000 738,605,866

40,622,000

446,250,000

“According to the financial model of IFRIC 12, between the financial instruments, grants IFRIC 12 to constitute a right to obtain a predetermined sum (financial asset) in respect of costs incurred for the construction of the works”.

Energy Gas ACSM AGAM Industry: “The ACSM AGAM Group also operates in the sale of natural gas and electricity, gas distribution, water management, energy management and heat, district heating, waste collection and transport”. Shareholders: Municipality of Como holds 24.71 per cent; 29.12 per cent is held by the city of Monza; 21.93 per cent belongs to A2A S.p.A.; 24.24 per cent to the market. Audit firm: Ernst & Young S.p.A. Supervisory bodies: ● ●

● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents;

166 ● ● ●

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

ACEA Industry: “Acea Energia Holding S.p.A. handles the purchase and sale – in any form – of electricity, heat, gas and other fuels or energy carriers for domestic and foreign markets”. References to Financial Statements for IFRIC 12: concessions are related to water services and public lighting. Shareholders: The share capital is made up as follows: 51 per cent is owned by the Municipality of Rome; 12 per cent by GDF Suez SA; 15 per cent by the Caltagirone Group; 22 per cent by the market. Audit firm: Ernst & Young S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

The total investments up to 31 December 2010 relating to the service itself resulted from the application of IFRIC 12 with the financial method, prepayments and accrued income. Ascopiave Industry: “The Ascopiave Group operates primarily in the areas of distribution and sale of natural gas as well as in other areas related to the core business, such as the sale of electricity, heat management and cogeneration”. References to financial statements for IFRIC 12: The Group currently holds concessions and direct contracts for the management of gas distribution in about 200 municipalities, exerting a distribution network that stretches over 8,000 kilometres and providing services to a customer base of over one million inhabitants. Shareholders: the shareholders of Ascopiave can be analysed as follows: Blue Flame S.R.L. holds 8.14 per cent; 61.52 per cent the Asco Holding

Italian Case Studies in Energy, Transport and Water Management 167

S.p.A.; the Veneto Region 2.09 per cent; the City of Rovigo 4.41 per cent; Ascopiave S.p.A. 5 per cent; while the remainder is on the market and is equal to 18.84 per cent. Audit firm: Ernst & Young S.p.A. “From the perspective of internal reporting, the Responsible Officer reports regularly to the Audit Committee and risks, the Board of Statutory Auditors and the Supervisory Board as to the manner of carrying out the process of evaluation of the system of internal control and risk management as well as the results of assessments carried out in support of the claims or statements”. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

SNAM Industry: “SNAM oversees regulated activities in the gas sector and is a major player in Europe in terms of invested capital for regulatory purposes in their field (RAB). As an integrated operator, present in the transportation and dispatching of natural gas, the condensation of liquefied natural gas storage and distribution of natural gas, plays a leading role in the system of natural gas infrastructure”. Shareholders: CDP Networks S.R.L. 30 per cent; ENI S.p.A. 20.23 per cent; 0.09 per cent SNAM S.p.A.; 49.68 per cent the market Audit firm: Ernst & Young S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

Intangible Assets

Name 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s

Name

ACSM –AGAM ACSM -AGAM ACEA ACEA ASCOPIAVE ASCOPIAVE SNAM RETEGAS SNAM RETEGAS

Share Capital

(A.I.) Service concession

Financial Assets

184,279,000 184,279,000 2,066,439,000 1,730,591,000 334,827,000

Retained earnings

Profit / Loss

289,678,000 289,678,000

436,337,000 436,337,000

24,723,000

415,151,000

520,808,000

935,959,000

7,609,004,079

2,480,000,000 3,609,026,041

Equity

76,619,000

74,274,000

7,757,000

158,650,000

2012 s ACSM -AGAM

76,619,000

80,629,000

1,402,000

158,650,000

1,098,899,000

156,127,000

77,383,000 1,332,409,000

234,412,000

128,812,000

25,595,000

ACEA ACEA ASCOPIAVE ASCOPIAVE SNAM RETEGAS SNAM RETEGAS

Total Assets

146,659,000 146,659,000 2,316,450,000

2012 c ACSM –AGAM

2012 c 2012 s 2012 c 2012 s 2012 c 2012 s

Non-current Assets

3,709,000 3,709,000 32,959,000

984,000

4,593,000,000 9,065,823

Current Assets

388,819,000

3,571,000,000 1,580,000,000 779,000,000 5,930,000,000 3,571,000,000 2,617,535,242 389,532,575 6,578,255,811

Provisions

Other Provisions 6,875,000

272,401,000 11,218,000

20,081,000,000 22,584,000,000 15,526,346,279 19,135,372,320

Current Liabilities

Non-current Liabilities

Total Liabilities

Total Liabilities and Equity

178,159,000

178,159,000

436,337,000

594,987,000

178,159,000

99,528,000

277,687,000

436,337,000

2,519,739,000

2,965,188,000

5,484,927,000

6,818,680,000

94,155,000

452,986,000

935,959,000

757,000,000 2,384,000,000 14,262,000,000 16,654,000,000 22,584,000,000 3,333,430 757,000,000 584,817,061 11,972,299,448 12,557,116,509 19,135,372,320

Italian Case Studies in Energy, Transport and Water Management 169

Name 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c

Total revenue

ACSM -AGAM 262,282,000 ACSM -AGAM 262,282,000 ACEA 3,591,922,000 ACEA ASCOPIAVE 1,078,038,000 ASCOPIAVE SNAM 3,946,000,000 RETEGAS 2012 s SNAM 184,458,971 RETEGAS

Depreciation and Amortization

Finance costs 2,488,000

Profit / Loss

120,554,000

7,757,000 1,402,000 77,383,000

9,075,000

25,595,000

21,491,000

397,000,000 779,000,000 2,000,000

233,379,850 389,532,575

In tables on page 168 and 169, we show the value of costs, revenues, profit/loss, depreciation and amortization of intangibles assets for the Italian listed companies as ACSM-AGAM, ACEA, ASCOPIAVE, SNAM RETEGAS. Electricity A2A Industry: “A2A mainly operates in the following sectors: ● ● ●

●

●

the production, sale and distribution of electricity; the sale and distribution of gas; the production, distribution and sale of heat through district heating networks; waste management (from collection to disposal and street cleaning) and in the implementation, management and making available to other operators equipment and integrated systems for the disposal of waste; the management of the integrated water cycle.” (General information on the A2A Group)

Shareholders: 27.50 per cent Municipality of Milan: Municipality of Brescia 27.5 per cent; Carlo Tassara 2.5 per cent; Alpiq Holding 5 per cent; 37.5 per cent to the market. Audit firm: PricewaterhouseCoopers S.p.A. EDISON Industry: “The referenced sector is mainly focused on electricity even though it is expanding its investment in hydrocarbons”. Shareholders: Transalpina di Energia S.r.l. 80.14 per cent; 19.35 per cent MNTC Holding S.r.l.; 0.51 per cent to the market.

170 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Audit firm: Deloitte & Touche S.p.A. Supervisory bodies: there is no reference to a Code of Conduct ENEL Industry: Electricity Shareholders: ME Italian Economic Ministry 31.2 per cent; 40.5 per cent to institutional investors; market 28.3 per cent. Audit firm: Ernst & Young S.p.A. Terna Industry: “Terna is the largest independent network operator for electricity transmission (transmission system operator, TSO) in Europe and sixth in the world in terms of kilometers of lines managed”. Shareholders: Minozzi Romano 5.35 per cent; Cassa Depositi e Prestiti 29.99 per cent; the market 64.66 per cent. Audit firm: PricewaterhouseCoopers S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

“The parent company, with the assistance of external consultants, conducted a thorough study of the applicability of IFRIC 12 and the effects of its adoption in their financial statements, which showed that the interpretation does not apply to the granting of the Parent Company; the part concerning the activities of transmission, since neither the concession nor the law provides that the return to public ownership of the NTG, even with payment of compensation, to become its owner. Based on the foregoing, the public entity does not control, through ownership, beneficial ownership or other rights, any significant residual interest in the RTN at the end of the concession period”. Terna is the largest independent network operator for electricity transmission (Transmission System Operator – TSO) in Europe and sixth in the world in terms of kilometres of lines managed. The Terna Group is the owner of the Italian National Transmission Grid (NTG), with more

Italian Case Studies in Energy, Transport and Water Management 171

than 57.4 thousand km of high-voltage lines (more than 63.4 thousand km of triads), 468 transformer stations and 22 lines of interconnection with neighbouring countries. In Italy, Terna exercises the role of TSO under government licence. It is responsible for the transmission and dispatching of electricity on very high-voltage lines throughout the country. Terna is also responsible for planning, implementation and maintenance of the network. The constituent elements of Terna’s mission are: ●

● ●

●

manage the transmission of electricity in Italy, guaranteeing the safety, quality and cost effectiveness over time; ensure equal conditions of access to all network users; develop market activity and new business opportunities with the experience and technical skills gained in management of complex systems; creating value for our shareholders with a strong commitment to excellence with professional and responsible behaviour to the community, while respecting the environment in which it operates.

The Italian electricity system consists of four segments: generation, transmission, distribution and sale. In this sector, Terna is responsible for the management of the electricity system through the exercise of the high-voltage grid, maintenance of infrastructure and network development (planning and implementation). Terni Energia Industry: “operations are underway in the preparation for the development of further projects both in the energy sector, through the creation of additional photovoltaic systems, and in the environmental sector, through the possible implementation of activities in the ‘circular economy’ (material recovery) also in neighbouring countries” Shareholders: Terni Research S.p.A. 56.47 per cent; Costruzione Baldelli S.r.l. 0.69 per cent; Venturi Fabrizio 0.58 per cent; 0.26 per cent Paolo Ricci; Neri Stefano 0.29 per cent; the market 41.71 per cent. Audit firm: PricewaterhouseCoopers Supervisory bodies: ● ● ●

Board of Directors; Board of Statutory Auditors; Independent Auditors.

In the table below, we show the value of Service Concession Arrangements, the costs, the revenues, profit/loss, depreciation and amortization of intangibles assets for the Italian listed companies as A2A, EDISON, ENEL, TERNA, TERNI ENERGIA.

(A.I.) Intangible Assets Service concession arrangements (A.I)

Name 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012c

A2A A2A EDISON EDISON ENEL ENEL TERNA TERNA TERNI ENERGIA

Name 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c

A2A A2A EDISON EDISON ENEL ENEL TERNA TERNA TERNI ENERGIA

Share Capital

1,393,000 83,571,431 105,000,000 18,757,933 35,970,000 11,852,686 280,200,000 275,009,001 5,555,935

Retained earnings

2,879

Profit / Loss

Financial Assets 53,000 9,671,426 75,000,000 1,317,025,151 5,518,000 39,189,051,513 755,700,000 1,933,752,467 45,287

Equity

Provisions

1,629,000 1,986,000 82,000 3,697,000 611,000 1,629,110,744 725,217,960 183,154,840 2,537,483,544 109,515,361 5,292,000,000 1,809,000,000 86,000,000 7,187,000,000 863,000,000 5,291,700,671 597,971,125 55,986,418 5,945,658,214 746,718,926 9,403,000 41,144,000 84,899,000 53,158,000 8,648,000 9,403,357,795 13,004,618,348 3,420,002,506 25,827,978,649 35,999,882 442,200,000 1,888,500,000 463,600,000 2,794,300,000 166,900,000 442,198,240 1,693,739,250 463,233,414 2,599,170,904 121,777,188 50,529,680 8,640,338 6,880,120 48,769,462

Financial Assets-SCA

3,435

Other Provisions

Current Assets

Non-current Assets

Total Assets

3,235,000 1,413,343,347 5,220,000,000 5,265,555,768 38,222,000 13,904,186,094 4,500,300,000 4,452,301,931 76,181,655

8,384,000 5,891,233,207 9,652,000,000 6,920,259,097 133,117,000 41,862,037,569 10,648,700,000 10,502,371,897 90,383,374

11,945,000 7,304,576,554 14,873,000,000 12,185,814,865 171,656,000 55,766,224,663 15,149,000,000 14,954,673,828 166,565,029

Current Liabilities

Non-current Liabilities

2,479,000 5,720,000 1,200,042,094 3,567,050,916 4,708,000,000 2,978,000,000 3,517,475,580 2,722,681,071 35,363,000 83,127,000 36,000,000 7,429,959,507 22,508,286,507 2,694,600,000 9,660,100,000 2,829,105,487 9,526,397,437 76,436,776 41,358,791

Total Liabilities

Total Liabilities and Equity

8,199,000 4,767,093,010 7,686,000,000 6,240,156,651 118,498,000 29,938,246,014 12,354,700,000 12,355,502,924 117,795,567

11,945,000 7,304,576,554 14,873,000,000 12,185,814,865 171,656,000 55,766,224,663 15,149,000,000 14,954,673,828 166.565.29

Italian Case Studies in Energy, Transport and Water Management 173

Name 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c 2012 s 2012 c

Total revenue

A2A 1,928,000 A2A 461,992,132 EDISON 12,844,000,000 EDISON 7,145,016,007 ENEL 84,899,000 ENEL 334,554,499 TERNA 1,805,900,000 TERNA 1,659,819,829 TERNI ENERGIA 65,400,333

Total Service concession Depreciation arrangement and revenue Amortization

18,706

1,287,100,000

Finance costs

Profit / Loss

65,000 193,357,913 121,000,000

82,000 183,154,840 86,000,000 55,986,418 2,075,000 3,420,002,506 463,600,000 463,233,414 6,880,120

5,275,000 2,446,265,858 189,900,000 188,308,377 4,153,648

Hydrocarbons Gas Plus Industry: “The activities in which the Group operates and that constitute information for the primary sector are: ● ●

●

exploration and hydrocarbon production (E & P Business Unit); distribution and transportation of natural gas (Business Unit Network & Transportation); Supply and sale to wholesale natural gas (Business Unit Supply & Sales).

Shareholders: Findim Group S.p.A. 15.02 per cent; 73.62 per cent Usberti Davide; 2.64 per cent Plus Gas S.p.A.; 8.72 per cent the market. Audit firm: Ernst & Young S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

According to IFRIC 12, service concession arrangements, plants, distribution, subsidiaries Gas Plus, Reti S.r.l., Salty and Gas Plus S.r.l. run in concession arrangements have been reclassified as intangible assets.

174

Sovereign Risk and Public-Private Partnership During the Euro Crisis

ENI Industry: “The activities are mainly related to maintenance actions for ordinary and optimization of systems and existing fields” Shareholders: MEF 4.34 per cent; Cassa Depositi e Prestiti S.p.A. 25.76 per cent; 69.9 per cent the market Audit firm: Ernst & Young S.p.A. Supervisory bodies: ● ●

● ● ● ● ● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

In the table below, we show the value of Service Concession Arrangements, intangible assets, total and detailed assets for the Italian listed companies as ENI, GAS PLUS.

Intangible Assets

Name 2012 c 2012s 2012 c 2012s

Name 2012c 2012s 2012c 2012s

ENI ENI GAS PLUS GAS PLUS

ENI ENI GAS PLUS GAS PLUS

(Intangible Assets) of which service concession arrangements

4.487.000,00 1.155.488.351,00 380.862.000,00 1.286.625,00

Share Capital

Retained Earnings

Financial Assets 1.229.000,00 2.784.388.004,00

Profit/Loss

Equity

Current Assets

Non-current Assets

Total Assets

48.742.000,00 90.383.000,00 33.095.747.948,00 50.471.998.939,00 142.930.000,00 536.170.000,00 78.523.403,00 299.577.982,00

Provisions for risks and charges

Current liabilities

Non-current liabilities

139.641.000,00 83.583.342.223,00 679.100.000,00 378.101.385,00

Total Liabilities

Total Liabilities and Equity

4.005.000,00 50.035.000,00 8.673.000,00 62.713.000,00 13.603.000,00 33.986.000,00 42.581.000,00 76.928.000,00 139.641.000,00 4.005.358.876,00 27.493.605.225,00 9.078.358.525,00 40.577.322.626,00 4.092.543.996,00 19.614.788.180,00 23.390.663.847,00 43.006.019.597,00 83.583.342.223,00 23.353.000,00 165.450.000,00 16.378.000,00 205.181.000,00 95.519.000,00 378.400.000,00 473.919.000,00 679.100.000,00 23.353.002,00 178.325.370,00 2.267.172,00 203.945.544,00 67.016.478,00 107.139.363,00 174.155.841,00 378.101.385,00

Name 2012c 2012s 2012c 2012s

ENI ENI GAS PLUS GAS PLUS

Total Revenue 128.766.000,00 51.463.601.796,00 267.447.000,00 6.551.477,00

Total Service Concession Depreciation and Arrangement Revenue Amortization 123.000,00

8.274.000,00 4.009.964.609,00 15.961.000,00 11.648.275,00

Finance Costs 8.673.000,00 9.078.358.525,00 16.378.000,00 2.267.172,00

176

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Waste disposal Hera Industry: “In the environment sector Hera is the leading national operator for the amount of waste collected and processed” Shareholders: Province of Bologna 18.7 per cent; 3.2 per cent Province of Ferrara; Province of Modena 12.7 per cent; 26.1 per cent Romagna Province; Private Institutions 9.4 per cent; 29.9 per cent the market. Audit firm: PricewaterhouseCoopers S.p.A. Supervisory bodies: ● ●

● ●

Board of Directors; Administrator responsible for the system of internal control and risk management; Board of Statutory Auditors; Independent Auditors – Audit Committee and Risk.

The application of interpretation of IFRIC 12 service concession arrangements has changed the method of accounting for corporate events for companies that operate in regulated sectors by specific concessions. For accounting purposes, the effect of the application of this principle changes the results: the income statement represents the work of investment in assets under concession, limited to network services. In the table below, we show the value of Service Concession Arrangements, intangible assets, total and detailed assets for the Italian listed company HERA.

2012c 2012s

Name 2012c HERA 2012s HERA

Name

Intangible Assets

HERA HERA

1.855.966.000,00 1.733.110.719,00

Share Capital

Retained Earnings

1.115.014.000,00 1.115.013.754,00

661.190.000,00 460.925.086,00

2012c 2012s

Profit/Loss

Financial Assets 139.730.000,00 228.571.726,00

Equity

118.658.000,00 1.894.862.000,00 116.170.906,00 1.692.109.746,00

Current Assets

Non-current Assets

Total Assets

2.146.055.000,00 1.302.895.428,00

4.539.260.000,00 3.732.819.205,00

6.699.469.000,00 5.049.868.887,00

Provisions for Risks and Charges

Current Liabilities

Non-current Liabilities

251.897.000,00 120.086.262,00

1.895.917.000,00 970.688.975,00

2.908.690.000,00 2.387.070.166,00

Name

Total Revenue

Depreciation and Amortization

Finance Costs

HERA HERA

4.492.748.000,00 1.366.506.413,00

248.714.000,00 212.956.833,00

134.358.000,00 116.170.906,00

Total Liabilities

Total Liabilities and Equity

4.804.607.000,00 6.699.469.000,00 3.357.759.141,00 5.049.868.887,00

178 Sovereign Risk and Public-Private Partnership During the Euro Crisis

Water Drinking Water Industry: “Acque Potabili S.p.A. performs the activity regarding the distribution of water and the management of the integrated water cycle, and is responsible for coordinating the activities of the Group, defining the strategic objectives and by providing technical advice and administrative Subsidiaries”. Shareholders: The share capital is divided as follows: 30.85 per cent Iren S.p.A., the 9.74 per cent Intesa Sanpaolo S.p.A., the 30.85 per cent is reported to the Town of Turin, while the remaining part, i.e. 28.56 per cent is left on the market. Audit firm: PricewaterhouseCoopers S.p.A. APS ACEGAS Industry: “Assets subject to certification: the collection and distribution of water, maintenance and operation of wastewater treatment plants and sewage, production and distribution of electricity, gas production and distribution, design and execution of services of waste management, disposal by incineration municipal waste, non-hazardous and health management services to public lighting and traffic lights, cemetery services, laboratory chemical and microbiological analysis”. Sub sectors: gas and electric resources management, management of environmental services such as waste disposal. References IFRIC 12: The rights of distribution and license consist of the costs incurred for the services concession contracts through which local governments have entrusted the management of the Company’s primary services, which constitute the core business of the Company, such as supply of water, gas, electricity, environmental services and so on and from January 1, 2010 have been reclassified as intangible assets Shareholders: 62.7 per cent Acegasaps Holding s.r.l.; 2.5 per cent ING Investment Management Belgium SA; 5.1 per cent Fondazione Cassa Risparmio Trieste; 3.7 per cent Intesa SanPaolo SA; 26 per cent the market.

Italian Case Studies in Energy, Transport and Water Management 179

Audit firm: PricewaterhouseCoopers S.p.A. Supervisory bodies ● ●

● ● ● ● ● ●

the Board of Directors ; Administrator responsible for the system of internal control and risk management; Audit Committee and risks; Supervisory Body pursuant to Legislative Decree no. 231/2001; Manager in charge of preparing the corporate accounting documents; Head of the Internal Audit Department; Board of Statutory Auditors; Independent Auditors.

In the table below, we show the company name; intangible assets; financial assets; current assets; not current assets; total assets; total revenues; revenues from the Service Concession Arrangements; Amortization of intangible assets; financial charges, profit of the year, for Italian listed companies as ACQUE POTABILI and ACEGAS APS.

Intangible Assets

Name 2012c 2012s 2012c 2012s

ACQUE POTABILI ACQUE POTABILI ACEGAS APS ACEGAS APS

Share Capital

Name 2012c 2012s 2012c 2012s

ACQUE POTABILI ACQUE POTABILI ACEGAS APS ACEGAS APS

(Intangible Assets) of which service concession arrangements

105.250.000,00 105.250.000,00 637.277.000,00 567.436.405,00

Retained Earnings

3.600.000,00 105.796.000,00 3.600.000,00 105.796.000,00 283.691.000,00 75.003.000,00 283.690.763,00 62.460.480,00

2012c 2012s 2012c 2012s

104.953.000,00 104.953.000,00

Financial Assets

Current Assets

Non-current Assets

Total Assets

104.953.000,00 727.000,00 30.861.000,00 78.212.971,00

140.571.000,00 140.571.000,00 330.332.000,00 180.693.132,00

144.074.000,00 144.074.000,00 939.061.000,00 842.602.241

284.645.000,00 284.645.000,00 1.269.393.000,00 1.023.295.373

Profit/Loss

Equity

51.000,00 51.000,00 25.521.000,00 23.647.278,00

109.447.000,00 109.447.000,00 384.215.000,00 369.798.521

Name

Total Revenue

ACQUE POTABILI ACQUE POTABILI ACEGAS APS ACEGAS APS

82.668.000,00 82.668.000,00 626.283.000,00 308.686.891

Provisions Provision for for Risks and Contingency Charges Legal Claims

3.389.000,00 19.513.020

19.513.020

Current Liabilities

Non-current Liabilities

Total Liabilities

Total Liabilities and Equity

141.959.000,00 141.959.000,00 536.698.000,00 366.099.176,00

33.239.000,00 33.239.000,00 348.480.000,00 287.397.676

175.198.000,00 175.198.000,00 885.178.000,00 653.496.852,00

284.645.000,00 284.645.000,00 1.269.393.000,00 1.023.295.373,00

Ricavi da concessione

Total Service Concession Arrangement Revenue

12.478.000,00

9.988.000,00 34.400.000,00

Depreciation and Amortization

Finance Costs

20.568.000,00 11.647.604,00

51.000,00 51.000,00 25.521.000,00 23.647.278

Italian Case Studies in Energy, Transport and Water Management 181

Gambling SNAI Industry: “SNAI S.p.A. is the main operator in the Italian betting market and among the top in the national market for games.” Shareholders: Colzi Piero 2.012 per cent; Global Games S.p.A. 67.188 per cent; the market 30.80 per cent. Audit firm: Ernst & Young S.p.A. In the table below, we show the company name; intangible assets; financial assets; current assets; not current assets; total assets; total revenues; revenues from the Service Concession Arrangements; Amortization of intangible assets; financial charges, profit of the year, for Italian listed company SNAI.

Name 2012 c 2012 s

2012 c 2012 s

SNAI SNAI

Intangible Assets

Financial Assets

Current Assets

Non-current Assets

Total Assets

151.233.000,00

152.844.000,00 131.221.000,00

604.583.000,00 610.671.000,00

757.427.000,00 741.892.000,00

382.940.000,00

Retained Earnings

Name

Share Capital

SNAI SNAI

60.749.000,00 149.601.000,00 –46.121.000,00 164.229.000,00 60.749.000,00 148.651.000,00 –46.063.000,00 163.337.000,00

2012 c 2012 s

2012 c 2012 s

Profit/Loss

Equity

Provisions for Risks and Charges

Current Liabilities

Non-current Liabilities

25.136.000,00 24.560.000,00

168.335.000,00 158.492.000,00

424.863.000,00 420.063.000,00

Name

Total Revenue

Depreciation and Amortization

SNAI SNAI

512.683.000,00 493.492.000,00

45.027.000,00 45.042.000,00

–46.121.000,00 –46.063.000,00

Name

Total Revenue

Depreciation and Amortization

Finance Costs

SNAI SNAI

512.683.000,00 493.492.000,00

45.027.000,00 45.042.000,00

–46.121.000,00 –46.063.000,00

Finance Costs

Total Liabilities

Total Liabilities and Equity

593.198.000,00 757.427.000,00 578.555.000,00 741.892.000,00

7

Case Studies in Spain (Energy, Transportation and Water Management)

7.1 The Spanish experience of PPP According to Allard and Trabant (2008), public-private partnership (PPP), is a marriage between public and private sector activity, a sort of a “third way to optimize the use of public funds and boost the quality of services traditionally provided by the public sector” (Allard, Trabant, 2008). PPPs have been extensively used in Spain for the procurement of light rail systems (Carpintèro, Barcham, 2012; Petersen, Carpintero, 2014). Spain was not a newcomer to PPP when projects involving cooperation between the public and private sectors began to spread in size and variety at the end of the 1990s. “There are records of privately constructed highways in Spain in the 19th century, and former dictator Francisco Franco used a simple form of BOT successfully in the 1970s to construct numerous toll highways. It appeared natural for Spain to explore the PPP option under the conservative government that came to office in 1996, whose platform focused on deregulating and privatizing the economy” (Allard, Trabant, 2008). In particular, owing both to budgetary constraints on the Spanish public sector and to the need to optimize financial resources, several models and methods of PPP for megaprojects (Irimia-Dièguez, OlivieroAlfonso, 2012) have been developed in the current Spanish and European financial crisis, although there is considerable confusion and ambiguity as to how these models should be systematized. In particular “when the megaproject is viable through user fees, the public sector can use PPPs to defer payments and as a way to control their deficits and debts without cutting investment in infrastructure and public services. According to Saussier (2012) a theory of public–private agreements is needed and is still to be constructed; little has been done to focus on specific aspects 183

Table 7.1

PPP Framework in Italy and Spain

Accounting Regulatory Environment Italy

Spain

Codified Roman law system Plan-based financial reporting issued by a public body accounting standards

Codified Roman law system Plan-based financial reporting issued by a public body

Credit as main financial system (creditor protection) Separation of tax and financial tax and accounting

Credit as main financial system (creditor protection) Tax dominated accounting system

Characteristics of PPP Roads Sector Italy

Spain

Start date: 2000s Direct toll model, more recently shadow tolls (autonomous governments)

Start date: 1960s Direct toll model, more recently shadow tolls (autonomous governments)

Coordination and management by public agency (Partnerships Public Body) Operators are public limited companies (set up by subsidiaries of construction companies)

No equivalent Operators are public limited companies (set up by subsidiaries of construction companies)

Comparison of accounting approaches Italy

Spain

IFRIC 12

Mercantile framework: legal and tax implications.

PPP Assets and liabilities defined according to control

There has been minimum debate. Spanish accounting treatment of infrastructure and contracts fits with EMU public deficit and debt requirements. There is no consideration of the economic rationale of transactions.

Pronouncements try to determine how the details of the contract are interpreted within the control based definitions.

Specific accounting variation to the Spanish General Accounting Plan for the toll sector.

Evolution of applicable regulation from leases, going through requirements, to specific accounting disclosure treatment provided by IFRIC’s interpretation.

Capitalization of financial expenses once the motorway is opened to traffic as deferred expenditure: becoming mechanism for new concessionaires.

Infrastructures falling within the definition of a service concession arrangement should not be recognized in operator balance sheet. A rebuttable assumption that asset would be on public balance sheet.

Basis of Accounting Treatment Not economic substance over legal form of transactions. Accounting Debate Much debate between accounting regulator and Treasury (UTFP) about the nature of PPP, which leads to competing views of where the asset in PPPs lies. Accounting Regulation PPPs accounting followed existing regulations on leasing and substance over form with modifications. Accounting Issues and Accountability Consequences Separability of service and property elements of contract: infrastructurebased service(off public balance sheet) or financing arrangement (on public balance sheet).

Continued

Table 7.1

Continued

Comparison of accounting approaches Italy

Spain

IFRIC 12

Party that bears the risks and rewards of ownership (e.g. potential variations in property profits and losses) is the party having an asset. Asymmetrical reporting between public and private agents: taxpayers face uncertainty about future liabilities.

Creation of a ‘reversion fund’: protection of investors’ funds (may also protect taxpayers’ funds).

Annual tariffs may be split into two parts in the income statement and in the balance sheet: lack of comparability since companies may vary their recognition policy. Government’s guarantees of Highways Agency’s payments are not reflected in the public sector accounts: taxpayers face uncertainty about future liabilities.

Public support (exchange rate insurance, subsidies, refundable advance payments, participative loans): boundaries between public and private sector become blurred.

Financial and intangible asset models used depending on whether the primary responsibility to pay the operator lies with the grantor or user. The accounting model is based on formal criteria, not on the economic substance: similar arrangements may be accounted for differently. IASB’s pronouncements relate to private sector companies. IFRICs exclude accounting for public sector grantors. Much criticized by commentators.

Accounting Issues and Accountability Consequences

Ad hoc revaluations: to increase the value of assets and facilitate access to finance.

Not all public support mechanisms are adequately reflected in public accounts: taxpayers face uncertainty about future liabilities.

Source: Adapted from Acerete, Stapleton, Stafford, 2007.

The scope of IFRIC’s interpretation is based on the control criteria. Eurostat uses an approach based on assessment of where risk lies for statistical purposes.

Case Studies in Spain (Energy, Transportation and Water Management) 187

of those arrangements, with respect to their differences from private– private, and are probably necessary in order to provide for the specificities of public–private agreements and to enhance our understanding of their efficiency or inefficiency in certain contexts (Irimia-Dièguez, Oliviero-Alfonso, 2012; Shaoul et al., 2012). They underline the need for information to be accessible to the public and, in particular, argue that a stream of information between partners in the public and private sectors needs to be developed and disseminated to achieve accountability for public money that is increasingly being spent in the private sector. Benito and Montesinos (2009) analyse some proposals for the private financing of public works that have emerged in Spain in recent years and show that all the new financing methods assessed are incorrectly labelled as private, since the payments are ultimately made by the government using its budgetary resources. Allard and Trabant (2008) state that Spain presents an interesting paradox in the history of PPP. While it is one of Europe’s oldest, most active and most enthusiastic users of PPPs, it is at the same time one of the countries that has demonstrated the least interest at an official level in informing, monitoring, regulating and following up projects to ensure that their principal benefits are being achieved. An in-depth literature review on PPP-related research over the last 20 years was performed by Kwak et al., 2009 (Irimia-Dièguez, OlivieroAlfonso, 2012). An interesting classification framework of PPP research is offered by defining the following critical success factors and barriers for PPP projects: 1. Government roles and responsibilities, whereby the roles of the government in facilitating PPP projects are clarified. 2. Concessionaire selection methods and criteria, which are classified into four packages: financial; technical; safety, health, and environmental; and managerial. 3. Risk identification and allocation strategies. 4. Financing techniques, instruments, and strategies. Hodge and Greve (2007) state that there is still much confusion around notions of partnership, what can be learnt from our history with partnerships, and what is new about the partnership forms that are in vogue today. Conceptually, there are five different types of possible PPP (Hodge et al., 2010):

188

Sovereign Risk and Public-Private Partnership During the Euro Crisis

1. Institutional cooperation for joint production and risk sharing (such as the Netherlands Port Authority). 2. Long-term infrastructure contracts (LTICs) that emphasize tight specification of outputs in long-term legal contracts, as exemplified in UK PFI projects. 3. Public policy networks, in which loose stakeholder relationships are emphasized. 4. Civil society and community development, in which partnership symbolism is adopted for cultural change. 5. Urban renewal and downtown economic development. Some alternatives to these PPP models can also be considered. According to Yescombe (2007), the main alternatives that may worth considering are public sector procurement and post-construction take-out. Public sector procurement may be adapted to achieve the main benefits of a PPP structure, without some of the drawbacks of cost and inflexibility. However, this will probably involve funding being wholly provided by (or at the risk of) the public sector, with the budgetary disadvantages included. As the highest-risk phase for a PPP is usually during construction, a post-construction take-out (or assumption of risk) by the PA cuts out the ‘higher’ cost of private sector funding thereafter in return for taking risks during the operation phase. This also at least allows the facility to be kept off the public sector balance sheet during the construction phase (Irimia-Dièguez, Oliviero-Alfonso, 2012). The table below, according to Irimia and Oliviero (2010), offers an overview and an international comparison (Spanish, Anglo, Auction) on the bidding models in PPP schemes with these key distinctive elements: ● ● ● ● ● ●

negotiations of concession framework; securing funding; cost of funding; degree of objectivity; duration of process; geographic location.

These are formulas for the participation of the private sector in the development of a public service (transport, energy, water, and so on) which may be seen in a variety of ways, the most common being concessions for building and operation. For this reason the concept of the PPP is that a project always had a contribution from the public sector, so that it can acquire vastly different forms.

Case Studies in Spain (Energy, Transportation and Water Management) 189 Table 7.2

Bidding models in PPP schemes

Negotiation of concession framework Securing funding Cost of bidding

Duration of process Degree of objectivity Geographic location

Spanish

Anglo

Auction

Reduced

Intense

Medium

Not required Medium 0.6 million € to 1 million € Reduced < 4 months + decision Medium 30% to 50% subjective Spain, France and Italy

Indispensable High 1.5 million € to 2 million € Very high 2 years

Indispensable High 1.2 million € to 1.8 million € Reduced 6 months

Medium–High 15% to 30% subjective

High 100% objective

UK, Ireland, Portugal, Holland, Greece, Germany

Canada, USA

Source: Irmia and Oliviero (2010).

Problems in the application of concessions for public transport infrastructures in urban environments stem largely from the fact that these projects form part of a complex area involving interactions that are often difficult to control. This implies enormous costs, and for this reason, tender projects of this type use mixed models, that is public and private sector participation, as we have already mentioned. In Spain, the Concessions Act, passed in 2003 to regulate concession contracts for public works (now duly derogated and with its provisions now included in the Law of Public Service Contracts passed in 2007) established a new legal framework, whose main characteristics are: ●

●

●

Maintaining the basic concepts of a concession, the procedure for the awarding of the same and respecting the existing specialities for the regulation and legislation in place, expanding the concession model for all public works and implementing this for all public sector administrations and public office bodies compliant with the same. Establishment of public aid may or may not be in the form of financial contributions and the winning bidder may be reimbursed with the price paid for the usage of the project and returns associated with the development of the area adjacent to the infrastructure. Establishment of the possibility of using the concept of a “shadow toll regime” and cross-financing for different projects involving public

190

●

●

●

●

Sovereign Risk and Public-Private Partnership During the Euro Crisis

works whenever these have a functional relationship and incidence in terms of their respective operation. Establishment of the obligation to restore the economic balance when this has been notably altered. Regulation of the financing systems on the part of the contract awarder in terms of the issuance of obligations and other titles, the use of assets, concession mortgaging and a loan with participation in the equity. Definition of a maximum timeframe of 40 years for tenders relating to the construction and operation of public works and 20 years for those dealing with operation tenders. Setting of a progress clause that demands the adaptation of the tender to advances over time in relation to legislation and technology.

7.2 Why is the energy sector different in Spain? Energy intensity in Spain has increased since 1990, while the opposite has happened in the EU15. Decomposition analysis of primary energy intensity ratios has been used to identify which are the key sectors driving the Spanish evolution and those responsible for most of the difference with the EU15 energy intensity levels. It is also a useful tool to quantify which countries and economic sectors have had most influence in the EU15 evolution. The analysis shows that the Spanish economic structure is driving the divergence in energy intensity ratios with the EU15, mainly due to the strong transport growth, but also because of the increase of activities linked to the construction boom, and the convergence to EU levels of household energy demand. The results can be used to pinpoint successful EU strategies for energy efficiency that could be used to improve the Spanish metric.

7.3 Typical energy sector case studies 7.3.1

Abengoa, S.A.

Abengoa, S.A. is a Spanish multinational corporation, which includes companies in the domains of energy, telecommunications, transportation and the environment. The company was founded in 1941 and is based in Seville, Spain. It is a global biotechnology company specializing in the development of new technologies in producing biofuels and biochemicals and promoting sustainability of raw materials. Abengoa invests in research in sustainable technology, and implements these technologies in Spain as well as exporting them globally.

Case Studies in Spain (Energy, Transportation and Water Management) 191

These technologies include concentrated solar power, second generation biofuels and desalination. In 2012, Abengoa and its subsidiaries employed approximately 26,500 people, operating in more than 80 countries. Abengoa began its involvement in the development of solar technologies in 1984 with the construction of the Solar Almeria Platform in Spain. 7.3.1.1 Service concession arrangements The analysis of whether IFRIC 12 applies to certain contracts and activities includes several complex factors and is significantly affected by legal interpretations of certain contractual agreements or other terms and conditions with public sector entities. Therefore, the application of IFRIC 12 requires significant judgement relating to, among other factors, (i) identification of certain infrastructures (and no contractual agreements) within the scope of IFRIC 12, (ii) understanding the nature of the payments in order to determine the classification of infrastructure as a financial asset or an intangible asset and (iii) the recognition of revenue from construction and concession activity. 7.3.1.2 Financial risk management Abengoa’s activities carried out through its operating segments are exposed to various financial risks: market risk (including foreign exchange, interest rate risk and price risk), credit risk, liquidity risk and capital risk. Model risk management in Abengoa seeks to minimize potential adverse effects on the financial performance of the group. Risk management is controlled by the Corporate Finance Department, which identifies and evaluates financial risks closely with the group’s operating segments, quantifying them by project, region and company. The internal management rules provide written policies for overall risk management, as well as specific areas such as exchange rate risk, credit risk, interest rate risk, liquidity risk, use of derivative hedging instruments and investment of excess liquidity. Both internal management rules and key control procedures of each company are formalized in writing and compliance is monitored by internal audit. 7.3.2

Gas Natural Fenosa

In Europe, through its European subsidiary that markets natural gas in France, Gas Natural Fenosa was the successful bidder for the supply of

192

Sovereign Risk and Public-Private Partnership During the Euro Crisis

natural gas in the region of Paris and for two years provided services to the main public supply points of 208 municipalities around the French capital. The company already had around 2,000 customers of varying types in France. Gas Natural Fenosa also started marketing natural gas in Germany, where it opened a sales office in Cologne at the beginning of 2012, and achieved its first three-year contracts to supply gas to customers. In Portugal, Gas Natural Fenosa increased electricity sales to SMEs by almost 50 per cent, and consolidated itself as the fourth largest operator in this market in 2012. Moreover, the company wanted to keep its leadership in Moldova, where it handled 70 per cent of electricity distribution. The concessions and their costs of acquisitions are acquired directly from a public entity, or at the fair value attributed to the corresponding concession in the event of being acquired as part of a business combination. These amounts relate both to concessions that are considered intangible assets, or construction and improvements of those infrastructures assigned to concessions in accordance with IFRIC 12 service concession agreements. The aforementioned assets related to the service concession agreements under IFRIC 12 are those where the licensor controls the services that GAS NATURAL FENOSA (operator) must provide, and the significant residual stake in the infrastructure at the end of the agreement, are set forth in this section in accordance with the accounting model for intangible assets based on the nature of the economic profits to be received by the operator. The income and expenses on construction services or infrastructure improvements are recognized for their gross amount.

7.4 The transport sector In Europe, Spain was not a newcomer to PPP when projects involving agreement and cooperation between the public and private sectors began to spread in size and variety at the end of the 1990s. “There are records of privately constructed highways in Spain in the 19th century, and former dictator Francisco Franco used a simple form of BOT successfully in the 1970s to construct numerous toll highways. It appeared natural for Spain to explore the PPP option under the conservative government that came to office in 1996, whose platform focused on deregulating and privatizing the economy. The first PPP projects in Spain in the 1990s were in the traditional transport sector, particularly highways. Budgetary constraints, as well as the belief that the private sector can, in some

Case Studies in Spain (Energy, Transportation and Water Management) 193

circumstances, be more cost-efficient than the public sector, mean that governments worldwide are using PPPs to construct and operate infrastructure. With particular attention to risk transfer (Vassallo, Ortega, 2012), Spain has a long history of using the private sector to help build and operate public infrastructure, particularly roads (Baeza, Vassallo, 2010), and toll motorway concessions (Vassallo, Sànchez-Solino, 2007). One of the most important listed companies in the Spanish experience of PPP in the transport Sector (with particular attention to roadway and railway transport) is Ferrovial, S.A., better explained later in the text. 7.4.1 7.4.1.1

PPPs case studies: transport Abertis

Abertis Infraestructuras, S.A. previously named Acesa Infraestructuras, S.A. was born in Barcelona in 1967. The business purposes of Abertis include the construction, maintenance and operation of toll roads under concession; the management of toll road concessions in Spain and internationally; the construction of roads; ancillary construction activities, maintenance and operation of toll roads, including service stations, integrated logistics and/or transport centres and/or car parks; and any other activity related to transport infrastructure and communications and/or telecommunications for the mobility and transport of people, goods and information, under the necessary authorization. The parent company can undertake its business purposes, especially its concessionary activities, directly or indirectly through its shareholding in other companies, subject, in this respect, to the legal provisions in force at the time. Abertis is the parent of a group of companies mainly engaged in the management of mobility and communications infrastructure operating in three sectors: toll road concessions, telecommunications and airports. The “administrative concessions” in the consolidated balance sheet mainly include concession contracts for the construction and operation of the various toll road networks, as per IFRIC 12, as well as concessions acquired directly or as part of a business combination. 7.4.1.2

Ferrovial

Ferrovial, S.A. previously Grupo Ferrovial, is a Spanish multinational company involved in the design, construction, financing, operation (DBFO) and maintenance of transport, urban and services infrastructure. It is a publicly traded company and is part of the IBEX 35 market value-weighted stock market index. The company’s headquarters are in Madrid. It has a multi-business approach in the energy, water and transport sectors.

194

Sovereign Risk and Public-Private Partnership During the Euro Crisis

The company was founded in 1952 as a railroad construction company called Ferrovial, from the Spanish word for railroad. Ferrovial acquired 98.27 per cent of Agromán, another leading Spanish contractor in June 1995 and then set up Cintra in February 1998. In June 2002, Ferrovial acquired the concession for Sydney airport, the largest airport in Australia. The company then expanded in the United Kingdom by acquiring Amey plc, a British contractor and major investor in Tube Lines, one of the two public-private partnership companies responsible for the maintenance of London Underground’s tracks and rolling stock in April 2003.

7.5 The water sector Water supply and sanitation in Spain are characterized by universal access and generally good service quality, while tariffs are among the lowest in the EU. Almost half of the population is served by private or mixed private-public water companies, which operate under concession contracts with municipalities. The largest of the private water companies, with a market share of about 50 per cent of the private concessions, is Aguas de Barcelona (Agbar). The large cities are all served by public companies, except Barcelona and Valencia. The largest public municipal company is Canal de Isabel II, which serves the metropolitan area of Madrid. Droughts affect water supply in Southern Spain, which is turning increasingly towards seawater desalination to meet its water needs. 7.5.1

Policy and regulation

A cornerstone of the legal framework for water supply and sanitation is the 1985 Water Law (Ley de Aguas). Policy and regulation functions for water supply and sanitation are shared among various Ministries. For example, the Ministry of Environment is in charge of water resources management and the Ministry of Health is in charge of drinking water quality monitoring. Watershed agencies (Confederaciones de Cuencas Hidrográficas) are in charge of planning, constructing and operating major water infrastructure such as dams; developing watershed plans; setting, monitoring and enforcing water quality targets; granting permits to use water, then inspecting water facilities for which permits were granted; undertaking hydrological studies; and providing advisory services to other entities. Watershed agencies are headed by a President who is nominated by the Cabinet at the proposal of the Minister of Environment. Each agency has a board, a user assembly and a council to ensure broad participation

Case Studies in Spain (Energy, Transportation and Water Management) 195

by various stakeholders in its decision-making process, both in planning and operations. There are a total of 15 such agencies in Spain for rivers that flow through more than one autonomous community. If a river runs entirely within the territory of an autonomous community its water administration, instead of one of the watershed agencies, is in charge of managing its water resources. This is the case in Galicia, Cataluña, the Balearic Islands, the Canary Islands, the Basque country and Andalusia. While watershed agencies do not provide water and sanitation services, they play an important role in determining the framework for the provision of such services. 7.5.2

Service provision

Service provision is the responsibility of more than 8,000 municipalities. Municipalities can provide services directly or through a municipal public company (54 per cent of market share), or through concessions to a mixed public-private company (13 per cent) or a private company (33 per cent). In some cities water supply is the responsibility of a company, while sanitation services are provided directly by the municipality. This is the case, for example, in Barcelona and was the case in Madrid until 2008. The main water service provider in Spain is Aguas de Barcelona (Agbar), a private company that provides water services to about 13 million people in more than 1,000 localities under concession contracts. Sewer services are provided to 8.25 million people in 365 localities, and wastewater treatment is carried out for 9.3 million people in 445 localities. Its main competitor is Aqualia. It is common practice in Spain that municipalities request upfront payments (known as the canon) when awarding water concessions. These funds are not used for water infrastructure. Also, not all contracts are awarded through competitive bidding. For example, in 2012 the Barcelona metropolitan authority awarded a 35-year concession worth an estimated 330 million euros to Agbar without a competitive tender. In February 2013 the director of Agbar’s Aquagest concession in Santiago de Compostela was jailed because of alleged bribes to municipal officials to ensure the renewal of his firm’s contract. Roque Gistau, president of the Spanish water and sanitation association (AEAS), says that the current system to award contracts must be reformed. He calls for the abolishment of the canon because it distorts the market. He also calls for the establishment of a water regulator such as those in England and Portugal. The largest public water company is Canal Isabel II that serves the metropolitan area of Madrid.

196

7.5.3

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Tariff level

A survey commissioned by the utility association AEAS in 2009 showed that the average tariff for water supply and sanitation was 1.50 euros/ m3. On average, industrial users paid 1.81 euros/m3 and residential users 1.40 euros/m3. This is one of the lowest water tariffs in the EU. There are large variations between cities and regions. The province with the highest average tariff is the Balearic Islands (2.65 euros/m3) and the region with the lowest is Lugo (0.61 euros/m3). A study commissioned by AEAS wants to shed light on the actual cost of water and make citizens aware of the need to pay the full costs of this service. According to a survey carried out in 2009 by the Spanish consumer organization OCU water bills were slightly higher than in the ANEAS survey at 227 euros per year for a water consumption of 175 m3. However, the survey shows a slightly lower average water and sewer tariff at 1.30 euros/m3. The OCU survey also shows that annual bills vary substantially between cities, ranging from 112 euros to 413 euros per year. According to another survey, an international water tariff survey by the International Water Association (IWA), the annual water and sewer bill of a household using 200 m3 per year was US$ 300 per year, or US$ 25 per month. However, the water sector in Spain does not appear as a core activity of the listed company under IFRIC 12 adoption. 7.5.4

Case study of Endesa, S.A.

Endesa, S.A. was incorporated in 1944. Its objectives are: the electricity business in its various industrial and commercial activities; exploitation of all types of primary energy resources; providing services of an industrial nature or related to its core business, especially gas. The company will develop, at national and international levels, the activities that make up its objectives, either directly or through their participation in other companies. To organize such activities within each geographic segment Endesa, S.A. considers the existence of two separate lines of business (generation and distribution, each including its related marketing activity) operated independently but coordinated at country level in order to capture the competitive advantages provided by vertical integration, respecting the legal rules on unbundling in those jurisdictions which so provide, and cost optimization opportunities that could result from a larger whole.

Case Studies in Spain (Energy, Transportation and Water Management) 197

Energy efficiency and storage ●

●

●

●

●

●

“Energytic”: innovative solutions enable customers in social housing to achieve the objectives of saving water and energy. It will feature 1,000 homes in France and 700 homes in Spain. Endesa participates actively in the European project as a technology partner in Spain, leading the contribution of remote client management. “Novare Energrid”: distributed intelligent infrastructure for managing grid system supply and demand. The system allows for the management of the production and consumption of energy from small nodes (housing, business) to create a decentralized system. In addition, the project aims to promote the improvement of energy management in buildings, through dialogue between consumers, producers and users. During 2013 it reached a marketing stage. “Store”: draft energy storage using storage technologies attached directly to electric power systems, oriented towards improving temporary imbalances in production and consumption in the Canary Islands. “Bess”: thermal power plant installation in Tarapacá (Chile) of an energy storage system (6 MW/1.5 MWh) for delivery to Northern Interconnected System (SING) in case of frequent sever disturbances. “Storage”: Brazilian development of a system of energy storage technologies with different Li-ion (LFP and NMC) capacity of 200 kWh for connection with a smartgrid, in order to assess their impact on the system. “Electronic Trainer”: device developed in Brazil for power factor correction in low voltage oriented residential customers with low consumption, thus improving the quality of supply.

Distribution and smart grids ●

●

Remote management: to establish a system of automatic and remote control and power supply management of domestic customers. This is a pioneering system installed in the homes of customers to replace traditional electric meters. During 2013 it reached the figure of 4.2 million smart meters installed in Spain. “Smartie Plus”: development of a new power electronics device that improves the utilization of network assets in current systems, enabling the maximization of the charge distribution, improving quality of supply and enabling more and better penetration of renewable energy into the grid.

198 ●

●

●

Sovereign Risk and Public-Private Partnership During the Euro Crisis

“Orion”: pilot smart grid technologies and automation in the MV network, to improve service in rural areas of Cundinamarca (Colombia). Effect “Carson”: development of a new configuration of grounding transformers in medium and low voltage areas, reducing the impedance of the soil and, consequently, the costs of maintenance and operation. “Cable Cure” Regeneration Technology: replacing underground cables damaged by aging caused by water and weathering, without any outage clients. This measure can produce a 65 per cent savings over traditional cable replacement alternative.

Excellent environmental management This is one of the three principal axes of the Environment Plan – which includes integrated water management, management systems and certification, risk management and environmental liabilities and a management of emissions regulations – and includes the following activities carried out in 2013: ●

●

●

In the field of integrated water management Endesa signed, for the fourth consecutive year, the CDP Water Disclosure initiative along with 180 large companies. It analyses the main risks and opportunities identified by companies in relation to water availability, and the same trends in the management of associated risk. In the field of environmental management systems, Spain and Portugal have maintained all certifications of environmental management systems according to ISO 14001 which Endesa has implanted in every business in this geographic area. It has implemented European Regulation EMAS in the thermal power plant systems in central Jinámar and for the diesel systems in El Palmar and recorded the thermal combined cycle Besos. By the end of 2013, 97.23 per cent of installed capacity in Spain and Portugal was certified ISO 14001, as well as all the port terminals, mining and distribution facilities. During 2013 the integrated environmental management, energy and indoor environmental quality (SIGAEC) implanted in head office from 2011 was extended to 18 buildings across Spanish territory. In Morocco, the thermal combined cycle Tahaddart maintained its ISO 14001 environmental certification in 2013. The result in 2013 was that environmental risk was low in all areas of Spain and Portugal.

Case Studies in Spain (Energy, Transportation and Water Management) 199

7.5.5

Case study of ACS Group

The ACS Group began operating in 1983 when a group of engineers acquired Construcciones Padrós, a middle-sized construction company with financial problems located in Badalona (Catalonia). After restructuring this company, the same strategy was employed with the acquisition of OCISA, a larger prestigious construction company which had been in operation for over 40 years. In the environmental area, it has achieved important contracts abroad that led to an international order book of 3,400 million euros. The industrial services, the most international area of the Group, continues its expansion abroad, with its international order book representing 50 per cent of the total. The infrastructure development industry is one of the basic sectors in the world economy and covers the execution of civil and industrial engineering projects in a great number of strategic sectors for any economy, which can be focused on both public and private clients. Companies which operate in this sector usually act in: ●

●

Construction of projects for clients, either public or private, to develop: power assets (power generating plants, etc.); assets related to the oil, gas or mining industries; telecommunications assets; civil works and building projects. Development of projects under concession regimes in the sphere of infrastructure for transport, environmental projects (waste treatment or water cycle plants); PPPs to develop social facilities (hospitals, prisons or police stations under concession arrangements); energy projects (investment in electricity generation and distribution); or assets for oil prospecting, extraction and refining or for all projects related to gas.

7.5.6

IFRIC 12

On 1 January 2010, the ACS Group applied this interpretation retroactively, restating their financial statements from 2009 for comparison purposes in their summarized financial statements. Therefore, they differ from those included in the 2009 consolidated financial statements. The effect of the application of IFRIC 12 and the voluntary application of the IAS 31 equity method on 31 December 2009 was a decrease of 82,247 million euros in equity, including a net loss of 5,343 million euros. Most of the effect on equity (decrease of 75,429 thousand euros) relates

200

Sovereign Risk and Public-Private Partnership During the Euro Crisis

to the effect on Abertis Infraestructuras, S.A., a company accounted for using the equity method.

7.6 Appendix: case studies Abengoa Bioenergy Abengoa Bioenergy (AB) is a global biotechnology company specializing in the development of new technologies in producing biofuels and biochemicals and promoting sustainability of raw materials. AB is currently constructing a biomass-to-ethanol facility in Hugoton, Kansas that will produce second generation biofuels. This refinery is forecast to be online and in full production by the end of 2013 or early 2014. The facility will be operated by Abengoa Bioenergy Biomass of Kansas, a company of Abengoa Bioenergy. Abengoa, S.A. as the parent company of a group of companies (hereafter called Abengoa or group), at the close of 2011 was composed of 583 companies: the parent company itself, 529 subsidiaries, 18 companies, 35 associates and joint ventures. The Group companies were also involved in 241 temporary consortia. Abengoa is an international company that applies innovative technology solutions for sustainable development in the areas of energy and the environment, generating energy from the sun, producing biofuels, desalinating sea water and recycling industrial waste. In 2011, changes in the organization of the Group led, among others, to the redefinition of activities and segments considered by the Group and the redefinition of its highest-level decision-making in the figure of President and CEO of the company, in line with applicable accounting standards. Consequently, they identified eight operating segments, grouped into three business activities (engineering and construction, infrastructure type concessions and industrial production). These business activities are focused in the areas of energy and environment and integrate operations in the value chain including R&D, project development, engineering and construction, operation and maintenance of own assets and those of third parties. Abengoa’s activities are organized to leverage their global presence and to use their experience in engineering and technology to strengthen their leadership position. IFRIC 12 Following the entry into force of IFRIC 12 on service concession agreements from 1 January 2010, Abengoa began to apply retroactive

Case Studies in Spain (Energy, Transportation and Water Management) 201

application of IFRIC 12 to accordance with IAS 8 as set out in paragraph 29 of IFRIC 12, without any significant impact on its consolidated financial statements at the end of 2010, as it had already been applying a similar accounting policy for certain assets and advances, mainly relating to concessions for international electricity transmission activity, desalination and solar thermal. At the date of this application, the company conducted an analysis of existing agreements and identified additional infrastructure within the group that could potentially qualify as a service concession arrangement, represented by solar thermal plants in Spain under RD 661/2007 and registered the register of pre-assignment in November 2009. At the close of 2010, the company concluded that it was necessary to continue the analysis because, based on information available at that date, the arguments that supported this accounting application were not completely contrasted to the previous setting in the 2010 budget as stated in the 2010 annual accounts. For this reason, the application of IFRIC 12 had no significant impact on Abengoa’s consolidated financial statements for year end 2010. In 2011, Abengoa continued to work on the accounting analysis for the possible application of IFRIC 12 to the solar thermal plants in Spain, having obtained throughout the year multiple independent legal, technical, and financial third-party views. In September 2011, the date on which they received the latest expert accounting reports, management concluded that, based on the analysis of the reports and new lessons learnt and given the circumstances for society they could apply IFRIC 12 to solar thermal plants in Spain under RD 661/2007 and as registered in the register of pre-assignment in November 2009, just as for other concession assets. Abertis (transport) At 31 December 2012, this group held 755 million euros, net of depreciation, in property, plant and equipment owned by its companies located abroad (738 million euros at 31 December 2011). Property, plant and equipment at 31 December 2012 included a gross amount of 489 million euros, with a carrying amount of 271 million euros (478 million euros and 280 million euros, respectively, in 2011), corresponding to assets that were revertible according to the concessions not affected by the application of IFRIC 12. These assets were located mainly at airport facilities (239 million euros, net, in 2012 and 249 million euros, net, in 2011).

202

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Most buildings and other constructions are associated with administrative concessions granted by various public corporations and revert at the end of the concession. The main concession contracts of the subsidiaries of the Abertis Group have been recorded using the intangible model, in keeping with IFRIC 12, most of which are as follows:

Spanish toll road concessionaire companies ●

●

●

●

●

Concession contract for the construction, maintenance and operation of toll roads entered into by the Ministry of Public Works and Acesa relative to the AP-7 and AP-2 toll roads, which terminates 31 August 2021 (awarded in 1967). Subsequent to the signing of this concession contract and without extending the term thereof, an agreement was entered into with the granting administration (amending certain aspects of the concession contract) to widen the AP-7 toll road between La Jonquera and Vilaseca/Salou, to three lanes over a 123 km stretch, at a planned investment of 500 million euros. Concession contract entered into by the Generalitat de Catalunya and Invicat for the construction, maintenance and operation of the C-32, C-31 and C-33 toll roads belonging to that regional government. The contract ends on 31 August 2021 (awarded 1967). Subsequent to the signing of the concession contract and without extending the term thereof, an agreement was entered into with the granting administration amending certain aspects of the concession and establishing the general conditions for adapting and modifying the stretch of the C-32 toll road between Palafolls that had been widened and the junction with highway GI-600, as well as for making other improvements and managing free flow related to the toll road and its functionality in the Maresme corridor, at a planned investment of 96 million euros. Concession contract entered into by the Generalitat de Catalunya and Aucat for the construction, maintenance and operation of the C-32 Pau Casals toll road. The concession ends on 26 January 2039 (awarded in 1989). Concession contract entered into by the Ministry of Public Works and Aumar for the construction, maintenance and operation of the AP-7 (Tarragona–Valencia and Valencia–Alicante) and AP-4 (Seville–Cadiz) toll roads, which ends on 31 October 2019. Concession contract entered into by the Ministry of Public Works and Iberpistas for the construction, maintenance and operation of

Case Studies in Spain (Energy, Transportation and Water Management) 203

●

●

●

●

the Villalba–Adanero (AP-6) toll road, which ends on 29 January 2018 (awarded 1968). Subsequent to the signing of the concession contract and without extending the term thereof, an agreement modifying certain points of the concession was entered into providing for the widening of the toll road to three lanes in each direction in the San Rafael–Villacastín stretch, at an investment of 70 million euros. Concession contract entered into by the Ministry of Public Works and Castellana for the construction, maintenance and operation of the stretches of the AP-6 toll road that connect with the road to Segovia (AP-61) and the AP-6 connection to Ávila (AP-51). The contract ends in November 2029 (awarded 1999), as set forth in the concession contract and in accordance with expected traffic between November 2015 and November 2019. Concession contract entered into by the Ministry of Public Works and Avasa for the construction, maintenance and operation of the Bilbao–Zaragoza stretch of the Ebro Toll Road, currently known as AP-68, which ends on 11 November 2026 (awarded 1973). Concession contract entered into by the Ministry of Public Works and Aulesa for the construction, maintenance and operation of the León–Astorga toll road, which ends on 11 March 2055 (awarded 2000). Concession contract entered into by the Regional Government of Madrid and Trados 45 for the construction, maintenance and operation of the O’Donnell–N-IV stretch of the M-45 highway in Madrid, which ends in August 2029.

French toll road concessionaire companies ●

●

Concession contract entered into by the French Government and Sanef for the maintenance and operation of toll roads in northern France (A1, Paris–Lille and A2, Paris–Valenciennes) and eastern France (A4, Paris–Strasbourg) as well as the Paris ring road (A16, Paris–Boulogne-sur-Mer, A26, Calais–Troyes and A29, Amiens– Neuchatel-en-Bray), which ends on 31 December 2029 (awarded 1964). Concession contract entered into by the French government and Sapn (wholly owned by Sanef) for the maintenance and operation of the toll roads in western France (A13, Paris–Caen and A14, Paris– Strasbourg) and the Paris ring road (A29, Le Havre–Saint Quentin), which ends on 31 December 2029 (awarded 1964).

204

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Ferrovial (transport) Ferrovial is the world’s leading private investor in transportation infrastructure, with a workforce of approximately 57,000 and operations in more than 25 countries. The Company provides municipal services to more than 800 cities and towns in Spain and to the millions who use the Madrid metro system and the hundreds of kilometres of streets and highways where Amey performs maintenance services in the United Kingdom. Ferrovial is a listed company on the Madrid Stock Exchange and is included in the prestigious Dow Jones sustainability index. Ferrovial’s activities focus on four businesses. Services ● Municipal services; ● Infrastructure management and maintenance; ● Facility management; ● Highways. Toll roads ● Concessions and management; ● Construction. Construction ● Civil works; ● Building; ● Industrial; ● Airports. Airports ● Shareholdings; ● Management. The Spanish Ferrovial offers a range of services, including airport, toll road and parking construction, and specialized services for developing, financing, maintaining and managing urban transport and services infrastructure. With operations in 49 countries and a workforce of 107,000, Ferrovial’s business model is focused on end-to-end infrastructure management, design, construction, financing, operation and maintenance.

See below for some financial reporting data Main figures Financial data*

2012

2011**

2010*

2009

2008

% 12/11

Net turnover EBIT Net profit Total assets Equity Gross capital expenditure Net debt/(cash) Total gross dividend

7,686 708 (2) 710 22,217 5,762 313 (1,489) 917

7,446 625 (2) 1,243 22,951 6,246 328 (907) 330

9,384 961 (2) 2,163 43,287 6,628 420 (31) 308

12,095 1,531 (2) –92 44,110 4,557 506 1,172 293

14,126 1,550 –838 48,203 3,692 971 1,664 277

3 13 –43

Operating data Average number of employees Construction backlog Services backlog

57,276 8,699 12,784

69,900 9,997 12,425

100,995 10,186 12,378

108,117 8,800 9,967 (1)

107,399 8,756 9,714 (1)

8.4% 16.7% 27%

10.2% 23.0% 14%

12.7% –0.8% n.s.

11.0% –5.9% n.s.

6,840 9.33 38.4 0.45 25% 733,510,225

5,457 7.44 33.5 0.42 –10% 733,510,255

Ratios EBIT margin Net margin Pay out Per share data Capitalization Year end closing price Average daily trading volume Gross dividend per share Appreciation in the year No. of shares at year end

9.2% 9.2% 129% 8,215 11.20 45.6 1.25 20% 733,510,225

6,037 8.23 21.0 0.40 68% 733,510,255

2,746 19.58 43.4 2.00 –59% 140,264,743

Notes: (1) Does not include the Tubelines portfolio. (2) EBIT before impairment losses and disposals of fixed assets. * Due to the sale of a 5.88% stake in BAA in October 2011, the 2010 financial statements have been re-expressed: see note 2.3 to the consolidated financial statements for 2011. ** Due to Budimex’s reallocation of value for PNI, the 2011 financial statements have been re-expressed. See note 5.B to the consolidated financial statements for 2012.

206

Sovereign Risk and Public-Private Partnership During the Euro Crisis

Ferrovial under IFRIC 12 adoption In addition to the description of Ferrovial’s activities, the PPP projects are conducted mainly in the toll roads and services areas under longterm arrangements under which the concession operator, in whom the group and its partners generally has an interest, finances the construction or upgrade of public infrastructure and which fall within the scope of application of IFRIC 12, service concession arrangements. Amortization and depreciation methods: IFRIC 12 – Intangible asset model. All initial investments relating to the infrastructure that is subsequently returned to the grantor, including expropriation costs and borrowing costs capitalized during construction, are amortized on the basis of the expected pattern of consumption applicable in each case (e.g. forecast vehicle numbers in the case of toll roads) over the term of the concession. The investments contractually agreed on at the start of the concession on a final and irrevocable basis to be made at a later date during the term of the concession, and provided they are not investments made to upgrade infrastructure, are considered to be initial investments. For investments of this nature, an asset and an initial provision are recognized for the present value of the future investment, applying a discount rate to calculate the present value that is equal to the cost of the borrowings associated with the project. The asset is amortized based on the pattern of consumption over the entire term of the concession and the provision is increased by the related interest cost during the period until the investment is made. Where a payment is made to the grantor to obtain the right to operate the concession, this amount is also amortized based on the pattern of consumption over the concession term. A provision is recognized for replacement investments, which must have been set up in full by the time the investment becomes operational. The provision is recognized on the basis of the pattern of consumption over the period in which the obligation arises, on a time proportion basis. Infrastructure upgrade investments are those that increase the infrastructure’s capacity to generate revenue or reduce its costs. In the case of investments that will be recovered over the concession term, since the upgrade investments increase the capacity of the infrastructure, they are treated as an extension of the right granted and, therefore, they are recognized in the consolidated statement of financial position when they come into service. They are amortized as from the date on

Case Studies in Spain (Energy, Transportation and Water Management) 207

which they come into service based on the difference in the pattern of consumption arising from the increase in capacity. However, if, on the basis of the terms and conditions of the concession, these investments will not be offset by the possibility of obtaining increased revenue from the date on which they are made, a provision will be recognized for the best estimate of the present value of the cash outflow required to settle the obligations related to the investment that will not be offset by the possibility of obtaining increased revenue from the date on which the investments are made. The balancing item is a higher acquisition cost of the intangible asset. In the case of the proportional part of the upgrade or increase in capacity that is expected to be recovered through the generation of increased future revenue, the general accounting treatment used for investments that will be recovered in the concession term will be applied (Annual Report, 2012).

8

Sovereign Risk and PPP Schemes: Future Directions

The construction and management of infrastructure, in the framework of concession relations between public sector and private sector entities, presents several critical aspects. For IAS adopter subjects operating on the basis of concession agreements the new rules on financial representation provided by IFRIC 12, which have already been subject of analysis by the OIC in application No. 3 of July 2010, have become compulsory for budgets from 2010. The new rules on financial representation provided by IFRIC 12 apply to public-to-private service concession arrangements when: ●

● ● ●

the grantor controls or regulates which services the operator must provide with the infrastructure; to whom it must provide them; at what price it must provide them; the grantor controls – through ownership, beneficial entitlement or similar – any significant residual interest in the infrastructure at the end of the term of the arrangement.

According to the new rules laid down by IFRIC 12 the grantor who builds and manages public works must not list tangible assets among the goods to be transferred at the end of the concession, but the grantor must include the fair value of the service. In particular, in accordance with IAS, the operator must recognize (Laghi, 2010; Campra et al., 2011): ●

a financial activity when having an unconditional contractual right to receive cash or another financial asset from, or following the instructions of, the grantor for construction services; 208

Sovereign Risk and PPP Schemes: Future Directions 209 ●

an intangible asset when the operator obtains, from the construction of the asset, the right to exploit the work charging the cost of service to third parties.

This accounting treatment differs profoundly from that existing in each of the other analysed countries. The assets under concession are recognized as property, plant and equipment if the market risk lies with the operator. Such different treatment has further implications from a fiscal point of view, since some methods of determining depreciation (i.e. as a function of borrowing costs) are no longer explicitly allowed. Other themes of interest regard the improvements to be implemented by the concessionaire without the recognition of tariff increases. In Italy it may happen, for example, that the concession agreement requires the concessionaire to construct real additions or additional works without additional economic benefits. In this case, according to the interpretative guidance of the OIC, the accounting at the time such liabilities are incurred should enrol the present value of future liabilities in return for a corresponding increase in intangible assets, which is then subject immediately to the amortization procedure, in full respect of the principle of correlation with revenues. This system does not differ from the one provided for the costs of remediation and environmental restoration, for which the explanatory report on the Ministerial Decree of 1 April 2009 stated that the accounting rules of IAS express a qualification designed to find direct tax recognition. Therefore, it seems logical to assume that the costs for improvements to be implemented by the concessionaire, capitalized on the value of the intangible asset, conform to the same treatment as the cost of remediation and environmental restoration. IFRIC 12, although addressed to concessionaires/operators and private sector entities, is also of fundamental importance for researchers in public enterprises and public management, since the same definitional framework, stressing the principle of substance over form, highlights a central need for further reflection on some issues and some key concepts, such as: ● ● ● ● ● ●

boundaries between public and private entities; identification and allocation of risk; infrastructures; public utilities, public interest services and/or benefits; major economic and social impacts; price/value of the services.

210

Sovereign Risk and Public-Private Partnership During the Euro Crisis

The interpretative usefulness of IFRIC 12 is essential in order to avoid confusion in the classification, measurement and recognition of ASCs involving public and private sector entities, such as outsourcing contracts, contracts of network capacity, take-or-pay agreements, all regulated instead by IFRIC 4 (Laghi 2010: 6), or even errors in the PPP framework, where the prevalence of economic substance is entirely public, as in selected case studies, and with reference to the discipline of IAS 20. The indications from economic literature and documents of the European Commission found further support in the experience of some European countries (UK, Italy and Spain), in which the diffusion of PPP formulas has gone hand in hand with an increasing focus on regulatory aspects relating to, in particular: i) the adequate allocation of administrative risk; ii) the proper design of the selection procedures for the private contractor; iii) the increasing attention to the contractual phase; iv) the preparation of principals ensuring the bankability of credits. Conversely, in other European countries (notably France and Germany), in which the PPPC has not reached similar levels of development, regulatory gaps are found in relation to some of the profiles mentioned, shown in Table 8.1. The following emerges from an international comparison of the three different countries examined in Table 8.2: ●

●

● ● ●

●

●

●

The possibility that financial constraints of the Internal Stability Pact will maximize the use of PPPs may be a “false myth” (see UK data); The risk of high indebtedness linked to PPP adoption is a risk to avoid, see the excessive use of PPPs and the experience of PPP arrangements in Portugal in the energy sector (Martins, Marques, Cruz, 2011); PPP is often used in countries with robust banking systems; PPP is often used in countries with a robust financial system; PPP is often used in countries with strong and efficient public administrations and a streamlined bureaucracy; PPP adoption is a big opportunity, especially for the public economies of Italy and Spain; The presence of different speeds and different approaches by multibusiness companies in UK and Spain compared to Italy (where we registered a mono-business approach in the sector under PPP adoption); The evidence of the application of the principle of substance over form in the business models and accounting regulations adopted by companies in the countries examined (except in Italy, where we registered publicly owned private operators in the PPP market).

Table 8.1

PPPs – a European comparison (Italy, UK, Spain)

Allocation of administrative and regulatory risk

Procedures for the selection of the contractor

Predisposition and contract expectation

Principals for the bankability of credits for the grantor

Accounting regulation under IFRIC 12 adoption

Italy

– Limits in the coordination of mechanismsbetween the various decision-making levels of Public Administration. – Lack of attention to the technical and design aspects.

Limited – Discretionary margins for PA management procedures. – The competitive dialogue is not yet operational. Presence of potentially discursive mechanisms in the submission of tenders.

Limited attention to the contractual phase.

– Failure mechanisms provided for by law to protect the lenders. – Lack of remedial feasibility level through negotiations, given the presence of rigidities in the Italian civil law (particularly as regards the system of collateral).

Listed Companies mono-business under IFRIC 12 adoption

UK

– Limits in the mechanisms of coordination between the various decision-making levels of the public administration (especially as regards the link with administrations responsible for the protection of specific interests). – Lack of attention to the technical and design aspects.

– Ample opportunity to concrete cases. – Competitive dialogue was introduced.

Great attention to the contractual phase (preparation of clauses that allow for an adequate risk allocation).

System of real and personal guarantees in terms of negotiation, the keeping of which is ensured by the principles that govern the English law of contract (privacy of contract).

Listed companies multi-business approach under IFRIC 12 adoption

Spain

– Presence of adequate coordination of mechanismsbetween the different authorities involved; – Great attention to technical aspects.

– Considerable margin of discretion to the PA in the management of procedures (extensive use of restricted procedures). – Competitive dialogue was introduced.

Great attention to the contractual phase (preparation of clauses that allow for an adequate risk allocation).

System of safeguards to protect the claims of the lenders required by law, despite the principles governing Spanish civil law.

Listed companies multi-business approach under IFRIC 12 adoption, except in water public services sector

Source: Adapted from ISAE Report, 2008.

Table 8.2

UK, Italy and Spain PPP Framework

Italy

Spain

UK

Codified Roman law system Plan-based financial reporting issued by a public body Credit as main financial system (creditors protection) Tax dominated accounting system

Common Law A record in the adoption and in the accounting regulatory environment

Starting date: 1980s Direct toll model, more recently shadow tolls (autonomous governments) No equivalent

Starting date: 1960s Project Financing adoption

Accounting Regulatory Environment Codified Roman law system Plan-based financial reporting issued by a public body accounting standards Credit as main financial system (creditors protection) Separation of tax and financial tax and accounting

Financial Approach

Characteristics of PPP Roads Sector Starting date: 20002 Direct toll model, more recently shadow tolls (autonomous governments) Coordination and management by public agency (Partnerships Public Body) Operators are public limited companies (set up subsidiaries of construction companies)

Operators are public limited companies (set up by subsidiaries of construction companies)

Comparison of Accounting Approaches Italy

Spain

UK

IFRIC 12

Basis of Accounting Treatment Not Economic substance over legal form of transactions.

Mercantile framework: legal and tax implications.

Tax implications

PPP Assets and liabilities defined according to control

There has been minimum debate. Spanish accounting treatment of infrastructure and contracts fits with EMU public deficit and debt requirements. There is no consideration of the economic rationale of transactions.

(Head, 2000) Confusion in IFRIC 12 adoption

Pronouncements try to determine how the details of the contract are interpreted within the control based definitions.

Accounting Debate Much debate between accounting regulator and Treasury (UTFP) about the nature of PPP, which leads to competing views of where the asset in PPPs lies.

Accounting Regulation PPPs accounting followed existing regulations on leasing and substance over form with modifications.

Specific accounting variation to the Spanish General Accounting Plan for the toll sector.

Evolution of applicable regulation from leases, going through disclosure requirements, to specific accounting treatment provided by IFRIC’s interpretation. continued

Table 8.2

Continued

Accounting Issues and Accountability Consequences Italy

Spain

UK

Separability of service and property Capitalization of financial Infrastructures falling within the definition of a elements of contract: infrastructure-based expenses once the motorway service concession arrangement should not be service(off public balance sheet) or is opened to traffic as recognized in operator balance sheet. financing arrangement (on public balance deferred expenditure: A rebuttable assumption that asset would be on sheet). becoming mechanism for new public balance sheet. concessionaires. Financial and intangible asset models used depending on whether the primary responsibility to pay the operator lies with the grantor or user. Party that bears the risks and rewards of Creation of a ‘reversion fund’: The accounting model is based on formal ownership (e.g. potential variations in protection of investors’ funds criteria, not on the economic substance: similar property profits and losses) is the party (may also protect taxpayers’ arrangements may be accounted for differently. having an asset. Asymmetrical reporting funds). Ad hoc revaluations: IASB’s pronouncements relate to private sector between public and private agents: to increase the value of companies. IFRICs exclude accounting for public taxpayers face uncertainty about future assets and facilitate access to sector grantors. Much criticized by commentators. liabilities. finance. Annual tariffs may be split into two parts Public support (exchange The scope of IFRIC’s interpretation is based on the in the income statement and in the rate insurance, subsidies, control criteria. Eurostat uses an approach based balance sheet: lack of comparability since refundable advance payments, on assessment of where risk lies for statistical companies may vary their recognition participative loans): purposes. policy. Government’s guarantees of boundaries between public Highways Agency’s payments are not and private sector become reflected in the public sector accounts: blurred. Not all public support taxpayers face uncertainty about future mechanisms are adequately liabilities. reflected in public accounts: taxpayers face uncertainty about future liabilities. Source: Adapted from Acerete, Stapleton, Stafford, 2007.

Sovereign Risk and PPP Schemes: Future Directions 215

Data on the evolution of PPPs have certainly underlined the crisis that has hit the industry (and the entire economy) hard and has given rise to significant volatility of PPPs; however, studying the figures shows the following: 1. The UK PPPs account for about 47 per cent of the total of all 28 EU countries; 2. The development of PPPs in the UK in recent years, shows a trend similar in many ways to the total of the 28 EU Countries; 3. If we examine the net values of UK PPPs they show a positive regression (France got the lion’s share in recent years); 4. In the UK the BoE has made a totally expansionary monetary policy by buying government bonds and pursuing a classic Keynesian policy. If the ECB in the EU adopted a similar policy (which it cannot do because of the Treaty) it would not serve PPPs much; 5. In the euro area, PPPs became a major economic stimulus, because the governments cannot finance public companies with issuance of sovereign bonds underwritten by ECB; 6. Spain shrinks the number of PPPs, but over the 16 years studied PPPs are worth three times those in Italy, despite the fact that the Italian GDP is higher than the Spanish; 7. In 2011 the volume of Italian PPPs was much higher than the levels in 2008, 2009 and 2010; 8. In 2012, we witnessed a fall similar to the negative peak of 2009, in 2013 the value of PPPs, even excluding UK, came back up; 9. All these concern the trend of “new PPPs that are carried out in each year” (in terms of value and number of deals); this means that the stock of PPPs (in terms of value and number of deals) actually tends to increase progressively. In summary, it is possible to say that in the UK there has been a sharp fall year on year, but the UK has used a lot in the past, which comes to represent a little less than half of all 28 EU PPPs. Conversely, if the ECB were more conservative, the trend of increase in the average standard would be maintained (with an r-square of 48 per cent). Among other positive aspects of IFRIC 12, there is an attempt to improve the financial reporting for investors, clarifying the nature and risks underlying the ASCs subject to measurement, recognition and assessment. However, several authors reveal that the centrality of the interpretative complexity is an effect and not just a source of greater needs of public finance (Laghi, 2010).

216

Sovereign Risk and Public-Private Partnership During the Euro Crisis

In fact, the entry or cancellation of balance sheet assets, are sometimes linked and based on the “transfer risk/benefit” model, and sometimes they are linked to the prevalence of the activity “control” model (Laghi, 2010; Martiniello, 2011; Heald, Georgiou, 2011), this circumstance generates an undoubted complexity of interpretation. Such a complexity is reflected as in a mirror (Heald, Georgiou, 2011), when assessing the adoption of IFRIC 12 with respect to the choice of evaluation based on the control model, or to the risk/benefit model, or to the new information provided by institutions such as the UTFP related to the principle of incurring the construction and management costs (Martiniello, 2011; Braja, Campra, Esposito, Ricci, 2013). Future research on innovative energy and healthcare PPPs in Europe will be important to complete this analysis.

Notes 2

Sovereign Risk: Credit Risk Analysis and the Role of PPP Schemes

1. It is better to consider the limit, rather than the use, to obtain a more conservative estimate of the conterparty’s bank exposure.

4

IFRIC 12 Service Concession Arrangements

1. In reply to the aforementioned concerns, the IASB set up a working group – staffed by representatives from the accounting regulatory bodies of Australia, France, Spain and the UK (four of the countries that had voiced queries) – tasked with conducting preliminary research into the matter. The working group recommended that IFRIC provide guidance on the application modalities of some of the existing accounting principles. 2. Before the release of the current version of Interpretation 12, in March 2005, IFRIC published three draft versions: D12 Service Concession Arrangements – Determining the accounting model; D13 Service Concession Arrangements – The Financial Asset Model; and D14 Service Concession Arrangements – The Intangible Asset Model. IFRIC received numerous letters commenting on the proposed drafts, and the staff of the IASB held meetings with many of the organizations concerned (operators, regulatory authorities, reviewers). Most respondents to D12–D14 supported the IFRIC’s proposal to develop an Interpretation. However, nearly all respondents expressed a concern with fundamental aspects of the proposals, some urging that the project be passed to the Board to develop a comprehensive standard. In its redeliberation of the proposals, IFRIC acknowledged that the project was a large undertaking but concluded that it should continue its work believing that it was (at the time) in a better position than the Board to address the issue in a timely manner. See “Basis for Conclusions” BC5, BC6 and BC7. 3. IFRIC Interpretation 12 was issued in November 2006 and approved by the European Commission on 25 March 2009 with EC regulation no. 254/2009, published in the Official Gazette of the European Union L/80 of 26 March 2009 and applicable (to date) to the financial statements for periods starting after the date the regulation came into force (art. 2 Reg. no. 254/2009), which was 29 March 2009 (art. 3 Reg. no. 254/2009). 4. The extension of IFRIC 12 accounting principles to private-to-private arrangements was requested by some respondents (when submitting their observations on the draft versions of the Interpretation to IFRIC ), but IFRIC concluded that this matter went beyond the scope of the project entrusted to the Committee. However, IFRIC pointed out that for such arrangements application by analogy might be appropriate, according to the hierarchy of sources contemplated in IAS 8 (paragraphs 7–12). In this connection see “Basis 217

218 Notes

5.

6.

7.

8.

9.

10.

for Conclusions” BC14. It should be noted that IAS 8 (paragraph 11) states that: “In exercising (its) judgement ... the management of the company must refer to and consider the applicability of the following sources in hierarchically decreasing order: (a) the provisions and application guidance provided in the Principles and Interpretations addressing similar or correlated cases; (b) the definitions, the recognition criteria and the measuring concepts to be adhered to in determining the entries for the assets, liabilities, revenues and costs contained in the Framework.” In this case too, some respondents asked IFRIC to provide guidelines on the recognition of public-to-private service concession arrangements on the grantor side. IFRIC replied that the request was outside the scope of the task entrusted to the Committee and pointed out that “in many cases the grantor is a governmental entity, and IFRS provisions are not intended for application to non-profit activities carried out by the private sector, the public sector or the government, notwithstanding the fact that they may be deemed appropriate by the entities that carry out such activities.” See “Basis for Conclusions” BC15. In this connection, “Basis for Conclusions” BC19, paragraph 5(b) of D12 proposes that for a service arrangement to fall within its scope the residual interest in the infrastructure handed over to the grantor at the end of the arrangement must be significant. Respondents argued, and IFRIC subsequently accepted, that the significant residual interest criterion would limit the usefulness of the guidance, in that a service arrangement for the physical life of the infrastructure would be excluded from the scope of the guidance. That result was not IFRIC’s intention. In its subsequent deliberations IFRIC concluded that it would not retain the proposal that the residual interest in the infrastructure handed over to the grantor at the end of the arrangement would have to be significant. As a consequence, a “whole of life” infrastructure, (i.e. infrastructure used in a public-to-private service arrangement for its useful life) is within the scope of the Interpretation. In recent years, IASB and IFRIC have also tended to prefer the notion of “control” over that of “transfer of risks and rewards” for revenue recognition purposes. In this connection see IFRIC 15 – Agreements for the Construction of Real Estate, issued in July 2008. See the previous section on IAS 18. IAS 18 (paragraph 14) states that for sales revenue to be recognized, all the following conditions must be met simultaneously:The entity has transferred to the buyer the significant risks and rewards associated with the ownership of the assets; In this connection IFRIC points out that paragraph 4 (which refers to contracts for services directly associated with work made to order) and paragraph 13 of IAS 18 specify that a contract should be subdivided into two phases or components: one for the construction process, which comes under the scope of IAS 11; and one for the management process, which comes under the scope of IAS 18. Furthermore, IFRIC underlined that the combination and splitting criteria provided for in IAS 11 (paragraphs 7 to 10) apply solely to the construction component of the contract. See “Basis for Conclusions” BC31. The part of paragraph 12 of IAS 18, in the IFRIC document, is the second part, which reads: “When assets or services are exchanged or bartered in exchange

Notes

219

for goods or services of a dissimilar nature, the exchange is regarded as a revenuegenerating transaction. The revenue is determined by the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalent transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.” See “Basis for Conclusions” BC33. 11. The grounds for such conclusions are given in BC62, which reads: “IFRIC considered whether the contract could include a derivative embodied in it if the amount due to the operator may vary as a function of the quality of the services supplied by the operator or as a function of the result and efficiency targets to be reached by the operator.” IFRIC concluded that it was not going to include it, since the definition of derivative contained in IAS 39 requires, among other things, that the variable does not pertain specifically to one of the parties to the contract. As a result, the contractual provision on payment variability does not meet the definition of derivative and therefore the provision on embodied derivatives given in IAS 39 does not apply. IFRIC pointed out that if the amount due to the operator depends on the attainment of quality, efficiency or result objectives set for the infrastructure, as described in paragraph BC44, this does not prevent it from being classified as a financial asset. 12. IFRIC considered whether the Interpretation should have provided guidance on when to recognize obligations and observed that the contractual terms and specific situation of each obligation might vary greatly from one contract to another. Accordingly, IFRIC concluded that the provisions laid down in IAS 37 are sufficiently clear to enable an operator to identify the period(s) in which to recognize said obligations. In this connection, see BC56 on IFRIC 12.

Bibliography Abrate, G., Erbetta, F., and Fraquelli, G. (2011). Public utility planning and cost efficiency in a decentralized regulation context: the case of the Italian integrated water service, Journal of Productivity Analysis, 35, 227–242. Acerete, B., Shaoul, J., and Stafford, A. (2009). Taking its toll: the cost of private roads in Spain, Public Money & Managament, 29(1), 19–26. Acerete, B., Shaoul, J., Stafford, A., and Stapleton, P. (2010). The cost of using private finance for roads in Spain and UK, Australian Journal of Public Administration, 69, S1, S48–60. Agrawal, D., Arora, N. and Bohn, J. (2004). Parsimony in Practice: An EDF-Based Model of Credit Spreads, Moody’s KMV White Paper. Agresti, A. (2002). Categorical Data Analysis, second edition, Wiley, New York. Akintoye, A., Beck, M., and Hardcastle, C. (2003) Public Private Partnerships: Managing Risks and Opportunities, Blackwell Science Ltd, Oxford. Akintoye, A., Fitzgerald, E., and Hardcastle, C. (1999). Risk Management for Local Authorities’ Private Finance Initiative Projects, Working Paper Cobra. Akintoye, A., Taylor, C., and Fitzgerald, E. (1988). Risk analysis and management of private finance initiative projects, Engineering, Construction and Architectural Management, 5(1), 9–21. Alcántara, V., and Duro, J. A. (2004). Inequality of energy intensities across OECD countries: a note, Energy Policy, 32, 1257–1260. Allard, G. and Trabant, A. (2008). Public-private partnerships in Spain: lessons and opportunities, International Business & Economics Research Journal, 7(2), 1–24. Altman E. I . (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy, Journal of Finance, September, 589–609. Altman, E. I., Resti, A., and Sironi, A. (2002). The Link between Default and Recovery Rates: Effects on the Prociclicality of Regulatory Capital Ratios, BIS Working Paper n. 113, July 2002. Altman, E. I., Brady, B., Resti, A., and Sironi, A. (2005). The link between default and recovery rates: theory, empirical evidence, and implications, Journal of Business, 78(6), 2203–2228. Amaduzzi, A., (1978). L’azienda nel suo sistema e nell’ordine delle sue rilevazioni, Utet, Torino. Amatucci, F., and Esposito, P. (2011). Financial dynamics of public private partnership in the design of welfare system. In Demetris Vrontis, Yaakov Weber, Hans Ruediger Kaufmann, Shlomo Tarba, and Evangelos Tsoukatos (eds) Business Research Challenges in a Turbulent Era, pp. 64–83, EuroMed Press . Amatucci, F., and Esposito, P. (2012). Le emissioni obbligazionarie: strumento di autonomia finanziaria? In Nicolai, M. (ed.), Primo Rapporto sulla Finanza Pubblica. Finanza Pubblica e Federalismo, pp. 621–647, Rimini, Maggioli Editore. Amatucci, F., and Esposito, P. (2013). Public private partnership in welfare system, Global Business & Economics Review, 15, 181–195. Amatucci, F., and Lecci, F. (2006). Le operazioni di partnership finanziaria pubblico-privato in sanità: un’analisi critica. In Anessi Pessina, E., and Cantù, E. (eds), L’aziendalizzazione della sanità in Italia: rapporto OASI, Milan, Egea. 220

Bibliography

221

Amatucci, F., and Vecchi, V. (ed.) (2009). Le operazioni di project finance: stato dell’arte e indicazioni per il futuro, OCAP, Milano: Egea. Amatucci F., and Vecchi V., (2011). Manuale di finanza per le aziende e le amministrazioni pubbliche, Milano, Egea. Amatucci, F., Germani, A., and Vecchi, V. (2007). ll project finance in sanità: un’analisi delle caratteristiche economico e finanziarie. In Anessi Pessina, E., and Cantù, E. (eds), L’aziendalizzazione della sanità in Italia: rapporto OASI, Milan, Egea. Ang, B. W. (2004). Decomposition analysis for policymaking in energy: which is the preferred method? Energy Policy, 32, 1131–1139. Ang, B. W. (2005). The LMDI approach to decomposition analysis: a practical guide, Energy Policy, 33, 867–871. Ang, B. W., and Zhang, F. Q. (2000). A survey of index decomposition analysis in energy and environmental studies, Energy, 25, 1149–1176. Aranda, A., Scarpellini, S., and Feijoo, M. (2003). Análisis de la Eficiencia energética en la industria española y su potencial de ahorro, Economía Industrial, 352, 11–24. Araten, M., and Jacobs, M. Jr. (2001). Loan equivalents for revolving credits and advised lines, The RMA Journal, May, 34–39. Arora, Navneet, Jeffery Bohn, and Irina Korablev (2005a). Power and Level Validation of the EDFTM Credit Measure in the U.S. Market, Moody’s KMV. Asarnow, E., and Marker, J. (1995). Historical performance of the U.S. corporate loan market: 1988–1993, The Journal of Commercial Lending, 10(2), 13–32. Ashbaugh, H. (2001). Non-US firms’ accounting standard choices, Journal of Accounting and Public Policy, 20, 129–153. Ashbaugh, H., and Pincus, M. (2001). Domestic accounting standards, international accounting standards, and the predictability of earnings, Journal of Accounting Research, 39(3), 417–434. Baietti, A., Kingdom, W., and Van Ginneken, M. (2006). Characteristics of well performing Public Water Utility, World Bank Group, Water Supply & Sanitation Working Notes, Note n. 9 . Bajari, P., and Lewis, G. (2008). Procurement Contracting with Time Incentives, NBER Working Paper. Bamber, D. (1975). The area above the ordinal dominance graph and the area below the receiver operating characteristic graph, Journal of Mathematical Psychology, 12, 387–415. Bangia, A., Diebold, F. X., Kronimus, A., Schagen, C., and Schuermann, T. (2002). Ratings migration and the business cycle, with application to credit portfolio stress testing, Journal of Banking and Finance, 26(2–3), 445–474. Bank of Italy (2006). Circular no. 263, New regulations for the prudential supervision of banks, 27 December. Bank of Italy (2008). Circular n. 269/2008, Supervisory Review and Evaluation Process – SREP, May. Bardos, M., Foulcher, S., and Oung, V. (2003). Exigences de capital et cycle économiques: une étude empirique sur les données françaises, Bulletin de la Commission Bancaire n. 28, April. Barone, G., and Bentivogli, C. (2006). Il trasporto aereo in Italia: ancora un caso di liberalizzazione incompiuta? Mercato concorrenza e regole, 1, 151–175.

222

Bibliography

Barth, M., Landsman, W., and Lang, M. (2008). International accounting standards and accounting quality, Journal of Accounting Research, 46(3), 467–498. Basel Committee on Banking Supervision – Consultative Document (2001). The Internal Ratings-Based Approach Supporting Document to the New Basel Capital Accord. Issued for comment by May 31. Basel Committee on Banking Supervision (2005). Update on work of the Accord Implementation Group Related to Validation under Basel II Framework, Basel Committee Newsletter n. 4, January. Basel Committee on Banking Supervision (2005). Studies on the Validation of Internal Rating Systems, Working Paper n. 14, May. Basel Committee on Banking Supervision (2005). Guidance on Paragraph 468 of the Framework Document, July. Basel Committee on Banking Supervision (2005). Validation of Low-default Portfolios in the Basel II Framework, Basel Committee Newsletter n. 6, September. Basel Committee on Banking Supervision (2005). International Convergence of Capital Measurement and Capital Standards – A Revised Framework, November. Basel Committee on Banking Supervision (2006). International Convergence of Capital Measurement and Capital Standards, A Revised Framework. Comprehensive Version – The New Basel Capital Accord, Report n.128, June. Basel Committee on Banking Supervision. Strengthening the Resilience of the Banking Sector. Issued for comment December 2009, Bank of International Settlements. Basel Committee on Banking Supervision (2010). Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, December. Basel Committee on Banking Supervision (2010). Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring, December. Basel Committee on Banking Supervision (2010). Guidance for National Authorities Operating the Countercyclical Capital Buffer, December. The Basel Handbook 2nd Edition (2007). A Guide for Financial Practitioners, Michael Ong, Risk Books. Engelmann, B. and Rauhmeier, R. (eds). The Basel II Risk Parameters, Estimation, validation and Stress Testing. Chapter IV – The Shadow Rating Approach – Experience from Banking Practice. Springer, Verlag. Beaver, W. (1967). Financial ratios as predictors of failures, Empirical Research in Accounting: Selected Studies, 1966, supplement to Journal of Accounting Research, 4, 71–111. Beccarello, M. (1998). Price-cap e recupero di produttività: suggerimenti dalla regolazione del settore del gas, Economia Pubblica, 4, 5–27. Benito, B., and Montesinos, V. (2009), An example of creative accounting in public sector: the private financing of infrastructures in Spain, Critical Perspectives on Accounting, 19, 963–986. Bentivogli, C., Panicara, E., and Tidu, A. (2008), Il project finanza nei servizi pubblici locali: poca finanza e poco progetto? Questioni di economia e finanza, n. 56, Banca d’Italia. Bentivogli, C., Panicara, E., and Tidu, A. (2010). La finanza di progetto. In Bianco, M. e Sestito, P. (a cura di), I servizi pubblici locali, Bologna, pp. 253–277.

Bibliography

223

Bianchi, C., Biovona, E., Ricci, P., and Landi, T. (2010). Applying system dynamics to foster organizational change, accountability and performance in the Public sector. A case- based Italian perspective, Systems Research and Behavioral Science Syst. Res. 27, published online in Wiley InterScience, DOI 10.1002/sres 1042. Bing, L., Akintoye, A., Edwards, P. J., and Hardcastle, C. (2005). The allocation of risks in PPP/PFI construction projects in the UK, International Journal of Project Management, 23, 25–35. Black, Fischer, and Cox, J. (1976). Valuing corporate securities and liabilities: some effects of bond indenture provisions, Journal of Finance, 31, 351–367. Black, Fischer, and Myron Scholes (1973). The pricing of options and corporate liabilities, Journal of Political Economy, 81(3), 637–654. Blanc-Brude, F., Goldsmith, H., and Välilä, T. (2007). Public-private partnerships in Europe: an update, Economic and Financial Report, EFR 2007–03, EIB. Blochwitz, S., Hohl, S., and When, C. (2003). Reconsidering Ratings, Unpublished Working Paper. BM & F. Bovespa (2010). Empresas Listadas. São Paulo, 2010. Disponível em: http://www.bovespa.com.br. Acesso em: 10 January 2011. COSTA, R. S. L. F. da. O impacto da adoção da IFRIC 12 nas empresas de serviço telefônico fixo comutado brasileiras: uma análise da aplicabilidade dos novos padrões contábeis. Dissertação de Mestrado – Departamento de Administração, Pontifícia Universidade Católica do Rio de Janeiro. Rio de Janeiro. Boeri, T., and Cohen, R. (ed.) (1998). Analisi dei progetti di investimento: teoria e applicazioni per il project financing, Milano: Egea. Borgonovi, E. (2005). Principi e sistemi aziendali per le amministrazioni pubbliche, Egea, Milano. Borgonovi, E., (2009). Finalità del federalism fiscal, Mecosan, 70, 3–8. Bradbury, M. (2008). Fifty-seven curious defects in Haswell and Langfield-Smith: a comment, Australian Accounting Review, 18(4), 287–293. Braja, E. M., Campra, M., Esposito, P., and Ricci, P. (2013). Theoretical framework on Public Private Partnership and Service Concession Arrangement, before and after IFRIC 12 adoption. Research trajectories, lines and dynamic development. In AIDEA. The firm’s role in the economy: does a growth-oriented business model exist? Article number 334, Bari, Cacucci Editore. Braja, E. M., Campra M., Esposito P., and Ricci P. (2015), Public Private Partnerships in Italy under IFRIC 12 adoption, Global Business Economic Review (forthcoming 2015). Brier, G. W. (1950). Verification of forecasts expressed in terms of probability, Monthly Weather Review, 78, 1–3. Broadbent, J., and Laughlin R. (1999). The private finance initiative: clarification of a future research agenda. Financial Accountability and Management, 15, 2, 95–114. Broadbent, J., and Laughlin R. (2005). The role of pfi in the uk government’s modernisation agenda, Financial Accountability and Management, 21, 1, 75–97. Budäus, D., and Grüb, B. (2007). Public private partnership: theoretische bezüge und praktische strukturierung. Zeitschrift für öffentliche und gemeinwirtschaftliche Unternehmen, 30, 3, 245–272. Broadbent, J., and Laughlin, R. (2004). Striving for excellence in public service delivery: experiences from an analysis of the private finance initiative. Public Policy and Administration, 19, 4, 82–99.

224 Bibliography Button, K. (2001). Transport policy. In El-Agraa, A. M. (ed.), The European Union: Economics and Policies, Prentice Hall Europe, Harlow, UK. Button, K. J., and Taylor, S. Y. (2000). International air transport and economic development, Journal of Air Transport Management, 6, 209–222. Camfferman, K., and Zeff, S. (2007). Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee, 1973–2000, Oxford: Oxford University Press. Camfferman, K., and Zeff, S. A. (2011). HYPERLINK “http://www.springerlink. com/index/h70k5k2664436231.pdf” Comment on ‘A political economy of accounting standard setting’. Journal of Management and Governance, Springer. Campra, M. (1998). Il bilancio. Francia, Germania, Regno Unito, Spagna, Italia, Milano: Giuffrè. Campra, M. (2005). La fusione. Normativa nazionale e IFRS, Milano: Giuffrè. Campra, M. (2005). Euro e bilancio d’esercizio. Italia, Francia, Spagna, Germania, Milano: Giuffrè. Campra, M. (2012). Accordi per Servizi di concessione in Ias/ifrs (Dezzani, Busso, Biancone), Ipsoa, Milano. Campra, M., Malfatti, L., and Passarani, D. (2011). IFRIC 12 e accordi per servizi in concessione, rivista Contabilità Finanza e Controllo – rivista di gestione aziendale, Il Sole 24 Ore. Cantor, Richard, and Chris Mann (2006). Analyzing the Tradeoff between Ratings Accuracy and Stability, Moody’s Investors Service, September. Capaldo, P. (1998). Reddito, capitale e bilancio di esercizio, Giuffrè, Milano. Capasso, A. (2002). Finanza di Progetto. Risorse pubbliche e private per il finanziamento delle opere di pubblica utilità, Milano, Franco Angeli. Cappellaro, G., and Longo, F. (2011). Institutional public private partnerships for core health services: evidence from Italy, Licensee biomed Central Ltd. Caramiello, C. (1993). Capitale e reddito, Giuffrè, Milano. Carbonara, N., Costantino, N., Pellegrino, R., and Sciancalepore F. (2011). Italian PPP applications: A Theoretical Framework. In Athena Roumboutsos and Nunzia Carbonara (eds), COST Action TU1001 – Public Private Partnerships in Transport: Trends & Theory, Discussion Papers, Arti Grafiche Favia srl, Bari, Italy. Cardillo, E. (2008). I presupposti scientifici e culturali dei percorsi di social accounting nel settore pubblico, Giappichelli, Torino. Carpintero, S., and Barcham, R. (2012). PPP in Light Rail Transit Systems in Spain. Proceedings of World Academy of Science, Engineering, and Technology. No. 65. Carrière, P. (1999). Project financing. Profili di compatibilità con l’ordinamento giuridico italiano. Cassella, F. (2005). Il project financing nel Regno Unito, Rivista di diritto pubblico comunitario, 1801. Caouette, John B., and Edward I. Altman (eds) (1998). Managing Credit Risk: The Next Great Financial Challenge (Frontiers in Finance Series), John Wiley & Sons, USA. Celio, M., and Cori, R. (2010). La nuova comunicazione della Commissione Europea sul PPP. CENSIS (2009). The Value of the Market for the Municipal Public Services, Report, Rome, January.

Bibliography 225 Commission of the European Communities (2004). Green paper on public private partnerships and community law on public contracts and concessions, COM(2004) 327. Committee of European Banking Supervisors (2006). Guidelines on the Implementation, Validation and Assessment of Advanced Measurement (AMA) and Internal Rating Based (IRB) Approaches, GL n. 10, April. Cooper, S. M., and Owen, D. L. (2007). Corporate social reporting and stakeholder accountability: the missing link, Accounting, Organizations and Society, 32(7–8). Cori, R. (2009). I contratti di Partenariato Pubblico-Privato. La definizione introdotta dal terzo correttivo al Codice dei contratti pubblici, UTFP News n. 5, Aprile-Giugno. Cosenz, F. (2010). A System Dynamics Approach to Analysing the Effect of Clientelism on Public Organizations Performance in Italy, Review of International Comparative Management, 11(academy 2), 2010. Costantino, L. (2003). Profili privatistici del project financing e gruppi di contratti, in Contratto e impr. CPC – Comitê de Pronunciamentos Contábeis. Disponível em: http://www.cpc. org.br. Acesso em: 10 jan. 2011. Credit Risk Measurement (2001). New Approaches to Value at Risk and Other Paradigms, second edition, Anthony Saunders and Linda Allen. Credit Risk Modelling (2003). The Cutting-edge Collection Technical Papers Published in Risk 1999–2003, Michael B. Gordy, Risk Books. Credit Risk Modeling using Excel and VBA (2007). Second edition, Gunter Loeffler, Peter N. Posh Wiley Finance Series. CRESME: www.cresme.it. Crosbie, Peter, and Jeffrey Bohn (2003). Modeling Default Risk, Moody’ s KMV White Paper. Cruz, C. F., Silva, A. F., and Rodrigues, A. (2009). Uma Discussão sobre os Efeitos Contábeis da Adoção da Interpretação IFRIC 12 – Contratos de Concessão. Revista Contabilidade Vista & Revista, Belo Horizonte, 20(4), 57–85, out./dez. Curcio, D. (2007). I fondamenti teorici del project financing, Banche e banchieri, 3, 202. CVM (2010) Comissão de Valores Mobiliários. Disponível em: http://www.cvm. gov.br. Acesso em: 10 January. 2011. ERNST&YOUNG; FIPECAFI. Manual de Normas internacionais de contabilidade: IFRS versus normas brasileiras. vol. 2. São Paulo: Atlas. De Laurentis, G. (2001). Rating Interni e Credit Risk Management – L’evoluzione dei processi di affidamento bancari, Bancaria Editrice. De Robertis, A. (1992). Privatizzazioni ed efficienza economica: aspetti teorici ed evidenze empiriche, in RIREA, Centro Poligrafico Romano, Roma, n. 1 e 2. Decarolis, F., Giorgiantonio, C., and Giovanniello, V. (2011). L’affidamento dei lavori pubblici in Italia: un’analisi dei meccanismi di selezione del contraente privato, Banca d’Italia, 7. Delladio, Gaiani, Iori, Meneghetti, Pozzoli (2011). Guida pratica fiscale. Contabilità e bilancio, Sole24ore. Dell’Atti, A. (2001). La concessione amministrativa quale strumento di privatizzazione funzionale. L’ammortamento dei beni gratuitamente devolvibili. Cacucci Editore, Bari.

226

Bibliography

Delmon, J. (2005). Project Finance, BOT Projects and Risk, The Hague: Kluwer Law International. Deloitte (2006). China’s New Accounting Standards, Deloitte Touche Tohmatsu. Dezzani, F., Busso, D., and Biancone, P. (2012). IAS/IFRS, Ipsoa, Milano. Dickinson, H., and Glasby, J. (2010). Why partnership working doesn’t work’: pitfalls, problems and possibilities in English health and social care, Public Management Review, 12, 811–828. DiMaggio, P., and Powell, W. (1983). The iron cage revisited institutional isomorphism and collective rationality in organizational fields, American Sociological Review, 48, 147–160. DiMaggio, P., and Powell, W. (1991). Introduction. In Walter W. Powell and Paul J. DiMaggio (eds) The New Institutionalism in Organization Analysis, Chicago: University of Chicago Press, pp. 1–38. Di Pietra, R., Gebhardt, G., McLeay, S., and Ronen, J. (2012). Special issue in governance and accounting regulation, Journal of Management & Governance 18, 675–681. Dudkin, G., and Välila, T. (2005). Transaction costs in public private partnerships: A First Look at the Evidence. EIB Economic and Financial Report. Durand, D. (1941). Risk Elements in Consumer Instalments Financing, NBER Working Paper. Dwyer, Douglas, and Irina Korablev (2007). Power and Level Validation of Moody’s KMV EDFTM Credit Measures in North America, Europe, and Asia, Moody’s KMV White Paper. Dwyer, Douglas, and Shisheng Qu (2007). EDFTM 8.0 Model Enhancements, Moody’s KMV White Paper. E4 (2003). Estrategia de Ahorro y Eficiencia Energética en España, Ministerio de Economía, Noviembre, Madrid. Edward, I. Altman and Herbert A. Rijken (2004). How rating agencies achieve rating stability, NYU Working Paper No. FIN-04-031, April 2004. Edwards, P., and Shaoul, J. (2003). Partnerships: for better, for worse? Accounting, Auditing & Accountability Journal, 16(3), 397–421. Elefanti, M. (2006). Le motivazioni alla base del processo di profonda trasformazione delle imprese pubbliche locali. In Elefanti, M. (ed.), L’evoluzione delle imprese pubbliche locali, Il Mulino, Bologna. Engelmann, B., Hayden, E., and Tasche, D. (2003). Testing rating accuracy, Risk, January, 82–86. Erbetta, F., and Cave, M., (2007). Regulation and Efficiency Incentives: Evidence from the England and Wales Water and Sewerage Industry. England: University of Warwick. Published online, 1 December 2007. Erbetta, F., and Fraquelli, G. (2003). Produttivita’ e redditivita’ nella distribuzione locale di gas naturale in Italia: proprieta’, diversificazione e scala operative, L’Industria, 4, 745–767. Esposito, P. (2010). State Capture, Governance, Accounatbility nelle aziende e nelle amministrazioni Pubbliche Locali. Dallo State Capture alla Society Capture, Rirea, Roma. Esposito, P. (2014). Outsourcing arrangements and telecommunication contracts: Accounting regulations under IFRIC 4 adoption, Thailand, AGBA Conference, Proceedings. Esty, B. (2001). An Overview of Project Finance – 2001 Updated, Working Paper Series, Harvard Business School.

Bibliography 227 Esty, B. (2003). The Economic Motivations of Using Project Financing, Working Paper, February. European Commission (2006). Directive n. 2006/48/EC, The taking up and pursuit of the business of credit institutions – Capital Requirements Directive, CRD, June. European Commission (2010). Endorsement of IFRIC 12 Service Concession Arrangements – Effect Study – Report. European Commission: Internal Market and Services DG. Brussels, June 2008. Disponível em: http://ec.europa.eu/internal_ market/accounting/docs/effect_study_ifric12_En.pdf. Acesso: em 04 out. 2010. European Investment Bank (EIB) (2009). R&D and financing of innovation in Europe. EIB Papers, 14(2), Luxembourg. EUROSTAT (2004). New Decision of Eurostat on Deficit and Debt. Treatment of Public-Private Partnerships, n. 18. EUROSTAT (2009). Eurostat Macroeconomic Aggregates at Constant Prices, Breakdown by 31 Branches, http://epp.eurostat.cec.eu.int. Data retrieved in June 2006 and February 2009. Evans, L. (2004). Language translation and the problem of international communication, Accounting, Auditing & Accountability Journal, 17(2), 210–248. Fabbris, L. (1997). Statistica multivariata. Analisi esplorativa dei dati, McGraw-Hill, Milano. Fabozzi, F. J., and Nevitt, P. K. (2000). Project Financing. London: Euromoney. Fédération des Experts Comptables Européens (FEE) (2005). Reference to the Financial Reporting Framework in the EU in Accounting Policies and in the Audit Report and Applicability of Endorsed IFRS, FEE, Brussels. Ferrovial Annual Report (2012). On line: http://www.memoria2012.ferrovial. com/recursos/doc/2012” www.memoria2012.ferrovial.com/recursos/doc/2012 Fidone, G. (2006). Aspetti giuridici della finanza di progetto, Roma. Financial Services Authority (2006). Expert Group Paper on Exposure at Default, June. Financial Stability Institute, FSI Award 2006 Winning Paper, Stability of a “through-thecycle” rating system during a financial crisis, Verónica Vallés, Central Bank of Argentina, September 2006. Finlombarda (2007). Public-Private Partnership in sanità: un possibile schema di contratto. Finnerty, J. D. (1996). Project Financing, New York: Wiley. Fisher, R. (1936). The use of multiple measurements in taxonomic problems, Annals of Eugenics, 7, 179–188. FMN: www.fmngroup.it. Fone, M., and Young, P. (2000). Public Sector Risk Management. Butterworth Heinemann, Oxford. Fundamentals of Corporate Credit Analysis, John Bilardello and Blaise Ganguin, McGraw-Hill, 2005. Gaffney, D., and Pollock, M. (1997). Can the NHS Afford the Private Finance Initiative? London: BMA, Health Policy and Economic Research Unit. Gaffney, G., Pollock, A., Price, D., and Shaoul, J. (1999). NHS capital expenditure and the private finance initiative – expansion or contraction? British Medical Journal, 310, 48–51. Gallia, R. (2008). Il Partenariato Pubblico Privato, Quaderni di Legislazione Tecnica, 4, 21–30. Gatti, S. (1999). Manuale del project finance, Roma, Bancaria Editrice.

228 Bibliography Gatti, S., and Germani, A. (2003). Le applicazioni del project finance nel settore sanitario. Generic Project Finance Methodology, Moody’s Investor Service, December 20, 2010. Germani, A. (2007). The Development in Italy of PPP Projects in the Healthcare. Journal: EPPPL, 2. Giorgiantonio, C., and Giovanniello, V. (2009). Infrastructure e project financing in Italia: il ruolo (possibile) della regolamentazione, Banca d’Italia, 56. Giorgiantonio, C., and Giovanniello, V. (2011). Infrastrutture e project financing in Italia: il ruolo (possibile) della regolamentazione, Banca d’Italia, 7. Giovando, G. (2012). Aspetti strategici, di gestione e di bilancio, Giappichelli Ed. Torino. Gisiger, Nicolas (2009). Risk-Neutral Probabilities Explained Working paper. Giussani, A. (2009). Introduzione ai principi contabili internazionali, Giuffrè, Milano. Golinelli, C. M., and Perrini, F. (2004). Il Project financing e il governo del territorio: il caso del Centro Congressi Italia. In Perrino, F. e Teti, E. (eds), Project financing per l’arte e la cultura, Milano. Gray, Dale and Samuel Malone (2008). Macrofinancial Risk Analysis, Hoboken, NJ John Wiley and Sons. Grimsey, D., and Lewis, M. K. (2004). Public Private Partnerships: The Worldwide Revolution in Infrastructure Provision and Project Finance. Cheltenham: Elgar. Grimesy, D., and Lewis, M. K. (2005). Are Public Private Partnership Value for Money? Evaluation Alternative Approaches and Comparing Academic and Practitioners View, Accounting Forum 29, available at HYPERLINK “http:// www.sciencedirect.com” www.sciencedirect.com. Guarini, E. (2008). Il Patto di stabilità tra equilibri di bilancio e dinamiche reali, in Pezzani F., Il Patto di lucidità, Egea, Milano. Guash, L. (2004). Granting and Renegotiation Concessions. Doing It Right, World Bank Institute. Guthrie, J., and Farneti, F. (2009). Sustainability reporting by Australian public sector organizations: why they report, May. On the limits of transparency as an “intelligent” form of accountability, see Roberts, J. (2009). No one is perfect: the limits of transparency and an ethic for “intelligent” accountability, Accounting, Organizations and Society, 34. Guthrie, J., Humprey, C., Jones, L. R., and Olson, O. (2005). International Public Management Financial Reform: Progress, Contradictions and Challenges, Information Age, Greenwich, CT. Hall, D. (2008). PPPs in the EU – A Critical Appraisal, ASPE Conference St. Petersburg, available at HYPERLINK “http://www.epsu.org” www.epsu.org. Hall, D., de la Motte, R., and Davies, S. (2003). Terminology of Public-Private Partnership (PPPs), EPSU, www.psiru.org. Haswell, S., and Langfield-Smith, I. (2008a). Fifty-seven serious defects in “Australian” IFRS, Australian Accounting Review, 18(1), 46–62. Haswell, S., and Langfield-Smith, I. (2008b). Serious IFRS defects a trifling matter? reply to two commentaries on ‘57 serious defects in “Australian IFRS”, Australian Accounting Review, 18(4), 294–296. Hawksworth, J. (2000). Implications of the Public Sector Financial Control Framework for PPPs, in The Private Finance Initiative: Saviour, Villain or

Bibliography 229 Irrelevance, A Working Paper for the IPPR Commission on Public Private Partnerships (London: Institute of Public Policy Research), pp. 9–22. Heald, D. (2011). PPP Accounting: Transparency and Governance. Presentation at the OECD fourth annual meeting of senior PPP officials, 24 March 2011. Heald, D., and Georgiou, G. (2010). Accounting for PPPs in a converging world. In Hodge, G., Greve, C. and Boardman, A. (eds). International Handbook of Public-Private Partnerships. Cheltenham: Edward Elgar, pp. 237–251. Heald, D., and Georgiou, G. (2011). The substance of accounting for PublicPrivate Partnerships. Financial Accountability & Management, 27, 2, 217–247. Henderson, J. (1999). The Place of Risk in the Private Finance Initiative. Paper presented at 1999 CIPFA Scottish Risk Management Conference, Edinburgh. Herbold, M. (2012). Organisation – PPP (Public Private Partnerships) in DeutschlandHYPERLINK “http://books.google.it/books?hl=it&lr=&id=2QQ0 vPAE0loC&oi=fnd&pg=PR6&dq=PPP+(herbold,+2012)&ots=ivNAWZJZUj&si g=wHCXlid1TkiuPkatK9RudTxB0Uk” : Probleme, Potenziale und empirische Analysen, Diplomde. HM Treasury (2006). Strengthening Long-term Partnerships, London, http://www. hm-treasury.gov .uk/d/bud06_pfI_618.pdf. HM Treasury (2008). Infrastructure Procurement: Delivering Long Term Value, London. HM Treasury (2012). UK private finance initiative projects: summary data as at March 2012. Available from: http://www.hm treasury.gov.uk infrastructure_ data_pfi.htm (Accessed: 2 August 2012). Hodge, G. A., Greve, C., and Boardman, A. E. (2010). International Handbook of Public Private Partnerships, Cheltenham, Edward Elgar. Hodge, G. A. and Greve, C. (2007). Public-private partnerships: an international performance review, Public Administration Review, 67(3), 545–558. Hodges, R. (2013). Accountability and Accounting for Public-Private Partnerships. In de Vries, P. and Yehoe, E. B. (eds.), The Routledge Companion to Public Private Partnerships (Routledge, Abingdon, UK), chapter 17. Hood, C. (1995). The new public management in the 1980s: variations on a theme, Accounting Organization and Society, 20(2/3). Hood, J., and Kelly, S. (1999). The emergence of public sector risk management: the case of local authorities in Scotland, Policy Studies, 20(4), 273–283. Hosmer, D. W., and Lemeshow, S. (2000). Applied Logistic Regression, second edition, New York: John Wiley & Sons. http://www.basel-ii-risk.com/Basel-II/Basel-II-Glossary/Exposure-at-Default.ht http://www.basel-ii-risk.com/Basel-II/Basel-II-Glossary/Probability-of-default.htm http://www.ine.es. I Controlli Societari. Milano: EGEA, pp. 151–169. IEA (2008). Energy Balances of OECD Countries, IEA/OCDE, Paris. IFRIC 12 (International Financial Reporting Interpretations Committee). Interpretation IFRIC 12 – Service Concession Arrangements approved on 25 March 2009 by means of Regulation (EC) no. 254. (IFRIC 12, par. 3.a). Iimi, A. (2008). HYPERLINK “http://books.google.it/books?hl=it&lr=&id=HMi S8jKOVigC&oi=fnd&pg=PA1&dq=ppp+(IIMI,+2008)&ots=UIkKETYUQo&si g=3rpcwZU1Ge5aJTtHMcCWmJImZuI” Bundling Public-Private Partnership Contracts in the Water Sector: Competition in Auctions and Economics of Scale in Operation, Policy Research Working Paper n. 4459, World Bank.

230 Bibliography Il metodo dei rating interni (2007). Basilea 2 e il rischio di credito: le regole, la loro attuazione in Italia, Francesco Cannata, Bancaria Editrice. Infopieffe: www.infopieffe.it. Iossa, E., and Russo, F. (2008). Potenzialità e criticità del Partenariato Pubblico Privato in Italia. Rivista di politica economica. Irimia, A., and Olivero, A. (2010). Financiación Privada de Infraestructuras. Ed. Escuela Andaluza de Economía, 4(3). Irimia, A., and Oliviero, A. (2012). Models of public-private partnerships in megaprojects: the Spanish case, Organization, technology and management in construction. An International Journal. ISAE (2008). Priorità nazionali. Infrastrutture materiali ed immateriali, Roma, June. Izzi, L., Oricchio,G., and Ratini, A. (2004). Il modello interno di rating del segmento retail di Capitalia. In De Laurentis, G., Saitam, F., and Sironi, A. (eds), Rating interni e controllo del rischio di credito. Esperienze, problemi, soluzioni, Roma, Bancaria Editrice. Jacob, C., Hilbig, Neunzehn D., Popp, T., Uhlig, T., and Winter (2012). PPP – Krankenhäuser: Qualitative und quantitative Risikoverteilung und die Lösung von Schnittstellenproblemen bei der Umstrukturierung von Kliniken. Kappeler, A., and Nemoz, M. (2010). Public-Private Partnership in Europe – Before and During the Recent Financial Crisis, European Investment Bank, Economic and Financial Report 2010/04, July. Kealhofer, S. (2003). Quantifying credit risk II: debt valuation. Financial Analysts Journal, May/June, 78–93. Kealhofer, Stephen (2003a). Quantifying credit risk I: default prediction. Financial Analysts Journal, January/February, 30–44. Keeney, R. L., and Raiffa, H. (1976). Decision with Multiple Objectives: Preferences and Value Tradeoffs, New York, Wiley. Kirsch, R. J. (2006). The International Accounting Standards Committee: A Political History, Wolters Kluwer. Korablev, Irina, and Shisheng Qu (2009). Validating the Public EDFTM Model Performance During the Credit Crisis, Moody’s KMV White Paper. Kunz, A. (1997). L’iscrizione dei beni gratuitamente devolvibili nei conti e nei bilanci d’impresa, Cedam, Padova. Kwak, Y. H., Chih, Y., and Ibbs, C. W. (2009). Towards a comprehensive understanding of public private partnerships for infrastructure development, California Management Review, 51(2), 51–78. Laghi, E. (1994). L’ ammortamento dell’avviamento. Aspetti economici, civilistici e contabili, Giappichelli, Torino. Laghi, E. (2010). La relazione logica e funzionale tra i due tipi di controllo. In C. Di Noia, M. Bianchi (eds). I Controlli Societari. Milano: EGEA, pp. 151–169. Laghi E., and Giornetti A. (2009). La “prevalenza della sostanza sulla forma” nella redazione del bilancio. TÉLOS, pp. 347–385. Laghi, E., Nenni, P., and Zanda, G. (2001). La valutazione economica e l’iscrizione in bilancio dei Diritti di sfruttamento di frequenze radiofoniche, Giappichelli, Torino. Lando, D., and Skødeberg, T. M. (2002). Analyzing rating transitions and rating drift with continuous observations, Journal of Banking and Finance, 26, 423–444.

Bibliography

231

Lee, W. C. (1999). Probabilistic analysis of global performances of diagnostic tests: interpreting the Lorenz curve-based summary measures, Statistics in Medicine, 18, 455–471. Leuz, C. (2003). IAS versus U.S. GAAP: information asymmetry-based evidence from Germany’s new market, Journal of Accounting Research, 41(3), 445–472. Li, B., Akintoye, A., Edwards, P. J., and Hardcastle, C. (2005). The allocation of risk in PPP/PFI construction projects in the UK. International Journal of Project Management, 23, 25–35. Liguori, M., Sicilia, M., and Pattaro, A. (2008). I comuni italiani ed il Patto di Stabilità Interno. Presentazione della ricerca sugli effetti dell’applicazione del patto sulle scelte di indebitamento ed investimento. In Le scelte di indebitamento degli enti locali. Prospettive per il controllo della spesa pubblica e la salvaguardia dell’autonomia aziendale, SDA Bocconi, 2008. Lima, A. E. (2010). Os efeitos da adoção da interpretação técnica ICPC 01 nas demonstrações contábeis das concessionárias de serviços públicos: o caso da COPASA. Dissertação de Mestrado Profissionalizante em Administração. Faculdade de Economia e Finanças IBMEC: Rio de Janeiro. Lippi, A. (2009). La valutazione delle politiche pubbliche, Bologna. Lo, A. (2003). Reconciling efficient markets with behavioral finance. The adaptive markets hypothesis, Journal of Investment Consulting, 7, 21–44. Lord, F. M., and Novick, M. E. (1968). Statistical Theories of Mental Test Scores, New York: Addison-Wesley Publishing Co. Mackie, P. (2010). Cost-benefit analysis in transport: a UK perspective, OECD and International Transport Forum, Discussion Paper n. 16. Marc, Gürtler, and Martin Hibbeln (2011). Pitfalls in Modeling Loss Given Default of Bank Loans, May 12. Mariani, M., and Menaldi, V. (2007). Il project financing nel codice dei contratti, Torino. Marrero, G. A., and Ramos-Real, F. J. (2008). La intensidad energética en los sectores productivos en la UE-15 durante 1991 y 2005: ¿Es el caso español diferente? Colección estudios económicos, www.fedea.es. Marsilio, M., Cappellaro, G., and Cuccurullo, C. (2009). Public-Private partnership: un’analisi bibliometrica, Azienda Pubblica, 2. Marsilio, M., Cappellaro, G., and Cuccurullo, C. (2011). Intellectual structure of PPPs research: a bibliometric analysis, Public Management Review, 13, 763–782, ISSN: 1471–9037. Martiniello, L. (2008). Public Private Partnerships and E-Services: The Web Portal for E Learning. In D’Atri, De Marco, Casalino (eds) Interdisciplinary Aspects of Information Systems Studies, Springer, pp. 409–415. Martiniello, L. (2011). Monitoring critically the state of the art in accounting for concessions, International Journal of Economics and Accounting, 2(4). Martins, A. C., Marques, R. C., and Cruz, C. O. (2011). Public-private partnerships for wind power generation: the Portuguese case, Energy Policy, 39, 94–104. Martins, V. A., and Andrade, M. E. M. C. (2009). Análise dos Normativos de Contabilidade Internacional sobre Contabilização de Contratos de Parcerias Público-Privadas, Revista Contemporânea de Contabilidade, Florianópolis, ano 06, 1(11), 83–107. Martins, V. A., and Andrade, M. E. M. C. (2010). Evidenciação dos ativos e passivos dos contratos de concessão: o caso da PPP-MG050, São Paulo. Anais do EnAPG. Measuring Transfer and Convertibility Risk, A. M. Best, March 15, 2011.

232 Bibliography McQuaid, R. W., and Scherrer, W. (2010). Changing reasons for public private partnerships. Public Money and Management, 30(1). Mendiluce, M. (2007). Cómo afectan los cambios estructurales a la evolución de la intensidad energética en España, Ekonomiaz, 65, 362–365. Mendiluce, M. (2008). La fiscalidad en el transporte rodado como instrumento para desvincular el transporte del crecimiento economic. In Becker, F., Cazorla, L.M. y Martínez-Simancas, J. (eds), Tratado de Tributación Medioambiental, Editorial Aranzadi, Navarra. Meneguzzo, M. (1995). New Public Management e modelli innovativi di programmazione e controllo interistituzionale della spesa pubblica. In Borgonovi, E. (a cura di), Il controllo della spesa pubblica, Egea. Merton, Robert C. (1974). On the pricing of corporate debt: the risk structure of interest rates, Journal of Finance, 29, May, 449–470. Merton, Robert (1992). Continuous Time Finance, Blackwell Publishing. Meyer, P. E. (1976). HYPERLINK “http://www.jstor.org/stable/245374” A framework for understanding” substance over form”, Accounting Review. Minogue, M. (1992). Changing the state: concepts and practice in the reform of the public sector. In Minogue, M., Polidano, C., and Hulme, D. (eds), Beyond the New Public Management, Northhampton, MA: Edward Elgar, 1998. See also Osborne, D., and Gaebler, T., Reinventing Government, Addison-Wesley Publ. Co. Montella, C. (2005). Rischi e garanzie nelle operazioni di “project financing”, Diritto e pratica. Moodys’ (2009). Global Heavy Manufacturing Rating Methodology, November. Moody’s Investor Service (2000). RiskCALCTM For Private Companies: Moody’s Default Model Rating Methodology, May. Moody’s Investor Service (2010). Global Manufacturing Industry, December 17. Moral, G., and García, R. (2002). Estimación de la severidad de una cartera de préstamos hipotecarios, in Banco de España, Estabilidad Financiera, n. 3. Morbidelli, G. (2005). Il project financing: considerazioni introduttive, Rivista di diritto pubblico comunitario, 1792–1818. Moutsaki, I. (2000). A latent variable model for ordinal variables, Applied Psychological Measurement, 24. Müller, B. (2008). International Adaptation Finance: The Need for an Innovative and Strategic Approach, Oxford Institute for Energy Studies, EV42. Munves, David and David Hamilton (2007). Moody’s Market Implied Ratings: Description, Methodology, and Analytical Applications, Moody’s ViewPoints. n. 1, December, http://www.autoritalavoripubblici.it. Nevitt, P. K. (1987). Project Financing, 4a ed., Bologna. Nobes, C. W. (2006). The survival of international differences under IFRS: towards a research agenda, Accounting and Business Research, 36(3), 233–245. Nobes, C. W. (2008). 57 varieties of serious defects in IFRS? Australian Accounting Review, 18(4), 283–286. Nobes, C. W., and Zeff, S. A. (2008). Auditor affirmations of compliance with IFRS around the world: an exploratory study, Accounting Perspectives, 7(4), 279–292. OECD (2010). Dedicated Public-Private Partnership Units. OGC (2006). Guidance on the Competitive Dialogue Procedure in the New Procurement Regulations, Gennaio, www.ogc.gov.uk. OGC e HMT (2008). Competitive Dialogue 2008. Joint Guidance on Using the Procedure, www.ogc.gov.uk.

Bibliography

233

OICE (2007). Procedure e tempi di esecuzione delle grandi opere nei paesi industrializzati, Collana OICE Studi e Convegni, n. 69, Roma, dicembre, www.oice.it. Papenfub, U., and Schaefer C. (2009). Improving public accountability by aligning reporting to organizational changes in public service provision – an empirical Internet study of all Austrian, German and Swiss Towns and States from an Agency-Theory, pp. 555–576. Paris, Rodrigues, and Cruz, Brugni (2011). A comparative study of European Union and Brazilian expected effects of IFRIC 12 endorsement. Parker, L., and Gould, G. (1999). Changing Public Sector Accountability: Critiquing New Directions, Accounting forum 23, available at HYPERLINK “http://www. sciencedirect.com” www.sciencedirect.com. Parlamento Europeo (2006). Relazione sul partenariato pubblico-privato e diritto comunitario in partnership, Milano. Perks, R. W. (1993). Accounting and Society, Chapman Hall, London. Petersen, O. H., and Carpintero, S. (2014). PPP projects in transport: evidence from light rail projects in Spain, Public Money and Management, 34(1), 43–50. Pinto, J. K. (1996). Power and Politic, Project Management Institute (PMI). Pisani, M. (2002). Un principio contabile per I beni in concessione, Franco Angeli, Milano. Pivato, G. (1958). Le gestion industriali produttrici dei servizi, Utet, Torino. Pollitt, C., and Bouckeart, G. (2000). Public Management Reform: A Comparative Analysis, Oxford: Oxford University Press. Pulejo L. (2005). Comunicazione e accountability nell’azienda Comune, Giappichelli, Torino; Qualitative criteria takes from Standard & Poor’s, Recovery: Recovery Analytics Update: Enhanced Recovery Scale and Issue Ratings Framework, May 30, 2007. Rabitti, G. L. (1996). Project Finance e collegamento contrattuale, Contratto e impresa, I, 234. Radebaugh, L. H., Gray, S., and Black, E. L. (2006). International Accounting and Multinational Enterprises, New Jersey: John Wiley & Sons. Raganelli, B. (2009). Finanza di progetto e opere pubbliche: quali incentivi? Torino. Range of Practice in Banks’ Internal Ratings Systems, A Discussion Paper by the Basel Committee on Banking Supervision, Basel, January 2000. Rangel, T., and Galende, J. (2010). Innovation in public-private partnerships (PPPs): the Spanish case of highway concessions, Public Money & Management. Rating Interni e Credit Risk Management, Giacomo De Laurentis, Bancaria Editrice, 2001. Recovery Risk (2005). The next Challenge in Credit Risk Management, Edward Altman, Andrea Resti, Risk Books. Recovery (2007). Recovery Analytics Update: Enhanced Recovery Scale and Issue Ratings Framework, May 30. Resti, A., and Sironi, A. (2007). Risk management and shareholders’ value in banking. From Risk Measurement Models to Capital Allocation Policies, Wiley Finance. Ricci, P. (2005). Enti strumentali regionali e loro accountability. Il caso Campania, Franco Angeli, Milano. Ricci, P. (2005). Principi contabili per gli enti locali e principi IPSAS: un confronto impossibile ? In La Finanza Locale, Maggioli Editore, Rimini, n. 10. Ricci, P. (2007). Introduzione all’ Economia Aziendale, Giuffrè, Milano, III edizione.

234 Bibliography Ricci, P. (2009). Introduction to “A Comparison of Government Accounting and Business Accounting” by James Chan, in RIREA, Roma, 3(e 4). Ricci, P. (2010). Il soggetto economico in ambito pubblico. Chi comanda davvero nell’azienda pubblica e perché, RIREA, Roma. Ricci, P., and Landi, T. (2009). La governance delle società per azioni dei servizi pubblici locali: attualità e prospettive, Azienda Pubblica, n. 2. Ricci, P., and Landi, T. (2010). Governance and accountability for Italian listed Public utilities companies, Review of International Comparative Management, 11(3). Ricci, P., and Landi, T. (2011). How to assess accountability of listed italian public utilities companies? Management delle Utilities, Maggioli, Rimini. Ricci, P., Cillo, V., and Landi, T. (2009). The Italian SMEs in the global context: the accountability system role. In Vrontis, D., Weber, Y., Kaufmann, R., and Tarba, S. (eds), Managerial and Entrepreneurial Developments in the Mediterranean Area, EuroMed Press, Cyprus, ISBN 978–9963–634–76–7, DOI 10.3292, 1496–1514. Ricci, P., Esposito, P., and Landi, T. (2010). L’accountability per il fronteggiamento dello State Capture nel management delle amministrazioni publiche locali, Azienda Pubblica, n. 2. Rjina, M. (2010). Il trattamento contabile e fiscal dei beni gratuitamente devolvibili, Economia Aziendale On Line, 4. Roberts, C., Weetman, P., and Gordon, P. (2008). International Corporate Reporting, Prentice Hall, Harlow. Robinson, P. (2000). “PFI and the Public Finances”. In The Private Finance Initiative: Saviour, Villain or Irrelevance, A Working Paper from the IPPR Commission on Public Private Partnerships, (London: Institute of Public Policy Research), pp. 1–8. Roncoroni, E. (1999). “Rapporti settoriali: gas”. In Fondazione Rosselli, I servizi di pubblica utilità in Italia, Guerini e associati, Milano, pp. 137–174. Rudi, Schäfer, and Alexander F. R. Koivusalo (2011). Dependence of defaults and recoveries in structural credit risk models, March 31. Saal, D. S. and Parker, D. (2000). The impact of privatisation and regulation on the water and sewerage industry in England and Wales: a translog cost function model, Managerial and Decision Economics, 21, 253–268. Saal, D. S. and Parker, D. (2001). Productivity and price performance in the privatised water and sewerage companies of England and Wales, Journal of Regulatory Economics, 20(1), 61–90. Saal, D. S., and Parker, D. (2004). The comparative impact of privatization and regulation on productivity growth in the English and Welsh water and sewerage industry, 1985–99, International Journal of Regulation and Governance, 4(2), 139–170. Saaty, T. L. (1977). A scaling method for priorities in hierarchical structures, Journal of Mathematical Psychology, 15, 234–281. Saussier, S. (2012). An Economic Analysis of the Closure of Markets and other Dysfunctions in the Awarding of Concession Contracts. Report for the European Parliament, IP/A/IMCO/NT/2012–11. Savas, E. S. (2000). Privatization and Public-Private Partnerships, Chatham House, New York. Savas, E. S. (2000). Privatization and Public-Private Partnership, Chatham House Publishers, New York.

Bibliography

235

Sawkins, J. W. (1995). Yardstick competition in the English and Welsh water industry: Fiction or reality? Utilities Policy, 5(1), 27–36. Schaefer, Stephen, M., and Strebulaev, A. Ilya (2008). Structural models of credit risk are useful: evidence from hedge ratios on corporate bonds, Journal of Financial Economics, 90(1), October, 1–19. Securities and Exchange Commission (SEC) (1973), Statement of Policy on the Establishment and Improvement of Accounting Principles and Standards, Accounting Series Release No. 150, December 20, SEC, Washington, DC. Securities and Exchange Commission (SEC) (2010). Commission Statement in Support of Convergence and Global Accounting, 33–9109, February 24, SEC, Washington, DC. Shaoul, J. (1998). Charging for capital in NHS trusts: to improve efficiency? Management Accounting Research, 9, 95–112. Shaoul, J., Edwards, P., and Stafford, A. (2004). Evaluating the operation of PFI in roads and hospital. Association of Chartered Certified Accountants, Research Report No. 84. Shaoul, J., Stafford, A., and Stapleton, P. (2007a). Evidence based policies and the meaning of success: the case of a road built under Design Build Finance and Operate, Evidence and Policy, 3(2), 159–179. Shaoul, J., Stafford, A., and Stapleton, P. (2007b). Private control over public policy: financial advisors and the private finance initiative, Policy and Politics, 35(3), 479–496. Shaoul, J., Stafford, A., and Stapleton, P. (2008a). The cost of using private finance to build, finance and operate hospitals. Public Money and Management, 28(2), 101–108. Shaoul, J., Stafford, A., Stapleton, P., and Macdonald, P. (2008b) Financial black holes: accounting for privately financed roads in the UK, ICAS, Edinburgh. Shaoul, J., Stafford, A., and Stapleton, P. (2010) Accountability for public expenditure under building schools for the future, Journal of Education Policy, 25(6), 749–756. Shaoul, J., Stafford, A., and Stapleton, P. (2011). Bridging the gap? Financing the Dartford and Skye bridges in the UK, Public Money and Management, 31(1), 51–58. Shapiro, C., and Willig, R. D. (1990). Economic rationales for the scope of privatization. In Suleiman, E. N. and Waterbury, J. (eds), The Political Economy of Public Sector Reform and Privatization, London: Westview Press. Shleifer, A. (1985). A theory of yardstick competition. Rand Journal of Economics, 16(3), 319–327. Simon, H. (1982). Models of Bounded Rationality, Volumes 1 and 2. Cambridge, MA: MIT. Sinclair, A. (1995). The chameleon of accountability: forms and discourses, Accounting, Organizations and Society, 20 (2–3). Sobehart, J. R., and Keenan, S. C. (2004). Performance evaluation for credit spread and default risk models. In Shimko, D. (ed.), Credit Risk: Models and Management, Second Edition, Risk Books London, pp. 275–305. Standard & Poor’s internet site (2003). ARCHIVE | Criteria | Corporates | Industrials: Liquidity Shapes Europe’s High-Yield Consumer-Oriented Credits, February. Standard & Poor’s website (2008). Criteria | Corporates | General: 2008 Corporate Criteria: Analytical Methodology Publication date: April 15.

236

Bibliography

Standard & Poor’s website (2009). Criteria | Corporates | Industrials: Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, January 27. Standard & Poor’s Guide to Measuring and Managing Credit Risk, Olivier Renaul, Arnaud de Servigny, McGraw-Hill, 2004. Steccolini, I., De Matteis, F., and Preite, D. (2008). La governante dei gruppi pubblici locali italiani: quali criticità per il bilancio consolidato? La Finanza Locale, n. 11. Steer Davies Gleave (2004). High Speed Rail: International Comparisons. Final Report, Commission for Integrated Transport, London (UK). Sullivan, H., and Skelcher, C. (2002). Working across Boundaries: Collaboration in Public Services, Basingstoke: Palgrave Macmillan. Tasche, D. (2003). A Traffic Lights Approach to PD Validation, Working Paper. UTFP: www.utfp.it. Valotti, G. (2006). I nuovi modelli di corporate governance delle imprese pubbliche locali. In Elefanti, M. (ed.), L’evoluzione delle imprese pubbliche locali, Il Mulino, Bologna. VanHam, H., and Koppenjan, J. (2000). Public Private Partnership in Port Development: Assessing and Managing Risk. Paper presented at the 4th International Symposium on Public Management, Erasmus Universty, Rotterdam. Vassallo, J. M., and Sanchez-Solino, A. (2007). Subordinated public participation loans for financing toll highway concessions in Spain. Journal of the Transportation Research Board, 1996(1), 1–8. Vassallo, J. M., Baeza, M. D. L. Á., and Ortega, A. (2012a). What was wrong with the toll highway concessions in the Madrid Metropolitan Area? Canadian Journal of Civil Engineering, 39(1), 81–90. Vassallo, J. M., Ortega, A., and de los Ángeles Baeza, M. (2012b). Risk allocation in toll highway concessions in Spain. Journal of the Transportation Research Board, 2297(1), 80–87. Vassallo, J. M., Ortega, A., and Baeza, M. D. L. Á. (2011). Impact of the economic recession on toll highway concessions in Spain. Journal of Management in Engineering, 28(4), 398–406. Vecchi, V., and Hellowell, M. (2012). Securing a better deal from investors in public infrastructure projects: insights from capital budgeting. Public Management Review. Available at http://dx.doi.org/10.1080/14719037.2012.686232 [first online August 2012]. Vecchi, V., Hellowell, M., and Longo, F. (2009) Are Italian healthcare organisations paying too much for their public private partnerships? Bocconi University, Milan, Mimeo. Whittington, G. (2005). The adoption of international accounting standards in the European Union, European Accounting Review, 14(1), 127–153. World Academy of Science, Engineering and Technology, 2012. World Bank (2002), Public Private Infrastructure Advisory Facility and water and sanitation program. Paper 3. World Bank (2013). www.worldbank.org. Yescombe, E. R. (2007). Public-Private Partnerships: Principles of Policy and Finance, Elsevier Finance, Great Britain.

Bibliography

237

Zeff, S. A. (2010). Political lobbying on accounting standards – US, UK and international experience, chapter 11. In Nobes, C. and Parker, R. (eds), Comparative International Accounting, Prentice-Hall, Harlow. Zeff, S. A., and Nobes, C. W. (2010). Has Australia (or Any Other Jurisdiction) “Adopted” IFRS? Australian Accounting Review, 20(2), 178–184. Zhang, Jing, and Zan Li (2009). Investing in Corporate Credit Using Quantitative Tools, Moody’s KMV.

Index credit risk, 2, 4, 5, 15 bank risk, 2, 4, 6, 25 sovereign risk, 25, 27, 28

risk transfer, 43, 81, 93, 99, 193 tariff, 31, 38–39, 41, 43, 107–108, 111, 133, 148, 186, 194, 196, 209, 214 value for money, 96, 99, 102

default probability, 8, 10, 15 rating, 15, 18, 23 parent support, 22 Public-Private Partnerships (PPPs), 30–33, 35–53, 77–79, 82, 84–86, 90, 94–106, 115–123, 125–127, 129–130, 132, 183–185, 187–189, 192–193, 199, 206, 208–213, 215–217 control, 36,43, 54, 56–61, 70–76, 78–81, 88–89, 101–102, 106–107, 110, 112, 117, 125–127, 129–130, 133, 145, 147–149, 153–156, 160–162, 165–167, 170, 173–174, 176, 179, 183, 185–186, 189, 191–192, 197, 208, 213–214, 216, 218 grantor, 36, 39, 54–68, 70, 72–77, 82, 88, 107, 110–111, 118–119, 126, 128–131, 154, 186, 206, 208, 211, 214, 218 infrastructure functionality, 74 Internal Stability Pact, 3, 79–80, 127, 210 management services, 36, 62, 64, 74, 178 operator’s right, 55, 60, 127 privatization, 28, 30, 102, 119, 126, 130, 149 Project Finance Initiative (PFI), 43, 52–53, 81, 86, 90, 93, 188 public sector, 32, 36, 38–39, 43, 53–54, 57, 78–79, 82–83, 90, 99, 101, 107, 125–126, 129, 162, 183, 186, 188–189, 191, 193, 208, 214, 218 public utilities, 30, 127, 148–150, 209 public works, 31, 35–36, 47, 78, 82, 115–117, 119–122, 124–126, 187, 189–190, 202–203, 208

service concession arrangement, 37, 54–59, 61–63, 65, 67, 69–71, 73, 76, 78, 82, 84, 106, 108–110, 112, 130, 138–139, 146–148, 150, 156–159, 162–163, 172–174, 176, 179, 181, 185, 191, 201, 206, 208, 214, 217–218 BOOT, 81, 93, 132 BOT, 36, 38–43, 45, 132, 183 concession, 37, 54–59, 61–63, 65, 67, 69–71, 73, 76, 78, 82, 84, 106, 108–110, 112, 130, 138–139, 146–148, 150, 156–159, 162–163, 172–174, 176, 179, 181, 185, 191, 201, 206, 208, 214, 217–218 effect on consolidated equity, 151 financial charges, 68, 74–76, 179, 181 IAS, 55, 59–65, 67–77, 79, 107, 113–114, 126, 137–138, 148, 152–154, 186, 199, 201, 208–210, 214, 217–219 IFRIC, 4, 55, 12, 35, 43, 54–61, 63, 65, 67–79, 82, 84, 100–101, 108–113, 118–119, 125–131, 134–135, 137–139, 141, 146–148, 151–155, 158, 160–162, 165–166, 170, 173, 176, 178, 185–186, 191–193, 196, 199–202, 206, 208–211, 213, 215–217, 219 intangible asset model, 75, 107, 111, 127–128, 131, 186, 206, 214, 217 lease, 41, 43, 55, 59–60, 111, 160, 185, 213 leasing in costruendo, 118 outsourcing, 32, 43, 126, 210, 217

239