Public Private Partnerships

Responses to Exposure Draft

July 2017 Public Private Partnerships Responses to Exposure Draft

Table of Contents

Response Organization Contact Person Page No. No. 1 Metrolinx Robert Siddall 1 – 4

2 BDO Canada LLP Armand Capisciolto, CPA, CA CPA (Michigan) 5 – 10

3 Government of Saskatchewan Terry Paton, Provincial Controller 11 – 14

4 Province of British Columbia Carl Fischer, CPA, CGA 15 – 20

5 City of Calgary Duri Lee, CPA, CA 21 – 24

6 Alberta Treasury Board and Finance Dan Stadlweiser 25 – 32

7 Auditor General of Canada Stuart Barr 33 – 38

8 Nova Scotia Finance and Treasury Josh Burk 39 – 42 Board 9 Ordre des Comptables Annie Smargiassi 43 – 52 Professionnels Agrées du Québec 10 PricewaterhouseCoopers LLP Lucy Durocher 53 – 55

11 Office of the Auditor General of Wayne Morgan, PhD, CPA, CA, CISA 56 – 61 Alberta Colin Semotiuk, CPA, CA 12 Treasury Board Secretariat of Leona Melamed 62 – 70 Canada Michael Lionais 13 PPP Canada Greg Smith 71 – 73

14 Canadian Union of Public Toby Sanger 74 – 80 Employees 15 Provincial Auditor of Saskatchewan Judy Ferguson, FCPA, FCA 81 – 83

16 City of Surrey Jorge Silvestre, BBA(app), CPA, CGA 84 – 87

17 Office of the Chief Administrative Michael Ruta, FCA 88 – 99 Officer 18 Province of Manitoba Aurel Tess, CPA, CGA 100 – 104

19 Ministre des Affaires Municipales de Nancy Klein 105 – 112 Québec 20 Comptroller General of Finance Ann Marie Miller 113 – 115 Newfoundland and Labrador 21 Colleges Ontario Finance Officers Kelly Morrow, CPA, CA 116 – 119 Public Private Partnerships Responses to Exposure Draft

22 Deloitte LLP Gloria Lemire, FCPA, FCA 121 – 128

23 The Regional Municipality of York Jason Li 129 – 132 Canice Mok 24 Auditor General of Ontario Bonnie Lysik 133 – 136

25 SaskBuilds Corporation Miller, Alicyn 137

Response Questionnaire Public Private Partnerships Statement of Principles

Name: Robert Siddall

Organization: Metrolinx

E-mail: [email protected]

General comments:

Dear Mr. Puskaric,

Thank you for the opportunity to comment on the Statement of Principles, Public Private Partnerships (PPPs).

We assume that the use of such arrangements is already well established and active in the Canadian public sector hence the collective experience of organizations can be reflected in the proposed standards. For example, using a risk based approach in the development of the standard will be very helpful as it may help alert users to identify areas of difficulty and pitfalls to avoid. The collective experience of preparers, auditors and other users can also be reflected as part of the guidance.

We suggest the final guidance to also cover the typical accounting and financial management issues that arise: availability and reliability of complete information over the term of the contract; clear application of the different PPP structures; and how to account for the asset over its life cycle. For example, how do we reflect the long term service capacity (including of fully amortized) of assets and treatment of perpetual upgrades that maintain or increase useful service lives. This is relevant especially in the context of the various possible PPP structures, such as a Design, Build, Finance, Operate and Maintain (DBFOM) models.

If there is a need and a way to reflect and/or enhance the current guidance on Statement of Recommended Practice (SORP-3), Assessment of Tangible Capital Assets, then that would also be very useful as the current guidance does not include the impact of external third parties managing public assets over their useful lives. . This is especially important in the more complicated PPP arrangements and longer term contracts whereby there is a reliance on Project Co or the concessionaire to provide information on asset condition and related expenditures on rehabilitations and refurbishments, etc.

1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include: • a requirement to build, acquire, improve or refurbish; • finance; and • maintain and/or operate the infrastructure? If not, what public private partnerships should be included or excluded?

Yes, we agree with the scope of the types of partnership arrangements as the different structures proposed cover the diverse nature of partnerships that currently exist in the Canadian public sector.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

Yes, we agree. Public private partnerships usually involve large capital projects including highways, bridges, light rail transit, hospitals, schools and water-treatment facilities. With these large projects, use of term ‘infrastructure’ and as necessary “complex infrastructure” seems appropriate.

A definition of what complex infrastructure means in the public sector will also be useful. The term is also currently used in other standards including PS 3150, Tangible Capital Asset and the proposed standard on Asset Retirement Obligations.

We agree. The proposed recognition guidance provides further insight on what may constitute control in a PPP contract and the eventual capital asset recognition treatment. It will also be helpful to know if there are situations, if any, where PPP arrangements in the public sector, do not result in a capital asset recognition treatment.

4. Do you agree a liability should be recognized when the public sector entity has an obligation to deliver cash or another financial asset as consideration for the building, acquisition, improvement or refurbishment of infrastructure? If not, where should the credit entry be presented?

We agree that a liability is established when an organization has an obligation to pay through cash or other non-cash means.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue- generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

The substance of such a transaction is that an entity has an obligation to pay for services procured under the partnership agreement so we agree that the non-cash part of the consideration constitutes a liability that will eventually need to be extinguished. The complexity arises when cash is not used as consideration. Non cash considerations such as right to future revenue streams, long term lease transactions, trigger measurement and recognition issues. The final standard must address these issues in such situations and provide guidance.

The proposed credit entry is consistent with existing standards on liability recognition.

6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset (for example, land). If yes, please provide examples of consideration types not considered?

Yes, it will be helpful to have additional guidance in such scenarios. Please see the general comments section.

Possible examples may include permanent easements (vs outright “sale” of assets), exclusive use of a certain portion of a larger asset where it is difficult to separate the value of contiguous assets, etc.

There is a need to discuss a scenario having a non-financial consideration such as land or other form of non-financial assets. 7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

We agree. The proposal is in line with the conceptual framework and historical cost application, PS 3150, Tangible Capital Assets and SORP- 3, Assessment of Tangible Capital Assets.

We agree. Subsequent expenditures on asset maintenance refurbishments and rehabilitations must be added to the cost of the asset to reflect the remaining or enhanced service capacity and useful life. Using historical cost is also appropriate.

Given the nature of the public sector and the funding mechanisms in place, it is necessary to account for the use of taxpayer’s resources. Public sector organizations obtain their funding via annual appropriations and spending authority for the different types of expenditures they incur. It is thus necessary to reflect how the organization has maintained the service life and efficiency of public assets. This leads to transparency and simplicity in reporting as well as demonstrating accountability for resources received.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

We found this discussion unclear. While the theoretical merits of using a discounted cash flow approach is valid, the relevance to using this approach in valuing PPP-built assets is unclear. Is the assumption here that if there are some assets, for example, those that are built over a very long term must use a discounted cash flow approach? If major asset builds take up to a maximum of ten years, then is the cost approach or the discount cash flow approach being recommended?

It will be helpful to further elaborate on the specific use of such an approach, thresholds for construction periods where this is relevant and useful and examples of specific types of asset builds that may be covered under such scenarios.

It will also be helpful to discuss the appropriate accounting for finance, operations and maintenance portions of long term PPP agreements. The current discussion on measurement focuses mostly on building and construction part of PPP arrangements. For example, guidance on appropriate accounting for interest expense (pre and post construction, special purpose vehicle (SPV) costs, etc.), appropriate disclosures related to operating and maintenance portions of the agreement, etc., will also be helpful.

10. Do you agree the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied? If not, where should the

balancing entry be recorded when the performance obligation is satisfied?

TheYes guidancewe agree onwith discount the proposed rate applies approach. when a public private partnership agreement includes a commitment to deliver an expected stream of cash flow over the term of the partnership.

11. However,Does thethe structureguidance ofon consideration discount rate istransferred silent on the in scenariopublic private when partnershipsthe public sector – which entity may transfers include to the private sectorconsideration entity the right for tobetterments, earn revenue maintenance, from third-party operations, users or frometc. –another require re specificvenue-generating guidance assetin addition as to consideration.the Statement of Principles proposals? If yes, what additional guidance is necessary? Please provide examples.

Yes,Since additional these right guidance to earn revenue is necessary from third with party respect users areas could o fgenerate measurement, consideration setting over expectations a long-term of period, third party how servicewill the discountingproviders, etctechnique. apply in terms of measuring such right to earn revenue.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or 4 additions would you make to these requirements, and why?

We agree with the proposed disclosures.

13. Are there additional matters requiring consideration?

5 Tel: 416 865 0111 BDO Canada LLP Fax: 416 367 3912 20 Wellington Street East Toll-free: 888 505 7993 Suite 500 www.bdo.ca Toronto Ontario M5E 1C5

Michael Puskaric, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto, Ontario M5V 3H2

October 10, 2017

Re: PSAB Statement of Principles – Public Private Partnerships

Dear Mr. Puskaric,

We have read the above-mentioned Statement of Principles that was issued August 2017 and are pleased to have the opportunity to provide responses to your specific questions as outlined below.

Overall, we agree with many of the proposals set out in the Statement of Principles. However, we have concerns about the use of cost as the initial measurement basis for the infrastructure and liability and the wording of the guidance provided in the Statement of Principles on determining cost.

Cost of an asset is typically defined as the consideration paid for an asset. When cash is paid in exchange for the infrastructure, it is easy to determine cost. However, when the “right to charge” is granted in exchange for the infrastructure determining cost is not as simple. Additionally, the guidance provided in the Statement of Principles on determining cost seems inconsistent with the concept of cost and instead seems to imply measuring the liability at fair value, rather than cost. In the proposed PSAS standard, we believe it would be more appropriate for the infrastructure to be measured at fair value rather than cost. See our response to Questions 6, 7 and 8 for further explanation of our concerns.

Additionally, we do not agree with the discount rate guidance provided in the Statement of Principles. We believe significantly more guidance on how an entity is to develop a discount rate, when one cannot be observed directly from the market, is needed. Infrastructure developed through public private partnerships is primarily long-term in nature, so the use of discount rates can have a material impact on the initial measurement and subsequent results of the arrangement. A lack of guidance could lead to significant differences in financial results for similar projects if dissimilar discount rates are used. Therefore, we believe additional clear discount rate guidance is needed.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. 6

1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include: a requirement to build, acquire, improve or refurbish; finance; and maintain and/or operate the infrastructure? If not, what public private partnerships should be included or excluded?

Yes, we agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include: a requirement to build, acquire, improve or refurbish; finance; and maintain and/or operate the infrastructure.

Additionally, the scope of the proposed standard should also make it clear how the Section applies to government not-for-profit organizations that follow PSAS with the PS 4200 series of standards. For example, the section on subsequent measurement in the Statement of Principles explains Section PS 3150, Tangible Capital Assets, would be followed when accounting for infrastructure in subsequent periods, but government not-for-profit organizations following the PS 4200 series would follow Section PS 4230, Capital Assets Held by Not-for-Profit Organizations.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

Yes, we agree that the overall term infrastructure accurately reflects items that should be covered in the Statement of Principles, however, we believe the proposed standard needs to provide a clear definition of what is meant by the term “infrastructure”. Without a clear definition it would be difficult to determine what types of assets should be accounted for under this proposed standard. For example, would leasehold improvements be considered infrastructure? We also believe what is meant by the term “public private partnership” needs to be clearly defined in the proposed standard, as this term has been defined in multiple ways by government agencies and the private sector. The proposed standard needs to be clear that its scope incudes only “public private partnerships” as it defines them.

International Public Sector Accounting Standard (IPSAS) 32, Service Concession Arrangements: Grantor, provides guidance on accounting for similar types of arrangements by government entities. IPSAS 32 provides clear definitions for the terms “service concession arrangement” and “service concession asset”, which would be similar to the terms “public private partnership” and “infrastructure” used in this Statement of Principles. Without clear definitions of specific terms used in a standard, the standard is difficult to apply and can result in diversity in practice.

Yes, we agree the clarified control guidance set out in Principle 1 and paragraphs .20-.38 in the Statement of Principles is appropriate and sufficient as it relates to the recognition of infrastructure.

We also believe guidance should be added to the standard on any impact renewal options have when assessing residual interest when determining control. 7

Yes, we agree a liability should be recognized when the public sector entity has an obligation to deliver cash or another financial asset as consideration for the building, acquisition, improvement or refurbishment of infrastructure.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Yes, we agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset.

6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset (for example, land)? If yes, please provide examples of consideration types not considered.

Yes, we believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset. The Statement of Principles says that the initial measurement of the infrastructure and liability should be at cost. However, cost could be problematic in this situation. For example, a piece of land is provided by a public sector entity as consideration for infrastructure constructed by a private sector entity. The land has a cost to the public sector entity of $100, but a fair value of $1,000,000. The infrastructure that has just been constructed by the private sector entity has a cost and fair value of $1,000,000. If the public sector entity, records the infrastructure on its books at cost, it would be recorded at $100 as that is the cost of the consideration the public sector entity has given up in exchange for the infrastructure. This does not make sense as the infrastructure would then be record on the public sector entity’s books at an amount that is completely unrelated to its value. In this situation, the infrastructure may be better reflected if it was recorded at its fair value instead of at cost. As noted in our response to Question 7 below, this is a further example of how using cost for the initial measurement of the infrastructure and liability is problematic.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

The guidance in the Statement of Principles states that initial measurement of the infrastructure should be at cost and the liability should be initially measured at the same amount as the infrastructure. We agree that the liability should be initially measured at the same amount as the infrastructure. However, we have some concerns regarding measurement of the infrastructure at cost and the wording of the guidance provided in the Statement of Principles on determining cost. 8

Cost of an asset is typically defined as the consideration paid for an asset. When cash is paid in exchange for the infrastructure, it is easy to determine cost. In the case of a public private partnership, the consideration paid is the liability, which could either be the obligation to deliver cash or the granting of the “right to charge”. Therefore, measuring the asset at cost and the liability at the same amount as the asset is circular.

In addition, the guidance provided seems inconsistent with the concept of cost. As an example, the Statement of Principles discusses the use of discounted cash flow technique or other “appropriate” estimate techniques in these situations to determine cost, however this seems to imply measuring the liability at fair value, rather than cost.

IPSAS 32 mentioned earlier in our response requires a service concession asset to initially be measured at fair value. In the proposed PSAS standard, we believe it would be more appropriate for the infrastructure to be measured at fair value rather than cost. For example, an appraisal of the infrastructure could be obtained to determine its fair value amount. Additionally Paragraph .55 of the Statement of Principles states that it would be “rare” for cash flows to be irrelevant in determining the initial cost of the infrastructure, however, we are not sure that is correct in scenarios where the consideration is the “right to charge”. In such situations we believe the most relevant measure is the fair value of the infrastructure.

Our response to Question 6, also points out another example of how cost can be problematic. As a result, we believe the Board should consider the use of fair value to measure the infrastructure rather than cost.

We do not agree that existing infrastructure, improved or refurbished using a public private partnership, should be measured at its carrying amount plus costs associated with the improvement or refurbishment of the existing infrastructure. As noted in our response to Questions 6 and 7 above, cost can often be problematic, especially in situations where consideration is the “right to charge”. Instead, we believe that existing infrastructure, improved or refurbished using a public private partnership, should be measured at its carrying amount plus the fair value associated with the improvement or refurbishment of the existing infrastructure.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

We do not agree with the discount rate guidance provided in the Statement of Principles. While we understand that this is a Statement of Principles and not all the details are flushed out, we would hope that the Exposure Draft and eventual standard would provide significantly more guidance on how an entity is to develop a discount rate when one cannot be observed directly from the market. Infrastructure developed through public private partnerships is primarily long-term in nature, so the use of discount rates can have a material impact on the initial measurement and subsequent results of the arrangement. A lack of guidance could lead to significant differences in financial results for similar projects if dissimilar discount rates are used. 9

Yes, we agree the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied.

Yes, we believe the structure of consideration transferred in public private partnerships, which may include consideration for betterments, maintenance, operations, etc., does require specific guidance in addition to what is proposed in the Statement of Principles. As noted in our response to Question 2, a lack of clear guidance often results in diversity in practice. We believe specific guidance should be provided on the structure of consideration transferred and that it should be clear whether or not betterments, maintenance and operations need to be considered. We believe the guidance should be clearly laid out in the body of the standard and that it would be very helpful if an example was provided. IPSAS 32 provides illustrative examples on accounting for different types of service concession arrangements, including an example of how a public sector entity would account for maintenance and betterments occurring during the life cycle of an arrangement under that standard. As accounting for public private partnerships can be very complex, examples are useful in helping public sector entities ensure they are applying the guidance consistently. We would encourage the Board to ensure the final public private partnerships standard included in the PSA Handbook provides a clear example of how the structure of consideration transferred, including consideration for betterments, maintenance, operations, etc., is to be accounted for in accordance with the requirements of the final standard.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

Yes, we agree with the disclosure requirements set out in the statement of principles. We believe that when the consideration is the form of a financial liability it should also be subject to the financial instruments disclosures set out in Section PS 3450, Financial Instruments.

13. Are there additional matters requiring consideration?

Paragraph .62 in the Statement of Principles explains that the infrastructure generates economic benefits to its users over its useful life and that the costs associated with the infrastructure should be expensed over the period of economic benefit in a rational and systematic manner. We agree with this, however, we believe it is important that the proposed standard makes it clear that the infrastructure’s useful life includes the residual period since the public sector entity has control over the infrastructure during the entire period (i.e. during the period when the private sector partner is operating/maintaining the asset and after the residual interest has been transferred to the public sector entity).

Additionally, as noted in our response to Question 11 above, we believe it would be beneficial for the proposed standard to include examples of accounting for different types of public 10

private partnerships. Ideally, this would include examples of arrangements where the private sector entity is compensated through cash, through access to a revenue stream and through a combination of financial and non-financial consideration. Accounting for public private partnerships is complex and up to this point has resulted in diversity in practice. Providing clear guidance in the body of the proposed standard along with illustrative examples will assist public sector entities in applying the guidance consistently.

Thank you for your consideration of the above-noted responses. If you have any further questions, please contact me at 416-369-6937.

Yours sincerely,

Armand Capisciolto, CPA, CA CPA (Michigan) National Accounting Standards Partner BDO Canada LLP 11

RESPONSE QUESTIONNAIRE Statement of Principles – Public Private Partnerships

Name: Terry Paton, Provincial Comptroller Organization: Government of Saskatchewan Email: [email protected]

(Responses to questions in yellow)

• a requirement to build, acquire, improve or refurbish;

• finance; and

• maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

Yes

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

Yes

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Yes, if a performance obligation is deemed to exist, we believe that a liability should be recognized for the unsatisfied portion of the performance obligation. If no performance obligation exists then the entire amount should be recognized as revenue immediately.

No, we believe that PSAB 3150 Tangible Capital Assets provides adequate guidance.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

No. We believe that there should be more guidance on discount rates. For example, paragraph .61 implies (although does not directly state) that the discount rate used should be taken from market rates if observable. This could be more specific by stating that the entity’s rate of borrowing should be used if it appropriately reflects the risks associated with the cash flows.

We recognize that there may be some reluctance to the idea of having more guidance on discount rates as it could make the standard too “rules-based.” We disagree that guidance on discount rates would result in the standard being rules-based. Discount rates are one of the most significant aspects of P3 accounting and not including such guidance would seem to call into question the point of having a P3 standard in the first place.

One of the stated outcomes for this standard is to enhance the comparability of financial statements amongst public sector entities. This cannot be done without providing more guidance on discount rates. Other PSAB sections (such as 3041, 3050, 3250, 3270 and 3310) provide suggested discount rates and it is not clear why this section would not as well.

Yes, however, there should be guidance provided with respect to any implied interest that may be present. For example, when the consideration is cash, the future cash flows are present valued to arrive at the capital cost of the infrastructure. Therefore, a portion of future payments is then treated as interest expense when paid.

In the case of non-financial consideration, we believe that there would also be an interest component. For example, the value of the non-financial consideration would need to be estimated and then present valued to arrive at the capital cost of the infrastructure. In such a case, there would also be an interest component as the performance obligation is satisfied in future years.

We believe that there should be additional guidance relating to betterments/life cycle costs. P3s often include a payment stream for life cycle costs (payments to be used by the private sector entity to repair and maintain the asset or enhance the asset’s useful life). It is our opinion that entities would follow PS3150 Tangible Capital Assets in determining whether these repairs and maintenance constitute a betterment of the infrastructure or are routine repairs and maintenance. However, the timing of recognition of these costs should be addressed by PSAB, as the timing of payments does not necessarily occur in the same period as the related repairs and maintenance

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

No. We believe that the disclosure requirements are excessive and should be reduced in order to be more consistent with similar types of arrangements outlined elsewhere in the Handbook (TCAs, debt, etc). We also believe that paragraph 76 is not necessary as materiality is an overriding concept within the Handbook.

In addition, we believe that all of the disclosure requirements presented may not be relevant throughout the entire period of the project. Perhaps more disclosure is useful at the start of/during the construction period of a P3. However, once the asset is in use, less disclosure would likely be necessary. The wording of the standard could be changed to “a public sector entity should may disclose the following information” in order to reflect this.

13. Are there additional matters requiring consideration?

We want to draw attention to two issues already addressed in previous comments. First, we strongly believe that there needs to be more guidance with regards to discount rates. In order for the standard to meet its goal of enhancing comparability of financial statements, enhanced guidance needs to be provided. Second, we believe that life cycle costs/betterments are a significant component of most P3 arrangements and should be addressed. In addition to these items, we would also suggest that the following areas be given some consideration:

a) Timing of recognition of asset – Construction of infrastructure as part of a P3 will often stretch over multiple reporting periods. The cost of the infrastructure should be recognized as the asset is constructed. This will result in the use of the percentage of completion method in most cases. Recognition options for P3 infrastructure should be addressed by PSAB.

b) Subsequent measurement (agreement modifications) – We believe that consideration should be given to situations where the P3 agreement has been modified after the initial obligation has been recognized. For example, a P3 agreement might include future cash flows that depend on future events (e.g. utility costs or performance requirements). We believe that PSAB should address subsequent measurement options for cases such as these.

c) Definition of a P3 – The SOP defines a P3 as public private partnerships: a) Between a public sector entity and a private sector entity for infrastructure-project delivery; b) With an allocation of responsibilities for, and risks of, the infrastructure; and c) With private capital at risk.

We believe that this definition might cause some confusion and that point (c) above could be more clearly stated as: “with long-term financing being provided by the private sector entity.” 14

d) Costs that are not included in contract – Principle 5 states that the liability recognized should be initially measured at the same amount as the infrastructure. However, there are often other costs incurred (and capitalized) by the public sector entity that are not a part of the P3 contract. Therefore, the initial liability will not directly equal initial cost. This should be clarified to direct that the initial liability should be measured at the same amount as the cost of the infrastructure based on the P3 contract cash flows. The liability will not contain initial procurement (or other) costs incurred by the public sector entity.

15 16 17 18 19 20 21

October 17, 2017

By email: [email protected]

Michael Puskaric Director, Public Sector Accounting Board Public Sector Accounting Board 277 Wellington Street West Toronto, Ontario M5V 3H2

Re: PSAB Statement of Principles: Public Private Partnerships

Dear Mr. Puskaric:

The City of Calgary (The City) would like to thank you for the opportunity to provide comments on the Public Sector Accounting Board’s (PSAB) Statement of Principles for Public Private Partnerships.

1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include:  a requirement to build, acquire improve or refurbish;  finance; and  maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

Yes, The City agrees with PSAB’s decision to define a scope of activities that are often found in a public private partnership. We would like to ask PSAB to revise paragraph .16 by referring to situations in which a private sector partner has the responsibility of designing the asset. Leaving the scope in its current form has the potential of excluding public private partnership delivery models that transfer the risk of design from the public sector entity to the private sector partner.

2. Do you agree with the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

No, The City does not agree with the proposal to use the term “infrastructure” and asks PSAB to, instead, use the term “tangible capital asset” to describe the items covered in the Statement of Principles.

We acknowledge that using a separate term may be beneficial if the assets possess unique characteristics that distinguish them from regular tangible capital assets. However, the assets used in a public private partnership share the same characteristics as tangible capital assets. In addition, the assets are subject to the same recognition and measurement principles noted in section PS 3150, Tangible Capital Assets. As a result, we cannot identify a specific reason which would justify the need for a unique term to describe the assets used in a public private partnership.

The City also notes that the Public Sector Accounting (PSA) handbook does not have a clear definition for the term “infrastructure”. We found that a couple areas of the handbook – section PS 3410, Government Transfers, and PSG-5, Sale-leaseback Transactions – use the term, but fail to explain what the term means. We are of the view that if the term will be more prominently featured in the PSA handbook, PSEs will require more guidance as to what the term 22

encapsulates, especially as failure to provide a standard definition may inadvertently cause PSEs to apply the term on an inconsistent basis.

The City, therefore, recommends PSAB to either use the term “tangible capital assets”, or introduce the new term “infrastructure” and provide clarifications as to what the term represents.

Yes, The City agrees that the control guidance is appropriate and sufficient as it relates to the recognition of infrastructure.

Yes, The City agrees that entities should recognize a liability when they need to provide the private sector partner with a financial consideration for the building, acquisition, improvement or refurbishment of assets.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Yes, The City agrees that the public sector entity should recognize a liability when it compensates its private sector partner through the provision of a right to charge users or earn revenue from another revenue-generating asset.

We would, however, like to ask PSAB to:  Clarify how to classify the liability: will public sector entities have the option to determine the classification of the liability (e.g. payables), or will PSAB advise public sector entities to use a specific liability such as deferred revenue in future exposure drafts?  Provide an illustrative example: it would be beneficial to see how a public sector entity would record the journal entries associated with this particular compensation model.

Yes, The City would like additional guidance for situations in which the private sector partner’s compensation will be in the form of a non-financial public sector asset. In particular, it would be beneficial to understand the measurement basis for the consideration. For instance, would PSAB require public sector entities to apply paragraph .58 from the proposed section PS 3400, Revenue?

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes, The City agrees that the initial measurement of the infrastructure and the liability should be at cost. Use of this methodology will be consistent with the requirements in section PS 3150, Tangible Capital Assets.

Yes, The City agrees that the assets should be measured at their carrying amount, as well as costs associated with their improvements and refurbishments.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

Yes, The City agrees with the discount rate guidance as provided in the Statement of Principles.

Yes, The City agrees that a public sector entity should recognize revenue as the performance obligation is satisfied. However, as noted in our response to question #5, it would be beneficial to see an example of a situation in which a public sector entity uses this compensation model.

No, The City does not believe that additional guidance is required given that public sector entities can refer to concepts discussed in section PS 1000, Financial Statement Concepts, and section PS 3150, Tangible Capital Assets, to make their accounting treatment decisions.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

Yes, The City agrees with the disclosure requirements.

13. Are there additional matters requiring consideration?

Yes, The City would like to ask PSAB to consider including:  Illustrative examples: to supplement accounting treatments discussed for both the financial liability model, as well as the right to charge users for revenue; and  Presentation of the asset and liability: to clarify whether public sector entities should separately present the asset and liability on the Statement of Financial Position, or to embed the balances as part of other assets and liabilities, such as tangible capital assets and payables. 24

Thank you for your consideration of our responses. If you have any further questions, please contact me at (403) 268-6416.

Sincerely,

Duri Lee, CPA, CA Accounting Research Lead The City of Calgary [email protected] (403) 268-6416 25

Office of the Controller 340 Terrace Building 9515 – 107 Street Edmonton, Alberta, Canada T5K 2C3 Telephone: 780-644-4736 www.finance.alberta.ca

AR 46474

October 16, 2017

Mr. Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto, Ontario M5V 3H2

PSAB Statement of Principles – Public Private Partnerships

Thank you for the opportunity to comment.

We commend PSAB for embarking on this project. Public private partnerships have become more common in Canada in recent years as public sector entities look for ways to outsource public services that are costly to construct, maintain or operate.

Due to limited guidance in the Canadian PSAS specific to public private partnerships, public sector entities had to analogize most public private partnerships to lease arrangements and follow the guidance recommended in PSG-2. It may be difficult to reconcile the control-focused approach of this SOP with PSG-2 in which the leased asset is recognized by the party that bears the “benefits and risks” incidental to ownership.

In view of the recent changes to the international lease standards and PSAB’s intent to reassess the guidance in the light of the international developments1, it may be an appropriate time to revisit PSAB’s guidance on leases.

It may also be useful, if the proposed standard included some direction on when an arrangement is not a lease - similar to the guidance provided in IFRIC 4 (now replaced with 1FRS 16).

1 As per ¶ 2 of PSG-2.

Page | 1

26 27

APPENDIX I

Response to Specific Questions

1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include:  a requirement to build, acquire, improve or refurbish;  finance; and  maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

Yes.

Since the proposals are limited to a specific subset of public private partnerships, where the risk and benefits associated with constructing, owning and operating the underlying assets, along with the control over the assets, are shared to a greater degree by the public sector entity and private sector entity involved in the agreement, it is suggested, in order to be consistent with other standard setters including, IPSASB and GASB, the term “service concession arrangements” be used.

The term “service concession arrangements” makes this SOP also more compatible with the recommendations of the IASB’s International Financial Reporting Interpretations Committee (IFRIC)’s Interpretation 12, Service Concession Arrangements (IFRIC 12) which addresses private partners’ accounting for such arrangements.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

Yes, subject to the following comment:

To avoid possible confusion with the common terminology for highways, roads, communication, water and electricity networks, it is suggested the term ”infrastructure and public facilities” be used. Some common examples of public private partnership arrangement include the construction of courtrooms, hospitals and school buildings that are not traditionally referred to as infrastructure.

Yes.

It may be useful to add:

 that control derived solely from the public sector entity’s regulatory role does not necessarily mean that such regulated items meet the definition of an asset. Control over the underlying property in a public private partnership agreement is based on a contract willingly entered by the private sector partner. Additionally, the private sector partner can transfer its property or even choose to use it for another purpose, and that also in the following scenarios the public sector entity is deemed to be in control:

Appendix 1 - Public Private Partnerships ED Response to Specific Questions Page | 1 28

o where it has a call option to buy the infrastructure from the private sector partner at the then fair value of the property. Since, in these cases the private sector partner cannot unilaterally choose to continue operating the asset or sell it to a third party, and

o where it has the option to purchase the property at a price which is expected to be sufficiently lower than its fair value at the date the option becomes exercisable. Since it is reasonably certain that the option will be exercised.

A discussion of the following possible scenarios that in practice may exist could also be useful:

 where none of the control criteria are met,  where only control over usage criterion is met, or  where only the control over residual interest criterion is met

Yes.

The resulting obligation meets the definition of liability as per PS 3200; since it represents the value of assets acquired from the private sector partner.

Yes.

Where the public sector entity does not have an obligation to pay cash or another financial asset to the private sector partner for building, acquisition, improvement or refurbishment of infrastructure and grants the operator the right to charge users a fee, then the resulting balance is essentially an unearned revenue. Considering the net debt model adopted by the PSAB, it is essential to classify the resulting liability as a non-financial liability in arriving at the net debt/(financial asset) of the public sector entity concerned.

Some standard setters require non-recognition of the resulting asset and liability based on the premise that it would lead to overstatement of assets and liabilities of the public sector entity and the fact that the resulting revenue will not be available for spending. However, we don’t support this approach since it results in the understatement of the public sector entity’s property and non-recognition of annual amortization.

A major question that has to be addressed is the treatment of the difference between the resulting liability recognized and the fair value of assets acquired.

Appendix 1 - Public Private Partnerships ED Response to Specific Questions Page | 2 29

6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset (for example, land)? If yes, please provide examples of consideration types not considered.

Yes.

Typically, non-cash compensation, mostly in the form of land close to the infrastructure, is provided to the private sector partner for various purpose, e.g. to construct a parkade, storage area or to be converted into a shopping complex. The land adjacent to some forms of infrastructure, for example railways or light rail transit stations would gain significant premiums in such cases. These arrangements are a form of non-monetary exchange. In the absence of any guidance by PSAB for non-monetary transactions, some guidance on the measurement and recognition of such transactions should be provided.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes.

The measurement of the initial liability reflecting the obligation of the public sector entity to provide compensation to the private sector partner for the construction of infrastructure should be based on the initial cost of the infrastructure. The initial cost of the infrastructure would represent its fair value.

Based on our past experience, generally, according to the terms of the agreement the public sector entity has to make a series of payments over the life of the arrangement. The payments normally consist of three elements reflecting the construction cost, the services and maintenance provided by the private sector partner and the imputed financing charges. Measurement of liability will be based on the present value of the payments for construction.

In many arrangements, the component elements (i.e. construction, service and maintenance, and imputed financing cost) are neither identified nor separable. Some guidance should be provided about the estimation of the component elements – possibly based on the initial fair value of infrastructure - in such situations.

Yes.

This is based on the assumption that control of the asset is retained by the public sector entity and it is not impaired in terms of service functionality. However, if control of the asset is transferred to the private sector partner it should be measured at fair value, considering that the arrangement is an exchange transaction. Any resulting gain or loss should be recognized in the statement of operations.

Appendix 1 - Public Private Partnerships ED Response to Specific Questions Page | 3 30

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

No.

In our view, the underlying nature of the risks in question has not been identified in the SOP. There is a difference between the discount rate applicable in a capital lease arrangement (under PSG-2) and a public private partnership. Under a capital lease arrangement, the source of cash outflow is the public sector entity concerned. Whereas, under a public partnership arrangement, the source of cash inflow is from the private sector partner. In other words, the direction of the cash flow is different under each scenario.

Under a public private partnership, the public sector entity has essentially subjected itself to the private partner’s cost of borrowing or cost of raising equity. Therefore, it appears that the private partner’s cost of capital should be the basis for present value calculation. Since the cost of capital for the private sector borrower is potentially higher than the public sector’s incremental borrowing rate, it would lead to a lower initial amount for recognition of the underlying cost of the infrastructure. Under the PSAB’s current conceptual framework, it appears that the difference should be recognized through the statement of operations.

Yes.

The resulting obligation, in a sense, reflects consideration received in advance of performance, because the public sector entity has received infrastructure and public property assets (after adjustment for financial assets paid or to be paid) without having performed its side of the exchange; i.e. provision of access to the underlying infrastructure. Therefore, it represents a deferred revenue. This liability (deferred revenue) should be amortized to revenue over the life of the arrangement as access to the infrastructure is provided.

Yes.

Some guidance is required where the asset and service component of payments by the public sector entity are not separable. It is suggested that the fair value of the components should be used as the basis of allocation. One suggested approach to determine fair value is the fair value of comparable assets or services (where possible).

Examples include situations, where:

 the cost of service and maintenance is included in the payments made to the private sector partner, and

Appendix 1 - Public Private Partnerships ED Response to Specific Questions Page | 4 31

 the private sector partner may have been given the right to charge users a toll for the usage of the infrastructure and deducts the cost of maintenance from payments to the public sector entity.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

Yes.

 The requirement in paragraph 76 for individual disclosures for each public private partnership that is material to the reporting entity should be reconsidered. There may be situations where the information required to be disclosed is deemed confidential to the private sector partner and, therefore, should only be disclosed in the aggregate.

 Considering the highly aggregated nature of the amounts in the consolidated financial statements of a public sector entity, we suggest the following additional disclosures should also be considered:

o contractual rights arising out of the arrangement, and

o situations where the unavoidable cost of the arrangement exceeds the related revenues or benefits; i.e. an onerous contract. The current PSAB guidance is silent on the treatment of onerous contracts.

13. Are there additional matters requiring consideration?

 As stated in our covering memo:

o Many current public private partnerships have been recorded in the financial statements of public sector entities by analogizing the arrangement with a capital lease agreement in accordance with PSG-2. However, this SOP appears to be based on transfer of control criteria. The transitional impact of this change of approach on the current public private partnership arrangements should be considered. One potential approach is to exempt the future standard exempt from the application of PS 2120 – ACCOUNTING CHANGES. This was the approach adopted for PS 3430 – RESRUCTURING TRANSACTIONS.

o There appears to be significant changes to lease standards as reflected in IFRS 15. In the light of PSAB’s original intent to revise the current leased tangible capital assets guideline - PSG-2 in response to the international developments (Please see ¶ 2. of the guideline), it is suggested that this guideline be reviewed. As an example, the guideline appear to be inconsistent with some of the concepts introduced in the recently release PS 3200 – ASSETS.

o To avoid incorrect treatment of some public private partnership that are a form of lease, it is suggested that certain criteria similar to IFRIC 4 (as replaced by IFRS 16) be introduced in the proposed standard.

 It may be appropriate to consider the interaction of this SOP with the proposed standard on Asset Retirement Obligations.

Appendix 1 - Public Private Partnerships ED Response to Specific Questions Page | 5 32

 It is quite common for the private sector entity, under some public private partnership arrangements, to establish an organization to finance, manage or generally operate the underlying infrastructure – a special purpose entity. In some cases the obligations of these organizations are guaranteed or back-stopped by the public sector entity involved. As a result, there is a possibility that such organizations may be considered controlled by the public sector entity. It is suggested that the proposed standard should addresses these situations.

Appendix 1 - Public Private Partnerships ED Response to Specific Questions Page | 6 33

17 October 2017

Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Board Public Sector Accounting Board 277 Wellington Street West Toronto ON M5V 3H2

RE: Statement of Principles - Public Private Partnerships

Dear Sir:

Thank you for the opportunity to comment on the above Statement of Principles. I am responding on behalf of the Office of the Auditor General of Canada.

Our responses to the specific questions posed in the Statement of Principles are provided below.

Please do not hesitate to contact me if you require any further information.

Sincerely,

Stuart Barr Assistant Auditor General

Enclosure

Question 1

Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include:  a requirement to build, acquire, improve or refurbish;  finance; and  maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

The proposed scope of this statement of principles is in our view too narrow.

The Scope paragraph .16 indicates that the private sector partner must have obligations for all three elements in order for a 3P arrangement to be scoped into the proposed standard. We question whether this might result in the exclusion of some 3P arrangements that would be best suited to apply the proposed standard. For instance, in the case of a 3P arrangement involving design-build-operate components but no finance component, the proposed 3P standard would still be a useful and relevant primary source of GAAP as the entity would need to assess the recognition and measurement requirements around the infrastructure and the existence and status of any performance obligations to the private sector entity in relation to the operation phase of the arrangement. We therefore question whether the existence of a financing component in a 3P arrangement should be mandatory for the 3P arrangement to be scoped into the new standard.

The proposed standard could still acknowledge that 3P arrangements typically involve a form of financing by either the public sector entity or a third party due to their long-term nature, without including the financing aspect as a mandatory requirement for a 3P arrangement to be within the scope of the standard. In other words, it may still be possible to achieve the same outcome without an explicit reference to the financing component as part of the conditions currently listed in paragraph .16.

If the proposed standard retains that it is mandatory for all three elements listed in Paragraph .16 of the SoP to exist in order for the 3P arrangement to fall within the scope, we would then consider it beneficial for the proposed standard to give further clarity regarding 3P arrangements that are specifically excluded from the scope as a result of not possessing all three of the bulleted items. For instance, for a 3P arrangement containing a design-build component and an operate- maintain component, but no finance component, the scope paragraphs should clarify that such arrangements are not in scope of the standard, and should refer to the other relevant standards (such as PS 3150 and proposed PS 3400) that the Board would expect financial statement preparers to apply in that scenario.

Question 2

Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

We currently do not support the term “infrastructure” without additional clarification within the proposed standard.

Since the term “infrastructure” is currently not defined anywhere within PSAS at the moment (although it is used a few times within PS 3410), it is difficult to conclude at this early stage of the project that it accurately reflects items that should be covered in this standard.

By its general definition, infrastructure implies large assets such as bridges, major public buildings (such as airports or hospitals), roads, etc. Therefore, it could be seen as implying a certain scale or size of asset is necessary to meet the definition, which may or may not be the intent in the case of a 3P standard. For instance, a 3P arrangement can be for a single small building or a major highway, as long as it meets the Scope criteria. But it would be rare to refer to a single small building as “infrastructure”.

If the Board opts to retain use of the term “infrastructure”, it should be properly defined, and it should be clear that the size of the asset that is the subject of the 3P arrangement has no bearing on the conclusion as to whether the 3P arrangement is in scope of the standard.

Unless The Board’s objective is to exclude certain types of tangible capital assets from the scope of the standard, the terms “infrastructure” and “infrastructure asset” used in the statement of principles could be replaced with the term “tangible capital asset acquired through a public private partnership” without changing the proposals or their intent in any way. The term “tangible capital assets” is already a defined and well understood term, and it contemplates all possible manner of scale of asset/project, and there are already direct inter-relationships with PS 3150 (see paragraph .18 of the statement of principles, for example).

Question 3

Do you agree the clarified control guidance is appropriate and sufficient as it relates to the recognition of infrastructure? If not, what further clarifications are necessary and what other basis of recognition is appropriate?

Yes, we support the clarified control guidance as it relates to the recognition of infrastructure.

Notwithstanding our overall support, it would be helpful to consider additional guidance and/or examples in relation to the concept of “significant residual interest” to assist with the application of professional judgments as to whether or not a “significant residual interest” exists.

Question 4

Do you agree a liability should be recognized when the public sector entity has an obligation to deliver cash or another financial asset as consideration for the building, acquisition, improvement or refurbishment of infrastructure? If not, where should the credit entry be presented?

Yes, we agree a liability should be recognized when the public sector entity has an obligation to deliver cash or another financial asset as part of a 3P arrangement.

We also believe it would be useful for the new standard to clarify that this type of liability is a financial liability in accordance with PS 3450.

Question 5

Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Yes, we agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred is the right to charge users or earn revenue from another revenue-generating asset. This proposal is consistent with the general approach outlined within the recent PS 3400 Revenue exposure draft.

Question 6

Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset (for example, land). If yes, please provide examples of consideration types not considered.

Yes, there one area where we invite the Board to consider additional guidance. It relates to a potential scenario wherein the consideration to the private sector entity is an unrecognized non- financial public sector asset, such as those assets referred to in PS 1000.57-.58.

Question 7

Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes, we agree the initial measurement of the infrastructure asset and the related liability should be at cost. We see no significant reason that these assets should follow a different measurement category than tangible capital assets in scope of PS 3150.

Question 8

Do you agree existing infrastructure, improved or refurbished using a public private partnership, should be measured at its carrying amount plus costs associated with the improvement or refurbishment of the existing infrastructure? If not, what alternative is more appropriate and why?

Yes, we agree existing infrastructure, improved or refurbished using a public private partnership, should be measured at its carrying amount plus costs associated with the improvement or refurbishment of the existing infrastructure. We see no significant reason that these asset betterments should follow a different measurement category than betterments of other tangible capital assets in scope of PS 3150.

Question 9

Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

Yes, we agree with the discount rate guidance as provided in the statement of principles.

It may be beneficial for the eventual standard or the basis for conclusions to also include some guidance regarding an at-inception reasonableness test on the discount rate determined, similar to what is found in PSG-2 paragraph 15.

Question 10

Do you agree the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied? If not, where should the

balancing entry be recorded when the performance obligation is satisfied?

Yes, we agree that the liability recognized as a result of the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied.

We believe that the eventual standard or the Basis for Conclusions would benefit from the inclusion of some illustrative examples on this aspect.

Question 11

Does the structure of consideration transferred in public private partnerships – which may include consideration for betterments, maintenance, operations, etc. – require specific guidance in addition to the Statement of Principles proposals? If yes, what additional guidance is necessary? Please provide examples.

Yes, we suggest that the new standard include specific guidance for various multi-component structures of 3P agreements. Specifically, illustrative examples of acceptable methods to estimate and allocate consideration to the different components would be beneficial. Other standard setters have provided useful guidance and/or illustrative examples of allocation calculations when consideration relates to more than separately identifiable component of the transaction, including IFRS 15, Revenue from Contracts with Customers (paragraphs .73-.86) and IPSAS 9, Revenue from Exchange Transactions (paragraph .18 and the Implementation Guide).

Question 12

Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

Yes, we agree with the proposed disclosure requirements proposed. We however encourage the Board to consider additional disclosure requirements.

More specifically, since the assets recognized under 3P arrangements are in substance tangible capital assets, many of the disclosure requirements in PS 3150.40-.42 are of relevance. For instance, users of the financial statements would likely benefit from the information provided by a continuity schedule on the 3P asset (PS 3150.40), or from other information such as the amount of interest capitalized if any (PS 3150.42(f)). A continuity schedule on the 3P liability may also be considered beneficial.

It would also be beneficial if there were explicit disclosure requirements around the details of any unfulfilled performance obligations relating to non-financial consideration. There are similar disclosure requirements to this found in the recent PS 3400 Revenue exposure draft (paragraph .65(b) and .65(c) for instance).

As there could exist contractual rights and/or contractual obligations in respect of a 3P arrangement prior to the point at which asset/liability recognition criteria are considered to be met, the eventual standard may also benefit from an explicit requirement to consider PS 3380 and PS 3390.

Question 13

Are there additional matters requiring consideration?

Yes, we have a number of additional matters for the Board’s consideration.

Presentation guidance:

We note that the “PRESENTATION AND DISCLOSURE” section of the statement of principles only speaks to disclosure requirements – it provides no guidance regarding presentation.

For instance, under IPSAS 32 Service concession arrangements: Grantor, there is a requirement to account for a service concession asset in a separate class of asset in accordance with the proper standard on capital assets.

If the Board wishes for separate presentation of 3P assets and/or 3P liabilities on the statement of financial position, this should be made clear in the presentation guidance within the eventual standard.

Guidance on cash flow presentation:

The users would benefit from including guidance within the standard in regards to statement of cash flow presentation requirements. This is of particular importance, as we have recently seen different judgments in practice regarding how payments made by the public sector entity to the private sector partner are presented on the statement of cash flows. The two main perspectives we have observed are outlined below: - Since the underlying asset being acquired through the 3P arrangement is a tangible capital asset, the payments to the 3P partner should be presented within Capital (or Investing) activities (similar to if the public sector entity had simply bought an asset directly). - Since the payments made by the public sector entity are applied to reduce the 3P liability balance, the payments to the 3P partner should be presented within Financing activities (in much the same way as lease payments made in regards to a capital lease are presented).

We also understand that the structure of the 3P arrangement (i.e. the distinct components within it), and the timing of the requirement payments to the private sector partner (i.e. during vs. after construction), are considered by some to have substantive implications for the conclusions to be reached in regards to presentation of those cash flows on the statement of cash flow.

Since one of the overarching goals of the Board for this project was to reduce differences in practice in how similar 3P arrangements are accounted for, we feel the eventual standard would greatly benefit from guidance on statement of cash flow presentation. Illustrative examples under various common scenarios may also be useful in this regard.

Modifications to contractual terms:

Paragraph .72 of the statement of principles discusses “Modifications to contractual terms and takeover rights”. This paragraph indicates when modifications are accounted for, but not how they are accounted for. As such, this paragraph could likely benefit from addressing that aspect. It may also be beneficial if the eventual standard included derecognition criteria for the asset, as the statement of principles focusses on recognition criteria.

39 Government Accounting PO Box 187 Halifax, Nova Scotia B3J 2N3 Finance and Treasury Board 6th Floor, Provincial Building www.gov.ns.ca/finance

October 17, 2017

Michael Puskaric, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto ON M5V 3H2

Re: P3 Statement of Principles

Dear Mr. Puskaric,

Thank you for the opportunity to provide comments on the P3 Statement of Principles. Our thoughts are as follows:

Yes, in general we agree with the overall scope of this section. However, we question the need for a standalone standard given that this section focuses more on providing additional clarification/guidance in accounting for P3s than on the introduction of new accounting principles. Because much of this SOP is drawn from existing standards we feel as though this section is more appropriate as either a standalone guideline or as part of PSG-2.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

No, we feel as though the term TCA would be more consistent with the handbook and more encompassing than the term infrastructure, which might exclude certain arrangements covered under the definition of TCA. An alternative would be to add a definition of infrastructure in the beginning of the section which would provide additional clarification in terms of what is covered.

40 Government Accounting PO Box 187 Halifax, Nova Scotia B3J 2N3 Finance and Treasury Board 6th Floor, Provincial Building www.gov.ns.ca/finance

We are ok with the clarified control guidance; however, we are concerned with the potential for conflicting guidance between this section and PSG-2. PSG -2 uses a more numerical test and other qualitative factors focused on risk and rewards of ownership rather than control. Given the introduction of a new asset section, and potentially a P3 standard, we feel as though it would be good for PSAB to bridge the gap in guidance in terms of recognizing assets under a finance lease in PSG-2 with the control based approach to asset recognition.

Yes, we agree that a liability should be recognized when the public sector entity has an obligation to deliver cash or another financial asset as consideration.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Yes, we agree that a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue generating asset. This is also consistent with the notion of performance obligations and exchange transactions in the new revenue standard.

We believe that additional guidance is required since there is currently no existing guidance in PSAB on non-monetary transactions. In addition, there may be unique measurement issues in those situations (i.e. use of fair market values) that would need to be addressed in the measurement part of the standard.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes.

8. Do you agree existing infrastructure, improved or refurbished using a public private partnership, should be measured at its carrying amount plus costs associated with the improvement or refurbishment of the existing infrastructure? If not, what alternative is more appropriate and why? 41 Government Accounting PO Box 187 Halifax, Nova Scotia B3J 2N3 Finance and Treasury Board 6th Floor, Provincial Building www.gov.ns.ca/finance

We agree with the concept but not with the use of the word “refurbish”. See comment in response to question #13, below.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

Yes, we are ok with the general discount rate guidance and feel that it is more in line with determining the rate based on the substance of the arrangement than on the prescriptive test outlined in PSG-2. However, this creates conflicting guidance between the two sections and could result in government choosing a rate consistent with the guidance in PSG-2, which is often the lower government borrowowing rate over the higher rate inherent in the private sector project. In the case of P3’s, since we have actively chosen a private sector partner for their expertise and efficiency, and this is not simply a direct substitute for government financing, then this rate may not be representative of the actual financing arrangement, where we expect to pay an interest rate premium on transferring risks to the private sector.

We feel as though there should be an amendment to either this guideline, which would see the removal of government’s rate of borrowing as an option, or to PSG-2, which would allow for government to choose the discount rate based on the substance of the arrangement.

Yes.

No, although it would be helpful if there were a few examples to assist with measurement such as: consideration for betterments, consideration for maintenance/operating, combination of consideration for betterments/operating.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

Yes, in principle we agree with the disclosure requirements, however, we feel as though it would be more practical to group together P3 partnerships with assets that are similar in nature (i.e. hospitals, schools) and ranges of terms, instead of disclosing each individually which could prove onerous and not provide materially value-added disclosure.

42 Government Accounting PO Box 187 Halifax, Nova Scotia B3J 2N3 Finance and Treasury Board 6th Floor, Provincial Building www.gov.ns.ca/finance

13. Are there additional matters requiring consideration?

Again, we are concerned about the potential for conflicting guidance between this section and PSG-2 regarding recognition timing under finance leases. For example, Paragraph .27 suggests that typically the recognition criteria are achieved during the construction period. We interpret PSG-2 to recognize the asset/lease obligation at or after the point of substantial completion.

In addition, it would be beneficial to have more guidance in the Subsequent Measurement section that would allow for agreement modifications. This would be applicable if there are financing and/or operating and maintenance components to the partnership. Examples might be a contract extension, agreement to purchase at end of contract, etc. Alternatively, this guidance could be added to PSG-2.

We recommend not using the words refurbish or refurbishment in the standard, as a refurbishment may not necessarily be considered a cost that is capital in nature. It would be better to remove these words, or replace them with “better” or “betterment” as defined by PS 3150.

Finally, in the situation where a government provides the right to earn revenue to the P3 partner in exchange for the construction of an asset, has any consideration been given to including a debt servicing component in the draw-down of the liability over time? While the form of the arrangement is that the government is not directly financing the asset, the substance of the arrangement may be that the asset is being financed through future foregone revenue. The accounting proposed in the SOP would see no reporting of any expense over the term of the contract, like the debt servicing costs that would normally be reported in a finance arrangement. We are concerned that this reporting may be net rather than gross reporting, perhaps less transparent, and not truly reflecting the substance of the transaction.

5, Place Ville Marie, bureau 800, Montréal (Québec) H3B 2G2 T. 514 288.3256 1 800 363.4688 Téléc. 514 843.8375 www.cpaquebec.ca

Montréal, le 17 octobre 2017

Monsieur Michael Puskaric, CPA, CMA Directeur, Comptabilité du secteur public Conseil sur la comptabilité dans le secteur public 277, rue Wellington Ouest Toronto (Ontario) M5V 3H2

Monsieur,

Vous trouverez ci-joint les commentaires du Groupe de travail technique Secteur public – Comptabilité dans le secteur public, de l’Ordre des comptables professionnels agréés du Québec concernant l’énoncé de principes intitulé « Partenariats public-privé ».

Nous vous serions reconnaissants de nous faire parvenir une copie de la traduction anglaise de nos commentaires.

Veuillez prendre note que ni l’Ordre des comptables professionnels agréés du Québec, ni quelque personne que ce soit ayant participé à la préparation des commentaires ne peuvent être tenus responsables relativement à leur utilisation et ils ne sont tenus à aucune garantie de quelque nature que ce soit découlant de ces commentaires, comme décrit dans le déni de responsabilité joint à la présente.

Veuillez agréer, Monsieur Puskaric, mes salutations distinguées.

Annie Smargiassi, CPA auditrice, CA Représentante du Groupe de travail technique Secteur public – Comptabilité dans le secteur public

p. j. Déni de responsabilité et commentaires 44

DÉNI DE RESPONSABILITÉ

Les documents préparés par les Groupes de travail de l’Ordre des comptables professionnels agréés du Québec (Ordre) ci-après appelés les « commentaires », sont fournis selon les conditions décrites dans la présente, pour faire connaître leur opinion sur des énoncés de principes, des documents de consultation, des exposés-sondages préliminaires ainsi que des exposés-sondages publiés par le Conseil des normes comptables, le Conseil des normes d’audit et de certification, le Conseil sur la comptabilité dans le secteur public, le Conseil sur la gestion des risques et la gouvernance et d’autres organismes.

Les commentaires fournis ne doivent pas être utilisés comme substitut à des missions confiées à des professionnels spécialisés. Il est important de noter que les lois, les normes et les règles sur lesquelles sont émis les commentaires peuvent changer en tout temps et que, dans certains cas, les commentaires écrits peuvent être sujets à controverse.

Ni l’Ordre, ni quelque personne que ce soit ayant participé à la préparation des commentaires ne peuvent être tenus responsables relativement à l’utilisation de ces commentaires et ils ne sont tenus à aucune garantie de quelque nature que ce soit découlant de ces commentaires. Les commentaires donnés ne lient pas, par ailleurs, les membres des Groupes de travail de l’Ordre ou, de façon plus particulière, le Bureau du syndic de l’Ordre.

La personne qui se réfère ou utilise ces commentaires assume l’entière responsabilité de sa démarche ainsi que tous les risques liés à l’utilisation de ceux-ci. Elle consent à exonérer l’Ordre à l’égard de toute demande en dommages-intérêts qui pourrait être intentée par suite de toute décision qu’elle aurait pu prendre en fonction de ces commentaires. Elle reconnaît également avoir accepté de ne pas faire état de ces commentaires reçus via le Groupe de travail dans les avis exprimés ou les positions prises.

Commentaires du Groupes de travail technique Secteur public – Comptabilité dans le secteur public de l’Ordre des comptables professionnels agréés du Québec concernant l’énoncé de principes intitulé « Partenariats public-privé » 2 45

MANDAT DU GROUPE DE TRAVAIL

Le Groupe de travail de l'Ordre des comptables professionnels agréés du Québec a comme mandat notamment de recueillir et de canaliser le point de vue des praticiens exerçant en cabinet et de membres œuvrant dans les affaires, dans les services gouvernementaux, dans l'industrie et dans l'enseignement ainsi que le point de vue d’autres personnes concernées œuvrant dans des domaines d’expertise connexes.

Pour chaque exposé-sondage ou autre document étudié, les membres mettent leurs analyses en commun. Les commentaires ci-dessous reflètent les points de vue exprimés et, sauf indication contraire, ces commentaires ont fait l'objet d'un consensus parmi les membres du Groupe de travail ayant participé à cette analyse.

Les commentaires formulés ne font l'objet d'aucune sanction de l'Ordre. Ils n'engagent pas la responsabilité de celui-ci.

COMMENTAIRES GÉNÉRAUX

Les membres ont souligné que le nouveau format utilisé par le CCSP pour présenter l’énoncé de principes apporte plus de clarté, est plus simple et permet de faciliter la compréhension des grands principes évoqués dans l’énoncé. Ils ont ajouté apprécier le changement dans la forme, qui élimine une grande quantité de détails superflus.

Comme ils l’expliquent de façon plus détaillés dans les réponses aux questions spécifiques du CCSP, les membres ont aussi indiqué que plusieurs partenariats public- privé sont actuellement analysés à la lumière des exigences de la NOSP-2 Immobilisations corporelles louées. Toutefois, selon eux, le champ d’application proposé dans le présent énoncé de principes, semble être plus restreint que celui de la NOSP-2; ils craignent donc que certains types d’accords de partenariats public-privé ne soient pas couverts par les présentes propositions.

Il serait par contre intéressant que les questions soient plus clairement reliées aux paragraphes des propositions auxquelles elles se rapportent.

RÉPONSES AUX QUESTIONS SPÉCIFIQUES DU CCSP

1. Êtes-vous d’accord qu’il convient de limiter le champ d’application du présent énoncé de principes aux partenariats public-privé dans lesquels l’entité du secteur public se dote d’un élément d’infrastructure avec la participation d’un partenaire du secteur privé qui est notamment responsable : • de la construction, de l’acquisition, de l’amélioration ou de la remise en état de l’élément d’infrastructure; • de son financement; • de son exploitation ou de son entretien? Sinon, quels sont les partenariats public-privé qui devraient être inclus dans le champ d’application ou en être exclus?

Les membres sont d’avis que des clarifications du champ d’application sont nécessaires. En effet, il n’est pas clair pour eux si les modalités prévues dans les alinéas a) à c) du principe 1 sont inclusives ou exclusives. Selon eux, il existe des partenariats qui ne comportent que les caractéristiques d’une ou deux des modalités, par opposition aux trois modalités présentées. Ils aimeraient, si les modalités sont inclusives, que soit clarifié le traitement des partenariats public-privé exclus du champ d’application. Ils ont donné l’exemple d’un partenariat public-privé prévoyant une entente de prestation de services sans qu’un élément d’infrastructure soit présent. Ils précisent que certaines ententes qui pourraient être sujettes à l’IFRC-4 Déterminer si un accord contient un contrat de location, dans le cas d’une entité qui applique les IFRS, risqueraient de ne pas être couvertes par les présentes propositions. Ils se demandent si le champ d’application ne devrait pas être élargi à ce type de partenariats public-privé. De plus, ils indiquent que la norme internationale pour le secteur public (IPSAB 32) a été élargie pour considérer les consensus dégagés dans l’IFRIC 12 Accords de concession de services. Ils demandent au CCSP de considérer aussi ces éléments dans le champ d’application. Ils aimeraient aussi que soit clarifié ou mieux défini « l’intérêt résiduel important » indiqué à l’alinéa .25c), Selon eux, cet intérêt pourrait s’avérer plus ou moins significatif si la durée totale de l’entente de services est plus ou moins longue. Ils aimeraient des clarifications

2. Selon vous, le terme «élément d’infrastructure» est-il approprié pour désigner les éléments visés par l’énoncé de principes? Dans la négative, quel autre terme serait plus approprié? Les membres se sont questionnés à savoir si une composante d’une infrastructure pourrait être inclue lorsqu’on traite d’ « infrastructure ». Ils ont indiqués être en accord avec la terminologie proposée si l’intention du CCSP est de limiter le champ d’application aux partenariats public-privé qui comportent les trois caractéristiques énoncées au principe 1 mais ne pas être en accord si l’objectif n’est pas de s’y limiter (voir également leur réponse à la question 1). Les membres ont également soulevé des demandes de clarification à l’égard de la troisième caractéristique (le contrôle de tout intérêt résiduel important) telles que précisées dans la réponse à la question suivante :

3. Selon vous, les précisions apportées aux critères de contrôle en ce qui concerne la constatation de l’infrastructure sont-elles suffisantes et appropriées? Dans la négative, quelles autres précisions serait-il nécessaire d’apporter ou quel autre critère de constatation serait-il approprié d’utiliser?

Non, les membres ne sont pas d’avis que les propositions sont suffisantes et appropriées car des clarifications devrait être apportées. D’abord, des clarifications seraient requises au sujet des indications du paragraphe .38, car d’abord selon eux, l’importance d’un intérêt résiduel, peut varier selon la durée d’un contrat. Selon eux, un élément pourrait répondre à la définition d’un actif en l’absence de tout intérêt résiduel important, notamment dans l’exemple d’un contrat dont la durée représenterait une portion significative de la durée de vie utile de l’élément d’infrastructure visé. Ils ont d’ailleurs soulevé tant les normes du secteur public que les autres, référentiels comptables canadiens, adressent ce type de circonstance.. Les membres se questionnent sur la pertinence d’ajouter des indications additionnelles à ce sujet dans les propositions. Ils ont aussi indiqué que les critères de contrôle leurs semblaient incohérents avec les indicateurs de contrôle énoncés au chapitre SP 1300 Périmètre comptable du gouvernement. En effet, des indications additionnelles, comme celles prévues au paragraphe SP1300.19 devraient être incluses, selon eux, dans les propositions. De

même, ils se sont questionnés à savoir si les indications énoncées à la NOSP-2 devraient être prises en considération. Ainsi, selon les membres, les critères de contrôle proposés devraient être étendus aux situations prévues par les exigences du chapitre SP 1300 et de la NOSP-2. Selon les membres, les intentions du CCSP au sujet de l’inclusion ou non des situations visées par la NOSP-2 dans les présentes propositions ne sont pas claires et devraient être mieux expliquées.

4. Êtes-vous d’accord que l’entité du secteur public devrait constater un passif lorsqu’elle a l’obligation de remettre à l’entité du secteur privé de la trésorerie ou un autre actif financier en contrepartie de la construction, de l’acquisition, de l’amélioration ou de la remise en état de l’élément d’infrastructure? Dans la négative, à quel compte conviendrait-il de porter le crédit?

Oui, les membres ont indiqué être d’accord avec les propositions.

5. Êtes-vous d’accord que l’entité du secteur public devrait constater un passif au titre de la portion non remplie de l’obligation de prestation dans le cas où la contrepartie de la construction, de l’acquisition, de l’amélioration ou de la remise en état de l’élément d’infrastructure serait l’octroi du droit de percevoir un tarif auprès des tierces parties utilisatrices ou de se servir d’un autre actif à des fins lucratives? Dans la négative, à quel poste conviendrait-il de porter le crédit lorsqu’il n’existe aucune obligation de verser de la trésorerie?

Les membres ont indiqué être d’accord avec les propositions et précisé qu’elles sont similaires à celles prévues à l’IFRIC 12.

6. Estimez-vous qu’il serait nécessaire d’ajouter des indications concernant le cas où la contrepartie de la construction, de l’acquisition, de l’amélioration ou de la remise en état de l’élément d’infrastructure est un actif non financier de l’entité du secteur public (par exemple, un terrain)? Le cas échéant, veuillez donner des exemples de contreparties qui n’ont pas été prises en considération.

Oui, les membres croient qu’il est nécessaire d’ajouter des indications ou des précisions pour certaines contreparties. Ils ont mentionné que certains éléments d’actifs pourraient ne pas être constatés dans les états financiers des entités du secteur public et que des indications devraient être fournies pour ces situations. Ils ont fait référence entre autres, aux situations visées par les paragraphes .57 et .58 du chapitre SP 1000 Fondements conceptuels des états financiers. Dans ce genre de situations, ils se sont questionnés à savoir si ces situations impliqueraient la constatation d’un gain aux résultats ou plutôt d’un gain reporté au bilan. De plus, ils se sont questionnés au sujet de certaines contreparties non financières. Par exemple, dans le cas où la contrepartie est un droit résultant d’un contrat de location. Ils aimeraient des éclaircissements pour ces situations.

7. Êtes-vous d’accord qu’il convient de mesurer initialement l’élément d’infrastructure et le passif au coût? Dans la négative, quel autre traitement serait plus approprié (et pourquoi)?

Oui, les membres sont d’accord qu’il convient de mesurer initialement l’élément d’infrastructure et le passif au coût. Par contre, ils souhaitent que le coût soit défini dans les propositions. Selon eux, dans certaines circonstances, le coût pourrait correspondre à une moindre valeur et des précisions sont nécessaires dans ces circonstances. La présence d’un actif non financier à titre de contrepartie, tel qu’élaboré dans la réponse à la question précédente, requiert également que des clarifications soient apportées à la définition du coût de l’élément d’infrastructure.

8. Êtes-vous d’accord qu’un élément d’infrastructure existant qui est amélioré ou rénové dans le cadre d’un partenariat public-privé devrait être évalué à sa valeur comptable majorée des coûts associés à son amélioration ou à sa remise en état? Dans la négative, quel autre traitement serait plus approprié (et pourquoi)?

Oui, les membres sont d’accord avec les propositions. Par contre, ils auraient souhaité d’avantage d’informations pour leurs permettre de comprendre la position du CCSP à ce sujet.

Selon eux, on aurait pu choisir la juste valeur à la date de l’amélioration ou de la remise en état et ils auraient souhaité en savoir plus sur l’historique des discussions au sujet du choix de la méthode choisie.

9. Les indications sur les taux d’actualisation, telles qu’elles sont formulées dans l’énoncé de principes, vous conviennent-elles? Dans la négative, pourquoi? Veuillez commenter.

Les membres sont d’avis que les indications sont adéquates mais le paragraphe .61 a soulevé des préoccupations. En effet, selon eux, la référence à un taux observable sur le marché est nouvelle et n’est pas nécessairement retenue dans d’autres référentiels comptables, et pourrait être incohérente avec des sections du manuel en comptabilité dans le secteur public, notamment les suivants : SP 3260 Passif au titre des sites contaminés, SP 3270 Passif au titre des activités de fermeture et d'après-fermeture des décharges contrôlées de déchets solides et NOSP 2 qui ne comportent pas de telle référence à un taux observable sur le marché. À titre d’exemple le chapitre SP 3270 (plus précisément au paragraphe 16) préconise plutôt qu’un taux d’actualisation déterminé selon des indications « internes » soit utilisé par opposition à un taux observable externe. De plus, les membres auraient souhaité, comme c’est le cas dans la NOSP 2 au paragraphe 15, que les propositions incluent une procédure de révision du taux d’actualisation retenu, appelé quelquefois en pratique « test de recul », demandant de réviser l’estimation du taux d’actualisation utilisé pour s’assurer d’une certaine cohérence entre les hypothèses retenues. Ce test permettrait également une cohérence avec la norme internationale IPSAB 32 et précisément avec le paragraphe AG42.

10. Êtes-vous d’accord qu’il convient de réduire le passif afférent à une contrepartie non financière et de constater un revenu lorsque l’obligation de prestation est remplie? Dans la négative, à quel compte conviendrait-il de porter le débit lorsque l’obligation de prestation est remplie?

Oui, les membres sont d’accord avec les propositions.

11. Êtes-vous d’avis que les composantes de la contrepartie transférée dans le cadre d’un partenariat public-privé — la contrepartie pouvant comporter plusieurs composantes se rattachant respectivement aux améliorations, à l’entretien, à l’exploitation, etc. — devraient faire l’objet d’indications particulières qui s’ajouteraient aux propositions de l’énoncé de principes? Le cas échéant, quelles indications supplémentaires faudrait-il ajouter? Veuillez donner des exemples.

Oui, les membres sont d‘avis que des indications particulières doivent s’ajouter aux propositions pour considérer les situations de contrat à composants multiples, comme c’est le cas dans les IFRS et les NCECF dans les normes de constatation des produits. Ils demandent des clarifications au sujet des méthodes d’estimation appropriées dans les circonstances. Ils réfèrent aux indications prévues dans IFRS 15 à ce sujet, qui précisent les méthodes acceptables.

12. Les obligations d’information vous conviennent-elles? Dans la négative, quels changements, suppressions ou ajouts feriez-vous à ces obligations (et pourquoi)?

Les obligations d’information conviennent partiellement aux membres. D’abord, ils ont indiqué que l’alinéa 7b iv) du principe 7 des propositions, devrait être remplacé par une obligation d’information plus large qu’uniquement à celle du taux d’actualisation. Selon eux, toutes les hypothèses retenues et liées à la comptabilisation des partenariats public-privé, devraient être divulguées et non uniquement le taux d’actualisation. De plus, comme les exigences mèneront à constater un élément d’actif et un élément de passif, les obligations d’information devraient prévoir des exigences similaires à celles du chapitre SP 3150 pour le poste d’actif constaté. Les membres proposent également que soient fournies des exigences de présentation distinctes au bilan ou dans les notes aux états financiers, de même qu’un lien vers les exigences relatives aux obligations contractuelles lorsque le partenariat implique des éléments non constatés dans les états financiers. En effet, selon leurs expériences, un engagement contractuel pourrait exister bien avant la constatation des éléments d’actifs et de passifs afférents.

Ils ont proposé finalement, que la méthode de renversement du passif vers les revenus, soit clairement indiquée et non uniquement des modalités de paiements relatifs aux contreparties financières. Selon eux, il est fréquent que des ententes contiennent des caractéristiques mixtes. Il n’est pas clair que ces informations soient fournies selon les exigences proposées au principe 7.

13. Y a-t-il d’autres points qui devraient être pris en considération?

Les membres ont proposé l’ajout d’indications au sujet des changements importants aux ententes qui pourraient amener soit à des modifications substantielles de contrats et donc à leur décomptabilisation (et à comptabilisation d’un nouveau contrat) ou à des contrats renégociés, comme c’est le cas pour les passifs financiers renégociés dont des modalités sont prévues aux paragraphes .42 à .51 du chapitre SP 3450 Instruments financiers.

October 17, 2017

Mr. Michael Puskaric, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto, ON M5V 3H2

Dear Mr. Puskaric:

Re: Public Private Partnerships – Statement of Principles

We are pleased to respond to the Statement of Principles on Public Private Partnerships (the SOP) issued by the Public Sector Accounting Board (PSAB or the Board). We are supportive of PSAB addressing the need for guidance on the accounting for public private partnership (“3P”) arrangements as we believe this will improve consistency among public sector entities accounting for these complex arrangements.

We generally support the principles outlined in the SOP as we believe these are consistent with the financial statement concepts of PS 1000, Financial Statement Concepts and would result in accounting that reflects the substance of commonly encountered public private partnership arrangements. For this reason, we have limited our responses to a number of specific areas for consideration by the Board in their deliberations:  We agree with Principle 1, that the public sector entity should recognize infrastructure when, under the terms of the 3P arrangement, the public sector entity controls it. This is consistent with PS 3210, Assets. However, we have noted some diversity in practice regarding whether infrastructure under construction is controlled by the public sector entity during the construction period (i.e. the private sector entity is creating an asset controlled by the public sector entity) or whether the infrastructure is controlled by the private sector entity while under construction and the risks and benefits of the economic resource pass to the public sector entity only upon completion (i.e. the public sector entity can only benefit from the asset to provide services when it is completed). We believe it would be helpful if the Board could expand on how Principle 1 applies to assets under construction when developing an exposure draft on 3P arrangements. This is important for the application of Principles 2 and 3 because whether control of the asset is maintained over time or obtained at a point in time is relevant in determining what is the past transaction that drives the recognition of a liability to pay for the asset.  Moreover, also with regards to Principle 1, the exposure draft should discuss explicitly how “whole-of-life” assets are assessed using the proposed control test. We are aware that the specific guidance found in International Public Sector Standard 32, Service Concession Arrangements: Grantor (IPSAS 32) has been considered by preparers and auditors in Canada in the absence of equivalent guidance under current PSAS. These considerations essentially focus the control determination on parts a) and b) of Principle 1 and remain very judgmental in application.

PricewaterhouseCoopers LLP 18 York Street, Toronot, Ontario, Canada M5J 0B2 T: +1 416-869-1130, www.pwc.com/ca

PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

Mr. Michael Puskaric, CPA, CMA Public Sector Accounting Board October 17, 2017

 Finally on Principle 1, we are concerned by the interaction of the “Access and Pricing” guidance with that found in PS 1300, Government Reporting Entity. More specifically, how to distinguish those situations where control is not present under PS 1300 in cases where a public sector entity regulates a particular type of services or when the recipient is financially dependent. The control indicators found in PS 1300 would lessen the importance of such factors when assessing the government reporting entity whereas they would be indicative of an asset under the proposed 3P guidance, which could arguably be seen as conflicting.  We agree with Principle 4 that constructed or acquired infrastructure should be recorded at its cost to the public sector entity. This is consistent with PS 3150, Tangible Capital Assets. However, as with many other situations where there are multiple units of account, the challenge is to determine what is the amount that is representative of the cost relating to each unit of account. We note that the discussion in the SOP states that allocations between capital and operations and/or maintenance components are determined using “estimation techniques” (paragraph 54) that may be calculated using a discounted cash flow technique (paragraph 53) unless expected cash flows are irrelevant in determining the cost of the infrastructure such as when consideration is non-financial in nature (paragraph 55). It does not provide guidance on determining what cash flows relate to the cost of infrastructure, as opposed to those that relate to the other components. We are concerned because the SOP does not provide guidance on allocation; the standard may not result in enhanced consistency in accounting for 3P arrangements. For example, guidance on allocating between components might be to base the allocation on relative fair values, or alternatively base on fair value of one (or more) components and residual value to the other (specifying either which component should have the residual allocation or allocating a residual to the less easily measured components). Absent detailed guidance, diversity in practice may result. Further, we believe there may be circumstances when there is a mix of financial and non-financial consideration under the contract (please refer also to our comment on Principle 6 below). The SOP does not articulate what proportion of non-financial consideration would make expected cash flows irrelevant to the determination of cost. It does not address whether an appropriate estimation technique should be applied to the non-financial consideration (e.g. fair value, the foregone revenue (opportunity cost), or the original cost of the non-financial consideration to the payor) or should be applied to determine the cost of infrastructure (e.g. an estimate of the fair value or the cost to acquire it separately). In our experience, allocation of consideration between the components is one of the more challenging aspects of accounting for 3P arrangements and we suggest that the Board provide further guidance in any exposure draft as how to allocate financial and non-financial consideration to the components within a 3P arrangement to enhance consistency of application. We believe this is a critical element of accounting for 3P arrangements as the measure of the asset drives the measurement of the liability, in accordance with Principle 5.  Principle 6 notes that a liability might be recognized as part of granting the private sector entity the right to earn revenues from third-party users. We agree that the granting of such rights can result in a performance obligation of the public sector entity, as they must continue to provide access of the underlying infrastructure asset to the private sector operator over the period of the contract. However, we believe additional guidance on how this relates to the measurement of the infrastructure asset and corresponding liability is warranted. For example, is the granting of such rights to the private sector a form of non-financial consideration that needs to be included in the measurement of the infrastructure asset (Principle 4)? If so, should the public sector entity present such revenue in a gross or net as an agent (flow-through for the private sector entity)?

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Mr. Michael Puskaric, CPA, CMA Public Sector Accounting Board October 17, 2017

Would the non-financial liability be considered a unilateral right under the proposed PS 3400 while the payments from third party users would be exchange type transactions under PS 3400 (or should they be the same)? How is the consideration measured and accounted for within the proposed PS 3400, Revenue? Does Principle 6 apply to other components of the 3P arrangement beyond the construction of the infrastructure (for instance, as consideration for maintenance service)? And if so, what should be the recognition point for those other components?  While the arrangements in scope of the statement of principles are commonly referred to as “public private partnerships” we have not observed in practice that 3P arrangements meet the definition of “government partnerships” as that term is used in PS 3060, Government Partnerships since there is no shared control of the assets or operations subject to the arrangement. The purpose and scope outlined in the SOP indicates that there must be control of the infrastructure assets by the government. We agree that arrangements in scope of this project should include those where the government obtains control – but not shared control – of infrastructure assets. However, we encourage the Board to consider carefully how this distinction can be made clear when developing a standard on 3P arrangements. For example, Principle 7 on disclosure includes disclosures such as “significant terms of the partnership” and “significant changes in the partnership”, which we believe may be confusing.

We would be pleased to respond to any questions you might have. Questions can be addressed to Michael Walke ([email protected] or 416-815-5011), Lucy Durocher ([email protected] or 416-869- 2311) or Martin Boucher ([email protected] or 514-205-5415).

Yours very truly,

PricewaterhouseCoopers LLP

Chartered Professional Accountants

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Wayne Morgan Colin Semotiuk Office of the Auditor General of Alberta Edmonton, Alberta

October 17, 2017

Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Board Public Sector Accounting Board 277 Wellington Street West Toronto ON

Dear Mr. Puskaric, Our response to the PSAB Statement of Principles (SoP) – Public Private Partnerships (P3) is below. We note the following principles guide our response:

• We agree the issue of control is important for determining whether the public sector entity has a P3 asset and liability • We believe the SoP should clearly recognize these are exchange transactions and therefore what follows is: o The P3 asset should be valued at cost, meaning the fair value of what was given up or received by the public sector entity, whichever is more clearly determinable o The liability should be limited to what represents outflows from past transactions. Typically this will include the financing arrangement part of the P3 o “Liabilities” for aspects of the P3 that will settle to revenue should not be recognized.

1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships when the public sector entity procures infrastructure using a private sector partner whose obligations include: • A requirement to build, acquire, improve or refurbish; • Finance; and • Maintain and/or operate the infrastructure? If not, what public private partnerships should be included or excluded? The SoP suggests public private partnerships be treated as tangible capital assets / capital leases. The SoP should further explain why current standards, in particular tangible capital asset (PS3150) and capital lease (PSG-2), are insufficient to deal with P3s. 57

In addition, PSAB should consider whether all or most P3s are actually government partnerships. For example, public private partnerships that meet the three criteria outlined in the Statement of Principles may also meet the definition of government partnership in PS3060.06, which defines a government partnership as “a contractual arrangement between the government and a party or parties outside of the government reporting entity that has all of the following characteristics: a) The partners co-operate toward achieving significant clearly defined common goals; b) The partners make a financial investment in the government partnership; c) The partners share control of decisions related to the financial and operating policies of the government partnership on an ongoing basis; and d) The partners share, on an equitable basis, the significant risks and benefits associated with the operations of the government partnership.” If PSAB decides that P3s are not government partnerships within scope of PS3060, a P3 standard should outline why PS3060 does not apply and correspondingly PS3060 should be updated to include a statement that the standard does not apply to partnerships that meet the definition of public private partnerships. We agree with the guidance in paragraph .37 and .38 regarding risks and suggest the implications of residual risks be more clearly drawn out i.e. residual risks are relevant to the public sector entity’s classification of the P3 at inception, not as a potential future event or contingency. Public sector entities may argue that they have separated themselves from the risks associated with ownership in a public private partnership, but in fact they have possibly only postponed them. Consider each of the examples in the Statement of Principles. In the example where the P3 partner operates a hospital wing, if the partner discontinues operations, risks associated with the public sector entity owning the rest of the hospital (and the attached wing) will likely be assumed by the public sector entity, regardless of contractual terms. In the example where a third party operates and collects tolls in exchange for a freeway/highway, if the operator fails to properly maintain the road and therefore shortens the useful life from 40 years to 30 years, it will be the public sector entity who bares the risk of ownership.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate? The Statement of Principles introduces the term “infrastructure” as a category of assets. Tangible capital assets are currently separated as an individual element in PS 1000.43. We find it unclear whether the new term represents a new financial statement element due to the fact that the Statement of Principles elevates public private partnerships to a single standard, or whether infrastructure is a special form of tangible capital assets. 58

3. Do you agree the clarified control guidance is appropriate and sufficient as it relates to the recognition of infrastructure? If not, what further clarifications are necessary and what other basis of recognition is appropriate? We agree that the public sector entity should be required to control the purpose and use of infrastructure. As we note above, in many cases the issue may not be control but joint control: the assets are subject to joint control by the public sector entity and the third party/parties. 4. Do you agree a liability should be recognized when the public sector entity has an obligation to deliver cash or another financial asset as consideration for the building, acquisition, improvement or refurbishment of infrastructure? If not, where should the credit entry be presented? Agree - a liability should be recognized when the public sector entity has an obligation to deliver cash or another financial asset. We suggest it would be useful for the new standards to clarify that this type of liability is a financial liability in accordance with PS 3450. 5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue – generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists? We have no examples of when one would exist. If one did exist, how would the obligation be satisfied? Would it be settled as the third party exercises the right and collects revenue over the life of the asset each year? If so, then some estimation of total revenue able to be collected over the life of the asset would be needed. Or would it settle simply straight-line over the life of the P3? The SoP seems to suggest that the public sector entity is recording the third party’s revenue as meeting the obligation. In other words, the public sector entity has very little if anything to do to satisfy the obligation and what has been given up is an intangible asset. So we question whether this is actually a liability. We believe that because the public sector entity is obtaining an asset for which it had to give up something, the exchange transaction nature of the P3 implies that the public sector entity has an asset (the right to charge users) that it does not have recorded but should be recognized. Two transactions have occurred as part of the exchange: first the recognition of the asset and revenue, second the disposal (or exchange) of the asset in return for the P3 asset. 6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public 59

sector asset (for example, land). If yes, please provide examples of consideration types not considered. We believe additional guidance is needed. It is not clear if the land in this question that is exchanged is recognized by the public sector entity or not. If the land is recognized, no additional guidance is necessary other than perhaps guidance on whether the first (preferred) measurement of cost of the P3 asset should be what is received, and the second measurement of cost of the P3 asset is what is given up, or whether a gain or loss on acquisition is appropriate. If the land is not recognized, then our response is the same as for question 5. For example, if a developer is provided 100 acres of unrecognized Crown land in exchange for a P3 highway where the land exchanged is not part of the P3 asset that will be recorded by the public sector entity. Upon building the highway, the land will be transferred to the P3 partner for their own purposes. The Crown land is not currently permitted to be recorded under the standards and therefore the public sector entity will be understating the cost of the P3 asset. We suggest two transaction therefore occur: first the public sector entity recognizes the land at fair value (Dr. Land Cr. Gain on land) and then records the P3 asset and disposal of the land (Dr. P3 Asset Cr. Land). Our concern is that recording P3 liabilities that settle to revenue make it very difficult for users to understand the benefits and costs of the P3. We note that it is the exchange nature of P3s that allows the recognition of these unrecorded assets. In contrast government transfer liabilities under PS3410 that settle to revenue are qualitatively different because they do not arise from exchange transactions, by definition.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why? Agree – the initial measurement of the infrastructure and the liability should be at cost. We note that cost includes the fair market value of any assets given up, including assets acquired by right of Crown, or fair market value of assets received, as discussed above.

8. Do you agree existing infrastructure, improved or refurbished using a public private partnership, should be measured at its carrying amount plus costs associated with the improvement or refurbishment of the existing infrastructure? If not, what alternative is more appropriate and why? Agree – existing infrastructure, improved or refurbished using a public private partnership, should be measured at carrying amount plus improvement or refurbishment costs. 60

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary. Disagree – paragraph .59 of the Statement of Principles requires: “a discount rate that comprises the time value of money and the risks specific to the infrastructure and liability . . .” We believe the discount rate should be the public entity’s borrowing rate. An important financial indicator of a public entity is net debt. Public private partnerships are a method of financing and have a direct effect on net debt. If public entities are permitted to use a discount rate that “comprises the time value of money and the risks specific to the infrastructure and liability,” there will be less consistency in application, and the value of the asset and liability may be understated along with net debt. Under this approach public sector entities may use rates above their comparable borrowing rates to lower the liability amount and decrease net debt. Using the entity’s borrowing rate is also consistent with PSG-2. We note the interest rate implicit in the P3, if determinable, should be disclosed so users can compare it to the interest rate used to measure the asset and liability and assist in evaluating the P3.

10. Do you agree the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied? If not, where should the balancing entry be recorded when the performance obligation is satisfied? We are unclear what in-flow is the public sector entity receiving, or what is the public sector entity is doing to result in the inflow. We find the Statement of Principles unclear on how settling the performance obligation results in revenue; as noted in question 5 and 6 we think it is revenue upon inception of the P3.

11. Does the structure of consideration transferred in public private partnerships – which may include consideration for betterments, maintenance, operations, etc. – require specific guidance in addition to the Statement of Principles proposals? If yes, what additional guidance is necessary? Please provide examples. We have not identified any additional guidance needed at this time, other than whether the public sector entity has a prepaid asset (prepaid maintenance).

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why? We believe significantly more requirements should be added, similar to the requirements under PS 3060 – Government Partnerships. As stated in our response to question 9, one 61

of the key principles of financial reporting is to evaluate performance. Public private partnership disclosure should therefore enable the reader to evaluate management’s decision to complete and continue the partnership. Such disclosure increases public sector accountability. Increased disclosure should include the risks borne by each of the partners. Disclosure of risks allows users to clearly see possible liabilities that the entity may incur. It would be beneficial if this disclosure included details of any unfulfilled performance obligations. Public private partnerships may also include contractual rights and/or contractual obligations, therefore the standard would benefit from some direct guidance in contractual rights and contractual obligations. We note that amortization expense and interest expense for P3 infrastructure assets should be disclosed separately. This is of key importance because different discount rate interpretations result in different classifications between interest expense and amortization expense. Further, given the increased focus on related party transactions, the public private partnership disclosure requirements should also include similar disclosure requirements. What transactions is the third party completing with parties related to them? The third party is acting on behalf of the public sector entity and should be making similar disclosures to what the public sector would be required to disclose in relation to the specific project. 13. Are there additional matters requiring consideration? We note that additional guidance on impairment (beyond reference to PS3150) may be needed. For example, what if the P3 becomes onerous – should a liability be recognized similar to onerous contracts under IFRS? Guidance on de-recognition of P3s would also be useful – what if the public sector entity takes over the P3 completely or exits the contract.

Thank you for the opportunity to comment. Sincerely, Wayne Morgan PhD, CPA, CA, CISA Colin Semotiuk CPA, CA 62

Michael Puskaric Director Public Sector Accounting 277 Wellington Street West Toronto, Ontario M5V 3H2

Dear Mr. Puskaric:

SUBJECT: Public Private Partnerships

Thank you for the opportunity to comment on the Statement of Principles (SOP) Public Private Partnerships. Our responses to the specific questions posed are provided in the Appendix below.

General comments

We find that the SOP lacks the detailed content and examples normally provided at this stage of the due process which help to inform respondents on all possibilities of the accounting treatment considered by the Task Force. Given that stakeholders requested guidance on applying the general principles to public private partnerships (“P3” arrangements), we find that the SOP does not have enough discussion on the arguments considered in order to provide the rationale for the conclusions reached.

As well, this SOP does not discuss the fact that many private sector entities involved in P3 arrangements in Canada are likely to be applying International Financial Reporting Standards (IFRS), specifically IFRIC 12 Service Concession Arrangements. In our opinion, ensuring that the associated assets are recognized by one of the parties to the arrangement would be in the public interest. Therefore, we encourage PSAB to consider whether the scope of the proposed standard is compatible with IFRIC 12.

If you have any further questions related to these comments, please do not hesitate to contact either Ms. Leona Melamed at [email protected] (613-355-2731) or myself at Michael.Lionais@tbs- sct.gc.ca (613-369-3118).

Yours sincerely,

Michael Lionais Acting Assistant Comptroller General of Canada, Treasury Board Secretariat of Canada c.c.: Bill Matthews, Comptroller General of Canada 64

APPENDIX

Responses to Questions Posed

We do not agree with the proposed scope. We suggest that PSAB consider the following:

1) There is no definition nor discussion of “infrastructure” in the Consultation Paper (CP) and therefore it is difficult to assess the scope. However, we believe that any tangible capital assets procured in a P3 arrangement should be in the scope of the proposed guidance, and not only those that are considered to be “infrastructure”.

2) PSAB may want to consider whether to include guidance on arrangements using existing assets of the public sector entity that do not require refurbishment or improvement. While such arrangements may be similar in nature to a service contract, the consideration provided to the private sector entity to operate the asset(s) may include non-financial consideration that would be accounted for in the same way as other P3 arrangements. As well, separate classification of assets used in P3 arrangements as a category within tangible capital assets, and their subsequent measurement, may also follow the requirements in the proposed guidance.

3) The requirement to “operate and/or maintain” lacks clarity and poses difficulties in understanding the scope of the standard. For some assets, maintenance is a component of servicing an asset that is operated by the public sector entity; therefore, the arrangement could be a lease with a service contract and therefore, not in the scope of this standard. Conversely, for assets such as roads and bridges, the maintenance activity serves to enable their use by third parties and may constitute the service provided by the private sector entity on behalf of the public sector entity.

To avoid this confusion, we suggest using the same scope as IPSAS 32 Service Concession Arrangements and Governmental Accounting Standards Board (GASB) Statement 60 Accounting and Financial Reporting for Service Concession Arrangements, both of which specify that assets in a P3 arrangement are used by the private sector entity to provide public services on behalf of the public sector entity. The scope of 65

IPSAS 32 also mirrors the scope of IFRIC 12, from the public sector perspective. As well, it would be useful to provide a decision tree to enable entities to determine whether the arrangement being analysed is a lease or within the scope of this proposed guidance.

4) As further discussed in our response to Question 3 below on the control criteria, we believe that the requirement for the public sector partner to control any significant residual interest in the asset should be a scope limitation rather than a control criterion. Assets to be used in the arrangement for the entire useful life should also be in the scope.

5) Although a gap in PSAS was identified for accounting for public-private partnerships, we do not see why this guidance could not be applied to similar arrangements between public sector entities (public public partnerships). It is the nature of the arrangement rather than the nature of the parties to the arrangement that has created the need for this guidance. PS 3060 Government Partnerships, applies to arrangements whereby the partners share control, which would be a different type of arrangement than those envisaged in this proposed standard.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

We do not agree that infrastructure is the most appropriate term, given that there may be infrastructure assets held by an entity that are not part of a P3 arrangement. As mentioned in our response to Question 1, the term “infrastructure” was not defined, except through the vague statement in paragraph .22 that “infrastructure by definition provides goods or services for public consumption”. The Oxford dictionary definition of infrastructure is: “The basic physical and organizational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society or enterprise”. However, in the Government of Canada’s Financial Statements, there are separate asset classes for “Buildings” versus “Works and Infrastructure.” As well, there could be other types of assets that are the subject of a P3 arrangement that do not meet the Oxford dictionary definition of infrastructure. The SOP does not outline why the proposed principles could not apply to all tangible capital assets.

While we recognize that International Financial Reporting Standards (IFRS) IFRIC -12 Service Concession Arrangements refers to “infrastructure” and also does not provide a definition, that guidance is an interpretation rather than a standard. The IPSASB decided not to use the term infrastructure in IPSAS 32, deciding that “service concession asset” was more descriptive.

We believe that the accounting principles being developed in this guidance should apply to any tangible capital assets that are the subject of the 66

arrangement. We encourage PSAB to identify a term that better aligns with the scope of the guidance, as the general term “P3 arrangements” encompasses more arrangements than those within the proposed scope. Consequently, in our opinion, a term similar to “service concession assets” would be more appropriate.

Notwithstanding this comment, our responses to the questions below refer to “infrastructure”, as being those assets intended to be in scope of the standard.

We agree with criteria (a) and (b) in Principle 1, but question the application of criterion (c), the control of the significant residual interest in the asset.

Paragraph .36 states that control of significant interest, if any, is necessary to satisfy the control criterion in Assets PS 3210.16(c), exposure to the risks associated with the economic resource. We have the following comments on the requirement and application of this criterion:  The public sector entity may be exposed to other types of risk, e.g. financial risk, during the term, and at the end, of the agreement. Consequently, a significant residual interest in the asset is not a necessary control criterion to satisfy that the public sector entity is exposed to the risks associated with the economic resource. Therefore, we believe that the requirement for the public sector partner to control the significant residual interest in the infrastructure should be a scope limitation rather than a control criterion. This change would also be consistent with the scope of IFRIC 12, which is likely to be the guidance applied by the private sector entity.  Clarification of the term “significant residual interest” within the context of a P3 arrangement should be provided.

In addition, with respect to control criterion (b), we believe that additional guidance on control should be provided for P3 arrangements where the price charged to third party users and collected as non-financial consideration by the private sector entity is subject to rate regulation, as the price is not controlled by either party.

We agree that a liability should be recognized when the public sector entity has an obligation to deliver cash or other financial consideration.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

We agree that a liability may be recognized for the unsatisfied portion of a performance obligation that allows the private sector partner the right to non- financial consideration over the term of the agreement. This aligns with the recent proposed guidance on recognizing performance obligations over time in the Revenue exposure draft. More detailed guidance and examples should have been provided in the SOP on this matter, given that this is one of the more contentious issues surrounding the accounting treatment of P3 arrangements.

However, we disagree that the performance obligation arises because the private sector entity is provided ongoing access to the infrastructure, as stated in paragraphs .47-.48. In our opinion, the performance obligation arises because the public sector entity has an obligation under the agreement, and over the term of the arrangement, to provide the ongoing right to earn third party revenue to the private sector entity. If the performance obligation arises only when the private sector entity can access the infrastructure, this is necessarily on completion of construction. However, depending on the terms of the agreement, the performance obligation may arise at an earlier point, such as signing the contract. The satisfaction of the performance obligation will occur once the infrastructure is operational.

In addition, we would like to note the conceptual issue that the non-financial consideration transferred to the private sector entity, i.e. the right to charge users or the right to earn revenue from another revenue-generating asset, is an intangible asset that would not be recognized under PSAS. Consequently, although we are of the opinion that the scope of the guidance should be expanded to include public-public partnerships (as per our response to Question 1), there would be an issue with applying these principles to such arrangements.

In our opinion, additional guidance on non-monetary transactions is required as there is no guidance in PSAS. Canadian public sector entities currently need to refer to the guidance of other standard-setters for such transactions.

7. Do you agree the initial measurement of the infrastructure and the liability 68

should be at cost? If not, what alternative is more appropriate and why?

We agree with the principle that the infrastructure should be measured at its cost to the public sector entity. Therefore, similar to a leased asset, the cost of the infrastructure asset would be the present value of the expected cash flows paid/payable, or the amounts that the private sector entity will obtain through the right to charge third party users, relating to the construction of the asset. Our comments with respect to the SOP guidance are:  Separating the unitary payments into the cost of the infrastructure and the cost to provide services with the asset may not be easily determinable. The SOP states only that “allocation is determined using estimation techniques”. More detailed guidance is required, e.g. whether bifurcation of the consideration should be based on the relative fair values of the contract components or some other basis.  Given the difficulties with separating unitary payments, we believe that the SOP should have discussed whether fair value would be relevant for initial measurement of the asset under PSAS, as required in IPSAS 32. Specifically, if the present value of the future payments is in excess of the asset’s fair value, impairment may need to be considered. As noted in our general comments, this type of discussion in the SOP would have been beneficial for stakeholders in developing informed views.  Measuring the asset when there is non-financial consideration, or a combination of financial and non-financial consideration is even more challenging. We encourage staff to develop appropriate guidance and examples to assist entities in determining measurement of the asset.

We agree that carrying amount plus the costs of betterments is appropriate for existing infrastructure. Refurbishment may or may not improve service potential. We find that it is not clear whether the terms “refurbishments”, “improvements” and “betterments” are used interchangeably. Also, please see our comments with respect to determining cost in the response to Question 7.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

While we understand that some of the key principles of selecting a discount rate have been provided, such as ensuring internal consistency with risk and inflation aspects of the future cash flows, we believe that PSAB should develop comprehensive guidance on discount rates which reflects the specific measurement principles in PSASs. 69

The measurement of an infrastructure asset and related obligation has similarities to leases. However, the guidance in PSG-2 Leased Tangible Capital Assets requires that the discount rate is the lower of the government's rate for incremental borrowing and the interest rate implicit in the lease, if practicable to determine. The SOP should explain why the proposals are not consistent with this guidance.

Paragraph .59 discusses uncertainty in future defaults on the cash flows. In our opinion, this is not generally relevant in a public sector context, given that public sector entities usually meet their obligations. Consequently, when there is financial consideration, the Government’s cost of borrowing is the most appropriate rate as the future cash flows are contractual.

As paragraph .61 of the SOP states that “where discount rates cannot be easily observed from the market…”, it seems that (although not specifically stated) the use of a market rate is being promoted. However, this is not consistent with guidance in other PSASs which often refer to the Government’s cost of borrowing but not the use of a current market rate.

As well, there is no discussion on the discount rate applicable to the non- financial consideration model. This needs to be addressed in more detail, given that there are no expected future cash flows from the public sector entity’s perspective.

Based on alignment with the proposals in the recent Revenue exposure draft, we agree that revenue should be recognized as the performance obligation is satisfied.

We believe that additional guidance would be helpful in accounting for the cost of betterments that are included in the lifecycle payments or non-financial consideration. As these payments do not link to the specific betterment activity, guidance on whether it is appropriate to separate and recognize the betterment in a future period would be useful. In practice, difficulties in obtaining timely information on the specific activity may create recognition and measurement challenges while recording betterments. 70

At the end of a P3 arrangement, the terms may require that the asset(s) is returned to the public sector entity in “like new” condition. Specific guidance or examples considering the impact of handback standards on recognition of betterments and determination of the residual value and amortization period would be helpful

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

We do not agree with the disclosure requirements. In our opinion, the requirement to separately disclose significant P3s is onerous and much too detailed for financial statement disclosures.

In addition, we believe that assets used in a P3 arrangement should be separately classified within tangible capital assets, similar to assets under capital leases.

13. Are there additional matters requiring consideration?

 PSAB may wish to review its lease accounting guidance, as PSG-2 Leased Tangible Capital Assets is based on a risks and rewards model rather than the control model outlined in PS 3210 Assets that is being applied in this proposed guidance.

 An area of subsequent measurement that has not been addressed is contract modifications, and how entities would affect the changes to the P3 asset and obligation.

 In general, the terminology used in the SOP has not been defined and has created confusion for stakeholders. For example, the terms “infrastructure” and “significant residual interest” are not clear, as noted in our responses above. As well, it is not clear whether the use of “betterments” versus “refurbishments” versus “improvements” is intentional; i.e. are these terms interchangeable or do they have different meanings within the guidance.

Please respond to the following questions:

• a requirement to build, acquire, improve or refurbish;

• finance; and

• maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

The traditional generally accepted words of design, build, finance, operate, and maintain are better understood and should be consistently used. I feel design is lacking in the definition and is a key to the P3 model.

Better paragraph 16 definition: Public – Private Partnerships (P3s) are a long-term performance- based approach to procuring public infrastructure where the private sector assumes a major share of the risks in terms of financing and construction and ensuring effective performance of the infrastructure, from design and planning, to long-term maintenance.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

It should be “public infrastructure” and not just infrastructure. Any procured asset must be in the public interest, provide public services and be procured by a public entity.

In a P3 procurement the public sector controls/establishes the performance required by the private sector (thus linked back to the P3 definition proposed above) so the concept of control should be linked the control of the performance of services provided for in the long term contractual agreement. I think “purpose and use” is not clear enough as the use of the word “performance”.

Paragraphs 29 and 30 say this more clearly however I feel linking it back to the establishment of performance along with the definition provided for in #1 above is better. The inclusion of pricing as part of the control issue may not be needed if one choses the control/establishment of performance as the definition. For example you could have a P3 where the private sector takes all revenue risk and sets pricing independent of the public sector. These do not happen often as the price charged does not usually generate value for taxpayers but you could have one so inclusion of pricing brings potential interpretation issues.

Residual interest is another way of saying the private sector will deliver as asset at a prescribed state at the end of the contractual period. This is simply another “performance” requirement of the contract.

My suggestion is to have one principle that the public sector sets/established the performance of the service to be provided inclusive of the contract period and the asset hand back.

Yes I agree, the issue is how to measure it and my view is that the liability is the same value as the asset value. The asset is then amortized over the useful life (which should be longer than the contract period if there is an asset handback) and the liability is reduced by payments from the public sector.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Perhaps providing the right to charge is a funding source that serves to reduce the otherwise capital cost of the new asset in a similar way that a government grant would. It becomes complicated as it would depend on how the revenue risk was transferred to the private sector in the contract language.

No comment.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes, cost of the Asset as found in the financial model of the private sector partner plus any direct costs of the public sector associated with the asset. This approach is consistent with current accounting practice. The liability should be recorded at the same amount.

Difficult to say. The materiality of the existing asset would need to be considered. Having said that if you are considering a new P3 procurement the existing asset condition is most likely such that there is not much value prior to the new procurement.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

The use of a discount rate for the public sector should only be used to decide whether or not to make the investment in which case their internal cost of borrowing (hurdle rate) should be used. Once a decision is made then one should turn to the winning bid to account for the payments required in the financial model to determine accounting. Accounting for the life of the contract of the P3 should be based upon the costs detailed in the financial model of the private sector including capital cost for the asset, financing charges (with carrying charges) and operations and/or operation costs.

Perhaps it reduces the cost of the asset and therefore the offsetting liability at inception of the P3. 73

I think there needs to be expanded discussion of the components of the payments by the public sector and how the entries should be made ie interest, capital repayment (liability reduction), operations and maintenance. The financial model of the private sector that is submitted as part of the response to the RFP process and supports the executed contract should be the source for such entries.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

The disclosure should aid the reader’s ability to understand future cash flow requirements of the partnership. I’m not sure why iv is required as iii would provide the information to allow readers to know the debt required cash flows. Perhaps a 5 year schedule detailing the capital/operations/maintenance amounts would be useful.

13. Are there additional matters requiring consideration?

While the word “partnership” is generally accepted in the definition of a public-private-partnership, a P3 is a long term contractual agreement that details the performance expectation of the private sector provider as well as the required payments of the public sector for that performance. It goes on to define any and all possible payment reductions for non-performance. Additionally, the private sector financing provides additional due diligence to ensure that the private sector does perform and get paid so that they can in turn be repaid. Most of this does not come through in the principles or definitions. 74

Comments on the Statement of Principles for Public Private Partnerships proposed by the Public Sector Accounting Board (PSAB) – from the Canadian Union of Public Employees (CUPE)

Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Board 277 Wellington Street West Toronto, Ontario, M5V 3H2 [email protected]

General/Introduction

We welcome PSAB’s initiative to establish public sector accounting standards for public-private partnerships (P3s). For too long, P3s have been a black hole for accountability and transparency, with generally negligible but also highly inconsistent reporting by different jurisdictions. Meanwhile, use of P3s by Canadian jurisdictions has mushroomed, driven in part by the ability of governments to shift the liabilities off their immediate balance sheets and onto future years. Data analysis of all contracts has revealed that similar types of liabilities and obligations through the UK’s Private Finance Initiative (PFI) reached over £300 billion.1 This is a massive amount of previously hidden debt/liabilities, equivalent to about C$500 billion, or almost $20,000 per UK family.

However, in Canada we have no way of knowing the magnitude of similar P3 liabilities and long-term obligations. The public may have information on the reported, and often discounted, capital cost from other sources, but there’s no consistency in reporting P3s in public financial statements. We also have no knowledge of the much larger obligations associated with P3s. It is essential that legislators, policy- makers and members of the public know more both to gain better knowledge of our existing and future fiscal state, but also to better inform and influence our current public policy-making.

CUPE has particular interest in this area because we are Canada’s largest union, representing over 650,000 workers across Canada, including many in sectors where P3s are in operation and are being proposed, including water and wastewater, hospitals, schools, transportation and transit, recreation facilities, energy and other sectors. We are of course concerned about the impacts on our members’ jobs in the short term, but we are particularly concerned about the impact of P3s on the cost, quality and availability of public services over the longer-term. Our members not only work to provide public services, but they also depend heavily on quality public services to maintain a decent standard of living, as do all Canadians. If the funding for these is cannibalized by P3 projects whose costs are largely hidden up front, then the vast majority of Canadians will be worse off over the longer term.

It is important that governments account for future P3 costs and obligations in their financial statements. But as IMF economists Funke, Irwin and Rial explain, unless costs and obligations are reflected in the most prominent indicators of the deficit and debt, the public accounting bias in favour of P3s will remain.

1 Dennis Campbell, James Ball and Simon Rogers, “PFI will ultimately cost £300 billion”, The Guardian, 5 July 2012. https://www.theguardian.com/politics/2012/jul/05/pfi-cost-300bn https://www.theguardian.com/news/datablog/2012/jul/05/pfi-contracts-list; Yousseff El-Gingihy, “If you think there’s no money for NHS funding, you’d be right—PFI has sucked it dry”, The Independent, 13 July 2016. http://www.independent.co.uk/voices/nhs-funding-pfi-contracts-hospitals-debts-what-is-it-rbs-a7134881.html

“Public-private partnerships (PPPs) can appeal to governments because they offer a new way of providing public services that is possibly more efficient than traditional public finance. But they can also appeal to governments because they allow new investments to be undertaken without any immediate increase in reported government spending or debt. This second motive for using PPPs rests largely on an illusion, because in the absence of efficiency gains (which are probably small relative to the total cost of the project), PPPs and publicly financed projects have a similar long-run effect on public finances. In some PPPs, the government defers payment, but ultimately must still pay the full cost of the project. In others, it concedes the right to collect user fees, and thus loses revenue it would have collected if the project had been financed traditionally.”

“(Public accounting rules encourage) a government under pressure to reduce its deficit or debt in the short run to use a PPP even if, in the long run, the PPP costs more than public financing. This bias in favor of PPPs can also lead governments to assume financial commitments that later prove unaffordable. … To reduce the bias in favor of PPPs, governments can improve the information that is available about the future fiscal costs and risks of PPPs. …. But governments often measure their debt and deficit in more than one way, and if there is no change in the most prominent (“headline”) indicators of the debt and deficit, the bias will probably remain2.”

As they emphasize, “Ensuring that all PPP projects are properly and consistently accounted for at every stage of the fiscal cycle reduces the incentive to pursue PPPs for the wrong reasons.”3

The authors recommend options such as a budget framework that treats P3s in budgetary accounting terms in the same way as publicly financed projects, longer term commitment budgeting that explicitly accounts for future costs, a two-stage budgeting process in which all projects must first be approved in budget planning on the assumption they will be publicly financed, and/or ceilings on the amount that can be spent on PPP projects, as a number of countries have done. Canada has one of the most active and largest markets in the world for P3 projects, but we also have one of the weakest legislative, accountability and transparency regimes for P3s in the world.

Public accounting standards also need to apply to other operational arrangements for delivering public services beyond these more strictly-defined P3s. For example, the growing interest in and use of social impact bonds and private financing for public infrastructure through the Canada Infrastructure Bank will create growing obligations and potential contingent liabilities that should be adequately reflected in public sector financial statements. Transparent and stringent accounting standards should apply to all public or private operations that provide public services and receive public funding, regardless of their particular operational structure.

Purpose and Scope

1. The definition of P3s as outlined in Question 1, suggests that this Statement of Principles (SoP) would apply only to those P3s that also have a Maintenance and Operations component, in addition to Design, Build and Finance. Design Build Finance (DBF) P3 projects with a long-term financing

2 Funke, K., T. Irwin and I. Rial (2013), "Budgeting and Reporting for Public-Private Partnerships", International Transport Forum Discussion Papers, No. 2013/07, OECD Publishing, Paris. https://www.itf- oecd.org/sites/default/files/docs/dp201307.pdf 3 Ibid, page 16.

component should also be covered by this, otherwise accounting for them could fall through the cracks.

Recognition of Infrastructure (Questions 2 & 3)

2. Question 1: This statement of principles of course focuses on public-private partnerships as defined with an infrastructure, or tangible capital asset component. However, public sector accounting standards should also ensure that the liabilities associated with emerging forms of delivery of public services with private finance, such as social impact bonds and other payment-by-results schemes, are adequately reflected in public sector financial statements.

3. In relation to Question 3—clarifying the control guidance in ASSETS, PS 3210--Principle 1 provides a reasonable definition of many existing P3s. However, there may be considerable uncertainty over what is considered “significant residual interest.” Would this cover project partnerships where the public sector entity has a less than 50% residual interest, as with the proposed Réseau électrique métropolitain? What about when multiple public sector entities have interests that constitute minority interests on their own, but a significant or majority interest together? Would right of first refusal and options to purchase at the end of a term be interpreted as potential or some degree of control? We think a broad approach should be taken to the question of the public sector’s residual interest. Even when the public sector has a minority or very small share in public infrastructure ownership, it will still ultimately bear a majority of the risk in instances of failure or abandonment by the private operator because there’s an implicit guarantee the responsible level of government will ensure the public infrastructure continues to function. We also want to minimize the possibility that infrastructure projects adopt increased levels of private ownership in order to evade P3 reporting requirements. The relevant International Public Sector Accounting Standards (IPSAS 32) also apply to assets that are used in a service concession arrangement for its entire useful life (“a whole of life asset”) if the other conditions (control of purpose and use and access and price) in Principle 1 are met4. Under IPSAS 32 the determination of whether a P3 asset and related liabilities are counted on the government’s balance sheet is based on a risk and rewards approach, which has led to different and applications of this. However, because virtually all P3 projects are developed and operated through Special Purpose Vehicle (SPV) corporate structures, with limited liability and relatively minor equity stakes, the ultimate risks for ensuring the infrastructure and associated public services continue to operate always remains with the public entity.

Recognition of Liability (Questions 4 – 6)

4. Question 4. A liability should be entered when a public entity has an obligation to deliver cash, another financial asset, or other rights including non-financial considerations for building, acquisition, improvement or refurbishment of infrastructure. The obligations associated with other private finance schemes that don’t involve a residual interest in infrastructure, such as social impact bonds, should also be reflected in public sector financial statements.

5. Question 5. Yes, we agree that a liability should be recognized for the unsatisfied portion of the performance obligation when the right to charge users or earn revenue is the consideration transferred for the building, acquisition, improvement, refurbishment maintenance or operation of infrastructure. Foregoing this future potential revenue is an opportunity cost for the public sector.

4 International Public Sector Accounting Standards “IPSAS 32—SERVICE CONCESSION ARRANGEMENTS: GRANTOR”, paragraph 9. http://www.ifac.org/system/files/publications/files/B8%20IPSAS_32.pdf

6. Question 6. Valuing tangible public assets at cost or for a nominal amount in the case of crown land not only reflects a significant discrepancy with private sector accounting practices, but also provides a significant incentive for public entities to sell off public assets and privatize public infrastructure and services, often largely driven by these differences in accounting rules between public and private sectors. The relevant International Public Sector Accounting Standards specifies that service concessions be measured at their fair value and so it also makes sense that any infrastructure, property, plant or equipment also be measured at their fair value.5 These inconsistencies in accounting treatments not only mean that public sector financial and fiscal statements often don’t present an accurate picture of changes in the real financial situation of public entities, but more disturbingly often result in poor policy decisions undertaken for short term political reasons that lead to negative longer-term financial consequences and cost the public more. Accounting standards should provide a comprehensive, transparent, and consistent representation of the financial situation in order to support good policy decisions. They shouldn’t provide an incentive for substantive and often negative policy changes to be undertaken largely because of differences in these accounting standards.

Initial Measurement (Questions 7 – 10)

7. Question 7. As discussed above in relation to Question #6, the valuation of tangible capital assets at cost less depreciation in public sector accounts results in an imbalance with private sector accounting and unfortunately can create significant incentive for privatization of these assets and for the use of public-private partnerships, substantially driven by these differences in accounting standards. The UK has already moved substantially forward with valuation of property, plant and equipment including land and buildings at their current values in existing uses and at market values. This review is an important opportunity for the PSAB and Canadian jurisdictions to also move forward on this. If we don’t start to move forward in these areas now, then we’ll fall even further behind in these areas of accounting standards.

8. Question 8. As stated above, existing infrastructure should be measured at fair market value rather than historical or carrying costs, less impairments plus costs associated with improvement or refurbishments.

9. Question 9. There are very significant differences in the discount rates used by different jurisdictions, which reflect fundamentally different conceptual (and in some sense ideological or political) approaches. We think that the appropriate discount rate to use is the public entity’s long- term cost of borrowing and that section .61 should be replaced with “the discount rate should be based on appropriate public sector borrowing costs.” . Not only does this represent the public entitiy’s actual cost of borrowing (and so the opportunity cost for these funds), but it is directly observable in the market. Using this as the discount rate then also requires proposed P3 projects to explicitly calculate and account for supposedly risk transfers. While these aren’t generally made public as they should be, at least we can be assured that they are subject to review by auditors. Assuming that the private sector weighted average cost of capital for a particular project appropriately reflects risk transfers involves an enormous and unwarranted leap of faith about the

5 See IPSAS 32, op cit, paragraph 11. IPSAS 17 provides the following definition: “Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.” IPSAS 17—PROPERTY, PLANT AND EQUIPMENT, https://www.ifac.org/system/files/publications/files/ipsas-17-property-plant-2.pdf

efficiency of these markets6. However, if PSAB is not prepared to recommend that the appropriate public sector borrowing costs be used as the discount rate, public sector entities should also be required to report the nominal contractual cash flows and equivalents (in the case of non-financial considerations), as the UK and Portugal have done, and as is recommended by IMF experts7. Market and project-based discount rates will vary from project to project and over time, which add another layer of calculation, potential confusion and opacity to financial statements. It is far more transparent, simple and consistent over time and between projects to report actual contractual cash flows and equivalents. These can be supplemented with a calculation of discounted and present values, but in those instances, the public entity should report on the discount rates applied, as proposed in Principle 7. This would serve to improve the representation of the actual transaction and provide greater clarity and transparency to the public and decision-makers.

Subsequent Measurement (Questions 10 -11)

10. Question 10. It appears to make sense to recognize the value of non-financial considerations, including the right to earn revenue, as revenue when the performance obligation is satisfied.

11. Question 11. Interests in public-private partnerships in Canada and other countries have often been resold for significant profits, often to investment funds based in tax. In the UK, equity sales have resulted in an annual 28.7% rate of return, more than double the expected rate of return stated in project business cases8. This suggests that the projects were significantly undervalued, most likely as a consequence of exaggeration and double-counting of risks transferred and/or elevated discount rates.9

Presentation and Disclosure (Question 12)

12. Question 12. We strongly support more detailed and comprehensive disclosure requirements both in general and in relation to public-private partnerships. Public entities should be required to disclose the information outlined in Principle 7 for each of the next five years (individually and in aggregate) and thereafter. As we also recommend in relation to discount rates (Question 7, Sections .59 - .61) the nominal cash flow amounts of these obligations should be also reported for greater transparency and accountability, as other jurisdictions have done. We also strongly support the requirement that operating and maintenance payments, as well as any other payments, or minimum revenue guarantees, also be required to be itemized. Providing this information would increase the transparency and accountability of infrastructure investments. It would also allow for greater comparability of P3 projects across jurisdictions. More specifically we recommend:  Adding the following sentence to the end of section .75: Where the discount rate is elevated to include the risk specific to the infrastructure and liability, the value of that risk should be disclosed and added to the disclosed value of risk already added to cash flows.

6 Especially given that a few large firms dominate the market for P3s in Canadian jurisdictions. See Office of the Auditor General of Ontario, “Infrastructure Ontario—Alternative Financing and Procurement”, Chapter 3.05 in 2014 Annual Report, December 2014. http://www.auditor.on.ca/en/content/annualreports/arreports/en14/305en14.pdf 7 Funke, et al, p. 19. 8 Dexter Whitfield, “PPP Profiteering and Offshoring: new Evidence” European Services Strategy Unit, October 2017. https://www.european-services-strategy.org.uk/wp-content/uploads/2017/10/PPP-profiteering- Offshoring-New-Evidence.pdf 9 Office of the Auditor General of Ontario, op cit.

 In Principle 7: making the following underlined additions: “In addition to the disclosure requirements of TANGIBLE CAPITAL ASSETS, Section PS 3150, a public sector entity should disclose the following information for each year:” (b): All contract documents including significant terms of the partnership affecting the amount, timing and certainty of expected cash flow…

We note that the International Public Sector Accounting Standards include significant disclosure obligations and hope that Canadian public sector accounting at least meets these standards10.

32. All aspects of a service concession arrangement shall be considered in determining the appropriate disclosures in the notes. A grantor shall disclose the following information in respect of service concession arrangements in each reporting period: (a) A description of the arrangement; (b) Significant terms of the arrangement that may affect the amount, timing, and certainty of future cash flows (e.g., the period of the concession, re-pricing dates, and the basis upon which re-pricing or re-negotiation is determined); (c) The nature and extent (e.g., quantity, time period, or amount, as appropriate) of: (i) Rights to use specified assets; (ii) Rights to expect the operator to provide specified services in relation to the service concession arrangement; (iii) Service concession assets recognized as assets during the reporting period, including existing assets of the grantor reclassified as service concession assets; (iv) Rights to receive specified assets at the end of the service concession arrangement; (v) Renewal and termination options; (vi) Other rights and obligations (e.g., major overhaul of service concession assets); and (vii) Obligations to provide the operator with access to service concession assets or other revenue-generating assets; and (d) Changes in the arrangement occurring during the reporting period.

33. The disclosures required in accordance with paragraph 32 are provided individually for each material service concession arrangement or in aggregate for each class of service concession arrangements.

13. Question 13. Are there any additional matters requiring consideration?

While these accounting principles apply to financial decisions that have already been taken, we would also like to see them applied to the business case development upon which the decision is made whether to opt for a P3 or public procurement. Rather than just applying after the fact in financial reporting, these same standards should apply to the initial decision making. This would ensure decision- makers and the public receive relevant information in a timely manner to ensure greater accountability and transparency in the development of public infrastructure.

As Funke et al recommend,

“To further enhance transparency, governments can disclose PPP contracts on their websites. The disclosures should include any amendment to original contracts, together with a summary of their main financial provisions. Certain material can be deleted on grounds of commercial confidentiality, but if the disclosure is to be useful the main financial provisions of the contract, including those in appendices and schedules, must be disclosed.”11

10 IPSAS 32, paragraph 32-33. 11 Funke et al, p. 20.

If they are to be of any use, these must include the cash flow payments associated with the projects, any other terms which expose public entitities to risks, detailed determination of risks retained and estimated to be transferred, and should also include comparable information for any public sector comparator used in determining whether a public-private partnership would be used instead of traditional procurement.

Respectfully submitted by

Toby Sanger, Senior Economist Canadian Union of Public Employees October 17, 2017

October 17, 2017

Mr. Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Board Public Sector Accounting Board Chartered Professional Accountants of Canada 277 Wellington Street West TORONTO, ON M5V 3H2

Dear Mr. Puskaric:

Re: Public Private Partnerships – Statement of Principles

We support the proposed statement of principles. The attachment sets out our responses to the specific questions listed in the statement of principles.

Yours truly,

Judy Ferguson, FCPA, FCA Provincial Auditor

DF/dd Attachment

82 Mr. M. Puskaric, MBA, CPA, CMA October 17, 2017 Responses to Specific Questions – Provincial Auditor Saskatchewan Public Private Partnerships – Statement of Principles Page 1

Question Response

1 Do you agree the scope of this Statement of Principles should We agree that PS 3150 covers the delivery model for design-build-finance where be limited to those public private partnerships where the the financing is simplistic (similar to a bank loan). However, the scope of the public sector entity procures infrastructure using a private Statement of Principles should consider circumstances with more complex sector partner whose obligations include: financing arrangements (e.g., structuring the design-build-finance similar to a · a requirement to build, acquire, improve or long-term capital lease). As such, we disagree with excluding these types of refurbish; public private partnerships. Although public private partnerships typically include · finance; and a form of financing due to their long-term nature – exclusion of these · maintain and/or operate the infrastructure? arrangements from the standard may inadvertently drive the legal structure of If not, what public private partnerships should be included or arrangements. excluded?

2 Do you agree the term “infrastructure” accurately reflects While we agree the term infrastructure would generally cover items that the items that should be covered in the Statement of Principles? If Statement of Principles should reflect, we are concerned that not using the term not, what term is more appropriate? tangible capital assets may cause confusion. We encourage the use of consistent terminology in the handbook.

3 Do you agree the clarified control guidance is appropriate and Yes, the guidance is appropriate and sufficient. sufficient as it relates to the recognition of infrastructure? If not, what further clarifications are necessary and what other basis of recognition is appropriate?

4 Do you agree a liability should be recognized when the public Yes, a liability should be recognized when the public sector entity has an sector entity has an obligation to deliver cash or another obligation to deliver cash or another financial asset as consideration. We note financial asset as consideration for the building, acquisition, that providing practitioners with specific guidance on the determination of the improvement or refurbishment of infrastructure? If not, where obligating event would be valuable in applying the standard. should the credit entry be presented?

5 Do you agree a liability should be recognized for the Yes, a liability should be recognized for the unsatisfied portion of the performance unsatisfied portion of the performance obligation when obligation when consideration is the right to charge users or earn revenue from consideration transferred for the building, acquisition, another revenue-generating asset. We note that providing practitioners with improvement or refurbishment of infrastructure is the right to specific guidance on the determination of estimated liability and an appropriate charge users or earn revenue from another revenue- basis of measurement would be valuable in applying the standard. generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

6 Do you believe additional guidance is required where Additional guidance is required where a government gives the private sector the consideration for the building, acquisition, improvement or right to use a public sector asset for stated period-of-time particularly since the refurbishment of infrastructure is a non-financial public sector PS Conceptual Framework does not include accounting for intangible assets

83 Mr. M. Puskaric, MBA, CPA, CMA October 17, 2017 Responses to Specific Questions – Provincial Auditor Saskatchewan Public Private Partnerships – Statement of Principles Page 2

Question Response

asset (for example, land). If yes, please provide examples of (rights). For example, the future revenue from a toll bridge owed to the private consideration types not considered. sector entity.

7 Do you agree the initial measurement of the infrastructure and Initial measurement of the infrastructure should be at cost. the liability should be at cost? If not, what alternative is more appropriate and why?

8 Do you agree existing infrastructure, improved or refurbished Yes, existing infrastructure, improved or refurbished using a public private using a public private partnership, should be measured at its partnership, should be measured at its carrying amount plus costs associated carrying amount plus costs associated with the improvement with the improvement or refurbishment of the existing infrastructure. or refurbishment of the existing infrastructure? If not, what alternative is more appropriate and why?

9 Do you agree with the discount rate guidance as provided in We have not researched on discount rate determination to conclude whether the Statement of Principles? If not, why? Please provide other viable discount rate options exist. We agree with the need for guidance. commentary.

10 Do you agree the obligation created by non-financial Yes we agree with reducing an obligation created by non-financial consideration consideration should be reduced and recognized as revenue and recognizing revenue when the performance obligation is satisfied. when the performance obligation is satisfied? If not, where should the balancing entry be recorded when the performance obligation is satisfied?

11 Does the structure of consideration transferred in public No additional guidance is necessary regarding the structure of consideration private partnerships – which may include consideration for transferred. betterments, maintenance, operations, etc. – require specific guidance in addition to the Statement of Principles proposals? If yes, what additional guidance is necessary? Please provide examples.

12 Do you agree with the disclosure requirements? If you do not Yes, the disclosure requirements are reasonable. agree, what changes, deletions or additions would you make to these requirements, and why?

13 Are there additional matters requiring consideration? No we did not identify any additional matters requiring consideration.

84 85 City of Surrey’s response to questions on Public Private Partnerships Statement of Principles

Questions relating to the Statement of Principles for Public and Private Partnerships

1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include:  a requirement to build, acquire, improve or refurbish;  finance; and,  maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

If the development of a new section related to Public and Private Partnerships moves forward, we would agree with the proposed scope.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what further clarifications are necessary and what other basis of recognition is appropriate?

We agree that infrastructure accurately reflects items that would be covered by this Statement of Principles.

If the development of a new section related to Public and Private Partnerships moves forward, we agree that the clarified control guidance provided in this statement of principal is appropriate and sufficient as it relates to the recognition of infrastructure.

If the development of a new section related to Public and Private Partnerships moves forward, we would agree a liability should be recognized when an obligation to deliver cash or another financial asset as consideration exists. As noted in paragraph 43, the three essential characteristics of a liability as outlined in PS 3200 are met when a public sector entity has an obligation to deliver cash or another financial asset as consideration.

86 ‐ 2 ‐

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue‐ generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

If the development of a new section related to Public and Private Partnerships moves forward, we would agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred is the right to charge users or earn revenue from another revenue generating asset.

This concept is analogous to that of deferred revenue liability. Provided the payor has the ability to enforce the performance obligations per the public private partnership agreement, the three essential characteristics of a liability as outlined in PS 3200 are met.

This treatment is consistent with the treatment outlined in paragraphs 18‐20 of the PS 3400 exposure draft.

6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non‐financial public sector asset (for example, land)? If yes, please provide examples of consideration types not considered.

If the development of a new section related to Public and Private Partnerships moves forward, we believe additional guidance is required where consideration is a non‐financial public sector asset, such as land that is not zoned for use for revenue generating ventures. For these non‐ financial considerations that do not directly or clearly involve the transfer of rights to earn revenue or appear to be revenue‐generating assets, guidance is required on what the standard suggests on valuing and recording the associated liability, if any, along with the future amortization and reduction of the liability.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

If the development of a new section related to Public and Private Partnerships moves forward, we agree the initial measurement of the infrastructure and the liability should be at cost. This treatment is consistent with the treatment outlined in PS 3150.

If the development of a new section related to Public and Private Partnerships moves forward, we agree with this treatment. This treatment would be consistent with the principles outlined in PS 3150 Tangible Capital Assets.

87 ‐ 3 ‐

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

If the development of a new section related to Public and Private Partnerships moves forward, we agree with the guidance provided.

10. Do you agree the obligation created by non‐financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied? If not, where should the balancing entry be recorded when the performance obligation is satisfied?

If the development of a new section related to Public and Private Partnerships moves forward, we agree that the consideration should be reduced and recognized as revenue when the performance obligation is satisfied.

If the development of a new section related to Public and Private Partnerships moves forward, we don’t believe the structure of consideration transferred requires specific guidance in addition to the guidance provided in the statement of principles.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

If the development of a new section related to Public and Private Partnerships moves forward, we agree with the disclosure requirements as outlined.

13. Are there additional matters requiring consideration?

None at this time.

Office of the Chief Administrative Officer  Bureau de directeur municipal Chief Financial Officer • Chef des finances

October 17, 2017

Michael Puskaric 277 Wellington Street West Toronto ON M5V 3H2

Re: Public Private Partnerships – Statement of Principles

Dear Mr. Puskaric,

The City of Winnipeg is widely recognized as a municipal leader in the use of Public Private Partnerships (P3s) to complete large infrastructure projects. The City has applied P3 models in delivering the following infrastructure projects:

 Charleswood Bridge (1995)  East District Police Station (2008)  Chief Peguis Trail Extension (2011)  Disraeli Bridges (2012)  Southwest Rapid Transitway (Stage 2) and Pembina Highway Underpass (in construction)

Our organization has extensive experience with P3 projects and has developed considerable expertise in P3 best practices including financial reporting. We have reviewed the Statement of Principles and are pleased to submit our response for your consideration.

Sincerely,

Michael Ruta, FCA Chief Financial Officer c. Doug McNeil, P.Eng., Chief Administrative Officer

Attachments

2nd floor – 510 Main Street  510, rue Main, 2e étage  Winnipeg  Manitoba  R3B 1B9 tel/tél. (204) 986-2323  fax/ téléc: (204) 949-1174  www.winnipeg.ca

89 City of Winnipeg Response to PSAB Statement of Principles Public Private Partnerships October 2017

Summary

The City of Winnipeg (the City) has reviewed the Statement of Principles and is in agreement with assets being recorded at cost with a corresponding liability being recorded in an equal amount. The cost of the asset is in all but rare cases available from the contract and moving to a discounted cash flows approach would only be appropriate when cost was not available from the contract. Further, the City is not supportive of prescribing an interest rate for discounting purposes as using a prescribed rate like the entity’s incremental borrowing rate will result in assets that are recorded in excess of cost (i.e. asset that are materially overstated). As the credit side of the entry is equal to the asset side, the material overstatement of the corresponding liability is of particular concern as it has the ability to reduce borrowing capacity and negatively impact an organization’s credit rating. In addition, recording of an inflated liability distorts and under-reports interest expense.

The Public Private Partnership (P3) delivery methodology is anchored by a competitive bid structure supported by information reflecting economic reality. In our experience interest rate information is readily available from financial models that have been verified by our auditors. No other standard setter to our knowledge provides prescriptive guidance in determining discount rates for P3’s. Prescriptive discount rates not reflecting economic reality unfairly punish governments who decide to adopt P3 methodologies by overinflating debt and cost of the asset.

Assets should be valued at Cost

The City is in agreement that assets should be recorded at cost.

The P3 delivery method is normally used for large infrastructure projects with capital values in excess of $100 million. P3 infrastructure projects involve a very rigorous bid process that can take over a year to complete. Three bidders are normally short listed to bid and there is a staged submission process. There is considerable competitive tension on the bid. At the end of the process, the winning bidder will have submitted both a design and a financing package (including a Financial Model). The successful bidder will be required to sign a contract that has been a part of the procurement process.

The contract that the successful bidder is required to sign at the end of the procurement process is the same contract offered to all three bidders. A draft contract is normally introduced at the inception of the procurement process by the public sector body. During the staged submission process, each bidder is able to make comments on the contract for consideration by the public sector body. The public sector body may make changes to the contract based on the comments received from all 3 bidders and a final contract is issued by the public sector body just prior to the final bid submissions. All 3 bidders are bidding on the same contract. 90 City of Winnipeg Response to PSAB Statement of Principles Public Private Partnerships October 2017

The procurement process also includes a requirement for each bidder to provide a Financial Model as part of their bid submission. The Financial Model is used to derive the final pricing of the infrastructure. The Financial Model submitted with the bid forms part of the final contract between the two parties. Procurement processes following best practice require the Financial Model to be audited by a third party acceptable to the public sector body, which is frequently a CPA firm. Procurement processes following best practice include acceptability of the Financial Model as a pass/fail in the evaluation of the final bid. Financial Models that do not disclose infrastructure cost would be evaluated as a ‘fail’.

The Financial Model must meet all the requirements that are set out by the public sector body in the procurement process. In all but rare circumstances, the audited Financial Model will identify the cost of the infrastructure, the amount of capital paid for during construction, the amount of capital being financed over the long term, the term of repayment in years as well as the interest rate.

It is important to note that P3 contracts typically focus on infrastructure projects in excess of $100 million dollars and commit public sector bodies to 30 year contracts and millions of dollars in future payments. It is unclear to the City what public sector body would be able to make such a large financial commitment without knowing the cost of what they were purchasing. Organizations doing business in this manner would not be following best practice and unlikely to meet the test of openness and transparency. Therefore, the scenario where a public sector body enters into financial commitment of this order of magnitude without knowing the cost of the infrastructure would be rare.

It should also be noted that bidders are also required to break out payments between capital and operations in their audited Financial Models. Therefore, use of estimation techniques to separate payments between capital and operations should only be used in the rare circumstances that this is not known from the contract.

Therefore, given the rigor of the P3 procurement process, cost will be set out in the contract/Financial Model. It is unclear to the City why a discounted cash flow process would be mandated by the standard when cost is already known. If there is any guidance in the standard as to determining cost, the standard should reflect that cost is normally available from the Financial Model that is part of the contract. Discounted cash flows should only be used to determine cost in the rare circumstances that the cost is not available from the contract.

Prescribing a Discount Rate

As detailed in the previous section, the cost of the infrastructure is in all but rare circumstances known from the contract. The City is not supportive of using a prescribed interest rate like an entity’s incremental borrowing rate to calculate cost as this will result in assets that are materially overstated. Prescribing an interest rate (other than the rate embedded in the contract) will calculate a value that is 91 City of Winnipeg Response to PSAB Statement of Principles Public Private Partnerships October 2017 different than cost, inconsistent with the principal of recording assets at cost (i.e. – is inconsistent with another principal in this standard) and does not reflect economic reality.

Public Sector bodies that enter into P3 arrangements do so knowing that they are paying a higher interest rate than had they issued bond debt. The public sector can borrow at lower rates than the private sector. A common borrowing rate used in cash flow analyses is the public sector’s incremental borrowing rate. This rate is an estimate normally derived from what an organization believes its interest rate would be had it gone into the Canadian market place and issued 30 year bonds. For clarity, bonds are not actually issued; it is only an estimate of what the interest rate would be if bonds had been issued. It is also theoretical in nature as during periods of financial crisis, public sector bodies may not be able to borrow at any rate for a period of time. Typically public sector borrowing rates would be used to estimate liabilities relating to landfills or asset retirement obligations which do not contemplate actual verifiable contractual commitments reflecting economic reality.

The incremental borrowing rate of the public sector body will be lower than the private sector interest rate that is embedded in the contract. Using discounted cash flows and the lower incremental borrowing rate would (mathematically) capitalize the Net Present Value caused by the difference in interest rates and add it to the cost of the asset (i.e. - overstate asset cost). As the credit side of the entry is to the liability, the corresponding liability is also overstated.

The City has performed a pro forma analysis on two P3 projects (attached). Each project has a financing structure that is common in the current P3 market. The results are as follows:

Scenario 1 - Bridges Project – approximately $200 million (with $110 million private sector debt)

 Asset value is increased by 12.6% over actual costs using incremental borrowing rate.  Assets are recorded at $24.9 million above cost/overstated by $24.9 million.  Total liabilities increased by 18.5%, with private sector debt (P3) debt increasing by 22.8%.  Debt owed to the P3 concessionaire is overstated by $24.9 million at commissioning.  Interest expense would be understated during the term of repayment.

Scenario 2 – Roadways Project – approximately $110 million (with $50 million private sector debt)

 Asset value is increased by 18.1% over actual costs using incremental borrowing rate.  Assets are recorded at $19.6 million above cost/overstated by $19.6 million.  Total liabilities increased by 28.6%, with private sector debt (P3) debt increasing by 39.2%.  Debt owed to the P3 concessionaire is overstated by $19.6 million at commissioning.  Interest expense would be understated during the term of repayment.

In summary, the above analyses validates that use of the discounted cash flows technique combined with prescribing the use of the incremental borrowing rate materially overstates both asset values and liabilities. 92 City of Winnipeg Response to PSAB Statement of Principles Public Private Partnerships October 2017

Disclosure

Regarding the requirement in the standard to disclose the ‘discount rate related to the obligation’, the City has concern that this lacks transparency. When public sector bodies enter into P3 arrangements, they do so knowing that they are paying a higher interest rate than had they pursued the project under a traditional approach. It is important that stakeholders are aware of the real interest rate being paid and this is required in order to be able to judge the public sector body’s decision to enter into a P3 arrangement. By moving to a prescribed discount rate like the entity’s incremental borrowing rate, the real interest rate being paid will never be known and therefore this lacks transparency.

Impact Different Amortization Periods

As P3 arrangements have higher interest rates than traditional procurements, the entity’s financial statements should reflect higher interest expense in the appropriate period. As noted earlier, using the lower incremental borrowing rate will increase the value of the asset capitalized on the balance sheet. When the infrastructure asset is subsequently amortized, the annual financial statements will report a higher amortization expense and a lower interest expense. Using the incremental borrowing rate will understate interest expense and present interest expense as amortization.

Further, assets normally have useful life beyond the term of the contract. For example, the estimated useful life of a Bridge is 75 years and a normal P3 contract in the current Canadian market is 30 years. So in this example, the bridge would be amortized over 75 years and interest expense on the private sector debt would be incurred over 30 years. As the amount of interest expense capitalized in the asset will be amortized over a different period, there is also a bottom line impact to an organization’s income statement. In this example, the asset generated by the change in interest rates will remain on the balance sheet for 75 years, well past the end of the 30 year P3 contract.

Private sector borrowing rates are higher than public sector interest rates and the annual interest expense should reflect the higher expense on an annual basis. Interest expense should not be understated. Future interest expense should not be capitalized on the balance sheet. The real interest rate should be disclosed in the financial statement notes.

Impact on Decision-making

The City of Winnipeg follows best practices in financial management and has a Council approved Debt Strategy that is designed to protect the City’s credit rating. The City’s Debt Strategy uses multiple financial metrics to determine maximum levels of borrowing. Recording liabilities at inflated amounts would needlessly reduce the borrowing room available under the City’s Debt Strategy. Debt levels are also one of a number of considerations used in determining a public sector body’s credit rating. 93 City of Winnipeg Response to PSAB Statement of Principles Public Private Partnerships October 2017

If the standard (once issued) were to require cost to be calculated using a discounted cash flow process and prescribed usage of the entity’s incremental borrowing rate, recording the liability at an inflated amount would needlessly reduce remaining borrowing capacity and inflate liabilities. As such, the required accounting treatment would certainly be a key consideration in choosing (or not choosing) the P3 delivery method.

The decision to deliver infrastructure using the P3 method or another method should be driven by the underlying economics of the decision and not by accounting treatment. For our organization, requiring that assets be valued using discounted cash flow and a prescribed discount rate could make it significantly less likely that the City would deliver infrastructure using the P3 delivery method. Accounting treatment would have significant influence on the business decision. Prescriptive discount rates not reflecting economic reality unfairly punish governments who decide to adopt P3 methodologies by overinflating debt and cost of the asset. 94

City of Winnipeg Impact ot using the Prescribed Incremental Borrowing Rate Scenario 1 - Bridge Project October 2017

Annual Service Payment Capital $ 9,806,000 Maintenance $ 1,602,265 $ 11,408,265

City’sincremental borrowing rate at signing of contract - 30 year debt 6.05% - calculated at time of finalVFM report. Imputed Interest Rate in P3 debt/rate implicit in the lease 8.1% - weighted average of debt and equity

Using Incremental Percentage Borrowing Rate as Increase in Asset Increase in Asset Using Actual Cost being proposed Value/Debt Value/Debt

Total cost of the asset at commissioning, from financial model $184,362,239 $184,362,239 City upfront costs (legal, land, P3 Advisor, Owner’s Eng., etc.) $13,789,000 $13,789,000 Asset cost $198,151,239 $198,151,239 $0

Capital asset generated by change in interest rates $0 $24,896,613 $24,896,613

Total cost of asset $198,151,239 $223,047,852 $24,896,613 12.6%

Funding

Cash Payments City cash $13,789,000 513,789.000 Gas tax funding $18,300,000 $18300000 Interim financing $31,700,000 $31,700,000 563,789.000 $63789000 $0

Debt City issued bond debt $25,000,000 $ 25,000,000 $0 Private Sector P3 debt $109,362,239 $ 134,258,852 $24,896,613 22.8% (*) $134,362,239 Si 59,258,852 $24,896,613 18.5%

Total cost of asset $198,151,239 $223,047,852 $24,896,613 12.6%

(*) - Net Present value of annual payments of $9,806,000 per year for 30 years using a 6.05% interest rate is $134,258,852. Observations

- Asset value is increased by 12.6% over actual costs using the incremental borrowing method. - Assets are recorded at $24.9 millionabove cost / overstated by $24.9 million. - Total liabilitiesare increased by 18.5%, with private sector (P3) debt increasing by 22.8%. - Debt owed to the P3 concessionaire is overstated by $24.9 millionat commissioning. - Interest expense would be understated during the term of the debt repayment. 95

City of Winnipeg Impact of using the Prescribed Incremental Borrowing Rate Scenario 1 - Bridge Project October 2017

Construction Cost Construction Cost

Total cost of the asset at commissioning, proponent’s financial model $184,362,239 (*) City upfront costs - paid directly by City $13,789,000 $198,151,239

Total cost of asset $198,151,239

Funding

City cash $13,789,000 Gas Tax funding received - cash $18,300,000 (**) Interim financing (City internal financing) $31,700,000 () City issued debt - long term debt external $25,000,000 () $88,789,000

Private Sector funding $109,362,239

Total cost of asset $198,151,239

Payments to Contractor

Total cost of the asset at commissioning, proponent’s financial model $184,362,239 less: commissioning payment -$75,000,000 P3 debt $109,362,239

(*) - paid for with a Commissioning payment of $75 million and an Annual Service Payment of $9,806,000 per year for 30 years.

() - the sum of these amounts is $75 million / used for commissioning payment. 96

City of Winnipeg Impact of using the Prescribed Incremental Borrowing Rate Scenario 1 - Bridge Project October 2017

Annual

Loan Amount $ 109,362,239

Interest rate 8.10%

Term in years 30

Payments per year 1

Annual payment $9,806,167

$1,035

Payment per contract $ 9,806,000

- rate implicit in the P3 debt is an interest rate of 8.1%. 97

City of Winnipeg Impact of using the Prescribed Incremental Borrowing Rate Scenario 2 - Roads Project October 2017

Annual Service Payment Capital $ 4,539,136 Maintenance $ 1,418,586 $ 5,957,722

City’s incremental borrowing rate at signing of contract - 30 year debt 5.02% - calculated at the time of final VFM report. Imputed Interest Rate in P3 debt/rate implicitin the lease 8.23% - weighted average of debt and equity

Using Incremental Percentage Borrowing Rate as Increase in Asset Increase in Asset Using Actual Cost being proposed Value/Debt Value/Debt

Total cost of the asset at commissioning, from financial model $99,904,893 $99,904,893 City upfront costs (legal, land. P3 Advisor, Owner’s Eng., etc.) $5,300,000 $5,300,000 Intersection improvements - paid in cash $2,000,000 $2,000,000 Traffic Signals - purchased/installed by City. $1,200,000 $1,200,000 Rounding $95,107 $95,107 Asset cost $108,500,000 $108,500,000 $0

Capital asset generated by change in interest rates $0 $19,618,842 $19,618,842

Total cost of asset $108,500,000 $128,118,842 $19,618,842 18.1%

Funding

Cash Payments PPP Canada Fund $22,300,000 $22,300,000 Provincial Funding $9,000,000 $9000000 City cash $8,500,000 $8,500,000 $39,800,000 $39,800,000 $0

Debt City issued bond debt $18,700,000 S 18,700,000 $0 Private Sector P3 debt $50,000,000 S 69,618,842 $19,61 8,842 39.2% (*) $68,700,000 $88,318,842 $19,61 8,842 28.6%

Total cost of asset $108,500,000 $128,118,842 $19,618,842 18.1%

(*) - Net Present value of annual payments of $4,539,136 per year for 30 years using a 5.02% interest rate is $69,618,842. Observations

- Asset value is increased by 18.1% over actual costs using the incremental borrowing method. - Assets are recorded at $19.6 millionabove cost/ overstated by $19.6 million. - Total liabilities are increased by $28.6%, with private sector (P3) debt increasing by $39.2%. - Debt owed to the P3 concessionaire is overstated by $19.6 million at commissioning. - Interest expense would be understated during the term of the debt repayment. 98

City of Winnipeg Impact of using the Prescribed Incremental Borrowing Rate Scenario 2 - Roads Project October 2017

Construction Cost Construction Cost

Total cost of the asset at commissioning, proponents financial model $99,904,893 (*) City upfront costs - paid directly by City $5,300,000 Intersection improvements works $2,000,000 Traffic Signals - purchased/installed by City. $1 200,000 $108,404,893 $95,107 - rounding Total cost of asset $108,500,000

Funding

PPP Canada Fund $22,300,000 () Provincial Funding $9,000,000 (*j City issued debt $18,700,000 (**) City cash $8,500,000 $58,500,000

Private Sector debt / P3 debt $50,000,000

Total cost of asset $1 08,500,000

Payments to Contractor

Total cost of the asset at commissioning, proponents financial model $99,904,893 Intersection improvements works $2,000,000 Rounding $95,107 Contractor cost $102,000,000

Milestones during construction $20,000,000 Completion payment $30,000,000 Intersection signals works (cash) $2,000,000 $52,000,000

P3 Debt $50,000,000

(*) - paid for will Milestone Payments of $20.0 million, Commissioning Payments of $30.0 million and Annual Service Payment of $4,539,136 per year for 30 years.

() - the sum of these payments is $50.0 million, with $20.0 million used for milestones during construction and a commissioning payment of $30.0 million. 99

City of Winnipeg Impact of using the Prescribed Incremental Borrowing Rate Scenario 2 - Roads Project October 2017

Annual

Loan Amount $ 50,000,000

Interest rate 8.23%

Term in years 30

Payments per year

Annual payment $4,538,101

$1,035

Payment per contract $ 4,539,136

- rate implicit in the P3 debt is an interest rate of 8.23%. 100

Finance Comptroller’s Division Comptroller’s Office 715 – 401 York Avenue Winnipeg, Manitoba R3C 0P8 Phone: (204) 945-4919 Fax: (204) 948-3539 E-mail: [email protected] October 17, 2017

Mr. Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto, ON M5V 3H2

Dear Mr. Puskaric:

Re: Statement of Principles – Public Private Partnerships

Thank you for the opportunity to comment on the Statement of Principles (SOP): Public Private Partnerships (P3s). The Province has included responses to the specific questions in the attachment.

The SOP is constructed on existing principles in the Handbook. Overall the Province is supportive of the SOP but we do have some concerns on a specific issue. We believe there should be more guidance for selecting the appropriate discount rate. The selection of the discount rate will be of tremendous significance on the evaluation of entering into a P3 agreement versus traditional procurement. The discount rate will also affect future budgets and the reported results in the Province’s Summary Financial Statements. A more prescriptive methodology for selecting the discount rate would allow for better comparison between projects and jurisdictions.

As requested, the Province has responded to your specific questions in the SOP.

We appreciate the opportunity to comment on this SOP. If you have any questions or concerns related to this comments please contact the undersigned.

Yours truly,

Aurel Tess, CPA, CGA Provincial Comptroller On Behalf of the Province of Manitoba

101 1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using a private sector partner whose obligations include: • A requirement to build, acquire, improve or refurbish; • Finance; and • Maintain and/or operate the infrastructure? If not, what public private partnerships should be included or excluded?

Yes, the Province agrees with the scope of the SOP. There is a requirement by the private sector to assume a portion of the risk related to the construction, financing, maintenance and/or operation of the infrastructure asset, or combination thereof. Under the traditional procurement model the public sector entity retains all of the risk related to the acquisition, construction, development and financing of the infrastructure asset. If there is no transfer of procurement risk then the agreement is not within the scope of SOP.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

The Province views the term “infrastructure” as acceptable. However infrastructure is only mentioned twice in the Public Sector Handbook and is not defined. The term “infrastructure” has different meanings depending on the user. The term would need to be defined in the Exposure Draft and should be inclusive of most tangible capital assets.

IFRIC 12 Service Concession Agreements includes roads, bridges, tunnels, prisons, hospitals, airports, water distribution facilities, and telecommunications networks as infrastructure. However the Province can envision that P3s could include computer networks, wastewater facilities, schools, buildings at colleges and universities, and any building used by a public sector entity to provide services to the public, or provide a workplace for its employees. The description of infrastructure in IFRIC 12 is not comprehensive enough to accommodate all possible P3s.

It might be advisable for the board to replace the term “infrastructure” with “tangible capital assets” which would accommodate all possible P3 arrangements.

Yes, the Province agrees with description of control as defined under Principle 1. The Province found sections .28 to .38 to be extremely helpful in providing guidance on control. These sections should be included in the Exposure Draft.

Page 2 of 5

102 Yes, the Province agrees that the public sector entity has an obligation to transfer resources to the private sector partner for the building, acquisition and development of an infrastructure asset. The credit meets the definition of a liability:

 It is a present obligation which the public sector entity cannot avoid,

 Will result in the future sacrifice of economic benefits; and

 Arises from a past transaction such as entering into the agreement, or some other event.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Yes, the Province agrees that there is an unsatisfied performance obligation when a private sector entity acquires, constructs or develops an infrastructure asset and has the right to charge users or earn revenue from another revenue generating asset of the public sector entity.

6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset (for example, land)? If yes, please provide examples of consideration types not considered.

Yes, there should clarification on how to account for the possible difference between the carrying value of the land and the liability recognized for the infrastructure. If a parcel of land is being used to discharge a liability, should we recognize the gain or loss on the exchange transaction if the carrying value is different from the liability? Or should the gain or loss be amortized into the operations of the public sector entity, on a systematic basis, such as the useful life of the new infrastructure asset?

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes, the Province agrees that the initial measurement of the infrastructure and liability should be at the cost of the infrastructure. However if the private sector entity has constructed the asset, the public sector entity may not always be able to make a reasonable estimate of the cost. In such situations the public sector entity should use an appropriate discount rate to initially measure the cost of the asset and the amount of the liability.

Page 3 of 5

103 Yes, the Province agrees that an existing infrastructure asset, that is improved or refurbished using a P3, should be measured at its carrying amount plus the cost associated with the refurbishment.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

It is the Province’s opinion that additional guidance on the discount rate is required for the Exposure Draft. The discount rate chosen has a significant impact on the cost of the infrastructure and the evaluation of the P3s benefits. The discount rate will also have significant effects for the budget and the Summary Financial Statements.

For each P3 there are at the very least two possible discount rates to choose from. One choice is the public sector entity’s incremental cost of borrowing. This would be the market interest rate that the public sector entity can obtain if it decided to finance the infrastructure itself.

The other possible discount rate for selection is the rate implicit in the P3 agreement. The implicit discount rate would be the rate that discounts the cash flow payments that approximates the estimated fair value or cost of the new asset. The discounted cash flows would exclude portions of the payments for the operating and/or maintenance of the asset by the private sector.

If a public sector entity is unable to estimate the fair value of the asset then it should use its incremental cost of borrowing. Whatever discount rate is selected the amount should not exceed the fair value of the asset.

The Province agrees that non-financial consideration, in the form of the granting of rights to the private sector, creates an obligation for the public sector entity. The right of the private sector to earn revenue from third parties, or from another revenue generating asset, represents a present obligation which the public sector entity cannot avoid. It results in the future sacrifice of economic benefits in the form of the infrastructure asset or another revenue generating asset, and the obligation arose from a past transaction.

The liability cannot be discharged until the public sector’s entity has satisfied its performance obligation. The performance obligation would be met when the private sector partner’s right to earn revenues from third parties has ended. The amortization of the liability over the term of the agreement would be in accordance with the economic substance of the public private partnership.

No additional guidance is required for the consideration of betterments. However readers should be guided to PS 3390 Contractual Obligations when there is future consideration

Page 4 of 5

104 for maintenance and operations of the infrastructure asset. PS 3390 was not included in section .08 of the SOP as available guidance in the Handbook.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

Yes, the Province agrees with the disclosure requirements. We also agree that non- material public private partnerships should be aggregated as appropriate.

13. Are there additional matters requiring consideration?

The Province has no additional matters requiring consideration.

Page 5 of 5 105 106 107 108 109

TRANSLATION

Ministère des Affaires municipales et de l’Occupation du territoire

Municipal Finance Division

October 16, 2017

Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto, Ontario M5V 3H2

Subject: Response to the Statement of Principles on Public Private Partnerships

Dear Sir:

The mission of the Municipal Finance Division (MFD) of Quebec’s Ministère des Affaires municipales et de l’Occupation du territoire (MAMOT) is to provide financial accountability support to municipalities and other municipal bodies. As part of this mission, the MFD would like to provide feedback on the Statement of Principles (SP) on Public Private Partnerships (PPPs) issued by the PSAB in July 2017. The comments are set out below in the same order as the questions in the SP.

A. a requirement to build, acquire, improve or refurbish;

B. finance; and

C. maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

Response: The SP is unclear on whether all three obligations have to exist at the same time. While the first obligation is covered by Section PS 3150, Tangible Capital Assets, the SP should also cover PPPs where only the first obligation exists; in this case, guidance should be provided in addition to that applying when B and/or C also exist.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

Response: The term seems appropriate.

Response: The clarified guidance seems sufficient and appropriate. 110

Response: We agree.

Response: Paragraph 46 states that a performance obligation is created through an exchange transaction and is an enforceable promise to deliver goods or services to a counterparty. Is granting a right to charge a fee equivalent to delivering a service? If it were actually a service, the recipient would have to recognize an operating expense. However, any portion of the fee revenue used to pay a private contractor for delivering and financing a PPP would not give rise to an operating expense for the contractor, but rather the settlement of an amount receivable from the public entity.

The idea of presenting a liability as consideration for a performance obligation provides little information about the financing aspect of PPPs when the private contractor is responsible for the financing and it is agreed that a portion of the fees must be allocated to the contractor’s loans contracted to finance the PPP. In this case, the present value of cash flows represented by a portion of the expected future fee revenue would likely be included in the public sector entity’s infrastructure cost, and thus be a liability equivalent to a financial consideration to be paid in future years from fees retained by the private contractor. From this perspective, the cost of this type of infrastructure would be comparable to the cost of infrastructure developed and financed by a public sector entity under the traditional method. The standard on PPPs should not result in governments and municipalities understating their assets and liabilities.

The SP should indicate that the infrastructure cost should include the present value of cash flows and transfers of non-financial assets between the public entity and private contractor, as well as cash flows corresponding to the portion of future fee revenue to be used by the contractor to make principal payments on loans contracted to finance the PPP.

The standard should clearly separate the various components of fee revenue, in particular:

 The portion used to repay the principal on loans contracted by the private contractor to finance the PPP (should be included in the cost determined by using the present value of cash flows, and therefore in the liability)  Coverage of operating and maintenance expenses (excluded from the cost and liability).

As explained above, the SP does not sufficiently address the financing obligation, particularly when part of the fee revenue must be used for principal repayments. It is important to fully address the financing obligation, since governments and municipalities may be tempted to use PPPs, thinking that they can thereby avoid presenting a liability. 111

6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset (for example, land)? If yes, please provide examples of consideration types not considered.

Response: Additional guidance is required. For example, a public sector entity could agree to transfer land on which a PPP building will be constructed. Should the two transactions be separated? How would this be done? What would happen if more land than required was transferred, so that in addition to the PPP constructed building, the private contractor was able to operate a parking lot and charge fees to use it, generating revenue that would be partially used to repay the contractor for financing the PPP?

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost?

Response: We agree. However, it should be clear that this cost should also cover the present value of cash flows corresponding to the portion of future fee revenue to be paid to the contractor to cover principal payments on loans contracted to finance the PPP (see response to question 5).

Response: We agree.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

Response: We agree with the guidance.

Response: We agree, although not completely. In reference to the response to question 5, a distinction should be made between a liability recorded as an offsetting credit to a performance obligation and a liability recorded as an offsetting credit to the portion of the infrastructure cost determined using the present value of cash flows, which corresponds to the portion of future fee revenue to be paid to the contractor for principal payments on loans contracted to finance the PPP. The liability would be extinguished as the private contractor recognizes fee revenue. However, as with a satisfied performance obligation, the public sector entity would also have to recognize an equivalent amount of revenue (but conceptually, what is the nature of the revenue?).

Response: The SP correctly explains the structure of consideration transferred to specify what should be included in the infrastructure cost, and therefore in the liability, and what should be excluded and instead expensed over each period. For example, when the transferred consideration covers operations and maintenance expenses. 112

However, the standard should be more specific on how to separate the components of fee revenue, as explained in the answers above.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

Response: We agree with the disclosure requirements.

13. Are there additional matters requiring consideration?

There seems to be a typo in paragraph 40 of the French version of the SP, which reads “…liée par une obligation de rémunérer l’entité du secteur public pour la livraison...” Instead of “secteur public,” shouldn’t it read “secteur privé”?

Yours truly,

Nancy Klein

Director General

c.c: Vicky Lizotte, CPA, CA, Director, Financial Reporting and Financing Department, MAMOT

Yvon Bouchard, CPA, CA 113

NL Response to PSAB Statement of Principles on Public Private Partnerships

• a requirement to build, acquire, improve or refurbish; • finance; and • maintain and/or operate the infrastructure?

If not, what public private partnerships should be included or excluded?

NL Response: While there is no significant concern from an accounting perspective with limiting the scope of the proposals to the types of P3 arrangements proposed, for completeness and clarity it may be more appropriate to address all types of such arrangements under one Section (e.g. including those where the private sector entity does not go beyond build, acquire, improve or refurbishing and financing) and indicate if other guidance is applicable (e.g., PS 3150, PSG-2, etc.).

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

NL Response: There is no concern with the terminology “infrastructure; however, as the term is not currently defined in the proposals, guidance should be developed that defines this terminology.

NL Response: The development of the control guidance appears to be appropriate as it is based on existing principles within the Public Sector Accounting Handbook (PSA HB). However, it is our view that the proposal may not be sufficient as it does not include any discussion or consideration as to whether it is comparable to the criteria of establishing whether substantially all the benefits and risks of ownership have been transferred (i.e. control) in regard to assessing capital leases under PSG-2.

NL Response: There has been no concern identified in regard to recognizing a liability when the public sector entity has an obligation to deliver cash or another financial asset as consideration for the building, acquisition, improvement or refurbishment of infrastructure.

NL Response: Yes, the Province agrees that the liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue- generating asset. However, this understanding is articulated from contemplating that the public sector entity is the lessor and the revenue would be in respect of the operating lease. As the details and discussion of these principles are limited in this SOP; PSAB should clarify the details in this regard in respect of a discussion, illustrative example or application guidance. 114 2

NL Response: As indicated in response to question five above, the guidance that has been included in respect of non- financial consideration is not clearly detailed beyond the basic principle. In this respect, discussion, illustrative example or application guidance would be beneficial for any type of asset, right or non-financial asset.

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

NL Response: The Province does not have any concern with the initial measurement of the infrastructure and the liability being recognized at cost.

NL Response: The Province does not have any concern with the initial measurement of the existing infrastructure, improved or refurbished using a public private partnership, being measured at its carrying amount plus costs associated with the improvement or refurbishment of the existing infrastructure.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

NL Response: The discount rate guidance appears reasonable; however, more discussion or details (e.g. consideration to factors and guidance as to when one rate is more suitable than others) could be developed and included.

NL Response: In respect of recognizing revenue and reducing the obligation created by non-financial consideration as revenue when the performance obligation is satisfied; it does appear reasonable to base it on the economic substance of the public private partnership. However, in respect of practical application this may be more challenging from the perspective of the public sector entity; it is our view that it would be beneficial if PSAB provide discussion and guidance around the basis upon which the performance obligations should be recognized (e.g., over the contract term, earning of guaranteed revenue requirement, etc.).

115 3

NL Response: While the guidance in the proposals relating to the structure of consideration transferred in public private partnerships is sufficient in respect to principle; it is our view that it requires more detailed guidance in respect of examples or “application guidance”.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

NL Response: In regard to presentation and disclosure, the proposals indicate that they should be made individually for material P3s. It would be more appropriate to consider the aggregate nature of summary consolidated financial statements and to allow disclosure on an aggregate basis for like categories of P3s given the volume of such arrangements that may exist. In comparison, the disclosure of long-term debt transactions are provided on a summary level and it is presumed that such obligations would be significant as well. More flexibility should be provided along with consistency across standards.

13. Are there additional matters requiring consideration?

NL Response: None noted at this time.

General Comments 116

COFO Colleges Ontario Finance Officers

October 15, 2017

Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Board Public Sector Accounting Board 277 Wellington Street West Toronto, Ontario M5V 3H2 [email protected]

Re: Public Private Partnerships – Statement of Principles

Dear Mr. Puskaric,

We have read the above-mentioned Statement of Principles that was issued in July 2017 and are pleased to have the opportunity to provide responses to PSAB’s specific questions.

Please find our responses to the proposed questions attached following this letter. This response was prepared by the Colleges Ontario Finance Officers (COFO) organization in conjunction with the Administrative Services Coordinating Committee (ASCC – a group comprised of Vice Presidents responsible for Finance and Administrative functions), on behalf of the 24 Colleges of Applied Arts and Technology in Ontario, and has been discussed and shared with the Ministry of Advanced Education and Skills Development staff.

Thank you for your consideration of our responses.

Yours sincerely,

Kelly Morrow, CPA, CA (on behalf of COFO) Chair of Financial Reporting Subcommittee, Colleges Ontario Financial Officers Associate Director, Financial Services The Humber College Institute of Technology and Advanced Learning [email protected] 416-675-5093

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Colleges Ontario Financial Officers – Financial Reporting Subcommittee

RESPONSE TO STATEMENT OF PRINCIPLES PUBLIC PRIVATE PARTNERSHIPS

1. Do you agree the scope of this Statement of Principles should be limited to those public private partnerships where the public sector entity procures infrastructure using private sector partner whose obligations include: a. a requirement to build, acquire, improve or refurbish; b. finance, and; c. maintain and/or operate the infrastructure?

Yes, Ontario Colleges agree that the scope should be limited as stated above.

The Sector questions whether leases and leasehold improvements would be considered or were intended to be in scope under this proposal. Consider an example where a College enters into an agreement with a service provider to operate a cafeteria; The College provides access rights to the space, and the right to earn revenues in that space; the service provider is responsible for leasehold improvements to the space, financing and maintaining/operating the space. Under this agreement, the College controls purpose and use, access and pricing, and residual interest. Ontario Colleges ask that the Board consider whether a scenario such as the one described in this response should be within the scope of Public Private Partnerships.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

The term “infrastructure” is not defined in the Statement of Principles. The implied meaning behind this term raises the question as to whether “infrastructure” is interchangeable with “asset”. The Sector believes that the term “infrastructure” is appropriate if it is defined. Additionally, the differences between the terms “infrastructure” and “asset” should be described.

Yes, Ontario Colleges agree that the clarified control guidance is appropriate and sufficient as it relates to the recognition of infrastructure, however further clarification is required with respect to control as it relates to residual interest. The Statement of Principles does not appear to consider the effects of renewal options at the end of the partnerships term. The Board should consider scenarios where a public sector entity may hold control over significant residual interest

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at the end of the original term, but not at the end of a renewal period and the impact that this might have on control.

Yes, the Sector agrees that a liability should be recognized when the public sector entity has on obligation to deliver cash or another financial asset as consideration for the building, acquisition, improvement or refurbishment of infrastructure. The obligation to transfer cash or another financial asset in exchange for infrastructure meets the definition of a liability in PS 3200.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

Yes, the Sector agrees that a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue-generating asset. Providing ongoing access rights to an asset in return for infrastructure meets the definition of a liability in PS 3200.

Ontario Colleges agree that additional guidance is required where consideration for the building acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset. Non-financial public sector assets are generally recorded at amortized cost, which when used as consideration for the building, acquisition, improvement or refurbishment of infrastructure may not represent the true or realistic costs of the infrastructure. Additional guidance is required to establish how the cost of the infrastructure will be determined in these situations (for example, fair value).

7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Ontario Colleges agree that the initial measurement of the infrastructure and the liability should be at cost if it is readily available. Ontario Colleges also agree that if cost is not readily available,

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an appropriate estimation technique should be used to determine the value at initial measurement, however the goal of the estimation technique is not clear in the Statement of Principles. For example, should the goal of the estimation technique be to determine the cost of the infrastructure, the replacement cost of the infrastructure or to determine the value of future cashflows foregone in the transaction (as in the case where consideration includes the right to charge users or earn revenue from another revenue-generating asset)? The Sector asks the Board to consider additional guidance in these circumstances surrounding the goal of the estimation technique.

8. Do you agree existing infrastructure, improved or refurbished using a public private partnership, should be measured at its carrying value amount plus costs associated with the improvement or refurbishment of the existing infrastructure? If not, what alternative is more appropriate and why?

Yes, Ontario Colleges agree that existing infrastructure improved or refurbished using a public private partnership, should be measuring at its carrying value amount plus costs associated with the improvement or refurbishment of the existing infrastructure. The Sector believes that there is not much of a conceptual difference between this suggested treatment and the accounting treatment of capital asset improvements under PS 3150, however Ontario Colleges have the same concerns over the establishment of “cost” as expressed in our response to question #7.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

The Sector agrees with the discount rate guidance as provided in the Statement of Principles.

Ontario Colleges agree that the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied. The Sector believes that there is not much conceptual difference between this suggested treatment and the accounting treatment of other types of revenue (i.e. tuition revenue) where a performance obligation needs to be satisfied before recognition.

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Ontario Colleges believe that sufficient guidance is available in the Statement of Principles proposals to address the structure of consideration transferred in Public Private Partnerships that may include consideration for betterments, maintenance, operations, etc.

12. Do you agree with the disclosure requirements? If you do not agree, what changes , deletions or additions would you make to these requirements, and why?

Ontario Colleges agree with the disclosure requirements, however point out that the requirements seem to focus more on a Public Private Partnership with financial consideration. The Sector suggests that perhaps it would be appropriate to add additional disclosure requirements for Public Private Partnerships with non-financial consideration.

13. Are there additional matters requiring consideration?

Ontario Colleges urge the Board to include specific technical examples of the differing Public Private Partnerships and their associated accounting treatments.

5 121 Deloitte LLP Bay Adelaide Centre East Tower 22 Adelaide Street West Suite 200 Toronto ON M5H 0A9 Canada

Tel: +14167757183 www.deloitte.ca

October 31, 2017

Michael Puskaric MBA, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto ON M5V 3H2 Canada

Subject: Statement of Principles – Public Private Partnerships

Dear Mr. Puskaric,

We thank you for the opportunity to provide comments on the above noted Statement of Principles regarding Public Private Partnerships.

Our response was developed collaboratively between practitioners who have expertise in public sector accounting along with practitioners who work extensively in supporting the private and public sector in establishing and accounting for Public Private Partnerships (which we also refer to as “P3’s” or “PPP’s”). Please find attached our comments to the specific questions raised in the invitation to comment. If you have any questions please contact Diana De Acetis ([email protected]) at 416-601-6203 or Matt Colley ([email protected]) at 416-643-8428.

Sincerely,

Gloria Lemire, FCPA, FCA NPPD Audit Private Deloitte LLP 122

Public Sector Accounting Board – Statement of Principles – Public Private Partnerships

If not, what public private partnerships should be included or excluded?

We agree that the scope of the Statement of Principles should be limited to Public Private Partnerships of infrastructure assets. We have noted that Public Private Partnerships can extend beyond infrastructure assets but we believe that the majority of partnerships are currently for infrastructure assets.

We do believe that the scope could be clarified to outline some of the more common features of a Public Private Partnership, including: • A Public Private Partnership is an arrangement that is governed by a contract that transfers risk to the Private Sector entity by establishing performance standards and expectations of the Private Sector entity in regards to an infrastructure asset, establishes how consideration will be provided, potentially how prices should be determined, and outlines a protocol for dispute resolution; and • The Public Sector Entity will retain a residual interest in the infrastructure asset

Additionally, we think clarification should also be provided that not “all” of the obligations outlined above must be present in a Public Private Partnership for it to be in scope. For instance, a public private partnership could just be a design build, and operate contract and have no financing component. Likewise, not all P3’s require operations or maintenance services.

2. Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

We believe that the term infrastructure needs to be defined. Based on the examples that have been provided, we think it would be important to include

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in the definition the fact that these are tangible capital assets that are used to provide a public service.

While we do believe that Public Private Partnerships can extend beyond infrastructure assets, we do believe that infrastructure assets make up the majority of P3 arrangements we see in practice and therefore limiting the Statement of Principles to infrastructure assets is an appropriate scope in our view.

In addition, we think that defining key terms will be very helpful in applying the standard. We believe that consideration should be given to the use of language in other frameworks, if the ultimate standards are aligned with such frameworks (i.e. service concession asset, for example).

We believe that further clarification is required on control as it relates to the recognition of infrastructure assets. Due to the nature of a Public Private Partnership, the Public Sector often transfers risk to the Private Sector (during construction, for example). In transferring this risk, the Public Sector entity may have given up control over how the asset is constructed as there is an agreement establishing the expectations. For instance, some arrangements may indicate that once a part is on the Public Sector entity property, title transfers to the Public Sector entity. However the Public Sector entity itself has little control over how that asset is used in the construction process or even in some cases throughout its operation.

Another example has to do with the risk of loss during the construction period. Typically, if a fire or vandalism or other issue were to occur, the Private Sector entity is responsible for responding to and determining how to complete the asset in accordance with the terms of the arrangements.

We believe that it would be helpful to provide guidance on determining whether the Public Sector entity controls the asset as it is being constructed, or once the Private Sector entity has delivered the asset in accordance with the specifications outlined in the contract or arrangement. Therefore, we believe that additional guidance would be helpful on how to operationalize the conditions for control.

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Additionally we believe that guidance could be provided as to when the control assessment should be performed (for example, at inception of the arrangement or throughout the life of the contract).

We also believe that clarification is needed specifically on the ability to control or set prices as being a factor in determining whether a public sector entity controls pricing. Often, pricing approval or the ability to establish pricing comes from another organization or specific Ministry or department. In these situations, the Public Sector entity itself can have very little control over pricing. Therefore, is it relevant to consider that regulation removes from the private sector entity the ability to determine pricing and, therefore, can be regarded as the Public Sector entity implicitly having control over pricing, or is “neutral” to the assessment, but would not preclude a Public Sector entity from having control, if the remaining conditions necessary for control are met.

As well, we believe guidance on pricing may be needed for situations when control over pricing changes over the life of the asset, such as when the Private Sector entity controls pricing over a defined period of time, but the Public Sector entity has the residual interest in the infrastructure asset. Therefore, the Public Sector entity may not control pricing for a period, but after the private sector entity recovers its costs plus a reasonable return or a defined time period, control over pricing may revert to the Public Sector entity, which raises a question as to whether the pricing condition would be met.

4. Do you agree a liability should be recognized when the Public Sector entity has an obligation to deliver cash or another financial asset as consideration for the building, acquisition, improvement or refurbishment of infrastructure? If not, where should the credit entry be presented?

We agree that a liability should be recognized when the Public Sector entity has an obligation to deliver cash or another financial asset as consideration for the infrastructure asset. However, we believe that the Statement of Principles is unclear on what triggers the obligation to deliver cash or another financial asset. As we have noted previously, the determination as to when the definition of an asset has been met would also apply to the recognition of the liability. When the Public Sector entity initially signs the agreement, there is an expectation it has established with the Private Sector entity to pay for the full project value, if the performance obligations in the contract have been met. We have noted that paragraph 43(c) suggests that signing the partnership agreement might give rise to an obligation. We believe it should be clarified that at this point, the contract is executory in nature and that there is no liability as the past event, which would be the construction, acquisition, etc.

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has not commenced. We do believe that guidance should be provided to support whether recognition would be appropriate as such actions occur, or once the completed asset has been provided to the Public Sector entity.

5. Do you agree a liability should be recognized for the unsatisfied portion of the performance obligation when consideration transferred for the building, acquisition, improvement or refurbishment of infrastructure is the right to charge users or earn revenue from another revenue generating asset? If not, where should the credit entry be presented when no obligation to deliver cash exists?

We agree that a liability should be recognized for the consideration that is considered to be non-financial. We do believe that clarification is needed however on how non-financial consideration is measured. For example, should the non-financial consideration be measured as a residual amount, being the difference between the cost of infrastructure and the present value of the contractually required payments? Or should the financial and non-financial liabilities require separate measurement, and if so, would the sum of these liabilities be capped at the cost of the infrastructure?

6. Do you believe additional guidance is required where consideration for the building, acquisition, improvement or refurbishment of infrastructure is a non-financial public sector asset (for example, land)? If yes, please provide examples of consideration types not considered.

Yes, we believe additional guidance is required to clarify whether the Public Sector entity has given up control of the non-financial asset provided. If control has been given up, we believe that a Public Sector entity may need to understand the difference between the fair value of the asset provided (which may or may not be used in the new P3 asset being constructed) and its carrying amount, to determine whether this gives rise to a gain or loss on the transaction, or has other accounting consequences.

In some circumstances, the determination of whether control has been given up may be difficult to determine. For example, a Public Sector entity which owns land may grant a Private Sector entity the right to build a hospital on such land, of which, 80% of the building will be owned and operated by the Public Sector entity, and 20% will contain a new wing for the Private Sector entity to own and operate. A question arises as to whether the Public Sector entity has given up control over a portion of the land, or whether the arrangement gives rise to a lease of the land, etc.

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7. Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

We agree that initial measurement of the infrastructure asset and liability should be at cost. Given the long-term nature of infrastructure assets, we believe that a present value technique should be required for P3 transactions, and that cost would be the present value of the contractual payments that are associated with the construction of the infrastructure assets. We do note that PSAB has encouraged but not required present value techniques for recent standards, but in our experience, given the significance of infrastructure assets, most Public Sector entities have applied a present value technique when determining cost in practice.

Yes, we agree that measuring the existing infrastructure at its carrying amount plus costs associated with the improvement or refurbishment of existing assets is appropriate as it is consistent with the treatment of the betterments under PSAS 3150. We do note that the Public Sector entity should consider if any portions of the existing asset are disposed of as a result of the changes which occur in the improvement/refurbishment project (i.e. Wing of hospital is torn down to rebuild new wing).

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

We believe that further guidance needs to be provided on how the discount rate is determined. We believe that some P3 arrangements may allow a Public Sector entity to determine the internal rate of return for the project, which could be used as the discount rate. Alternatively, if the internal rate of return cannot be determined by the Public Sector entity, an alternative should be provided. In our experience, many Public Sector entities refer to their incremental borrowing rate for discounting purposes.

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10. Do you agree the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied? If not, where should the balancing entry be recorded when the performance obligation is satisfied? We agree that the obligation created by non-financial consideration should be recognized as revenue as the performance obligation is satisfied provided the criteria for revenue recognition are met. We believe that this project should closely monitor the current Revenue project being considered by PSAB as we believe that there could be issues on revenue recognition (such as recognition at a point in time or over time) that will need to be consistent with that standard once finalized.

We agree with the guidance in the Statement of Principles and believe it is important for preparers to understand that payment streams may need to be bifurcated to various activities. For example, bifurcation would come into play when payments are not identified by activity (e.g. construction of an asset, maintenance, operation of the asset). In those circumstances it will be necessary to bifurcate or allocate the consideration among the activities, as those activities may run for different periods or can be terminated separately without affecting other components of the arrangement.

12. Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why? We agree with the disclosure requirements but have the following points that should be considered:

• We were not clear as to whether the proposed disclosure of significant changes in the partnership includes changes in ownership of the private sector partners (e.g. a construction company divests of its interest after construction is completed). Disclosures concerning the private sector partner may be subject to privacy laws. • We believe that P3 infrastructure assets would be reported as tangible capital assets, and we believe consideration should be given as to

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whether these assets should be a specific category within the PS 3150 disclosure. • We agree that aggregation of non-material P3 arrangements will be necessary. However, given the significance of infrastructure assets in senior governments, we question whether disclosure for each material P3 infrastructure asset will be onerous for senior government.

13. Are there additional matters requiring consideration? We believe that the following matters should be considered moving forward:

1. We believe that additional guidance should be provided for the unit of account i.e. componentization vs network level in accounting for infrastructure assets. Given the complex nature of the assets being put into service, it may be beneficial to componentize assets depending on which party is responsible for the future replacement of assets 2. Typically lifecycle costs are separately identified in a P3 arrangement and can be associated with future purchases of assets. Some lifecycle asset payments are required regardless of whether the asset is replaced, and so further guidance on the treatment of lifecycle costs, including the timing of their recognition, may be beneficial. 3. We believe that the term “take over rights” should be defined or described. It would be helpful to understand whether take over rights impact the assessment of control. 4. We have noted that modifications are to be accounted for when the event occurs. We believe there should be a broader requirement for the Public Sector entity to re-assess the arrangement whenever there has been a significant change in the terms, the party’s rights / obligations, use of the asset, etc. 5. We understand that control is a criteria to recognize an asset. While we do not believe this to be common, we wonder whether it should be clarified if the loss of such control is the point at which the asset should be de- recognized.

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November 7, 2017

Michael Puskaric, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto ON M5V 3H2

Dear Mr. Puskaric:

Re: STATEMENT OF PRINCIPLES – PUBLIC PRIVATE PARTNERSHIPS – July 2017

Thank you for providing us with the opportunity to comment.

Our Office supports PSAB’s initiative to develop a public sector accounting standard specific to public private partnerships.

We believe that an accounting standard is required in light of the continued use of public private partnership arrangements by government to support public sector investments in infrastructure across Canada.

One of the primary objectives of financial reporting is accountability. Standards for financial reporting should facilitate accountability by including the most relevant information that is comparable for similar transactions within a jurisdiction and among jurisdictions. We have responded to the questions posed in the Invitation to Comment with these principles in mind.

Responses to Requests for Specific Comments

Our responses to the matters on which you specifically requested comments are set out below.

Question 1

 a requirement to build, acquire, improve or refurbish;  finance; and  maintain and/or operate the infrastructure?

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Mr. Michael Puskaric Page 2 November 7, 2017

If not, what public private partnerships should be included or excluded?

Yes. We agree that the scope of the Statement of Principles captures the public private partnership arrangements that require further guidance not already provided for in existing Public Sector Accounting standards.

Question 2

Do you agree the term “infrastructure” accurately reflects items that should be covered in the Statement of Principles? If not, what term is more appropriate?

We believe that for greater clarity and consistency in the application of the guidance, the proposed standard should use the term should be “infrastructure asset” and a definition of the term should be provided.

Question 3

Yes. We agree with the control guidance provided in the Statement of Principles. The guidance is very prescriptive in defining when the government controls the infrastructure asset procured through a public private partnership arrangement. This will facilitate a consistent application of this guidance within a jurisdiction and among jurisdictions across Canada.

Question 4

Yes. We agree with proposed treatment outlined above.

Question 5

Yes. We agree with proposed treatment outlined above.

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Mr. Michael Puskaric Page 3 November 7, 2017

Question 6

Yes. We believe additional guidance may be appropriate. For example, additional guidance may be required on how to value the non-financial public sector assets since their valuation would impact the value of the liability resulting from the public private partnership arrangement.

Question 7

Do you agree the initial measurement of the infrastructure and the liability should be at cost? If not, what alternative is more appropriate and why?

Yes. We agree the initial measurement of the infrastructure asset and liability should be at cost. We encourage PSAB to include guidance that prevents public sector entities from capitalizing infrastructure costs that would not be capitalized if incurred directly.

Question 8

Yes. We agree with the proposed treatment outlined above.

Question 9

Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

We understand the position on discount rates presented in the Statement of Principles. However, given the overarching objective of comparability noted in our introductory comments above, we believe that the government’s rate of borrowing may be a more appropriate basis for discounting the expected cash flows arising from public private partnership arrangements.

Question 10

Do you agree the obligation created by non-financial consideration should be reduced and recognized as revenue when the performance obligation is satisfied? If not, where should the balancing entry be recorded when the performance obligation is satisfied?

Yes. We agree with this statement. This approach is consistent with the Board’s Exposure Draft – PS3400 Revenue.

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Mr. Michael Puskaric Page 4 November 7, 2017

Question 11

We believe the final standard should include additional guidance for the various multi-component structures of public private partnership arrangements. These arrangements are complex and illustrative examples of acceptable methods to estimate and allocate consideration to the different components would be beneficial.

Question 12

Do you agree with the disclosure requirements? If you do not agree, what changes, deletions or additions would you make to these requirements, and why?

We agree with the disclosure requirements noted in the Statement of Principles. We do suggest, however, that the Board also consider requiring disclosure of any unfulfilled performance obligations relating to non-financial consideration in a public private partnership arrangement.

We also believe that disclosing in financial statements the extent to which investments in infrastructure have been funded through public private partnership arrangements may be information that is useful to the public and legislators. This is especially true in light of the differing views on whether the public private partnership model is an appropriate financing model that governments should be entering into.

Question 13

Are there additional matters requiring consideration?

We find that illustrative examples are excellent tools to educate stakeholders and demonstrate the application of the standard. We encourage PSAB to provide illustrative examples in the proposed standard.

Thank you for the opportunity to comment.

Yours truly,

Bonnie Lysyk Auditor General of Ontario 137

RESPONSE QUESTIONNAIRE Statement of Principles – Public Private Partnerships

Name: Teresa Florizone, Vice President of Corporate Services and CFO Organization: SaskBuilds Corporation Email: [email protected]

I would like to take this opportunity to provide feedback on two items on the questionnaire.

9. Do you agree with the discount rate guidance as provided in the Statement of Principles? If not, why? Please provide commentary.

No. I believe that more guidance should be provided on discount rates as there are divergent opinions and accounting treatments currently. A standardized approach will enhance the comparability of financial statements.

Choosing the appropriate discount rate was the largest challenge faced by the Province of Saskatchewan in determining the accounting treatment for P3s. We looked at PSG-2, capital leases, to help inform our understanding. In order to obtain the market value of the P3, we determined that there was no comparable asset in the market place because each P3 is unique and specific. We found the definition of market price most useful: the amount that two willing parties have agreed as the transaction price. For our P3s, that was the cash flow over the period of the agreement. The capital stream was the agreed upon price of the asset and using the government’s borrowing rate did not result in an amount higher than the market; it resulted in calculating the market value or cost.

More guidance is required around betterments/life cycle costs. In particular, the timing of recognition of these costs should be addressed by PSAB because the timing of payments does not necessarily occur in the same period as the related repairs and maintenance.