Canada’s Public Sector Accounting Board (PSAB) has issued an exposure draft on changing the way that PPPs are accounted for by the public sector in Canada.  This could have an impact on the attractiveness of PPP as a way of funding infrastructure projects, which in turn could affect the opportunities available for private sector partners.  Comments on the proposals are invited up to 29 February 2020.  The new framework will apply to fiscal years beginning on or after 1 April 2022.

Key Takeaways

– blurs distinction between PPP and conventional procurement models

– conflates public sector risk of “availability payment” and “user pay” models

– accounts for capital assets separately from ongoing lifecycle costs


Canada is a world leader in PPP, with over 280 active projects, valued at in excess of $139 billion.  The PSAB is proposing a new PPP accounting standard for the public sector.  While the concept has been broadly welcomed, some of the specifics have led to major concerns by private sector partners.

What is the PSAB’s definition of a PPP contract?

A PPP contract is a finance and procurement method for the public sector whereby it commissions an infrastructure asset from a private sector partner.  Typically the public sector will dictate the purpose and use of the asset and how it should be made available to the public during the term of the contract.  It will have access to the future economic benefits and risks of the infrastructure and will control any significant residual interest at the end of the PPP term.  The public sector recognises the asset when it acquires control of the infrastructure.

What types of PPP contracts are there?

There are two main types of PPP contract, an “availability payment” model, and a “user pays” model.

a) Availability payment

The private sector partner is remunerated by the public sector for building the infrastructure and then keeping it up and running.  The private sector partner bears the risk of penalty deductions for the asset not being available at the required standard, but the public sector is obliged to make payments under the contract provided the availability criteria are met.  Normally the terms of the PPP contract result in the public sector recognising the infrastructure on its books at the end of the construction period.

b) User pays

The other type is the user pays contract, where the private sector partner is given exclusive rights to exploit an infrastructure asset, such as a toll road, for a period of time.  The residual interest in the asset will ultimately transfer to the public sector.  The risk of the asset being unprofitable is borne by the private sector, and the public sector’s liability for the asset is at the end of the contract term.

It is the risk profile of the contract which determines how it is accounted for, so the analysis of risk is very important.  Whichever type of contract is used, the rationale is to transfer risk to the private sector.

Which aspects of the Public Sector proposals are controversial?

 a) PSAB on Risk

The PSAB needs to recognise any liability which also arises when it recognises an asset.  This could be a financial obligation, a performance obligation, or a combination of the two.  The different types of obligation should be shown separately.

While the financial obligation recognised with the availability payment model is an established part of the PPP accounting scene, the PSAB considers that the user pays model requires the public sector to defend the private sector partner’s right to exploit the asset.  There is an obligation for the public sector to “maintain exclusivity of rights granted” namely access and the right to charge fees.  This constitutes a performance obligation on the public sector and should be accounted for as a liability.

This risk profile of the user pays model is not currently reflected in public sector accounting.

b) PSAB on Lifecycle

Typically, a service contract for a PPP asset is seen as an indivisible bundle of services including finance, construction, operation, lifecycle and maintenance of a PPP asset.

The PSAB is keen to separate out the contract into its constituent services and consider them separately in terms of accounting.  Under the new standard, the asset and service elements of the contract would be split into a capital asset and operating/maintenance components.

There is a distinction between lifecycle costs which result in a “betterment” of an asset which should be accounted for as part of that asset, and maintenance lifecycle costs which should be treated as an expense.

Private Sector View

The private sector has concerns about the new standard including:

– removing the distinction in accounting between an asset procured directly by the public sector and a PPP asset, despite the different risk profiles.  The benefits of risk transfer are no longer captured.  This potentially makes PPP procurement look less attractive than other procurement models, and therefore less likely to be chosen.

– lack of differentiation between PPP models that create different financial risk profiles for the public sector entity.  Accounting treatment should distinguish between these and provide for a fair representation of the public entity financial exposure.

– not distinguishing between “self-supported user pay obligations” for the private sector and performance liabilities for the public sector by using the term “performance obligation” for the public sector liability when the actual performance obligation with the user pays model is on the private sector.

– not appropriately recognising the risk transfer features of PPP by prioritising form over economic substance, resulting in a greater capitalisation of assets and liabilities than under conventional delivery.

– splitting PPP payments into an asset and O & M component rather than viewing the whole as a service rendered at a combined unitary cost.

– treating lifecycle as an expense even if it is necessary to achieve the asset’s useful economic life.  Lifecycle costs are based on contractual obligations, rather than commissioned so it is not possible to know whether they are a betterment, and the narrow definition of betterment suggests that little would be capitalised.

– confusing purpose and use tests with economic benefit and risk. While the public sector dictates what the asset is used for, the economic benefit and risk, particularly with the user pays model, is borne by the private sector for the life of the concession.

– confusing regulatory controls in the public interest with control over economic interests when looking at the control tests.

My View

The benefits of the risk transfer principles inherent in PPP are in danger of being lost with the new accounting proposals.

An unintended consequence of the exposure draft is that the private sector may need to consider how the precise bifurcation of costs between capital, service and lifecycle would affect the public sector body’s accounting, rather than focusing on its own bid.

Choices between initial capital expenditures and lifecycle costs will in many cases result in a higher capitalisation of assets and liabilities for the public sector than conventional procurement.  This will affect the public sector budgetary and selection processes.

The proposed accounting treatment may discourage the use of “user pay” models, as these are consolidated in the same way as availability payment models.  They would be consolidated at a liability level equal to forecast revenues, despite the outflow of economic resources being unlikely.  This would be unfortunate, as they present a much lower risk for the public sector.

If you have any questions about how the proposals might affect your bid and would like to speak to me or a member of the Operis Accounting and Tax team, please get in touch.

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