BENITO - An Example of Creative Accounting 2008 PDF

Critical Perspectives on Accounting 19 (2008) 963–986
An example of creative accounting in public

sector: The private financing of
infrastructures in Spain夽
Bernardino Benito a,∗ , Vicente Montesinos b,1 , Francisco Bastida c,2
a Department of Accounting, Faculty of Economics and Business, University of Murcia-Campus
of Espinardo, 30100 Espinardo (Murcia), Spain
b Department of Accounting, Faculty of Economics, University of Valencia, Avga. Tarongers s/n,
46022 Valencia, Spain

c Department of Accounting, Faculty of Economics and Business, Technical University of Cartagena,
Alfonso XIII, 50, 30203 Cartagena, Spain
Received 11 January 2007; received in revised form 25 July 2007; accepted 30 August 2007
Abstract
This paper analyses some proposals for private financing of public works having emerged in Spain in
recent years. We show that all the new financing methods assessed are incorrectly named as “private”,
for the payments are finally made by the Government by means of its budgetary resources. A deferral
of accounting and budgetary recognition of these transactions, together with a false disclosure in
financial statements of the debt connected with the projects, are the main reporting consequences of
the new funding methods. In short, it is a clear example of “creative accounting” with the aim of
meeting the convergence criteria imposed by the European Union.
© 2007 Elsevier Ltd. All rights reserved.
Keywords: Public sector; Creative accounting; Infrastructures; PFI
夽 The analysis and conclusions of this paper are part of a broader study, funded by the Spanish Fiscal Studies
Institute.
∗ Corresponding author. Tel.: +34 968 363812; fax: +34 968 363818.
E-mail addresses: benitobl@um.es (B. Benito), vicente.montesinos@uv.es (V. Montesinos),

fco.bastida@upct.es (F. Bastida).
1 Tel.: +34 963 828294; fax: +34 963 828287.
2 Tel.: +34 968 325740; fax: +34 968 325782.
1045-2354/$ – see front matter © 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.cpa.2007.08.002
964 B. Benito et al. / Critical Perspectives on Accounting 19 (2008) 963–986
1. Introduction
Most of infrastructures have been financed in Spain through the public budget until
the middle of the nineties. Concessions and private financing have been scarcely used.
However, private financing of new infrastructures (private finance initiative, PFI, or more
recently named also as public–private partnership, PPP) is growing in recent years. These
are the main reasons for reducing the use of budgetary resources:
• European Monetary Union (EMU) requirements concerning government deficit and debt
limit the amounts that public entities can borrow to finance capital assets. According to
the 1996 Stability and Growth Agreement, European Governments must reach a balanced
budget in 2001, namely, a zero deficit. This target must be achieved in spite of the social
pressure for more and best public services and benefits, making almost impossible for
the public sector to reduce current expenses and thus generate savings.
• Important investment funds are searching in the financial markets for safe and steady
investments.
• Rigidity of traditional Public Administration brings about high management inefficien-
cies.
• Financial earnings are normally improved by companies’ flexibility and management
skills. Investment priorities, as well as verification of public works profitability and
feasibility can be enhanced through the private business requirements if enough financial
rate of return is achieved.
Furthermore, the infrastructures still remain in Spain quite below the most advanced
countries’ equipments in the European Union (EU). It is generally known that endowment
for infrastructures is one of the most important conditions for economic growth in any
country. For example, the 2005–2020 Infrastructures and Transports Strategic Plan of the
Spanish Ministry of Development highlights that, according to recent studies, the cumulative
marginal productivity of the public capital is almost of 1.5, i.e., an increase of D 1 in public
capital investment leads, in the long term, to a GDP increase of almost D 1.5.
All the arguments set out here lead to the conclusion that lots of imagination are required
when searching for new methods to fund public investments. On the one hand, a high quality
in public services must be accomplished, and on the other hand, a rigid budgetary discipline
has to be achieved. Accordingly, new funding methods have appeared in which private
partners are involved in the development of public investment projects (PFI).
Our main hypothesis is that many countries have used PFIs to defer payment and this way
control their deficits and debt without cutting investments in infrastructures and public ser-
vices. Lack of a clear accounting standards on how to report PFIs has allowed governments
to do it.
The following pages analyse some proposals for private financing of public works having
emerged in Spain in recent years. After assessing all the new financing methods, we find that
they are incorrectly named as “private”, for the payments are finally made by the Government
by means of its budgetary resources. A deferral of accounting and budgetary recognition of
these transactions and a wrong disclosure in financial statements of the debt connected with
the projects are the main reporting consequences of the new funding methods. In short, it is
B. Benito et al. / Critical Perspectives on Accounting 19 (2008) 963–986 965
a clear example of “creative accounting” with the aim of meeting the convergence criteria
imposed by the EU.
The remaining of the paper is organized as follows. Section 2 presents the theoretical
background. Section 3 describes the main PPP contracts’ characteristics. Section 4 shows
the opportunities for using new financing methods of public works in Spain. In Section 5
we analyse different forms of private financing of infrastructures and their implications for
government deficit and debt. Section 6 summarizes and presents conclusions.
2. Theoretical framework
The choice between budget and PFI when financing infrastructures has to do with the
theory of property rights, which states that ownership matters when contracts are incomplete,
thus preventing parties from stipulating all the potential eventualities in the contract (see
Hart, 1996 for an insight on this theory). Therefore, a key aspect in PFI is the appropriate
risk sharing between private and public sectors established in the contract. If adequate
risk is not shifted to the private sector, then projects become quasi public, but with the
funding removed from the government’s balance sheet. A critical issue in the risk transfer
arrangements is to achieve pricing that correctly reflects the risks assumed by each party to
the transaction (Brown, 2005).
Hart (2003) developed a theoretical model of PPPs within the framework of the property
rights theory. He concluded that conventional provision is good if the quality of the building
can be well specified, whereas the quality of the service cannot be. In contrast, PPP is good
if the quality of the service can be well specified in the initial contract (or, more generally,
there are good performance measures which can be used to reward or penalise the service
provider), whereas the quality of the building cannot be.
The principal rationale for the adoption of PPP is that it addresses the deficit of phys-
ical infrastructures of the countries. Since Public investment is constrained by the limits
on public spending imposed by membership of the single EU currency, PPP becomes an
attractive way of funding investments. PPPs involve contracting between government and
the private sector under conditions of imperfect information. Theoretical developments
such as principal–agent theory provide an insight on PPPs. This theory focuses on the
design of “optimal contracts” in the face of asymmetries in the information and objectives
of contracting parties. Emphasis is placed on the optimal allocation of risk as a means of
“incentivising” agents to achieve principal’s (government) objectives. PPP contracts spec-
ify which risks are borne by the government (principal) or contractor (agent). Moreover, as
PPP contracts can connect different elements of infrastructure projects (for example, link the
design and construction with one or all of the finance, operation and maintenance elements)
there is better scope for transferring risk compared to traditional procurement methods.
For example, payment may be withheld until assets are in operation thereby “encourag-
ing” contractors to complete construction on time and within budget (Hurst and Reeves,
2004).
PPPs can provide higher value for money compared with other approaches, if there is an
effective implementation structure and if the objectives of all parties can be met within the
contract. We must bear in mind that such contracts are complex to design, implement and
manage. Sometimes they are not the best option: indeed in some cases it has been reported
that they lead to an increase in the costs of services to citizens.
From a theoretical viewpoint, the main justification for PPP is the possibility to exploit
the management expertise and the efficiency of the private sector without giving up quality
standards of outputs, thanks to appropriate control mechanisms from the public party. This
result is achieved by setting up complex contractual arrangements with the private sector
operator (“agent”) where the public sector acts as the “principal”. In principal–agent rela-
tionships, the most complex issues are the precise definition of the tasks assigned to the
agent, the measurement of the agent’s performance, and the extent to which the principal
can control the agent’s performance for the whole duration of the contractual relationship. In
PPPs, the cornerstone is the allocation of risk between the two parties: well-designed PPPs
redistribute the risk to the party that is the “superior insurer” or the “least cost avoider”, i.e.,
the party best suited to control and/or bear the risk (European Parliament, 2006).
The Public Choice theory argues that taxpayers perceive debt-funded projects less costly
than tax-financed ones, since they fail to perceive the actual cost of debt (Buchanan, 1967).
Taxpayers do not properly evaluate inter-temporal government budget restrictions. When
government offers deficit-financed outlay program, taxpayers overestimate benefits of cur-
rent expenditures and underestimate future tax burden. PFI contracts allow incumbents to
invest in new infrastructures, which have a positive impact on voters’ opinion about them,
while deferring the payments of the infrastructure.
3. Public works’ funding through public–private partnership
In order to fill the growing gap between needed infrastructures and available resources,
a key question arises: Which is the best way to make the investment in terms of value
for money? In this context, since the nineties, PPPs have spread in Europe in general,
and in Spain in particular. However, compared to PPPs, traditional contracts still are
more widely used, and they may be more appropriate in many projects. Even in the
UK, where PPP is frequently used, traditional contracts finance 85% of public invest-
ment (PriceWaterhouseCoopers-PWC, 2005). Thus, it is important to analyse the traditional
model of public contracting as opposed to PPP. The main characteristics of the former would
be
• The public sector buys assets, not services, to the private sector.
• Assets are ex ante perfectly specified: the public sector designs the asset before the
contracting process starts.
• The private sector only takes responsibility for the asset construction. The private sector
takes no responsibility for the asset’s long-run yield after the guarantee period.
• The public sector is directly involved in the management of the project contract. If
there are several companies singing the contract, the public sector usually takes the
responsibility of coordinating them.
In spite of its common use, there is neither a generally accepted definition nor a unique
model of PPP. It encompasses several relationship structures in which the private sector
provides an asset or a service to the public sector. “Utilities” and transport projects based in
administrative concessions have been used since years ago in the EU, especially in France,
Italy and Spain. In this type of contracts, the company receives the payments made by
service users, as it is the case, for example, in highway tolls. PFIs, in the UK, broadened
this concept to a wider scope of public infrastructures, and combined it with the introduction
of services not paid by final users, but by the public sector.
PFIs include several types of contract, such as
• Short run management contracts with zero or small capital expenditure.
• Administrative concession contracts. These may involve the funding, design and con-
struction of assets, with an important investment, together with the providing of related
services.
• Joint ventures and partial privatizations, with a shared ownership between the public and
the private sector (see in this respect Bult-Spiering and Dewulf, 2006; PWC, 2005).
The main difference between a PPP and a traditional contract is that in a PPP, private
holder earnings are connected to service outcomes and to asset yield during the contractual
period. The private holder is responsible not only for delivering the asset, but also for the
project management and for the appropriate provision of the service during the contractual
period. The timing of payments received by the company is completely different from
traditional contracts.
The European Commission (2004) highlights the following PPP characteristics:
• The relatively long duration of the relationship, involving cooperation between the public
and the private partner on the project.
• The method of funding the project, partly from the private sector, sometimes by means
of complex arrangements between the various players. However, public funds – in some
cases rather substantial – may complement the private funds.
• The key role of the economic operator, who is involved in different stages in the project
(design, completion, implementation, funding). The public partner focuses primarily on
defining the objectives to be attained in terms of public interest, quality of services and
pricing, and it takes responsibility for ensuring compliance with these objectives.
• The distribution of risks between the public partner and the private partner, to whom
the risks generally borne by the public sector are transferred. However, a PPP does not
necessarily mean that the private partner assumes all the risks, or even the major share
of the risks linked to the project. The precise distribution of risk is determined case by
case.
Besides, the European Investment Bank (2005) identifies these aspects in PPP:
• It is initiated by the public sector.
• Involves a clearly defined project and the sharing of risks with the private sector.
• Is based on a contractual relationship which is limited in time.
• Has a clear separation between the public sector and the borrower: there must be a private
partner providing financial resources to fund the project (PWC, 2005).
PPPs introduce new elements in the relationships between public and private sector. The
financial reports must disclose the assets/rights and liabilities/commitments that arise in
the provision of services and infrastructures under PPP. PPPs, as opposed to traditional
contracts or privatization, imply a risk sharing between public and private partners, in order
to achieve a more efficient use of resources. Risk sharing and public resources involved
determine the responsibility of the parties concerned in the project.
An accounting discussion has started stemming from what we have just said. The issue
at stake is the way PPPs should be reported in the public sector financial statements. The
concrete PPP where the problem arises is the one in which the private holder is responsible
for designing, building or reforming and financing an infrastructure. The contract enables
the public partner to have the infrastructure at the citizens’ disposal, whereas the private
partner commits to provide the infrastructure and is entitled to be paid by the public partner.
When these new financing methods emerged, there was no clear accounting standard
providing guidance on how to report them. Thus, many countries used them to defer payment
and this way control their deficits and debt without cutting investments in infrastructures
and public services. In this sense, Milesi-Ferretti (2004, p. 378) says that the imposition of
numerical rules may encourage the use of dubious accounting practices, thereby reducing
the degree of transparency in the government budget. These concerns have gained strength
with the use of ‘creative public finance’ by a number of European countries in order to
facilitate meeting the budget deficit ceiling established in the Maastricht Treaty. In the same
way, Koen and van den Noord (2005, p. 7) state that “creative accounting” operations may
have merits of their own. PPPs for instance have proliferated in several EU countries since
the late 1990s, either at the national or sub-national level (e.g., in the form of PFI contracts in
the UK and concessions in Spain). Instead of the government buying an asset and operating
it, a private entity invests and owns the asset (at least partly and at least during the period of
exploitation), selling the corresponding services to the government. PPPs may be justified
on efficiency grounds, but from the perspective adopted here their main feature is that they
initially reduce the general government deficit and debt for a given level of investment
in publicly used infrastructure. In 1999, the Irish Government launched a programme of
PPPs, in order to address the country’s acute deficit of physical infrastructure. The first PPP
to reach the stage of operation was the contract for five secondary schools. The evidence
indicated that this PPP has not resulted in significant innovations, and the public sector has
failed to provide any evidence of value for money (Hurst and Reeves, 2004).
Within the EU, Spain has been one of the countries taking advantage of the lack of clear
accounting standard for new financing methods for infrastructures. However, as we will see
later, the last Eurostat guidance has banished all doubts, and accordingly, almost all these
new methods must be included in order to compute the public deficit and debt.
4. Opportunities for using new financing methods of public works
Soon after the Spanish Conservative Government took over in March 1996, the Minister
of Public Works considered the possibility of financing infrastructures based upon the use
of funds coming from privatizations and other methods. The aim was to avoid an increase
of government deficit and debt rates.
Besides, several circumstances did exist for resorting to private financing:
• Plenty of available private savings.

• Private business licensees had at that time remarkable earnings and capitalization rates.
Therefore, they had financial resources available for reinvesting.
• Considering the reduction of government investment – gross fixed capital formation –
building firms looked to be inclined to share direct infrastructure investments, in order
to enhance certain bidding amounts in public works.
• A policy of monetary stability led to reductions of interest rates and thus private invest-
ment funds started to be interested in long-term investments with satisfactory profit
margins.
All these advantageous circumstances made the Government issue several rules to boost
government investment. Thus, in December 1996 two acts were passed with the following
decisions regarding private financing of public works:
• Amendment of some provisions of Governments’ Contracts Act, setting up the so-called
“German” or “key on hand method” (also called turnkey) for contracting investments,
according to which, government investments are not paid for until they are completely
finished. The regulation of this contracting method was later developed by a Royal Decree
in May 1997. The next section will analyse in detail this type of contract.
• Amendment of some provisions of the General Budgetary Act, in order to allow longer
terms for payments and to ease the use of revenues from public enterprises.
• Changes in the 1972 rules for building, maintenance and operation of granted highways:
◦ Extension of concession term limit from 50 to 75 years.
◦ Enlargement of the scope of the concession for licencees. Road maintenance and
operation are no longer the only allowed activities for these enterprises, but also other
could be carried out, such as service areas at the highways.
◦ Securities could be issued as toll rights supporting documents. Further provisions for
constitution and operations of the funds corresponding to these securities have been
developed by a 1998 Royal Decree.
• State-controlled firms entitled to borrow money can be established with budgetary
resources. This variety has been known as “Spanish method”. We will be dealing with
this in more detail later on.
• A public entity named “Railway Infrastructures Management Entity” (Gestor de
Infraestructuras Ferroviarias, GIF)3 was created with the main objective of building
and managing new railway infrastructures. This entity is a commercial corporation, not
considered as Public Administration, since its revenues come from a fee the operators4
pay for using the infrastructures. These entities will not be taken into account when
calculating the public sector deficit and net lending/borrowing, according to European
System of Accounts 1995 (ESA 95). This will be explained below.
3 Established in 1997, has disappeared and joined the Railway Infrastructures Managing Administration (Admin-
istrador de Infraestructura Ferroviaria, ADIF), which started working on 1 January 2005.

4 A 1998 Royal Decree regulated the railway infrastructures operation for international transport services,
railways corporations licences and rates for the use of railways infrastructures. All theses rules were adopted
according art. no. 104 of the 1997 Spanish Act and the European Directives 95/18/CE, regulating the railways
corporations licences and 95/19/CE, regulating the concession of railways infrastructure capacities and the fees
to be paid by its use.
The next section analyses these proposals, particularly: the “full price payment con-
tract” (also known as “German method” or “Turnkey”); the establishment of enterprises or
public entities building works on behalf of either the Administration or themselves (sys-
tem known as “Spanish method”) and the “shadow toll” (financing method used by some
Spanish Regions). In spite of these methods being considered PPP or PFI, as we said in
the introduction, all of them are incorrectly categorized as “private”, for the payments are
finally made by the Government through its budgetary resources. A deferral of accounting
and budgetary recognition of these transactions and a wrong disclosure in financial state-
ments of the debt connected with the projects are the main reporting consequences of these
new funding methods. In short, it is a clear example of “creative accounting” with the aim
of meeting the convergence criteria imposed by the EU.
5. Different forms of private financing of infrastructures and their implications

for government deficit and debt
First, we must make clear that no standards have been developed in Spain for PFI
accounting treatment. Accordingly, we will focus on the EU regulatory framework, more
specifically, on the ESA 95 Manual on government deficit and debt issued by Eurostat. We
believe the analysis of these EU rules is of great interest, because they are legally binding in
all member countries of the Eurozone, and almost all of them have considered the financing
formulas explained in this manuscript in a larger or smaller extent (see at this respect PWC,
2005), with the purpose of fulfilling the Maastricht Treaty requirements for public deficit
and debt limits.
Fig. 1 and Table 1 show how PFI use and high government deficit have been closely
related in many EU countries. Thus, the higher the government deficit, the larger the use
of PFI. This relationship makes clear, as stated above, that in most cases the aim of using
PPP or PFI has been the deferral of the payment and debt. In summary, we could label it as
“creative accounting”.
Fig. 1. Average 2000–2005 PFI activity as a percentage of mean GDP. Source: PricewaterhouseCoopers (2005).
Table 1
General government deficit (−)/surplus (+) as a percentage of GDP
Source: Eurostat.
Shaded countries are those with the highest PFI activity (see Fig. 1).
The ESA 95 Manual is the result of European Commission’s concern about the need
to ensure the correct application of ESA 95 criteria to elaborate statistics and government
finance accounts. PFI are among the operations with unclear treatment. This document
supersedes other Eurostat regulations, and it is the result of some countries’ consultations
to Eurostat regarding the accounting treatment of some PFI operations, which were being
reported according to ESA 79. Usually, the answers to the consultations were published as
News Releases, which we will refer to in the following pages (Table 2 summarizes them).
5.1. Full price payment when public works are accepted (“German method”)
In this case, the Government signs a contract with the successful bidder for building and
financing the project. Building costs and interests are paid when the work is finished and
accepted by the Government. Therefore, the Government does not pay any money until the
project is finished (there are no partial payments). The contractor must finance the building,
i.e., paying costs in advance while the building project is in progress, until the work is finally
Table 2
Main news releases of the Eurostat in relation with the treatment of PFI/PPP
News Release no. 16/97 of 21 February 1997, Treatment of Public Finance Initiatives
News Release no. 33/97 of 30 April 1997, Treatment of public finance initiatives
News Release no. 15/2002 of 31 January 2002, Treatment of the transfer of Government real estate to a
publicly owned corporation in Austria
News Release no. 80/2002 of 3 July 2002, Securitisation operations undertaken by general government
News Release no. 18/2004 of 11 February 2004, Treatment of public–private partnerships
News Release no. 88/2007 of 25 June 2007, Securitisation operations undertaken by general government
accepted. This method has been widely used for road building in Germany (that is why it
is known as “German method”) (Izquierdo and Vasssallo, p. 200).
When the public work is finished, the Government will pay either in cash or through
a maximum period of 10 years. It is possible for the contractor to convert these future
payments into tolls to be paid by the infrastructure users. The following conditions have to
be met to use this financing method:
• Eligible projects are: road infrastructures, water and railway equipment and environmen-
tal and coastal installations.
• Total contracting price, financial costs when deferring payments not included, must be
over the following amounts:
◦ Roads, 24 million euros.
◦ Railway and water infrastructures, 18 million euros.
◦ Environmental and coastal installations, 6 million euros.
• This kind of contracts is not applicable to infrastructures improvements, repairs, conser-
vation and demolition works.
• A specific contract will be signed for any individual work, within the abovementioned
limits. Therefore, accumulation of works in a single contract is not permitted.
• Total annual amount committed using this contracting method cannot go beyond 30% of
initial budgetary appropriations for investments in capital assets during the year.
This “German method” has been used by the Spanish Central Administration. Although
a specific regulation of this method for Municipal Governments was supposed to be issued
more than 1 year ago, it has not been published so far. In the same way, some Spanish Regions
planned to use this kind of contract, but no concrete regulation has yet been adopted.5
The main reason argued for using this financing method is the possibility to defer
accounting and budgetary recognition of investment expenses until the date the work is
fully executed. In the same way, the recognition of the debt connected with these trans-
actions is also deferred. Therefore, during the building period, neither budgetary expenses
nor net borrowing increase, thus making easier for the Spanish Government to meet the
5 Public sector in Spain is organized in three levels: State or Central Administration, Regions (Autonomous
Communities) and Local Entities. Out of the total government expenses in Spain, these three administrations
spend approximately 50%, 35% and 15%, respectively.
convergence criteria (this is a patent example of “creative accounting”). That is to say,

the Government argues that the infrastructure is not reported until it is finished and deliv-
ered. However, the bottom line is only the deferral of recognition of expenses and debt
in the accounting books. This contract makes possible to do important public works, but
at the expense of relevant commitments on future budgets and an increase of government
indebtedness.
According to the current EU accounting standard (ESA 95), in force since 1999, invest-
ment expenses must be reported along the years of construction (accrual accounting). The
previous approach under ESA79 (cash accounting). reported the expenses according to the
payments made (Lüder, 2000, pp. 118–122). A consequence of the taking in consideration
of these circumstances has been the suspension of the use this financing method during
several years, according to additional dispositions of the laws passing the State General
Budgets.
5.2. Constitution of public corporations and/or public entities
As previously stated, the possibility to create public firms for road and water works build-
ing and operation was created by Law in 1996. This is the case of “Railway Infrastructures
Management Entity”. This entity has its own legal status as a subsidiary of the Ministry
of Public Works, it is able to hire and fire its own staff and it holds its own assets and
liabilities. The entity’s main activities are building the high-speed railway infrastructures
connecting Madrid–Barcelona–France, as well as the safety and control systems manage-
ment. Revenues come from rates paid by users of operated lines and by the users of its own
telecommunication networks. The entity can borrow funds by itself and the State is allowed
to give it a financial support. Similar corporations has been also established by the Ministry
of Environment, for example, Ebro Basin Waters (Aguas de la Cuenca del Ebro, ACESA).
Considering the Spanish Regions, the Catalan Government was the first creating this
kind of corporations, as in 1990 it established the firm Infrastructures Management Inc.
(Gestión de Infraestructuras S.A., GISA). An agreement defines the management and
financial links between Catalan Government and GISA, which obtains revenues by the
management responsibilities for building infrastructures. Under the guarantee of these rev-
enues, the firm obtains funding in the financial markets, without any specific governmental
guarantee. When infrastructure construction is finished, it becomes a capital asset of the
Catalan Government. Similar processes are going on in other Regions: Andalusia, Castilla-
León, Galicia, Castilla-La Mancha or Madrid. This kind of corporations is also usual in the
local public sector, but only in the largest municipalities.
In addition to efficacy and efficiency criteria, the main advantage of these entities has
been that their borrowing is not consolidated when setting up public sector debt. However,
in the new ESA 95 the borders for different sectors of economy are established according
to a market criterion. Thus, if an entity’s purpose is to produce goods or services for the
market and it sells its production in the market, it must be included in the corporations
sector, irrespective whether the owner is public or private (Jones, 2000). According to ESA
95 criteria, if sales are 50% or more out of the total operating expenses of an economic
unit, the production of this unit is considered as market-oriented (paragraphs 3.33 and
3.37). In order to meet this criterion, amounts paid by the Government that contracted the
building of the infrastructure are not considered as sales. On the one hand, a consequence of
ESA 95 criteria is the non-inclusion in the consolidated accounts of Public Administrations
of market-oriented units, not necessarily with legal status. On the other hand, ESA 95
simultaneously leads to the inclusion of corporations, agencies or entities mainly operating
on the base of official financial aids. This is the case, for instance, of the agent corporations
we are analysing in this section.
In the above-mentioned circumstances, new funding and management methods arise with
the aim of establishing entities whose debt is not consolidated in public sector accounts.
Special attention must be paid to the constitution of securities funds. A securitisation oper-
ation occurs when a government transfers ownership rights over financial or non-financial
assets, or the right to receive specific future revenues, to another unit, named the securi-
tisation unit, who in exchange pays the originator. In order to finance the purchase, the
securitisation unit borrows on its own account by, typically, issuing bonds called asset
backed securities (ABS). The securitisation unit uses income generated by the transferred
asset or by the specific future flows, or by sales of the transferred assets, to service its debt.
Usually the lenders will have a direct and legal claim on those assets or on those flows, in
the event of the securitisation unit not paying the interest and principal due.
When the proceeds obtained from the sale of the assets are higher than the initial price
paid to government, and the securitisation contract includes, in addition to the initial pay-
ment by the securitisation unit, a clause on additional future payments to government, a
deferred purchase price (DPP) is said to exist and all or part of the proceeds are allocated
to government.
Fig. 2 shows the basic features of the operating mechanism of this funding method.
The key issue to be determined is whether a securitisation operation gives rise to revenue
for the government, thereby reducing the public deficit if there is one, or whether the
proceeds should be considered as government borrowing. Eurostat has decided the following
(News Release no. 88/2007 of 25 June 2007) (this decision complements and amends the
decision taken on the same issue in News Release 80/2002 of 3 July 2002):
1. All securitisation of fiscal claims by government should be treated as government bor-

rowing.
2. The existence of a DPP clause or of similar arrangements should lead to the classification
of the securitisation operation as government borrowing.
3. A clause in the contract referring to the possibility of substitution of assets (except for
marginal cases limited in scope and deriving purely from technical and material errors)
should lead to the classification of the securitisation operation as government borrowing.
4. A clause of the securitisation contract stipulating ex ante government compensation to
the unit (in case of government actions which are specifically related to the unit and
not to different economic units more generally) should lead to the classification of the
securitisation operation as government borrowing.
5. When government compensates (for instance in the form of cash, of debt assumption,
or of direct or indirect guarantee) the unit ex post for specific events, although compen-
sation was not originally foreseen in the contract, a reclassification of the operation as
government borrowing must occur, with an impact on the surplus/deficit of government
in the year in which the compensation is decided.
Fig. 2. Operating mechanism of securities funds. (1) Public Administration asks the public entity for infrastructure
building. This request gives rise to rights in favour of this public entity. (2) Public entity’s rights are handed over
to a securities fund, which pays to the entity the present value of these rights. With this money, the public entity
can afford to pay builders or financial institutions for refunding previous borrowings. (3) Public Administration
pays to the securities fund.
To sum up, when Spain has used this funding method, the aim was to hide public debt
(as Koen and van den Noord, 2005 point out). Eurostat decision, however, concluded that it
was “creative accounting”, and therefore the balance sheet should disclose the related debt.
Something similar happened in other EU countries, such as Austria, Greece or Italy (see in
this respect Milesi-Ferretti and Moriyama, 2006, p. 3288).
5.3. The “shadow toll” method
Known also as DBFO (design, build, finance and operate), the infrastructure is built
and operated by the concessionaire, who usually is a private firm. Government just
pays the corresponding rates in order to get services provided using the assets con-
structed. This model is being applied for motorways, medical care in hospitals, elderly’s
homes, day nurseries, sport facilities, pools, waste treatment, water desalination, etc.
The payment is made by means of periodic amounts of money that depend upon the
use of the infrastructures by citizens. In order to avoid a low-use risk for the licensee
firm, the Government guarantees the concessionaire enough revenues to achieve financial
balance.
This kind of contracts is, in short, nearly pure concessions, with the only difference that
it is not the user but the Government who pays the rates. The accounting treatment of this
funding method for infrastructures resembles the operating lease. Sometimes, infrastruc-
tures’ ownership transfers to the Administration at the end of the operating period, and then
the essence of the method is closer to a finance lease.
Spanish Regions’ legislation also labels this funding method as demand levy, and the
system is built upon a private sector involvement in the construction projects, on the base
of foreseeable cash flows generation. Users do not pay any toll, but it is the Government
who guarantees payments to private corporations according to previously fixed rates.
The main argument Spanish Regions make for the adoption of this funding method is
to foster private involvement – specially small and medium size firms – in public works
projects development.
It is not hard to realize that the funding method based on the “shadow toll” is very similar
to the “finance lease”. As in the cases of Germany and France,6 when the Government uses
the finance lease, it cedes public property to a leasing corporation for some time. This
corporation constructs and finances the work and when the building process is concluded,
the construction is made over to the Government, which operates the installations as lessee,
until the date of reversion.
We think the Belgian experience on the “shadow toll” is worth commenting. In 1960 the
Belgian Government decided to use this way to finance its road construction. The reason
for using this method was to cope with the existing budgetary limitations and thus being
able to avoid an increase in taxes or debt. As time went by, it was clear that the only real
outcome of this policy was an increase of public financial burden. Accordingly, in 1982,
after more than 600 km of roads had been constructed (50% of total network), the Belgian
State took up again the direct management of the highways program (Izquierdo, 1992, pp.
119–120).
In the United Kingdom, the 1991 Roads Act set up a new system for construction of
toll roads by the private sector. This system operates through a contractual link with the
State. On the one hand, each project must be self-financed by means of the tolls paid by the
users. On the other hand, no public guarantees or aids are allowed (this is purely the method
known as project finance). The promoter or contractor takes on the building and operation
risks; as it is not usual in UK to pay tolls by the users, it is the State which pays during
the first years the road runs (from this fact follows the famous name of shadow toll for this
method). However, the possibility exists for a financial support of the British State to these
infrastructures, using operating grants, earmarked taxes, exchange guarantees, refunding
advances, subsidized loans, fiscal benefits, etc.
Austria has also experienced this financing method. In this way, different highways
construction, operation and maintaining projects have been developed since 1982. Other
experiences using this method for financing roads or highways were implemented in Finland,
Portugal and the Netherlands (Yates, 1992).
Out of the PPP/PFI methods for infrastructure and public services provision, the “shadow
toll” technique has been the most controversial, mainly in the British accounting practice,
due to its implications in the Government financial reports (see in this respect Allen, 2001;
Broadbent and Laughlin, 1999; English and Guthrie, 2003; Froud and Shaoul, 2001; Heald,
6 In this latter country this kind of contracts is named “public work management contracts” (marché d’entreprise
de travaux publics)”; see Aguila (1995) and Besançon and Van Ruymbeke (1990).
2003; Heald and Geaughan, 1997; Hodges and Mellett, 2002; Mayston, 1999; Rutherford,
2003). This is a summary of the accounting problems at stake:
(a) whether properties used in PFI contracts are assets and the amounts to be paid to
operators are government’s liabilities or if, by contrast, the Government only receives
a service and pays for it;
(b) whether the operator owns an asset to deliver a service or if, by contrast, the operator
has a financial asset representing the amount of payment obligations owed by the
Government.
The solution finally adopted in the UK is that the Government must report the asset if
the Government directly assumes the asset’s risks and benefits. Therefore, “risk” is the key
element when defining the nature of a DBFO contract (Accounting Standards Board, 1994;
Treasury Private Finance Taskforce, 1997).
The first time Eurostat issued guidance for estimating PFI incidence on Government
deficit and debt was in its 21 February 1997 News Release no. 16/97, through the analysis
of two cases:
• Case no. 1. A Government asks a corporation to build and finance a capital asset. Cor-
porations become the owners of these assets as the building is going on. In this case, the
gross capital formation must be included in the Public Administration sector. Investment
in this case increases government deficit but it has no impact on government borrowing,
as Council Regulation 3065/93 determines. According to this regulation, Public Admin-
istrations’ long and medium-term commercial commitments with corporations are not
included in debt when calculating convergence criteria accomplishment.
• Case no. 2. A Government asks a corporation to build a capital asset which will be
operated by this corporation right through its useful life. The corporation becomes too
the owner of the asset. In this case, gross capital formation must be included in the
corporations sector, and there is no incidence either on government deficit or debt.
Eurostat shows also concrete examples where both possibilities are simultaneously in
use: case no. 1 is the method used in Germany for building and pre-financing of roads by
public sector agents. The bridge of Oresund, joining Denmark and Sweden, is an example
of case no. 2. The construction began in 1996 by means of a Governmental Danish and
Swedish Consortium of public corporations. The consortium funded the project by issuing
government-secured debentures. The works ended in 2000 and the consortium has a license
for operating the bridge and collecting tolls. Total debt is estimated to be refunded in 2026,
while the consortium will operate the bridge indefinitely. Gross capital formation is included
in the corporations sector, with no incidence on government deficit.
Other PFI contracts in UK are examples of case no. 2. Instead of buying and operating a
capital asset, the State hires the services of an operator in the private sector (Heald, 1997;
Mumford, 1998). These operators manage to get the assets in order to provide the requested
services. Gross capital formation is included in the corporations sector, with no incidence
on government deficit. A purchase of services provided by business corporations is recorded
in Public Administrations’ accounts, thus increasing government deficit every year.
The Eurostat 30 April 1997 News Release no. 33/97 added a new case to the previously
considered (case no. 3): a corporation builds an infrastructure and subsequently the corpora-
tion operates it during a given time period, collecting periodically certain amounts of money
paid by Government. These payments concern the acquisition of infrastructure services. At
the end of the operation time, the infrastructure comes back to the Public Administration
with no additional payment. In this case, these rules must be taken into account:
• Initial investment (gross fixed capital formation) must be recorded in the corporation’s
accounting books, with no incidence on government deficit.
• Government annual payments are services acquisitions that increase government deficit
every year.
• At the end of the operating time, the reversion of infrastructures to Public Administration
does not generate a reduction in government deficit.
Considering the three above-mentioned PFI cases, we can conclude that Eurostat News
Releases presents the “German method” (case no. 1) and “shadow toll” (cases no. 2 and no.
3) treatment.
Focusing on cases no. 2 and no. 3, investment must be reported as a fixed asset by the
building corporation, with no increase of government expenses and debt. Only the amounts
paid by Government when using fixed assets are recorded as government expenses (current
expenses to be more precise).
However, as previously discussed, “shadow toll” method has been used in Spain, as a
licence system where private sector is engaged to build and maintain the infrastructure, and
Government pays a toll or rate for its use, until the settlement of financial commitments.
When the concession term is over, infrastructure becomes a public ownership, with no
additional cost for Public Administration. As can be observed, the Spanish implementation
of “shadow toll” differs a little bit of British PFI. According to British practices, any new
investment the government tries to do using budgetary resources, must be supported by a
specific study; this study must disclose that investment costs are lower than those incurred
when using a new DBFO concession. As a result of this assessment, if PFI is preferred, a
pure-toll concession or a service management or payment for services rendered contract
will be implemented. Nevertheless, it is indeed a question of a deferred disclosure and by
instalments payment of investment, along with maintenance costs, all through the concession
time.
In short, we can considered this PFI as a hire purchase, or at most a quite similar method
to a finance lease, with the only difference that no option will be paid by the lessee (Gov-
ernment) to the lessor (private corporation) when receiving the definitive ownership of the
asset. Another difference that can also be argued is that in the case of a finance lease, a fixed
amount must be paid all through the term of the contract, whereas the fees to be paid when
using the “shadow toll” method depend upon the use citizens make of the infrastructure
(e.g., for roads fees are paid according to annual traffic). No exact previous calculation
can thus be done of the amounts to be paid every year by Public Administration with its
budgetary resources. However, Government will guarantee enough revenues for financial
balance of the concessionaire. If no guarantee existed, probably nobody would bid for build-
ing the infrastructure. Besides, the Government will also fix a ceiling amount to be paid
(for example if traffic exceeds the ceiling volume of vehicles, no more fees will be paid).
To sum up, we can say that Public Administration runs into debts that must be reported
in the financial statements by its maximum amount, as required by a conservative account-
ing philosophy. Spanish Regions’ PFI regulations require budgetary appropriations by the
maximum amount the Government is bound to pay to the concessionaires (according to
the foreseeable use of infrastructures), in order to guarantee both the effective operation
of privately constructed works and the profitability of the investment. This fact endorses
our opinion about the accounting treatment of the commitments stemming from this PFI,
as no risks are indeed assumed by licensees. We must bear in mind that, as the theory of
property rights shows, a key aspect in PFI is the accurate risk sharing between private and
public sectors. If adequate risk is not shifted to the private sector, then projects become quasi
public, but with the funding removed from the government’s balance sheet. The amount of
debt will be included in a fixed asset (a tangible asset or use duties). If the maximum amount
taken for debt evaluation remains over the effective payments done when the concession
term is over, asset and debt must be cut down by the difference. This reduction must be
done every year by the difference between the maximum estimated payments and the real
amount of commitments.
In January 2000 there was a relevant shift in Eurostat initial opinion towards a position
close to our arguments. Thus, the document “ESA95 Manual on government deficit and
debt” shows a clarification about accounting treatments of these PFIs by means of two
examples (which are identical to the “shadow toll”):
• Case a. Government requires a corporation to build a prison according to the government’s

specifications. Government agrees to pay the corporation a certain amount for 25 years
for making the prison available for its use, provided it is adequately maintained. At the
end of the 25-year period, legal ownership of the prison is transferred from de contractor
to government.
• Case b. Government signs a contract with a corporation for the design and construction of
a road. The corporation is also responsible for maintaining the road for 25 years according
to an agreed standard. Government pays the contractor an annual fee linked to the number
of vehicles using the road.
According to Eurostat standards, the treatment for each case should be
• Case a. When the corporation is exposed to most of the risk/rewards of ownership dur-
ing the period of exploitation, the infrastructure is recorded in the corporation balance
sheet. The contract between government and the corporation has the characteristics of
an operating lease. Only regular payments by government have an impact on govern-
ment net lending/borrowing. If the infrastructure is given to government at the end of
the operation period it will be presented in the government balance sheet through a gross
fixed capital formation, balanced by a capital transfer, with no impact on government net
lending/borrowing.
• Case b. When the government is exposed to most of the risk/rewards of ownership
during the period of exploitation, the infrastructure is reported in the government balance
sheet. The contract between government and the corporation has the characteristics of
a financial lease. The infrastructure built by the corporation is allocated to government
balance sheets through GFCF, balanced by an imputed loan of equal value. Accordingly,
there is an impact on government net lending/borrowing for the value of GFCF, and
government debt is increased by the amount of the loan imputed. During the operation
Table 3
Factors influencing the distinction between operating and finance lease
1. Who is responsible for the maintenance and insurance of the asset?
Assume government organizes and pays directly for the insurance and maintenance of the asset
This suggests a finance lease since government is bearing the risk of variations in such costs
2. Who repays finance on early termination of a contract?
Assume the government is responsible for repayment of the corporation debt in the event of early
termination of the contract
This suggests a finance lease since government is bearing that risk
3. Who determines the nature of the asset?
Assume the corporation has significant and ongoing discretion on how to fulfil the contract; it makes the key
decisions on design and construction of the asset; it decides how it is operated and maintained in order to
provide the service required by the purchaser
This suggests and operating lease
4. Who bears the demand risk?
Demand for services provided by the asset might be greater or less than expected. Assume the corporation
income is affected by the demand for the asset, such that government or other customers only pay for the
amount of service consumed
This suggests an operating lease
5. Are there any third part revenues?
Assume the corporation uses the asset to provide services to customers other than just government, and the
government is not exposed to the variability of third party demand, and these revenues are significant part
of the total income from the asset
6. Does government pay less if the quality of service is not good enough?
Assume government payments are reduced when the service provided by the corporation is not up the
required standard, even if this is because of problems with asset rather than how it is operated
7. Does government pay more if the corporation costs increase?
Assume government does pay more if there is an increase in the corporation costs related to the asset. For
example the corporation might have to undertake more maintenance than expected
This suggests a finance lease
8. Who bears the residual value risk?
Assume government has the option, at the end of the contract, to buy the asset at the current market price,
and that it is not bound to buy the asset at a pre-agreed price if it does not need it nor if the asset is not in
good condition
period, annual payments should be subdivided into repayments of principal and interest
payments related to the imputed loan. Interest payments have an impact on government
net lending/borrowing.
Risks/rewards of ownership should be assessed according to the factors presented in

Table 3.
In a contract, not all the characteristics have to point to the same assessment of the con-
tract, but some may lead to classify it as financial lease and some others may lead to consider
it as an operating lease. In this situation, the relative importance of each characteristic of the
project must be balanced. In order to avoid confusion regarding risks evaluation, Eurostat
issued 11 February 2004 News Release no. 18/2004 (which has been added to the ESA
95 Manual), making clear the treatment of PFI impact on government deficit (net borrow-
ing)/surplus (net lending) and debt. This news release states that Eurostat decision applies
to contracts in which government is the main buyer of services provided by a private entity
and the demand comes directly from the government or from other users (as for example,
in medical and education services or some transport infrastructures). An important feature
of these contracts is that they usually require the production of several assets. These assets,
on the one hand, are specifically designed for the provision of the service, and on the other
hand, they need an initial capital outlay. The key issue is the beforehand classification of the
assets involved in the PFI contract: either as government assets or recorded in the private
partner balance sheet.
Eurostat considers the assets involved in a PFI as non-government assets only if there
is strong evidence that the partner is bearing most of the risk attached to the specific PFI.
Therefore, the analysis of the risks borne by the contractual parties is the core element
for the assessment of a PFI project, as far as the classification of the assets involved in
the contract is concerned. This analysis, therefore, is essential to ensure the appropriate
accounting treatment of PFI impact on the government deficit. However, this assessment
does not consider risks not closely related to the asset and that can be fully separated from
the main contract. This the case when part of the contract might be periodically renegotiated,
and subject to performance and penalty payments that do not significantly depend on the
condition of the main assets. Many risks may be observed in practice in such arrangements.
Eurostat has selected three main categories of “generic” risks. Therefore, “bearing a risk”
for one party means that this party bears the majority of the risk.
A first category is “construction risk”, covering notably events like late delivery, failure to
keep specified standards, additional costs, technical deficiency and external negative effects.
Government’s obligation to start making regular payments to a partner without taking into
account the effective condition of the assets would be evidence that government bears the
majority of the construction risks.
A second category is “availability risk”, where the responsibility of the partner is quite
clear. It may not be in a position to deliver the volume that was contractually agreed or to
meet safety or public certification standards relating to the provision of services to final
users, as specified in the contract. It also applies where the partner does not meet the
required quality standards relating to the delivery of the service, as stated in the contract,
and resulting from an evident lack of “performance” of the partner. Government will be
assumed not to bear such risk if it is entitled to reduce significantly (as a kind of penalty)
its periodic payments, like any “normal customer” would require in a commercial contract.
Government payments must depend on the effective degree of availability supplied by the
partner during a given period of time. Application of the penalties where the partner is
defaulting on its service obligations should be automatic, should also have a significant
effect on the partner’s revenue/profit and must not be purely “cosmetic” or symbolic.
A third category is “demand risk”, covering variability of demand (higher/lower than
expected when the contract was signed) irrespective of the performance of the private
partner. This risk should only cover a shift of demand not resulting from inadequate or low
quality of the services provided by the partner or any action changing the quantity/quality
of services provided. To the contrary, it should result from other factors, such as business
cycle, new market trends, direct competition or technological obsolescence. Government
will be assumed to bear the risk where it is obliged to ensure a given level of payment to the
partner regardless of the effective level of demand by the final user. This makes irrelevant the
impact of fluctuations in demand level on the partner’s profitability. However, this statement
does not apply where the shift in demand results from an obvious government action, such
as decisions of units of general government (and thus not just the unit(s) directly involved
in the contract) that represent a significant policy change, or the development of directly
competing infrastructure built under government mandate.
Eurostat recommends that assets involved in PFI should be classified as non-government
assets, and therefore recorded off-balance sheet for government, if both of the following
conditions are met:
1. The private partner bears the construction risk.

2. The private partner bears at least one of either availability or demand risk.
If the construction risk is borne by government or if the private partner bears only the
construction risk and no other risks, the assets are classified as government assets. This has
important consequences for government finances, both for deficit and debt. The initial capital
expenditure related to the assets will be recorded as government fixed capital formation,
with a negative impact on government deficit/surplus. As a counterpart of this government
expenditure, government debt will increase in the form of an “imputed loan” from the
partner, which is part of the “Maastricht debt” concept. The regular payments made by
government to the partner will have an impact on government deficit/surplus only for the
part relating to purchases of services and “imputed interest”.
Finally, we must bear in mind that the concept of “private” entity must be interpreted
as opposed to the limits of the government. Therefore, it includes public, public–private or
private companies providing services to the government on a market basis (Jones, 2000).
All mentioned above supports the idea of real transfer of demand and availability risks
for the “not-consolidation” of this kind of operations in the “Public Administration” sector,
discarding models of fixed and unconditional payments as those of some projects developed
by the government.
Furthermore, special attention is paid to the construction risk. This makes clear the strong
need for two elements as a previous stage before the definition of the contract or before
its bidding. On the one hand, the definition of investment costs before establishing the
conditions of the provision of services. On the other hand, a thorough financial planning of
flows the operation will generate.
Provided that in the Spanish case the Government has assumed the majority of the
contractual risks, we can conclude that, once again, the aim was to defer the reporting of
deficit and debt. This deferral is no longer possible in the light of the last Eurostat guidance,
and was a clear example of “creative accounting”.
Renda and Schrefler (2006, p. 1) state that in the case of Spain the legislation spells out
that the State always maintains responsibility in contracts involving the public party. As a
result, when a PPP turned out to be more expensive than what had been calculated ex ante,
the government was expected to fund the project and ensure its viability.
Something similar has happened in Ireland, where Eurostat indicated that early PPP
projects involved insufficient risk transfer to the private partner, and that investment in
these projects would be classified as public investment. Until 2005, all PPP investment in
Ireland had been treated in this way (International Monetary Fund, 2004).
6. Concluding remarks
When PFIs described in this paper are used, it is the Government – and therefore taxpayers
– but not users, who finally pay the public works. A common characteristic of PFI is
that private corporations construct and they (where appropriate) also operate the public
work. Business revenues come either from official aids or from periodical payments for
construction, maintenance and operation of infrastructures, the amount of which are linked
to its actual use.
Deferral of payments and instalment plans, as well as borrowing decentralization, have
made possible for Spanish Public Administrations, as well as other European governments,
to bid and contract new public works while fitting EMU requirements without a dramatic
reduction in public investment. However, PFI implementation has just been, at bottom, a
financial make-up. In other words, it has been a clear example of public sector “creative
accounting”. As Hart (2003) points out, policy makers argue that PPPs are good because
the private sector is a cheaper source of financing than the public sector. This reasoning is
strange since it is hard to imagine an agent that is more able to borrow than the Government
through its taxation powers.
It is important to say, according to PWC (2005), that all these PFIs are, in gen-
eral, more expensive than traditional debt operations. As Hurst and Reeves (2004) show,
PPPs implemented in Ireland have not resulted in significant innovations, failing to pro-
vide value for money. PFIs are more complex operations and difficult to analyse, and
sometimes they are extremely sophisticated from a legal perspective. However, we must
bear in mind that governments must keep on investing on social centres, road infras-
tructures, water-treatment plants, etc., and therefore the first point must be whether the
investment is feasible from a traditional budgetary point of view. In case it is not viable,
other alternatives will be considered (price subsidies, refundable advances, syndicated
loans, subsidiary loans, exceptional financial aids, among others). These alternatives
should have the appropriate budgetary surveillance, so as to accurately control the vol-
ume of operations the government is able to finance. In the same way that limits upon
future expenses prevent current politicians from imposing excessive financial burdens to
future politicians, PFI use should be justified from a budgetary and economic point of
view.
The theoretical underpinnings of our assessment of PFI is twofold. On the one hand,
according to the property rights theory, a key aspect in PFI is the appropriate risk sharing
between private and public sector in the contract. If adequate risk is not shifted to the
private sector, then projects become quasi public, but with the funding removed from the
government’s balance sheet. If this is the case, projects become more expensive in the
long run, while politicians have been able to present a “good” financial situation in the
short run. On the other hand, if we take into account the Public Choice theory, as we said
before, taxpayers overestimate benefits of current expenditures and underestimate future

tax burden. Thus, PFIs allow incumbents to create infrastructures, with an eye on winning
the next elections. However, the sad part of the story is that these PFIs are more expensive
in the long run than them being financed through the traditional contracts.
In the search for imaginative solutions, we would like to comment on a recent and interest-
ing practice used by the Austrian Government, that could be used by other European public
entities. The government establishes a new real estate company (Bundesimmobilienge-
sellschaft, BIG), which is 100% owned by the federal State. Most of the public buildings
(schools, universities, offices, etc.) have been transferred to this company for its manage-
ment and maintenance. BIG has financed this transfer by issuing securities and contracting
loans. Most of the buildings transferred to BIG are subsequently rented back to the gov-
ernment units which previously occupied these buildings, by individual contracts based
on market estimates. The BIG continues to employ all State civil servants who previously
managed the maintenance of these buildings. Their civil servant status has been maintained.
As far as government accounts are concerned, this transfer has raised three questions:
(i) whether BIG is an institutional unit in its own right or an ancillary unit of general
government, (ii) whether BIG had to be classified in the sector ‘general government’ or
in the sector ‘non-financial corporations’, and (iii) whether the property transfer from the
government to BIG should be considered as a ‘sale of property’ (improving the deficit) or
as ‘other volume changes in financial assets/changes in classification and structure’ (neutral
for the measurement of deficit).
Eurostat decision is as follows in this respect (see Eurostat 31 January 2002 News
Release no. 15/2002): BIG is an institutional unit in its own right, should be classified
in the non-financial corporations sector, and BIG debt is not to be considered as part of
government debt. Besides, the purpose of the transfer is to improve public management
of real estate by rationalisation of buildings use, as well as management costs reduction.
Moreover, because of the size of the transaction, it was not possible to organise a normal
market sale of the property on the Austrian market. In addition, Austrian State wanted to
maintain indirectly the ownership of the transferred property via the State owned company.
For these reasons, the transfer of property was arranged bilaterally between the Austrian
State and BIG. Considering these aspects, this transfer should not be treated as a market
sale of real estate property in the sense of ESA 95. In consequence, the assets transfer to
BIG has no impact on government deficit/surplus.
To sum up, PPPs are not a miracle solution and need long time to produce visible results.
Governments should allocate the risk to the party that is the “least cost avoider”, i.e., the
party best suited to control and/or bear the risk. Without this approach, the public sector
runs the risk of using PPPs for the wrong reasons, for example to make up public accounts
in the short-term while worsening the long-term financial sustainability.
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Critical Perspectives on Accounting 19 (2008) 963–986

An example of creative accounting in public

46022 Valencia, Spain

Keywords: Public sector; Creative accounting; Infrastructures; PFI

E-mail addresses: benitobl@um.es (B. Benito), vicente.montesinos@uv.es (V. Montesinos),

3. Public works’ funding through public–private partnership

4. Opportunities for using new ﬁnancing methods of public works

• Plenty of available private savings.

istrador de Infraestructura Ferroviaria, ADIF), which started working on 1 January 2005.

5. Different forms of private ﬁnancing of infrastructures and their implications

convergence criteria (this is a patent example of “creative accounting”). That is to say,

5.2. Constitution of public corporations and/or public entities

1. All securitisation of fiscal claims by government should be treated as government bor-

5.3. The “shadow toll” method

• Case a. Government requires a corporation to build a prison according to the government’s

Risks/rewards of ownership should be assessed according to the factors presented in

1. The private partner bears the construction risk.

before, taxpayers overestimate benefits of current expenditures and underestimate future

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