Theoretical framework on Public Private Partnership and Service Concession Arrangement, before and after



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Theoretical framework on Public Private Partnership and Service Concession Arrangement, before and after IFRIC 12 adoption.



Research trajectories, lines and dynamic development.”
( Braja E.M.*, Campra M.**, Esposito P.***, Ricci P.****)

-
Abstract


The present paper aims:

  1. to achieve a consistent systematization of business and economic literature on Public Private Partnerships (PPPs) and Service Concession Arrangements (SCAs), in favour of the implementation and management of public assets granted to contractual entities (Foldvary, 1994, 2010), falling within the discipline of IFRIC 12, before and after its adoption by scholars from different countries;



  1. to analyze and systematize the clarification provided by IFRIC 12 (Laghi, 2010; Campra, 2012: 2675), in relation to service concession for concession operators providing a public service or public work, especially in Italy, by means of a “literature survey " also evaluating the bibliometric analysis from other studies (Capellaro, Cuccurullo, Marsilio, 2009, 2011).



  1. to determine to what extent IFRIC 12 helped to improve the order and to simplify the conceptual vagueness and chaos of definitions applying to the different forms of PPPs and SCAs. How much evidence does currently exist in the literature subsequent to the introduction of IFRIC 12. Will the analysis of the selected case studies proposed in this paper be able to get an answer to this question.

IFRIC 12 gives guidance on the accounting by operators for Service Concession Arrangements (SCAs) between a public body and a private company, it does not specify the accounting by grantors, and provides for the concession assets, once verified some objective and subjective conditions (Laghi, 2010: 127), an alternative way to recognize them. In fact, infrastructure within the scope of this Interpretation shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. Infrastructure shall not be recognized as material activity (highways, water supply, etc.), but as a right to charge users (intangible asset); or a right to receive consideration from the grantor for utilities paid (financial assets); or a mixed method, forked method (Campra, 2011). The proposed systematization of business literature, even in the presence of a weak and not systemic defense of the doctrine on the subject, would make it possible:

  1. to highlight in a systematic manner the weaknesses linked to the application of contractual PPPs and SCAs in Italy, detected by different scholars with regard to the adoption of IFRIC 12;



  1. to provide a starting point for future researches, identifying elements that are capable to predict crisis or scandal (Di Pietra, McLeay, Ronen, 2010; Di Pietra, Gebhardt, McLeay, Ronen, 2012), even through subsequent international comparisons by scholars from different countries (stone, 2000, 2002; Ronen, 2008; Dean, Gebhardt, 2008).

Keywords: Public Private Partnership (PPP), Service Concession Agreement (SCA), public services, regulation, concession, IFRIC 12.

_________

(*) Assistant Professor in Business Administration - University of Piemonte Orientale “Avogadro”. E-Mail.: eugenio.braja@eco.unipmn.it

(**) Full Professor in Business Administration - University of Piemonte Orientale “Avogadro”. E-Mail.: maura.campra@eco.unipmn.it

(***)Ph. D., Research Fellow in Business Administration – University of Piemonte Orientale “Avogadro”. E-Mail.: paolo.esposito@eco.unipmn.it. Corresponding Author.

(****) Full Professor in Public Management and Governance – University of Sannio. E-Mail.: ricci@unisannio.it.

Introduction

The present paper aims:



  1. to achieve a consistent systematization of business and economic literature on Public Private Partnerships (PPPs) and Service Concession Arrangements (SCAs), in favour of the implementation and management of public assets granted to contractual entities (Foldvary, 1994, 2010), falling within the discipline of IFRIC 12, before and after its adoption by scholars from different countries;



  1. to analyze and systematize the clarification provided by IFRIC 12 (Laghi, 2010; Campra, 2012: 2675), in relation to service concession for concession operators providing a public service or public work, especially in Italy, by means of a “literature survey " also evaluating the bibliometric analysis from other studies (Capellaro, Cuccurullo, Marsilio, 2009, 2011).



  1. to determine to what extent IFRIC 12 helped to improve the order and to simplify the conceptual vagueness and chaos of definitions applying to the different forms of PPPs and SCAs. How much evidence does currently exist in the literature subsequent to the introduction of IFRIC 12. Will the analysis of the selected case studies proposed in this paper be able to get an answer to this question.

The accounting treatment to be applied to "Service Concession Arrangements" (SCA), under IFRIC 12, represents one of the most significant and emblematic cases where the principle of the prevalence of substance over form prevails (Meyer, 1976; Shere, 1986; Adwinckle, 1987, Di Pietra, 2010), as to highlight "typical light and shade" of a principle which is the basis of IAS/IFRS accounting model (Laghi, Giornetti, 2009; Laghi, 2010).

IFRIC 12 gives guidance on the accounting by operators for Service Concession Arrangements (SCAs) between a public sector body and a private sector entity, it does not specify the accounting by grantors, and provides for the concession assets, once verified some objective and subjective conditions (Laghi, 2010: 127), an alternative way to recognize them. In fact, infrastructure within the scope of this Interpretation shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. Infrastructure shall not be recognized as material activity (highways, water supply, etc.), but as a right to charge users (intangible asset); or a right to receive consideration from the grantor for utilities paid (financial assets); or a mixed method, forked method (Campra, 2011). The proposed systematization of business literature, even in the presence of a weak and not systemic defense of the doctrine on the subject, would make it possible:



    1. to highlight in a systematic manner the weaknesses linked to the application of contractual PPPs and SCAs in Italy, detected by different scholars with regard to the adoption of IFRIC 12;



    1. to provide a starting point for future researches, identifying elements that are capable to predict crisis or scandal (Di Pietra, McLeay, Ronen, 2010; Di Pietra, Gebhardt, McLeay, Ronen, 2012), even through subsequent international comparisons by scholars from different countries (stone, 2000, 2002; Ronen, 2008; Dean, Gebhardt, 2008).

SECTION I

Research objective
The objective of the present paper is to analyze the impact and the scope of IFRIC 12 's innovative discipline on accounting , in reference to PPP, and in particular with regard to service concessions for concession operators offering public service or public works in Italy, through an organic systematization of the business literature on the topic (Laghi, 2010; Campra, 2012: 2675). The work is divided into four main sections. The first section describes the relevance of the research theme, its practical implications, the historical reconstruction and the regulatory framework referring to PPP in Italy. The second section is divided into two parts. The first part, highlights the phenomenological trend in Italian PPPs; the second part proposes a classification of literature on PPPs and the SCA (literature survey), before and after the adoption of IFRIC 12. The third section, considers the study that aims at locating an atypical case within the panel of listed Italian companies adopting IFRIC 12, revealing pathological and discursive aspects in the application of IFRIC 12 and identifying forms of PPP that are, substantially, public. IFRIC 12, provides a set of guidelines on accounting by concessionaires for Service Concession Arrangements (SCA) between public authorities and private companies, it does not deal with the accounting by the grantor, and provides for the concession assets, once verified some objective and subjective conditions (Laghi, 2010: 127), an alternative way to recognize them. In fact, infrastructure within the scope of this Interpretation shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. Infrastructure shall not be recognized as material activity (highways, water supply, etc.), but as a right to charge users (intangible asset); or a right to receive consideration from the grantor for utilities paid (financial assets); or a mixed method, forked method (Campra, 2011). The fourth section describe the business model of the listed companies under the IFRIC 12 adoption., describing a pilote case, the FNM Nord Spa.

The proposed systematization of business literature, even in the presence of a weak and not systemic defense of the doctrine on the subject, would make it possible:



  1. to provide a systematization of economic literature on the complex and multi-faceted discipline of Public Private Partnership (PPP) and Service Concession Arrangements (SCA), falling within the interpretation of IFRIC 12;



  1. to highlight in a systematic manner the various problems of interpretation, legislation, regulation and application of the different types and different models of Public Private Partnership (PPP) and Service Concession Agreements (SCA), before and after the application of the interpretations offered by IFRIC 12;



  1. to offer subsequent international comparisons by scholars from different countries.


Methodology
The research methodology is both theoretical and empirical

  • Theoretical framework of Service Concession Agreements and its evolutionary path in the Italian, European and international context. Review of literature;

    • Significant analysis of literature through a survey process according to the different applications of IFRIC 12 and the interpretive positions by various organizations (World Bank, Oecd, the IASB, EFRAG, Eurostat, OIC, AVLP, Court of Auditors);

  • Analysis of development applicative models based on differentiating variables, highlighted by the empirical analysis (case method. Triangulation: sources, methods, results);

  • Case studies (Yin, 1984, 1995), "testing", new areas of investigation.

The selected case studies, have in the first case, an atypical nature, representing an anomaly for survey and accounting treatment models of IFRIC 12 (financial model); in the second case, a typical scenery, a listed company which is representative of the whole sample of reference in the panel of analyzed and classified Italian listed companies. The first case study, is characterized by being held in a majority of capital shares by the same public body which is the grantor of functional privatization (grant) for the realization of interests and works of public interest and utility. The control upon the concessionaire is held by the grantor that corresponds to the majority shareholder of the concessionaire providing public assets or services. The selected methodological support provides an answer to the following questions: does IFRIC 12 apply in the case the private entity is essentially a public body and coincident with the grantor? Would it be a public-private partnership or, would it be appropriate to consider Public Public Partnership? And does IFRIC 12 apply?
Theoretical/deductive (Yin, 1984, 1995): systematization of theories by means of an empirical verification of the evolution of the selected business models, up to an outline of future potential circumstances. Critical reflection and proposals.


Research questions (RQs)
In Italy, the development of the business literature on IFRIC 12, is being merely guaranteed by some authoritative scholars in addition to a large and growing group of professionals (Campra, 2005, 2012; Laghi, 2009: 26; Giussani, 2009: 180; Delladio, Gaiani, Meneghetti, Pozzoli, 2011: 168; Giovando, 2012: 200; Rotondaro, Zambon, 2010: 2010; Leo, 2011: 164; Brescia, Muraca, 2011: 381; Cordazzo, 2008: 40), despite the strategic importance and interest expressed by international literature. Shown below are the research questions to which we will try to provide an examination in the next few paragraphs:
- Is it unclear the overview on business models and on the accounting treatment of concession services linked to PPP? If Yes, why?
- Is the theoretical approach by Italian scholars, on service concession, different from the theoretical approach by scholars from other countries? If Yes, why?

- Do literature-identified cases find a response in the empirical evidence offered by the selected case studies?


- Do publicly-owned concession companies corresponding to the grantor of functional privatization, represent further forms of PPP?

After having identified the different approaches to the research theme, we will develop evolutionary profiles and any emerging experiential practice raised in literature.

Considerations, critical reflections and proactive analysis are aimed to investigate a tenuous and weak presence of Italian corporate economic doctrine within the complex and multiform rules concerning Private Public Partnership (PPP) arrangements and concession services (SCA) falling within the application discipline offered by IFRIC 12, in spite of the robust and growing interest by scholars of international law and economists, particularly by scholars of public management in the international business economic doctrine. The systemization of literature, will detect the emerging practices in the business economic doctrine, in order to verify, in a context of growing scarcity of financial resources, the identification of new business models supporting public decision-makers in an increasingly complex financial framework, in an effort to combine the pursuit of economic balance under the respect of rules, needs and rights.

This systematization can be regarded as a starting point to develop new lines and future research on PPPs and SCAs falling within the application of IFRIC12, through international comparisons, analyzing business models and specific mostly.



PPP, PF, SCA and IFRIC 12.

The prevalence of the legal approach: a classification.

PPP ((Public Private Partnership)

The Public-Private Partnership (PPP) refers to contract forms, based on the cooperation between a public sector entity (grantor) and a private sector entity (operator) through which their respective expertise and resources are integrated in order to perform public works or services and related management services.

A PPP process- wholly or partly - embraces the following activities:

-design;

-funding;

-construction or renovation;

-management;

-maintenance.
SCA - Service Concession Arrangements
The absence of a precise definition of service concession both in national and EU legislation was filled by Community directives no. 17 and no. 18 of 2004. They both defined the service concession as "a contract that has the same characteristics of a public service contract, except for the fact that the consideration received or receivable by the operator providing public services solely consists in the right to operate the service or in this right together with payment.

Moreover, apart from the merits of defining the provision of services, the above mentioned directives exclude service concession within the Community framework. In fact, article 18 of Directive 17/2004 states that its rules do not apply to work and service concessions as well as article 17 of Directive 18/2004 provides that, without prejudice to the application of the provisions referred to article 3, this Directive shall not apply to service concessions. The above definition of service concession was drawn from the Public Contract Code (art. 3, c. 12), which also provides, at article 30 ("service concessions") the discipline of the institution for ordinary sectors and at article 216 ("work and service concessions")-containing a reference to article 30 – the discipline for special sectors.

This definition is based on the one referring to public procurement contract: a notion concerning the concession contract is not provided as considered necessary within the European Community. However the definition solves the thorny question concerning the delineation of service contract institution, in relation to the contiguous notion of service concession and similar figures, that have been engaging both internal and European doctrine and jurisprudence, for many years.
PPP from Giolitti to Law no. 142/90
The discipline concerning local public services in Italy, dates back to the early 1900, in harmony with the Giolitti law (Law No. 103 March 29, 1903) in Italy. This law, which allowed municipalities and provinces to hire and manage the services deemed essential to the local authorities, remained in force until the end of the 80s of the last century, and allowed local authorities to take from the market economy those goods and services aimed to satisfy collective needs. Municipal enterprises, were therefore public enterprises operating in a single production structure and acting within the territory reference framework.

This area was excluded from the intervention of the private sector entity, which could still get reference by the administration of a concession for the management of the service.

Municipal companies and concessions, however, were not the only way in which it was possible to manage a public service. The Giolitti law, in fact, allowed the local Government to directly manage the monopoly service. Besides providing the management of the public service on the part of the local authority, the law 103/1903 also provided a list of services to be defined as such, but did not specifically outline this notion. Through this list it was possible to identify essential services for the community, services that were to be returned to the authority. The Giolitti law remained into force until 1990, year in which the dismantling of State-owned companies began in order to ensure the free market wished by the European Union.
The Italian case:

complexity, regulatory confusion and statutory profiles.
Unlike the experience of other European countries, Italy regulatory efforts have focused on the procedural aspects of the PPP, with limited attention to other relevant segments, but especially with regard to the civil rules of the relationships between the various actors involved in these operations, this also gives explanation of the scarce number of projects and little finance in relation to PPPs (Bentivoglio, Panicara, Tidu, 2008, 2010).

The term public-private partnership (PPP) refers to all forms of cooperation between public sector and private sector aiming at the design, construction, financing, operation and maintenance of public works or utilities, or the supply of goods or the provision of services.


In our system, the first general discipline of PPP for the realization of public works was introduced by Law no. 415 in November 18, 1998, (the so-called Merloni-ter law), which included articles from 37-bis to 37-nonies in the framework law on public works (Law no. 109 February 11, 1994, the so-called Merloni law), then merged into the legislative decree no. 163 April 12, 2006, (the Public Contract Code: articles from 153 to 160).

These articles are divided into two groups, governing both logically and chronologically distinct phases: i) the first group, whose articles are mainly focused on recent reform measures, is aimed at the selection of the private contractor as well as at the commitment of the public works concession ; ii) the second group relates to the implementation of the contractual relationship between the public authority and the concessionaire and provides certain forms of guarantee in favour of the funding bodies.

With reference to the latter stage, the most relevant laws are related to: i) the possibility to succeed in the project company concession relationship potentially formed by the successful contractor; ii) the favour in respect of funding bodies, according to which the sums owed by the government to the concessionaire as compensation in the event of termination or withdrawal "are intended primarily to satisfy the claims of the concessionaire financers and are unavailable on the part of the concessionaire until full satisfaction of financers’ claims"; iii) the so-called step-in right ", which grants to funding bodies the chance to appoint a substitute in the event of termination of the concession relationship for reasons resulting from the concessionaire; iv) introduction of a conventional privilege to protect claims of those financing the realization of public works or public service management.
Despite the importance of these remedial provisions for the regulation of public works, since they removed the obstacles to successful use of PPP, interpreters and professionals have showed the insufficiency and inadequacy of these guiding principles. It is possible to consider, for example, the need to introduce) a dynamic step-right up, enabling the intervention of funding bodies before the concessionaire will be in a full-blown default situation; as well as ii) more detailed rules on privilege, which ensures the PPP project “locked-in”.
The contractual partnership is based, instead, on purely formal ties between public authorities and private entities for the commitment of the public work. In this context, one of the best known models is the concession model, which is characterized by the existence of a direct link between the private entity and the final user, providing a service to the community in place of and under the control of the public authority (Gallia, 2008).

This model is also characterized by a specific mode of private remuneration, since the operator’s consideration results from users of the public service (Vecchi, Amatucci, 2008, 2009).

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

- mainly public capital partnerships;

- mainly private capital partnerships;

- public-private partnership established according to the civil code;

-urban transformation partnership.

The main forms of contractual PPPs are:

- concession of construction or upgrade services and operation services;

- sponsorship;

- leasing (“leasing in costruendo”).
SECTION II
Trends and Theory

The network of strategic infrastructure under concession in Italy
The Public and Private Partnership (PPP) demand, on the basis of available data by the National Observatory of the Public-Private Partnership1, an information and monitoring system and alerts of concession contracts within the entire landscape of the PPP, the economic and financial crisis scenario, continued to grow in 2012, but the execution path becomes increasingly difficult.

Developing analysis, assistance and technical knowledge programs become a strategic variable in this difficult market period, to delineate the possible effectiveness and synergies that may allow the growing demand for public-private partnership to play a role as a driving force for the revival of the country.



In 2012, participation notices were 3,204 for a business volume of 8,682 million. Compared to 2011 there has been a growing demand compared to a sharp decline in economic value, that was sub sequential to the general crisis which made it difficult to find financial resources through funding even for private companies. Between 2011 and 2012 the number of competitions increased by 13.15% from 3,204 tenders to 2,832 notices, while the business volume decreased by 34.7%, from 13.3 billion euros of amounts devoted to competition to 8.7 billion euros. This remarkable decline resulted from the collapse, after an expansive period, of over 50 million large-scale works to be realized through PPP, decreasing by 39.7% in one year. Last year no exceptional amount work was realized, such as the two public work concessions, convened in the second half of 2011, for the strengthening and maintenance of the A22 Brennero-Modena motorway (3 billion euros) and for the construction of the Rome – Latin Intermodal Corridor and Cisterna-Valmontone connection (2.7 billion), in addition works exceeding 50 million significantly reduced, passing from 22 annual participation notices between 2010-2011 to 14 participation notices in 2012.
Chart 1. – The evolution of PPP 2002-2012




Source: (CRESME, 2013)

The PPP demand continued to grow in 2012, driven mainly by the municipalities and local stakeholders, but it became increasingly difficult to materialize, not surprisingly, things went even worse for the PPP works that were adjudicated: from 796 participation notices adjudicated in 2011 to 642 participation notices adjudicated in 2012 ( -19.3%) and from 8.3 billion euros to 3.8 ( -54%).



Chart 2. – The evolution of PPP contract awards 2002-2012



Source: (CRESME, 2013)

The dynamics in progress are also highlighted by the importance of PPP in the public work market, risen from 16.9% in 2011 to 19.8% in 2012 in terms of number of opportunities – the highest level recorded since the Centre was operational, i.e. since 2002 when it represented less than 1% of the opportunities – and from 43.3% to 36.2% for economic value.



Chart 3. PPP – percentage on OOPP 2002-2012




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