Public‐Private Partnerships: Form Over Substance?

Public-private partnerships have been devised to avoid treating financing arrangements as government "debt". Governments face incentives to avoid treating these arrangements as giving rise to liabilities. Both the Australian and UK standards boards have avoided a "substance over form" approach in order to accept that PPPs may be kept off-balance-sheet. The analysis supporting their conclusions was based on consideration of whether PPPs led to the acquisition of an asset, using the analogy of accounting for finance leases, rather than addressing whether the substance of commercial arrangements means that contractual commitments may evolve into liabilities.     

Risk Management in Public–Private Partnerships

This study investigates the risk management in long‐term concession contracts known as public–private partnerships (PPPs). The M4 is the first Australian PPP road concession to reach the end of its concession cycle. It provides a unique and timely opportunity to examine the risk management process over its contract term and the efficacy of PPP contractual structures in managing uncertainties. Our specific research interests focus on two questions. First, what risk management approach was implemented? Second, has the risk‐allocation strategy defined in the contract facilitated or hindered the risk management process? The findings of the study suggest that under the incomplete contract approach, the risk management practices rooted in a strong contractual framework, allied with good relationship skills, has contributed to a positive outcome for the M4 PPP. The study provides generalisable insights into risk management in inter‐organisational long‐term contracts.     

The Effect of “Private” and “Public” Risks on Oilfield Asset Pricing: Empirical Insights into the Georgetown Real Option Debate

The Spring 2005 issue of this journal featured a “debate” over the best way of applying real options. In “Real Options Analysis: Where Are the Emperor's Clothes?,” Adam B orison criticized most practices that go under the name real options and recommended an “integrated” approach that combines real options techniques with a traditional approach known as “decision tree analysis.” This approach breaks valuation problems into two components—“market” risks (say, oil price changes) and “private” risks (the possibility that actual reserves fall well short of estimated) — and then uses option pricing models to evaluate the market risks and decision trees for the private risks. In response to Borison's article, Tom Copeland and Vladimir Antikarov argued that these two components can be evaluated in a single analysis that uses both DCF (to calculate the value of the “underlying asset”) and Monte Carlo simulation (to estimate the volatility of the underlying), thereby expanding the range of real options applications. In this article, the authors attempt to shed light on this debate with the findings of their extensive empirical analysis of U.K. oilfield expansion options. The bottom line of their study is that size matters in the context of oilfields, presumably because it offers a reliable guide to the kind and size of risks associated with the project. In the case of the larger oilfields, where market risks are likely to outweigh the private risks, the author's findings suggest that both approaches are reasonably effective and provide roughly the same degree of accuracy. In the case of smaller fields, however, where private risks are proportionally larger, the authors conclude that Borison's approach is likely to be more reliable.     

Skinner's “Interpretation Panel”— A Means to Balance “Power”

The rules versus principles debate and the vital importance of context ‐ the circumstances‐specific nature of judgment ‐ are at the heart of Ross Skinner's suggestion for an “interpretation panel". International considerations and developments involving governance and regulation have created imbalances in power, expertise, and impartiality, increasing the importance of and need for such a panel. This analysis considers the nature of the problem, how professional judgment has been characterized, and why a panel would be appropriate to address, among other concerns, the audit committee's dilemma when accounting disputes arise. Evidence is provided that management turnover is higher in cases involving multiple restatements, governance problems, or regulators' sanctions. Although, intuitively, management turnover is likely to be associated with widely publicized restatements, some patterns suggest that it is a function of entity size, scope of management changes considered, and the manner in which the restatement was identified. Specifically, an identifiable source of discovery, as well as external involvement, is associated with a greater propensity for management change. In contrast, restatements linked to changes in available guidance from regulators are less likely to result in such turnover. One implication is that effective control design and monitoring to facilitate internal discovery of errors can decrease the likelihood of multiple restatements and reduce fault finding that leads to management change. The judgmental nature of restatements suggests that an infrastructure supporting “right‐mindedness” does have merit. An interpretation panel would increase the feasibility of principles‐based standards, facilitating timely resolution of accounting‐associated disputes and thereby enhancing the information environment underlying the allocation of capital.     

How Banks Price Loans to Public‐Private Partnerships: Evidence from the European Markets

This article presents the findings of a recent analysis of the drivers of credit spreads in project finance loans to public‐private partnerships, or PPPs, an increasingly popular form of procurement worldwide. PPPs are project finance transactions in which project output is a function of government policy in fields such as health, transport, and education. Because of the controversy that now surrounds the use of private finance in PPPs, understanding the determinants of the cost of debt in such highly leveraged projects is of interest to policy makers as well as originators and participants in the transactions. Using a large sample of credit spreads on debt extended to PPP projects in Europe over the past 15 years, the authors' study reports that market risk is the only significant driver of PPP debt credit spreads in a large portfolio of PPP debt; at the same time, technical risks appear to be diversified “away” by the structuring of the projects. Most important, and contrary to standard debt pricing models, factors like loan size, maturity, and leverage do not show up as significant determinants of the cost of debt in PPPs, reflecting a high degree of confidence by lenders that loans will be repaid or recovered. These results support the view that the use of project finance in PPPs is premised on effective risk management as well as confidence in the private sector's ability to manage public projects.     

Global Public‐Private Investment Partnerships: A Financing Innovation with Positive Social Impact

Global bond markets, along with banks and governments, are the main source of funding for investment in environmentally friendly infrastructure and the transition to clean energy. Although such bonds are a relatively recent innovation, the green bond market has grown rapidly from its start in 2008 to around $800 billion in outstanding issues. The problem, however, is that green bonds, which represent less than 1% of global bond markets, have been issued disproportionately by government‐sponsored entities, corporations, and municipalities in developed markets. In the emerging market countries where the infrastructure investments are most needed, they barely exist. The authors describe a new investment vehicle, called the AP EGO fund, whose mission and MO are to channel the vast global pools of institutional savings that are now invested in low or (even negative) yield fixed‐income assets—as much as $17 trillion in 2019—to higher‐return emerging markets green investments, in particular sustainable infrastructure, by creating a new asset class: emerging‐market green bonds issued by banks. The AP EGO fund is premised on and involves a reworking of the public‐private partnership (PPP) into a form they call the global public‐private investment partnership (or GPPIP). Unlike the PPP, which combines a public agency with a private operator, the GPPIP has four instead of just two partners. In addition to the standard public agency and the private concession operator, there is a development bank—in this case the International Finance Corporation (IFC), which is the financial markets affiliate of the World Bank—and private investors that include emerging‐market banks as well as global institutional investors. Along with the mediating role played by a public agency like the IFC, the AP EGO Fund is fundamentally different from other PPPs in that it takes the form of a special purpose securitization vehicle whose shares are backed by a pool of green bonds issued by emerging market banks in multiple emerging market countries. And besides its application to a new asset class, the fund also breaks new ground by applying a securitization technique with a fund structure designed with an embedded “first‐loss” protection to a global pool of green bonds originated in emerging market economies. By means of this structuring, the green‐bond‐backed fund shares issued by the AP EGO are now providing developed market institutional investors with somewhat higher‐yielding fixed income securities that nevertheless carry an investment‐grade rating.     

Management Controls in Public–Private Partnerships: An Analytical Framework

Drawing on transaction cost economics and organisational theory, this paper proposes a framework to analyse management controls in Public–Private Partnerships (PPPs). The paper contributes to the related literature at a conceptual level by showing how three control archetypes, namely market, bureaucratic and clan, in conjunction with two control strategies, namely performance evaluation and trust‐based strategies, could be used by public partners to minimise relational and performance risk, thereby achieving value for money. Practitioners could also use the linkages identified in this paper to develop management control systems for PPPs.     

The Effects of Monetary Policy “News” and “Surprises”

There is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks. The shocks that are investigated, however, almost exclusively represent unanticipated changes in policy, which surprise the private sector and which are typically found to have a delayed and sluggish effect on output. In this paper, we estimate a New Keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks. The paper shows that the conventional estimates confound two distinct effects on output: an effect due to unanticipated or “surprise” shocks, which is smaller and more short‐lived than the response usually obtained in the literature, and a large, delayed, and persistent effect due to anticipated policy shocks or “news.” News shocks play a larger role in influencing the business cycle than unanticipated policy shocks, although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited.     

Disclosure “Bunching”

This paper studies managers' preferences among information acquisition and disclosure policies when their firms are required to engage in “real‐time” or “continuous” financial reporting. The paper predicts that for many, but not all, processes describing the distribution of their firms' cash flows, when subject to such reporting requirements, managers will engage in disclosure “bunching,” that is, they will bunch the discretionary component of the information they acquire and disclose into a single point in time rather than spread the acquisition and disclosure of that information over time. We show that managers' preferred bunching period depends on managers' strategy for trading in their firms' shares, managers' risk aversion, the risk premium the capital market attaches to firms' shares, and the size of managers' initial ownership stakes in their firms. We also study and characterize how the equilibrium prices of firms' shares vary over time and also how managers' optimal trading strategies vary with their most preferred “bunching” strategies. Several extensions confirm the robustness of the optimality of disclosure “bunching.”     

From Accounting to “Forecounting”*

Using Ross Skinner's 1995 CA Magazine article, “Judgment in Jeopardy", as a stepping stone, we revisit the meaning of professional judgment in accounting in light of developments in standard setting, financial markets, and business operations that have taken place over the past two decades. We argue that it is time to change the view that accountants' professional judgment is the application of accounting‐based knowledge and experience in the selection of an appropriate accounting method. Accountants now face a standard‐setting context that emphasizes the estimation of future cash flows as well as new business and financial realities. This context implies that, in exercising their professional judgment to choose between forecast alternatives, accountants must rely on knowledge and experience from other disciplines (even though this is not well integrated into accounting). Hence, accounting must evolve from its traditional stewardship role to the new role of “forecount‐ing” (the estimation of future cash flows). The implications as well as the challenges of that evolution are discussed.