IFRIC 12: Service Concession Arrangements
IFRIC 12 Features of Service Concession Arrangements
The grantor is a public sector entity, including a governmental body, or a private sector entity to which the responsibility for the service has been devolved. • The operator is responsible for at least some of the management of the infrastructure and related services and does not merely act as an agent on behalf of the grantor. • The contract sets the initial prices to be levied by the operator and regulates price revisions over the period of the service arrangement. • The operator is obliged to hand over the infrastructure to the grantor in a speciﬁed condition at the end of the period of the arrangement, for little or no incremental consideration irrespective of which party initially ﬁnanced it.
Included in the scope of the IFRIC may include: • provision of transport services; • construction and operation of waste treatment plants; • provision of public airport services; • construction and maintenance of hospitals; • generation of renewable energy; • production of electricity; and • construction and operation of public transport systems, schools, prisons, etc.
For existence of a public service obligation, the services offered do not have to be made available to all members of the public. Instead, the services need to be available to beneﬁt members of the public. For example, prisons only accommodate those individuals required to be incarcerated by law, and cannot be accessed by members of the public seeking accommodation. However, prisons would still be considered to provide services to the public
The Interpretation applies to public-to-private service concession arrangements if:
(a) the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and (b) the grantor controls - through ownership, beneﬁcial entitlement or otherwise - any signiﬁcant residual interest in the infrastructure at the end of the term of the arrangement
Whether the grantor controls the price is important in evaluating whether the criterion in (a) is satisﬁed. The application guidance in IFRIC 12 states that “for the purpose of condition [IFRIC 12:5](a), the grantor does not need to have complete control of the price: it is sufﬁcient for the price to be regulated by the grantor, contract or regulator, for example by a capping mechanism.”
If the agreement requires review or approval of pricing by the grantor that would generally be sufﬁcient for the agreement to meet the IFRIC 12:5(a) requirement. Such reviews or approvals of pricing should not be disregarded unless there is sufﬁcient evidence supporting an assertion that a review or approval of pricing is non-substantive.
If an agreement contained a cap but the cap is set such that it would only ever take effect in very remote circumstances then the grantor would not be considered to have control over the price, e.g. stating in the contract that a road toll must not exceed CU1000, when the anticipated toll is CU2.
Such a price capping mechanism would generally be considered non-substantive and the arrangement would be outside the scope of IFRIC 12
Example: Concession with unregulated prices and congestion payment
Company A is granted a concession for the construction and operation of a toll road for 40 years. The price Company A is able to charge users is set by the grantor for years 1-3 of the arrangement. From the fourth year of operation of the toll road, Company A is able to charge users at a price it considers appropriate, based on its own strategy and business perspectives. However, the concession arrangement provides for a mechanism known as a “Congestion Payment” whereby Company A will pay certain amounts to the grantor if there is congestion (i.e., trafﬁc jams) in the use of the complementary public infrastructure (i.e., nearby roads).
The grantor exercises absolute control over the pricing for an insigniﬁcant period of time in the context of the service concession arrangement as a whole. The congestion payment mechanism would need to be analysed to determine if it is substantive. If this mechanism is included in the contract solely to avoid excessively high prices, it may not be substantive because the operator has the freedom to charge what it wants within a reasonable range. The only limitation is that the operator cannot charge a price the market would not bear and in doing so create congestion on other roads. If the mechanism is considered non-substantive, the arrangement would fall outside the scope of IFRIC 12
Significant Residual Interests
When considering whether a signiﬁcant residual interest exists for purposes of determining whether the criterion in IFRIC 12:5(b) is satisﬁed, the residual value should be estimated as the infrastructure's current value as if it was of the age and condition expected as at the end of the contract. An asset which will only be able to be sold for scrap value is unlikely to have a signiﬁcant residual value at the end of the contract. Conversely, a building with a 50 year useful life that is only used in a service concession arrangement for 20 years is likely to have a signiﬁcant residual value at the end of the arrangement. If a building with a signiﬁcant residual value is retained by the operator, the arrangement would be outside the scope of IFRIC 12.
IFRIC 12 does not address the circumstance in which the grantor provides an indemniﬁcation to the operator in respect of the residual value of the assets at the end of the arrangement. When such an indemniﬁcation is provided, the facts and circumstances relating to the arrangement will need to be analysed to determine whether the arrangement is within the scope of the Interpretation.
Under the terms of a service concession arrangement, an operator may be required to replace parts of an item of infrastructure, for example the top layer of a road or the roof of a building. In these types of arrangements, the item of infrastructure is considered as a whole for the purpose of determining whether the grantor controls any signiﬁcant residual interest. Thus, condition IFRIC 12:5(b) would be met for the whole of the infrastructure, including the part that is replaced, if the grantor controls any signiﬁcant residual interest in the ﬁnal replacement of that part.
Furthermore, an arrangement where the infrastructure is used for its entire useful life ('whole of life assets') would be within the scope of IFRIC 12 provided condition IFRIC 12:5(a) is met. This is the case irrespective of which party controls any remaining insigniﬁcant residual interest.
Infrastructure used in a concession arrangement for its entire useful life
The term of a concession arrangement for the construction and operation of a solar thermal plant is 30 years, which coincides with the estimated useful life of the plant. The fact that the infrastructure is not controlled by the grantor at the end of the concession arrangement does not automatically lead to a conclusion that the concession arrangement is outside the scope of IFRIC 12. When the term of a concession arrangement is equal to the useful life of the infrastructure, the arrangement is within the scope of IFRIC 12, provided that the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price
Indeﬁnite term of the concession arrangement
Certain arrangements allow the operator to renew the license arrangement indeﬁnitely without signiﬁcant costs. In those cases, a careful analysis of all the facts and circumstances is necessary in order to establish whether, at a point of possible renewal, there will be signiﬁcant residual interest.
Where there may be signiﬁcant residual interest in the infrastructure, it is necessary to determine who controls that residual interest. If the terms of the arrangement are such that the grantor controls the residual interest in the infrastructure if the operator chooses not to renew the license, the arrangement would fall within the scope of IFRIC 12. In contrast, if the grantor does not control the signiﬁcant residual interest in the infrastructure if the operator decides not to renew the arrangement, the arrangement would not meet the criterion in paragraph 5(b) and so would be excluded from the scope of IFRIC 12
Application of IFRIC 12 when residual interest is returned to grantor at fair value
An entity (the operator) has entered into a service concession arrangement in which it will construct a bridge and operate that bridge for 30 years. It cannot sell the bridge to a third party unless the government (the grantor) agrees to the sale. At the end of the arrangement, the grantor is required to repurchase the bridge for its fair value at the end of the term of the arrangement. The bridge has an estimated useful economic life of 50 years. Does the grantor control the residual interest in the infrastructure at the end of the term of the arrangement in accordance with IFRIC 12:5(b)?
Yes. IFRIC 12:5 states, in part, 'This Interpretation applies to public-to-private service concession arrangements if … the grantor controls - through ownership, beneﬁcial entitlement or otherwise - any signiﬁcant residual interest in the infrastructure at the end of the term of the arrangement.'
IFRIC 12:AG4 states, in part, 'For the purposes of condition (b) [of IFRIC 12:5 outlined above], the grantor's control over any signiﬁcant residual interest should both restrict the operator's practical ability to sell or pledge the infrastructure and give the grantor a continuing right of use throughout the period of the arrangement.' In this scenario, the operator would not be able readily to sell or pledge the infrastructure even though it may be able to sell or pledge its economic interest in the residual value of the infrastructure.
IFRIC 12 applies a control approach. Accordingly, the grantor has a continuing right of use of the infrastructure asset at the end of the term of the arrangement and therefore controls the use of the bridge throughout its economic life. This is the case even though the grantor has to pay fair value for the asset at the end of the term of the arrangement.
Would the grantor control the residual interest in the infrastructure at the end of the term of the arrangement if the grantor has the option to purchase the bridge (at an amount equal to its fair value) rather than an obligation to repurchase?
Yes. In the circumstances described, the condition in IFRIC 12:5(b) “together identify when the infrastructure ... is controlled by the grantor for the whole of its economic life” is met due to the existence of the purchase option at the end of the term of the arrangement; the grantor has the power to purchase the bridge or to allow the operator to retain it for its continued use and/or disposal.
Due to the existence of the purchase option held by the grantor, the operator is unable readily to sell or pledge the infrastructure even though it may be able to sell or pledge its economic interest in the residual value of the bridge.