EARLIER, in most countries, while public sector operators were responsible for construction, operation and maintenance of infrastructure, including toll highways, toll bridges, power plants, water supply plants, airports, sea ports, etc, such infrastructure was financed through public budget appropriation. Of late, in today’s expanding global economy, governments of several countries use a build-operate-transfer (BOT) model for the purpose. The BOT model allows private, foreign and national investors to finance, design, construct, upgrade and operate large-scale infrastructure and development projects. In return, the operator (a private sector company) is granted the right to generate revenues from the infrastructure facilities for a specified term or concession period. These revenues enable the company to recover its invested capital and also earn a fair return on investment during the concession period, which may range typically from 10 years to 40 years. At the end of this period, assets of the BOT project are transferred, in good condition, to the government or to the local authority which granted the concession (i.e., grantor). This arrangement is articulated in a contract which delineates performance standards, mechanisms for adjusting prices and provisions for arbitrating disputes.
In India, successful public-private participation arrangements are emerging and it is estimated that to sustain economic growth, investments of $350-500 billion would be required in the next five years. While these service arrangements may assume any variety of forms, participation by both the grantor and operator, accompanied by an initial large investment, raises questions over the assets and liabilities to be recognised by the operator. To facilitate this scenario, a reasonable framework of concessionaire agreements and specialised considerations for accounting and preparation of financial statements of these private sector entities should be prescribed.
Currently, from an Indian perspective, BOT assets are recognised as fixed assets and depreciated over the course of the BOT contract. This treatment does not fully exhibit the risks and rewards associated with the arrangement and also does not reflect the substance of the underlying arrangement rather than in form. For example, the operator neither holds a leasehold right to nor owns the asset; he constructs the asset in accordance to the grantor’s specifications and he also complies with the grantor’s operation and maintenance requirements for the asset. In addition, he should also comply with the terms for transfer of the assets at the end of the concessionaire period as specified by the grantor. In such a situation, how would the operator be justified in recognising these assets as his own?
Further, in most of the cases, the initial development takes place over a time frame of 3-7 years. At this stage, the operator continues to provide services by building the infrastructure; therefore what is the justification for not recognising the revenues during this period? One can observe that there are more risks and efforts involved during the development phase rather than the operations phase. But the present Indian Accounting Standards permit revenue recognition only during the operation phase, but not during the development phase.
Infrastructure, within this context, is not 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. The operator has the right to operate the infrastructure to provide service to the public, on behalf of the grantor, in accordance with the terms specified in the contract.
Internationally, the context for accounting for BOT projects has changed to one where the asset is recognised as a financial or intangible asset.
On November 30, 2006, the International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC Interpretation 12-Service Concession Arrangements. This Interpretation provides guidance on accounting by private sector operators involved in the provision of public sector infrastructure assets and services. With effect from January 1, 2008, the standard is to internationally recognise the BOT asset as a financial asset or an intangible asset.
Various factors, including globalisation, encourage the migration of accounting to a more singular and common platform in terms of rules and standards. In this context, it would be prudent for infrastructure companies based in India to recognise BOT assets as intangibles, on par with their international peers.
To do this, Indian companies need to be educated about the benefits of recognising the service concession as a financial or intangible asset, which include greater synthesis and congruence with international standards. A more accurate and insightful view into how the BOT asset is recognised on the books.
Accounting for service concession arrangements commences from the time of bidding for a service concession. Research indicates that accounting issues are present across each stage of the value chain; these issues include, and are not limited to
• Prior costs — bid costs, security deposits, consultant fees, etc.
• Construction and procurement of assets — recognition of intangible assets, recognition of financial assets, borrowing costs, special purpose entities, etc.
• Operations and maintenance — revenue recognition, exchange fluctuations, taxation, current and deferred income taxes, impact on credit rating by bank creditors, etc.
It is not only Indian companies who will have to be educated on the benefits of recognising service concessions as financial or intangible assets. Retail and institutional investors, financial services providers and the market as a whole must become aware of this new practice. Accounting firms will need t