A service concession arrangement is a binding arrangement between a grantor and an operator in which:
- The operator uses the service concession asset to provide a public service on behalf of the grantor for a specified period of time; and
- The operator is compensated for its services over the period of the service concession arrangement.
There is no definition in IFRIC 12 but a characteristic included is as follows: a service concession: “typically involves a private sector entity (an operator) constructing the infrastructure used to provide the public service or upgrading it (for example, by increasing its capacity) and operating and maintaining it for a specified period of time. The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes”.
IFRIC 12 goes on to say (in IFRIC 12 3) that service concessions often include the following features:
- The procuring entity is normally a public sector body, or in some cases is an entity to which the responsibility for the function has been devolved.
- The operator is responsible for managing at least some of the assets and services i.e. it is not acting merely as an agent.
- The contract sets the initial price and the mechanism through which future prices are to be set or regulated.
- The operator is obliged to transfer the asset to the public sector body at the end of the contract, in a specified condition for little or no additional consideration.
The IFRIC’s avoidance of a strict definition of a service concession is a reflection of the great variety of forms that public-private arrangements can take in different countries around the world. By focusing instead on the typical features, a wide variety of schemes could fall within the scope of the IFRIC. Therefore, the decision as to whether a particular contractual arrangement is a service concession should be based on the substance of the transaction i.e. “does it feel like a service concession?”
Grantor – The entity that grants the right to use the service concession asset to the operator.
Operator – The entity that uses the service concession asset to provide public services subject to the grantor’s control of the asset.
Service concession asset – An asset used to provide public services in a service concession arrangement that:
- Is provided by the operator which:
- The operator constructs, develops, or acquires from a third party; or
- Is an existing asset of the operatory; or
- Is provided by the grantor which:
- Is an existing asset of the grantor; or
- Is an upgrade to an existing asset of the grantor.
The following types of arrangements are outside the scope of IAS 15:
- No public service is delivered
- The operator manages the public services as agent for the grantor (rather than as principal), and
- The service and management components of the contract relate to assets not controlled by the grantor.
Examples of service concession arrangements involve water treatment and supply facilities, motorways, car parks, tunnels, bridges, airports and telecommunication networks. Examples of arrangements that are not service concession arrangements include an enterprise outsourcing the operation of its internal services (such as an employee cafeteria, building maintenance, and accounting or information technology functions).
A government department enters into an arrangement with a private company to construct a toll road between an airport and a major city, and the private company is responsible for maintaining the road to a specified level, and collecting tolls for a period of 15 years after construction.
The government department is responsible for regulating the price of the tolls during the period of the arrangement, and the road must be transferred to the government department at the end of the arrangement.
In this case, the government department controls the asset because the agreement stipulates:
- The asset (road) that must be provided to the public
- The condition the road must be maintained to
- The price the toll operator can charge the public to access the road, and
- That the road will be transferred to the government department after 15 years, at the end of the arrangement.
See also: The IFRS Foundation