16 September 2005
The rules of the much-debated Private Finance Initiative game are about to change. The Office for National Statistics is soon expected to start counting a new tranche of PFI deals against public sector net debt.
Under the ONS's changes, the debts taken on by PFI consortiums will be 'imputed' as government debt as, in effect, the government has made contractual guarantees that creditors will be repaid. This will affect only
'on-balance sheet' PFI deals – where the assets and liabilities are reported as capital expenditure in departmental accounts.
The Treasury appears unperturbed by the move, which it estimates will increase the PSND by just 1%.
Yet a less publicised challenge to Chancellor Gordon Brown's calculations has also been brewing. Forthcoming changes to international accountancy rules will see previously 'off-balance sheet' PFI deals moved on to the government's books, perhaps doubling the PSND increase.
The blow could damage the PFI's appeal, insofar as it enables departments and local authorities to get around the capital spending constraints imposed by the Treasury and cleared each year through Parliament.
Around 43% of PFI deals are off-balance sheet. Only the annual service charge is reported in departmental accounts, as accountants – following Treasury guidance – have deemed that the underlying assets and liabilities belong to the contractors, not the state. As such, the ONS, not to mention Parliament, has little say over which aspects of these deals, if any, are reported.
'The government has not been transparent about how much money the public sector has committed to paying back and paying [loan interest] fees,' says Anne Stafford, a lecturer in accounting and finance at Manchester Business School.
That is about to change. The influential International Accountancy Standards Board is on the point of finalising new rules for the treatment of PFI deals.
These will make it likely that Treasury accounting guidance will be scrapped and, in the view of National Audit Office officials, huge chunks of previously
off-balance sheet liabilities moved on to the government's books.
The IASB's interpretation committee argues that, if the assets are subject to government controls and are destined for an eventual return to the public sector, they should be reported on the government's balance sheet.
This approach is in sharp contrast with that used in the UK and in the Treasury's own accountancy guidance, which has relied on the principle of 'risks and rewards'.
It is a particular application of the Treasury's guidance that led to the Department of Health's decision, for example, that only five of their 72 signed major PFI contracts should be on-balance sheet. Public Finance has learnt that the capital value of the remaining off-balance sheet contracts totals £4.93bn.
A DoH spokesman confirmed that the 'vast majority, if not all' of these relate to contracts for hospital buildings. As hospital buildings – like schools, prisons and courts – are obliged to be open to the public, an accountant using the proposed new IASB interpretations would deem these as public, not private liabilities.
The IASB has no direct authority over the way governments report their accounts. But the 2000 Government Resourcing Accounting Act means that the Treasury is legally obliged to follow UK Generally Accepted Accountancy Practice, the rules of which are now formally converging with those of the IASB.
Indeed, PFI contractors John Laing and Balfour Beatty are so confident that the principle will be endorsed later this year that they incorporated the new interpretation into their published interim accounts.
Ken Wild, Deloitte's global leader in international accountancy standards and a member of both the Treasury's statutory Financial Reporting Advisory Board and the IASB's interpretation committee, told PF: 'The Treasury would have to revise TN1 [Technical note 1: How to account for PFI transactions]. The government wants to see as much of this stuff off-balance sheet as possible.
'But under new IASB rules, public sector accounts would be driven more to the control approach. You would end up with more potentially coming on the government's balance sheet.'
The NAO and Audit Commission confirmed that they are watching the IASB's work 'closely'.
A Treasury spokesman said: 'We are aware of proposals for operators, principally in the private sector. For the public sector, we shall continue with our convergence strategy.'
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