Browns investment rule at risk as PFI debts go on the books

21 Sep 06
The Office of National Statistics has recalculated public sector net debt to include Private Finance Initiative deals in a move that threatens the chancellor's sustainable investment rule.

22 September 2006

The Office of National Statistics has recalculated public sector net debt to include private finance initiative deals in a move that threatens Gordon Brown's sustainable investment rule.

The recalculation involves 'imputing' the current debt element of completed PFI deals into PSND for the first time. The change adds £5.95bn to PSND. Along with other updated calculations, the PFI debt brings PSND to £474.2bn, or 36.7% of Gross Domestic Product, up from 35.3% last year.

The Chancellor's rule means he must keep PSND below 40% of GDP over the economic cycle. Christine Frayne, senior research economist at the Institute for Fiscal Studies, told PF the change put that in doubt.

'The Treasury's projections for 2009-10 show they are expecting PSND to reach 38.4%. That does not include these new ONS calculations and it is possible that, as more PFI schemes come into operation, the increase they bring to PSND will be even greater,' she said.

Yet the current recalculations only involve half of existing PFI deals, with a full capital value of £23bn. But a Treasury memo released to Public Finance under the Freedom of Information act reveals that the Treasury acknowledges that moves afoot to reform PFI accounting will bring 'most' of the remaining £23bn PFI deals onto the public sector's balance sheet. The ONS change means they too will now be scored as PSND.

The memo refers to current discussions at the International Accountancy Standards Board to change the way decisions about PFI-like deals. If endorsed, they are likely to be adopted by the UK public sector over the next three to five years.

'If it were to be adopted by the UK, most PFI transactions that are currently off-balance sheet would be reclassified as Finance Leases and come onto the public sector balance sheets,' the memo says.

Ken Wild, International Accounting Standards lead for Deloitte and member of both the Treasury's Financial Reporting Advisory Board and the IASB said the new principles were on-track to come into effect in 2009.

He said that combined effects of that change and of the ONS reforms should help eliminate concerns that procurements are deliberately structured to keep them off balance sheet and out of the PSND.

'The accounting treatment shouldn't matter in deciding a procurement,' Wild told PF. 'It should be on value for money, rather than sticking something on or off balance sheet. My worry is people get hung up over the accounting and with the best will in the world it does distort things. So by trying to neutralise the treatment somewhat – it doesn't matter what it is, it's counted – must be good.'

The size of the debt imputed from the PFI schemes assessed in the latest ONS PSND measure is much smaller than the £23bn capital value of the schemes currently on public sector balance sheets as ONS statisticians only included debts of PFI assets that were operational. Those still in the design or build stages were excluded. That included a substantial portion of the £16bn London Underground public-private partnership deal.


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