Listen to this article
This is an experimental feature. Give us your feedback. Thank you for your feedback.
What do you think?
Many private finance initiative projects are to remain, in effect, off the government’s balance sheet. The decision means that hospitals, clinics, schools, waste and local authority projects can continue to be built under PFI without counting against the government’s capital expenditure totals.
With public sector capital spending set to halve in cash terms after 2011, that will come as a considerable relief to public bodies.
They face seeing capital expenditure drop from £44bn ($68bn) this year to a mere £22bn a year in 2013-14, a reduction that would have had an even bigger impact if the billions of pounds of PFIs and PPPs that are in the pipeline had to count within that.
In spite of the widespread expectation that almost all PFI projects would go on the books as the Treasury fulfils a longstanding promise to move the public sector to international financial reporting standards, the Treasury has now issued all-but-final guidance to Whitehall departments indicating that, while they will count on departmental accounts, a different accounting standard will apply for the Treasury’s budgeting purposes.
That will be based on the European accounting standard that is applied by the Office for National Statistics to the national accounts. It has the effect that many projects will continue to count as off-balance sheet.
”The expected effect is that things will go on much as before,” a leading PFI accounting expert said. “There may be some changes at the margins over which projects count as on the books or off.
“But broadly speaking, where a project would have been off the books up to now, they will remain off the books.”
He added, however, that one effect of the guidance could be that departments would have to produce two sets of accounts, one complying with the IFRS standard and another to meet the European one.
Nick Prior, head of government and infrastructure at the consultants Deloitte, said: “This clarification is extremely welcome for the future of PFI and PPPs. Government departments should now be able to bring forward projects that have been delayed because of uncertainty over budgetary arrangements.”
About 60 per cent by value of PFI projects are currently off balance sheet. Critics, and even some supporters, of PFI have argued that the need to shift risks to the private sector – sometimes artificially – to achieve off-balance sheet treatment has been bad for public procurement.
A study last year by PwC, the professional services firm that advises both the public and private sectors on PPPs, said that if the projects all came back on the books it would ”frankly come as a relief” as some have been “distorted” to get them off balance sheet.