But if we go back to the period before the Pre-Budget Report, the government had set out the 40% limit and had managed to stay below it. This was pointed out in the Pre-Budget Report. Page 29 of the report stated that the PSND percentage had been reduced from 42% in 1996/97 to 36% in 2006/07 (HM Treasury November 2008).
In this context, a major advantage of PFI projects was that they did not, in general, appear as part of PSND.
So we come back to the issue of whether the introduction of International Financial Reporting Standards (IFRS) would bring more PFI projects into the PSND. In a two-page paper headed "Private Finance Initiative and public debt" and dated May 2008, Martin Kellaway of the Office for National Statistics denied that they would (Kellaway, May 2008, 21). As stated above, in 2006/07, PFI/PP projects contributed only about £13 bn to the PSND and Kellaway stated that "the introduction of IFRS will not lead to any changes in PSND" (page 21).
Why not? Here I try to set out the reasoning as simply as possible using the two-page paper by Kellaway and an earlier, longer one by Chesson and Maitland-Smith of the ONS (November 2006).
Looking at the PFI deals, the first question is; is the asset on or off the public sector's balance sheet? Kellaway states that generally, if the deal is recorded as a public sector finance lease, it is judged to be on the public sector's balance sheet and it is included in the PSND. What is a finance lease? It is a lease which transfers substantially all the risks and rewards of ownership of an asset to the lessee - that is, to the government (see Chesson and Maitland-Smith, November 2006, 28). Kellaway goes on to say that an asset is not on the public sector's balance sheet when it is an operating lease (Kellaway, May 2008, 21) and, of course, this is when the risks and rewards are not transferred to the government.
On page 29 of their paper (November 2006), Chesson and Maitland-Smith pointed out that there were 700 signed PPP/PFI deals in the UK with a capital value of £46 billion55. However less than 70 of these (that is, less than 10 per cent of the total number) are reported to be in the finance lease category (Chesson and Maitland-Smith, November 2006, 37). Within these 70 projects, only five NHS projects are listed. These are the NHS Trusts of Oxleas, Barnet and Chase Farm Hospitals, Queen Mary's Hospital Sidcup, Bromley Hospitals and Buckinghamshire Hospitals. The finance lease liability for these five is given as £229 million. No detailed explanation was given in the article as to why these five were included as finance leases and, conversely, why the vast majority of PFI projects in the NHS were assessed as operating leases.
On the second page of his two-page article, Kellaway raises the possibility that under IFRS, many PFI projects would be transferred to the public sector's balance sheet. But, he argues, European statistical rules are different from those of the IFRS. The European focus is on risks and the ONS accepts the judgements of government accountants as to whether the public sector bears the risks and rewards of the capital assets and whether the liabilities are contingent on the supply of services (Chesson and Maitland-Smith, November 2006, 27, 30). By contrast, the focus of the IFRS is on the control of the asset during the concession period, on the regulation of services and on what happens at the end of the concession period (Kellaway, May 2008, 22). So Kellaway concludes that "any impact from IFRS in the financial statements of public sector entities will not automatically transfer into public sector debt" (Kellaway May 2008, 22)
But if it did, are we really talking about £30 billion or very much more? Admittedly the capital value of PFI projects is given as £57 billion with £24 billion on the public sector's balance sheet (see Committee of Public Accounts, June 2008, page Ev 11), so that there is £33 billion off the public sector's balance sheet. But the future payments on all PFI projects are reported to amount to £181 billion or £100 billion in present value terms (Committee of Public Accounts, June 2008, page Ev 11). The latter is said to be arrived using the 'standard discounting methodology' which I take to mean using the Treasury's discount rate of 3.5% per annum. It is worth noting that in 2006/07, £100 billion was about 8 per cent of GDP - enough to destroy the 40% fiscal rule even before the global credit crunch.
55. In a report of the Committee of Public Accounts produced in mid-2008, there was said to be over 500 operational projects under the Private Finance Initiative (Committee of Public Accounts, June 2008, page 1)