When considering PFI and similar transactions within the National Accounts, the key issue to consider is whose balance sheet the assets, and associated liabilities, should be reported on for the purpose of the National Accounts. In the National Accounts it is the economic ownership of the assets that is important, not the legal ownership, nor the results of the control tests applied in the financial statements of public sector entities compiled under the Financial Reporting Manual ("FReM"). For the purposes of National Accounts, economic ownership is evidenced by the access to the risk and rewards associated with the underlying assets. Detailed guidance on the approach to be used for assessing the National Accounts treatment is contained within Section 3.2 of this paper.
Where, for the purposes of National Accounts, assets legally owned by a private sector partner underlie a PFI, or similar transaction and those assets are judged to be on the public sector balance sheet, the treatment in the National Accounts is consistent with the treatment of a finance lease as it is recorded in financial statements. That is the cost of the public sector of acquiring that asset increases Public Sector Net Investment ("PSNI") and Public Sector Net Borrowing ("PSNB"). The finance lease liability that financed the acquisition of the asset adds to Public Sector Net Debt ("PSND"). Subsequently, depreciation on the asset, the interest charge that is recognised on the liability and the payment to the contractor for the provision of services are a cost to the current balance. The amortisation of the liability leads to a reduction in cash and liabilities with no impact on PSNB (which is not affected by financial transactions) or PSND (where the two effects net out).
Where, for the purposes of National Accounts, assets legally owned by a private sector partner underlie a PFI, or similar, transaction and those assets are judged not to be on the public sector balance sheet for the purposes of National Accounts, the treatment in the National Accounts is consistent with the treatment of an operating lease as it is recorded in financial statements. In those cases the current budget records the value of the services consumed by government.