C. How are PFI projects accounted for?

If a DBFO project is financed under the PFI, the capital expenditure does not normally score as public expenditure, although the charges levied by the private sector operator for the use of the building and services that are provided do. This is because under the PFI the private sector contractor arranges the finance. This idea is better known as 'off-balance sheet' financing as the liability for the debt is not recognised on the public sector balance sheet.28 As Philip Stephens commented in the Financial Times in 1996:

The most obvious effect [of the PFI] on the public finances is to reduce spending now and replace it with a stream of future liabilities. A private contractor picks up the bill for the construction of, say, a new prison, while the taxpayer guarantees it an income spread out over the lifetime of the asset. Today's capital investment thus becomes tomorrow's current spending.

And later;

[…] We know that, like all off-balance sheet spending, the PFI flatters the official accounts. Future liabilities do not show up in the accounts.29

In an article critical of the PFI, the Economist magazine expressed concern about the scope for a government to use the PFI to disguise the underlying position of public finances. The Economist commented that although it was plausible that a private operator could minimise future management costs, such advantages should be:

[...] set against the potential which the PFI offers governments for creative accounting designed to disguise their spending commitments. In particular, the timing of spending can be obscured. If a project, such as a road, is publicly financed, the construction costs are counted as public spending as they occur; if it is privately financed, they are added to public spending years later, when the road is complete and the government starts to pay the contractor for it, perhaps through a 'shadow' toll pegged to how many cars use the road. And if a project, say a toll bridge, is financed by the operator levying a charge on users, its cost will never appear in the public-spending total. The temptation is obvious. Economic commentators watch public spending and borrowing closely, not only to judge the government's own finances but as indicators of how well it is managing the economy as a whole. The PFI can lower both these numbers, at least for a time. […] Because the obligation to pay for the service or facility provided by the private investor will not be counted as public borrowing (though it will be just as binding), the borrowing figure will be lowered too.

To 'prove' that the government is not using the PFI as an accounting scam, the Treasury constantly stresses that PFI projects involve genuine transfers of risk to private investors. Likewise, the private finance Panel publishes apparently detailed analyses of the efficiency gains achieved by recent projects. [...] Yet these attempts at explanation raise more questions than answers. For instance, private contractors appear to be willing to bear risks over which they have no control - in the case of the national-insurance computer, the supplier will bear much of the risk of demand volumes being lower than expected because of, say, the impact of new social-security legislation. This seems hard to swallow. Moreover, it is impossible to assess the financial impact of any risk transfer because contracts between the government and its suppliers are usually kept secret to protect commercial confidentiality. 30

In a 1996 report, the Treasury Committee made clear its concern about the absence of any systematic recording of PFI commitments in the public accounts. Sir Christopher Bland of the Private Finance Panel (PFP), when giving evidence to the Committee, noted:

[…] the Treasury do not centrally total those forward commitments for every government department, and it is the case that not all government departments themselves total those forward commitments [...] and if you ask some departments "What are the revenue implications of the PFI contracts they have signed in the year say, 2005?", they would not readily be able to give you an answer, and if you asked the Treasury "What is the sum total of the PFI commitments in the year 2005?", they would not readily be able to give you a total, but the information is there and it needs to be codified, organised and assembled fairly speedily in our view. 31

In response to a recommendation from the Treasury Committee in 1996 the Treasury now publishes forecasts of the committed expenditure for public services flowing from private sector investments signed under the PFI. The following table from the 2001 Financial Statement and Budget Report (FSBR) set out the estimated future payments to the private sector for signed PFI deals.

Table 4: Estimated payments under PFI
contracts, signed deals as at March 2001

The figures represent departments' best available estimates. Actual expenditure in future years arising from deals will depend upon the payment mechanism details for each contract. However, these figures do not tell the whole story: as more PFI deals are signed the size of payments to the private sector will increase further. The Treasury also publishes capital spending by the private sector by sponsoring department. The relevant estimates for 2000/01 to 2003/04 appear in Appendix 4 of this paper.

In September 1998, the Accounting Standards Board (ASB) stated that the capital value of PFI schemes should appear on the Government's "balance sheet". However, following negotiations between the ASB and the Treasury, in June 1999 the Treasury issued a new version of their note How to account for PFI transactions which allowed most PFI transactions to be excluded from Government borrowing figures on the grounds that they were "operating leases", not "finance leases".32 The guidance states that the "property risks" and "service related risks" (staffing costs) of PFI deals should be separated out. If done properly, it should be clear that property related risk has been transferred to the private sector, and hence should not be on the Government balance sheet. The ASB has said that the revised accounting guidance is to be kept under review and updated as necessary in the light of developments in the PFI to ensure that it remains both "useful in practice and is consistent with the ASB's application note".33

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28 UNISON, Public Services Private Finance, March 2001

29 "Buy now, pay later", Financial Times, 19 April 1996

30 "Cooking the books", Economist, 28 October 1995

31 Treasury Committee, The Private Finance Initiative, 1 April 1996, HC 146 1995-96,xi, para 29.

32 House of Commons Library Deposited Paper 99/1259

33 HM Treasury, More Private Finance Initiative (PFI) deals expected as clarity of accounting standards is resolved, News release 103/99, 24 June 1999