54. Accounting rules consistent with UK GAAP (Generally Accepted Accounting Practice) are used by economists to determine how PFPs are treated in the National Accounts, which cover the entire economy and include Public Sector Net Debt.
55. Until April 2009 UK GAAP was used by accountants to put together public sector financial accounts. So, until April 2009, a PFP was recorded the same way in both the public authority's financial accounts and the National Accounts.
56. UK GAAP only included the liabilities if the balance of risk and reward was with the public sector, and excluded them if the balance of risk was deemed to be with the private sector. Interpreting the balance of risk was left to individual public bodies and their auditors. This led to most PFP deals being off-balance sheet. Around 78% (£22 billion) of operational PFPs in England by capital value are not recorded on the balance sheet of public sector financial accounts and are thus excluded from the Public Sector Net Debt statistics part of the National Accounts (NAO p 95).15
57. From April 2009 departments are required to issue accounts using IFRS (International Financial Reporting Standards). Under IFRS those assets which are controlled by the public sector-which include most PFPs-will be brought on to the departments' balance sheets. The IFRS criterion of control differs from the UK GAAP criterion of risk; thus the department accounts and National Accounts will conflict.
58. To resolve this conflict the Treasury has decided that departments should also produce a second set of accounts in line with the old UK GAAP basis which will be consistent with the National Accounts. The NAO said, therefore, that they "expect that ... the majority [of PFPs] will not be included in statistics of Public Sector Net Debt" (NAO pp 95-100).
59. There should be greater clarity about financial liabilities arising from PFPs. The Treasury's requirement that departments should run two sets of accounts, though an understandable response to the use of one accounting system within departments and another nationally, is far from ideal. Furthermore, national accounts solely on a UK GAAP basis give a misleading picture of overall liabilities by excluding most PFPs from figures of Public Sector Net Debt. We recommend that the Government should publish figures for total liabilities for privately-financed public sector procurement as a separate item alongside figures for Public Sector Net Debt. Brief statistical information should also be supplied as to the distribution of these liabilities across a series of separate categories that reflects differences in the extent of risk transfer away from the public sector.
60. Inclusion of PFP liabilities in Departmental balance sheets, as now required, together with publication of aggregate figures of national PFP liabilities, as we now recommend, should provide a clearer picture of their economic significance. The motive widely imputed by witnesses to the Treasury for its perceived bias in favour of PFPs- their low profile in accounts-would also fall away.
61. We recommend that, subject to the need to maintain control of public spending, the Government should take measures to remove institutional bias in favour of private financing of public procurement, so that public authorities can select it, or another procurement method, on a case-by-case basis according to value for money.
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15 This excludes the London Underground PPPs, which before the failure of Metronet had a capital value of about £18 billion and were on-balance sheet, but are not pure PFI contracts.