Q121 Lord Eatwell: I would just like to follow up from that. What I did not understand from the memorandum you sent us, also indeed from what you have just said, is the relationship between what you think would be an appropriate accounting standard and the accounting standard which is being imposed upon you by others. Your memorandum consisted entirely of referring to other accounting institutions-to the IFRS standards, and so on and so forth-it did not say at all whether you thought they were satisfactory (if you like, fit for purpose) for the UK assessment of risk in PFI projects. I wonder if you could comment on that.
Ms Matheson: I will start and then perhaps I can ask my colleague to add on to that. I think it depends on what is the purpose. If you think about our purpose with national accounts, then we are looking at the economy as a whole, and the important (and, I mentioned that we have a legal obligation) obligation as well is to make sure that what we do is consistent with the treatment of other countries. So the international standards are important in that they are the ones that we stick by, but they are important because they are an important way of looking at the economy across countries.
Q122 Lord Eatwell: I can see that if everybody wants to get their national income accounting straight then they will get the national income accounting straight, but we are trying to understand the value to the public purse of these procedures. We all know, for example, in the national accounts, if you employ a housekeeper it is part of the GDP and if you marry her and do not pay her it is not part of the GDP. We all know that. So if we are looking at social welfare, the national accounts are not representing social welfare in those terms. If you are interested in social welfare we would not look to the national accounts. So I think that this international comparison is a complete red herring; the issue is: are these accounting procedures appropriate for us to understand the welfare contribution to the UK of these particular projects?
Ms Matheson: Let me, in one sentence, reply, and then I will hand it on. As I said, it depends on what the purpose is, and the assessment of value for money or any of those other considerations are not considerations for me or for the Statistics Office; that is not what we are here to do; that is a matter for the NAO or for others. What we do have a responsibility to do is be transparent about what we are measuring and how we are measuring it.
Professor Whittington: Could I make an observation, please? I did not want to make an initial statement but the initial statement did actually say something that I believe to be incorrect (I am sure it was a mistake, not deliberate), namely, that this balancing of risks that is done by the internationally accepted methods of national accounting is not the same as the current UK standard FRS 5 and the application note to that or even the Treasury's guidance to that, which has widely been interpreted as allowing everything to go off balance sheet but was not intended, I hope, for that purpose. The big thing that gets missed out of the assessment of risks under FRS 5, and is included by the national accounts and was alluded to by the local authority representative just now, is construction risk. Obviously, we all know-anybody who has dealt with builders knows-that construction is a horrible process to go through. Construction contracts carry enormous risk, but that risk occurs irrespective of whether I buy an asset or whether I lease it or whether I get it under a PFI contract. That is something that happens before the asset is created. Once the asset is created, as an accountant within current accounting standards, I have to ask myself: "Should that asset which has now been created be on the balance sheet?" In other words, who do all the subsequent risks and rewards (or however I care to evaluate it) lie with? Do I sit in this position that an owner of the asset sits in, or am I really just renting it from a provider of services? That has to be done once the construction is over. I think the potential conflict with national accounts (the ECOFIN system) lies in the fact that they only identify three areas of risk, much narrower than FRS 5, and one of those areas is construction risk. That means that most PFI contracts will say: "Well, the construction risk lies with the constructor because the price is usually fixed under contract"; hence it is off balance-sheet. Under FRS 5 that would not happen. That is a serious problem now because we have a new international interpretation, IFRIC 12, which has been adopted by the Treasury and is going to be used in resource accounting. IFRIC 12 is based on control but I think we can bypass that-control of risk and rewards are not so different as you might think, but I do not want to get into technicalities-and IFRIC 12 will bring on to the balance sheet a lot of things, it is widely believed. However, these things will not be brought on to the balance sheet by the internationally accepted method of doing national accounts. Not only does that apply to the national accounts but I understand the Treasury is applying this same standard to budgetary procedures by departments, so that for budgetary purposes they will be leaving things off balance sheet and for ex-post accounting they will bring them on balance sheet, which I find quite extraordinary. So there is a conflict between the way national accounts are done, and the way business accounts are done and the way they are being interpreted by the Treasury for the accounts of departments. This is not the fault of the national statistical office but it is a matter of government policy; I guess it has to do with international agreements on borrowing requirements, and so on. It is, nevertheless, a practical problem.
Q123 Chairman: Is this a conflict which can or has to be resolved, or is it a paradox you just have to live with?
Professor Whittington: We get back to the issue Lord Eatwell was discussing before, of what all this is for. I believe, because I like to think accounting is useful, that accounting is telling us what our obligations are when it is recording liabilities. I was very struck by the discussion you have just had with the local authorities which indicated that a PFI contract binds future generations. In fact, because of the fact that it suppresses what economists call "real options" it actually, in some way, is more burdensome than a conventional purchase of an asset. The fact that future generations, or future taxpayers, are bound-hence the scope for allocating revenue in the future is constrained-is a very important thing that people should know; they should know how much they have borrowed, how much the Government is in debt-in the economic sense as well as in the legal or technical sense. I do think that is very important information from a policy point of view and an ex-post appraisal point of view. It gets suppressed if we do not put these things on balance sheet.
Q124 Lord Levene of Portsoken: Just on the basis of what Professor Whittington said, if I heard you correctly, you said the same risk was there whether the building was bought or leased. Surely, it depends on who is doing the buying and leasing, because if the Government or a local authority buys a building they are at risk throughout the process, but if they are leasing it it is the owner/contractor who is going to do the leasing who is at risk, and the local authority or the Government only has a problem once they have taken it on. Is that not right?
Professor Whittington: I was thinking of a long-term lease. I was thinking in terms of finance leases; in short-term leases or rental, clearly, the landlord is responsible. The longer the lease, usually, as you know, the more responsibility the tenant takes on. If I have a 999-year lease, then it is pretty well mine. I understand that one of the Cambridge colleges is actually owned by an Oxford college (or, at least, the ground is) but it is 999 years so nobody talks about that and they repair their premises as if they own it.
Q125 Lord MacGregor of Pulham Market: I think, like others, I may be having some difficulty in getting back on track! Can I ask the question which I hope will help do that. Could you elaborate more to justify having liabilities treated differently in the departmental resource funds and the Treasury national balance sheets, and indicate more of the consequences of that?
Mr Grice: I think a lot of this comes back to what are the purposes for which these accounts are used. I can imagine it would be safest, I suppose, if there was one set of accounts which will give you the answer to everything. So far as we are concerned, we have at least three objectives, as Jil mentioned at the outset. One is we do have international obligations to compile national accounts according to international conventions. The overriding convention existing on national accounts is voluntary, the United Nations System of National Accounts, but the European System of Accounts, which is essentially derived from that, is a statutory obligation; it is an obligation in European regulation and those procedures we have to abide by in order to produce gross domestic product figures and other national accounting information according to the European standard. For that purpose, the information provided by, essentially, as I understand it, UK generally accepted accounting practice (which is largely on which the resource accounts are based) is appropriate for making those calculations. We believe it is appropriate and so, too, do the European authorities. A second purpose is actually to produce the public finance figures where, again, we have legal requirements under European regulation in connection with the Stability and Growth Pact and the Excessive Deficit procedures. Again, for that purpose the resource estimates that the Treasury produces and uses in its budgeting, we have access to and, essentially, take on board, is appropriate. We believe that and, again, so do the European authorities. Then again, this is not the only purpose; this is not the only information one would want to look at in analysing these kinds of situations, and while it is certainly not our job as the statistics office to make assessments of value for money in PFI deals, or anything of this kind, it is our job, we see, to produce a range of information about public finances in general which will indicate the transparency and enable such judgments to be made. In that connection, it may be the IFRS, the new accounting standard, is something we need to look at, and indeed we have started to do that. I am not sure that is a direct answer to your question but that is the position we are at, at the moment.
Q126 Chairman: We are talking about IFRIC 12 or IFRS thing, which is what we are about. Would it be a practical problem for the ONS to, as it were, sum what is on the various local authorities and other government departments IFRIC 12 data to produce a separate national figure? Not to supplant the European approach but as a supplement to see it from a different view. Would that be a problem?
Ms Matheson: I do not think it would be a problem. What we would need to do is be very clear about what it was that it was measuring and what part of the overall picture is that about. Again, our role, as you say, is to aggregate and we do that based on audited accounts; we are not responsible for the standards against which those are audited. So if there was some great user demand for us to do that and if those data were available and audited, then adding them up-
Q127 Chairman:-would be a fairly simple thing. I am sorry to be simplistic but let me push it a bit further. If it was analogous to a business and that business had a whole string of subsidiary companies, which may be local authorities or government departments or whatever it is, then in summing the consolidated accounts of that business you take all the subsidiaries and you add them all up and you would know what you had got, at the end of the day, because the two would be the same. Here we have an anomaly whereby, at the moment, the sum, which we do not know, of the equivalent of the subsidiaries in the public sector does not match what should be the consolidated accounts at national level. All right, you are caught by different standards-and we understand why that has happened-but I would have thought that it might shed a little bit more light if, in addition to the European approach, you actually summed what we have got in our various national subsidiaries. Am I being too simple? Perhaps I should ask an accountant. Professor Whittington, does that make any sense?
Professor Whittington: It makes sense to me but I am not a national accountant. I was over-awed by being here with two of them.
Ms Matheson: It would not be a national account is the point.
Q128 Chairman: Absolutely, but it might shed some light on national liabilities.
Mr Grice: We are very open to the idea that national accounts are not the only information that is useful in this area. Indeed we did, over the summer, publish a series of papers on ways in which more transparency and wider information about the public finances might be produced. In that light, I would certainly regard the proposal as being one which merits further examination, but we would have to look at the feasibility, exactly what it measured, and so on.
Q129 Lord MacGregor of Pulham Market: That is actually what I meant by the consequences in my question. You described the situation from your point of view, which I think most of the general public do not understand at all, but there is a widespread concern, for example, in terms of national liabilities and national debt, that some of the PFI projects and other things are not appearing in the national debt figures and that this is, somehow or other, because of the way in which the statistics are drawn up. I wonder if you could comment on that.
Professor Whittington: I will comment on it, if you like, because they are reluctant. Can I just briefly comment because I think what you said is exactly correct? I can understand the international standards for national accounts but I think they are behind the times, as it were. Accounting has moved on a lot in the last 30 years and the way people do business has; complex contracts with PFIs have emerged and they are a bit behind the game, if you like, and that is why they have not thought it out and they have got construction risk in there and missing lots of others out. It also, of course, suits, no doubt, many national governments that they do their national income accounts that way because they are under a bit of pressure from borrowing. People use these very naïve numbers-Public Sector Borrowing Requirements and things. So, naturally, I imagine, there is a reluctance by many governments to change this system. Then, of course, we have the question: should the UK change and then be blamed for borrowing more than anybody else, when it is purely an illusion? I think there is a serious problem. That is as an outside observer.
Q130 Lord MacGregor of Pulham Market: You mean an illusion that we are borrowing more than anybody or an illusion that if we changed the system our figures would look larger than they actually are compared to others?
Professor Whittington: The illusion is not in absolute terms. If you mean: "Are they telling the truth?" I would say they are telling the truth if they did proper accounting, as I put it. They are not telling the relative truth, and countries and currencies are often measured in relative terms. If they have all got this little bit of buffer called the PFI there and we make ours hang out as if it is borrowing and the others do not, it makes the UK look worse than it ought, and is not doing the country a favour-I can see that. That is a problem of the emerging practice on national accounting. In the future, I think, there is a great deal of hope because international standards are developing very rapidly; IFRIC 12 comes from the private sector International Standards Board, there is a Public Sector International Standards Board as well which has been working on IFRIC 12-type interpretations for government, and I am sure that these bodies, eventually, will persuade international organisations like the World Bank and the IMF, that are backing them. I think practice will improve in the future. At the moment we have an anomaly because they are catching up.
Ms Matheson: There is a dialogue between the two anyway; so these things do take time to evolve-that is certainly true. On your first point about transparency, of course, as we have said, the national accounts are the national accounts, and we are interested in improving transparency outside the national accounts framework to help public understanding of the nature of public debt or other aspects. So that is absolutely consistent with the direction that we are going. It is just not easy to do, and I am never sure that we are quite going to be in a position very quickly to get to the point where the public do understand all the complexities of this. That is the challenge.