Budgeting mechanisms favour the use of off-balance sheet debt

3.10 Normally affordability might be defined as whether a public authority has the cash to pay for a project. But budgeting mechanisms mean that most discussions of PPP affordability relate to budgetary cover, rather than cash flows. This section sets out how the budgeting rules differ depending on whether the project is on or off-balance sheet. The budgeting rules can make a project appear more affordable if it is off-balance sheet, even though the cash flows will be the same however it is accounted for.

3.11 Treasury controls public spending through departmental budgets, including limits on capital investment-Capital Departmental Expenditure Limits (Capital DEL), and limits on resource spends- Resource Departmental Expenditure Limits (Resource DEL).46 It allocates set amounts of Capital DEL and Resource DEL to each Department in its three year spending reviews.47

3.12 Most local authority PFIs are supported by PFI credits. PFI credits are a promise by Government to make available a stream of funding for local authorities that undertake PFI schemes that are off-balance sheet. PFI credits are outside the budgetary process. The stream of funding that they promise comes from (the Department for) Communities and Local Government and is included in its Resource DEL.

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46 Other budgetary controls, such as Annually Managed Expenditure, are not relevant for PPPs.

47 More detailed budgeting guidance can be found in Consolidated budgeting guidance from 2009-10 (IFRS updated), HMT (June 2009).