Since the Government announced1 the adoption of International Financial Reporting Standards (IFRS) from 2008/2009 onwards there has been much speculation about what this means for the future of the Private Finance Initiative (PFI). If, as suggested by the recent Financial Reporting Advisory Board (FRAB) consultation paper2, the government chooses to apply the "service concessions" accounting standard under IFRS to PFI schemes, and that application means that the great bulk of them have to be accounted for on-balance sheet3 by government, will that not remove the accounting driver for implementing projects through PFI? And, notwithstanding the fact that accounting classification was never meant to have been the rationale for the use of PFI, will this not in fact have a significant impact on the behaviour of procuring authorities and therefore the pipeline of PFI schemes?
The relationship between the introduction of IFRS in the public sector and the propensity to use PFI is not, in fact, as simple as many have supposed. However, there will clearly be some impact. Indeed, it is arguable that the widespread debate about the implications of IFRS on PFI may already have had some dampening effect on the PFI pipeline.
This is therefore an opportune moment to ask whether, to put it bluntly, this matters at all. Has PFI in fact brought about the long term benefits in public procurement which were claimed for it? And, to the extent that there have been any beneficial effects, how far are they attributable to the introduction of private finance in PFI, as distinct from other aspects of PFI project delivery? Could these benefits not have been brought about by, say, the use of Design, Build, Manage and Operate (DBMO) models? In other words, what have been the benefits of the Private Finance Initiative? And do these benefits outweigh any additional costs associated with PFI?
It is also a good time to see whether the blanket answer to the balance sheet question potentially implied by IFRS will provide opportunities to improve PFI delivery. Specifically, will there be options to structure projects more efficiently if keeping them off balance sheet disappears as an attainable objective
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1 Budget 2007 - Delivered 21st March 2007 announced the adoption of International Financial Reporting Standard on all public accounts from 2008/9 onwards
2 "Accounting for PPP arrangements, including PFI" - Financial Reporting Advisory Board consultation paper, issued 10 December 2007
3 On balance sheet is an industry term indicating that the assets and liabilities associated with the project are recorded on the balance sheet of the relevant entity