Partnerships Victoria (PV) is the brand name for the Public Private Partnerships (PPPs) entered into by the current Victorian State Government. The more generic term - PPPs - covers a wider range of models and includes infrastructure based service delivery projects established in Victoria from the late 1980s onwards.
The Victorian Treasury is responsible for managing the PV programme. PV policy was initially launched in 2000. Some of its central tenets include the retention of core service delivery responsibility, the requirement for value for money (as measured against the Public Sector Comparator benchmark) public interest tests, and both a whole of lifecycle and whole of Government approach to the provision of public infrastructure and related services. As at December 2007, 18 PV contracts worth around $AUD 5.5 billion in capital investment had been signed by the Victorian State Government (since late 1999).
Both Treasury and the State Government insist that the accounting treatment of PVs is not a consideration in procurement choice. The accounting guidance applied in the Victorian public sector (and other States too) is set out by the Australian Heads of Treasuries Accounting and Reporting Advisory Committee (HoTARAC). More recently, Victorian Treasury has been advising agencies to exercise caution in using the HoTARAC accounting guidance on new and emerging projects given the relevant IFRS standards (which were crafted for private sector entities). The HoTARAC approach is based on the UK Accounting Standard FRS 5, Application Note F.
The general rule is that the entity primarily enjoying the benefits from the infrastructure (and carrying the risks e.g. impairment), is allocated the assets (and the relevant debt). Generally, in Australia, the only cases where the owner of the underlying infrastructure assets is judged not to be the State are the projects where the private party takes at least some Demand risk, such as self funding projects (where revenue is collected directly from the public using the services, rather than payments from the public sector). A common Australian example is toll roads.
Consequently, at 30 June 2006, only two of the 18 PV projects signed are or will be off-State balance sheet. These two are the Docklands TV and Film Studios and the Eastink Toll Road (not yet in operation). In addition, a number of older Victorian PPPs remain off-State balance sheet (e.g. CityLink Toll Road and the full service Mildura Hospital), but again the great majority of the pre PV PPPs are also on-State balance sheet.
To ensure that the decision whether to utilise a PPP structure is not a function of the accounting treatment such a project would receive, the decision as to the accounting treatment comes at the very end of the procurement stage, at financial close. To allow for this, the public sector body will have to commit to the expenditure on the project, however procured, and will therefore be prepared for the project to appear on the balance sheet.
This is achieved through a set sequence in the procurement of infrastructure projects:
1) Identify/define the service need.
2) Consider the plausible options (technical, financial, social etc).
3) Business Case: confirm that the project is worth doing, commence assessment of the potential for PV along with early development of the key value for money benchmark - Public Sector Comparator (PSC).
Criteria involving the delivery of the service, risk transfer optimisation and value for money are therefore the primary decision-making factors.
It is clear that in the UK there will no longer be an accounting driver to structure a project as an off-balance sheet PFI scheme in order to avoid counting against capital allocations, since in many cases, this will not be practically and commercially achievable while still delivering value and affordability.
The case for using PFI will - as government policy has consistently intended - turn on its supposed intrinsic merits as a procurement method offering better value for money. The current accounting debates therefore have the effect of putting that case under the microscope. Just how strong is it?