A related issue in the assessment of value for money is the consideration of how PPP arrangements should be accounted for and disclosed in public sector financial statements and budgets. Any deficiencies or inadequacies in this respect have obvious transparency limitations. The only jurisdiction we know of that has developed detailed guidance on how to account for the complex risk allocations that arise under PPP arrangements is the UK, which has made extensive use of such arrangements for the provision of public infrastructure and services. Application Note F to UK Accounting Standard Financial Reporting Standard FRS5 "Reporting the Substance of Transaction: Private Financing Initiative and Similar Contracts" was issued in response to a range of concerns about the report of private finance initiative arrangements.
There is not currently an Australian accounting standard that deals specifically with risk allocation issues associated with PPPs. The Australian Accounting Standards Board (AASB) has been examining the issue of accounting by public sector entities for the provision of public infrastructure by other entities. The previous Public Sector Accounting Standards Board (PSASB) originally commenced the project in response to concerns expressed by several government authorities and commentators about the financial report of BOO, BOOT and other similar arrangements for the provision of public infrastructure by private sector entities.44 In December 1999, the AASB issued an exposure draft, Exposure Draft ED 100 "Arrangements for the Provision of Public Infrastructure by Other Entities - Disclosure Requirements".
In December 2000, the AASB having reviewed the submissions received on ED 100 made a number of decisions, including that a revised ED should be developed on the basis of ED 100 and that a new Project Advisory Panel be established with both public sector and private sector members, to assist the AASB in developing this project. Shortly thereafter, the Heads of Treasury Accounting and Reporting Advisory Committee (HOTARAC) established a subcommittee to work through accounting and reporting issues (including recognition and measurements issues) relevant to private sector involvement in public infrastructure provision. The AASB gave its tacit endorsement to this work and at its June 2002 board meeting was briefed on progress made by the HOTORAC subcommittee.45
More recently, in September 2002, the International Accounting Standards Board (IASB) invited the AASB to join a research team, comprising national standard setters and others from Australia, France, Spain and the United Kingdom, to look into a potential IASB project "Accounting for Service Concession Arrangements". It has been agreed that there be a meeting of the jurisdictions involved in the project on 18 December 2002 to further the project. At its December 2002 meeting the AASB was briefed on progress made by various groups working on accounting and reporting issues relating to infrastructure projects. The AASB agreed that the scope of the potential IASB project should be comprehensive and deal with accounting for service concession arrangements by all participants.46
Currently, because transactions involving the delivery of infrastructure can have the characteristics of a lease agreement, governments have utilised Australian Accounting Standard 17 Accounting for Leases (AAS17) in accounting for PPP-type transactions. AAS17 requires that leasing-type arrangements be classified as either operating or finance leases, with the degree to which ownership risk is transferred between the lessor and lessee being the critical variable. Finance leases are required to be reflected in the balance sheet of the lessee, whereas operating leases are not. In this regard, it has been said that:
Critics of PPPs claim that governments can use PPPs to understate debt by not recording in the balance sheet the total value of payments payable to the private sector providers, that is, PPP obligations are 'off balance sheet'.47
An alternative view is that the underlying rational for PPPs is not the achievement of off-balance sheet borrowing, but rather that they offer value for money. For example, the NSW Treasury has said in respect to the recently released NSW and Victorian policies on PPPs:
…the policies require that privately financed options demonstrate superior value-for-money to the Government and community compared to conventional, publicly funded approaches to infrastructure provision. This is the sole reason for considering private financing and delivery - with both States having low debt levels, off-balance sheet borrowing is not an attraction in its own right.48
The South Australian guidelines on PPPs notes that, while the accounting standards attempt to create a clear distinction between operating and finance leases, for evaluation purposes most service contracts with the private sector under consideration by agencies will fall somewhere between the strict definitions of operating and finance leases. In this regard, the guidelines advise that:
Agencies should keep in mind that there is a fundamental tension between meeting the requirements of [Australian Accounting Standard 17 Accounting for Leases (AAS17)] for operating leases and achieving value for money. The fundamental objective of the partnerships procurement process is to achieve an efficient allocation of risk, not simply to transfer as much risk as possible in order to achieve an operating lease classification.49
As discussed earlier, attempting to transfer inappropriate risk to the private sector will add unnecessary cost to a PPP agreement, thereby undermining value for money. The difficulties associated with these issues were demonstrated in the context of the Department of Defence's tender process for the procurement of patrol boats for the Royal Australian Navy. In announcing the tender in July 2001, the then Minister for Defence stated that the Government was keen to pursue the project under private financing arrangements, but that the Government must be satisfied it is receiving the best outcome for the investment of taxpayer dollars.50 However, in announcing the shortlist for the tender in June 2002, the current Minister for Defence stated that:
After evaluating two possible procurement options, the Government has decided to directly purchase the boats. The use of private financing to deliver the boats and associated through-life support was also considered. However, advice provided to the Government indicated that there was uncertainty about whether the requisite capability could be provided on a value for money basis while also ensuring that the transaction would be classified as an operating lease for accounting purposes.51