| Chapter 4 introduced, amongst other things, the issue of control as a key area for early consideration and highlighted its relationship with classification and financial reporting. Public sector bodies will need to consider a number of questions regarding the JV's classification and accounting treatment, and subsequently keep them under review. The main issue of classification will be whether the JV is considered a public or private sector body in the UK's national accounts. There are a range of issues which can affect the sector classification of the body which are particularly relevant to JVs. This Chapter considers the wider issues related to the levels of public sector control, classification and financial reporting in the formation of JVs. The focus is on: ● determining factors of classification and ownership delineation within the public sector; ● analysis of the main implications of public/private classification; ● financial reporting, auditing and other financial services regulations; ● contingent liabilities and guarantees. Note that the separate issue of whether or not the JV is a "contracting authority" under EU public procurement rules is dealt with in Chapter 9. |
Classification issues
5.1 It should always be recognised that issues of classification are secondary in importance to those of establishing control or governance structures for the JV that provide best VfM and best protect the public sector's interest in the JV. Nevertheless, classification will be important to participants as it determines the budgetary and financial control framework under which the body will operate. The same public/private classification issues apply to JVs that are partnerships.
5.2 The Office for National Statistics (ONS) is the body responsible for determining the classification of companies into the public or private sector within the national accounts; it makes its decisions in accordance with the guidelines in the European System of Accounts (ESA).42 Since the national accounts classification is utilised by HM Treasury in determining the appropriate financial and budgetary controls for public sector bodies, it can advise on the likely national accounts classification but the final decision is made by the ONS.
5.3 All public sector bodies have a mandatory requirement to report expenditure according to HM Treasury's budgeting standards; in order to comply with this they must get a national accounts classification in respect of any new bodies where they have been involved in their set-up.
5.4 Theoretically classification should be one of the last stages in the establishment of the JV, however, for practical reasons the public sector body may wish to clarify the issue of the JV's classification, as far as is practical, before engaging formally with the private sector.
5.5 Full details of the process for classifying a new body, or extant bodies, is contained in HM treasury's Classification Information Pack43. A summary of the process is described in Box 5.A below.
| Box 5.A: Process for attaining a classification Step 1 ● The public sector participant may be liaising with HM Treasury to discuss policy formulation, and implementation issues involved in setting up a JV as set out in Chapter 4. ● Although HM Treasury is able to provide advice to public sector participants at any point during the process of designing a new body, procuring authorities should also consider obtaining their own professional advice so they are fully aware of the impacts of classification of the JV on themselves. ● The HM Treasury's role can include providing provisional classification decisions for planning purposes and advice on the key points that lead to different sector classifications. Participants should recognise that these opinions may differ from the final decision of the ONS. This is especially relevant to JVs, where controls over the body are split between two sectors. Step 2 ● HM Treasury will write to ONS to request a classification decision presenting all of the governance documents and a completed classification questionnaire for the JV. ONS cannot be involved in the policy formulation process so are unable to provide advice to participants; all contact with ONS is through HM Treasury. ● The earliest point at which ONS can be consulted on a classification is once near-final governance documents are in place and the participants have completed a classification questionnaire. ONS will not classify bodies where information is incomplete or likely to change.This makes it even more vital that accounting officers in the procuring authority consider seeking professional advice to get an early view on the likely classification if the implications of whatever the ONS's final decision could be material. ● Classification by the ONS is a detailed process and is subject to the resource constraints of ONS's business areas. When planning the process to set up a JV, participants should allow at least twelve months for a classification decision. Step 3 ● ONS will write to HM Treasury to give their decision and the reasoning behind it. HM Treasury will then write to the public sector participant to convey the decision, set out what it means for budgets, and what further action needs to be taken. HM Treasury will also forward the decision to Cabinet Office for classification within Cabinet Office's typology. ● ONS's decision is final and will not be reconsidered unless there is a material change to the structure of the body, or additional information is provided that HM Treasury consider sufficient to alter the body's national accounts status. In such cases, HM Treasury will approach ONS with the new facts. |
5.6 Public sector bodies should assure themselves at an early stage, seeking appropriate professional advice where appropriate, that the classification decision (the process for which is set out below) would not have a material impact on the business case approval as set out in Chapter 4. This means that any risks associated with the ONS's ultimate view and any changes to the way classification is assessed would need to be borne by the public sector body (as appropriate). This may require letters of assurance, e.g. from the senior responsible accounting officer at local authority level or accounting officers at departmental level, to be submitted as part of the approvals process outlined in Chapter 4 to ensure the implications of these issues are fully understood at a high level.
5.7 Within the public sector, there are three sub-sectors to which a body can be attributed in the national accounts: central government; local government; and public corporations. Table 5.A describes the key characteristics and provides examples.
Table 5.A: Example classifications
| Characteristics | Examples | |
| Central Government
Local Government
Public Corporations
| ● public sector controlled ● non-market ● UK-wide remit ● separate institutional unit ● public sector controlled ● non-market ● local remit ● separate institutional unit ● public sector controlled ● market producer ● separate institutional unit | Government departments and their agencies, the devolved administrations, most non-departmental public bodies. local authorities, bodies owned and controlled by local authorities. government owned companies, nationalised industries, most trading funds. |
5.8 If a body is controlled by general government (central or local government) or a public corporation, then it will be in the public sector. If not, then it will be in the private sector. So the key question that needs to be addressed to determine whether a body is in the public sector or the private sector is "who controls the body?" ESA 95 defines control as the ability to determine general corporate policy; this control may arise through a variety of means.
5.9 HM Treasury's Sector Classification paper includes full guidance on the technical detail of how bodies are classified within the national accounts framework, including the various mechanisms for control.44 For convenience, examples of control issues taken into account by ONS are included in Annex D.
5.10 Simplistically, if the public sector has more than a 50% participation in a JV, it will have control, and the JV will typically be classified to the public sector.
5.11 If a body is a 50/50 (deadlock) JV with neither partner having overall control over the Board, then national accounts require it to be classified as private sector. However in these cases the ONS would look very closely at all possible controls to check whether the public sector partner had any extra powers above those held by the private sector participant.
5.12 The equity interest of the public sector must reflect the value of the assets which it contributes and the public sector should not agree to a participation in a JV of less than 50% simply to avoid public sector classification. Participants should note that where participation is less than 50% to the public sector the body will still need to go through the classification process to be classified within national accounts.
5.13 Notwithstanding classification, where significant borrowing, capital expenditure or use of assets is anticipated through a JV, guidance should be sought from the sponsor department and the relevant HM Treasury expenditure team at an early stage.
5.14 Public sector bodies are required to account for their relationship with other entities under the relevant financial reporting standards, as set out above and in Annex E, taking note of the requirements of the Financial Reporting Manual or appropriate accounts direction.
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42 For further details on the ONS procedure, ESA system and individual classifications (www.statistics.gov.uk).
43 Latest version of Classification Information Pack available from (www.hm-treasury.gov.uk/d/classification_pack.pdf).
44 Latest version of Sector Classification paper available from www.hm-treasury.gov.uk/d/classification_pack.pdf.