The NI Executive's ability to keep private finance off balance sheet has been reduced over recent years.10 This ability will be reduced even further when the UK government moves to International Financial Reporting Standards (IFRS) from 2009/10. Under this system, it is likely that PPPs will be accounted for in accordance with IFRIC 12, an Interpretation of IFRS issued by the International Accounting Standards Board and strongly supported by the Financial Reporting Advisory Board (FRAB), to which the Treasury is accountable. This declares that private operators should not record the up-front capital cost of PPP projects on their balance sheets if overall control of the asset concerned is not in their hands - and this is the case for the vast majority of PPP projects.
Under pressure from FRAB, the Treasury has accepted that a "mirror-image treatment" of IFRIC 12 is appropriate for the public sector (Heald 2008). This means that investments under PPP will have to be recorded on the balance sheet of the public sector, thereby scoring against the budgets of departments and devolved administrations. It is also likely that, from 2009/10, many PPPs will also score against PSND and, unless it is reformulated, the sustainable investment rule (ONS 2007).
From a financial transparency point of view, the move to IFRS will be widely welcomed if it removes perverse incentives to use PPP. On the other hand, with the accounting-driven advantage of PPP eroded, it is essential that ministers consider how investment by devolved administrations is to be funded if shortfalls in capital investment to be avoided. It remains to be seen whether the Treasury will introduce new regulations that will allow the NI Executive to meet its investment needs.
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10 Some 60% of the finance committed to so far on signed PPPs in NI is off-balance sheet (HM Treasury 2008)