3.16 Most PFI projects are recorded as off-balance sheet in the National Accounts (Figure 18). This means that PFI debt does not appear in UK debt statistics and the investment does not count as an upfront cost in departmental capital budgets.
3.17 The PF2 schools used an aggregator (Aggregator Vehicle plc) to combine the financing requirements for all its batches of schools, comprising five PF2 projects, which enabled it to reduce transaction costs and access cheaper debt finance from the European Investment Bank (EIB) and Aviva. As the PF2 model was designed to be off-balance sheet under the National Accounts, the government had planned for the aggregator to be classified as an off-balance sheet finance vehicle. However in 2014-15, the Office for National Statistics (ONS) (following the introduction of ESA 2010) classified the PF2 schools aggregator as on-balance sheet - the debt was classified as government debt and the capital investment scored in education budgets. There are no plans to use the aggregator vehicle again. HM Treasury and IPA have told us that the balance sheet treatment of the aggregator was not a relevant consideration in their decision not to use it again.
Figure 18 Eurostat and ESA |
What is Eurostat?
Eurostat is the statistical office of the European Union. Its main role is to process and publish comparable statistical information at European level.
European System of Accounts (ESA)
The UK is required to produce a set of National Accounts using the internationally agreed guidance and rules set out in the ESA. Under ESA 95 most PFI projects were considered to be off-balance sheet meaning related PFI debt does not appear in measures of UK government debt such as Public Sector Net Debt (PSND). HM Treasury also chooses to set budgets based on the National Accounts classification so any upfront investment provided under PFI does not feature in departmental capital budgets.
In June 2013, ESA 2010 was introduced, replacing the previous set of rules known as ESA 95. ESA 2010 introduced changes that made it more difficult for future Public Private Partnership (PPP) debt, like Private Finance Initiative (PFI) and Private Finance 2 (PF2), to be classified as off-balance sheet. The Office for National Statistics (ONS) - the UK's independent producer of official statistics- implemented the ESA 2010 rules in 2014. Eurostat published new guidance in September 2016 clarifying the balance sheet treatment changes under ESA 2010 for PPPs.
International Financial Reporting Standards (IFRS)
The ESA differs to how departmental financial statements and the Whole of Government Accounts (WGA) are produced, which use a different set of accounting rules know as IFRS. These rules classify nearly all PPP projects as on-balance sheet.
Implications of leaving the European Union (EU)
Upon leaving the EU, the ONS may have more control over the statistical classification of PFI and PF2 contracts. Whether or not the UK will continue to adopt the Eurostat guidance will depend on negotiations as part of the exiting process.
Source: Eurostat; HM Treasury; National Audit Office analysis |