In the UK, all debt for which the government is ultimately liable appears as government debt on the national accounts.
If the debt of a PFI company is guaranteed by the taxpayer (as for Metronet, for example, unwisely) then it appears as government debt on the national accounts.
If it does not appear as government debt on the national accounts, that means that the taxpayer isn’t liable for it.
While there are many arguments possible about the benefits or disbenefits of PFI (and, irrespective of whether PFI is a good thing or a bad thing in aggregate, it is certain that the disbenefits are exaggerated and the benefits understated in nearly all discussions of the topic), this isn’t one of them.
Hi John. The governement may not be guaranteeing the debt which the PFI company raised to finance the asset. However they do have a long term liability to pay the ongoing charges, which depending on the deal could be up to 30 years. The government would like us to consider these operational leases and so not on the national balance sheet but, they are in effect committed to these payments. It may not be debt, but it is a long term liability.
Entirely agreed.
While that's undoubtedly true, John, it doesn't really tell the whole story. If the PFI company is running an essential public service (say, your local hospital) then it will be politically impossible — and probably undesireable from a social standpoint — for the taxpayer to fail to support it should it get into financial difficulties.
Aren't there arguments within government about whether particular deals fall on or off balance sheet? Also, do all off-balance sheet deals fall on someone else's balance sheet, and if so, whose?
What benefits are understated? The only one I can think of that isn't usually mentioned is that it hampers the Tories should they wish to pay for tax cuts by freezing or cutting funding for public services, as they'll be dealing with hard-nosed businessmen rather than public sector managers. It thus ties any future Tory government into either a minimum level of public service spending or renouncing their business friendly market-led approach to public services.
Rather notoriously, because the government and companies have historically had different accounting standards, PFI deals would be off both sides balance sheets…
I understand, but don't quote me on this, that the government is falling into line and adopting IFRS, which should stop some of the weirdness. (That said, any privately held PFI company will still be reporting under UK GAAP in its stat accounts).
Nahhh, liabilitiesnotdebt is right on this one (and so was Sir David Tweedie when he cleared up the analagous issue in FRS3, if I recall correctly – it's the question of capitalisation of finance leases). Any sensible accounting principle should treat a contract to make fixed payments over a fixed term as a debt, whether or not it's structured as a debt or as a long term lease. The UK taxpayer is liable for making the payments on the PFI projects, and can be taken to court if the government fails to make them. So they ought to be capitalised on the government balance sheet, otherwise said balance sheet is going to significantly overstate the extent to which forecast tax receipts are available for discretionary spending.
uk.gov is indeed adopting IFRS – however, this is a migration from UK GAAP not from arcane proprietary accounting.
Ironically given the standard lies about lack of financial transparency, the current lot have been pretty good at aligning government accounts with GAAP – the "double off balance sheet" thing is more or less an urban myth created by morons who don't understand PFI.
"What benefits are understated?" – the fact that government is generally unspeakably bad at project management, implementation and cost control – so while most PFIs do feature a large margin for the PFI company, most of those have still been cheaper than getting it done by the comedians who would otherwise have got it done…
…apparently Dan and I are overlapping, today.
The government operates under FRS3. Government accounts have to be compatible with FRS3. PFI contracts that can't be escaped are treated as finance leases not operating leases.
My original point, however, was based on the oft-repeated claim that the government is responsible for the debt held by PFI SPVs. This only happens when the SPV's debt is guaranteed by the Treasury, which only happens when everyone concerned agrees to sign a contract that they know to be really really stupid in order to stitch up Ken Livingstone…