The British Treasury has developed a more detailed approach to the public-sector balance-sheet treatment of the PFI Model, based on the British FRS5 accounting standard for private-sector companies (which remain consistent with the later and broader Eurostat rules discussed above). This takes a ‘substance over form’ approach (i.e.the balance-sheet status cannot be passed by mechanical tests; the commercial reality of the transaction has to be taken into account). There are three stages to the balance-sheet decision:
Separability. The question to be asked here is whether the Service Fees under the PPP Contract can be divided into a ‘lease’-type payment covering the project’s
capex, and a service payment covering the opex. This would be the case if the pay- ments were clearly divided into a part which covers the capex (similar to the Availability Charge in the case of a PPA (cf. §1.4.2) and another part which covers the opex. If so the capex element would be on the public-sector balance sheet (unless there is a significant transfer of residual risk (cf. §15.11)). Therefore although, as will be seen below, the payments by the Public Authority are built up from both capex and opex elements, once the initial level of the payments has been calculated it should not vary on this basis thereafter if the Facility is to remain off the public- sector balance sheet. This is the reason that the term ‘Unitary Charge’ (or ‘Unitary Payment’) was devised in the United Kingdom for the Service Fees under a PFI- Model PPP Contract, emphasising the point that the Service Fees are not separable into their different elements. Having said this, as will be seen below (cf. §12.4.8, 15.2.5), in reality the Service Fees may vary with individual cost items.
Risk transfer Assuming that the Public Authority’s payments are not separable, the next question is whether there has been a substantial transfer of risk to the private sector, or have significant risks been retained by the Public Authority, for example:
•
Does the Public Authority repay the project’s debt if it goes into default (cf. §15.5.1)?•
Is there such a high level of debt that lenders must be taking no risks?•
Does the Public Authority decide how the PFI Contract is to be fulfilled (since pre- sumably it would then be taking the risk if it is not fulfilled)? This obviously rein- forces the requirement that a PPP should be based on output specifications (cf.§1.3.2, §2.2).
If the answer to any of these questions is ‘yes’, the project will probably be on the public-sector balance sheet.
Quantitative risk analysis. Inevitably there will be some risks retained by the Public Authority (cf. §15.2.4); these should be quantified and discounted to an NPV.
If this NPV is ‘substantial’ in relation to the NPV of project costs as a whole, or to risks assumed by the Project Company it is reasonable to assume that adequate risk transfer has not taken place to get the Facility off the public-sector balance sheet.
This means that, for example, usage risk for a school has to be quantified and shown not be substantial, where this risk is retained by the Public Authority.
Since this approach looks at the substance of the transaction rather than its formal struc- ture, it has to involve questions of judgement, e.g.in ‘valuing’ risk transfer. This means that the final decision on balance-sheet treatment is not always obvious, relies heavily on accountants’ opinions, and is actually as subjective as the similar process in preparing a PSC, discussed above.
Perhaps not surprisingly, the actual balance-sheet treatment of PFI projects in Britain is confusing, and different government auditing bodies have taken different views on the matter. Central-government accommodation projects, prisons, roads (cf. §13.4.5), etc., have been placed on-balance sheet after further review of risk transfer; however hospitals in England (but not in Scotland) are off-balance sheet as are most local-government projects.
PFI projects classified as finance leases and so included in public-sector debt in 2006 are shown in Table 5.2; these are considerably smaller in total than the £23 billion of PFI
§5.5 Balance-Sheet Treatment 73
projects said to be on-balance sheet at that time (cf. §3.4.3), firstly because, as discussed above, where PFI projects are shown as public-sector debt, this only occurs after comple- tion of construction, and secondly because the amount shown is the finance lease amount, i.e.the NPV of only the capital element of the Service Fees. (The London Underground projects also inflate the £23 billion figure considerably—see the note to Table 3.2.) The ori- ginal intention seems to have been that all PFI projects should be off-balance sheet, but at some point during the procurement process (when it was too late to change the procure- ment strategy), or thereafter, the view changed. If an increasing proportion of projects finds its way onto the public-sector balance sheet, the prospects for further growth in the PFI programme appear limited, since the same construction-period balance-sheet benefits and at least some long-term transfer of maintenance risks can be achieved by other less financially-complex means (cf. §17.2.1, §17.3). A reduction in central-government proj- ects is already evident.
However, discussion on balance-sheet treatment is only relevant in countries where restraints on public-infrastructure investment arise from artificial constraints, such as the Maastricht Treaty limits on public budgets in the European Union. In other countries, such as South Africa, the issue is not artificial—there is a clear budgetary limit on the govern- ment’s ability to provide funding for infrastructure, and private-sector funding through PPPs therefore offers the only way of accelerating this provision.
Table 5.2
Finance-lease liabilities in U.K. public-sector debt, 2006
Public Authority Projects Finance Amount
(£ million)
Department for Transport Shadow-Toll roads (11) 973
Transport for London London Underground (3) 858
Ministry of Defence Accommodation & equipment (13) 658
Home Office Prisons (12) 378
Foreign Office Government Communications HQ 310
HM Treasury Office 152
HM Revenue & Customs Office 187
Scottish Executive Hospitals (3) 207
n/a Channel Tunnel Rail Link 220
Other 208
Total 4,151
Source: Office for National Statistics (see Bibliography)