Diapositive 1

1
OECD - Working Party of Senior Budget Officials
Public-Private Partnerships Affordability, Value
for Money and the PPP Process
Frédéric MARTYCNRS GREDEG University of
Nice Sophia-Antipolis OFCE Innovation and
Competition Department
Winterthur (Zürich) 21-22 February 2008
2
Public-Private Partnerships Affordability, Value
for Money and the PPP Process
Session 5 Friday, February 22
United Kingdom Accounting for PPPs
Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
3

• Even if Eurostat in 2004 issued a directive on
  PPPs consolidation in public accounts, many
  difficulties and uncertainty remain.
• No clear and comprehensive set of rules guide
  Governments on how to account for PPPs.
• Opportunistic fiscal strategies seem always
  possible to bypass Government spending limits and
  fiscal rules
• Are the PPPs contract principally a gimmickry to
  push debt finance off public books ?

Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
4

• A case study on British PFI contracts based on
  the HMT PFI database (July 2007)
• A choice driven by value for money
  considerations?
• HM Treasury asserted since 1997 that VfM is the
  principal criterion to commit into a PFI contract
• UK PFI accounting rules are stricter than
  Eurostat directive (2004)
• FRS 5 is applied (Accounting standard Board,
  1998)
• a quantitative analysis of risks is led
• demand risk must be borne by the private partner
• Some contracts originally off the books were
  re-integrated.
• UK Public Finance rules (Golden Rule) would
  allow to finance conventionally all the PFI
  contracts

Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
5

• Nevertheless, just 13 of PFI contracts are
  recorded on the books.
• These ones represent 46 of the total value.
• Not counting the three atypical contracts on the
  London Underground, just 19 of the total value
  is recorded in Government balance sheet.

Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
6

• The distribution of PFI contracts according to
  their accounting treatment reveals a predominance
  of off-balance sheet classification

Source Marty (2007) Working paper OFCE
Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
7

• The annual Government commitments induced by
  PPPs contract are marginally recorded in the
  books as the figure shows

Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
8

• The HMT directives (1997 and 1999) in favour of
  choices based on VfM and not on accounting
  considerations had apparently a limited impact on
  contracts consolidation

Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
9

• The contracts that present an important capital
  value (and could deteriorate the financial ratios
  of the private partner in case of a consolidation
  in its account) are often maintained on-balance
  sheet.

Contract Year domain Amount (M)
Skynet V 2003 Defence satellites 1079
St Barts Hospital / London NHS Trust 2006 Health 1000
Prime 2003 Social Affairs Real Estate 990
Birmingham Hospital 2006 Health 627
Colchester 2004 Defence Real Estate 539
M6 Motorway 1992 Transports 485
Contract Year Domain Amount (M)
London Underground 2003 Transports 6687
London Underground 2002 Transports 5526
London Underground 2003 Transports 5831
Allenby 2006 Defence real estate 1257
MBR 2000 Defence real estate 439
Severn Crossing 1990 Transports 331
Main contracts on the books
Main contracts off the books
Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
10

• The accounting treatment of PFI contracts
  differs according to Governments departments

Defence
Numbers of contract Capital values
On balance sheet 11 2.24B
Off balance sheet 36 3.34B
Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
11

• Health sector predominance of off balance
  sheet treatments

Health
Numbers of contract Capital values
On balance sheet 5 243M
Off balance sheet 81 8047M
Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
12

• In the domain of transports, the London
  Underground contracts break the equilibrium

Transports
Numbers of contract Capital values
On balance sheet 20 (3 London Underground) 19.7B (London Underground 17.6B)
Off balance sheet 29
Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
13

• Accounting for PFI contracts What are the
  perspectives ?
• The British Treasury already re-integrated some
  PFI contracts on the public sectors balance
  sheet.
• In its 2006 guidance on Value for Money
  assessment, HMT asserted again that The
  assumption should be that projects will be
  on-balance sheet, unless there is significant
  historical record to suggest otherwise.
• But, many inconsistencies might be put into
  relief
• PFI credits delivered by local governments are
  sometimes conditioned to an off balance-sheet
  treatment
• Some real estate operations are on the books,
  some other off the books (MoD case for example)

Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008
14

• 4. The most important limit to Government
  deconsolidation strategy is the ability to the
  private partner to integrate PFI contract in its
  own accounts.
• As it is also the case for risk transfer, a
  public strategy based on a systematic
  deconsolidation would certainly fail to achieve
  VfM.
• The deterioration of the financial ratios of the
  private partners will lead to a degradation of
  the financial notation of its debt, which will
  induce increasing financial costs
• The potential impact of a PFI contracts
  consolidation on balance sheet could deter
  private firms from bidding.

Frédéric MARTY - Winterthur (Zürich) 21-22
February 2008