1. 1 OECD - Working Party of Senior Budget Officials Public-Private Partnerships: Affordability, Value for Money and the PPP Process Frédéric MARTY CNRS – GREDEG – University of Nice Sophia-Antipolis OFCE – Innovation and Competition Department Winterthur (Zürich) – 21-22 February 2008

2. 2 Public-Private Partnerships Affordability, Value for Money and the PPP Process United Kingdom Accounting for PPPs Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 Session 5 – Friday, February 22

3. 3 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o Even if Eurostat in 2004 issued a directive on PPPs consolidation in public accounts, many difficulties and uncertainty remain. o No clear and comprehensive set of rules guide Governments on how to account for PPPs. o Opportunistic fiscal strategies seem always possible to bypass Government spending limits and fiscal rules o Are the PPPs contract principally a gimmickry to push debt finance off public books ?

4. 4 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o A case study on British PFI contracts based on the HMT PFI database (July 2007) A choice driven by value for money considerations? o HM Treasury asserted since 1997 that VfM is the principal criterion to commit into a PFI contract o UK PFI accounting rules are stricter than Eurostat directive (2004) o FRS 5 is applied (Accounting standard Board, 1998) o a quantitative analysis of risks is led o demand risk must be borne by the private partner o Some contracts originally off the books were re-integrated. o UK Public Finance rules (Golden Rule) would allow to finance conventionally all the PFI contracts

5. 5 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o Nevertheless, just 13 % of PFI contracts are recorded on the books. o These ones represent 46 % of the total value. o Not counting the three atypical contracts on the London Underground, just 19 % of the total value is recorded in Government balance sheet.

6. 6 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o The distribution of PFI contracts according to their accounting treatment reveals a predominance of off-balance sheet classification Source : Marty (2007) – Working paper OFCE

7. 7 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o The annual Government commitments induced by PPPs contract are marginally recorded in the books as the figure shows

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

9. 9 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o 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. ContractYeardomain Amount ( £ M) Skynet V2003 Defence – satellites 1079 St Bart s Hospital / London NHS Trust 2006Health1000 Prime2003Social Affairs – Real Estate 990 Birmingham Hospital 2006Health627 Colchester2004 Defence – Real Estate 539 M6 Motorway 1992Transports485 Main contracts – off the books ContractYearDomain Amount (M £ ) London Underground 2003Transports6687 London Underground 2002Transports5526 London Underground 2003Transports5831 Allenby2006 Defence – real estate 1257 MBR2000 Defence – real estate 439 Severn Crossing 1990Transports331 Main contracts – on the books

10. 10 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o The accounting treatment of PFI contracts differs according to Governments departments Defence Numbers of contract Capital values On balance sheet11£2.24B Off balance sheet36£3.34B

11. 11 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o Health sector : predominance of off balance sheet treatments Health Numbers of contract Capital values On balance sheet5£243M Off balance sheet81£8047M

12. 12 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o In the domain of transports, the London Underground contracts break the equilibrium Transports Numbers of contractCapital values On balance sheet20 (3 London Underground) £19.7B (London Underground = £17.6B) Off balance sheet29

13. 13 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 o Accounting for PFI contracts : What are the perspectives ? 1.The British Treasury already re-integrated some PFI contracts on the public sectors balance sheet. 2.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. 3.But, many inconsistencies might be put into relief 1.PFI credits delivered by local governments are sometimes conditioned to an off balance-sheet treatment 2.Some real estate operations are on the books, some other off the books (MoD case for example)

14. 14 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008 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. o 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 o The potential impact of a PFI contracts consolidation on balance sheet could deter private firms from bidding.