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OECD - Working Party of Senior Budget Officials

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.

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OECD - Working Party of Senior Budget Officials

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  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. 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 Government’s departments Defence Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008

  11. Health sector : predominance of off balance sheet treatments Health Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008

  12. In the domain of transports, the London Underground contracts break the equilibrium Transports 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 sector’s 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 contract’s consolidation on balance sheet could deter private firms from bidding. Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008

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