MPs target PFI 'off balance sheet' accounting

The Treasury Select Committee believes the government’s PFI reform is not going far enough as it is not addressing the incentive offered by PFI’s 'off balance sheet' accounting method, as opposed to value for money.

The UK’s Treasury Select Committee – a spending watchdog made up of members of Parliament (MPs) – said on Monday that the government’s proposed reforms of the Private Finance Initiative (PFI) do not go far enough in making sure the procurement method delivers better value for money for the taxpayer.
 
That’s because PFI liabilities are still able to be recorded off balance sheet, potentially incentivising PFI’s use over other, more cost-efficient procurement methods. PFI is the UK’s standardised procurement method for public-private partnerships.                                                                                                                                                                                                           
“We must avoid using PFI solely as a means of placing government finance off balance sheet. Value for money is crucial,” warned Andrew Tyrie, chair of the Treasury Select Committee. However, the current “system of national accounting continues to provide an incentive to use PFI because such liabilities are excluded from public sector net debt,” Tyrie added.
 
In a report unveiled Monday, the watchdog expressed concern that this incentive would not change anytime soon: “Treasury said that any consequential increase in public borrowing might compromise the achievement of the fiscal targets. This could be taken to mean that PFI is still used, at least in part, as a means of off balance sheet finance, rather than because it represents the best financing method available.”
 
The watchdog pointed to a situation late last year where “Transport for London had been prevented by the government from increasing its own borrowing as it wished in order to fund investment in the Crossrail project and [was] told that the majority of the investment had to be through the PFI” as an example of PFI’s off balance sheet incentives.
 
While saluting the government’s initiative to look for other sources of private sector funding now that the cost of project finance bank debt has shot up, the Treasury Select Committee was wary of what it might take to get pension funds and life insurers to fund UK infrastructure.
 
Referring to the government’s agreement with two groups of UK pension funds and the Association of British Insurers to channel up to £20 billion (€24 billion; $31 billion) of institutional capital into infrastructure, Tyrie warned that “the Government must be cautious about taking on further contingent liabilities or providing guarantees that could lay additional costs at the door of future taxpayers”.
 
In the watchdog’s view, “the most cost-effective method for sourcing capital from institutional investors is to sell government gilts to them”. Other alternatives to private sector financing initiatives could rely on improving the reliability of public procurement by “transferring project risk to contractors on the basis of fixed price design and build contracts”.
 
The Treasury is currently holding fortnightly meetings with two pension groups to hammer out a strategy on how to increase pension investment in UK infrastructure ahead of a planned five-year, £170 billion infrastructure spend. An announcement on the results of their joint work is due to be unveiled in spring, when the 2012 Budget will be revealed.