Tories reject on-balance sheet approach for public sector PFI

The Government wants all the hospitals, prisons and roads built and run under the Private Finance Initiative to stay off the balance sheet of the public sector.

Up to now, everyone involved with the PFI has agreed on one thing – that the Treasury has allowed a mass of contradictory advice to circulate, giving rise to delays and escalating costs. The learn-as-you-go attitude struck by the Treasury from the outset is seen as the culprit. It meant contractors, public sector organisations and their advisors had little idea if they could still debate the merits of finance leases, which keep the assets on the purchaser’s balance sheet, against operating leases, which kept them on the supplier’s side.

For some time, accountants and lawyers have advised caution and told both sides of the tender process that operating leases are the safe option.

After all, the Treasury wants to reduce the public sector borrowing requirement in accordance with the Maastricht Treaty. And what better way than by keeping assets off the public sector balance sheet.

But according to the private finance panel, the body entrusted by the Treasury with promoting the initiative, public sector managers have continued to ignore their hints. These managers have drawn up plans to build and run new facilities under the PFI with a finance lease as their preferred option. Unfortunately, this is old thinking.

The guidance issued by the private finance panel this week calls on public sector managers to seek the advice of professional advisors, which, it is implied, will give them the most up to date advice.

Under the heading ‘Private Finance Panel Tackles Accounting Problems in PFI’, KPMG partner and panel member Sheila Masters has agreed with critics that more guidance is needed. But she refuses to reveal the real opinion of the panel.

‘The focus must now be on agreeing the treatment for all transactions and establishing a proper body of precedent which can act as an authoritative source of guidance. This is why we are advising that it is best practice in PFI to obtain accounting advice on a transaction before submitting to a competitive tender process and to consider sharing conclusions on accounting treatment with potential bidders.’

A spokesman for the panel said the advice is supposed to prevent local authorities, health trusts and Government departments which are commissioning PFI projects from even considering on-balance sheet, finance lease deals.

But the panel refuses to be explicit and still says that it is possible technically to embark on a finance lease-backed deal; it’s just that there is no example it can think of where a finance lease might be cheaper, and therefore allowable.

The panel has, in effect, ruled out finance lease-backed deals, but refused to say so officially. This stance puts the emphasis back on the professional advisors to tell the real story or, in the words of one accountancy firm, ‘do the dirty work for the panel’.

Yet again, say the critics, the guidance issued by the panel lacks any guidelines that clarify the situation. We are still dealing in hints, even if most firms involved believe this is the biggest hint so far.