1 oecd - working party of senior budget officials public-private partnerships: affordability, value...
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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
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Public-Private Partnerships Affordability, Value for Money
and the PPP Process
United KingdomUnited KingdomAccounting for PPPsAccounting for PPPs
Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008
Session 5 – Friday, February 22
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 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 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 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
Répartition des contrats selon leur traitement comptable
512
78
contrats hors bilan contrats consolidés
Source : Marty (2007) – Working paper OFCE
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
0
1000
2000
3000
4000
5000
6000
7000
8000
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
2019-20
2022-23
2025-26
2028-29
2031-32
Part des flux de paiements des PFI consolidées dans les flux totaux
toutes PFI
PFI consolidées
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
0
10
20
30
40
50
60
70
80
1987 1991 1995 1999 2003 2007
Répartition annuelle des contrats selon leur traitement comptable
hors bilan consolidés
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.
Contract Year domain Amount (£M)
Skynet V 2003 Defence – satellites
1079
St Bart’s 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
Main contracts – off the books
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
10 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008
o The accounting treatment of PFI contracts differs according to Government’s departments
DefenceDefence
nombre de contrats - Défense
hors bilan
consolidés
montants - PFI de Défense
hors bilan
consolidés
Numbers of contract
Capital values
On balance sheet 11 £2.24B
Off balance sheet 36 £3.34B
11 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008
o Health sector : predominance of off balance sheet treatments
HealthHealth
Numbers of contract
Capital values
On balance sheet 5 £243M
Off balance sheet 81 £8047M
nombre de contrats - Santé
hors bilan
consolidés
montants -Santé
hors bilan
consolidés
12 Frédéric MARTY - Winterthur (Zürich) – 21-22 February 2008
o In the domain of transports, the London Underground contracts break the equilibrium
TransportsTransports
Numbers of contract Capital values
On balance sheet 20 (3 London Underground)
£19.7B (London Underground = £17.6B)
Off balance sheet 29
répartition des contrats - ministère des transports
contrats consolidés contrats déconsolidés
montants - Transports
hors bilan
consolidés hors métro deLondres
métro de Londres consolidé
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 sector’s 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 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 contract’s consolidation on balance sheet could deter private firms from bidding.