Finance: Accounting for private cash in state projects

City+: A dispute between Treasury and the accountants' watchdog threatens the Private Finance Initiative. Paul Gosling looks at the implication s

The future of the Private Finance Initiative is under threat, following disclosure of an argument between the Accounting Standards Board (ASB) and the Treasury. The ASB says the Treasury's existing rules for accounting for PFI contracts can hide possible liabilities - but the Treasury appears to be terrified that if reforms proposed by the ASB are adopted then such deals would have to be counted against the Public Sector Borrowing Requirement, undermining an essential element of the PFI.

"It is like the games the previous government played with unemployment figures," suggests Allan Cook, technical director of the ASB. He says that unless the PFI is properly accounted for then it will lose credibility and "In the end, the instrument dies in your hand." This view is even endorsed by some of the Treasury's own accountancy advisers.

It was initially the big firms that expressed concern at the Government's accounting for PFI, though there had not been unanimity between them about whether PFI deals should be on or off balance sheet. The ASB responded by proposing that the assets and liabilities financed by PFI should always appear on someone's balance sheet, and launched a consultation process that ends next month.

The ASB says that it expects all the firms to support its final recommendation, though it may take time to hammer out the detail. Even then, the findings will not be binding on the Government, as the ASB has jurisdiction only over the private sector. The ASB hints, though, that ignoring its views will scupper the Treasury's aim to move to commercially approved accounting standards.

"They are introducing resource accounting, which will take assets and liabilities seriously, and that is praiseworthy," says Mr Cook. "It follows that they should look seriously to determine what are the assets and liabilities. They can apply whatever accounting rules they want, but their object was to adopt accounting rules that are generally accepted through the country, and they said they would in most cases apply private sector accounting rules."

A primary concern of the ASB is that the current rules allow the borrowing liabilities for some assets to be used by the public sector not to appear on the balance sheet of either the public body or their private sector partner. An example has been the Channel Tunnel rail link, where the inability of private sector contractors to deliver within budget looks likely to land the Government with nearly pounds 500m in liabilities that ministers were previously unaware of.

Even without unexpected disasters happening to capital projects, the ASB believes that the Government's accounts may understate future revenue obligations. Several PFI deals have involved the sale and lease back of assets, providing short-term capital receipts, but longer-term increased revenue expenditure. "These deals have a significant implication in the amount of taxation that needs to be raised in subsequent periods," warns Mr Cook. "That is a big shift in resources."

The Treasury has told the ASB that it has monitoring systems that prevent too much of departmental budgets being "silted up" in this way, but this has failed to reassure the ASB. Members of the Public Accounts Committee of the House of Commons have also expressed concern at the issue of "silting up" revenue budgets through sale and lease-back contracts. However, David Davis, chairman of PAC, says he is relaxed about this. "There are plenty of committed income streams in government," he claims, "much more so than in commercial concerns. It is the decision-making that is critical - are you losing an income stream, or losing a cost stream?"

There is also tension between the accountants and the PFI deal-makers in some of the firms. Where the accountants want PFI contracts to be properly accounted for, some of the PFI corporate finance advisors fear the loss of lucrative business. This may help to explain a growing chorus calling for a compromise.

Peter Holgate, accounting technical partner at Coopers and Lybrand, says: "We are not in full agreement with the ASB proposals, because we think they would get too many assets and liabilities on the public sector balance sheet. From an accounting point of view there is a range of different transactions with the PFI. Some we have said are on balance sheet, some are off, and some are border-line." But the body that bears the risk must show that in its accounts, he says.

The Chartered Institute of Public Finance and Accountancy takes a similar view of the matter.

"The two `conflicting' sets of guidance have more in common than divides them," says Cipfa's policy and technical director, Martin Evans. "Where the Treasury says `and', the ASB says `or'. But we do believe it is for the ASB to decide."

A spokesman for the National Audit Office adds: "We think there is much less difference between the Treasury and the ASB than has been suggested. Although liabilities under the PFI are not currently disclosed, they will be when resource accounting comes in." He says that accounts will then have to disclose, by way of notes, all PFI commitments.

Increasingly, a compromise solution looks the likely outcome.