accounting for the private finance initiative: birth ... · pdf fileaccounting for the private...

Accounting for the Private Finance Initiative: Birth,

Growth, Death and Resurrection

Ron Hodges 1 Inaugural Address 30 October 2013

Inaugural Address 30 October 2013

OUTLINE

1. INTRODUCTION: PFIs & PPPs

2. BIRTH

3. GROWTH

4. DEATH

5. RESURRECTION

6. SOME CONCLUDING REMARKS

Ron Hodges 2

INTRODUCTION

What are Private Finance Initiative (PFI) contracts and Public Private Partnerships (PPP) arrangements?

Does accounting matter?

Ron Hodges Inaugural Address 30 October 2013 3

INTRODUCTION: PFI & PPP

Ron Hodges 4

PUBLIC PRIVATE PARTNERSHIPS BROAD VIEW (Treasury, 2000; Kernaghan, 1993)

P PRIVATE FINANCE INITIATIVE (PFI)

5

FEATURES OF PFI DEALS

They are constructed as service contracts.

Usually back by significant capital assets (roads, hospitals, prisons etc).

They are long-term (e.g. 30+ years).

Public sector pays an annual service charge based on availability and service performance.

The private sector provider is typically a consortium headed by a shell company (SPV).

Ron Hodges Inaugural Address 30 October 2013

INTRODUCTION: FORMS OF PPP/PFI ACCOUNTABILITY

1. ACCOUNTABILITY FOR VALUE FOR MONEY

Contractual arrangements, risk transfer, authorisation and monitoring arrangements.

2. POLITICAL ACCOUNTABILITY

Of an executive body to a legislature on behalf of citizens (for public policy).

3. FINANCIAL ACCOUNTABILITY

By individual entities (financial accounting) or governments (national / whole of govt accounts)


7

THE MAJOR QUESTIONS ON ACCOUNTING FOR PPP


WHOSE ASSETS?

HOW WILL THEY BE PAID FOR?

ALTERNATIVE FINANCIAL ACCOUNTING TREATMENTS


GRANTOR ASSETS ON the (public sector) B.S. OFF the (private sector) B.S.

OPERATOR ASSETS OFF the (public sector) B.S. ON the (private sector) B.S.

DOUBLE COUNTED ASSETS ON the (public sector) B.S. ON the (private sector) B.S.

ORPHAN ASSETS OFF the (public sector) B.S. OFF the (private sector) B.S.

Adapted from: Heald and Georgiou, 2011, p.227.

BIRTH


THE EARLY YEARS OF PFI

1992: Conservative Government (Major) introduces PFI.

It is made compulsory for consideration as a method of financing public schemes >£1M.

Major capital assets are key to development of these schemes (Mayston, 1999).

Very few schemes reach financial closure.


11

Number and Capital Value of Signed PFI Schemes

Source: Treasury (2006) - excludes London Underground PPP

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Cap

ital

Valu

e (

£ B

illi

on

s)

0

20

40

60

80

100

120

Nu

mb

er

of

Sig

ned

Deals

Capital value Number of signed deals


THE EARLY YEARS OF ACCOUNTING FOR PFI

There was an absence of specific disclosure requirements about PFI; little was disclosed in the accounts of public sector entities (Hodges and Mellett, 1999).

It becomes apparent that public sector obligations can be made ‘off-balance sheet’.

Interim guidelines for the public sector (Treasury Taskforce, 1997) were based on a loose interpretation of risks and rewards.


GROWTH


GROWTH YEARS OF THE PFI

PFI takes off; it’s ‘the only game in town’.

New Labour Govt (Blair) supports PFI/PPP, increased focus, restructures policy units.

Schemes get bigger or are combined.

Adaption to new sectors (e.g. social housing) remains problematic (Grubnic and Hodges, 2003; Hodges and Grubnic, 2005).


15

Number and Capital Value of Signed PFI Schemes

Source: Treasury (2006) - excludes London Underground PPP

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Cap

ital

Valu

e (

£ B

illi

on

s)

0

20

40

60

80

100

120

Nu

mb

er

of

Sig

ned

Deals

Capital value Number of signed deals



PFI cumulative capital £m (to February 2010) Source: Treasury 2011

Department £m

Children, Schools & Families 6,469

Health 11,244

Transport 12,029

Local government 2,056

Defence 8,805

Environment, Food and RA 2,687

Northern Ireland 1,737

Scotland 5,696

Others (each below £1.5 billion) 4,925

Total (excludes approx £10 billion Tube PPP) 55,668

16 Ron Hodges

THE GROWTH YEARS OF ACCOUNTING FOR PFI

Private sector accounting is developed through an ASB (1998) standard FRS 5, based on a ‘risks and rewards’ analysis.

At the development stage the accounting firms and professional bodies support the ASB’s approach while the Treasury, govt departments, operators, developers do not (Hodges & Mellett, 2002; Broadbent and Laughlin, 2002).

Treasury Taskforce (1999) determines the application of FRS 5 in the U.K. public sector.



PFI: Treatment of capital values based upon UK GAAP (Hodges and Mellett, 2012)

Department £m CapVal £m ON

CapVal £m OFF

Projects ON

Projects OFF

Children, Schools & Families 6,469 1,101 5,368 17 124

Health 11,244 380 10,864 7 94

Transport 12,029 9,363 2,666 23 29

Local government 2,056 0 2,056 0 60

Defence 8,805 1,150 7,655 12 38

Environment, Food and RA 2,687 635 2,052 1 21

Northern Ireland 1,737 864 873 15 21

Scotland 5,696 847 4,849 9 76

Others (each <£1.5 billion) 4,925 1,104 3,821 32 79

Total 55,668 15,464 40,204 116 542

18 Ron Hodges

Inaugural Address 30 October 2013 19

ACCOUNTING FOR PFI Some difficulties

Distinctions between what contacts which are ‘on’ and which are ‘off’ balance sheet may be marginal and may distort VFM issues (Heald, 2003).

It is impossible to compare entities using the two different treatments (Hodges & Mellett, 2004)

Disclosures in private sector accounts do not compensate for lack of public sector disclosures. There is some evidence that assets may not be on anyone’s balance sheet! (Edwards et al, 2004)

Ron Hodges

DEATH


DEATH: of UK GAAP accounting for PFI


UK Listed Companies adopt IFRS from 2005

UK Government sector adopts IFRS from 2009/10

IFRIC 12 Service Concessions

IPSAS 32 Service Concessions: Grantor

SERVICE CONCESSION ACCOUNTING UNDER IFRIC 12 / IPSAS 32.

The recognition of assets is based upon power to ‘control and regulate’ the use of those assets.

Recognition of obligations as either a financial liability or as deferred income.

Likelihood of bringing schemes onto public sector balance sheets.


UK Treasury Flow Chart for Public Sector PPP Client under IFRIC 12

REPORT ASSET AND RELATED

LIABILITY USING ON BALANCE

SHEET TREATMENT.

LEASE ACCOUNTING

FOLLOWING IAS 17

IS A LEASE INCLUDED?

INFRASTRUCTURE OF

THE GRANTOR,

OPERATOR IS GIVEN

ACCESS

INFRASTRUCTURE ON

BALANCE SHEET AS

PP&E (IAS 16) OR AS A

LEASED ASSET (IAS 17)

Column 2 Column 3

ON PUBLIC SECTOR ON BALANCE

SHEET (IASB IFRIC12 MIRROR IMAGE

/ IPSAS 32)

ON PUBLIC SECTOR

BALANCE SHEET UNDER

IAS16 OR IAS17

OFF PUBLIC

SECTOR

BALANCE

SHEET –

TREATED AS

CURRENT

EXPENDITURE

Source: HM Treasury (2008, with additional explanation)

Column 1

CONTROL OF THE

INFRASTRUCTURE?

INFRASTRUCTURE ALREADY

OWNED OR CONSTRUCTED BY

THE OPERATOR?

RECOGNISE

AS

EXPENDITURE

SIGNIFICANT RESIDUAL INTEREST

IN THE INFRASTRUCTURE?

Inaugural Address 30 October 2013 23 Ron Hodges


PFI: treatment of capital values based on IFRS / IPSAS (Hodges & Mellett, 2012)

Department (to March 2011) £m CapVal £m ON

CapVal £m OFF

Projects ON

Projects OFF

Education 2,190 2,190 0 38 0

Health 11,887 11,530 357 111 4

Transport 6,644 5,547 1,097 46 10

Local government 1,538 1,298 240 41 6

Defence 9,064 9,064 0 46 0

Environment, Food and RA 3,059 0 3,059 0 24

Northern Ireland 1,786 1,583 203 26 11

Scotland 5,704 5,704 0 84 0

Others (each <£1.5 billion) 4,728 4,583 145 91 8

Total 46,600 41,499 5,101 483 63

24 Ron Hodges

Bringing PFI on balance-sheet: University Hospitals Birmingham NHSFT

2010/11 Accounts

Additions to Fixed Assets of £479.6M.

Impairment cost £243.6M

Borrowings up £448M

Loss for year = £252.3M

Net liabilities = £32.9M


Sources: UHB Annual Report 2010/11, Ellwood 2012.

THE FINANCIAL CRISIS & PFI

The financial completion of PFI schemes starts to dry up:

2008 = 63 schemes

2009 = 22 schemes.

PFI investment is bought into the public sector.


PFI GETS INVESTIGATED


PFI IS RESURRECTED

March 2009 – the Treasury creates an ‘Infrastructure Finance Unit’ to support PFI projects under procurement.

Is this PFPFI?

December 2012 – the Treasury announces ‘ a new approach to public private partnerships’.

This is PF2.


PF2: Some key features

Public sector minority equity interest

Public sector board membership

Long term equity e.g. pension funds

No windfall gains, use lifecycle reserves

Greater transparency – private sector gains, off-balance sheet PFI control totals, procurement stage plans.

Efficiency, flexibility, risk transfer...blah, blah



OUTLINE

1. INTRODUCTION: PFIs & PPPs

2. BIRTH

3. GROWTH

4. DEATH

5. RESURRECTION

6. SOME CONCLUDING REMARKS

Ron Hodges 31

ACCOUNTING FOR PFI: SOME CONCLUDING REMARKS

Accounting both communicates and creates realities (Hines, 1988).

If PFI is a ‘Great British export’ then accounting for it is not.

Academic commentators!

WOT? NO IMPACT?


WHAT NEXT FOR PUBLIC SECTOR OFF-BALANCE SHEET FINANCE?

It’s Guaranteed!!


REFERENCES... possibly mentioned today

Broadbent. J and Laughlin, R (2002), Accounting choices: technical and political trade-offs and the UK’s private finance initiative. Accounting, Auditing & Accountability Journal, 15(5): 622–654.

Edwards, P., Shaoul, J., Stafford, A. and Arblaster, L. (2004), Evaluating the Operation of PFI in Roads and Hospitals, Certified Accountants Educational Trust, London.

Ellwood, S. (2012), Accounting Magic; (dis)appearing hospitals, mimeo, University of Bristol

Grubnic, S. and Hodges, R (2003), Information, trust and the private finance initiative in social housing, Public Money & Management, 23(3): 177-184

Heald, D. (2003), ‘Value for money tests and accounting treatment of PFI schemes’, Accounting, Auditing and Accountability Journal, 16(3): 342-371.

Heald, D. and Georgiou, G. (2011), ‘The Substance of Accounting for Public Private Partnerships’, Financial Accountability & Management, 27(2): 217-247.

Hines, R. (1988), ‘Financial Accounting: in communicating reality, we construct reality’, Accounting, Organizations & Society, 13(3): 251-261.

Hodges, R. and Grubnic S (2005), Public Policy Transfer: the case of PFI in housing, International Journal of Public Policy, 1(1): 58-77.

Hodges, R. and Mellett, H (1999), ‘Accounting for the Private Finance Initiative in the United Kingdom National Health Service’, Financial Accountabiiity & Management, 15(3&4): 275-290.


REFERENCES... possibly mentioned today

Hodges, R & Mellett, H. (2002), Investigating standard setting: accounting for the United Kingdom’s private finance initiative, Accounting Forum, 26(2): 126-151

Hodges, R. and Mellet, H. (2004), ‘Reporting PFI in Annual Accounts: A User’s Perspective’, Public Money & Management, 24(3): 153-158.

Hodges, R. and Mellett, H. (2012),’The U.K. Private Finance Initiative: an accounting retrospective’, British Accounting Review, 44(4): 235-247.

Kernaghan, K. (1993), Partnership and Public Administration: conceptual and practical considerations, Canadian Public Administration, 36(1): 57-76.

Mayston, D. (1999), The Private Finance Initiative in the National Health Service, An Unhealthy Development in New Public Management, Financial Accountability & Management, 15, no. 3&4, pp. 249-274.

Treasury (2000), Public Private Partnership: The Government’s Approach, London.

Treasury (2006), PFI : strengthening long-term partnerships, London.

Treasury (2008), Accounting for PPP Arrangements including PFI under IFRS, Financial Reporting Advisory Board, Paper 92(02), 5 June 2008.

Treasury (2011), PFI deals signed March 2011, www.hm-treasury.gov.uk/ppp_pfi_stats.html

Treasury (2012), A new approach to public-private partnerships, December.


http://www.hm-treasury.gov.uk/ppp_pfi_stats.html



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