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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?
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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)
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THE MAJOR QUESTIONS ON ACCOUNTING FOR PPP
Ron Hodges Inaugural Address 30 October 2013
WHOSE ASSETS?
HOW WILL THEY BE PAID FOR?
ALTERNATIVE FINANCIAL ACCOUNTING TREATMENTS
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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
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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.
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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
Ron Hodges Inaugural Address 30 October 2013
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.
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GROWTH
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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).
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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
Ron Hodges Inaugural Address 30 October 2013
Inaugural Address 30 October 2013
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.
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Inaugural Address 30 October 2013
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
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DEATH: of UK GAAP accounting for PFI
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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.
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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
Inaugural Address 30 October 2013
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
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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.
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PFI GETS INVESTIGATED
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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.
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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
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Inaugural Address 30 October 2013
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?
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WHAT NEXT FOR PUBLIC SECTOR OFF-BALANCE SHEET FINANCE?
It’s Guaranteed!!
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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.
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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.
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Thanks for listening... if you were
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