SUBSECCIÓN II. PRESENTACIÓN Y PAGO
DE LAS OBLIGACIONES EN GENERAL CAPÍTULO I
Traditionally, one of the major characteristics of traditional pro- curement is its transparency – an essential ethos of public sector finance. An event in December 2001 was to add fuel to the lobby which regarded PPP/PFI accounting practices with suspicion. The Enron Corporation was one of the world’s largest energy, commodi- ties and services company marketing electricity and natural gas, de- livered energy and other physical commodities, as well as providing financial and risk management services to customers, worldwide. Based in Houston, Texas, Enron was formed in July 1985 by the merger of Houston Natural Gas and InterNorth of Omaha, Nebraska. Enron rapidly evolved from delivering energy to broker- ing futures as energy markets were deregulated. The company en- tered the European energy market in 1995. In 1999, Enron launched a plan to buy and sell access to high speed internet bandwidth and launched EnronOnline, a web-based commodity trading site. In 2000, Enron reported revenues of $101 billion and held stakes in 30 000 miles of gas pipeline and had access to a 15 000 mile fibreoptic network. On the face of it Enron was a success. In fact, it was known as one of the coolest organisations to work for with its executives leading expensive and lavish life styles and of course Enron’s accounts were audited by one of the world’s most respected firm of accountants, Arthur Anderson. However, disaster was just around the corner and in December 2001 following a collapse in its share price Enron, filed for Chapter 11 bankruptcy protection with an es- timated $27 billion worth of what is known as off balance sheet debt. According to Iain McWhinney, President, Currie & Brown USA,
There is definitely a legacy of Enron. Auditors are wanting to see greater cost visibility, as well as clear processes and procedures to manage it. This is where the QSs come into their own.
Many PFI deals are accounted for by the same off balance sheet processes used by Arthur Anderson when auditing Enron’s ac- counts. Off balance sheet is an accounting procedure that for example, helps firms with significant long-term operating lease arrangements and unconsolidated affiliates, have debt-equity ratios that make them look financially healthier and more solvent than they actually are. Similarly, firms with resources at risk, because they have made certain guarantees that protect their customers or the creditors of unconsolidated affiliates or because they have left
other contingent obligations off the balance sheet, may look like they have less debt than they actually have. By the same token, firms with large amounts of unfunded and unrecorded post-retire- ment obligations may look deceptively healthy.
The government publication, PFI: Meeting the Investment Challenge points out that 57 per cent of PFI projects by value are ac- counted for on balance sheet thereby leaving 43 per cent off balance sheet. In September 1998, the Accounting Standards Board (ASB) stated that the capital value of PFI transactions should appear on the government’s balance sheet. However, negotiations between the ABS and the Treasury resulted in a revised version of the note, ‘How to
Account for PFI Transactions’, which allowed most PFI deals to be ex-
cluded from the government’s borrowing figures on the grounds that they are ‘operating leases’. In 1999 new guidance was issued which stated that property risks and service related risks (staffing costs) of PFI deals should be separated out. It should then be clear that the property-related risk has been transferred to the private sector and hence should not be on the government balance sheet. In 2001, the Office for National Statistics began to examine the ways in which PFI projects are treated for accounting purposes and by May 2005 was under pressure to make material changes in the way in which projects are classified. Any change from current FRS 5 Accounting Standards
Agency – Reporting the Substance of Transactions processes to put
more of the £43 billion spent of PFI project on balance sheet, would have the effect of raising public sector net debt to near the Treasury’s self imposed limit of 40 per cent and making the PFI process far less attractive to public sector agencies and private consortia alike.
When launched in 1992 the mission of the PFI was stated by Chancellor Norman Lamont as ‘allowing the private financing of capital projects’. In a speech to the annual PFI conference in October 1996, Chancellor Kenneth Clarke said, ‘The injection of private capital investment and expertise that the PFI brings is a key factor in reconciling the need for sound public finances with ac- ceptable levels of taxation and huge investment in infrastructure’. In 2001, Andrew Smith, the Chief Secretary to the Treasury wrote, ‘It is central to the government’s approach to use the PFI/PPPs over traditional forms of procurement only where they provide better value compared to traditional public provision. But better value for money means that we can deliver more essential services and to a higher standard than otherwise would be the case’. Between the de- livery of these statements there lies almost a decade of confusion and exaggeration about the rational for PFI. Claim and counterclaim
about its worth, as well as very real concerns about the ethics of al- lowing private organisations to build, operate and maintain the means of delivering healthcare and education for profit.
Whatever the confusion, the motive behind PFI remains the same: to re-align the public sector from being an owner of assets to a pro- curer of services. The government has a duty to provide and procure high quality public services in sectors such as healthcare, education, custodial services, etc. However, government does not have any need to own, maintain or operate the built assets that are essential to pro- vide these services. Initial enthusiasm for the PFI was perhaps bor- dering on a ‘something for nothing’ mentality, that is to say instead of the government paying £65 million up front for a new prison, it was much better to get the private sector to provide, maintain and operate it. However, there truly is no such thing as a free lunch and it should not be overlooked that the PFI leaves a legacy in the pay- ments that must be made under long-term contractual arrange- ments by successive governments. Table 4.2 illustrates the estimated payments that must be made by the Treasury under existing PFI contracts until year 2019 although contracts have been signed com- mitting successive governments to make payments until 2031.
The current state of the PPP/PFI
Expenditure on PFI projects is in addition to traditionally cen- trally funded and procured public projects. In the NHS, for exam- ple, approximately 85 per cent of all projects are currently funded directly by the Treasury. By the end of 2005, approximately 680 PFI deals had been signed with a total value of £56 billion of which two major projects, the London Underground PPP and the Table 4.2 Scale of PFI unitary payments
£ million £ million 2001–2002 2900 2010–2011 3500 2002–2003 3600 2011–2012 3600 2003–2004 3600 2012–2013 3600 2004–2005 3600 2013–2014 3400 2005–2006 3500 2014–2015 3400 2006–2007 3700 2015–2016 3100 2007–2008 3700 2016–2017 3200 2008–2009 3600 2017–2018 3200 2009–2010 3500 2018–2019 2700
Channel Tunnel Rail Link, contributed a massive £32 billion. Of the traditional public service agencies, the Department of Health leads the way with £3600 million committed to deals in 2005/06 with further plans extending to 2008. In terms of overall public sector investment, the PFI has accounted for between 12 and 15 per cent of annual public sector capital investment although this is predicted to drop sharply in the short to medium term. Table 4.3 illustrates investment in public sector projects.
So, what is the current state of health of the PFI and why is it used? When it was first launched in 1992 the principle rationale was to:
● provide value for money and efficiency savings ● transfer risk from the public to the private sector
and these motives still remain pretty much the driving force as the procurement policy matures. In 2001, the IPPR Commission also came to the conclusion that PPPs are not a panacea for resolving all the challenges which modern government faces. They may be one important part of a wider strategy for the revitalisation of public service, but they are not a way of resolving how public serv- ices should be funded. In 2004, following Building Better
Partnerships, the IPPR published a follow-up report entitled, 3
Steps Forward, 2 Steps Back – Reforming PPP Policy. The 2004 re-
port presented its conclusions stating that there is still confusion over the role of PPPs.