Select Committee on Treasury Minutes of Evidence

Supplementary memorandum submitted by the Office for National Statistics


There are over 700 PFI schemes, each with their own individual characteristics and contractual details. For classification purposes ONS always looks at individual cases on their merits. It is therefore difficult to make general statements and the following discussion should thus be treated cautiously.

In the scenario where a PFI contractor gets into financial difficulties it will not always be the case that the PFI deal will fail. In such situations the contractor would probably seek to refinance their debt, seek an equity injection or enter into a sale of the going concern to a third party. In all of these scenarios there would be no impact on the public sector finances as there would be no transactions between the public and private sectors.

  However, if there were transactions between the public and private sectors in the event of failure, or the PFI asset or service is not delivered to the specified standard, the impact on the public sector finances would depend on the nature of the actual transactions involved. The remainder of this note outlines general scenarios, with the proviso that definitive assessments cannot be made without particular knowledge of the individual schemes.

  PFI deals can be categorised into on-balance sheet and off-balance sheet schemes.

  For off-balance sheet schemes, the capital assets are recorded in the private sector's non-financial balance sheet. One of the most important criteria used by the accountants to judge whether PFI schemes are off balance sheet is the transfer of risk. Were an off-balance sheet PFI scheme to fail, there should be no direct effect on the public finance ie no public sector transactions should be recorded and hence there is no impact on the public sector balance sheet.

  In practice, it is possible that Government may intervene if it wants a service delivered etc and there is no alternative source. This would be no different to its interventions to help private sector companies who get into financial difficulty when providing public services or intervention in the agricultural industry where there are out-breaks of BSE, foot and mouth disease etc. Were any actual intervention involving government financial support to occur, the expenditure (or tax relief) would be recorded in the public sector accounts in the normal way, based on an analysis of the circumstances in the case.

  For on-balance sheet schemes, the capital assets are recorded in the public sector's non-financial balance sheet on basis of "economic ownership" rather than legal ownership. There should in principle be a corresponding liability (a finance lease loan) in public sector net debt. In simplified terms, the private contractor is viewed as making a loan to the public sector, which then uses the proceeds to build or improve its capital asset. The subsequent payments to the private sector are recorded as a repayment of that loan, with interest.

  If an on-balance sheet PFI deal was terminated, then a cash payment may be made from the public sector to the private sector contractor together with the transfer of legal ownership of the asset to government.

  In the event of a failure, the sale of legal ownership of the asset to the Government would not be recorded in the National Accounts, since the asset is already on the public sector balance sheet. Instead, the cash payment would be viewed as a repayment of the notional debt outstanding on the finance lease loan. Any difference between the size of the payment and the level of the outstanding loan would be recorded as an imputed capital transfer. If the payment exceeded the outstanding loan there would be an imputed transfer to the private sector. If the payment were less than the outstanding loan there would be an imputed receipt from the private sector.

  The effect of these transactions on key fiscal aggregates would in principle be as follows:

    —  no direct effect on the public sector current budget;

    —  public sector net borrowing would change in line with the imputed capital transfer, increasing if there were a transfer to the private sector and decreasing if there were a receipt from the private sector; and

    —  public sector net debt would be reduced by the amount of the outstanding loan less the cash payment.

  In practice, as the Committee were advised, ONS is not yet in a position to include the finance lease loan associated with on-balance schemes in estimates of public sector net debt. Consequently we would not include any repayments of those loans in the event of a failure until such time as they are included in public sector net debt.

9 December 2005

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 16 January 2006