Supplementary memorandum submitted by
the Office for National Statistics |
FAILURE OF A PFI: STATISTICAL IMPLICATION
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
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
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
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