Private Finance Initiative - Treasury Contents

Written evidence submitted by the Chartered Institute of Public Finance and Accountancy

CIPFA, the Chartered Institute of Public Finance and Accountancy, is the professional body for people in public finance. Our 14,000 members work throughout the public services, in national audit agencies, in major accountancy firms, and in other bodies where public money needs to be effectively and efficiently managed.

As the world's only professional accountancy body to specialise in public services, CIPFA's portfolio of qualifications are the foundation for a career in public finance. They include the benchmark professional qualification for public sector accountants as well as a postgraduate diploma for people already working in leadership positions. They are taught by our in-house CIPFA Education and Training Centre as well as other places of learning around the world.

We also champion high performance in public services, translating our experience and insight into clear advice and practical services. They include information and guidance, courses and conferences, property and asset management solutions, consultancy and interim people for a range of public sector clients.

Globally, CIPFA shows the way in public finance by standing up for sound public financial management and good governance. We work with donors, partner governments, accountancy bodies and the public sector around the world to advance public finance and support better public services.


The Chartered Institute of Public Finance and Accountancy (CIPFA) welcomes the opportunity to provide evidence to the Select Committee on the Private Finance Initiative. CIPFA is one of the leading professional accountancy bodies in the UK and the only one which specialises in the public services. It is responsible for the education and training of professional accountants and for their regulation through the setting and monitoring of professional standards.

CIPFA has a key role in local authority accounting. We are responsible for the Code of Practice on Local Authority Accounting in the United Kingdom, which represents professional best practice in this area and which local authorities are required to follow under the 2003 Local Government Act. This is reinforced for CIPFA members through the Statement of Professional Practice with which all members are required to comply. In developing the Code of Practice, CIPFA works closely with HM Treasury and the other relevant authorities to ensure that financial reporting across the public sector is as consistent as possible.

CIPFA believes that the main emphasis of the enquiry should be around ensuring that the optimum procurement method is selected for each capital project, and that the accounting and budgeting requirements do not provide incentives for one form of procurement over another. The key conclusions from our submission are:

—  PFI deals have a strong focus on the Outline Business Case and the Value for Money Test; but their long duration may make them less flexible.

—  It is probable that there would have been fewer PFI projects if the debt had more usually been scored on-balance sheet.

—  The control approach adopted in IFRIC 12 and which is being developed for the public sector by the IPSASB is the appropriate basis on which to account for PFI arrangements in financial statements.

—  The UK Government should seek to influence the development of requirements for economic and statistical reporting, so that balance sheets in the UK and other government National Accounts show PFI debt as assessed under the "control approach".

—  Only those risks which the private sector are best placed to manage should be transferred.

—  Business cases should consider all methods of making available the assets required to meet service needs, including the use of partnerships with the private sector; value for money should be paramount.

CIPFA is happy to offer the Select Committee whatever assistance it is able in the consideration of the Private Finance Initiative.


1.  The UK has used PFI arrangements since 1992. The first schemes were in central government, with other parts of the public sector adopting PFI arrangements at a later date.

What are the strengths and weaknesses of different public procurement methods?

2.  A strength of PFI has been the strong focus placed on the Outline Business Case and the Value for Money Test. CIPFA's Prudential Code for Capital supports strong asset management of which the Business Case is a part. In considering capital projects, however procured, public bodies need to apply rigorous cost benefit analysis and ensure all projects are sustainable and affordable.

3.  A potential weakness of PFI is the long duration of the contracts, such that there may be less flexibility to adapt the arrangements to changing circumstances.

If PFI debt had been on-balance sheet rather than off-balance sheet would PFI projects have been used as much? How should PFI deals be accounted for?

4.  When PFI arrangements were first introduced, the accounting issues had not been addressed in accounting standards. Accounting treatments were developed initially by analogy with leases. The risk and rewards approach that underpinned leasing standards was adapted for PFI deals, and similar approaches are used in the requirements for statistical and economic reporting (eg under the European System of National and Regional Accounts, referred to as ESA 95). ESA 95 requirements are used for National Accounts which inform HM Treasury's economic planning process.

5.  In September 1998 the Accounting Standards Board issued an amendment to Financial Reporting Standard 5 (FRS 5) "Reporting the Substance of Transactions" in the form of Application Note F "Private Finance Initiative and similar contracts".

6.  Application Note F set out the accounting requirements for PFI schemes. Assets and liabilities were treated as on-balance sheet or off-balance sheet based on an assessment of the relative balance of risks and rewards. Under Application Note F, retention by the public sector of demand risk and residual value risk was regarded as generally decisive.

7.  In 1999, the Treasury Taskforce issued Technical Note No. 1 "How to Account for PFI Transactions". This was intended to be an interpretation of Application Note F, but in practice acquired the position of a competitor standard, allowing for a wider spectrum of risks to be considered[83]. As a result, risks and rewards were not assessed on a consistent basis across the whole of the public sector.

8.  The risk and rewards approach in Application Note F (and Technical Note No 1) was similar to that used in ESA 95, and became the effective basis on which the funding and approval of projects was decided.

9.  The use of PFI deals to keep debt off-balance sheet appears to have been viewed positively by both the previous Conservative and Labour governments. This is best shown by considering the funding arrangements for local government, where central government funding for PFI deals was typically only available where the scheme was off-balance sheet. PFI funding was in addition to schemes funded through more traditional procurement methods. This provided local government with an incentive to enter into PFI deals that were off-balance sheet. The incentive for local government related to the additional funding rather than the off-balance sheet treatment per se. However, during much of this time HM Treasury sought to manage the PSBR within certain limits and it is unlikely that as much funding would have been made available had more PFI schemes been on-balance sheet. CIPFA would therefore conclude that it is probable that there would have been fewer PFI projects if the debt had been on-balance sheet. This conclusion is based on the effect on the PSBR, and does not reflect whether or not the schemes provided value for money; this is a separate consideration.

10.  In 2006 the International Financial Reporting Interpretations Committee (IFRIC) of the International Accounting Standards Board (IASB) issued Interpretation No 12 (IFRIC 12), "Service Concession Arrangements". Under the accounting requirements set out in IFRIC 12, which covers most UK PFI deals, assets are treated as off-balance sheet for the private sector operator where the public sector has control of the assets. IFRIC 12 does not cover the public sector accounting, but the clear implication is that the assets (and related liabilities) should be on-balance sheet for the public sector. Since 2009-10, this has been the approach taken in the Financial Reporting Manual (FReM) issued by HM Treasury, the Code of Practice on Local Authority Accounting in the United Kingdom issued by CIPFA/LASAAC and the similar manuals in the health service (issued by the Department of Health and Monitor).

11.  It should be noted that the references above to the UK public sector having adopted the control approach refer to the accounting within an entity's financial statements produced under the FReM (and equivalent guidance in other parts of the public sector). The treatment of PFI deals in the National Accounts produced under ESA 95 continues to be based on a risk and rewards basis.

12.  There is currently no international standard that covers the public sector accounting for PFI schemes, although the International Public Sector Accounting Standards Board (IPSASB) is currently developing such as standard. A Consultation Paper was issued in 2008, and this was followed by an Exposure Draft in 2010. CIPFA continues to work with the IPSASB to develop this standard.

13.  The proposed IPSASB standard adopts the control approach of IFRIC 12; the proposed standard is intended to provide a "mirror approach" to IFRIC 12, such that an asset will either be on the private sector balance sheet or the public sector balance sheet.

14.  The control approach is seen as less subjective than the risk and reward approach, and is more likely to result in assets (and related liabilities) being on-balance sheet for the public sector. CIPFA strongly supports this approach.

15.  The control approach considers which party has ultimate control of the assets, rather than day to day control. This is consistent with the definition of an asset in both IFRS and IPSAS as "resources controlled by an entity as a result of past events…".

16.  Concentrating on who has ultimate control of the asset provides a solid basis for recognising assets and, where appropriate, related liabilities. This approach is also likely to be less susceptible to attempts to structure deals in such as way as to provide a desired accounting outcome.

17.  This emphasis on control also helps to align the balance sheet with accountability for services. The public sector will enter into PFI deals to meet service delivery objectives through the construction, renovation, or improved operation of the underlying property. The public sector will generally remain ultimately accountable for the delivery of the service provided through the property, and is therefore accountable for the operation of the property, even though its operation is being undertaken by the operator. Because of this, and because of the general public perception that the service being provided through a PFI arrangement is a public service, political risk associated with the delivery of services through the underlying property remains with the public sector, notwithstanding the fact that some service delivery risk may fall to the operator.

18.  For these reasons, CIPFA believes that the control approach adopted in IFRIC 12 and which is being developed for the public sector by the IPSASB is the appropriate basis on which to account for PFI arrangements. This approach, which the UK public sector has followed since 2009/10, provides for a more consistent treatment than the risk and rewards approach previously followed, particularly given the potential conflict between Application Note F and Technical Note No. 1. This improvement in accounting should also help to reduce, if not eliminate, the number of occasions on which an asset appears on neither the public sector nor private sector balance sheet.

19.  As the UK budgeting framework is based on the National Accounts (and therefore ESA 95), budgets and financial statements are inconsistent in relation to PFI deals. Whilst these differing treatment remain in place, there remains the possibility that PFI deals may be structured to achieve an off-balance sheet treatment within National Accounts (and therefore within the budget), notwithstanding the fact that the deal will be on-balance sheet within the financial statements of the entity and within the Whole of Government Accounts.

20.  It should be noted that accounting standards and standards for economic and statistical reporting such as ESA 95 need to reflect a balance between the conceptual and the pragmatic approaches. Because of the vulnerability of the risk and rewards approach to structuring, and the greater possibility of assets appearing on neither the private sector nor the public sector balance sheet, CIPFA believes that the control approach would be more appropriate for economic and statistical reporting.

21.  As CIPFA considers that the control approach to PFI arrangements provides better accounting, we would recommend that the UK Government seek to influence the development of requirements for economic and statistical reporting, so that balance sheets in the UK and other government National Accounts show PFI debt as assessed under the "control approach". This would not only help ensure that National Accounts better avoid the risks of structuring, and the risk that assets do not appear anywhere in National Accounts, but would also remove the disconnect between budgets and financial statements.

How far can risk really be transferred from the public to the private sector? Are there particular kinds of risk which are particularly appropriate for transfer through PFI deals, or particular projects which are suited for PFI?

22.  As the public sector will ultimately remain accountable for the delivery of services, it is inevitable that some risks, including a degree of delivery risk, will remain with the public sector.

23.  Whilst almost any level of risk can be transferred from the public to the private sector, the real issue is at what level is risk transfer cost-effective and appropriate. Only those risks which the private sector are best placed to manage should be transferred as the private sector will price in to contracts significant premiums for risks that it cannot directly manage. An example of risks that may attract an undue premium would include environmental risks and under occupancy (except where there is the potential to replace public sector with private sector use).

24.  Adoption of the control approach to balance sheet classification should encourage a different view to be taken of risk transfer and bring a focus on the transfer of costs that the private sector is best placed to manage, such as construction, maintenance and third party income risks. With the current determination there may be a danger that risks are transferred to support a balance sheet treatment.

In what circumstances are PFI deals suitable for delivery of services?

25.  The key to the identification of circumstances where PFI deals are suitable for the delivery of services is effective Capital Strategy and Asset Management Planning processes. These should be focussed on meeting service needs rather than the acquisition of capital assets. Where a future service need is identified the business case should consider all methods of making available the assets required to meet service needs, including the use of partnerships with the private sector.

26.  Value for money should be paramount in arriving at a decision as to the appropriate manner in which to deliver the service and related assets. Robust option appraisal methodologies should be used to ensure that each option is assessed on a level playing field. PFI deals will be a suitable method of delivering services where it can be demonstrated that such a scheme can deliver the best value for money over the life of the contract, taking into account the possible need for flexibility regarding changing circumstances.


27.  PFI deals have been useful in delivering assets and services that otherwise might not have been available to the public. PFI deals still have a role to play in delivering assets, but value for money is paramount, and a level playing field is required when assessing differing procurement options.

28.  Previous accounting and budgeting arrangements may have obscured the level of future commitments being taken on by the public sector. In the current economic climate, it is important that such deals are as transparent as possible, and this is best achieved by using the control approach for financial statements, National Accounts and budgets.

April 2011

83   Heald, D A and G Georgiou (2010) "Accounting for Public-Private Partnerships in a converging world", in Hodge, G, C Greve and A Boardman (eds), International Handbook on Public-Private Partnerships, Cheltenham, Edward Elgar, pp 237-261. Back

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Prepared 10 August 2011