03/03/2008 00:01

Accounting changes should not detract from positive impact of PFI, new study finds

Since the Government announced the adoption of International Financial Reporting Standards (IFRS) from 2008/2009 onwards, there has been much speculation about what this means for the future of the Private Finance Initiative (PFI). While definitive guidance has yet to be issued by the Government, it looks as if the majority of PFI schemes will be on balance sheet in the future. This will remove any accounting driver for using PFI.

With this in mind, PricewaterhouseCoopers has today published a study, “The Value of PFI – Hanging in the Balance (Sheet)?” which looks at the continuing case for using PFI schemes in the light of the accounting debate. The paper, published under the auspices of its Public Sector Research Centre, examines whether these schemes have brought the benefits that were promised and assesses in particular how important the overall role of private finance has been.

The paper notes that, while the evidence is still emerging, certain conclusions about the positive impact of PFI schemes can already be drawn:

• PFI has made a difference to the implementation of large asset-intensive projects, and the role of private finance within PFI has been a big part of that difference;
• The role of debt finance has exerted beneficial discipline on public and private sectors alike at the front end of projects;
• Equity investment has helped the integration of design, construction, maintenance and operation, as well as providing an incentive for sustained good performance during the operational phase of projects; equity has also cushioned the public sector from a significant part of the ‘pain’ in the very few cases where projects have defaulted;
• PFI has also had a wider beneficial effect on big ticket public procurement, particularly in the areas of risk analysis and allocation;
• In principle, some (but not all) benefits of private finance could be brought about by reforms to project control disciplines and through other non-PFI contractual mechanisms. While it is too early to reach firm conclusions on the new initiatives now in play, it is not easy to see how they could ever fully match the disciplines flowing from externally provided finance.

Looking at the implications of the change in accounting treatment on public policy on PFI, the paper notes that there is a real risk the efficiency gains made in the past 10-15 years will dissipate if procurers swing back towards conventionally-financed projects. It suggests that the policy should be directed towards refining and honing the existing private finance models. Jon Sibson, partner, public private advisory practice, PricewaterhouseCoopers LLP, said: “Policy makers must find ways to preserve the policy incentive on public procurers to embrace the disciplines of private finance. The drive to shorten procurement timetables and make tender processes more transparent and predictable should continue. This will reduce bid costs and reduce the degree to which investors price procurement process risk. “At the same time, the urge to adopt new models should be approached with caution. Two models involving public sector equity have been applied in primary health care and schools. There should be a pause for digestion and reflection before considering whether the public sector equity model should be applied more widely. Whatever the benefits of public sector equity - and they may be considerable - it should not be forgotten that many of the benefits of PFI have come from plain, old fashioned private sector equity.”

ENDS

Notes to Editors:

About the Public Sector Research Centre

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