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PFI: £47bn ‘Enron-style’ debt

By Ian Fraser and Torcuil Crichton

Published: The Sunday Herald

Date: July 7th, 2002

Gordon Brown, UK chancellor of the exchequer; image: BBC

Gordon Brown, UK chancellor of the exchequer; image: BBC

The Treasury has hidden a £47 billion debt mountain caused by Britain’s PFI schemes using “Enron-style accounting” to keep payments off the government’s balance sheets, according to to the head of one of the UK’s largest accountancy firms.

Maurice Fitzpatrick, the head of economics at Tenon, says the practice is masking the true cost of PFI schemes and undermining the credibility of the government’s own book-keeping at a time when accounting practices are under the spotlight.

Fitzpatrick has carried out extensive analysis of public-sector spending and concluded that the government’s current PFI deals have created a £47 billion debt pile — which appears nowhere in the country’s stated £311 billion public sector debt. “There are disturbing parallels between what the government is doing with PFI and Enron,” said Fitzpatrick. “I don’t think the government is trying to defraud people but the current treatment of PFI accounting, to the extent that it understates the national debt, is certainly misleading.”

Enron, the US energy giant, crashed earlier this year after it was discovered to have lied about profits and concealed debts so they didn’t show up in the company’s accounts.

The Treasury does not comply with normal UK accountancy practice when dealing with the thousands of PFI deals it has made to finance the construction of public buildings across the country. Under a basic PFI scheme a private company builds, for example, a school and continues to own it while leasing it back to a local authority over a 30-year period. The lease rental paid by the local authority, funded by the government, is treated as an annual expense. However, if an ordinary private company entered into a similar deal, for example to lease a piece of equipment, it would have to show the total cost of the deal in its own accounts, not just the yearly cost.

“The government’s accounts will only show the annual payments,” said Fitzpatrick. “What they don’t show is the obligation to pay for the whole of the capital costs for the school over a 30 year period. The straightforward implication is that the national debt is being understated by 15%. The rather wider implication is that at a time when private sector accounts are being questioned it’s not helpful if the government itself isn’t following transparent accounting practices.”

The government and the Accounting Standards Board, which regulates the industry, is aware of the distortion that the practice creates. Senior figures in the ASB claim that in most PFI deals the practice is acceptable but admit there are grey areas where some costs should be on the books but are not.

Further rule changes for PFI accounting are to be introduced this year to counter criticisms that the government is relying on flawed public-sector comparisons when calculating thecost of providing services through PFI deals.

Last month the head of the National Audit Office — the accounting body that scrutinises public-sector spending — accused the government of depending on “spurious” data when assessing whether PFI proposals were cost-effective. Auditor-general Jeremy Colman said proponents of PFI are relying on calculations that use “pseudo-scientific mumbo-jumbo, where financial modelling takes over from thinking.”

The Treasury is keen to nip such criticisms in the bud and is planning to radically modify the PFI assessment process in revised spending plans that are expected to be published within the next six to eight weeks. Michael Ellam, head of communications and strategy at the Treasury, would not be drawn on the timing of the revised edition. But he said: “We are not using Enron-style accounting. We have a statutory obligation to publish all our contingent liabilities. Whether it appears on or off the balance sheet is a matter for the Office for National Statistics.”

 

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