Tick, tick, tick…

The PFI has been granted a stay of execution. Chancellor Alistair Darling confirmed in last month’s Budget that the Treasury will not require departments to adopt international accounting standards until the 2009/10 fiscal year, 12 months later than expected.

This is big news for the construction industry as it means that although the PFI will stay as it is for another 12 months, after that it will have to conform to the prudent spirit of the new guidelines. This will almost certainly result in billions of pounds of future PFI projects that reach financial close by April 2009 coming on to the public sector balance sheet, thereby threatening Gordon Brown’s sacred sustainable investment rule (see box below).

This, in turn, will add weight to the claim that the government is losing its grip on the nation’s finances. The PFI has been used as a way of procuring roads, hospitals and schools without having to meet their capital costs out of public funds: £32.5bn of schemes signed to September last year, or 57% of the total, are not on the government’s balance sheet.

The big fear is that the moment these schemes become more transparent, the PFI will have outlived its usefulness: one company director says officials have told him that “if all this money comes on balance sheet, we simply can’t do these schemes anymore”.

Adrian Ewer, chief executive of PFI specialist John Laing, disagrees with this prediction. He points out that under the new rules the government can keep schemes off balance sheet if it transfers more risk to the private sector. There are already examples of this, such as the Department of Health’s Local Improvement Finance Trust (Lift) programme and the Ministry of Defence’s £13bn air refuelling contract. Under Lift the private sector partners team up with a primary care trust to build, renovate and maintain health clinics. The private sector retains ownership of 60% of the land in the scheme even if it previously belonged to the trust. And the AirTanker consortium that won the refuelling contract owns the aircraft built during the 27-year scheme, even though they are ultimately paid for by the taxpayer.

In both cases, the private sector gains the bulk of any profit made on the sale of assets, but it also takes the risk of falls in value. “Greater risk transfer is inevitable, it is happening, and the private sector is ready for it,” says Ewer, who adds that PFI companies are now mature enough to take on the extra responsibility.

Also, some sectors are more amenable to risk transfer than others. A road scheme, for example, can give a private sector consortium revenue through tolling, but the value of that depends on the willingness of drivers to pay rather than taking a different route. And given the general antipathy towards London’s congestion charge, it would be a brave transport minister who introduced a wave of toll roads across the country.

Even braver, though, would be to risk losing PFI expertise overseas. Many PFI contractors have started to sell their skills to markets that are experimenting with the PFI model. “Most UK PFI companies are now looking to Europe,” says an industry insider. “There’s not as much of a pipeline of work over here anymore anyway.”

That said, the government still relies heavily on the PFI: figures from the Treasury’s PFI database show that spending last year was £3.6bn which, with the exception of spikes in 2002, 2003 and 2005, is broadly in line with project values since the start of the decade. The likelihood is that with PFI bolstering the government like this, it will find a way around its impending problem.

For example, it is by no means certain that the government will revisit already-funded schemes. Retrospective accounting could cost millions of pounds in consultants’ fees, and this provides a ready-made excuse for Whitehall to use the new accounting rule only for forthcoming projects. Together with risk transfer, this will save the public purse about £20bn, and that means the sustainable investment rule ought not to be threatened in the near future.

An indication of the extent of the potential damage to the government’s balance sheet should be shown in “shadow” accounts, which departments have been asked to keep for the 2008/09 fiscal year. These will be drawn up under the international standards, although one observer argues that “they will be just pushed to one side, like the Northern Rock figures”.

The nationalisation of Northern Rock effectively meant that the government had broken its sustainable investment rule, but Darling managed not to include that debt in his figures by arguing that the move was only a temporary measure. Just as canny, an accounting source believes that many departments are likely to argue that they do not have the resources to produce two sets of accounts, and so few, if any, shadow accounts will be produced.

What is frustrating about all of this is that whether or not a hospital or school appears on the books makes it no less of a reality. The economic decision should not be affected. An industry source compares this to changing speed limits from miles per hour to kilometres per hour. The signs might have changed, but the speed remains the same. “But to enforce the change you would need to give the police a new type of speedgun,” he says.

Still, it doesn’t sound as if PFI will be found guilty of breaking the speed limit any time soon.