The Private Finance Initiative : sixth report, together with the proceedings of the Committee, minutes of evidence and appendices / Treasury Committee.

  • Great Britain. Parliament. House of Commons. Treasury Committee
Date:
1996
Catalogue details

Licence: Open Government Licence

Credit: The Private Finance Initiative : sixth report, together with the proceedings of the Committee, minutes of evidence and appendices / Treasury Committee. Source: Wellcome Collection.

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    ing to acknowledge that the ‘extra-value-for-money test’ makes no sense if Exchequer funds are not available as an alternative. . the way in which the new [1992] guidance is currently drafted implies that the central test of acceptability is the degree of transfer of risk to the private sector. This is not central; what is important is that the taxpayer is getting best value for money. There is no a priori reason why this should be secured by imposing the greatest risk on the private partner. The smaller the risk transferred to the private sector, the finer will be the terms on which the private sector will be willing to put up the money. Hancock thereby proposed that the public sector should continue to carry the risk whilst delegating responsibility for raising finance to the private sector. Moreover, he postulated a ‘shortage of public finance’ as a result of macroeconomic constraints which do not affect private finance, a view which has already been shown to be unsupported by detailed argument or evidence. Yet there has been a detectable. shift in the language of Treasury documents, from implicitly presenting risk transfer as an all-or-nothing phenomenon towards references to risk-sharing. Whilst continuing to emphasise that there must be risk transfer, Sir John Cope, then the Paymaster-General, vigorously denied that ‘the Government is seeking to transfer a// risks to the private sector’ and declared that ‘we are look- ing for a sharing of risk, with the public and private sectors each taking on those risks which they are best placed to manage’ (Cope, 1993, paras 16 and 18, italics in original). Ernst & Young (1993) attempted to disaggregate project risk into component parts as the basis for a discussion of which com- ponents should be transferred: front-end risks consisting of pre-bidding risk, bidding risk, planning risk, environmental risk and underwriting risk; and post-financing risks consisting of construction risk, oper- ating risk, end user or market risk, political and regulatory risk and financial risk. The Labour Opposition has joined with City commentators, contending that the ‘Government has proved characteris- tically inflexible in its approach to risk’ (Brown, Cook and Prescott, 1994, p. 9); their document does not endorse the importance of risk transfer. Erosion of Public Expenditure Controls There are substantial dangers that recourse to private finance will be used as a means of undertaking hidden public borrowing and expenditure: A cynic might ... interpret the government’s recent promotion of private finance as a creative means of hiding the true extent of the PSBR (Institute for Fiscal Studies, 1993,p.62). Private finance should not be used simply to get around public expenditure controls, for exam- ple to defer payments to later years because direct public funding is constrained (Treasury, 1989, as amended 1992, para 29.1.15). . we are not interested in pure funding vehicles, and sale and leaseback arrangements, whose sole purpose is to get round our public expenditure controls. They will not pass any genuine value for money scrutiny. Nor should they. We have made it clear that we disapprove of local councils who lease parking meters. There is no room for that sort of creative accounting in Central Government (Major, 1989, p. 5). Without a significant transfer of risk to the private sector, schemes for private finance look like an attempt to circumvent budgetary controls on public expenditure, whether by creative accounting around definitions or by retiming the scoring of expenditure. In the 1980s, local authorities resorted to a range of private funding vehicles in order to evade public expenditure control; these unconventional means of finance involving private parties became known as ‘avoidance instruments’. The only knowledge which the Treasury has of the extent of use of such instru- ments comes from anecdotal evidence and from approaches by local authorities facing financial pressures as a result of their use; there are no separate returns to central government of local authorities’ obliga- tions under such instruments. Peak use of avoidance instruments may have occurred before the 1987 gen- eral election, when it was reported that local authorities had massive liabilities from which they were looking for release had there then been a change of government. Such subversion of central government controls was ended by the Local Government and Housing Act 1989 which introduced a new capital finance system in England and Wales designed to prohibit avoidance instruments; the 1980s’ schemes of extended credit were still permitted, but the incentive to undertake them was removed as they now scored equally with conventional borrowing against public expenditure constraints. Although the amount of outstanding liabilities is unknown, the passage of time since the implementation of the new capital finance system on 1 April 1990 and the reluctance of financial institutions to renew existing arrangements mean that this is a disappearing phenomenon. Most of the new growth of private finance is concentrated in the quasi-public sector. Outside the Treasury, private finance is typically viewed as a substitute for public finance which is not available because of macroeconomic constraints (Ernst & Young, 1993). Yet, if the macroeconomic