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Comments from the Association of Chartered Certified Accountants
June 2001

The Association of Chartered Certified Accountants (ACCA) is pleased to have been invited to participate in the inquiry into the technical implications and other issues arising from Private Finance Initiatives (PFI) and Public Private Partnerships (PPP). We welcome the inquiry as a forerunner to the Scottish Parliament taking oral evidence on this subject in the summer. The paper has been considered by ACCA's Public Sector Technical Issues Committee. The Committee's members are professional Chartered Certified Accountants with considerable experience of public sector practice.

We respond to the specific matters raised for comment as follows.

Specific Matters for Comment

1. In preparing this submission, ACCA did not presume that public services generally can be provided better by either the public or the private sector. We believe that governments (local and central) and their agencies need to make the best use of resources available, whether in the public, voluntary or private sectors, when aiming to deliver new and improved public services and when promoting economic growth and regeneration. It is our view that there is no one best service provision model which will meet all public service needs and objectives.
   
   It is our view that many leisure and cultural services provided by public sector entities could arguably be classed as commercial activities and the distinction between what constitutes a "true" public service and what does not is becoming blurred. ACCA shares the Government's view that both sectors and hence the economy as a whole should be able to benefit from well structured arrangements which combine private sector investment and entrepreneurial skills with the experience and resources of the public sector when delivering many services.
   
   The main advantage to be gained from funding capital schemes through PFI/PPPs is that such arrangements can open up additional sources of financial sponsorship and capital investment for the provision of many public services. Entities, for example, which have the ability to invest in or have invested in new technology and which have access to specialist skills and knowledge, in areas such as procurement or facilities management for instance, can often enjoy economies of scale giving them a natural market advantage over competitors and hence the means to deliver high quality and cost-effective services.
   
   Such schemes offer government bodies the opportunity to procure services rather than assets and hence they are able to avoid having to manage the risks associated with providing asset intensive services leaving public sector managers to concentrate on delivering core services. The main disadvantages associated with procuring services through PFI/PPPs appear to stem from accountability issues, getting the contract right in the first instance and then monitoring the contractors performance over time. The following bullet points outline potential problem areas:
   • the complexities of EC procurement regulations and tendering procedures (for example hindsight has shown that negotiated procedures give better results than EC restricted procedures);
     
     
   • designing outcome service specifications and measuring performance of arrangements which typically span considerably long time frames (15-30 years);
     
     
   • drawing up transparent measured contingency plans; and
     
     
   • ensuring that public sector managers have excellent negotiating skills and trusting elected members to have long term vision which should take precedence over short term political aspirations. ACCA is not aware of any reason why it is necessary to obtain private capital in order to obtain efficiency savings in public service delivery.

2. PPP projects should be structured to provide incentives for the private sector supplier to perform efficiently and effectively in order to ensure that services are delivered at best value to citizens. ACCA believes that the best value determinants of a PPP are as follows:
   • contract specifications should be output based, as opposed to stipulating how the service is to be delivered; no unnecessary constraints should be placed on the private sector for the delivery of these outputs;
     
     
   • contracts should ideally require the contractors to take responsibility and assume risk for the performance of assets over a significant part of their useful life, if efficiencies arising from long term asset management are to be realised;
     
     
   • payments made to the contractor should be related to performance;
     
     
   • projects should involve extensive consultation with the community and be subject to a rigorous value for money options appraisal; options considered should include "do nothing" or "do minimum". Where appropriate, the appraisal should include a public sector comparator.

3. The assumptions used in assessing projects (for example, discount rate, risk transfer and repayment period) are critical for effective decision making. Business plans and project investment appraisals should be subject to a rigorous sensitivity analysis with risks sufficiently quantified (contingency plans, insurance costs to mitigate or eliminate risk) within business plans and investment appraisals.
   
   
4. Public sector bodies are encouraged to procure asset intensive services (such as schools, police stations, magistrates courts and other accommodation) from the private sector so that the private sector operator carries the risks associated with ownership of the assets. As payment passes to the operator from current revenues based on performance, such schemes are classed as revenue projects as opposed to capital projects. This type of scheme eliminates the need to account for the associated assets and project costs (except, perhaps the decommissioning costs of old assets) in the capital programme.
   
   Without a sufficient level of risk transfer, the substance of transactions are likely to viewed as financing arrangements (in effect giving the public body access to borrowed funds through a finance lease or deferred payment). The DETR's explanatory note on PFI and public/private partnerships in local government points out that given sufficient risk transfer, the capital investment undertaken by the private sector will not score against public sector capital spending limits: "changes to the Capital Finance Regulations mean that projects meeting specified criteria will require reduced or no credit cover, depending on the precise circumstances, and can therefore be undertaken outside an authority's capital budget".
   
   It may be possible to separate out capital costs or charges from operational costs in order to make comparisons between like projects carried out by public and private sector entities and to establish benchmarks or cost indicators for determining efficiency savings.
   
   
5. The introduction of Resource Accounting and Budgeting (RAB) does not provide a mechanism for tracking this form of public sector capital investment but it does go a long way towards ensuring that public sector accounts are prepared on a comparable basis with the private sector which in turn should provide better information for decision making purposes.
   
   The RAB implications of a transfer from capital charges to revenue funding are that a one line entry for the provision of a service would appear in the current/revenue account of the public sector entity (in addition there would appear the client costs of managing the contract) and there would not be any fixed assets associated with delivery of the service in the balance sheet (unless a contractual arrangement allowed for the transfer back of assets over a certain time frame).
   
   Some PPPs take the form of joint venture company (JVC) with the public and private sectors working together to increase capital investment to assist service delivery, or to encourage economic development and urban regeneration. The public sector entity would have to account for its share of activities including the extent to which it owned the assets and liabilities of such schemes.
   
   
6. PFIs which involve complete privatisation do not appear in public sector accounts, nevertheless associated regularity costs need to be built into the budget. With housing privatisation, for example, housing benefit costs may rise as a direct result of rising costs in the social housing sector, over which the public sector has no control.
   
   Most PFI/PPPs (other than privatisation) typically span 15-30 years and therefore, providing that contracts have been structured in such a way so as to allow service costs to rise in line with specific inflation indices, then a degree of certainty is provided over the term of the contract for budgeting purposes. Risk management strategies should allow for measured contingency costs to be included in the budget in the event of contract failure.
   
   Some projects will earn additional revenue support from central government. It is important to ascertain which projects qualify for such support and to identify how it is to be incorporated within the Barnet formula.
   
   
7. Although some aspects of a PFI/PPP contract might be commercially sensitive, authorities are encouraged to make as much of the contract detail available to the public as is considered possible. Much operational detail, should be made public and private sector operators should not be allowed to work to standards lower than those prevailing in the public sector. For example, if authorities operate equal opportunities practices, have ethical investment policies and operate environmentally friendly waste management systems then contractors should be required to operate like policies.
   
   
8. When employees transfer to the private sector under TUPE agreements, it is essential that staff are transferred for the right reasons. Similarly if redundancy payments are built into the agreement they should be calculated on a fair and transparent basis. Employees should be kept informed and be consulted throughout the process. If the transfer is seen to be used as a means of getting rid of surplus staff through the private sector then an air of distrust will be formed around the initiative.

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