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WILL PFI CHANGES AFFECT MoD PROGRAMMES?

19 May 05. Chris Giles of the FT reported that The UK Office for National Statistics has decided to include billions of pounds of capital expenditure undertaken under the private finance initiative in public sector net debt figures, a move that will reduce Gordon Brown’s room for manoeuvre against his fiscal rules. This move may affect the yet unsigned AirTanker PFI deal to supply tanker requirements for the RAF under a PFI contract with the EADS AirTanker consortium. Serco is another company to have made considerable gains in this area and it may well be affected for future contracts.

The classification change will also mean that there is no longer an accounting advantage for public sector managers to procure big projects through the PFI. That could lead to fewer PFI deals in future, harming the prospects for companies that are heavily engaged in PFI contracts, such as Carillion, Skanska and Serco.

By the end of 2004, the government had signed PFI contracts worth £42.7bn and the reclassification will affect around 57 per cent of these deals. These are the contracts deemed to be “on-balance sheet” because little risk has been transferred to the private sector. The size of the revision is likely to be smaller than the £24bn value of on-balance sheet PFI deals signed so far, as it will affect only the capital expenditure element of each PFI deal at the time a private company spends the money.

But it will raise the Treasury’s forecast for public sector net debt as a share of gross domestic product closer to the chancellor’s self-imposed limit of 40 per cent, making tax rises in this parliament more likely unless Mr Brown changes his fiscal rules.

The chancellor’s sustainable investment rule says that “net debt will be maintained below 40 per cent of GDP in each and every year of the current economic cycle”.

The ONS said on Thursday night that it had been aware of the incorrect classification of on-balance sheet PFI deals since 2001 and intended to correct it once it had a reliable estimate of the revisions. A spokesman added that it would be at least six months before the first estimates would be available.

In February, the ONS changed the classification of road maintenance expenditure, which improved the public finances by £3bn. The decision removed a previous classification error, but its timing, coming shortly before the Budget and the election, raised eyebrows. The long delay in this reclassification will raise further questions about political influence over national statistics. Mr Brown has a window of opportunity, however, to make the change irrelevant, as he can redefine his fiscal objectives under the 1998 Code for Fiscal Stability once every parliament.

Many economists have said that the sustainable investment rule is arbitrary and that there is nothing special about the 40 per cent of GDP limit. If, however, Mr Brown reconfirms the rule, he would have to accept the ONS’s reclassification. The problem the ONS has discovered with the current definition of public sector net debt is that it is not consistent with international standards for national accounts. These include on-balance sheet PFI, such as the London Underground public private partnership. Instead, the debt figure is compiled from annual cash deficits and surpluses, which do not include capital expenditure under the PFI.

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