Source · Select Committees · Public Accounts Committee
Recommendation 14
14
Accepted
Historical choice of private financing for 'fiscal illusion' is not appropriate practice
Conclusion
Historically, private financing was sometimes selected over public financing because it did not increase short-term government borrowing. This kept public sector debt levels down, as the assets were considered off-balance sheet for national accounts purposes. The Office for Budget Responsibility called this a “fiscal illusion”: where the accounting measure does not reflect the true fiscal implications of a transaction.26 We asked the Treasury whether infrastructure financed through Public Private Partnerships should be on or off balance sheet. The Treasury told us that the Green book stipulates that the balance sheet classification of a project should not be a determining factor of whether a particular financing model is chosen and that the focus should be on choosing the correct structure to ensure the project will be delivered well and provide value for money, whether on or off balance sheet.27 Centrally held data on private finance
Government Response Summary
The government states the recommendation is implemented, affirming that its 10 Year Infrastructure Strategy and Green Book appraisals ensure value for money and that financing model selection is project-specific, consistent with the Treasury's existing position.
Government Response
Accepted
HM Government
Accepted
2.1 The government agrees with the Committee’s recommendation. Recommendation implemented 2.2 The government’s 10 Year Infrastructure Strategy sets out several of the main basic models available to deploy private finance into projects, many of which have been and continue to be highly successful in delivering infrastructure investment. 2.3 In general, while some model archetypes might be suitable for different markets or different asset types, the selection of a financing model will be highly dependent on the specifics of a given project (e.g. the risk profile, maturity of technology, and so on). The Treasury's preferred model for any type of infrastructure project is the one that offers the best value for money, and it appraises proposals on a case-by-case basis using the Green Book. 2.4 Contracting authorities should design their model with suitable provisions and appropriate risk transfer based on the specific project at hand ensuring value for money. This means that the appropriate model will often be a bespoke version of an existing basic model. NISTA provides advice and guidance to contracting authorities, and the Treasury teams and NISTA work together to implement the 10 Year Infrastructure Strategy including through considering how private finance can deliver the government’s infrastructure priorities. 2.5 The Treasury evaluates the costs and benefits of alternative options – including financing models – as part of the Business Case process to identify the preferred model for each project and to ensure value for money is achieved for each infrastructure investment.