Controversial PFI liability plans backed by accountants

Private Finance Initiative (PFI) lawyers have reacted angrily to the news that chartered accountants are backing proposals to put liability for PFI projects on the public sector.

The Institute of Chartered Accountants (ICA) is backing a proposal made by the Accounting Standards Board (ASB) last December to change the accounting rules, but it wants the ASB to soften its stance.

Many lawyers believe that if the Treasury adopted the ASB's plans it would scupper nearly all PFI projects, as the main thrust of PFI in the public sector is to remove its liability for capital assets.

The ASB is proposing to separate payments for the service element in a contract from payments that might be for the underlying asset, and treat the latter as a liability on the public sector. However, it has stressed that the “commercial substance” rather than the “legal form” of the contracts should be looked at.

The ASB suggests auditors look for three warning signs in a PFI contract, any one of which should lead to the separation of the contract. The most controversial suggested criterion is the presence of any clause specifying that payments by the public sector body will be increased or decreased depending on the level of service provided by the contractor.

The ICA backs the idea of separation but rules out using this criterion which would cover nearly every PFI project.

Tim Steadman, projects partner at Clifford Chance, said: “If the accountants judge substance over form, they will find there is sufficient assumption of risk by the private sector parties to pass the accounting tests and ensure the asset is not shown on the government balance sheet.”