Truth should be unvarnished on PPP accounting

Anthony Hilton12 April 2012

CBI chief Digby Jones urged at the weekend that Enron should not be used to give business a bad name. He was right to do so, but it is supremely ironic all the same. If any part of British society should be embarrassed by Enron it is the one that is most partial to a similar kind of financial smoke and mirrors - not the business community but the Government.

Enron degenerated into what looks suspiciously like fraud in its later years but there was no suggestion of wrongdoing or evil intent when it first started to use off-balance-sheet vehicles, just as there is no suggestion of illegality in what the British Government is doing now. Enron's initial purpose was simply to flatter its reported figures - to show the accounts without some of the heavy costs associated with various activities, while still appearing to enjoy the benefits of those same activities. Within the bounds of what was acceptable, it set out to look more financially prudent and soundly based than it really was.

This is exactly what the Government seeks to do with PPP - the Public Private Partnership - and what the Conservatives sought to do with its predecessor, the Private Finance Initiative. The aim in both cases is to use private sector money for what would formerly have been public sector projects. The hospitals, schools, bridges, roads or whatever get built and voters see and use them. But they are delivered without tipping the public sector accounts into the red.

That is the theory. The facts, as far as one can get at them, are that PFI and PPP cost the taxpayer more in the long run. This can be ignored, however, because the bills will be spread over the next 15 to 30 years and no one will notice, or if they do it will be impossible to prove. But PFI and PPP projects are every bit as much off-balance-sheet financing as anything Enron did - and they have the same core purpose, which is to window-dress the accounts, specifically by keeping down the size of the public sector borrowing requirement.

Government would argue that these partnerships in fact have two purposes - to mobilise private sector money and to bring in private sector management. The theory, which I do not dispute, is that the private sector is more efficient in project management and building.

If that premise is accepted, it would make sense to separate finance from management and account for each aspect of the job transparently, weaning the Government away from its cherished opaque off-balance-sheet vehicles.

Under such a system, Government would supply the money by selling bonds to City institutions, which have a huge appetite for such paper. This would bring an immediate saving because it is always cheaper for Government to borrow than it is for the private sector because the Government has a top-notch credit rating. Government could then funnel this finance to private sector companies and their management teams recruited to handle the project in return for an agreed management fee.

This would optimise what both sides do best, but there would be no disguising the fact that Government is paying for the projects up front and the effect would be shown clearly in the national accounts. Most people think this would be a good thing but the Treasury and the politicians are, of course, totally opposed to it. They, like the board of Enron, appear to believe that if people were shown the unvarnished truth in the accounts they would think less highly of their leaders or the board. This may be true, but it is surely not sufficient reason to be opaque.

The lesson of Enron for the Government ought to be that you cannot fool all of the people all of the time.

Cues at Bank

IT IS almost five years since independence was given to the Bank of England in the setting of monetary policy, and a fitting way was found to mark the date by Shadow Chancellor Michael Howard. In a speech to the Institute of Public Policy Research, he said the Conservatives were converts to the system, and was generous in his praise of Chancellor Gordon Brown for putting it in place.

But Howard did suggest two improvements. He would increase the term of the independent members from three years to four, but not allow them to be reappointed. This would give them longer to develop into the job but not make them beholden to the Chancellor.

Second, he would require the appointment of Governor, Deputy Governor and other monetary policy committee members to be approved by a joint committee of the House of Commons.

Labour might see these suggestions as a cunning Tory plot to undermine the Chancellor's authority. Perhaps they are. But they have merit all the same.

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