Contractors face increasing risks

Contractors could be forced to take on substantially more risk if the Accounting Standards Board (ASB) votes next month to change the accounting rules on PFI contracts.

The ASB wants all PFI schemes be forced onto the balance sheets of either the Government or the private sector company involved.

The amendment also requires the service elements to be separated out from the capital assets, with rigourous ownership tests applied. This will mean that the vast majority of assets will end up on the Government's balance sheet, making the liability count towards the Public Sector Borrowing Requirement.

This flies in the face of current Treasury guidelines, which state that the assets and services should be viewed as a whole in most PFI contracts and therefore liabilities kept off balance sheet because they are passed onto the private sector.

ASB chairman Sir David Tweedie said: "It is crucial to ensure that those transactions that give rise to liabilities for the Government are reported as such, so that Parliament is not misled over the extent of the payments it is committed to make in the future. Similarly, it is important that private sector accounts do not portray a false position to shareholders and others interested in them."

If the ASB votes in the amendment it will become accounting law under the Companies Act 1985 and will have to be observed by the private sector.

But PFI experts warned this week that the amendment could force even more risk onto the private sector. "This may lead to a complete transformation of PFI," said Hedy Richards, senior PFI manager at chartered accountants Ernst and Young. "The private sector may have to take on more residual risk and that would be very unpopular."

The ASB looks set to vote the amendment in next month. A spokeswoman told CJ this week: "The ASB is standing behind the principles of the note because they are an accounting standard which must be followed," and added: "If the Government retains the risk it should recognise that in its balance sheets and so should the private sector. It is an accounting fact of life."

Tory MP Nick Gibb said the Government was "fiddling the accounts by trying to get all this debt off balance sheet. The ASB is absolutely right to stand firm on this."