Value for money tests and accounting treatment in PFI schemes

In Private Finance Initiative (PFI) projects, value for money (VFM) tests and accounting treatment are distinct but related issues. VFM analysis should be concerned with total risk, not just with the sharing of risk, which dominates the accounting treatment decision. A framework is developed for logical thinking about what is meant by `̀ best VFM’’ in the context of PFI projects. This involves consideration of the full set of alternatives, not an artificially diminished subset. The credibility of analytical techniques can be tarnished if they are misused to legitimate a predetermined decision. A reduction in construction risk may be a powerful source of VFM gains under PFI, but, under UK accounting regulation, this should not influence the accounting treatment decision. New complications about how VFM should be interpreted arise directly from the process of public sector fragmentation: affordability to the client is not necessarily the same as VFM for the public sector as a whole. Only public auditors, such as the National Audit Office, can gain access to PFI documentation on the conditions necessary for a comprehensive assessment of both accounting treatment and VFM. However, such studies require the kind of theoretical underpinning provided in this article, as otherwise the findings are likely to be ambiguous and hence vulnerable to rebuttal. In particular, VFM judgements must make explicit the basis of comparison on which they rest. Introduction In the same way that UK Conservative governments of the 1980s bequeathed public enterprise privatisation to the world, the Labour Government elected in 1997 has embarked upon extensive use of private finance in public services, portraying it as part of the `̀ third way’’ (Giddens, 1998). The Private Finance Initiative (PFI) was originally a Conservative initiative, but it has subsequently been positioned by the Labour government within its programme of public private partnerships (PPP)[1]. In both cases, emulation across the world has been remarkable[2], and invisible earnings on privatisation and PFI advice have become economically valuable to the UK economy. However, the UK position on the PFI is complicated. The Conservative Party, which in government invented it (Treasury, 1992; 1993; 1995), might prefer full privatisation of certain public services. The Labour Party, antagonistic to the PFI in opposition, has embraced it in government with noted enthusiasm. The Liberal Democrats, publicly hostile to the PFI, are encountering internal controversies (Wintour, 2002), not least in relation to recourse to the PFI where Liberal Democrats are in control of particular local authorities. Rather than there being an intelligent debate, however, the vast media coverage of the PFI usually resembles the dialogue of the deaf, with different groups speaking past each other. T h e E m e r a ld R e s e a r c h R eg is te r fo r th is jo u r n a l i s a v a i la b le a t http://www.emeraldinsight.com/researchregister T h e cu rr e n t i s s u e a n d fu l l te x t a r c h iv e o f th is jo u r n a l is a v a i la b le a t http://www.emeraldinsight.com/0951-3574.htm