WRITTEN QUESTION E-1816/03

by Charles Tannock (PPE-DE) to the Commission

(2 June 2003)

Subject: The increasing use by Member States of off-balance items to reduce public-sector deficits

Enron has become infamous for its use of off-balance items to disguise the true level of the company's indebtedness. Less well-understood is the increasing frequency with which EU Member State governments, including the British government, are using this facility. In the UK Private Finance Initiatives are used in a range of economic activities from the building of foundation hospitals to maintaining railway networks. Off-balance sheet vehicles with or without public sector involvement are often thinly capitalised with interest payments frequently accounting for most of the profit before anything is left for the shareholders. Recent investigations by The Times revealed that the lead contractor will typically have an equity interest of only 5 per cent in a project, and that even on that basis the equity invested by the five biggest construction-related PFI contractors in the UK is supporting unreported debts of GBP 2 billion, suggesting, in turn, that the special purpose vehicles that own the various PFI contracts of these companies alone have collected debts of about GBP 40 billion.

As Enron showed, the issue of whether potential liabilities should be allowed to appear as off-balance items is a very real one. Many accountants are increasingly nervous at the implications of this growing practice, arguing that a liability is a liability and that hiding it somewhere off the balance sheet doesn't make it go away, whilst others point to the political reality that a government is unlikely to allow nuclear power plants, rail networks or foundation hospitals to go bankrupt. According to a Conservative Party analysis the total off-balance sheet debt held by the Chancellor comes to more than GBP 100 billion, indicating a real public sector debt level of 40 rather than 32 per cent of national income.

In the case of Network Rail, a dispute arose at the end of last year as to whether the Chancellor should be allowed to offload up to GBP 21 billion of debt by keeping it off the public sector balance sheet. The Office of National Statistics (ONS) agreed with this procedure based on consultations with the department chief accountant Alan Beard who was later reported to have said that it would be a mistake to assume that his judgement necessarily supported the ONS decision. The Department of Transport defended its accounting procedures, saying that they were in line with European guidelines. Is that correct, and what are the obligations of the Member States in this regard under the terms of the Growth and Stability Pact? Does the Commission believe that in both the private and public sector there needs to be discussion with the International Accounting Standards Board to ensure consistent and transparent accounting and what steps has the Commission taken to ensure that EU governments comply with their obligations in this area?

Answer given by Mr Solbes Mira on behalf of the Commission

(8 July 2003)

The government deficit and debt that are relevant for the purpose of the Stability and Growth Pact are defined in Council Regulation (EC) No 3605/93 of 22 November 1993 on the application of the Protocol on the excessive deficit procedure annexed to the EC Treaty(1), as amended(2), through a cross-reference to the European System of National and Regional Accounts(3). Additional guidelines for interpreting ESA 95 rules are to be found in the Eurostat's ESA95 Manual on government deficit and debt.

ESA 95, which has to be applied strictly for the benefit of the Stability and Growth Pact (SGP), does not record off-balance sheet items. This means that the government's contingent liabilities, which may or may not become at one point in time government liabilities depending on the fulfilment of some conditions, are not recorded as government debt before such conditions are fulfilled.

The liabilities of the units that the Honourable Member describes as off-balance vehicles are recorded as government debt in case they are classified as part of the general government sector. This depends on the economic nature of their activity and degree of autonomy vis-à-vis the government.

As far as Private Finance Initiatives (PFIs) and Public Private Partnerships (PPPs) are concerned, the ESA95 Manual on government deficit and debt already provides some guidance on the issue. According to the currently existing rules, the PPP-related liabilities are recorded in the accounts of the government or of the contractor depending on which unit is exposed to most of the risks of each specific project. Moreover, to better clarify the accounting treatment of these complex transactions, Eurostat is currently chairing a task-force on PPP which will soon lead to the adoption of more detailed accounting rules.

Concerning the sectoral classification of Network Rail, Eurostat analysed carefully the information at its disposal and agreed with the United Kingdom's Office for National Statistics (ONS) that it should be classified in the non-financial corporation sector (as a private producer), that is outside general government. This is because Network Rail fulfils the criteria of market producer according to national accounts methodology.

The issues mentioned by the Honourable Member referring to Foundation Hospitals and nuclear power plants have been recently discussed with the office of National Statistics (ONS) during a recent Eurostat mission to the United Kingdom.

Finally, it is worth to recall that there are regular contacts between the International Accounting Standards Board (IASB) and Eurostat which lead to the discussions of matter of common interest as far as the accounting standards are concerned.

(1) OJ L 332, 31.12.1993.

(2) OJ L 58, 3.3.2000.

(3) ESA95.