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UK PFI: pawning future income?

The UK has the EU's most extensive public finance initiative programme. According to pro-PFI lobbying group the PFI Forum, at March 1 this year 276 projects with a combined capital value of more than £34 billion ($61 billion) had been completed and were operating.

Some of these, such as the London Underground PFI, are crucial to the UK's infrastructure. It can be assumed that the government will bail them out even if the PFI company goes bust. So borrowing by PFI companies creates contingent liabilities for central government or local authorities.

"The simple starting point is that public infrastructure can only be paid for in two ways, either by the taxpayer or by user charges," says Peter Robinson, senior economist at UK think-tank the Institute for Public Policy Research. "It doesn't matter what clever financing structures or accounting mechanisms you have. Any major infrastructure project will create a future claim on the government."

Whether PFI projects go on or off the government's balance sheet is decided by government auditors, in theory according to how much risk is transferred. "The key rule is that the accounting treatment of the project should never drive the decision on that project," says Robinson.

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