When ‘invisible’ debt turns ugly

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Published on:

The collapse of Carillion has raised perennial questions about PPP.

Carillion-R-600

Euromoney wrote last year about the rise of invisible debt. Governments have been piling up contingent liabilities that they can keep off-balance sheet in order to hit budget targets, buoy credit ratings or simply hide the measure of overall indebtedness from the public eye. A popular example of this is the funding of infrastructure through public private partnerships.

The UK’s public-sector debt is estimated to be about £1.83 trillion. This represents one of the highest debt-to-GDP ratios among advanced economies. 

At 1.7% of GDP, the UK’s use of PPPs, which involve off-balance sheet debt and other contingent liabilities, is the third highest in Europe behind Portugal and Hungary, according to a recent report from the National Audit Office (NAO). 

The NAO calculates that the cost to the state of those contingent liabilities from existing Private Finance Initiative (PFI) commitments (part of the broader PPP procurement programme) with a capital value of £60 billion will be about £199 billion until 2040.

These are striking numbers. PPPs can be a useful way of directing capital to projects that require heavy investment long before there is any pay off. They enable risk to be allocated to public and private investors according to appetite, which can result in higher quality assets and increased operational efficiency. They also, very often, do not. 

Usefulness curtailed

The usefulness of PPP is greatly curtailed when the primary motive is to keep debt off balance sheet rather than to streamline operations and reduce costs. 

In 2015, the UK government’s provisions and contingent liabilities alone (not including guarantees and ‘remote’ contingent liabilities) totalled £251 billion, according to another NAO study, or one sixth of total assets and 14% of total GDP.

The collapse of facilities management and construction services company Carillion in January shows the need for urgent reform in the PPP procurement process in the UK. It highlighted the Achilles heel of the concept: the near impossibility of seamlessly replacing one operator with another if the original contractor runs into trouble. 

The chaos following the firm’s collapse also highlights the importance of transparency in the management of off-balance sheet contingent liabilities – something at which the UK government is clearly struggling. It will publish equity returns for PF2 projects (the least-used of the government’s PPP schemes) but not for all other types of PPP. 

And while the cost of the private-sector debt associated with these projects is in the public domain, the government itself publishes no data on the cost of debt for any of the programmes – the true cost overall is all but impossible to evaluate. If the country is to have any real chance of assessing the risk-reward of these programmes, much more transparency is needed.