Pamela Stapleton

Highway robbery? A financial analysis of Design, Build, Finance and Operate (DBFO) in UK Roads

Abstract The ex‐post facto cost of using private finance in roads is examined using a case study approach. The paper focuses on the first eight design, build, finance and operate (DBFO) roads commissioned by the UK Government’s Highways Agency and paid for through a system of shadow tolls. It carries out a financial analysis of the publicly available accounting information from the Highways Agency and its private sector partners for the first 6 years since the start of the 30‐year schemes in 1997. Publicly available financial information about the schemes was found to be limited and opaque. In 3 years, the Highways Agency had paid more than the construction cost. It was unclear whether the payments were higher than expected at financial close. Its private sector partners reported a post‐tax return on capital of 29% and an effective cost of capital of 11% in 2002, twice the cost of public finance. However, operating through a complex web of subcontracting creates additional, undisclosed sources of profit for their parent companies that make it difficult to establish the total cost of using private finance. The paper questions the wisdom of using private finance by providing evidence about the cost, including the cost of risk transfer.

Compliance with International Accounting Standards in a national context: some empirical evidence from the Cairo and Alexandria Stock Exchanges

The contribution of this paper is to provide evidence, from a sample of 281 listed companies, about Egyptian convergence to international accounting. We construct indices to measure both disclosure and measurement/presentation convergence, and the impacts of education and training, tax, and three company characteristics on compliance. Compliance, which is low, is associated with the volume of trading in company stocks, but not with industry sector or legal status. The findings suggest weak enforcement, and a need for education and training of accountants, and the removal of adverse tax implications for companies if increased convergence is to be achieved.The contribution of this paper is the provide evidence from a sample of 281 companies about Egyptian convergence to international accounting. We construct indices to measure convergence and the impacts of education, tax and three company characteristics on compliance. Compliance, which is low, is associated with the volume of trading in company shares, but not with industry sector or legal status. The findings suggest weak enforcement, the need for education of accountants and the removal of adverse tax implications for companies if increased convergence is to be achieved.

The diffusion of risks in public private partnership contracts

Purpose - The UK government argues that the benefits of public private partnership (PPP) in delivering public infrastructure stem from transferring risks to the private sector within a structure in which financiers put their own capital at risk, and the performance-based payment mechanism, reinforced by the due diligence requirements imposed by the lenders financing the projects. Prior studies of risk in PPPs have investigated “what” risks are allocated and to “whom”, that is to the public or the private sector. The purpose of this study is to examine “how” and “why” PPP risks are diffused by their financiers. Design/methodology/approach - This study focuses on the financial structure of PPPs and on their financiers. Empirical evidence comes from interviews conducted with equity and debt financiers. Findings - The findings show that the financial structure of the deals generates risk aversion in both debt and equity financiers and that the need to attract affordable finance leads to risk diffusion through a network of companies using various means that include contractual mitigation through insurance, performance support guarantees, interest rate swaps and inflation hedges. Because of the complexity this process generates, both procurers and suppliers need expensive expert advice. The risk aversion and diffusion and the consequent need for advice add cost to the projects, impacting on the governments economic argument for risk transfer. Originality/value - The expectation inherent in PPP is that the private sector will better manage those risks allocated to it and because private capital is at risk, financiers will perform due diligence with the ultimate outcome that only viable projects will proceed. This paper presents empirical evidence that raises questions about these expectations.

Financial black holes: The disclosure and transparency of privately financed roads in the UK

Purpose - This paper aims to examine empirically whether the system of public expenditure reporting is capable of delivering financial accountability, focusing on the UK governments use of private finance for roads. Design/methodology/approach - Publicly available documents from the public and private sector partners for 11 roads contracts are examined, together with a publicly provided bridge paid for via tolls as a comparator. Findings - Reporting by both public and private sectors is limited and opaque, such that accountability to the public is inadequate. The evidence also shows that the scale of the additional expenditure generated by private finance warrants greater disclosure and scrutiny than is currently the case. Research limitations/implications - These findings, which occur in the roads sector where projects are large and visible, are likely to be replicated elsewhere in the public sector. Accountability issues may be even more problematic in public bodies where reporting is more diffuse. Furthermore, the proliferation of other forms of private finance increases the problems of reporting clear financial information, the lack of which not only makes informed public debate about public and fiscal policy impossible but also may lead to the wrong policy choice. Originality/value - There has been little

New development: New global health care PPP developments—a critique of the success story

Health care public–private partnerships (PPPs), where clinical services as well as infrastructure are delivered by the private sector, are coming under the spotlight as governments seek to achieve value for money in health budgets. Existing examples have been widely reported as successful. However, this article urges caution as a closer look at the evidence shows that handing over control of service delivery to the private sector is difficult to monitor and evaluate, carries cost implications which remain largely unquantified and can create additional risk.

Private finance: bridging the gap for the UK's Dartford and Skye bridges?

This article investigates the outcomes in terms of the cost to both the taxpayer and road users of using private finance to build and operate the Dartford crossings and the Skye bridge. It provides the detailed financial evidence that confirms the broader international experience that the use of private finance in public infrastructure requires considerable political subventions to make projects financially viable.

Firm-specific determinants of the extent of compliance with international accounting standards in the corporate annual reports of companies listed on the Egyptian Stock Exchange: a positive accounting approach

This paper examines the firm specific characteristics – as a proxy for positive accounting research – that are associated with the propensity of companies listed on the Cairo and Alexandria Stock Exchanges (CASE) to comply with the newly harmonised Egyptian Accounting Standards (EASs) issued in 1997 and that are close to the international accounting standards (IASs). Although having an international audit firm is the dominant factor associated with disclosure and measurement/presentation compliance, ownership concentration, share trading, size as measured by market capitalisation and internationality are also associated with compliance. However, the results show that profitability, liquidity and leverage do not seem to affect the extent of compliance with EASs and the performance of manufacturing are at par with non-manufacturing firms. Also the performance of private sector firms is at par with public sector firms. This may indirectly imply that the positive accounting perspective may not be entirely applicable for de facto compliance in Egypt. Hence, it cannot be entirely inferred that listed Egyptian companies may use de facto compliance with EASs as a means of reducing agency costs, raising capital, reducing political costs or signalling to the market that they are high quality firms.

Making Concessions: Political, Commercial and Regulatory Tensions in Accounting for European Roads PPPs

Abstract Governments increasingly use private finance to fund roads infrastructure. In particular the European Commission has promoted the use of public private partnerships (PPPs) to deliver the projects forming the trans‐European Network. This use of private finance raises important questions about how public monies and assets are accounted for. The paper examines, first, accounting in both public and private sectors for roads PPPs in Spain and the UK, countries which not only have considerable experience in the use of private finance for the provision of roads but also act as exemplars of a number of differences which may be significant from an international perspective in terms of financial reporting and economic outcomes. Second, it examines the tensions between national, European Union and international accounting pronouncements. Our findings suggest that the business environment has influenced the development of accounting policy. In Spain a powerful toll sector presence within the legal framework has led to substantial variations, having real economic impact. In the UK, the accounting regulator has prevailed over political concerns. For European public sector accounting, conflict remains between political choice and technical accounting. These findings may have global relevance, as the adoption of international accounting pronouncements will not remove these conflicts.

A changing market for PFI financing: Evidence from the financiers

Abstract Responses to a questionnaire survey received from PFI financiers, and interviews with senior managers, show that as the credit crunch took hold banks became more risk averse. The prediction of Toms et al. that collusion between the state and the private sector might cease in the face of austerity does not appear to have occurred. Rather the state has intervened to benefit the private sector. We argue that two successive UK Governments intervened in the market to protect the role of private finance in PFIs but whether such interventions represent value for taxpayers’ money is a question for future research.

The role of structure in manipulating PPP accountability

Purpose - The purpose of this paper is to examine the accounting and governance of public private partnerships (PPPs) that are structured as joint venture partnerships. Drawing on Giddens’ structuration theory, the paper examines how human agents interact with these joint venture structures and analyses the effects on financial disclosures and public accountability for taxpayers’ investments. Design/methodology/approach - The authors adopt a cross-case analysis to investigate two such PPP schemes, which form part of the UK’s programme of investment in primary healthcare, known as the Local Improvement Finance Trust (LIFT) policy. The authors employ a combination of interviews and analysis of financial statements and publicly available official documents. Findings - The corporate structure of these LIFT schemes is very complicated so that the financial accounting is opaque. The implication is that the joint venture mechanism cannot be relied upon to deliver transparency of reporting. The paper argues that the LIFT structures are deliberately constructed by human agents to act as barriers to transparency about public expenditure. Practical implications - The financial reporting undermines public accountability and transparency as both are necessarily restricted. Policy makers should pay attention to not only the private sector technologies but also the manner in which structures are used to reduce transparency and consequently undermine public accountability. Originality/value - The paper provides detailed analysis from the perspective of structuration theory to show how human agents use structures to impact on financial reporting and public accountability.