The Public Finance Initiative in the UK - Coursework Example

The Public Finance Initiative in the UK The Public Finance Initiative (PFI) has been an innovative tool employed by the United Kingdom government to engage the private sector to deliver public services. It origins can be traced back to the year 1992. The PFI warrants private sector firms to provide public services such as construction, operation, and maintenance. According to the UK Treasury, by the years 2003/2004 the PFI accounted for more than 10 percent of the total investment in UK’s public sector (Department for Education and Skills, 2002). This essay explores the overall working policy of the PFI, its approach on how it enables the public sector to take on projects and the risks of the conventional procurement (Michael, 2011). This essay seeks to expound on the advantages and disadvantages of PFI as a method of financing projects in the public domain. It will further highlight the positive benefits of PFI on building new schools and touch lightly on why the PFI was introduced, its source of funding, and its role in the education center (Michael, 2011). It shows that PFI has seen improved performance on the building of new schools compared to other existing measures like the traditional tendering system. Definition of Private Finance Initiative (PFI) The conventional procurement is where the government contracts a private entity to build and construct a project and then it operates the finished project or contracts it for operation. In most cases, the operator is limited because they come in only to find that things have been already constructed. The limitation means that the operator enjoys less flexibility, which may result in inefficiency (David, 2006). The PFI can be considered to be a public-private partnership. It is a process that combines the procurement and purchase of capital items by the public sector from private cotractor. The public sector contracts the operation to the private contractor, and it pays the contractor as per their contractual agreements. There is a clear distinction between PFI, privatization, and contracting out. In (PFI, the public sector is still the main consumer and enabler of the project), and contracting out (the contractor provides the asset and services). A PFI contract is specific but allows for flexibility and synergistic relationship between the private sector and the public sector. Under the PFI contracts, the private sector will design, build, finance, and operate the projects based on the public sector specified outputs. The public sector bodies specify the outputs and the private sector would frame the project based on these specifications. For instance, the UK government has established the shortages of schools due to the increase in population (Audit Commission, 2003). Because of the failure of Building for Future Program, it would enter into a PFI partnership with interested private sector contractors. The government provides the output, which, in this case, is the building of schools that share similar standards. The approach to PFI approach The PFI approach enables the public sector to carry out projects that they could not finance due to the large number of funds required during their construction. The PFI then becomes an attractive option to the public sector. However, due diligence has to be carried out before deciding to employ the PFI approach. For instance, a government has to show that the advantages of using PFI overrides and outweigh other existing methods such as raising funds through bonds and other markets. The risk of the conventional procurement The risk of public affair comes from not only the uncertain business environment but also political and social risk. Some of the public projects are large, and the normal public service agencies lack the capacity to guide them until they reach the implementation stage. It was established that there was a need for effective risk management initiatives. These initiatives included anticipation, preparation, and mitigation of adverse outcomes. Management of risks brings about opportunities that spur innovations and developments of new ideas. When undertaking construction of public utilities, there are a lot of risks involved. The risks include the rise in costs of construction material, a decrease in demand for the services the construction was being carried for and the overrun in the completion time. Traditional procurement methods meant that the public sector would bear the brunt of these risks occurring. Advantages of PFI (David, 2006) The public sector will have a greater certainty with the pricing of any project. The public and private sector are bound by a contract that stipulates the annual financial payment for the services rendered. The PFI allows the public sector to concentrate on its core business. The private sector is responsible for the assets and provision of services that supports the public sector. The inclusion of the private contractor in the public sector spurs innovation. The private contractor often introduces creative and more innovative ideas and methods of service delivery, which ultimately increases the quality of service. The contractor work is closely monitored and has to be approved by the stringent standards in order for the payment to be initiated. Therefore, the scrutiny put on the contractor ensures that the work delivered will be of quality. The public is guaranteed that the contractor will shoulder the risks and any reduction in quality will mean that the contractor will compensate the public sector body. The long-term contract requires the government and the contractor to establish the costs involved in the lifetime of the project. This eliminates the piecemeal like the establishment of costs done. For example, the government’s traditional method of determining the cost of construction and the operations separately from each other during the project. Disadvantages of PFI (David, 2006) Most PFIs tie the public sector into long-term contracts. The minimum duration allocated for these contracts is normally 30years. The business environment often changes over the period of the contract. Hence, there is the risk of the contract becoming unsuitable for the government as well as the private sector. During the course of the contract, variation may arise which would require the changing of the contractual agreement. These renegotiations are cumbersome and often results in the private sector paying more in terms of pricing. Some of the public projects are risky in nature. In most cases, the contractor will charge a premium for accepting to take the risks. The life cost of a public sector project may be higher than the government borrowing rates as the contractor will be applying commercial rates to the payment done by the public sector body. Why was the PFI introduced by the UK Government The UK government to introduce and adopt PFI was influenced by two major reasons: The first reason was the tendency of the government to control the capital investment levels. Public sector investments are capital intensive, and it is upon the government to influence it, so as to provide a balance when it is planning for infrastructure development. However, due to the controlling nature of governments in the public sector expenditure, infrastructure development may slow down and thus affect the delivery of services (David, 2006). The private sector is encouraged to make the investment. One of the tools that was at the disposal of the private sector to use and is the subject of this essay is the PFI. The second reason is the poor procurement procedures in projects involved in the public sector. The UK government noticed that public sector projects were being undermined by substandard procurement, design, and construction. The poor service during the initial commencement of the projects often led to delays in finishing a project and most often resulted with cost overruns. Therefore, the need for involving the private sector and having a standardized procurement process arose. What is PFI in the education sector? The UK government has employee PFI in the development of schools in the UK. The use of PFI has not been limited to the building and rehabilitation of schools. PFI goes beyond the brick and mortar. The government has used PFI to provide other services around the school environment. The private sector partner does not deal directly with the government. The private contractor will enter into an agreement with the Local Authority (David, 2006). Part of the agreement stipulates that the contractor will do the designing, construction, financing, and operation of the school buildings. In addition to the construction, the contractor also will provide other services. These services may include catering and landscaping. The education PFI contracts run for a duration of 30years, which offers sufficient time for the private sector to recoup their investments. How is PFI funded? The private sector contractor charges the local authority every month. This charge is known as the unitary charge, and it covers all costs that are involved in a school. Two bodies are responsible for availing funds for the unitary charge. The first source is the Department for Education and Skills (DfES) (Department for Education and Skills, 2002). DfES supports the PFI by paying the capital cost of the school project. The payment is done on an annual basis, and it takes care of the capital and interest accrued during that period. The second source of the unitary charge is the schools, which have been constructed under the PFI. The schools are charged and pay for the costs accrued by using the services offered by the contractor (Audit Commission, 2003). The benefits of PFI in building new schools Before the establishment of PFI and building schools, most schools had issues with the school lay out, the size of the classroom and ultimately the presence of environment control mechanisms. A study conducted by the Audit Commission found out that there were a number of key changes that the students, teachers, and the surrounding communities wanted. This changes that the school stakeholders wanted to experience include a larger and adaptable classroom, dining hall, improved natural light and the availability of more storage space (Audit Commission, 2003). This issues had constantly plagued the government financed and controlled school. Therefore, it was upon the private contractors to offer solutions that would solve the existing problems. The PFI offered the UK government a chance to provide new technology, buildings, and services to schools while incorporating leadership and project management on its staff. The benefits of the PFI were numerous, and they not only changed the lives of students but their teachers and management staff. Some of these benefits are outlined below (Gateshead, n.d.): In the current schools, the school management is tasked with the day to day management and running of the school. Some schools lack leaders who lack the ability to juggle between running the managerial work and upholding high education stands. Under the contract between the government and the private contractor, the private contractor will shoulder the responsibility of providing services to the schools. The burden of offering these services to the schools will thus be shifted from the school management. The public sector through the DfES and the school management do not have to spend on money before receipt of the services. The contractor is only paid after the project service commences. All the public sector stakeholders, for instance, the government, schools, and local education authorities benefit from the expertise of the private contractor. There is less risk for the public to bear since most of it is transferred to the contractor. Use of PFI improves the facilities of a school and allows even the communities that are within the proximity of the school to share and use the new facilities. PFI has also has cultured the sense of ownership among the communities around the schools. The students take pride in being in a learning environment PFI is a great tool that can still enable governments to realize their infrastructure goals when they have limited amounts of resources. It offers the government an opportunity to gain knowledge and experience from the private sector at the same time. Use of these private contractors in the public sector brings the assimilation of innovation and technology. The PFI contract allows the schools to get face-lifts, modern buildings, and improved services such as catering and landscaping. References Audit Commission, 2003. Audit Commission. [Online] Available at: http://archive.audit-commission.gov.uk/auditcommission/sitecollectiondocuments/AuditCommissionReports/NationalStudies/pfi_report.pdf [Accessed 30 April 2015]. David, C., 2006. The United Kingdom Private Finance Initiative: The Challenge of Allocating Risk. OECD Journal on Budgeting, 5(3), pp. 38-55. Department for Education and Skills , 2002. Department for Education and Skills. [Online] Available at: www.dfes.gov.uk/ppppfi/index.cfm [Accessed 30 April 2015]. Gateshead Council, n.d. Gateshead Council. [Online] Available at: https://www.gateshead.gov.uk/Education%20and%20Learning/Schools/pfi/Benefits.aspx [Accessed 30 April 2015]. Michael, G., 2011. The Guardian. [Online] Available at: http://www.theguardian.com/education/2011/jul/19/300-schools-built-private-finance-scheme [Accessed 30 April 2015]. Public Accounts Committee, 2003. Delivering better value for money from the Private Finance Initiative, London: Stationery Shop. Read More