Private Finance Initiative - Essay Example

?Introduction Private finance initiative (PFI) represents a recent stride in the long standing public private partnership (PPP) that seeks to utilise private funding as a means of funding public projects. The concept has expanded from the use of private finance for building projects to the use of private finance to provide services using public infrastructure1. The emergence of this particular PPP can be seen as a consequence of neo-liberalist economic policies pursued at the end of the nineties in the United Kingdom2. Ever since the implementation of PFI, it has come under intense critique from certain quarters that argue that PFI promotes the interest of the private sector at the expense of public service provision. 2. This paper will look into the value for money delivered by PFI methods in order to determine if PFI is preferable in comparison to public funding. Synopsis of PFI 3. The PFI method relies on delivering infrastructure and / or services for the general public through the utilisation of private funds and resources. The provision is kept in line using public sector specifications so the public sector can be seen as exerting sizable influence on the overall process. Typically the private sector’s involvement is largely directed to financial support for public projects as per the PFI approach. However, the private sector can also be involved in the operation and maintenance of services that might have been built using PFI or other previous methods3. The basic contention behind PFI is to allow the private sector greater involvement in public spending projects so that the burden on the public sector is eased. Moreover, the involvement of the private sector ensures that public sector projects are competitive enough while delivering optimal value for money goods and services. Advantages and Disadvantages of PFI Successful PFI Implementations 4. Advocates of PFI argue that projects implemented under the PFI arrangement show greater promise than conventionally public sector funded projects. Research indicates that conventional public infrastructure provision arrangements provided on time and on budget projects around 30% and 27% respectively. In contrast, PFI arrangements provided an increase of 76% and 78% for on time and on budget project handovers4. These statistics clearly highlight that PFI has the capacity to deliver better both in terms of budget variances and schedule variances. The inherent nature of the private sector makes it competitive since the public sector has little or no other competition for infrastructure and service delivery. It is often common that the public sector tends to see negative budget and negative schedule variances on projects since no other benchmarks are possible. However, the private sector thrives on competition and escalating negative budgetary and negative scheduling variances indicate a failing business strategy. The need to remain relevant to the market ensures that private businesses are more efficient in terms of resource and time utilisation when compared to the public sector. 5. Similarly, other research into PFI arrangements showed that optimised deals were attained in every case studied. Moreover, research findings indicated that value for money in PFI projects was achieved 80% of the time5. Another notable aspect of PFI initiatives is the decrease in costs since private financers are looking for ways to reduce costs. Research indicates that public infrastructure provision becomes between 7% and 23% cheaper when PFI methods are applied6. Other research placed cost reduction at 11%7. It could be reasoned that cheaper infrastructure and service provision would lead to a lower quality. However, it must be noted from the research above that value for money is achieved in 80% of PFI projects which tends to dispel this method of reasoning. 6. Critics of the PFI approach contend that private involvement tends to make infrastructure and service provision too competitive such that value addition is minimised. However, such claims hold little ground in light of the evidence presented above that shows that value for money is achieved on 80% of all PFI projects. The private sector provides more optimised services since active market competition is always available. Businesses optimise infrastructure and service provision in terms of both cost and value addition since market competition forces them into such a state. However, the public sector is under no such competition from other sectors so there is little need to optimise infrastructure and service provision. Therefore, the common provision of infrastructure and services by the public sector sees massive cost increases that are not warranted by the value addition they offer. Greater Complexity and Lack of Innovation 7. PFI has come under criticism for introducing greater complexity to existing operations. Critics contend that public sector workflow was well configured given its optimisation over years of practice. The introduction of PFI tends to add another layer of complexity since PFI-public relationships are still not as well defined as required8. It is also argued that PFI tends to limit innovation and response capacity for future operations expansion since the private operator is only concerned with temporal profit making schemes9. However, this argument tends to make little sense given that the supporting research was conducted in the early years of PFI implementation and since government bureaucracy tends to be far more complicated and fraught with red-tapism compared to private management systems. Expecting low innovation and long term expansion returns from PFI projects holds little credence. 8. It can also be argued that PFI implementation has been able to bring together disparate goods and services provision to provide more long term solutions. Research indicates that the scope of PFI has been expanding over the last two decades of its implementation which can be seen as a signal of its success10. The implementation of PFI is increasingly being diverted to more complex service arrangements than before11 such as health services facility provision and staffing. The conglomeration of eclectic services under the umbrella of PFI projects ensures that cross sector collaboration increases in more efficient methods saving on both costs and time. In contrast, collaboration in the public sector often takes far more time and resource commitment since cross sector collaboration has to be approved at various vertical and horizontal levels. This can also be seen as an indication of the fact that PFI based infrastructure and service provision projects are more responsive to changes in demand given their greater flexibility. The public sector often tends to suffer economically since the system is not flexible enough to handle changed in demand especially major changes. The health sector provides a glaring example where it has taken years to adopt to changing insurance policy attitudes after the global economic crisis. Policy Creation and Implementation Focus 9. PFI also presents the advantage of bringing businesses into policy making focus. Previously, businesses had to lobby in order to pursue policy change but now businesses are essentially policy making partners for the public sector. In turn the public sector is governed by representative of the people so hijacking the public private policy making process cannot be classed as simple. The increased focus on businesses as policy makers is preferable since it allows them to optimise policy delivery accordingly12. Assumption of Risk 10. The skewed assumption of risk in large projects by the private sector has also been used to criticise PFI. The private sector should theoretically assume all risks associated with a project since it provides the requisite finance. However, practical arrangements mandate that the public sector and the private sector share risks through an agreed formula. Critics of PFI contend that the private sector fails to take onto its fair share of risk assumption and puts the risk taking pressure on the public sector13. It is argued that if such projects fail, the public sector would have to intervene using public money that would burden the public through new taxes to support such bailouts. However, it must be considered that it is not in the inherent design of the private enterprise to fail. Moreover, any such failures on these large projects would start to produce symptoms long before failure that would allow the public sector regulators to reign in problems for solutions. Stabilisation and Optimisation Time 11. Certain quarters argue that PFI provides a solution that still requires a sizable amount of time to optimise itself. In the meantime, PFI would produce distortions in the distribution of public wealth and value for money. In order to deal with these problems, it is suggested that the public sector should utilise a number of different procurement instruments in addition to PFI14 while PFI optimises itself over time. The growth of PFI in recent decades is proof enough to support the contention that PFI or an allied derivative would be the future of public infrastructure growth and service provision. Conclusion 12. It seems to be standard practice to criticise a few failures in the PFI domain and to use such failures to paint the PFI picture. However, the evidence presented above clearly shows that PFI is taking on increased usage and that too from multiple governments around the world15 which indicates its strengths. PFI exhibits stronger commitments to on budget and on time project and service delivery since the financers are looking to optimize costs. The quality of infrastructure and service provision does not suffer since PFI projects offer better value for money in most projects. The implementation of PFI tends to lower bureaucratic manipulations and hence boosts overall innovation and commitment to long term delivery including future expansion. Businesses are in focus for both policy creation and implantation allowing them to bridge the gap between these two areas. PFIs pressure the public sector to assume greater risks but the involvement of private finance provides a strong guarantee against project failure. References 1. Allen Consulting Group, Performance of PPPs and Traditional Procurement in Australia (Infrastructure and Partnerships Australia 2007) 2. Allyson Pollock, NHS Plc: The Privatisation of Our Health Care (London: Verso 2005) 3. Allyson Pollock, M Allyson, Jean Shaoul and Neil Vickers, ‘Private finance and "value for money" in NHS hospitals: a policy in search of a rationale?’ British Medical Journal 342 (2002) pp 1205–1209 4. Auditor-General of New South Wales, The New Schools Privately Financed Project (Sydney: Auditor-General’s Office 2006) 5. D Gaffney, Allyson Pollock, D Price and J Shaoul, ‘PFI in the NHS: is there an economic case?’ British Medical Journal 319 (1999) 6. J Barlow, J K Roehrich and S Wright, ‘De facto privatisation or a renewed role for the EU? Paying for Europe’s healthcare infrastructure in a recession’ Journal of the Royal Society of Medicine 103 (2010) 7. James Barlow and Martina Koberle-Gaiser, ‘Delivering Innovation in Hospital Construction: Contracts and Collaboration in the UK’s Private Finance Initiative Hospitals Program’ California Management Review 31(2) (2008) 8. James Barlow and Martina Koberle-Gaiser, ‘The private finance initiative, project form and design innovation: The UK’s hospitals programme’ Research Policy 37(8) (2008) pp 1392-1402 9. J Zheng, J K Roehrich and M A Lewis, ‘The dynamics of contractual and relational governance: Evidence from long-term public-private procurement arrangements’ Journal of Purchasing and Supply Management 14(1) (2008) pp 43-54 10. Mott Macdonald, Review of Large Public Procurement in the UK (London: Mott Macdonald 2002) 11. M Pollitt ‘The Declining Role of State in Infrastructure Investment in the UK’ in S V Berg, M G Pollitt and M Tsuji, Private Initiatives in Infrastructure: Priorities, Incentives and Performance (Aldershot: Edward Elgar 2002) 12. Rob Ball, Maryanne Heafey and Dave King, ‘The Private Finance in the UK: A value for money and economic analysis’ Public Management Review 9(2) (2007) 13. Sally Ruane, ‘Corporate and political strategy in relation to the Private Finance Initiative in the UK’ Critical Social Policy 30(4) (2010) pp 519-540 14. Tony Bovaird and Elke Loffler, Public Management and Governance (London: Routledge 2003) Read More