Private Finance Initiatives - Essay Example

Private Finance Initiatives Number Department Private Finance Initiative A private finance initiative (PFI) is a contract between a government and a private investor which is aimed at developing a public facility. Under such agreements, a private firm is responsible for initiating the development and maintenance the public property. Public employees may sometimes be required to work under private supervisors through a process known as Transfer of Undertakings (Protection of Employment). TUPE enables these individuals to enjoy the status of being public and private workers simultaneously. This arrangement is intended to relieve the government of a heavy burden of initiating and funding projects across the country. The PFI is a program that began Britain and Australia before spreading to most of the Western countries and eventually to the rest of the world. Since early 1990s, PFI has grown into one of the common ways to develop public investments1. The program is being used to develop many different types public infrastructure. With a PFI, private organizations can place bids on these infrastructure projects, and reverse the conventional trend, whereby developing public projects were solely the responsibility of the government. The private investor that emerges the winner in the bidding process is normally awarded the contract to develop and maintain the infrastructure project. FPI enables private companies to benefit from a permanent profit from such an initiative2. In most cases, governmental organizations are not ready to handle big projects, but they do want to make sure the projects are. By engaging the private sector through a PFI, this is tenable. Apart from relieving the government of the burden of laying infrastructures, a private finance initiative reduces the amount of tax being channelled to such projects. When the private investors shoulder the larger percentage of the funding, the government can then concentrate on other important projects. PFI projects In many cases, the method of construction that is implemented by governments has been based on placing the burden on the PFI contractors to design, bid and build the public assets. Under these criteria, the public organizations often come up with a design for a public infrastructure project. This work may be done by internal experts, or it may be awarded to a private company specialized in architecture. Once the plan is authorized, the government then invites bids from privately owned construction companies, thus paving way for the winning bidder to construct the facility3. Many projects for government facilities have conventionally had extended private sector contacts to cater for maintenance. Typical cases of a PFI are court facilities and government offices that have been built on privately owned buildings. The health care industry is also not left out: many small government-owned health care facilities are operating in private sector premises. Better Service Delivery Private finance initiative has been implemented in the United Kingdom, where the government emphasized its significance and contribution toward better service delivery to citizens. In 2002, the government announced that it would engage the private sector more, especially to improve the quality of services in the healthcare industry4. The government made public its intention to ensure that quality services were achieved by approving contracts that had met the thresholds of quality. But whereas PFI can be more costly to implement as compared to conventional government funding, since public institutions enjoy lower lending rates than the private investors, most of the governments around the world have held the belief that the increased costs of amassing the needed finances by the private sector will remain etched in the better services for a far longer period of time5. Additionally, proponents of a PFI believe that there will be efficiency in savings. Market forces have also proved the government wrong: private companies have succeeded where the public sector has failed in terms of risk management6. Most of private companies have demonstrated better capacity in terms of innovations, design, and maintenance operations throughout the validity of the agreement they sign with government. In light of these qualities of the private sector, proponents of a PFI have argued that it creates room for the delivery of more important services and to a better standard than would be case if such programs were under the control of government7. Nonetheless, establishing the level at which these objectives can been fulfilled is a very challenging process, especially in the early stages of the process. PFI-built facilities including those that provide health care services are increasingly beginning to sprout. Therefore it would be premature to talk of consistent benefits that have been achieved. PFI’s impact on the better services in a health facility, for example, can be construed to mean the capacity of the organization to the meet the unique needs of the patients by offering quality treatment options. Nonetheless, it is usually difficult to measure the level of services that has been achieved. Quality of services can be tentatively measured through an analysis of the facilities in the hospital and the total number of trained personnel offering services at the facility. Nonetheless, critics argue that the increased budget that arises from the public-private agreements has diminished whatever achievements that have been made under a PFI8. Reduction of Facilities Most of governments around the world are often quick to enter into such arrangements because they are keen on carrying a lighter burden when it comes to infrastructural development, and as such they have maintained that obtaining the money to finance a PFI project does not amount to staff layoffs. Proponents add that by retaining the employees who have been working in the facilities that have changed hands, services remain uncompromised. Despite the arguments supporting a PFI culture, several studies have punched holes in the latest project between governments and the private sector9. PFI impacts infrastructural development in a negative way. For example, in the United Kingdom, all of the first PFI projects targeted at the health care centres have been affected by reductions in the capacity and facilities such as fewer beds and redundancies of the medical staff10. It is evident that contrary to the perception of many, regarding the expected boost in the number staff working under a PFI arrangement, the new staffs fail to meet the requirements of new challenges caused by the changes. Redundancies and undue pressure on the remaining often stem from a PFI. In contrast, proponents have argued that PFIs agreements are often signed through public procurement processes, especially after a painstaking evaluation of the possible pitfalls that may arise has been carried out. However, in real sense, the operations often witness the engagement of an immensely technical, compound process which may yield undesirable outcomes. Essentially, rigorous and goal-oriented criteria are often employed to evaluate the relative advantages of the government-funded programs and PFIs. All PFI programs are usually weighed against a reputable program funded by the government, through a process that is referred to as the public sector comparator. The process sees the use of appraisal criteria, whereby the finances related to each variable undergoes cut-backs so as to depict the transfer of risks11. Risk Transfer Notably, with the public sector comparator, risks that would otherwise overburden the people are capped. Under private finance initiative, the risks are transferred to another party who in this case is the private company. These include defects in design, extra costs incurred during construction, unplanned maintenance costs, and abrupt changes in demand among others. In risk management, the criteria have resulted in more positive outcomes and higher value for money than public finance initiatives. The main reason why the private sector has registered successes in this rather tricky scenario, where the financial and wider network of government has little or no chances of yielding better outcomes is that, the private companies has put in place stiffer measures and better interventions that help to manage risks in a more effective way and guarantee them profit even in challenging and unpredictable markets. In contrast, government initiatives all over the world are not aimed at yielding profits. Risk Premiums Despite the transfer of risks to the private sector, most private companies that participate in PFIs have benefitted from the relatively minimal level of risk. As a result, such firms have traded their eyes on ‘risk premiums’ by making new innovations in the market. As risks decline following the completion of the “risky” stages of an infrastructure project, private contractors tend to seek more funds at lower interest rates; and as a result, they stand to benefit from the variation between the initial and refinancing costs. These manoeuvres sometimes turn ‘risky’ markets into a profitable environment to venture into12. The refinancing initiatives can lead to companies gaining huge profits as the taxpayer is prompted to grapple with high high-risk premiums that have been caused by obtaining of initial funds at higher interest rates.13 In some situations, tax payers may pay a risk premium for costs that the PFI contractor has evaded. In the early 2000s, a private contractor in the UK evaded risks arising from serious procrastinations in the supply of computerized systems to the country’s immigration office14. Moreover, the successful transfer of risks to the PFI contractor in the case of a large project is uncertain because the firm may fail to complete the project, in which case the government will be obligated to deliver the services needed in one way or another. Bailouts and the unpredictable One of the ways in which the government can intervene if case a contractor fails to deliver on a project is by implementing a bailout. In the recent past, the UK government has bailed out various privatised industries such as the railway system with millions of the tax payers’ money, but when the troubled sectors are out of the financial problem, the substantial profits they make go to the pockets of the private investors15. In a nutshell, whatever strategy which may be implemented prior to awarding PFI contracts on the capital assets so as to deliver public services is more likely to result in a scenario that will necessarily benefit some individuals or parties and trigger losses to others. In most cases, the outcomes of a PFI cannot be easily predicted at the point of signing the contract16. Conclusion The current world continues to witness many private finance initiatives sprouting, especially in the wake of budget deficits which affect governments around the world. Meanwhile, much of the debate about the different types of PFI initiatives remain highly politicized. Whereas, proponents of PFI argue in favour of the program and cite its potential to deliver on value for money in public projects, opponents make counterclaims that PFI often limit the capacity of the government to formulate appropriate policies that can benefit all citizens under conventional situations. PFIs have been viewed by critics as more of a violation of the liberal labour laws, because their implementation often shake off some employees, while others are prompted to take new challenging responsibilities and or forced to live on poor pay. While proponents claim that PFIs result in substantial savings, opponents argue that they increase the expenses related with procuring financial assets. It is therefore rational to argue that although PFI contracts have enabled the private sector to make significant economic contributions by improving the state infrastructure, it is not an absolute panacea for development initiatives. Bibliography Acerete et al, ‘The Cost of Using Private Finance for Roads in Spain and the UK’ (2010) 69 AJPA S48. Akbiyikli et al, ‘Achieving sustainable construction within private finance initiative (PFI) road projects in the U’ (2012) 18 TEDE 207. kbiyikli et al, ‘Achieving sustainable construction within private finance initiative (PFI) road projects in the UK’ 18 TEDE 207. 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Demirag, Istemi, & Khadaroo, Iqbal, ‘Accountability and value for money: a theoretical framework for the relationship in public-private partnerships’ (2011) 15 JMG 271. Hodkinson, Stuart. Antipode, ‘Housing Regeneration and the Private Finance Initiative in England: Unstitching the Neoliberal Urban Straitjacket’ (2011), 43 A 358. Kakabadse et al, ‘Effectiveness of private finance initiatives (PFI): study of private financing for the provision of capital assets for schools’ (2007) 27 PAD 49. Kamara, John M, ‘Integration in the project development process of a Private Finance Initiative (PFI) project’ (2012) 8 AEDM 228. Kamara, John M., ‘Integration in the project development process of a Private Finance Initiative (PFI) project’ (2012) 8 AEDM 228. Leiringer, Roine, & Schweber, Libby, ‘Managing multiple markets: big firms and PFI Building’ (2010) 38 RI 131. McGuinness, Kevin, & Bauld, Steve, ‘P3, PFI & AFP: The Business of Public Sector Procurement The Business Of Public Sector Procurement (2010) 13 S 1. Read More