Private Finance Initiative - Essay Example

?Introduction In the recent years, Private Finance Initiative (PFI) has increasingly gained popularity with the government departments. The schemes are part of government’s strategy to involve private enterprises in the areas where their managerial and operational skills could be exploited to give better value proposition for the taxpayers. It had basically evolved as public procurement of infrastructure for public departments like education, health, housing, transport and defence sectors (Hallowell, 2010). As a public private partnership, it provides finances for public services and also delivers the same. The public department just makes monthly repayments for capital utilized and bears the on-going service costs. The major objective of PFI is to increase efficient delivery of public services and transfer risk to the private enterprises. But currently, it has come under lot of controversy for excessive payments, bribery, corruption and poor value for money. The paper would analyse PFI for managerial effectiveness, operational efficiency and cost effectiveness for public service delivery and asses its viability for best value for money. Analysis Public sector is showing significant shift in its operational areas towards privatization regarding public procurements of works, goods and services with emphasis on cost saving and increasing efficiency. The concept had originated in the developed nations which were getting concerned with large amounts of spending from the public funds for public utility services. It had led to frequent cases of irregularities related to public funding including lack of commitment, transparency and efficiency issues (OECD, 2007). The reforms therefore had become necessary. An effective public procurement through PFI was a good option especially when relationship is forged through fair and competitive auction –bidding (Audit commission, 2001). Most importantly, it was envisaged as an economic development agenda which could be used in widening the scope and extent of a nation’s infrastructural development and proffered public services towards its citizens. In the modern context, the efficacy of public procurement via Private Finance Initiatives or PFI is important paradigm that is influenced by hordes of externalities like fair bidding, transparency, accountability, rules and regulations, framework, nature of work and cost effectiveness. PFI is improved form of public procurement system because of its unique framework as public private partnership. Moreover, private finance is sought within the realms of a public environment, processed by a series of state defined legal, administrative, political, and management networks. Like private sector, it ensures that the procurement of goods, services and works is optimally efficient and effective, and results in best value for money (Deloitte, 2009). But it differs from the private sector in the sense that it is not profit oriented. Indeed, these emerge as vital issues that require constant monitoring, regulation, and audit to keep the process corruption free. In the traditional procurement system, the spending department or body finalizes the project and budget and thereafter sends proposal to the treasury for loan (Whitfield, 2001). After approval the department gets the long term loan at very low interest rates as they are perceived to be low risk borrowers with government not expecting to fail or default in its repayments (Grout, 1997). The loan sanction for the project is a long drawn process that each public department has to follow for any proposed work in the public area. Apart from the highly fractious procedures of finance, the operation, management and risks are hugely critical elements that become difficult to manage in the long run with the same efficiency and quality (Hood et al., 2006). Indeed, the changing socio-economic and political environment makes the various projects quite risky. Most importantly, getting the state treasuries to fund the various public projects would a massive burden on it and which could ultimately have adverse impact on the developmental processes (Flinders, 2005). Maintaining it for sustained period of time would further drain national resources. The PFI, on the other hand, relies fundamentally on the private sector for its finance of public projects. This not only eases the burden on the state but greatly facilitates the socio-economic development. In UK, PFI programmes are long term contractual relationship between public and private sector for procuring and delivering public service at minimal cost to the public. Evolved in 1992, it was designed as a process that would use private finance for building capital such as hospital, school buildings, road, ports etc. and in return for fixed repayments; the private body would take up maintenance and delivery of critical services as a package deal for an extended period of time, ranging from 25 years to 30 years. The value of money vis-a-vis cost effectiveness; risk transfer; performance outcome; and financial viability over a long contractual time span, is key criteria that decide the procurement of specified public services. Various scholars acknowledge the necessity of PFI in the efficient delivery of public services (Nettleton, 2000; Birnie, 1999; Mustafa, 1999). They believe that private enterprise would introduce discipline and professionalism within the operation and delivery of the goals and objectives of the contract. PFI projects can broadly be categorized into three types: free standing; joint ventures; and services sold to public sector (Ahadzi, 2001). Free standing projects cannot be considered actual PFI as private sector pays for the utility that it would build or undertake and retrieve the cost through private charge for use. Dartford Bridge is prime example which was built by private sector. The government’s contribution was limited to design, planning and deciding on the route to linking road. Services like medicines, medical equipment to hospitals, accommodation and running day care centres etc. are sold to public sectors like hospital, social work department etc. become important PFI projects as considerable capital investment is involved. But joint ventures where government participation is significant are highly desirable. It involves massive public funding and recurring cost of maintenance and therefore makes private finance very attractive, both in terms of easy availability of large amount of money and the facility of delivery high class services in the specified area for extended period of time (Helm et al., 2009). This type of PFI is usually common in infrastructure capital works like building of hospitals, schools etc. and at the same time, providing services like temporary staff, equipment, and other such things which involve heavy expenditure. Indeed, PFI offers considerable benefits in terms of resource expertise and facilitates greater creative input for optimal productive outcome that justify taxpayers money. Foreshaw (1999) asserts that it helps counter the inefficiency of public delivery regarding time and cost overruns, higher maintenance, poor design and faster degradation of capital. As a growth initiative it has delivered by developing infrastructure to improve transport facility, healthcare, education and defence sector. For ensuring future improvements, dynamic framework of planning was established that focused on cost reduction and relied on market competition (McQuaid, 2010). At the same time, public sector comparators were used as benchmark for best value propositions. Their viability on long term was key issue that helped sustain best value for the whole duration of the contract period. Furthermore, in the current environment of highly volatile economy, the transfer of risks is most pertinent and useful aspect of PFI that provides stability and economic benefit to the users (Burger, 2008). In most of the cases, public sector just rents the infrastructure like hospital and school whereas, the private sector designs, builds and maintains it. Thus the risk transfer is considerable and saves the public sector substantial amount of running cost and overhead cost. Allocation of risk transfer is on the basis of capabilities and to ‘whoever is best able to manage it’ (HM, 1995). As private sector is better equipped to handle financial risks, construction and operating risks are transferred to it. Interestingly, Transfer of financial risks serve as motivation for private sector to supply services timely and efficiently in order to get payments from the public sector. The continued payment is also subject to meeting specified criteria of performance (TTF, 1999). PFI has greatly contributed to the economic development of the nation. NHS is the lifeline of UK that provides exemplary healthcare services to the people (Gaffney, 1999). PFI in building hospitals and providing other non-core services greatly help the public sector in meeting its public commitments and deliver quality and affordable healthcare services. Same is the case with school buildings, public transport system including underground system, social housing and other projects of public utility. PFI projects were important linkages that were created with defined goals of economic development and have evolved over time into necessary processes that facilitate better and more efficiently delivered public services. But PFI has also come under controversy. A BBC report (2011) claims that as per Treasury select committee report, long term expenses of PFI projects were much higher than conventional procurement methods and cannot be relied upon to provide good value for taxpayers’ money. It further claimed that government has become ‘addicted’ to PFI and consequently, it is paying off ?1bn debt incurred which can be translated as taxpayer equivalent to direct government debt of ?1.7 bn! The collapse of London Underground Maintenance firm, Metronet in 2008 had wide ranging ramifications on the public sector as well as taxpayers (bbc, 2011). It had caused great public inconvenience as well as transferred considerable liability to the public sector and taxpayer. NAO (2012) asserts that UK has 700 PFI projects with 61 contracts under active consideration but it needs to adopt stringent and more transparent measures to compare with alternative funding resources as billions of pound of hard earned taxpayers money is at risk. The statistics are eye openers and give insight into the extent of complacency of public sector that has scarce regard for best value for taxpayers’ money. It not only questions the efficacy of PFI but its very viability in the broader precinct of public utility is doubtful. But it cannot be denied that the onus of responsibility for choosing the private sector and developing appropriate framework of public private partnership falls on the public sector and government. With massive funding that is required for various public works external resources become critical factors for distributing the financial burden as well as the risks. The public sector and processes need to be more stringent measures in selection as well as in creating appropriate framework of operation and management for PFIs. Laja (2011) reports that NAO is much dissatisfied with the performances of PFI which it believes needs to be challenged to achieve major cost saving for the public sector. The stupendous amount of ?65 bn PFI repayment bill of NHS is testament to the inefficient planning, lack of vision and reduced motivation for finding alternative funding resources. Parker (2012) claims that PFI have created nearly ?239bn of liabilities to taxpayers. The worst part is that it would be carried forward to the future generation. Private investors have become major beneficiary at the cost of taxpayer. These are important indicators of deteriorating performance of PFI which need to be reviewed for authenticity and for evolving better benchmark of performance and more challenging criteria of selecting private finance body. Conclusion The PFIs have significantly contributed to the economic and social development of the country. It has provided government with huge opportunities to create mammoth infrastructure of facilities that benefit people. The contract of infrastructure development and maintenance transfers the financial risks and simultaneously, enhances efficacy of the services delivered. In the last 20 years, the various areas of public sectors have seen infusion of new technology within their operation that not only give best value for taxpayer money but also provide the people with higher quality of life. Indeed, imperatives of the changing times demand modernization that can only be met through comprehensive partnership with private sector and private finance. Thus, one can state that PFI is vital ingredient of public private partnership that needs to be exploited for the opportunities that it provides in terms of finances and expertise in the area of management and operation of public systems. (words: 1986) Reference Ahadzi, Marcus and Bowles, Graem, ‘Public-Private Partnership in UK infrastructure development: The macroeconomic perspective’, (2001), (1), ARCM, 971. Audit Commission, ‘Building for the Future. The Management of Procurement Under the Private Finance Initiative’, (2001), Government publication. Editor, ‘PFI projects ‘poor value for money’ says MPs’, (London, August 19, 2011), BBC News 1, http://www.bbc.co.uk/news/uk-politics-14574059 accessed 4 December 2012. Birnie, J. (1999) Private ‘Finance Initiative (PFI) – UK construction industry response’, (1999), (5)(1) JCP 5. 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Delivering a 21st Century Infrastructure for Britain (Policy Exchange: London 2009). HM Treasury, Private Opportunity, Public Benefit: Progess the Private Finance Initiative (HMSO: London 1995) Hood, J., Fraser, I. and McGarvey, N., (2006) Transparency of Risk and Reward in U.K. Public–Private Partnerships (PublicBudgeting & Finance, London 2006). Laja, Sade. ‘Government must learn from PFI mistakes, says NAO’, (London, April 28, 2011) Guardian, http://www.guardian.co.uk/public-leaders-network/2011/apr/28/government-pfi-mistakes-nao accessed 4 December 2012. Mustafa, A. (1999) ‘Public–private partnership: an alternative institutional model for implementing the private finance initiative in the provision of transport infrastructure’, (1999), (5), (2) JPF 64. NAO, Lessons from PFI and other projects. (2012) Government publication from: http://www.nao.org.uk/publications/1012/lessons_from_pfi.aspx accessed 4 December 2012. 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