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Essay: Essay on Private Finance Initiatives | Project Management

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Essay on Private Finance Initiatives | Project Management

Provision and financing of infrastructure is of primary concern to the UK governments due to the role that efficient infrastructure play in economic growth and social activity. In the U.K., infrastructure provision largely has been the responsibility of the public sector since the Second World War and, traditionally, infrastructure procurement was viewed as asset procurement; decisions relating to provision, production, and financing of assets as well as the operation and maintenance of the services were undertaken by the public sector. (Mustafa, 1999) Assets were procured from private sector contractors whose responsibilities were limited to the construction of the asset, and the risks associated with operation of the facility remained with the public sector. Recently, responsibility for financing, producing, and operating infrastructure facilities has shifted from the public sector to the private sector.

In 1992, the Government introduced a new policy, the Private Finance Initiative (PFI), to promote the private sector’s involvement in infrastructure and public services provision. At the heart of this policy is attracting private sector’s funds, management and innovation to the provision of infrastructure services. The policy aims at allocating risk to the party that is best suited to manage it and demonstrating value for money for any expenditure by the public sector. (Tutor2u, 2005) PFI covers a wide range of infrastructure services such as prisons, roads, light rail systems, health, defence, higher and further education, and the Government’s national insurance recording system. The general principles of the policy apply to all sectors alike; however, the implementation varies depending on each sector’s characteristics and each client’s requirements. (Office of the Deputy Prime Minister, 2005)

One specific PFI project is the A1-M1 link road where the project sponsors are the Yorkshire Link Ltd. (YLL); The A1-M1 link road is reported to show significant savings over both the public sector comparators. (Mustafa, 1999) Despite the uncertainties within this project, the senior lenders were able to provide strong letters of support during the bidding process, conditioned upon ultimate resolution of ownership structure. This provided reassurances to the client and dampened the initial effect of the change in ownership. Furthermore, it contributed to the building of trust between the bidding team and the Highways Agency, which added value in the later stages of ownership changes. During the final stages of ownership-change transactions Tarmac PLC withdrew its support for the tender and BICC PLC, in a short time, stepped in and supported the project on the basis agreed in the concession contract. In the end, the sponsors’ relationship with key bankers and the influence of key personnel of the bidding team of the sponsors downplayed the effect of owner-ship change. (Mustafa, 1999)

As such, although PFI started as a policy initiative to attract and encourage private sector participation in the provision of infrastructure services, the Labour Government recognized the potential of PFI and set out to move it forward by way of the Bates Review. Despite some criticism dismissing PFI as a tool of Government off-balance-sheet financing strategy, the benefits from the implementation of PFI were evident in a number of successful projects in central as well as local government such as roads, light rail, prisons, defence, and schools. The scale of the Bates second review, around the end of the 1990s, was seen as proof that PFI was taking public services provision in the U.K. into the Millennium, and lead to the development of the Public Private Partnership (PPP). Defining the roles and responsibilities of each party is an integral part to effective implementation of PPP objectives. For this to work efficiently, the frame-work within which the public and private sectors interact needs to be enhanced and a formula that maximizes the best of public and private sectors skills and minimize the impact of the disparity in institutional objectives and culture needs to be developed. The relationship between the private and public sectors and within the private sector is a significant factor in successful implementation. (Mustafa, 1999)

However, despite the success of many PFI and PPP initiatives, Tutor2u (2005) claims that many critics argue that PFI offers poor value for money, as private sector firms often require high profits for assuming high risk Given that some private sector firms are demanding rates of return in excess of 30% for investment in London Underground modernisation, this implies a pay back period of 3 years, with 22 years of ‘super-normal profit’. The use of private firms in a Public Private Partnership (PPP) also increases the cost of borrowing, as the government can borrow money at lower rates of interest than the private sector, because there is less risk of default. In such a partnership, the government must also act as ultimate guarantor, and has to intervene when private sector firms fail in transport.

In conclusion, whilst PFI and PPP can be highly effective ways of investing in transport infrastructure, there are several key issues that affect the implementation of PFI and the development of PPP in the transport sector. These include the high cost of bidding, protracted negotiations, the restricted innovative input by the private sector, and the differing objectives of public and private sector participants in these long-term projects. There are many ways these issues could be solved, one of which is to address the implementation of PFI at a sector level as opposed to a project level. A joint public private institutional arrangement, or partnership, is inclined to yield a more efficient outcome provided that the appropriate framework exists and that the analysis takes in to account the characteristics, objectives and norms of interacting parties. The current model of PFI would thus be suitable for larger, one-off projects, however, the PPP model would provide a more efficient setting for typical projects albeit new construction or improvement to existing assets.

References

  1. HM Treasury. (2005) Public private partnerships. http://www.hm-treasury.gov.uk/documents/public_private_partnerships/ppp_index.cfm (Accessed 12th Dec 2005)
  2. Mustafa, A. (1999) Public-Private Partnership: An Alternative Institutional Model for Implementing the Private Finance Initiative in the Provision of Transport Infrastructure. Journal of Project Finance; Vol. 5, Issue 2, p. 64.
  3. Office of the Deputy Prime Minister (2005) PFI Published Guidance www.local.dtlr.gov.uk/pfi/guidance.htm (Accessed 12th Dec 2005)
  4. Tutor2u. (2005) Transport Economics – Private Finance Initiative. http://www.tutor2u.net/economics/content/topics/transport/transport_pfi.htm (Accessed 12th Dec 2005)

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