Introduction
The increasing globalization and related financial crises issues have forced governments to seek alternative ways of funding their projects including infrastructure development and delivering of public services. Prior studies have demonstrated an increase in privatization of public services for the past few decades. In developed economies, public sectors have increasingly engaged in contracts and partnership deals with private sectors in a bid to counter the financial issues. Through legal government agreements, the private sector continues to provide public services.
However, despite the increased efficacy in service provision, sometimes private sector’s operations remain questionable. For instance, the UK, the Malaysian, China, Vietnam, and Tunisian governments have been in the forefront in accepting privatization of public procurement department as one way of enhancing innovations within the public sector management. However, the services offered by the private sector remain questionable in the public limelight, thus leading to increased public debates. Therefore, this essay examines issues surrounding Private Finance Initiatives and the public sector in the United Kingdom, Middle East, Asia, and Africa.
Overview of the Private Finance Initiative (PFI)
PFI is a common term used in the United Kingdom and Australia to denote Private Finance Initiatives operating within the UK and Australian governments. In the UK where the issue has been controversial, the PFI initiative emerged through the British Conservative government efforts in the year 1992, with a major aim of encouraging other UK-based private sectors to increase their participation in developing public sector projects.
In Africa, the Middle East, and China, PFI is in its infant stages under the watch of the Organization for Economic Cooperation and Development (OECD). Currently, in the UK, China, Egypt, Turkey, and Tunisia, PFI is responsible, for providing major public services including development of national infrastructure (schools, hospitals, roads, and rail) and other related public services.
PFI’s primary role is to provide substitute-financing techniques to public infrastructure projects. Concerning service provision, Special Purpose Vehicle commonly dubbed as SPV is responsible for financing infrastructural projects. SPV provides financing debts in the form of bonds or debts used to cater to the establishment, refurbishment, operation, and maintenance of the projects. After the successful completion of projects, the government starts to lend money in the form of unitary charge to the SPV Company to make payments to the concerned companies on behalf of the government under the condition that all services provided by the company will meet the desired degree.
Potential benefits of PFI
Since the introduction of the PFI into the British governance system and in some countries in the Middle East and North Africa, several changes have occurred in the provision of public services and in the development of infrastructure. Research conducted by Corner in 2006 reveals, “The existence of powerful performance incentives in Private Finance Initiative contracts, which at least potentially offer significantly improved performance compared to past practices”.
In fact, for the best part of it, working in contract with PFI has enabled better estimation of risk as compared to the traditional practices when the government activities concerned with controlling risks related to individuals rather than controlling risk involving public expenditure and related services. Last year, a report compiled by National Audit Office indicates that PFI has contributed significantly to the growing economy of the involved countries, as well as some potential weaknesses that have resulted from the signed contracts between the PFI and the public sector. The following are some of the potential benefits resulting from PFI services.
Better risk management
Risk management has been one of the most contested issues within the Public-Private Partnerships with several partnerships collapsing because of a lack of proper risk management strategies. Gao and Schachler assert that management of financial risks associated with public projects remains the most important thing within the public sector since public sector liabilities are normally underestimated by taxes paid to the public, and in case of losses, the public in most cases assumes the situation and places the burden on the public.
Despite little evidence revealing the importance of PFI on risk management in the provision of public services, several researchers have concurred with this aspect. Froud affirms, “Management of risk puts the PFI very significantly at the fore of the latest phase of UK public sector management”. Risk management within the public-private partnership in the involved countries involves project management risks, construction risks, and asset maintenance risks.
Risk management under the PFI is achievable using a number of strategies, which the public must understand before ignoring the risk aspect in PFI. In the context of building and construction of public infrastructure, the contractors are responsible for the risks that may result in the construction industry for the government ensures all risk associated with procurement of construction material; that is, construction costs and maintenance of the ongoing projects lie in the contractor’s responsibility.
The government does not engage in self-purchasing of construction materials, and thus the contractors bear the risks in the entire construction activities. Compared to the traditional system of providing and maintaining public services where the public sector was directly involved in the construction activities, in case of failure, the public would cater for the risks. Since the contracts serve for longer periods, any implications rising within the markets rarely affect the public and thus project-related risks are transferrable from the public sector to the private sector.
Improved public services
The public-private partnership between the public sector and the PFI has continuously proven significant through the services offered, which is part of risk management as well. Prior research reveals that PFI has consistently contributed to efficient service provision compared to the traditional system of handling public services. By engaging in partnership with the PFI, the government has managed to receive quality services compared to the traditional era.
Central to the construction industry, the PFI has ensured improved performance during the constructing phase, which has been eminent within the government time and budget assessment by delivering a large number of projects within the budget estimates and the stipulated time. Through improved innovative approaches and enhanced technology, the PFI has managed to deliver buildings of better quality in the UK, Egypt, Tunisia, China, and Turkey. In the past when the public sector managed public services, there had been underinvestment in the public infrastructure.
Construction activities carried out by the PFI have been of more effectual as compared to those conducted by their fellow counterparts in the public sector. Research conducted by Gao and Schachler in Scotland, Wales and England revealed that public managers identified several merits attached to PFI projects including enhanced cost control, circumvention of redundant additional construction works, and improved design within the construction industry with more user-oriented aspects.
In Italy, France, Germany, Australia, and the USA, effectiveness in the PFI services is imminent for they provide better public services by putting more emphasis on major construction activities, which cover projects that are less expensive to the public sector. This is by working within the public budget estimates, as well as enhancing increased capital investment, which has increased the volume of the services provided. In fact, according to a House of Commons Treasury Committee (HCTC) report, PFI has encouraged the ongoing maintenance of public infrastructure by concentrating on construction of effective assets and providing a transparent whole-life public cost.
Cost-effectiveness
A public-private partnership between the government and the Private Finance Initiatives has been imperative in the provision of public services since the partnership enhances cost-effectiveness within the public sector. According to Corner, providing public services through the PFI has proved significant for there has been considerably greater price certainty since the public sector operates within a contract framework that bears a long-term agreement, which binds it under annual unitary payment avoiding several financial crisis-related issues.
On the other hand, since the contractors are responsible for all assets and other related costs including maintenance and procurement, it is unlikely for the risk to fall upon the public. According to a report by HCTC, service provision by PFI is more important due to “encouraging the allocation of risks to those ablest to manage them, achieving overall cost efficiencies and greater certainty of success”. By so doing, the government, which depends on taxes, is safe from the risks associated with such projects. The following table provides statistical evidence on PFI against PSC, by (House of Commons Treasury committee 2012).
Table 1: Assumptions under VFM assessment in the UK.
Demerits of PFIs
Despite several merits attached to the provision of services by the PFI, several studies have demonstrated potential disadvantages associated with this practice. A study by HCTC portrays similar evidence within the context of contracts signed between the public sector and the PFI; for instance, the contracts are normally of long-term basis involving binding agreements that lead to over-extended expenditure periods within the government finances.
Takim highlights this aspect by arguing that these contracts abide by the government depending on PFI services within a pre-determined period of between 25-30 years, which puts the government under uncertainties touching on economic imbalances among other risks. Moreover, HCTC demonstrates that the cost of finance, flexibility in service provision, and private competition seem to be the major factors that may influence the effectiveness of the PFI operations in the government.
Cost of finance and value of money
Privatization of public services in several countries has been marred with numerous malpractice allegations, thus taking the contracts into controversial arguments. Parker and Hartley argue that private borrowing in the private sector is more expensive as compared to government borrowing when dealing with financial projects.
It is quite evident, through comparative studies conducted by different researchers, that private sectors are less cautious on their expenditure while developing and maintaining government projects since they normally allow an elevated level of capital ventures. Froud affirms, “There is evidence that the value for money used directly results from the potential for higher costs to the public sector purchaser.” This aspect possibly pushes the government to overspread beyond its financial capacity, which may result in an economic crisis.
Extensive contract durations
In several cases, the public sector has controversially placed several arguments against the period in which PFI agreements serve, since there are allegations that the PFI has continuously been extending unnecessary contracts with malicious deals. In special attention to construction and procurement of public properties, the PFIs have been increasing their serving terms within their contracts to continue consuming government funds.
Apart from the higher cost of finance triggered by the global credit crunch in the recent past, long-term binding agreements pose commercial risks due to elongated periods characterized by high pecuniary values associated with contracts. Some contractors have taken this element as an advantage to misuse government finance and end up leaving the contracts unfulfilled, thus transferring the risks to the government.
Conclusion
Private Finance Initiatives have continued to prove significant by enhancing service provision within the public sector by encouraging innovative and technologically enabled projects with greater price certainty, as they provide services within the contract agreements, the stipulated time, and the expected expenditure. Research reveals that the responsibility for assets and procurement cost and uncertainties remain under the control of PFI, thus leveraging the risks associated with maintenance, construction overruns, and refurbishment from the government or public.
However, PFI activities have not been so much appealing to the entire public, especially the public sector workers and their management. Arguments based on empirical evidence produced by Gao and Schachler together with Takim reveal that PFI has not proven important enough in transferring the risk and managing uncertainties since in several occasions PFI has been acquiring money from banks at a considerably high cost, which could be better if done through public services.
Therefore, this contention might remain endless if the government does not reveal the reality within PFI-government partnership. Nevertheless, the merits of PFI outweigh its demerits.
Bibliography
Allen, G, The Private Finance Initiative (PFI), 2001. Web.
Corner, D, ‘The United Kingdom Private Finance Initiative: The Challenge of Allocating Risk’, OECD journal on budgeting, vol. 5, no. 3, 2006, pp. 38-55.
Froud, J, ‘The Private Finance Initiative: risk, uncertainty and the state’, Accounting, Organisations and Society, vol. 28, 2003, pp. 567–589.
Gao, S & MH Schachler, ‘Public Bodies’ Perceptions on Risk Transfer in the UK’s Private Finance Initiative’, Journal of Finance and Management in Public Services, vol. 3, no. 1, 2004, pp.25-39.
House of Commons Treasury Committee (HCTC), Private Finance Initiative: Seventeenth Report of Session, 2012.
Parker, D & K Hartley, ‘Transaction costs, relational contracting and public private partnerships: a case study of UK defence’, Journal of Purchasing & Supply Management, vol. 9, 2003, pp. 97-108.
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