References
Ashworth, A. (2006) Contractual procedures in the construction
industry. Pearson Education.
Dickins, S. (2017) ”Economy of
new town”, BBC News, -02-28, .
Fontinelle, A. (2006) Private Finance Initiative – PFI. Available
at: https://www.investopedia.com/terms/p/privatefinanceinitiative.asp
(Accessed: Jan 22, 2018).
Mackenzie, L. (2012) “PF2” – a new approach to public private partnerships in England? |
Lexology. Available at: https://www.lexology.com/library/detail.aspx?g=0db7041b-fded-46f0-a6f5-4e598d5c7f38
(Accessed: Jan 23, 2018).
McIntyre, F. (2018) Carillion | What went wrong. Available
at:
https://www.newcivilengineer.com/business-culture/carillion-what-went-wrong/10027062.article
(Accessed: Jan 23, 2018).
Riley, G. (2013) Private Finance Initiative. Available
at: https://www.tutor2u.net/economics/reference/private-finance-initiative
(Accessed: Jan 22, 2018).
TIFFIN, M. and HALL, P. (1998) PFI-THE LAST CHANCE SALOON? Thomas Telford-ICE
Virtual Library, pp. 12.
Yeung, P. (2016) Thousands of students with nowhere to go as
17 Edinburgh schools shut instantly. Available at:
http://www.independent.co.uk/news/uk/home-news/thousands-of-students-affected-as-17-edinburgh-schools-to-close-amid-safety-fears-a6976641.html
(Accessed: Jan 24, 2018).

To summarise, PFI has
been used for almost 30 years already, however,
it is too soon to make big decisions on its performance so far. It is clear
that a method has some limitations, which are causing it to be not so
trustworthy, but the advantages of the initial idea how it should work forces
us to work through it and try to improve it as it could be the best method to
provide public infrastructure and services.

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Conclusion

Looking at many examples of PFI
projects I was not able to form my own strong opinion about this procurement
method. However, PFI has some strong pluses, but at the same time minuses as well. It is clear what is the
purpose of using PFI procurement method that government could not only save
time but money as well, because due to the complicated
management of big projects they tend to have overruns and time delays. It is
clearly mentioned that PFI system transfers all of the risks from government to
private consortiums, but private investors would never sign a deal where the government would not assure them that the
services or estates that will be provided are
not going to be used. Therefore, the government
is behind all the PFI projects. For instance, new hospital or prison, which has
been built by PFI project will never be
half empty, as the government is the main supplier of people for these
services. Companies before taking these projects are being guaranteed that
government will allocate humans to the services they are providing. Moreover,
the public sector has shown a weak skill
of pricing the risks. As private sector can take an advantage of this. In
addition to this high tendering prices for contractors has led to a massive increase in price for these
projects. The risk allocation of PFI method, clearly, needs some improvement as
the unnecessary cost increases can be noticed. As well as risk allocation
problems standards for private companies assigned on PFI projects, in my
opinion, should be improved or at least they should be monitored by external
engineers, as the competency of work could be guaranteed. If some of the
changes in PFI procurements would occur, this method could bring a massive
boost to an economy as good examples of PFI projects have proven to be win-win
situations. However, many projects also have shown
some negative aspects of it.

Discussion

In 2003, the Building Schools for
the Future (BSF) programme was announced, which objective was to renovate 3,500
secondary schools in 15 years’ time. The plan
included rebuilding entirely half of the school
estate, 35 percent of it should be remodelled structurally and what is left should
be refurbished. Local authorities entered into PPP’s, with private sector
consortiums. The Department for Children, Schools and Families were the
authority which announced this project and decided to use PFI for different
ways to help BSF projects. It tried to encourage authorities to use PFI to
procure many types of public buildings
because they would be built with better management and maintenance. Unluckily
banking sector started to face some difficulties, which led to reduced amounts
of money that could be borrowed from them. By 2011, the government abandoned
the scheme, leaving many of these projects at their design stage or planning
stage(Ashworth, 2006).

On April 2016, 17
PFI-funded schools in Edinburgh failed to open after the Easter break because
of structural problems after the Storm Gertrude hit Edinburgh. All the closed
schools were built by Miller Construction and were constructed through private
finance programme, which was worth £360 million deal and signed 2001. This
event just proved that PFI contracts do
not mean that private sector companies can provide higher standard projects as
structural problems just before the school exams disrupted normal students’
routine(Yeung, 2016).

Same story as Metronet Rail
happened to company Tube Lines. It also was falling short in terms of financing
and kept asking money of TfL until TfL decided that buy out their contracts and
take over their projects even tough TfL is still using PFI contracts for its
maintenance and expansion services.

The other bad example of PFI was
a Metronet Rail company. The company was in public-private partnership (PPP)
with London Underground and it was responsible for rail replacements, many
station refurbishments, and signals.
Under PFI contracts Metronet Rail company was producing around £50 million
profit despite the fact that it was behind in all its major works. This proves
that not necessarily private companies are performing faster and with better
management in public service projects.

One of the most recent examples
of using PFI contracts was Carillion company. This company had over 450
government contracts. Its major projects included HS2, Aberdeen Western
Peripheral Route and two hospitals, which one of them was the Royal Liverpool
Hospital. It was a shocking news when this year 15th of January
Carillion announced its liquidation. The company has collapsed under the weight
of £900 million debts to its subcontractors and banks. The company was
destroyed by itself when the company
tried to overstretch itself in terms of tendering for contracts. The company underestimated most of the PFI
contracts it has signed and could not handle the situation and it got out of
control(McIntyre, 2018).

Getting the private
sector to build and run prisons has brought benefits as well. First thing is
speed: private jails are built in around 2 years’ time, while the prisons which
were built by the government usually
takes about 7 years. Running costs are lower too, mainly because the staff is
paid a quarter less than in the public sector and get fewer benefits. UK
government decided to close 30 poor condition jails and instead of them open 12
super-prisons which capacity can reach up to 3,000 inmates each. The proposed
prisons should cost around a £3.75 billion and are expected to save about £600
million a year because current old
prisons are less efficient and have high maintenance establishments. One of the
sites for the super-prison is in Wrexham,
North of Wales. As it has opened it is the
biggest prison ever seen in Europe it has cost £216 million and it can
house 2,016 inmates. This project gave massive economic benefits to the North
Wales region as it created more then a 1,000 new workplaces and only local suppliers were
involved in this project(Dickins, 2017, Riley, 2013).

The construction of new motorway
M6 was in high need to relieve congestions in the area, but the government did not have any funds to afford
this project. That is where a PFI contract was like a fresh breath of air for
the government. The contract was won by
Midland Expressway Limited (MEL) and the contract was for 53 years so that 3
years for construction and 50 years for an operation.
After MEL finished the construction base they started to recoup all the costs
through toll charges. Both parties ended
up in a win-win situation.

There are many examples of good
use of PFI and many examples of PFI contracts that ended up as a failure.

Examples of
PFI

In the beginning,
these changes to PFI have been welcomed. Changes in
the standardisation of procurement and
shortening the time of tendering have been welcomed positively as cost-cutting
changes. Also, it is widely accepted that it was sensible to remove some
long-term soft services from PFI contracts. However, there were concerns that
these changes have not actually improved the financial aspects of PFI contracts because it was concerned that these
actions will change the debt to equity ratio, which will increase the costs of
the project(Mackenzie, 2012).

As well as changes in financing
and procurement there were some changes in handling project risks. Main aspects
of it are that contracts will not have a
“soft” services anymore, which included cleaning, catering and other parts of
maintenance. Adding a fact that government will retain some of the risks and
will take a share of insurance companies(Mackenzie, 2012).

The main differences in
procurement process include some Treasury
checks and a centralisation of
procurement has been introduced. The tender process has been also more standardised, so the bidders could get
compensations if projects that they have tendered for have been cancelled. As well as this a standardised documentation has been introduced,
which includes procurement and contract guidance, a shareholder’s agreement, a
facilities management service output specification and a payment mechanism of a
project(Mackenzie, 2012).

Changes that have been made in
financing is that government looks to become a minority equity investor so that
greater transparency and better alignment could be achieved. Also, the amount
of equity of private sector companies has
to increase as well. PF2 states that banks cannot be the majority of financial
funding of the project and private companies during a tendering stage will be asked to provide a long-term plan of
financing the project. According to PF2, funding competitions should be
arranged for a proportion of private sector equity. Furthermore, the control
total will be added to the government
account balance sheet for PF2 contracts and all PF2 contract will be an open
book contract with actual and forecast equity return information(Mackenzie, 2012).

After a lot of criticism to the government of using PFI contracts in 2011, it
was decided to initiate a review on PFI. After the review was done it was
published on 2011 House of Commons Treasury Select Committee report that there
was no clear evidence of any benefits or any financial savings on PFI projects.
That is why the government in 2012
announced that it will still be using private sector for delivering
infrastructure and services, but from that time it will have another approach
for it and named it as Private Finance 2 (PF2). There has been a number of
changes from PFI moving to PF2 and main changes fall into three categories:
financing, procurement, and risks(Mackenzie, 2012).

Private Finance 2

As well as advantages PFI has
disadvantages which cause us to think if
it so beneficial as it is so used by the government. There are some examples of
PFI when the primary purpose of a building or structure has been distorted,
this usually happens to buildings with functions that are carried out in them
such as education or health treatments. The priority of the funds according to
PFI is to pay off the PFI loan, but due to the primary purpose of the building, most of its funds should be directed
to its core business. Another
disadvantage of PFI is that there are very high costs for terminating its
contracts and even though the contracts last long
period of time it is still very difficult to renegotiate its conditions.
Payments for PFI contracts can last many years in order to repay the initial
construction cost of the building, its operational costs and maintenance costs
and usually these sums are higher than the initial calculated costs, so in long-term government will end up paying much
more than the private company has spent on the project that they have built,
also it could have been that a project cost could have been over-estimated as
well. Moving on there is a possibility that some public projects have been
distorted to increase a profitability to PFI using companies, so they would maximize their profits. To add up there have
been some examples were PFI projects were built, but during this time it was
decided that the project is no longer required for its original purpose, but
governments were still left to pay PFI
contracts to private companies for many years in front(Riley, 2013).
High tendering costs are also a massive disadvantage of PFI projects because according to industry studies
tendering for public sector projects private sector companies have to spend
around five times more than for traditional public-sector contract(TIFFIN and HALL, 1998).

Disadvantages of PFI

There are many advantages of
using PFI contracts for public sector projects. PFI has resulted in a number of
important and useful projects that would have never been built using
traditional procurement methods alone, because of the range of skill and
abilities that could be provided by private sector
companies. In addition to this,
the use of PFI practices has helped to
provide a constant workload over the past decade to the construction industry, which is generally not very stable industry
and suffers booms and slumps occasionally. Talking about the PFI contracts,
they all have been well written with the correct apportionment of risk-reward as in early days of PFI it was hard
to judge any risks that came across and the arrangements that were used in PFI
contracts were completely different from the traditional practices. Learning from this kind of contracts and practices is
beneficial for everyone who gets involved into them. Also, looking back
in time it is clear to see that public sector lacked experience and knowledge
of criteria that should be used in the construction
of big projects. There were many examples of budget overruns and projects not
being completed on time. Due to PFI, the
entire process was simplified. The private construction companies take the
major risks that involve design,
building, financing and operation phases of the project as a client (central or local government) does not
hold any cost associated risks, not even overruns or any other additional
costs. Additional to this it may be even more efficient for private companies
to fund and build the project in terms of building and running costs. Private
companies are also motivated to build an asset to a high standard and maintain
it to an excellent condition, because the government
is inclined to pay on a performance-related
basis for the use of the building and for its continuing management(Ashworth, 2006).
PFI could also bring extra investments as governments would use higher
borrowings ant taxes private sector could fund the project right from the
start. Moreover, PFI projects theoretically should be cheaper for governments
because PFI firms have to pay taxes for governments as well as bidding for
these projects creates competition(Riley, 2013).

Advantages of PFI

In UK private finance initiative
was introduced by the Conservative government in 1992. Initially, PFI was used for projects such as railways and roads. In
the beginning, trade unions opposed PFI
and condemned it as a form of privatisation
by the Labour party. At that time critics argued that savings in expenditure that
time will need to be repaid most probably many times over in the future, but HM
Treasury considered PFI to have many advantages. One of the most important
facts was that Labour government recognised
that a public-sector capital was limited and that there were only two options
for public sector projects. They could be constructed on a PFI basis or not constructed
at all. Because of this, PFI method of financing public projects continued to
expand in both the number of projects and their overall value. The main
justification of PFI was that the public-sector projects were poor at delivery
and management and the private sector was better at providing such services. By
2007 the total capital value of PFI contracts in the UK had risen to almost £70
billion and this has committed taxpayers in the UK
to spend over £215 billion for those projects over their lifetime in contracts
of PFI. The financial crisis in 2007 presented private finance initiative with great
challenges because the capital had dried up, that is why the number of projects
assigned by the PFI contracts has reduced significantly. Even though UK
government has reduced the number of assigned new PFI projects and it is still
committed to paying massive amounts to
private companies, PFI still remains the UK government’s preferred method for
public procurement for major projects. The biggest healthcare provider in the
UK the NHS has stated that PFI is their number one choice for the construction
of new hospital projects, and that there are no other options for them, because
government cannot provide such funding for this kind of projects or they risk
of abandoning the projects half way of their construction phase. That is why
the government has become the PFI funding
arm on a temporary basis. As people started to criticize the government for PFI
contracts due to massive debts government tried to take some action. This has
resulted in a curtailment of projects, some of which have been postponed and
others abandoned(Ashworth, 2006).

Private Finance Initiative in the UK

PFI is a particular type of public-private partnership. The private finance
initiative (PFI) is a method of funding what are deemed to be public sector
projects with private capital, other words public projects are funded and constructed
by private investors. This funding method has initially been developed in
Australia in the late 1980s. PFI has also been developed in many other
countries around the world as governments have sought to reduce the public
estate. The ideas of PFI have received approval from the World Bank and the
International Monetary Fund (IMF) as ways of funding public sector projects
such as hospitals, schools, universities, roads, etc.  There is no actual standard model of PFI, and
the methods that are employed by PFI will depend on the circumstances of the
project. PFI method transfers responsibility of projects on private companies,
but accountability of the projects still stays on government’s shoulders. Usually, PFI has a long-time horizon covering
not just construction phase but also the maintenance of the project for a
specific time(Fontinelle, 2006, Ashworth, 2006).

A public-private
partnership (PPP) is a method of procuring different kinds of government
service through a partnership with the private business sector. The PPP
provides contracts between public parties and private sector companies where
the private companies take all the risks
from the government. In PPP the private
company is responsible for its funding. There are many contractual arrangements
that are used in PPP. Most common one is design,
build and operate (DBO). Other alternatives could be built, operate and transfer (BOT), build, own and operate (BOO),
design, build, finance and operate (DBOF), build, own, operate and transfer (BOOT)(Ashworth, 2006).

Introduction

One of the particular types of PPP is a PFI. Private finance
initiative (PFI) is a construction project funding method where public-sector
projects are being built, funded, operated and maintained by private sector
companies. PFI was introduced in the UK
in 1992 and it became the most widely used project financing method since then.
By 2007 the PFI contract value has risen to £70 billion and this has committed taxpayers in the UK to spend £215 billion over the lifespan of PFI projects. However, the government still uses this approach to provide
public infrastructure and services. There are many arguments considering
advantages and disadvantages of PFI and if it should be used or not. Due to an
enormous amount of critics on this approach, Private Finance 2 (PF2) method was
introduced as an improved model of PFI.
Even though people were happy about the changes they still could see some gaps
in this new PF2. Examples show that PFI can be a successful method for providing services and infrastructure, but
at the same time, there have been some
failed projects as well. The author
discusses the problems of PFI contracts and sees a lot of potential in the
approach.

Abstract

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