Saturday, January 21, 2012

The Failure Factors of Private Finance Initiative (PFI) Projects.

The degree of success of PFI project varies according to the type of project, with the most successful projects being roads. This do not typically involve a clear division between “core” and “ancillary” services to be provided under the PFI deal. Hospitals and university, in contrast, are more complicated in this respect.

The key to concluding a PFI deal that will deliver efficiency savings and a good quality public service at the same time lies in harnessing that experience to maximum effect. Too often, however, this simply has not happened. A lack of clarity about the desired outcome of the public sector purchaser, excessive delays in negotiation, poor project management on the part of the public sector and a lack of understanding of some of the key concepts of PFI have all combined to produce some cases where the taxpayer has definitely not received best value for money; and where the users of the public service have not received the level of service they are entitled to.

One of the key lessons to be drawn from the history of PFI deals to date is the need to improve the expertise of the public service and its advisers in negotiating and concluding PFI deals. Too often, public sector managers conclude a PFI deal and then move back into their normal day job, thus failing to capture what expertise has been built up. The major factors contribute to the failure of PFI projects are :-

(a) Ineffective management by the public sector, and a failure to control costs.

In a number of cases, a lack of expertise and poor project management skills on the public sector side have led to procurement processes being run inefficiently. As a result, costs, particularly those relating to professional advice, have not been sufficiently well-controlled and have escalated.

(b) Poor end product specification by the public sector.

The lack of clarity on the public sector side about what is required, and indeed what is attainable in respect of any particular project, has led to increased costs and unnecessary work, in other words, insufficient thought has been put into the exact specification and requirements at an early stage.

(c) Use of inappropriate measurements

It is almost impossible to calculate how much the public sector option would have cost over the long term. With the benefit of their greater commercial and PFI experience, private sector bidders will tend to be more accurate with their long-term cost estimates. Basing PFI decisions on apparently spurious calculations does not enhance the credibility of the PFI concept.

(d) Ineffective contingency planning.

Many PFI deals get into difficulty because of the lack of contingency planning in the public sector, particularly in relation to large government IT contracts.

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