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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Advantages of Private Finance Initiative (PFI) Procurement for Government Project.

The reason for growth in the number of PFI projects emerging in Malaysia especially in higher education sector can be attributed to the advantages include:

• allowing capital to be accessed immediately (at a time when governments often claim a scarcity of public funds);

• focusing upon output specifications provides an opportunity for greater innovation;

• taking long-term assets of a department's balance sheets;

• allowing an asset to be delivered more cheaply and efficiently (due to private sector capital and management expertise);

• the transference of risks normally borne by the public sector (including the obligation to invest in the development of new technology or attempt new innovations to meet output specifications);

• imposing the obligation on the private sector to maintain and operate the facility, provides the private sector partner with the incentive to construct the facility using high quality materials, and design the facility so that it can be run economically;

• overcoming the potential for major infrastructure projects being severely curtailed or cancelled following the election of a new government looking for financial savings;

• because the private sector partner must hand the asset back to the public sector at the end of the concession period in the condition it was in on the first day of the concession period, the private sector partner is compelled to maintain the asset properly;

• long term projects provide the service provider with long term capital as well as avoiding the costly process of re-tendering; and

• allowing a public sector body to transfer its non-core functions to a private provider (and thereby allow the public sector body to concentrate on its core functions, facilitating the delivery of higher standards of service and greater value for money).

The advantages of PFI are even more far-reaching than the above. For the structure of PFI itself is also a reason for the growth in PFI. Well drafted output specifications and contract documents which provide for operation, life cycle and routine maintenance and facilities management services will mean that a PFI contractor should (as discussed above) take a whole of life costing approach and formulate an integrated approach to design, financing, construction and the operation of facilities. This should increase economic efficiency as a whole by addressing issues of maintainability, durability and operability from the outset of a project. If all of the above factors can be achieved, then the parties will have gone a considerable way to ensuring that the best overall value is achieved.