Private Finance Initiative (PFI) Seminar Key Note Address by YB Tan Sri Nor Mohamed Yakcop

Private Finance Initiative (PFI) Seminar
Key Note Address

By:

YB Tan Sri Nor Mohamed Yakcop
Minister of Finance II
10 November 2006
Impiana Hotel, Kuala Lumpur



YBhg. Dato Shahrir Abdul Jalil,
Managing Partner of Shahrizat Rashid & Lee,

Mr. Alan Jenkins,
Chairman of Eversheds,

H.E. Mr. Boyd McCleary,
British High Commissioner to Malaysia

Distinguished Guests,

Ladies and Gentlemen,

Assalamualaikum w.b.t and Good Morning,

I would like to express my appreciation to the organisers for inviting me to speak at today's seminar on Private Finance Initiatives (PFI). This seminar is indeed timely and I would like to commend both Eversheds and Shahrizat Rashid & Lee for taking this initiative, a private initiative to advance the discussions on implementing PFI in Malaysia.

2. YAB Dato' Seri Abdullah bin Hj. Ahmad Badawi, Prime Minister of Malaysia, first mentioned Private Finance Initiatives (PFI) in his speech at the tabling of the Ninth Malaysia Plan, as a key modality to implement the country's national development agenda going forward. The 15 year National Mission articulated by the Prime Minister is a major challenge for the country, in striving to achieve the vision of developed nation status by 2020. We therefore require the full commitment and effort of both the public and private sectors to achieve Vision 2020. The introduction of the PFI concept by the Prime Minister is a key part of this effort as it involves establishing an optimal relationship in the partnership between the public and the private sector in driving national development.

3. Using PFI in pursuing national development must be seen in the context of the Government's broader policy priorities of energising the private sector as the engine of national economic growth and, at the same time, improving public delivery and services. Strong and sustained growth is required to maintain the trajectory towards Vision 2020. In order to achieve this, the success of the Ninth Malaysia Plan rests heavily on maintaining double digit growth rates for private investment. Towards promoting private sector consumption and investment, the Government has consistently maintained pro-growth economic policies.

4. The 2007 Budget clearly demonstrated the Government's focus on stimulating private sector participation. Firstly, the Budget was expansionary both in terms of expenditure and taxation. Secondly, comprehensive incentives were outlined for private sector participation in new growth sectors, particularly Biotechnology and Islamic Finance. Thirdly, the Government announced initiatives for joint investment between the Government and the private sector to catalyse new investments areas, such as in Southern Johor. Fourthly, the Prime Minister also articulated in the Budget the principles of disclosure, transparency, accountability and mutual trust as principles to enhance public delivery through private sector participation. Overall, the 2007 Budget very much reflects the Government's philosophy of increasingly facilitating a conducive environment for doing business, whether through providing infrastructure, enhancing public delivery or enhancing the tax system and where necessary to promote strategic sectors, providing the private sector with assistance, whether in the form of incentives or joint investment.

Ladies and Gentlemen,
5. The introduction of PFI provides the Government with options going beyond the existing modalities of implementation, which thus far has mainly focused on either privatisation or conventional Government funded projects. In fact, in the Malaysian context, we view PFI in the broadest of terms, as capturing a wide spectrum of options that lie between the two extremes of privatisations and Government projects. In its purest forms, privatisation involves the private sector financing the project entirely and taking all the risks, including revenue and viability risk. Government projects lie on the opposite end of the spectrum, whereby the projects are funded by the Government and the private sector is limited to typically just execution or construction risk. Even then, for Government funded projects, ultimately the Government is still exposed to the risk of having paid progress payments but with the contractor unable to complete the project. PFI, as a broad concept, recognizes the scope for a mutually beneficial arrangement in terms of the different permutations of structuring the relationship between the Government and private sector, particularly in terms of the allocation of risks and financing. The scope for formulating a win-win scenario arises because different projects involve different risks and rewards, and between the private sector and the public sector, certain risks and rewards are best borne by one party compared to the other.

6. In the Malaysian development context, among the key areas identified as suitable for the implementation of PFI include regional development such as for the Southern Johor Economic Region, education, public transportation, health and water infrastructure. As elaborated by the Prime Minister, in the Ninth Malaysia Plan, the PFI approach will be utilized broadly in two circumstances - first, to optimize implementation of Government projects and services; and second, to enhance the viability of private sector projects in strategic or promoted areas.

7. In the first circumstance, optimization in the implementation of Government projects includes both in terms of value for money and also in terms of the quality of public services. Take for example, the construction of a Government building. Undertaken as a conventional construction project, the Government is exposed, in the short run, to completion risk and, in the longer run, to the risk of escalating maintenance costs, especially where the contractor has no interest in ensuring the long term durability of the building. Alternatively the project could be undertaken using a Build, Lease and Transfer approach, whereby the private sector will lease the building to Government say for 20 years at a fixed lease including maintenance. In this structure, the Government does not start paying until the building is satisfactorily completed and ready for use. In the longer run, there is no risk of escalating maintenance costs. Indeed with this structure, the private sector is incentivised to ensure a higher quality of construction to avoid the future burden of high maintenance costs. This simple example demonstrates the scope for value for money by avoiding the risk of maintenance costs and better quality in terms of the building construction.

8. Maintenance is indeed a good example where private sector is well positioned to be more efficient and better able to manage the risk of controlling costs. This applies not only in terms of buildings but also in terms of equipment and transportation facilities such as trains and buses. A key factor in securing the potential benefits of the PFI approach is structuring the arrangement to ensure that the right risks are borne by the right party and that the incentives of the private sector are aligned appropriately. Key performance indicators or service level agreements can be put in place with the appropriate financial carrot and stick to derive the optimal relationship. It is in this context that advisors, both financial and legal, many of whom are present today can help create value, drawing from international experience, to advise the Government and private sector participants in terms of how best to achieve an efficient and equitable sharing of risks and rewards.

9. The Government has already commenced implementation of this type of PFI projects. The projects have been identified and work has started in terms of preparation of designs and award of contracts. Pembinaan BLT Sdn Bhd was formed last year and by the end of this year would have commenced implementation on more than RM 2 billion worth of projects relating to police quarters and buildings, using a Build Lease and Transfer approach. Under the Ninth Malaysia Plan, an amount of RM20 billion worth of projects, including schools and Government buildings, was also approved to be implemented using the Build Lease Transfer approach. In the international experience, the efficiency savings from private sector bearing the risks have often been partially offset by the higher cost of financing by the private sector. In the model implemented by Government under for example Pembinaan BLT, not all of the risks have been transferred to the private sector. However, the financing has been secured based on the lower Government cost of funding. Going forward, we expect to engage with the private sector on different permutations of risk and reward sharing towards continually improving our PFI structures.

Ladies and Gentlemen,
10. In the second circumstance identified by the Prime Minister, the Government will help enhance the viability of private sector or privatisation projects in strategic or promoted areas. The basic rationale here is that there are various potential private projects which could be on the borderline in terms of viability and may therefore not be implemented. However, amongst these projects, there would be some which are highly beneficial to the country, in the sense that it would result in significant benefits and spinoffs, which are public good in nature and not be fully captured by the private sector party. With a little assistance from the Government, these projects can be implemented with the private sector bearing all the risk and accruing the private returns, and at the same time the country benefits. Again, this would be a win-win arrangement between the Government and private sector.

11. The Prime Minister has already announced a facilitation fund of RM 5 billion to provide such support. Thus far, the Government has already announced that the 2nd Penang Bridge will proceed on this basis. The principle is well demonstrated here in the sense that whilst a privatized concession alone may not be sufficient to finance the project, the project will result in large spinoffs for the development of the Northern region and thus justifies Government support. To evaluate projects such as these, a central PFI unit has been formed, with its secretariat based in the Economic Planning Unit.

12. This approach of enhancing viability of private sector projects will also be utilized where Government assistance can play a role in catalysing and create a momentum of investment in new growth areas. As mentioned earlier, such measures were announced in the 2007 Budget.

13. One such measure was the formation of the Creative Industry Development Fund with an initial allocation of RM 100 million. The Fund will be used to jointly invest with private sector parties in developing export quality media content. Amongst private sector parties identified to participate include Media Prima and TM. We have seen the success of the Indian and Korean film industries. We believe Malaysia is not short of talent. Thus, the Government believes a focus towards producing high quality content, whether in the areas of film, animation, computer games or theatre has the potential to develop into a thriving industry. Whereas in the past the Government promoted new growth industries primarily through tax incentives, a PFI approach is now available as another modality to build up a strategic infant industry.

Ladies and Gentlemen,
14. In addition to new industries, the PFI approach will be utilized to develop new regions. In the 2007 Budget, in addition to the amounts to be spent on infrastructure, a specific allocation of RM 200 million was provided to establish a strategic investment fund for the Southern Johor Economic Region. The fund will be utilized to spur investments in new industry clusters, particularly for private sector education and healthcare. Towards catalyzing a more rapid development of these clusters, the fund will be used as an incentive to support and jointly invest with the early entrants.

15. In addition to providing support through joint investments with private sector parties, we expect there are many innovative means to help private sector parties to enhance viability in a mutually beneficial manner. To assist the initial entrants of private universities and hospitals into Southern Johore, the Government could enhance viability by committing to procure a level of services in the future, such as sending a certain number of Government sponsored students to these universities. The commitment however would be tied to performance criteria such as quality of education and employability of graduates. This can operate as an incentive for the university to improve itself towards securing more Government sponsored students.

Ladies and Gentlemen,
16. The success of the PFI rests on getting an optimal partnership between public and private sector in terms of sharing the risks and rewards, in addition to incentivising the alignment of interests. Well structured, a PFI approach will be mutually beneficial in providing the private sector a market return and providing the Government with value for money, higher quality of public services and broader economic spinoffs. I am confident that the PFI approach will increasingly play a larger role in promoting strategic private sector investments. The Government looks forward to engaging with the private sector in developing workable and efficient PFI models towards advancing the national development agenda.

17. It is through seminars such as these that both public and private sector participants are able to gain insights from international experience in order to develop applications for Malaysia. I would like to again thank the organizers and sponsors making today's seminar possible, and wish all of the participants today a fruitful discussion.

Thank you.


10 November 2006

Brocade’s network hardware price model: Pay-as-you-go

Shamus McGillicuddy, News Director.Published: 1 Sep 2011

Why should you buy your switches and routers when you can rent them month-to-month? Brocade is offering that option as of this week with its new Brocade Network Subscription, a pay-as-you-go network hardware price model.

IT cost reduction has always been an issue for enterprises, particularly with network hardware prices. Cisco Systems’ customers joke about a “Cisco tax” because the company charges premium prices for its equipment; meanwhile, vendors like HP Networking and Juniper Networks win over deals by offering lower list prices on their switches and routers.

Attempting to drive down costs, many organizations turn to leasing network infrastructure rather than buying it. But this only shifts costs from capital to operational, and lease agreements bind a customer for a minimum number of years, charging a penalty if the enterprise backs out of the deal early.

Brocade’s new network hardware price model, announced at VMworld this week, is a month-to-month “rental” of network infrastructure, which won't necessarily bring down costs, but will enable IT shops to try on new technology for size with the ability to return or exchange without penalty—and that could mean overall savings if companies are able to avoid overbuying or investing in technology that doesn't work for them.

The program, available immediately, covers all of Brocade’s IP/Ethernet products and includes Essential Support from Brocade Global Services. Brocade hasn’t published the actual subscription rates for the program, but it is offering free quotes on its website. The company will also continue to offer its original network hardware price scheme alongside Brocade Network Subscription.

Pay-as-you-go networks could make enterprises early adopters

Aaron Mahler, director of network services at Sweet Briar College in Virginia, is less than halfway into five-year leases from both Juniper and Meraki for the college’s network infrastructure. While Mahler usually leaves network hardware price analysis to his financial officers, the flexibility of a pay-as-you go model intrigues him because it introduces the potential to try new technology.

“If there are no penalties [for canceling a hardware subscription], that would make us much more nimble in terms of scaling with the network we have. If a big shift in technology happens, it would be nice to be able to make that change within the term of our lease. As long as our finance folks look at the numbers and say it makes sense from a total cost perspective, then I would definitely be interested in it.”

Being nimble is especially important at a time when so many new networking technologies are pending. So, for example, as all of the major networking vendors hammer out their data center roadmaps, network managers can use the pay-as-you-go approach to wait out a plan from their preferred vendor, said Andre Kindness, senior analyst with Forrester Research.

“If Juniper had this for their products, customers would feel comfortable with bringing [Juniper’s] EX8200 [into their data centers] and then switch to QFabric down the line. They wouldn’t be as scared to invest. It’s lower risk.”

Pay-as-you-go models also allow organizations to back out of technology that doesn't pan out, mitigating the risks in trying new architectures, according to Mike Spanbauer, principal analyst with Current Analysis. That's helpful considering vendors are currently knee-deep in choosing sides among competing pre-standard technologies like Transparent Interconnection of Lots of Links (TRILL) and Shortest Path Bridging (SPB).

Brocade has rolled out its new VCS data center network fabric, based loosely on TRILL, and its new line of VDX data center switches. With no capital investment and no penalty for backing out, users are much more likely to try the new technology.

“There’s no commitment to a single path necessarily because you can return [the hardware] if it doesn’t work out for you. Once it’s installed you definitely have migration challenges to get off that equipment, but you’d have that challenge with any solution. In this case you don’t have to worry about capital depreciation issues that limited you to only making changes every three years or so,” said Spanbauer.

Economic environment demands new network hardware price models

Beyond enabling technical innovation, pay-as-you-go models may help companies drive down costs.

Whether pay-as-you-go networks are cheaper than those bought with a traditional capital budget will probably depend on how long an enterprise keeps the rented network in place and how well it plans for growth. Most enterprises build a network with a lifecycle of five to seven years with excess capacity to account for growth over that time. A company that builds a pay-as-you-go network can install and pay for only the capacity that is needed, and add more ports when growth is required.

Some vendors have introduced pricing schemes for application delivery controllers and WAN optimization appliances that allow customers to pay a fee for a temporary burst in capacity when needed, said Kindness. Meraki, a provider of wireless LAN infrastructure, also introduced a pay-as-you-go model to its network hardware price scheme earlier this year.

“When pharmaceutical manufacturers buy chemical, they’ll bring in two truckloads of the chemical. But if they only use one truckload, they can send the other one back,” said Kindness. The same need is growing in IT infrastructure spending, he said.

(Source - http://searchnetworking.techtarget.com)

Cisco Live 2011: Catalyst 6500 upgrade the game changer?

Rivka Gewirtz Little, Senior Site Editor. Published: 13 Jul 2011

LAS VEGAS—Cisco served up comfort food for the networking masses on the first day of Cisco Live 2011, sidestepping edgy cloud announcements and focusing instead on a major Catalyst 6500 upgrade.

Cisco is in full battle mode in the switching market where it has lost some ground to competitors with less expensive equipment, including HP Networking. Some customers had expected Cisco to launch a smaller and less expensive addition to the Nexus line (the Nexus 7009 mentioned at Cisco Live 2010), but the Catalyst 6500 upgrade will enable 25,000 existing customers to upgrade their E-Series chasses without the cost of a rip and replace. The message is that they don't need to go with less expensive and less functional equipment from competitors.

“Our goal and aim was to make sure we could protect those customers' investment,” said Scott Gainey, Cisco director of marketing.

The refresh is centered on the Catalyst 6500 Series Supervisor Engine 2T, a 2-terabit card that triples the throughput capability of the 6500 switch from 720 Gbps to 2Tbps and adds virtualization segmentation. Cisco execs compared the $38,000 Supervisor 2T to HP's A9508 switch, saying customers can triple the performance at one third of the cost with this upgrade.

HP called Cisco's comparison of the Supervisor 2T with HP's A9508 "meaningless." Mike Nielsen, director of solution marketing at HP, said that Cisco is comparing the price of a supervisor engine upgrade with the cost of a complete chassis switch system from HP. He also pointed out that HP launched a new competitor to the Catalyst 6500 platform at Interop, the A10500 series, which outperforms an upgraded 6500.

"HP delivers two times Cisco's performance with the HP 105000. Cisco 2T delivers 80 Gbps per slot; HP 10500 doubles that to 160 Gbps," Nielsen said.

The Catalyst 6500 upgrade also includes 10 Gigabit Ethernet line cards—the 6900 8-port 10G card with baked in TrustSec security and the 6800, which includes two 16-port 10G modules and a 48-port Gigabit Ethernet module. Cisco also announced service modules that enable a high performance next-generation firewall, an application control engine for acceleration and security, more comprehensive NetFlow capabilities and mobility management that enables north of 10,000 devices on one module. Cisco says the combined bandwidth from the cards and supervisor make the Catalyst 6500 40 GbE ready, but the company hasn't announced any 40 GbE ports yet.

Catalyst 6500 upgrade? What about the Nexus transition?

Many believed that the Nexus line was meant to replace the aging Catalyst 6500, but this week at Cisco Live, execs said the two addressed very separate markets with different needs.

“The Nexus was meant to bring 10 Gigabit Ethernet into the data center, but gigabit Ethernet is also enormous and there are segments [other than the data center] that have to be addressed. The 6500 fits the sweet spot of the campus that nobody in the market can keep up with,” said John McCool, senior vice president of data center and switching.

“We see the market bifurcating into a campus-based market that needs rich services and the data center network with convergence that takes a different functionality,” he added.

For those who want to keep existing 6500s in the core and aren't concerned about building a Nexus-based data center and managing two sets of equipment, the release seems only positive.

"The core of the network may not always get the limelight, but it makes or breaks the performance of the applications our faculty, students, and researchers depend upon daily,” said Ed Wilson, network test engineer at Pennsylvania State University, who was part of Cisco's press launch. “The introduction of the Catalyst 6500 Supervisor Engine 2T will extend our investment in Cisco systems.

On the other hand, customers who have invested big into Cisco's server products, the Unified Computing System (UCS), and built a Nexus-based network to support UCS want to see more than a Catalyst 6500 upgrade. Many of these users will eventually take build a core-to-edge 10 GbE network and had gotten the message from Cisco that 6500s would be eventually replaced by the Nexus.

“We're going with the Nexus because it has FCoE capabilities and we're looking at the long-term architecture. Also we need the virtualization abilities of the Nexus” said Rich Parker, security and communications manager at law firm Baker Botts LLP. “I've also heard this is the last supervisor upgrade for the 6500, so that's not an investment we would make.”

Adding speed and functionality to a much-loved switch is never a bad thing, said Gestalt IT founder Stephen Foskett. It's also not the most exciting thing Cisco could have announced when it comes to switching, he said

(Source - http://searchnetworking.techtarget.com)