An Investigation in Private financial initiative (PFI) dilemma
Introduction:
The fundamental concept of Private financial initiative (PFI) is to create a partnership between public and private sector by financing public projects via private sector capital. In this practice, after founding public project by private sector, project leased back over a certain period of time to public sector (government), and private sector provides set of services associated with project such as maintenance.
PFI initially introduced by British Conservative government in 1992 to found the modernization project of Britain public infrastructure such as roads, schools and hospitals. Nowadays, PFI practiced by several governments in different countries (e.g. United Kingdom, Australia, Spain, Malaysia, japan).
Under the PFI contract, the government obligated to lease the project from private sector (private company) for pre-determined period that is usually 25 to 30 years. In the other hand, private company committed to lease the project to public sector. This contract guaranties a stream of future income for private company, and a long-term obligation for government to bear those future payments. As these contracts impose millions of dollars or any other currency for public sector in the expense of taxpayers and at the same time as the private sector contracted to run these projects and maintain the quality of services, the question of value for money arise.
Does PFI practice bring adequate value for the money paid by public sector or this practice failed to provide good value for taxpayers’ money? Does PFI practice is more efficient than any other type of borrowing for taxpayers? These sorts of questions led to debate between different parties of government as well as economists and researchers. To investigate these issues, this paper runs through different scholarly papers and different ideas to shed some light on this dilemma.
Does PFI create value for public sector?
“We are using PFI to ensure value for money and that the public interests and public services are properly protected when we increase public investment” Gorden Brown, The Times, September 2002
It is argued that PFI provides extra investment opportunities for public sector, however, argues that the public sector is able to finance the projects by borrowing from private sector or contract with private sector run the projects trough PFI plans rather than finance the project by public funding. Either way, public sector obligated to repay it’s borrowing and in PFI case public sector repay the full cost of construction to private sector in 25 – 30 years. But borrowing from private sector does not provide higher financing than funding the projects by public sector. Public sector obligated to repay to private sector in the form of future interest or leasing. Additional investment in this case does not come from additional financial resource but through a political decision that assume equivalent expenditure on private sector financing and public sector investment.
Mentioned of an increased interest in use of public sector to implement innovative products and to deliver higher quality services. Mean while, PFI practiced by government to finance public projects and a movement toward improved services in public infrastructure. But to what extent this practice has innovation to provide better service and higher value for public sector. In a research done by ) on UK’s PFI financed hospitals, researchers found that PFI may have less effect on stimulating design innovation than old model. In PFI models hospitals, there is less coordination in operational system. Therefore PFI failed to provide innovation effects for UK government. Researchers believe on reconsideration of PFI plan by policy makers to provide higher quality and more efficient hospital cares.
In another study, explored the distributional implications on value for money (VFN) practice and methodology that used by British government to evaluate PFI projects to understand whether this practice leads to rational and equitable resource allocation. The research revealed that VFM methodology producing results that are far from rational distribution of wealth and serve to increase social exclusion. Practiced techniques are only in favor of found providers (Private sector) under the mask of value for money and risk transfer to private sector. Therefore, PFI plans, particularly in UK’s hospitals are running in expense of patients and their families, work force and taxpayers. Thus while government hide behind results of VFM such as transfer of risk, PFI is leading to losing the benefits for public while redistributing money from board mass to elite few. The argument continues by pointing at situation in UK’s health care services with question of PFI effects on stakeholders (taxpayers). Private companies have business-oriented mindset and most important code of it is to lower expenses and to increase income. The researcher, in this investigation noticed that this policy runs in expense of public sector. To decrease labor costs and increase revenue, hospitals try to increase their patient flow, applying new technological devices that reduce length of stay, day treatments, and favoring patients with acute sickness than those who have chronically sickness.
PFI projects raised many difficulties and problems. The payment services to private sector is based on the quality of service provided by private sector but in practice it is based on contracts which mentions that the quality and level of service are measured by the Trust and it may vary from the reality.
The Building Futures Group has argued that more than 70 hospitals that build or under construction in UK by PFI could become obsolete way before the ongoing contracts expire, while the National Health Service still obligated to paying to them. In the other hand these hospitals due to rapid change in medical technology and shift in demands needed to make changes in their infrastructure. This argument goes for other sectors such as Balmoral High School in Northern Ireland case which build in 2002 by initial cost of 17 million pound and closed in 2007 due to lack of students while the PFI contracts goes for 20 years more. Base on this incident and other same experiences, it can be argued weather the government policy makers have evaluate the PFI contracts deep and rational enough to create value for taxpayers or they are wasting money.
Cost of finance in PFI is higher than indirect finance for government and of course stakeholders, which in this case are taxpayers. Scholars’ debate that government should chose channels that can borrow in lower rate such as government bonds instead of financing via PFI. However governments argue that higher cost of finance is covered with shifting in risk to private sector but researchers have doubt about functioning of risk shifting.
Advocates of PFI argue that PFI projects are more cost efficient than projects go through controversial public investments. They claim that public investment projects overrun the budget or agenda appointed for the project. They also point at possibility of inflation or any other economic downturn to affect the cost of investment by public sector. While PFI projects are protected by fixed contracts that may contain bonus for early completion or penalties for late completion. In the other hand opponents of PFI argue that above mentioned bonus or penalties can be imposed in public sector investment as well. Opponents also point at the fact that most of public projects that failed was due to failure of any sub private contractors in most of the projects. A report of HK’s National Audit Office (NAO) shows that 69% of PFI projects between 2003 delivered on time and 2008 and 65% of PFI projects done on contacted price. Beside of above mentioned reasons by opponents they also mention rejection of some proposed projects by private sector due to possibility of financial loss in the projects, therefore it should be concluded that private sector only participate in projects that bring guaranteed profit for them in expense of public sector.
More ever the cost of PFI projects is way higher than what it mentioned in contracts due to accumulated interests. For example Princess Royal University Hospital in Kent cost 118 million pound for contractor to build while the final bill was 1.2 billion pound for taxpayers. Beside cost of interests for taxpayers, costs of services provided by PFI financed projects are so high that some times turn them to useless facilities for society.
A recent investigation (2011) conducted by UK’s Treasury selected committee to clarify PFI initial claims about cost efficiency and risk sharing. The result mentioned that PFI is not more efficient than any other type of borrowing for taxpayers and it was an illusion that PFI shield taxpayers from risk. They conclude that PFI is poor value for money. True cost of PFI has never been calculated properly and it was hidden off balance sheet, therefore excluded from government’s debt calculation.
Many researchers from different countries that dealt with PFI mentioned that VFM assessment model by government hindered by lack of transparency and public accountability. There are major concerns between researchers about efficiency of PFI projects and the ability of these projects to benefit public sector. A new method of accounting needs to evaluate public policy decision in distributing resource between different social groups. PFI plans tend to mislead in contribution of resources between different classes of society.
In a survey conducted by the Association of Chartered Certificate Accountants (ACCA), public sector accountants was questioned about their experience of PFI, the result came up as below:
- 46 % of respondents think that PFI projects do not provide good value for money.
- 39% of respondents mentioned that they would not elect PFI, if their organization were able to choose between PFI and public sector management and procurement. Meanwhile, 24% of responders were uncertain.
- 48% of responders mentioned that they would not advise other organizations to use PFI as good value for money. Only 6 % of responders were so sure that they will advice for PFI.
- 50% were disagreeing that government taking a correct decision to promote using of PFI instead of public sector investment.
- 31% of responders mentioned that PFI practice has had negative effect on cost of services that they provide.
This survey as one of the many confirms the concern of taxpayers from the nature of PFI and its ability to provide value for their money.
Conclusion:
It is almost 20 years since beginning of financing public sector projects by Private Financial Initiative in UK and rest of the world. What is the out come of this practice was debated from early years of PFI implications. Governments from early days advocated FPI practice as a value creator for taxpayers’ money, a procedure to shift the project risks to private sector and a cost effective way to perform costly projects in time with minimum cost. However after several years it turned out that PFI financed projects are not even cost effective or value maker but it increases the expenses of taxpayers.
What procedure or method should have nations take to overcome the negative impact or PFI or how to turn them to value creator one to public sector are still on debate. This is so obvious that future of PFI projects depends on the method that government assesses it. Governments should not sign any public-private financed projects by measuring the short term out come as many governments act this way to showoff the extent of the projects opened or achieved in country within their period of governance. These sorts of projects require deep financial and accounting analysis to come up with real costs and expenses for taxpayers.
Creation of good value for taxpayer’s money should be the main goal of government in every single project and PFI financed projects seems to miss this fundamental point.
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