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.
Best services for writing your paper according to Trustpilot
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 hasbeen used for almost 30 years already, however,it is too soon to make big decisions on its performance so far. It is clearthat a method has some limitations, which are causing it to be not sotrustworthy, but the advantages of the initial idea how it should work forcesus to work through it and try to improve it as it could be the best method toprovide public infrastructure and services.ConclusionLooking at many examples of PFIprojects I was not able to form my own strong opinion about this procurementmethod. However, PFI has some strong pluses, but at the same time minuses as well. It is clear what is thepurpose of using PFI procurement method that government could not only savetime but money as well, because due to the complicatedmanagement of big projects they tend to have overruns and time delays. It isclearly mentioned that PFI system transfers all of the risks from government toprivate consortiums, but private investors would never sign a deal where the government would not assure them that theservices or estates that will be provided arenot going to be used. Therefore, the governmentis behind all the PFI projects.
For instance, new hospital or prison, which hasbeen built by PFI project will never behalf empty, as the government is the main supplier of people for theseservices. Companies before taking these projects are being guaranteed thatgovernment will allocate humans to the services they are providing. Moreover,the public sector has shown a weak skillof pricing the risks. As private sector can take an advantage of this.
Inaddition to this high tendering prices for contractors has led to a massive increase in price for theseprojects. The risk allocation of PFI method, clearly, needs some improvement asthe unnecessary cost increases can be noticed. As well as risk allocationproblems standards for private companies assigned on PFI projects, in myopinion, should be improved or at least they should be monitored by externalengineers, as the competency of work could be guaranteed.
If some of thechanges in PFI procurements would occur, this method could bring a massiveboost to an economy as good examples of PFI projects have proven to be win-winsituations. However, many projects also have shownsome negative aspects of it.DiscussionIn 2003, the Building Schools forthe Future (BSF) programme was announced, which objective was to renovate 3,500secondary schools in 15 years’ time. The planincluded rebuilding entirely half of the schoolestate, 35 percent of it should be remodelled structurally and what is left shouldbe refurbished. Local authorities entered into PPP’s, with private sectorconsortiums. The Department for Children, Schools and Families were theauthority which announced this project and decided to use PFI for differentways to help BSF projects. It tried to encourage authorities to use PFI toprocure many types of public buildingsbecause they would be built with better management and maintenance.
Unluckilybanking sector started to face some difficulties, which led to reduced amountsof money that could be borrowed from them. By 2011, the government abandonedthe scheme, leaving many of these projects at their design stage or planningstage(Ashworth, 2006).On April 2016, 17PFI-funded schools in Edinburgh failed to open after the Easter break becauseof structural problems after the Storm Gertrude hit Edinburgh. All the closedschools were built by Miller Construction and were constructed through privatefinance programme, which was worth £360 million deal and signed 2001. Thisevent just proved that PFI contracts donot mean that private sector companies can provide higher standard projects asstructural problems just before the school exams disrupted normal students’routine(Yeung, 2016).Same story as Metronet Railhappened to company Tube Lines.
It also was falling short in terms of financingand kept asking money of TfL until TfL decided that buy out their contracts andtake over their projects even tough TfL is still using PFI contracts for itsmaintenance and expansion services.The other bad example of PFI wasa Metronet Rail company. The company was in public-private partnership (PPP)with London Underground and it was responsible for rail replacements, manystation refurbishments, and signals.Under PFI contracts Metronet Rail company was producing around £50 millionprofit despite the fact that it was behind in all its major works. This provesthat not necessarily private companies are performing faster and with bettermanagement in public service projects.One of the most recent examplesof using PFI contracts was Carillion company. This company had over 450government contracts. Its major projects included HS2, Aberdeen WesternPeripheral Route and two hospitals, which one of them was the Royal LiverpoolHospital.
It was a shocking news when this year 15th of JanuaryCarillion announced its liquidation. The company has collapsed under the weightof £900 million debts to its subcontractors and banks. The company wasdestroyed by itself when the companytried to overstretch itself in terms of tendering for contracts. The company underestimated most of the PFIcontracts it has signed and could not handle the situation and it got out ofcontrol(McIntyre, 2018).Getting the privatesector to build and run prisons has brought benefits as well.
First thing isspeed: private jails are built in around 2 years’ time, while the prisons whichwere built by the government usuallytakes about 7 years. Running costs are lower too, mainly because the staff ispaid a quarter less than in the public sector and get fewer benefits. UKgovernment decided to close 30 poor condition jails and instead of them open 12super-prisons which capacity can reach up to 3,000 inmates each. The proposedprisons should cost around a £3.75 billion and are expected to save about £600million a year because current oldprisons are less efficient and have high maintenance establishments.
One of thesites for the super-prison is in Wrexham,North of Wales. As it has opened it is thebiggest prison ever seen in Europe it has cost £216 million and it canhouse 2,016 inmates. This project gave massive economic benefits to the NorthWales region as it created more then a 1,000 new workplaces and only local suppliers wereinvolved in this project(Dickins, 2017, Riley, 2013).The construction of new motorwayM6 was in high need to relieve congestions in the area, but the government did not have any funds to affordthis project. That is where a PFI contract was like a fresh breath of air forthe government. The contract was won byMidland Expressway Limited (MEL) and the contract was for 53 years so that 3years for construction and 50 years for an operation.
After MEL finished the construction base they started to recoup all the coststhrough toll charges. Both parties endedup in a win-win situation.There are many examples of gooduse of PFI and many examples of PFI contracts that ended up as a failure.Examples ofPFIIn the beginning,these changes to PFI have been welcomed.
Changes inthe standardisation of procurement andshortening the time of tendering have been welcomed positively as cost-cuttingchanges. Also, it is widely accepted that it was sensible to remove somelong-term soft services from PFI contracts. However, there were concerns thatthese changes have not actually improved the financial aspects of PFI contracts because it was concerned that theseactions will change the debt to equity ratio, which will increase the costs ofthe project(Mackenzie, 2012).As well as changes in financingand procurement there were some changes in handling project risks.
Main aspectsof it are that contracts will not have a”soft” services anymore, which included cleaning, catering and other parts ofmaintenance. Adding a fact that government will retain some of the risks andwill take a share of insurance companies(Mackenzie, 2012).The main differences inprocurement process include some Treasurychecks and a centralisation ofprocurement has been introduced.
The tender process has been also more standardised, so the bidders could getcompensations 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, afacilities management service output specification and a payment mechanism of aproject(Mackenzie, 2012).Changes that have been made infinancing is that government looks to become a minority equity investor so thatgreater transparency and better alignment could be achieved. Also, the amountof equity of private sector companies hasto increase as well. PF2 states that banks cannot be the majority of financialfunding of the project and private companies during a tendering stage will be asked to provide a long-term plan offinancing the project. According to PF2, funding competitions should bearranged for a proportion of private sector equity. Furthermore, the controltotal will be added to the governmentaccount balance sheet for PF2 contracts and all PF2 contract will be an openbook contract with actual and forecast equity return information(Mackenzie, 2012).
After a lot of criticism to the government of using PFI contracts in 2011, itwas decided to initiate a review on PFI. After the review was done it waspublished on 2011 House of Commons Treasury Select Committee report that therewas no clear evidence of any benefits or any financial savings on PFI projects.That is why the government in 2012announced that it will still be using private sector for deliveringinfrastructure and services, but from that time it will have another approachfor it and named it as Private Finance 2 (PF2).
There has been a number ofchanges from PFI moving to PF2 and main changes fall into three categories:financing, procurement, and risks(Mackenzie, 2012).Private Finance 2As well as advantages PFI hasdisadvantages which cause us to think ifit so beneficial as it is so used by the government. There are some examples ofPFI when the primary purpose of a building or structure has been distorted,this usually happens to buildings with functions that are carried out in themsuch as education or health treatments. The priority of the funds according toPFI is to pay off the PFI loan, but due to the primary purpose of the building, most of its funds should be directedto its core business. Anotherdisadvantage of PFI is that there are very high costs for terminating itscontracts and even though the contracts last longperiod of time it is still very difficult to renegotiate its conditions.Payments for PFI contracts can last many years in order to repay the initialconstruction cost of the building, its operational costs and maintenance costsand usually these sums are higher than the initial calculated costs, so in long-term government will end up paying muchmore 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 aswell. Moving on there is a possibility that some public projects have beendistorted to increase a profitability to PFI using companies, so they would maximize their profits.
To add up there havebeen some examples were PFI projects were built, but during this time it wasdecided that the project is no longer required for its original purpose, butgovernments were still left to pay PFIcontracts 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 studiestendering for public sector projects private sector companies have to spendaround five times more than for traditional public-sector contract(TIFFIN and HALL, 1998).Disadvantages of PFIThere are many advantages ofusing PFI contracts for public sector projects. PFI has resulted in a number ofimportant and useful projects that would have never been built usingtraditional procurement methods alone, because of the range of skill andabilities that could be provided by private sectorcompanies. In addition to this,the use of PFI practices has helped toprovide a constant workload over the past decade to the construction industry, which is generally not very stable industryand 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 hardto judge any risks that came across and the arrangements that were used in PFIcontracts were completely different from the traditional practices. Learning from this kind of contracts and practices isbeneficial for everyone who gets involved into them. Also, looking backin time it is clear to see that public sector lacked experience and knowledgeof criteria that should be used in the constructionof big projects. There were many examples of budget overruns and projects notbeing completed on time.
Due to PFI, theentire process was simplified. The private construction companies take themajor risks that involve design,building, financing and operation phases of the project as a client (central or local government) does nothold any cost associated risks, not even overruns or any other additionalcosts. Additional to this it may be even more efficient for private companiesto fund and build the project in terms of building and running costs. Privatecompanies are also motivated to build an asset to a high standard and maintainit to an excellent condition, because the governmentis inclined to pay on a performance-relatedbasis for the use of the building and for its continuing management(Ashworth, 2006).
PFI could also bring extra investments as governments would use higherborrowings ant taxes private sector could fund the project right from thestart. Moreover, PFI projects theoretically should be cheaper for governmentsbecause PFI firms have to pay taxes for governments as well as bidding forthese projects creates competition(Riley, 2013).Advantages of PFIIn UK private finance initiativewas introduced by the Conservative government in 1992. Initially, PFI was used for projects such as railways and roads. Inthe beginning, trade unions opposed PFIand condemned it as a form of privatisationby the Labour party. At that time critics argued that savings in expenditure thattime will need to be repaid most probably many times over in the future, but HMTreasury considered PFI to have many advantages.
One of the most importantfacts was that Labour government recognisedthat a public-sector capital was limited and that there were only two optionsfor public sector projects. They could be constructed on a PFI basis or not constructedat all. Because of this, PFI method of financing public projects continued toexpand in both the number of projects and their overall value. The mainjustification of PFI was that the public-sector projects were poor at deliveryand management and the private sector was better at providing such services.
By2007 the total capital value of PFI contracts in the UK had risen to almost £70billion and this has committed taxpayers in the UKto spend over £215 billion for those projects over their lifetime in contractsof PFI. The financial crisis in 2007 presented private finance initiative with greatchallenges because the capital had dried up, that is why the number of projectsassigned by the PFI contracts has reduced significantly. Even though UKgovernment has reduced the number of assigned new PFI projects and it is stillcommitted to paying massive amounts toprivate companies, PFI still remains the UK government’s preferred method forpublic procurement for major projects. The biggest healthcare provider in theUK the NHS has stated that PFI is their number one choice for the constructionof new hospital projects, and that there are no other options for them, becausegovernment cannot provide such funding for this kind of projects or they riskof abandoning the projects half way of their construction phase. That is whythe government has become the PFI fundingarm on a temporary basis. As people started to criticize the government for PFIcontracts due to massive debts government tried to take some action. This hasresulted in a curtailment of projects, some of which have been postponed andothers abandoned(Ashworth, 2006).
Private Finance Initiative in the UKPFI is a particular type of public-private partnership. The private financeinitiative (PFI) is a method of funding what are deemed to be public sectorprojects with private capital, other words public projects are funded and constructedby private investors. This funding method has initially been developed inAustralia in the late 1980s. PFI has also been developed in many othercountries around the world as governments have sought to reduce the publicestate. The ideas of PFI have received approval from the World Bank and theInternational Monetary Fund (IMF) as ways of funding public sector projectssuch as hospitals, schools, universities, roads, etc.
There is no actual standard model of PFI, andthe methods that are employed by PFI will depend on the circumstances of theproject. 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 coveringnot just construction phase but also the maintenance of the project for aspecific time(Fontinelle, 2006, Ashworth, 2006).
A public-privatepartnership (PPP) is a method of procuring different kinds of governmentservice through a partnership with the private business sector. The PPPprovides contracts between public parties and private sector companies wherethe private companies take all the risksfrom the government. In PPP the privatecompany is responsible for its funding. There are many contractual arrangementsthat 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).IntroductionOne of the particular types of PPP is a PFI. Private financeinitiative (PFI) is a construction project funding method where public-sectorprojects are being built, funded, operated and maintained by private sectorcompanies.
PFI was introduced in the UKin 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 providepublic infrastructure and services. There are many arguments consideringadvantages and disadvantages of PFI and if it should be used or not.
Due to anenormous amount of critics on this approach, Private Finance 2 (PF2) method wasintroduced as an improved model of PFI.Even though people were happy about the changes they still could see some gapsin this new PF2. Examples show that PFI can be a successful method for providing services and infrastructure, butat the same time, there have been somefailed projects as well. The authordiscusses the problems of PFI contracts and sees a lot of potential in theapproach.Abstract
