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Private Finance Initiative

 

There are many arguments concerning Private Finance Initiative (PFI). It is a system that is used all over the world to provide funding for various projects starting from infrastructure developments to other schooling plans. It usually has a public-private partnership type of procurement that was implemented in the UK industry of construction in 1992; it transfers the responsibility for providing public services from the public to the private sector (Kemp & Stephani, 2015). Moreover, there is an essential governments strategy used for delivering public services that are of high quality. The PFI scheme takes advantage of the availability of funds in private organizations and institutions to plan some critical projects for the nation. The PFI system is widely employed in Europe and Asia in countries such as France, Germany, and UAE as well as Japan. Hickman (2000) assumes that PFI scheme has covered some public services which include health, prisons, defense, transportations, and education. The procurement covers the reduction of the whole project, namely: finance, design, construction, operation, and maintenance. Therefore, the essay explains the importance of implementation of different measures in PFI to improve management systems in both England and the Arab Emirates. Furthermore, the context will elaborate the advantages and disadvantages of using Private Finance Initiative in the economy.

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The advocates for the PFI postulate that it is an advanced form of public procurement which can capitulate efficiency savings and higher value of money for the public sector, given the right situational circumstances, unlike the traditional type, where it was dependent on the public sector for management and finance. On the other hand, the PFI is criticized by some individuals, because it provides low value for money as the public sector is limited to excessive payments for a couple of years. Evidently, the private sector controls the administration and maintenance of the PFI facilities cultivating an assumption that these projects are run for profit-making objective rather than the quality of service delivery. The public sector usually pays monthly expenses that include the repayment of the service costs and capital investments. Bhattacharyay, Kawai, and Nag (2012) believed that the main contractual feature of PFI includes risk management between private and public sectors, a value of funds in the broad segments, and the purchase of amenities. There are some catalysts for this type of procurement; this includes the achievement of value for funds through shifting risks from the public sector to the private sector. Sarmento (2013) also mentions availing money in nations which have an increased demand for new projects that are related to infrastructure. Apart from this, it allows the government to reduce expenditure of capital and convert the costs of infrastructure into inexpensive operational costs (Kemp & Stephani, 2015).

Additionally, there is a law in Dubai that contains various articles which explain the partnership existing both in public and the private sectors in the country as well as in the United Arab Emirates. Therefore, the law no. 22 of 2015 contains Article 2 which explains the existing partnership. It describes the contractual association between the two sectors with a primary aim of performing the whole project or its part. Article 2 also provides the goals of the law, such as to use regulatory, administrative, financial, technological, and technical capabilities in this case, enabling the society to enjoy the best affordable services. Article 4 states all the projects starting with the subject of the partnership between the sectors and strives to explain the nature of the assignment. Article 14 entails the procedure of selecting a partner, covering the principles of transparency, competitiveness, equality, publicity, equal opportunity, achieving the desires of the public, and declaration of competition (McGauran, 2002).

The Private Finance Initiative has many benefits. Hickman (2000) claims that these benefits start from risk management and go all the way to the real design professionalism and concepts. When the procurement is put into practice, some large private owned sector companies officially introduce their project proposals (Bhattacharyay, Kawai, & Nag, 2012). Thus, the number of the range of the tender indicates that the project can be approached in various ways, since companies have forwarded their proposals which are typically based on the area in question. Sarmento (2013) concluded that the proposal would involve a project which has been proposed and scrutinized by experts who come from the various fields. In other words, the issue would have been different if the project was given to a typical general contractor; hence, it would make the project plan. The involvement of some private proposals would enhance the competitive budget. Northern Ireland Audit Office (2005) stated that the proposal selection and evaluation group will then examine the budget that is within the expected costs. Therefore, the organizations that submit proposals would be required to keep their plans realistic in an attempt to get a chance to be allowed to conduct the whole project.

The companies selected to undertake the implementation of the project will then continue working on it. Large private enterprises that are situated around the globe will put much emphasis on ensuring that the projects are successful and there are no substantial risks associated with them (Kemp & Stephani, 2015). In this case, the name of the companies is usually protected. There is also a large amount of invention and innovation offered by some bidders. Since there are higher chances of facing competition, there will be a great need to do everything possible to fulfill the expectations. Hickmans (2000) focus on the need to improve the project will lead to the development of designs that are different, and when put into construction, they will attract everyones attention. In a situation, where the government assigns a project to a public company, and the undertaking fails to impress the audience, the blame will be on the government institution leaving the public corporation safe. However, the private sector company frequently operates the maintenance of the projects in order to possess relevant knowledge and expertise in the best way to perform the maintenance duties in a less costly and less risky manner. The assignment will then be maintained for the remaining period of the agreement.

The PFI assignments concern both old and new project (Bhattacharyay, Kawai, & Nag, 2012). They usually have some significant deals that have succeeded in the industry of healthcare, where citizens prefer to be treated in private hospital rather than in the governmental ones. However, a person typically faces an increased cost when the private sector does the work, but considering the service that it offers, the cost will be not considered as a loss.

Nonetheless, the risk associated with the PFI scheme still remains. This is especially true when the private company fails to realize the expectation in a given assignment, so normally the debts of the project will be shouldered by the government. It is worth noting that these private sector companies usually have better resources that help them to tackle and avoid the risks involved. Hence, a minimal chance of the plans failure will be preferred to a serious risk of the project collapsing when conducted by the public sector (Kemp & Stephani, 2015). For this reason, the PFI scheme reduces the risk that the government normally faces when the project design fails to be delivered successfully.

However, the private sector looks forward to getting a good return on its capabilities to provide investment and performance. The public sector, on the contrary, strives to get the agreements which have incentives that make the private sector use the shortest time possible to deliver their services which are of a specified standard. Private finance is likely to be more expensive compared to private borrowing. In addition to this, the profits made by PFI are unacceptably high. The projects, which are usually paid by the government after a period of time together with the associated interest rates, are slow and complicated. Basically, it is a very expensive way in comparison with the short term loans, thus, affecting the governments final balance sheet.

There are times when projects conducted by private sectors lead to some severe problems, and this typically makes the public sector cover them (Kemp & Stephani, 2015). A good example is when Metronet, which is found in England, failed to realize its plan immediately after four years period of its seventeen billion euros, a thirty-year contract that required the modernization of the two-thirds of the whole London Underground. A public sector undertook the assignment, since the transport projects are very vital and essential to fail in the future (Great Britain, 2011).

Northern Ireland Audit Office (2005) approved that the projects funded by the public usually take some time to be completed and may eventually prove to be unsuccessful. Report developed by the office of the national audit proved that seventy percent of the public assignments were not delivered on time while seventy-three percent suffered from a lack of funds. The public sector projects are usually tied to the contracts for an extended period, which is typically thirty years. The business of Northern Ireland Audit Office (2005) will require a change of the agreement during the period, and this may be impossible, especially during the duration of the contract. It may require renegotiation over the terms of the contract and its price, which could lead to various disadvantages that may increase the transaction cost.

Hodge and Greve (2005) believed that the matter that the private finance is usually more expensive than when the government borrows money is of the utmost importance, but owing to the period of financial crisis, the dissimilarity between the two types of costs has widened. Capital cost for the PFI projects reaches over eight percent, which is a double figure for the government rate of around four percent. Therefore, the PFI has the impact on swelling the cost associated with finance for the public investments. In essence, this would have been cheaper if the government had borrowed funds from its accounts, since the increased costs can easily be identified and measured. This process usually has these two essential components: a higher cost of the transaction and a higher return to its investors. Moreover, the main principle that is not included in the contractual model is the allocation of risks, so that the cost can be easily understood, minimized, and controlled. The potential to save the costs with the help of the PFI may directly lead to improved risk. In a situation, when a firm faces various problems, it will be forced to manage and avoid any bad repercussions. Hodge & Greve (2005) claimed that while improved management of a particular aspect might lead to increased efficiency in cost, other circumstances may trigger a decrease in costs for the public company.

The government was lucky to be associated with cheaper funding compared to the private sectors that are involved in the project finance, but the cost of this finance and government funding became insufficient due to the beginning of the financial crisis. The significant increase in the cost of private finance is interpreted as a highly inefficient way of the PFI methods of financing. Data discovered in the recent days suggest that the average total cost of capital is double in comparison with that by the government.

A committees specialist adviser has suggested that paying a debt of one billion euros may be similar to paying a debt of the government of 1.7 billion euros. Thus, a seventy percent rise in investment would be distributed for the related costs of the long-term period by the government rather than the private finance. Another way to express this type of the cost policy is to pay a debt of over four percent cheaper when the funding of the government was used. For this reason, the PFI can be a source of excessive spending for the government rather than a source of income.

Transferring the risk to the private company is essential, especially the allocation of the constructing risk (Hodge & Greve, 2005).However, the PFI agreement, which requires thirty years, is usually not important to put the risk on another person. There are turnkey contracts that are used for similar results. In this case, the private finance schemes have not availed the importance of the transfer of the risk as in some cases the undue risks have been assigned to these sectors to manage (Kemp & Stephani, 2015).

Great Britain (2011) proposes that the PFI contracts which are involved in providing critical time and price are certain. Nonetheless, no evidence suggests that the projects by PFI are usually quick to be realized as it is a proven fact that these projects require much time. Therefore, introducing the price of the post-contractual can be seen as an efficient measure, which hence leads to the cost efficiency. This is for the fact that cost efficiency issues arise when the contracts/agreements are more advanced.

The cases when the PFI and construction sector have partnered include the Royal Liverpool Hospital PFI project in Liverpool. The facility was constructed in the 1960s and was officially opened in 1978 due to some delay regarding quality, fire certifications, and quality care delivery. In 2003, the company authorities projected a new hospital plan under the PFI project as the facility did not meet the requirements of a modern health care institution. The estimated cost was approximately 451 million pounds. Some time later, the project underwent public consultation as the trust managers decided not to support the project in providing the business case for reconstruction of the facility. Besides this, some secrecy issues led to a cumbersome comparisons between the PFI projects and the project that were financed by the public, which resulted in halting the project (Mair,& Jones, 2015).

In conclusion, with all the information that was covered, the users of public facilities should appreciate the current implementation by the means of e-toll. In other words, the main reason should consist in incorrect information and poor planning provided to individuals. Therefore, the PFI scheme is crucial in the economy of both England and Dubai, since the government will be capable of identifying a private company that will ensure the whole project is done in a professional and skilled way. Furthermore, this allows a faster way to implement the new assignments that eliminate the governmental debts. The implementation of the private finance into the facilities that are used by the public would gradually be enhanced. Nevertheless, the private sectors that control the projects would make prices higher, which an ordinary citizen in Dubai would never easily accept. Thus, when making the project effective and visible, the Dubai administration ought to identify various means of providing such public facilities as, for example, transport at a lower price.