Private Finance Initiative: Advantages and Disadvantages

Introduction

The implementation of public projects involving construction is often associated with a financial burden on the parties involved. In order to balance the financial implications of public projects, Private Finance Initiatives (PFI) are incorporated in the practice of collaboration between public sector organizations and private contractors. Despite the relief on the public sector’s side related to the lack of management of projects under the private-public partnership terms, the advantages and disadvantages of PFI continue to be a subject for debate. On the one hand, the supporters of such a partnership between public and private organizations identify that they produce multiple developmental and innovative opportunities and enhance cost-efficiency¹. On the other hand, the opponents of such an initiative refer to long-term financial losses, debt-related risks, and poor quality of projects, implying a low level of value for money². This paper is aimed at exploring and discussing the advantages and disadvantages of PFI. Although there are risks associated with PFI, they might be mitigated using proper strategies to enhance the benefits of public-private partnerships.

Debate around Private Finance Initiative

PFIs or private-public partnerships have been used as a common practice in many countries of the world to facilitate the financing and implementation of public projects. In essence, such a form of cooperation between public and private entities is regulated by specially designed programs and agreements. In particular, PFIs imply that ‘private firms are contracted by public authorities to finance, build, and manage public projects’³. Such projects might involve a small contractor company that cooperates with several subcontractors, which obtain the obligations of the contractor to implement the project as requested by a public client. Since the construction industry is a sphere that is characterized by intensive resources, the presence of PFIs in this field allows for balancing the financing burden and ensures successful completion of development projects⁴. Thus, money from the government is allocated to private contractor companies that cooperate with finance management, facilitators, and subcontractors to reduce governmental resource strain. However, proponents and opponents of PFI claim to have grounds to support or discourage the initiative, respectively.

Advantages of Private Finance Initiative

First of all, it is essential to identify the advantages of PFI to validate its popularity and frequent utilization by governments across the globe. Firstly, the usage of PFI allows for the undertaking of more capital projects in a given period with faster results achievement⁵. This characteristic implies the second benefit of PFI, which is an increased value for money invested in the private-public partnership due to the savings on costs and project management. Indeed, research shows that PFI allows for ‘extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenance’⁶. Indeed, the government obtains an opportunity not only to share responsibilities but also risks with the private entities, which serves as insurance for cost savings.

Thirdly, since the infrastructure domain develops rapidly and imposes challenges for the limited capacities of public entities, cooperation with the actively advancing and competitive private sector helps to meet the needs of the public. Indeed, the case of the UK, which actively initiates PFI contracts in transportation, healthcare, and other spheres, demonstrates that the number of projects increases with more public programs successfully completed within shorter periods. In particular, it is stated that ‘the PFI has meant that more capital projects have been undertaken for a given level of public expenditure and public service capital projects have been brought on stream earlier’⁷. Thus, with projects implemented faster, more benefits for the citizens under governmental programs might be achieved, which is an important advantage of PFI.

Fourthly, the innovation opportunities that are more available to the private sector help to advance the development projects initiated by the governments. Indeed, the case of Dubai demonstrates how innovation can be integrated into governmental programs for sustainable and effective urban solutions achievable due to private contractor inclusion⁸. Moreover, besides the benefits for the public entities, PFI serves as ‘a way of developing local private sector capabilities through joint ventures with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services’⁹. Finally, PFIs allow for achieving more sustainable practices in project implementation, which are particularly relevant to the transportation industry.

Research suggests that infrastructure faces the pressure of sustainability, necessitating the advancement of new construction approaches with the prioritization of environmental impact. Such pressure ‘implies a major change in the industry’s understanding of society’s demands and its clients and in its own sense of corporate social responsibility in its work practices’¹⁰. In this regard, since governmental resources might be limited, cooperation with private companies might contribute to the public sector’s sustainability capacity. The case of road construction projects in the UK using PFI vividly illustrates the benefits of public-private partnerships since PFI measures allow for more effective sustainability achievements than traditional procurement approaches. Thus, PFIs are beneficial in operational, financial, management, and innovative domains for the public sector, as well as boost the development of the private sector, serving as a procurement improvement. Nonetheless, the characteristics of public-private partnerships are not limited to advantages; opponents of this initiative appeal to the risks generated by PFI.

Disadvantages of Private Finance Initiative

The involvement of private parties in governmental programs might have negative implications, primarily due to financial, legal, and operational risks. Firstly, PFI implies that governments might bear financial risks due to the implied costs in the complicated system of contractors and subcontractors. Secondly, the involvement of multiple parties in the form of private contractors, subcontractors, managing organizations, and others might cause litigation complications due to shared responsibilities and the lack of agreements on project implementation¹¹. Indeed, contractors and subcontractors might have different views and decision-making approaches, which obstructs effective project implementation and lead to additional costs from the governmental side. As the case of the implementation of PFIs in Greece shows, there is a high risk of arbitration between the parties associated with the disagreement as per the completion of projects¹². Therefore, the intensified risk for litigation is considered as one of the significant disadvantages of PFIs.

Secondly, debt complications and additional financial burden associated with loans for project completion are viewed as the causes of diminished value for money under PFI. Experts emphasize that ‘while private sector can make it easier to get finance, finance will only be available where the operating cashflows of the project company are expected to provide a return on investment’¹³. Thus, there are implicit financial risks associated with the complicated system of financing private-public partnerships. Thirdly, the distribution of responsibility for the completion and the quality of projects implies governments’ increased risks for being held accountable for drawbacks, which leads to additional costs¹⁴. Moreover, there is an opportunity for the politicization of construction projects due to the financing of specifically chosen private entities.

Finally, when it comes to the discussion of the value for money, PFI should be implemented for projects where value for money ‘is the optimum combination of whole life cost and quality to meet the user’s requirement’¹⁵. Indeed, to ensure that the value for money is sufficient, the public sector should foresee such risks as operational, occupancy, inflation, and residual value risks. Thus, there are multiple risks associated with the complexity of PFI implementation, which should be properly addressed to mitigate the disadvantages and enhance benefits.

Opportunities for Mitigating the Disadvantages of Private Finance Initiative

Among the possibilities of mitigating the risks associated with the disadvantages of PFI, the most effective deem to be the ones incorporating long-term perspectives and the benefits for both parties, namely private and public entities. The case of the Government of Dubai, whose Department of Finance has introduced a new enhanced approach to FPI management, demonstrates how governmental investments might be used for successful project implementation¹⁶. Indeed, Dubai’s case demonstrates how the integrative cooperation between private and public organizations may become ‘the next global innovative trend for governments around the world seeking to finance their infrastructure and urban development projects’¹⁷. It requires solid legal work to create a foundation for a reliable partnership with minimal risks for both parties. Importantly, as informed by the Dubai PFI use case, the investment into research in this field, including professional gatherings and conferences, might increase the chances of generating qualitatively new approaches to regulating public-private relations.

Another way of eliminating the risks and bridging the gaps in the standardization of construction projects is through a thorough regulation of the parties’ responsibilities via FIBIC contracts. According to scholars, the mission of the FIBIC organization is ‘to improve the business climate and promote the interests of consulting engineering firms, globally and locally, consistent with the responsibility to provide quality services for the benefit of society and the environment’¹⁸. For example, the contracts between public and private entities under PFI in Dubai are regulated by FIDIC provisions¹⁹. Under FIDIC, there are multiple litigation options that allow for foreseeing disputes and resolving them in a timely manner to ensure that the interests of contractors, clients, and subcontractors are aligned.

Moreover, since one of the most significant disadvantages recognized in PFI is the disagreement between the involved parties, including several subcontractors and shared obligations, additional regulation might be an effective solution. Indeed, according to Klee, ‘interface agreements are used in this context to protect the project company from issues arising between the subcontractors’²⁰. The importance of such agreements is in the addressing of cashflow risks faced by co-dependent subcontractors, which might be mitigated by means of liabilities reallocation between subcontractors.

Conclusion

In summation, as the overview of the advantages and disadvantages of the cooperation between public and private entities under PFI shows, this initiative implies both positive and negative characteristics. On the one hand, the proponents of PFI argue that it allows for fruitful collaboration between private and public entities, creating an environment for innovative, efficient, sustainable, and reliable project implementation. On the other hand, the opponents propose claims suggesting that PFIs burden governments with unnecessary financial risks, debt complications, the responsibility of governments before citizens for possible private sector’s drawbacks, and potential politicization of construction projects. Multiple cases, including the PFI implementation in Dubai, Greece, the UK in general, and in the transportation and construction spheres in particular, show the effectiveness of PFIs. Given the scope of advantages and disadvantages, it is imperative to enhance the positive implications of PFI in order to mitigate the risks. Collaborative action of public and private sectors is vital in this regard since solid legislative agreements should be improved, FIBIC contracts ensured, and innovation implemented

Reference List

Allen G, ‘The Private Finance Initiative’ (House of Commons Library 2003). Web.

Akbiyikli R, Eaton, D and Dikmen, S U, ‘Achieving Sustainable Construction within Private Finance Initiative (PFI) Road Projects in the UK’ (2011) 18(2) Technological and Economic Development of Economy 207.

Alshawi M, ‘Concept and Background to Public Private Partnership (PPP)/Private Finance Initiative (PFI UK Experience (2009)’ (Iraq Institute for Economic Reforms, 2009).

Athanasakis D, ‘Arbitration for supply chain and money supply cause disputes in PPP projects: distilling comparative economic interests from the Greek legal system’ (2009) 9(1) International Journal of Construction Management 93.

Baker E and others, FIDIC Contracts: Law and Practice (Routledge 2009).

Government of Dubai, ‘Dubai Department of Finance announces new PPP projects worth AED25 billion’ (Government of Dubai, 2021).

Grose M, Construction Law in the United Arab Emirates and the Gulf (Wiley Blackwell 2016).

Klee L, International Construction Contract Law (2nd edn, Wiley-Blackwell 2018).

World Bank, ‘Government Objectives: Benefits and Risks of PPPs’ (The World Bank, 2020).

Footnotes

1. World Bank, ‘Government Objectives: Benefits and Risks of PPPs’ (The World Bank, 2020). Web.
2. Mustafa Alshawi, ‘Concept and Background to Public Private Partnership (PPP)/Private Finance Initiative (PFI UK Experience (2009)’ (Iraq Institute for Economic Reforms, 2009). Web.
3. Lukas Klee, International Construction Contract Law (2nd edn, Wiley-Blackwell 2018) 49.
4. Rifat Akbiyikli, David Eaton and Seyyit Umit Dikmen, ‘Achieving Sustainable Construction within Private Finance Initiative (PFI) Road Projects in the UK’ (2011) 18(2) Technological and Economic Development of Economy 208.
5. Grahamme Allen, ‘The Private Finance Initiative’ (House of Commons Library 2003). Web.
6. World Bank, ‘Government Objectives: Benefits and Risks of PPPs’ (The World Bank, 2020). Web.
7. Grahamme Allen, ‘The Private Finance Initiative’ (House of Commons Library 2003). Web.
8. Government of Dubai, ‘Dubai Department of Finance announces new PPP projects worth AED25 billion’ (Government of Dubai, 2021). Web.
9. World Bank, ‘Government Objectives: Benefits and Risks of PPPs’ (The World Bank, 2020). Web.
10. Rifat Akbiyikli, David Eaton and Seyyit Umit Dikmen, ‘Achieving Sustainable Construction within Private Finance Initiative (PFI) Road Projects in the UK’ (2011) 18(2) Technological and Economic Development of Economy 208.
11. Lukas Klee, International Construction Contract Law (2nd edn, Wiley-Blackwell 2018).
12. Dimitriois Athanasakis, ‘Arbitration for supply chain and money supply cause disputes in PPP projects: distilling comparative economic interests from the Greek legal system’ (2009) 9(1) International Journal of Construction Management 93-95.
13. World Bank, ‘Government Objectives: Benefits and Risks of PPPs’ (The World Bank, 2020). Web.
14. World Bank, ‘Government Objectives: Benefits and Risks of PPPs’ (The World Bank, 2020). Web.
15. Mustafa Alshawi, ‘Concept and Background to Public Private Partnership (PPP)/Private Finance Initiative (PFI UK Experience (2009)’ (Iraq Institute for Economic Reforms, 2009). Web.
16. Mustafa Alshawi, ‘Concept and Background to Public Private Partnership (PPP)/Private Finance Initiative (PFI UK Experience (2009)’ (Iraq Institute for Economic Reforms, 2009). Web.
17. Government of Dubai, ‘Dubai Department of Finance announces new PPP projects worth AED25 billion’ (Government of Dubai, 2021). Web.
18. Ellis Baker and others, FIDIC Contracts: Law and Practice (Routledge 2009).
19. Michael Grose, Construction Law in the United Arab Emirates and the Gulf (Wiley Blackwell 2016).
20. Lukas Klee, International Construction Contract Law (2nd edn, Wiley-Blackwell 2018) 49-50.