Private Finance Initiative and Public Private Partnership - Essay Example

Project Management Project means a planned activity requiring a set of non-routine tasks for completion in a time limited effort. To complete a project we need to plan, organize, direct and control the resources of the organization for a relatively short term objective which has been established to complete specific goals and objectives (Kerzner, 1995). We require resources to plan and execute a number of tasks during the project life cycle. Supplies or resources are procured using the existing supply network of the company or the project manager or PFI/PPP depending upon the availability, the types of requirements and the strategic importance of the project and procurements. The PFI is termed as a more formal approach for PPP adoption. PFI in simplest form is termed as Design Build Finance and Operate (DBFO) system. Procurements of material can be made using different modes in general, but the Private Finance Initiative (PFI) and Public Private Partnership (PPP) stands distinctly apart in that it allows the contribution of private parties as well in public sector projects. This not only helps in having better options for the project manager, but it also provides momentum to the project towards its completion on time. The PFI generally involves long term contracts ranging from 15-30 years with private sector contractors for providing quality services as per the agreement terms. The PPP forum states that1 such an arrangement ‘typically involves the joint ownership of a special purpose vehicle established under company law’. The suitable conditions for such procurements include; Detailed project planning on the part of the project manager Availability of competent, willing and responsible private companies within easy reach of the project The inclination on the part of the project management team to bring private partners on board for better execution of the project Availability of proper guidelines to carry forward the public-private partnership Transparent bidding process The value of the project is large enough to involve private parties There’s scope for similar requirements in future as well, once the project on hand is completed These are in fact the basic minimum conditions that need to be taken into account. Things like financial background, track record, mutual chemistry of the private partner with the public sector organization are the one’s which need to be taken into while finalizing the partnership program The key benefits of PFI/PPP include; It provides leverage in budgeting for the project The percentage of adherence to the specifications is found more in such procurement as non-adherence implies heavy losses to the private supplier. The private party can never afford to be complacent as it knows that it might result in heavy penalties. Transparent bidding process also helps in doing away with the cartel system in the process of procurements. Levels of corruptions can be minimized using such partnership program. The risk is allocated suitably amongst the private company and the public sector company, instead of being majorly on the public sector It provides a whole range of expertise from all around instead of getting limited to a selected few Provides value for money as it helps in capitalizing on the experience of the private sector Inviting PFI/PPP is not free from potential disadvantages, if there are some problems in the execution process. The contractual obligation in PFI/PPP is meant to safeguard all the parties involved, but at times the cumbersome process and the terms of the contractual agreement works to the disadvantage of potential bidders. In addition the amount of flexibility that is available in purely public sector project is missing in PPP projects. Quite often the pressure of delivering on time takes its toll on the workforce, who finds themselves stretched beyond their limits, but such voices often remain mum because private companies do not encourage the unions within their companies. A prerequisite for such partnerships is to have a agreed method of problem resolution, which quite often happens to be time taking. The main argument in favor of private partnerships is that it brings in more professionalism and discipline in the functioning of the joint venture. The private entrepreneurs are always on the lookout for better ways of bringing about professionalism, better techniques and innovative methods towards completing the projects. Emphasizing the importance of innovation, Eaton (2001) says, ‘without innovation a business does not have a rational source of competitive advantage in construction’. Private sector partners seem to believe more on this statement. But on the other hand the public sector happens to be a laggard as far as updating the knowledge base in concerned. In fact now the situation has improved a bit with emphasis on professional approach in the functioning of public sector units as well, but the promptness with which private companies adopt newer technology and newer methods, public sector has not been able to follow. The PFI is considered to be primarily a UK initiative, as it was started off by the Conservative Chancellor of the Exchequer Mr. Norman Lamont with the long standing ideological stance that private sector would be able to provide better public services than the state owned public sectors (Broadbent and Laughlin, 2003). With PFI/PPP maximum chances are that the project can be completed within the stipulated time frame, as there won’t be any sense of complacency on the part of the project partners, which is actually a hallmark of the working of the public sector units. Private companies will try to complete the project on time because they have to take up other projects as well. If the functioning is found satisfactory, some of the future projects can be accommodated with similar agreements. In any case a database is also kept of private companies having outstanding records, which helps in PFI/PPP agreements in projects with other companies. But the picture of private partnerships may not be that rosy as is often gets projected, because for one the number of private companies with an ability to take up bigger infrastructure projects may not high. The presence of limited number of private companies often leads to cartel like situation. Secondly, not many private companies might be available with the kind of experience that a public sector company has, while there are a number of public sector units with years of experience in the field. Today we are living in an era where technology has brought about radical changes. Internet is one such feature of today’s tech-savvy era, which has also impacted the process of procurement. E-procurement is now assisting in the process of procurement. This has also come in handy as far as PFI/PPP obligations are concerned. E-procurement has brought quite a bit of transparency in the communications, tendering process etc. amongst the collaborating parties. Such factors also impact the decision to go in for PFI/PPP partnerships or other procurement methods. But in general, the decision to choose this method of procurement can be taken in view of the following factors; a. Allocation of risks between different project parties: Everybody wishes to minimize the risk associated with the project in order to gain maximum advantage out of it. Such risk avoidance is taken care of when the terms of the agreement are framed. Therefore, our endeavor would be to minimize the risk for the project, while pressing for its timely completion. As a project management team we will try to look for experience private entrepreneurs having good experience in the field and a track record or timely deliverance. Decisions about projects involve making assumptions about costs, values and the outcome of interactions. When the decisions are made in the beginning, nobody can be sure about the outcome, therefore the outcome is subject to the risk that it might be financially less attractive than expected. Therefore, the important thing is whosoever tries to identify the risk, does it truthfully for equitable sharing amongst the partners. b. Client priorities in terms of time/cost/quality and funding/finance requirements: Projects are supposed to have a life cycle which has different phases depending upon the nature of the project, the costs involved and the resources mobilization. Project life cycle implies a sequence of logical steps which are required to be completed for achieving the stated objectives or project goals. According to Frame (2003), the project life cycle can be broadly broken into broad phases: project conception, planning, implementation or execution, and termination or closure. Figure below provides a graphical representation of the project life cycle. c. d. e. f. g. h. i. j. Once the needs are identified, the project management team starts planning the requirements and steps for completion of the project. During this step, schedules and resource requirements are also taken into consideration by the project management team. The project undergoes a try run for its correctness and adherence to the set of objectives. If everything is found correct, the project is implemented at the site. The decision to go for PFI/PPP procurement makes it imperative that there will be better adherence to time schedules, better quality will be delivered. At the same time, the private party must appear to be on a sound footing as far as funding and finances are concerned. Depending upon the size of the company, the funding decisions are taken, either through equity from public or funding from banks and financial institutions. Client is concerned more about the time schedule and quality of the final product, therefore the project must not be deprived of its momentum on account of finances, at any point of time during its lifetime. Based upon the experience in the PPP, expert suggest that that PFI schemes worked best in areas like hospitals, schools, prisons, court buildings and police stations2. A number of issues and problems which quite often take away the merits of the consortium involving PFI/PPP contracts could be divided into the following three categories; i. Financial Problems: Though it is the first thing that is looked into while doing the groundwork for the consortium, yet sometimes on account of problems from financial institutions, bearish situations in equity markets the private parties are not able to mop up enough funds for the project. This results in delays at a number of stages in the project’s implementation and completion phase. But at such times the consortium too is in a precarious position. On such circumstances, the client and the public sector company find themselves in a situation where work cannot be started, but they cannot take any action against the private company, because they are aware about the situation. A new process cannot be initiated because of the all round gloom in the market. Moreover, the process of finding a suitable partner requires good amount of time and other resources. The net effect of this is delay in project completion and perceptible shortcomings on the part of the project management team as well. ii. Legal Issues: There are circumstances, when some intermittent developments lead to confrontations. For example, if a building contract is being executed by the project team, some accident takes place which results in an injury or death of a construction worker. It gives rise to disputes amongst the parties in the consortium on account of reasons for the accident, compensation amount being paid and safety precautions being taken by the concerned parties. Sometimes, the disputes get settled in short time in the interest of the project as well as the injured persons, but there are times when it gets flared up in a full fledged legal battle. This in turn results in further delay of the project. iii. Insurance problems: The project and the workers are often covered under relevant insurance schemes, but if the project gets wiped out by hurricane Katrina, for example, then it results in huge liabilities. This might result in insurance related problems. In fact insurance requires a certain amount of premium to be paid to the insurance company by the client. Often, the agreement paper makes it prerequisite to have proper insurance from PFI/PPP partner, but there are situation when the private partner find it more convenient to plan out the facilities without actually going in for insurance cover, as this results in savings. David Kincaid (1994) said that combining the specialized skills in facility management offers the opportunity to add value and benefit to the organization. Whenever a company plans to enter into new area, trying to strengthen the loose ends, looking for a new facility for manufacturing, service centre, sales planning etc. it requires evaluating the pros and cons of selecting a number of available alternative locations. Role of Project Manager in overseeing PFI/PPP contracts Birnberg (1998) once said, “A project manager is a businessman, a psychologist, an accountant, a technician, part designer, part nuts-and-bolts: a truly rare combination of skills”. This statement in itself sums up the qualities that a project manager must have in order to get the project completed on time, with value addition for the client and a high quality product. In general, some of the qualities of a project manager can be summed up as; i. The manager must be absolutely clear about the requirements of the client ii. The manager must be able to assess the requirement in the form of finances, human resources, infrastructure beforehand. iii. The manager must be able to interpret the fine prints in the agreement papers amongst the parties concerned in the consortium. iv. The manager must be able to display the leadership qualities as well. Such qualities come in handy on a number of occasions during the project period. v. The project manager must have the qualities of a firelighter who can adhere to commitments to mutually agreed outcomes. vi. The manager encouraging reflection before action and tries to coach others to achieve demanding objectives. To summarize the PFI can be termed as a very helpful initiative to lessen the worries of the client once the agreement papers are sighed. The client doesn’t need to be unduly bothered about cost escalation, time overruns and substandard qualities coming in the way of successful completion of the project. The Private Finance Initiative (PFI) works to the advantage of clients like where it involves important procurement tools for Defense, requiring strong track record delivering the projects on time, to the budget and to the agreed specifications. References: 1. BBC (2001). Mixed picture of PFI for MSPs. Available online at http://news.bbc.co.uk/2/hi/uk_news/scotland/1666859.stm (November 22, 2008) 2. Birnberg, H. (1998), Roles of a Project Manager. Handbook for Association for Project Managers, Association for Project Managers, Brisbane. 3. Broadbent, Jane and Laughlin, Richard (2003). Public Private Partnership: An Introduction. Accounting, Auditing and Accountability Journal. Vol-16, No-3. MCB UP Ltd. 4. Eaton, D. (2005). Quantifying quality – PFI and the delivery of public services. Royal Institution of Chartered Surveyors, London. UK. 5. Frame, J. Davidson (2003). ‘Managing Projects in Organizations: How to Make the Best Use of Time, Techniques, and People.’ Jossey-Bass. San Francisco. 6. Kerzner, H. (1995). Project Management: a Systems Approach to Planning, Scheduling, and Controlling. New York: Van Nostrand Reinhold. 7. PPP Forum (2008). Available online at http://www.pppforum.com/ (November 20, 2008) Read More