Managing in International Business Markets
Private Finance Initiative (PFI) was launched with the objective to rapidly develop and augment public facilities in a win-win situation for the government and the private sector and the overall benefits being enjoyed by people in general. Keeping capital payments out of the government’s borrowing requirement, and generating good value for money are the two main reasons for the government to encourage PFI. It is basically transfer of risk from the public to the private sector. PFI is mainly applied by government to projects that are big, complex and require regular maintenance.
To assess and understand the Private Finance Initiative the Treasury defines PFI as follows:
“PFI is the mechanism for the public sector to contract for the purchase of services on a long term basis to take advantage of private sector management skills incentivised by having private finance at risk. This will commonly involve the private sector supplying a new major capital asset, such as a hospital or a school, on a design, build, finance and operate basis”
“A system for providing capital assets for the provision of public services. Typically, the private sector designs, builds and maintains infrastructure and other capital assets and then operates those assets to sell services to the public sector. In most cases, the capital assets are accounted for on the balance sheet of the private sector operator”
www.dasa.mod.uk/natstats/ukds/2004/glossary.html
In my research it was found that although government intention was to provide a clear benefit to the people with better public facilities the actual implementation had some problems. I highlight two cases where things didn’t go quiet as planned.
The first case is “Tower Hamlets”: 27 schools were to be refurbished at a cost of £120m by a company called Tower Hamlets Schools Ltd. The major contractor behind the company was a company called Ballast PLC and the finance backing was by Abbey National Treasury Services (ANTS) – Ballast PLC was a subsidiary of a DUTCH company which closed business and the finance company Abbey National Treasury Services withdrew completely from the PFI finance market.
As a result many schools were left with buildings under construction affecting the teaching standards and in some cases student moral. Further more to continue services the schools paid a higher fee to Tower Hamlets Schools Ltd to keep it in business and ensure completion of the project.
The above case highlights how international businesses can affect the execution of contracts awarded under PFI. We can compare using two models on Internationalization – 1) The old model on internationalization i.e. The Uppsala Model and 2) The new theory which says that new companies are going global right from the start i.e. The New International Venture Theory
As we can see in the above case that since the Dutch parent company had losses and went out of business local schools in UK had to face problems.
A second case is that of the very infamous “Jarvis”, it is the largest contractor in the PFI scheme run by the government. As a large company it has run into problems with many contracts. It currently holds about 10% market share by value of the contracts awarded.
Prominent amongst its failed commitments are the Potters Bar rail accident, Jarvis-built school in Scotland, Jarvis contract to re-roof schools in the Wirral and the Lancaster University delay in providing new halls of residence.
Jarvis and its subsidiaries have now changed names in order to avoid a public backlash against the many poor performances it has had. Jarvis has begun to call the group ‘Engenta’ and also bids for contracts in the name of “Prismo”. The Jarvis Primary Health Company, a joint venture with the Montrose Partnership, changed its name to Patient First Partnerships
Even though the company has issued profit warnings and has paid millions of pounds in compensation, it remains an important player in the PFI business as it is a one-third owner of Tube Lines, which runs several London Underground lines under a large Public Private Partnership contract.
PFI has its own share of success as well, with large scale development over the past decade – record number of new schools and hospitals, highly capital incentive projects for rail and road development which now have staggered payments over 25 years normally and prisons. The Docklands Light Railway Extension of 4.2kms is a successful project linking the South of the river Thames and SE London to Kent.
Public – Private partnership has many best practice cases which highlight the gains - typical government projects run into problems of cost/time overruns, levels of usage, construction delays, integration of technology and automation and effective management of the projects. Key to many projects is the on going service and maintenance provided by the private sector enterprise. A typical PFI consortium involves a construction company, a finance bank and a service provider who would maintain and run the facility.
In theory the key benefits from the PFI scheme are:
- Public services to be provided by private sector:
o Expertise in certain core areas results in better deliverance of the public service which government might not be able to match. Also in smaller countries where governments don’t have the experience of executing large projects successful private companies can do the same effectively.
- Efficient Private management:
o As management is in private hands accountability increases hence greater efficiency results.
- Separation of ownership and services:
o A key argument is that of governments putting tax pounds upfront for expensive public facilities like roads. With PFI the ownership is with the private company and the government pays for the services it receives.
- Competition amongst private bidders:
o Competition results in rival companies providing the best services at the lowest cost.
- Risk management
o Typical government projects over run on schedules and budgets resulting in tax payer money being blocked or delayed in a non performing facility. In the PFI the onus of project completion and deliverance is on the private company hence the government just needs to ensure that the project is completed on time within the set parameters.
But critics point out that the government is committing a lot of money by way of payments spread over 25 years and hence future governments will have fewer funds at their disposal for development. By 1999, future commitments for PFI projects in Britain totaled £83.8 billion (up to 2026).
As the PFI increases, to raise money the government may increase taxes and charge for services it provides and hold back the expenditure. The PFI is estimated to result in 150,000 transfers and 30,000 job losses from 1998 to 2007.
If we follow the cycles provided in the Uppsala model we can see that the PFI is being fine tuned to deliver better services and avoid project delays just as a company expands gradually into foreign markets with growing local knowledge and experience. During research we found that PFI was successful in building roads and prisons but failed when it came to schools hospitals, and IT project. One of the main causes for the failure with PFI is that with technology advancing at a very fast pace it is not feasible for the government to keep updating its IT sector and therefore it was a big failure in the PFI. The government should find out the causes of such failures at hospitals and schools and extend the best practices in the successful completion of road and prison projects.
One of the most common feature of PFI is that the cost keeps increasing and therefore not feasible at times to continue with the project and therefore a big question if efforts and money should be invested in the PFI.
The above case study has been very useful to understand the concept of Private Finance Initiative that has been adopted by the government. There are numerous lessons learnt from the above case as it gave me a brief analysis of how the government operates and finances out its huge projects for better development and maintenance, as if it is done by the public sector than there are many political issues that might effect the development and maintenance of the project and therefore it prefers PFI to doing it by itself as according to the government it is the transfer of risks to the private companies.
The case and further research gave me an idea of the pros and cons of Private Finance Initiative as it may be successful in a few cases but not necessarily in all kinds of projects and therefore the government has to look into detail of which projects to be given to the PFI.
As we said above that from research it can be seen that cost was one of the main concerns in the PFI and therefore the private companies should look into this carefully and try and resolve this to lower cost to get more projects from the government for development and maintenance.
British government has claimed that the private sector “can compensate for the higher cost of borrowing by being more innovative in design, construction, maintenance and operation over the life of a contract by: avoiding “costly over-specification in design”; creating greater efficiencies and synergies between design and operation; investing in the quality of the asset to reduce maintenance costs; and “managing risk better”.
REFERENCES
Ford, D. (ed) (2002) Understanding Business Marketing and Purchasing, Third Edition, Thomas learning
Buckley, P.J. and Ghauri, P.N. (1999) The Internationalization of a Firm, Thomson Business Press
Hill, (ed) (2002) International Business, Competing in the Global Marketplace, McGraw Hill
Daniels and Redebaugh (ed) (2003) International Business for twenty first century, Pearson Education
Lee, kiefer and Steve Carter (2005) Global marketing Management, OUP
• A Government initiative which aims to bring private sector enterprise and discipline into areas traditionally regarded as public
www.niauk.org/article_30.shtml
• A system for providing capital assets for the provision of public services. Typically, the private sector designs, builds and maintains infrastructure and other capital assets and then operates those assets to sell services to the public sector. In most cases, the capital assets are accounted for on the balance sheet of the private sector operator.
www.dasa.mod.uk/natstats/ukds/2004/glossary.html
• Introduced by the Conservative government in 1992 as a way of generating new investment in public services without raising taxes.
news.bbc.co.uk/1/low/in_depth/business/2001/ppp/1483456.stm
• The UK Government’s initiative to encourage the development of private finance in the public sector.
www.stirling.gov.uk/index/services_homepage/learning/ppp/ppp-glossary.htm
• A government or public authority initiative to acquire private financing for public sector infrastructure.
https://www.marketplace.lloydstsb.com/doc/glossary/pfi.html
• A UK government initiative in the 1980’s to introduce the benefits of private sector management and finance into public sector projects, such as road building and the building and running of hospitals. The PFI differs from privatisation in that responsibility for “public service” aspects of the project - eg clinical responsibility in hospitals - remains in the public sector.
www.fanshawelofts.co.uk/glossary.aspx
• The Private Finance Initiative specifies a method by which the United Kingdom government provides financial support for “public private partnerships” known as Public-Private Partnerships (PPPs) between the public and private sectors
