Wednesday, October 31, 2018

PFI RIP!

As PPPs face an existential crisis, Philip Hammond's budget speech in UK had this,
I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector. But there is compelling evidence that the Private Finance Initiative does neither... I have never signed off a PFI contract as Chancellor... and I can confirm today that I never will. I can announce that the Government will abolish the use of PFI and PF2 for future projects.
So the country which pioneered the use of PPPs in health, education, and infrastructure sectors through its Private Finance Initiative (PFI) has come the full circle. I have blogged on numerous occasions outlining the reversing momentum on the use of PPPs in infrastructure sector across Europe and US (See the latest herehere, here, here, here, here, and here). UK had done 716 PFI projects with a capital value of £60 bn and with future charges amounting to £199 bn over the next three decades.

The FT had this to say,
Nearly 30 years after the private finance initiative was born as a means of paying for the construction of hospitals, schools and roads, the chancellor sounded the death knell for the contentious funding mechanism — saying he had never “signed a PFI contract as chancellor” and never would.
One of the major triggers was this report of the National Audit Office (NAO) which demolished the claims of PPP supporters and found that PFI projects had much higher life-cycle costs than their public sector comparators. Schools built with private money was found to be 40% more expensive and hospitals 60% more!

More than even "value for money and risk transfer", the real reason for doing PPPs should be realisation of true efficiency gains. In fact, risk transfer should not be the primary consideration at all since it generally leads to public sector transferring excessive risks to the private sector, which in turn bids aggressively to assume the risks in the full knowledge that having won the bid they can always come back and renegotiate favourable terms. 

And the most appropriate way to do PPPs should be to unbundle construction and operation risks, use public money for arms-length construction contracting, and then concession out operation and maintenance to private providers where efficiency gains are to be had. 

Time for policy makers in countries like India who are steaming ahead with PPPs across sectors to take note!

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