Private Finance Initiative Schemes Research Articles

Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR

The internal rate of return (IRR) is widely used in Private Finance Initiative (PFI) schemes in the UK for measuring performance. However, it is well-known that the IRR may be a misleading indicator of economic profitability. Treasury Guidance (2004) recognises that the IRR should not be used and net present value (NPV) should be calculated instead, unless the cash flow pattern is even. The distortion generated by the IRR can be quantified by the notion of scheduling effect, introduced in Cuthbert and Cuthbert (2012). We combine this notion with the notion of average IRR (AIRR), introduced in Magni (2010, 2013) and show that a positive scheduling effect arises if the AIRR, relative to a flat payment stream, exceeds the project's IRR. The scheduling component can be measured in two separate ways, in terms of specific AIRRs, one of which enables the scheduling component to be decomposed into relative capital and relative rate components. We also highlight the role of average capital, whose quotation in the market, in association with IRRs or AIRRs, would deepen the economic analysis of the project.

The U.K. private finance initiative: An accounting retrospective

The Private Finance Initiative (PFI) in the U.K. has been the subject of considerable interest in government, professional and academic literature. This reflects its importance as one of the classic forms of Public Private Partnership, its adoption in other jurisdictions, the scale of infrastructure investment under PFI legislation and the extent of controversy that has accompanied its development and application. The financial reporting of PFI schemes has been one element of this controversy in view of its potential to limit public sector financial accountability by off-balance sheet financing and the potential for alternative interpretations of its accounting treatment. It is now an appropriate time to review the turbulent history of accounting for the PFI as U.K. public sector accounting is now based upon International Financial Reporting Standards. This has resulted in the redundancy of previous accounting guidance issued by the UK ASB and the Treasury which, at the time of being abandoned, contained unresolved inconsistencies.This paper uses a triangulation method of investigation linking the input to, and output from, the regulatory process to an analysis of public domain evidence of press coverage and letters submitted to the standard setter and interviews with key participants to the standard-setting process. This approach shows that hidden pressures were influential in the process of developing PFI accounting regulation. Different interpretations of the ASB's principles-based Application Note and the Treasury's more rules-based Technical Note created de-facto alternative accounting treatments. The pressure, from organisations such as the Financial Reporting Advisory Board, for reform of PFI accounting was only released by the government's decision to switch the U.K. public sector to IFRS-based accounting.

Why IRR is an inadequate indicator of costs and returns in relation to PFI schemes

Abstract The Internal Rate of Return (IRR) is a commonly used indicator of the performance of Private Finance Initiative (PFI), schemes in the UK. Treasury guidance recognises, however, that IRR is potentially misleading, unless the relevant payment streams are of a flat, annuity, type. This paper uses data on a number of actual PFI schemes to examine whether the payment streams involved are sufficiently flat for IRR to be a reliable indicator. There is clear evidence that the assumption of flat payment profiles in PFI schemes is violated. As a result, quoting IRR alone in the PFI context is liable to understate both the true opportunity cost of PFI finance to the public sector, and the potential scale of private sector profit. Our analysis also indicates that a statistic based on average outstanding debt is a reliable indicator of the extent of departures of the relevant payment profiles from annuity type.

NHS trusts advised to renegotiate 'wasteful' building repayments.

The RCN has urged the government to renegotiate private finance initiative schemes used to build hospitals, as NHS trusts warned that the burden of debt is bringing them to the brink of collapse.

Profitability of Major Private Sector Companies Involved in The Private Finance Initiative Scheme

Private Finance Initiative (PFI) has become a widely used mechanism for delivering public services in the United Kingdom. Despite the extensive use of the PFI scheme and strong support from the private sector companies, it has often been controversial. One of the controversies is based on the claim that the private sector companies are making excessive profits from PFI projects. Hence, this paper aims at evaluating the profitability of several private sector companies which are heavily involved in the PFI projects. The analysis of the performance of private sector companies suggested that no clear evidence of excessive profits were made by the companies from their PFI involvement.

Impact of governance on project delivery of complex NHS PFI/PPP schemes

PurposeThis study aims to examine the impact of governance on project delivery in complex private finance initiative (PFI) projects. Governance is crucial in delivering successful projects within budget, time and in accordance with other project objectives.Design/methodology/approachA two‐stage approach was used to address the research questions. First, a literature review was carried out and second, a multiple case study approach based on detailed semi‐structured interviews with project directors and senior managers was conducted to provide an in‐depth insight on how two major PFI projects were planned, managed and delivered in the National Health Service (NHS, UK).FindingsProject governance influences project delivery in terms of cost, speed of completion, quality and its financial viability as it is critical in providing clear organisational structure, effective decision‐making structures and control processes. The success of one scheme was attributed to an appropriate governance structure enabling necessary reviews and adjustments to be made to render the scheme financially viable and affordable. The failed scheme, subsequently abandoned at a cost of over £15 million to tax payers, was due to an inadequate governance structure creating conflicting priorities of stakeholders, complex decision making with negative impact on project deliverables such as cost and time.Originality/valuePrevious research has not addressed the management aspect of governance which has a significant influence on financial outcomes of NHS PFI schemes. This will enable NHS and other public client organisations to understand the need for adequate governance structure in reducing the risks of projects running over time and incurring increase costs to ensure financial viability and affordability, particularly in large complex schemes.

Regulating employment conditions in a hospital network: the case of the Private Finance Initiative

A key component of the UK government's modernisation agenda has been encouragement of public–private partnerships to enhance public service delivery. In contrast to adversarial forms of contracting out associated with the degradation of employment conditions, public–private partnerships are intended to deliver mutual gains and empower the workforce. These degradation and empowerment interpretations concentrate on developments at the workplace. In this article, we develop a third interpretation of the consequences of the Private Finance Initiative (PFI), which links workplace practice to state regulation, highlighting the growing importance of state re-regulation and the contradictory effects on the workforce. Drawing on a case study of a large acute hospital PFI scheme, we highlight the degree of re-regulation of employment conditions that has been necessary to make PFI more palatable to the workforce and trade unions. These measures have fostered blended outcomes for the workforce.

The Acceptability of Private Finance Initiative (PFI) Scheme in Malaysia

Today’s competitive global environment has led governments around the world to seek new ways to finance projects, build infrastructure and deliver services. Private Finance Initiative (PFI) is increasingly being used as a tool to bring together the strengths of both sectors, public and private to facilitate the delivery of projects and services. However, the new PFI Scheme introduced by the Government of Malaysia through the Ninth Malaysia-Plan in the delivery of public infrastructure is subject to criticisms, in particular when the Employees Provident Fund (EPF) was used as a main source of project financing. The study presented in this paper investigates the acceptability of PFI in Malaysia, taking into consideration factors contributing to success, negative factors, and key differences between PFI and the traditional forms of procurement. Empirical research was undertaken based on a questionnaire survey to public and private sectors in Malaysia. In total 60, valid responses were received, constituting a response rate of 45 per cent. The results were analysed by means of various statistical methods. The study disclosed that 97 percent (public) strongly disagree that EPF was the main source of project financing in implementing PFI projects in Malaysia.

Has the NAO Audited Risk Transfer in Operational Private Finance Initiative Schemes?

The government's main justification for using private finance is that it provides value for money by transferring project risks to the private sector. However, of the 622 PFI deals signed by October 2007, the National Audit Office (NAO) has examined the relationship between risk transfer and risk premiums in only three. The government's justification for the policy is largely unevaluated and unscrutinized by Parliament, raising wider issues of public accountability for public expenditure.

Therapeutic Landscapes in Hospital Design: A Qualitative Assessment by Staff and Service Users of the Design of a New Mental Health Inpatient Unit

This pilot research project sought to provide a postoccupation assessment of a new mental health inpatient unit in East London, built under the Private Finance Initiative scheme. Qualitative discussion groups or unstructured interviews were used to explore the views of people who had been service users (but were currently well) and of nursing staff and consultants working in the new hospital. The participants gave their views on the aspects of the hospital which were beneficial or detrimental to well-being and the reasons for their views. Informants discussed hospital design in terms of: (1) respect and empowerment for people with mental illness; (2) security and surveillance versus freedom and openness; (3) territoriality, privacy, refuge, and social interactions; (4) homeliness and contact with nature; (5) places for expression and reaffirmation of identity, autonomy, and consumer choice; and (6) integration into sustainable communities. Themes emerging from this research were interpreted in light of ideas from geographical research on therapeutic landscapes constituted as physical, social, and symbolic spaces, as well as research from environmental psychology. The findings have practical implications for hospital design and underline the need to consider empowerment of patients in decisions over hospital design. We note the challenges involved in determining therapeutic hospital design given changing models of care in psychiatry, lack of consensus over models of care, and the varying and somewhat conflicting requirements these imply for the physical, social, and symbolic attributes of design of hospital spaces. We also note the implications of our findings for an interpretation of therapeutic landscapes as contested spaces.

PRIVATE FINANCE INITIATIVE (PFI) IN MALAYSIA: THE NEED FOR AND ISSUES RELATED TO THE PUBLIC SECTOR COMPARATOR (PSC)

The Concept of Private Finance Initiative (PFI) or Public Private Partnership (PPP) has been internationally implemented over the last two decades. In Malaysia, even though the involvement of the private sector in assisting with the provision of public services and facilities is not new, only recently under the Ninth Malaysia Plan the government officially announced the implementation of projects using PFI scheme in order to promote greater involvement of the private sector in delivering public services (Ninth Malaysia Plan, 2006). Consequently, a series of PFI projects is now being implemented including some already under construction. However, little is known on the real nature of the Malaysian PFI. One of the aspects considered critical in the implementation of a PFI project is the need for a public sector comparator (PSC) to demonstrate that the project can achieve value for money through comparing the public sector comparator (PSC) with the bid or bids submitted by the private sector. The study being reported herein focuses on the concept of PFI as practiced in Malaysia and the construction of a PSC. Given that under the Malaysian PFI, the PSC is yet to be established there is an urgent need for one to be constructed. In addition, critical issues concerning the transfer of risks and the determination of discount rate are also discussed. The study combines literature review on PFI and interviews with civil servants involved in the implementation of PFI in Malaysia. Keywords: Private Finance Initiative (PFI), value for money (VFM), Public sector comparator (PSC), risk transfer, discount rate.

The social construction of financial statement elements under Private Finance Initiative schemes

An episode in the development of accounting for Private Finance Initiative (PFI) scheme transactions is explored from a social constructionist perspective. The “carrying” of meanings between sub‐worlds of the financial accounting world through social processes, principally by means of the standard‐setting body’s conceptual framework, is shown to be implicated in the social construction, maintenance and modification of accounting meanings. The social constructionist model is developed in several ways, some of which respond to particular characteristics of the financial accounting world.

Value for money tests and accounting treatment in PFI schemes

In Private Finance Initiative (PFI) projects, value for money (VFM) tests and accounting treatment are distinct but related issues. VFM analysis should be concerned with total risk, not just with the sharing of risk, which dominates the accounting treatment decision. A framework is developed for logical thinking about what is meant by “best VFM” in the context of PFI projects. This involves consideration of the full set of alternatives, not an artificially diminished subset. The credibility of analytical techniques can be tarnished if they are misused to legitimate a predetermined decision. A reduction in construction risk may be a powerful source of VFM gains under PFI, but, under UK accounting regulation, this should not influence the accounting treatment decision. New complications about how VFM should be interpreted arise directly from the process of public sector fragmentation: affordability to the client is not necessarily the same as VFM for the public sector as a whole. Only public auditors, such as the National Audit Office, can gain access to PFI documentation on the conditions necessary for a comprehensive assessment of both accounting treatment and VFM. However, such studies require the kind of theoretical underpinning provided in this article, as otherwise the findings are likely to be ambiguous and hence vulnerable to rebuttal. In particular, VFM judgements must make explicit the basis of comparison on which they rest.

Evaluating the Private Finance Initiative in the National Health Service in the UK

This paper seeks to develop a system of how to judge the merit and worth of Private Finance Initiative (PFI) projects in the UK National Health Service (NHS) once they are operational. This concern is couched in relation to whether PFI can be seen to provide long‐term “value for money” (VFM) using a broad definition of this term. This paper does not attempt to further the debate that has focussed on the broader macro economic VFM arguments; rather, the focus is upon developing a model for evaluation at the organisational level where there is a paucity of direction and clarity. Whilst there are many VFM criteria available to guide whether PFI in the NHS should be pursued at the pre‐decision stage, there is little in the way of post‐project evaluation systems to judge VFM once decisions have been taken. Little thought has been given to the design of these post‐project evaluation systems let alone the experiences of how such systems may operate. This paper is addressing these lacunae but only in the sense of suggesting a design for a system for post‐project evaluation. This is drawn from PFI pre‐decision processes, post‐project intentions of some PFI schemes and evaluation theory. It is not about the judgements that come from the use of such a framework which the paper conclude will take some time to be forthcoming.

Achieving best value in private finance initiative project procurement

The wherewithal of achieving best value in private finance initiative (PFI) projects and the associated problems therein are documented. In the UK, PFI has offered a solution to the problem of securing necessary investment at a time of severe public expenditure restraint. In PFI schemes, the public sector clients must secure value for money, while the private sector service providers must genuinely assume responsibility for project risks. A broad‐based investigation into PFI risk management informs the discussion in this paper. It is based on 68 interviews with PFI participants and a case study of eight PFI projects. The research participants comprised of contractors, financial institutions, public sector clients, consultants and facilities management organizations. The qualitative software Atlas.ti was used to analyse the textual data generated. The analysis showed that the achievement of best value requirements through PFI should hinge on: detailed risk analysis and appropriate risk allocation, drive for faster project completion, curtailment in project cost escalation, encouragement of innovation in project development, and maintenance cost being adequately accounted for. Factors that continue to challenge the achievement of best value are: high cost of the PFI procurement process, lengthy and complex negotiations, difficulty in specifying the quality of service, pricing of facility management services, potential conflicts of interests among those involved in the procurement, and the public sector clients' inability to manage consultants.

The Private Finance Initiative ‐ What opportunities for facilities management?

Within the UK the Private Finance Initiative (PFI) has developed into a mature process for the procurement of improved infrastructure and associated facilities management (FM) service delivery. The role of FM within this process provides enormous opportunity to ensure maximum value is provided in terms of both value and performance of the final design and delivery of support services. As the first wave of PFI schemes are now becoming operational, this paper aims to explore these opportunities and identify what, if any, lessons have been learnt for the future development and success of the PFI and the value it can provide to both the taxpayer and private investor.

Accounting for the Private Finance Initiative in the United Kingdom National Health Service

This paper examines the operation of the UK government's Private Finance Initiative (PFI) from the viewpoint of accounting in the National Health Service. It explores how the entity concept may be used to remove representation of the economic consequences of such schemes from public accounting reports. Illustrations are provided from the accounts of hospital NHS Trusts, with their high‐value and politically sensitive capital projects. The paper provides contemporary evidence of the financial reporting of PFI schemes and the contradictions between the form and substance of these transactions.

PFI- THE LAST CHANCE SALOON?

Keywords HEPHERD WINSTANLEY & PUGH, NORTON ROSE PFI, FINANCE, PRIVATE, INITIATIVES, CONTRACTS, DBFO, DESIGN, BUILD, OPERATE, PROJECTS, PROCUREMENT, PUBLIC SECTOR, PRIVATE SECTOR, BIDDING, METHODS, HOSPITALS, PRISONS, ROADS, RAILWAYS, RISKS, TRANSFER, CONTRACTORS... Show All

Risk analysis and management of Private Finance Initiative projects

The Private Finance Initiative (PFI) is a recent development in the UK in which private sector organisations, design, build, finance and operate assets to deliver a service to public sector clients. The initiative is expected to bring the private sector's finance, management skills and expertise into projects which would normally be undertaken by the public sector. Equivalents of this initiative, also found outside the UK, include DBFO (Design Build Finance Operate), BOO (Build Own Operate) and turnkey projects. Two important considerations for a project to receive an approval for the initiative are that it must represent value for money and there must be sufficient transfer of risk to the private sector. This paper, based on a questionnaire survey, provided the perceptions of clients, contractors and financial institutions on risk associated with PFI and how these determine their approach to PFI schemes. The analysis shows that design changes and the level of information on functional, performance and output requirements for PFI schemes are of major concern to the parties involved in this procurement route.

PFI in the NHS

The National Health Service (NHS) hospitals in Britain are currently in a state of decay following many years of underinvestment in the estate. The NHS urgently requires billions of pounds of investment ranging from total hospital new builds to small refurbishment of existing facilities. The previous Conservative government put forward the Private Finance Initiative (PFI) as the procurement mechanism to address this problem. The new Labour government currently appear to be committing themselves to the same approach. PFI project sponsors have spent upwards of £30m bidding for around 30 major PFI schemes. Despite this, by the time of the UK election in May 1997 not one scheme had reached financial close and many sponsors were expressing their disillusionment with the process. Unlike PFI on other Government infrastructure and service schemes, each PFI hospital is tendered by a separate Trust with their own limited budgets. Many Trusts have demanded schemes without realising that they cannot afford them and whilst these schemes may work out cheaper than publicly financed hospitals over 30 years or more, charges are higher in the early years. This is primarily due to the market for loans, the conditions attached to these loans in terms of repayment periods and cover ratios, and the requirement of the sponsors to generate a reasonable return on their investment. This paper discusses the major issues and analyses some of the technical financial problems surrounding the PFI in the NHS. The authors draw on practical experience of financial structuring and modelling hospital projects to build a generic model to analyse NHS PFI economics.