Public-private partnerships and PFI procurement in construction projects

Construction Project Management

Project Management for Construction

Project management in the field of construction is a task that encompasses each and every facet of the construction project itself -- all the way from research and development to a project's ultimate review and completion. It includes a seemingly endless cycle of decision making and planning, optimizing performance, fragmenting the project management among different areas and specializations, improving productivity, communicating effectively and ensuring quality of both work and performance (Hendrickson, 1998, p.3). The project management process and the procurement process are two aspects of construction that have long been considered to be in "lock-step" with one another, in that neither can function without the evolution of the other (Hairston, 2005, p.1). The procurement process, generally involves five steps that must be thoroughly examined throughout the project, including: defining requirements, selection of a supplier, production of an agreement, day-to-day administering and performance assessment (Hairston, 2005, p.1). And such procurement can be completed through different methods, and with different implications as seen in the sections to follow.

PFI/PPP Method of Procurement

The private finance initiative (PFI) is a way of creating "public-private partnerships" (PPPs) by funding public infrastructure projects with private capital (Feachem, Ni and Sekhri, 2011, p. 1498). This method of procurement differs from other modes of procurement in that it uses private sector expertise and resources in order to develop and deliver public sector infrastructure and/or services according to a specification defined by the public sector, as a sub-set of a broader procurement approach termed PPP, with the main defining characteristic being the use of project finance (and in particular, private sector debt and equity) in order to deliver the public services (Shah, 2011, p. 81). Additionally, beyond developing the infrastructure and providing finance, private sector companies are able to operate through public facilities, in many cases, using former public sector staff who have had their employment contracts transferred to the private sector (Marshall, 2011, p. 442).

Comparatively, PFI/PPT deals have considerable advantages and disadvantages within the field, first and foremost being found in the area of financing and profits. Refinancing of PFI deals is relatively common in terms of construction. Benefits of PFT include easing the burdens on management through the provision of services by a contractor and the fact that no payments are made by the public sector until the service commences, allowing PFI to remain a top financial choice for the public sector. Financing for projects using PFI/PPT are also common and efficient within the public setting, gaining financial backing from banks and other financial institutions with relative ease. Once construction of a project is complete, the risk profile of that respective project can be lower, so cheaper debt can be obtained (Feachem, Ni and Sekhri, 2011, p. 1450). In the future, such refinancing may be done via bonds -- as the construction stage is financed using bank debt, and then bonds for the much larger period of operation (Feachem, Ni and Sekhri, 2011, p. 1450).

Additionally, benefits of such relationships between the public and private sector in terms of developing and constructing new areas of infrastructure, include increased community use of new facilities, a greater sense of ownership and community pride in newly-constructed environments, as well as more readily available private sector partnerships for new construction projects in the future. Such partnerships yield the benefits of having both areas of society involved in a manner that contractually states that each will maintain its own duty in the partnership in order to reach an ultimate goal, ensuring that each area fosters a relationship with the other without stepping on each other's respective toes.

However, while PFI has been set up by many government associations on an international level to promote joint ventures between the public and private sectors, the utilization of PFI/PPT endeavors is not always a positive one. In most PFI contracts, the benefits of refinancing must be shared with the government. Additionally, a major problem exists and has been noted by several researchers as to the fact that there is no solid definition as to what a PFI deal is. That is, many projects which involve local authorities can be brought within the PFI label although they are not technically PFI, and it is possible to re-model deals to make them into a PFI deal (Tsang, 1997, p.1). Attorney Catherine Hand notes,

"You usually had to go through hoops to ensure that a transaction did not come within the capital finance regulations; now it is advantageous for a deal to come within those regulations, and the problem is how to restructure a deal to fall within the regulations and qualify for the extra revenue support grant" (Tsang, 1997, p.1).

PFI procedural difficulties can emerge in the construction field in the case of long-term infrastructure projects such as a new medical facility or a highway. Local authorities normally work from year to year, so if such a project enters into a long-term contract, any councilors elected after that decision was made can argue that it has removed their freedom of action (Tsang, 1997, p.1).

Conclusion

In understanding the facets of a PFI/PPT construction endeavor, one must first understand the aforementioned facets of the partnership that will come into play from the construction project's inception to its completion. The decision to engage in such an endeavor is clearly one that is subjective, but should be undertaken carefully in gauging the risks involved.