4 thoughts on “Let’s have less PFI – by reducing the scope of the state”

  1. Posted 03/02/2018 at 08:43 | Permalink

    As always, a well-argued case made in favour of small Government – this time, on the reasons why use of PFI for the provision of public services has not delivered – as was promised by the governing elite, at the time.

    Actually, the current band of elite politicians are listening to those who are suggesting that Government should get out of the business of providing some public services altogether.

    Take, for example, the task of equipping the Armed Forces with military equipment to defend this country. A job Governments have consistently failed at, for as long as anyone can remember.

    Instead of subsidising the defence industry in perpetuity, this minority Government is now seeking to elicit input of private sector investment capital into defence equipment programmes to replace taxpayer funds, which will serve to take the burden off the public purse.

    In its latest policy statement on defence procurement expressed in the refreshed Defence Industrial Policy document which was published just before Parliament adjourned for the Christmas recess, the Government says:

    “We want to encourage more private venture capital into the defence sector, including from non-traditional defence suppliers. Co-investment (where both industry and Government jointly invest) is commonplace in the civil aerospace and automotive sectors, and we want to see more of this in defence”.

    Government policy documents are, almost always, framed in language which is deliberately ambiguous in meaning (to sow confusion), leaving them open to multiple interpretations – indeed, as many times as there are readers. However, in this case, the message behind the words cannot be clearer.

    After decades of propping up the defence industry with unquestioning support, the Government is realistic in its aims and recognises that the private sector will not willingly put forward or risk its own money. Nevertheless, it has come to the conclusion that industry’s appetite for self-funding will only be boosted when the instrument of competition is applied more rigorously.

    Defence procurement officials are famous for sticking to tried-and-failed practices of the past, which is why the new Secretary of State for Defence has taken to invoking the oft quoted saying “If you always do what you always did, you will always get what you always got” in relation to the behavioural change he is expecting of people directly underneath him at MoD.

    To this end, it would be a mistake for MoD to underestimate the formidable resistance that will be put up by defence contractors, or to resort to the failed approach of gentle persuasion and talking, to try to convince them to stake their own money. Nor will the presently applied ‘sudden death’ competition (which reduces the field of bidders from six to one abruptly, thereby removing the incentive for the single Contractor to perform) cut it anymore.

    Instead, the Government should select the winning Contractor from a choice of industry teams, by running a multiple-phase winner-takes-all competition (see this illustration pic.twitter.com/RUToAZ6thx) on the basis of a level playing field genuinely open to all-comers, including non-domiciled suppliers, with the rules of the contest declared at the outset – and combine it with use of Government’s considerable power of coercion, exercised judiciously.

    Accordingly, each Bidder should be invited to declare that part of the bottom-line Selling Price for the overall programme which is to be paid for, from his own (or third party) funds to advance the developmental status of his starting-point for the Technical Solution – as a separate line item on DEFFORM 47, to enable Abbey Wood Team Leader to make a like-for-like comparison. The more money bidders put in, the less MoD will have to contribute, and the lower the risk that the Team Leader will be censured for exceeding the sanctioned budget. See this illustration pic.twitter.com/UIZFTSayqq on how it works.

    Normal commercial pressures and market forces inherent within the context of a multiple-phase winner-takes-all competition will, in themselves, compel defence contractors to take a business decision to voluntarily make a contribution from their own funds – not, because the Government says so, as some people in the pay of the State with inflated egos seem to think, but because of the omnipresent threat from the Competition! It will not even require expenditure of procurement officials’ time, in trying to persuade bidders to put forward their own money – saving MoD an enormous amount in overhead costs.

    Such a feat has not been achieved on any previous equipment acquisition programme for the UK’s Armed Forces, not least, because no one (including the Secretary of State for Defence) has being able to provide convincing evidence of any private sector capital invested – instead, this issue has been dominated by lies, disinformation and spin.

    In staking their own funds, bidders implicitly acknowledge and accept a proportionate share of programme risks, so relieving the strain on public finances and with it, ensuring that MoD gets more for its money than it would otherwise do. Additionally, the long-standing practice of bidders concealing technical risks from MoD will cease immediately.

    An added benefit to be derived from compelling bidders to borrow funds from third parties such as Finance Houses or private equity partners to pay for the cost of developing their Technical Solutions is that, the monitoring and scrutinising function will be automatically transferred from MoD to the lending institutions, who are likely to be much more rigorous and demanding regarding day-to-day performance than disengaged, here-today-gone-tomorrow procurement officials – yet another good reason why the headcount at MoD’s arms-length defence procurement organisation at Abbey Wood, Bristol should be cut even further!

    It is one thing for elite politicians to make ambitious statements in glossy documents for public consumption, and quite another to get front-line procurement officials to implement this policy so that it delivers the outputs, as promised. The acid test will be the actual figure in pounds sterling quoted by bidders on DEFFORM 47 – any number greater than zero will be clear indication that effective implementation of this policy is under way. To enable Parliament to scrutinise the ongoing effectiveness of this policy, it should insist that the Government makes data on private sector investment capital committed during each phase of equipment procurement programmes available, on a regular basis.

    The ultimate aim is to gradually cut the Government’s contribution of funds down to zero, commensurate with achievement of levels of competitiveness in the Defence Industry comparable with that exhibited by world-beating, export-orientated, advanced technology non-defence companies in the UK – which happen to pose a nil cost burden upon the taxpayer. Indeed, they are net contributors to the Exchequer, because they pay their full share of corporation tax dues!

  2. Posted 07/02/2018 at 23:01 | Permalink

    There is a lot of press about Carillion and its debt burden etc, valuations of intangibles, but the questions no one seems to have asked is who were the clients that wouldn’t pay, what were the debtor days and what really caused a cashflow crisis? Are UK public bodies partly to blame or is it all the fault of the directors?

  3. Posted 09/02/2018 at 16:17 | Permalink

    There are several disadvantages in the PFI system. And here are a couple of them:
    1. Inflexibility and poor value for money: Long service contracts may be difficult / costly to change – especially when the management of a project seems to have gone wrong. There have been many stories of flawed projects for example private firms contracted out to provide car parking, cleaning and other services in hospitals built and run as part of a PFI. Infrastructure may not designed to last more than the length of the contract and will need replacing or maintenance costs will be high.
    2. Risk: The ultimate risk with a project lies with the public sector (government). Private finance agreements are complicated to organise and there is no guarantee that the private sector will make a better cost benefit analysis of a project than the public sector.

    But according to my research, which I did with the help of the site assignment.essayshark.com/finance-help, I can highlight some advantages of this program:
    1. Delivery: The private sector is not paid until the asset has been delivered. New PFI projects are nearly all fixed price contracts with financial consequences for contractors if delivered late. PFI firms pay tax which in theory could make the projects cheaper overall for the government.
    2. Dynamic efficiency: Private sector better placed to bring innovation and good design to projects, higher quality of delivery, lowering maintenance costs. The bidding process for PFI projects creates competition at point of tendering.

    Therefore, the failure of one company is not a reason to completely distrust this system; it’s only an occasion to look at the shortcomings and try to eliminate them.

  4. Posted 23/08/2018 at 15:34 | Permalink

    Interesting article!

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