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Private finance initiative (PFI): a case study of Carillion plc

   

Added on  2021-02-19

8 Pages2694 Words348 Views
Management of Risk andScheduling
Private finance initiative (PFI): a case study of Carillion plc_1
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Private finance initiative (PFI) ....................................................................................................1Principles of risk allocation in relation with the PFI ..................................................................2Rationale for abolishing PFI practices ........................................................................................2Case overview of Carillion plc ...................................................................................................3Impact of PFI abolishment on construction activities..................................................................4CONCLUSION................................................................................................................................5REFERENCES ...............................................................................................................................6
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INTRODUCTIONPrivate finance initiative (PFI) is defined as the financing of public sector projects byprivate sector organisations so that capital related burden on taxpayers and government can bereduced. In PFI projects up front cost of building or the government projects is handled byprivate companies which then lease it to public. In return annual payments are delivered toprivate company and thus this types of contract represents effective examples of public privatepartnerships (Demirag, 2018). However, recently UK chancellor took the decision to abolish thePFI contracts deals in response to risk allocation in such projects. The study will analyse therationale for incorporating such decisions and its impact on risk management objectives. Private finance initiative (PFI) PFI were implemented in 1992 in UK and are used for public works such as hospitals,schools, prison and other public infrastructures. PFI contracts are usually 25-30 years long andfor these projects funds are provided by private firms instead of receiving it from taxpayers.Along with the funds private companies are also given the responsibility to manage and completethe project (Lop, Ismail and Isa, 2018). One of the advantage of using such projects is thatgovernment is not required to pay huge amount of investments at once for funding large publicprojects while the private companies can gain benefits through interest received fromgovernment along with the long term repayments. There are various projects in UK which are subjected to PFI such as main road, NHS,airports and bridges. The key advantage of such popularity of PFI projects in UK is that foraccomplishments of public infrastructure projects government may need huge volume of amountand thus instead of borrowing sum from the bond market private firms are employed for fundingthe project (Freedland, 2018). In addition to this when responsibility is shifted from public sectorto private sector then a sense of responsibility to complete projects on time by minimising theconstruction risk of the buildings is also shared. In long term such types of projects helps to improve the relationship between private andpublic sector by encouraging the resource and knowledge sharing with each other. However,recently the PFI is facing huge criticism in UK. There has been constant debate and evidencesthat repayment terms include heavy interest rates which is ultimately shifted to taxpayers. Inaddition to this ongoing maintenance also enhances tax burden and cost of the project. Thus, for1
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