Private Finance Initiative and UKs Construction Industry Essay

Private Finance Initiative and UKs Construction Industry - Essay Example Private Finance Initiative (PFI) is a device employed by United Kingdom’s government to arguably to make the construction industry more competitive and more profitable. This does not come as a surprise since the UK construction industry provides a tenth of the UK's gross domestic product, employs 1.4 million people and is worth around  £65 billion per annum. With an output of  £81.9bn in 2006, the UK construction industry is ranked in the global top ten. Thus, it is only then logical to support the industry. PFI is a way of funding major new public building projects such as hospitals, schools, prisons and roads. Private consortiums, usually involving large construction firms, are contracted to both design and build a new project, and also to manage it. The contracts typically last for 30 years. The building is not publicly owned but leased by a public authority, such as a council or health trust, from the private consortium. The private consortium raises the cash to build the project. It is then paid back with interest by the government through regular payments over the period of the contract. PFI projects could be viewed as a means of enabling government services to be "outsourced" to private sector suppliers. PFI is not the same as privatization as the Government retains ultimate responsibility to the public for the service concerned. Outside the UK, PFI is more commonly known as Public Private Partnerships (PPP). The policy has not been without its critics. As with any form of hire purchase, buying something on tick is more expensive than paying for it up front. The Edinburgh Royal Infirmary is often cited as an example of how expensive the PFI can be. It cost  £180m to build and will cost  £900m to pay for. ... Use of PFI in the Construction Industry Since the advent of PFI, the construction industry has found itself on much more stable ground. Between 2001 and 2002, its output is estimated to have increased by 9.7%. According to the Major Contractors Group (MCG), a major construction trade association which represents UK firms such as Carillion (formerly part of Tarmac), Costain and Amec, construction companies engaged in the private finance initiative expect to make between three and ten times as much money as they do on traditional contracts. (Research and Markets Online, 2003) Bill Tallis, the director of MCG, said construction firms traditionally received rates of return of 1.5% to 2% on contracts but were now expecting margins of 7.5% to 15% on PFI building schemes. The high profit available to investors in PFI schemes explains why John Laing PLC has sold off its basic construction company and bought up stakes held in such projects by hard-pressed Amey PLC. (Macalister, 2003) This strategy is reinforced by figures from the European Construction Industry Federation (ECIF), which show that the UK construction sector grew by over 8% last year while its counterpart in Germany and France slumped by 2.5% and 0.7% respectively. (UK DTI Online, 2007) The UK government defends PFI by its use of something called the 'public sector comparator'. This shows whether or not privately financed schemes offer better value for money than conventional funding. The main problem with this is that the government has provided an accounting device called 'risk costing' which has meant that private firms generally emerge as winners. When a consortium of private companies agrees to build something for a public