Constructing a Viable Private Finance Initiative（PFI）Mechanism : A Case Study of Social Housing

Constructing a Viable Private Finance Initiative（PFI）Mechanism : A Case Study of Social Housing
Abstract
Under the trend of Reinventing Government and Public Private Partnership, in the last two decades, every country has thus experienced substantial revolution concerning the provisions of public infrastructure and the government’s role has evolved from the direct supplier of the civil services into the regulator or even the purchaser of such services. As well as, the relationship between the government and the private sector has shifted from the directorship and suppression concerning the public infrastructure into the cooperation and partnership of such the public infrastructure. The private sector’s involvement level concerning the public infrastructure and role that the private sector plays have thus developed to be increasingly critical and important.
In our country, private sector participation in public construction and public infrastructure operations follow the “Act for Promotion of Private Participation in Infrastructure Projects” and “Government Procurement Law”. However the preferential policy in “Government Procurement Law” for private participation is insufficient. Authority regulates that “Act for Promotion of Private Participation in Infrastructure Projects” should prevail at the moment of application. Despites the incentive to promote private participation does exist; the Act requires at least 50% of self-liquidating rate in the construction-operational plan as threshold level. Therefore, for the sake of the project to achieve requested self-liquidating target, the operational organ often tries to expand the proportion of ancillary business, which has been questioned by the public on the legitimacy promoting private participation in government infrastructure project. Furthermore, low self-liquidating public projects are being completely operated now, by the government oneself. That not only limits opportunities for private participation, but also piles up heavy financial burden for government treasury. These obstacles delay the completion time for public provision planning, and of course, affecting to the timeline of country''s overall economic realization.
All these force to come in reflection, though government needs actively promote "low self-liquidating, high public interest" projects, such obstinacy law situation sets private sector outdoor from participating public projects. In order to break the existing restrictions for private sector participation in public construction, Government should step outside the box and invert the past thinking of pursuing “high self-liquidating or government zero contribution”.
There is a proverb that “An ass from Germany is a professor in Rome”. This paper studies relevant literatures concerning the differences between British and Japanese PFI mechanism and our national current regulations for the private sector’s participation and analyzed the evaluation mechanism for appraising that the PFI emphasizes “Value for Money, VfM” and taken an empirical study on the government’s initiating the public housing for devising how the VfM model could be applied in evaluation and the procurement procedures and then integrated our national auditing mechanism concerning the private sector’s participation and for establishing a PFI evaluation mechanism, expected to be referred by the government for promoting the private sector’s participation in the public infrastructure of high public interest and low-financing ratio and exploration of the feasibility of our national implementing PFI mechanism that can establish an innovative exemplar. This paper study concludes, as follow:
I. Constructing the public social housing by means of the PFI model shall be defined as that the government signs a long-term agreement with the private sectors that offer the equity investment for constructing the public social housing and the government, following the construction completion and starting the service provisions as contracted, shall disburse the payment calculated according to the full Life Cycle Cost and then the government shall charge the rental from the lessee at discounted rates. Therefore, initiating the public social housing by means of the PFI can be expected to benefit the government, private enterprises and the people (the lessees). The government can defer the financing payment and relieve the financial burden due to the equity investment from the private sector and achieve the operation efficiency that can only be done by the private sector and early fulfillment of the public social housing policy. The private sector, if meeting the performance required as contracted, shall be rewarded with stable rental revenue, relieving the operation risk and promote the willingness for the private sector’s participation. The people, namely the lessees, can enjoy the high-quality public social housing at discounted rates earlier.
II. Prior to finalizing the implementation f initiating the public social housing by means of the PFI mechanism, there shall evaluate the self-financing ability for the public projects as planned. If there proves to be able to achieve the self-financing, the current “Act for Promotion for Participation” shall apply. If there evaluates the “Act for Promotion for Participation” may not apply due to insufficient self-financing ability, further evaluation concerning shall be conducted for evaluating such the project can meet the applicable requirements as promulgated in the PFI. After the project as planned is proven to meet the applicable requirements of the PFI, the VfM qualitative and quantitative evaluation shall be conducted. Not until a project as planned to be initiated is proven to fare VfM can the PFI mechanism be applied in initiating the public social housing. However, if the PFI is evaluated to lack VfM, the government shall take the helm in initiating the public social housing instead.
III. The PFI, being validated to be feasible for initiating the public social housing, shall require mainly such justifications as: (1) Insufficient self-financing (2) Meeting such 6 applicable requirements as “Such the Project Involving Significant Equity Investment”, “Service Provisions Being Able to be Implemented by Public Bidding due to being able to be evaluated its performance as promulgated”, “Applicable to the Life Cycle Planning”, “Such A Project being Significant Sufficiently”. “Stable Technology as Required by Such the Project as Planned” and “Such a Project’s Service Provision Being Validated to be Required for Long Term”. (3) Meeting the evaluation requirements of VfM Qualitative, including “Suitable For Long Term Contracting” (Faring Feasibility”, “Expected PFI benefits and returns Exceeding the Costs as Planned” (Faring Advantage) and “PFI being executable” (Faring Feasibility).
IV. Where there have not yet established the complete basic data for each industry’s Public Sector Comparator currently, it shall be difficult for directly applying the British VfM Qualitative Evaluation. Moreover, both the PFI mechanism and the compensable BTO fare the dual characters of private sector participation and government procurement which are more similar, it is thus advised that the government, prior to constructing a complete basic database for the comparison benchmark, shall apply the current promotion mechanism auditing for appraising the relevant economic benefits of the BTO model or the quantitative evaluation mechanism of financing and integrate how the Japan has established the risk transfer evaluation factors as refereed for our national VfM quantitative evaluation mechanism concerning the PFI
V. Where the PFI features that the government defers the payment as due by means of the long-term contracting, there does justification for promulgating the acts regulating the PFI liquidation mechanism for insuring the long-term stable repayment. It is thus advised that the government shall enact the PFI enforcement guidelines for solving how the government appropriate the long-term liquidation budget during the operation duration and the obstacles impeding the construction projects in case of insufficient self-financing ability
VI. Due to PFI model combines advantage characteristics of "Life Cycle perspective design project" and "output specification and performance based reward mechanism". In addition to manage quality and efficient operation for social housing, it can also expect other favorable result, such as: with more favorable construction basis and maintenance quality, the public social housing can achieve more life span than the contracted as signed by the PFI. In consequence, if the social housing (the existing object) still remain value in use by the time the contract ends, it is advised to transfer the social housing (the existing object) to the government in return for remain value of the object; and to continue the provision of social housing and effective use of existing buildings (resources), that makes triple win synergy between the government, the private sector and the people.