The Private Financing of Skye Bridge - Free Essay Example

Sample details Pages: 9 Words: 2558 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? The Private Financing of Skye Bridge Introduction The intention of this report is to respond to issues that have been raised by a public policy research group in respect of financial and policy issues arising from the Skye Bridge PFI[1] project in Scotland. Although originally intended to run for a maximum of 27 years, following significant controversy, the contract was terminated by the Scottish Executive in 2004, at which time a substantial compensation was paid to the private consortium. Within the report, our intention is to study the expectations of the original policy, evaluate the projected and actual costs of the project and provide an assessment of the PFI policy, together with recommendations regarding the approach and operation of future similar contracts. Don’t waste time! Our writers will create an original "The Private Financing of Skye Bridge" essay for you Create order It is our conclusion that, despite the difficulties experience on the project being studied, the improvements already addressed, together with recommendations made, will see benefits accruing from PFI contracts in the future. The Project Construction of the Skye Bridge in Scotland was one of the UKà ¢Ã¢â€š ¬Ã¢â€ž ¢s first PFIà ¢Ã¢â€š ¬Ã¢â€ž ¢s, with contracts being signed between the Scottish Office Development Department and Skye Bridge Limited in December 1991 (Forty Second Report 1998, 1). An integral part of this contract was the charging of tolls. Construction of the bridge was completed and it was opened in 1995 (Auditor General, 2003. p.1). However, following continuous controversy regarding rising toll charges, despite the fact that these were to achieve a saving on the cost of previous ferry crossing charges, together with other cost issues, the bridge was returned to public ownership in October 2004, several years earlier than had been anticipated (David Ross 200 4). At the same time, the tolls were abolished. Expectations The Scottish Office Development Departmentà ¢Ã¢â€š ¬Ã¢â€ž ¢s initial objective with this project was to provide a tolled bridge from the mainland to Skye to alleviate congestion problems associated with the ferry service, within a timeline that a publicly funded scheme could not achieve (Forty Second Report 1998, 1). This objective was clearly achieved. In addition to objectives, PFIà ¢Ã¢â€š ¬Ã¢â€ž ¢s should also be measured against the provision of value for money. In this respect, before being accepted, such contracts should be compared against other options, including public funded projects, in accordance with government guidelines (HM Treasury 2006). This provides a fair degree of choice between various routes (Gwartney, et.al. 2002). Economics: Private and Public Choice. Once the PFI route is determined then, to assess its value for money, all material aspects of the contract should be put out for competiti ve tender, before an operator is chosen. However, as can be seen from David Healdà ¢Ã¢â€š ¬Ã¢â€ž ¢s example in appendix (Figure 1), value for money does not relate solely to the financial issue. It also includes the transfer or risk and the potential saving this attracts. As can be from the example, the percentage of risk attributable to the purchaser, in this case the Scottish Office reduces significantly when this is quantified. The Skye Bridge projectà ¢Ã¢â€š ¬Ã¢â€ž ¢s achievement of value for money was more limited than it might have been. Although it achieved the effect of transferring the risk of construction, in other areas it cannot be determined whether this was the case. Firstly, there was no attempt to produce a comparative public sector option. Secondly, although they indicated that transfer of risk was a key factor in their decision, this had not been quantified (Forty Second Report 1998, secs. 72-81). Lastly, it was deemed that the view taken on the cost to the pu blic was limited, as it did not include financial considerations outside of the contract itself, such as the annual loss of ferry operation revenues. Project Costs Within the confines of the availability of information from which to ensure accuracy of the financial costs of this project, the report has endeavoured to assess the total cost of this project against other forms of funding and the original estimates for the project as prepared in 1991. Projected The initial projected cost for the Skye Bridge project was  £37 million. However, following a revision in 1997, with the public purse subsidising user fees, this increased to  £39 million (see appendices figure 2). Whilst the operator, Skye Bridge Ltd bore the cost of the construction and operating the bridge, this was to be recouped during the life of the contract by and estimated  £24 million from users, with the balance coming out of public funds. However, in addition to this figure, the loss o f  £1 million per annum from the closure of the ferry service added to that cost. However, as can be seen from the following analysis, the budgeted figure was significantly lower than the eventual cost during the life of the contract, which some have placed as high as  £93 million (George Montbiot, 2001). Actual costs In addition to the initial costs as described previously, the cost to the public was increased during the course of the contract because of a number of addition actions and financial issues that the government needed to address. The analysis of the final cost is provided in appendices (see Figure 3). As can be seen from this analysis, the most significant aspect of this increase  £27 million resulted from the cost of compensating the private operator for the termination of the contract. However, there were also extra costs involved in early delays caused by the need for a public enquiry, despite the fact that it could be considered that this should be the operatorà ¢Ã¢â€š ¬Ã¢â€ž ¢s risk (Monbiot 2004). In addition to the toll subsidy already allowed for in the revised projections (see figure 2 and above section on actual cost), by the termination of the contract, this had increased by a further  £5 million. The results show that, in the case of this project, there were some serious errors at all stages. These included the lack of competitive options being studied in the beginning, with no public option to compare with the PFI; insufficient competitor bids being sought or evaluated when the PFI contract was sent out to tender, or indeed when seeking consultants (Forty-second report 1988, 67-68). In addition, in the same report, the Public Accounts Committee determined that the Scottish Office Development Department did not pay enough attention to the way that the toll charges were being managed during the life of the contract. In other words, they did not control this element of the contract delivery suf ficiently. Comparisons In appendices (see figure 4), we have presented a comparison of two other options that could have been taken by the public authority, as well as comparing actual against the original projection. In the latter case, as has already been established, the final figure exceeded projection by  £54 million. Had the project been funded totally by the government, the costs and their make-up would have provided different scenarios again. Had the total cost come from traditional public investment, in other words out of the taxpayerà ¢Ã¢â€š ¬Ã¢â€ž ¢s purse, as with traditional public investment, and the bridge been toll free, then the cost to the government would have been a total of  £64 million. This takes into account the cost of building the bridge at the original  £39 million, although experts estimate it could have been as low as  £15 million, (George Monbiot 2001), plus the  £9 loss of ferry revenue. It also provides for interest on the debt at the rate of 6% per annum over a five-year period. The third option would have been to increase public debt to cover the project. Had this been the case, and the government continued with their original concept of providing a tolled crossing, the cost would have been  £54 million, assuming that the road user would have been the same as it was under the PFI contract. The difficulty facing all public authorities in this situation is that they are required to make decision between what will be politically acceptable and what is economically viable (Broadbent and Laughlin 2002). However, when making such decision it is important that all the factors to achieve value for money are taken into account, which obviously in the case of the Skye Bridge. Had the approach been different it is likely, based on subsequent successes, that the outcome would have been different. Research Limitations In preparing this report, our research has been restricted to that information which is available in the public domain. In terms of information from public sources, we have studied literature that is made public on the websites or through journals and other publications of a number of public bodies. The organisations included the Scottish Executive, whose responsibility is to the public in its role as the devolved government of Scotland (about 2006). Many of the other documents referred to within this report have also come from the National Audit Office. A central part of their role is to audit the accounts of all of the government departments that exist in the UK. Parts of these duties include the evaluating and auditing of PFI projects such as the SKY Bridge. The intention of these audits is to evaluate the performance of the projects and make recommendations that can be incorporated into future directions of corporate governance for future projects of the same nature. However, whilst the Freedom of Information Act (Lord Chancellorà ƒ ¢Ã¢â€š ¬Ã¢â€ž ¢s department 2000), provided for transparency in public accounting, there are exceptions, which do influence the amount of information that the government delivers to the public arena (Tim Gosling 2004). In respect of PFIà ¢Ã¢â€š ¬Ã¢â€ž ¢s one of the exceptions that is most commonly used, is the ability of governments to not disclose information that is considered to be of a à ¢Ã¢â€š ¬Ã…“commercially sensitiveà ¢Ã¢â€š ¬Ã‚  nature. As the who premise of PFIà ¢Ã¢â€š ¬Ã¢â€ž ¢s are based upon a public-private partnership, they often use the fact that a commercial organisation is involved as a way of restricting the information made available to the public. As can be seen from the results of parliamentary questions, this non-disclosure has been the subject has been the subject of much debate (Written Answers 2002). Despite pressure from a number of sources, this position has been steadfastly held over the years. In case where the government has been pressed on the issue of addition information regarding the cost of PFI deals, this has often been flatly refused (Parliamentary Staff 2002). It should be mentioned at this stage that the failure of the Skye Bridge PFI contract is not the only PFI project that has been badly handled. During the time that these initiatives have been operating, there have been several other notable failures, including ones in which the construction firm Jarvis were involved (Feature 2004). Private Finance Initiative Although the result of this report would tend to suggest that proceeding with a project by choosing the Private Finance Initiative might be a dubious, if not incorrect option, there is sufficient information available to prove that, on average, the system has been effective in reducing the overall cost to the public purse and transferring the risks from the public to the private sector. The Auditor General (2001), in their report, that the failure or problems associated with PFI project only occ urs in 24% of cases, with cost overruns being considerably reduced (Article 2003). This compares favourably with the record of Public Sector projects, before the adoption of this policy. Historical data shows that the position in the public sector showed difficulties attaching to 70% of projects. Many of the PFI successes have also been seen in the transport industry, with projects such as the Dartford Toll tunnel being amongst them (Olivier Debande 2002). Conclusion and recommendations From the information that was available in the preparation of this report, it is apparent that errors in terms of the Skye Bridge project. From its inception, the project was dogged with problems (BBC News 2004). Since the date of the Skye Bridge project, there have been several calls for reform (F. Terry 1996). In response to this, the government has authorised several reports on the matter and issued new guidelines as to the operation of a PFI project, such as the latest value for money as sessment Guidance (HM Treasury 2006). It is important that when PFI projects are considered, the first step is to ensure that alternative options are examined for comparison purposes, and that the decision to use PFI is indeed in the public interest. Furthermore, the public departments must ensure that the competitive bidding element is maintained at all stages of the process. This includes consultants, constructors and other private parties that will be involved in the agreement. Finally, it is essential to clearly define the areas of the risks that are being transferred to the private sector. References About (2006). The Scottish Executive is the devolved government for Scotland. Scottish Executive. Retrieved 13th January 2007 Article (2003). PFI projects have cut overruns, says NAO. Public Finance. Retrieved 15 January 2006 from https://www.cipfa.org.uk/publicfinance/news_details.cfm?News_id=15366 Auditor General (2001). Managing the Relationship to secure a succes sful partnership in PFI projects. National Audit Office. London. Auditor General (2003). The Skye Bridge. National Audit Office. London. BBC News (2004). Timeline: Skye Bridge Tolls. BBC News online. Retrieved 15 January 2006 from https://news.bbc.co.uk/1/hi/scotland/4114195.stm. Broadbent, J. and Laughlin, R (2002). Accounting choices: technical and political trade-offs and the UKà ¢Ã¢â€š ¬Ã¢â€ž ¢s Private Finance Initiative. Accounting, Auditing Accountability Journal. Vol. 15, No 5, pp.622-54. Debande, Olivier (2002). Private Financing of Transport Infrastructure. Journal of Transport Economics and Policy, Vol 36, part 3, pp. 355-87. Feature (2004). Jarvis: PFIà ¢Ã¢â€š ¬Ã¢â€ž ¢s triumphs and tragedies. The Economist, 16 December 2004. Forty Second Report (1998). The Skye Bridge. Public Accounts Committee. UK. Retrieved 15 January 2007 from https://www.publications.parliament.uk/pa/cm199798/cmselect/cmpubacc/348/34802.htm Gosling, Tim (2004). Openness Surve y Paper. Institute for Public Policy Research. UK. Gwartney, James D., Sobel Russel, S. and Stroup, Richard L (2002). Economics: Private and Public Choice. South Western College Publishing, USA. 10th ed. Heald D. (2003). Value for money tests and accounting treatment in PFI schemes. Accounting, Auditing Accountability Journal. Vol. 16, No 3, pp.342-71. HM Treasury (2006). Value for Money Assessment Guidance. HM Stationery Office. London. Lord Chancellors Department (2000). Freedom of Information Act (2000) à ¢Ã¢â€š ¬Ã¢â‚¬Å" Part 2. HM Stationery Office. London. Monbiot, George (2001). Captive State: The Corporate Takeover of Britain. Pan Books. UK. Parliamentary Staff (2002). Extra costs of PFI deals will not be revealed. Accountancy Age, 2 December 2002. Ross, David (2004). Tolls end on the bridge over troubled waters. The Herald, Scotland, UK. Terry, F (1996). The Private Financing Initiative à ¢Ã¢â€š ¬Ã¢â‚¬Å" Overdue reform or policy breakthrough. Publi c Money and Management, 9-16. Written Answers (2002). Public-private partnerships and PFI. Commons Hansard, Vol 394, column 277W. Appendices Figure 1Source: David Heald (2003) Table Expenditure on the Skye Bridge project by the Department and users Payments to Skye Bridge Limited  £ millions Note Toll payments by users to be received by Skye Bridge Limited over the lifetime of the concession, together with payments agreed in December 1997 by the Department to subsidise tolls for regular users 24 1 Payments by the Department to or on behalf of Skye Bridge Limited for constructing the approach roads, and compensation for the cost of design changes and delay following a public inquiry 12 1 Other direct project expenditure by the Department Including advisers fees, survey work, land purchase and staff costs 3 1 Total payments by users and the Department 39 1 Indirect public expenditure reflecting loss of ferry revenue by Caledonian MacBrayne  £1 million a year Figure 2 Source Forty-second report 1998 Item Final Cost  £ millions User Costs  £33 Initial costs à ¢Ã¢â€š ¬Ã¢â‚¬Å" Department  £15 Cost of delays due to public enquiry  £4 Loss of Ferry Revenue  £9 Compensation for termination  £27 Subsidy for tolls  £5 Total  £93 Figure 3 Calculation of final cost Traditional Public Investment  £ Millions Public Debt  £ Millions Final cost  £ Millions Budgeted cost  £ Millions Public Purse  £48  £15  £64  £15 Road Users  £33  £33  £24 Capital Providers  £16  £6 Bridge Operator Figure 4 Cost comparisons 1 Footnotes [1] Private Finance Initiative