InsiderTAPS (1 October 2006)
Insider TAPS Issue 007 - Private Finance Initiatives (PFI) in Malaysiaa
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The Malaysian Government recently announced its Ninth Malaysia Plan (9MP) and there was a new buzzword in town – Private Finance Initiatives or PFI. Almost half of the 880 projects identified for first roll-out under the 9MP totaling some RM15.0 billion will be via PFI. In fact, it has been announced that the RM2.8 billion 2nd Penang Bridge as well as the RM1.3 billion Johor Bahru monorail projects will be under PFI.
This got the market excited but at the same time slightly perplexed: What exactly is PFI? How is it different from the previous privatization programmes? Are there any guidelines on PFI?
What is PFI?
PFI or sometimes also known as Public Private Partnership (PPP) is a privatization policy that has been very successful in the United Kingdom.
PFI is specifically defined in the 9MP as the transfer of the responsibility of financing and managing capital investment and services of public sector assets to the private sector in return for lease payments that commensurate with the quality of services and an amount sufficient to ensure returns on investments.
What is the Difference?
Seemingly, PFI is not different from the previous privatization models. Both involve the public sector tapping the expertise and efficiency of the private sector.
But under PFI, the private sector’s revenue must commensurate with the quality of services it provides. While this may seem to be a statement of the obvious (or at the very least should have been implicit), it was unfortunately not always the case in past privatization projects. Hence, the clear elucidation of accountability as a key principle in PFI represents a paradigm shift in Malaysia’s privatization landscape.
Key PFI Principles
While there is currently no guidelines/framework for PFI, indications in the 9MP are that many of the ingredients for a successful PFI (based on the UK and Singapore experience) will be contained in the framework, including:
• PFI projects will be via tender
• Tender evaluation will be undertaken by a special PFI unit comprising the Ministry of Finance, the Economic Planning Unit and the National Implementation Directorate (which incidentally is chaired by the Prime Minister himself which underscores the seriousness of the Government’s commitment to PFI)
• Emphasis will be placed on the bidders’ experience
• Key performance indicators (KPIs) will be implemented to measure the quality of service delivery. These KPIs will be implemented pre-construction (as targets/outputs) as well as post-construction (as a reward-penalty system where the private sector’s payment must commensurate with its achievement of the KPIs)
The Way Forward
The PFI concept represents a fundamental shift behind the thinking of Malaysia’s privatization policy. If properly implemented, it will promote transparency and accountability of public sector projects. It will also hopefully avoid the lopsided privatization contracts of the past that have given privatization such a bad reputation.
It is hoped that the Government will not merely pay lip service to PFI; labeling pure privatization contracts as PFI simply won’t do. The statement of intention in the 9MP and indications thus far are promising indeed. However, whether the eventual PFI framework will truly have its desired effects remains to be seen. As the saying goes, “the devil lies in the details”.