Tang, L; (2007) Examine the incentive mechanism in the operational phase of school PFI projects. Doctoral thesis , UCL (University College London).

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Abstract

PFI was initiated in 1992 as a new procurement method to deliver public services by the private sector. In a standard PFI project the private sector designs, builds, finances and operates an asset and associated services for the public sector in return for an annual payment linked to its performance in delivering the service. The incentive for performance given by the PFI contract is that if the PFI Company cannot provide the services as specified in the output specification, payment deduction will result. However, in practice, some empirical problems have occurred in terms of this incentive mechanism in operational phase of projects. The objective of this paper is to examine the incentive mechanism in the operational phase, in the context of school PFI projects, so as to provide an indication of the key areas to be considered when developing PFI schools, and suggest possible improvement in the incentive structure in operational phase. This research consists of literature review on the PFI incentive structure and on operational school PFI projects and interviews over four individual local authorities in London area. It applies Transaction Cost Economics and Principal-agent Theory to the analysis. The data obtained is self-report interviews within London area and public sector issued reports. The application of economic theories in analyzing the practical problems provides a different way of thinking over the issue. The research identified a number of key areas in the incentive mechanism within the operational school PFI projects in London area. The soft FM services are difficult to measure in a continuously sliding scale, while the hard FM services are easier. The payment deduction occurs mainly on performance but not availability. The research shows that payment deduction is not working as well as expected and provides a weak incentive to PFI Company in rectifying the problems in services. Aspects related to monitoring have been identified as a problem to the effectiveness of incentives. While partnering, which is based on relationship management, provides another effective way over contract management in managing PFI projects. The research develops possible methods to deal with the problems identified in the analysis. Adoptions of these recommendations should help to better manage the school PFI projects, but acknowledging the limitation based on the scale of the research.

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