Incomplete contract in Private Finance Initiative (PFI) : identification of its presence and development of proposed strategies

Abstract

The research concerns identifying the presence of incomplete contract (IC) in Private Finance Initiative (PFI) projects in Malaysia and the development of appropriate strategies. A contract can be incomplete due to its lengthy period, high risk and uncertainty, high transaction cost, and others. Theoretically, complete contract cannot be achieved and many contracts - including PFI contracts - remain inefficiently incomplete. Previous researchers claimed that IC in PFI projects caused problems such as delay, time and cost overruns, and disputes among the contracting parties. Consequently, these problems led to inefficiencies in the project’s implementation and delivery. Malaysia has been using PFI as an alternative procurement route in delivering public infrastructure and services. However, there are criticisms surrounding PFI implementation, such as lopsided and the absence of a robust and clear agreement. Notwithstanding, there is lack of literature evidence on the presence of IC in PFI projects in Malaysia. With the aim to facilitate achieving effectiveness and efficiency in PFI contracts, this research was conducted 1) to establish the concept of IC; 2) to identify the presence of IC in PFI projects; 3) to assess its extent and implications; 4) to develop appropriate strategies to deal with implications caused by IC; and 5) to assess the appropriateness and acceptance by the PFI key players in Malaysia on the strategies proposed. The methodology adopted was extensive literature review, two rounds of modified Delphi questionnaire involving 18 panelists and 13 panelists in Round 1 and Round 2 respectively and interview survey approach involving 30 respondents. The findings from this research confirmed the presence of IC in PFI projects in Malaysia and identified the provisions that contribute to the incompleteness, areas in the contracts that are deemed incomplete, their extent and implications. Subsequently, appropriate strategies have been specifically designed, validated and herein proposed to address the implications arising from IC in PFI projects. In the course of doing this research, a robust methodology has been developed to identify the presence of IC in PFI projects. The methodology may be modified for it to be applicable to identify IC in other contract settings. The significance of the research and its findings may be viewed as follows; 1) key PFI stakeholders, policy makers and contract drafters may use this research and its findings as reference in their future endeavor in developing and managing PFI contracts; 2) the proposed strategies could assist contract drafters especially those who are involved in PFI projects in giving attention to aspects that contribute to contract incompleteness and its implications and consequently improve the provisions when drafting new contracts; and 3) the proposed strategies could provide basis in the preparation of guidelines and solutions in dealing with IC.