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Massive government opportunity opens up for technology firms

By Rob Hosking

Friday 21st July 2000

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NO MORE INCIS: The proposal Paul Swain is looking at strikes at the heart of failed IT projects
Technology firms could jump on the government IT gravy train if a proposal under consideration by Minister of Communications Paul Swain is adopted.

The proposal, based on a model already adopted in the UK, could be a way of funding e-government proposals being developed by the State Services Commission and other agencies, and could open up a vast new area of investment for IT firms.

Under the scheme, dubbed Private Finance Initiative (PFI), investment from private IT firms is used as a major source of funding government services.

A paper prepared by the Information Technology Association (Itanz) says a PFI contract typically stipulates the services the government requires, and the supplier designs, builds, monitors, controls and manages the technology and other infrastructure throughout the life of the contract.

Instead of building a project for a government department, the private firm retains ownership of some or all of the project.

"We're looking at the proposal with interest," Mr Swain said. "It needs further work but it's an interesting idea - its one of a number of options for funding IT projects."

The proposal goes to the heart of several difficult issues the government faces in this area. For example, the spectre of Incis and other failed IT projects hangs over any government spending on IT.

Since that project got into trouble government managers have sought to devise contracts that push as much of the risk of the project on to the supplier. This was one of the points of contention between the government and IBM over Incis and sources within the IT industry and within the government suggest it has been an issue when contracts have been devised since then.

The PFI proposal does have the advantage of shifting some of the risk on to the IT company supplying the service, the Itanz paper says. But it also has the advantage of compensating the supplier for that risk.

"A PFI contract is intended to optimise the allocation of risk between the public and private sectors ... the principle is that the risk should be transferred to the sector best able to manage it."

But that does not mean the transfer of all the risk, the paper says.

"Risks are of many kinds - including political, operational and financial - and not all are appropriate for transfer."

Among those that would be carried by the private firm are delay - the firm would get paid only when the service came on-stream.

Furthermore, the government pays the supplier the same amount for the service regardless of the cost of design and development - this moves those risks on to the private firm and provides an incentive to provide the service cheaply.

In the UK, a typical contract puts the design development and operating risks on to the private firm. One risk retained by the public service is a requirement being wrongly specified by the government agency concerned.

This addresses one of the major gripes IT firms have with government departments - that all too often public sector projects are poorly scoped.

The PFI proposal also deals with the funding problems swirling around the e-government initiative. E-government could ultimately allow access to government services online across the whole range of central and possibly local government services, from home computers and publicly funded kiosks, but this will not be cheap.

Just over $4 million was allocated for e-government in this year's Budget but this is just for preliminary work. Given the fiscal constraints the government will be under over the next two years - Finance Minister Michael Cullen has only about $550 million a year for new spending and the many claims that will be from other ministers - alterative methods for funding e-government will be necessary.

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