PRIVATE FINANCE INITIATIVE (PFI)

Private Finance Initiative (PFI)

Private Finance Initiative (PFI)

Introduction

The Private Finance Initiative (PFI) was announced in the 1992 Autumn Statement with the aim of achieving closer partnerships between the public and private sectors. It was one of a range of policies introduced by the Conservative Government to increase the involvement of the private sector in the provision of public services. Following two reviews of the PFI by Sir Malcolm Bates, the present Government has continued to pursue the delivery of some public services through this means. PFI entails transferring the risks associated with public service projects to the private sector in part or in full. Where a private sector contractor is judged best able to deal with risk, such as construction risk, then these responsibilities should be transferred to the private sector contractor. Where the private sector is deemed less able to manage the project's risks, such as whether demand will be high enough, then at least some of the responsibility must remain within the public sector.

The PFI has meant that more capital projects have been undertaken for a given level of public expenditure and public service capital projects have been brought on stream earlier. As at 1 September 2001 there had been almost 450 PFI deals signed with a total capital value of £20 billion. The increased level of activity must be paid for by higher public expenditure in the future, as the stream of payments to the private sector grows. PFI projects signed to date have committed the Government to a stream of revenue payments to private sector contractors between 2000/01 and 2025/26 of almost £100 billion. This paper also considers whether the PFI offers value for money, using examples of specific PFI projects where possible. However, due to the long length of some PFI contracts it will be a number of years before a complete analysis is possible.

Discussion

The Private Finance Initiative (PFI) was announced by the then Chancellor, Norman Lamont, in the 1992 Autumn Statement with the aim of increasing the involvement of the private sector in the provision of public services. The PFI is a form of public private partnership (PPP) that marries a public procurement programme, where the public sector purchases capital items from the private sector, to an extension of contracting-out, where public services are contracted from the private sector. PFI differs from privatisation in that the public sector retains a substantial role in PFI projects, either as the main purchaser of services or as an essential enabler of the project. It differs from contracting out in that the private sector provides the capital asset as well as the services. The PFI differs from other PPPs in that the private sector contractor also arranges finance for the project.

Under the most common form of PFI, the private sector designs, builds, finances and operates (DBFO) facilities based on 'output' specifications decided by public sector managers and their departments. Such projects need to achieve a genuine transfer of risk to the private sector contractor to secure value ...