PFI arrangements have taken a lot of criticism, perhaps undeservedly so, often from people who don't necessarily understand what they are and how they work. A lot of this stems from the fact that earlier PFI contracts were subject to a number of flaws or have suffered from a breakdown in communication between client and supplier, but it is beyond the scope of this article to debate the reasons for successes and failures of PFI projects in the UK incidentally, in Australia and Canada PFI has been received much more positively.
It presents a model which allows the government to carry out large scale construction and infrastructure projects without having to make massive up-front payments by contracting an organisation to design, build and manage facilities for a long-term, fixed amount of time, spreading the cost over many years usually over decades.
Typical PFI projects include schools, hospitals and prisons but can also be used for other government buildings including office accommodation.
These JVs will usually consist of a construction firm, a facilities management firm and a finance house. The JV will finance the design and build of the facility themselves hence including a finance house meaning the government does not need to make huge up-front payments for new buildings. A PFI contract can last for as long as three to four decades and the service charge will include interest payments, so the value of a PFI to the JV can be many, many millions of pounds.
PFI allows the government to spread the cost of infrastructure investment over a 30 to 40 year period, rather than having to make a large investment up-front. It also gives them the guarantee that there will be a facilities management provider available throughout the course of the contract to manage the buildings and keep things running efficiently, without having to go through time consuming and expensive tender processes. There are drawbacks for both the government and the JV organisation:.
What's on Practical Law? Show less Show more. Ask a question. An initiative introduced by the government in to encourage private sector businesses to tender to local and central government authorities for the provision of public infrastructure and services. Thus, the government does not have to lay out a large sum of money at once to fund a large project. Termination procedures are highly complex, as most projects are not able to secure private financing without assurances that the debt financing of the project will be repaid in the case of termination.
In most termination cases, the public sector is required to repay the debt and take ownership of the project. In practice, termination is considered only a last resort. Many of the projects that are the subject of private finance initiatives are infrastructure projects that benefit the public sector. These include highways and roadways, transport projects such as railroads, airports, bridges, and tunnels.
Private sector firms may also be contracted to construct water and wastewater facilities, prisons, public schools, arenas, and sports facilities. Governments have traditionally had to raise money on their own in order to fund public infrastructure projects. If they aren't able to find the money, governments may also borrow from the bond market, and then hire and pay contractors to complete the job.
This can often be very cumbersome, which is where the PFI comes in. PFIs are intended to improve on-time project completion and also transfer some of the risks associated with constructing and maintaining these projects from the public sector to the private sector. Financial advisers such as investment banks help manage the bidding, negotiating, and financing processes. PFIs also improve the relationship between the public and private sector, while providing both long-term advantages.
Through this relationship, both sectors can share knowledge and resources. A key drawback is that since the repayment terms include payments plus interest , the burden may end up being transferred to future taxpayers. In addition, the arrangements sometimes include not only construction but ongoing maintenance once the projects are complete, which further increases a project's future cost and tax burden. There is also a risk that private sector firms may not comply with relevant safety or quality standards when managing a project.
The length of time a typical PFI project might last, although some are shorter or longer, depending on the need. In the United Kingdom in the s, a scandal surrounding PFIs revealed the government was spending significantly more on these projects than they were worth to the benefit of the private firms running them and to the taxpayers' detriment.
In addition, PFIs have been criticized as an accounting gimmick to reduce the appearance of public-sector borrowing. Investing Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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