Private finance initiative

The private finance initiative (PFI) is a way of creating "public–private partnerships" (PPPs) by funding public infrastructure projects with private capital. Developed initially by the governments of Australia and the United Kingdom, and used extensively there and in Spain, PFI and its variants have now been adopted in many countries as part of the wider programme of privatisation and financialisation, and presented as a means for increasing accountability and efficiency for public spending. PFI has also been used simply to place a great amount of debt "off-balance-sheet".

PFI has been controversial in the UK; the National Audit Office felt in 2003 that it provided good value for money overall. However, more recently the Parliamentary Treasury Select Committee found that "PFI should be brought on balance sheet. The Treasury should remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits. It should also ask the OBR to include PFI liabilities in future assessments of the fiscal rules".

The private finance initiative (PFI) is a procurement method which uses private sector capacity and public resources in order to deliver public sector infrastructure and/or services according to a specification defined by the public sector. It is a sub-set of a broader procurement approach termed Public Private Partnership (PPP), with the main defining characteristic being the use of project finance (using private sector debt and equity, underwritten by the public) in order to deliver the public services. Beyond developing the infrastructure and providing finance, private sector companies operate the public facilities, sometimes using former public sector staff who have had their employment contracts transferred to the private sector through the TUPE process which applies to all staff in a company whose ownership changes.

A public sector authority signs a contract with a private sector consortium, technically known as a Special Purpose Vehicle (SPV). This consortium is typically formed for the specific purpose of providing the PFI. It is owned by a number of private sector investors, usually including a construction company and a service provider, and often a bank as well. The consortium's funding will be used to build the facility and to undertake maintenance and capital replacement during the life-cycle of the contract. Once the contract is operational, the SPV may be used as a for contract amendment discussions between the customer and the facility operator. SPVs often charge fees for this go-between 'service'.

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