2.2.6.2. Private Finance Initiative (PFI)

In the Private Finance Initiative (PFI) model, the private sector similar to the BOO model builds, owns and operates a facility. However, the public sector (unlike the users in a BOO model) purchases the services from the private sector through a long-term agreement. PFI projects therefore, bear direct financial obligations to the government in any event. In addition, explicit and implicit contingent liabilities may also arise due to loan guarantees provided to lenders and default of a public or private entity on non-guaranteed loans.

In the PFI model, asset ownership at the end of the contract period may or may not be transferred to the public sector. The PFI model also has many variants.

 

IDevice Icon Examples of PFI projects

The annuity model for financing of national highways in India is an example of the PFI model. Under this arrangement a selected private bidder is awarded a contract to develop a section of the highway and to maintain it over the whole contract period. The private bidder is compensated with fixed semi-annual payments for his investments in the project. In this approach the concessionaire does not need to bear the commercial risks involved with project operation.

Private infrastructure development in Japan is done mainly via the PFI model.

Apart from building economic infrastructure, the PFI model has been used also for developing social infrastructure such as school and hospital buildings, which do not generate direct "revenues". Examples include Japan and the United Kingdom of Great Britain and Northern Ireland.


iDevice icon Case Study: The PFI programme in the education sector in the U.K.

PFIs in the education sector have been used extensively in the UK, where virtually all new schools and tertiary education institutions are being built under PFI arrangements, rather than traditional procurement methods. The PFI refers to a strictly defined legal contract for involving private companies in the provision of public services, particularly public buildings.

Under a PFI program, a capital project such as a school, hospital or housing estate, is designed, built, financed and managed by a private sector consortium, under a contract that typically lasts for 30 years. Contracts can be structured differently. The most commonly used structure is DBFO. Under DBFO, a private sector partner (usually a consortium of companies) takes on the provision and long-term operation of a facility in line with the given specification. The private consortium is paid regularly from public money, based on its performance throughout the contract period. If the consortium misses performance targets, its payment is reduced.

 


Copyright © 2008 by Transport Policy and Development Section, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).