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Private Finance Initiative  

Private Finance Initiative

The private finance initiative (PFI) provides a way of funding major capital investments, without immediate recourse to the public purse. Private consortia, usually involving large construction firms, are contracted to design, build, and in some cases manage new projects. Contracts typically last for 30 years, during which time the building is leased by a public authority. Premiercallcentre.co.uk provides independent professional technical service, fully managed to help your financial needs, call us today, through a pre-set of questions, we are able to establish your needs and the nature of your call in more detail and handle this in line with your requirements.

The Private Finance Initiative (PFI), developed initially by the Australian and United Kingdom governments, is a method to provide financial support for "public-private partnerships" (PPPs) between the public and private sectors. PFI has now been adopted in Australia, Canada, the Czech Republic, Finland, France, India, Ireland, Israel, Japan, Malaysia, the Netherlands, Norway, Portugal, Singapore, and the United States (amongst others) as part of a wider program for privatization and deregulation driven by corporations, national governments, and international bodies such as the World Trade Organization, International Monetary Fund, and World Bank.

Overview

The Private Finance Initiative (PFI) is a procurement method which secures private funding for public institutions in return for part-privatisation. PFI is also an operational framework which transfers responsibility, but not accountability, for the delivery of public services to private companies. PFI projects aim to deliver infrastructure on behalf of the public sector, together with the provision of associated services such as maintenance. Under PFI the private sector operates facilities as well as providing finance, so some public sector staff have their employment contracts transferred to the private sector through a process known as TUPE. Every PFI deal has its own particular characteristics, however there are common threads which this article seeks to explore.

How PFI contracts work

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.

PFI contracts are for long terms, typically 30–60 years. During the period of the contract the consortium will provide certain services, which were previously provided by the public sector. The consortium is paid for the work over the course of the contract on a "no service no fee" performance basis.

The public authority will design an "output specification" which is a document setting out what the consortium is expected to achieve. If the consortium fails to meet any of the agreed standards it should lose an element of its payment until standards improve. If standards do not improve after an agreed period, the public sector authority is usually entitled to terminate the contract, compensate the consortium where appropriate, and take ownership of the 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 a last resort only.

Whether public interest is at all protected by a particular PFI contract is highly dependent on how well or badly the contract was written and the determination (or not) and capacity of the contracting authority to enforce it. Many steps have been taken over the years to standardise the form of PFI contracts to ensure public interests are better protected.

Method of funding

Prior to the global financial crisis of 2008–2009, large PFI projects were funded through the sale of corporate bonds, issued by the company running the PFI. Since the crisis, funding by senior debt has become more common.

Smaller PFI projects - the majority by number - have typically always been funded directly by banks in the form of senior debt. Senior debt is generally slightly more expensive than bonds, which the banks would argue is due to their more accurate understanding of the credit-worthiness of PFI deals - they may consider that monoline providers underestimate the risk, especially during the construction stage, and hence can offer a better price than the banks are willing to.

Since the global financial crisis of 2008–2009, senior debt has been provided to UK PFIs by the European Investment Bank (EIB) and the newly founded Treasury Infrastructure Finance Unit (TIFU) alongside banks in some PFIs. A recent example where this has taken place is the Manchester Waste PFI.

Refinancing of PFI deals is also common. Once construction is complete, the risk profile of a project can be lower, so cheaper debt can be obtained. This refinancing might in the future be done via bonds - the construction stage is financed using bank debt, and then bonds for the much longer period of operation. In most PFI contracts, the benefits of refinancing must be shared with the government.

The banks who fund PFI projects are repaid by the consortium from the money received from the government during the lifespan of the contract. From the point of view of the private sector, PFI borrowing is considered low risk because public sector authorities are very unlikely to default. Indeed, under IMF rules, national governments are not permitted to go bankrupt (although this is sometimes ignored, as when Argentina defaulted on its foreign debt). Repayment depends entirely on the ability of the consortium to deliver the services in accordance with the output specified in the contract.

Public health

Because PFI is so prevalent in the UK health sector, it has become a serious public health issue in its own right. Instead of focusing on the needs of patients, some health authorities have become preoccupied with the design and management of PFI contracts, projects and operations and when mistakes occur, patients are adversely affected. In recent years, the two most serious C. difficile infection outbreaks in UK hospitals occurred at Stoke Mandeville where 33 patients died between 2003-5, and at Maidstone and Tunbridge Wells NHS Trust between 2004-6 where at least 1,100 were infected and about 90 died. These outbreaks were subsequently investigated by the Healthcare Commission. According to Richard James, Professor of Microbiology at Nottingham University the most striking part of the commission's findings is the "mirror image" between what happened at the two hospital trusts: "These might be characterised as the risks of reorganisation. Both trusts had undergone difficult mergers, both were preoccupied with finance and both were trying to reconfigure services and build a private finance initiative (PFI) hospital." Prof. James adds that both hospitals allowed infection control measures to be "over-ridden by other imperatives, including targets relating to finance". The Healthcare Commission itself said that focus on the complexities of finance had been "at the price" of infection control.

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