Private Finance Initiative - Explained
What is a Private Finance Initiative?
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Table of ContentsWhat is a Private Finance Initiative?How Does a Private Finance Initiative Work?Examples of PFI ProjectsAdvantages of PFIsDisadvantages of PFIsCriticism of PFIs in the United Kingdom
What is a Private Finance Initiative?
A private finance initiative (PFI) is a method of financing public projects in which private firms receive contracts to complete public projects. PFI is a form of public-private partnerships whereby funds needed to complete public projects are provided by the private sector or private firms execute public projects on behalf of the government. PFIs entail major projects or infrastructures like schools, parks, health centers and hospitals, road construction, street light, and many others. This initiative relieves the government and taxpayers of financial burdens associated with the projects. Usually, in a PFI, the private sector pays the up-front costs associated with the projects, after completion, the government is required to make scheduled payments to the private company after leasing the infrastructure to the public.
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How Does a Private Finance Initiative Work?
Private finance initiative (PFI) is a long-term partnership between the government and the private sector to complete long-term public projects and infrastructure. Sometimes, the partnership can take up to 30 years or even more. Under PFIs, the completed projects are leased to the public in exchange for a payment over a long period of time. PFIs only became popular after 1997, but there were first used by the United Kingdom in 1992. To date, PFIs are commonly used in the United Kingdom and Australia, while these partnerships are referred to as public-private partnerships in the United States. In PFIs, private firms get their money back through repayments made by the government for a long period of time, including interest payments.
Examples of PFI Projects
Private finance initiatives (PFIs) are often used to finance major public projects which are mostly infrastructural projects. Examples of such projects include; Tunnels, bridges, roads, railways, seaports, airports, hospitals, schools, libraries, health centers, public parks, sports, and recreational facilities, prisons, and water facilities. Private firms enter a long-term agreement with the government to complete the projects. These firms pay an upfront cost for the projects. Here are the major points to know about a private finance initiative;
- A private finance initiative is a financing method in which public projects are financed by the private sector.
- Private firms pay the up-front cost for completing public projects in exchange for steady repayments by the government spread over a long period of time.
- PFIs were first used in the United Kingdom in 1992 before they became popularly used in many countries.
- This financing method is otherwise called a private-public partnership, it relieves the government and taxpayers of the burden of financing major public infrastructure projects.
- In PFIs, private firms get their money back through repayments made by the government plus interest.
Advantages of PFIs
Naturally, private finance initiatives relieve the government of the capital or financial burden associated with the execution and completion of public projects. When a government needs to build infrastructures such as schools, public toilets, railways, roads, airports, health centers and water facilities for public use, they need to raise money to finance them. This could be through imposing heavy tax burdens on taxpayers or through borrowing from the bond market. PFIs relieve governments of this burden through partnerships with the private sector to finance the projects. These partnerships also allow the government to transfer the risks associated with the infrastructure projects to private firms.
Disadvantages of PFIs
Despite the benefits of private finance initiatives, they have some negative attributes. Governments are required to make repayments to private firms plus interest which is often burdensome. Taxpayers suffer future heavy tax burdens as a result of repayments made to private firms by the government. In some cases, private firms may not comply with quality standards when executing or managing public projects and projects short of quality can be catastrophic in the future. Because most PFIs also require private firms to carry out maintenance on the projects after completion, the government is exposed to higher future costs.
Criticism of PFIs in the United Kingdom
One major criticism of private financing initiative is that it creates more burden for the government than it ordinarily would have incurred. This is because most times, governments end up paying more for completed projects than their actual worth or the amount they would have spent if the project was executed by the government. Critics of this partnership also argue that while private firms benefit more from this partnership, the government and taxpayers eventually end up in a loss. It is also argued that some projects do not worth the amount eventually paid for them by the government.