DEFINITION of ‘Private Finance Initiative – PFI’
A method of providing funds for major capital investments where private firms are contracted to complete and manage public projects. Under a private finance initiative, the private company, instead of the government, handles the up-front costs. The project is then leased to the public, and the government authority makes annual payments to the private company. These contracts are typically given to construction firms and can last 30 years or longer. In the United States, PFIs are called public-private partnerships.
BREAKING DOWN ‘Private Finance Initiative – PFI’
Private finance initiatives were originally started as part of Great Britain’s strategy for providing high quality services. PFIs were first implemented there in 1992 and become popular after 1997. They were used to fund major public works projects such as schools, prisons, hospitals and infrastructure. Instead of funding these projects up front from tax receipts, private firms construct them and then make their money back through long-term (25+ years) repayments, plus interest, from the government. Thus, the government does not have to outlay a large sum of money at once to fund a large project. PFIs are also supposed to improve on-time project completion and 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 process.
A key drawback is the interest and payments associated with PFIs burden future taxpayers. In addition, the arrangements sometimes include not only construction, but also ongoing maintenance once the projects are complete, which further increases these projects future cost and tax burden.
In the United Kingdom in the 2000s, 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 taxpayer’s detriment. PFIs have also been criticized as an accounting gimmick to reduce the appearance of public-sector borrowing.