1 The Private Finance Initiative (PFI) model has been used since the early 1990s. Projects have typically been funded using 90 per cent debt finance from banks and 10 per cent equity finance. Equity investors (investors) have been exposed to the risk that their returns might vary, compared with initial expectations. These investors were also first in line to bear losses if projects encountered serious difficulties.
2 Investors have typically been either contractors, who also provide services under the contract, or financial institutions. Some investors are interested in a long-term involvement with a project. However, many of those investing in the project at its start, known as primary investors, will sell their shares soon after the new asset has been delivered in order to fund new projects. These primary investors sell their shares to secondary investors who want a long-term stable income from mature projects.
3 Equity is just one of the components of a PFI project. In July 2010, we reported on the increased cost of debt in Financing PFI projects in the credit crisis and the Treasury's response. In April 2011, we reported on Lessons from PFI and other projects. The latter report summarised learning points from our recent reports on procuring and managing projects.
4 The Treasury is responsible for private finance policy and guidance and, on 15 November 2011, the Chancellor announced his intention to reform the PFI model. The Treasury launched a call for evidence on 1 December 2011. This is looking at many aspects of privately financed projects, including the role of equity finance, about which the Treasury has been conducting its own analysis in support of the planned policy reform.