The Private Finance Initiative (PFI) was announced by the then Chancellor, Norman Lamont, in the 1992 Autumn Statement with the aim of increasing the involvement of the private sector in the provision of public services. The PFI is a form of public private partnership (PPP) that marries a public procurement programme, where the public sector purchases capital items from the private sector, to an extension of contracting-out, where public services are contracted from the private sector. PFI differs from privatisation in that the public sector retains a substantial role in PFI projects, either as the main purchaser of services or as an essential enabler of the project. It differs from contracting out in that the private sector provides the capital asset as well as the services. The PFI differs from other PPPs in that the private sector contractor also arranges finance for the project.
Under the most common form of PFI, the private sector designs, builds, finances and operates (DBFO) facilities based on 'output' specifications decided by public sector managers and their departments.1 Such projects need to achieve a genuine transfer of risk to the private sector contractor to secure value for money in the use of public resources before they will be agreed. The private sector already builds most public facilities but the PFI also enables the design, financing and operation of public services to be carried out by the private sector. Under the PFI, the public sector does not own an asset, such as a hospital or school but pays the PFI contractor a stream of committed revenue payments for the use of the facilities over the contract period. Once the contract has expired, ownership of the asset either remains with the private sector contractor, or is returned to the public sector, depending on the terms of the original contract.
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1 For reference, a step by step guide to the PFI process appears in Appendix 1 of this Paper.