15. Private finance projects, such as the Dartford Crossing and Second Severn Crossing, predate the PFI. From 1981 such private investment in public projects was governed by the Ryrie Rules which laid down that any privately-financed solution must be shown to be more cost-effective than a publicly-financed alternative, and that privately-financed expenditure by the nationalised industries could not be additional to public expenditure provision, which would be reduced by the amount of any private finance borrowed.3 Any role for private finance in increasing investment in public infrastructure was thus ruled out and the benefits sought were mainly efficiency gains.
16. These restrictions were largely removed by 1990. The Private Finance Initiative was formally introduced by the then Chancellor of the Exchequer, Norman Lamont MP, in the Autumn Statement of 1992. He stated that "any privately financed project which can be operated profitably will be allowed to proceed, … Government will actively encourage joint ventures with the private sector, where these involve a sensible transfer of risk to the private sector" and "public organisations will be able to enter into operating lease agreements with only the lease payments counting as expenditure and without their capital budgets being cut".4 The scope of private finance to increase investment in public infrastructure was thus recognised. By 1994 the Government explicitly acknowledged that "the private sector's contribution is additional to public provision",5 and the Chancellor stated that private sector finance would be the main source of growth in public investment.6 Thereafter Treasury approval for public-sector funding for capital projects was not usually forthcoming unless private finance options had been explored and found uneconomic. This institutional bias in favour of private finance has continued in various forms under successive Governments.
17. In PFPs, building contractors, facilities managers and service providers typically form a consortium and take shares in a Special Purpose Vehicle (SPV) which signs the contract with the public authority. It usually brings together construction with maintenance and certain services ("bundling") which the SPV undertakes to provide over a long period such as thirty years ("whole life"), in return for fixed annual payments starting when construction is complete. The SPV, which retains ownership of the building, finances its construction by borrowing (usually 85-90%) and owners' equity (10-15%).
18. Relatively few PFPs were implemented before 1997. No long-term PFP has yet run its course.7
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3 PA Grout, The economics of the private finance initiative, Oxford Review of Economic Policy, 1997;
vol 13 pp 53-66.
4 HC Deb 12 November 1992 col 998.
5 Financial Statement and Budget Report, November 1994, cited in John Hall, Private Opportunity, Public
Benefit, Fiscal Studies,1998, vol. 19, no. 2, pp 121-140.
6 HM Treasury, Private Finance: Overview of progress, News release 118/94, 8 November 1994 which was cited in House of Commons Library Research Paper, The Private Finance Initiative (PFI), 18 December 2001.
7 The Skye Bridge PFP was bought out by the Scottish Government in 2004.