F1 Under a PFI contract, the private sector is responsible for supplying services that traditionally have been provided by the public sector. It is integral to most PFI contracts that the operator designs, builds, finances and operates a property in order to provide the contracted service. Examples of such properties are roads, bridges, hospitals, prisons, offices, information technology systems and educational establishments.
F2 The main features of a PFI contract are as follows:
(a) A contract to provide services is awarded by the purchaser (a public sector entity) to the operator (a private sector entity). The contract will specify the level of service required over the period of the contract.
Usually, the contract also provides for a single ('unitary') payment to be made in each period, linked to factors such as availability, performance and levels of usage.
(b) A property, which is legally owned by or leased to the operator, will usually be necessary to perform the contracted service. Such properties include buildings (eg a prison or hospital), roads, railways, bridges, vehicles, and computer systems. Under the PFI contract, the operator will typically design, build, finance and operate the property. The contract may specify features or standards required of the property, for example, in order to satisfy statutory obligations of the purchaser. The property may or may not have potential for third-party use during the term of the PFI contract.
(c) The PFI contract will specify arrangements for the property at the end of the contract term (which may include various options available to one or both parties). Legal title to the property may pass to the purchaser for a fixed, perhaps nominal, price. Alternatively, or in addition, there may be provision to re-tender the PFI contract for a further term and for the property to pass to the successful new operator. In either of these cases the PFI contract may require the property to be maintained to a minimum standard or to have a stated remaining useful economic life at the end of the contract term. Further possibilities are that the operator retains legal title to the asset at the end of the PFI contract or that the purchaser acquires legal tide to the property for its market value at the time.
(d) As a public sector body, the purchaser is required to demonstrate that the involvement of the private sector offers value for money when compared with alternative ways of providing the services. This is generally achieved by a transfer of risk from the public to the private sector.
F3 Contracts of a similar nature to PFI contracts exist between entitles in the private sector, for example some contracts for warehousing and distribution services, where a property is necessary to perform the contracted service. This Application Note is relevant to such contracts.