Full Form of PFI – Private Finance Initiative
The full form of PFI stands for the Private Finance Initiative. Private Finance Initiative is a way by which public sector projects are financed through investments by private sector investors and it is for this reason that PFI is also known as a public-private partnership because of the relationship that is established between the two sectors. It eliminates the need for immediate investments for the projects by the government for the construction, operation, and maintenance of the public projects and thereby reduces its burden as well as the burden on the future taxpayers.
The existence can be identified by the presence of the following features.
- It is a contractual arrangement between the private sector authority and a consortium of private sector investors.
- The essential feature is that it uses private finance (i.e. private sector debt as well as underwritten equity) to fund public projects and services.
- Private sector consortium undertakes the construction, operation, and maintenance of the public projects as well as facilities.
- In return for the services provided, the consortium is remunerated for the quantum of services provided and based on their compliance with the performance standards.
What are the projects that can be undertaken under a Private Finance Initiative arrangement?
- Infrastructure projects for the general public
- Public facilities
How Does Private Finance Initiative Works?
- In this case, public sector authority firstly contracts with Special Purpose Vehicle (SPV), which is basically a consortium of private sector undertakings. SPVs are owned by private sector investors made for special purposes.
- The funding available with the consortium is used for building and overall maintenance of the project. While the project is under progress, SPV may help in contract amendments between the public sector and the facility provider and for this service it may charge additional fees.
- The tenure of the contracts is usually for a period of 25-30 years, depending on the requirements and nature of each project. During the project tenure, SPV undertakes works and is remunerated by the public sector authority on a “no service, no fees” basis. This means that the public sector authority prescribes certain “output specifications” regarding the outcomes to be achieved by the SPV.
- If certain standards as specified as not met by SPV, relevant portion is fees are put on hold until such standards are met.
- However, if SPV does not improve the standards over time, public sector authority may terminate the contract and take ownership of the project itself.
It includes infrastructure projects such as highways, tolls, roadways, bridges, railroads, airports, etc. Further, PFI arrangements are not just limited to infrastructure projects but can also extend to the provision of public facilities such as the construction of water and wastewater management, schools, colleges, hospitals as well as sports facilities.
Thus, whenever the public sector contracts with the private sector to undertake the development of a public project, it may be called PFI.
The model provides the following benefits.
- Before the PFI model was existent, the governments had to make investments into the public projects either through own funds or by raising money from borrowings and paying interest on such borrowings. Also, they were required to appoint the contractors to get the work done. But it eliminates the need for investments by the government.
- It has been observed that PFI models provide on-time completion of projects.
- The risks that are attached to the construction and maintenance of the projects are vested with the private sector instead of the public sector.
- The model is advantageous for both the private and the public sectors in the long term since they get to share resources as well as expertise and establishes a good relationship between the two sectors.
There are some limitations which are as follows.
- It requires that interest is to be paid along with the repayments made, the burden of which may eventually get transferred to the taxpayers.
- It may happen that the private sector contractors do not meet the prescribed safety standards and the requisite quality when undertaking the project.
- Sometimes, the projects are given not only for construction but also for the afterward maintenance. Not only this will increase the project cost but it may also lead to an additional burden for the taxpayers in the future.
Governments instead of following the earlier practice of making direct investments and carrying out construction and operation of the public projects, many times follow PFI arrangements for the same. Thereby, it establishes a relationship between the private and public sectors and leads to on-time completion of the public projects.
This has been a guide to the full form of PFI (Private Finance Initiative). Here we discuss features, scope, examples, and how does PFI work along with benefits and limitations. You may refer to the following articles to learn more about finance –