1. Executive Summary
During this report I will be discussing whether the UK’s approach concerning Prviate Finance Initiatives (PFI’s) has been effective. Firstly, PFIs are an approach the Government often utilises to secure construction projects and other services. Under the initiative, private firms fund the projects, leaving the NHS to make repayments over 30 or 40 years. In many ways, it is the equivalent of a mortgage. This document explains a more in depth view of their characteristics.
A more in depth look towards PFI’s show us that when a government wants to acquire something (a school, hospital, community centres) it can raise the funds itself, hire the designer and contractors, and then finally undertake the work. On the other hand, it can draw up an output specification for what it wants and enter into a PFI where the design, finance, and construction are all provided by a private consortium.
1.1 Further research into PFI’s
Under a PFI the private consortium typically undertakes to maintain the project for fifteen to thirty years after construction. The consortium is paid back in predefined instalments, conditional on performance over the lifetime of the contract. On expiry of the contract, ownership of the project’s assets normally reverts back to the public sector. PFIs were introduced by the Conservatives in 1992, however their use only really took off after the 1997 election of the Labour Government. Although the role of PFIs has expanded, the majority of public investment (over 85% in 2003) is still carried out by traditional means of procurement.
PFIs involve extensive risk transfer to the private sector, thus greater cost certainty for the Government. In order to guarantee this, the project is compactly specified in the contract, defining who bears which risk. The private sector will not want to abide by the risk without some form of compensation, so it’s important that the risks are transferred to the party that is best placed...