CONCEPT AND BACKGROUND TO PUBLIC PRIVATE PARTNERSHIP (PPP) / PRIVATE FINANCE INITIATIVE (PFI)

PFI (Private Finance Initiative) is a public service delivery type of PPP (Public Private Partnership) where the responsibility for providing public services is transferred from the public to the private sector for a considerable period of time.

In PFI projects, the private sector develops, finances and maintains an asset used in the delivery of public services. In return, the public sector pays a monthly charge that covers both the repayment of the capital investment and the ongoing service costs. This transforms government departments from being owners and operators of assets into the purchasers of services from the private sector. The key principles of PFI are:

• Purchase services not assets

• Value for money to the public sector

• Project risk management between public and private sectors

• Utilizing and incorporating private sector know-how and expertise; and

• Incorporating whole life-cycle costing in infrastructure projects

The PFI market is limited to large size contractors. In PFI projects, design and construction become fully integrated up-front with operations and asset management. Ongoing service delivery, operational, maintenance and refurbishment costs become a single party’s responsibility for the length of the concession period; PFI projects typically comprise three main parties, as follows:

• The Awarding Authority: this is the public sector client responsible for procuring the project. It may be a central government department, local authority, or government agency.

• The Special Purpose Vehicle (SPV): A limited company (i.e. the project consortia) that is set up for the sole purpose of delivering the PFI project. It is responsible for the project from the start to the end of the contract, which normally spans more than twenty years. It acts as the management and operating company for the project, and is the legal owner of the concession that is granted by the public sector.

• Third-party funders: such as equity, bank loans, or bonds.

In PFI procurement, it is a fundamental requirement that appropriate risks are transferred to the private sector, or allocated to the party that is best able to manage the risk in a cost effective manner.