The concept of a Private Finance Initiative (PFI) has become increasingly popular in recent years when it comes to financing large public sector projects. A PFI is a long-term agreement between the public sector (government, local authority and/or a public sector organisation) and a private partner (such as a consortium/joint venture of companies or a single private sector firm).

Under a PFI, the private sector designs, builds, finances and operates public works projects, such as hospitals, prisons, roads and other infrastructure projects, over a long period of time. The public and private sector partners share the risks and rewards associated with project delivery, over the life of the contract. The private sector partner is in charge of raising funds for the project and therefore offloading the burden of public sector financing.

The public sector partner will pay the private sector over a long term, usually in the form of a predefined annual ‘availability payment’. This payment includes performance linked incentive payments if a particular service standard is met or exceeded. The private sector partner is also usually responsible for ongoing maintenance of the project, enabling the public sector partner to concentrate on the delivery of public services.

The key advantages of PFIs are that they shift risk (project delivery, financing, operation and maintenance) from the government to the private partner, while also alleviating the pressure on government budgets. The private sector partner can also bring in new ideas, fresh thinking and greater efficiency to project delivery as they have the power to innovate and capitalise on new technologies.

In order to ensure the long-term success of PFIs, careful planning and monitoring of each project is required, to ensure that any potential risks are understood and managed. A number of tools exist, such as those provided by PFI specialists, to enable informed planning, tracking and control of PFI projects.

To sum up, a PFI is an effective way for the public sector to finance large public works projects through the private sector. By shifting risk and leveraging the knowledge and expertise of the private sector, a PFI offers substantial cost savings to the public sector. With the many tools available to help monitor and control PFI projects, a PFI is an attractive option for public sector organisations looking to take advantage of repaying private firms over the long term.