Private Finance Initiative (PFI) changes model of funding for large-scale investment projects First launched in 1992 by a Conservative government and was extended heavily by the Labour government of 1997-2010. By 2011, more than 700 hospitals, schools, prisons and other public sector projects had been built under the PFI scheme Encourages private investors manage the design, build, finance and operation of public infrastructure such as new schools, hospitals, social housing, defence contracts, prisons and road improvements. Typical PFI contract repaid by government over 30 year period

1. Private Finance Initiative (PFI)
A2 Microeconomics - 2014

2. Basics of the PFI
• Private Finance Initiative (PFI) changes model of funding for
large-scale investment projects
• First launched in 1992 by a Conservative government and was
extended heavily by the Labour government of 1997-2010.
• By 2011, more than 700 hospitals, schools, prisons and other
public sector projects had been built under the PFI scheme
• Encourages private investors manage the design, build,
finance and operation of public infrastructure such as new
schools, hospitals, social housing, defence contracts, prisons
and road improvements.
• Typical PFI contract repaid by government over 30 year period

3. PFI Project Examples
Source:
http://en.wikipedia.org/wiki/Private_finance_initiative

4. PFI Projects
Under a Private Finance Initiative (PFI) project:
1. Government takes bids for and then buys a whole
project package
2. Project package typically includes construction,
services and maintenance
3. The government pays back the costs of the whole
project over time

5. Alder Hey - Liverpool
The new £167m hospital, which is being built on behalf of Alder Hey
Children’s NHS Foundation Trust, will have a floor area of 51,000m2,
and will contain 270 beds and 16 state of the art operating theatres.
75% of bedrooms will be single occupancy with en-suite bathrooms,
improving privacy and dignity for patients and their families. The
official opening of the new hospital is planned for Autumn 2015

6. Case for Private Finance
Efficiency: Is the private
sector more efficient at
delivery?
Extra investment -
brings long term
economic and social
benefits
Delivery: The private
sector is not paid until
the asset has been
delivered – fixed price
contracts
Dynamic efficiency –
innovation, is there
better design from
leading private sector
businesses?

7. Case for Private Finance
Efficiency: Is the private
sector more efficient at
delivery?
Extra investment -
brings long term
economic and social
benefits
Delivery: The private
sector is not paid until
the asset has been
delivered – fixed price
contracts
Dynamic efficiency –
innovation, is there
better design from
leading private sector
businesses?

8. Case for Private Finance
Efficiency: Is the private
sector more efficient at
delivery?
Extra investment -
brings long term
economic and social
benefits
Delivery: The private
sector is not paid until
the asset has been
delivered – fixed price
contracts
Dynamic efficiency –
innovation, is there
better design from
leading private sector
businesses?

9. Case for Private Finance
Efficiency: Is the private
sector more efficient at
delivery?
Extra investment -
brings long term
economic and social
benefits
Delivery: The private
sector is not paid until
the asset has been
delivered – fixed price
contracts
Dynamic efficiency –
innovation, is there
better design from
leading private sector
businesses?

11. Criticisms of PFI Project Approach
Debt costs: financing costs of PFI typically 3-
4% over that of government debt
Inflexibility and poor value for money: Long
service contracts difficult / costly to change
Risk: The ultimate risk with a project lies
with the public sector (government
PFI has added to public sector debt but
created many private sector fortunes

12. Criticisms of PFI Project Approach
Debt costs: financing costs of PFI typically 3-
4% over that of government debt
Inflexibility and poor value for money: Long
service contracts difficult / costly to change
Risk: The ultimate risk with a project lies
with the public sector (government
PFI has added to public sector debt but
created many private sector fortunes

13. Criticisms of PFI Project Approach
Debt costs: financing costs of PFI typically 3-
4% over that of government debt
Inflexibility and poor value for money: Long
service contracts difficult / costly to change
Risk: The ultimate risk with a project lies
with the public sector (government
PFI has added to public sector debt but
created many private sector fortunes

14. Criticisms of PFI Project Approach
Debt costs: financing costs of PFI typically 3-
4% over that of government debt
Inflexibility and poor value for money: Long
service contracts difficult / costly to change
Risk: The ultimate risk with a project lies
with the public sector (government
PFI has added to public sector debt but
created many private sector fortunes

15. Cross Rail – PFI Ditched in 2013
In 2013 the UK government scrapped plans to procure the Crossrail rolling stock
as a private finance initiative and instead decided to finance it fully on Transport
for London’s balance sheet. That decision was prompted by concerns about how
long it had taken to get previous PFI train deals financed, including Thameslink