Page 2: Private Finance Initiative
Governments (the public sector) and the private sector (companies) are increasingly working together. PricewaterhouseCoopers is experienced in advising both private and public sectors. The privatisations and public/private sector partnerships are large and complex transactions, sometimes affecting entire industries.
The Conservative Government launched the Private Finance Initiative (PFI) in 1992 in a bid to deliver high quality and cost-effective public services whilst avoiding the need to raise taxes in the short-term. PFI allows the public sector service providers to obtain or ‘procure’ those services, while placing the risks of buying and maintaining the asset with the private sector.
In a PFI, the Government body sets up a contract with a private company. The private company buys, builds and services the asset. The Government has use of the fully serviced asset for the period of the contract and at the end of this period, the Government will own the asset. The Government uses the fully serviced asset in exchange for a rental payment.
Typical examples of PFI are projects requiring large investment such as schools, hospitals, road and rail links, waste disposal services and prison services. A recent example is that of Falkirk schools. This contract is a good example of the types of risks that are transferred through the procurement process (see right). Substantially, these risks are the construction, operating and financing costs.
Private Finance Initiatives are also utilised in building new schools. In the case of Falkirk, Scotland, a 25 year contract was signed between Falkirk Council and a company called Class 98 to provide three new secondary schools, a major secondary school extension and a special needs school at a cost of £70 million. This was the first PFI project involving the provision of a number of schools to be undertaken.
The risks for the private sector in undertaking a PFI are many and it is the role of the negotiating team to assess how great are these risks and whether they would affect the completion of the project. In some contracts this risk may be split between the public and private sector. For the Falkirk PFI, Class 98 carries the risk of an increase in construction costs through any delays. The Council retains the risks associated with any changes in legislation and education which may, for example, change how children are taught in 20 - 25 years’ time.