Private Finance Initiative

PFI basics

The Private Finance Initiative (PFI) was introduced in the UK in 1992. The objective of the program is the development of partnerships between the public sector and private sector entities, aimed at increasing the involvement of the private sector in the provision of public services, and the enhancement of value received by society at large.

Danziger Capital Partners LLP advises United Kingdom companies on tendering, structuring, and financial execution of capital projects through the Private Finance Intitiative.

Since its commencement, the PFI has been the most common method of financing new public assets, such as hospitals, schools, roads, courts, prisons, social housing, water and waste projects, police stations, fire stations, airports, roads, railways and major defense equipment. By end 2008, 628 projects had been contracted under the PFI, with a total capital value of £62 billion. (HM Treasury, “Private Finance Initiatives: Statistics”) The United Kingdom has procured 221 primary, secondary schools and colleges, 181 hospitals, 62 transportation projects, 36 government buildings, sixteen prisons, nine court facilities, and numerous other projects through Public-Private Partnerships. (Partnerships UK Projects Database).

The PFI is managed by HM Treasury, through a policy division staffed by Treasury officials, and a project division staffed by persons from the private sector.

PFI financing of schools

Through PFI, Public-Private Partnerships have been used to finance much of the UK’s social infrastructure, including schools. The PFI allows public school districts to contract with the private sector for the construction and maintenance of a school, ensuring its upkeep over a specified, long-term period (typically 25 to 30 years). Since inception, the PFI program has delivered 94 new education projects covering over 800 schools. Building Schools for the Future projects that there will be over £9 billion in investment in 2008-2011. (Department for Children, Schools and Families, “Secondary Building Programme Increases Momentum As 50th BSF School Opens”, 20 January 2009.)

PFI financial structuring

The PFI is structured as a UK government financing scheme, whereby a private-sector contractor provides a high-value asset on a “design, build, finance, operate and maintain” basis.

A special-purpose vehicle is formed by private sector investors. The SPV holds the new capital asset on its balance sheet. The SPV then receives two streams of cash flow under the project -