Private Finance Initiative

Public private partnerships & private capital

The Private Finance Initiative (PFI) is a way of creating public private partnerships (PPPs) by funding public infrastructure projects with private capital. It is a procurement method which acquires private funding for public institutions in return for partial privatisation. PFI also transfers responsibility, but not accountability, to deliver public services to private companies. These projects try to build infrastructure for the public sector, with the associated services. With this scheme the private sector runs the facilities in addition to ensuring funding. These means that many public sector workers have their contracts shifted to the private sector through a process known as Transfer of Undertakings (Protection of Employment) (TUPE). All PFI deals possess its own certain characteristics, though they have much in common.

The theory behind this transfer of responsibility is that justify the private sector is better at delivering services than the public sector. This has become contentious however. The PFI has been presented with difficulties because many sources of private capital have dried up due to the credit crunch in 2007 and onwards, nevertheless PFI remains the UK government's preferred method for public sector procurement.

Because of the banks financial problems however, the UK government now has to pay for the supposedly 'private' finance initiative itself. In 2009 it was announced £2bn of public money will be lent go to private firms building hospitals and other schemes under PFI. This has been roundly criticised by political figurers such as Vince Cable.

Because of the ideological position of the dominant party in government, it seems that the idea of private sector involvement will continue. The new Conservative Chancellor George Osborne has signaled the future conduct of the government by criticising the old regime but proposing a modified PFI which would preserve the arrangement of private sector investment for public infrastructure projects in return for part-privatisation, but would ensure proper risk transfer to the private sector along with transparent accounting. Later in May 2010, he announced that the role of the new Office for Budget Responsibility will include examining the cost of outstanding PFI deals.

There are calls for renegotiating PFI agreements because of the cut budgets of government departments.

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