Private Finance Initiative (PFI) is one of the several types of Public - Private Partnerships (PPP). In the earlier days private investors never showed much interest in PPP/PFI as in most countries, governments were not efficient enough in delivering policies and regulations, and understanding their concerns. But, with the realization of the importance of channeling private sector funds, the governments started to act and create an environment conducive for investments. This has paved the way for the growth of PPP patterns in most of the developed countries. Today, it seems as if infrastructure projects cannot be undertaken without some sought of partnership between public and private parties. Although there are several types of PPPs, this article mainly focuses on PFI, as it has been a very successful model in the European counties, especially the UK. This was possible by improving capital markets, regulations and delivery mechanisms of the government. The success achieved by the UK with regard to PFI was only because of a strong political will.
The Treasury Task Force in the UK defines PFI as, "One of the main mechanisms through which the public sector can secure improved value for money in partnership with the private sector. Through PFI, the private sector is able to bring a wide range of managerial, commercial and creative skills to the provision of public services, offering potentially huge benefits for the government". PFI has thus emerged as a key instrument to involve the private sector in infrastructure development projects. During 2003-2004, 11% of the total investment in infrastructure projects in the UK was made through PFI. This shows the importance of PFI in the UK. PFI is one of the more popular types of PPPs, which offers the opportunity to involve the private sector in modernizing and improving the quality of public services, without undermining the government's responsibility to the taxpayer for the quality of the service provided. PFI has strong points in its favor. It increases efficiency, lowers costs and improves the quality of public services. However, there is an argument that PFI is costlier than public borrowings, but again that depends on whether the government has sufficient funds or not. On the other hand, PFI creates the right incentive structures, monitors contracts, and shares the risks such as occupancy risk, inflation risk, planning and designing risks of projects, and latent defect risks.
The UK government was under pressure to reduce it's borrowings. In 1989, the then Chief Secretary to the Treasury, John Major, announced the need for introducing the PFI model. He mentioned that PFI can be an important source of an alternative public sector financing. In the early 1990s, a central policy of the Conservative government led by Margaret Thatcher also viewed that PFI would change the chronic problems in infrastructure development, provided there was full control on the private parties. The main outcome of this initiative was that private bodies are more efficient. The PFI model was approved after the autumn statement of 1992 by Norman Lamont, the then Chancellor of Exchequer. Lamont opined that the projects run by private parties could not be compared with public funded projects, and the government would encourage a joint venture model with such private parties. The idea was to share the risks between these two parties. But despite the announcement, private initiatives were very less. Thus, in 1993, the need to establish a `Private Finance Panel' was felt. Local authorities got greater autonomy, assuming that private parties would genuinely assume significant risk.
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