NationMaster - Encyclopedia: Private Finance Initiative

The Private Finance Initiative specifies a method, developed initially by the United Kingdom government, to provide financial support for "Public-Private Partnerships" (PPPs) between the public and private sectors. This has now been adopted by parts of Canada, France, the Netherlands, Portugal, Ireland, Norway, Finland, Australia, Japan and Singapore (amongst others) as part of a wider reform program for the delivery of public services which is driven by the WTO, IMF & World Bank as a part of their 'deregulation' and privatization drive. Public-private partnership (PPP) is a variation of privatization in which elements of a service previously run solely by the public sector are provided through a partnership between the government and one or more private sector companies. ... The public sector is that part of economic and administrative life that deals with the delivery of goods and services by and for the government, whether national, regional or local/municipal. ... The private sector of a nations economy consists of those entities which are not controlled by the state - i. ... For other uses of the initials WTO, see WTO (disambiguation). ... The flag of the International Monetary Fund (IMF) The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring foreign exchange rates and balance of payments, as well as offering technical and financial assistance when asked. ... Logo of the World Bank The International Bank for Reconstruction and Development (IBRD, in Romance languages: BIRD), better known as the World Bank, is an international organization whose original mission was to finance the reconstruction of nations devastated by WWII. Now, its mission has expanded to fight poverty by means...

These projects aim to deliver all kinds of works for the public sector, together with the provision of associated operational services. In return, the private sector receives payment, above the price that the Public Sector could have achieved the work, linked to its performance in meeting agreed standards of provision. Works can mean several things, including: drug paraphanelia albums called Works. ... In economics and marketing, a service is the non-material equivalent of a good. ...

Overview

PFI is used in central and local government. In the case of projects procured by local government authorities, the capital element of the funding enabling the local authority to pay the private sector for these projects is given by central government in the form of what are known as PFI "credits". PFI is not just a different way of borrowing money; the loans are paid back over the period of the PFI scheme by the service provider who is at risk if the service is not delivered to standard throughout. The local authority then procures a partner to carry out the scheme and transfers detailed control, and in theory the risk, in the project to the partner. The cost of this borrowing as a result is higher than normal government borrowing (but cheaper when better management of risks is taken into account) but does not all appear as borrowing in public accounts. Local governments are administrative offices of an area smaller than a state. ...

Each PFI project is different depending on local circumstances. However there are some common threads that run through all projects. The public sector authority signs a contract with a private sector "Operator". During the period of the contract the Operator will provide certain services, which are currently provided by the local authority. The Operator is paid for the work over the course of the contract and on a "no service no fee" performance basis. The authority will design an "output specification" which is a document setting out what the Operator is expected to achieve. If the Operator fails to meet any of the agreed standards it should lose an element of its payment until standards improve. If standards do not improve after an agreed period, the public sector authority is entitled to terminate the contract. A contract is a promise or an agreement that is enforced or recognised by the law. ...

PFI is therefore dependent on both the standard of contracts used and the determination of the parties to enforce them.

The National Audit Office scrutinises public spending on behalf of Parliament and is independent of Government. It provides review reports on the value for money of many PFI transactions and makes recommendations. The Public Accounts Committee and Audit Commission also provide reports on these issues. Categories: United Kingdom-related stubs ... A Public Accounts Committee (PAC) is a parliamentary committee responsible for overseeing government expenditures to ensure they are effective and honest. ... The Audit Commission is a non-departmental public body in the United Kingdom which is responsible for auditing local government in England, National Health Service Trusts and other local agencies in England and Wales. ...

A notable example of PFI, and the only UK mission so far funded under the scheme, is the British Embassy in Berlin. The largest PFI in the world, as of 2006, will be the AirTanker provision of the Future Strategic Tanker Aircraft to the UK's Royal Airforce, valued in excess of £10 billion over 27 years. The Future Strategic Tanker Aircraft (FSTA) will provide aerial refueling (AR) and Air Transport (AT) for the Royal Air Force using a version of the Airbus A330 MRTT. The Royal Australian Air Force announced in April 2004 that they had selected Airbus to provide tankers to a similar specification. ...

Controversy

The Private Finance Initiative was begun under the Conservative government of John Major in 1992. It immediately proved controversial, as it was perceived by critics as a back-door form of privatisation. Nonetheless, the Treasury found the scheme advantageous and pushed Labour to adopt it after the 1997 general election. PFI has continued and, indeed, expanded under Labour. This has been strongly criticised by many trade unions and elements of "Old Labour". The 2002 Labour Party Conference passed a vote against PFI, though this did not change the government's policy. The Conservative Party is the largest political party on the right-of-centre in the United Kingdom. ... Sir John Major, KG, CH (born 29 March 1943) is a British politician who served in the Cabinets of Margaret Thatcher as Chief Secretary to the Treasury, Foreign Secretary and Chancellor of the Exchequer before succeeding Thatcher as Conservative Party leader and Prime Minister of the United Kingdom from 1990... 1992 (MCMXCII) was a leap year starting on Wednesday. ... Privatization (sometimes privatisation, denationalization, or — especially in India — disinvestment) is the process of transferring property, from public ownership to private ownership. ... The new eastern entrance to HM Treasury HM Treasury (Her/His Majestys Treasury) is the United Kingdom government department responsible for and putting into effect the UK Governments financial and economic policy. ... The Labour Party has historically been the principal left wing political party of the United Kingdom since its formation in the early 20th century (see British politics). ... 1997 (MCMXCVII in Roman) is a common year starting on Wednesday of the Gregorian calendar. ... A union (labor union in American English; trade union, sometimes trades union, in British English; either labour union or trade union in Canadian English) is a legal entity consisting of employees or workers having a common interest, such as all the assembly workers for one employer, or all the workers... For the Cusco album, see 2002 (album). ... The Labour Party Conference, or annual national conference of the Labour Party, is formally the supreme decision-making body of the Party. ...

According to Treasury and NAO reports that PFI deals are very much more likely to be delivered on time and on budget - a study by the Treasury in July 2003 [1] showed that the only deals in its sample which were over budget were those where the public sector changed their minds after deciding what they wanted and from whom they wanted to buy it. It is claimed there is a far greater visibility of long-term consequences of decisions made by politicians and civil servants through PFI deals than conventionally where most of the long-term consequences and obligations of decisions are obscured from public scrutiny. This is not agreed with by those who believe that the details of these deals are wilfully complex and buried in confidential documents and footnotes. 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ...

As against that, however, there have been a number of high-profile PFI failures, many of which have been exposed by Private Eye, a British satirical magazine. For example, a June 17 2005 leaked government report said that a new privately financed hospital in Leeds had "breached every section of the fire safety code".[2]. The PFI Skye Bridge infamously cost the public £93m (and required the closure of the existing ferry to prevent competition), although it should have cost only £15m to build. Equally, the fact that major risks are effectively transferred has been demonstrated in a number of cases, most notably the National Physical Laboratory; this deal ultimately caused the collapse of the building contractor when the cost of building a complex scientific laboratory was very much larger than estimated. The laboratory was ultimately built but the cost of doing so caused the complete financial collapse of a very old and previously financially robust construction company which was ultimately sold, it is believed, for £1. The laboratory continues to operate with the public sector not having to pick up any of the construction cost overrun. Private eye may mean: Look up Private eye on Wiktionary, the free dictionary Private Eye a fortnightly British satirical magazine-newspaper, edited by Ian Hislop (as of 2005) A private investigator, a private detective for hire (see also crime fiction and detective fiction) Private Eye, a song by Alkaline Trio... June 17 is the 168th day of the year in the Gregorian calendar (169th in leap years), with 197 days remaining. ... Skye Bridge The Skye Bridge is a road bridge over Loch Alsh, connecting the mainland of Scotland with the Isle of Skye. ...

Furthermore, the scale of PFI projects in the Health & Education sector since 1997 is now having a serious impact on Public Service Budgets. Because the projects are more expensive in the Private sector (On average 30% more than if the Government borrowed the money and did the work in the Public sector) the payments to the Private owners of the PFI schemes are stretching already constricted Budgets. Many Health Primary Care Trusts are in serious difficulty already, and when the level of spending falls in 2007, some may go bust. The Government is already in negotiation with Private Healthcare providers to come in and run 'failing' Trusts. Many services in the National Health Service in the United Kingdom are provided by NHS Trusts. ...

Additional controversy is caused by the off-balance sheet nature of many PFI contracts. Under UK accounting, the PFI company does not enjoy the risks and rewards of the building - the government carries demand risk, for example - so the building is not shown on its balance sheet. Instead its main asset is the finance debtor - the long term contractual obligation of the government to pay for the building. For the government accounting, the fact that it pays a single charge (the 'Unitary Charge') for both the building and its maintenance is sufficient for it to be classed as a revenue item, so neither the building or the long-term obligation to pay appear of the government's balance sheet. Were the total PFI liability shown on the UK balance sheet - as would be required under UK accounting standards - the government's finance would look somewhat different.

Financial Structure

The typical PFI provider has three parts or legal entities: a holding company (known for short as Topco), a capital equipment or infrastructure provision company (known for short as Capco), and a services or operating company (Opco). The main contract is the concession contract between the Government and Topco. Topco then flows down requirements to Capco and Opco, with legal contracts to enforce. These two legal entities then typically flow down their requiremnets to subcontractors, again with contracts to match. Typically the main subcontractors are the same companies as the shareholders of the Topco. Large PFIs are often let to consortiums of companies rather to individual firms. The Capco may not be a separate legal entity but rather one of the prime sharesholders taking on the responsibility to provide the capital equipment (e.g. the hospital).

Large PFI projects are funded through the sale of corporate bonds, issued by the company running the PFI. An essential feature of PFIs is that these bonds are rated as BBB+ by the credit rating agency Standard and Poors. BBB+ is close to the lowest investment grade rating, any lower than that and the bond receives speculative or 'junk' status. If a rating of better than BBB+ is given then the Government is likely to want to renegotiate the deal, to lower the unit price it pays for the service. Any lower than BBB+ means that investors would be unlikely to take on the risk. So although bond rating typically affects the cost of borrowing for corporates, in the PFI case it effects the whole viability of the deal. The reason for existency of the treasury team in the PFI supplying company is to gain an investment grate rating. A PFI firm will typically go to two of the three main credit rating agencies, sharing details of their financial model, concession contract and capital equipment solution. The Standard and Poors Corporation (S&P), a subsidiary of McGraw-Hill, is a company that performs financial research and analysis on stocks and debt instruments. ...

Smaller PFI projects - the majority by number - are funded directly by banks in the form of senior debt. Senior debt is generally slightly more expensive than bonds, which the banks would argue is due to their more accurate understanding of the credit-worthiness of PFI deals - they may consider that the monoline providers underestimate the risk, especially during the construction stage, and hence can offer a better price than the banks are willing to.

Refinancing of PFI deals is also common. Once construction is complete, the risk profile of a project is much lower, so cheaper debt can be obtained. This refinancing may be done via bonds - the construction stage is financed using bank debt, and then bonds for the much longer period of operation. In most PFI contracts, the benefits of refinancing must be shared with the procuring authority.

Contents

Overview

Controversy

Financial Structure

See also

References

External links

Websites

Reports

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