About Private Finance

What is a Public Private Partnership (PPP)?

A PPP is a public service or private business venture which is funded and operated through a partnership between the public sector (either central or local government) and one or more private sector companies. There are a range of possible models of PPP but the emphasis is on partnership. Some possible models are PFI, joint ventures, part privatisations and large outsourcing deals.

What is a Private Finance Initiative (PFI)?

PFI is the most common form of PPP in this country. The UK has been the leader in using this form of procurement to deliver public services and there are now over 700 PFI contracts signed. The main sectors that use PFI are hospitals and schools but PFI is also used to build roads, light rail, offices, libraries, defence equipment, waste facilities, housing and street lighting.

Typically a PFI contract will last around 30 years and require the private sector to design, build, finance and operate a new asset (or sometimes refurbish an existing asset). In the majority of cases the contractor is a specially created company for that contract, known as a Special Purpose Vehicle (SPV). The shareholders of the SPV are often the main contractors involved in the contract and may include a financier.  The SPV borrows funds to finance construction of the asset it then operates and maintains for the remainder of the contract. See figure 1. 

The public sector pays the SPV a Unitary Charge providing the SPV delivers the contracted services. These payments should cover financing and operational costs and provide the SPV with a profit.

Figure 1: The consortium company joint venture model

 

 

(Source: PFI: Meeting the investment challenge (HM Treasury (2003). Crown copyright. Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland).

In the past few years, new approaches to delivering privately financed projects have been developed. These include the LIFT and Building Schools for the Future programmes, as well as various models of PPP which are not PFI, such as joint venture companies and part privatisations. In addition, there are still a small number of privatisations carried out in the UK.

Since Treasury guidance issued in 2003, PFI is no longer used for projects with a capital value of under £20 million nor for IT projects.