Among the priorities to be addressed within regulatory reform, the institution of a suitable legal framework to associate private capital to public investment projects is often quoted, under the name of private finance initiative (PFI). The PFI model was introduced in the 1990s in the UK as a way of using private funding to pay for major public infrastructure projects such as roads, prisons and schools. In a PFI agreement, the private sector obtains finance to design, build and operate a facility for the benefit of the public. In return the public sector will grant its private sector partner a long-term contract to run the facility and will pay a monthly fee over the life of the project to repay the loan. With some twenty years' experience, the formula is now quite well known, but the associated costs of covering the funding and project risks are now better known. Last November, the UK government launched a review of the system, with a view to reform. A 'call for evidence' on a replacement funding method that would "draw on private sector innovation but at a lower cost to the taxpayer" closed on 10 February.
The PFI model was introduced in the 1990s as a way of using private funding to pay for major public infrastructure projects such as roads, prisons and schools. In a PFI agreement, the private sector obtains finance to design, build and operate a facility for the benefit of the public. In return the public sector will grant its private sector partner a long-term contract to run the facility and will pay a monthly fee over the life of the project to repay the loan. With some twenty years' experience, the formula is now quite well known, but the associated costs of covering the funding and project risks are now better known. Last November, the UK government launched a review of the system, with a view to reform. A 'call for evidence' on a replacement funding method that would "draw on private sector innovation but at a lower cost to the taxpayer" closed on 10 February.
This week, the National Audit Office added fuel to the discussion in a report stating that PFI investors are overcharging for risk. "Public sector authorities could be paying more than they should to equity investors who are charging more than they should to offset risk in projects funded by way of the PFI. Investors selling shares in PFI schemes early in order to fund future projects are typically receiving high returns of "between 15 and 30%" – well above an expected return of 12-15% at the point the contracts are signed... PFI projects are traditionally split into the 'construction' and 'operation' phases, with the construction phase being the most risky. Although investors theoretically bear these risks, which can include contractors failing to deliver or project costs being higher than anticipated, such risks are generally passed on to contractors in the project subcontracts. Additionally, the Government is a "very safe credit risk".
The same questioning in ongoing in France, where a full page in Le Monde made the point that the hidden debt arising from past PFI could be an unexploded bomb, especially for local authorities and hospitals.The French debate is summarized by an academic in an article published yesterday under the title "PFI: an opportunity or a curse for the State?".
There are also useful resources managed by the European PPP resource centre (EPEC).
The PFI model was introduced in the 1990s as a way of using private funding to pay for major public infrastructure projects such as roads, prisons and schools. In a PFI agreement, the private sector obtains finance to design, build and operate a facility for the benefit of the public. In return the public sector will grant its private sector partner a long-term contract to run the facility and will pay a monthly fee over the life of the project to repay the loan. With some twenty years' experience, the formula is now quite well known, but the associated costs of covering the funding and project risks are now better known. Last November, the UK government launched a review of the system, with a view to reform. A 'call for evidence' on a replacement funding method that would "draw on private sector innovation but at a lower cost to the taxpayer" closed on 10 February.
This week, the National Audit Office added fuel to the discussion in a report stating that PFI investors are overcharging for risk. "Public sector authorities could be paying more than they should to equity investors who are charging more than they should to offset risk in projects funded by way of the PFI. Investors selling shares in PFI schemes early in order to fund future projects are typically receiving high returns of "between 15 and 30%" – well above an expected return of 12-15% at the point the contracts are signed... PFI projects are traditionally split into the 'construction' and 'operation' phases, with the construction phase being the most risky. Although investors theoretically bear these risks, which can include contractors failing to deliver or project costs being higher than anticipated, such risks are generally passed on to contractors in the project subcontracts. Additionally, the Government is a "very safe credit risk".
The same questioning in ongoing in France, where a full page in Le Monde made the point that the hidden debt arising from past PFI could be an unexploded bomb, especially for local authorities and hospitals.The French debate is summarized by an academic in an article published yesterday under the title "PFI: an opportunity or a curse for the State?".
There are also useful resources managed by the European PPP resource centre (EPEC).
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