Full Form Of Pfi Private Finance Initiative How Does It Works

Full Form of PFI – Private Finance Initiative

Features

The presence of the following features can identify the existence.

It is a contractual arrangement between the private sector authority and a consortium of private sector investors.The essential feature is that it uses private finance (i.e., private sector debt and underwritten equity) to fund public projects and services.The private sector consortium undertakes public projects and facilities construction, operation, and maintenance.In return for the services provided, the consortium reimburses for the quantum of services provided based on their compliance with the performance standards.

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Scope

What are the projects that can be undertaken under a Private Finance Initiative arrangement?

Infrastructure projects for the general publicPublic facilities

How Does Private Finance Initiative Works?

In this case, public sector authority firstly contracts with Special Purpose VehicleSpecial Purpose VehicleA Special Purpose Vehicle (SPV) is a separate legal entity created by a company for a single, well-defined, and specific lawful purpose. It also serves as the main parent company’s bankruptcy-remote and has its own assets and liabilities.read more (SPV), a consortium of private sector undertakings. Private sector investors own SPVs made for special purposes.The funding available with the consortium is used for the building and overall maintenance of the project. While the project is in progress, SPV may help in contract amendments between the public sector and the facility provider, and for this service, it may charge additional fees.The contracts’ tenure is usually 25-30 years, depending on the requirements and nature of each project. During the project tenure, SPV undertakes work, and the private sector authority reimburses on a “no service, no fees” basis. It means that the public sector authority prescribes certain “output specifications” regarding the outcomes to be achieved by the SPV.If SPV does not meet certain standards, the relevant portion is fees are put on hold until such standards meet.However, if SPV does not improve the standards over time, the public sector authority may terminate the contract and take ownership of the project.

Examples

It includes infrastructure projects such as highways, tolls, roadways, bridges, railroads, airports, etc. Further, PFI arrangements are not just limited to infrastructure projects. Still, they can also extend to the provision of public facilities such as the construction of water and wastewater management, schools, colleges, hospitals as well as sports facilities.

Thus, it may be called PFI whenever the public sector contracts with the private sector to undertake the development of a public project.

Benefits

The model provides the following benefits.

Before the PFI model existed, governments had to invest in public projects either through their funds or by raising money from borrowings and paying interest on such borrowings. Also, they were required to appoint contractors to get the work done. But it eliminates the need for investments by the government.It has been observed that PFI models provide on-time completion of projects.The risks attached to the construction and maintenance of the projects vest with the private sector rather than the public sector.The model is advantageous for both the private and the public sectors in the long term since they can share resources and expertise and establish a good relationship between the two sectors.

Limitations

There are some limitations which are as follows.

It requires that interest must pay along with the repayments made, the burden of which may eventually get transferred to the taxpayers.It may happen that the private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more contractors do not meet the prescribed safety standards and the requisite quality when undertaking the project.Sometimes, the projects are given not only for construction but also for the afterward maintenance. Not only will this increase the project cost, but it may also lead to an additional burden for the taxpayersThe TaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more.

Conclusion

Instead of following the earlier practice of making direct investments and carrying out the construction and operation of public projects, governments often follow PFI arrangements. It establishes a relationship between the private and public sectors and leads to the on-time completion of public projects.