how private finance initiatives pfis work
private finance initiatives are used to fund major public works many are infrastructure projects that benefit the public sector these include highways and roadways and transport projects such as railroads airports bridges and tunnels private sector firms may also be contracted to construct water and wastewater facilities prisons public schools arenas and sports facilities 2instead of funding these projects up front from taxpayers private firms are hired to finance manage and complete the projects the private firms typically make their money back through long term repayments from the government or revenue generated from the project for example highway tolls under this arrangement the government does not have to lay out a large sum of money at once to fund a major project 3depending on the type of project pfi contracts typically last 20 to 30 years they can run longer or shorter depending on the project 2the public sector partner is responsible for clearly defining the objectives of the project and making sure that the private sector partner complies with the terms of the partnership real world example of a private finance initiativein 2020 the u s government engaged in public private partnerships in response to the covid 19 pandemic it partnered with private vaccine developers such as pfizer biontech and moderna the end result was launching effective vaccines in less than a year 4public private partnerships were also responsible for innovations in covid 19 testing treatment options and vaccine distribution throughout the country 5advantages of private finance initiativesgovernments have traditionally had to raise money on their own to fund public infrastructure projects if they aren t able to find the money governments may also borrow from the bond market then hire and pay contractors to complete the job this can often be very cumbersome which is where the pfi comes in pfis are intended to improve on time project completion and transfer some of the risks associated with constructing and maintaining these projects from the public sector to the private sector 2pfis also improve the relationship between the public and private sectors while providing both with long term advantages through this relationship both sectors can share knowledge and resources 2financial advisors such as investment banks help manage the bidding negotiating and financing of a pfi disadvantages of private finance initiativesa key drawback of private finance initiatives is that since the repayment terms typically include payments plus interest the burden may end up being transferred to future taxpayers in addition the arrangements sometimes include not only construction but also ongoing maintenance once the projects are complete which further increases a project s future cost and tax burden 6there is also a risk that private sector firms may not comply with relevant safety or quality standards when managing a project 6in addition terminating a pfi contract before it ends can be highly complex as most projects are not able to secure private financing without assurances that the financing of the project will be repaid in the case of termination in most termination cases the public sector is required to repay the debt and take ownership of the project in practice termination is considered only as a last resort 7criticism of pfis in the u k private finance initiatives were first implemented in the united kingdom in 1992 and became more popular after 1997 in the 2000s controversy surrounding pfis revealed that the government was spending significantly more on these projects than they were worth to the benefit of the private firms running them and to the taxpayers detriment in addition pfis have been criticized by some as an accounting gimmick to reduce the appearance of public sector borrowing 89