# Understanding Private Finance Initiatives (PFI): Pros, Cons, Notable Examples

## What Is a Private Finance Initiative (PFI)?

A private finance initiative (PFI) is a system whereby public projects are financed by private companies, which alleviates immediate financial burdens on the government. With a PFI, a private company handles a project's up-front costs and the government authority pays the private company back over the long term. Typical projects funded by PFIs include infrastructure and public facilities. PFIs are used extensively in the UK and Australia. In the United States, they're called  
public-private partnerships (PPPs).

### Key Takeaways

*   A Private Finance Initiative (PFI) allows governments to finance large public projects through private sector funding.
*   PFIs help shift immediate capital burden off taxpayers, with private companies covering upfront costs and receiving long-term government payments.  
    
*   Common PFI projects include infrastructure like highways, schools, and hospitals, enhancing public service without immediate government expenditure.
*   Although PFIs aim to reduce public financial burden, they can transfer costs to future taxpayers and complicate contract termination.
*   While prominent in the UK and Australia, similar arrangements in the US are known as public-private partnerships (PPPs).

## How Do Private Finance Initiatives (PFIs) Work?

Private finance initiatives are used to fund major public works. Many are infrastructure projects that benefit the [public sector](https://www.investopedia.com/terms/p/private-sector.asp). 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.

Instead 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](https://www.investopedia.com/terms/r/repayment.asp) from the government or [revenue](https://www.investopedia.com/terms/r/revenue.asp) 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.

The length of the contract depends entirely on the project. However, PFI contracts typically ran between 25 to 30 years in the United Kingdom.

> **Important**
>
> The public-sector must define project goals clearly and ensure the private-sector partner follows the terms.

## Regional Variations and Controversies of PFIs

The term private finance initiative is used primarily in the United Kingdom and Australia. In the United States, PFIs are typically called [public-private partnerships (PPPs)](https://www.investopedia.com/terms/p/public-private-partnerships.asp).

PFIs were controversial in the UK and declined after the global financial crisis due to high costs. As such, the Chancellor abolished their use in 2018. New initiatives were no longer in use but existing ones continued until they expired.  

## Pros and Cons of Private Finance Initiatives (PFIs)

### Advantages

Traditionally, governments had to raise funds themselves for [public infrastructure projects](https://www.investopedia.com/articles/markets/080816/can-infrastructure-spending-really-stimulate-economy.asp). If funding is short, governments may [borrow from the bond market](https://www.investopedia.com/investing/basics-of-municipal-bonds/) and hire contractors, a cumbersome process where PFIs can help.  

PFIs aim to ensure projects finish on time and shift some construction risks to the private sector.

PFIs enhance public-private sector relationships, offering long-term benefits to both sectors. Through this relationship, they can share knowledge and resources.

> **Fast Fact**
>
> Financial advisors, such as investment banks, help manage the bidding, negotiating, and financing of a PFI.

### Disadvantages

A drawback of PFIs is that repayments with [interest](https://www.investopedia.com/terms/i/interest.asp) might burden 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.

There's also a risk private firms might not meet safety or quality standards in project management.

In 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.

Pros

*   Governments can issue bonds to raise money when there is a shortfall
    
*   Designed to improve on-time project completion  
    
*   Transfers some of the risks associated with constructing and maintaining projects  
    
*   Improve relationships between public and private sectors
    

Cons

*   May put a financial burden on taxpayers
    
*   Risk to private-sector firms that don't comply with safety or quality standards
    
*   Terminating contracts can be complex
    

## Why Are Private Finance Initiatives (PFIs) Criticized?

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](https://www.investopedia.com/terms/a/accounting.asp) gimmick to reduce the appearance of public-sector borrowing.

## Real-World Example of a Private Finance Initiative (PFI)

In 2020, the U.S. government [engaged in public-private partnerships](https://www.investopedia.com/ask/answers/021715/what-impact-publicprivate-partnerships-have-economic-growth.asp) in response to the COVID-19 pandemic. It partnered with private vaccine developers such as Pfizer, BioNTech, and Moderna. This resulted in the launch of vaccines in less than a year.

Public-private partnerships were also responsible for innovations in COVID-19 testing, treatment options, and vaccine distribution throughout the country.  

## What are Examples of Private Finance Initiative (PFI) Projects?

Private finance initiatives (PFIs) typically include major government projects such as highways, public transport, airports, bridges, and tunnels. Other examples of private finance initiatives include hospitals, arenas, prisons, and public schools.

## What are the Benefits of Private Finance Initiatives?

One of the main benefits of private finance initiatives is alleviating the immediate financial burden on a government and taxpayers to finance major public-sector projects. PFIs can also transfer some of the risks associated with a project from the public sector to the private sector.

## How Long do Private Finance Initiative Projects Last?

Private finance initiative projects usually take decades to complete. Contracts in the U.K. typically last 25 to 30 years.

## The Bottom Line

Private finance initiatives (PFIs) allow governments and the private sector to join forces to finance and implement projects that benefit the public sector. While PFIs have some potential downsides, governments around the world have used them for decades to finance a wide variety of projects, ranging from highways to schools to hospitals. Potential drawbacks include long-term financial burdens on taxpayers due to interest payments and the challenges of terminating contracts. Referred to as public-private partnerships (PPPs) in the U.S., such partnerships were instrumental in developing COVID-19 vaccines.

> **Article Sources**
>
> 1.  International Road Federation. “[Public Private Partnerships in Highway Construction](https://www.irf.global/assets/pdf/Alan-Ruck-Public-Private-Partnerships-in-Highway-Construction.pdf).”
>     
> 2.  UK Parliament. "[Goodbye PFI](https://commonslibrary.parliament.uk/goodbye-pfi/)."
>     
> 3.  Thomson Reuters, Practical Law. "[Private Finance Initiative (PFI)](https://uk.practicallaw.thomsonreuters.com/Glossary/UKPracticalLaw/I250197b6e8db11e398db8b09b4f043e0?transitionType=Default&contextData=%28sc.Default%29&firstPage=true)."
>     
> 4.  The World Bank, Public-Private Partnership Legal Resource Center. “[PPP Contract Types and Terminology](https://ppp.worldbank.org/public-private-partnership/ppp-contract-types-and-terminology)."
>     
> 5.  The World Bank, Public-Private Partnership Legal Resource Center. “[Government Objectives: Benefits and Risks of PPPs](https://ppp.worldbank.org/public-private-partnership/overview/ppp-objectives).”
>     
> 6.  The World Bank, Public-Private Partnership Legal Resource Center. “[Termination Provisions](https://ppp.worldbank.org/public-private-partnership/termination-provisions).”
>     
> 7.  Nasdaq. “[Public-Private Partnerships Are Key to Improving America’s Pandemic Response Now and in the Future](https://www.nasdaq.com/articles/public-private-partnerships-are-key-to-improving-americas-pandemic-response-now-and-in-the).”
>     
> 8.  National Institutes of Health. “[NIH to Launch Public-Private Partnership to Speed COVID-19 Vaccine and Treatment Options](https://www.nih.gov/news-events/news-releases/nih-launch-public-private-partnership-speed-covid-19-vaccine-treatment-options).”