Private Finance Initiative - PFI


DEFINITION of 'Private Finance Initiative - PFI'

A method of providing funds for major capital investments where private firms are contracted to complete and manage public projects. Under a private finance initiative, the private company, instead of the government, handles the up-front costs. The project is then leased to the public, and the government authority makes annual payments to the private company. These contracts are typically given to construction firms and can last 30 years or longer. In the United States, PFIs are called public-private partnerships.


Loading the player...

BREAKING DOWN 'Private Finance Initiative - PFI'

Private finance initiatives were originally started as part of Great Britain’s strategy for providing high quality services. PFIs were first implemented there in 1992 and become popular after 1997. They were used to fund major public works projects such as schools, prisons, hospitals and infrastructure. Instead of funding these projects up front from tax receipts, private firms construct them and then make their money back through long-term (25+ years) repayments, plus interest, from the government. Thus, the government does not have to outlay a large sum of money at once to fund a large project. PFIs are also supposed 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. Financial advisers such as investment banks help manage the bidding, negotiating and financing process.

A key drawback is the interest and payments associated with PFIs burden future taxpayers. In addition, the arrangements sometimes include not only construction, but also ongoing maintenance once the projects are complete, which further increases these projects’ future cost and tax burden.

In the United Kingdom in the 2000s, a scandal surrounding PFIs revealed 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 taxpayer’s detriment. PFIs have also been criticized as an accounting gimmick to reduce the appearance of public-sector borrowing.

  1. Cash Flow From Financing Activities

    A category in the cash flow statement that accounts for external ...
  2. Equity Financing

    The act of raising money for company activities by selling common ...
  3. Inventory Financing

    A line of credit or short-term loan made to a company so it can ...
  4. "A" Round Financing

    The first major round of business financing by private equity ...
  5. Warehouse Financing

    A form of inventory financing in which loans are made to manufacturers ...
  6. Alternative Risk Financing Facilities

    A type of private insurer that offers various types of coverage ...
Related Articles
  1. Economics

    Successful Ways That Governments Reduce Federal Debt

    Governments have many options when trying to reduce debt, and throughout history some of them have actually worked.
  2. Economics

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  3. Fundamental Analysis

    Cash Flow Statement: Analyzing Cash Flow From Financing Activities

    The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors.
  4. Economics

    Debt Monetization: A Nearsighted Government Policy?

    We look at whether this financial practice benefits a government in the long term.
  5. Bonds & Fixed Income

    A Look At National Debt And Government Bonds

    Learn the functions of the U.S. Treasury, and find out how and why it issues debt.
  6. Investing Basics

    Understanding Off-Balance Sheet Financing

    For anyone who was invested in Enron, off-balance sheet (OBS) financing is a scary term. Off-balance sheet financing means a company does not include a liability on its balance sheet. It is an ...
  7. Economics

    Why Governments Issue Foreign Bonds

    Government bonds issued in foreign currency have drawn a growing amount of interest in recent years. This article explores why governments, particularly those in emerging markets, choose to denominate ...
  8. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  9. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  10. Retirement

    Is The U.S. Government Too Big To Fail?

    Some think that the U.S. government is too big to fail, but one must only look at historical examples to know that it's not true.
  1. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  2. What are the ethical arguments against government subsidies to companies like Tesla?

    The ethical argument behind government subsidies is that they should be put into place to help industries that will, in turn, ... Read Full Answer >>
  3. What happens if the Federal Reserve lowers the reserve ratio?

    If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required ... Read Full Answer >>
  4. How will a value added tax impact the government budget?

    In 1992, the Congressional Budget Office conducted an economic study on value-added tax, or VAT. At the time, the CBO concluded ... Read Full Answer >>
  5. What strategies can be used to achieve the goals of contractionary policy?

    In the United States, the Federal Reserve is charged with controlling monetary policy, and Congress (along with the executive ... Read Full Answer >>
  6. What austerity measures can a country implement to curtail government spending?

    Broadly speaking, there are three types of austerity measures. The first is focused on revenue generation (higher taxes), ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!