PFI stands for the public finance initiative, which is a way of financing big public-sector projects through the private sector.
It involves a long-term contract that runs for about 25 to 30 years between a private party and a government entity where the private sector designs, builds, finances and operates a public asset, such as a hospital or a school.
The asset is then handed back to the public sector at the end of the contractual period.
How does it work?
PFI is generally used to finance major public works, many of which benefit the public sector. These include motorways and transport projects such as railroads, airports, bridges and tunnels, but private sector firms may also be contracted to construct the likes of schools, hospitals and prisons.
Instead of funding these projects upfront from taxpayers, private firms are hired to finance, manage, and complete the projects.
READ MORE: Scotland cannot be subject to another PFI experiment from the UK
In return, the government authority makes repayments to the private company over the long term. Firms could also make money back from revenue generated through the project – for example, motorway tolls.
PFI essentially aims to take the burden off governments and taxpayers in terms of raising capital for big projects. The government does not have to lay out a large sum of money at once to fund a major project.
Why was it brought in?
PFIs were first implemented in the UK in the early 1990s under John Major’s government.
According to Private Eye, the initial idea actually came from Tory frontbencher David Willets who, in a pamphlet in 1993 called The Opportunities for Private Funding in the NHS, argued that instead of paying for hospitals by public funding, you could get a private enterprise to build and run them and inherit them at the end.
But the idea never really got off the ground under the Tories, with many figures in the party opposed to it. It was under the Labour government of Tony Blair (below) that PFI really took off.
In the late 1980s and 1990s, the UK was in recession and driven by a political ideology that believed privatisation would bring greater investment, higher production standards and more efficiency into the public sector.
It seemed that PFI had many advantages - it would bring private sector investment, knowledge and management skills into the public sector, deliver buildings and infrastructure on time and on budget with the private sector not paid until the asset had been delivered, and encourage innovation, and help to seed new private sector industries.
READ MORE: Labour's embrace of NHS privatisation will fail those who need it most
A far bigger temptation perhaps though was that PFI investment could be hidden “off-balance-sheet” with the true cost of debt not crystalising until the asset was handed back to the public sector in the far future.
It meant that the public could see new schools and hospitals being built and refurbished in the 1990s and 2000s and think positively of their political representatives at the time, while the real cost of that spending was being pushed 25 to 30 years into the future for today’s taxpayers to pay.
Economics expert Richard Murphy said the burden of debt from PFI has been “extraordinary”, with one of the most well-documented cases being Norwich Hospital which, as of 2022, 20 years after it had been built, was still paying as much each year to the company which built it as it was spending on medical supplies, according to the Eastern Daily Press.
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