Private finance initiative (PFI) / public-private partnership (PPP)

The private finance initiative (PFI) is a way of getting private sector involved in financing public sector projects like schools, hospitals and prisons. Firms take on the costs of building and running public services in return for a fixed fee from the Government, payable over a number of years.

Deals within the PFI are known as public-private partnerships, or PPPs. They range from the large (the London Underground PPP was worth £16bn in 2002) to much smaller projects (local government has adopted the financing method to pay for everything, from GP surgeries to street lighting schemes).

The supposed advantage to the Government is that PFI transfers some of the risk of major capital projects to the private sector while spreading out the cost. For the companies, the margins are often bigger than their commercial projects and deals can be refinanced at a lower rate once the (risky) building stage is complete.

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