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PPP Explained

A Public Private Partnership (PPP) is an umbrella term for Government schemes involving the private sector in public sector projects.

The Private Finance Initiative (PFI), which has now been superseded by PF2, is a form of PPP developed by the Government in which the public and private sectors join to design, build or refurbish, finance and operate (DBFO) new or improved facilities and services to the general public. Under the most common form of PFI, a private sector provider like John Laing will, through a Special Purpose Company (SPC), hold a DBFO contract for facilities such as hospitals, schools, and roads according to specifications provided by public sector departments. Over a typical period of 25-30 years, the private sector provider is paid an agreed monthly (or unitary) fee by the relevant public body (such as a Local Council or a Health Trust) for the use of the asset(s), which at that time is owned by the PFI provider. This and other income enables the repayment of the senior debt over the concession length. (Senior debt is the major source of funding, typically 90% of the required capital, provided by banks or bond finance.) Asset ownership usually returns to the public body at the end of the concession. In this manner, improvements to public services can be made without upfront public sector funds; and while under contract, the risks associated with such huge capital commitments are shared between parties, allocated appropriately to those best able to manage each one.

One of the key requirements for PFI schemes is that they offer the public sector value for money (VFM). The Government, and indeed the private sector, demand high-quality services, delivered on time and to budget. Historically, major investment projects built purely under public finance have failed time and again to keep within the initial schedule and funding constraints. PFI has proven to be substantially more cost-effective and reliable.

PFI concessions are competitively bid in compliance with EU or local procurement rules. The private sector consortium chosen as ‘preferred bidder' (i.e. to whom the contract is ultimately awarded) has incentives to perform to the highest standards throughout the whole of the concession - not only is reputation at stake, but revenues are only earned once the asset is operational, and penalties are given for unsatisfactory performance and results by way of deductions to the governmental monthly fee. Contracts are carefully drawn up at 'financial close' to ensure any failings of sub-contractors also carry heavy penalties. Performance is monitored closely at all stages, allowing problems to be rectified before they escalate.

Related information

Please click here to view a PFI Model Infographic.




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