In today's world, the ability to fund public sector projects has become difficult to obtain. As governments look for innovative ways to raise funds, one financial tool that has proven very effective has been private finance initiatives. Used to create partnerships between the public and private sector, it has been used to help fund various infrastructure projects.
A Popular Global Program
Private finance initiatives, while used in the United States, have been used extensively in Europe and other countries around the world including:
Projects Funded through PFI
Private finance initiatives have been used to fund a number of infrastructure projects around the world such as:
- Police headquarters
- Public schools
Once a project is finalized, a contract is signed between the public and private sector parties involved. These contracts often call for private sector companies to operate the public facilities, and this agreement can stay in place for 25-30 years or more depending on the contract. Much of the time, public sector staff continue to be used to operate the facilities, with their employment contracts being transferred to the private sector companies based on agreements stated in the contract.
Various methods have been used to fund both big and small PFI projects, with the two most common ones being the sale of bonds and loans from banks. Bonds have been used in financing bigger projects, while loans are the primary choice for smaller projects. Once PFI projects are completed, the deals are often refinanced to save thousands of dollars over the life of the loan. This occurs once construction is completed and the risk factor of the project can be lowered, allowing for better financing options. For larger projects, refinancing is sometimes done by bonds. In these cases, bank debt is used to fund construction, then bonds used to fund the building's operation. In almost all cases, the money saved through refinancing must be shared equally with the government.
While private finance initiatives have their detractors, overall they are seen as very effective ways to get projects completed in a much shorter period of time and in a far more efficient manner.