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HMRC internal manual

Business Income Manual

Measuring the profits (particular trades): Private finance initiative (PFI): background

PFI introduced private sector expertise and finance into the design, building and maintenance of major public-sector infrastructure projects and the operation of some public services.

Under a PFI scheme the private sector assume much of the risk in:

  • building and managing property, e.g. a hospital, and/or
  • providing support services,

thereby enabling the public sector to concentrate resources on delivering their core activities, e.g. the provision of quality healthcare.

The public sector ‘purchaser’ has to demonstrate that the PFI contract offers value for money to the Exchequer, in effect that there has been a transfer of risk to the private sector ‘operator’. The intended result is an improvement in both the quality of public services and the nation’s infrastructure, at an affordable cost.

In a typical PFI transaction an operator contracts to provide services to the purchaser for a period, in return for an annual service payment (the ‘unitary charge’). The unitary charge may be linked to performance, availability and usage criteria.

Many PFI projects involve the operator in the design and construction of a PFI property, e.g. a school, road or an information technology system, as well as the provision of ancillary support services, e.g. maintenance of the property, to agreed standards. The contracts are often for quite lengthy periods, typically 25 - 30 years.