Case Study – Private Finance Initiative in UK – Insights for India

Case Study of the Private Finance Initiative (PFI) in the UK: Insights for India
Shahana Sheikh and Mukul G. Asher

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This paper has two main objectives. The first is to analyse United Kingdom’s experience of of more than two decades of PPP method or procurement in the social sector, through its Private Finance Initiative (PFI) which was introduced in 1992. The second is to discuss insights from UK’s PFI experience for similar social sector initiatives in India.

PFI attempted to use methods and practices of project finance for public sector infrastructure projects, specifically for the sectors such as education and health. By 2012, 717 PFI projects were either under construction or in operation across the various departments of the UK Government, with a total capital cost of GBP 54.7 billion, and total repayments amounting to GBP 301.3 billion until the financial year 2049-50. These projects were initiated with the objective of reaping benefits from private sector’s presumed project management skills and innovation and risk management expertise, and thereby progressing towards greater output-orientation by the public sector departments. To what extent were the above objectives realised?

This paper finds that the main operational challenges in PFI were related to use of public sector comparators, skill deficits in the public sector, complexity and rigidity of contracts, improper allocation of risks, and lack of transparency of PFI-linked public finances. These led to operational and other reforms in 2012, named Private Finance-2 (PF2). Nevertheless, challenges still remained, primarily in participation of institutional investors, pricing of equity, accounting and budgetary treatment of PFI projects, and estimation of savings from existing PFI projects.

Among the key insights for India arising from the PFI experience are the need for government departments to skill themselves with project management and contract negotiation and monitoring abilities; focusing on whole-life costing of project rather than on only short-term budget costs; comparative analysis of conventional procurement (which in any case needs to be strengthened) with estimation of PPP- linked full economic costs, including contingent liabilities; understanding implications of risk allocation between the PPP project partners; keeping project financing simple, while focusing on project implementation; keeping channels open to debt holders;and establishing and regularly maintaining information and data systems for performance monitoring as well as for bench-marking of PPP projects. The PPP method should not be used to obtain money. It has high transaction costs and complex governance structures which must be offset by sufficiently large operational efficiencies, and learning capacities of public sector organisations. Governmental decision making structures which can periodically examine existing policies and refine or restructure them is also a good lesson for India.

Read the full case study in PDF [479KB]

You can refer to the case study as:
Shahana Sheikh and Mukul G. Asher, “Case Study of the Private Finance Initiative (PFI) in the UK: Insights for India” Takshashila Case Study 2015-02. (2015)

You can also find the case study on the SSRN database.