The Private Finance Initiative and Public Sector Finance

Abstract

Traditionally, when the public sector wanted more capital assets, it borrowed funds for the purpose. Under the Private Finance Initiative (PFI), private consortia borrow funds to build assets and then, in return for a charge, use them to provide services for the public sector. The authors explore the implications for the public finances of using the PFI. A widely held belief, which has been put forward by the Treasury, is that using the PFI allows investment in assets used by the public sector to grow, even within public spending limits, because PFI investments fall outside the ambit of public borrowing. However, the authors show that if a constant amount of spending is transferred every year from traditional finance to PFI finance, then the fall in public borrowing will diminish over time and may eventually wholly disappear. So, even if some PFI finance is used every year, the scope for extra investment will diminish and may eventually disappear. They also show that, if PFI finance is used, then the required tax yield for a given level of investment may be permanently higher or permanently lower. In addition, they show that, even if a switch to PFI did reduce both public borrowing and taxes, then it might not facilitate much extra investment.