A Private Finance Initiative (PFI) is a means by which the private sector is able to provide public services. The government works with a private sector partner to deliver a public service, with the private company financing the project and then being reimbursed over the project`s lifetime. This article will aim to explain how PFI contracts work.

PFI contracts are typically used for large-scale projects such as hospitals, schools or transport infrastructure, and they often involve the construction or refurbishment of a facility. The private sector partner will take on the risk of building the facility, and then maintain and run it over a specified period of time, usually 20 or 30 years.

The cost of the project is covered by the private company, who will then receive regular payments from the government throughout the contract`s lifetime. These payments are made according to a pre-agreed schedule and cover both the capital cost (the initial cost of building the facility) and the ongoing costs of maintenance and operation.

The contracts are designed to be cost-neutral for the public sector, as the payments made to the private sector partner should be no more than the cost of providing the service in-house. However, the private sector company will typically require a profit margin in order to take on the risk of the project.

PFI contracts have been controversial in the UK, with critics arguing that they are poor value for money for taxpayers. The National Audit Office has stated that the cost of PFI contracts can be up to 40% higher than using traditional procurement methods.

To counter this, the government has introduced a new model of procurement called PF2, which aims to address some of the criticisms of PFI. PF2 contracts require the private sector partner to take on more of the risk, and also provide greater transparency around costs.

In conclusion, PFI contracts are a means of delivering public services through the private sector, with the private company responsible for financing and delivering the project. The cost of the project is covered by regular payments from the government, and the contract typically covers a 20-30 year period. While controversial, PFI contracts remain a popular model for delivering large-scale public projects.