In 1992 the UK government announced the introduction of the PFI for the
procurement of infrastructure projects, such as roads, bridges, railways, hospitals, prisons, etc. Under PFI the whole cost of a project is met from private investment funds and the lenders of those funds look to the stream of cash flows from the earnings of the project for a repayment of (or a return on) their investments. The sponsors of a PFI project are usually a consortium of contractors and their funding banks who set up a company to undertake the project.
The company receives loans from the sponsors (and often other banks)
and may also raise equity capital, i.e. shares. It designs, constructs, finances, maintains and operates the project for a term of years under a concessionary agreement granted by the promoter who may be a government department,
local authority or other public body.
An outstanding example of PFI was the Channel Tunnel. The initiators of
the idea were two groups of banks and contractors one British, the other French. After the English and French Governments agreed to support the project, the banks became the sponsors of it and set up the company Eurotunnel to fund, own and operate the tunnel under a 55-year concession from the two Governments. The contractors then joined together to form Transmanche Link to design and construct the tunnel. Transmanche Link was a holding company for two other executive companies, one an alliance of five British contractors to drive the tunnel from the English side, the other an alliance of five French contractors to work from the French side. Eurotunnel was, in effect the client or promoter for whom Transmanche Link worked.
APFI project takes much time and money to set up because of the long term
of the contract and the many risks which have to identified and allocated to one or other of the parties. The contractor has also to negotiate with banks and other funding agencies for the necessary capital. Hence, only the largest contractors with substantial financial backing are able to undertake a PFI scheme.
The promoter has also to spend money on setting up an organization to
check that the sponsors and their contractor comply with the terms of a concessionary agreement, and to resolve any problems occurring due to changed circumstances arising during construction and the period of the agreement.