| Abstract: | This article outlines and assesses the private finance initiativein the UK. The initiative has been slow to develop despite pressurefrom governments (anxious to limit the PSBR) and several revampsto facilitate the PFI approach. Within a PFI project there arebeneficial incentives to avoid cost over-runs but not to reducecosts where they affect long-run services. These incentivesand the limits to their effectiveness are explored. Such contractsrequire the transfer of risk from the public to the privatesector. the role and pricing of risk in the PFI is analysed.It is argued that the PFI does not value risk correctly andthat the value for money test is biased against private-sectorprovision. Policy implications are discussed, including a revampof the value for money test and the introduction of explicitassessment of the impact of potential renegotiation and othercontractual difficulties. |
