Project Financing Initiative
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Started by entrepreneurs in America extracting oil in Texas. The project would be financed against the asset in the ground (value of the oil). Set up because projects became too large and companies didn’t have the assets to secure a loan against. The financial reward of successful oil extraction was large enough for the lenders to accept the risk of failure. | Started by entrepreneurs in America extracting oil in Texas. The project would be financed against the asset in the ground (value of the oil). Set up because projects became too large and companies didn’t have the assets to secure a loan against. The financial reward of successful oil extraction was large enough for the lenders to accept the risk of failure. | ||
PFI has been commonly used in the UK since it was implemented in 1992 by John Major leader of the Conservative government. one of the largest projects using this method being the channel tunnel between England and France. | PFI has been commonly used in the UK since it was implemented in 1992 by John Major leader of the Conservative government. one of the largest projects using this method being the channel tunnel between England and France. | ||
| − | PFI is used over the world but primarily in Anglo-saxon countries such as the U.S., Australia, Canada, South Africa but is also used in pioneering countries such as Chile and the Netherlands. | + | PFI is used all over the world but primarily in Anglo-saxon countries such as the U.S., Australia, Canada, South Africa but is also used in pioneering countries such as Chile and the Netherlands. |
Revision as of 15:42, 21 September 2015
Private finance initiative (PFI) is where the debt incurred by a project is repaid by the income that comes from the completed asset. other names and forms Started by entrepreneurs in America extracting oil in Texas. The project would be financed against the asset in the ground (value of the oil). Set up because projects became too large and companies didn’t have the assets to secure a loan against. The financial reward of successful oil extraction was large enough for the lenders to accept the risk of failure. PFI has been commonly used in the UK since it was implemented in 1992 by John Major leader of the Conservative government. one of the largest projects using this method being the channel tunnel between England and France. PFI is used all over the world but primarily in Anglo-saxon countries such as the U.S., Australia, Canada, South Africa but is also used in pioneering countries such as Chile and the Netherlands.
A sign of its complexity is the many names and variations it has. PFI can also be known as non-recourse (or limited recourse if mixed with other financing) unsecured or off-balance-sheet financing. Non-recourse means that the financial lenders have no recourse to claim against if the project is a failure. It is unsecured because the loan is not secured by any assets other than those of the project itself and its future income. It is called off balance sheet because the capital invested in the project will not appear on the balance sheet of the parent company. Being off-balance sheet also gave tax advantages to these projects.
Private financing can take different forms but are fundamentally very similar. Public-Private Partnership (PPP) always involves both private and public sectors sharing the benefits of sale, transfer or exploitation of an asset but this is not always financed by PFI sometimes it can be paid for with the public sector capital.
It should be noted that PFI is separate to privatisation because in the former, the asset or service remains public, in the latter a public service is being transferred to the private sector.
