Private Finance Initiative—The Theory Behind Practice*

Abstract

Since its launch in 1992, the UK's Private Finance Initiative (PFI) is being used more often as an innovative means for governments to expand public infrastructures and services. The practical advantages and disadvantages of PFI have been considered, but theoretical justifications for PFI remain unexamined. Compared with conventional capital budgeting practice, we examined four theoretical justifications: the competitive market model, a new principal-agent relationship, shifting of risk, and the accountability problem. We found some theoretical support for PFI; however, some questions still remain about the theory and practice of PFI.