PF2 (Private Finance 2)

PF2 (Private Finance 2) was the UK Treasury's 2012 reform of the Private Finance Initiative, designed to address well-documented criticisms of PFI while preserving the core concept of privately financed, integrated design-build-finance-operate contracts for public infrastructure. It was short-lived: the model was discontinued alongside PFI in October 2018, with only a small number of contracts concluded under the PF2 label.

What is PF2 (Private Finance 2)?

PF2 was announced in December 2012 following a review of PFI by HM Treasury. The reforms addressed three main criticisms of PFI:

Excessive equity returns. PFI equity investors had earned returns substantially higher than the risk-adjusted return that the public sector considered appropriate. PF2 introduced a government equity co-investment in project companies (SPVs): central government departments would take a minority equity stake (typically 25%), participating in returns and gaining direct board representation to monitor costs and performance. This was intended to share upside returns between the public and private sector.

Soft services inflexibility. PFI contracts bundled "hard" facilities management (building fabric, M&E) with "soft" services (cleaning, catering, portering) into the unitary charge. This made it difficult for the public authority to change service providers for soft services without triggering complex contract amendments. PF2 generally removed soft services from the unitary charge, allowing the authority to contract for them separately and change them more easily.

Transparency. PFI contract terms were inconsistently disclosed. PF2 required greater transparency on costs, benchmarking results, and lifecycle maintenance programmes, published through the Treasury's PFI database.

Structurally, PF2 retained the core PFI architecture: an SPV, private debt financing, long-term availability payments, and a hard FM and lifecycle obligation. The differences were refinements rather than a fundamental redesign.

In practice, PF2 attracted only a handful of signed contracts (primarily in the education sector) before the model was withdrawn. The appetite for privately financed public infrastructure had weakened significantly following post-2008 increases in private finance costs and growing political opposition to long-term off-balance-sheet commitments.

Why it matters for bidders

PF2 contracts are a small subset of the wider PFI/PPP landscape, but the structural reforms it introduced (government equity co-investment, transparency requirements, reduced soft services scope) influenced later discussions about the future of infrastructure financing in the UK and informed PPP reform debates across Europe.

Suppliers working on the few live PF2 contracts need to understand the presence of a government equity stakeholder with board representation, which adds a layer of oversight not present in standard PFI structures.

Example

A PF2 schools programme funded new secondary schools in several English local authorities from 2013 onwards. Under the PF2 structure, the Education Funding Agency took a 25% equity stake in each project SPV. Construction subcontractors and FM providers operated under the same integrated framework as PFI, but without catering and cleaning bundled into the unitary charge.

Frequently Asked Questions

Is the government equity stake in PF2 projects still active?

Yes. Where PF2 contracts were signed and SPVs were formed, the government equity co-investment (typically held through the Treasury's infrastructure holding vehicle) remains in place for the life of the contract. The government continues to participate in equity distributions and sit on SPV boards.

Why did PF2 produce so few contracts?

Several factors reduced PF2 uptake. Private finance costs remained elevated relative to public borrowing costs after the 2008 financial crisis. Political opposition to long-term PFI-type commitments made government departments cautious about committing to new projects. The model was also seen as administratively complex without offering enough improvement over PFI to justify the effort of a new framework.

How does PF2 compare to PPP structures in other European countries?

Most European PPP structures lack the government equity co-investment feature that PF2 introduced. The European Investment Bank has explored similar co-investment structures in some member states, but PF2's specific approach was largely a UK policy experiment rather than an EU-wide innovation.