Fazakerley Prison Services Limited (FPSL), the PFI project consortium formed by Group4 and Tarmac, refinanced the public services project it had been awarded by the Prison Service to design, build, finance and operate Fazakerley Prison, in November 1999.93
FPSL was able to refinance the project due to its success in delivering the project four months ahead of time, establishing a track record in its operation, and because of increased confidence in the financial markets towards PFI projects generally. The refinancing of the project improved the expected returns to FPSL's shareholders, both through the early repayment of their original investment and the expectation that the flow of dividends would be higher than projected. In total, the expected returns to FPSL's shareholders were increased by £10.7 million (61%) as a result of the refinancing of the project, when compared to their originally projected level, of £17.5 million, at the time the contract was signed.
The Prison Service did not consider that FPSL would be able to refinance the project and had therefore not negotiated, as part of its contractual rights, a share in any benefits from refinancing. However, the lenders to FPSL considered it prudent for Prison Service consent to be obtained, as the refinancing proposals would create additional liabilities for the Service. The Service decided that it should be compensated for agreeing to accept these additional liabilities and negotiated an up front payment from FPSL of £1 million, or 10% of the gains from refinancing. This sum was consistent with the Prison Service's estimate of the extra financial risk it was taking on.
The Prison Service acknowledged that the success of the project contributed to the opportunity for a refinancing to take place and that it was therefore reasonable for FPSL to benefit from the refinancing as a reward for taking risks in successfully developing the first PFI prison project. The Service also did not wish to deter FPSL or other consortia from bidding in future PFI prison competitions by removing opportunities for them to benefit from this type of project.
____________________________________________________________________
93 NAO, The refinancing of the Fazakerley PFI, HC 584 Session 1999-2000, 29 June 2000