2.6 The price of the deal rose by 4.9 per cent over the 20 month period from selection of preferred bidder to financial close: the net present cost increased from £296.6 million (after adjusting for variations accepted by the Home Office at Further Best and Final Offers) to £311 million at financial close. Figure 8 opposite provides details of the price changes to the deal.
8 |
| Changes in Price from Further Best and Final 8 nal Offers to Financial Close | |
|
|
| £m net present cost |
|
| AGP Bid at FBAFO (Adjusted for bid cost error and demand risk exclusion) | 296.6 |
|
| Scope Changes: Effect of 15% increase in staff numbers on capital expenditure lifecycle and service costs (£9.8m); Renegotiation of the payment mechanism (-£4.8m); Removal of the mail & messenger services when the Home Office decided to keep these in-house (-£8.3m); service cost changes (-£3.5m); and increase in purchase price for 2 Marsham Street (£6.5m) | -0.3 |
|
| Indexation (from 15/2/01 to Financial Close)7: | 13.4 |
|
| Financial Changes: Refinancing (£2.8m); Extra negotiated Ambac structural fee (£0.6m); Financial market conditions - lower interest rate at financial close (-£7.5m); Other finance/tax/working capital (-£2.2m) | -6.3 |
|
| Other Changes: Residential purchase price and adjustment (£2.4m); stamp duty (£1.7m); inflation reserve (£0.4m); timing of Marsham St payment (£1.3m); miscellaneous (£1.8m) | 7.6 |
|
| Total NPV at Financial Close | 311.0 |
|
| Source: PricewaterhouseCoopers | |
2.7 During the period in which the Home Office was negotiating the contract with AGP, the Public Accounts Committee held a hearing on the Refinancing of the Fazakerly Prison8. At the hearing, the Head of the Prison Service accepted that refinancing gains on future PFI contracts should be shared equally between the government department and the private sector partner. Having taken advice from the Office of Government Commerce and Partnerships UK, the Home Office decided that a 50:50 split of refinancing gains needed to be reflected in the Marsham Street contract although Office of Government Commerce guidance on sharing refinancing gains was not published until June 2002, after financial close.
2.8 Following tough negotiations, the final contractual agreement was that the Home Office would receive a 50:50 share of any refinancing gains. In return, AGP was allowed a 1.1 per cent increase in its Internal Rate of Return, equivalent to a £275,000 increase in the annual payment to the consortium. It is unclear at this stage whether a refinancing gain is likely and therefore impossible to comment on whether this increase in the annual payment was value for money. However, the approach taken by the Home Office was prudent; it reflected a warning that the Home Office had previously given to the Committee of Public Accounts at the hearing on the Refinancing of the Fazakerly Prison that there was a risk that in the future the Department might have to pay for a 50:50 share of any refinancing gains in any PFI contract it signed.
_____________________________________________________________________________________________
7 When the FBAFO bids were submitted in May 2000, the bidders had to provide letters stating that their bid prices were subject to indexation, changes in financing costs and Home Office mandated changes. Indexation of costs was to commence from 15 February 2001 until financial close at an increase of 0.35% per month for construction costs and by reference to RPI for other costs.
8 PAC Report on the refinancing of the Fazakerly PFI prison contract, HC995-i), 1999-2000; pxx, paragraph 16 and p3, paragraph 27.