1.10 The NAO published a report in June 2000 on the refinancing of Fazakerley prison that highlighted the issue of refinancing in PFI deals. This report, together with the subsequent PAC report, reinforced by NAO seminars and media coverage of the issues, as well as emerging experience elsewhere, gave the public sector and its advisers a more detailed awareness of refinancing issues and highlighted the need for authorities to address this issue when negotiating contracts. The recommendations set out in these reports are summarised in Appendix 4.
1.11 In the Fazakerley prison refinancing, completed in 1999, the Prison Service secured £1 million of the £10.7 million refinancing gain. The contractors' returns increased from 16 per cent to 39 per cent as a result of the refinancing, largely because shareholders were able to reduce their level of funds invested in the project. The £1 million return to the public sector was given to compensate the Prison Service for its increased termination liabilities.
1.12 Our report also set out guiding principles on refinancing (Figure 5).
5 |
| General principles that departments can apply to refinancings |
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| ■ Appropriate benefits should go to those bearing risks ■ Benefits from reducing costs in a developing market should be shared if they have not already been reflected in the contract price ■ It is reasonable for departments to seek compensation for any increased exposure to termination liabilities arising from a refinancing ■ Substantial refinancing gains to the private sector may threaten the perceived value for money of the project ■ A refinancing should not jeopardise the stability and success of the long-term contractual relationship between a consortium and a department ■ If the private sector seeks to improve its returns by renegotiating parts of a PFI contract, it is reasonable for departments to seek a share of refinancing benefits. |
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| Source: National Audit Office |
1.13 At the PAC hearing on the NAO's Fazakerley prison refinancing report in November 2000, the Prison Service said that it had been in the dark about refinancing both when letting the Fazakerley contract in 1995 and when faced with the refinancing in 1998 and 1999. The Treasury acknowledged that there had been a lack of knowledge in departments about refinancing in the early days of the PFI. It said that changes had been, and were continuing to be, made in the light of experience and that more changes would be made in guidance to be issued in spring 2001.