The Prison Service's position

Paragraphs 1.6, 1.13, 1.14

4  Although the PFI contract with FPSL did not give the Prison Service any contractual rights to share in the benefits of the refinancing directly, it did require the Prison Service's consent for arrangements which could increase termination liabilities (the payment the Prison Service would have to make if the contract was terminated prematurely5). There was, however, uncertainty initially as to whether the proposed terms of FPSL's refinancing would require such consent.

Paragraphs 1.21 and 1.22

5  The Prison Service's position strengthened when FPSL's lenders decided that it would be prudent for FPSL to seek consent anyway. The lenders were concerned that the Prison Service might in the future decline to pay them termination liabilities on the grounds that FPSL had proceeded with the refinancing without explicit consent. Without consent, FPSL considered that it would have been able to pursue a different refinancing strategy which would have secured only £5.2 million of benefits.

Paragraphs 1.19 and 1.20, Figure 3

6  The Prison Service's advisers, NM Rothschild & Sons (Rothschild), calculated that the Service's maximum termination liabilities, which were approximately £90 million before the refinancing in 1999, would reduce over time more slowly as a result of the refinancing. Rothschild showed that the maximum termination liabilities would be between £8 million and £47 million higher than previously anticipated depending on when termination of the contract occurred. In present value terms, the increase in termination liabilities would be up to £13.5 million. The Prison Service formed the view that it was justified in seeking compensation from FPSL for accepting this extra risk.

Summary of increase in expected returns to FPSL's shareholders

Figure 2

£m

£m

% increase since 1995

Expected shareholders' returns when the PFI contract was let in December 1995

17.5

Increase from early delivery of the prison and lower costs

3.4

20

Increase from refinancing before payment to the Prison Service 1,2

10.7

61

14.1

81

Payment to the Prison Service from the refinancing 1

(1.0)

(6)

13.1

75

Expected shareholders' returns in November 1999 after the refinancing

30.6

Source: National Audit Office from information supplied by PricewaterhouseCoopers, FPSL's advisers

Notes:  

1.  FPSL paid £1 million to the Prison Service as compensation for increased termination liabilities.

2.  FPSL considered that it would not have required Prison Service consent to obtain £5.2 million of these refinancing benefits.