3.17 When the Prison Service awarded the Fazakerley PFI prison contract in 1995, it estimated that the contract, worth £247 million, would only deliver marginal financial savings of £1 million (less than one per cent) compared with a similar project under traditional procurement27. Our analysis shows that the total expected payments to FPSL shareholders increase from £17.5 million to £30.6 million as a result of the early delivery of the prison, lower costs and the refinancing (Figure 2, page 4). As a result, the shareholders' projected rate of return has increased from 16 per cent28 to 39 per cent. Although the £1 million compensation which the Prison Service has secured is consistent with its estimate, based on cautious assumptions, of the extra financial risk it will bear in respect of increased termination liabilities, FPSL's shareholders will receive the balance of £9.7 million (91 per cent) of the benefits arising directly from the refinancing. The refinancing could, therefore, be perceived as having provided FPSL with substantial rewards from a contract which only offered marginal value for money at the time it was awarded. The award of the Fazakerley and Bridgend contracts has, however, enabled the Prison Service to stimulate competition for subsequent PFI prisons in turn leading to greater savings.
3.18 Any assessment of a contract's value for money should also take into account all the costs and benefits that are likely to arise from the contract. The Fazakerley contract has contributed to a range of financial and non-financial benefits that are not reflected in a simple comparison of the contract price with the cost of a traditional publicly funded project.
3.19 The Fazakerley prison was opened five months ahead of schedule, to a timetable that was significantly faster than traditional prison building programmes, and has generally been operating satisfactorily. The success of the Fazakerley prison - the first prison under the PFI - has enabled the Prison Service to take forward its PFI prison programme which currently comprises seven prisons either in the stage of procurement or construction. These prisons should provide much needed additional prisoner places at a cost which should deliver significant savings compared with traditional procurement, and at a time when it is unlikely that public finance could have funded such a programme. The Prison Service sees these benefits as rewards which flow from its decision to enter into the Fazakerley contract with FPSL in 1995. FPSL says that its pricing of the contract reflected the risks involved in developing a PFI project in a new sector. In addition, assuming the contract is not terminated prematurely, the refinancing has not increased the cost of the prison for the Service.
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27 The National Audit Office report on The PFI Contracts for Bridgend and Fazakerley Prisons, Figure 10, page 46 (HC 253 1997-98).
28 The projected rate of return to shareholders was 12.8 per cent at the time the contract was awarded (Figure 7, page 42 of the aforementioned National Audit Office report). The projected rate of return had increased to 16 per cent just before the refinancing as a result of cost efficiencies by FPSL.