3.32 In any negotiating situation, it is good practice to consider what alternatives are open to the parties involved. In the context of refinancing negotiations, departments who have secured a right to approve part or all of a refinancing proposal should consider what would happen if they withhold their consent.
3.33 In the case of Fazakerley, the Prison Service calculated that FPSL would still have been able to secure £5.2 million of the refinancing benefits without consent. This is because some of the terms of the refinancing would still generate benefits for FPSL without increasing concurrently the Prison Service's termination liabilities. This knowledge assisted the Prison Service in its negotiations. In addition, the Service and Rothschild discussed with FPSL and its advisers some possible alternative approaches to the refinancing (paragraph 1.25). We consider, however, that a fuller assessment of these alternatives and the commercial pressures facing FPSL would have shown that the Prison Service was in a stronger negotiating position than it had realised.
3.34 Firstly, although FPSL considered that it could have secured benefits of £5.2 million30, at the time of the refinancing, without the Prison Service's consent there was uncertainty about whether £2.6 million of these benefits did, in fact, require the Service's consent.31 Secondly, although the terms of the refinancing had been agreed in April 1999, in the second half of 1999 FPSL was under great time pressure to complete the refinancing. Tarmac wished to have the subordinated debt it had lent to FPSL repaid so that there would be increased liquidity in Tarmac's year-end balance sheet at 31 December 1999. Thirdly, because of expected uncertainty in the financial markets leading up to the end of the millennium, FPSL wished to complete the refinancing by no later than 30 November 1999. Finally, FPSL's shareholders had been advised of the proposal which, after paying the Prison Service £1 million, would yield benefits of £9.7 million before the end of 1999 and it would have been very difficult for FPSL to put forward revised plans which proposed either deferring or reducing these benefits.
3.35 The Prison Service could have considered making use of the time pressures faced by FPSL to press for a greater share of the refinancing benefits, although this would have meant reopening the agreement it had already reached with FPSL. Although the £1 million share compensated the Prison Service for its increased exposure to termination liabilities, the Service had been possibly exposed to the consequences of adverse movements in interest rates (paragraph 3.5), benchmarking showed that the pricing of the Fazakerley contract was now out of line with other PFI prison contracts (paragraphs 3.11 and 3.12), and the Service had, like FPSL, borne risks when the PFI was being developed as a form of procurement (paragraph 3.12). These are arguments which the Prison Service could have pursued further in negotiations with FPSL given the Service's strong negotiating position. The Prison Service considered, however, that it had agreed a deal with FPSL as its PFI partner and, were the situation reversed, it would not want a contractor to reopen negotiations at a late stage.
________________________________________________________________________
30 This relates to the benefits from the lower lending margin (£2.6 million) and the fixing of interest at lower rates for the remaining term of the original loan facility (£2.6 million), see Figure 7 page 25.
31 For the reasons set out in Note 2 to Figure 7, page 25.