3.36 Where departments are seeking to maximise the benefits they secure from financial negotiations with consortia, they should consider linking at least a proportion of their advisers' remuneration to the sum achieved. This will create an incentive for advisers to help departments achieve the best possible outcome.
3.37 The Prison Service did not adopt this strategy. Rothschild told us that, in addition to assessing the impact of the refinancing on the Service's termination liabilities, it gave the Prison Service some initial broad advice on how the Service might approach the negotiations. Rothschild was not, however, asked to lead the negotiations or to attend any negotiation meetings. Nor was it asked to provide any detailed briefing to the Prison Service on how the negotiations should be conducted to achieve the best outcome. The Prison Service's decision to handle the negotiations itself was based on a view that this was the best approach given its experience in negotiating PFI prison contracts and the good working relationship it had developed with FPSL in relation to Fazakerley prison.
3.38 Although the Prison Service was experienced in awarding PFI contracts, it had never before been faced with a refinancing. Also, Treasury guidance on standard PFI contract terms, which includes refinancing issues, was only issued towards the end of the negotiations over the Fazakerley refinancing. The Prison Service used its advisers well in assessing the impact of the refinancing on its termination liabilities, but the refinancing also increased significantly the rewards FPSL would receive from the project compared with those anticipated when the Prison Service originally let the contract. The Service might, therefore, have achieved an even better deal if it had asked its advisers to consider whether there were issues other than the increase in termination liabilities which were worth negotiating over and, if so, sought more input from its advisers during the negotiations.
3.39 The Service decided to remunerate Rothschild based on hourly rates. During the negotiations with FPSL, the Service arranged for FPSL to pay the Service's advisers' costs. The Service made this arrangement because the refinancing had been proposed by FPSL and it was FPSL who would receive most of the resulting benefits. We are concerned that such an arrangement could have created a restriction on the extent to which the Service could use its advisers. The advisers' costs were £40,000 for a transaction which yielded benefits of £10.7 million and took a year to complete (partly attributable to periods of inactivity in the negotiations). Both the Prison Service and Rothschild say, however, that there was no such constraint in practice.