The National Office has said that 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 the benefits. The statement comes in the recently published NAO report on The Refinancing of the Fazakerley PFI Prison Contract.

The NAO also acknowledges that 'substantial refinancing gains to the private sector may threaten the perceived value for money of the project'.

Fazakerley Prison Services Limited, a consortium formed by Group 4 and Tarmac (now Carillion), is expected to boost its returns by £10.7m following refinancing of the project to construct operate and maintain the new prison on Merseyside.

Sir John Bourne, head of the National Audit Office, told Parliament that the Prison Service had secured just £1 million of the expected increase in returns to shareholders, following negotiations during which it rejected lower offers.

The NAO concludes that the benefits which the refinancing brings to shareholders can be seen as 'the reward for taking risks in managing this novel prison contract.'

The Audit Office says the Fazakerley refinancing has important lessons for Government departments since further refinancings are likely to occur. This is because banks are often prepared to offer better terms once the project is successfully developed and the perceived risks reduce. Refinancing opportunities apply especially to early PFI deals, says the NAO, where better terms are now available in the developing PFI market.

Richard Byatt

Download the Executive Summary or the full report at www.nao.gov.uk/pn/9900584.htm