Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. Move on to the refinancing deal itself. How does that affect the taxpayer? Does it actually mean a longer leasing term?
  (Mr Narey) No, the term of the contract, 25 years, is unchanged.

  41. Who actually gets the prison at the end of the contract?
  (Mr Narey) We do. At the end of the contract we get a prison with a life of at least 35 years in perfect order. Anything that is wrong with it has to be rectified and it is handed over to us.

  42. When does the taxpayer stop paying for it?
  (Mr Narey) At the end of the 25-year period.

  43. The profits which have been made from the refinancing deal have been shared very unequally between yourselves and the Prison Service and have basically gone into the pockets of your shareholders. Why did you not reinvest it into the company? Why did you not buy new equipment? Why did you not use that money to improve the service?
  (Mr Herzberg) Group 4/Carillion is effectively investing it in equity in future projects, in future prisons and other projects.

  44. You are saying that the shareholders have not received a better dividend.
  (Mr Herzberg) I am not saying that. I have agreed with the figures that Mr Williams quoted previously.

  45. You cannot invest it twice.
  (Mr Herzberg) We are taking monies out of this project, as a result of dividends etcetera, and will be using that to invest in future PFI projects.

  46. It seems to me that you are a magician because you are using the same money for two reasons or two years. You are paying your shareholders a bigger dividend than they would normally have received if you had not made those extra rewards and you are also investing it in new infrastructure.
  (Mr Banks) Fazakerley Prison Services Limited has one project which is the Fazakerley prison, Altcourse prison. As a result of this refinancing dividends were paid to the shareholders. A new project we are involved in is the project at Rye Hill which is another PFI prison which is due to open in January next year which Carillion and ourselves are jointly working on in terms of building, financing and we propose to operate.

  47. I am sure you are. There is a huge PFI in my constituency in Durham in the hospital so I am trying to compare the two. What you are saying is that if anything goes wrong with this—obviously it will not, but if it did—then the prison would come back to the Prison Service, would it?
  (Mr Narey) Yes, if the contract were terminated, the prison comes back to us.

  48. When I read the report what I did not really understand perfectly was that when a contract is agreed, in the original deal, how can the consortium then come along and change what seems to me the contract which has already been made in the first place?
  (Mr Kent) Effectively the contract has not changed. Nothing has changed except for the rate of return that the contractor is getting and the compensation we got. The rest of the contract remains unchanged.

  49. Does it say in the contract that you can refinance the deal if you want to?
  (Mr Kent) Not in this contract; it did not say so in this contract.

  50. Why were they allowed to go ahead and do it?
  (Mr Narey) Because at the time we were in the dark. This was an innovative deal. The Treasury guidance which has been published since and which is being re-issued next year, was not available. We did not anticipate the prospect of refinancing; I wish we had but we did not. We accept that our advisers did not know of it, there was no Treasury guidance to suggest we should be aware of it. We have learned from this now and have made it an integral part of our contracts.

  51. At the end of the day why were they allowed to proceed. By proceeding you have made money but you might not have. I am thinking on behalf of the taxpayer and it could have lost money so why was it allowed to proceed if it did not say in the contract originally that they could do this? How can they just come along and do something they want to do?
  (Mr Narey) Because allowing them to proceed was to the taxpayers' advantage. There is an argument to suggest we did not need to approve the refinancing at all. We came to the conclusion that we probably did need to approve the refinancing of £5.5 million. The consortium could have made all the gains bar £5.5 million without giving us anything. We let them go ahead on the basis of the additional £5.5 million and we got 20 per cent of that back for the taxpayer. That resulted in a significant underspend last year and that money was returned to the Treasury.

  52. But you could not be certain of that, could you?
  (Mr Narey) We were certain in the negotiations because we did not agree to the refinancing until we agreed the sum of £1 million.

  53. If you look at paragraph 1.6 on page 9, the last sentence, which begins "Lazard Brothers & Co.Limited", it is basically saying that the refinancing was viable as long as there was no increase in liabilities for the Prison Service as a result.
  (Mr Narey) Yes.

  54. How could you be certain of that? You still cannot really be certain about that, can you? You cannot be certain of that now.
  (Mr Narey) No, I volunteer we are certain and there is a potential increase in liabilities because our termination costs through the contract, if we had to terminate, have risen. That was the basis on which we argued for what became a 20 per cent share of the sum over which we had any leverage. I am not trying to justify the contract or suggest that we would do it again. At the time people sitting in my chair were not aware of this prospect and they were going forward in good faith and they have got a value for money prison out of it.

  55. Page 10, paragraph 1.7. The Prison Service accepted compensation from the consortium of a share of the refinancing benefits as compensation for additional liabilities. What gives the Prison Service the right to accept additional liabilities so that FPSL can actually make profits for the shareholders which could at the end of the day be at the expense of the taxpayer? Who gives you the right to do that?
  (Mr Narey) As I have explained, we only arguably had any right to make decisions to approve or not to approve the refinancing of about £5.5 million. We believed that the advantages for us in getting about £1 million of that back were a good deal for the taxpayer. It meant that Group 4 had more confidence in the running of the prison and made the likelihood of termination much less.

  56. Paragraph 1.12, page 12. I cannot understand what it seems to be saying here. Why should anybody be rewarded for carrying out a successful contract? Presumably if you agree a contract, you expect it to be successful, so why should you be further rewarded for doing it or for being successful?
  (Mr Narey) The Treasury may want to say something because paragraph 1.12 refers to Treasury guidance. Because in taking forward this venture, particularly this, the first ever DCMF prison, there was a considerable risk involved. Although I now think it is very unlikely and the prison has opened successfully, there was a chance that the consortium could have lost considerable sums of money on this in terms of commissioning a new and difficult prison with category of prisoners.

  57. Fair enough. I accept that but at the end of the day you signed a contract with them, they signed a contract with you and you would expect it to be successful otherwise you would not have actually signed it, yet they get rewarded at the end of the day. Not only do they get rewarded, they are even very reluctant to pay you any part of the profit back. They offer you a measly £100,000 which you rightly turn down. You then settle for £1 million out of £14 million and then you give them back £500,000 even though they have failed in part of the contract. They are on a very good deal.
  (Mr Narey) No, we got back £1 million of £5 million and yes, we did give them back £500,000 and that was a very good deal indeed for the taxpayer because it means—and this is very important—that we do not have to pay for overcrowded places there unless we are using them. In terms of the length of the contract, I suggest we will save millions of pounds on that deal.

  Mr Steinberg: It sounds like a very good deal. I shall tell you a little story just before I finish which I can remember a bloke telling me when he was negotiating with the old pit owners. The negotiator went in and he came back out and was asked if he had got a good deal. He said "I've got a grand deal: nowt for the first three metres". That sounds about the same sort of deal that you got, to be quite honest.

Mr Campbell

  58. May I start by saying that I very much welcome Mr Narey's comments about how well Altcourse fulfils the requirements of the Prison Service and also cautiously welcome the savings which have been made through refinancing? I want to concentrate very much on the deal for the taxpayer in this particular refinancing package. If I have this right, the FPSL has made about £14 million which it did not expect to make, of which over £10 million is as a result of refinancing. I think I read in the report that this represents something in the region of an 80 per cent return over four years. You deal with a huge amount of money in PFI contracts but this is a good deal, is it not, for you? This has turned out to be a good deal for you.
  (Mr Herzberg) May I first of all confirm the facts? Certainly the £10.7 million was from the refinancing, although we have had discussions on which required consent and which did not. I would say, if I were to compare this with the last contract I was called before this Committee to discuss, this is certainly a better one than the last one. I talked about a margin having been substantially eroded on the last one. The last one we discussed opened on time. This one opened early. This one we have performed satisfactorily; I would argue very well. However, risk is related to performance and in order to achieve those returns you have to perform. I believe that we should actually get a reward for that performance.

  59. My concern is the scale of that reward. Let me just go back to something you said to Mr Steinberg when you said that the £10 million windfall, let us call it, would actually be reinvested in the future. You are not trying to tell the Committee are you, that some of that would be taken off and paid to shareholders?
  (Mr Herzberg) No. Let me absolutely clear on that. Mr Banks did touch on it. Fazakerley Prison Services Limited is a joint venture between Carillion and Group 4. The benefits, the £10.7 million arising from the refinancing, is available to be paid as dividends to the two shareholders, to Carillion and to Group 4. Carillion and Group 4 both happen to have a very active and cash hungry PFI programme. It is there that we are directly reinvesting the money—let us be open about it—in order to make dividends and returns, construction profits and operating profits, on future projects.

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