Select Committee on Public Accounts Minutes of Evidence



Copy of a letter to the Clerk of the Committee from the Directors of Fazakerley Prison Service Limited

  At the meeting of the committee of Public Accounts held on Wednesday 1 November, we were asked by the Chairman of the committee to produce a memorandum setting out the risks associated with the delivery of the Fazakerley Prison project.

  This memorandum seeks to respond to that request identifying the principal risks associated with the project, each of which had (and in certain cases still has) the potential to impact upon the financial performance of the contract for its Contractor and its principal subcontractors.

  We believe that the memorandum reflects the many and varied risks faced by FPSL and raises important issues for future PFI contracts, both within and outside the Prison Estate.

A D Banks

F R Herzberg

17 November 2000


  Fazakerley prison was one of the first two prisons to be procured under the Private Finance Initiative. The perception of underlying risk on the part of sponsors and financial institutions was significantly higher than would be the case today.

  Whilst the prison service had procured prisons through traditional procurement methods from the private sector, these had typically been delivered late and above budget. The prison service had also established a track record of procuring management services from the private sector, but typically under shorter-term contracts with less commercial risk transfer.

  Never before had all of these services been brought together in a single project. Never before had the private sector been invited to invest directly in this kind of project which at the time was seen by some financial institutions to carry political risk in addition to the operational and commercial risks identified above. These factors led some financial institutions to decline the opportunity to participate, and inevitably had an impact on the terms secured when compared to the terms available in the current market now that a track record of success has been established and the perception of risks is significantly less.

  The potential financial impact can take the form of increased costs of delivery of the contract, the costs of financial penalties levied by the Authority for late delivery of the project, failure to make prisoner places available for use by the Prison Service or to meet performance criteria and losses on termination of contract.

  The principal risks are detailed in sections 1-8 below.


  The Contractor has to meet costs overruns associated with the design and construction of the prison unless the Prison Service is responsible. These may include:

    —  design development and compliance;
    —  protestors occupying or damaging the site, or interrupting services to the site;
    —  strikes;
    —  fuel shortages;
    —  ground conditions;
    —  community relations;
    —  planning conditions;
    —  ground contamination;
    —  statutory agreement conditions;
    —  weather;
    —  building control;
    —  labour supply;
    —  plant supply;
    —  materials and equipment supply;
    —  inflation;
    —  changes in legislation;
    —  supply of statutory services;
    —  design management;
    —  ground water;
    —  unforeseen events.


  Payments to the Contractor do not commence until construction is complete. In addition, payments are due to the Prison Service in the event of delay, unless the delay arises because of action by the Prison Service or due to certain circumstances beyond the control of the Contractor. Factors giving rise to delay could include the following:

    —  protesters;
    —  strikes;
    —  weather;
    —  ground conditions;
    —  planning conditions;
    —  designer performance;
    —  ground contamination;
    —  labour supply;
    —  plant supply;
    —  materials and equipment supply;
    —  unforeseen events;
    —  changes in legislation;
    —  design development and compliance.


  The Contractor is responsible for meeting any increased costs associated with the management and operation of the prison. Factors giving rise to such costs include:

    —  labour supply;
    —  wage rates;
    —  strikes;
    —  materials and equipment supply;
    —  utilities;
    —  inflation;
    —  changes in legislation:
      —  Health and Safety at Work;
      —  Human Rights Act 1998;
      —  Employment Law.


  The Contractor is responsible for meeting costs overruns associated with ensuring the prison is ready to open on time and for the implication of any delays. Factors giving rise to potential problems include the following:

    —  Approval of Operating Instructions—which are critical to opening;
    —  Selection and training of staff;
    —  Extra staff required in early months of opening;
    —  Manipulation of the environment by prisoners [eg sit-down protests] before they realise the staff are competent;
    —  Rate of build-up of prisoner numbers;
    —  Establishing routines for staff and prisoners.


  The Contractor is responsible for managing the general operating risks associated with the management of the prison which include:

    —  Escapes;
    —  Assaults by prisoners on staff;
    —  Assaults by prisoner on prisoner in which staff intervene;
    —  Hostage incidents;
    —  Managing the mentally disadvantaged: unpredictability;
    —  Prisoners with needles: risk of staff skin being pierced during searching, or by prisoners using needles as weapons;
    —  Prisoners admitted from courts: unhygienic: unknown health risks to staff in admissions;
    —  "Dirty" protests;
    —  Safe systems of work issues;
    —  Health and Safety at Work incidents;
    —  Industrial injuries;
    —  Managing the media;
    —  Unauthorised activities of non-recognised Trades Unions.

5.1  Issues affecting delivery of the regime including:

    —  behaviour modification programmes;
    —  visits;
    —  food;
    —  industries;
    —  education;
    —  Health Care.

5.2  Issues causing mental stress including:

    —  Suicide and Self Harm incidents;
    —  deaths in custody from other causes;
    —  threat of assault by a significant proportion of prisoners;
    —  allegations by prisoners;
    —  need for constant vigilance.


  The Contractor assumes all risks associated with the maintenance of the prison (including maintaining Prisoner Place Availability). Maintenance risks can be analysed as follows:

6.1  Routine maintenance

    —  Original equipment not properly specified;
    —  Labour and material costs not correctly priced.

6.2  Capital replacement

    —  Replacement items not properly priced;
    —  Timing of replacement not correctly forecast;
    —  Adequate routine maintenance undertaken.


  The Contractor bears the risk of shortfall in predicted returns. These include:

    —  loan finance costs more than expected (inadequately hedged);
    —  loan tenure not long enough in the context of an income stream diminished by poor performance;
    —  dividends trapped by distribution lock-ups;
    —  total write-off of equity following period of particularly diminished performance;
    —  changes in tax rates;
    —  changes in tax regime not covered by change in law provisions;
    —  indexation of fee not sufficient to cover price inflation specific to contractor's labour and material costs.


  In addition to the risk of increased costs of delivery, revenue due to the Contractor may be reduced:

8.1  Availability

  The Contractor will only be paid to the extent that Available Prisoner Places are made available to the Prison Service. Availability criteria include the following:

    —  three meals a day (one hot);
    —  clean clothes;
    —  clean drinking water;
    —  clean bed/mattress and bedding;
    —  heating and lighting to specified levels;
    —  one hour's exercise a day;
    —  bath/shower every seven days and daily access to hot water;
    —  access to healthcare worker;
    —  mail (including outgoing post);
    —  access to legal advisers;
    —  facilities for release;
    —  cell call system;
    —  satisfactory security;
    —  compliance with prison rules.

8.2  Performance

  Revenue to the Contractor may also be reduced in the event of a failure to meet certain performance criteria in the following areas:

    —  escapes from the prison;
    —  escapes from escort;
    —  absconding;
    —  release failure;
    —  release in error;
    —  items smuggled in;
    —  category A procedure failure;
    —  category A searching failure;
    —  failure of other procedures;
    —  key/lock compromises;
    —  assault on staff;
    —  assault on prisoners;
    —  concerted indiscipline;
    —  hostage taking;
    —  roof climbing;
    —  self harm;
    —  class A drug;
    —  other drugs;
    —  contingency planning not completed;
    —  fire evacuation not completed;
    —  failure of reporting;
    —  tool loss;
    —  failure of medical response;
    —  failure to see medical officer;
    —  failure to provide meals;
    —  health and safety failure;
    —  failure to provide a response to complaints;
    —  substantiated complaints;
    —  failure to clean;
    —  repair failure;
    —  failure to provide main programme;
    —  failure to provide regime;
    —  failure to provide education;
    —  lack of out of cell hours;
    —  lack of sentence plans;
    —  visits not occurring properly;
    —  release without discharge report;
    —  lack of legal adviser;
    —  lack of course attendance.

17 November 2000

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