The directors present the strategic report for the year ended 31 March 2023.
Peterborough Prison Management Limited (the "company") is a Private Finance Initiative ("PFI") vehicle whose purpose is to design, construct, finance and manage HMP Peterborough. It has a 25 year contract with the Secretary of State for Justice (the "Authority"). In 2015 the company completed work on a major extension in order to increase capacity by 292 places. This work was funded by the Authority and had limited impact on profit as the amounts recovered from the Authority were mainly offset by Construction costs payable to the Construction and Operating Subcontractor.
In the year the Company made a profit for the financial year of £4,965,000 (2022: £842,000) and closed the year with net assets of £4,473,000 (2022: £1,366,000).
The company's operations are managed under the supervision of its shareholders and funders and are monitored by key performance indicators in the PFI contract with the Authority and the subcontract with Sodexo Limited who supply the facilities maintenance services throughout the life of the concession. These key performance indicators are in place to monitor certain operational functions and failure to meet minimum targets result in financial penalties, which are ultimately payable by Sodexo Limited.
The PFI contract and subcontract with the Authority and Sodexo Limited, respectively, are fixed for the life of the contract, and this enables the company to have certainty over its income and major expenses until 2030. Furthermore the company has a Credit Agreement with its lender which fixes the level of borrowing and repayments due until the loan is fully repaid in 2028. The directors have prepared a detailed forecast up to 2032 incorporating inter alia the terms of the PFI contract, Subcontract and Credit Agreement. This forecast, which is updated regularly, predicts that the company will be profitable and will have sufficient cash resources to operate within the terms of the PFI contract, Subcontracts and Credit Agreement for at least 12 months from the date of signing the accounts. Therefore the directors, having considered the financial position of the company and its expected future cash flows, have prepared the financial statements on the going concern basis. Its main exposure is to financial risks as detailed in the following section.
Principal risks and uncertainties
The company's principal activity as detailed above is low risk as its trading relationships with its customer, funders and sub-contractors are determined by the terms of their respective detailed PFI contracts with the subsidiary.
Financial risk management
The company has exposure to a variety of financial risks which are managed with the purpose of minimising any potentially adverse effect on the company's performance.
The board has policies for managing each of these risks and they are summarised below:
Interest rate risk
The company hedged its interest rate risk at the inception of the project by swapping its variable rate debt into fixed rate by the use of an interest rate swap.
The company's project revenue and most of its costs were linked to inflation at the inception of the project, resulting in the project being largely insensitive to inflation.
Liquidity risk
The company adopts a prudent approach to liquidity management by maintaining sufficient cash and liquid resources to meet its obligations. Due to the nature of the project cash flows are reasonably predictable and so this is not a major risk area for the company.
Credit risk
The company receives the bulk of its revenue from a government agency and therefore is not exposed to significant credit risk.
Cash investments and interest rate swap arrangements are with institutions of a suitable credit quality.
Ownership
The Company is owned by its ultimate controlling parties Sodexo Investment Service Limited, Dalmore Capital (Para 2) Limited and PFI Custodial (Holdings) Limited.
Going Concern
The directors have prepared a detailed model forecast to project completion incorporating the relevant terms of the PFI contract, subcontracts and Credit Agreement and reasonably prudent economic assumptions. This forecast and associated business model, which is updated regularly, predicts that the Company will be profitable and will have sufficient cash resources to operate within the terms of the PFI contract, Subcontract and Credit agreement. Therefore, the directors, having considered the financial position of the Company and its expected future cash flows, for at least 12 months from the date of signing the accounts, and have prepared the financial statements on a going concern basis. The directors confirm that they do not intend to liquidate the Company or cease trading as we consider we have realistic alternatives to doing so.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 March 2023.
Strategic report
The information that fulfils the Companies Act requirements of the business review is included in the Strategic Report. This includes a review of the development of the business of the Company during the year, of its position at the end of the year and of the likely future developments in its business.
Details of the principal risks and uncertainties are included in the Strategic Report.
The profit for the financial year was £4,965,000 (2022: £842,000). £4,405,000 of dividends were recommended and paid during the year (2022: £2,343,000). The company has net assets of £4,473,000 (2022: £1,366,000).
Ordinary dividends were paid amounting to £4,405,000 (2022: £2,343,000). Dividends of £1,500,000 have been paid out after the year end up to the date of this report.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The Articles of Association of the company provide that in certain circumstances the directors are entitled to be indemnified out of the assets of the company against claims from third parties in respect of certain liabilities arising in connection with the performance of their functions, in accordance with the provisions of the UK Companies Act 2006. Indemnity provisions of this nature have been in place during the financial year but have not been utilised by the directors.
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
The information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
The strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
As explained more fully in the directors' responsibilities statement set out on page 4, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
We assessed whether the engagement team collectively had the appropriate competence and capabilities to identify or recognise non-compliance with laws and regulations by considering their experience, past performance and support available.
All engagement team members were briefed on relevant identified laws and regulations and potential fraud risks at the planning stage of the audit. Engagement team members were reminded to remain alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
We obtained an understanding of the legal and regulatory frameworks that are applicable to company and the sector in which it operates, focusing on provisions that had a direct effect on the determination of material amounts and disclosures in the financial statements. The most relevant frameworks we identified include:
UK Generally Accepted Accounting Practice, including FRS 102;
Companies Act 2006;
UK Corporation Tax legislation; and
VAT legislation
We gained an understanding of how the company is complying with these laws and regulations by making enquiries of management and those charged with governance. We corroborated these enquiries through our review of relevant correspondence with regulatory bodies and board meeting minutes.
We assessed the susceptibility of the financial statements to material misstatement, including how fraud might occur, by meeting with management and those charged with governance to understand where it was considered there was susceptibility to fraud. This evaluation also considered how management and those charged with governance were remunerated and whether this provided an incentive for fraudulent activity. We considered the overall control environment and how management and those charged with governance oversee the implementation and operation of controls. We identified a heightened fraud risk in relation to:
Revenue recognition; and
Management override of controls.
In addition to the above, the following procedures were performed to provide reasonable assurance that the financial statements were free of material fraud or error:
Recalculating the unitary charge received by taking the base charge per the project agreement and uplifting for RPI;
Agreeing a sample of months' income receipts to invoice and bank statements;
Performing an assessment on the service margins used in the year and agreeing margins used to the active financial models;
Reconciling the finance income and amortisation to the finance debtor reconciliation to ensure allocation methodology is in line with contractual terms and relevant accounting standards;
Reviewing minutes of meetings of those charged with governance for reference to: breaches of laws and regulation or for any indication of any potential litigation and claims; and events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud;
Reviewing the level of and reasoning behind the company’s procurement of legal and professional services;
Performing audit work procedures over the risk of management override of controls, including testing of journal entries and other adjustments for appropriateness, evaluating the business rationale of significant transactions outside the normal course of business and reviewing judgements made by management in their calculation of accounting estimates for potential management bias;
Completion of appropriate checklists and use of our experience to assess the company's compliance with the Companies Act 2006; and
Agreement of the financial statement disclosures to supporting documentation.
Our audit procedures were designed to respond to the risk of material misstatements in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve intentional concealment, forgery, collusion, omission or misrepresentation. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.
Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
The profit and loss account has been prepared on the basis that all operations are continuing operations.
Peterborough Prison Management Limited is a private company limited by shares incorporated in England and Wales. The registered office is 1 Park Row, Leeds, United Kingdom, LS1 5AB.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £000.
FRS 102 granted certain first-time adoption exemptions from the full requirements of FRS 102. The following exemptions have been taken in the financial statements since transition:
The company's parent undertaking, Peterborough Prison Management Holdings Limited includes the company in its consolidated financial statements. The consolidated financial statements of Peterborough Prison Management Holdings Limited are prepared in accordance with FRS 102 and are available to the public and may be obtained from Companies House, Crown Way, Cardiff, CF14 3UZ. In these financial statements, the company is considered to be a qualifying entity (for the purposes of this FRS) and has applied the exemptions available under FRS 102 in respect of the following disclosures:
Reconciliation of the number of shares outstanding from the beginning to end of the period;
Cash Flow Statement and related notes; and
Key Management Personnel compensation.
As the consolidated financial statements of Peterborough Prison Management Holdings Limited include the equivalent disclosures, the company has also taken the exemptions under FRS 102 available in respect of the following disclosures:
The disclosures required by FRS 102.11 Basic Financial Instruments and FRS 102.12 Other Financial Instrument Issues in respect of financial instruments not falling within the fair value accounting rules of Paragraph 36(4) of Schedule 1.
Service concession arrangements
The company entered into its Service concession arrangement before the date of transition to this FRS. Therefore, its service concession arrangements have continued to be accounted for using the same accounting policies being applied at the date of transition to this FRS.
Finance debtor and service income
The company is an operator of a PFI contract. The underlying asset is not deemed to be an asset of the company under old UK GAAP, because the risks and rewards of ownership as set out in that Standard are deemed to lie principally with the Authority.
During the construction phase of the project, all attributable expenditure was included in amounts recoverable on contracts and turnover. Upon becoming operational, the costs were transferred to the finance debtor. During the operational phase income is allocated between interest receivable and the finance debtor using a project specific interest rate. The remainder of the PFI unitary charge income is included within turnover in accordance with FRS 102 section 23. The company recognises income in respect of the services provided as it fulfils its contractual obligations in respect of those services and in line with the fair value of the consideration receivable in respect of those services.
Major maintenance costs are recognised on a contractual basis and the revenue in respect of these services is recognised when these services are performed.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Loans and Receivables
Trade debtors, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment.
Interest is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the debt instrument to the net carrying amount on initial recognition.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans and loans from fellow group companies, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives, including interest rate swaps, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
The company holds derivative financial instruments which have the effect of fixing the interest rate payable on bank borrowings. Amounts payable or receivable in respect of interest rate derivatives are recognised as adjustments to interest over the period of the contract. See hedge accounting below for how the derivative is accounted for.
The company designates certain derivatives as hedging instruments in cash flow hedges. At the inception of the hedge relationship, the entity documents the economic relationship between the hedging instrument and the hedged item, along with its risk management objectives, and clear identification of the risk in the hedged item that is being hedged by the hedging instrument. Furthermore, at the inception of the hedge the entity determines and documents causes for the hedge ineffectiveness. Where hedge accounting recognises a liability then an associated deferred tax is also recognised.
The preparation of financial statements in conformity with FRS 102 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based upon historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.
The following estimates have had the most significant effect on amounts recognised in the financial statements.
The Company uses derivative financial instruments to hedge certain economic exposures in relation to movements in interest rates as compared with the position that was expected at the date the underlying transaction being hedged was entered into. The Company fair values its derivative financial instruments and records the fair value of those instruments on its Statement of Financial Position. No market prices are available for these instruments and consequently the fair values are determined by calculating the present value of the estimated future cashflows based on observable yield curves. There is also a judgment on whether an economic hedge relationship exists in order to achieve hedge accounting. Appropriate documentation has been prepared detailing the economic relationship between the hedging instrument and the underlying loan being hedged.
Accounting for service concession arrangements
Accounting for the service concession contract and finance debtors requires estimation of service margins, finance debtor interest rates and associated amortisation profile which is based on forecast results of the contract. These were forecast initially within the operating model at financial close and are closely monitored throughout the duration of the project.
All turnover is generated from the principal activity of the company. All turnover arose within the United Kingdom.
The average monthly number of persons (including directors) employed by the company during the year was: nil (2022: nil).
The actual charge for the year can be reconciled to the expected charge for the year based on the profit or loss and the standard rate of tax as follows:
In addition to the amount charged to the profit and loss account, the following amounts relating to tax have been recognised directly in other comprehensive income:
Corporation tax remained at 19% until March 2023. From April 2023 the main rate increased to 25% for business profits made by the company over £250,000. A small profit rate (SPR) was introduced for companies with profits of £50,000 or less so that they will continue to pay corporation tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective corporation tax rate. The company has assessed the impact of this change and consider the full rate of 25% will apply.
The Company has £nil tax losses during the year (2022: £nil). There is a deferred tax asset relating to the interest rate derivative, calculated at 25%, which will unwind over the term of the hedging arrangement. All movements in the deferred tax have been recognised in other comprehensive income.
The Company claimed tax relief in the period for surrenderable consortium tax losses.
The Financial Asset is unsecured and has an imputed finance charge of 5.98% pa. The asset is repayable in instalments over a 25 year period that commenced in 2006.
The amounts owed to group undertakings totalling £422,000 is subordinated debt principal (2022: £422,000).
The bank loan is secured by a fixed and floating charge over the assets of the Company. Interest is charged on the above loan at the rate of SONIA +0.9%. The loan is repayable in instalments over a period of 23 years, which commenced in 2005. The bank loan is with Royal Bank of Scotland.
In December 2002 the company entered into a twenty five year fixed interest rate swap arrangement (amended August 2008 and March 2011) to hedge is exposure to the effect of interest rate fluctuations.
The swap converts the bank loan to a fixed rate of 4.96% and is payable in semi-annual amounts between 30 September 2010 and 31 March 2028.
The amounts owed to group undertakings totalling £422,000 is subordinated debt principal (2022: £422,000).
The bank loan is secured by a fixed and floating charge over the assets of the Company. Interest is charged on the above loan at the rate of SONIA +0.9%. The loan is repayable in instalments over a period of 23 years, which commenced in 2005. The bank loan is with Royal Bank of Scotland.
In December 2002 the company entered into a twenty five year fixed interest rate swap arrangement (amended August 2008 and March 2011) to hedge is exposure to the effect of interest rate fluctuations.
The swap converts the bank loan to a fixed rate of 4.96% and is payable in semi-annual amounts between 30 September 2010 and 31 March 2028.
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The deferred tax asset relates to the derivative financial liability. The deferred tax liability relates to the timing difference of income received in relation to the finance debtor. Deferred tax has been calculated at 25%, the rate which has been enacted and took effect from 1 April 2023. This has been considered appropriate as it is not expected that a material proportion of the deferred tax asset or liability will unwind within the year.
At 31 March 2023 the company owed Peterborough Prison Management Holdings Ltd £2,953,000 (2022: £3,376,000) in the form of subordinated debt. The was £nil interest outstanding at the year end (2022: £nil).
During the year the company paid Dalmore Capital £69,000 (2022: £60,000) for management services and dividends totalling £3,008,000 (2022: £1,211,000).
During the year the company paid PFI Custodial Holdings Limited £19,000 (2022: £18,000) for management services and dividends totalling £736,000 (2022: £781,000).
During the year Sodexo Limited charged the company £44,196,000 (2022: £40,168,000) for operation fees and SPV charges. The company owed Sodexo Limited £4,386,000 (2022: £4,110,000) at the year end. During the year Sodexo Limited charged the company £39,000 (2022: £36,000) for SPV charges of which £19,000 (2022: £nil) was included within creditors at the year end. Dividends totalling £661,000 (2022: £351,000) were also paid to Sodexo during the year.
The company's immediate parent undertaking is Peterborough Prison Management Holdings Limited, which is the smallest and largest entity to consolidate these financial statements. Copies of the financial statements of Peterborough Prison Management Holdings Limited are available from Peterborough Prison Management Limited, C/O Dalmore Capital Limited, 1 Park Row, Leeds, England, LS1 5AB.
Peterborough Prison Management Holdings Limited is owned by three parties: Sodexo Investment Services Limited, Dalmore Capital (Para 2) Limited and PFI Custodial (Holdings) Limited. Although, after a transaction during the financial year, the Dalmore group now owns a majority interest in Peterborough Prison Management Holdings Limited, the directors believe that the Company does not have an ultimate controlling party, as the shareholder agreement requires shareholder approval representing at least 80% of shares in the company for any significant decision relating to the company.