REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON CONTRACTS

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REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON
CONTRACTS

• 8 November 2002

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TASK TEAM TERMS OF REFERENCE

• To understand output specifications, costing
  assumptions, project finance and risk allocation.
• To identify capital and operational costs.
• To identify features for re-negotiation to
  address DCS affordability constraints.
• To establish a sound methodological basis for
  comparison with existing and recently constructed
  conventional prisons.
• To report to Ministers of Correctional Services,
  Finance, Public Works and Portfolio Committee.

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TASK TEAM MEMBERS
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TASK TEAM FINDINGS

• Part I Existing PPP Transactions
• Overview of existing PPP transactions.
• Options for Re-negotiation of Existing Contracts.
• Conclusions and Recommendations.
• Part II Future Prison Projects
• Illustrative comparisons of Public and PPP
  Prisons
• Future Evaluation Methodology Feasibility
  Protocol.
• Conclusions and Recommendations.
• Part III Recommendations for Next Steps

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PART I EXISTING PPP PRISONS TRANSACTIONS
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1. OVERVIEW OF EXISTING PPP PRISONS TRANSACTIONS
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BLOEMFONTEIN PRISON PPPPARTIES TO THE CONTRACT
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LOUIS TRICHARDT PRISON PPPPARTIES TO THE CONTRACT
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DCS SPECIFICATIONS

• Specifications based on inputs rather than
  outputs or outcomes.
• Specifications imported from UK prison ideal
  and high level.
• No prior feasibility undertaken to ensure
• Affordability limits
• Optimal value for money
• Optimal risk transfer

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DCS SPECIFICATIONS DESIGN

• Cell configuration (2-man and 4-man cells).
• Security.
• Special centres (e.g. assessment, visitors,
  special treatment).
• Utilities.
• Service centres (e.g. catering, health,
  religious).
• External works.

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DCS DESIGN SPECIFICATIONS EXAMPLES

• Cell size 5.5m2 single or 8m2 double.
• Cell height 2.7m.
• Minimum 5 layers of security.
• Telephone monitoring system.
• CCTV, cameras, x-rays, etc.
• Minimum requirement according to Health and
  National Building Regulations.

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DCS SPECIFICATIONS OPERATIONS

• Goal 1 Keep inmates in custody
• Central control, number of prisoners per cell,
  supervision, security during visits, escorts,
  special category prisoners, roll checks, etc.
• Goal 2 Order, control and safety
• Regulating remedy deficiencies, grievance
  procedures, use of force, financial transactions,
  repairs, maintenance, drug control measures, etc.
• Goal 3 Decent conditions for inmates
• Admission times, personal hygiene clothing,
  bedding, cell equipment, meals, healthcare, etc.
• Goal 4 Prepare for return to community
• Legal rights representation, official visits,
  unofficial visits, etc.

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DCS SPECIFICATIONS OPERATIONS

• Goal 5 Structured Day Programmes
• Structured Day Programme, times of unlocking,
  activities, time outdoors, social work services,
  religion, work, education training programmes,
  physical education library, psychologists, etc.
• Goal 6 Deliver services with maximum efficiency
• Strategic development plans, personnel policies,
  equal opportunities, drug alcohol free
  work-place, conditions of service, uniforms,
  recruitment selection and training.
• Goal 7 Promote community involvement
• Community participation and vice versa, formal
  informal community development, employment to
  local community, local PR policy.

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OVERVIEW
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FEES PAYABLE BY DCS
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COMPARISON OF FEE STRUCTURE

• Fee comparison complicated by
• Different start dates.
• K-Factor
• Real increases above inflation.
• Bloemfontein from 0.623 to 0.789 six monthly.
• Louis Trichardt six monthly increases
• Years 2-3 6
• Years 4-5 5
• Year 6 4
• Years 7-9 2
• Years 10-13 1
• Years 14-25 3 decrease each 6 months
• Net Present Value of all fees (8 discount rate)
• Bloemfontein R1.3 billion
• Louis Trichardt R1.2 billion

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REAL INDEXED FEE ADJUSTED FOR K-FACTOR
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BREAKDOWN OF OPERATING COSTS (BLOEMFONTEIN)
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BREAKDOWN OF OPERATING COSTS (LOUIS TRICHARDT)
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EXISTING PPP PRISONS FINANCE
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RISK ALLOCATIONTECHNICAL / OPERATIONAL
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RISK ALLOCATION LEGAL / FINANCIAL
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2. OPTIONS FOR RE-NEGOTIATION OF EXISTING
CONTRACTS
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OPTIONS FOR RE-NEGOTIATION

• Construction Expenditure
• None.
• Operating Expenditure
• Changes in levels of service.
• Amendments to fee payment structure.
• Change in prisoner numbers.
• Refinancing
• Possible conversion of debt portfolio to
  inflation-linked funding.

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OPTIONS FOR RE-NEGOTIATIONOPERATING EXPENDITURE

• Staff costs
• Hours out of cell.
• Service specifications.
• Rehabilitation and Health Care
• Change in specifications.
• Fee payment structure
• Amendments to K-factor adjustments to improve
  cashflows.
• Change in Prisoner Numbers
• Bloemfontein 2 new units.
• Louis Trichardt convert 2-bed cells to 4-bed
  cells and use reception/special
  treatment centre.

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OPTIONS FOR RE-NEGOTIATIONINDICATIVE FEE
CALCULATION
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OPTIONS FOR RE-NEGOTIATIONREFINANCING

• Methodology
• Net Present Value of unexpired portion of debt
  (settlement estimate).
• Convert into new CPI-linked bond debt and
  calculate new repayments and NPVs.
• Compare with existing payments.

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OPTIONS FOR RE-NEGOTIATION RE-FINANCING
ASSUMPTIONS
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OPTIONS FOR RE-NEGOTIATIONRE-FINANCING BENEFITS
(BLOEMFONTEIN)
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OPTIONS FOR RE-NEGOTIATIONRE-FINANCING BENEFITS
(LOUIS TRICHARDT)
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3. CONCLUSIONS RECOMMENDATIONS EXISTING PPP
CONTRACTS
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CONCLUSION EXISTING CONTRACTS

• The PPP Prison Projects delivered according to
  DCS specifications, notably achieving
• Competitive construction costs.
• Construction on time, on budget.
• Fast-track delivery (lt 2years full capacity).
• Comparative operating costs.
• Significant black equity and sub-contracting
• Significantly higher-quality facilities.
• Significantly higher-levels of service.
• Appropriate risk allocation.
• But

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CONCLUSIONS PROBLEMS WITH EXISTING CONTRACTS

• DCS specifications were too high (the PPP prisons
  remain driven by DCS input specifications).
• Relatively high cost of debt.
• Higher than normal return on equity.
• Additional budgeting pressures for DCS.
• Despite overcrowding in DCS system, no ability to
  over-populate PPP prisons.

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RECOMMENDATION EXISTING PROJECTS

• Operating
• Engage contractors in order to improve Value for
  Money by
• Reviewing standards and specifications.
• Amending fee payment structure.
• Consider options for extra prisoners on a
  marginal cost per prisoner basis. Proposed
  Feasibility Protocol will be used by DCS to
  determine optimal value for money
• Finance
• Engage contractors to
• Improve cash flows and NPV and
• Consider converting debt portfolio to
  inflation-linked funding.

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PART II FUTURE PRISON PROJECTS
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1. ILLUSTRATIVE COMPARISONSPUBLIC AND PPP
PRISONS
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BARRIERS TO DIRECT COMPARISON BETWEEN PPP AND
PUBLIC PRISONS

• CAPITAL COSTS
• Dates of construction
• Type of prison
• Inmates per cell
• Location
• Risk transfer
• Split functions DPW/DCS
• Inclusion of staff housing
• Capacities
• Security levels
• Technology and design

• OPERATING COSTS
• Overcrowding
• Standards of facilities
• Standards of activities
• Hours out of cell
• Rehabilitation
• Health facilities
• Risk transfer penalties
• In-house food services
• Availability of information

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ILLUSTRATIVE COMPARISON RISK TRANSFER IN RESPECT
OF CAPITAL COST
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REASONS FOR DIFFICULTIES IN COMPARING PRISON
CONSTRUCTION COSTS

• Prisons differ by
• Type (e.g. super max, max, medium, youth centres,
  etc.)
• Size (inmates varies from lt1000 to gt3000).
• Constructed at different times, different
  operating philosophies.
• Different geographic locations
  construction/logistical problems.
• DCS does not have a cost centre focus PPP
  operators have different cost allocation
  structures.
• Functions and costs split between DCS DPW.
• Historical procurement problems created
  inefficiencies.

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ILLUSTRATIVE COMPARISON FUNDED CONSTRUCTION
COST FORGOVERNMENT
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ILLUSTRATIVE COMPARISON OPERATING COSTS
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REASONS FOR DIFFICULTIES IN COMPARING PRISON
OPERATING COSTS

• Overcrowding of public prisons.
• Prisons differ by
• Type (e.g. super max, max, medium, youth centres,
  etc.)
• Standards of facilities (health, catering,
  recreation, etc.)
• Standards of activities (education, vocational
  training, work).
• Hours out of cell.
• Different operating philosophies, often result of
  different design.
• DCS does not have a cost centre focus to
  accounting.
• PPP operators have different cost allocation
  structures.
• Risk transfer differs.

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2. FUTURE EVALUATION METHODOLOGY FEASIBILITY
PROTOCOL
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PROPOSED FUTURE EVALUATION METHODOLOGY FOR NEW
PRISONS

• Applicable for projects as both PPP and
  conventional procurement.
• Purpose is to assess all options based on clear
  output specifications.
• For all choices, DCS needs to demonstrate
• Affordability
• Value for Money
• Acknowledgement and treatment of risk

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FUTURE EVALUATION METHODOLOGY FEASIBILITY
PROTOCOL
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FUTURE EVALUATION METHODOLOGY FEASIBILITY
PROTOCOL
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FUTURE EVALUATION METHODOLOGY FEASIBILITY
PROTOCOL
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FUTURE EVALUATION METHODOLOGY FEASIBILITY
PROTOCOL
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3. CONCLUSIONS RECOMMENDATIONS FUTURE PRISON
PROJECTS
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RECOMMENDATION FEASIBILITY PROTOCOL FOR FUTURE
PROJECTS

• DCS to clearly establish output specifications
  (for design operations).
• Establish budget constraints.
• Develop comparable accounting standards for both
  PPP and DCS-operated prisons.
• Adopt clear rules for DCS staff movement during
  any future PPP procurements.
• Comprehensive feasibility
• Cost private design, finance, build and operate,
  versus
• Risk-adjusted Public Sector Comparator.
• Results
• If clear distinction Adopt.
• If depends on assumptions Policy decision or
  pilot comparisons.

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PART IIITASK TEAMS RECOMMENDATIONS FOR NEXT
STEPS
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TASK TEAMS RECOMMENDATIONS FORNEXT STEPS
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TASK TEAMS RECOMMENDATIONS FORNEXT STEPS
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MINISTERS OF CORRECTIONAL SERVICES, FINANCE,
PUBLIC WORKS andPARLIAMENTARY PORTFOLIO
COMMITTEE ON CORRECTIONAL SERVICES
REVIEW REPORT SUBMITTED TO