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REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON CONTRACTS

REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON CONTRACTS. 8 November 2002. TASK TEAM TERMS OF REFERENCE. To understand output specifications, costing assumptions, project finance and risk allocation. To identify capital and operational costs.

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REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON CONTRACTS

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  1. REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON CONTRACTS 8 November 2002

  2. 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.

  3. TASK TEAM MEMBERS

  4. 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

  5. PART I EXISTING PPP PRISONS TRANSACTIONS

  6. 1. OVERVIEW OF EXISTING PPP PRISONS TRANSACTIONS

  7. BLOEMFONTEIN PRISON PPPPARTIES TO THE CONTRACT

  8. LOUIS TRICHARDT PRISON PPPPARTIES TO THE CONTRACT

  9. 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

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. OVERVIEW

  15. FEES PAYABLE BY DCS

  16. 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

  17. REAL INDEXED FEE ADJUSTED FOR “K-FACTOR”

  18. BREAKDOWN OF OPERATING COSTS (BLOEMFONTEIN)

  19. BREAKDOWN OF OPERATING COSTS (LOUIS TRICHARDT)

  20. EXISTING PPP PRISONS: FINANCE

  21. RISK ALLOCATION:TECHNICAL / OPERATIONAL

  22. RISK ALLOCATION: LEGAL / FINANCIAL

  23. 2. OPTIONS FOR RE-NEGOTIATION OF EXISTING CONTRACTS

  24. 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.

  25. OPTIONS FOR RE-NEGOTIATION:OPERATING 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.

  26. OPTIONS FOR RE-NEGOTIATION:INDICATIVE FEE CALCULATION

  27. OPTIONS FOR RE-NEGOTIATION:REFINANCING 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.

  28. OPTIONS FOR RE-NEGOTIATION: RE-FINANCING ASSUMPTIONS

  29. OPTIONS FOR RE-NEGOTIATION:RE-FINANCING BENEFITS (BLOEMFONTEIN)

  30. OPTIONS FOR RE-NEGOTIATION:RE-FINANCING BENEFITS (LOUIS TRICHARDT)

  31. 3. CONCLUSIONS & RECOMMENDATIONS: EXISTING PPP CONTRACTS

  32. 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 (< 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 …

  33. 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.

  34. 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.

  35. PART II FUTURE PRISON PROJECTS

  36. 1. ILLUSTRATIVE COMPARISONS:PUBLIC AND PPP PRISONS

  37. 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 BARRIERS TO DIRECT COMPARISON BETWEEN PPP AND PUBLIC PRISONS

  38. ILLUSTRATIVE COMPARISON: RISK TRANSFER IN RESPECT OF CAPITAL COST

  39. 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 <1000 to >3000). • 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.

  40. ILLUSTRATIVE COMPARISON: FUNDED CONSTRUCTION COST FORGOVERNMENT

  41. ILLUSTRATIVE COMPARISON: OPERATING COSTS

  42. 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.

  43. 2. FUTURE EVALUATION METHODOLOGY: FEASIBILITY PROTOCOL

  44. 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

  45. FUTURE EVALUATION METHODOLOGY: FEASIBILITY PROTOCOL

  46. FUTURE EVALUATION METHODOLOGY: FEASIBILITY PROTOCOL

  47. FUTURE EVALUATION METHODOLOGY: FEASIBILITY PROTOCOL

  48. FUTURE EVALUATION METHODOLOGY: FEASIBILITY PROTOCOL

  49. 3. CONCLUSIONS & RECOMMENDATIONS: FUTURE PRISON PROJECTS

  50. 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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