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The case for the Private Prisons

Explore the effectiveness of Public-Private Partnerships (PPPs) for prison infrastructure, risks, outcomes, and procurement methods. Understand the PPP project cycle and comparison with traditional procurement.

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The case for the Private Prisons

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  1. The case for the Private Prisons THE PRIVATE PRISONS case Portfolio Committee for Correctional Service: Cape Town 1 June 2011 Portfolio Committee for Correctional Services National Treasury | 1 June 2011

  2. CONTEXT OF DISCUSSION • Problem: • Decision made that new infrastructure is required to address problem of overcrowding and to meet the objectives set out in the White Paper. • Question : • Which procurement method will deliver on the objectives and outcomes of government and the Department in the most efficient manner. • Measure of time to deliver; quality of delivery, efficiency of the services, price and risk transfer; sustainable jobs created and socio economic impact = VFM in construction and operations. FACT: Government money is been spend in the conventional procurement and operations of the Department and in a PPP model; the question is what method delivers in the most efficient and effective manner over time. Feasibility Study required as basis for investment decision for all Mega Capital Projects.

  3. Content of discussion • What is a PPP and what it is not? • Key elements of the PPP project cycle • Review of the current two private prisons • Comparison of the cost of Private and DCS operated prisons • Procurement of four new PPP Prisons • Outcome of the Feasibility Study • Current Status • Questions

  4. What PPPs is about? • PPP procurement requires shifting public administration resources from input and process definition to output prescription and outcome measurement • The diverse interests of different sectors can in fact, be harnessed for the collective good. • This is what PPPs are about. The public gets better, more cost-effective services; the private sector gets new business opportunities.

  5. What is a PPP? A PPP is defined in South African law as: • A contract between a government institution and private party • Private partyperforms aninstitutional function and/or uses state property in terms of output specifications ; and performance is measured and managed via a penalty regime. • The infrastructure must be maintained and have an agreed useful life at end of contract • Substantial project risk (financial, technical, operational)transferred to the private party • Private party benefits through: unitary payments fromgovernment budget and/or user fees

  6. What it is not Degree of Risk Transfer • PPPs • Private Party: • Finances (whole or most) • Designs • Builds • Operates • Government purchases complete service and/or enables business • Fixed assets belong to Government • Infrastructure maintained with a useful life agreement • Privatisation • State assets sold • State liabilities dispensed • Government has Regulatory function only • Outsourcing • Capitalisation is for the Government Account • Government buys specific services but retains risk • Fixed and movable assets typically belong to Government

  7. What is a PSC? Conventional Government procurement and maintenance of a building Overruns Delays Govt Payment Capex Opex: Budgeted vs. Actual 0 10 20 3 Time (years)

  8. What is a PPP? Unitary Paymentexample: Govt Payment Construction period No payment Operational period Payment against delivery 0 10 20 2 Time (years)

  9. PPP Projects in operation

  10. Key PPP Regulatory Features • Three tests for a PPP: • Affordability • Value for money • Appropriate risk transfer • Applied in a set PPP project cycle: • Inception • Feasibility • Procurement • PPP agreement management

  11. PROCUREMENT DECISION: TREASURY APPROVAL 1 Risk-adjusted PPP Reference Model = PPP Reference Model + Retained Risk Rand Preliminary VfM (Value for Money) TA : I Nominal Affordability Preliminary Affordability Value for Money TA : III The PPP reference model cost is thus an ‘all-in’ cost to the institution for undertaking the project through a PPP Retained Risk PSC Public Sector Comparator Risk Adjusted PSC PPP Reference Private Sector Proposal

  12. Value for Money Comparison

  13. Typical contractual arrangements Generic Project Finance Structure for PPPs Government PPP Agreement Private Party (Special Purpose Vehicle) [SPV] Equity Debt Shareholding Loan Agreements Subcontracts Subcontractor e.g. Operations Subcontractor e.g. Construction

  14. Fair and Transparent Procurement • PPP Procurement is different from a conventional tender process: • A conventional tender processconsist of several separate stages that are not always integrated and outcomes not linked. • The PPP procurement processis an integrated process with distinct stages and controls and outcomes

  15. Stages of PPP Procurement • RFQ – Pre-qualification • Request for Proposals (RFP) • Negotiations • Commercial Close • Financial closure

  16. PPP Procurement in the Project Cycle • Procurement is Phase III of the PPP project cycle • There are three Treasury approvals during procurement: TA:IIA; TA:IIB and TA:III • Treasury Regulations 16.5 and 16.6 outline the functions of procurement

  17. MANGAUNG AND KATUMA SINTHUMULE PRISONS • South Africa’s first two PPP prisons: • Prior to TR 16 that governs and regulates PPPs • Procurement started 1997 • No feasibility and procurement protocol • Contracts concluded March 2000 and August 2000 • Operational July 2001 and March 2002 • Running for 9 -10 years • Contract management requirements • Operating well • Technical Review undertaken in 2002 by Multi Disciplinary Task Team.

  18. OVERVIEW (2002 study)

  19. IGNIS REVIEW - CONCLUSION 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 …

  20. CONCLUSIONS • DCS specifications were too high (the PPP prisons remain driven by DCS’ input specifications). • Relatively high cost of debt. (Opportunity to Refinance 2011) • Higher than normal return on equity. • Additional budgeting pressures for DCS. (Baseline allocation for PPPs) • Despite overcrowding in DCS system, no ability to over-populate PPP prisons.

  21. 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

  22. COMPARISON: ON TIME AND ON BUDGET CONSTRUCTION

  23. FINAL COMPARISON (2002 study) Notes: (1) Before adjustment for risk transfer or actual experience on differences on costs e.g. delays (2) Without overcrowding adjustment (3) Adjusted for 70% overcrowding (4) No adjustment for differences in standards

  24. Total Actual Cost: 2001 - 2011 Mangaung Kutuma Sinthumule R2600 161 036 Operational cost: 68% R1785 699 042 Indexed to CPI Operational cost per prisoner per day: R287 Service not of the same standard; Measure of efficiency of services under PPP. • R2797 883 142 • Operational cost: 65% • R1838 098,689 • Indexed to CPI • Operational cost per prisoner per day: R243 • DCS cost per prisoner per day(2011): R246

  25. Fix component: Actual Cost: 2001 - 2011 Mangaung Kutuma Sinthimule Infrastructure R92.0M p.a. To date: R814,5M Debt term 2018: R729,5M • Infrastructure: • R101 ,7M p.a. • To date: R959,7M • Debt term: 2016: R515,8M

  26. Procurement of 4 new PPP prisons 2007 -2011 • Three variants considered in final evaluation • Conventional Procurement (PSC) • PPP Procurement with all services by Private Party • PPP Procurement with shared services • Conventional Procurement • Design, construction, finance, facilities management and correction services by DCS • All risks remain with DCS • Financed off budget • Capital budget and operational budget

  27. PROCUREMENT OPTIONS (cont) • PPP Procurement with all services by Private Party • Design, Finance, Construction, facilities management & maintenance and all correctional services by private party • Optimal risk transfer achieved • Full life cycle costs included • Similar to Mangaung and Kutama Sinthumule • Less input specific and more output driven • DCS pays on available places per month • Detailed payment mechanism, penalty regime and monitoring

  28. PROCUREMENT OPTIONS (cont) • PPP with shared services • Private party designs, finances, construct, facility manages and maintains • DCS provides correction services • Less optimal risk transfer • Interfaces a significant risk • DCS pays lower fee based on available places • Detailed payment mechanism, penalty regime and monitoring • DCS carries staff cost and specific correction services cost over and above

  29. RISK ANALYSIS

  30. RESULTS OF THE FINANCIAL MODELLING 2007 Rand per offender per day

  31. PROCUREMENT OPTIONS (cont)

  32. RECOMMENDATION • Consistent with the outcome of 2002 study and the actual cost to date • Most value for money if all services provided by the Private Partner • Private Partner assumes and accepts manageable risks • Procurement option: PPP

  33. Current Status of Project • Treasury Approval 1 and 11 given 2007 and 2008 • Four Consortiums short listed: • Ikwesi Consortium • Siza Bantu Consortium • South African Custodial Management • UmtyaNethunga Consortium • Bid Submission 29 May 2009 • Policy Review 2010: • Shorter operational periods; DCS to prepare to take over operations • Recognition and accommodation of needs of women and women with children • Educational programmes for juvenile offenders • Recognition and accommodation of needs of psychiatric patients • Greater use of offender labour • Bid validity expires 31 October 2011 • Bid Evaluation at risk - DCS to prioritize • TREASURY APPROVAL III: VFM report on negotiated contracts.

  34. QUESTIONS Elsa Strydom National Treasury PPP Unit Tel: 012 -3155317 email: elsa.strydom@treasury.gov.za

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