1 / 68

Comprehensive Review of South Africa's Public-Private Partnership Prison Contracts

This briefing from the National Treasury provides an in-depth look at the regulations, recommendations, and findings related to public-private partnership (PPP) prison contracts in South Africa.

jenniferwalters
Download Presentation

Comprehensive Review of South Africa's Public-Private Partnership Prison Contracts

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON CONTRACTS:National Treasury briefing to Portfolio Committee on Correctional Services18 March 2003

  2. CONTENTS • WHAT IS A PPP? • TREASURY REGULATIONS FOR PPPs • TASK TEAM FINDINGS – November 2002 • TREASURY RECOMMENDATIONS

  3. What is a PPP? • A contractual arrangement between a public sector institution and a private entity where the private partyperforms aninstitutional function OR uses state property in accordance with output specifications for a significant period of time, in return for a benefit. • It involves a substantial transfer of all forms of project life cycle risk (financial, technical, operational) to the private party. • Public sector role shifts: Government is purchaser of services and/or enabler of the project - monitor and regulator of service delivery, no longer its direct administrator.

  4. What is a PPP? degree of risk transfer to private party • Privatise • Assets purchased • Liabilities purchased • Government has regulatory function only • PPP • Private party: • Finances (whole or most) • Designs • Builds • Operates • Government purchases complete service and/or enables business • Fixed assets belong to government • Outsource • Capitalisation is for government account • Government buys specific services but retains risk • Fixed and movable assets belong to government

  5. What is a PPP? Government institution Generic project finance structure for PPPs PPP Agreement Equity shareholding Private party (special purpose vehicle) Loan agreement/s Debt Sub-contracts Sub-Contractor eg construction Sub-Contractor eg operator

  6. What is a PPP? Traditional payment mechanism Example: Govt-built and operated prison Payment (Rands) Overruns Delay costs Construction/ development Overruns Operating costs 0 3 10 15 Time (years)

  7. What is a PPP? PPP payment mechanism Example: PPP Prison Payment (Rands) Operational period Pre-set payment by govt against delivery Construction Period No initial payment by govt 0 2 10 15 Time (years)

  8. South Africa’s regulatory framework for PPPs • The Constitution • Public Finance Management Act • Treasury Regulations • First issued in terms of PFMA in May 2000. • Reg 16 deals with PPPs (amended May 2002), applies to all: • national departments • provincial departments • Schedule 3 public entities and business enterprises • [not to local govt - Municipal Finance Management Act]

  9. SA’s Regulatory framework for PPPs • Regulation 16requires all PPP deals to obtain • National Treasury Approvalsfor: • Affordability • Value-for-money • Appropriate allocation of Risk • These approvals embedded in Generic PPP Project Life-cycle: • TA I: Demonstrating Affordability • TA II A & II B: Demonstrating Value-for-Money • TA III: Financial Closure

  10. Clear Government policy and systems now in place for PPPs Generic PPP project life cycle Reflecting Treasury Regulation 16 issued in terms of the Public Finance Management Act, 1999

  11. Feasibility method to set affordability and calculate value-for-money[Treasury Approval I] Adjustment for private sector efficiency Preliminary affordability Nominal affordability Value for money Actual affordability and value for money Rand affordability NB: Value for money is only achieved if all appropriate risks are transferred to the private sector Public Sector Comparator (PSC) Risk- adjusted PSC PPP reference Actual private sector proposal

  12. REVIEW OF THE PUBLIC PRIVATE PARTNERSHIP PRISON CONTRACTS:Findings of DCS, National Treasury and DPW Task TeamNovember 2002

  13. 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.

  14. TASK TEAM MEMBERS

  15. 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

  16. PART I EXISTING PPP PRISONS TRANSACTIONS

  17. 1. OVERVIEW OF EXISTING PPP PRISONS TRANSACTIONS

  18. BLOEMFONTEIN PRISON PPPPARTIES TO THE CONTRACT

  19. LOUIS TRICHARDT PRISON PPPPARTIES TO THE CONTRACT

  20. 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

  21. 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.

  22. 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.

  23. 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.

  24. 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.

  25. OVERVIEW

  26. FEES PAYABLE BY DCS

  27. 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

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

  29. BREAKDOWN OF OPERATING COSTS (BLOEMFONTEIN)

  30. BREAKDOWN OF OPERATING COSTS (LOUIS TRICHARDT)

  31. EXISTING PPP PRISONS: FINANCE

  32. RISK ALLOCATION:TECHNICAL / OPERATIONAL

  33. RISK ALLOCATION: LEGAL / FINANCIAL

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

  35. 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.

  36. 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.

  37. OPTIONS FOR RE-NEGOTIATION:INDICATIVE FEE CALCULATION

  38. 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.

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

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

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

  42. Need to re-shape cash flows through negotiations. Both contracts Real (excl inflation) total fees due

  43. 3. CONCLUSIONS & RECOMMENDATIONS: EXISTING PPP CONTRACTS

  44. 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 …

  45. 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.

  46. 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.

  47. PART II FUTURE PRISON PROJECTS

  48. 1. ILLUSTRATIVE COMPARISONS:PUBLIC AND PPP PRISONS

  49. 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

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

More Related