Procurement Methodology for New Generation Prisons: briefing by Department

Meeting report

CORRECTIONAL SERVICES PORTFOLIO COMMITTEE
6 June 2006
PROCUREMENT METHODOLOGY FOR NEW GENERATION PRISONS: BRIEFING BY DEPARTMENT

Chairperson:

Comparison on Procurement Methodologies briefing
Additional info

SUMMARY
The Department of Correctional Services presented a detailed summary of the different financing models it had studied before selecting the Project Finance Model as the most feasible option for building new generation prisons. Some Members were concerned that the Department failed to give actual cost projections for the project and wondered what had become of the allocations that were made for the years in which no construction had taken place. Others were concerned about what the Department intended to do to improve the maintenance of their facilities. The Department would meet with the Committee again to present a blueprint of the facilities in order to show how these facilities would improve upon the existing ones.

The Chairperson reminded all present that the Committee in its report to Parliament had indicated that, " the Committee also recommend that it will be briefed in the future on developments with regard to new generation facilities. At present, due to insufficient information the Committee cannot make a decision on whether to support or not to support the construction of the new prisons using the Public Finance Model (PFM) The Committee requires a full written report and verbal briefing before 12 June 2006 by the Department highlighting the comparative cost implications in both the short and long term for building using conventional processes, the PFM or the Public/Private Partnership (PPP) routes."MINUTES


He said that the Committee wanted to understand the Department’s budget so that it could support it. The Committee would not support something it did not understand. He, and some other Members of the current Committee were part of the Committee that supported the building of the Louis Trichardt and the Manuang prisons. Unfortunately the Committee at that time had not "applied their minds correctly" when they made the decision to go ahead with the prisons.

Each time the Department appeared before the Committee to discuss their budget, it complained about the uneven distribution of funds between the two PPP prisons and the about 240 state-owned prisons. The Committee was not negative but needed to understand the budget they approved. He reminded the Department that taxpayers’ money was involved and the Committee would call the Department to give an explanation up until the point it understood the proposed model. The Department understood the model and needed to inform the Committee so that it could convincingly defend it to the public. He wondered whether this model was the only one available to the Department.

He urged Members to pose all their questions so that they could understand the model. The Committee would be approving the Budget. If anything went wrong the taxpayers would ask the Committee to account. He reiterated that the Committee would not support something that it did not understand.

Mr Teboho Motseki (Chief Deputy Commissioner: DCS) said that the Department seriously considered the Committee’s request for a presentation and took the decision that it was willing to engage as much as it could around this specific subject. It appeared as though the Committee needed as much information as possible. The presentation would include a very detailed comparison of the models available to the Department and would not focus on the cost involved but on the Department’s experience of the building of facilities to date. The Department would endeavour to explain how it had arrived at the selection of the PFM.

Department of Correctional Services (DCS) Presentation
The Department’s Chief Financial Officer, Mr Patrick Gillingham, briefed the Committee on the background to the building of the new facilities, the per capita costs and the different financing models that it had considered. He emphasised that affordability had been one of the Department’s main considerations. The Department had considered global debates, the performance of PPP facilities and the overcrowding dilemma in its decision to come up with a new financing model for the building of the new generation prisons. Mr Gillingham presented a detailed comparison of the three models: the Public Sector Comparator Model (PSC), the Public Private Partnership model (PPP) and the Project Finance Model (PFM). The Department had selected the PFM, which was a partial PPP model as the most feasible option.

Discussion
Mr N Fihla (ANC) noted that the projected inmate figure for 2005/2006 was 197 952 while for 2006/2007 it was projected at 181 552. He wondered whether the reduction in numbers should be taken as an indication that the Department had a strategy in place to overcome overcrowding.

Mr Gillingham answered that the Department had a directive that was responsible for formulae that had to be used for budget purposes. At the end of the financial year the figures might be smaller or greater, but the Department needed to have a projection so that they could do the calculation. The exact figure could only be done at the end of the financial year. The medium term expenditure framework (MTEF) also required the Department to make projections over a specific period.

Mr E Xolo (ANC) noted that the DCS reported that the PPP prisons were not able to address overcrowding. He wondered whether the DCS would be using their own design for the prisons or whether the private sector would be responsible for the design.

Mr Motseki responded that the DCS had explained that it needed a facility that would address the issues related to overcrowding. The designs were then selected from private sector contributions. He felt that overcrowding presented a Catch 22 situation. It was an ongoing problem that the DCS was trying to address within the IGS structures, etc. The DCS was also promoting alternatives to incarceration. He emphasised that the DCS could not alleviate the pressure of overcrowding in one facility by transferring it to another one. PPP facilities were contractually bound to ensuring that their facilities were not overcrowded. He assured Members that the DCS was beginning to appreciate the Committee’s concerns. The briefing sessions should be longer so that questions could be adequately addressed. The DCS was satisfied that the current designs would accommodate the functions it would need to perform. The DCS would present the designs and talk the Committee through them.

Mr J Selfe (DA) thought that the report of the transactional advisor, which he had already requested on a previous occasion, would be central to the debate around the new prisons. He said that he would still like to see the document irrespective of its complexity.

Mr Motseki replied that the transactional advisors report indicated nothing substantial that could have assisted in reducing the cost of (PPP prisons. The DCS would request the transactional advisors to present their findings to the Committee.

Mr Selfe commented that the per capita costs were calculated on the total number of offenders correctional facilities were able to accommodate. Everyone was aware that the PPP facilities could only accommodate a certain number of inmates. The cost projections for PPP facilities were based on a 100% occupancy rate. The amount spent per capita in DCS prisons was based on a much higher occupancy rate. He wondered what the per capita costs would be if the DCS prisons were also operating at 100% occupancy. He was still not convinced by the DCS’s argument in favour of the Public Finance Model and feared that the Department was trying many different models without thoroughly interrogating them and then discarding them once they failed. He felt that the transactional advisor’s report, which presumably went into greater detail than the presentation, would be of great assistance.

Mr Motseki explained that issues of cost were part of but one set of considerations. The cost of PPP facilities was relatively higher than the cost involved in Government-run facilities. It was also not entirely true that PPP prisons provided a better service than the government-run prisons. He emphasised that the DCS could not hand over the mandate, which required them to ensure the security and management of inmates. This responsibility still remained with DCS, irrespective of whether the facility was run by a private company. This fact had been demonstrated in the handling of problems that arose at the two PPP prisons.

Mr Motseki reminded the Committee that the debate around whether government functions could be handed over to the private sector was an international one and not unique to South Africa. The DCS felt that the issue of security and the management of inmates could not be handed over to the private sector. The DCS’ assessment was that this specific set of facilities was a bit more expensive.

Mr Motseki said that the DCS was not in a position to give the figures Mr Selfe had requested. The Department was aware that the debate around this issue could only be concluded once these figures were available.

Mr Gillingham added that the DCS had to pay for the PPP facilities irrespective of whether they were full to capacity or not. The DCS had to ensure that people were transferred to these prisons otherwise the money spent would go to waste.

Ms S Seaton (IFP) was concerned about the maintenance costs related to DCS prisons. She did not believe that the cost of maintenance was taken into account. Each time maintenance was discussed with any Government department it was said that the Department of Public Works (DPW) was responsible for it. She believed that a lot more money was spent in this area than reflected by the figures.

Mr Motseki said that issues of maintenance were taken into account when the per capita costs were calculated. Mr Gillingham said that DPW still performed the maintenance functions but the maintenance budget resided with DCS.

Ms Seaton knew that the private prisons had to maintain certain standards. DCS prisons however were in a "shocking" condition. One could not claim that any money was being spent on the maintenance of DCS prisons. She wanted to know what costing had been considered to ensure that all prisons were brought up to standard and then maintained on a regular basis.

Mr Motseki said that the DCS had been the first to acknowledge, during the presentation of their strategic plan, that there was a discrepancy between the DPW’s responsibility to perform maintenance and the DCS’ desire to create better facilities. DPW had its own programme for maintenance and the DCS had its own vision for how it wanted the facilities to look. Since DCS was not responsible for the maintenance of the buildings, it was constantly dealing with the backlog. There were certain things that the DCS would be able to do on its own but it would then have to procure services. The PFM would address this issue since the private partner would be handling the maintenance of the facility.

Ms W Ngwenya (ANC) asked how the new prisons would differ from the existing ones. She wondered whether they would have any additional facilities and what Government would gain from them being built.

Mr Gillingham said that the old facilities were designed to "warehouse" people, while the new ones aimed at facilitating the Department’s rehabilitation ideals through unit management, etc. The DCS invested in a concept design that would realise its objectives. There might be differences from facility to facility, but the basic concept would remain the same.

Mr Motseki added that there would be a number of differences in and advantages to the new facilities.

The Chairperson requested the Department to elaborate on the advantages the new facilities would have. The Department could respond in writing if they did not have answers readily available.

Ms Ngwenya requested a blueprint of the new prisons so that the Committee could see what the difference between the new and the old ones was.

The Chairperson added that in 2001 a consultant had presented a blueprint of the layout of the new prisons; he agreed that this would be useful so that the Committee could see what they would look like.

Mr Gillingham explained that the Department would present the blueprint of the design to the Committee at a later stage. The new facilities would have units instead of communal cells. Each unit would accommodate no more than 240 inmates (10 per cell; 60 per section). It would thus be easier to separate offenders according to the programmes they would be involved in. Movement control was one of the specific issues the DCS sought to address – it would be easier for staff to move around the facility, than for offenders to do so. Each unit would have consultation rooms, which would reduce the inmates’ movement around the facility and thus decrease the security risk such movement posed. There would also be greater use of technology e.g. control rooms from which a number of gates could be controlled. The DCS would like officials to be involved in the rehabilitation of offenders instead of controlling gates, etc. He agreed that initially this would affect the cost of the project but argued that in time it would break even. There would also be proper visitation facilities that would accommodate legal advisors, etc.

The Chairperson said that on 26 May tenders were issued for the Kimberley facility, which would be built by the DPW. He wondered why the DCS decided to use the PFM for the construction of the facilities to be built at Leeuwkop, Nigel and Klerksdorp. He was curious about how much the Kimberley facility would cost.

Mr Gillingham said that the tender for the Kimberley facility was in place. This facility had progressed the furthest, and much money had already been invested in it. The DCS would have had to account for wasteful expenditure if it had not proceeded with the building of this particular facility. The building of the Leeuwkop facility was subject to an assessment that would be done because there were specific environmental problems experienced at the site. This site was unique. It was not serving the community in the manner it should. The DCS would look at how to deal with such matters in the Gauteng province as a whole. Once the viability assessment had been concluded it would report back to the Committee.

The Chairperson again asked how much had been spent on the Kimberley facility. He also asked how much had been spent on the earthworks for the Nigel and Klerksdorp facilities and wondered what would happen when a new contractor took over these projects – would the DCS get a refund on the amount that had already been spent?

Mr Selfe added that according to the figures he had about R100 million had been spent on consultants’ fees (Leeuwkop – R27, 7 million, Klerksdorp – R25 million, Nigel – R27, 7 million and Kimberley R27, 7 million). He asked whether these funds were recoverable so that it could be used in some other way.

Mr Gillingham said that in an earlier presentation the DCS had explained how much had been spent on consultants. As far as the Kimberley facility was concerned the DCS had already paid R28 million to the contractor for the earthworks. The consultants’ fees came to R21, 1 million. This facility would be used as a benchmark. Money had been spent on the earthworks for the other projects (Members had been given the figures at an earlier meeting). In the 2005/06 budget the DCS had had R390 million available for all four facilities. The DCS had indicated to the DPW that this money was earmarked for new facilities and should not be used for anything else. In 2005 the money was reprioritised and used in other projects. He stressed that the DCS had money available for the continuation of the building project. There had been no need to request a roll over or additional funding.

Mr Gillingham said the presentation made at the previous meeting explained the figures Mr Selfe mentioned. The design and the consultation cost would have to be covered. The DCS would not select a new site but would use the one at Nigel. This was non-negotiable. Once earthworks were done the DCS had to use the sites so as not to be guilty of wasteful expenditure. No earthworks had been necessary at the Klerksdorp site.

Mr Fihla wanted to know how much the design and the construction of the prisons would cost and wanted to know how far along the building process was. He said that since there was a definite undertaking to build the eight new generation prisons the DCS should have costed their construction already.

Mr Xolo requested the Department to supply timeframes for the construction process. He wondered who would be responsible for monitoring the building process, and the maintenance of the buildings once construction had been completed.

Mr Motseki explained that after tendering one entered into a contract with the specific service providers. At this point one agreed on timeframes and milestones. The project manager had to ensure that the agreed upon timeframes were adhered to. Only if this was adhered to could payments be made. One usually also retained an amount that would ensure that if irregularities that occurred after the fact were discovered, the money would not be paid over. These were standard components of contracts of this nature.

Mr S Mahote (ANC) was concerned that the comparison of the three models did not reflect costs. He feared that the PFM might be approved now, only to discover later that it was a more costly option.

Mr Motseki explained that the reason for a tender was to get different proposals. One could only reflect costs once proposals had been received. When budgetary projections were made one anticipated that the market would remain stable. The figures could however decrease or increase. He added that the construction industry was booming and prices were escalating at unpredictable levels. The PFM was flexible enough to provide for any eventuality that could not be predicted. If the DCS made a down payment, the payments that would follow would be lower. He assured the Committee that with the PFM the DCS would be able to proceed as long as differences were reasonable and quantifiable. The DCS was not able to say what the costs would be because that was dependant upon the figures that would be received from the private sector.

Mr Mahote said that he was aware of how the tender process worked but wanted to know what the Department’s projections were.

Mr Motseki responded that due to the volatility in the market it was difficult to make projections. It would be unfair to give a figure that was well thought though.

Mr Mahote was concerned that there was no indication as to whether there had been any research into the PFM. He also noted that the presenters spoke of a second feasibility study that had been done. He wondered what had become of the first one.

Mr Mahote was curious about whether there were any other options apart from the three covered in the presentation.

Mr Motseki explained that the DCS only had the three options it had presented.

Mr Mahote asked whether it would be possible to reduce the length of the 15-year contract. He was concerned about what might happen should the DCS discover that there were problems with the facilities.

Mr Gilingham explained that the 15-year term was negotiable. The transactional advisor had advised that there should be a cut off point. If the period was too short the cost might escalate; if it were too long a lot of interest would need to be paid. The 15-year period was thought to be the safest but the DCS could still make a down payment, which would shorten the repayment period. He added that the new head offices being built in Pretoria would be utilising the same model. The model was not unique to the DCS.

The Chairperson said that the new head office was another debate altogether. The DCS would be called to brief the Committee on this particular issue as well.

Mr Fihla was curious about Mr Gillingham’s assessment of the models that he had presented. He asked which one he preferred.

Mr Selfe said that the document he had received earlier that morning but that the DSC had not presented indicated that "after the completion of the next stage of the feasibility study the transaction adviser would be in a better position to advise on which option is better and include a comparison of detailed costs, affordability and detail risk transfer issues." He wondered who was doing the feasibility study and what it entailed. He wondered whether issues of cost and risk transfer had been discussed with the National Treasury. He reminded all present that the National Treasury’s approval would be necessary should the DCS decide to take the PFM route.

Mr Motseki said that the DCS had discussed the PFM with the PPP unit in the National Treasury. Both departments were in agreement that the project should proceed. Treasury’s regulations around PPP projects required that feasibility studies had to be conducted and that a determination about which model to use should be based on the outcomes of this study. In this specific case the DCS would not be handing over the operation of the facility. On the basis of their agreement the DCS had signed off a tendering process that would exclude the operations of the facility. He stressed that DCS could not hand over its operational obligation to a private company, because it would still be held accountable should something go wrong.

Mr Selfe said that in the 2005/06 financial year there had been an amount available for capital assets and an amount for building and other fixed structures. He asked what became of that allocation since building did not proceed during that financial year.

The Chairperson referred the Member to a document dated 2 September 2003, which indicated that over a three period (2004 – 2007) a total of R739 million would be spent on the Nigel, Leeuwkop, Klerksdorp and Kimberley prisons. He also wondered what had become of these allocations.

Mr Selfe pointed out that he was not clear on what the difference was between the PPP model and the PFM. The presentation indicated that certain core and non-core functions could be contracted out. Even within DCS-managed prisons certain facility management services (e.g. nutrition) might then also be privatised. The only difference between the two models appeared to be that the people running the facility would be correctional officials as opposed to private companies. Most of the other functions could be privatised or outsourced. He wondered what the benefits were in terms of financial predictability particularly given the fact that the PFM was also subject to unitary payments that escalated with the Consumer Price Index (CPIX). He was worried that the Committee was asked to approve a budget without knowing what the figures, the escalation or the functions that would be outsourced were. He requested the DCS to distinguish between facility management services and non-core functions.

Mr Motseki explained that there were certain specific skills that the DCS was unable to acquire. One such service was the provision of medication within correctional facilities. The DCS handed such functions over to a company that would be able to handle the function much better than the DCS was able to. He felt that the feasibility study would address some of these issues and the Department would then be able to provide the Committee with a list of precisely which functions would be outsourced. The decision to do the feasibility study had been taken in the hope that it would fast track the process. Once it had been completed the Department would be able to tell what the associated costs would be.

Mr Gillingham added that the PFM was a partial PPP model - the operations of the facility would still be performed by the DCS since it could not transfer functions it had been mandated to perform. The feasibility studies for the Nigel and Klerksdorp facilities would be shorter since the sites had already been prepared. Once proposals had been received the Department would be in a better position to comment on the cost of the project. The building period for a project of this size was normally 24 months. He said that the first four prisons would give the DCS guidance as far as the construction of the next four prisons were concerned.

Mr Gillingham added that since the DCS had already outsourced some of its non-core functions it had decided to distinguish between non-core functions and facility management services. He confirmed that facility management services included non-core functions.

The Chairperson wondered whether the Department would wait until the feasibility study had been completed before it would advertise for tenders. He asked if this meant that no decision had been taken on which model to use.

Mr Motseki said that the DCS would wait until the feasibility study had been completed before proceeding. He said that the Department would respond to the issues it was unable to answer at a later stage.

The Chairperson appreciated the DCS’ "openness and frankness". He thought that the Department was now more at ease with the Committee and its questions. He repeated that the Committee wanted to support and defend any decisions made by the Department, and that the public would hold the Committee accountable when questions arose. The Committee would definitely invite the Department to a follow-up meeting.

He urged Members to interrogate the issue but not to delay the process unnecessarily since with each passing day the cost attached to the project would increase.

In closing he reported that two inmates had escaped from the Middledrift correctional facility earlier that morning. They had firearms, which had allegedly been smuggled in by officials and also had had access to a getaway car. The area commissioner had confirmed the escape. The Committee would follow up on the matter.

The meeting was adjourned.