Correctional Centre Public Private Partnerships: Treasury's view, with Minister of Correctional Services

Correctional Services

31 May 2011
Chairperson: Mr V Smith (ANC)
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Meeting Summary

In the presence of the Minister of Correctional Services, the Committees received a briefing from National Treasury on Public Private Partnerships. The briefing was conducted by the Treasury’s Public Private Partnerships Unit. The Unit outlined the necessity of Public Private Partnerships.

Public Private Partnerships procurement required shifting public administration resources from input and process definition to output prescription and outcome measurement. The diverse interests of different sectors could be harnessed for the collective good. The public theoretically got better, more cost-effective services; whilst the private sector got new business opportunities.

Public Private Partnerships were defined as a contract between a Government institution and a private party. The private party performed an institutional function and/or used state property in terms of output specifications. Performance was measured and managed via a penalty regime in which non-performance was subject to pre-noted punitive measures. The infrastructure should be maintained and have an agreed useful life at end of contract. Substantial project risk (financial, technical, and operational) transferred to the private party. The private party benefited through: unitary payments from Government’s budget and/or user fees.

The Government had numerous
Public Private Partnerships in operation, such as the Inkosi Albert Luthuli Hospital and the Chapman’s Peak Toll Road amongst others. Public Private Partnerships were preferred to conventional procurement because they offered more value for money and efficiency. Consistent with the outcome of 2002 study and the actual cost to date, most value for money would be achieved if all the services were provided by the private partner. The private partner would assume and accept manageable risks. The Treasury was in the process of looking into four consortia which had bid for a Public Private Partnerships; these were Ikwesi Consortium, Siza Bantu Consortium, the South African Custodial Management and Umtya Nethunga Consortium.

Members were unhappy with the security risks posed
by the Public Private Partnerships as they related to the Department of Correctional Services. They commented on the adverse effects on the rehabilitation of inmates due to the Public Private Partnerships. They lamented the fact that former Correctional Services employees had left the Department and joined some of the private companies bidding for Public Private Partnerships. They asked whether the Government could do without Public Private Partnerships and who had instituted the policy. They stated that custodianship was the responsibility of the state and it should remain that way. The Department said that it needed to seek permission to go to private correctional centres. The Minister said that the DCS had no mandate or role in private correctional centres, thus the value could not be effectively assessed.

Meeting report

National Treasury on Public Private Partnerships with Minister of Correctional Services: briefing
Mr Tumi Moleke, Director of the Public Private Partnership Unit: National Treasury, presented the Committees with the Treasury’s view on Public Private Partnerships (PPPs).

Public Private Partnerships (PPPs) procurement required shifting public administration resources from input and process definition to output prescription and outcome measurement. The diverse interests of different sectors could be harnessed for the collective good. The public theoretically got better, more cost-effective services; whilst the private sector got new business opportunities.
PPPs were defined as a contract between a Government institution and private party. The private party performed aninstitutional function and/or used state property in terms of output specifications. Performance was measured and managed via a penalty regime in which non-performance was subject to pre-noted punitive measures. The infrastructure should be maintained and have an agreed useful life at end of contract. Substantial project risk (financial, technical, and operational)transferred to the private party. The private party benefited through: unitary payments from Government budget and/or user fees. The Government had numerous PPPs in operation, such as the Inkosi Albert Luthuli Hospital and the Chapman’s Peak Toll Road amongst others.

There were three tests for a PPP before it was instituted: affordability, value for money, and the appropriate risk transfer. After the PPP’s inception, a feasibility study had to be undertaken before procurement
and eventually a PPP agreement was signed. There was a generic financial structure for a PPP (see document) which outlined how a PPP was hierarchically set up.

PPP Procurement was different from a conventional tender process in that a conventional tender process consisted of several separate stages which were not always integrated and outcomes not linked. The PPP procurement process was an integrated process with distinct stages and controls and outcomes. These were:
Request for Proposals (RFP) – Pre-qualification

Request for Proposals (RFP)
Negotiations
Commercial Close
Financial closure

South Africa’s first two private correctional centres, Mangaung and Kutama Sinthumele were PPP projects instituted prior to the Treasury Regulations which governed and regulate PPPs. The two centres offered competitive construction costs, the construction on time, and on-budget. They offered fast-track delivery by reaching full capacity within two years. They had comparative operating costs, significant black equity and sub-contracting, significantly higher-quality facilities, significantly higher-levels of service and appropriate risk allocation. Studies undertaken in 2002 showed that the two PPP operated centres were being run more efficiently than the Department of Correctional Services (DCS) operated centres.

PPPs were preferred to conventional procurement because they offered more value for money and efficiency.
Consistent with the outcome of 2002 study and the actual cost to date, most value for money would be achieved if all the services were provided by the private partner. The private partner would assume and accept manageable risks. The Treasury was in the process of looking into four consortia which had bid for a PPP; these were, Ikwesi Consortium, Siza Bantu Consortium, the South African Custodial Management and Umtya Nethunga Consortium.

Ms Elsa Strydom, Senior Project Advisor: PPP Unit, said that the Treasury had conducted a feasibility study prior to settling on the PPP route for the private centres and that the PPP had been found to be the most financially sound approach with regard to additional centres. The PPP route had been a better option in terms of efficiency as compared to procurement and/or construction.

Mr Moleke added that the private sector was involved in both conventional procurement and if a PPP was instituted. In conventional procurement, tenders were issued to bidders to assist in architecture and construction. The only problem which arose from private sector involvement was the issue of maintenance. The PPP Unit was working to improve coordination with those who worked on design, construction and maintenance. That would assist with controlling operational costs in certain facilities. The PPP Agreement was the tool which would be used to assist with that coordination. Money was spent on both a PPP and on conventional procurement, therefore money was not the issue but efficiency was.

Discussion
Co-ChairpersonMr V Smith (ANC) said that the Treasury did not seem to be factoring in operational costs that affected the Department of Correctional Services (DCS) directly. The PPPs had an impact on the rehabilitation of inmates. Were the PPP Agreements inclusive of the need for those PPPs to take care of the inmates in a facility? He asked whether after a period of 25 years, DCS was handed a building which was a “shell” and would cost more to restore and maintain. Would all future major structures be handled via PPPs or would there be a select group of projects? There lacked a consistency in the deciding of which projects were to be PPPs and which were to be exclusive to the DCS and that was wrong.

Mr Moleke replied that part of the Treasury’s policy review on PPPs looked specifically at the issue of operational costs. It was not an official Treasury position to include or exclude inmate management operational costs from the PPP Agreements. The inclusion or exclusion of those things was informed by the engagement which the Treasury had with relevant stakeholders and the guidance it received from that engagement. The Treasury was open and amenable to suggestions on how to better the area of operational costs. The Treasury could in future take a policy position to clearly outline operational costs and where responsibility lay for PPPs. The Custodial Act allowed for PPPs. The Act did not abdicate responsibilities of custodianship from the DCS or accountability. The PPP agreements with the two private centres had performance indicators and standards. These standards and indicators included a rehabilitation measure; if that was not met there were punitive measures included in the Agreements. Maintenance was a key part of ensuring that buildings/infrastructure did not become shells. Government was not very good at maintaining buildings that it owned. The PPP agreements made it clear that regular maintenance was to be conducted. At the end of the 25 year commitment, a building must still be in good enough condition to function for 5 to 10 more years.

Mr Smith commented that custody was the responsibility of the state. He asked what the consequences would be if politicians decided that they no longer wanted custodianship of inmatess outsourced or handled via PPPs. He commented that his major problem was handing over responsibility of custodianship to the private sector. There was no way of monitoring whether the human rights of prisoners in private correctional centres were being protected and respected.

Mr Moleke replied that the major drawback from choosing to abandon PPPs would be the loss in confidence that the private sector would have in the Government.

The Hon. Nosiviwe Mapisa-Nqakula, Minister for Correctional Services asked the Treasury representatives whether they were aware that the bidders for PPPs made the bulk of their profits from managing custodial services.

Mr Moleke responded that the reason why some bidders would benefit mainly from custodial services would be because of the manner in which that bidder’s consortium was structured. The Treasury would have to review the issue when giving out tenders in future.

Co-Chairperson Mr T Godi (APC) said that the Standing Committee on Public Accounts (SCOPA) had been invited to the meeting because of the monetary focus of the presentation by the Treasury. Money was essential and critical to the work of SCOPA. He commented that he disagreed with Mr Moleke’s comments on the involvement of the private sector. He asked whether PPPs were Government-wide policy or if they were selectively instituted.

Mr Moleke replied that the Custodial Act allowed for PPPs. The Act did not abdicate responsibilities of custodianship from the DCS or accountability. A policy document was in the process of being produced; it related to capital expenditure projects. The document would outline the procedure for a capital expenditure project and would outline what amount would necessitate a PPP and what would necessitate conventional procurement.

Mr M Steele (DA) asked whether there wasn’t a conflict of interest with regard to private contractors, who had formerly worked at the DCS, working to become service providers under the PPP system.

Co-Chairperson Mr Godi said that Mr Steele’s question was more political and would be reserved for a Department response. It was not appropriate for the Treasury to respond to such a question.

Ms M Matladi (UCDP) asked what the Treasury’s advisory role entailed if it allowed the DCS to procure buildings at a price that was exorbitant.

Mr Moleke responded that the Treasury had established the PPP Unit specifically to deal with matters of exorbitant spending after learning lessons from previous Departmental procurement. There were regulations now in place to prevent such procurement from occurring again and there was procedural conduct to be followed.

Ms W Ngwenya (ANC) asked whether the Government could do without PPPs and whose position it was to pursue PPPs. She asked about DCS employees leaving the Department to set up private companies that bid for PPP deals.

Mr Moleke responded that investment was needed in the economy and infrastructure development was also needed. The PPPs were a necessary part of gaining that investment. The PPPs were useful but there was need to properly regulate them. He could not answer the second question as it was a political question.

Mr Velile Mbete, Chief Director: Public Finance: Justice and Protection Services, replied that the Medium Term Expenditure Framework (MTEF) went out to every Department annually. The MTEF outlined the amount available to each Department for capital expenditure projects and parameters governing them. The Government had made many mistakes in the past over procurement, for instance, a correctional centre in Kimberley had been contracted for R631 million but had ended up costing R951 million; the Treasury did not know why the sum had risen so exponentially. PPPs were preferred because they offered efficiency and value for money.


Mr L Max (DA) commented that it seemed like the push for PPPs was based on a political decision. He asked what the cost difference was between conventional procurement and a PPP. Were the outcomes of the PPP facilities being measured? Did the PPPs offer value for money?

Mr Moleke replied that the feasibility study relating to the PPPs had shown that the PPPs represented the best value for money in terms of capital expenditure projects. The study looked at a variety of things including salaries, operational costs and capacity. Performance measures were included in the PPP agreements and there punitive measures if they were not met.

Mr N Singh (IFP) asked who was held accountable for the management of private correctional centres. He asked whether overspends in the DCS on capital expenditure projects had been approved.

Mr Moleke replied that the issue needed to be addressed in the feasibility study in order to ensure that when a contract was granted it was done so properly with clear delineations of responsibility.

Co-Chairperson Mr Smith asked whether the PPP Unit was advisory or activist.

Mr Moleke replied that the Unit played two roles, advisory and regulatory. The regulations outlined what could be carried out and what could not within the parameters of a PPP Agreement. The Unit’s advisory role entailed informing departments of what was most likely to get the best value for money based on experience.

Co-Chairperson Mr Godi asked whether the PPP Unit had advised the DCS on what its best option was.

Mr Moleke responded that the DCS had registered a project and a feasibility study had been conducted and based on that the accounting officer within the DCS had made a decision. The ultimate responsibility lay with the accounting officer in a department.

Ms M Phaliso (ANC) said that by allowing private contractors to operate certain prisons, the security of the country had been compromised. She asked whether the Treasury was going to proceed with PPPs regardless of that fact.

Mr Moleke replied that he could not offer a response to that question as it was political.

Ms W Ngwenya (ANC) commented that it was a serious concern that DCS officials who had formerly been part of the Department had left to become employees of private contractors bidding for PPPs. She asked who the approved consortiums were staffed by; she knew that some of the consortia that had received PPPs were former DCS employees. She asked why some of the PPP centres did not have juvenile facilities.

Co-Chairperson Mr Godi said that the Treasury could not respond to political questions. Some of the questions should be posed to the DCS.

Mr S Abram (ANC) asked whether the feasibility study that had been conducted by the Treasury had taken into account what the cost would be for the four approved PPPs. He asked how the Treasury could justify exorbitant spending on capital expenditure projects when their output was comparatively poor.

Ms L Mashiane (COPE) commented that she was happy that National Treasury had taken over the issue of capital expenditure projects. She expected the National Treasury to carry out a due diligence study to prevent exorbitant expenditure. She commented that there was no value for money emanating from the PPPs. The Treasury should look into PPPs more seriously and if there was value for money, it should be proven.

Mr L Tolo (COPE) said that the issue of PPPs had been disputed in the past and would be disputed in the future.

Co-Chairperson Mr Smith thanked the Treasury representatives for their attendance. He said that the Committee would like to engage separately with the Treasury on issues such as the refinancing of certain correctional centres, amongst other issues. The Treasury had been helpful to the Committee and he appreciated the Treasury’s participation.

Co-Chairperson Mr Godi said that SCOPA’s perspective on PPPs was clearer after the Treasury’s presentation. There needed to be greater engagement at a policy level to seek an acceptable way to deal with capital expenditure projects.

Mr Tom Moyane, National Commissioner: DCS appreciated the engagement which had taken place in the meeting. The PPPs had been inherited by the current political leadership in the DCS. There had been a departmental review as to the effectiveness of PPPs. Value for money had to include an examination of the rehabilitation of inmates and their reformation. The DCS had no mandate or role in private centres, thus the value could not be effectively assessed. The DCS needed to seek permission to go to private correctional centres. Any request for specific facilities to be added to the privately-run centress would result in additional costs being incurred, that presented a problem for the DCS. Rehabilitation was core and the security implications were high, these were areas where the DCS had serious concerns. Direction on a way forward needed to be provided by the people of South Africa as the DCS could not act unilaterally.

The Minister thanked the co-Chairpersons for including the DCS in their engagement with National Treasury. A balance needed to be struck between investor confidence and issues of national security. The DCS were not against PPPs, but there should have been a different approach to the policy when it related to the DCS. The current outcomes were not in alignment with Government priorities as they related to the DCS. The DCS had no mandate or role in private correctional centres, thus the value could not be effectively assessed. A review on PPPs needed to be undertaken and more needed to be done to assess their effectiveness in DCS terms.

Co-Chairperson Mr Smith thanked all those present and who had participated in the meeting.

The meeting was adjourned.

 

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