PPP Correctional Centres Contracts: briefing on Negotiations

Correctional Services

10 August 2006
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Meeting report

CORRECTIONAL SERVICES PORTFOLIO COMMITTEE
10 August 2006
"PRIVATE" PRISON CONTRACTS: BRIEFING BY ON NEGOTIATIONS

Chairperson: Mr D Bloem (ANC)

Documents handed out:
Preparation for and negotiations with Private Parties to the two PPP Correctional Centres Contracts to Improve Value for Money PowerPoint Presentation

SUMMARY
Transactional advisors from Kagiso Financial Services briefed the Committee on the re-financing of the Kutama Sinthumule and the Mangaung correctional facilities. The presentation detailed the various refinancing options available for both facilities. The two private operators had made it clear that neither contract contained any possibilities for savings to be shared. This was contrary to the expectations of the task teams. Questions were raised on the specific facilities, and in particular the contracts for Nigel and Klerksdorp. The Chairperson was concerned that the Department had invited tenders for the Kimberley facility despite no feasibility study having been doneHe also expressed his concern at the long delays. He emphasised that the Committee would closely monitor developments related to the prisons.

MINUTES
The Chairperson reminded members that it had been decided, on 2 May 2006, that the transactional advisors would brief the Committee on the cost implications, when building new prisons, of using the Public Finance Model (PFM) as opposed to conventional financing models. This was in line with the Committee’s oversight function in monitoring the establishment of the eight new prisons, ensuring that they were within the budget, and scrutinizing public private partnerships.
 
Deputy Commissioner’s opening remarks
Mr Teboho Motseki (Deputy Commissioner, Correctional Services) attended the meeting and reported that the Commissioner, Mr Linda Mti, was unable to attend due to other commitments. He commented that it was appropriate, during Women’s Month, to point out that only 3% of inmates in correctional service facilities were women.

Mr Motseki reported that the transactional advisors were contracted in 2004 to report to and conduct a feasibility study for the Department of Correctional Services’ (DCS) renegotiation of the re-financing of the Kutama Sinthumule and Mangaung correctional facilities. The report had now been received, and the Committee would be briefed as soon as the feasibility study was completed.

Kagiso Financial Services Presentation
Mr Eugene van den Burgh and Ms Nonceba Khosa, (Transactional advisors: Kagiso Financial Services) briefed the Committee on the options for re-financing of, and the design and operating changes to the Mangaung and the Kutama Sinthumule correctional facilities. Re-financing constraints were similar for both facilities and would require re-financing to be flexible and embedded in upfront agreements. The re-financing model should also ensure value for money and improve the cash flow of the Department. The findings of the two private operators that had been approached made clear that neither contract contained any indication that savings could be shared. The transactional advisors were of the opinion that PPP operators were reluctant to change the fee structure.

Mr Motseki added that that the Department of Public Works (DPW), DCS and National Treasury task team had not anticipated the problems as they had hoped for significant gains. The report received from the transactional advisor now indicated that this would not be the case. He believed that the feasibility report would add another dimension to the options already available to the DCS.

Discussion
The Chairperson said that in previous meetings the Committee had made clear that the building of the prisons could not be continuously postponed. He requested Mr Motseki to give a clear indication of when the report of the feasibility study would be available.

Mr Motseki replied that the DCS had been told that the feasibility study for four of the prisons should be completed sometime before the end of September. These four were the Allendale, Port Shepstone, Polokwane and East London facilities.

The Chairperson asked when the feasibility studies for the Kimberley, Klerksdorp, Nigel and Leeuwkop facilities would be complete.

Mr Motseki replied that the DCS was in the process of adjudicating the tender for the Kimberley facility. He expected that this process would be complete by the following day, after which work would proceed in earnest. Tenders for the feasibility studies of Nigel and Klerksdorp would be invited soon. The environmental impact study for Leeuwkop had still not been completed.

The Chairperson asked whether a feasibility study had been done for the Kimberley facility.

Mt Motseki explained that the DCS had undertaken to expedite the building of the Kimberley facility through conventional financing models. Tenders had already been invited although no feasibility study had been done.

The Chairperson was concerned at this statement, and asked representatives from the National Treasury whether it was legal for a Department to invite tenders without a feasibility study having been done.

Mr Cor Hoak (Director: Correctional Services, National Treasury) explained that National Treasury wanted to see what information was available that would serve as a guide in the planning of the project, and preferred feasibility studies to have been done.

Mr William Dachs (Head PPP unit, National Treasury) said that he did not believe that it was illegal but that National Treasury preferred that the feasibility study be done first.

The Chairperson felt that this did not answer the question specifically enough. On further questioning, Mr Hoak replied that, for a project of this magnitude, feasibility studies should have been done before tenders were invited.

The Chairperson commented that the Department appeared to be in very serious trouble as far as the PPP prisons were concerned. It was important for the Committee to closely scrutinize the process and it would not approve anything without proper consideration. He pointed out that the prisons were very costly to taxpayers and government. He queried whether any lessons had been learned from the mistakes that had been made during the building of the Kutama Sinthumule and Mangaung facilities.

Mr van den Burgh said that he would not necessarily agree that the existing two PPP prisons had experienced mistakes. However, valuable lessons had been learnt through these projects and the PPP regime and guidelines had been substantially improved. It was clear that substantial funding flexibility must be built into the agreements for any new procurement.

Mr J Selfe (DA) believed that the financing model for the Kimberley facility was entirely state- driven, tenders had been invited and would be adjudicated by the following day. The second part of the investigation would be into the next four PFM prisons to be built. He asked when the Committee would be briefed on the three outstanding prisons, and whether the contracts for the Nigel and Klerksdorp facilities would be awarded during this financial year.

Mr Motseki answered that the DCS had commissioned the feasibility studies for two of these prisons. He was not sure when the tenders would be closed. He urged members to wait on the outcome of the feasibility studies, which would inform the DCS as far as the most efficient financing model, as no prediction could be made on the findings.

The Chairperson thanked the transactional advisors for their input. The Committee would need National Treasury’s assistance and guidance in this matter, and would discuss the matter in more detail at the meeting on the following Tuesday, 15 August. He stressed that the Committee wanted to assist the Department, but was duty bound to exercise proper oversight by asking all relevant questions and investigating fully.

The meeting was adjourned.

 

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