Safety and Cost Effectiveness of Private Prisons

Tabled: 29 March 2018

4 Prison costs

Achieving sustainable cost savings is one reason governments choose to outsource the operation of prisons to private companies. Demonstrating that prisons can operate at a lower cost while maintaining quality standards can support efforts to improve efficiency in the public prison system.

We have used CV's data on prison costs, including operating costs directly attributable to individual prisons. For public prisons, this includes labour, locally incurred supplies and consumables expenses. For private prisons, this includes contract payments.

We have also included the costs CV incurs centrally for managing the system and allocated these across individual prisons. We based the allocation on each prison's share of the total average prison population for the year, adjusted where necessary to better reflect cost attribution. For example, we allocated CV's centrally incurred contract management costs to the privately operated prisons and the three public prisons with significant facilities provision and management contracts—Hopkins, MRC and Marngoneet. Broader DJR corporate overhead costs and the capital assets charge applied by DTF as part of the output budgeting process are not included in these costs.

The cost information provided in this section excludes the state's two women's prisons—the Dame Phyllis Frost Centre and Tarrengower Prison.

4.1 Conclusion

The private prisons cost the state up to 20 per cent less than the average for publicly operated prisons with the same security rating and system-wide average costs. More efficient staff shift patterns largely account for these savings.

4.2 Total system costs

Total system costs have increased steadily since 2010–11 due to ongoing growth in prisoner numbers driven by sentencing and parole reforms, and an increasingly complex prisoner population. Figure 4A shows that the total system costs for male prisons increased by 90 per cent from 2010–11 to 2016–17, rising from $425.9 million to $811.2 million. Prisoner numbers increased by 49.5 per cent during this period.

Prison direct costs—include labour, catering, utilities, cleaning, asset depreciation and maintenance costs for public prisons, and contractual payments and asset depreciation for private prisons.

Other costs—include centrally managed system-wide support functions such as operational support, offender management, sentence management, security and intelligence, health services costs, business support and contract management costs.

Note: JARO (OCSR) costs are not included in prisons' direct or other costs.

Figure 4A
System-wide costs for male prisons, 2010–11 to 2016–17

System-wide costs for male prisons, 2010–11 to 2016–17

Source: VAGO based on data provided by CV.

Prison direct operating costs increased by 86 per cent over the period. Other costs increased by 105 per cent, with the largest increases relating to IT system costs, sentence management, and security and intelligence.

The average number of male prisoners in the system increased from 4 272 in 2010–11 to 6 383 in 2016–17. Figure 4B shows the average annual costs per prisoner, for both total system costs and direct prison operating costs. These costs grew by 27 and 24 per cent respectively during this period. The average total cost per prisoner per year increased from $99 703 in 2010–11 to $127 092 in 2016–17.

Figure 4B
Average annual system-wide costs per male prisoner, 2010–11 to 2016–17

Average annual system-wide costs per male prisoner, 2010–11 to 2016–17

Source: VAGO based on data provided by CV.

4.3 Prison cost comparisons

We used CV information on system-wide and individual prison costs, from 2010–11 to 2016–17, to compare the costs of private prisons against system‑wide averages and public prisons with the same security ratings and similar characteristics.

While these comparisons yield insights, they should be treated with caution. Differences in the characteristics of individual prisons including location, age, size, physical layout, security classification, prisoner profile and their role or function within the overall system influence their operating costs. These differences make it difficult to compare costs on a 'level playing field'.

Despite this, our comparisons show that the private prisons cost the state less than the average for publicly operated prisons with the same security rating. DJR's advice to government in recent years, and our review of available benchmarking, indicates that the lower costs are largely attributed to more efficient staff shift patterns.

Average cost per prisoner

Figure 4C shows that the average annual total costs per prisoner at Port Phillip and Fulham were lower than those for public prisons with the same security classifications.

Figure 4C
Prison costs—average annual cost per prisoner, 2010–11 to 2016–17

Prison costs—average annual cost per prisoner, 2010–11 to 2016–17

Source: VAGO based on data provided by CV.

Port Phillip

Figure 4D indicates that Port Phillip has lower average operating costs than publicly operated maximum-security prisons.

Figure 4D
Port Phillip—average annual per prisoner cost comparison, 2010–11 to 2016–17

Port Phillip—average annual per prisoner cost comparison, 2010–11 to 2016–17

Source: VAGO based on data provided by CV.

The value-for-money assessment undertaken by CV when negotiating the new contract for Port Phillip concluded that the cost bid from G4S was significantly lower than the operating costs at Barwon and similar to, but still lower than, the costs at MRC. CV considered MRC the best cost comparison for Port Phillip due to its similar prisoner profile and level of activity.

Fulham

Figure 4E shows that Fulham has been consistently below the average per‑prisoner costs across all publicly operated medium-security prisons—Hopkins, Loddon, Middleton and Marngoneet—since 2012–13. The average annual per-prisoner costs across all publicly operated medium-security prisons for 2016–17 include costs for Karreenga, a medium-security facility opened in September 2016 adjacent to Marngoneet Correctional Centre.

Figure 4E
Fulham—average annual per-prisoner cost comparison, 2010–11 to 2016–17

Fulham—average annual per-prisoner cost comparison, 2010–11 to 2016–17

Source: VAGO based on data provided by CV.

The value-for-money assessment undertaken by CV when negotiating the new contract for Fulham concluded that GEO's pricing was lower than the benchmarked costs.

4.4 Why do private prisons cost the state less to operate?

DJR's advice to government in 2014 and 2015 recommending the negotiation of contract extensions for Fulham and Port Phillip consistently indicated that these prisons were more than 20 per cent cheaper to operate than publicly operated prisons.

A number of reviews found that private prisons:

  • are less costly for the state than publicly operated prisons
  • appear to operate at lower operational staff-to-prisoner ratios, particularly during daylight hours
  • have more flexible staff scheduling to better accommodate the day's structure, with shifts of various lengths between 7.60 hours and 12.40 hours and shorter shift-overlap periods.

In September 2014, the government responded to these reviews by asking CV to investigate opportunities for workforce and rostering efficiencies within public prisons. CV advised us that it continues to examine and progress these opportunities.

Under the new contracts, the average annual per-prisoner costs are broadly consistent with the past few years. See Part 5 for discussion of the value‑for‑money assessments that informed the new contracts.

4.5 Comparing prison cost elements

We examined and compared private prison costs, as agreed in the new contracts with public prison costs for 2016–17.

The private operators have lower labour costs, but their utility costs are mixed.

Labour

We compared the agreed base labour costs in the new contracts for Fulham and Port Phillip with labour costs for broadly similar public prisons. These comparisons covered all labour costs including custodial, management and administration roles and show significantly lower labour costs in the privately operated prisons. Under the new contract:

  • Fulham's expected labour costs per prisoner are around 33 per cent lower than comparable labour costs at Loddon
  • Port Phillip's expected labour costs per prisoner are around 45 per cent lower than comparable costs at Barwon and 25 per cent lower than MRC.

We did not find significant differences in the staff pay rates between the public and private prisons for the most common roles, such as correctional officers.

Utility costs

We compared the agreed base utility costs in the new contracts for Fulham and Port Phillip with utility costs for broadly similar public prisons, covering water, electricity and gas. Our comparison shows significant variation across the public and privately operated prisons.

Under the new contracts, Fulham has a higher average utility cost per prisoner than Port Phillip, primarily due to higher expected water and sewerage charges for its location, which also contributed to Barwon's high utility costs.

4.6 Actual costs under the new contracts

As part of the contract negotiations, both operators submitted detailed financial bids using cost templates specified by CV. CV incorporated the final agreed cost templates into the new contracts as an attachment to the payment schedule, and these costs are key 'base amounts' underpinning payments made to the operators.

We examined the operator's claimed and actual costs under the new contracts using actual staffing rosters for labour costs and invoices for subcontracted services, local government charges and utility costs passed on to the state. We found no significant variances.

4.7 State-funded capital works

The state has funded multiple capital projects at Fulham and Port Phillip since 1997. These projects usually involve adding new bed capacity or security upgrades.

The private operators are responsible for the design, costing and procurement processes for state-funded capital works on their sites. CV actively reviews key steps, agrees outcomes and then pays for the works. The state provides funding for capital costs based on an up-front agreement of both the capital cost and the operational cost impact.

The state enters into a contract with the prison operator for each capital works project and, in turn, the operator enters into a 'back to back' contract with a construction firm. CV advised that the private operators bear the risk of cost and time over-runs on capital works.

CV performs due diligence and other processes, including reviewing pricing and costs and, in some cases, engaging quantity surveyors to support decisions on new state-funded capital works. We reviewed CV's due diligence for two state‑funded capital projects—one at Fulham and one at Port Phillip—and found CV's processes for assessing and overseeing both projects were rigorous.

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