Safety and Cost Effectiveness of Private Prisons

Tabled: 29 March 2018

Appendix D. Improvements in new private prison contracts

The table below lists the contractual improvements or 'negotiation benefits' described by DJR in the contract administration manuals for the new contracts, and our comments on the validity of the claimed improvements and benefits.

Figure D1
Improvements in the new contacts

Claimed feature or improvement

Description and VAGO comment

Long-term contractual arrangements

The initial terms are 11 years (Fulham) and 10 years (Port Phillip). The further extension terms are only available if GEO and G4S achieve a set of contractual, commercial and operational thresholds measured over a specified three-year period. The operators have an automatic right to extension if they meet these thresholds; otherwise, the decision to extend reverts to the state.

While these contract terms are longer than typical service contracts, this was seen as necessary to resolve the lease misalignment issues. The potential disadvantages to the state of being 'locked-in' to a long-term contract are mitigated through the performance-based mechanism for earning a further extension term and more generally through provisions which allow the cost of the services to be reviewed, benchmarked and/or indexed.

Overall, the contract terms, including the mechanism for earning a further term, strike a good balance between providing long-term incentive for the operators and preserving flexibility for the state.

Updated contractual provisions and commercial regimes, including refined risk allocation and improved enforceability through greater clarity of provisions

The clarity and enforceability of the provisions in the new contracts will be tested over time. Despite this, it is clear that the new contracts represent a fundamental rewrite and have been 'modernised' to align more closely with the Partnerships Victoria standard commercial principles.

The contracts align closely with the model used for Ravenhall which should support efficient and effective contract management of the private prisons. That said, the commercial mechanisms in the contracts are complex and will require significant resources to manage.

A rigorous asset management and investment regime

The new asset management and investment regime is an improvement over the initial contracts. The contracts include much more specific facilities maintenance requirements, and an asset life cycle schedule and associated funding schedule that were rigorously tested during negotiations. The parties established a 'sinking fund' model to promote strategic management of asset life cycle and maintenance investment. The state funds this activity and will share in any cost savings at the end of the term.

Improved clarity and detail within the contracted services specification

A detailed output specification defines the services to be provided under the new contract, covering both correctional services and facilities maintenance and management. This is similar to Ravenhall and incorporates system-wide requirements. The services specification is an improvement on those in the initial contracts.

Restructured payment, performance and reporting mechanisms, including a strengthened performance incentive regime

This claim is correct and, at a high level, the risk allocation is the same for Fulham and Port Phillip. The risk allocation is evidenced by the overarching obligations on the operators imposed by clause 4 and related clauses including the payment and performance regime. Under the initial contracts, performance was only assessed once a year to determine the performance payment. This meant that there was no incentive for operators to try to address poor performance on an SDO if it had failed to a degree that would impact its performance payment.

The entire service payment is now at risk—through deductions for poor performance and other regimes in the contract

Due to the operation of the 'Available Prisoner Place' concept and the service-linked fee, it is possible that payments to the operators could be close to zero (ignoring 'Pass Through Payments'). Although, this is largely theoretical, as it is unlikely that all the prisoner accommodation would fail the 'Available Prisoner Place' test at once.

An improved modifications regime within the contract

The new contracts improve the modifications regime compared to the initial contracts. They provide the state with flexibility to adapt services and/or facility requirements, with pre-agreed pricing parameters.

Capacity 'tranching' regime, allows the state to lower or increase the required bed capacity in the prisons in increments of 50 and adjust the service payment accordingly

This regime provides flexibility to the state to adjust prisoner numbers in these two prisons at a pre-agreed price to match system-wide requirements. The regime allows the state to turn tranches of 50 prisoner places off or on and decrease or increase the service payment. There are up to six tranches for Port Phillip and four tranches for Fulham.

The value of this mechanism is linked to the size of the relative price reduction and the cost structures of the private operators, so is difficult to assess. We understand that the state has flexibility to implement a more permanent change to prisoner numbers through the modifications regime as an alternative to the tranching regime.

Improved contractual security for the state, including a parent guarantee and increased performance bonds

The new contracts provide the state with improved direct security in addition to its ability to reduce payment for poor performance and its step-in and termination rights. This security is in the form of a parent company guarantee and a performance bond.

The performance bond for Fulham increased from $3 million to $8 million, and for Port Phillip, from $8 million to $12 million.

Parent company guarantees:

  • For Fulham, the parent company guarantee liability of the guarantor (The GEO Group, Inc.) is limited to the liability of the contractor under the State Project Documents, but no upper cap is specified.
  • For Port Phillip, liability is similarly limited but an overall cap is specified. The Guarantor is G4S Regional Management (UK&I) Limited.

High contractual and commercial consistency with the Ravenhall contract

Consistency across the three full-service private prison contracts should provide contract management and operational management efficiencies for the state. Although there are prison-specific differences, it is reasonable to suggest that the similarities will provide management efficiencies for the state. Despite this, the commercial mechanisms in the contracts are complex and will require significant resources to manage.

Alignment of crown lease and contract term, including improved end-of-term arrangements for the state

The negotiations for the new contracts have aligned the lease terms with the terms of the new contracts and improved end-of-term arrangements for the state. The revised lease arrangements provide for the operators to surrender these leases at the end of the service terms under the new contracts.

Ownership of the facilities has reverted to the state from the commencement of the new contracts with the exception of furniture, fixtures and equipment at Fulham.

Source: VAGO based on information from CV and the original and new contracts for Fulham and Port Phillip.

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