Privately financed prisons have features that create unique issues for those financing them. Recently tranche five, a group of prisons bought together for financing (public or private), came to a close with UKDS securing the contract for Petersborough Prison. The next tranche is due to come under consideration later this year. The Government’s decision on whether the prisons will be privately financed is likely to be positive after a report from the National Audit Office (NAO) in June 2003 commended the influence that PFI prisons have had in improving standards and efficiency across the prison system as a whole.

The Market

A prison differs from other types of detention centres with regard to the type of offenders and time periods concerned. Prisons are typically longer term and do not have juvenile facilities. Many existing or proposed detention centres house facilities are privately managed and incorporate many of the features, issues, and parties as PFI prisons. There are also prisons in the UK that are only privately managed such as Wolds in East Yorkshire, and Doncaster.

UK prison PFIs are different from other types of housing contracts because they integrate the provisions of services as well as the structure. The provision of services required for prisons deters many of the usual housing developers, and specialised companies have entered this field. Because many soft services are involved in privately managing prisons, many employment and service provision issues come into the picture.

The main issue for this round of PFI prisons (tranche five) has been physical insurance for the prison buildings. The programme ran into serious difficulty because the insurance market refused to provide cover for some facilities after the fire that closed the Yarl's Wood immigration centre in Bedfordshire, run by Group 4.

A riot broke out at Yarl's Wood centre riot in February 2002 and the consequential fire caused £97 million worth of damage. Group 4 had been refused anything but minimal coverage for this and two other immigration facilities. Although the immigration centres are not prisons, insurance companies were unnerved by the disturbances at Yarl's Wood with insurers either quoting very high new premiums for prisons or completely refusing insurance for all custodial services.

After 9/11 and the problems that were compounded by Yarl’s Wood , the insurance market has been very volatile. However, Group 4 has told IJ that insurance has been secured for the new Yarl’s Wood that will open later in this year. Building materials and design has been important for PFI prisons, as different levels of security need to incorporate different design features leading to different insurance premiums.

The Actors

UKDS - UKDS is a subsidiary of Sodexho Alliance S.A., a French services company.

Interserve - Interserve, a major player in the support services market, ranked in the FTSE 250 with a turnover of over £1.1 billion in 2002. Its wide range of services underpins the core operations of organisations in both the public and private sectors, from hospitals and schools to infrastructure, petrochemical companies and the utilities.

Group 4 - Group 4 Prison Services is a subsidiary of Group 4 Falck Global Solutions Ltd part of the second largest security company in the world. Group 4 operates three prisons and detention centres in the UK.

Securicor - Securicor Security Services (UK) provide security services in the areas of manned guarding, electronic monitoring, aviation, rail and maritime security.

The Deals

There are 137 operational prisons in the UK. The British government has put eight DBFO prisons through the procurement process, to be designed, built and operated by the private sector. PFI account for 7 per cent of prison population or around 5,000 prisoners.

Signed PFI contracts include the following:

Refinancing

The first refinancing of a PFI prison contract took place in November 1999 and involved Altcourse Prison, previously known as Fazakerley. The contract had been won in December 1995 to Fazakerley Prison Services Ltd (FPSL), a project company formed by Group 4 and Tarmac. Under the contract, FPSL is responsible for constructing the new prison and operating and maintaining it for 25 years.

The PFI contract did not give the Prison Service a contractual right to share in the benefits of a refinancing. But because the refinancing involved the Prison Service supporting an increased risk, the latter sought compensation for accepting it. Increased risk arises because the refinancing augmented the project's debt, and, in certain termination circumstances, HM Prison Service would have to pay off that debt. The final contract did give the Prison Service a right to seek such compensation.

The Prison Service accepted compensation of £1 million, having rejected lower offers. The £1 million compensation was consistent with the Service's estimate (adjusted for risk) of the extra payment which might arise. The actual payments could range between £8 million and £47 million with a low probability which the Prison Service assessed as no more than 10 per cent in the worst case. This refinancing was an important model for future prison refinancings.

Since this refinancing there has only been one other refinancing involving Parc prison in May 2001. This deal had no return for the government in the contract. Other refinancings are planned for 2003.

Future Developments

Competition will be fierce for the next two prisons that will be put forward in Tranche six. It is likely that with the standardisation of contracts and the experience that the four separate companies bring will make bids more competitive.

The refinancings of prisons and refinancing clauses in contracts may change after the public’s criticism of the first PFI prison refinancing deals. The Government may look to contract for a greater share of the return from the refinancing.

Away from the UK, plans for PFI prisons are emerging with Japan recently announcing plans for its first PFI prison. France has identified 18 prison projects, although the French model does not replicate the UK model as French society has different views on the privatisation of prisons that involve many criminological aspects. These countries see that the private finance of prisons has been a positive experience in the UK and wish to emulate this in their own countries.IJ

Alexandra Johnson