Last week Rory Stewart, the prisons Minister, announced that operation of two new prisons, at Glen Parva and Wellingborough, will be offered to the private sector, with no in-house bid – though bids will be judged against a default a public sector benchmark, so public operation might still be a possible result. (They cannot be built using private finance, the Chancellor having formally abolished PFI in the Budget, though Stewart thinks private capital might yet find a role in the projected 'new for old' prisons deal, not yet agreed with Treasury. That sort of land swap is probably a better field for private capital - always assuming the customer is clued up enough not to be taken for an expensive ride.)
This will be welcome news to the private sector, given that it will be 8 years since the last competition started, and the last new build, Berwyn, was given to the public sector with no competition. But there are problems.
For a start, can the private sector still run prisons more cheaply than the State? The gap has much narrowed since MoJ savagely cut both staffing levels and pay in public sector prisons earlier this decade. While public sector pensions have also been cut, they are still much more generous than most defined benefit private schemes. But because the public scheme is unfunded, the true costs are unknowable, and can be magicked away through accountancy legerdemain. Besides, who cares about the deficit in 2050?
One can't answer that question by looking at the costs of existing prisons, because complex adjustments are needed to ensure fair comparison (and comparison is flatly impossible for privately run prisons built using PFI, as most are.) The best comparators are Berwyn and Oakwood, both big, new, Cat Cs – but comparison is complicated by the fact that Berwyn has been only slowly building up numbers. However, figures I have obtained indicate that when full, Berwyn's cost per prisoner could be in the region of 15-20% more expensive than Oakwood's.
But price is no longer the key: we are way past the point where the cheapest bid is the winner. Now, neither public nor private sector prisons are adequately funded, that is to say, for safe staffing levels – hence the chaotic violence that has overwhelmed so many prisons, in both sectors. So, a private sector bid that incorporated convincingly safe staffing levels might well be above the public benchmark. But if that were the case, how could the MoJ (running a structural deficit of about £1bn a year) give preferential funding to the private sector? Such is the dilemma of outsourcing in an age of austerity: unacceptably poor service, in a choice of two colours.
One also has to ask: who will bid? The MoJ foolishly allowed the market to consolidate from 4 operators down to just 3 in 2008 - of which 2, SERCO and G4S are still (after five years!) under investigation by the SFO, for over-charging on tagging contracts. Difficult, surely, for the MoJ to award a contract to a company that might be on trial for (or convicted of) fraud against it?
The MoJ no doubt thinks to bring in new operators. That has always been difficult. From the customers' perspective, a prison is about the riskiest service to contract for - so you look for companies that have some sort of record in managing offenders, or detention. They are few, and some are in America, where prisons are run very differently. And over the years, the Government has marched so many potential new operators – Reliance, MITIE, and GEO, amongst many others – up that particular hill and down again, before invariably awarding prison contracts to the three existing operators. Would any outsider have the appetite for another round, suspecting they are there just to make up the numbers?
And from the operators' perspective, just how appealing is a prison contract nowadays, anyway - with margins tighter than ever, and prisons more difficult and dangerous to run than ever, meaning huge commercial and reputational risk? Where it can be 8 years between opportunities - and many competitions are aborted mid-stream? For a customer which is institutionally incapable of planning more than couple of years ahead (spending plans never more than 3 years ahead, elections every 5 years or sooner, ministers changing every 18 months)? A customer whose last 3 big procurements - probation, FM, tagging - have all ended in very public failure? Where Treasury have not agreed funding of the 'new for old' programme, where private sector share of the system is already 18% and very unlikely to grow much, where the prison population and system can't rise much, because it simply can't be afforded? And with the market doomed if Labour get in – which may well happen even before these contracts are signed?
Would a potential new operator think this prospect worth the considerable investment – not much change from £1m - needed to mount a credible bid? In the past, I advised several companies to bid. If advising a board today, I'd say, look elsewhere for opportunities.
Indeed, it isn't even clear whether all the existing three operators would want to bid. G4S, in particular, has been badly bruised by repeated failures – at Birmingham prison, Medway Detention Centre, Brook House Immigration Removal Centre (for all that they run prisons at Altcourse and Rye Hill that are doing alright). It is possible that they have had enough.
What if the MoJ holds a party, but no one turns up?
I was formerly Finance Director of the Prison Service and then Director of the National Offender Management Service responsible for competition. I also worked in the NHS and an IT company. I later worked for two outsourcing companies.
Click below to receive regular updates