Victoria's prison system: Community protection and prisoner welfare

7.2 Within the arrangements the Government retains the ultimate social responsibility to the community for the operation of the prison system and duty of care to prisoners. However, in line with one of its reform objectives, the Government has been able to transfer significant financial risks to the private sector. Certain operating risks have also been transferred by placing the onus on contractors to provide services which meet the Government's standards. The agreements with contractors provide the Government with wide access and monitoring rights and a number of options where the services delivered are not in line with specified standards.

7.3 Despite these strengths, certain provisions within the agreements work against the delivery of high quality services. In particular, service delivery outcomes used as a basis for paying contractors performance-linked fees, are deficient in that they were developed on the basis of outcomes achieved in outdated prisons identified for replacement. They are also primarily quantitative in nature, do not address some key areas of prison operations and focus attention on short-term achievements. These shortcomings, coupled with provisions which enable performance-linked fees to be paid, even where outcomes have been only partly met, do not encourage service excellence. These issues will need to be considered at the time new agreements are negotiated. In the interim, a major challenge for the Government is to more effectively utilise available options to ensure any poor performance is promptly addressed.

7.4 With the exception of weaknesses in monitoring procedures, as discussed more fully in Part 5 of this Report, audit found that the framework established for administering agreements was generally sound. It could be further enhanced by minimising certain overlaps and duplication of effort which currently exist within the Department, eliminating any perceptions that impartiality could be compromised where conflicts arise between the interests of public and private providers and enhancing market competition by establishing agreements for public prisons which more closely mirror those with private sector contractors.

7.5 There is little doubt that the agreements between the Government and 3 private contractors have resulted in the delivery of some non-financial benefits to the community and prisoners including the replacement of a number of outdated prisons with state-of-the art facilities. However, at this stage, there is some uncertainty whether the cost savings expected to flow from the reforms will be realised.

7.7 In assessing the new arrangements, audit examinations focused on a number of key criteria, namely, whether:

• sound contractual agreements are in place which clearly specify the rights and obligations of all parties, protect the interests of the Government and are conducive to the achievement of the Government's desired outcomes;
• efficient organisational arrangements have been developed which clearly assign roles and responsibilities for managing agreements;
• strong monitoring procedures have been put in place, utilising reliable information;
• procedures have been established for promptly addressing any deficiencies identified in the performance of prison operators;
• payments have been made to contractors in line with agreements; and
• outcomes have been in line with the Government's expectations.

7.8 Audit comments in relation to each of these aspects follow. In terms of the adequacy of contractual agreements, the matters relating to the design and construction of new prisons were not assessed. Similarly, the financing arrangements for the prisons were not examined in detail as part of this audit.

7.9 The Government has entered into a range of complex agreements with private sector companies, or consortia, (the contractors) which address the financing, design, construction and operation of 3 private prisons. The Report of the Auditor-General on the Statement of Financial Operations, 1995-96 set out the key terms of the primary agreements. In relation to the financing aspects embodied in the agreements, the Report identified, in summary, that:

• The prisons were to be constructed on land leased by the contractors from the Government;
• The construction of the prisons was to be funded by the contractors primarily through debt financing (totalling $126 million) with a proportion of equity contribution (totalling $18 million). A start-up funding contribution of $7 million was also provided by the Government;
• Prison accommodation services are to be provided by the contractors at a charge to the Government. It is intended that the charge will finance the debt obligations of the contractors, including principal and interest payments;
• Correctional services are to be provided by the contractors in return for a fee payable by the Government for the delivery of the services;
• Ownership of the facilities is to rest with the contractors; and
• The contractors' financiers are to hold a security interest in the new facilities.

7.10 The primary instrument which governs the ongoing operations of each prison is a Prison Services Agreement between the Government and the contractor. Under the terms of each Agreement, the contractor can, with the approval of the Secretary, appoint an organisation to operate and manage the prison (the operator). The contractor is responsible for ensuring that the operator is suitable in areas such as probity and financial standing, is capable of providing correctional services and complies with the relevant conditions of the Agreement.

7.11 Details of the contractor for each of the private prisons, together with the operators appointed by the contractor, are summarised in Table 7A.

Prison facility        Contractor                       Operator         

Metropolitan Women's   Excor Investments Pty     Corrections             
Correctional Centre    Ltd                       Corporation of          
                                                 Australia Pty Ltd       

Fulham Correctional    Australasian              Australasian            
Centre                 Correctional Investment   Correctional            
                       Ltd                       Management Pty Ltd      

Port Phillip Prison    Australian Correctional   Group 4 Correction      
                       Facilities Pty Ltd        Services Pty Ltd        

Form of Agreements

7.12 Although each Prison Services Agreement reflects the specific aspects of the prison, the Agreements are, in essence, the same. Each addresses the following broad areas.

Design and construction

7.13 The Agreement provides for the design and construction of a new prison facility in accordance with approved drawings and specifications. It covers a range of matters such as the contractor's responsibilities, construction milestones, inspection requirements and processes for any necessary modifications.

Accommodation services

7.14 In accordance with each Agreement, the accommodation services provided by contractors are to comply with all relevant laws, be suitable for their intended purpose, be of the required capacity, be adequately maintained and meet certain defined standards. The standards include the accommodation of the majority of prisoners in single cells, access for disabled persons to all prison facilities, provision of a safe and secure environment including secure prisoner accommodation and a secure physical prison perimeter. The Agreements also address access rights and insurance requirements.

Correctional services

7.15 Each Agreement specifies the correctional services to be provided by the contractor as:

• containment and supervision of prisoners in a safe, secure, humane and just manner;
• provision of opportunities for rehabilitation which prepare prisoners for law-abiding and productive participation in the community on their release;
• facilitation of reparation to the community through work performed in prison; and
• other correctional services defined in the Agreement, such as health services for prisoners.

7.16 The services are to comply with all relevant legislation and policies, specified rehabilitation, reparation, containment and supervision objectives, relevant quality assurance programs, prison management specifications and an operating manual. In the case of the prison management specifications, an Annexure to each Agreement sets out numerous standards to be applied in relation to prisoner management. The Agreement also identifies the expected profile of the prisoners, e.g. the number of remand prisoners, mainstream prisoners, protection prisoners and hospitalised prisoners and defines the expected movement of prisoners as a result of reception and discharge.

Performance-linked fee

7.17 The Agreements provide for the payment of an annual performance-linked fee. The level of fee payable is dependent on the extent to which service delivery outcomes have been met. These outcomes, included in an Annexure to each Agreement, differ for each prison depending on the prison profile.

General provisions

7.18 The Agreements contain a number of general provisions which cover matters such as warranties, default, disputes and confidentiality.

Term of Agreements

7.19 The Agreements apply to the provision of accommodation services for a period of 20 years (the facility term). The Minister may, at least 3 years prior to the expiration of the facility term, request an extension for up to 10 years for the Metropolitan Women's Correctional Centre and the Port Phillip Prison, and 20 years in the case of the Fulham Correctional Centre.

7.20 Correctional services are to be provided by the contractors for a period of 5 years. The Minister may, at any time, notify the contractor whether he will initiate a competitive tender process in relation to the options for 5 further 3 year terms. If tenders are to be called, the contractors for the Port Phillip Prison and the Fulham Correctional Centre have the first right to make an offer and pursue agreement with the Government for the provision of correctional services at those prisons.

Public prisons

7.21 While there is no formal contract between CORE and the Secretary of the Department of Justice, arrangements relating to the provision of services at the 10 publicly-managed prisons are formalised in 2 documents, namely, a Framework Agreement and a Service Agreement. The Framework Agreement establishes CORE as a Service Agency and sets out the roles and responsibilities of the Deputy Secretary of the Department (the Contract Administrator), the Chief Executive of CORE, the Secretary and the Minister.

7.22 The development of the Service Agreement involved formalising the quantity and nature of services the Government sought to purchase and CORE's proposed service delivery model. It also defines the service standards and outputs to be delivered in exchange for particular resourcing levels. The Contract Administrator is responsible under the Agreement for the:

• specification of the level and type of services to be provided and the required service delivery outcomes;
• payment for the correctional services provided by CORE; and
• monitoring the financial performance of CORE.

7.23 The Framework Agreement is effective for a 3 year period to 30 June 1999. An annual Service Agreement came into operation on 1 July 1997 and has been renewed for a further 12 months.

Strengths of contractual agreements

7.24 Audit found that the Prison Services Agreement established between the Government and each contractor protects the rights of the Government in a number of significant respects and facilitates many of the Government's objectives.

Transfer of risks

7.25 Irrespective of the means of delivering services within the prison industry, the Government cannot totally abrogate its social responsibility to the community and duty of care to prisoners. However, in line with one of the primary aims of introducing reforms to the prison industry, it has been possible to transfer some risks to the private sector.

7.26 As indicated in the Report of the Auditor-General on the Statement of Financial Operations, 1995-96, the agreements provide for the contractors to substantially bear the financing risks associated with the construction of new facilities. In terms of the ongoing operational risks associated with accommodating prisoners and delivering correctional services, the Prison Services Agreements also contain a number of provisions which shift responsibilities away from the Government by placing the onus on the contractors to deliver agreed standards of service, namely:

• Specification within the Agreements of the standards to be met in delivering services;
• Provision for a reduction in monthly payments by the Government for accommodation and correctional services where the operator fails to deliver services to the required standard, in any material way;
• Default clauses which provide for a period during which the operator is encouraged to address any deficiencies in service delivery, prior to the Government becoming entitled to exercise termination rights or institute any legal proceedings;
• Provision for the payment of a performance-linked fee, based on the satisfactory achievement of service delivery outcomes. As this payment is intended as the means of providing the companies with a return on their equity investment, they are encouraged to achieve the desired outcomes, particularly given that they have injected significant equity in the facilities;
• Provision for the prisons to remain in the hands of the Government in the event that the Agreement is terminated as a result of accommodation services not meeting a satisfactory standard; and
• A financing structure which is based on the accommodation services charge meeting the debt service obligations of the contractors. This encourages the contractors to provide accommodation services to the required standard as a termination of the Agreement would place the contractors ability to meet its financing obligations at risk.

Default provisions

7.27 The Prison Services Agreement, provides the Government with a number of avenues to address circumstances where the services provided are not to the required standard. A default notice may be issued to the contractor in a range of circumstances (referred to as a non-compliance notice in the case of the Fulham Correctional Centre). For example, a failure to provide correctional services in a manner which satisfies the requirements of the Agreement constitutes a default. Certain defaults are classified as material including the escape of more than 2 prisoners in a single incident, a default which the Minister considers has a material adverse effect on the public interest or failure to implement a classification decision which results in the accommodation of a protection prisoner in non-protection accommodation for more than 24 hours in a month. If the Minister issues a default or non-compliance notice, the contractor has a nominated period in which to address the matters specified in the notice.

7.28 Monthly payments to the contractor for the provision of accommodation and correctional services can be reduced in the case of a material default or certain areas of non-compliance with Agreements. In such cases the Secretary (or the Commissioner in the case of Metropolitan Women's Correctional Centre) can issue a certificate. The issue of a certificate does not prevent the Minister from issuing a default or non-compliance notice. A reduction in, or non-payment of, the annual performance linked fee also occurs where the required standard of service is not met.

7.29 Under the Agreement, the Government has the right, in certain circumstances, to require the contractor to remove a prison operator and appoint a new operator. In an emergency, the Minister, the Secretary or a person authorised by the Minister also has the right to enter the prison with a view to remedying the emergency.

7.30 The Government retains the ultimate right to terminate the Agreement if the accommodation or correctional service requirements are not met over a period of time including when a default notice is not adequately addressed. The Government also retains the right to sue the contractor for any resulting damages.

Monitoring provisions

7.31 A feature of the Agreements is the inclusion of provisions which enable the performance of the contractor to be monitored by the Government. These include the following:

• The contractor must provide the Commissioner with daily, monthly, annual and other reports as required;
• The Commissioner is to certify that the accommodation and correctional services have met requirements, prior to approving monthly payments to the contractors;
• The Minister, Secretary, Commissioner and certain authorised persons have the right to access the prison facilities at any time;
• Probity investigations are to be undertaken of relevant persons including employees of the contractor and operator. The Secretary has access to such information, if required, and has the right to require the contractor to deny the employment of a particular person considered unsuitable;
• Copies of insurance policies must be provided by the contractor as evidence that specified insurance cover has been maintained;
• The operating manual developed for each prison, which is to include a range of matters including staff training programs, is to be endorsed by the Secretary;
• The contractor has a general responsibility to keep the Government fully informed of operational matters and developments and to be available to discuss prison performance; and
• From time-to-time, the Government may arrange for a review of the correctional services provided, including an assessment against best practice.

Other provisions

7.32 A number of other aspects of the Prison Services Agreements protect the Government's interest, including provisions for:

• Specified facility maintenance standards to be met by the contractor;
• Some flexibility in relation to prison capacity. For example, each Agreement defines a maximum prison capacity in addition to a standard prison population. If the actual prison population varies from the standard prison population, the fee payable to the contractor increases or decreases accordingly;
• A performance bond to be paid in advance by the contractor and used by the Government where any amounts are outstanding from the contractor; and
• Any damages to the facility to be repaired by, and at the expense of, the contractor.

Contractual weaknesses

7.33 While there are a number of strengths in the agreements which the Government has entered into for the provision of accommodation and correctional services, audit is of the view that some provisions currently work against the delivery of high quality services within a competitive environment. These matters, which are detailed in the following paragraphs, will need to be considered at the time the Agreements are renegotiated.

Service delivery outcomes

7.34 There are approximately 20 service delivery outcomes included in each Agreement, broken into 5 broad categories. The categories (and examples of the outcomes for various sub-categories) are as follows:

• prison operation (the number of prisoner escapes, self-mutilations, assaults, positive drug tests);
• education and training (the proportion of prisoners identified as requiring adult basic education or vocational training who are enrolled in and complete relevant programs);
• prison industries (the number of skill areas in which prisoners are able to participate, proportion of sentenced prisoners participating in prison industries);
• health (the proportion of prisoners medically screened within 24 hours of reception into the prison, number of valid complaints relating to health services which are received by the Commissioner); and
• other programs (the availability of programs, the proportion of prisoners completing programs).

7.35 In the case of the Port Phillip Prison, the final category is health: secondary and tertiary care. This variation is due to the fact that the prison is responsible for providing the major men's prison hospital and the only Psycho-Social Unit in the Victorian corrections system.

7.36 The service delivery outcomes to be achieved are expressed as maximums (e.g. 1 prisoner escape) or minimums (e.g. 80 per cent of prisoners participating). They are a key determinant in achieving the Government's desired service delivery standards given that they form the basis of any performance linked fees paid to contractors. Despite this critical role, audit found that some aspects of the outcomes are not conducive to encouraging a high standard of service delivery within prisons. Specifically:

• They were primarily established on the basis of the performance of Victorian public prisons, with comparable profiles, over the previous 3 years. Documentation within the Department also states quite clearly that many of the outcomes were not necessarily based on an average performance but on the lowest standard achieved during the 3 year period. In particular, the service delivery outcomes for self-mutilations, assaults and positive drug test results were based on the highest rates recorded over the period. As a result, the outcomes do not place any expectation on the contractors to improve on minimum standards or adopt best practice. In contrast they reflect a level of performance, which was achieved in outdated prisons which had been identified for replacement with an aim of improving the quality of services provided;
• They are essentially quantitative in nature. For example, outcomes relating to the education and training of prisoners in adult basic education focus on the number of modules in which targeted prisoners have enrolled or which they have completed. The quality of the programs provided or the outcomes for prisoners in terms of increased skills are not measured by the outcomes;
• They do not adequately reflect all key aspects of the prison operators' performance. Examples of important areas not adequately addressed include outcomes associated with rehabilitation programs. Given that the provision of opportunities for rehabilitation is a key policy objective of the Government, the measurement of outcomes in this area is essential. Similarly, poor food service operation can have a detrimental impact on prison operations but this area of activity is not covered by the service delivery outcome; and
• In most cases, the outcomes have a short-term focus and, therefore, do not cover some matters which may not have an immediate impact but contribute to the good management of a prison in the longer-term. Examples include the quality or effectiveness of staff recruitment and training.

Performance-linked fee

7.37 In circumstances where a default or non-compliance notice has been issued or the matters raised in the notice have not been satisfactorily addressed, there is a reduction in the annual performance-linked fee payable to the contractor. The reduction relates to the particular component of the services which are in default proportionate to the period of the year when the contractor was in default. However, the total fee, as defined in the Prison Services Agreement, is paid to a contractor where this situation does not apply and all categories of service delivery outcomes have been fully met or exceeded. The Agreement also provides for the full fee or a reduced fee to be paid in certain other circumstances. For example:

• Where a particular category of service delivery outcome has been fully met, the amount due for that category is paid irrespective of the results for all other categories;
• Where only 1 sub-category has not been met (but has been at least 80 per cent achieved) the total performance linked fee is still payable;
• Where 2 or more sub-categories, within a particular category, have been between 80 and 100 per cent met, 80 per cent of the total amount which could be paid for that category is due to the contractor;
• Where 1 sub-category is between 50 and 80 per cent met, 50 per cent of the total amount which could be paid for that category is due to the contractor as long as all other outcomes within the category have been met to at least 80 per cent; and
• Where any sub-category is only 50 per cent or less met, no payment is due for that category.

7.38 As a result of this structure of payments, coupled with the previously discussed limitations of the service delivery outcomes, it is possible for a contractor who is not performing to a high standard or who is performing badly in a number of key areas of prison operations to still receive the full amount, or a substantial proportion, of the annual performance linked fee. This situation is illustrated later in this Part of the Report in relation to the Port Phillip Prison.

Service standards

7.39 Given that 1 of the Government's objectives in introducing private prison operators was to improve service delivery, it is important that the service delivery requirements defined in the Prison Services Agreements are consistent with this aim. It is also important that they are directed at the achievement of the Government's principal accommodation and correctional services objectives.

7.40 The framework for the delivery of correctional services in Victoria comprises the following elements:

• The Corrections Act 1986 and associated Corrections Regulations 1988. The Act was amended in 1994 to permit private operators to provide correctional services. The Act does not specify objectives for prisons. However, it does specify management and administration requirements of prisons, including private prisons;
• Standard Guidelines for Corrections in Australia, 1996 developed in a national Ministerial forum as an agreed common standard to be adopted by all Australian States and Territories; and
• Correctional Policy and Management Standards (for men's and women's prisons) developed by the Commissioner as subordinate to the Act to facilitate the consistent implementation of correctional policy in Victoria. They reflect and expand on the Department's objectives for correctional services and specify the outcomes and outputs required of prisons for specific service or activities.

7.41 The Agreements with public and private prison operators include a range of requirements to be met by prison operators in the provision of services. By way of example, the Agreements define the standards of facilities to be used to accommodate prisoners in areas such as design and construction, physical environment, safety and security and facilities for conducting educational programs. In the area of correctional services, the prison management specifications included in the Agreement define the standards to be adopted and/or procedures to be followed in 45 areas of prison operations including the following:

• bedding;
• classification and placement of prisoners;
• clothing;
• deaths in prison;
• disciplinary process;
• discharge of prisoners;
• education;
• emergency management;
• food;
• health services;
• personal development and life skills program;
• prisoner management;
• security;
• staff selection and training; and
• substance abuse treatment programs.

7.42 The specifications cover many qualitative aspects of prison management. The Agreement also provides for an operating manual to be developed by each contractor and endorsed by the Secretary. The manual is to address a range of operational issues including the way in which the prison management specifications will be met.

7.43 While the Agreements identify the services to be provided and the required service delivery outcomes to be achieved, the method of service delivery is appropriately left to the discretion of the prison operator. For example, the specifications require the operators to ensure that the location of all prisoners is known at all times. It is up to the discretion of the contractors whether this is achieved by means of video surveillance or direct staff supervision and this will be generally documented in the operating manuals.

7.44 An audit assessment of the accommodation and correctional service requirements included in the Agreements and the operating manuals developed for each prison indicated that they are in line with the framework of correctional services requirements in Victoria. While monthly payments to contractors can be reduced where serious or ongoing defaults are identified, the level and extent of monitoring by the Commissioner is not sufficient to identify the extent of serious deviations from the management specifications. Audit considers that for the provisions of the agreement to be effective there needs to be a clearer link between monthly payments and the level of compliance by contractors with the management specifications. This would provide greater incentives for the delivery of services which are in line with best practice.

Inconsistencies between public and private sector agreements

7.45 The Agreements relating to the provision of services in the 10 publicly-managed prisons embody many of the service delivery requirements contained in the Prison Services Agreements with private contractors, including service delivery outcomes and prison management specifications. However, the manner in which services are delivered are more specifically defined in relation to the publicly managed prisons thus providing less flexibility to introduce innovative service delivery practices.

7.46 As CORE remains part of the departmental budgetary process it is not subject to any measures such as a reduction in payments when it does not satisfy its service delivery outcomes nor does it receive a performance fee when outcomes are achieved. In these circumstances, it cannot be said that there is a level playing field in terms of participants in the prison industry. While the establishment of "real competition in the delivery of correctional services" was one of the Minister's aims in introducing prison reform, it is evident that competition between the public and private prison operators is not yet fully in place.

7.47 When CORE was established as a service agency it was anticipated that it would subsequently be established as a statutory authority. Agreements were to be renegotiated at that time and funding was to be established on a cost per prisoner basis, similar to that which occurs with the private prisons. However, as indicated in Part 5 of this Report, changes to the status of CORE have now been postponed to a later date.

7.48 Irrespective of the structural arrangements in place for CORE, in renegotiating current agreements, which expire at the end of June 1999, attention will need to be given to progressing towards a situation where all providers, irrespective of whether they are in the public or private sector, are subject to the same performance requirements.

Roles and responsibilities

7.49 As indicated in Part 5 of this Report, the Commissioner plays a key legislative and contractual role in relation to regulating and monitoring the Victorian prison industry.

7.50 Under the provisions of the Prison Services Agreements, a Contract Administrator is also appointed by the Secretary to act as agent for the Minister, in line with delegations. The responsibilities of the Contract Administrator are to facilitate the official liaison between the Minister and the contractor. The Corrections Contracts Branch was established by the Department in 1995 to assist the Contract Administrator in managing the Agreements. Related tasks of the Branch include:

• effecting the monthly payment of the accommodation and correctional services fees;
• providing contractual advice to the Contract Administrator, Secretary and Minister;
• working with the Commissioner in assessing the performance of the private prisons;
• administering and managing contractual disputes and default procedures;
• procuring commercial legal advice as required; and
• overseeing probity investigations.

7.51 The Branch liaises with the prison operators in all matters with respect to the implementation, administration or modification of the Agreements.

7.52 In terms of the publicly-managed prisons, the Chief Executive Officer of CORE reports to the Deputy Secretary who is also responsible for the Commissioner and the Corrections Contracts Branch. CORE also provides certain information to the Deputy Secretary/Contract Administrator, through the Branch. The Branch also monitors the performance of CORE.

7.53 As with other contractors, it obtains monitoring information on CORE from the Commissioner, including the following reports:

• the performance of CORE against its Service Agreement and Business Plan;
• the future requirements for service delivery by CORE;
• changes in policy required to achieve best practice; and
• CORE's contribution towards the achievement of outcomes.

Need for arms-length relationship with all providers

7.54 To ensure that each service provider is treated equitably within the purchaser/provider relationship, the Contract Administrator needs to operate, and be seen to operate, at arms-length from all providers. However, the current structural arrangements could compromise the impartiality of the contract administration process.

7.55 In managing the agreements with various contractors, the Contract Administrator and the Corrections Contracts Branch have access to a range of commercially sensitive information relating to all providers. At the same time, the Branch can have input to the directions of the public service provider, CORE. For example, the Branch's 1998-99 Business Plan, indicated that it would assist CORE in the development of its Corporate and Business Plans. While the Contract Administrator indicated to audit that any interaction with CORE would be minor, the perceptions which the current structural arrangements create can work against the establishment of a competitive market in which all participants, or potential participants, can be confident that they will be treated equitably. Concerns in this regard were raised by contractors in discussions with audit where they questioned the impartiality of the Branch in the event that a conflict arose between the interests of CORE and those of another provider.

7.56 Further comments on this issue as it relates to the independence of the Commissioner, are detailed in Part 5 of this Report.

Overlap and duplication

7.57 The assignment of responsibilities between the Corrections Contracts Branch and the Commissioner results in the overlap of some functions, particularly the monitoring role. As the 2 organisations operate as separate bodies and are physically separated, some work, including their interactions with the prison operators, can be duplicated.

Policies and procedures

7.58 Audit examinations indicated that the Corrections Contracts Branch has fulfilled its role with respect to contract administration in an effective and efficient manner. The Branch has established appropriate procedures and controls to administer agreements. These include:

• assigning designated staff for each contract;
• developing contract administration plans identifying the respective responsibilities of the Branch and each contractor under the Agreements;
• developing a Contract Administrator's Guide for each Agreement; and
• appointing a probity auditor to regularly monitor and report to the Branch on ownership and financial developments with respect to each contractor.

7.59 The processes for managing the Agreements were also found to be well organised, systematic, and in accordance with the principles of the Outsourcing and Contract Management Guidelines issued by the Department of Treasury and Finance. A framework is in place which:

• clarifies aims and sets objectives;
• outlines principles to be followed;
• provides a common decision-making process;
• develops management and financial methodologies; and
• establishes an evaluation, reporting, implementation and reporting scheme that defines responsibility and accountability.

7.60 The Guidelines recommend that service level changes be negotiated with the service provider and that an annual benchmark review be conducted to identify alternative services, service levels or performance incentives. The Prison Services Agreements with each of the contractors provide for the Secretary to undertake a performance review of correctional services from time-to-time. Although the Corrections Contracts Branch has not yet undertaken such a review, the Commissioner has recently commenced a review of the service delivery outcomes defined in the Agreements. In line with the Guidelines, audit considers that reviews of this nature should be conducted annually.

Contract monitoring

7.61 There is no doubt that the Prison Services Agreements with the private prison contractors provide ample means of ensuring accountability to the Contract Administrator and the Commissioner. Since the first private prison commenced operations, there has been considerable monitoring carried out to verify the probity of the private prison contractors and operators and to verify their compliance with a range of requirements included in the Prison Services Agreements.

7.62 The Corrections Contracts Branch relies almost completely on the advice of the Commissioner in determining whether services have been delivered in accordance with the Agreements. In addition, the Branch meets regularly with contractors to discuss issues, review performance and resolve any concerns. However, as discussed in Part 5 of this Report, the Commissioner's monitoring program does not necessarily address all relevant matters or provide a depth of review which enables a full assessment of the performance of an operator. These weaknesses must, in turn, impact on the quality of the contract management process of the Corrections Contracts Branch. In addition, as reports provided by the Commissioner are not received by the Branch's contract managers until 2 months after they have been received by the Commissioner, the timeliness of their monitoring role is also in question.

7.63 While the establishment by the Branch of its own monitoring program would only add further to duplications, the situation reinforces the need for the Commissioner to have a sound and comprehensive monitoring program in place. It also highlights the need, in enhancing the operational framework of the Commissioner as suggested in Part 5 of this Report, for consideration to be given to clarifying the roles of the Commissioner and Contract Administrator with a view to:

• eliminating any duplication of effort thereby allowing for more efficient use of scarce resources;
• greater sharing of skills and experience through facilitating a closer involvement of the Corrections Contracts Branch in the monitoring process;
• limiting time delays in the monitoring process; and
• simplifying the relationship between the Government and contractors.

Management of contract payments

7.64 The level of payments and the method of calculating monthly payments to contractors are specified in the Prison Services Agreements. Payments comprise the following major components:

• An accommodation services charge paid monthly in arrears. It includes components relating to debt servicing, rent, maintenance and insurance;
• A correctional services fee, also paid monthly in arrears. The fee is adjusted annually to reflect price and wage increases and may be increased or reduced according to prisoner numbers; and
• The previously mentioned performance-linked fee assessed and paid annually.

7.65 The Agreements contain specific clauses which detail approximately 34 events which may effect the level of payments to the Contractor. Examples include the payment by the contractor of a fee where a prisoner escapes, adjustments relating to certain impacts of government policy changes and, as indicated earlier, reductions where the services provided by the contractor are not in line with the terms of the Agreement.

7.66 It was the intention of audit to summarise in Table 7B the total amounts paid to private contractors for the 3 major payment components. The amount to be shown for each prison covered the period commencing on the date the first payment was made to the contractor up to 31 December 1998. The relevant figures have been deleted from the table following legal advice recently obtained by the Department of Justice from the Victorian Government Solicitor (refer to Foreword to this Report).

                          Accommodation Correctional Performance-          
Prison                         services                              Total 
                                charge      services   linked fee          
                                                 fee                       

Metropolitan Women's                                                       
Prison                                                                     
(August 1996 to                   X XXX       XX XXX        X XXX   XX XXX 
December 1998)                                                             

Fulham Correctional                                                        
Centre                                                                     
(April 1997 to December          XX XXX       XX XXX        X XXX   XX XXX 
1998)                                                                      

Port Phillip Prison                                                        
(September 1997 to                                                         
December 1998)                   XX XXX       XX XXX          XXX   XX XXX 

Total                            31 584       62 199        4 190   97 973 

7.67 An audit examination indicated that the procedures in place within the Corrections Contracts Branch were adequate to facilitate the payment to contractors in line with the terms of the Prison Services Agreements. Testing of a sample of actual payments made during the 1996-97 and 1997-98 financial years in addition to a number of payments and variations examined up to December 1998 indicated that contractors had been paid correctly and punctually.

Action taken as a result of poor performance

7.68 A range of options are open to the Government where the performance of the contractor is not in accordance with the Prison Services Agreements. For example, a default notice may be issued requiring the contractor to take action to address the default within a specified timeframe and/or a certificate can be issued reducing the accommodation services charge or the correctional services fee. The effectiveness of the options available within the Agreements are dependent on how they are exercised by the Government to overcome any performance difficulties. In the following paragraphs which describe the approach of the Government to date in addressing poor performance, it was intended to disclose information on the actual financial penalties imposed on private contractors. However, due to the previously mentioned legal advice recently obtained by the Department, a decision has been made to refer only to percentage reductions rather than to disclose actual dollar amounts.

7.69 In administering the Agreements to date, the Government has endeavoured to work with contractors in a spirit of partnership. For example, opportunity has been given to the contractors to overcome teething problems experienced during the initial months of operation.

7.70 In the case of the Metropolitan Women's Correctional Centre and the Fulham Correctional Centre, the Government has not considered it necessary to issue any default notices or certificates. However, in line with Agreements, the maximum performance-linked fee due to the contractors has been reduced where service delivery outcomes were not fully achieved. For example, the maximum performance-linked fee payable in relation to the Metropolitan Women's Correctional Centre was reduced by 20 per cent for the year ended August 1997. Details of the areas where results were below the service delivery outcomes established in the Agreement are set out in Table 7C. The table serves as an illustration of the way in which the results against service delivery outcomes defined in the Agreements impact on the calculation of the annual performance linked fee.

                                   Required                               
                                    service       Assessed    Achievement 
Correctional services              delivery          result         level 
                                    outcome                               

                           Prison operation                            

Incidents of                            3.6    4.5 per cent   80 per cent 
self-mutilation/attempted                        (18 women)      but less 
suicide (as a per cent of                                    than 100 per 
the average muster)                                                  cent 

Assaults on Prisoners - by              0.3          0.353    Over 80 per 
other Prisoners where an                      (38 assaults)      cent but 
incident is recorded (per                                       less than 
prisoner year)                                               100 per cent 

Assaults on staff or other              0.1           0.167   Over 50 per 
persons where an incident is                  (17 assaults)      cent but 
recorded                                                     less than 80 
(per prisoner year)                                              per cent 

                          Prison industries                            

Participation rate                       80            70.9   Over 80 per 
(per cent)                                                       cent but 
                                                                less than 
                                                             100 per cent 

                                Health                                 

Per cent of prisoners who               100    Not reported  Less than 50 
are medically assessed and                                       per cent 
psychiatrically screened on                                               
the day of reception into                                                 
the prison as a proportion                                                
of all prisoners received.                                                
(per cent)                                                                

Per cent of prisoners who               100    Not reported  Less than 50 
are psychiatrically assessed                                     per cent 
within 24 hours of referral,                                              
as a proportion of all                                                    
prisoners so referred.                                                    
(per cent)                                                                

7.71 In the case of the Port Phillip Prison, monthly payments to the contractor have been reduced on 2 occasions and the annual performance-linked fee payable for the year ended September 1998 was also reduced. However, audit considers the provision within the Agreements could have been more effectively and decisively utilised to facilitate action to address serious service delivery deficiencies at the Prison. There is also scope to strengthen the Agreements in relation to the Government's ability to reduce monthly payments to contractors where the level of service delivered does not meet the Government's standards.

7.72 As a result of these factors, the financial penalties to the contractor have been minimal in terms of the total contract value. even though deficiencies at the Port Phillip Prison were not fully addressed for over a year and resulted in significant expense to the Government in terms of monitoring. Details of the action taken by the Government in relation to the Port Phillip Prison are presented in the following paragraphs.

Reduction in accommodation services charge - Port Phillip Prison

7.73 On 23 March 1998, the Secretary issued a certificate to the effect that a default in relation to accommodation services had occurred at the Port Phillip Prison owing to the fact that certain facilities, including 48 cells for prisoner accommodation had not been available for use since the evening of 11 March 1998 because of a fire on that day. The daily accommodation services charge was reduced by 8 per cent (reflecting a reduction of an equivalent level in the maximum prison capacity of 600). The total reduction relating to the certificate (covering 12 days) was extremely small. The contractor was allowed 30 days in which to address the situation and the Prison subsequently returned to full capacity on 23 April 1998. Under the Agreement, a reduction in the accommodation services charge does not apply beyond the period of the certificate as long as the contractor is pursuing action to address the matters raised in the certificate. As a result, only 1 reduction occurred in the annual accommodation services charge. This reduction represented less than 0.2 per cent of the annual accommodation services charge payable to the contractor.

Reduction in correctional services fee - Port Phillip Prison

7.74 In February 1998 Port Phillip Prison was assessed by the Commissioner as satisfying the criteria specified in the Prison Services Agreement with respect to the accommodation services charge and the correctional services fee. In meeting the criteria required for payment of the correctional services fee, the Commissioner identified that the prison was only meeting or exceeding 11 of the 19 service delivery outcomes. However, as performance against the service delivery outcomes impacts only on the calculation of the annual performance-linked fee, a reduction in the monthly amount payable to the contractor was not made on the basis of these results.

7.75 Subsequently, in June 1998, the Secretary issued a Correctional Services Default Notice. The Secretary cited a range of performance deficiencies dating back to late 1997. The primary trigger for the issue of the notice appears to have been the major disturbance at the prison on March 11 1998.

Part of Port Phillip Prison. The Government issued a
Default Notice in respect of the operation of this prison in June 1998.

7.76 A certificate was also issued in relation to the deficiencies which were identified in the Notice. This resulted in a reduction in the correctional services fee payable to the contractor for the period 12 March 1998 to 31 May 1998. The Department contended in the certificate that the following defaults had occurred:

• The containment and supervision of prisoners had failed to be safe, secure, humane and just as demonstrated by:
  • 5 prisoner deaths, allegedly due to unnatural causes, which occurred after the prison's opening (2 deaths occurred on 19 March 1998 and 1 each on 30 October 1997, 16 December 1997 and 4 January 1998);
  • failure to take remedial action following recommendations relating to the deaths in custody on 30 October 1997, 16 December 1997 and 4 January 1998; and
  • self-mutilations or attempted suicides by prisoners as at end of March 1998 which were double the prescribed service delivery outcome detailed in the Prison Services Agreement.
• Containment and supervision of prisoners failed to be safe, secure, humane and just in that:
  • the general management and supervision of the prison failed to prevent the 11 March 1998 disturbance and deal adequately with that emergency and its aftermath;
  • ongoing lack of management and supervision evidenced by failure to deal with non-conforming prisoners and the prevalence of illicit drugs, demonstrated by:
    • fires, 126 drug-related issues and 2 instances of protracted difficulties with locking down units at the prison at night (reported between 1 December 1997 and 28 February 1998);
    • assaults on staff and 11 self-mutilations in March 1998;
    • outstanding disciplinary matters (41 drug related) for March 1998 of which 69 were outstanding for more than 60 days; and
    • during April 1998, 29 of 73 prisoner charges were recorded more than 10 days after the incident (outside the appropriate reporting time frame defined in the Agreement).
• The level of illicit drugs in the prison was excessive with 25 per cent of all prisoners testing positive for drugs during random samples conducted in March 1998. During the period September 1997 to March 1998, 18 per cent of prisoners tested positive. In addition, the 94 drug-related incidents reported in March exceeded the level expected when compared across all prisons in Victoria. This in turn demonstrates a failure to:
  • control substances which threaten the good order or security of the Prison;
  • comply with the Victorian Prison Drug Strategy;
  • implement appropriate levels of drug testing;
  • establish a proactive approach to drug management;
  • undertake targeted drug tests following the incident on 11 March 1998 and failure to undertake appropriate levels of targeted drug testing in April following the high levels identified in March;
  • promptly record urinalysis results on information systems and failure to expeditiously process disciplinary charges; and
  • maintain a register of prisoners classified as Identified Drug Users.
• The control of security of keys and tools by the Contractor was inadequate and did not meet the requirements of the Prison Management Specification incorporated in the Agreement. For example an inventory of all keys was not held, there was no regular reconciliation of keys with records, tools introduced into the Prison were not adequately recorded and controlled, and all ladders were not secured.
• Prisoner security was inadequate in that the Prison Management Specification requires that the contractor ensures that the location and the movement of all prisoners within the prison were known and controlled at all times. For example, appropriate and accurate records of roll checks were not conducted before unlocking the prisons each day.
• Failure by the contractor to ensure that sufficient security systems and procedures existed to detect, prevent or deter prisoner escapes. For example, there was a failure to adequately search vehicles entering and exiting the prison, visiting areas were not adequately supervised and searching procedures in relation to visitors were inadequate.
• Failure by the contractor to implement or to comply with its Emergency Management procedures and to train employees in the application of those procedures. For example, staff were not aware of all emergency procedures and how to access and use all appropriate equipment.

7.77 Extensive discussions were subsequently held with the operator and a plan to address the issues was provided by the operator. The Commissioner indicated that the plan was not adequate in itself to address the non-compliance issues and at the June 1998 quarterly meeting with the prison operator, the Contract Administrator expressed disappointment at the lack of commitment to time frames for the rectification of defaults, despite months of communication and feedback from the Commissioner. The Contract Administrator commented that the Department had been very accommodating of commissioning issues in the Prison's first year of operation but this had gone beyond what was considered reasonable. As indicated in Part 5 of this Report, significant resources of the Commissioner continued to be directed at monitoring the Prison operator with a view to ensuring the deficiencies were adequately addressed.

7.78 Although the issues raised in the default notice in June 1998 were not fully addressed until March 1999, the contractor was subject to only 1 reduction in the correctional services fee covering the period from 12 March 1998 to 31 May 1998 (81 days). The reduction represented less than 2 per cent of the annual correctional services fee.

Performance-linked fee - Port Phillip Prison

7.79 In October 1998, the Department undertook an annual assessment of the Prison against the service delivery outcomes defined in the Agreement. The assessment related to the payment to the contractor of the annual performance linked fee for the year ended September 1998. In accordance with the terms of the Agreement, the fee was to be based on outcomes achieved in relation to accommodation services (representing 35 per cent of the maximum performance linked fee) and correctional services (representing 65 per cent of the maximum performance linked fee). The annual performance-linked fee paid to the contractor amounted to 65 per cent of the maximum fee payable, comprising:

• 99.5 per cent of the maximum accommodation services component (the reduction related to the previously mentioned period in March and April 1998 when certain facilities were damaged); and
• 46 per cent of the maximum correctional services component (the reduction was made as a result of the matters raised in the June 1998 default notice and the outstanding status of some of the matters which still needed to be addressed at the time of the assessment).

Non-financial benefits

7.81 It is evident that the introduction of the 3 new prisons has resulted in the delivery of a number of non-financial benefits, namely:

• Inadequate and ageing plant at the Coburg Prisons Complex and Fairlea Women's Prison have been replaced with state-of-the-art facilities. The new facilities are far superior particularly in terms of providing modern accommodation, minimal internal restrictions so as to encourage a normal work and living routine and improved visitor areas. As a result, they are conducive to improved service delivery;
• Permanent prison capacity within the 3 prisons has been established at 1 305 compared with the replaced prison capacity of 1 223. Notwithstanding the increased capacity, the State's prison system has experienced capacity pressures which have necessitated a strategic response by the Government (refer to Part 6 of this Report);
• Government policy and micro-economic reform objectives have been implemented. In particular, private sector investment funds have been introduced into Victorian prison infrastructure. The commissioning of 3 new prisons within a period of 13 months is unlikely to have been possible under government funding constraints;
• The introduction of competition and the development of service delivery outcomes, prison management specifications and the benchmarking of performance and costs to support the tender process have increased accountability of service providers and have the potential to improve the quality of services;
• The publicly-managed prisons have been required to become more accountable and commercially-focused through the establishment of CORE;
• An improved quality of health services for prisoners has been facilitated; and
• The potential for innovation in design and management approaches has been increased through the introduction of 3 different prisons each with its own particular design features and management regimes.

Financial impacts

Expected cost savings

7.82 The generation of cost savings was also one of the expected outcomes of the prison industry reforms. Table 7D, replicated from the Report of the Auditor-General on the Statement of Financial Operations, 1995-96, discloses the estimated net present value of savings in service provision costs which the Government expected to achieve under the new arrangements over the 20 year terms of the agreements with private prisons.

                                                                Estimated 
                                                               savings in 
                                                                  service 
                                    Number of      Initial      provision 
Facility                            prisoners      term of     costs (a) 
                                                 agreement                

                                        (no.)      (years)           ($m) 

Metropolitan Women's Correctional         125           20             16 
Centre                                                                    

Fulham Correctional Centre                600           20            157 

Port Phillip Prison                       600           20             62 

7.83 One of the key reasons for the Government's expectation of cost savings was that financial benchmarks were developed and used in assessing tenders for each prison. The benchmarks, calculated in 1993-94 dollars after applying an inflation adjustment, were based on actual costs associated with the prisons identified for replacement. Prison Services Agreements with the Government were based on tender prices which were all below the established financial benchmarks. Further comment in relation to the benchmarks is included in Part 4 of this Report.

7.84 Since the new prisons became operational, the Government has not undertaken a review to determine whether cost outcomes have been in line with expectations. However, a number of factors discussed in the following paragraphs raise some doubts in this regard and pose some limitations on making meaningful cost comparisons under the previous and current arrangements.

Increase in overall costs for total corrections program

7.85 The cost of the Government Corrections Program, which includes services other than prisons, indicates that overall costs have increased significantly in the 3 years since the introduction of the private prisons. Table 7E provides details of the costs over the past 5 years based on figures disclosed in the Annual Reports of the Department of Justice and, in the case of the 1998-99 figure, the budget estimates prepared by the Department of Treasury and Finance.

Year                           Cost 

1994-95                    113 500 

1995-96                    115 900 

1996-97                    144 100 

1997-98                    173 700 

1998-99                 (a)184 800 

7.86 There are also indications that there was an expectation that the costs of operating the 3 new private prisons would increase significantly, at least in the initial years, compared with the cost of operating the prisons they replaced. For example, it was estimated by the Department in January 1995 that the annual costs of operating the 4 existing prisons was around $42 million compared with the expected cost of operating the 3 new prisons in 1998-99 of $72 million.

Analysis of operating costs relating to private and public prisons

7.87 In order to provide Parliament with cost data relating to both private and public prisons, audit sought from the Department details of cost to the Government relating to the delivery of services in both public and private prisons for 1997-98 and to date in 1998-99.

7.88 Table 7F presents the data prepared by the Department.

                   Public prisons     Private prisons         Total        
                            1998-99              1998-99             1998-99  
                   1997-98  to March    1997-98  to March   1997-98  to March 
                                1999                 1999                1999 

Costs of                                                                      
delivery of                                                                   
prison services      102.8      73.1       60.5      51.1     163.3     124.2 
($million)                                                                    

Estimated                                                                     
average daily                                                                 
prison               1 637     1 539      1 055     1 303     2 692     2 842 
population                                                                    

Estimated                                                                     
average daily                                                                 
cost per               172       173        157       143       166       159 
prisoner ($)                                                                  

Factors impacting on cost comparisons

7.89 The information presented in the above paragraphs relating to trends in overall costs and comparisons between public and private prisons needs to be considered in the context of the following:

• The estimated cost savings from the 3 private prisons are to be derived over a 20 year period, but not necessarily in the first few years or evenly over that period. This is due to the payment level and structure of the accommodation services charge which varies for each contractor over the facility term. While the base charge for the Metropolitan Women's Correctional Centre is consistent over the 20 facility term, the corresponding charge for the Fulham Correctional Centre is lower for several years then gradually increases over the remaining period. On the other hand, payments of the base charge for the Port Phillip Prison are condensed over a 15 year period with payments steadily increasing over the period;
• Certain costs such as those associated with capital, maintenance and employee superannuation now included in payments to contractors were not included in initial estimates or under the previous costing arrangements;
• given that there has been a transfer of financial risk through the introduction of equity by the private sector, it could be expected that such a transfer would involve a cost to the Government; and
• there have been initial change-over costs involved in transferring from publicly-managed to privately operated prisons.

7.90 It also needs to be recognised that the corrections environment has changed significantly since the private prisons were commissioned. This situation makes direct cost comparisons of public and private operators and of the current system with the system which existed in, and prior to, 1995 very difficult. Structural changes likely to have impacted on the total cost of providing services include:

• the introduction of the roles of Commissioner and Contract Administrator to manage and monitor the arrangements;
• the abolition of the Victorian Prison Industries Commission with each prison provider now assuming the Commission's responsibilities;
• the tendering-out of health service provision and prisoner transport arrangements; and
• the increase in the proportion of maximum security and protection prisoners, sex offenders and drug-related offenders who are now accommodated in special units in addition to an unforeseen increase in women prisoners.

7.91 While acknowledging these limitations, audit considers that it is important for the Government to periodically review cost outcomes of the new arrangements. A planned review by the Department is therefore strongly supported by audit given that the private prisons have now been operating for a number of years. Such periodic reviews will provide useful input to the ongoing management of contractual agreements and should assist in any future negotiations with contractors which are necessary at the end of the current agreement terms.

• RESPONSE provided by Secretary, Department of Justice

  The Prison Services Agreements for private providers are predicated on a regime that requires the delivery of correctional services, which meet the standards specification of Government. The Agreements specify 42 correctional service standards, a number of specific policies in respect of drugs, suicide and self-harm, health delivery, and quality assurance. The payment of the contractor's correctional services fees are predicated on the operator meeting each of the service standards and policy requirements specified in this suite of documents. It should also be noted that many of the standards described above have a qualitative measurement component and are not solely quantitative in nature.

  The service delivery outcomes are only used for the assessment of the annual performance linked fee, which in itself represents less than 5% of the total aggregate annual payments payable to each of the contractors under all three contracts.

  The New Prisons model was implemented to specifically promote innovations and improvements in service delivery. The contracts provide for the variation of service delivery outcomes at the Commissioner's sole discretion. As service delivery outcomes are based on the last three years performance, this mechanism ensures that these measures become more challenging to the performance of each operator over time.

  The reality of service contracts where there is a duty of care responsibility is that only through the adoption of a contractual partnering approach will this duty of care be properly exercised. The more adversarial model which appears to be advocated by audit would, in the Department's view, inevitably lead to litigation, particularly in relation to commercial issues, rather than focus on service delivery issues and prisoner welfare.