Update: Serco's $300 mln Mt Eden prison contract ended

Update: Serco's $300 mln Mt Eden prison contract ended

Dec. 9 (BusinessDesk) - The Corrections Department used an opt-out clause to cancel its 10-year, $300 million contract with the UK's Serco to manage the Mt Eden Correctional Facility in Auckland, saying the agreement failed to keep pace with New Zealand's changing prison muster.

The decision to end the contract after six years follows a string of scandals at Mt Eden this year, including the emergence of video showing organised fights, contraband and a death in the prison, which resulted in Corrections taking back management. It will continue to oversee the prison during a transition through until Serco's exit in March 2017.

Serco's London Stock Exchange-traded shares dropped this week, to last trade at 103.3 pence, after the multi-national services provider said it would lift its cost cutting target in 2016 but forecast a 20 percent drop in revenue. The shares have tumbled 71 percent in the past two years.

The company may yet be able to win back the Mt Eden work. Corrections chief executive Ray Smith said he expects to put a range of options before the government early next year and can't rule out another private operator winning the contract. As of today, the total prison population stood at 8,949, up about 3.6 percent from December last year. Total remand prisoners, which make up the bulk of Mt Eden's inmates, stood at 1,865 in December 2014, up from 1,555 a year earlier.

"Prison muster is at an all time high," Smith told a briefing in the Beehive. "Remand numbers have peaked across the last couple of years. The transitory nature of Mt Eden prison is probably different to what it was even five or six years ago."

That meant the initial ambition for the prison, that it have "a really strong rehabilitative focus" wasn't achieved because Mt Eden has become heavily based on remand prisoners, most of whom on average will be in for a four-week stay, he said.

By contrast, Wiri prison, Serco's other Corrections' contract, has a more stable population and is overseen by a board that includes local representatives. Smith said his impression is that Wiri "is going very well" and there's no talk of ending that contract. Still, monitoring has been stepped up since the problems at Mt Eden emerged, he added.

The announcement to end the Mt Eden contract in March 2017 coincides with Corrections Minister Sam Lotu-Iiga being replaced by Judith Collins, brought back into the Cabinet in a reshuffle this week. Collins held the portfolio when Serco was awarded the initial contract to run the prison.

Finance Minister Bill English said the government isn't about to abandon the use of its public-private partnership (PPP) model for managing prisons.

"We'd expect to maintain or expand the private prison management," he told reporters at parliament today.

"The overall task here is performance across the prison system," English said. "It happens that in the PPP prisons you have a much clearer, stronger accountability framework, and it is less clear across the public prisons. We think the model has got some real benefits."

Managing the Serco contract has highlighted "the difficult position Corrections has been in having quite a number of different roles; a monitor, a regulator, a competitor, so that’s just one set of longer term issues we need to deal with," he said. Serco would likely be allowed to bid for any new contract put out to tender and "would have to meet criteria, they would have to be a competent bidder."

Corrections chief Smith said no new penalties were being imposed on Serco although the company was unlikely to earn its annual $3 million performance fee.

"My assessment of it, and it isn’t a finalised position, is most of that will be probably not earned in the last fiscal period" and it was "not inconceivable” Serco would get none of the fee, he said.

Hampshire-based Serco runs outsourced public services around the world in numerous sectors, employing 122,000 people in 30 countries, including Australia's mainland and Christmas Island immigration detention centres to house asylum-seekers and illegal migrants arriving by boat and air.

The New Zealand unit reported an annual loss of $2.6 million, including a $1.5 million impairment charge on mobilisation and bid costs, in calendar 2014.

(BusinessDesk)

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