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The Cost Escalation In the Regional Prisons

ednesday 9 August 2006

Media release from the State Services Commissioner

Release of the Report Into The Cost Escalation In the Regional Prisons Development Project

The State Services Commissioner, Mark Prebble, today released the report of his review into the cost escalation of the Department of Correction's Regional Prisons Development Project.

Cabinet had invited the State Services Commission, in consultation with the Treasury, to review the processes, systems and contracting practices for the Spring Hill Corrections Facility and Otago Regional Correction Facility in order to learn lessons for future capital projects and to determine the cause of these cost escalations.

Mark Prebble appointed PricewaterhouseCoopers (PwC) to lead the review. In undertaking this task, PricewaterhouseCoopers assessed relevant documentation and interviewed those involved in the Regional Prison Building Programme.

"I have now released their report and it is publicly available on the SSC's website," Mark Prebble said.

"Designing and constructing modern prisons is a very complex process. The building of a modern prison is equivalent to building a small town. For example, Spring Hill on a daily basis, will service more than 1,000 people.

"In addition, over the nine year period of the Regional Prison Development Project the policy and legislative environment changed significantly for the Department of Corrections. These changes led to the Department, and its management team, being under extreme pressure to house increasing numbers of offenders in the prison system.

"The report outlines how this increase in required prisoner beds led to an intense focus on delivering the new prisons 'on time'. It is impressive that the Department delivered on such a tight timetable, but it came at a cost.

"The report finds that several intertwined factors led to the apparent price increasing by $140.8 million when compared to the estimates presented as part of the Budget 2005. These factors were: market influences, consent and regulatory changes, design finalisation and infrastructure costs.

The major factor was market influences which contributed to about 57 percent of the cost increase and reflected the heated construction market, increased commodity prices and increased labour costs.

"The report outlines a number of areas where the Department could have improved its performance. In summary these key findings are:

* Ministers were not kept fully informed about the indicative nature of the estimations presented during the 2005 Budget process. Later, in 2005, when the Department obtained indications that overall costs may escalate, Ministers should have been advised earlier of this emerging risk. For such a major project, the nature and level of the departmental reporting to Ministers was not adequate and did not sufficiently signal the fiscal risks to the Crown.

* There were issues with the initial project governance and a lack of clarity with regard to the role of the Steering Group, which was too reliant on contractors for decision making and inadequate reporting. These issues have already been addressed by the Department when it strengthened its governance in 2005.

* The chosen procurement methodology, the Collaborative Working Arrangement, was appropriate for the nature and scale of the project. However, the development of the Target Outturn Cost (TOC) occurred too late and exposed the Crown to some cost risk. Further, the risks of this procurement methodology should have been outlined for each prison so that risks, including fiscal risks, could be managed more tightly.

"Some public commentary on this issue has indicated a concern that one, or more, individuals involved with the project have manipulated the process to their own advantage. This review has not found any evidence of wrong-doing, or deliberate actions for personal gain. Though I did not ask PwC to do a forensic inquiry, I did ask them to advise me if any evidence led them to the conclusion that a further inquiry was necessary. I am now confident that this is not required.

"I will now share the Cost Escalation Review findings with other government agencies, to ensure the learnings from this project will be of benefit in the future," Mark Prebble said.


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