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prison privatisation in south africa issues, challenges and ...

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ehalf. With the government guarantee<strong>in</strong>g the cash flow of the company, the bank will usually<br />

provide the loan at a reduced <strong>in</strong>terest rate.<br />

The certificate of participation is part of what makes <strong>prison</strong> contracts so attractive to the private<br />

sector. The company gets reduced rate f<strong>in</strong>anc<strong>in</strong>g, thus decreas<strong>in</strong>g their cost of capital <strong>and</strong><br />

<strong>in</strong>creas<strong>in</strong>g their rate of return. These are the ratios that stockholders like, <strong>and</strong> successful<br />

managers are those that keep their stockholders happy. The government is content because it<br />

has avoided additional debt <strong>and</strong> cut back on long, drawn-out approval processes. The negative<br />

side to the use of a certificate of participation is that the government becomes f<strong>in</strong>ancially l<strong>in</strong>ked<br />

to the management of the <strong>prison</strong>. If the <strong>prison</strong> company should fail or the contract be<br />

term<strong>in</strong>ated, what would become of the loan? It would more than likely become due, <strong>and</strong> if the<br />

company could not pay, then there is the possibility that the bank could require the funds from<br />

the government. Pay<strong>in</strong>g off the loan from a bankrupt private <strong>prison</strong> company is not likely to be<br />

approved by voters.<br />

The question of the public <strong>in</strong>terest also comes <strong>in</strong>to play when exam<strong>in</strong><strong>in</strong>g the f<strong>in</strong>ance<br />

arrangements for private <strong>prison</strong> companies. If voters have turned down the bond issue or their<br />

representatives have passed legislation restrict<strong>in</strong>g debt, then turn<strong>in</strong>g to private f<strong>in</strong>anc<strong>in</strong>g is <strong>in</strong><br />

effect spend<strong>in</strong>g taxpayer money without their approval. In fact, if the voters have explicitly voted<br />

aga<strong>in</strong>st spend<strong>in</strong>g on a new <strong>prison</strong> <strong>and</strong> a private <strong>prison</strong> contract is substituted <strong>in</strong>stead, then the<br />

government is directly contraven<strong>in</strong>g the will of the people. Private sector f<strong>in</strong>anc<strong>in</strong>g of <strong>prison</strong><br />

construction could save money <strong>and</strong> time but it can also be used to circumvent the checks <strong>and</strong><br />

balances which are <strong>in</strong>tended to ensure that the government rema<strong>in</strong>s accountable to the will of<br />

the people. In this way, the use of private f<strong>in</strong>ance mechanisms becomes un- or even antidemocratic.<br />

The most common means of f<strong>in</strong>anc<strong>in</strong>g private <strong>prison</strong>s is through the establishment of a<br />

consortium. The consortium is a group of companies which each own a percentage of a trustee<br />

company formed expressly for the purpose of a private <strong>prison</strong> contract. The companies that<br />

usually form a consortium are those which represent the design, construction, f<strong>in</strong>ance <strong>and</strong><br />

management of the <strong>prison</strong>: architecture firms, construction/contractor groups, banks, <strong>and</strong><br />

private <strong>prison</strong> companies. The trustee company will own the facility <strong>and</strong> lease it back to the<br />

state, usually over a term of 20 or 25 years. The title for the facility will not transfer to the state<br />

until all of the capital <strong>and</strong> lease payments are made to the trustee company, which then<br />

disburses earn<strong>in</strong>gs to the various members of the consortium.<br />

The trustee company obta<strong>in</strong>s the certificate of participation <strong>and</strong> is able to access the benefits<br />

afforded to governments <strong>in</strong> secur<strong>in</strong>g f<strong>in</strong>ance. This <strong>in</strong>cludes not only a lower borrow<strong>in</strong>g rate, but it<br />

also means that the <strong>in</strong>terest <strong>in</strong>come to the bank which provides the f<strong>in</strong>anc<strong>in</strong>g is exempt from<br />

taxation. In many constituencies, <strong>in</strong>terest received on a loan offered to the state is not taxed by<br />

the state. In this way, the banks w<strong>in</strong> because they receive tax-free <strong>in</strong>come. The construction<br />

companies <strong>and</strong> architecture firms ga<strong>in</strong> a multimillion r<strong>and</strong> government contract. And the private<br />

<strong>prison</strong> companies get reduced rate capital <strong>and</strong> guaranteed cash flow.<br />

Everyone <strong>in</strong>volved <strong>in</strong> private <strong>prison</strong> contracts seem to w<strong>in</strong>, except the public <strong>in</strong>terest. These<br />

transactions are kept notoriously secret, <strong>and</strong> it is almost impossible to legally f<strong>in</strong>d out exactly<br />

how much is be<strong>in</strong>g paid to whom for what purpose <strong>and</strong> whether, <strong>in</strong> the long run, there is any<br />

cost sav<strong>in</strong>gs to the taxpayer at all. That is not to say that such consortium arrangements will<br />

necessarily act aga<strong>in</strong>st the public <strong>in</strong>terest, but the avoidance of any restra<strong>in</strong>ts <strong>and</strong> a lack of<br />

transparency <strong>in</strong> the entire process certa<strong>in</strong>ly does not provide any guarantees that the parties<br />

<strong>in</strong>volved will prioritise the protection of the public <strong>in</strong>terest.

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