Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
COST EFFICIENCY
Two independent reports have suggested that there have been significant cost
savings from procurement. The CBI report estimates cost savings of between
£40m and £60m per annum from prison-service procurement, amounting to a
total of between £200m and £260m between 1991 and 2002. This estimate is
based on the most recent available data for cost per prisoner place, which state
that the operating costs of privately-managed prisons are 10-15 per cent lower
than comparable publicly managed prisons. The CBI measure also includes
construction cost savings of 20 per cent achieved by designing and building
prisons under PFI contracts rather than traditional procurement means. These
savings are mainly attributable to the fact that new prisons have been completed
on time 105 and on budget, with construction times falling by more than 40 per
cent and the risk of cost over-runs transferred to the private contractor. The
measure also includes operating cost reductions in the three market-tested
prisons won by the in-house bid.
There is some question over whether cost per prisoner place is the appropriate
measure to use. A study by the Home Office found that whilst this measure
reports cost savings of the order assumed by the CBI, two alternative measures
based on the cost of available places give a different picture. These measures,
based on cost per place, show the gap between public and private management
costs narrowing over time to the extent that there are no longer any savings to
be made from private sector involvement. 106 The study suggests that the
marginal cost of accommodating an additional prisoner is small, and therefore
that over-crowded prisons will appear more cost efficient than prisons operating
at or under capacity when measured in terms of cost per prisoner. The number
of prisoner places on the other hand is more stable and so reporting cost in
terms of prisoner places provides a more reliable indicator of relative efficiency.
Figure 9.1 opposite shows trends in these different measures over time.
105 In contrast to prisons constructed under traditional procurement, which averaged 13% construction overruns. See
Competition: a catalyst for change in the prison service, CBI, p.18.
106 Park, I.(2000) ‘Review of Comparative Costs and Performance of Privately and Publicly Operated Prisons 1998-99’
Home Office Statistical Bulletin 6/00, RDS Directorate .
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