The Real Cost of Prisons Weblog

The Home Office has already said it wants to expand its prisons, or build enough new ones, to hold an extra 8,000 inmates during the next six years. Where to get the money? is the question. And one possible answer is: from the general public.

"We are currently planning for the private sector to raise the finance to build any new prisons, which has been the model for the last 15 years," said the Home Office.

Property is thrift

The proposal hinges on a new investment vehicle called a Real Estate Investment Trust - or Reit for short - which will come into existence at the start of next year.These will be conventional property investment companies, but with significant tax advantages. They will not have to pay corporation tax on their income from rent, or on the capital gain they make on any sales of UK properties.And 90% of rental income must be given as dividends to the shareholders.

Nice for the shareholders.

Already some of the UK's biggest property firms have decided to take advantage of this and convert to the new tax status, come the New Year. The rules:it's not an investment where people can invest in small scale property companies So, could an existing or new firm set up in business as a Reit for the specific purpose of building and running prisons? This seems tricky, at least under the present rules.

Firstly, Reits have to be companies that have their shares traded on a recognised stock exchange. And they will have to own at least three properties. According to Oliver Gilmartin, an economist at the Royal Institution of Chartered Surveyors, "It's not an investment where people can invest in small scale property companies."

Building a prison for letting to the government in the future is allowed in principle.But three-quarters of profits in a Reit have to come from letting properties, which would rule out most pure construction companies.Furthermore, 75% of the value of the Reit's assets must be made up of those properties.So you would not get the tax advantages of being a Reit if your construction activity infringed on those limits.

Investment potential

Some would-be investors might regard that as a pity. The prisons, once built, could be let to the government on a long lease. This would guarantee a nice, predictable flow of income for the shareholders.You just have to regard prisoners as long-term, social tenants, whose rent is paid by the government. Given the government's - and the public's - enthusiasm for locking up criminals, there would probably be few problems with what landlords call void periods, ie unlet prison cells.But what about wear and tear? Or riot damage? Malcolm Harrison of the Association of Rental Letting Agents (ARLA) said: "Who is going to judge fair wear and tear? I'm not quite sure."

Cunning plans

Currently 11 prisons in the UK are managed by private companies such as GSL, Serco and G4S Justice Services.

Some new prisons have been built through the government's Private Finance Initiative.

Under this, private companies are paid to build, maintain and service buildings - such as schools, hospitals, roads and, indeed, prisons - in return for guaranteed payments for, say, 25 or 30 years, after which the building becomes public property.

So the government has no problem with cunning new ideas to bring in private finance for public projects.

But with the rules as they are, it is no wonder that a Home Office spokeswoman said: "We have not given any serious consideration to Reits, but are always ready to look at innovative ideas that could help us to build places more quickly and cost effectively." Story from BBC NEWS:
Published: 2006/12/01 15:58:06 GMT
Timeline of British Prisonshttp://news.bbc.co.uk/2/hi/uk_news/4887704.stm

AND

Public to be sold shares in new prisons
'Buy-to-let' scheme planned to fund building of 8,000 new jail places Alan Travis, home affairs editor Friday December 1, 2006 www.guardian.co.uk/prisons/story/0,,1961501,00.html?gusrc=rss&feed=1

Guardian
The public are to be offered the chance to purchase shares in new prisons under a "buy to let" scheme being considered by the Home Office, it emerged yesterday.

The idea has been floated in an attempt to overcome the refusal of the chancellor, Gordon Brown, to find the extra money needed for 8,000 new prison places at a time when the service is at breaking point.

Home Office finance directors, who are looking for alternative ways of funding the next wave of new prisons, hope that the public can be tempted to invest in a new-style property company that would build jails and then rent them out to private prison operators. This would provide a steady guaranteed dividend from the "rental income".

One incentive for small investors is that the government's punitive penal policy has seen prison numbers rise relentlessly over the past 10 years and would appear to guarantee a steady stream of rental income with no apparent shortage of prison "tenants".

The prison population in England and Wales passed the 80,000 mark for the first time this week, with 85 of the 139 prisons in England and Wales officially declared to be overcrowded. The Home Office confirmed last night that it was considering a number of proposals, but the probation officers' union described the "buy to let" scheme as absurd.

The home secretary, John Reid, is under severe pressure to find the new prison places, but a standstill budget for the Home Office for the foreseeable future means it could take several years to fund and build the new prisons, all of which are to be privately run.

Over the summer the home secretary said he had won cabinet backing for 8,000 extra prison places, with 4,000 to be provided in existing jails and a further 4,000 in three "super-prisons" each housing 1,300 inmates, double the normal capacity. The model uses "real estate investment trusts" (Reits) which are to be launched by the Treasury in January and will enjoy tax exemptions.

They are designed to encourage a wider range of investors in property. This model has already been used in the United States by the Corrections Corporation of America to finance several new privately run jails. According to a Home Office source quoted by Building magazine, finance officials will be considering the option over the coming weeks.

Under the proposed system, the prison operator would rent the facility from the Reit and the income would be channelled back to the investors. Private prison contracts tend to be long-term in Britain, with 25-year leases common.

A Home Office spokeswoman said final decisions had not been made about providing the extra 8,000 prison places; she confirmed that the government was considering proposals for funding their construction through a number of means.

Harry Fletcher of Napo, the probation officers' union, said: "The Treasury has refused to finance a conventional prison-building programme so Mr Reid is having to go to extreme lengths to find the money. Under this scheme shareholders would have a vested interest in seeing that the jails were full as the more rent that would come in, the higher the dividends."

He said it was an absurd proposition and wondered what safeguards there would be to ensure that organised crime networks did not invest heavily and buy up the new jails.