High Court dawdled as compensation costs soared

The High Court of Justice's rejection of privately run prisons Thursday will have far-reaching constitutional and social consequences - but also direct and indirect consequences on the Israeli economy.

Starting today, the local business community will have to contend with the questions raised by the court's ruling, which marks the first-ever termination of a public-private partnership after construction was completed.

Minrav Engineering and Construction and Africa Israel were co-winners of the state tender to build and operate the prison, which is located near Be'er Sheva.

1. Three years to build, 4.5 years to decide. The petition against the prison was submitted to the High Court of Justice on March 16, 2005. The state opposed halting the project at the time, on the grounds that it would take three years to complete the tender process and to build and fill the facility, and "the verdict on the petition will be issued a long time before that." On July 12, 2006 the High Court ruled against issuing an interim order to suspend the project, for the same reasons.

The last deliberation on the petition was held on July 8, 2007, after which the parties waited 20 months to hear from the court. On March 18, 2009 the High Court issued an interim order against using the prison until a final ruling was made, effectively sentencing the petitioners and the respondents to an additional eight months of uncertainty.

2. No one's losing sleep at Bank Leumi. The state may be getting a brand-new prison that meets high standards, on time and on budget, but that doesn't mean it's cheap, once you recall that a private franchise pays more to raise capital than the state does. Not to mention various indirect costs borne by the state, including the incalculable cost of continued overcrowding in Israeli prisons even after the new facility was finished.

Had the project been canceled prior to construction, the state would have owed the franchisee a relative pittance, to cover the cost of preparing the bid for the tender. Now, however, the state will have to pay an estimated NIS 217 million in construction and start-up costs. Of that, NIS 176 million was a loan from Bank Leumi; the remaining NIS 34 million was put up by the partners. Monthly financing costs for the loans have been estimated at NIS 450,000.

Then there's the matter of the estimated NIS 1.6 million it costs to maintain the prison infrastructure, including paying to train the 125 prison guards and other staff members who have already been hired. Also still to be hashed out is the indemnity resulting from any suits filed by suppliers who stand to be hurt by the project's cancelation.

3. Focusing on the loss of profits. On top of the conventional indemnities for costs incurred, the state and the franchisee will also have to negotiate compensation for the loss of the profits that the latter would have seen had the prison got off the ground as planned - for the 22 years of the build, operate phases of the project, prior to transfer to the state. Revenues have been estimated at NIS 1.5 billion.

Complicating the compensation talks will be the fact that termination by court order is not one of the three possible reasons for termination expressly provided for in the agreement between the state and the partners.