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The High Court of Justice put an end to years of controversy Thursday by ruling that privately run prisons are unconstitutional.

Following the decision, the state is expected to have to pay hundreds of millions of shekels in compensation to a company that had already completed construction of the first private prison, near Be'er Sheva.

The panel of nine justices, presided over by Supreme Court President Dorit Beinisch, ruled that for the state to transfer authority for managing the prison to a private contractor whose aim is monetary profit would severely violate the prisoners' basic human rights to dignity and freedom.

In 2004, after the United States, Britain and France had all approved private prisons, the Knesset passed Amendment 28 to the Prisons Ordinance, which permitted the establishment of such prisons in Israel. The state's motivation was to save money by transferring prisoners to facilities managed by a private firm, to be chosen by tender. The state would pay the franchisee $50 per day for each inmate, but would be spared the cost of building new prisons and expanding the Israel Prison Service's staff.

In 2005, the human rights department of the Academic College of Law in Ramat Gan filed a petition to the High Court challenging the amendment. The petition relied on two arguments. First, it said, transferring prison powers to private hands would violate the prisoners' fundamental human rights to liberty and dignity. And second, a private organization always aims to maximize profit, and would therefore seek to cut costs by, for instance, skimping on prison facilities and paying its guards poorly, thus further undermining the prisoners' rights.

Others soon joined the petition, including Shlomo Twizer, a former chief of staff of the Prisons Service.

The High Court deliberated on the case for two and a half years. During this time, the firm that won the tender, A.L.A. Management, not only began construction of the prison, but finished it, and also started hiring personnel. This past March, however, the court issued an injunction preventing the prison from beginning operations.

In her ruling, Beinisch wrote that the amendment granted a private, for-profit corporation invasive authority over prisoners. For example, the manager of the private prison would have been authorized to sentence a prisoner to solitary confinement for as long as 48 hours, to order invasive inspections of a prisoner's naked body and to authorize the use of reasonable force in order to search the prisoners.

She acknowledged that these powers are more limited than those granted to wardens in state prisons. Nevertheless, she wrote, they are unacceptably invasive in the hands of a private agent.

Moreover, Beinisch said, while the amendment was passed in part due to a desire to improve prison conditions, the main purpose of the change was economic - namely, to save the state money.

Normally, the ruling noted, the court does not intervene in economic policies decided upon by the cabinet and Knesset. But in this case, Beinisch wrote, the legislation harms basic constitutional rights. Thus the amendment's economic aspect is not the decisive factor that the court must weigh in exercising its power of judicial review.

Israel's basic legal principles, she continued, hold that the right to use force in general, and the right to enforce criminal law by putting people behind bars in particular, is one of the most fundamental and one of the most invasive powers in the state's jurisdiction. Thus when the power to incarcerate is transferred to a private corporation whose purpose is making money, the act of depriving a person of his liberty loses much of its legitimacy. Because of this loss of legitimacy, the violation of the prisoner's right to liberty goes beyond the violation entailed in the incarceration itself.

Beinisch also argued that in a prison run by a private company, prisoners' rights are undermined by the fact that the inmates are transformed into a means of extracting profit. Efficiency, she wrote, is not a supreme value when the most basic and important human rights for which the state is responsible are at stake.

Attorney Gilad Barnea, who represented the petitioners, said the ruling was very important because of two "significant things it does. First, it defines the bounds of what is permissible and not permissible in transferring the powers of the state to private hands. Second, the ruling takes the social compact and turns it into an element of human dignity ... which means that if something contravenes the social compact, it can be annulled." This, Barnea added, "is an international precedent."