I have tracked the problem to this...
On OpenVZ server s1 this works but on other OpenVZ server it does not.
Both are Debian Squeeze servers.
Looks like something is missing there that some how relates to dh_testdir.
root@server:/tmp/jailkit-2.14# ./debian/rules binary
make: dh_testdir: Command not found
make: *** [config.status] Error 127