Competition in the Prison Business; C. Logan

Mr. Logan is Associate Professor of Sociology, Uni versity of Connecticut at Storrs. Given the dismal performance of the state in running its prisons, many people now are willing to entertain, and to test, the proposition that pri vate enterprise can do it better. The Fruits of Monopoly What do we normally expect in a business that is protected from com petition? More often than not, we find unmet demand, low quality, and high cost. Precisely these conditions now characterize the prison busi ness. Rising crime rates and more punitive public conceptions ofjustice have increased the demand for im prisonment. Supply, however, has not kept up with demand, so prisons and jails have become seriously ov ercrowded. The Bureau of Justice 469 470 THE FREEMAN August Statistics reports that in 1983, state and federal prisons operated, on the average, at about 110 per cent of ca pacity. In 15 states, 21,420 prisoners were released early because of ov ercrowding. Over 8,000 other pris oners, in 18 states, were held in local jails because of prison crowding. In a recent survey of corrections offi cials, police, prosecutors, public de fenders, court personnel, and pro bation and parole officials, a majority of all but the public de fenders identified overcrowding as the number one problem of the en tire criminal justice system. This was in response to an open-ended question (no prompting or choices of fered) and for most groups this prob lem was far ahead of the nearest contender.

The strain on quantity also affects the quality of imprisonment. Cor rections departments have been forced to double-cell and to house the overflow of inmates in tents, gym nasiums, corridors, recreational rooms, and basements. San Quentin, built to hold 2700 but currently housing 3900, must, to insure secu rity, confine most of its prisoners to their cells continuously, allowing them to emerge only for meals and showers. Courts have begun to de clare these conditions intolerable. As of 1983,41 states and the District of Columbia either were under court order to remedy prison conditions or were the subjects of litigation. However, it is much easier to order reforms than to pay for them. Cal culations of the cost of constructing a new prison range as high as $125,000 per bed, but are highly var iable. The U.S. Department of Jus tice, using 1982 dollars, cites aver age construction costs per bed of $26,000, $46,000, and $58,000 for minimum, medium, and maximum security prisons, respectively. Since they are based on a systematic sur vey of all states and are specified by prison type, these may be the best figures to use for average costs nationally. .

Cost Overrun Most estimates ofconstruction cost are probably too low, because they ignore such considerations as land purchase, site preparation, over runs, hidden costs, and financing cost (for example, if construction is paid for by a 20-year bond at 10 per cent interest, the real cost will be tri ple the original figure). Moreover, construction cost is only the begin ning; operating cost adds yearly to the burden. As with construction, figures on operating cost vary widely, running from $4,000 to $30,000 per inmate per year. Th~ most common figures are in the mid teen thousands, as represented by the American Correctional Associa tion's figure of $15,000 and the fed eral prison system's estimate of $13,000.

1985 COMPETITION IN THE PRISON BUSINESS 471 The cost of constructing and op erating prisons has been rising faster than the general level of inflation. This is not surprising; cost is pre dictably less restrained where the government has a monopoly over im perative services. If current condi tions of demand and supply persist, we can expect the cost of imprison ment to continue its upward course. However, two recent developments may deflect this course somewhat. First, taxpayers are beginning to re sist. Perhaps the public is aware that it does not get from the penal system full value for its tax dollar. This should put pressure on the govern ment to be more efficient. Second, private entrepreneurs are beginning to offer an alternative. Where de mand for a service outstrips supply and where current prices seem un reasonably high, conditions are ripe for competition and the emergence of new sources of supply. We should.

therefore not be surprised to see this occur. Despite long-standing and wide·, spread dissatisfaction with the qual·· ity, quantity, and cost of imprison·· ment, it still comes as a shock to most people to learn of the rise, at the be·· ginning of the 1980s, of a new source of supply in response to this unmet, or poorly met, demand. Nonetheless, a number of entrepreneurs, many with prior governmental experience in corrections and other areas of criminal justice, recently have come to believe that they can build and run prisons at least as effectively, safely, and humanely as the state, but with greater efficiency. This would lower the cost to taxpay ers while allowing a profit for themselves. The Private Prison Pioneers Actually, virtually all aspects of corrections (food services, medical services and counseling, educational and vocational training, recreation, maintenance, security, industrial programs, and so on) are already subject to private contracting on a piecemeal basis. What is new is the idea of running entire, secure insti tutions completely under private contract. These facilities are usu ally, but not necessarily, built and owned by the companies that man age them.!

The first such facility dates to 1975, when RCA Services Company, a subsidiary of Radio Corporation of America, established the Intensive Treatment Unit, a 20-bed, high se curity, dormitory style training school for delinquents at Weavers ville, Pennsylvania. The second did not appear until 1982, when the State of Florida turned over the op eration of the Okeechobee School for Boys to the Eckerd Foundation (cre ated by the founders of a drugstore chain). In 1983, a prison for youthful offenders near San Francisco was contracted by the U.S. Bureau of 472 THE FREEMAN August Prisons to Eclectic Communications, Incorporated. Most recent of all have been con tracts "forthe private operation of se cure institutions for adults. By the end of 1984, the U.S. Immigration and Naturalization Service (INS) had contracts with two private com panies for the detention of illegal al iens (including facilities for fami lies). One of these, Behavioral Systems Southwest, has been set ting up and running detention cen ters for the INS since 1983. They run facilities totaling 350 beds in Ari zona, California, and Colorado and have proposed additional centers in New Mexico. The other INS contrac tor, Corrections Corporation of America, constructed and opened a $5 million, 350-bed detention center in Houston in 1984 and has been awarded a contract for another fa cility in Laredo, Texas, to open in 1985 with an expected daily popu lation of 175.

At the local government level, adults are also being held in several privately owned and operated facil ities. Corrections Corporation of America owns and runs a 250-bed, medium security correctional facil ity for Hamilton County, Tennessee. Southwest Detention Facilities owns and runs jails for counties in Texas and Wyoming and is negotiating for similar facilities in Colorado and New Mexico. So far, however, I have learned of only one currently operating commerical prison for con victed adult felons: in 1984, Palo Duro Private Detention Services opened a 575-bed medium security prison for convicted immigration of fenders, under contract to the U.S. Bureau of Prisons. These inmates are in the custody of the U.S. Bureau of Prisons because they have been convicted and sentenced to prison terms. The illegal aliens held for the INS are in temporary detention, mostly pending deportation.

States have been slow to follow the federal lead, perhaps partly because of statutory impediments, but pri vate companies are prepared to sign contracts with one state or many. Buckingham Security Limited, a Pennsylvania-based company incor porated in Connecticut, has plans to site and build a 720-bed maximum security prison near Pittsburgh. They have letters of intent from sev eral states to contract for the care of protective custody inmates. These inmates consume extra resources and cause many problems within their original prisons, but are not so troublesome when removed to sep arate facilities. Cost Advantages of Private Prisons What does it cost to build and run prisons in the private sector? It is difficult to give a definite answer to this question even in the public sec tor, where experience is long and 1985 COMPETITION IN ~rHE PRISON BUSINESS 473 data are plentiful. Early figures on private costs must, therefore, be re·· garded with caution, but they ap·· pear to support an expectation of savings.

At an annual cost per inmate of $40,000, RCA's Weaversville Inten sive Treatment Unit is much more expensive than the other institu tions. From independent descrip tions of the programs and facilities, it seems likely that much of the cost reflects high quality and small size, combined with the special needs of hard-core juvenile offenders. One ex pert (James Finkenauer, a criminol ogist at Rutgers) has described Weaversville as "better staffed, or ganized, and equipped than any pro gram of its size that I know."2 The Florida School for Boys at Okeecho bee, at $14,588 annually per inmate, is comparable in operating cost to the American Correctional Associa tion's estimate of $15,000 for state run institutions. Other available cost figures vary considerably. The lowest is $14 a day, per inmate, which Behavioral Sys tems Southwest charges the INS to detain illegal aliens in a series of converted and lightly secured mo tels. This is low by any standards, but the $24/day charged to the INS by Corrections Corporation of Amer ica for the same service may be an even better deal, since it covers con struction of a new facility. The Hanl ilton County contract with CCA does not include basic construction, but the $21/day fee includes a commit ment to spend up to $1 million in renovation during the first year of the four-year contract.

Behavioral Systems Southwest compares their $14/day charge to a current INS cost of $40-$50/day, while Corrections Corporation of America claims their $24/day charge is one-third less than it would oth erwise cost the agency (which would compare it to $36/day). Palo Duro Private Detention Services charges the U.S. Bureau of Prisons $45/day for medium security imprisonment, which they say is 25 per cent less than the projected cost ifthat agency provided the service itself. South west Detention Facilities has offered to build and run a regional prison at a fee of$54/day for three counties in New Mexico that currently spend $78/day to house each of their prisoners. Even the high security prison pro posed by Buckingham Security Lim ited would be competitive at $24,000 per year (about $66/day) per inmate, since that figure includes construc tion. Buckingham Security's esti mate of $15 million to construct a maximum security prison with 720 beds works out to $20,833 per bed, a steal compared to the U.S. Depart ment of Justice average figure (cited above) of $58,000 per bed for a max imum security prison. Corrections Corporation of America built their 474 THE FREEMAN August 350-bed detention center in Houston for $5 million, or $14,286 per bed.

What these figures suggest is that claims from the private sector of ability to build and run prisons at lower cost are at least plausible and worth putting to the test. The data are too limited and too crude to sup port any firm or categorical conclu sions yet, but they are enough to show that a prima facie case for com mercial prisons must be taken seri ously. Pending further da.ta, the case for (or against) private prisons rests mainly on a priori arguments, only a few of which can be considered here. 3 A Priori Arguments for Privatization Perhaps the strongest presump tion in favor of private contracting of imprisonment is to assume that it would be similar in success or failure to the private contracting of other public services. We know that these other contracts are not always suc cessful. However, E. S. Savas, in Pri vatizing the Public Sector,4points out that the most rigorous and compre hensive research (of which there is little so far) supports the general su periority of private over public pro vision of such diverse services as solid-waste collection, electric power, fire protection, transportation, health care, education, social ser vices, protective services, and a number of others.

Obviously, imprisonment differs from these other activities in impor tant respects, but not necessarily in ways that relate to efficiency and cost. Besides, if a prison system is broken down into its various sepa rate activities, there are only a few aspects that do not have counter parts in both the public and the pri vate sector. Therefore, evidence of successful private delivery of other public services warrants the pre sumption that it would be feasible for imprisonment also Personnel is probably the major area where savings could be ex pected with private contracting. Businesses, for economic reasons, tend to hire and retain approxi mately the number of employees that they truly need. Governments, for political reasons, frequently em ploy too many or too few. Retirement programs, sick pay, fringe benefits, and (for blue collar workers) salaries are generally more generous in the public sector, as the Grace Commis sion has documented. This is be cause wages and benefits are not subject to the direct discipline of market forces in the public sector, at least not as much as they are in the private.

Profit-and-Loss versus Bureaucratic Incentives Costs other than personnel are also more likely to be held down by com mercial prisons, as a result of the in1985 COMPETITION IN THE PRISON BUSINESS 475 trinsic economic incentives found in profit-making companies but absent from government agencies. Public service institutions tend to be both inefficient and ineffective, not so much because they are public rather than private, but because of the way they are financed. Profit-and-loss in centives differ fundamentally from bureaucratic incentives. Entrepreneurs are motivated, un der conditions of competition, to pro vide maximum satisfaction at min imum cost. Bureaucrats, in contrast, are rewarded not so much for em. ciency, but in direct proportion to the sizes and budgets of their agencies. Budget-based organizations are thus motivated to grow and to spend. Their money is based on promises, intentions, and efforts, and not strictly on results.

There is another reason why it tends to be inefficient for a govern mental unit to attempt to supply all its own services. Economies of scale vary greatly by the type of service and by the size and nature of the area being served, but as Robert W. Poole, Jr. notes: "The one arrangement least likely to be most efficient is for all the services to be provided at the scale defined by the size of the city" (or county, or state).5 For example, nearly all cities need some jail ser vices, but it may require a multi-city contract to meet efficiently the needs of small cities, while a large city can' operate more efficiently by using multiple contractors to meet its var ied needs (e.g., high and low secu rity, male and female inmates, ju veniles and adults, detoxification units, etc). Moreover, economies of scale can change, sometimes rapidly, due to technology or market forces; private vendors can respond to these changes more readily than can po litical entities.

Other Benefits So far, I have addressed only the fiscal advantages of commercial prisons, but certain other potential benefits are no less important. One goal of contracting is to inject into the public sector some of the greater flexibility that is often found in the private sector. Flexibility is espe cially important in the administra tion of public policy, where concen tration of decision-making magnifies the consequences of ignorance, un certainty, and error. Policies regard ing imprisonment, for example, con tain implicit or explicit projections about trends, distributions, and pat terns of crime and punishment. Even where broad trends are discernible, however, it is beyond the powers of social science to make highly accu rate and reliable forecasts. Because of the scale on which it op erates and the ponderous way in which it moves, government is much more dependent than is private en terprise on the longterm accuracy of projections. Of course, the private 476 THE FREEMAN August sector must also be able to predict, if it wishes to make a profit, but it can make better use of short-term (and therefore more accurate) predictions because it can generally respond more quickly to changes in information.

A market in corrections would share in the general advantages of markets over all forms of central planning. The advantage most rel evant here is that competition iso lates and minimizes the conse quences of erroneous predictions, while central planning magnifies them. If a state launches a major prison construction plan and hires an army of civil servants on the ba sis of a longterm projected trend that does not materialize, or that un expectedly reverses itself after a few years, the cost will be monumental. If several competing contractors are responding continually to projected needs, it is unlikely that they will all make the same mistakes at once. Some contractors will predict bet ter than others, or be able to respond more quickly to altered predictions. These companies will survive and prosper by being able to meet the changing needs of the state more ef fectively. The less successful com panies will have to absorb and thereby contain the cost of their in accurate predictions. In contrast, when the state has a monopoly on the prison business, it can simply pass on to taxpayers the full cost of its errors. Thus, the state has less in centive to avoid errors in the first place.

Speedy Response This presumption offlexibility and speed of response on the part of pri vate prison contractors is not just a matter of faith; concrete examples can be cited. In 1975, the Attorney General of Pennsylvania ruled that even hard-core delinquents could not be incarcerated in facilities with adult offenders. Faced with the need to immediately relocate all affected juveniles, and having no suitable fa cilities available, the state turned to RCA, with whom they already had a contract for educational programs for delinquents. In ten days, RCA set up the Weaversville Intensive Treat ment Unit, a heavy security facility with 20 beds and 30 staff members. In this case, RCA was able to conyert buildings already owned by the state; other contractors have built their own or remodeled existing pri vate structures, such as motels, to make them secure. While a spokesman for the Federal Bureau of Prisons reports that it takes two or three years to site and build 6 and other sources report that it takes five years or more to build secure facilities, private contractors claim to be able to design, finance, and build a prison in as little as six months. Corrections Corporation of America financed, built, and opened 1985 COMPETITION IN r£HE PRISON BUSINESS 477 its 350-bed detention facility for the INS in just seven months.

Contracts allow government agen·· cies to experiment with new pro·· grams without longterm commit·· ment of funds or of tenured civil service staff. Thus, vested interests in these programs do not accumulate inside the agencies. This avoids the tendency toward bureaucratic self· perpetuation that ordinarily makes public programs difficult even to al· ter, let alone to eliminate. Of course, advantages of flexibility for the pub lic agency translate into insecurity for the private contractor. If the vulnerability of a contract is an advantage to one side, it is a dis advantage to the other. However, this problem is intrinsic to all pri vate contracting. To survive and suc ceed, a contractor must be able to solve this problem in a variety of ways: by providing service that is too good to give up; by accurately antic ipating and being ready to meet the shifting needs of different clients; by holding down the administrative cost of hustling from one contract to another; by cultivating multiple clients; or by other techniques that must be the stockin-trade of any competitive contractor.

Flexibility Promotes Justice The flexibility of private prison contracts can also enhance justice. Public concerns over justice and punishment have led to reforms in many components of the justice sys tem. Abolishing parole, limiting ju dicial discretion, banning or restrict ing plea bargaining, and other such reforms, are supposed to curb abuses and' to make punishment more uni form and just. One objection to these reforms is the fear that they will pro duce further and more dangerous overcrowding of prisons. Therefore, attempts have been made to reintro duce discretion through mecha nisms for diversion, sentence reduc tion, emergency release, and "early community reintegration." The search for these new discre tionary mechanisms, which are de signed to forestall or to relieve the pressures of overcrowding, rests on a faulty assumption: that prison flow can and should be fine-tuned by the state, while prison capacity remains virtually fixed. A penal system pri marily concerned with doing justice, however, makes just the opposite as sumption: prison flow should re spond to crime rates, which are largely beyond the control of the state; therefore, prison capacity must be flexible.

At least at the margins, then, the prison system should be able to ex pand and contract as the shifting de mands of justice require. Flexibility at the margins will tend to maximize the supply and minimize the cost of imprisonment. Commercial prisons, with efficient management, multi ple vendors, and renewable, adjust478 THE FREEMAN able contracts, offer an increased prospect of achieving this marginal flexibility. Government Should Foster Competition Public employee unions will no doubt offer many reasons why gov ernment services, including impris onment of criminal offenders, are best handled by civil servants under direct employment and administra tive management by the state. They may be correct, much of the time, in this assertion, but they should be made to uphold their claim in open competition. No longer should they be permitted to foreclose the ques tion through monopolization by fiat.

Competition is as important to the processes of government as it is to those of private enterprise. As a mechanism of evaluation, account ability, and control, it is unmatched. How do we know-and how can we be sure-that the government is run ning our prisons in the most just, hu mane, effective, and efficient man ner possible? A very good test is to see whether private enterprise can do it better. Competitive private contracting introduces a market test of price that is absent under governmental mo nopoly, and it provides a new basis for comparison of all programs, both public and private, on dimensions other than cost. Many of the com ponent activities of the penal system are already subject to competition among private vendors.-Why not do the same for the administration of entire prisons? The ultimate legal authority for imprisonment must, by definition, remain in the hands of government, which means that a high degree of regulation will al ways be necessary. With that prov iso, however, rigid legal obstacles to the private administration of pris ons should be removed. i) -FOOTNOTESlInformation on the programs described be low comes from the following sources: Kevin Krajick, "Punishment for Profit" Across the Board, 21, March 1984, pp. 20-27; Kevin Kra jick, "Prisons for Profit: the Private Alterna tive" State Legislatures, 10, April 1984, pp. 9 14; Philip E. Fixler, Jr., "Behind Bars We Find an Enterprise Zone" The Wall Street Journa~ November 29, 1984, p. 34; The Hartford Cour ant, April 1, 1984; The Philadelphia Inquirer April 16, 1984; and telephone inquiries.

2Cited in Krajick, "Punishment for Profit." 3For an extended list of a priori arguments both for and against privatization of public ser vices generally, see E. S. Savas, Privatizing the Public Sector: How to Shrink Government (Chatham, N.J.: Chatham House Publishers, 1982), pp. 89-91. 4Ibid., pp. 93-111. 5Robert W. Poole, Jr., "Objections to Priva tization" PolicyReview, 24, Spring 1984, p. 107. 6Cited in Krajick, "Punishment for Profit."