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NEW Y 0 R K -- Private prisons provide
more efficiency at a lower cost to American taxpayers. So
say those who endorse this corporate strategy and that’s
ringing bells on Wall Street.
Some investment advisors predict a
recession-proof future for these gated communities --
although few may ever want to visit them. Stock in the
nation’s largest prison company, Corrections Corporation
of
America
, rocketed tenfold on the New York Stock Exchange over the
last four years. Shareholders in other publicly traded
prison firms have enjoyed similar results.
“I don’t know of any other industry
growing this quickly,” says Brian Ruttenbur, prison stock
analyst with Nashville-based Sun Trust Equitable Securities.
“CCA grew by 30 percent in 1997 and will continue that
growth for the next three to five years.”
CCA leads the nation with 52 percent of
the market in private prisons, followed by Florida-based
Wackenhut Corrections Corp., which stakes out a 27 percent
share. Some 20 other firms also are claiming a piece of the
action, according to analysts.
A Bullish Business Behind Bars
Given that the
U.S.
prison population more than doubled over the last two
decades, business plans for private prisons predict a
growing market share. The
United States
now locks up more prisoners than any other developed nation
on Earth.
As of 1996, the nation had 1.7 million
inmates under lock and key, including all prisons and jails
on the federal state, county and city levels. As government
budgets choke on spiraling costs and strain existing public
prisons bursting at the seams with overcrowding, public
officials have been signing long-term contracts that hand
over responsibilities to private companies for guarding,
feeding and rehabilitating convicted citizens with promises
of cutting expenses by 15 to 20 percent.
As the inmate market grows steadily,
corporations have been expanding their prison business at a
galloping clip. They now make up the fastest-growing sector
of the nation’s correctional system -- supplying a total
of 6 percent of all
U.S.
correctional facilities. In 1996, the firms took custody of
almost 80,000 prisoners in 130 private slammers on every
level: city and county jails, juvenile facilities,
immigration detention camps and federal prisons. By 1997,
bed capacity reached 105,000 in 157 facilities.
“There’s no indication that growth
will moderate in the private sector,” says Charles Thomas,
a noted
University
of
Florida
criminologist who also serves on the board of CCA’s
affiliated real-estate holding company.
Applying the Bottom Line
The prison business exploits its
competitive edge by taking advantage of flexibility, says
Susan Hart, CCA’s vice president of communications. While
rules and purchasing procedures thwart efficiency in the
public sector, private firms can always nail down the best
deal for supplies and construction.
“If you apply proven business
principles to a correctional center, the result is going to
be cost savings,” she says.
Another big savings: labor, which
accounts for about 70 percent of the operating budgets for
prisons.
Private guards take home lower wages
than their publicly employed counterparts, but they
frequently get stock ownership plans. There are few unions,
and some companies avoid providing the generous benefit
plans state workers are accustomed to over the last two
decades, their business plans look great on paper.
“We don’t pay a lot of overtime and
maintain a part-time work force,” says Pat Cannan,
spokesman for Wackenhut Corrections Corp.
High technology also cuts labor costs.
Video cameras, infrared security systems and heat detectors
reduce the need for guards who now sit at centralized
command posts where they can open and close gates simply by
touching a computer screen. Design innovations also allow
wider fields of vision for watching prisoners, something
that reduces personnel needs.
Local officials also willingly cut
attractive deals with offers of free property and tax breaks
in exchange for much-needed jobs. And, in an innovative
twist, prison companies have been selling their completed
prisons to real estate investment trusts, which then lease
them back to the parent operation. Tax advantages
subsequently lift the company’s profit margin.
After
Youngstown
,
Ohio
, sold 100 acres of land for $1 to CCA, the closely
affiliated Prison Realty Trust of Nashville then raised an
estimated $47 million in cash on the completed prison.
Wackenhut plans to tap into a similar cash stream this month
by raising $113 million on eight prisons.
Pioneers: CCA and Wackenhut
The explosive increase in private
prisons began in 1984 when CCA first entered the business.
Back then they built minimum-security facilities. Wackenhut
landed its first contract in 1986. Now, expansion continues
unabated as companies compete for entire state prison
systems, including those in
New Jersey
,
Michigan
,
Illinois
and
Ohio
.
Tennessee
has been flirting with CCA for several years about turning
over its 21 prisons and 14,000 inmates to the company’s
care. CCA head Doctor Crants contributed nearly $100,000 to
legislators there, making him the single largest contributor
in the state, according to The Tennessean newspaper.
The support wasn’t returned-legislation for privatizing
the prison system was recently withdrawn. But backers vowed
to revisit the idea after elections in November.
Nevertheless, such grand plans
encourage stock analysts, who remain bullish on private
prisons.
“They are volatile, but very powerful
performers and have huge potential, even compared to high
tech stocks,” says Gary Boston, a Paine Webber research
analyst.
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