Privatization of Prisons

August, 1995

National Institute of Corrections
Boulder, Colorado
Prison News Service

No one-year period in the history of privatization comes remotely close to matching the scope and significance of the developments that took place within the private corrections industry during 1994. The most striking indicator of this involves a significant acceleration in the overall growth of the industry as that growth is reflected by the total number of beds in facilities now under private management, existing facilities whose capacity is being expanded, and new facilities whose opening is anticipated within the next 12-18 months. Between the end of 1992 and the end of 1993, this total capacity figure rose by an impressive 31.72 percent to 32,555, but during 1994 the comparable measure of size rose by an even more robust 50.99 percent to 49,154 (see Figure 4.2).

Regarding changes within the industry, several events are especially noteworthy.

Esmor Correctional Services became the second publicly held private corrections firm and began trading on the NASDAQ exchange. Soon after the Esmor IPO, the Wackenhut Corrections Corporation became the third publicly held company and began trading on the NASDAQ. The Corrections Corporation of America, which for more than a decade has traded on the NASDAQ exchange, became the first private corrections management firm to begin trading on the New York Stock Exchange.

1994 also found evidence of diversification in the form of private firms expanding the scope of the services they provide to include areas other than full-scale facility management. The most obvious indicator of this is the acquisition of TransCor America, the largest inmate transportation service in the United States, by the Corrections Corporation of America

Competition for corrections contracts continues to be intense. Florida, for example, received proposals for three 350-bed l facilities in December 1994. Each management firm was empowered to submit as many as three proposals Nine firms submitted a total of 23 proposals.

Between December 31. 1993 and December 31, 1994 the number of secure private facilities in operation or under construction rose from 73 to 88, an increase of 20 55 percent.

Between December 31. 1993 and December 31. 1994 the rated capacity of secure private facilities already in operation rose by 24.55 percent to 30,821 and the actual prisoner population in those facilities rose by 28.75 percent to 28,678.

Between December 3 I . 1993 and December 3 I, 1994 the capacity utilization for secure private facilities already in operation rose by 3.64 percent to 93.05 percent.

Reliance on contracting in the United States continues to disproportionately represent state and federal agencies. The total confined population of modestly more than 1.5 million adults has approximately the following distribution by level of government: 63 percent in state facilities, 31 percent in local facilities, and 6 percent in federal facilities. The capacity of all private facilities, including new facilities and planned expansions of existing facilities, is allocated in approximately the following manner: 79 percent for state agencies, 15 percent for federal agencies, and 6 percent for local agencies.

All of the early indicators suggest that 1995 will bring continued growth to the private corrections industry. —Excerpted from the "Private Adult Correctional Facility Census.'' released by the Private Corrections Project of the University of Florida at Gainesville. Professor Charles Thomas.

Public Facilities

Public officials are increasingly using the public/private partnership model to finance, design, and construct public facilities, including real estate projects such as government administrative office buildings, convention centers. stadiums, arenas, and parking garages. In the past, many of these projects would have been financed entirely with public funds, or deferred until public funds were available.

For many building projects, government officials can not only realize projects in much less time, they can also work with private developers to structure public/private finance and development plans that optimize private equity and taxable debt, thereby avoiding the use of tax-exempt debt financing.

The public/private building development industry includes two types of facilities—user fee facilities and facilities that primarily house public functions. User fee facilities include convention centers/hotels, stadiums, and parking structures. Public use facilities include libraries, office buildings, schools. and infrastructure facilities such as prisons.

The scope of the current market for user fee facilities in major U.S. cities is estimated at $8.5 billion to $10.75 billion (see Table 4.7). For example, cities such as Charlotte (N.C.), Kansas City (Kansas), Long Beach and Sacramento (Calif.), Chicago. Baltimore, Atlantic City (N.J.), and Dallas are either constructing new or expanding existing convention facilities.

Government officials are discovering that they can achieve a major portion of their building programs with less public funds and in less time by sharing the costs. risks and responsibilities with the private sector. a process known as project splitting." In many projects, not only can the government complete civic facilities with little or no public funds, they can also negotiate profit sharing If the project generates any financial "upside," the government sponsor obtains a share of the profits without incurring the risks of ownership. Table 4.8 describe some of the benefits of private-sector involvement in such construction projects.

From the Perspective of the Government Sponsor
Eliminate or Reduce Ownership and Development Risks

· Private Equity vs. Public Capital

· Taxable Debt vs. Tax-Exempt Debt

· Private Investment Induces Long -Term Commitment by Owner and Operator

· Not Using Tax-Exempt Debt Avoids IRS Restrictions on Private Operators

· Monetize Under Performing Real Estate Assets

· Private Ownership Generates Property Tax Revenue

· New Developments (only possible using the Public/Private Partnership Approach) Create Jobs and Tax Revenue

· Successful Developments Generate Non-Tax Revenue from Government Profit Participation

In some instances, facilities become financially or politically feasible with the public/private partnership approach. If voters or local officials believe that the private market should determine when and it a building should be built, or that the project should not be funded entirely with public debt, the public/private model may be appropriate.

Contributed by John Stainback, President of Privatization For America, a Houston-based building development firm specializing in public/private projects.

Stadiums and Arenas

The financing and construction of stadiums and arenas is gradually becoming more private than public. Moreover, the trend toward private management of these facilities is also increasing

The Boston Garden, for example, is being replaced by the Shawmut Center, a $ 1 60-million project that is entirely private!: funded (state and local governments have agreed to upgrade parking and mass transit facilities near the arena). Philadelphia's $215-million Core-States Center will receive only $20 million from state and local taxpayers, and less than 15 percent of the $262 million spent for the Rose Arena Garden in Portland will come from local taxes.
Table of Estimated Development Costs
Type of Facility Estimated Development Cost
($Billions)
Convention Centers $1.00—1.50
Convention Headquarter Hotels 1.50—2.00
Stadiums 2.45—2.75
Arenas 2.05—2.25
Parking Garages
(100 Cities. 2 Garages Each) 		1.00—1.25
Other User Fee Facilities .50—1.00
Cumulative Total Development Cost $8.50—10.75

Source: Privatization For America

In December 1994, Abe Pollin, the owner of Washington. D.C.'s NBA Bullets and NHL Capitals, agreed to fund most of the cost of a 23,800-seat, $180-million downtown sports arena. Originally seeking $90 million from taxpayers, the owner agreed to come up with the funds when the cash-strapped district balked. Taxpayers will spend about $15 million to purchase the site and perhaps twice that to prepare it for construction, but Pollin will pay $600,000 per year to lease the site. There is a wide mix of arrangements by which stadiums and arenas are owned and managed (see Table 4.9), but there seems to be a definite trend toward an increased role for the private sector. According to John Nicholson of the Boston-based Nicholson Group, the number of local governments moving toward private management of existing facilities in the first half of the 1990s is roughly triple the rate of a decade earlier.
Operation and Ownership of Stadiums and Arenas
Stadiums Arenas
Publicly Owned and Operated 30% 24%
Publicly Owned/Privately Run 14% 15%
Privately Owned and Operated 28% 14%
Other* 28% 37%

* Includes university facilities and facilities (publicly owned) run by authorities or nonprofit agencies.

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Compliments of Proposition One Committee