Daaaih Loong writes: "On November 6 the Wall Street Journal (subscription only) posted an article by Joseph Hallinan on the bail-out of failing private prisons by the Federal Government.

Federal Government Saves Private Prisons As State Convict Population Levels Off

CALIFORNIA CITY, Calif. -- Like pioneers from an earlier time,
Corrections
Corp. of America nearly met its demise here in the Mojave Desert.

The private-prison operator spent $106 million in 1998 to build a giant
prison in the sand, confident it would land a contract to house
California
prisoners. What CCA officials didn't anticipate, however, was a sudden
stall
in the growth of California's prison population and fierce opposition
from
unionized state prison guards worried about their jobs. The prison
remained
empty and helped push CCA, then struggling with management problems and
mounting debt, to the brink of financial disaster.

The company's desperation should have presented an opportunity to Uncle
Sam.
While state prison populations appeared to be leveling off, the head
counts
in federal prisons were growing more rapidly than ever, fueled by
tougher
drug and immigration laws. The U.S. Bureau of Prisons needed more beds,
and
the empty prison here offered immediately available capacity.
Presumably,
the bureau could negotiate a fire-sale price.

Bonanza for CCA

From 1995 to 2000, the three companies (CCA, Wackenhut and Cornell )
made a
total of more than $528,000 in federal campaign contributions -- much
of it
in "soft money" given to the political parties, according to the Center
for
Responsive Politics, a nonpartisan, nonprofit research group in
Washington,
D.C.

As it turned out, the contract signed last year was a bonanza for CCA.
The
Bureau of Prisons agreed to pay above-market prices and, on top of
that, big
cash bonuses if the company achieved vaguely defined performance
targets.

Most important, the Bureau of Prisons guaranteed CCA a 95% occupancy
rate --
an arrangement almost never included in state private-prison contracts,
which typically base payment on the number of beds actually filled.
Here in
California City, the federal government agreed to pay for 95% of the
beds,
whether it needs them or not. For now, the prison is full, but the
guarantee
provides important insurance if demand flags again.

The government didn't stop with CCA, which sparked the creation of the
private-prison market nearly 20 years ago and now commands 52% of it.
Of the
five private prisons now operating under contract with the Bureau of
Prisons, three belong to CCA and two to Wackenhut Corrections Corp.,
the
industry's No. 2 player, which has had its own financial problems. All
of
the contracts are generous by conventional industry standards, as they
include occupancy guarantees and long-term renewal options.

What's more, the Bureau of Prisons is expected in coming months to
announce
additional similarly structured private-prison deals, involving a total
of
6,000 beds and more than $1 billion in potential revenue over time. The
bureau's offer of occupancy guarantees is "the reason why we're so
excited
about the federal side," Steven Logan, chairman and chief executive of
Cornell Cos., the No. 3 publicly traded prison company, told Wall
Street
analysts in June. Federal officials, he added, "cut you that check
every
month," whether or not the cells are full.

For more than three years, the private-prison business has been
floundering.
A decade-long prison-building boom among states has slowed markedly,
while
bad publicity about escapes and violence at certain for-profit lockups
has
raised questions about the companies' competence.

Now, even as the national economy slogs through a recession and a
disaster-era federal budget tightens, Washington is effectively
throwing the
industry a life preserver.

The Bureau of Prisons says its purpose isn't to rescue CCA and the
other
companies. Bureau officials at first resisted the push for
privatization
during the mid-1990s by the Clinton administration and Congress. And
bureau
officials still disagree with the industry contention that outsourcing
prisons saves taxpayers money.

In fact, the federal prison agency's ambivalence over privatization
helps
explain why it has been so generous to the prison companies. Forced by
higher political authorities to do business with the industry, a proud
and
reluctant U.S. prison bureaucracy has embraced the idea that to
replicate
its own high standards, it has to pay the private sector a premium.

Expensive Experiment

If privatization at the federal level turns out to be an expensive
experiment, the chances that Congress or the White House would push for
broad-scale outsourcing of federal prisons would diminish. The public
system
would survive largely intact, and public employees would keep their
jobs.

Bureau officials say privatization gives them more flexibility to deal
with
surges in particular inmate populations, such as illegal immigrants.
"We
don't sit around and strategize how we can make the contractors look
bad or
look more expensive," Michael Janus, the bureau's outsourcing chief,
says.

Asked to explain the above-market contracts and bonuses, he responds
that
"price is way down on the list" of factors important to his agency. The
federal government, he adds, wants the best prisons, not necessarily
the
cheapest.

It doesn't hurt relations between the companies and the federal
government
that CCA and Wackenhut have hired numerous former Bureau of Prisons
officials, including those who now serve as wardens of all five of the
federal prisons that have been privatized so far. A Bureau of Prisons
spokesman says the hiring of former officials has no bearing on
contracting
decisions.

For their part, CCA officials say that at California City they are
providing
an almost-new facility and top-notch services that merit premium pay.
Even
with the recent addition of five private prisons to the federal
government's
100 publicly owned and operated facilities, the federally run lockups
still
have more inmates overall than their stated capacity. "We think [the
Bureau
of Prisons] could probably use us more," says CCA's chief executive,
John
Ferguson.

Since CCA opened its pioneering private prison in Tennessee in 1984,
government use of such facilities has been controversial. Critics argue
that
only officials accountable to the public should be trusted with the
welfare
of inmates.

But prisons cost a fortune -- $50 million and up, as a rule of thumb --
and
private industry long had argued that it could house and manage
prisoners
less expensively than government. By 1997, CCA, based in Nashville,
Tenn.,
had 47 prisons, healthy profits and a soaring stock price.

Encouraged by a national trend toward locking up more drug felons for
longer
periods of time, CCA built prisons based on speculation that states
would
rent space in them. In 1998, it acted "on spec" when it put up the one
here
in California City.

But then trouble struck. After California's prison population jumped by
22%
from 1993 to 1996, the growth rate began to slow -- to 3.9% in 1998 and
then
to only 0.7% in 1999. That made the state a less-eager potential
customer.
Resistance from the politically potent prison-guard union, which feared
privatization of public-sector jobs, ended any hope that state inmates
would
fill the California City facility.

And CCA was having difficulties elsewhere. A rash of inmate escapes and
guard-brutality cases led to harsh media attention and contributed to
jitters on Wall Street about prison companies' stock. In one of the
most-notorious examples, two inmates were killed by other inmates and
six
escaped from a medium-security CCA prison in Ohio during separate
incidents
in 1998.

Privatization opponents pointed to such events as evidence that the
industry
was incompetent or negligent. CCA and its rivals countered that the
incidents illustrated only isolated problems and that, on the whole,
private
prisons are on a par with public.

Meanwhile, CCA's financial management was faltering. Long-term debt
taken on
to finance its building boom climbed to $1.09 billion in 1999, from
$127
million only two years earlier. The company began losing money -- $730
million in 2000. Its stock dropped to $4.50 a share in 1999, from
nearly $45
in 1997. In 2000, it fell as low as 19 cents.

As states around the country began to ease the Draconian sentencing
laws
that helped the industry get established in the first place, the future
looked bleak for CCA. The one ray of hope came from Washington.

Founded in 1930, the Bureau of Prisons remains in the shadow of its
parent
agency, the U.S. Justice Department. But the BOP, as it's known in
Washington, prides itself on being the class operation in its field.

The BOP had resisted suggestions from the Clinton administration that
the
federal government privatize prisons. "The BOP was adamantly opposed to
it,"
says a former career Justice Department official involved in internal
discussions about privatization. "Although they would never say it,"
the
official adds, "I think they were afraid of the camel's nose," meaning
that
even a small move toward privatization could lead to the eventual
outsourcing of most federal prison work.

In a July 1999 "Message to All Bureau of Prisons Employees Regarding
Privatization," the agency's director, Kathleen Hawk Sawyer, tried to
reassure subordinates that they weren't going to lose their jobs to
privatization. For one thing, she wrote, the prison companies hadn't
"established an acceptable track record" for "the incarceration of
medium-
or high-security inmates."

Nevertheless Clinton administration officials intent on "reinventing"
government did see privatization as a means of holding down the growth
in
the BOP's work force, which had nearly doubled during the 1980s, to
19,000
employees. In 1995, as part of his budget proposal to Congress for the
next
fiscal year, President Clinton said his administration planned to
privatize
the management and operations "of most future federal [prison]
facilities
under construction."

This proposal was enthusiastically received in Congress, where CCA,
Wackenhut and Cornell were lobbying for broader privatization. From
1995 to
2000, the three companies made a total of more than $528,000 in federal
campaign contributions -- much of it in "soft money" given to the
political
parties, according to the Center for Responsive Politics, a
nonpartisan,
nonprofit research group in Washington, D.C.

The Justice Department, acting on behalf of the BOP, continued to raise
safety concerns about privatization, but the momentum was too strong. A
Republican-controlled Senate appropriations subcommittee put language
in a
spending bill in 1996, directing the BOP to launch its first privately
operated prison, in Taft, Calif. A spokesman for Sen. Judd Gregg of New
Hampshire, the subcommittee chairman at the time, declines to comment.

The bureau had little choice but to comply. It hired Wackenhut for the
job.
Congress intervened again in 1997, ordering the BOP to take
responsibility
for certain inmates in Washington, D.C.'s corrections system.

The BOP didn't warm quickly to privatization. "We did not pursue this
change
in the Bureau's approach to private contracting," Dr. Sawyer, a BOP
veteran
who holds a doctorate in counseling and rehabilitation, wrote in her
1999
memorandum.

She noted that "private prison companies often seek business by
promising to
federal and state legislators that they can provide comparable services
at a
reduced cost." These industry claims "have not been proven," she
stated. But
"we cannot ignore them. Some legislators and other policymakers are
convinced the cost savings are real."

The BOP opposed broad privatization but recognized that many in
Congress
viewed outsourcing as a thrifty strategy. Meanwhile, the federal-prison
population was expanding rapidly.

By the end of the 1990s, declining rates of violent and property crime,
combined with some easing of state sentencing laws, contributed to an
apparent leveling off in state prison head counts. But the opposite was
happening in the smaller federal system. Harsher federal
drug-sentencing
laws enacted in the 1980s kept tens of thousands of inmates in federal
prisons for longer terms. And tough immigration legislation in 1996 led
to
sharp increases in the arrest and incarceration of so-called criminal
aliens.

Last year, the federal inmate population expanded at a brisk 7.5% rate,
to a
total of 145,416. BOP officials say they had no choice but to go along
with
additional outsourcing to handle some of the growth.

But, Dr. Sawyer wrote in her 1999 memo, "we must be cost-competitive
with
the private-sector companies in order to argue against further
congressional
mandates for privatization." One way she has done that is cutting the
BOP's
own costs.

Another factor that has helped keep the BOP cost-competitive with the
private sector is the relatively high cost of the bureau's
private-prison
contracts.

The BOP's approach to determining how much to pay prison contractors
indicated a remarkable solicitousness toward the industry's financial
concerns. The bureau's Mr. Janus says that the agency held two rounds
of
"interchange" meetings with industry representatives, the first in 1995
and
the second about two years ago. The bureau organized the meetings,
which
were private and held with one company at a time, because it was
"searching
for ideas of mutual benefit to both the government and contracting
community," he says.

Marvin H. Wiebe, senior vice president for government affairs with
Cornell,
says the meeting he attended in late 1998 or early 1999 at the BOP's
Washington office, was "outstanding, phenomenal." He recalls that as
many as
10 bureau officials listened as he outlined the contracting terms his
company would like to see in federal-prison contracts. "We were asking
for
100% occupancy" guaranteed, he says. "And they came back with what I
thought
was a very fair and creative plan, which is that they guaranteed 95%
occupancy."

Louise Green, a spokeswoman for CCA, says employees currently with the
company "didn't have any conversations" of this sort with the BOP,
although
ex-employees may have. Wackenhut employees attended meetings with
bureau
officials, says Margaret Pearson, a company spokeswoman. But the
company
declines to make those employees available or comment further.

BOP officials decline to discuss in detail why they went along with the
industry's suggestion of occupancy guarantees, sometimes known as
take-or-pay provisions. In a written statement responding to questions
on
the topic, the bureau says: "In formulating our approach, we solicited
input
from the corrections industry and other independent correctional
experts.
Based on our own data and feedback from the private-corrections
industry, we
determined that payment for 95% of designated capacity was
appropriate."

Mr. Janus adds that paying for the exclusive use of an entire prison
gives
the federal government more leverage in determining how a facility is
managed. That reasoning is roughly akin to that of a company that rents
an
entire hotel for a conference, instead of just the rooms its employees
occupy -- an analogy that Mr. Janus accepts.

As an additional plum, the BOP promised companies substantial bonuses
for
"optimum performance" in three areas: overall work quality,
responsiveness
and management of "quality-control" programs.

The idea of awarding performance bonuses and agreeing to take-or-pay
guarantees startles some state-prison officials, who otherwise
generally
express respect for their federal counterparts. Montana, for example,
offers
neither take-or-pay nor bonuses to CCA, which operates a 500-bed
medium-security prison in the town of Shelby. "We expect them to do a
good
job," says Pat Smith, contracting chief for the Montana Department of
Corrections. "If they don't, we fire them."

Asked whether any CCA customers, other than the federal government,
provide
bonus payments, company spokesman Steven M. Owen says, "I'm not aware
of any
that come to mind." None of Wackenhut's state contracts has bonus
provisions, either, says Ms. Pearson.

Apart from financial considerations, the BOP didn't see the highly
publicized incidents of violence or escapes at some private prisons as
an
obstacle to hiring the industry. The bureau's Mr. Janus says those
kinds of
events happen periodically in all prison systems, including the BOP.

Still, the bureau shares the view of many private-prison skeptics that
the
industry lacks sufficient competence to handle medium- and
high-security
inmates. That is why the BOP limited its private contracts to only the
least-risky inmates, those classified as low- or minimum-security, Mr.
Janus
says. Most inmates in the bureau's growing population of criminal
aliens
fall into those categories.

In the fall of 1999, the BOP sought industry proposals for housing
criminal-alien prisoners in the Southwest. CCA put in the winning
proposal.

In June 2000, with CCA losing money and its California City facility
sitting
empty, the BOP awarded the company the biggest contract in
private-prison
history. Covering both California City and a second CCA facility in
Cibola
County, N.M., the deal promised the company a minimum of $68.7 million
a
year in revenue, the equivalent of 22% of CCA's total 2000 revenue. The
deal, which spanned three years, with seven one-year options to renew,
could
be worth $760 million over the 10-year period. The day it was
announced,
CCA's stock rose 56%.

Almost all of the roughly 2,300 criminal aliens held at the California
City
prison have been convicted of one of three offenses: illegal entry into
the
country, illegal re-entry, or possession or trafficking of drugs. As
low-
and minimum-security inmates, they are less expensive to guard than
more-dangerous prisoners, who require greater security.

Yet the BOP agreed to pay an annual average of $21,880 per inmate at
California City, or slightly more than the $21,601 the agency spends,
on
average, throughout the entire federal system, including medium- and
high-security inmates.

As a result of its occupancy guarantees, the BOP sometimes pays more
than
the $21,880 average. California City is fully occupied now. But as of
Oct.
11, at its sister CCA prison in Cibola County, N.M., 877 of 961 beds
under
contract -- 91% -- were occupied. The cost of paying for the extra 4%,
to
fulfill its take-or-pay guarantee, has hiked the BOP's annualized
per-prisoner cost at Cibola to $23,777 -- 10% higher than the average
cost
at BOP-run prisons overall.

The BOP has included the 95% guarantee in all five of its existing
private
prisons, three of which are operating below capacity. Future
federal-prison
contracts are also expected to include such guarantees.

The good news for CCA doesn't end there. In May, the company learned it
would receive a $520,000 bonus for its successful operation of the
prison at
California City and a third facility it operates for the BOP, at Eloy,
Ariz.
For a company that had a loss of $5.3 million for the first quarter
this
year, that's a significant amount.

As set out in the written BOP contract, the objective of the bonus "is
to
afford the contractor an opportunity to earn [an] increased fee
commensurate
with the achievement of the optimum performance." Unofficially, says
Mr.
Janus, "it avoids the haggling that sometimes takes place in a
contractual
negotiation." Since privatization of federal prisons began in 1997, the
BOP
says it has paid a total of $2.3 million in bonuses to CCA and
Wackenhut.

A look at what states pay private prisons makes CCA's federal contract
look
even richer. Here in California City, the company receives $57.48 per
inmate
a day at full occupancy. In Mississippi, by contrast, CCA gets just
$28.29 a
head a day. In Idaho, it gets $37.60; in Montana, $51.59.

"Do we pay a little bit more?" asks the BOP's Mr. Janus. "Probably. But
I
think we get a better service."

By service, Mr. Janus says, he means a range of things, from the
recreational programs a prison offers inmates to how accommodating it
is in
meeting BOP requests. For instance, he says, the occupancy guarantees
and
bonuses ensure that when the BOP doubles to 80 from 40 the number of
prisoners it delivers to California City during a particular week, CCA
won't
grumble. The government values another kind of flexibility, as well, he
adds. Rather than financing construction of new prisons for criminal
aliens,
the BOP has committed itself to only three years of service at
California
City. After that, if illegal immigration eases or there is a move to
legalize some of those who have entered the country unlawfully, the BOP
can
walk away from the private prison.

At the California City facility, 120 miles northeast of Los Angeles,
Warden
Percy Pitzer says that high on the list of services that warrant
generous
pay is inmate rehabilitation. In the hobby-craft room, for instance,
inmates
spend their days at plywood tables making elaborate jewelry boxes from
toothpicks and Popsicle sticks. In an indication of how rarely violence
is a
problem here, the inmates are allowed to use razor-blade-equipped box
cutters in their craft work.

Privatization of federal prisons will continue to expand, the BOP
predicts.
CCA's Mr. Ferguson says he very much looks forward to more federal
contracts. "We treasure the Bureau," he says."