SECTION: IN THE NEWS

LENGTH: 3071 words

HEADLINE: PREPARED STATEMENT OF
MATTHEW PAGE
BEFORE THE HOUSE EDUCATION AND WORKFORCE COMMITTEE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
SUBJECT - "FEDERAL PRISON INDUSTRIES:
RECOMMENDATIONS FOR REFORMS THAT PROTECT
LAW-ABIDING WORKERS AND PREPARE INMATES
FOR A SUCCESSFUL RETURN TO SOCIETY WITH GAINFUL EMPLOYMENT"

BODY:

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Mr. Chairman, and members of the Subcommittee, I am Matthew Page and I serve as Director of Legislative Affairs for the Small Business Legislative Council (SBLC). SBLC is a permanent, independent coalition of nearly eighty trade and professional associations that share a common commitment to the future of small business. Our members represent the interests of small businesses in such diverse economic sectors as manufacturing, retailing, distribution, professional and technical services, construction, transportation, and agriculture. Our policies are developed through a consensus among our membership. Individual associations may express their own views.
I wish to thank the Subcommittee for the invitation to testify on the very important issue of Federal Prison Industries. And even though we hail from opposite ends of the state, I particularly appreciate the opportunity to provide testimony for a fellow Hoosier, Mr. Roemer.
INTRODUCTION
In 1934, the Federal Prison Industries (FPI) was created by an act of Congress. FPI is a wholly owned government corporation managed by the Department of Justice's Bureau of Prisons. The intended purpose of FPI is to serve as a means for managing, training, and rehabilitating inmates. The theory behind the program is that it provides prisoners with work-place experience to use in society upon release from prison. In turn, it is thought that the job skills learned in prison will lead to lower recidivism rates.
Under the trade name UNICOR, Federal Prison Industries markets about 150 types of products and services to federal agencies. The products produced by FPI include furniture, textiles, and electronic components. Some of the services FPI performs include data entry, engine repair, and furniture refinishing. By mandate, FPI is limited to offering its goods and services to the federal government, with certain exceptions for approved state projects under the Prison Industries Enhancement (PIE) program.
Under current law, Federal Prison Industries is a significant source of unfair competition for small business. FPI's unfair advantages include: (1) "mandatory source" status, which requires Federal agencies to purchase products directly from FPI, even if the product can be purchased in the private sector at a cheaper price or better quality; (2) FPI has a constant source of cheap labor prisoners are paid wages only a fraction of what would be found in the private market; (3) FPI does not have to provide the same type of benefits offered to employees commonly found in private sector companies; and (4) FPI does not have to adhere to the same OSHA health and safety regulations required by all private sector firms.
In addition to these competitive advantages, opponents of the FPI program assert that Federal Prison Industries have a horrible service track record. Several General Accounting Office studies have validated these assertions. In fact, a June 1998 GAO study (GAO/GGD-98-118) reports that FPI still has notable problems meeting customer due dates for delivery of goods. In the private sector, if the manufacturer is delinquent on delivery, the customer has the ability to shop elsewhere. However, in the case of FPI, the customer, being the Federal government, is held captive and has little or no choice because of mandatory source status.
Under current law, FPI is limited by the types of goods (i.e. textiles and furniture) it may provide the Federal government, but some in Congress would completely change that policy by allowing FPI the opportunity to let prisoners make all types of commercial products. Congressman Bill McCollum has a plan that would expand the scope of FPI beyond just Federal contracts, meaning FPI would come into direct unfair competition with many more small businesses. Even more alarming is FPI Chief Operating Officer, Steve Schwalb's stated goal of reaching sales of $600 million by the year 2000.
SIZE AND SCOPE OF FPI
Across the country there are approximately 1.8 million individuals locked up in federal and state prisons. Of those nearly 2 million prisoners, close to 107,000 of them are incarcerated in the federal prison system. All physically able federal inmates must work a minimum of five days a week. In 1998, Federal Prison Industries employed nearly 20,000 prisoners, or roughly 15 percent of the entire prison population. Traditionally, FPI maintains employment of 15 - 20 percent of federal prisoners. The other inmates perform jobs relating to the operation and maintenance of correctional facilities.
Despite the relatively limited number of federal prisoners participating in the FPI program, the amount of inmate-related sales are remarkable. In 1960, FPI had sales of $29 million. By 1980, the number of FPI sales jumped to $117 million. Today, however, FPI has turned into one of the largest federal contractors. In fiscal years 1996, 1997, and 1998 FPI had net sales of about $496 million, $513 million, and $534 million, respectively, in products and services. To offer some comparison, based on its over half a billion dollars in sales, FPI ranks 37th among the top-100 Federal contractors, just behind Texas Instruments.
It is important to note that under current law, FPI is not permitted to participate in interstate commerce. But some in Congress and within the program would like to modify FPI's limitations. FPI supporters are looking to expand the number of products and services FPI can provide, and of greater concern, move beyond just servicing Federal agencies.
The first step towards FPI's expansion is already in play. Representative McCollum has a plan that would greatly expand the market for prison-made goods to include state and local governments as well as the private sector. In addition, people within FPI management are expressing a similar desire to expand its scope. Steve Schwalb recently revealed his intent, with or without congressional consent, to increase the number of inmates working for FPI to 25,000 and he hopes to top $600 million in sales by 2000.
UNFAIR COMPETITIVE ADVANTAGES
Any reasonable business would love to have the lengthy list of competitive advantages Federal Prison Industries enjoys. Under current law, federal agencies are required to purchase products through FPI because of its mandatory source status; inmate employees get paid only a fraction of the prevailing wage in the private sector; there is no penalty or loss of sale, so product quality and delivery time often remains poor; and FPI has the power to specify the price of goods.
Under any other set of circumstances, FPI would be declared a monopoly by the Federal government. But because there is a certain policy objective, FPI continues to receive the endorsement of many lawmakers. The Federal Acquisition Regulation (FAR) dictates how Federal agencies purchase private sector products.

Normally, the FAR requires any private business seeking a Federal contract to first submit a bid under strict guidelines. All submitted proposals compete against one another for the right to acquire the work. Based on a full and open competition, the bid which can most efficiently and economically complete the work is typically awarded the job. Once chosen, the winning bid must adhere to specific guidelines or otherwise lose the contract. Moreover, the contract winner sometimes must defend its award against a protest bid filed by a competitor questioning the agency's selection. Simply put, FPI is not held to the same standard.
Under federal statute, FPI is a mandatory source provider. As set forth in 18 U.S.C. 4124, federal agencies are required to purchase FPI products if they meet the buying agency's requirements. All things considered equal, a buying agency may not seek an outside supplier unless FPI cannot meet the buying agency's requirements. Even under such circumstances, the buying agency is required to obtain FPI's written authorization prior to placing an order for a similar item through outside sources. Remarkably, the waiver request requires the agency to justify that the FPI product does not meet the basic needs of the agency and then FPI has the final say on whether it is a valid request. Its hard to think of any other entity that has such control over certain purchasing powers of the Federal government.
Unlike their private sector counterparts, prison workers receive minimal compensation. While FPI participants are admittedly paid more then other prison workers, their hourly wage still remains a fraction of what they must be paid in the private sector. Because FPI is not subject to the federal minimum wage, inmate pay averages only $0.92 per hour. It can not be emphasized enough how huge a competitive disadvantage this is for small business.
FPI is also afforded unparalleled power over the acceptability of their performance. Whereas private sector businesses must ensure quality products delivered on-time, FPI, because of its mandatory source power, can, and often does, produce inferior quality goods behind schedule.
There is no penalty or loss of sale for FPI products that are poorly made or delivered late. Meanwhile, private sector contractors must face the consequences of producing shoddy products or delivering behind schedule. Moreover, FPI has the authority to specify the price the agency will pay for their products. Unfortunately for the taxpayer, this often leads to unnecessary overpricing. The General Accounting Office has conducted studies of FPI's pricing practices and discovered that goods were overpriced by 15 percent nearly 90 percent of the time. Why should the taxpayer ultimately have to pay millions of extra dollars for products from FPI?
SMALL BUSINESS IMPACT
Unfortunately, the issue of unfair competition is extremely familiar to small business. It is especially well known to those small businesses that try to do business with the Federal government. In fact, during the past three White House Conferences on Small Business, the delegates voted as one of their top priorities the enactment of "legislation that would prohibit government agencies, tax-exempt and antitrust-exempt organization from engaging in commercial activities in direct competition with small business." It should be noted that during the 1995 White House Conference, the issue of unfair government competition ranked higher than OSHA regulatory reforms or tax equity for small business, two issues traditionally favored by small business.
What do all of FPI's competitive advantages mean to small business? They translate into lost job opportunities. Take for example, General Engineering Service, Incorporated, a small business producer of missile shipping containers, which was stung particularly hard by FPI's competitive advantages. General Engineering Service used to employ 150 workers until FPI forced them to close their doors. Because of the mandatory source status, FPI was able to eliminate small business contractors from providing the Department of Defense with missile shipping containers, something companies like General Engineering Service had been doing for years. Because of the mandatory source provision, small businesses were eliminated without the benefit of the competitive bidding process that protects the government from purchasing overpriced or low quality products and that protects companies from unfair competition. Moreover, FPI took the missile container contract in direct violation of its authorizing statute.
Whenever FPI produces a new product or significantly expands its production of an existing product, the FPI board may approve production only after a detailed written analysis of the probable impact on industry and free labor has been conducted. Prior to the missile container contract, FPI had never produced such containers, yet FPI neither provided an impact study to determine what its effect on this market would be or sought the approval of its board for this unauthorized expansion.
Moreover, FPI is prohibited by statute from "capturing more than a reasonable share of the market among federal departments, agencies, and institutions for any specific market." The missile container case is a clear example of how FPI ignored this requirement. Due to the shrinking size of the missile container market, which is dominated by small business, it should have been clear to FPI that their new presence in the field would represent an unreasonable capture of the market share. By the time this realization was made, it was too late for General Engineering Service, Inc.
The General Engineering Service story is but one of many examples of how FPI has a negative impact on small business. It also helps illustrate how the training inmates receive while participating in FPI does not necessarily translate into jobs upon release from prison.
Additionally, It has come to our attention that FPI is in the process of moving forward in the direction of allowing prisoners to perform services in the private sector. We believe FPI has initiated pilot programs as we speak. SBLC does not approve of FPI s new business ventures and perceives these pilot programs to be a violation of their statute.
SBLC views the Federal Prison Industries' statutory language is unmistakably clear on the subject of performing commercial activities. Under 18 U.S.C. section 4122(a), the mission of FPI is plainly described as: "Federal Prison Industries shall determine in what manner and to what extent industrial operations shall be carried on in Federal penal and correctional institutions for the production of commodities for consumption in such institutions or for sale to the departments or agencies of the United States, but not for sale to the public in competition with private enterprise."
Moreover, the enabling legislation is clear on FPI's requirement to minimize their operation's impact on private industry. In 18 U.S.C. 4122(b), FPI is instructed to operate so that "no single private industry shall be forced to bear an undue burden of competition from the products of the prison workshops, and to reduce to a minimum competition with private industry or free labor," diversifying "it products so that its sales are distributed among its industries as broadly as possible." Despite what appears to be unquestionably clear, FPI continues to choose to abuse its statutory limitations.
LEGISLATION
It appears to us the Prison Industries Reform Act (H.R. 2558), would greatly expand the scope of Federal Prison Industries.
Provisions of H.R. 2558 that concern us include:
Expands FPI's mandatory-source status for products to include all forms of services by defining "product" to include services.
Allows any prison industry to offer for sale on the open market "assembled" or "foreign-made" goods.
Exempts FPI from compliance with the Competition in Contracting Act of 1984 or with the Federal Acquisition Regulations (FAR). Exempts inmate-workers making products (or performing services) for sale in the commercial market from being paid the Federal minimum wage.
In stark contrast, the Federal Prison Industries Competition in Contracting Act (H.R. 2551), introduced by you and your colleagues Barney Frank, Mac Collins, and Carolyn Maloney, would narrow the parameters on work performed and goods sold by Federal Prison Industries. We appreciate your concern for the small business opportunities that would be lost if FPI was expanded.
Highlights of H.R. 2551 include:
Requires FPI to compete for its contracts, with sole-source contract award authority available to avoid prison disturbances.
Eliminates FPI's mandatory source selection so Federal agencies no longer need to obtain FPI's permission to purchase competitively from privates sector firms.
Requires FPI awarded contracts to meet the quality standards required by the purchaser, fulfill established time deadlines, and do not exceed current market prices.
Prohibit FPI from selling services in the commercial market.
Specify that FPI s Board of Directors cannot authorize expansion of FPI production under certain circumstances.
SBLC POSITION
Before FPI is allowed to expand its operations into the private market, FPI needs to be reformed. SBLC believes the new business opportunities H.R. 2558 would create for FPI are ripe for abuse. And we do not feel that Federal Prison Industries has demonstrated the responsibility to refrain from abusing these new privileges, especially ones that would permit sales of FPI goods and services in the commercial marketplace.
SBLC supports the efforts of Members of Congress who are seeking to limit the scope of Federal Prison Industries. Specifically, SBLC supports your bill, H.R. 2551, which would truly eliminate the mandatory source status for FPI, as well as place limitations on further market penetration. Jobs for prisoners should never come at the expense of work for the private sector. Preparing prisoners to respond to emergencies or natural disasters is much preferable than training them to take away market share in the furniture and textile industries. Prisoners should be given technical skill training that could apply to any job, as opposed to placing them in full-time jobs that will not translate to work outside of prison.
In short, SBLC firmly believes the Congress should be more concerned with ensuring fair business opportunities for law-abiding small businesses rather than expanding market share for a program that has lost its sense of mission.
Mr. Chairman, SBLC thanks you for your dedicated leadership on this issue. I thank the Subcommittee for holding this hearing and I look forward to working with you as this issue moves forward.
END


LOAD-DATE: September 29, 1999