Competing with ConvictsFederal Prison Industries Inc., is doing a booming business selling goods manufactured by federal prisoners to government agencies. Its private-sector competitors aren't happy.
By Jeff Erlich
From the outside, the federal prison in Petersburg, Va., is a shimmering mass of coiled razor wire and double fences, but once inside the gauntlet of steel doors and guards, the prison seems more like a small industrial park than the set of The Shawshank Redemption.
Never mind that stiffened drug sentences have swollen the prison's population to more than a quarter above its design capacity. Hardly anyone is to be seen on the manicured lawns.
This peace and quiet, prison officials say, is largely bought with a massive jobs program called Federal Prison Industries, which employs 400 inmates in three factories at Petersburg and thousands more at other federal prisons across the country. Inmates learn job skills and stay out of trouble for 37 1/2 hours a week.
"We're really keeping 400 people busy, so that they're not thinking about ways to harass us," says Joe Ludgate, Petersburg's associate warden for industry and education. "It's a big contribution to security."
It's also a big business. FPI, which sells under the trade name Unicor, had nearly $500 million in sales to federal agencies in 1996. While most government executives probably don't give much thought to the Federal Prison Industries, the products of prison labor often are right under their seats. Furniture is Unicor's biggest business, making up more than 40 percent of its sales. Two of Second Lady Tipper Gore's side chairs recently were reupholstered at Petersburg, and Attorney General Janet Reno holds meetings over a conference table refinished there.
Unicor, which sells only to the government, also has extensive clothing and electronics business lines. Federal law enforcement officials chasing down criminals rely on ballistic vests made by people they have put away, and soldiers wear Kevlar helmets and combat fatigues made by prison laborers. In a typical government office, items ranging from the laser printer's toner cartridge to the cubicle partitions to the director's high-backed swivel seat were created in federal prison factories.
Officials of the Bureau of Prisons say FPI is their top-priority program. That bothers both private industry representatives, who say they're losing jobs to felons, and some agency officials, who are required to buy from Unicor.
The intensity of the debate is likely only to increase, as FPI continues on a course to expand employment by 30 percent over the next three years, pushing into federal markets already occupied by private companies.
"They usually steamroll their way into any industry they want," says Brad Miller, government affairs manager at the Business and Institutional Furniture Manufacturers Association, which has rallied its members against Unicor's expansion of its office furniture business.
Steve Schwalb, FPI's chief operating officer, says he is bothered by the virulence of the criticism it receives, and notes that industry representatives have stopped Unicor from entering new markets that would put employees of private companies out of work.
"This is not like we've been selling illegal arms to the Iranians," he says during an interview in his office six blocks from the Capitol. "What we're doing here is implementing public policy."
Keeping Prisoners Busy
Federal Prison Industries was created in 1934. Justice Department officials worried that idle convicts were making the federal prisons increasingly dangerous, and argued they needed the government, which was growing due to the creation of Franklin Roosevelt's New Deal agencies, as a customer for factories they would build to keep prisoners busy.
Over the years, FPI has grown to include more than 17,000 prisoners, supervised and trained by 1,450 corrections officials at prisons across the country and 250 more in FPI's Capitol Hill headquarters. With the prison population continuing to expand, FPI expects to get even bigger in the years ahead.
While the agency is funded solely from its sales and is designed to act like a corporation, some contend that its true cost to the government comes from selling its wares to agencies at prices higher than private vendors would offer in competitive procurements. To guarantee work for prisoners, FPI's enacting legislation requires agencies to buy whatever it sells, unless they receive waivers from FPI.
These waivers are relatively easy to get. The Army, for example, has received them to outfit its recreational hotels, where a less institutional feel is sought. In 1996, FPI approved 92 percent of 10,600 waiver requests, giving up $410 million in business out of $446 million in requests received. If FPI denies a waiver, agencies can appeal to the agency's ombudsman, Jan Hynson.
Prison officials say that without the current system, they would need to hire more staff with less money to keep inmates busy with make-work jobs. But industry officials argue that FPI creates jobs inside prisons at the expense of those in the outside world.
While the majority of federal prisoners spend their workdays helping run their institutions by mowing, landscaping and cleaning, this work cannot accommodate everyone. FPI picks up the slack, employing one fourth of all able-bodied federal prisoners. And, since the program pays 23 cents to $1.15 an hour, compared to 12 cents an hour for most other tasks, it provides the hope of upward mobility for prisoners in other jobs. At Petersburg, 200 prisoners are on the waiting list to work in the electronic cable, printing and furniture refurbishing factories.
The money helps pay for phone calls and toiletries, which makes inmates less likely to rob each other, and lifts the burden on prisoners' families, according to inmates.
"It really takes the worries away," says Michael Holzendorf, who's eight years into an 11-year sentence for dealing crack, and works as a solderer at Petersburg.
And, if prisoners are required to compensate victims, half of their salary goes toward restitution.
The work also provides training in basic job skills, prison officials say. "It really feels good when somebody's probation officer calls back and tells you he's doing OK on the street," says Tim Dycus, an offset press supervisor at Petersburg.
Aside from specific job skills, the program teaches the work ethic to inmates who have never held a job before, Schwalb says.
The program may also help to keep ex-convicts from committing crimes and winding up back in prison, according to a study commissioned by the Bureau of Prisons.
The study, updated in July 1996, tracked 7,000 ex-convicts following their release, to see how many got jobs and how many stayed out of prison. After an average of 10 years, inmates who worked in an FPI factory were about one-fifth less likely to end up back in a federal prison-not miraculous, but nothing to turn your nose up at either, says Schwalb, particularly given the great concern over stemming the tide of repeat offenses.
The cause for the lower recidivism, FPI officials suggest, is the work ethic, job skills and job experience inmates get from the program. Petersburg's cable factory manager Bob Werlinger learned to solder in a $3,000 class; his wards learn for free.
The other side of the coin, however, is that FPI uses only labor-intensive practices, so an ex-convict is likely to feel like a 19th-century cobbler walking into a Nike factory when he looks for work in his trade.
Also, the study did not examine whether prisoners who make it in FPI, which is more demanding than other prison employment alternatives, already were less likely to become repeat offenders.
While rehabilitating prisoners, FPI has worked to repair its own image with federal purchasing officers.
In July 1996, Master Chief Petty Officer John Hagan, the Navy's senior enlisted sailor, told the House National Security Committee that Unicor's "product is inferior, costs more and takes longer to procure. Unicor has, in my opinion, exploited their special status instead of making changes which would make them more efficient."
The Defense Logistics Agency found that Unicor's prices were an average of 13 percent higher than those of commercial companies, according to a letter George Allen, the deputy commander of the agency's Defense Personnel Support Center, wrote in May 1996 to Rep. Van Hilleary, R-Tenn.
Unicor also delivered 42 percent of its orders late, compared to an industrywide average delinquency rate of 6 percent. And, wrote Allen, "there is no practicable way to terminate a contract or to recoup monies that would normally be owed by a commercial firm."
In a 1993 report examining the quality of electric cable sold to the Army between 1986 and 1990, the Defense Department's inspector general found that 31 FPI contracts were reported to have quality deficiencies, nearly twice the rate of the next most problematic customer.
"The stuff was poor quality," says Derek Vander Schaaf, the deputy Pentagon inspector general at the time. Vander Schaaf said the investigation uncovered no battlefield failures, but was nonetheless eye-opening. "If you can't compete at 50 cents an hour for labor, guys, come on."
It wasn't just electric cables that had government buyers shaking their heads.
"UNICOR chairs used to routinely break soon after they were put into service [and] case goods such as desks routinely had Formica peeling off the edges," R.W. Thomale, acquisition chief of the Veteran Affairs Medical Center in Dallas, wrote last September to Vice President Gore's National Performance Review.
The NPR has recommended that the Justice Department end FPI's preferred status and force it to compete with private companies. The department has not adopted the recommendation, and Congress is just now preparing to consider the idea. But rather than waiting for the ax to drop, FPI officials have taken it upon themselves to improve the quality of their goods and guarantee they'll be delivered within 30 days.
As a result, the change in FPI "has been something akin to the transformation of the ugly duckling into the beautiful swan," according to Diane Broadway, a Navy contracting officer in Chesapeake, Va.
"They are as reliable as any other vendor, and their prices are comparable or cheaper," says Peter Isaacs, deputy commander, of the Army's family and support center, Alexandria, Va., which outfits the Army's guest hotels.
Still, a trip to a Staples office supply superstore in Washington shows that Unicor still has some problems with price competition.
Unicor charges $545 for a 5-foot-wide wood-laminate desk; Staples' most expensive desk, made of solid wood, lists for $400. Unicor asks $397 for a high-back ergonomic office chair with lumbar support and adjustable arms; Staples' most expensive ergonomic chair goes for $300. Unicor sells hard-plastic stacking chairs for $52; Staples will sell you one for $20, or if you want upholstery, for $50.
If you want top-of-the-line products, however, prison labor can accommodate you better than Staples. Buying from the prisons, you could outfit your office with a $1,020 6-foot-wide oak desk, a $66 desk lamp, a $37 clock and a $64 oak-veneer trash can.
A Department of Veterans Affairs study found that these prices costs the VA an extra $4 million a year just on sheets and pillowcases, money that could go toward providing better care for veterans, a spokeswoman says.
Given that wage rates for prisoners are a fraction of what they are in the outside world, you might wonder whether FPI could do its job for less, and pass along the savings to the rest of the government.
Schwalb says emphatically no. Just seven cents of every dollar FPI takes in goes to pay prisoners, he says. Another 22 cents is needed to pay the staff providing the intensive training and security FPI's unique workforce demands. About 50 cents goes to materials and to outside companies that assist FPI, and the rest goes to overhead.
Despite FPI's claims of quality improvements and fair prices, some agency officials are still rankled by the requirement to buy from FPI, unless they apply for a waiver.
Earlier this year, Navy forwarded draft legislation to the Office of the Secretary of Defense asking for an appeal to end Unicor's special status. The proposal was circulated through the Pentagon, but never made it out of the building to Capitol Hill.
It might not take the backing of the Pentagon to push through a change in FPI's status, however. Sen. Carl Levin, D-Mich., in 1996 introduced a bill to strip FPI of its preferential status, but the legislation never made it to a vote. This year, however, Levin reintroduced the bill and he expects the Senate to take it up.
But on the House side, Rep. Bill McCollum, R-Fla., chairman of the House Judiciary crime subcommittee, wants to more widely spread FPI's benefits. "Prisoners who are employed by Unicor have lower rates of recidivism than those prisoners who are not," McCollum said at a hearing last September. "Assuming that this public safety benefit would continue to occur if a higher percentage of . . . inmates were employed by Unicor, the important question becomes how to accomplish this."
Trade associations ranging from the American Defense Preparedness Association to the furniture makers group would rather see legislators clip FPI's wings.
The problem is that every time FPI expands, it bumps into private companies already selling in the federal market. "A prison work program must be conducted in a manner that does not unfairly eliminate the jobs of hard-working citizens who have not committed crimes," says Levin.
Schwalb says he tries to mitigate the impact of expansion by moving into areas where government is increasing its outsourcing, such as data processing, and into areas where expanding commercial sales can relieve the pressure on private vendors, like furniture.
Nevertheless, many companies claim to have been crippled, or at least grazed, by FPI's actions, and those companies usually aren't in the Fortune 500.
The clothing makers at the Selma, Ala.-based American Apparel Inc. felt the pinch last year, when FPI's board approved expanding production of battle-dress uniforms to 25 percent of the Pentagon's purchases, according to the company's president, Rick Cippele.
Before the expansion, FPI made just a small percentage of the military's uniforms. Set-asides for small and disadvantaged businesses accounted for 50 percent, and American Apparel got most of the rest.
FPI's expansion squeezed American Apparel's share of the market to one-fourth. Partly as a result of that decision, Cippele says, the company has been forced to cut employment from 1,300 to 900 in the past few years. "We're talking about principally working mothers and heads of households," Cippele says. He acknowledges, however, that the North American Free Trade Agreement's easing of Mexican imports and a decision by the federal Committee for Purchase from People who are Blind or Severely Disabled to set aside a small share of coat production for the companies it speaks for also had an affect on American Apparel's sales.
Some companies that stood their ground and managed to keep FPI from moving into their industries have been left feeling like they barely dodged a freight train.
General Engineering Services, a small business in Forest Park, Ga., was forced to take FPI to court in 1996 to keep it from moving in on its missile and ammunition container business, a line of work that has practically no customers outside the government. FPI executives argued that since DoD plans to increase missile purchases, there would be enough room for them to get into the market. But after the court challenge, the FPI board decided the market in fact was shrinking, and rejected the plans for FPI to get into this line of work.
Schwalb concedes that FPI has the potential of stepping on some toes; that's why its staffers conduct market studies and its oversight board holds hearings and weighs each proposed new or expanded product line to balance the prisons' needs against the potential harm to private firms. Since 1990, the board has rejected four of 21 proposals; one was withdrawn; three approved after being modified; and 13 approved as requested.
As the prison population continues to grow and the federal budget stays flat, however, pressure will continue to mount for FPI to branch out into already occupied markets.
Currently, FPI employs 17,000 of a total of 96,000 federal prisoners. But by 2000, the federal prison population is expected to grow to 127,000, and FPI says it will need to add another 3,000 jobs in order to make sure that all federal prisoners have something to keep them occupied. If the Bureau of Prisons takes over responsibility for Washington, D.C.'s prison in Lorton, Va., as U.S. Budget Director Franklin Raines proposed in January, another 2,000 jobs will need to be added. The bottom line: FPI's work will need to grow 30 percent in three years.
Mina Raskin, Schwalb's executive assistant, says FPI has not studied how this will translate into sales, since the value of new or expanded product lines is an unknown. But, if the increase in sales matches the increase in the workforce, FPI will be pulling in $650 million by 2000.
Already, FPI is showing signs of pushing up against its limits.
In January, Schwalb withdrew a proposal to make American flags for the government, just one week before the board was scheduled to hold a hearing on the matter. Although FPI's market study showed it would not put current flag makers out of business, the idea of convict-made U.S. flags flying over the Capitol and draping the coffins of soldiers was too much for critics to bear, and under the increasing "volume and tenor" of these complaints, Schwalb said, he withdrew the proposal.
Another proposal that struck opponents of FPI as ironic was to have inmates make steel doors for prisons.
This proposal was approved in May 1996, even though steel door makers argued that prisoners might use the opportunity to give their fellow inmates a shot at premature freedom. Bill Knesek of Weeper Metal Fabricators Corp., told the board that inmates could sabotage the doors with shoddy welding, or steal the special screwdrivers used to assemble them.
FPI officials, however, maintain that they so far have done a pretty good job at keeping tools, and prisoners, from disappearing, and they plan on keeping it that way.
Jeff Erlich is a staff writer for Defense News in Washington.