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US States Rattle Cup in Break With Prisons

Stocks in this article: GEO CXW STI

By the Financial Times ( Financial Times) -- U.S. states are poised to privatize scores of prisons as they try to close budget deficits, creating significant new markets for the industry's biggest private contractors.

In Florida alone, 29 state prisons are due to be privatised -- the largest prison privatization program in U.S. history, says Tobey Sommer, an analyst covering the private prison market at SunTrust Robinson Humphrey, an investment bank based in Atlanta.

Arizona recently finished public hearings on a plan to add thousands of privately operated prison beds. And in Ohio last month two companies won contracts worth $200 million to run five of the state's 32 correction facilities. Other states are expected to follow as private contractors pitch themselves as a solution to cash-strapped states' fiscal woes.

The Ohio and Florida plans have a new twist that Sommer believes could be copied by other states hoping to streamline their budgets. Instead of outsourcing only newly built prisons, they plan to outsource existing beds as well. "This may be a blueprint to close other states' budget gaps" Sommer said.

The Florida Department of Corrections has until the end of the year to complete the process and private operators must guarantee cost cuts of 7 per cent or more. Proponents say it will save the state $22 million a year.

"Probably 5% of prisons in Florida are currently privatized," said JD Alexander, a Republican senator in the state, who has been the major advocate of the scheme. "This expansion of privatization will bring it to one-third," he added.

But not all agree. "It simply does not save money," said John Rivera, president of the Police Benevolent Association, which represents the state's correction officers and opposes privatization. "They told legislators and the community that they would save millions per year and now they are already $25 million over budget."

In the 20 years to 2007, the national prison population trebled to 1.6 million people, with 9% in private facilities. On average, it costs about $25,000 a year -- though some states average up to $45,000 -- to keep an inmate housed. But debate persists over how much privatization actually saves.

E-mails from the Florida Department of Corrections' chief deputy secretary identify $25 million in losses that the state would incur from compensation paid to 3,800 workers if they lose their jobs.

Alexander, however, points to Texas, a state with a high number of private prisons, as evidence that a lower cost per inmate can be achieved. Proponents argue that private companies can run prisons more cheaply by cutting workers' wages and benefits.

But some analysts disagree, saying any savings are mitigated by higher employee turnover and more lawsuits because of a lack of sovereign immunity.

"The claim that private corporations can do same job more cheaply and still generate profits for stockholders is pretty implausible," said David Fathi, director of the national prison project for the American Civil Liberties Union.

Two companies dominate the private prison sector: Corrections Corporation of Americaand GEO Group. In August 2010, Geo bought the third public company that operated in the market, Cornell, for $730 million in stock and cash, creating a "duopoly". Neither company would comment.

Private prisons' star has risen over the past three decades as the war on drugs, which began in the 1980s, saw the introduction of mandatory minimum sentencing.

At the same time, private companies have pushed further into state prisons from their strong position in the federal system. They began by soliciting speculative prison building projects at the county level, creating what has become known as the "prison bubble". The bubble has now burst. Incarceration rates have not been increasing as fast over the past five years, and in 2010 fell for the first time in 20 years.

But private prison corporations are still trying to expand the market for their services, and have been buoyed by developments in Florida.

"They are sophisticated in their efforts to generate business," said Fathi. "The overwhelming cause is fiscal crisis. States are realising money is finite, and spending $40,000 a year on each prisoner is very expensive, stuff you won't have for teachers and schools, for example."


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