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Prisons for Profit: Don't Hope for a Breakout

NEW YORK (TheStreet) -- There are a lot of publicly traded companies in seemingly strange businesses, but Corrections Corporation of America (CXW) takes the cake, building and operating prisons.

This is nothing new, either; the company has been in business for almost 30 years, having opened its first facility in 1984.

Of course, the notion of a for-profit company running correctional facilities, which has historically been a function of state, local or the federal government, is not without its share of controversy. Yet the company has continued growing through the years, and now operates 67 facilities in 20 states and the District of Columbia, with a total capacity of 92,000 beds. The company owns 47 of those facilities; which makes for an interesting albeit somewhat strange real estate portfolio.

I became acquainted with this company in 1990, and will never forget the first CXW annual report that I saw; it featured reproductions of handwritten letters from Corrections Corp. inmates heaping praise on the company for the skills and training provided within the facilities.

The cover was even more interesting; displaying a letter from the mother of an inmate, praising the company for the kindness shown to her by the prison guards. It was addressed to "Warden." You can't make this stuff up.

While Corrections Corp has built a thriving business, it has had its share of stumbles along the way. In 1997, at a time when I had a position, the company separated into two publicly traded entities CCA Prison Realty (a real estate investment trust or REIT) and Corrections Corp. which served as the operating company. Just two years later, those companies combined to form New Prison Realty, also organized as a REIT.

This episode resulted in the company taking on loads of debt. Operating performance declined, and the company nearly went under. The company survived, but it was a long, slow climb back and begged the question, should for-profit companies be involved in prisons.

Certainly one of the drivers to the company's success has been the cost advantages it can offer over government-run facilities; which may spur further growth as states grapple with budgetary constraints. In 2007, Pew Charitable Trusts estimated that the average annual operating costs per inmate were $24,000 per year for government run prisons, and $16,000 for privately run prisons. Building costs of privately run facilities have also historically been lower, as have the lead times for construction.

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