In our spring issue, we introduced you to Federal Prison Industries and the unique advantage that Federal Prison Industries enjoys, the requirement in 18 U.S.C. § 4124 that agencies must purchase from Federal Prison Industries the goods that Federal Prison Industries chooses to offer. As the size of the federal market declines, this absolute preference has had devastating effects on private industry, particularly so in industries where the market is for unique federal items, i.e., mail bags and ammunition boxes, or where federal requirements predominate, i.e., systems furniture.
In our last issue, we reported that Federal Prison Industries had proposed revisions to its regulations that will correct one problem: to base its decisions for production of new products on discrete Federal Supply Classification (FSC) codes, rather than on Standard Industrial Classification (SIC) codes, which understate the impact on industry, this because SIC code data is collected by industry, rather than by product.
We’re happy to report that the Joint has gotten the point, both about the use of SIC codes, and about the impact of its production decisions on items with limited markets. Additionally, proposals to eliminate the absolute preference have been initiated in Congress.
Last August 7th, Federal Prison Industries published proposed regulations to tie new product definitions to FSC codes rather than SIC codes. Industry comments were received on October 8th. Mr. Todd Baldau of Federal Prison Industries’ Planning, Research, and Activation Branch tells us that a decision regarding the new product definitions is not likely in the near future. According to Mr. Baldau, Federal Prison Industries needs a new system due to the impending federal statistical move from SIC codes to the North American Industrial Coding System (NAICS). Since NAICS employs industry data from Canada and Mexico as well as the United States, a switch to the NAICS classifications will broaden the range of error significantly. Therefore, the need to adopt FSC codes, due to more specific classifications (product, rather than industry), is greater than ever.
In the March 22nd edition of the Commerce Business Daily, Federal Prison Industries announced a proposal for manufacturing a new product: aluminum and steel shipping and storage containers. SIC codes of different products were combined to meet the product definition: all steel and aluminum storage and shipping containers, including missile and ammunition containers. Industry commentators noted that this aggregation of SIC codes resulted in an overestimated market. Industry commentators also objected to the treatment of these products as interchangeable although they are materially different in design and manufacture. In the November 15th edition of Commerce Business Daily, Federal Prison Industries’ Board of Directors announced its decision that Federal Prison Industries should not enter this market.
Three considerations led the Board to believe that Federal Prison Industries’ entry would unduly burden private industry. First, the nature of these products limits sales primarily, if not solely, to federal agencies. For example, there are not many private companies in need of missile containers, and to allow Federal Prison Industries an absolute preference to sell to the one and only customer would have a tremendous effect. Second, most of the manufacturers in this industry are small businesses that could not survive the loss in sales. Third, future growth in the industry is unlikely due to decreased military purchases.
A look at recent history shows that the Board’s predominant consideration here was the absence of another market for these products. Out of 12 proposed new products since 1990, the Board has refused only 4 cases. Besides this decision on shipping and storage containers, the proposed products were: (1) army tents, (2) army shoes, and (3) army boots. In each of these instances, no private market whatsoever existed for the product. This shows, at least before the Board, that vendors will likely not be able to bar market entry absent a showing that the federal agencies are either the only possible customer or the most substantial customer. In all other situations, the Board has allowed new or expanded production despite the high burdens placed on industry.
Legislative efforts to remove Federal Prison Industries’ absolute preference are underway. Representatives Jan Meyers (R-KS), Mac Collins (R-GA), and Pete Hoekstra (R- MI) have joined with the members of the Competition in Contracting Act Coalition to introduce H.R. 3745, The Competition in Contracting Corrections Act. This bill would repeal the absolute preference and prevent Federal Prison Industries from dominating any market by limiting it to twenty percent of federal purchases from any single SIC code. Senators Carl Levin (D-MI) and Spencer Abraham (R-MI) have introduced similar legislation, S. 1797.
The representatives have already voiced their determination to see that the issue remains in the spotlight. In a letter to Joseph M. Aragon, Chairman of Federal Prison Industries’ Board of Directors, Congressman Pete Hoekstra noted his intent to request that GAO conduct an independent evaluation of customer satisfaction with Federal Prison Industries’ products. As we noted in our spring issue, despite agency objections, Federal Prison Industries has maintained that its products are high quality. Congressman Hoekstra intends to gather data to either refute or support Chairman Aragon’s contentions.
The fight against Federal Prison Industries’ absolute preference is gaining momentum. Beyond these Congressional efforts, the Clinton Administration has shown support for reform. Vice President Gore would eliminate the absolute preference as part of his reinventing government plan. Also, the Administration has said that it will present reform proposals for the House and Senate Judiciary Committees in the next session of Congress. And public awareness of the problem has been heightened, thanks to a recent 60 Minutes segment. The crux of the 60 Minutes presentation was that although there are some perceived benefits to providing work to prisoners, this should not be at the expense of the private sector, and that Federal Prison Industries should be forced to compete for agency requirements just as other vendors.
— Katherine S. Milin
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