Private prisoner operators rely on government contracts for a proportion of their revenue. Recent government policy changes threaten the stability of private prisoner operators’ revenue. On August 17, 2016, the United States Justice Department announced that the Bureau of Prisons would phase out the use of privately run prisons. Deputy Attorney General Sally Yates announced this policy change in a memo that instructs Bureau of Prison officials to decline to renew the contracts of private prison operators or to “substantially reduce its scope in a manner consistent with law.” Yates continued to explain that this measure, “is the first step in the process of reducing – and ultimately ending – our use of privately operated prisons.” Yates explained that the change in policy is necessary because the contracted facilities do not save enough money and consistently fall below certain safety standards. The Department of Homeland Security Secretary Jeh Johnson announced similar sentiment on August 29, stating that the agency would, “review our current policy and practices concerning the use of private immigration detention and evaluate whether this practice should be eliminated.”
Both statements reflect a sharp change in government policy. State and federal governments first began using private prisons in the early 1980’s to save money and to combat a rising prison population. Governments outsourced to private prison companies to either build their own facilities to house inmates or to run existing government facilities. The private prison model was intended to save taxpayer money and to relieve overcrowded prisons. While the proportion of prisoners incarcerated in private prisons has consistently hovered around 1% of overall prisoners from 1990 to 2014, the growth of the overall prison population from 743,000 in 1990 to 1.5 million prisoners today, has greatly increased private prisons’ influence and revenue.
Private prisons began restructuring to take advantage of their newfound demand. In 1994 the Geo Group held an initial public offering, opening their company to outside investors. After divesting healthcare assets, the company restructured into a real estate investment trust (REIT) in 2013. Opponents of private prisons believe that the shift from private companies to publicly held entities coincided with growing complaints about their effectiveness and safety. Governments have more closely evaluated the conditions of private prisons as safety violations have called into question whether publicly held companies should house government prisoners.
The stock market reacted swiftly to The Justice Department and Homeland Security’s policy change. The Geo Group ($GEO) and Corporate Corrections of America ($CXW), two REITS that operate over 75% of the market for private prisons, lost 39.6% and 46.9% of their market caps respectively on the day that the Justice Department announced their policy change. Secretary Jeh Johnson’s subsequent announcement further hurt The Geo Group’s and CCA’s stock prices. With such a dramatic policy shift and a corresponding impact, investors and analysts must grapple with the inevitable question: How quickly will private prisons be phased out and can prison operators adjust their revenue streams to avoid overdependence on government contracts?
I argue that amidst a number of headwinds, privately held prison companies will continue to maintain steady revenue in the short term and the recent drop in $GEO and $CXW are likely overdone. While not immune to long term changes, the diverse geographical and operational offerings, the timing of potential phase outs, and political difficulties indicate that private prisons and support facilities will continue to operate in the short term and allow future diversification to prevent overdependence on federal government contracts.
Diversified Geographical and Operational Offerings
Some private prison operators contain diverse revenue streams. In 2015, The Geo Group derived 15% of its revenue from the Bureau of Prisons, 12% from the U.S. Marshals, and 18% from the U.S. Immigration and Custom Enforcement (ICE). Over half of The Geo Group’s revenue came from state and international facilities and non-residential offerings such as day reporting centers and location monitoring services. While private prison operators are exposed to the changing sentiment surrounding the effectiveness and desirability of their facilities, their revenue streams are largely geographically confined to each municipality. Even if the Bureau of Prisons is successful in phasing out all of The Geo Group’s federal contracts, contracts in other municipalities like Florida or Australia will likely remain unaffected.
In addition to geographical diversity, some prison operators have been developing diverse revenue streams. GEO Care, responsible for The Geo Group’s reentry facilities, day reporting, and youth services, has grown from monitoring 70,000 individuals in 2012 to 137,000 in 2015. These services are not dependent on federal government contracts and are less susceptible to government competition. While the revenues derived from this business segment are proportionally the same as in 2012, the expanded use of GEO’s offerings imply that its revenues can adapt to shifting government sentiment.
Timing of Phase Outs
Even if substantial phase outs occur, most will not affect revenue in the short term. Below is a table listing the Bureau of Prison facilities that the government may phase out. Only one of the facilities, D. Ray James Correction Facility, in Georgia, is up for renewal this year. The Geo Group announced on September 30th that despite the Justice Department’s change in policy, it negotiated a two-year contract extension with the D. Ray James Correction Facility. The contract will cover 1800 prisoner beds, less than the 1962 prisoner beds in the previous contract. This development indicates that, regardless of the government’s official position, private prisons will likely continue to negotiate short term contract extensions that will keep revenue steady in the short term.
|Institution Name||Capacity||When Contract Could Run Out||Owned or Managed?|
|Big Spring Correctional Center||3509||2017||Owned|
|Great Plains Correctional Facility||1940||2020||Owned|
|Reeves County Detention Complex R1/R2||2407||2017||Managed|
|Reeves County Detention Complex R3||1356||2017||Managed|
|D. Ray James Correction Facility||2847||2016||Owned|
|Moshannon Valley Correctional Center||1878||2021||Owned|
|Rivers Correctional Institution||1450||2017||Owned|
Accommodating existing prisoners could delay planned phase outs. The GEO Group owns five out of the seven Bureau of Prisons facilities that face contract phase outs. To accommodate the prisoners phased out of GEO’s care, the federal government would have to possess the capacity to take on these additional prisoners. Instantly accepting all of The Geo Group’s inmates could put a strain on the system and undermine the federal government’s goal – to make prisons more efficient and safe. Even if phase outs do occur, they are likely to be delayed to safely accommodate an influx of federal prisoners.
Private prisons’ reliance on government contracts makes them active political actors. Overhauling the government’s use of private prisons will face numerous political obstacles as the private prison players have fought hard to establish themselves as formidable Washington insiders. In the weeks following the Department of Justice and Homeland Security announcements, the bipartisan supported crime bill that would have reduced federal minimum sentences failed to pass the House of Representatives. Geo Corp rallied 5% on this news and as of October 15, is up over 19% since the day after the Department of Justice announcement.
Despite the market’s initial reaction, recent developments indicate that private correctional operators can survive the threat of the phase out of government contracts. Private prisons will likely be able to extend government contracts in the short term, while shifting their revenue streams to depend on alternative opportunities such as home monitoring and day reporting reentry services. While the government’s recent announcements mark a stark change in policy, diversified private prisons will survive and adjust to changing sentiment.