At the beginning of the decade, the private prison industry was in a tailspin. After several profitable years in the 1990s, companies contracting prison beds to public corrections agencies were losing revenue at an alarming rate.
Capital earned during the 1990s had been poured into a speculative prison-building boom that backfired. State corrections agencies, a mainstay of what was then a relatively new industry, had begun pulling inmates out. There were too many prison beds and too few prisoners.
"They basically had overbuilt," said Anton Hie, an analyst in the Nashville office of Jefferies and Co. who covered industry leader Corrections Corporation of America and its closest competitor, the GEO Group, for several years through the end of 2006. "There was a lot of promise of new inmates that never came. ... It kind of all came crashing in."
Then, in early 2000, CCA announced a lucrative new contract. The Immigration and Naturalization Service was to house 1,000 detainees at the company's San Diego Correctional Facility in Otay Mesa, built as part of the late-1990s construction boom. The agency agreed to pay a per diem fee of $89.50 for every person held.
In a news release at the time, a company principal heralded the San Diego agreement as "one of the largest contracts ever to be awarded to the private corrections industry."
It was one of a series of federal contracts that experts credit with saving the private prison industry, and at the same time marking a turning point in the way that immigrant detainees -- illegal immigrants, asylum-seekers, legal residents appealing deportation and others -- are held.
"The private prison industry was on the verge of bankruptcy in the late 1990s, until the feds bailed them out with the immigration-detention contracts," said Michele Deitch, an expert on prison privatization with the Lyndon B. Johnson School of Public Affairs at the University of Texas in Austin.
As increasingly tough immigration laws have called for the detention and deportation of ever more immigrants, the demand for bed space by immigration authorities has helped turn what was once a dying business into a multibillion-dollar industry with record revenue and stock prices several times higher than they were eight years ago.
In San Diego, CCA is in the permitting process to build a nearly 3,000-bed facility that the company hopes will be used by U.S. Immigration and Customs Enforcement, or ICE. It would hold more than four times the detainees held in Otay Mesa now.
Federal contracts from three agencies -- ICE, the U.S. Marshals Service and the Bureau of Prisons -- account for 40 percent of the 2007 revenue of CCA, which controls almost half of the private prison beds in the United States. Thirteen percent of the company's revenue, which hit a record of nearly $1.5 billion last year, comes directly from ICE. The company reported a net income of $133 million last year.
The competing GEO Group, formerly known as Wackenhut Corrections Corp., credits the three agencies for 27 percent of its operating revenue last year, with ICE responsible for 11 percent. The company, which earned total revenues of $1.2 billion in 2007, runs the Western Regional Detention Facility in downtown San Diego, a U.S. Marshals Service prison from which ICE rents short-term space.
Other prison players that have benefited from immigration-detention contracts include the Cornell Cos., based in Texas, and Management and Training Corp., a privately held Utah company that in 2006 opened what is now the nation's largest ICE facility, a set of tentlike structures in Willacy, Texas, that holds 2,000 people and will soon hold more. A 1,086-bed expansion was completed in March.
Detention contracts are not the only ones fueling the recent growth of prison companies, which have benefited from other federal contracts while enjoying a resurgence in demand for state prison beds.
However, it's the federal contracts that pay best, experts say. Housing federal detainees typically brings in more per "man-day," an industry term for what is earned per detainee. Companies also house immigrants for other federal agencies. CCA and GEO Group, for example, contract with the Bureau of Prisons to house foreign-born inmates under a federal "criminal alien" program. Both companies contract extensively with the U.S. Marshals Service, which receives federal funding to hold a growing number of immigrants being prosecuted for illegal re-entry after deportation.
"The federal system over the last five to seven years has been by far the largest-growing part of the (private prison) system, and it is because of the immigrant-detainee population," Deitch said.
For the federal government, the appeal of contractors is obvious: According to ICE, the agency spent $119.28 per day on average last year to house a detainee at an agency-run facility, compared with $87.99 per day at a contract detention facility.
Empty Beds To Riches
The private prison industry as it exists today dates to the 1980s, when state governments were grappling with overcrowding. Tougher sentencing guidelines created demand for more prison space, but many states lacked the funds and political support to build it.
The industry did well meeting this demand for several years, but it was almost done in a decade later by overexpansion and other problems. By the end of the 1990s, the industry was in "capital destruction mode," said Hie, the analyst.
"They were victims of their own success," Hie said. "They had so much money to spend on new prisons that they went out and did it."
At the same time, the industry was rocked by a series of highly publicized escapes, riots and other scandals, among them a 1996 videotape showing inmates in a now-defunct firm's Texas prison being kicked by officers and attacked by dogs, which prompted an FBI investigation.
"Many states started learning that they were not saving money, and more importantly, that there were a lot of liabilities associated with privatization," Deitch said. "A lot of states stopped contracting."
CCA's stock value took a dizzying tumble, falling from a high of $70.13 on Jan. 1, 1998, to $1.15 on the same date three years later. In the third quarter of 2000, the company reported a net loss of $253.7 million.
Rival Wackenhut's stock price, while not nearly as high, dropped to less than a third of its value between early January 1998 and 2001. Some smaller companies went out of business, Deitch said.
Fortunately for the industry, the federal government began seeing a surge in demand around this time, fueled by federal drug-sentencing laws that had created more inmates and tougher 1996 immigration laws that made more immigrants deportable.
In 2000, the federal Bureau of Prisons entered into an agreement with CCA to house foreign-born convicts in a California City prison, initially built on speculation in the late 1990s to house state prisoners that didn't arrive.
The same year, CCA announced its immigration-detention contract in San Diego.
Since then, new immigration policies that focus on detaining and removing deportable immigrants have become commonplace, leaving federal immigration authorities with insufficient space to house them.
The industry leaders' stock prices have rebounded. Since 2001, CCA shares have split twice and multiplied tenfold, closing Friday at $26.17. The GEO Group, which changed its name from Wackenhut Corrections in 2003, has also completed two stock splits and seen its stock value jump from roughly $2.50 a share in early January 2001 to $26.76 Friday.
Meanwhile, the industry has broadened its political influence, spending more to lobby agencies such as the Department of Homeland Security and the Bureau of Prisons. CCA alone boosted its federal lobbying expenses from $410,000 to $3 million between 2000 and 2004, according to the Center for Public Integrity.
Immigration-detention contracts can make or break quarterly profits. In its fourth-quarter 2007 financial data, the Cornell Cos., which had flat revenue last year, partly blamed a $2 million loss on the withdrawal of ICE detainees from a troubled facility in Albuquerque, N.M.
CCA, meanwhile, credited part of its success last year to revenue from ICE moving into a Georgia prison on which construction began in 1999 but was suspended a year later for lack of clients.
A New Building Boom
Now, as in the late 1990s, the industry is on a building spree. CCA is building or expanding nine facilities around the country for federal, state or undetermined customers. This does not include the company's planned megaprison in San Diego, which has yet to obtain county approval.
In October, the GEO group announced it would add 1,100 beds to its ICE contract facility in Aurora, Colo. According to its most recent financial report from 2006, the company opened or expanded half a dozen facilities that year.
Unlike a decade ago, analyst Hie said, there is more demand to support the latest building boom. Strong demand also helps companies push terms favorable to them. "Take or pay" arrangements such as the one at Otay Mesa, where ICE must pay for a set occupancy level even if beds go unfilled, are commonplace.
The demand from ICE is staggering: Last year, all of the agency's 3,619 new detention beds were contracted.
Agency officials said there are no plans to build any more federally run detention centers, leaving contractors to fill the void.
During the February conference call, CCA executives told investors that ICE was planning to privatize three of its detention centers in California and Arizona. The agency has three facilities in these states -- in El Centro, San Pedro and in Florence, Ariz.
"We estimate the capacity is somewhere at 11,000 beds," said CEO John Ferguson.
Asked about this claim, ICE spokeswoman Pat Reilly in Washington, D.C., replied in an e-mail that the contractor was in error and no such plans were imminent. However, she added, "privatization is always an option."
Leslie Berestein: (619) 542-4579; email@example.com
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