John Palatiello testifies on Federal Prison Industries reform
Statement of the U.S. Chamber of Commerce, presented by John Palatiello for the hearing on Prison Industry Competition before the House Small Business Committee
November 21, 2002
Mr. Chairman and Members of the Committee, I am John Palatiello, Executive Director of MAPPS, a national association of firms in the mapping, spatial data and geographic information systems field. I am also a member of the U.S. Chamber of Commerce and have the privilege of serving as the Chair of the Chamber's Privatization and Procurement Council. It is on the Chamber's behalf that I appear before you today.
The U.S. Chamber is the world's largest federation of business organizations, representing more than three million businesses and professional organizations of every size, sector and region of the country. The Chamber serves as the principal voice of the American business community. Over ninety-six percent of the Chamber members are small businesses with fewer than 100 employees. The Chamber commends this Committee for its dedication and interest in holding this hearing on Federal Prison Industries (FPI) competition. The Chamber respectfully submits these comments for the record.
The Need for Reform
In 1934, President Roosevelt established FPI as a government-owned corporation. FPI was given special "mandatory source" status in the government procurement process, forcing government agencies in need of a product to purchase that product from FPI. No consideration can be given to a private sector competitor unless that agency asks FPI for an exception from its own monopoly. FPI has unfettered discretion in making waiver decisions; FPI does not have to grant a waiver even if the agency demonstrates that a commercial product or service is of higher quality, can be obtained quicker and acquired at a substantially lower cost. It is ironic that there are laws prohibiting the U.S. from importing goods that are made by prisoners in other countries, yet we have laws that require our own federal government to buy goods and services from prisoners in this country.
Each year, FPI expands to produce even more goods and services. In 1994, FPI was involved in only 85 markets with sales totaling $390 million. Today, FPI employs over 20,000 inmates and produces over 300 products and services that in 2001 alone totaled nearly $600 million worth of sales to the federal government, making it the 39th largest Government contractor. Which makes FPI a formidable competitor for even a large private sector enterprise, much less a small business. Evidence indicates that FPI will continue its expansionist behavior, by exploiting its mandatory source status and increasingly encroaching on private sector industries in order to be a profitable enterprise, forcing small businesses to halt production lines, lay off employees and close their doors for good.
Ensuring a level playing field for the private sector in the federal procurement process by ending FPI's unfair advantage is a major priority for the Chamber. The Chamber has long-standing policy that the government should not perform the production of goods and services for itself or others if acceptable privately owned and operated services are or can be made available for such purposes. The private sector should be allowed to compete fairly with FPI for federal contracts – plain and simple – by eliminating the requirement that government agencies purchase products and services from FPI.
Reform of FPI starts with the realization that FPI currently exceeds its statutory authority. They can set any price they want within the range of market prices and have no incentive to charge the lowest price. FPI, rather than federal agencies, determines whether FPI's products and services and delivery schedule meets the agency's needs. By granting FPI a monopoly, issues of price, quality and efficiency fall by the wayside at the expense of U.S. taxpayers. FPI is also limited to no more than a reasonable share of the government market, but in over 100 military apparel items, they have determined that 100% of the market is reasonable. If 100% is not more than a reasonable market share, what is?
Recent aggressive expansion by FPI into the services arena has caused great concern in the business community. Even though FPI's authorizing statute does not specifically mention services, FPI has implied that it is a "preferential source" for services and used this to enter into sole source contracts with Federal agencies for services. They are quickly expanding their services portfolio, which includes printing, environmental testing, recycling, mapping and imaging, distribution and mailing, data conversion, and call center and help desk support.
Mr. Chairman, this expansion is alarming not only because it adversely impacts the private sector but also because it is wholly inappropriate to allow inmates access to classified or infrastructure information used in mapping projects or the personal or financial information of private citizens used in call center operations. We should be extremely cautious with the information we arm our federal inmates with in preparation for life beyond bars.
While we are empathetic to FPI's goal to employ federal inmates to reduce recidivism by providing vocational and remedial opportunities while incarcerated, it should not be done at the expense of law-abiding, taxpaying businesses. It is unfortunate that in today's society we are faced with an increasing inmate population. However, we believe other sources of work opportunities for inmates should be explored that do not infringe upon the private sector's opportunities to compete for government contracts and threaten the general safety of our citizens.
Legislative reform addressing these concerns is way overdue and more oversight by the FPI Board and Congress is needed now. H.R. 1577 has been introduced in the House and strikes a proper balance between reforming FPI's unfair monopolistic practices and providing adequate programs designed to rehabilitate inmates and reduce recidivism.
Legislative Initiatives
For many years, the Chamber has been a leader in the broad-based Competition in Contracting Act Coalition, comprised of business, labor and federal manager representatives, which advocate comprehensive, fundamental reform of FPI. The Chamber and the Coalition strongly support H.R. 1577, the Hoekstra-Frank-Collins-Maloney Federal Prison Industries Competition in Contracting Act Coalition of 2002. Mr. Chairman, we would like to thank you and Ranking Member Velasquez for cosponsoring this bill and for your continued support of comprehensive FPI reform. This bipartisan legislation would impose overdue and much-needed restraints on the unfair competitive practices of FPI that inflict damage on law-abiding businesses and the workers they employ.
The Competition in Contracting Act would require FPI to be a more responsible supplier to Federal agencies and the taxpayer, and would allow the private sector to compete fairly with FPI for federal contracts by eliminating the requirement that government agencies purchase products from FPI. The legislation provides a 5-year transition period for FPI as it adapts to the loss of its preferential status and adjusts to competition. It would protect taxpayer dollars and federal agency operating budgets by eliminating FPI's ability to overcharge for its products. Agency contract officers, not FPI, would determine if FPI's offered product best meets buying agencies' needs in terms of quality and time of delivery.
The bill would provide inmates additional opportunities for remedial and vocational education, which have been demonstrated to be more effective in reducing recidivism. It also provides inmates broader access to release preparation programs, including programs focused on the development of job-hunting skills thereby increasing the likelihood of securing post-incarceration employment. H.R. 1577 allows for partnerships with non-profit organizations, such as Habitat for Humanity, which provides inmates alternative work opportunities to apply skills learned in vocational training.
The U.S. Chamber of Commerce strongly supports this legislation because we believe that the private sector can better address the needs of federal agencies by providing higher quality goods, in a more timely fashion, and for a lower price. The time has come for Congress to address this much-needed reform to ensure fair competition for American businesses in the federal procurement process and to curb FPI's entry into the commercial marketplace. While such comprehensive reform is our ultimate goal, there are several administrative actions that can be implemented by the White House and the FPI Board to provide interim relief.
Administrative Actions
The Fiscal Year 2002 Defense Authorization Act provides some relief from FPI's monopoly for the Department of Defense (DOD). Section 811 of this Act requires DOD to conduct market research before purchasing products that are listed in the catalog for the Federal Prison Industries (FPI), to determine whether the FPI product is comparable in price, quality and time of delivery to products available from the private sector. If the FPI product is not comparable, DOD must use competitive procedures to acquire the product without securing a waiver from FPI itself. Enactment of such language is a significant step forward but relief for all federal agencies is absolutely necessary.
The Chamber encourages the Administration to implement such a policy that would allow a waiver of FPI's mandatory source status for any Federal agency that can make a determination that the product offered by FPI is not comparable to products available in the private sector in terms of price, quality, and time of delivery. Federal buying agencies, not FPI, should be empowered to decide what best meets its needs and should be afforded maximum flexibility to examine existing marketplace opportunities and purchase products on a competitive basis, thereby obtaining the "best value" for taxpayer dollars.
FPI's desire to expand into the commercial marketplace is an alarming development that is seen as a call to arms by industry. The Chamber for three reasons opposes FPI's move into the commercial marketplace. First, the decision to expand into the commercial marketplace is in conflict to the clear language of FPI's enabling legislation and beyond the discretion of the Board. Second, it is a reversal of more than sixty years of public policy. Finally the creation of a state run enterprise, competing with its own citizens, is a policy so at odds with the role of government in a free society, that it is a decision best left to Congress.
Title 18 U.S.C. section 4122(a) specifically states:
Federal Prison Industries shall determine in what manner and to what extent industrial operations shall be carried on in Federal penal and correctional institutions for the production of commodities for consumption in such institutions or for sale to the departments or agencies of the United States, but not for sale to the public in competition with private enterprise.
Now however, despite this seemingly clear prohibition on entering the commercial market found in the statute, recent evidence shows that FPI has engaged in expansionist practices. Sixty-five years of public policy should not be overturned, especially without public debate. The United States should not be selling commercial services in competition with law-abiding taxpaying businesses, using prison labor that is paid no more than $1.25 an hour. FPI's expansion in the commercial market is a dramatic shift in policy, and in conflict with the clear language of 18 U.S. C. 4122(a). We urge that the Administration and the FPI Board reject any project in which Federal inmates provide services in the commercial marketplace, while the Administration undertakes a comprehensive legal review of FPI's expansion into commercial market sales of inmate services.
FPI's Board of Directors has been given broad statutory authority by Congress to decide what goods FPI will be authorized to produce and the amount of a product FPI will be permitted to offer. The Board is to ensure that FPI employs the maximum number of inmates possible without adversely impacting the private sector. Despite this broad statutory authority, it seems that FPI staff has, to date, been able to usurp a great deal of the Board's authority in practical terms. Today, FPI staff appears to be making decisions on product line expansion, drafting impact studies that justify the expansion, and then actually drafting the Board's decision authorizing the expansion. We have urged the FPI Board to reclaim its authority to minimize FPI's adverse impact on the private sector. We also urge that the Board adopt a policy that it will deliberate and take such actions in a public forum.
Conclusion
Thank you for the opportunity to appear before you today on behalf of the U.S. Chamber of Commerce and submit these comments on behalf of Chamber members that rely on an efficient, fair competitive process in providing the federal government with goods and services to maintain and grow their businesses. We appreciate the Committee's continued examination of FPI's impact on the private sector, particularly small businesses, and dedication to implement fair, comprehensive reform. I'd be happy to answer any questions you might have. Thank you.