The Business Model Of Private Prisons

According to a report from Think Progress, there are between 1.57 and 2.4 million people incarcerated in the U.S. prison system. These prisoners are there for a multitude of different crimes ranging from drug possession and petty larceny to grand theft auto and murder. With that many people in prison (not to mention the number of people in jail, something different than federal prison) there needs to be plenty of prisons to house the inmates. This has given rise to the private, or for-profit, prison system.

The private prison system raises a lot of questions. One that many people wonder about is how can a private company legally incarcerate people? Isn’t that the government’s job to house and hold prisoners? The answer is yes, but the government does contract out quite a bit of their work.

A public prison is one that is completely owned by the government. This means that they have to provide the prison building, staff the guards and administration, and oversee all of the prisoners and everything that happens in the prison. Even with a public prison, many of the services are outsourced to private contractors such as the food service, cleaning services and maintenance.

With a private prison, many of the burdens are taken off the government and put onto a private company. Instead of all the business that goes along with running a prison, the government simply has to supply the prisoners, and oversee the prison. Now that begs the question of how a for-profit prison makes money. (For more, see: Prison Stock 'That's Hot' [CXW,GEO].)

A public prison is naturally non-profit. The end goal is to house prisoners in an attempt to rehab them or remove them from the streets. A private prison, on the other hand, is run by a corporation. That corporation’s end goal is to profit from anything they deal in.

In order to make money as a private prison, they receive a stipend from the government. This money from the government can be paid in a multitude of different ways. It can be based on the size of the prison, based on a monthly or yearly set amount, or in most cases it is paid based on the number of prisoners that the prison houses.

Let’s suppose that it costs $100 per day to house a prisoner (assuming full capacity, including all administration costs), and the prison building can hold 1,000 inmates. A private prison can offer their services to the government and charge $150 per day per prisoner. Generally speaking, the government will agree to these terms if the $150 is less than if the prison was publicly run. That spread is where the private prison makes their money.

As in any business, saving money wherever possible increases the bottom line. Expanding also allows the business to bring in more money, but it needs capital to do that. (For more, see: Private Prisons Have Future Growth All Locked Up.)

As a business grows it can make the choice to go public. Essentially, this does a few things for the company that it can’t do as a privately held business.

With most businesses, exposure is the key to growth. The more people that know about the company, the more sales they can do. However, with a private prison exposure isn’t something they really need. Instead, they need capital boosts for two other reasons.

If a prison can “mark up” a prisoner $50 per day, that means their prison can theoretically earn $50,000 per day on a prison that houses 1,000 inmates. If they can land another contract with the government to build a prison in the neighboring state, they could start earning an additional $50,000 per day by maxing out that prison. By going public, they can see a sudden influx of money that would allow them to build that second prison.

Still, there is a seedier reason to go public for a private prison. In order to stay in business, these prisons need a constant stream of inmates coming in to replace those that have served their sentence. This means that laws have to be enforced, contracts renewed, and in some cases, laws more strictly enforced. To do so they have to buy politicians. This process is called lobbying and is often frowned upon.

On the surface, a private prison seems like a great idea. If it costs the government $200 per day to house a prisoner, and a private company comes along and says they can do it for $150 per day, then why not save the government money while allowing a corporation to profit? The problem lies in the economics behind prisoners.

The goal of the prison system is to rehabilitate socially deviant individuals. Since prison has over a 75% recidivism rate, those goals have been doubted. Beside that point, if prison were 100% effective, the private prisons would be working themselves out of business. This makes one wonder: is prison supposed to rehab the individual, or is it supposed to earn money? If the goal is to earn money, then a high prison population is the end goal.

Another problem that arises is the fact that these are for-profit businesses. This means if they can cut services from their list, then they save money. Suppose a prison cuts out the cleaning services and the cost per prisoner drops to $90 per day. They instantly earn an additional $10 per day; a number that can add up quickly if there are 1,000 prisoners in the facility. Cutting cleaning makes the company more money: but provides unhealthy and inhumane living conditions for the inmates. Cutting costs ultimately affects the prisoners and diminishes the quality of their living quarters.

Finally, the law needs to be structured in such a way that allows a steady stream of new inmates. This ties back to that lobbying aspect: stricter laws mean more people in the system. More people in the system means more money for the prison. Many have argued that this is the entire reason that the war on drugs was started: another set of laws that could incarcerate thousands of people every single year.

There are currently around 150,000 inmates housed in about 130 private prisons. They represent roughly 8 to 10% of the prisoner population. Many of these prisons save the government money, but some actually cost more per prisoner than a public facility would cost.

The capitalist mindset says any time an industry can be run privately it is better for the economy. The socialist mindset says that the government should be supplying those services. The realist says that the prison system is overcrowded as it is.