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Costs and benefits of privatization can be tricky to assess.

Two cost and performance comparisons of four prison sites--one privately operated and three publicly operated--reached differing conclusions about the extent of the cost savings of privatization. This suggests one important lesson: Cost comparisons are deceivingly complex, and great care needs to be taken when comparing the costs of privately and publicly operated prisons.

The overall percentage of adults in private prisons is relatively small--7 percent of the 1.5 million prisoners in the U.S., according to the Bureau of Justice Statistics' most recent survey of prisons. (1) But the actual impact for some states may be much greater. In New Mexico, for example, private providers house more than 40 percent of the state's inmates. (2) It is thus vital that policymakers have the best possible cost and quality information when they are making decisions regarding privatizing prisons in their jurisdictions. The question is, what criteria should prison administrators and policymakers use when making cost and quality evaluation?

To help find an answer, in 2007, the National Institute of Justice (NIJ) assembled researchers, prison officials, private service providers, and proponents and opponents of prison privatization to discuss this complicated and often controversial issue. At the core of the meeting were two cost and performance analyses of the same prison sites conducted by different parties. The prison sites included one privately run site in Taft, Calif., that consists of a low-security facility and a minimum-security facility, and three publicly operated sites in Elkton, Ohio; Forrest City, Ark.; and Yazoo City, Miss., each with a low--and minimum-security facility. While no consensus was reached about the optimal design for these types of evaluation studies, or whether prison privatization is a net benefit to correctional systems, participants at the meeting noted the value of further research to sort out these complex issues.

Due to the expense of conducting evaluation studies, it is uncommon to have competing research analyses like these. However, in 1996, the U.S. House of Representatives directed the U.S. Bureau of Prisons (BOP) to perform a five-year prison privatization demonstration project of the privatized low--and minimum-security prisons in Taft. The BOP had previously privatized its halfway houses, but this was the first privatization of its prison facilities. Although Congress did not request a formal evaluation of the Taft facilities, BOP leadership decided that an evaluation of cost and quality would help them make better decisions regarding privatization. The BOP provided funding to NIJ to secure proposals for an evaluation of the Taft site and BOP sites with similar inmate populations and architectural designs. Abt Associates was chosen to conduct the study, which took place from 1999 to 2004. (3) At the same time, the BOP's Office of Research conducted its own independent study to understand how to conduct this new type of research. The study had two components: a performance or quality analysis (4) and a cost analysis. (5)

The Abt and BOP studies offer the research and public policy communities a rare opportunity to consider the different approaches that were used, why the results were different and how this can inform the prison privatization debate. Someone not familiar with the literature on privatization might assume that cost comparisons are accomplished without controversy or ambiguity. One key lesson learned from these privatization studies is that comparisons are not so simple.

Consider, for example, daily costs. Table 1 lists per diem costs for the four locations as analyzed by the Abt and BOP researchers. According to the Abt analysis, the Taft site was much cheaper to run every year than the three publicly operated sites. In 2002, for example, Abt reported that the average cost of the three public sites was 14.8 percent higher than Taft. According to the BOP analysis, however, the average cost of the public site in 2002 was only 2.2 percent higher than Taft.
Table 1. Average Per Diem Costs Per Inmate (in dollars) for Fiscal
Years 1999 to 2002

Prisons           1999          2000          2001          2002

               Abt    BOP    Abt    BOP    Abt    BOP    Abt    BOP

Publicly operated
Elkton        39.72  35.24  39.77  34.84  44.75  36.79  46.38  40.71
Forrest City  39.46  35.29  39.84  35.28  41.65  37.36  43.61  38.87
Yazoo City    41.46  36.84  40.05  34.92  43.65  37.29  42.15  38.87

Privately operated
Taft          33.82  34.42  33.25  33.21  36.88  37.04  38.37  38.62


Why were the Abt and BOP cost analyses so dramatically different? And more important, what policy implications does this have? There are two primary reasons: 1) the way inmate population sizes were treated and 2) what was included in overhead costs, such as indirect costs of office supervision, computer services and budget development.

Regarding inmate populations, Taft had, on average, approximately 300 more inmates each year than the three publicly operated sites throughout the study period. Therefore, the private service provider for Taft benefited from economies of scale that reduced average costs. To adjust for such economies of scale, the BOP researchers made adjustments to the expenditures. Abt, in its analysis, however, did not consider economies of scale, choosing instead to use the actual average per diem amount that the BOP paid the Taft contractor. In other words, the BOP estimated what expenditures would have existed for identically sized prisons, and Abt based its analysis on actual expenditures. Both sets of researchers believed that their methods yielded the best comparison.

With respect to overhead costs, different approaches by the two research groups again led to different findings. Basing its analysis on the extent to which the government actually provided resources to support the Taft operation, Abt concluded that only a bare minimum of support was provided. It therefore reported a 100 percent savings of overhead costs. The BOP, on the other hand, assumed that many overhead costs (planning, auditing, and other central and regional operations) continued to be incurred by the government even if a private company was operating the prison. Therefore, the BOP researchers applied a 10 to 12 percent overhead rate (the average for BOP sites during the 1998 to 2002 study period), calculating privatization savings of 35 percent of overhead for that five-year period. The different underlying assumptions regarding overhead costs had significant implications for the bottom-line estimations of costs and savings. As previously noted, the assumptions made by Abt led to a finding of much less overhead for the Taft private provider, suggesting that the government could save a great deal of money by privatizing prisons. The assumptions underlying the BOP analysis were different and led to a less optimistic conclusion.

Unless policymakers are mindful of these subtleties in basic assumptions, they are not likely to delve deeply enough when considering taxpayer benefits of prison privatization. Prison administrators and policymakers considering privatization would be well advised to consider the specific analytic assumptions underlying any studies that they look at. Even if private and public prisons cost the same, it is important to know whether they perform at an equal level.

The Abt and BOP studies reported on objective indicators of performance. Some of these the public operations. One of the limitations of this particular set of studies was that there was no common audit procedure to compare the publicly and privately operated prisons. Prison audits of case management, safety, medical care and security are just some of the important dimensions that administrators use to gauge the performance of their institutions. Such audits could and should be used to compare privately and publicly operated prisons.

Despite differences in the approaches and assumptions used by Abt and the BOP, their reports represent two of the best prison privatization analyses performed to date. Administrators, policy analysts and researchers looking at prison privatization and the larger public policy issue of government outsourcing would benefit from a close consideration of the full reports.

ENDNOTES

(1) Sabol, W.B., T.D. Minton and P.M. Harrison. 2007. Prison and jail inmates at midyear 2006. Washington, D.C.: U.S. Department of Justice, Bureau of Justice Statistics.

(2) Terrell, S. 2007. Audit: N.M. private-prison costs soar. New Mexican, May 24.

(3) McDonald, D.C. and K. Carlson. 2005. Contracting for imprisonment in the federal prison system: Cost and performance of the privately operated Taft Correctional Institution, final report submitted to the National Institute of Justice, NCJ 211990. Cambridge, Mass.: Abt Associates Inc. (November). Available at www.ncjrs.gov/pdffiles1/nij/grants/211990.pdf.

(4) Camp, S.D. and D.M. Daggett. 2005. Evaluation of the Taft Demonstration Project: Performance of a private-sector prison and the BOP. Washington, D.C.: Federal Bureau of Prisons. (October). Available at www.bop.gov/news/research_projects/published_reports/pub_vs_priv/orelappin2005.pdf.

(5) Nelson, J. 2005. Competition in corrections: Comparing public and private sector operations. Alexandria, Va.: The CNA Corp. (December). Available at www.bop.gov/news/research_projects/published_reports/pub_vs_priv/cnanelson.pdf.

Gerry Gaes, Ph.D., served as director of research at the Federal Bureau of Prisons from 1988 to 2002 and was a visiting scientist with the National Institute of Justice from 2002 to 2007.
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Author:Gaes, Gerry
Publication:Corrections Today
Geographic Code:1USA
Date:Oct 1, 2008
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