Punishment & Profit - The U.S. Private Prison Industry

As the United States presidential election has come into full swing, mass incarceration and the state of the prison-industrial complex has become a topic of national concern. The issue has risen into the forefront of the American conscience in result from various forms of public critique. From writers, like Michelle Alexander and Ta-Nehisi Coates, who have described the ways in which people of color have suffered from the era of mass incarceration. To television shows, like Orange is The New Black (produced by Netflix (NASDAQ: NFLX)), which has sparked concern regarding the living conditions of inmates, and has shed further light on the effectiveness of private prisons. Effectiveness is an issue which has only come under greater scrutiny particularly when, in 2010, three inmates (two of which were convicted murderers) escaped from a private prison in Arizona. A fiasco which resulted in a three week national search, and eventual shootout between the inmates and the local police. In turn, this has inevitably begged the question of whether private institutions should be the bearers of public safety? When Democratic presidential nominee, Hillary Clinton, answered this question in the negative, the two largest private prison solution providers in the US, Corrections Corporation of America (NYSE: CXW) and GEO Group (NYSE: GEO) fell by 6% and 4.2% respectively. Publicly traded private prison corporations have outperformed the S&P 500 on a dividend yield basis over the last five years; however, as the era of mass incarceration may come to an end so too may the performance of the industry.On September 14, 1986, President Ronald Reagan and First Lady Nancy Reagan spoke somberly to the nation, referencing the war that was currently being waged on American soil; The War on Drugs. The national incarceration rate increased dramatically during the Reagan administration, largely due to the radical criminalization of drug use. Today, the United States incarcerates a greater percentage of its population than any other country in the world. It has led to significant pressure on already constrained public budgets for the development, operation, and management of prisons throughout the U.S. Private sector prison solution providers, such as GEO and CXW, have dramatically benefited from the era of mass incarceration. It is industry which is now worth a little over $3.5 billion. The primary revenue stream for each of these companies is the securing of public contracts to develop and manage prison facilities, therefore there is a direct relationship between the number of individuals imprisoned on a yearly basis, and the potential revenues which can be achieved by these companies. The confluence of states eagerly attempting to find lower cost solutions to public managed facilities, and the rapid rise of the prison population, has produced significant, predictable, revenue growth for the major players in the sector. Private prison facilities have acted not only as providers of public safety, but also as providers of cheap labor. Corporations and public organizations alike have contracted prison labor to produce a range of goods, from handcuffs and belts for police officers, to holiday packaging for Starbucks coffee cups.

Private prison providers have become uniquely positioned within the private and public sectors, and have leveraged this position to have significant lobbying power within the U.S. political system; a phenomenon which has since been defined as the prison industrial complex. The existence of the prison industrial complex, coupled with the aforementioned concerns has led to a dramatic shift in public sentiment and public policy. Institutional investors have been pressured by their constituents to divest from private prison holdings, protesters gathered outside of an Whole Foods Market in Texas, demanding the company cease their labor contract with a private prison program, and a mere few months ago, President Obama announced the release of a little over 6,000 prisoners from federal prison.

The uncertainty regarding both the political and economic landscape in the U.S. has produced a radically different environment for the private prison industry. Swift changes in policy demonstrate the political threat which is currently imposed upon the industry. Greater political focus on remedying the state of incarceration in the United States through changes in policy will have direct ramifications on the rate of imprisonment in the U.S., and the ability of private prison providers to win public contracts. Economically, private prison providers have benefited from low interest rates, borrowing at a low cost of capital in order to develop new prison facilities. However, all good things must come to an end, and as interest rates rise, the debt structure of each of these companies will be critical for continued operational efficiency. In turn, the future performance of the private prison industry is heavily dependent upon business as usual within U.S. politics, however, if this presidential election can be described as anything, it is not business as usual.

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