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Is The For-Profit Prison Industry A Blemish On Your Portfolio?

By  +Follow August 7, 2013 8:24AM
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Incarceration is perhaps not the gentlest topic of conversation, but it has made more than a blip on the radar of the mainstream press recently.

This is especially the case in California, where a prisoner hunger strike against cruel and unusual detention practices is about to turn one month old. Concurrently, the pressure on Jerry Brown has increased after the US Supreme Court upheld a lower-court order mandating that the Governor figure out some way to reduce the state’s prison population by 10,000 inmates before the year is over.

It is commonly known but no less shocking that the United States incarcerates more people per-capita than any other country on the face of the planet, including those frightful totalitarian nations we always hear about such as Russia, China, and Iran.

Some statistics make this contention more palpable (for better or for worse): the United States is the world’s third most populous country, with just north of 300 million citizens, or about 4.5 percent of the world’s total population, a far cry from China’s 19 percent (1.3 billion people) and India’s 17 percent (1.2 billion people). And though crime rates have declined steeply over the last 30 or so years, incarceration rates have gone up, to the extent that the US is responsible for nearly 25 percent of the globe’s entire prison population.

The reasons for this state of affairs are numerous and beyond the scope of the current writing. Suffice it to say that the growth of the prison population over the last three decades has put considerable strain not only on taxpayers, but also on Federal and state detention facilities.

One of the responses to this unfortunate challenge has been to turn to the private sector. Indeed, private prisons have become a multi-billion dollar industry since the Corrections Corporation of America (CXW) was established just over 30 years ago.

The website of the investigative journalism non-profit ProPublica published an article last year with some telling statistics. As of December 2010, 1.6 million people were incarcerated in the US, 128,195 of which were being held in private facilities (a number that increased 37 percent between 2002 and 2009).

With no less than 66 facilities and 91,000 available beds across 20 states, the Corrections Corporation of America commands an enormous share of this market. The $3.27 billion market-cap company netted $156.8 million on revenue of $1.76 billion. The previous year, CEO Damon Hinninger compensation for his work in 2011 totaled $3.7 million. The CCA has spent over $18 million in lobbying US politicians over the last decade.

The other publicly traded incarceration firm is the Geo Group Inc. (GEO) , a $2.46 billion market-cap company. In 2012, the company earned $134.7 million on revenue of $1.5 billion. The Geo Group operates 65 correctional facilities throughout the land, with a total of 65,700 available beds, and has spent almost $3 million on lobbying over the last ten years. CEO George Zoley’s compensation for the year 2011 was $5.7 million.

These two companies are the biggest, best known private prison concerns in the US, but the industry is far more expansive than that, including multitudes of companies small and large, publicly traded and not. In the wake of numerous scandals that have been coming to light on an ever more regular basis, however, there has been an increasing pushback against the for-profit detention system.

Just one small but potent incident paints a vivid portrait of the dangers that can result from the conflict of interest between the bottom line and law & order. In 2011, Pennsylvania judge Mark Ciavarella was sentenced to 30 years in prison for his role in a scheme to mete out the harshest, longest possible sentences to the juveniles who had the misfortune to pass through his courtroom. Ciavarella was found guilty of accepting over $1 million in bribes from local and privately owned juvenile detention facilities in exchange for more inmates.

Not only was this act thoroughly repulsive in itself, but it resulted in the overturning of some 4,000 convictions over a five year period, from 2003 to 2008. Aside from the trauma to which this enormous number of young people was subjected as a result of being institutionalized under such conditions, it also means that taxpayers were billed not once but twice.

But the problems with private prisons are larger, and exist on a structural level. Unlike correctional facilities run directly by federal and state governments, private prisons enjoy immunity from federal disclosure laws, and as such are not subject to Freedom of Information Act requests. This means that abuse, malfeasance, and other sorts of neglect can be swept under the rug.

Aside from the obvious ethical/moral reasons to avoid investing in the incarceration industry, however, there are fundamental reasons as well. The “hacker” group Anonymous just recently released a rather smart and well-researched report that deserves a look from investors who have CXW or GEO in their portfolios, or are considering it.

While the report cites many of the objections mentioned in this article, it also discusses the fact that the states who have made the most use of the CCA’s services are the same states that are now trying their hardest to reduce the prison population rather than imprison more people, as overcrowding has become too expensive from both the budgetary and societal perspectives. Overall, prison populations have declined throughout the country over the last three to five years, and the CCA itself has admitted that less prisoners will hurt their bottom line.

 

[Image Courtesy of Flickr Creative Commons]

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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By  +Follow August 7, 2013 8:24AM
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