Ways to Privatize

For-profit prison projects typically follow one of the following models:

For-profit Development

A for-profit firm finances or arranges for financing, and designs and builds a correctional facility:

• A for-profit firm may build a facility with an agreement that the host jurisdiction or another entity (usually a federal agency) will supply inmates and pay a per diem or monthly fee. The prison is usually owned by the for-profit firm or a development corporation that floated a tax-exempt bond to fund its construction. In many cases, the host jurisdiction will purchase the prison over time through lease/fee payments.ⁱ



• Alternatively, a for-profit firm may build a facility to accommodate anticipated overflow from one or more jurisdictions. This type of prison is built on speculation, meaning the facility was planned, financed and constructed without a contractual agreement with any government agency to house prisoners there. While this type of development can be the most risky for all parties involved, because it generates sole-source emergency contracts at high per diem rates, it tends to be the most lucrative for the for-profit companies.¹⁴ Jurisdictions may pay high prices to solve short-term deficiencies. These high per diems allow a for-profit firm to rapidly recoup its investment.

For-profit Management

A for-profit firm manages and operates a new or existing federal, state or local facility. Besides managing the secure functions in a facility, the firm may also be responsible for the institution’s ancillary services (e.g., food services, medical services, etc.). The firm will either perform these services directly or subcontract with another firm. The big companies usually provide most of the services in facilities they manage while smaller companies may sub-contract work to specialized for-profit providers.

For-profit Purchase of Public Prisons

A for-profit company purchases an existing public correctional facility from a jurisdiction. When private companies own a correctional facility, it is more difficult for governments to cancel the contract. This form of prison privatization has become more common with the advent of prison Real Estate Investment Trusts (REITs). The principal business strategy of a prison REIT is to build or acquire correctional facilities, and lease the bed space to its management affiliate. Prison REITs allow a management firm, like Wackenhut or CCA, to liquidate its assets (in this case correctional facilities), and also provide it with a source of self-funding.

In January 1999, CCA’s shareholders consummated a very complex merger of CCA and its REIT, CCA Prison Realty Trust. The surviving company was Prison Realty Trust Inc., a prison REIT, and CCA became its operating subsidiary. This merger went against conventional wisdom in the industry, and CCA/Prison Realty experienced organizational and financial difficulties as a result of the merger. In an attempt to rectify its organizational problems, a year later, CCA/Prison Realty attempted to restructure itself. The proposed reorganization included the resignation of two top executives (CCA co-founder Doctor Crants and his son Robert Crants III) and a structural relapse to the company’s original non-REIT configuration.¹⁵ The purpose of the proposed reorganization was to provide the company with more liquidity and cheaper access to capital.

ⁱ Although this is typically the arrangement, there does not seems to be too many prisons that havebeen purchased from the for-profit vendors because privatization is still relatively new and the facility ownership is a source of leverage for the for-profit operators.

¹⁴ Jim Macdonald, “Dynamics of Growth of the Privatization Industry,” presented at 4th Annual Privatizing Correctional Facilities, sponsored by World Research Group, Las Vegas, Nevada, September 24, 1999, pg. 14.

¹⁵ “Prison Realty Restructures,” CNN, December 27, 1999.