Correctional Facilities Industry Report

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Source: http://www.myledlightingguide.com/images/installations/alcatraz.jpg

April 19, 2017

Prepared by Blair Seaman
Introduction
The correctional facilities industry has remained fairly static over the past few years, seeing
relatively slow growth in revenue. The industry is responsible for owning, managing and leasing
prisons, community correctional facilities, and juvenile detention centers. Changes in
incarceration and crime rates heavily affect this industry, and have driven profitability down in
recent years. This document provides a comprehensive look of several aspects of the
correctional facilities industry, including key drivers and trends, when considering the transition
to privatization of facilities. Ensuing a brief overview of the industry, the major aspects outlined
in this document are prevalent companies, products, financial performance, target markets,
market drivers, global themes and trends, and industry threats and opportunities.

Industry Overview
The correctional facilities industry generates 5.3 billion dollars in revenue annually, with an
expected 0.2% increase for the year. Crime rates are expected to continue to fall by 0.5%
annually, resulting in a tepid revenue growth forecast for the near future. Over the next five
years, revenue is expected to grow an annualized 0.6%, approaching 5.4 billion dollars in
revenue for the industry. This decelerated growth of the industry may be a result of decreases in
both incarceration and crime rates nationally. The correctional facilities industry has few
prevalent companies. The leading companies operate facilities and supply services to roughly
62% of the industry market, with the remaining 38% being operated by over 400 companies
(OHollaren, 2016). Barriers to entry in this market are high, and larger, established companies
have easily taken control of the market share. Smaller companies struggle to sustain profits with
large initial capital costs and heavy government regulation. Correctional facilities are owned and
operated by companies on behalf of government agencies with the intent of generating revenue
from the select market (OHollaren, 2016).

Prevalent Companies
The correctional facilities industry contains a relatively small number of prevalent companies,
with three main companies controlling 62% of the market share (OHollaren, 2016). The
IBISWorld report includes all aspects of the correctional facilities industry, including suppliers of
support services rather than solely including facility owners. CoreCivic, formerly known as
Correction Corporation of America, holds the highest market share for the industry. Geo Group
and Management & Training Corporation trail behind with smaller, but reputable market shares.
CoreCivic and Geo Group currently lead the industry, as demonstrated in the figure below.
Figure 1

Source: www.ibisworld.com

Figure 1 displays the market share for the most prevalent companies within the correctional
facilities industry. Although there are hundreds of companies involved in the market share, this
pie chart identifies CoreCivic and the Geo Group as the most notable companies in the
correctional facilities industry. Hundreds of smaller, less established companies make up
roughly a third of the market share within this industry.

CoreCivic is a large corporate enterprise that offers several services to correctional facilities that
allow for its large market share. Their main services offer corrections and detention
management, real estate for facilities, and rehabilitation and reentry facilities (CoreCivic, Inc).
The Geo Groups diverse service offerings has also allowed their large market share in the
industry. The Geo Group operates as a real estate focused entity, with a special emphasis in
the reentry domain of the industry (GEO Group, Inc.).

Services and Segments

Community Correctional Facilities
Community correctional facilities are much less costly than their more formal, prison
counterparts. These facilities have fewer restrictions than more common correctional facilities,
and there are often no correction officers. The theory behind these facilities is that therapy, job
placement, and other services may help inmates achieve successful reentry into society.
Currently, these facilities account for 27.7% of industry revenue (OHollaren, 2016).

Security Level Prisons

Correctional facilities are also segmented into three security brackets: minimum, medium, and
maximum. Minimum security prisons are often work and rehabilitation oriented, with a fairly low
staff-to-inmate ratio. This segment accounts for 6.1% of industry revenue and has remained a
stable segment of the industry. Medium security prisons often offer work and treatment
programs, but do not offer the same freedoms that less secure facilities might. This segment
accounts for the largest amount of industry revenue, at 63.6%, with increased use due to
overcrowding. Maximum security prisons are much more restrictive, with inmates rarely let out
of their cells. These facilities never permit inmates to leave the premises, and offer the least
amount of training programs for inmates. This segment accounts for roughly 2.6% of industry
revenue (OHollaren, 2016).

Target Markets
State and Local Governments
The correctional facilities industry specifically targets state and local governments because they
are aware that they need somewhere to house their offenders. Specifically, at the end of 2014
30 states housed a portion of their prisoners in private facilities, creating a large market for the
industry. A combination of swelling prison populations and tight budgets has also expanded the
market for contracts with privately managed facilities. As a whole, this market accounts for 52%
of the total industry revenue (OHollaren, 2016).

Immigration and Customs Enforcement

As the problem of illegal immigration has developed, efforts to detain these individuals has also
expanded. Immigration and Customs Enforcement has seen a surge in the number of illegal
immigrants in their custody due to the recent crackdown on illegal border crossing by the federal
government. With the efforts to control illegal immigration only expected to increase, this offers a
very strong market for the correctional industry to focus on. Currently, the ICE market accounts
for 21% of the total industry revenue (OHollaren, 2016).

US Marshals Service
The United States Marshall Service is responsible for the enforcement attached to the
operations of the United States federal courts. However, the USMS does not own or operate
any of its correctional facilities itself. As such, it relies solely on federal, state, and privately
owned facilities to house its offenders, accounting for 14% of the industry revenue (OHollaren,
2016).

Federal Bureau of Prisons

The correctional facilities industry targets the Federal Bureau of Prisons as an entity to manage
and oversee facilities. The Bureau of Prisons contracts with private correctional facilities to
provide rehabilitation services to prisoners. Once again, overcrowding in government owned
facilities has pushed the market towards the privatization route. Although total federal prison
populations have declined in recent years, the BOP oversees 170,000 inmates, accounting for
13% of the total industry revenue (OHollaren, 2016).

Key Market Drivers

Incarceration Rate
One of the main determinants of demand for services within the correctional facilities industry is
the incarceration rate. As prison populations rise, facilities become overcrowded and state and
federal governments are driven to employ a greater number of industry services (OHollaren,
2016). On average, total incarceration- including state prisons, federal prisons, and local jails- is
about 670 inmates per 100,000 residents (Ingraham, 2017).

Government Consumption and Investment

As the industry takes a turn towards privatization, government consumption and investment will
become even more vital to its success. Privately managed facilities earn all of their revenue
from their contracts with federal and state governments. Therefore, as federal and state budgets
change, correctional facility contracts may not receive the same investment as prior years
(OHollaren, 2016).

Crime Rate
Understandably, the crime rate also plays a key role in the correctional facilities industry. As the
crime rate increases, simultaneous increases in the incarceration rate are expected. Greater
levels of occupancy within correctional facilities stimulates the demand for the industrys
services. However, the crime rate has shown a downward trend for the past five years, and is
expected to continue to decrease in the near future (OHollaren, 2016). Therefore, as the crime
rate decreases further it could pose as a threat to the industry.

Global Themes and Trends

Universal Privatization
With the hope of decreasing both costs and overcrowding in prison populations, several
countries have mimicked the United States shift to privately owned correctional facilities.
Specifically, at least eleven countries, spread across five continents, are involved in some
degree of prison privatization (Mason, 2013). Currently, Australia leads the world in proportion
of prisoners held privately, as demonstrated by figure two.

Figure 2

Source: www.sentencingproject.org

Figure two displays the percentage of prisoners held privately in various countries across the
globe. Interestingly, while privatization has expanded greatly, it is most concentrated in
predominantly English-speaking nations. While the United States maintains the highest number
of privately held prisoners, New Zealand, England and Wales, Scotland, and Australia maintain
larger proportions of prisoners held privately (Mason 2013).

Public Scrutinization
With the decrease in the incarceration rate leaving several correctional facilities empty, some
facilities have opted to sell out to private companies. However, this suggestion has received
lash back from advocacy groups worldwide. These groups are wary of the secretive process of
privately owned facilities after reports of violations of inmate-care standards in their facilities
(Lauer, 2017). As more reports come out about the mistreatment of inmates in privately owned
facilities, the public resistance is likely to continue.

Limited Globalization
Due to the nature of this service industry, there is no international trade, and thus little
globalization. However, Geo Group, the second largest industry company, operates several
correctional facilities in Australia and South Africa (OHollaren, 2016). Although recents trends
towards privatization may encourage more industry players to extend their operations overseas,
globalization has not increased significantly in the past five years (OHollaren, 2016).

Industry Threats and Opportunities

Falling Incarceration Rates
The incarceration rate is one of the main drivers of the correctional facilities industry, and the
United States is currently in a continued decline unlike any other since the 1960s. The
incarceration rate peaked during 2007 and 2008, but has consistently fallen ever since
(Ingraham, 2017). This poses as a major threat to the industry as a decrease in inmates
amplifies the hefty fixed costs associated with operations.

Overcrowding in Prison Populations

Despite the recent decrease in the incarceration rate, the United States still leads the world in
terms of our proportion of imprisonment compared to our total population. This has lead to a
huge problem of overcrowding within our correctional facilities. With many inmates facing
lengthy sentences, one individual suggests that we focus on rehabilitating rather than jailing to
approach this issue (Pollock, 1991). Regardless, the lack of adequate space to accommodate
our current prison population is concerning for the industry.

Fostering Employment Growth

Due to increased costs for energy, health care, and wages, many small companies have been
looking for ways to cut costs in production. One of the ways business owners have been
experimenting with this has been by employing inmates currently serving sentences. Although
federal law still requires that companies pay minimum wage, companies can save considerable
amounts on health care, vacation time, turnover, and other payroll costs. Aside from the benefit
to the companies, employed inmates are often required to surrender a percentage of their
earnings to prison operators. This small percentage could in turn generate millions of dollars of
revenue for the industry (Farrell, 2008).

Summary
The correctional facilities industry is a multi-billion-dollar industry. Annual revenue is
approaching 5.3 billion dollars with a steady projected annual increase set to mimic increases in
GDP. Prevalent companies within the industry are CoreCivic and the Geo Group. Together, the
two companies account for over half of the industrys market share. The industry is composed of
community and security level prisons. Recent domestic and global trends address privatization,
public scrutiny, and globalization. Overall, the industry is healthy, but expected to experience a
tepid growth.
 References

CoreCivic, Inc. (2017). Company Details. Retrieved April 21, 2017 from Mergent Online
Database.

Farrell, M. (2008, August). Putting prisoners to work. Forbes. Retrieved April 21, 2017,
from https://www.forbes.com/2008/08/18/prison-small-business-ent-manage-cx
_mf_0818prisonlabor.html

GEO Group, Inc. (2017). Company Details. Retrieved April 18, 2017 from Mergent
Online Database.

Ingraham, C. (2017, January 04). The incarceration rate is falling-and Trump's

law-and-order politics likely won't stop that. The Washington Post. Retrieved April
21, 2017, from https://www.washingtonpost.com/news/wonk/wp/2017/01/04/the-i
ncarceration-rate-is-falling-and-trumps-law-and-order-politics-likely-wont-stop-tha
t/?utm_term=.048f44206b2d

Lauer, C. (2017, March 31). Empty jails hope to cash in on illegal immigration
crackdown. Associated Press: Financial News. Retrieved April 18, 2017 from
Access World News database.

Mason, C. (2013, August). International growth trends in prison privatization. Retrieved

April, 21, from The Sentencing Project website: http://sentencingproject.org/wp-
content/uploads/2015/12/International-Growth-Trends-in-Prison-Privatization.pdf

O'Hollaren, K. (2016, November). Correctional facilities in the US (Rep. No. 56121).

Retrieved April, 2017, from IBISWorld database.

Pollock, E. J., & Geyelin, M. (1991, Jan 07). U.S. incarceration rate highest in world.
Wall Street Journal. Retrieved April 18, 2017, from ProQuest database.