Mr. Chairman, Members of the Committee. My name is Gary Engebretson and I am the President of the Contract Services Association of America. CSA is the nation’s oldest and largest association of government service contractors. We represent more than 250 companies and tens of thousands of employees. Our members perform services of every conceivable type, from low tech to high tech, for virtually every agency of the Federal government and scores of state and local governments.

I greatly appreciate the opportunity to be here today and to share with you our members’ views on the question of the Federal Prison Industries (FPI), also known as UNICOR, and its status as a mandatory source in the Federal procurement arena.

Created in 1934, FPI’s mission is to employ Federal prisoners to manufacture products and provide services exclusively for other Federal agencies. But as a mandatory source of supply, FPI has a virtual lock on the Federal market – even when price and quality comparisons demonstrate that the private sector is a better supplier. This ultimately translates into a loss of business for those companies that are traditional government suppliers. Indeed, the Federal Prison Industries has flourished into a $500 million per year operation that manufactures more than 150 products and ranks as the 54^th largest contractor to the Federal government.

How does this mandatory source status work? Current law and regulation obligates a Federal agency to look first to FPI to fulfill its requirements for a product – and to negotiate a contract with FPI on a sole source basis. The final determination of the price to be paid for its products is left to FPI. This is completely contrary to normal procurement practices where the private sector, when selling to the Federal government, is required by statute to sell at a fair and reasonable price established through competitive bidding.

In order to seek bids from the private sector, the agency must first obtain clearance or permission from FPI. A waiver does not need to be granted even when FPI’s product is more expensive, would take longer to be delivered, and does not meet the agency’s needs as effectively as a commercial item. I quote from the regulations, "purchases from other sources because of a lower price are not normally authorized and clearances will not be issued on this basis." (FAR 8.605(b) Clearances)

FPI has an additional unfair advantage over the private sector. It need not comply with the laws and regulations imposed on the private sector such as those governing minimum wage rates, retirement and other fringe benefits, insurance costs, and compliance with OSHA requirements. And, according to the General Accounting Office, the cost of prison labor ranges from .25 cents to $1.23 per hour.

FPI claims it can provide products of equal or better quality than the private sector; make deliveries as promptly as the private sector; and sell some products at a lower price than the private sector thereby saving taxpayer dollars. If these three statements are true, FPI would not need to have a "super preference" that allows them to force out the private sector and prevent companies from bidding on contracts.

Contrary to FPI’s assertions, GAO reported in April 1998 that the Federal Prison Industries cannot back-up its frequent claims about being a quality supplier to federal agencies, furnishing products that meet their needs in terms of quality, price and timeliness of delivery. Once FPI commandeers a product, it erodes, displaces or eliminates private sector competition and opens the door for it to raise its future prices.

The issue is becoming important to CSA members because FPI sees services as ripe for aggressive expansion. While the authorizing statute is silent with respect to services, FPI is already involved in numerous service-related activities including laundry services, distribution and mailing services, data services and telephone support services. To be more specific, on its website, FPI states that "medical facilities and VA hospitals that are trying to outsource their laundry functions can turn to UNICOR for their hazardous laundry needs;" the website further outlines exactly what FPI will provide. According to the FPI, there are currently three sites available for this type of service – Eglin Air Force Base in Florida, Fort Bliss Army Base in El Paso, Texas and Maxwell Air Force Base in Montgomery, Alabama.

Unfortunately, the approval process and the requirement for an adverse market impact study that affords some coverage for private sector manufacturers do not currently apply to services. While the mandatory source requirement does not strictly apply to services, it is implied and FPI has used it to enter into sole source contracts with Federal agencies for services.

Furthermore, as the Federal government moves to greater competitive sourcing of its commercial-type activities, it is my understanding that FPI wants to become the "first stop" for federal agencies when outsourcing those commercial-type activities currently performed by Federal employees and proposed for contracting out. FPI is seeking to obtain this mandatory status either through a statute or regulation (from the Office of Management and Budget).

CSA has actively promoted greater outsourcing and privatization of non-inherently governmental functions. There is an ever-increasing appreciation of the many benefits offered by thoughtful and aggressive efforts to competitively outsource the Federal government’s commercial activities to the private sector.

A number of proposals have been discussed that would require the government to competitively outsource its commercial activities where doing so represents the best overall value to the taxpayer. These measures also have recognized the importance of providing fair and appropriate soft landing policies to those Federal employees who are impacted by an outsourcing decision by giving those Federal employees a right of first refusal for jobs for which they are qualified. Indeed, the percentage of Federal employees offered a position with a private sector firm taking over a commercial activity is high. But there would be no soft landing or right of first refusal for a Federal employee whose job would be going to FPI. For that matter, how does any employer (private or Federal) explain to his/her employees that FPI is taking over the manufacturing of a product or the provision of a service that the employees have been performing in order to give jobs to criminals? What will happen to the people who lost their jobs to prisoners?

In closing, let me state that any policy concerning FPI must balance two legitimate needs that are defined in the current law:

1. The need to train prisoners for gainful employment so they may become productive members of society upon their release from prison; and
2. The need to minimize the effect of FPI’s operations on the private sector and its employees.

The Vice President’s 1993 National Performance Review has recommended that the Federal Prison Industries relinquish its privilege as a mandatory supply source and compete commercially for Federal business. And the 1995 White House Conference on Small Business recommended government mandatory sources be curtailed from competing unfairly with small private sector companies.

Mr. Chairman, the bill introduced by yourself and several other Members is a major step in the right direction – and one which we support. That bill, the "Federal Prison Industries Competition in Contracting Act" (H.R. 2758), would remove FPI’s mandatory source status with the Federal government, and make FPI compete for its contracts. It would allow businesses to compete fairly with FPI for Federal contracts and it would relieve Federal agencies from the requirement to purchase products manufactured in federal prisons and allow a genuine bidding process to take place. And it would place services squarely under the coverage provided by the bill.

As the association that represents the broadest sector of service companies, CSA believes that both industry and the Government benefits from fair competition based on the price and quality of the product or service in question. We look forward to working with you toward that end.

Mr. Chairman, thank you for this opportunity to appear before your subcommittee and I will be happy to answer your questions.