Testimony of Andrew S. Fortin

Manager of Privatization Policy

Representing the U.S. Chamber of Commerce and the Competition

in Contracting Act Coalition

Before the

Subcommittee on Oversight and Investigations

Committee on Education and the Workforce

U.S. House of Representatives

April 21, 1999

Mr. Chairman and Members of the Committee, My name is Andrew Fortin; I am the manager of Privatization Policy for the U.S. Chamber of Commerce. I appear before you today to present the Chamber's views as well as the views of the Competition in Contracting Act Coalition on the expansion of the Federal Prison Industries into the commercial marketplace, an alarming development which is taking place contrary to sixty years of public policy, and without public debate.

The Chamber of Commerce is the world's largest business federation representing an underlying membership of more than three million businesses and organizations of every size, sector, and region of the country. The Competition in Contracting Act Coalition represents more than 330 companies and associations from 42 states; the Coalition has long been an advocate of Prison Industry reform. On behalf of both the Chamber and the Coalition, I welcome this opportunity to comment on this controversial issue.

At the outset, I would like to applaud Chairman Hoekstra's leadership on this issue, as well as the important contributions of Congressman Frank, Collins and Maloney in providing a public forum to discuss what would otherwise be a covert assault on law abiding citizens.

In my remarks today, I would like to touch on two broad issues of concern to America's employers. First, is the expansion of the prison industries into the commercial market, and second, is the on going problem of priority treatment of prison made goods in federal procurements.

Administrative Expansion must be Stopped

The Federal Prison Industry's (FPI) unilateral decision to expand into the commercial market is an alarming new development that is seen as a call to arms by industry. FPI's move into the commercial market is opposed by the Chamber of Commerce for three reasons. First, the decision by FPI's Board to expand into the commercial market is in conflict to the clear language of FPI's enabling legislation and therefor arbitrary, capricious and beyond the discretion of the Board. Second, it is a reversal of more than sixty years of public policy. Finally, the creation of a state run enterprise, competing with its own citizens, is a policy so at odds with the role of government in a free society, that it is a decision best left to Congress.

FPI's decision to expand into the commercial market was based on a series of internal Justice Department legal 'opinions' which found that expansion into the commercial market is not in conflict with FPI's enabling legislation. Ina memo dated November 11, 1997, FPI concludes, "it is not prohibited from selling services on the open market." According to FPI's reasoning, because Congressional debate on this provision focused mainly on products, that congress did not intend to prohibit FPI from entering the commercial services market. The opinion gives only cursory treatment to 18 U.S.C. section 4122(a), which states:

18 U.S.C. 4122: Administration of Federal Prison Industries Federal Prison Industries: shall determine in what manner and to what extent industrial operations shall be carried on in Federal penal and correctional institutions for the production of commodities for consumption in such institutions or for sale to the departments or agencies of the United States, but not for sale to the public in competition with private enterprise.

This section, the very first provision in the statute governing the Administration of FPI, spells out in clear, plain language that the markets for prison commodities is other prisons and federal agencies, but "not for sale to the public in competition with the private sector." Despite the seemingly clear prohibition on entering the commercial market found in the statute, FPI has repeatedly stated that they have the authority to do so, and are beginning commercial pilot programs.

Since its inception in 1934, FPI has adhered to this statutory Prohibition Preventing it from entering commercial markets. They have exclusively, and with preferential status, sold their products to the federal government. In other words, for more than sixty years, FPI has interpreted their statute to mean what it says, "but not for sale to the public in competition with the private sector."

Now, based on an internal memorandum, sixty years of policy has been overturned, without public debate. The United States will now be selling commercial services in competition with law abiding taxpaying businesses, using prison labor which is often paid less than a dollar an hour. Because the creation of a state run enterprise using prison labor to offer products to the commercial market in competition with private enterprise is a dramatic shift in policy, and in conflict with the clear language of 18 U.S.C. 4122(a). It is an expansion that cannot and should not take place by administrative fiat but rather by the passage of a legislative mandate that is a matter of public record.

Legislation to reform FPI is not a new concept. - The Chamber has testified in previous hearings in the 104th and 105th Congress. The difference todav. is that FPI has decided to forego the legislative process and to enter the commercial market. The expansion is already underway. We ask that Congress take immediate action to halt FPI's expansion into the commercial marketplace, and to pass legislation which even more clearly states that it is not the policy of the United States to use prison labor to compete with its own law abiding citizens.

Proposed Rule Would Expand Flawed Policy

In addition to their foray into the commercial market through pilot programs, FPI issued a proposed rule that would expand existing flawed policies. The proposed rule was published in the January 7 issue of the Federal Register. It will stifle competition, force government contractors to buy from FPI, and allow for unlimited expansion into the commercial market.

Under current law federal agencies are compelled to purchase the products they need from FPI. This "Felon's First" preference program has been a constant concern for industry. By granting FPI a monopoly, issues of price, quality and efficiency fall by the wayside. In fact the language of the proposed rule spells out one of our key concerns:

Section 302.16 . . ."The determination of what constitutes the current market price, the

methodology employed to determine the current market price, and the conclusion that a

product does not exceed market price is the responsibility of FPI to determine."

Not only can FPI dictate what the 'market price' for a given product is, the proposed rule prevents contracting officers from even investigating if the price is reasonable. Section 302.9(d) of the proposed rule states that,

"A contracting activity should not solicit bids, proposals, quotations, or otherwise test the market for the purposes of seeking alternate sources to FPI.

In short, FPI has created a framework where they set prices, compel purchases, and subvert competition. Such a policy is contrary to federal procurement policies, which emphasize open competition and best value to the taxpayer. These proposals are a step in the wrong direction.

In the proposed rule, FPI also seeks to compel government contractors to purchase from FPI. Section 302.09 (g) would force government contractors to purchase goods from FPI when they provide products for government use. Under this plan, not only would government agency's hands be tied in looking for the best, most efficient supplier, but private companies would be forced to purchase from FPI as well. Such a policy would undermine the ability of government contractors to innovate and find the best prices in meeting their contract requirements for the government by again subverting competition.

In addition to subverting competition and choice through the expansion of mandatory source, FPI takes one last punch through a concept called "Preferential Source." What this means is that if an agency is not compelled to buy from FPI, it may do so, without competition.

Under the proposed rules found in the January 7 Federal Register, FPI subverts competition and choice in every conceivable forum. FPI is the sole arbiter of price. If the product or service is a mandatory source, agencies and now government contractors must purchase if from FPI. For everything else, FPI creates a preferential source status, again allowing it to side-step competition.

The proposed rule would also cement FPI's entrance into the commercial market, subject, only to the limitations it decides to place on itself. If "Felon's First" priority in federal procurements is bad policy, then FPI's participation in the commercial market is unconscionable. American businesses are governed by a host of labor, workplace safety, wage and environmental laws. Despite this burden, they continue to be world class competitors. It is wrong for the federal government to tax these businesses, build factories, exempt itself from workplace regulations and directly compete with business. The idea of a state run factory, paying less than a dollar and hour competing with law abiding citizens is an idea best left in the dust bin of history.

Legislative Reform Should Address Mandatory-Source

Any legislation to address FPI's expansion should also implement the National Performance Review recommendation to "take away the Federal Prison Industries status as a mandatory source of federal supplies and require it to compete commercially for federal agencies', business". Despite the many laudable attempts to have government adopt more businesslike practices, some branches of the federal government are having a hard time making the adjustment. The operation of Federal Prison Industries represents one of the longest running conflicts with government policy that industry has faced.

It is ironic that at the same time that the Justice Department is accusing Microsoft of monopolistic practices, it is harboring over 100 factories within the Bureau of Prisons that operate with monopoly powers. While Microsoft meets only one of the three tests of a monopoly: having an overwhelming market share, FPI has two of the three: the power to set
prices, and the power to prevent competition. FPI employs monopolistic tactics within the government purchasing process through its "mandatory source status". It is not required to bid for contracts under the same guidelines that apply to private companies. It can set any price it wants within the range of market prices and has no incentive to charge the lowest price. The only way around buying from the prisons is for an agency to request a waiver but FPI itself controls
the waiver and appeals process. Nearly 10,000 waiver requests are made each year and there is no record of how many agencies could not afford the time or resources to challenge the red tape of FPI's bureaucracy.

FPI is currently attempting to accomplish by administrative fiat, what it has been unsuccessful in attempting legislatively. Action is needed and soon. Complete elimination of mandatory source status at a date certain is needed now, the proposed rule must be withdrawn or overridden, and the issue of FPI's entrance into the commercial market must be clearly proscribed. The Justice Department's double standard must end. Our government should not be exempt from the rules and regulations it asks its citizens to obey.