Chairman Fitzgerald and Members of the Subcommittee, I am John Palatiello, Executive Director of MAPPS, a national association of firms in the mapping, spatial data and geographic information systems field.  I am also a member of the U.S. Chamber of Commerce and have the privilege of serving on the Chamber's Privatization and Procurement Council.  It is on the Chamber's behalf that I appear before you today. 

The U.S. Chamber is the world's largest federation of business organizations, representing more than three million businesses and professional organizations of every size, sector and region of the country.  The Chamber serves as the principal voice of the American business community.  Over ninety-six percent of the Chamber members are small businesses with fewer than 100 employees.  The Chamber commends the Subcommittee for their interest in holding this legislative hearing on S. 346, a bill that seeks to infuse competition in the federal procurement process with regard to purchases from Federal Prison Industries.  We would especially like to thank Senators Levin and Thomas for their leadership and dedication to reforming the unfair competitive practices of FPI.  The Chamber respectfully submits these comments for the record.

FPI in the Free Market

Our free market system is essential to achieving and maintaining a vibrant and productive economy and is a necessary foundation of political and social freedom.  The United States government is responsible for enforcing laws that promote competition in the marketplace and ensure a level playing field among competitors to benefit American consumers.  Monopolies do not belong in a free market economy.  When you remove competition from the equation you are left with higher prices, lower quality or service, and lower productivity as a result of lower efficiency.  Non-market practices also stifle innovation and reduce the availability of goods and services. 

This is exactly the situation with respect to FPI sales in the federal market.  The federal government – the consumer in this case – is paying above market prices for lower quality goods and in doing so, is squandering American taxpayer dollars while completely ignoring the very rules it enforces in the commercial market.  The Senate Governmental Affairs Committee has jurisdiction over the federal procurement process; a process aimed to deliver on a timely basis the best value product or service to federal agencies while promoting competition and reliance on the private sector for commercial items. Reform of FPI is aligned with the goals of this committee to ensure fair and full competition to ensure the best value for the American taxpayer while removing barriers that prevent businesses, particularly small businesses, from obtaining government contracts.

This Committee has a long history of advancing pro-competition, pro-reform procurement legislation, including the Competition in Contracting Act (CICA), the Federal Acquisition Reform Act, the Federal Acquisition Streamlining Act (FASA) and the Federal Activities Inventory Reform Act (FAIR).  We believe S. 346 is the next logical reform in federal procurement.

The Need for Reform

In 1934, President Roosevelt established FPI as a government-owned corporation.  FPI was given special "mandatory source" status in the government procurement process, forcing government agencies in need of a product to purchase that product from FPI.  No consideration can be given to a private sector competitor unless that agency asks FPI for an exception from its own monopoly.  It is ironic that there are laws prohibiting the U.S. from importing goods that are made by prisoners in other countries, yet we have laws that require our own federal government to buy goods and services from prisoners in this country. 

Each year, FPI expands to produce even more goods and services.  FPI’s sales growth, all through non-competitive contracts, has been formidable:  $546 million in 2000, $339 million in FY 1990, up from $117 million in 1980, and $29 million in 1960.  Today, FPI produces over 300 products and services that in 2002 alone totaled $678 million worth of sales to the federal government, making it the 34th largest Government contractor.  This makes FPI a formidable competitor even for a large private sector enterprise, much less a small business.  Evidence indicates that FPI will continue its expansionist behavior, by exploiting its mandatory source status and increasingly encroaching on private sector industries in order to be a profitable enterprise, forcing businesses to halt production lines, lay off employees and even close their doors for good.

Ensuring a level playing field for the private sector in the federal procurement process by ending FPI's unfair advantage is a major priority for the Chamber.  The Chamber has long-standing policy that the government should not perform the production of goods and services for itself or others if acceptable privately owned and operated services are or can be made available for such purposes.  The private sector should be allowed to compete fairly with FPI for federal contracts – plain and simple – by eliminating the requirement that government agencies purchase products and services from FPI. 

Reform of FPI starts with the realization that FPI has exceeded its statutory authority. They are free to set any price they want within the range of market prices with no incentive to charge the lowest price.  Until the recent enactment of reform measures, FPI, rather than federal agencies, determined whether FPI's products and services and delivery schedule meets the agency's needs.  While these reform measures have provided some relief, permanent comprehensive reform is needed to reign in this organization.  By granting FPI a monopoly, issues of price, quality and efficiency fall by the wayside at the expense of U.S. taxpayers.  Contrary to FPI’s assertions, the General Accounting Office (GAO) reported in 1998 that FPI cannot back up its frequent claims about being a quality supplier to Federal agencies, furnishing quality products at low prices to meet their needs.  Once FPI commandeers a product, it erodes, displaces, or eliminates private sector competition, thus opening the door for it to raise its prices.  

Recent aggressive expansion by FPI into the services arena has caused great concern in the business community.  Even though FPIs authorizing statute does not specifically mention services, FPI has interpreted that it is a "preferential source" for services and used this to enter into sole source contracts with Federal agencies for services.  They are quickly expanding their services portfolio, which includes printing, environmental testing, recycling, mapping and imaging, distribution and mailing, laundry services, data conversion, and call center and help desk support.
 
This expansion is alarming not only because it adversely impacts the private sector but also because it is wholly inappropriate to allow inmates access to classified or infrastructure information used in mapping projects or the personal or financial information of private citizens used in call center operations.  We should be extremely cautious with the information we arm our federal inmates with in preparation for life beyond bars. 
  
FPI's desire to expand into the commercial marketplace is an alarming development that is seen as a call to arms by industry.  The Chamber opposes FPI's move into the commercial marketplace for four reasons.  First, the decision to expand into the commercial marketplace is in conflict with the clear language of FPI's enabling legislation and beyond the discretion of the Board.  Second, it is a reversal of more than sixty years of public policy.  Third, this authority that FPI has claimed for itself without any specific legislative authority from Congress.  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. 

Title 18 U.S.C. section 4122(a) specifically states:
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.

Now, however, despite this seemingly clear prohibition on entering the commercial market found in the statute, recent evidence shows that FPI has engaged in expansionist practices.  Sixty-five years of public policy should not be overturned, especially without public debate.  The United States should not be selling commercial services in competition with law-abiding taxpaying businesses, using prison labor that is paid no more than $1.25 an hour. FPI's expansion in the commercial market is a dramatic shift in policy, and in conflict with the clear language of 18 U.S. C. 4122(a).  We urge that no proposal to inject Federal inmate provided services in the commercial marketplace be entertained by Congress.    

While we are empathetic to FPI's goal to employ federal inmates to reduce recidivism by providing vocational and remedial opportunities while incarcerated, it should not be done at the expense of law-abiding, taxpaying businesses.  It is unfortunate that in today's society we are faced with an increasing inmate population.  However, we believe other sources of work opportunities for inmates should be explored that do not infringe upon the private sector's opportunities to compete for government contracts, threaten the general safety of our citizens, and provide for expansion in the commercial market.

Legislative Solutions

Legislative reform addressing these concerns is way overdue and more oversight by the FPI Board and Congress is needed now.  Recent language enacted in the FY02 and FY03 Defense Authorization bills and the FY04 Consolidated Appropriations Act provides interim relief from FPI’s monopoly by allowing federal agencies to decide how to best meet their procurement needs by examining existing marketplace opportunities and purchasing products on a competitive basis.  The House recently overwhelmingly passed the Hoekstra-Frank-Collins-Maloney-Sensenbrenner-Conyers Federal Prison Industries Competition in Contracting Act of 2003, H.R. 1829, a comprehensive reform bill that eliminates FPI’s preferential status.  Clearly, the House, Senate and the Administration are in support of fundamental reform.  FPI, reform supporters and FPI proponents alike agree that FPI’s mandatory source status should be eliminated.  S. 346 is the vehicle to make that happen.
        
For many years, the Chamber has been a leader in the broad-based Competition in Contracting Act Coalition, comprised of the business, labor and federal manager communities that advocate comprehensive, fundamental reform of FPI.  The Chamber and the Coalition strongly support S. 346.  This bipartisan legislation would impose overdue and much-needed restraints on the unfair competitive practices of FPI that inflict damage on law-abiding businesses and the workers they employ, while blatantly wasting taxpayer dollars. 

S. 346 provides for fundamental reform while maintaining a process in which FPI can still sell to federal agencies but on a competitive, rather than a preferential sole-source basis.  By amending the Federal Procurement Policy Act, it requires federal agencies to use competitive procedures for the purchase of products.  S. 346 simply makes permanent the language included in the FY02 and FY03 Defense Authorization bill and the FY04 Consolidated Appropriations bill approved by the House and Senate and signed into law by the President. S. 346 would require FPI to be a more responsible supplier to Federal agencies and the taxpayer, and would allow the private sector to compete fairly with FPI for federal contracts by eliminating the requirement that government agencies purchase products from FPI.  Agency contract officers, not FPI, would determine if FPI's offered product best meets buying agencies' needs in terms of quality and time of delivery.

Even with reform, FPI would still have an enormous competitive advantage over the private sector.  FPI pays its inmates $.23-$1.15 per hour and is not required to provide any employee benefits like Social Security, unemployment compensation or insurance.  In addition, as a Government-owned corporation, FPI is exempt from Federal and state income taxes, gross receipts taxes, excise tax and state and local sales taxes on purchases.  FPI does not have to pay for utilities or equipment and has a special statutory line-of-credit from the U.S. Treasury for $20 million at 0% interest.  FPI is also exempt from standards, inspections or fines by various Federal, state or local enforcement agencies, such as OSHA, that regulate all private sector suppliers to the Federal Government.   
   
S. 346 includes language that would prohibit inmates from having access to classified data, critical infrastructure data, and personal or financial data under any Federal contracts.  The American people would be outraged to know that prisoners can given access to their credit card numbers, the address and value and tax assessments of others homes, as well as location information on our underground gas pipelines and other critical infrastructure that, if in the wrong hands, threatens our security.  Simply yet adequately stated, sensitive information of this nature should not be in the hands of convicted criminals. 

S. 346 also protects Federal prime contractors and subcontractors at any tier from being forced to use products or services furnished by FPI.   FPI would no longer be able to force contractors to use FPI as a mandatory source for products or to be specified as a mandatory source on contracts. We have seen this new, expansive authority, which was not enacted by Congress through legislation, but claimed by FPI through interpretation, used, for example, to force architects and engineers to include FPI products in their design specifications, even if those products are not the most efficient, cost effective or appropriate solution.   

To assure the safety of the prison guards and the inmates themselves, S. 346 would allow the Attorney General to award a contract to Federal Prison Industries if he/she believes that the loss of such prison work would endanger the safe and effective administration of a prison facility. While this is a valid concern, it is important to note only a small percentage - roughly 17% - of inmates actually work in the FPI program.  The remaining able bodied inmates are engaged in various tasks relating to the operation and maintenance of the correctional facility.  These tasks reduce the operating costs of the facility and keep inmates occupied in daily work activities.

Many concessions have been made on behalf of FPI reform supporters over the years and S. 346 provides additional safeguards in addition to a level playing field on which FPI and the private sector can compete.  FPI asserts that comprehensive reform will cause inmate employment to decline, factories to be shut down, and sales to decrease.  We argue that for decades businesses have suffered from declining employment rates and decreases in sales, and have been forced to shut down factories and production lines because of FPI’s unfair competitive advantage and practices.  Therefore, the time is now for balanced comprehensive reform.
 
Conclusion

Thank you for the opportunity to appear before you today on behalf of the U.S. Chamber of Commerce and to submit these comments on behalf of Chamber members that rely on an efficient, fair competitive process in providing the federal government with goods and services to maintain and grow their businesses. We appreciate the Subcommittee's examination of FPI's impact on the private sector at this hearing today and urge quick consideration of S. 346 by the full committee.  I'd be happy to answer any questions you might have. Thank you.