With 1.5 million people behind bars, the United States imprisons a larger share of its population than any other nation. Indeed, the rate of incarceration in the United States has grown much faster than the population in the past decade, leading to serious overcrowding in local, state and federal al prisons. In IS@@ alone, federal facilities are operating at 160 percent of capacity, while state facilities are at 117 percent, despite a desired capacity rate of @@ percent that allows for periodic maintenance and repairs, special housing for protective custody, disciplinary cases and emergency needs.

The cost of confining inmates in the United States almost doubled in the past five years, reaching $50 billion lion annually, or $33,334 per inmate, per year. Estimates show that one 700-bed bed jail and one 1,600-bed prison need to be opened every week just to meet the rising demand. The projected annual construction cost of this is $5.98 billion.

But, with the political climate favoring decreasing taxes and reducing the size of government, it is unlikely that cities and counties will be able to build and manage many more prisons.

At the same time, the war on drugs and theget tough,, policies, like the "three strikes" laws, will yield even greater numbers of inmates.

Federal funding to the states and local governments for measures to combat violent crime has risen by one-third, reaching as high as $15 billion in 1996.

However, appropriations are restricted to states and local governments that impose longer sentences for violent crimes or require violent criminals to serve at least @@ percent of their sentences before parole.

Additionally, figures from the U.S. Bureau of Labor Statistics rank correctional officers in the top 15 growth occupations. All this means louder calls for significant expansion of prisons and jails. However, local officials at all jurisdictional levels find little support for building and managing these facilities.

The private option

As part of the privatization movement of the early 1980s construction and complete management of prisons and jails became a reality, and contracting out for specific services and products accelerated.

But, private prisons are not a new phenomenon in the United States. In fact, the concept of privatized prisons peaked during the 19th century's Industrial Revolution and was completely phased out in the 1950s after several highly publicized prisoner exploitation scandals. Contracting out for laundry, food, medical, education and vocational services, however, has continued to be widespread.

The Bureau of Prisons (BOP) has for a number of years contracted with almost 700 state, local and private providers to operate juvenile facilities and non-secure, community-based adult facilities.

In 1985, a new wave began in which private companies finance, construct and operate entire institutions. The growth from 1985 to 1995 has been impressive, especially since 1992. In that year, nearly 21,000 inmates were in private hands. By 1995, the number had reached more than 50,000.

Currently, 90 adult prisons, jails and federal detention centers housing approximately 2 percent of the U.S. inmate population are privately operated. The vast majority of these facilities ties are minimum@ and medium-security level detention centers.

Most privately managed facilities are located in the Sunbelt states where labor unions are still fairly weak. Texas(with 33 facilities), Florida and California (7 facilities), Tennessee and Kentucky (4 facilities) have the highest concentrations of private facilities.

However, those states house only percent of the total number of inmates in prisons and jails throughout the United States. A total number of l@ states have contracted out for privately managed facilities. Some are financed, built and operated by private companies, but most are built with public money and run on contract by private firms.

It's a good business for some. Correctional Corporation of America (CCA), Nashville, Tenn., which manages 27 facilities and employees some 15,000 people, has seen its stock triple since the end of 1995 and its profit rise 85 percent. Its closest competitor in the market, Wackenhut Corrections Corp., Coral Gables, Fla., has enjoyed similar success.

Furthermore, the 1996 federal BOP budget proposes privatizing four new facilities in New York, California, Mississippi and Arkansas to avoid hiring an additional 4,000 government employees. It also calls for private sector operation of the majority of future pre-trial detention and minimum- and low-security federal prisons.

Despite the push to privatization, however, there has, as yet, been no significant savings to local governments. The U.S. Marshal's service, which transports and holds prisoners in state and locally owned institutions, is using fewer than 12 privately run institutions, partly because the cost of keeping prisoners in private facilities is 24 percent higher than the cost of doing so in nearby public institutions.

In one case - that of Leavenworth Detention Center, a maximum security jail, in Leavenworth, Kan., which opened in 1992 - the private company charged $113.70 a day for each of the first 198 inmates and $18.05 for all additional detainees, the latter representing the variable costs.

Part of the $113.70 though, includes construction recovery costs spread over a five-year period - when a reasonable recovery period is 20 years to 30 years. (This portion of its contract led the Marshal's service to renegotiate the cost-per-detainee.)

A similar five-and-a-half-year recovery period was established in Eloy, Ariz., at the first privatized jail in the BOP system. BOP solved the problem by agreeing to take ownership of the facilities to spare contractors excessive recovery periods.

Medical costs are another factor, since contracts with private operators stipulate that medical costs inside the facility are covered by the company, while those resulting from referral for external service are the responsibility of the local government.

Consequently, contractors, physicians regularly refer inmates to outside specialists, a practice partially responsible for the growth in the BOP's medical costs from $175 million in 1991 to $250 million in 1994. In two Texas prisons, medical costs were renegotiated in order to avoid unnecessary referral to specialists.

The success stories

The best privately managed facilities are more than jails. CCA's showcase facility, located in Nashville, Tenn., is both a business and program success, with courses for high school completion, computer training, prison chores and day parole for outside paid employment, all of which are designed to prevent recidivism.

The facility also features a strong therapeutic environment and vocational training and stresses crime prevention in its rehabilitation programs.

In Florida, at least 7 percent savings is required of each contract. Florida officials regularly inspect and audit private facilities and can levy fines or even terminate the service if the contract - which may include mandatory staffing levels, training requirements of guards, healthcare, food services and education - is violated.

The contract is detailed, requiring a variety of other programs for inmates. In Texas, state law requires that privatization yield a 10 percent savings over its own costs. As a result, private prison companies performed well in Texas, which houses significantly more privately run facilities than any other state.

Most states keep strict watch over prisoner discipline, reducing the opportunity for inmate abuse and the risk of successful inmate lawsuit.

In privately run prisons, all quasi-judicial decisions that can lead to additional punishment of inmates are handled by the jurisdictional supervisory personnel. The states usually make emergency plans for taking over facilities if the firm goes out of business, in case of workers, walkouts or if the company loses its control over a institution.

The Immigration and Naturalization Service, for example, canceled one contract because of a prisoners, uprising that occurred as a result of violations by untrained guards.

Potential savings

Still, in many cases, privately run prisons can be cheaper than government-run facilities because they are not bound by the public sector's rigid purchasing, procurement and bidding requirements, and they are more flexible in devising activities and creating necessary acquisitions to meet changing conditions.

Most private prison companies usually pay salaries similar to those of the public sector in the same region. However, medical and retirement benefits are less generous than those in the public sector yielding long term substantial savings. Workers are usually non-unionized and can be hired and for fired more easily than the government employees.

Experience has shown that a straight per-diem is the preferred charge for housing detainees. However, the charge varies among regions, depending upon particular input prices, mainly labor costs. Governments should pay for a pre-specified number of beds regardless of the number of beds that are actually used. It is often preferable for the government to own the facility and lease it to the private contractor.

Additionally, there may be a tendency to use less qualified work forces at the privately operated facilities, and companies that are not able to operate under the strict contract may simply just walk away from the operation, forcing the public agency to take over.

Privatization liability

Privatizing city and county correctional facilities raises a number of legal and public-policy issues. Concerns exist about the potential liability of a government agency for the actions of its contractor.

For instance, if a contractor violates a confined person's rights or causes an injury or death, would the government agency be liable@ The extent of a contractor's obligations to uphold a charge's constitutional right is itself subject to dispute. Normally, constitutional protections apply to government facilities.

Some question whether contractors would be bound by the same requirements. Would a private correctional facility be considered as acting with the authority (and responsibility) of government?

In other words, would such rights as freedom of speech and religion enjoy the same protection in a private facility as in a city or county prison?

Courts may be moving toward a determination that private prisons may be considered to be performing a public function, and the same obligations apply.

Further, if a quasi-market were developed in prison facilities where prisoners might be sent to other facilities, would prisoners then be able to claim that they were denied access to attorneys, friends or family?

Also, would private prisons be bound by the same security rules as public prisons?

For example, questions about the appropriate use of force, including deadly force, may be decided by a community's elected officials or its police officers.

Would the same rules then apply to private prisons? Would violating the rules of a private prison be equivalent to violating the same rules in a public prison? Can a private prison official grant time off for good behavior or effectively add time for violating prison rules?

Would normal due process requirements apply? Would granting such power to private prison officials be an unconstitutional delegation of governmental authority? Would private employees enjoy the same immunity as public employees?

The competitive spirit

At a minimum, privatization will mean that the contractor (and in effect, the government) will incur substantial legal costs. However, to the extent that privatization improves prison quality (which may well be in the interest of a for-profit firm), litigation would probably decrease. Such issues abound in the field of private correctional facilities.

Still, the service can be specified and compliance with the contract monitored. The contract can specify minimum confinement per-day, set living space per inmate, nutritional requirements, exercise time, educational benefits and other services. The contract also can specify the required minimum complement of guards and their training. Drafting such a contract or proposal for bidding would entail considerable effort.

Further, monitoring to ensure compliance is also time-consuming. Such fixed-price type contracts have become common in health care, an area certainly no less complex than corrections. In health care, Medicare, Medicaid and many private insurers pay a certain fixed amount for each of about 500 illnesses.

Also, fixed-price contracts are already in use in the case of private correctional facilities. For example, a private Nashville prison in 1995 was paid $40 per day, per inmate. There must be adequate competition to ensure that prices are reasonable. Even though the industry was still small in 1995, there were, at that time, 19 companies in the field. The top two, CCA and WCC had about 55 percent of the market.

The industry would be described as moderately concentrated, but as demand grows, concentration is likely to decline, making the industry even more competitive.

Further, entry barriers are modest. Capital costs and economies of scale are sufficiently small so entry would be easy. In addition, the number of potential entrants is large. Security firms not already in the industry could enter should prices and profits make doing so attractive. The competitive prices are likely to prevail in the long run, and they would cover costs including normal profits.

Simon Hakim and Erwin Blackstone are professors of Economics at Temple University in Philadelphia.