Private Prisons Save Money, Boost Productivity

Privatization saves 5 to 20 percent

In a get-tough-on-crime move nearly a decade ago, Florida passed in 1995 a law requiring all prison inmates to serve at least 85 percent of their sentences. Since then, the amount of time most inmates spend behind bars in the Sunshine State has increased dramatically, putting privatization on the table for Florida policymakers.

Longer sentences mean more crowded prisons and a bigger market for the private prison industry, said Alan Duffee, executive director of the Correctional Privatization Commission that oversees Florida’s five private prisons. “That has been an effect of [the 85 percent law],” Duffee said. “We have fewer inmates (going) out than coming in.”

According to the Los Angeles, California-based Reason Foundation, new research shows private prisons are “a viable alternative for addressing state budget and cost concerns”-not only in Florida, but across the United States.

Privatization and Competition

Three-fifths of all U.S. states host private prisons; most of them contract with the companies to house prisoners. Studies show privatization can result in savings in the range of 5 to 20 percent. Adding to that body of research, two new studies take a slightly different approach to estimating the cost savings associated with prison privatization.

By measuring an entire department’s spending rather than just a particular prison’s spending, the studies account for the cost savings that result when public prisons respond to private competition.

In an August 2003 report, two professors at Vanderbilt University analyzed whether the use of private prisons by state correctional departments had any effect on the rate of growth in the operating budgets of state corrections systems. While anecdotal evidence existed in Texas and Arizona, a systematic analysis had never been done.

Using data for 1999-2001, the study found states that utilized private prisons had considerably more success in keeping their total public corrections spending under control than states with no private prisons. During the period studied, the daily cost of housing prisoners grew 8.9 percent more slowly in states with private prisons than in states without them.

In 2001, according to the study, states without private prisons spent $445 million a year on average for their corrections systems. The researchers projected the average state in that group could save $20 million a year in public prison operating costs simply by introducing competition and prison privatization. Further savings would be achieved through the actual operation of the private prisons themselves.

Importantly, the Vanderbilt University researchers also found that turning over to the private sector even the smallest of prison populations results in big savings. States with less than 5 percent of their prison population in private facilities experienced a 12.5 percent increase in expenditures over the period studied, versus an 18.9 percent increase for states without private prisons. States that had turned over larger shares of their prison populations to private management experienced even greater savings: Expenditure growth was just 5.9 percent for this group over the period studied.

In a second study, researchers at the Rio Grande Foundation in New Mexico compared per-prisoner department of corrections budgets across 46 states. The study uses the percentage of prisoners under private management as its measurement of the extent of privatization in each state. The author controlled for factors that affect a corrections department’s per-prisoner cost: market wage for prison employees, prison crowding, and labor conditions, for example.

Holding other factors constant, the Rio Grande study found states with 5 percent of their prison population in private prisons spent about $4,804 less per prisoner in 2001 than states without any privatization.

As the extent of privatization increases, so do savings. New Mexico, for example, has 45 percent of its prison population under private management; it spent $9,660 less per prisoner in 2001 than did counterpart states with no privatization. New Mexico has gone farther down the prison privatization road than any other state–saving $51 million in 2001 alone, according to the Rio Grande study.

A Compelling Case

While the Vanderbilt study looked at privatization’s effect on the growth of prison expenditures over time, the Rio Grande study was more a snapshot of how privatization affected corrections spending in 2001. While the two studies didn’t measure the same things, the results are complementary and make a compelling case.

States that utilize competition and privatization for corrections save money. The more a state competes and privatizes, the more money it saves.

The experience of competition and privatization has been well documented across a broad range of services. These two studies represent another feather in the cap for privatization, and a continued solution for the state of Florida.

Geoffrey Segal is director of privatization and government reform at Reason Foundation