Private Businesses Fight Federal Prisons for Contracts

Stephen Marks | The Images Bank | Getty ImagesAs chief financial officer of a military clothing manufacturer, Steven W. Eisen was accustomed to winning contracts to make garments for the Defense Department.

But in December, Mr. Eisen received surprising news. His company, Tennier Industries, which is in a depressed corner of Tennessee, would not receive a new $45 million contract.

Tennier lost the deal not to a private sector competitor, but to a corporation owned by the federal government, Federal Prison Industries.

Federal Prison Industries, also known as Unicor, does not have to worry much about its overhead. It uses prisoners for labor, paying them 23 cents to $1.15 an hour. Although the company is not allowed to sell to the private sector, the law generally requires federal agencies to buy its products, even if they are not the cheapest.

Mr. Eisen, who laid off about 100 workers after losing out on the new contract, said the system took sorely needed jobs from law-abiding citizens. “Our government screams, howls and yells how the rest of the world is using prisoners or slave labor to manufacture items, and here we take the items right out of the mouths of people who need it,” he said.

Although Federal Prison Industries has been around for decades, its critics are gaining more sympathy this year as jobs, competition and the role of government have become potent political issues. Recently, a clothing company complained that the government company had expressed interest in making Air Force windbreakers like one worn by the president. Last month, amid negative news reports and pressure from the Senate minority leader, Mitch McConnell, F.P.I. said it would stop competing for the contract because it could damage the private company that makes the jackets, Ashland Sales and Service.

In addition, a bipartisan coalition of lawmakers is resuscitating a bill to overhaul the way the prison manufacturing company does business, proposing to eliminate its preferential status.

Under current practice — governed by intricate laws, regulations and policies — an agency must buy prisoner-made goods if the company offers an item that is comparable in price, quality and time of delivery to that of the private sector, with certain exceptions. The company’s prices are not always the lowest, but it frequently has been able to underbid private companies, Congressional aides say.

The bill seeks to limit those advantages by putting a limit on F.P.I.’s sales to the federal government, opening more product areas to private companies and strengthening requirements that the prices for prisoner-made products be competitive. The legislation would also impose federal work-safety standards and higher wages, starting at $2.50 an hour.

Separately, Senator McConnell has introduced a bill that would subject the Bureau of Prisons, including its manufacturing company, to greater Congressional oversight.

F.P.I. has traditionally relied on office furniture, electronics and clothing manufacturing for the bulk of its business, but it has been moving into new industries like renewable energy. The company already has one factory each in New York and Oregon to build solar panels and is looking into making energy-efficient lighting and small wind turbines.

“This is a threat to not just established industries; it’s a threat to emerging industries,” said Representative Bill Huizenga, a Michigan Republican who is the lead sponsor of the proposed overhaul legislation. “If China did this — having their prisoners work at subpar wages in prisons — we would be screaming bloody murder.”

View the original article here

Huge Private Debts Pose Another Hurdle for Euro Zone

Away from the markets' fixation with the debts of Greece and other governments, concern is growing at the painfully slow progress Europe is making in tackling a much bigger mountain of corporate and household debt.

Jonathan Kitchen | Image Bank | Getty ImagesWith austerity pointing to weak growth if not outright recession , the risk is that the burden of servicing the debt can only increase, causing a rise in bad loans. The spotlight then would fall on the capacity of banks to take losses and whether they might have to turn to their governments for help.

Over-indebtedness is not confined to the periphery of the bloc.

Denmark, Sweden and the Netherlands all have private-sector debt that far exceeds the safety threshold of 160 percent of GDP set by the European Commission as part of a new exercise to detect and correct risky macroeconomic imbalances.

In the case of the Netherlands, the main culprit is home loans, which have risen more than 7 percent a year since 2000 as borrowers have taken advantage of the tax deductibility of mortgage interest, according to Dutch central bank governor Klaas Knot.

"In my view the high stock of mortgage debt is among today's biggest vulnerabilities of the Dutch economy," Knot, a member of the European Central Bank's Governing Council, said in a recent speech in London.

Up to a point, debt is not only good for growth, it is vital. But it's possible to have too much of a good thing.

The Commission, the EU's executive body, said no fewer than 15 of the EU's 27 members exceeded its 160 percent safety cutoff, led by Ireland with 341 percent.

A recent Bank for International Settlements working paper concluded that when public debt rises to 95 percent of GDP from 85 percent, trend economic growth can be reduced by more than one-tenth of a percentage point.

For corporate debt the pain threshold is closer to 90 percent and the economic hit is slighter, while for household debt the BIS's best guess is that the inflection point is around 85 percent of GDP.

"A clear implication of these results is that the debt problems facing advanced economies are even worse than we thought," said the BIS authors, led by chief economist Stephen Cecchetti.

Pain in Spain

What should be done?

"Current efforts focus on raising the cost of credit and making funding less readily available to would-be borrowers. Maybe we should go further, reducing both direct government subsidies and the preferential treatment debt receives. In the end, the only way out is to increase saving," the BIS paper said.

Although private-sector debt burdens are worryingly high in a host of European countries, the markets' focus is understandably on those countries that have either been bailed out by the EU and the International Monetary Fund or are struggling to sell their bonds at non-punitive rates.

Take Spain. Its public-sector debt is still only 61 percent of GDP, having doubled since the onset of the crisis, but it is drowning in private sector debt equivalent to 227 percent of GDP.

Spanish corporations hold twice as much debt relative to national output as do U.S. companies and six times as much as German firms, according to the McKinsey Global Institute.

"Debt reduction in the corporate sector may weigh on growth in the years to come," MGI said in a report.

Looking at the composition of Spain's debt, Jamie Dannhauser, an economist with Lombard Street Research, a London consultancy, said it was irrational to describe Spain as facing a sovereign debt crisis brought on by fiscal profligacy.

Rather, investors are demanding high bond yields because they are worried about the impact that recessionary policies will have on Spanish corporations and, with a lag, on the country's banks.

"Growth is the only way to make the private debt stock sustainable, and the market quite reasonably judges that all of the policies being forced on Spain will depress output in the short term," he said.

Coming Down Slowly

Banks have set aside plump loan-loss provisions, but Spain's private debt load was "grotesque," Dannhauser said.

"Markets are worried about the banks, and because the government ultimately stands behind the banks, they then become worried about the government," he said.

Recession in Spain would have a big impact on Portugal, which is both deeper in debt and less competitive than its bigger neighbor. According to the Commission, Portugal has public-sector debt of 93 percent of GDP and private-sector debt of a whopping 249 percent of GDP.

Making matters worse, Portugal's corporate debt to GDP is still as high as it was at the peak of the financial crisis.

According to Lombard Street Research's figures, the capacity of business to service the debt is stretched: non-financial company debt is 16 times pre-interest cash flow compared with 12 in Spain.

"As such, Portugal's banking system is hugely exposed to the deepening recession," Dannhauser said.

For the euro zone as a whole, the picture is a little brighter as firms in most of the larger countries have started to deleverage.

The ratio of debt to total assets has declined from a peak in 2009, as has the debt service burden, according to a study by Guntram Wolff and Eric Ruscher with Bruegel, a Brussels think tank.

The corporate debt-to-GDP ratio has also dipped, to 79 percent from 81 percent in late 2009, but it was just 60 percent as recently as 2000. As such, they said it was too early to sound the all-clear.

"The still very high level of indebtedness of non-financial corporations by historical standards points to remaining vulnerabilities, in particular in scenarios of high costs of debt financing," Wolff and Ruscher said in a report.

Copyright 2012 Thomson Reuters. Click for restrictions.

View the original article here