FEDERAL PRISON INDUSTRIES BOARD OF DIRECTORS DECISION: PROTECTIVE CLOTHING The Board of Directors for Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to significantly expand its production of protective clothing. As required by statute, FPI prepared a comprehensive impact study, which analyzed the potential impact, if any, that FPI's expansion of production may have on the private sector. FPI announced, in the August 21, 1995, edition of the Commerce Business Daily, its plans to present this proposal to the Board of Directors; described the procedures for obtaining a copy of the competitive impact study; and invited public comment on its proposal. Copies of the impact study analyzing the proposal to expand production of protective clothing were sent directly to the principal trade associations, various manufacturers, and other interested parties. FPI received written comments on its proposal from several sources, prepared responses to those comments, and submitted all such information to FPI's Board of Directors, along with its request to expand production of protective clothing. Members of the Board reviewed all of the materials and heard in-person comments from industry representatives at an FPI Board of Directors meeting held in Washington, D.C. on December 8, 1995. The Board of Directors appreciates all parties who took the time and effort to comment. The written and oral comments were helpful in developing a clearer picture of the industry and its concerns. In its competitive impact study, FPI proposed increasing its production in the protective clothing market from approximately $18 million in FY 1995 to $60 million in FY 2000. After review of all written materials submitted for the record, including the information submitted by FPI to support its growth proposal, comments by industry, and the oral testimony of industry representatives, the Board of Directors of Federal Prison Industries finds that the factual material in the impact study constitutes a reliable basis for its determination concerning market share. More specifically the Board makes the following findings, as clarified by comments received from industry, both written and oral: One segment of the protective clothing industry that was the subject of much discussion was that of bullet resistant, or protective, vests. It is clear from both the comments and the study that the bulk of the domestic protective vest business to date has been the result of purchases by state and local law enforcement agencies as well as individuals for their personal protection. Federal law enforcement agencies have only recently entered this market in a significant way. Since steady growth among federal law enforcement agencies is foreseen, and since FPI is limited to selling only to federal agencies, FPI's continued expansion will be in the form of new business, and in this sense it will be accomplished with minimal impact. The record does not demonstrate that there are firms who specialize primarily in protective vests, which are dependent largely on the federal sector for their business. In any event, in response to questioning by the board, there was no evidence offered of any significant differences in the manufacturing processes for the non-federal market as compared to the federal market. Thus, it is reasonable to conclude that producers can shift from one market to the other with relative ease. Of course, while the overall commercial market is available to private firms, it is not to FPI. Several of the oral comments were directed to the method of measurement of the federal market and the total domestic market for protective clothing. One commenter argued that the inclusion of the cost of the raw material in the fabrication of the protective clothing exaggerates the size of the market. It is true that FPI is only in the fabricator portion of the industry. For this reason, if the cost of the raw material is factored into the calculation of the size of the total market, it must also be factored into the cost of the items which comprise FPI's sales of these same items. In the same way if the cost of raw materials were taken out of the data that comprises the size of the market, then it would also have to be taken out of FPI's sales. As long as that is done consistently, as it has been in the market study, it is an apples-to-apples comparison, and the cost of raw materials does not distort the market size. It is reasonable to conclude that FPI's impact on the industry will be ameliorated by growth in the industry. Though there is disagreement as to the rate of growth in the overall protective clothing industry, the Board believes that the case has been made that the industry will continue to experience moderate growth in the segments in which FPI produces protective clothing. A growth rate of 3.5% above inflation seems reasonable, given (a) the move toward outfitting federal law enforcement officers with protective clothing, (b) a stabilized military troop level, (c) continued technological advances resulting in protection upgrade and/or replacement, and (d) ongoing safety and liability concerns related to health, security, and the environment. The role of the board is to determine whether such expansion would result in FPI assuming more than a reasonable share of the market, and whether it would impact unduly on private industry. Based on the entire record, including the size of the federal and total domestic market, and the prospects for growth in that market, the Board believes that the sales levels proposed by FPI authorized represents a reasonable share of the market and that production at these levels will not impose an undue burden of competition on industry. Therefore, the Board authorizes FPI to increase production of protective clothing to the levels it proposed, as follows, with certain caveats: FY 1996: $27 million. FY 1997: 38 million. FY 1998: 45 million. FY 1999: 52 million. FY 2000: 60 million. The Board recognizes that it is difficult to achieve exact levels each year. It is therefore understood that FPI may exceed the annual limits by insubstantial amounts, so long as the aggregate over the 5 year period does not exceed $222 million. Even though the sales levels equate to projected market share, as reflected in the study, primarily for ease of reference and tracking, it is the decision of the Board of Directors to use sales dollars, rather than market share, as the measure of expansion. In addition to its current and semi-annual publication of sales data in the Commerce Business Daily, FPI will compile its sales in protective clothing at the end of each fiscal year, and provide a copy of this information to the industry association. Should the industry believe that circumstances such as (but not limited to) the overall industry growth rate or federal government purchases have changed sufficiently that FPI's authorized production is having a substantially greater impact than anticipated in this decision, the industry is invited to provide, at their convenience, such written information to the Board. The Board will carefully review this information and, if warranted, will amend FPI's authorized production levels. The industry expressed concern that FPI should not concentrate its growth in any single segment of the protective clothing market, which could have the consequence of assuming up to 100% of that market segment. The Board appreciates the industry's apprehension regarding concentrated growth by FPI in any one segment of the protective clothing market such as protective vests, notwithstanding the statutory requirement to emphasize employment of inmates. It is the Board's position that FPI not take 100% of any specific protective clothing item, unless so requested by the customer. (There are occasions where, in order to both bolster the industrial base and improve procurement efficiencies, a federal customer may prefer that FPI take 100% of a particular product. This is generally offset by FPI waiving its production of a related item, to be produced by an alternate vendor.) Currently, FPI is producing approximately $6 million per year of soft body armor and approximately $12 million of extreme cold weather garments. Other types of protective clothing which are under development for possible production by FPI include slash-resistant garments, flame resistant coveralls, fire resistant combat vehicle crewman undergarments and extreme cold weather undershirts. Thus, there are multiple items available to meet FPI's requirements, and the Board therefore directs that FPI not totally concentrate its production in any one segment of the protective clothing market. In addition, also at the recommendation of commenters, the Board directs that FPI specifically not engage in production of charcoal chemical protective clothing, which was one of the areas of special concern expressed by industry. On the other hand, commenters offered suggestions concerning ``labor intensive, low-end manufacturing'' which may lend themselves to manufacture in a prison setting. The Board requests that FPI staff pursue such potential options with industry representatives. Furthermore, the Board requests FPI to explore with members of the protective clothing industry possibilities for cooperative efforts, such as subcontracting, in order to lessen FPI's impact on the private sector, and to pursue job placement of qualified inmates upon release within the industry. The intent of these efforts is to work together to expand opportunities for private industry; provide better quality products at lower costs to the federal customers; and enhance employability of federal inmates upon their release. The Board also notes for the record that, while FPI must be self-sufficient, the principal emphasis of increased sales should be the creation of additional inmate jobs, which teach work skills and enhance the prospects for employment and successful reintegration upon release. Decided this 6th day of February, 1996. For the Board: Joseph M. Aragon, Chairman.

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