Firms Investing in Prison Work Unite

Representatives of 14 of the oldest and most important business partners of the Federal Prison System, or UIS, decided last week to form a cartel to unite in a drive for investment in prison colonies. The overloaded penal system, with more than 1 milion behind bars, is adopting some features of the U.S. system.

Enterprises operating in association with prisons were given the right to engage in independent business activities in 1993. They actively took advantage of this and have often been in direct competition with each other. Potential investors have also frequently struggled over particularly promising colonies.

"Occasionally we have a situation where commercial structures independently emerge in the same market niche from within one UIS subdivision," said Konstantin Montlevich, head of the department for organizing cooperation between commercial and investment structures with the Federal Prison Administration, or GUIN.

Companies cooperating with UIS have decided to join forces to form a production and investment group for the prison system. The partnership aims to divide the spheres of influence.

Entrepreneurs are understandably attracted to the prison business. For the company Monolit, making clothes in UIS enterprises is 10 percent to 20 percent cheaper than having them made outside prison walls. Therefore, half of the company's production takes place in prison. "Many firms that produce work clothes, including Vostok-Service and Trakt, do this," said Alexander Lukyanov, Monolit's general director.

In addition, in this country the prison system provides entrepreneurs with a guaranteed sales market. This is in contrast to the United States where prison supplies are bought on the open market. Here 30 percent of goods produced behind bars - be they cars or cigarettes - go toward supporting the prison system.

In the Krasnodar region, for example, prisoners manufacture filterless Prima cigarettes and will soon start producing them with filters. This year, GUIN prepared a business plan for producing Prima in Tatarstan. "Prima is by far the most popular cigarette with prisoners," said Montlevich.

The right to the Prima brand belongs to the Tabakprom association. International tobacco companies Reemtsma and JT International, which want to produce Prima, recently had to pay $500,000 each to join the association. Tabakprom refused the right to produce the Prima brand to UIS enterprises members, but the association has no plans to take the prison owners to court.

The head of the new association of prison investors is Sergei Tarzanov, general director of the company Polymermash, which has worked with UIS since 1993. The company has organized the manufacture of plastic piping in prisons as well as pasta-making equipment and mini bakeries.

"These bakeries have been set up in about half of the 1,100 prisons," Tarzanov said.

The nation has 750 state enterprises that were founded by UIS institutions. Last year they produced goods valued at 6.6 billion rubles ($235 million) and attracted 13 billion rubles in investments. The average daily wage of an inmate is 8.23 rubles ($0.29) and the majority of inmates in prison colonies work.

For comparison, the nearly 1.8 million inmates in the United States, or roughly 0.45 percent of the population, puts the United States second behind Russia, with just under the 1 percent. The United States spends about $21 billion a year on prison construction and upkeep.

Private prisons help to ease the burden. There are 120 in 26 states, or 6 percent of the nation's prisons. The first private firm to get involved in the prison business was Corrections Corporation of America, founded in 1984.

Servicing private prisons costs 15 percent to 20 percent less than state prisons. Wackenhut, the second-largest prison company, registered receipts of $137.8 million with $8.3 million in profit in 1997. Analysts put private prison business revenues at $30 billion to $40 billion.