FEDERAL PRISON INDUSTRIES BOARD OF DIRECTORS DECISION DORMITORY AND QUARTERS FURNITURE The Board of Directors for Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to significantly expand its production of dormitory and quarters furniture (hereinafter referred to as dorm and quarters or D&Q). As required by statute, FPI prepared a comprehensive impact study, which analyzed the potential impact that FPI's expansion of production may have on the private sector. FPI announced, in the July 18, 1995, edition of the COMMERCE BUSINESS DAILY, its plan 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 dorm and quarters were sent directly to the principal trade association, 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 dorm and quarters. Members of the Board reviewed all of the materials and heard in-person comments from the association and industry representatives at an FPI Board of Directors meeting held in Washington, D.C. on December 7, 1995. The industry's written and oral comments were helpful in developing a clearer picture of the industry and its concerns. The Board of Directors is called on by statute to make a determination as to whether expansion in the dorm and quarters industry would result in FPI's assuming more than a reasonable share of the market and unduly impacting on the industry. In reaching our decision, we have relied on the complete written and oral record before us. BACKGROUND - In both its oral and written comments on the current expansion proposal pending before the Board, the Quarters Furniture Manufacturers Association (QFMA), the principal trade association for the dorm and quarters industry, asserted that on several occasions in prior production years FPI did not comply with the statutorily required procedural requirements, i.e., industry comment followed by Board approval, before expanding in dorm and quarters furniture production, and that therefore the FPI production, over and above production levels in 1991, was unauthorized. As a result of QFMA's allegations, this Board asked FPI to prepare a detailed report of its dorm and quarters production since 1989. The report, which has been made available to QFMA and all interested parties, has been made a part of the record. In the report, FPI identified several instances where production expansion occurred between 1990 and 1995, which should have first been authorized by the Board. FPI staff also identified the reasons for the failure to seek Board approval and assured us that procedures have been developed to prevent future reoccurrence of such an error. Because of FPI's failure to seek Board approval with regard to expansion of production of dorm and quarters furniture, QFMA asked that FPI roll back its current production level of dorm and quarters to $10 million, the amount it was producing in 1991 prior to the unapproved expansion, and further asked that this level of production remain in place through the year 2000, in order partially to compensate private companies in this market for FPI's unauthorized growth. There is no way to turn back the clock so as to perform the market study as of 1991. Nor is it possible to determine with certainty whether, if such a study had been conducted, the Board on the basis of then-available information would have authorized expansion, or at what level. However, the board is able to determine, based on information currently available and using the methodology in the market study, that first, expansion would very likely have been approved as of 1991 or subsequent years based on then-available market information; and second, the expansion which did in fact take place did NOT result in a situation where FPI came to occupy more than a reasonable share of the market or unduly impact on private industry. A study done in 1991 would have been based on projections.1 It is now possible to look to see what actually occurred.2 To put it succinctly, we now have something better than a crystal ball to judge consequences; we have a rear view mirror. Several factors are relevant to a determination of whether the expansion would have been approved and its consequences. First, the federal market: as pointed out by the study and comments, the federal market for dorm and quarters furniture was larger in 1991 than now, and has been a declining market. To cite the primary reason for this, the Department of Defense, which is FPI's largest customer for this product, is considerably smaller today than it was in 1991. Second, while there is some difference of opinion as to the relevance of the non-federal market (see discussion below), to whatever extent that market is relevant, it too was as healthy then as now. Third, vendors to government of dorm and quarters furniture, as reflected by GSA schedules and industry self-reported data (see Appendix VI of Competitive Impact study), are relatively constant in numbers, employment levels, and ratio of federal dorm and quarters sales to total sales (28 to 35% during the four-year time period from 1992 to 1995). Finally, the industry-appointed representative noted in the July 13, 1995 letter to FPI that ``the Federal market is clearly able to sustain both UNICOR and private vendors at the present time''. In sum, we conclude that any production level that is reasonable today would presumably have been considered reasonable when measured against a larger federal market3, a sizable private market, and an industry whose membership was at least as healthy than as now. FPI's lower share of a larger market, coupled with an even faster growing inmate population between 1990 and 1995 than the BOP is facing in the next five years, makes it reasonable to believe that the Board would have decided favorably on a request for significant expansion to create the additional inmate jobs required. While this Board can say with some assurance that it would likely have approved the total overall growth in sales as produced by FPI between 1990 and 1994, we cannot address specifically what the Board of Directors would have done in 1990 or 1991 as fare as approving a certain level of growth each year. We can say that several ``new product'' requests were considered by the Board during the early 1990's. Those that were approved led to a decision which stipulated a market share ceiling which FPI could not exceed. Depending upon the market, the Board in its past decisions has approved market share in excess of 25 percent, for entry into a new product. The Board did not, however, establish a ``ramp up'' schedule for FPI production from one year to the next. Thus it is unlikely that they would have done so for dorm and quarters furniture, had they ruled on a request before it at that time. The current Board is concerned with the rate of expansion as well as the maximum authorized ceiling, and has therefore established a desired ramp up schedule for future growth. While FPI roughly doubled its sales from 1991 to 1992, the reasonableness of such an increase must be viewed in light of the fact that it started with a much lower base, and a market share of less than 10 percent (9.8%), and reached only 17.7% even after doubling its sales (according to the ``new'' methodology; the old methodology would have resulted in an FPI market share of only 10.3% and 13.3% in FY 1992 and FY 1993, respectively). A 15 percent market share was considered, by most parties in private industry, at the time the guidelines were established, to be per se reasonable. REVISED METHODOLOGY OF ESTIMATING THE FEDERAL MARKET - Extending over a period of several months starting in February of 1995, FPI and representatives from the dorm and quarters industry had a series of meetings, the purpose of which was to develop an improved methodology for estimating the size of the federal market. A modified methodology was agreed upon in April, 1995. As measured by this new methodology, the size of the federal market for D&Q furniture was reduced from an estimated $184 million to an estimated $85.1 million for fiscal year 1994, with the result that FPI's sales ($20.7 million in FY 1994) comprised approximately 25 percent of the federal market, rather than approximately 15 percent, as had previously been estimated. This is not an expansion within the meaning of the statute but simply a revised estimate of FPI's share of the federal market at a certain point in time. While the impact on the private sector immediately prior to the change in estimated market share was identical to the impact immediately after the change, the methodology change nonetheless places FPI's production levels in a different perspective. FEDERAL GOVERNMENT MARKET - The Department of Defense (DoD) is the primary customer for dorm and quarters furniture in the federal government, with only a small amount of purchases from the Department of State, Department of Veterans Affairs, and other federal agencies. FPI's position, as set out in its market study, is that the D&Q market should stabilize at 1994 levels, with growth projected at 3 percent for inflation. This is based on the fact that most of the troop reductions planned through the year 2000 (88%) have been completed and further substantial decreases in military funding appear unlikely. In a May letter to FPI, QFMA estimated that D&Q would grow at a rate of 2 percent ABOVE inflation. NON-FEDERAL MARKET - QFMA contends that their product is unique to government and that the only relevant market is the FEDERAL dorm and quarters furniture market. It contends that the private sector market for dorm and quarters-type furniture (e.g., hotel/motel, university, health care) is different from the dorm and quarters-type furniture purchased by the federal government, and therefore not relevant to this impact study. FPI is not contesting that residential household furniture is different. FPI requested that QFMA supply supporting documentation on the difference between government supplied dorm and quarters furniture and private sector dorm and quarters furniture. The industry's response is contained in a letter dated June 22, 1995. In that letter, QFMA distinguishes between ``contract'' and ``residential'' furniture, and then subdivides contract furniture into multiple segments: health care, hospitality (including hotels and motels), and institutional furniture (colleges and universities). Hospitality and institutional furniture are then eliminated on grounds of aesthetics, potential for abuse, durability, price and safety. The letter concludes that federal D&Q furniture design and the manufacturing tooling are different from hospitality and institutional, that the final product is ``inherently'' different, and that the ``channel to get these products to market is different.'' On the other hand, at the hearing a small business executive told the Board that his company did a substantial amount of school business and used federal work to fill in the production gaps during certain times of the year. The differences enumerated by QFMA involve differences in durability, style, and price. While these differences could be overcome, the Board concludes that the transition would not be an easy one for small businesses to undergo. Clearly, the non-federal market is more limited than for other ``commercial'' like products which FPI produces. PRODUCTION LEVELS - In its competitive impact analysis, FPI projects its impact on the federal dorm and quarters market, based on its production increasing to $35 million in FY 2000. FPI provided information in support of its request that the federal market for dorm and quarters should accommodate its proposed expansion in this market. Industry representatives emphasized that there were only about 10 companies on the Federal Supply Schedule that actually produced dorm and quarters, and that 8 of these were small businesses. The establishment of a ``reasonable market share'' is a subjective judgment, and will vary from product to product. There is no typical percentage of market share which is universally ``reasonable''. In this situation, taking into account the revised market share, the fact that this industry has many small businesses, and the relatively limited non-federal market, the Board believes that FPI's requested level of production would potentially impose an undue burden on private industry. With these considerations in mind, the Board establishes FPI production at the following levels: FY 1996: $21.8 million. FY 1997: $22.9 million. FY 1998: $24.0 million. FY 1999: $25.2 million. FY 2000: $26.5 million. These figures are significantly less than those originally requested by FPI, and growth is projected at the 5% annual rate reflected in the industry's input into the market study. The Board recognizes that it is very difficult to achieve exact levels each year. It is therefore, understood that FPI may exceed the annual limits by in substantial amounts, so long as the aggregate over the 5 year period does not exceed $120. 4 million. In addition to its current semi-annual publication of sales data in the Commerce Business Daily, FPI will compile its sales in dorm and quarters at the end of each fiscal year, and provide a copy of this information to the industry association. The sales level authorized represents approximately 26% of the market through the year 2000. For ease of reference and tracking, it is the decision of the Board of Directors to use sales dollars, rather than market share, as a measure of expansion. The Board believes that the sales level authorized represents a reasonable share of the market, consistent with the definition as published in interim form in the December 4, 1989 edition of the COMMERCE BUSINESS DAILY, and will not impose an undue burden of competition on any single private industry. 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, and the Board will review this information and give it due consideration. SUBCONTRACTING - The Board also requests that FPI continue discussions with members of the dorm and quarters industry to explore possibilities for cooperative efforts such as subcontracting in order to lessen FPI's impact on the private sector. The intent is to expand opportunities for private industry; provide quality products at competitive prices to the federal customers; and enhance employability of federal inmates upon their release. To that end, the Board encourages the private sector to work with FPI to explore opportunities for job placement of qualified inmates within the dorm and quarters industry upon release. WAIVERS - In its oral comments, QFMA stated that improving the processing of waivers was even more important than whether authorized production levels varied a few million dollars one way or another. This Board understands the needs of private industry to have the process of granting waivers as smooth as possible, in order to level out the production process. The Board directed that FPI negotiate with QFMA procedures for improving waiver processing. Several meetings were held on this subject with the following outcome: FPI will coordinate with the four branches of the armed services in an effort to grant maximum waivers at the beginning and throughout each fiscal year, with sensitivity toward maintaining production flow for the private sector and FPI factories; FPI will encourage the armed services to submit their annual waiver requests and production allocations to FPI as soon as practicable in each fiscal year; authority to load factories and grant waivers for dorm and quarters furniture will be centralized in a single manager at the central office level, so as to better control the process; every effort will be made to grant or deny waivers received in good order within 15 working days after receipt; finally, FPI will determine prorated shipment targets for each branch of the armed services based on their projected expenditures and, once the annual shipment target has been met, FPI will grant all subsequent waiver requests from that branch for any order scheduled to ship during the remainder of the fiscal year. WAIVER OF MANDATORY SOURCE - Members of QFMA have expressed an interest in holding discussions with FPI to discuss a pilot project under which FPI would voluntarily agree to waive its status as a mandatory source for dorm and quarters furniture. Toward this end, the Board encourages FPI an QFMA to initiate discussions in an effort to arrive at a future agreement to be presented to the Board, under which FPI would voluntarily waive its mandatory source. The Board finds the pilot intriguing, yet has a concern that placing too much emphasis on profit and business efficiency may detract from FPI's equally paramount obligation to employ inmates and teach them work skills and habits, and could result in fewer inmate jobs for the FPI program. With this caveat, we recommend that the subject be pursued with private industry but that adequate safeguards be established to prevent erosion of the programmatic responsibilities of FPI. Decided this 8th day of March, 1996. For the Board: Joseph M. Aragon, Chairman. 1 Because of lags in federal data collection, the best available information available in 1991 may have been 1990 or even 1989 data. 2 The market study prepared by FPI in 1995 collected market data for the time period 1991 - 1995. In addition, data sources for this time period are publicly available. The record was held open for QFMA to supply additional information, and whatever has been supplied has been taken into consideration. 3 Between 1990 and 1994, data on purchases by Government agencies, as reported by the Federal Procurement Data Center, augmented by the methodology agreed upon between QFMA and FPI, is as follows: $99.2 million in FY 1990; $105.2 million in FY 1991; $117.1 million in FY 1992; $114.3 million in FY 1993; and $85.1 million in FY 1994. FPI's respective sales and market share during this period were $11.5 million (11.6%); $10.3 million (9.8%); $20.7 million (17.7%); $24.6 million (21.5%); and $20.7 million (24.4%). Thus, FPI's market share for each of these years during this period was lower than what the board approves in this decision.

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