FPI CBD ANNOUNCEMENT Federal Prison Industries, Inc., 320 First Street, NW, Washington, DC 20534 Attention: Manager, Planning, Research and Activation. Federal Prison Industries, Inc. (FPI) - announces the decision by its Board of Directors regarding a proposal to initiate production of aluminum and steel shipping and storage containers. Today the Board of Directors for Federal Prison Industries (FPI) issues its decision regarding FPI's proposal to produce a new product--namely aluminum and steel shipping and storage containers. In accordance with the Public Involvement Procedures, FPI announced, in the March 22, 1996 edition of the Commerce Business Daily, the availability of a market impact study on a proposal for manufacturing a new product, specifically aluminum and steel shipping and storage containers. Prior to the preparation of the study, information was solicited from members of the container industry and organized labor. The announcement described the procedures for obtaining a copy of its impact study and invited public comment on the proposal. Subsequently, FPI received written comments from a number of sources, prepared responses to those comments, and submitted all such material to the Board. We have reviewed this information and heard the in-person comments of industry representatives at a meeting in Ann Arbor, Michigan on July 22, 1996. Following this meeting, we asked FPI to provide more detailed information concerning the types of containers that its market study encompasses and the size of these market segments. In response, FPI prepared an addendum to which nine commenters responded with their own insights. The Board wishes to thank all parties who contributed their written and in-person comments concerning FPI's proposal. The board would emphasize that, notwithstanding the fact that FPI needs to create several thousand jobs by the year 2000, the Board is nonetheless required by statute to do this in such a way as to minimize the impact on any single industry in the private sector. The job of identifying sufficient work for the growing number of inmates continues to loom large, and will become increasingly more challenging in the future. In deciding whether to allow production of this product, it is the Board's duty to determine first, whether to approve the combining of SIC codes; and second, whether FPI's production would unduly burden the private industry which manufactures this product or would result in the capture of more than a reasonable share of the total aluminum and steel container market. Definition Of The Specific Product: Several industry commenters argued that FPI's study, in defining the product to encompass steel and aluminum storage and shipping containers, including missile and ammunition containers, defined the market too broadly, and that FPI's use of multiple Standard Industrial Classification (SIC) codes unfairly inflated the market size. First, commenters assert that the aggregation of various SIC codes, as FPI did in its market study, unfairly represents the size of the total market for the product. Since one SIC code does not adequately cover all shipping and storage containers, the market study aggregates multiple codes. Commenters claimed that this aggregation misleads one to believe that the size of the container industry is substantial and that each manufacturer produces an assortment of the products identified by the various SIC codes. A second objection to the market study is that it treats products that are materially different in design and manufacture as though they are interchangeable. According to these comments, aluminum and steel containers should not be included in the same market as they involve substantially different production processes and machinery. Thus, a company manufacturing aluminum containers might face more serious losses than FPI suggests if it were forced to switch over to steel containers. The Aggregation of SIC Codes: The Board understands that the SIC system does not provide guidance to define the container market, since container data is encompassed in a vast number of SIC codes that include containers, rather than in any single category, per se. The Board recognizes that FPI aggregates SIC codes in its market study for several reasons. First, no single SIC code encompasses the breadth of containers FPI is proposing to produce. Second, FPI's use of multiple SIC codes to define its desired production stems from the fact that the Federal government aggregates and publishes its acquisition information on shipping and storage containers in this manner. Aluminum and steel shipping and storage containers, including missile containers, are substantially similar in function to be considered one specific product. The SIC codes do not differentiate between containers made of different materials, and therefore should not be distinguished on the basis of their predominant material of manufacture. Under the SIC system, general use steel boxes and containers have their own SIC codes. Containers for specialized equipment, however, such as aircraft engines, aircraft parts, missiles, etc., may be classified based on the particular use, or product, for which they are designed. For example, if a company is shipping aircraft parts, and manufactures the container for shipping, the container's value of shipments is most likely included in a miscellaneous SIC code for aircraft parts. Moreover, there are no SIC codes that differentiate between the type of material used, except for steel. Aluminum containers are classified under the type of product being contained or under miscellaneous metal categories. Although the containers can house a variety of items and are of varying sizes, the basic function, i.e., shipping and storage of cargo or materials, is essentially the same. Moreover, based on testimony provided at the Board hearing, it appears that even some of the highly specialized companies produce both aluminum and steel containers. It is the Board's decision that the specific product, shipping and storage container, is similar enough in end use and interchangeability that they may be considered as one product for purposes of defining the scope of this market and have the Board render a decision on FPI's potential impact. For these reasons, we think that FPI's aggregation was appropriate and, therefore approve the specific product aggregation of SIC codes as set forth in the impact study. In rendering this decision, the board has carefully considered all information provided by the industry regarding particular segments. Industry Impact: Several commenters asserted that FPI's proposal poses a particular threat to their continued viability, because they produce missile containers which, by their very nature, are limited to the Federal government. That is, they do not do this as a marketing decision; rather, it is dictated by the manufacturing process. We concur that these firms would be disproportionately affected, since the Federal government is the only buyer for many of these specialized containers, particularly of missile containers. Were container manufacturers able to access a viable non-Federal market, the Board would be more inclined to find that FPI's proposal represents a reasonable share of the Federal market. Impact on Small Businesses: Moreover, and perhaps the most critical factor leading to the Board's decision, is the fact that the container industry, particularly the missile and ammunition container segment of that industry, is dominated by small businesses. As reflected in the comments to the study, 97 percent of the suppliers of missile and ammunition containers to the Federal government are small businesses. Projected Market Growth: A third factor in the Board's consideration resulting in its decision is the fact that the market for aluminum and steel shipping and storage containers does not appear to be growing. In particular, the ammunition segment of that market has been, and continues to be in decline. While the overall market shows a slight increase for the next five years, based principally on inflation, projected growth is soft, particularly in the absence of a comparable commercial market. Decision: Given these circumstances that (1) no comparable commercial market for many of these specialized containers is available; (2) the industry is heavily dominated by small businesses; and (3) future growth in this market is tenuous at best, the Board feels that FPI's entry into this market would unduly burden the industry. The Board therefore denies FPI's proposal. The Board would like to acknowledge the comments made by the Small Business Administration and others, including Williamson Metal Works, and AC, Inc., suggesting that approval by the Board of FPI's entry into this market at a level not to exceed 20 percent for any market segment, or item, i.e., National Stock Number, would be acceptable, and would represent a reasonable share of the market from their perspective. While the Board appreciates the efforts on the part of some to arrive at solutions that allow for compromise, we believe that this product is an instance where, for the reasons espoused above, FPI's presence represents a potential adverse impact to the health of small businesses already serving this market. Partnerships in Subcontracting: The Board notes that FPI has attempted to subcontract with private sector companies in the past on containers. Such work can be beneficial where FPI offers its capability to a private company that may not be in the position to bid on the entire contract on its own. FPI has also performed refurbishing on containers as a service to the military (FPI is not a mandatory source for services). The Board has in the past strongly encouraged and promoted such partnerships with private firms, that can be beneficial to both parties. We therefore, continue to encourage such partnerships with private industry, reemphasizing that FPI is not a mandatory source in such endeavors, and would secure work because it offers the best price, quality, and delivery, in a competitive circumstance, to the successful prime bidder. Decided this 7th day of November, 1996. For the Board: Joseph M. Aragon, Chairman. 1. The Public Involvement Procedures' definition of terms, promulgated with private sector participation, requires FPI to define new products using the most current 7-digit SIC code; moreover, it permits FPI to combine codes, with the Board's approval, in instances where the 7-digit code provides a breakdown which is too differentiated. FPI has done this based on the rationale that the items within the various categories may be combined in accordance with the definition of the term new product. 2. See Market Study, p8, discussing conversion of missile containers to general purpose containers.

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