FPI BOARD OF DIRECTORS' DECISION ON SIGNS, DECALS AND RELATED ITEMS The Board of Directors for Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to significantly expand its production of signs, decals and related items (hereinafter referred to as "signs"). As required by statute, FPI prepared a comprehensive impact study which analyzed the potential impact that FPI's expansion of production may have on private industry and labor. On March 27, 1998, FPI sent out "early notification" letters to various sign industry vendors, trade associations and other interested parties. The letters stated that FPI would soon begin work on an impact study covering FPI's proposal to significantly expand its production of signs. The letters also invited recipients to submit any information which might be of use for the impact study. FPI announced, in the June 15, 1998, edition of the Commerce Business Daily, its plans to present its proposal to the Board of Directors; described the procedures for obtaining a copy of the impact study; and invited public comment on its proposal. Copies of the impact study were sent to various manufacturers, trade associations, labor representatives and private individuals. FPI received written comments on its proposal from three sources, prepared responses to those comments, and submitted all such information to FPI's Board of Directors. Members of the Board reviewed all of the materials, including all comments received from interested parties. The Board also heard in-person comments from a sign manufacturer who is also a member of the sign industry's primary trade association during a hearing held on October 20, 1998, in Washington, DC. The Board wishes to thank all parties who took the time and made the effort to submit comments. The industry's written and oral comments were helpful in developing a clearer picture of the industry and its concerns. The Board is now called on by statute to make a determination as to whether the proposed significant expansion in the production of signs would result in FPI's assuming no more than a reasonable share of the market and not cause an undue impact on the industry. In reaching our decision, we have relied on the impact study, with the additional insight that the private sector has afforded us. Issues Objections to FPI's proposal centered on two main arguments: first, that by increasing its sales, FPI will limit the amount private vendors may increase their own sign sales; and second, that FPI's sign production is focused on a narrow niche of the sign market and FPI's impact on that specific niche is too great. The Board examined both of these arguments very carefully. The Board recognizes that every sale of signs (or any other product or service) by FPI is a sale not made by a private vendor. However, the evidence presented to the Board makes clear that the sign industry is healthy and experiencing steady growth. FPI has requested to increase its annual sign sales from $9 million during FY 1998 to $32 million in FY 2004. During this same period, the total domestic market for the types of signs made by FPI is projected to grow by almost $1.6 billion. It is our belief that the growth in the total domestic sign market will provide private sign vendors with ample opportunity to significantly increase their sales during the next five years. The Board received written comments and heard in-person testimony that FPI's expansion proposal would result in an undue burden on the interior architectural and modular sign systems segment of the sign market. We were told that FPI had overestimated the size of this segment of the market. Upon reviewing all of the material related to these criticisms, we feel FPI's increase in sign sales will not create an undue burden. The impact study calculates the total domestic market for architectural signs to be $535 million. The Board heard testimony from a private vendor that this market segment is closer to $200 million. The vendor, speaking on behalf of the sign industry's principal trade association, suggested that only a small number of companies are active in the architectural or modular sign systems segment of the market, and that an increase in FPI's production would have an especially strong impact. The Board acknowledges these concerns, but we feel the evidence does not warrant rejecting FPI's growth proposal. The Board first points out that FPI manufactures a variety of sign and decal items, substantially diversifying its production within the sign industry. We also feel it important to note that the manufacturer making this argument allowed that her firm also produces a diverse variety of sign items, limiting the potential impact which could result from FPI's expansion proposal. As to the accuracy of FPI's market estimates, the Board notes that the impact study provides a clear methodology for how each market estimate is calculated. We wish to emphasize the credence we lend to the report of the FPI Methodology Review Panel (included as an attachment to the impact study). The Panel's report was prepared in response to our request for an objective review of FPI's methodology in calculating Federal procurements. The Board notes that while we received criticism of FPI's estimate of this segment of the market, no interested party provided any type of supporting materials or data to substantiate a lower estimate. Based on in-person testimony presented, we again reviewed the section of the impact study analyzing the potential impact on the private sector. The Board has historically placed an emphasis on the extent to which private companies are reliant upon the Federal market as a measure of potential impact. The study identified only five vendors who obtain more than 20% of their total sales from the Federal government. Only one of these vendors was identified by commenters as participating in the architectural/modular sign systems segment of the market. From materials presented to us, the Board concludes that this particular vendor 1) chose not to offer any information while FPI was preparing its proposal; 2) opted not to submit any comments in response to FPI's impact study; and, 3) decided not to respond to FPI's request for a private sector partner to manufacture signs. The Total Domestic Sign Market FPI's impact study provides a thorough analysis of the total domestic sign market. The impact study estimates the total domestic market for the types of signs manufactured by FPI will be $3.9 billion in 1999. The Board did not receive any written or in-person comments challenging this estimate. FPI's impact study projects this market to grow 7% annually through 2004. Several commenters questioned this projection. However, when we inquired as to what a more accurate figure may be, commenters were either unable or unwilling to offer an estimate. Two commenters stated they "had no crystal ball" and thus would not make a projection. However, the manufacturer who testified before the Board stated that her company has targeted its future growth at 10% annually. This would appear to validate FPI's estimate of 7% annual growth for the industry. It is the Board's impression that the commenter was primarily focused on her firm's rate of return on investment. The commenter did not provide the Board with reason to believe any of her firm's existing workers may be in danger of displacement as a result of FPI's expansion proposal. The levels of FPI production approved by the Board will equate to only 0.6% of the total domestic sign market in FY 2004, a slight increase from 0.4% in FY 1998. FPI's increase in sales will be more than offset by growth in the total domestic sign market. Despite the approved levels of production in this decision, sign sales available to private vendors will nevertheless increase significantly. Measuring the levels of production approved in this decision against the total domestic sign market, we see that in FY 1999, sign sales available to private vendors totaled approximately $3.9 billion. By FY 2004, presuming the growth projected by the impact study occurs, the amount available to private vendors will grow to $5.4 billion. This "expanding pie" allows for FPI to increase its own sales while allowing private vendors to continue to increase their sales. Federal market Information provided to the Board included conflicting projections regarding the current and future size of the Federal sign market. In its proposal, FPI estimated the Federal sign market to be $69.5 million in FY 1998. In testimony before the Board, a representative of the sign industry's trade association claimed FPI's estimate was flawed by overstating the amount of signage purchased per square foot of facility space. The commenter suggested the Federal sign market was smaller than FPI's estimate. Following the hearing, the commenter submitted additional information further challenging FPI's estimate of the Federal sign market. The Board recognizes the differing estimates of the Federal sign market represent a discrepancy. Since we rely heavily upon the Federal market data when rendering a decision, it is crucial we have confidence in the data's accuracy. As noted earlier, FPI's impact study includes complete documentation of how its estimate is calculated. In contrast, the commenter criticizing FPI's estimate of the Federal market offered only limited anecdotal evidence, supplied after the Board's hearing. The Board also noted the commenter's testimony that signs purchased by Federal customers are often bought in ways beyond the GSA contract schedule. This substantiates a contention from FPI's impact study that data covering Federal sign buys is significantly under reported. In light of the evidence presented to us, it is the Board's opinion that FPI's estimate of the Federal sign market is reasonable. The Board made a particular note of the fact that the manufacturer presenting in-person testimony obtained less than 2% of its total sales from the Federal government. The presenter allowed that even if her firm reached its growth goals, only 10% of its sales would be from the Federal market. The Board also notes that FPI is restricted by statute to only selling its products and services to the Federal government. The vast majority of the domestic market for almost every product and service provided by FPI is available solely to private vendors. Indeed, the total domestic market for signs is significantly larger than the Federal market. Production Levels After careful review, it is the Board's decision to approve the expansion proposed by FPI staff. The Board is mindful of the concerns raised by private vendors and does not authorize FPI's expansion lightly. However, we believe that FPI's newly approved level of sales for signs will aid in providing additional inmate jobs while resulting in minimal impact on the sign industry. The Board approves FPI to increase its production of signs, decals and related items to the following levels: FY 1999 $ 16 million; FY 2000 21 million; FY 2001 25 million; FY 2002 28 million; FY 2003 30 million; and, FY 2004 32 million Given the difficulty in achieving an exact level within a given year, FPI may exceed the annual limits by insubstantial amounts, so long as the aggregate over the five year period does not exceed $152 million. The Board believes this increase in sales to the Federal government, coupled with a projected total domestic market growth rate of 7% annually, will effectively minimize FPI's impact on the private sector. In light of the data from the impact study, as well as comments submitted by interested parties and the oral testimony presented before the Board, we feel FPI's increased sign production will not place an undue burden on the sign industry. Rather, we believe the evidence is clear that the growth opportunities available to the industry will be equally as significant as the approved increase in FPI's sign sales. Additional Board Review In addition to its current and semi-annual publication of sales data in the Commerce Business Daily, FPI will compile its sign sales at the end of each fiscal year, and provide a copy of this information to all interested parties. Should any party believe that circumstances such as (but not limited to) overall industry growth or Federal procurements have changed sufficiently that FPI's authorized production is having a substantially greater impact than anticipated in this decision, that party may provide such written information to the Board. The Board will then review the information and, if warranted in light of the information supplied, reexamine FPI's authorized production levels. Decided this 30th day of November, 1998. For the Board of Directors: Joseph Aragon, Chairman Posted 12/11/98 (W-SN279486).

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