FPI BOARD OF DIRECTORS' DECISION ON ENGINE ELECTRICAL COMPONENTS The Board of Directors of Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to initiate production of engine electrical components. FPI mailed a letter on November 25, 1998 to trade associations, the Small Business Administration, and over 60 companies that supplied the Federal Government with items classified under Federal Supply Classification (FSC) code 2920. That letter notified recipients of the initiation of a public involvement process, as required by FPI's authorizing legislation (18 U.S.C. 4122); explained the public involvement process; and requested any relevant information which the recipients would be willing to share. As required by statute, FPI then prepared a comprehensive impact study, which analyzed the potential impact that FPI's production may have on the private sector. FPI announced, in the February 2, 1999, edition of the Commerce Business Daily (CBD), its plans to present this 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 analyzing the proposal to initiate production of engine electrical components were sent directly to the principal trade associations, various manufacturers, and other interested parties. FPI received written comments on its proposal from three sources by the due date of March 19, 1999, prepared responses to those comments, and submitted all such information to FPI's Board of Directors, along with its request to initiate production of engine electrical components. Members of the Board reviewed all of these materials, in addition to four comments submitted in response to FPI's submission of its final proposal and impact study. The Board also heard in-person comments from two representatives of industry and a member of Congress at an FPI Board of Directors meeting held in Washington, DC on May 25, 1999. The Board of Directors wishes to thank those parties who took the time and effort to comment. 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 required by statute to determine a production level, if any, which will result in FPI assuming no more than a reasonable share of the market and not unduly impacting the industry. In reaching our decision, we have relied on the entire record, including the impact study, written comments submitted, and oral presentations by three individuals at the Board meeting. The Board also noted that, based on the comments FPI received after publication of the original draft impact study, FPI modified its earlier proposal. FPI's revised final impact study requested that FPI be allowed to pursue only those Department of Defense (DoD) engine electrical components contracts that are currently being performed outside of the U.S. The Board addresses the substantive comments raised on FPI's proposal in this decision. Below is a summary of the Board's assessment and findings. The Role of the Board of Directors: During the hearing, Mr. Thomas Tyson, President of Southern Automotive Wholesalers, suggested that the FPI Board made decisions based on questionable material and that FPI should have an appeals process, with a mediator, for businesses who feel they might be threatened by an FPI expansion. It is a mistake to assume that the FPI Board reviews only the material presented by FPI. All information in the record is considered, including all industry-provided data and comments. We also carefully review the oral presentations, ask questions of both FPI and industry representatives, when indicated, and have, on occasion, requested additional information be provided before beginning deliberations. There is no such thing as a blanket approval of impact studies. This Board has, in the past, denied or modified proposals made by FPI, as well as approved proposals. Each proposal is reviewed on its own merits. Further, the Board is always open to revisiting any decision should circumstances change sufficiently so that FPI's approved production is having a greater impact than anticipated. Industry has been encouraged to provide any pertinent information to the Board that addresses unanticipated impact. In the case of engine electrical components, the Industry Involvement, or Guidelines, process worked as it was intended. FPI announced its intentions, and drafted its first impact study based on all available information. Following comments and further data received from industry, FPI revised its earlier impact study and request. This was done specifically so as not to unduly burden the domestic industry. Contacting Associations and Companies: Mr. Tyson further noted during the hearing that FPI did not contact one of the principal industry trade associations involved with this issue. FPI contacted three trade associations regarding this proposal, Auto Parts and Accessories Association, Small Motors Manufacturing Association, and the National Electrical Manufacturing Association, in compliance with the Guidelines statute. Automotive Parts Rebuilders Association (APRA) was not originally included in the list of those associations notified. APRA represents companies that rebuild used motor vehicle parts, not new components. However, FPI immediately responded when APRA expressed the concern that FPI's manufacturing of new components could impact the companies rebuilding used parts that it represents. As indicated in FPI's formal response to the original comments received, FPI mailed a letter on November 25, 1998, to Southern Automotive Wholesalers, Inc. and over 60 other companies, notifying them of FPI's initiation of the public involvement process and requesting certain information. The letter to Southern Automotive Wholesalers did not come back to FPI by returned mail. However, Mr. Tyson's point is acknowledged regarding return receipt requests for those original mailings. The FPI Board of Directors has instructed FPI staff to review this situation. We do not believe it would be cost effective to require FPI to use this method for all the companies it contacts. However, we do recommend this, or other like, method of confirmation for future impact studies in cases of companies whose sales to the Federal government make up a significant percentage of their overall sales dollars. Impact Study Data: Mr. Tyson noted during the hearing that the original impact study contained a number of inaccuracies and errors concerning Southern Automotive Wholesalers, however no specifics were identified. FPI responded to Mr. Tyson's specific concerns in their letter dated March 4, 1999, and adjusted the impact study accordingly. The Board notes that FPI's original data was based on the best information available from legitimate sources, Dun and Bradstreet and the Federal Procurement Data Center. FPI, however, also makes every attempt to use industry data when it is provided. In this particular case, FPI revised its study to reflect the data presented by Southern Automotive Wholesalers. This is the intent of the Guidelines process. Although FPI uses the best and most recent publicly available data, when a company furnishes more accurate data, FPI will incorporate it. Mr. Tyson further indicated that his company, Southern Automotive Wholesalers, is located in a labor surplus area. The Board notes this concern. When able to ascertain this information, FPI does identify companies as being in a labor surplus area. Nonetheless, the Board will have FPI continue to make every effort to identify when companies meet this criterion. In this particular case, once provided this and other compelling information, FPI revised its earlier request to include only those engine electrical components contracts that are currently being performed outside of the U.S. This revision occurred primarily because of the information provided by Mr. Tyson. Foreign Trade and Repatriation: During the hearing there were comments made regarding the subject of repatriation and foreign trade. The issue of FPI producing products for U.S. firms using offshore labor has been given serious consideration since the Deloitte and Touche Independent Market Study report to Congress in August 1991. In an attempt to lessen FPI's reliance on traditional industries, the Board has encouraged FPI to make every effort to pursue opportunities in non-traditional areas, including, but not limited to, repatriation of offshore manufacturing, subcontracting, expansion of services, recycling, and vertical integration. Each of these represents job opportunities in non-traditional areas and generally they do not rely on mandatory source. Mr. Tyson remarked during the hearing that "the value of open trade with foreign countries outweighs the benefit of occupying the time of a few felons." Although the Board was pleased to note that Mr. Tyson was able to view the "big picture" regarding trade with other countries, it is important to note that FPI is far more than just a program to keep inmates busy. FPI is critical both to the Bureau of Prisons and the American public in general. The Board must always keep this "big picture" in mind when considering actions that affect FPI, and continually balance the need for a positive inmate work program with concerns from the private sector. We take this obligation very seriously and understand that as much as the inmate worker gains from an FPI experience, so does the American public, from the correctional officer that is provided a safe working environment, to the many small businesses that obtain work as suppliers to FPI, to the communities that are kept safe from escapes, to the American taxpayer who does not have to bear the cost of higher recidivism or appropriated funds for inmate work programs. These benefits cannot and should not be ignored, and the Board has a duty to consider them as it evaluates the concerns of the private sector. Mr. Audie Zimmerman, Director of Government Sales and Marketing for Prestolite Electric, Inc., noted during the hearing that there were positive aspects for industry if FPI repatriated work currently being performed overseas. Prestolite and other domestic companies, either working in partnership with FPI or as suppliers to FPI, could re-hire staff that had to be laid off due to work going off shore. In addition, for DoD customers, having FPI work in partnership with domestic companies would be beneficial for readiness. The military could prepare itself more quickly in unexpected situations using domestically-supplied parts rather than having to rely on off shore parts. FPI has demonstrated its ability in the past to effectively meet surge capacity in support of DoD. The Board further notes that the current contractor for the NSNs in question is Sielman, S.A., a Greek company. This company obtained the contract through the provisions of the Defense Industrial Cooperation Agreement signed by the governments of Greece and the United States on November 10, 1986. It is not FPI's intention to attempt to limit the number and types of contracts open to bidding by foreign nationals. Rather, it is the Board's responsibility to continually search for work opportunities for the expanding Federal inmate population that will not unduly impact U.S. domestic manufacturers. In recent years, that search has led us to the possibility of repatriating work that has gone to off shore companies. Level Playing Field: During the hearing, there were also comments made that FPI does not have to bear the same kinds of financial liabilities that private sector companies do. Mr. Tyson indicated, erroneously, that FPI does not have overhead costs and payroll liabilities, and does not have to comply with OSHA regulations. That is an inaccurate statement. Not only does FPI have overhead expenses such as utilities, but it also must keep its manufacturing processes labor-intensive without the advances and efficiencies that allow private sector companies to move forward and prosper. FPI also manages a workforce population with numerous disadvantages. Beyond the obvious issue of security, generally inmate workers have minimal education, very little, if any, real work experience, and are not highly skilled. They are also subject to the real demands and interruptions of a correctional environment. Rather than being in an advantageous position, FPI staff has to work as diligently and efficiently as possible under the circumstances to keep production at an acceptable level. FPI also fully complies with all state and Federal OSHA regulations. There does not appear to be universal agreement with the idea put forth by Mr. Tyson that foreign companies are competing on a "level playing field" with U.S. trade, and thus are acceptable as competitors. As Mr. Zimmerman pointed out, foreign companies are not subject to the same laws and restrictions to which American companies must adhere. So that even though having foreign companies involved in producing U.S. goods may be beneficial for world trade and goodwill among nations, it is not accurate to assume that they have the same production liabilities and obligations that U.S. companies, or even prison industries, have. The FPI Methodology Report: During the hearing, both Representative Peter Hoekstra (R-MI) and Mr. Tyson referenced the FPI Methodology Review Panel Final Report. The Methodology Review Panel briefed the Board at its meeting held September 30, 1997. At this meeting, the panel presented its final report and reviewed its findings and recommendations. Several recommendations have been implemented, including posting the FPI Sales Report on the UNICOR web site and making three year history of data available. Specifically addressing the studies, the Panel did not "urge" FPI to hire an outside entity to conduct the impact studies. Rather it suggested that FPI would be subject to less criticism if the studies were contracted out. At the same time, the panel recognized that this may not be possible, due to costs, time, resources, etc. Moreover, the Panel stated that FPI's methodology and basic approach is sound and reasonable, and complimented FPI's work on the studies, particularly its supporting documentation, stating: "FPI is to be lauded for stating its assumptions and documenting the procedures used in each of its impact studies .... FPI has done a thorough job of documenting each step taken in estimating Federal procurements and making them available for review and criticism." There are a number of reasons the Board is not recommending that FPI contract this task out at this time. As articulated by the Panel, FPI staff ensures that the impact studies presented to the Board are comprehensive, well-documented, and as detailed as possible, with industry-provided data included to the maximum extent possible. The cost of an outside contractor providing the same services would be prohibitive. This is especially true given that FPI would still need to conduct its own research for the proposal. The Board believes that the current process, which allows full private sector input, fulfills both the letter and the spirit of the Guidelines legislation and is fair and reasonable. The Engine Electrical Components Market: In its final impactstudy, FPI requested that the Board authorize its initiating production of engine electrical components which fall primarily within FSC code 2920 -- Engine Electrical System Components, non-aircraft. FSC code 2920 forms the basis for identifying the Federal market for engine electrical components. FPI also used SIC industry 3694 -- Engine Electrical Equipment and SIC industry 3714 -- Motor vehicle parts and accessories, to further clarify and define the Federal market. The 4-digit level of the SIC system is the only level used by Federal agencies in reporting their procurement data. Federal Market: Based upon data obtained through DOD, the General Services Administration (GSA), Postal Service, and other agencies, the market study estimated the current Federal market for engine electrical components at $32.1 million and projected the market to reach $38.2 million by 2004. Domestic Market: The estimated value of the total domestic engine electrical component market was approximately $9.4 billion in 1996. The total domestic market is estimated to reach $11.2 billion in 2000 and $13.4 billion by 2004. The entire Federal market is less than one-third of 1 percent of the domestic market. Potential FPI Impact: It is the determination of the Board of Directors that the sales levels requested by FPI would not place an undue burden upon the engine electrical components industry or labor. We based this determination on the record, including the following conclusions: * Most vendors active in the Federal engine electrical component market are either diversified manufacturers or distributors of a wide variety of products other than engine electrical components and also market those products to the commercial sector. However, one vendor, Southern Automotive Wholesalers, Inc., relies heavily on the FSC 2920 market, deriving approximately 52 percent of its total sales from this particular Federal market. Based on concerns raised in correspondence received from Southern Automotive Wholesalers, FPI modified its original proposal to focus its efforts exclusively on repatriating work that is performed outside of the United States. Given this change of direction by FPI, the Board is confident that concerns raised by Southern Automotive Wholesalers have been adequately addressed, and that FPI's production of repatriated engine electrical components would not have an adverse impact on their company. * In order to avoid the potential for adversely impacting the domestic industry, any FPI production of engine electrical components would be based on repatriation of contracts performed by non-U.S. vendors. FPI limited its request to the annual contract value of NSN's 2920009092483 and 2920012646542, or any future work that it could also repatriate that is performed outside the U.S. * No civilian jobs within the domestic industry should be lost as a result of this initiative. Board Intervention: Upon review of the official record and on the basis of all the aforementioned information, the Board was inclined to approve FPI's request to initiate production of engine electrical components that are currently being manufactured outside of the U.S., at the levels requested in the impact study. However, due to the concerns expressed in a May 7th letter by Mr. Theo Efremides, President of Sielman, S.A., the Board needed more information on the issue of foreign reciprocal trade; specifically the details of the Defense Industrial Cooperation Agreement (DICA) and DoD's opinion on the subject. The Board requested that FPI staff contact DoD to seek this additional information. FPI obtained a copy of DICA, and contacted the DoD Office of Defense Procurement (Foreign Contracting). DoD officials discussed the issue with FPI staff, and expressed reservations about FPI using its mandatory source status to obtain these particular contracts. These concerns were conveyed to FPI through a letter from the Office of Defense Procurement. DoD noted its concerns regarding the balance of defense trade between Greece and the U.S. Specifically, the intent of DICA is the removal of trade barriers in order to allow each country the opportunity to compete. Based on this information, the Board considers the DoD request that FPI not become a mandatory source for the NSNs in question to be valid and justified. Board Decision: Because of DoD's legitimate concerns regarding the DICA issue, the Board has decided to deny FPI's r Posted 07/14/99 (W-SN353957).

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