FPI BOARD OF DIRECTORS DECISION ON ELECTRIC PORTABLE AND HAND LIGHTING EQUIPMENT The Board of Directors of Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to expand production of electric portable and hand lighting equipment. FPI mailed a letter on January 25, 1999 to trade associations, the Small Business Administration, organized labor, and over 60 companies that supplied the Federal Government with items classified under Federal Supply Classification (FSC) code 6230. 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 March 30, 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 expand production of electric portable and hand lighting equipment were sent directly to the principal trade associations, various manufacturers, and other interested parties. FPI received written comments on its proposal from four sources by the due date of May 14, 1999, prepared responses to those comments, and submitted all such information to FPI's Board of Directors, along with its request to expand production of electric portable and hand lighting equipment. Members of the Board reviewed all of these materials and also heard in-person comments from three representatives of industry at an FPI Board of Directors meeting held in Washington, D.C. on October 19, 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 ofthe industry and its concerns. No comments were received by the associations contacted, either at the beginning of the process, or after the final study was completed and mailed to the associations. Likewise, no comments were received from either the Small Business Administration or organized labor. The following three individuals/companies testified at the hearing: Carolyn Stine, President, Multi-Spec Products Corporation; Kevin McDermott, President, Tek-Lite, Incorporated; and, Thomas Joseph, President, Magnum Products, Incorporated. The Board of Directors is required by statute to determine a production level, 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 FPI modified its earlier proposal, based on the comments FPI received after publication of the original draft impact study. FPI's revised final impact study requested that FPI be allowed to pursue all items within FSC code 6230 with the exception of flashlights and specific NSN items made over a previous three year period (reviewed on an annual basis) by two of the companies that commented. The Board addresses the substantive comments raised on FPI's proposal in this decision. SIZE OF MARKET Federal Market Based upon data obtained through Department of Defense (DOD), the General Services Administration (GSA), the Postal Service, and other agencies, the market study estimated the current Federal market for electric portable and hand lighting equipment at $34 million and projected the market to reach $40 million by 2004. Domestic Market The estimated value of the total domestic electric portable and hand lighting equipment market was approximately $2.8 billion in 1996. The total domestic market is estimated to reach $3.3 billion in 2000 and $3.9 billion by 2004. The entire Federal market is less than one percent of the domestic market. The Board believes that a substantial market exists outside the Federal government for FSC code 6230 items. IMPACT STUDY DATA 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 two companies, Multi-Spec Products and Tek-Lite, Inc. During the hearing, Ms. Carolyn Stine stated that FPI misstated its Federal market share percentage as 27.5% when its own internal report stated a 34.4% market share. The Board clarified these figures with FPI staff. The 34.4% figure is an actual number from FPI's publicly available Fiscal Year 1997 market share report. The 27.5% figure was an estimate of the Fiscal Year 1998 market share based upon sales data available when the study was completed. Ms. Stine also indicated that FPI's revised proposal to eliminate items manufactured in a previous three-year period would have little positive impact. Government purchases of the types of lighting items manufactured by Multi-Spec occur not on a three-year cycle as alluded to in the report, but rather on varying cycles, between six months and seven years. A case in point is that of a floodlight last manufactured in 1994. This particular floodlight was recently on a solicitation which was awarded to Multi-Spec and which will keep the company busy for six months. She further indicated that the items listed in her correspondence with FPI should all be excluded because of the cyclic nature of the solicitations. Although this point had not been previously made, the Board considered it in its deliberations. Mr. Kevin McDermott restated his written opinions that FPI's expansion in Federal Supply Class 6230 would severely damage small companies. He also referred to the market share percentages mentioned by Ms. Stine and clarified above. He indicated that his company has already suffered as a result of Defense downsizing and that his company's employment has decreased from a high of 70 to its present eight employees. He indicated that the company produces approximately 25 NSNs within the FSC code 6230 class. He also stated that 99% of his company's revenues are from military purchases with a 50/50 split between FSC code 6220 and 6230 items. Mr. Thomas Joseph indicated that his company primarily manufactures light towers and that there are only six major manufacturers of these items. Mr. Joseph asserted that the original impact study contained a number of inaccuracies concerning Magnum Products, Inc. Mr. Joseph stated that items sold to the Federal government are cyclic and estimated that 10 to 25 percent of his revenues are from Federal government procurement. The Board notes that the percentage of Magnum sales to the Federal government is higher than that indicated in the study. Nonetheless, given the sizable domestic market and Magnum's sales levels outside the Federal sector, the Board believes that Magnum will not be significantly impacted by FPI's expansion. REASONABLE SHARE OF THE MARKET Mr. McDermott stated that he believed that FPI should concentrate its manufacturing efforts evenly across all FSC codes. He noted that FPI's market share is high in FSC code 6230 and five other FSC codes, but low in all others. He suggested that FPI spread these percentages more evenly across all the FSC codes, and particularly concentrate expansion efforts in those with low percentages. The Board notes that the statute and guidelines provide that the determination of "reasonable market share" be determined by the Board of Directors on a product by product basis. One of the primary reasons for this is that the impact may vary by product and by industry, depending upon a range of factors. The current practice has made it possible to focus on the specific product and incorporate industry input so that rather than an acrossthe board rule of thumb, a far more sensitive mechanism exists, by which market determinations are individualized. Ms. Stine restated her written opinions that law-abiding, taxpaying citizens should not suffer at the expense of providing inmate jobs. She indicated that her company currently employs 11 people, down from a high of 25. Further she stated that she believed the reduction in staff is attributable to NIB/NISH involvement in the production of one NSN item, a distress light marker, which constituted 35% of her business prior to 1996. She stated that FPI's proposal to further decrease the availability of additional items for private sector competition would erode her ability to stay in business. OTHER ISSUES Market Study Procedures Mr. Joseph stated that FPI has failed to provide information he believed pertinent to both his presentation and long-standing belief that the government is being "ripped off" by FPI's pricing and procurement policies. He indicated that he has attempted to obtain specific information from FPI on numerous occasions about its involvement in light towers and has not received any answers. He suggested that FPI produced a new product without following its own procedures. The current guideline procedures were provided to each interested party in FPI's original package and letter of request for information. Floodlight components have been provided by private sector manufacturers and assembled by FPI since the 1970's, using inmate labor, and subsequently returned to the military as a cohesive end unit. The guideline rules in existence prior to 1997 were capacity-based, and stated that "significant expansion" was triggered by one of two criteria: 1) production at a new factory not offset by corresponding reduction at an existing factory, or, 2) production at an existing factory accompanied by a 10% increase in capacity resulting from expanding any of three production inputs: plant size, equipment capacity, or inmate employment. Since floodlights were not considered a new product nor did capacity changes occur, the industry involvement guidelines process was consequently not invoked, no study was conducted, nor was the Board tasked with rendering a decision. Mr. Joseph also indicated that FPI had not satisfactorily responded to his inquiries about specific items manufactured by FPI for Defense agencies or how FPI is awarded contracts without competition. The Board has reviewed the questions raised by Mr. Joseph, and provided in the record, particularly related to the NF-2D floodlight. The Board recognizes that FPI's operations are open to the public, however, there are certain conditions under which all government agencies can and do exclude information deemed sensitive. In the case of an ongoing contract negotiation, such as the one Mr. Joseph referred to at Memphis, Tennessee, release of the information pertinent to these negotiations is not deemed public. In the context of the study, the NF-2D contract issue is unrelated to the expansion proposal and was addressed separately in a response to Mr. Joseph by FPI. Any questions related to Defense procurement procedures should be directed to the Department of Defense. Repatriation During the hearing there were comments regarding repatriation and foreign trade. The issue of FPI producing products for U.S. firms as a means of providing new avenues to create inmate jobs without adversely impacting private industry using offshore labor has recently been given serious consideration. 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 services, subcontracting, expansion of services, recycling, and vertical integration. Each of these represents job opportunities in non-traditional areas and they do not rely on mandatory source. Mr. McDermott, in particular, after being asked by a Board member if Tek-Lite would be willing to engage in partnership agreements with FPI, stated that he would be willing to participate in a venture where FPI would produce component parts currently produced offshore with subsequent sale to his company. Mr. McDermott stated that he would support this kind of initiative because some components are no longer available in the United States and that FPI would be a viable alternative. Level Playing Field During the hearing, there were also comments made that FPI does not have to bear the same financial liabilities that private sector companies do. Mr. Joseph indicated that because FPI does not have to pay minimum wages, its labor costs are much lower than those in the private sector. While this is a common perception, it does not account for costs incurred because of the correctional environment. These costs do not occur in the private sector and are additional overhead costs incurred by FPI. Common technological advances and efficiencies that allow private sector companies to move forward and prosper are not common in FPI. FPI also manages a workforce population with numerous disadvantages. Beyond the obvious issue of security, inmate workers generally have minimal education, very little, if any, real work experience, and are not highly skilled. They are also subject to the 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 applicable Federal OSHA regulations. Mr. Joseph inferred that the military would pay more by purchasing light towers from FPI than directly from his company and that his company was not given a chance to compete for the light tower/portable floodlight. The customer determines the specifications they require. Once the customer comes to FPI, FPI's price must, by statute, be within the current market price. In this particular case, since FPI's value added consists of inmate labor and assembly of parts provided by the private sector, FPI put its parts purchase out to a competitive bid. This contract, unlike a previous FPI award which went to Magnum Products, was awarded to another vendor. This award was upheld by the General Accounting Office after Mr. Joseph filed a protest. The GAO was the final administrative authority on the contract matters at issue. Any other issues related to DoD procurement should be addressed to the DoD. Mr. Joseph also inferred that there is no competition as far as the portable floodlight is concerned. FPI is mandated to meet all specifications including price, quality, and delivery, and routinely waives contracts for which these conditions cannot be met. Moreover, FPI is only authorized to produce up to the level of production authorized by the Board. Any production above or beyond that level would have to be performed by the private sector. From conversation with staff, the Board understands that the customer is happy with FPI's producing the current lights and is supportive of its continuing relationship with FPI. Further, the study mentions that two other manufacturers of these units are on GSA Schedule. This means that any agency can select a commercial version of the total unit from that schedule. The Board encourages Mr. Joseph to contact GSA to find out how Magnum Products' floodlight units can likewise be listed on this schedule. Military Readiness Mr. Joseph indicated that he believed FPI could not deliver its products to the DoD in the event of a national crisis or emergency, such as Haiti. He mentioned that Magnum supplied DoD with floodlights for Haiti after receiving the contract on Friday afternoon, redesigning it, and shipping it the following Thursday. He did not think FPI could respond that quickly. The Board notes that FPI has always worked with DoD and the private sector to ensure DoD can meet its readiness requirements. During the Gulf War, FPI was able to quickly respond to many DoD requirements. For those instances when FPI cannot respond quickly, DoD can and does solicit the private sector for production capabilities to meet its needs. DoD does not typically rely on one manufacturer for any single item unless there is a small requirement, or the item is only made by that one manufacturer. It is unlikely that FPI will be a sole source supplier to the military for any NSN item within FSC code 6230 unless the military desires it. FPI has worked with DoD to assure that its operations are conducted in a way that does not significantly impact the supplier base for DoD. FPI is on record in writing to DoD that it will not produce 100% of any requirement unless requested by the customer. This will ensure that DoD continues to have secondary sources of supply in the private sector. The Board believes this policy addresses industry concerns and continues to affirm FPI's adherence to it. Research and Development Mr. McDermott advised the Board on recent technological advances in lighting products, specifically the move to solid state lighting which uses light-emitting diode (LED) technology. Thistechnology results in longer lasting, more efficient hand-held lighting items, and in battlefield situations, allows a soldier to see without allowing the enemy to see him. Mr. McDermott stated that this kind of technology is being developed by the private sector and that he did not believe FPI could effectively perform the research and development for these items. He stated that he believed this was the future of the lighting industry. Mr. McDermott alluded that research and development efforts for technologically advanced lighting items would decrease or disappear if FPI increases its market share of FSC code 6230. His presentation was specific to night vision equipment. The Board notes, after further research, that night vision equipment items are not included in FSC code 6230. FPI is not involved in this kind of production for the very reasons Mr. McDermott mentioned, that is, technological advancements and extensive research and development efforts. LED technology appears to be a highly specialized manufacturing area. The Board also notes, that there may be security issues related to inmate production of such items, that would first have to be addressed. Potential FPI Impact It is the determination of the Board of Directors that, with the further concessions made to address concerns of Multi-Spec and Tek-Lite, the sales levels requested by FPI would not place an undue burden upon the electric portable and hand lighting equipment industry or labor. We based this determination on the record, including the following conclusions: * Most vendors active in the Federal electric portable and hand lighting equipment market are either diversified manufacturers or distributors of a wide variety of products across various FSC code categories. The exceptions are those manufacturers primarily involved with flashlight production. However, two vendors, Multi-Spec Products and Tek-Lite, Inc., rely heavily on the FSC code 6230 market, deriving approximately 50 percent of total sales from this particular Federal market. Based on concerns raised in correspondence received from these two companies, FPI modified its original proposal to eliminate specific National Stock Number (NSN) items made over a three-year period from production. After additional comments provided during the Board hearing, the Board has further reduced FPI's proposal by excluding from production Posted 01/06/00 (W-SN413724).

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