Is This The End Of The Private Prison Industry?

The U.S. Department of Justice just announced plans to phase out the use of private prisons, effectively killing the federally-funded wing of the private correctional services industry after concluding that the facilities are both less safe and less effective than their government-run counterparts.

In a memo released Thursday, Deputy Attorney General Sally Yates instructed officials to either decline to renew their contracts with private prisons, or “substantially reduce” the contracts’ scope.

“They simply do not provide the same level of correctional services, programs, and resources; they do not save substantially on costs; and as noted in a recent report by the Department’s Office of Inspector General, they do not maintain the same level of safety and security,” Yates wrote.

The report that Yates referenced was released last week, and it found that private prisons incurred more safety and security incidents than federally-run correctional institutions. For example, private prisons had higher rates of assaults and had eight times as many illegal cellphones confiscated each year.

There are currently 13 privately run facilities in the federal Bureau of Prisons system. Yates said that the Justice Department will not terminate any of its existing contracts, and instead it will simply not renew them when they eventually expire. All of the contracts will come up for renewal over the next five years.

Several private prisons are operated by publicly-traded companies, and investors couldn’t sell off these stocks fast enough following today’s news. The Corrections Corporation of America (NYSE:CXW) and the GEO Group (NYSE:GEO) both fell about 38% on Thursday afternoon.

The Justice Department’s move away from private prisons isn’t necessarily a death notice for both companies; the GEO Group, for example, also operates facilities in Australia, South Africa, and the United Kingdom.

According to its latest end-of-year report, the Bureau of Prisons is only responsible for 15% of GEO Group’s revenue stream, while other federal sources U.S. Immigrations and Customs Enforcement and the U.S. Marshals make up 18% and 12%, respectively.

It's also important to consider that today's decision only extends to federal contracts. Private prisons could still continue to operate on the state and local level.

However, winnings federal contracts in the U.S. is a sizeable enough portion of both companies’ business for this decision to make a major impact, and it will be interesting to see how each company responds. With one memo, the Justice Department completely changed the state of the private prison industry in the United States.