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Privately Operated Prisons a Potential Growth Industry : Business: State has five such facilities, may add another. The field is attracting large investors.

THE PRICE OF PUNISHMENT. The Booming Business of Running California's Prisons. Last in a series


SACRAMENTO — Prisons are a growth industry in California, so some entrepreneurs are hoping that the state will turn increasingly to privately owned and operated prisons as a way to shave costs.

The Department of Corrections is unlikely to turn over control of maximum-security prisons anytime soon, and officials say private prisons will remain only a limited player as the $3-billion-a-year state prison system expands.

But four private companies now run five prisons for 1,300 low-security inmates in California, and the state is considering a proposal to open a sixth private prison for 550 medium-security inmates. With 22 states allowing private prisons, the business has caught the attention of big-time investors.

This year, Cornell Cox, a corrections firm in Houston, entered the California market by buying the state's biggest private prison firm, Eclectic Communications Inc. Cornell Cox is backed by Wall Street investment houses Charterhouse and Dillon, Reed & Co.

Dillon, Reed's venture capital arm homed in on corrections as an investment opportunity because government spends billions a year on prisons annually and the market grows 12% a year, said Peter A. Leidel, a senior vice president of Dillon, Reed.

"Crime is becoming a more significant problem," Leidel said. "More dollars will flow to it."

State records show that Eclectic has received contracts worth more than $50 million since 1988. Arthur McDonald, the company's former owner, said he sold the company for more than $10 million.

McDonald is a former social worker and vice president of a soft drink firm who started Eclectic in 1974 with "$1,000 and an electric typewriter." By the time he sold the company, he had run two private prisons for California and a dozen halfway houses.

"Crime pays. I hate saying that, but it really does," said McDonald, who has retired to South Dakota.

Cornell Cox is privately held, but hopes to go public with a stock offering soon, Leidel said. This summer, Wackenhut Corp., a Florida-based security firm that runs a 200-bed prison in McFarland, spun off its prison subsidiary, Wackenhut Corrections Corp., and began offering its stock publicly. The state will pay Wackenhut $4.5 million this year to operate the prison.

Criminal justice professor Dale Sechrest, of Cal State San Bernardino, is studying private prisons and expects that the business will expand as prison costs increase.

"What worries me," said Sechrest, "is that all these promises of doing the job better for less money are not true." Private firms operate prisons for less than the state, but he said the difference is "marginal," a few thousand dollars per inmate a year.

Craig Brown, undersecretary of the Youth and Adult Correctional Agency, said the role of private prisons may increase slightly in years to come, but will remain limited.

"Public safety is a fundamental role of government and should be done by government," Brown said.

Sen. Robert Presley (D-Riverside) held a hearing on the 240-bed Mesa Verde private prison in Bakersfield in July and concluded that it is cheaper to run than state prisons, and may do a better job.

The facility is run by Durwood Sigrest, a former parole agent who co-founded Alternative Programs Inc. His contract pays $16,600 per inmate--several thousand dollars a year less than the cost of housing in a state prison.

Sigrest saves money by paying guards $11 to $12.50 an hour, half of what the state pays correctional officers. Unlike the Department of Corrections, he also cut costs by not paying high prevailing union wages for construction.

Although Sigrest is "profit-motivated and efficiency-motivated," he also hopes to make a difference in prisoners' lives. "I feel an urgent need to make a run at that," he said.

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