GAO

United States General Accounting Office

Report to Congressional Requesters

June 1999 DEFENSE 

ACQUISITIONS

Historical Analyses of 

Navy Ship Leases

GAO/NSIAD-99-125

Page 1 GAO/NSIAD-99-125 Defense Acquisitions

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-281374 Letter

June 25, 1999

The Honorable John Warner

Chairman, Committee on Armed Services

United States Senate

The Honorable Olympia Snowe

Chairwoman

The Honorable Edward Kennedy

Ranking Minority Member

Subcommittee on Seapower

Committee on Armed Services

United States Senate

To acquire 12 Auxiliary Dry Cargo vessels, the Navy recently proposed 

using long-term leasing rather than outright purchase.1

 Historically, the 

Navy has purchased its combat ships, but it has used long- and short-term 

leasing arrangements to acquire certain auxiliary vessels to perform supply 

and other operational support functions. Although it now appears that the 

Navy will purchase the dry cargo vessels, it still considers long-term leasing 

an alternative to purchasing auxiliary vessels. 

This letter responds to your request for a historical analysis of the Navy’s 

decisions to lease Sealift tankers, Maritime Prepositioning Ships, T-5 

replacement tankers, and Chouest specialized support vessels. 

Specifically, we (1) determined the basis and support for the Navy’s lease 

decisions, (2) reviewed past concerns regarding those decisions, and

(3) identified legislative and regulatory changes that affect current and 

future leasing decisions. On April 21, 1999, we testified on some historical 

insights into Navy ship leasing. This report updates the information 

provided in that testimony.

1

In 10 U.S.C. 2401, a long-term lease is defined as a lease, charter, service contract, or conditional sale 

agreement that lasts for a period of 5 years or longer (including options to renew or extend the initial 

term of the lease), for a period of more than one-half the useful life of the vessel, or for a period of

3 years or longer (including options to renew or extend the initial term of the lease) when certain 

investment tax credits or depreciation are claimed by the lessor. For the purposes of this report, a 

short-term lease is any lease, charter, or service contract that does not meet the definition of a 

long-term lease provided in 10 U.S.C. 2401. 
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Results in Brief The primary reason the Navy decided to use long-term leases to acquire 

auxiliary vessels in the early 1970s and early 1980s was the ability to 

acquire the vessels without a large, up-front obligation of procurement 

funds, which were being used to purchase combat ships and meet other 

Navy procurement priorities. The Navy also cited readiness and industrial 

base concerns as reasons for entering into the long-term lease 

arrangements. Cost-effectiveness was not the primary factor in the Navy’s 

decisions. The Navy complied with then-existing requirements to perform 

lease versus purchase cost analyses, and its analyses concluded that 

leasing was more cost-effective than purchasing. 

When the Navy entered into these long-term leases, concerns arose 

regarding (1) the budget authority needed to make such large, long-term 

funding commitments and (2) the cost-effectiveness of such commitments. 

After entering into the long-term arrangements of the early 1980s, the Navy 

expressed concerns about the total amount it should record as a firm 

obligation in the Navy Industrial Fund.2

 Congress was also concerned 

about whether the Navy Industrial Fund could adequately cover the total 

obligations that would accrue from these leases. To address these 

concerns, the Navy requested and received congressional authorization to 

carry out the acceptance provisions of the long-term leasing contracts and 

incur obligations in advance of appropriations. The cost-effectiveness of 

these long-term commitments was also questioned. At the time, there were 

limited guidelines for conducting lease versus purchase analyses. As a 

result, cost studies used different assumptions and methodologies in 

analyzing the alternatives and drew different conclusions about the 

cost-effectiveness of leasing. In 1983, our report and a congressional staff 

study questioned the validity of the assumptions used in the Navy’s studies 

and their conclusions.3

 Had the Navy’s studies used assumptions that more 

fully reflected the government’s total costs, they would have concluded 

that purchasing was the cheaper alternative.

Since the long-term leasing decisions of the early 1970s and early 1980s, a 

number of changes in oversight and cost analyses have occurred that will 

2

At that time, the Navy Industrial Fund was a revolving fund that provided products and services, and it 

was reimbursed for those products and services by its customers out of operation and maintenance 

appropriations.

3

Improved Analyses Needed to Evaluate DOD’s Proposed Long-Term Leases of Capital Equipment

(GAO/PLRD-83-84, June 28, 1983) and Tax Aspects of Federal Leasing Arrangements, Staff of the Joint 

Committee on Taxation JCS 3-83 (Feb. 25, 1983).

Letr
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affect current and future long-term lease decisions. Through legislation, 

Congress has increased its control over leases lasting 5 years or more and 

made the leasing decision more transparent. Additionally, budget-scoring 

guidelines have increased the emphasis on up-front budget authority by 

providing Congress with a mechanism to assess the cumulative impact of 

long-term leasing decisions prior to the obligation of funds. Finally, tax 

benefits, which made leasing an attractive option to the Navy, have been 

reduced, and more detailed guidelines now require that the Navy perform 

lease versus purchase analyses that better reflect the government’s total 

cost of long-term leasing arrangements.

Background The Military Sealift Command is responsible for administering the 

Department of Defense’s (DOD) leases of auxiliary vessels. In the early 

1970s and early 1980s, the Navy used long-term leases, called charter and 

build arrangements, to acquire Sealift tankers, Military Prepositioning 

Ships (MPS), and T-5 replacement tankers. Under these arrangements, the 

private sector lessors arranged for the construction, long-term financing, 

and delivery of the vessels. In return, the lessors, as owners of the ships, 

receive a return on their investment from the Navy’s lease payments, tax 

benefits, and the residual value of the vessels at the end of the leases. The 

Navy leased the vessels for 20 to 25 years and agreed that it would pay 

scheduled termination costs if it canceled the leases. The termination 

costs ensure that lessors will recover their investment plus a specified rate 

of return.

In 1972, the Navy entered into contracts with two contractors for the 

long-term lease of nine Sealift tankers. These tankers were put into service 

in 1974 and 1975, but are no longer being leased. In 1982, the Navy awarded 

13 separate contracts (based on offers received from 3 different 

companies) for the long-term lease of a total of 13 MPS vessels. Each 

contract was awarded to a separate special purpose corporation. The first 

of these 13 vessels was delivered to the Navy in September 1984, and all 

remain under lease. Also in 1982, the Navy awarded contracts for the 

long-term lease of five newly constructed T-5 replacement tankers. The 

first of these tankers was delivered in June 1985, and all remain under 

lease. 

The Navy has used a different type of lease arrangement to acquire the 

specialized support services of vessels owned and operated by Edison 

Chouest Offshore. Since 1988, the Navy has used the small- to 

medium-sized Chouest vessels for transportation services and special 
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missions, such as oceanographic surveillance and research. Generally, 

these vessels have been leased through short-term leases that consist of a 

fixed period of 17 months or less followed by multiple option periods of

17 months or less that, when combined, do not exceed 5 years. With 

30-days notice, the Navy can cancel these short-term leases during the 

option period without incurring termination costs. In addition to these 

short-term leases, the Navy entered into a 5-year, long-term lease for the 

Cory Chouest in 1998. For the long-term lease of the Cory Chouest, the 

Navy’s termination costs are limited to redelivering the vessel to its owner 

in its original condition, with normal wear and tear excepted. Under both 

the short- and long-term leases of the Chouest vessels, the Navy’s lease 

payments cover the services of the vessel, crew, and its operation and 

maintenance on a daily use basis.

Since 1969, a DOD instruction has required DOD components to perform 

economic analyses of lease versus purchase decisions.4

 Following the 

long-term leasing decisions of the early 1980s, Congress enacted statutory 

provisions that require specific analyses or determinations to be made 

prior to entering into certain types of leasing arrangements. These statutes 

and other guidelines do not apply to the short-term leases of Chouest 

vessels, and as a result, the Navy is not required to perform lease versus 

purchase analyses prior to entering into these short-term arrangements.

Basis and Support for 

Lease Decisions

Cost-effectiveness was not the primary reason for the Navy’s decisions to 

lease auxiliary vessels in the early 1970s and early 1980s. According to 

Navy officials, the primary reason for proposing long-term lease(s) was the 

need to devote procurement funds to higher priority combat ships. 

Long-term leasing allowed the Navy to meet its support requirements 

without a large, up-front obligation of procurement funds. Had the Navy 

purchased these vessels, funds would have been obligated from the Navy’s 

Shipbuilding and Conversion procurement appropriation; payments would 

have been required prior to delivery over the relatively short construction 

phase; and auxiliary ships would have had to compete with combat ships 

for procurement funds. By leasing the vessels, the Navy believed it could 

spread payments over the length of the leases and use its annual Operation 

and Maintenance appropriations to fund them without incurring an 

up-front obligation of the total lease amount. 

4

Since 1969, this instruction (DOD Instruction 7041.3) has been revised twice, in 1972 and 1995.
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Readiness was an additional factor cited in the Navy’s decision to enter into 

long-term leases for auxiliary vessels. For example, the Navy believed that 

the MPS vessel program could not fulfill its mission effectively unless all

13 vessels could be acquired in a short period. However, available 

procurement funds were insufficient to purchase enough MPS vessels to 

fulfill the Marines’ requirement for prepositioned equipment and supplies 

in three strategic locations around the world. Through the long-term 

leasing arrangement, the Navy acquired all 13 vessels by 1986—4 years 

after the contracts were awarded.

Industrial base concerns were another factor in the decision to lease the 

MPS vessels and T-5 replacement tankers in the early 1980s. At that time, 

the commercial shipbuilding sector was in decline. A Navy official stated 

in a 1983 hearing that projects such as the MPS and T-5 replacement tanker 

programs were needed to prevent the potential closing of several 

commercial shipyards and to protect the nation’s industrial base.5

Cost-effectiveness was not the primary reason for the Navy’s lease 

decisions, but the Navy maintained that long-term leasing was a 

cost-effective way of acquiring the services of auxiliary vessels. Cost 

studies provided by the Navy, together with historical references to Navy 

analyses in our 1973 report6

 and in congressional hearings in 1982 and 

1983,7

 indicate that the Navy complied with DOD requirements to perform 

lease versus purchase cost analyses in support of its long-term leasing 

decisions for the Sealift tankers, MPS vessels, and T-5 replacement tankers. 

The Navy’s analyses showed that long-term leasing would be cheaper than 

purchasing.

Flexibility and cost-effectiveness are cited as the primary reasons for 

leasing the Chouest vessels. According to a Military Sealift Command 

official, flexibility is important because the military requirements for 

5

Federal Leasing Practices Hearing before the Subcommittee on Oversight of the Committee on Ways 

and Means, House of Representatives, 98th Congress, First Session, February 28, 1983.

6

See Build and Charter Program for Nine Tanker Ships (B-174839, Aug. 15, 1973). 

7

See Hearing on Contract Awards for Charter and Conversion of the TAKX Pre-Positioning Ships 

Program before the Readiness Subcommittee of the Committee on Armed Services, House of 

Representatives, 97th Congress, Second Session, September 17, 1982; Federal Leasing Practices Hearing 

before the Subcommittee on Oversight of the Committee on Ways and Means, House of 

Representatives, 98th Congress, First Session, February 28, 1983; and Governmental Lease Financing 

Reform Act Hearing before the Committee on Finance, U.S. Senate, 98th Congress, First Session, July 19, 

1983. The TAKX program is now commonly referred to as the MPS program.
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special mission vessels, as well as the funding for these requirements, are 

frequently uncertain. The lease arrangements for the Chouest vessels 

provide military users the flexibility to obtain commercial vessels for 

short-term, specific technological and design needs. Military users like 

short leases because they can return the vessel to its owner rather than 

retain an asset that they no longer need once a mission is completed or that 

they can no longer afford once funding is discontinued. While lease versus 

purchase analyses were not required for the short-term leases of the 

Chouest vessels, such an analysis was performed before the Navy entered 

into a 5-year, long-term lease for the Cory Chouest. This analysis 

concluded that it was in the government’s best interest to lease this vessel 

instead of purchasing a similar vessel. The Navy found that the 

government would save approximately $3 million to $15.4 million by 

leasing the Cory Chouest from 1998 through 2003 rather than purchasing a 

comparable vessel. 

Concerns About 

Budget Authority and 

Supporting Analyses

The Navy’s decisions to enter into long-term leases raised concerns about 

whether (1) the Navy had sufficient budget authority to cover the total cost 

of the leases, especially termination costs if the leases were canceled and 

(2) the Navy’s lease versus purchase analyses adequately reflected the 

government’s costs. 

Concerns Regarding Budget 

Authority

Under the Navy’s ship leasing programs, the leases were to cover a base 

period of 5 years, renewable up to 20 or 25 years at 5-year intervals, with 

substantial termination costs for failure to renew. After entering into the 

long-term leasing arrangements with the contractors in the early 1980s, the 

Navy became concerned about the total amount it should record as a firm 

obligation in the Navy Industrial Fund once the lease period started, and it 

requested our legal opinion. Following the request, Congress expressed 

concern about the adequacy of the Navy’s budget authority to cover the 

total long-term obligations that would accrue from these leases. We8

concluded that once the Navy, through acceptance of vessel delivery, 

agreed to commence the lease, it must record the leases as firm obligations 

in an amount sufficient to cover lease payments for the 5-year base period 

plus the gross termination expenses should the leases not be renewed at 

the end of the 5 years. If the Navy Industrial Fund did not have an existing 

8

62 Comp. Gen. 143, B-174839 (Jan. 28, 1983), Navy Industrial Fund: Obligations in Connection with 

Long-Term Vessel Charters.
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unobligated balance sufficient to cover these costs at the time of the 

delivery of all the vessels, it would be in violation of the Antideficiency 

Act.9

 The opinion contained suggested actions the Navy could take to 

increase its funding authority and avoid such a violation. One option was 

to obtain specific contract authority from Congress. The Navy 

subsequently requested and received such authority from Congress to 

proceed with the leasing arrangements in the absence of an appropriation 

covering the total potential termination liability.10 The following year, 

Congress provided the Navy additional contract authority, which allowed 

the Navy to proceed with the leasing arrangements in the absence of an 

appropriation or existing unobligated balance sufficient to cover the total 

lease payments for all 5 years of the 5-year base period.11

Specifically, under these authorities granted by Congress, the Navy was 

only required to record annually against its industrial fund an amount equal 

to the estimated lease payments for the then current lease year for the MPS 

and T-5 replacement tanker leases. With respect to the termination liability, 

the authority required that the Navy record against its then current fiscal 

year Operation and Maintenance appropriation an amount equal to only 

10 percent of the gross termination costs that would be due for failure to 

renew the leases. Without these authorities, the Navy would have been 

required to record the full amount of the gross termination costs and the 

full amount of the estimated lease payments for the first 5-year base period 

of the leases. A study conducted on the Navy’s behalf in 1983 determined 

that the highest termination values for the MPS program occurred during 

the first 5 years; the termination liability for failing to renew the lease after 

this period was estimated to be 128.1 percent of the lessor’s cost to acquire 

the ship. 

Concerns Regarding 

Cost-Effectiveness of 

Leasing

The Navy complied with DOD requirements to perform lease versus 

purchase cost analyses in support of its long-term leasing decisions in the 

early 1970s and early 1980s. However, guidelines for such analyses at that 

time were neither detailed nor specific. As a result, the outcomes of these 

analyses were influenced by the methodologies and assumptions used in 

9

The Antideficiency Act, codified in 31 U.S.C. 1341, prohibits authorizing or incurring obligations or 

expenditures in excess of amounts available in an appropriation or fund unless authorized by law. 

10Supplemental Appropriations Act of 1983 (P.L. 98-63).

11Appropriations Act of 1985 (P.L. 98-473).
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each study. Although the methodologies and assumptions the Navy used 

showed leasing to be cheaper, our 1983 review of the Navy’s decision and a 

study by the Joint Committee on Taxation used different methodologies 

and assumptions and found purchasing to be the cheaper alternative. 

Specifically, the Navy’s lease versus purchase cost comparison for the MPS 

vessels concluded that the government would save $29.3 million per ship 

by leasing the 13 MPS vessels. However, the MPS study conducted by the 

Joint Committee staff concluded that outright purchase would be cheaper 

by $20.8 million per ship. Our 1983 report concluded that it would cost 

between $11.9 million and $38 million more per ship to lease the MPS 

vessels. The differences between the studies’ conclusions are a result of 

different methodologies and assumptions regarding (1) tax revenues,

(2) residual values, and (3) discount rates. 

The majority of the differences between the Navy study and the 

congressional staff study were attributed to differing assumptions 

regarding how to account for tax revenue. The Navy study reduced the 

total cost of the lease to the government by the taxes that would be paid on 

interest income received by the lenders that financed a portion of the ship’s 

acquisition. The committee staff’s methodology did not include these taxes 

as a source of government revenue. The methodologies and assumptions 

used in both studies were acceptable under then existing guidelines; 

however, in our June 1983 report, we supported the committee staff study’s 

decision not to consider these taxes because the Treasury would receive 

taxes on the income earned from either a lease or a purchase. 

Another key difference between the Navy and committee staff studies was 

the treatment of residual values. The residual value of a vessel is an 

estimate measure in present value terms of what that vessel could be sold 

for at the end of the lease term. The Navy’s study of the MPS program 

assumed that the vessels would have no residual value at the end of their 

25-year leases, whereas the committee staff assumed that the residual 

value of the ships would be nearly 60 percent of the original cost of the 

ships. While it is not clear if a residual value of 60 percent was appropriate, 

a residual value of zero was not consistent with Internal Revenue Service 

(IRS) requirements at the time. Had the residual value been assumed to be 

20 percent, which would be consistent with the minimum IRS requirements 

at the time, the cost advantage of leasing identified in the Navy’s study 

would be reduced. In our 1983 review of these studies, we agreed with the 

staff study’s assumption that the vessels would have a residual value at the 

end of the lease terms. 
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Determining whether leasing is more economical than purchasing also 

depends on the discount rate used to adjust the total value of lease 

payments to recognize the time value of money—the lost opportunity to 

invest the money and earn interest. A lower discount rate makes 

purchasing a more economical option, while a higher rate makes leasing 

more economical. When the lease versus purchase analyses were 

performed for the long-term leasing arrangements of the early 1970s and 

early 1980s, there was some flexibility regarding what discount rate to use 

in the analysis. In prior reports, we expressed concern regarding the 

discount rates used in the Navy’s lease versus purchase analyses. For 

example, in a 1973 report on the Navy’s analysis of the Sealift tanker 

program, we found that the Navy had inappropriately selected a high 

discount rate.12 Had the Navy used the lower and more appropriate rate, it 

would have found that the cost of leasing exceeded the purchase cost. In 

our 1983 report, we questioned whether the prescribed Office of 

Management and Budget (OMB) discount rate was realistic, and in our 

analysis, we used a discount rate based on the average yield on marketable 

Treasury obligations, which we believed was a better reflection of the 

government’s true cost of borrowing funds.

Actual lease payment and ship purchase cost data for the MPS vessels, T-5 

replacement tankers, and Chouest vessels are provided in appendix I.

Changes That 

Influence Lease 

Decisions

Since the long-term leasing decisions of the early 1970s and early 1980s, a 

number of changes have occurred that will affect current and future 

long-term leasing decisions by increasing oversight and improving cost 

analyses. Through legislation, Congress has increased its control over 

these types of decisions and made them more transparent. Additionally, 

scoring guidelines now provide Congress with a mechanism to assess the 

cumulative impact of long-term leasing decisions prior to the obligation of 

funds. Reductions in tax benefits and changes in how these benefits are 

treated in lease versus purchase analyses minimize the loss of tax revenue 

and ensure that such a loss of revenue is more fully considered in the 

decision. Finally, as part of the decision-making process, more detailed 

guidelines require that government agencies perform lease versus purchase 

analyses that better reflect the government’s total cost for long-term leasing 

arrangements.

12Build and Charter Program for Nine Tanker Ships (B-174839, Aug. 15, 1973).
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Changes to Increase 

Congressional Control and 

Lease Decision 

Transparency

Concerns about the budgetary impact of the leases’ long-term funding 

commitments and uncertainties about their cost-effectiveness led Congress 

to establish a number of statutory conditions and requirements for entering 

into long-term leases as part of the fiscal year 1984 Department of Defense 

Authorization Act (P.L. 98-94) in September 1983. These requirements, now 

codified in 10 U.S.C. 2401, increased congressional control over certain 

lease decisions, made lease decisions more transparent, and provided for 

the development of more detailed guidelines for conducting lease versus 

purchase cost comparisons. 

In general, 10 U.S.C. 2401 requires that13

• DOD’s long-term leases or charters of vessels and aircraft, or leases or 

charters with substantial termination liabilities, be specifically 

authorized by law;

• notice of intent to issue a solicitation for such a lease or charter be given 

to the Committees on Armed Services and on Appropriations of the 

Senate and House of Representatives;

• a detailed description of the terms of the lease and a justification for 

entering into the lease rather than purchase of the vessel be provided to 

Congress;

• an analysis comparing the costs of leasing to those of purchasing be 

submitted to Congress with any request for authorization of such a 

lease;

• such analysis be evaluated by OMB and the Treasury Department; and

• OMB and Treasury jointly issue guidelines for determining under what 

circumstances DOD may use lease arrangements rather than use direct 

procurement. 

Additionally, Congress established statutory requirements for certain 

leases lasting less than 5 years. Under these requirements, now codified in 

10 U.S.C. 2401a, a Secretary of a military department cannot (1) enter into a 

leasing arrangement that exceeds 18 months or (2) extend or renew such 

an arrangement for a term of 18 months or more until the Secretary has 

considered all costs of such a lease, including the estimated termination 

13This statute did not apply to any lease or charter agreement entered into before December 1, 1983. 

The Joint Explanatory Statement of the Committee of Conference stated that “nothing in this section 

shall impede or affect the ability of the Secretary of the Navy to proceed to acquire the use of thirteen 

T-AKX class Maritime Prepositioning Ships and the use of five new T-5 tankers in accordance with the 

long term charter arrangements negotiated by the Navy before the date of enactment of this Act.” 

House Conference Report No. 98-352, p. 246.
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liability. The Secretary must also determine in writing that the contract is 

in the best interest of the government.

Increased Emphasis on 

Up-Front Budget Authority

At the time the Navy entered into the long-term leases in the early 1970s 

and early 1980s, Congress’ ability to assess the cumulative impact of such 

arrangements prior to the obligation of funds was limited. Since the Navy 

entered into these leases, mechanisms for requesting budget authority have 

been more clearly established, which increases the transparency of these 

arrangements.

The Balanced Budget and Emergency Deficit Control Act of 1985 

(P.L. 99-177), as subsequently amended,14 established statutory limits on 

federal government spending by creating spending caps on discretionary 

spending. To track progress against and compliance with budget 

enforcement requirements and spending caps, budget scorekeeping 

guidelines have been established for lease-purchases, capital leases, and 

operating leases.15 If the Navy were to now enter into the types of leases it 

entered into in 1972 and 1982, the current scorekeeping rules would require 

that the Navy request up-front budget authority for the estimated net 

present value of the government’s total estimated legal obligations over the 

life of the contract. 

Changes That Eliminate Tax 

Incentives

Under leasing arrangements for the Sealift tankers, MPS vessels, and T-5 

replacement tankers that were entered into prior to 1984, the lessors 

qualified for special tax benefits. These benefits included accelerated 

depreciation of the ship’s cost and deductions on interest payments that 

lowered the shipowners’ taxes. Consequently, shipowners passed some of 

these benefits to the Navy in the form of lower lease payments, which made 

leasing a more attractive option to the Navy. However, these tax benefits 

also represented a loss of tax revenue to the U.S. Treasury. The Deficit 

Reduction Act of 1984 (P.L. 98-369) modified tax laws and eliminated the 

benefits available to the owners of assets leased to government entities; the 

act did not, however, affect prior Navy leasing arrangements.

14The Balanced Budget Act of 1997 (P.L. 105-33) extended the discretionary spending caps to 2002.

15Preparation and Submission of Budget Estimates, OMB Circular A-11 (July 1, 1998).
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More Detailed Guidelines 

Will Influence Future Cost 

Analyses

In October 1984, OMB and Treasury issued joint guidelines for DOD’s 

leases. These guidelines required that any special tax benefits conveyed to 

the shipowner be added to the cost of a lease in a lease versus purchase 

analysis.16 Additional OMB guidance was issued in 1992 to prevent lease 

versus purchase analyses from understating the government’s total cost of 

leasing. Specifically, this guidance, which is to be applied 

government-wide, prescribes that analyses (1) should add special tax 

benefits to the cost of leasing and (2) should not subtract the normal 

payment of taxes on the lessor’s income derived from the leases from the 

total lease costs.17 Had this guidance been in place when the Navy 

conducted its analyses of the MPS and T-5 replacement tanker lease 

programs, the analyses would have concluded that purchasing was cheaper 

than leasing. 

OMB’s 1992 guidance also addressed the issue of discount rates. This 

guidance prescribes that lease versus purchase analyses are to use 

discount rates that reflect the Treasury’s borrowing rate. OMB now 

annually updates the discount rates to be used in the analyses. Current 

discount rates as prescribed in the OMB guidance are lower than those 

used in the past analyses, and lower rates tend to make leasing less 

attractive today.

Conclusions The Navy’s decisions in the early 1970s and early 1980s to enter into 

long-term ship leases were based primarily on the decision to acquire ships 

without a large up-front obligation of procurement funds. The Navy also 

believed leasing was more cost-effective than purchasing the ships. These 

decisions were supported by certain assumptions that were used in the 

absence of clear guidance. Different economic assumptions would have 

supported purchasing, rather than leasing, these ships. Our legal opinions 

clarified requirements for such leases, and current budgetary legislation 

and scoring guidance now emphasize up-front budgeting for such leases. 

The elimination of tax advantages for leasing, together with more detailed 

guidelines for conducting lease versus purchase analyses, will make it 

more difficult to support long-term leasing on a cost-effectiveness basis.

16Joint OMB and Treasury Guidelines to the Department of Defense Covering Lease or Charter 

Arrangements for Aircraft or Naval Vessels (Oct. 31, 1984).

17Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, OMB Circular A-94 

(Oct. 29, 1992).
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Scope and 

Methodology

To determine the basis and support for the Navy’s decisions to lease instead 

of purchase selected auxiliary vessels, we interviewed and requested 

documents from Military Sealift Command, Naval Sea Systems Command, 

Office of the Assistant Secretary of the Navy (Financial Management 

Comptroller), Office of the Deputy Chief of Naval Operations (Logistics), 

and the Center for Naval Analyses officials in Washington, D.C. We also 

interviewed officials from Edison Chouest Offshore in Galliano, Louisiana; 

Avondale Industries, Inc., in New Orleans, Louisiana; and the American 

Shipbuilding Association in Washington, D.C. We also reviewed 

congressional hearings and previous reports by us, Navy contractors, and 

others regarding the leasing of vessels by the Navy, and we examined 

applicable laws and regulations.

To review past concerns regarding the leasing decisions of the early 1970s 

and early 1980s, we primarily relied upon congressional hearings 

conducted in the early 1980s and previous reports. We also interviewed 

Navy and Military Sealift Command officials.

To identify legislative and regulatory changes that affect current and future 

long-term leasing, we examined applicable laws, legislative histories, and 

regulations. We also interviewed Military Sealift Command and industry 

officials.

We did not verify the reliability of the lease payment data provided by

(1) the Military Sealift Command from its contract files and accounting 

systems and (2) in select cases, Edison Chouest Offshore. The Military 

Sealift Command was unable to provide lease payment data relating to the 

Sealift tanker program. According to agency officials, the Sealift tanker 

contracts had been closed out and specific payment records sent to 

storage, and they could not be located and retrieved within the time 

constraints of our review. The Military Sealift Command also informed us 

that because of accounting changes, it would be virtually impossible to 

obtain a complete and accurate record of how much has been spent on 

technical or regulatory upgrades and insurance on the four categories of 

auxiliary vessels covered by our review. Therefore, we did not attempt to 

replicate the Navy’s prior lease versus purchase analyses.

We performed our review between November 1998 and March 1999 in 

accordance with generally accepted government auditing standards.
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Agency Comments and 

Our Evaluation

DOD did not provide written comments. However, in oral comments on a 

draft of this report, DOD did not take issue with the information presented 

in it. DOD suggested certain technical clarifications, and we have 

incorporated them in the text where appropriate.

We are sending copies of this report to Senator Robert Byrd, Senator Carl 

Levin, Senator Joseph Lieberman, Senator Ted Stevens, Senator Fred 

Thompson, Representative Dan Burton, Representative David R. Obey, 

Representative Ike Skelton, Representative Floyd D. Spence, 

Representative Henry A. Waxman, and Representative C.W. Bill Young in 

their capacities as Chairmen or Ranking Minority Members of Senate and 

House Committees. We are also sending copies of this report to the 

Honorable William S. Cohen, Secretary of Defense; the Honorable Richard 

Danzig, Secretary of the Navy; Rear Admiral Gordon S. Holder, 

Commander, Military Sealift Command; and the Honorable Jacob J. Lew, 

Director, Office of Management and Budget. Copies will be made available 

to others upon request. If you or your staff have any questions concerning 

this report, please call the contacts listed in appendix II.

James F. Wiggins

Associate Director 

Defense Acquisitions Issues
Page 15 GAO/NSIAD-99-125 Defense Acquisitions
Page 16 GAO/NSIAD-99-125 Defense Acquisitions

Appendix I

Lease Payment and Ship Cost Data ApenIdxi

As requested by the Subcommittee, this appendix summarizes actual lease 

payment data for the Military Prepositioning Ships (MPS) vessels, T-5 

replacement tankers, and selected Chouest vessels. For the MPS vessels 

and T-5 replacement tankers, the lessors’ original cost to acquire the ships 

is also provided; such data are not available for the Chouest vessels.

MPS Vessels and T-5 

Replacement Tankers

Actual lease data are available for the MPS vessels and the T-5 replacement 

tankers, but such data are not available for the Sealift tankers. The data 

identify the lessors’ cost to acquire the ships—the capitalized costs—and 

the total lease payments of the lease period.1

 However, the data do not 

reflect all the costs that would be considered in a lease versus purchase 

analysis. Table I.1 shows the present value as of fiscal year 2000 of the 

capitalized costs, the total lease payments, and their difference for the MPS 

vessels and T-5 replacement tankers.

Table I.1: Present Value of Total Lease Payments and Capitalized Costs for MPS 

Vessels and T-5 Replacement Tankers (in constant fiscal year 2000 dollars)

a

Calculation of total lease payments assumes that the leases will not be terminated prior to the 

completion of their 20- and 25-year terms.

b

To do the present value calculations, we used an Office of Management and Budget (OMB) 

prescribed rate of 2.9 percent. All values have been rounded.

Source: GAO analysis of Military Sealift Command contract data.

Based on this present value analysis, the total lease payments for both the 

MPS vessels and T-5 replacement tankers are less than the capitalized costs 

of the ships, which suggests that it was cheaper for the Navy to lease these 

vessels. However, an analysis that only considers lease payments and 

1

The capitalized cost of a vessel is determined upon the delivery of that vessel and represents the 

acquisition costs incurred by the vessel’s lessor. Included within these acquisition costs are the 

construction price, interest on interim financing, and other costs associated with the construction and 

delivery of the vessel.

Type of ship

Number of 

ships

Length of 

leasesa

Present value 

of total lease 

paymentsb

Present value

of total 

capitalized 

costs Difference

MPS vessels 13 25 years $4.7 billion $5.1 billion $474 million

T-5 

replacement 

tankers 5

20 years $655 million $736 million $81 million
Appendix I

Lease Payment and Ship Cost Data

Page 17 GAO/NSIAD-99-125 Defense Acquisitions

capitalized costs does not fully account for the government’s total costs. 

Under the leasing arrangements for these ships, the owners qualified for 

tax benefits, including accelerated depreciation rates, interest deductions 

on the long-term debt, and amortization deductions for certain elements of 

vessel cost. These tax benefits, along with the lease payments and residual 

value, provide the owners with a net return on investment. A portion of 

these tax benefits was passed on to the Navy in the form of reduced lease 

payments, which made leasing more attractive to the Navy. These lower 

lease payments do not fully offset the loss of tax revenue to the U.S. 

Treasury. The government’s total cost for these lease arrangements, 

therefore, consists of not only the lease payments, but also the loss of tax 

revenue as a result of the tax benefits that were available to the lessors as 

shipowners.

Chouest Vessels Since 1988, the Navy has used short-term leases to acquire the services of 

19 Chouest vessels. While the Navy has leased some of these Chouest 

vessels for a total of 5 or more years under a series of short-term leases, 

each short-term lease was awarded pursuant to separate, fully competed 

solicitations. Lease payments for Chouest vessels include not only the 

services of these vessels, but also their crew, operations, maintenance, and 

other costs; these costs are not broken out separately. Table I.2 shows the 

approximate total lease payments for selected Military Sealift Command 

short-term leases of Chouest vessels from the inception of the initial leases 

through fiscal year 1998.2

 For example, the Laney Chouest was first leased 

in 1988 for 17 months with two 17-month extension options, then leased 

again under a new contract in 1992 for the same length of time, and then 

under a third contract beginning in 1997 for 15 months. In 1998, the

Laney Chouest was returned to its owner; it is the only vessel in table I.2 

that is no longer leased by the Navy. During the 10-year period that the 

Navy leased the Laney Chouest under consecutive, separate short-term 

contracts, it paid the contractor approximately $42.6 million in lease 

payments.

2

Beginning in 1994, the Navy has also leased harbor tugs from Edison Chouest Offshore. Currently, 13 

Chouest tugs are operating under Navy leases in California, Florida, and Georgia.
Appendix I

Lease Payment and Ship Cost Data

Page 18 GAO/NSIAD-99-125 Defense Acquisitions

Table I.2: Total Short-Term Lease Payments for Chouest Vessels Through Fiscal Year 

1998 

a

Lease payment data for the Laney Chouest were available for only fiscal years 1989 through 1998.

b

At the start of fiscal year 1999, the Navy’s long-term lease of the Cory Chouest commenced. This 

table does not present the payments associated with this long-term lease.

Source: GAO analysis of Military Sealift Command and contractor accounting data.

On October 1, 1998, the Military Sealift Command commenced a new 

long-term contract to charter the Cory Chouest—an oceanographic 

surveillance vessel used as a platform for the Surveillance Towed Array 

Sensor System (SURTASS) and Low Frequency Active (LFA) acoustic 

detection system. The Cory Chouest will be chartered through the year 

2003 because of delays in the delivery of the Navy’s new T-AGOS 23 vessel, 

The Impeccable. The Cory Chouest is currently performing the mission 

that The Impeccable is expected to perform upon its completion. In 

addition, the Cory Chouest will substitute for other surveillance vessels as 

they are retrofitted with LFA.

The Cory Chouest total estimated lease (charter hire) payments for the

5-year contract that commenced on October 1, 1998, range from

$24 million to $27 million in constant fiscal year 2000 dollars (based on 

price economic adjustments). These payments are based on daily rates by 

fiscal year and do not include estimated port charges, fuel, use of satellite 

communications, meals for government personnel, and reimbursable items 

as listed in the contract.

Dollars in millions (constant fiscal year 2000)

Vessel

Fiscal year of

initial lease

Number of

subsequent

short-term leases

Total lease

payments

Laney Chouest 1988a 2 $42.6

Cory Chouest 1989 2b 45.4

Dolores Chouest 1990 1 12.9

Carolyn Chouest 1994 0 15.0

Kellie Chouest 1996 0 10.1

Margaret B. Chouest 1996 0 14.6
Page 19 GAO/NSIAD-99-125 Defense Acquisitions

Appendix II

GAO Contacts and Staff Acknowledgements ApendxIi

GAO Contacts James F. Wiggins, 202/512-4530

Robert J. Stolba, 202/512-8963

Acknowledgements In addition to those named above, Johana R. Ayers, Rosa M. Johnson, 

Stephanie J. May, and Charles W. Perdue made key contributions to this 

report.

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