United States General Accounting Office

GAO Testimony

Before the Subcommittee on Government Management,

Information, and Technology, Committee on Government

Reform and Oversight, House of Representatives

For Release on Delivery

Expected at

9:30 a.m., EDT

Friday,

September 12, 1997

FEDERAL PROPERTY

DISPOSAL

Information on DOD’s

Surplus Property Program

Statement of David R. Warren, Director, Defense

Management Issues, National Security and International

Affairs Division

GAO/T-NSIAD-97-257

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here to discuss the Department of Defense’s (DOD)

process for disposing of surplus personal property. Surplus personal

property can be any items other than real property, which is land and

buildings and items permanently attached to them. Personal property

includes items such as aircraft parts, computers, furniture, and clothing.

DOD maintains a complex disposal system that is characterized by massive

volumes of excess property. In fiscal year 1996, for example, DOD disposed

of millions of items with a reported acquisition value (the amount

originally paid for the items or most recently paid for similar items) of

almost $24 billion. Our testimony today will focus on (1) an overview of

how the disposal process works and how it differs from private sector

disposal systems, (2) the means used to dispose of personal property,

(3) efforts to improve the efficiency and effectiveness of the current

disposal operation, and (4) opportunities to improve aspects of the

disposal function through competitive outsourcing.

Summary DOD’s disposal process is governed by numerous laws and regulations that

require DOD’s surplus property be made available to many organizations.

Thus, the best items are taken through the transfer and donation process

leaving the least marketable items available for sale. This and other factors

contribute to DOD’s low rates of return. Although the private sector obtains

higher rates of return than DOD for comparable items, it does not handle

the quantities, types, and conditions of items that DOD does. Thus, the

private sector is able to develop disposal expertise and tailor its disposal

strategies so that it obtains higher rates of return.

DOD recognizes that it needs to improve its management of property

disposal and has adopted or is planning to adopt a number of commercial

practices that should help improve its operations. DOD is also involving the

private sector in certain aspects of the process, particularly in the sales of

surplus property, to improve its rate of return and become more business

like in its operations. In addition, aspects of DOD’s disposal process that

are deemed to be not inherently governmental functions may be

outsourcing candidates—an aim we supported in recent legislative

proposals.

Background The Federal Property and Administrative Services Act of 1949

(P.L. 81-152), as amended, placed responsibility for the disposition of

Page 1 GAO/T-NSIAD-97-257 Federal Property Disposal
government real and personal property within the General Services

Administration (GSA). GSA delegated the responsibility for disposal of DOD

personal property to the Secretary of Defense, who in turn delegated it to

the Defense Logistics Agency (DLA). DLA established the Defense

Reutilization and Marketing Service (DRMS) to carry out the disposal

function. Although DRMS disposes of the majority of items generated by

DOD activities, certain categories of items, such as nuclear devices and

cryptographic equipment, are disposed of by other means.

In fiscal year 1996, DRMS had about 170 Defense Reutilization and

Marketing Offices (DRMO) worldwide that receive and dispose of personal

property for DOD activities. It also employed about 3,700 people and

disposed of millions of items with a reported acquisition value of almost

$24 billion.

Data Indicates Operating

Losses and Low Rates of

Return on DRMS’ Disposal

Operations

With a few exceptions, historical data indicates that DRMS has experienced

operating losses in recent years and low rates of return on disposed items.

For example, DRMS reported net operating losses in three of the four years

from fiscal year 1993 to 1996. These losses ranged from a low of

$84 million in fiscal year 1996 to a high of $153 million in fiscal year 1995.

DRMS’ overall rate of return on the reported acquisition value of all usable

surplus property it sold in fiscal year 1996 was 1.97 percent. For fiscal

years 1995 and 1994, the rates were 2.28 and 1.83 percent, respectively.

DRMS calculates the rate of return by dividing the proceeds from the sale of

usable items by the reported acquisition value of usable property sold.

DRMS’ overall rate of return is based on all usable items sold (excludes

scrap).

The rates of return on property disposal at overseas DRMOs are higher than

in the continental United States. For example, in fiscal year 1996, the rate

of return for DRMOs in Europe was 6.98 percent, whereas the rate in the

Pacific region was 2.88 percent. The higher rates of return at overseas

DRMOs are primarily due to better items being available for sale because of

fewer overseas transfer and donation customers. The lower rates in the

Pacific region, as compared to Europe, are due to (1) bilateral agreements

that give the host country “first right of refusal” (i.e., first opportunity to

buy the items), (2) a smaller customer base, and (3) higher shipping costs

incurred by customers due to longer distances.

Page 2 GAO/T-NSIAD-97-257 Federal Property Disposal
DOD’s Personal

Property Disposal

Process Is Guided by

Legislation While the

Private Sector Has

Greater Flexibility

Figure 1 shows a general overview of the personal property disposal

process. The disposal process, which is governed by numerous laws and

regulations, starts when DOD activities turn in items to the DRMOs for

disposal. Upon arrival, the items are inspected, condition and

demilitarization (i.e., rendering an item militarily unusable) codes are

verified; the type of sale is determined; and items requiring special

handling such as hazardous material and precious metals are identified in

order to apply extra controls. Items are accumulated for 2 to 4 weeks and

then processed together. At anytime during the process, all customers may

screen items and attach tags, indicating a desire to have them, but the

items may only be issued and removed in accordance with established

priorities. First priority is given to DOD activities, federal agencies, and

other entities with legislative priority equal to DOD, such as certain law

enforcement organizations and humanitarian relief agencies, among

others. Second priority goes to approved donee organizations, such as

state and local governments, museums, and Boy and Girl Scouts. Within

these priorities, items are dispensed on a first-come, first-served basis.

Customers have 14 days to requisition and 14 days to remove items, unless

otherwise agreed with the DRMO. Items that are tagged but are not removed

within the prescribed time frames are available for use by other qualified

organizations during a 3-day period known as the “blue light special.”

Figure 1: The Personal Property Disposal Process

Period 2 Period 3 Period 4 Period 5

(3 days)

Period 1 Period 6

Sales

inspection/award

and removal

Sales 

preparation

10-42 days

Property

accumulation

14-28 days

Federal

 cycle

21 days

Donation

cycle

21 days

Blue 

light

special

Finish

Excess Property Surplus Property

Start

a b

aProperty not needed by DOD activities is considered to be excess and is available for

reutilization by other DOD activities, transfer to other federal agencies, and transfer to

organizations that have been given priority equal to that of the federal government for the purpose

of obtaining excess personal property.

bProperty not needed by the federal government or organizations with equal priority is considered

surplus and is available for donation to eligible organizations or for sale.

Page 3 GAO/T-NSIAD-97-257 Federal Property Disposal
Items that still remain after this part of the process has been completed

are sold to the general public through three types of sales—international,

local, and retail. International sales are used for items with global appeal,

such as machine tools, or property that requires additional controls, such

as hazardous materials. After several hundred items are accumulated, a

catalog is published, and sealed bids are solicited. The high bidder for

items requiring extra controls or demilitarization undergoes a clearance

process before the award. The DRMOs use local sales for items that do not

have global appeal and either publish a catalog or hold an auction at the

DRMO. Sealed bids are solicited for the catalog sales, and on-the-spot bids

are made at the auctions. Items with commercial appeal, such as

computers, furniture, and clothing are sold at retail stores at 40 DRMOs.

Retail sales are made on a cash and carry basis.

Disposal Systems in the

Private Sector

The disposal systems of private sector companies, particularly the

commercial airlines, are much different than DOD’s system, which is based

on statutory requirements. For example, the airlines we interviewed place

special emphasis on selling surplus property and create incentives for

employees to maximize the return on sales. These companies expect to

obtain reasonable proceeds from the surplus aircraft parts they sell and

are less concerned than DOD with how quickly the property moves off the

warehouse shelves. To maximize sales proceeds, staff are trained to

understand aircraft parts terminology and the applications that exist for

various parts. This training and experience make it more likely that highly

marketable parts will be identified and marketed appropriately. Further,

the staff often specialize in selling a specific category of part, such as

engine parts, to promote a better understanding of the parts and the

markets to which they sell.

In addition, progressive commercial companies provide employees with

the resources to effectively sell surplus property. Marketing staff are

provided a wide range of sales tools and techniques and are held

accountable for the property they intend to sell. At one airline, sales

personnel are responsible for the sale of the surplus property and are

rated on how well they maximize sales proceeds. Figure 2 compares the

differences between DOD’s and the private sector’s disposal processes.

Page 4 GAO/T-NSIAD-97-257 Federal Property Disposal
Figure 2: Comparison of DOD and Private Sector Disposal Processes

DOD

Emphasizes moving items quickly and 

complying with laws

Handles huge quantities, types, and 

conditions of items

Cannot develop disposal expertise for 7 

million active line items

Has rigid disposal system defined by laws 

and regulations; all items treated the 

same

Best items are taken through transfers 

and donations

Sells items that are usually not new

Private sector

Emphasizes maximizing return

Handles few quantities, types, and 

conditions of items

Can develop disposal expertise for fewer 

items

Can tailor disposal strategy on an 

individual item basis

Best items are not taken through 

transfers and donations

Sells items that often were over bought or 

did not sell well (i.e., new items)

Large Majority of

Items Disposed of

Through Sales and

Scrap

DOD’s primary disposal objective is to maximize the reuse of surplus

property within the military services, various levels of government, and

authorized organizations before offering the property for sale to the

general public. Despite this goal, DOD actually sells most of its surplus

property to the general public either through sales efforts or as scrap, as

shown in figures 3 and 4.

Page 5 GAO/T-NSIAD-97-257 Federal Property Disposal
Figure 3: Average Dispositions, FY 1992-96

c d

8.1%

4.5%

30.7%

45.7%

11.0%

By reported acquisition value

5.2%

4.5%

31.3%

35.9%

23.0%

By line item

Reutilization T/D/F Sales Scrap Other

Note: Totals for the line item dispositions do not add due to rounding.

cSome property declared excess by one activity within DOD is reutilized by other DOD activities.

dIncludes personal property (1) transferred (2.1%) to other federal agencies or organizations

given priority equal to the federal government, (2) donated (2.1%) to eligible organizations, and

(3) sold (0.3%) to foreign military sales customers—the system through which

government-to-government sales of military equipment are made.

Page 6 GAO/T-NSIAD-97-257 Federal Property Disposal
Figure 4: Disposition by Reported Acquisition Value, FY 1992-96

Dollars in 

millions

FY 1992 FY 1993 FY 1994 FY 1995 FY 1996

Reutilization 1,600 7% 1,770 5% 2,146 8% 2,295 9% 2,848 12%

Transfers 540 2% 532 2% 532 2% 575 2% 465 2%

Donations 502 2% 610 2% 648 2% 551 2% 592 2%

Sales 5,100 22% 9,100 26% 8,722 34% 9,189 38% 8,459 35%

FMS 99 <1% 18 <1% 84 <1% 42 <1% 133 1% 

Scrap 9,882 43% 14,553 42% 13,557 53% 11,372 48% 11,099 47%

Other 5,744 24% 7,878 23% 344 1% 318 1% 305 1%

Total 23,467 100% 34,461 100% 26,033 100% 24,342 100% 23,901 100%

e

f

eAccording to DRMS personnel, the “other” category was significantly larger in fiscal years 1992

and 1993 than in subsequent years because it was used as a “catch all” category.

f

Fiscal year 1993 disposals were larger than other years because of DOD base closures and

drawdowns (force reductions).

DOD Has Efforts

Underway to Improve

Disposal Operations

DOD is seeking to improve its disposal process by using more commercial

practices and making greater use of the private sector in disposing of

property. While we have not done recent work in this area, our 1994 report

stated that, while not always directly comparable to DOD, the commercial

airlines’ system for selling surplus aircraft parts reflects the profit

incentive.1

 The airlines we interviewed expect to obtain reasonable rates

of return on the surplus aircraft parts they sell. Officials from one airline

told us they often receive as much as 50 percent of the manufacturer’s list

price (the price of the parts brand new) from the sale of their surplus

aircraft parts.

1

Commercial Practices: Opportunities Exist to Enhance DOD’s Sales of Surplus Aircraft Parts

(GAO/NSIAD-94-189, Sept. 23, 1994).

Page 7 GAO/T-NSIAD-97-257 Federal Property Disposal
Commercial companies use marketing techniques that substantially

enhance the visibility and marketability of their parts, including

(1) identifying highly marketable commercial-type parts, (2) selling the

parts as Federal Aviation Administration certified, (3) arranging parts into

sales groupings that meet buyer needs, and (4) actively marketing the

parts to a full spectrum of civil aviation buyers. Even though it may not be

practicable for DOD to duplicate commercial marketing techniques because

of competing priorities, DOD could substantially increase its proceeds by

adopting some basic marketing practices that have worked successfully in

the private sector. Critical to the success of such practices, however, will

be the establishment or realignment of incentives.

Compared with the private sector’s rates of return for similar items, DRMS

rates are low. As noted earlier, airline companies report receiving as much

as 50 percent of the manufacturer’s list price for aircraft parts. One reason

for DRMS’ lower rates of return is that many of the aircraft parts it disposes

of have only military application, and those parts with commercial

application are not certified by the Federal Aviation Administration, a

requirement for commercial use. Another factor for the lower DRMS rate of

return is that the best items are reutilized, transferred, or donated, leaving

the least marketable items available for sale. The volume and types of

items DRMS disposes of annually (about 4 million line items) also make it

difficult for DRMS to develop expertise or tailor disposal strategies for

individual items, as the private sector does. Moreover, the quantities,

constant influx of items, and time limits on the various phases of the

process drive DRMS’ emphasis on moving items through the process quickly

to make room for incoming items.

DOD Initiatives In response to the recommendations made in our report and by others,

DOD has developed several initiatives, changed some of its business

processes, and adopted best practices to improve its property disposal

operation. For example, DOD is employing or considering key initiatives,

such as contracting with private auctioneering companies to conduct

property sales, using the Internet to advertise available property, selling

the property to private contractors that will dispose of it and share the

proceeds with DOD, and allowing property located at the depots to remain

there rather than shipping it to the DRMOs to save labor and other costs.

DRMS has also hired a financial advisor to assist in developing proposals for

joint venture arrangements with the private sector.

Page 8 GAO/T-NSIAD-97-257 Federal Property Disposal
In addition, DRMS plans on restructuring its organization, under a concept

known as Enterprise Management, to operate and compete similar to a

private enterprise by reorganizing into (1) a corporate and leadership unit,

which will be staffed by government employees to handle inherently

governmental functions, such as senior management and legal functions;

(2) a utility function, which will handle the reutilization, transfer, and

donation functions with the help of private firms, and (3) a marketplace

function, which will contract with the private sector to handle sales and

disposal of hazardous wastes. DOD activities will be able to choose whether

they want to use DRMS’ services for a fee or sell the property themselves.

DRMS’ Activities

Appear to Be

Candidates for

Outsourcing

Several recent reviews of DOD military forces, such as the Report of the

Defense Science Board, the Commission on Roles and Missions, the

Quadrennial Defense Review, and the Bottom-Up Review have

recommended that competitive outsourcing be considered as an option to

reducing costs, streamlining operations, and improving performance. The

intent of competitive outsourcing is not to automatically give work to the

private sector, but to determine, on a case-by-case basis, just how

competitive the marketplace is and to take advantage of outsourcing if

there are efficiencies to be gained through this means.

Legislative proposals have been introduced this year in Congress

specifically related to the competitive procurement of services in

connection with the disposal of surplus property at DRMS’ locations. In

particular, section 1402 of H.R. 1119 (the National Defense Authorization

Act of 1998) requires that the Secretary of Defense establish procedures to

conduct competitions among private sector sources and DRMS, and other

interested federal agencies, for the performance of all such services at a

particular site. Since DOD has identified DRMS as not an inherently

governmental function, and, therefore, a candidate for outsourcing, we

agreed with the aim of this legislation.2

In August 1995, we reported that DLA cited several impediments it believed

would limit them from fully outsourcing the DRMS operation and would

need to be carefully considered before an outsourcing decision was made.

Some of the impediments related to the size and the scope of DRMS’

operations; the lack of a demonstrated, comparable infrastructure in the

commercial marketplace to manage the DOD disposal function; how a

contractor would or should operate to ensure DRMS’ mission is given the

required level of emphasis; time and resource constraints with Office of

2

1997 Defense Reform Bill: Observations on H.R. 1778 (GAO/T-NSIAD-97-187, June 17, 1997).

Page 9 GAO/T-NSIAD-97-257 Federal Property Disposal
Management and Budget Circular A-76 procedures; and difficulties in

preparing and administering contracts. Generally, the government and

private sector officials we interviewed did not believe these impediments

to be significant. DLA officials, while concerned with these impediments,

indicated that DLA supports the outsourcing of functions or operations, on

a case-by-case basis, where there is demonstrated competence in the

private sector that will provide equal or better disposal services.

Mr. Chairman, this concludes our statement. We would be happy to

answer any questions you or the members of the Subcommittee may have.

(709301) Page 10 GAO/T-NSIAD-97-257 Federal Property Disposal
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