GAO

United States General Accounting Office

Report to the Chairman, Subcommittee 

on Military Readiness, Committee on 

Armed Services, House of 

Representatives

December 1999 MILITARY BASE 

CLOSURES

Lack of Data Inhibits 

Cost-Effectiveness 

Analyses of 

Privatization-in-Place 

Initiatives

GAO/NSIAD-00-23

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Contents

Letter 3

Appendixes Appendix I: Privatization-in-Place Initiatives 24

Appendix II: Comments From the Department of Defense 32

Appendix III: GAO Contacts and Staff Acknowledgments 36

Related GAO Products 37

Tables Table 1: Initial Cost Comparison Between Projected Government and 

Actual Privatization Operations at Newark, Ohio (July 1997) 11

Table 2: Updated Cost Comparison Between Projected Government and 

Actual Privatization Operations at Newark, Ohio (November 1998) 12

Abbreviations

BRAC base realignment and closure

DOD Department of Defense
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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-283515 Letr

December 20, 1999

The Honorable Herbert H. Bateman

Chairman, Subcommittee on Military Readiness

Committee on Armed Services

House of Representatives

Dear Mr. Chairman:

This report responds to your request concerning the privatization-in-place 

of select Department of Defense industrial facilities that were closed as a 

result of base realignment and closure decisions made in 1993 and 1995. 

Privatization-in-place is a concept in which a private sector entity takes 

over the operations of a facility that was once operated by the government. 

To date, privatization-in-place has been associated with the base closure 

process and used by the Department for transferring industrial work to the 

private sector. With legislative constraints affecting the Department’s 

ability to close military facilities, privatization-in-place is not likely to be 

used outside the base realignment and closure process.1

The privatization of the former government-run operations at the Air Force 

Aerospace Guidance and Metrology Center in Newark, Ohio; the Naval 

Surface Warfare Center in Louisville, Kentucky; and the Naval Air Warfare 

Center in Indianapolis, Indiana, have been the only privatization-in-place 

actions resulting from the base closure process. These facilities primarily 

provide industrial support services for the Department. The Newark, Ohio, 

facility—operated by Boeing North American, Inc., and Wyle Laboratories, 

Inc.—performs maintenance on guidance systems for Air Force aircraft 

1

 Specifically, in 1977, Congress enacted legislation, reflected in 10 U.S.C. 2687, which 

essentially halted Department of Defense initiated base closures. Under section 2687, the 

closure of any military installation in the United States with at least 300 authorized civilian 

positions or the realignment of any installation involving a reduction of more than 1,000 

civilian employees or more than 50 percent of the installation’s authorized civilian 

workforce could not take place until the Secretary of Defense had evaluated the “fiscal, 

local economic, budgetary, environmental, strategic, and operational consequences of such 

closure or realignment.” These requirements would make it difficult to close a large 

industrial facility such as a depot outside the base closure and realignment process. 

Subsequently, special legislative authorities were enacted in 1988 and 1990 to overcome 

impediments to base closure. These authorities provided the basis for four rounds of base 

realignments and closures between 1988 and 1995. 
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and intercontinental ballistic missiles and provides metrology and 

calibration services. The Louisville facility—operated by Raytheon Systems 

Company and United Defense Limited Partnership—provides maintenance 

and other services for Navy shipboard air defense systems and guns. The 

Indianapolis facility—operated by Raytheon—designs and develops 

advanced electronics and other products for aviation, space, and other 

defense applications.2

 Appendix I provides additional background 

information on these privatization-in-place initiatives.

Our overall focus was to assess the status, cost, and effectiveness of the 

Department’s three privatization-in-place actions. Specifically, our 

objectives were to (1) determine how contractors are responding to 

decreasing workloads at these privatized facilities, (2) compare the 

cost-effectiveness of the privatization-in-place operations to the former 

government-run operations, and (3) identify the impact of privatization on 

excess capacity in the Department’s industrial infrastructure.

Results in Brief In general, the contractors at the privatization sites are facing decreasing 

defense workloads and have either initiated or planned efforts, such as 

bringing in new work and reengineering business processes, to reduce 

operating costs and improve efficiencies. Contractors at these facilities 

have experienced difficulties in attracting new customers and are uncertain 

about future workload levels. Contractors at the Navy privatization sites in 

Kentucky and Indiana are optimistic about efforts under way to increase 

workloads. 

Due primarily to data limitations, we were able to compare the 

cost-effectiveness of privatization-in-place with the former government-run 

operation for only one of the three facilities in question. Our analysis of a 

recent Air Force cost comparison study indicates that costs to the 

government for fiscal year 1997 for work performed at the privatized 

facility in Newark, Ohio, were about 16 percent higher than the estimated 

cost had the Air Force continued to operate the facility. Similar cost 

comparison studies of the Navy privatizations have not been done and were 

not possible to construct due to (1) the absence of sufficient, detailed 

2

 At both Louisville and Indianapolis, Navy contracts were initially awarded to subsidiaries 

of Hughes Aircraft Company. Subsequently, Raytheon Company merged with Hughes 

Aircraft in December 1997 and took over Hughes’ s operations at Louisville and 

Indianapolis.
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historical baseline cost data for the closed Navy facilities and (2) changes 

to workload volume and mix. However, contractors at each of the 

privatized sites have initiated business improvements that appear to be 

increasing operating efficiencies and reducing costs to the government. 

The military customers were generally pleased with the timeliness and 

quality of the products produced by the privatized facilities.

As a general rule, privatization-in-place has not optimized reductions in 

excess capacity and operating costs in the infrastructure owned and 

operated by the Department of Defense—a major base realignment and 

closure objective. Rather than closing facilities and transferring defense 

work to other underutilized defense facilities in the public or private sector 

to reduce excess capacity, privatization-in-place allows work to remain at 

the original sites to be performed by the private sector. While the 

Department no longer owns the infrastructure, it continues to support it 

through payments for contract work performed at these facilities. 

Indirectly, the Department continues to pay for excess capacity, and as a 

result, the goal of eliminating excess capacity may be realized more in form 

than in substance. Consequently, the cost reductions anticipated under the 

base closure process may not be fully realized. At the same time, 

privatization-in-place actions can produce some reduction in excess 

capacity and operating costs, where privatized facilities are also used to 

consolidate defense related work from other contractor facilities, such as 

at the former Naval Surface Warfare Center in Louisville. In such instances, 

contractors’ efforts to improve business practices and reduce their own 

defense business infrastructure may create efficiencies in overall 

public-private defense infrastructure.

Should the Department of Defense consider privatization-in-place in the 

future, we are recommending that the Secretary of Defense require the 

services to (1) consider the overall cost-effectiveness of this approach in 

reducing operating costs and excess capacity in the combined public and 

private sectors supported by the defense budget; (2) retain an adequate 

baseline of historical government costs, preferably on a per-unit basis, to 

assess the cost-effectiveness of privatization-in-place; and (3) periodically 

reassess the cost-effectiveness of prior privatization-in-place initiatives, in 

light of excess capacity in other private sector and DOD facilities and 

continuing declines in military workloads.

Background Three facilities have been privatized-in-place as a result of the 1993 and 

1995 base realignment and closure (BRAC) processes—an Air Force 
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facility in Newark, Ohio, and Navy facilities in Louisville, Kentucky, and 

Indianapolis, Indiana. The facility at Newark is owned by an Ohio-chartered 

local redevelopment authority, which was formed to accept the transfer of 

the property from the Air Force.3

 The Louisville and Indianapolis facilities 

are still owned by the government, which established leases between the 

Navy and selected local redevelopment authorities for facility use. At both 

privatization sites, the Navy plans to eventually transfer the property to the 

local redevelopment authorities.

Recommending closure of the military facilities, the BRAC commissions 

provided the Department of Defense (DOD) with the flexibility to move 

work to other DOD facilities or to the private sector.4

 Closure actions at 

two Air Force facilities as a result of the 1995 BRAC process (the Air 

Logistics Centers at Kelly Air Force Base, San Antonio, Texas, and 

McClellan Air Force Base, Sacramento, California) at one point focused on 

privatizing work in place. However, the Air Force subsequently shifted to 

an emphasis on public-private competition to determine where the work 

would best be done.5

 Nevertheless, efforts to privatize-in-place the work at 

these latter facilities have stimulated significant debate over the benefits of 

such privatization initiatives and have figured prominently in subsequent 

congressional debates over whether to authorize additional BRAC rounds. 

Consequently, the three privatization-in-place initiatives have created much 

interest in the costs and benefits of these privatized operations compared 

with prior government operations.

Prior studies have questioned the privatization-in-place concept. An August 

1996 Defense Science Board study team concluded that 

privatization-in-place should be avoided, since it tends to preserve excess 

capacity. In 1996, a privatization task force comprised of executives from 

3

 A local redevelopment authority is a community organization officially recognized by DOD 

as having sole responsibility for planning reuse of the property and serving as the 

community’s point of contact for all matters relating to the closure.

4

 The 1993 BRAC Commission recommended closure of the Air Force facility as a DOD 

operation, while the 1995 BRAC Commission recommended closure of the Navy facilities.

5

 To the extent privatization-in-place involves a potential transfer of DOD in-house depot 

maintenance and repair work valued at $3 million or more to a contractor, 10 U.S.C. 2469 

requires that a competition among public and private sector entities be held for the work. In 

addition, the San Antonio and Sacramento workloads were the subject of special 

restrictions contained in 10 U.S.C. 2469a.
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the aerospace industry that was formed by the governor of California 

concluded that privatization-in-place

“inhibits the realization of cost savings intended from base closures and the performance 

goal improvements that privatization is intended to achieve. Privatization-In-Place, 

therefore, does nothing to solve the excess capacity problem within either the public or 

private sector of the industrial base.”6

Our prior report on the Air Force privatization of the Newark aerospace 

facility showed that as of July 1997, and based on several months of 

contractor operations, the Air Force estimated that contractor costs were 

about 17 percent higher than historical costs for similar work at the former 

government facility.7

 The Air Force attributed this increase primarily to 

increased material costs, contract oversight and administration costs, and 

estimated contractor award fees. Neither DOD nor we have previously 

performed similar cost comparisons for the Navy privatizations. However, 

our July 1997 report on the Louisville privatization questioned the Navy’s 

workload relocation analysis and concluded that privatization-in-place was 

not likely to be as cost-effective as relocating the work to other DOD 

facilities.8

Privatization 

Contractors’ Efforts to 

Combat Decreasing 

Workloads

Defense workloads at the privatized facilities are less than those before 

privatization. However, workloads at the former Air Force facility in 

Newark, Ohio, have remained relatively stable during the 3 years of 

privatized operations. Even so, in the near future, the aircraft and missile 

repair contractor is expecting workload decreases as military system 

requirements decline. Workloads at the former Navy facilities in Louisville, 

Kentucky, and Indianapolis, Indiana, have decreased more significantly. As 

a result, the contractors at these locations are reducing their infrastructure 

and reengineering business processes to contain costs. Moreover, the Navy 

contractors have moved other defense work into the privatized facilities to 

supplement the existing workload and consolidate certain operations. 

6 Report of the California Chief Executive Officers’ Defense Privatization Task Force to 

Governor Pete Wilson: Pathway to Privatization—An Industry Perspective, California Trade 

and Commerce Agency (Sacramento, Cal.: Mar. 1996), p. xix.

7 Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance System Depot 

Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).

8 Navy Depot Maintenance: Privatizing Louisville Operations in Place Is Not Cost-Effective

(GAO/NSIAD-97-52, July 31, 1997).
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Workload at Air Force 

Privatization-in-Place Site

Less maintenance work is performed at the privatized facility at Newark 

than had been performed under the Air Force’s operation. However, during 

the years of privatized operations the overall workload has remained 

relatively stable. Aircraft repairs performed by the primary contractor, 

Boeing North American, Inc., have decreased somewhat, while missile 

repairs have stayed about the same. The facility’s other contractor, Wyle 

Laboratories, has experienced a small workload increase. However, both 

contractors expressed uncertainty about their future workload projections, 

with Boeing officials expecting sizable workload decreases. For example, 

aircraft repair requirements are expected to decrease by about 6 percent in 

2000, with further decreases expected through year 2014. Boeing officials 

attribute these expected decreases to normal system retirements and 

attrition, increasing reliability of newer and future weapon systems, and 

greater reliance on the original equipment manufacturers for logistics 

support. 

The outlook for combating these anticipated workload reductions is not 

very optimistic because of difficulties in attracting new work. Although 

Boeing has been actively pursuing the acquisition of work from other 

in-house operations, manufacturing partners, other DOD programs, and 

commercial sources to offset its declining Air Force workload, its efforts 

have been largely unsuccessful to date. Wyle Laboratories has been 

encountering similar problems in acquiring additional work. It now 

performs very little commercial work and has few prospects for any major 

new business. 

Workload at Navy 

Privatization-in-Place Sites

Since privatization-in-place was implemented at the Navy facilities in 

Louisville and Indianapolis, the defense workload has declined, primarily 

due to reduced Navy operational requirements and lower weapon systems 

maintenance budgets. In some cases, the workload reduction has been 

significant. According to contractor officials, work now performed by 

United Defense Limited Partnership in Louisville has declined almost 

80 percent, from 1.3 million direct labor hours in 1994 to about 

277,000 hours in 1998. Moreover, Raytheon’s maintenance workload in 

Louisville has declined about 50 percent, and its workload in Indianapolis 

has decreased about 30 percent since privatization.

In response to declining workloads, the Navy’s privatization contractors 

have instituted several business improvements to contain costs. In 

Louisville, for example, United Defense reduced the former Navy 

workforce by over two-thirds and its facility infrastructure by about 
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40 percent. This was accomplished primarily through organizational 

restructuring initiatives and work process efficiencies. Raytheon in 

Indianapolis has similarly reduced its workforce by 330 employees, or 

17 percent, mostly in response to declining workloads. By reengineering its 

workstations and improving inventory storage, Raytheon has also 

modernized its facility in Louisville to provide for a more cost-effective 

maintenance work flow and to accommodate new production work. 

In addition to infrastructure reductions and improved business practices, 

the contractors at the former Navy facilities have brought in additional 

defense business work from their other facilities to supplement the 

declining workload. For example, Raytheon in Louisville has transferred its 

Phalanx and Rolling Airframe Missile launcher production work from its 

Tucson, Arizona, facility. Moreover, United Defense is moving some naval 

gun production work from a Navy-owned plant in Fridley, Minnesota, to 

Louisville. As a result, Navy and United Defense officials believe that the 

workload will stabilize at its current level over the next 2 years, if the 

Congress provides additional funds for gun repair work at Louisville 

beyond DOD’s budget requests as it has for the last 2 years. While United 

Defense continues to use the Fridley facility, officials told us they plan to 

downsize it further. They said that by the end of the year 2000 the Fridley 

workforce will be reduced by 285 employees, or 17 percent, and its facility 

infrastructure by about 1 million square feet, or 50 percent.

Raytheon has also been able to consolidate work from its plant in Long 

Beach, California, with that in Indianapolis, thereby reducing the 

company’s internal infrastructure. Raytheon officials told us that it had 

transferred its entire Long Beach facility depot-level repairs and spares 

manufacturing to Indianapolis. This restructuring initiative equated to 

consolidating about 120,000 square feet from its Long Beach facility to 

Indianapolis. Raytheon has also brought additional work to Indianapolis 

from foreign government sales.

Cost-Effectiveness of 

Privatization-in-Place 

Is Difficult to 

Determine

Although military customers were generally pleased with the quality and 

timeliness of products produced by the privatized activities, data 

limitations precluded us from determining for two of the facilities in 

question whether privatization-in-place offers a more cost-effective 

approach for DOD to accomplish its workloads than the former
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government-run operations.9 A recent Air Force study on the Newark, Ohio, 

facility indicated that privatized operations were costing more than former 

Air Force operations, but no similar cost studies have been performed for 

the Navy privatizations at Louisville and Indianapolis. Moreover, we were 

unable to independently conduct such cost comparisons primarily because 

of (1) the absence of sufficient historical baseline data for operations at the 

former government-run facilities and (2) Navy-directed revisions in 

maintenance practices for certain key weapon systems and changes in 

workload mix. While the two Navy privatization contractors have initiated 

business improvements that appear to be improving operating efficiencies 

and reducing costs, the cost-effectiveness relative to the former 

government operations is unknown.

Air Force Studies Show 

Privatization Costs at 

Newark Exceed Costs of 

Former Government 

Operations 

In our prior work in January 1997, we asked the Air Force to compare the 

costs of missile repair at Newark, Ohio, under privatization to the facility’s 

costs to perform this same work under government control, based on about 

3 months of contractor data. The Air Force also initiated similar cost 

analyses of its two other workload components—aircraft repair and 

metrology operations. Estimated privatization-in-place costs for fiscal

year 1997 (the first full year of privatization) were projected based on 

limited actual work data for the contractors’ operations and included some 

other privatization costs attributable to the government (e.g., costs for 

contract administration and oversight). Estimated government costs were 

based on actual production data from fiscal year 1995, escalated for 

inflation and adjusted for fiscal year 1997 requirements. These costs also 

included comparability adjustments for such items as estimated base 

operating support costs (cost comparability adjustments represent factors 

that need to be added to the government’s actual production costs in order 

to obtain a total government cost for the operation). The Air Force study, 

released in July 1997, estimated that the fiscal year 1997 work performed at 

the privatized facility would likely cost the government about $14.1 million, 

or about 17 percent more than if the facility had continued to operate as a 

government activity. Contract award fees, government costs for contract 

administration and oversight, and higher material costs were the primary 

causes for the cost differential. Table 1 shows the results of this study.

9

 An alternative to privatization-in-place was closure of the facilities, with transfers of the 

workloads to other DOD facilities. According to BRAC commissions, the closure option was 

estimated to provide annual savings to DOD of $3.8 million, $28.6 million, and $39.2 million 

for Newark, Louisville, and Indianapolis, respectively, after one-time closure costs have 

been recouped.
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Table 1: Initial Cost Comparison Between Projected Government and Actual 

Privatization Operations at Newark, Ohio (July 1997)

Note: Numbers may not add due to rounding.

Source: Air Force cost comparison study dated July 1997.

In our December 1997 report,10 we concluded that the Air Force’s cost 

study methodology was analytically sound, appeared reasonable, used the 

best available data, and was consistent with DOD guidance on 

public-private depot competitions.11 While we reported that the study 

provided a reasonable interim cost estimate at that time, we also reported 

that it was premature to reach a final conclusion on costs until a full year of 

actual data was available. 

Subsequently, the Air Force conducted follow-on workload cost analyses 

based on reported fiscal year 1997 costs and production results. In its 

November 1998 study, the Air Force concluded that the privatization costs 

were again greater than the projected government costs to perform the 

same work. Privatized costs were $16.8 million, or about 21 percent higher 

than historical Air Force costs. Table 2 shows the results of this updated 

Dollars in millions

Work category Government Privatization Difference

Percentage

change

Aircraft $34.4 $42.4 $8.0 +23

Missile 41.2 45.5 4.3 +11

Metrology 8.7 10.5 1.8 +21

Total $84.2 $98.3 $14.1 +17

10 Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance System Depot 

Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).

11 We did not verify the accuracy of the Air Force historical cost data used for the study. Our 

prior work has identified unreliable cost data as one of several key weaknesses in DOD’s 

financial management systems. These long-standing weaknesses led us to designate DOD 

financial management as a high-risk area vulnerable to waste, fraud, abuse, and 

mismanagement. DOD has started to devote additional resources to correct these problems. 

Our recent work includes Department of Defense: Status of Financial Management 

Weaknesses and Actions Needed to Correct Continuing Challenges

(GAO/T-AIMD/NSIAD-99-171, May 4, 1999), High-Risk Series: An Update (GAO/HR-99-1, 

Jan. 1999), Major Management Challenges and Program Risks: Department of Defense

(GAO/OCG-99-4, Jan. 1999), and Defense Outsourcing: Better Data Needed to Support 

Overhead Rates for A-76 Studies (GAO/NSIAD-98-62, Feb. 1998).
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study. Our review of this cost analysis identified some overstated contract 

costs for leasing and capital improvement projects and the omission of 

estimated government revenue received from corporate federal income tax 

payments. We subsequently made adjustments to the analysis that resulted 

in decreasing the cost differential to about 16 percent in favor of the former 

government operation.

Table 2: Updated Cost Comparison Between Projected Government and Actual 

Privatization Operations at Newark, Ohio (November 1998)

Note: Numbers may not add due to rounding.

Source: Air Force cost comparison study dated November 1998.

The updated study followed the same general approach and methodology 

used in the interim study. Contractor costs represented a full year of 

privatization operations and, as previously described, included other 

associated privatization costs. The government cost estimates were largely 

based on fiscal year 1995 data that were adjusted for inflation and applied 

to actual repair quantities accomplished by the contractors during fiscal 

year 1997. After resolving some concerns raised by Boeing, the Air Force 

added some additional cost to the government estimate for comparability 

reporting purposes. This had the effect of reducing the cost differential 

from about 24 percent to 21 percent. These additional costs were 

attributable to detailing each workload’s allocated share of accounting, 

information services, and dispensary costs. We agree with these 

comparability adjustments.

As noted previously, the Air Force’s interim study initially identified three 

factors contributing to the increased costs of privatization at Newark, 

namely (1) contract award fees, (2) government costs for contract 

administration and oversight, and (3) material costs. Although the first two 

causes—award fees and contract monitoring—are continuing contributors 

Dollars in millions

Work category Government Privatization Difference

Percentage

change

Aircraft $37.5 $45.2 $7.7 +21

Missile 33.9 41.0 7.2 +21

Metrology 8.8 10.7 1.9 +21

Total $80.2 $97.0 $16.8 +21
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to increased privatization costs at Newark, the material cost issue has since 

been resolved. As a result of a 1998 Air Force Audit Agency study 

recommendation to improve visibility over materials and to control 

contractor access to material in the DOD supply system at Newark, the 

contractors and DOD have performed a detailed inventory of material 

on-hand and instituted new record keeping procedures and controls. As a 

result, neither the Air Force nor the Defense Contract Management 

Command view the material cost issue as an ongoing factor in terms of 

increased privatization costs. The November 1998 updated cost study 

assumed that material costs were the same for both the contractor and the 

government.

While the Air Force cost studies indicate operations are more costly at the 

privatized facility, the contractors have been incorporating business 

improvements to obtain cost efficiencies in order to reduce their operating 

costs. For example, in October 1997—after the data had been collected for 

the updated Air Force study—Boeing reduced its staffing by 77 to better 

size the workforce for the workload, thereby reducing costs. Moreover, 

Boeing has introduced new work flow and work processes intended to 

reduce turnaround times and costs for some work. A Wyle official cited 

reduced turnaround times for repairs and the elimination of repair 

backlogs. The Air Force, however, does not plan to revise its cost 

comparison for future years beyond fiscal year 1997 because of concerns 

about the usefulness of the historical baseline costs as the data get older.

Air Force customers and Defense Contract Management Command 

officials were satisfied with the timeliness and quality of the work 

performed by both Boeing and Wyle to date. Although citing some initial 

start-up problems experienced with Wyle Laboratories, they said that both 

contractors now exhibit positive performance measurements in such areas 

as scheduling, repair process improvements, and quality assurance. For 

example, ongoing Boeing program management reviews report missile and 

aircraft repairs meeting or falling below target pricing expectations, with 

related repair performance results meeting or exceeding most workload 

goals. According to Air Force managers, they would prefer not to relocate 

the current workload to any other facility, government or private sector, 

given the present quality of work and the expertise developed over the 

years in Newark.
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Similar Comparative Cost 

Analyses of Navy’s 

Privatizations at Louisville 

and Indianapolis Cannot Be 

Made

The Navy has not performed any similar cost analyses on the

privatization-in-place sites at Louisville and Indianapolis. Moreover, the 

absence of sufficient historical data for former Navy operations at these 

sites precluded us from performing cost comparisons similar to that of the 

Air Force’s study at Newark. Thus, the cost-effectiveness of these 

particular initiatives, in relation to former government operations, is 

unknown. However, contractors at these privatization facilities have taken 

steps to improve cost efficiency and program results. While the Navy has 

not performed cost analyses similar to the Air Force study of Newark, it 

continuously monitors the costs for work performed at Louisville and 

Indianapolis as part of its ongoing contract oversight and administration.

Our discussions with Navy officials showed that detailed operational and 

financial data, such as per unit costs, needed for an equitable cost 

comparison were not available. Some macro-level data, including total 

work years expended and reported overall costs, were available at 

higher-level headquarters units (such as the Naval Air Systems Command at 

Patuxent River, Maryland, for the Indianapolis site), but were not useful for 

the overall purpose of comparing costs. Moreover, Navy-directed revisions 

to maintenance practices on select weapon systems and changes to 

product mix occurred after the privatizations were under way, thereby 

precluding equitable cost comparisons even if detailed historical data were 

available. For example, Raytheon has modified its maintenance practices 

for overhauling Phalanx systems at Louisville by making only necessary 

repairs, referred to as condition-based maintenance, rather than 

performing complete overhauls. This change in practice has reportedly 

resulted in fewer component replacements, reduced labor hours, and 

reduced costs for each unit overhauled. United Defense in Louisville has 

made similar changes to its overhaul process for the Navy’s 5-inch 

MK-45 gun.

Although the overall cost-effectiveness of the Navy privatizations could not 

be determined, there are indications of at least potential short-term cost 

savings to the government resulting from contract provisions restricting 

labor rate charges and the contractors’ efforts to improve business 

practices. In Indianapolis, for example, a city-imposed covenant placed on 

Raytheon at the time of contract negotiations requires it to offer labor rates 

for most Navy work that are 15 percent lower than Navy-operated facility 

rates over the 5-year contract period. However, after that time, the rates 

will not be restricted and will be renegotiated, thus raising uncertainty 

about future rates. A Defense Contract Management Command analysis 

confirmed that Raytheon was performing work under the primary Navy 
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contract in 1997 at labor hour rates that were, on the average, 15 percent 

less than the prevailing Navy rates at the time. 

Facing decreasing workloads and increased costs, United Defense in 

Louisville reduced its workforce and facility space by returning unneeded 

buildings to the local base redevelopment authority and reengineering 

maintenance processes. United Defense officials now believe their labor 

hour rates are comparable to rates used by the Navy when it operated the 

facility; however, without a baseline of historical government costs, we 

could not independently validate this assertion. Raytheon in Louisville has 

reengineered its facility layout and manufacturing and maintenance 

practices to improve cost efficiencies, and Navy contractors at Louisville 

and Indianapolis have consolidated some workload operations at the 

privatized facilities by bringing in work from their other facilities to reduce 

overall contractor infrastructure and costs. For example, United Defense 

has relocated assembly work from its Fridley, Minnesota, site to Louisville, 

thereby reducing space requirements at Fridley by over 50 percent and 

reducing hourly labor rates by as much as $14. However, we did not assess 

the impact of the transfers on the cost of the work remaining at Fridley. 

Raytheon in Louisville has brought in production work for the Phalanx and 

Rolling Airframe Missile launcher from its plant in Tucson, Arizona, thereby 

allowing it to close its Lewisville, Texas, facility. Raytheon has also 

transferred its Long Beach facility depot-level repairs and spares 

manufacturing to Indianapolis. This restructuring contributed, along with 

other transfers, to closing Raytheon’s Long Beach facility.

Navy customers of the Louisville and Indianapolis privatizations-in-place 

told us they were satisfied with the timeliness, quality, and cost of the work 

performed to date. Customers said, for example, that United Defense and 

Raytheon in Louisville have either maintained or improved quality and 

timeliness since privatization through changes made to the older Navy 

work processes and better customer service. They also said that work 

performed by Raytheon at Indianapolis was as good as that provided by the 

Navy before privatization. None of the customers we spoke with planned to 

transfer work to other locations. In Louisville, for example, Navy officials 

told us they would prefer not to relocate the current workload to any other 

facility, government or private sector, given the quality of work and the 

expertise developed over the years. In fact, the Navy gun work customers 

of United Defense see no reasonable alternative for overhauling their naval 

guns outside the Louisville facility. As such, they plan to continue sending 

work to Louisville in the future, as do the Raytheon customers.
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Privatization-in-Place 

Does Not Optimize 

Excess Capacity 

Reductions in DOD’s 

Own Infrastructure

Privatization-in-place has not optimized reductions in excess capacity in 

DOD’s own infrastructure, but it can allow for some cost savings in the 

overall public-private defense infrastructure supported by the defense 

budget. Reducing DOD’s infrastructure was a major BRAC objective, but 

information provided by DOD, as well as our prior reports, shows that 

excess capacity still exists in the industrial infrastructure, despite four 

rounds of BRAC. Rather than closing facilities and transferring defense 

work to other underutilized DOD facilities to reduce excess capacity, 

privatization-in-place causes workload to remain at those sites. As a result, 

DOD continues to support the costs associated with maintaining that 

facility infrastructure through the rates charged by the contractors for the 

workload performed. If, instead of privatization, these facility workloads 

had been relocated to other underutilized DOD facilities, DOD’s excess 

capacity and infrastructure costs would have been more optimally reduced. 

In effect, by increasing the workload and utilizing capacity at underutilized 

government facilities, facility overhead costs can be spread over a larger 

workload base and, as a result, overall costs for repairs on specific units 

could be reduced and customer prices lowered. 

Although privatization-in-place has not addressed DOD’s excess capacity 

problem, contractors at the privatized facilities we visited told us they have 

either reduced or are trying to reduce their costs, as noted previously, 

through improved operating efficiencies and reductions in their corporate 

infrastructure. However, to the extent that DOD maintains underutilized 

facilities in its industrial infrastructure, it is difficult to assess whether 

privatization-in-place offers a cost-effective alternative to relocating 

workload to other underutilized DOD locations. Privatization-in-place 

would only be a more cost-effective alternative if the contractors can 

achieve savings that are significant enough to offset the savings lost by not 

relocating workloads to DOD’s underutilized facilities.

Conclusions Latest estimates of costs at one privatized facility were about 16 percent 

higher than costs of the same activities when operated as an Air Force 

facility. However, without an adequate historical baseline and accounting 

of government operating costs, the Department of Defense lacks the means 

to compare current costs of operations with the former government-run 

operations. Faced with decreasing workloads, it will be increasingly 

difficult to hold down costs of workloads performed at the Department’s 

three privatized facilities. Contractors performing work at these facilities 

are taking steps to reduce costs and improve efficiencies. The Department 
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needs to examine these initiatives in the context of the entire defense 

industrial infrastructure rather than in isolation as individualized 

operations. As a general rule, privatization-in-place does not optimize 

reductions in excess capacity in government-owned facilities, and it 

reduces the potential to achieve greater economies in overhead costs. The 

Department’s efforts to eliminate facilities it owns by transferring them to 

the private sector does not appear to be cost-effective at one facility, but 

insufficient data were available to fully assess the cost-effectiveness of the 

other two locations relative to former government operations. Moreover, 

since the Department is continuing to pay for the use of these facilities 

through contractual arrangements, they have not optimized reductions in 

excess capacity but rather have shifted it to the private sector. Thus, 

through privatization-in-place actions, the goal of eliminating excess 

capacity may be realized more in form than in substance.

Recommendations Should DOD consider privatization-in-place in the future, we recommend 

that the Secretary of Defense require the services to (1) consider the 

overall cost-effectiveness of this approach in reducing operating costs and 

excess capacity in the combined public and private sectors supported by 

the defense budget; (2) retain an adequate baseline of historical 

government costs, preferably on a per-unit basis, to assess the 

cost-effectiveness of privatization-in-place; and (3) periodically reassess 

the cost-effectiveness of prior privatization-in-place initiatives, in light of 

excess capacity in other private sector and DOD facilities and continuing 

declines in military workloads. 

Agency Comments and 

Our Evaluation

DOD provided written comments on a draft of this report. These comments 

are included in their entirety in appendix II. DOD disagreed with our 

recommendations, stating that they were unreasonable to implement. In 

light of DOD’s comments, we made changes to the report to clarify our 

position and have revised our recommendations to reflect these changes. 

We continue to believe that our recommended actions can be accomplished 

and that they are essential to assessing the cost-effectiveness of 

privatization-in-place. 

DOD disagreed with our recommendation regarding the assessment of the 

cost impact of future privatization-in-place actions on DOD and 

private-sector defense-supported infrastructure, stating that it would be 

unreasonable to estimate operating cost reductions for both the public and 
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private sectors. DOD also stated that such an assessment would be 

sensitive to many factors outside the control of DOD. While we agree that 

such an assessment would be difficult to complete, especially for the 

private sector portion, some assessment needs to be made, even if it 

includes rough order of magnitude estimates, for DOD to be in a position to 

assess the cost-effectiveness of any such proposal. Such an assessment 

should, for example, consider the effects of consolidating complimentary 

workloads at potential privatized locations from other facilities (and 

thereby reducing or eliminating infrastructure associated with those 

facilities), either in DOD or in the private sector, to achieve the best 

possible efficiencies. We continue to believe that such an assessment, 

completed prior to implementing privatization-in-place, is essential if DOD 

is to assure itself that privatization-in-place is a cost-effective option to take 

to reduce DOD infrastructure and costs.

DOD also disagreed with our recommendation regarding the retention of 

historical baseline government cost data for subsequent use in analyzing 

the cost-effectiveness of privatization-in-place actions. In disagreeing, DOD 

stated that it was unreasonable to retain such historical cost data because 

it would necessitate a change in accounting procedures at most DOD 

activities and place an unnecessary burden on these activities. While we 

agree that some financial reporting changes may be necessary and 

additional record keeping may be required, we do not believe 

implementation of this recommendation need be unnecessarily 

burdensome or unreasonable given the Air Force’s ability to collect such 

cost data for its cost analyses of the Newark facility. 

We further believe it is important to develop and retain such a performance 

baseline of costs, to the extent practical, to be able to conduct future cost 

comparison analyses, as well as effectively manage costs of current 

operations. In fact, such accumulation of historical cost information is 

already required by financial accounting standards. Specifically, Statement 

of Federal Financial Accounting Standards No. 4 requires agencies to 

accumulate and report the costs of its activities on a regular basis for 

management information purposes. The standard also states that 

measuring cost is an integral part of measuring performance in terms of 

improving efficiency and cost-effectiveness. Without an adequate baseline 

of historical operating costs, DOD is not in a position to judge the 

cost-effectiveness of any potential privatization-in-place actions, including 

anticipated infrastructure efficiencies achieved by these actions. 

Therefore, any changes in accounting procedures necessary to improve 
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DOD’s ability to identify costs associated with work performed at its 

individual activities should be considered.

Finally, we have added a recommendation to provide for a reassessment of 

prior privatization-in-place actions, in light of declining workloads in those 

facilities and continued excess capacity in both the public and private 

sectors.

In addition to comments regarding our recommendations, DOD provided 

technical comments regarding specific findings presented in our draft 

report. Our evaluation of these comments is provided below. 

DOD disagreed with our statement that privatization-in-place does not 

reduce excess capacity. We have modified our report and 

recommendations to better reflect our view of the impact of 

privatization-in-place on the total defense industrial infrastructure, 

including that in both the public and private sector. We believe that 

privatization-in-place may reduce excess capacity in DOD’s infrastructure 

to a certain extent. However, we continue to believe that it does not 

maximize potential efficiencies that could be gained because the workload 

remains at the privatized facility instead of being transferred to other DOD 

facilities to further reduce excess capacity. Furthermore, the privatization 

sites may subsequently acquire additional workloads that could have gone 

to other underutilized DOD facilities, thus missing an opportunity to 

further reduce excess capacity. At the same time, some efficiencies may be 

gained when privatization-in-place options are used to consolidate work 

from other contractor-operated locations.

DOD stated that privatization-in-place is a BRAC implementation issue, not 

a BRAC selection issue. We agree that privatization-in-place is a matter of 

implementation and that initial base closure decisions are made on the 

basis of excess infrastructure and military value considerations. However, 

costs to close and return on investment are also factors considered by DOD 

in its BRAC decision making. An expected outcome of closure decisions is 

reduced infrastructure operating costs. Before implementing any potential 

future privatizations-in-place, we continue to believe it would be prudent 

for DOD to assure that this option is cost-effective and consistent with the 

overall base closure concept of reducing costly excess infrastructure 

capacity.
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Scope and 

Methodology

To determine how contractors are responding to decreased workloads at 

the former DOD facilities in Newark, Ohio; Indianapolis, Indiana; and 

Louisville, Kentucky, we reviewed documents and interviewed officials 

from both the government and private sectors. Our DOD contacts included 

those organizations responsible for overseeing the privatization initiatives 

and program managers who programmed defense workloads for the 

facilities. Through those contacts, we sought to gain a sense of the progress 

being made by the privatization contractors and their satisfaction level with 

the cost, timeliness, and quality of the work being performed. We also 

visited the privatization-in-place sites, toured the facilities, and discussed 

operational status and future plans with cognizant contractor officials. We 

contacted city and local redevelopment authority officials at the various 

privatization locations to obtain their perspective on the privatized 

operations.

To examine the cost-effectiveness of the privatization-in-place actions and 

their impact on DOD’s industrial infrastructure, we reviewed prior work on 

the Louisville, Kentucky, and Newark, Ohio, operations as well as available 

DOD workload relocation analyses related to the closures of the military 

facilities at the three locations. We did not examine the cost-effectiveness 

of the privatizations as compared to the option of closing the facilities and 

transferring the workloads to other locations, as envisioned under one 

BRAC option. Further, we did not examine other issues associated with 

privatization-in-place such as preservation of jobs in the local communities 

and retention of technological skills needed to provide services, such as 

depot maintenance, to DOD. Rather, we limited our review to comparisons 

between costs of the privatizations-in-place and those of the former 

government-run operations. In that regard, we reviewed July 1997 and 

November 1998 Air Force cost analyses that compared privatized 

operational costs with those of former Air Force operations at Newark, 

Ohio. The latter study was an update to the July 1997 study that we had 

reviewed in our prior report of the Air Force privatization initiative.12 In 

analyzing the most recent cost study, we compared study results with that 

of the previous work and used DOD’s guide for making cost comparisons 

between public depots and private contractors to ensure that the Air Force 

study included all applicable cost elements and included any adjustments. 

We discussed the study results with cognizant Air Force and contractor 

12 Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance System Depot 

Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).
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officials. We also discussed factors that affect the cost-effectiveness of 

privatization-in-place with Air Force and contractor officials. 

For the Navy privatizations at Indianapolis, Indiana, and Louisville, 

Kentucky, we attempted to identify comparable DOD cost comparison 

analyses of government versus privatized operations, but found none. We 

also collected cost data from contractor and Navy sources to make such 

comparisons. However, we were unable to conduct these analyses because 

of (1) the absence of sufficient, detailed historical Navy baseline data for 

operations at the closing military facilities at those sites and 

(2) Navy-directed revisions in maintenance practices for certain key 

weapon systems and changes in product mix. While rigorous cost 

comparisons were not possible, we reviewed selected contractors’ costs 

and discussed business improvements and restructuring initiatives to bring 

in additional work to the privatization sites with Navy and contractor 

officials. We did not attempt to identify the impact on other government 

contracts as a result of workload transfers from other contractor facilities. 

In addition, we contacted Defense Contract Management Command 

officials at these sites to obtain contractor-related cost information and 

their views about contractors’ performance.

In conducting our work, we contacted officials from the following 

organizations:

• Office of the Secretary of Defense in Washington, D.C.;

• Air Force Materiel Command, Dayton, Ohio;

• Air Force Metrology and Calibration Program Office, Newark, Ohio;

• Naval Sea Systems Command and Naval Surface Warfare Center 

Headquarters, Arlington, Virginia;

• Naval Air Systems Command and Naval Air Warfare Center 

Headquarters, Patuxent River, Maryland;

• Defense Contract Management Command offices at Newark, Ohio; 

Louisville, Kentucky; and Indianapolis, Indiana;

• Raytheon Systems Company, Indianapolis, Indiana;

• Raytheon Systems Company and United Defense Limited Partnership, 

Louisville, Kentucky; 

• Boeing North American, Inc., and Wyle Laboratories, Inc., Boeing 

Guidance Repair Center, Newark, Ohio;

• Louisville/Jefferson County Redevelopment Authority, Louisville, 

Kentucky;
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• Indianapolis Economic Development Corporation, Indianapolis, 

Indiana; and

• Heath-Newark-Licking County Port Authority, Newark, Ohio.

We conducted our review from October 1998 through September 1999 in 

accordance with generally accepted government auditing standards. 

We are sending copies of this report to the Honorable Jacob Lew, Director, 

Office of Management and Budget; the Honorable William S. Cohen, 

Secretary of Defense; the Honorable F. Whitten Peters, Secretary of the Air 

Force; the Honorable Richard Danzig, Secretary of the Navy; the Honorable 

Louis Caldera, Secretary of the Army; General James L. Jones, 

Commandant of the Marine Corps; and other interested parties. We will 

make copies available to others upon request.

GAO points of contact concerning this report and other key contributors 

are listed in appendix III.

Sincerely yours,

David R. Warren, Director

Defense Management Issues
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Appendix I

Privatization-in-Place Initiatives AAppenednxidxeIis

The following sections provide additional information on DOD 

privatization-in-place initiatives at Newark, Ohio; Louisville, Kentucky; and 

Indianapolis, Indiana.

Newark, Ohio The announcement to close the Newark, Ohio, facility as an Air Force 

managed operation was made in 1993, with workload turnover in October 

1996 to two contractors—Rockwell International and Wyle Laboratories. 

While the Air Force retained most of its existing workload at the privatized 

facility, the Navy moved most and the Army moved all of their Newark 

workloads to other sites. For the work remaining at Newark, Rockwell 

International was awarded a contract for depot repairs of aircraft inertial 

navigation systems and missile guidance systems and Wyle Laboratories 

was awarded a contract for operating the primary standards laboratory and 

providing calibration services. Boeing North American, Inc., has since 

taken over the Rockwell division responsible for work at Newark. The 

facility, now called the Boeing Guidance Repair Center, has been turned 

over by the Air Force to the Heath-Newark-Licking County Port Authority, 

which leases it to Boeing.

The Port Authority is the Ohio-chartered local redevelopment authority 

formed to accept the conveyance of the property from the Air Force. It is 

responsible for managing the property and for economic redevelopment. 

The lease represents about 88 percent of the old Newark facility space 

occupied by the contractors. The lease provides that Boeing pay the Port 

Authority for appropriate administrative operations and staffing, buildings 

and ground maintenance, and reimbursable charges attributable to on-site 

fire protection services, some utilities, insurance, and taxes. A portion of 

the lease is retained in a capital equipment reserve fund to pay for future 

major facility and equipment repairs or replacements. Wyle Laboratories, in 

turn, subleases about 17 percent of the facility space from Boeing. It pays a 

pro rata share of the lease and for other Boeing provided services, 

including electricity charges, protective services, and building 

maintenance, based on the square footage it and the co-located offices of 

the Air Force Metrology and Calibration program1

 occupy.

1

 The Air Force only privatized the standards lab operations, technical order management, 

and certain calibration workloads. The Air Force Metrology and Calibration office retained 

responsibilities for program management, contract oversight, certification of Air Force 

Primary Measurement Equipment Labs, and standards procurement. 
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Until recently, Boeing has been operating under an indefinite 

delivery/indefinite quantity, cost plus award fee contract that was originally 

valued at $264 million. The performance term consisted of the base year 

(9-month transition period) and four 1-year options. In October 1999, the 

Air Force renegotiated and awarded a sole-source 15-year contract (5-year 

basic term and two 5-year options) with Boeing. As a cost plus award fee 

contract, it features incentive provisions for reducing costs and developing 

new business. Also, Boeing is in the early stages of implementing several 

management changes to promote manufacturing efficiencies to include 

improved process monitoring.

Boeing and government officials believe that future workload requirements 

at its facility will decline for repairing aircraft and missile items, thus 

increasing the overhead rate. Aircraft repair requirements are expected to 

decline by about 6 percent in 2000 with further declines expected through 

year 2014. Officials attribute these expected declines to normal system 

retirements and attrition, increasing reliability of newer and future weapon 

systems, and increasing reliance on original equipment manufacturers for 

logistics support. Although missile repair requirements were similarly 

expected to decline with strategic missiles retirements, the life expectancy 

for those missiles has actually increased, with the resulting missile 

workload remaining about the same.

To replace declining workloads, retain employment levels, and maintain 

operating efficiencies, Boeing is actively pursuing future work from other 

Boeing operations, manufacturing partners, DOD programs, and 

commercial sources to offset its declining workload. However, it has not 

been very successful to date. Moreover, Boeing expects very little 

commercial work—its future nondefense workload is not expected to 

exceed 5 percent of its total work requirements within the new contract 

period. If new work is not added to replace declining requirements, repair 

prices could increase due to overhead.

Wyle Laboratories workload with the Air Force has increased somewhat 

since contract inception, but the company has had similar difficulties in 

acquiring new commercial customers. The Wyle Laboratories’ contract is 

similar to the Boeing contract. It is an indefinite delivery/indefinite 

quantity, cost plus award fee contract consisting of a base year and four 

1-year options, ending in September 2000. The contract was originally 

valued at $19 million and the current estimate at completion is $49 million. 

A Wyle Laboratories’ official attributed the cost increase to increased 

calibration workloads and higher than expected leasing and overhead 
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costs. Regarding potential nondefense work, Wyle Laboratories currently 

performs very little commercial work, and it has no immediate prospects 

for any major new business. 

Prior to privatization, the Newark facility employed about 2,500 personnel. 

When closure was announced in 1993, the total workforce declined to 

about 1,500; and, by the official closure date in October 1996, the workforce 

had declined further, to about 1,350. At start-up, Boeing employed about 

800 and Wyle about 100; most workers were former government employees 

at the Newark facility. About 130 government civilian and military remained 

in the Air Force Metrology and Calibration Program Office.

Since privatization, Boeing’s workforce has decreased, with better matches 

between personnel and workload requirements and associated small 

reductions in workload. In October 1997, for example, 77 employees were 

“reduced-in-force” due to reduced workload requirements forecasted for 

fiscal year 1998. However, most workforce-related reductions have 

occurred incrementally over time as a result of Boeing-instituted 

production and personnel efficiencies. Thus, the Boeing workforce 

currently numbers about 640.

In contrast, since privatization, Wyle Laboratories’ workforce and 

workload, as well as that pertaining to the co-located Air Force Metrology 

and Calibration Program Office, have increased and are expected to further 

increase next year. At time of closure, about 80 government lab technicians 

were hired by Wyle Laboratories to augment its staff working on primary 

standards lab operations. The Wyle workforce has since grown to about 

125, with added workloads attributable to increased demands for repairing 

calibration equipment and revising technical orders. It is expected to 

further increase its workforce to about 140 next year. Likewise, the Air 

Force Metrology and Calibration Office expects to grow by 20 to 40 

employees to accommodate the increased contract management and 

standard measurement responsibilities associated with the increased 

Wyle-related workload.

Louisville, Kentucky The decision to close the Louisville facility was announced in 1995, with 

workload turnover to two contractors (United Defense Limited Partnership 

and Hughes Missile Systems Company) occurring in August 1996. 

Raytheon, the current contractor, subsequently merged with Hughes and 

took over its operations at Louisville. To implement the privatization, the 

Navy set up a lease with the Louisville local redevelopment authority, 
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known as the Louisville/Jefferson County Redevelopment Authority, for 

use of the facility until title of the property can be transferred to the 

redevelopment authority. The lease requires no payments to the Navy and 

provides for an initial 1-year term with four 1-year renewal options. Under 

the agreement, the redevelopment authority assumes responsibility for 

routine protection, repair, and maintenance at the site. The Navy assumes 

all liability for environmental conditions existing at the time of turnover. An 

application has been submitted to the Navy by the redevelopment authority 

for acquisition of the property through an economic development 

conveyance; it is currently pending.2

The redevelopment authority, in turn, leases out the property to the 

contractors at a rate, which, according to community officials, is below 

market value. However, the contractors are responsible for operations and 

maintenance costs for the portion of the facility that they occupy. Any part 

of the property not leased to the Navy’s two contractors or occupied by 

Navy personnel can be leased to other commercial activities by the 

redevelopment authority. In fact, 70,000 square feet, or 14 percent, of this 

available space has been leased to three local commercial enterprises. 

Work performed for the Navy at Louisville is done under cost reimbursable 

type contracts by the two contractors—United Defense and Raytheon. The 

contracts cover an initial base period from August 1996 through September 

1996 with five 1-year options, taking them through fiscal year 2001. There 

are also agreements that were put into place between the Navy contractors 

and the local redevelopment authority as a part of their competitive 

selection by the city of Louisville. These agreements include promises by 

the contractors to use best efforts to expand their businesses, to hire 

former government workers at wages equal to what they had earned with 

the government, and to guarantee employment levels.

The Navy workload has been taken over by United Defense and Raytheon, 

with some engineering support still being provided by a Navy detachment 

and its support contractor remaining in place at the Louisville facility.3

 This 

detachment is working out of buildings still owned and maintained by the 

2

 An economic development conveyance is a means by which a local redevelopment 

authority may obtain property from DOD at no cost provided the property is to be used for 

economic development and job creation purposes.

3

 A contractor, CACI Field Services, Inc., which employs about 60 employees at the 

Louisville facility, provides technical support services to the Navy engineering detachment. 
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Navy. Once the Navy has turned over the facility to the local redevelopment 

authority, the detachment will lease its space at no cost to the government. 

United Defense is responsible primarily for production, overhaul and 

maintenance support of naval guns. Raytheon mainly performs production, 

overhauls, and component repair for the Phalanx close-in-air defense 

system and the Rolling Airframe Missile launcher. United Defense and 

Raytheon annual sales are about $35 million and $21 million, respectively.

The workload at Louisville has declined significantly from that prior to 

privatization. Although workload had begun declining prior to 

privatization, the workload after privatization was even lower than initially 

estimated. According to United Defense officials, its share of the total 

Louisville defense work had declined from about 1.3 million direct labor 

hours in 1994 to 277,000 in 1998, a drop of almost 80 percent. Because of 

the ongoing decline in work, United Defense only hired a total of 

354 employees at the onset of privatization, a reduction of about 60 percent 

from the prior level of 866 Navy employees. However, according to United 

Defense officials, it initially expected the workload to be about 

449,000 direct labor hours based on prior Navy projections. In response to 

the lower workload, United Defense further reduced its workforce to 

256 employees. Moreover, United Defense returned several buildings to the 

local redevelopment authority, thereby reducing its facility infrastructure 

by 40 percent, from about 1 million square feet to about 600,000 square feet. 

United Defense also redesigned its existing space to allow for a more 

efficient work process.

Beginning in fiscal year 1999, United Defense has transferred gun 

production work from its Fridley, Minnesota, plant to Louisville. United 

Defense projects that, as a result, its total workload at Louisville will 

stabilize for the next few years. However, this assumes that a significant 

amount of funding will continue to be provided over the next 2 years from 

congressionally-designated increases to the Navy’s budget. For example, 

MK-45 gun mount overhaul work, which comprises about 30 percent of 

United Defense’s workload, has been funded in fiscal years 1998 and 

1999 primarily through congressionally-designated additions to the Navy’s 

budget. Further, Navy officials maintain that there is little, if any, funding 

available for this work in the Navy’s budget for fiscal years 2000 and 

beyond without additional funding from the Congress. 

In addition to adding work to Louisville, the transfer from Fridley will 

assist United Defense in reducing its infrastructure. Specifically, United 

Defense officials assert that after transferring work from Fridley, United 
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Defense will reduce its Fridley space by over 1 million square feet, or 

50 percent, and reduce its Fridley workforce by 285 people, or 17 percent. 

Raytheon similarly has seen a 50-percent decrease in its maintenance 

workload, going from about 250,000 thousand direct labor hours in 1994 to 

about 128,000 thousand hours in 1998. However, the company has 

transferred in its Phalanx and Rolling Airframe Missile launcher production 

work from its facility in Tucson, Arizona. As a result of this added work, 

Navy and Raytheon officials expect a net increase in Raytheon’s Louisville 

workload. The consolidation of Phalanx and Rolling Airframe Missile 

launcher work at Louisville has also allowed Raytheon to close its plant in 

Lewisville, Texas, because of the space made available in Tucson.

While Raytheon has not reduced its on-site facility infrastructure, it has 

updated its entire facility to accommodate the workload changes 

associated with the new production work. Under Navy direction Raytheon 

has also made improvements to the process for overhauling Phalanx 

systems by adopting “condition-based maintenance.” Under this approach, 

only parts that are not working are repaired or replaced as opposed to the 

prior Navy process of replacing all parts whether working or not. 

Conditioned-based maintenance has reportedly allowed Raytheon to keep 

its overhaul costs down.

Indianapolis, Indiana In 1995 the closure of the Indianapolis facility was announced, and on 

January 6, 1997, the workload was transferred to the Navy’s contractor, 

Hughes Technical Services Company. As is the case in Louisville, Raytheon 

became the contractor after it merged with Hughes in December 1997. The 

facility is currently under lease from the Navy to the city of Indianapolis for 

$1 per year over a 10-year term with two 5-year renewal options. An 

application for acquisition of the facility through economic development 

conveyance has been submitted by the city and is currently pending before 

the Navy. The redevelopment authority is subleasing the facility to 

Raytheon for $1 per year with a lease term of 20 years. Under this lease, 

Raytheon is responsible for the operation and maintenance costs for the 

property. 

Similar to the situation in Louisville, there are also agreements in place 

between the city of Indianapolis and Raytheon for such things as hiring 

former government workers at wages equal to those before privatization 

and guaranteeing employment levels. Indianapolis also was able to obtain 

other commitments from Hughes (now Raytheon), including such promises 
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as reducing product costs to Navy customers, transferring related lines of 

work into Indianapolis from other locations, and expanding commercial 

revenues. However, according to Raytheon officials, the agreement to 

expand commercial revenues related to a specific product line managed by 

Hughes that was not acquired by Raytheon after the merger. As such, 

Raytheon officials at Indianapolis do not anticipate being able to fulfill this 

promise made by Hughes, and this agreement provision has since been 

removed by the city of Indianapolis.

Work performed by Raytheon is done for the Navy through a 1-year 

indefinite delivery contract with four 1-year renewal options. The 5-year 

contract period runs through December 2001, at which time Raytheon will 

compete with other private companies for the Navy’s business. Raytheon’s 

annual sales at Indianapolis are about $180 to $200 million. 

The volume of work at Indianapolis, as measured by direct labor hours, has 

dropped 30 percent since privatization, prompting Raytheon to lay off 

about 330 employees in mid-1998. According to Navy and Raytheon 

officials, the reductions in workload occurred primarily because of 

decreased Navy requirements and the transfer of certain inherently 

governmental functions to other Navy facilities. However, Raytheon has 

added new work to Indianapolis, primarily for foreign customers. For 

example, it has brought in armored tank modification work for Portugal, 

accounting for about $31 million in sales. Additionally, Raytheon 

transferred other DOD work for depot repairs and spares manufacture to 

Indianapolis from its plant in Long Beach, California. This internal 

restructuring initiative equated to consolidating about 120,000 square feet 

from its Long Beach facility at Indianapolis. Raytheon has since closed the 

Long Beach facility. As a result of Raytheon’s efforts to bring in new work 

to Indianapolis, the older Navy work that existed prior to privatization now 

only makes up about 65 percent of Raytheon’s total business at 

Indianapolis.

Work performed by Raytheon is done for the Navy through a 1-year 

indefinite delivery contract with four 1-year renewal options. The 5-year 

contract period runs through December 2001, at which time Raytheon will 

compete with other private companies for the Navy’s business. Raytheon’s 

annual sales at Indianapolis are about $180 to $200 million.

The volume of work at Indianapolis, as measured by direct labor hours, has 

dropped 30 percent since privatization, prompting Raytheon to lay off 

about 330 employees in mid-1998. According to Navy and Raytheon 
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officials, the reductions in workload occurred primarily because of 

decreased Navy requirements and the transfer of certain inherently 

governmental functions to other Navy facilities. However, Raytheon has 

added new work to Indianapolis, primarily for foreign customers. For 

example, it has brought in armored tank modificaiton work for Portugal, 

accouting for about $31 million in sales. Additionally, Raytheon transferred 

other DOD work for depot repairs and spares manufacture to Indianpolis 

from its plant in Long Beach, California. This internal restructing initiative 

equated to consolidating about 120,000 square feet from its Long Beach 

facility at Indianapolis. Raytheon has since closed the Long Beach facility. 

As a result of Raytheon’s efforts to bring in new work to Indianpolis, the 

older Navy work that existed prior to privatization now only makes up 

about 65 percent of Raytheon’s total business at Indianpolis.
Page 32 GAO/NSIAD-00-23 Military Base Closures

Appendix II

Comments From the Department of Defense ApendxiI

See comment 1.

Note: GAO comments 

supplementing those in the 

report text appear at the end 

of this appendix.
Appendix II

Comments From the Department of Defense

Page 33 GAO/NSIAD-00-23 Military Base Closures

See comment 1.

Now on p. 17.

Now on p. 17.
Appendix II

Comments From the Department of Defense

Page 34 GAO/NSIAD-00-23 Military Base Closures

See comment 1.
Appendix II

Comments From the Department of Defense

Page 35 GAO/NSIAD-00-23 Military Base Closures

The following is GAO’s comment on the Department of Defense’s letter 

dated November 3, 1999.

GAO Comment 1. We have revised the report title to more accurately reflect the report’s 

primary point that we could not perform cost-effectiveness analyses of all 

privatization-in-place initiatives due to the lack of data.
Page 36 GAO/NSIAD-00-23 Military Base Closures

Appendix III

GAO Contacts and Staff Acknowledgments ApendxIi

GAO Contacts Barry Holman (202) 512-8412

Julia Denman (202) 512-8412

Acknowledgments In addition to those named above, James Reifsynder, Bruce Fairbairn, Joe 

Faley, and Cary Russell made key contribitions to this report.
Page 37 GAO/NSIAD-00-23 Military Base Closures

Related GAO Products

Defense Depot Maintenance: Use of Public-Private Partnering 

Arrangements (GAO/NSIAD-98-91, May 7, 1998).

Inventory Management: DOD Can Build on Progress by Using Best 

Practices for Reparable Parts (GAO/NSIAD-98-97, Feb. 27, 1998).

Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance 

System Depot Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).

Navy Depot Maintenance: Privatizing Louisville Operations in Place Is Not 

Cost-Effective (GAO/NSIAD-97-52, July 31, 1997).

Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in 

Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, 

Mar. 18, 1997) and (GAO/T-NSIAD-97-112, Apr. 10, 1997).

Privatization: Lessons Learned by State and Local Governments

(GAO/GGD-97-48, Mar. 14, 1997).

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save 

Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.12, 1997).

High Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).

Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly 

While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).

Army Depot Maintenance: Privatization Without Further Downsizing 

Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).

Navy Depot Maintenance: Cost And Savings Issues Related to Privatizationin-Place at the Louisville, Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 

1996).

Defense Depot Maintenance: Privatization and the Debate Over the PublicPrivate Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/NSIAD-96-148, 

Apr. 17, 1996).

Closing Maintenance Depots: Savings, Personnel, and Workload 

Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996).
Related GAO Products

Page 38 GAO/NSIAD-00-23 Military Base Closures

Aerospace Guidance and Metrology Center: Cost Growth and Other 

Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994).

(709342) Letr
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