United States General Accounting Office

GAO Testimony

Before the Subcommittee on Readiness, Committee on

Armed Services, U.S. Senate

For Release and Delivery

Expected at

9:30 a.m., EDT

Wednesday

April 17, 1996

DEFENSE DEPOT

MAINTENANCE

Privatization and the Debate

Over the Public-Private Mix

Statement of David Warren, Director, Defense Management

Issues, National Security and International Affairs Division

G O A

years

1921 - 1996

GAO/T-NSIAD-96-148

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss defense depot maintenance

issues. As requested by the Committee, my testimony will focus on our

preliminary analysis of the March 1996 Department of Defense (DOD)

report responding to the congressional mandate for a comprehensive

depot maintenance policy. It will also address issues related to the

allocation of depot maintenance workload between the public and private

sectors, such as ongoing privatization initiatives, including

privatization-in-place.1

 Specific issues I will address are

• DOD’s depot maintenance management model in the post cold war era,

• the extent to which DOD’s proposed depot maintenance policy is consistent

with congressional direction and guidance,

• the savings that DOD is anticipating from privatization of depot

maintenance activities, and

• the cost-effectiveness of privatization-in-place as an alternative for closing

depots.

Before I discuss specifics, I’d like to summarize the key observations from

our ongoing work.

First, the new model for managing depot maintenance is evolving. DOD’s

proposed model continues to be a mix between the public and private

sectors. However, DOD’s policy report signals a clear intent to shift

workloads to the private sector when readiness, sustainability, and

technology risks can be overcome. Such a shift, if not effectively managed,

including the downsizing of remaining depot infrastructure, could

exacerbate existing excess capacity problems and the inefficiencies

inherent in underutilization of depot maintenance infrastructure.

Second, we have several initial observations on the DOD policy report.

• It provides an overall framework for managing defense depot maintenance

activities.

• It sets forth a clear preference for moving workload to the private sector

that will likely result in a much smaller core capability than exists today.

• It is not consistent with congressional guidance in one key area—the use

of public-private competitions for non-core workloads.

1

For purposes of this testimony, privatization means assigning or transferring work to private sector

contractors whose employees perform the work in a facility that is usually not owned by the federal

government, although depot plant equipment may be government owned. Privatization-in-place means

the work will be performed at a former DOD facility.

Page 1 GAO/T-NSIAD-96-148
• It provides substantial flexibility on how the policy will be implemented.

As a result, the precise effects of this policy on such factors as

public-private mix, cost, and excess capacity remain uncertain.

Third, privatizing depot maintenance workloads in the current

environment, is not likely to achieve the savings DOD expects and may even

be more costly. Saving estimates of 20 percent were based on the

May 1995 report of the Commission on Roles and Missions (CORM) of the

Armed Services. This report relied primarily on results from public-private

competitions for commercial activities under Office of Management and

Budget (OMB) Circular A-76. Our analysis showed that the public sector

won about half of these competitions and that the savings were therefore

the result of competition rather than privatization. Further, these

competitions involved activities that more readily lend themselves to

private sector competition. These include family housing, real property

and vehicle maintenance, civilian personnel administration, food service,

security and law enforcement, and other support services. These

activities—unlike depot maintenance—generally required low-skilled

labor, uncomplicated and repetitious work tasks, small capital investment

to enter the market, and were common to the private sector. Also, many

offerors participated in the competitions.

Recognizing the influence of competition on potential savings from

privatization initiatives, we examined results from the Department’s

public-private competition program for depot maintenance and reviewed

contracting actions for depot maintenance work by 12 DOD buying

activities to determine the competitiveness of the private sector market,

and where possible, to make price comparisons. Our review of the depot

maintenance public-private competition program revealed that 67 percent

of the 95 non-ship competitions were won by DOD depots—with winning

public sector bids averaging 40 percent less than their closest private

sector competitor. For 23 percent of these public-private competitions

there were no private sector offerors and for another 35 percent, only one

private sector offeror. Additionally, we analyzed 240 active depot

maintenance contracts, finding that 182—or 76 percent—were awarded

sole-source. Further, about 86 percent of the full and open competitions

had 4 or less offers. Finally, our analysis of a limited number of military

systems or components that are dual-sourced—that is, repaired by both a

DOD depot and a private sector firm—determined that DOD depot prices

were lower for 62 percent of the items. Accordingly, privatizing without

public-private competition and/or privatizing into a non-competitive

Page 2 GAO/T-NSIAD-96-148
environment would not likely result in expected savings and may actually

be more costly.

DOD has discontinued public-private competitions arguing that the depot

accounting systems are inadequate to fully capture costs. We recognize

that improvements must be made in this area, but implementation of

improved internal controls, the use of the cost comparability handbook,

and review and approval of the accounting systems and proposals by the

Defense Contract Audit Agency should provide a reasonable basis for

public-private comparability.

Fourth, based on our preliminary analysis, DOD’s plans to privatize-in-place

and delay closure and most workforce reductions until 2001 at the

Sacramento and San Antonio Air Logistics Centers are not likely to be as

cost-effective as closing the military facilities and reallocating depot

maintenance work to other centers or private sector facilities having

underutilized capacity. DOD states that its plan reflects concerns regarding

the near-term costs of the closures and the potential effects on local

communities and Air Force readiness. The Base Realignment and Closure

(BRAC) Commission considered these factors and concluded that large

potential savings and excess capacity of the Air Force depot system

necessitated the difficult decision to close these activities and consolidate

work at remaining depots.

Our analysis indicates that savings of about $182 million annually can be

achieved by transferring the centers’ depot maintenance workloads to the

remaining depots, which have about 45 percent excess capacity in fiscal

year 1996 and are significantly underutilized. Further, our analysis of

privatization-in-place at the Aerospace Guidance and Metrology Center at

Newark Air Force Base, Ohio indicates that maintenance costs will likely

increase rather than decrease as a result of this privatization initiative.

Existing statutes concerning the performance of core workload and

requirements for competition affect various privatization initiatives,

including privatization-in-place, and it is not clear how DOD would proceed

if these statutes are not repealed.

To conclude my summary, I think it is important to note that the future of

the DOD depot system under the Department’s new policy is uncertain. DOD

depots would be used sparingly for public-private competitions since the

depots could not compete for non-core workloads where “adequate

private sector competition” exists even though they may offer the most

cost-effective source of repair. If not effectively managed, over the long

Page 3 GAO/T-NSIAD-96-148
term, DOD depots could become an economic liability rather than a

cost-effective partner in the total DOD industrial base. Accordingly, as

workloads are moved to the private sector, further downsizing—including

additional closures—will be required. With these observations in mind,

depot maintenance privatization should be approached carefully, allowing

for the evaluation of economic, readiness, and statutory requirements that

surround individual workloads. With that as a summary, let me turn to my

detailed remarks.

Background Depot maintenance is a key part of the total DOD logistics effort and is a

vast undertaking, supporting millions of equipment items, 53,000 combat

vehicles, 514,000 wheeled vehicles, 372 ships, and 17,300 aircraft of over

100 different models. Depot maintenance requires extensive shop

facilities, specialized equipment, and highly skilled technical and

engineering personnel to perform major overhaul of weapon systems and

equipment, to completely rebuild parts and end items, to modify systems

and equipment by applying new or improved components, or to

manufacture parts unavailable from the private sector. DOD’s depot

maintenance facilities and equipment are valued at over $50 billion. DOD

annually spends about $15 billion—or about 6 percent of its $243 billion

fiscal year 1996 budget—on depot maintenance activities. About $2 billion

of this amount includes contractor logistics support, interim contractor

support, and funds for labor associated with the installation of some major

modifications and parts of software maintenance, which are contracted to

the private sector using procurement, rather than operation and

maintenance funds.

The DOD depot system, which is actually comprised of four systems,2

employs about 89,000 DOD civilian personnel, ranging from laborers to

highly trained technicians to engineers and top-level managers. Our recent

report on closing maintenance depots provides a history of each of the

services’ depot systems.3

 While the number of depot personnel has been

reduced by over 40 percent relative to when the DOD depot system was at

its peak in 1987, depot facilities and equipment have not been similarly

2

DOD Directive 5100.1, “Functions of the Department of Defense and Its Major Components,” assigns

the Army, Navy, Air Force, and Marine Corps, under their respective Secretaries, the responsibility for

“providing logistics support for service forces, including procurement, distribution, supply, equipment,

and maintenance, unless otherwise directed by the Secretary of Defense.” To meet the responsibility to

maintain its equipment, each service operates a depot maintenance system, with the Navy system

including three different types of depots, excluding the Marine Corps.

3

Closing Maintenance Depots: Savings, Workload, and Redistribution Issues (GAO/NSIAD-96-29,

March 4, 1996).

Page 4 GAO/T-NSIAD-96-148
downsized. At the time of the 1995 BRAC process, the DOD depot system had

40 percent excess capacity, based on an analysis of maximum potential

capacity for a 5-day week, one 8-hour-per-day shift operation. The Air

Force, which had not closed a U.S. depot since the 1960s, had 45 percent

excess capacity. Currently, there are 29 major DOD depot maintenance

facilities—Army depots, Air Force logistics centers, naval aviation depots,

naval shipyards, naval warfare centers, and Marine Corps logistics

bases—that perform depot maintenance work—of which 10 are in the

process of being closed as DOD maintenance depots as a result of BRAC

decisions.4 Additionally, DOD uses over 1,300 U.S. and foreign commercial

firms to support its depot maintenance requirements.

Statutes and regulations influence the mix of maintenance work

performed by the public and private sectors. For example, as early as 1974,

legislation prescribed a specific dollar value mix for public and private

sector performance of alteration, overhaul, and repair work for naval

vessels. Since then, workload allocation decisions have been influenced by

percentage goals found in DOD policy guidance and legislation.

DOD Directive 4151.1, “Use of Contractor and DOD Resources for

Maintenance of Materiel,” directed the services to plan for not more than

70 percent of their depot maintenance to be conducted in DOD depots to

maintain a private sector industrial base. The most basic of the legislative

mandates governing the performance of depot-level workloads is 10 U.S.C.

2464, which provides for a “core” logistics capability to be identified by the

Secretary of Defense and maintained by DOD unless the Secretary waives

DOD performance as not required for national defense. Traditionally, core

was defined as the capability, including personnel, equipment, and

facilities, to ensure timely response to a mobilization, national

contingency, or other emergency requirement. The composition and size

of this core capability are at the heart of the depot maintenance

public-private mix debate.

Other statutes affect the extent to which depot-level workloads can be

converted to private sector performance. Two of the most significant are

10 U.S.C. 2466 and 10 U.S.C. 2469. The first prohibits the use of more than

40 percent of the funds made available in a fiscal year for depot-level

maintenance or repair for private sector performance: the so-called “60/40”

rule. The second provides that DOD-performed depot maintenance and

repair workloads valued at not less than $3 million cannot be changed to

4

There are also 16 Army and 9 Navy facilities in the continental United States for weapons and

munitions depot maintenance.

Page 5 GAO/T-NSIAD-96-148
performance by another DOD activity without the use of “merit-based

selection procedures for competitions” among all DOD depots and that

such workloads cannot be changed to contractor performance without the

use of “competitive procedures for competitions among private and public

sector entities.” In recent years DOD has sought relief from both these two

statutes.

DOD Depots Will

Have a Future Role

but It Will Be Smaller

DOD and the Congress are defining the role of DOD depots in the post cold

war era, much in the same way the roles of U.S. war-fighting forces are

being reshaped. The new model for managing depot maintenance has not

yet emerged. However, given DOD’s depot maintenance policy report, the

model apparently will be a mix between public and private sector

capabilities, but with a clear shift toward greater reliance on the private

sector. DOD’s March 1996 Depot-Level Maintenance and Repair Workload

Report projected a significant increase in the depot work that will be

privatized. Further, since the services periodically reevaluate their core

workload requirements, it is unknown how much more of their current

work will be determined to be non-core and privatized. Unless effectively

managed, including downsizing of remaining depot infrastructure, a major

shift in depot workloads to the private sector would exacerbate existing

excess capacity in the DOD depot maintenance system.

Historically, depot maintenance on wartime critical DOD systems has been

largely performed in DOD depots. Based on both cost and risk factors, the

general DOD policy was to rely on DOD depots to provide a cost-effective

and reliable source of support for wartime readiness and sustainability.

With some exceptions, peacetime maintenance of weapon systems with

wartime taskings was performed in DOD depots. This peacetime workload

constituted depot maintenance core. Core was determined by quantifying

the depot work that would be generated under war scenarios and then

computing the amount of peacetime work needed to employ the number

of people necessary to support the anticipated wartime surge. Peacetime

workload was composed of a mix of high and low-surge items allowing

employees to transfer from low surge workload to high surge workload

during war. While there were always a number of potential war scenarios,

the depots were sized to support a sustained global war.

During the cold war, there was not much pressure to move work from DOD

depots to the private sector. Military leaders expressed a clear preference

for retaining much of their work in DOD depots, which were highly flexible

and responsive to changing military requirements and priorities. The

Page 6 GAO/T-NSIAD-96-148
quality of the DOD depots was high and users were generally well-satisfied

with the depots’ work. Further, the threat of a global war and the resulting

stress on the logistics system were constant reminders of the need to

maintain the flexibility and responsiveness the depot system provided.

Historically, DOD has reported that about 70 percent of its depot

maintenance work was performed in DOD depots.

In our 1994 testimony before the Readiness Subcommittee of the House

Armed Services Committee, we stated that the private sector more likely

receives about 50 percent of the DOD depot maintenance budget. We noted

that a portion of the funds expended on the maintenance workload

assigned to the public sector ultimately was used for private sector

contracts for parts and materiel, maintenance and engineering services,

and other goods and services. Additionally, some types of depot

maintenance activities, such as interim contractor support and contractor

logistics support, were not included in previously reported statistics.5

 Our

review of data in DOD’s March 1996 workload report indicates that by fiscal

year 1997, the mix will be about 64 percent in the public sector and

36 percent in the private sector. Further analysis indicates that the data

does not include funds reported by the services for interim contractor

support, contractor logistics support, or goods and services that the DOD

depots ultimately buy from the private sector. Including these funds would

change the mix to about 53 percent in the public sector and 47 in the

private sector. While the Department’s projection for the public-private

mix in 2001 is 50 percent in each sector, our analysis indicates that it is

actually about 37 percent in the public sector and 63 in the private sector.

Further, since the services are conducting risk analyses to further define

their minimum core capability, the DOD depots’ share of funding could be

reduced even further.

With the end of the cold war and the subsequent declines in defense

spending, there are increased pressures to privatize more depot

maintenance work. Those declines affected force structure and the public

and private activities supporting force structure. As acquisition programs

began to decline, a growing concern arose over the impact on the defense

industrial base. Particular concern focused on how that industrial base

could be maintained without the large development and production

programs of the past, and attention began to shift to DOD depot workloads

as a potential source of work to keep the industrial base viable.

5

Depot Maintenance: Issues in Allocating Workload Between the Public and Private

Sectors,(GAO/T-NSIAD-94-161, Apr. 12, 1994).

Page 7 GAO/T-NSIAD-96-148
Advocates of more private sector involvement argue that a shift toward

the private sector would not only help keep the private sector production

base healthy during a period of reduced weapon procurement but also

could result in lower costs, since the private sector could provide depot

maintenance at lower cost than the public sector. Proponents of the DOD

depot system believe the DOD depots have provided a quality, responsive,

and economical source of repair. They note that DOD maintenance policy

for many years has supported the outsourcing of depot maintenance work

when it was determined to be cost-effective to do so. Further, they

contend there are substantial differences between developing and

producing new systems and maintaining fielded ones and that the dollars

spent on maintenance, while not small, cannot fill the void created by

declining production dollars.

Section 311 of the National Defense Authorization Act for Fiscal Year 1996

is an indication of congressional intent regarding the continued need for

DOD depots:

It is the sense of Congress that there is a compelling need for the

Department of Defense to articulate known and anticipated core

maintenance and repair requirements, to organize the resources of the

Department of Defense to meet those requirements economically and

efficiently, and to determine what work should be performed by the

private sector and how such work should be managed.

Section 311 also directed the Secretary of Defense to develop a

comprehensive policy on the performance of depot-level maintenance and

repair for the Department of Defense that maintains the core capability

described in 10 U.S.C. 2464 and report to the Senate Committee on Armed

Services and House Committee on National Security. The section further

directed that in developing the policy, the Secretary should include certain

elements such as interservicing, environmental liability, and exchange of

technical data.

The Congress supports preserving a DOD depot maintenance system to

support core requirements. With no additional BRACs scheduled, the

Department was charged with developing a depot maintenance policy that

provides adequate workloads to ensure cost efficiency and technical

proficiency in time of peace.

Page 8 GAO/T-NSIAD-96-148
Preliminary

Observations

Regarding DOD’S

Depot Maintenance

Policy Report

We are analyzing DOD’s depot maintenance policy and workload analysis

reports, as required by Section 311, and will be reporting our findings by

May 18, 1996. However, as requested, I am providing our observations to

date on the policy report. First, it provides an overall framework for

managing DOD depot maintenance activities. Second, it sets forth a clear

preference for moving workload to the private sector, which will likely

result in a much smaller core capability than exists today. Third, it is not

consistent with congressional guidance in one key area—the use of

public-private competitions. Fourth, the policy provides substantial

latitude in implementation. As a result, the precise affect of this policy on

such factors as public-private mix, cost, and excess capacity remain

uncertain.

Policy Report Provides

Depot Maintenance

Framework

In response to the congressional requirement for a comprehensive

statement of depot maintenance policy, DOD provided an overall

framework for managing DOD depot maintenance activities. The policy

report reiterates some past policies and identifies some new initiatives for

depot-level maintenance. It references other directives, publications,

memorandums, and decisions and notes that DOD plans to develop an

updated single publication with applicable maintenance policy guidance.

Our assessment is based on observations to date about the policy report

and other related documents.

Policy Report Sets Forth a

Preference for

Privatization

The policy report clearly states that the Department has a preference for

privatizing maintenance support for new systems and for outsourcing

non-core workload. It represents a fundamental shift in the historical

policy of relying on DOD depots to provide for the readiness and

sustainment of wartime tasked weapon systems.

Section 311 of the authorization act states that the DOD policy should

provide that core depot-level maintenance and repair capabilities are

performed in facilities owned and operated by the United States. It also

states that core capabilities include sufficient skilled personnel,

equipment, and facilities that are of the proper size to ensure a ready and

controlled source of technical competence, and repair and maintenance

capability necessary to meet the requirements of the National Military

Strategy and other requirements, and to provide for rapid augmentation in

time of emergency.

Page 9 GAO/T-NSIAD-96-148
Core, as set forth in the policy and workload reports, no longer means that

wartime work will be performed primarily by DOD depots. DOD’s core

concept is for its depots to perform maintenance requirements that the

service secretaries identify as too risky for the private sector to perform.

In determining core workloads, the DOD policy calls for maintaining only

“minimum capability”—which does not necessarily mean an actual

workload for a depot. What once was calculated as core is now called

pre-risk core. For those mission essential workloads that historically

would dictate retention of a core capability, the services will conduct a

risk assessment6

 to determine if the work should be made available for

competition within the private sector. The policy guidance provides some

limited criteria for performing a risk assessment, but DOD has not yet

developed guidelines for making those assessments in a consistent

manner. It is unclear the extent measured criteria or subjective judgement

will be used for such assessments.

In a similar vein, DOD’s policy on depot maintenance seeks to severely limit

the use of DOD depots for new weapon systems. Section 311 provides for

the performance of maintenance and repair for any new weapon systems

defined as core in facilities owned and operated by the United States. On

the other hand, the Department reported to the Congress in August 1995

that it intended to privatize depot maintenance for new systems and

reported in its January 1996 depot maintenance privatization initiative that

it intended to freeze the transition of new workloads to DOD depots. The

policy report and other recently issued DOD guidance, such as DOD

Instruction 5000.2, also show that DOD’s maintenance concept for new and

modified systems will minimize the use of DOD depots.

This preference, in combination with DOD’s minimum core concept and

limited public-private competitions, if not effectively managed—including

reducing infrastructure and developing competitive markets—would likely

result, over the long term, in DOD depots becoming an economic liability

rather than a cost-effective partner in the total DOD industrial base. The

DOD policy report states that the Department will provide for cost

efficiency, sufficient workload, and technical proficiency in its depots.

However, accomplishing this objective will be difficult given that the

depots already are underutilized and the policy providing for additional

outsourcing would exacerbate that situation, unless there are additional

depot closures. Further, the report does not provide a clear indication,

6

DOD’s policy report requires three risks to be assessed: readiness, sustainability, and technology. It is

unclear, however, what procedures should be used for making these assessments.

Page 10 GAO/T-NSIAD-96-148
aside from recognizing ongoing BRAC actions, on how the Department

intends to downsize to minimum core.

Policy Report Is

Inconsistent With

Congressional Direction

Regarding the Use of

Public-Private Competition

While we are in the process of reviewing the policy report for consistency

with congressional direction and guidance, our observation to date is that

the report is inconsistent in one key area—the use of public-private

competitions for allocating non-core depot maintenance workloads.

Section 311(d)(5) of the act provides that in cases of workload in excess of

the workload to be performed by DOD depots, DOD’s policy should provide

for competition “between public and private entities when there is

sufficient potential for realizing cost savings based upon adequate

private-sector competition and technical capabilities.” DOD’s report

provides a policy that is inconsistent with this instruction. According to

DOD, it will engage in public-private competition for workloads in excess of

core only when it determines “there is not adequate competition from

private sector firms alone.” The report did not clarify what would

constitute adequate competition. Under this policy, DOD depots would be

used sparingly for public-private competitions and DOD depots cannot

compete for all non-core workloads, where adequate private sector

competition exists, even though the DOD depots could offer the most

cost-effective source of repair.

We have reported that public-private depot maintenance competitions can

be a beneficial tool for determining the most optimum cost-effective

source of repair for non-core workloads. As noted in our recent reports on

the Navy’s depot maintenance public-private competition programs for

ships and aviation, we found that these competitions generally resulted in

savings and benefits and provided incentives for DOD depot officials to

reengineer maintenance processes and procedures, to develop more

cost-effective in-house capability and to ensure that potential outsourcing

to the private sector is more cost effective than performing the work in

DOD depots.7

We recognize that DOD’s public-private depot maintenance competition

program raised concerns about the reliability of DOD’s depot maintenance

data and the adequacy of its depot maintenance management information

systems. These deficiencies are not insurmountable. As we noted in prior

reports, many of the problems were internal control deficiencies that can

7

Navy Maintenance: Assessment of the Public-Private Competition Program for Aviation Maintenance

(GAO/NSIAD-96-30, Jan. 22, 1996) and Navy Maintenance: Assessment of the Public and Private

Shipyard Competition Program (GAO/NSIAD-94-184, May 25, 1994).

Page 11 GAO/T-NSIAD-96-148
be addressed with adequate top-level management attention. We also

noted that some corrective actions have already been undertaken and

additional improvements can be made. Further, we recommended that the

Defense Contract Audit Agency be used to certify internal controls and

accounting policies and procedures of DOD depots to assure they are

adequate for identifying, allocating, and tracking costs of depot

maintenance programs and to ensure proper costs are identified and

considered as part of the bids by DOD depots. DOD has stated that it plans to

use the Defense Finance and Accounting Service to review and certify the

accounting systems of DOD depots.

Policy Provides Wide

Latitude for

Implementation

The policy report provides wide implementation latitude in a number of

key areas. For example, it provides for a DOD depot capability, but the

ultimate extent of such capability, and hence DOD depot requirements,

could be substantially reduced depending on future core workload

assessments of privatization, readiness, sustainability, and technology

risks.

Depending on implementation, the policy’s preference for privatization

and the lack of a clear and consistent methodology for determining risks

will likely lead to significant amounts of workload previously designated

as core being reclassified as non-core and privatized. For example, with

respect to the Aerospace Guidance and Metrology Center, the Air Force is

privatizing depot maintenance operations involving 627,000 direct labor

hours of work—100 percent of which had been previously defined as

core—stating that because the workload is being privatized-in-place, the

risk is manageable. It is unclear how risky that privatization may turn out

to be, particularly in light of the contractor’s interest in divesting itself of

its defense business. However, a similar rationale is being used to support

other in-place privatizations. With this predilection, it is likely that future

core will represent something far different than it did in the past. For

example, DOD’s March 1996 workload report noted that core would ensure

“that the Air Force establishes and retains the capabilities needed to

assure competence in overseeing depot maintenance production that has

both public and private sector elements”—a significantly different mission

than that historically envisioned for DOD’s core capability. Further, DOD’s

March 1996 report to Congress, Improving the Edge Through Outsourcing,

included intermediate maintenance of DOD weapons and

equipment—another function traditionally considered core—as one which

the Department will now consider privatizing.

Page 12 GAO/T-NSIAD-96-148
The policy also provides wide latitude in several areas where the decision

for determining public or private sector source of repair is based on an

assessment of what is “economical” or “efficient.” For example, the policy

states that non-core workloads be made available for only private sector

competition when it is determined that the private sector can provide the

required capability with acceptable risks, reliability, and efficiency. This

efficiency requirement does not require the inclusion of the public sector

to ensure that privatization is the most cost-effective option.

DOD’S Assumption

That Depot

Maintenance

Privatization Will

Achieve 20-Percent

Savings Is

Unsupported

The underlying assumption behind DOD’s depot maintenance privatization

initiative is the expectation that savings of 20 percent will be achieved and

these savings will be made available to support the services’

modernization programs. Our analysis indicates that this assumption is

unsupported. The data cited by Department officials to support this

savings assumption is the Report of the Commission on Roles and

Missions of the Armed Forces.

In May 1995 the CORM concluded that 20 percent savings could be achieved

by the privatization of various commercial activities and recommended

that DOD transfer essentially all depot maintenance to the private sector.

The Commission rejected the notion of core and recommended that DOD

(1) outsource all new support requirements, particularly the depot-level

logistics support of new and future weapon systems and (2) establish a

time-phased plan to privatize essentially all existing depot-level

maintenance. In its August 1995 response to the Congress on the CORM

report, DOD noted that the Department agreed with the Commission’s

recommendation to outsource a significant portion of its depot

maintenance work, including depot maintenance activities for new

systems. However, the DOD response noted that DOD must retain a limited

core depot maintenance capability to meet essential wartime surge

demands, promote competition, and sustain institutional expertise.

We found that the Commission’s assumptions on savings from

privatization generally were based on reports of projected savings from

public-private competitions for various commercial activities as part of the

implementation of OMB Circular A-76. These commercial activities reviews

included various base operating support functions, such as family housing,

real property and vehicle maintenance, civilian personnel administration,

food service, security and law enforcement, and other support services.

While these activities were varied in nature, they had similarities in that

they generally involved low-skilled labor; required little capital investment;

Page 13 GAO/T-NSIAD-96-148
generally involved routine, repetitious tasks that could readily be

identified in a statement-of-work; and had many private sector offerors

who were interested and had the capability to perform the work.

Our review of A-76 competitions and public-private competitions for

depot-level maintenance found that the conditions under which A-76

competitions resulted in lower private sector prices were often not present

or applicable to depot maintenance. Specifically, we found that:

• Reengineered government activities won about half of the A-76

competitions because they could provide the work cheaper. Our work

shows that for public-private competitions involving depot maintenance

activities, a program authorized by the Congress and implemented

independently from A-76, DOD depots won 67 percent of the non-ship

competitions. Public-private competitions for ships provided a unique

situation wherein private sector offerors could bid marginal or

incremental costs while DOD depots were required to bid full costs—a

condition which, in concert with the more competitive nature of the ship

repair market, led to the public shipyards not being competitive.8

• When the private sector won A-76 competitions, savings were significantly

higher than when the government function was performed by military

personnel. The additional costs of military pay and benefits when coupled

with productivity losses incurred for additional duties resulted in

decreased competitiveness of the military personnel assigned to these

duties. Depot maintenance, on the other hand, is performed almost

exclusively with civilian personnel.

• The A-76 competitions did not involve activities comparable to depot

maintenance—which is far more complex, less repetitious, and involves

many unique systems not found in the private sector.

• Problems associated with statements of work in A-76 competitions

resulted in cost increases for privatized work because of contract

modifications to more explicitly define required work—a condition we

also identified in our review of DOD’s public-private program for depot

maintenance. The impact of this cost growth for depot maintenance

competitions can be illustrated by submarine repair competitions. While

the average award amount for private shipyards was 16 percent less than

that for competitions won by the public sector, greater cost growth in the

private sector resulted in the average actual costs being about the same.

• While the A-76 commercial activity competitions resulted in savings, the

savings were not readily quantifiable, did not consider the cost of the

8

Navy Maintenance: Assessment of the Public and Private Shipyard Competition Program

(GAO/NSIAD-94-184, May 25, 1994).

Page 14 GAO/T-NSIAD-96-148
competition or the administration of the contracts, and for those

competitions that were audited, savings were often less than projected. We

had similar findings in our review of public-private competitions for depot

maintenance. Additionally, we found that for the non-ship depot

maintenance competitions won by a DOD depot, the DOD depots’ bids

averaged 40 percent less than the lowest private sector offeror. Where we

observed cost growth in the limited number of depot competitions we

analyzed, the growth was not sufficient to result in the DOD depots’ costs

exceeding the bid of the lowest private sector offeror.

• The A-76 competitions were conducted in a highly competitive private

sector market—frequently involving 4 or more offerors, with 10 percent of

the competitions involving 11 or more offerors. Savings were much higher

for those A-76 competitions won by the private sector where there were 5

or more private sector offerors. Our review of DOD’s 95 non-ship depot

maintenance public-private competitions showed the private sector

market to be significantly less competitive. Twenty-two of the

competitions had no private offerors and 33 had only one. Only 28 of these

competitions had three or more offerors, while the number of offerors

averaged less than two per competition.

Current Depot

Maintenance Market Is Not

Highly Competitive

Recognizing the influence of competition on achieving savings from

privatization, we analyzed the competitiveness of DOD’s non-ship depot

maintenance repair contracts. We asked 12 DOD buying commands to

identify depot maintenance contracts that were open during 1995. They

identified 8,452 contracts valued at $7.3 billion and, based on high dollar

value, we selected 240 contracts valued at $4.3 billion to analyze the

commands’ use of competitive procedures for the contracted workloads.

The following table shows the results of our analysis.

Page 15 GAO/T-NSIAD-96-148
Table 1: Procedures for Contract Award

Full and Opend Limiteda Sole Source Total Awards

Competition

Dollars in billions

Command Number Value Number Value Number Value Number Value

Army 10 $.578 3 $.017 43 $.538 56 $1.133

Air Force 37 1.348 1 .100 60 .900 98 2.348

Navy 2 .286 5 .048 79 .518 86 .852

Total 49 $2.212 9 $.165 182 $1.956 240 $4.333

aLimited competition refers to those which are conducted using other than full and open

competition.

As shown, the 12 buying commands awarded (1) 182, or 76 percent, of the

contracts through sole-source negotiation; (2) 49, or 20 percent, through

full and open competition, and (3) 9, or 4 percent, by limited competition.

The 49 fully competitive awards accounted for about 51 percent of the

total dollar value while the 182 sole-source contracts accounted for about

45 percent of the dollar value.

In reviewing the number of offerors for the 49 contracts valued at 

$2.2 billion that were awarded through full and open competition, we

found that the commands averaged 3.6 offers for the 49

contracts—ranging from a low of only 2 offers to a high of 10. For 30 of the

49 contracts—about 

86 percent of the $2.2 billion—the number of offers was 4 or less. Five

contracts valued at $525.8 million had only two offers, while only 

19 contracts valued at $309.4 million had five or more offers.

We also found that a large portion of the dollar value of the contracts went

to a relatively small number of contractors. Although the total number of

contractors involved in the 240 contracts was 71, 13 of these contractors

had most of the workload, about 76 percent of the $4.3 billion. Three of

these 13 contractors had workload valued at $1.3 billion, about 30 percent

of the $4.3 billion.

Our analysis of depot maintenance contracts showed that the private

sector market was more competitive for certain types of systems and

equipment than for others. For example, awards for repair of ground

vehicles, trucks, airframes, engines, and other items were more often

competitive while sole-source contracts were prevalent for fire control

Page 16 GAO/T-NSIAD-96-148
systems, communications and radar equipment, electronic components,

and other components. We found that the buying commands sometimes

used both DOD depots and private sector sources for repair of a limited

number of items. To make price comparisons, we looked at 414 items that

buying activities identified as being maintained in both sectors. For

62 percent of the items, the contract price was higher than the price for

the same item repaired in a DOD depot.

We also analyzed the impact of other conditions relevant to creating a

competitive environment. Regarding the ability to clearly define the

service to be provided, the buying commands reported that depot

maintenance activities present a difficult challenge. For much of the depot

maintenance work, specific tasks that must be done, spare and repair

parts that will be required, and the type and skill-level of the labor required

cannot be identified until the equipment or component is inducted into the

repair facility for inspection and repair. Our review of depot maintenance

contracts showed the difficulty in constraining cost growth in this

environment—particularly when cost-type contracts are used. It also

showed the large costs normally associated with drafting statements of

work, conducting the competitions, and administering the contracts. At

one buying activity which obligates about $180 million per year for depot

maintenance contracts, we found sole-source contracts were used

100 percent of the time—many of which were also cost reimbursable.

Officials said they did not have the manpower, technical data, technical

manpower, or contracting skills to use competitive contracting.

Additionally, officials noted that the process for qualifying repair sources

is difficult and time-consuming.

Privatization-In-Place

Plans Do Not Appear

to Optimize Savings

There have been a number of recent initiatives to privatize depots

recommended for closure or realignment by BRAC. The most prominent

among these so-called “in-place” privatization initiatives involve the

Aerospace Guidance and Metrology Center, a depot recommended for

closure by the 1993 BRAC Commission and located on Newark Air Force

Base, Ohio, and the Sacramento and San Antonio Air Logistics Centers,

which were recommended for closure by the 1995 BRAC Commission and

are located on McClellan Air Force Base, California, and Kelly Air Force

Base, Texas, respectively.

We previously reported that, although it may be several years before the

total cost of privatizing the Aerospace Guidance and Metrology Center’s

depot maintenance workload can be identified, our preliminary analysis

Page 17 GAO/T-NSIAD-96-148
indicated that this privatization will likely increase, rather than decrease,

depot maintenance costs.9

 In addition, our recent analysis of 254 contract

items disclosed that (1) unit costs were higher after privatization for 201,

or about 79 percent, of the items and (2) overall, there was a net cost

increase of $6.01 million for the 254 items.10 Further, although the Air

Force is projecting annual savings of $5 million for the last 4 years of the

5-year contract, we found that the Air Force did not include all relevant

costs in its analysis. For example, our analysis showed that the Air Force’s

estimated prices for eight contract items did not include such items as

material costs totalling $15 million.

We also reported on the potential impact of privatizing the San Antonio Air

Logistics Center’s engine workload in place rather than transferring the

work to the Oklahoma City Air Logistics Center.11 Specifically, we

reported that consolidating San Antonio’s engine workload with Oklahoma

City’s engine workload would reduce Oklahoma City’s overhead rate for

engine work by as much as $10 an hour and would result in an estimated

annual savings of $76 million. As requested by Chairman Spence, we are

conducting a more thorough review of the Department’s

privatization-in-place initiatives, particularly those underway at San

Antonio and Sacramento. Our preliminary observations on these initiatives

follow.

Privatization-In-Place at

Sacramento and San

Antonio Will Be Costly

The BRAC Commission’s July 1995 report to the President noted that the

decision to close the Sacramento and San Antonio Air Logistics Centers

was a difficult one to make, but was necessary given the Air Force’s

significant excess depot capacity and limited defense resources. The

Commission report also concluded that these actions should save about

$151.3 million over the 6-year implementation period and $3.5 billion over

20 years. Since this announcement, DOD has moved forward with its

privatization efforts at these locations, including the announcement that

contracts for five prototype workloads are to be awarded by the close of

1997.

When the President forwarded the BRAC Commission recommendations to

the Congress, he stated that his intent was to privatize the work in place or

9

Aerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and

Privatization (GAO/NSIAD-95-60, December 9, 1994).

10This is a conservative estimate because it ignores contractor profits, lease costs, and other

privatization costs that have not yet been determined.

11Depot Maintenance: Opportunities to Privatize Repair of Military Engines, (GAO/NSIAD-96-33,

March 5, 1996).

Page 18 GAO/T-NSIAD-96-148
in the local communities in order to (1) avoid the immediate costs and

disruption in readiness that would result from the relocation of the

centers’ missions, (2) mitigate the impact on the local communities, and

(3) preserve important defense work forces. The administration also

decided to delay the centers’ closures until the year 2001 to further

mitigate the adverse impact on the local communities.

Our analysis indicates that delaying the centers’ closures until 2001 could

increase net costs during the 6-year BRAC implementation period by

hundreds of millions of dollars, primarily because it would limit the Air

Force’s ability to achieve recurring savings to offset expected closure

costs. Additionally, although the closures’ potential impact on local

communities and readiness is a valid concern, actions can be taken to limit

the impact. For example, the Sacramento community’s successful

conversion of the Sacramento Army Depot to private use has

demonstrated that this conversion, although difficult, can be

accomplished. Further, according to Navy depot maintenance officials,

on-going efforts to quickly close three aviation depots have had no

significant impact on readiness.

Our preliminary analysis also indicates that privatizing the two centers’

depot maintenance workloads in place is likely to be a more costly

alternative than transferring the workloads to the three remaining centers.

One reason for this is that there are substantial costs associated with

privatization-in-place that do not apply to DOD maintenance depots. For

example, our analysis indicates that unique requirements such as the cost

of proprietary data rights, contractor profits, and contractor oversight

could add 20 percent, or more, to the cost of performing the work.

Further, the cost plus contract that will likely be used is not conducive to

generating significant private sector economies, a situation already

unfolding at the Aerospace Guidance and Metrology Center.

More significantly, our analysis indicates that privatization-in-place

eliminates the opportunity to consolidate workloads at the remaining

centers and to, thereby, achieve substantial “economy of scale” savings

and other efficiencies. The Air Force’s five air logistics centers currently

have approximately 57.3 million direct labor hours of depot maintenance

capacity to accomplish about 29.3 million hours of workload (projected

fiscal year 1999)—leaving a projected excess capacity of 49 percent in

1999. The BRAC decision to close the San Antonio and Sacramento Air

Logistics Centers provides the Air Force the opportunity to redistribute

workload to the remaining three air logistics centers, thereby reducing

Page 19 GAO/T-NSIAD-96-148
excess capacity within its depot system to about 8 percent. Our analysis

indicates that redistributing 8.2 million hours of work from Sacramento

and San Antonio to the remaining centers would allow the Air Force to

achieve annual savings of as much as $182 million.12 According to financial

management officials at the receiving air logistics centers, one-time

workload transition costs of about $475 million would be required to

absorb the additional workloads, indicating that net savings would occur

within 2-1/2 years of the transition completion.13 On the other hand, if the

remaining centers do not receive additional workload, they will continue

to operate with significant excess capacity, becoming more and more

inefficient and more and more expensive as their workloads continue to

dwindle due to downsizing and privatization initiatives.

Finally, various statutory restrictions may affect the extent to which

depot-level workloads can be converted to private-sector

performance—through privatization-in-place or otherwise—including 

10 U.S.C. 2464, 10 U.S.C. 2466, and 10 U.S.C. 2469. While each of these

statutes has some impact on the allocation of DOD’s depot-level workload, 

10 U.S.C. 2469 constitutes the primary impediment to privatization in the

absence of a public-private competition. Competition requirements of 

10 U.S.C. 2469 have broad application to all changes to the depot-level

workload valued at $3 million or more currently performed at DOD

installations, including Kelly and McClellan. The statute does not provide

any exemptions from its competition requirements and, unlike most of the

other laws governing depot maintenance, does not contain a waiver

provision. Further, there is nothing in the Defense Base Closure and

Realignment Act of 1990—the authority for the BRAC

recommendations—that, in our view, would permit the implementation of

a recommendation involving privatization outside of the competition

requirements of 10 U.S.C. 2469.

The determination of whether any single conversion to private-sector

performance conforms to the requirements of 10 U.S.C. 2469 depends

upon the facts applicable to the particular conversion. We do not have

DOD’s position regarding how it plans to comply with the statutory

12Because of numerous uncertainties, it is impossible to precisely estimate the potential savings. For

example, it is uncertain where some workloads would be transferred. Further, for systems such as the

C5 aircraft at San Antonio, which could have relocation costs of about $100 million,

privatization—either in-place or at contractor facilities—may be the most cost-effective alternative.

13This amount includes $318 million for relocating or separating center personnel, most of which

would also be incurred under privatization-in-place.

Page 20 GAO/T-NSIAD-96-148
restrictions.14 While DOD has stated that it will structure these conversions

to comply with existing statutory restrictions, details of the Department’s

privatization plans for Kelly and McClellan are still evolving. Further,

“in-place” privatizations at Newark, Kelly, and McClellan are now the

subject of litigation. In March 1996, the American Federation of

Government Employees filed a lawsuit challenging these privatization

initiatives, contending that they violate the public-private competition

requirements of 10 U.S.C. 2469 and other depot maintenance statutes.15

Conclusion While our analysis of DOD’s depot policy report continues, we believe there

are several points the Congress needs to consider as it contemplates the

repeal of 10 U.S.C. 2466 and 10 U.S.C. 2469—two statutes that influence

the allocation of depot maintenance workload between the public and

private sectors.

First, the policy does not provide for participation of DOD depots in depot

maintenance competitions for non-core workload as directed by the

Congress. Second, since the policy provides wide latitude during

implementation, likely outcomes of the policy change are difficult to

predict. Third, cost savings are likely achievable from some depot

privatization, but not in the percentages and scope predicted by the CORM.

Fourth, privatization-in-place does not appear to be cost-effective given

the excess capacity in DOD’s depot maintenance system.

Given these considerations, the Congress needs to assure itself that any

new policy has the intended required features and that a process is in

place to monitor readiness, sustainability, and cost considerations.

Further, the effective implementation of the new policy will require a

further downsizing of the Department’s remaining depot maintenance

infrastructure and the development of more competitive private sector

markets.

Thank you Mr. Chairman that completes my statement. I would be happy

to answer questions at this time.

(709195)

14We have, by letter dated January 3, 1996, requested that DOD provide us with its plans for how it will

comply with existing statutory restrictions in its privatization initiatives at various locations, including

Kelly and McClellan. DOD has yet to respond to our request.

15AFGE v. Clinton, No. C2 96-0283 ( S.D. Ohio filed Mar. 18, 1996).

Page 21 GAO/T-NSIAD-96-148
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