Although there is no generally agreed upon definition of partnering, for purposes of this report, partnering arrangements include, but are not limited to (1) use of public sector facilities and employees to perform work or produce goods for the private sector; (2) private sector use of public depot equipment and facilities to perform work for either the public or private sector; and (3) work-sharing arrangements, using both public and private sector facilities and/or employees. Work-sharing arrangements share similar characteristics to the customer-supplier partnerships on which we have previously reported. Partnering arrangements exclude the normal service contracting arrangements where contract personnel are used to supplement or assist depot personnel in performing work in depot facilities. DOD spends about $13 billion, or 5 percent of its $250 billion fiscal year 1997 budget, on depot maintenance, which includes repair, rebuilding, and major overhaul of weapon systems, including ships, tanks, and aircraft. The Army has five depots managed by the Industrial Operations Command (IOC), and the Air Force has five depots managed by the Air Force Materiel Command (AFMC). The Navy’s three aviation depots and four shipyards are managed by the Naval Air and Sea Systems Commands. Also, a significant amount of depot repair activities is performed at various private contractor facilities. Depots operate through a working capital fund. The fund is used to finance a depot’s cost of producing goods and services for its customers. The fund is reimbursed through customer payments for the goods and services provided and is to be self-sustaining and operate on a break-even basis over the long term. Defense spending and force structure reductions during the 1980s and 1990s resulted in substantial excess capacity in both public and private sector industrial repair and overhaul facilities. Some of DOD’s excess depot maintenance capacity has been reduced through the base realignment and closure process. However, the services and the private sector continue to have large industrial facilities and capabilities that are underused. We have reported and testified that reducing such excess capacity and resulting inefficiencies could save hundreds of millions of dollars each year. Navy officials state that they have already significantly reduced excess capacity by closing three of six aviation depots and four of eight shipyards. To address its excess capacity problem, DOD continues to seek legislative authority for additional base closures under a base realignment and closure type process. However, due to congressional concerns over local social and economic impacts of such closures and questions regarding the savings and experiences from previous closures, such authority has not been provided. There is also a continuing debate between the Congress and the administration over where and by whom the remaining depot workloads will be performed. Central to this debate has been DOD’s efforts to rely more on the private sector for depot maintenance and statutory provisions that (1) require public-private competitions for certain workloads, (2) limit private sector workloads to 50 percent of the available funding for a particular fiscal year, and (3) require maintaining certain core capabilities in the public depots. DOD, the Congress, and the private sector have shown an interest in partnering arrangements as another tool to address the problems of excess capacity and declining workloads. DOD agrees with partnering concepts and discusses partnering in both the Defense Planning Guidance, which contains guidance for the services to develop their strategic plans, and in the fourth comprehensive Quadrennial Defense Review, a report required by the Military Force Structure Review Act of 1996, which was included in the National Defense Authorization Act for Fiscal Year 1997. In the Defense Planning Guidance, DOD directs the services to encourage commercial firms to enter into partnerships with depots to reduce excess capacity, overhead burdens, and maintain critical skills. In the Quadrennial Defense Review, DOD states that it will use in-house facilities to partner with industry to preserve depot-level skills and use excess capacity. A number of statutory provisions enacted primarily during the 1990s provide, within limitations, the authority and framework for partnering. Specifically, provisions in title 10 permit working capital funded activities, such as public depots, within specified limits, to sell articles and services to persons outside DOD and to retain the proceeds. Central among these limitations is that any goods or services sold by the depots must not be available commercially. Also, the National Defense Authorization Act for Fiscal Year 1995 authorized the Secretary of Defense to conduct activities to encourage commercial firms to enter into partnerships with depots. Further, section 361 of the National Defense Authorization Act for Fiscal Year 1998, provides that the Secretary of Defense shall enable public depots to enter into public-private cooperative arrangements, which shall be known as “public-private partnerships” for the purpose of maximizing the utilization of the depots’ capacity. However, the 1998 Authorization Act does not appear to have expanded the services’ ability to enter into such arrangements since section 361 did not contain any specific sales or leasing authority for use in partnering. Table 1 shows the major provisions in title 10, along with relevant sections in the 1995 and 1998 National Defense Authorization Acts, which facilitate partnering. The Army and the Air Force, for various reasons, view partnering arrangements differently. The Army believes that there are substantial opportunities within its legal authority to enter into contractual arrangements with private sector companies for the sale of goods and services. It has entered into a number of such arrangements using this authority. The Air Force believes such opportunities are very limited and has not entered into any such arrangements. The Army has entered into partnering arrangements under the legislation covering sales of goods and services. A sales arrangement is a contract between a depot and a private firm whereby a depot provides specific goods and services. The Army has designated which depots may sell articles and service outside of DOD and has issued specific implementing guidance. In 1995, the U.S. Army Depot Systems Command (now IOC) issued policy guidance for its facilities to enter into sales, subcontracts, and teaming arrangements with private industry. In July 1997, IOC developed the criterion for determining commercial availability. Under the criterion, a customer must certify that the good or service is not reasonably available in sufficient quantity or quality in the commercial market to timely meet its requirements. Cost cannot be a basis for determining commercial availability. The Army has also entered into a number of work-sharing arrangements that do not require specific legislative authority. They differ from a sales arrangement in that there is no contract between a depot and a private firm. The Air Force has not approved any proposed partnering arrangements. The Secretary of Defense has delegated to the Secretary of the Air Force the authority to designate which depots may sell articles and services outside of DOD. However, the Air Force Secretary has not made any such designations nor developed criteria to determine whether a good or service is available from a domestic commercial source. Air Force officials state that 10 U.S.C. 2553, like the corresponding Army sales statute (10 U.S.C. 4543), prohibits the Air Force from selling articles or services if those articles or services are available from a domestic commercial source. However, unlike the Army, Air Force officials believe the restriction prohibits the sale of almost any product or service their depots could provide. Army depots have entered into a number of partnering arrangements under the current statutory framework and within the context of the public-private workload mix for depot maintenance. These arrangements include sales under 10 U.S.C. 4543 and subcontracting under 10 U.S.C. 2208(j). Red River, Tobyhanna, and Anniston Army Depots all have ongoing arrangements with private industry to provide services such as testing and repair of communications equipment; development of training devices; testing of circuit card assemblies; and overhaul, conversion, and grit blasting of tracked vehicles. For example, table 2 lists sales statute partnering initiatives that are underway at the Anniston depot as of July 1997. In each of these sales arrangements, the Army has awarded the private sector company a contract to perform a certain scope of work. The contractor then makes a business decision to have the depot perform a portion of that work under the sales statutes. The sale is accomplished by a contract between the depot and the private sector firm that allows the depot to be reimbursed for costs associated with fulfilling the contract. These costs are estimated by maintenance personnel and are based on direct labor, materials, and in-house support costs. The contractor must pay the depot in advance for performing the service, and the depot reimburses its working capital fund to cover these estimated costs. For illustrative purposes, the FOX vehicle upgrade and M113 grit blast/test track partnering arrangements are described in more detail below. Following award of the FOX vehicle upgrade contract to General Dynamics Land Systems, Anniston representatives informed the contractor that the depot had facilities and capabilities that could meet the contractor’s needs and provide for substantial facility cost savings and other benefits. In January 1997, officials from Anniston and General Dynamics Land Systems agreed to partner on the upgrade of 62 FOX reconnaissance vehicles. The partnering agreement included a 4-year contract with the depot under 10 U.S.C. 4543. Under the contract, the depot performs asbestos removal, grinding, welding, machining, cleaning and finishing, and prime and final paint operations. Under the terms of the contract with the Army, General Dynamics Land Systems does the upgrade using the depot’s facilities. Depot facilities are provided to General Dynamics Land Systems as government-furnished property under its contract with the Army and revert back to the Army when the contract is complete. Depot personnel stated that this partnering arrangement has resulted in (1) a lower total cost for the combined work performed, (2) sustainment of core depot capabilities, and (3) overhead savings from using underutilized facilities.