In the mid-1990s, DOD became concerned that inadequate housing allowances and poor quality military housing were negatively affecting quality of life and readiness by contributing to servicemember decisions to leave military service. DOD noted that when living in private-sector housing in the local communities, servicemembers were paying about 19 percent of housing costs out of pocket, because housing allowances were inadequate. DOD also noted that the quality of military-owned housing had been in decline for more than 30 years because military-owned housing was not considered a priority and because earlier attempts at solutions ran into regulatory or legislative roadblocks. DOD officials stated that much of the military-owned family housing in the United States was old, lacked modern amenities, and required renovation or replacement. DOD estimated that completing this work with historical funding levels and traditional military construction methods would take more than 20 years and cost about $16 billion. In response, and with the approval of Congress, DOD began two major initiatives. First, DOD began an initiative to increase housing allowances to cover the average cost of housing and utilities in each of the nation’s various geographic areas, thus eliminating the average out-of-pocket housing costs paid by servicemembers. This initiative was completed at the beginning of calendar year 2005. Second, DOD began an initiative to privatize most military-owned housing to use private capital and construction expertise to replace or renovate inadequate housing faster than could be achieved using traditional funding methods at historical funding levels. At DOD’s request, Congress enacted legislation in 1996 authorizing the Military Housing Privatization Initiative to allow private- sector financing, ownership, operation, and maintenance of military housing. DOD policy states that private-sector housing in the communities near military installations will be relied upon as the primary source of family housing. However, when communities do not have an adequate amount of suitable housing, DOD intends to use housing privatization—rather than military-owned housing financed with military construction funds—as the primary means for meeting family housing requirements. As of December 2005, the services had awarded 52 projects to privatize over 112,000 family housing units and had plans to award 57 more projects to privatize over 76,000 more units by 2010. Table 1 shows implementation status by service. Also, appendix II contains more detailed status information on the 12 projects at the installations we visited during this review. The duration of the initial development period—that is, the period when developers construct new housing units and renovate older units—varies among privatization projects, often lasting from 5 to 10 years. Thus, planned housing improvements resulting from privatization normally are not completed for several years after the projects are awarded. For all awarded projects as of September 2005, privatization developers had completed the construction of 10,911 new housing units and the renovation of 9,161 older housing units. Figures 1 through 5 show photographs of newly constructed and older privatized housing units at selected installations we visited. Servicemembers can choose whether or not to live in privatized housing— there are no mandatory assignments. Those who choose to live in privatized housing receive the same housing allowance (which is used to pay rent and utilities) as they would if they rented or purchased housing in the local communities. Within the Office of the Secretary of Defense (OSD), the Housing and Competitive Sourcing Office, which reports to the Deputy Under Secretary of Defense (Installations and Environment), provides oversight of the housing privatization program, but the primary responsibility for implementing it rests with the individual services. OSD designed and uses the program evaluation plan report to oversee the effectiveness of the program and the performance of awarded projects. The report, prepared semiannually for the periods ending June 30 and December 31, is a compilation of extensive data submitted by the services for each awarded project and includes information on project contract structure, construction and renovation progress, occupancy, financial performance, and servicemember satisfaction with the housing. This report is a continuation of a series of reports that we have issued on matters related to DOD’s housing privatization program as well as DOD’s process for determining housing requirements. The following summarizes key issues from these reports: In July 1998, we reported on several concerns as the housing privatization program began, including (1) whether privatization would produce insignificant cost savings and whether the long contract terms of many projects might cause the building of housing that will not be needed in the future; (2) whether controls were adequate to protect the government’s interests if developers failed to operate and maintain the housing as expected; and (3) whether DOD would face certain problems if privatized housing units were not fully used by military members and were subsequently rented to civilians, as the contracts permit. In March 2000, we reported that initial implementation progress for the privatization program was slow, the services’ life-cycle cost analyses provided inaccurate cost comparisons, and DOD lacked a plan for evaluating the effectiveness of the program. In June 2002, we reported that DOD needed to (1) revise its housing requirements determination process to take into account greater use of community housing as well as the projected impact that the housing allowance initiative might have on military installation housing requirements; and (2) improve the value of the primary privatization oversight report by completing the report on time, including information on funds accumulated in project reinvestment accounts, and obtaining periodic independent verification of key report elements. In May 2004, we reported that DOD needed to improve its revised housing requirements determination process to help ensure that housing investments, whether through military construction or privatization, were supported by consistent and reliable needs assessments. We also reported that DOD needed to survey servicemembers with dependents to update information on the housing preferences for family housing, given recent changes such as the increase in housing allowances. In response to each report, DOD officials have stated that they planned management actions to address our concerns. Although OSD and the services have implemented program oversight policies and procedures to monitor the execution and performance of privatized housing projects, opportunities exist for improvement. Though owned and managed by the private sector, DOD maintains a strong interest in the operational and financial performance of privatized housing projects because it is accountable for public funds expended and because, according to DOD officials, the military’s housing objectives can be met only if the projects remain viable. Thus, adequate program oversight is essential to help monitor and safeguard the government’s interests and to help ensure the long-term success of the program. However, we identified three areas of concern—the adequacy of the Navy’s oversight methods, the usefulness of DOD’s primary oversight report, and the consistency of tenant satisfaction data—which provide opportunities for enhancing the oversight of awarded privatization projects. Specifically, as evidenced by issues identified in some Navy and Marine Corps projects we visited, the Navy’s oversight methods are not adequate to identify some project operational concerns or to ensure accurate reporting of project information. As a result, in contrast to the Army and the Air Force which have more robust oversight methods, there is less assurance that Navy management could become aware of project performance issues in a timely manner in order to plan needed actions to mitigate the concerns. Also, the usefulness of OSD’s primary program oversight tool—the semiannual privatization program evaluation report—has been limited because the report has not focused on key project performance metrics, has not been issued in a timely manner, and has included inaccuracies. Moreover, data on servicemember satisfaction with housing are inconsistent because DOD has not issued guidance to the services for collecting and reporting satisfaction information. As a result, data gathered to date cannot be readily tracked over time or compared among the services, and their value could be improved as a tool to more fully assess the impact of the privatization program, as well as the impact of DOD’s overall housing program, on servicemember quality of life. The Navy’s oversight program for monitoring Navy and Marine Corps projects has not adequately identified and addressed some project operational concerns, nor does it ensure accuracy in project information reported to DOD headquarters. Adequate program oversight is essential to help monitor and safeguard the government’s interests and to help ensure the long-term success of the program. However, in contrast to the Army’s and Air Force’s oversight programs, the Navy’s oversight program was less comprehensive and thus provided less assurance that Navy management would become aware of project performance issues in a timely manner. To illustrate, we found that the Army and the Air Force have robust, well- developed portfolio oversight programs to help top management monitor implementation of their privatization programs. Both of these services collected and analyzed detailed performance information on each project including construction progress, construction costs, occupancy levels, rental revenues, operating expenses, net operating income, and the debt coverage ratio. These services prepared detailed project reports, which compared actual project performance data with expectations and discussed reasons for significant variances. The Army and the Air Force also prepared quarterly portfolio summary reports, which monitored project execution, analyzed trends, highlighted current and potential performance issues, and documented recent and planned actions to address any project concerns. In contrast, the Navy’s oversight program was less structured, included fewer details on project performance, and did not include summary oversight reports on portfolio performance, even though such reports were required by Navy guidance. Specifically, in February 2004, the Navy established a portfolio management group and assigned the group responsibility to oversee the Navy’s and Marine Corps’ housing privatization program. Although the group’s charter stated that it would review project performance information and prepare consolidated portfolio summary reports, Navy officials stated that no such reports had been prepared at the time of our review in January 2006, almost 2 years after the charter was approved. Navy officials initially told us that the required summary reports were not needed because portfolio monitoring was performed in other ways, such as a review of monthly status reports from each project. They further stated that the Navy intended to eliminate the reporting requirement.