DOD annually spends about $15 billion on depot maintenance activities at 29 major defense depots and at about 1,300 private contractors. Depot maintenance involves repairing, overhauling, modifying, and upgrading defense systems and equipment. It also includes limited manufacture of parts, technical support, modifications, testing, and reclamation as well as software maintenance. The primary depot maintenance workloads assigned to DOD depots are those required to sustain core maintenance capabilities. Core maintenance capability is the skilled personnel, facilities, and equipment maintained at organic defense depots to meet the readiness and sustainability requirements of the weapon systems that support the Joint Chiefs of Staff contingency scenarios. Core maintenance capability exists to minimize operational risks, guarantee readiness of weapon systems in war or contingency situations, and ensure a ready and controlled source of technical competence. A combination of factors has created extensive excess capacity in the DOD depot system. These include (1) the downsizing of the armed forces due to the end of the Cold War; (2) efforts by some DOD components to conduct more repairs in field-level maintenance activities; (3) contracting out more depot work to the private sector; and (4) the increased reliability, maintainability, and durability of most military systems and equipment. While depot maintenance personnel in DOD depots have been reduced by 43 percent since 1987, similar depot infrastructure reductions have not been made. As of 1996, excess capacity in the DOD depot system is projected to be about 40 percent, using an analysis of maximum potential capacity and programmed workload as the basis for comparison and assuming a 5-day week, one 8-hour-per-day shift operation. The excess capacity varies in each service from a low of 33 percent in naval aviation, to 35 percent for naval shipyards, 42 percent for the Army, and a high of 45 percent for the Air Force. Some initiatives—namely consolidating workloads, implementing competition between government depots and the private sector, mothballing depot plant equipment, and tearing down unused buildings or converting them to other military uses—have been used to reduce some of the excess capacity. However, depot downsizing has largely occurred through the Base Realignment and Closure (BRAC) process. Fifteen depots have closed or are in the process of being closed as a result of BRAC decisions. While this will eliminate some excess capacity, privatization-in-place rather than closure and consolidation of workload in remaining depots has been proposed for seven depots recommended for closure or realignment. Privatization-in-place will result in privatizing excess capacity rather than eliminating it. Various statutes affect the mix of depot maintenance workload between the public and private sectors. Title 10 U.S.C. 2464 requires the Secretary of Defense to identify core logistics activities and to maintain them within DOD depots unless the Secretary specifically waives that requirement. Title 10 U.S.C. 2466—referred to as the “60/40” rule—states that no more than 40 percent of the depot maintenance funds made available in a given fiscal year may be spent for depot maintenance conducted by nonfederal personnel. Title 10 U.S.C. 2469 provides that DOD-performed depot maintenance and repair workloads valued at not less than $3 million cannot be changed to 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. DOD has requested relief from the last two provisions and from other statutes affecting competition and privatization. For example, the Department provided Congress a list of statutory encumbrances to privatization, including: 10 U.S.C. 2461, which requires studies and reports before conversion to 10 U.S.C. 2465, which prohibits contracts for performance of firefighting or security guard functions; section 8050 of the DOD Appropriations Act for Fiscal Year 1996, which permits public-private competition, but requires certification that bids include comparable estimates of costs from public and private sector bidders; section 317 of the National Defense Authorization Act for Fiscal Year 1987, Public Law 99-661, which prohibits the Secretary of Defense from contracting for the functions performed at Crane Army Ammunition Activity or McAlester Army Ammunition Plant; 10 U.S.C. 4532, which requires that the Army shall have supplies made by factories and arsenals if it can do so on an economical basis; and 10 U.S.C. 2305 (a) (1), which specifies that in preparing for the procurement of property or services to be acquired, the Secretary of Defense shall specify the agency’s needs and solicit bids or proposals in a manner designed to achieve full and open competition. In May 1996, DOD proposed a provision that would allow the Secretary of Defense to acquire by contract from the private sector or any nonfederal government entities those commercial or industrial type supplies and services necessary or beneficial to the accomplishment of DOD’s authorized functions, notwithstanding any provision of title 10 or any statute authorizing appropriation for or making DOD appropriations. “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 DOD that maintains the core capability described in 10 U.S.C. 2464 and to 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 providing for public-private competitions and performance of new workloads defined as core in DOD depots. Congress wanted assurance from DOD that essential organic core requirements would be sustained before it would consider the repeal of 10 U.S.C. 2466 and 2469. The DOD report, Policy Regarding Performance of Depot-Level Maintenance and Repair, was submitted to your committees on April 4, 1996. We were required to report our analysis to Congress 45 days after the DOD report was submitted. Our analysis of DOD’s depot maintenance workload distribution report is provided separately in a companion report. DOD and Congress are defining the role of DOD depots in the post Cold-War era. 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 of public-private sector capabilities, but with a clear shift toward greater reliance on the private sector. This shift is reflected in DOD policy provisions that (1) call for a minimum core requirement, (2) redefine core to allow for privatizing mission essential requirements previously defined as core, (3) limit public depots from competing with the private sector for noncore workloads, (4) provide a preference for privatizing depot maintenance and repair for new systems, and (5) provide disincentives for depots to compete. DOD’s Depot-Level Maintenance and Repair Workload Report, submitted to Congress April 4, 1996, projected a 40-percent increase in the depot work that will be privatized between fiscal years 1997 and 2001. However, since the services have not completed their reassessments of core workload requirements, it is not known how much more of their current and future depot maintenance work will ultimately be determined to be noncore and privatized. Unless effectively managed, including downsizing of remaining depot infrastructure, a major shift in depot workloads to the private sector could exacerbate existing excess capacity in the DOD depot maintenance system and be more costly than the current 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, 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 the depot maintenance core. The 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 and skills necessary to support the anticipated wartime surge. Peacetime workload was composed of a mix of high- and low-surge items, which allowed 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 quality of the DOD depots was high and users were generally well-satisfied with the 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 its depots. In a 1994 testimony, we stated that our work showed that the private sector more likely received about 50 percent of the DOD depot maintenance budget.