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,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. 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 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. 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 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 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 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. 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. 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.