The Military Sealift Command (MSC) provides ships for fleet support; special missions; and strategic sealift of equipment, supplies, and ammunition to sustain U.S. forces worldwide. While MSC uses a combination of government and privately owned ships to carry out this mission, all these ships have civilian crews who work either directly for MSC or for MSC’s contract operators. This report deals with contractor-operated ships, which account for 69 of the 200 ships in MSC’s fleet (see table 1.1). Our review specifically focused on 40 ships in the 5 programs where MSC awarded long-term charter contracts for 3 or more ships. These programs include maritime prepositioning ships, T-5 tankers, oceanographic survey ships, T-AGOS surveillance ships, and fast sealift ships (see fig. 1.1). MSC spends over $400 million per year to operate and maintain these 40 ships. This figure includes payments for leasing the 18 privately owned ships in the group. Maritime prepositioning ships rapidly deliver urgently needed Marine Corps equipment and supplies to a theater of operations during a war or contingency. These 13 privately owned ships are divided into three squadrons located in the Atlantic, Pacific, and Indian Oceans and carry everything from tanks and ammunition to food, water, and fuel. Each squadron can support a U.S. Marine Corps Expeditionary Brigade of 17,300 troops for 30 days. The maritime prepositioning ships were among the first ships to arrive in Saudi Arabia during Operation Desert Shield and in Somalia during Operation Restore Hope. The primary mission of the five privately owned T-5 tankers is point-to-point delivery of refined petroleum products to Department of Defense (DOD) users throughout the world. In addition, two of the tankers are equipped with modular fuel delivery systems, which allow them to refuel combatant ships at sea. At 30,000 tons displacement, the T-5 tankers are 3,000 tons larger than the contractor-operated sealift tankers that we reported on last year. In addition, the T-5s have ice-strengthened hulls and are approximately 10 years newer than the sealift tankers. During Operations Desert Shield and Desert Storm, MSC tankers provided fuel to naval fleet units operating in the Red Sea, the Persian Gulf, and the Gulf of Oman. The mission of the eight government-owned fast sealift ships is to provide rapid surge capability to U.S. armed forces throughout the world. They are the fastest roll-on/roll-off cargo ships in the world and are designed to carry bulky Army equipment such as tanks and helicopters. Combined, the eight ships can carry almost a full Army mechanized division. The fast sealift ships are normally maintained in a reduced operating status, with skeleton crews who perform preventive and corrective maintenance and basic operational checks. All eight ships are assigned to Fast Sealift Squadron One, in New Orleans, Louisiana, and they can be activated and underway from ports on the U.S. East and Gulf Coasts in 96 hours. Each of the fast sealift ships made up to seven trips to Saudi Arabia during Operations Desert Shield and Desert Storm. They were also involved with Operation Restore Hope. The mission of 7 of the 10 government-owned T-AGOS ships is to locate and track submarines. The remaining three have been converted to do counterdrug missions. These ships are homeported in Little Creek, Virginia, and Pearl Harbor, Hawaii, and are monitored by MSC field organizations located at these homeports. The T-AGOS ships operate towed array sensor systems to gather submarine acoustical data, especially to locate new and quieter submarines. The mission of the four government-owned oceanographic ships is to support worldwide oceanographic survey programs with acoustical, biological, physical, and geophysical research. Their precision sonar systems permit continuous charting of a broad strip of ocean floor. The research conducted by these ships helps to improve the Navy’s undersea warfare and enemy ship detection capabilities. MSC’s contract operators are tasked with providing personnel, equipment, tools, and supplies to maintain MSC’s ships. They use three different levels of maintenance and repair to keep MSC’s ships operational. The first level of maintenance and repair is performed by the ship’s crew. It includes preventive maintenance and minor mechanical and electrical repairs. This work may be done during regular or overtime hours, and it may or may not be reimbursable under the terms of the applicable contract. The second level of maintenance and repair is industrial assistance, which is done by subcontractors. This work is beyond the capability of the ship’s crew but does not require an overhaul. The subcontractors may actually maintain or repair the ship’s equipment, or a technical representative may provide expertise to the ship’s crew. Industrial assistance is usually reimbursable, either directly or through a budgeted system of payments. Overhauls are the third level of maintenance and repair. They can be scheduled, as required by Coast Guard regulations, or unscheduled, for example, to repair a damaged propeller. Since none of the MSC contract operators we reviewed function under firm fixed-price contracts, overhauls are directly reimbursable. The Ranking Minority Member of the Subcommittee on Oversight of Government Management and the District of Columbia, Senate Committee on Governmental Affairs, asked us to examine the Military Sealift Command’s contractor-operated ship programs. Specifically, we determined whether MSC has adequate management controls (1) to oversee contractors and prevent abuses and (2) to ensure contractual requirements are being met. To determine whether MSC has adequate oversight of the maintenance and repair work done on its contractor-operated ships, we reviewed MSC’s engineering and maintenance and repair instructions, files, and manuals, including the Engineering Operations and Maintenance Manual. We also reviewed maintenance and repair invoices, visited a sample of ships, and interviewed responsible MSC personnel. We used the ships’ operational schedules to visit ships that were about to complete an overhaul. For four of the five programs we were able to visit a ship that was in for overhaul, but this was not possible for the T-5 tankers. Therefore, we visited a tanker that was in its full operational status. (App. I lists the ships that we visited.) During our ship visits, we interviewed crew members, contractor and shipyard officials, MSC field personnel, and Coast Guard and American Bureau of Shipping inspectors. We visited several fast sealift ships because they were all located at the same port. To determine MSC’s effectiveness in establishing and administering contract requirements, we reviewed the contracts for each of the ship programs and compared and contrasted the requirements contained in those contracts. We then discussed the contract differences with cognizant MSC officials to determine why the differences existed and to determine what, if any, standardized procedures these officials used to establish and administer program requirements. We also reviewed numerous MSC instructions dealing with funding, billing, and invoice certification. We reviewed the Department of Defense’s National Industrial Security Program Operating Manual and MSC’s security and crew qualification files to verify the suitability of the crew members on MSC’s contractor-operated ships. To determine the effectiveness of MSC’s current organizational structure, we met with various MSC officials and discussed their responsibilities with regard to MSC’s contractor-operated ship programs. We also reviewed MSC’s Standard Operating Manual, the draft proposal “Reinventing MSC,” and the MSC Commander’s June 1, 1995, update to the reinvention proposal. We then discussed the reorganization initiative with MSC’s current program managers. We did not address this area in depth because MSC’s reinvention management team and its working groups had not developed the program management organization’s structure by the time we completed our audit work. We conducted our work between July 1994 and August 1995 in accordance with generally accepted government auditing standards. An ongoing joint investigation by the Federal Bureau of Investigation and the Naval Criminal Investigative Service has led to guilty pleas by four former employees of MSO, Inc., an MSC contractor that operated 10 oceanographic vessels. The investigation revealed that these employees had fraudulently altered overtime records of other MSO employees (crew members), changing nonreimbursable overtime charges to overtime charges that are reimbursable. It is estimated that these fraudulent overcharges amounted to millions of dollars during a 3-year period. This case shows that oversight and basic internal controls are fundamental for any entity to ensure that payments are made accurately and correspond to goods and services actually received. During our review of MSC’s contractor-operated ship programs, we found that those who approve and pay bills do not verify that MSC has received the goods or services it is paying for. Part of the reason for this practice is a disconnect between headquarters-level invoice reviewers and field-level personnel, whose main concern is the operation but not the cost of the ships’ repair. In fiscal year 1994 alone, MSC spent $93.8 million to maintain and repair the ships in the five contractor-operated programs we reviewed. Given the large amounts of money spent on maintenance and repairs, it is imperative that MSC have effective controls over these expenditures. MSC lacks controls in three general areas: verification of crew-performed repairs, review of invoices for subcontracts, and oversight of repair work performed during overhauls. Though MSC’s Comptroller is responsible for coordinating MSC’s internal control program, he does not have the authority to ensure that MSC has a sufficient system of internal controls that is being adhered to. For three of MSC’s contractor-operated ship programs, MSC has included in its contracts predetermined dollar amounts for crew-performed minor repairs that are to be done as part of the contracts’ fixed price. According to the contracts, these predetermined amounts, or “minor repair thresholds,” can be met in three ways.