DOD spends about $15 billion annually—or about 6 percent of its $243-billion fiscal year 1996 budget—on depot maintenance activities. Depot maintenance involves repairing, overhauling, and 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. About $2 billion is spent on contractor logistics support, interim contractor support, and labor used to install some major modifications and parts of depot software maintenance, which are contracted to the private sector using procurement, rather than operation and maintenance funds. Depot maintenance is accomplished in both the DOD depot system and by about 1,300 defense contractors. Currently, there are 29 DOD depot maintenance facilities; 15 depots have been or are in the process of being closed. The DOD depot system employs about 89,000 DOD civilian personnel. This is 43 percent lower than the employment level in the peak year, 1987. The depot maintenance workload mix has been the subject of considerable debate in recent years. Historically, depot maintenance on most wartime critical systems was largely performed in DOD depots. The peacetime workload for such critical systems constituted what is referred to as depot maintenance core workload. 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. They expressed the view that the defense depots were highly flexible and responsive to changing military requirements and priorities and produced high-quality work. However, with the end of the Cold War and the subsequent declines in defense spending, there is now increased pressure to privatize more depot maintenance work. As acquisition programs began to decline, a growing concern focused on how the industrial base can be maintained without large development and production programs. Attention began to shift to DOD depot workloads as a potential source of work to keep the industrial base viable and reduce DOD infrastructure costs. Efforts to increase the private sector’s share are affected by several statutes that relate to the mix of maintenance work performed by the public and private sectors. Three of the most significant statutes affecting the workload mix are 10 U.S.C. 2464, 10 U.S.C. 2466, and 10 U.S.C. 2469. Title 10 U.S.C. 2464 provides that DOD activities should maintain a logistics capability sufficient to ensure technical competence and resources necessary for an effective and timely response to a mobilization or other national defense emergency. Title 10 U.S.C. 2466 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. Title 10 U.S.C. 2469 provides that DOD-performed depot maintenance and repair workloads valued at $3 million or more cannot be changed to another DOD activity without the use of merit-based selection procedures or 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 statutes DOD officials believe limit their flexibility to contract out additional depot maintenance workloads—including 10 U.S.C. 2466 and 2469 and other statutes affecting competition and privatization. Directions for Defense, the 1995 report of the Commission on Roles and Missions, recommended that DOD privatize most existing depot maintenance work and all support for new and future weapon systems. In his letter forwarding the Commission Report to Congress, the Secretary of Defense agreed with the Commission’s recommendations but expressed a need for DOD to retain a limited organic core capability to meet essential wartime surge demands, promote competition, and sustain institutional expertise. DOD established joint teams and working groups to plan and direct efforts aimed at increasing privatization and outsourcing. DOD’s January 1996 Plan for Increasing Depot Maintenance Privatization and Outsourcing provides for substantially increasing reliance on the private sector. Section 311 of the National Defense Authorization Act for Fiscal Year 1996 reiterated long-standing congressional support for maintaining core capabilities within DOD depots as essential to national security. Congress found that DOD did not have a comprehensive policy regarding the performance of depot-level maintenance and repair and expressed a compelling need for DOD to (1) articulate known and anticipated core maintenance and repair requirements, (2) organize its resources to meet those requirements economically and efficiently, and (3) determine what work should be performed by the private sector and how such work should be managed. Congress specified that DOD submit a policy report that provides for properly sizing depot capabilities to meet security requirements effectively and efficiently, competition between public and private entities for noncore workload, and performance of maintenance and repair for any new weapon systems defined as core in facilities owned and operated by the United States. Section 311 also required DOD to provide a workload distribution report that included (1) an analysis of the need for 10 U.S.C. 2466—the 60/40 rule, its effects on readiness and national security, and a description of specific difficulties experienced by DOD as a result of that requirement; (2) an analysis of the public-private distribution of depot maintenance and repair workloads for fiscal years 1991 through 1995; and (3) a projection of the public-private workload distribution for fiscal years 1997 through 2001. The act also required us to analyze and report to Congress on each of these reports within 45 days of their submission. Our analysis of DOD’s policy report is being provided separately. DOD’s report questions the need for the 60/40 legislative rule (10 U.S.C. 2466) that limits the percentage of depot maintenance work performed in the private sector. The report stated that the provision has influenced DOD’s approach to depot maintenance management and cited various types of privatization options that the rule has precluded. It noted that such options could be more cost-effective. The report does not cite any readiness effects, adverse or otherwise. If the 60/40 provision is repealed, DOD’s policy preference for privatizing depot maintenance could result in a large shift of work from the public to the private sector. Under current conditions, a large shift to the private sector, if not properly managed, could result in a more costly depot maintenance system and could increase readiness risks. We found that (1) depot workload competition is limited and privatization without competition may not achieve expected savings, (2) privatization could increase public depot excess capacity and increase depot maintenance costs, and (3) privatization of some mission-essential workloads could increase readiness risks. DOD’s workload distribution report did not cite any direct effects of the 60/40 provision on military readiness or national security. DOD officials stated that there were no readiness concerns to report. However, the report discussed potential costs and the need to downsize DOD’s Cold War depot maintenance infrastructure. Further, the report noted that relief from 10 U.S.C. 2466 would allow DOD to consider lower cost depot maintenance options, such as establishing government-owned and contractor-operated operations, outsourcing new systems, teaming with industry, and using contract employees at DOD facilities. Section 311 also provided that the DOD report describe any specific difficulties experienced as a result of the 60/40 provision. Although the report indicated the section 2466 requirement has influenced the Department’s approach to depot management for some time, it provided no examples of particular instances when the 60/40 provision has inhibited the Department from contracting out depot maintenance workload that it wanted to privatize. We asked service officials to identify examples of this situation, but only the Army was able to identify one. According to Army officials, when DOD was conducting public-private competitions, one planned Army aviation public-private competition was changed to a public-public competition. This was done because of concern that if a contractor won the competition, the resulting reallocation of Army aviation maintenance would have violated the 60/40 rule for this particular Army commodity, although not for the Army as a whole. This situation caused the Army to discontinue public-private competitions for aviation programs before DOD terminated the program. DOD officials noted that they have not experienced negative effects on military readiness resulting from 60/40. Further, DOD depots historically have produced high-quality work and have been responsive to the needs of military commanders. The issue is whether, as DOD reported, the 60/40 provision limited the Department’s flexibility to move depot maintenance workloads to the private sector, where contractor maintenance can be more cost-effective. DOD’s workload distribution report emphasized that DOD needs the flexibility to make source of repair decisions without being constrained by mandated limits. However, DOD officials acknowledged that given the current methodology for computing public-private workload mix, the services have some latitude to contract out additional depot maintenance work without breaching the 40-percent threshold for almost all services and commodities. Using the 60/40 rule and the current methodology for developing the mix for fiscal year 1996, we estimate that the Air Force can contract out additional workloads valued at $559 million, the Army $69 million, the Marine Corps $40 million, the naval aviation community $33 million, and the naval ship community $223 million. As discussed later in our report, we are concerned that the current methodology for computing the public-private workload mix overstates the public sector’s share and understates the private sector’s share. DOD’s workload report states that relief from the 60/40 rule is needed to permit a shift in the workload mix to the private sector and that the Department has developed a reasonable, quantitative approach for identifying the need for and size of required organic core capabilities.