The Department of Defense (DOD) spends about $8 billion annually to provide housing for families of active-duty military personnel. Seeking to provide military families with access to adequate, affordable housing, DOD either pays cash allowances for families to live in private sector housing or assigns families to government-owned or government-leased units. The housing benefit is a major component of the military’s compensation package. DOD Policy Manual 4165.63M states that private sector housing in the communities near military installations will be relied on as the primary source of family housing. About 569,000, or two-thirds, of the military families in the United States live in private housing. These families receive assistance in locating private housing from housing referral offices operated at each major installation and are paid housing allowances to help defray the cost of renting or purchasing housing in local communities. Housing allowances, which totaled about $4.3 billion in fiscal year 1997, cover about 80 percent of the typical family’s total housing costs, including utilities. The families pay the remaining portion of their housing costs out of pocket. The remaining 284,000, or one-third, of the military families in the United States live in government-owned or -leased housing. These families forfeit their housing allowances but pay no out-of-pocket costs for housing or utilities. In fiscal year 1997, DOD spent about $3 billion to operate and maintain government-owned and -leased family housing. In addition, about $976 million was authorized to construct and renovate government family housing units in fiscal year 1997. Unaccompanied and single enlisted personnel in lower paygrades normally are required by service policy to live in government-owned barracks when space is available. Single officers and single senior enlisted personnel usually can choose to live in civilian housing and receive housing allowances. According to DOD officials, the military services face three significant housing problems. First, in March 1998, a DOD official testified before the Congress that about 200,000 of the military-owned family housing units were old, had not been adequately maintained and modernized, and needed to be renovated or replaced. Using traditional military construction (Milcon) financing at current funding levels, DOD has estimated that over $20 billion and 30 to 40 years would be required to accomplish this task. Second, according to DOD estimates, about 15 percent of the military families living in private housing are considered unsuitably housed primarily because of the high cost of the housing in relation to their housing allowances. Third, DOD officials have stated that most of DOD’s 400,000 barracks spaces also are old, do not meet current suitability standards, and need major improvements estimated to cost about $9 billion using traditional funding methods. DOD has undertaken several initiatives to address these problems, including requests to the Congress for more housing construction funding and increased housing allowances to make privately owned housing more affordable to military members. The Congress approved DOD’s request for a new housing allowance program starting in January 1998. The new allowance program replaced the Basic Allowance for Quarters and Variable Housing Allowance with a single allowance designed to better match the allowance amount with the cost of housing in each geographic area. Under the new program, housing allowances will be determined on the basis of costs for suitable civilian housing in each geographic area and allowance increases will be tied to growth in housing costs. According to DOD, the new allowance program should result in higher allowances in expensive housing areas and could result in lower allowances in some low-cost housing areas. The higher allowances in some areas could result in increasing the quantity of housing that is considered affordable to military families. Under the old program, housing allowances often did not keep up with changes in housing costs and in many cases servicemembers paid higher out-of-pocket costs than originally intended. The new allowance program is being phased-in over a 6-year period because of budget considerations and the desire to keep any allowance reductions gradual. To improve its existing family housing and barracks inventory more economically and at a faster rate, DOD concluded that a new initiative was needed. The new initiative, known as the Military Housing Privatization Initiative, called for new authorities to allow and encourage private sector financing, ownership, operation, and maintenance of military housing. In May 1995, DOD requested the Congress to approve a variety of new authorities that, among other things, would allow DOD to (1) provide direct loans and loan guarantees to private entities to acquire or construct housing suitable for military use, (2) convey or lease existing property and facilities to private entities, and (3) pay differential rent amounts in addition to the rent payments made by military tenants. The new authorities would also allow DOD to make investments, both limited partnership interests and stock and bond ownership, to acquire or construct housing suitable for military use and permit developers to build military housing using room patterns and floor areas comparable to housing in the local communities. The authorities could be used individually or in combination. Appendix I contains a complete list and description of the authorities. The Congress approved the new authorities, and the initiative was signed into law on February 10, 1996. However, the Congress limited the new authorities to a 5-year test period to allow DOD to assess their usefulness and effectiveness in improving the military housing situation. Based on the results of the test, the Congress will consider whether the authorities should be made permanent. The basic premise behind the initiative is for the military to take advantage of the private sector’s investment capital and housing construction expertise. DOD has noted that the private sector has a huge pool of housing investment capital. By providing incentives, such as loan guarantees or co-investments of land or cash, the military can encourage the private sector to use private investment funds to build or renovate military housing. Use of private sector capital can reduce the government’s near-term outlays for housing revitalization by spreading costs, specifically increased amounts for housing allowances, over a longer term. DOD’s goal is to have the private sector to invest at least $3 in military housing development for each dollar that the government invests. By leveraging government funds by a minimum of 3 to 1, the military can stretch its available construction funds so that significantly more housing can be revitalized in comparison with traditional Milcon financing. DOD officials stated that, with leveraging, the housing problem could be solved with current funding levels in only 10 years. DOD also noted that privatization can reduce the average cost of military housing through the use of commercial specifications and standards and local building codes and practices. A DOD housing official stated that the military’s cost for a house built with Milcon funding—about $135,000, excluding land—is substantially higher than private industry averages, primarily due to government procurement practices and overly detailed specifications. Under Milcon financing, contractors normally are faced with specifications, standards, and housing sizes different from industry or local practices. As a result, some contractors do not compete for these jobs and those that do often raise their prices to cover the higher costs associated with the requirements. According to DOD, use of commercial building standards and practices can also reduce costs by increasing competition and by reducing developer risk because the homes are more marketable to nonmilitary families, if not used by servicemembers and their families. In September 1995, in anticipation of the enactment of the new authorities, DOD established the Housing Revitalization Support Office (HRSO) to facilitate implementation of the initiative. With a staff of 16 full-time personnel and support from consultants, HRSO is responsible for overseeing and assisting the services in using the new initiative. The individual services are responsible for nominating potential privatization projects; working with HRSO in reviewing projects and recommending which authorities should be used; preparing requests for proposals; and managing the contract competition, award, and implementation processes. Under the privatization initiative, the Office of Management and Budget (OMB) and DOD have agreed on guidance regarding the amount that should be recognized and recorded as an obligation of DOD at the time a privatization agreement is signed. The guidance refers to this process as scoring. In this report, we use the word “scoring” to refer to the application of this guidance to agreements made under the privatization initiative. Funding for the privatization initiative is accomplished through two funds established by the authorizing legislation—the DOD Family Housing Improvement Fund and the DOD Military Unaccompanied Housing Improvement Fund. The funds receive sums by direct appropriations and transfers from approved Milcon projects and from proceeds from the conveyance or lease of property or facilities. The two funds are used to implement the initiative, including the planning, execution, and administration of privatization agreements. The two funds must be managed separately and amounts in the two funds cannot be commingled. Table 1.1 shows the sources and uses of funds in the DOD Family Housing Improvement Fund for fiscal years 1996 and 1997. No appropriations were made to the fund for fiscal year 1998. In fiscal year 1997, $5 million was appropriated for the DOD Military Unaccompanied Housing Improvement Fund. About $100,000 from this fund was used to pay for an Air Force study on developing privatized unaccompanied housing projects. Because it represents a new approach to improving military housing, we reviewed the implementation of the Military Housing Privatization Initiative to (1) measure progress to date, (2) assess issues associated with privatizing military housing, and (3) determine whether the initiative is being integrated with other elements of DOD’s housing program. We performed work at HRSO and the DOD offices responsible for housing management and housing allowances. We also performed work at the Air Force, the Army, the Navy, and the Marine Corps headquarters offices responsible for implementing the initiative and at the OMB office responsible for reviewing privatization agreements.