oversight

Military Base Closures: Lack of Data Inhibits Cost-Effectiveness of Analyses of Privatization-in Place Initiatives

Published by the Government Accountability Office on 1999-12-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Chairman, Subcommittee
                  on Military Readiness, Committee on
                  Armed Services, House of
                  Representatives

December 1999
                  MILITARY BASE
                  CLOSURES

                  Lack of Data Inhibits
                  Cost-Effectiveness
                  Analyses of
                  Privatization-in-Place
                  Initiatives




GAO/NSIAD-00-23
Contents



Letter                                                                                                3


Appendixes             Appendix I:    Privatization-in-Place Initiatives                             24
                       Appendix II:   Comments From the Department of Defense                        32
                       Appendix III: GAO Contacts and Staff Acknowledgments                          36


Related GAO Products                                                                                 37


Tables                 Table 1: Initial Cost Comparison Between Projected Government and
                         Actual Privatization Operations at Newark, Ohio (July 1997)     11
                       Table 2: Updated Cost Comparison Between Projected Government and
                         Actual Privatization Operations at Newark, Ohio (November 1998) 12




                       Abbreviations

                       BRAC      base realignment and closure
                       DOD       Department of Defense




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United States General Accounting Office                                                            National Security and
Washington, D.C. 20548                                                                      International Affairs Division



                                    B-283515                                                                                          Leter




                                    December 20, 1999

                                    The Honorable Herbert H. Bateman
                                    Chairman, Subcommittee on Military Readiness
                                    Committee on Armed Services
                                    House of Representatives

                                    Dear Mr. Chairman:

                                    This report responds to your request concerning the privatization-in-place
                                    of select Department of Defense industrial facilities that were closed as a
                                    result of base realignment and closure decisions made in 1993 and 1995.
                                    Privatization-in-place is a concept in which a private sector entity takes
                                    over the operations of a facility that was once operated by the government.
                                    To date, privatization-in-place has been associated with the base closure
                                    process and used by the Department for transferring industrial work to the
                                    private sector. With legislative constraints affecting the Department’s
                                    ability to close military facilities, privatization-in-place is not likely to be
                                    used outside the base realignment and closure process.1

                                    The privatization of the former government-run operations at the Air Force
                                    Aerospace Guidance and Metrology Center in Newark, Ohio; the Naval
                                    Surface Warfare Center in Louisville, Kentucky; and the Naval Air Warfare
                                    Center in Indianapolis, Indiana, have been the only privatization-in-place
                                    actions resulting from the base closure process. These facilities primarily
                                    provide industrial support services for the Department. The Newark, Ohio,
                                    facility—operated by Boeing North American, Inc., and Wyle Laboratories,
                                    Inc.—performs maintenance on guidance systems for Air Force aircraft


                                    1
                                     Specifically, in 1977, Congress enacted legislation, reflected in 10 U.S.C. 2687, which
                                    essentially halted Department of Defense initiated base closures. Under section 2687, the
                                    closure of any military installation in the United States with at least 300 authorized civilian
                                    positions or the realignment of any installation involving a reduction of more than 1,000
                                    civilian employees or more than 50 percent of the installation’s authorized civilian
                                    workforce could not take place until the Secretary of Defense had evaluated the “fiscal,
                                    local economic, budgetary, environmental, strategic, and operational consequences of such
                                    closure or realignment.” These requirements would make it difficult to close a large
                                    industrial facility such as a depot outside the base closure and realignment process.
                                    Subsequently, special legislative authorities were enacted in 1988 and 1990 to overcome
                                    impediments to base closure. These authorities provided the basis for four rounds of base
                                    realignments and closures between 1988 and 1995.




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                   and intercontinental ballistic missiles and provides metrology and
                   calibration services. The Louisville facility—operated by Raytheon Systems
                   Company and United Defense Limited Partnership—provides maintenance
                   and other services for Navy shipboard air defense systems and guns. The
                   Indianapolis facility—operated by Raytheon—designs and develops
                   advanced electronics and other products for aviation, space, and other
                   defense applications.2 Appendix I provides additional background
                   information on these privatization-in-place initiatives.

                   Our overall focus was to assess the status, cost, and effectiveness of the
                   Department’s three privatization-in-place actions. Specifically, our
                   objectives were to (1) determine how contractors are responding to
                   decreasing workloads at these privatized facilities, (2) compare the
                   cost-effectiveness of the privatization-in-place operations to the former
                   government-run operations, and (3) identify the impact of privatization on
                   excess capacity in the Department’s industrial infrastructure.



Results in Brief   In general, the contractors at the privatization sites are facing decreasing
                   defense workloads and have either initiated or planned efforts, such as
                   bringing in new work and reengineering business processes, to reduce
                   operating costs and improve efficiencies. Contractors at these facilities
                   have experienced difficulties in attracting new customers and are uncertain
                   about future workload levels. Contractors at the Navy privatization sites in
                   Kentucky and Indiana are optimistic about efforts under way to increase
                   workloads.

                   Due primarily to data limitations, we were able to compare the
                   cost-effectiveness of privatization-in-place with the former government-run
                   operation for only one of the three facilities in question. Our analysis of a
                   recent Air Force cost comparison study indicates that costs to the
                   government for fiscal year 1997 for work performed at the privatized
                   facility in Newark, Ohio, were about 16 percent higher than the estimated
                   cost had the Air Force continued to operate the facility. Similar cost
                   comparison studies of the Navy privatizations have not been done and were
                   not possible to construct due to (1) the absence of sufficient, detailed


                   2
                    At both Louisville and Indianapolis, Navy contracts were initially awarded to subsidiaries
                   of Hughes Aircraft Company. Subsequently, Raytheon Company merged with Hughes
                   Aircraft in December 1997 and took over Hughes’ s operations at Louisville and
                   Indianapolis.




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             historical baseline cost data for the closed Navy facilities and (2) changes
             to workload volume and mix. However, contractors at each of the
             privatized sites have initiated business improvements that appear to be
             increasing operating efficiencies and reducing costs to the government.
             The military customers were generally pleased with the timeliness and
             quality of the products produced by the privatized facilities.

             As a general rule, privatization-in-place has not optimized reductions in
             excess capacity and operating costs in the infrastructure owned and
             operated by the Department of Defense—a major base realignment and
             closure objective. Rather than closing facilities and transferring defense
             work to other underutilized defense facilities in the public or private sector
             to reduce excess capacity, privatization-in-place allows work to remain at
             the original sites to be performed by the private sector. While the
             Department no longer owns the infrastructure, it continues to support it
             through payments for contract work performed at these facilities.
             Indirectly, the Department continues to pay for excess capacity, and as a
             result, the goal of eliminating excess capacity may be realized more in form
             than in substance. Consequently, the cost reductions anticipated under the
             base closure process may not be fully realized. At the same time,
             privatization-in-place actions can produce some reduction in excess
             capacity and operating costs, where privatized facilities are also used to
             consolidate defense related work from other contractor facilities, such as
             at the former Naval Surface Warfare Center in Louisville. In such instances,
             contractors’ efforts to improve business practices and reduce their own
             defense business infrastructure may create efficiencies in overall
             public-private defense infrastructure.

             Should the Department of Defense consider privatization-in-place in the
             future, we are recommending that the Secretary of Defense require the
             services to (1) consider the overall cost-effectiveness of this approach in
             reducing operating costs and excess capacity in the combined public and
             private sectors supported by the defense budget; (2) retain an adequate
             baseline of historical government costs, preferably on a per-unit basis, to
             assess the cost-effectiveness of privatization-in-place; and (3) periodically
             reassess the cost-effectiveness of prior privatization-in-place initiatives, in
             light of excess capacity in other private sector and DOD facilities and
             continuing declines in military workloads.



Background   Three facilities have been privatized-in-place as a result of the 1993 and
             1995 base realignment and closure (BRAC) processes—an Air Force



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facility in Newark, Ohio, and Navy facilities in Louisville, Kentucky, and
Indianapolis, Indiana. The facility at Newark is owned by an Ohio-chartered
local redevelopment authority, which was formed to accept the transfer of
the property from the Air Force.3 The Louisville and Indianapolis facilities
are still owned by the government, which established leases between the
Navy and selected local redevelopment authorities for facility use. At both
privatization sites, the Navy plans to eventually transfer the property to the
local redevelopment authorities.

Recommending closure of the military facilities, the BRAC commissions
provided the Department of Defense (DOD) with the flexibility to move
work to other DOD facilities or to the private sector.4 Closure actions at
two Air Force facilities as a result of the 1995 BRAC process (the Air
Logistics Centers at Kelly Air Force Base, San Antonio, Texas, and
McClellan Air Force Base, Sacramento, California) at one point focused on
privatizing work in place. However, the Air Force subsequently shifted to
an emphasis on public-private competition to determine where the work
would best be done.5 Nevertheless, efforts to privatize-in-place the work at
these latter facilities have stimulated significant debate over the benefits of
such privatization initiatives and have figured prominently in subsequent
congressional debates over whether to authorize additional BRAC rounds.
Consequently, the three privatization-in-place initiatives have created much
interest in the costs and benefits of these privatized operations compared
with prior government operations.

Prior studies have questioned the privatization-in-place concept. An August
1996 Defense Science Board study team concluded that
privatization-in-place should be avoided, since it tends to preserve excess
capacity. In 1996, a privatization task force comprised of executives from



3
  A local redevelopment authority is a community organization officially recognized by DOD
as having sole responsibility for planning reuse of the property and serving as the
community’s point of contact for all matters relating to the closure.
4
 The 1993 BRAC Commission recommended closure of the Air Force facility as a DOD
operation, while the 1995 BRAC Commission recommended closure of the Navy facilities.
5
 To the extent privatization-in-place involves a potential transfer of DOD in-house depot
maintenance and repair work valued at $3 million or more to a contractor, 10 U.S.C. 2469
requires that a competition among public and private sector entities be held for the work. In
addition, the San Antonio and Sacramento workloads were the subject of special
restrictions contained in 10 U.S.C. 2469a.




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                          the aerospace industry that was formed by the governor of California
                          concluded that privatization-in-place

                          “inhibits the realization of cost savings intended from base closures and the performance
                          goal improvements that privatization is intended to achieve. Privatization-In-Place,
                          therefore, does nothing to solve the excess capacity problem within either the public or
                          private sector of the industrial base.”6

                          Our prior report on the Air Force privatization of the Newark aerospace
                          facility showed that as of July 1997, and based on several months of
                          contractor operations, the Air Force estimated that contractor costs were
                          about 17 percent higher than historical costs for similar work at the former
                          government facility.7 The Air Force attributed this increase primarily to
                          increased material costs, contract oversight and administration costs, and
                          estimated contractor award fees. Neither DOD nor we have previously
                          performed similar cost comparisons for the Navy privatizations. However,
                          our July 1997 report on the Louisville privatization questioned the Navy’s
                          workload relocation analysis and concluded that privatization-in-place was
                          not likely to be as cost-effective as relocating the work to other DOD
                          facilities.8



Privatization             Defense workloads at the privatized facilities are less than those before
                          privatization. However, workloads at the former Air Force facility in
Contractors’ Efforts to   Newark, Ohio, have remained relatively stable during the 3 years of
Combat Decreasing         privatized operations. Even so, in the near future, the aircraft and missile
                          repair contractor is expecting workload decreases as military system
Workloads                 requirements decline. Workloads at the former Navy facilities in Louisville,
                          Kentucky, and Indianapolis, Indiana, have decreased more significantly. As
                          a result, the contractors at these locations are reducing their infrastructure
                          and reengineering business processes to contain costs. Moreover, the Navy
                          contractors have moved other defense work into the privatized facilities to
                          supplement the existing workload and consolidate certain operations.


                          6
                           Report of the California Chief Executive Officers’ Defense Privatization Task Force to
                          Governor Pete Wilson: Pathway to Privatization—An Industry Perspective, California Trade
                          and Commerce Agency (Sacramento, Cal.: Mar. 1996), p. xix.
                          7
                           Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance System Depot
                          Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).
                          8
                            Navy Depot Maintenance: Privatizing Louisville Operations in Place Is Not Cost-Effective
                          (GAO/NSIAD-97-52, July 31, 1997).




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Workload at Air Force          Less maintenance work is performed at the privatized facility at Newark
Privatization-in-Place Site    than had been performed under the Air Force’s operation. However, during
                               the years of privatized operations the overall workload has remained
                               relatively stable. Aircraft repairs performed by the primary contractor,
                               Boeing North American, Inc., have decreased somewhat, while missile
                               repairs have stayed about the same. The facility’s other contractor, Wyle
                               Laboratories, has experienced a small workload increase. However, both
                               contractors expressed uncertainty about their future workload projections,
                               with Boeing officials expecting sizable workload decreases. For example,
                               aircraft repair requirements are expected to decrease by about 6 percent in
                               2000, with further decreases expected through year 2014. Boeing officials
                               attribute these expected decreases to normal system retirements and
                               attrition, increasing reliability of newer and future weapon systems, and
                               greater reliance on the original equipment manufacturers for logistics
                               support.

                               The outlook for combating these anticipated workload reductions is not
                               very optimistic because of difficulties in attracting new work. Although
                               Boeing has been actively pursuing the acquisition of work from other
                               in-house operations, manufacturing partners, other DOD programs, and
                               commercial sources to offset its declining Air Force workload, its efforts
                               have been largely unsuccessful to date. Wyle Laboratories has been
                               encountering similar problems in acquiring additional work. It now
                               performs very little commercial work and has few prospects for any major
                               new business.


Workload at Navy               Since privatization-in-place was implemented at the Navy facilities in
Privatization-in-Place Sites   Louisville and Indianapolis, the defense workload has declined, primarily
                               due to reduced Navy operational requirements and lower weapon systems
                               maintenance budgets. In some cases, the workload reduction has been
                               significant. According to contractor officials, work now performed by
                               United Defense Limited Partnership in Louisville has declined almost
                               80 percent, from 1.3 million direct labor hours in 1994 to about
                               277,000 hours in 1998. Moreover, Raytheon’s maintenance workload in
                               Louisville has declined about 50 percent, and its workload in Indianapolis
                               has decreased about 30 percent since privatization.

                               In response to declining workloads, the Navy’s privatization contractors
                               have instituted several business improvements to contain costs. In
                               Louisville, for example, United Defense reduced the former Navy
                               workforce by over two-thirds and its facility infrastructure by about


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                         40 percent. This was accomplished primarily through organizational
                         restructuring initiatives and work process efficiencies. Raytheon in
                         Indianapolis has similarly reduced its workforce by 330 employees, or
                         17 percent, mostly in response to declining workloads. By reengineering its
                         workstations and improving inventory storage, Raytheon has also
                         modernized its facility in Louisville to provide for a more cost-effective
                         maintenance work flow and to accommodate new production work.

                         In addition to infrastructure reductions and improved business practices,
                         the contractors at the former Navy facilities have brought in additional
                         defense business work from their other facilities to supplement the
                         declining workload. For example, Raytheon in Louisville has transferred its
                         Phalanx and Rolling Airframe Missile launcher production work from its
                         Tucson, Arizona, facility. Moreover, United Defense is moving some naval
                         gun production work from a Navy-owned plant in Fridley, Minnesota, to
                         Louisville. As a result, Navy and United Defense officials believe that the
                         workload will stabilize at its current level over the next 2 years, if the
                         Congress provides additional funds for gun repair work at Louisville
                         beyond DOD’s budget requests as it has for the last 2 years. While United
                         Defense continues to use the Fridley facility, officials told us they plan to
                         downsize it further. They said that by the end of the year 2000 the Fridley
                         workforce will be reduced by 285 employees, or 17 percent, and its facility
                         infrastructure by about 1 million square feet, or 50 percent.

                         Raytheon has also been able to consolidate work from its plant in Long
                         Beach, California, with that in Indianapolis, thereby reducing the
                         company’s internal infrastructure. Raytheon officials told us that it had
                         transferred its entire Long Beach facility depot-level repairs and spares
                         manufacturing to Indianapolis. This restructuring initiative equated to
                         consolidating about 120,000 square feet from its Long Beach facility to
                         Indianapolis. Raytheon has also brought additional work to Indianapolis
                         from foreign government sales.



Cost-Effectiveness of    Although military customers were generally pleased with the quality and
                         timeliness of products produced by the privatized activities, data
Privatization-in-Place   limitations precluded us from determining for two of the facilities in
Is Difficult to          question whether privatization-in-place offers a more cost-effective
                         approach for DOD to accomplish its workloads than the former
Determine



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                         government-run operations.9 A recent Air Force study on the Newark, Ohio,
                         facility indicated that privatized operations were costing more than former
                         Air Force operations, but no similar cost studies have been performed for
                         the Navy privatizations at Louisville and Indianapolis. Moreover, we were
                         unable to independently conduct such cost comparisons primarily because
                         of (1) the absence of sufficient historical baseline data for operations at the
                         former government-run facilities and (2) Navy-directed revisions in
                         maintenance practices for certain key weapon systems and changes in
                         workload mix. While the two Navy privatization contractors have initiated
                         business improvements that appear to be improving operating efficiencies
                         and reducing costs, the cost-effectiveness relative to the former
                         government operations is unknown.


Air Force Studies Show   In our prior work in January 1997, we asked the Air Force to compare the
Privatization Costs at   costs of missile repair at Newark, Ohio, under privatization to the facility’s
                         costs to perform this same work under government control, based on about
Newark Exceed Costs of
                         3 months of contractor data. The Air Force also initiated similar cost
Former Government        analyses of its two other workload components—aircraft repair and
Operations               metrology operations. Estimated privatization-in-place costs for fiscal
                         year 1997 (the first full year of privatization) were projected based on
                         limited actual work data for the contractors’ operations and included some
                         other privatization costs attributable to the government (e.g., costs for
                         contract administration and oversight). Estimated government costs were
                         based on actual production data from fiscal year 1995, escalated for
                         inflation and adjusted for fiscal year 1997 requirements. These costs also
                         included comparability adjustments for such items as estimated base
                         operating support costs (cost comparability adjustments represent factors
                         that need to be added to the government’s actual production costs in order
                         to obtain a total government cost for the operation). The Air Force study,
                         released in July 1997, estimated that the fiscal year 1997 work performed at
                         the privatized facility would likely cost the government about $14.1 million,
                         or about 17 percent more than if the facility had continued to operate as a
                         government activity. Contract award fees, government costs for contract
                         administration and oversight, and higher material costs were the primary
                         causes for the cost differential. Table 1 shows the results of this study.

                         9
                          An alternative to privatization-in-place was closure of the facilities, with transfers of the
                         workloads to other DOD facilities. According to BRAC commissions, the closure option was
                         estimated to provide annual savings to DOD of $3.8 million, $28.6 million, and $39.2 million
                         for Newark, Louisville, and Indianapolis, respectively, after one-time closure costs have
                         been recouped.




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Table 1: Initial Cost Comparison Between Projected Government and Actual
Privatization Operations at Newark, Ohio (July 1997)
Dollars in millions
                                                                                 Percentage
Work category               Government        Privatization       Difference         change
Aircraft                            $34.4              $42.4            $8.0              +23
Missile                              41.2                  45.5          4.3              +11
Metrology                             8.7               10.5            1.8               +21
Total                               $84.2              $98.3          $14.1               +17


Note: Numbers may not add due to rounding.
Source: Air Force cost comparison study dated July 1997.


In our December 1997 report,10 we concluded that the Air Force’s cost
study methodology was analytically sound, appeared reasonable, used the
best available data, and was consistent with DOD guidance on
public-private depot competitions.11 While we reported that the study
provided a reasonable interim cost estimate at that time, we also reported
that it was premature to reach a final conclusion on costs until a full year of
actual data was available.

Subsequently, the Air Force conducted follow-on workload cost analyses
based on reported fiscal year 1997 costs and production results. In its
November 1998 study, the Air Force concluded that the privatization costs
were again greater than the projected government costs to perform the
same work. Privatized costs were $16.8 million, or about 21 percent higher
than historical Air Force costs. Table 2 shows the results of this updated

10
 Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance System Depot
Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).
11
  We did not verify the accuracy of the Air Force historical cost data used for the study. Our
prior work has identified unreliable cost data as one of several key weaknesses in DOD’s
financial management systems. These long-standing weaknesses led us to designate DOD
financial management as a high-risk area vulnerable to waste, fraud, abuse, and
mismanagement. DOD has started to devote additional resources to correct these problems.
Our recent work includes Department of Defense: Status of Financial Management
Weaknesses and Actions Needed to Correct Continuing Challenges
(GAO/T-AIMD/NSIAD-99-171, May 4, 1999), High-Risk Series: An Update (GAO/HR-99-1,
Jan. 1999), Major Management Challenges and Program Risks: Department of Defense
(GAO/OCG-99-4, Jan. 1999), and Defense Outsourcing: Better Data Needed to Support
Overhead Rates for A-76 Studies (GAO/NSIAD-98-62, Feb. 1998).




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study. Our review of this cost analysis identified some overstated contract
costs for leasing and capital improvement projects and the omission of
estimated government revenue received from corporate federal income tax
payments. We subsequently made adjustments to the analysis that resulted
in decreasing the cost differential to about 16 percent in favor of the former
government operation.



Table 2: Updated Cost Comparison Between Projected Government and Actual
Privatization Operations at Newark, Ohio (November 1998)
Dollars in millions
                                                                              Percentage
Work category              Government        Privatization     Difference         change
Aircraft                           $37.5             $45.2           $7.7             +21
Missile                             33.9              41.0            7.2             +21
Metrology                            8.8              10.7            1.9             +21
Total                              $80.2             $97.0          $16.8             +21


Note: Numbers may not add due to rounding.
Source: Air Force cost comparison study dated November 1998.


The updated study followed the same general approach and methodology
used in the interim study. Contractor costs represented a full year of
privatization operations and, as previously described, included other
associated privatization costs. The government cost estimates were largely
based on fiscal year 1995 data that were adjusted for inflation and applied
to actual repair quantities accomplished by the contractors during fiscal
year 1997. After resolving some concerns raised by Boeing, the Air Force
added some additional cost to the government estimate for comparability
reporting purposes. This had the effect of reducing the cost differential
from about 24 percent to 21 percent. These additional costs were
attributable to detailing each workload’s allocated share of accounting,
information services, and dispensary costs. We agree with these
comparability adjustments.

As noted previously, the Air Force’s interim study initially identified three
factors contributing to the increased costs of privatization at Newark,
namely (1) contract award fees, (2) government costs for contract
administration and oversight, and (3) material costs. Although the first two
causes—award fees and contract monitoring—are continuing contributors



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to increased privatization costs at Newark, the material cost issue has since
been resolved. As a result of a 1998 Air Force Audit Agency study
recommendation to improve visibility over materials and to control
contractor access to material in the DOD supply system at Newark, the
contractors and DOD have performed a detailed inventory of material
on-hand and instituted new record keeping procedures and controls. As a
result, neither the Air Force nor the Defense Contract Management
Command view the material cost issue as an ongoing factor in terms of
increased privatization costs. The November 1998 updated cost study
assumed that material costs were the same for both the contractor and the
government.

While the Air Force cost studies indicate operations are more costly at the
privatized facility, the contractors have been incorporating business
improvements to obtain cost efficiencies in order to reduce their operating
costs. For example, in October 1997—after the data had been collected for
the updated Air Force study—Boeing reduced its staffing by 77 to better
size the workforce for the workload, thereby reducing costs. Moreover,
Boeing has introduced new work flow and work processes intended to
reduce turnaround times and costs for some work. A Wyle official cited
reduced turnaround times for repairs and the elimination of repair
backlogs. The Air Force, however, does not plan to revise its cost
comparison for future years beyond fiscal year 1997 because of concerns
about the usefulness of the historical baseline costs as the data get older.

Air Force customers and Defense Contract Management Command
officials were satisfied with the timeliness and quality of the work
performed by both Boeing and Wyle to date. Although citing some initial
start-up problems experienced with Wyle Laboratories, they said that both
contractors now exhibit positive performance measurements in such areas
as scheduling, repair process improvements, and quality assurance. For
example, ongoing Boeing program management reviews report missile and
aircraft repairs meeting or falling below target pricing expectations, with
related repair performance results meeting or exceeding most workload
goals. According to Air Force managers, they would prefer not to relocate
the current workload to any other facility, government or private sector,
given the present quality of work and the expertise developed over the
years in Newark.




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Similar Comparative Cost       The Navy has not performed any similar cost analyses on the
Analyses of Navy’s             privatization-in-place sites at Louisville and Indianapolis. Moreover, the
                               absence of sufficient historical data for former Navy operations at these
Privatizations at Louisville
                               sites precluded us from performing cost comparisons similar to that of the
and Indianapolis Cannot Be     Air Force’s study at Newark. Thus, the cost-effectiveness of these
Made                           particular initiatives, in relation to former government operations, is
                               unknown. However, contractors at these privatization facilities have taken
                               steps to improve cost efficiency and program results. While the Navy has
                               not performed cost analyses similar to the Air Force study of Newark, it
                               continuously monitors the costs for work performed at Louisville and
                               Indianapolis as part of its ongoing contract oversight and administration.

                               Our discussions with Navy officials showed that detailed operational and
                               financial data, such as per unit costs, needed for an equitable cost
                               comparison were not available. Some macro-level data, including total
                               work years expended and reported overall costs, were available at
                               higher-level headquarters units (such as the Naval Air Systems Command at
                               Patuxent River, Maryland, for the Indianapolis site), but were not useful for
                               the overall purpose of comparing costs. Moreover, Navy-directed revisions
                               to maintenance practices on select weapon systems and changes to
                               product mix occurred after the privatizations were under way, thereby
                               precluding equitable cost comparisons even if detailed historical data were
                               available. For example, Raytheon has modified its maintenance practices
                               for overhauling Phalanx systems at Louisville by making only necessary
                               repairs, referred to as condition-based maintenance, rather than
                               performing complete overhauls. This change in practice has reportedly
                               resulted in fewer component replacements, reduced labor hours, and
                               reduced costs for each unit overhauled. United Defense in Louisville has
                               made similar changes to its overhaul process for the Navy’s 5-inch
                               MK-45 gun.

                               Although the overall cost-effectiveness of the Navy privatizations could not
                               be determined, there are indications of at least potential short-term cost
                               savings to the government resulting from contract provisions restricting
                               labor rate charges and the contractors’ efforts to improve business
                               practices. In Indianapolis, for example, a city-imposed covenant placed on
                               Raytheon at the time of contract negotiations requires it to offer labor rates
                               for most Navy work that are 15 percent lower than Navy-operated facility
                               rates over the 5-year contract period. However, after that time, the rates
                               will not be restricted and will be renegotiated, thus raising uncertainty
                               about future rates. A Defense Contract Management Command analysis
                               confirmed that Raytheon was performing work under the primary Navy



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contract in 1997 at labor hour rates that were, on the average, 15 percent
less than the prevailing Navy rates at the time.

Facing decreasing workloads and increased costs, United Defense in
Louisville reduced its workforce and facility space by returning unneeded
buildings to the local base redevelopment authority and reengineering
maintenance processes. United Defense officials now believe their labor
hour rates are comparable to rates used by the Navy when it operated the
facility; however, without a baseline of historical government costs, we
could not independently validate this assertion. Raytheon in Louisville has
reengineered its facility layout and manufacturing and maintenance
practices to improve cost efficiencies, and Navy contractors at Louisville
and Indianapolis have consolidated some workload operations at the
privatized facilities by bringing in work from their other facilities to reduce
overall contractor infrastructure and costs. For example, United Defense
has relocated assembly work from its Fridley, Minnesota, site to Louisville,
thereby reducing space requirements at Fridley by over 50 percent and
reducing hourly labor rates by as much as $14. However, we did not assess
the impact of the transfers on the cost of the work remaining at Fridley.
Raytheon in Louisville has brought in production work for the Phalanx and
Rolling Airframe Missile launcher from its plant in Tucson, Arizona, thereby
allowing it to close its Lewisville, Texas, facility. Raytheon has also
transferred its Long Beach facility depot-level repairs and spares
manufacturing to Indianapolis. This restructuring contributed, along with
other transfers, to closing Raytheon’s Long Beach facility.

Navy customers of the Louisville and Indianapolis privatizations-in-place
told us they were satisfied with the timeliness, quality, and cost of the work
performed to date. Customers said, for example, that United Defense and
Raytheon in Louisville have either maintained or improved quality and
timeliness since privatization through changes made to the older Navy
work processes and better customer service. They also said that work
performed by Raytheon at Indianapolis was as good as that provided by the
Navy before privatization. None of the customers we spoke with planned to
transfer work to other locations. In Louisville, for example, Navy officials
told us they would prefer not to relocate the current workload to any other
facility, government or private sector, given the quality of work and the
expertise developed over the years. In fact, the Navy gun work customers
of United Defense see no reasonable alternative for overhauling their naval
guns outside the Louisville facility. As such, they plan to continue sending
work to Louisville in the future, as do the Raytheon customers.




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Privatization-in-Place   Privatization-in-place has not optimized reductions in excess capacity in
                         DOD’s own infrastructure, but it can allow for some cost savings in the
Does Not Optimize        overall public-private defense infrastructure supported by the defense
Excess Capacity          budget. Reducing DOD’s infrastructure was a major BRAC objective, but
                         information provided by DOD, as well as our prior reports, shows that
Reductions in DOD’s      excess capacity still exists in the industrial infrastructure, despite four
Own Infrastructure       rounds of BRAC. Rather than closing facilities and transferring defense
                         work to other underutilized DOD facilities to reduce excess capacity,
                         privatization-in-place causes workload to remain at those sites. As a result,
                         DOD continues to support the costs associated with maintaining that
                         facility infrastructure through the rates charged by the contractors for the
                         workload performed. If, instead of privatization, these facility workloads
                         had been relocated to other underutilized DOD facilities, DOD’s excess
                         capacity and infrastructure costs would have been more optimally reduced.
                         In effect, by increasing the workload and utilizing capacity at underutilized
                         government facilities, facility overhead costs can be spread over a larger
                         workload base and, as a result, overall costs for repairs on specific units
                         could be reduced and customer prices lowered.

                         Although privatization-in-place has not addressed DOD’s excess capacity
                         problem, contractors at the privatized facilities we visited told us they have
                         either reduced or are trying to reduce their costs, as noted previously,
                         through improved operating efficiencies and reductions in their corporate
                         infrastructure. However, to the extent that DOD maintains underutilized
                         facilities in its industrial infrastructure, it is difficult to assess whether
                         privatization-in-place offers a cost-effective alternative to relocating
                         workload to other underutilized DOD locations. Privatization-in-place
                         would only be a more cost-effective alternative if the contractors can
                         achieve savings that are significant enough to offset the savings lost by not
                         relocating workloads to DOD’s underutilized facilities.



Conclusions              Latest estimates of costs at one privatized facility were about 16 percent
                         higher than costs of the same activities when operated as an Air Force
                         facility. However, without an adequate historical baseline and accounting
                         of government operating costs, the Department of Defense lacks the means
                         to compare current costs of operations with the former government-run
                         operations. Faced with decreasing workloads, it will be increasingly
                         difficult to hold down costs of workloads performed at the Department’s
                         three privatized facilities. Contractors performing work at these facilities
                         are taking steps to reduce costs and improve efficiencies. The Department



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                      needs to examine these initiatives in the context of the entire defense
                      industrial infrastructure rather than in isolation as individualized
                      operations. As a general rule, privatization-in-place does not optimize
                      reductions in excess capacity in government-owned facilities, and it
                      reduces the potential to achieve greater economies in overhead costs. The
                      Department’s efforts to eliminate facilities it owns by transferring them to
                      the private sector does not appear to be cost-effective at one facility, but
                      insufficient data were available to fully assess the cost-effectiveness of the
                      other two locations relative to former government operations. Moreover,
                      since the Department is continuing to pay for the use of these facilities
                      through contractual arrangements, they have not optimized reductions in
                      excess capacity but rather have shifted it to the private sector. Thus,
                      through privatization-in-place actions, the goal of eliminating excess
                      capacity may be realized more in form than in substance.



Recommendations       Should DOD consider privatization-in-place in the future, we recommend
                      that the Secretary of Defense require the services to (1) consider the
                      overall cost-effectiveness of this approach in reducing operating costs and
                      excess capacity in the combined public and private sectors supported by
                      the defense budget; (2) retain an adequate baseline of historical
                      government costs, preferably on a per-unit basis, to assess the
                      cost-effectiveness of privatization-in-place; and (3) periodically reassess
                      the cost-effectiveness of prior privatization-in-place initiatives, in light of
                      excess capacity in other private sector and DOD facilities and continuing
                      declines in military workloads.



Agency Comments and   DOD provided written comments on a draft of this report. These comments
                      are included in their entirety in appendix II. DOD disagreed with our
Our Evaluation        recommendations, stating that they were unreasonable to implement. In
                      light of DOD’s comments, we made changes to the report to clarify our
                      position and have revised our recommendations to reflect these changes.
                      We continue to believe that our recommended actions can be accomplished
                      and that they are essential to assessing the cost-effectiveness of
                      privatization-in-place.

                      DOD disagreed with our recommendation regarding the assessment of the
                      cost impact of future privatization-in-place actions on DOD and
                      private-sector defense-supported infrastructure, stating that it would be
                      unreasonable to estimate operating cost reductions for both the public and



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private sectors. DOD also stated that such an assessment would be
sensitive to many factors outside the control of DOD. While we agree that
such an assessment would be difficult to complete, especially for the
private sector portion, some assessment needs to be made, even if it
includes rough order of magnitude estimates, for DOD to be in a position to
assess the cost-effectiveness of any such proposal. Such an assessment
should, for example, consider the effects of consolidating complimentary
workloads at potential privatized locations from other facilities (and
thereby reducing or eliminating infrastructure associated with those
facilities), either in DOD or in the private sector, to achieve the best
possible efficiencies. We continue to believe that such an assessment,
completed prior to implementing privatization-in-place, is essential if DOD
is to assure itself that privatization-in-place is a cost-effective option to take
to reduce DOD infrastructure and costs.

DOD also disagreed with our recommendation regarding the retention of
historical baseline government cost data for subsequent use in analyzing
the cost-effectiveness of privatization-in-place actions. In disagreeing, DOD
stated that it was unreasonable to retain such historical cost data because
it would necessitate a change in accounting procedures at most DOD
activities and place an unnecessary burden on these activities. While we
agree that some financial reporting changes may be necessary and
additional record keeping may be required, we do not believe
implementation of this recommendation need be unnecessarily
burdensome or unreasonable given the Air Force’s ability to collect such
cost data for its cost analyses of the Newark facility.

We further believe it is important to develop and retain such a performance
baseline of costs, to the extent practical, to be able to conduct future cost
comparison analyses, as well as effectively manage costs of current
operations. In fact, such accumulation of historical cost information is
already required by financial accounting standards. Specifically, Statement
of Federal Financial Accounting Standards No. 4 requires agencies to
accumulate and report the costs of its activities on a regular basis for
management information purposes. The standard also states that
measuring cost is an integral part of measuring performance in terms of
improving efficiency and cost-effectiveness. Without an adequate baseline
of historical operating costs, DOD is not in a position to judge the
cost-effectiveness of any potential privatization-in-place actions, including
anticipated infrastructure efficiencies achieved by these actions.
Therefore, any changes in accounting procedures necessary to improve




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DOD’s ability to identify costs associated with work performed at its
individual activities should be considered.

Finally, we have added a recommendation to provide for a reassessment of
prior privatization-in-place actions, in light of declining workloads in those
facilities and continued excess capacity in both the public and private
sectors.

In addition to comments regarding our recommendations, DOD provided
technical comments regarding specific findings presented in our draft
report. Our evaluation of these comments is provided below.

DOD disagreed with our statement that privatization-in-place does not
reduce excess capacity. We have modified our report and
recommendations to better reflect our view of the impact of
privatization-in-place on the total defense industrial infrastructure,
including that in both the public and private sector. We believe that
privatization-in-place may reduce excess capacity in DOD’s infrastructure
to a certain extent. However, we continue to believe that it does not
maximize potential efficiencies that could be gained because the workload
remains at the privatized facility instead of being transferred to other DOD
facilities to further reduce excess capacity. Furthermore, the privatization
sites may subsequently acquire additional workloads that could have gone
to other underutilized DOD facilities, thus missing an opportunity to
further reduce excess capacity. At the same time, some efficiencies may be
gained when privatization-in-place options are used to consolidate work
from other contractor-operated locations.

DOD stated that privatization-in-place is a BRAC implementation issue, not
a BRAC selection issue. We agree that privatization-in-place is a matter of
implementation and that initial base closure decisions are made on the
basis of excess infrastructure and military value considerations. However,
costs to close and return on investment are also factors considered by DOD
in its BRAC decision making. An expected outcome of closure decisions is
reduced infrastructure operating costs. Before implementing any potential
future privatizations-in-place, we continue to believe it would be prudent
for DOD to assure that this option is cost-effective and consistent with the
overall base closure concept of reducing costly excess infrastructure
capacity.




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Scope and     To determine how contractors are responding to decreased workloads at
              the former DOD facilities in Newark, Ohio; Indianapolis, Indiana; and
Methodology   Louisville, Kentucky, we reviewed documents and interviewed officials
              from both the government and private sectors. Our DOD contacts included
              those organizations responsible for overseeing the privatization initiatives
              and program managers who programmed defense workloads for the
              facilities. Through those contacts, we sought to gain a sense of the progress
              being made by the privatization contractors and their satisfaction level with
              the cost, timeliness, and quality of the work being performed. We also
              visited the privatization-in-place sites, toured the facilities, and discussed
              operational status and future plans with cognizant contractor officials. We
              contacted city and local redevelopment authority officials at the various
              privatization locations to obtain their perspective on the privatized
              operations.

              To examine the cost-effectiveness of the privatization-in-place actions and
              their impact on DOD’s industrial infrastructure, we reviewed prior work on
              the Louisville, Kentucky, and Newark, Ohio, operations as well as available
              DOD workload relocation analyses related to the closures of the military
              facilities at the three locations. We did not examine the cost-effectiveness
              of the privatizations as compared to the option of closing the facilities and
              transferring the workloads to other locations, as envisioned under one
              BRAC option. Further, we did not examine other issues associated with
              privatization-in-place such as preservation of jobs in the local communities
              and retention of technological skills needed to provide services, such as
              depot maintenance, to DOD. Rather, we limited our review to comparisons
              between costs of the privatizations-in-place and those of the former
              government-run operations. In that regard, we reviewed July 1997 and
              November 1998 Air Force cost analyses that compared privatized
              operational costs with those of former Air Force operations at Newark,
              Ohio. The latter study was an update to the July 1997 study that we had
              reviewed in our prior report of the Air Force privatization initiative.12 In
              analyzing the most recent cost study, we compared study results with that
              of the previous work and used DOD’s guide for making cost comparisons
              between public depots and private contractors to ensure that the Air Force
              study included all applicable cost elements and included any adjustments.
              We discussed the study results with cognizant Air Force and contractor


              12
               Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance System Depot
              Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).




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officials. We also discussed factors that affect the cost-effectiveness of
privatization-in-place with Air Force and contractor officials.

For the Navy privatizations at Indianapolis, Indiana, and Louisville,
Kentucky, we attempted to identify comparable DOD cost comparison
analyses of government versus privatized operations, but found none. We
also collected cost data from contractor and Navy sources to make such
comparisons. However, we were unable to conduct these analyses because
of (1) the absence of sufficient, detailed historical Navy baseline data for
operations at the closing military facilities at those sites and
(2) Navy-directed revisions in maintenance practices for certain key
weapon systems and changes in product mix. While rigorous cost
comparisons were not possible, we reviewed selected contractors’ costs
and discussed business improvements and restructuring initiatives to bring
in additional work to the privatization sites with Navy and contractor
officials. We did not attempt to identify the impact on other government
contracts as a result of workload transfers from other contractor facilities.
In addition, we contacted Defense Contract Management Command
officials at these sites to obtain contractor-related cost information and
their views about contractors’ performance.

In conducting our work, we contacted officials from the following
organizations:

•   Office of the Secretary of Defense in Washington, D.C.;
•   Air Force Materiel Command, Dayton, Ohio;
•   Air Force Metrology and Calibration Program Office, Newark, Ohio;
•   Naval Sea Systems Command and Naval Surface Warfare Center
    Headquarters, Arlington, Virginia;
•   Naval Air Systems Command and Naval Air Warfare Center
    Headquarters, Patuxent River, Maryland;
•   Defense Contract Management Command offices at Newark, Ohio;
    Louisville, Kentucky; and Indianapolis, Indiana;
•   Raytheon Systems Company, Indianapolis, Indiana;
•   Raytheon Systems Company and United Defense Limited Partnership,
    Louisville, Kentucky;
•   Boeing North American, Inc., and Wyle Laboratories, Inc., Boeing
    Guidance Repair Center, Newark, Ohio;
•   Louisville/Jefferson County Redevelopment Authority, Louisville,
    Kentucky;




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• Indianapolis Economic Development Corporation, Indianapolis,
  Indiana; and
• Heath-Newark-Licking County Port Authority, Newark, Ohio.

We conducted our review from October 1998 through September 1999 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to the Honorable Jacob Lew, Director,
Office of Management and Budget; the Honorable William S. Cohen,
Secretary of Defense; the Honorable F. Whitten Peters, Secretary of the Air
Force; the Honorable Richard Danzig, Secretary of the Navy; the Honorable
Louis Caldera, Secretary of the Army; General James L. Jones,
Commandant of the Marine Corps; and other interested parties. We will
make copies available to others upon request.

GAO points of contact concerning this report and other key contributors
are listed in appendix III.

Sincerely yours,




David R. Warren, Director
Defense Management Issues




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Page 23   GAO/NSIAD-00-23 Military Base Closures
Appendix I

Privatization-in-Place Initiatives                                                                           AA
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                The following sections provide additional information on DOD
                privatization-in-place initiatives at Newark, Ohio; Louisville, Kentucky; and
                Indianapolis, Indiana.



Newark, Ohio    The announcement to close the Newark, Ohio, facility as an Air Force
                managed operation was made in 1993, with workload turnover in October
                1996 to two contractors—Rockwell International and Wyle Laboratories.
                While the Air Force retained most of its existing workload at the privatized
                facility, the Navy moved most and the Army moved all of their Newark
                workloads to other sites. For the work remaining at Newark, Rockwell
                International was awarded a contract for depot repairs of aircraft inertial
                navigation systems and missile guidance systems and Wyle Laboratories
                was awarded a contract for operating the primary standards laboratory and
                providing calibration services. Boeing North American, Inc., has since
                taken over the Rockwell division responsible for work at Newark. The
                facility, now called the Boeing Guidance Repair Center, has been turned
                over by the Air Force to the Heath-Newark-Licking County Port Authority,
                which leases it to Boeing.

                The Port Authority is the Ohio-chartered local redevelopment authority
                formed to accept the conveyance of the property from the Air Force. It is
                responsible for managing the property and for economic redevelopment.
                The lease represents about 88 percent of the old Newark facility space
                occupied by the contractors. The lease provides that Boeing pay the Port
                Authority for appropriate administrative operations and staffing, buildings
                and ground maintenance, and reimbursable charges attributable to on-site
                fire protection services, some utilities, insurance, and taxes. A portion of
                the lease is retained in a capital equipment reserve fund to pay for future
                major facility and equipment repairs or replacements. Wyle Laboratories, in
                turn, subleases about 17 percent of the facility space from Boeing. It pays a
                pro rata share of the lease and for other Boeing provided services,
                including electricity charges, protective services, and building
                maintenance, based on the square footage it and the co-located offices of
                the Air Force Metrology and Calibration program1 occupy.



                1
                 The Air Force only privatized the standards lab operations, technical order management,
                and certain calibration workloads. The Air Force Metrology and Calibration office retained
                responsibilities for program management, contract oversight, certification of Air Force
                Primary Measurement Equipment Labs, and standards procurement.




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Until recently, Boeing has been operating under an indefinite
delivery/indefinite quantity, cost plus award fee contract that was originally
valued at $264 million. The performance term consisted of the base year
(9-month transition period) and four 1-year options. In October 1999, the
Air Force renegotiated and awarded a sole-source 15-year contract (5-year
basic term and two 5-year options) with Boeing. As a cost plus award fee
contract, it features incentive provisions for reducing costs and developing
new business. Also, Boeing is in the early stages of implementing several
management changes to promote manufacturing efficiencies to include
improved process monitoring.

Boeing and government officials believe that future workload requirements
at its facility will decline for repairing aircraft and missile items, thus
increasing the overhead rate. Aircraft repair requirements are expected to
decline by about 6 percent in 2000 with further declines expected through
year 2014. Officials attribute these expected declines to normal system
retirements and attrition, increasing reliability of newer and future weapon
systems, and increasing reliance on original equipment manufacturers for
logistics support. Although missile repair requirements were similarly
expected to decline with strategic missiles retirements, the life expectancy
for those missiles has actually increased, with the resulting missile
workload remaining about the same.

To replace declining workloads, retain employment levels, and maintain
operating efficiencies, Boeing is actively pursuing future work from other
Boeing operations, manufacturing partners, DOD programs, and
commercial sources to offset its declining workload. However, it has not
been very successful to date. Moreover, Boeing expects very little
commercial work—its future nondefense workload is not expected to
exceed 5 percent of its total work requirements within the new contract
period. If new work is not added to replace declining requirements, repair
prices could increase due to overhead.

Wyle Laboratories workload with the Air Force has increased somewhat
since contract inception, but the company has had similar difficulties in
acquiring new commercial customers. The Wyle Laboratories’ contract is
similar to the Boeing contract. It is an indefinite delivery/indefinite
quantity, cost plus award fee contract consisting of a base year and four
1-year options, ending in September 2000. The contract was originally
valued at $19 million and the current estimate at completion is $49 million.
A Wyle Laboratories’ official attributed the cost increase to increased
calibration workloads and higher than expected leasing and overhead



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                       Privatization-in-Place Initiatives




                       costs. Regarding potential nondefense work, Wyle Laboratories currently
                       performs very little commercial work, and it has no immediate prospects
                       for any major new business.

                       Prior to privatization, the Newark facility employed about 2,500 personnel.
                       When closure was announced in 1993, the total workforce declined to
                       about 1,500; and, by the official closure date in October 1996, the workforce
                       had declined further, to about 1,350. At start-up, Boeing employed about
                       800 and Wyle about 100; most workers were former government employees
                       at the Newark facility. About 130 government civilian and military remained
                       in the Air Force Metrology and Calibration Program Office.

                       Since privatization, Boeing’s workforce has decreased, with better matches
                       between personnel and workload requirements and associated small
                       reductions in workload. In October 1997, for example, 77 employees were
                       “reduced-in-force” due to reduced workload requirements forecasted for
                       fiscal year 1998. However, most workforce-related reductions have
                       occurred incrementally over time as a result of Boeing-instituted
                       production and personnel efficiencies. Thus, the Boeing workforce
                       currently numbers about 640.

                       In contrast, since privatization, Wyle Laboratories’ workforce and
                       workload, as well as that pertaining to the co-located Air Force Metrology
                       and Calibration Program Office, have increased and are expected to further
                       increase next year. At time of closure, about 80 government lab technicians
                       were hired by Wyle Laboratories to augment its staff working on primary
                       standards lab operations. The Wyle workforce has since grown to about
                       125, with added workloads attributable to increased demands for repairing
                       calibration equipment and revising technical orders. It is expected to
                       further increase its workforce to about 140 next year. Likewise, the Air
                       Force Metrology and Calibration Office expects to grow by 20 to 40
                       employees to accommodate the increased contract management and
                       standard measurement responsibilities associated with the increased
                       Wyle-related workload.



Louisville, Kentucky   The decision to close the Louisville facility was announced in 1995, with
                       workload turnover to two contractors (United Defense Limited Partnership
                       and Hughes Missile Systems Company) occurring in August 1996.
                       Raytheon, the current contractor, subsequently merged with Hughes and
                       took over its operations at Louisville. To implement the privatization, the
                       Navy set up a lease with the Louisville local redevelopment authority,



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Privatization-in-Place Initiatives




known as the Louisville/Jefferson County Redevelopment Authority, for
use of the facility until title of the property can be transferred to the
redevelopment authority. The lease requires no payments to the Navy and
provides for an initial 1-year term with four 1-year renewal options. Under
the agreement, the redevelopment authority assumes responsibility for
routine protection, repair, and maintenance at the site. The Navy assumes
all liability for environmental conditions existing at the time of turnover. An
application has been submitted to the Navy by the redevelopment authority
for acquisition of the property through an economic development
conveyance; it is currently pending.2

The redevelopment authority, in turn, leases out the property to the
contractors at a rate, which, according to community officials, is below
market value. However, the contractors are responsible for operations and
maintenance costs for the portion of the facility that they occupy. Any part
of the property not leased to the Navy’s two contractors or occupied by
Navy personnel can be leased to other commercial activities by the
redevelopment authority. In fact, 70,000 square feet, or 14 percent, of this
available space has been leased to three local commercial enterprises.

Work performed for the Navy at Louisville is done under cost reimbursable
type contracts by the two contractors—United Defense and Raytheon. The
contracts cover an initial base period from August 1996 through September
1996 with five 1-year options, taking them through fiscal year 2001. There
are also agreements that were put into place between the Navy contractors
and the local redevelopment authority as a part of their competitive
selection by the city of Louisville. These agreements include promises by
the contractors to use best efforts to expand their businesses, to hire
former government workers at wages equal to what they had earned with
the government, and to guarantee employment levels.

The Navy workload has been taken over by United Defense and Raytheon,
with some engineering support still being provided by a Navy detachment
and its support contractor remaining in place at the Louisville facility.3 This
detachment is working out of buildings still owned and maintained by the


2
 An economic development conveyance is a means by which a local redevelopment
authority may obtain property from DOD at no cost provided the property is to be used for
economic development and job creation purposes.
3
 A contractor, CACI Field Services, Inc., which employs about 60 employees at the
Louisville facility, provides technical support services to the Navy engineering detachment.




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Privatization-in-Place Initiatives




Navy. Once the Navy has turned over the facility to the local redevelopment
authority, the detachment will lease its space at no cost to the government.
United Defense is responsible primarily for production, overhaul and
maintenance support of naval guns. Raytheon mainly performs production,
overhauls, and component repair for the Phalanx close-in-air defense
system and the Rolling Airframe Missile launcher. United Defense and
Raytheon annual sales are about $35 million and $21 million, respectively.

The workload at Louisville has declined significantly from that prior to
privatization. Although workload had begun declining prior to
privatization, the workload after privatization was even lower than initially
estimated. According to United Defense officials, its share of the total
Louisville defense work had declined from about 1.3 million direct labor
hours in 1994 to 277,000 in 1998, a drop of almost 80 percent. Because of
the ongoing decline in work, United Defense only hired a total of
354 employees at the onset of privatization, a reduction of about 60 percent
from the prior level of 866 Navy employees. However, according to United
Defense officials, it initially expected the workload to be about
449,000 direct labor hours based on prior Navy projections. In response to
the lower workload, United Defense further reduced its workforce to
256 employees. Moreover, United Defense returned several buildings to the
local redevelopment authority, thereby reducing its facility infrastructure
by 40 percent, from about 1 million square feet to about 600,000 square feet.
United Defense also redesigned its existing space to allow for a more
efficient work process.

Beginning in fiscal year 1999, United Defense has transferred gun
production work from its Fridley, Minnesota, plant to Louisville. United
Defense projects that, as a result, its total workload at Louisville will
stabilize for the next few years. However, this assumes that a significant
amount of funding will continue to be provided over the next 2 years from
congressionally-designated increases to the Navy’s budget. For example,
MK-45 gun mount overhaul work, which comprises about 30 percent of
United Defense’s workload, has been funded in fiscal years 1998 and
1999 primarily through congressionally-designated additions to the Navy’s
budget. Further, Navy officials maintain that there is little, if any, funding
available for this work in the Navy’s budget for fiscal years 2000 and
beyond without additional funding from the Congress.

In addition to adding work to Louisville, the transfer from Fridley will
assist United Defense in reducing its infrastructure. Specifically, United
Defense officials assert that after transferring work from Fridley, United



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                        Privatization-in-Place Initiatives




                        Defense will reduce its Fridley space by over 1 million square feet, or
                        50 percent, and reduce its Fridley workforce by 285 people, or 17 percent.

                        Raytheon similarly has seen a 50-percent decrease in its maintenance
                        workload, going from about 250,000 thousand direct labor hours in 1994 to
                        about 128,000 thousand hours in 1998. However, the company has
                        transferred in its Phalanx and Rolling Airframe Missile launcher production
                        work from its facility in Tucson, Arizona. As a result of this added work,
                        Navy and Raytheon officials expect a net increase in Raytheon’s Louisville
                        workload. The consolidation of Phalanx and Rolling Airframe Missile
                        launcher work at Louisville has also allowed Raytheon to close its plant in
                        Lewisville, Texas, because of the space made available in Tucson.

                        While Raytheon has not reduced its on-site facility infrastructure, it has
                        updated its entire facility to accommodate the workload changes
                        associated with the new production work. Under Navy direction Raytheon
                        has also made improvements to the process for overhauling Phalanx
                        systems by adopting “condition-based maintenance.” Under this approach,
                        only parts that are not working are repaired or replaced as opposed to the
                        prior Navy process of replacing all parts whether working or not.
                        Conditioned-based maintenance has reportedly allowed Raytheon to keep
                        its overhaul costs down.



Indianapolis, Indiana   In 1995 the closure of the Indianapolis facility was announced, and on
                        January 6, 1997, the workload was transferred to the Navy’s contractor,
                        Hughes Technical Services Company. As is the case in Louisville, Raytheon
                        became the contractor after it merged with Hughes in December 1997. The
                        facility is currently under lease from the Navy to the city of Indianapolis for
                        $1 per year over a 10-year term with two 5-year renewal options. An
                        application for acquisition of the facility through economic development
                        conveyance has been submitted by the city and is currently pending before
                        the Navy. The redevelopment authority is subleasing the facility to
                        Raytheon for $1 per year with a lease term of 20 years. Under this lease,
                        Raytheon is responsible for the operation and maintenance costs for the
                        property.

                        Similar to the situation in Louisville, there are also agreements in place
                        between the city of Indianapolis and Raytheon for such things as hiring
                        former government workers at wages equal to those before privatization
                        and guaranteeing employment levels. Indianapolis also was able to obtain
                        other commitments from Hughes (now Raytheon), including such promises



                        Page 29                                    GAO/NSIAD-00-23 Military Base Closures
Appendix I
Privatization-in-Place Initiatives




as reducing product costs to Navy customers, transferring related lines of
work into Indianapolis from other locations, and expanding commercial
revenues. However, according to Raytheon officials, the agreement to
expand commercial revenues related to a specific product line managed by
Hughes that was not acquired by Raytheon after the merger. As such,
Raytheon officials at Indianapolis do not anticipate being able to fulfill this
promise made by Hughes, and this agreement provision has since been
removed by the city of Indianapolis.

Work performed by Raytheon is done for the Navy through a 1-year
indefinite delivery contract with four 1-year renewal options. The 5-year
contract period runs through December 2001, at which time Raytheon will
compete with other private companies for the Navy’s business. Raytheon’s
annual sales at Indianapolis are about $180 to $200 million.

The volume of work at Indianapolis, as measured by direct labor hours, has
dropped 30 percent since privatization, prompting Raytheon to lay off
about 330 employees in mid-1998. According to Navy and Raytheon
officials, the reductions in workload occurred primarily because of
decreased Navy requirements and the transfer of certain inherently
governmental functions to other Navy facilities. However, Raytheon has
added new work to Indianapolis, primarily for foreign customers. For
example, it has brought in armored tank modification work for Portugal,
accounting for about $31 million in sales. Additionally, Raytheon
transferred other DOD work for depot repairs and spares manufacture to
Indianapolis from its plant in Long Beach, California. This internal
restructuring initiative equated to consolidating about 120,000 square feet
from its Long Beach facility at Indianapolis. Raytheon has since closed the
Long Beach facility. As a result of Raytheon’s efforts to bring in new work
to Indianapolis, the older Navy work that existed prior to privatization now
only makes up about 65 percent of Raytheon’s total business at
Indianapolis.

Work performed by Raytheon is done for the Navy through a 1-year
indefinite delivery contract with four 1-year renewal options. The 5-year
contract period runs through December 2001, at which time Raytheon will
compete with other private companies for the Navy’s business. Raytheon’s
annual sales at Indianapolis are about $180 to $200 million.

The volume of work at Indianapolis, as measured by direct labor hours, has
dropped 30 percent since privatization, prompting Raytheon to lay off
about 330 employees in mid-1998. According to Navy and Raytheon



Page 30                                    GAO/NSIAD-00-23 Military Base Closures
Appendix I
Privatization-in-Place Initiatives




officials, the reductions in workload occurred primarily because of
decreased Navy requirements and the transfer of certain inherently
governmental functions to other Navy facilities. However, Raytheon has
added new work to Indianapolis, primarily for foreign customers. For
example, it has brought in armored tank modificaiton work for Portugal,
accouting for about $31 million in sales. Additionally, Raytheon transferred
other DOD work for depot repairs and spares manufacture to Indianpolis
from its plant in Long Beach, California. This internal restructing initiative
equated to consolidating about 120,000 square feet from its Long Beach
facility at Indianapolis. Raytheon has since closed the Long Beach facility.
As a result of Raytheon’s efforts to bring in new work to Indianpolis, the
older Navy work that existed prior to privatization now only makes up
about 65 percent of Raytheon’s total business at Indianpolis.




Page 31                                    GAO/NSIAD-00-23 Military Base Closures
Appendix II

Comments From the Department of Defense                                        Appendx
                                                                                     iI




Note: GAO comments
supplementing those in the
report text appear at the end
of this appendix.




     See comment 1.




                                Page 32   GAO/NSIAD-00-23 Military Base Closures
                 Appendix II
                 Comments From the Department of Defense




See comment 1.




Now on p. 17.




Now on p. 17.




                 Page 33                                   GAO/NSIAD-00-23 Military Base Closures
                 Appendix II
                 Comments From the Department of Defense




See comment 1.




                 Page 34                                   GAO/NSIAD-00-23 Military Base Closures
              Appendix II
              Comments From the Department of Defense




              The following is GAO’s comment on the Department of Defense’s letter
              dated November 3, 1999.



GAO Comment   1. We have revised the report title to more accurately reflect the report’s
              primary point that we could not perform cost-effectiveness analyses of all
              privatization-in-place initiatives due to the lack of data.




              Page 35                                   GAO/NSIAD-00-23 Military Base Closures
Appendix III

GAO Contacts and Staff Acknowledgments                                                         Appendx
                                                                                                     Ii




GAO Contacts      Barry Holman (202) 512-8412
                  Julia Denman (202) 512-8412



Acknowledgments   In addition to those named above, James Reifsynder, Bruce Fairbairn, Joe
                  Faley, and Cary Russell made key contribitions to this report.




                  Page 36                                 GAO/NSIAD-00-23 Military Base Closures
Related GAO Products


             Defense Depot Maintenance: Use of Public-Private Partnering
             Arrangements (GAO/NSIAD-98-91, May 7, 1998).

             Inventory Management: DOD Can Build on Progress by Using Best
             Practices for Reparable Parts (GAO/NSIAD-98-97, Feb. 27, 1998).

             Air Force Privatization-in-Place: Analysis of Aircraft and Missile Guidance
             System Depot Repair Costs (GAO/NSIAD-98-35, Dec. 22, 1997).

             Navy Depot Maintenance: Privatizing Louisville Operations in Place Is Not
             Cost-Effective (GAO/NSIAD-97-52, July 31, 1997).

             Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in
             Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111,
             Mar. 18, 1997) and (GAO/T-NSIAD-97-112, Apr. 10, 1997).

             Privatization: Lessons Learned by State and Local Governments
             (GAO/GGD-97-48, Mar. 14, 1997).

             Defense Outsourcing: Challenges Facing DOD as It Attempts to Save
             Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.12, 1997).

             High Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).

             Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly
             While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).

             Army Depot Maintenance: Privatization Without Further Downsizing
             Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).

             Navy Depot Maintenance: Cost And Savings Issues Related to Privatization-
             in-Place at the Louisville, Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18,
             1996).

             Defense Depot Maintenance: Privatization and the Debate Over the Public-
             Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/NSIAD-96-148,
             Apr. 17, 1996).

             Closing Maintenance Depots: Savings, Personnel, and Workload
             Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996).




             Page 37                                   GAO/NSIAD-00-23 Military Base Closures
                   Related GAO Products




                   Aerospace Guidance and Metrology Center: Cost Growth and Other
                   Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994).




(709342)   Leter   Page 38                                 GAO/NSIAD-00-23 Military Base Closures
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