oversight

Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot Maintenance Program

Published by the Government Accountability Office on 1997-05-01.

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

                     United States General Accounting Office

GAO                  Testimony
                     Before the Subcommittee on Readiness, Committee on
                     Armed Services, U.S. Senate




For Release
on Delivery
Expected at
                     DEFENSE DEPOT
10:00 a.m., EDT
Thursday,            MAINTENANCE
May 1, 1997



                     Uncertainties and
                     Challenges DOD Faces in
                     Restructuring Its Depot
                     Maintenance Program
                     Statement of David R. Warren, Director, Defense
                     Management Issues, National Security and International
                     Affairs Division




GAO/T-NSIAD-97-112
                   Mr. Chairman and Members of the Subcommittee:

                   We are pleased to be here today to discuss the Department of Defense’s
                   (DOD) (1) plans for eliminating costly depot maintenance excess capacity,
                   (2) progress in finalizing a new depot workload allocation policy,
                   (3) current approach for allocating maintenance workloads for new and
                   existing systems, and (4) estimates that billions can be saved by
                   outsourcing depot maintenance. Before getting into the details of our
                   statement we would like to provide a brief summary of the major points
                   covered in our testimony.


                   It is important to note that the waste and inefficiency in DOD’s logistics
Results in Brief   system, including the management of its $13 billion depot maintenance
                   program, is one of the key reasons we identified DOD’s infrastructure
                   activities as 1 of 24 high-risk areas within the federal government.1 There
                   is excess capacity in the industrial repair and overhaul facilities of the
                   public and private sectors, which contributes significantly to their
                   inefficiency. Consequently, how maintenance workloads are ultimately
                   allocated to the two systems is a topic of great interest to the Congress,
                   DOD, and the affected public and private sector activities.


                   Costly excess capacity totaling about 50 percent remains in the DOD depot
                   system, which actually comprises four systems.2 As the services seek to
                   privatize a greater share of their depot maintenance, the cost of
                   maintaining excess capacity will increase unless additional capacity
                   reductions are made. The Navy has made the greatest progress in dealing
                   with this through consolidation and expedited closures of facilities
                   affected by the base closure and realignment (BRAC) process. The Army,
                   and even more so the Air Force have been less successful. However, all
                   three military departments to some extent are implementing actions that
                   will privatize-in-place costly excess capacity. Our work shows the
                   following:



                   1
                     Defense Infrastructure (GAO/HR-97-7, Feb. 1997). In 1990, GAO began a special effort to review and
                   report on the federal program areas its work identified as high risk because of vulnerabilities to waste,
                   fraud, abuse, and mismanagement.
                   2
                    DOD Directive 5100.1,”Functions of the Department of Defense and Its Major Components,” assigns
                   the Army, Navy, Air Force, and Marine Corps, under their respective Secretaries, the responsibility for
                   “providing logistics support for service forces, including procurement, distribution, supply, equipment
                   and maintenance, unless otherwise directed by the Secretary of Defense.” To meet the responsibility to
                   maintain its equipment, each service operates a depot maintenance system, with the Navy system
                   including three different types, and the Marine Corps having its own system.



                   Page 1                                                                           GAO/T-NSIAD-97-112
•   Privatization-in-place at the Sacramento and San Antonio Air Force depots
    will privatize rather than eliminate excess capacity and could be about
    $182 million per year more expensive than redistributing that workload to
    other underutilized Air Force depots. We estimate the annual savings from
    transferring the work would offset the one-time transfer costs in about
    2 years.
•   The cost of operating the recently privatized-in-place Aerospace Guidance
    and Metrology Center in Newark, Ohio, now called the Boeing Guidance
    Repair Center (BGRC), will likely cost $13 million to $23 million more
    annually to operate than before privatization—an 18- to 31-percent
    increase.
•   As a result of the Navy’s decisions to privatize-in-place, the Naval Surface
    Warfare Center workloads at Louisville, Kentucky, operational costs will
    be about $59 million more annually than redistributing the workloads to
    other underutilized Navy industrial facilities. We estimate the annual
    savings from transferring the work would offset the one-time transfer
    costs in about 4 years.

    Moving next to DOD’s plans for outsourcing depot maintenance, our work
    shows the plans and policies are still evolving. Last year, the Congress
    received and ultimately rejected DOD’s proposed policy regarding
    depot-level maintenance and repair. Provisions in the policy were
    predicated on relief from the existing statutes that influence depot
    workload allocations between the public and private sectors. These
    provisions include 10 U.S.C. 2464, which prohibits the use of more than
    40 percent of the funds made available in a given year for depot-level
    maintenance for private sector performance and 10 U.S.C. 2469, which
    provides that DOD-performed depot maintenance and repair workloads
    valued at not less than $3 million cannot be changed to performance by
    contractors without the use of competitive procedures among public and
    private sector entities. Some changes have been made based on
    congressional concerns about certain aspects of the policy report, but DOD
    has not finalized its new policy to address all of these concerns. For
    example, DOD has reinstituted its public-private competition program and
    states that it intends to use competitive procedures before outsourcing
    depot maintenance workloads valued at $3 million or more. However, core
    capability3 requirements have not yet been quantified. Moreover, no time
    frame has been established for finalizing key draft depot maintenance
    policy letters issued in December 1996 and January 1997.

    3
     Core depot maintenance capabilities are to be established to meet essential wartime demands,
    promote competition, and sustain institutional expertise. These capability requirements shape the
    minimum amount of organic depot facilities, equipment, and personnel needed to maintain a ready and
    controlled source of technical competence.



    Page 2                                                                      GAO/T-NSIAD-97-112
    Even though a new depot maintenance policy has not been finalized,
    operational decisions soon have to be made regarding whether new and
    existing systems will be maintained in the public or private sectors. Our
    ongoing work shows that for both existing and new systems, assessments
    are being made to determine what portion of the current workload could
    be outsourced with acceptable risk. The absence of clear policy on how to
    proceed in this area has caused some delays in choosing the maintenance
    sources and raised some concerns about whether the most cost-effective
    strategies are being selected. For example:

•   Air Force workload and personnel moves associated with the Sacramento
    and San Antonio depots are undecided. If there is no relief from the
    legislative requirement to have 60 percent of the depot maintenance work
    done in the public sector, the Air Force will not be able to
    privatize-in-place all of the depot maintenance workload in these facilities,
    which were recommended for closure during the 1995 BRAC process. The
    Air Force believes it can privatize all the Sacramento workloads and the
    San Antonio C5 cargo aircraft workload, but not all of San Antonio’s
    engine workload, unless it makes other adjustments to its current depot
    maintenance workload mix.
•   Program officials for the C-17, F-22, and F/A-18 E/F aircraft told us that
    they are delaying final support decisions partially because of the uncertain
    status of internal DOD core policies and the potential for obtaining relief
    from legislation regarding the workload mix between the public and
    private sectors.

    The last area we will comment on relates to our views on the accuracy of
    savings estimates tied to the outsourcing of depot maintenance. DOD is
    facing large shortfalls in its modernization accounts and plans to reduce
    costs and generate savings for modernization through the outsourcing of
    support activities, such as depot maintenance. DOD’s projected savings are
    based on estimates cited by the Commission on Roles and Missions (CORM)
    and the Defense Science Board (DSB). The CORM and DSB maintain that
    through competition in the private sector, depot maintenance costs can be
    reduced by 20 to 40 percent. We believe that in some cases outsourcing
    can reduce maintenance costs, but not to the extent being estimated by
    the CORM and DSB. Our past and present work in this area has demonstrated
    that:

•   The assumptions were based on projected savings for competitions
    involving base operations support activities such as stocking shelves,
    operating motor pools, and cutting grass—activities which require low



    Page 3                                                     GAO/T-NSIAD-97-112
                 skill levels and little capital investment and involve simple tasks that
                 should be readily characterized in a statement of work where performance
                 is easily measurable. Further, large capital investments and highly skilled
                 personnel are required to do depot maintenance work and cost control
                 performance monitoring is complex—characteristics that generally
                 increase the risk of contracting out.
             •   Savings projections were rarely validated and when they were audited
                 generally were less than projected.
             •   The commercial activities on which competition savings were projected,
                 were conducted in a highly competitive environment, while 91 percent of
                 the nonship depot maintenance contracts awarded in fiscal years 1996 and
                 early 1997 were awarded noncompetitively.

                 In conclusion, the inefficient operation of depot maintenance activities
                 results in a reduction of the military services’ purchasing power through
                 their operations and maintenance. Stated another way, more operations
                 and maintenance funds will be required to perform the same level of
                 maintenance. This situation makes deciding the future of the DOD depot
                 maintenance system more difficult. Depot maintenance privatization
                 should be approached carefully, allowing for evaluation of economic,
                 readiness, and statutory requirements that surround individual workloads.
                 If not effectively managed, privatizing depot maintenance activities,
                 including the downsizing of the remaining DOD depot infrastructure, could
                 exacerbate existing capacity problems and the inefficiencies inherent in
                 underutilization of depot maintenance capacity. DOD needs to provide the
                 Congress with a plan that clearly defines how it will deal with this set of
                 complex issues.


                 Depot maintenance is a key part of the total DOD logistics system that
Background       supports millions of equipment items, over 52,000 combat vehicles, 351
                 ships, and over 17,000 aircraft. Depot maintenance is a vast undertaking
                 that requires extensive shop facilities, specialized equipment, and highly
                 skilled technical and engineering personnel to perform major overhauls of
                 weapon systems and equipment, to completely rebuild parts and end
                 items, to modify systems and equipment by applying new or improved
                 components, to manufacture parts unavailable from the private sector, and
                 to program the software that is an integral part of today’s complex weapon
                 systems. This work is done in both military depots and the private sector.
                 DOD facilities and equipment are valued at over $50 billion. A large but
                 unknown amount of government-owned depot plant equipment is used by
                 private contractors—many of them original equipment manufacturers of



                 Page 4                                                    GAO/T-NSIAD-97-112
                         weapons or major systems and components. Appendix I contains the
                         history of the DOD depot maintenance system. Appendix II provides
                         summary information on our recent prior reports regarding DOD’s depot
                         maintenance program.

                         DOD spends about $13 billion—5 percent of its $250 billion fiscal year 1997
                         budget—on depot maintenance activities. Over $1 billion of this amount is
                         procurement funding (rather than operation and maintenance funding) for
                         contractor logistics support, interim contractor support, and some
                         software maintenance.


Workload and Personnel   With the end of the Cold War and reduction in new defense procurement,
Reduced Since the Cold   commercial contractors would like more of the depot maintenance
War Ended                business. Other factors contribute toward a declining workload base,
                         which must be shared among all potential sources of repair—both public
                         and private. These factors include: (1) a reduction in the number of
                         systems and equipment that need to be repaired and overhauled;
                         (2) efforts by some components to do more repairs in field-level
                         maintenance activities; and (3) the increased reliability, maintainability,
                         and durability of some systems and equipment. Further, the already
                         controversial debate is heating up over how various depot maintenance
                         workloads should be allocated among the military depots, original
                         equipment manufacturers seeking life-cycle management support to
                         increase their shrinking workload base, and third-party repair vendors
                         who would also like a larger share of this multibillion dollar business. In
                         combination with these factors, the debate has been fanned by the
                         implementation of base realignment and closure recommendations,
                         proposals to privatize work in place, and by news of the success achieved
                         by many private sector commercial activities in reducing their operations
                         and support costs through outsourcing noncore activities.4

                         DOD’s depot system employs about 76,000 DOD civilian personnel, including
                         laborers, highly trained technicians, engineers and top-level managers. As
                         shown on figure 1, the number of depot maintenance personnel has been
                         reduced by about 71,000 personnel—a 48-percent reduction since 1990.
                         Over the same period of time, the organic depot maintenance workload
                         had a similar decline of about 43 percent, while the total depot
                         maintenance budget declined by a margin of only 12 percent. Appendix III
                         shows the reduction of DOD personnel by service.

                         4
                          DOD defines outsourcing as the transfer of a function previously performed in-house to an outside
                         provider. Privatization is a subset of outsourcing which involves the transfer or sale of government
                         assets to the private sector.



                         Page 5                                                                         GAO/T-NSIAD-97-112
Figure 1: Reductions in DOD’s Depot Maintenance Budget, Depot Maintenance Personnel, and Direct Labor Hours
Personnel (in thousands) /Hours (in millions)                                             Budget (in billions of dollars)
160                                                                                                                   14



                                                                                                                      12
140

                                                                                                                      10


120
                                                                                                                      8



                                                                                                                      6
100


                                                                                                                      4

 80
                                                                                                                      2



 60                                                                                                                   0
      FY90          FY91            FY92            FY93        FY94           FY95           FY96            FY97

                        Depot maintenance budget Depot maintenance personnel Direct labor hours




Excess Capacity Exists in                  While DOD has substantially reduced depot maintenance requirements, and
the Public and Private                     the number of depot maintenance personnel has been similarly reduced,
                                           DOD has not completed complementary reductions in its depot
Sectors
                                           maintenance infrastructure—despite four rounds of base closures. As a
                                           result, DOD has extensive excess capacity in the form of large numbers of




                                           Page 6                                                          GAO/T-NSIAD-97-112
under utilized buildings and equipment. Additionally, the private sector
has seen its production workload for new systems and equipment decline
and has significant excess production capacity.

We refer to excess capacity that is derived by determining what is the
potential for doing more work after the programmed workload is
accomplished, assuming that the production capability will be used to the
maximum extent, which would require the availability of additional
trained personnel. This same measure was used in the BRAC process to
identify the potential for consolidating like workloads to improve capacity
utilization and reduce redundancies. However, DOD normally measures
excess capacity by an analysis that constrains facility and equipment
availability by the availability of trained personnel and the organization of
work stations, assuming an 8-hour workday, for 5 days a week. A
maximum potential capacity utilization between 75 and 85 percent is
generally considered an efficient operating level. Using maximum
potential capacity measurements, DOD is predicted to have excess capacity
in fiscal year 1999 of about 50 percent. Figure 2 shows excess capacity
using both the maximum potential capacity and constrained
measurements. The Air Force has the most extensive excess capacity.
Appendix IV shows excess capacity in each of the DOD depots using both
the maximum potential capacity and constrained measurements.




Page 7                                                     GAO/T-NSIAD-97-112
Figure 2: Comparison of Depot Capacity and Workload

Direct Labor Hours (000s)
60,000



50,000



40,000



30,000



20,000



10,000



     0
                Army             NAVAIR               NAVSEA               Navy other    Air Force

                             Maximum Capacity         Available Capacity      Workload




                                        Even after four BRAC rounds, the four services have costly excess capacity
Navy Has Been More                      within their depot maintenance systems. With the exception of the Navy
Successful Than the                     privatization-in-place efforts, our work shows that the Navy has been the
Other Services in                       most successful at addressing this issue. However, the Army and the Air
                                        Force have not succeeded in making significant reductions in their excess
Reducing Costly                         capacity. Further, DOD’s privatization of depots and the Air Force’s plans to
Excess Capacity                         implement BRAC decisions have contributed to the excess capacity
                                        problem and ultimately will drive up depot maintenance costs. Such cost
                                        increases mean that military service customers can buy less depot
                                        maintenance with available operation and maintenance dollars.




                                        Page 8                                                       GAO/T-NSIAD-97-112
Navy Is Saving by            The Navy has closed three of its six aviation depots, consolidating
Expeditiously Closing        workloads from the closing depots to improve capacity utilization and
Aviation Depots and          reduce excess capacity. These actions will significantly increase utilization
                             and reduce excess capacity in the remaining three naval aviation depots.
Shipyards but Is Missing     The 1993 BRAC Commission approved the Navy’s recommendation to close
Savings Opportunities by     aviation depots located in Pensacola, Florida; Alameda, California; and
Privatizing the Louisville   Norfolk, Virginia. The Navy completed the closures in about 3 years versus
Depot                        the 6-year period allowed under the BRAC legislation. And through a
                             combination of workload consolidations, interservicing actions, and
                             outsourcing noncore workloads, the Navy reduced its projected operating
                             rate by about $10 per hour. Based on a forecast of 13 million direct labor
                             hours for fiscal year 1999, this is expected to produce a savings of about
                             $130 million.

Capacity Reduction and       Our work shows that based on maximum potential capacity and fiscal
Expedited Closures           year 1999 workload forecasts, the three remaining naval aviation depots
                             will have an average excess capacity of 37 percent, substantially lower
                             than the other services. Because the Navy reallocated workloads and
                             specialties among its aviation depots, and reengineered work spaces in the
                             process, Navy officials state that given the availability of depot
                             maintenance personnel, capacity utilization will be about 95 percent. This
                             represents an increase of 36 percent after the workload transition is
                             completed.

                             The Navy has also expeditiously closed four of its eight naval shipyards.
                             The 1991 BRAC Commission recommended closure of the Philadelphia
                             Naval Shipyard, and repair work was terminated in 1995. The 1993 BRAC
                             Commission recommended closure of the Charleston and Mare Island
                             Naval Shipyards, and repair work was terminated in 1995. The 1995 BRAC
                             Commission recommended closure of the Long Beach Naval Shipyard, and
                             repair work was terminated in 1996. As a result, from September 30, 1991,
                             through September 30, 1996, the Navy shipyard production had decreased
                             in direct labor hours by 50 percent, while employees were reduced by
                             about 63 percent. Table 1 shows other measures of the shipyard
                             downsizing over this period.




                             Page 9                                                     GAO/T-NSIAD-97-112
Table 1: Comparison of Public Shipyards for Fiscal Years 1991 and 1996
Dollars in millions
                                               Number of           Number of            Number of           Feet of        Fixed assets less
Fiscal year                                    shipyards           employees             drydocks            piers             depreciation
1991                                                       8             61,647                   35         67,358                   $1,630.7
1996                                                       4             23,110                   16         21,075                      821.6
Reduction                                                  4             38,537                   19         46,283                      809.1
Percent of reduction                                     50                   63                  54              69                           50

The Navy’s                                The Navy’s privatization of its Louisville depot was not the most
Privatization-in-Place of                 cost-effective choice; the Navy could have saved more through
Louisville Depot Is Not                   consolidation of workloads and improved use of capacity in remaining
Cost-Effective                            industrial activities.5 The Louisville, Kentucky, Detachment of the Naval
                                          Surface Warfare Center, Crane Division, a depot recommended for closure
                                          by the 1995 BRAC Commission, supported the overhaul and remanufacture
                                          for naval surface ship gun and missile systems. In analyzing the cost of
                                          privatizing the Louisville workload in place versus transferring it to
                                          another depot, the Navy estimated that the contract alternative would cost
                                          more on an annual recurring basis and the one-time cost of transferring
                                          the workload to another depot would be prohibitive. However, we found
                                          the Navy’s analyses understated the annual savings of transferring the
                                          workloads to other underused facilities and overstated the one-time
                                          transfer costs.

                                          Our analysis shows a one-time cost of $243 million and an annual savings
                                          of $59 million by transferring the workload. The annual savings would
                                          offset the one-time cost in about 4 years. The Navy’s annual savings
                                          estimate recognized that transferring the workloads to underused facilities
                                          would reduce the overhead cost for those production units being
                                          considered for transfer. However, the per-unit savings were applied only
                                          to the workloads transferred and not to existing workloads at receiving
                                          locations.


Privatization Plans Without               As a result of BRAC decisions during the 1988, 1991, and 1993 BRAC rounds,
Further Downsizing Will                   the Army terminated work at three of its eight maintenance
Increase Excess Capacity                  depots—Lexington-Blue Grass, Kentucky; Sacramento, California; and
                                          Tooele, Utah. The Secretary’s recommendations to the 1995 BRAC
at Army Depots                            Commission proposed realignment and termination of work at two


                                          5
                                          Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place at the Louisville,
                                          Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996).



                                          Page 10                                                                       GAO/T-NSIAD-97-112
                             additional depots—Letterkenny in Pennsylvania and Red River in Texas,
                             but the Commission recommended that parts of each depot remain open.
                             Plans for implementing the 1995 BRAC recommendations are still evolving.

                             Nonetheless, based on the actions taken thus far, the Army is not
                             effectively downsizing its depot maintenance infrastructure to reduce
                             costly excess capacity. We reported in September 19966 that tentative
                             plans for allocating some workloads from realigned depots to remaining
                             depots will likely achieve some reduction in excess capacity and savings at
                             two remaining depots. However, tentative plans to privatize workloads in
                             place or retain workloads in facilities that were to be downsized or closed
                             will increase excess capacity in the Army depots, from 42 to 46 percent
                             over the next 3 years.

                             This increase is caused by several factors including: (1) a forecasted
                             decrease in future year depot-level workload; (2) the Army’s tentative
                             decision to establish a government-owned, contractor-operated facility at
                             Letterkenny for maintenance of the Paladin combat vehicle and tactical
                             missile; and (3) the Defense Depot Maintenance Council’s decision
                             supporting the Air Force plan to delay the transfer of the ground
                             communications-electronics workload from the Sacramento depot to the
                             Tobyhanna depot. We recommended that DOD reassess this delay, which is
                             costing the Army about $24 million annually.

                             On March 13, 1997, the Council approved the Air Force’s proposal for a
                             3-year workload transfer beginning in 1998 with the transfer of 20 percent
                             of the workload in the first year, and 40 percent in each of the next 2 years
                             with full operational capability at the Tobyhanna Depot in 2001. This
                             transfer schedule will increase the total cost of the transfer and delay
                             potential consolidation savings. Additionally, the BRAC recommendation to
                             downsize rather than close Red River depot, although based on readiness
                             concerns, adds to the excess capacity in the Army system.


Excess Capacity Will         The Air Force has the most serious excess capacity problem. Although
Remain at Air Force          three of the six depots in the Air Force depot system were recommended
Depots After Privatization   for closure, the Air Force opted to privatize the workloads in place at all
                             three. Despite major force structure reductions and significant excess
                             capacity in the Air Force depot maintenance system, none of the Air
                             Force’s five large, multicommodity logistics centers or their maintenance

                             6
                             Army Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess
                             Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).



                             Page 11                                                                   GAO/T-NSIAD-97-112
depots were recommended for closure during the first three BRAC rounds.
These five depots have about 57 million direct labor hours of capacity to
accomplish about 32 million direct labor hours of work, leaving about
26 million hours of excess capacity—or about 45 percent. Additionally, the
Air Force military depots’ workloads are projected to decline to about
20 million direct labor hours of work in 1999. At this workload level, the
Air Force depots would have about 65 percent unused capacity. Although
depots at the Sacramento and San Antonio centers were identified for
closure during the 1995 BRAC process, the executive branch, citing
readiness, up-front costs, and potential effects on the local community,
indicated that these workloads should be privatized-in-place or in the local
communities.

In December 1996, we reported that if the remaining depots do not receive
additional workloads they are likely to continue to operate with significant
excess capacity and to become more inefficient and expensive as
workloads continue to dwindle due to downsizing and privatization
initiatives.7 Our analysis indicates that redistributing 8.2 million direct
labor hours of work from the closing Air Force depots to the three
remaining depots would (1) reduce the projected excess capacity in 1999
from about 65 percent to about 27 percent, (2) lower the hourly rates by an
average of $6 at receiving locations by spreading fixed cost over a larger
workload, and (3) save as much as $182 million annually as a result of
economies of scale and other efficiencies. This estimate was based on a
workload redistribution plan that would relocate only 78 percent of the
available hours to Air Force depots. Table 2 provides an overview of the
savings achievable through consolidation and increased use of capacity in
the remaining three Air Force depots.




7
 Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists
(GAO/NSIAD-97-13, Dec. 31, 1996).



Page 12                                                                      GAO/T-NSIAD-97-112
Table 2: Potential Savings From Air Force Depot Consolidation
                                                                        Labor/overhead
Depot location                                Direct labor hours                  rates                    Cost                Total cost
Before consolidation
Oklahoma City                                          7,122,421                  $59.11          $421,006,305
Ogden                                                  4,939,623                  $65.47          $323,397,118
Warner Robins                                          6,763,218                  $59.55          $402,749,632
Sacramento                                             3,222,409                  $63.81          $205,621,918
San Antonio                                            5,000,190                  $58.24          $291,211,066
                                                                                                                         $1,643,986,039
After consolidation
Oklahoma City                                         12,214,902                  $50.22          $613,432,378
Ogden                                                  6,626,348                  $59.68          $395,460,449
Warner Robins                                          8,206,611                  $55.17          $452,758,729
                                                                                                                         $1,461,651,556


Total potential savings                                                                                                   $182, 334, 483

                                          According to management officials at the three remaining centers, it would
                                          cost about $475 million to absorb all of the Sacramento and San Antonio
                                          workload. Using our estimate of $182 million in projected annual
                                          consolidation savings, net savings would occur within 2.6 years of the
                                          consolidation.8


Air Force Efforts to                      The Air Force is currently conducting a public-private competition for the
Privatize San Antonio and                 Sacramento and San Antonio depot workloads and plans to award
Sacramento Depots                         contracts for three work packages and complete the transition by 2001.
                                          Initially, the Air Force pursued a prototype approach to privatization with
                                          three Sacramento workloads, hydraulics, electric accessories, and
                                          software, and two San Antonio workloads, C-5 aircraft paint/depaint and
                                          fuel accessories. However, shortly after the Defense Depot Maintenance
                                          Council approved the prototypes on February 1, 1996, DOD began to
                                          question this approach because of industry and community group desires
                                          to have larger segments of work competed.

                                          Consequently, on August 16, 1996, the Air Force Materiel Command
                                          announced it had revised its plans and created larger packages of work for

                                          8
                                           In addition, the Army estimates that the BRAC Commission mandated transfer of about 1.2 million
                                          hours of ground communications workload from the Sacramento depot to the Tobyhanna Army Depot
                                          will save an additional $24 million annually.



                                          Page 13                                                                   GAO/T-NSIAD-97-112
competition. The Command’s planners project that with the current 60-40
limitation, about $600 million of the two centers’ $1.6 billion workload will
be available to transfer to the private sector. Within this constraint, the
Command believes it can privatize all of the Sacramento workload as a
single package and San Antonio’s C-5 workload as a separate package. The
Air Force’s current approach is to hold a public-private competition for the
C-5 package first and then compete the Sacramento workload, excluding
the BRAC-directed transfer of ground communication-electronics workload
to Tobyhanna Army Depot. The San Antonio Air Logistics Center
anticipates a later public-private competition for $240 million of the
$700 million San Antonio engine workload. The Command is studying
other San Antonio workloads for public-private competitions, if the 60-40
limitation is raised or eliminated. If there is no relief from 60-40 legislation,
the Air Force in 1998 must begin moving large workloads and workers to
other DOD depots. By 2001, this move would involve 5.6 million labor hours
and more than 4,000 people making it comparable to one Air Force depot.

Title 10 U.S.C. 2469 requires a public-private competition when
outsourcing depot-level workloads valued at over $3 million. In structuring
the competition, the Air Force responded to industry concerns that
previous public-private competitions had favored the public depots. We
have previously reported that private sector firms won about 57 percent of
the public-private competitions between 1985 and 1993. These awards
amount to about 44 percent of the total competitive award dollars in the
competitions.9

In the interest of addressing concerns from both industry and public
competitors, the Air Force held joint industry-depot conferences to solicit
and discuss competition issues. The Air Force considered these issues and
structured its competition procedures and evaluation criteria to reflect
these concerns. For example, the Air Force’s C-5 request for proposal
requires the public offeror to depreciate any newly acquired capital assets
over the life of the contract. Private sector offerors, on the other hand, are
allowed to choose the method of depreciation they will use. Also, the Air
Force has precluded the public competitors from partnering with the
private sector. The solicitation provides for the selection of the public or
private sector entity that offers the lowest total evaluated cost. This is to
be calculated based upon a cost realism assessment of each proposal,
various cost adjustments to attempt to equalize the private and public



9
 Depot Maintenance: Issues in Allocating Workload Between the Public and Private Sectors
(GAO/T-NSIAD-94-161, Apr. 12, 1994).



Page 14                                                                     GAO/T-NSIAD-97-112
                               sector proposals, and a quantified analysis of the dollar value of the
                               technical merits of the respective proposals.


Previous Air Force             We estimate that the cost of performing aviation and missile guidance
Privatization-in-Place         repair at BGRC, Newark, Ohio, is from $13.3 million to $23.3 million higher
Initiative Resulted in         than what the organic depot would have cost to perform the same work.
                               This represents an increase of between 18 to 31 percent.
Increased Costs
                               Prior to its closure, the Aerospace Guidance and Metrology Center,
                               located on Newark Air Force Base, Ohio, primarily supported three key
                               workloads—repair and overhaul of missile and aircraft guidance systems
                               and management of the Air Force’s metrology and calibration program.
                               Recommended for closure by the 1993 BRAC Commission, the Air Force
                               decided to privatize the workload in place. In December 1995, the Air
                               Force awarded a contract for the repair and overhaul work to Rockwell
                               International Corporation, Autonetics Electronic Systems Division,
                               Anaheim, California, which was subsequently purchased by The Boeing
                               Company in August 1996. The facility and workload were in transition
                               between January and August 1996. A local reuse authority assumed
                               control of the Newark facility when it closed, and has been in negotiation
                               with the contractor over the terms of a lease agreement.

                               After the transition period and 3 months of contractor performance during
                               fiscal year 1997, the system program managers at the Ogden and
                               Oklahoma City Air Logistics Centers noted that program funds were being
                               expended faster than anticipated and the most significant contributing
                               factor appeared to be the excessive amount of material ordered. Ogden
                               and Oklahoma City system managers were investigating this condition at
                               the same time we initiated a follow-up to determine the cost impact of the
                               Newark privatization. After reviewing the Ogden and Oklahoma City
                               information, we requested that the centers prepare an estimate of organic
                               versus contractor costs for the fiscal year 1997 workload.

Contract Cost Analysis Shows   On March 16, 1997, the Air Force Materiel Command released the
Increased Costs                completed cost analysis of the items managed by Ogden and repaired at
                               BGRC. The analysis estimated that privatizing-in-place will result in a
                               $3.4 million to $13.2 million higher total cost to the government in fiscal
                               year 1997, an increase of from 8.5 to 33 percent over the organic depot
                               alternative. The report estimates that the most probable increase will be
                               close to $6.7 million—a 17 percent higher cost. We reviewed the Air Force
                               analysis and found that this figure does not reflect increased material



                               Page 15                                                    GAO/T-NSIAD-97-112
                        usage by the contractor. The contractor has ordered significantly higher
                        quantities of material than were used by the organic depot for comparable
                        workloads. While the contractor’s material usage report does not clearly
                        indicate whether actual consumption has increased along with increased
                        material orders, we observed that the increased material orders are
                        consistent with increased usage of government-furnished material
                        experienced with other contracts of a similar type.10 Further, a lack of
                        accountability over government-furnished material has hindered attempts
                        to reconcile actual material consumption, and is a condition we identified
                        in our review of other depot maintenance contracts. Given the evidence of
                        increased material orders, we believe the $6.7 million Air Force Materiel
                        Command estimate is more likely to represent the low end of the cost
                        range.

                        The Oklahoma City Air Logistics Center analysis is not yet completed. We
                        collected cost data from Oklahoma Air Logistics Center and Headquarters
                        Air Force Materiel Command to compute an estimate of fiscal year 1997
                        organic and contract costs to repair the aircraft guidance workload
                        currently on contract at BGRC. Based on that data, we estimate that the
                        cost for repairing Oklahoma City managed aircraft guidance items will
                        likely be between $6.5 million to $10 million more for fiscal year 1997 than
                        the organic depot alternative. This represents an increase of from 19 to
                        29 percent more than the organic alternative. Similarly to the Ogden
                        analysis, our low range does not include increased contractor usage of
                        material. There are similar indications of increased government-furnished
                        material orders.


                        Workload allocation between the public and private sector has a long
Depot Privatization     history of congressional interest and is affected by various statutes. With
Policy Still Evolving   the downsizing of the military and associated reductions in the depot
                        maintenance workload, DOD, the Congress, and the defense industry have a
                        heightened interest in the issue. In fiscal year 1996, the Congress directed
                        DOD to develop policies with a goal of eliminating legislation related to
                        depot maintenance workload allocations. While DOD developed policy
                        proposals, the Congress did not agree with them, and no legislative
                        changes were made. Key concerns raised by congressional committees
                        involved the need to allow public depots to compete for noncore
                        workloads and the imprecise definition of core workloads. Consequently,
                        DOD’s policy is still evolving.



                        10
                          The Air Force is using a cost-plus-award-fee contract for the Newark workload. The contractor’s fee
                        is primarily based on his performance in reducing the cost of labor.



                        Page 16                                                                       GAO/T-NSIAD-97-112
Current Statutes and     Statutes and regulations influence the mix of maintenance work done by
Directives               the public and private sectors. As early as 1974, legislation prescribed a
                         specific dollar-value mix for the public and private sectors’ alteration,
                         overhaul, and repair work for naval vessels. Since then, workload
                         allocation decisions have been influenced by percentage goals found in
                         DOD policy and legislation. In recent years DOD has sought relief from these
                         statutes. The following are key documents and statutes:

                         DOD Directive 4151.18, “Maintenance of Military Materiel,” (Aug. 12, 1992) establishes policy
                         and assigns responsibility for DOD maintenance at all levels. It establishes a source-of-repair
                         process, requires the maintenance of core capabilities within military depots to meet
                         contingency requirements, and provides for competition between public and private
                         sources to achieve economies and efficiencies.


                         Section 2464 of title 10 requires that a “core” logistics capability be identified by the
                         Secretary of Defense and maintained by DOD unless the Secretary waives DOD performance
                         as not required for national defense. Core is defined as the capability, including personnel,
                         equipment, and facilities, to ensure timely response to a mobilization, national contingency,
                         or other emergency requirement. The composition and size of this core capability are at the
                         heart of the depot maintenance public-private mix debate.


                         Section 2466 of title 10 prohibits the use of more than 40 percent of the funds made
                         available in a fiscal year for depot-level maintenance or repair for private sector
                         performance and is often referred to as the 60-40 rule.


                         Section 2469 of title 10 provides that DOD-performed depot maintenance and repair
                         workloads valued at not less than $3 million cannot be changed to performance by another
                         DOD activity without the use of merit-based selection procedures for competitions among
                         all DOD depots and that such workloads cannot be changed to contractor performance
                         without the use of competitive procedures for competitions among public and private
                         sector entities.




Congressional            The Congress has over the years consistently supported the need for
Requirements for Clear   public depots and the retention of core capability requirements as
Policy and DOD’s         essential to national security. Section 311 of the National Defense
                         Authorization Act for Fiscal Year 1996 reiterated that support and required
Response                 DOD to articulate known and anticipated core requirements, to organize its
                         resources to meet those requirements economically and efficiently, and to
                         determine what work should be done in the private sector and how it
                         should be managed. Section 311 directed the Secretary of Defense to
                         develop a comprehensive depot maintenance policy that, among other




                         Page 17                                                                  GAO/T-NSIAD-97-112
                                things, should (1) provide for core capabilities properly sized to meet
                                security requirements and assign sufficient workloads for cost efficiency
                                and technical proficiency, (2) provide for public-private competitions for
                                noncore workloads, (3) address technical data issues, and (4) provide for
                                the organic performance of maintenance and repair for any new weapon
                                systems defined as core.

DOD Policy Proposal States a    DOD  submitted its report Policy Regarding Performance of Depot-Level
Preference for Private Sector   Maintenance and Repair to the Congress in April 1996. The report
Depot Maintenance               discussed DOD’s revised methodology for determining core capability
                                requirements and the workloads necessary to sustain them. The new
                                methodology included an assessment of private sector capability to
                                determine whether mission-essential workloads could be outsourced at
                                acceptable risk and a best-value assessment (generally through
                                competition within the private sector) of noncore workloads. The report
                                also stated DOD’s intent to size the organic sector to minimum core
                                requirements plus additional workloads for which the public depots were
                                the last source of repair and where private industry costs were clearly
                                prohibitive. The report limited public-private competitions to noncore
                                workloads where there was inadequate competition in the private sector.

                                The report also affirmed DOD’s plans to support new or developing weapon
                                systems in the private sector based on its revised acquisition policy (DOD
                                Directive 5000.2-R, para. 3.3.7).11 The directive requires that support
                                concepts for new and modified systems maximize the use of long-term
                                total life-cycle contractor logistics support that combines depot-level
                                maintenance with wholesale and selected retail materiel management
                                functions.

Congressional Committees        We evaluated DOD’s policy report and its report Depot Maintenance and
Disagreed With the Proposal     Repair Workload, as required by section 311 of the National Defense
                                Authorization Act for Fiscal Year 1996, and had concerns in several areas.
                                The policy report provided a framework that was vague in several
                                areas—including core determinations and support for new systems—and
                                was inconsistent with congressional direction calling for public-private
                                competition for noncore workloads. The stated policies provided wide
                                latitude regarding implementation, which made it difficult to assess its
                                impact and expected results. Also the data in the workload report was not


                                11
                                 This directive “Mandatory Procedures for Major Defense Acquisition Programs (MDAP) and Major
                                Automated Information System Acquisition Programs” (MAISAP), March 15, 1996, established the
                                management framework for acquiring DOD systems and equipment, including their life-cycle
                                management.



                                Page 18                                                                  GAO/T-NSIAD-97-112
                            comprehensive and projections of future workloads were not consistent or
                            comparable with the reported historical figures.

                            Congressional committees also criticized DOD’s policy report and revised
                            acquisition guidance. The House National Security Committee found the
                            policy report to be “seriously deficient and nonresponsive in a number of
                            areas,” particularly in providing for core capabilities, identifying specific
                            weapon systems and equipment supporting national military strategy,
                            sufficiently workloading public depots, providing for public-private
                            competitions, addressing technical data issues, and providing for organic
                            support of new weapon systems defined as core. The Committee also
                            found that the companion workload report did not provide all the
                            mandated data and appeared to skew comparisons of past and future
                            workload allocations by its treatment of costs for contractor logistics
                            support and interim contractor support.

                            The Senate Armed Services Committee had many of the same concerns
                            and found the policy report “not well thought out in general and not
                            responsive to Congressional guidance on several important issues, such as
                            the requirement to provide for full and open competition for all non-core
                            workloads”. This Committee also found DOD’s revised source of support
                            policy as inconsistent with current law and congressional direction in
                            section 311 and possibly inconsistent with national security interests.

Depot Workload Allocation   For several years, the Congress has asked DOD to better define core
Policies Still Evolving     capability requirements and specifically identify the workloads and
                            weapon systems that must be maintained in DOD depots to satisfy core
                            requirements. Establishing and justifying firm core requirements is a
                            fundamental prerequisite for determining minimum depot workloads and
                            supporting outsourcing decisions. DOD’s response to the Congress in its
                            policy report again failed to meet congressional expectations. DOD has yet
                            to firmly define and establish minimum core capability requirements.
                            However, some policy changes have been made in response to concerns
                            about the policy proposal.

Some Changes Have Been      Since the issuance of the policy and workload reports, an interservice
Made                        team has further refined and improved the core methodology to permit
                            best-value comparisons of both public and private sources in determining
                            allocation of noncore workloads. In response to our recommendation, DOD
                            also developed a standard set of evaluative factors that the services are to
                            consider in their private sector risk assessments. However, each service




                            Page 19                                                     GAO/T-NSIAD-97-112
                                 can add individual factors, establish factor weights, and develop the
                                 specific evaluative process for its risk assessments.

                                 In reviewing the quantification of core requirements in the services, we
                                 noted that each service applies the methodology differently based on its
                                 operating requirements and support concepts. For example, the Air Force
                                 views core as a capability to manage and oversee a particular commodity
                                 class or type of repair rather than a specific weapon system or component.
                                 The Air Force risk assessment assigns a low weight to the risk from
                                 sole-source contracts and allows an item to be outsourced to a sole-source
                                 provider, given an acceptable total risk score. The Navy, on the other
                                 hand, relates core capabilities to specific peacetime workloads on
                                 mission-essential systems and plans to maintain some organic workload
                                 for each weapon system as tasked by the Joint Chiefs of Staff scenario.
                                 According to a Navy official, completely supporting a tasked workload on
                                 a sole-source contract is considered an unacceptable risk to the Navy.

                                 DOD  revised Directive 5000.2-R to better reflect core considerations and to
                                 eliminate the need for a waiver to justify selection of an organic source of
                                 support. However, some program offices tell us they believe that
                                 outsourcing depot maintenance for new systems is still the preferred
                                 option. They noted that informal guidance from senior Air Force
                                 acquisition leadership emphasizes that life-cycle management by the
                                 original equipment manufacturer be used.

Key Policy Proposals Are Still   Additionally, although two draft depot maintenance policy letters were
in Draft                         distributed in December 1996 and January 1997, it is uncertain when, or if,
                                 these policy statements will be issued. The first memorandum, from the
                                 Office of the Deputy Under Secretary of Defense Logistics, discussed DOD’s
                                 current positions on principal policy issues. Among other things, it
                                 (1) stated DOD’s commitment to maintain a robust organic depot
                                 maintenance capability sized to support core requirements; (2) directed
                                 the services to submit public-private workload allocations through fiscal
                                 year 2002, but not to include interim contractor support and contractor
                                 logistics support costs in estimating compliance with the 60-40 statute;
                                 (3) established service goals to achieve a minimum of 75-percent capacity
                                 use in each remaining depot upon completion of BRAC actions;
                                 (4) identified downsizing through divestiture, mothballing, and demolition
                                 as the preferred approach to increasing capacity use; (5) directed
                                 improvements in cost accounting and internal controls; (6) revised
                                 public-private competition policy to provide for competitions involving
                                 repair workloads valued at more than $3 million; and (7) provided for



                                 Page 20                                                    GAO/T-NSIAD-97-112
    maximum use of total contractor logistics support arrangements for new
    and modified systems that are determined to be noncore.

    The second memorandum, from the Deputy Under Secretary of Defense
    (Industrial Affairs and Installations), provided the draft guidance on depot
    maintenance public-private competitions in the following key areas:

•   Workload determination. Only noncore-related depot-level maintenance
    and repair workload will be available for competition. However, workload
    previously defined as core may be determined to be noncore as a result of
    the redetermination process. Eligible new workloads will be evaluated to
    determine if viable potential public and private sector sources exist, and a
    formal public-private competition will be conducted for any package
    valued at $3 million or more.
•   Competition formulation. For each work package under consideration, the
    applicable DOD component will determine which government candidate
    would compete, and the Defense Depot Maintenance Council will make
    the final determination regarding which depot can compete.
•   Proposal evaluation and source selection. Best-value principles will be
    used when evaluating proposals and selecting a source of repair. Appeals
    by military depots will be resolved internally within the DOD rather than by
    GAO. DOD’s “Cost Comparability Handbook” will be modified to adjust
    military depot offers by federal income taxes, cost of facilities capital, and
    liability insurance.
•   Cost estimation and accounting. The Defense Contract Audit Agency will
    (1) review each public depot maintenance activity to determine if it has
    well-documented procedures for handling direct and indirect costs,
    (2) audit the cost-estimating systems of the public depot offerors,
    (3) ensure that each military department’s depot cost-estimating and
    accounting systems are in compliance in a timely manner, and (4) assess
    the accuracy and completeness of incurred costs on depot awards. The
    guidance provides for no comparable scrutiny for a private sector offeror.

    Both the private sector and some depot supporters in the Congress have
    raised concerns regarding aspects of these documents. It is uncertain
    whether these letters will ultimately become DOD policy. Since there is no
    approved DOD competition guidance, the Air Force is conducting the
    competitions at Sacramento and San Antonio using its own guidance.




    Page 21                                                     GAO/T-NSIAD-97-112
                         In response to our reports, DOD has consistently stated that it intends to
Current Actions Point    comply with existing statutes relating to depot maintenance workload
to Greater Use of the    allocations. As we look at the services’ current actions related to
Private Sector to        (1) privatization-in-place, (2) assessments of existing organic workloads,
                         and (3) assessments of where to perform new weapon system depot
Perform Depot            maintenance, we see significant movement of depot maintenance
Maintenance              workload to the private sector. While we are continuing work in this area,
                         we are concerned that, due to a lack of clear policy and direction, some
                         maintenance strategies are being delayed and others are being selected
                         that may not be the most cost-effective.


Privatization-in-Place   As previously discussed, privatizing organic workloads at closing depots
                         rather than transferring and consolidating work at remaining depots
                         further exacerbates DOD’s excess depot capacity problem and increases
                         depot maintenance costs.


Assessments of Organic   DOD  officials are examining workloads now at organic depots with a view
Workloads                to increase outsourcing. Service officials are utilizing the new core
                         methodology12 and risk assessment process to review mission-essential
                         workloads and reclassify existing organic core work as noncore for
                         outsourcing. The Air Force has assessed seven workloads to date and
                         determined that the risks from outsourcing were acceptable; that is,
                         adequate DOD capability remains, and available commercial sources can
                         capably do the work. The Air Force plans to assess its entire workload to
                         determine minimum core capabilities and identify outsourcing candidates.
                         The Army and the Navy are also beginning to reassess their current
                         workloads to identify core.

                         The hydraulics workload at the Air Force’s Sacramento Center illustrates
                         the impact the new risk assessment process will have on DOD core
                         capabilities. The Air Force determined that all of this large
                         workload—currently about 420,000 hours per year—was required to
                         support a core capability based on its necessity to support mission aircraft
                         during contingencies. This was a key factor used by the Air Force to
                         support its position that Sacramento should not be closed during the 1995
                         BRAC process. A recent risk assessment subsequently determined that the
                         entire workload could be outsourced and would no longer be classified as



                         12
                           The core methodology being used is the one contained in DOD’s April 1996 policy report submitted to
                         the Congress.



                         Page 22                                                                      GAO/T-NSIAD-97-112
                          core. The Defense Depot Maintenance Council agreed with the Air Force
                          recommendation.

                          A critical assumption, however, is that current Army and Navy hydraulic
                          workloads must continue to be maintained in military depots in the future
                          to provide the minimum DOD organic core capability requirement.
                          Additionally, there is some question regarding whether the Navy and the
                          Army could support Air Force workloads. If future hydraulic workloads
                          increase or decrease, or if the Army and the Navy desire to outsource their
                          workloads, the retention of minimum core could be jeopardized. In
                          concept, the Council would be the arbitrator and determine whether the
                          additional risk would be acceptable.

                          DOD  is also looking to expand the use of private contractors to assume
                          total contractor logistics support of fielded weapon systems. In what is
                          viewed as a model for other systems, the Air Force plans to reduce the
                          F-117 program office from 226 to 20 employees and greatly expand the
                          prime contractor’s role in logistics support of the F-117 fleet, to include
                          materiel management, systems integration, modifications, and
                          subcontractor management, as well as continuing depot repairs and
                          systems engineering responsibilities. The Air Force is also considering
                          contractor-provided, integrated systems management for its specialized
                          C-130 fleet and some strategic missiles, while the Army expects to issue an
                          integrated fleet management contract for the Paladin.


Assessments of Where to   DOD’s  revised acquisition policies and privatization plans establish a clear
Outsource New Systems     preference for contractor support of new weapon systems and upgrades.
                          Citing in particular the guidance to maximize contractor-provided, total
                          life-cycle logistics support, acquisition program officials from all services
                          are actively planning or strongly considering contractor logistics support
                          of both depot maintenance and materiel management functions, much
                          more so than in the past.

                          Of the programs we have reviewed thus far, few have made final formal
                          decisions on the source of repair. However, of those systems offices that
                          have decided or are nearing a decision, most are planning to outsource.
                          The decisions on many systems, especially the largest dollar ones, have
                          been delayed and the programs will rely on contractor support for a
                          number of years as options are evaluated. Officials cited several reasons
                          for delaying decisions, including uncertainties about DOD core policies, the
                          status of efforts to lift statutory workload restrictions, and the time needed



                          Page 23                                                     GAO/T-NSIAD-97-112
                                        to obtain better cost and performance data. Only the Black Hawk will
                                        continue organic support like that used for its predecessor models.
                                        Officials plan on a fairly even split of the AC-130U gunship workloads to
                                        public and private sources but have not yet determined plans for airframe
                                        maintenance, the gunship’s largest workload. Table 3 summarizes the
                                        projected source of repair plans on systems we have reviewed. As
                                        indicated, for many programs, including the largest systems in terms of
                                        acquisition costs, the final support decisions have not yet been made.


Table 3: New Systems Tentative Depot Support Plans
System                         Leaning to organic          Undecided/deferred            Leaning to contract
Army
  Apache Longbow                                                                         √
  Black Hawk                   √
  Javelin                                                  √
  JSTARS GSM                                                                             √
  Paladin                                                                                √
Navy
  F/A-18E/F                                                √
  Seawolf                                                  √
  T406 engine                                                                            √
  V-22 Osprey                                              √
Air Force
  AC-130U gunship                                          √
  B-1B CMUP                                                                              √
  C-17                                                     √
  F-117 engine                                                                           √
  F-22                                                     √
  JASSM                                                                                  √

                                        At the request of higher headquarters, several programs reconsidered and,
                                        in at least one case, reversed earlier decisions to rely on organic support.
                                        The Office of the Secretary of Defense tasked the C-17 program office to
                                        reevaluate its organic depot support strategy when the fleet size
                                        decreased, and the Air Force Chief of Staff directed the F-22 program
                                        office to consider privatizing logistics support as a means to cut costs. The
                                        F/A-18E/F system office decided to revisit its plans for organic support
                                        when the program was restructured as a major acquisition.




                                        Page 24                                                     GAO/T-NSIAD-97-112
                                  In 1995, the Under Secretary of Defense for Acquisition and Technology
                                  reversed organic support plans for the B-2 aircraft. Air Force cost analyses
                                  and core assessments showed that a relatively equal mix of public and
                                  private support was most cost-effective and would maintain core
                                  capabilities for the stealth technologies. Based on a consultant study, the
                                  Under Secretary directed that most work be instead outsourced to the
                                  manufacturer, citing as reasons, a high level of complexity and the B-2’s
                                  still maturing design.

Preliminary Observations on       Our new systems work is continuing. We have some preliminary
New Systems Maintenance           observations based on our work to date.
Decisions
                              •   Guidance on making source-of-repair decisions is still evolving, and
                                  program officials are unsure how or whether to address noncost factors,
                                  particularly core requirements. Some programs are moving ahead with
                                  support plans without establishing a solid, comprehensive business case
                                  to justify the decision.
                              •   Cost benefit analyses comparing public and private options often do not
                                  indicate a clear cost advantage for either sector. In the past, this would
                                  have usually justified selecting an organic depot based on core
                                  requirements and the perceived lower risk in using the public depots as a
                                  ready and controlled source. Today, the same inconclusive analyses are
                                  being used to justify delays in making final decisions.
                              •   Programs delaying final support decisions will rely on interim contractor
                                  support and similar arrangements to provide logistics support for 3 to 10
                                  years.
                              •   Past experience on the B-1B and other programs shows that interim
                                  contractor support can be an expensive, extended support method and
                                  that unreasonable delays in finalizing support decisions can increase costs
                                  and degrade readiness.
                              •   DOD policy establishes total contractor logistics support as the preferred
                                  model for new systems, but this may not be appropriate for most systems.
                                  Air Force managers have found contractor logistics support to be
                                  cost-effective for commercially derived systems with established
                                  competitive repair sources. These conditions are not often present for
                                  military-unique systems and cutting edge technologies. Privatizing total
                                  support on new and future weapon systems can also make it difficult for
                                  the organic depots to acquire and sustain technical competence on new
                                  systems, leading edge technologies, and critical repair processes. This is
                                  necessary to maintain future core capabilities and provide a credible
                                  competitive repair source.




                                  Page 25                                                   GAO/T-NSIAD-97-112
                          •   The services and the Defense Logistics Agency are also testing and
                              implementing innovative, alternative contractor-provided support
                              arrangements—including repair warranties, partnering, modernizing
                              through spares, and prime vendor programs—that are expected to
                              decrease organic workloads. We are continuing to evaluate these concepts
                              and impacts on DOD depots.


                              Facing large shortfalls in its modernization accounts, DOD plans to reduce
Projections for               costs and generate savings for modernization through the outsourcing of
Achieving Billions by         support activities, including depot maintenance. DOD’s projected savings
Privatizing Depot             level is based on estimates made through studies by the CORM and the DSB.
                              The CORM and DSB studies maintain that through competition in the private
Maintenance Are Not           sector, depot maintenance costs can be reduced by 20 to 40 percent. While
Well Supported                we believe some savings may be achieved from outsourcing some depot
                              maintenance workloads, our work shows that savings estimates of this
                              magnitude are questionable for several key reasons. As already discussed,
                              they assume that existing legislation relating to depot maintenance
                              workload allocation will be repealed. In addition, the highly competitive
                              environment assumed in the studies does not exist in the depot
                              maintenance market place.


Savings Assumptions Are       As the basis for its outsourcing savings assumption, DOD cites data from
Not Based on Depot            the CORM’s report, Directions for Defense (May 24, 1995), which claimed
Maintenance Activities        that 20-percent savings could be achieved through outsourcing. The report
                              rejected the idea of core requirements and recommended that DOD
                              (1) outsource all new support requirements, particularly the depot-level
                              logistics support of new and future weapon systems and (2) establish a
                              time-phased plan to transfer essentially all depot maintenance to the
                              private sector. DOD agreed with the report’s recommendation to outsource
                              a significant portion of its depot maintenance work, but believed that it
                              should retain a limited capability to meet essential wartime surge
                              demands, promote competition, and sustain institutional expertise. Based
                              on our prior work in the area of savings from outsourcing, we question
                              whether DOD can achieve the level of savings it is claiming.

                              We initially questioned the data cited by DOD to support its savings
                              assumptions in April 1996 testimony before this Subcommittee.13 We
                              stated that the CORM’s assumptions on savings were generally based on

                              13
                               Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix
                              (GAO/T-NSIAD-96-146, Apr. 16, 1996).



                              Page 26                                                                    GAO/T-NSIAD-97-112
    reports of projected savings from public-private competitions for various
    commercial activities as part of the implementation of Office of
    Management and Budget Circular A-76. In reviewing the A-76 competitions
    and DOD’s public-private competitions for depot maintenance, we found
    that the conditions under which A-76 competitions resulted in lower
    private sector prices often were not present or applicable to depot
    maintenance. The weaknesses in extrapolating the results of these
    reported savings to depot maintenance included the following:

•   The support functions used for the A-76 studies were dissimilar to the
    depot maintenance function.
•   Substantial savings occurred when competition was introduced into the
    noncompetitive environment; however, the reported savings were based
    on the difference between precompetition costs and the prices proposed
    and did not reflect the subsequent cost overruns, modifications, or
    add-ons.
•   Public activities were allowed to compete for workloads and won about
    half of the competitions by reengineerng their operations to provide the
    work cheaper.
•   The A-76 competitions were conducted in a highly competitive private
    sector market.

    Further analysis of the CORM savings assumptions in our July 1996 report
    showed that projected savings were often not achieved due to cost growth
    and other factors.14 We concluded that outsourcing essentially all depot
    maintenance under current conditions would not likely achieve expected
    savings and, according to the military services, would result in
    unacceptable readiness and sustainability risks.

    As additional support for outsourcing, DOD cites data from the DSB’s
    November 1996 report, Achieving an Innovative Support Structure for 21st
    Century Military Superiority. DSB claimed savings up to 40 percent through
    outsourcing of DOD support activities, including depot maintenance, and
    recommended that DOD use the private sector for logistics and
    maintenance in the continental United States. From a preliminary analysis
    of DSB’s report, we determined that the savings projections were based on
    primarily the same assumptions as those used by the CORM—although DSB’s
    study expanded the functions and activities that it recommended for
    outsourcing and claimed savings up to 40 percent. Our March 1997



    14
     Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are
    Questionable (GAO/NSIAD-96-161, July 15, 1996).



    Page 27                                                                  GAO/T-NSIAD-97-112
                                        testimony15 before the Subcommittee showed that, while we agreed that
                                        outsourcing can sometimes provide savings, we questioned whether the
                                        magnitude of savings anticipated by DSB is attainable within the current
                                        strategy and force structure.


Many Current Depot                      Our April 1996 testimony and July 1996 CORM report noted that much of the
Maintenance Contracts Are               depot work contracted to the private sector was awarded sole source and
Sole Source                             that obtaining competition for remaining noncore workloads may be
                                        difficult and costly.16 For example, to test for the extent of competition,
                                        we sampled 240 contracts, totaling $4.3 billion, that 12 DOD buying
                                        commands had open during 1995. Of these 240 contracts, 182, about
                                        76 percent, were awarded on a sole-source basis—about 45 percent of the
                                        total dollar value.

                                        Recently, we asked the DOD buying commands to classify as competitive or
                                        sole source all the new contracts awarded from the beginning of fiscal
                                        year 1996 to date. As shown in table 4, of the 15,346 contracts totaling
                                        $2.2 billion, 13,930—about 91 percent—were awarded sole source. The
                                        sole-source contracts totaled about $1.5 billion, or about 68 percent of the
                                        total dollars awarded.


Table 4: DOD Depot Maintenance Contracts Awarded From Fiscal Year 1996 to Date
Dollars in millions
                                                          Competitive                   Sole source                        Total
Command                                                Number            Value       Number            Value        Number           Value
Army                                                           2             $1             40          $540              42           $541
Air Force                                                 1,263             443          1,268            336          2,531            779
Navy                                                        151             253        12,622             638        12,773             891
Total                                                     1,416           $697         13,930         $1,514         15,346         $2,211

                                        Table 5 compares the services’ use of competition for contracts we
                                        sampled in 1995 with that used in contracts awarded since the beginning
                                        of fiscal year 1996. The Air Force had the greatest percent of competitive
                                        contracts in 1995 and 1996. The Army’s use of competition decreased, and
                                        the Navy’s use was low for both periods.


                                        15
                                         Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs
                                        (GAO/T-NSIAD-97-110, Mar. 12, 1997).
                                        16
                                         Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix
                                        (GAO/NSIAD-96-148, Apr. 17, 1996) and Defense Depot Maintenance: Commission on Roles and
                                        Mission’s Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996).



                                        Page 28                                                                      GAO/T-NSIAD-97-112
Table 5: DOD’s Use of Competition for Depot Maintenance Work
                                                           Competitive contracts open in     Competitive contracts awarded
                                                                       1995                     from FY 1996 to date
                                                                Percent of     Percent of         Percent of     Percent of
Service                                                      total number      total value     total number      total value
Army                                                                   23              53                 5               .2
Air Force                                                              39              62                50              57
Navy                                                                    8              39                 1              28



Reason Cited for                         Our work also showed that, for existing weapon systems, obtaining a
Sole-Source Awards                       competitive market may be costly for DOD because it has not acquired the
                                         technical data rights for many of its weapon systems. In examining the
                                         reasons for sole-source contracting, we observed that the justification
                                         most often cited was that competition was not possible because DOD did
                                         not own the technical data rights for the items to be repaired. Command
                                         officials told us that DOD would have to make costly investments in order
                                         to promote full and open competition for many of its weapon systems.
                                         Also, we have found that savings through competition may be adversely
                                         affected by private businesses that choose not to bid for maintenance
                                         workloads that have (1) small volumes, (2) obsolete technology,
                                         (3) irregular requirements, and (4) unstable funding. DOD may be able to
                                         encourage more competitive bidding through bundling common work and
                                         offering contracts with terms and conditions such as multiple options and
                                         multiyear performance periods.


                                         In conclusion, the inefficient operation of depot maintenance activities
Conclusion                               results in a reduction in the military services purchasing power through its
                                         operations and maintenance funds. DOD faces difficult decisions in
                                         outsourcing depot maintenance workloads to create a balanced,
                                         cost-effective system. Depot maintenance privatization should be
                                         approached carefully, allowing for evaluation of the economic, readiness,
                                         and statutory requirements that surround individual workloads. If not
                                         effectively managed, the privatization of workloads, including the
                                         downsizing of remaining DOD depot infrastructure, could exacerbate
                                         existing excess capacity problems and the inefficiencies inherent in
                                         underused depot capacity. We believe DOD needs to develop an overall
                                         plan for addressing its key management issues, including its proposed
                                         management structure for depot maintenance, for review by the Congress
                                         and other affected parties.




                                         Page 29                                                         GAO/T-NSIAD-97-112
Appendix I

History of the Services’ Depot Systems


               The services’ maintenance depots have primary responsibility for
               maintaining, overhauling, and repairing most major systems and system
               components, including aircraft, helicopters, ships, tanks, artillery, support
               vehicles, missiles, and ammunition. The maintenance depots are a
               controlled source of technical capability for repairing and manufacturing
               mission-essential equipment and components that support peacetime
               operations or a surge capability in the event of total mobilization or some
               other national defense contingency. The depots also provide engineering
               services for the production and development of hardware design changes,
               and develop and maintain computer software. Furthermore, they furnish
               technical teams to provide field maintenance of equipment in emergencies,
               as needed.


               From the Revolution until World War II, the Army’s equipment
Army Depots    maintenance needs were mostly contracted out. During the 19th century,
               in-house maintenance work, consisting mostly of rifle and other gun repair
               and carriage repair, was done in the Army’s arsenals—which also
               manufactured guns. The number of arsenals tended to rise and fall
               according to the various wars and other military actions that occurred in
               the 19th and early 20th centuries.

               About the time of World War I, the Army began to acquire larger
               equipment, such as trucks and tanks, which typically require more
               maintenance than rifles, guns, and carriages. Still, most maintenance work
               between World War I and II continued to be contracted out. Finally, during
               and after World War II, large-scale, in-house equipment maintenance
               began in earnest when the Army acquired massive quantities of new,
               modern equipment.

               By the 1970s, the Army’s depot maintenance work was centralized at a
               limited number of depots compared to previous years. In 1976, 10 depots
               performed maintenance work in the continental United States and 2 in
               Europe. Between 1983 and 1985, Army depot maintenance personnel
               strengths increased to over 20,000, their highest level ever. At that time,
               the organic program represented approximately 67 percent of the total
               Army direct depot maintenance program funding. During the mid-1980s,
               the Army lost some of its organic depot maintenance workload, staffing,
               and capacity. By 1988, only eight depots were still performing
               maintenance work in the United States and only one in Europe. Sierra and
               New Cumberland depots had stopped maintenance work in the United
               States and in Europe, the Mainz Depot was closed. However, as its



               Page 30                                                    GAO/T-NSIAD-97-112
                 Appendix I
                 History of the Services’ Depot Systems




                 in-house maintenance capability was declining, the Army increased its
                 reliance on commercial sources, reversing a long trend.

                 Although the Department of Defense’s (DOD) input to the 1995 the base
                 closure and realignment (BRAC) recommended closing the Red River Army
                 Depot and transferring the light combat vehicle maintenance mission to
                 Anniston Army Depot, the BRAC Commission disagreed. The Commission
                 found that while Anniston had the capacity to accept ground combat
                 vehicle depot maintenance workload from Red River, closing Red River
                 would place too much risk on readiness. It recommended realigning Red
                 River Army Depot by moving all maintenance missions, except for those
                 related to the Bradley fighting vehicle series, to other depot maintenance
                 activities, including the private sector.

                 In addition, the 1995 BRAC Commission agreed with the Secretary of
                 Defense’s recommendation to realign depot-level maintenance at the
                 Letterkenny depot to other depots or the private sector. It recommended
                 the (1) transfer of towed and self-propelled combat vehicle maintenance
                 workloads to the Anniston depot and missile guidance system
                 maintenance workload to the Tobyhanna depot or the private sector and
                 (2) retention of an enclave for conventional ammunition storage and
                 tactical missile disassembly and storage at Letterkenny.


                 In 1799, the Congress authorized five naval shipyards to be located at
Navy Shipyards   Portsmouth, New Hampshire; Boston, Massachusetts; New York, New
                 York; Philadelphia, Pennsylvania; and Norfolk, Virginia. The Mare Island
                 and Puget Sound shipyards were authorized in 1852 and 1891, respectively.
                 The last four naval shipyards were authorized in this century: Charleston,
                 in 1901; Pearl Harbor, in 1908; San Francisco (Hunters Point), in 1919; and
                 Long Beach, in 1940.

                 From the earliest years through World War I, naval shipyards were the
                 principal logistics support element in the Navy’s shore establishment. In
                 addition to building and repairing ships, naval shipyards provided many
                 support activities, such as supply support, medical and dental care, and
                 training facilities. During the period between the World Wars, additional
                 shore facilities were established to support the fleet and provide a wide
                 range of support services. Naval shipyards were thus able to focus on their
                 industrial mission of building, maintaining, and modernizing Navy ships.
                 Employment peaked at over 380,000 personnel during World War II.




                 Page 31                                                  GAO/T-NSIAD-97-112
                       Appendix I
                       History of the Services’ Depot Systems




                       In 1968, naval shipyards stopped building ships in order to concentrate on
                       repairing an increasingly complex fleet. This enabled the private sector to
                       focus more on new construction. From the mid-1960s to the mid-1970s, the
                       Navy closed three nonnuclear shipyards—New York, Boston, and Hunters
                       Point—leaving six nuclear capable and two nonnuclear naval shipyards.
                       These closure decisions were made after careful studies indicated that
                       there was excess capacity for the foreseeable peacetime and mobilization
                       workloads.

                       During the post-Vietnam years, naval shipyards’ employment peaked at
                       80,000 in 1983. Since then, naval shipyard employment levels have
                       declined due to improved ship design techniques, reduced force levels,
                       changes in maintenance philosophy, and austere budgets. As a result, the
                       Philadelphia Naval Shipyard was selected for closure by the 1991 BRAC
                       Commission and the Mare Island and Charleston naval shipyards were
                       selected for closure by the 1993 BRAC Commission. All three shipyards
                       were closed in 1996.

                       The 1995 BRAC Commission recommended closing the Long Beach Naval
                       Shipyard, and retaining the sonar dome government-owned,
                       contractor-operated facility and family housing units needed to fulfill Navy
                       requirements. The shipyard ceased operations in July 1996 and will close
                       in September 1997. The employment level of the remaining four naval
                       shipyards is projected at 22,771 by the end of fiscal year 1997.


                       The first naval aviation maintenance depot was established in 1917 at
Navy Aviation Depots   Norfolk, Virginia, and was named the Construction and Repair
                       Department. In 1923, this unit and two others formed by then—one at
                       North Island and one at Pensacola—were redesignated as Assembly and
                       Repair Departments. In 1948, their names were changed to Overhaul and
                       Repair Departments. Prior to 1967, the aviation depots were under the
                       cognizance of their respective air stations. The status of Overhaul and
                       Repair Departments at the six Navy and one Marine Corps Air Stations
                       was changed in 1967 to that of separate commands, each called a Naval Air
                       Rework Facility and directed to report to the Commander of the Naval Air
                       Systems Command instead of the air station commanding officer. In 1987,
                       the name Naval Aviation Depot replaced the name Naval Air Rework
                       Facility to more accurately reflect the range of its activities.

                       In 1973, the Naval Air Rework Facility, Quonset Point, Rhode Island, was
                       closed under the Navy Shore Establishment Realignment Program. This



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                      Appendix I
                      History of the Services’ Depot Systems




                      was the first naval aviation depot to close in recent history. The 1993 BRAC
                      Commission called for closing three more naval aviation depots—those
                      located in Norfolk, Virginia; Pensacola, Florida; and Alameda, California.
                      The depots remaining open are located at the Marine Corps Air Station at
                      Cherry Point, North Carolina; the Naval Air Station at North Island, San
                      Diego, California; and the Naval Air Station at Jacksonville, Florida.

                      The naval aviation depots went from a high of 35,690 employees in 1967 to
                      14,797 employees in 1995. Further planned reductions from closures and
                      downsizing are projected to reduce the number of employees to 10,543 by
                      1999. DOD did not recommend additional aviation depot closures as a result
                      of the 1995 BRAC process.


                      The two Marine Corps maintenance depots are now called
Marine Corps Depots   multicommodity maintenance centers. The oldest, in Albany, Georgia, was
                      established as the Repair Branch of the Marine Corps Supply Center in
                      1954. The other, located in Barstow, California, was established in 1961 as
                      the Yermo Complex. The facilities have grown over the years as a result of
                      additional mission responsibilities and the expansion of their industrial
                      production capabilities. Today, each facility has just under 1,000 civilian
                      employees and 10 military personnel. Each generally supports the same
                      systems and commodities, except that Albany also supports the Marine
                      Corps Maritime Prepositioning Forces Program. Both Albany and Barstow
                      perform a combination of intermediate and depot maintenance activities.


                      From 1918 to 1939, the Army Air Corps, from which the Air Force was
Air Force Depots      created after World War II, operated four air depots. With the threat of
                      global conflict in 1939, two additional depots were constructed. During
                      World War II, the number of depots increased to 12. After the war, three
                      depots were deactivated. In the early 1950s, during the Korean Conflict,
                      the Air Force invested $1.8 billion to upgrade the remaining nine depots,
                      which became part of the Air Materiel Command. A 10th depot was
                      activated in 1961 to house laboratories and management activities for the
                      Air Force’s metrology and calibration program and depot repair of inertial
                      navigation systems for intercontinental missile systems and aircraft. The
                      Air Force entered the 1960s with over 145,000 personnel at 10 logistics
                      centers, including 62,000 depot maintenance personnel. In 1963 and 1964,
                      4 of the 10 depots were closed. The remaining six became the base of the
                      Air Force Logistics Command in support of the Vietnam Conflict. Five of
                      the six were located on multifunction logistics bases called air materiel



                      Page 33                                                    GAO/T-NSIAD-97-112
Appendix I
History of the Services’ Depot Systems




areas, which were responsible for both wholesale supply and depot
maintenance activities for Air Force weapon systems and equipment. By
the end of the 1960s, the Air Force Logistics Command had been reduced
to 112,000 employees, including 50,000 depot maintenance personnel.

During the 1970s, the Air Force consolidated individual repair activities at
its 6 depots, reducing the number from 52 to 20. This realignment
eliminated duplicate repair sources for many commodity items. During the
early 1980s, Air Force logistics operations grew as U.S. military forces
were increased. The Air Force undertook a major capitalization
improvement program to modernize the depot industrial base with modern
plant equipment and technological advancements. The Air Force Logistics
Command employed 40,800 depot maintenance personnel in 1986. In the
1990s, downsizing, consolidations, and cuts were made to the Air Force
depot system, and the Air Force Logistics Command merged with the Air
Force Systems Command to form the Air Force Materiel Command. Depot
maintenance manning was reduced by 17 percent between 1990 and 1991.
In 1995, the Air Force Materiel Command had 29,004 depot maintenance
personnel.

The type of depot maintenance work done at each of the Air Force depots
includes the following: (1) Ogden Air Logistics Center— strategic missiles,
aircraft, air munitions, photo/reconnaissance, and landing gear;
(2) Oklahoma City Air Logistics Center— aircraft, engines, and oxygen
equipment; (3) Sacramento Air Logistics Center— space/ground
communications-electronics, aircraft, hydraulics, and instruments; (4) San
Antonio Air Logistics Center— aircraft, engines, nuclear equipment; and
(5) Warner Robins Air Logistics Center— aircraft, avionics, propellers, and
life support systems.

The 1993 BRAC Commission recommended closing the Aerospace Guidance
and Metrology Center, Newark, Ohio, which has been privatized-in-place.
This privatized facility, which is currently known as the Boeing Guidance
Repair Center (BGRC), does repairs, overhauls, and upgrades for inertial
guidance and navigation systems and components and displacement
gyroscopes for intercontinental missiles and most Air Force aircraft. It
also houses the management of the Air Force’s metrology and calibration
program. Although DOD did not recommend any additional depots for
closure in 1995, the BRAC Commission recommended closing the San
Antonio and Sacramento Air Logistics Centers, which the Air Force also
plans to privatize-in-place using competitive procedures that include a
military depot. The Air Force also has one depot-level activity in Colorado



Page 34                                                   GAO/T-NSIAD-97-112
                         Appendix I
                         History of the Services’ Depot Systems




                         Springs, Colorado, which maintains the software on Air Force space
                         systems. This activity is not funded using depot maintenance funds and is
                         not officially categorized as a depot. It is staffed with a combination of
                         government and contractor personnel.



Other Depot Facilities

Naval Weapons Stations   The five existing naval weapons stations are descendants of the naval
                         ammunition depots of World War II. However, these depots are no longer
                         the major providers and maintainers of naval ordnance that they were in
                         the past. In the 1970s, the Army, under the single manager concept, was
                         assigned responsibility for producing and maintaining most of the Navy’s
                         high-volume conventional munitions and missiles. The naval weapons
                         stations now maintain only small volume, miscellaneous items.


Naval Surface Warfare    The Naval Surface Warfare Center, Crane Division, supports the
Center                   development, production, evaluation, and maintenance of electronic and
                         mechanical products integral to combat weapon systems. The Crane
                         Division employs about 470 depot maintenance personnel as of fiscal
                         year 1997. Commissioned in 1941 as a naval ammunition depot, Crane was
                         one of four inland activities constructed to load, store, and issue
                         ammunition to the fleet. Today, the Center serves as a modern
                         sophisticated leader in diverse and highly technical product lines such as
                         microwave devices, acoustic sensors, and microelectronic technology.

                         The Louisville, Kentucky, site of the Crane Division was commissioned by
                         the Navy in 1941 to produce ordnance material and munitions for World
                         War II. Louisville employed 4,480 personnel at its peak during World
                         War II. The 1995 BRAC Commission urged the Navy to allow privatization of
                         the facility, which occurred in August 1996. At the time of the BRAC
                         recommendation, the depot employed 1,600 civilian personnel. It provides
                         overhaul and engineering support for naval gun and missile launching
                         systems, and produces small weapon system parts using flexible
                         computer-integrated manufacturing technologies and methods.


Naval Undersea Warfare   The Navy’s undersea warfare munitions capability was originally
Center                   established in 1914. In recent years, depot maintenance for undersea




                         Page 35                                                   GAO/T-NSIAD-97-112
Appendix I
History of the Services’ Depot Systems




warfare systems has been consolidated at the Naval Undersea Warfare
Center, Keyport, Washington. The consolidation was done to recognize the
inherent efficiencies of having a single national depot maintenance center
for the Navy’s family of torpedoes. Among the Center’s assigned duties, is
the maintenance and repair of undersea weapons and systems, underwater
targets, and countermeasure devices.

Since the end of the Cold War, workload at the Center has followed a
downward trend. Direct workload has declined from a peak of 821 work
years in the late 1980s to 417 work years in fiscal year 1997, representing a
51-percent decline.




Page 36                                                    GAO/T-NSIAD-97-112
Appendix II

Abstracts From Related GAO Products


High-Risk Series: Defense      This report addresses the difficult process of reducing DOD’s
Infrastructure                 infrastructure. It focuses on the need for infrastructure reductions and
(GAO/HR-97-7, Feb. 1997)       obstacles that have hindered DOD’s ability to achieve significant cost
                               savings in this area. It describes DOD’s future years funding plan for
                               infrastructure and discusses areas in which we have identified
                               opportunities for reductions. It also discusses the need for DOD to give
                               greater structure to its reduction efforts by developing a strategic plan and
                               involving the Congress.


Air Force Depot                Deciding the future of DOD’s depot system is difficult. Depot maintenance
Maintenance:                   privatization should be approached carefully, allowing for evaluation of
Privatization-in-Place Plans   the economic, readiness, and statutory requirements that surround
                               individual workloads. Privatizing workloads in place at two closing Air
Are Costly While Excess        Force depots does not reduce the excess capacity in the remaining depots
Capacity Exists                or the private sector and consequently is not a cost-effective approach to
(GAO/NSIAD-97-13,              reducing depot infrastructure. Private industry representatives generally
Dec. 31, 1996)                 agree with this statement.

                               Although the Air Force’s privatization initiative for the Sacramento and
                               San Antonio depots has not progressed far enough for us to estimate
                               precise costs and savings, consolidating depot maintenance workloads at
                               remaining underused depots could result in a net savings in 2 years or less.
                               Transferring the workloads to other depots could yield additional
                               economy and efficiency savings of over $200 million annually, in addition
                               to the $268 million annual savings the BRAC Commission estimated.
                               Moreover, if the workload consolidation does not occur, the remaining Air
                               Force depots are likely to become more inefficient and more costly. Plans
                               to delay many closure-related actions until 2001 will substantially reduce
                               future savings envisioned by the BRAC Commission.


Navy Depot Maintenance:        We found that the Navy’s plan for privatizing the workloads in place at the
Cost and Savings Issues        Louisville depot will not reduce excess capacity in the remaining public
Related to                     depots or the private sector, may prove more costly than transferring the
                               work to other depots, and does not appear to be consistent with an
Privatizing-in-Place at the    existing requirement for public-private competitions. The Navy’s
Louisville, Kentucky, Depot    preliminary cost analysis that privatization-in-place is cost-effective is
(GAO/NSIAD-96-202,             based on limited cost data that overstates the cost of relocating the
Sept. 18, 1996)                workloads by at least $66 million and on the general assumption that
                               privatizing workloads will save 20 percent. The projection was based on
                               conditions that are not relevant for most of the depot maintenance



                               Page 37                                                    GAO/T-NSIAD-97-112
                            Appendix II
                            Abstracts From Related GAO Products




                            workloads and does not reflect the cost of excess capacity in the public
                            sector. The goal of reaching 20 percent savings is not likely to be reached.
                            Furthermore, we were unable to find any element of the Navy’s plan for
                            privatization of the Louisville depot that addresses 10 U.S.C. 2469, which
                            requires competition between the public and private sectors before
                            privatizing DOD workloads valued at not less than $3 million.


Army Depot Maintenance:     If not effectively managed, the privatization of depot maintenance
Privatization Without       activities, could exacerbate existing capacity problems and the
Further Downsizing          inefficiencies inherent in underuse of depot maintenance capacity.
                            Tentative plans to transfer some workloads from realigned depots to
Increases Costly Excess     remaining depots should improve capacity use and lower operating costs
Capacity                    to some extent, but they will not resolve the Army’s extensive excess
(GAO/NSIAD-96-201,          depot capacity problems. Since the Army is not effectively downsizing its
Sept. 18, 1996)             remaining depot maintenance infrastructure, privatization initiatives
                            outlined in DOD’s March 1996 workload analysis report to Congress will
                            increase excess capacity in Army depots and increase Army depot
                            maintenance costs. Privatizing workloads in place will also aggravate
                            excess capacity conditions in the private sector.

                            In the absence of further downsizing, the Army can significantly reduce
                            depot maintenance costs by transferring, rather than privatizing-in-place,
                            workloads from closing and downsizing depots.


Defense Depot               Pursuant to a congressional request, we examined the Commission on
Maintenance: Commission     Roles and Missions (CORM) privatization assumptions to determine
on Roles and Mission’s      whether privatization would adversely affect military readiness and
                            sustainability.
Privatization Assumptions
Are Questionable            The CORM’s depot privatization savings and readiness assumptions are
(GAO/NSIAD-96-161,          based on conditions that do not currently exist for many depot workloads.
July 15, 1996)              Privatizing essentially all depot maintenance under current conditions
                            would not likely achieve expected savings and, according to the military
                            services, would result in unacceptable readiness and sustainability risks.
                            The extent to which DOD’s long-term privatization plans and market forces
                            will effectively create more favorable conditions for outsourcing is
                            uncertain.

                            The CORM assumed a highly competitive and capable private market exists
                            or would develop for most depot workloads. However, we found that most



                            Page 38                                                    GAO/T-NSIAD-97-112
                           Appendix II
                           Abstracts From Related GAO Products




                           of the depot workloads contracted to the private sector are awarded
                           non-competitively. Further, the CORM’s privatization savings do not reflect
                           the cost impact of excess capacity in the public depots. The CORM’s
                           privatization assumptions are based primarily on reported savings from
                           public-private competitions for commercial activities. These activities
                           were generally dissimilar to depot maintenance activities because they
                           involved relatively simple, routine, and repetitive tasks that did not
                           generally require large capital investments or highly skilled and trained
                           personnel. The CORM report stated that the services’ organic depot
                           maintenance requirements exceed the real needs of the national military
                           strategy and that private contractors could provide essentially all of the
                           depot maintenance services. The CORM assumed that public-private
                           competitions would be used only in the absence of private sector
                           competition and would be limited to only a few cases. We found that
                           public-private competitions have resulted in savings and benefits and can
                           provide a cost-effective way of making depot workload allocation
                           decisions for certain workloads.

                           Our analysis of depot maintenance workloads currently contracted to the
                           private sector shows, for the most part, that contractors were responsive
                           to their requirements for delivery and performance. Historically, the
                           services have determined that the risks of privatizing most workloads are
                           too high and have retained them in the public depots. We found that DOD’s
                           risk assessment methodology does not include guidance or criteria for the
                           services to use in making such assessments and involves subjective
                           judgments. The services are reassessing their previously designated core
                           workloads with a view toward privatization.


Defense Depot              Our analysis of DOD’s workload report shows that the use of more
Maintenance: More          comprehensive and consistent data would provide Congress and DOD
Comprehensive and          decisionmakers a more accurate picture of historical and future
                           projections of depot maintenance workload allocations between the
Consistent Workload Data   public and private sectors. Without such data, the reports are of limited
Needed for                 use to Congress and defense decisionmaker when considering public and
Decisionmakers             private sector workload allocation policy. Although DOD’s workload report
(GAO/NSIAD-96-166,         primarily justifies eliminating the 60-40 rule, our work shows that, with
May 21, 1996)              few exceptions, the rule has not affected past public-private workload
                           allocation decisions. However, if not repealed, the 60-40 rule would
                           restrict DOD’s plans for large-scale privatization.




                           Page 39                                                   GAO/T-NSIAD-97-112
                             Appendix II
                             Abstracts From Related GAO Products




                             The workload report’s projections of public-private depot workloads for
                             fiscal years 1997-2001 are not consistent and comparable to historical data.
                             The future data does not include certain types of private sector depot
                             maintenance costs, including interim contractor support and contractor
                             logistics support. We include a matter for congressional consideration for
                             improving the methodology and process DOD uses to collect, analyze, and
                             report depot maintenance workload data for the public and private
                             sectors.


Defense Depot                The DOD policy report calls for a greater reliance on private sector
Maintenance: DOD’s Policy    maintenance capabilities than the current projection. The policy provides
Report Leaves Future Role    wide latitude regarding how certain policies and concepts will be
                             implemented. For example, each service is implementing differently the
of Depot System Uncertain    policy’s new process for risk assessments to determine which
(GAO/NSIAD-96-165,           mission-essential maintenance requirements should be privatized. Thus, it
May 21, 1996)                may be impossible to estimate the future depot maintenance workload
                             mix. The DOD policy also shows a preference for maintaining new systems
                             in the private sector. However, it is unclear that this is the most
                             cost-effective long-term approach for military-unique defense systems. In
                             addition, the policy excludes DOD depots from competing for non-core
                             work except when private sector competition is inadequate. This is
                             inconsistent with congressional direction for competition between
                             public-private entities.


Defense Depot                Responding to a congressional request, we testified on the privatization of
Maintenance: Privatization   defense depot maintenance activities. We noted that (1) DOD’s evolving
and the Debate Over the      depot maintenance policy includes a public-private mix and shifts work to
                             the private sector where feasible; (2) depot privatization could worsen
Public-Private Mix           excess maintenance capacity and inefficiencies if not carefully managed;
(GAO/T-NSIAD-96-146,         (3) the DOD policy report provides an overall framework for managing
Apr. 16, 1996, and           depot maintenance activities and substantial implementation flexibility,
GAO/T-NSIAD-96-148,          but the policy is not consistent with congressional guidance on
Apr. 17, 1996)               public-private competition for noncore workloads; (4) privatizing depot
                             maintenance is not likely to achieve the 20-percent savings DOD projects,
                             since most savings have come from competition rather than privatization;
                             (5) about half of depot maintenance private-public competitions have been
                             won by the public sector; and (6) DOD plans to privatize-in-place and delay
                             downsizing and closure of two Air Logistics Centers will probably cost
                             more than closing them and relocating their workloads to underutilized
                             defense or private facilities.



                             Page 40                                                   GAO/T-NSIAD-97-112
                              Appendix II
                              Abstracts From Related GAO Products




Military Bases: Closure and   Our analysis of base support costs in the future year defense plan and at
Realignment Savings Are       nine closing installations indicates that BRAC savings should be substantial.
Significant, but Not Easily   However, DOD’s systems do not provide information on actual BRAC
                              savings. Therefore, the total amount of actual savings is uncertain. If DOD
Quantified                    does not fully achieve estimated BRAC savings, DOD’s ability to fund future
(GAO/NSIAD-96-67, Apr. 8,     programs at planned levels will be affected. DOD has complied with the
1996)                         legislative requirement for submitting annual cost and savings estimates,
                              but there are limitations to the submissions’ usefulness. Consequently, the
                              Congress does not have an accurate picture of the savings achieved by the
                              BRAC process.



Depot Maintenance:            The rationale and requirement for maintaining some capability in the
Opportunities to Privatize    public depot system derive both from statutory requirements and from the
Repair of Military Engines    recognition that some public depot capability is needed to mitigate cost
                              and readiness risks where private sector capabilities are limited or
(GAO/NSIAD-96-33, Mar. 5,     inadequate. Private sector capabilities generally make commercial
1996)                         counterpart engines ideal candidates for privatization. However, DOD has
                              about 45 percent excess capacity for engine depot maintenance.
                              Additional privatizations of commercial counterpart engines at a time of
                              decreasing depot workload—without first decreasing the excess capacity
                              in DOD’s depots—would increase the per-unit repair cost of work
                              remaining in DOD’s depot system.

                              It is not yet known how DOD plans to implement its privatization initiatives
                              or how it will address statutory provisions such as 10 U.S.C. 2469—which
                              require competitions that include public depots before privatizing depot
                              maintenance workload valued at $3 million or more.


Closing Maintenance           DOD has substantially reduced its initial estimates of net savings resulting
Depots: Savings, Workload,    from depot closures during the 6-year implementation period allowed by
and Redistribution Issues     law and, to a lesser extent, of the annual savings after the implementation
                              period has been completed. Although DOD believes its new estimates are
(GAO/NSIAD-96-29, Mar. 4,     more accurate, they still do not accurately reflect potential savings
1996)                         because (1) some closure-related costs are not included and (2) some
                              estimates have not been updated to reflect major changes in such areas as
                              the expected cost of doing work after it is transferred to new sources of
                              repair. As a result, the magnitude of the savings is uncertain.




                              Page 41                                                    GAO/T-NSIAD-97-112
                             Appendix II
                             Abstracts From Related GAO Products




                             DOD is offering displaced employees a comprehensive and costly
                             outplacement program that provides assistance, benefits, and separation
                             incentives, thus limiting the number of employees involuntarily separated.

                             Military services can increase savings by (1) conducting public-public and
                             public-private competitions for the work or (2) analyzing the
                             cost-effectiveness of moving the work to other service depots. In addition,
                             they can improve operations through reengineering. However, DOD has not
                             taken action to maximize these savings. Instead, the services have
                             (1) discontinued public-public and public-private competition programs in
                             May 1994, (2) implemented a privatization-in-place plan that will likely
                             increase maintenance costs, (3) rarely considered interservicing
                             alternatives, and (4) not required the depots to reengineer transferred
                             workloads.


Navy Maintenance:            Navy public-private competitions generally resulted in savings and
Assessment of the            benefits, although precise quantification of such savings is not possible.
Public-Private Competition   Due to the time and cost of performing such competitions, a rapidly
                             declining depot maintenance workload, and a private sector concern
Program for Aviation         about fairness, much less maintenance work was subjected to
Maintenance                  public-private competition than had been projected. The issue of fairness
(GAO/NSIAD-96-30, Jan. 22,   centers on private sector concerns that military depot prices have not
1996)                        reflected the total cost to the government of performing this work,
                             including the labor and material to be applied to competition work as well
                             as an appropriate share of overhead.

                             Congressional direction to reinstitute public-private competitions together
                             with recommendations by the Commission on Roles and Missions to
                             privatize most depot maintenance work has resulted in DOD’s reexamining
                             its depot workload with a view toward moving more work to the private
                             sector. While DOD maintains it has reinstituted its public-private
                             competition program, in practice no competitions have been held since
                             DOD terminated the program in 1994. A number of factors may limit or
                             impede a major competition program in the current environment. They
                             include (1) the cost and difficulties of such competitions and (2) the
                             amount of work available for competition under current law and policies
                             limiting the mix of public and private depot maintenance work. Initiatives,
                             such as improving cost accounting systems for depot work, can be taken
                             to improve public-private competitions to ensure their future usefulness in
                             identifying the most cost-effective source of repair for depot maintenance
                             workloads.



                             Page 42                                                   GAO/T-NSIAD-97-112
                            Appendix II
                            Abstracts From Related GAO Products




Depot Maintenance: the      Comparing F/A-18 Modification, Corrosion, and Paint Program cost and
Navy’s Decision to Stop     performance at the North Island and Ogden depots was complicated
F/A-18 Repairs at Ogden     because a number of data judgments and adjustments were required. The
                            Navy’s analysis did not always use the most current and complete
Air Logistics Center        information available and did not make adjustments for all known
(GAO/NSIAD-96-31,           differences in work completed at each depot. Our analysis, using more
Dec. 15, 1995)              current and complete information, showed that Ogden’s costs were
                            slightly lower. Nevertheless, given DOD’s decision to retain F/A-18 repair
                            capability at the Navy’s North Island facility, it appears consolidation of
                            the workload at that location is the most cost-effective approach. There is
                            no clear statutory or DOD guidance that defines the steps, processes,
                            analyses, and validation procedures required for a merit-based selection
                            process. Such guidance is needed if DOD intends to base future depot
                            maintenance workload allocation decisions on merit-based analyses.


Depot Maintenance: Issues   The DOD annually spends about $15 billion for depot maintenance,
in Allocating Workload      modifications, and upgrades to support aircraft, combat vehicles, wheeled
Between the Public and      vehicles, ships, and other equipment. DOD is downsizing and must consider
                            how to cost-effectively acquire needed depot maintenance activities while
Private Sectors             supporting industrial base needs in both the public and private sectors. We
(GAO/T-NSIAD-94-161,        discussed (1) the share of DOD’s depot maintenance program spent in the
Apr. 12, 1994)              public and private sectors; (2) the use of public-private competition as a
                            tool for allocating the depot maintenance workload; (3) observations on
                            the Defense Science Board Depot Maintenance Task Force findings and
                            recommendations; and (4) DOD’s transfer of employees, workload,
                            equipment, and facilities at closing maintenance depots.

                            We have concerns about the implementation of the public-private
                            competition, and the amount of savings is hard to quantify. Nevertheless,
                            we believe that the depot maintenance costs can be cut. We support many
                            of the task force’s findings and recommendations but disagree on some
                            issues. For example, we agree that a rational maintenance core policy
                            needs to be identified but believe that this should be done throughout DOD
                            rather than on a service-specific basis. None of the maintenance depots
                            targeted for closure have shut down yet. DOD appears to have an effective
                            program to help employees find new jobs, although some workers may
                            have to settle for lower-paying positions. Concerns have also been raised
                            about other aspects of the depot closures.




                            Page 43                                                   GAO/T-NSIAD-97-112
                             Appendix II
                             Abstracts From Related GAO Products




Depot Maintenance: Issues    We were asked to determine (1) the extent to which the current DOD depot
in Management and            maintenance system has excess capacity, (2) the basis for current DOD
Restructuring to Support a   allocations of depot work between the public and private sectors,
                             (3) whether the private sector’s role in the performance of depot
Downsized Military           maintenance activities is changing, (4) the status of the public-private
(GAO/T-NSIAD-93-13,          competition initiative, and (5) the action needed to ensure that future
May 6, 1993)                 defense maintenance requirements can be managed more cost-effectively.

                             We testified that substantial excess capacity exists within DOD’s depot
                             maintenance system. Conservative estimates put excess capacity at 25 to
                             50 percent. Because depot maintenance costs are significantly influenced
                             by overhead, elimination of this excess capacity will be critical to reducing
                             future depot maintenance costs. DOD needs to closely review its capital
                             equipment acquisitions before acquiring new or replacement capability for
                             workload that may be allocated to the private sector. Cost-effective future
                             management of the defense depot maintenance system is first dependent
                             on determining what workload capability must be retained within
                             DOD—commonly referred to as core requirements—and what can or
                             should be contracted out to the private sector. In addition, the services
                             have not defined their minimum essential core requirements.

                             In the past, the private sector’s role in depot maintenance remained
                             relatively consistent at about 33 percent of the annual depot maintenance
                             budget and is aggressively seeking additional workload. However, DOD
                             does not have a comprehensive strategy for determining what depot
                             maintenance work should be done by the private sector. Public-private
                             competitions have been implemented to varying degrees among the
                             services. The current DOD depot management structure does not appear to
                             be conducive to making interservice decisions that are essential to
                             developing a more effective and efficient depot maintenance system.




                             Page 44                                                    GAO/T-NSIAD-97-112
Appendix III

DOD Depot Employment Levels by Service



                      80,000




                      60,000
Number of Employees




                      40,000




                      20,000




                          0
                               FY 87   FY 92    FY 93         FY 94   FY 95   FY 96    FY 97

                                ARMY NAVAIR NAVSEA NAVY OTHER AIR FORCE MARINE CORPS




                                                        Page 45                                GAO/T-NSIAD-97-112
Appendix IV

Capacity and Workload Forecasts for
Remaining Depots for Fiscal Year 1999


Direct labor hours in thousands
                                                                                                    Percentage    Percentage
                                  Maximum                                  Maximum     Available     excess of     excess of
                                   potential     Available                  capacity    capacity     maximum        available
Depot                              capacity       capacity      Workload     excess      excess       capacity      capacity
Naval aviation
Cherry Point                          5,735             3,797      3,620       2,115        177            37              5
Jacksonville                          7,158             5,572      5,355       1,803        217            25              4
North Island                          7,772             4,318      4,027       3,745        291            48              7
Subtotal                             20,665         13,687        13,002       7,663        685            37              5
Naval shipyard
Norfolk                              15,851         12,000         8,723       7,128      3,277            45             27
Pearl Harbor                          8,032             5,320      3,739       4,293      1,581            53             30
Portsmouth                            7,996             7,028      3,209       4,787      3,819            60             54
Puget Sound                          14,919         14,000        11,717       3,202      2,283            21             16
Subtotal                             46,798         38,348        27,388      19,410     10,960            41             29
Other Navy
Albany                                1,883             1,215      1,089        794         126            42             10
Barstow                               1,563             1,037        928        635         109            41             11
Crane                                 2,451              974         583       1,868        391            76             40
Keyport NUWC                          1,141              672         555        586         117            51             17
Subtotal                              7,038             3,898      3,155       3,883        743            55             19
Air Force
Oklahoma City                        12,863             7,881      7,624       5,239        257            41              3
Ogden                                 9,005             8,371      4,596       4,409      3,775            49             45
San Antonio                          15,220             1,575      1,606      13,614         (31)          89             –2
Sacramento                           10,291             1,724        989       9,302        735            90             43
Warner Robins                         9,913             7,605      5,508       4,405      2,097            44             28
Subtotal                             57,291         27,156        20,323      36,968      6,833            65             25
Army
Anniston                              4,512             3,192      2,614       1,898        578            42             18
Corpus Christi                        4,714             4,009      3,338       1,376        671            29             17
Letterkenny                           3,707              213         164       3,543         49            96             23
Red River                             4,684             1,534        898       3,786        636            81             41
Tobyhanna                             7,606             5,091      2,736       4,870      2,355            64             46
Subtotal                             25,223         14,040         9,750      15,473      4,290            61             31
Total                               157,016         97,129        73,618      83,398     23,511            53             24




(709240)                                      Page 46                                                      GAO/T-NSIAD-97-112
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