Federal Property Disposal: Information on DOD's Surplus Property Program

Published by the Government Accountability Office on 1997-09-12.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Government Management,
                          Information, and Technology, Committee on Government
                          Reform and Oversight, House of Representatives

For Release on Delivery
Expected at
9:30 a.m., EDT
                          FEDERAL PROPERTY
September 12, 1997        DISPOSAL

                          Information on DOD’s
                          Surplus Property Program
                          Statement of David R. Warren, Director, Defense
                          Management Issues, National Security and International
                          Affairs Division

             Mr. Chairman and Members of the Subcommittee:

             We are pleased to be here to discuss the Department of Defense’s (DOD)
             process for disposing of surplus personal property. Surplus personal
             property can be any items other than real property, which is land and
             buildings and items permanently attached to them. Personal property
             includes items such as aircraft parts, computers, furniture, and clothing.
             DOD maintains a complex disposal system that is characterized by massive
             volumes of excess property. In fiscal year 1996, for example, DOD disposed
             of millions of items with a reported acquisition value (the amount
             originally paid for the items or most recently paid for similar items) of
             almost $24 billion. Our testimony today will focus on (1) an overview of
             how the disposal process works and how it differs from private sector
             disposal systems, (2) the means used to dispose of personal property,
             (3) efforts to improve the efficiency and effectiveness of the current
             disposal operation, and (4) opportunities to improve aspects of the
             disposal function through competitive outsourcing.

             DOD’s disposal process is governed by numerous laws and regulations that
Summary      require DOD’s surplus property be made available to many organizations.
             Thus, the best items are taken through the transfer and donation process
             leaving the least marketable items available for sale. This and other factors
             contribute to DOD’s low rates of return. Although the private sector obtains
             higher rates of return than DOD for comparable items, it does not handle
             the quantities, types, and conditions of items that DOD does. Thus, the
             private sector is able to develop disposal expertise and tailor its disposal
             strategies so that it obtains higher rates of return.

             DOD recognizes that it needs to improve its management of property
             disposal and has adopted or is planning to adopt a number of commercial
             practices that should help improve its operations. DOD is also involving the
             private sector in certain aspects of the process, particularly in the sales of
             surplus property, to improve its rate of return and become more business
             like in its operations. In addition, aspects of DOD’s disposal process that
             are deemed to be not inherently governmental functions may be
             outsourcing candidates—an aim we supported in recent legislative

             The Federal Property and Administrative Services Act of 1949
Background   (P.L. 81-152), as amended, placed responsibility for the disposition of

             Page 1                               GAO/T-NSIAD-97-257 Federal Property Disposal
                           government real and personal property within the General Services
                           Administration (GSA). GSA delegated the responsibility for disposal of DOD
                           personal property to the Secretary of Defense, who in turn delegated it to
                           the Defense Logistics Agency (DLA). DLA established the Defense
                           Reutilization and Marketing Service (DRMS) to carry out the disposal
                           function. Although DRMS disposes of the majority of items generated by
                           DOD activities, certain categories of items, such as nuclear devices and
                           cryptographic equipment, are disposed of by other means.

                           In fiscal year 1996, DRMS had about 170 Defense Reutilization and
                           Marketing Offices (DRMO) worldwide that receive and dispose of personal
                           property for DOD activities. It also employed about 3,700 people and
                           disposed of millions of items with a reported acquisition value of almost
                           $24 billion.

Data Indicates Operating   With a few exceptions, historical data indicates that DRMS has experienced
Losses and Low Rates of    operating losses in recent years and low rates of return on disposed items.
Return on DRMS’ Disposal   For example, DRMS reported net operating losses in three of the four years
                           from fiscal year 1993 to 1996. These losses ranged from a low of
Operations                 $84 million in fiscal year 1996 to a high of $153 million in fiscal year 1995.
                           DRMS’ overall rate of return on the reported acquisition value of all usable
                           surplus property it sold in fiscal year 1996 was 1.97 percent. For fiscal
                           years 1995 and 1994, the rates were 2.28 and 1.83 percent, respectively.
                           DRMS calculates the rate of return by dividing the proceeds from the sale of
                           usable items by the reported acquisition value of usable property sold.
                           DRMS’ overall rate of return is based on all usable items sold (excludes

                           The rates of return on property disposal at overseas DRMOs are higher than
                           in the continental United States. For example, in fiscal year 1996, the rate
                           of return for DRMOs in Europe was 6.98 percent, whereas the rate in the
                           Pacific region was 2.88 percent. The higher rates of return at overseas
                           DRMOs are primarily due to better items being available for sale because of
                           fewer overseas transfer and donation customers. The lower rates in the
                           Pacific region, as compared to Europe, are due to (1) bilateral agreements
                           that give the host country “first right of refusal” (i.e., first opportunity to
                           buy the items), (2) a smaller customer base, and (3) higher shipping costs
                           incurred by customers due to longer distances.

                           Page 2                                GAO/T-NSIAD-97-257 Federal Property Disposal
                                         Figure 1 shows a general overview of the personal property disposal
DOD’s Personal                           process. The disposal process, which is governed by numerous laws and
Property Disposal                        regulations, starts when DOD activities turn in items to the DRMOs for
Process Is Guided by                     disposal. Upon arrival, the items are inspected, condition and
                                         demilitarization (i.e., rendering an item militarily unusable) codes are
Legislation While the                    verified; the type of sale is determined; and items requiring special
Private Sector Has                       handling such as hazardous material and precious metals are identified in
                                         order to apply extra controls. Items are accumulated for 2 to 4 weeks and
Greater Flexibility                      then processed together. At anytime during the process, all customers may
                                         screen items and attach tags, indicating a desire to have them, but the
                                         items may only be issued and removed in accordance with established
                                         priorities. First priority is given to DOD activities, federal agencies, and
                                         other entities with legislative priority equal to DOD, such as certain law
                                         enforcement organizations and humanitarian relief agencies, among
                                         others. Second priority goes to approved donee organizations, such as
                                         state and local governments, museums, and Boy and Girl Scouts. Within
                                         these priorities, items are dispensed on a first-come, first-served basis.
                                         Customers have 14 days to requisition and 14 days to remove items, unless
                                         otherwise agreed with the DRMO. Items that are tagged but are not removed
                                         within the prescribed time frames are available for use by other qualified
                                         organizations during a 3-day period known as the “blue light special.”

Figure 1: The Personal Property Disposal Process

        Excess Property a                                      Surplus Property b
    Property           Federal            Donation              Sales                  Blue                Sales
  accumulation          cycle              cycle              preparation              light          inspection/award
   14-28 days          21 days            21 days             10-42 days              special           and removal
Start                                                                                                Finish

Period 1           Period 2          Period 3            Period 4                 Period 5          Period 6
                                                                                  (3 days)
                                          Property not needed by DOD activities is considered to be excess and is available for
                                         reutilization by other DOD activities, transfer to other federal agencies, and transfer to
                                         organizations that have been given priority equal to that of the federal government for the purpose
                                         of obtaining excess personal property.
                                          Property not needed by the federal government or organizations with equal priority is considered
                                         surplus and is available for donation to eligible organizations or for sale.

                                         Page 3                                          GAO/T-NSIAD-97-257 Federal Property Disposal
                          Items that still remain after this part of the process has been completed
                          are sold to the general public through three types of sales—international,
                          local, and retail. International sales are used for items with global appeal,
                          such as machine tools, or property that requires additional controls, such
                          as hazardous materials. After several hundred items are accumulated, a
                          catalog is published, and sealed bids are solicited. The high bidder for
                          items requiring extra controls or demilitarization undergoes a clearance
                          process before the award. The DRMOs use local sales for items that do not
                          have global appeal and either publish a catalog or hold an auction at the
                          DRMO. Sealed bids are solicited for the catalog sales, and on-the-spot bids
                          are made at the auctions. Items with commercial appeal, such as
                          computers, furniture, and clothing are sold at retail stores at 40 DRMOs.
                          Retail sales are made on a cash and carry basis.

Disposal Systems in the   The disposal systems of private sector companies, particularly the
Private Sector            commercial airlines, are much different than DOD’s system, which is based
                          on statutory requirements. For example, the airlines we interviewed place
                          special emphasis on selling surplus property and create incentives for
                          employees to maximize the return on sales. These companies expect to
                          obtain reasonable proceeds from the surplus aircraft parts they sell and
                          are less concerned than DOD with how quickly the property moves off the
                          warehouse shelves. To maximize sales proceeds, staff are trained to
                          understand aircraft parts terminology and the applications that exist for
                          various parts. This training and experience make it more likely that highly
                          marketable parts will be identified and marketed appropriately. Further,
                          the staff often specialize in selling a specific category of part, such as
                          engine parts, to promote a better understanding of the parts and the
                          markets to which they sell.

                          In addition, progressive commercial companies provide employees with
                          the resources to effectively sell surplus property. Marketing staff are
                          provided a wide range of sales tools and techniques and are held
                          accountable for the property they intend to sell. At one airline, sales
                          personnel are responsible for the sale of the surplus property and are
                          rated on how well they maximize sales proceeds. Figure 2 compares the
                          differences between DOD’s and the private sector’s disposal processes.

                          Page 4                               GAO/T-NSIAD-97-257 Federal Property Disposal
Figure 2: Comparison of DOD and Private Sector Disposal Processes

     DOD                                                    Private sector
     Emphasizes moving items quickly and                    Emphasizes maximizing return
     complying with laws
     Handles huge quantities, types, and                    Handles few quantities, types, and
     conditions of items                                    conditions of items

     Cannot develop disposal expertise for 7                Can develop disposal expertise for fewer
     million active line items                              items

     Has rigid disposal system defined by laws              Can tailor disposal strategy on an
     and regulations; all items treated the                 individual item basis

     Best items are taken through transfers                 Best items are not taken through
     and donations                                          transfers and donations

     Sells items that are usually not new                   Sells items that often were over bought or
                                                            did not sell well (i.e., new items)

                                        DOD’s primary disposal objective is to maximize the reuse of surplus
Large Majority of                       property within the military services, various levels of government, and
Items Disposed of                       authorized organizations before offering the property for sale to the
Through Sales and                       general public. Despite this goal, DOD actually sells most of its surplus
                                        property to the general public either through sales efforts or as scrap, as
Scrap                                   shown in figures 3 and 4.

                                        Page 5                               GAO/T-NSIAD-97-257 Federal Property Disposal
Figure 3: Average Dispositions, FY 1992-96

            30.7%                                                                   31.3%







      By reported acquisition value                                               By line item
                                      c             d
                         Reutilization      T/D/F       Sales       Scrap        Other

                                             Note: Totals for the line item dispositions do not add due to rounding.

                                             Some property declared excess by one activity within DOD is reutilized by other DOD activities.
                                              Includes personal property (1) transferred (2.1%) to other federal agencies or organizations
                                             given priority equal to the federal government, (2) donated (2.1%) to eligible organizations, and
                                             (3) sold (0.3%) to foreign military sales customers—the system through which
                                             government-to-government sales of military equipment are made.

                                             Page 6                                           GAO/T-NSIAD-97-257 Federal Property Disposal
Figure 4: Disposition by Reported Acquisition Value, FY 1992-96

Dollars in               FY 1992              FY 1993 f            FY 1994                 FY 1995                FY 1996

Reutilization           1,600   7%        1,770     5%           2,146      8%          2,295       9%        2,848       12%

Transfers                 540    2%           532   2%             532      2%            575       2%           465       2%

Donations                 502   2%            610    2%            648      2%           551       2%            592       2%

Sales                   5,100 22%         9,100     26%          8,722     34%          9,189     38%         8,459       35%

FMS                        99 <1%              18   <1%              84    <1%              42    <1%            133      1%

Scrap                   9,882 43%        14,553     42%        13,557      53%        11,372      48%         11,099      47%

Other e                5,744 24%          7,878     23%            344      1%            318       1%            305      1%

Total                 23,467 100%        34,461 100%           26,033 100%            24,342 100%             23,901 100%

                                           According to DRMS personnel, the “other” category was significantly larger in fiscal years 1992
                                          and 1993 than in subsequent years because it was used as a “catch all” category.
                                           Fiscal year 1993 disposals were larger than other years because of DOD base closures and
                                          drawdowns (force reductions).

                                          DOD  is seeking to improve its disposal process by using more commercial
DOD Has Efforts                           practices and making greater use of the private sector in disposing of
Underway to Improve                       property. While we have not done recent work in this area, our 1994 report
Disposal Operations                       stated that, while not always directly comparable to DOD, the commercial
                                          airlines’ system for selling surplus aircraft parts reflects the profit
                                          incentive.1 The airlines we interviewed expect to obtain reasonable rates
                                          of return on the surplus aircraft parts they sell. Officials from one airline
                                          told us they often receive as much as 50 percent of the manufacturer’s list
                                          price (the price of the parts brand new) from the sale of their surplus
                                          aircraft parts.

                                           Commercial Practices: Opportunities Exist to Enhance DOD’s Sales of Surplus Aircraft Parts
                                          (GAO/NSIAD-94-189, Sept. 23, 1994).

                                          Page 7                                          GAO/T-NSIAD-97-257 Federal Property Disposal
                  Commercial companies use marketing techniques that substantially
                  enhance the visibility and marketability of their parts, including
                  (1) identifying highly marketable commercial-type parts, (2) selling the
                  parts as Federal Aviation Administration certified, (3) arranging parts into
                  sales groupings that meet buyer needs, and (4) actively marketing the
                  parts to a full spectrum of civil aviation buyers. Even though it may not be
                  practicable for DOD to duplicate commercial marketing techniques because
                  of competing priorities, DOD could substantially increase its proceeds by
                  adopting some basic marketing practices that have worked successfully in
                  the private sector. Critical to the success of such practices, however, will
                  be the establishment or realignment of incentives.

                  Compared with the private sector’s rates of return for similar items, DRMS
                  rates are low. As noted earlier, airline companies report receiving as much
                  as 50 percent of the manufacturer’s list price for aircraft parts. One reason
                  for DRMS’ lower rates of return is that many of the aircraft parts it disposes
                  of have only military application, and those parts with commercial
                  application are not certified by the Federal Aviation Administration, a
                  requirement for commercial use. Another factor for the lower DRMS rate of
                  return is that the best items are reutilized, transferred, or donated, leaving
                  the least marketable items available for sale. The volume and types of
                  items DRMS disposes of annually (about 4 million line items) also make it
                  difficult for DRMS to develop expertise or tailor disposal strategies for
                  individual items, as the private sector does. Moreover, the quantities,
                  constant influx of items, and time limits on the various phases of the
                  process drive DRMS’ emphasis on moving items through the process quickly
                  to make room for incoming items.

DOD Initiatives   In response to the recommendations made in our report and by others,
                  DOD has developed several initiatives, changed some of its business
                  processes, and adopted best practices to improve its property disposal
                  operation. For example, DOD is employing or considering key initiatives,
                  such as contracting with private auctioneering companies to conduct
                  property sales, using the Internet to advertise available property, selling
                  the property to private contractors that will dispose of it and share the
                  proceeds with DOD, and allowing property located at the depots to remain
                  there rather than shipping it to the DRMOs to save labor and other costs.
                  DRMS has also hired a financial advisor to assist in developing proposals for
                  joint venture arrangements with the private sector.

                  Page 8                               GAO/T-NSIAD-97-257 Federal Property Disposal
                   In addition, DRMS plans on restructuring its organization, under a concept
                   known as Enterprise Management, to operate and compete similar to a
                   private enterprise by reorganizing into (1) a corporate and leadership unit,
                   which will be staffed by government employees to handle inherently
                   governmental functions, such as senior management and legal functions;
                   (2) a utility function, which will handle the reutilization, transfer, and
                   donation functions with the help of private firms, and (3) a marketplace
                   function, which will contract with the private sector to handle sales and
                   disposal of hazardous wastes. DOD activities will be able to choose whether
                   they want to use DRMS’ services for a fee or sell the property themselves.

                   Several recent reviews of DOD military forces, such as the Report of the
DRMS’ Activities   Defense Science Board, the Commission on Roles and Missions, the
Appear to Be       Quadrennial Defense Review, and the Bottom-Up Review have
Candidates for     recommended that competitive outsourcing be considered as an option to
                   reducing costs, streamlining operations, and improving performance. The
Outsourcing        intent of competitive outsourcing is not to automatically give work to the
                   private sector, but to determine, on a case-by-case basis, just how
                   competitive the marketplace is and to take advantage of outsourcing if
                   there are efficiencies to be gained through this means.

                   Legislative proposals have been introduced this year in Congress
                   specifically related to the competitive procurement of services in
                   connection with the disposal of surplus property at DRMS’ locations. In
                   particular, section 1402 of H.R. 1119 (the National Defense Authorization
                   Act of 1998) requires that the Secretary of Defense establish procedures to
                   conduct competitions among private sector sources and DRMS, and other
                   interested federal agencies, for the performance of all such services at a
                   particular site. Since DOD has identified DRMS as not an inherently
                   governmental function, and, therefore, a candidate for outsourcing, we
                   agreed with the aim of this legislation.2

                   In August 1995, we reported that DLA cited several impediments it believed
                   would limit them from fully outsourcing the DRMS operation and would
                   need to be carefully considered before an outsourcing decision was made.
                   Some of the impediments related to the size and the scope of DRMS’
                   operations; the lack of a demonstrated, comparable infrastructure in the
                   commercial marketplace to manage the DOD disposal function; how a
                   contractor would or should operate to ensure DRMS’ mission is given the
                   required level of emphasis; time and resource constraints with Office of

                    1997 Defense Reform Bill: Observations on H.R. 1778 (GAO/T-NSIAD-97-187, June 17, 1997).

                   Page 9                                         GAO/T-NSIAD-97-257 Federal Property Disposal
           Management and Budget Circular A-76 procedures; and difficulties in
           preparing and administering contracts. Generally, the government and
           private sector officials we interviewed did not believe these impediments
           to be significant. DLA officials, while concerned with these impediments,
           indicated that DLA supports the outsourcing of functions or operations, on
           a case-by-case basis, where there is demonstrated competence in the
           private sector that will provide equal or better disposal services.

           Mr. Chairman, this concludes our statement. We would be happy to
           answer any questions you or the members of the Subcommittee may have.

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