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Defense Depot Maintenance: Commission on Roles and Mission's Privatization Assumptions are Questionable (Letter Report, 07/15/96, GAO/NSIAD-96-161).

Pursuant to a congressional request, GAO examined the Commission on
Roles and Missions' (CORM) privatization assumptions to determine
whether privatization would adversely affect military readiness and
sustainability.

GAO found that: (1) the privatization of all depot maintenance
activities would result in unacceptable readiness and sustainability
risks; (2) it is difficult to determine whether the Department of
Defense's (DOD) privatization efforts will create more opportunities for
outsourcing to the private sector; (3) most depot workloads contracted
to the private sector are awarded noncompetitively; (4) the lack of
competitive private sector markets could negate expected privatization
savings; (5) CORM privatization assumptions do not reflect the cost of
excess space in public depots; (6) privatizing depots without reducing
their excess capacity could reduce depot efficiency and increase costs;
(7) CORM data does not support estimated depot privatization savings;
(8) public depots provide greater flexibility than private depots; (9)
the DOD risk assessment methodology does not include guidance for
assessing depot maintenance levels; (10) the services are reassessing
the effects of privatizing their core workloads; and (11) public-private
competitions have resulted in some measurable savings and afforded DOD a
cost-effective method of determining workload allocations.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-161
     TITLE:  Defense Depot Maintenance: Commission on Roles and 
             Mission's Privatization Assumptions are Questionable
      DATE:  07/15/96
   SUBJECT:  Privatization
             Defense procurement
             Cost effectiveness analysis
             Equipment maintenance
             Defense cost control
             Competition limitation
             Military downsizing
             Defense contracts
             Combat readiness
             Maintenance services contracts
IDENTIFIER:  Navy Commercial Activities Program
             F-14 Aircraft
             Kiowa Helicopter
             
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Cover
================================================================ COVER


Report to the Chairman, National Security Committee, House of
Representatives

July 1996

DEFENSE DEPOT MAINTENANCE -
COMMISSION ON ROLES AND MISSION'S
PRIVATIZATION ASSUMPTIONS ARE
QUESTIONABLE

GAO/NSIAD-96-161

Defense Depot Maintenance

(709042)(709172)


Abbreviations
=============================================================== ABBREV

  ATCOM - Aviation and Troop Support Command
  CECOM - Communications-Electronics Command
  CORM - Commission on Roles and Missions
  CNA - Center for Naval Analysis
  DOD - Department of Defense
  MICOM - Missile Command
  NICP - Naval Inventory Control Point
  NAVAIR - Naval Air Systems Command
  OC-ALC - Oklahoma City Air Logistics Center
  OO-ALC - Odgen Air Logistics Center
  OMB - Office of Management and Budget
  SA-ALC - San Antonio Air Logistics Center
  SM-ALC - Sacramento Air Logistics Center
  TACOM - Tank-Automotive and Armaments Command
  WR-ALC - Warner Robins Air Logistics Center

Letter
=============================================================== LETTER


B-271919

July 15, 1996

The Honorable Floyd Spence
Chairman, National Security Committee
House of Representatives

Dear Mr.  Chairman: 

As you requested, we analyzed the assumptions the Commission on Roles
and Missions (CORM) used to support its recommendations for a
time-phased plan to privatize essentially all Department of Defense
(DOD) depot maintenance activities.  Specifically, we examined the
assumption that such privatization would save 20 percent and not
adversely affect readiness and sustainability.  We also addressed the
Commission's assumption that requirements for public-private depot
maintenance competitions would be limited.  Preliminary observations
on these issues were also discussed in recent testimony.\1 Other
questions contained in your October 12, 1995, request will be
answered in later reports. 


--------------------
\1 Defense Depot Maintenance:  Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146, Apr.  16, 1996) and
(GAO/T-NSIAD-96-148, Apr.  17, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The CORM's depot privatization savings and readiness assumptions are
based on conditions that do not currently exist for many depot
workloads.  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 of the depot workloads contracted to the private sector are
awarded noncompetitively--mostly to the original equipment
manufacturer.  Additionally, a number of factors would likely limit
private sector competition for many workloads currently in the public
depots.  Without highly competitive and capable private sector
markets, the cost and readiness risks of privatizing depot
maintenance workloads may prove unacceptable.  Further, the CORM's
privatization savings do not reflect the cost impact of excess
capacity in the public depots.  As we have previously reported,
privatization without reducing excess capacity will further
exacerbate the severe excess capacity problem in the DOD depot system
and increase the cost of workloads, which continue to be maintained
in these depots. 

The CORM data does not support its depot privatization savings
assumption.  The CORM's assumption is based primarily on reported
savings from public-private competitions for commercial activities
under Office of Management and Budget (OMB) Circular A-76.  These
commercial activities were generally dissimilar to depot maintenance
activities because they involved relatively simple, routine, and
repetitive tasks that did not generally require large capital
investment or highly skilled and trained personnel.  Public
activities were allowed to compete for these workloads and won about
half of the competitions.  Many private sector firms generally made
offers for this work due to the highly competitive nature of the
private sector market for these activities and estimated savings were
generally greater in situations where there were larger numbers of
private sector offerors.  GAO and defense audit reports have stated
that projected savings were often not achieved due to cost growth and
other factors.  Savings did occur from many of these competitions,
even though they were less than projected.  Nonetheless, the savings
resulted from competition rather than from privatization.  In the
absence of a highly competitive market, privatizing unique, highly
diverse and complex depot maintenance workloads that require large
capital investments, extensive technical data, and highly skilled and
trained personnel will not likely achieve expected savings and could
increase the cost of depot maintenance operations. 

Our analysis of depot maintenance workloads currently contracted to
the private sector found, for the most part, that the contractors
were responsive to contract requirements for delivery and
performance.  However, DOD officials noted that DOD depots provide
greater flexibility than contractors and can more quickly respond to
nonprogrammed, quick-turnaround requirements.  The military services
periodically assess the readiness and sustainability risks of
privatizing depot workloads.  If the risks are determined to be too
high, the workloads are retained in the public depots.  Historically,
the services have determined that the risks of privatizing most
workloads are too high and have retained them in the public depots. 
These assessments have provided the primary justification for
maintaining a large organic depot maintenance core capability.  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 now conducted in government facilities
within the United States.  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. 
Consistent with DOD's recently announced policy preference for
privatizing depot maintenance workloads, the services are currently
reassessing their previously designated core workloads with a view
toward privatization. 

The CORM assumed that public-private competitions would only be used
in the absence of private sector competition and would be limited to
only a few cases.  We found that public-private depot maintenance
competitions have resulted in savings and benefits and can provide a
cost-effective way of making depot workload allocation decisions for
certain workloads.  The beneficial use of such competitions could
have significantly more applicability than the Commission assumed. 


   BACKGROUND
------------------------------------------------------------ Letter :2

DOD annually spends about $15 billion for depot maintenance work that
includes repairing, overhauling, modifying, and upgrading aircraft,
ships, tracked and wheeled vehicles, and other systems and equipment. 
It also includes limited manufacture of parts, technical support,
modifications, testing, and reclamation as well as software
maintenance.  DOD estimates that about 60 percent of its expenditures
for depot maintenance work is performed in its 24 maintenance depots
and the remaining 40 percent in the private sector.  We have reported
that the public-private mix is closer to 50-50 when it includes
interim contractor support services and public depot purchases of
parts, supplies, and maintenance services from the private sector. 

Historically public depots have served to provide a ready and
controlled source of repair and maintenance.  Reductions in military
force structure and related weapon system procurement, changes in
military operational requirements due to the end of the Cold War, and
increased reliability, maintainability, and durability of military
systems have decreased the need for depot-level maintenance support. 
Efforts to downsize and reshape DOD's maintenance system have
addressed depot efficiency and the workload mix between the public
and private sectors.  A key issue currently being debated within
Congress and DOD is the extent to which the private sector should be
relied on for meeting DOD's requirements for depot-level maintenance. 

Congress, in the National Defense Authorization Act for Fiscal Year
1994, established the Commission on Roles and Missions of the Armed
Forces to (1) review the appropriateness of the current allocations
of roles, missions, and functions among the armed forces; (2)
evaluate and report on alternate allocations; and (3) make
recommendations for changes in the current definition and
distribution of those roles, missions, and functions.  The
Commission's May 24, 1995, report, Directions for Defense, identified
a number of commercial activities performed by DOD that could be
performed by the private sector.  Depot-level maintenance was one of
these activities.  The Commission concluded that privatizing such
commercial activities through meaningful competition was the primary
path to more efficient support.  It noted that such competition
typically lowers costs by 20 percent. 

Based on its conclusions, the Commission recommended that DOD
transition to a depot maintenance system relying on the private
sector by, (1) directing support of all new systems to private
contractors, (2) establishing a time-phased plan to privatize
essentially all existing depot-level maintenance, and (3) creating an
office under the Assistant Secretary of Defense (Economic Security)
to oversee privatization of depots.  In his August 24, 1995, letter
to Congress forwarding the Commission report, the Secretary of
Defense agreed with the Commission's recommendations but expressed a
need for DOD to retain a limited organic core capability to meet
essential wartime surge demands, promote competition, and sustain
institutional expertise.  DOD's January 1996 report, Plan for
Increasing Depot Maintenance Privatization and Outsourcing, provides
for substantially increasing reliance on the private sector for depot
maintenance. 


   DATA DOES NOT SUPPORT THE CORM
   DEPOT PRIVATIZATION SAVINGS
   ASSUMPTION
------------------------------------------------------------ Letter :3

The CORM, in support of its depot privatization savings assumption,
cites reported savings from public-private competitions under OMB
Circular A-76.\2 These competitions were for various non-depot
maintenance commercial activities, in which there was generally a
highly competitive private market.  Projected savings were greater
for competitions having larger numbers of private sector competitors. 
The public sector won about half of these competitions.  Our analysis
indicates that private sector competition for depot maintenance may
be much less than found in the A-76 activities.  The data also
suggests that little or no savings would result from privatizing
depot maintenance in the absence of competition. 

The CORM report cites two studies supporting its savings
assumption--one by OMB and one by the Center for Naval Analysis
(CNA).\3

Both reports are evaluations of numerous public-private competitions
for commercial activities under OMB Circular A-76 guidelines.  The
commercial activities included base operating support functions such
as family housing, real property maintenance, civilian personnel
administration, food service, security, and other support services. 
These activities are characterized by highly competitive markets with
low-skill labor, little capital investment, and simple, routine and
repetitive tasks that can readily be identified in a contract
statement-of-work.  None of the competitions studied were for depot
maintenance, which generally has dissimilar characteristics.  Both
reports show that substantial savings occurred when competition was
introduced into the noncompetitive environment.  However, the
reported savings are based on the difference between the
precompetition cost and the price proposed and do not reflect
subsequent contract cost overruns, modifications, or add-ons.  Based
on a limited number of audits, projected A-76 privatization savings
were often reduced or eliminated as a result of subsequent contract
cost growth. 

The OMB study of commercial activities competed from 1981 to 1988
cited average savings of 30 percent from original government cost
with an average 20-percent savings when the government won the
competition and 35 percent when the private sector won.\4

About 40 percent of competitions were won by government, 60 percent
by the private sector. 

The CNA study cites a previous CNA review of the Navy's Commercial
Activities Program in which both the public and private sectors each
won about half the roughly 1,000 competitions reviewed.\5 The offers
where the public sector won were roughly 20 percent lower than the
precompetition cost baseline, whereas winning offers from private
firms averaged 40 percent below earlier costs.  The report noted that
larger private sector savings occurred when activities were performed
predominately by military personnel.  Nearly all depot maintenance
work is performed by DOD civilians.  In 29 percent of the cost
studies reviewed, there were no cost savings. 

These studies did not specifically address outsourcing to the private
sector when the public sector did not participate in the competition. 
Since the government's costs were lower in about half the cases,
these savings would not have been realized without public
competition.  Further, in limited situations where audits have been
conducted, projected savings have not been verified.  For example, a
1989 Army Audit Agency report summarizing the results of prior
commercial activities reviews stated that for 10 functions converted
to contractor performance, only $9.9 million of $22 million in
projected savings were realized.\6 Performance work statement
deficiencies, mandatory wage rate increases received by contractor
personnel, and higher-than-estimated contract administration costs
accounted for about 90 percent of the reduction in estimated savings. 

Our 1990 report on OMB Circular A-76 savings projections found (1)
costs of conducting the competitions were not considered in
estimating savings, (2) savings figures were projections and were not
based on actual experience, (3) DOD lacked information regarding
modifications made after the cost study, (4) DOD's A-76 database
contained inaccuracies and incomplete savings data, and (5) an error
in design resulted in a computer program that miscalculated program
savings.\7

A July 1995 Congressional Budget Office report entitled Public and
Private Roles in Maintaining Military Equipment at the Depot Level
stated that contracting out was most likely to outperform public
depots if competition existed among private firms.  The report noted,
however, that without competition, the private sector's ability to
provide service for the least cost could be reduced and the risk of
poor-quality or nonresponsive support could increase.  The CORM
report also states that savings occur when meaningful competition is
obtained in a previously sole-source area and public-private
competitions are preferable to noncompetitive awards to the private
sector. 


--------------------
\2 OMB Circular A-76 provides policy guidance and instructions for
federal agencies to use in identifying and determining whether
certain government activities should be outsourced to the private
sector. 

\3 A 1988 OMB study titled Enhancing Government Productivity Through
Competition:  A New Way of Doing Business Within the Government to
Provide Quality Government at Least Cost and a 1994 CNA study
entitled Issues Concerning Public and Private Provision of Depot
Maintenance. 

\4 Enhancing Governmental Productivity Through Competition:  A New
Way of Doing Business Within the Government to Provide Quality
Government at Least Cost (OMB, Aug.  1988). 

\5 Analysis of the Navy's Commercial Activities Program, Center for
Naval Analysis, July 1993. 

\6 Report of Audit:  Contractor Operations of Commercial Activities,
U.S.  Army Audit Agency, EC 89-205, June 9, 1989. 

\7 OMB Circular A-76:  DOD's Reported Savings Figures Are Incomplete
and Inaccurate (GAO/GGD-90-58, Mar.  15, 1990). 


   CONDITIONS LIMITING DEPOT
   MAINTENANCE PRIVATIZATION
------------------------------------------------------------ Letter :4

The CORM recognized that privatizing essentially all depot
maintenance would require a time phased approach.  Under current
conditions, privatizing essentially all depot workloads (1) would not
likely achieve expected savings and could prove more costly, (2)
could adversely impact readiness, and (3) would be difficult if not
impossible under existing laws.  These conditions are discussed
below. 


      ACHIEVING EXPECTED
      PRIVATIZATION SAVINGS NOT
      LIKELY UNDER CURRENT
      CONDITIONS
---------------------------------------------------------- Letter :4.1

Limited competition and excess depot capacity could negate expected
savings.  The CORM assumed depot workload privatization savings would
result from private sector competition.  We found that much of the
depot work contracted to the private sector is awarded
noncompetitively and that obtaining competition for remaining
non-core depot workloads may be difficult and costly.  In addition,
privatizing depot workloads without reducing excess depot capacity
could significantly increase the cost of work performed by the
depots. 


      LIMITED OR NO COMPETITION
      FOR MOST CONTRACTED DEPOT
      WORKLOADS
---------------------------------------------------------- Letter :4.2

The CORM's recommendation to privatize essentially all depot
maintenance assumed that meaningful competition would be obtained for
most of the work.  The Commission generally defined meaningful
competition as that generated by a competitive market, including
significant numbers of both buyers and sellers.  Our review of
selected DOD depot maintenance contracts found that a large portion
of the awards were not made under these conditions.  To determine the
extent of competition in awarding depot maintenance contracts, we
reviewed 240 such contracts totaling $4.3 billion at 12 DOD buying
activities.  We selected high-dollar value contracts from a total of
8,452 open 1995 depot-level maintenance contracts that were valued at
$7.3 billion.  As shown in table 1, 182 of the 240 contracts--76
percent--were awarded on a sole-source basis.  These contracts
accounted for 45 percent of the total dollar value.  In nine other
contracts accounting for about 4 percent of the total, competition
was limited to only two offerors.  The remaining 49 contracts were
classified as awarded through full and open competition.  These
awards accounted for 51 percent of the total dollar value.  However,
some had only limited responses.  For example, the number of offerors
was 2 in each of
5 contracts totaling $525.8 million--24 percent of the total award
value for the 49 competed contracts. 



                                      Table 1
                      
                          Procedures for Contract Award\a

                               (Dollars in billions)



Co
mm
an
d     Number     Value    Number     Value    Number     Value    Number     Value
--  --------  --------  --------  --------  --------  --------  --------  --------
Ar        10    $0.578         3    $0.017        43    $0.538        56    $1.133
 my
Ai        37     1.348         1     0.100        60     0.900        98     2.348
 r
 F
 o
 r
 c
 e
Na         2     0.286         5     0.048        79     0.518        86     0.852
 vy
==================================================================================
To        49    $2.212         9    $0.165       182    $1.956       240    $4.333
 t
 a
 l
----------------------------------------------------------------------------------
\a The classification of full and open, limited, and sole source were
assigned by DOD buying activities.  Limited means competitions
conducted using other than full and open competition. 

Original equipment manufacturers were awarded 158 of the
182 noncompetitive contracts.  The remaining 24 were awarded on a
sole-source basis for reasons such as peculiar requirements, national
emergencies, and international agreements.  Where competition was
limited, the OEMs won eight of the nine workloads.  The OEMs also won
9 of the 49 contracts that DOD classified as awarded pursuant to full
and open competition.  Table 2 shows the number of offers received
for the contracts classified as awarded pursuant to full and open
competition. 



                          Table 2
          
              Offerors for Competed Contracts

                   (Dollars in millions)

                                                Percent of
             Number of       Award   Number of       total
             contracts       value    offerors       value
----------  ----------  ----------  ----------  ----------
                     5      $525.8           2          24
                    11       514.5           3          23
                    14       861.8           4          39
                     3        75.3           5          03
                    16       234.1        6-10          11
==========================================================
Total               49    $2,211.5
----------------------------------------------------------
The buying activities awarded the maintenance contracts to 71
different contractors but 13 of these contractors had received
workloads valued at $3.3 billion--76 percent of the total amount
awarded.  Table 3 shows the distribution of the workload to the 71
contractors. 



                                Table 3
                
                  Contract Value Distribution of Work
                                Awarded

                         (Dollars in millions)

                                             Number of     Total award
                        Contract value     contractors           value
----------------------  --------------  --------------  --------------
                                  $< 1               5            $4.1
                                 1 -10              26           112.7
                                11 -30              14           239.2
                                31 -60               9           405.2
                               61 -100               4           299.0
                                  100>              13         3,272.6
======================================================================
Total                                               71        $4,332.8
----------------------------------------------------------------------

      DIFFICULTY AND COST OF
      COMPETING NON-CORE WORKLOADS
---------------------------------------------------------- Letter :4.3

Although DOD plans to privatize non-core workloads currently in the
public depots, it has not assessed the extent that such workloads
will attract private sector competition.  Factors that resulted in
noncompetitive awards for much of the depot work currently performed
by the private sector, may apply to much of the work currently
performed by public depots.  The types of existing public workloads
where private sector competition may be limited include:  (1)
workloads where data rights necessary for competition have not been
acquired, (2) small workloads that do not justify large private
sector capital investment costs, (3) workloads for older and/or
highly specialized systems, (4) workloads with erratic requirements
where DOD cannot guarantee a stable workload, and (5) workloads that
would be costly to move from one source of repair to another.  These
factors could further limit cost-effective privatization of existing
workloads.  For example, our review of 95 non-ship depot maintenance
public-private competitions found that 22 did not receive any private
sector offers and 33 only had 1. 

DOD may have to acquire the technical data rights to compete many of
its weapon systems.  The most-often-cited justification for the 182
sole-source awards was that competition was not possible because DOD
did not own the technical data rights for the items to be repaired. 
Command officials stated that DOD will have to make costly
investments in order to promote full and open competition for many of
its weapon systems.  For example, in its justification for less than
full and open competition for the repair and testing of the AN/URQ-33
Joint Tactical Information Distribution System, the Warner Robins Air
Logistics Center noted that the technical data was not procured from
the original equipment manufacturer and estimated that $1 million and
a minimum of 6 months would be required to start up a new contractor. 
Similarly, the Army Missile Command's justification for a sole-source
maintenance and repair award to the original equipment manufacturer
for the AH-58D Kiowa Warrior helicopter, noted that the program
manager had not procured the technical data package due to funding
and cost restraints.  The command estimated that technical data
suitable for full and open competition would cost about $18 million. 

The difficulty of accurately describing or quantifying depot
maintenance requirements may impact privatization savings.  Under
fixed-price contracts, more of the risks are incurred by the
contractor.  If costs are greater than expected, then the contractor
incurs the loss.  The government incurs more risk under a cost
reimbursable contract.  Under such contracts, the government
generally reimburses the contractor for the costs incurred. 
Accordingly, the contractor's incentive to maximize efficiency and
minimize cost is generally greater under a fixed-price contract. 
Cost reimbursable contracts are often used when contract requirements
cannot be adequately described and/or costs accurately estimated. 
Such contracts are used for many depot maintenance workloads. 

Our analysis of the 240 contracts showed that the commands used
fixed-price contracts in 151 (or 63 percent ) of the 240 contracts,
cost-reimbursable type contracts in 61 contracts, and a combination
of the 2 types in 28 contracts.  Table 4 shows the types of contracts
the commands were using to acquire depot-level maintenance. 



                                Table 4
                
                           Types of Contracts

                                          Cost
                            Firm  reimbursemen  Combinatio
                     fixed price             t           n       Total
------------------  ------------  ------------  ----------  ==========
Army                          19            30           7          56
Air Force                     63            26           9          98
Navy                          69             5          12          86
======================================================================
Total                        151            61          28         240
----------------------------------------------------------------------
The buying activities said they used fixed pricing in the 151
contracts because adequate repair histories were available to
establish a price range for the maintenance work.  In using 61
cost-reimbursement type contracts, DOD officials stated that the
maintenance requirements could not be predetermined for the contract
period or that no adequate repair history existed to establish
reasonable price ranges. 


      PRIVATIZATION COULD REDUCE
      PUBLIC DEPOT EFFICIENCY AND
      INCREASE COSTS
---------------------------------------------------------- Letter :4.4

Non-core workloads that may be good candidates for
privatization--that is, a competitive private market exists--may not
be cost-effective to privatize if it results in increased excess
capacity and other inefficiencies in the public depots. 

Given the requirement to preserve public depot capabilities, DOD must
manage depot maintenance workloads to assure efficient operations. 
In some cases where privatizing a particular workload could produce
some level of savings, the savings could be more than offset by
creating inefficiencies in the remaining public depots.  For example,
the Air Force's Oklahoma City Air Logistics Center currently has
about 43 percent excess capacity.  Had DOD decided to reallocate the
engine workload from the closing San Antonio Center to Oklahoma City
instead of privatizing the workload in place, the labor hour rate for
all of the Oklahoma City Center's work would be reduced by $10 an
hour.  Such a reduction could save about $70 million a year. 


      LARGE-SCALE PRIVATIZATION
      COULD AFFECT READINESS
---------------------------------------------------------- Letter :4.5

Our analysis of depot maintenance work currently contracted with the
private sector found that contractors, for the most part, were
responsive to DOD's needs in terms of meeting contractual
requirements for delivery and performance.  However, service
officials stated that historically, the flexibility and
responsiveness of DOD depots had significantly influenced decisions
to select a DOD depot rather than a contractor for most critical
military systems.  The military services have considered the
readiness and sustainability risks of privatizing existing depot
workloads and determined that the risks for privatizing most
workloads were too high.  In the past, these assessments provide the
primary justification for maintaining a large organic depot
maintenance core capability. 

DOD is implementing a new depot maintenance policy that is likely to
significantly increase the depot maintenance workloads performed by
the private sector.  Based on the policy preference for contractor
maintenance, DOD is now conducting risk assessments on workloads
previously designated as core.  In many cases, the services are
redesignating mission essential core workloads as non-core.  DOD's
March 1996 depot workload report to Congress, which reflects its
latest "core" workload determinations, projects that the fiscal year
1997 depot workload mix of about 60 percent public and 40 percent
private will shift to about a 50/50 mix by fiscal year 2001. 
However, these projections were not developed using the DOD's new
risk assessment process.  We recently reported that DOD's ongoing
risk assessment process will likely result in an even greater shift
of depot maintenance workload to the private sector.\8

As required by the fiscal year 1996 Defense Authorization Act, we
analyzed and reported on DOD's March 1996 depot workload report.\9 We
noted that the DOD's risk assessment process is based to a large
extent on subjective judgements.  Further, DOD's methodology for
assessing workload privatization risks does not include guidance or
criteria for the services to use in making such assessments.  As a
result, the services individual risk assessments may not be
consistent within the services or uniform among the services.  The
CORM report stated that DOD core depot requirements exceed the real
needs of the national security strategy and that with proper
oversight private contractors could provide essentially all of the
depot-level maintenance services now conducted in government
facilities. 

To evaluate contractor support and responsiveness for the workloads
currently in the private sector, we analyzed contract modifications
to 195 of the 240 contacts reviewed.  We only found indications of
contractor performance problems in four of these contracts.  These
involved extensions to the period of performance due to the
contractors not meeting the required delivery dates.  However, DOD
materiel managers noted that DOD depots provide greater flexibility
than contractors and can more quickly respond to nonprogrammed,
quick-turnaround requirements.  Further, DOD contracting personnel
stated that contract files may or may not provide a reasonable
assessment of readiness impacts.  For example, these files would
provide no indication of the impacts of cost growth on DOD's ability
to procure required depot maintenance services. 


--------------------
\8 Defense Depot Maintenance:  DOD's Policy Report Leaves Future Role
of Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996). 

\9 Defense Depot Maintenance:  Public-Private Workload Data Is of
Questionable Value to Decisionmakers (GAO/NSIAD-96-66, May 18, 1996). 


      LEGAL LIMITATIONS TO DEPOT
      PRIVATIZATION
---------------------------------------------------------- Letter :4.6

In recommending that essentially all depot maintenance work be
privatized, the Commission recognized that privatization could be
limited or precluded by a collection of laws, regulations, and
historic practices developed to protect the government's depot
maintenance capability.  Among the barriers cited were 10 U.S.C. 
2469, which requires public-private competitions before any workload
over $3 million can be moved to the private sector from a public
depot, and 10 U.S.C.  2466, which sets the amount of depot-level
maintenance workload that must be performed in public depots to not
less than 60 percent, that is, the 60/40 rule.  Since the concept of
core\10 requirements centers around the determination of acceptable
levels of risks, the size and extent of core capability and
requirements can become somewhat subjective.  Accordingly, the amount
of depot work subject to privatization may be driven in part by the
60/40 rule. 

DOD is seeking repeal of these and other laws in order to fully
implement its depot privatization plans.  For example, in May 1996,
DOD proposed a provision that would allow the Secretary of Defense to
acquire by contract from the private sector or any nonfederal
government entities those commercial or industrial type supplies and
services necessary or beneficial to the accomplishment of DOD's
authorized functions, notwithstanding any provision of title 10 or
any statute authorizing appropriation for or making DOD
appropriations.  This proposal was not supported by the DOD
authorization committees during deliberations over the fiscal year
1997 DOD authorization bill. 


--------------------
\10 DOD defines core as the capability maintained within the organic
defense depots to meet readiness and sustainability requirements of
the weapon systems that support the Joint Chiefs of Staff contingency
scenarios. 


   DESPITE LIMITATIONS,
   PUBLIC-PRIVATE COMPETITIONS
   PRODUCED SAVINGS AND BENEFITS
------------------------------------------------------------ Letter :5

The CORM recognized that there are instances where establishing
competition within the private sector would be too costly.  In these
cases, the Commission stated that public-private competition, however
imperfect, was generally preferable to noncompetitive contracts.  The
CORM assumed, however, that there were only a few cases in which such
competitions would be required.  We found that requirements for and
benefits of such competitions may be greater than assumed.  As noted
earlier in this report, most depot workloads currently contracted to
the private sector are noncompetitive and obtaining private sector
competition for those workloads currently in the public depots could
prove difficult and costly.  In examining DOD's experience with
public-private competition for depot-level maintenance, we found that
the competitions generally resulted in savings, but precisely
quantifying the savings is difficult because many other variables
affect maintenance costs.  We also found that some workloads are not
well suited for competing--either private-private or public-private. 

DOD's experience with public-private competition for depot-level
maintenance began in 1985 when Congress\11 authorized the Navy to
compete shipyard workloads.  In 1991, with DOD's push to promote
efficiency in depot maintenance operations and the Navy's assertion
that competition encouraged public shipyards to become more
efficient, Congress\12 permitted the Air Force and the Army to
conduct public-private competitions for depot-level maintenance
workloads.  DOD had planned to use the program for allocating
maintenance workloads to the most cost-efficient providers and to
save $1.7 billion as part of its strategy to achieve an overall $6.3
billion reduction in depot maintenance costs from fiscal years 1991
to 1997.\13 However, DOD suspended the program in May 1994 and
reported to Congress in February 1995 that competition could not be
reinstituted until its cost accounting and data systems permitted
actual cost accounting for specific workloads. 

During our review of the Navy's public-private competition program
for aviation maintenance,\14 Navy officials stated that such
competitions had been beneficial to the government and resulted in
maintenance savings for the involved workloads.  They stated that
competitions for workloads that had previously been assigned to Navy
depots resulted in the Navy depots streamlining overhead, improving
work processes, reducing labor and material requirements, and
instituting other cost-saving initiatives in order to submit the
lowest bids and avoid job losses.  For example, the public-private
competition for F-14 aircraft airframe overhauls--a competition won
by a Navy depot--resulted in the depot reducing the average cost per
overhaul from $1.69 million the year preceding the competition to
$1.29 million, in inflation adjusted dollars, the year following the
competition, a 24-percent decrease. 

A number of factors have limited DOD public-private competitions. 
They include:  (1) private sector concerns regarding the fairness of
competitions; (2) the time and cost of contract solicitation, award,
and administration; (3) declining depot requirements and the
inability to guarantee stable workloads; (4) lack of government-owned
technical data packages; and (5) limited sources of repair, and
low-dollar value workloads that generate little or no interest from
the private sector.  An April 1994 DOD task force report on
depot-level activities identified several concerns with continuing
public-private competitions.  For example, efficiencies achieved
would not be as likely in the future because the costs of conducting
competitions were high and the payoffs would be progressively smaller
as workloads were recompeted. 

Critics of public-private competitions charge that such competitions
are inherently unfair because DOD's accounting and financial
management systems do not capture and reflect all the costs.  In
February 1995, DOD reported to the House and Senate Appropriations
Committees that its automated financial management systems and
databases did not provide an accurate basis for determining the
actual cost of specific competition workloads.  To remedy this
situation, DOD was developing policies, procedures, and automated
processes that would permit actual cost accounting for specific
workloads accomplished in public depots. 

Our January 1996 report to the Ranking Minority Member, Subcommittee
on Defense, Senate Committee on Appropriations, summarized many
actions DOD had taken to improve public-private competitions.\15
Among these actions were (1) the development of a cost comparability
handbook that, among other things, identified adjustments that should
be made to public depots' offers as a result of differences in the
military services' accounting systems and (2) having the Defense
Contract Audit Agency certify that successful offers included
comparable estimates of all direct and indirect costs.  We noted that
the incentive to continue with some of the initiatives was lost after
DOD terminated public-private competitions.  We also identified
additional actions that DOD could take to further improve
competitions, for example, provide the Defense Contract Audit Agency
the technical support needed to properly evaluate depot offers and to
conduct an incurred cost audit to assess whether depots are able to
perform work as offered. 

Our report also summarized the Navy's suggestions for addressing
concerns regarding public depot cost overruns and administration
costs resulting from competitions.  These included establish fixed
prices for the competed work based on offer amounts, execute the work
like normal workload using existing control systems with no separate
contract administration, and assess penalties for cost overruns to
make the depot less competitive in future competitions. 


--------------------
\11 The 1985 Department of Defense Appropriations Act, Public Law
98-473. 

\12 National Defense Authorization Act for Fiscal Year 1991, Public
Law 101-510. 

\13 These cost reductions were mandated by Defense Management Review
Decision 908C, "Consolidating Depot Maintenance" dated January 12,
1991. 

\14 Navy Maintenance:  Assessment of the Public-Private Competition
Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan.  22, 1996). 

\15 Navy Maintenance:  Assessment of the Public-Private Competition
Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan.  1996). 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

DOD officials declined to comment on this report.  They noted that
the draft report we provided for comment included no recommendations
and did not require a response.  Further, the report addresses
assumptions of the Commission on Roles and Missions of the Armed
Forces, a group established by Congress that no longer exists.  While
the Commission on Roles and Missions was not a DOD entity, in
forwarding the Commission's report to Congress, the Secretary of
Defense stated that DOD agreed with the Commission's recommendation
to outsource a significant portion of DOD's depot maintenance work. 
Further, DOD's January 1996 report on outsourcing depot maintenance
cited the Commission's savings projections as its rationale for its
depot privatization initiative. 

Appendix I sets forth our scope and methodology.  We will continue
evaluating DOD's actions on its plans to privatize depot-level
maintenance to complete our response to issues raised by the National
Security Committee. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to the Secretaries of Defense,
the Army, the Navy, and the Air Force; the Director of the Office of
Management and Budget; and interested congressional committees. 
Copies will be made available to others upon request. 

If you or your staff have any questions concerning this report,
please contact me on (202) 512-8412.  Major contributors to this
report are listed in appendix II. 

Sincerely yours,

David R.  Warren, Director
Defense Management Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

The Chairman of the House Committee on National Security asked us to
comment on the May 1995 report by the Commission on Roles and
Missions of the Armed Forces that recommended the Department of
Defense (DOD) privatize its depot-level maintenance activities.  The
Chairman requested that we review a number of issues related to the
Commission's report; this report provides information on the
Commission's assumptions that privatization could reduce maintenance
costs by 20 percent and the potential impact of privatization on
military readiness and sustainability.  It also identifies some areas
DOD may need to improve if it moves toward total privatization of
depot-level maintenance. 

To evaluate the Commission's assumptions about cost savings from
privatization and the impact that it might have on readiness and
sustainability, we reviewed its report, discussed the assumptions
with former staff members of the Commission, and reviewed supporting
data that the Commission had maintained.  We made extensive use of
our prior work and the work of others on issues related to DOD's
depot-level maintenance operations to determine how consistent the
Commission's work was with prior findings, conclusions, and
recommendations.  In addition, we analyzed selected depot-level
contracts to evaluate (1) the extent to which DOD used competitive
procedures in awarding the contracts and (2) how well the contractor
performance responded to DOD's depot-level maintenance needs. 

We performed our review at the following: 

  -- Four Army buying activities:  the Aviation and Troop Support
     Command (ATCOM), St.  Louis, Missouri; the
     Communications-Electronics Command (CECOM), Fort Monmouth, New
     Jersey; the Missile Command (MICOM), Redstone Arsenal, Alabama;
     and the Tank-Automotive and Armaments Command (TACOM), Warren,
     Michigan. 

  -- Five Air Force buying activities:  Odgen Air Logistics Center
     (OO-ALC), Hill Air Force Base, Utah; Oklahoma City Air Logistics
     Center (OC-ALC), Tinker Air Force Base, Oklahoma; Sacramento Air
     Logistics Center (SM-ALC), McClellan Air Force Base, California;
     San Antonio Air Logistics Center (SA-ALC), Kelly Air Force Base,
     Texas; Warner Robins Air Logistics Center (WR-ALC), Robins Air
     Force Base, Georgia. 

  -- Three Navy buying activities:  the Naval Inventory Control Point
     (NICP), Mechanicsburg, Pennsylvania; Naval Inventory Control
     Point (NICP), Philadelphia, Pennsylvania; and Naval Air Systems
     Command (NAVAIR), Arlington, Virginia. 

DOD maintains a database on all contract awards that contains data on
awards made by competition and awards that are made by other than
competition.  We did not use this database to evaluate DOD's use of
competitive procedures for depot-level maintenance because a test at
one Army command showed coding errors and difficulty in identifying
maintenance contracts.  Therefore, we asked each buying activity to
identify all depot-level maintenance contracts that were open at a
given point during 1995 for use in evaluating the extent they had
used competitive procedures and contractor performance. 

Each buying activity provided a list of contracts from their
database.  We did not attempt to verify the accuracy of the buying
activities' databases.  The data contained a large number of small
contracts.  For timeliness, we chose to cover dollar value rather
than numbers of contracts.  We arranged the dollar value of the
contracts from highest to lowest and selected high-dollar value
contracts that would provide us at least 50-percent coverage of the
total dollar value awarded by each service.  Table I.1 presents the
universe of contracts identified and our sample size. 



                               Table I.1
                
                        Universe and Sample Size

                         (Dollars in millions)

                                     Total                     Percent
                                  contract            Dollar  of total
                       Number of    dollar  Sample  value of    dollar
Buying activities      contracts   value\a    size    sample     value
--------------------  ----------  --------  ------  --------  --------
Army
----------------------------------------------------------------------
ATCOM                        825      $766      20      $325      0.42
CECOM                         26       651      13       615      0.94
MICOM                        143       317      20       185      0.58
TACOM                         10        10       3         9      0.84
======================================================================
Subtotal                   1,004    $1,745      56    $1,133      0.65

Air Force
----------------------------------------------------------------------
OO-ALC                       341     2,371      20     1,665      0.70
OC-ALC                       585        72      20        26      0.36
SM-ALC                       221       119      18        72      0.61
SA-ALC                       586       253      20        87      0.35
WR-ALC                       535     1,058      20       498      0.47
======================================================================
Subtotal                   2,268    $3,872      98    $2,348      0.61

Navy
----------------------------------------------------------------------
NICP-Philadelphia            176                20       217      0.50
                                       433
NAVAIR                        39       949       6       522      0.55
NICP-Mechanicsburg         4,965                60       113      0.41
                                       273
======================================================================
Subtotal                   5,180    $1,655      86      $851      0.51
======================================================================
Total                      8,452    $7,272     240    $4,333      0.60
----------------------------------------------------------------------
\a Total may not add due to rounding. 

At the buying activities we visited, we reviewed the files of
selected contracts to identify cost, schedule, and performance
issues.  We also discussed the contracting process and contractor
performance with contracting officers, negotiators, and specialists. 
To identify contract types and contracting methods suitable for
depot-level maintenance, we reviewed the Federal Acquisition
Regulation and DOD supplements and talked to personnel from the
Defense Contract Audit Agency and Defense Contract Management
Command. 

We conducted our review between February 1995 and April 1996 in
accordance with generally accepted government auditing standards. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Julia C.  Denman
Karl J.  Gustafson
M.  Glenn Knoepfle
Frank T.  Lawson
John M.  Ortiz
Enemencio Sanchez
Jacqueline E.  Snead
Edward A.  Waytel
James F.  Wiggins
Bobby R.  Worrell
Cleofas Zapata, Jr. 


*** End of document. ***