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Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot Maintenance Program (Testimony, 03/18/97, GAO/T-NSIAD-97-111).

GAO discussed the Department of Defense's (DOD) plans for eliminating
costly depot maintenance excess capacity, focusing on DOD's: (1)
progress in finalizing a new depot workload allocation policy; (2)
current approach for allocating maintenance workloads for new and
existing systems; and (3) estimates that billions can be saved by
outsourcing depot maintenance.

GAO noted that: (1) the waste and inefficiency in DOD's logistic system,
including the management of its $13 billion depot maintenance program,
is one of the key reasons GAO identified DOD's infrastructure activities
as 1 of 24 high risk areas within the federal government; (2) there is
excess capacity in the industrial repair and overhaul capability of the
public and private sectors, which contributes significantly to their
inefficiency; (3) costly excess capacity totalling about 40 percent
remains in the DOD depot system; (4) 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;
(5) the Navy has made the greatest progress in dealing with its excess
depot maintenance through the consolidation and expedited closure of
those facilities affected by the base realignment and closure process;
(6) Congress received and ultimately rejected proposed policy regarding
depot-level maintenance and repair; (7) provisions in the policy were
predicated on relief from the existing statutes that influence depot
workload allocations between the public and private sectors; (8) 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 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; (9) assessments are being made to determine
what portion of DOD's current workload can be outsourced without
acceptable risk; (10) 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; (11) the inefficient operation of depot maintenance
activities results in a reduction of the military services' purchasing
power through their operations and maintenance; and (12) privatizing
depot maintenance activities, including the downsizing of the remaining
DOD depot infrastructure, could exacerbate existing capacity problems
and the inefficiencies inherent in under utilization of depot
maintenance capacity.

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

 REPORTNUM:  T-NSIAD-97-111
     TITLE:  Defense Depot Maintenance: Uncertainties and Challenges DOD 
             Faces in Restructuring Its Depot Maintenance
             Program
      DATE:  03/18/97
   SUBJECT:  Defense cost control
             Military downsizing
             Defense procurement
             Base closures
             Base realignments
             Privatization
             Defense economic analysis
             Equipment maintenance
IDENTIFIER:  C-17 Aircraft
             F-22 Aircraft
             F/A-18E/F Aircraft
             B-1B Aircraft
             HERCULES Missile System
             Stealth Aircraft
             UH-60 Helicopter
             GAO High Risk Program
             C-5 Aircraft
             F-117 Aircraft
             C-130 Aircraft
             Paladin Howitzer
             Black Hawk Helicopter
             B-2 Aircraft
             AC-130U Gunship
             
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Cover
================================================================ COVER


Before the Subcommittee on Military Readiness, Committee on National
Security, House of Representatives

For Release on Delivery
Expected at
10:00 a.m., EDT
Tuesday,
March 18, 1997

DEFENSE DEPOT MAINTENANCE -
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-97-111

GAO/NSIAD-97-111T


(709246)


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

  BRAC - base realignment and closure
  BGRC - Boeing Guidance Repair Center
  CORM - Commission on Roles and Missions
  DOD - - Department of Defense
  BSB - Defense Science Board
  BRAC -
  DSB - Defense Science Board

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am 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 my statement I would like to provide a brief summary of
the major points covered in my testimony. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:1

It is important to note that the waste and inefficiency in DOD's
logistics 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 realignment and
closure (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: 

  -- 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 capability\3
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. 

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 I 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 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. 


--------------------
\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. 

\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. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Depot maintenance is a key part of the total DOD logistics system
that 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 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
      REDUCED SINCE THE COLD WAR
      ENDED
-------------------------------------------------------- Chapter 0:2.1

With the end of the Cold War and reduction in new defense
procurement, commercial contractors would like more of the depot
maintenance 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. 

   Figure 1:  Reductions in DOD's
   Depot Maintenance Budget, Depot
   Maintenance Personnel, and
   Direct Labor Hours

   (See figure in printed
   edition.)


--------------------
\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. 


      EXCESS CAPACITY EXISTS IN
      THE PUBLIC AND PRIVATE
      SECTORS
-------------------------------------------------------- Chapter 0:2.2

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

   Figure 2:  Comparison of Depot
   Capacity and Workload

   (See figure in printed
   edition.)


   NAVY HAS BEEN MORE SUCCESSFUL
   THAN THE OTHER SERVICES IN
   REDUCING COSTLY EXCESS CAPACITY
---------------------------------------------------------- Chapter 0:3

Even after four BRAC rounds, the four services have costly excess
capacity within their depot maintenance systems.  With the exception
of the Navy privatization-in-place efforts, our work shows that the
Navy has been the most successful at addressing this issue.  However,
the Army and the Air Force have not succeeded in making significant
reductions in their excess capacity.  Further, DOD's privatization of
depots and the Air Force's plans to 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. 


      NAVY IS SAVING BY
      EXPEDITIOUSLY CLOSING
      AVIATION DEPOTS AND
      SHIPYARDS BUT IS MISSING
      SAVINGS OPPORTUNITIES BY
      PRIVATIZING THE LOUISVILLE
      DEPOT
-------------------------------------------------------- Chapter 0:3.1

The Navy has closed three of its six aviation depots, consolidating
workloads from the closing depots to improve capacity utilization and
reduce excess capacity.  These actions will significantly increase
utilization and reduce excess capacity in the remaining three naval
aviation depots.  The 1993 BRAC Commission approved the Navy's
recommendation to close aviation depots located in Pensacola,
Florida; Alameda, California; and Norfolk, Virginia.  The Navy
completed the closures in about 3 years versus 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
         EXPEDITED CLOSURES
------------------------------------------------------ Chapter 0:3.1.1

Our work shows that based on maximum potential capacity and fiscal
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. 



                                     Table 1
                     
                        Comparison of Public Shipyards for
                            Fiscal Years 1991 and 1996

                              (Dollars in millions)

                          Number
                              of                            Feet    Fixed assets
                          shipya   Number of   Number of      of            less
Fiscal year                  rds   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
         PRIVATIZATION-IN-PLACE OF
         LOUISVILLE DEPOT IS NOT
         COST-EFFECTIVE
------------------------------------------------------ Chapter 0:3.1.2

The Navy's privatization of its Louisville depot was not the most
cost-effective choice; the Navy could have saved more through
consolidation of workloads and improved use of capacity in remaining
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. 


--------------------
\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). 


      PRIVATIZATION PLANS WITHOUT
      FURTHER DOWNSIZING WILL
      INCREASE EXCESS CAPACITY AT
      ARMY DEPOTS
-------------------------------------------------------- Chapter 0:3.2

As a result of BRAC decisions during the 1988, 1991, and 1993 BRAC
rounds, the Army terminated work at three of its eight maintenance
depots--Lexington-Blue Grass, Kentucky; Sacramento, California; and
Tooele, Utah.  The Secretary's recommendations to the 1995 BRAC
Commission proposed realignment and termination of work at two
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 1996\6 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. 


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


      EXCESS CAPACITY WILL REMAIN
      AT AIR FORCE DEPOTS AFTER
      PRIVATIZATION
-------------------------------------------------------- Chapter 0:3.3

The Air Force has the most serious excess capacity problem.  Although
three of the six depots in the Air Force depot system were
recommended 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 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. 



                                     Table 2
                     
                      Potential Savings From Air Force Depot
                                  Consolidation

                                            Labor/
                       Direct labor       overhead
Depot location                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                                                   $182, 334, 483
 savings
--------------------------------------------------------------------------------
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


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

\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. 


      AIR FORCE EFFORTS TO
      PRIVATIZE SAN ANTONIO AND
      SACRAMENTO DEPOTS
-------------------------------------------------------- Chapter 0:3.4

The Air Force is currently conducting a public-private competition
for the Sacramento and San Antonio depot workloads and plans to award
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 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 sector proposals, and a quantified analysis of the dollar
value of the technical merits of the respective proposals. 


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


      PREVIOUS AIR FORCE
      PRIVATIZATION-IN-PLACE
      INITIATIVE RESULTED IN
      INCREASED COSTS
-------------------------------------------------------- Chapter 0:3.5

We estimate that the cost of performing aviation and missile guidance
repair at BGRC, Newark, Ohio, is from $13.3 million to $23.3 million
higher than what the organic depot would have cost to perform the
same work.  This represents an increase of between 18 to 31 percent. 

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 INCREASED COSTS
------------------------------------------------------ Chapter 0:3.5.1

On March 16, 1997, the Air Force Materiel Command released the
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 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. 


--------------------
\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. 


   DEPOT PRIVATIZATION POLICY
   STILL EVOLVING
---------------------------------------------------------- Chapter 0:4

Workload allocation between the public and private sector has a long
history of congressional interest and is affected by various
statutes.  With 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. 


      CURRENT STATUTES AND
      DIRECTIVES
-------------------------------------------------------- Chapter 0:4.1

Statutes and regulations influence the mix of maintenance work done
by 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 REQUIREMENTS
      FOR CLEAR POLICY AND DOD'S
      RESPONSE
-------------------------------------------------------- Chapter 0:4.2

The Congress has over the years consistently supported the need for
public depots and the retention of core capability requirements as
essential to national security.  Section 311 of the National Defense
Authorization Act for Fiscal Year 1996 reiterated that support and
required 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 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 PREFERENCE FOR
         PRIVATE SECTOR DEPOT
         MAINTENANCE
------------------------------------------------------ Chapter 0:4.2.1

DOD submitted its report Policy Regarding Performance of Depot-Level
Maintenance and Repair to the Congress in April 1996.  The report
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. 


--------------------
\11 This directive "Mandatory Procedures for Major Defense
Acquisition Programs (MDAPs) and Major Automated Information System
Acquisition Programs," (MAISAPs), Mar.  15, 1996, established the
management framework for acquiring DOD systems and equipment,
including their life-cycle management. 


         CONGRESSIONAL COMMITTEES
         DISAGREED WITH THE
         PROPOSAL
------------------------------------------------------ Chapter 0:4.2.2

We evaluated DOD's policy report and its report Depot Maintenance and
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 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
         POLICIES STILL EVOLVING
------------------------------------------------------ Chapter 0:4.2.3

For several years, the Congress has asked DOD to better define core
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
         MADE
------------------------------------------------------ Chapter 0:4.2.4

Since the issuance of the policy and workload reports, an
interservice 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 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 IN DRAFT
------------------------------------------------------ Chapter 0:4.2.5

Additionally, although two draft depot maintenance policy letters
were 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 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. 


   CURRENT ACTIONS POINT TO
   GREATER USE OF THE PRIVATE
   SECTOR TO PERFORM DEPOT
   MAINTENANCE
---------------------------------------------------------- Chapter 0:5

In response to our reports, DOD has consistently stated that it
intends to comply with existing statutes relating to depot
maintenance workload allocations.  As we look at the services'
current actions related to (1) privatization-in-place, (2)
assessments of existing organic workloads, and (3) assessments of
where to perform new weapon system depot maintenance, we see
significant movement of depot 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
-------------------------------------------------------- Chapter 0:5.1

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
      WORKLOADS
-------------------------------------------------------- Chapter 0:5.2

DOD officials are examining workloads now at organic depots with a
view to increase outsourcing.  Service officials are utilizing the
new core methodology\12 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 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. 


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


      ASSESSMENTS OF WHERE TO
      OUTSOURCE NEW SYSTEMS
-------------------------------------------------------- Chapter 0:5.3

DOD's revised acquisition policies and privatization plans establish
a clear 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 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

                                        Undecided/
System              Leaning to organic  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. 

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 NEW SYSTEMS
         MAINTENANCE DECISIONS
------------------------------------------------------ Chapter 0:5.3.1

Our new systems work is continuing.  We have some preliminary
observations based on our work to date. 

  -- 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. 

  -- 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. 


   PROJECTIONS FOR ACHIEVING
   BILLIONS BY PRIVATIZING DEPOT
   MAINTENANCE ARE NOT WELL
   SUPPORTED
---------------------------------------------------------- Chapter 0:6

Facing large shortfalls in its modernization accounts, DOD plans to
reduce costs and generate savings for modernization through the
outsourcing of support activities, including depot maintenance. 
DOD's projected savings 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 sector, depot maintenance
costs can be reduced by 20 to 40 percent.  While 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 NOT
      BASED ON DEPOT MAINTENANCE
      ACTIVITIES
-------------------------------------------------------- Chapter 0:6.1

As the basis for its outsourcing savings assumption, DOD cites data
from the CORM's report, Directions for Defense (May 24, 1995), which
claimed 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
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 testimony\15

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. 


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

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

\15 Defense Outsourcing:  Challenges Facing DOD as It Attempts to
Save Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.  12,
1997). 


      MANY CURRENT DEPOT
      MAINTENANCE CONTRACTS ARE
      SOLE SOURCE
-------------------------------------------------------- Chapter 0:6.2

Our April 1996 testimony and July 1996 CORM report noted that much of
the depot work contracted to the private sector was awarded sole
source and 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. 



                                     Table 5
                     
                        DOD's Use of Competition for Depot
                                 Maintenance Work

                                                          Competitive contracts
                                  Competitive contracts    awarded from FY 1996
                                       open in 1995              to date
                                  ----------------------  ----------------------
                                     Percent     Percent     Percent     Percent
                                          of          of          of          of
                                       total       total       total       total
Service                               number       value      number       value
--------------------------------  ----------  ----------  ----------  ----------
Army                                      23          53           5          .2
Air Force                                 39          62          50          57
Navy                                       8          39           1          28
--------------------------------------------------------------------------------

--------------------
\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). 


      REASON CITED FOR SOLE-SOURCE
      AWARDS
-------------------------------------------------------- Chapter 0:6.3

Our work also showed that, for existing weapon systems, obtaining a
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. 


   CONCLUSION
---------------------------------------------------------- Chapter 0:7

In conclusion, the inefficient operation of depot maintenance
activities 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. 


HISTORY OF THE SERVICES' DEPOT
SYSTEMS
=========================================================== Appendix I

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. 


   ARMY DEPOTS
--------------------------------------------------------- Appendix I:1

From the Revolution until World War II, the Army's equipment
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 in-house maintenance capability was
declining, the Army increased its reliance on commercial sources,
reversing a long trend. 

Although DOD's input to the 1995 the base realignment and closure
(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. 


   NAVY SHIPYARDS
--------------------------------------------------------- Appendix I:2

In 1799, the Congress authorized five naval shipyards to be located
at 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. 

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. 


   NAVY AVIATION DEPOTS
--------------------------------------------------------- Appendix I:3

The first naval aviation maintenance depot was established in 1917 at
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 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.  The Department of Defense (DOD) did not
recommend additional aviation depot closures as a result of the 1995
BRAC process. 


   MARINE CORPS DEPOTS
--------------------------------------------------------- Appendix I:4

The two Marine Corps maintenance depots are now called 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. 


   AIR FORCE DEPOTS
--------------------------------------------------------- Appendix I:5

From 1918 to 1939, the Army Air Corps, from which the Air Force was
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 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 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
--------------------------------------------------------- Appendix I:6


      NAVAL WEAPONS STATIONS
------------------------------------------------------- Appendix I:6.1

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 CENTER
------------------------------------------------------- Appendix I:6.2

The Naval Surface Warfare Center, Crane Division, supports the
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
      CENTER
------------------------------------------------------- Appendix I:6.3

The Navy's undersea warfare munitions capability was originally
established in 1914.  In recent years, depot maintenance for undersea
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. 


ABSTRACTS FROM RELATED GAO
PRODUCTS
========================================================== Appendix II


      HIGH-RISK SERIES:  DEFENSE
      INFRASTRUCTURE (GAO/HR-97-7,
      FEB.  1997)
------------------------------------------------------ Appendix II:0.1

This report addresses the difficult process of reducing the
Department of Defense's (DOD) infrastructure.  It focuses on the need
for infrastructure reductions and 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 MAINTENANCE: 
      PRIVATIZATION-IN-PLACE PLANS
      ARE COSTLY WHILE EXCESS
      CAPACITY EXISTS
      (GAO/NSIAD-97-13, DEC.  31,
      1996)
------------------------------------------------------ Appendix II:0.2

Deciding the future of Department of Defense's (DOD) depot system is
difficult.  Depot maintenance privatization should be approached
carefully, allowing for evaluation of the economic, readiness, and
statutory requirements that surround individual workloads. 
Privatizing workloads in place at two closing Air Force depots does
not reduce the excess capacity in the remaining depots or the private
sector and consequently is not a cost-effective approach to reducing
depot infrastructure.  Private industry representatives generally
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: 
      COST AND SAVINGS ISSUES
      RELATED TO
      PRIVATIZING-IN-PLACE AT THE
      LOUISVILLE, KENTUCKY, DEPOT
      (GAO/NSIAD-96-202,
      SEPT.  18, 1996)
------------------------------------------------------ Appendix II:0.3

We found that the Navy's plan for privatizing the workloads in place
at the Louisville depot will not reduce excess capacity in the
remaining public 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 existing requirement for public-private
competitions.  The Navy's preliminary cost analysis that
privatization-in-place is cost-effective is based on limited cost
data that overstates the cost of relocating the 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 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: 
      PRIVATIZATION WITHOUT
      FURTHER DOWNSIZING INCREASES
      COSTLY EXCESS CAPACITY
      (GAO/NSIAD-96-201,
      SEPT.  18, 1996)
------------------------------------------------------ Appendix II:0.4

If not effectively managed, the privatization of depot maintenance
activities, could exacerbate existing capacity problems and the
inefficiencies inherent in underuse of depot maintenance capacity. 
Tentative plans to transfer some workloads from realigned depots to
remaining depots should improve capacity use and lower operating
costs to some extent, but they will not resolve the Army's extensive
excess depot capacity problems.  Since the Army is not effectively
downsizing its 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 MAINTENANCE: 
      COMMISSION ON ROLES AND
      MISSION'S PRIVATIZATION
      ASSUMPTIONS ARE QUESTIONABLE
      (GAO/NSIAD-96-161, JULY 15,
      1996)
------------------------------------------------------ Appendix II:0.5

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

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 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 MAINTENANCE: 
      MORE COMPREHENSIVE AND
      CONSISTENT WORKLOAD DATA
      NEEDED FOR DECISIONMAKERS
      (GAO/NSIAD-96-166, MAY 21,
      1996)
------------------------------------------------------ Appendix II:0.6

Our analysis of DOD's workload report shows that the use of more
comprehensive and consistent data would provide Congress and DOD
decisionmakers a more accurate picture of historical and future
projections of depot maintenance workload allocations between the
public and private sectors.  Without such data, the reports are of
limited use to Congress and defense decisionmaker when considering
public and private sector workload allocation policy.  Although DOD's
workload report primarily justifies eliminating the 60-40 rule, our
work shows that, with 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. 

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 MAINTENANCE: 
      DOD'S POLICY REPORT LEAVES
      FUTURE ROLE OF DEPOT SYSTEM
      UNCERTAIN (GAO/NSIAD-96-165,
      MAY 21, 1996)
------------------------------------------------------ Appendix II:0.7

The DOD policy report calls for a greater reliance on private sector
maintenance capabilities than the current projection.  The policy
provides wide latitude regarding how certain policies and concepts
will be implemented.  For example, each service is implementing
differently the policy's new process for risk assessments to
determine which mission-essential maintenance requirements should be
privatized.  Thus, it 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 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)
------------------------------------------------------ Appendix II:0.8

Responding to a congressional request, we testified on the
privatization of defense depot maintenance activities.  We noted that
(1) the DOD's evolving depot maintenance policy includes a
public-private mix and shifts work to the private sector where
feasible; (2) depot privatization could worsen excess maintenance
capacity and inefficiencies if not carefully managed; (3) the DOD
policy report provides an overall framework for managing depot
maintenance activities and substantial implementation flexibility,
but the policy is not consistent with congressional guidance on
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. 


      MILITARY BASES:  CLOSURE AND
      REALIGNMENT SAVINGS ARE
      SIGNIFICANT, BUT NOT EASILY
      QUANTIFIED (GAO/NSIAD-96-67,
      APR.  8, 1996)
------------------------------------------------------ Appendix II:0.9

Our analysis of base support costs in the future year defense plan
and at nine closing installations indicates that BRAC savings should
be substantial.  However, DOD's systems do not provide information on
actual BRAC savings.  Therefore, the total amount of actual savings
is uncertain.  If DOD does not fully achieve estimated BRAC savings,
DOD's ability to fund future programs at planned levels will be
affected.  DOD has complied with the 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: 
      OPPORTUNITIES TO PRIVATIZE
      REPAIR OF MILITARY ENGINES
      (GAO/NSIAD-96-33, MAR.  5,
      1996)
----------------------------------------------------- Appendix II:0.10

The rationale and requirement for maintaining some capability in the
public depot system derive both from statutory requirements and from
the recognition that some public depot capability is needed to
mitigate cost and readiness risks where private sector capabilities
are limited or inadequate.  Private sector capabilities generally
make commercial 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 DEPOTS: 
      SAVINGS, WORKLOAD, AND
      REDISTRIBUTION ISSUES
      (GAO/NSIAD-96-29, MAR.  4,
      1996)
----------------------------------------------------- Appendix II:0.11

DOD has substantially reduced its initial estimates of net savings
resulting from depot closures during the 6-year implementation period
allowed by law and, to a lesser extent, of the annual savings after
the implementation period has been completed.  Although DOD believes
its new estimates are more accurate, they still do not accurately
reflect potential savings 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. 

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: 
      ASSESSMENT OF THE
      PUBLIC-PRIVATE COMPETITION
      PROGRAM FOR AVIATION
      MAINTENANCE
      (GAO/NSIAD-96-30, JAN.  22,
      1996)
----------------------------------------------------- Appendix II:0.12

Navy public-private competitions generally resulted in savings and
benefits, although precise quantification of such savings is not
possible.  Due to the time and cost of performing such competitions,
a rapidly declining depot maintenance workload, and a private sector
concern about fairness, much less maintenance work was subjected to
public-private competition than had been projected.  The issue of
fairness centers on private sector concerns that military depot
prices have not 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. 


      DEPOT MAINTENANCE:  THE
      NAVY'S DECISION TO STOP
      F/A-18 REPAIRS AT OGDEN AIR
      LOGISTICS CENTER
      (GAO/NSIAD-96-31, DEC.  15,
      1995)
----------------------------------------------------- Appendix II:0.13

Comparing F/A-18 Modification, Corrosion, and Paint Program cost and
performance at the North Island and Ogden depots was complicated
because a number of data judgments and adjustments were required. 
The Navy's analysis did not always use the most current and complete
information available and did not make adjustments for all known
differences in work completed at each depot.  Our analysis, using
more 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
      IN ALLOCATING WORKLOAD
      BETWEEN THE PUBLIC AND
      PRIVATE SECTORS
      (GAO/T-NSIAD-94-161, APR. 
      12, 1994)
----------------------------------------------------- Appendix II:0.14

The DOD annually spends about $15 billion for depot maintenance,
modifications, and upgrades to support aircraft, combat vehicles,
wheeled vehicles, ships, and other equipment.  DOD is downsizing and
must consider how to cost-effectively acquire needed depot
maintenance activities while supporting industrial base needs in both
the public and private sectors.  We discussed (1) the share of DOD's
depot maintenance program spent in the 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. 


      DEPOT MAINTENANCE:  ISSUES
      IN MANAGEMENT AND
      RESTRUCTURING TO SUPPORT A
      DOWNSIZED MILITARY
      (GAO/T-NSIAD-93-13, MAY 6,
      1993)
----------------------------------------------------- Appendix II:0.15

We were asked to determine (1) the extent to which the current DOD
depot maintenance system has excess capacity, (2) the basis for
current DOD allocations of depot work between the public and private
sectors, (3) whether the private sector's role in the performance of
depot maintenance activities is changing, (4) the status of the
public-private competition initiative, and (5) the action needed to
ensure that future 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. 


DOD DEPOT EMPLOYMENT LEVELS BY
SERVICE
========================================================= Appendix III



   (See figure in printed
   edition.)


CAPACITY AND WORKLOAD FORECASTS
FOR REMAINING DEPOTS FOR FISCAL
YEAR 1999
========================================================== Appendix IV

                        (Direct labor hours in thousands)

                  Maximu
                       m                  Maximu  Availa
                  potent  Availa               m     ble  Percentage  Percentage
                     ial     ble          capaci  capaci   excess of   excess of
                  capaci  capaci  Worklo      ty      ty     maximum   available
Depot                 ty      ty      ad  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             157,01  97,129  73,618  83,398  23,511          53          24
                       6
--------------------------------------------------------------------------------

*** End of document. ***




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