Concessions Contracting: DOD Military Exchange Services Rates of Return
(Letter Report, 05/09/96, GAO/GGD-96-108).
Pursuant to a congressional request, GAO reviewed concessions
contracting in the Department of Defense's (DOD) three military exchange
services, focusing on: (1) the extent of centrally managed concessions
operations; (2) the rates of return and factors that influenced the
rates of return; and (3) the rates of return compared to other agencies'
or governments' rates of return.
GAO found that: (1) in fiscal year (FY) 1994, 27 centrally managed DOD
concessions operations produced $273.5 million in gross revenues; (2) in
FY 1994, DOD received $57.7 million or a 21.1 percent rate of return
from centrally managed concessions operations; (3) the 1994 rate of
return was higher than the average rates of return of civilian agencies,
selected state governments, and Canada; (4) DOD policy requires that
centrally managed concession contracts be procured as competitively as
possible at the headquarters level from a central location by trained
procurement personnel to obtain the best advantage possible; (5) DOD
concessions policies do not provide preferential treatment to the
incumbent concessioners or grant concessioners compensation for
improvements made to federal property; and (6) in 1994, 6 of the 9
centrally managed contracts were awarded competitively and DOD
controlled all concessions fees.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-96-108
TITLE: Concessions Contracting: DOD Military Exchange Services
Rates of Return
DATE: 05/09/96
SUBJECT: Concessions contracts
Defense contracts
Defense procurement
Assignment of contract proceeds
Post exchanges
Profits
Retail facilities
User fees
Military facilities
IDENTIFIER: DOD Morale, Welfare, and Recreation Program
Concessions Contracting: DOD Military Exchange Services Rates of Return
(Letter Report, 05/09/96, GAO/GGD-96-108).
Pursuant to a congressional request, GAO reviewed concessions
contracting in the Department of Defense's (DOD) three military exchange
services, focusing on: (1) the extent of centrally managed concessions
operations; (2) the rates of return and factors that influenced the
rates of return; and (3) the rates of return compared to other agencies'
or governments' rates of return.
GAO found that: (1) in fiscal year (FY) 1994, 27 centrally managed DOD
concessions operations produced $273.5 million in gross revenues; (2) in
FY 1994, DOD received $57.7 million or a 21.1 percent rate of return
from centrally managed concessions operations; (3) the 1994 rate of
return was higher than the average rates of return of civilian agencies,
selected state governments, and Canada; (4) DOD policy requires that
centrally managed concession contracts be procured as competitively as
possible at the headquarters level from a central location by trained
procurement personnel to obtain the best advantage possible; (5) DOD
concessions policies do not provide preferential treatment to the
incumbent concessioners or grant concessioners compensation for
improvements made to federal property; and (6) in 1994, 6 of the 9
centrally managed contracts were awarded competitively and DOD
controlled all concessions fees.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-96-108
TITLE: Concessions Contracting: DOD Military Exchange Services
Rates of Return
DATE: 05/09/96
SUBJECT: Concessions contracts
Defense contracts
Defense procurement
Assignment of contract proceeds
Post exchanges
Profits
Retail facilities
User fees
Military facilities
IDENTIFIER: DOD Morale, Welfare, and Recreation Program
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Oversight of Government
Management and the District of Columbia, Committee on Governmental
Affairs, U.S. Senate
May 1996
CONCESSIONS CONTRACTING - DOD
MILITARY EXCHANGE SERVICES' RATES
OF RETURN
GAO/GGD-96-108
DOD Concessions Contracting
(240192)
Abbreviations
=============================================================== ABBREV
DOD - Department of Defense
MWR - Morale, welfare, and recreation
Letter
=============================================================== LETTER
B-270282
May 9, 1996
The Honorable William S. Cohen
Chairman, Subcommittee on Oversight
of Government Management and the
District of Columbia
Committee on Governmental Affairs
United States Senate
Dear Mr. Chairman:
This report is in response to your request for us to provide
information on concessions contracting in the Department of Defense's
(DOD) three military exchange services. You requested that we
determine (1) the extent of centrally managed concessions operations
in DOD's military exchange services, (2) the rate of return from
centrally managed concessions operations and factors that affected
the rate of return, and (3) how the exchange services' rates of
return compared to other agencies' or governments' rates of return
from concessions. Because of data availability and time
considerations, you asked that we not include this information in our
report on the concessions activities of 75 federal civilian agencies,
which we provided to you earlier.\1
--------------------
\1 See Concessions Contracting: Governmentwide Rates of Return
(GAO/GGD-96-86, April 29, 1996).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The 3 DOD exchange services reported 27 centrally managed concessions
agreements in effect during fiscal year 1994. Concessions are
generally businesses that use a government's property to provide
services to the general public or specific individuals and share the
profits with the government. The centrally managed concessions for
DOD's exchanges are contracts that are negotiated and procured at the
headquarters level. The reported gross revenues from these
concessions were $273.5 million in fiscal year 1994. Concessioners
paid the exchange services a reported $57.7 million from their
concessions revenues, for an overall rate of return of 21.1
percent.\2
The exchange services' 21.1 percent overall rate of return for fiscal
year 1994 was higher than the fiscal year 1994 average 3.6 percent
overall rate for civilian agencies that we calculated on the basis of
data received from civilian agencies. The exchange services'
information also showed a higher rate of return than the average rate
reported by other governments we surveyed, including Canada,
California, Maryland, Michigan, and Missouri, which reported a 12.7
percent average rate of return. Our review of the overall
concessions area revealed that two key factors affecting the rate of
return were the use of competition in selecting concessioners and
agencies' authority to retain concessions fees. DOD's policy
requires exchange services to procure concessions services primarily
through competitive negotiation. The exchanges reported that 9 of
the 27 centrally managed concessions contracts were awarded or
extended in fiscal year 1994, and competition was used in 6 of these
9 contracts. The exchanges also retain all fees received from
concessions operations to support DOD morale, welfare, and recreation
programs for military members and their families.
--------------------
\2 From financial information the exchanges reported, we calculated
the rate of return by dividing reported concessions fees by reported
gross revenues.
BACKGROUND
------------------------------------------------------------ Letter :2
For the purpose of this assignment, we defined "concessions" as
private or public entities using federally owned/leased property
under a government contract, permit, license, or other similar
agreement to provide recreation, food, or other services to either
the general public or specific individuals.
Military exchanges are nonappropriated fund activities that are
established and controlled by, and operated for the benefit of, DOD
components. They maintain control and custody over their activities'
proceeds, which are used to fund their operations. The military
exchanges have a dual mission of providing (1) authorized patrons
with articles and services necessary for their health, comfort, and
convenience; and (2) a source of funding for DOD morale, welfare, and
recreation (MWR) programs. DOD has three military exchange services
providing service on a worldwide basis. They are the Army and Air
Force Exchange Service, the Navy Exchange Service Command, and the
Marine Corps MWR Support Activity.
The primary purposes of the exchange services' concessions program
are to provide (1) services to military personnel and their families
at the best possible prices and (2) revenues in the form of
concessions fees to support programs that directly benefit service
members. Concessions contractors are provided space at the exchanges
to supply a particular concessions service to exchange customers.
The exchanges receive commissions from the concessioners, expressed
as a percentage of sales receipts.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
The objectives of our review were to determine (1) the extent of
centrally managed concessions operations in DOD's military exchange
services, (2) the rate of return from the centrally managed
concessions operations and factors that affected the rate of return,
and (3) how the exchange services' rates of return compare to other
agencies' or governments' rates.
To accomplish objectives one and two, we (1) sent a questionnaire to
DOD requesting general information on its exchange services'
centrally managed concessions agreements and detailed information,
such as whether the agreement was competed, on centrally managed
concessions that the exchanges either awarded or extended in fiscal
year 1994; (2) interviewed officials from the three exchange
services; and (3) reviewed DOD's policies and regulations relating to
the exchange services' concessions operations.
Our information about the concessions agreements comes from the
agencies' questionnaire responses for the agreements. To check
whether the questionnaires were filled out completely and accurately,
we (1) manually reviewed all pages of each form, (2) checked selected
responses against copies of the concessions agreements that agencies
sent to us, and (3) followed up with agency staff in selected cases
to clarify their responses. However, we did not verify the accuracy
of data provided by agencies or other governments.
To accomplish objective three, we compared DOD's information with
information we received from a survey of 75 federal and civilian
agencies, 4 states, and Canada. The survey information is reported
in our previously cited report on concessions.
We did our review of the exchange services from November 1995 to
February 1996, in accordance with generally accepted government
auditing standards. All of our work was done in Washington, D.C. On
April 2, 1996, we provided a draft of this report to the Secretary of
Defense for comment. On April 8, 1996, we discussed the draft report
with the Assistant Director, MWR and Resale Activities, Office of the
Assistant Secretary of Defense (Force Management Policy). His
comments are discussed on page 6.
EXTENT OF CONCESSIONS IN THE
MILITARY EXCHANGE SERVICES
------------------------------------------------------------ Letter :4
As shown in table 1, the 3 DOD exchange services reported 27
centrally managed concessions agreements in effect during fiscal year
1994. The reported concessioners' gross revenues from these
concessions were $273.5 million.
Table 1
Reported Centrally Managed Concessions
Agreements With the Military Exchange
Services in Fiscal Year 1994
Number
of
centra Rate
lly Concessione Concessio of
manage rs' ns
d revenue fees return
agreem (in (in (perce
Agency ents millions) millions) nt)
------------------------------ ------ ----------- --------- ------
Navy Exchange 16 $161.9 $32.8 20.2
Service Command
Army Air Force 7 89.7 19.8 22.1
Exchange Service
Marine Corps MWR 4 21.9 5.1 23.3
Support Activity
======================================================================
Total 27 $273.5 $57.7 21.1
----------------------------------------------------------------------
Source: GAO questionnaire data.
Reported services provided by the exchanges' concessioners included
income tax preparation, food service operations, truck rental
services, and telegraphic services and equipment.
From the reported information, we computed an overall rate of return
of 21.1 percent that the exchanges received from centrally managed
concessions operations in fiscal year 1994. We calculated this rate
by dividing the reported concessions fees of $57.7 million by the
reported gross revenues of $273.5 million earned by the
concessioners.
Analysis of questionnaire data showed that the exchange services'
fiscal year 1994 overall 21.1 percent rate of return was higher than
the civilian agencies' fiscal year 1994 average overall rate of 3.6
percent. We calculated the civilian agencies' rate from information
reported by 42 agencies or agency components. The exchange services'
rate was also higher than the average rate of other governments we
surveyed, including Canada, California, Maryland, Michigan, and
Missouri, which reported an average 12.7 percent overall rate of
return. The states reported that they received rates of return
ranging from 11 to 17 percent, while Canada's overall reported rate
was 9.8 percent.
MILITARY EXCHANGE SERVICES'
MANAGEMENT OF CONCESSIONS
------------------------------------------------------------ Letter :5
Exchanges' centrally managed concessions contracts are agreements
that are negotiated and procured by the headquarters level of the
exchange service. These centrally managed concessions are dispersed
throughout the world for use by military members and their families
at the many military installations. Although these concessions are
to be procured from a central location, according to exchanges'
officials, oversight is performed at the local level using applicable
DOD directives.
Although the competition requirement of the Armed Services
Procurement Act and the Federal Acquisition Regulation do not apply
to exchange concessions because of the exchanges' status as
nonappropriated fund activities, DOD policies require competition to
the extent possible. DOD policy requires that procurements using
nonappropriated funds be accomplished primarily through competitive
negotiation; by trained procurement personnel; in a fair, equitable,
and impartial manner; to the best advantage of the applicable DOD
organization.
The exchanges reported that 9 of the 27 centrally managed concessions
were awarded or extended in fiscal year 1994. They reported that (1)
competition was used to select six of the nine concessions
contractors, (2) two contracts were based on unsolicited offers
submitted by the contractors, and (3) one concessions contract was
awarded as a sole-source contract after a determination that it was
the only source able to provide the required level of service.
The military exchanges' concessions policies do not incorporate two
factors that reduce competition and are required by legislation for
some civilian concessions. First, the exchanges' policies do not
provide for preferential treatment to the incumbent concessioner when
a contract expires. In contrast, for certain civilian agency
concessioners, legislation provides for preferential right of
contract renewal to the existing concessioners when the contract
expires in order to encourage continuity of service. Second, the
exchanges' policies do not grant concessioners the right to be
compensated for improvements to property and/or for property they
construct on federal land. However, legislation requires that
certain civilian agency concessioners be compensated for improvements
they make to facilities on federal property. Civilian agency
officials said this practice reduces the number of bidders because
either the agency or successor concessioner has to pay the incumbent
concessioner reconstruction costs less depreciation for the
improvements, not to exceed fair market value.
According to the exchanges, if a concessioner makes improvements to
or constructs a building (other than portable or relocatable
structures), the government assumes immediate ownership when the
government approves the building. To assist concessioners in
recouping their investment, the exchanges said they will agree to a
long-term contract, lasting from 10 to 25 years. However, if for any
reason the concessioner does not perform for the entire length of the
contract period, the government is to retain sole ownership of the
facility.
Exchange concessioners are to retain title to their furniture,
equipment, and movable fixtures. Under the exchange services'
policies, the exchanges are not liable to concessioners for the costs
of concessioners' investment in such items. At the end of a
contract, the contractor has the option of removing all furniture,
fixtures, and proprietary equipment.
The exchanges also retain and control all concessions fees received
from concessions operations. According to questionnaire data, the
retained fees are used to (1) offset concessions' operating expenses,
(2) support MWR programs for military members and their families, and
(3) cover capital improvement expenses.
AGENCY COMMENTS
------------------------------------------------------------ Letter :6
On April 2, 1996, we provided copies of a draft of this report to the
Secretary of Defense for comment. On April 8, 1996, we discussed the
draft report with the Assistant Director, MWR and Resale Activities,
Office of the Assistant Secretary of Defense (Force Management
Policy). He said DOD concurred with the facts and findings in the
report and had no further comments.
---------------------------------------------------------- Letter :6.1
As arranged with your office, unless you release its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter. At that time, we will send copies of
the report to interested congressional committees, the agencies
included in our review, the Director of the Office of Management and
Budget, and other interested parties. We will also make copies
available to others upon request.
Major contributors to this report were John S. Baldwin Sr.,
Assistant Director; Lucy M. Hall, Evaluator-in-Charge; Abraham L.
Logan, Staff Evaluator; and Jill P. Sayre, Senior Attorney. Please
contact me on (202) 512-8387 if you have any questions concerning
this report.
Sincerely yours,
J. William Gadsby
Director, Government Business
Operations Issues
*** End of document. ***