Military Housing: Continued Concerns in Implementing the Privatization
Initiative (Chapter Report, 03/30/2000, GAO/NSIAD-00-71).

Pursuant to a legislative requirement, GAO provided information on the
Department of Defense's (DOD) Military Housing Privatization Initiative,
focusing on the: (1) status of the housing privatization initiative; (2)
accuracy of the services' life-cycle cost analyses comparing the cost of
proposed privatization projects to comparable projects financed through
military construction funds; and (3) progress DOD is making in
coordinating and integrating the initiative with other family housing
programs.

GAO noted that: (1) although initial plans for housing privatization
were aggressive, actual progress has been slow; (2) almost 4 years after
the program was initiated, DOD has awarded only two privatization
contracts to build or renovate 3,083 military family housing units; (3)
DOD explains that because this represents a new way of doing business,
developing procedures and financial instruments and awarding contracts
have taken more time than expected; (4) it appears questionable whether
the services will meet a DOD goal to eliminate all inadequate family
housing by fiscal year 2010; (5) because no projects under the program
have been completed, there is little basis for evaluating the
effectiveness of the program in eliminating inadequate housing more
economically and faster than could be achieved through traditional
military construction financing; (6) until experience is gained in the
actual operation of several projects, key questions will remain
unanswered, such as whether: (a) the military will need the housing over
the 50-year terms of most projects; (b) developers will operate and
maintain privatized housing in accordance with contracts; and (c) actual
privatization costs and savings will be in line with DOD estimates; (7)
DOD has not developed a formal evaluation plan to help answer these
questions and assess the overall merits of the initiative as it is
implemented; (8) a review of 14 projects found that the services did not
prepare a life-cycle cost analysis for 2 projects and that the analyses
for the remaining 12 projects were incomplete, primarily because DOD had
not issued standardized guidance for preparing the analyses; (9) DOD has
made progress in coordinating this initiative with other housing options
by increasing use of cross-organizational panels that review and
coordinate housing policies and issues; (10) however, it has not
finalized an overall integrated housing strategy for addressing its
housing needs in a manner that considers the interrelationships among
these options; (11) DOD's January 2000 announcement of a new initiative
to significantly increase housing allowances over the next 5 years makes
a well-developed strategy that balances the various housing options even
more important; (12) the services have not improved their housing
requirements determination processes to more accurately estimate how
much housing the installations must supply and they have not always
updated their housing requirements assessments prior to approving
privatization projects; and (13) thus, they cannot be assured that they
are meeting an adequately documented need.

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

 REPORTNUM:  NSIAD-00-71
     TITLE:  Military Housing: Continued Concerns in Implementing the
	     Privatization Initiative
      DATE:  03/30/2000
   SUBJECT:  Military housing
	     Cost analysis
	     Housing programs
	     Privatization
	     Housing construction
	     Housing allowances
	     Military cost control
	     Rental housing
	     Life cycle costs
IDENTIFIER:  DOD Military Family Housing Program
	     DOD Military Housing Privatization Initiative
	     DOD Family Housing Improvement Fund
	     DOD Military Unaccompanied Housing Improvement Fund

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GAO/NSIAD-00-71

6

16

DOD's Housing Problem 16

The Military Housing Privatization Initiative 17

Previous GAO Report on the Privatization Initiative 19

Objectives, Scope, and Methodology 19

Remain

22

Status of the Privatization Initiative 22

Implementation Has Been Slower Than Expected 25

DOD Has Curtailed Privatization Plans 27

Eliminating Inadequate Housing by Fiscal Year 2010 Is Questionable 28

More Progress Needed to Measure Initiative's Overall Effectiveness 28

Conclusions 32

Recommendation 32

Agency Comments and Our Evaluation 32

and Indicate Modest Potential Savings

34

The Services' Life-Cycle Cost Analyses Lack Consistency and
Reliability 34

Overall Projected Savings Are Modest 36

DOD Had Not Issued Final Guidance for Life-Cycle Cost Analyses 38

Conclusions 39

Recommendation 39

Agency Comments and Our Evaluation 40

Other Housing Options

41

Required Integrated Housing Strategy Has Not Been Developed 41

Slow Progress in Improving Housing Requirements Determinations 42

Updated Market Analyses Not Available for Some Privatization
Projects 44

Maximizing Use of Housing in Local Communities Is Least Costly but Difficult
to Implement 45

Conclusions 47

Recommendations 48

Agency Comments and Our Evaluation 48

Appendix I: Summary of Authorities in the Military Housing
Privatization Initiative

50

Appendix II: DOD's Military Housing Privatization Program as of
October 1999

52

Appendix III: Navy's Limited Partnership Agreements for Housing at Corpus
Christi and Kingsville, Texas and Everett, Washington

53

Appendix IV: Life-Cycle Cost Comparisons for Privatization Projects Awarded
or Approved for Solicitation as of October 1999

60

Appendix V: Comments From the Department of Defense

62

Appendix VI: GAO Contacts and Staff Acknowledgments

66

Table 1: Privatization Projects as of October 1999 23

Table 2: DOD Family Housing Improvement Fund 24

Table 3: Comparison of Life-Cycle Cost Estimates for 12 Projects 37

Table 4: Out-of-pocket Costs at Portland from January through
September 1999 54

Table 5: Occupancy at Portland in August 1999 55

Table 6: Out-of-pocket Costs at Kingsville from January through
September 1999 56

Table 7: Occupancy at Kingsville in August 1999 57

Table 8: Out-of-pocket Costs at Everett from January through
September 1999 58

Table 9: Occupancy at Everett in August 1999 59

DOD Department of Defense

National Security and
International Affairs Division

B-284453

March 30, 2000

The Honorable Conrad Burns
Chairman
The Honorable Patty Murray
Ranking Minority Member
Subcommittee on Military Construction
Committee on Appropriations
United States Senate

The Honorable David L. Hobson
Chairman
The Honorable John W. Olver
Ranking Minority Member
Subcommittee on Military Construction
Committee on Appropriations
House of Representatives

This report discusses the Department of Defense's Military Housing
Privatization Initiative. As requested, we reviewed the implementation of
the initiative to determine the status of current and planned family housing
privatization projects, examine the accuracy of life-cycle cost analyses for
proposed projects, and assess progress toward integrating the initiative
with other military housing programs.

We are sending copies of this report to the Honorable William Cohen,
Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army;
the Honorable Richard Danzig, Secretary of the Navy; General James L. Jones,
the Commandant of the Marine Corps; the Honorable F. Whitten Peters,
Secretary of the Air Force; and to interested congressional committees.
Copies will also be made available to others upon request.

If you or your staff have any questions on this report, please call me on
(202) 512-5140. Major contributors to this report are listed in appendix VI.

Carol R. Schuster
Associate Director, National Security
Preparedness Issues

Executive Summary

The Department of Defense (DOD) estimates that about 200,000 military family
housing units are old, lack modern amenities, and require renovation or
replacement. According to DOD, completing this work at current funding
levels and using traditional military construction methods would take 30
years and cost about $16 billion. To improve housing more economically and
faster than could be achieved if only traditional military construction
funds were used, the Congress enacted legislation at DOD's request
authorizing a 5-year pilot program, termed the Military Housing
Privatization Initiative, to allow private sector financing, ownership,
operation, and maintenance of military housing. Under the program, starting
in 1996, DOD can provide direct loans, loan guarantees, and other incentives
to encourage private developers to construct and operate housing either on
or off military installations. Servicemembers, in turn, use their housing
allowance to pay rent and utilities to live in the privatized housing.
Although there can be exceptions, DOD's position is that the government's
estimated total costs for a privatization project should be equal to or less
than the total costs for the same project financed by military construction
funding. To estimate and compare these costs as part of a project's approval
process prior to solicitation, the services perform a life-cycle cost
analysis. In response to a congressional mandate,1 GAO addressed the
following questions: (1) What is the status of the housing privatization
initiative? (2) What is the accuracy of the services' life-cycle cost
analyses that compare the cost of proposed privatization projects to
comparable projects financed through military construction funds?
(3) What progress is DOD making in coordinating and integrating the
initiative with other family housing programs?

Although initial plans for housing privatization were aggressive, actual
progress has been slow. Almost 4 years after the program was initiated, DOD
has awarded only two privatization contracts to build or renovate 3,083
military family housing units. Several more years will be required before
all planned construction under these contracts is completed. The services
plan to have 20 more projects, involving 27,911 units, awarded or approved
for solicitation before the privatization authorities expire in February
2001. DOD explains that because this represents a new way of doing business,
developing procedures and financial instruments and awarding contracts have
taken more time than expected. Because progress has been slow and because
the services have curtailed plans for using the initiative, it appears
questionable whether the services will meet a DOD goal to eliminate all
inadequate family housing by fiscal year 2010. Also, because no projects
under the program have been completed, there is little basis for evaluating
the effectiveness of the program in eliminating inadequate housing more
economically and faster than could be achieved through traditional military
construction financing. Until experience is gained in the actual operation
of several projects, key questions will remain unanswered, such as whether
(1) the military will need the housing over the 50-year terms of most
projects, (2) developers will operate and maintain privatized housing in
accordance with contracts, and (3) actual privatization costs and savings
will be in line with DOD estimates. Although a formal evaluation plan could
help answer these questions and assess the overall merits of the initiative
as it is implemented, DOD has not developed such a plan.

GAO's review of the 2 privatization projects already awarded and
12 additional projects approved for solicitation found that the services did
not prepare a life-cycle cost analysis for 2 projects approved for
solicitation and that the analyses for the remaining 12 projects were
incomplete, inaccurate, or inconsistently prepared primarily because DOD had
not issued standardized guidance for preparing the analyses. For example,
seven did not include costs for project planning and design and three did
not consider the value of government property to be conveyed to the
developer as part of the agreement. After making adjustments to provide
consistency, considering all project costs under both options, and
correcting other errors, GAO found that over the life of the projects the
privatization option, on average, would be about 11 percent less costly than
comparable projects financed with military construction funds. Two
privatization projects would cost more than comparable projects under the
military construction option, but DOD stated that these projects were
approved because they were still in the military's best interest.

DOD has made progress in coordinating this initiative with other housing
options, such as housing allowances and military construction, by increasing
use of cross-organizational panels that review and coordinate housing
policies and issues. However, it has not finalized an overall integrated
housing strategy for addressing its housing needs in a manner that considers
the interrelationships among these options, as directed by a

congressional committee and as previously recommended by GAO.2 DOD's January
2000 announcement of a new initiative to significantly increase housing
allowances over the next 5 years makes a well-developed strategy that
balances the various housing options even more important. For example,
implementation of the new housing allowance initiative most likely will make
more housing in local communities affordable to servicemembers, reduce the
demand for on-base housing, and increase the cost of privatized housing
relative to housing constructed with military construction funds since,
under privatization, housing allowances are paid to the developers as rent.
Also, the services have not improved their housing requirements
determination processes to more accurately estimate how much housing the
installations must supply and they have not always updated their housing
requirements assessments prior to approving privatization projects. As a
result, the services cannot be assured that they are constructing,
replacing, or revitalizing housing only at installations where the need for
additional housing is adequately documented.

GAO is recommending that DOD develop an evaluation plan for the initiative,
improve policy guidance, and require that housing requirements assessments
be updated as part of the approval process for proposed privatization
projects.

DOD spends about $8 billion annually to provide housing for families of
active-duty military personnel. DOD's policy is to rely on the housing in
local communities near military installations as the primary source of
family housing. About two-thirds of military families in the United States
live in private housing and receive a cash allowance to help defray the cost
of renting or purchasing a home. The other one-third lives in
government-owned or -leased housing. These families forfeit their housing
allowance but pay no out-of-pocket costs for housing or utilities. Studies
show that the cost to the government is significantly less when military
families are paid a housing allowance and live in housing in the local
communities as compared to providing government-owned housing. This is
largely because housing allowances only cover an average of 81 percent of
the costs of off-base housing and servicemembers must pay the rest
out-of-pocket. However, in January 2000, DOD announced a new $3 billion
initiative that would significantly increase servicemembers' housing
allowances over the next 5 years. If this initiative is implemented as
planned, the inequity in housing costs between servicemembers who live
on-base and off-base would be eliminated because out-of-pocket costs for the
typical military family would be reduced to zero.

According to DOD, the quality of government-owned housing has declined for
more than 30 years primarily due to a lack of priority. Because of concerns
that poor quality housing could cause servicemembers to leave the military,
DOD proposed a privatization initiative aimed at solving its housing problem
more economically and faster than under traditional means by taking
advantage of the private sector's investment capital and housing
construction expertise. The resulting legislation authorized the Military
Housing Privatization Initiative, which permitted DOD to enter into a
variety of arrangements with private sector entities to build and renovate
military housing both on and off military bases. DOD's goal was to encourage
private sector investment to obtain at least $3 in military housing
improvements for each dollar that the government invested. By reducing the
amount of government funds initially required to revitalize housing, DOD
planned to quicken the pace of housing revitalization. DOD's Competitive
Sourcing and Privatization Office provides oversight of this program, but
primary responsibility for implementing it rests with the individual
services.

DOD has made limited progress in implementing the privatization initiative.
At the beginning of the program in 1996, DOD expected to award about 8 to 10
projects for up to 2,000 family housing units within a year and increase
this total to 8,000 in fiscal year 1997. In 1998, DOD said that the services
were planning privatization projects totaling about 87,000 units at 49
installations before the authorities expired in fiscal year 2001. However,
as of January 2000, contracts for only 2 projects containing about 3,100
units had been awarded. According to DOD, progress has been slower than
expected because the initiative represents a new way of doing business for
both the military and the private sector. Many initial legal, financial,
contractual, and budgetary issues had to be resolved to the satisfaction of
parties representing the government, developers, and private lenders before
the initiative could proceed.

In the Conference Report for the 1999 Military Construction Appropriations
Act, the conferees cited concern over the slow pace of the initiative's
implementation and the high level of reliance that the services had begun to
place on the initiative relative to other housing options.3 The report noted
that the initiative was a pilot project and not intended to become a
substitute for the traditional housing construction program. In response to
this report, and a subsequent House Committee on Appropriations,
Subcommittee on Military Construction, letter to the Secretary of Defense
that cited similar concerns, the services scaled back their privatization
plans to the current program consisting of 22 projects to build or renovate
30,994 units.

Because no projects under the initiative have been fully implemented, there
is little basis to evaluate whether this program could ultimately achieve
its goals of eliminating inadequate housing more economically and faster
than could be achieved through traditional military construction financing.
Also, despite the fact that this pilot program is 4 years old, DOD has not
developed an overall evaluation plan to assess the program's merits. Without
an evaluation plan, DOD has no means to systematically compare the actual
cost and implementation time frames of privatized projects to traditional
military construction projects, assess the advantages and disadvantages of
the various authorities, measure contractor performance, or assess
servicemembers' satisfaction with the privatized housing. Timely, complete,
accurate, useful, and consistent performance data could help decision-makers
evaluate the overall effectiveness of the initiative, determine whether the
initiative is meeting program goals, and identify what modifications might
be needed as the program is implemented over the next several years.

Savings

For the 2 privatization projects already awarded and the 12 projects
approved for solicitation, GAO found that DOD did not prepare a life-cycle
cost analysis for 2 projects and that the analyses for the remaining
12 projects were inaccurate, inconsistently prepared, or lacked support for
some assumptions used. For example, the Marine Corps' life-cycle cost
analysis for its proposed 712-unit privatization project at Camp Pendleton
estimated that the government would save $28 million, or about 17 percent,
compared to military construction over the 50-year term of the project.
However, the analysis did not consider the value of 512 government housing
units that will be conveyed to the developer, the costs of project
development and solicitation, and the costs of monitoring the privatization
contract. GAO's recalculation of costs after making adjustments showed that
privatization would save the government considerably less−about
$11 million, or 5 percent.

In addition, the analyses for two projects approved for solicitation
indicate that privatization costs will exceed the costs of comparable
projects financed through the military construction program. Specifically,
life-cycle cost estimates for planned projects at Robins Air Force Base,
Georgia, and Stewart Army Subpost, New York, showed that privatization would
cost more than military construction financing--9 percent and 15 percent,
respectively. However, DOD officials stated that these privatization
projects were still in the best interest of the military because the housing
improvements could be completed faster and with substantially less initial
government funds.

For the two projects without life-cycle cost analyses, DOD explained that
the Army did not prepare a life-cycle cost analysis for a proposed project
at Fort Hood because it had not settled on the scope of the project or
selected a developer to help it plan the project. Also, the Marine Corps had
not prepared an analysis for a planned project at Marine Corps Logistics
Base, Albany, Georgia, because officials assumed that an analysis was not
needed since the proposed project required no initial government funds. DOD
officials stated that a life-cycle cost analysis is required regardless of
the terms of individual projects and that an analysis should have been
prepared for this project.

Although DOD agreed with a July 1998 GAO recommendation that DOD expedite
efforts to develop a standard methodology to assist the services in
performing these analyses, GAO found that DOD had not issued such guidance
as of January 2000.4 DOD had developed draft guidance for performing the
analyses, but its use was not mandatory. Also, although the draft guidance
generally identified the costs that should be considered in analyzing each
alternative, it did not include details on how to estimate each type of cost
or when it is appropriate to approve a proposed privatization project that
costs more than a comparable military construction project.

All of the life-cycle analyses prepared to date may understate privatization
costs because DOD is in the process of increasing the housing allowances
servicemembers use to pay for rent and utilities in privatized housing. If
DOD fully implements the housing allowance initiative, privatization savings
will be less than currently estimated.

Housing Options

To maximize the advantages from the initiative and minimize total housing
costs, privatization needs to be part of an integrated strategy that
includes coordinated decisions on the structure of housing allowances and
housing construction, accurate determinations of housing needs, and maximum
use of private sector housing in accordance with DOD housing policy. Yet, as
of January 2000, DOD had not completed development of an integrated housing
strategy showing how the various housing options will be used to meet DOD's
housing needs in an optimum manner. In the previously mentioned 1999
Appropriations Act Conference Report, DOD was directed to prepare a report
on such a strategy by December 1, 1998. DOD officials stated that the delay
was caused by a lack of staff and that the report should be issued soon.

DOD has taken steps to improve coordination on housing issues, including
increased use of a policy board to review and coordinate issues, such as
military housing, that cross functional and organizational lines and
directly affect installations. Members of the board include officials from
the separate DOD offices responsible for military housing construction and
housing allowances. DOD also created a policy panel to focus solely on
military housing issues by reviewing and coordinating housing matters at the
staff working level.

DOD also has made little progress in improving its processes for determining
how much housing the military must provide at installations versus how much
local communities could be expected to supply, which is a critical element
of an overall strategy. Prior GAO and DOD Inspector General work has
highlighted long-standing problems in the processes the services use to
determine their housing requirements that can result in overstating on-base
housing needs.5 Accurate assessments of requirements are important because
it generally costs more to house servicemembers on base than to pay housing
allowances for servicemembers to secure housing in local communities. In
December 1997, DOD convened a cross-service working group to develop
recommendations for improving its processes for determining housing
requirements. However, DOD decided that the task was too big for the group,
and in January 1999, it contracted with the Center for Naval Analyses for a
complete review of the processes being used. According to DOD, the results
of this review, expected by summer 2000, will be used to improve the
processes.

DOD's Housing Management Manual 4165.63M states a housing market analysis
should be performed at installations where acquisition of housing is planned
to help determine military housing needs and the ability of the local
communities to meet these needs. Although housing market analyses had been
prepared within the past 5 years at 9 of the 14 installations with a
privatization project awarded or approved for solicitation, GAO found that
no housing market analysis had been prepared within the past 5 years for the
remaining 5 installations. Although these analyses are important to
accurately estimate housing requirements, updated analyses have not been
specifically required as part of the approval process for proposed
privatization projects.

GAO makes several recommendations concerning implementation of the
privatization initiative, particularly in view of DOD's new plans to
increase housing allowances. GAO is recommending that the Secretary of
Defense develop an evaluation plan for the initiative, improve agency
guidance related to life-cycle cost analyses, clarify guidance for approving
a privatization project when the project's estimated total costs exceed the
costs to implement the project with military construction funds, and require
that housing requirements assessments be updated as part of the approval
process for proposed privatization projects.

DOD agreed with GAO's recommendations. DOD stated that a privatization
evaluation plan is necessary and that such a plan should be ready for review
by the services in late summer 2000. DOD also stated that it
(1) intends to issue refined guidance for life-cycle cost analyses that will
require the services to examine the costs of privatization and military
construction alternatives in a uniform and comprehensive manner and
(2) is establishing a senior-level, joint Housing Policy Panel to provide
policy for determining housing requirements and to establish clear policy
for satisfying those requirements. DOD disagreed that the life-cycle costs
for future privatization projects would necessarily increase if basic
housing allowances were increased as planned. To ensure that life-cycle
costs do not increase, DOD said that it would use mechanisms, such as
revenue sharing accounts, in its contracts to offset this increased cost.
GAO believes that the actions planned by DOD will improve implementation of
the privatization initiative. With respect to the effect of increased
housing allowances on the life-cycle costs of future privatization projects,
GAO notes that DOD cannot be ensured that contractors would accept new
mechanisms that would limit government costs. If they do not, the costs of
privatized housing would increase since rents are determined on the basis of
the allowances.

DOD's comments and GAO's evaluation of them are discussed in the report
where appropriate. These comments are provided in their entirety as appendix
V.

Introduction

The Department of Defense (DOD) spends about $8 billion annually to provide
housing for families of active-duty military personnel. Seeking to provide
military families with access to adequate, affordable housing, DOD either
pays cash allowances for families to live in private sector housing or
assigns families to government-owned or government-leased units. The housing
benefit is a major component of the military's compensation package.

DOD Housing Management Manual 4165.63M states that private sector housing in
the communities near military installations will be relied on as the primary
source of family housing. About 544,000, or two-thirds, of the military
families live in private housing. These families receive assistance in
locating private housing from housing referral offices at each major
installation and are paid a cash housing allowance to help defray the cost
of renting or purchasing housing in local communities. The housing
allowance, which totaled about $4.5 billion in fiscal year 1999, covers
about 81 percent of the typical family's total housing costs, including
utilities. The families pay the remaining portion of their housing costs out
of pocket.

About 265,000, or one-third, of the military families live in
government-owned or -leased housing. These families forfeit their housing
allowances but pay no out-of-pocket costs for housing or utilities. In
fiscal year 1999, DOD spent about $2.8 billion to operate and maintain
government-owned and -leased family housing. In addition, about $740 million
was authorized to construct and renovate government family housing units in
fiscal
year 1999.

According to DOD, access to affordable, quality housing is a key element
affecting the quality of life of military members and their families.
Because quality of life directly affects personnel retention and ultimately
unit readiness, DOD states that adequate housing can enhance its efforts to
maintain a ready, quality force. Yet, affordable housing is unavailable in
the communities surrounding some military installations, and the poor
quality of on-base housing is a long-noted problem. In March 1999, the
Acting Deputy Under Secretary of Defense (Installations) testified before
the Congress that about 200,000 of the military family housing units were
old, below contemporary standards, and in need of extensive renovation or

replacement.6 He estimated that fixing this problem using only traditional
military construction financing would take 30 years and cost as much as $16
billion.

To address its housing problem, DOD has undertaken several initiatives. To
make privately owned housing more affordable to military members, the
Congress approved DOD's request for a new housing allowance program that
started in January 1998. The program was designed to better match the
allowance amount with the cost of housing by determining allowances on the
basis of costs for suitable civilian housing in each geographic area and
tying allowance increases to growth in housing costs. In January 2000, the
Secretary of Defense announced a major new quality-of-life initiative to
increase housing allowances. According to DOD, it plans to ask the Congress
to approve funding that would reduce average out-of-pocket housing costs
from about 19 percent in calendar year 2000 to 15 percent in calendar year
2001, with continued reductions each year thereafter, eliminating such costs
entirely by year 2005. DOD estimated that this initiative will cost more
than $3 billion over the next 5 years and planned to allocate these funds
from overall DOD budget increases that it will request over this period.

In May 1995, DOD proposed an initiative to improve the quality of its
military housing inventory. This initiative, known as the Military Housing
Privatization Initiative, was designed to improve military housing more
economically and at a faster rate than could be achieved through traditional
military construction funding by allowing private sector financing,
ownership, operation, and maintenance of military housing. DOD asked the
Congress to provide new authorities that would allow DOD to (1) provide
direct loans and loan guarantees to private entities to acquire or construct
housing suitable for military use, (2) convey or lease existing property and
facilities to private entities, and (3) pay differential rent amounts in
addition to the rent payments military tenants make. The new authorities
would also allow DOD to make investments, both limited partnership interests
and stock and bond ownership, to acquire or construct housing suitable for
military use and permit developers to build military housing using room
patterns and floor areas comparable to housing in the local communities. The
authorities could be used individually or in combination.

The Congress passed legislation containing 12 new authorities, and the
initiative was signed into law on February 10, 1996.7 However, the Congress
limited the new authorities to a 5-year test period to allow DOD to assess
their usefulness and effectiveness in improving the housing situation. Based
on the results of the test, the Congress will consider whether the
authorities should be extended or made permanent. (See app. I for a complete
list and description of the authorities.)

The basic premise behind the initiative is for the military to use the
private sector's investment capital and housing construction expertise. DOD
has noted that the private sector has a huge amount of housing investment
capital. By providing incentives, such as loan guarantees or co-investments
of land or cash, the military can encourage the private sector to use
private investment funds to build or renovate military housing.

Use of private sector capital can reduce the government's initial outlays
for housing revitalization by spreading costs--specifically increased
amounts for housing allowances--over a longer term. As tenants in privatized
housing, military occupants receive a housing allowance and pay rent. DOD's
goal is to encourage private sector investment in order to obtain at least
$3 in military housing development for each dollar that the government
invests. By leveraging government funds by a minimum of
3 to 1, DOD officials state that the military can revitalize three times as
many housing units as it would with a military construction project for the
same amount of money, thus allowing the housing problem to be solved three
times faster.

In anticipation of the enactment of the new privatization authorities, DOD
established the Housing Revitalization Support Office in September 1995 to
facilitate implementation of the initiative. This office established the
financial and legal framework for the new initiative and assisted the
services in using the initiative. In August 1998, DOD shifted primary
responsibility for implementing the initiative to the individual services.
With this change, the office was eliminated, and housing privatization
oversight responsibility was assigned to the newly created Competitive
Sourcing and Privatization Office. As part of its oversight
responsibilities, the new office establishes DOD policy for the initiative
and monitors implementation of the program.

Because it represented a new approach to improving military housing, we
reviewed DOD's implementation of the new initiative between June 1997 and
March 1998 and issued a report in July 1998.8 The report, which included
recommendations to DOD for improving the initiative, noted that
implementation of the initiative was off to a slow start and, that in
addition to potential benefits, the initiative raised several concerns,
including whether privatization will result in significant cost savings and
whether the military will need the housing over the long term--50
years--proposed for many projects. The report also noted that privatization
is only one of several options, including housing allowances and military
construction, available to address the housing problem and that DOD had not
fully integrated these options into an overall housing strategy to meet its
housing needs in an optimum manner.

As mandated in the Conference Report for Fiscal Year 1999 Appropriations for
Military Construction, Family Housing, and Base Realignment and Closure, we
reviewed implementation of the Military Housing Privatization Initiative.9
Specifically, we (1) determined the status of family housing privatization
projects, (2) examined the accuracy of the services' life-cycle cost
analyses that compared the cost of proposed privatization projects to
comparable projects financed through military construction funds, and
(3) assessed how the initiative was being integrated with other family
housing programs. We performed work at the Competitive Sourcing and
Privatization Office and at the DOD offices responsible for housing
management and housing allowances. We also performed work at the Air Force,
the Army, the Navy, and the Marine Corps headquarters offices responsible
for implementing the initiative. At each location, we interviewed
responsible agency personnel and reviewed applicable policies, procedures,
and documents.

To determine the status of family housing privatization projects, we
reviewed DOD's and the services' privatization project plans, compared the
plans to actual progress, and explored reasons for differences. We
identified the privatization authorities used or planned for each proposed
project, reviewed funding for the projects and the initiative, estimated the
leveraging of funds for approved projects, assessed DOD's and the services'
plans for measuring the effectiveness of the initiative, and discussed
concerns about the initiative with DOD and service officials. In addition,
we visited Navy privatization projects at Corpus Christi and Kingsville,
Texas, and Everett, Washington, that were originated under a previous
authority to test the use of limited partnerships. (New privatization
projects also are planned at these locations.) We also visited Fort Carson,
Colorado; Lackland Air Force Base, Texas; and the Marine Corps Logistics
Base, Albany, Georgia. At each installation, we reviewed housing conditions
and occupancy statistics, assessed the status of privatization plans for
projects that are underway or planned, and discussed with local service
officials their views of the initiative.

To examine the accuracy of life-cycle cost analyses for proposed
privatization projects, we reviewed DOD guidance for performing such
analyses, and for each project approved for solicitation, we examined the
project's life-cycle cost analysis. In our review, we (1) assessed adherence
to guidance, (2) reviewed the assumptions and data used and the
documentation supporting each analysis, (3) checked the accuracy of the
calculations, and (4) performed an alternative life-cycle cost analysis if
the original analysis excluded some applicable costs, used incorrect
assumptions or data, or contained other problems. When proposed projects
included the conveyance of government property, we generally used the
services' estimates for the property's value in our alternative analyses
because it was beyond the scope of our review to perform independent
property appraisals. In January 2000, as our report was being finalized for
publication, the Secretary of Defense announced plans to significantly
increase housing allowances over the next 5 years. We have noted throughout
our report the potential effects of this new initiative on our findings and
analyses if the initiative is fully implemented as planned.

To assess how the initiative was being integrated with other family housing
programs, we reviewed DOD's and the services' housing policies, programs,
initiatives, and plans. We also reviewed previous reports and studies
related to military housing issues and discussed with DOD and service
officials how they dealt with areas identified as needing improvement.

We conducted our review from May 1999 through January 2000 in accordance
with generally accepted government auditing standards.

Privatization Progress Is Slow and Unanswered Questions Remain

Although initial plans and goals were aggressive, DOD's actual progress in
using the privatization initiative to help eliminate the 200,000 inadequate
family housing units has proceeded slowly. As of January 1, 2000, almost
4 years after the authorities were signed into law, DOD had awarded only two
privatization contracts to build or renovate 3,083 military family housing
units, and several more years will be required before this work is completed
and the units are occupied. Because progress has been slow and because the
services have curtailed plans for using the initiative, it appears
questionable whether the services will meet a DOD goal to eliminate all
inadequate family housing by fiscal year 2010. Also, until experience is
gained in the actual operation of several projects, several key questions
will remain unanswered, such as whether the military will need the housing
over the 50-year terms of most projects and whether developers will operate
and maintain privatized housing in accordance with contracts. Although a
formal evaluation plan could help answer these questions and assess the
overall merits of the initiative as it is implemented, DOD has not developed
such a plan.

As of January 1, 2000, DOD had awarded contracts for two military housing
privatization projects. The first, at Lackland Air Force Base, was awarded
in August 1998, and it calls for the construction of 420 family housing
units. Construction, which began in April 1999, is expected to be completed
in February 2001, although the first 92 units were ready for occupancy in
January 2000. The second, at Fort Carson, was awarded in September 1999, and
it calls for constructing 840 family housing units and renovating 1,823
units. The Fort Carson project was initially planned for award in February
1998, but as a result of litigation, the Army canceled the planned award and
decided to resolicit the project. Army officials estimate that 4 or 5 years
will be required to complete the construction and renovation phases of the
project. Under both contracts, the contractors will construct the units on
the base and will operate and maintain the units for 50 years.

The services planned to have 20 additional projects awarded or approved for
solicitation prior to the expiration of the authorities in February 2001. As
shown in table 1, as of October 1999, 12 of these projects had been approved
for solicitation, and 8 projects were in planning prior to starting

the solicitation process.10 Together, the total housing units (30,994) in
these projects and the two projects already awarded represent about
14.5 percent of the military's total U.S. family housing units. Appendix II
contains more details on the planned projects.

Table 1: Privatization Projects as of October 1999

          Awarded        Approved for     In planning prior  Total
 Service                 solicitation     to solicitation
          Number  Units  Number  Units    Number   Units     Number Units
 Armya    1       2,663  1       6,631    2        7,518     4      16,812
 Air
 Force    1       420    3       1,900    5        5,029     9      7,349
 Navy     0       0      5       5,123    0        0         5      5,123
 Marines  0       0      3       1,026    1        684       4      1,710
 Total    2       3,083  12      14,680   8        13,231    22     30,994

aUnits for the Army, except for the awarded project at Fort Carson, are
considered the maximum number--the final number of units could be less.

Source: Competitive Sourcing and Privatization Office, DOD.

Table 1 does not reflect two Navy projects (589 off-base units) approved
under a prior legislative authority. The authority for these projects was
not the legislation that established the privatization initiative, but was
included in Public Law 103-337, enacted October 5, 1994. This law gave only
the Navy authority to test the use of limited partnerships in order to meet
the housing requirements of naval personnel and their dependents.11
Appendix III provides details on the Navy's limited partnership agreements
at Corpus Christi, Kingsville, and Everett.

Funding for the initiative is accomplished through two funds established by
the 1996 authorizing legislation: the DOD Family Housing Improvement Fund
and the DOD Military Unaccompanied Housing Improvement Fund. The funds can
receive sums by direct appropriations and transfers from approved military
construction projects and from proceeds from the conveyance or lease of
property or facilities. The funds are used to implement the initiative,
including the planning, solicitation, award, and administration of
privatization contracts.

As shown in table 2, from fiscal year 1996 through fiscal year 1999,
$49.0 million was appropriated for the DOD Family Housing Improvement Fund
and about $43.2 million was transferred into the fund from military
construction appropriations. DOD used about $23.2 million to fund family
housing projects and about $17.3 million to administer the initiative,
including the costs of consultant support. Although the fund had a balance
of about $51.7 million at the end of fiscal year 1999, officials in the
Competitive Sourcing and Privatization Office stated that about
$46.3 million was committed to funding future projects, leaving a fund
balance of about $5.4 million.

Table 2: DOD Family Housing Improvement Fund

                                      Fiscal year
                                      1996   1997   1998  1999 Total
 Additions to fund
 Appropriations                       $22.0  $25.0  $0.0  $2.0 $49.0
 Transfers from military construction        5.9    7.0   30.3 43.2
 Total additions                                               $92.2
 Expenditures from fund
 Funding for projects                 10.3   5.9    7.0   0.0  $23.2
 Administration and consultants       3.0    4.9    7.3   2.1  17.3
 Total expenditures                                            $40.5
 Fund balance end of fiscal year 1999                          $51.7a

aAccording to officials in the Competitive Sourcing and Privatization
Office, $46.3 million is committed to future projects, leaving a balance of
about $5.4 million.

Source: Competitive Sourcing and Privatization Office.

For fiscal year 2000, $2 million was appropriated to the fund for planning,
administration, and oversight of the initiative. According to DOD, as
additional privatization projects are awarded, military construction funds
associated with the projects will be transferred into the fund and will be
used to pay for the initial award costs. In fiscal year 1997, $5 million was
appropriated for the DOD Military Unaccompanied Housing Improvement Fund.
This amount was rescinded in fiscal year 1999 because the services had no
plans for privatized unaccompanied housing projects, such as new or
renovated barracks.

Under the privatization legislation, the Congress provided DOD with
12 authorities to allow and facilitate private sector financing, ownership,
operation, and maintenance of military housing. The authorities can be used
individually or in combination. For the 2 privatization projects awarded and
the 12 projects approved for solicitation as of October 1999, the services
plan to use some of the 12 authorities, such as conveyance of property,
direct loans, and loan guarantees, frequently. The services plan limited use
of other authorities, such as the assignment of members to housing units
constructed under the initiative. Three authorities (build and lease, rental
guarantees, and interim leases) will not be used on these 14 projects.
According to DOD officials, use of the build and lease and rental guarantee
authorities usually involve government commitments to pay lease or rental
costs over the entire term of the contracts. In accordance with the guidance
for recording obligations under the initiative, DOD would have to set aside
funds to cover the value of these commitments up front. Because the funds
required to cover the commitments could approximate the amount of funds
required under traditional military construction financing, use of these
authorities might not result in DOD meeting its goal of obtaining at least
$3 of housing improvements for each dollar the government invests. Thus, DOD
is not likely to use these authorities as part of a privatization
arrangement.

DOD was initially optimistic about how quickly the new privatization
authorities could help solve its housing problem of 200,000 inadequate
housing units. In a May 1995 press release, DOD stated that if the Congress
passed legislation authorizing the use of private sector financing and
expertise to improve military housing, DOD could solve its housing problem
in 10 years--by fiscal year 2006. During congressional hearings in March
1996, after the initiative was authorized, DOD officials stated that about 8
to 10 projects, with up to 2,000 family housing units, should be

awarded within the next year.12 During March 1997 and 1998 congressional
hearings, DOD officials stated that the goal was to increase the number of
units planned for construction and revitalization to 8,000 in fiscal year
1997 and to 18,000 units in fiscal year 1998.13

DOD did not meet these goals, and in July 1997, it revised the target date
when it issued planning guidance for fiscal years 1999 through 2003. The
guidance directed the services to plan to revitalize, divest through
privatization, or demolish inadequate family housing by or before fiscal
year 2010--4 years later than the original target date. DOD also included
housing privatization in its November 1997 Defense Reform Initiative Report
as a specific initiative to help reduce excess infrastructure.

According to DOD officials, privatization implementation has been slower
than expected primarily because the initiative represents a new way of doing
business for both the military and the private sector. Initially, DOD had to
develop protocols for site visits and new tools and models to assess the
financial feasibility of using the various authorities to help solve the
housing problem at an installation. Then, as detailed work began on
developing potential projects, according to officials, many legal issues
relating to the applicability of the Federal Acquisition Regulation and the
Federal Property Management Regulations had to be addressed. Also, new
financial and contractual issues had to be resolved, such as establishing
loan guarantee procedures to insure lenders against the risk of base
closure, downsizing, and deployment; developing a process to provide direct
loans to real estate developers; and creating documents for conveying
existing DOD property to developers.

Another factor that slowed implementation was initial disagreement between
DOD and the Office of Management and Budget on how projects that used the
various authorities should be scored.14 Discussions between the agencies
continued for several months until a written agreement that provided
detailed scoring guidance applicable to the first 20 privatization projects
was adopted on June 25, 1997. After these projects are completed, the
agreement will be reviewed to determine if any changes are needed.

The services' current privatization program of 22 projects is significantly
smaller than previously planned. In 1998, the services planned privatization
projects totaling about 87,000 units at 49 installations under the
authorities. In the Conference Report for the 1999 Military Construction
Appropriations Act discussed previously, the conferees cited concern over
the slow pace of the initiative's implementation and the high level of
reliance that the services had begun to place on the initiative compared to
other options, such as military construction. The Conference Report provided
guidance to DOD, stating that the services needed to use all available
options to address the family housing problem, including the traditional
military construction program and adequate use of existing private sector
housing. The guidance noted that the initiative was a pilot project and not
intended to become a substitute for the traditional housing construction
program. Because of the guidance and expressed concerns, DOD took two steps.
First, in August 1998, DOD announced that to help streamline the initiative,
primary responsibility for implementation would shift from DOD headquarters
to the individual services. Second, in October 1998, DOD stated it would
provide the Congress with quarterly status reports containing project
updates. However, DOD did not reduce its planned reliance on privatization
to address its housing needs. The first quarterly report, issued in February
1999 for the first quarter of fiscal year 1999, listed 48 planned
privatization projects involving about 87,860 units--about the same size
program as identified previously.

In a June 1999 letter to the Secretary of Defense, the Subcommittee on
Military Construction, House Committee on Appropriations, again noted that
the initiative was a pilot program and was not a replacement for traditional
military construction. Noting that the Army's and the Navy's fiscal year
2000 military construction budget requests included no family housing
projects in the continental United States, the Subcommittee expressed
concern that the initiative had veered off course from the original intent
of the legislation. In its response, DOD wrote that both privatization and
military construction will be necessary to rectify inadequate military
housing and that privatization will be pursued as a pilot program to better
understand the circumstances in which it is most effective. The letter
included a scaled-down list of planned projects that was later refined into
the current program consisting of 22 projects to build or renovate 30,994
units.

Because privatization implementation has proceeded more slowly than expected
and with scaled-back privatization plans, it appears questionable whether
the services will meet DOD's goal of eliminating all inadequate family
housing by fiscal year 2010. Army officials estimated that with their
reduced privatization plans and with current military construction funding
levels, about 44,000 inadequate Army houses will remain in the United States
after fiscal year 2010. Air Force and Marine Corps officials also stated
that it is questionable whether they can eliminate inadequate housing by
2010. In estimating the funds needed to meet the 2010 goal, the Air Force,
in its August 1999 Family Housing Master Plan, identified a
$3.6 billion funding shortage. The Navy plans to meet the 2010 goal using
current privatization plans and military construction funding. An official
noted that the Navy had been investing in improved family housing for
several years prior to the privatization initiative.

According to DOD, an analysis has shown that (1) if DOD were to rely solely
on military construction funding at current levels and no privatization
beyond the current plans, inadequate housing units would not be eliminated
until 2091 and (2) if the services were permitted to use the privatization
authorities beyond their expiration date at a level consistent with current
plans, inadequate housing would not be eliminated until 2019. However, DOD
officials stated that it is still possible to meet the 2010 goal. First, DOD
officials stated that they plan to request the Congress to extend the
authorities beyond their expiration date in February 2001. Second, if the
authorities are extended, the services could expand privatization plans.
Third, implementation of the new initiative to increase housing allowances
could help by reducing the need for some on-base housing.

An assessment of the status of the privatization initiative normally would
include an assessment of how the initiative is doing in meeting its goals of
eliminating inadequate housing more economically and faster than could be
achieved through traditional military construction financing. However, no
projects under the initiative have been fully implemented, occupied by
military families, and operated over a period of time. As a result, at this
time only limited information is available to assess the initiative's
overall effectiveness in achieving its goals. The only actual experience
with completed privatization projects comes from the Navy's projects
completed under the prior authority, and this experience included some mixed
results. Also, although the pilot initiative is almost 4 years old, DOD has
not established an evaluation plan that will help assess the merits of the
initiative as it is implemented over the next few years.

DOD notes that privatization provides an advantage over traditional
financing by requiring less initial government funding to get housing
constructed or renovated because the private sector provides most of the
required funds. DOD's estimates for 12 proposed projects showed that for an
average initial government cost of about $14 million, the military should
obtain new or renovated housing that would have initially cost the
government about $75 million if traditional military construction funds were
used. As discussed in the next chapter, current estimates also predict that
most proposed projects will result in long-term savings to the government,
although the average amount is modest--about 11 percent. However, such
estimates are difficult to make with precision because they include many
assumptions and cost estimates over long time frames. In addition, increased
housing allowances, as called for in the new initiative announced in January
2000, could increase privatization costs and reduce the estimated savings
from privatization. Before actual privatization costs and savings are known,
several projects will have to be constructed, occupied, and operated over a
period of time.

In our prior report on the privatization initiative, we noted that in
addition to questions about long-term savings, privatization raises other
concerns and questions. For example, will developers operate and maintain
privatized housing in accordance with the contracts and in a manner that
meets servicemembers' expectations? To increase profits, developers could
limit maintenance and repairs and cut costs by hiring less qualified
managers and staff and using inferior supplies. DOD plans to include
maintenance standards, modernization schedules, required escrow accounts,
and other safeguards in each privatization contract to help ensure adequate
performance. However, enforcing the contracts could be difficult,
time-consuming, and costly. Another question is whether the housing will be
needed over the life of the projects--typically 50 years. DOD housing
officials stated that accurate forecasts of housing needs beyond 3 to 5
years cannot be assured. Also, if privatized units are not rented by
servicemembers, the contracts allow civilians to rent the units, creating
concerns about the impact of civilians living on base. Until several
privatization projects have been implemented and occupied and experience is
gained in the operation of these projects, these concerns and questions will
remain largely unanswered.

The only actual operating experience in housing privatization comes from the
Navy's projects originated under the prior authority. These off-base
projects in local communities at Corpus Christi and Kingsville, Texas, and
Everett, Washington, have been considered successful in that they were
implemented relatively quickly and should result in savings to the
government. However, the projects also have included some mixed results. For
example, although intended for enlisted families, many civilians, officers,
and single servicemembers live in the Texas units, and the rental charges
for all three sites have resulted in out-of-pocket costs for most enlisted
paygrades that exceed the 19-percent national average, as shown by the
following examples for August 1999.

At Corpus Christi, civilians and officers occupied 25 percent and 8 percent,
respectively, of the units. An enlisted paygrade E-5 occupant of a
three-bedroom unit paid about $191, or 31 percent, more for monthly rent and
utilities than covered by the member's housing allowance.15

At Kingsville, only 11 of the 102 units were occupied by enlisted members
with their families. The other units were occupied by single enlisted
members, officers, and civilians. A paygrade E-5 occupant of a three-bedroom
unit paid about $185, or 33 percent, more for monthly rent and utilities
than covered by the member's housing allowance.

At Everett, 183 of the 185 units were occupied by enlisted members with
their families. A paygrade E-5 occupant of a three-bedroom unit paid about
$185, or 24 percent, more for monthly rent and utilities than covered by the
member's housing allowance.

To significantly reduce or eliminate the out-of-pocket costs at these sites,
the Navy implemented a new program in October 1999. Using one of the
authorities provided in the current privatization initiative, differential
lease payments, the Navy modified the existing limited partnership
agreements and began paying a portion of each member's monthly rent directly
to the developer. The idea is that the Navy will pay a portion of a member's
rent so that the member's housing allowance is sufficient to pay the balance
of the rental amount plus expected utilities. The Navy estimated that over
the remaining term of the agreements at Corpus Christi, Kingsville, and
Everett the differential lease payments will cost about $8.2 million. Local
officials at the sites stated that while the differential lease program will
help military families living in the privatized units, other military
families living in nearby civilian housing could experience some resentment
because their out-of-pocket costs are not covered by the program.

In regards to whether the developers were meeting expectations for managing
the projects, Navy officials at the three sites stated that the developers
were operating the units in a satisfactory manner. However, according to
local Navy housing officials in August 1999, a survey of residents at the
Corpus Christi units indicated that on-site maintenance fell short of an
acceptable rating. At Everett, officials stated that, although the project
was operating well and most residents were pleased to be living in the
project, residents had complained that maintenance requests were responded
to more slowly than expected and that the quality of maintenance work was
lower than expected.

Despite the fact that the initiative is 4 years old, DOD has not developed
an evaluation plan to ensure consistent measurement of the progress and
effectiveness of the initiative from project identification through the end
of each privatization contract. As a result, it has no means to
systematically compare the cost and implementation time frames of privatized
projects to traditional military construction projects, assess the
advantages and disadvantages of the various authorities, or measure
servicemembers' satisfaction with the privatized housing and contractor
performance. Timely, complete, accurate, useful, and consistent performance
data could help decision-makers evaluate the overall effectiveness of the
initiative, determine whether the initiative is meeting program goals,
address questions and concerns, and identify what modifications might be
needed as the program is implemented over the next several years.

To date, DOD's assessment of the initiative has focused on establishing the
framework for implementing the program, measuring the number of projects and
housing units planned or approved for privatization, and ensuring that
approved projects leverage government funds in constructing or renovating
military housing. The services, however, have individually begun developing
approaches to measure performance of projects after construction is
completed and military families have moved in. For example, the Army plans
to collect and measure data on (1) contractor response times to maintenance
requests, (2) time required for a contractor to prepare a vacated unit for
the next occupant, (3) contractor completion of recurring maintenance needs
against established schedules,
(4) contractor payment of mortgages and other financial requirements in
accordance with schedules, and (5) satisfaction of military occupants with
the housing. But, without an overall DOD evaluation plan as a guide, the
services' might not consistently collect the performance information needed
for an overall assessment of the initiative.

Because no projects under the initiative have been fully implemented, there
is little basis to evaluate whether the initiative will ultimately achieve
its goals of eliminating inadequate housing more economically and faster
than could be achieved through traditional military construction financing.
Also, despite the fact that this pilot program is 4 years old, DOD has not
developed an overall evaluation plan to assess the initiative's merits.
Without an evaluation plan, DOD has no means to systematically compare the
actual cost and implementation time frames of privatized projects to
traditional military construction projects, assess the advantages and
disadvantages of the various authorities, measure contractor performance, or
assess servicemembers' satisfaction with the privatized housing.

To help evaluate the overall effectiveness of the Military Housing
Privatization Initiative, we recommend that the Secretary of Defense direct
the Competitive Sourcing and Privatization Office to develop a privatization
evaluation plan. The plan, which should be used by all services to ensure
consistency, should include performance measures to help officials determine
whether the initiative is meeting goals and whether modifications to the
initiative are needed. The plan should also provide a means to evaluate the
merits of the individual authorities, compare the actual and estimated costs
of each project, assess key aspects of developer performance, collect
statistics on the use of the housing, and assess servicemembers'
satisfaction with the housing.

DOD agreed with our recommendation and stated that it had already taken
steps to implement the recommendation. DOD stated that it had initiated a
plan to establish peer review and audit mechanisms to evaluate privatization
projects across the services to capture best practices. DOD also stated that
the peer review process will be used to develop a formal evaluation plan and
that the draft of this plan is scheduled for review by the services in late
summer 2000. We believe that these steps can help measure the overall
effectiveness of the program as it is implemented over the next several
years.

Life-Cycle Cost Analyses Lack Consistency and Reliability and Indicate
Modest Potential Savings

The life-cycle cost analyses prepared by the services to compare proposed
privatization and military construction projects were inconsistent,
inaccurate, and lacked support for some assumptions. For example, some
analyses did not consider project planning costs, while other analyses
excluded the value of government property transferred to the private
contractor. In addition, these comparisons show that the estimated savings
from privatization would be modest, averaging about 12 percent. After making
appropriate adjustments to the analyses, we calculated privatization savings
to be about 11 percent.

Although the amount of government funds needed to initiate housing projects
under the privatization option can be substantially less than needed under
the military construction option, this does not necessarily mean that the
government's long-term total costs for the projects also will be less under
privatization because annual costs differ under each option. To estimate and
compare the government's long-term costs for proposed projects financed
through privatization and military construction, the services prepare
life-cycle cost analyses and use the results to help decide whether proposed
privatization projects should be approved for solicitation. However, DOD has
not issued formal guidance for the services to use in preparing the
analyses, nor has it developed definitive guidance for when more costly
privatization projects should be approved over military construction
projects.

Reliability

In our comparison of DOD's draft guidance for performing life-cycle cost
analyses with the services' analyses for the 2 privatization projects
awarded or the 12 projects approved for solicitation, we found
inconsistencies, inaccuracies, or a lack of support for some assumptions and
estimates in every completed analysis. For example, (1) seven analyses did
not consider costs for project planning and design, (2) three analyses did
not consider the value of government property conveyed to the developers,
(3) two analyses included the value of conveyed property but did not provide
supporting documentation for the estimates used, (4) six analyses did not
include costs for monitoring the privatization contract,
(5) two analyses did not use the correct Office of Management and Budget
discount rate to adjust for the time value of money, and (6) no analyses
were performed for two projects.

In its life-cycle cost analysis for the proposed privatization project at
Camp Pendleton, for example, the Marine Corps compared estimates of the
government's long-term costs for the project financed through the initiative
and with military construction funds. Under the privatization option, the
developer would build 200 housing units, renovate 512 government housing
units, and operate and maintain these units for 50 years and the government
would convey 512 existing government housing units to the developer, lease
the land for the housing to the developer for 50 years at no cost, provide
for a portion of the project financing through a direct loan, and pay
housing allowances to the military occupants of the housing. Under the
military construction option, the government would pay for the construction
or renovation of the 712 units and operate and maintain the units for 50
years. The Marine Corps' analysis showed that privatization would cost the
government about $28 million, or about 17 percent, less than military
construction. However, our review found that the Marine Corps did not
estimate and consider (1) the value of the 512 units to be conveyed to the
developer and (2) the costs of project development and monitoring the
privatization contract. The Marine Corps also incorrectly used different
discount rates for the two options to adjust for the time value of money.
After adjusting for these problems and recalculating the government's costs
under the two options, we found that privatization was less costly--about
$11 million, or about 5 percent, less than military construction--but
considerably less than the Marine Corps' estimated savings of $28 million.

The Army did not prepare a life-cycle cost analysis for the proposed
privatization project at Fort Hood because it had adopted a new approach to
developing privatization projects. Under this approach, rather than defining
the scope of a proposed project and then selecting a developer to implement
the project, the Army will first select a developer who will help define the
scope and plan the project at the installation. Thus, although an
installation has been approved to plan a privatization project, the Army is
unable to perform a life-cycle cost analysis until a developer is selected
and the project's scope is defined.

According to a Marine Corps official, a life-cycle cost analysis was not
prepared for the Marine Corps Logistics Base, Albany, Georgia, project
because the proposed project required no initial government funds. The
military would convey to a developer 419 older, government housing units and
a vacant hospital facility located off base. In return, the developer would
construct 114 housing units on base and operate and maintain the units for
50 years. Military members occupying the units would receive housing
allowances and pay rent. According to the DOD draft guidance and to
officials in the DOD office responsible for the initiative, a life-cycle
cost analysis should have been prepared for this project.

Our review of the 12 life-cycle cost analyses for the 2 awarded projects and
the 10 remaining projects approved for solicitation that had a life-cycle
cost analysis prepared by the services indicates that the long-term savings
to the government from privatization will be modest. The services estimated
for these projects that privatization, on average, should cost the
government about 12 percent less than military construction financing. After
recalculating costs, making adjustments to the services' estimates to
provide consistency, considering all project costs under both options, and
correcting other problems, we found that privatization, on average, should
cost the government about 11 percent less than military construction
financing (see table 3). For 10 projects, the estimated savings ranged from
38 percent to 5 percent. For two projects, Robins Air Force Base and Stewart
Army Subpost, we estimated that privatization would cost more than military
construction--about 9 percent and about 15 percent more, respectively.16 DOD
officials stated that these projects were still in the best interest of the
military because with privatization, the housing improvements could be
completed faster and with substantially less initial government funds.
Appendix IV provides more details comparing the results from the services'
life-cycle cost analyses with our estimates.

Table 3: Comparison of Life-Cycle Cost Estimates for 12 Projects

 Dollars in
 millions
                                                        Estimated savings

                Military             Privatization      Dollars Percentage
                construction option  option
 Services'
 estimate
 Total cost     $3,128               $2,755             $373    11.9
 Average
 project cost   $261                 $230               $31     11.9
 Our estimate
 Total cost     $3,297               $2,937             $360    10.9
 Average
 project cost   $275                 $245               $30     10.9

Note: Includes the awarded projects at Fort Carson and Lackland and the 10
remaining projects approved for solicitation that had a life-cycle cost
analysis prepared by the services.

Because life-cycle cost analyses use numerous assumptions and estimates,
actual costs and savings from implemented privatization projects will vary
from the results of the analyses. Budgetary consequences from approved
projects cannot be known until the projects are constructed, occupied, and
operated for several years. In particular, DOD's newly announced initiative
to significantly increase housing allowances could increase privatization
life-cycle costs for awarded contracts and for future projects because
servicemembers use their allowances to pay for rent and utilities in
privatized housing. If the initiative is fully implemented, several of the
currently planned privatization projects with estimated savings could
possibly cost the government more than if the projects were paid for with
military construction funds.

Nevertheless, privatization has a relatively modest effect on total
government costs because it shifts funding requirements from the military
housing construction, operations, and maintenance accounts to the military
personnel accounts to pay for additional housing allowances. Service
officials have recognized this and have stated that the long-term savings to
the government from privatization may be modest. For example, the Army's
February 1999 housing budget submission for fiscal year 2000 stated that
analyses show privatizing Army family housing will not save money.

DOD had not issued final guidance for the services to use in their
life-cycle cost analyses. Preparing accurate, reliable cost comparisons of
projects financed by military construction funding or through privatization
is difficult because the comparisons involve long-range projections and
include many different costs, variables, and assumptions. For example, under
military construction financing, the military pays the initial construction
or renovation costs and then pays the annual costs to operate, maintain, and
manage the units. The military does not pay monthly housing allowances to
occupants since the servicemembers occupying the units forfeit their
allowances when living in government-owned housing. In contrast, under most
proposed privatization projects, the military initially uses some funds
and/or conveys some existing military houses or property to secure a
contract with a private developer. Since the housing is not
government-owned, the military pays monthly housing allowances to the
servicemembers occupying the housing and some housing management costs for
servicemember referral services and for oversight of the contracts, which in
many cases is for 50 years.

In our July 1998 report on the initiative, we noted that DOD had not
provided guidance to the services for performing life-cycle cost analyses.
Without such guidance, there is little assurance that the analyses will be
prepared consistently and that the assumptions and estimates used will
result in reliable cost comparisons. Although we recommended that DOD
expedite efforts to develop a standardized methodology for performing these
analyses and DOD agreed that this was necessary for consistent comparisons,
DOD had only developed draft guidance by October 1999, and use of this
guidance was not mandatory. DOD officials stated they planned to issue final
guidance in February 2000.

DOD's draft guidance generally identified the costs that should be
considered in the analysis of each alternative. However, the guidance did
not include details on how the estimates for each type of cost should be
determined. For example, details were not provided on how the costs of the
contribution of government housing units or other property should be
determined. Because many proposed projects include the conveyance of
government property to the developer and the valuation of these assets can
be critical to the outcome of the overall analysis, detailed guidance in
this area could help ensure more accurate and consistent analyses.

DOD officials stated that for a proposed privatization project to be
approved, the government's estimated total costs in present value terms for
the project normally should be equal to or less than the total costs for the
same project financed by military construction funding.17 The officials
stated an exception to the guideline could be approved under some
circumstances, such as when the total cost difference between the options
was small but substantially less initial government funds were needed to
construct the project under privatization. However, DOD had not developed
definitive guidance for when an exception could be approved. As a result,
DOD could not ensure that approval decisions for privatization projects with
total costs exceeding military construction costs were made in a manner that
consistently determined what was in the government's best interest.

Overall long-term projected savings from privatization are modest, and if
DOD fully implements the new housing allowance initiative, these savings
could be even less. Also, because of the deficiencies in the services'
analyses and because DOD had not provided guidance on the circumstances that
would justify approving privatization projects that would cost more than
comparable military construction projects, DOD cannot ensure that approval
decisions for proposed privatization projects are made in a manner that
consistently determines what is in the government's best interest.

To increase the reliability and consistency of life-cycle cost analyses and
to provide specific criteria for approving privatization projects, we
recommend that the Secretary of Defense (1) refine the draft guidance on
preparing life-cycle cost analyses to clearly specify what costs should be
included in the analyses and to better explain how the services should
estimate each type of cost and (2) develop definitive guidance for approving
a privatization project when the project's estimated total costs exceed the
costs to implement the project with military construction funds.

DOD agreed with our recommendation, stating that it should refine the
guidance for life-cycle cost analyses. DOD stated that it intends to issue
refined guidance, incorporating our recommendations, that will require the
services to examine the privatization and military construction alternatives
and their associated costs in a uniform and comprehensive manner. DOD
expects to have the revised guidance completed and ready for coordination
with the services in late spring 2000. We believe these are positive steps
to help ensure that approval decisions for proposed privatization projects
are made in a manner that consistently determines what is in the
government's best interest.

DOD commented that we inaccurately assumed that, if DOD's proposed
initiative to increase housing allowances by about 19 percent over a 5-year
period is fully implemented, privatization savings will be less than
currently estimated. According to DOD, for projects not yet awarded, it
would add mechanisms, such as reinvestment requirements, revenue-sharing
accounts or increased land rent, to ensure that life-cycle costs are not
increased when allowances are increased. While this may be true for future
projects, it should be noted that, for the projects already awarded, any
increase in housing allowances will increase costs since rents are
determined on the basis of the allowances. In addition, for new projects,
DOD cannot be assured that contractors would accept new mechanisms that
would limit government costs. If they do not, the costs of privatized
housing would increase. We have modified our report to show the uncertainty
of the impact of the allowance initiative on the cost of privatized
projects. Aside from the relative costs of privatization and military
construction, the real significance of the housing allowance initiative is
that it should make more housing affordable to military families in some
local communities, thereby reducing the need for government-supplied
housing, regardless of the source of funding.

Continued Efforts Needed to Integrate Privatization With Other Housing
Options

The privatization initiative is only one of several options, including
housing allowances and traditional military construction, available to meet
the housing needs of servicemembers and their families. To be most
effective, the initiative needs to be integrated with the other elements of
an overall housing strategy. Although DOD has made progress in coordinating
the initiative with other housing options, it has not developed a plan
showing how the various options will be used to meet DOD's housing needs in
an optimum manner. Development of a coordinated housing strategy is even
more important in view of the potential impacts from DOD's new initiative to
increase housing allowances. Also, the services have not improved their
housing requirements determination processes to more accurately estimate how
much housing the installations must supply, and they have not always updated
their housing requirements assessments prior to approving privatization
projects. As a result, the services cannot be assured that they are
constructing, replacing, or revitalizing housing only at installations where
the need for additional housing is adequately documented.

In the July 1998 Conference Report discussed previously, the conferees
expressed concern that DOD was not fully coordinating the various options
for addressing housing needs. As a result, the conferees directed DOD to
report to the House and Senate Committees on Appropriations by December 1,
1998, on an integrated family housing strategy, including a detailed plan
for integrating the DOD offices that have responsibilities for the
military's family housing program. The conferees' direction also stated that
this strategy should focus on the maximum use of existing civilian housing,
the use of enhanced housing referral services, coordination of housing
allowances, and the appropriate use of privatization and traditional
construction options.

At the time of our review in January 2000, DOD had not completed the
requested report. DOD officials stated that the delay was caused by a lack
of staff and that the report should be issued soon. However, DOD officials
stated that DOD has improved the mechanisms that are used to ensure that
housing decisions are well-coordinated. For example, DOD has increased use
of the Installations Policy Board, which reviews and coordinates policies
and issues affecting DOD installations, such as military housing. The
membership of this board includes management officials from the DOD offices
responsible for housing and for housing allowances. In addition, DOD formed
the Military Family Housing Policy Panel, which meets regularly to review
and coordinate military housing matters at the staff working level.
Officials in each of the services stated that coordination has improved
among the various offices responsible for housing, housing allowances, and
member quality-of-life issues.

Because of the interdependency of military family housing, privatization,
and housing allowances, the continued coordination of these options is
important. DOD and the Congress have made efforts to reduce average
out-of-pocket costs for members and their families, and in January 2000, DOD
announced plans to eliminate out-of-pocket costs through significant
allowance increases over the next 5 years. Increases in housing allowances
make civilian housing more affordable, and therefore, may reduce the demand
for on-base housing. Also, the rental fees for most privatized housing are
established on the basis of the servicemembers' housing allowances. Thus,
significant increases in housing allowances could result in significant
increases in rental payments to a developer, creating the potential for
larger than expected profits. Conversely, any significant decreases in
housing allowances--although unlikely with implementation of DOD's new
initiative to significantly increase allowances--could have the effect of
developers' cutting corners on operations and maintenance of privatized
housing to save money. These relationships make coordination essential for
an effective housing program.

Marine Corps officials provided an example of the challenges posed in
coordinating the various housing programs. They explained that prior to the
public release of the military housing allowance rates for 1999, they had no
knowledge that the rates would be decreasing at the Marine Corps
installation at Twenty-nine Palms, California, where a major privatization
project was planned. When the new rates were announced, the Marine Corps
decided to cancel the project because the decreased rates made the project
financially infeasible.

Fundamental to an integrated housing plan is a process that accurately
determines the services' housing needs and the local communities' ability to
meet those needs at each installation. Accurate requirements analyses can
help ensure that government housing, whether privatized or not, is provided
only at installations where the local communities cannot meet the military's
family housing needs, as specified by DOD policy. However, our prior work
and the work of others have found significant, long-standing problems in the
processes the services use to determine military housing requirements. DOD
has taken steps to address these problems, but progress in implementing
improvements has been slow.

To illustrate, a 1992 report by the DOD Inspector General stated that the
Navy and the Air Force had overstated family housing requirements and
understated the amount of private sector housing available to satisfy
requirements for several proposed housing projects. A 1994 report by the
Naval Audit Service stated that the Navy had overstated housing requirements
at eight installations because the requirements determination process was
based on flawed procedures, poor implementation of those procedures, and
inaccurate data. In our 1996 report on military family housing, we noted
that DOD and the services relied on housing requirements analyses that (1)
often underestimated the private sector's ability to meet family housing
needs and (2) used methodologies that tended to result in a
self-perpetuating requirement for government housing.18 In response to our
recommendation that DOD improve the requirements process, DOD stated that it
intended to revisit procedures for determining housing requirements.

More recently, an October 1997 DOD Inspector General report stated that "DOD
and Congress do not have sufficient assurance that current family housing
construction budget submissions address the actual family housing
requirements of the Services in a consistent and valid manner."19 The
Inspector General recommended development of a DOD standard process and
standard procedures to determine family housing requirements. In response,
DOD convened a working group, including representatives from each service,
in December 1997 to address the problems and develop recommendations for
improving the housing requirements determination process. According to a DOD
official with responsibility for overseeing the DOD housing policy, the
working group made progress, but at a slow pace. Deciding that the job was
too big for the working group, in January 1999, DOD contracted with the
Center for Naval Analyses to review the current housing requirements models
and private sector methods and to recommend a model that would be better
than the current models and would be more consistent across the services.
This review is scheduled to be completed in calendar year 2000. DOD
officials stated that they plan to issue revised policies for determining
housing requirements during calendar year 2000 after they examine the
review's results.

Projects

The DOD Housing Management Manual 4165.63M states a housing market analysis
should be performed at installations where acquisition of housing is
programmed to help determine military housing needs and the ability of the
local communities to meet these needs. The housing market analysis should
consider housing demand for both military and civilian populations,
including the affordability of local housing as well as economic and
demographic trends in the market area. Although these analyses are important
to accurately estimate and document housing requirements, they have not been
specifically required to be updated as part of the approval process for
proposed privatization projects. For 5 of the 14 installations with a
privatization project awarded or approved for solicitation, we found that no
housing market analysis had been prepared within the past 5 years.

The Army, for example, had not performed market analyses at Fort Carson and
Fort Hood within the past 5 years. Army officials stated that family housing
requirements at these installations had been estimated using an econometric
model and that the requirements had been verified by the Army Audit Agency.
The officials agreed that housing market analyses provide more detailed
information on local housing conditions and stated that such analyses will
be performed at Fort Hood and other Army installations with planned
privatization projects. Also, the Navy's last housing market analysis for
Corpus Christi and the Marine Corps' last market analysis for Camp Pendleton
were both dated in 1994. Navy and Marine Corps officials stated that updated
market analyses for these locations were delayed pending completion of DOD's
efforts to improve the housing requirements determination process.

The Marine Corps also had not performed a housing market analysis for its
planned privatization project at Stewart, New York, or at the recently
withdrawn project at Chicopee, Massachusetts. At each location, the basis of
the housing requirement was an informal survey of all servicemembers
stationed or assigned within a 1-hour commute of each location. In June
1999, DOD had notified the Congress of its intent to begin the solicitation
process for privatizing housing units at these locations. However, in
October 1999, the Marine Corps placed the Chicopee project on hold pending a
reexamination of long-term projections of Marines in the Chicopee region. By
the end of October, the project was officially withdrawn from consideration
for privatization because of the uncertainty over the housing requirement.

At some proposed privatization locations where housing market analyses had
been performed within the past 5 years, the analyses included information
that raised questions concerning the need for on-base family housing. For
example, the November 1996 market analysis for the Marine Corps Logistics
Base, Albany, Georgia, showed that the local community had 2,149 suitable
rental units that were vacant. However, the analysis assumed that only two
of these vacant units were available to Marine families because the
methodology used to determine requirements assumed that only a small portion
of available civilian housing would be available to military families.
Specifically, because the total Marine family housing requirement
represented only 0.1 percent of the total suitable rental units in the local
community, the market analysis assumed that only 0.1 percent of the suitable
rental vacancies would be available to Marine families.

Difficult to Implement

Implementation of DOD's policy of relying first on existing housing in the
local communities to meet military family housing needs is important to
contain costs. According to our estimates in 1996, total annual costs to the
government were about $5,000 less for a military family that lived in local
community housing instead of government-owned housing because the family
typically paid about 19 percent of its housing costs out of pocket and the
government paid less in education impact aid because private housing is
subject to local taxes.20 The estimates also showed that housing
constructed, operated, and maintained by the private sector generally costs
less than housing constructed, operated, and maintained by the military.
Although the government's cost for families living in private housing would
increase if out-of-pocket costs were eliminated, as envisioned in DOD's
announced initiative to increase housing allowances, the cost would still be
less than providing government-owned housing.

Most military families in the United States receive a housing allowance and
live off base, consistent with DOD policy. A recent Rand study stated that
most members would prefer to live off base in the civilian communities if
out-of-pocket costs were not too great.21 However, military members
frequently have incurred significant out-of-pocket costs to live off base or
accepted housing that the military does not consider suitable. As a result,
many members have sought to live in government housing where all costs are
covered. Other factors, such as being close to work, on-base amenities, or a
preference to live close to other military families, may have contributed to
some members seeking on-base housing; but the primary reason, according to
the Rand study, is the economic benefit. It is for this reason that many
installations have had high demand, including a waiting list, for on-base
housing, even though much of the housing was considered inadequate.

Recognizing the economic benefit that members receive when living on base,
the services have generally viewed any decrease in the number of on-base
housing units as a cut in military benefits since the result would be more
members paying out-of-pocket costs. Thus, counter to the DOD policy of
relying on local communities as the primary source of housing, the services
have often resisted reducing on-base inventory, even when adequate civilian
housing was available. At some locations, rather than divest of inadequate
on-base housing by increasing reliance on civilian housing, the services
planned to maintain current on-base housing inventories by revitalizing or
replacing inadequate housing through military construction funding or
through privatization implemented with no out-of-pocket costs.22

If fully implemented over the next 5 years, DOD's new initiative to
eliminate out-of-pocket costs will respond to this issue and should make
private housing more affordable. However, perhaps best illustrating the
present situation is the Air Force's recent effort to develop a family
housing master plan. Published in August 1999, prior to the announcement of
DOD's new initiative, the master plan provides a road map for how the Air
Force plans to address its housing needs through military construction,
privatization, and operation and maintenance funding. The plan clearly
recognizes the conflict between maximum reliance on civilian housing and the
desire to limit the number of members paying out-of-pocket costs for
housing.

Air Force guidance for preparing the master plan stated that on-base housing
requirements will be determined by using "the Air Force interpretation" of
DOD's housing policy of relying on local communities for housing. The Air
Force interpretation is to maximize reliance on local community housing
"consistent with the needs of the mission and military families." According
to the Air Force, mission and family needs include keeping a viable on-base
housing community and considering the military family demand for on-base
housing when assessing housing needs. With this view, even at installations
where the local communities could house more military families, the Air
Force plans to retain on-base housing inventories, providing there is a high
demand for the units--defined as occupancy of 98 percent or greater over the
previous 3 years. The master plan states that "the Air Force does not intend
to solve it's housing problem `on the backs of the troops'. As long as there
is an economic disparity between on- and off-base [housing costs], the Air
Force will retain and maintain on-base housing where troops are `voting'
with their `demand'".

Air Force housing officials stated that the analyses performed in completing
the master plan showed that many Air Force installations could rely more on
local community housing. However, because the demand for on-base housing was
also high at most of these installations, the Air Force did not consider all
of these installations to have surplus on-base housing. DOD housing
officials agreed that the Air Force's interpretation of DOD's guidance on
reliance on community housing appeared different and stated this
interpretation would be examined in the requirements determination review
being performed by the Center for Naval Analyses.

DOD has yet to develop an approach to solve its housing problem in a manner
that optimally integrates housing allowances, traditional military
construction, and privatization. An integrated strategy that recognizes the
interdependency of these elements has become even more essential because of
the potential significant impacts of DOD's new housing allowance initiative
on privatization, military construction, and the need for on-base housing.
DOD officials state that such a plan is under development and will be
completed this year. However, additional steps are needed to better ensure
that privatization, or military construction, is used to construct or
revitalize housing only at installations where the need is adequately
documented. One step is for DOD to follow through with plans to issue
revised policies during calendar year 2000 to improve the methods used to
estimate housing needs and the ability of local communities to meet these
needs. Further steps include requiring updated housing requirements
assessments as part of the approval process for proposed privatization
projects and addressing questions regarding the services' application of
DOD's policy of relying on private sector housing.

As part of the development of the DOD integrated housing strategy and in
view of the potential impacts from the new housing allowance initiative, we
recommend that the Secretary of Defense (1) require that housing
requirements assessments be updated as part of the approval process for
proposed privatization projects and (2) clarify DOD's policy that requires
primary reliance on private sector housing to specifically delineate the
circumstances under which privatization or military construction projects
are permissible when alternative housing is available in local communities.

DOD agreed with our recommendations, acknowledging the need for greater
consistency among the services in validating housing requirements. DOD
stated that it is working to achieve coordination and consistency in its
housing programs through use of ongoing studies and several senior-level
working groups. Also, understanding that the allowance initiative will
affect military housing requirements, DOD stated that it is establishing a
senior-level, joint Housing Policy Panel to provide policy for determining
housing requirements and to establish clear policy for meeting those
requirements. We believe that these steps can improve DOD's internal
coordination on housing matters and enhance DOD's efforts to effectively
integrate housing options. Establishing clear policy on use of private
sector housing and on circumstances that justify use of military housing is
important to minimizing government housing costs whether privatized or not.

Summary of Authorities in the Military Housing Privatization Initiative

1. Direct loans: The Department of Defense (DOD) may make direct loans to
persons in the private sector to provide funds for the acquisition or
construction of housing units suitable for use as military family or
unaccompanied housing. (10 U.S.C. 2873(a),(1))

2. Loan guarantees: DOD may guarantee a loan to any person in the private
sector if the proceeds of the loan are used to acquire or construct housing
units suitable for use as military family or unaccompanied housing. (10
U.S.C. 2873(b))

3. Build and lease: DOD may enter into contracts for the lease of military
family or unaccompanied housing units to be constructed under the
initiative. (10 U.S.C. 2874)

4. Investments in nongovernmental entities: DOD may make investments in
nongovernmental entities carrying out projects for the acquisition or
construction of housing units suitable for use as military family or
unaccompanied housing. An investment under this section may include a
limited partnership interest, a purchase of stock or other equity
instruments, a purchase of bonds or other debt instruments, or any
combination of such forms of investment. (10 U.S.C. 2875(a),(b))

5. Rental guarantees: DOD may enter into agreements with private persons
that acquire or construct military family or unaccompanied housing units
under the initiative to guarantee specified occupancy levels or to guarantee
specific rental income levels. (10 U.S.C. 2876)

6. Differential lease payments: Pursuant to an agreement to lease military
family or unaccompanied housing to servicemembers, DOD may pay the lessor an
amount in addition to the rental payments made by military occupants to
encourage the lessor to make the housing available to military members. (10
U.S.C. 2877)

7. Conveyance or lease of existing property and facilities: DOD may convey
or lease property or facilities, including ancillary supporting facilities,
to private persons for purposes of using the proceeds to carry out
activities under the initiative. (10 U.S.C. 2878)

8. Interim leases: Pending completion of a project under the initiative, DOD
may provide for the interim lease of completed units. The term of the lease
may not extend beyond the project's completion date.
(10 U.S.C. 2879)

9. Conformity with similar local housing units: DOD will ensure that the
room patterns and floor areas of military family and unaccompanied housing
units acquired or constructed under the initiative are generally comparable
to the room patterns and floor areas of similar housing units in the
locality concerned. Space limitations by paygrade on military family housing
units provided in other legislation will not apply to housing acquired under
the initiative. (10 U.S.C. 2880(a),(b))

10. Ancillary supporting facilities: Any project for the acquisition or
construction of military family or unaccompanied housing units under the
initiative may include the acquisition or construction of ancillary
supporting facilities for the housing. (10 U.S.C. 2881))

11. Assignment of members of the armed forces to housing units: DOD may
assign servicemembers to housing units acquired or constructed under the
initiative. (10 U.S.C. 2882)

12. Lease payments through pay allotments: DOD may require servicemembers
who lease housing acquired or constructed under the initiative to make lease
payments by allotment from their pay.
(10 U.S.C. 2882ï¿½)

DOD's Military Housing Privatization Program as of October 1999

                                                             Estimated
 Service  Project             Number of    Current status    contract award
                              unitsa
                                                             date
 Army     Fort Carsonb        2,663        Awarded           September 1999

          Fort Hood           6,631c       Approved for      September 2000
                                           solicitation
          Fort Meade          3,170c       In planning       April 2001
          Fort Lewis          4,348c       In planning       December 2000
 Air ForceLacklandd           420          Awarded           August 1998

          Dyess               402          Approved for      July 2000
                                           solicitation

          Elmendorf           828          Approved for      March 2000
                                           solicitation

          Robins              670          Approved for      April 2000
                                           solicitation
          Kirtland            1,890        In planning       November 2000
          Patrick             960          In planning       July 2000
          Dover               450          In planning       January 2001
          McGuire/Ft Dix      999          In planning       February 2001
          Tinker              730          In planning       December 2000

 Navy     Everett II          300          Approved for      March 2000
                                           solicitation

          Kingsville II       150          Approved for      February 2000
                                           solicitation

          San Diego           3,248        Approved for      August 2000
                                           solicitation

          South Texas         812          Approved for      September 2000
                                           solicitation

          New Orleans         613          Approved for      October 2000
                                           solicitation

 Marines  Pendleton           712          Approved for      April 2000
                                           solicitation

          Albany              114          Approved for      February 2000
                                           solicitation

          Stewart             200          Approved for      January 2001
                                           solicitation

          Beaufort/Parris     684          In planning       February 2001
          Island
 Total
 units                        30,994

aTotal estimated units at project award.

bArmy officials estimated that 4 to 5 years will be required before planned
construction and renovation is completed.

cMaximum possible units--actual number not yet determined.

dConstruction is scheduled to be completed in February 2001.

Source: Competitive Sourcing and Privatization Office, DOD.

Navy's Limited Partnership Agreements for Housing at Corpus Christi and
Kingsville, Texas and Everett, Washington

Public Law 103-337, enacted October 5, 1994, included provisions that gave
the Navy authority to test the use of limited partnerships with the private
sector to develop family housing for Navy servicemembers and their families.
The Navy initiated two limited partnership agreements using this earlier
authority to help meet family housing shortages for enlisted servicemembers
in the Corpus Christi and Kingsville, Texas and the Everett, Washington,
areas.

In South Texas, the Navy entered into a limited partnership agreement in
July 1996 with a private developer to build and operate 404 family housing
units at two locations. The units, all completed and ready for occupancy by
November 1997, were built off base using commercial building standards and
practices. The Navy contributed $9.5 million to the project, and the
developer financed the balance of the project's $32 million total cost. In
return for its contribution, occupancy preferences were given to Navy
families, and rents were targeted to be affordable on the basis of enlisted
paygrade E-5 housing allowances. When a vacancy occurs, the developer gives
the Navy 45 days to find a military tenant. If a Navy family does not rent
the vacant unit, the developer can offer the unit to civilians. Each tenant,
military or civilian, was initially responsible for paying utilities.

The limited partnership agreement lasts 10 years, with a 5-year option
period. At the end of the partnership, the units will be sold. The agreement
calls for the developer to repay the Navy its initial equity contribution,
plus one-third of the net sale proceeds.

The units include two-, three-, and four-bedroom townhouse units. Each unit
includes a range, a refrigerator, a dishwasher, a microwave oven, washer and
dryer connections, and a carport. The two-bedroom unit has about 1,030 gross
square feet and two baths, the three-bedroom unit has about 1,207 gross
square feet and two baths, and the four-bedroom unit has about 1,355 gross
square feet and two baths.

To serve the Corpus Christi Naval Air Station and the Ingleside Naval
Station, 302 units were constructed near Portland, a community about
22 miles from the Naval Air Station and about 16 miles from the Naval
Station. The partnership agreement established the initial rental rates for
the units and stated that the rates could be adjusted annually on the basis
of the percentage change in a specified housing cost index. The 1999 monthly
rents at Portland for a two-bedroom, three-bedroom, and four-bedroom unit
are $625, $690, and $835, respectively. Local Navy housing officials
estimated that average monthly utilities for a two-, three- and four-bedroom
unit were $107, $127, and $142, respectively. Thus, total estimated monthly
costs were $732, $817, and $977 for a two-bedroom, three-bedroom, and
four-bedroom unit, respectively.

The 1999 monthly housing allowance for a paygrade E-5 member at Corpus
Christi was $626. Thus, a paygrade E-5 servicemember that rented a
two-bedroom unit at Portland paid $106, or about 17 percent, more than the
member's housing allowance. In comparison, a paygrade E-4 member renting a
two-bedroom unit paid $177, or about 32 percent, more than the allowance for
an E-4 member, and a paygrade E-6 member paid $34, or about 5 percent, more
than the allowance for an E-6 member. On average, throughout the United
States, military members living in civilian housing pay about 19 percent
more for their housing than their allowances.

Table 4 provides more details on out-of-pocket costs at Portland from
January through September 1999.

Table 4: Out-of-pocket Costs at Portland from January through September 1999

                           Out-of-pocket costsa
                           Paygrade E-4    Paygrade E-5     Paygrade E-6
           Rent plus
 Unit type estimated       Amount Percent  Amount  Percent  Amount Percent
           utilities
 2 bedroom $732            $177   32       $106    17       $34    5
 3 bedroom $817            $262   47       $191    31       $119   17
 4 bedroom $977            $422   76       $351    56       $279   40

aOut-of-pocket costs represent the difference between rent plus estimated
utilities and the member's housing allowance.

Source: Service housing officials at Corpus Christi Naval Air Station.

Because of concern over the amount of out-of-pocket costs members were
paying at the privatized units, the Navy implemented a new program in
October 1999 to significantly reduce or eliminate these costs. Using one of
the authorities provided in the current privatization legislation,
differential lease payments, the Navy modified the existing limited
partnership agreement and began paying a portion of each member's monthly
rent directly to the developer. The idea is that the Navy will pay a portion
of a member's rent so that the member's housing allowance is sufficient to
pay the balance of the rental amount plus expected utilities. With the
differential lease payments, most members will have no out-of-pocket housing
costs--similar to living in government housing. The Navy estimated that over
the remaining term of the partnership agreements at Portland and Kingsville,
Texas, the differential lease payments will cost about $6.1 million.

At the time of our visit in August 1999, all of the units were occupied. Of
the 302 units, 222 units were occupied by the military, 76 units were
occupied by civilians, and 4 units were occupied by property management.
(See
table 5.) Under terms of the agreement, property management officials stated
that civilian occupants are not required to vacate the units at the end of
their leases, even if military families are on a waiting list for the units.

Table 5: Occupancy at Portland in August 1999

 Occupant category      Number of units  Percent
 Enlisted E-5 and below 107              36
 Enlisted E-6 and above 90               30
 Officer                25               8
 Civilian               76               25
 Property Management    4                1
 Total                  302              100

Source: Service housing officials at Corpus Christi Naval Air Station.

To serve the Kingsville Naval Air Station, 102 two- and three- bedroom units
were constructed on private property in Kingsville, a community located
about 40 miles from Corpus Christi. The 1999 monthly rent at Kingsville was
$521 for a two-bedroom unit and $625 for a three-bedroom unit. Local Navy
housing officials estimated that average monthly utilities for a two- and
three-bedroom was $78 and $114, respectively. Thus, total estimated monthly
costs were $599 for a two- and $739 for a three-bedroom unit, respectively.

The 1999 monthly housing allowance for a paygrade E-5 servicemember at
Kingsville was $554. Thus, a paygrade E-5 servicemember that rented a
two-bedroom unit at Kingsville paid $45, or about 8 percent, more than the
member's housing allowance. In comparison, a paygrade E-4 member renting a
two-bedroom unit paid $108, or about 22 percent, more than the allowance for
an E-4 member; and a paygrade E-6 member paid $(23), or about (4) percent,
less than the allowance for an E-6 member. Table 6 provides more details on
out-of-pocket costs at Kingsville prior to the October 1999 implementation
of differential lease payments.

Table 6: Out-of-pocket Costs at Kingsville from January through September
1999

                           Out-of-pocket costsa
                           Paygrade E-4    Paygrade E-5     Paygrade E-6
           Rent plus
 Unit type estimated       Amount Percent  Amount  Percent  Amount Percent
           utilities
 2 bedroom $599            $108   22       $45     8        $(23)  (4)
 3 bedroom $739            $248   51       $185    33       $117   19

aOut-of-pocket costs represent the difference between rent plus estimated
utilities and the member's housing allowance.

Source: Service housing officials at Kingsville Naval Air Station.

At the time of our visit to the Kingsville units in August 1999, all of the
units were occupied. However, of the 102 units, only 30 units were occupied
by military members with families. Forty units were occupied by single
servicemembers, 30 units were occupied by civilians, and 2 units were
occupied by property management personnel. Also, the majority of the
units--55−were occupied by military officers rather than enlisted
personnel. Navy officials stated that the project was not serving junior
enlisted members and their families to the extent envisioned when the
project was developed. Many of the units were occupied by single,
junior-level officers, many of whom shared the units with another single,
junior-level officers. The partnership agreement did not provide for
specific rental preferences for enlisted servicemembers with families, and
local housing officials stated that they had not attempted to secure
vacancies for enlisted members.

Table 7 provides more details on occupancy at Kingsville in August 1999.

Table 7: Occupancy at Kingsville in August 1999

 Category of occupant Number of units  Percent
 Enlisted family      11               11
 Enlisted single      4                4
 Officer family       19               19
 Officer single       36               35
 Civilian             30               29
 Property Management  2                2
 Total                102              100

Source: Service housing officials at Kingsville Naval Air Station.

In March 1997, the Navy entered into a 10-year limited partnership with a
private developer to build and operate 185 family housing units in the
Everett, Washington, area. The housing was intended primarily to serve
servicemembers assigned to the Everett Naval Station, located about
18 miles away. The Navy contributed $5.9 million to the project, and the
developer financed the balance of the project's $19 million total cost.

Beginning in the 6th year, 20 percent of the units will be sold annually.
Navy families occupying the units will be given an opportunity to purchase
the units. The Navy will share in the net proceeds from the sales, and by
the end of the agreement, the Navy will have been repaid its initial equity
contribution plus one-third of any additional net sale proceeds. In return
for its contribution, occupancy preferences were given to Navy families, and
rents were targeted to be affordable on the basis of enlisted paygrade E-5
housing allowances. When a vacancy occurs, the developer gives the Navy 30
days to find a military tenant. If a Navy family does not rent the vacant
unit, the developer can offer the unit to civilians. Each tenant, military
or civilian, is responsible for paying utilities.

The Everett units were constructed off base using commercial building
standards and local practices. Each townhouse unit includes a range, a
refrigerator, a dishwasher, a washer, a dryer, and a two-car garage.
Excluding the garage, the two-bedroom unit has about 1,160 gross square feet
and two baths, the three-bedroom unit has about 1,212 gross square feet and
two and a half baths, and the four-bedroom unit has about
1,556 gross square feet and two and a half baths.

The partnership agreement established the initial rental rates for the units
and stated that the rates would be adjusted annually on the basis of the
percentage change in a specified housing cost index. The 1999 monthly rents
for a two-bedroom, three-bedroom, and four-bedroom unit were $790, $817, and
$926, respectively. Local Navy housing officials estimated that average
monthly utilities for a two-, three-, and four-bedroom unit were $145, $128,
and $156, respectively. Thus, total estimated monthly costs were $935, $945,
and $1,082 for a two-bedroom, three-bedroom, and four-bedroom unit,
respectively.

The 1999 monthly housing allowance for a paygrade E-5 servicemember at
Everett was $760. Thus, a paygrade E-5 servicemember that rents a
two-bedroom unit paid $175, or about 23 percent, more than the member's
housing allowance. In comparison, a paygrade E-4 servicemember renting a
two-bedroom unit paid $274, or about 42 percent, more than the allowance for
an E-4 servicemember; and a paygrade E-6 servicemember paid $99, or about 12
percent, more than the allowance for an E-6 member. However, similar to the
situation at Corpus Christi and Kingsville, the Navy modified the
partnership agreement at Everett in October 1999 to provide for differential
lease payments. This modification is expected to eliminate most or all
out-of-pocket costs for military occupants of these units. The Navy
estimated that over the remaining term of the partnership agreement at
Everett, the differential lease payments will cost $2.1 million.

Table 8 provides more details about out-of-pocket costs at Everett prior to
the October 1999 implementation of differential lease payments.

Table 8: Out-of-pocket Costs at Everett from January through September 1999

                           Out-of-pocket costsa
                           Paygrade E-4    Paygrade E-5     Paygrade E-6
           Rent plus
 Unit type estimated       Amount Percent  Amount  Percent  Amount Percent
           utilities
 2 bedroom $935            $274   42       $175    23       $99    12
 3 bedroom $945            $284   43       $185    24       $109   13
 4 bedroom $1,082          $421   64       $322    42       $246   30

aOut-of-pocket costs represent the difference between rent plus estimated
utilities and the member's housing allowance.

Source: Service housing officials at Everett Naval Station.

At the time of our visit to Everett in August 1999, 183 units were occupied
by enlisted members and their families, 1 unit was occupied by the on-site
project manager, and 1 unit was vacant. (See table 9.)

Table 9: Occupancy at Everett in August 1999

 Category of occupant            Number of units  Percent
 Enlisted paygrade E-5 and below 103              55
 Enlisted paygrade E-6 and above 80               43
 Officer                         0                0
 Civilian                        0                0
 Property Management             1                1
 Vacant                          1                1
 Total                           185              100

Source: Service housing officials at Everett Naval Station.

Local Navy housing officials stated that management attention helps ensure
that junior enlisted servicemembers receive preference in renting units at
the Everett project. The local housing office maintains separate waiting
lists for paygrades E-6 and below and paygrades E-7 and above. When notified
of a vacancy, the housing office takes a proactive role in getting an
enlisted servicemember to fill the vacancy.

Life-Cycle Cost Comparisons for Privatization Projects Awarded or Approved
for Solicitation as of October 1999

This table compares the government's long-term costs for proposed projects
financed through privatization and military construction.23 We completed our
analyses prior to DOD's January 2000 announcement of an initiative to
significantly increase housing allowances over the next 5 years. If the
initiative is implemented as planned, the increased allowances could
increase privatization costs for these projects.

.

 Dollars in millions
                     Present value of estimated total costs
                     Service estimate                                Our estimate

 Service             Military      Privatization DifferencePercent   Military      PrivatizationDifference Percent
        Installation construction                                    construction
 Army   Fort Carsona $693          $641          $52       7.5       $734          $685         $49        6.7

 Navy   Kingsville   $24           $18           $6        25.0      $24           $15          $9         37.5
        IIb
 Navy   Everett IIc  $82           $47           $35       42.7      $82           $52          $30        36.6
 Navy   South Texasd $245          $175          $70       28.6      $241          $176         $65        27.0
 Navy   San Diegod   $1,093        $972          $121      11.1      $1,077        $958         $119       11.0
 Navy   New Orleansd $173          $153          $20       11.6      $168          $149         $19        11.3
 Air
 Force  Lacklanda    $119          $107          $12       10.1      $141          $124         $17        12.1
 Air
 Force  Elmendorf    $319          $287          $32       10.0      $360          $332         $28        7.8
 Air
 Force  Robinse      $109          $114          $(5)f     (4.6)     $112          $122         $(10)f     (8.9)
 Air
 Force  Dyess        $75           $68           $7        9.3       $99           $70          $29        29.3
 MarinesPendleton    $166          $138          $28       16.9      $219          $208         $11        5.0
 MarinesStewart      $30           $35           $(5)f     (16.7)    $40           $46          $(6)f      (15.0)
 Total               $3,128        $2,755        $373      11.9      $3,297        $2,937       $360       10.9
 Average             $261          $230          $31       11.9      $275          $245         $30        10.9

aBecause the services' cost estimates for these projects have been revised,
the results of the analyses differ from the results shown in our prior
report.

bTotals reflect annual costs for 10 years, the proposed term of the
privatization agreement.

cTotals reflect annual costs for 15 years, the proposed term of the
privatization agreement.

dAccording to the Navy, in this proposed privatization project, the Navy
intends to provide to the developer only a restricted leasehold right to
existing military housing units with full reversion to the Navy at the end
of the privatization term. Also, the Navy states that the restricted
leasehold right will not be provided to an independent private developer,
but to a public-private partnership that includes the Navy. Because
ownership of the units does not transfer to the developer and because the
Navy continues to have some control over the units, the Navy does not place
a separate value on this property as part of the cost of privatization in
the life-cycle cost analysis. Instead, the Navy considers the value of the
property to be equal to the rental fees that can be generated from the units
that are occupied by Navy servicemembers and their families over the term of
the project.

eSee footnote 1 on page 35.

fMilitary construction alternative costs less than privatization
alternative.

Comments From the Department of Defense

GAO Contacts and Staff Acknowledgments

Carol Schuster (202) 512-5140
William Solis (202) 512-8365

In addition to those named above, Gary Phillips, James Ellis, and Charles
Perdue made key contributions to this report.

(702008)

Table 1: Privatization Projects as of October 1999 23

Table 2: DOD Family Housing Improvement Fund 24

Table 3: Comparison of Life-Cycle Cost Estimates for 12 Projects 37

Table 4: Out-of-pocket Costs at Portland from January through
September 1999 54

Table 5: Occupancy at Portland in August 1999 55

Table 6: Out-of-pocket Costs at Kingsville from January through
September 1999 56

Table 7: Occupancy at Kingsville in August 1999 57

Table 8: Out-of-pocket Costs at Everett from January through
September 1999 58

Table 9: Occupancy at Everett in August 1999 59
  

1. See Conference Report for Fiscal Year 1999 Appropriations for Military
Construction, Family Housing, and Base Realignment and Closure (House Report
105-647, July 24, 1998).

2. House Report 105-647, July 24, 1998, and Military Housing: Privatization
Off to a Slow Start and Continued Management Attention Needed
(GAO/NSIAD-98-178 , July 17, 1998).

3. House Report 105-647, July 24, 1998.

4. Military Housing: Privatization Off to a Slow Start and Continued
Management Attention Needed (GAO/NSIAD-98-178 , July 17, 1998).

5. Military Family Housing: Opportunities Exist to Reduce Costs and Mitigate
Inequities (GAO/NSIAD-96-203 , Sept. 13, 1996) and DOD Family Housing
Requirements Determination, DOD Inspector General Report No. 98-006, Oct. 8,
1997.

6. Hearings before the Subcommittee on Military Installations and
Facilities, House Committee on Armed Services, Mar. 9, 1999.

7. The National Defense Authorization Act for Fiscal Year 1996 (P. L.
104-106, section 2801).

8. Military Housing: Privatization Off to a Slow Start and Continued
Management Attention Needed (GAO/NSIAD-98-178, July 17, 1998).

9. House Report 105-647, July 24, 1998.

10. For a project to be approved for solicitation (the competitive process
to select a contractor for the project), DOD must first notify the Congress
of its intent of entering into a housing privatization contract for the
project. Thirty days after the notice, DOD can begin the process of
selecting a developer for the project.

11. See section 2803 of Public Law 103-337. The authority to use limited
partnerships is now available to all services under the 1996 law
establishing the privatization initiative.

12. Hearings before the Subcommittee on Military Installations and
Facilities, House National Security Committee, Mar. 7, 1996.

13. Hearings before the Subcommittee on Military Readiness, House National
Security Committee, Mar. 12, 1997, and the Subcommittee on Military
Construction, House Appropriations Committee, Mar.12, 1998.

14. Scoring refers to the process used to determine the amount that should
be recognized and recorded as an obligation of DOD at the time a
privatization contract is signed.

15. Paygrade E-5 is a petty officer second class in the Navy or a sergeant
in the Army.

16. The Robins privatization proposal calls for an on-base elementary school
operated by DOD to close when the project is awarded. In comparing the
proposal's life-cycle costs with the military construction option, the Air
Force considered two alternatives. The first military construction
alternative assumed that, similar to the privatization proposal, the on-base
school would close. The estimated military construction life-cycle costs for
this alternative are less than the estimated privatization life-cycle costs.
The second military construction alternative assumed that the school would
remain open over the life of the project. Because of the costs to operate
the school, the estimated military construction life-cycle costs for this
alternative are significantly higher than the estimated privatization
life-cycle costs.

17. To consider the time value of money, DOD's life-cycle cost analyses
estimate all costs in present value terms which estimate future costs in
current dollars.

18. Military Family Housing: Opportunities Exist to Reduce Costs and
Mitigate Inequities (GAO/NSIAD-96-203 , Sept. 13, 1996).

19. DOD Family Housing Requirements Determination, DOD Inspector General
Report No.
98-006, Oct. 8, 1997.

20. Education impact aid is paid to local governments to help cover the cost
of educating dependents of military members. The impact aid for each
dependent is significantly higher for students that live with their families
in government housing because such housing is not subject to local property
taxes. When military families live in housing in the local communities, a
much smaller amount is paid for each student because the housing is subject
to local property taxes.

21. An Evaluation of Housing Options for Military Families (RAND, 1999).

22. DOD policy issued in September 1998 stated that privatization projects
should be designed so that the members' housing allowances will fully cover
the costs of rent and utilities, thus resulting in no out-of-pocket costs
for members living in privatized housing.

23. The services did not prepare a life-cycle cost analysis for two projects
approved for solicitation--Fort Hood and Marine Corps Logistics Base,
Albany.
*** End of document. ***