Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of
Depot System Uncertain (Letter Report, 05/21/96, GAO/NSIAD-96-165).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) policy regarding depot-level maintenance and repair,
focusing on the: (1) future role of defense depots; and (2)
inconsistency of DOD policy with current statutes and congressional
directives.

GAO found that: (1) the DOD depot maintenance policy calls for a greater
mix of public and private-sector maintenance capabilities; (2) DOD will
likely rely more on private-sector depots given the uncertainty of
future workload assignments; (3) the policy is vague and offers no
guidance as to how DOD should downsize its depot maintenance capacity;
(4) the policy ignores congressional directives calling for competition
between public and private-sector entities for non-core maintenance
work; (5) under this policy, DOD depots would not be allowed to compete
for non-core workloads even if they offer the most cost-effective source
of repair; and (6) DOD needs to develop a system that allows excess
capacity reduction and vigorous public-private competition between DOD
depots and commercial firms.

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

 REPORTNUM:  NSIAD-96-165
     TITLE:  Defense Depot Maintenance: DOD's Policy Report Leaves 
             Future Role of Depot System Uncertain
      DATE:  05/21/96
   SUBJECT:  Military downsizing
             Maintenance services contracts
             Privatization
             Equipment maintenance
             Base closures
             Base realignments
             Competition
             Cost effectiveness analysis
             Military cost control
IDENTIFIER:  F-404 Engine
             
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Cover
================================================================ COVER


Report to Congressional Committees

May 1996

DEFENSE DEPOT MAINTENANCE - DOD'S
POLICY REPORT LEAVES FUTURE ROLE
OF DEPOT SYSTEM UNCERTAIN

GAO/NSIAD-96-165

Defense Depot Maintenance

(709185)


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

  BRAC - base realignment and closure
  DOD - Department of Defense
  OSD - Office of the Secretary of Defense

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


B-272042

May 21, 1996

The Honorable Strom Thurmond
Chairman
The Honorable Sam Nunn
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Floyd Spence
Chairman
The Honorable Ronald Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

As required by section 311 of the National Defense Authorization Act
for Fiscal Year 1996, this report provides our analysis of the
Department of Defense's (DOD) report, Policy Regarding Performance of
Depot-Level Maintenance and Repair, which was submitted to Congress
April 4, 1996.  Specifically, our analysis of the policy report
addresses (1) the likely future role of defense depots, (2) the
adequacy of the depot maintenance policy's content, and (3) the
inconsistency of DOD's policy with current statute and congressional
direction in section 311 regarding the use of public-private
competitions.  Our recent depot maintenance testimonies discussed our
preliminary findings on the policy report; this report provides our
overall analysis.\1


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


   BACKGROUND
------------------------------------------------------------ Letter :1

DOD annually spends about $15 billion on depot maintenance activities
at 29 major defense depots and at about 1,300 private contractors. 
Depot maintenance involves repairing, overhauling, modifying, and
upgrading defense systems and equipment.  It also includes limited
manufacture of parts, technical support, modifications, testing, and
reclamation as well as software maintenance.  The primary depot
maintenance workloads assigned to DOD depots are those required to
sustain core maintenance capabilities.  Core maintenance capability
is the skilled personnel, facilities, and equipment maintained at
organic defense depots to meet the readiness and sustainability
requirements of the weapon systems that support the Joint Chiefs of
Staff contingency scenarios.  Core maintenance capability exists to
minimize operational risks, guarantee readiness of weapon systems in
war or contingency situations, and ensure a ready and controlled
source of technical competence. 

A combination of factors has created extensive excess capacity in the
DOD depot system.  These include (1) the downsizing of the armed
forces due to the end of the Cold War; (2) efforts by some DOD
components to conduct more repairs in field-level maintenance
activities; (3) contracting out more depot work to the private
sector; and (4) the increased reliability, maintainability, and
durability of most military systems and equipment.  While depot
maintenance personnel in DOD depots have been reduced by 43 percent
since 1987, similar depot infrastructure reductions have not been
made.  As of 1996, excess capacity in the DOD depot system is
projected to be about 40 percent, using an analysis of maximum
potential capacity and programmed workload as the basis for
comparison and assuming a 5-day week, one 8-hour-per-day shift
operation.  The excess capacity varies in each service from a low of
33 percent in naval aviation, to 35 percent for naval shipyards, 42
percent for the Army, and a high of 45 percent for the Air Force. 

Some initiatives--namely consolidating workloads, implementing
competition between government depots and the private sector,
mothballing depot plant equipment, and tearing down unused buildings
or converting them to other military uses--have been used to reduce
some of the excess capacity.  However, depot downsizing has largely
occurred through the Base Realignment and Closure (BRAC) process. 
Fifteen depots have closed or are in the process of being closed as a
result of BRAC decisions.\2

While this will eliminate some excess capacity,
privatization-in-place rather than closure and consolidation of
workload in remaining depots has been proposed for seven depots
recommended for closure or realignment.  Privatization-in-place will
result in privatizing excess capacity rather than eliminating it. 

Various statutes affect the mix of depot maintenance workload between
the public and private sectors.  Title 10 U.S.C.  2464 requires the
Secretary of Defense to identify core logistics activities and to
maintain them within DOD depots unless the Secretary specifically
waives that requirement.  Title 10 U.S.C.  2466--referred to as the
ï¿½60/40ï¿½ rule--states that no more than 40 percent of the depot
maintenance funds made available in a given fiscal year may be spent
for depot maintenance conducted by nonfederal personnel.  Title 10
U.S.C.  2469 provides that DOD-performed depot maintenance and repair
workloads valued at not less than $3 million cannot be changed to
performance by another DOD activity without the use of merit-based
selection procedures for competitions among all DOD depots and that
such workloads cannot be changed to contractor performance without
the use of competitive procedures for competitions among private and
public sector entities.  DOD has requested relief from the last two
provisions and from other statutes affecting competition and
privatization.  For example, the Department provided Congress a list
of statutory encumbrances to privatization, including: 

  -- 10 U.S.C.  2461, which requires studies and reports before
     conversion to contractor performance;

  -- 10 U.S.C.  2465, which prohibits contracts for performance of
     firefighting or security guard functions;

  -- section 8050 of the DOD Appropriations Act for Fiscal Year 1996,
     which permits public-private competition, but requires
     certification that bids include comparable estimates of costs
     from public and private sector bidders;

  -- section 317 of the National Defense Authorization Act for Fiscal
     Year 1987, Public Law 99-661, which prohibits the Secretary of
     Defense from contracting for the functions performed at Crane
     Army Ammunition Activity or McAlester Army Ammunition Plant;

  -- 10 U.S.C.  4532, which requires that the Army shall have
     supplies made by factories and arsenals if it can do so on an
     economical basis; and

  -- 10 U.S.C.  2305 (a) (1), which specifies that in preparing for
     the procurement of property or services to be acquired, the
     Secretary of Defense shall specify the agency's needs and
     solicit bids or proposals in a manner designed to achieve full
     and open competition. 

In May 1996, DOD proposed a provision that would allow the Secretary
of Defense to acquire by contract from the private sector or any
nonfederal government entities those commercial or industrial type
supplies and services necessary or beneficial to the accomplishment
of DOD's authorized functions, notwithstanding any provision of title
10 or any statute authorizing appropriation for or making DOD
appropriations. 

Section 311 of the National Defense Authorization Act for Fiscal Year
1996 provides an indication of congressional intent regarding the
continued need for DOD depots: 

     "It is the sense of Congress that there is a compelling need for
     the Department of Defense to articulate known and anticipated
     core maintenance and repair requirements, to organize the
     resources of the Department of Defense to meet those
     requirements economically and efficiently, and to determine what
     work should be performed by the private sector and how such work
     should be managed."

Section 311 also directed the Secretary of Defense to develop a
comprehensive policy on the performance of depot-level maintenance
and repair for DOD that maintains the core capability described in 10
U.S.C.  2464 and to report to the Senate Committee on Armed Services
and House Committee on National Security.  The section further
directed that in developing the policy, the Secretary should include
certain elements, such as providing for public-private competitions
and performance of new workloads defined as core in DOD depots. 
Congress wanted assurance from DOD that essential organic core
requirements would be sustained before it would consider the repeal
of 10 U.S.C.  2466 and 2469. 

The DOD report, Policy Regarding Performance of Depot-Level
Maintenance and Repair, was submitted to your committees on April 4,
1996.  We were required to report our analysis to Congress 45 days
after the DOD report was submitted.  Our analysis of DOD's depot
maintenance workload distribution report is provided separately in a
companion report.\3


--------------------
\2 Additionally, the Red River Army Depot, which is being realigned
rather than closed is not included in this number. 

\3 Defense Depot Maintenance:  More Comprehensive and Consistent
Workload Data Needed for Decisionmakers (GAO/NSIAD-96-166, May 21,
1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The DOD depot maintenance policy report to a certain extent addressed
each of the elements required by section 311 of the 1996 DOD
Authorization Act and the report also provided some information not
requested.  However, the policy is only a framework, is vague in
several areas, and provides wide latitude regarding how certain
policies and concepts will be implemented.  Consequently, a precise
analysis in all areas is not possible.  Notwithstanding the report's
limitations, our review shows the following key points: 

  -- The policy calls for a clear shift to a greater reliance on
     private sector maintenance capabilities than exists today.  For
     example, DOD's future public-private workload mix projections
     call for about a 50-percent split by fiscal year 2001.  Given
     the uncertainty of how the workloads will be assigned under the
     policy and concerns we have about how DOD evaluates this data,
     it is likely the private sector percentage will be higher than
     50 percent.\4

  -- The policy is vague or provides wide implementation latitude in
     a number of key areas, leading to questions as to what the
     practical effects it could have once implemented.  For example,
     the policy incorporates a new process for performing risk
     assessments to determine which mission essential maintenance
     requirements should be privatized.  However, guidance and
     criteria have not been provided for making the assessments. 
     Consequently, each service is now independently developing its
     own methodologies for doing these assessments.  Until this is
     done, or preferably a single DOD methodology is adopted, and
     these assessments are conducted, it is impossible to estimate
     with any precision the future public-private depot maintenance
     workload mix. 

The policy for determining the source of repair for new systems being
brought into the DOD inventory also is vague and provides wide
implementation latitude.  The DOD policy provides a preference for
maintaining new systems in the private sector.  While the policy
recognizes that some core capability will be maintained in the DOD
depot system, it is uncertain what these capabilities will represent
in terms of workloads and facilities.  The policy establishes total
life-cycle contractor logistics support as the preferred future model
for maintaining new systems that are not identified as core. 
Contractor logistics support, which generally involves long-term,
sole-source contracting with the original equipment manufacturer, has
historically been used for military systems that are the same as or
derivatives of commercial systems.  For these systems, the existence
of extensive supply and maintenance capability in the private sector
increases the probability that long-term support in the private
sector would be more cost-effective than transitioning the system to
DOD depots for support.  However, it is unclear that this will be the
most cost-effective long-term approach for military unique defense
systems.  Other areas, such as the acquisition of technical data and
other resources to support a competitive environment, use of
interservicing, and environmental liability, are similarly vague or
also provide wide latitude for implementation. 

  -- The policy is inconsistent with congressional direction calling
     for competition between public-private entities for noncore
     work.  Section 311 directs that DOD's policy should provide for
     competition between public and private entities for noncore
     workloads when there is a sufficient potential for realizing
     cost savings based on adequate private-sector competition and
     technical capabilities.  Instead, DOD's policy is to exclude DOD
     depots from competing except when there is not adequate private
     sector competition.  Under this policy, DOD depots would not be
     allowed to compete for noncore workloads when there is adequate
     private sector competition, even though they may offer the most
     cost-effective source of repair. 

Given the uncertainties associated with the implementation of DOD's
depot maintenance policy, its precise effects on such factors as the
public-private mix of work, cost-effectiveness of operations, and
excess capacity in the existing DOD depot system are uncertain. 
However, a possible result is a less cost-effective public depot
system than exists today.  Central to avoiding this situation is
developing an approach that allows for excess capacity reduction and
vigorous public-private competition between the remaining DOD depots
and commercial firms.  Also, it will be important to increase the
competitiveness of the private sector market.  Our report contains
matters for congressional consideration and recommendations to DOD. 


--------------------
\4 This issue is discussed further in our companion report. 


   DOD DEPOTS WILL HAVE A FUTURE
   ROLE, BUT WILL BE SMALLER THAN
   BEFORE
------------------------------------------------------------ Letter :3

DOD and Congress are defining the role of DOD depots in the post
Cold-War era.  The new model for managing depot maintenance has not
yet emerged.  However, given DOD's depot maintenance policy report,
the model apparently will be a mix of public-private sector
capabilities, but with a clear shift toward greater reliance on the
private sector.  This shift is reflected in DOD policy provisions
that (1) call for a minimum core requirement, (2) redefine core to
allow for privatizing mission essential requirements previously
defined as core, (3) limit public depots from competing with the
private sector for noncore workloads, (4) provide a preference for
privatizing depot maintenance and repair for new systems, and (5)
provide disincentives for depots to compete.  DOD's Depot-Level
Maintenance and Repair Workload Report, submitted to Congress April
4, 1996, projected a 40-percent increase in the depot work that will
be privatized between fiscal years 1997 and 2001.  However, since the
services have not completed their reassessments of core workload
requirements, it is not known how much more of their current and
future depot maintenance work will ultimately be determined to be
noncore and privatized.  Unless effectively managed, including
downsizing of remaining depot infrastructure, a major shift in depot
workloads to the private sector could exacerbate existing excess
capacity in the DOD depot maintenance system and be more costly than
the current system. 

Historically, depot maintenance on wartime critical DOD systems has
been largely performed in DOD depots.  Based on both cost and risk
factors, the general DOD policy was to rely on DOD depots to provide
a cost-effective, reliable source of support for wartime readiness
and sustainability.  With some exceptions, peacetime maintenance of
weapon systems with wartime taskings was performed in DOD depots. 
This peacetime workload constituted the depot maintenance core.  The
core was determined by quantifying the depot work that would be
generated under war scenarios and then computing the amount of
peacetime work needed to employ the number of people and skills
necessary to support the anticipated wartime surge.  Peacetime
workload was composed of a mix of high- and low-surge items, which
allowed employees to transfer from low-surge workload to high-surge
workload during war.  While there were always a number of potential
war scenarios, the depots were sized to support a sustained global
war. 

During the Cold War, there was not much pressure to move work from
DOD depots to the private sector.  Military leaders expressed a clear
preference for retaining much of their work in DOD depots, which were
highly flexible and responsive to changing military requirements and
priorities.  The quality of the DOD depots was high and users were
generally well-satisfied with the work.  Further, the threat of a
global war and the resulting stress on the logistics system were
constant reminders of the need to maintain the flexibility and
responsiveness the depot system provided. 

Historically, DOD has reported that about 70 percent of its depot
maintenance work was performed in its depots.  In a 1994 testimony,
we stated that our work showed that the private sector more likely
received about 50 percent of the DOD depot maintenance budget.  We
noted that a portion of the funds expended on the maintenance
workload assigned to the public sector ultimately was used for
private sector contracts for parts and material, maintenance and
engineering services, and other goods and services.  Additionally,
some types of depot maintenance activities, such as interim
contractor support and contractor logistics support, were not
included in previously reported statistics.\5

With the end of the Cold War and the subsequent declines in defense
spending, there are increased pressures to privatize more depot
maintenance work.  Those declines affected force structure and the
public and private activities supporting force structure.  As
acquisition programs began to decline, a growing concern arose over
the impact on the defense industrial base.  Particular concern
focused on how that industrial base could be maintained without the
large development and production programs of the past, and attention
began to shift to DOD depot workloads as a potential source of work
to keep the industrial base viable. 

Advocates of more private sector involvement argue that a shift
toward the private sector would not only help keep the private sector
production base healthy during a period of reduced weapon procurement
but also could lower costs, since the private sector could provide
depot maintenance for less than the public sector.  Proponents of the
DOD depot system believe DOD depots have provided a quality,
responsive, and economical source of repair.  They note that the DOD
maintenance policy for many years has supported the outsourcing of
depot maintenance work when it was determined to be cost-effective to
do so.  Further, they contend there are substantial differences
between developing and producing new systems and maintaining fielded
ones and that the dollars spent on maintenance, while not small,
cannot fill the void created by declining production dollars. 


--------------------
\5 Depot Maintenance:  Issues in Allocating Workload Between the
Public and Private Sectors, (GAO/T-NSIAD-94-161, Apr.  12, 1994). 


   POLICY PROVIDES GENERAL
   FRAMEWORK, BUT MANY AREAS ARE
   VAGUE OR PROVIDE WIDE
   IMPLEMENTATION LATITUDE
------------------------------------------------------------ Letter :4

DOD's new depot maintenance policy clearly states that, consistent
with its core policy, the Department has a preference for privatizing
depot maintenance support for new systems and for privatizing
existing noncore workload.  This represents a fundamental shift in
the historical policy of relying on DOD depots to provide for the
readiness and sustainment of wartime tasked weapon systems.  Although
the precise effects of its implementation are unknown at this time,
it is likely the DOD depots will have significantly less work than in
the past.  While the policy recognizes the need to maintain a limited
core capability in the DOD depot system, it provides wide
implementation latitude that could result in the DOD depot system
becoming greatly underutilized and thereby becoming very inefficient
and costly.  The policy does not address how DOD intends to further
downsize its depot maintenance capacity and improve the efficiency
and cost-effectiveness of remaining DOD depot maintenance
infrastructure. 

DOD's report, Policy Regarding Performance of Depot-Level Maintenance
and Repair, provides an overall, but limited, framework for managing
depot maintenance activities.  The policy reiterates some past
policies; identifies some new plans and initiatives; references and
incorporates a number of other directives, publications, memorandums,
and decisions; and notes that DOD later plans to develop an updated
single publication with applicable maintenance policy guidance.  The
policy and its supporting documentation contain information relating
to each of the nine content elements required by Congress, but in
varying levels of completeness and detail. 


      RISK ASSESSMENT POLICY COULD
      SIGNIFICANTLY REDUCE
      EXISTING DOD DEPOT WORKLOADS
---------------------------------------------------------- Letter :4.1

The policy report does not contain specific direction and criteria
for implementing key provisions critical to articulating core
requirements and allocating resources between the public and private
sectors.  This is particularly the case for the core methodology
model, which the services are to use to determine core capability
requirements and the workloads necessary to sustain these
capabilities.  While the policy describes the model and provides an
overview of its procedures, it does not provide guidance and
performance criteria for assessing private sector capabilities,
establishing risk thresholds, and making best value determinations. 
Such guidance is critical to both implementing the model and
determining whether mission essential workloads previously determined
to be core and performed in public depots can be outsourced at
acceptable levels of risk.  Until this guidance and criteria are
established and implemented, the core requirements that will result
from the new policy cannot be predicted with any precision. 

Moreover, in the absence of clear ï¿½how-toï¿½ guidance and criteria,
each service is developing its own approaches and methods for
implementing the model.  Each is independently planning and
developing a process for assessing private sector capabilities,
determining levels of risk and prudent risk thresholds, and making
economy of scale and best value adjustments.  Several independent
efforts are already under contract.  This duplication of effort among
the services is costly and will likely result in inconsistent
implementation of the methodology.  Office of the Secretary of
Defense (OSD) officials acknowledged the need to develop and publish
standard risk assessments, best value criteria, and other
implementing guidance and criteria.  However, specific plans and
milestones for doing this have not yet been established. 

As an indication of how the policy might affect workload allocations,
we noted that DOD has recently taken several existing workloads
previously defined as core and redesignated them noncore.  For
example, at the Aerospace Guidance and Metrology Center, the Air
Force is privatizing depot maintenance operations involving 627,000
million direct labor hours of work--100 percent of which had been
previously defined as core--stating that because the workload is
being privatized in place, the risk is manageable.  It is unclear how
risky that privatization may turn out to be in light of the
contractor's interest in divesting itself of its defense business and
the fact that the contractor is not contractually obligated to
perform the maintenance work at the privatized facility.  A similar
rationale is being used to support other in-place privatizations.  In
addition, the Air Force's selection of five prototype workloads for
possible privatization includes work previously classified as core
and performed at public depots.  For example, 100 percent of the
peacetime hydraulics workload at Sacramento Air Logistics Center and
100 percent of the peacetime fuel accessories workload at San Antonio
Air Logistics Center are considered core based on military surge
requirements to support contingency operations.  Core depot
maintenance workload at other depot maintenance activities are also
being privatized-in-place.\6


--------------------
\6 We are reporting separately on privatization-in-place plans for
these two centers and at Army and Navy Depots. 


      IMPLEMENTATION OF RISK
      ASSESSMENT POLICY COULD
      SIGNIFICANTLY REDUCE CORE
      REQUIREMENTS FOR NEW SYSTEMS
---------------------------------------------------------- Letter :4.2

Section 311 directed that DOD's depot maintenance policy should
provide for the performance of maintenance and repair of any new
systems defined as core under 10 U.S.C.  2464 in facilities owned and
operated by the federal government.  Because of the Department's
expressed preference for privatizing depot maintenance for future
systems and the wide latitude for defining core requirements for new
systems, future core requirements for new systems are likely to be
far less than in the past.  While DOD recognizes the need to retain a
limited core capability, it is uncertain whether new systems with
wartime taskings will be identified as core after DOD considers
privatization through its risk assessment process.  As an example of
the change in the Department's concept of core, DOD's workload report
stated that the Air Force core would represent the capabilities
needed to ensure competence in overseeing depot maintenance
production that has both public and private sector elements. 
Further, DOD's 1996 report to Congress, Improving the Edge Through
Outsourcing, stated that DOD will consider privatizing other
maintenance activities essential for meeting wartime taskings and
previously identified as core, such as intermediate maintenance
conducted at field operating locations.  With such wide latitude for
defining core, it is uncertain the extent to which the Department
will continue to support wartime mission taskings with DOD core
maintenance capability. 


      MOST NEW SYSTEMS TO BE
      MAINTAINED BY THE PRIVATE
      SECTOR BUT IMPLEMENTATION
      QUESTIONS EXIST
---------------------------------------------------------- Letter :4.3

Directions for Defense, the May 1995 report of the Commission on
Roles and Missions of the Armed Forces recommended that DOD privatize
most existing depot maintenance work and all support for new and
future weapon systems.  In his August 24, 1995, letter to Congress,
the Secretary of Defense agreed with the Commission's recommendations
but expressed a need for DOD to retain a limited organic core
capability to meet essential wartime surge demands, promote
competition, and sustain institutional expertise.  DOD established
joint teams and working groups to plan and direct efforts aimed at
increasing privatization and outsourcing.  DOD's January 1996 report,
Plan for Increasing Depot Maintenance Privatization and Outsourcing,
provides for substantially increasing reliance on the private sector
for depot maintenance.  It noted that DOD planned to freeze the
transition of workloads from the private sector to DOD depots.  DOD's
March 15, 1996, Instruction 5000.2 stated the following regarding
depot maintenance for new systems. 

     "It is DOD policy to retain limited organic core depot
     maintenance capability to meet essential wartime surge demands,
     promote competition, and sustain institutional expertise. 
     Support concepts for new and modified systems shall maximize the
     use of contractor provided, long-term total life-cycle logistics
     support that combines depot-level maintenance along with
     wholesale and selected retail materiel management functions. 
     Life-cycle costs and use of existing capabilities, particularly
     while the system is in production, shall play a key role in the
     overall selection process.  Other than stated above, and with an
     appropriate waiver, DOD organizations may be used as substitutes
     for contractor-provided logistics support, such as when
     contractors are unwilling to perform support, or where there is
     a clear, well-documented cost advantage."

The policy and DOD Instruction 5000.2 also change the decision-making
chain over workload assignments, the factors considered, and related
impacts on core.  Previously, the service logistics chiefs, working
in conjunction with functional organic depot maintenance and business
managers, would make overall core assessments and provide input to
source-of-repair decisions on new weapon systems to ensure that
overall core capabilities were maintained.  The services used a
merit-based decision tree to determine source-of-repair assignments
based on cost, military risks, and core requirements.  DOD's new
policies place these fundamental life-cycle support decisions under
the service acquisition representatives responsible for the weapon
system.  It is also unclear how acquisition managers will evaluate
whether or not a new system or technology must be sustained
organically to support future competition and future depot
maintenance core requirements, including retention of required
institutional skills.  The acquisition community has not been given a
solid framework for making these decisions and there does not seem to
be any provision for involving the functional depot maintenance
community in the process.  Thus, a source-of-repair decision on an
individual weapon system may be suboptimal to the entire logistics
system and not provide in the aggregate needed core capability. 


      COST-EFFECTIVENESS OF DOD
      POLICY PREFERENCE FOR
      CONTRACTOR LOGISTICS SUPPORT
      QUESTIONABLE
---------------------------------------------------------- Letter :4.4

The policy further establishes contractor logistics support as the
preferred management model for new and future systems that are not
considered core.  Contractor logistics support provides for lifetime
support in the private sector, to include depot-level maintenance and
repair and, sometimes, supply operations and materiel management
functions at retail and wholesale levels.  Air Force managers have
found this approach to be a cost-effective tool when the system is a
commercial derivative, where there is meaningful competition in the
private sector for production and repair of the system, and where a
logistics infrastructure is already established in the private
sector.  These conditions are not present for those weapon systems
that are military unique and which often represent the cutting edge
of technology. 

Cost is also a concern when relying on lifetime support arrangements. 
Under contractor logistics support, the original equipment
manufacturer usually receives the contractor logistics support
contract, at least for a period of time when the system is first
fielded.  The manufacturer is usually the only contractor initially
capable of producing, modifying, and maintaining the system.  Our
work has demonstrated how often depot work is sole sourced, often to
the original equipment manufacturer, and the implications of
sole-source contracting on costs and future competition potential.\7

For example, the Air Force is achieving significant savings as a
result of interservicing its F404 engine to a Navy depot rather than
continuing to contract on a sole-source basis with the equipment
manufacturer as it had done in the past.  Also, the Air Force has
reported large contract savings after recompeting some contractor
logistics support contracts, often moving the work from the
manufacturer to other commercial firms. 

Another issue regarding the privatization of new workloads using the
contractor logistics support concept is the long-term impact on the
depots' ability to provide a credible competitive source and maintain
technical competence on new systems, leading edge technologies, and
critical repair processes.  One stated reason for maintaining core is
to sustain in-house technical competence--skilled maintenance
workers, engineers, contracting officials, and program managers--to
minimize technological risks.  Without new work, as older systems are
phased out of the inventory, the DOD depots could not remain viable,
as they would become obsolete and increasingly inefficient as older
workloads dwindled.  As the depot technologies aged, it would also be
more difficult for management personnel to maintain engineering and
technical experience on new technologies performed exclusively in the
private sector.  DOD officials consider these skills essential for
proper management of depot maintenance workload, whether in the
public or private sector. 


--------------------
\7 Defense Depot Maintenance:  Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146, Apr.  16, 1996, and
GAO/T-NSIAD-96-148, Apr.  17, 1996). 


      OTHER KEY POLICY AREAS ARE
      VAGUE OR PROVIDE WIDE
      IMPLEMENTATION LATITUDE
---------------------------------------------------------- Letter :4.5

While DOD's policy report covered to some degree all the elements
Congress required, we found some elements to be vague or subject to
wide latitude in its implementation.  For example: 

  -- Congress required that the DOD policy provide for meeting core
     depot maintenance requirements economically and efficiently and
     specified that the depots be assigned sufficient workloads to
     ensure cost-efficiency during peacetime.  DOD's policy states
     the Department's intention to provide for cost-efficiency,
     sufficient workload, and technical proficiency in its depots,
     but does not provide specific plans and processes to do so.  On
     the contrary, the policy's preference for outsourcing new and
     established workloads and its limitations on doing noncore
     workloads in public depots would seem, in the long term, to
     decrease utilization, increase excess capacity, and make depots
     increasingly inefficient.  The policy does not provide for
     reorganizing, consolidating, or closing additional facilities to
     deal with the resulting excess capacity and inefficiency. 
     Without such a plan, it is not clear how DOD intends to
     significantly increase the amount of depot maintenance workload
     in the private sector while economically and efficiently
     utilizing its depot capability. 

  -- Congress required that DOD identify depot-level maintenance and
     repair activities that are necessary to ensure the depot-level
     maintenance repair capability required by 10 U.S.C.  2464.  The
     DOD report listed current DOD maintenance facilities where core
     workload is performed, but did not identify information on
     weapon system workloads and key technology areas that are needed
     to maintain core capabilities.  Further, without having more
     complete information regarding how repair base and risk
     assessments are to be conducted, DOD cannot identify what
     specific maintenance workloads will be retained in DOD depots as
     core under its new core methodology. 

  -- In section 311, Congress required that the DOD policy provide
     for the transfer from one military department to another using
     merit-based selection processes workloads that supports core
     depot-level maintenance and repair capabilities.  The policy
     report restates existing policies and procedures and identifies
     the organizations involved in interservicing decisions. 
     However, it provides no new plans or initiatives.  We and others
     have reported in the past on redundancies and underutilization
     in DOD's depot maintenance operations and have recommended
     increased integration of the services' depot maintenance
     operations.  Most recently, we reported that because DOD has
     made limited progress over the past
     20 years in interservicing workloads, it appears unlikely that
     this cost-reduction tool will be used on a widespread basis.  We
     noted that the continued emphasis on a servicewide core rather
     than DOD-wide core inhibits interservicing opportunities.\8 It
     is unclear how DOD can support interservicing while increasing
     the number of workloads being privatized.  For example, we noted
     that interserviced workloads have been among the first to be
     offered for privatization as a result of recent privatization
     initiatives. 

  -- The policy stresses the importance of acquiring adequate
     technical data to support competitive procurements and
     references revised acquisition guidance relative to new systems
     and modifications.  It also discusses at some length new
     information technology that can improve access to data and its
     management.  It does not discuss or prescribe specific
     management actions and guidance for resolving data issues on
     established workloads.  An example would be the releasibility
     and transfer of proprietary data on work previously done by the
     depots but is now outsourced or to be accomplished at
     privatized-in-place facilities.  Our work shows that proprietary
     data issues are important factors in limiting competitions for
     depot maintenance contracts.\9

  -- Congress provided that the depot maintenance policy address
     environmental liability, an important issue given the extent of
     pollution at public depots and plans to close bases and
     privatize work in place.  The policy expresses DOD's intent to
     use sound management practices to limit and control pollutants
     and also references Superfund legislation, which makes DOD
     responsible for cleaning up its facilities and prohibits
     transfer of property to nonfederal ownership until cleanup is
     completed or a remedial plan is approved.  We have previously
     reported on increased costs, delayed cleanup, indemnification
     and sharing of costs with contractors, and other legal issues
     associated with Superfund and DOD's environmental liability.\10
     One of the key issues is how environmental liability will be
     handled at closing industrial facilities.  The report stated
     that environmental restoration liability must be addressed when
     DOD closes, sells, donates, or operates as a government-owned,
     contractor-operated facility, but it did not provide any
     specifics.  Further, the policy does not address the
     environmental liability for private contractors performing depot
     maintenance work. 


--------------------
\8 Closing Maintenance Depots:  Savings, Workload, and Redistribution
Issues (GAO/NSIAD-96-29, March 4, 1996). 

\9 Aerospace Guidance and Metrology Center:  Cost Growth and Other
Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec.  9,
1994) and Defense Depot Maintenance:  Privatization and the Debate
Over the Public-Private Mix (GAO/T-NSIAD-96-146, Apr.16, 1996, and
GAO/T-NSIAD-96-148, Apr.  17, 1996). 

\10 Military Bases:  Environmental Impact at Closing Installations
(GAO/NSIAD-95-70, Feb.  23, 1995). 


      EFFECTIVE IMPLEMENTATION
      REQUIRES EXCESS CAPACITY
      REDUCTION AND A COMPETITIVE
      ENVIRONMENT
---------------------------------------------------------- Letter :4.6

The policy's determination to (1) size depots to a minimum core
workload, (2) limit public-private competitions to relatively minor
and obsolete workloads, (3) reduce other depot work by the amount won
during competitions, (4) restrict the depot's ability to obtain new
workloads, and (5) apply best value concepts only for last-source
workloads and other work the private sector cannot or will not
provide will decrease the maintenance workloads assigned to DOD
depots.  The combination of these conditions--if not effectively
managed to include further reductions in infrastructure and
development of competitive markets--would likely result, over the
long term, in DOD depots becoming an economic liability rather than a
cost-effective partner in the total DOD industrial base.  The DOD
policy report states that the Department will provide for
cost-efficiency, sufficient workload, and technical proficiency in
its depots.  However, accomplishing this objective will be difficult
because the depots already are underutilized and the policy providing
for additional outsourcing would exacerbate that situation, unless
there are additional depot closures.  Further, the report does not
provide a clear indication, aside from recognizing ongoing base
closure and realignment decision actions, about how the Department
intends to downsize to minimum core. 


   DOD POLICY IS INCONSISTENT WITH
   CONGRESSIONAL GUIDANCE WITH
   RESPECT TO COMPETING NONCORE
   WORKLOADS MAINTAINED IN DOD
   DEPOTS
------------------------------------------------------------ Letter :5

Section 311(d)(5) of the act provides that for depot maintenance
workloads in excess of that required to be performed by DOD depots,
(i.e., noncore workloads), DOD's policy should provide for
competition "between public and private entities when there is
sufficient potential for realizing cost savings based upon adequate
private-sector competition and technical capabilities." DOD's policy
is inconsistent with this instruction.  According to DOD, it will
engage in public-private competition for workloads in excess of core
only when it determines "there is not adequate competition from
private sector firms alone." The report did not clarify what would
constitute adequate competition.  Under this policy, DOD depots would
be used sparingly for public-private competitions and DOD depots
cannot compete for all noncore workloads where "adequate private
sector competition" exists, even though they may offer the most
cost-effective source of repair.  Also, if a competition were
conducted and a DOD depot won, the current DOD policy provides for
reviewing the depot's other existing workloads for possible
outsourcing or interservicing.  This workload displacement provision,
in effect, creates a disincentive for DOD depots to compete. 

Closely related to competition issues is the concept and application
of best value.  The policy mentions best value many times, but
usually in reference to private-private competitions.  The policy
excludes DOD depots from a best value analysis for workloads judged
to have sufficient private sector competition.  The policy does
provide for including DOD depots for best value assessments in
situations where there is limited competition, the government is the
last source of repair, or the private sector cannot or will not
compete. 

We have reported that public-private competition can be a beneficial
tool for determining the optimum cost-effective source of repair for
noncore workloads.  As noted in our recent reports on the Navy's
depot maintenance public-private competition programs for ships and
aviation, we found that these competitions generally resulted in
savings and benefits and provided incentives for DOD depot officials
to reengineer maintenance processes and procedures, to develop more
cost-effective in-house capability, and to ensure that potential
outsourcing to the private sector is more cost-effective than
performing the work in DOD depots.\11

We recognize the public-private competition concerns about the
reliability of DOD's depot maintenance data and the adequacy of its
depot maintenance management information systems.  However, these
deficiencies are not insurmountable.  As we discussed in our prior
reports on the public-private competition program, many of the
problems were internal control deficiencies that can be addressed
with adequate top-level management attention.  Further, we noted that
some corrective actions have already been undertaken and additional
improvements can be made.  We recommended that the Defense Contract
Audit Agency be used to certify internal controls and accounting
policies and procedures of DOD depots to ensure they are adequate for
identifying, allocating, and tracking costs of depot maintenance
programs and to ensure proper costs are identified and considered as
part of the offers by DOD depots.  DOD has stated that it plans to
use the Defense Finance and Accounting Service to review and certify
the accounting systems of DOD depots. 


--------------------
\11 Navy Maintenance:  Assessment of the Public-Private Competition
Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan.  22, 1996)
and Navy Maintenance:  Assessment of the Public and Private Shipyard
Competition Program (GAO/NSIAD-94-184, May 25, 1994). 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :6

Since DOD's policy report did not provide for public-private
competition consistent with the direction of section 311 of the 1996
Defense Authorization Act, Congress may wish to consider providing
new direction regarding DOD's use of public-private competition and
the manner in which those competitions should be conducted. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

We recommend that the Secretary of Defense: 

  -- Direct the military services to work with OSD to jointly develop
     consistent policies and methodologies for assessing private
     sector repair capabilities and determining prudent risk
     thresholds for assigning mission essential workloads to the
     private sector.  The methodology should, at a minimum, identify
     specific qualitative and quantitative factors to be evaluated in
     this process. 

  -- Establish specific milestones for completing the new depot
     maintenance policy and individual guidance and criteria
     necessary to the implementation of the policy's various
     components. 

  -- Develop a set of measurable goals to determine if DOD's depot
     maintenance policy is achieving the desired objectives, such as
     eliminating excess depot maintenance capacity, restructuring
     remaining depots to improve their efficiency and capacity
     utilization, decreasing depot maintenance costs, and improving
     readiness. 



   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

DOD officials commented orally on a draft of this report.  These
officials stated that DOD only had a short time to develop the policy
and workload reports.  However, they believe the reports were
comprehensive and provided more than was required by the 1996 Defense
Authorization Act.  Nonetheless, the officials generally concurred
with the findings and recommendations in this report.  We have made
technical corrections in several areas to address their comments. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

We reviewed DOD's report, Policy Regarding Performance of Depot-Level
Maintenance and Repair, which was submitted to Congress April 4,
1996.  We compared the report's provisions against the congressional
content requirements and other considerations in section 311 of the
National Defense Authorization Act for Fiscal Year 1996.  We
identified areas of compliance and areas where the policy was
inconsistent or had potential adverse impacts or significant
management challenges.  From each military service, we obtained
back-up data, comments on the policy, and report inputs.  We
evaluated related events and management actions, including OSD and
service privatization and outsourcing plans, revised acquisition
policy guidance, and results from recent source-of-repair assignment
decisions and interservicing.  We drew extensively from information
gathered in our related reviews of depot maintenance, including
privatization-in-place, closing depots, public-private competitions,
and depot maintenance contracting. 

We interviewed officials and examined documents at OSD and Army,
Navy, Marine Corps, and Air Force headquarters, Washington, D.C.;
Army Materiel Command, Alexandria, Virginia; Naval Air Systems
Command, Arlington, Virginia; Naval Sea Systems Command, Arlington,
Virginia; Marine Corps' Logistics Plan and Strategic Mobility
Division, Arlington, Virginia; Air Force Materiel Command,
Wright-Patterson Air Force Base, Ohio; Naval Aviation Depot,
Jacksonville, Florida; Ogden Air Logistics Center, Ogden, Utah;
Oklahoma City Air Logistics Center, Oklahoma City, Oklahoma; and
Warner Robins Air Logistics Center, Warner Robins, Georgia. 

We conducted our review from February to May 1996 in accordance with
generally accepted government auditing standards. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members, House and Senate Committees on Appropriations, the
Senate Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight; the Secretaries of Defense, the
Army, the Navy, and the Air Force; and the Director, Office of
Management and Budget. 

Please contact me at (202) 512-8412 if you or your staff have any
questions.  The major contributors to this report are listed in
appendix I. 

David R.  Warren
Director, Defense Management Issues


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

James Wiggins, Associate Director
Julia Denman, Assistant Director
Marilyn Wasleski, Senior Evaluator
Glenn Knoepfle, Senior Evaluator
Gregory Harmon, Evaluator
Paul Newton, Evaluator


   OFFICE OF GENERAL COUNSEL,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:2

John Brosnan, Assistant General Counsel


   CHICAGO FIELD OFFICE
--------------------------------------------------------- Appendix I:3

Bruce Fairbairn, Evaluator-in-Charge


   LOS ANGELES FIELD OFFICE
--------------------------------------------------------- Appendix I:4

Dennis DeHart, Senior Evaluator
Jean Orland, Evaluator


*** End of document. ***