Navy Maintenance: Assessment of the Public-Private Competition Program
for Aviation Maintenance (Chapter Report, 01/22/96, GAO/NSIAD-96-30).

GAO reviewed the Navy's plans and procedures for public-private
competitions of aviation depot-level maintenance workloads. Various
factors limited the amount of past depot-level work available for
competitive awards, including the time and costs for performing
competitions. Although actual savings were difficult to quantify, GAO
found that the Navy's competition programs generally reduced operating
costs and in many cases streamlined production processes. The Navy ended
its aviation maintenance competition program in 1993, and the Defense
Department terminated the program in 1994 despite continued
congressional support for it. However, as DOD begins to implement
recommendation by the Commission on Roles and Missions leading to the
possible privatization of most depot maintenance, use of competitive
procedures for distribution of workloads between the public and private
sectors should prove cost-effective.

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

 REPORTNUM:  NSIAD-96-30
     TITLE:  Navy Maintenance: Assessment of the Public-Private 
             Competition Program for Aviation Maintenance
      DATE:  01/22/96
   SUBJECT:  Privatization
             Cost effectiveness analysis
             Naval aviation
             Military facilities
             Aircraft maintenance
             Maintenance costs
             Competitive procurement
             Maintenance services contracts
             Navy procurement
             Military cost control
IDENTIFIER:  F-14 Aircraft
             Tomcat Aircraft
             Orion Aircraft
             P-3C Aircraft
             DOD Defense Management Review
             F/A-18 Aircraft
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Defense,
Committee on Appropriations, U.S.  Senate

January 1996

NAVY MAINTENANCE - ASSESSMENT OF
THE PUBLIC-PRIVATE COMPETITION
PROGRAM FOR AVIATION MAINTENANCE

GAO/NSIAD-96-30

Navy Maintenance

(709042, 709114)


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

  ASO - Aviation Supply Office
  DOD - Department of Defense
  GAO - General Accounting Office
  NAVAIR - Naval Air Systems Command
  NADEP - Naval Aviation Depot

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


B-270593

January 22, 1996

The Honorable Daniel K.  Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

Dear Senator Inouye: 

As requested, we reviewed the Navy's plans and procedures for
public-private competitions of aviation depot-level maintenance
workloads.  Various factors limited the amount of past depot-level
work available for competitive awards, including the time and costs
for performing competitions.  While actual savings were difficult to
quantify, we found that the Navy's competition programs generally
reduced operating costs and in many cases resulted in streamlined
production processes.  The Navy terminated its aviation maintenance
competition program in 1993 and the Department of Defense (DOD)
terminated the program in 1994.  However, as the DOD begins to
implement recommendations by the Commission on Roles and Missions
leading to the possible privatization of most depot maintenance, use
of competitive procedures for distribution of workloads between the
public and private sectors should prove cost-effective. 

We are sending copies of this report to the Chairmen and Ranking
Minority Members, House and Senate Committees on Appropriations;
Senate Committee on Armed Services; House Committee on National
Security; the Director, Office of Management and Budget; and the
Secretaries of Defense, the Navy, and the Air Force. 

Please contact me at (202) 512-8412 if you have any questions
concerning this report.  Major contributors were Julia Denman,
Assistant Director; Gary Phillips, Evaluator-in-Charge; and James
Ellis, Evaluator. 

Sincerely yours,

David R.  Warren
Director, Defense Management Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Navy's aviation depot competition program began in fiscal year
1987 when the Congress authorized the Navy to expand its competition
program for ship maintenance and repair to include public-private
competitions for aircraft depot repair work.  Because of significant
savings generated from the ship competition program, the concept was
first applied to F-14 fighter aircraft depot overhauls.  In 1990, the
Navy decided to greatly expand the program to achieve savings in the
Navy's $1.5 billion aviation depot maintenance program.  In 1993, the
Navy implemented a new industrial strategy that did not include
public-private competitions and in May 1994, DOD terminated the
public-private competition program, despite continued congressional
support for it. 

At the request of the former Chairman, and now Ranking Minority
Member, of the Subcommittee on Defense, Senate Committee on
Appropriations, GAO reviewed the Navy's aviation depot maintenance
competition program to determine (1) the nature and extent of past
competitions, (2) whether savings resulted, (3) prospects for and
impediments to future competitions, and (4) whether program
improvements can be made. 


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

Before the public-private competition program, most depot-level
maintenance for the Navy's airframes, engines, and aviation
components was automatically assigned to Navy depots.  The depots
were paid a set price for each type of repair based on labor
standards, material estimates, and past experience.  Other
maintenance work was performed by private contractors with the price
determined through competitive bidding or contract negotiations. 
Most Navy aviation maintenance contract workload was awarded on a
noncompetitive basis.  Under the public-private competition program,
the depots and private companies directly competed for selected
maintenance work and the bidder offering the best value to the
government was awarded the contract. 

The Navy public-private competition program was first applied to a
Navy aircraft repair requirement in 1987, and in 1992 the Navy
started using public-private competition for determining the source
of repair for some component repair work.  In May 1994, the Deputy
Secretary of Defense terminated the program. 

The conference committee on the fiscal year 1995 defense
appropriations bill noted that both the House and Senate reports
raised serious concerns regarding the Department of Defense's (DOD)
policy on competition for depot maintenance workloads.  The conferees
agreed that public-private competition for depot maintenance
workloads should be reinstituted. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Navy public-private competitions generally resulted in savings and
benefits, although precisely quantifying such savings is not
possible.  For competition workloads, public depots substantially
reduced operating costs by streamlining production processes and
reducing overhead.  However, the Navy's expectations to greatly
expand public-private competitions and to thereby achieve over $550
million in savings over a 6-year period never materialized.  The time
and cost of performing such competitions, combined with a rapidly
declining depot maintenance workload and a private sector concern
about fairness, resulted in much less maintenance work being
subjected to public-private competition than had been projected.  The
issue of fairness centers on private sector concerns that military
depot prices did not reflect the total cost to the government of
performing this work, including the labor and material to be applied
to competition work as well as an appropriate share of overhead. 

Congressional direction to reinstitute public-private competitions
together with recommendations by the Commission on Roles and Missions
to privatize most depot maintenance work has resulted in DOD
reexamining its depot workload with a view toward moving more work to
the private sector.  Since 10 U.S.C.  2469 requires a public-private
competition before any depot workload valued at $3 million or more
can be moved to the private sector, efforts to privatize depot
maintenance work will increase the need for DOD to perform
public-private competitions, both to comply with the statute as well
as to assure that privatization is cost-effective.  While DOD
maintains it has reinstituted its public-private competition program,
in practice no competitions have been held since DOD terminated the
program in 1994. 

A number of factors may limit or impede a major competition program
in the current environment.  They include (1) the cost and
difficulties of performing such competitions and (2) the amount of
work available for competition under current law and policies
limiting the mix of public and private depot maintenance work. 

Initiatives, such as improving cost accounting systems for depot
work, can be taken to improve public-private competitions to assure
their future usefulness in identifying the most cost-effective source
of repair for depot maintenance workloads. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      RELATIVELY LITTLE WORKLOAD
      COMPETED
-------------------------------------------------------- Chapter 0:4.1

Relatively little depot maintenance workload has been competed
between the public and private sectors.  Of the $4.6 billion spent on
aircraft and engine maintenance since 1988, only $268 million, or
about 6 percent, was included in the public-private competition
program.  Similarly, of the
$3.2 billion spent on component repairs since 1992, only $196
million, or about 6 percent, was competed. 

Plans to save $550 million by competing most Navy aviation depot
maintenance work never materialized, primarily because of declining
maintenance requirements, greater than expected cost and time
requirements to conduct competitions, concerns over fairness, and a
change in Navy industrial strategy.  Navy officials noted that
administrative delays in completing the competitions were caused by
the need to clarify maintenance requirements and develop statements
of work.  However, they conceded that these factors also impede the
Navy's ability to conduct competitions among private sector
contractors.  For example, although Navy officials told GAO they
intended to privatize some of the maintenance workload being
relocated from closing Navy aviation depots, they are using a
two-step process that first relocates the workload to another Navy
depot.  This is primarily caused by the time requirements to
technically and administratively prepare for contracting out the
workloads. 


      MEASURING PRECISE SAVINGS
      NOT POSSIBLE
-------------------------------------------------------- Chapter 0:4.2

Precisely comparing costs and quantifying savings resulting from
public-private competition is not possible because (1) few major
competitions have been performed and there is little baseline data
allowing a comparison of maintenance costs before and after the
competition, (2) maintenance requirements increased as aircraft aged,
(3) workloads decreased from precompetition levels, and (4) inflation
increased costs.  However, available data suggests that savings
resulted from the competition program. 


      AVAILABLE DATA INDICATES
      SAVINGS GENERALLY RESULTED
-------------------------------------------------------- Chapter 0:4.3

The public-private competition program has reduced depot maintenance
costs for the competed workloads.  The threat of reduced workloads
and job losses provided an incentive for Navy depots to minimize
costs.  In response to the competitions, the depots took several
steps to lower their costs, such as identifying the most efficient
process to accomplish each repair task, developing new staffing
requirements to ensure that the minimum number of people with the
correct skill levels were assigned, and making organizational changes
that would focus on reducing overhead costs. 

GAO's comparisons of maintenance and repair costs before and after
competitions showed, in most instances, that costs after competition
were significantly lower.  In cases where the costs were higher, the
higher cost was attributable primarily to inflation, increases in
required maintenance tasks, and reductions in total workload volume. 
In these cases, the cost may have been even higher without the
competition.  GAO's comparison of component repair costs after
public-private competition showed that, even with inflation, costs
declined in 25 of 33 cases by an average of 41 percent.  In eight
cases, the costs increased by an average of 37 percent.  When
adjusted for inflation, the average cost of an F-14 airframe
overhaul, competed in 1987 and won by Navy depots, decreased from an
average $1.69 million in the year before the competition to $1.29
million after the competition.  In the first 4 years after the
competition, the average cost per F-14 airframe overhaul was about 22
percent lower than the precompetition cost. 


      PUBLIC-PRIVATE COMPETITIONS
      COULD BE A USEFUL TOOL, BUT
      SOME FACTORS MAY LIMIT ITS
      USE
-------------------------------------------------------- Chapter 0:4.4

The public-private competition program has been beneficial and the
conference report on the fiscal year 1995 defense appropriations
bill, directed DOD to reinstitute public-private competitions. 
Further, DOD efforts to privatize a greater share of depot work, as
recommended by the Commission on Roles and Missions, will be subject
to the 10 U.S.C.  2469 requirement that depot-level maintenance
workloads valued at $3 million or more not be changed to performance
by a contractor unless the change is made using competitive
procedures that allow DOD depots to participate. 

Despite an environment that calls for greater public-private
competitions, some of the factors that led the Navy to terminate its
competition program even before the Deputy Secretary formally
terminated the program throughout DOD may still limit the program's
use.  For example, depot repair and maintenance workloads continue to
decline and the Navy depots are still in a state of transitioning
workload from closing depots.  However, one of the Navy's key
points--that a large part of the remaining work must be retained in
the public sector in order to preserve critical core capabilities--is
under review.  The core concept was challenged by the May 1995 Report
of the Commission on Roles and Missions.  Furthermore, the Secretary
of Defense's August 1995 comments to the Senate Armed Services
Committee on the Commission report stated that DOD agrees with the
Commission's recommendation to outsource a significant portion of the
Department's depot maintenance work.  If this position is implemented
as DOD policy, it could significantly increase the amount of Navy
workload available for competition, since current law generally
requires such changes to be made using competitive procedures that
include public depots.  However, concerns regarding the time and cost
of conducting competitions and the fairness of the program have not
been fully resolved. 

In March 1995, DOD notified the Senate and House Appropriations
Committees that DOD did not plan to reinstate the competition program
at that time.  According to the DOD's report to the Congress, the
financial systems and databases within DOD are not capable of
supporting the determination of actual cost of specific workloads. 
Further, according to DOD officials, there was an expectation that
the DOD would be successful in its efforts to have 10 U.S.C.  2469
repealed. 

The public-private competition program could be a useful tool for
determining where depot maintenance workload can be performed more
cost effectively.  DOD initiated some actions that could improve the
public depots' ability to identify, allocate, and track depot
maintenance costs for specific competition workloads, but the
termination of the competition program in May 1994 appears to have
lessened the incentive to fully implement these programs. 
Opportunities also exist to implement other improvement initiatives. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO recommends that the Secretary of Defense (1) reinstitute
public-private competition for depot maintenance workloads as quickly
as possible; (2) develop and issue guidelines regarding the
conditions, framework, policies, procedures, and milestones for
reinstituting public-private competition; and (3) require the Defense
Contract Audit Agency to review internal controls and accounting
policies and procedures of DOD depots to assure 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 bids by DOD depots. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

DOD officials provided official oral comments on a draft of this
report that have been incorporated as appropriate.  DOD generally
concurred with the information regarding (1) limited public-private
competitions held to date, (2) benefits achieved from previous
competition programs and difficulties quantifying savings, and (3)
factors leading GAO to suggest reinstatement of public-private
competition programs.  However, they noted concerns that depot prices
may not fully reflect the cost to the government of performing
competition work, including all labor, material, and overhead. 

DOD officials generally concurred with GAO's recommendations, but
only partially concurred with the recommendation to reinstitute
competitions.  DOD officials state that a November 1994 memorandum
from the Deputy Under Secretary of Defense to the service secretaries
notified depot activities that they can compete for workloads if
certain conditions were met.  DOD also states that it will comply
with all applicable legislation when making source of repair
decisions--including the 10 U.S.C.  2469 requirement that prohibits
changing workloads valued at $3 million or more from a public depot
without using competitive procedures that include both public and
private entities.  However, DOD also cites its policy of prohibiting
public-private competitions until financial accounting systems are
improved and the Defense Finance and Accounting Service certifies
that adequate procedures are in place to identify and track all
pertinent costs.  DOD also cites its policy that only core workloads
should be performed in its depots and notes that it plans to seek
legislative relief from the 10 U.S.C.  2469 requirement. 

DOD's actions show that in practice it has not reinstituted
public-private competitions.  DOD has not conducted a public-private
competition since it terminated the program in 1994 and it has not
provided guidance to the services for reinstituting public-private
competitions.  Furthermore, GAO believes the November 1994 memorandum
provided guidance to the services regarding the conditions which DOD
depots could compete for complementary workloads of non-DOD agencies,
such as the Federal Aviation Administration's ground communications
equipment. 

GAO agrees that DOD needs to improve its financial accounting and
information systems; however, completion of these improvements should
not preclude public-private competitions.  GAO believes that
development of the Cost Comparability Handbook for preparing bids and
the availability of the Defense Contract Audit Agency to review the
current cost systems and assure that successful bids include
comparable estimates of all direct and indirect costs provide
reasonable bases for conducting such competitions. 

Regarding GAO's recommendation that the Defense Contract Audit Agency
certify the adequacy of internal controls and accounting procedures,
DOD officials stated that they agreed that certifications were
required and that they planned to have the Defense Finance and
Accounting Service perform this task.  Since the Defense Finance and
Accounting Service owns the DOD accounting systems and for other
reasons, GAO continues to believe the Defense Contract Audit Agency
would provide a more rigorous, independent assessment of the ability
of military depots to identify and track the costs of competition
work and to prepare competition bids that include all appropriate
costs. 


INTRODUCTION
============================================================ Chapter 1

The Navy historically has accomplished required depot-level
maintenance for aircraft by assigning work to Naval Aviation Depots
(NADEP) and by contracting out work to private companies.  NADEPs
mainly repair the airframes, engines, and components associated with
key aircraft such as the F-14 Tomcat and the P-3C Orion.  Private
contractors perform Navy aviation maintenance work such as the repair
of certain cargo and training aircraft, selected engines, and
designated components.  A limited amount of Navy aviation maintenance
work is performed by other service maintenance depots. 

The Naval Air Systems Command (NAVAIR), which operates NADEPs,
determines depot maintenance requirements for airframes and engines
on the basis of fleet needs and administers the airframe and engine
repair programs.  Similarly, the Naval Aviation Supply Office (ASO)
determines repair requirements for aircraft and engine components and
administers the component repair program. 

Table 1.1 shows the Navy's funding for airframe, engine, and
component depot-level maintenance in fiscal year 1994. 



                               Table 1.1
                
                   Fiscal Year 1994 Depot Maintenance
                       Funding for Major Programs

                         (Dollars in millions)


Program                 Amount   Percent    Amount   Percent     Total
--------------------  --------  --------  --------  --------  ========
Airframes               $240.9        73     $87.1        27    $328.0
Engines                  168.1        86      27.1        14     195.2
Components               625.5        61     398.1        39   1,023.6
======================================================================
Total                 $1,034.5        67    $512.3        33  $1,546.8
----------------------------------------------------------------------
In an April 12, 1994, testimony,\1 we pointed out that previous
reports of workload mix between the public and private sectors
understate the portion of funding going to the private sector.  We
noted that an actual accounting of what percentage of the depot
maintenance dollars ultimately going to the private sector, either
directly or through the purchase of repair parts or secondary
services is not readily available because of limitations in the way
the Department of Defense (DOD) collects data.  However, based on our
review of available data, we projected that more than 50 percent of
depot maintenance funding goes to the private sector. 


--------------------
\1 Depot Maintenance:  Issues in Allocating Workload Between the
Public and Private Sectors (GAO/T-NSIAD-94-161, Apr.  12, 1994). 


   PUBLIC-PRIVATE COMPETITION
---------------------------------------------------------- Chapter 1:1

Competition between the public and private sectors for depot
maintenance work initially began in fiscal year 1985 when the
Congress authorized a test program to allow public and private
shipyards to compete for the overhaul of selected ships on the basis
of cost comparisons.  The competition program's goal was to help
balance public and private industrial base concerns while achieving
economy through competition.  The Congress believed that by allowing
public and private shipyards to directly compete for work, depot
performance would be improved and depot maintenance costs would be
reduced.  Our 1994 report provided the history and status of the
Navy's ship competition program.\2 In fiscal year 1987, the Congress
authorized the Navy to expand the scope of the competition program to
include public-private competitions for depot repair of aircraft. 
The first NAVAIR work package subjected to public-private competition
was for F-14 standard depot-level maintenance. 

In December 1990, NAVAIR published plans to greatly expand its
public-private competition program to meet the savings goal of a
Defense Management Review initiative regarding aviation depot
maintenance.  The NAVAIR plan assumed that most airframe and engine
overhaul work above the minimum levels required to support the depot
industrial base would be subjected to public-private competition. 
The plan specifically included future competition for 10 different
airframes and 4 different engines.  Partly based on initial results
from the F-14 competition, the plan also assumed that the new
competitions would result in a 20-percent savings in maintenance
costs, or about $550 million by fiscal year 1995.  In fiscal year
1992, ASO began its public-private competition program for aviation
components with a goal to achieve significant maintenance cost
savings. 

Because of concerns over rapidly declining depot maintenance
requirements, the need to reduce excess depot capacity and help
preserve the private sector industrial base, NAVAIR announced a new
depot industrial strategy in April 1993 that basically eliminated
future use of public-private competition for Navy aviation
maintenance.  The new strategy called for NADEPs to perform core
maintenance work and for private contractors to perform non-core
work.  Core work was defined as the work necessary to maintain fleet
readiness throughout the life cycle of front line weapon systems. 
The strategy expected that as the public and private sectors
specialized, the public depots would only compete against private
companies when there was insufficient competition in the private
sector to ensure reasonable repair prices.  The strategy did not
specify criteria for assessing insufficient competition.  It also did
not recognize the impact of the 10 U.S.C.  2469 provision that was
enacted in October 1992 requiring that public depots be allowed to
compete for depot maintenance workloads valued at $3 million or more
before moving this work to the private sector. 

In a May 4, 1994, memorandum on depot maintenance operations policy,
the Deputy Secretary of Defense discontinued the DOD's public-private
competition program.  He cited a report of the Defense Science
Board\3 that identified several concerns with continuing the program
and recommended eliminating it.  The report noted the difficulties in
conducting fair competitions, the high costs associated with the
competition program, and the divisive effects of a policy that asks
private sector firms to aggressively compete with their major
(sometimes only) customer. 

In its report on the fiscal year 1995 DOD appropriation bill, the
conference committee disagreed with DOD's announced policy and
directed DOD to reinstitute public-private competition. 
Additionally, the conferee's directed DOD to respond to issues raised
in House and Senate Appropriations Committee reports regarding
public-private competition for depot maintenance workloads. 

In its February 1995 report to the Senate and House Appropriations
Committees, DOD stated that the financial systems and databases
within the Department are not capable of supporting the determination
of actual cost of specific workloads.  Further, DOD perceives that
competitions involving the organic depots have had disruptive and
divisive effects on the military services, particularly the depot
maintenance community.  Last, the report noted that since DOD is
moving to size its organic capabilities consistent with its core
depot maintenance policy, it is questionable whether additional
capacity and resources should be retained in order to compete.  The
report also stated that DOD is developing policies, procedures, and
automated systems that will permit actual cost accounting for
specific workloads accomplished in organic depots to overcome these
problems and concerns.  However, substantial changes are required
that will be time- consuming to complete and implement.  The report
concluded that DOD cannot reinstate public-private competition until
cost accounting and data systems are in place to conduct fair and
open competitions.  Nevertheless, the House and Senate conference
agreement on the fiscal year 1996 National Defense authorization bill
continues to support public-private competitions. 


--------------------
\2 Navy Maintenance:  Assessment of the Public and Private Shipyard
Program, (GAO/NSIAD-94-183, May 25, 1994). 

\3 Depot Maintenance Management, Defense Science Board Task Force,
Office of the Under Secretary of Defense for Acquisition and
Technology, April 1994. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:2

As requested, we reviewed the Navy's public-private competition
program for aviation depot maintenance to determine (1) the nature
and extent of past competitions, (2) whether savings resulted, (3)
prospects for and impediments to future competitions, and (4) whether
program improvements can be made. 

We performed our review at the following organizations having
management responsibility for the Navy's aviation maintenance
program:  NAVAIR, Washington, D.C.; its subordinate office, the Naval
Aviation Depot Operations Center, Patuxent River, Maryland; and the
Naval ASO, Philadelphia, Pennsylvania.  We also performed detailed
audit work at NADEPs that participated in major public- private
competitions:  the Norfolk NADEP, Norfolk, Virginia; the North Island
NADEP, San Diego, California; and Jacksonville NADEP, Jacksonville,
Florida.  At each location, we interviewed responsible agency
personnel and reviewed applicable policies, procedures, and
documents. 

To assess the program's impact on depot maintenance costs, we
attempted to compare the maintenance costs for competed work before
and after the competition.  Our cost comparisons did not include the
costs to perform the competitions or administer the awards and,
except for the F-14 competition program, adjustments were not made to
account for inflation.  Because some competitions involved new
maintenance work, our assessment was limited to those involving
maintenance work that had been performed before the competition.  Our
assessment was also limited by the small number of competitions
performed and by many factors that make historical cost comparisons
difficult such as changes in the amount of maintenance work required,
changes in total workload, changes in worker efficiency, and the
impact of inflation. 

To examine the future potential of the program, we interviewed key
managers at headquarters and NADEPS that have been involved with the
public-private competition program.  We asked the managers questions
concerning benefits from the program, barriers limiting the future
use of the program, and suggestions for improving the program. 

Our analyses used cost data reported by the NAVAIR Industrial
Financial Management System.  This standardized, automated cost
accounting system provides the Navy's official cost information for
NADEP operations.  We did not make an independent assessment of the
reliability of the data. 

The Navy considers the NADEPs' actual cost information on competition
work to be business sensitive.  Thus, this report does not disclose
the actual costs of competition work.  Instead, we disclose (1)
average maintenance costs per unit over time and (2) differences
between actual costs and amounts approved for payment by the contract
administrator. 

Our review was performed between March 1994 and October 1995 in
accordance with generally accepted government auditing standards. 


PUBLIC-PRIVATE COMPETITION FOR
NAVY AVIATION REPAIRS HAS BEEN
LIMITED
============================================================ Chapter 2

Between fiscal years 1987 and 1990, the Navy's public-private
competition program for aviation depot maintenance went from a
limited pilot program to a planned program that was to include nearly
all aircraft and engine maintenance work and result in savings of
$550 million over 6 years.  The program never matured to the level
planned.  Only about 6 percent of the Navy's aviation maintenance
workload was actually competed between the public and private
sectors. 

NAVAIR and ASO officials stated that planned program growth never
occurred for many reasons, including difficulty in conducting
public-private competitions, declining maintenance workloads, and the
need to eliminate excess depot capacity.  Further, during most years
the naval aviation competition program was active, the program was
limited to no more than 4 percent of depot maintenance funds. 


   LIMITED WORKLOAD INCLUDED IN
   PROGRAM
---------------------------------------------------------- Chapter 2:1

Relatively little of the funds spent on Navy aviation depot
maintenance has been for work competed between the public and private
sectors.  Of the $4.6 billion NAVAIR spent on aircraft and engine
maintenance since 1988, only $268 million, or about 6 percent, was
included in the public-private competition program.  In ASO, only
$196 million, or about 6 percent, of the $3.2 billion spent on
component repairs since 1992 was competed between the public and
private sectors.  However, ASO officials noted the number of
competition program candidates has increased since the program was
first used and would have continued to increase if DOD had not
terminated the competition program in 1994.  Table 2.1 compares total
depot maintenance funding to the value of the maintenance work
awarded through public-private competition. 



                               Table 2.1
                
                  Value of Public-Private Competition
                                 Awards

                         (Dollars in millions)

                                               Value of
                                                public-
                             Total depot        private
                             maintenance    competition
Program                        funding\a         awards        Percent
-------------------------  -------------  -------------  -------------
Airframes                       $2,953.4         $237.3            8.0
Engines                          1,693.7           30.3            1.8
Components                       3,168.8          196.3            6.2
======================================================================
Total                           $7,815.9         $463.9            5.9
----------------------------------------------------------------------
\a Total maintenance funding includes funding in the years that the
public-private competition program was operational for each program. 
For airframes and engines, total maintenance funding includes fiscal
years 1988 through 1994.  For components, total maintenance funding
includes fiscal years 1992 through 1994. 

Table 2.1 also shows that the percentage of competed engine workload
was significantly lower than the percentage of competed airframe and
component workloads.  NAVAIR officials stated that less engine work
was competed because the projected savings from engine competitions
were much smaller than the other programs.  The primary reason for
this is that a greater portion of engine costs is for material rather
than labor.  NAVAIR officials stated that potential competition
savings normally are greater for workloads with higher labor costs. 


   COMPETITION FOR AIRFRAME AND
   ENGINE REPAIRS
---------------------------------------------------------- Chapter 2:2

NAVAIR's public-private competition program for airframe and engine
maintenance has included six competitions, five for aircraft work and
one for engine work.  Four of the six competitions were for
maintenance work that had been routinely performed before the
competition and two competitions were primarily for new work to
upgrade aircraft. 

The public sector won four of the competitions valued at $215.9
million and the private sector won two valued at $51.7 million.  Of
the four public sector awards, three went to NADEPs and one was won
by an Air Force depot.  Table 2.2 summarizes the public-private
competitions performed by NAVAIR. 



                               Table 2.2
                
                Public-Private Competitions for Airframe
                         and Engine Maintenance

                         (Dollars in millions)


                        Year                                     Award
                      compet  Type of   Publ  Priv               value
Workload                  ed  work        ic   ate  Winner    estimate
--------------------  ------  --------  ----  ----  --------  --------
F-14A airframe          1988  Public       1     2  Public       $81.8
overhaul                      existing              NADEP

P-3C                    1988  New          1     1  Public        31.5
aircraft                                            NADEP
upgrade

SH-2F                   1990  Private      1     2  Private       22.0
airframe                      existing
overhaul

S-3A                    1990  New          1     1  Private       29.7
aircraft
upgrade

F/A-18                  1993  Public       2     2  Public        72.3
airframe                      existing              Air
rework                                              Force

J-52 engine repair      1993  Public       2     1  Public        30.3
                              existing              NADEP
----------------------------------------------------------------------
The winning bid was the lowest bid in five of the six NAVAIR
public-private competitions.  For these five competitions, the
winning bid averaged 42 percent less than the next closest bid.  In
the competition for the SH-2F helicopter overhaul, NAVAIR awarded the
contract to a private company that had bid higher than the lowest
bid.  The award was made because the company offered the best value
to the government after considering the results from a technical
evaluation of all bids. 


   COMPETITION FOR AVIATION
   COMPONENT REPAIRS
---------------------------------------------------------- Chapter 2:3

ASO's public-private competition program included 33 competitions for
the repair of aviation components.  The estimated total value of the
competed workload is about $196 million.  Before the competitions,
NADEPs performed the maintenance for 21, or 64 percent, of the
components and private companies performed the maintenance for 9, or
27 percent, of the components.  The public and private sectors both
performed maintenance on the remaining three components. 

Three of the competitions had no bids from the private sector and 19
competitions had only 1 private bidder.  Ten of the competitions had
2 bids from the private sector and 1 had 3--with only one-third of
the competitions having two or more private sector bidders.  ASO
officials noted that overhaul and repair of complex aviation
components is a market area where in many cases only one private
sector firm, generally the equipment manufacturer, is interested in
and qualified to do the work.  These officials noted that most of
ASO's contracted workload with the private sector is awarded without
competition. 

NADEPs won 14, or 42 percent, of the 33 public-private competitions
valued at $61.9 million and private companies won 17, or 52 percent,
of the competitions valued at $120.7 million.  In two, or 6 percent,
of the competitions, ASO awarded work valued at $13.7 million jointly
to a NADEP and a private company.  Each competition award was made to
the lowest bidder.  Details concerning each of the ASO public-private
competitions are included in appendix I. 


   REASONS FOR LIMITED PROGRAM
---------------------------------------------------------- Chapter 2:4

In the early years of the competition program, the Navy's
public-private program for aviation maintenance was limited to not
more than 10 percent of the non-core depot funds, or 4 percent of the
total depot funds.  There was a statutory limitation on the amount of
work that could be competed by the Army and the Air Force.  However,
because the DOD competition program was structured as a prototype
program, the Navy adhered to the limitation as well.  The Fiscal Year
1993 National Defense Authorization Act rescinded the limitation on
the amount of depot maintenance funds eligible to be spent for
workload that was awarded based on public-private competitions. 

While Navy planning documents suggested that the Navy expected to
expand the program to incorporate much of its non-core engine and
aircraft workload, NAVAIR officials stated that the planned expansion
was not realistic.  Although the Navy had been authorized to conduct
public-private competitions for its aviation workloads since 1987, in
May 1993 testimony,\1 we noted that it had completed only four
competitions-- two aircraft and two component parts.  Additionally, a
1992 Naval Audit Service report concluded that the Naval Air Systems
Command was not obtaining the full potential benefit of the
competition program and attributed this condition to several factors,
including a lack of guidance.  Although the Navy subsequently
initiated action that was expected to substantially increase the
amount of competed work, the planned expansion never occurred for the
following reasons: 

  The time and cost of performing competitions.  For example, in 1990
     NAVAIR found that preparing the statements of work and request
     for proposals necessary to conduct the competitions was much
     more difficult and time-consuming than had been expected.  As a
     result, about 2 years passed before additional workload packages
     were ready to compete.  Navy officials conceded the amount of
     time required should have been anticipated since administering a
     competition program that only involves private sector bidders
     also requires significant time for performing required technical
     and administrative tasks. 

  Defense downsizing resulted in rapidly declining maintenance
     workloads and less workload available for public-private
     competition.  Since core workload was to be maintained in Navy
     depots, there were fewer opportunities to identify above-core
     workloads that were large enough to make it worthwhile to
     undertake a competition.  Moreover, uncertainties involving
     workload shifts from closing depots made it difficult to plan
     for and accomplish additional public-private competitions. 

  Implementation of a new Navy maintenance strategy that called for
     downsizing Navy depots to core and contracting out non-core
     workload with the private sector.  The introduction of this
     strategy in the Navy basically terminated the Navy's
     public-private competition program, even though DOD did not
     cancel the program until May 1994.  Moreover, this strategy did
     not recognize the 10 U.S.C.  2469 provision requiring that
     before privatizing workloads of $3 million or more, public
     depots be allowed to compete for the work. 

ASO officials also stated that their public-private competition
program was limited for several reasons, including the relatively
late start of the program in 1992.  In addition, ASO officials agreed
with NAVAIR that performing a public-private competition was
difficult, time-consuming, and resource intensive.  As a result, few
competitions were completed before DOD's termination of the program
in 1994.  However, these officials pointed out that the same
limitations impact this activity when it attempts to conduct
competitive procedures that involve only the private sector. 
Officials noted that most of ASO's contract depot maintenance
workload is awarded without competition--generally to the original
equipment manufacturer.  Additionally, officials noted that the
number of systems competed through the public- private competition
program had been increasing at the time the Deputy Secretary of
Defense terminated the program in May 1994. 


--------------------
\1 Depot Maintenance:  Issues in Management and Restructuring to
Support a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993). 


COMPETITION PROGRAM CONSIDERED
BENEFICIAL, BUT QUANTIFYING
SAVINGS IS DIFFICULT
============================================================ Chapter 3

Steps implemented by NADEPs in response to public-private competition
have resulted in maintenance savings.  However, precisely comparing
costs and quantifying the savings is difficult because many variables
affect maintenance costs other than competition, such as changing
maintenance requirements and decreasing total workload.  Nonetheless,
available information indicates that competition generally resulted
in lower costs, particularly when inflation and workload changes are
considered. 


   COMPETITION PROGRAM HAS BEEN
   BENEFICIAL
---------------------------------------------------------- Chapter 3:1

We interviewed 14 officials at NAVAIR, ASO, the Naval Aviation Depot
Operations Center, the Norfolk NADEP, and the Jacksonville NADEP to
obtain opinions on public-private competition for aviation
maintenance.  Each official had detailed experience with the program. 

All of the officials believed that public-private competition has
been beneficial to the government and has resulted in maintenance
savings for the involved workloads.  They stated that, as
competitions were performed for maintenance work that had always been
assigned to the depots, NADEPs knew that many jobs could be
eliminated if they lost the competitions.  As a result, the program
motivated NADEPs to streamline overhead, improve work processes,
reduce labor and material requirements, and implement other
cost-saving initiatives in order to submit the lowest possible bids. 
For example, in preparing their competition bids, we were told that
NADEPs carefully evaluated the maintenance specifications to ensure
that they would only perform required repair work and eliminate
unnecessary tasks.  Each required task was closely evaluated to
ensure that the most efficient process would be used to accomplish
the work.  In addition, new staffing requirements were developed from
the bottom up to ensure that only the minimum number of people with
the correct skill levels were assigned to the repair process. 

As a result of the competition for the F-14 overhaul, the Norfolk
NADEP went from a two-shift operation to a one-shift operation and
reduced the number of personnel assigned to the program.  In this
process, Norfolk reduced the F-14 production staff by over 100
people.  Norfolk also made other changes to increase cost awareness
and control.  For example, the number of cost centers was increased
to provide better visibility of production overhead costs and cost
center managers were made responsible for controlling these costs. 
General overhead costs also were reviewed to eliminate unnecessary
expenses. 

In response to the public-private competition for the F/A-18 work,
the North Island NADEP did a detailed review of the F/A-18 repair
operations with a view to reduce costs.  One of the changes adopted
reduced labor and processing time by moving work crews to each
aircraft as work progressed instead of physically moving the aircraft
to different work stations.  Other cost saving changes included
establishing central approval authority for recommended repair tasks,
having daily progress meetings between the managers and artisans at
the site of each aircraft in the plant, and reducing component repair
time by only repairing the items needed for safe operation instead of
completely overhauling the entire component.  Although North Island
lost the F/A-18 competition to an Air Force depot, the changes were
incorporated into the NADEP's operations for core aircraft that were
not included in the competition package.  Additionally, NADEP North
Island submitted an unsolicited proposal for the F/A-18 workload
being performed at the Air Force depot and the Navy decided not to
exercise an option with the Air Force depot for the second year and
returned the workload to North Island.\1

Navy officials stated that the measures adopted by NADEPs in response
to competition caused the depots to become more businesslike, with an
increased focus on efficiency and bottom-line results.  Similarly,
public-private competition also provided an increased incentive for
private companies to minimize their bids in order to win competed
workload.  As a result, the officials stated that public-private
competition has helped to ensure that maintenance work was performed
by the activity, public or private, that provided the best value to
the government.  However, officials acknowledged that after the
public-private competition program was canceled, it no longer served
as an impetus for implementing many of the program improvements. 


--------------------
\1 The Navy's decision is discussed in our report, Depot Maintenance: 
The Navy's Decision to Stop F/A-18 Repairs at Ogden Air Logistics
Center (GAO/NSIAD-96-31, Dec.  15, 1995). 


   LIMITATIONS IN QUANTIFYING
   COMPETITION SAVINGS
---------------------------------------------------------- Chapter 3:2

Although NADEP managers believe the public-private competition
program had a positive impact on reducing depot maintenance costs,
precisely quantifying the program's impact is difficult for several
reasons.  First, because relatively little workload has been
subjected to public-private competition, only limited quantitative
information is available for analysis.  For example, only four of
NAVAIR's six competitions (F-14 airframe, SH-2F airframe, F/A-18
airframe, and J-52 engine) involved existing workload where baseline
data is available to allow a comparison of maintenance costs before
and after competition.  Further, although baseline data was available
for the ASO component competitions, the 33 competitions represent a
very small portion of the many thousands of different components
managed by ASO. 

Second, of the competitions with baseline data, work was still in
process on the J-52, F/A-18, and all ASO competition awards at the
time of our review.  Thus, only limited actual performance
information was available for analysis. 

Third, a comparison of average maintenance costs per unit before and
after competition is affected by many variables other than the
competition itself.  For example, as aircraft get older, generally
more repair work is required, which increases repair costs.  These
cost increases can be a significant factor over a 5-year period such
as that involving the F-14 competition work.  Other factors making
cost analyses difficult include decreases in total workload that
increase overhead costs per unit, the impact of inflation, possible
inconsistencies in cost accounting procedures, changes in worker
efficiency, and possible productivity losses from decisions to close
depots such as the 1993 decision to close the Norfolk NADEP. 


   MAINTENANCE COSTS AFTER
   COMPETITION
---------------------------------------------------------- Chapter 3:3

Recognizing the limitations on quantifying savings, we compared
actual average maintenance costs per unit for F-14 airframes, F/A-18
airframes, and J-52 engines before and after public-private
competition.  For SH-2F airframe maintenance, we compared the average
contract costs before and after the competition.  For the ASO
component competitions, we compared amounts paid for the work before
the competitions with the amounts included in the competition awards. 


      F-14 OVERHAUL COSTS DECLINED
-------------------------------------------------------- Chapter 3:3.1

NAVAIR's first work package subjected to public-private competition
was for F-14 standard depot-level maintenance.  This work, which
basically is an overhaul of the airframe, had always been performed
by the Norfolk and North Island NADEPs.  However, all F-14 overhauls,
both competitive and noncompetitive, were to be performed in the same
manner. 

The F-14 competition package consisted of 4 F-14 overhauls for the
first year of the award and 20 overhauls a year for 4 subsequent
years.  Although never used, the package also gave the Navy an option
to include up to five additional overhauls each year under the
competition program. 

NADEPs won the competition with a bid substantially lower than the
next closest private sector bid.  The first F-14 airframes under the
program began overhaul near the end of fiscal year 1988.  Not all
planned F-14 overhauls were included in the competition package
because the Navy wanted to ensure that the NADEPs would retain a core
capability for repairing F-14s in support of military contingencies
even if they lost the competition work.  As part of its December 1990
plan to reduce depot costs, the Navy decided to perform all F-14
overhaul work at the Norfolk NADEP.  The last F-14 overhauled under
the competition award was completed in November 1994.  From fiscal
year 1987, the year before the competition program, through fiscal
year 1994, the Norfolk and North Island NADEPs completed 83 F-14
competition overhauls and 244 noncompetition overhauls. 

After the start of the competition program, our analysis of F-14
overhauls showed that, after adjusting for inflation, the average
overhaul cost was substantially lower for the 5 years covered in the
competition package--1988 through 1992.  Before the competition in
fiscal year 1987, the average F-14 overhaul cost was $1.69 million. 
In fiscal year 1988, the average overhaul cost had dropped to $1.29
million, a decrease of about 24 percent.  Even as the workload began
to decline and aircraft aged from 1988 through 1992, the
inflation-adjusted cost remained significantly lower than the fiscal
year 1987 noncompetitive cost.  In 1993 and 1994, the number of F-14
overhauls dropped substantially and the average cost increased above
the 1987 precompetition level.  Table 3.1 summarizes our F-14
overhaul analysis.  The analysis includes both competition and
noncompetition overhauls and excludes the costs of airframe
modifications, which vary from airframe to airframe.  Costs have been
adjusted to constant fiscal year 1987 dollars to account for
inflation. 



                               Table 3.1
                
                  F-14 Overhaul Costs Before and After
                              Competition

                         (Dollars in thousands)

                                                               Percent
                                                           change from
                               Overhauls                   fiscal year
Fiscal year                  completed\a   Average cost           1987
-------------------------  -------------  -------------  -------------
1987                                  60         $1,690              0
1988                                  66          1,292            -24
1989                                  57          1,392            -18
1990                                  46          1,173            -31
1991                                  26          1,314            -22
1992                                  33          1,591             -6
1993                                  23          2,051             21
1994                                  14          2,040             21
----------------------------------------------------------------------
\a Excludes two overhauls for which final cost data was not available
at the time of our review. 

Norfolk NADEP officials attribute the decline in F-14 costs to the
cost saving measures adopted as a result of the public-private
competition program.  Although the savings were substantial, several
factors limited the amount of savings.  For example, they stated that
as the F-14s aged, several maintenance problems developed that
required more work to correct during the overhaul process than had
been previously experienced.  At the same time, many F-14 components
had to be repaired concurrently with each overhaul rather than simply
replaced because the components were not available in the Navy supply
system.  In addition, total workload assigned to the NADEP decreased
sharply after 1990 resulting in an increase in the overhead costs
charged to each overhaul.  Finally, depot officials acknowledged that
worker efficiency declined after the 1993 decision to close the
Norfolk NADEP.  As discussed in a recent report, this efficiency loss
also occurred at other closing depots.\2


--------------------
\2 Closing Maintenance Depots:  Savings, Personnel, and Workload
Redistribution Issues (GAO/NSIAD-96-29, draft report submitted to DOD
for comment Sept.  1995). 


      F/A-18 MAINTENANCE COSTS
      DECLINED
-------------------------------------------------------- Chapter 3:3.2

In 1993, NAVAIR subjected the F/A-18 depot maintenance to
public-private competition.  The competed workload, called the F/A-18
maintenance, corrosion, and paint program, is similar to an overhaul
of the airframe and is referred to as an overhaul in this report. 
The North Island NADEP always performed this work before the
competition.  Similar to the F-14 case, not all planned F/A-18
overhauls were included in the competition package because the Navy
wanted to ensure that the NADEP would retain a core capability for
repairing F/A-18s in support of military contingencies even if they
lost the competition. 

The Air Force's Ogden Air Logistics Center depot submitted the lowest
bid for the competed workload and was awarded the contract.  At the
time of our review, the Air Force depot had completed 13 of the 36
F/A-18s included in the competition award.  We analyzed the Navy's
F/A-18 costs at the North Island NADEP before and after the
competition effort.  At the time of our review in February 1995,
North Island had completed eight F/A-18s from the core workload that
were not competed using the new process improvements adopted as a
result of the competition.  Our analysis showed that the average cost
of an F/A-18 overhaul at the North Island NADEP was 37 percent lower
than the average cost before the competition. 

We are separately reporting in more detail on the Air Force's F/A-18
costs and contract performance along with the Navy's decision not to
exercise contract options with the Air Force.\3


--------------------
\3 Depot Maintenance:  The Navy's Decision to Stop F/A-18 Repairs at
Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec.  15, 1995). 


      J-52 ENGINE REPAIR COSTS
-------------------------------------------------------- Chapter 3:3.3

For the past several years, the Jacksonville NADEP has performed
required depot maintenance on the J-52 engine, which powers the A-6
aircraft.  Depending on the extent of maintenance required, the depot
repair of each J-52 engine is classified as a minor repair, a major
repair, or a major repair with conversion. 

The J-52 competition package consisted of a base period and options
for work in 4 subsequent years.  Estimated workload for the base
period included 12 minor repairs, 95 major repairs, and 60 major
repairs with conversion.  In fiscal year 1993, the year before the
competition program, Jacksonville completed 8 J-52 minor repairs, 100
J-52 major repairs, and 125 J-52 major repairs with conversion. 

The Jacksonville NADEP won the competition in July 1993 with a bid
significantly below other bids.  The first J-52 engine work under the
award began in January 1994.  Since the competition, all J-52 engines
are being repaired under terms of the competition award.  At the time
of our visit to Jacksonville in September 1994, the NADEP had
completed 28 engines consisting of 11 major repairs and 17 major
repairs with conversion. 

We compared the average costs of J-52 engine major repairs and major
repairs with conversions for fiscal year 1993 to the average costs of
engines completed thus far under the competition program.  The
analysis showed that, with inflation included, the average cost of
J-52 major repairs decreased by 2 percent and major repairs with
conversions increased 4 percent, from the averages before
competition. 

Jacksonville officials stated that factors outside of their control,
such as declining workload and problems with material availability,
caused J-52 costs to be higher than they would have been otherwise. 
They stated that without competition, J-52 costs would have been even
higher. 


      SH-2F COSTS INCREASED
-------------------------------------------------------- Chapter 3:3.4

The SH-2F public-private competition involved standard depot-level
maintenance, or overhaul, of an estimated 54 helicopter airframes
over a 4-1/2 year period.  The same private contractor that had
performed this work before the competition won the competition award
in 1990.  Under the contract prior to the competition, the contractor
had overhauled
75 SH-2F airframes.  Under the competition contract, only 14
airframes were actually overhauled because of declining workload
requirements. 

We compared the average contract cost for the 75 SH-2F airframe
overhauls before competition to the average contract cost of the 14
SH-2F airframe overhauls completed under the competition award. 
Because the cost of government-furnished material was excluded from
the prior contract but included in the competition award, we made an
adjustment using Navy estimates to make the costs comparable. 

The analysis showed that the average SH-2F airframe overhaul cost was
60 percent higher after the public-private competition.  NAVAIR
officials attributed the cost increase to inflation and to
differences in the work required by the two contracts.  The officials
stated that some additional repair work was required by the
public-private competition contract that was not required by the
previous contract. 


      ASO COMPONENT COSTS
-------------------------------------------------------- Chapter 3:3.5

All of ASO's 33 public-private competitions for component repairs
involved work that had been previously performed by either a depot, a
private contractor, or both.  We compared the average cost of each of
these component repairs before the competition to the average price
included in the competition award.  Table 3.2 summarizes the changes
in component repair costs after the public-private competition. 



                               Table 3.2
                
                Changes in Component Repair Costs After
                              Competition

                                                               Average
Type of change                 Number of     Percentage         change
in costs                           cases       of cases       in costs
-------------------------  -------------  -------------  -------------
Decrease                              25             76            -41
Increase                               8             24             37
======================================================================
Total                                 33            100            -24
----------------------------------------------------------------------
As shown in table 3.2, the average repair costs decreased in 25 of
the
33 cases after competition.  Of these 25 cases, the work continued to
be performed in the same sector after the competition in 15, or 60
percent, of the cases.  Of the remaining cases, work shifted from the
public sector to the private sector in seven cases, from the private
sector to the public sector in two cases, and from both sectors to
the private sector in one case.  For example, depot maintenance for a
generator component used on the P-3C aircraft had been performed by
the Alameda NADEP before the competition.  After the competition, the
work was shifted to a private company that had bid 70 percent less
than the average amount previously paid to the NADEP for the work. 
In another case, the Norfolk NADEP won the competition for repair of
a fire control set component used on the F-14 aircraft.  The NADEP
had bid 85 percent less than the average amount paid to a private
contractor that had performed the work before the competition. 

Table 3.2 also shows that average repair costs of competed components
increased after competition in eight cases.  For example, the repair
of a turbine stator component used in a J-52 engine was performed by
a private contractor before the competition.  During the
public-private competition for the work, the same contractor and one
NADEP submitted bids.  The contractor bid less and won the work
although the bid was 54 percent higher than the amount paid for the
work before the competition. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:4

Available data indicates that maintenance savings have generally been
achieved as a result of the Navy aviation public-private competition
program.  However, quantifying the precise savings is not possible. 
Quantitative evaluation is limited not only by the small number of
competitions that have been conducted, but also by the many variables
other than competition that affect maintenance costs.  Nonetheless,
available information indicates that competition generally resulted
in lower costs, particularly when inflation and workload changes are
considered.  Further, maintenance officials involved in performing
this work believe that the complete program was cost beneficial. 


FUTURE USE OF PUBLIC-PRIVATE
COMPETITION APPEARS ADVANTAGEOUS
============================================================ Chapter 4

Although it appears the Navy's aviation public-private competitions
resulted in benefits and DOD plans to privatize more of its depot
work, DOD is not allowing the use of public-private competitions. 
Further, the consensus of Navy officials we interviewed is that
several factors, such as declining workload and implementation of
depot closure decisions may restrict the program's potential use. 
However, a current legislative requirement directs that public-
private competition be used before depot maintenance workloads of $3
million or more can be shifted to the private sector.  Also, while
DOD maintains it cannot effectively implement public-private
competitions largely because of accounting system weaknesses, we
believe actions can be taken to work around these problems. 


   CURRENT ENVIRONMENT CALLS FOR
   PUBLIC-PRIVATE COMPETITIONS
---------------------------------------------------------- Chapter 4:1

DOD is currently formulating plans to implement the Roles and
Missions Commission's recommendation to privatize much of DOD's depot
maintenance workload.\1 The Commission report recommended that the
DOD transition to a depot maintenance system relying mostly on the
private sector.  In an August 24, 1995, letter to the Chairman of the
Senate Armed Services Committee, the Secretary of Defense stated that
DOD agrees with the Commission's recommendation to outsource a
significant portion of the DOD's depot maintenance work. 

However, current law precludes transitioning depot maintenance
workloads valued at $3 million or more to the private sector without
allowing public depots to compete.  Title 10 U.S.C.  2469 provides
that the performance of a depot-level maintenance workload that has a
threshold value of $3 million or more being performed by a
depot-level activity of DOD may not be changed to the private sector
without using competitive procedures that include both public and
private entities.  This provision is intended to assure that the work
will be awarded based upon where it can be accomplished more
cost-effectively. 

Following DOD's 1994 decision to terminate the public-private depot
competition program, the fiscal year 1995 defense appropriations
conference report directed DOD to reinstitute public-private
competition and to report its policy regarding public versus private
competition for depot maintenance workloads.  In a report responding
to the Committee's direction to reinstitute the program, DOD stated
that the financial systems and data bases within DOD are not capable
of supporting the determination of actual cost of specific workloads. 
The report concluded that DOD cannot reinstate public-private
competition until cost accounting and data systems are in place to
conduct fair and open competitions.  The Congress continued to
support the public-private competition program in considering the
fiscal year 1996 appropriation and authorization bills. 


--------------------
\1 Report of the Commission on Roles and Missions of the Armed
Forces, May 24, 1995. 


   FACTORS THAT MIGHT LIMIT THE
   FUTURE OF THE PROGRAM
---------------------------------------------------------- Chapter 4:2

We interviewed 14 officials at NAVAIR, ASO, the Naval Aviation Depot
Operations Center, the Norfolk NADEP, and the Jacksonville NADEP to
obtain opinions regarding the future use of public-private
competition for aviation maintenance.  Each official had detailed
experience with the program. 

All of the officials stated that barriers exist that limit the future
use of the competition program.  For example, the officials stated
that the NADEPs are required to maintain the ability to perform depot
repairs on front line weapon systems.  To meet this requirement, the
NADEPs must perform a defined minimum quantity of work, called core
workload, on front line weapon systems.  Thus, only workload
requirements above the level defined as core are considered
potentially available for public-private competition.  Because of
defense downsizing, funding for airframe and engine depot maintenance
decreased about 30 percent between fiscal years 1991 and 1994 and
further reductions are expected.  As depot workload decreases, the
above-core workload also decreases making less work potentially
available for competition.  However, we noted that findings of the
Report of the Commission on Roles and Missions challenged the
validity of the core concept.  Likewise, the Secretary of Defense's
comments to the Senate Armed Services Committee regarding this report
noted that DOD agrees with the Commission's recommendation to
outsource a significant portion of DOD's depot maintenance work.  The
Secretary's letter also noted that DOD believes it must retain a
limited organic core to meet essential wartime surge demands, promote
competition, and sustain institutional expertise. 

With smaller workloads to compete, officials stated that potential
savings from public-private competitions are reduced.  In addition,
the reduced potential savings may be offset by the high cost to
perform public-private competitions.  These costs include the costs
to prepare the request for proposal, evaluate proposals, make
selections, and perform contract administration.  Further, some
officials also stated that additional savings from recompeting work
previously subjected to public-private competition would be
progressively smaller.  We noted that the factors cited as costs of
competition are also relevant for competitions conducted solely among
private sector contractors; that is, in order to save money, it is
necessary to spend money. 

Another potential barrier to public-private competition for aviation
maintenance work is implementation of the Base Closure and
Realignment Commission decisions.  In 1993, decisions were made to
close three of the six Navy NADEPs.  Implementing these decisions
involves much planning, management attention, and disruption to
normal operations as maintenance capabilities and workload are
shifted from the closing depots to other facilities.  As a result,
NAVAIR and NADEP managers say they have less time to manage the
technical and administrative details of public-private competitions. 
Additional uncertainties over the future structure of DOD's aviation
maintenance depots will continue to exist until the 1995 round of
base closing decisions are implemented.  A related concern is the
potential socio-economic impacts of traditional maintenance
organizations losing all or substantial work resulting from
competitions. 

The officials interviewed noted additional concerns about the
public-private competition program.  For example, concerns exist in
both the public and private sector over the fairness of competitions
and the ability of DOD to create a level playing field.  Several
officials stated that while progress has been made in making
competitions fair, problems remain.  Also, some officials noted that
NADEPs are required to maintain certain facilities, equipment, and
skills to support national defense requirements.  This requirement,
particularly as total workload declines, increases depot overhead
costs and makes NADEPs less competitive in comparison to the private
sector. 

The officials further commented about problems with the NADEPs' cost
accounting and work control systems in a competitive environment. 
The NADEPs' systems were designed to support budgetary, accounting,
and work processing needs for Navy industrial activities where work
is directly assigned.  The systems have been certified by the Navy
comptroller as meeting DOD principles and standards.  However, the
systems were not designed to support bid preparation and contract
execution as required by the public-private competition program.  As
a result, NADEPs often use additional, costly manual efforts and
processes to prepare competition bids and comply with contract
administration procedures for competition awards. 

Further, DOD perceives that competitions involving the organic depots
have had disruptive and divisive effects on the services,
particularly the depot maintenance community.  Last, given that DOD
is moving to size its organic capabilities consistent with its core
depot maintenance policy, DOD officials stated that it is
questionable whether additional capacity and resources should be
retained in order to compete. 


   POSSIBLE IMPROVEMENTS TO THE
   PROGRAM
---------------------------------------------------------- Chapter 4:3

We asked Navy officials whether any additional changes were needed to
improve the public-private competition program.  Several officials
stated that the program could be improved if it were recognized that
the depots exist to support national defense requirements, and as
such, cannot be operated entirely like a private business.  For
example, although the government cannot contract with itself, NAVAIR
treats a competition award to a NADEP like a contract by establishing
a separate contract administration function and requiring the NADEP
to comply with private sector contract administration procedures. 
The officials interviewed stated that these procedures duplicate
normal NADEP funding and work control processes and cause the NADEP
to incur unnecessary costs in trying to execute competition awards
like a private business. 

At other times, several officials stated that NADEPs are not expected
to operate like a private business.  For example, some NADEPs have
experienced frustration when military command decisions occasionally
shift NADEP work priorities or present other demands that conflict
with the best execution of competition work from a contractual
perspective.  NADEP managers believe their primary mission is to
support the fleet.  Thus, they have tried to be responsive to what
they believe are the needs of the customer, even though this may not
be in the NADEP's best interest from a contractual perspective. 

The substantial contractual cost overrun on the F-14 overhaul
competition shows the adjustments depots must make to operate in a
competitive contractual environment.  The actual costs incurred by
the Norfolk and the North Island NADEPs in overhauling the F-14 will
exceed the amounts the contract administrator approved for payment. 
Overall the potential overrun is about $59 million, or an average of
about $700,000 for each of the 84 overhauls.  Under precompetitive,
noncontractual conditions the depot is paid a fixed price for the
work performed, including work that is in addition to the original
work order.  Under the competitive environment, the NADEPs sometimes
performed work that was over and above the contractual requirement
without always getting approval from the contract administrator and
thereby incurring overruns.  A private contractor does not get paid
for any work or costs that are over and above the contract
requirements unless approved by the contract administrator. 

To address these concerns and reduce administration costs for
competitions awarded to NADEPs, several officials suggested that
NAVAIR (1) to the extent possible establish fixed prices for competed
work based on the bid amounts, (2) execute the work like normal
workload using existing control systems with no separate contract
administration, (3) use independent auditors to validate depot
performance after the work is completed, and (4) assess penalties for
cost overruns to make the depot less competitive on future
competitions. 

If no changes are made in the administration of competition awards to
NADEPs, the officials interviewed suggested other improvements to the
competition program.  For example, several officials stated that
NAVAIR maximize use of fixed prices to reduce the time and cost of
negotiations for over and above work.  Several officials also
suggested that NAVAIR develop systems that will aid NADEPs in
developing bid proposals and in interfacing with the contract
administrator. 


      OTHER ACTIONS TAKEN AND
      NEEDED TO IMPROVE
      PUBLIC-PRIVATE COMPETITIONS
      AND ENSURE THEIR FAIRNESS
-------------------------------------------------------- Chapter 4:3.1

DOD has already taken numerous actions to enhance the credibility and
fairness of public-private competitions when the Deputy Secretary of
Defense canceled the competition program in May 1994.  In addition,
there are other actions that can be taken to further enhance the
fairness and credibility of future competitions, should DOD
reinstitute the program. 

Many of the actions that DOD took to improve public-private
competitions were summarized in our September 30, 1993,
correspondence to the Chairman, Subcommittee on Defense, Senate
Committee on Appropriations.\2 For example, we noted that actions
taken to improve the process included (1) the development of a Cost
Comparability Handbook that, among other things, identified
adjustments that should be made to public depots' bids as a result of
differences in the military services' accounting systems and (2) the
Defense Contract Audit Agency certifying that successful bids
included comparable estimates of all direct and indirect costs. 
However, we noted that after DOD's termination of the public-private
competition program, depot officials lost the incentive to continue
with some of the improvement initiatives previously undertaken. 

Our 1993 correspondence also identified additional actions that could
be taken to further improve the competition program.  These included
(1) ensuring that the Defense Contract Audit Agency auditors receive
the technical support they need to properly evaluate depots' bids and
(2) requiring the Defense Contract Audit Agency to conduct an
incurred cost audit to assess whether depots are able to perform work
for the amount they bid. 

Defense Contract Audit Agency personnel pointed out that some of the
same accounting system and bid proposal problems they identified
during accounting system and bid proposal audits were identified
during their reviews of private contractors, particularly when
contractors have not previously dealt with DOD contract
administration practices and procedures.  These officials noted that
when multiple competition programs required follow-on reviews at a
given depot, depot bids improved as public depots had to respond to
the Defense Contract Audit Agency accounting system audits, which
identified problems that had to be resolved and as depot officials
became more familiar with required policies and procedures. 

Recognizing the need for improved internal controls throughout the
DOD depot system, the Under Secretary of Defense (Logistics) has
established an Integrated Process Team to assist in framing DOD's
efforts to implement required improvements in financial management
and internal controls.  Coopers and Lybrand is working with one depot
in each of the four military services to improve internal controls
and accounting procedures.  Finally, at our suggestion, the Commander
of the Ogden Air Force depot implemented a broad-based financial
management improvement program, including the development of a Depot
Maintenance Business Area Policies and Procedures Handbook that
states policy in support of maintenance activities and gives
procedures and tasks necessary to implement the policy.  This
handbook was developed as a team effort crossing many functional
lines and levels of management and production.  It addresses
financial management responsibility, labor, material, internal
controls, and other key areas.  Further, Defense Contract Audit
Agency officials reviewed drafts of the handbook and worked with
depot officials to refine the processes and procedures and conduct
follow-up reviews of the program's implementation.  Other Air Force
depot officials have expressed an interest in implementing a similar
program.  These initiatives suggest the potential for generating the
kind of high-level visibility and commitment that are needed to
assure that required improvements are implemented. 


--------------------
\2 Depot Maintenance (GAO/NSIAD-93-292R, Sept.  30, 1993). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:4

While the Congress has continued to support the use of public-
private competition, DOD has terminated the public-private
competition program.  We share the Deputy Secretary of Defense's
concerns about the reliability of DOD's depot maintenance data and
the adequacy of its depot maintenance management information systems. 
However, we believe these deficiencies are not insurmountable and
that many of them can be resolved at the local level if the depot
commanders and senior leadership are committed to do so.  Further, if
individual depots demonstrate their ability to maintain required
internal control and accounting procedures and practices, they should
be allowed to compete with the private sector for depot maintenance
work.  We continue to support the use of public-private competition,
where appropriate, as a resource allocation tool for assuring that
depot maintenance requirements can be met cost-effectively. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 4:5

We recommend that the Secretary of Defense (1) reinstitute public-
private competition as a tool for allocating depot maintenance
workload as quickly as possible; (2) develop and issue implementing
guidelines regarding the conditions, framework, policies, procedures,
and milestones for reinstating public-private competition programs;
and (3) require the Director, Defense Contract Audit Agency, to
certify internal controls and accounting policies and procedures of
DOD depots to assure 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 bids by DOD
depots. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 4:6

DOD officials provided official oral comments.  They generally agreed
with our presentation of facts and the analysis, which led us to
conclude that the use of public-private competitions provided an
effective tool for allocating depot maintenance workloads between the
public and private sectors.  However, they noted their concern over
the fairness issue, which centers on concerns that depot prices may
not reflect the cost to the government of performing competition
work, including all labor, material and overhead.  Further, they also
only partially concurred with our recommendation regarding the
reinstatement of the public-private competition program.  DOD
officials stated that a November 1994 Office of the Secretary of
Defense memorandum implementing section 335 of the Fiscal Year 1995
National Defense Authorization Act reinstituted public-private
competitions and noted the conditions under which military depots
could bid on competition work.  However, the officials stated that
current DOD policy prohibits depots from competing until improvements
to their financial accounting systems have been completed and the
Defense Finance and Accounting service certifies that adequate
procedures are in place to identify and track all pertinent costs. 
These officials also told us that DOD intends to request
congressional relief from the provisions of
10 U.S.C.  2469 that requires competitive procedures when changing
workloads valued at $3 million or more from public depots to the
private sector. 

In practice the competition program has not been reinstituted.  No
public-private competitions have been held since the program was
terminated in 1994 and depot officials in each of the services told
us they have been precluded from bidding on DOD workloads and have
dismantled their competition offices.  Depot officials also noted
that DOD has not issued any guidance to clarify the specific
conditions, policies, or procedures to follow in any future
public-private competitions. 

Regarding DOD's statement that its November 1994 memorandum
reinstituted public-private competitions, it does not appear that
memorandum was directed at such competitions.  The memorandum
provided guidance regarding depot maintenance workloads of other
federal agencies (such as Federal Aviation Administration ground
communications equipment or Coast Guard boats) that might be made
available for repair in military depots. 

DOD officials concurred with our recommendation to have the public
depots complete an assessment of internal controls and accounting
procedures; however, they said they believe the Defense Finance and
Accounting Service should perform the evaluations.  We continue to
believe that the Defense Contract Audit Agency should be assigned
responsibility for the review because this agency (1) is routinely
involved in similar evaluations of private sector contractors and is
uniquely prepared to undertake this responsibility, (2) was assigned
this responsibility during the latter phases of DOD's prior
competition program, (3) accomplished accounting system audits and
bid proposal evaluations for all military depots competing for
public-private competition work, and (4) already identified areas
where improvements were needed and, in one case, successfully worked
with a depot in developing and implementing required improvements. 
Further, since the Defense Finance and Accounting Service owns the
DOD accounting systems, the Defense Contract Audit Agency would
provide an independent assessment of the ability of military depots
to identify and track the cost of competition work.  We continue to
believe that the Defense Contract Audit Agency is the preferred
agency for accomplishing these tasks. 


PUBLIC-PRIVATE COMPETITIONS FOR
AVIATION COMPONENT REPAIRS
=========================================================== Appendix I

                         (Dollars in millions)


                              Year  Type                        Contra
                          complete  of      Publ  Priv              ct
Workload                         d  work      ic   ate  Winner   value
------------------------  --------  ------  ----  ----  ------  ------
A-4 components                1993  Public     2     1  Public    $7.7
A-4 position                  1993  Public     2     1  Public     0.2
 indicator
Air generator                 1993  Public     2     1  Public     0.8
AJB-3B                        1994  Public     1     1  Privat     4.0
                                                             e
AN/ARR-78                     1993  Privat     1     1  Privat     3.1
                                     e                       e
QH-7                          1993  Public     1     2  Privat     0.7
                                                             e
ARC-159                       1994  Privat     1     2  Privat     4.3
                                     e                       e
ARC-182                       1993  Privat     1     2  Public     0.4
                                     e
ARC-182                       1993  Privat     1     2  Privat     0.1
                                     e                       e
ARC-182                       1993  Privat     1     2  Privat     4.2
                                     e                       e
ASN-50                        1993  Public     1     2  Public     6.8
AWG-15 fire control set       1993  Privat     1     1  Public     2.5
                                     e
Displacement                  1994  Public     1     3  Privat     1.6
 gyro                                                        e
F-14 canopy                   1994  Public     1     1  Public    10.8
F-404 exhaust                 1994  Public     1     2  Privat    35.3
 frame                                                       e
F/A-18 auxiliary power        1992  Both       1     1  Privat     7.5
 unit                                                        e
Gyro ASN-50/73                1994  Public     1     2  Privat     2.5
                                                             e
ID-1329                       1993  Public     1     2    Both     4.0
J-52 turbine stator           1993  Privat     1     1  Privat     1.0
                                     e                       e
LAU-7 launcher                1994  Both       2     1    Both     9.7
LAU-7 power supply            1994  Public     1     1  Public     7.2
P-3 alternator                1993  Public     1     2  Privat     3.8
 generators                                                  e
P-3 gyro                      1993  Public     1     1  Public     3.9
S-3 actuator                  1993  Public     1     1  Public     1.0
S-3 compress cylinder         1994  Public     1     0  Public     0.3
S-3B constant speed           1993  Public     3     0  Public     9.8
 drive
SH-60 ARC-174                 1994  Both       1     1  Privat     0.2
                                                             e
T-56 engine starter           1994  Public     1     0  Public     0.5
T-58 engine                   1994  Public     1     1  Public     9.9
T-700 fuel control            1994  Public     0     1  Privat     3.1
                                                             e
T-700 fuel control            1994  Privat     0     1  Privat     2.1
                                     e                       e
T-700 fuel control            1994  Privat     0     1  Privat     0.4
                                     e                       e
T-700 rotor assembly          1994  Public     0     1  Privat    46.7
                                                             e
----------------------------------------------------------------------



RELATED GAO REPORTS AND
TESTIMONIES
=========================================================== Appendix 1

Closing Maintenance Depots:  Savings, Personnel, and Workload
Redistribution Issues (GAO/NSIAD-96-29).  (In draft as of Dec.  15,
1995.)

Depot Maintenance:  The Navy's Decision to Stop F/A-18 Repairs at
Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec.  15, 1995). 

Depot Maintenance (GAO/NSIAD-94-242R, July 28, 1994). 

Navy Maintenance:  Assessment of the Public and Private Shipyard
Competition Program (GAO/NSIAD-94-184, May 25, 1994). 

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

Depot Maintenance (GAO/NSIAD-93-292R, Sept.  30, 1993). 

Depot Maintenance:  Issues in Management and Restructuring to Support
a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993). 

Navy Maintenance:  Public/Private Competition for F-14 Aircraft
Maintenance (GAO/NSIAD-92-143, May 20, 1992). 

Navy Maintenance:  Competing Vessel Overhauls and Repairs Between

Public and Private Shipyards (GAO/NSIAD-88-109, Mar.  25, 1988). 
*** End of document. ***