State Department: Options for Reducing Overseas Housing and Furniture
Costs (Letter Report, 07/31/98, GAO/NSIAD-98-128).

GAO reviewed the practices of the private sector and other foreign
governments to determine whether those practices offer the potential to
reduce overseas housing costs and provide quality services for
Department of State and other agencies.

GAO noted that: (1) its examination of practices in the private sector
suggests that several options may exist to reduce State's overseas
residential housing and furniture costs, including: (a) using relocation
companies and similar service providers to search for housing and
negotiate leases to reduce in-house support costs, and shift some
property preparation and related maintenance expenses to landlords; (b)
providing employees with housing allowances to select their own homes
rather than managing and maintaining a housing pool of government leases
and preassigning residences; and (c) shipping employees' household
effects and/or acquiring furniture overseas as an option to operating an
extensive government-buying and inventory program; (2) GAO's analysis of
State's processes shows that State has not based its current approach to
providing overseas residential housing and furniture on a comparative
cost analysis; (3) based on GAO's analysis of selected posts, State
could potentially reduce its costs by adopting some or all of these
practices; (4) GAO's analysis of practices in Brussels and London showed
that State's internal housing support costs are several hundred thousand
dollars greater than the costs that would be incurred if homefinding
services were outsourced to a relocation company; (5) such practices are
potentially applicable for a large number of annual relocations that
State and other agencies conduct; (6) expanding housing allowance
programs consistent with practices of the private sector could also
result in recurring savings, primarily by minimizing in-house support
requirements; (7) private-sector practices indicate that two options
should be considered for reducing costs associated with residential
furniture; (8) State could ship employees' household effects as its
primary means of furnishing residences; (9) actual shipping data show
that State often ships nearly the same amount of employees' household
effects to posts offering government furniture as it does to its
unfurnished posts; (10) thus, an expansion in the number of unfurnished
posts could occur with relatively minor increases in shipping costs for
household effects and avoid the often significant procurement, storage,
and handling costs associated with the government furniture program;
(11) the second option is to give overseas posts the alternative of
acquiring furniture on the local market; and (12) cost savings would
potentially result from lower furniture prices and reduced shipping,
inland transportation, and inventory costs.

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

 REPORTNUM:  NSIAD-98-128
     TITLE:  State Department: Options for Reducing Overseas Housing and 
             Furniture Costs
      DATE:  07/31/98
   SUBJECT:  Americans employed abroad
             Cost control
             Employee transfers
             Federal agency reorganization
             Freight transportation operations
             Household goods
             Relocation allowances
             Transportation costs
             Privatization
IDENTIFIER:  Dept. of State Living Quarters Allowance Program
             Dept. of State International Cooperative Administrative 
             Support Services System
             
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Cover
================================================================ COVER


Report to Congressional Committees

July 1998

STATE DEPARTMENT - OPTIONS FOR
REDUCING OVERSEAS HOUSING AND
FURNITURE COSTS

GAO/NSIAD-98-128

State Department

(711259)


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

  FBO - Office of Foreign Buildings Operations
  ICASS - International Cooperative Administrative Support Services
  LQA - Living Quarters Allowance

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


B-279560

July 31, 1998

Congressional Committees: 

The Department of State and other U.S.  government agencies operating
overseas spend over $200 million annually to provide leased housing
and furniture for their employees and their families.  In light of
the continuing need to control the costs of overseas operations, we
undertook a review to determine if any practices of the private
sector and other foreign governments offer the potential to reduce
costs and provide quality services for State and other agencies. 
This work supports State's efforts to reengineer and improve its
operations, and to develop innovative approaches to reducing costs
and providing quality services overseas. 


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

State is authorized to provide leased housing to its employees and
those of other agencies overseas.  Several thousand State and other
U.S.  agency employees are assigned to new duty stations at more than
250 diplomatic posts each year.  The process is complicated.  The
majority of employee housing overseas is provided by State through
short-term lease arrangements with local landlords.  Other employees
either receive housing allowances and enter into private lease
arrangements or occupy government-owned housing.  Most of State's
overseas posts are "furnished posts," meaning that government-owned
residential furniture is provided for State employees and those of
other agencies participating in posts' furniture programs.  Furniture
is typically procured in the United States and shipped to overseas
posts.  However, at about 25 posts, employees' household effects are
shipped to meet most furniture requirements.  Employees are also
authorized limited shipments of their household effects to furnished
posts. 

The residential leased housing and furniture process is also costly. 
For example, State's direct costs include about $120 million annually
for residential leases and about $36 million annually to ship
employees' household effects.  In addition, State and other agencies
spent about $12 million in fiscal year 1996 to purchase government
residential furniture and according to 1997 data, spent more than $10
million annually to rent warehouses used to store residential
furniture and other government property.  The support costs
associated with the process are more difficult to quantify, but
according to State documents they total well over $30 million
annually for a variety of overseas support and administrative
functions.  In addition, State and other agencies maintain more than
300 overseas warehouses to store furniture and other items, and the
value of State's furniture inventory alone has been estimated to
exceed $100 million.  While State is reengineering its logistics
process to reduce costs and eliminate inefficiencies, it has not
initiated actions to streamline its employee relocation process. 
However, State and other agencies operating overseas are now
implementing the new International Cooperative Administrative Support
Services (ICASS) system, which offers for the first time the
opportunity for agencies to document the total costs of their current
support processes and develop less costly and innovative
alternatives. 

Many U.S.  companies also have substantial investments in overseas
operations and spend considerable sums to support their overseas
expatriate employees.  According to a study by a private consulting
firm, corporations have about 250,000 U.S.-based expatriate employees
overseas.  Similar to State, these companies each share a common goal
of providing employees and their families with safe and suitable
housing at a reasonable price.  To improve the efficiency of their
operations and reduce costs, U.S.  corporations are focusing on core
business processes and increasingly contracting with outside service
providers to help employees find a residence and typically use one
instead of many commercial forwarders to ship employees' household
effects. 


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

Our examination of practices in the private sector suggests that
several options may exist to reduce State's overseas residential
housing and furniture costs.  The adoption of one or more of these
practices at a number of State's overseas posts could potentially
save millions of dollars.  Specific practices that we found prevalent
and that State should consider adopting or expanding include

  -- using relocation companies and similar service providers to
     search for housing and negotiate leases to reduce in-house
     support costs, and shift some property preparation and related
     maintenance expenses to landlords;

  -- providing employees with housing allowances to select their own
     homes rather than managing and maintaining a housing pool of
     government leases and preassigning residences; and

  -- shipping employees' household effects and/or acquiring furniture
     overseas as an alternative to operating an extensive
     government-buying and inventory program. 

Our analysis of State's processes shows that State has not based its
current approach to providing overseas residential housing and
furniture on a comparative cost analysis.  Based on our analysis of
selected posts, State could potentially reduce its costs by adopting
some or all of these practices.  For example, our analysis of
practices in Brussels and London showed that State's internal housing
support costs are several hundred thousand dollars greater than the
costs that would be incurred if homefinding services were outsourced
to a relocation company.  Such practices are potentially applicable
for a large number of the annual relocations that State and other
agencies conduct.  Over one-half of the total U.S.  direct hires
living overseas are located in 24 posts serviced by at least one
relocation company.  Expanding housing allowance programs consistent
with practices of the private sector could also result in recurring
savings, primarily by minimizing in-house support requirements. 
Employees would also be given a greater choice in selecting their
residences. 

Private sector practices indicate that two options should be
considered for reducing costs associated with residential furniture. 
First, State could ship employees' household effects as its primary
means of furnishing residences.  Actual shipping data shows that
State often ships nearly the same amount of employees' household
effects to posts offering government furniture as it does to its
unfurnished posts.  Thus, an expansion in the number of unfurnished
posts could occur with relatively minor increases in shipping costs
for household effects and avoid the often significant procurement,
storage, and handling costs associated with the government-furniture
program.  The second option is to give overseas posts the alternative
of acquiring furniture on the local market.  State officials at
several posts, including New Delhi, San Jose, Panama City, and
Bogota, believed that cost savings could be realized through local
purchases of furniture without sacrificing quality.  Cost savings
would potentially result from lower furniture prices and reduced
shipping, inland transportation, and inventory costs. 


   STATE'S PROCESSES ARE
   CUMBERSOME AND INEFFICIENT
------------------------------------------------------------ Letter :3

State's leased housing and furniture processes are very cumbersome
and inefficient and result in unnecessarily high costs due to a
combination of factors.  State performs most housing support
functions in-house involving several layers of management and
oversight to monitor and enforce compliance with housing standards
and numerous regulations.  The system for furnishing housing is
equally complicated and costly because of its long-cycle times,
several handoffs, substantial inventories, and large numbers of
in-house support staff requirements.  State and other agencies
operate different housing and furniture program configurations,
further adding to the complexity of the process.  These
configurations include over 150 posts largely operating government
short-term residential leasing and furniture programs, about 28 posts
having one or more State employees under private leased arrangements,
and about 25 unfurnished posts.  In addition, significant variations
occur at the same post.  For example, some agencies elect not to
provide government-owned furniture. 


      RESIDENTIAL LEASING REQUIRES
      SUBSTANTIAL IN-HOUSE SUPPORT
---------------------------------------------------------- Letter :3.1

The key objective of State's program for leasing overseas residences
is to provide safe and secure housing adequate to meet the personal
and professional needs of employees at a cost most advantageous to
the U.S.  government.  State's approach to providing residential
housing focuses on performing nearly all management and support
functions in-house and minimizes the degree of responsibility placed
on relocating employees for finding a residence.  It is costly, staff
and time intensive, and we found that employees are sometimes not
satisfied with their residences. 

Residential leasing is a multi-step process.  Typically, in-house
staff search the rental market; negotiate and sign leases; and
arrange for and provide inspections, property preparation and
maintenance, and minor repairs.  Each residence must meet State's
worldwide space standards, which are based on the employee's position
and family size, and on location.  Most overseas posts also have an
inter-agency housing board, comprised of representatives from the
different agencies at post.  Housing boards are chartered to control
rental costs and ensure fair and equitable treatment of employees in
applying housing standards and in assigning housing to employees.  We
found that boards meet regularly throughout the year to assign
housing, inspect and approve residential units, and address appeals
from dissatisfied employees.  In addition, according to State
Department procedures, each post must receive the Office of Foreign
Buildings Operation's (FBO) approval to lease any property that
exceeds applicable space standards or any property costing more than
$25,000 annually in rent, with few exceptions.\1 In fiscal year 1996,
FBO processed more than 900 requests for cost waivers, approving most
of them.  The system typically requires a separate telegram from the
post for each waiver request, a review of each request by FBO, and a
telegram from FBO notifying the post of its decision.  Figure 1
illustrates State's government leasing process at a typical overseas
post. 

   Figure 1:  Typical Steps in
   State's Government Leasing
   Process

   (See figure in printed
   edition.)

Note:  Embassy London is used as an example. 

We estimate that hundreds of staff and related resources are
dedicated to this program both overseas and at State headquarters. 
At a substantial portion of State's posts, personnel spend varying
amounts of their workday managing and supporting the short-term lease
program.  These personnel can include the embassy's administrative
officer, general services officer,\2 assistant general services
officer, housing specialists, maintenance and work order personnel,
procurement staff, and financial management staff.  In addition, most
posts maintain housing boards with as many as 13 voting members and
other nonvoting members who often spend several hours each month
addressing housing issues.  In posts that provide government
furniture for leased housing, additional support costs for
warehousing and inventory management services are incurred. 

The support costs associated with this type of program can be very
significant at certain posts.  For example, at the mission in
Brussels and the embassy in London, we obtained information on the
number of people who spent all or part of their time on residential
short-term lease activities.  We multiplied the time each person
spent by their compensation level to arrive at the salary cost
allocated to short-term lease activities.  Post reports in Brussels
showed that 42 staff (10 housing and 32 maintenance) spent a portion
of their time managing or supporting 250 short-term leases in fiscal
year 1996.  Salary expenses that were allocated for short-term lease
activities were estimated to be about $1.4 million, which averaged
about $5,400 per lease.  In London, at least 13 staff (4 housing and
9 maintenance) spent varying amounts of time on the embassy's
short-term lease program; their salary expenses for these activities
were $375,000, or about $3,150 per lease for 119 units.\3 FBO's
review and approval of proposed leases exceeding cost ceilings and/or
space standards has resulted in additional indirect costs to the
government.  These costs result from the staff requirements in FBO to
review and approve waiver requests and costs associated with cabling
posts on waiver decisions.  In addition, the indirect costs of
interagency housing boards were also significant, amounting to more
than $90,000 annually in Brussels, $70,000 in London, and at least
several thousand dollars in Caracas.  In addition to being costly, a
recent audit report by State's Inspector General found that
interagency housing boards typically have not been effective in
controlling property rental costs.  Housing boards did not use
comparative cost as a factor in selecting residences, as called for
in housing policy. 

The interagency housing boards have also been criticized for
frequently not selecting housing that meets employees' expectations. 
A cornerstone of State's program is its policy of preassignment,
which states that to the maximum extent possible, interagency housing
boards should assign all new employees to appropriate housing prior
to their arrival at post.  This is intended to avoid temporary
housing costs and employee morale problems that foreign service
officers often attribute to the inconvenience and difficulties
associated with finding suitable residences in foreign countries. 
Despite State's substantial investment in resources to locate
suitable housing, we identified instances in which the employees were
not satisfied with the housing selected for them.  For example, at
the post in Brussels, employees have frequently been dissatisfied
with the residences selected for them by the interagency housing
board.  The board processed appeals for almost one-fourth (54) of the
new residences for employees from January 1994 through December 1996. 
The reasons for the appeals varied but most were approved.  In some
cases, where employees were dissatisfied with their apartments, the
housing board placed the employees in other available housing units
but continued to pay rent for the unoccupied units.  FBO officials
believed that such actions represented poor post management and did
not necessarily reflect a weakness in the short-term lease program. 
We note, however, that other posts have encountered related
difficulties, suggesting a broader-based problem in the process.  For
example, the preassignment component of the process has been linked
to problems at other posts, including several Latin American and
Caribbean countries.  A 1996 State document notes that some posts in
that region have allowed employees to search for housing themselves
and repeatedly appeal housing board decisions. 


--------------------
\1 State Department requirements are more restrictive than the law,
22 U.S.C.  section 301, which requires high-level approval of leases
in excess of $50,000 annually. 

\2 For example, the General Services Officer in Caracas estimated
that as much as 60 percent of his time was spent supporting/managing
the short-term lease program. 

\3 The total support costs can be much greater if other cost elements
are considered.  For example, State's new ICASS system identifies
several additional costs that should be included in determining the
leasing and building expense support costs that should be shared by
agencies at overseas posts.  In addition to salaries and
compensation, such ICASS cost elements include motor vehicle charges,
electricity, and miscellaneous supplies.  If all ICASS and property
preparation costs are included, the annual support budget for the
short-term residential leasing program in London totals over $700,000
for fiscal year 1998. 


      LIVING QUARTERS ALLOWANCE
---------------------------------------------------------- Letter :3.2

In a limited number of locations, State operates a Living Quarters
Allowance (LQA) program that allows employees to choose their
residence.\4 It provides an allowance to employees based on rank and
family size, and employees typically work with real estate agents to
locate and select a residence.  The employee is also responsible for
signing the lease.  As a result, posts having LQA programs often
incur relatively minor support costs for short-term residential
leasing.  For example, three posts currently under LQA (Geneva,
Guatemala City, and Quito) have a combined ICASS budget of about
$150,000 for leasing and short-term residential leasing building
operation expense support in fiscal year 1998, compared to the over
$1.5 million allocated for the post in Brussels. 

State has substantially reduced its participation in the LQA program
over the years even though its own internal analysis has on occasion
indicated that allowance programs could have substantial benefits,
including being less costly than government leasing programs.\5 The
reduction has occurred due to several factors, including complaints
from employees about the adequacy of allowance rates and the
inconveniences associated with homefinding and temporary lodging in
foreign countries.  According to 1996 data, State had one or more
employees under LQA at 28 posts; employees of other agencies,
principally the Department of Defense, were under LQA arrangements at
a significantly larger number of posts. 


--------------------
\4 LQA programs often need only one person for in-house support
requirements--for example, the U.S.  mission in Geneva, Switzerland,
which has about 70 employees under LQA, needs only one foreign
national employee to support the program. 

\5 For example, analysis by FBO in the late 1980s identified several
pros and cons associated with government leasing and allowances. 
However, the analysis noted that one statement could be made with
confidence--in terms of cost-effectiveness, LQA with minimal in-house
support was demonstrably cheaper than full service government
leasing.  Analysis by the U.S.  embassy in Singapore in 1994
concluded that LQA programs could save over $3,000 annually per
rental unit at that post.  Cost reductions were projected to result
primarily from reduced in-house staff requirements and maintenance
costs.  More recently, post officers participating in State's Bureau
of Inter-American Affair's 1997 Administrative Officers' Conference
concluded that allowance programs could benefit the Department by
giving employees a choice in their residence and reducing staff time
and costs associated with maintenance. 


      PROCESS FOR PROVIDING
      RESIDENTIAL FURNITURE IS
      CUMBERSOME AND COSTLY
---------------------------------------------------------- Letter :3.3

State's process for meeting residential furniture requirements is
cumbersome and costly because of its numerous handoffs and long-cycle
times.  State meets most of its requirements by buying furniture in
the United States under a central contract and shipping and storing
it overseas until needed.  Furniture for some posts is first shipped
to a State facility in Antwerp, Belgium, where it is distributed to
the receiving posts.  The value of State's inventory has been
estimated to exceed $100 million.  State and other agencies also
spend about $10 million annually to lease over 200 warehouses
worldwide to store furniture and other property.  In Brussels alone,
warehouse lease, utilities, and personnel costs for fiscal year 1996
totaled about $628,000, or $2,500 per furnished unit.  In addition,
State and other agencies own 95 warehouses worldwide and have spent
over $35 million to purchase or build these warehouses.  State also
ships up to 7,200 pounds of employees' household effects to
supplement the furniture provided by the government, or allows
employees to ship up to 18,000 pounds to unfurnished posts. 

Little attempt has been made to determine the total cost of the
furniture process or the cost-effectiveness of providing a furnished
or unfurnished post.  In addition, furniture decisions at individual
posts may not reflect all cost considerations because funding
responsibilities for program segments are spread among various State
bureaus.\6 State documents indicate that decisions in the early 1990s
concerning requests by certain posts to change their designation from
partial to full-shipment posts were based largely on the availability
of funds in one Bureau to fund shipping costs.  Analysis by State was
insufficient to determine if such changes would result in overall
savings or additional costs for the Department. 

Figure 2 illustrates State's process for meeting overseas furniture
requirements. 

   Figure 2:  State's Process for
   Providing Residential Furniture
   at Posts

   (See figure in printed
   edition.)


--------------------
\6 For example, according to a State budget official, State's
regional bureaus allocate funds to the posts for property
preparation, procurement and shipping of residential furniture, and
inland transportation of furniture.  On the other hand, funding of
household effects shipments is the responsibility of the Bureau of
Personnel. 


   PRACTICES OF OTHER
   ORGANIZATIONS COULD SAVE MONEY
   AND PROVIDE QUALITY SERVICE
------------------------------------------------------------ Letter :4

We studied the practices of six major U.S.  companies and three other
governments that have large international operations to learn how
they provided housing for their overseas employees and met
residential furniture requirements.  We chose these organizations
because they operate in many of the same locations as State, support
large numbers of overseas employees, and have adopted various best
practices to improve expatriate management.  For example, Ford Motor
Company is represented in 50 locations throughout Europe, Asia, the
Middle East, Latin America, and Africa and supports about 2,500
expatriate employees.  Citibank supports more than 1,000 expatriates,
including 136 in London, its top overseas destination, and 101
employees in Singapore.  The majority of the expatriates employed by
most of these companies are professional, mid-level employees. 

We found that the prevalent private sector process for providing
housing and furniture includes contracting with a relocation company
or other service provider to identify available housing from which
the employees can make a choice, giving an allowance to the employee
to pay for rent, and using a contractor to ship employees' household
effects to furnish the residence.\7 Another option the British
government uses is acquiring furniture overseas.  The primary
benefits of these practices, if applied to State, include minimizing
investments in support staff, reducing administrative and warehousing
requirements, giving employees a choice in selecting their residence,
and/or procuring furniture from sources offering the best price and
quickest delivery time.  The potential applicability of one or more
of these practices to State is widespread and would not diminish
State's ability to provide secure housing or high-quality furniture. 

Figure 3 shows the housing and furnishing processes typically used by
the private sector companies whose practices we reviewed. 

   Figure 3:  Typical Housing and
   Furnishing Processes Used by
   Private Sector Companies

   (See figure in printed
   edition.)

Note:  Some companies allow a homefinding visit prior to relocation. 
Private sector companies in London were used as examples. 


--------------------
\7 Outsourcing is a practice that private sector companies are using
with greater frequency.  A study of 30 corporations by a private
consulting firm noted that companies are basing the decisions to
outsource on a comparison of (1) the price of the outside service
with the cost of developing the same level of expertise and
administering the program internally, (2) the level of service that
can be provided, and (3) the value that can be added by performing
the service in-house versus through an outside source. 


      OUTSOURCING HOMEFINDING AND
      RELATED SERVICES
---------------------------------------------------------- Letter :4.1

During our benchmarking exercise, we found that many leading U.S. 
companies and at least one other government embassy have outsourced
homefinding and destination services to professional international
relocation companies.  Relocation companies assist the employee in
finding suitable housing and handle all settling-in activities.\8

Our benchmarking efforts indicate the private sector's use of
relocation companies has provided quality services that meet
employees' needs for secure, safe, suitable, and affordable housing. 
Our analysis at two posts indicates that using a relocation company
could result in potential savings of several hundred thousand dollars
annually.  Further, the increasing availability of relocation
services throughout the world makes outsourcing homefinding services
an option that State should consider. 

Corporate officials cited two key benefits of outsourcing the
homefinding function--increased employee satisfaction and reduced
in-house support requirements.  High levels of employee satisfaction
were generally attributed to (1) working with a local relocation
specialist that handles all aspects of finding and negotiating a
lease and (2) being able to select a residence that meets their
needs.  According to relocation officials in Brussels and London,
expatriate employees typically identify a suitable residence during a
2 or 3 day home search.  In addition, outsourcing allows private
sector firms to minimize the number of in-house personnel needed to
support operations.  For example, in Brussels, Citibank needed only
one employee\9 working part-time to support the expatriate program
for approximately 80 employees, whereas State employed 42 staff to
provide housing and maintenance support for about 250 employees.  In
London,
2 Texaco employees provided housing support for about 150 expatriate
employees, whereas State required 13 staff to provide housing and
maintenance support for about 119 employees.  Also in London, the
Australian High Commission used a relocation company to locate
housing for its 55 foreign service employees, which reduced its
in-house support requirements to one person, part-time.  Furthermore,
most property preparation and related maintenance expenses were
typically handled by landlords for leases signed either by
individuals or by the corporation. 

We conducted a cost analysis of the U.S.  mission's housing office in
Brussels and the embassy in London to determine if relocation company
services could be a cost-attractive option for posts having large
housing support components.  Our analysis indicated that using a
relocation company could potentially yield significant savings at
those posts.  For example, in fiscal year 1996, the mission in
Brussels employed 10 staff, full or part-time, to provide short-term
lease housing support for about 30 new or lease renewals annually.\10
Based on cost data provided by the post, the annual salary expenses
attributable to short-term leasing for these staff were estimated to
total about $700,000.  If property preparation and other support
costs\11 are included, the embassy's direct and indirect support
costs for short-term residential leases exceed $1.5 million annually. 
In contrast, a private sector company outsourcing its homefinding
function would incur salary expenses and the relocation company's
fees, which we estimate would total between $207,000 and $277,000
depending on the mix of new leases and renewals.\12 Thus, if all
costs are weighed, outsourcing homefinding services could result in a
substantial savings, particularly if outsourcing resulted in leased
properties having lower rents and reduced property preparation and
maintenance-related costs. 

In London, the U.S.  embassy identified four persons having full or
part-time responsibility for the short-term residential leasing
program.  According to the post, their estimated salary costs for
short-term leased duties totaled about $200,000 annually, and if all
ICASS support costs and property preparation costs are considered,
the total costs for London's residential short-term lease support are
a little over $700,000 annually.  The embassy is responsible for
placing about 40 new employees in short-term residences each year. 
Using a relocation company to find new properties or assist employees
to move into existing leases would cost between $118,000 and
$151,000.  If the embassy continued its current policy of
preassigning employee housing selected from a pool of properties
identified by a relocation company, data provided by the post
indicated that the embassy could potentially save money, depending on
the prices it negotiates and the services that would be included. 

In weighing the pros and cons of using relocation companies, State
noted that there are costs that probably would not be reduced by
outsourcing.  These include, for example, the costs of security
surveys and security upgrades.  Additional costs could also be
generated by outsourcing, including temporary living costs for
employees waiting to move into their residences.  For example, post
officials in London estimated that temporary living costs could
increase by as much as $264,000 annually, if employees were allowed
to choose their residences instead of having them preassigned.  Even
if such costs were incurred, the outsourcing option could still be
attractive because of the large indirect support and property
preparation/maintenance costs incurred in the current embassy
program.  Further, several options exist to reduce temporary living
costs, including the use of temporary apartments or homefinding
visits prior to relocating. 

We also note from our benchmarking that the relocation industry is
growing and becoming more competitive, offering a wide range of
services at increasingly competitive prices.  Industry data shows
that relocation companies have operations in most developed and many
developing countries, especially throughout Europe.  Some companies
are affiliated with U.S.-based firms that are used domestically by
U.S.  government agencies including the General Services
Administration, the Department of Defense, and the Federal Bureau of
Investigation.  One relocation company, together with its affiliates,
operates in 250 cities worldwide.  At least one relocation company is
located in 24 of the 25 countries having the largest U.S.  overseas
presence--comprising over 50 percent of total overseas State and
other agency assignments.  Officials at most of the companies we
visited overseas said that multiple relocation companies are
available in their respective cities offering quality services at
competitive prices. 


--------------------
\8 Relocation companies' approach to finding suitable housing for
employees include prescreening and identifying viable units,
escorting the employee to visit potential housing,
negotiating/signing the lease, connecting utilities, and ensuring
maintenance needs are met.  The relocation company works directly
with the employees to identify their specific housing needs and
offers a number of choices within a specified cost range established
by the company. 

\9 Neither of the two private sector companies we visited in Brussels
or London provided property preparation staff but instead relied on
the landlord to make minor repairs or contracted with local vendors
for services as needed. 

\10 State officials said the 250 government leases are awarded for 9
years in Brussels; thus, the housing office must negotiate or renew
approximately 30 leases annually. 

\11 State's new ICASS system includes property preparation and
related maintenance costs in the costs of short-term residential
leases. 

\12 According to officials of one relocation company, their firm
could provide several services for about $2,250 per unit, including
housing search, lease negotiation, and supervision of legal
requirements. 


      HOUSING ALLOWANCES
---------------------------------------------------------- Letter :4.2

Greater use of housing allowances is another private sector practice
that could substantially reduce State's overseas in-house support
requirements and maintenance costs, and give employees a choice in
selecting their residences.  Private sector employees are provided a
housing allowance to cover rental costs based on local market
conditions, family size, and position.  Allowances permit companies
to manage and control costs with minimal oversight.  Other
governments sometimes use allowances--for example, the Australian
High Commission's employees received housing allowances in London. 
State also has the LQA program that provides participating employees
a set amount based on rank and family size, lets employees choose
their residence, and operates with minimal in-house support
requirements.  As previously mentioned, State has chosen to
substantially reduce its participation in the LQA program over the
years due to employees' complaints about the inconveniences of
finding a residence in foreign countries and temporarily staying in
hotels, and the difficulties encountered in finding suitable
residences within LQA rates.  State officials said that it is hard to
put a price tag on the costs associated with the inconvenience factor
but believed that it could be substantial. 

We believe that the private sector practices we identified could help
mitigate some of the problems that employees of State and other
government agencies have with the LQA program and encourage State to
expand it as a cost-effective option to government leasing at certain
posts.  Specifically, using relocation companies (a process not used
in the LQA program) to help employees find housing and negotiate
leases could ease the burden associated with negotiating leases in
foreign countries and also offer employees a greater choice in
selecting their residence.  As already noted, use of relocation
companies can be less costly to the government at posts having large
in-house support structures.  Also, providing rental or
government-owned furniture until the employee's household effects
arrive would allow employees to move directly into their residences
upon arrival.  We were told that the U.S.  embassy in Madrid provides
State's employees with furniture welcome kits enabling them to move
quickly into their residences.  In London, Texaco provided rental
furniture enabling employees to move into their residences almost
immediately upon arrival, which has resulted in improved employee
morale, improved productivity, and has also reduced or eliminated
expensive temporary living costs.  According to a Texaco official,
about one-third of incoming employees move directly into their
residence shortly after their arrival.  In cases where household
effects have not arrived, rental furniture or company-owned
"temporary packages" of basic furniture and accessories are provided. 
The official noted that the $2,200 rental cost of furnishing a
two-bedroom apartment for 1 month is still less expensive than
temporary living expenses that could easily exceed $9,000 for a
month. 

In addition, a furniture rental company in the United Kingdom with a
client base of over 250 companies told us that temporary rentals have
become more popular and that many U.  S.  companies are utilizing
this service to reduce temporary living expenses.  We also found that
one of the major U.S.  companies operating in Caracas provided
employees the option of temporarily using company furniture in their
residences until their household effects arrived.  According to a
company official, this furniture was procured locally in Caracas and
stored/managed by the same local firm used to handle household
effects shipments upon arrival in Caracas.  In addition, this company
also has two apartments that it uses for temporary employee housing. 

It is difficult to determine the validity of concerns expressed by
State's employees that its housing allowances are frequently
insufficient to cover the costs of suitable housing at overseas
posts.  If allowances are insufficient to cover the costs of suitable
housing, expansion of LQA programs based on any model could be
problematic for State.  We note State's documents indicate that LQA
rates are insensitive to local market conditions and are intended to
ensure that 80 percent of all employees in the program are fully
covered for LQA expenses.\13 Furthermore, State employees complain
that they frequently must pay out-of-pocket for items under LQA
because the system has a "lag problem" \14 and that the system's
paperwork requirements are time-consuming and cumbersome.  In
comparison, State's government leased housing program places little
administrative burden on the employee and pays all rental costs. 
With these factors in mind, it seems obvious that posts would choose
a system that pays 100 percent of housing costs (government leasing)
instead of a system that pays only 80 percent (LQA). 

State allowance office officials agreed that LQA's limited coverage
policy has encouraged posts to adopt government leasing programs even
though State's additional support costs are substantial.  However,
they believed that the Department of Defense, which has the largest
number of overseas civilian employees under the LQA system, would not
support 100 percent coverage of rental costs due to the additional
costs that would be incurred by the Department of Defense.  They
acknowledged that State and the Department of Defense have not (1)
examined all costs involved in overseas housing or attempted to
determine if an increase in the coverage of LQA rates would be
advantageous or disadvantageous to the government as a whole or (2)
determined if State should ensure its government lease ceilings are
consistent with LQA rates to control costs and ensure equity among
all civilian government employees at overseas posts.  FBO officials
expressed concern about pegging government lease ceilings to current
LQA rates, stating that the quality of overseas embassy housing could
suffer.  FBO officials were supportive of an allowance option that
allowed rates to be set by a monthly survey or mechanism such as that
used by the private sector. 

According to the officials at some of the companies we used as
benchmarks, they have often purchased their housing allowance rates
from private sources\15 that reflect local living conditions and
rental costs.  According to one of the commercial vendors providing
these rates, data on housing costs is currently available quarterly
for more than 150 countries, including State's largest 25 posts, as
well as, many remote African and East Asian countries.  State may
want to determine if using the rates available from these commercial
sources would enable it to have rates more sensitive to local market
conditions.  The purchase of these rates could also possibly help
State address some of the deficiencies it has identified in the
current LQA system.  According to State documents, these
inefficiencies include labor intensive reconciliation requirements. 


--------------------
\13 LQA rates are intended to substantially cover expenditures for
rent, electricity, fuel, water, certain taxes levied by the local
government, and agents' fees required by law to be paid to the
landlord. 

\14 According to FBO officials, State's current allowances tend to
lag behind real costs because of administrative delays in processing
changes in allowance rates. 

\15 Allowance rates are developed by human resource staff in country
or procured from commercial sources. 


      USE OF EMPLOYEES' HOUSEHOLD
      EFFECTS
---------------------------------------------------------- Letter :4.3

Private sector companies typically expect their employees to furnish
their overseas residences with their own household effects. 
Employees' furniture is typically shipped door-to-door\16 by
contractors directly from the United States to the overseas residence
at the company's expense.  The advantages of this process include
minimal in-house support requirements and little or no investments in
warehouses and furniture inventories.  State maintains, however, that
expanding the use of household effects to furnish residences would
often result in unacceptable increases in its transportation and
temporary living costs.  Our analysis shows that shipping costs would
not increase as much as State officials estimate and that there are
opportunities to offset or reduce temporary living expenses.  If
these factors are considered, the expanded use of employees'
household effects may be an efficient and cost-effective alternative
to State's practice of buying, storing, and managing large
inventories of residential furniture supplemented by making
additional shipments of employee-owned furniture. 

We reviewed transportation documents and other information provided
by State to determine if there were significant differences between
furnished and unfurnished posts in the amount of household effects
shipped.  Our analysis showed that the average weight of household
effects shipped overseas is often about the same regardless of
whether the post provides furniture or not.  A State transportation
document listing shipments to more than 50 posts in 1996 showed
relatively small differences between partial and full-shipment posts
in the average amounts of household effects shipped.  For example,
the average weight of shipments of household effects to Brussels (a
furnished post) was about 4,800 pounds compared with an average
weight of about 5,100 pounds for Rome (an unfurnished post).  For
those posts included in the document, a comparison of seven furnished
and unfurnished posts having the largest number of shipments showed
that the average weight of shipments varied by only about 1,100
pounds. 

We also identified options, such as providing temporary furniture or
using rental furniture until an employees' household effects arrive,
that may offset or reduce temporary living costs.  For example, the
embassy in Paris, a mostly unfurnished post, was able to accommodate
about 80 incoming employees in 1997 by using temporary furniture in
their assigned quarters or by using government-owned and furnished
transient quarters, according to the general services officer.  He
said that the post did not pay any temporary quarters allowances in
fiscal year 1997.  In addition, representatives of a furniture rental
company in London told us their company offers a basic set of
temporary furniture and private sector companies are taking advantage
of this option. 


--------------------
\16 In our October 1997 report on State's transfer process State
Department:  Using Best Practices to Relocate Employees Could Reduce
Costs and Improve Services (GAO/NSIAD-98-19), we concluded that the
Department could operate much more efficiently and save money by
adopting the door-to-door method for shipping overseas that is used
by the private sector.  Unlike State's current process for shipping
household effects that involves substantial personnel and other
indirect support costs, the door-to-door approach used by the private
sector entails contracting with only one commercial freight forwarder
for all transportation and related services to relocate an employee's
household effects. 


      LOCAL PROCUREMENT OF
      FURNITURE
---------------------------------------------------------- Letter :4.4

If State decides to continue to procure furniture, purchasing
furniture locally or regionally may be a cost-effective option at
certain locations.  Local or regional procurement would be consistent
with the practices of some of the organizations we studied and with
State's own reengineering efforts.  Moreover, officials at a number
of posts told us they can purchase comparable furniture from local
and regional sources and save money on transportation and warehousing
costs. 

Some foreign governments and private sector companies purchase
residential furniture either locally or regionally.  For example,
according to British officials, the British government operates four
central procurement units to purchase residential furniture.  The
unit in Washington, D.C., purchases furniture from local markets for
British posts in the Americas; the Hong Kong unit, for posts in
Australia and Asia; New Delhi, for that region; and London, for all
other locations.  British officials stated that in the past, their
government had purchased furniture in the United Kingdom for
distribution worldwide.  However, about 10 years ago, the British
government initiated a study of procurement options to develop ways
to increase efficiency and established regional procurement units as
a result.  Other governments purchasing furniture locally include the
Australian High Commission in New Delhi and the Canadians in
Canberra, according to U.S.  officials at those locations.  In
addition, officials of Proctor & Gamble in Caracas and Texaco in
London told us their companies purchase furniture locally for use in
company-owned temporary quarters. 

In 1995, State established a Logistics Reengineering Project team to
study how State procured its goods and services and to recommend
improvements.  The team, which met with a number of private sector
companies to identify "best practices" applicable to State, concluded
that State's procurement system was characterized by long-cycle
times, high overhead costs, redundancy, and substantial inventory. 
To address these inefficiencies, the team designed a new system
offering customers more efficient alternatives for obtaining goods
and services.  Direct local purchase, where feasible, was a key
option identified by the team.  However, residential furniture
purchases were not included in the team's study because State's
residential furniture contract requires that, with few exceptions,
all furniture be procured under the contract. 

We previously raised the issue of central procurement of furniture
with State in June 1997.\17 State responded that the program had
served it well for decades, was efficient, and was supported by "Buy
America" Act principles.  State officials have defended the
domestically procured furniture as important in helping the
Department meet its representational responsibilities.  However,
State did not cite any studies or analyses to support its conclusion
that the furniture program is cost-effective or necessary for
representational purposes.  In addition, a State procurement official
told us the Buy America Act does not generally apply to the purchase
of furniture for use outside the United States. 

Officials at a number of State's overseas posts told us that
purchasing residential furniture locally or regionally would result
in significant savings in direct procurement, transportation, and
warehouse costs.  For example, post officials in Costa Rica told us
that they have explored the feasibility of local procurement, largely
because of the long lead-time associated with contract purchases
(typically 5 months or longer) and the significant number of missing
items in recent shipments.  They found that high-quality U.S. 
furniture can be purchased locally from a company operating furniture
showrooms in San Jose.  According to the officials, the company could
deliver and set up furniture in a residence within 6 weeks. 
Furthermore, the purchase price of the furniture available through
this company is typically lower than that offered under the contract. 
For example, according to post officials, a living room set would
have cost $4,296 under the contract compared with $2,850 if purchased
locally, representing a potential cost savings of 30 percent or more. 
In addition, their analyses showed that the post could buy four sets
of furniture for the price it pays for three sets under the General
Services Administration contract.  They believed that the savings in
containerization and shipping costs make the local purchase option
even more attractive to the post in San Jose.  Additional savings
would also accrue from reduced inventories of furniture in the
embassy warehouse.  Post officials also noted that the U.S. 
furniture distributor operating in San Jose has similar showrooms in
other countries.  We contacted the company's headquarters and
confirmed that similar operations exist in Guatemala, Colombia,
Honduras, Venezuela, and Turkey.  Other examples include the
following: 

  -- Officials at posts in Bogota and Panama City said significant
     opportunities exist to procure furniture locally or regionally
     and that such procurement would result in significant savings
     and better service. 

  -- A post official in New Delhi estimated that he could save about
     $13,000 on a complete set of furniture for a three-bedroom house
     with living room if purchased locally. 

  -- Officials at the embassy in London told us they are exploring
     alternatives to the furniture contract and they are interested
     in pilot-testing options including local purchase. 

Some posts already purchase residential furniture locally or
regionally, further demonstrating the feasibility of expanding this
option.  For example, posts purchase items that are not provided
under the contract or because contract items are unsuitable.  The
U.S.  embassy in Hong Kong purchases furniture locally because
furniture built to U.S.  specifications is too large for Hong Kong
residences.  Because of the high costs associated with moving
furniture inland from the port of destination to the embassy, and the
availability of good quality/comparably priced local furniture, the
Drug Enforcement Administration in Bogota recently decided to
purchase five households of furniture from a local manufacturer for
approximately $55,000.  According to Drug Enforcement Administration
officials, they could purchase only three or four households of
furniture for that price under State's contract, once inland
transportation charges were added. 


--------------------
\17 State Department:  Provision of Residential Furniture
Inconsistent With Best Practices (GAO/NSIAD-97-173R, June 10, 1997). 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

State's residential leasing and furniture processes are costly and,
in some cases, do not result in a high level of customer
satisfaction.  Unlike the private sector companies we analyzed, State
has not systematically weighed the potential cost advantages of using
services available from private sector relocation companies or
developing a sound housing allowance program.  It also has not
conducted valid, systematic analysis of its furniture program and its
costs.  We believe that State could save money and provide quality
services to its employees and those of other agencies by adopting the
practices we identified in the private sector. 

Savings could be realized several ways.  Using relocation and other
service providers could reduce overall costs at posts having
substantial in-house support costs.  The data provided by the U.S. 
mission in Brussels and the U.S.  embassy in London showed that the
posts' internal compensation-related housing support costs for
short-term leases were higher than the estimated costs of services
available from relocation companies.  If other support costs
typically shared among agencies operating overseas are included in
the posts' cost calculations, these two posts alone could potentially
save several hundred thousand dollars annually by outsourcing
relocation services instead of performing them in-house.  Other posts
having costly in-house support infrastructures could potentially do
the same. 

Expanding the use of housing allowances could eliminate most in-house
support requirements at individual posts, reduce or eliminate
maintenance costs, and produce overall savings.  For example, it was
projected in 1994 that a housing allowance program in Singapore could
reduce annual housing costs to the U.S.  government by as much as
$3,000 per lease compared to government short-term leases. 
Considering that State and other agencies have over 8,000 short-term
leases worldwide, and shared property preparation and
maintenance-related support costs of about $30 million annually, the
potential savings through the use of allowances are significant. 
Shipping employees' household effects as an alternative to providing
government furniture could produce significant savings at posts
having large furniture inventories, substantial staff resources
devoted to support warehouse operations, and large warehouse rents. 
Although the savings are difficult to quantify, the potential appears
large because State spends millions annually to purchase, store, and
maintain residential furniture.  Buying residential furniture locally
could save up to 30 percent or more of the purchase, shipping, and
packing price of government furniture at some posts.  Furniture
inventories, which have been estimated to exceed $100 million, could
also be reduced. 

Clearly, some practices may have applicability only at certain posts,
due to regional or country conditions.  Thus, pilot projects should
be used to establish the applicability of the practices at a broad
selection of appropriate posts.  In addition, each practice would
have off-setting costs that would have to be carefully considered in
the pilots before decisions are made.  For example, the expanded use
of housing allowances would have to consider how to minimize
temporary housing costs, through the use of temporary furniture,
rental furniture, or other means. 


   RECOMMENDATION
------------------------------------------------------------ Letter :6

We recommend that the Secretary of State direct the Under Secretary
for Management to establish a pilot program for testing the practices
we identified for leasing and furnishing of overseas residences.  The
pilot should be coordinated through the ICASS framework at the pilot
posts, which provides a mechanism to fully document direct and
indirect costs of alternatives and involve all key agencies operating
at posts.  Options that should be in the pilot include outsourcing
homefinding, expanding the use of housing allowances, increasing the
use of employees' household effects, and procuring furniture locally. 
The Under Secretary should designate specific posts for the pilot. 
We believe the pilot should initially focus on 6-8 posts.  We believe
good candidates include Brussels, London, Paris, the Hague,
Singapore, Bangkok, San Jose, Nassau and Mexico City.  If the pilot
tests confirm the cost advantages of one or more of the practices,
the Under Secretary should also establish an implementation plan for
a larger roll-out of these practices. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In written comments on a draft of this report, State noted our report
raised legitimate questions about possible savings in its housing
program and that it plans to establish a task force to study whether
modifications to the housing program are warranted.  State did not
agree with our conclusion that expanding shipments of employee-owned
furniture or purchasing residential furniture locally are potential
alternatives to the current system.  State cautioned that its housing
program is not a "one size fits all" activity and believed that the
results of the pilot program would be prejudiced because the posts we
suggested for consideration in the pilot are in well-developed
countries.  State said that its test would include a greater variety
of posts from countries at other levels of the economic scale and
geographic diversity.  It also noted its test would include other
costs and benefits of suggested alternatives.  State identified
several cost elements that it believed would not be reduced by
outsourcing, such as market analyses and staff time and expenses
related to participation in the housing boards, or would lead to
additional costs, such as the overhead associated with private
relocation services and the additional costs for shipping employees'
household effects.  State also said that changing to private
relocation firms would not reduce the overhead State incurs in
managing congressionally-mandated housing standards and regulations
without a change in statute. 

We are encouraged that State plans to establish a task force to study
its housing practices.  However, we are concerned that this proposed
effort, if undertaken as described in State's comments, will preclude
a full examination of the merits of applying proven business
practices to key operations.  Specifically, State does not plan to
review its furniture program, and its comments regarding the proposed
housing study suggest that State (1) may select test locations that
will not afford reasonable opportunities to explore the options, (2)
has predetermined that some cost elements cannot be reduced and that
other costs will be incurred, and (3) does not plan to explore
options other than outsourcing that we believe offer cost savings
potential.  Our analysis clearly shows that opportunities exist to
maximize efficiencies and cost savings in both the housing and
furniture programs through the application of outsourcing and other
business practices.  Therefore, we urge State to expand the scope of
its study to include the review of all the practices we recommended
for pilot testing in both the housing and furniture programs. 

We fully recognize that a "one size fits all" program is not
practical, given the varying conditions in individual countries and
cities.  We also recognize that alternative service providers may not
be available at some locations.  The posts we identified for pilot
testing were chosen because our analysis indicated that those posts
had the potential to adopt some or all of the practices we identified
and reduce costs.  Our post selection profile included large and
high-support cost operations, the existence of a relatively
sophisticated business and diplomatic community, post receptivity to
options and problems with existing programs, and the availability of
alternative service providers.  In selecting posts for its tests,
State needs to consider these factors while ensuring that the
location, scope, and cost of post operations warrant consideration
for change. 

We agree that State should consider all relevant cost elements in
testing alternatives but it needs to ensure that cost analyses are
not geared to maintaining the status quo.  For example, it is
premature to assume that outsourcing would not reduce costs
associated with State's market analysis programs, management of
housing profiles, and housing board operations.  State needs to
determine if part or all of these support functions could be handled
by a relocation company to lower costs and/or free up post staff to
do higher priority work.  Further, fees charged by outside service
providers are negotiable, offering opportunities for posts to
exercise their leverage in obtaining prices.  The cost elements
discussed in our report represent the major costs that must be
considered in examining the merits of specific options.  For example,
in Brussels and London, the prices typically charged by relocation
companies for housing services were significantly less than the
direct and indirect costs incurred by those posts for short-term
lease support. 

Outsourcing, however, is not the only option that State should
consider.  Our analysis of the furniture program and State's own data
demonstrate that local procurement could save substantial amounts of
money and reduce delivery time at a number of posts.  In addition,
our report indicates that State employees at more than 50 posts are
shipping almost the same amount of household effects regardless of
whether the post is furnished or unfurnished.  Therefore, the
additional shipping costs incurred in shipping employees' household
effects would likely be minimal, resulting in little or no need for a
government-furniture program at some locations. 

State is also incorrect in its assertion that statutory change is
needed to reduce the management overhead associated with the housing
program.  According to State's regulations, the Congress mandated the
development of an interagency housing policy in 1979 to ensure
uniformity and equity in the program.  Although there is general
language in the conference report accompanying the 1979 Foreign
Assistance Appropriations Act indicating that real property should be
acquired under a consolidated master plan through a single government
agency, that language does not legally require any particular housing
policy.  Therefore, State can address inefficiencies in its housing
process without statutory change. 

State needs a management commitment to cost-based decision-making and
a willingness to change.  Cost-based decisions can help State improve
its operations, reduce support requirements, and free up resources to
focus on core diplomatic programs and activities.  The options we
proposed are based on modern business practices that strive to
achieve these objectives.  Therefore, we believe that our
recommendation for State to fully consider all of our identified
options in the process of conducting its tests remain valid.  Lastly,
State expressed concern that our recommendation presupposed the
outcome of any test by calling for a proposed implementation schedule
for a larger rollout of the suggested practices.  We clarified the
recommendation to reflect that a schedule should be prepared if the
test confirms the advantages of the suggested practices.  State's
comments and our analyses are detailed in appendix I. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

In recognition of the need for cost-effectiveness in undertaking
foreign affairs activities, we identified potential efficiencies and
cost savings in State's residential leasing and furniture processes. 
To map State's processes, we met with State officials and reviewed
pertinent documents.  We conducted fieldwork at embassies/missions in
Brussels, Belgium; London, England; and Caracas, Venezuela--these
cities each have substantial embassy/mission operations and large
numbers of expatriates employed by U.S.  firms.  We also contacted
embassy officials at several additional posts and interviewed
officials at State's headquarters in Washington, D.C., including key
officials responsible for benchmarking with private and public sector
organizations and designing State's new logistics system.  We
developed flow charts of generic housing and furniture processes and
developed related cost data to the extent practical. 

To identify best practices in the private sector and other
organizations, we researched literature and consulted with various
experts in the area, including representatives of the Employee
Relocation Council--a professional organization of several thousand
corporations and other organizations concerned with issues affecting
the relocation of employees and their families overseas.  To compare
private sector and State processes, we visited six companies in the
United States and three field offices for those companies in Brussels
and London, and one company in Caracas to develop detailed
information on these processes.  We selected these companies based on
the number of employees transferred overseas, the typical time frames
for an overseas assignment, and actions taken to control costs of
international operations.  We also met with several international
destination service and furniture rental companies to document the
scope of their services and costs. 

We visited the embassies of the United Kingdom and Canada in
Washington, D.C., and met with the British Foreign and Commonwealth
Office, London Procurement Group; and the Office of the Australian
High Commission in London to obtain an understanding of how other
national governments provide housing and furniture for their
employees at overseas locations.  In addition, we developed
information on the U.S.  Agency for International Development's
housing and furniture processes.  We did not independently verify any
cost savings or performance benefits data provided by the companies
and other organizations we visited or those identified in other
studies. 

We conducted our review from May 1997 to March 1998 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Administrator, U.S. 
Agency for International Development; the Director of the U.S. 
Information Agency; the Director, Office of Management and Budget;
and interested congressional committees.  We will also make copies
available to others upon request. 

Please contact me at (202) 512-4128 if you or any of your staff have
any questions concerning this report.  The major contributors to this
report are listed in appendix II. 

Benjamin F.  Nelson, Director
International Relations and Trade Issues

List of Congressional Committees

The Honorable Jesse A.  Helms
Chairman
The Honorable Joseph R.  Biden, Jr.
Ranking Minority Member
Committee on Foreign Relations
United States Senate

The Honorable Judd Gregg
Chairman
The Honorable Ernest F.  Hollings
Ranking Minority Member
Subcommittee on Commerce, Justice, State,
 the Judiciary and Related Agencies
Committee on Appropriations
United States Senate

The Honorable Benjamin A.  Gilman
Chairman
The Honorable Lee H.  Hamilton
Ranking Minority Member
Committee on International Relations
House of Representatives

The Honorable Harold Rogers
Chairman
The Honorable Alan B.  Mollohan
Ranking Minority Member
Subcommittee on Commerce, Justice, State,
 and the Judiciary
Committee on Appropriations
House of Representatives




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
STATE
============================================================== Letter 



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Now on p.  2. 

Now on p.  3. 

Now on pp.  3-5. 

Now on p.  6. 

Now on p.  7. 

Now on p.  7. 



(See figure in printed edition.)

Now on p.  7. 

Now on p.  8. 

Now on p.  8. 

Now on p.  12. 



(See figure in printed edition.)

Now on p.  13. 



(See figure in printed edition.)

Now on p.  21. 

Now on p.  21. 

Now on p.  21. 

Now on p.  23. 

Now on p.  22. 

Now on p.  23. 


The following are GAO's comments on the Department of State's letter
dated June 1, 1998. 

GAO COMMENTS

1.  The estimate that millions of dollars could be saved is based on
our analyses of several cost indicators.  As noted in the report, one
indicator is the large numbers of American and foreign national
personnel directly involved in managing and supporting posts'
residential housing and furniture programs.  The costs to support one
American direct hire overseas have been estimated to exceed $200,000
annually, and the costs of foreign nationals average at least
$18,500.  Very few positions worldwide would have to be eliminated or
assigned to higher priority tasks to achieve substantial savings
and/or efficiencies.  Another example is the potential use of LQA--as
noted in our report, data generated by the post in Singapore
indicated that savings of as $3,000 per lease could result from using
LQA in place of government leasing.  Considering that State and other
agencies have over 8,000 short-term leases worldwide, the potential
for significant cost savings is apparent. 

2.  We do not agree that a statutory change is needed to reduce the
overhead associated with the State's housing program.  With the
exception of the current legislative requirement for approval of
leases in excess of $50,000 per year, inefficiencies in State's
overseas processes can be addressed without changes in statutory
requirements, primarily by looking for ways to minimize posts'
in-house support requirements.  State's housing allowance programs
already demonstrate that posts' support requirements can be minimized
while still complying with housing standards.  Another alternative is
to contract with relocation companies to measure properties for
compliance with space standards, conduct market surveys, and visit
potential properties to determine the compatibility with State's
policies.  According to State's regulations, Congress mandated the
development of an interagency housing policy in 1979 to ensure
uniformity and equity in the program.  Although there is general
language in the conference report accompanying the 1979 Foreign
Assistance Appropriations Act indicating that real property should be
acquired under a consolidated master plan through a single government
agency, the language does not legally require any particular housing
policy. 

3.  We believe that high cost operations that include substantial
overhead and numerous administrative steps deserve special attention
for reengineering and consideration of alternative practices.  For
example, we noted in our draft report that the internal support
budget for the short-term leasing program in Brussels totaled more
than $1.5 million in fiscal year 1998, compared to about $150,000 in
total for leasing and short-term residential leasing building
operation expense support at three posts currently under LQA (Geneva,
Guatemala City, and Quito). 

4.  The staff, compensation, and time data were supplied by the posts
in London and Brussels based on their budget and personnel records. 

5.  We recognize that the current process may offer several benefits. 
We note that the options we presented may also offer benefits,
including some of the same benefits that currently exist.  For
example, it is our understanding that relocation companies can
negotiate the same favorable lease terms on behalf of the U.S. 
government as State currently receives.  As stated in our report, we
reviewed whether any private sector practices offer the potential to
reduce costs and provide quality services overseas to State.  Since
we identified several practices with such potential, we would expect
that State, in its study of the housing program, would examine and
compare specific costs and benefits of the practices we identified
and its current process.  Until State performs this analysis, it is
difficult to project the cost-effectiveness of State's current
system. 

6.  We found that State has little comprehensive cost data to support
its decisions concerning whether to use government short-term leasing
or LQA for housing programs.  However, ICASS data shows that
government leasing programs often have substantially higher support
costs compared to LQA programs--an important issue to be considered. 
Because the support cost differences are potentially so great, State
should include an examination of housing allowance options in its
housing studies.  If State determines that the costs of other
factors--such as the need for employees to stay home for maintenance
and look for residences--outweigh the advantages of reduced in-house
administrative support costs, then these costs should be fully
documented as part of the decision-making process. 

7.  We agree various shipping cost factors need to be considered in a
comparative analysis.  However, State appears to miss the point by
making the comment that to compare shipping household effects with
contract furniture, the cost of shipping contract furniture under
current practices should be added to the costs of household effects. 
This would skew the results of any analyses designed to determine if
it is more cost-effective to ship employee household effects or
provide government furniture.  Analyses must first be based on
State's actual shipping data, which we found to show that employees
often ship the same weight of household effects whether a post is
furnished or unfurnished.  For example, State provided us actual
shipping data for over 50 posts in 1996.  Our comparison of seven
furnished and unfurnished posts having the largest number of
shipments showed that the average weight of shipments varied by only
about 1,100 pounds, or about 6 percent of the maximum amount
authorized for shipment to unfurnished posts.  This data suggests
that the significant sums of money spent on operating a
government-furniture program may be excessive and unneeded.  In
addition, State's comments did not consider the potential cost
savings that could be derived by using household effects in place of
government furniture.  For example, the post in Singapore estimated
that its annual warehousing costs alone could be reduced about
$180,000 by using household effects instead of government furniture. 

8.  Clearly, country-unique factors would have to be considered in
making decisions.  Assuming State's assertion is correct, in
countries such as Brazil it may not make sense to consider the use of
employees' household effects as an option to government furniture. 
Other options may exist, however, such as purchasing furniture
locally or even working with the host government to eliminate
rules/customs that contribute to inefficiencies in diplomatic
missions. 

9.  We clarified the text to state that the estimate of potential
savings resulting from local procurement could be as much as 30
percent or more of the purchase, shipping, and packing costs of the
contract furniture.  This conclusion was based on data provided by
State's overseas posts.  For example, post officials in San Jose told
us that they could purchase a living room set locally for about
$2,850, compared to the contract cost of approximately $4,296. 

10.  The information was provided by post officials in San Jose.  We
did not verify the data on local costs and availability, but post
officials told us that high-quality furniture is available locally
often with purchase prices below the government-furniture contract
price.  In addition, they note that the lead time for local delivery
would be about 6 weeks, compared to 5-months or longer under the
contract. 

11.  We recognize the importance of purchasing quality products and
expect that State would consider this factor in examining the local
purchasing option.  We found that a few posts now purchase furniture
locally, and based on our overseas visits, we are unaware of any
concerns about safety or fulfilling representational responsibilities
associated with these purchases. 

12.  State's comments assume that its current furniture contract
would be continued and that prices would increase if quantities were
decreased.  However, until State explores the various options
identified in this report, it is difficult to project how the current
contract might be affected, including whether it should be continued
or renegotiated.  We again encourage State to include its furniture
program in its study plans. 

13.  We modified the text in response to this data. 

14.  The lack of a worldwide property inventory system in State makes
it difficult to verify State's claim that most of the residential
furniture is in use.  Although this seems to be a logical assumption,
at two of the posts we visited large inventories of residential
furniture were in storage at that time.  For example, in London, the
majority of the items in the warehouse were residential furniture,
including hundreds of dining chairs.  Overall, our analysis shows
that local procurement can substantially reduce the time for delivery
of goods and services; thus, reductions in overall inventory and
storage requirements could be expected.  This view is consistent with
State's own efforts to reengineer its logistics system.  According to
State, the benefits associated with simpler and cheaper supply
channels are expected to total millions of dollars in savings,
partially resulting from reduced inventory costs and consolidated
warehousing. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Diana M.  Glod
Lynn B.  Moore
Jodi M.  Prosser
LaVerne G.  Tharpes

OFFICE OF THE GENERAL COUNSEL

Richard Seldin


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