Military Housing: Privatization Off to a Slow Start and Continued
Management Attention Needed (Chapter Report, 07/17/98, GAO/NSIAD-98-178).

GAO reviewed the Department of Defense's (DOD) Military Housing
Privatization Initiative, focusing on DOD's efforts to: (1) measure
progress to date; (2) assess issues associated with privatizing military
housing; and (3) determine whether the new initiative is being
integrated with other elements of DOD's housing programs.

GAO noted that: (1) DOD considers privatization to be a powerful new
tool to help address the military housing problem; (2) two years have
passed since the new authorities were signed into law, yet no new
agreements have been finalized to build or renovate military housing;
(3) more than a dozen projects are being considered; however, only one
project is close to contract signing; (4) according to DOD, progress has
been slower than expected because the initiative represents a new way of
doing business for both the military and the private sector; (5) many
legal, financial, contractual, and budgetary scoring issues had to be
resolved to the satisfaction of parties representing the government,
developers, and private lenders; (6) although DOD expects implementation
to speed up after the first few privatization deals are completed, it is
difficult to predict how much the program can be accelerated given the
unique circumstances of individual projects; (7) in addition to
potential benefits, implementation of the privatization initiative
raises several concerns; (8) one concern is whether privatization will
result in significant cost savings; (9) to a large degree, privatization
shifts funding from military housing construction, operations, and
maintenance accounts to military personnel accounts to pay for increased
housing allowances used to pay rent to developers of privatized housing;
(10) GAO's review of the services' life-cycle cost analyses for two
privatization projects disclosed that the difference in the cost of
privatization and traditional military construction financing was
considerably less than the services' estimates and relatively modest;
(11) the privatization initiative has not been fully integrated with
other elements of an overall housing strategy to meet DOD's housing
needs in an optimum manner; (12) comprehensive housing referral services
could lessen the need for government housing, yet only the Navy has
aggressively pursued this option; (13) better coordination between the
separate offices responsible for housing allowances and military housing
construction and management could ensure that their decisions on housing
matters are made in concert, rather than in isolation, with each other;
and (14) comprehensive, better integrated plans could tie together the
elements of DOD's housing program and help maximize the advantages of
the privatization initiative while minimizing total housing costs.

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

 REPORTNUM:  NSIAD-98-178
     TITLE:  Military Housing: Privatization Off to a Slow Start and 
             Continued Management Attention Needed
      DATE:  07/17/98
   SUBJECT:  Military housing
             Privatization
             Housing programs
             Military facilities
             Interagency relations
             Military cost control
             Cost effectiveness analysis
             Rental housing
             Housing allowances
             Life cycle costs
IDENTIFIER:  DOD Military Housing Privatization Initiative
             
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Cover
================================================================ COVER


Report to the Secretary of Defense

July 1998

MILITARY HOUSING - PRIVATIZATION
OFF TO A SLOW START AND CONTINUED
MANAGEMENT ATTENTION NEEDED

GAO/NSIAD-98-178

Military Housing

(703244)


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

  DOD - Department of Defense
  HRSO - Housing Revitalization and Support Office
  Milcon - Military Construction
  OMB - Office of Management and Budget

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


B-279995

July 17, 1998

The Honorable William S.  Cohen
The Secretary of Defense

Dear Mr.  Secretary: 

This report discusses the Department of Defense's (DOD) new military
housing program known as the Military Housing Privatization
Initiative.  Specifically, we reviewed the implementation of the new
initiative to (1) measure progress to date, (2) assess issues
associated with privatizing military housing, and (3) determine
whether the new initiative is being integrated with other elements of
DOD's housing program. 

This report contains recommendations to you.  As you know, as the
head of a federal agency, you are required under 31 U.S.C.  720 to
submit a written statement on actions taken on our recommendations to
the Senate Committee on Governmental Affairs and the House Committee
on Government Reform and Oversight no later than 60 days after the
date of this report.  A written statement must also be submitted to
the Senate and House Committee on Appropriations with an agency's
first request for appropriations made more than 60 days after the
date of this report. 

We are sending copies of this report to appropriate congressional
committees; the Secretaries of the Army, the Navy, and the Air Force;
the Commandant, U.S.  Marine Corps; and the Director, Office of
Management and Budget. 

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

Sincerely yours,

Mark E.  Gebicke
Director, Military Operations
 and Capabilities Issues


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


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

The Department of Defense (DOD) spends about $8 billion annually to
provide housing for military members and their families either by
paying cash allowances for members to live in private sector housing
or by assigning members to military-owned or -leased quarters.  Over
the past several years, DOD has expressed concern over the poor
quality of the military housing inventory and the need for
renovations and improvements to bring the housing up to contemporary
standards.  To improve housing faster and more economically than
could be achieved if only traditional military construction
appropriations were used, the Congress approved DOD's request for a
new initiative, known as the Military Housing Privatization
Initiative, that allows and encourages private sector financing,
ownership, operation, and maintenance of military housing.  Under the
initiative, DOD can provide direct loans, loan guarantees, and other
incentives to encourage private developers to construct and operate
housing either on or off military installations. 

Because it represents a new approach to improving military housing,
GAO reviewed the implementation of the new initiative to (1) measure
progress to date, (2) assess issues associated with privatizing
military housing, and (3) determine whether the new initiative is
being integrated with other elements of DOD's housing program. 


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

DOD officials testified before the Congress in March 1998 that about
200,000 of the existing military-owned family housing units were old,
had not been adequately maintained and modernized, and needed to be
renovated or replaced.  Although GAO's work performed in 1996
questioned DOD's methodology for estimating military housing
requirements, it is clear that DOD faces a significant challenge in
this area.\1 Using traditional military construction financing at
current funding levels, DOD has estimated that over $20 billion and
30 to 40 years would be required to upgrade or replace existing
family housing.  In addition, DOD estimated that most of the
services' 400,000 unaccompanied barracks spaces also were old and
needed major improvements estimated to cost about $9 billion using
traditional funding methods. 

DOD concluded that these problems could be solved faster and more
economically if the military could take advantage of the private
sector's investment capital and housing construction expertise.  The
basic premise was to encourage private sector investment, rather than
use government funding, to build and operate housing on military
installations or in nearby communities where local markets could not
meet military housing needs.\2

As tenants in the privatized housing, military occupants would
receive a housing allowance and pay rent.  DOD's goal was to reduce
the government's near-term outlays for housing revitalization by
encouraging the private sector to invest at least $3 in military
housing development for each dollar that the government invested. 

At DOD's request, the Congress enacted a series of legislative
authorities, termed the Military Housing Privatization Initiative, in
fiscal year 1996 to test over a 5-year period use of various
incentives and arrangements to encourage private sector investment in
military housing.  Among other things, these authorities permit DOD
to (1) provide direct loans and loan guarantees to private entities
to construct or revitalize housing, (2) convey or lease existing
property and facilities to private entities, and (3) allow developers
to build military housing using room patterns and floor areas
comparable to similar housing in the local communities.  With the new
authorities, DOD stated that its housing problem could be solved with
current funding levels in 10 years. 

Separate DOD offices have key responsibilities for the military's
housing program.  Responsibility for the new privatization initiative
and for other matters involving the construction, operation, and
maintenance of military housing lies with the Under Secretary of
Defense for Acquisition and Technology.  Appropriations for
military-owned and -leased family housing are included in the
services' military construction and family housing accounts. 
Responsibility for housing allowances and for all compensation issues
lies with the Under Secretary of Defense for Personnel and Readiness. 
Appropriations for housing allowances are included in the services'
military personnel accounts. 


--------------------
\1 Military Family Housing:  Opportunities Exist to Reduce Costs and
Mitigate Inequities (GAO/NSIAD-96-203, Sept.  13, 1996). 

\2 DOD Policy Manual 4165.63M states that private sector housing in
the communities near military installations will be relied on as the
primary source of family housing.  The policy states that government
housing may be programmed when the local communities cannot meet the
military's need for acceptable and affordable housing.  DOD studies
show that the cost to the government is significantly less when
military families are paid an allowance and live in housing in the
local communities. 


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

DOD considers privatization to be a powerful new tool to help address
the military housing problem.  However, implementation of the
initiative is off to a slow start.  Two years have passed since the
new authorities were signed into law, yet no new agreements have been
finalized to build or renovate military housing.  More than a dozen
projects are being considered; however, only one project is close to
contract signing.  According to DOD, progress has been slower than
expected because the initiative represents a new way of doing
business for both the military and the private sector.  Many legal,
financial, contractual, and budgetary scoring issues had to be
resolved to the satisfaction of parties representing the government,
developers, and private lenders.  Although DOD expects implementation
to speed up after the first few privatization deals are completed, it
is difficult to predict how much the program can be accelerated given
the unique circumstances of individual projects.  In 1997, DOD
changed its initial 10-year goal for solving the military's housing
problem by fiscal year 2006 by extending the goal 4 years, to fiscal
year 2010. 

In addition to potential benefits, implementation of the
privatization initiative raises several concerns.  One concern is
whether privatization will result in significant cost savings.  To a
large degree, privatization shifts funding from military housing
construction, operations, and maintenance accounts to military
personnel accounts to pay for increased housing allowances used to
pay rent to developers of privatized housing.  GAO's review of the
services' life-cycle cost analyses for two privatization projects
disclosed that the difference in the cost of privatization and
traditional military construction financing was considerably less
than the services' estimates and relatively modest--about 10 percent
or less.  Another concern is that the long term--50 years--proposed
for many privatization projects may increase the potential that the
housing may not be needed in the future, the contractor might not
operate and maintain the housing as expected, and civilians might
occupy on-base housing if it is not fully used by military members. 

The privatization initiative has not been fully integrated with other
elements of an overall housing strategy to meet DOD's housing needs
in an optimum manner.  First, the services have not corrected
long-standing weaknesses in their requirements determination
processes and therefore are not assured that they are constructing,
replacing, or revitalizing housing only at installations where the
local communities cannot meet the housing needs of military families. 
Second, although DOD's policy is to reduce costs by maximizing the
use of housing in local communities, DOD has not taken full advantage
of this policy.  More accurate processes for determining housing
requirements, for example, would show that the communities
surrounding many installations can meet thousands of additional
family housing requirements.  Comprehensive housing referral services
could also lessen the need for government housing, yet only the Navy
has aggressively pursued this option.  Finally, better coordination
between the separate offices responsible for housing allowances and
military housing construction and management could ensure that their
decisions on housing matters are made in concert, rather than in
isolation, with each other.  Comprehensive, better integrated plans
could tie together the elements of DOD's housing program and help
maximize the advantages of the privatization initiative while
minimizing total housing costs. 


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


      PRIVATIZATION IS OFF TO A
      SLOW START
-------------------------------------------------------- Chapter 0:4.1

Although initial goals were aggressive and DOD actively pursued
implementation of the new initiative, actual progress has been slow. 
In July 1997, DOD revised its target for solving its housing problem
in 10 years when it directed the services to plan to revitalize,
divest through privatization, or demolish inadequate family housing
by fiscal year 2010,
4 years later than the original target.  According to DOD, progress
has been slower than expected because the initiative represents a new
way of doing business; and as a result, many management, legal,
financial, contractual, and budgetary scoring issues had to be
addressed and resolved. 

The timeline for a planned privatization project at Fort Carson,
Colorado, illustrates the slow progress in implementing an agreement
under the initiative.  In October 1993, prior to the start of the
initiative, the Army requested and the Congress appropriated $16.5
million in military construction funds to replace 142 family housing
units at Fort Carson in fiscal year 1995.  The project was approved,
but construction did not begin and the funds were held in abeyance as
the Army considered how privatization might be used to finance a much
larger housing project.  A DOD evaluation team visited Fort Carson in
December 1995, and in June 1996, DOD concluded that Fort Carson was a
good privatization candidate.  A request for proposal was issued in
December 1996 for a privatization project involving the construction
of 840 new family housing units, the revitalization of 1,824 existing
units, and the operation and maintenance of all units for a 50-year
term.  A contractor was initially selected in July 1997, and in
February 1998, DOD notified the Congress of its intent to award the
project.  However, in April 1998, as the result of litigation, the
Army subsequently decided to cancel the proposed award, reexamine the
acquisition process for the Fort Carson project, and study corrective
action alternatives.  Although DOD officials did not estimate when
these steps will be completed or when the project will again be ready
for contract award, an additional 4 to 5 years will be needed after
the award to finish construction and revitalization of the housing
itself. 


      IMPLEMENTATION OF THE
      PRIVATIZATION INITIATIVE
      RAISES SEVERAL CONCERNS
-------------------------------------------------------- Chapter 0:4.2

Several concerns have been raised about the privatization initiative,
which will require continued management attention.  For example,
questions exist over the potential cost savings from privatization
compared with traditional military construction projects.  To
estimate and compare the government's long-term costs for a housing
project financed through the privatization initiative and through
traditional military construction methods, the services prepare
life-cycle cost analyses.  However, DOD has not developed a
standardized methodology for the services to use in performing the
analyses.  While DOD is working on such a methodology, it has not
established milestones and a specific implementation date.  Until
standardization is achieved, the services' analyses may not be
prepared consistently and may use assumptions and estimates that do
not result in reliable cost comparisons. 

GAO reviewed the services' life-cycle cost analyses for two proposed
privatization projects, Fort Carson and Lackland Air Force Base,
Texas, and found that the savings estimated to be achieved by using
the privatization approach will be considerably less than that
estimated by the services.  For example, in comparison to military
construction funding, the services had estimated that privatization
will save about $197 million, or
24 percent, at Fort Carson and about $42 million, or 29 percent, at
Lackland.  GAO made adjustments to the services' analyses because
some project costs had been excluded, some cost estimates were not
based on actual budgeted amounts, and the 1998 Office of Management
and Budget discount rate was not used to adjust for the time value of
money.  With the adjustments, estimated cost savings over the planned
50-year terms of the privatization agreements will be about $54
million, or about 7 percent, at Fort Carson and about $15 million, or
about 10 percent, at Lackland. 

Another concern has been the long-term nature of many proposed
privatization agreements--usually 50 years.  In an April 1997 report
on the privatization initiative, the Center for Naval Analyses
discussed several risks associated with long-term agreements.  The
report noted that when rents are fixed at levels other than market
rates, such as in the planned Fort Carson agreement where rent will
equal a member's housing allowance, a contractor has little economic
incentive to maintain the property.  The contractor can increase
profits by limiting maintenance and repairs and can cut costs by
hiring less qualified managers and staff and using inferior supplies. 
In short, under fixed-rent arrangements, contractors may have an
incentive to cut services in ways that, although difficult to
predict, could erode the quality of life for residents.  To help
ensure adequate contractor performance, DOD plans to include
maintenance standards, modernization schedules, required escrow
accounts, and other safeguards in each privatization agreement. 
However, enforcing the agreements could be difficult, time-consuming,
and costly. 

An additional concern of long-term privatization projects, as well as
for projects financed with traditional military construction funds,
is whether the housing will be needed over the life of the projects. 
DOD housing officials stated that accurate forecasts of housing needs
beyond 3 to
5 years cannot be assured.  Yet, without this assurance, risks
increase that all of the units will not be needed over the 50-year
term of some proposed agreements.  If units are not rented by the
military, privatization agreements provide for civilians to rent the
units even if the units are located on an installation.  The matter
of civilians living on base raises some questions that have not been
fully answered by DOD.  For example, if civilians rented privatized
housing units on base, would security concerns be increased at some
installations and would the government be required to pay education
impact aid to the community for each civilian child? 


      PRIVATIZATION INITIATIVE CAN
      BE BETTER INTEGRATED WITH
      OTHER ELEMENTS OF DOD'S
      HOUSING PROGRAM
-------------------------------------------------------- Chapter 0:4.3

Although the privatization initiative provides a powerful new option
for addressing DOD's housing problem, it is only one of several tools
available to meet the housing needs of servicemembers and their
families.  DOD can best hope to maximize the advantages from the
initiative and minimize total housing costs if it ensures that (1)
accurate determinations are made of housing needs and the ability of
the local communities to meet these needs at each installation, (2)
maximum use of existing private sector housing is achieved in
accordance with existing DOD housing policy, and (3) decisions on the
structure of housing allowances and housing construction are made in
concert with each other.  Although each of these elements is
ostensibly part of DOD's overall housing strategy, DOD has tended to
view and manage these elements separately, rather than as part of a
well-integrated strategy. 

First, an accurate assessment of housing requirements is the
foundation upon which construction decisions should be based if DOD
is to minimize costs and avoid building or revitalizing housing that
is not needed.  Yet, the services have not corrected long-standing
weaknesses in their housing requirements determination processes,
which often understate the ability of local communities to meet
military housing needs and tend to result in a self-perpetuating
requirement for government housing.  A 1996 GAO evaluation of the
housing requirements analyses for 21 installations showed that
methodology problems understated the ability of the private sector to
meet military needs at 13 installations.  DOD has recognized this
problem, and in December 1997, it convened a working group that
included representatives from each service to examine the services'
housing requirements determination processes.  However, milestones
for the working group and for implementing improvements to the
requirements processes had not been developed as of March 1998. 

Second, maximizing the use of existing housing in local
communities--DOD's stated policy--is important to contain costs. 
According to GAO's estimates in 1996, total annual costs to the
government were about $5,000 less for a military family that lived in
local community housing instead of government-owned housing.  Yet,
DOD and the services have not taken full advantage of this policy. 
For example, the Army and the Air Force have reported that the
communities surrounding many military installations could, in fact,
meet thousands of additional family housing requirements, thus
reducing the need for government housing.  In addition, providing
comprehensive housing referral services to servicemembers has proven
to be an effective means of promoting greater use of community
housing.  The Navy, for example, has pursued a more aggressive, or
enhanced, approach to housing referrals to help families find
suitable housing since 1994.  Working with local landlords and
apartment managers, the Navy in many cases has obtained preferences
for military families such as reduced rental rates, waiving of some
rental fees and deposits, and unit set-asides in which certain
vacancies are offered to military families before they are offered to
civilians.  More aggressive programs by the other services, similar
to the Navy's approach, could have the effect of reducing the need
for new construction, whether it be through privatization or
traditional military construction. 

Third, decisions related to housing allowances and military housing
construction should be made in concert, rather than in isolation,
with each other.  Effective coordination between the two DOD offices
that separately manage housing allowances and the privatization
initiative is important since changes in housing allowances could
affect the amount of local housing that is affordable to military
families and significantly affect privatization agreements in which
the rental rates are equal to the servicemembers' housing allowance. 
Yet, when a new allowance program that will index housing allowances
to local housing costs was developed in 1997, there was little
coordination between the two DOD offices to ensure that the impact of
the new program on the privatization initiative was fully analyzed. 

In November 1997, DOD took an important step in its planning by
directing the services for the first time to submit plans for
eliminating inadequate family housing.  The services were directed to
submit plans that identify by installation, housing revitalization
requirements and the potential for privatization.  However, DOD did
not provide written guidance for the services to use in determining
these elements of a plan.  Further, to optimally address housing
problems, comprehensive plans are needed that integrate all elements
of DOD's housing program, establish an improved process to more
accurately determine housing requirements, maximize use of existing
private sector housing, explore how referral services can be
enhanced, and ensure better coordinated decisions on housing
allowances and military construction. 


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

To ensure that the privatization initiative is effectively integrated
with other elements of DOD's housing program, GAO recommends that the
Secretary of Defense expand the directive to the services concerning
their plans for eliminating inadequate housing.  Specifically, the
Secretary should direct the services to prepare detailed, integrated
housing plans that will (1) describe their plans for addressing
long-standing weaknesses in their housing requirements determination
processes, (2) demonstrate how they will attempt to maximize their
reliance on community housing in accordance with DOD's stated policy,
and (3) outline improvements in housing referral services.  The plans
should also include analyses of the estimated impact of the new
housing allowance program on the availability of housing in local
communities and show how housing allowances, traditional military
construction, and the privatization initiative will be used in
concert to meet DOD's housing needs in the most economical manner. 
Each service plan should include estimated milestones for achieving
the goals of the plan. 

GAO also recommends that the Secretary (1) establish a mechanism to
promote more effective coordination between the offices responsible
for housing allowances and housing management and (2) expedite DOD's
effort, including establishing and monitoring milestones, to develop
a standardized methodology for comparing life-cycle costs of proposed
privatization projects with military construction alternatives. 



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

DOD provided comments on a draft of this report that are included in
appendix VI.  DOD partially concurred with GAO's report and
recommendations.  DOD's comments and GAO's evaluation of them are
included in the report where appropriate. 

With respect to the pace of the program, DOD stated that taking time
to resolve critical program issues was necessary to ensure effective
implementation of subsequent projects and that proceeding more
rapidly would have created long-term problems for the program.  GAO
is not suggesting that DOD should have moved more quickly to
implement this new program.  As noted in GAO's conclusion, the
initiative does represent a new way of doing business, and many
issues needed to be resolved.  GAO's intent was simply to factually
report on the program's implementation. 

With respect to integration of housing elements, DOD agreed with the
need to integrate the privatization program with other elements of
its housing program and outlined actions related to several elements
of GAO's recommendation.  DOD stated, however, that it would not turn
its attention to integrating the various elements of the overall
housing program until it had demonstrated success in the
privatization initiative.  GAO does not agree that DOD should wait to
demonstrate success with the privatization initiative before focusing
on integration.  Better integration of housing elements is needed now
to maximize the advantages of the initiative and ensure that housing
is revitalized or constructed only at installations where the local
communities cannot meet the military housing requirements.  An
expanded directive to the services in preparing their housing plans
would help focus the services' attention on how they can use the full
range of tools available to them in concert to address their housing
problems in the most economical way. 

With respect to a life-cycle cost analysis, DOD stated that it is
developing a standard methodology for comparing costs between
traditional military construction and privatization.  However, it did
not set a milestone for completing this task as GAO recommended.  In
view of the large number of projects proposed for privatization, GAO
believes that expediting efforts to adopt a standardized methodology
is important and that setting a milestone for completing this task
can best ensure that this methodology is in place as soon as
possible. 

Finally, DOD agreed that coordination between the offices responsible
for housing allowances and housing management is necessary but
believes that existing coordination mechanisms are effective.  GAO
believes that the uncertainty among service officials concerning the
impact that the new housing allowances might have on the
privatization program illustrates that better coordination is needed. 
A better understanding of this impact is important since the new
housing allowance program could result in making more local community
housing affordable to military families, thus reducing the need for
privatized housing in some locations. 


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

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

DOD Policy Manual 4165.63M states that private sector housing in the
communities near military installations will be relied on as the
primary source of family housing.  About 569,000, or two-thirds, of
the military families in the United States live in private housing. 
These families receive assistance in locating private housing from
housing referral offices operated at each major installation and are
paid housing allowances to help defray the cost of renting or
purchasing housing in local communities.  Housing allowances, which
totaled about $4.3 billion in fiscal year 1997, cover about 80
percent of the typical family's total housing costs, including
utilities.  The families pay the remaining portion of their housing
costs out of pocket. 

The remaining 284,000, or one-third, of the military families in the
United States live in government-owned or -leased housing.  These
families forfeit their housing allowances but pay no out-of-pocket
costs for housing or utilities.  In fiscal year 1997, DOD spent about
$3 billion to operate and maintain government-owned and -leased
family housing.  In addition, about $976 million was authorized to
construct and renovate government family housing units in fiscal year
1997. 

Unaccompanied and single enlisted personnel in lower paygrades
normally are required by service policy to live in government-owned
barracks when space is available.  Single officers and single senior
enlisted personnel usually can choose to live in civilian housing and
receive housing allowances. 


   DOD'S HOUSING PROBLEM
---------------------------------------------------------- Chapter 1:1

According to DOD officials, the military services face three
significant housing problems.  First, in March 1998, a DOD official
testified before the Congress that about 200,000 of the
military-owned family housing units were old, had not been adequately
maintained and modernized, and needed to be renovated or replaced. 
Using traditional military construction (Milcon) financing at current
funding levels, DOD has estimated that over $20 billion and 30 to 40
years would be required to accomplish this task.\1 Second, according
to DOD estimates, about 15 percent of the military families living in
private housing are considered unsuitably housed primarily because of
the high cost of the housing in relation to their housing allowances. 
Third, DOD officials have stated that most of DOD's 400,000 barracks
spaces also are old, do not meet current suitability standards, and
need major improvements estimated to cost about $9 billion using
traditional funding methods. 

DOD has undertaken several initiatives to address these problems,
including requests to the Congress for more housing construction
funding and increased housing allowances to make privately owned
housing more affordable to military members.  The Congress approved
DOD's request for a new housing allowance program starting in January
1998.  The new allowance program replaced the Basic Allowance for
Quarters and Variable Housing Allowance with a single allowance
designed to better match the allowance amount with the cost of
housing in each geographic area.  Under the new program, housing
allowances will be determined on the basis of costs for suitable
civilian housing in each geographic area and allowance increases will
be tied to growth in housing costs.  According to DOD, the new
allowance program should result in higher allowances in expensive
housing areas and could result in lower allowances in some low-cost
housing areas.  The higher allowances in some areas could result in
increasing the quantity of housing that is considered affordable to
military families.  Under the old program, housing allowances often
did not keep up with changes in housing costs and in many cases
servicemembers paid higher out-of-pocket costs than originally
intended.  The new allowance program is being phased-in over a 6-year
period because of budget considerations and the desire to keep any
allowance reductions gradual. 


--------------------
\1 On the basis of our prior work, we recognize that DOD faces
significant housing problems, but we do not fully agree with DOD on
the magnitude of the problems.  In a September 1996 report, Military
Family Housing:  Opportunities Exist to Reduce Costs and Mitigate
Inequities (GAO/NSIAD-96-203, Sept.  13, 1996), we noted that the
private sector can meet additional family housing requirements and
eliminate the need to renovate or replace many military owned units. 
Our work also found that because DOD uses new construction standards
to assess the condition of military owned housing units, many housing
units that DOD classifies as inadequate are not dilapidated but only
lack modern amenities such as a separate utility room or a carport. 


   THE MILITARY HOUSING
   PRIVATIZATION INITIATIVE
---------------------------------------------------------- Chapter 1:2

To improve its existing family housing and barracks inventory more
economically and at a faster rate, DOD concluded that a new
initiative was needed.  The new initiative, known as the Military
Housing Privatization Initiative, called for new authorities to allow
and encourage private sector financing, ownership, operation, and
maintenance of military housing. 

In May 1995, DOD requested the Congress to approve a variety of new
authorities that, among other things, would allow DOD to (1) provide
direct loans and loan guarantees to private entities to acquire or
construct housing suitable for military use, (2) convey or lease
existing property and facilities to private entities, and (3) pay
differential rent amounts in addition to the rent payments made by
military tenants.  The new authorities would also allow DOD to make
investments, both limited partnership interests and stock and bond
ownership, to acquire or construct housing suitable for military use
and permit developers to build military housing using room patterns
and floor areas comparable to housing in the local communities.  The
authorities could be used individually or in combination.  Appendix I
contains a complete list and description of the authorities. 

The Congress approved the new authorities, and the initiative was
signed into law on February 10, 1996.\2 However, the Congress limited
the new authorities to a 5-year test period to allow DOD to assess
their usefulness and effectiveness in improving the military housing
situation.  Based on the results of the test, the Congress will
consider whether the authorities should be made permanent. 


--------------------
\2 The National Defense Authorization Act for Fiscal Year 1996
(Public Law 104-106, 110 Stat.  186). 


      POTENTIAL BENEFITS FROM
      PRIVATIZATION
-------------------------------------------------------- Chapter 1:2.1

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

Use of private sector capital can reduce the government's near-term
outlays for housing revitalization by spreading costs, specifically
increased amounts for housing allowances, over a longer term.  DOD's
goal is to have the private sector to invest at least $3 in military
housing development for each dollar that the government invests.  By
leveraging government funds by a minimum of 3 to 1, the military can
stretch its available construction funds so that significantly more
housing can be revitalized in comparison with traditional Milcon
financing.  DOD officials stated that, with leveraging, the housing
problem could be solved with current funding levels in only
10 years.  DOD also noted that privatization can reduce the average
cost of military housing through the use of commercial specifications
and standards and local building codes and practices.  A DOD housing
official stated that the military's cost for a house built with
Milcon funding--about $135,000, excluding land--is substantially
higher than private industry averages, primarily due to government
procurement practices and overly detailed specifications.  Under
Milcon financing, contractors normally are faced with specifications,
standards, and housing sizes different from industry or local
practices.  As a result, some contractors do not compete for these
jobs and those that do often raise their prices to cover the higher
costs associated with the requirements.  According to DOD, use of
commercial building standards and practices can also reduce costs by
increasing competition and by reducing developer risk because the
homes are more marketable to nonmilitary families, if not used by
servicemembers and their families. 


   MANAGING THE PRIVATIZATION
   INITIATIVE
---------------------------------------------------------- Chapter 1:3

In September 1995, in anticipation of the enactment of the new
authorities, DOD established the Housing Revitalization Support
Office (HRSO) to facilitate implementation of the initiative.  With a
staff of 16 full-time personnel and support from consultants, HRSO is
responsible for overseeing and assisting the services in using the
new initiative.  The individual services are responsible for
nominating potential privatization projects; working with HRSO in
reviewing projects and recommending which authorities should be used;
preparing requests for proposals; and managing the contract
competition, award, and implementation processes. 

Under the privatization initiative, the Office of Management and
Budget (OMB) and DOD have agreed on guidance regarding the amount
that should be recognized and recorded as an obligation of DOD at the
time a privatization agreement is signed.  The guidance refers to
this process as scoring.  In this report, we use the word "scoring"
to refer to the application of this guidance to agreements made under
the privatization initiative. 

Funding for the privatization initiative is accomplished through two
funds established by the authorizing legislation--the DOD Family
Housing Improvement Fund and the DOD Military Unaccompanied Housing
Improvement Fund.  The funds receive sums by direct appropriations
and transfers from approved Milcon projects and from proceeds from
the conveyance or lease of property or facilities.  The two funds are
used to implement the initiative, including the planning, execution,
and administration of privatization agreements.  The two funds must
be managed separately and amounts in the two funds cannot be
commingled. 

Table 1.1 shows the sources and uses of funds in the DOD Family
Housing Improvement Fund for fiscal years 1996 and 1997.  No
appropriations were made to the fund for fiscal year 1998. 



                               Table 1.1
                
                  DOD Family Housing Improvement Fund
                                Activity

                         (Dollars in millions)

                                             Fiscal year
                                          ------------------
                                              1996      1997     Total
----------------------------------------  --------  --------  ========
Additions to fund
Appropriations                               $22.0     $25.0     $47.0
Transfers from Milcon                                    5.9       5.9
Total additions                                                  $52.9

Expenditures from fund
----------------------------------------------------------------------
Funding for projects                           9.5       5.9      15.4
Administration and consultants                 3.0       6.0       9.0
Request for proposal development               0.8                 0.8
======================================================================
Total expenditures                                               $25.2
======================================================================
Fund balance end of fiscal year 1997                             $27.7
----------------------------------------------------------------------
Source:  HRSO. 

In fiscal year 1997, $5 million was appropriated for the DOD Military
Unaccompanied Housing Improvement Fund.  About $100,000 from this
fund was used to pay for an Air Force study on developing privatized
unaccompanied housing projects. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

Because it represents a new approach to improving military housing,
we reviewed the implementation of the Military Housing Privatization
Initiative to (1) measure progress to date, (2) assess issues
associated with privatizing military housing, and (3) determine
whether the initiative is being integrated with other elements of
DOD's housing program.  We performed work at HRSO and the DOD offices
responsible for housing management and housing allowances.  We also
performed work at the Air Force, the Army, the Navy, and the Marine
Corps headquarters offices responsible for implementing the
initiative and at the OMB office responsible for reviewing
privatization agreements.  At each location, we interviewed
responsible agency personnel and reviewed applicable policies,
procedures, and documents. 

To measure implementation progress and assess issues associated with
privatizing military housing, we reviewed DOD's and the services'
implementation plans, compared the plans to progress made, and
explored reasons for differences.  We discussed potential barriers
and concerns about the privatization initiative with DOD and service
officials to obtain their views and to determine how they were
dealing with the concerns.  We also reviewed estimated cost savings
from the initiative and examined the assumptions and estimates the
services used in preparing life-cycle cost analyses for proposed
privatization projects at Fort Carson, Colorado, and Lackland Air
Force Base, Texas.  In addition, we visited Navy privatization
projects at Corpus Christi, Texas, and Everett, Washington, that were
implemented under a previous initiative to test the use of limited
partnerships to improve housing in the Navy.  At each site, we toured
the new housing units, reviewed occupancy statistics and rental
costs, and discussed with local service officials their views of the
initiative. 

To determine whether the new initiative is being integrated with
other elements of DOD's housing program, we reviewed DOD's and the
services' housing policies, programs, initiatives, and plans.  We
also examined previous reports and studies related to military
housing issues, reviewed DOD and service housing organization and
management structures, and discussed the need for well-integrated
housing plans with DOD, service, and OMB officials. 

We conducted our review between June 1997 and March 1998 in
accordance with generally accepted government auditing standards. 


PRIVATIZATION IS OFF TO A SLOW
START AND REQUIRES CONTINUED
MANAGEMENT ATTENTION
============================================================ Chapter 2

Initially optimistic about how quickly the new privatization
authorities could solve the housing problem, DOD officials now
recognize that implementation will be slower than expected.  For a
variety of reasons, final privatization agreements have not been
signed for any proposed housing projects initiated since the
authorities were signed into law in February 1996.  DOD officials
believe that progress may speed up after the first few projects are
approved; however, each project is unique and will require
individualized planning and negotiation.  In 1997, DOD revised its
initial goal for solving the DOD housing problem in 10 years by
delaying the target 4 years, to fiscal year 2010.  Other issues, such
as potential savings from privatization, risks associated with
long-term privatization agreements, and use of the authorities to
improve barracks, are also of concern and will require continued
monitoring and attention from DOD management. 


   IMPLEMENTATION HAS BEEN SLOWER
   THAN EXPECTED
---------------------------------------------------------- Chapter 2:1

In May 1995, DOD first announced its proposal to use private sector
financing and expertise to improve military housing.  In a May 8,
1995, press release, DOD stated that the quality of military housing
had declined for many years because of a lack of priority and because
earlier attempts at solutions ran into regulatory or legislative
roadblocks.  However, with congressional approval of new authorities
to acquire help from the private sector, DOD stated that its 30-year
housing problem could be solved in
10 years.  DOD officials repeated this claim in subsequent testimony
before several congressional committees. 

Anticipating congressional approval of the initiative, the Secretary
of Defense established a fiscal year 1996 goal to use the new
authorities to execute projects affecting at least 2,000 family
housing units and 2,000 barracks spaces.  During congressional
hearings in March 1996 and 1997, DOD officials stated that about 8 to
10 projects with up to 2,000 family housing units should be awarded
within the next year and that the goal was to increase the number of
units planned for construction and revitalization to 8,000 in fiscal
year 1997 and to 16,000 units in fiscal
year 1998.  This planned ramp-up would have to actually occur and
continue for DOD to solve its housing problem within the initial
10-year time frame, by fiscal year 2006. 

Although the initial goals were aggressive and DOD actively pursued
implementation of the new initiative, progress has been slow.  Since
the authorizing legislation was signed in February 1996 through the
end of February 1998, no new agreements were finalized to build or
renovate military housing.  In January 1998, DOD was actively
considering more than a dozen projects for privatization and many
others were in the early planning stages.  However, only one,
Lackland Air Force Base, apparently is close to contract signing,
which is the beginning point for implementing housing improvements. 
Appendix II shows details of the projects being considered in January
1998. 

DOD officials often point to two Navy projects as the first examples
of improvements under the initiative.  The projects--404 new units at
Corpus Christi, Texas, and 185 new units at Everett, Washington--were
constructed off base on private property under limited partnership
agreements between the Navy and private developers.  However, the
authority for these projects was not the legislation that established
the initiative, but was legislation approved in October 1994.  This
legislation gave only the Navy authority to test the use of limited
partnerships in order to meet the housing requirements of naval
personnel and their dependents.\1 Appendix III provides details on
the Navy's limited partnership agreements at Corpus Christi and
Everett. 

The proposed Fort Carson privatization project illustrates the slow
progress in implementing an agreement under the initiative.  In
October 1993, the Army requested $16.5 million in Milcon funds to
replace 142 family housing units at Fort Carson in fiscal year 1995. 
The project was approved, but construction did not begin because the
Army became interested in leveraging the funds through privatization
to finance a much larger housing improvement effort at the
installation. 

A HRSO team visited Fort Carson in December 1995, and after study and
analysis, concluded in June 1996 that government housing at Fort
Carson was a good candidate for privatization.  The proposed
privatization project--to construct 840 new family housing units,
revitalize 1,824 existing units, and operate and maintain all of the
units for a 50-year term--was approved in August 1996, and the
request for proposal was issued in December 1996 for offers from the
private sector to accomplish the requirements of the project.  A
contractor was selected in July 1997, and final negotiations began
prior to contract award.  On February 10, 1998, DOD notified the
Congress of the Army's intent to transfer Fort Carson's 1995 Milcon
appropriation into the DOD Family Housing Improvement Fund and to
award the contract.  However, in April 1998, as the result of
litigation, the Army decided to cancel the proposed award, reexamine
the acquisition process for the Fort Carson project, and study
corrective action alternatives.  Although DOD officials did not
estimate when these steps will be completed or when the project will
again be ready for contract award, DOD estimated an additional 4 to 5
years will be needed after the award to finish construction and
revitalization of the housing itself. 

In July 1997, DOD revised its target date for solving its housing
problem when it issued planning guidance for fiscal years 1999
through 2003.  The guidance directed the military services to plan to
revitalize, divest through privatization, or demolish inadequate
family housing by or before fiscal year 2010, 4 years later than the
original target. 


--------------------
\1 See section 2803 of Public Law 103-337, October 5, 1994.  The
authority to use limited partnerships is now available to all
services under the 1996 legislative initiative. 


      REASONS FOR SLOW PROGRESS
-------------------------------------------------------- Chapter 2:1.1

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

HRSO officials stated that the process has been slow to obtain
concurrence on the details of the proposed Fort Carson and Lackland
project agreements from lawyers representing the government, the
developers, and the potential lenders.  In addition, the officials
noted that because the initiative has had high visibility both within
and outside of DOD, much care and attention were devoted to ensuring
that no mistakes were made as the initial agreements were developed. 
However, once the first one or two deals are completed, the officials
believe that subsequent deals should proceed much faster. 

Another factor that slowed implementation was initial disagreement
between DOD and OMB on how projects that used the various authorities
should be scored.  Discussions between the agencies continued for
several months until a written agreement was adopted on June 25,
1997, which provided detailed scoring guidance applicable to the
first 20 privatization projects.  After these projects are completed,
the agreement will be reviewed to determine whether any changes are
needed.\2


--------------------
\2 Because planning for the first two projects, Fort Carson and
Lackland Air Force Base, was well underway before the scoring
guidance agreement was adopted, OMB agreed that the guidance would
not apply to these projects.  As a result, the military can provide
utilities at no cost to the developers or the military occupants in
these projects without incurring a scoring impact.  In all other
privatization agreements, the cost of utilities will be scored if the
military pays. 


   SAVINGS FROM PRIVATIZATION
   APPEAR MODEST
---------------------------------------------------------- Chapter 2:2

Privatization allows DOD to address its military housing problem more
quickly by securing private sector financing of housing improvements. 
However, whether privatization also saves the government money in the
long term, and if so, how much money are questions that have not been
answered. 

Under traditional Milcon financing of military housing, the military
pays the initial housing construction or renovation costs and then
pays the annual costs to operate, maintain, and manage the units. 
The military does not pay monthly housing allowances since occupants
of the units forfeit their allowances when living in government-owned
housing.  Under most proposed privatization projects, the military
initially uses some funds to secure an agreement with a private
developer and then pays monthly housing allowances to the
servicemembers that occupy the housing, since the housing is not
government-owned.  The servicemembers use their housing allowances to
pay rent to the developer.  In addition, under most privatization
options, the military continues to pay some housing management costs
for servicemember referral services and for contract oversight. 
Thus, although the exact budgetary consequences from use of the
various privatization authorities are not known, it appears that
privatization largely results in a shift in funding from military
housing construction, operations, and maintenance accounts to
military personnel accounts to pay for additional housing allowances. 

Performing accurate cost comparisons between privatization and Milcon
alternatives is difficult because the comparisons involve many
variables and assumptions.  However, one key issue in the comparisons
is whether the housing under each alternative is the same.  To
illustrate, developers of projects under the initiative might use
local building practices and standards to construct or revitalize
housing that may be different in size and amenities from that
constructed under Milcon building standards and specifications.  For
example, HRSO officials stated that privatized housing for married
junior enlisted personnel based on local standards may result in
garden-style apartments with no carports or garages.  Normally,
Milcon housing for married junior enlisted personnel results in
larger townhouse type units with a carport or a garage.  Because of
such differences, a cost comparison between Milcon and privatization
alternatives may not always result in an analysis of comparable
housing. 

HRSO and service analyses of potential privatization projects have
primarily focused on the financial feasibility of the deals.  In
other words, the analyses attempt to determine whether deals can be
made that are attractive to developers while still meeting DOD's
leveraging goals.  HRSO did not initially focus on comparing the
long-term or life-cycle costs of a potential privatization project
with the costs to perform the same project using traditional Milcon
financing. 

Nevertheless, prior to finalizing a privatization agreement, the
services perform a life-cycle analysis comparing project costs using
both alternatives.  HRSO, however, has not provided guidance for how
these analyses should be completed, including what costs to consider
and what assumptions to use.  As a result, the services' life-cycle
analyses may not be prepared consistently and may use assumptions and
estimates that do not result in reliable cost comparisons.  HRSO
officials stated that this is a concern and that they have tasked a
consultant to develop a standard methodology for performing the
analyses.  Although milestones and a specific implementation date
have not been established, HRSO officials stated that the services
will be required to use the standardized methodology when it is
completed and approved by HRSO. 

We reviewed the services' life-cycle cost analyses for two proposed
privatization projects at Fort Carson and Lackland Air Force Base to
compare estimates of the government's long-term costs for housing
financed with Milcon funds and through the privatization initiative. 
The Fort Carson analysis, which was included in the February 10
congressional notification of DOD's intent to enter into the Fort
Carson agreement, estimated that over the 50-year term of the
agreement privatization will cost about $197 million, or 24 percent,
less than Milcon.  The Lackland Air Force Base analysis, which might
be revised before the contract is awarded, estimated that
privatization will cost about $42 million, or 29 percent, less than
Milcon. 

In our review, we made adjustments to the services' analyses because
some project costs had been excluded, some cost estimates were not
based on actual budgeted amounts, and the 1998 OMB discount rate was
not used to adjust for the time value of money.  We made no
adjustments for possible differences in the size or amenities of the
housing resulting from each alternative.  As shown in table 2.1, our
review showed that although privatization was less costly for each
project, the overall estimated cost savings to the government were
considerably less than the services' estimates--about $54 million
less, or about 7 percent, at Fort Carson and $15 million less, or
about 10 percent, at Lackland.  Appendixes IV and V provide details
on the assumptions used in DOD's and our review of Fort Carson and
Lackland life-cycle cost estimates. 



                                    Table 2.1
                     
                        Life-Cycle Cost Comparison for Two
                              Privatization Projects

                                      Estimated total costs
                  --------------------------------------------------------------
                         Service estimate                  Our estimate
                  ------------------------------  ------------------------------
Project           Privatizatio          Differen  Privatizatio          Differen
description                  n  Milcon        ce             n  Milcon        ce
----------------  ------------  ------  --------  ------------  ------  --------
Fort Carson:              $640    $837      $197          $679    $733       $54
 construct 840
 new units,
 revitalize
 1,824 existing
 units, operate
 and maintain
 for 50 years.
Lackland Air              $103    $145       $42          $130    $145       $15
 Force Base:
 construct 420
 new units,
 operate and
 maintain for
 50 years.
--------------------------------------------------------------------------------
With no other cost comparisons to review at this time and with each
future privatization agreement having unique circumstances and costs,
it is difficult to draw conclusions on the extent of cost savings
available from the privatization initiative.  However, Army and Air
Force officials have stated opinions that long-term savings to the
government through the privatization initiative may be minimal.  For
example, an Army housing official stated that, although privatization
can help solve the Army's housing problems faster than Milcon,
privatization does not significantly reduce the Army's total costs
because reduced family housing costs are offset by higher personnel
costs, which are used to pay for additional housing allowances. 
Also, the Air Force completed a hypothetical analysis comparing
life-cycle costs to revitalize 670 family housing units through
privatization and Milcon.  The analysis showed that there would be
less than a $1-million difference between the two alternatives in
total costs to the government over the life of the project. 


   LONG-TERM PRIVATIZATION
   AGREEMENTS INCLUDE CONCERNS
---------------------------------------------------------- Chapter 2:3

According to DOD officials, most of the potential privatization
projects now under consideration call for long-term agreements
between DOD and the developers.  Many proposed deals are for 50 years
with an option for another 25 years.  HRSO officials stated that
long-term agreements are needed to make the proposed projects
financially feasible by providing a long-term cash flow to cover the
developers' investment costs for new construction and revitalization. 

To illustrate, the privatization proposal for Fort Carson calls for a
whole-base deal in which the developer will revitalize existing
units, construct new units, and operate and maintain all units for 50
years.  Land related to the project will be leased to the developer. 
At the end of the 50-year term, providing that the government does
not exercise an option to extend the agreement for another 25 years,
the developer will be required to vacate the premises and may be
required to remove the housing.  The developer is expected to invest
about $220 million to construct and revitalize the units and will
recoup this cost, as well as the operating and maintenance costs,
excluding utilities, from the rents paid by the occupants over the
term of the agreement.  Military families have first preference in
renting the units and will pay rent equal to the members' housing
allowances.  If military families do not rent the units, the units
can be rented to civilians.  DOD plans to provide a loan guarantee
for funds that the developer borrows to construct and revitalize the
units.  However, the loan guarantee only covers the risks of base
closure, deployment, and downsizing.  In the event of a base closure
default, the government could be obligated to pay off the loan and
assume ownership of the project for disposal. 


      FORECASTS OF HOUSING NEEDS
-------------------------------------------------------- Chapter 2:3.1

Long-term privatization agreements present several concerns that
require careful consideration.  For example, before the military
invests in a long-term housing project through a privatization
agreement or traditional Milcon funding, the military should know
with a high degree of certainty the installation's future housing
needs.  To do this, the military must first determine whether the
installation will be needed in the future; specifically, whether the
installation is a likely candidate for closure during any future
reductions in military infrastructure.  If the installation is
predicted to be needed, then the military must forecast (1) the
installation's future mission, military population, and family
housing requirement; (2) future private housing availability and
affordability in the local community; and (3) future military family
housing preferences for on-base or off-base housing. 

According to several service officials, making accurate forecasts of
these variables beyond a 3- to 5- year period cannot be assured. 
Yet, without long-term assurance that the privatized housing will be
needed, risks increase that the service will not need all, or any, of
the housing over the term of the agreement. 


      CONTRACTOR PERFORMANCE
-------------------------------------------------------- Chapter 2:3.2

Another concern associated with long-term privatization agreements is
the potential for poor performance or nonperformance by the
contractors.  A major concern, particularly for on-base privatization
projects, is whether contractors will perform housing repairs,
maintenance, and improvements in accordance with the agreements. 
Although maintenance standards, modernization schedules, required
escrow accounts, and other safeguards will be included in the
agreements, enforcing the agreements could be difficult,
time-consuming, and costly. 

In an April 1997 report on the privatization initiative, the Center
for Naval Analyses discussed concerns with long-term agreements.\3
The report noted that when rents are fixed at levels other than
market rates, such as in the proposed Fort Carson and Lackland
agreements where rent equals a member's allowance, a contractor has
little economic incentive to maintain the property.  The contractor
can increase profits by limiting maintenance and repairs and can cut
costs by hiring less qualified managers and staff and using inferior
supplies.  In short, under fixed-rent arrangements, contractors may
have an incentive to cut services in ways that, although difficult to
predict, could erode the quality of life for servicemembers. 

The report also noted that long-term agreements contain disincentives
that can occur late in the agreement.  For example, the report stated
that the long-term financial incentive for the developer during the
last 20 years may be to disinvest so that the value of the physical
assets foregone at the end of the term has been drained by use. 
Further, if the value of the units declines and military families do
not rent the units, the potential exists for civilians to move on
base, paying lower rents and creating an on-base slum.\4


--------------------
\3 Housing Benefits:  Analysis of Public-Private Authorities, Center
for Naval Analyses, CRM 97-27, April 1997. 

\4 Under proposed privatization agreements, military families will
not be required to occupy privatized housing. 


      PROSPECTS OF CIVILIANS
      LIVING ON BASE
-------------------------------------------------------- Chapter 2:3.3

Privatization agreements provide for civilians renting the housing
units if they are not rented by military families.  Long-term
agreements increase the potential that civilians will eventually live
on base.  For example, over a period of years, housing allowances
could increase and more community housing could become available,
making it more likely that military families would choose to live off
base.  In this circumstance, the contractor could rent vacancies to
civilians. 

In some locations, installation commanders may welcome civilians
living on base.  However, in other locations, the civilians may not
be welcomed.  Marine Corps officials stated that most Marine
installation commanders did not want civilians living on base because
of security reasons and because of the tradition of having a military
housing community available to members and their families. 

In addition to possible security concerns at some installations, the
prospect of civilians living on base also raises some questions that
have not been fully answered.  For example, if civilians rented
privatized housing units on base, would the government be required to
pay education impact aid to the community for each civilian child,\5
and would law enforcement responsibilities be more complicated
because both local community and base police could be involved in
matters related to on-base civilian tenants? 


--------------------
\5 Education impact aid is paid to local governments to help cover
the cost of educating dependents of military members.  The impact aid
for each dependent is significantly higher for students that live
with their families in government housing because government housing
is not subject to local property taxes.  When military families live
in housing in the local communities, a much smaller amount is paid
for each student because the housing is subject to local property
taxes. 


   USING PRIVATIZATION TO IMPROVE
   UNACCOMPANIED HOUSING IS
   UNLIKELY
---------------------------------------------------------- Chapter 2:4

According to DOD and service officials, there would be little
financial advantage in using privatization to improve unaccompanied
housing.  The primary problem lies in the services' mandatory
assignment policies for single junior enlisted personnel and the
budgetary scoring impact from mandatory assignments. 

The current policy in each service requires mandatory assignment of
single junior enlisted members to the barracks, providing that space
is available.  According to DOD officials, most military leaders
strongly support this policy because they believe that such
assignment provides for military discipline and unit integrity. 
However, in accordance with the guidance established for recording
obligations under the privatization initiative, mandatory assignment
of military personnel to privatized housing constitutes an occupancy
guarantee, which results in a government obligation to pay rental
costs over the entire term of the agreement.  Thus, when a
privatization project includes an occupancy guarantee, DOD must set
aside funds to cover the value of this guarantee up front.  Because
the funds required to cover the guarantee could approximate the
amount of funds required under traditional military construction
financing, funding for a privatized barracks project would not meet
DOD's goal to have the private sector to invest at least $3 for each
dollar the government invests. 

This issue is not a problem in military family housing because
mandatory assignments normally are not made.  In most cases, married
members in all paygrades can decline government-owned housing, if
available, and decide where they want to live.  Because installation
commanders do not appear to be willing to change the current policy
regarding barracks assignments, privatizing unaccompanied housing
does not appear to be a financially viable alternative. 

An additional barrier to privatized barracks cited by DOD officials
is a lack of funding to pay for increased housing allowances.  If
privatized, occupants would begin receiving housing allowances to pay
rent.  In family housing, there is a separate budget account for
housing operations and maintenance that can provide a funding source
to help pay for increased allowances.  However, barracks operations
and maintenance is not funded by a similar separate account. 
Instead, barracks operations and maintenance is funded from the
overall base operating budget.  According to service officials, this
budget account often is underfunded and, therefore, does not have
sufficient funds to help pay for increased housing allowances for
unaccompanied personnel. 

Of the $5 million appropriated for the Military Unaccompanied Housing
Improvement Fund in fiscal year 1997, about $100,000 was used to pay
for an Air Force study on developing privatized unaccompanied housing
projects.  Because of the barriers to developing privatized barracks
projects, it is uncertain whether the remaining funds will be used as
seed money for privatized unaccompanied housing projects


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:5

DOD officials are aware of the issues discussed in this chapter. 
Since the beginning of the privatization initiative, DOD has
attempted to speed implementation and address issues associated with
potential savings from privatization, risks associated with long-term
agreements, and using the authorities to improve barracks.  However,
the initiative does represent a new way of doing business, and DOD
has been appropriately deliberate in its implementation.  As
implementation continues and progress is made, continued management
attention can help ensure that benefits from the initiative are
realized, potential risks are minimized, and program changes are
adopted when needed.  DOD has already recognized the need to
standardize the methodology the services use in preparing life-cycle
analyses comparing costs of privatization and Milcon alternatives. 
However, DOD needs to ensure that a standardized methodology is
developed and implemented as quickly as possible.  Without a standard
methodology, DOD officials cannot be assured that the services'
estimates of cost differences between the two alternatives for
proposed projects are consistent and reliable. 


   RECOMMENDATION
---------------------------------------------------------- Chapter 2:6

We recommend that the Secretary of Defense expedite HRSO's effort to
develop a standardized methodology for comparing life-cycle costs of
proposed privatization projects with military construction
alternatives.  This action should include establishing and monitoring
milestones for the development and implementation of the methodology. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:7

In commenting on a draft of this report, DOD noted that the time it
has taken to initiate the program was appropriate and necessary to
resolve critical program issues that will ensure timely and effective
implementation of all subsequent projects.  DOD stated that
proceeding more rapidly would have created major long-term problems
for the program.  We are not suggesting that DOD should have moved
more quickly to implement this new program.  As noted in our
conclusion, the initiative does represent a new way of doing
business, and many issues needed to be resolved.  Our intent was
simply to factually report on the program's implementation.  The fact
remains that DOD established several goals for the program, which
included having 16,000 units planned for construction by fiscal year
1998.  To date, no units have been constructed or revitalized and it
is unlikely that any units will be before the end of fiscal year
1998.  Moreover, although DOD expects implementation to accelerate
once it completes its first projects, we believe it is important to
recognize that each proposed project will come with its own unique
circumstances and that it may be unrealistic to assume that the
program can be greatly accelerated. 

With respect to life-cycle cost comparisons of family housing
construction under Milcon and privatization, DOD noted that although
our life-cycle cost savings estimates under privatization for Fort
Carson and Lackland Air Force Base are less than DOD's estimates, the
savings are still significant.  DOD also stated that the type of
economic analysis by which we made its estimates between the two
alternatives tend to obscure an important underlying reality--that
family housing military construction funding is not available at the
levels estimated in the comparisons.  We did not develop a unique
cost analysis for these two projects but rather used the cost
analysis developed by the military services.  As we stated in our
report, we made adjustments to the services analyses because some
project costs had been excluded, some cost estimates were not based
on actual budgeted amounts, and the 1998 OMB discount rate was not
used to adjust for the time value of money.  Also, the fact that DOD
has required a life-cycle cost comparison for all proposed projects
suggests that it, too, believes that life-cycle cost analyses are
necessary to accurately evaluate housing alternatives.  Without a
standardized life-cycle cost methodology in place, privatization
projects could be undertaken that are more costly than other
alternatives.  Our intent was simply to provide an independent
life-cycle cost analysis as a check against the DOD estimates. 
Lastly, we agree that military construction funds would not likely be
available at the same levels available under privatization since the
privatization initiative seeks to leverage government funds by a
minimum of three to one. 

DOD partially concurred with our recommendation regarding a
standardized methodology for comparing life-cycle costs of proposed
projects under both alternatives.  DOD agreed that a consistent
presentation of life-cycle cost comparisons is desirable and
necessary and stated that it is developing such a standard
methodology for application to all future projects.  Our
recommendation, however, was aimed at expediting this effort, and DOD
did not provide specific information concerning a schedule for
developing and implementing its standardized methodology.  In view of
the large number of projects that the services have proposed for
privatization, we believe that adopting a standardized methodology as
soon as possible is important.  Use of a standardized methodology
across service lines would provide a consistent way of comparing
costs and permit more informed decisions about the relative merits of
housing alternatives. 


PRIVATIZATION INITIATIVE CAN BE
BETTER INTEGRATED WITH OTHER
ELEMENTS OF DOD'S HOUSING PROGRAM
============================================================ Chapter 3

The privatization initiative is only one of several tools, including
housing allowances and traditional military construction, available
to meet the housing needs of servicemembers and their families.  To
be most effective, the initiative needs to be integrated with the
other tools and elements of an overall housing strategy.  For
example, to maximize the advantages from the initiative and minimize
total housing costs, privatization needs to be part of a strategy
that ensures (1) accurate determinations of housing needs and the
ability of the local communities to meet these needs at each
installation, (2) maximum use of private sector housing in accordance
with DOD housing policy, and (3) coordinated decisions on the
structure of housing allowances and housing construction.  Although
DOD and the services have tended to view and manage these elements
separately, rather than as part of a well-integrated strategy, DOD
has recently taken some steps to improve planning for eliminating
inadequate family housing.  However, to optimally address housing
needs, additional steps can be taken to develop comprehensive plans
that integrate all elements of DOD's housing program. 


   ACCURATE HOUSING REQUIREMENTS
   DETERMINATIONS PROVIDE STARTING
   POINT
---------------------------------------------------------- Chapter 3:1

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

For example, in our 1996 report on military family housing, we noted
that DOD and the services relied on housing requirements analyses
that (1) often underestimated the private sector's ability to meet
family housing needs and (2) used methodologies that tended to result
in a self-perpetuating requirement for government housing.  Our 1996
evaluation of the housing requirements analyses for 21 installations
showed that methodology problems understated the ability of the
private sector to meet military needs at 13 of the installations. 
The Congressional Budget Office, the Center for Naval Analyses, and
others have reported similar problems with the services' housing
requirements determination processes. 

In our report, we recommended that DOD revise the housing
requirements determination process by considering the results of an
on-going DOD Inspector General's review of the services' requirements
processes.  In response to our recommendation, DOD stated that it
would consider the results from the Inspector General's review and
would implement accepted recommendations.  The Inspector General's
report was issued in October 1997.  The report stated that "DOD and
Congress do not have sufficient assurance that current family housing
construction budget submissions address the actual family housing
requirements of the Services in a consistent and valid manner."

The Inspector General recommended developing a DOD standard process
and standard procedures to determine family housing requirements.  In
response, DOD officials stated that a working group, including
representatives from each service, was convened in December 1997 to
address the problems in the housing requirements determination
process.  However, milestones for the working group and for
implementing improvements to the requirements process had not been
developed at the time of our review in March 1998. 


   MAXIMIZING USE OF CIVILIAN
   HOUSING HAS BEEN MOST
   ECONOMICAL
---------------------------------------------------------- Chapter 3:2

Integrated housing plans founded on accurate requirements
determinations can help ensure implementation of DOD's policy of
relying first on existing private sector housing to meet the
military's family housing needs.  Implementation of this policy has
been the most economical form of privatization.  When servicemembers
are paid housing allowances and families live in suitable private
housing in local communities, the government's cost for housing is
minimized and the military is effectively out of the housing
business.  To illustrate, in our 1996 housing report, we compared the
government's costs to provide housing for a military family in
government-owned and private sector family housing units in fiscal
year 1995.  The comparison showed that the government spent an
average of $4,957 less for each family that lived in private sector
housing.  The difference resulted because a typical family living in
private housing paid $2,016 of its housing costs out of pocket and
the government paid $1,416 less in education impact aid because
private housing is subject to local taxes.  The remaining amount
represented the estimated difference in the annual cost of a housing
unit constructed, operated, and maintained by the military and a unit
constructed, operated, and maintained by the private sector. 

There are other advantages to relying on private housing.  In the
current environment of constrained defense budgets and DOD's requests
for future rounds of base closures, the short-term flexibility
offered by maximum use of private sector housing appears preferable
to the long-term commitments required by Milcon and most
privatization agreements.  Existing private sector housing also can
offer military members a greater selection of housing options to fit
their needs instead of limiting them to what is available in military
housing. 

The services have not always maximized use of existing private sector
housing in accordance with the DOD policy.  In our 1996 report, we
stated that the communities surrounding many military installations
could meet thousands of additional family housing needs.  For
example, the Army reported in 1996 that over 34,000 government family
units at 59 Army installations were occupied but were considered
surplus--meaning that the communities near these installations had
affordable housing available that could meet these requirements. 
Similarly, the Air Force reported that over 4,000 government units at
13 Air Force installations were surplus.  The Navy and the Marine
Corps did not accumulate comparable housing information on their
installations. 

We are not suggesting that the scope of any planned privatization
project is not justified.  A sufficient quantity of affordable
private sector housing is not available at many U.S.  military
installations.  We do believe, however, that long-range, integrated
housing plans can provide the focus needed to ensure that maximum use
is made of civilian housing before new investments are made in
military housing.  In particular, when local communities can meet
additional military family housing requirements, this focus can
ensure that government housing units are closed when the units reach
the end of their economic life rather than renovated or replaced
through Milcon or privatization.  By ensuring that privatization
authorities are used only where needed, the military's risks are
reduced and costs are minimized for incentives to private developers,
education impact aid, on-base housing utilities, and police and fire
support for on-base housing. 


      NAVY'S ENHANCED HOUSING
      REFERRAL SERVICES HAVE
      EXPANDED PRIVATE HOUSING
      OPPORTUNITIES
-------------------------------------------------------- Chapter 3:2.1

Providing comprehensive housing referral services to servicemembers
has proven to be an effective means of promoting greater use of
existing private sector housing.  Effective referral services that
result in placing more military families in suitable private sector
housing could reduce the need for new construction, whether it is
accomplished through privatization or Milcon.  DOD policies currently
require each installation to assist servicemembers and their families
in finding suitable private housing in the local communities.  The
Navy, however, has adopted a more aggressive, or enhanced, approach
to housing referrals to help families find suitable housing. 

According to Navy officials, the Navy has pursued enhanced housing
referral services since 1994.  Under this approach, Navy housing
officials work with local landlords and apartment managers to obtain
preferences for military families such as reduced rental rates,
waiving of some rental fees and deposits, and unit set-asides in
which certain vacancies are offered to military families before they
are offered to civilians.  For example, Navy housing officials at
Everett, Washington, stated that they had signed agreements with 39
housing complexes that had resulted in providing affordable housing
for about 350 servicemembers and their families.  This approach also
includes welcome centers, which servicemembers can visit to obtain
detailed information on area housing and receive personal assistance
in securing suitable housing. 

DOD officials stated that the Navy's approach has been successful and
probably would be beneficial if adopted by the other services. 
However, the officials stated that there is no current initiative to
implement enhanced referral programs in the other services. 


   USE OF HOUSING ALLOWANCES IS A
   KEY TOOL BUT REQUIRES
   COORDINATION
---------------------------------------------------------- Chapter 3:3

Long-range, integrated plans can emphasize the use of housing
allowances as a key tool in addressing the military's housing
problem.  Adequate housing allowances can help military members and
their families secure suitable housing in the local communities,
reducing the need for on-base housing.  However, because use of
allowances to address the services' housing problems can directly
affect the use of other tools, such as privatization and military
construction, coordination is required to manage the impacts.  This
coordination has not always occurred.  In some cases, DOD initiatives
relating to housing allowances and to construction and management of
military family housing have been viewed and managed separately
rather than in combination to achieve a synergistic impact. 

One reason for this is that separate DOD organizations manage these
two key components of the family housing program.  Housing allowances
are the responsibility of the Under Secretary of Defense for
Personnel and Readiness and primarily are managed centrally at DOD
headquarters by the organization responsible for all compensation
issues, including basic pay and other types of allowances. 
Appropriations for housing allowances are included in the services'
military personnel accounts.  Construction, management, and
privatization of military housing are the responsibility of the Under
Secretary of Defense for Acquisition and Technology.  This
organization establishes overall DOD housing policy and delegates
primary housing management responsibility to the individual services,
their major commands, and individual installations.  This
organization is responsible for most housing initiatives, including
the Milcon program and the privatization initiative.  Appropriations
for the family housing program are included in the services' military
construction and family housing accounts. 

DOD officials stated that the two organizations work together and
coordinate on matters relating to housing allowances.  However, each
organization is responsible for its own initiatives, and an overall
strategy has not been developed to ensure optimum integration of all
initiatives.  For example, when a new housing allowance program was
developed, there was little discussion between the two organizations
on how the program would affect the privatization initiative, even
though allowance changes could affect not only the affordability of
existing private sector housing but also privatization agreements
where rental rates are equal to the servicemembers' housing
allowances. 

The Congress approved DOD's request for major changes to DOD's
housing allowance program starting in 1998.  Allowances in the future
will be based on average housing costs in each geographic area.  As
the new program is phased in over a 6-year period, DOD officials
stated that allowances in high-cost areas are expected to increase
and allowances in low-cost areas are expected to remain constant or
decline.  However, largely because of limited coordination between
the DOD offices responsible for housing allowances and housing
management, service officials told us that they were uncertain how
the new allowance program would affect the privatization initiative,
but they did voice some concerns.  For example, some officials
questioned how a contractor under a privatization agreement would
respond if rents were based on housing allowances and the allowances
declined.  Conversely, if allowances increased significantly, rental
payments to the contractor could increase significantly, creating the
potential for windfall profits. 

Also, Marine Corps housing officials stated that if housing
allowances increased, the need for on-base housing could decrease. 
For example, with larger allowances some occupants of privatized
on-base housing might move to community housing, leaving on-base
vacancies available to civilians.  This view appears to be supported
by a 1997 study on military housing issues by the RAND organization. 
The study stated that the primary reason military families choose
on-base housing is economics.  Many families, particularly in lower
paygrades, believe that the value of the on-base housing exceeds the
amount of allowance they forfeit to live there.  RAND also found that
few families would choose to live in on-base housing if their housing
allowances would permit them to obtain suitable housing in the
community without considerable out-of-pocket costs. 


   SOME STEPS HAVE BEEN TAKEN TO
   IMPROVE HOUSING PLANS
---------------------------------------------------------- Chapter 3:4

In November 1997, DOD took an important step in its planning by
directing the services for the first time to submit plans for
eliminating inadequate family housing.  The services were directed to
submit plans by May 1, 1998, that identify by installation, housing
revitalization requirements and the potential for privatization. 
Although this information could be an important first step in
developing comprehensive housing plans, DOD did not provide written
guidance for the services to use in determining revitalization
requirements and privatization potential.  Further, comprehensive
plans that integrate not only privatization but also other elements
of DOD's housing program are needed.  The DOD direction to the
services did not require the plans to include steps to improve the
requirements determination processes; maximize existing private
sector housing; develop enhanced referral services; or coordinate use
of allowances, military construction, and privatization options. 

On its own initiative, the Air Force appears to have recognized the
need for comprehensive, integrated housing plans.  Air Force
officials stated that privatization alone will not solve the housing
problem and that the ultimate solution lies within an integrated
approach.  With this in mind, in August 1997, the Air Force began
working with consultants to develop a housing master plan for each
Air Force installation.  Air Force officials stated that the master
plans will define the most effective housing investment strategy by
integrating construction, operations and maintenance revitalization,
privatization, and reliance on local community housing.  The Air
Force expects the first portion of the plans, potential for
privatization, to be completed by May 1998 to comply with the DOD
direction.  The overall master plans are expected to be completed in
December 1998. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:5

DOD needs to ensure that the services develop long-range, integrated
housing plans that rely on and use all of the available tools; not in
isolation, but in a coordinated, optimum manner.  Such plans can
provide the focus needed to ensure accurate housing requirements
determinations, maximum use of suitable civilian housing, use of
enhanced housing referral services, coordination of housing
allowances changes, and appropriate use of privatization and Milcon
alternatives. 

DOD has taken some initial steps to developing better planning. 
However, additional steps can be taken to ensure that the military's
housing problems are addressed in an optimum manner.  Also, achieving
a more integrated approach has been somewhat hampered by separate DOD
organizations responsible for housing allowances and housing
construction and management.  Although there may be valid reasons for
keeping these functions in separate offices, greater efforts are
needed to ensure effective coordination on housing issues. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:6

We recommend that the Secretary of Defense expand the directive to
the services concerning their plans for eliminating inadequate
housing.  Specifically, the Secretary should direct the services to
prepare detailed, integrated housing plans that will (1) describe
their plans for improving their housing requirements determination
processes, (2) demonstrate how they will attempt to maximize their
reliance on community housing in accordance with DOD's stated policy,
and (3) outline improvements in housing referral services.  The plans
should also include analyses of the estimated impact of the new
housing allowance program on the availability of housing in local
communities and show how housing allowances, traditional military
construction, and the privatization initiative will be used in
concert to meet DOD's housing needs in the most economical manner. 
Each service plan should include estimated milestones for achieving
the goals of the plan. 

We also recommend that the Secretary establish a mechanism to promote
more effective coordination between the offices responsible for
housing allowances and housing management. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:7

DOD partially concurred with our recommendations, stating that it is
aware of the need to integrate effectively all the elements of its
housing program.  DOD said that the services already have begun
making specific plans about whether privatization or military
construction should be pursued at each installation.  DOD also stated
that development of standard procedures for determining housing
requirements is the subject of a working group first convened in
December 1997, which includes representatives from each service. 
However, DOD stated that the legislative authority for privatization
expires in 2001, unless extended or made permanent.  As a result, DOD
stated its immediate focus is on demonstrating at several prototype
sites how housing privatization can be an effective tool for
addressing DOD's housing problems.  DOD stated that only after
succeeding in this demonstration and in a demonstration of how other
new elements of DOD's housing program can succeed will its focus turn
toward the imperative of better integrating these new tools with all
the other aspects of its housing program. 

Although the steps DOD outlined are positive, we do not agree that
DOD should wait until it can demonstrate successes in its
privatization program before focusing on integrating the elements of
its overall housing program.  Better integration of housing elements
is needed now to maximize the advantages of the initiative and ensure
that housing is revitalized or constructed only at installations
where the local communities cannot meet the military housing
requirements.  Also, we believe all the elements of our
recommendation are important aspects of such integration.  While DOD
mentioned steps related to certain elements, it did not directly
address those aimed at promoting maximum reliance on community
housing.  For example, DOD did not state whether it would encourage
the services to improve their housing referral programs or analyze
the impact of the new housing allowance program on available housing
in the community before proceeding to revitalize or build new
housing.  We continue to believe that DOD should expand the directive
to the services concerning development of installation housing plans
to cover each element of our recommendation to help ensure maximum
reliance on community housing.  An expanded directive to the services
in preparing their housing plans would help focus the services'
attention on how they can use the full range of tools available to
them in concert to address their housing problems in the most
economical way.  Moreover, requiring the services to set milestones
for achieving their housing goals would help DOD measure progress in
improving military housing. 

DOD also agreed that coordination between the offices responsible for
housing allowances and housing management is necessary and
appropriate but stated existing coordination mechanisms are adequate
and effective.  We believe that improved coordination during
development and implementation of the new allowance program could
have increased understanding of how the new program will affect the
privatization initiatives.  As noted in our report, service officials
were uncertain about the relationship of the two initiatives. 
Moreover, as we pointed out, the new program could result in making
more local community housing affordable to military families, thus
reducing the need for privatized housing in some locations.  We
continue to believe that the relationship between military housing
and allowances is extremely close, improved coordination between the
offices responsible for these issues can lead to a more integrated
approach to housing, and new mechanisms are needed to help achieve
this improved coordination. 


SUMMARY OF AUTHORITIES IN THE
MILITARY HOUSING PRIVATIZATION
INITIATIVE
=========================================================== Appendix I

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

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

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

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

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

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

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

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

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

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

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

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


PRIVATIZATION PROJECTS UNDER
CONSIDERATION AS OF JANUARY 1998
========================================================== Appendix II

                                        (Dollars in millions)

                                                                                      Estimated
                                    Number of units                              construction costs
                            -------------------------------                      -------------------
                                                             Site:     Estimate
                                                             located   d fiscal
                                             Addition        on base   year for           Government
                            Replac  Renovat    al new  Tota  or off    contract          contributio
                  Project       ed       ed   housing     l  base         award   Total          n\a
Service           --------  ------  -------  --------  ----  --------  --------  ------  -----------
Army              Fort           0    1,824       840  2,66  On            1998  $220.0         $9.6
                  Carson                                  4

                  Fort         700    4,240     1,043  5,98  On            2000  $315.0        $39.0
                  Hood                                    3

                  Fort         141    2,785       133  3,05  On            2000  $179.0         $4.4
                  Stewart                                 9

                  Fort         730    2,619       366  3,71  On            2000  $305.0         $9.4
                  Lewis                                   5

Air Force         Dyess          0        0       402   402  Off           1999   $25.8        $19.9

                  Elmendor       0      320       300   620  On            1999   $79.3        $12.5
                  f

                  Kirtland   1,066      759         0  1,82  On            1999       b        $26.4
                                                          5

                  Lackland     272        0       148   420  On            1998       b            b

                  Mt. Home       0      497         0   497  On            1999   $21.2        $11.0

                  Peterson       0        0       200   200  Off           1999       b            b
                  A

                  Peterson       0        0       182   182  On            1999   $57.0            b
                  B

                  Robins         0      300       370   670  On            1999   $44.9        $12.0

Navy              Everett        0        0       400   400  Off           1999       b            b
                  II

Marine Corps      Pendleto       0      512       204   716  On            1998       b        $20.0
                  n

                  Albany       160        0         0   160  On            1998       b            b

====================================================================================================
Total                        3,069   13,856     4,588  21,5
                                                         13
----------------------------------------------------------------------------------------------------
Note:  This table does not include many potential privatization
projects that are in the early planning stages.  For example, the
Navy has begun planning a potential regional privatization project in
San Diego, California, and the Marine Corps has begun planning for
projects at Beaufort, South Carolina, and Camp Lejeune, North
Carolina. 

\a The government contribution column does not include the value of
any government assets conveyed. 

\b An estimate was not available at the time of our review in January
1998. 

Source:  Data provided to us in January 1998 by service officials. 


NAVY'S LIMITED PARTNERSHIP
AGREEMENTS FOR HOUSING AT CORPUS
CHRISTI, TEXAS, AND EVERETT,
WASHINGTON
========================================================= Appendix III

The Congress approved legislation in October 1994 that gave the Navy
authority to test the use of limited partnerships with the private
sector to develop family housing for Navy servicemembers and their
families.  The Navy initiated two limited partnership agreements
using this earlier authority to help meet family housing shortages
for enlisted servicemembers in the Corpus Christi, Texas, and the
Everett, Washington, areas. 


   HOUSING AT CORPUS CHRISTI,
   TEXAS
------------------------------------------------------- Appendix III:1

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

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

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

The 404 units were constructed at two locations--Portland and
Kingsville--to serve separate Navy installations in the area.  To
serve the Corpus Christi Naval Air Station and the Ingleside Naval
Station, 302 units were constructed near Portland, a community about
22 miles from the Naval Air Station and about 16 miles from the Naval
Station.  The partnership agreement established the initial rental
rates for the units and stated that the rates could be adjusted
annually on the basis of the percentage change in a specified housing
cost index.  The 1997 monthly rents at Portland for two-bedroom,
three-bedroom, and four-bedroom units were $598, $660, and $798,
respectively.  Local Navy housing officials estimated that monthly
utilities averaged $136.  Thus, total estimated monthly costs were
$734, $796, and $934 for two-bedroom, three-bedroom, and four-bedroom
units, respectively. 

The 1997 monthly housing allowance for a paygrade E-5 member at
Corpus Christi was $588.  Thus, a paygrade E-5 servicemember that
rented a two-bedroom unit at Portland paid $146, or about 25 percent,
more than the member's housing allowance.  In comparison, a paygrade
E-4 member renting a two-bedroom unit paid $207, or about 39 percent,
more than the allowance for an E-4 member, and a paygrade E-6 member
paid $93, or about 15 percent, more than the allowance for an E-6
member.  On average, throughout the United States, military members
living in civilian housing pay about 20 percent more for their
housing than their allowances. 
Table III.1 provides more details on out-of-pocket costs at Portland. 



                                   Table III.1
                     
                     Out-of-pocket Costs at Portland in 1997

                                     Out-of-pocket costs\a
                ----------------------------------------------------------------
                    Paygrade E-4          Paygrade E-5          Paygrade E-6
                --------------------  --------------------  --------------------
Un
it   Rent plus
ty   estimated
pe   utilities     Amount    Percent     Amount    Percent     Amount    Percent
--  ----------  ---------  ---------  ---------  ---------  ---------  ---------
2         $734       $207         39       $146         25        $93         15
 b
 e
 d
 r
 o
 o
 m
3         $796       $269         51       $208         35       $155         24
 b
 e
 d
 r
 o
 o
 m
4         $934       $407         77       $346         59       $293         46
 b
 e
 d
 r
 o
 o
 m
--------------------------------------------------------------------------------
\a Out-of-pocket costs represent the difference between rent plus
estimated utilities and the member's housing allowance. 

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

At the time of our visit in January 1998, not all of the units were
occupied.  Of the 302 units, 178 units were occupied by the military,
61 units were occupied by civilians, and 63 units were vacant.  (See
table III.2.)



                              Table III.2
                
                 Occupancy at Portland in January 1998

Occupant category                  Number of units             Percent
------------------------------  ------------------  ------------------
Enlisted E-5 and below                          82                  27
Enlisted E-6 and above                          78                  26
Officer                                         18                   6
Civilian                                        61                  20
Vacant                                          63                  21
======================================================================
Total                                          302                 100
----------------------------------------------------------------------
Representatives from the Navy and the developer stated that the
vacancies existed because (1) many units were completed during the
fall after the time when most members transfer to the area and (2)
the units had not been aggressively marketed to civilians.  The
developer's representative stated that plans existed to increase
marketing to civilians.  Navy representatives also stated that there
were 493 servicemembers on the waiting list for family housing at
Corpus Christi.  However, because these families had not chosen to
rent at the Portland project, they apparently preferred waiting for
on-base family housing at Corpus Christi, which would result in no
out-of-pocket costs and a shorter commute to work. 

To serve the Kingsville Naval Air Station, 102 two- and three-bedroom
units were constructed on private property in Kingsville, a community
located about 40 miles from Corpus Christi.  The 1997 monthly rent at
Kingsville was $498 for a two-bedroom unit and $598 for a
three-bedroom unit.  Local Navy housing officials estimated that
monthly utilities averaged $121.  Thus, total estimated monthly costs
were $619 and $719 for two-bedroom and three-bedroom units,
respectively. 

The 1997 monthly housing allowance for a paygrade E-5 servicemember
at Kingsville was $553.  Thus, a paygrade E-5 servicemember that
rented a two-bedroom unit at Kingsville paid $66, or about 12
percent, more than the member's housing allowance.  In comparison, a
paygrade E-4 member renting a two-bedroom unit paid $154, or about 33
percent, more than the allowance for an E-4 member; and a paygrade
E-6 member paid $17, or about 3 percent, more than the allowance for
an E-6 member.  Table III.3 provides more details on out-of-pocket
costs at Kingsville. 



                                   Table III.3
                     
                       Out-of-pocket Costs at Kingsville in
                                       1997

                                     Out-of-pocket costs\a
                ----------------------------------------------------------------
                    Paygrade E-4          Paygrade E-5          Paygrade E-6
                --------------------  --------------------  --------------------
Un
it   Rent plus
ty   estimated
pe   utilities     Amount    Percent     Amount    Percent     Amount    Percent
--  ----------  ---------  ---------  ---------  ---------  ---------  ---------
2         $619       $154         33        $66         12        $17          3
 b
 e
 d
 r
 o
 o
 m
3         $719       $254         54       $166         30       $117         19
 b
 e
 d
 r
 o
 o
 m
--------------------------------------------------------------------------------
\a Out-of-pocket costs represent the difference between rent plus
estimated utilities and the member's housing allowance. 

Source:  Service housing officials at Kingsville Naval Air Station. 

At the time of our visit to the Kingsville units in January 1998, all
of the units were occupied.  Of the 102 units, 90 units were occupied
by the military, and 12 units were occupied by civilians.  However,
the majority of the units, 68 units, were occupied by military
officers rather than enlisted personnel.  (See table III.4.)



                              Table III.4
                
                Occupancy at Kingsville in January 1998

Category of occupant               Number of units             Percent
------------------------------  ------------------  ------------------
Enlisted E-5 and below                          15                  14
Enlisted E-6 and above                           7                   7
Officer                                         68                  67
Civilian                                        12                  12
Vacant                                           0                   0
======================================================================
Total                                          102                 100
----------------------------------------------------------------------
Although all of the units at Kingsville were occupied, Navy officials
stated that the project was not serving junior enlisted members to
the extent envisioned when the project was developed.  Most of the
units were occupied by single, junior-level officers, many of whom
shared the units with another single, junior-level officer.  The
partnership agreement did not provide for specific rental preferences
for enlisted servicemembers with families, and local housing
officials did not attempt to secure vacancies for enlisted members. 


   HOUSING AT EVERETT, WASHINGTON
------------------------------------------------------- Appendix III:2

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

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

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

The partnership agreement established the initial rental rates for
the units and stated that the rates would be adjusted annually on the
basis of the percentage change in a specified housing cost index. 
The 1997 monthly rents for two-bedroom, three-bedroom, and
four-bedroom units were $725, $750, and $850, respectively.  Local
Navy housing officials estimated that average monthly utilities for
two-bedroom, three-bedroom, and four-bedroom units were $130, $140,
and $155, respectively.  Thus, total estimated monthly costs were
$855, $890, and $1,005 for two-bedroom, three-bedroom, and
four-bedroom units, respectively.  The 1997 monthly housing allowance
for a paygrade E-5 servicemember at Everett was $712.  Thus, a
paygrade E-5 servicemember that rents a two-bedroom unit paid $143,
or about 20 percent, more than the member's housing allowance.  In
comparison, a paygrade E-4 servicemember renting a two-bedroom unit
paid $269, or about 46 percent, more than the allowance for an E-4
servicemember; and a paygrade E-6 servicemember paid $38, or about 5
percent, more than the allowance for an E-6 member.  Table III.5
provides more details about out-of-pocket costs at Everett. 



                                   Table III.5
                     
                      Out-of-pocket Costs at Everett in 1997

                                     Out-of-pocket costs\a
                ----------------------------------------------------------------
                    Paygrade E-4          Paygrade E-5          Paygrade E-6
                --------------------  --------------------  --------------------
Un
it   Rent plus
ty   estimated
pe   utilities     Amount    Percent     Amount    Percent     Amount    Percent
--  ----------  ---------  ---------  ---------  ---------  ---------  ---------
2         $855       $269         46       $143         20        $38          5
 b
 e
 d
 r
 o
 o
 m
3         $890       $304         52       $178         25        $73          9
 b
 e
 d
 r
 o
 o
 m
4       $1,005       $419         71       $293         41       $188         23
 b
 e
 d
 r
 o
 o
 m
--------------------------------------------------------------------------------
\a Out-of-pocket costs represent the difference between rent plus
estimated utilities and the member's housing allowance. 

Source:  Service housing officials at Everett Naval Station. 

At the time of our visit to Everett in January 1998, all of the units
were occupied.  Of the 185 units, 184 units were occupied by the
military, and
1 unit was occupied by a civilian, the on-site project manager.  (See
table III.6.)



                              Table III.6
                
                  Occupancy at Everett in January 1998

Category of occupant               Number of units             Percent
------------------------------  ------------------  ------------------
Enlisted paygrade E-5 and                      112                  60
 below
Enlisted paygrade E-6 and                       72                  39
 above
Officer                                          0                   0
Civilian                                         1                   1
Vacant                                           0                   0
======================================================================
Total                                          185                 100
----------------------------------------------------------------------
Local Navy housing officials stated that management attention helps
ensure that junior enlisted servicemembers receive preference in
renting units at the Everett project.  The local housing office
maintains separate waiting lists for paygrades E-6 and below and
paygrades E-7 and above.  When notified of a vacancy, the housing
office takes a proactive role in getting an enlisted servicemember to
fill the vacancy. 


DOD'S AND OUR ASSUMPTIONS USED IN
LIFE-CYCLE COST ANALYSIS FOR FORT
CARSON
========================================================== Appendix IV

Alternative and cost                                    Comments on differences
factor                     DOD estimate   Our estimate  in cost factors
------------------------  -------------  -------------  ------------------------
Military Construction:\a
--------------------------------------------------------------------------------
Construction costs for         $123,550           Same
 new units (per unit)
Revitalization costs for        $65,729           Same
 existing units (per
 unit)
Operations and                   $8,102         $6,385  Our estimate was based
 maintenance costs                                       on Army's fiscal year
 (annual per unit)                                       1999 budget request,
                                                         including utilities.
Revitalization costs for        $65,729           Same
 all units in year 25 of
 operation (per unit)
Education impact fee             $1,995           Same
 (annual per unit)

Privatization alternative:
--------------------------------------------------------------------------------
Government contribution     $36,577,000           Same
Housing allowances               $8,528         $8,040  Our estimate was based
 (annual average per                                     on 1998 allowances for
 unit)                                                   paygrades of proposed
                                                         occupants.
Utilities costs (annual              $0         $1,414  Army pays utilities. Our
 average per unit)                                       estimate was based on
                                                         Army's fiscal year 1999
                                                         budget request for
                                                         utilities.
Housing management costs           $113           Same
 (annual average per
 unit)
Education impact fee             $1,995           Same
 (annual per unit)

Both alternatives:
--------------------------------------------------------------------------------
Discount rate                      3.6%           3.8%  Our estimate was based
                                                         on the 1998 Office of
                                                         Management and Budget
                                                         (OMB) discount rate.
Total years in analysis              50           Same
--------------------------------------------------------------------------------
\a Milcon. 


DOD'S AND OUR ASSUMPTIONS USED IN
LIFE-CYCLE COST ANALYSIS FOR
LACKLAND AIR FORCE BASE
=========================================================== Appendix V

Alternative and cost                                    Comments on differences
factor                     DOD estimate   Our estimate  in cost factors
------------------------  -------------  -------------  ------------------------
Milcon alternative:
--------------------------------------------------------------------------------
Construction costs for         $131,575           Same
 new units (per unit)
Operations and                   $6,325           Same
 maintenance costs
 (annual per unit)
Revitalization costs for         $2,887             $0  We assumed Milcon funds
 year 25 of operation                                    appropriated for
 (annual set-aside per                                   revitalization in year
 unit)                                                   25 of operation.
Revitalization costs for             $0        $65,729  We assumed Milcon funds
 all units in year 25 of                                 appropriated for
 operation                                               revitalization in year
                                                         25 of operation. We
                                                         used same amount per
                                                         unit as the Army used
                                                         in the Fort Carson
                                                         analysis.
Education impact fee                 $0         $2,000  We included an estimate
 (annual per unit)                                       for education impact
                                                         fees.

Privatization alternative:
--------------------------------------------------------------------------------
Government contribution     $18,301,000           Same
Housing allowances               $6,361         $7,307  Our estimate was based
 (annual average per                                     on 1998 allowances for
 unit)                                                   paygrades of proposed
                                                         occupants.
Utilities costs (annual          $2,316           Same
 average per unit)
Housing management                   $0           $150  We estimated this cost
 costs                                                   based on one-third of
 (annual average per                                     current budgeted amount
 unit)                                                   for housing management
                                                         costs.
Education impact fee                 $0         $2,000  We included an estimate
 (annual per unit)                                       for education impact
                                                         fees.

Both alternatives:
--------------------------------------------------------------------------------
Discount rate                      3.0%           3.8%  Our estimate was based
                                                         on the 1998 OMB
                                                         discount rate.
Total years in analysis              40             50  We used the expected
                                                         term of the agreement.
--------------------------------------------------------------------------------



(See figure in printed edition.)Appendix VI
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix V



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII


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

Carol Schuster, Associate Director
William Solis, Assistant Director
Charles Perdue, Senior Economist


   NORFOLK FIELD OFFICE
------------------------------------------------------- Appendix VII:2

Gary Phillips, Evaluator-in-Charge
James Ellis, Senior Evaluator

*** End of document. ***