Defense Depot Maintenance: Use of Public-Private Partnering Arrangements
(Letter Report, 05/07/1998, GAO/NSIAD-98-91).

This report provides information on the use of partnering arrangements
between the Defense Department and private-sector contractors to use
excess capacity at military service repair depots. GAO discusses (1) the
legal framework under which partnering can occur and (2) the types of
current partnering arrangements and the views of the military services
and industry on such arrangements. GAO focuses on Army and Air Force
depots.

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

 REPORTNUM:  NSIAD-98-91
     TITLE:  Defense Depot Maintenance: Use of Public-Private
	     Partnering Arrangements
      DATE:  05/07/1998
   SUBJECT:  Joint ventures
	     Military facilities
	     Privatization
	     Defense cost control
	     Contractors

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Cover
================================================================ COVER

Report to Congressional Requesters

May 1998

DEFENSE DEPOT MAINTENANCE - USE OF
PUBLIC-PRIVATE PARTNERING
ARRANGEMENTS

GAO/NSIAD-98-91

Defense Depot Maintenance

(709271)

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

  AFMC - Air Force Materiel Command
  DOD - Department of Defense
  FOX - x
  IOC - Industrial Operations Command

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

B-279126

May 7, 1998

Congressional Requesters

This report responds to your requests for information regarding the
use of partnering arrangements between the Department of Defense
(DOD) and private sector contractors to use excess capacity at
military service repair depots.  Specifically, this report discusses
(1) the legal framework under which partnering can occur and (2) the
types of current partnering arrangements and the services' and
industry's views of such arrangements.  As agreed with your offices,
we focused our review on Army and Air Force depots.

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

Although there is no generally agreed upon definition of partnering,
for purposes of this report, partnering arrangements include, but are
not limited to (1) use of public sector facilities and employees to
perform work or produce goods for the private sector; (2) private
sector use of public depot equipment and facilities to perform work
for either the public or private sector; and (3) work-sharing
arrangements,\1 using both public and private sector facilities
and/or employees.  Work-sharing arrangements share similar
characteristics to the customer-supplier partnerships on which we
have previously reported.\2

Partnering arrangements exclude the normal service contracting
arrangements where contract personnel are used to supplement or
assist depot personnel in performing work in depot facilities.

DOD spends about $13 billion, or 5 percent of its $250 billion fiscal
year 1997 budget, on depot maintenance, which includes repair,
rebuilding, and major overhaul of weapon systems, including ships,
tanks, and aircraft.  The Army has five depots managed by the
Industrial Operations Command (IOC), and the Air Force has five
depots managed by the Air Force Materiel Command (AFMC).\3

The Navy's three aviation depots and four shipyards are managed by
the Naval Air and Sea Systems Commands.  Also, a significant amount
of depot repair activities is performed at various private contractor
facilities.

Depots operate through a working capital fund.  The fund is used to
finance a depot's cost of producing goods and services for its
customers.  The fund is reimbursed through customer payments for the
goods and services provided and is to be self-sustaining and operate
on a break-even basis over the long term.

Defense spending and force structure reductions during the 1980s and
1990s resulted in substantial excess capacity in both public and
private sector industrial repair and overhaul facilities.  Some of
DOD's excess depot maintenance capacity has been reduced through the
base realignment and closure process.  However, the services and the
private sector continue to have large industrial facilities and
capabilities that are underused.  We have reported and testified that
reducing such excess capacity and resulting inefficiencies could save
hundreds of millions of dollars each year.\4 Navy officials state
that they have already significantly reduced excess capacity by
closing three of six aviation depots and four of eight shipyards.

To address its excess capacity problem, DOD continues to seek
legislative authority for additional base closures under a base
realignment and closure type process.  However, due to congressional
concerns over local social and economic impacts of such closures and
questions regarding the savings and experiences from previous
closures, such authority has not been provided.  There is also a
continuing debate between the Congress and the administration over
where and by whom the remaining depot workloads will be performed.
Central to this debate has been DOD's efforts to rely more on the
private sector for depot maintenance and statutory provisions that
(1) require public-private competitions for certain workloads, (2)
limit private sector workloads to 50 percent of the available funding
for a particular fiscal year, and (3) require maintaining certain
core capabilities in the public depots.

DOD, the Congress, and the private sector have shown an interest in
partnering arrangements as another tool to address the problems of
excess capacity and declining workloads.  DOD agrees with partnering
concepts and discusses partnering in both the Defense Planning
Guidance, which contains guidance for the services to develop their
strategic plans, and in the fourth comprehensive Quadrennial Defense
Review, a report required by the Military Force Structure Review Act
of 1996, which was included in the National Defense Authorization Act
for Fiscal Year 1997.  In the Defense Planning Guidance, DOD directs
the services to encourage commercial firms to enter into partnerships
with depots to reduce excess capacity, overhead burdens, and maintain
critical skills.  In the Quadrennial Defense Review, DOD states that
it will use in-house facilities to partner with industry to preserve
depot-level skills and use excess capacity.

--------------------
\1 In these work-sharing arrangements, the public and private sectors
share the workload for a particular program.  A depot is assigned
work through normal Army channels and industry performs work pursuant
to a government contract.

\2 Partnerships:  Customer-Supplier Relationships Can Be Improved
Through Partnering (GAO/NSIAD-94-173, July 19, 1994).

\3 The 1995 Base Realignment and Closure process designated two of
these depots for closure -- the Air Force's San Antonio and McClellan
Air Logistics Centers.  The closures have been delayed until the year
2001.

\4 Defense Outsourcing:  Challenges Facing DOD As It Attempts to Save
Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.  12, 1997)
and Air Force Depot Maintenance:  Privatization-in-Place Plans Are
Costly While Excess Capacity Exists (GAO/NSIAD-97-13, Dec.  31,
1996).

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

A number of statutory provisions enacted primarily during the 1990s
provide, under certain conditions, the authority and framework for
partnering arrangements.  Various provisions of title 10 of the
United States Code allow the services to sell articles and services
outside DOD for limited purposes and under certain conditions.\5 The
Army has this authority for many of its industrial facilities under
section 4543 of title 10.  The Army controls the sales authority
under this provision.  The authority for the remaining DOD industrial
facilities, including those of the Air Force, is contained in 10
U.S.C.  2553.  It requires the Secretary of Defense to designate
which facilities will have the authority to sell articles and
services outside of DOD.  Under both provisions, the goods or
services sold must not be available commercially in the United States
and providing these goods and services must not interfere with a
facility's military mission.  Due in part to these differing
authorities, the extent to which the Army and the Air Force pursue
partnering arrangements varies.

The Army has designated depots that may sell articles and services
outside of DOD and has developed criteria for determining when such
goods and services are not commercially available.  As shown in
appendix II, at the time of our review the Army had established 13
partnering arrangements using both the sales statutes in title 10 and
work-sharing arrangements not requiring specific legislation.  Army
and private sector officials state that partnering has improved
operational efficiencies at their respective facilities and that they
are pursuing additional partnering opportunities.

The Secretary of Defense has delegated to the Secretary of the Air
Force the authority to designate which facilities may sell articles
and services outside of DOD.  However, the Air Force Secretary has
not made any such designations nor developed criteria to determine
whether a good or service is available from a domestic commercial
source.  There have been several private sector and depot proposals
to enter into partnering arrangements but none have been approved.
The Commander of the Air Force Materiel Command states that he is not
opposed to partnering, but he is not willing to enter into such
arrangements unless savings can be demonstrated.

--------------------
\5 There are additional authorities that may be used by a DOD
activity to sell goods or services such as 22 U.S.C.  2770 for the
sale of items to be incorporated into end items to be sold to foreign
countries.  This report only concerns the provisions cited by DOD as
authority for partnering.

   STATUTORY AUTHORITY EXISTS
   UNDER WHICH PARTNERING CAN
   OCCUR
------------------------------------------------------------ Letter :3

A number of statutory provisions enacted primarily during the 1990s
provide, within limitations, the authority and framework for
partnering.  Specifically, provisions in title 10 permit working
capital funded activities, such as public depots, within specified
limits, to sell articles and services to persons outside DOD and to
retain the proceeds.  Central among these limitations is that any
goods or services sold by the depots must not be available
commercially.  Also, the National Defense Authorization Act for
Fiscal Year 1995 authorized the Secretary of Defense to conduct
activities to encourage commercial firms to enter into partnerships
with depots.  Further, section 361 of the National Defense
Authorization Act for Fiscal Year 1998, provides that the Secretary
of Defense shall enable public depots to enter into public-private
cooperative arrangements, which shall be known as "public-private
partnerships" for the purpose of maximizing the utilization of the
depots' capacity.  However, the 1998 Authorization Act does not
appear to have expanded the services' ability to enter into such
arrangements since section 361 did not contain any specific sales or
leasing authority for use in partnering.\6 Table 1 shows the major
provisions in title 10, along with relevant sections in the 1995 and
1998 National Defense Authorization Acts, which facilitate
partnering.

                                     Table 1

                         Laws That Provide Authority for
                           Partnering at Public Depots

                              Date
Provision                  enacted  Relevant terms
---------------------  -----------  --------------------------------------------
Title 10 Section              1962  Permits the Secretary of Defense to
 2208                                establish DOD working capital funds.
                              1991
 Subsection 2208(j)                  Permits depots to sell articles or services
                                     outside DOD if purchaser is fulfilling a
                                     DOD contract and the contract is awarded
                                     pursuant to a public-private competition.
Title 10 Section 4543         1993  Authorizes Army industrial facilities to
                                     sell articles or services outside DOD for
                                     specified purposes and under certain
                                     conditions, including that the goods or
                                     services not be commercially available in
                                     the United States and the sale will not
                                     interfere with the facility's military
                                     mission. The proceeds are to be credited to
                                     the funds incurring the costs of
                                     manufacture or performance.
Title 10 Section 2553         1994  Permits the Secretary of Defense to
                                     designate DOD industrial facilities, other
                                     than Army facilities governed by section
                                     4543, to sell articles or services outside
                                     DOD under conditions similar to those set
                                     forth in 4543. The proceeds are to be
                                     credited to the funds incurring the costs
                                     of manufacture or performance.
Title 10 Section              1994  Allows the secretary of a military
 2471                                department, under certain conditions, to
                                     lease excess depot equipment and facilities
                              1956   to a person outside DOD.
 Title 10 Section
 2667                                Allows the leasing of nonexcess equipment
                                     and facilities of a DOD activity to a
                                     person outside DOD. The proceeds may be
                                     used by the leasing military department.
1995 National Defense         1994  Directs the Secretary of Defense to
 Authorization Act                   encourage commercial firms to enter into
 Section 337                         "partnerships" with depots.
1998 National Defense         1997  Authorizes a 2-year pilot program under
 Authorization Act                   which Army industrial facilities may sell
 Section 141                         articles and services to persons outside
                                     DOD without regard to their commercial
 Section 361                         availability in support of DOD weapon
                                     systems.

                                     Adds section 2474 to title 10, establishing
                                     Centers of Industrial and Technical
                                     Excellence at existing depots and
                                     permitting receipts from public-private
                                     "partnerships" to be credited to depots'
                                     accounts.

                                     Amends 10 U.S.C. 2471 to permit proceeds
                                     from leases of excess equipment and
                                     facilities to be used by the leasing
                                     military department.
--------------------------------------------------------------------------------

--------------------
\6 Section 361 did amend the provision at 10 U.S.C.  2471 to provide
that the proceeds from leases of excess equipment and facilities
could be used by the leasing military department.

   PARTNERING ARRANGEMENTS AT
   DEPOTS
------------------------------------------------------------ Letter :4

The Army and the Air Force, for various reasons, view partnering
arrangements differently.  The Army believes that there are
substantial opportunities within its legal authority to enter into
contractual arrangements with private sector companies for the sale
of goods and services.  It has entered into a number of such
arrangements using this authority.  The Air Force believes such
opportunities are very limited and has not entered into any such
arrangements.

The Army has entered into partnering arrangements under the
legislation covering sales of goods and services.  A sales
arrangement is a contract between a depot and a private firm whereby
a depot provides specific goods and services.  The Army has
designated which depots may sell articles and service outside of DOD
and has issued specific implementing guidance.  In 1995, the U.S.
Army Depot Systems Command (now IOC) issued policy guidance for its
facilities to enter into sales, subcontracts, and teaming
arrangements with private industry.  In July 1997, IOC developed the
criterion for determining commercial availability.  Under the
criterion, a customer must certify that the good or service is not
reasonably available in sufficient quantity or quality in the
commercial market to timely meet its requirements.  Cost cannot be a
basis for determining commercial availability.

The Army has also entered into a number of work-sharing arrangements
that do not require specific legislative authority.  They differ from
a sales arrangement in that there is no contract between a depot and
a private firm.

The Air Force has not approved any proposed partnering arrangements.
The Secretary of Defense has delegated to the Secretary of the Air
Force the authority to designate which depots may sell articles and
services outside of DOD.  However, the Air Force Secretary has not
made any such designations nor developed criteria to determine
whether a good or service is available from a domestic commercial
source.  Air Force officials state that 10 U.S.C.  2553, like the
corresponding Army sales statute
(10 U.S.C.  4543), prohibits the Air Force from selling articles or
services if those articles or services are available from a domestic
commercial source.  However, unlike the Army, Air Force officials
believe the restriction prohibits the sale of almost any product or
service their depots could provide.

      ARMY PARTNERING ARRANGEMENTS
      USING EXISTING LEGISLATION
---------------------------------------------------------- Letter :4.1

Army depots have entered into a number of partnering arrangements
under the current statutory framework and within the context of the
public-private workload mix for depot maintenance.  These
arrangements include sales under 10 U.S.C.  4543 and subcontracting
under
10 U.S.C.  2208(j).  Red River, Tobyhanna, and Anniston Army Depots
all have ongoing arrangements with private industry to provide
services such as testing and repair of communications equipment;
development of training devices; testing of circuit card assemblies;
and overhaul, conversion, and grit blasting of tracked vehicles.  For
example, table 2 lists sales statute partnering initiatives that are
underway at the Anniston depot as of July 1997.

                                     Table 2

                      Partnering Initiatives Using the Sales
                                     Statutes

                                                            Dollar value of
Project             Sales statutes      Partner             contract
------------------  ------------------  ------------------  --------------------
Amphibious assault  10 U.S.C. 4543      United Defense      $181,000
vehicle                                 Limited
                                        Partnership

AGT 1500 Turbine    10 U.S.C. 4543      Allied Signal       $867,000
engine/
recuperator

FOX nuclear,        10 U.S.C. 4543      General Dynamics    $2.4 million
biological, and                         Land Systems
chemical
reconnaissance
vehicle
maintenance and
upgrade

Hercules            10 U.S.C. 4543      United Defense      $52,000
                                        Limited
                                        Partnership

M113 grit blast/    10 U.S.C. 4543      United Defense      $1.96 million
test track          10 U.S.C. 2208(j)   Limited
                                        Partnership

Base operations/    10 U.S.C. 4543      General Dynamics    $40,000
base logistics                          Land Systems
--------------------------------------------------------------------------------
In each of these sales arrangements, the Army has awarded the private
sector company a contract to perform a certain scope of work.  The
contractor then makes a business decision to have the depot perform a
portion of that work under the sales statutes.  The sale is
accomplished by a contract between the depot and the private sector
firm that allows the depot to be reimbursed for costs associated with
fulfilling the contract.  These costs are estimated by maintenance
personnel and are based on direct labor, materials, and in-house
support costs.  The contractor must pay the depot in advance for
performing the service, and the depot reimburses its working capital
fund to cover these estimated costs.

For illustrative purposes, the FOX vehicle upgrade and M113 grit
blast/test track partnering arrangements are described in more detail
below.

         FOX VEHICLE MAINTENANCE
         AND UPGRADE PROJECT
-------------------------------------------------------- Letter :4.1.1

Following award of the FOX vehicle upgrade contract to General
Dynamics Land Systems, Anniston representatives informed the
contractor that the depot had facilities and capabilities that could
meet the contractor's needs and provide for substantial facility cost
savings and other benefits.  In January 1997, officials from Anniston
and General Dynamics Land Systems agreed to partner on the upgrade of
62 FOX reconnaissance vehicles.  The partnering agreement included a
4-year contract with the depot under
10 U.S.C.  4543.  Under the contract, the depot performs asbestos
removal, grinding, welding, machining, cleaning and finishing, and
prime and final paint operations.  Under the terms of the contract
with the Army, General Dynamics Land Systems does the upgrade using
the depot's facilities.  Depot facilities are provided to General
Dynamics Land Systems as government-furnished property under its
contract with the Army and revert back to the Army when the contract
is complete.

Depot personnel stated that this partnering arrangement has resulted
in (1) a lower total cost for the combined work performed, (2)
sustainment of core depot capabilities, and (3) overhead savings from
using underutilized facilities.  The depot has received about $1
million for its efforts on the first eight vehicles.  The contractor
stated that this project is a good example of a mutually beneficial
program; the contractor reports that it would have cost more to
perform the depot's share of the work at another location.  The
contractor also reports that it is spending $450,000 to upgrade
buildings at the depot and that it will occupy 27,000 square feet of
otherwise vacant or underutilized space.  A General Dynamics Land
Systems official stated that by occupying space at the Anniston depot
there was a savings to the program cost.

         M113 GRIT BLAST/TEST
         TRACK PROJECT
-------------------------------------------------------- Letter :4.1.2

The partnering arrangement on the M113 grit blast/test track project
was entered into under 10 U.S.C.  4543 and 2208(j).  The Army was
seeking a way to meet its fielding schedule for the M113 and asked
United Defense Limited Partnership if it could partner with the
Anniston depot to help meet fielding requirements.  Under this
partnering arrangement, United Defense Limited Partnership contracted
with the depot to perform grit blasting on the vehicle hulls and the
depot provided use of its test track facilities pursuant to a
subcontract with the contractor under
10 U.S.C.  2208(j).

Army officials stated that this partnership will allow them to meet
the fielding schedule and reduce overall program costs.  Contractor
officials stated by using the depot's grit blasting and test track
facilities, the need to build facilities to perform these functions
was negated.

      ARMY'S WORK-SHARING
      PARTNERING ARRANGEMENTS
---------------------------------------------------------- Letter :4.2

The Army and private sector defense firms have established
noncontractual partnering relationships by sharing workloads.  Army
program managers generally determine the mix of work between depots
and private sector contractors.  On any particular workload, either a
depot or a private sector firm could receive all or part of the work.
Under the Army's work-sharing partnering arrangements, a depot and a
contractor share specific workloads, based on each party's strengths.
The private sector firms' share of the workload is performed pursuant
to a contract with the activity supporting the program.  Thus, there
are no contracts directly between depots and private sector firms;
however, there are memorandums of understanding and detailed
agreements on how the partnerships will operate.  These agreements
generally provide mechanisms to mitigate risks, mediate disputes, and
standardize work processes.  Discussion of such arrangements at
Anniston and Letterkenny depots follows.

         ANNISTON ARMY DEPOT
-------------------------------------------------------- Letter :4.2.1

General Dynamics Land Systems, the original equipment manufacturer
for the Abrams tank, and Anniston entered into a work-share
partnering arrangement to upgrade the tank.  Anniston and the
contractor jointly initiated the Abrams Integrated Management XXI
program in 1993 to mitigate a number of problems, including a
declining depot-level maintenance workload, limited production of new
Abrams tanks, and fleet sustainment.  The goal of this arrangement
was to unite the tank industrial base expertise in armored vehicle
restoration, make needed improvements, and extend the life of the
fleet while reducing the dollars required to support the fleet.  The
Army approved the arrangement based on its objectives and projected
benefits and awarded General Dynamics Land Systems a contract on a
sole-source basis for its share of the work.

Under this arrangement, the depot disassembles the vehicles, prepares
the hull and turret for reassembly, and performs component
restoration and overhaul, and then the contractor uses these
components for assembly, system integration, and testing.  According
to depot officials, this partnering strategy retains core
capabilities by allowing the depot to maintain its current skill base
and reduces overhead costs through additional labor hours.  A
contractor representative cited benefits from the partnering
arrangement such as developing new programs and creating additional
business opportunities.

         LETTERKENNY ARMY DEPOT
-------------------------------------------------------- Letter :4.2.2

The Paladin program is a work-share partnering arrangement between
Letterkenny Army Depot and United Defense Limited Partnership.  In
1991, the Army determined that full-scale production of the Paladin,
a self-propelled howitzer, would be maintained within the private
sector.  However, due to factors such as cost growth and quality
concerns, potential offerors were encouraged to use government
facilities to the maximum extent practical.  United Defense Limited
Partnership proposed that the Letterkenny depot partner with it on
reconfiguring the Paladin, which would include the contractor doing
its portion of the work at the depot.  United Defense Limited
Partnership won the contract in April 1993, and the "Paladin
Enterprise" was formed in May 1993.  Both parties signed a memorandum
of understanding that established the roles and rules of the
partnership.

Under this arrangement, the depot performs chassis and armament
overhaul, modification, and conversion to the new configuration.  The
contractor is required to provide most of the Paladin-unique chassis
components, a new turret, subsystems for automatic fire control, and
the integration of all components.

According to depot officials, all participants in this arrangement
are benefiting from the dual use of the depot.  Specifically, depot
officials reported that collocating the contractor at the depot has
resulted in numerous savings, including $15 million in cost avoidance
by eliminating material processing through the Defense Logistics
Agency, and renovation of a government warehouse at the contractor's
expense valued at $3.4 million.  Contractor representatives stated
that this arrangement has allowed the contractor to remain in the
tracked vehicle market and to retain critical skills and technology
that will be needed when DOD resumes new vehicle production.  The
contractor is looking for additional partnering opportunities and
believes that its experience with Paladin will enhance its ability to
partner on future contracts.

None of the Army's partnering arrangements reviewed included the
leasing of excess or nonexcess depot equipment or facilities as
permitted under sections 2471 and 2667 of title 10.  However, there
are a number of partnering arrangements in which depot facilities are
provided to contractors as government-furnished property for the
performance of the contracts.

      AIR LOGISTICS CENTERS NOT
      PARTNERING
---------------------------------------------------------- Letter :4.3

The Air Force has not approved several proposals for its depots to
provide products or services to the private sector.  For example, in
January 1997, ABB Autoclave Systems, Inc., on behalf of Porsche
Engineering Services, requested the use of Warner Robins Air
Logistics Center's fluid cell press to form door panels.  The press
manufacturer stated that the depot and Cessna had the only fluid cell
presses with the table size needed to produce these door panels.
However, the Cessna press was not available.  The Center's Commander
requested approval from AFMC to enter into this partnering
arrangement with Porsche.  In April 1997, AFMC denied the request
because it believed that it did not have the authority to enter into
such a partnering arrangement since the Secretary of the Air Force
had not designated any depots to enter into such arrangements nor
issued implementing guidance to use in determining commercial
availability.

In another case, the Oklahoma City Air Logistics Center had excess
capacity in its engine test cell and proposed to AFMC that it enter
into a partnering agreement with Greenwich Air Services, Inc.  Under
the terms of the agreement, Greenwich would lease the test cell
facilities for testing commercial high bypass turbofan engines.  The
Center believed that this arrangement would more fully use its test
cell, thereby reducing excess capacity.  Greenwich also viewed the
arrangement as a "win-win" proposal that would defray or delay a
capital investment expense and increase its product line.  However,
AFMC did not approve the request because the Secretary of the Air
Force had not designated any depot to enter into sales arrangements
nor issued implementing guidance to use in determining commercial
availability.

The Commander, AFMC, stated that he is neither a proponent nor
opponent of partnering arrangements.  However, he would consider
approving such arrangements if it could be demonstrated that they
would save money.  He stated that his approach to cost reduction is
(1) identify what is excess and divest it, (2) lease any underused
capacity, and (3) then, and only if dollar savings can be
demonstrated, explore partnering opportunities.

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

In an era of reduced defense procurement, commercial contractors have
become more interested in sharing repair and maintenance workloads
with depots.  Additionally, depots, in an effort to reduce overhead
costs and retain core capabilities, are willing to enter into
partnering arrangements with the private sector.

A legal framework and the authority to enter into partnering
arrangements exist in title 10.  These authorities differ in some
respects between the Army and the Air Force as do their approach to
partnering.  The Army has used this legislation, as well as work
sharing, to initiate several partnering arrangements which, according
to Army and contractor officials, have been mutually beneficial.  The
Air Force, on the other hand, has not initiated any partnering
arrangements, citing the lack of a designation from the Secretary of
the Air Force identifying which logistics centers may use the sales
statutes and the legislative requirement that the good or service
provided by the depot not be commercially available.  The Air Force,
unlike the Army, has not developed criterion to determine commercial
availability, and in the absence of such criterion, has been
reluctant to enter into any sales arrangements.

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

Considering DOD's expressed support of partnering, we recommend that
the Secretary of the Air Force designate the Air Logistics Centers
that may use the sales statutes and provide implementing guidance to
include criteria for determining the commercial availability of goods
or services provided by the centers.

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To develop information on the legal framework under which partnering
can occur, we identified and reviewed legislation, DOD and the
services' policies and procedures, and talked to the services'
Offices of General Counsel.  We surveyed the services to determine
what partnering arrangements were ongoing or had been proposed at
their depots, and the services' views of such arrangements.

In addition, we interviewed officials at the Office of the Secretary
of Defense; Air Force Headquarters, Washington, D.C.; Army
Headquarters, Washington, D.C.; the Naval Sea Systems Command,
Arlington, Virginia; the Naval Air Systems Command, Patuxent River,
Maryland; the Army Material Command, Alexandria, Virginia; Air Force
Materiel Command, Wright-Patterson Air Force Base, Ohio; and the
Army's IOC, Rock Island, Illinois; and the Army's program manager for
Abram tanks.  We also visited the Ogden Air Logistics Center, Hill
Air Force Base, Utah, and the Anniston Army Depot, Anniston, Alabama.

To obtain private sector views on partnering, we interviewed
officials and obtained information from Lockheed Martin, Arlington,
Virginia; General Dynamics Land Systems, Anniston, Alabama; United
Defense Limited Partnership, Arlington, Virginia.; and United Defense
Limited Partnership-Steel Products Division, Anniston, Alabama.

We did not independently verify the benefits reported by the depots
and the contractors; however, we did obtain documentation related to
and supporting the reported figures.

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

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

DOD concurred with our findings and recommendation and provided a
number of comments that it characterized as technical.  Where
appropriate, we made minor changes and clarifications in response to
these comments.  However, we believe that one of the comments
warrants further discussion.  DOD commented that the definition of
partnering varies and that the Air Force has done many projects that
could be considered partnering.  As an example, DOD cited an
agreement between Warner Robins Air Logistics Center and Lockheed
Martin Corporation for repair services for the LANTIRN navigation and
targeting systems.  During our review, we discussed the LANTIRN
project with officials from Warner Robins.  It was explained that the
project was to be implemented in two phases, with phase I being a
firm-fixed price contract awarded to Lockheed Martin for the repair
of 40 items.  According to Warner Robins officials, this contract was
essentially the same as any contract the Center enters into except
the contractor would perform the work at Center facilities.  These
officials stated that phase I of the LANTIRN project does not
constitute a partnering arrangement.  However, under phase II of the
project, if approved, Lockheed would subcontract with the Center for
repair services to the LANTIRN for foreign military sales.  This
would be considered a partnership arrangement as defined in our
report, because it constitutes the use of public sector facilities
and employees to perform work or produce goods for the private
sector.

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

We are sending copies of this report to the Secretaries of Defense,
the Army, the Air Force, and the Navy; the Director, Office of
Management and Budget; and interested congressional committees.
Copies will be made available to others upon request.

If you have any questions concerning this report, please contact me
at (202) 512-8412.  Major contributors to this report are listed in
appendix III.

David R.  Warren, Director
Defense Management Issues

List of Congressional Requesters

The Honorable Kay Bailey Hutchison
United States Senate

The Honorable Neil Abercrombie
The Honorable Saxby Chambliss
The Honorable Tillie K.  Fowler
The Honorable James V.  Hansen
The Honorable John N.  Hostettler
The Honorable Ernest J.  Istook
The Honorable Walter B.  Jones, Jr.
The Honorable Solomon P.  Ortiz
The Honorable Norman Sisisky
The Honorable J.  C.  Watts, Jr.
House of Representatives

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

(See figure in printed edition.)

ARMY PARTNERING INITIATIVES AS OF
JULY 1997
========================================================== Appendix II

                Date approved/
Name               awarded      Depot           Contractor      Objective
--------------  --------------  --------------  --------------  ----------------
Abrams             6/12/96      Anniston Army   General         Proof of
Integrated                      Depot           Dynamics Land   Principle on
Management XXI                                  Systems         upgrade of 18
                                                                M1A1s

M1A2 Upgrade       8/26/95      Anniston Army   General         Overhaul work
Program/                        Depot           Dynamics Land   and
Gunner's                                        Systems         manufacturing
Primary Sight

M88A1 recovery     7/28/95      Anniston Army   United Defense  Conversion work
vehicle                         Depot           Limited
                                                Partnership

AGT 1500           7/28/95      Anniston Army   Allied Signal   Overhaul work,
turbine                         Depot                           packaging, and
engines/                                                        preservation
recuperators

FOX nuclear        8/16/95      Anniston Army   General         Upgrade work
biological                      Depot           Dynamics Land
chemical                                        Systems
reconnaissance
vehicles

Marine Corps'      2/14/96      Anniston Army   United Defense  Nonskid paint
amphibious                      Depot           Limited         and use of test
assault                                         Partnership     track
vehicle 7A1

M113 family of     3/21/96      Red River Army  United Defense  Overhaul work,
vehicles                        Depot and       Limited         grit blasting,
                                Anniston Army   Partnership     and use of test
                                Depot                           track

T-1571/T-154/      2/12/96      Red River Army  Wagner          Rubberize and
T-130E1 track                   Depot           Castings        assembly work
bodies

M109 Paladin       2/24/94      Letterkenny     United Defense  Upgrade work
Production                      Army Depot      Limited
Program                                         Partnership

Bradley            10/25/95     Red River Army  United Defense  Overhaul and
Conversion                      Depot           Limited         Conversion Work
Program                                         Partnership

AN/TTC-39          8/21/96      Tobyhanna Army  Dynamic         Acceptance
circuit card                    Depot           Industries      testing
assemblies                                      Corporation

Teach-quick         1/5/97      Tobyhanna Army  Enlogex, Inc.   Development of
advantage                       Depot                           training device

Communications      3/7/97      Tobyhanna Army  Pulse           Test and repair
security                        Depot           Engineering,
equipment                                       Inc.
--------------------------------------------------------------------------------

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

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

James F.  Wiggins, Associate Director

OFFICE OF THE GENERAL COUNSEL

John G.  Brosnan, Assistant General Counsel

DALLAS FIELD OFFICE

Ronald L.  Berteotti, Assistant Director
Patricia J.  Nichol, Evaluator-in-Charge
Oliver G.  Harter, Senior Evaluator
Kimberly C.  Seay, Senior Evaluator

*** End of document. ***