Coast Guard's Acquisition Management: Deepwater Project's Justification
and Affordability Need to Be Addressed More Thoroughly (Chapter Report,
10/26/98, GAO/RCED-99-6).

Pursuant to a congressional request, GAO reviewed the extent to which
the Coast Guard has: (1) accurately depicted the need to replace or
modernize its deepwater ships and aircraft; and (2) aligned the
estimated cost of its Deepwater Project with its overall budget for
capital projects.

GAO noted that: (1) although the Coast Guard is correct in starting now
to explore how best to modernize or replace its deepwater ships and
aircraft, the Deepwater Project's only formal justification developed to
date does not accurately or fully depict the need for replacement or
modernization; (2) this justification concluded that most deepwater
ships and aircraft would need to be phased out starting in the next 2 to
9 years; (3) however, subsequent analyses by the Coast Guard and others
have shown that deepwater aircraft likely have a much longer life; (4)
the justification asserted that these ships and aircraft were incapable
of performing future missions or meeting future demand, but GAO was
unable to validate these assertions from the information available; (5)
the Coast Guard withdrew the justification on the basis of concerns
expressed by the Office of Management and Budget and is now developing
more accurate and updated information; (6) several of these studies are
still under way, even as contracting teams have already begun work on
developing their initial deepwater proposals; (7) any delays in
communicating this updated information to the contractors could
adversely affect the quality of the proposals submitted; (8) while the
Coast Guard's acquisition approach seems an appropriate way to avoid a
costly one-for-one replacement of ships and aircraft, the agency could
face major financial obstacles in proceeding with a Deepwater Project
costing as much as initially proposed for planning purposes; (9) at a
projected $500 million a year, expenditures for the project would take
virtually all of the Coast Guard's projected spending for all capital
projects, which currently include the construction of new buoy tenders
and motorized lifeboats; (10) the Coast Guard expects more than $165
million of the annual funding to come from new user fees for domestic
ice-breaking and navigational services that the Coast Guard currently
provides; (11) however, the congressional subcommittees with
jurisdiction over the Coast Guard's budget have expressed opposition to
such fees, and the House and Senate have prohibited the Coast Guard from
planning or implementing any new user fees; (12) if hoped-for funding
does not occur, the Coast Guard may be left having either to reduce the
scope of the project or to stretch out the procurement period; and (13)
many other government procurement projects have demonstrated that when
agencies attempt to address a problem by stretching out the procurement
period, administrative and other costs increase, resulting in lower
value for the amount of money spent.

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

 REPORTNUM:  RCED-99-6
     TITLE:  Coast Guard's Acquisition Management: Deepwater Project's 
             Justification and Affordability Need to Be Addressed
             More Thoroughly
      DATE:  10/26/98
   SUBJECT:  Equipment repairs
             Aircraft
             Helicopters
             Ships
             Cost control
             Cost analysis
             User fees
             Future budget projections
             Federal procurement
IDENTIFIER:  Coast Guard Deepwater Capability Replacement Project
             
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Cover
================================================================ COVER


Report to the Subcommittee on Transportation, Committee on
Appropriations, U.S.  Senate

October 1998

COAST GUARD'S ACQUISITION
MANAGEMENT - DEEPWATER PROJECT'S
JUSTIFICATION AND AFFORDABILITY
NEED TO BE ADDRESSED MORE
THOROUGHLY

GAO/RCED-99-6

Coast Guard's Deepwater Project

(348038)


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

  AC&I - acquisition, construction, and improvements
  ARSC - Aircraft Repair and Supply Center
  DMAR - Deepwater Mission and Analysis Report
  DOD - Department of Defense
  DOT - Department of Transportation
  GAO - General Accounting Office
  OMB - Office of Management and Budget
  SSMEB - Ship Structure and Machinery Evaluation Board

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


B-280862

October 26, 1998

The Honorable Richard C.  Shelby
Chairman
The Honorable Frank R.  Lautenberg
Ranking Minority Member
Subcommittee on Transportation
Committee on Appropriations
United States Senate

In response to your request, this report discusses the extent to
which the Coast Guard has (1) accurately depicted the need to replace
or modernize its deepwater ships and aircraft and (2) aligned the
estimated cost of its Deepwater Project with its overall budget for
capital projects.  This report contains recommendations to the
Secretary of Transportation to assist the Coast Guard as it proceeds
with the project. 

As requested, unless you publicly announce its contents earlier, we
plan no further distribution of this report until 7 days after the
date of this letter.  We will then send copies to the Secretary of
Transportation; the Commandant of the Coast Guard; the Director,
Office of Management and Budget; and other interested parties.  We
will make copies available to others upon request. 

If you or your staff have any questions, please call me at (202)
512-2834.  Major contributors to this report are listed in appendix
IV. 

John H.  Anderson, Jr.
Director, Transportation Issues


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


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

The U.S.  Coast Guard is currently planning the potentially largest
acquisition project in its history.  Called the Deepwater Capability
Replacement Project, this effort involves replacing or modernizing
many of the Coast Guard's 92 ships and 209 airplanes and helicopters
used in search and rescue, drug interdiction, the interception of
illegal immigrants, fisheries regulation, defense operations, and
other at-sea operations.  Teams of contractors are currently at work
developing competing proposals for the Coast Guard's consideration. 
For initial planning purposes, the Coast Guard estimates the cost of
the project to be $9.8 billion (in constant dollars) over a 20-year
period. 

Because of the project's potential size, the Subcommittee on
Transportation, Senate Committee on Appropriations, asked GAO to
review the project's justification and the planning process being
followed by the Coast Guard and to focus on the following questions: 

  -- To what extent does the current justification for the Deepwater
     Project accurately depict the Coast Guard's need to modernize or
     replace ships and aircraft? 

  -- To what extent are projected costs for the Deepwater Project
     consistent with the Coast Guard's overall budget for its capital
     projects? 


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

The Coast Guard's deepwater operations involve missions that cannot
be carried out by shore-based small boats.  These missions include
search and rescue far out at sea, drug interdiction, the interception
of illegal immigrants, and protection against illegal fishing
operations.  The Coast Guard currently has 43 cutters, 49 patrol
boats, 71 surveillance aircraft, and 138 recovery helicopters for
meeting these missions.  In total, the Coast Guard estimates that it
spent about $1.3 billion in fiscal year 1997 in personnel,
maintenance, and other costs related to these operations. 

The Coast Guard began the Deepwater Project in 1996, following an
internal assessment indicating that most of these ships and aircraft
were at or near the end of their useful life.  The agency hopes to
replace or modernize its existing ships and aircraft, as well as make
the use of innovative technology such as satellites and improved
detection capabilities.  The project is still in the early stages,
but by 2002, the Coast Guard hopes to make final decisions about
which ships and aircraft should be included.  Initial planning
estimates call for spending $300 million starting in fiscal year 2001
and $500 million a year over the next 19 years, although the Coast
Guard acknowledges that the actual funding amount depends largely on
the funding priorities established by the administration and the
Congress. 

The Coast Guard is using a "system of systems" approach to determine
the type and mix of ships and aircraft that will best accomplish its
missions.  Rather than considering replacement of an individual class
of ships or aircraft, the agency is looking to develop a system that
will integrate ships, aircraft, sensors, and communications equipment
so that they can better operate with one another.  The hoped-for
result is a smaller number of ships and aircraft that will require
fewer staff to operate.  Teams of private contractors operating on a
competitive basis will develop proposals for the system.  The Coast
Guard plans its own series of checks and reviews of these proposals
to help ensure that the final result is the most effective and
economical system of systems. 


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

Although the Coast Guard is correct in starting now to explore how
best to modernize or replace its deepwater ships and aircraft, the
Deepwater Project's only formal justification developed to date does
not accurately or fully depict the need for replacement or
modernization.  This justification concluded that most deepwater
ships and aircraft would need to be phased out starting in the next 2
to 9 years.  However, subsequent analyses by the Coast Guard and
others have shown that deepwater aircraft--and perhaps many
ships--likely have a much longer life, assuming that maintenance and
upgrades are carried out.  The justification also asserted that these
ships and aircraft were incapable of performing future missions or
meeting future demand, but GAO was unable to validate these
assertions from the information available.  The Coast Guard withdrew
the justification on the basis of concerns expressed by the Office of
Management and Budget and is now developing more accurate and updated
information.  Several of these studies are still under way, even as
contracting teams have already begun work on developing their initial
deepwater proposals.  Any delays in communicating this updated
information to the contractors could adversely affect the quality of
the proposals submitted. 

While the Coast Guard's acquisition approach seems an appropriate way
to avoid a costly one-for-one replacement of ships and aircraft, the
agency could face major financial obstacles in proceeding with a
Deepwater Project costing as much as initially proposed for planning
purposes.  At a projected $500 million a year, expenditures for the
project would take virtually all of the Coast Guard's projected
spending for all capital projects, which currently include the
construction of new buoy tenders and motorized lifeboats.  The Coast
Guard expects more than $165 million of the annual funding to come
from new user fees for domestic ice-breaking and navigational
services that the Coast Guard currently provides.  However, the
congressional subcommittees with jurisdiction over the Coast Guard's
budget have expressed opposition to such fees, and the House and
Senate have prohibited the Coast Guard from planning or implementing
any new user fees.  If hoped-for funding does not occur, the Coast
Guard may be left having either to reduce the scope of the project or
to stretch out the procurement period--that is, to buy items in
smaller quantities over longer periods of time.  However, many other
government procurement projects have demonstrated that when agencies
attempt to address a problem by stretching out the procurement
period, administrative and other costs increase, resulting in lower
value for the amount of money spent. 


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


      JUSTIFICATION DID NOT
      ACCURATELY OR FULLY DEPICT
      MODERNIZATION OR REPLACEMENT
      NEEDS
-------------------------------------------------------- Chapter 0:4.1

The Coast Guard's justification for the Deepwater Project, issued in
1995, underestimated the useful life of many ships and aircraft in
the deepwater fleet.  The projections of remaining useful life were
based on estimates developed when these ships and aircraft were
originally built.  At that time, estimated service lives were
generally 20 years for aircraft and 30 years for ships unless
substantial modifications were subsequently made.  However, reviews
done since 1995 by the Coast Guard and others have shown that with
proper maintenance and ongoing upgrades, many ships and aircraft can
be used for a much longer period.  A number of these upgrades are
already under way or planned.  For example, beginning with a $4
million request in fiscal year 1999, the Coast Guard plans to begin
improving communications and information flow for all aircraft. 
Similarly, the agency has requested about $12.9 million in fiscal
year 1999 for replacing surface search radars on many of its cutters. 
With upgrades like these, the useful service life of many of these
assets, particularly aircraft, is extended 10 or more years beyond
original estimates, according to the Coast Guard's evaluations. 

Being able to use existing ships and aircraft for a longer time is of
limited help if these assets cannot meet new capability needs or are
too few in number to do the job.  The Coast Guard's 1995
justification asserted that current ships and aircraft lacked
capabilities needed for future missions and could not satisfy the
likely demand for services.  However, the Coast Guard did not conduct
a thorough analysis of the capabilities of current assets as required
by the Department of Transportation's and the Coast Guard's
acquisition guidelines, and GAO was unable to validate the
information on which the estimated future demand for services had
been based. 

The Coast Guard and its parent agency, the Department of
Transportation, now recognize that the 1995 justification did not do
an adequate job of reflecting the condition of, capability
deficiencies of, and future demand for ships and aircraft. 
Recognizing some of these same points, the Office of Management and
Budget told the Coast Guard and the Department in January 1998 to
withdraw the original justification.  The administration plans to
create a Presidential Roles and Missions Commission to review and
validate the Coast Guard's roles and missions and issue a report in
October 1999.  The results of the Commission's work, coupled with the
results of ongoing assessments of the condition and capabilities of
existing deepwater ships and aircraft, will be used to prepare a
revised justification, which the Coast Guard expects to issue in
January 2000. 

Even though the project's justification has been withdrawn, the Coast
Guard is proceeding with the next phase of the acquisition process,
in which three contractor teams will submit their competing versions
of a proposed "blueprint" for the future deepwater system.  GAO
expressed concerns to senior Coast Guard and Department of
Transportation officials about proceeding without a clear
understanding of the condition and capabilities of ships and aircraft
and of service demands envisioned in a well-substantiated
justification.  GAO noted that when the Coast Guard awarded contracts
in August 1998 to three contractors to develop the proposal for the
Deepwater Project, a number of key internal studies and assessments
on the condition and capabilities of ships and aircraft were still
being developed by the Coast Guard.  For example, internal
engineering evaluations of the condition of two classes of deepwater
ships were under way and are scheduled for completion in mid-1999. 
Also, a study of the capabilities of the agency's deepwater ships and
aircraft and a comparison with future requirements was under way; it
is scheduled for completion in November 1998 at the earliest. 

Without clear knowledge of whether current ships and aircraft are
clearly deficient in their capabilities or when they are likely to
reach the end of their useful life, contractors may develop proposals
that call for a system of ships and aircraft that is unnecessary or,
if necessary, is brought into service too early or too late.  This is
of particular concern when the potential cost of new aircraft and
ships is considered.  Even if contractors receive this updated
information, receiving it too late could mean that they would be
disadvantaged in developing their "blueprint" proposals.  For
example, they may already have eliminated alternatives that, in the
context of the additional information, are more cost-effective. 
While the Coast Guard recognizes that it is essential to provide
contractors with updated information on the condition of ships and
aircraft as soon as possible, it believes that it was also important
to move forward with the contract awards because the contractors had
already formed their teams and were ready to begin work and that long
procurement lead times require the agency to initiate actions now
without delay. 

Some lessons learned from the development of the initial
justification have applicability for future procurement efforts.  The
development of the initial justification for the Deepwater Project
was the most complex mission analysis that the Coast Guard had ever
undertaken, according to Coast Guard officials.  They said that in
many respects, the agency was learning as it went through the
process.  GAO identified three key factors that contributed to the
Coast Guard's difficulty in dealing with this complex task.  First,
the agency had not yet developed ways to collect and analyze data
essential for justifying such a large procurement project.  For
example, the agency had no systematic way to collect true operating
and maintenance costs for its ships; such data would have been useful
in comparing costs over time and demonstrating the agency's assertion
that ships' maintenance and operating costs were rising
significantly.  Even when systems were in place to collect data on
ships and aircraft, the analyses were sometimes not completed when
scheduled because of budget constraints.  Second, the Coast Guard's
and the Department of Transportation's guidance for preparing mission
analysis studies is limited for specifying acceptable methods to
assess the condition of current ships and aircraft and for disclosing
methodologies and data sources so that decisionmakers can consider
any data limitations and minimize erroneous conclusions.  Third,
formal review mechanisms within the Coast Guard and the Department of
Transportation did not recognize the data shortcomings of the
justification.  Little if any data verification was done; rather,
reviewers presumed that the underlying data were accurate and
complete.  Taken together, these shortcomings raise questions about
the accuracy and completeness of the data used to justify the
Deepwater Project as well as the efficacy of the process for
justifying future projects. 


      FISCAL CONSTRAINTS COULD
      LIMIT DEEPWATER PROJECT'S
      FUNDING
-------------------------------------------------------- Chapter 0:4.2

The Coast Guard's "system of systems" approach to the Deepwater
Project seems logical as a way to avoid the costly one-for-one
replacement of ships and aircraft, and its use of multiple
contractors is an attempt to leverage technology and identify
cost-effective alternatives.  Nevertheless, finding funds for a
project as costly as the one that the Coast Guard has initially
proposed may be difficult for several reasons.  One reason is that
when full acquisition begins, the annual amount needed would be about
equal to the Coast Guard's entire annual budget for capital projects
as projected by the Office of Management and Budget.  The Coast Guard
has other capital projects under way or planned, such as replacing
ships that maintain navigational aids and upgrading the capabilities
of existing aircraft.  Unless the Congress were to grant additional
funds, which under existing budget laws, could mean reducing the
funding for some other agency or program, these other capital
projects could be affected. 

Another reason why funding could be difficult is that about one-third
of the Coast Guard's future budget for its capital projects is
predicated on a proposed user fee for navigational and domestic
ice-breaking services.  These fees would be charged to ships, barges,
and other vessels that rely on the Coast Guard's navigational aids
and traffic systems in busy ports or that need ice-breaking services
in the Great Lakes in order to operate during cold months.  Such fees
have proven controversial when proposed in the past, and the
Subcommittees of the Senate and House Committees on Appropriations
with jurisdiction over the Coast Guard's budget have cited their
opposition to the new user fees.  If user fees are not approved, the
money would most likely need to come from additional appropriations. 
This would place the Deepwater Project in competition with other
budget priorities, both inside and outside the Coast Guard. 

Now that the Coast Guard has found that many of its ships and
aircraft will have a longer useful life, funding needs for the
Deepwater Project could lessen.  If many ships and aircraft can be
upgraded and used for a longer period of time, the project's
needs--particularly in the short term--could be considerably less
than the $500 million a year that the Coast Guard has asked
contractor teams to design their proposals around. 


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

GAO recommends that the Secretary of Transportation direct the Office
of the Assistant Secretary for Administration and the Coast Guard to
expedite the issuance of information that the Coast Guard has
developed or is developing on the condition and capabilities of ships
and aircraft.  To help ensure that future mission analysis studies on
the Deepwater Project or other major acquisitions are more accurate
and complete, GAO recommends improvements in the Coast Guard's and
the Department of Transportation's acquisition guidelines for
evaluating the condition of assets, disclosing how information
supporting acquisitions is developed, and reviewing acquisition
proposals.  Finally, to help ensure that planning for the Deepwater
Project is conducted with the realities of competing projects and
limited budgets, GAO also recommends that the Secretary direct the
Commandant of the Coast Guard to evaluate whether contracting teams
should be instructed to base their proposals on the assumption of a
lower, more realistic funding level than $500 million a year and
submit the decision to the Department for review. 


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

GAO provided the Department of Transportation and the Coast Guard
with a draft of this report for review and comment.  The Department
and the Coast Guard generally concurred with the information in the
report, and the Department indicated that it would consider the
report's recommendations.  The Coast Guard generally concurred with
the recommendations and said it will strive to improve the
acquisition process.  In addition, the Department and the Coast Guard
provided several comments that clarified information on the
Department's acquisition process, the cost of operating deepwater
ships and aircraft, and the goals of the Deepwater Project, which we
have incorporated into the report as appropriate. 


BACKGROUND
============================================================ Chapter 1

Started in 1996, the Coast Guard's Deepwater Capability Replacement
Project is potentially the most significant and largest acquisition
project in the agency's history.  The Coast Guard's deepwater
missions--that is, those missions beyond the normal operating range
of shore-based small boats--include such actions as enforcing
fisheries laws, intercepting drug smugglers, and conducting search
and rescue operations far out at sea.  Cutters, patrol boats,
airplanes, and helicopters are all critical to meeting these
responsibilities.  Through the Deepwater Project, the Coast Guard is
considering how to best meet these missions in the future--and in the
process, how to replace or modernize this fleet of ships and
aircraft.  The Coast Guard's preliminary estimates put the Deepwater
Project's cost at $9.8 billion over a 20-year period.\1


--------------------
\1 The Coast Guard's projection is in constant 1998 dollars. 


   CURRENT DEEPWATER SHIPS AND
   AIRCRAFT AND MISSIONS
---------------------------------------------------------- Chapter 1:1


      WHAT ARE THE COAST GUARD'S
      PRIMARY DEEPWATER SHIPS AND
      AIRCRAFT? 
-------------------------------------------------------- Chapter 1:1.1

The Coast Guard's deepwater missions are met by four classes of ships
and four classes of aircraft, including the Coast Guard's largest
cutters, airplanes, and helicopters.  (See table 1.1.) The ships and
aircraft are spread throughout the maritime areas of the nation,
including the Pacific and Atlantic coasts, Alaska, Guam, and Hawaii. 



                                             Table 1.1
                              
                                 Description of Deepwater Ships and
                                              Aircraft

Type of asset        Number    Description
-------------------  --------  --------------------------------------------------------------------
Ship
---------------------------------------------------------------------------------------------------
378-foot high        12        This is the largest multipurpose cutter in the fleet. It has a
endurance cutter               planned crew size of 167, a speed of 29 knots, and a cruising range
                               of 14,000 nautical miles. The Coast Guard operates it for about 185
                               days a year, and it can support helicopter operations.

270-foot medium      13        This cutter has a planned crew size of 100, a speed of 19.5 knots,
endurance cutter               and a cruising range of 10,250 nautical miles. The Coast Guard
                               operates it for about 185 days a year, and it can support helicopter
                               operations.

210-foot medium      16        This cutter has a planned crew size of 75, a speed of 18 knots, and
endurance cutter               a cruising range of 6,100 nautical miles. The Coast Guard operates
                               it for about 185 days a year, and it can support operations of
                               short-range recovery helicopters.

110-foot patrol      49        This patrol boat has a planned crew size of 16, a speed of 29 knots,
boat                           and a cruising range of 3,928 nautical miles. The Coast Guard
                               operates most for about 1,800 hours a year.

===================================================================================================
Total                92\a


Aircraft
---------------------------------------------------------------------------------------------------
HC-130 long-range    30        This is the largest aircraft in the Coast Guard's fleet. It has a
surveillance                   planned crew size of seven, a speed of 290 knots, and an operating
airplane                       range of about 2,600 nautical miles. The Coast Guard operates most
                               of these aircraft for about 800 hours every year.

HU-25 medium-range   41        This is the fastest aircraft in the Coast Guard's fleet. It has a
surveillance                   planned crew size of five, a speed of 410 knots, and an operating
airplane                       range of 2,045 nautical miles. The Coast Guard generally operates it
                               for about 800 hours a year.

HH-60J medium-       42        This helicopter is capable of flying 300 miles off shore, remaining
range recovery                 on scene for 45 minutes, hoisting six people on board, and returning
helicopter                     to its point of origin. The Coast Guard operates most for about 700
                               hours a year. It has a planned crew size of four, a maximum speed of
                               160 knots, and a maximum range of 700 nautical miles.

HH-65 short-range    96        This helicopter is capable of flying 150 miles off shore. It has a
recovery helicopter            crew allowance of three, a maximum speed of 165 knots, a maximum
                               range of 400 nautical miles, and a maximum endurance of 3.5 hours.
                               The Coast Guard operates most for about 645 hours a year.

===================================================================================================
Total                209
---------------------------------------------------------------------------------------------------
\a Total also includes a 213-foot medium-endurance cutter that was
commissioned in 1944 and a 230-foot medium- endurance cutter that was
commissioned in 1942.  The 213-foot cutter has a planned crew size of
64, and the 230-foot cutter has a planned crew size of 106. 


      HOW ARE THESE SHIPS AND
      AIRCRAFT USED? 
-------------------------------------------------------- Chapter 1:1.2

The Coast Guard uses its deepwater ships and aircraft to carry out a
number of maritime missions and responsibilities.  On the basis of
data for fiscal year 1997, the primary missions are in search and
rescue operations and three categories of law enforcement: 
protecting fisheries, interdicting illegal migrants at sea, and
controlling the flow of drugs.  Together, these activities account
for about 80 percent of the operational hours of deepwater ships and
50 percent of the operational hours of aircraft.  (See fig.  1.1.)

   Figure 1.1:  Primary Uses of
   Deepwater Ships and Aircraft,
   Fiscal Year 1997

   (See figure in printed
   edition.)

Source:  GAO's analysis of the Coast Guard's data. 

Usage varies considerably by the type of ship or aircraft.  For
example, 378-foot cutters are used mainly in fisheries enforcement,
while 110-foot patrol boats are used mainly in search and rescue
activities and drug control efforts.  HC-130 aircraft have their
greatest usage in fisheries enforcement, and helicopters spend much
of their time in search and rescue activities and drug control
activities.  Appendix I provides a more detailed breakout for the
usage of each type of ship and aircraft. 


      HOW MUCH DOES IT COST TO
      OPERATE AND MAINTAIN THE
      COAST GUARD'S DEEPWATER
      SHIPS AND AIRCRAFT? 
-------------------------------------------------------- Chapter 1:1.3

The Coast Guard estimates that it spent about $589 million to operate
its deepwater ships and about $662 million to operate its deepwater
aircraft in fiscal year 1997.  The costs are broken out into three
major areas:  direct expenditures (e.g., the personnel costs of ship
and aircraft operators), direct support expenditures (e.g., the cost
of maintenance), and overhead (e.g., the cost of training).  Direct
expenditures account for the largest portion of operating costs. 
(See fig.  1.2.) Appendix II provides more detailed information on
the cost to operate and maintain each type of ship and aircraft. 

   Figure 1.2:  Operational Costs
   for Deepwater Ships and
   Aircraft, Fiscal Year 1997

   (See figure in printed
   edition.)

Source:  The Coast Guard's Cost Accounting Model. 


   DEEPWATER CAPABILITY
   REPLACEMENT PROJECT
---------------------------------------------------------- Chapter 1:2

The Deepwater Capability Replacement Project is intended as an
integrated system of ships, aircraft, command, control,
communications, intelligence, surveillance, and reconnaissance
equipment to replace or modernize the Coast Guard's current assets. 
According to the Coast Guard's justification for the project, the
existing deepwater ships and aircraft are at or approaching the end
of their service life.  The agency hopes to replace or upgrade them
and end up--through the use of innovative technology, such as
satellites--with a smaller number of ships and aircraft.  By doing
so, the Coast Guard hopes to lower total ownership costs\2 by
acquiring a system of assets that requires fewer staff to operate and
maintain.  As presented, the project will potentially be the largest
procurement effort in the Coast Guard's history. 


--------------------
\2 Total ownership costs include acquisition, operating, and support
costs. 


      WHAT ACQUISITION PROCESS
      DOES THE COAST GUARD NEED TO
      FOLLOW? 
-------------------------------------------------------- Chapter 1:2.1

As it proceeds with the Deepwater Project, the Coast Guard will be
required to follow the acquisition process outlined in Office of
Management and Budget (OMB) Circular A-109, which is the principal
guidance for acquiring major systems in the federal government.  To
avoid the problems commonly experienced in acquiring major systems,
such as cost overruns and delays, OMB Circular A-109 specifies five
major phases that agencies must complete when making large
acquisitions:  (1) determine mission needs, (2) identify and explore
alternative design concepts, (3) demonstrate alternative design
concepts, (4) undertake full-scale development and limited
production, and (5) commit to full production.  To secure the
involvement of the agency's top management in reviewing a project's
progress, problems, and risks, Circular A-109 establishes a key
decision point between each phase.\3

The Coast Guard has already moved beyond the first phase of the A-109
process:  it has examined mission needs as they relate to the need to
replace or modernize its fleet of deepwater ships and aircraft.  This
first phase is critical because it justifies the project and
identifies the deficiencies that need to be resolved.  The Department
of Transportation (DOT), the Coast Guard's parent agency, does not
allow its agencies to request funds for a project unless DOT has
reviewed and approved a well-documented statement of mission needs. 

In the first phase of the Circular A-109 process, the Coast Guard
assembled and obtained DOT's approval of a Mission Needs Statement. 
This statement is based on the Coast Guard's Deepwater Mission
Analysis Report (DMAR), which was issued in November 1995.\4 The DMAR
determined that the Coast Guard's ships and aircraft were aging and
that future demand exceeded the number of operational hours provided
by the ships and aircraft.  The DMAR also determined that capability
improvements were needed in such matters as speed, boarding capacity,
and the ability to classify targets.  The DMAR concluded that as a
result of these findings, there was a need to begin a project for
acquiring new ships and aircraft. 

The Coast Guard is now in the second phase, or concept exploration,
of the Circular A-109 process.  During this phase, the Coast Guard or
its contractors will develop key program documents, such as project
baselines, requirements documents, acquisition plans, and evaluation
criteria.  Alternative concepts for correcting the deficiencies
identified in the DMAR must also be explored as part of this step. 

For this acquisition, the Coast Guard is using a novel systems
approach to examining its mission, its existing assets, and how best
to accomplish its mission.  Rather than using the traditional
approach of considering the replacement of an individual class of
ships or aircraft, the Coast Guard will use a "system of systems"
approach that integrates ships, aircraft, sensors, and communication
links together as a system to accomplish mission objectives.  Through
this approach, the Coast Guard hopes to avoid "stovepiping" the
acquisition of ships and aircraft, which has led to a situation where
they could not operate optimally together. 

According to the Coast Guard, the process incorporates multiple
controls, which will maximize existing resources in an efficient
manner.  These controls include the use of multiple teams of
contractors in a competitive environment to identify the most
cost-effective set of equipment.  Also, the Coast Guard has hired an
independent contractor, who is prohibited from gaining any potential
production contracts, to provide a check on the results from the
industry teams.\5


--------------------
\3 Key Decision Point 1 involves a review of the agency's Mission
Needs Statement, which is an executive summary of the Mission
Analysis Report.  This decision point authorizes the agency to
proceed into Concept Exploration, or an analysis of different
concepts.  Key Decision Point 2 validates the alternative concept(s)
that the agency is proposing and authorizes the agency to proceed
into demonstration and validation of the selected concept.  Key
Decision Point 3 validates the best design, verifies the resolution
of technical issues, and authorizes the agency to proceed into
full-scale development.  After the agency builds and tests
developmental models and prototypes, Key Decision Point 4 reviews the
test and evaluation of the prototype, and authorizes production and
deployment.  DOT calls on its agencies to revalidate the mission's
needs at each key decision point. 

\4 In conducting the DMAR, the Coast Guard received assistance from
the Naval Undersea Warfare Center and a private contractor. 

\5 The Coast Guard has selected the Center for Naval Analysis to
conduct the independent analysis.  According to the Coast Guard, the
Center will consider the upgrade/modernization/replacement of
existing ships and aircraft as well as the range of potential
commercial technologies viable for the Deepwater Project.  The Center
will provide an objective perspective on deepwater concepts, a
function that is intended to be a safeguard for the government,
according to the Coast Guard. 


      HOW DOES THE COAST GUARD
      PLAN TO PROCEED? 
-------------------------------------------------------- Chapter 1:2.2

From August 1998 through December 1999, the Coast Guard will pay
three teams of contractors to develop competing proposals for the
Deepwater Project.  Their development contracts, costing about $7
million each, call for the contractor teams to develop a proposal for
maximizing the Coast Guard's ability to carry out its missions while
minimizing total ownership costs.\6 The proposals could include
replacing existing ships, aircraft, and other equipment; upgrading
them; or some combination of the two.  Besides submitting their
proposals, the contractors will be required to provide other products
such as cost estimates for implementing their proposals, a schedule
for acquiring or upgrading any new ships and aircraft, and an
implementation plan for integrating the new or upgraded equipment
into the Coast Guard. 

Once the contractors submit their initial proposals, the Coast Guard
will go through a series of steps designed to refine its concept of
the system of systems.  When the Coast Guard has selected a system
that it wants from the proposals submitted, it will ask the
contractors to submit additional final proposals for the system for
the Coast Guard to evaluate.  At the end of this process, the Coast
Guard intends to award a contract to one of the contractor teams to
build the system, which the Coast Guard calls the Integrated
Deepwater System.  The initial procurement of ships and/or aircraft
is anticipated to begin in fiscal year 2002. 


--------------------
\6 For fiscal year 1999, the Coast Guard requested $28 million for
the Deepwater Project, most of which was to be used to pay three
teams of contractors to develop deepwater proposals. 


      HOW MUCH IS THE PROJECT
      LIKELY TO COST? 
-------------------------------------------------------- Chapter 1:2.3

In August 1996, the Coast Guard estimated that the cost of the
Deepwater Project would range from $7.25 billion to as much as $15
billion.  This estimate was based on replacing the existing fleet of
92 ships and 209 aircraft currently involved in deepwater missions. 
The Coast Guard cautioned that the estimate reflected a rough order
of magnitude and that future estimates would be more accurate as the
types and numbers of ships and aircraft are determined.  The agency
suggested that its estimate may portray the worst-case scenario
because, through the use of technology, the Coast Guard intends to
reduce the number of ships and aircraft required. 

When the Coast Guard supplied guidance for contractors to use in
deciding how to develop proposals for the new system, it proposed a
budget target that was consistent with the August 1996 estimate.  For
planning purposes, the Coast Guard told contractor teams to develop
proposals that assume a cost of $9.8 billion over a 20-year period,
or roughly $500 million a year starting in fiscal year 2002.  The
agency cautioned, however, that funding levels are ultimately
contingent upon congressional approval. 

The Coast Guard is planning for substantial funding increases for the
Deepwater Project over the next 4 years.  In fiscal year 1998, the
Coast Guard spent $5 million on the Deepwater Project.  The Coast
Guard estimates that this cost will grow to an estimated $500 million
by fiscal year 2002.  (See table 1.2.)



                               Table 1.2
                
                  Projected Funding for the Deepwater
                                Project

                         (Dollars in millions)

                                                              Projecte
Fiscal                                                               d
year                  Main tasks                               funding
--------------------  --------------------------------------  --------
1998                  Concept exploration: Coast Guard              $5
                       issues request for proposal and
                       awards contract to three teams of
                       contractors.
1999                  Concept exploration: Teams develop            28
                       concepts and submit initial
                       proposals. Coast Guard develops
                       requirements documents, acquisition
                       plans, and baseline.
2000                  Concept exploration: Coast Guard              19
                       determines final mix of ships and
                       aircraft and prepares a second
                       request for proposal.
2001                  Concept exploration: Contractors             300
                       prepare response to the mix of ships
                       and aircraft prescribed by the Coast
                       Guard. Coast Guard reviews proposals.
2002                  Concept exploration: Coast Guard             500
                       awards the contract for the next
                       phase of the deepwater system--the
                       demonstration and validation phase.
----------------------------------------------------------------------

   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

The Subcommittee on Transportation, Senate Committee on
Appropriations, asked us to review the Deepwater Project's
justification and the planning process that the Coast Guard was
following.  We focused our review on the following questions: 

  -- To what extent does the current justification for the Deepwater
     Project accurately depict the Coast Guard's need to modernize or
     replace its ships and aircraft? 

  -- To what extent are projected costs for the Deepwater Project
     consistent with the Coast Guard's overall budget for its capital
     projects? 

To answer the first question, we examined three main areas covered in
the Deepwater Project's justification:  the condition of current
assets, projected capability needs, and projected demand for
services.  We analyzed the Coast Guard's documents depicting this
need, such as the Deepwater Mission Analysis Report and the Mission
Needs Statement, and compared the information that these documents
presented with other Coast Guard data, such as engineering studies on
the condition of Coast Guard ships and aircraft, planned upgrades for
extending the service life of ships and aircraft, and records of
actual usage.  In those instances where the Coast Guard had relied on
contractors to develop data for the project's justification, we
interviewed contractor officials and obtained information on the
procedures and methodology they used.  We interviewed Coast Guard and
DOT acquisition and planning officials in headquarters to understand
the process used by the Coast Guard to justify the Deepwater Project. 
We also interviewed (1) staff in the Coast Guard's Pacific Area
office in Alameda, California; Atlantic Area office in Norfolk,
Virginia; and the district office in Miami, Florida; (2) engineering
and maintenance managers at the Coast Guard's headquarters; (3) Coast
Guard staff in the Maintenance and Logistics Command in Norfolk,
Virginia, and Alameda, California; (4) Coast Guard staff in the
Engineering Logistics Center in Baltimore, Maryland; and (5) staff in
the Coast Guard's Aircraft Repair and Supply Center in Elizabeth
City, North Carolina, to obtain information on the agency's deepwater
missions, the condition of ships and aircraft, and maintenance
practices.  We also reviewed OMB Circular A-109 and DOT's and the
Coast Guard's policies on and procedures for major acquisitions. 

Finally, we judgmentally selected locations for site visits that gave
us the full mix of deepwater air and ship fleets and mission
responsibilities.  On the basis of this selection, we visited and
interviewed ship crews in Seattle, Washington; Norfolk, Virginia;
Miami, Florida; St.  Petersburg, Florida; and Alameda, California,
and air crews in Elizabeth City, North Carolina; Miami, Florida;
Clearwater, Florida; and Kodiak, Alaska, to obtain information on the
condition, capability, and operations of deepwater assets. 

To answer the second question, we reviewed OMB's budget targets for
the Coast Guard's budget for its capital projects, budget reports
issued by the Congressional Budget Office, the Coast Guard's Capital
Investment Plan, the Deepwater Project's funding and acquisition
strategy, and other Coast Guard budget documents.  We also
interviewed Coast Guard, DOT, and OMB officials on the affordability
of the Deepwater Project. 

We performed our work from October 1997 through September 1998 in
accordance with generally accepted government auditing standards. 


THE COAST GUARD'S FORMAL
JUSTIFICATION DID NOT ACCURATELY
OR FULLY DEPICT MODERNIZATION OR
REPLACEMENT NEEDS
============================================================ Chapter 2

When it initially proposed the Deepwater Project in 1995, the Coast
Guard indicated that most classes of deepwater ships and aircraft
would begin reaching the end of their service life within the next 2
to 9 years and would largely need to be phased out by 2010. 
Information developed since the initial proposal indicates, however,
that many of these assets, particularly aircraft, have a service life
that extends considerably beyond what the Coast Guard projected at
the time.  In the 1995 proposal, the Coast Guard also asserted that
the capabilities of existing ships and aircraft were inadequate to
meet current and future demand.  We were unable to verify whether
these assertions were correct because the Coast Guard did not have
sufficient supporting evidence. 

The Coast Guard and DOT now recognize that the 1995 justification did
not adequately reflect the condition of deepwater ships and aircraft
or their ability to meet future needs.  The Coast Guard is conducting
a number of internal studies that will update the condition and
capabilities of its ships and aircraft as part of the next phase of
the acquisition process.  This phase began in August 1998, when the
Coast Guard awarded contracts to three teams of contractors for
developing competing proposals for the future deepwater system. 
Delays in providing updated information to the contractor teams could
adversely affect the quality of the proposals submitted, in that, the
teams could be disadvantaged in developing the most effective
economical proposals for the Deepwater Project. 

The 1995 project justification was inadequate in part because of the
Coast Guard's relative inexperience in preparing a mission analysis
this complex and in part because of certain weaknesses in the system
for developing and approving such studies.  More specifically, the
system's weaknesses included not accumulating complete data, not
having specific guidance for preparing the analysis, and not having a
review process that was thorough enough to identify weaknesses in the
methodologies and the data used. 


   MOST DEEPWATER SHIPS AND
   AIRCRAFT CAN BE USED BEYOND
   ORIGINALLY ESTIMATED SERVICE
   LIFE
---------------------------------------------------------- Chapter 2:1

The Coast Guard's justification of the need for the Deepwater Project
was presented in the DMAR, issued in 1995.\1 The DMAR based its
determination of how long ships and aircraft could operate on the
estimate made when they were built or when they last underwent
substantial modification.  However, such estimates are not always
reliable predictors of actual service life, according to industry
sources and officials in the Coast Guard who operate and maintain
deepwater ships and aircraft.  Instead, the estimates are benchmarks
signaling the need for a more thorough engineering reevaluation of
the condition and remaining life of the ships and aircraft.  Since
1995, a number of these reevaluations have been conducted.  They show
that for deepwater aircraft, service lives can be extended
significantly beyond the initial estimates through a combination of
maintenance, safety, and capability upgrades.\2 The reevaluations of
deepwater ships have been more limited than reevaluations of the
aircraft, but the ships studied thus far show that they are also
likely to have a longer service life. 


--------------------
\1 Although the Coast Guard has since withdrawn this document until
it can be revised, we include a substantial analysis of it here
because (1) analyzing the available justification was a major part of
our congressional charge for this review, (2) understanding the
document's shortcomings is important for assessing future revisions
and for determining what changes to the process might be in order,
and (3) DOT's and the Coast Guard's guidelines indicate that the
purpose of concept exploration--the acquisition phase that the Coast
Guard is in--is to explore alternative concepts for correcting the
deficiencies described in the analysis. 

\2 The Coast Guard stated that while the service life of ships and
aircraft can be extended through maintenance and upgrades, there can
also be risks associated with doing so, especially in terms of costs
and capability.  According to the Coast Guard, the current phase of
the project will determine whether and how long it is cost-effective
to extend the service life of ships and aircraft. 


      JUSTIFICATION FOR THE
      DEEPWATER PROJECT CALLED FOR
      PHASEOUT OF MOST AIRCRAFT
      AND SHIPS BY 2010
-------------------------------------------------------- Chapter 2:1.1

According to the DMAR, most of the Coast Guard's deepwater aircraft
and ships will have reached the end of their service life by 2010. 
The estimated service lives were generally 20 years for aircraft and
30 years for ships unless substantial modifications had been
conducted.  Because these ships and aircraft were acquired over a
period of years, the DMAR indicated that the oldest of these would
need replacement or modernization generally starting from 1998
through 2003.  The estimates used were based on industry standards,
according to a Deepwater Project official.  The DMAR's depiction of
the service life of each type of aircraft and ship is shown in table
2.1. 



                               Table 2.1
                
                Phaseout of Aircraft and Ships as Shown
                              in the DMAR

                                               Estimated      Phaseout
                                     Years  service life  period shown
Type of asset                     acquired      in years       in DMAR
----------------------------  ------------  ------------  ------------
Ships
----------------------------------------------------------------------
378-foot high-endurance            1967-72       33-39\a     2003-2007
 cutter
270-foot medium-endurance          1983-91            30     2012-2020
 cutter
210-foot medium-endurance          1964-69       36-45\b     2002-2011
 cutter
110-foot patrol boat               1986-92            20     2005-2012

Aircraft
----------------------------------------------------------------------
HC-130 long-range                  1972-87            20     1998-2008
 surveillance airplane
HU-25 medium-range                 1982-84            20     2002-2004
 surveillance airplane
HH-60J medium-range recovery       1990-96            20     2010-2015
 helicopter
HH-65 short-range recovery         1984-89            20     2005-2009
 helicopter
----------------------------------------------------------------------
\a Service life is based on the date of renovation and modernization
plus 15 years. 

\b Service life used is based on the date of major maintenance plus
15 years. 


      REEVALUATION SHOWS THAT
      AIRCRAFT HAVE LONGER SERVICE
      LIVES
-------------------------------------------------------- Chapter 2:1.2

Studies by the Coast Guard and other independent groups\3 show that
Coast Guard aircraft can operate significantly beyond their 20-year
design life, assuming that proper maintenance and upgrades are done. 
Since the DMAR was issued, the Coast Guard has completed a new study
of its aircraft.  A draft of this study, prepared in May 1997,
concluded that the Coast Guard's aircraft are capable of operating
safely until at least 2010 and likely beyond.\4 This conclusion
substantially affects the estimated service life of aircraft
presented in the DMAR.  As figure 2.1 shows, on the basis of
estimated service life alone, no aircraft would need to be replaced
before 2010, and the final phaseout of most types of aircraft could
stretch until 2020 and beyond. 

   Figure 2.1:  Comparison of
   Phaseout Periods Shown in the
   DMAR and Projected by
   Subsequent Reevaluations

   (See figure in printed
   edition.)

The study's conclusion was predicated on three main factors. 

  -- Condition of aircraft is good--and independently corroborated. 
     According to the Coast Guard's engineering officials, outside
     assessments have been conducted on three of the four types of
     aircraft.  Like the Coast Guard's assessment, these independent
     studies found the aircraft to be in good condition and capable
     of operating far beyond the estimates used in the DMAR. 

  -- Capabilities of existing aircraft can be upgraded to better meet
     the Coast Guard's missions.  The study identifies several
     projects that can further the life or upgrade the capability of
     each aircraft.  For fiscal year 1999, for example, the Coast
     Guard is requesting $37 million in acquisition, construction,
     and improvements (AC&I) funding for projects to upgrade
     individual types of aircraft.\5 In addition to projects related
     to specific aircraft, other current AC&I projects are improving
     the flow of communication and information for all aircraft--for
     example, a $21.5 million project is providing secure and
     reliable communications for command and control through
     commercial satellite communications.\6 In all, according to a
     Coast Guard engineering official, the study identified about
     $200 million in AC&I projects benefitting deepwater aircraft. 
     (For more detailed information on the projects, see app.  III.)

  -- A rigorous maintenance program is in place.  According to the
     Coast Guard Aircraft Repair and Supply Center (ARSC) official
     responsible for maintaining the agency's aircraft, a rigorous
     maintenance program for aircraft, as well as periodic
     assessments of the condition of each aircraft, allow the
     aircraft to operate beyond original service life estimates.  The
     Coast Guard uses a two-level maintenance system that includes
     maintenance performed at the air stations (servicing, component
     replacement, and inspection for corrosion and fatigue cracks)
     and more extensive maintenance performed periodically at the
     ARSC,\7 which can take several months to be completed. 

At the four air stations we visited, we asked 37 Coast Guard flight
crew members what they thought about the condition and capability of
their aircraft and their ability to carry out their missions.  (These
flight crews also conduct maintenance on their own aircraft.)
Overall, most crew members said that they were satisfied with the
condition and performance of their aircraft but noted shortcomings in
sensors and communication equipment that hampered their ability to
fully carry out their missions.  For example, Coast Guard crew
members stated either that existing night vision capabilities are
totally absent or that they are making due with equipment designed
for other purposes. 


--------------------
\3 The Coast Guard contracted with CAE Aviation Ltd.  to perform an
engineering study on the condition of HC-130 aircraft and to develop
options for extending the life of the fleet; the report was issued on
January 10, 1997.  Aircraft manufacturers Sikorsky and Dassault
conducted studies of the HH-60J and HU-25, respectively. 

\4 The draft study, entitled "Near Term Support Strategy," was
initiated as part of the Coast Guard's internal budgeting process and
conducted by the Coast Guard's Aeronautical Engineering Division. 
The study was based on consultations with manufacturers of the
aircraft and with Department of Defense agencies operating similar
aircraft, as well as consultations with Coast Guard headquarters
aircraft engineers and staff at the Aircraft Repair and Supply Center
(the Coast Guard's maintenance depot facility).  In consulting with
these sources, the Coast Guard was able to identify the factors that
would cause an aircraft to reach the end of its service life the
soonest and what it would take to extend its service life.  The study
was approved as a final report on August 19, 1998. 

\5 These appropriations fund AC&I of ships, aircraft, and other
equipment. 

\6 Of the $21.5 million for this project, $4 million was requested
for fiscal year 1999, $5 million was planned for fiscal 2000, and
$12.5 million was planned for future years. 

\7 The Coast Guard performs major overhauls of the two types of
helicopters and HU-25 medium-range surveillance airplanes at its
ARSC, and it contracts out the overhaul maintenance of HC-130s. 


      LIMITED DATA OBTAINED
      SUGGESTS THAT SHIPS MAY ALSO
      HAVE A LONGER SERVICE LIFE
-------------------------------------------------------- Chapter 2:1.3

Although the Coast Guard has not yet performed all of the engineering
studies necessary to evaluate the entire fleet of deepwater ships,
recently completed assessments of some of its deepwater ships show
that they can operate beyond the service life estimates used in the
DMAR.  These engineering assessments, performed from 1994 through
1997 by the Coast Guard's Ship Structure and Machinery Evaluation
Board and referred to as SSMEBs, have been conducted for a limited
number of three of the four types of ships.  Each has shown that the
ships are in good condition and that, in two of three instances, the
service life estimates are longer than those presented in the DMAR. 

The Coast Guard established the SSMEBs as a way of assessing the
condition of ships and determining if their service life can be
extended.  The assessments are supposed to be conducted on one or
more ships of each type 10 years after the commissioning of the lead
ship and at each 5-year interval thereafter.\8 SSMEBs on the 378-foot
high-endurance cutter have not been performed because of budgetary
constraints, according to the Coast Guard's Chief Naval Engineer.\9
In light of information needs for the Deepwater Project, the Coast
Guard is initiating assessments on one 378-foot and one 270-foot
cutter and expects to complete them in fiscal year 1999. 

The most recent SSMEBs or other evaluations have indicated that the
service life of the evaluated vessels is longer than that indicated
in the DMAR.\10

  -- 270-foot cutter.  In 1994, an SSMEB showed the evaluated cutter
     to be in excellent condition and a potential for extending the
     cutter's service life through the replacement of equipment or
     modifications to be done during maintenance periods.  A
     recommended mid-life maintenance, similar to that done on the
     210-foot cutters, would add an additional 15 years to the
     service life of the vessels--well beyond the service dates shown
     in the DMAR. 

  -- 210-foot cutter.  SSMEBs conducted on two cutters in 1997 showed
     that their service life was longer than that shown in the DMAR
     (at least 2 additional years for one cutter evaluated and at
     least 5 years for the other). 

  -- 110-foot patrol boat.  The three SSMEBs conducted on these
     patrol boats since 1995 were consistent with the service life
     estimates used in the DMAR.  However, other studies conducted by
     the Coast Guard have estimated the remaining service life to be
     up to 6 years beyond the dates cited in the DMAR. 

As with aircraft, maintenance and upgrades are key factors that help
extend the service life of Coast Guard surface vessels, according to
Coast Guard naval engineering officials.  A number of upgrades are
scheduled, and the Coast Guard takes preventive and corrective action
on a continual basis to ensure that a vessel's condition is
maintained.\11 For example, the Coast Guard has been replacing
surface search radars on many of its cutters since 1994 and has
requested $12.9 million for fiscal year 1999 to continue this
project. 

During the course of our work, we visited cutter crews at four
locations to discuss the capabilities of the Coast Guard's deepwater
ships and specific on-board systems for such functions as detecting
and classifying targets and communicating with other Coast Guard
assets and land units.  Like their aviation counterparts, most of the
ships' crew members were satisfied with the performance of their
vessel.  However, many said that outdated sensors and communication
equipment limited their abilities to fully perform their missions. 
Similar to Coast Guard pilots, crew members cited the need to improve
night vision capabilities, which could improve target detection
capabilities and the ability of helicopters to land on cutters at
night.  Also, they noted the difficulty of launching small boats from
cutters during rough seas, which could be improved if the ships had
better launching systems; the inefficiency of the gas turbine engines
on the high-endurance cutters was mentioned as well. 


--------------------
\8 An SSMEB consists of a review of the repair history of a class of
cutters, an assessment of the future supportability of the main
propulsion, auxiliary, and prime mission equipment on that class of
cutter, and a thorough physical examination of the hull, engines, and
auxiliary equipment. 

\9 Although no 378-foot cutter has recently received an SSMEB, the
service life of these ships has been studied.  In 1990, officials in
the Coast Guard's Cutter Division estimated that the 378-foot cutters
had a service life that could be extended from 2007 through 2012, or
4 to 5 years longer than the service life estimates used in the DMAR. 

\10 An SSMEB's determination that a ship's service life can be
extended by a certain period (e.g., 5 additional years) should not be
taken to mean that the ship will necessarily reach the end of its
useful life when the 5-year period has ended.  A subsequent SSMEB
will determine if the useful life can be extended further. 

\11 Vessel maintenance generally occurs at three
levels--organizational, intermediate, and depot. 
Organizational-level maintenance is conducted by the assigned crew of
the unit or by shore-based teams assigned to a group of vessels.  It
generally takes place on board ship or at Coast Guard facilities,
such as boat stations or engineering support units. 
Intermediate-level maintenance is performed by Coast Guard
maintenance staff with specialized resources or skills unavailable to
the unit.  Depot-level maintenance involves major overhauls, major
hull repairs, or major system overhauls and is done at commercial
shipyards or at the Coast Guard's yard about once every 4 years for
cutters and once every 3 years for patrol boats. 


      REMAINING SERVICE LIFE OF
      SHIPS AND AIRCRAFT MERITS
      CAREFUL STUDY
-------------------------------------------------------- Chapter 2:1.4

As ships and aircraft continue to age, rising operations and
maintenance costs can become one factor in deciding whether to keep
equipment or replace it.  For example, studies have shown that the
cost to operate and maintain aircraft can rise as they age.  This
occurs as equipment wears out and needs to be replaced or maintained
more frequently.  So far, the studies showing that the agency's ships
and aircraft have a longer life than originally thought have presumed
that proper maintenance and upgrades will be carried out.  Several of
the studies note that upgrades are more likely to be a lower-cost
solution than replacing the entire ship or aircraft.  As the Coast
Guard proceeds with the Deepwater Project, it is developing
information on the cost to operate and maintain its ships and
aircraft over time.\12 Such information may provide the agency with
additional insights on the most cost-effective solutions to carrying
out its deepwater missions. 


--------------------
\12 Beginning in fiscal year 1997, the Coast Guard began developing a
Fleet Logistics System to address, in part, the absence of integrated
cost-accounting and historical data and management information for
the maintenance, repair, and modernization of its ships.  The Coast
Guard plans to complete this project in fiscal year 2000. 


   ACQUISITION REQUIREMENTS FOR
   DEMONSTRATING A CAPABILITY GAP
   NOT MET
---------------------------------------------------------- Chapter 2:2

DOT's and the Coast Guard's acquisition requirements emphasize the
need to document any gaps between the capability of current ships and
aircraft and future performance expectations as part of the mission
analysis.  Specifically, the Transportation Acquisition Manual says
that a mission analysis "identifies capabilities needed to perform
required functions, highlights deficiencies in the functional
capability, and documents the results of the analysis." Likewise, the
Commandant's instruction setting the Coast Guard's policy on mission
analysis states that mission analysis is to "identify deficiencies in
current and projected capabilities." The instruction also states that
mission analysis should include a "baseline of current mission
performance and asset capabilities." However, we found that the
justification presented in the DMAR was not backed up by quantifiable
analyses demonstrating that a capability shortfall existed. 

While the DMAR asserted that a gap in capabilities existed, we found
no evidence that the Coast Guard had conducted an analysis comparing
the current capabilities of aircraft and ships with current and
future requirements, as required by DOT's and the Coast Guard's
guidance.  For example, the DMAR stated that "A comparison between
mission requirements and current asset capabilities indicate that
Coast Guard assets are very capable, but will not meet all
requirements for the future." According to the Coast Guard official
heading the team responsible for preparing the DMAR, the Coast Guard
did not perform any specific analyses or comparisons to support this
statement.  Rather, the statement was based on an informal comparison
conducted by the project team and based on its experiences with the
deepwater aircraft and ships. 

Coast Guard officials told us that they plan to complete a
comparative assessment of the current capabilities and functional
needs of the future deepwater system by November 1998.\13 Coast Guard
officials told us that the proposed comparative assessment would
involve a baseline determination of current deepwater ships and
aircraft and an evaluation of how well they meet future functional
requirements.  As of August 1998, a contractor for the Coast Guard
had collected data on the performance standards and measures for
deepwater missions, as well as the capabilities of ships and
aircraft.  These data will be used in the comparative assessment to
be conducted by the Coast Guard. 


--------------------
\13 Since the DMAR was issued, the Coast Guard has defined its
functional requirements for the future system.  The future functional
requirements for deepwater missions were defined in the System
Performance Specifications, which provide a baseline performance
specification for the Coast Guard's Integrated Deepwater System and
are included in the request for proposal. 


   SHORTFALLS IN MEETING DEMAND
   FOR SERVICES COULD NOT BE
   VERIFIED
---------------------------------------------------------- Chapter 2:3

DOT's and the Coast Guard's acquisition requirements call for
developing an estimate of the future need and demand for major
systems before they request funds from the Congress.  According to
the DMAR, the Coast Guard's deepwater ships and aircraft were able to
meet only about one half the actual need for surface and air hours. 
In future years, as existing ships and aircraft reach the end of
their useful life, the gap between available resources and actual
need was projected to become even greater.  (See fig.  2.2.)

   Figure 2.2:  Demand Gap
   Presented in Initial Deepwater
   Project's Justification

   (See figure in printed
   edition.)

Source:  DMAR. 

The unmet need, according to the Coast Guard, affects primarily the
drug interdiction and fisheries missions.  For example, the Coast
Guard said that it had to reduce drug interdiction missions in the
Caribbean below desired levels and that it had to reduce fisheries
patrols in areas off the Northeast coast that had been closed to
fishing.  The unmet need also reflected cutting operations in
low-priority areas; areas that would typically receive little
attention would not be patrolled. 


      PROJECTED DEMAND FOR COAST
      GUARD SHIPS AND AIRCRAFT IS
      OF UNKNOWN RELIABILITY
-------------------------------------------------------- Chapter 2:3.1

We attempted to verify the Coast Guard's estimates of surface and
aviation hours needed for deepwater law enforcement missions, which
constitute over 95 percent of the total estimated mission-related
hours for ships and about 90 percent of the total estimated
mission-related hours for aircraft.  The Coast Guard and its
consultant who studied this area could not provide us with the
information they used to make these estimates. 


         ESTIMATES FOR SHIPS
------------------------------------------------------ Chapter 2:3.1.1

We could not verify the reasonableness of surface demand hour
estimates because the data sources used were not documented or
available.  The Coast Guard had contracted with a private company to
develop the demand analysis.  Contractor officials responsible for
the analysis told us the analysis was based on data obtained from
Coast Guard officials.  However, the contractor did not document any
details regarding the data, such as which Coast Guard officials
provided the data and what they were based on. 

Coast Guard officials told us that the demand analysis was based on
two main sources:  fiscal year 1992 data from the Law Enforcement
Information System and information supplied by working groups at the
Coast Guard's headquarters, who based their estimates on recent field
experience.  To verify these data, we judgmentally selected 24 data
items and asked Coast Guard officials to provide support for them. 
The Coast Guard was unable to provide us with sufficient support for
any of the 24 items. 

One of the data items that we examined--the estimated demand for drug
interdiction hours--provides an example of the lack of clearly
verifiable information, as well as an example of the possible errors
introduced into the analysis.  The demand analysis based its
estimates of drug interdiction hours, in part, on intelligence
reports showing 400 suspected narcotraffickers per year in one
district.  Coast Guard officials were unable to provide support for
these data and said that they presumed that the analysts had access
to intelligence lists and that they had counted approximately 400
different suspect vessels for fiscal year 1992.  In addition, we
found that the estimated surface demand hours for drug interdiction
may have been substantially overstated because the number of possible
suspect vessels may have been double-counted.  For example, two Coast
Guard performance standards task the Coast Guard to (1) board 10
percent of the targets of interest within high-threat areas and (2)
apprehend, assist in the apprehension of or hand-off to another
counter-drug law enforcement agency, every known narcotrafficker
intercepted.  To accomplish both standards, the Coast Guard must
identify and board vessels.  However, the contractor did not adjust
its methodology to eliminate the problem of identifying and boarding
the same vessel twice.  Our analysis indicates that the resulting
overstatement could be as much as 21 percent of the total demand
estimate for drug interdiction, depending on the extent of the
duplication. 


         ESTIMATES FOR AIRCRAFT
------------------------------------------------------ Chapter 2:3.1.2

We could not verify the reasonableness of the Coast Guard's estimate
of needed aircraft hours because the source and quality of the data
used in the study were not fully supported.  The estimate was based
on a 1992 Coast Guard study that used fiscal year 1991 aviation data. 
The Coast Guard told us that the fiscal year 1991 aircraft usage
totaled about 40,000 hours.  However, the 1992 study indicated that
about 75,000 hours were needed--35,000 more than could be supported
by actual usage on the basis of the prior year's usage.  Coast Guard
officials were unable to provide support for the additional 35,000
hours other than to explain that for its 1992 study, the Coast Guard
directed its district offices to base their estimates of needed
aircraft hours on historical data for fiscal year 1991 and to add
hours for unmet and future requirements.  The district offices did
not provide support for their unmet and future requirements. 


      KEY ASSUMPTION NOT DISCLOSED
      FOR DEMAND ESTIMATES
-------------------------------------------------------- Chapter 2:3.2

The Coast Guard's guidelines for mission analysis require the
disclosure of assumptions that underlie the analysis.  However, the
Coast Guard did not disclose a key assumption in the analysis that
the demand for services was based on the Coast Guard's having
unlimited resources to accomplish every task within its missions.  In
other words, the Coast Guard based the demand on fully meeting every
responsibility assigned to the agency and with the assumption that it
would have enough staffing, support, and equipment to meet all of
these responsibilities. 

A Coast Guard official said that the agency assumed unlimited
resources because the agency sets its sights on providing a high
level of service and strives to achieve it.  Not making this
assumption clear, however, can present a distorted picture of the
demand for services.  While the Coast Guard may believe it is
appropriate to base its estimates on the underlying assumption that
unlimited resources will be available, not disclosing this fact can
leave decisionmakers with an unclear picture of what is being
presented. 


   MANY DATA ISSUES REMAIN
   UNRESOLVED
---------------------------------------------------------- Chapter 2:4

In January 1998, the Office of Management and Budget told the Coast
Guard and DOT to withdraw the DMAR and the Mission Needs Statement as
justification for the Deepwater Project.  This occurred because OMB
officials were concerned that more data were needed before the Coast
Guard formally submitted information to contractor teams on the
extent of the Coast Guard's resource needs.  To address this concern,
the administration plans to create a Presidential Roles and Missions
Commission to review and validate the Coast Guard's roles and
missions.  More specifically, the Commission will identify the Coast
Guard's statutory and regulatory missions and evaluate whether the
agency continues to be the most appropriate organization to carry out
these assignments.\14 The results of the Commission's work would then
be used as input to the project. 

The Coast Guard plans to replace the DMAR after the Presidential
Commission completes its work in October 1999.  As of August 1998,
the Coast Guard planned to revise the DMAR by January 2000.  In the
meantime, the Coast Guard's plans call for the contractors themselves
to assess the condition of ships and aircraft as part of the next
phase of the acquisition process.  In August 1998, the Coast Guard
awarded contracts to three contracting teams to develop proposals for
an integrated deepwater system.  By February 1999, these contractors
must submit a description of the alternatives they are considering
for the system.  By December 1999, they must submit their proposal
for the system, including life-cycle cost estimates of the system and
its assets and an implementation schedule for acquisition and
deployment. 

We expressed concerns to senior Coast Guard and DOT officials about
proceeding without the kind of clear understanding of the condition
and capabilities of vessels and aircraft and service demands
envisioned in a well-substantiated DMAR.  Our concern mirrored a
similar concern expressed in a November 1997 internal Coast Guard
study, which concluded that the DMAR and the Mission Needs Statement
needed to be revalidated.  According to a December 1997 memo from the
Assistant Commandant for Operations, "Industry will extensively use
these documents .  .  .  to develop a system of systems and it is
critical that our projected missions and the stated levels/standards
of performance are still accurate."

Without clear knowledge of whether current ships and aircraft are
clearly deficient in their capabilities or when they are likely to
reach the end of their useful life, contractors may develop proposals
that call for buying ships and aircraft that are unnecessary or, if
necessary, are brought into service too early or too late.  This is
of particular concern when the potential cost of new aircraft and
ships is considered.  Even if contractors receive this updated
information, receiving it too late could mean that they would be
disadvantaged in developing workable proposals for the next step of
the acquisition process.  For example, they may already have
eliminated alternatives that, in the context of the additional
information, are more cost-effective. 

Coast Guard officials agreed that it is essential to provide
contractors with updated information on the condition of ships and
aircraft as soon as possible, but they said that it was also
important to move forward with the contract awards because the
contractors had already formed their teams and were ready to begin
work.  They noted that long procurement lead times require that the
agency initiate actions now without delay.  According to agency
officials, the Coast Guard has learned the importance of having
sufficient time for advance planning to ensure that it has adequate
ships and aircraft to accomplish its mission while ensuring that they
are available at minimal cost.  Coast Guard officials also said they
plan to provide the information on the condition and capabilities of
its ships and aircraft as contractors proceed with their work. 

What follows is a listing of the relevant types of information,
together with Coast Guard officials' statements about the degree to
which contractors would be provided with such information during this
phase of the acquisition process. 


--------------------
\14 According to the Coast Guard, the Commission will distinguish
which of its roles, missions, and functions might be (1) added or
enhanced, (2) maintained at current levels of performance, or (3)
reduced or eliminated. 


      STUDIES OF THE USEFUL LIFE
      OF AIRCRAFT AND SHIPS
-------------------------------------------------------- Chapter 2:4.1

The Coast Guard plans to provide contractor teams with available data
on its existing ships and aircraft at a meeting with them in
September 1998, according to Coast Guard officials.  As of August
1998, several studies of ships had not been finalized.  The specific
studies under way or completed and their status follow: 

  -- Internal evaluation of aircraft (the Near Term Support Strategy
     study).  This study, which establishes a baseline of the
     condition of all four types of deepwater aircraft, was
     essentially completed in May 1997 and issued in final form on
     August 19, 1998.  A Coast Guard Deepwater Project official said
     that project officials expected to provide contractors with the
     results of this study in September 1998.  He said the
     contractors will also be able to visit the Aircraft Repair
     Supply Center and other Coast Guard locations to obtain
     additional information on aircraft condition. 

  -- Internal evaluations of ships (SSMEBs and related studies). 
     SSMEBs and related studies conducted since the DMAR was
     published provide the most up-to-date indications of vessels'
     conditions.  In addition to the SSMEBs and studies already
     completed, the Coast Guard's Boat Engineering Branch plans to
     issue an engineering report soon on the remaining useful service
     life of the 110-foot patrol boats.  A Coast Guard Deepwater
     Project official said that the completed SSMEBs and studies
     would be released to contractors when completed.  Several
     additional SSMEBs are scheduled for completion in June 1999,
     well after the contractors have started their work.  The Coast
     Guard official added that for SSMEBs under way, as well as for
     any other information on ships' conditions, contractors will be
     able to visit Pacific and Atlantic Logistics Centers to obtain
     their own information. 


      STUDIES OF THE CAPABILITIES
      OF AIRCRAFT AND SHIPS
-------------------------------------------------------- Chapter 2:4.2

During our review, the Coast Guard began planning to study the
capabilities of its current deepwater aircraft and ships and
comparing these capabilities with the future functional requirements
of the deepwater system.  This work will be done by a private
contractor.  The information from such a study would appear to be
critical to contractors in developing proposals for the most
cost-effective way to fill such gaps.  This analysis is scheduled for
completion in November 1998.  A Coast Guard Deepwater Project
official told us that project officials plan to make the study and
its underlying data available to contractors at that time. 


      STUDIES OF FUTURE DEMAND
-------------------------------------------------------- Chapter 2:4.3

As part of the ongoing planning for the Deepwater Project, the Coast
Guard attempted to recalculate its estimates of future demand for
services.  According to the staff involved, the reliability of the
underlying database did not permit such a recalculation.  OMB expects
that the Presidential Roles and Missions Study will be issued by
October 1999 and that it will provide additional information on the
future demand for Coast Guard services.  A Coast Guard Deepwater
Project official said that the Coast Guard plans to recalculate the
demand estimate as part of revising the DMAR.  According to the Coast
Guard's current plan, as of August 1998, the DMAR and the Mission
Needs Statement will not be revised until January 2000, or after
contractors have submitted their initial proposals on the project. 


      PRESIDENTIAL COMMISSION
      STUDY ON ROLES AND MISSIONS
-------------------------------------------------------- Chapter 2:4.4

Decisions made by the Presidential Commission formed for studying the
Coast Guard's roles and missions could also have a direct bearing on
the eventual shape of the Deepwater Project.  The Commission was
proposed out of concern that more information was needed on the Coast
Guard's resource needs.  However, by July 1998, the future of the
proposed Commission had become more uncertain.  In that month, the
Subcommittee on Transportation, House Committee on Appropriations,
expressed concerns about the Commission and proposed replacing it
with a blue-ribbon panel to study not only the Coast Guard's roles
and missions but its capital needs as well.  But even if the
Presidential Commission is formed in the fall of 1998, the results of
its work are not anticipated until at least October 1999.  As a
result, the results of the Commission's study will not be available
for the contractors to consider as they develop their blueprints for
the agency's future deepwater system.  The timetable for a report by
the congressionally proposed blue-ribbon panel shows that its report
would be issued by January 2001. 


   BETTER ACQUISITION GUIDANCE AND
   REVIEW COULD HELP AVOID SIMILAR
   PROBLEMS IN THE FUTURE
---------------------------------------------------------- Chapter 2:5

A number of factors contributed to the data weaknesses we noted in
the DMAR and ultimately resulted in the Coast Guard's proceeding with
the project before it had established a fully sound justification. 
One reason, Coast Guard officials pointed out, was that nothing as
comprehensive as the Deepwater Project had ever been covered in a
mission analysis report.  For example, it was the first time the
Coast Guard had dedicated staff to produce a mission analysis, and it
was the first time the Coast Guard had ever tried to document the
demand for the ships and aircraft being studied.  In many respects,
the agency was learning as it went through the process, since the
staff were not familiar with mission analysis techniques. 

We also noted weaknesses in DOT's and the Coast Guard's internal
guidance for preparing mission analyses and the processes for
reviewing such documents.  Three aspects of the process merit
attention:  more specific requirements and guidance for assessing the
condition of current assets, more thorough disclosure of how
information supporting the justification was developed, and more
structured and thorough review of the project justification itself. 


      GUIDANCE FOR ASSESSING
      CONDITION OF CURRENT ASSETS
      IS LIMITED
-------------------------------------------------------- Chapter 2:5.1

DOT and Coast Guard policies provide limited guidance for assessing
current assets as part of developing a mission analysis report, such
as the DMAR, on which the project's justification is based.  The
closest thing to a requirement for assessing the condition of current
assets is a statement in the DOT Acquisition Manual that the mission
analysis should be "based on the continuous monitoring of
performance, supportability, and maintenance trends of operational
systems to determine when they will no longer be able to meet current
or emerging needs." The Coast Guard's guidance generally outlines the
types of analyses and information to be included in the mission
analysis but does not specifically mention an assessment of the
current condition of the assets scheduled for replacement. 


      DISCLOSURE OF DATA SOURCES
      AND METHODOLOGIES WAS
      LARGELY ABSENT
-------------------------------------------------------- Chapter 2:5.2

In reviewing the information on which the decisions about an
acquisition as large as the Deepwater Project will be based, it is
important that decisionmakers in the Coast Guard and the DOT are able
to understand how planners arrived at their conclusions.  For
example, it is important for decisionmakers to know about any
limitations in the approach for collecting information, limitations
in the reliability of the underlying data, or other factors that
would affect the credibility of the information in supporting a major
capital expenditure.  Such explanations of how planners arrived at
their conclusions is an important part of minimizing the possibility
for errors and erroneous conclusions. 

The Coast Guard's and DOT's guidance for developing a mission
analysis are silent on disclosing methodologies and data sources.  We
found several instances in which not knowing this information could
result in assigning too much credibility to the conclusion being
drawn.  For example, in its presentation on capability shortfalls,
the DMAR stated that deepwater ships and aircraft had capability
deficiencies but did not explain the information on which this
conclusion was based.  According to a Deepwater Project official, to
make this assertion, the Coast Guard relied on the opinions of a few
personnel who were working on the Deepwater Project.  No database was
developed, nor was any systematic approach used to collect
information on capability deficiencies from a cross-section of
personnel who actually operated and maintained these assets. 
Similarly, the DMAR did not include an explanation for how planners
had determined the substantial gap between future demand and current
operating levels, which was presented in the DMAR.  In developing
this estimate, planners relied in part on a survey of a small number
of Coast Guard units--not enough to provide statistical validity. 
This limitation was not disclosed. 

We recognize that in some instances, it may be difficult to develop
information as thoroughly or systematically as might ideally be
desired.  However, ensuring that explanations for how information was
obtained and what information is used for conclusions would provide a
more solid foundation for the Coast Guard when it develops mission
analysis reports in the future. 


      REVIEW AT AGENCY AND
      DEPARTMENTAL LEVELS DID NOT
      DISCLOSE DATA PROBLEMS
-------------------------------------------------------- Chapter 2:5.3

After the justification for the Deepwater Project was developed, it
went through a number of reviews inside and outside the Coast Guard. 
None of these reviews included any systematic checks of the
underlying information.  As a result, these reviews did not disclose
the data weaknesses that we later found, including the fact that some
basic acquisition requirements--such as documenting the capability
deficiencies of current assets--were not met.  For example, the
DMAR's primary internal review, which was coordinated by the Director
of Resources' office, involved a review of the document by a number
of senior managers within the Coast Guard.  However, this review did
not involve any verification of the underlying data on which the
DMAR's findings and conclusions were based. 

This same focus was found in additional reviews that took place. 
Before an acquisition as large as the Deepwater Project can proceed
past the first main decision point and into the concept exploration
phase of OMB Circular A-109's acquisition process, the Coast Guard's
System Acquisition Manual calls for it to be reviewed by two
councils--one within the Coast Guard (the Coast Guard Acquisition
Review Council) and one within DOT (the Transportation Systems
Acquisition Review Council).  The Coast Guard Acquisition Review
Council is an advisory body on major acquisitions for the agency's
acquisition executive.  It reviews major acquisitions at each key
decision point and serves as a forum for discussing project-related
issues and resolving problems that need to be handled by the Coast
Guard's top management.  According to the Coast Guard's Systems
Acquisition Manual, the Council shall review a project's
documentation, ensure that the project manager is ready for DOT's
review, and ensure top management's commitment to the project's
acquisition strategy and plans.  However, this review did not include
a check of the underlying information.  As a result, the data
problems that eventually surfaced were not revealed by this review. 

When a project moves to a review by the Transportation Systems
Acquisition Review Council, members presume that the sponsoring
agency has presented complete and valid data, according to the
Council's Executive Secretary.  In reviewing the Deepwater Project,
Council members did ask the Coast Guard to clarify its schedule and
estimated costs, clarify the mission activities, and identify the
remaining service life of assets.  However, the level of review did
not extend to examining the completeness of the data. 

Our review suggests that at one or more points in the process of
reviewing a proposal of this size and complexity, additional steps
should be taken to help ensure that acquisition requirements are
adequately carried out.  For example, reviewers of proposals might
require that preparers of documents like the DMAR complete checklists
or certify that requirements have been met.  Alternatively, one or
more of these levels of review could employ a checklist or some other
approach to ensure that a certain level of testing and verification
is conducted as part of the review.  For the DMAR, such steps would
likely have identified the absence of a formal analysis for comparing
required capabilities with the capabilities of existing assets. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:6

The remaining useful life of the Coast Guard's deepwater aircraft and
ships may be much longer than the Coast Guard originally estimated. 
While this development could be a justification for slowing down the
project, it should be weighed against the long lead time needed for a
procurement of this magnitude.  If the Coast Guard ensures that the
contractors that are developing the initial deepwater proposals have
current, complete information on the condition and capabilities of
the agency's ships and aircraft, potential problems in this area
could be minimized and the project could proceed as planned.  This
information is critical for ensuring that contractors have the
opportunity to develop the most cost-effective proposals as possible,
as well as ensuring that the Coast Guard is able to make the best use
of existing, upgradable ships and aircraft. 

The development of the initial justification for the Deepwater
Project was the most complex mission analysis the Coast Guard has
ever undertaken, according to Coast Guard officials.  As they
continue to refine its acquisition-planning process, the Coast Guard
and DOT can also apply the lessons learned to future acquisitions as
well.  In particular, the agencies can look to (1) strengthening the
guidance for determining how to establish the remaining useful life
of assets, (2) providing better data and documentation on how
information supporting an acquisition was developed, and (3) ensuring
that reviews of proposals include checks that will help ensure the
completeness and accuracy of the information behind a proposal. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:7

We recommend that the Secretary of Transportation direct the Office
of the Assistant Secretary for Administration and the Coast Guard to
expedite the development and issuance of updated information from
internal studies to contractors involved in developing proposals for
the Deepwater Project.  Information should include, but not
necessarily be limited to, the remaining service life of ships and
aircraft, gaps between current and needed capabilities, and future
service levels. 

We recommend that the Secretary of Transportation direct the Office
of the the Assistant Secretary for Administration and the Coast Guard
to carry out the following additional actions: 

  -- Revise acquisition guidelines to better ensure that mission
     analysis projects for future projects are based on accurate and
     complete data on the condition of current assets, as appropriate
     for the assets or systems in question.  Such revisions should
     stress the importance of using rigorous engineering or other
     data-based evaluations to estimate the remaining service life of
     assets rather than using estimates made when the assets were
     produced or modified. 

  -- Revise acquisition guidelines to ensure that mission analysis
     reports and mission needs statements disclose the methodologies
     and data sources used.  Also, expand the guidelines and
     emphasize the importance of using more systematic data
     collection techniques, such as structured interviews, sampling
     techniques, and empirical data. 

  -- Develop a method to better ensure that existing acquisition
     requirements are carried out, such as documenting the gap
     between current and needed capabilities.  Such actions could
     include the use of tools like checklists of key requirements or
     certification that requirements have been met. 


ESTIMATED FUNDING LEVEL FOR THE
DEEPWATER PROJECT MAY NOT BE
ATTAINABLE IN THE CURRENT BUDGET
ENVIRONMENT
============================================================ Chapter 3

The Coast Guard has told contractors developing proposals for the
Deepwater Project to develop their plans on the assumption that the
project will cost $9.8 billion over 20 years--$300 million starting
in fiscal year 2001 and $500 million per year thereafter.  At this
size, the budget would take virtually all of the Coast Guard's
projected spending for its capital projects, thus leaving little room
for ongoing and future projects that amount to at least $300 million
a year.  Unless the Congress grants additional funds, which, under
existing budget laws could mean reducing funding for some other
agency or program, these other capital projects could be severely
affected.  Furthermore, the Coast Guard proposes that about one-third
of the project's funding come from proposed user fees for
navigational and domestic ice-breaking services.  Such fees have
proven controversial when proposed in the past, and the Subcommittees
of the Senate and House Committees on Appropriations with
jurisdiction over the Coast Guard's budget have already expressed
their opposition to such fees.  Absent such fees, the money would
most likely need to come from additional appropriations.  This would
place the Deepwater Project in competition with other budget
priorities, both inside and outside the Coast Guard. 

If budget realities force a readjustment in the Coast Guard's
acquisition plans for the Deepwater Project, the agency will likely
face one of two choices:  reducing the project's scope or buying the
same amount but over a longer period of time.  Department of Defense
(DOD) agencies seeking to procure several such items at once under
restricted budgets have often tried to deal with the situation
through the latter approach.  However, this approach ultimately
drives up costs because of such factors as higher administrative
costs and the loss of quantity discounts.  Now that the Coast Guard
has found that many of its ships and aircraft will have a longer
useful life than originally thought when the Deepwater Project was
proposed, it can reassess the project's strategy and scope and avoid
this problem. 


   COAST GUARD'S CAPITAL-SPENDING
   TARGET IS EXPECTED TO GROW
---------------------------------------------------------- Chapter 3:1

Funding for the Coast Guard's capital needs is affected by efforts to
balance the federal budget.  These efforts have resulted in limits on
discretionary spending\1

through fiscal year 2002.\2 These limits are translated into budget
targets developed by OMB for individual agencies.  The budget targets
set by OMB are then subject to change as the President and the
Congress consider trade-offs involved in changing the distribution of
available funds among programs and agencies. 

Overall, OMB's budget targets call for an increase in the Coast
Guard's Acquisition, Construction, and Improvements account--the
account used to fund the agency's capital projects--over the next 5
years, from about $398 million in fiscal year 1998 to about $518
million in fiscal 2003.  The higher target presumes that $165 million
in new user fees will be available. 


--------------------
\1 Discretionary spending refers to outlays controllable through the
congressional appropriation process.  In contrast, mandatory
spending, which includes outlays for such entitlement programs as
food stamps, Medicare, and veterans' pensions, is controlled by the
Congress indirectly by its defining of eligibility and setting the
benefits or payment rules rather than directly going through the
appropriation process. 

\2 Accompanying the effort to balance the budget are statutory limits
on total discretionary spending that have been in effect since fiscal
year 1991.  The Balanced Budget and Emergency Deficit Control Act of
1985 (the "Deficit Control Act"), as amended by the Budget
Enforcement Act of 1990, the Omnibus Budget Reconciliation Act of
1993, and the Budget Enforcement Act of 1997, established statutory
limits on federal government discretionary spending for fiscal years
1991 through 2002.  Under these limits, outlays for discretionary
spending will remain almost constant in dollar terms from fiscal year
1998 through fiscal 2002.  OMB is the agency that prepares the
calculations and estimates used to adjust and enforce these limits. 


   ESTIMATED COST OF DEEPWATER
   PROJECT LEAVES LITTLE ROOM FOR
   OTHER CAPITAL PROJECTS
---------------------------------------------------------- Chapter 3:2

The estimated cost for the Deepwater Project that the Coast Guard put
forth in its initial spending plan would soon take up nearly the
entire AC&I budget target established by OMB.  By fiscal year 2002,
when capital spending for the Deepwater Project is anticipated to
reach $500 million, the Deepwater Project will have consumed 97
percent of the projected AC&I account.  If the Coast Guard receives
the target levels set by OMB, they will leave little room for the
Coast Guard's other ongoing capital expenditures.  The Coast Guard's
capital plan shows that at least $300 million a year in other capital
needs is scheduled from fiscal year 1999 through fiscal 2003.\3

Many of these projects, such as the buoy tender projects and shore
infrastructure improvements, are ongoing projects that have been in
progress for years. 

Taken together, all current and projected capital spending would
dwarf OMB's target by fiscal year 2002.  (See fig.  3.1.)
Expenditures for the Deepwater Project alone will have risen to the
point where they are nearly as great as OMB's target, while
expenditures for projects already approved, other future projects,
and AC&I personnel\4

bring the total to more than $300 million higher than the OMB target. 

   Figure 3.1:  Comparison of
   OMB's Budget Target and Actual
   and Proposed Coast Guard
   Capital Projects, Fiscal Years
   1999-2003

   (See figure in printed
   edition.)


--------------------
\3 To identify and plan for its 15-year capital needs, the Coast
Guard develops an Agency Capital Plan (formerly called the Capital
Investment Plan).  According to the Coast Guard, the plan was based
on unconstrained resource needs, did not reflect the austere budget
climate in which it was issued, and was not a budget strategy
document.  Coast Guard officials are developing a new plan that would
be more aligned with probable levels of funding.  Initially, the
Coast Guard planned to issue an interim plan in July 1997.  As of
July 1998, the agency had not issued its new plan. 

\4 Salaries and other costs for Cost Guard personnel responsible for
AC&I projects are counted as part of the AC&I account. 


   USER FEE PROPOSAL CREATES
   GREATER FUNDING UNCERTAINTY
---------------------------------------------------------- Chapter 3:3

The spending targets set by OMB presume funding from two main
sources--annual appropriations from the Congress and new user fees. 
As proposed, the portion that would come from appropriations would
drop from $407 million in fiscal year 1999 to $353 million in fiscal
2003.\5 To augment these funds, the administration is proposing $165
million per year in new user fees beginning in fiscal year 2000.\6
The fees are for navigational services (such as vessel traffic
services in busy harbor areas or maintaining other aids to
navigation) and ice-breaking services in domestic waters.  The Coast
Guard currently provides these services but does not charge for them. 

If past experience is any indication, the new fee will likely create
controversy.  The administration has proposed such fees before, and
they have met with strong opposition.  Groups who would have to pay
the fees, such as ship and barge companies, have argued that singling
out such a function for additional charge is unfair.  For example,
the administration's proposed fiscal year 1998 budget mentioned the
possibility of collecting a fee to recover the Coast Guard's cost of
providing ice-breaking services in the Great Lakes and the Northeast. 
However, in its deliberations on the Coast Guard's budget, the
Congress did not endorse this user fee. 

Obtaining this additional capital funding through user fees would
also require congressional approval of a change with regard to
earmarking--that is, allowing an agency to keep at least a portion of
the fees collected to pay for providing the service.  Currently, the
Coast Guard is not allowed to keep fees collected; the revenues are
sent to the Department of the Treasury, and the agency is reimbursed
for its collection costs only.\7

In July 1998, in their deliberations on the Coast Guard's fiscal year
1999 budget request, the Subcommittees of the Senate and House
Committees on Appropriations with jurisdiction over the Coast Guard's
budget cited their opposition to the new user fees proposed by the
administration, and in addition, the House and Senate have prohibited
the Coast Guard from planning or implementing any new user fees. 
This restriction will require the Coast Guard to seek out alternative
sources of financing.  The limits on discretionary spending set by
the Deficit Control Act, as amended, will make it difficult for the
Coast Guard to increase the level of funding for its AC&I account
without taking funds away from another agency or budget account. 
Within the context of this act, as amended, increasing the level of
appropriated funding in the future can be done only by reducing the
level of another account, since discretionary spending is limited to
the same nominal amount from fiscal year 1999 through fiscal 2002. 
These conditions--the reality of deficit reduction efforts and the
uncertainty of a yet to be implemented user fee--point to the
potential for a "double squeeze" on the Coast Guard's AC&I account. 


--------------------
\5 Twenty million dollars would come from the Oil Spill Liability
Trust Fund. 

\6 For fiscal year 1999, the administration is proposing $35 million
in new user fees. 

\7 In some circumstances, the Congress has allowed agencies to keep
the proceeds from user fees to finance programs.  For example, in
1997, the Congress authorized the National Park Service to conduct a
demonstration fee program that allows parks and other units to
collect new or increased admission and user fees and spend the new
revenue for park improvements. 


   REASSESSING THE ACQUISITION AND
   FUNDING PLAN FOR THE DEEPWATER
   PROJECT COULD REDUCE THE RISK
   OF COST INCREASES LATER
---------------------------------------------------------- Chapter 3:4

Now that the Coast Guard knows that many of its deepwater ships and
aircraft will have a longer useful life than originally thought, it
may be in a position to reassess whether the funding strategy for the
Deepwater Project should be changed.  Such a reassessment may be
needed to avoid the procurement mistakes often made by federal
agencies in the past.  If budget realities dictate the procurement of
deepwater ships and aircraft at a much lower level than $500 million
a year, this could result in the Coast Guard's being able to obtain
considerably less value for the dollars expended. 

Agencies that plan procurements that are too large for available
funding budgets are left with essentially two choices:  they can
reduce the scope of the project at that point or they can adjust by
using schedule stretch-outs--that is, buying smaller quantities of
each item and lengthening the period over which the assets are
acquired.  Our work on DOD's acquisition projects shows that costs
can expand dramatically when this latter approach is adopted as a
solution to acquisition plans that are not closely aligned with
probable funding levels.  For example, in a study of DOD's
acquisition strategy, we found that an attempt to purchase too many
weapon systems at once had the effect of driving up costs, even when
the weapons being produced were proven systems that were beyond the
testing stage.  When DOD was faced with funding limitations and had
to stretch out the procurement period for 17 such weapons systems,
the systems had cost increases totaling $10 billion.\8

The Coast Guard has already used schedule stretch-outs as a way to
deal with tight budgets--and with the same consequences.  For
example, the Coast Guard stretched procurement of 11 seagoing buoy
tenders to 5 years instead of the planned 3-year period.  Because of
the loss of quantity discounts and higher administrative costs, the
acquisition cost increased by an estimated $20 million to $30
million, according to the Coast Guard. 

As the Coast Guard proceeds with the project, the
better-than-anticipated life of current deepwater ships and aircraft
may provide the agency with an opportunity to adopt a more effective
approach.  It is now clear that many deepwater assets--especially
aircraft--can operate many years beyond earlier estimates, assuming
they receive the proper maintenance and upgrades.  If many of these
ships and aircraft can be upgraded and used for a much longer period
of time, replacement needs--particularly in the short term--could be
considerably less than the $500 million a year the Coast Guard has
asked contractors to design their proposals around.  Instead of being
in a situation that commits the Coast Guard to replacing several
kinds of deepwater ships and aircraft at once, the improved outlook
would appear to allow the Coast Guard to focus on acquiring those
ships and aircraft clearly in need of immediate recapitalization. 
This, in turn, would allow the Coast Guard to focus more dollars on
completing other nondeepwater acquisition projects in the near term,
thereby avoiding the waste that can occur under stretched-out
schedules. 

Coast Guard managers pointed out that their planning approach to the
Deepwater Project permits adjustments to the acquisition strategy and
projected funding stream if projected levels of funding are not
appropriated.  Agency managers indicated that decisions on the
schedule and options for procurement--ranging from the replacement of
the entire system to the renovation and modernization of the existing
system--will be made as the Coast Guard proceeds with the project. 
According to agency managers, proceeding to the next phase of the
acquisition--demonstration and validation--will be contingent on the
availability of funds.  In the likelihood that $500 million a year is
not received, they said, the agency will make adjustments and call on
its contractors to revise their proposals and plans. 

We acknowledge that the Coast Guard has the flexibility to adjust the
project later, but we question the advisability of continuing to ask
contractors to develop a proposal so expensive that its funding
appears doubtful.  Our concern is that the planning assumption on
which the Deepwater Project's development is currently being based (a
funding stream of $500 million a year) make the options for later
adjustments expensive.  If proposals must be extensively redone to
make them less expensive, the government will have spent time and
money in funding work that may be of limited value, and if the
decision is made to adopt an expensive proposal but stretch out the
procurement period to make it affordable, the Coast Guard could
repeat the money-wasting scenario we have identified in so many other
DOD scenarios.  By contrast, using a strategy that is based on
probable funding levels would appear to leave the Coast Guard in a
better position to continue with the rest of the acquisition process. 


--------------------
\8 The $10 billion estimate is in 1996 dollars.  See Weapons
Acquisition:  Better Use of Limited DOD Acquisition Funding Would
Reduce Costs (GAO/NSIAD-97-23, Feb.  23, 1997). 


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

In a global sense, the Coast Guard is correct in beginning now to
explore future systems to modernize deepwater ships and aircraft,
especially given the long lead times often associated with
procurements of this magnitude.  The agency's "system of systems"
approach seems logical as a way to avoid a costly one-for-one
replacement of assets, and its use of multiple contractors is an
attempt to leverage technology and to identify cost-effective
alternatives.  However, despite these efforts, the proposed cost of
the Deepwater Project threatens to overwhelm the Coast Guard's AC&I
account, which already rests on an uncertain premise that new user
fees will be approved.  By directing contractor teams to base their
proposals on a funding amount nearly equal to its entire projected
budget for its AC&I account, the Coast Guard is at risk of receiving
Deepwater Project proposals that either (1) must be redone once
funding levels become known or (2) result in expensive, stretched-out
procurements. 

Contractors have just begun work on developing their proposals for
the Deepwater Project.  To align these proposals more realistically
with the agency's budget constraints and other capital needs, the
Coast Guard would need to move as quickly as possible in changing the
funding assumptions on which the project is based. 


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

We recommend that the Secretary of Transportation direct the
Commandant of the Coast Guard to evaluate whether contracting teams
should be instructed to base their proposals for the Deepwater
Project on the assumption that the funding level will be lower than
$500 million a year.  We also recommend that the Commandant be
directed to submit his decision on this matter to DOT's
Transportation System Acquisition Review Council and/or other
appropriate offices within DOT for approval. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 3:7

We provided DOT and the Coast Guard with a draft of this report for
review and comment.  DOT and the Coast Guard generally concurred with
the information in the report, and DOT indicated that they would
consider the report's recommendations.  The Coast Guard generally
concurred with the recommendations and said it will strive to improve
the acquisition process.  In addition, DOT and the Coast Guard
provided several comments that clarified information on the DOT
acquisition process, the cost of operating deepwater ships and
aircraft, and the goals of the Deepwater Project, which we have
incorporated into the report as appropriate. 


PRIMARY USES OF DEEPWATER SHIPS
AND AIRCRAFT, FISCAL YEAR 1997
=========================================================== Appendix I

                                                 Mission area
                     --------------------------------------------------------------------
                                                             Training
                                                     Search       and  Military
                         Drug  Fisherie                 and    public  operatio
Type of asset         control         s  Migrants    rescue   affairs        ns    Others
-------------------  --------  --------  --------  --------  --------  --------  --------
Ships
-----------------------------------------------------------------------------------------
378-foot high-          28.2%     36.6%      1.4%      3.2%     14.8%      7.3%      8.5%
 endurance cutter
270-foot medium-         44.2      13.8      15.1       1.3      10.4       2.1      13.1
 endurance cutter
210-foot medium-         40.3      18.5      14.1       2.8      11.7       0.6      12.0
 endurance cutter
110-foot patrol          24.0      20.8      10.2      29.2       3.8       0.3      11.6
 boat

Aircraft
-----------------------------------------------------------------------------------------
HC-130 long-range        18.9      25.6      10.1      15.4      17.8       0.1      12.1
 surveillance
 airplane
HU-25 medium-range       26.1      20.7       8.0      13.1      22.0         0      10.1
 surveillance
 airplane
HH-60 medium-range       17.2       8.3       1.6      17.7      38.7       0.4      16.1
 recovery
 helicopter
HH-65A short-range       11.7       8.7       3.4      18.9      37.1       0.6      19.6
 recovery
 helicopter
-----------------------------------------------------------------------------------------
Source:  GAO's analysis of the Coast Guard's data. 


OPERATIONAL COSTS FOR DEEPWATER
SHIPS AND AIRCRAFT, FISCAL YEAR
1997
========================================================== Appendix II

                                           Direct
                               Direct     support
                           expenditur  expenditur
Type of asset                      es          es  Overhead
-------------------------  ----------  ----------  --------
Ships
-----------------------------------------------------------
378-foot high-endurance    $101,184,7  $68,525,66  $38,499,
 cutter                            69           9       933
270-foot medium-           72,227,363  47,618,453  26,753,5
 endurance cutter                                        84
210-foot medium-           63,451,659  44,332,894  24,907,6
 endurance cutter                                        50
110-foot patrol boat       53,650,282  30,850,002  17,332,5
                                                         26

Aircraft
-----------------------------------------------------------
HC-130 long-range          115,198,84  23,660,979  23,305,0
 surveillance airplane              5                    44
HU-25 medium-range         70,859,905   9,674,890  9,529,35
 surveillance airplane                                    0
HH-60 medium-range         112,287,29  26,676,029  26,274,7
 recovery helicopter                7                    38
HH-65 short-range          173,186,66  36,086,986  35,544,1
 recovery helicopter                0                    25
-----------------------------------------------------------
Source:  The Coast Guard's Cost Accounting Model. 


UPGRADES TO THE COAST GUARD'S
AIRCRAFT
========================================================= Appendix III

The Coast Guard has identified several projects that can further the
life or upgrade the capability of its aircraft.  These projects are
funded from acquisition, construction, and improvement
appropriations. 



                                   Table III.1
                     
                      Projects That Can Prolong the Life of
                            the Coast Guard's Aircraft

                              (Dollars in millions)

           Project's                                     Project's  Project's
Aircraft   title           Project's description              cost  status
---------  --------------  -------------------------  ------------  ------------
HC-130     T-56 Engine     The engine upgrade will           $20.8  Started in
           Conversion      decrease operating and                   FY1997
                           support costs and
                           increase safety for
                           flight crews.

HC-130     Side Looking    The project will                   13.1  Started in
           Airborne Radar  standardize the Coast                    FY1993
                           Guard's SLAR-equipped
                           aircraft by upgrading the
                           SLAR to the HU-25 Aireye
                           standard. This project
                           will replace outdated and
                           obsolete sensor systems.

HC-130     Aircraft        The project provides               16.3  Started in
           Sensor Upgrade  increased sensor                         FY1998
                           efficiencies via 12
                           systems capable of being
                           rapidly interchanged
                           between aircraft. It will
                           provide the capability
                           for more effective 24-
                           hour operations and
                           provide surface-or land-
                           based assets with long-
                           range real-time
                           information.

HC-130     Long Range      The upgrade will replace          40-96  Started in
           Search          antiquated electrical and                FY1998
           Capability      avionics systems and
           Preservation    install standard fleet
                           components.

HU-25      Avionics        The project will replace           11.6  To start in
           Improvements    obsolete 1970s-vintage                   FY1999
                           avionics.

HU-25      Reengining of   Project will replace              To be  Start date
           aircraft        engines.                     determined  undetermined

HH-60J     Independent     The project will replace              6  To start in
           Navigation      the current unreliable                   FY1999
                           system with a new system
                           necessary for safe
                           successful single-
                           aircraft operations.

HH-60J     Service Life    The project would replace         To be  Start date
           extension       entire transmission upper    determined  undetermined
                           deck, vibrator absorber
                           system, and reinforce
                           tail pylon.

HH-65A     Kapton          The project rewires the            12.7  Started in
           Rewiring        helicopter. This will                    FY1997
                           correct a serious flight
                           safety hazard posed by
                           the existing Kapton
                           wiring.

HH-65A     Mission         The project replaces               20.4  Started in
           Computer        obsolete mission                         FY1997
           Unit            computers with smaller,
                           lighter, more reliable,
                           and supportable
                           equipment.

HH-65A     LTS-101 engine  The project would replace          17.4  Start date
           life cycle      the engine control system                undetermined
           cost reduction  with a Full Authority
                           Digital Electronic
                           Control, which will
                           minimize safety risks and
                           increase engine
                           performance.

All        Aviation        This source and data               12.3  Started in
aircraft   Logistics       entry project will                       FY1997
           Management      provide a framework to
           Information     streamline the data entry
           System          process while
                           facilitating access to
                           management-level
                           information for aviation
                           logistics.

All        Commercial      The project will provide           21.5  To start in
aircraft   SATCOM          secure and reliable                      FY1999
                           communications for
                           command and control
                           through commercial
                           satellite communications.
--------------------------------------------------------------------------------
Legend

FY = fiscal year


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

Neil Asaba
Sarah Brandt
Steven Calvo
David Hooper
Christopher Jones
LuAnn Moy
David Robinson
Stanley Stenersen
Randy Williamson


*** End of document. ***