Federal Property Disposal: Information on DOD's Surplus Property Program
(Testimony, 09/12/97, GAO/T-NSIAD-97-257).

GAO discussed the Department of Defense's (DOD) process for disposing of
surplus personal property, focusing on: (1) an overview of how the
disposal process works and how it differs from private sector disposal
systems; (2) the means used to dispose of personal property; (3) efforts
to improve the efficiency and effectiveness of the current disposal
operation; and (4) opportunities to improve aspects of the disposal
function through competitive outsourcing.

GAO noted that: (1) DOD's disposal process is governed by numerous laws
and regulations that require DOD's surplus property be made available to
many organizations; (2) thus, the best items are taken through the
transfer and donation process leaving the least marketable items
available for sale; (3) this and other factors contribute to DOD's low
rates of return; (4) although the private sector obtains higher rates of
return than DOD for comparable items, it does not handle the quantities,
types, and conditions of items that DOD does; (5) thus, the private
sector is able to develop disposal expertise and tailor its disposal
strategies so that it obtains higher rates of return; (6) DOD recognizes
that it needs to improve its management of property disposal and has
adopted or is planning to adopt a number of commercial practices that
should help improve its operations; (7) DOD is also involving the
private sector in certain aspects of process, particularly in the sales
of surplus property, to improve its rate of return and become more
business-like in its operations; and (8) in addition, aspects of DOD's
disposal process that are deemed to be not inherently governmental
functions may be outsourcing candidates--an aim GAO supported in recent
legislative proposals.

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

 REPORTNUM:  T-NSIAD-97-257
     TITLE:  Federal Property Disposal: Information on DOD's Surplus 
             Property Program
      DATE:  09/12/97
   SUBJECT:  Surplus federal property
             Equipment inventories
             Property disposal
             Federal property management
             Inventory control
             Military inventories
             Privatization
             Personal property

             

Federal Property Disposal: Information on DOD's Surplus Property Program
(Testimony, 09/12/97, GAO/T-NSIAD-97-257).

GAO discussed the Department of Defense's (DOD) process for disposing of
surplus personal property, focusing on: (1) an overview of how the
disposal process works and how it differs from private sector disposal
systems; (2) the means used to dispose of personal property; (3) efforts
to improve the efficiency and effectiveness of the current disposal
operation; and (4) opportunities to improve aspects of the disposal
function through competitive outsourcing.

GAO noted that: (1) DOD's disposal process is governed by numerous laws
and regulations that require DOD's surplus property be made available to
many organizations; (2) thus, the best items are taken through the
transfer and donation process leaving the least marketable items
available for sale; (3) this and other factors contribute to DOD's low
rates of return; (4) although the private sector obtains higher rates of
return than DOD for comparable items, it does not handle the quantities,
types, and conditions of items that DOD does; (5) thus, the private
sector is able to develop disposal expertise and tailor its disposal
strategies so that it obtains higher rates of return; (6) DOD recognizes
that it needs to improve its management of property disposal and has
adopted or is planning to adopt a number of commercial practices that
should help improve its operations; (7) DOD is also involving the
private sector in certain aspects of process, particularly in the sales
of surplus property, to improve its rate of return and become more
business-like in its operations; and (8) in addition, aspects of DOD's
disposal process that are deemed to be not inherently governmental
functions may be outsourcing candidates--an aim GAO supported in recent
legislative proposals.

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

 REPORTNUM:  T-NSIAD-97-257
     TITLE:  Federal Property Disposal: Information on DOD's Surplus 
             Property Program
      DATE:  09/12/97
   SUBJECT:  Surplus federal property
             Equipment inventories
             Property disposal
             Federal property management
             Inventory control
             Military inventories
             Privatization
             Personal property

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


Before the Subcommittee on Government Management, Information, and
Technology, Committee on Government Reform and Oversight, House of
Representatives

For Release on Delivery
Expected at
9:30 a.m., EDT
Friday,
September 12, 1997

FEDERAL PROPERTY DISPOSAL -
INFORMATION ON DOD'S SURPLUS
PROPERTY PROGRAM

Statement of David R.  Warren, Director, Defense Management Issues,
National Security and International Affairs Division

GAO/T-NSIAD-97-257

GAO/NSIAD-97-257t

Federal Property Disposal

(709301)


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

  DLA - Defense Logistics Agency
  DOD - Department of Defense
  DRMO - Defense Reutilization and Marketing Office
  DRMS - Defense Reutilization and Marketing Service
  FMS - Foreign Military Sales
  GAO - U.S.  General Accounting Office
  GSA - General Services Administration

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here to discuss the Department of Defense's
(DOD) process for disposing of surplus personal property.  Surplus
personal property can be any items other than real property, which is
land and buildings and items permanently attached to them.  Personal
property includes items such as aircraft parts, computers, furniture,
and clothing.  DOD maintains a complex disposal system that is
characterized by massive volumes of excess property.  In fiscal year
1996, for example, DOD disposed of millions of items with a reported
acquisition value (the amount originally paid for the items or most
recently paid for similar items) of almost $24 billion.  Our
testimony today will focus on (1) an overview of how the disposal
process works and how it differs from private sector disposal
systems, (2) the means used to dispose of personal property, (3)
efforts to improve the efficiency and effectiveness of the current
disposal operation, and (4) opportunities to improve aspects of the
disposal function through competitive outsourcing. 


   SUMMARY
---------------------------------------------------------- Chapter 0:1

DOD's disposal process is governed by numerous laws and regulations
that require DOD's surplus property be made available to many
organizations.  Thus, the best items are taken through the transfer
and donation process leaving the least marketable items available for
sale.  This and other factors contribute to DOD's low rates of
return.  Although the private sector obtains higher rates of return
than DOD for comparable items, it does not handle the quantities,
types, and conditions of items that DOD does.  Thus, the private
sector is able to develop disposal expertise and tailor its disposal
strategies so that it obtains higher rates of return. 

DOD recognizes that it needs to improve its management of property
disposal and has adopted or is planning to adopt a number of
commercial practices that should help improve its operations.  DOD is
also involving the private sector in certain aspects of the process,
particularly in the sales of surplus property, to improve its rate of
return and become more business like in its operations.  In addition,
aspects of DOD's disposal process that are deemed to be not
inherently governmental functions may be outsourcing candidates--an
aim we supported in recent legislative proposals. 


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

The Federal Property and Administrative Services Act of 1949
(P.L.  81-152), as amended, placed responsibility for the disposition
of government real and personal property within the General Services
Administration (GSA).  GSA delegated the responsibility for disposal
of DOD personal property to the Secretary of Defense, who in turn
delegated it to the Defense Logistics Agency (DLA).  DLA established
the Defense Reutilization and Marketing Service (DRMS) to carry out
the disposal function.  Although DRMS disposes of the majority of
items generated by DOD activities, certain categories of items, such
as nuclear devices and cryptographic equipment, are disposed of by
other means. 

In fiscal year 1996, DRMS had about 170 Defense Reutilization and
Marketing Offices (DRMO) worldwide that receive and dispose of
personal property for DOD activities.  It also employed about 3,700
people and disposed of millions of items with a reported acquisition
value of almost $24 billion. 


      DATA INDICATES OPERATING
      LOSSES AND LOW RATES OF
      RETURN ON DRMS' DISPOSAL
      OPERATIONS
-------------------------------------------------------- Chapter 0:2.1

With a few exceptions, historical data indicates that DRMS has
experienced operating losses in recent years and low rates of return
on disposed items.  For example, DRMS reported net operating losses
in three of the four years from fiscal year 1993 to 1996.  These
losses ranged from a low of $84 million in fiscal year 1996 to a high
of $153 million in fiscal year 1995.  DRMS' overall rate of return on
the reported acquisition value of all usable surplus property it sold
in fiscal year 1996 was 1.97 percent.  For fiscal years 1995 and
1994, the rates were 2.28 and 1.83 percent, respectively.  DRMS
calculates the rate of return by dividing the proceeds from the sale
of usable items by the reported acquisition value of usable property
sold.  DRMS' overall rate of return is based on all usable items sold
(excludes scrap). 

The rates of return on property disposal at overseas DRMOs are higher
than in the continental United States.  For example, in fiscal year
1996, the rate of return for DRMOs in Europe was 6.98 percent,
whereas the rate in the Pacific region was 2.88 percent.  The higher
rates of return at overseas DRMOs are primarily due to better items
being available for sale because of fewer overseas transfer and
donation customers.  The lower rates in the Pacific region, as
compared to Europe, are due to (1) bilateral agreements that give the
host country "first right of refusal" (i.e., first opportunity to buy
the items), (2) a smaller customer base, and (3) higher shipping
costs incurred by customers due to longer distances. 


   DOD'S PERSONAL PROPERTY
   DISPOSAL PROCESS IS GUIDED BY
   LEGISLATION WHILE THE PRIVATE
   SECTOR HAS GREATER FLEXIBILITY
---------------------------------------------------------- Chapter 0:3

Figure 1 shows a general overview of the personal property disposal
process.  The disposal process, which is governed by numerous laws
and regulations, starts when DOD activities turn in items to the
DRMOs for disposal.  Upon arrival, the items are inspected, condition
and demilitarization (i.e., rendering an item militarily unusable)
codes are verified; the type of sale is determined; and items
requiring special handling such as hazardous material and precious
metals are identified in order to apply extra controls.  Items are
accumulated for 2 to 4 weeks and then processed together.  At anytime
during the process, all customers may screen items and attach tags,
indicating a desire to have them, but the items may only be issued
and removed in accordance with established priorities.  First
priority is given to DOD activities, federal agencies, and other
entities with legislative priority equal to DOD, such as certain law
enforcement organizations and humanitarian relief agencies, among
others.  Second priority goes to approved donee organizations, such
as state and local governments, museums, and Boy and Girl Scouts. 
Within these priorities, items are dispensed on a first-come,
first-served basis.  Customers have 14 days to requisition and 14
days to remove items, unless otherwise agreed with the DRMO.  Items
that are tagged but are not removed within the prescribed time frames
are available for use by other qualified organizations during a 3-day
period known as the "blue light special."

   Figure 1:  The Personal
   Property Disposal Process

   (See figure in printed
   edition.)

\a Property not needed by DOD activities is considered to be excess
and is available for reutilization by other DOD activities, transfer
to other federal agencies, and transfer to organizations that have
been given priority equal to that of the federal government for the
purpose of obtaining excess personal property. 

\b Property not needed by the federal government or organizations
with equal priority is considered surplus and is available for
donation to eligible organizations or for sale. 

Items that still remain after this part of the process has been
completed are sold to the general public through three types of
sales--international, local, and retail.  International sales are
used for items with global appeal, such as machine tools, or property
that requires additional controls, such as hazardous materials. 
After several hundred items are accumulated, a catalog is published,
and sealed bids are solicited.  The high bidder for items requiring
extra controls or demilitarization undergoes a clearance process
before the award.  The DRMOs use local sales for items that do not
have global appeal and either publish a catalog or hold an auction at
the DRMO.  Sealed bids are solicited for the catalog sales, and
on-the-spot bids are made at the auctions.  Items with commercial
appeal, such as computers, furniture, and clothing are sold at retail
stores at 40 DRMOs.  Retail sales are made on a cash and carry basis. 


      DISPOSAL SYSTEMS IN THE
      PRIVATE SECTOR
-------------------------------------------------------- Chapter 0:3.1

The disposal systems of private sector companies, particularly the
commercial airlines, are much different than DOD's system, which is
based on statutory requirements.  For example, the airlines we
interviewed place special emphasis on selling surplus property and
create incentives for employees to maximize the return on sales. 
These companies expect to obtain reasonable proceeds from the surplus
aircraft parts they sell and are less concerned than DOD with how
quickly the property moves off the warehouse shelves.  To maximize
sales proceeds, staff are trained to understand aircraft parts
terminology and the applications that exist for various parts.  This
training and experience make it more likely that highly marketable
parts will be identified and marketed appropriately.  Further, the
staff often specialize in selling a specific category of part, such
as engine parts, to promote a better understanding of the parts and
the markets to which they sell. 

In addition, progressive commercial companies provide employees with
the resources to effectively sell surplus property.  Marketing staff
are provided a wide range of sales tools and techniques and are held
accountable for the property they intend to sell.  At one airline,
sales personnel are responsible for the sale of the surplus property
and are rated on how well they maximize sales proceeds.  Figure 2
compares the differences between DOD's and the private sector's
disposal processes. 

   Figure 2:  Comparison of DOD
   and Private Sector Disposal
   Processes

   (See figure in printed
   edition.)


   LARGE MAJORITY OF ITEMS
   DISPOSED OF THROUGH SALES AND
   SCRAP
---------------------------------------------------------- Chapter 0:4

DOD's primary disposal objective is to maximize the reuse of surplus
property within the military services, various levels of government,
and authorized organizations before offering the property for sale to
the general public.  Despite this goal, DOD actually sells most of
its surplus property to the general public either through sales
efforts or as scrap, as shown in figures 3 and 4. 

   Figure 3:  Average
   Dispositions, FY 1992-96

   (See figure in printed
   edition.)

Note:  Totals for the line item dispositions do not add due to
rounding. 

\c Some property declared excess by one activity within DOD is
reutilized by other DOD activities. 

\d Includes personal property (1) transferred (2.1%) to other federal
agencies or organizations given priority equal to the federal
government, (2) donated (2.1%) to eligible organizations, and (3)
sold (0.3%) to foreign military sales customers--the system through
which government-to-government sales of military equipment are made. 

   Figure 4:  Disposition by
   Reported Acquisition Value, FY
   1992-96

   (See figure in printed
   edition.)

\e According to DRMS personnel, the "other" category was
significantly larger in fiscal years 1992 and 1993 than in subsequent
years because it was used as a "catch all" category. 

\f Fiscal year 1993 disposals were larger than other years because of
DOD base closures and drawdowns (force reductions). 


   DOD HAS EFFORTS UNDERWAY TO
   IMPROVE DISPOSAL OPERATIONS
---------------------------------------------------------- Chapter 0:5

DOD is seeking to improve its disposal process by using more
commercial practices and making greater use of the private sector in
disposing of property.  While we have not done recent work in this
area, our 1994 report stated that, while not always directly
comparable to DOD, the commercial airlines' system for selling
surplus aircraft parts reflects the profit incentive.\1 The airlines
we interviewed expect to obtain reasonable rates of return on the
surplus aircraft parts they sell.  Officials from one airline told us
they often receive as much as 50 percent of the manufacturer's list
price (the price of the parts brand new) from the sale of their
surplus aircraft parts. 

Commercial companies use marketing techniques that substantially
enhance the visibility and marketability of their parts, including
(1) identifying highly marketable commercial-type parts, (2) selling
the parts as Federal Aviation Administration certified, (3) arranging
parts into sales groupings that meet buyer needs, and (4) actively
marketing the parts to a full spectrum of civil aviation buyers. 
Even though it may not be practicable for DOD to duplicate commercial
marketing techniques because of competing priorities, DOD could
substantially increase its proceeds by adopting some basic marketing
practices that have worked successfully in the private sector. 
Critical to the success of such practices, however, will be the
establishment or realignment of incentives. 

Compared with the private sector's rates of return for similar items,
DRMS rates are low.  As noted earlier, airline companies report
receiving as much as 50 percent of the manufacturer's list price for
aircraft parts.  One reason for DRMS' lower rates of return is that
many of the aircraft parts it disposes of have only military
application, and those parts with commercial application are not
certified by the Federal Aviation Administration, a requirement for
commercial use.  Another factor for the lower DRMS rate of return is
that the best items are reutilized, transferred, or donated, leaving
the least marketable items available for sale.  The volume and types
of items DRMS disposes of annually (about 4 million line items) also
make it difficult for DRMS to develop expertise or tailor disposal
strategies for individual items, as the private sector does. 
Moreover, the quantities, constant influx of items, and time limits
on the various phases of the process drive DRMS' emphasis on moving
items through the process quickly to make room for incoming items. 


--------------------
\1 Commercial Practices:  Opportunities Exist to Enhance DOD's Sales
of Surplus Aircraft Parts (GAO/NSIAD-94-189, Sept.  23, 1994). 


      DOD INITIATIVES
-------------------------------------------------------- Chapter 0:5.1

In response to the recommendations made in our report and by others,
DOD has developed several initiatives, changed some of its business
processes, and adopted best practices to improve its property
disposal operation.  For example, DOD is employing or considering key
initiatives, such as contracting with private auctioneering companies
to conduct property sales, using the Internet to advertise available
property, selling the property to private contractors that will
dispose of it and share the proceeds with DOD, and allowing property
located at the depots to remain there rather than shipping it to the
DRMOs to save labor and other costs.  DRMS has also hired a financial
advisor to assist in developing proposals for joint venture
arrangements with the private sector. 

In addition, DRMS plans on restructuring its organization, under a
concept known as Enterprise Management, to operate and compete
similar to a private enterprise by reorganizing into (1) a corporate
and leadership unit, which will be staffed by government employees to
handle inherently governmental functions, such as senior management
and legal functions; (2) a utility function, which will handle the
reutilization, transfer, and donation functions with the help of
private firms, and (3) a marketplace function, which will contract
with the private sector to handle sales and disposal of hazardous
wastes.  DOD activities will be able to choose whether they want to
use DRMS' services for a fee or sell the property themselves. 


   DRMS' ACTIVITIES APPEAR TO BE
   CANDIDATES FOR OUTSOURCING
---------------------------------------------------------- Chapter 0:6

Several recent reviews of DOD military forces, such as the Report of
the Defense Science Board, the Commission on Roles and Missions, the
Quadrennial Defense Review, and the Bottom-Up Review have recommended
that competitive outsourcing be considered as an option to reducing
costs, streamlining operations, and improving performance.  The
intent of competitive outsourcing is not to automatically give work
to the private sector, but to determine, on a case-by-case basis,
just how competitive the marketplace is and to take advantage of
outsourcing if there are efficiencies to be gained through this
means. 

Legislative proposals have been introduced this year in Congress
specifically related to the competitive procurement of services in
connection with the disposal of surplus property at DRMS' locations. 
In particular, section 1402 of H.R.  1119 (the National Defense
Authorization Act of 1998) requires that the Secretary of Defense
establish procedures to conduct competitions among private sector
sources and DRMS, and other interested federal agencies, for the
performance of all such services at a particular site.  Since DOD has
identified DRMS as not an inherently governmental function, and,
therefore, a candidate for outsourcing, we agreed with the aim of
this legislation.\2

In August 1995, we reported that DLA cited several impediments it
believed would limit them from fully outsourcing the DRMS operation
and would need to be carefully considered before an outsourcing
decision was made.  Some of the impediments related to the size and
the scope of DRMS' operations; the lack of a demonstrated, comparable
infrastructure in the commercial marketplace to manage the DOD
disposal function; how a contractor would or should operate to ensure
DRMS' mission is given the required level of emphasis; time and
resource constraints with Office of Management and Budget Circular
A-76 procedures; and difficulties in preparing and administering
contracts.  Generally, the government and private sector officials we
interviewed did not believe these impediments to be significant.  DLA
officials, while concerned with these impediments, indicated that DLA
supports the outsourcing of functions or operations, on a
case-by-case basis, where there is demonstrated competence in the
private sector that will provide equal or better disposal services. 


--------------------
\2 1997 Defense Reform Bill:  Observations on H.R.  1778
(GAO/T-NSIAD-97-187, June 17, 1997). 


-------------------------------------------------------- Chapter 0:6.1

Mr.  Chairman, this concludes our statement.  We would be happy to
answer any questions you or the members of the Subcommittee may have. 


*** End of document. ***