We recently determined that excess capacity in the DOD depot maintenance system is about 40 percent for fiscal year 1996. The Navy awarded contracts to Hughes Missile Systems Company and United Defense Limited Partnership on July 19, 1996. Navy Plans Do Not Reduce Excess Capacity in the Public or Private Sector

Because the Navy plans to privatize the Louisville depot’s current workload in place, neither excess capacity nor associated maintenance costs will be reduced at other DOD depots or the private sector. Privatizing-in-place transfers excess capacity to the private sector but does not eliminate it. DOD pays for this excess capacity, whether it is in the public or the private sector. The Navy’s estimate overstated the program’s cost estimate by $2.4 million. The Navy concluded that privatizing Louisville’s workload will be more cost-effective than transferring it to the naval facilities identified in the BRAC recommendation. In reviewing the Navy’s privatization-in-place plan, we asked Navy officials to explain how the plan complied with existing statutory restrictions. 2469 requirement for a public-private competition. Recommendations

We recommend that the Secretary of Defense direct the Secretary of the Navy, before exercising any contract options for the Louisville depot maintenance workloads, to ensure military depots have the required capability needed to sustain core depot repair and maintenance capability and adequately document a risk assessment for privatizing mission-essential work being considered for privatization; at a minimum, revise the Navy’s cost analysis to reflect the annual cost savings from workload transfers on the workloads currently performed at those locations by spreading the fixed costs over the increased workload; and use competitive procedures, where applicable, to ensure the cost-effectiveness of the Louisville privatization-in-place initiative.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) plans to privatize-in-place the Navy's Louisville, Kentucky, depot maintenance workload, focusing on the: (1) impact on excess depot capacity and operating costs at remaining industrial facilities; (2) cost-effectiveness of this planned privatization-in-place option; and (3) statutory requirements affecting transfers of depot maintenance workloads to the private sector.

What GAO Found

GAO found that: (1) privatization-in-place is not cost-effective given the excess capacity in the DOD depot maintenance system; (2) the Navy's privatization plan for the Louisville depot will not reduce excess capacity at the remaining depots or in the private sector and may be more costly than transferring the work to other depots; (3) DOD pays for the excess capacity whether it is in the public or private sector; (4) privatizing the facility may not comply with statutory requirements for public-private competitions, since the Navy plans to use noncompetitive procurement procedures; (5) the Navy overstated the cost of transferring the Louisville workload to other depots by at least $66 million and generally assumed that privatization would save 20 percent, which is not likely to be realized; (6) the Navy's projection is based on conditions that are not relevant for most depot maintenance workloads and does not reflect the cost of excess capacity in the public sector; (7) the Navy did not assess the risk associated with contracting the depot's core workload, since the majority of the workload is mission essential; and (8) in July 1996, the Navy awarded contracts to Hughes Missile Systems Company and United Defense Limited Partnership for work in progress, but it did not verify that the privatization plan conformed with statutory requirements for public-private competition.