Data Does Not Support the CORM Depot Privatization Savings Assumption

The CORM, in support of its depot privatization savings assumption, cites reported savings from public-private competitions under OMB Circular A-76. These activities are characterized by highly competitive markets with low-skill labor, little capital investment, and simple, routine and repetitive tasks that can readily be identified in a contract statement-of-work. These studies did not specifically address outsourcing to the private sector when the public sector did not participate in the competition. Under current conditions, privatizing essentially all depot workloads (1) would not likely achieve expected savings and could prove more costly, (2) could adversely impact readiness, and (3) would be difficult if not impossible under existing laws. The CORM assumed depot workload privatization savings would result from private sector competition. Limited or No Competition for Most Contracted Depot Workloads

The CORM’s recommendation to privatize essentially all depot maintenance assumed that meaningful competition would be obtained for most of the work. Original equipment manufacturers were awarded 158 of the  182 noncompetitive contracts. The types of existing public workloads where private sector competition may be limited include: (1) workloads where data rights necessary for competition have not been acquired, (2) small workloads that do not justify large private sector capital investment costs, (3) workloads for older and/or highly specialized systems, (4) workloads with erratic requirements where DOD cannot guarantee a stable workload, and (5) workloads that would be costly to move from one source of repair to another. Such contracts are used for many depot maintenance workloads. Large-Scale Privatization Could Affect Readiness

Our analysis of depot maintenance work currently contracted with the private sector found that contractors, for the most part, were responsive to DOD’s needs in terms of meeting contractual requirements for delivery and performance. The military services have considered the readiness and sustainability risks of privatizing existing depot workloads and determined that the risks for privatizing most workloads were too high. We noted that the DOD’s risk assessment process is based to a large extent on subjective judgements. However, DOD materiel managers noted that DOD depots provide greater flexibility than contractors and can more quickly respond to nonprogrammed, quick-turnaround requirements. The CORM assumed, however, that there were only a few cases in which such competitions would be required. As noted earlier in this report, most depot workloads currently contracted to the private sector are noncompetitive and obtaining private sector competition for those workloads currently in the public depots could prove difficult and costly. The Chairman requested that we review a number of issues related to the Commission’s report; this report provides information on the Commission’s assumptions that privatization could reduce maintenance costs by 20 percent and the potential impact of privatization on military readiness and sustainability.
Why GAO Did This Study

Pursuant to a congressional request, GAO examined the Commission on Roles and Missions' (CORM) privatization assumptions to determine whether privatization would adversely affect military readiness and sustainability.

What GAO Found

GAO found that: (1) the CORM's depot privatization savings and readiness assumptions are based on conditions that do not currently exist for many depot workloads; (2) privatizing essentially all depot maintenance under current conditions would not likely achieve expected savings and, according to the military services, would result in unacceptable readiness and sustainability risks; (3) the extent to which DOD's long-term privatization plans and market forces will effectively create more favorable conditions for outsourcing is uncertain; (4) the CORM assumed a highly competitive and capable private market exists or would develop for most depot workloads; (5) however, GAO found that most of the depot workloads contracted to the private sector are awarded noncompetitively, mostly to the original equipment manufacturer; (6) additionally, a number of factors would likely limit private sector competition for many workloads currently in the public depots; (7) the CORM data does not support its depot privatization savings assumption; (8) the CORM's assumption is based primarily on reported savings from public-private competitions for commercial activities under Office of Management and Budget (OMB) Circular A-76, but these commercial activities were generally dissimilar to depot maintenance activities because they involved relatively simple, routine, and repetitive tasks that did not generally require large capital investment or highly skilled and trained personnel; (9) GAO's analysis of depot maintenance workloads currently contracted to the private sector found, for the most part, that the contractors were responsive to contract requirements for delivery and performance; (10) however, DOD officials noted that DOD depots provide greater flexibility than contractors and can more quickly respond to nonprogrammed, quick-turnaround requirements; (11) the military services periodically assess the readiness and sustainability risks of privatizing depot workloads, and if the risks are determined to be too high, the workloads are retained in the public depots; (12) the CORM assumed that public-private competitions would only be used in the absence of private sector competition and would be limited to only a few cases; (13) public-private depot maintenance competitions have resulted in savings and benefits and can provide a cost-effective way of making depot workload allocation decisions for certain workloads; and (14) the beneficial use of such competitions could have significantly more applicability than the Commission assumed.