	Background

At DOD’s request, Congress approved legislative authority in 1997 for  privatizing utility systems at military installations. GAO Report Identified Weaknesses in Program Implementation

In May 2005, we issued a report that identified management weaknesses in  DOD’s implementation of the utility privatization program. The report  noted that utility privatization implementation had been slower than  expected, the services’ economic analyses supporting utility privatization  decisions provided an unrealistic sense of savings to a program that  generally increases government utility costs, DOD’s funding obligations  would likely increase faster than they would under continued government  ownership, DOD did not require that the services’ economic analyses be  subjected to an independent review for accuracy and compliance with  guidance, implementation of the fair market value requirement in some  cases resulted in higher contract costs for utility services, the services had  not issued specific contract administration guidance for the program, and  DOD’s preferred approach of permanently conveying utility system  ownership to contractors may give the contractor an advantage when  negotiating service contract changes or renewals. None of the services met DOD’s September 2005 implementation goal and  the program’s estimated completion date has now slipped to September  2011. Service officials stated that additional delays  occurred because the services decided to suspend the program between  October 2005 and March 2006. According to the officials, the suspension  was provided to allow DOD and the services time to review concerns  noted in our May 2005 report, develop and issue supplemental guidance  for the program, and implement program changes necessitated by  modifications in the program’s legislative authority made by the National  Defense Authorization Act for Fiscal Year 2006. 2688 authority bringing the total number of awarded  projects to 81. However, the services have awarded no projects under this  authority since DOD issued supplemental program guidance in November  2005. Program Delays Have Resulted in Increased Implementation Costs

With program delays, the services’ estimated program implementation  costs have increased from about $268 million through fiscal year 2005 to  about $285 million through fiscal year 2006. DOD’s Changes to Improve Utility Privatization Implementation Have Addressed Many Areas but Have Not Eliminated All Program Concerns

DOD has made many changes to improve the management and oversight  of the utility privatization program since our May 2005 report. We found that changes to address some  issues have not been effectively implemented, some changes were not  sufficient to totally eliminate the concerns, and DOD did not make  changes to address some concerns causing continued questions about the  reliability of the economic analyses, the availability of funds to pay for the  remaining projects that might be privatized, the adequacy of contract  oversight in projects awarded prior to DOD’s changes, and the control of  long-term cost growth in utility privatization contracts. However, in view of competing needs and budget priorities,  questions remain over availability of the additional funds needed to  complete the program. Although it is  too early in the program’s implementation to know to what extent DOD’s  efforts will be successful in ensuring equitable contract price adjustments  and limiting long-term cost growth in the utility privatization program, our  review found indications that containing cost growth may become a  concern. If fully  implemented, the changes should result in more reliable economic  analyses supporting proposed privatization projects, improved budgetary  consideration of increased utility costs from privatization, enhanced  oversight of privatization contracts, and reduced instances where  contractors recover more than the amounts they paid as the fair market  value for system conveyances. Also, although DOD’s changes designed to improve utility  privatization contract administration and oversight are key steps in the  right direction, it may take some time to fully implement improvements as  new privatization contracts are awarded and oversight of older contracts  is assessed. Recommendations for Executive Action

We recommend that the Secretary of Defense direct the Deputy Under  Secretary of Defense (Installations and Environment) to take the following  seven actions:  require independent reviewers to report to decision makers on the  thoroughness of each economic analysis and any significant anomalies in  the assumptions used and estimated costs for each ownership option;  issue guidance requiring the services to perform the postconveyance  reviews as noted in DOD’s March 2006 report to Congress;    address the utility privatization program potential funding shortfall in view  of all DOD and service funding and priority needs;    ensure that utility privatization contracts awarded prior to the November  2005 supplemental guidance have adequate resources and contractor  performance surveillance plans;    place additional emphasis on monitoring contract cost growth as utility  privatization contracts undergo periodic price adjustments and other  changes are negotiated;  require, in addition to the “should cost” estimate, that each project  economic analysis include the system’s current annual costs and the actual  expected annual costs if the system is not privatized; and  issue detailed guidance explaining how the services should incorporate  margins of error in the economic analyses. 2.
Why GAO Did This Study

Department of Defense (DOD) installations have about 2,600 electric, water, wastewater, and natural gas utility systems valued at about $50 billion. In 1997, DOD decided that privatization was the preferred method for improving utility systems, and Congress approved legislative authority for privatizing DOD's utility systems with Public Law No. 105-85. DOD estimates that some utility privatization contracts will cost over $100 million. In a May 2005 report, GAO identified several management weaknesses in DOD's implementation of the program. The Fiscal Year 2006 National Defense Authorization Act required GAO to evaluate and report on changes to the utility privatization program since May 2005. Accordingly, this report updates the status of the program and discusses the effect of DOD's changes on the concerns noted last year. To conduct this review, GAO summarized program status and costs, assessed DOD's changes to program guidance and in other areas, and reviewed the services' implementation of the changes.

What GAO Found

DOD's progress in implementing the utility privatization program has been slower than expected and the estimated completion date has slipped from the department's target of September 2005 to September 2011. DOD attributed the delays to the complexity of the program and to the services' decision to suspend and reassess the management of the program between October 2005 and March 2006. Since May 2005, the services privatized 14 utility systems under the legislative authority for the program, bringing the total number of awarded projects to 81. However, the services have awarded no projects since DOD issued new program guidance in November 2005. Meanwhile, the services' total estimated program implementation costs through fiscal year 2006 have increased to $285 million, and more funds will be required before the program is completed in 2011. Since GAO's May 2005 report, DOD has issued new guidance and required changes in procedures. If fully implemented, these changes should result in more reliable economic analyses, improved budgetary consideration of increased utility costs, enhanced oversight of privatization contracts, and reduced instances where contractors recover more than the fair market value paid for system conveyances. However, a number of concerns from the May 2005 report remain. For example, although DOD made changes to improve the reliability of project economic analyses by requiring independent reviews, GAO reviewed 10 economic analyses and found reliability issues that had not been identified during the independent reviews. DOD directed the services to adequately consider in their budgets the increased costs resulting from utility privatization. However, questions remain over the availability of the funds needed to complete the program because the services estimate that they will need $453 million more than is currently programmed to pay costs associated with remaining utility systems that might be privatized. Although DOD made many changes to improve contract administration and oversight, it may take some time to fully implement the changes as new privatization contracts are awarded. GAO's review of five projects awarded prior to DOD's changes found continuing questions about the adequacy of resources provided to perform oversight and the lack of required plans for overseeing contractor performance. It is too early in the program's implementation to know to what extent DOD's efforts will be successful in ensuring equitable periodic contract price adjustments and limiting long-term cost growth in the utility privatization program. However, GAO found indications that cost growth may become a challenge. DOD did not change its guidance to require that project economic analyses depict the actual expected costs of continued government ownership if the systems are not privatized. Therefore, DOD's reported $650 million in long-term cost reductions is unrealistic.