Summary
Privatization-in-place is a concept in which a private sector entity takes over the operations of a facility that was once run by the government. So far, privatization-in-place has been associated with the base closure process and has been used by the Defense Department (DOD) to transfer industrial work to the private sector. With legislative constraints affecting DOD's ability to close military facilities, privatization-in-place is not likely to be used outside the base realignment and closure process. Three privatization-in-place efforts have resulted so far from the base closure process: the Air Force Aerospace Guidance and Metrology Center in Newark, Ohio; the Naval Surface Warfare Center in Louisville, Kentucky; and the Naval Air Warfare Center in Indianapolis, Indiana. These facilities primarily provide industrial services for the military. This report assesses the status, the cost, and the effectiveness of DOD's three privatization-in-place actions. GAO (1) determines how contractors are reacting to falling workloads at these privatized facilities, (2) compares the cost-effectiveness of the privatization-in-place operations to the former government-run operations, and (3) identifies the impact of privatization on excess capacity in DOD's industrial infrastructure.
GAO noted that: (1) in general, the contractors at the privatization sites are facing decreasing defense workloads and have either initiated or planned efforts to reduce operating costs and improve efficiencies; (2) contractors at these facilities have experienced difficulties in attracting new customers and are uncertain about future workload levels; (3) contractors at the Navy privatization sites in Kentucky and Indiana are optimistic about efforts under way to increase workloads; (4) due primarily to data limitations, GAO was able to compare the cost-effectiveness of privatization in place with the former government-run operation for only one of the three facilities in question; (5) GAO analysis of a recent Air Force cost comparison study indicates that costs to the government for fiscal year 1997 for work performed at the privatized facility in Newark, Ohio, were about 16 percent higher than the estimated cost had the Air Force continued to operate the facility; (6) similar cost comparison studies of the Navy privatizations have not been done and were not possible to construct due to (a) the absence of sufficient, detailed historical baseline cost data for the closed Navy facilities, and (b) changes to workload volume and mix; (7) contractors at each of the privatized sites have initiated business improvements that appear to be increasing operating efficiencies and reducing costs to the government; (8) in general, privatization in place has not optimized reductions in excess capacity and operating costs in the infrastructure owned and operated by the Department of Defense-a major base realignment and closure objective; (9) privatization in place allows work to remain at the original sites but be performed by the private sector; (10) while the Department no longer owns the infrastructure, it continues to support it through payments for contract work performed at these facilities; (11) indirectly, the Department continues to pay for excess capacity, and as a result, the goal of eliminating excess capacity may be realized more in form than in substance; (12) the cost reductions anticipated under the base closure process may not be fully realized; (13) at the same time, privatization-in-place actions can produce some reduction in excess capacity and operating costs, where privatized facilities are also used to consolidate defense related work from other contractor facilities; and (14) in such instances, contractors' efforts to improve business practices and reduce their own defense business infrastructure may create efficiencies in overall public-private defense infrastructure.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
Director:
Team:
Phone:
No director on record
No team on record
No phone on record
Recommendations for Executive Action
Recommendation: Should the Department of Defense consider privatization in place in the future, the Secretary of Defense should require the services to: (1) consider the overall cost-effectiveness of this approach in reducing operating costs and excess capacity in the combined public and private sectors supported by the defense budget; (2) retain an adequate baseline of historical government costs, preferably on a per-unit basis, to assess the cost-effectiveness of privatization in place; and (3) periodically reassess the cost effectiveness of prior privatization-in-place initiatives, in light of excess capacity in other private sector and Department of Defense facilities and continuing declines in military workloads.
Agency Affected: Department of Defense: Office of the Secretary
Status: Not Implemented
Comments: DOD did not concur with the recommendation, stating that determining reductions in private sector defense infrastructure operating costs is prohibitive and that it is unreasonable to require DOD activities to retain historical baseline cost data to assess privatization-in-place initiatives because it would place unnecessary burdens on these activities. DOD also stated that periodic reassessments of privatization-in-place initiatives are unnecessary because future sourcing decisions will be based on competitions, not on analysis of historical baselines. While DOD has taken no action, GAO continues to believe that the recommendations are valid.
