Summary

Costly excess capacity in the Navy depot infrastructure has been aggravated by the recent privatization-in-place of the Louisville depot. In comparing privatization-in-place to the transfer of workloads to other Navy facilities, the Navy understated the annual savings from transferring the work and overstated the one-time transfer fee. GAO estimates that transferring the workload rather than privatizing-in-place would have saved $48.6 million during the first five years. After that time, transferring would yield annual savings of nearly $30 million. One of the contractors at Louisville could take over part of Louisville's workload at another industrial facility it operates that has significant excess capacity. GAO included defense infrastructure in its list of government areas at high risk for waste, fraud, abuse, and mismanagement. (See GAO/HR-97-7, Feb. 1997.) GAO's main concern relates to inefficient business processes and excess capacity. The Defense Department needs an overall plan for addressing the problem. The situation at Louisville is representative of this overall concern.

GAO noted that: (1) the Navy's privatization-in-place of the workloads at the Louisville depot, without reducing excess capacity at its remaining depots, does not appear to be as cost-effective as transferring the workloads to underutilized Navy facilities; (2) GAO's analysis shows that the Navy's final cost comparison understated the annual savings from transferring the work and overstated the one-time transfer cost; (3) GAO estimates the one-time transition cost for transferring the workload is about $10 million less than the Navy projected; (4) using GAO's estimate, the cost for the transfer option is about $234 million, or about $100 million more than the privatization-in-place option; (5) GAO estimates annual savings of $29.9 million for the transfer option, or about $20.6 million more than the Navy estimated; (6) using GAO's estimates, the transfer option would pay back the additional one-time transition cost in less than 3.5 years, compared to the additional 12-year payback period computed using the Navy estimates; (7) the Navy's analysis recognized that transferring the workloads to underutilized facilities would reduce the overhead cost for each production unit; (8) however, the Navy's analysis applied per-unit savings only to the workloads transferred and not to existing workloads at receiving locations; (9) GAO estimates that transferring the workload rather than privatizing-in-place would have resulted in savings of about $48.6 million over the first 5-year period; (10) after that time, transferring would result in annual savings of about $29.9 million; (11) one of the contractors at Louisville could take over part of Louisville's workload at another industrial activity it operates that has significant excess capacity; (12) GAO estimates that transferring the gun repair workload to the Fridley, Minnesota, facility could result in annual savings of about $9.2 million on the consolidated Navy workloads performed at that facility; (13) Navy officials stated that the Navy intends to divest itself of this facility; (14) officials at the Hughes Missile Systems Company said they could not handle the other Louisville workload--the Phalanx close-in-weapon system--in existing facilities without incurring large infrastructure costs; (15) GAO recently issued a report identifying DOD infrastructure activities as a high-risk area; (16) GAO's primary concerns related to inefficient business processes and excess capacity, and GAO pointed out that DOD needs an overall plan for addressing the problem; and (17) the situation at Louisville is representative of this overall concern.