GAO questions value of 'privatization-in-place'

An Air Force facility that was privatized three years ago costs 16 percent more to operate than if it had not been turned over to the private sector, according to a new General Accounting Office study.

In the study, GAO criticized the privatization-in-place concept, under which the operations of a government facility are simply turned over to a private firm that continues to operate from the same location. The idea has been used at an Air Force facility in Newark, Ohio, and two Navy facilities.

"As a general rule, privatization-in-place does not optimize reductions in excess capacity in government-owned facilities, and it reduces the potential to achieve greater economies in overhead costs," GAO said in "Military Base Closures: Lack of Data Inhibits Cost-Effectiveness Analyses of Privatization-in-Place Initiatives" (NSIAD-00-23).

But GAO cautioned that its conclusion was based on limited data. Not only are there only three examples of privatization-in-place in the Defense Department, but data for comparing costs of the two privatized Navy facilities is not complete, GAO said.

President Clinton touted the privatization-in-place concept during his 1996 reelection campaign as a means of keeping jobs at two closing Air Force bases in Texas and California. Amid criticism from Congress, the Air Force eventually moved away from the privatization-in-place model and used public-private competitions to determine where the work at McClellan Air Force Base in Sacramento, Calif., and Kelly Air Force Base in San Antonio, Texas, would be performed after the bases closed.

Customers of the contractors at the three facilities where privatization-in-place actually occurred have been satisfied with the quality of work since privatization, GAO found.

But GAO said a wider review of the Defense Department's needs would show that the Pentagon could have saved more money by closing facilities and moving work to other sites around the country, rather than continuing to fund the privatized facilities through contracts.

"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," GAO said.

In a response to the report, the Defense Department disagreed with GAO's conclusions.

"DoD no longer operates or maintains these properties, and no longer retains the capacity," said Roger W. Kallock, deputy undersecretary of Defense for logistics.

Kallock pointed out that at one of the privatized Navy facilities, in Louisville, Ky., contractor United Defense turned over some of the buildings it didn't need to a local redevelopment authority so that another organization could use them.

"This is contractor, not DoD capacity," Kallock said.