Privatization's Problematic Side Can Be Costly

or years, politicians and the business community have touted privatization as the key to cutting large, inefficient government bureaucracies and saving taxpayer dollars. But where other agencies are predicting high payoffs in turning over certain operations to the private sector, AMC is treading cautiously.

When AMC promised the Army it would trim $2 billion from its budget over the next budget planning cycle, it wasn't counting on any potential savings through privatization. While the agency is pursuing a privatization strategy, officials there say they are not yet ready to quantify any potential savings.

"Privatization is a two-edged sword," says Col. Keith Brower, executive director for business at AMC and chairman of the Privatization Working Group. "There's a lot of savings on the front end, but once you've divested yourself, if you don't have a mechanism that keeps the costs of contractor support from escalating then you're locked into what can be a huge bill."

Brower does anticipate future savings in turning over to the private sector some installation support functions, such as solid waste management, and some materiel management functions, such as cataloging. But he is less than sanguine.

"In some places where we've privatized our installation support, we found out it's very attractive [initially] but as you get into the incremental increases over the years, you've got nowhere to go because everything is tied up in the contract. You lose flexibility," he says.

Controlling costs over the long term is only part of the problem with privatization. Even the best laid plans can turn problematic when political considerations become involved. That's what happened when a plan to privatize an Air Force depot, which would have resulted in more work for an Army depot, was stalled. AMC's Tobyhanna Army Depot in Pennsylvania was to take on more electronics work from an Air Force depot at McClellan Air Force Base in California, which was targeted for closure by the 1995 Base Closure and Realignment Commission.

Savings attributable to more efficient use of facilities as a result of the transfer were estimated at $24 million, according to a September General Accounting Office study. But President Clinton directed Secretary of Defense William Perry to space out the privatization at McClellan over a five-year period to reduce the economic impact of base closings in California.

Unfortunately for the Army, the economic impact of the President's decision will be negative: "Delaying all of the workload transfers until the year 2001 could require the Tobyhanna depot to undergo a reduction-in-force, followed by a costly rehiring and retraining situation when the Air Force workloads are eventually transferred," the GAO found.

Congress is also a stumbling block to some of AMC's plans. Last year, when AMC lobbied for relief from laws prohibiting the privatization of guards and firefighters at military installations, it was unsuccessful. Likewise, the agency's request to contract out work being done at the Crane and McAlester Army Ammunition Plants in Indiana and Oklahoma was turned down. (The 1987 Defense Authorization Act prohibited contracting out work at either of these facilities, despite the successful privatization of every other Army ammunition plant.)

"This is part of our frustration," Brower says. "We were perfectly committed to privatizing those functions. There's no reason you need a Defense Department employee guarding a gate when you can hire a security service."