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[H.A.S.C. No. 106–7]



FOR FISCAL YEAR 2000—H.R. 1401






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(H.R. ???)


MARCH 9, 1999


U.S. House of Representatives,
Committee on Armed Services,
Military Installations and Facilities Subcommittee,
Washington, DC, Tuesday, March 9, 1999.

    The subcommittee met, pursuant to notice, at 1:05 p.m., in room 2212, Rayburn House Office Building, Hon. Joel Hefley (chairman of the subcommittee) presiding.

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    Mr. HEFLEY. The subcommittee will come to order. I think it ought to be noted that the Navy had the most difficulty getting here. Get a little moisture in the air, and what happens to the Navy? Maybe the Navy would like to explain that in their comments.

    Secretary HOLADAY. I'll take that for the record, sir.

    Mr. HEFLEY. Actually, I would like to commend everybody who is here, both committee and witnesses and everybody who made it through this Colorado weather that we're not supposed to be having back here.

    This afternoon, the Subcommittee on Military Installations and Facilities meets to conduct an oversight hearing on the implementation of the Military Housing Privatization Initiative and the privatization of defense utility systems. I believe the efficient and effective implementation of these two important facilities initiatives is critical to the long-term viability of infrastructure supporting the Nation's military installations.

    Since the Military Housing Privatization Initiative was authorized by the National Defense Authorization Act of fiscal year 1996, this committee has carefully monitored its implementation. I think it's fair to say that the Congress, to this point, has been disappointed in the scope of the implementation. The members of this subcommittee, on a bipartisan basis, view this program as critical, given that roughly two-thirds, or over 200,000 units of the military family housing inventories is classified as substandard or inadequate. There were a number of factors impeding progress in this program, but as the expiration date of February 10, 2001 for the 5-year test period of these authorities approaches, I believe we have worked through many, but maybe not all, of the major challenges which initially confronted Department of Defense [DOD] and the military services. In that context, I'm especially gratified to see that the Department is requesting an appropriate amount of funding for the Family Housing Improvement Fund to support program privatization projects, one of the few bright spots in an otherwise disappointing budget request.
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    Nevertheless, there are a number of serious policy issues in the Department's current approach to the implementation of its military family housing privatization program. I continue to remain deeply concerned about the rush of the military departments, particularly the Department of the Army and the Department of the Navy, to place all hopes for recapitalizing and improving military family housing on privatization, without being certain that it will work in all locations.

    Earlier in this hearing cycle, I expressed my deep concern about the Army's budget request for military family housing construction. In the budget projections accompanying the budget request for fiscal year 1999, the Army indicated that 132.6 million would be programmed in fiscal year 2000 for military family housing construction. Regrettably, the fiscal year 2000 budget request contains a program value of 57.9 million for that account, and owing to incremental funding, a mere 14 million in funding for the coming fiscal year. Those funds would be dedicated to support personnel stationed in Germany and Korea.

    While I strongly support Military Construction [MILCON] funding for overseas military family housing construction, I question the Army's policy of de-funding its MILCON construction program at all U.S.-based installations in the expectation that privatization will provide adequately for housing at each of those locations. Military family housing privatization was intended as a supplement to, and not a substitute for, the limited construction dollars available to the services.

    I am similarly concerned about the program of the Department of the Navy. Although the fiscal year 2000 budget request for Navy military family housing construction has a program value of 235.8 million, the 64.6 million requested in fiscal year 2000 appropriation, the budget justification documents indicate that there are only three new construction projects in the proposed program. Each of the projects, two benefiting the Navy and one benefiting the Marine Corps, are located in the extremely high-cost area of Hawaii.
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    In the area of construction improvements, 57 percent of the Navy's program is dedicated to Outside the Continential United States [OCONUS] housing. In the United States, the Navy proposes to revitalize eight officer houses in San Diego, demolish 104 units at Naval Air Warfare Center [NAWC] China Lake, improve 72 officer housing units in Hawaii, and improve 406 units for enlisted personnel and their families in Hawaii and Puerto Rico. No stateside improvements for enlisted personnel are programmed. Again, I support projects of this kind, but I question the wisdom of pinning the entirety of the Navy's CONUS military family housing program effort on the privatization option.

    While we want to be helpful, we simply do not know enough about this program to justify the policy decisions which appear to have been made by both the Army and the Navy. I hope we discuss this in greater detail today. I also hope we can clarify issues surrounding proposals for military family housing privatization projects which imply commercial development that may adversely harm the morale, welfare, and recreation programs of the Department, upon which military personnel and families rely.

    [The prepared statement of Mr. Hefley can be found in the appendix.]

    Mr. Taylor, do you have any comments?


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    Mr. TAYLOR. Thank you, Mr. Chairman. I join you in welcoming our witnesses today, and as usual, I will keep my remarks pretty brief.

    The quality of life that we provide for our troops and for their families is central to retention and recruitment of our armed forces. It is also central to the readiness of our military. When it comes to housing, it's not only where you live, but how you live.

    As such, the Military Housing Privatization Initiative of 1996 serves as potentially important to reducing the troop and family housing deficit. The ability to leverage the military construction dollar to private sector investment opens the door to better housing for our military, and at the same time, helps boost the civilian housing industry.

    Here in Congress, we are closely following the variety of approaches to privatization, not only in housing, but also in utilities, that the services are undertaking. We are keenly interested in having the pilot initiative prove successful, but understand that there are likely to be problems, such as the slow start that has been experienced in each of the services' privatization programs. We look forward to working with the Department and the services in making the programs work effectively for our military. Thank you, Mr. Chairman.

    [The prepared statement of Mr. Taylor can be found in the appendix.]

    Mr. HEFLEY. Thank you, Mr. Taylor.

    I want to welcome to the subcommittee today a panel of senior officials from the Office of the Secretary of Defense and the military departments who are principally responsible for management of the Military Housing Privatization Initiative and the commercialization of utility systems and associated infrastructure on the nation's military installations.
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    The first statement will be offered by Randall Yim, Acting Deputy Under Secretary of Defense for Installations.

    Mr. Yim will be followed by Sandy Apgar, Assistant Secretary of the Army for Installations and Environment; Duncan Holaday, Deputy Assistant Secretary of the Navy for Installations and Facilities; and Jimmy Dishner, Deputy Assistant Secretary for the Air Force for Installations.

    I would ask unanimous consent that each of the prepared statements of the witnesses today be included in the record. Hearing no objection, that will be so ordered. I further ask unanimous consent that certain materials made available to the membership in advance of this hearing, specifically my letter to the Secretary of the Army of February 3, 1999 on the subject of a military family housing privatization project at Fort Hood, Texas; Mr. Apgar's response of March 8, 1999; my letter to the Secretary of the Air Force of March 4, 1999 on the subject of a military family housing privatization project at Robins Air Force Base, Georgia; the Secretary's response, received today; an article appearing in the March 1, 1999 edition of the Air Force Times; and any material relating to these items, be included in the record at the appropriate place. Hearing no objection, that is so ordered.

    [The material to be provided can be found in the appendix.]

    Mr. HEFLEY. I would ask the witnesses to be as brief as you can and still make your points so that we can get to the questions.

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    In light of the situation with the weather, it may be a little difficult if we run too late, although we do not have votes today, because of the weather and people not being able to get in, so we don't have those kind of interruptions. But as brief as you can keep your statements and make your point, that would be good, and then we'll go to the questions, and try not to keep you any longer than we absolutely need to.

    Mr. Yim, I would turn it over to you at this point.


    Secretary YIM. Thank you, Mr. Chairman and distinguished members of this committee. I'm very pleased to be here today to discuss the status of the Department's housing and utilities privatization programs and our overall program initiatives to better manage our infrastructure, as we reshape our installations to match our changing military mission requirements.

    Mr. Chairman, I have already made the commitment to you and to Mr. Taylor to work closely to develop and share information so that we may effectively address these challenges ahead. Let me make that same commitment to each member of this committee. Now, and in the future, I will do whatever it takes to answer your questions and hopefully address your concerns and reach consensus on what needs to be done. Let me begin by indicating that I am committed to the housing and utility privatization programs and working closely with you and your staff to make them successful.

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    What we are talking about today is simply an exercise of good common business sense. Like any business, we have to do business better, faster, and cheaper in order to survive and prosper, and in many instances, this means that we don't do everything ourselves. As much as we may hate to admit it, others may be able to provide us with certain services and fulfill our requirements better, faster, and cheaper than we can.

    Secretary Cohen recently stated that our goal was to substantially improve our infrastructure management activities and get them to consume a smaller portion of the defense budget. He stated this effort is smart, in and of itself, but it is also imperative, in order to free up funds to help pay for priorities such as weapons modernization and readiness goals. Our challenge, then, is to focus on what we do best, and recognize when others may support us more cost-effectively, but let me emphasize that effectiveness means much more than lowest price.

    The Department must and will not lose sight of other goals that are crucial to the performance of our missions, such as force protection, control of mission essential goods and services, and the protection of quality of life for our most valuable assets, our soldiers. We will improve quality of life. We will improve performance. We are seeking, really seeking, better and faster, not just cheaper. We are fortunate now to be supported by a robust private sector marketplace. It gives us greater flexibility to investigate ways to do business better, faster, and cheaper and allows us to take advantage of an increasingly competitive world. We have much to learn from our successful private companies and our dedicated public workforce about how to do business better in this new environment, and like the best companies and organizations in the United States, we have embarked on a very systematic and vigorous effort to determine those functions that hold the most promise for process improvements and cost reduction through privatization, competition, outsourcing, and housing and utilities certainly have been identified as two primary areas for immediate action.
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    Improving the condition of military housing for our soldiers, using every tool available, is not only the right thing to do, it is essential to retention and recruitment, and therefore, to readiness. It continues to be one of our top priorities. Right now, privatization appears to be our most promising tool, but again, let me emphasize, it's not the only tool in the tool shed, as the chairman correctly points out. Military housing is old. It's below contemporary standards and in need of repair. Approximately two-thirds of DOD's 300,000 houses are inadequate, and fixing this problem using traditional MILCON, military construction, would take 30 years or more, and cost as much as $16 billion.

    Recognizing the severity of the problem, Congress, with the leadership of this committee and its chair, in 1996 enacted the Military Housing Privatization Initiatives, and these new authorities are most welcome. They enable the Department to combine our experience with private sector expertise and capital. In using privatization, what we hope to achieve is to stretch and leverage our limited housing resources by a factor of at least three to one. This means we hope to be able to build and renovate housing, three times as many housing as we would with a typical military construction project, for the same amount of money. Hopefully, this will allow us to solve our housing problem, then, three times as fast. Our first two Navy projects, completed in 1997 in Corpus Christi, Texas and in Everett, Washington demonstrated this leveraging concept on an average of about four to one or three to one, respectively. This past summer, the Air Force was successful in awarding a privatization contract at Lackland Air Force Base, and it looks like the leveraging effect was about eight times, in that particular project.

    We established several goals 2 years ago. The first was to renovate or replace all substandard family housing units by 2010, using all of the tools available to us, and our first goal, as an interim milestone, is to privatize approximately 30,000 housing units by the end of fiscal year 00. To date, we have completed two projects and awarded one project, totaling about 1,000 units. We currently have six projects in solicitation. That's about another 4,000 units. And the services have notified Congress of plans to issue solicitations for about 21 additional military housing units at seven sites.
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    We recognize that this is a very ambitious plan, but we believe sincerely that, by working closely with each of you, it is a plan that can succeed. We are anxious to move forward with this program. We will answer the questions that are very, very good questions about the program. We do need to answer them. We want to move forward, because the sooner we can build and renovate these houses, the sooner our service members and their families can move in.

    On utility systems, the Department has been working to privatize utility systems with a goal of privatizing about 2,300 of them by September 2003, except where privatization is uneconomical or unique security reasons require ownership by the Department. We are not going to do anything, again, that jeopardizes force protection mission requirements. This is a program specifically designed to get DOD out of the business of owning, operating, and maintaining these systems, not only to save money, but to be more efficient.

    The military departments currently have legislative authority to convey all utility systems under their control. That's electric, water, waste water, natural gas, steam, hot and chilled water, for example, telecommunications, to a utility company or to a private entity.

    We are currently focusing again on privatizing about 2,300 of what we call the big four: electric, water, waste water, and natural gas systems. To put this in perspective, the Department consumes 70 percent of all of the energy of the entire Federal Government. We spend nearly $6 billion a year and about 2.4 billion of that on infrastructure maintenance. This consumption represents a tremendous procurement leverage, and yet in the past, we have devoted too much, excessive management attention toward funding the operation and maintenance as we own our own large utility infrastructure. We can better meet our requirements by relying on the private sector to own and operate and maintain the utility infrastructure and concentrate our efforts and management focus on energy and commodity use and acquisition and cost.
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    We have set some ambitious goals. Again, by September 2003, we plan to privatize about 2,300 utility systems that we have identified currently as candidates. We have two interim milestones to monitor progress. We have directed the services to complete their systems analyses by the end of fiscal year 2000, and to release their solicitations by no later than end of fiscal year 2001. We have established guidance that gives criteria for exempting some systems. Where privatization does not have along-term economic benefit, systems may be exempted, and additionally, the operational impact must be minimized and national security assured.

    We have a number of inherent challenges in such an aggressive utility privatization approach, and we are seeking your support on two legislative changes to better equip us.

    First, the law currently restricts the length of utility service contracts to only 10 years, while the life of most of these utility systems is 30 years, approximately. This limitation forces the purchaser of a utility system from the Department or the services to amortize their cost over a 10-year period. Perhaps that doesn't make the deal pencil out. That may be too short of a period of time, and reduce their flexibility.

    The Department is proposing legislation that would authorize that, in connection with the privatization of utilities, to enter into longer-term utility service contracts, on the order of not to exceed 50 years, giving us greater flexibility to make good deals.

    And secondly, we're requesting that Congress amend the utility privatization authorization to permit the departments, military departments, to use previously appropriated MILCON funds to facilitate the privatization effort. We would anticipate that these funds would be used to meet the often more stringent civilian standards for safety of operation and to facilitate privatization.
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    In April, I will be submitting to Congress a report outlining in much greater detail the Department's use of the utility privatization authorities and include the criteria for selecting candidates.

    Before I close, Mr. Chairman, let me say a few words about Base Realignment and Closure [BRAC]. Our military mission needs have changed. We must be vigilant to assure that our installation structure similarly changes to match these new mission requirements. At this end, we are embarking on a series of interrelated initiatives to reshape our installation infrastructure.

    In addition to the privatization of housing and utilities, these include competitive sourcing, energy conservation, restructuring of energy purchases, outleasing of under-utilized facilities, demolition programs, construction for supporting new standards for barracks, and most importantly, authorization for additional rounds of base closure and realignment. We project that we can save upwards of $3 billion a year from two additional BRAC rounds, and we may use these savings to support additional readiness and modernization programs, but as I emphasized before, it's a mistake to view BRAC simply as a bill-payer to generate money to fund someone else's readiness initiatives.

    The BRAC process is the most effective tool we have to move forces and realign and reshape our infrastructure to match our new missions, and as such, has to be viewed as an integral part of any force modernization and readiness program. We will be bringing additional information to you and working closely, hopefully, to reach a consensus on a new BRAC strategy.

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    In conclusion, Mr. Chairman, I would like to thank you and the members of this committee for providing me this opportunity, and also for your extremely strong support of our programs over the years. The potential is enormous, the challenges are difficult, but we are working hard with you to make it a success.

    Thank you very much.

    [The prepared statement of Secretary Yim can be found in the appendix.]

    Mr. HEFLEY. Thank you, Mr. Yim. Do they, over at the Pentagon—you very carefully prepare your testimony, and is there a little card that says, ''Insert BRAC statement'' in each of these? [Laughter.]

    Secretary YIM. Well, funny you should ask, Mr. Chairman. I think that, because I have been requested by the Secretary to assist in pushing forward with additional BRAC, yes, I have requested that people insert the BRAC statement.

    Mr. HEFLEY. Phil and George, we need to prepare our boilerplate BRAC statement, so that we can hand it to you, you hand it to us, we'll save the time.

    Ours basically is that we're not too keen on two more general rounds of BRAC. We would like for you to work with us. Perhaps, if you have excess infrastructure, we would like for you to work with us on a more focused, targeted BRAC of some kind, where you take the things that you absolutely are not going to give up off the table before we do it. If you would begin to think in those terms, then we would begin to try to work with you along that line.
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    I don't need to say again that the President poisoned the well terribly on BRAC, and that you're not likely to get two more general rounds of BRAC under this President, even though it doesn't start until after he's gone. So we would be willing to work with you, but we want you to broaden your perspective on it a little bit, and look at maybe another innovative way to do it.

    I apologize to Mr. Apgar, Sandy, for taking up your time, but I'll turn it over to you now.


    Secretary APGAR. Thank you, Mr. Chairman, distinguished member of the committee. It's an honor to appear before you to discuss the Army's privatization initiatives.

    Let me begin by reaffirming my commitment made to you, Mr. Chairman, and to the committee, at your first hearing, my first hearing, to work with you in developing this program and in addressing policy issues before they become obstacles.

    In my opening comments, I would like to highlight the major changes that privatization entails in Army housing policy and practices, because these have become the subject of some misunderstanding in recent weeks, and in some cases, quite genuinely, issues that will need to be worked out over time and cannot be answered decisively today.
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    As you know, the Army's family housing situation is extremely serious, a huge backlog of substandard houses to be renovated and maintained, and a substantial housing deficit, especially of three-to-four-bedroom houses for junior enlisted soldiers. Therefore, upon taking office last summer, my first step was to visit Forts Carson and Lewis to see the situation firsthand, and to test how privatization could make a difference, both to the local commanders and their staffs and to soldiers and their families, with whom I visited. On returning, and after several weeks of intensive internal staff discussion and review with all the internal experts and consultants that we could mobilize, I began pressing an aggressive strategy that was designed to maximize our advantage of scale in creating a market opportunity for the private sector, because without a market opportunity, privatization has no meaning, using the housing privatization authorities to their fullest extent, and also to begin mobilizing support for privatization both in the industry, on whom all of us are going to depend, and in the Army, to increase our chances of success.

    In short, I tried to approach this problem as the Senate Armed Services Committee asked me to do in my confirmation hearing, as a business issue, a problem to be solved using all of the resources that we could possibly bring to bear.

    Our overriding goal in housing privatization is to enhance the quality of life for soldiers and their families by providing attractive, affordable residential communities on Army installations, and we are driven by a strong sense of urgency in achieving that goal. We are pursuing three major changes in policy and practices, and together these do, in the jargon of today, form a paradigm shift.

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    First, our strategic focus is shifting from housing production to community development. The centerpiece of what we are now calling the Residential Communities Initiative, RCI, is the neighborhood and the community, not the housing unit, per se. That is, we are aiming to create and sustain attractive, comfortable homes in clustered neighborhoods that are safe, clean, and convenient, with the features and amenities enjoyed by the majority of Americans in their neighborhoods, such as landscaping, nearby recreation facilities, community centers, and similar support facilities.

    This shift is not our invention. It emulates the basic shift that has occurred in the last 30 years in this country and in an industry of which I have been a part.

    The second major change is that our business relationships are shifting from contracting to partnering. Contractors, as the name implies, are in the business of bidding and executing contracts. Under traditional military construction, the Army serves as the developer, provides the funds, takes the risks, and issues the contracts with construction firms. When the houses are built, the contractor's job is done. The contractor leaves and the Army manages and maintains the completed project.

    In RCI, by contrast, the Army would partner with qualified private developers who would arrange the financing from private investors, take appropriate business risks, bid the construction contracts, and manage the ongoing services, such as landscaping and building maintenance and continued facility development, that are necessary to operate completed neighborhoods and communities. The structure of these partnerships would be tailored to each situation, but typically, they would include a long-term ground lease, or limited partnership, and management contracts with specific performance measures that align the partners' goals with the Army's.
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    In short, RCI is designed to use the housing privatization authorities, which, as I observed in our last hearing, I professionally regard as the most robust package of housing legislation in this country since World War II, to leverage the creativity and experience, as well as the capital, of the development industry.

    The third shift, from procuring a contractor through a request for proposal process to engaging a partner through a request for qualifications process, is a direct consequence of the first two changes. In an Request for Proposals [RFP], the Army details explicit requirements for project execution and selects the contractor based on the proposal. The contractor cannot recommend change to the project specifications until after the award. The presumption in that procedure, which, of course, has existed for many years, is that the Army knows all of its requirements and knows all that should be done. But frankly, in this complex business of developing and sustaining Army family communities, there is no monolithic single institution, including the Army, that can know everything about its requirements, and in particular, can respond to the creativity and the experience that the private sector can bring.

    So in the request for qualifications, a procurement reform that really was pioneered in the public sector at the state level and also by the U.S. Postal Service, the contrast is profound. In the Request for Qualifications [RFQ], the Army formulates requirements for selecting the developer, envisaging the developer as a partner, such as experience, demonstrated track record, financial resources, management capabilities, as demonstrated in comparable situations, by scale, by scope, and by complexity. The Army and the developer then work jointly to develop the best plan for project execution. This change encourages the developer to innovate in every aspect of the project during the planning process, and eliminates delays in execution.
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    So the RFQ has four major benefits over the RFP, generically; it is much simpler and less costly for the developer and the private sector in general to compete; it provides more flexibility to develop projects that meet the needs of all parties concerned; it maximizes the opportunities for innovation in neighborhood and building design, interior features and amenities that will obviously benefit our soldiers and their families; and, finally, it enables the Army to seek the best available financing and a higher return on investment.

    We designed the RFQ specifically to encourage much broader competition, and preliminary indications are that it will do so.

    Mr. Chairman, the Army's value of selfless service demands that we take care of our soldiers and their families. Providing them with better places in which to work and live is, therefore, a basic institutional responsibility.

    Privatization, to me, does not mean out-sourcing that responsibility. It means stepping up to it through a different means, to the same end. I take that challenge as my most important professional and personal responsibility in this position. I know that you share this desire.

    In summary, I personally want to work closely with you to make the Residential Communities Initiative for the Army work, and work as quickly and as efficiently as we possibly can. With the support of this committee, we'll be better able to support the Army and the soldiers and their families who serve our nation. Thank you, sir.

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    [The prepared statement of Secretary Apgar can be found in the appendix.]

    Mr. HEFLEY. Thank you, Mr. Secretary. Secretary Holaday.


    Secretary HOLADAY. Mr. Chairman, distinguished members of the committee, I welcome the opportunity to be able to come and talk with you today about the Navy and Marine Corps housing program's utility privatization program.

    As you know, we have been, in the Department of the Navy, a strong believer in the housing privatization program, and we appreciate the committee's support and sponsorship of the legislation and allowing us to move forward with this innovative new way to provide housing to our service members.

    In keeping with the Department of Defense's policy to rely first on the private sector to provide housing for our families, the Department of the Navy, as a matter of policy, is looking to public-private ventures [PPV] as our first choice to meet our housing needs when local communities are unable to satisfy them. We will use standard military construction in those instances when public-private ventures do not make sense or are economically not feasible.

    We have already completed, within the Department of the Navy, two projects, one at Everett, Washington and another at Kingsville and Corpus Christi, Texas. They're successful projects and we're very happy with them.
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    We have four projects presently under procurement, one at Marine Corps Logistics Base in Albany, Georgia, which is very close to award. We'll be coming over to you within the next 30 days asking for permission to contract that contract.

    We also have a Marine Corps project at Camp Pendleton, where we have already completed our RFQ work, and we are about to go out with a request for proposal.

    We have two projects in the Navy, a follow-on project at Kingsville and a follow-on project at Everett, Washington. The RFQs have been issued there and we expect to be able to move forward with them fairly rapidly.

    Five Navy projects are presently on hold over here in Congress, awaiting congressional approval. We're working with the committees to be able to answer questions about those proposals. We're ready to move forward with them as soon as we receive the approval to do so.

    We have 10 other Navy and seven Marine Corps projects under development in the Pentagon. We hope again to be able to move forward with those fairly soon and come over to you within the next 6 months on all of those projects.

    If these projects all work out, the ones that we have under procurement, the ones that have already been submitted to Congress with a request to be moved forward on procurement, and the ones we're still developing in the Pentagon, if all those projects work out as we hope, we'll be able to provide 21,000 new and renovated homes to our sailors and Marines for the same amount of money as we would otherwise have only been able to provide 4,000 homes, if we had used traditional MILCON.
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    Again, as Secretary Yim pointed out, that is a tremendous leverage ability to be gained by using the privatization authorities. We continue to look forward to working with the committee on this important program.

    With regard to utilities privatization, we strongly support OSD's direction to privatize our utility systems. We're looking at roughly 886 systems in the Department of the Navy worldwide. We have already issued about 197 requests for expression of interest to the private sector. We're getting a good response from people as they look at the opportunity to take over operation and ownership of our utility system. We will only privatize our systems when it makes economically good sense, and when it does not interfere with national security.

    We think we are ready to move forward with this program. We see some major benefits to the Department of the Navy from privatized systems. Thank you very much, and I will be happy to answer any questions.

    [The prepared statement of Secretary Holaday can be found in the appendix.]

    Mr. HEFLEY. Thank you, Mr. Secretary. Secretary Dishner.


    Secretary DISHNER. Mr. Chairman and members of the committee, good afternoon. I appreciate the opportunity to share with you Air Force efforts to prudently rely on the private sector, not only for family housing, but utility services.
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    Let me start, as always, Mr. Chairman, by reiterating the Air Force's sincere appreciation for the strong support you have and your committee has always given to Air Force facility and infrastructure programs.

    As you know very well, attaining and maintaining readiness is our No. 1 priority, and installations are the foundation of readiness. The Air Force needs world class installations, and we view privatization as a means to that end, but not as an end in itself. People are the key to Air Force readiness. While modern technology enables our forces to perform their missions more effectively, it cannot substitute for high-quality people. We have invested heavily in our people, and we must find better ways to pReserve that investment against the challenges of unprecedented national prosperity, declining military budgets, and escalating demands on service members and their families.

    We have found in repeated quality of life surveys that safe and affordable family housing is one of the most important variables in the dynamics of retention. The Air Force has consciously taken a measured, iterative approach to housing privatization, learning the lessons from our first project at Lackland Air Force Base, Texas, before expanding the effort.

    During this process, we have attempted to minimize the impact on our family housing MILCON program, executing normal MILCON projects on time, and within budget. Along the way, we have learned valuable lessons which will be captured in future privatization projects.

    With reference to the Air Force Base Lackland project, last year when I summarized the Air Force housing privatization program before the committee, little did I anticipate what a success we would encounter in our first experiment of this type.
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    I am now pleased to report that I signed the first Air Force contract on 4 August with a private developer at Lackland Air Force Base, which will result in 420 new homes for our enlisted members and their families in the grades of E–3 through E–7, for a scored outlay of $6.3 million. By comparison, the $17 million in MILCON projects programmed for accomplishment at Lackland would have resulted in just 140 new units. This represents an eight to one leverage of Air Force resources and confirms our belief that prudent partnering with the private sector can significantly reduce our 26-year housing renovation backlog without degrading other Air Force interests.

    Although we did not use the housing privatization authorities of the 1996 National Defense Authorization Act overseas, the Air Force has ongoing housing success stories at Aviano Air Base, Italy and Royal Air Force [RAF] Lakenheath, United Kingdom. The Air Force is currently in the process of producing build-to-lease housing at these locations, in an effort to address some of its most severe housing requirements. At each location, the scope of work is more than 500 units to be leased for a period of 10 years. Units will be built on private property at multiple locations for a target population compromised mainly of junior enlisted members. These contracts are underway with completion scheduled in fiscal year 2000.

    Returning to the United States, we have 12 projects in various stages of approval, which will give us 10,765 new housing units by 2002. At Robins Air Force Base, Georgia, we plan to leverage Air Force assets, including approximately 300 acres of land and 670 housing units, existing housing units, to construct 370 new units, renovate the remainder, and reduce the housing deficit.

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    The request for proposal was released to industry in December 1998 and proposals are now being evaluated. I will address, in the Questions and Answer [Q&A] portion, Mr. Chairman, your letter and our response back to that, if I may. At Elmendorf Air Force Base, Alaska, we are completing the last actions to release this request for proposal to private industry this month, which will provide 828 units of housing.

    We currently have four other projects in the solicitation development stage, to include Dyess Air Force Base, Texas; Mountain Home Air Force Base, Idaho; Kirtland Air Force Base, New Mexico; and Patrick Air Force Base, Florida. We also have three projects in the concept development stage at Wright-Patterson, McGuire, and Tinker Air Force Base, Oklahoma.

    Before long, we will be using the Air Force Family Housing Master Plan to augment this list to ensure we are addressing the greatest housing needs of the Air Force first. Again, using the private sector to obtain the 10,765 housing units by 2002 is a great opportunity for the Air Force to address the critical quality of life concerns.

    Utilities privatization, Under the 1998 statute, the Air Force has designated 463 out of 638 utility systems for privatization, and analysis for 55 of these systems is currently underway. I should point out that of the 55 systems, 25 are located in Texas across seven Air Force installations, three Army, and one Navy installation, totaling a total of 40 systems, and it's a joint approach, has been requested by this committee before in looking at installations and privatization. We continue to search for partnering opportunities when timing and funding allow, to reap the benefits of economies of scale and to maximize the benefits of presenting one face to the private sector as we posture for better negotiating leverage.

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    We have also programmed 204 systems for analysis in fiscal year 1999, and the remaining 204 systems in 2000. The Air Force has committed 92 million in the fiscal year 1998–2002 to execute this program. As a result of our commitment, the Air Force will be able to meet the goals established by the Department of Defense to privatize all utility systems by 2003.

    Again, Mr. Chairman, I very much appreciate the opportunity to share with you the Air Force's housing and utility privatization. We are convinced our measured approach to privatization has been prudent and our plans for privatization are on target. The solid base of experience we are developing in both arenas will pay big dividends to Air Force quality of life and efficiency, and prove to be the resource multiplier.

    Thank you, Mr. Chairman.

    [The prepared statement of Secretary Dishner can be found in the appendix.]

    Mr. HEFLEY. Thank you, Mr. Secretary. Mr. Taylor, do you have any questions?

    Mr. TAYLOR. Thank you, gentlemen. I just this year made the transition over to MILCON, so I wasn't around when Mr. Hefley and others put this program together. I've noticed that all of you all are real long on generalizations—this is the greatest thing since sliced bread—but pretty short on specifics, as to how you got these impressive results, in the case of the Air Force, talking about an eightfold increase in what you could have acquired.
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    So my question would be, where specifically did you realize the savings? Was it a situation where the services were just doing that poor a job of being stewards of the public trust, or are there some unforeseen expenses down the line that we will incur?

    I don't want to sound like the skunk at the garden party, but this really does, in many instances, sound too good to be true.

    Secretary YIM. Mr. Taylor, the theory underlying the use of the new authorities is to allow us to take our funds, our traditional MILCON funds, and leverage it against private sector capital. So the additional money we hope is coming from private sector investment with us, through the form of public-private ventures—the Navy, for example, is investigating limited liability corporations—but other relationships between the public sector, the military, and the private sector, so we can take advantage of not only the expertise outside, but the money outside.

    So we're giving them a market opportunity with us presenting our soldiers as essentially the rental stream for them, and they are investing their capital to improve our housing stock for us on a quicker rate, and it's that leveraging concept that is key for us.

    Mr. TAYLOR. Secretary Yim, I guess my question would be, we're obviously saving on the up front acquisition costs, but are we going to end up paying more in rent down the road than we would have paid in acquisitions costs and maintenance costs combined, and has anyone actually run the numbers, so that 10 years from now, a similar panel doesn't sit there saying how could they have done something so stupid?
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    Secretary YIM. You're absolutely hitting on the crucial point for us, sir. When we look at these projects, and we're projecting them over 30 years or 50 years, as we enter into deals, for example, the first several years of any project, that's a pretty standard construction project. We're going to be renovating houses, rehabing them, constructing new ones to the requirements.

    The key on this whole program is the management post the construction period of time as we enter into a longer-term contractual relationship with the private developer for the operation and maintenance of the housing stock, the capital repair and replacement funding, all of the nuts and bolts day-to-day operation.

    So the contracts have to be very carefully structured to give us off-ramps, for example, if the private developer doesn't perform. We are allowing our service people to vote with their feet, so if the housing stock is inadequate, we are not guaranteeing, over long terms, occupancy. They can walk out of there. Those are the control mechanisms we hope to have in place. We're requiring, for example, capital improvement set-asides, but not just sticks. We're also looking at giving financial incentives for the private sector. So we hope that we will be able to learn how to contract better and to monitor performance over the life of these agreements, and achieve what we all hope to achieve, Congressman.

    Secretary DISHNER. If I may—

    Mr. TAYLOR. Sure.

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    Secretary DISHNER [continuing]. Maybe I can give a little more specific answer to your question, Congressman. I think I know where you're going.

    We have taken a look at, as an example, Robins Air Force Base, and did a cash-flow. What we're comparing is doing this MILCON-wise, or doing it by the private sector. When you go by the private sector, you look through the same thing you and I do when we own a home. We have a mortgage. And over the life of the mortgage, what do you actually wind up paying?

    So we took the same number of houses that we had and ran it through, and 93.4 million, under privatization, after the lifecycle, compared to 93.6. To me, it's a wash. So there's the answer on do you wind up paying more by going privatization versus MILCON.

    The reason we're doing privatization, of course, is that we don't have all the money to do the houses up front, so we have a great saving.

    This is the first time that we've had enough numbers to be able to have the flow of numbers to be able to look at replacement, renovation, Operations and Maintenance [O&M] expenses, utilities expense, periodic maintenance, the residual value on the MILCON side, as compared to direct loan, loan guarantees, loan payments, housing allowances, and contract support on the privatization side. So we've looked at that, because, very honestly, we said it differently, privately.

    We said, ''Wait a minute. I know when I buy a $100,000 house that over 30 years, I wind up paying $300,000, because there's interest on that mortgage. But when we run the numbers through, versus MILCON and privatization, because of the leverage we get, they're very, very close.''
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    We used Robins. Now, I presume the same thing would happen at Tinker, Elmendorf, and other places that we had run the numbers through.

    So on the deal itself, I think it's a good return for the taxpayer. For every dollar a taxpayer—down at Lackland, for that project, for 420 units, for every dollar we got seven more dollars that didn't have to come from the taxpayer. So that was 140 units, and we got 420 units, for less price, $14.7 million, compared to 6.3.

    So the numbers do work out, both up front when you do do it—it's a capitalization cost, is what you're doing. Should you buy the plant today or should you buy the plant over time? There's commercial examples of this. There's housing examples of this. But it works out to be very, very close, 93.4 to 93.6, Congressman.

    Mr. TAYLOR. Mr. Secretary, my follow-up would be, I realize that each subcommittee tends to look at its little fiefdom, but we're all also part of a larger committee, and every dollar we spend on housing we don't have for procurement, we don't have for pay raises, we don't have for military health care. My concern would be, we save on the up front, but at some point, another committee has got to allocate more money for housing allowances.

    I will use the analogy of south Mississippi. We are very much affected by the oil patch in Louisiana. When they're doing well, our rents go up. When they're doing crummy, our rents go down. But we've had a building boom, so even though the oil patch is doing poorly, our rents have gone up dramatically, as the troops in south Mississippi know, from having to rent places. What is to keep other areas where there is a boom from the landlords jacking up the rents and then another subcommittee of the Armed Services Committee gets hit with a huge increase in paying for the family housing allowances?
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    Secretary DISHNER. Of course, you're jumping over to the personnel committees that handle that, and the BA, the basic allowance.

    Mr. TAYLOR. It's all the same committee. We all serve on the Armed Services Committee.

    Secretary DISHNER. Absolutely. Yes, sir. Yes, sir. But that's through the readiness. And the BA, the basic allowance for housing, is tied to the economy. We change that, as you know, every so often. The Air Force just had an increase, I think, about the last 4 months, I believe that they had an increase, and that's by regional area, et cetera.

    So when we do these privatization efforts, as we did at Lackland—that's the only one I can put my arms around for you—it was tied to a flow of cash, and of course, when we notified the committees, of course, they say, ''We're locking in,'' because 60 percent of our people live off-base today. I mean, they live downtown. Again, just to use San Antonio for a moment, they live downtown in San Antonio, 60 percent of them. Only 40 percent live on the base, on the average. So that the privatization effort is they're downtown getting the same BA that they would be paid, except they're living in a house that we privatized, that we stimulated, that we incentivized a local developer to build the houses to do them.

    You're actually correct. The committee is the same committee and it takes, in a way, although the Air Force continues to build over 2,000 units a year regular family housing MILCON, and we have taken maybe a little bit more measured approach than the other two services, but to me, and to us, we feel that that's the better way to go. Does that answer you, sir?
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    Mr. TAYLOR. I must be mumbling worse than usual, because that really didn't answer my question. I'll say it a little bit more succinctly, I hope.

    What guarantees do we have that, down the line—the rental increases affect what this committee has to appropriate, the full committee has to appropriate, as far as family housing allowances. What guarantees do we have that these things that we used to own, that we're now renting, that the rents won't go up dramatically?

    Secretary DISHNER. The contractor signs a contract with us.

    Mr. TAYLOR. For how long?

    Secretary DISHNER. At Lackland, it was a 50-year land lease, guaranteeing the amount of dollars that would flow to him, because he couldn't take that to the bank to borrow money on it. What happens around San Antonio would not affect—

    Mr. TAYLOR. But what guarantees do you have against price escalation, sir?

    Secretary DISHNER. Because he signed an agreement that says that he's going to get from us this amount of money for that, without any increase on his side.

    Mr. TAYLOR. Flat rate?

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    Secretary DISHNER. No, over——

    Mr. TAYLOR. Am I mumbling worse than usual? Is it a flat rate? Is it tied to inflation? Is it tied to an increase in the military budget? What are his increases tied to? What guarantees do we have when we're projecting out into the future our costs for housing allowances?

    Secretary DISHNER. His increase in costs are figured in when he did the deal initially. We are paying the base allowance for housing to him for that. He can't come in in 10 years and say, ''My costs went up.'' All he's getting is the BA bumped up by inflation.

    Mr. TAYLOR. OK. So it's fixed price plus inflation?

    Secretary DISHNER. Fixed price plus inflation, and he's worked that out, otherwise I hope he wouldn't have signed the contract, or she wouldn't have signed the contract in the first place. Yes, sir.

    Secretary YIM. The actually contractual relationships may vary slightly, but the policy is we are going to developer's abilities to raise rents to address exactly your concerns, tying them to escalations in the basic allowance for housing, and forcing them to focus on what is available to our soldiers and not moving these guys out of there. We know that that's a concern.

    For example, as they build new housing, and they find that it may be more profitable for these guys to rent it to higher grade officers, or to rent it to civilians, we're not going to let them force out our soldiers, particularly the junior enlisted, and we're going to—the policy is to ask the services in their contracting to create some ties to the basic housing allowance structure so that does not occur.
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    Mr. TAYLOR. Mr. Chairman, if I could ask just one last one?

    Mr. HEFLEY. Surely.

    Mr. TAYLOR. Mr. Yim, as you know from a previous hearing, there is a lot of disappointment in the President's budget manipulations, that we feel like effectively cut the MILCON budget in half this year. What if a future President, in his budget proposal, cuts the basic housing allowance? Are the landlords going to accept less?

    Secretary YIM. We certainly hope that that would not occur.

    Mr. TAYLOR. It did happen with MILCON, this year. Hadn't happened, I guess, in my lifetime, but it sure as heck happened this year. So what if a future president says, ''Well, I'm going to save some money by cutting housing allowances''?

    Secretary YIM. I know we disagree about the budget a bit, because we believe that the budget is a real program value increase and that there's a split funding of it for this particular year. We have faced this problem, as we've gone down the housing path, for many years. Our policy, the OSD policy for many years has been to rely on the private sector market to fulfill our housing requirement, as the first look, and then to build only if the local market could not satisfy our housing requirements.

    We were always facing the problem with our soldiers, ''Are you getting enough from the basic allowances to be able to live to the standard that you're entitled to?'' I'm afraid that there is no guarantee about that, but it is an issue that the Department of Defense, the Secretary has raised as a top priority item. My bosses have been directing me to work with the under secretary for personnel and readiness to coordinate, so that we look at the allowance structure to be sure that it pencils out to support these programs, and we are doing that.
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    Mr. TAYLOR. Thank you, Mr. Chairman.

    Mr. HEFLEY. Thank you, Mr. Taylor. Mr. Ortiz.

    Mr. ORTIZ. Thank you, Mr. Chairman. As you know, we have been working on this project for several years, because there is a great need for housing for our military. I just want to ask Secretary Holaday, and I appreciate what has been done in south Texas, but how much of the money that was authorized and appropriated for family housing in south Texas has the Navy spent, and what are the Navy's plans for spending the total amount?

    I understand that you did say just a few moments ago, Mr. Secretary, that you are working on another project in Kingsville. But we have authorized and appropriated money to the tune of about 40-some-odd million dollars, and some of it has not been spent yet. Can you enlighten me a little bit on that?

    Secretary HOLADAY. Yes, sir. I would have to get the exact numbers for you, for the record, because I don't have them immediately available to me. You'll see, though, that the Kingsville project that we have under procurement right now meets the entire need that we have in Kingsville, and that the south Texas project that we have that will address the housing needs in Corpus Christi and Ingleside, that combined area up there, again will meet the entire housing needs of the Navy community in the Corpus Christi-Ingleside area. I'm not sure if we used the entire amount of money that the committee was able to appropriate for us in the south Texas area for those two projects, the Corpus Christi, that's on hold presently in the Congress, or the Kingsville, that's under procurement.
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    I do know that we are going to use those funds to completely meet all of our requirements down there, which is actually more than we would have been able to accomplish if we just used the military construction funds. I can get you the details on that, sir, for the record.

    Mr. ORTIZ. If you can, for the record, because the money that we authorized and appropriated, we did that because of the need.

    Secretary HOLADAY. Yes, sir.

    Mr. ORTIZ. We were hoping that those amounts would be spent.

    Secretary HOLADAY. Yes, sir. As we pointed out, as Secretary Yim pointed out and also Secretary Dishner, and I mentioned in my remarks, the leverage that we get by using public-private ventures is considerable.

    The Corpus Christi-Kingsville project, where we've already executed our leverage, was about four to one, so we were able to take the money we had available to us and provide approximately four times as many houses immediately than we would have been able to provide if we had used just military construction funding. We're looking at roughly the same kind, I think it's about a five to one leverage combined, between the Kingsville and the south Texas project that we have underway, either under procurement or the one that's on hold, so we will again be able to make more effective and efficient use of those funds that you were able to obtain for us, and take care of all of our housing needs in those two areas, than if we had just gone ahead with a straightforward military construction project. I know that the delay has been frustrating to you, sir, and I just hope you will bear with us, because we will be able to, as these two projects execute, take care of all our sailors.
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    Mr. ORTIZ. I worry about that. One time, I thought the chairman would take the money, because we were not using it, and put it in Colorado.

    Secretary HOLADAY. No, sir, we wouldn't do that.

    Mr. HEFLEY. That's right. If you hadn't been watching so closely, I would have. [Laughter.]

    Mr. ORTIZ. Another question. We want to be sure that what we build is affordable——

    Secretary HOLADAY. Yes, sir.

    Mr. ORTIZ [continuing]. Especially in the areas of those that are E–5, the enlisted men and women who serve in the military.

    Now, in the Kingsville project, we had two or three single bachelor pilots who would get, you know, an apartment for them, because they would split the cost. It was very convenient. And these were units that we were hoping that enlisted military personnel would utilize.

    Secretary HOLADAY. Yes, sir.

    Mr. ORTIZ. But they were not affordable. I think that we have talked about this before. Are we making assurances that the enlisted personnel, E–4, E–5, can afford these units?
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    Secretary HOLADAY. Yes, sir, we are. There are two things that we're doing.

    Let me first address the existing projects, both Kingsville and Corpus Christi, and the same holds true for our project in Everett, Washington. As you may recall, those projects were initially executed under the authorities that only the Department of the Navy received from the committee, Congress, in 1995, which were actually much different from the legislation that passed in 1996, and much more restrictive in terms of the amount of money that we could put into the project and where we could build and what we could contribute in terms of other assets besides cash.

    Initially, that whole idea was to stimulate, help stimulate development of housing in the private sector off of naval bases and the local economy. In fact, looked at from that standpoint, the projects worked very, very well. But we also have an out-of-pocket cost for our service members, particularly the middle grade and junior grade enlisted, who would live in those housing units.

    We now have the new authorities that we received in 1996, but those new authorities were able to go back and, if you will, retrofit those earlier projects and reduce the rents to the service members. We've received the authority from the Congress to be able to proceed with that. It's a differential lease payment option, is what we're using. We have already negotiated with the developers in both Kingsville and Corpus Christi and up in Everett, Washington to make the adjustments in the rental structure that we need to make.

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    We'll be coming over to the Congress within the next 30 days asking for approval to move forward with that differential lease payment, which will reduce out-of-pocket costs for the service members who would not otherwise be able to afford the rentals at their allowance rate. With the new projects that we're undertaking, again using the new authorities that we have in 1996, the 1996 legislation gives us a great more flexibility and ability to be able to build housing and only charge rent that is within the allowance structure of our service members, and that's what we're doing.

    All the new Navy and Marine Corps projects are designed to be rented to a service member at no more than their basic allowance for housing. So we've been able to go back and take care of that problem that you raised.

    Mr. ORTIZ. We appreciate that. Those units are beautiful, and those that reside in those units love to be there.

    I just have one last question, and I know there's a lot of other members who would like to ask other questions. On the privatizing of the utilities, do we have any idea as to how much money we will save by doing that?

    Secretary YIM. We have a lot of leverage and a lot of room to save some money, because we're spending $6 billion. What we're hoping to do, we have to factor in a lot of the up front costs, as well as the cost of transition. Frankly, because we're just starting down this path, we don't have good numbers to give you right now. I know that some of the up front costs, depending on how you bundle the systems, could be as high as $300,000 per system to assess. That's on a single system.
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    What we're trying to do is have different mechanisms, for example, of bundling together systems, having the services cooperate together, create a regional approach, and maybe we can lower some of those up front costs. As a result, then, we could relieve ourselves of the operation and maintenance. But it's very difficult for me to give you an exact figure now at this time.

    Mr. ORTIZ. One of the things that bothers me is the bundling stuff. You know, when we bundle everything into one package, that doesn't give others the opportunity to also be able to compete.

    Secretary YIM. I realize that one size doesn't fit all, and it depends quite a bit on the market conditions. We're entering a very complex era of deregulation of the utility markets and some uncertainty and variances from state to state, so bundling not only could mean utility systems together into a single solicitation, but I also use the phrase more loosely to say that different services should cooperative together on a regional approach, say perhaps for the electric systems or for the natural gas systems. I believe very strongly that we leave a lot of money on the table, that we're not really fully recognizing the bargaining leverage that the services and the Department bring to bear, and we need to really exploit that bargaining power in this new market. I'm afraid I'm not able to give you specifics on the numbers.

    Mr. ORTIZ. I understand. But you know those areas that concern me—bundling, assumptions, out-sourcing—I don't think I'm the only one that this bothers. I hope that we're not basing, you know, savings on assumptions, and then we go broke, and we say, ''Well, we assumed wrong.''
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    Secretary YIM. We're not only looking at relieving ourselves of the immediate operation and maintenance responsibilities, but also the costs of improving and upgrading the systems. We've often deferred the ability to improve, and some of our systems are sadly lagging behind their mission requirements. We hope that, by privatizing, we can offload some of those improvement responsibilities, also. That's quite difficult for me. There's cost avoidance, which is always difficult, as you know, for us to measure, and then future savings from avoiding capital improvement costs is a difficult metric for us, too.

    Mr. ORTIZ. We thank you very much. I would like, for the record, to submit further questions, Mr. Chairman.

    Mr. HEFLEY. Without objection. Mr. Snyder.

    Mr. SNYDER. Thank you, Mr. Chairman. Mr. Yim, I wanted to ask you, I know you haven't been with the Department for a terribly long time, but there are differences between how the different services do the privatization. Have you come to any conclusions about how great the differences are, whether they should be standardized, are there advantages or disadvantages to having the different ways of doing things, that are essentially the same task?

    Secretary YIM. We have been very reluctant, Congressman, to impose a standardized one size fits all, because if we look at the theory behind it, to leverage against the private sector, that means that the marketplace, the site-specific marketplace is really going to dictate the types of deals that can be structured. There's a very different economic environment for a rural area with a limited housing market versus an urban area, such as San Diego, with high property values; so we did not want to constrain the innovation being brought by either the services or the private sector developers. I can give some generalizations, however.
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    The Air Force has taken, in Secretary Dishner's words, and it's the right term, a measured approach, a more measured approach. Perhaps that is a reflection of the fact that the Air Force, as a newer service, their housing stock is frankly in better condition, and so they have not taken, to the same extent as the Army, and to a lesser extent, the Navy, more of the whole-base approach. They just haven't had to do that.

    When you look at the Army's housing stock, and the deteriorated condition of that, in fact, it's just older. And I don't mean that in a pejorative sense, that they're not taking care of their soldiers. It's just older things. They need to generate more capital investment, and as a result, they are taking a more whole-base approach on the theory that they will get better economies of scale and be able to create a better opportunity for the private sector to invest their own capital. We are encouraging that. We are encouraging these pilot projects that the services are commencing. The Army, for example, has four pilots on the table. They have different economic conditions for each. We want them to experiment. We want them to bring some innovation.

    My responsibility, OSD's responsibility, is to be sure that the best business practices identified by the services are quickly translated into the services, and that we can provide some guidance in avoiding some terrible mistakes, but it is fundamentally a marketplace-driven privatization initiative, because of the leveraging.

    Mr. SNYDER. I guess some things work better in the marketplace than others. It's not just the marketplace, it's the skills of working in the marketplace. I would think, at some point, there are going to be some skills learned that I think would be transferable to all the services.
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    Secretary YIM. We hope so. And we have no illusions. The private sector community have very sophisticated negotiators on these agreements. Again, it's not the standard type of military construction that we're concerned about. People know how to contract for renovations and new housing starts. The differences in this program will be the long-term operation and maintenance of the housing stock over time, as we turn it over to private developers. We're encouraging the services to bring on experts, and we're trying to provide them with some expert assistance so that they equalize the negotiating power. We don't want to get chopped up by private sector experts on that. We want to interface at the same level, speak the same language, get that same expertise. Frankly, that's a difficult lesson. The private sector is more mature, I would say, in their experience in some of these deals, than we are, because we have headed down a more traditional path.

    Secretary DISHNER. Could I add to that, Secretary Yim? Because under Secretary Yim, we have the Air Force, having Lackland finished. We just finished a few weeks ago giving a briefing to both the Army and the Navy on the particulars of the Lackland deal, the financials, how it was done, lessons learned—and lessons learned, because that was our first one. So although it's no template, we wanted to make sure that if we had a problem that we had to work through, we wanted to make sure they were aware of it, so as the projects go through Secretary Holaday and the Army, too, it will be shared with each one of the services to make sure that if we get close to something, and we will never have a template that we can share, but to make sure that we don't screw up three times instead of just once, whoever is the lead. So it's a very helpful atmosphere, to be able to share that way.

    Mr. SNYDER. I wanted to ask, have there been any complaints from service members on any of these projects that have been completed? Have you had any negative reaction from service members?
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    Secretary HOLADAY. Certainly, Mr. Ortiz raised the issue of out-of-pocket expense that we face down in south Texas. Interestingly, even though the Everett project and our Texas projects, the first ones, in both cases, the service members were paying out-of-pocket expenses. The complaints we saw were from service members in Texas. Service members in Washington, for whatever reason, were not uncomfortable with that. But that's one of the issues that came up, and it's one of the things we moved to fix, to resolve that. We learned that. Otherwise, there have been no serious complaints that come to mind.

    Mr. SNYDER. I wanted to ask—given the snowy day, everybody is entitled to one off-the-wall question—if I was a service member and you moved, and I go on to base housing, and it's my wife and I and maybe a kid, and I move to this place, and I just think it's atrocious, and I go to the base commander and say, ''I want to do it myself, help me finance it,'' are there any options at all for service members who want to use their free time and entrepreneurial spirit? Is there any financial incentive at all for service members who need family housing to choose individual units and do something themselves?

    Secretary HOLADAY. One of the things that we did in our first project in Washington, the Everett project, was, it's a fascinating deal, in some ways, because although it's a 10-year deal on private sector land, at the end of the fifth year, beginning of the sixth year, we're going to sell off the houses, 20 percent a year, with the sailors having the right of first refusal on buying the house. We wanted to see how that would work, and to see whether our sailors would be interested in moving from rental status to ownership status, so we are trying that. There are a number of other programs, of course, throughout the United States that provide assistance of one sort or another to sailors and Marines and other service members, to help them become homeowner.
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    Mr. SNYDER. With home ownership off the base?

    Secretary HOLADAY. Right. This is the only one that we've got in terms of public-private venture. I would be uncomfortable with doing it on base, I mean with what would otherwise be military family housing, because it would tie up that housing unit and not make it available to another member when somebody rotated.

    Secretary DISHNER. If your question is, can someone fix up their own house for some reason, add shelving, et cetera, we do allow that, with a little bit of control, so that the next person that comes and says, ''I don't want the shelving around this window,'' so therefore we got to rip it down and so forth, but——

    Mr. SNYDER. I'm thinking of like a major rehab thing with a financial incentive, putting on a roof, putting on an extra room, building a room for the baby.

    Secretary DISHNER. No, sir,

    Mr. SNYDER. There's no incentive at all?

    Secretary DISHNER. No, sir.

    Mr. SNYDER. May I one question, Mr. Chairman, about the BRAC question? Incidentally, I caught the tail end of Mr. Hefley's comment to you. If you stop talking about BRAC, there won't be anybody in Washington, D.C. talking about BRAC.
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    Secretary YIM. I hope to change that, sir.

    Mr. SNYDER. In terms of some of the thoughts about coming up with some kind of a list of bases excluded or not excluded, does the prospect of another round or two of BRAC interfere with these contracts that you all make? Let's suppose you've got one of your units privatized, and that base is closed in year 2001, and you've got 47 years left on a 50-year lease. What does that mean?

    Secretary YIM. We've asked the services to buildup their MILCON requirements in general, and their housing plans, irrespective of the prospect of receiving additional BRAC authorization. It's a immediate quality of life housing need that needs to be fulfilled, whether we get additional BRAC authorization or not. The question is, are we being stupid? Are we spending a lot of MILCON in a housing effort on an installation that's going to hit a BRAC round, and we're wasting our money? Frankly, that's not how we've asked them to buildup the requirements, because we just can't presume that that is going to be the case. I don't even know which way it cuts, in all honesty. One of the problems in the base re-use experience has been the transition of housing to the private sector. To the extent that we have a robust housing program, it may make the transition of that base, should it be on a closure or realignment list, easier to the community.

    We have actually had the experience in Fort Ord in California where there was a robust housing program on, Fort Ord hit the list, and the housing program is still proceeding fairly well. On the other hand, a robust housing project could make the base be utilized more efficiently, lower the costs, and help keep it off the list. So it's hard to tell which way it cuts.
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    Mr. SNYDER. Thank you, Mr. Chairman.

    Mr. TAYLOR. Mr. Chairman, I have a question.

    Mr. HEFLEY. Go ahead.

    Mr. TAYLOR. Mr. Snyder, maybe it is the snow, but I do think you hit on something. As Mr. Hefley and I have discussed, you know, because of the fear of BRAC, Mr. Yim, you, not you, but the whole idea of BRAC has created a cottage industry amongst the 50 states where they all raise money, either public money or private money, to BRAC-proof themselves. I know that one of the things that the Federal Government does help the states with is thing like the Mississippi Housing Corporation, where we guarantee a loan to the state, and in turn, the state guarantees loans to lower-income and middle income people so they can get low-interest loans to buy their first home. Has any thought been given along the ''Let's do something different'' line to encouraging the states, since all of them do have very real fears of future BRAC closings, since all of them, to the best of my knowledge, that have bases, are appropriating state funds to keep that from happening, has any thought been given to actually going to the different state legislatures and saying, ''Well, you know, if you really want to take care of the troops and you want to protect yourself from base closings, maybe you ought to come up with something like what Virginia did, which is state-guaranteed low-interest loans for people who are in the services who choose to purchases or build a home in Virginia''?

    Let's take it on the road, and do it in other places. I think the states need some guidance from a central location.
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    Secretary YIM. We hope to be able to look at a variety of different ideas as we work on the BRAC process and making the reuse aspect of it smoother. We are a bit concerned on having people presume or try to second-guess the services' military requirements now. We need a BRAC commission to begin, the services to begin the modeling on what bases are excess, how the mission requirements have changed. It's very difficult, and I think a bit dangerous, to presume that just because of the past, that a particular installation or area is going to be hit again in a BRAC realignment or closure, so we're reluctant to create unnecessary concern in some of the communities now.

    On the housing, we're a bit concerned, too. If we have programs that essentially transfer ownership of the housing to local public entities, and they wish to serve other than our servicemen's requirements, service people requirements, we're concerned about some force protection issues, violating the integrity of the base. So we've been cautious, but certainly that is not meaning we're not receptive to investigating ideas like that.

    Mr. TAYLOR. Let me be a bit more specific. I think most of us served in the state legislature, and prior to BRAC, I think most local governing authorities, state legislators, they looked at bases as (a), there forever, and (b), a one-way street where the local entity got a good deal. Now, with the fear of losing bases, and the fact that 100 installations have closed, all of a sudden, the states and the cities and the counties are saying: ''Wait a minute. Maybe this is a two-way street. Maybe we have to invest a little bit of money to keep that good thing around here.'' So the public mood really is ripe for something like what Virginia has done, but I do think the other 49 states need some guidance as to how to do it.

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    I really do think, rather than having those local communities invest in some suede shoe artist from Wall Street telling them he's going to save their base, they could do a much better job by investing those same funds in low-interest loans helping the young sailors and Marines and airmen buy a home there.

    Secretary DISHNER. Congressman, if I could directly answer your question, the Chairman is very familiar with that suggestion, because Colorado Springs did exactly what you said. We went out to Colorado Springs on housing privatization and presented a program where we tried to get industry to get involved, and Colorado Springs said ''We don't want to do that.''

    ''Well, why don't you want to do that?'' They said: ''No, we have a low and moderate income goal that we have to meet within the state, so we'll build the houses. Will you just send the enlisted people from Peterson Air Force Base out on our property, and we'll have it.'' Prime example of what you're saying sir.

    It hasn't started yet, by the way, but that was offered by the community of Colorado Springs, where we had gone through and said, ''We would do some MILCON with you and we'll get you some land if you do it,'' and they said: ''No, we don't want the taxpayers' dollar at all. We would rather do it ourselves.'' That's exactly what C. Springs is doing, the epitome of what you're saying, sir.

    Also, Congressman Snyder, you mentioned about the, well, what do we have in there for future base closures? Well, in Lackland, which is the only one I've got to share with you, it is that we participated in a first mortgage, which states in there at this base—and I'm not recommending that Lackland is even going to be up for closure now. But if, in fact, something happened to Lackland, the Federal Government participated in the first mortgage on that. That's how it is covered and why we're doing these 30–40 year deals. And that base gets, ''Well, how do you get out of that? Do you pay off the note?'' No, we do not. So we gave them a guarantee through a first mortgage.
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    That takes care of privatization of housing and this other suggestion, which is right on, is being done by the State of Colorado and Colorado Springs, Congressman Taylor.

    Mr. TAYLOR. Thank you, Mr. Chairman.

    Mr. HEFLEY. Mr. Saxton.

    Mr. SAXTON. Thank you. Secretary Yim , I have always been somewhat confused, and maybe that's normal, as to how these privatized lease arrangements are scored. Can you discuss that? I ask it in general, but I also ask it specifically, because Secretary Dishner took care to emphasize in his statement at one point the word ''scored'' when he was talking about the expenditure of $6.3 million. Can you help us out with that process?

    Secretary YIM. That is a very difficult question, to explain all of the Office of Management and Budget [OMB] scoring rules, but——

    Mr. SAXTON. Let me tell you what my focus is, and then you can perhaps address that. At some point in the last few years, we were in a discussion about this general subject, and it came to light that a great deal of the cost of the entire length of the project was scored up front, or toward the front.

    That always kind of discouraged me, because it makes it more difficult, from my point of view, for the process to work.
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    Secretary YIM. The biggest problem is on the scoring of guarantees, and whether all of that cost is going to be brought up front, and that does make some of these projects just not pencil out very well if we have to do that. We are receiving the benefit of more favorable scoring, and I think each of the services can describe, on their projects, a little bit more detail. From OMB right now, with these new housing privatization authorities, where we're entering into public-private partnerships and creation of these limited liability corporations, we're getting much more favorable scoring.

    For example, let me give an example for overseas, on a company barracks overseas. We had very difficult scoring problems in the past, where there would be a claim that we had been guaranteeing the soldiers being in that housing, and therefore there was a score that had to be attributed to that, which really just made the unaccompanied barracks programs drop off the radar screen. We've been working with OMB about this problem. I think perhaps what I should do is defer to the services for some specific examples to illustrate the point better.

    Secretary DISHNER. Congressman Saxton, you recall, too, what was referred to previously, started in 1987–1988, was the 801 housing, which was about as close as we got to privatization in those days, by again guaranteeing payments, over, in those cases, 20 years. As you know, in 1986, Congress then said: ''No, you can't forward load our children and our grandchildren. If you're going to order something over time, then you score it, or you pay for it in that first year that you do it,'' which really probably had an impetus to get us to housing privatization and try to do that. OMB continues to support that. That's legislation. It's law, that they have to follow. By the mechanisms that we use in financing with the private sector, as long as we do not obligate the future expenditures to be done, then we can get around the scoring.
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    If I recall correctly, something like $6–7 million was scored all for the 420 units at Lackland, and if we had had to do that, it would be over $40 million, because we would have had to pay it—you know, we were good payers in the past. You know, with MILCON, the Government just paid you dollars right up front. Therefore, the scoring has been, would have been a real disaster to us, and that is what killed, really, the 12 projects that we had in the Air Force on 801, because you were signing a lease agreement that said you guarantee for 20 years you will make your payments, and that's not the case now. So scoring, at least with the Lackland project, and what we've looked at at Robins, and now Elmendorf, going on to Tinker, that OMB has been—I don't want to say they're flexible. They're holding our feet to the fire. But the scoring has not been a problem at all, and we've been able to go forward. Because if it gets close to having a full score for the units, we might have been doing this by MILCON, then, which gets scored right up front.

    Mr. SAXTON. Of course. Yes, sir.

    Secretary HOLADAY. The Navy and Marine Corps are in sort of a different position, perhaps, than the other services. Certainly all the Navy projects to date have been equity deals, where we put up cash as part of our contribution, as our major contribution to the deal, along with, in some cases, now with the new projects, housing assets. What we get scored on by OMB is the cash that we put up, in essence. That's our liability. If the deal were to go south, or go sour, that's what the cost would be to the Federal Government, is those funds that we had put up.

    Mr. SAXTON. So you put up—I'm sorry, but let me just make sure that we understand—you put up a percentage, 20 percent, 30 percent?
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    Secretary HOLADAY. In the case of south Texas, the projects we were talking about earlier, the ones we executed down in Kingsville and Corpus Christi, our contribution was $9.5 million, which was about 33 percent, 30 to 33 percent of the total cost of the deal, and that's what we were scored. I mean, we were limited about the amount of cash we could put forward, and that's what we were scored by, was the cash we put forward. If we were to offer up guarantees of any sort, as Secretary Yim said, we would also be scored on the net present value of those guarantees.

    Frankly, if you wanted a good discussion on the OMB scoring rules, I think we either have to answer that for the record or get somebody from OMB to explain it. We get the information on a deal-by-deal basis. We know about what the rules are, but I couldn't give you a complete and full explanation of all of it.

    Mr. SAXTON. Just so it works.

    Secretary HOLADAY. Yes, sir. And again, the important thing is that the new authorities that we have, and the ability to work with them, allows us to accomplish a lot more with a lot less up-front cost than we would otherwise be able to. I hope that answers your question.

    Mr. SAXTON. Yes, sir. Let me ask one final question, Mr. Chairman. I think you've already given me part of this answer, but I'll ask anyway, because it has other ramifications.

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    Marine bases around the country have, or at least some bases—I guess ''many'' is a better way to put it—have had difficulty in attracting private sector development near or on the perimeter of bases for some economic reasons. I had an experience a few years ago where the commander of one of the bases, in a discussion with him about how the community could be helpful to him, said that they were discouraged from time to time, because the people who come to visit, military folks who come to the base to visit on a short-term basis, have to drive so far away to find a place to stay. And so I got some of my motel-owner associates together, and we had lunch, and I explained this to them, that there's a great demand and there's a shortage, et cetera, et cetera, and the conversation went on.

    Pretty soon, they started talking about, ''Well, how can we do this together, so we don't all assume the risk?'' I said, ''Well, I don't quite understand what you're all afraid of.'' And they said, ''Well, did you ever hear of BRAC?'' In other words, next to my Air Base, they don't want to build, you know, they don't want to make an investment, because they're afraid that the military will walk away. I guess the question, in this context, is, absent guarantees—and you've already given me part of this answer—absent guarantees that we're going to pay the freight on this thing for the 30 or 40 or 50 years of lifespan, what is it that attracts the kind of investment that is needed for the privatization projects that you all are about?

    Secretary YIM. The ability to have the soldiers come to the housing, and looking at the housing allowances, it's not a guaranteed occupancy, but that offering up of the soldiers as the lessees of the property has proven to be attractive. The leveraging concepts, a bit, have proven to be attractive, where it isn't just purely all of the risk is borne by the private sector. The services are willing to throw some element of the equity position or loan guarantees, assume some element of risk. It does expose an issue, that the private developers, as they want to have these things pencil out, are going to be aggressive, push the envelope on trying to developed related commercial facilities to try to support the income stream on their programs.
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    We're very concerned, as I know many of these committee members are, on a view that we're subsidizing commercial activities. We are not going to do that. We're going to adhere to the statutory prohibitions on that. I think it's the concept of a risk-sharing, and that the renters are a bit guaranteed, although not guaranteed in the OMB scoring sense.

    Secretary DISHNER. I know, Congressman, the base from which you talk. To me, in 1999, the entrepreneur has to be an entrepreneur. The Guard and Reserve people that you're referring to, that show up at that base in New Jersey, drive all the way to Philadelphia, drive into New York City, and one would think that 50 or 60 or 70 more rooms right nearby would be a boon. I mean, I have to float Monday through Friday, but to me, it would be good. We've spoken, also, to the same group that you have, the motel and hotel owners of America, to try to incentivize them to do it, but they say the same thing: ''We want a guarantee.'' And we say: ''We don't use the ''g'' word anymore. Welcome to 1999.''

    But I said: ''Is there some way that we can show you the numbers of people that drive, our reservists, especially, at McGuire and on the weekend? Hundreds travel to the other motels.''

    To me, it's just, you know, if you're in the motel business, I think market capture has to be a part of that. But they said the same thing to me, sir, that they said to you, and that's unfortunate. Hopefully, over time, they will be able to see the wisdom of doing that at that base and other bases, where we do have weekenders who have to drive many, many hours, and it really impacts our Guard and Reserve a great deal.

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    Mr. SAXTON. Thank you, Mr. Chairman.

    Mr. HEFLEY. Mr. McHugh.

    Mr. MCHUGH. Thank you, Mr. Chairman. Unlike Mr. Taylor, I was a member of this subcommittee when the privatization initiative took flight, and as I did then, I continue to believe it's a basically good program, one that we need to continue to explore, and I want to commend the Chairman for his very important role in that. I think, as Mr. Taylor's question suggested, this is a process we have to watch very quickly, because while the words sometimes sound great, you can get in trouble genuflecting automatically in front of certain shibboleths. So I think this is an important exercise.

    I'd like to return to a point, Secretary Yim, that you touched on in response to my friend from New Jersey's last question, and that is the issue of commercialization within the privatization programs. On other days, I wear another hat, as chairman of the Morale, Welfare and Recreation [MWR] panel of this committee, full committee. We are receiving some very disturbing reports that many of the initiatives that are being studied and formulated under RCI might, in fact, have a whole range of components that could very seriously impact the MWR initiative at the various bases.

    You said you are concerned, and I commend you for the comment, that there is even a perception that you are underwriting commercial projects. You're not going to do that. That's an important part of it. But even the presence of highly commercialized projects within these housing units, no matter how they are financed, poses a serious threat to the exchange system, to the commissaries, to the cash-flow that is so vital through those facilities in supporting all of the other invaluable MWR programs.
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    I wanted to state that, No. 1. No. 2, I wanted to ask you and Secretary Yim, if you would like to begin, in spite of your concerns about creating templates, I think there are some areas where there has to be some sort of guideline here. Exactly how are you approaching this, and what can you do to help my blood pressure come down a bit with respect to some of the stories I'm hearing as Chair of the MWR panel?

    Secretary YIM. Well, let me see if I can address that, on several fronts. First, we are very, very aware of the important non-pay benefit that the MWR programs provide to our service people. There is no question that that's an important part of the compensation for our people enlisting and remaining in public service through the military. The military family housing authorities do grant the Departments some authorities to construct facilities that go beyond just housing, and we read the ancillary facilities provision of the statute fairly narrowly, from OSD's perspective. We believe it includes only those facilities specifically listed in the statutory definition, or very similar. Those include, for example, child care centers, tot lots, those type of things. It doesn't include widespread convenience stores, grocery store, department store type creations.

    However, there is a separate statutory scheme out there. There are different statutes that allow the military to convey or lease real property, and let me just quote from that statute, ''For the purpose of using proceeds of such conveyance or lease to carry out housing privatization.'' So it is possible for the military services to permit a private developer to develop retail activities that fall outside the definition of ancillary supporting facilities, outside the scope of the military privatization statutes, but the limitation on that different statutory scheme is that the proceeds have to be used to support military housing. That's an important limitation.
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    We then are looking at two different ways of control rods, or at least two different ways of control rods. If people are going to use the special tools that have been provided under military family housing, these loan guarantees, these abilities to have differential lease payments, then they have to adhere to the fairly narrow definition of ancillary support facilities. If they're going to use other statutory authorization to have commercial development, then there's limitations on the use of those funds that are important. It has to be poured back into the housing projects. We hope that's a control rod.

    In addition, we have asked the services, and the services have responded, knowing the importance of the MWR programs, they have committed, each service has committed—the Air Force has a policy, for example; the Army is developing policies—to coordinate with the MWR programs so that we are not having major disconnects, we are not having competing entities, that we are not setting policy for MWR programs as a result of unanticipated consequences of the housing programs.

    I perhaps should let the services answer on how they're handling it directly, but that is the overall guidance that OSD is providing, sir.

    Mr. MCHUGH. I would like to hear that, because my blood pressure went down, then it went up. I'm not sure of things right now.

    Secretary DISHNER. Let me see if I can get it down again.

    Mr. MCHUGH. Thank you, Mr. Secretary.
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    Secretary DISHNER. The Chairman and you certainly have a concern. I wrote the letter that disclosed the Robins project to you that you very graciously said, ''Go ahead and proceed with that,'' and we have. So I am accountable for making sure, whether other ancillary functions and other things are included or not, so I'll take the spear on that. Little did we know—this is our second project, now, and we're still on the learning curve—that that would have then been an impact. We should have known that. Take the spear, and we'll run with it. That's what Mr. Peters said back to the Chairman. Absolutely. We have the RFPs, by the way, back, going through the analysis there, and we're going to use Robins to make sure, and we'll share that with the other two services, to make sure that, ''Whoops, be sensitive to MWR and Army/Airforce Exchange Service [AAFES] and commissary, to do that.''

    So nothing has been done. No land has been conveyed at Robins Air Force Base to anybody. We just got the RFPs in. But we now know that, in fact, if we're going down that route, which when you talk about housing, you certainly do talk about the Wa-Wa, or the 7–11 or something, we already have one. It's called the Shopette, it's called AAFES, et cetera, and we're going to be sensitive to that.

    Your blood pressure can go down. The Air Force, and I think the other services—they can speak for themselves, but I think they will agree—the Air Force is not proceeding to do something in total disregard to the quality of life, which includes not only housing, but where you shop and the source of our Non-Appropriated Funds [NAF]. It just wouldn't make sense.

    So that one got out, and I stand accountable for that, but hearing it from you, I'll guarantee that, as projects come forward, if in fact there's any intimation of that, where we are looking to proffer the financial viability to get somebody interested, it approaches the commercial. Our policy, which was just signed out, says that the boards of AAFES, the boards of Defense Exchange Commissary Agency [DeCA], and the MWR will approve use of that property. It may be a deal that you might want to participate in, as an example, being head of one of those boards.
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    Mr. MCHUGH. Anybody else? Well, let me just say, that is reassuring, and I'm pleased to see that some progress is being made. I think it's vital you talk amongst yourselves. Secretary Holaday can tell you, for example, that about $5 million, 10 percent of interim MWR funding, comes through their share on AAFES. So if the Air Force is out building a project or the Army is out building a project that, in some way, undermines the dividend under AAFES, you're into the Marines' pocketbook, even though you're not technically building housing.

    The last word I would say on this, if I might, Mr. Chairman, and I hope I'm not being too presumptuous, either for your subcommittee or for my panel, but the one consultive body I have not heard here is Congress. I would hope that before any of these initiatives go so far as we find ourselves locked in a bad situation, and again discover that something inappropriate has happened that we just didn't foresee, that we have the opportunity on this subcommittee—I would certainly appreciate, and I know my panel members would, as well, in the full committee—to be advised as to how this is progressing. I think this is important to MWR, but it's important to the viability and the success of the entire initiative that, as I started my comments with today, I think it's a good one. So we need to talk.

    Secretary HOLADAY. If I may, the Department of the Navy is taking a very narrow reading of the authorities that we have been given by the committee.

    Mr. MCHUGH. I know you have.

    Secretary HOLADAY. So we have not contemplated, in any of our projects, do not contemplate in any of our projects having what I would call commercial developments as part of our housing proposal.
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    Mr. MCHUGH. I appreciate and understand that, Mr. Secretary, and I think that's good. If you can do it that cleanly, I commend you and urge you to write a little paper as to how we can do that. I know for the moment, at least what we're hearing, is an Air Force and an Army situation. But as I noted, if that end of the equation goes south, you'll feel it in your 5 million bucks.

    Secretary HOLADAY. Yes, sir. One follow on, if I may, with reference to Mr. Grone. One of the questions he always asks us when we come over to talk to him about our proposals, is what ancillary facilities are we planning to incorporate in our project. So the committee is interested, and we always provide that information to the committee when we discuss our projects with him.

    Mr. MCHUGH. That's why he's so good. Thank you, sir. Thank you, Mr. Chairman.

    Mr. HEFLEY. Mr. Thompson.

    Mr. THOMPSON. Thank you, Mr. Chairman. I was a little concerned when I heard how far ahead the Air Force was in regard to military housing. I represent a base that the Air Force has stated that over 50 percent of the housing available is listed as inadequate. In touring that base, it becomes pretty obvious that the deferred maintenance has really taken a toll on the stock, housing stock that is available.

    When we talk about the partnerships, private-public partnerships, contracting out, is there anything taken into consideration to ensure that we, in fact, have the ongoing maintenance that is going to be necessary to make these facilities habitable and enjoyable to the people who are living there?
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    Secretary DISHNER. As compared to the 801 project I mentioned earlier, which we no longer have the authority, because of scoring, to do, about half of those were maintained by the Government and the other half by the contractor. In the housing privatization, they're owned, operated, and maintained by the contractor.

    Mr. THOMPSON. We have the safeguards in place to ensure that they are, in fact, maintained in such a way that they will be——

    Secretary DISHNER. Yes, sir. We have said this, again, for the Lackland project, which is the only one I have so far, to make sure that they're—''What level does that mean, and the roofs or siding that needs to be painted,'' et cetera, yes, sir, ''and Heating and Air Conditioning [HVAC] systems,'' yes, sir.

    Mr. THOMPSON. If I may ask one more question to followup on something that Mr. Taylor had mentioned earlier, in the costs associated with building out these projects, is there consideration given for cost overruns that may occur while the project is rolling out, or is the price that we agree to, as I think Mr. Yim had mentioned, in that initial contract, is that a set price and there are no further adjustments, or are cost overruns considered as they occur?

    Secretary YIM. That's going to vary, service by service, as they enter into these agreements.

    Mr. THOMPSON. So once you enter into an agreement, there can, in fact, be an adjustment that to that cost if there is some situation there arises?
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    Secretary DISHNER. Well, I don't think there's much flexibility, because we don't want this thing to spiral out of shape, and he or she is still building the units, and all of a sudden the price has gone up. Don't want that to happen.

    Mr. THOMPSON. So it doesn't happen, if you don't want it to?

    Secretary DISHNER. Well, I only have the one, so it hasn't—I'm not there yet, Congressman. But on the Lackland one—but it's a two-way street here. We agree to pay so much up front. We agree that, ''The individuals will stay there and pay so much for BA, you provide a house of this quality.'' So if it costs them double the price, Heaven forbid, then they're not a good businessperson. That's why we do a lot of financial checks on the corporation that's doing it, because we find a lot are good builders.

    We're talking about own and operate for 30 to 40 years. That's staying power. It takes a specific type of company to do that.

    Secretary YIM. And again, the theory is to move away from ''We're just contracting out the construction of housing, and so we're responsible for overruns.'' By entering into specific deals that someone is providing, fulfilling a requirement for us, then we're shoving onto them the risk of cost overruns or improper management. That is certainly where we're headed, and where we wish to be.

    Mr. THOMPSON. Thank you. Thank you, Mr. Chairman.

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    Mr. HEFLEY. Thank you. You all express strong support, and I believe you, of these initiatives, and up the ladder from you, even, that expression is. But when I go out to these bases, I find some institutional resistance out at the base level, some real concern about whether this is going to work, particularly the 50-year contracts and things like that.

    I would be curious as to what you all are hearing at that level. Do you pick up some of this concern from your base commanders and so forth, and your facilities people out there?

    Secretary HOLADAY. Yes, sir. I think that's natural. We're trying something new that we haven't done before.

    Mr. HEFLEY. Yeah.

    Secretary HOLADAY. And we're sensitive to that, too. I mean, it's hard for me to predict 5 years into the future, or actually, it's hard for me to predict, sometimes, 3 years into the future, but predicting 50 years is extremely difficult. I think there was somebody that said, ''If you're going to predict or forecast, you should do it very, very often.'' One of the things we are trying to do to deal with that is to create corporate structures that will allow us to make adjustments over time, so that we recognize there will be changes in requirements, a need for more housing or less housing, that we need the ability to deal with management structures, so that if we have problems that we had not anticipated, we can make adjustments and become a little bit more nimble than we otherwise are, and we are trying to build that into the corporate agreements, the business agreements we're developing, to work with our partners in the private sector.
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    I understand the concerns of the base commanders. Frankly, we have the same issues at bases, even with the housing that we continue to own and operate. We don't know two or 3 years from now what our exact funding levels are going to be or what our requirements are, and we have that same situation, to a large extent, with our own existing housing, as well.

    Mr. HEFLEY. It's been my sense, that along with the fact that we didn't know how to do these new things, that one of the problems of why it hasn't moved faster is institutional resistance within the Department and so forth. But do you think, at this point, the resistance you might be getting at the base level is holding anything up, or is it just misgivings about doing something new, but really isn't deterring the program?

    Secretary DISHNER. Well, in the Air Force, General Ryan—who was in the unique position of having been born on an Air Force base, and now lives on an Air Force base, and his dad was a former Chief of Staff, the position that he now fills, as you know—wants to make sure—and he's personally been involved, of late—to make sure that, in fact, ''measured'' is his term, that we're taking a measured approach to it, to make sure. Some of that does come from some of the wing commanders that we have. It is a new concept. Again, we've been at this just 3 years. It seems like a lifetime, but it's only 3 years. And it's hard to sometimes grasp that. We continue, and he does, through the appropriate offices, continue to provide information to them, and let them know that he is personally looking at the projects, and once he does that, it's just like a watershed. We've taken the wing commanders and their expressions of interest or concern, and made sure we tried to answer those. For some people that have been in the military for 22, 25 years, and all of a sudden, even if it's on the site of the base, that someone else is going to own that and operate it, and we say, ''Well, gee, you got 12 801 projects in the Air Force that's owned and operated, and some of them are downtown, they're not even near the base,'' and they don't realize that, and it's understandable. I don't detect, in the Air Force, some ingrained, that, ''Boy, this is never going to happen,'' or anything. It's just that they want to make sure that we're doing it in a measured way. Having General Ryan involved, in my opinion, has helped a great deal, because he says: ''I'll watch over to make sure that we're doing something that's good for the airmen. Even 20 years from now, when we're already gone, what legacy did we leave?'' So I think the questions that you've heard, Congressman Hefley, have been just, ''How do you do this,'' and ''What's going on?''
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    Mr. HEFLEY. And, you know, I don't blame them. I don't blame them at all.

    Secretary DISHNER. No, sir. No, sir. I agree with you.

    Mr. HEFLEY. I don't want them to be able to hold it up because of those concerns, but I don't blame them for having the concerns. At the outset of this hearing, I expressed a continuing concern about the budget request of the Department of the Army and the Navy in the area of your family housing construction, and I'd like to give Secretary Apgar and Secretary Holaday an opportunity to respond to that. In the context of that answer, could both of you also provide some detail on the assessments you've done at CONUS installations? How certain are you that housing privatization can work at every location, or is this just for some locations?

    Secretary APGAR. Mr. Chairman, as you know, our principle has been to use these privatization authorities to the maximum extent in CONUS, in order to enable us to address the equally serious concerns overseas, for which we don't have these legislative authorities. In the 43 installations in CONUS which are now part of the program, all but a few appear from preliminary analysis to benefit from privatization and to be able to use these authorities.

    One of the main purposes of the pilot program is to look more closely at that issue. Frankly, it depends on careful market analysis and having the private sector take the kind of view of what capacity is available in local markets and what may develop over time. It's on the basis of that, on which that determination should be made. The obvious cases are remote installations, where there is no dynamic sizable housing market, or special conditions that may apply.
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    I think the principle, however, in making this work, is to take each location as a distinct local market, look that those conditions and what affects them over time, and make that determination as we go. We're not seeking approval for a list of 43 that may occur over a period of years in precise terms, but seeking the support to look at each, and enable them.

    Mr. HEFLEY. Secretary Holaday.

    Secretary HOLADAY. Yes, sir. I'm trying to think of the best way to answer this. As you know, we have expressed strong support, in the Navy, for the privatization program over the last 3 years that I've been testifying in front of the committee, and we believe that we're making the proper use of the authorities within the United States to help meet the needs of our sailors and Marines much more rapidly than we would be able to using military construction programs. In virtually every case that we have looked at so far in the United States, it's made sense to follow a public-private venture path, rather than military construction path. That doesn't mean that that will always be true. Again, as Secretary Apgar mentioned, there may be remote locations that have less than a dynamic housing market, or where our requirement is very small, that it would make sense to do military construction, rather than a PPV.

    One place comes to mind. Our joint Reserve base in Dallas-Fort Worth we originally looked as possibly doing a public-private venture on just a few housing units. On further investigation, we decided to go ahead and proceed with military construction, and we released the military construction funds that we had on hold, in order to be able to do MILCON at the base instead of p pursuing a PPV. The Department of the Navy's fiscal year 2000 construction program, as you mentioned in your opening something, sir, is about $230 million that's largely focused overseas on purpose, or outside of the United States on purpose. That's where our biggest problem is today. Our largest problem within the Navy and the Marine Corps is in Hawaii, working with two services together, is in Hawaii, and that's where much of our constructions and improvements are focused, on our existing housing and new housing in Hawaii.
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    We do have projects, one in San Diego, one at Yuma, one at Camp Pendleton, a couple of small projects here in Washington, and one at Cherry Point, to meet needs here in the United States that we think military construction, again, may be more appropriate for than a public-private venture. We're trying to pursue a balanced approach to take care of those places where we have the greatest need in our current budget, to use public-private ventures where they make the best sense for us. We feel that we are, in fact, taking a balanced approach.

    Mr. HEFLEY. Thank you. Secretary Yim, the goal of housing and privatization was to provide more housing more quickly than could otherwise be provided with MILCON dollars at those locations which might be able to support such projects from an economic perspective. In your prepared statement, you suggest that privatization in the housing and utility areas will free up funds for readiness and modernization. Elsewhere, you talk about the leverage of public to private funds in some of those projects. In the housing program, isn't it true that those ratios only capture the up front costs, and work done by the General Accounting Office [GAO] suggests that the difference in lifecycle costs, while favorable to the Government, really are fairly narrow. That would seem to bolster the notion that we are getting more housing more quickly, but that we should not expect to reap savings for other purposes. Privatization will require additional expenditures in the Military Personnel [MILPERS] accounts, specifically in the area of allowances. Why are those costs not factored into the three-to-one or like ratios that you referred to in your statement?

    Secretary YIM. I think that's a valid point, Mr. Chairman. We do anticipate that we will be able to execute on this leveraging concept, and when we give broad ratios, it's based on some limited experience, but we're very optimistic about it. There's no question we have to look at the long-term costs, and perhaps those ratios are going to decrease as we get more data and experience over time with these new initiatives. I think the point remains that the housing program isn't first and foremost a cost savings measure. We hope to be able to shrink our overhead costs while maintaining our infrastructure, but when we focus on housing, as I said in our statement, we are also preserving other values.
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    Quality of life is foremost to us. That is not fundamentally a cost-saving measure for the Department nor any of the military services. If we are able to improve the quality of the housing stock, if we are able to leverage, even if it's not eight to one in all occasions, we will consider that a success.

    Mr. HEFLEY. Mr. Secretary, now that most of the responsibilities for program management have been devolved to the services, would you describe a bit the role your office plays in the program development and implementation process?

    Secretary YIM. As you know, because I'm recent to the Department, I'm trying to find out my role in a lot of different areas, Mr. Chairman, but certainly one of the most important things that the OSD must do is to be able to capture the best business practices quickly and to share them among the services. We also have to listen very carefully, as I hope we have, to congressional concerns about subsidizing competing commercial activities, subsidizing civilian housing projects, and the problem of pushing out the junior enlisteds, having private developers with the profit motivation that may be inconsistent with some of our intangibles of preserving quality of life, trying to migrate out some of our lower-paying enlisted, or the—excuse me, I don't mean lower paying. I mean the junior enlisteds that have lower housing allowances, migrating them out over time. We are going to be very vigilant to assure that that does not occur, and that's one of the most important roles.

    On MWR programs, we hear that very clearly. At the OSD level, I would not be able to walk down the hall without Secretary De Leon pinning me up against the wall, if I ignored the MWR programs. So that type of coordination, that listening function, I hope is what we bring to the table.
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    Mr. HEFLEY. In the matter of utility privatization, you've been fairly aggressive on this, and it's already slipped once, I guess. But do you have any concern that putting over 2,000 systems into the private marketplace at roughly the same time—can the market absorb that kind of activity between now and September of 2003?

    Secretary YIM. I'm not going to paint myself as a utility privatization expert. We certainly have asked the services to be very aggressive about this, and I believe that this is the right time to do this, with an era of increasing competition on the sale of the commodity. There are many utility companies willing to also assume the responsibility for operation and maintenance of the systems themselves, because of the competition on the sale of the commodity, and those really are two distinct issues. But we think that we are able to take advantage of that competition in the private sector marketplace, and we should try to exploit that. We haven't seen that a lot before. A lot of utility companies, 20 years ago, they had exclusive rights. They didn't have to worry about competition and they didn't offer you good deals, and they didn't take over these systems unless it was in prime shape. That's changed now, and we need to be aggressive to see what works. I can't tell you with any certainty that 2,300 is too much, and certainly the services feel that OSD is pushing them very, very hard on this. We slipped some of the schedules in light of those realities.

    We initially thought that there may be about 700 systems. When the inventory came back and there's 2,300, we told the services: ''You're right. We need to take a more measured approach to this.''

    We also had difficulties with the deregulation environment, with people claiming exclusivity and franchise territories. So I think we have responded appropriately by extending the services additional time.
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    Mr. HEFLEY. Have each of the military departments adequately programmed the cost to keep the utility privatization effort on schedule, assuming that the private market can absorb this; and what is the scope of the cost involved in conducting these assessments?

    Secretary YIM. I'll hope that the services have been programming the amount of money. We know that roughly the cost, if you look at a single utility, is about 300,000, and a lot of that is the environmental assessments that are necessary: Are you going through contaminated areas? What are some of the environmental impacts of transfer? Then they need to look at security issues: Are we giving away something that's going to create a mission-essential problem for us? So we are looking at about a $300,000 per service assessment for a single system. We hope that, by getting the services to blend together, bundling, or work cooperatively to exploit a particular region, we can lower the cost into maybe the 100–130,000 range.

    I know the services are struggling a bit, but we hope that they are budgeting those up-front costs.

    Secretary DISHNER. Mr. Chairman.

    Secretary APGAR. Mr. Chairman.

    Secretary DISHNER. Go right ahead Sandy.

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    Secretary APGAR. Mr. Chairman, we have programmed $40 million in the 2000 to 2004 budget, and I believe that is sufficient. It will cover economic analyses, environmental real estate actions, procurement negotiations, and we're also confident of meeting the Defense Reform Initiative directives to this end.

    Mr. HEFLEY. The same with the Navy and the Air Force?

    Secretary HOLADAY. Yes, sir. We believe we have programmed sufficient funds to be able to meet the requirements. Also, one of the steps I think that helps us out, by issuing RFIs, first requests for expression of interest, which is a relatively inexpensive thing to do, that will limit the amount of funding we spend on environmental assessments and so on, so we won't have to do an environmental assessment on a utility system that no one is interested in taking over.

    Secretary DISHNER. Yes, sir. We have the program for the out years, of course, the dollars that are needed, and for fiscal year 1999, during this current year, to be able to meet all the 400-and-some–68 systems that we have to look at. As Secretary Holaday just mentioned, there's a three-part look-see, and the second part is the most expensive of that 300,000 that Secretary Yim said, but the first part is not that much. So if we can get through that look and say, ''Does it make sense,'' and we do enough before we launch on an environmental impact statement, and those things, we feel that we have enough in the budget, 1999 and 2000, and that which will come in later on in the Amended Program Objective Memorandum [APOM], sir.

    Mr. HEFLEY. Well, Secretary Yim, when we're talking about savings, you've come up with a number of 327 million, I think, in annual savings. How did you arrive at that number? We talked about that a little bit in some of the earlier questions, but I'm still a little confused. Do you think that is a pretty solid projection, or a ballpark number, or what?
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    Secretary YIM. We have been criticized from a variety of GAO reports on our ability to accurately track costs and savings, particularly on cost avoidance measures, and when we look at utility privatization, we have an idea of the cost of maintaining, but we're looking at cost avoidance, as we offload our O&M responsibilities. That is a difficult area for the Department and the services to accurately track. I will acknowledge that. That is valid criticism.

    Mr. HEFLEY. OK. Secretary Apgar, let me return to the housing thing just a bit. In the last Future Years Defense Plan [FYDP], you programmed new construction at Schofield Barracks and Fort Dettrick, Meade, Bragg, and Bliss. Only Fort Meade is programmed for a housing privatization project this year. For improvements to the existing units, you deferred work at Forts Benning, Leavenworth, and McNair, in addition to the United States Military Academy. How do you attend to address the needs at those installations when the privatization is clearly down the road a bit?

    Secretary APGAR. There is a two-part answer, I think, Mr. Chairman. First, we will continue to fund and program all of the immediate needs for maintenance and repair, and any installation will benefit from that. When we began last summer to look closely that the privatization initiative, we did take a comprehensive look, and re-examine the sequence and priorities of the entire portfolio, if you will, of all the installations, based on need, measured both by the housing deficit and also by condition, potential economic feasibility, given the privatization tools available, and the local commanders and command teams' interest and intent. We did re-sequence the entire list last fall, in light of those criteria. It certainly is not a rigid list that will never change, and the sequences can change, based on experience and progress. We also took the four hosts in the pilot program—Forts Hood, Lewis, Stewart, and Meade—based on those criteria, but also based on the purpose of the pilot, to have a diverse group of posts that represented the vast majority of the rest. By its nature, the pilot is designed to test a variety of innovations, as well as the feasibility of privatization, and that entailed a re-sequencing, as well.
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    Mr. HEFLEY. I understand that those projects would have addressed what they call Condition Red housing. Are families at risk at these locations of being moved into the economy on a permanent or a semi-permanent basis, due to the lack of funding? Or are the facilities such that they can still be used, they're just not very good?

    Secretary APGAR. They can still be used. They're not very good. But in any case where a local commander clearly demonstrates and requests an urgent condition, we have tools available and capacity to meet those urgent needs, and certainly want to do so, are responsive to doing so, and if we find that those needs exceed our program, we will be the first to say so, and come back to you.

    Mr. HEFLEY. Mr. Snyder, Mr. Taylor, do you have further questions?

    Mr. SNYDER. No questions.

    Mr. TAYLOR. No questions.

    Mr. HEFLEY. If not, we thank you, and we'll let you go out and fight the elements. This committee stands in recess, and thank you very much for your testimony.

    [Whereupon, at 3:14 p.m., the subcommittee was adjourned.]

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March 9, 1999
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