SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOC67050
[H.A.S.C. No. 10642]
NATIONAL DEFENSE AUTHORIZATION ACT
FOR FISCAL YEAR 2001H.R. 4205
OVERSIGHT OF PREVIOUSLY AUTHORIZED PROGRAMS
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
MILITARY INSTALLATIONS AND FACILITIES SUBCOMMITTEE HEARINGS
Page 2 PREV PAGE TOP OF DOCON
DIVISION BMILITARY CONSTRUCTION
MARCH 16, 2000
MILITARY INSTALLATIONS AND FACILITIES SUBCOMMITTEE
JOEL HEFLEY, Colorado, Chairman
TILLIE K. FOWLER, Florida
JOHN M. McHUGH, New York
HOWARD ''BUCK'' McKEON, California
JOHN N. HOSTETTLER, Indiana
VAN HILLEARY, Tennessee
JOE SCARBOROUGH, Florida
BOB STUMP, Arizona
JIM SAXTON, New Jersey
STEVE BUYER, Indiana
Page 3 PREV PAGE TOP OF DOCGENE TAYLOR, Mississippi
SOLOMON P. ORTIZ, Texas
NEIL ABERCROMBIE, Hawaii
ROBERT A. UNDERWOOD, Guam
SILVESTRE REYES, Texas
VIC SNYDER, Arkansas
ROBERT BRADY, Pennsylvania
MIKE THOMPSON, California
Philip W. Grone, Professional Staff Member
George Withers, Professional Staff Member
Noah Simon, Research Assistant
Rebecca Anfinson, Staff Assistant
C O N T E N T S
CHRONOLOGICAL LIST OF HEARINGS
Thursday, March 16, 2000, Fiscal Year 2001 National Defense Authorization ActThe Implementation of The Military Housing Privatization Initiative and The Privatization of Military Utility Systems and Asset Management Practices of the Military Department
Page 4 PREV PAGE TOP OF DOC
Thursday, March 16, 2000
THURSDAY, MARCH 16, 2000
FISCAL YEAR 2001 NATIONAL DEFENSE AUTHORIZATION ACTTHE IMPLEMENTATION OF THE MILITARY HOUSING PRIVATIZATION INITIATIVE AND THE PRIVATIZATION OF MILITARY UTILITY SYSTEMS AND ASSET MANAGEMENT PRACTICES OF THE MILITARY DEPARTMENT
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Hefley, Hon. Joel, a Representative from Colorado, Chairman, Military Installations and Facilities Subcommittee
Taylor, Hon. Gene, a Representative from Mississippi, Ranking Member, Military Installations and Facilities Subcommittee
Apgar, Hon. Mahlon, IV., Assistant Secretary of the Army for Installations and Environment
Dishner, Jimmy G., Deputy Assistant Secretary of the Air Force for Installations
Page 5 PREV PAGE TOP OF DOC
Holaday, Duncan, Deputy Assistant Secretary of the Navy for Installations and Facilities
Yim, Randall A., Deputy Under Secretary of Defense for Installations
[The Prepared Statements can be viewed in the hard copy.]
Apgar, Hon. Mahlon, IV.
Dishner, Hon. Jimmy G.
Hefley, Hon. Joel
Holaday, Hon. Duncan
Taylor, Hon. Gene
Yim, Hon. Randall A.,
DOCUMENTS SUBMITTED FOR THE RECORD:
[The Documents submitted for the Record are pending and can be viewed in the hard copy.]
Page 6 PREV PAGE TOP OF DOC
QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD:
[The Questions and Answers can be viewed in the hard copy.]
FISCAL YEAR 2001 NATIONAL DEFENSE AUTHORIZATION ACTTHE IMPLEMENTATION OF THE MILITARY HOUSING PRIVATIZATION INITIATIVE AND THE PRIVATIZATION OF MILITARY UTILITY SYSTEMS AND ASSET MANAGEMENT PRACTICES OF THE MILITARY DEPARTMENT
House of Representatives,
Committee on Armed Services,
Military Installations and Facilities Subcommittee,
Washington, DC, Thursday, March 16, 2000.
The subcommittee met, pursuant to call, at 10:05 a.m. in room 2212, Rayburn House Office Building, Hon. Joel Hefley (chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. JOEL HEFLEY, A REPRESENTATIVE FROM COLORADO, CHAIRMAN, MILITARY INSTALLATIONS AND FACILITIES SUBCOMMITTEE
Page 7 PREV PAGE TOP OF DOC Mr. HEFLEY. The committee will come to order.
This morning, the Subcommittee on Military Installations and Facilities meets to conduct an oversight hearing on the implementation by the Department of Defense (DOD) of a number of critical privatization efforts in the area of military family housing and military utility infrastructure. In addition, the subcommittee will consider the changes proposed by the Administration to the Military Leasing Act. In general, I have lumped all of these items under the broad category of asset management because what is at issue is how to bests utilize the existing real estate and infrastructure assets of DOD and the military departments to provide better facilities to support the military mission and enhance the quality of life for military personnel and their families.
This subcommittee has been very supportive in recent years of initiatives to bring private sector capital and better business practices to bear, where appropriate, on improving the condition of military infrastructure. However, no initiative can substitute for the continued attention of the Department of Defense to fund adequately the military construction and military family housing accounts, as well as funding real property maintenance beyond the level required for bare sustainment. I continue to believe that the department has not provided adequate funding, either in the current budget request or over the course of the current Future Years Defense Plan (FYDP), to begin to address the real requirement to modernize and recapitalize military infrastructure.
There is often a lot of talk about best business practices from DOD when it comes to new authorities to privatize or to outsource certain commercial functions. However, it is never a best business practice to fail to invest in basic maintenance or new facilities when they are required. No successful business would operate that way; yet the Department of Defense continues to do so. At some point, the department must recognize that privatization alone cannot solve all of its infrastructure and support problems. There are, unfortunately, no substitutes for basic investment. Having said that, I continue to believe we should innovate where possible, keeping in mind the inherent military mission of our installations and the unique support systems upon which military personnel and their families depend.
Page 8 PREV PAGE TOP OF DOC
For those reasons, the subcommittee previously opposed the insertion of broad based commercial and retail development as a component of projects under the military housing privatization initiative in order to ensure the continued viability of the resale system that supports critical morale, welfare and recreation programs. Additionally, the subcommittee insisted that the privatization of military utility infrastructure take into account unique security requirements and that systems support sensitive activities be exempt from the privatization effort.
As the military services begin the process of implementing new pilot projects to enhance the value of military real estate assets at Ford Island, Hawaii, and at Brooks Air Force Base in Texas, I continue to believe that it is critically important that Congress exercise oversight of leasing activities and have visibility over financial flows, particularly on expenditures the services may make from any revenue which is generated by these new activities.
In a broader expansion of permissible military leasing activity, I believe we must be careful not to encourage activities inconsistent with the military mission of the installation. Within that framework, however, I believe we can find a way to expand management flexibility for the military services that will enhance installations management and improve the quality of military facilities.
[The prepared statement of Mr. Hefley can be found in the Appendix.]
Mr. Taylor, do you have remarks you would like to make?
Page 9 PREV PAGE TOP OF DOCSTATEMENT OF HON. GENE TAYLOR, A REPRESENTATIVE FROM MISSISSIPPI, RANKING MEMBER, MILITARY INSTALLATIONS AND FACILITIES SUBCOMMITTEE
Mr. TAYLOR. Thank you, Mr. Chairman. I also would like to welcome our witnesses today.
The topics we cover today in our hearing are important. Given enough time, I am sure that we could devote an entire hearing to each of them. I understand with the compressed schedule that the Chairman has called for that is not going to be possible.
I would like to take the time only to make one observation on the idea of housing privatization. I support the concept. We are all appalled at the overall condition of the housing that our men and women in uniform have to endure, with two-thirds of DOD's housing stock in the continental United States judged to be adequate. To address this problem in the long run, I believe that the military housing privatization initiative (MHPI) continues to show promise as a part of the answer. However, I agree with you, Mr. Chairman, that we must not be given over to a tendency to want the privatization approach to solve all of our problems. In that, we must continue to search for the right mix of federal commitment in the form of military construction funds and private investment under the MHPI.
By way of example, I would like to point out that the military personnel in the Mississippi Gulf Coast are experiencing extreme frustration of having to wait for housing and very often settle for substandard housing. That frustration is further compounded by the prospect of having to wait for years for the MHPI process to provide relief for them. In a situation where market forces and critical needs areas keep the developers from wanting to compete for MHPI projects, the privatization concept falters. In the Mississippi Gulf Coast region where developers have so many other opportunities, the outlook for a housing solution for military personnel based on privatization in a reasonable amount of time is not good. In such a case, I believe it would be much more prudent and equitable for our nation to invest in military construction funds necessary to quickly provide the relief in-house.
Page 10 PREV PAGE TOP OF DOC
It is my hope that as we learn more about how to bring MHPI housing on line more quickly, we will be able to find the right mix of public and private funding and that the housing privatization concept will live up to its promise of providing high quality housing for our troops and their families.
Mr. Chairman, I look forward to hearing from our witnesses. I yield the balance of my time.
[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 (OSD) and the military departments who are principally responsible for the management of these key facilities initiatives.
The first statement will be offered by Randall Yim, 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 of the Air Force for Installations. It is as always a pleasure to have this group with us again.
Before we begin, however, the subcommittee is in receipt of two written statements for the record. The first is submitted by Philip Tolofson, executive director of the Colorado Springs Utilities, and Lee R. Cook, Military Utilities Privatization Manager for CSU. The second is submitted by the National Educational Association on the subject of military housing and privatization. I ask unanimous consent that both of these statements be placed in the record. Without objection, it is so ordered.
Page 11 PREV PAGE TOP OF DOC
[The prepared statement of Messrs. Tolofson and Cook can be found in the Appendix.]
[The prepared statement of The National Educational Association can be found in the Appendix.]
Mr. HEFLEY. Mr. Yim, with that bit of housekeeping out of the way we will turn the floor over to you.
STATEMENT OF RANDALL YIM, DEPUTY UNDER SECRETARY OF DEFENSE FOR INSTALLATIONS
Secretary YIM. Thank you very much, Mr. Chairman, Congressman Taylor, Members of the committee. Thank you again for the opportunity to appear to discuss further details on three important programs within our overall installation management programs. First, asset management through enhanced leasing of our non-excess facilities, second our utilities system privatization and energy management programs, and, third, our housing privatization. Frankly, these are all asset management programs. We need to view installations as assets, not as liabilities, and then, too, we really do view installations as integral parts of military missions, of our weapons systems, of our military culture. They will continue to be under funded, undervalued and their preservation just not respected.
At my last hearing before you, Congress emphasized the importance of adequately funding our installation programs. Once we get the money we do receive, we in installations then have the responsibility, the obligation, to spend what we receive as wisely and as cost efficiently as possible. I believe that the three programs that we are going to discuss today illustrate that we are trying to stretch as far as possible in an intelligent manner the resources we are able to obtain.
Page 12 PREV PAGE TOP OF DOC
Let me begin with the housing privatization program, and let me begin by thanking this committee for its interest in improving the quality of life for our dedicated military people and their families and also thank you sincerely for your constructive criticism of our important housing privatization, construction and revitalization programs. These criticisms have been most helpful, really most helpful, particularly since I know that you share our common goal of improving this housing stock for our people. Your concerns this past year, as well as the concerns raised by General Accounting Office (GAO) in its past reports and its current draft report entitled 'Military Housing: Continued Concerns in Implementing the Privatization Initiative,' have been catalysts for us in both our examination of our own programs and our efforts to significantly improve our performance. My written statement really attempted to outline in detail a history of our housing programs, what we have done in the past, what we are trying to achieve and what we are doing to make our programs as cost efficient as possible, make them better in essence.
While cost savings are a very important part of our program, this initiative is fundamentally about quality of life and doing what is right for our dedicated military members and their families.
Why am I here? Let me briefly address two major areas I think of concern. First, why are we doing this and why are we putting money on the table for the private sector? second, what are we doing to insure the best use of what we are putting on the table and that we get the best possible deals not only now, but in the long run, deals that will not fall apart in five to ten years from now.
Page 13 PREV PAGE TOP OF DOC We are doing this program because over two-thirds of our housing inventory in the United States is substandard. That is about 180,000 units. We are doing this program because all agree that fixing the housing program is a top priority, but an unfortunate reality has been that adequate military construction money has not been available to fix this problem within any acceptable period of time, and I do not expect Military Construction (MILCON) ever to be sufficient.
A problem of this magnitude requires attacks from all fronts. We must have a substantial housing privatization program, as well as increases in housing allowances, combined with MILCON to be able to fix this problem.
Congressman Taylor, I think I agree with you. Housing privatization, and the Chairman, is not the be all or end all solution, but neither is MILCON. MILCON would take us about $60 billion and over 30 years or more to fix this problem, and that is why the Secretary, Secretary Cohen, endorsed our three part program first by funding a plan and requesting legislation to increase housing allowances to eliminate the out-of-pocket costs paid by service members for off-base housing. Second, by increasing reliance upon the private sector to meet our housing needs through use of these increased allowances both within the existing markets and by aggressive housing privatization programs, and, third, by maintaining a strong military construction funding.
We have established a goal of fixing our family housing by 2010 and our barracks problems by 2008. Our services are on track with sufficient budgets to meet the barracks goal, but, frankly, we will have a difficult path to meet the housing goal of 2010, family housing, but we are going to give it our best shot. It is precisely because we have to push very hard to meet the 2010 goal that we must have a strong housing privatization program and analyze and use all of the tools given to us by Congress in the housing privatization authority.
Page 14 PREV PAGE TOP OF DOC
These authorities allow us to put some value on the table to attract private sector innovation and cost efficiency and best business practices, to leverage what we are able to bring to the table on at least a three-to-one and hopefully more like an eight-to-one or more basis. That means we can solve our housing problems eight times as fast as under a traditional MILCON program.
This raises very justifiable concerns by Congress. One, that we do not know what we are doing, and, two, because we do not have the necessary expertise we are putting too much on the table too soon, and, three, we are not watching the back end of the deal well enough. There is absolutely no doubt that the program has been executed much more slowly than anyone ever would have wanted. Absolutely no doubt about it. This is not a function, I think, that people are dumb or recalcitrant, but it is really a very complex and new program. We are not just talking about a construction program. We know how to do that.
These projects crash, if they are going to crash, not during the construction phase, but later during the operation and maintenance and the repair and replacement phases. So we had to both get better expertise on board about these long-term financing and management issues, but we also had to figure out, frankly, what we really wanted to get out of the program. We wanted to figure out what to ask of the private sector, what we should be asking for and how to protect ourselves in the long term.
I believe we have figured out some of that now, and the answer does vary depending upon the service needs and the locations, but as we answered the question we also figured out that what we were asking for, what we wanted, what we needed was more than what we could pay using the housing allowances we pay our people, and so as a result what we did is we created this development gap, this classic kind of American dream type of development gap. Let me illustrate it by a chart that is included in my written statement on page 11. I also took the liberty of putting a color version on your chairs. If I can ask somebody just to put that chart up briefly?
Page 15 PREV PAGE TOP OF DOC
[The Chart referred to can be found in the Appendix.]
Secretary YIM. Let me illustrate what this development gap that I am talking about is. Simply stated, experience has shown us that the total funds available combining developer equity and available private sector financing is normally less than the total development cost of what we want.
We create this development gap, which has to be filled by various uses of our housing privatization authorities, so again just notionally we want something that may cost us about $40 million. The developer throws in his or her own money. He can get private sector financing. Typically we do create a gap between the $40 million that it is going to really cost to do the whole deal and what the developer can bring to the table. What the housing private authorities allow us to do is put some value onto the table to bridge that development gap.
Now, what we do, you have authorized us to use 12 different authorities in the housing privatization statutes. We are not going to use all of them everywhere. We are not even going to use all of them at the same time. It really depends on what is the most effective in a particular situation and what is the least scored cost to us of using these development authorities. Let me illustrate it again by the chart, if I could.
[The Chart referred to can be found in the Appendix.]
Secretary YIM. For example, assuming we had a $6 million development gap, of course we could put $6 million on the table, an equity contribution. It is scored 100 percent. The cost is $6 million. That is of some benefit. It works in some places, but it is scored not favorably. Differential lease payments. The Navy is using differential lease payments. If the housing allowances are insufficient to really be able to fund the development costs over time, we can supplement the housing allowances by differential lease payments. The net present value of that income stream is scored. We get a little bit more favorable scoring. I am just notionally saying it may be $5 million out of the total $6 million, so we do not have to put up so much money up front.
Page 16 PREV PAGE TOP OF DOC
One of the most effective things is to convey some sort of equity position, convey a property interest, either by having a no cost or a low cost lease or conveying them title to some of the units that they are going to rehab. We have very favorable Office of Management & Budget (OMB) scoring on it. It is a score zero for us, and so that is a very effective way to bridge the development gap, but it is not always necessary. We do not always have to put that on the table.
Finally, just as an illustration, we may be able to provide direct loans, government loans, to bridge over the financing or supplement the financing. Usually that is scored depending on the interest or the payment terms at a budget subsidy rate, so again as a notionality I am saying it is scored maybe at half the actual value of the development gap, and again it gives us favorable finance.
Now, does the development gap always exist? No, it does not. Not always, but it does most of the time for three reasons. First, to protect our people in these deals we require that the private sector developers do the whole deal without charging our people more than the housing allowance, and since these housing allowances are statutorily limited to 15 percent below market, we require people to pay 15 percent out-of-pocket. A development gap is immediately created.
Now, Secretary Cohen's plan to eliminate this 15 percent out-of-pocket by 2005 will help, but not until 2005, and even then it will not solve the whole problem because there are two other reasons for the development gap.
Page 17 PREV PAGE TOP OF DOC The second reason is created by our own traditional on base housing assignment patterns. For example, junior enlisteds assigned to base housing built with traditional MILCON typically get a single family home with a number of bedrooms sufficient to handle the number of their dependents. These same junior enlisteds, if they live off base, could not afford the same type of product with his or her housing allowance, so they would probably only be able to get into an apartment.
When we privatize projects on base, we tend to require the developers to build or renovate units equivalent to the existing base housing, even though that is above what the housing allowances would support in the market, so there is no perceived difference or unfair difference between people of the same grade living on base in privatized versus government housing. We create this kind of historic then assignment type of development gap.
The third reason that a gap exists is by a unique risk, and this is whether real or perceived. It really does not matter, I guess, to the private sector whether it is real or perceived because they perceive it based upon future governmental actions such as deployments or base closures, and this risk effects, again rightly or wrongly, the availability, the cost and amount of private sector financing and thus adds either to the project cost or decreases the amount of available financial resources and again contributes to that development gap.
It is because that development gap exists in most cases that we have to put something on the table, even though I think we would all agree that the best deal would be where we do not have to put up any of our own money. Now, if we do have to put up some of our own money, then we have to assure that we get the best deal out of what we put on the table and minimize the risks that we have to keep putting money into a bad position, keep putting it into a bad or risky deal that begins to crash in the future, and are we doing a good job about using our money wisely. I think so, but we can do much better. We just can do better.
Page 18 PREV PAGE TOP OF DOC
This is the focus of this draft GAO study that last Friday I signed out a letter concurring with all of the basic recommendations. First, the GAO said that we need to get our act together and have a privatization and evaluation plan. I agree. Absolutely. We have one. It needs to get better. We have used private sector experts since about 1996 to help us develop evaluation tools. These have been good. They need to get better.
We have established, as I mentioned in my prior hearing before you, this Installation Policy Board. I have the pleasure of working with the gentleman to my right and, perhaps most importantly, more importantly, senior service engineers that really know what they are doing and people from the budgeting and planning community.
We are establishing basically a peer review and audit type so that we have some consistency upon the services. We vet issues, and when we cannot solve them at our level we frame it and raise it to senior policy levels. That quickly is possible. We will have a draft evaluation plan in coordination with these gentlemen and the Installation Policy Boards later this spring. We are going to get our act together. This is going to get better.
Second, the GAO criticized us that we have to have a life cycle cost analysis methodology. I agree. Absolutely. We have one. It needs to get better. It will. Our current review identified not only difference in methodology used by the services, but also how specific costs are derived. We have expanded our direction to the services on life cycle cost analysis to require them to include such items as consultant costs, construction inspection, long-term management issues. We are going to issue new guidance again in coordination through the services and the Installation Board later this spring. It is going to get better.
Page 19 PREV PAGE TOP OF DOC
Finally, the GAO said we had to get an integrated strategy, including a way to get some consistency in the determination of what our housing requirements really are. I agree. Absolutely. The services have taken different approaches. While I applaud and encourage the services to take different approaches using the housing privatization authorities to solve site specific problems, they should not have markedly different approaches to determining the housing requirements initially.
In addition to the Installation Policy Board, we are beginning a senior housing policy panel to integrate this issue not only among the services, but within my office, between my office installations and the people on the personnel and readiness side that set the housing affordability criteria and the housing allowances. This is a difficult issue. We are not going to be able to solve it this year, but we are going to get better this year.
So I think that we are watching the store on housing, listening to the concerns of this committee and members of Congress to solve the problem, but not at any and all cost, smartly and wisely with an analytically sound basis. We need your help in extending the housing privatization authorities, which will expire in February, 2001, so it would need to be done this legislative session, and in keeping our feet to the fire. I thank you for your support today.
Let me briefly touch on utility privatization. It is like housing privatization, an asset management program for us. We are primarily interested in cost savings, but also recapitalization of the aging infrastructure so it continues to support our missions requirements.
Page 20 PREV PAGE TOP OF DOC
Our goal is to privatize about 1,700 utility systems by 2003. We will allow exceptions, and we have really listened to this committee's lead on this, only where it is not economical or where unique military reasons such as security require us to retain these systems. We are aggressively pursuing privatization because I believe it makes sound business sense to do so. We believe that the public sector and private sector experts can more efficiently run these systems for us. We can take advantage of their constant infusion of best business practices and, frankly, their investment to upgrade our systems for us as many aspects of installation management we do not devote sufficient resources to properly maintain, let alone improve, our infrastructure. Utility systems are no exception. As a result, we are looking to privatization for a better, more consistent way to maintain, as well as modernize them.
The services report pretty good progress to meet the 2003 goal. In fact, the Air Force looks slightly ahead. We do not want them to slow down, but if we knew what we know now before we started them down this path several years ago, we would have requested that the service integrate utility system privatization with energy management where appropriate to maximize results. We are asking the services to do this now, but not at the expense of slowing down the utility system privatization.
Why am I talking about integration? Because the economics of utility system privatization are impacted by our energy conservation goals and our attempts to get better deals on the utility commodity market. For example, the amount of capital improvements that guys are going to be willing to put into privatizing our systems and improving them will be influenced by whether or not this company is also the company selling us the utility commodity and whether we are reducing demand by energy conservation or other measures.
Page 21 PREV PAGE TOP OF DOC
Rather than slow down the process of system privatization and add this additional layer of complexity, the Installation Policy Board is looking at a variety of products so that we do not have a lot of unintentioned but well meaning good results, that we do not leave too much money on the table, for example. We do not want people to enter into long-term agreements for power purchases that take away the incentive for people to come on and privatize systems. We in OSD need to take our responsibilities seriously to get some consistent contracting products out there, some consistent guidance, some economic analysis out there. We are going to get better on that.
A final area, enhanced use leasing. Again, this is asset management. Our proposal is to make better use of under utilized non-excess property by allowing others to make dual use of these facilities, capturing the revenue and applying them to installation requirements that are not fully funded by military construction or organizational & maintenance (O&M) requirements. This is an approach again that allows our facilities to be viewed as assets rather than liabilities. We want to realize the unused economic value of some of our facilities through leases to the private sector to generate added value, either cash or in kind. Congress has already permitted us to do this under 10 USC 2667 and to take some of the proceeds to fund under funded RPM, real property maintenance, or environmental restoration. We are proposing modest adjustments to this that would enhance the authority and align the incentives better with the installation commanders.
Important, we are asking for environmental indemnification if we cause contamination to extend to that to the private sector. We want to be able to accept more types of in kind consideration. We want to be able to apply the revenue from these types of leasings to facility related requirements without additional appropriation and to authorize use of cash proceeds for construction or renovation.
Page 22 PREV PAGE TOP OF DOC
Now, the big concern is are we trying to trick Congress and try to get this as a way to escape congressional oversight, so we are very concerned about it. We patterned our legislation after the minor military construction authority which requires us to notify Congress and to wait 30 days before we do any project in excess of $500,000 and to report annually to Congress about our leasing activities and the money we generate. We wanted to be sure that you understand we are not trying to escape congressional oversight. What we are trying to do is to keep this revenue down at the installation level so that we give an incentive to our installation commanders to reward best business practices.
Do we think they are going to chase this dollar and jeopardize some of their military readiness or military missions? I sincerely do not believe so because they are not rated on being landlords. They are rated on how they fulfill military missions. We also are going to have service oversights, and I think that we also have to depend in the innate integrity of our service commanders that they are going to prioritize the military missions.
Let me just conclude. Even though we seem to spend most of our time coming over here and begging you for money to meet various liabilities, you in Congress I think already understand that our facilities are our assets and that what we should do is to work to manage them as assets, not as liabilities, and attempt to realize some of their under utilized economic value to fund some of our facility maintenance and revitalization. I think the housing, the leasing and the utility programs are excellent examples of that asset management approach, and I would appreciate your support on our programs as you have in the past.
Thank you very much, Mr. Chairman.
Page 23 PREV PAGE TOP OF DOC
[The prepared statement of Secretary Yim can be found in the Appendix.]
Mr. HEFLEY. Thank you, Mr. Secretary.
STATEMENT OF THE HON. MAHLON APGAR, IV, ASSISTANT SECRETARY OF THE ARMY FOR INSTALLATIONS AND ENVIRONMENT
Secretary APGAR. Thank you, Mr. Chairman, Congressman Taylor, Members of the subcommittee. It is a pleasure to appear before you to discuss the Army's privatization and asset management initiatives. Let me also begin by thanking you for your strong support of our efforts to improve quality of life for our soldiers and your interest in effective asset management, which is the central issue for the Army.
Privatization is essential to our installations and facilities strategy. As we transform for fiscal year 2001 and beyond, we must also take giant strides to ensure that Army installations keep pace with that change. We intend to help the Army achieve its new overall vision by implementing a complementary vision for our installations. It reads:
''By the year 2020, Army posts will fully support and satisfy our war fighting needs while providing soldiers and their families with a quality of life that equals that of their peers in civilian communities.''
Page 24 PREV PAGE TOP OF DOC
A central part of achieving that vision is privatization and effective asset management. No single quality of life issue in the Army is as important as safe, attractive and convenient housing for our soldiers and families.
Family housing provides a major incentive for recruiting and retaining Army soldiers, yet when we ask them about their quality of life the lack of adequate housing is one of their deepest concerns. We have long waiting lists at nearly all of our major posts in the United States, and soldiers living off post are finding it increasingly difficult to rent or buy adequate housing. Our soldiers are career soldiers today. They are no longer driven merely by a mandatory service obligation, but are dedicated professionals, mature, stable, well educated, focused on the long term. More than half are married, and their family housing expectations are similar to their expectations of their civilian counterparts. Contemporary living standards in civilian communities consider more than a functional shell, square footage and bedroom count. The American home building industry is highly sophisticated and consumer driven. They know this business. Features like family rooms, well equipped kitchens, landscaping and extra bathrooms mark civilian housing even in affordable housing for the lowest income groups.
In short, our Army families need more than quarters, as we have provided for many years. They need a place to call home in neighborhoods and communities that are safe, supportive and attractive. Without the military housing privatization initiative authority, the Army simply cannot meet the Department of Defense goal to eliminate inadequate family housing by 2010.
As an example of what can be done and with the strong support of you, sir, and this committee, we recently awarded DOD's largest privatization project to date at Fort Carson. I am pleased to report that Fort Carson's housing privatization effort shows real promise and has already produced visible results, even in its first few months. We are using the lessons learned already from this project to improve and inform the process that we are designing for the succeeding three pilot projects and to maximize opportunities for interchange between the developers, the local community and the Army in our residential communities initiative or RCI.
Page 25 PREV PAGE TOP OF DOC
Following from the initial Fort Carson approach, we transformed the Army's capital ventures initiative, as it was then known, to RCI in July, 1998. Using the same authority, the Army intends to privatize approximately 12,000 on post family housing units by the end of fiscal year 2001, in addition to the more than 2,000 units at Fort Carson that have recently been privatized.
The three RCI pilot projects, Forts Hood, Lewis and Meade, are being developed and solicited using the request for qualifications process. For each of these posts we will select through open competition an experienced master developer to work closely with the Army and affected stakeholders, including the local community, to prepare a community development and management plan or CDMP. We are seeking not only capital from these development partners, essential as that is to our program, but also the four Es of the private homebuilding and real estate industries, the entrepreneurialship, the efficiency, the effectiveness and the expertise that mark the best of private enterprise. Their capabilities will leverage our assets to the benefit of Army soldiers.
After we review the deal structure with Congress and others, the Army will implement the community development and management plan in each of these three succeeding pilots through a lease, a contract or a limited partnership type agreement with the developer and will use or at least consider the various tools to fashion the best approach for each. The community development and management plan under the strategy is not simply a blueprint to build housing. It sets family housing in the context of its neighborhood and adjacent communities, both on post and off post. That is the genius of large scale master plan communities in the private sector in this community, and it is one of the most powerful levers of housing privatization for the long term.
Page 26 PREV PAGE TOP OF DOC
We are also taking a number of steps to strengthen the oversight and management of the program. Among them, we are introducing a program management information and reporting system framework alongside the Army's standard accounting and budgeting system, which is not well suited to reveal our true costs, our total values, our performance measures and the benefits of privatization.
Second, we are designing a policy issue process to more rigorously analyze the dozens of policy issues that are already arising as we begin Fort Carson and we anticipate the first planning and negotiating agreement at the other three posts.
Third, we have set up an integrated process team or IPT fashioned on the overall Defense Department model for large scale weapons systems and a management committee which I chair to include three other Assistant Secretaries whose policies affect or will be affected by this program, the commanding Generals of the two major commands in our pilot, U.S. Army Forces Command (FORSCOM) and the Military District of Washington, the Chief of Engineers and the Director of the Army staff. We will meet monthly, and there are subcommittees, and there are subcommittees and working groups including many other constituencies as part of this formal structure and process.
Fourth, we are deepening our analytical capabilities along the lines that Mr. Yim suggested to evaluate not only life cycle economics, but also the full capitalization of debt and equity as the project moves and matures through its entire life cycle and the intangible as well as tangible costs and benefits.
Page 27 PREV PAGE TOP OF DOC For example, the oversight committees have focused in great detail in recent months on the expenses associated with setting up privatization, consultant costs and the rest, and we have spent an enormous amount of time analyzing and responding to those requests, but the context of those expenses is, in our view, much greater. The savings to be generated, the leverage of scarce public dollars with private capital, the speed of achieving results once development begins and the quality of the end product, those sorts of analytics have to be developed in a much more robust way and set the front end costs and issues into a proper context.
Fifth, we have begun a formal dialogue with Housing and Urban Development (HUD) on how there are lessons learned especially in affordable housing, which really is the public policy context for a large portion of our stock, and our historic housing can help. We fully support DOD's proposal to extend the authorities beyond February, 2001. Without them, we will not be able to meet our goal to eliminate inadequate housing by 2010 or to fully engage the talents and resources of private enterprise. At the same time, we will continue to use a combination of privatization initiatives and traditional military housing construction funds to modernize our family housing as part of a three-prong strategy mirroring that of the department.
Privatize on post wherever it is feasible, increase housing allowances to eliminate soldiers' housing costs off post and apply MILCON in those locations where the private market will not support adequate military housing. This is an exciting but also intensely busy time for the Army as we address this central problem and strive to provide quality housing and other community facilities. Our goal is to work with you and your staff and the other committees as appropriate to provide the best program we can and to use the tools of privatization and the underlying philosophy as a central element of that strategy.
Page 28 PREV PAGE TOP OF DOC Because our utilities privatization situation is in context with the department as a whole and you have the written remarks, let me, if I may, just close with a few comments on asset management and then certainly finish up with questions you may have about our utilities systems privatization issues.
Our asset management situation is almost as severe as our housing problem. As the Army has downsized, we have held onto assets that are under utilized and deteriorating. We own and are responsible for more facilities than we need to support our mission or can maintain with current and projected budgets. Some of these surplus facilities represent resources that, if properly handled, could be better used to advance our mission and close some of the gaps that you in your opening comments referred to, Mr. Chairman. Because decision making authority is so widely dispersed, a broader strategic view of asset management is particularly important. We need to consider how best to utilize our assets within the context of the many competing priorities the Army faces.
We are, as you know, changing the way we have done business in the past by pursuing an installation strategy to reduce costs through innovative practices and realize savings that will allow increased spending for readiness modernization and soldier and family well being programs, including facilities modernization. To maximize returns on these assets, we must manage them in a more businesslike manner. In many instances, property currently restricted to exclusive Army use has a much higher potential value for other purposes. Inherent physical attributes of Army land and facilities, as well as proximity to existing public infrastructure, can make Army installations attractive for other economic market supportable functions that could generate significant additional value if they do not infringe on military mission.
Page 29 PREV PAGE TOP OF DOC The principal tool we have now available to use, Section 2667 of Title 10, provides the legal authority to lease non-excess real property. We have been able to put a modest amount of our non-excess assets to more productive uses through leases executed under the 2667 authority. Passage of DOD's proposed enhancements to that, which are in this year's legislative package, would permit us to enter, within limits, public/private partnership arrangements with developers and lease Army land and facilities to them on a long-term basis, which would in turn enhance and support our mission and again close some of the funding gaps that you have referred to.
We have to begin now, in concert with the new Army vision, to manage our Army posts as strategic assets, not simply as a collection of facilities and projects. To do that, we must fix a fiscal model that is now suited to the long-term investments you make through the Army to create unique and valuable real estate assets.
In closing, Mr. Chairman, we are pursuing privatization with both vision and vigor. There are significant obstacles to achieving the vision that both you, these committees, and we wish to pursue. We see this as a long-term issue of partnership, both with the Congress, but also with the private sector, to harness these qualities and capabilities or entrepreneurship of efficiency, of effectiveness and expertise wherever we can, but these have to be seen as true partnerships, not a them and us, not government versus business, that recognize the benefits that derive from a balanced relationship where there are shared goals and expectations over a long period of time and that yield best value to the Army and the government, not simply the least cost.
In doing that, we must protect our military culture, priorities and capabilities even as we strive for improved cost efficiency and effectiveness.
Page 30 PREV PAGE TOP OF DOC
Mr. Chairman, this concludes my opening statement. I look forward to the discussion. Thank you.
[The prepared statement of Secretary Apgar can be found in the Appendix.]
Mr. HEFLEY. Thank you.
STATEMENT OF DUNCAN HOLADAY, DEPUTY ASSISTANT SECRETARY OF THE NAVY FOR INSTALLATIONS AND FACILITIES
Secretary HOLADAY. Sir, I have a written statement that with your permission I would like to submit for the record and then briefly summarize our housing programs.
Mr. HEFLEY. Without objection.
Secretary HOLADAY. Mr. Chairman, Mr. Taylor, Members of the committee, I appreciate the opportunity to come before you today to discuss the Department of the Navy's housing program. As Secretary Perry said when he appeared before you, there is much to applaud in this year's budget in the area of housing.
Page 31 PREV PAGE TOP OF DOC First, the Secretary of Defense has proposed reducing out-of-pocket expenses for members who own or rent their homes in the local community, a reduction from 19 percent now to 15 percent in 2001 and, with Congress' consent, to zero in 2005. This will be a particularly welcome improvement for the three-quarters of our Marines and sailors who live in private sector housing, most of whom are located in high cost coastal communities. This year's budget also demonstrates the Department of the Navy's continuing reliance on traditional military construction and improvements funding to help meet our on base military family housing requirements. We are asking the committee to approve over $360 million to renovate or replace over 3,100 homes, 2,800 of them within the United States. This is more funds than enacted by Congress last year.
We are also proceeding with our housing privatization program or, as we refer to it in the Department of the Navy, housing public/private ventures or PPVs. We have seven previously authorized and appropriated projects under procurement that we expect to provide us with about 6,100 new, replacement or renovated homes for our Marines and sailors at a cost of about $105 million. All funding for these projects will come from prior year appropriations. We are not requesting any new PPV funds this year.
I believe that the department has developed a carefully considered, fiscally responsible acquisition and management strategy that will allow us to not only make wise choices of development partners, but also properly participate in the long-term management of these PPVs. That way we can ensure that our sailors and Marines continue to receive the quality housing they deserve at an affordable price throughout the life of the project. These PPV projects and the authorities that enable them are a vital part of the department's housing strategy. I ask your support in extending the Military Housing Privatization Act for another five years.
Page 32 PREV PAGE TOP OF DOC
On the bachelor housing front, we are exploring an initiative that would dramatically improve housing for about 25,000 junior sailors that are assigned to ships. When deployed at sea away from home port, all of our sailors must endure bunkbeds, sharing cramped living spaces with dozens of their shipmates and living out of a small locker. When the ship returns to home port, their peers who are married or assigned to aviation squadrons or submarines get housing ashore, as do all sailors assigned to shore duty. The single shipboard E1 through E4 however, are now required to continue living in those cramped quarters aboard ship. We are working out the details of a home port ashore program that would provide these sailors quarters ashore either in a Bachelor Enlisted Quarters (BEQ) or in the local community when their ship is in home port. While the program is not yet fully developed, we believe that the portion of the housing privatization authorities that applies to bachelor quarters will be an important adjunct to the home port ashore program, and I urge you to also reauthorize these authorities. Also, though not directly related to the home port ashore program, we are already in the initial stages of developing two bachelor PPVs, a Bachelor Officer Quarters (BOQ) at the Marine Corps Basics School in Quantico and a BEQ at the Naval base in Anacostia.
It has been a pleasure working with the committee to improve living conditions for our Marines and sailors. Whenever we ask, they perform their duties admirably in often difficult and dangerous conditions. Ensuring that they and their families have adequate quality housing when at home is one of our most rewarding tasks. I look forward to continuing to work with the committee to accomplish our goals.
Thank you, Mr. Chairman.
Page 33 PREV PAGE TOP OF DOC [The prepared statement of Secretary Holaday can be found in the Appendix.]
Mr. HEFLEY. Thank you, Mr. Secretary.
STATEMENT OF JIMMY DISHNER, DEPUTY ASSISTANT SECRETARY OF THE AIR FORCE FOR INSTALLATIONS
Secretary DISHNER. Good morning, Mr. Chairman, and ladies and gentlemen. I will just touch on some of the items that the Air Force will be ready to respond to in more details in the Question and Answer (Q&A) period.
We are very happy that this committee, in giving us the authorization with others to do the housing privatization in 1996, was rewarded when we opened up our first house in November of 1999 under that authorization. I had the privilege of handing the key to the first enlisted man and his lovely wife down at Lackland Air Force Base, and they moved into a home. Only if you were there could you appreciate that the first unit to be delivered under this authorization and why it means so much to our men and women of all the services, but a very, very telling, telling experience.
Then in February, Secretary Cohen and others went down to have a ribbon cutting down at Lackland where we opened up the remaining 92 units in phase II, which are now lived in by our airmen and airwomen, so this committee should take great credit. Because of your support for that, the Air Force has not delivered on the housing privatization.
Page 34 PREV PAGE TOP OF DOC
I took some numbers and just looked at because as we agreed in 1996, we wanted a balanced program. Housing privatization was not to replace housing by MILCON, but between the two would be balanced. It would be a way that we could use the private sector, in addition to MILCON, to provide the houses for our men and women. I ran out just to the projects that we have that we are looking at. They all have not been approved by OSD, nor have we notified you on them, but I racked up something like 8,800 units. Just using that and the amount of dollars that we think we would need through consultants and through scoring, those things that we need to put on the table to help them as Secretary Yim testified to, would need approximately $150 million. If you just use $100,000 per unit, that would be over $1 billion that we would need in MILCON. Now, that is a pretty good rate of return, and I compliment all of you because you gave us the tool to be able to go in and do that.
It is somewhat lethargic. I agree with Secretary Yim. We still need to move faster on that, but the telling is still there. As we grow into that, we will also be able to give a little bit more experience on how is it working.
The person who now owns, operates and maintains the unit, how are they doing? Is the escrow account established for capital improvement, is that being properly monitored, et cetera. Now we are into the execution of the financial plan.
We are planning to buy down from 15% over the next 5 years until 2005. We will get it to zero to help them. Most of the housing, as you know, are for our enlisted and not for our officers.
Page 35 PREV PAGE TOP OF DOC We also feel that the dollars that are put on the table, two of our projects so far we looked at. There will be zero scoring at Charleston and at Little Rock. Those two areas will not require a dollar of taxpayers' to be able to privatize those projects as we look at them today. Very telling in underscoring the 1996 authorization.
Number two is unaccompanied housing that was mentioned earlier by Secretary Holaday. The Air Force currently does not have any projects for unaccompanied for our dormitories, but we would like to see that authority extended because we do share between the services, and Doc has been very kind to share the information on what he is doing here in Anacostia and over in the Washington, D.C., area. We want to look at that because if there is another way to do that type of leverage, we certainly want to do that, and so I also ask, the Air Force also asks, that we extend that unaccompanied housing authority.
In the area of utilities, that law, as you know, is 1998. The Air Force has looked at over 600 specific utilities, has now focused on 435, the remainder being either set aside for readiness or have already been privatized over the years to do about 435 individual units over 31 or 32 bases. We will complete this, another privatization approach, 12 to 18 months in advance of where we thought we would be, and that is OSD wanted us to be completed by 2003.
At Brooks Air Force Base, the term used by Secretary Yim is asset management. We have the authority, as this committee knows, to look at that and see is there a way that the Air Force in the instant case could be used elsewhere, I presume with the other services where we could leverage our assets, where we could take a value that is there and working through the City of San Antonio in this case be able to work with them and then subsequently with the developer through them to be able to weigh and balance the cost to run Brooks Air Force Base against what that property value, which is currently under utilized, could be done. We are very pleased. The request for information (RFI) that both the city and the Air Force agreed, industry input, is on the street. We will have information coming in on that at the end of the month and into April. Meetings with the city, Mayor Peake, a very interesting and progressive out-of-the-box thinker, is just great. We have been able to work with him. We have had five meetings with him and his team that he has put together. We have just released the environmental impact statement that must be done, as you know, before you can either lease or do other things with federal property. We just funded that, and that is underway. The Air Force is very pleased with those types of authorities that this committee was out of the box in their thinking to be able to give us the authorities to move forward, and we think it was a good thing to do, and we continue to work with it.
Page 36 PREV PAGE TOP OF DOC
I have written comments, Mr. Chairman. If I may submit those to you and make those a part of the record, I would be pleased to do. We thank you for your stewardship. This may turn out to be the last time we appear before you, but we want to thank you very much for your personal efforts and personal stewardship, as well as all the ladies and gentlemen on your committee. Thank you, sir.
[The prepared statement of Secretary Dishner can be found in the Appendix.]
Mr. HEFLEY. Thank you. Without objection, all of our full statements will be put in the record.
Mr. TAYLOR. Secretary, I am going to open this up to all of you. I personally have, with the inquiries I have seen, been very disappointed in the privatization effort. The basic response I have heard is that well, if the government will build me a building and give it to me then I will rent it back to you. I would like to hear specifically some instances where in other places of the country that the response has been better than that.
The second thing I would ask you to comment on is do we have a mechanism to take advantage of downturns in the housing construction market? For example, and maybe what I am seeing is because of the strength of the south Mississippi economy, our guys are making so much money in the private sector that they literally want something handed to them or they are just not going to bother with it, but that is not always going to be the case. There are going to be cycles. There are going to be times when people in the construction business are looking for some of those places. Some of those times and some of those places are going to be near bases where we need housing. Is there a mechanism where within the Administration you can respond to those downturns in the economy and say doggone it, we have an opportunity in Albuquerque. Those people are desperate for work. We can put something out for bid. We are pretty sure we are going to get good prices. Do you have within the Administration a mechanism to respond to downturns in the economy so that you can get some bargains when they present themselves?
Page 37 PREV PAGE TOP OF DOC
Secretary YIM. Well, let me respond to the second question, if I could. I will let the services talk about specific projects.
I think the mistake that we were making initially in the housing privatization is we threw everything on the table, and we did need to throw all of the tools on the table. Of course, as a private sector guy if everything is out there, I am going to take it. It is free candy for me. I am going to use it. In certain areas we had difficult housing markets because of the housing boom. We needed to put good tools on the table, give them value to bridge that development gap that I talked about as necessary. Other areas we did not need to do that, and I think we have learned that yes, we do not need to put it all out at once. We have to figure out the most effective combination. That is what I view as the most effective mechanism for us to take advantage of changes in the housing market, the housing boom, the development community, is to really put out instead of telling them this is what we want and this is what we are going to give you is to tell them just what the product is that we want and let them propose back to us either through the Request for Qualification (RFQ) process pioneered by the Army or the RFP process being used by the other services, come back and tell us how we can get the best deal. I think that is the focus, Congressman.
Secretary APGAR. Congressman Taylor, from the feedback we have had both at our industry forums and through a variety of other venues in the past 18 months, we find that the industry, and by that I mean both the private sector homebuilders and the large scale real estate developers in the land development/community development business for this program, are encouraging about their willingness to participate if they see a fundamental commitment by the government. To them, that means both Congress and the Administration and this department; a commitment to the program. After all, business people, which is my background, really want predictability in the ground rules, and if they do not see that they are not willing to commit for the long term, which is what we are asking them to do. If they do see it in public policy, then they will take us seriously, and to date that commitment, perceived or real, but it is very much perceived, is quite fundamental to their reaction. Where we have assured them over the last 12 months, and particularly in recent months, through their industry forums, as well as ours, that we are serious, that there is commitment and that we do at least have the authority and the resources to go forward with these various pilots, we have found the responses to be positive.
Page 38 PREV PAGE TOP OF DOC
So far with respect to the one privatization project we have in place at Fort Carson, although that is only several months old in terms of the formal award, the visible results have already been marked. Two hundred units which had been unoccupied and needed serious renovation were tackled within days of the formal agreement being consummated and were brought on line just before the holidays and were occupied. That was not only a symbolic gesture. That was a very real business decision and action to put a task force together with the development partner, put those units into inventory, get them occupied.
The reaction, as you would expect, from our soldiers and their families was extraordinary. They were grateful not only for the action, but for the results. There have been literally dozens of specific actions from landscaping and clean up to more fundamentals that have already shown up. We cannot say or claim more than initial facts, but the expectations should be positive if together we really can move forward with this program.
Mr. TAYLOR. Mr. Chairman, if I may?
Mr. HEFLEY. Surely.
Mr. TAYLOR. You know, the Chairman has in other meetings said to other representatives of the Administration that he would consider base closure if and when the Administration would step forward and say these bases are off the table. Let us just consider these other bases.
Getting back to the sense of certainty that businessmen are searching for, what can you offer to them as far as a long-term commitment, given the fact that the next Administration could very well call for another round of base closure and that every base in America is theoretically on that list? I would think what the Chairman is asking for would play into what you are saying. If the Administration, if the DOD, was willing to say these bases are not going to close in the next decade, these bases might close, these bases are most likely going to close, and then in those bases that you have said are off the table be willing to offer some long-term commitments for housing, I think that would solve what you are looking for.
Page 39 PREV PAGE TOP OF DOC
Secretary APGAR. With respect to base closures, I will respectfully defer to my colleague from the Office of the Secretary of Defense, but with respect to the specific privatizations
Mr. TAYLOR. Getting back to that sense of certainty, how do you give the business community that is looking to pay off this bill in a period of ten years or 15 years or 20 years? How do you give them that sense of certainty that they are looking for and at the same time assure the taxpayers who we all work for that we are not going to be guaranteeing someone rent payments for 20 years on a base that may or may not be there?
Secretary YIM. Let me step in and answer the base closure issue real quickly.
Mr. TAYLOR. Sure.
Secretary YIM. What we are doing is really two or three different things. The services are allowed to guarantee against the risk of deployments or base closures, and we are getting very favorable scoring from OMB about that, so the amount of the guarantee onlythe guarantee only kicks in, for example, if the guy cannot make his loan payments as a result of our decision to either deploy the troops or to close that particular installation. As a result, OMB does not score it at the total amount of the guarantee, but at the risk factor. It is typically like three or five percent, so we are getting pretty favorable scoring on the types of guarantees that we are laying in there.
Page 40 PREV PAGE TOP OF DOC second, we are asking people to
Mr. TAYLOR. I am sorry. Just for clarification, Mr. Secretary, you can do that right now?
Secretary YIM. Yes. Yes.
Mr. TAYLOR. For how long?
Secretary YIM. For the length of the transaction.
Mr. TAYLOR. Twenty years? Thirty years?
Secretary YIM. Right. Over the life of the financing. Again, it is tied to the financing.
Mr. TAYLOR. What is the typical length of time, for my information?
Secretary YIM. Typically they are getting at least 30 years financing, 20, 25, 30 year financing. The projects typically have a life beyond the financing of maybe about 40 to 50 years.
Mr. TAYLOR. But you can guarantee for 30 years right now?
Page 41 PREV PAGE TOP OF DOC Secretary YIM. It is a financial guarantee. We are not
Mr. TAYLOR. I am saying loan guarantee.
Secretary YIM. Right. That is correct. That is correct, and the scoring is good.
The second thing that we are doing is we are
Mr. TAYLOR. Up to what percentage of the total value of the project? Eighty-five percent? Ninety percent?
Secretary YIM. Well, again it depends on the financing, what they get. We are not guaranteeing them against their own typical financial problems or risks, so if they give us a crummy product or they are mismanaging the funds and they default, we do not guarantee against that stuff.
Mr. TAYLOR. But in an ideal world
Secretary YIM. Right.
Mr. TAYLOR. you can guarantee what percentage of the total value of the loan?
Secretary YIM. We guarantee 100 percent of the loan
Page 42 PREV PAGE TOP OF DOC
Mr. TAYLOR. One hundred percent.
Secretary YIM. against the contingency of those downsizing or base closures. Right.
The second important thing we do is we ask them to build to civilian standards, to commercial standards, so again the loan guarantee only kicks in if these guys default on their loan and they cannot offload the property in essence during a base closure.
Now, if we force them to build military unique houses, then they are going to have difficulty in a closure offloading these onto the civilian market. By allowing them to build to commercial standards, we hopefully minimize the risk that we would have to actually execute on the guarantee because they can offload the product into the civilian market.
Mr. TAYLOR. Back to my first question. Do you have any mechanisms to take advantage of opportunities that will from time to time present themselves as you have a downturn in the housing market and developers are out there trying to keep their work crews together and are willing to work for less money? Can you respond on a short-term basis?
Secretary YIM. No. The unfortunate answer is the Department of Defense cannot respond very agilely on budgetary changes. I mean, that is just the reality. The projects are funded through the military construction budgets, and then they are transferred into the family housing improvement funds, so if they were not budgeted or had some kind of cover in the budgeting process, we are going to wait another cycle to get that money in there, so the fact of the matter is the kind of monolithic structure that we have prevents us from being as agile as we would like in the private sector.
Page 43 PREV PAGE TOP OF DOC
However, the real agility is caused by not having the throw all of the toolsyou know, getting smarter, not putting all of the tools out of the table or people to pick up whether they need it or not. If we have good negotiating leverage, we do not have to put out as many tools or subsidy points to bridge that development gap. I think Secretary Dishner mentioned that he hopes to have a couple ofI have forgotten. Either Secretary Holaday or Dishner. There are a couple of projects out there that may not require any scored subsidy by the service.
Mr. TAYLOR. Thank you, Mr. Chairman.
Mr. HEFLEY. Mr. Ortiz.
Mr. ORTIZ. Mr. Chairman, I would also note that once again those nose to the grindstone Democrats are here.
Mr. HEFLEY. I am sitting here just hoping there is not a coup in the making.
Mr. ORTIZ. Mr. Chairman, thank you very much for saying we did not have anything else to do.
Page 44 PREV PAGE TOP OF DOC
Mr. HEFLEY. I will tell you. We have a very loyal bunch of Democrats in this committee, and I am a little concerned over here on my side.
Mr. HEFLEY. Now try to take us over.
Ms. FOWLER. I heard the Chairman calling, I think.
Mr. ORTIZ. Thank you, Mr. Chairman.
This is a question for Secretary Holaday, and I think he has an idea as to what I am alluding to, but the next PPV in our projects in South Texas have been languishing for almost two years. Is the delay being caused by the process that we have in place now? Do you need more congressional guidance to speed up the process or less? Are you getting mixed signals, or is the problem in the Pentagon? How would you suggest that the process be changed to speed up getting new housing for our South Texas service members because as you well know, we have been waiting for two years. They say we are going to get it. We are going to wait. It is coming. You know, time just flies by, and we have not got anything. What can you
Secretary HOLADAY. Sir, that is an awkward question. I am afraid my answer might be even more awkward.
The good news side of this is that this last year we were able to improve housing projects that are already in place in Texas by using the differential lease program, the authorities that we have available, to bring the out of pocket expense down to zero for our service members who are in the housing projects at Kingsville and Corpus Christi, and we were able to do that fairly rapidly, even though it involved renegotiating the contracts with the developers that were in place.
Page 45 PREV PAGE TOP OF DOC
The second project we have in Kingsville we expect to award this summer. The project in South Texas has been delayed, and we probably will not award that until early next year. The delay, the current delay, in South Texas, the one that will be at Corpus Christi and Ingleside, is partially a result of some problems within the Pentagon and partially the result of some requests we received from the developers for an additional amount of time to submit their technical and financial proposals.
As you might recall, sir, the Department of the Navy is using a two-step process where we first go out and ask for qualifications from developers and then follow that up with those people who we believe are well qualified and ask them for technical and financial proposals. Again, in South Texas we have had an issue where the developer community has asked us for additional time to present their bids.
Frankly, I would like to see the process to be streamlined. I understand there are concerns within the Congress, however, that since we are in a new program where we need to demonstrate our success and our ability to work with the new tools that we have to have additional oversight both within the Pentagon and also in the Congress that we do not normally receive with the military construction program, and that is adding additional time to our ability to be able to get housing projects quickly on line.
Mr. ORTIZ. My other question would be will they be affordable, because at one time, you know, we had to come up with a supplemental because the rents were too high. Some of the junior enlisted people or even officers, especially the enlisted people, had to put money out of their pocket.
Page 46 PREV PAGE TOP OF DOC
Secretary HOLADAY. Sir, all of these projects will be at zero out of pocket, all the new projects.
Mr. ORTIZ. All of them?
Secretary HOLADAY. Yes, sir.
Mr. ORTIZ. Okay. Very good.
Now, what decision has the Navy made regarding whether Texas Navy bases are wholesale or retail electric customers?
Secretary HOLADAY. We have within the area in Corpus Christi, we have a finding from the Texas Utility Commission that we can act as a wholesale customer, and part of that is because of the specific nature of the way the Navy does business.
We have a public works center that buys the electricity and then retails it out to our other Navy activities in the area, and we can plan on continuing using that authority as long as the Texas Public Utilities Commission allows us to do so.
Mr. ORTIZ. I just have one short question, Mr. Chairman. I was not able to be at the last MILCON meeting because we had a committee hearing at the same time, but, Mr. Holaday, what is the source of funding for the Navy College? I know this is nothing to do with today's hearing, but the Navy College office concept. Are base commanders having to pay for implementing it out of existing base operating or real property maintenance funds? Maybe you can enlighten me a little bit on that.
Page 47 PREV PAGE TOP OF DOC
Secretary HOLADAY. Sir, I am going to have to take that for the record, if I may,
Mr. ORTIZ. Okay.
Secretary HOLADAY. and get back to you on it.
Mr. ORTIZ. Very good.
Thank you, Mr. Chairman.
Mr. HEFLEY. Thank you. I think on this vote what we are going to do is if some of you would like to run and vote and come back, we will just continue. I hate to keep this esteemed group waiting while we have to go vote since there is just one vote.
Mrs. Fowler is going now. If any of the rest of you would like to, and we will just keep plowing through here.
Mr. ABERCROMBIE. Will this panel stay
Mr. HEFLEY. This panel will stay.
Mr. ABERCROMBIE. until we can get through it?
Page 48 PREV PAGE TOP OF DOC Mr. HEFLEY. Yes.
Mr. ABERCROMBIE. Okay. Thank you, Chairman.
Mr. HEFLEY. Mr. Reyes.
Mr. REYES. Yes, sir. My turn?
Mr. HEFLEY. Your turn. Sit down.
Mr. REYES. I am always here. Why am I being penalized?
Mr. HEFLEY. The reality is it was Mr. Abercrombie's term, but he is getting ready to go vote.
Mr. ABERCROMBIE. I will do the questions.
Mr. HEFLEY. Would you rather do the questions? All right. Then we will do you.
Mr. ABERCROMBIE. Okay.
Mr. REYES. I was ready.
Mr. ABERCROMBIE. We both have to vote one way or another.
Page 49 PREV PAGE TOP OF DOC
Secretary Yim, thank you. I am sure you are probably already aware just from previous hearings and discussions about my concern on the higher allowances. You mentioned in your testimony, and I am paraphrasing slightly here, I expect. The higher allowances will increase the income available to private sector developers.
That worries me considerably because I am concerned about rental gouging, if you just take it from that side. That has happened before in Hawaii. At least anecdotally I have been told that it has happened elsewhere as well; that the increased housing allowance does not provide any more housing, that it does not do any more developing. It just allows existing units to be jacked up in price. People crowd in. Even though they are not supposed to be renting to more than two people or three, depending on local zoning and so on, they will bring in four or five singles and subterfuge. All kinds of stuff comes into it. Very little in the way of increased housing. Lots of increased price gouging, et cetera, profit taking.
How that translates then for private sector development, I am concerned about that, too, that prices just get jacked up and it becomes a means to increase profits not on the basis of what the market is really all about or what your intentions are, but what you construct or what Secretary Apgar has indicated in the past is the normal process of give and take in market forces.
How do you propose to keep theI am not so naive to think that just voting against it is going to solve anything, and I am not so naive as to think that voting against it if only as a protest would stop the increased housing allowances from becoming available to you, so what I am interested in is what do you propose, if anything, or what series of things do you propose to try to come to grips with what I hope you agree is a very real problem?
Page 50 PREV PAGE TOP OF DOC
Secretary YIM. I do agree. It is a problem and a concern to us. There are several things that we are proposing.
First is we are looking at various contractual mechanisms in the deals that prevent people from just pulling off excess profits because of increases, programmed increases in housing allowances, so, for example, we are requiring reinvestment accounts. There are provisions that allow us to increase if we gave them below market rents, the developer below market rents, for example, in use of our property, various mechanisms that we would like all of the services to incorporate into their deals. The four deals that have gone down so far have variants of these mechanisms to prevent essentially this excess profits or gouging issues.
The second issue is this is a function, I think, also of the new way of calculating basic allowance for housing rates. Previous to this year, previous to the experts, the Runsheimers, going in there and doing market surveys, we actually had people fill out questionnaires. the service people would bring back their own questionnaires, and the rates would be set based on the responses.
Now, if they got gouged or they were forced to live in substandard conditions because they were getting gouged, they would inaccurately report what the market rents were, and that exacerbated the problems, so if they were getting gouged they report higher expenses. We kick up more money. They would get gouged again. It became an endless cycle. Or, worse, if they could not afford it because they were getting gouged they would be doubling or tripling or quadrupling up. They would report less, and we would not give them enough. It would be perpetuating the cycle.
Page 51 PREV PAGE TOP OF DOC
In theory againI know that I am gun shy after engaging you on theory again, but
Mr. ABERCROMBIE. No, no. That is all right.
Secretary YIM. I believe in practice that the new way of calculating through market analysis with experts will help us get out of this kind of death cycle that occurred under the previous regs, so again it is difficult for us in DOD to control private sector bad behavior, but contractually we think we can take out that excess profit type incentive to gouge us and, second, I think from our personnel side how we calculated the Basic Allowance for Housing (BAH) rate.
Mr. ABERCROMBIE. Thank you very much. I am a little reluctant even to useyou are not going to offend me if you do not use the phrase excess profit. I am not trying to keep anybody from making a profit.
You know, one person's excess profit is another person's legitimate and necessary expectation, but I think there is a difference. I think you can tell the difference, though, if you have people in your department, I guess, and that is maybe what I am getting to, too, that are going to have to take a close look that understand market forces.
Maybe you are going to have to contract with somebody to be a kind of not an ombudsman exactly, but an auditor of some kind, someone that you can rely on, whose objectivity you can rely on, who understands real estate and development elements in a given area because you may even get to the point where you are going to have to say to some people look, you are not eligible for the housing allowance given what the agreement is here. This will be mostly going to people who are going in.
Page 52 PREV PAGE TOP OF DOC
The first object is for family housing, right?
Secretary YIM. Yes. That is correct.
Mr. ABERCROMBIE. Okay. So that is a little bit different than the single military personnel situation, but that is what I am driving at is that you have to have or the Secretaries have to have or the Commanders have to have or however this evolves some kind of not necessarily a formula or a mechanism, but some kind of institutional reference, I think, in the person of somebody who is capable, who is qualified, to give good advice as to how to and what kind of perhaps contract language to put into place.
Secretary YIM. All right. Thank you. We will
Mr. ABERCROMBIE. And anything that you can do that will help the Chairman put together something that will see that that is going to take place. I hate to have to get, report language or something, Mr. Chairman, that, mandates this kind of thing or orders it done because we do not know what the hell to order other than do not let it happen. You know, that is an exercise in surface concern, and it has no practical consequence that would be of use to you.
Secretary YIM. I will continue as we have in the past to work with your staff and see what we can put together.
Mr. ABERCROMBIE. Thank you, Mr. Chairman.
Page 53 PREV PAGE TOP OF DOC
Mr. HEFLEY. Thank you, Mr. Abercrombie.
I guess we are going to have to take a brief recess since all of us need to go vote. When Mrs. Fowler gets back we will have her just start up again, and we will be back as quick as we can.
Mrs. FOWLER. [presiding] We are going to bring the subcommittee back to order. In the interest of time, we will keep moving. The Chairman asked me to go ahead and start back up.
I think some of the other members will be coming back from the vote, but we will go on now to Mr. Rodriguez. Do you have some questions? You are up next since you and I are the ones here.
Mr. RODRIGUEZ. Let me first of all thank you. Madam Chair, thank you for allowing me to make a few comments.
I want to just continue to encourage you to move forward. I know that we are all optimistic about the situation at Brooks and the possibility of opportunities that exist there in terms of being able to leverage both with the private and public sector participation, and I want to encourage you to move on that.
Page 54 PREV PAGE TOP OF DOC One of the things that I had in terms of the utilities situation. At what point as we deal with utilities do we make sure that they are reliable, and what kind of exceptions have you looked at?
I know we have different state laws that apply in certain situations. I just wanted to get your feedback from that perspective in terms of the different types of, you know, utilities that exist, both the profit making and the municipally owned, as well as cooperatives and those other things. I wanted to get your view, Mr. Secretary.
Secretary YIM. Yes, Congressman. Well, of course we are concerned when we privatize utilities that we do not do something stupid to jeopardize our mission requirements, so one of the analysis on the financial feasibility is on the long term are we going to be getting the service we expect at about the same rate that we are currently paying.
Now, because there is a lot of competition with deregulation in various states, et cetera, then we have a lot of people that are interested in acquiring our services, our systems, and that raises some of the issues that you raise. Are we getting a lot of companies that do not have a good track record and that type of thing wanting to bid on privatization? We are concerned about it.
There are several things in play. The states, of course, are concerned, and they have their own regulatory commissions, and they regulate various people. There is a federal sovereignty issue for us about whether or not we have to adhere to a state designation of a particular franchise utility or a state designation of exclusive territory. Under the current statutory scheme, we believe that we are limited; that if more than one utility company shows an interest in acquiring our distribution system that we must send it out competitively, put out a competition, and the only exception to that is on the acquisition of the electric commodity itself because there is a specific statute that waives the federal sovereignty issue for the purchase for the electric commodity.
Page 55 PREV PAGE TOP OF DOC
All that being said, given that federal issue, we in general have been willing to have companies respect the state regulatory schema provided, and I think the test for us in the federal sovereignty is there is no substantial interference with federal programs. It does not negate the intent of the federal programs, et cetera, and so I think we share the concerns with the state that there is not a weak link being created in a larger utility system grid, that there are not a lot of fly by night companies coming in and trying to do deals with us to just snag market share or get a toehold and then try to spin out the systems, but we will vigorously protect the federal sovereignty issue.
Mr. RODRIGUEZ. Okay. When you talk about the federal, is that a federal law that applies across the board or just to the Department of Defense?
Secretary YIM. I believe that is a federal law that applies across the board because it is in Title
Mr. RODRIGUEZ. Does that also imply that, for example, a federal courthouse could decide to contract on its own or any federal building or maybe the building that I am in?
Secretary YIM. Fortunately, I have people that know really what they are talking about behind me.
Mr. RODRIGUEZ. Okay.
Page 56 PREV PAGE TOP OF DOC Secretary YIM. Apparently, the statute that I am referring to only applies to the Department of Defense.
Mr. RODRIGUEZ. Okay. Thank you. Thank you very much.
Mrs. FOWLER. Any other questions? Thank you.
I will go to my questions. First, I want to thank you all for being here. I just want to say to Secretary Holaday how much I have enjoyed working with you and appreciate all your help you have been to me with the Navy bases and trying to improve the quality of life of our young people there. I appreciate that.
I have a couple questions on the utility privatization that I would like to ask Secretary Yim. As I was looking through some of the information, as I understand it, DOD has interpreted 10 United States Code (USC) 2688 in a manner that would allow utility contractors that are not regulated by state utility regulators to operate DOD systems upon their privatization. How does DOD then propose to regulate these utility privatization contractors with regard to safety, reliability, fairness of rates and other aspects of operation in the absence of regulation by the relevant state authorities?
My second question is has the department developed any estimate of additional cost, for example, contract oversight cost, associated with allowing unregulated utility privatization contractors to operate the infrastructure that is now owned and operated by DOD versus allowing only contractors that are regulated by state authorities to operate that infrastructure?
Page 57 PREV PAGE TOP OF DOC
Secretary YIM. Let me just begin by prefacing it. It is not to the department's interest to have unreliable systems at all, and so I think that many of the states have standards for reliability and service that are very consistent with what the DOD would like to see. The issue boiled down to whether we are giving over our federal sovereign rights and in all circumstances respecting state regulatory designation. I think that was a step that we were not willingwe do not believe we have the statutory authority, nor were we willing to go that far.
However, it is just not to our interest to create a problem for a larger electric grid or a gas grid or a water distribution system, and so we are very concerned that we receive reliable service. That is the point of our utility privatization. I believe we are in favor of competition. That is really what our thing is, competition to be sure that we get the best deal. We do need to devote, and we do not have a budget line item that says okay, how do we assure that we are not going to have a reliability problem. Certainly I think that is a good suggestion. We need to really spend some time thinking about are we creating a massive oversight issue and what type of funding we need to do to protect reliability.
We have, for example, in the Air Force they have their base civil engineers that go out and assure and provide contract management, contract oversight. I would expect that to continue. The Navy has a public works department essentially that is charged with doing that same type of thing. It is probably difficult because the oversight is from many different pots, to actually figure out exactly a line item cost for those type of things.
Mrs. FOWLER. Well, I think again, and I am a big supporter of privatization, but unfortunately so often the Pentagon goes through these things and estimates the cost, and then we get out there and find out we are not saving, and we are creating more problems.
Page 58 PREV PAGE TOP OF DOC
When I saw the article the other day about this contracting out and the contracts that have not been overseen and the money that has been wasted and lost because of that, I am very concerned if DOD is going to take on a major new function of being a regulator of private utilities that have taken contracts on military bases, then I would hope there is some documents somewhere that relates to your estimate of cost, the costs and how you will be overseeing it, you know, how this would be pursued. If there are some documents, I would certainly like to have them furnished to the committee because I think that is the key question that we have to look at before we could proceed forward with this.
My other concern and question would be that it is my understanding that under DOD's vision of utility privatization that capital investments to improve or to replace distribution systems would essentially be amortized through rate structures. Who is going to then be making the decisions as to which capital investments are appropriate? Is this to be a matter solely under the base commander's purview, or is it something that would rise to higher levels within each of the services? These again are major questions because if DOD is going to be overseeing and regulating these private utilities and then we talk about capital investments, is DOD making those decisions? I mean, how is this going to work? We have very little information on that.
Secretary YIM. I agree with those concerns. It is a question of both resources internally to provide the oversight and then also expertise. This is a very complex issue that we are asking installation commanders, for example, to go get better rates in a deregulating market. I mean, these are what we train city managers over years and years of experience to do, and I will admit that we are not giving as much training as we really should on this extremely important issue to our installation commanders.
Page 59 PREV PAGE TOP OF DOC
Now, how are we going to assure that we are not giving away the store then? In theory again, what we hope to havelet me now say in theory. What we hope to have happen is that by combining the utility system privatization with some thought about the energy conservation and energy market aspects of it that we can get companies to invest in the necessary improvements and certainly on the baseline maintenance of our systems and pay for it through rates, in the rate structure. So in a deregulating market, for example, ordinarily if we are not privatizing the system or asking for upgrades we may be anticipating lower rates because of the competition. Perhaps we do not get the full benefit of the deregulating market in the competition and take some of the delta between the full amount of the rate reduction, and we accept a lesser amount to be able to fund the upgrades or capital improvements to the system.
That is the type of complexity that we need to be able to analyze, and this will raise the issue for us internally to what extent do we need to centrally manage it either within OSD or the departments, the services, and really the services prefer that OSD, because we are not operational, get out of their business, but we need to provide some general tools to do that oversight and management.
Mrs. FOWLER. Just a minute. I am just concerned because I do not think my question has still been answered then as to who is going to be making the decision as to which capital investments are appropriate. Is that going to be the base commander? Is that going to be the OSD? I mean, what level? Who is going to be making those decisions as we go down the road here?
Secretary YIM. It will be primarily the services and how they manage it internally. I believe most of them are looking at some aspect of centralized management of it. The overall OSD guidance says you need to look at the economics of this deal over the life of the system that you are going to be conveying, so I cannot say to you it is this deputy under secretary or this deputy assistant secretary.
Page 60 PREV PAGE TOP OF DOC
Mrs. FOWLER. Well, I guess I will tell you. I am really concerned. You know, we had this defense reform initiative directive that says that, you know, all contracts have got to be released no later than September 30 of next year.
You have already put out 250 Requests for Proposal (RFPs), and yet it does not seem to me that we have still a very clear understanding of the process by which this is going to be working. You know, you are out there putting out RFPs, and I do not know if people even understand what they are replying to. I would hope you could furnish to this subcommittee some clear and better information on if DOD is regulating these how this is going to be handled, what costs you are looking at as far as oversight and how you do that on these capital investments, a clear understanding of who is going to be making those decision. I am very concerned. How can private companies make very informed decisions to compete if they do not have this information because we could end up with a big mess down the road. A great idea, you know, and something that we should be pursuing, but not if it is not being laid out properly.
Secretary HOLADAY. Ms. Fowler, may I take an opportunity to address a couple of the issues that you raised from the Department of the Navy standpoint?
One of the things that we do as we enter into the utilities privatization is to do a thorough and complete assessment of the condition of the utilities distribution system that we are talking about privatizing so that not only the potential offerors know exactly what they are getting into, as you so correctly put it, but we know exactly what we are getting into. Many of our systems are in bad shape. Many of our systems within the Department of the Navy are in very good shape because we have taken care to maintain them over the years, but we think it is extremely important to do a full assessment to put that information out to the public when we do the RFP and in fact when we start the RFI process, so we are doing that. We have made a conscious effort to make sure that all parties know exactly what they are getting into and how to evaluate what needs to be done to the systems to bring them up to industry standards.
Page 61 PREV PAGE TOP OF DOC
Mrs. FOWLER. That still does not get into how much is it going to be costing DOD, you know, what the process is going to be on who is overseeing and how you are overseeing these contracts. I mean, I think this is a whole system that maybe you have the documents somewhere, and if you do we would like to see them.
Secretary HOLADAY. Yes. I believe that we have looked at those issues at least within the Department of the Navy, and we have taken a professional approach to it. I would be happy to discuss it further with you.
Secretary DISHNER. May I try, Ms. Fowler? The Air Force has at Tyndall Air Force Base, Florida, Air Force Civil Engineering Support Agency (AFCESA). AFCESA currently negotiates through the Contential United States (CONUS) all of the utility rates, et cetera. They go out. They meet with the state, they meet with the purveyor, et cetera. Additionally, and I know you understand with the privatization there are two parts to that. One is the lease of where the lines are. That is a real estate action. The other is the commodity. Of course, the two sort of go hand in glove.
The Air Force over the yearsit has nothing to do with utility privatization of 1998had 80 utilities already outsourced. They were either set up that way when the base was first built more than likely, et cetera. AFCESA is our center of excellence for that. They will look at these deals that come through from the utility providers to make sure, so if you want to know what level it is we want to make sure that our center of expertise that we have had there for years knows every utility, knows how they deal, etcetera. Then when someone else comes that they are not familiar with, they have a body of experience to be able to address that, so we feel comfortable that we can do that, albeit that after stating that if there is some specific in working with OSD that we need to reinforce, we certainly will do that, but this is not a new thing for the Air Force to do whatsoever. We have been doing it for years, negotiating with those that are purveyors of utilities.
Page 62 PREV PAGE TOP OF DOC
Mrs. FOWLER. What percentage of those are regulated by the states versus by DOD of those that you have privatized?
Secretary DISHNER. The rate? The percentage between
Mrs. FOWLER. You have state utility regulators which would apply in certain cases, and then in others it seems like it is going to have to be DOD.
In all of yours are the states overseeing thoseI do not know which states you have done them in or whator is DOD?
Secretary DISHNER. It is a mixture of two. DOD does not oversee Air Force utilities. We oversee our own utilities as far as contracting for those, making adjustments if we see that in fact their rates have increased too much.
Mrs. FOWLER. I have gone too long I know. I would love to get some more information on numbers.
Mr. HEFLEY. [presiding] I am glad, Ms. Fowler, you are pursuing this. I may repeat some of what you did since I was out of the room, but I am wondering where you have state regulatory systems, why reinvent the wheel? Why do we have to learn how to do it?
To answer some of the questions Ms. Fowler was asking about, who decides what needs to be done in terms of upgrading and who decides what the rates ought to be? You have competent regulatory authorities, public utilities commissions or whatever you call them in a various state that have been doing that for everybody else, for the private utilities, for the municipal utilities, for everybody else. They have been doing that over the years. Why would you not continue to have them do that part of it for you? Do you have any objection to letting them continue to do that for you?
Page 63 PREV PAGE TOP OF DOC
Secretary YIM. Part of it is that we have always protected the federal sovereignty issue on operation of our military bases, and under the current statutory scheme the current statute that requires competition when we privatize our utility systems at more than one utility company or more than one entity shows an interest, then that is a clear direction that we are not to waive federal sovereignty in that area. The only area where the statute allows us or authorizes us to waive federal sovereignty is in the purchase of the electric commodity itself.
Again, I am giving you a very technical answer. The fact of the matter is most installation commanders believe if everything is going well right now, I am happy with the guy that is providing me service, and why in the world, OSD, are you forcing us to go competitive and introduce an element of risk? There are some reasons why. Not only the federal sovereignty issue. We think that competition has been in general a very good, a very fair way of us getting the best deal.
Now, it raises all of these issues of oversight. You have heard that some of the services have their own centralized management. We have been investigating within OSD notin a defense agency. Not in my office, but in a defense agency that had expertise, for example, in fuels management for all of the service, the Defense Energy Support Center (DESC) out of our Defense Logistics Agency. Would they take over the lead executive agent, for lack of a better word, status on some selected utility system privatization and energy management. That is a good way to develop expertise in a core group. They are doing that in selected projects.
For example, in Texas, as Congressman Rodriguez knows, there is a regional demonstration project across service lines for utility system privatization and energy management. There is one demo project the DESC, Defense Energy Support Center, is doing in New Jersey and Pennsylvania for the procurement of the commodity, so we are aware of this issue.
Page 64 PREV PAGE TOP OF DOC
We are trying to take steps also internally within the gentleman to my right and others on the Installation Policy Board that I keep touting to you, and I think that is a very substantive body. It is not just a sham body. We meet every single month. We discuss these issues very, very seriously to try to get some consistency across service lines, and I think what OSD has done is recognize the complexity. We are augmenting our own staff with private sector experts that help universities or municipalities deal with these complex issues so we can try to get some expertise that will level the bargaining position that we have, so we are aware of this. To say we are there, that is not correct. We are not there. It could always get better for us.
Mr. HEFLEY. Well, I understand your views, Secretary Yim, and I think Secretary Apgar as well, that competition in the privatization of infrastructure has a lot of merit, but I think some of the local utilities and states which have not deregulated have a legitimate concern about the way we are proceeding.
Let me ask a couple of questions. In fact, it looks to me like in a sense that the department may have changed its mind on the question. Last year, Secretary Apgar, you testified that a strategy has been developed to take advantage of the diverse rules and regulations governing the CONUS utility industry. You went on to describe five different types of systems, including electrical and natural gas systems where state regulations restrict negotiations to current providers and those with no franchise utility territory and where federal acquisition regulation requirements for competitive procedures would apply. There was a very clear difference established based on the statute of the franchise as recognized by state law, and yet the Army and DOD are not proceeding in this fashion, it would appear. Am I correct in that or not? Are you paying no attention to the state law?
Page 65 PREV PAGE TOP OF DOC
Secretary YIM. DOD issued guidance after we had an attorney working group look at this issue. I issued guidance about a month ago, Mr. Chairman, that if more than one utility company shows an interest that we expect the services to go a competitive route and consistent with our statute. So to the extent that the services were looking at a different way, I will take the responsibility. That is the guidance coming out of my office and under my signature.
Mr. HEFLEY. And is it your position today that even under a competitive system like this you would oppose state utility regulation, or, in other words, complying with state law because of the jurisdictional, federal jurisdictional question?
Secretary YIM. You know, I think that I would have to say no, I would not. I am not soliciting this as legislation because we certainly did not clear anything like this through OMB in the building. In many cases we have very, very reliable services being provided to the bases, and the public utility commissions do much more oversight than OSD or the services ever could hope to do in assuring reliability of the system. I agree with that 100 percent. We will protect our federal sovereign rights to the extent that statutes do not waive federal sovereignty. If we were told differently, then we would consider changing how we are operating, but I do not want to also negate the benefit we believe exists through competition. Now, the fundamental guiding principle for us is are we going to get reliable service, and is it going to be a good deal for us. If there are other ways in which that mission can be accomplished for us, we would be very welcome of support to do that.
Mr. HEFLEY. I may have some other questions for you to submit answers on the record that are somewhat technical, and I will get those to you.
Page 66 PREV PAGE TOP OF DOC
Mr. Rodriguez, you I think wanted to come in on this again.
Mr. RODRIGUEZ. Yes. I think you have kind of hinted on it. In terms of my question, you have kind of answered it because I know that you talked about kind of a feeling like there is statutory restrictions in terms of allowing you the leeway, and yet the law, the contracting law, allows an opportunity for you to use what is in the best interest for the government in terms of utilization. Is there anything we need to do to make it more flexible to allow you that opportunity? Is that what you are saying, or is that what I am gathering?
Secretary YIM. I believe that there is a statutory prohibition against us just doing a sole source deal even with a state designated franchise utility if more than one utility company shows an interest in our systems, so we are just prohibited straight up under law.
Mr. RODRIGUEZ. If the state says you cannot compete within this area, then you are saying that the requirement allows you to compete in that area?
Secretary YIM. Right. The federal law requires competition, and federal sovereignty overrides a competing state regulation.
Mr. RODRIGUEZ. But you also indicated in terms of what is best, you know, for the government and that you would be willing to look at that flexibility?
Secretary YIM. I always welcome flexibility. I will tell you what my personal perspective is. I believe in competition, and I will look very closely if the services brought to usif the law was changed and the services wanted to go a sole source with a facility, I would look very closely at it to be assured that it was not just a convenience that motivated that decision, but there was really some economic and reliability underpinnings to that, and my office would exercise a great deal of oversight to assure ourselves of that.
Page 67 PREV PAGE TOP OF DOC
Mr. RODRIGUEZ. What you just indicated in terms of looking at the situation, that means that you can also assess the situation in terms of opening it up or not, but also assess it based in terms of looking and recognizing the state law or other guidelines and best interest of DOD and move on and sole source it.
Secretary YIM. I think that if we were not required to sole source, but were given the flexibility, that would be much moreI would be much more receptive to that type of proposal.
Mr. RODRIGUEZ. Okay.
Mrs. FOWLER. Just one question. Have any cost savings been built into the FYDP due to this utility privatization? If so, what?
Secretary YIM. I would need to actually analyze that a little bit better. What typically happens to us on that is that there is a concern raised by the installation commanders that when we privatize we then incorporate outside standards, and it may be that we did not maintain our utility systems to the standards that the privatized entity is going to be insisting upon, and so what we then trigger is a should cost, as opposed to what we are actually paying. We may not recognize an actual savings.
Mrs. FOWLER. But I thought the whole purpose of privatization was to save money, run these more efficiently.
Page 68 PREV PAGE TOP OF DOC Secretary YIM. Yes, and also to improve the reliability of our systems, so what we are also correcting is a chronic under funding of our infrastructure problems by relying on private sector investment.
Mrs. FOWLER. But you have mandated that all 1,700 of these systems have to be privatized unless due to national security reasons, you know, they get a waiver.
Secretary YIM. Or they are uneconomical, and that would allow the services to bring that issue straightforward to us.
Mrs. FOWLER. But I guess my concern is some of these are not losing money. I mean, some of these are very well run, and that does not seem to be a factor you are taking in. We could end up spending more versus savings, so I would really like to see some figures. I worry constantly because I see these figures that get put into the FYDP in saving money on outsourcing, and now I am worrying about privatization. I mean, what has been built in there? Is it going to be a savings, or is it going to cost more money? Again, my question on oversight. What is the cost going to be on that? Has that been factored in? These are bottom line questions. The buck ends up stopping here, and we need to, you know, have some better information.
Secretary YIM. I know that the Chairman shares that. I will commit to getting some answers with real numbers after I have had a chance to screen them and look at them to be sure I am accurate.
Mr. HEFLEY. We would appreciate that.
Page 69 PREV PAGE TOP OF DOC
Mrs. FOWLER. Right. Thank you.
Mr. HEFLEY. Secretary Yim, we discussed during your earlier appearance before the subcommittee this year the question of how the increase in the BAH might affect the need for housing privatization. I would like to take this opportunity to get a reaction from each of the Service Secretaries through a couple of questions. If each of you could be specific with regard to your own programs, it would be very helpful.
First, Secretary Cohen's comment is in excess of the BAH assumptions made when several current housing privatization projects and procurements were being developed, how will the increase in the BAH affect those contracts and the requirement placed on the contractors to finance upgrades and maintenance in those housing developments?
Second, what effect will full funding of the BAH have on the need for housing privatization on the base?
Secretary APGAR. Mr. Chairman, although the impact is at this point not completely analyzed, I think there are two elements to the issue.
First, raising the allowances is going to enable us to work with the developers to put more dollars into the projects on post to replace or revitalize units because the pool will be larger in the pilot privatization cases. That obviously will not be true everywhere, but it is likely to be the case in the privatization pilots.
Page 70 PREV PAGE TOP OF DOC The second element is the impact on post housing itself, and it certainly will have an impact, but it may be counterintuitive. The natural assumption I think so far is that it would reduce the demand for on post housing, but in the Army's case, at least in my personal view, that is not necessarily a clear conclusion because of the natural propensity for both commanders and soldiers to want to live on post for its convenience and services, not universally certainly. We have not carefully as yet analyzed that issue, dissected it sufficiently to give more than a superficial answer, and that is really what I have just given you.
Secretary HOLADAY. Sir, if I understood, there were two parts to the question, the first being what was the effect of the BAH changes on our ongoing contracts.
I will agree with Secretary Apgar. This is going to be somewhat of a learning experience as we do the detailed analysis, but we have in fact taken a quick cut and looked at each of the projects we have underway and the projects we already have executed in Everett, Washington, and Corpus Christi and Kingsville, and the BAH increase has not to this point had any effect on either the requirement for the number of houses that we are talking about building or affected the cost analysis, the life cycle cost analysis, that we have done that would compare whether we should do military construction or a privatization deal. In all cases it is still more effective for us and cheaper for us to do a privatization rather than using military construction. We are going to take a fresh look as we get closer to the point of actual contract award to see if there are any adjustments that need to be made in the number of houses that might be built or renovated under any of the ongoing projects and will be prepared to discuss that with you and the staff when we come over prior to contract award, so we will be able to give you specifics on each particular project at the time that it is most appropriate to do so.
Page 71 PREV PAGE TOP OF DOC In terms of the long-term effect on requirements for our military bases, again the jury is still out. It is something that we are going to have to take a look at as we develop both our military construction program and our privatization program, and we will be very careful to consider that before we come in and ask for any additional projects.
Secretary DISHNER. As you know, Mr. Chairman, the Air Force has the one project that has already been assigned and opened up, at least phase one. We need to look to see if in fact if that developer does come in and say now, you just changed the rate by which we signed this deal in August of 1998, and I ran my financial numbers based upon that BAH rate. He has not done that yet, but let us assume he does. We would look to see if there is a way to participate in that so that the risk, however, that he took with the given BAH rate, and now we increase the BAH rate. I think we have to balance that. He was the first one, and I hope will be the first of many, but at the time of whatever those BAH rates were that company had to come in and say on their side, not our side, do we want to do it, so we will have to look at that if they come in, balance the risk that he had against that.
The other thing to keep in mind, and I know you do, Mr. Chairman, and Members of your committee, is that the BAH goes for more than just housing privatization. In the case of Lackland, it goes for the 60 percent of the people who do not live on the base. You use those monies, you know, to continue the rent. Now, that opens up the door of well, is the rent at that apartment place that you live or wherever you do live going to go up? We need to be sensitive to that.
As far as future privatization projects, we need to look at that. We have always worried about it going down, and what does that do to a deal that you have just signed in August of 1998 when it goes down? Well, this is private sector. Welcome to the private sector. It is a good way to say that. When it goes the other way, we think there ought to be some participation in that, and we will just have to look at that in the future projects and build that in. That may be negative. Maybe something is going to happen that is going to go positive. By 2005, there will be more money in the BAH to do that.
Page 72 PREV PAGE TOP OF DOC
Secretary YIM. Mr. Chairman, may I supplement that
Mr. HEFLEY. Yes. Surely.
Secretary YIM. just very, very briefly? There was a lot of concern when we had that independent of the Secretary's new three-prong initiative about some declines in BAH rates in certain geographical areas as a function of the new way of calculating that.
I think that you I know are very aware that the Administration has said that we are not going to allow the geographical downturn, and we are going to grandfather in by geographical area, and we are coming up with I think about $27 million extra to assure that does not occur.
The key factor is I think for us Office of the Secretary of Defense (OSD) is insisting that there be some sort of lock box type mechanism built into the deals so that if we are getting windfall profits or excess money coming in here, they are being prioritized for repair and replacement and that the developer's profit is coming out at the bottom end of the deal, not at the top end of the deal. I think that is going to be an effective control mechanism. We are going to be screening the requirements very carefully because we believe that we are not changing our policy at all; that we should rely on the private sector for meeting our housing needs. There always is going to be an on base requirement, but we do not wish the services to arbitrarily inflate that requirement because it is maybe contrary to some of the rent studies that indicate that our people actually, if they had more money, would prefer to live off base.
Page 73 PREV PAGE TOP OF DOC
second, we hope that the services maintain a very robust MILCON and do not offset the anticipated increases in BAH from some of their own MILCONs, and we are going to ride herd on the services on that.
Mr. HEFLEY. I am glad you are going to do that.
Secretary Yim, you described in your statement the progress and how OSD manages the housing privatization process, and I do, as you know, remain concerned about the level of competition in some of the procurement processes the services are either using now or contemplating using in the future. I think we probably get the best value through head to head competition, and certainly at Fort Carson it appears that the development community had a very clear target to hit and by all accounts that I can see the contractor met or exceeded those expectations, or at least at this point it appears so. Does your office routinely review both the substance of what the services want to accomplish through privatization at a given base, but also the specific procurement tools they use to get there?
Secretary YIM. Yes. As I think Secretary Holaday alluded to, we provide a level of oversight, whether they like it or not, greater than we do on the normal MILCON programs. One of the things we do is to assure that not only that the funding is there, their financial viability that we would ordinarily do, what is the requirement there, but also have they complied with the competitive procedures.
For example, our office, the Director of Procurement, may be involved. If they are proposing a sole source type of mechanism, we have some concerns about that. All that being said, I know that what we may be alluding to is the Air Force's projects, for example, maybe considering privatizing the process of privatization by retaining some sort of agent, private sector agent, to help them in specific locations. I am receptive to that. I would like to look at it. We have not had final projects being presented to us to demonstrate that concept, but we would look at it. It may offer us some advantages, but we will actually specifically screen it to see if it runs afoul of some of our competitive requirements, as well as my bias for competition to try and get us the best deal. The biggest problem is if you do not do it competitively, how can you assure you really got the best deal?
Page 74 PREV PAGE TOP OF DOC
Mr. HEFLEY. Yes. You know, an issue that I do not think most of us thought much about when we were looking at this at the outset is the effect of privatization on the local school situation. The law provides for the inclusion of schools as ancillary supporting facilities, but none of the services has sought to include new schools in their projects to this point so I have a couple of questions, I guess.
First, Secretary Yim, what attention is OSD bringing to this issue, and do you have any guidance for us in this area?
Second, Secretary Dishner, at Robins Air Force Base I understand that you are planning on transferring control of the existing DOD schools there to local authorities. Maybe you could talk about that.
It is clear at Fort Carson where we have the first really big project going that they are going to need at least one additional school, so any of you that can shed light on this problem, which is a very real problem, we would appreciate it.
Secretary YIM. I think one of the biggest concerns on the communities is the impact aid and what affect is our privatization going to have on impact aid to school districts. Our bias, our preference, as we have indicated to the services, is that do not transfer the underlying ownership of the land to the developer as part of the privatization deals. You can go ahead if you need to and transfer the ownership of the houses built on the land, but not the underlying land itself. If the government retains the underlying land, then we will pay the higher level of impact aid because, of course, there is not an offsetting property tax bill that would justify the lower. I think that is our primary way of hopefully not negatively impacting the local school districts through our privatization efforts.
Page 75 PREV PAGE TOP OF DOC
Mr. HEFLEY. Have you given any thought, though, Secretary Yim? Have you given any thought to what we do about building in this school need into future projects, or what do we do about the projects we have gotten started now about that?
Secretary YIM. The housing privatization authorities give us the ability to include schools, and I believe I was looking through my notes to try to find the one that I think we actually did allow a school project. I am sorry. I just cannot find that off the top of my head right now.
Mr. HEFLEY. That is all right.
Secretary YIM. I think that is a good thing that we need to investigate, because we do impact the local communities that are struggling to maintain the proper level of education funding, and we should not be one of the additional causes of that problem.
Mr. HEFLEY. Secretary Apgar.
Secretary APGAR. Mr. Chairman, if I may, this is a central issue. One of the lessons learned from the Fort Carson initial experience which we have already applied with the anticipation at Forts Hood, Lewis and Meade is to discuss with the local districts and local jurisdictions what the impact would be based on the current projections of growth. That is one of those critical issues in the community development planning process which we will be tackling. Because you asked for ideas, one from private sector experience certainly with mature planned communities such as Columbia, Maryland, up the road and others around the country is to identify the demographics of that projected growth.
Page 76 PREV PAGE TOP OF DOC
Of course, we have more control in a sense over that than typical private community, private sector local marketplace does, and so isolate land parcels, infrastructure plans for that purpose in the initial plan, make the land available either free or at some other modest cost suitable to the local jurisdiction and assist through the economics of the development process to subsidize in some fashion some of the ancillary facilities that a school requires, playgrounds, auditoriums and so on, that are also community facilities or could be for multiple use. Those are ways that the private sector has tackled what it would otherwise have been to them a similarly difficult, if not impossible, problem and done it in a way that is complementary to the two sets of entities involved. Those and many other ideas are ones that in this process we really do need to tackle.
Mr. HEFLEY. Well, you know, you mentioned the payments and so forth. We really have never done a very good job of being where we ought to be on that. If we are not up to where we need to be, then the school districts really do need some kind of assistance to their schools. It is hard for us to convince Congressmen from the east sometimes where the federal government does not own much of the land that this is an important factor to those of us from the west where the federal governmentin the State of Colorado, they own a third of the State of Colorado. Somehow or other we have to get that across unless we have some direct way to subsidize it.
Secretary DISHNER. Mr. Chairman, at our Lackland project the Lackland school district, with the inclusion of all the family projected and children that would use the Lackland district, there still remains an almost 300 child deficit in the school system, so that is not going to impact. If in fact we can get the extension to the housing privatization and we continue to do this at Lackland, which we plan to do, meaning houses, et cetera, we would continue to work with the Department of Education, DOE, in San Antonio also to develop and put money aside, exactly what you are asking, to be able to support that impact. It certainly would be, and again not by desire, but it certainly would be disingenuous to have a great savings of federal dollars to do a housing privatization and then turn around and make that a burden on the community, which is really part and parcel of our privatization, so your point is well taken, Mr. Chairman.
Page 77 PREV PAGE TOP OF DOC
Mr. HEFLEY. Mr. Rodriguez, do you have a comment on this area?
Mr. RODRIGUEZ. Mr. Chairman, yes. Thank you very much for bringing up that key issue.
I know for the last three and a half years that I have been here we have some distinctions at Lackland, Randolph and about seven other sites and Fort Sam Army. There are some schools totally within the system, which means that they have no revenues whatsoever for construction purposes because they have no tax base. There are some that are quasi that have a combination of both federal and private and have a tax base, but for those that do not have any tax base they are basically at the mercy of both the Department of Defense, and in fact the ones in Texas, all seven I think, the ones in my area, have been cited for the lack of, you know, facilities that they have.
I am hoping that we really take a real close look at that issue that you have cited, Mr. Chairman, because I think that we need to look at construction both in terms of upgrading some of those units or barracks, and I make the comment they go back prior to the microwave, so there is a real need to kind of look at that in terms of quality of life for the children of those people in the military, and so I know that the Air Force and Department of Defense is looking at that.
For a while, if I can just add, I would go to the Department of Education, and they would send me to the Department of Defense. The Department of Defense would send me back to the Department of Education. I think we are finally getting a response.
Page 78 PREV PAGE TOP OF DOC
Secretary YIM. This was the basis of one of the General Accounting Office (GAO) criticisms that when DOD goes down the housing privatization path, they have to integrate between the acquisition, technology and logistics installation side of the house and the personnel and readiness side that runs the DOD school systems, and that is one of our priorities to try to do that better.
Mr. HEFLEY. Thank you.
Secretary Dishner, the Air Force I think has a reputation, and I think they deserve the reputation, for maybe paying a little better attention to the housing both for families and unaccompanied than the other services. You have made a lot of inroads I think in modernizing dormitories, and the family housing stock is in comparative terms better shape than elsewhere in DOD.
When we first started looking at this whole problem, we found that the Marine Corps was the worst and you were the best in terms of trying to have decent facilities. That is why it came as a bit of a surprise, I guess, that current Air Force planning shows a deep gap in the funding to support the effort to fix all of your inadequate housing by 2010. I understand the Air Force is on average about $360 million in each of the next ten years, a funding shortfall of $3.6 billion, and to resolve this, of course, is an important quality of life issue. Can you address this shortfall? Are you looking at realistic options to dig out of this hole? When do you expect in the absence of resolving this shortfall to hit the target of fixing the Air Force's inadequate housing units?
Page 79 PREV PAGE TOP OF DOC Secretary DISHNER. A two part answer, of course, and the first part is obvious that we certainly need to do by the extension of the housing privatization law would give us a chance to even approach that.
The second part, of course, is as the Air Force continues to look at its budget and its requirements for modernization, et cetera, that we have to balance those over some functional areas.
Thank you for the lead in. I think all services keep their men and women, you know, number one in their hearts, but have to weigh the same question. Do we buy more planes, in our venue more planes, or do we buy an equal number of houses for the people who fly the plane? We will continue to look at it. We do project that it would even be worse if we were not having the housing privatization. It would be something that would take us more than just until 2030 to get out of the hole. To me, that is something that we need to work on within the Air Force. We need to continue to balance.
There are three pillars that we have in the Air Force, aircraft, people and places. It is a very hard job to do. I sit on one of those boards that weighs where the resources, where the funding for and resources should come from for the requirements that we need. An interesting job, but one that we continue to look at.
I am hopeful, Mr. Chairman, that we can come to you next year and the following years and say that we have adjusted, that we are putting what we think is a larger amount in against housing since it is so dear to our quality of life of our men and women, but your observation is exactly correct, sir, for the 349, 401 and approximately $360 million for the out years through 2007 so far.
Page 80 PREV PAGE TOP OF DOC
Mr. HEFLEY. That is still a daunting task, is it not, even with privatization?
Secretary DISHNER. Yes, sir, it certainly is.
Mr. HEFLEY. Back to the Army. Currently there is a reprogramming request that you have pending for support of consulting services for the Army's housing privatization program. You know, this subcommittee I think you know wants to be as helpful as we can in facilitating privatization, but there are some aspects of this reprogramming that concern me.
First, it seems the Army is paying significantly more than the Air Force or the Navy for consultant support. In some instances the costs appear to be double or as much as four times what the other services are paying on a per project basis. I am not sure what the value added here is. Moreover, these were not unanticipated expenses in last year's budget request. It seemed to be adequate to handle what you needed.
Second, the source troubles me. I know there is not a great deal of loose cash lying around the family housing support account, so finding a source is tough, but it does seem that the deferral of demolition of unneeded housing units will simply add to the backlog of maintenance by keeping units standing that will go unoccupied.
We have been reviewing the information the Army has submitted in some detail. Mr. Secretary, I do want to give you the opportunity to discuss the request. I would also ask the other services to talk about their consulting costs and how the use of consultants are being used in privatization efforts. It would appear to me you can understand it a little better on the initial big projects like a Fort Carson or Hood or something like that, but as we get into it more do you anticipate that we will be learning more how to do it and the consulting costs will go down because they have helped us learn the process, and we can count on this curve being a downward curve?
Page 81 PREV PAGE TOP OF DOC
Secretary APGAR. Mr. Chairman, that appears to be at least a five part question, and I may not have captured all the parts, so
Mr. HEFLEY. I apologize for that.
Secretary APGAR. let me try and dissect it as best as possible. Please help me if the parts do not quite fit together.
Frankly, I do not believe we are spending too much or requesting too much in setting up what is a very complex, very innovative and for this department largely unprecedented program. The real test is whether what we are spending to set it up produces good value both for the taxpayer and obviously for the soldier.
Here is the best estimate, and it is an estimate, that I can give you at this point for the costs. Please bear in mind that until a month ago I had no accesswe had no accessto the data on Fort Carson because of the strictures of the procurement process, so that data is new. When Fort Carson's privatization was set up in 1995, rigorous cost collection was not anticipated. Until the last few months when we have bore down on this problem, our own internal accounting was not structured for this purpose. With all those caveats in mind, the total cost of privatizing the four Army posts that are now part of this program, Carson, Hood, Lewis and Meade, is approximately $18.1 million for the set up to the point that the award is made and the initial planning process in the case of the RCI pilots is completed. In other words, until dirt is ready to be moved as the industry would put it.
Page 82 PREV PAGE TOP OF DOC For Fort Carson specifically, as you know, it went through two procurement stages and now is actually in a follow on stage, so we have broken those costs down. If you deduct the cost of the second stage, in effect, because we do not want to double count, had it been done once in the procurement, the total cost would be about $15.3 million. That equates to about $1,000 per housing unit. Put that, please, in the context that we traditionally under MILCON spend between $6,000 and $10,000 per unit on planning and design cost, perfectly consistent, straightforward, well accepted, no challenges.
In the private sector, if we set those expenses in the context of the total development value the total development value of these four projects over their life is approximately $6.2 billion, and the set up expense in effect is about three to four-tenths of one percent of that value. That is how the private sector would measure the relative cost of set up and asset management. That is very good value because any sophisticated private sector investor such as a pension fund, insurance company or others would both set up and hire consultants, asset managers, portfolio managers, to perform effectively similar or identical tasks, and those fees, those expenses, would be in the range of half of one percent to as much as a percent and a half for active development projects as these are.
So I believe, quite frankly, that there has been some mythology about this issue to date. First of all, the data is imprecise at best. Poor, to be frank. We have devoted an enormous amount of time the last couple of months to imposing an information structure and an analytical structure to get at it because the accounting system is not very useful for dissecting these costs to begin with. I believe in addition, although I cannot speak for my colleagues, that the costs across the services on a per unit basis are also approximately the same, so although in total the project expenses to the Army because of the scale of our projects, which is far greater than both the Air Force's and Navy's, is larger on a per unit basis, which I would suggest to you is the relevant measure, these are in line.
Page 83 PREV PAGE TOP OF DOC
As to the context for looking at these expenses, we are leveraging public dollars at least eight to one and as much as 30 to one in the case of Fort Meade to produce the $6 billion of development value. We estimate on our initial models that the savings against that $6 billion of development investment will be approximately $1.16 billion over their lives.
The other relevant measure is, of course, expense to savings achieved as the quantitative benefits, the qualitative benefits of quality of product and, finally, the partly quantitative partly qualitative benefits of time saved, which at this point we can only measure in abstract terms, but we ought to be able to do these projects. Fort Carson already shows a little evidence of this in a far shorter time, though I cannot give you good metrics yet, but should be prepared to do so within a few months' time. Those are all parts of the context of this expense.
As to the source of funds, this also has turned out to be quite a complicated issue. We originally had anticipated these funds, but last year $8.4 million was deducted from our Army family housing account. We had to replace that, but to replace it put us over the ten percent threshold. I am no budget expert. This is, frankly, as arcane to me as what many of you have called arcane in the privatization economics, so I am personally still struggling with the structure of this, but we had to replace those lost funds within our existing structure, and that is where the reprogramming need arose. The source of the funds, those demolition units, equate to approximately 600 units. Although I would be the last to suggest that that is how we ought to source it, all of our financial and budget experts searching around could not find any other source. Given the lesser of evils, had there been another source I certainly would have been the first to vote for it.
Page 84 PREV PAGE TOP OF DOC Frankly, we are in a bind. There is no question that we need the support for all the reasons that I believe all of us have suggested to this committee before. We need the expertise. We need the deal making capability, particularly in the way that we have set up the pilot project. We have retained what we believe is one of the best advisors, in fact several, in the nation who represent those capabilities to support us. On a per project basis, this does equate to approximately $4 million, a little over $4 million, per project on average. Will that continue? No. There is no reason why after the initial set up, the initial templates, the initial experience curve, why that level of funding should be required.
How much should it be reduced? I cannot tell you. I would expect it to be in the range of 50 to 75 percent of that number on an ongoing basis and decline over time. After all, as you institutionalize both the philosophy and the skills, you expect any innovative project to reduce. Our procurement colleagues in the weapons side of our house tell me that that learning curve may take as long as ten years in the weapons system world. In this world, somewhere between five and ten years is probably the right measure as well. None of this will be solace to those who simply do not like the expense to begin with, and there seem to be many of those. On the other hand, in terms of prudent management and probity of public expenditure, of all of the experience at least that I personally have been able to bring to this issue from my past 30 years, I believe it is both well justified and hope that you will accept it.
Mr. HEFLEY. Comments from either one of the other Secretaries?
Secretary HOLADAY. I think first the Department of the Navy spent about $5.5 million through the end of fiscal year 1999 on consultants. That runs about 1.2 percent of our total development cost through that time, which is about one-fourth of what we would spend on planning and design if we were to be executing military construction projects. Our consultants, we believe, are necessary, and in fact we have been encouraged by people who have provided oversight to us, both within the Office of the Secretary of Defense and over here in the Congress to use experts in this manner, and I would like to echo again Mr. Apgar's remarks on this.
Page 85 PREV PAGE TOP OF DOC
Our expertise is not in the financial analysis or development of well thought out public/private ventures. We need to rely on the private sector to provide us expertise that we do not have in house, and I think it is reasonable for us to hire consultants who are experts in financial analysis to help us do overviews of the financial statements and the qualifications of the people that we are looking to do business with. Of course, that is what we are asking these consultants to do for us, so I believe that the expenses have been reasonable. I think that we have gotten a good payoff for them. I think that they help us preserve the public fisc and the public trust. It is well worthwhile.
With regard to how those expenses might change in the future, if anything I would expect them to perhaps go up as we do more public/private ventures. The cost per unit, while I have not calculated it, probably will stay the same or go down, but the actual dollar value may in fact go up as we expand our use of these authorities.
Mr. HEFLEY. Secretary Dishner.
Secretary DISHNER. Mr. Chairman, I will echo those two statements. The Air Force, over the last 22 projects that we have looked at in various stages, again only the one have we moved people into, began to do that at Lackland, which started at $1.6 million for a consultant, but for the 22 projects to date we have spent something like $10.1 million for that, average roughly $500,000.
I think that will continue. As I have said many times not to you, Mr. Chairman, and to this committee, that we need to use these sources for housing privatization because I do not think we should look to the military other than preparing them to go to Bosnia is what I state. We ought to use the military for that and then use the private sector to some degree, not totally, but to some degree, to give us that financial advice that we need. I do not think we need to have that as a core competency of the Air Force to be an entrepreneur. We need to appreciate it. We need to have the acumen and the management skills to review those consultant presentations, et cetera, to make sure that the government is still getting the best value for what we are doing, but I think the money is well spent over the years, steady.
Page 86 PREV PAGE TOP OF DOC
Whether it goes up and down, I do not know. I would hope that if this market economy that we are going, which has not been mentioned today, but depending on who you listen to when is the bubble going to break, and then what will be the need for private consultants? If everything starts to turn south and the market goes away, what will be the financial community who really carried the financial burden for housing privatization? The banks, the New York markets, et cetera, how will they approach that? I do not know what the future would bring, but I do agree that currently we do need to continue to use those financial advisors who have the expertise, the acumen and the experience that we do not possess in the Air Force.
Mr. Chairman, one other thing. I was handed this back on the question of schools. You had asked about Robins. I came back to Lackland, which I did want to tell you anyway, but at Robins we recently transferred the Lynwood Elementary School, which was a DOD school, by the way, to the country school system.
That is just another example of whether we do the funding or do the impact aid, but here is where we even had a school that we had already paid for, the federal government, and we just conveyed that to their system as a source to help out, to try to help them in construction.
Mr. HEFLEY. All right.
Secretary APGAR. Mr. Chairman.
Mr. HEFLEY. Yes?
Page 87 PREV PAGE TOP OF DOC
Secretary APGAR. May I clarify one point which Secretary Dishner rightly codified? As we increase privatization, the total expenditure on external talent and resources will increase. The management issue, I suggest, is on a per family, per unit basis how we control that expenditure just as MILCON expenditures traditionally control the technical service aspects of building projects, and so I did not want to on the record miscast my comment that the costs will go down. The percentage spent should go down.
Mr. HEFLEY. Yes.
Secretary APGAR. The per unit costs may go down slightly, but I would agree with my colleagues. Frankly, $1,000 a unit is very good value to begin with on average. The issue to be managed is at that level rather than trying to measure total expenses because, frankly, the more we do the more it will increase.
Mr. HEFLEY. Sure. Secretary Apgar, you discuss in your statement the use of existing law to assist with the development and maintenance of historic properties and specifically reference the ongoing project down at Fort Sam Houston. I think there are some opportunities here. Historic properties, though, as you all well know, are a growing concern. Any suggestions you have about how we can better handle that we would like to have that.
The Fort Sam Houston approval took quite a while because we needed the assurance that the activities the Army contemplated there are consistent with the intent of current law and with the mission of the installation. Can you talk in a little more detail about what you are planning at Fort Sam Houston and how we might use current authorities to help with other historic properties on a broader sense?
Page 88 PREV PAGE TOP OF DOC
Secretary APGAR. With pleasure, sir. First of all, we have two pilot projects at Fort Sam Houston. One is the leasing authority to focus particularly on the Brooks Army Medical Center and two buildings, each pavilion complex there, which are listed historic properties, to find alternative uses to preserve the historic properties to the greatest extent feasible, but in doing so to also offset costs and/or create value.
The notice of availability was issued in December. The written proposals were actually due a week ago and I believe are in and so we are just about to look at those. The developer selected will work with us to develop a business and leasing plan that at a very small scale is in some ways similar to the community development and management plan in RCI and then would be implemented through the leasing arrangements.
The other pilot is part of our protocol with the National Trust for Historic Preservation, who have a broad based relationship with us to look at our existing authorities across the board, that is all existing authorities, and are focusing on several, on five, posts, national historic landmark posts, of which Fort Sam is also one. With that focus and the scope of research to recommend where authorities that already exist can be more creatively used and where procedures, either because of the National Historical Preservation Act or our own interpretations of it, can be simplified, streamlined and the rest to enable more creative use such as the Fort Sam case.
The National Trust is also embarking on a major task force where we are bringing in real estate and construction entrepreneurs who specialize in historic property development to look at the far more fundamental issue of recapitalizing our historic property stock. I expect to see the first models from that this summer and will certainly be happy to share those with you, your staff, the committee, as they emerge.
Page 89 PREV PAGE TOP OF DOC
We embarked on this because, quite frankly, with the Army's enormous stock, 12,000 buildings on the National Register are eligible, 70,000 more that must be evaluated under the Act, 12 national historic landmarks and a belief in the Army culture that historic properties are a part of our culture and in the sense the Army's birthright, we cannot afford to pay for them under current structures, either budget or procedures, and we simply must find a way to fundamentally rethink what we do with them. It is for us a major mission, and we very much appreciate both your personal interest from your own background in this area and look forward to chairing both the ideas and hopefully actions from them.
Mr. HEFLEY. We do want to work with you on it, with all of you, because it is not a minor problem. We have two competing goals here that we have to balance and try to do it in a fiscally responsible way. I am glad you are working at it. Like I said, I appreciate your suggestion.
We are about to wind down here, but, Secretary Dishner, I want you to talk to me a little bit about the Rome, New York, project. As you know, this committee did not authorize the Rome project, nor did the authorizing committee in the Senate authorize the project, nor did the Appropriations Committee in the Senate put this project in, nor did our Appropriations Committee put it in in the normal objective process of evaluating it. We did not think it was a very good project. At the last minute, due to politics because I think based on the moaning, groaning, whining of the two Senators and one congressman from New York, certain members of the leadership in the House finally told the Appropriations Committee put it in.
Mr. Taylor is expressing his shock that politics played a part in it.
Page 90 PREV PAGE TOP OF DOC
Mr. TAYLOR. And appalled.
Mr. HEFLEY. And appalled. Not only shocked, but he is appalled as well.
Can you tell us where this is? We still do not think this is a very good project, and we will think that while technically you probably can come to us and say well, this does not perhaps BRAC proof Rome, by any serious discussion we have had on base closure the fact that we have an excess of labs comes up. It is a relatively small lab. If we do have, as the Air Force is pushing really hard for more rounds of base closure, and that is near and dear to Secretary Yim's heart, even though technically this could be said not to BRAC proof it from a moral standpoint the more we put into that the harder it is going to be.
I do not know whether it ought to stay or not. I am not saying it ought to go, but if you have an excess of labs this would fall in that, so tell me about why we ought to be doing this at this time, or maybe we should not. You are in the process of doing a study on it.
Secretary DISHNER. Well, we have looked at, and I shared that with staff, the economics of that in the broad sense and over time. The Secretary and the Air Force has not gotten off the position to date, and that is of this morning, that the project that we currently have in of some $12.8 million is the project that was submitted. He has not, nor has anyone changed from that position. What he has asked to be done, and we did that, was provide additional information so that he could have that at his disposal to make a further decision or further affirmation of what we have, so as of my testimony to you, we have a project. It is in the program. It is for $12.8 million, and the proffer by the State of New York to double that in essence has not been agreed to.
Page 91 PREV PAGE TOP OF DOC
Mr. HEFLEY. Has not been agreed to?
Secretary DISHNER. Has not been agreed to as of today, sir.
Mr. HEFLEY. As of today.
Secretary DISHNER. And I do not mean it that way that tomorrow that will change, but the position of the Air Force is, as I just stated, the project that we currently have in is the one that we support and we would like funding for.
Mr. HEFLEY. If this committee took the unusual step of trying to deauthorize it, what would that do to the Air Force's plans?
Secretary DISHNER. Deauthorize the $25.8 million or just deauthorize the $25.8 million down to $12.8 million?
Mr. HEFLEY. Well, you can do either. Either or both, I suppose. Yes.
Secretary DISHNER. The Air Force has a requirement at Rome Lab for a $12.8 million project.
Mr. HEFLEY. Okay. All right.
Page 92 PREV PAGE TOP OF DOC Mr. Taylor, Mr. Rodriguez, do you have further questions at this point?
Mr. TAYLOR. No, Mr. Chairman.
Mr. HEFLEY. Well, we thank you for your long-suffering indulgence. You have been very, very helpful to us.
This committee will stand adjourned.
[Whereupon, at 12:45 p.m. the subcommittee was adjourned.]
A P P E N D I X
March 16, 2000
[This information is pending.]