Defense Infrastructure:

Army's Privatized Lodging Program Could Benefit from More Effective Planning

GAO-10-771: Published: Jul 30, 2010. Publicly Released: Jul 30, 2010.

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The Department of Defense (DOD) operates nearly 70,000 lodging rooms--similar to hotel rooms--and spent nearly $1 billion in 2009 to operate them. In 2002, Congress provided authority to privatize lodging facilities. Army privatized lodging at 10 installations in August 2009 and plans to privatize its remaining domestic facilities in the future. The National Defense Authorization Act for Fiscal Year 2008 requires GAO to review lodging privatization and an Army report. This report addresses (1) the factors the military services considered in their decisions to privatize, (2) challenges in the Army's privatization efforts, (3) the effect of the economic downturn on the Army's privatization program, and (4) the extent to which an Army report required by the act, issued in March 2010, addresses the elements in the law. GAO reviewed documentation and interviewed officials from the Office of the Secretary of Defense, the military services, the developer for the Army's privatization project, and four Army installations where lodging was privatized.

The Army decided to privatize its lodging facilities to obtain private sector financing to address the poor condition of its facilities and the high estimated costs to repair them, whereas the other military services decided not to privatize since the services' lodging expenses could increase due to higher room rates if privatized and officials viewed their lodging facilities as in generally good condition. GAO's analysis found that if the military services chose to privatize, lodging costs could increase due to higher room rates. Army officials GAO interviewed generally viewed the lodging privatization transfer process and improvements the developer has made since the transfer as a success; however some challenges affected the timing of building new facilities and the transition of operations to the private developer. First, the private developer had to delay the start of major renovations and new construction by 2 years given several life-safety and critical system deficiencies at these facilities. The developer is currently repairing these deficiencies at its expense before these conveyed facilities can be used as collateral to obtain further financing to begin the planned renovations and new construction at the Army's 10 installations privatized to date. However, the extent to which similar life-safety and critical system deficiencies repairs for the next group of facilities to be privatized should be completed by the Army or the private developer is unclear because the Army has not fully assessed the costs and benefits of performing these repairs. Second, those involved in privatizing the lodging facilities experienced confusion about some aspects of the transfer of facilities and equipment to the developer because the Army did not develop a single, comprehensive transition plan that included information on all the tasks to be completed as part of the transfer process. Thus, installations encountered some problems, such as transferring data to the developer, and the Army may encounter similar challenges in future lodging privatization efforts. The economic downturn hindered the private developer's ability to obtain financing for the lodging privatization project at favorable interest rates, which also delayed the project. Specifically, the Army cited the constrained credit environment, the ability to demonstrate sufficient cash flow, and the need to address facility life-safety and critical repair issues before using the facilities as collateral as factors that affected the private developer's ability to obtain long-term financing for the lodging privatization project. The Army's report addressed the three elements required by the law, but it lacks some information related to one of the elements that could help clarify the Army's responses. The Army's report addressed the elements that the Army evaluate the efficiency of lodging privatization and make recommendations about expanding the program. While the Army's report describes implementation at the privatized installations, as required, it does not describe how it plans to incorporate lessons that the Army identified in the report into future privatization efforts. GAO recommends that the Army assess the costs and benefits of completing repairs to future facilities to be privatized, develop a transition plan, and clarify how it will incorporate lessons learned into future privatization efforts. In commenting on a draft of this report, DOD agreed with GAO's recommendations and plans to take actions to address them.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To better ensure that the Army is spending its financial resources as efficiently as possible, the Secretary of the Army should direct the Assistant Chief of Staff for Installation Management and the Commander, Installation Management Command, working with the Assistant Secretary of the Army (Installations and Environment), to assess the costs and benefits of the Army or a private developer repairing life-safety and critical infrastructure deficiencies at facilities in future groups to be privatized.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: In response to our recommendation, the Army assessed the costs and benefits of having the Army or a private developer perform life-safety and critical system repairs. Based on the Army's assessment, officials decided not to transfer two buildings at one installation, reducing the estimated cost of the life safety and critical system repairs by about $26 million, resulting in a cost avoidance of about $11 million. The Army considered using fiscal year 2011 operation and maintenance funding or raising lodging rates in fiscal year 2011 to complete the necessary repairs, but determined that having the private developer perform the necessary repairs was the preferred approach. DOD expects that the private developer will leverage the already-repaired facilities in the first group of facilities that were privatized and an anticipated government direct loan to perform the repairs for the second group of facilities to be privatized. Therefore, the Army will not need to pay for these repairs with appropriated funds.

    Recommendation: To facilitate more efficient operations before, during, and after the transition from service-operated to privatized lodging, the Secretary of Army should direct the Assistant Secretary of the Army (Installations and Environment), working with the Assistant Chief of Staff for Installation Management and the Commander, Installation Management Command, and other appropriate stakeholders, to develop a single, comprehensive transition plan for future lodging privatization that includes details on key aspects of privatizing.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: In response to our recommendation, the Army developed a comprehensive checklist detailing key steps in transitioning from Army lodging facilities to privatized facilities, which is currently in use for the second group to be privatized. Additionally, the Army standardized information dissemination to the installations and employees by using newsletters, bi-weekly calls to affected lodging managers, and posting information to an internal Army Web site. Moreover, the Commander, Installation Management Command, issued an operations order that included details on key tasks related to the transfer. As a result, installation officials and others responsible for implementing the transfer of lodging facilities from the Army to the private developer have access to information that should ease the transition for future facilities to be privatized, including the group of facilities currently undergoing privatization.

    Recommendation: To facilitate effective implementation of lessons learned into the lodging privatization program, the Secretary of the Army should direct the Assistant Secretary of the Army (Installations and Environment); the Assistant Chief of Staff for Installation Management; the Commander, Installation Management Command; and other stakeholders to clarify how the Army will incorporate lessons learned into its current and future privatization efforts.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: Key steps that the Army has taken in identifying and implementing lessons learned from the first lodging facilities privatized include evaluating facilities for life-safety and critical repair deficiencies, developing checklists for the timely termination of government contracts, and collecting information on lessons learned from the private developer and incorporating the input into other key documents related to the transfer. As a result, future groups of lodging facilities to be privatized--including the group currently undergoing privatization--can benefit from lessons learned from the first group privatized and be better prepared to address challenges encountered by the first group.

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