Maintaining Excess Capacity in DOD Industrial Reserve Facilities Costs the Government Millions of Dollars a Year

The National Industrial Reserve Act of 1948 authorized the Department of Defense (DOD) to maintain a nucleus of government-owned industrial plants and a reserve of machine tools and other manufacturing equipment to supply the needs of the Armed Forces in a national emergency. In March 1977, DOD had 131 industrial facilities, 51 government operated and 80 contractor operated. The Secretaries of the military services can rent the excess production capacity of these plants if, in their opinion, it is advantageous to the government. Two types of rental agreements can be used: the facilities contract authorized by the Armed Services Procurement Regulation and the nondefense lease. In the case of government-owned, contractor-operated plants, it is difficult to determine what are adequate rental rates. However, there was some indication that the rental rates at six plants visited were low. At the five Air Force plants surveyed, heavy capital-type rehabilitation of plant and equipment was commonly financed by applying rent for commercial production to the cost as allowed under nondefense leases. The Secretary of Defense, in conjunction with the service Secretaries, should provide guidance as to which type of rental agreement to use in various circumstances, review the reasonableness of rental rates in current agreements, and determine the adequacy of legislative and executive authorization and oversight of capital-type rehabilitation projects in plants under nondefense leases.