Excess Navy Ships Sold to Foreign Countries at Understated Prices

NSIAD-84-7: Published: Apr 12, 1984. Publicly Released: Apr 12, 1984.

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GAO reviewed Navy policies and procedures for selling excess ships to foreign countries.

GAO found that the 11 ships sold during 1981 and 1982 were not priced in accordance with Navy guidelines which require that ships be sold at the higher of fair or scrap value. By using scrap value to set prices for eight of the sales, the Navy did not: (1) include the amount spent to upgrade the ships while they were in service; (2) charge overhaul costs to foreign countries; (3) determine the condition of the ships at the time of sale; or (4) include incidental costs. GAO also found that, in the three cases where fair value was used, conversion and incidental costs were excluded from the sales price. While the Navy believes that political and diplomatic considerations often outweigh approved pricing guidelines, the decision to sell a ship at a lower price rests with Congress rather than with the Navy. GAO found that, if the Navy had used appropriate prices for the 11 sales, it would have totalled $36.4 million rather than the $5.2 million actually charged.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to revise pricing guidance to require that the Chief of Naval Operations use the fitness of a ship in deciding what fair value rate to apply in computing the fair value price.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Navy has prepared draft instructions which address this issue, but has not yet formally issued the instructions.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to revise pricing guidance to require that the Board of Inspection and Survey, in addition to determining whether a ship is fit or unfit for further U.S. Navy service, also determine the overall condition of the ship.

    Agency Affected: Department of Defense

  3. Status: Closed - Not Implemented

    Comments: DOD stated that the procedures by which ships are priced for specific legislation are already subject to review by four congressional committees. The Navy, in seeking legislation authorization to sell ships, should specifically disclose to Congress either that the proposed sales price is the higher of scrap or fair value or provide the rationale for the sale price.

    Recommendation: The Secretary of Defense should require the Secretary of the Navy to provide Congress, for ship sales which require specific legislation because they are less than 20 years old or over 3,000 tons, with information on: (1) a proposed sale price based on the higher of scrap or fair value; and (2) Navy proposals to sell a ship for less than this amount, how the amount was calculated, and the justification for the proposed sale price.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should require the Secretary of the Navy to adhere to the established pricing instructions, which require pricing ships at the higher of fair value or scrap value. Specifically, when computing the sale prices for ships being sold to foreign countries, the Navy should include conversion costs to determine fair value.

    Agency Affected: Department of Defense

  5. Status: Closed - Not Implemented

    Comments: DOD will not change its policy; however, Navy stated that recent overhaul costs will be included in sales prices.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to revise pricing guidance to require that ship overall costs be prorated based on their recommended schedule for overhaul and such prorated costs be included in the sale price.

    Agency Affected: Department of Defense

 

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