ARTICLE

July 2003

Army Considers Privatizing Its Depots, Ammo Facilities

by Harold Kennedy

The U.S. Army—under pressure from Defense Secretary Donald H. Rumsfeld to trim infrastructure—is mulling over proposals to privatize its arsenals, ammunition plants and repair depots.

Rand, a federally funded nonprofit research institute based in Santa Monica, Calif., has made a series of recommendations for privatizing the Army’s industrial base, which includes seven arsenals, five repair depots and 14 ammunition plants across the nation. In a 2002 report, Rand proposed:

• Forming public-private partnerships to encourage corporations to invest in Army facilities.
• Using Army venture capital to persuade private industry to help develop innovative military technologies.
• Spinning off Army activities, such as arsenals and depots, into Federal Government Corporations, similar to Fannie Mae, the U.S. Postal Service and the Tennessee Valley Authority.

Another Rand study, which has not been published, recommended selling the Army’s arsenals in Rock Island, Ill., and Watervliet, N.Y., and some of its ammunition plants to private industry.

The recommendations caught the attention of then-Army Secretary Thomas E. White Jr., who last fall directed the Army Materiel Command to draw up plans to implement them. The plans were to be part of the Army’s larger “Third Wave” initiative to privatize up to 200,000 civilian and military jobs.

This initiative is called the Third Wave because it will be the Army’s third effort in the past two decades to streamline itself by encouraging more interaction between public and private sectors.

Public-Private Partnerships
The Rand study argued, for example, that the Army’s industrial facilities—its arsenals, ammunition plants and depots—are “obvious candidates for public-private partnerships.”

One Army partnering program “already producing tangible results is the Armament Retooling and Manufacturing Support program,” the report said. ARMS allows contractors to lease dormant facilities at Army ammunition plants to commercial enterprises.

According to one recent evaluation of the program, the Army had recovered $125 million of the $170 million it had invested in ARMS. Overall, the evaluation said, ARMS had resulted in an economic impact of more than $2.1 billion.

Other partnerships in the works include plans for leasing and developing buildings at Picatinny Arsenal, N.J.; construction of a contractor-support facility at Fort Leonard Wood, Mo.; development of a hot-weather test track at Yuma Proving Ground, Ariz., and leasing factory equipment and facilities at Rock Island Arsenal, Ill.

The Rand report also proposed the Army establish a venture capital fund similar to the Central Intelligence Agency’s In-Q-Tel enterprise. The CIA set up In-Q-Tel to solve some of its most difficult information-technology problems. In-Q-Tel is only 18 months old, the report said, “but it appears to have made a very promising start in terms of technology development.”

Typically, the study said, venture capital funds invest in businesses that have a high risk of failure, but also a potential of high returns, if successful. In addition, venture capital investors usually become deeply involved with the business. They prefer to fund relatively new companies, with much less overhead and a core staff more directly affected by the success of the company, the study said.

The Army could use a venture capital organization to circumvent much of the bureaucratic red tape that hinders collaboration between the Army and the commercial technology sector, the study suggested. The Army venture capitalist would act as a middleman, who understands the needs of the Army and the commercial technology sector. And since the venture capital organization would be outside the Army, it should be better able to gain the trust of commercial clients and act more quickly and flexibly than the Army’s current contracting organizations.

The Army also may find it worthwhile to convert some of its functions into federal government corporations, the report said. Congress founded the first FGC in 1781. Since World War II, it has created about one FGC per year.

About 60 exist today. In addition to those named above, they include the National Railroad Passenger Corporation (AMTRAK), the Smithsonian Institution and Federal Prison Industries Inc.

FGCs are popular because of the flexibility they offer policymakers, the study said. For example, they are not bound by many of the bureaucratic rules that govern federal agencies, including Civil Service regulations, the Federal Acquisition Regulation/Defense FAR Supplement, the Competition in Contracting Act and Office of Management and Budget circulars.

The study cited three Army candidates for FGCs—the service’s chemical demilitarization operations, research and development laboratories, and its depots.

In 1998, the Army considered converting its chemical demilitarization program into an FGC, but no action was taken, according to the report. “At this stage in the demilitarization process, it may now be too late to consider making this organizational change,” the report said. “However, the other two FGC candidates are still timely and relevant, and the Army has not seriously studied them.”

The study found that “the FGC model emerged as one of the more promising organizational models” for the R&D laboratories. “Its strength lies in its ability to achieve flexibility and efficiency, characteristics desirable to the Army in adapting to changing research needs,” the study said.

Army depots—which repair, overhaul and upgrade weapons systems and equipment—would make good FGCs, the study said, because the concept “removes the activity from the rigidity of the annual budgeting and appropriations process, when that rigidity conflicts with the basic nature of the business.”

Also, the report noted, the 1997 Quadrennial Defense Review requires the Army to eliminate 17,366 civilian positions—including 8,530 from the AMC—by fiscal year 2004. “By applying the FGC concept to its depot system, the Army could make reductions in its government civilian workforce without having to eliminate jobs,” the study said.

The proposals drew quick fire from interested parties. The AMC opposed Rand’s proposal to privatize Watervliet and Rock Island. Instead, the command recommended keeping the two arsenals in the Tank-Automotive and Armaments Command’s new Ground Systems Industrial Enterprise.

Single Business Unit
The GSIE, which began operating informally in 2002, is scheduled to become official in October. It includes the two arsenals, plus the Lima Army Tank Plant, in Ohio, and depots in Anniston, Ala.; Red River, Texas, and Sierra, Calif. The AMC argued that the GSIE operates “as a single business unit.” It efficiently uses “core capabilities of each installation, while simultaneously transforming those core capabilities and public-private partnerships with industry, to provide organic manufacturing and repair capability that fully supports customers and future Army needs.”

From Capitol Hill, a bipartisan group of senators and representatives wrote White: “We find it unacceptable for the Army to move to ... sell or privatize federal facilities and ... civilian and military jobs without congressional oversight and consultation.”

In March, Sen. Arlen Specter, R-Pa., announced the formation of a Senate Caucus on Military Depots, Arsenals and Ammunition Plants. “This caucus will help ensure that issues such as privatization and base closures receive proper congressional oversight,” he said.

Some industry executives said that Rand proposals failed to take important considerations into account. Any Army facility that is privatized would have to incur new costs—for such factors as environmental compliance and taxation—that are not levied against government organizations, said Raymond H. Bronson, vice president for business and technology development of Alliant Techsystems, which runs several military ammunition plants. That, he said, would erode any savings resulting from privatization.

The AMC asked the Industrial Committee of Ammunition Producers to conduct its own study of privatization. The ICAP study found that, before companies would be interested in buying an Army plant, they would have a long list of requirements.

A comprehensive environmental baseline study, for example, would have to be completed. A cap would need to be placed on environmental liability. Government would have to accept responsibility for pre-existing environmental, health and safety conditions. Exactly what is being sold, such as land, buildings, equipment, mineral rights, intellectual property, tenant agreements and use restrictions, would have to be defined clearly.

Contractual requirements for maintaining core capabilities and capacities would have to be established. Otherwise, the contractor will maintain only those capabilities and capacities that are economical.

Meeting such requirements would not be easy, warned Dennis Brogan, director of production at the Army’s Joint Munitions Command, headquartered at Rock Island Arsenal. Conducting an environmental baseline study “can take 12 to 18 months,” he told an ICAP meeting. “Changing environmental permits can take years.”

The Joint Munitions Command—formerly the Operations Support Command—was created in January to make management of military ammunition more efficient, the commander, Maj. Gen. Wade H. McManus Jr., told National Defense.

The command manages the production, storage, issue and demilitarization of conventional ammunition of all U.S. military services, he explained. “We provide everything from .22 caliber bullets to 2,000-pound bombs,” he said.

To ensure the services get the ammunition they need, the JMC is developing and modernizing systems to provide commanders with accurate, up-to-the-minute information on the status of munitions, McManus said.

McManus—who was head of the OSC at the time—discovered the need for such information shortly after September 11, 2001.

“I was summoned to the Pentagon a few days after the World Trade Center attacks to brief the chief on our ability to supply ammunition if we got into an extensive combat operation in this war on terrorism,” he told NDIA’s 2003 Munitions Executive Summit.

“In the presentation, we had no really good way to measure readiness,” he said. “We were evaluating things in terms of how well programs were funded. We were not looking at ... what our stockpile actually looked like.”

Since then, McManus has implemented a munitions readiness report that answers the question: “Do I have enough serviceable ammunition to meet contingency requirements anywhere in the world?” If the answer is “no,” an explanation is required.

Serviceability is an important issue, McManus said. “Bullets are kind of like tomatoes,” he said. “They go bad. We need to get them to the services as quickly as possible.”

At press time, Rand’s proposals were awaiting approval by the Army secretary. The position, however, was vacant for the moment. White was fired in April after several disagreements with Rumsfeld.

In early May, President Bush announced his intention to nominate Air Force Secretary James G. Roche as White’s replacement, but it will take some time for the nomination to be formally submitted to the Senate and the Senate to confirm the choice.

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