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RAND Arroyo Review of Army Arsenals and Ammunition Plants. May 2004. Mike Hix. Scope of Study; 14 Government-Owned Ammunition Plants and 2 Arsenals. GOCO PLANTS. GOGO FACILITIES. CONTRACTORS. Scranton. Chamberlain. Ammunition. Riverbank. Norris. McAlester. Louisiana. Valentec.

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slide2

Scope of Study; 14 Government-Owned Ammunition Plants and 2 Arsenals

GOCO

PLANTS

GOGO

FACILITIES

CONTRACTORS

Scranton

Chamberlain

Ammunition

Riverbank

Norris

McAlester

Louisiana

Valentec

Pine Bluff

Radford

Lake City

Alliant Tech

Crane

Lone Star

Kansas

Mississippi

Cannons & Mounts

MTI

Day &

Zimmerman

Milan

Watervliet

Am Ord

Iowa

General

Dynamics

Rock Island

Holston

British

Aerospace

BAE OS

problems in the ordnance base 1
Problems in the Ordnance Base (1)
  • Lack of a strategic vision
    • Ideas, draft plans, reorganizations
    • But no approved, stable vision and plan for achieving it
  • Army ownership of peripheral function creates management distraction for Army leadership
    • Manufacturing not a core Army function; commercial activity, 10 USC 2501, 2535
    • Peripheral function even in logistics community
  • Reduced workload, over-capacity, high costs--prominent in arsenals
    • Reducing equipment, space, and personnel helps, but insufficient
slide4

Steep Decline in Manufacturing and Resulting Idle Capacity Precipitated Request for Study

Watervliet Arsenal

peak production

1976

97%

47%

30%

4%

problems in the ordnance base 2
Problems in the Ordnance Base (2)
  • Capital investment doesn’t compete well in Army operating budget
    • Leads to old and inefficient equipment and practices--particularly in ammo plants
    • Contractors lack incentives to modernize Army equipment
  • Ammunition has a low funding priority
    • Variable buys from year to year
    • Inefficient order quantities
    • Low investment in manufacturing technology and methods
    • Under-funding of war reserves leads to strategy change by default: from replenishment to surge
  • Ammunition replenishment policy in flux
    • No DoD guidance
    • No Army proponent (for equipment, missiles or conventional ammo)
    • No published Army policy
problems and guidance suggest a vision or policy objective for the base
Problems and Guidance Suggest a Vision, Or Policy Objective, for the Base

A responsive, innovative, efficient manufacturing base capable of meeting national security requirements while relying to the maximumpracticalextent on the inherent advantages of competition and private ownership of capital

  • Maximum practical extent is defined by four criteria:
  • Inherently governmental functions
  • National security requirements
  • Private sector willingness to provide
  • Cost
slide7

Conceptual Framework for Assessment

Is this capability critical

to the Army’s needs?

No

Divest

Yes

Mission Critical

Should the government own this mission-critical capability?

Is the function inherently governmental?

Is there a national security reason for government ownership?

Is it impossible to interest the private sector in providing the capability?

Can the government provide the capability at lower long-run cost?

No to all

Divest

Yes to any

Some form of government ownership

options for advancing the vision

CREATE A FEDERAL GOVERNMENT CORPORATION

  • Transfer plants to FGC as going concerns
  • Charter: Meet DoD require-ments & sell commercial goods

CONSOLIDATE

  • Merge manufacturing onto fewer plants
  • Declare unneeded plants excess

RECAPITALIZE ON

MULTI-FUNCTIONAL POSTS

  • Close all plants as part of broad BRAC strategy
  • Recapitalize on enduring installations
Options For Advancing the Vision

PRIVATIZE

  • Sell plants as going concerns, with ammunition contract
  • Require buyer to maintain capability for set period
  • Trade sale revenue for conduct of remediation and breaks on ammo prices
privatization and fgc offer benefits consolidation lacks
Privatization and FGC Offer Benefits Consolidation Lacks

BENEFITPRIVAT. FGC CONSOL.

Divests Government

Divests Army

Houses mfg with core competency

Removes Army leadership distraction

Improves access to capital

Strengthens incentives for investment

Enhances commercial use of assets

Increases likelihood of revenue from sale

Avoids budget costs of consolidation

Avoids front-loaded remediation

Reduces overhead

Avoids political issues of transfer of work

Can meet mission requirements

COMPLIANCE

MANAGERIAL

COST

EXTERNAL

MISSION

recommended objective end states
Recommended Objective End States
  • 11 GOCO plants
    • Privatize sequentially to limit risk; package plants to improve value; keep plants whose sale would increase costs
    • Exclude Mississippi--NASA-owned
    • Fallbacks: 1) long-term land lease and divestiture of equipment; 2) consolidate
  • 3 GOGO plants
    • Continue current ownership:
      • Other activities occur at these plants (depot, demil)
      • Protective legislation on Crane and McAlester
      • Crane--Navy-owned
      • Provides government-owned land hedge (55% of existing acreage)
  • 2 arsenals
    • Convert to federal government corporation
      • Assess performance, could be end state or transition to private
    • Fallbacks: 1) Seek special legislation to privatize; 2) Consolidate during BRAC; or 3) Convert to GOCO through A-76
expected benefits of recommendations
Expected Benefits of Recommendations
  • Creates and implements a vision
  • Eliminates for Army leadership the distraction of peripheral function--management of factories
  • Transfers production assets to organizations whose core function is manufacturing
  • Consistent with national policy
  • Reduces Army costs
    • Generates revenue from sale: apply to environmental remediation or reduce prices
    • Incentivizes and enables modernization--enhances productivity
    • Fosters competition
    • Enhances property development
    • Reduces government staff
  • Stimulates competition for more efficient replenishment means
  • Maintains or increases employment at all locations
  • Does not require BRAC authority
  • Avoids front-end cost of consolidations
substantial uncertainty surrounds savings estimates
Substantial Uncertainty Surrounds Savings Estimates

Ammo plants

Arsenals

Ammunition Plants

Arsenals

6 plants

ASSUMPTIONS VARIED

Sale revenue (DCF, Multiple of sales)

Ammunition prices

ARMS benefits

Contract termination costs

Gov’t employee termination costs

Discount rate

3

Arsenals

PRESENT VALUE OF SEVEN-YEAR SAVINGS TO ARMY ($ MILLIONS)

recommended process
Recommended Process
  • Adopt broad policy:
    • Adopt a vision that dictates maximum practical private-sector reliance (where criteria are met), with target date of FY07
    • Create FGC for Watervliet and Rock Island
  • Assign responsibility to develop and execute plan
    • Fix responsibilities: ASA(ALT) lead, with ASA(I&E), AMC, and now PEO(Ammo)
    • Establish timelines
    • Establish progress reporting
  • Specific actions
    • Build GSA/Army team
    • Begin proper environmental characterization of facilities
    • Conduct any further required assessment of ongoing initiatives, market analysis, and requirements
    • Contract for outside implementation assistance (investment banker, technology, legal)
    • Draft FGC charter
    • Lay groundwork for full Army commitment to policy objective
ammunition plants steps in the sale process
Ammunition Plants: Steps in the Sale Process
  • Army declares intent to exit the ammunition manufacturing business
  • Army arranges industry days, initiates RFIs to gain info on market
  • Army declares property excess-to-ownership, but not excess-to-need
    • Restricts sale to buyers who can maintain manufacturing capability
    • Like use permits transfer of property during remediation
  • GSA solicits offers
    • May either begin with negotiated sale to current operator (PRP) or competitive sale (ETA) among ammunition manufacturers, partnerships
    • Buyer agrees to maintain capability for set period; Army agrees to ammo buys
  • Bidders respond with:
    • Offering price for plant (divestiture action)
    • Ammunition prices (procurement action)
  • Army/GSA team may accept most favorable offer (if it provides fair market value), or reject all offers
    • House oversight committee must approve

A decision to market a plant carries little cost risk

If best offer leaves Army worse off, Army/GSA team rejects it

slide16

What Might A FGC or GSE Look Like?

  • Name: U.S. Ordnance Corporation (USOC)
  • Charter:
    • Maintain capacity to meet U.S. DOD requirements for ordnance materiel (peacetime and replenishment)
    • Provide ordnance-related materiel to U.S. DOD and, as authorized, to foreign nations
    • Manufacture and sell non-ordnance products as capable
    • Generate revenues that equal costs
  • Management: Board of directors appointed by President, with advice of Senate
  • CEO: Manufacturing executive
  • Personnel: USOC employees, not civil service
  • Tax status: Exempt
  • Budget: Independent of Federal budget
usoc structure
USOC Structure

USOC

Rock Island Division

Watervliet Division

Rock Island

Real Estate Holdings

Watervliet

Manufacturing

Rock Island

Manufacturing

Watervliet

Real Estate Holdings

Metal

Products

Metal

Products

Commercial

Commercial

Composite

Products

Composite

Products

Residential

Residential

Manufacturing

Sciences

Recreational

Recreational