Defense Acquisition

Historical Insights Into Navy Ship Leasing Gao ID: T-NSIAD-99-141 April 21, 1999

GAO is currently reviewing the Navy's decisions in the early 1970s and early 1980s to lease Sealift tankers, Maritime Prepositioning Ships, T-5 replacement tankers, and, more recently, Chouest specialized support vessels. This testimony is based on this work and earlier GAO reviews. GAO discusses (1) the basis and support for the Navy's decisions to lease rather than buy these ships, (2) the concerns that surrounded the decisions, and (3) the legislative and regulatory changes that will influence future lease versus purchase decisions.

GAO noted that: (1) the primary reason the Navy decided to use long-term leases to acquire auxiliary vessels in the early 1970s and early 1980s was because available procurement funds were needed for higher-priority combat ships, and leasing arrangements allowed the Navy to acquire the support ships without a large, up-front obligation of procurement funds; (2) the Navy also believed that leasing was cost-effective and helped support the industrial base; (3) the Navy complied with existing requirements to perform lease versus purchase cost comparisons; (4) these comparisons concluded that leasing was cheaper than purchasing; (5) the Navy's decision to enter into long-term leases in the early 1970s and early 1980s raised concerns regarding the budget authority needed to make such large long-term funding commitments; (6) Congress expressed concern about whether the Navy Industrial Fund could adequately cover the total obligations that would accrue from these leases; (7) to address this concern, the Navy requested and received specific congressional authorization to carry out the acceptance provisions of the long-term leasing contracts; (8) there were also concerns regarding the cost-effectiveness of these leases; (9) when the leasing decisions were made, there were limited standardized governmentwide guidelines for conducting lease versus purchase analyses; (10) as a result, the studies used different assumptions and methodologies in analyzing the alternatives and drew different conclusions; (11) in 1983, GAO's report and a congressional staff study questioned the validity of the assumptions used in the Navy's studies and their conclusions; (12) had the Navy's studies used assumptions that more fully reflected the government's total costs, they would have concluded that purchasing was the cheaper alternative; (13) since the long-term leasing decisions of the early 1970s and early 1980s, a number of changes have occurred that will affect future long-term leasing decisions by increasing oversight and improving cost analyses; (14) Congress has increased visibility of and control over these types of decisions; (15) budget-scoring guidelines increase the emphasis on up-front budget authority by providing Congress with a mechanism to assess the cumulative impact of long-term leasing decisions prior to the obligation of funds; (16) tax benefits that favored leasing have been reduced; and (17) as part of the decisionmaking process, more detailed guidelines require that the Navy perform lease versus purchase analyses that better reflect the government's total cost of long-term leasing arrangements.

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