Defense Acquisitions

Historical Analyses of Navy Ship Leases Gao ID: NSIAD-99-125 June 25, 1999

The Navy recently proposed long-term leasing rather than outright purchase of 12 auxiliary dry cargo ships. Historically, the Navy has bought its combat ships and relied on long-term and short-term leases to acquire some auxiliary vessels for supply and other support functions. Although it now appears that the Navy will purchase the dry cargo ships, its still considers long-term leasing an alternative to buying auxiliary vessels. This report provides an historical analysis of the Navy's decisions to lease Sealift tankers, Maritime Prepositioning Ships, T-5 replacement tankers, and Chouest specialized support vessels. GAO (1) determines the basis and the support for the Navy's lease decisions, (2) reviews past concerns about those decisions, and (3) identifies legislative and regulatory changes that affect current and future leasing decisions. This report updates an April 1999 testimony before Congress. (See GAO/T-NSIAD-99-141.)

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 the ability to acquire the vessels without a large, up-front obligation of procurement funds, which were being used to purchase combat ships and meet other Navy procurement priorities; (2) the Navy also cited readiness and industrial base concerns as reasons for entering into the long-term lease arrangements; (3) cost-effectiveness was not the primary factor in the Navy's decisions; (4) the Navy complied with then-existing requirements to perform lease versus purchase cost analyses, and its analyses concluded that leasing was more cost-effective than purchasing; (5) when the Navy entered into these long-term leases, concerns arose regarding: (a) the budget authority needed to make such large, long-term funding commitments; and (b) the cost-effectiveness of such commitments; (6) after entering into the long-term arrangements of the early 1980s, the Navy expressed concerns about the total amount it should record as a firm obligation in the Navy Industrial Fund; (7) Congress was also concerned about whether the Navy Industrial Fund could adequately cover the total obligations that would accrue from these leases; (8) to address these concerns, the Navy requested and received congressional authorization to carry out the acceptance provisions of the long-term leasing contracts and incur obligations in advance of appropriations; (9) the cost-effectiveness of these long-term commitments was also questioned; (10) at the time, there were limited guidelines for conducting lease versus purchase analyses; (11) as a result, cost studies used different assumptions and methodologies in analyzing the alternatives and drew different conclusions about the cost-effectiveness of leasing; (12) since the long-term leasing decisions of the early 1970s and early 1980s, a number of changes in oversight and cost analyses have occurred that will affect current and future long-term lease decisions; (13) budget-scoring guidelines have increased 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; and (14) tax benefits, which made leasing an attractive option to the Navy, have been reduced, and more detailed guidelines now 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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