RAND Arroyo Review of Army Arsenals and Ammunition Plants

1. RAND Arroyo Review of Army Arsenals and Ammunition Plants May 2004 Mike Hix

2. 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

3. 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

4. Steep Decline in Manufacturing and Resulting Idle Capacity Precipitated Request for Study Watervliet Arsenal peak production 1976 97% 47% 30% 4%

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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)

13. 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

14. BACK-UP SLIDES

15. 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

16. 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

17. 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