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Annual Privatization Report 2005 - Military Housing Privatization

January 1, 2005

Military Housing Privatization


Over the years, military housing took a back seat to other defense spending priorities. This resulted in dilapidated, decades-old housing, high maintenance costs, and low service member morale. In recognition of the importance of the quality of life of military personnel, however, military living conditions have been made a higher priority in the past decade. Realizing that housing construction and management is not a core government competency, the military has turned to the private sector for answers. Privatization has proven to be a great success, delivering higher-quality housing to satisfied service members at lower costs to the government —and, ultimately, taxpayers.

By the mid-1990s, military housing had fallen deep into disrepair. Military housing was decrepit and in short supply. There were too few quality housing units on base and the quality units that existed off base were unaffordable for many military families, particularly those of junior enlisted personnel. At the time, the Department of Defense (DoD) estimated that 60 percent of military housing units were inadequate, and that it would take 30 years and at least $20 billion for the government to refurbish them all using the traditional military construction approach.1 To improve the living conditions and morale of service members, Congress established the Military Housing Privatization Initiative (MHPI) under the National Defense Authorization Act for Fiscal Year 1996 (Public Law 104-106 110, Stat 186, Section 2801). The Bush administration later designated military housing privatization a President's Management Agenda Initiative.2

The military housing privatization program has proven so successful that the government has continually expanded the program and found it to be a crucial tool to repair and replace inadequate military housing. According to Philip W. Grone, Deputy Under Secretary of Defense, Installations and Environment:

The housing privatization program has expanded rapidly in recent years. The number of privatized housing units rose from 5,894 at the end of 2000 to 87,512 this year.4 Current plans are to privatize a total of over 185,000 units —84 percent of all U.S. on-base housing —by the end of 2007.5 As of February 2005, the DoD had awarded 43 military housing privatization projects.6

In light of the MHPI's success and expansion, Congress removed a sunset clause that would have caused the program to expire in 2012, thereby making the program permanent, and removed a budget authority cap of $850 million in the Ronald W. Reagan National Defense Authorization Act for 2005 (Public Law 108-375 107, Section 2805).


How It Works

While the MHPI is governed by DoD policy guidelines, each service branch runs its own privatization program. The Army's program is called the "Residential Community Initiative," the Navy's program is "Public Private Ventures," and the Air Force's program is "Housing Privatization." After an initial evaluation and feasibility study is conducted, the project concept is approved by the Office of the Secretary of Defense, and Congress has been notified of the solicitation proposal, the service may seek out private partners to address its housing needs. After the request for proposal (RFP) is issued, the service holds an industry forum to introduce the project and organizes local meetings to answer developers' and financiers' questions about the project.

The developer selection process varies somewhat among the services. The Air Force and the Navy select a developer through a two-step process, based first on the developers' qualifications, and second on their project development and management plans. The Army bases its decision solely on the developers' qualifications, and then works together with the selected developer to come up with a Community Development and Management Plan (CDMP). If the Army is satisfied with the CDMP and the working relationship with the developer, it will give the developer the green light to proceed with the project.

After the contract has been awarded, there is typically a series of stakeholder meetings and community forums to solicit comments from enlisted personnel and their spouses, as well as members of the local community and local governments. Frequent "management review committee" meetings between the developer and the service ensure that the project stays on track and that any concerns or problems that arise may be addressed quickly and to the satisfaction of all parties.

Typically, the service and the developer form a limited partnership to develop the project. The developer receives a 50-year ground lease and is responsible for asset, property, and maintenance management. The private developer assumes virtually all of the financial burden of developing the project. Financing sources include developer and government equity investments and private-sector loans.

Rents are set equal to the Basic Allowance for Housing (BAH), a housing stipend issued by the DoD to military personnel living off base (and now provided to those living in on-base MHPI projects as well). BAH is determined based on a service member's geographical location, pay scale, and whether he or she has dependents. In addition, the developer is required to provide a standard renter's insurance package. Since service members may be forced to transfer or deploy on short notice, they are allowed more leeway in breaking their leases without penalty than a typical renter in the private sector.

Developers are also offered some protection for their investments. If the military base on which their project is located were to close, they would continue to own and manage the leased property and housing development, and so would be able to rent out their units on the private market. In addition, if occupancy rates fall below a certain threshold, the developer can rent to others at market rates using the following priority list: (1) unaccompanied (single) service members, (2) federal civil service employees, (3) retired military personnel, (4) guard and reserve military personnel, (5) retired federal civil service employees, (6) DoD contractors/permanent employees, and (7) members of the general public.7

The government's oversight does not end with the completion of the project. Privatization projects are continually evaluated with the use of Program Evaluation Plan (PEP) reports. The DoD collects PEP information from the services and conducts semi-annual reviews. The Department also holds quarterly meetings with the services to share best practices, lessons learned and areas of weakness, and other ideas regarding the housing privatization programs.


Benefits of Military Housing Privatization


Cost Savings

One of the most palpable benefits of military housing privatization is that private project development is significantly cheaper than government housing construction and management. According to the DoD, it would cost $16 billion to make the necessary housing improvements based on the traditional military construction (MILCON) program.8 Privatization is expected to cost only $14 billion, a savings of $2 billion.9 Indeed, even after factoring in BAH (rent) payments to military personnel who previously lived on base and did not draw allowances, the DoD concluded in 2004 that private development is much cheaper: "Life cycle analyses have shown privatization to be less costly than military construction for all projects so far. Our most recent data reflects for the 20 projects we've analyzed thus far, a life cycle advantage for privatization of about 10-15 percent."10

Under the MHPI, the private developer pays the vast majority of the development costs. DoD policy requires that a privatized housing project must generate at least $3 of housing development (as estimated by MILCON) for every $1 appropriated by Congress to support the project, or a "leverage ratio" of 3 to 1.11 For the 43 projects awarded as of February 2005, government construction costs totaled $767 million for developments that would have cost $11 billion under the traditional MILCON approach.12 This represents a leverage ratio of over 14 to 1, far exceeding program guidelines and expectations.


Speed in Addressing the Shortage of Adequate Housing

Not only are private-sector housing developers cheaper than government developers, they are also much quicker.13 Using MILCON, the DoD estimates it would take another 20 years to fix all of the military's substandard housing.14 Assuming the DoD's budget requests are fulfilled, the Department anticipates eliminating all inadequate military housing units in the United States by the end of FY 2007 —and all inadequate units overseas by the end of FY 2009 —through the use of privatization.15

It is interesting to note that while one of the main justifications given by the DoD for the MHPI is "a shortage of quality affordable private housing,"16 The President's Management Agenda of FY 2002 decried excess military family housing units.17 So by maintaining inadequate housing and not developing quality affordable housing, the DoD had created both a surplus and a shortage in military housing at the same time! Only the government could accomplish such a feat.


Better Housing Quality and Property Management

Prior to the introduction of the MHPI, DoD-owned housing was notorious for its old age, poor condition, lack of funding, and "anachronistic features."18 According to the DoD, in January 2001, approximately 180,000 of the Department's 300,000 family housing units worldwide were deemed "inadequate."19 ("'Inadequate' is defined by each service as housing which requires significant renovation or repair of kitchen, bathroom, infrastructure, plumbing, [or] electrical beyond a certain dollar level."20) Primarily because of the military housing privatization program, however, the DoD expects to reduce the number of inadequate units to 67,079 units out of a total of 136,017 units worldwide by the end of FY 2005, and to eliminate all inadequate units by the end of FY 2007.21 While nearly half of the military's existing housing units are still substandard, this represents a dramatic improvement from the 60 percent inadequacy rate of just a couple of years ago.22

Approximately one-third of military families live on base.23 Unfortunately, these families have had to put up with aging and deteriorating housing. On-base housing has an average age of 33 years, and 25 percent of it is over 40 years old.24 The housing privatization program is now offering military families brand new (or newly renovated) homes that are larger and contain more modern features.

Private-sector companies have a strong interest in providing and maintaining high-quality housing for their military customers. If pride in developing and sustaining quality communities is not enough, private companies have the added incentive of the profit motive: they must offer attractive living spaces to keep up occupancy rates and profits, or else lose out to private off-base housing competitors. Under the government (bureaucracy) system, there is no such incentive, and housing quality is determined by arbitrary political priorities and (typically insufficient) budget allocations —with disastrous results.

In contrast to the poor state of government-maintained military housing, the DoD has been highly complimentary of the quality of privatized housing:

In addition, a Defense Communities article on Air Force housing privatization reports:

Quality improvements are not limited to the mere construction of privatized housing units, however. Privatized military housing also offers better property management and maintenance. Private management companies reportedly fix maintenance problems much quicker, for example.27 According to the DoD, "many tenants are initially impressed by improved response to trouble calls even prior to housing improvements being completed."28 In addition, "awarded projects show vastly improved operation and maintenance, better customer service, and greater Service member satisfaction, as measured in the customer surveys used to support the President's Management Agenda metric for tenant satisfaction."29 Chris Crennan, Vice-President of Lincoln Military housing, Mid-Atlantic Region, whose company is taking on a housing privatization project at NAS Patuxent River, proudly reported his company's maintenance track record: "97 percent of calls are received within 24 hours and . . . emergency calls are addressed within 30 minutes."30 At Fort Meade, the base handed over a maintenance backlog of 4,000 repairs to the new private management company. All problems were fixed within 8 months.31 Base Commander Col. John W. Ives noted that the civilian management team was able to quickly make decisions and respond accordingly, "something you couldn't do in the Army system." Added Ives, "[Privatization] is the right answer for families."32

More and more military and DoD personnel are realizing that not only is private-sector property management beneficial because it is more efficient, it removes the burden of management from the military altogether. Said Joseph K. Sikes, DoD's director of housing and competitive sourcing, "After 2007, more and more bases will determine it's easier not to take care of the houses yourself. It's better to have a private developer maintaining it and operating it, and so I think we'll see even more projects become privatized."33 Under Secretary of Defense Grone was even more blunt:

The management efficiency gains from housing privatization can greatly improve military operations. Privatization is beneficial not only because it allows the military to redistribute money saved to more productive uses, but also because it allows the services to achieve efficiency elsewhere by freeing up personnel for more core military duties. The use of private housing developers thus maximizes both financial and human resources.


Higher Service Member Morale

The importance of quality military housing stretches much further than efficiency or aesthetics; it goes to the very preparedness and morale of the military. In 1995, just before the establishment of the MHPI, a Defense Science Board report concluded that military family housing "made daily activities a trial and lowered morale."35 More recently, the DoD echoed this sentiment, asserting that the poor housing situation that developed over the decades "has led to a decline in readiness and morale among Service members."36 By reversing this trend, the Military Housing Privatization Initiative represents an effort not only to save the government money and improve the quality of life of the United States' military personnel, but also an effort to improve the demeanor and quality of the military overall. As Under Secretary of Defense Grone maintains, "Sustaining the quality of life of our people is crucial to recruitment, retention, readiness, and morale."37

Indeed, housing quality has proven to be an important tool for service member recruitment and retention. The DoD reports that service retention rates at bases with high-quality housing are about 15 percent higher than at bases with lower-quality housing.38

It is important to note that the housing quality must impress not only service members, but their families as well. As Col. Ives explains, "In the Army, we have a mantra: 'You enlist the soldier but you reenlist the family.'"39

Privatized housing communities provide plenty of amenities and social activities to improve the quality of life for service members and their families. Amenities may include adequate parking, high-speed Internet capability, swimming pools, community centers, tot lots, meeting rooms, athletic fields and facilities, fitness centers, jogging paths, and bike paths. In addition, private property managers organize such social activities such as family events, BBQs, ice cream socials, town hall meetings, date nights, military spouse activities, children's programs, and educational programs. Sometimes these social activities are conducted in conjunction with the YMCA or other local organizations.

These amenities and community activities are already helping to ease the burdens of military life and improve the quality of life of service members and their families. The military is taking advantage of these benefits offered by private developers to strengthen its forces. As one recruiter remarked of the housing privatization project at Fort Meade, "We're going to use this as a selling technique, to show [potential enlistees] the quality of life they can expect one day."40


Government Official Testimonials

As the results above indicate, the military housing privatization program has been nothing less than a smashing success. Perhaps the truest evaluations of the program's success come from those charged with implementing it. The reactions and conclusions of military and DoD leaders speak for themselves:


Conclusion

The Military Housing Privatization Initiative has proven to be a remarkable success since its creation in 1996. In less than a decade, the military services have made impressive strides in utilizing private housing developers to replace inadequate on-base housing. These private developers have shown that they can build, renovate, operate, and maintain higher-quality housing communities at less cost than traditional military construction methods. The results have been greater efficiency for the services and greater quality of life and morale for service members and their families.

The Navy is now experimenting with barracks privatization for single service members.45 Like much of the military family housing units (particularly before the implementation of MHPI), the barracks have been described by the DoD as "often substandard, inadequately maintained, or obsolete."46 Given the success of the MHPI, the Navy and other services should seek to expand the privatization program to include more barracks projects. It is encouraging to see that the DoD "is also interested in working with Congress to determine whether privatization authorities can be used in other areas including lodging facilities and overseas facilities to address [the Department's] needs."47

While the military housing privatization program has allowed the government —and thus taxpayers —to achieve significant cost savings, it has brought many other benefits as well. In fact, as the DoD observes, "the biggest advantages of privatization are not monetary, but rather are the speed at which these houses can be renovated and constructed by the private sector, and the quality of the housing and housing maintenance that the residents receive almost immediately."48 These quality improvements translate into higher service member morale and, ultimately, a more efficient and effective military.


Endnotes

1 Terry Pristin, "Privatization puts housing in reach of military families," San Diego Union-Tribune, March 6, 2005, http://www.signonsandiego.com/uniontrib/20050306/news_1h06ihous.html.

2 U.S. Office of Management and Budget, The President's Management Agenda, Fiscal Year 2002, pp. 39-42, http://www.whitehouse.gov/omb/budget/fy2002/mgmt.pdf.

3 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

4 Ibid.

5 Ibid.

6 Ibid.

7 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing Privatization FAQs," http://www.acq.osd.mil/housing/faqs.htm (as of June 14, 2005).

8 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing 101," http://www.acq.osd.mil/housing/housing101.htm (as of June 14, 2005).

9 John Benner, "Military Aims to Improve Base Housing —and Morale; Private Sector Assists Renewal of Family Units," Washington Post, November 13, 2003. Available on the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site at http://www.acq.osd.mil/housing/docs/washpost01.htm.

10 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Construction, March 3, 2004, http://www.acq.osd.mil/housing/ct04_grone.htm.

11 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing Privatization FAQs," http://www.acq.osd.mil/housing/faqs.htm (as of June 14, 2005).

12 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

13 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Construction, March 3, 2004, http://www.acq.osd.mil/housing/ct04_grone.htm.

14 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing 101," http://www.acq.osd.mil/housing/housing101.htm (as of June 14, 2005).

15 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

16 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing Privatization," http://www.acq.osd.mil/housing/mhpi.htm (as of June 14, 2005).

17 U.S. Office of Management and Budget, The President's Management Agenda, Fiscal Year 2002, p. 39, http://www.whitehouse.gov/omb/budget/fy2002/mgmt.pdf.

18 Chuck Debelius, Andrea Hajian, and Kelly Ladue, "Fort Meade: A Housing Privatization Partnership at Work," Defense Communities, July/August 2001, p. 8, http://www.acq.osd.mil/housing/docs/ftmeade_article.pdf.

19 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

20 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing Privatization FAQs," http://www.acq.osd.mil/housing/faqs.htm (as of June 14, 2005).

21 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

22 Benner, "Military Aims to Improve Base Housing —and Morale; Private Sector Assists Renewal of Family Units."

23 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing 101," http://www.acq.osd.mil/housing/housing101.htm (as of June 14, 2005).

24 Ibid. See also Lisa Marinelli, "Military Housing at a Glance," San Diego Union-Tribune, July 25, 2004, http://www.signonsandiego.com/uniontrib/20040725/news_1hs25milside.html.

25 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Construction, March 3, 2004, http://www.acq.osd.mil/housing/ct04_grone.htm.

26 Lieutenant Colonel Jason Dudjak, "Savvy Debt Deals Fund Construction: The Air Force uses private-sector finance practices to fund the rebuilding of entire communities," Defense Communities, May/June 2005, p. 22, http://www.phma.com/PHMA_DOWNLOADS/2005.MayJun.DC.pdf.

27 Benner, "Military Aims to Improve Base Housing —and Morale; Private Sector Assists Renewal of Family Units."

28 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

29 Ibid.

30 Bryan Jaffe, "Privatization of military housing to bring ‘promising' changes," dcmilitary.com, April 28, 2005, http://www.dcmilitary.com/navy/tester/10_17/features/34604-1.html.

31 Benner, "Military Aims to Improve Base Housing —and Morale; Private Sector Assists Renewal of Family Units."

32 Ibid.

33 Sgt. 1st Class, Doug Sample, "Privatization to Help DoD Meet Housing Quality Goal," American Forces Press Service, July 20, 2004, http://www.dod.gov/news/Jul2004/n07202004_2004072004.html.

34 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Construction, March 3, 2004, http://www.acq.osd.mil/housing/ct04_grone.htm.

35 Benner, "Military Aims to Improve Base Housing —and Morale; Private Sector Assists Renewal of Family Units."

36 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing Privatization FAQs," http://www.acq.osd.mil/housing/faqs.htm (as of June 14, 2005).

37 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Construction, March 3, 2004, http://www.acq.osd.mil/housing/ct04_grone.htm.

38 See Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing 101," http://www.acq.osd.mil/housing/housing101.htm (as of June 14, 2005), and Terry Pristin, "Privatization puts housing in reach of military families," San Diego Union-Tribune, March 6, 2005, http://www.signonsandiego.com/uniontrib/20050306/news_1h06ihous.html.

39 Benner, "Military Aims to Improve Base Housing —and Morale; Private Sector Assists Renewal of Family Units."

40 Ibid.

41 George Cahlink, "Navy signs largest public-private housing partnership," GovExec.com, November 8, 2004, http://www.govexec.com/dailyfed/1104/110804gl.htm.

42 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing Privatization FAQs," http://www.acq.osd.mil/housing/faqs.htm (as of June 14, 2005).

43 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Construction, March 3, 2004, http://www.acq.osd.mil/housing/ct04_grone.htm.

44 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

45 Ibid.

46 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing 101," http://www.acq.osd.mil/housing/housing101.htm (as of June 14, 2005).

47 Philip W. Grone, Statement before the U.S. House of Representatives, Appropriations Committee, Subcommittee on Military Quality of Life and Veterans Affairs, March 2, 2005, http://www.acq.osd.mil/housing/ct05_grone.htm.

48 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics Web site, "Military Housing Privatization FAQs," http://www.acq.osd.mil/housing/faqs.htm (as of June 14, 2005).




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