The Perils of Privatization

Almost a decade ago, the Air Force (along with the rest of DoD) went on a "privatization" binge. The reasoning was simple: by converting thousands of positions from military billets to civilian contractor positions--and "outsourcing" a variety of functions, the Pentagon hoped to save billions of dollars, and improving the quality of services and support provided to the troops.

Ten years later, DoD's privatization venture has produced mixed results, at best. For every successful enterprise, there seems to be a corresponding horror story of cost overruns, unforeseen consequences, and promises that were never kept.

One of those outsourcing horror stories has been unfolding at Moody AFB, Georgia for the past three years. Located just north of Valdosta, near the Florida state line, Moody is sometimes viewed as a backwater, an assignment to be avoided, if at all possible. Having spent some time at Moody, we can assure you that the base and its host unit, the 347th Rescue Wing, play a vital role in the nation's defense. And you'll never find a community more appreciative or supportive of the military than Valdosta, Georgia.

In return, the Air Force has steadily expanded Moody's mission and facilities. By 2009, almost 1,000 additional airmen (and their families) will be assigned to the base. That influx has created a need for more military housing, to accommodate the new arrivals and replace older units that were nearing the end of their service life. To satisfy those goals, Moody became part of a DoD program to provide "privatized" quarters for military personnel.

Here's how the project was supposed to work: under the 1996 Military Housing Privatization Initiative (MPHI), a developer was supposed to build and maintain 606 new units for Moody personnel. A contract for the project was awarded in February 2004 to a Meriden, Connecticut firm, Carabetta Enterprises, LLC. The Moody project was the smallest of six privatization contracts awarded at Georgia military bases over the past seven years. Carabetta has a total of $3.3 billion in military housing projects, scattered across five states.

So, three years (and millions of dollars later), what does the Air Force have to show for the Moody privatization effort? According to the Duluth (GA) Weekly, approximately two new housing units. The rest of the project is a morass of unpaid bills, unfinished homes and litigation. The Valdosta Daily Times reports that the project was padlocked last March, after Carabetta's partner, American Eagle Communities, failed to pay local sub-contractors working on the housing units.

The problems at Moody have caught the attention of Georgia Senator Saxby Chambliss, who highlighted the issue on the Senate floor Wednesday evening. Mr. Chambliss says he's "disappointed" with the service's response so far. Senator Chambliss wants an "action plan" for the Air Force, and answers to some troubling questions about the Moody project, namely:

--What prompted the USAF to award the contract to Carabetta, which filed for bankruptcy in 1990?

--Why isn't the Air Force taking steps to terminate the contract?

--Where does the service plan to house personnel that planned to live in the now-shuttered community?

Mr. Chambliss is also pushing for the Air Force (or DoD) Inspector General to take a look at the Moody program, and the Carabetta firm. When lenders stopped advancing money for the project six months ago, it was already $25 million over budget, and hopelessly behind schedule. According to Mr. Chambliss, Carabetta's other military housing projects have been halted as well; the Valdosta Daily Times reports that the firm is trying to sell some of those ventures to another company. At this point, prospects for the Moody project look rather bleak. The Air Force has told Senator Chambliss that since it has "no legal agreements" with the contractor, issues of non-payment must be resolved through the court system.

That must be awfully reassuring to Air Force families who planned to use their housing allowance to rent one of those privatized housing units.

***

ADDENDUM: There are a number of lessons to be learned from the Moody debacle. First, the DoD contracting system is hard-broke; as Senator Chambliss wondered, how does a firm with a history of financial trouble (and poor performance) wind up with billions of dollars in military housing contracts? Secondly, housing is a market that works best with minimal government interference, particularly in a community like Valdosta. Recent data indicates that the median home price in the area is only $115,000--well below the national average. That translates to an "average" mortgage payment of $700-$800 a month, within the reach of most military families.

Finally, as with other "outsourcing" ventures, the "savings" initially promised to DoD often prove illusory, especially when you consider some of the "unplanned" problems that arise after the contract is awarded. When Columbus AFB, Mississippi (a pilot training base) privatized its aircraft maintenance function in the late 1990s, no one anticipated a "wild cat" strike by civilian mechanics that shut down flight operations for a week, and threw the training schedule into chaos. Similarly, when ground was broken for the Moody housing project, no one expected that the venture would wind up in the local court, with work halted, more military families on the way, and only two units to show for the taxpayer's investment.