Tuesday, October 30, 2007

The Perils of Privatization, Redux

A few weeks ago, we noted the abysmal failure of a Defense Department effort to "outsource" military housing to private contractors at four Air Force installations. Leading the list is Moody AFB near Valdosta, Georgia, where a planned, 600-unit housing development has been shuttered because the developer, Connecticut-based Carabetta Enterprises, LLC., has fallen hopelessly behind schedule and failed to pay local contractors for their work. Three years into the project, the Air Force has only two new housing units to show for its money--and millions more invested by banks and others who helped finance the development.

Making matters worse, Moody AFB is growing rapidly, and needs additional housing for its personnel. With expansion of Moody's 347th Rescue Wing, more than 1,000 new airmen (and their families) are projected to arrive in the Valdosta area by 2009. The private development was designed--in part--to ease a potential housing crunch. Now, with the project a morass of unpaid bills, unfinished homes and litigation, there are questions about where some of the inbound airmen and their families will reside.

But Moody isn't the only DoD installation with privatized housing problems. The Associated Press (via Air Force Times) is reporting that a similar project has faltered at Little Rock AFB, Arkansas, leaving another installation--and more airmen--in the lurch. The situation in Arkansas is strikingly similar to what happened at Moody:

American Eagle Communities entered a $106 million agreement three years ago with the U.S. Air Force to renovate homes for the base as part of the Defense Department’s push to privatize military housing. Under the agreement, American Eagle is to manage the housing, collect rent and handle maintenance and upkeep.

But in May, the company halted its work, leaving empty lots and half-built residences, after private investors stopped funding the project. Also, more than $12 million in private bonds issued in 2004 to help fund the project defaulted this month. Another $52.2 million in bonds were repaid to investors last month as American Eagle officially slipped into default on the contract.

As the AP article indicates, there is a corporate connection between the failed projects at the two bases. American Eagle Communities, which defaulted on the Little Rock housing contract, is the same firm that failed to pay sub-contractors and vendors in Valdosta, prompting a Georgia judge to shutter that project. The development firm is a partnership between Carabetta Enterprises and Shaw Group, Incorporated, a Baton Rouge, Louisiana firm.

All told, Carabetta and its partners received more than $3 billion in military housing contracts, despite the company's shaky financial history. Carabetta went bankrupt in the 1990s, and according to newspaper reports in Connecticut and Georgia, the firm viewed the housing contracts as a way to stabilize its financial situation.

Now, according to the AP, American Eagle is trying to sell its military housing projects to a new developer. Included in the package are the failed ventures at Little Rock and Moody, along with projects at Hanscom AFB, Massachusetts and Patrick AFB, Florida. Each of the four developments is currently in default. If the sale falls through, the projects will start all over again, with a new proposal, a new contractor and new funding sources.

Meanwhile, the Air Force has a shortfall of more than 3,000 housing units and there are no indications when the failed projects might actually be completed. The housing crunch will be most severe in higher-cost-of-living areas (including Hanscom and Patrick), where junior enlisted members and their families will be forced to find quarters on the local rental market. Under the privatized plan, rental rates for military personnel would equal their monthly housing allowance, providing a potential savings over other rental properties in the area.

Georgia Senator Saxby Chambliss has emerged as a critic of the program, describing the Air Force's response to the failed projects as "inadequate." Along with Senator Mark Pryor of Arkansas, Chambliss has authored legislation demanding an investigation into all failed military housing projects. The bill calls for descriptions of how the contracting company was solicited and chosen, how the financing was structured, and what remedies are available to recover from stalled projects.

From our perspective, we wonder why it takes an act of Congress to mandate an investigation. Since the unfinished housing units are earmarked for military personnel, the DoD Inspector General should be on the case, along with the Government Accountability Office and various U.S. attorneys in locations where the developers are headquartered. Obviously, the failed projects in Georgia, Arkansas, Massachusetts and Florida are an embarrassment for the Air Force (and the Pentagon), but that's no reason to delay an inquiry.

To be fair, DoD's private housing initiatve has had its share of success stories. A number of projects have been completed, occupancy rates average 90%, and tenant satisfaction is reportedly high. That's why an investigation into the default by Carabetta and its partners should begin immediately. Housing is an important quality-of-life issue for military personnel, and promises made to service members at those four bases have not been kept. The Pentagon and the Justice Department need to find out what went wrong, fix the problems, and demand accountability from those who allowed the projects to fail.


Additionally, we believe that DoD needs to rethink the privatization scheme in areas where housing is readily affordable. As we observed in our last post, the median home price in Valdosta, Georgia is only $115,000, which translates into a mortgage payment of $700-$800 a month. The average home price in Jacksonville, Arkansas (the community adjacent to Little Rock AFB) is $127,000. In those markets, the Pentagon might find it more efficient--and cost effective--to develop a program that encourages home ownership, instead of trying to salvage those failed privatization projects.


F said...

In point of fact, Spook86, this tragedy illustrates not the failure of privatization, but rather the failure of private companies who are kept afloat by feeding at the public trough. Carabetta has apparently demonstrated several times their inability to compete in the market, but despite that failure they are managing (mismanaging) a multi-billion dollar project. I agree with the idea of a full-fledged investigation, and I'm betting it will uncover influence coming from Congress or the Pentagon is behind the awarding of the contract.

The way to allow private enterprise to work is to allow contractors to compete without sizeable government guarantees. The result would possibly be more expensive housing units, but at least there would be housing units. At a time when housing starts are reportedly down nationwide, there should be no shortage of contractors willing to move into the market. There might be a shortage of laborers, but that's another issue. F

Unknown said...

F--I can't disagree with any of your points. I'm currently trying to trace political contributions from Carabetta to members of Congress. Like you, I'm willing to bet that someone went to bat on their behalf, giving Carabetta the inside track on those contracts, despite their shaky financial history.

I think the privatization scheme may be necessary in places where many military personnel (E-1 through E-7) would be hard-pressed to buy a house, or find decent rental quarters, i.e., Boston (which includes Hanscom AFB), the D.C. metro area, New Jersey (McGuire AFB and Ft Dix), and portions of SoCal.

However, in places where houses are very affordable, Uncle Sam should not be in the business of subsidizing military housing.

For a fraction of what's been wasted in Valdosta and Little Rock, the Air Force could have set up programs to help personnel with paperwork for VA loans, and paid their closing costs on buying a house. Incidentally, DoD already has a "home purchase" programs for civilians who relocate, so it wouldn't be a stretch to provide grants to cover closing costs. By my (rough) calculations, the Pentagon could set up an assistance office and pay closing costs for everyone of those in-bound airmen at Moody and the total cost would be about one-third of what's been spent on the failed housing project.

F said...

I agree with your proposal to help servicemen afford private accommodation -- such a program would pay dividends to the servicemen and the national economy, and would ultimately cost the US taxpayer less.

If you learn something about influence being used to support Carabetta, please publish it. Thanks. F