Leasing as a strategic financing option: the navy’s maritime prepositioned ships experience

Published date01 March 2008
Date01 March 2008
Pages149-173
DOIhttps://doi.org/10.1108/JOPP-08-02-2008-B001
AuthorJoseph G. San Miguel,John K. Shank,Donald E. Summers
Subject MatterPublic policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 8, ISSUE 2, 149-173 2008
LEASING AS A STRATEGIC FINANCING OPTION: THE NAVY’S
MARITIME PREPOSITIONED SHIPS EXPERIENCE
Joseph G. San Miguel, John K. Shank and Donald E. Summers*
ABSTRACT. Recently, leasing has been prominent in the press due to the Air
Force’s recent ill-fated attempt to obtain the use of Boeing re-fueling
tankers. Forgotten is that, in the early 1980’s, a highly controversial Navy
long-term leasing program of Maritime Prepositioned Ships had a different
result. However, an unintended consequence of the Navy’s success was
that future government leases were practically eliminated. This research
examines the issues and parties involved in this unprecedented creative and
innovative leasing program for ships used by the Navy’s Military Sealift
Command. While the analysis concludes that the Navy’s leasing program
was successful and cost effective, laws and policies were changed so that
long-term leasing is no longer viable for the strategic financing of military
requirements. The case is presented here that existing laws and regulations
should be reconsidered so that leased military resources can once again be
used to provide and maintain national security.
INTRODUCTION
On January 25 and February 7, 2005, The Wall Street Journal
confirmed a widely reported major shift in Department of Defense
---------------------------
* Joseph G. San Miguel, Ph.D., CPA, is Professor, Graduate School of
Business & Public Policy, Naval Postgraduate School. His research interests
are strategic resource management, strategic control, and corporate
financial reporting. The late John K. Shank, Ph.D., CPA, was Visiting
Professor of Financial Management, Graduate School of Business & Public
Policy, Naval Postgraduate School, and Emeritus Professor, Tuck Graduate
School of Business, Dartmouth College. His research interests were
strategic cost management, financial controls, and finance. Professor
Shank passed away on March 30, 2006. Donald E. Summers, MS, LtCol,
USMC (Ret.), CMA, CFM is Lecturer, Graduate School of Business & Public
Policy, Naval Postgraduate School.
Copyright © 2008 by PrAcademics Press
150 SAN MIGUEL, SHANK & SUMMERS
(DOD) weapons acquisition policy over the next decade (Jaffe & Karp,
2005; Pasztor, 2005). They cite retired Admiral Arthur Cebrowski,
head of the Pentagon’s Office of Force Transformation, who sees a
significant shift away from capital-intensive weapons towards the
more labor-intensive systems used in guerilla wars.
Notwithstanding this transformative agenda, the Navy’s 2007
and 2008 President’s Budget still makes a strong case for a steadily
growing capital investment budget between 2006 and 2011. The
budget proposal submitted on February 23, 2005, by Admiral Bruce
Engelhardt, Director of the Office of Budget in the Office of the
Assistant Secretary of the Navy (Financial Management and
Controller), shows proposed growth in annual weapons investments
from $26 billion in 2004 to $42 billion in 2011 (Engelhardt, 2005).
The key components of this budget include the new Joint Strike
Fighters, DD(X) destroyers, Virginia-class nuclear submarines, and
Multi-mission Maritime Aircraft (MMA) to replace the aging P3 Fleet,
among many other programs. Not mentioned explicitly in Admiral
Engelhardt’s report is the question of how to replace thirteen
currently leased Maritime Prepositioned Ships (MPS) which support
the readiness of three Marine Expeditionary Brigades. The use of
these ships was arranged in the early 1980’s through 25-year leases
(five renewable periods of five years each), which will expire between
2009 and 2011.
This paper reviews the history of the MPS program to help assess
the lessons for current Navy acquisition policy. Today, there is a
strong disposition against leasing as a financing strategy for the US
military. As just one piece of evidence, consider the recent firestorm
of criticism, which met the Air Force’s attempt in 2002 to lease,
instead of buy, replacements for 100 aging KC135E refueling tankers
(Furber & Jaeger, 2004). The evaluation of the MPS history
presented here contributes significantly to an assessment of the
efficacy of leasing as a component of future acquisition policy.
SOME HISTORY ON THE POLICY PERSPECTIVE
The Navy has a long history of leasing ships to augment military
capability in times of war (Peters, 1979). Over 450 supply ships,
using merchant marine crews, were leased and deployed during
World War II. During the Korean War, over 200 leased ships were

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