Aligning Incentives in the Transportation Working Capital Fund

Cost Recovery While Retaining Readiness in Military Transportation

by Kathryn Connor, Michael Vasseur, Laura H. Baldwin

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Research Question

  1. What changes can be made to USTRANSCOM's TWCF cost-recovery process to better align customer peacetime decisions with the wartime mission?

During peacetime and wartime, the U.S. Transportation Command (USTRANSCOM) is responsible for moving units, people, equipment, and households by ship, aircraft, rail, and truck for the Department of Defense. The peacetime and wartime movements are interrelated, because many, but not all, customer movements in peacetime are crucial for preparing USTRANSCOM and its components for future wartime requirements. USTRANSCOM utilizes a hybrid working-capital fund (WCF) approach to recover its costs, called the Transportation Working Capital Fund (TWCF). USTRANSCOM charges rates to customers for specific services, such as moving a container by surface transportation or chartering an aircraft to move personnel; these rates include some fixed costs. How these rates are determined varies by the service provided. USTRANSCOM receives revenue from other sources to cover additional costs. Recent efforts by a USTRANSCOM working group found that customers perceive the cost of movements as being too high.

This report analyzes adjustments to TWCF cost recovery that could better align customer peacetime decisions with the wartime mission. To recommend a cost-recovery approach that meets this objective and improves transparency, the authors reviewed literature on commercial WCF best practices, analyzed budget and cost data, and interviewed stakeholders. The authors applied lessons learned in these analyses to recommend changes to TWCF cost recovery and examined these changes in the context of five deep-dive case studies.

Key Findings

USTRANSCOM is critical for wartime operations, so it cannot close even if there is a small demand for its services

  • Many types of peacetime movements help USTRANSCOM prepare for the needed wartime capability. Keeping these types of movements within the Defense Transportation System can contribute to overall readiness.
  • USTRANSCOM's goals are more complex than those typically found in private industry, because USTRANSCOM is not operating with a profit motive. Additionally, USTRANSCOM must accomplish its mission at a wide range of operational tempo.

USTRANSCOM is currently recovering some fixed costs — those that are required to support USTRANSCOM's mission and are largely invariant despite the level of customer activity — from customers through rates

  • This policy runs against preferred practice in relevant academic literature, suggesting that customer incentives could be better aligned with the Defense Transportation System's readiness needs through changes in USTRANSCOM's cost-recovery structure.
  • Customers need to be encouraged to use USTRANSCOM's services, either through mandates in DoD regulations or through financial subsidies.
  • USTRANSCOM needs a mechanism to help prioritize customer requirements. Its working-capital fund can be used to serve this role when prices are structured transparently to incentivize customers to make wise choices about their transportation needs.

Recommendations

  • USTRANSCOM should recover fixed costs through non-rate mechanisms, rather than through rates.
  • USTRANSCOM should adjust rates to reflect activities' effects on its readiness.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Overview of Current TWCF Processes

  • Chapter Three

    WCF Best Practices from Industry

  • Chapter Four

    Applying WCF Best Practices to USTRANSCOM

  • Chapter Five

    Case Studies on Specific Areas

  • Chapter Six

    Recommendations for a Future USTRANSCOM Cost-Recovery System

  • Appendix A

    Policy

  • Appendix B

    Supplementary Data Analysis

This research was sponsored by USTRANSCOM's Program Analysis and Financial Management Directorate and conducted within the Acquisition and Technology Policy Center of the RAND National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community.

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