Where's the Oversight?
    By Michael Hirsh
    Newsweek

    Monday 13 February 2006

The untold tale of the latest Pentagon budget is the wastage and overpricing that continue to lard it up to the tune of perhaps $100 billion - with Congress scarcely paying attention.

    From his earliest days in office, George W. Bush has talked a good game about transforming the military. He even hired a corporate turnaround specialist, Donald Rumsfeld, to accomplish the task. But after Bush earlier this month proposed a nearly half-trillion dollar defense budget for fiscal 2007 earlier this month-one that doesn't include many of the costs of the Iraq war-even some of the president's loyalists were appalled. One of them, Kori Schake, who until recently was director of defense strategy on Bush's National Security Council, last Thursday wrote a blistering op-ed in The New York Times headlined "Jurassic Pork." She noted that Rumsfeld's supposedly transformational Quadrennial Defense Review looks little different from four years ago, and that the latest budget "continues programs and practices that have been made obsolete by technology, innovation and field experience."

    But that's only part of the story. The untold tale is the wastage and overpricing that continue to lard up the Pentagon budget to the tune of perhaps $100 billion, with Congress scarcely paying attention. In some cases, corporate welfare-type programs that were launched in the '90s - at a time the Clinton administration felt defense contractors needed help because of post-Cold War budget cuts - are still on the books. And today they are feathering the bottom lines of giant companies like Boeing and Lockheed Martin, even though Big Defense has long since returned to health.

    Even some well-meaning reform programs have backfired because of lax oversight by the Pentagon. On Tuesday, Congress will begin hearings on a General Accounting Office report concluding that $8 billion in "incentive fees" given to defense companies over the past three-and-a-half years were largely a waste of taxpayer dollars. The fees were intended as a reward to contractors for delivering faster results and coming in under price. Instead, the GAO says, companies were given incentive fees on 597 contracts for doing nothing.

    One of the most worrying contractor practices is to use-or abuse-a little-known provision in acquisition guidelines that permits companies to escape Pentagon and congressional oversight, officials say. How? By pretending that they are competing in the commercial market for big-ticket goods that in truth are being designed for and sold exclusively to the Pentagon. Boeing, for example, sold the Pentagon the $168 billion Future Combat System under such an arrangement, and it was only under pressure from Sen. John McCain's office that the terms were changed to allow performance, costs and pricing on the program to be monitored.

    In another instance, Lockheed Martin used a similar provision, called "Part 12" of the Federal Acquisition Regulation (FAR), to win a multi-billion contract to supply C130J transport planes. The plane has more than doubled in price in less than a decade and, by the Air Force's own admission, the government is paying Lockheed a princely 20 to 25 percent profit. One of Lockheed's subcontractors, engine-builder Standard Aero, is now suing it, claiming the bigger company has grabbed its proprietary information under cover of the contract-and again, without Pentagon oversight - a move that it says could hold up needed transport planes for U.S. troops.

    After many months of pressure from McCain beginning last April, Lockheed finally agreed to convert the contract to the regular "Part 15" of FAR, which forces the company to reveal pricing and other data to the Pentagon and Congress. But as of last Friday the Air Force's chief procurement officer, Ken Miller, had still not redrawn the contract. "We're like the little Dutch boy sticking his finger in the dike," says one Senate official. Prodded by McCain, the Defense Department's Inspector General is now looking into these and other allegations regarding the abuse of Part 12, says IG spokesman Gary Comerford.

    The FAR Part 12 provision was also well-intended. Enacted in 1994, it was a way of encouraging companies soon to be deprived of contracts because of the "peace dividend" to produce "dual-use" goods, and of pushing the Pentagon to buy better, cheaper commercial items off the shelf rather than building everything, even those infamous $468 hammers, on its own. But the contractors learned to game the system while few people were watching.

    And now in some cases, like the C130J contract, contractors are using the provision to actually reduce competition without accountability by "insourcing," or cutting out subcontractors. "Procurement guidelines are so complicated they're beginning to look like the tax code," says a senior government procurement official. "No one knows how much this has cost us." Because Congress and watchdog groups are beginning to catch the companies at disguising military goods as commercial, he adds, "they're being a little cleverer now. They're trying to bring it down to the component level, calling it avionics or engines."

    Lockheed spokesmen say the criticism of the company's behavior on Part 12 and the C130J contract is unfair. "We invested over a billion dollars of our money in this thing" at a time, in the '90s, when the Pentagon said it couldn't fund it, said one company official, Tom Jurkowsky. Asked whether the C130 was offered for commercial use, he said that at the time it was developed "there was a belief that market and economic conditions were appropriate and this was good airplane to get, say, from an outlying city in Germany to Frankfort, or to take cargo from northern Africa to Paris. That type of thing." Why didn't it sell to commercial carriers? "Because of various economic conditions it didn't work," Jurkowsky said. In any case, congressional critics say, Lockheed learned years ago the plane was not viable commercially, yet it maintained the same contractual free ride.

    A Boeing spokesman, Dan Beck, also denies any company wrongdoing. "We don't believe Boeing has ever tried to engage in price gouging or lack of accountability," he said. Last year, however, a Boeing executive who previously had been the Air Force's chief procurement officer, Darlene Druyun, was imprisoned for favoring Boeing in contracts in exchange for personal favors, including the hiring of her daughter and son-in-law. Mike Sears, Boeing's former chief financial officer, was also convicted in the scandal. And in a speech last month, Boeing General Counsel Doug Bain warned 250 top Boeing executives that more indictments could be down the road. He also said the company might have to compensate the U.S. government by up to $5 billion to $10 billion.