Every two years or so Washington talks about ‘fixing’ procurement; every administration makes at least one push to “fix” procurement, Congress usually follows with its own plan. Secretary Gates is currently involved in such a discussion. For those not familiar with Washington DC jargon, ‘Procurement’ technically means anything and everything that the US Government purchases under contract – from large lots of office furniture to F-22s and Aircraft Carriers. In fact, what the politicians and pundits are really talking about is the Department of Defense and its half brother, the Intelligence Community.
Let’s begin by admitting that something is not quite right. A recent example will serve to point out the scale of the problem. The President needs a new helicopter. That is undisputed by anyone who has bothered to make the most cursory examination of the facts. While the helicopters he flies in look great, and are maintained by an incredibly diligent and dedicated group of Marines, civilians and contractors, each of those airframes has more 10,000 hours of flight time, or so I am told. If you have ever been in or near a helicopter, think of what happens to all the various pieces of metal in that airframe, and in particular to the main structural members, after 10,000 hours of shuddering operation. While these aircraft are safe, they are well past their design life and need to be replaced. (By way of comparison, a ten year old car will have roughly 4 to 5000 hours of operating time. Consider a 25 year old car, moving at 125 miles per hour, 1000 feet above the ground. Now put the President in it.)
Enter the VH-71. The VH-71 was a design that was accepted by the DOD as the replacement for the helicopters that are now used to transport the President. The contract called for 26 aircraft, with a total cost of the program being about $6 Billion. While that may seem excessive – nearly $230 million per aircraft, it must be remembered that this aircraft was carrying the President. Accordingly, there was a good deal of research and development money needed (it was a new aircraft and you don’t fly the President around in an untested airframe), and a large chunk of the money actually went to a wide range of special equipment for the President. In other words, this was money in the contract, but not really in the airframe itself.
But, the contract started ‘expanding.’ By the time it was terminated in 2009 it had grown to more than $11 Billion, before any of the helicopters had been delivered to the DOD, although seven have been built.
Now, this is not the first such contract to have an overrun. The list of overruns is, in fact, long and storied. Nor is it in any way a Republican or Democrat unique event. In fact, virtually every single program under consideration or review spans several administrations, from initial concept development through R&D (research and development) to initial acquisition. Each is subject to annual Congressional Review, and, of course, DOD and the entire Executive branch have no money except what Congress gives them. In fact, even then they don’t have money: Congress needs to both appropriate money – identify a specific pot of money for a specific program, and then authorize it being spent – giving DOD the ‘green light’ to actually move the money to the contractor. And there are a host of committees and subcommittees in both the House and Senate that have to play a role in these (and other) steps.
So, if there is this oversight, how can it be that no one objects when a program doubles in size in a matter of three or four years? Who is responsible – really? Why does no one object when a program drags on for years, even decades without yielding any results, yet the funding continues?
While this issue will be batted around Washington, and in the end legislation will be passed that purports to ‘fix’ this, the fact is that the situation is more or less just what everyone wants. That’s why it is what it is. Nor is this new.
A History of Overruns
During an earlier administration – the Washington administration (215 years ago) - the US Navy let out contracts for six frigates. (One of them, the USS Constitution, is still afloat in Boston.) The Navy went out of its way to make sure that the frigates were actually assembled in six different states, with the ribs and structural members made from live-oak from Georgia, the masts and spars came from Maine, South Carolina furnished wood for the decks, Rhode Island produced canvas for the sails, New Jersey produced oak for the keel and cannon-balls, Massachusetts produced more sails, gun carriages, cannon, anchors, and copper plating for the hull (Paul Revere), etc. In the end more than half of Congressional districts in the young country were enriched by the contract. (I recently saw an article in an aviation industry trade magazine that reported that the F-22 was made up of parts from more than 1000 different companies located in more than 40 states.) The Constitution was originally funded at $115,000. The actual procurement costs of the six frigates is listed below.
Constitution 44 guns 1576 tons $302,719, built in Boston
President 44 guns 1576 tons $220,910, built in New York
United States 44 guns 1576 tons $229,336, built in Philadelphia
Chesapeake 36 guns (originally 44) 1244 tons $220,678, built in Gosport (Va)
Congress 36 guns 1268 tons $197,246, built in Portsmouth (NH)
Constellation 36 guns 1265 tons $314,212, built in Baltimore
Numbers ARE Relative
As another point of reference, the US GNP at the time of the ordering of these six frigates was somewhere in the range of $100 - 200 million. Although it isn’t possible to make an exact comparison of GNPs when a fair percentage of the population were farmers who had little surplus and little cash income, the number nevertheless gives a sense of the level of investment the nation was willing to make. Assuming a $200 million GNP, $300,000 represents an investment of .15% of GNP. To place this in perspective, the current US GNP is on the order of $14 trillion. An investment of .15% amounts to $21 billion. The current estimate for the cost of the yet to be built USS FORD, the next nuclear aircraft carrier, is roughly $14 billion. In short, it will cost less than the USS Constitution.
A Built-in Problem
Another point that complicates any effort to control costs is to recognize that irrespective of any other consideration, the economic reality is that this is a monopsonistic market. A monopsonistic market is one in which there are multiple sellers and only one buyer. This is compounded by several other key points: the amount of money available is generally known; it is in the interest of the payer (the Congress) to reward each seller; and the user (the DOD) manages the program with people who are promoted (or otherwise rewarded) based on successfully delivering the platform based on capability, not cost. Let us look at each in turn.
Monopsony
A monopsony exists whenever you have only one buyer and multiple sellers. Just as with a monopoly, this results in an inefficient market. As a general rule, a monopsony will lead to the buyer buying fewer items than an efficient market would produce, which inevitably should lead to market failure. As the market cannot be allowed to fail (the US government still needs to buy tanks, for example) the tank manufacturer is paid a higher price in order to sustain inefficient production. But, there is no way to avoid a monopsony – no one else is going to buy submarines, and even if US aircraft are marketed overseas to our allies, US purchases are still the foundation of any production line.
At the same time, the inefficient market will eventually force consolidation of the production line into a single seller. You then are faced with a single seller (a monopoly) and a single buyer (a monopsony), the most inefficient possible answer.
This has already happened in a number of weapons systems: there is only one builder of tanks in the US, there is only one maker of aircraft carriers, only one maker of large airframes, etc.
This will also lead to legislative ‘fixes’ to economic problems. Congress may insist on competition and so split an already inefficient contract into two pieces in order to maintain two production companies in a given ‘strategic’ industry. The result is two separate production facilities each with an installed production capacity that exceeds the annual purchase of the government. The space launch capacity for the US was like this for many years, until the two separate corporate elements were merged into a hybrid that is struggling to produce lower cost space launch vehicles.
Starting with the ‘Right Answer’
A second problem that develops in this situation is that of complete (or nearly complete) knowledge. Each of the various companies involved in DOD procurement is aware of how much money is available for procurement, with just a small margin of error. And at the same time, unlike any true commercial enterprise, a more efficient production line will not materially affect the number of units purchased. If the DOD wants 100 fighter aircraft for the Navy, and Congress wants to spend $10 Billion dollars, there is no real incentive to making an airplane for $90 million.
The Fox Guarding the Hen House
At the same time, within DOD, programs are managed by uniformed officers who are from that ‘community.’ That is, tank procurement programs are managed by tank (armored) officers; and aircraft procurement programs are managed by pilots from that specific community (F-18 program officers are F-18 pilots, for example). While this obviously is not the case by the time you get to the three star officers who are the senior managers for each service, the day-to-day management of these programs is conducted by officers who have to return to their community when they leave this specific tour.
There is obvious merit to this process: an officer who has spent the previous dozen years on submarines is going to understand what is and what is not needed in the next submarine. It is a good idea to have that expertise helping to ‘steer’ the program.
But, at the same time, such an officer will also want the very best submarine available. And the same officer knows that the submarine community will watch his efforts and ‘grade’ him accordingly. Which provides pressure to continually improve the submarine, which will drive the cost up. There is also great resistance to ever canceling a program or recommending a cancellation because it might be seen as hurting your own community.
Further, if you, as a fighter pilot, know that the Congress is only going to buy 200 or 300 fighters, are you going to want ‘ok’ fighters or the very best that technology can provide? You (and your friends) are going to be flying those airplanes and you will almost to a certainty be outnumbered if you ever go into combat – you want the very best – and who cares about the price.
The American taxpayer says the same thing when the Army and Marines end up in combat: we want the best for our troops (and we do).
Staff Growth and the Authority to Say ‘No’
There is a related problem of the growth in staff sizes and a concomitant reduction in authority of any one individual. Every applicable staff, and every associated staff officer, wants to have a say on any relevant program. That has a simple (but substantial) cost in the amount of time required to push any program review through the respective staffs. This causes a much greater and more complex problem because every staff wants to adjust relevant programs to meet their perception of the required capabilities of the particular weapon or system.
Because there is no mechanism to continual performance improvement, nor is there organizational resistance (there may be resistance from small groups of operators, but they have a hard time getting heard in Washington), adding capabilities or otherwise ‘improving’ the system, irrespective of cost or time, is something that can be accomplished by any dedicated individual or staff. But, once a program has been improved, there are very few offices that have the authority to remove a capability.
It is also worth noting that there is no ‘real’ value in saving money. By that I mean that if a program cost is cut from $5 billion to $4 billion, the Navy or Air Force or even DOD as a whole doesn’t get that money to spend elsewhere. At best, the service can recommend a reapportionment of spending, but Congress will decide. And it is the primary interest of the Congress to make sure that money flows to the various states and districts, not to specific programs to purchase specific capabilities.
Next: Part 2 - the Rest of Problem
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