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Project on Government Oversight

Say 'NYET!' to Mergers

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April 28, 2008

From POGO's blog:

In an important Washington Post op-ed today, former senior Department of Defense officials Dov S. Zakheim and Lt. Gen. Ronald T. Kadish (Ret.) point out that the lack of competition in the Pentagon's buying has led it to become a Soviet-style system:

The Government Accountability Office reported last month on how things are going with nearly 100 major U.S. defense systems. Not well, it seems. They have exceeded their original budgets and are, on average, almost two years behind schedule.

The GAO report lays bare a festering problem in our nation's military procurement system: Competition barely exists in the defense industry and is growing weaker by the day.

It was a different story just two decades ago. In the 1980s, 20 or more prime contractors competed for most defense contracts. Today, the Pentagon relies primarily on six main contractors to build our nation's aircraft, missiles, ships and other weapons systems.

It is a system that largely forgoes competition on price, delivery and performance and replaces it with a kind of "design bureau" competition, similar to what the Soviet Union used--hardly a recipe for success.

With less competition, contractors have few incentives to keep costs down and performance high. In essence, we are left with a few super-sized contractors that are holding all of the cards. As witnessed by the Air Force tanker deal and the recent IBM suspension, the government has few places to turn--it has, in effect, handcuffed itself.

The Pentagon pushed a policy in the mid-90s to consolidate the defense industry, which has led to the situation we have today. Zakheim and Kadish describe a fateful Clinton Administration "Last Supper" meeting that precipitated the mergers.

Even worse, however, was that the federal government paid for the defense contractor mergers under a policy which its opponents, including POGO, called "payoffs for layoffs." At the behest of defense contractors, the Pentagon and its friends in Congress paid the contractors billions of dollars to merge. At the time, POGO noted:

These mergers contain an even more fundamental problem: even if there are short-term savings for the government, in the long run any lower prices are likely to be offset by the effects of reduced competition from excessive corporate merging. The Pentagon has not yet fully examined the long-term government costs of reduced competition from the tremendous concentration currently underway in the defense industry.

The health care, homeland security, and IT industries are also following a similar path toward merger-mania. In some instances, new companies are being gobbled up by the large DoD contractors. Too much power, influence, and control over the government marketplace is not good for taxpayers. POGO agrees with Zakheim and Kadish--more oversight isn't going to fix the problem. The government has to do something to increase competition and bring in the many small and mid-sized firms that can help the government meet its needs. 

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.