Economic Impacts of the National Security Build-up: Government Procurement Practices
Council on Foreign Relations Speech by Danielle Brian, Project On Government Oversight. Waste, fraud and abuse in the Department of Defense is on the rise due to taxpayer protection rollbacks.
The federal government is the biggest consumer of goods and services in the world and relies heavily on free-market forces to ensure fair prices. But a large portion of federal dollars buy goods and services that are not affected by these market forces. Because the government is often the only consumer of a particular product, and more importantly, because often times only one supplier exists, free market forces cannot always regulate prices. This scenario most often plays out in defense spending, where the federal government is, by necessity, the only buyer of weapons systems and military-unique services, and where, due in part to recent mega-mergers, there are very few companies able to provide these goods and services. Given that the defense budget comprises approximately 2/3 of federal procurement spending, it is the battleground over which federal procurement issues are being played out.
The Project On Government Oversight was formed in 1981 at the beginning of the Reagan defense build-up. We were then called the Project On Military Procurement. We were the creation of a number of Pentagon insiders concerned both about weapons that don't work, and the waste of defense dollars - in other words More Bucks and Less Bang. During the 1980s we exposed the now infamous $7600 coffee maker and the $436 hammer. We highlighted the overpricing of weapons system spare parts in order to make the overpricing of entire weapons systems more comprehensible to the average person. Few know how much an Army tank or Air Force airlifter should cost, but everyone knows how much a hammer should cost.
In large part because of these revelations, new laws were introduced. Three of particular note were the Competition in Contracting Act, the re-creation of the Cost Accounting Standards Board and new emphasis placed on the Truth in Negotiations Act.
The Competition in Contracting Act of 1984 required contracts to be "fully and openly competed." In addition, the Cost Accounting Standards Board set accounting rules for noncommercial contracts to achieve uniformity and consistency in contractors' accounting practices – something I think we can all appreciate today in the era of Enron and Worldcom. The Truth in Negotiations Act (TINA) required contractor cost and pricing data submitted to the government to be current, accurate, and complete. Given the lack of free-market forces in play for most defense acquisition, these provisions were essential for protecting the taxpayer from waste, fraud and abuse.
The Pentagon Inspector General noted that these reforms "resulted in dramatic increases in reported competitive procurements and savings from 1985 to 1988." The next year, she testified before Congress that, "(W)e believe that these controls have been critical to maintaining the Government's ability to adequately protect its interests in the acquisition area."
Despite (or perhaps because of) these successes for the taxpayer, the defense industry was not happy with the new system. In the 1990s, it mounted an offensive against what it saw as overbearing procurement reforms of the 1980s. This offensive was a hallmark of then-Vice President Gore's "Reinventing Government" initiative, and was given the media-friendly moniker of "Defense Acquisition Reform."
These attacks on taxpayer protections were buried in the 1994 Federal Acquisition Streamlining Act and the 1996 Clinger-Cohen Act. These provisions would have made George Orwell proud. They created such Orwellian concepts as "competitive" one-bid contracting; "commercial items" that are only bought by the government; information about cost and pricing that "need not be current, accurate, and complete;" and "indefinite delivery, indefinite quantity" contracts.
The result? A May 2001 DoD IG audit of 145 sole-source and "competitive" one-bid contracts discovered that overpricing had occurred in more than 1/3 of the contracts. In the vast majority of the remaining cases, the DoD IG was unable to determine whether overpricing had occurred, due to inadequate data. A 2002 Associated Press computer analysis found that, "(I)n all, the government bought $123 billion of its $230 billion in goods and services in 2001 without bids or with methods that auditors say are frequently used to bypass competition." In other words, now the government is buying more than half its goods and services without any competition.
"Commercial items" procurement is equally permissive and troubled. Under the Acquisition Reform definition of "commercial items," goods such as military cargo planes qualify. For example most recently the Pentagon attempted to categorize the $232 million C-17 as a commercial product. By thus categorizing the airlifter, the Air Force could bypass pricing oversight which is only intended to be lifted for items which are truly commercial and whose prices are set by free market forces. The Pentagon was successful in claiming the C130J as a commercial product, although we have so far been successful in preventing the C-17 from being so miscast. Due to such a tortured definition of "commercial," the cost and price data for these items are not available to the government. In 2000, the General Accounting Office revealed that the cost of nearly 3000 spare parts purchased by the military bought under the "commercial" price system in 1998 increased by ten times or more in just one year.
Another example of Acquisition Reforms is the creation of Indefinite Delivery Indefinite Quantity contracts. Under these contracts, the government does not specify exactly which products or services it wants, it is basically the equivalent of a hunting license. Such contracts, stifle small business competition by providing perfect opportunities for large contractors to monopolize entire market segments and thereby liberally overcharge the government. A recent DoD Inspector General report states, "The underlying goal of multiple award contracting was to obtain the best value while sustaining competition. . . . However, the large percentage of sole-source orders demonstrates that most DoD contracting organizations continued to be increasing the risk to the Government and losing the benefits of price competition."
Acquisition reforms have also introduced the use of government purchase or credit cards for micropurchases – buys under $2,500. The idea was to speed up purchasing time by removing normal accounting internal controls for purchases under $2,500. These cards have now been found to buy obviously personal items, including breast enlargements and lap dances. These are the purchase card equivalents of the coffee pots and hammers of the 1980s. They are tangible examples of far greater, but less obvious, abuses created by Acquisition Reform.
With defense spending set to sharply increase given new Homeland Security spending and the likely war on Iraq, the "Acquisition Reform" that has taken place over the past decade has put the government in a dangerously vulnerable position where it is not only possible for contractors to get away with overcharging the government, but very likely.
For example, Secretary Rumsfeld has waived most cost and testing oversight of the $8 billion Ballistic Missile Defense (BMD) program by allowing the use of an agreement known as "Other Transactions" rather than normal contracting rules. This move was intended to encourage new, smaller, more innovative companies to bid on BMD contracts. In fact however, the two "Other Transactions" agreements signed to date are to Boeing and Lockheed-Martin. Hardly new companies to break into defense contracting, they will not need to provide cost and pricing data and can even be exempt from undergoing government audits.
Judge Stephen Daniels spoke at the White House Office of Federal Procurement Policy Lecture Series this summer. He summed up the impact of this shift:
"Efficiency and ease of contracting are important. But we have not been careful enough in weighing increases in efficiency against the critically important values of openness, fairness, economy, and accountability. By diminishing those key values, we have damaged the system and created a pseudo-efficiency which, on closer inspection, has resulted in greater costs. The procurement system is far less faithful to the democratic and capitalistic impulses that it once reflected. By disdaining full and open competition, we have sapped the system's greatest strength. We all know that a genuinely competitive marketplace works to the greatest benefit of all of us as consumers. Why shouldn't this engine of capitalism continue to benefit all of us as taxpayers, too?"
In addition to real concerns about the Pentagon's ability to adequately account for its dollars, there is a real question regarding whether the Pentagon is even buying what it needs. I was invited to a briefing by Secretary Rumsfeld on this subject the week before last. He made it clear that the budget is not being driven by national security needs - not news to some of us, but very interesting to hear this from the Secretary of Defense. He made it clear there are a number of weapons systems he believes are not needed - yet he is struggling to cut them. He blames both Congress' parochial interests in preserving unneeded weapons' systems, and perhaps more interestingly, the eroding civilian control at the Pentagon. As a result, while the Army's Crusader appears to have been killed, the Army Stryker Personnel Carrier, the Air Force F-22 Fighter Aircraft, the Marine's V-22 Tiltroter Osprey are all still being procured - even if we as a nation don't need or want them.
I will conclude with a question. If the government itself is unable to access basic cost and pricing data in order to determine how its defense dollars are being spent, and the Secretary of Defense has little say on what its defense dollars are buying, how can the public monitor and shape defense policy?