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Boeing Executive Named to Pentagon Will Face Many Potential Conflicts

President Trump recently named Boeing executive Patrick Shanahan to be Deputy Secretary of Defense, marking the second defense contractor nominee this administration has named to a Pentagon post. The appointment raises a number of potential conflict of issues the public and Congress should examine—including how difficult it will be for Shanahan to recuse himself from the business and interests of his former employer.

When President Obama named a defense industry official—then-Raytheon lobbyist William Lynn—POGO joined open government groups in opposing the nomination because of the substantial conflict his appointment created. The Senate Armed Services Committee required him to recuse himself from programs he personally lobbied on, specifically the DDG-1000 Zumwalt-class destroyer, AMRAAM air-to-air missile, F-15 airborne radar, Patriot “Pure Fleet” program, Future Imagery Architecture program, and Multiple Kill Vehicle.

Previous industry experience doesn’t always mean a bad deal for taxpayers. For example, Shay Assad went from being an executive at Raytheon to a pro-taxpayer Director of Defense Pricing who was aggressive enough to earn himself the title of “most hated man in the Pentagon” by those who wanted to stick to their business-as-usual ways. But it does require careful oversight to make sure there isn’t improper influence, and that public officials are committed to doing what’s best for our military effectiveness at an affordable price.

Under President Trump, Shanahan would be required to sign President Trump’s ethics executive order that prohibits him from working on matters related to former employers or clients for two years (our take on that here). As was true of the Obama ethics executive order, President Trump’s EO includes a waiver provision that can be signed by the President or his designee. But unlike the Obama pledge, the waiver provision does not include criteria for when a waiver can be granted or a requirement to publicly disclose the waiver.

As detailed below, there are a number of matters related to Boeing that could create potential conflicts of interest that undermines the fairness of Pentagon policies and acquisition programs should Shanahan be confirmed.

Financial and Programmatic Conflicts of Interest

Boeing is the second largest contractor for the Department of Defense (DoD), receiving $25 billion in fiscal year 2016. Among the major Boeing weapon programs DoD currently oversees is the $43.5 billion KC-46 tanker—already $2 billion over cost—and the $62 billion V-22 Osprey.

Shanahan’s own career at Boeing included managing the Apache and Chinook helicopter programs, the V-22 program, and three years leading its ballistic-missile defense program, including a Ground-Based Missile Defense system the Union of Concerned Scientists found cost taxpayers $40 billion and still has no proven track record of being an effective countermeasure.

Boeing is also half of a joint venture with Lockheed Martin called United Launch Alliance (ULA), the prime contractor for the Air Force’s Evolved Expendable Launch Vehicle (EELV) program, which has come under Congressional criticism for cost overruns that more than doubled the cost of the program and having an unfair monopoly. The DoD is also currently evaluating alternatives for the F-35 Joint Strike Fighter program, including comparing the platform to Boeing’s F-18—which could result in substantial benefits for Boeing.

Anti-Taxpayer Policy Conflicts

Concerns about the revolving door between defense contractors and the Pentagon go beyond specific acquisition programs, however, and include policies that impact government oversight of companies’ operations. According to the Center for Responsive Politics, Boeing is one of the top spenders on lobbying, ranking 7th. A review of Boeing lobbying disclosure forms filed for the last year reveal a number of defense policy areas that taxpayers should monitor for potential conflicts of interest.

Increased Pentagon Spending: Unsurprisingly, disclosure forms show Boeing has lobbied on the need to lift defense spending caps, putting both Boeing and Shanahan in line with the proposed Pentagon budget. As Boeing noted in a recent SEC filing, “We derive a substantial portion of our revenue from the U.S. government, primarily from defense related programs with the U.S. DoD… Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the authorizations and appropriations process could result in reductions, cancellations, and/or delays of existing contracts or programs. Any of these impacts could have a material effect on the results of the Company’s operations, financial position and/or cash flows.”

Acquisition Reform: Boeing’s lobbying disclosure forms are vague about the company’s approach to acquisition reform. But generally the defense industry has been resistant to real competitive fly-before-you buy requirements and realistic operational testing to make sure weapon systems will be effective and safe in combat. Perhaps the greatest test for Shanahan and his colleagues will be whether they will cancel weapons systems found to be operationally ineffective.

Contractor Accountability: Boeing’s disclosure forms show they also lobbied on the Fair Pay and Safe Workplace Executive Order, which would have required contractors to disclose to the government their labor law violations, provide employees information needed to verify the accuracy of paychecks, allow employees to file discrimination and sexual assault and harassment claims in court, and include labor law violation information as part of the contract award process. The contractor accountability measure was rolled back earlier this month by Congress, and is still sitting on the President’s desk was signed by President Trump on March 27.

Commercial Items: Lobbying disclosure forms note Boeing lobbying on supply chain management. Boeing’s SEC filings also note “periodic audits of costs that we determine are reimbursable” present a risk to shareholders. Audits by the DoD Inspector General have repeatedly found that the Department pays too much for spare parts, and that contracting officers cannot access the information they need to determine if prices are fair or reasonable because parts have been mislabeled as “commercial”—as in sold to customers and therefore reflecting a market-determined price—when the U.S. government is in fact the only customer. When items are labeled “commercial,” the government is not allowed to access to the contractor’s cost or pricing data. Boeing has been one of the companies identified in multiple cases. To save taxpayer money, the Department previously sought an updated definition of commercial items to mean goods or services that are actually sold to the general public in like quantities and so actually kept in check by the market. The Department of Defense, under pressure from Congress and industry, killed a proposal to get cost or pricing data from contractors. Adding to the problem, commercial items definitions could be further weakened by Congress.

Trade Policy: Boeing lobbied in favor of the Trans-Pacific Partnership (TPP), an agreement then-Secretary of Defense Ashton Carter promoted as key to rebalancing US policy in Asia. Shanahan himself introduced then-Secretary of State John Kerry at an event making a similar case. The Trump administration, on the other hand, has opposed TPP.

Insurmountable Conflicts?

Efforts to drain the swamp and strengthen the integrity of Pentagon operations are severely undermined when defense contractor officials are named to top posts. Issuing Mr. Shanahan a waiver from the Trump executive order could defeat the purpose revolving door reforms, yet confirming him without a waiver and requiring himself to recuse himself from matters that affect Boeing could make it impossible for him to effectively serve in his position. Either way the military industrial complex is alive and well and of its executives are heading to run the Pentagon.