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Stealth Spending At The Pentagon


The Air Force wants to expand its fleet of F-22 Raptors. But at $130 million apiece, these stealthy planes from Lockheed Martin Corp. (LMT) are the most expensive fighters ever. So the Pentagon is proposing to buy its next 20 Raptors piecemeal: sections of the fuselage in fiscal 2007, much of the innards in future years.

Senator John McCain (R-Ariz.) smells something funny here. He says the Air Force is trying to minimize the near-term expense of the F-22s while ensuring that eventually Congress will feel obliged to fund all 20 planes. After all, lawmakers don't want voters to learn that a bunch of half-built fighters are parked in a hangar somewhere. "This approach hamstrings Congress to continue supporting the program, without regard for possible spiraling costs, slips in schedule, or material changes to specifications," McCain told BusinessWeek in an e-mail interview.

McCain and other budget hawks say they're seeing more of this kind of gimmickry as the Pentagon strains to maintain the costly occupation of Iraq. A member of the Senate Armed Services Committee, McCain is set to become chairman of the panel next year. In coming days, the once and possibly future Presidential candidate expects to back a slate of acquisition-reform proposals to be introduced by Senator John Warner (R-Va.), the current committee chairman.

The military argues that it's stretching every dollar to cover a growing list of missions around the world. As for the piecemeal F-22 proposal, now pending before Congress, Air Force spokesman Doug Karas says: "It's not the run-of-the-mill way to do it. But this is the way, because of budget constraints, that we think we can do it without hurting the program." Lockheed Martin declined comment.

STOPGAP JET

Buying in pieces isn't controversial when it comes to huge items such as aircraft carriers, each of which costs billions and takes years to build. Trying to shape the debate on the F-22, McCain asks why the Air Force doesn't simply ask for the money needed to build the number of planes it wants. The Pentagon has requested $2 billion, rather than the $3.5 billion required for 20 completed fighters.

The Air Force already has 65 of the F-22s, which were first envisioned in the 1980s for aerial duels against a Soviet enemy that no longer exists. Part of the reason the Pentagon wants to extend the purchase of additional Raptors is that its next-generation Joint Strike Fighter, a more versatile plane, isn't scheduled to begin full production until 2011. In case of a serious war, the Pentagon says it doesn't want to get caught without the capacity to build fighters quickly. (Meanwhile, the Air Force says it is repairing a problem with the tails of some F-22s.)

In contrast to the go-slow tactic on the F-22, the Pentagon often tries to accelerate acquisitions, citing efficiency and other goals. Procurement officers are encouraged to forgo onerous financial-oversight procedures when buying from smaller companies that presumably can't afford to comply with the requirements. The aim is to attract nimble competition for the big defense contractors.

The problem is that the Pentagon has jammed big-dollar projects through this "other transaction authority" (OTA), and many of the beneficiaries have been the giants that dominate the defense business. In 2000, the Defense Dept. used OTA to launch a $127 billion program, led by Boeing Co. (BA), designed to overhaul the way the Army fights, from its use of battlefield software to the deployment of armored robots. Last year, under pressure from Congress, the Pentagon reversed itself and applied standard regulations to what's known as Future Combat Systems. Boeing has said the switch won't affect its work.

Northrop Grumman Corp. (NOC) heads up the separate $6.3 billion program that has produced the unmanned Global Hawk reconnaissance aircraft. That project operated under OTA for its first eight years, until it was converted to a conventional contract in 2003. Northrop notes that the OTA contract was initially awarded to a company it acquired in 1999. The flexible OTA terms allowed the use of smaller, more efficient suppliers, Northrop says, and the Global Hawk took its first test flight only 33 months after the contract was signed. The Pentagon put the large-nosed spy craft into active service in 2001 and now has more than 30 of them.

Worried that too many OTA contracts are going to traditional defense contractors, Congress in January required that any OTA deal exceeding $100 million receive scrutiny by senior Defense officials.

CUTTING CORNERS

In a much lower price range, the Pentagon's specially designed $436 hammer from the mid-1980s led to a push to buy ordinary items from conventional commercial sources. The military now purchases everything from portable toilets to pickup trucks this way and doesn't have to follow certain big-ticket regulations and audit requirements when doing so.

In some cases, however, the Defense Dept. has made costly, complex acquisitions using the off-the-shelf method. In a contract issued in 1999 that runs through this year, the Air Force acquired a $74 million fighter jet simulator program without demanding that the supplier, Lockheed Martin, provide certified cost and pricing data, as it normally would have to. In March, the Pentagon's Inspector General concluded there wasn't a commercial market for military jet simulators, and the Air Force should have used conventional procurement procedures.

The Air Force now acknowledges that it bent the rules. "We said: 'You know what? You're right. That should not have been a commercial procurement,"' says spokesman Karas. The Air Force was trying to save money and avoid excessive bureaucracy, he adds. Worried about other possible instances of inappropriate "commercial" procurement, Congress demanded in January that the Pentagon provide notice of any supposedly off-the-shelf purchases of major weapon systems.

Karas maintains that "the Air Force is interested in improving processes and making sure we're acquiring things in the best possible way." But from Capitol Hill, McCain sees reason for skepticism.

By Eamon Javers


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