The Insider

House Democrats are firmly in line with the Obama administration's proposed strategic defense guidance. Within minutes of the end of the press briefing featuring the president, Defense Secretary Leon Panetta and Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey, House Armed Services Committee Ranking Member Adam Smith (D-WA) issued the following statement:

Today's announcement marks the conclusion of an important strategic analysis of the threats that our country faces today, as well as in the future and how we can best address those threats moving forward. It represents a synopsis of the global threat environment, and presents a broad strategy to address those threats.

This review comes at an important time. Congress has been engaged in an ongoing debate about how best to meet the spending reductions stipulated in the bipartisan Budget Control Agreement without undermining our national security objectives. I have consistently said that we can rationally evaluate our national security strategy, our defense expenditures, and the current set of missions we ask the military to undertake and come up with a strategy that requires less funding and strengthens national security. I believe this review provides a framework to achieve that goal.

Not only does the strategic review clearly articulate the threats we face, but it also shows that simply spending more money on defense does not necessarily makes us safer – spending more wisely and effectively does.  Clearly, we do not have an endless amount of resources, and that should be taken into consideration, but it should not be the driving force behind our national security strategy. As demonstrated by the strategy laid out today, the Administration fully understands this fact.

The Administration has put together a significant string of foreign policy successes, including the death of bin Laden, Anwar Al-Awlaki, the elimination of much of al Qaeda's leadership, the end of the war in Iraq, and supporting the uprising in Libya.  Today's announcement lays out a strategy that will enable the United States to build on those successes and confront the threats of today as well as in the future, wherever they may emerge.

UPDATED 12:45 p.m.: House Armed Services Committee Chairman Buck McKeon (R-CA) just released a decidedly dimmer view of the strategy:

This is a lead from behind strategy for a left-behind America. The President has packaged our retreat from the world in the guise of a new strategy to mask his divestment of our military and national defense. This strategy ensures American decline in exchange for more failed domestic programs. In order to justify massive cuts to our military, he has revoked the guarantee that America will support our allies, defend our interests, and defy our opponents.   The President must understand that the world has always had, and will always have a leader. As America steps back, someone else will step forward.

An honest and valid strategy for national defense can't be founded on the premise that we must do more with less, or even less with less. Rather you proceed from a clear articulation of the full scope of the threats you face and the commitments you have. You then resource a strategy required to defeat those threats decisively. One does not mask insufficient resources with a fuzzy worldview and a strategy founded on hope and a hollow force.

UPDATED 2 p.m.: House Armed Services strategic forces subcommittee Chairman Mike Turner (R-OH) is more worried about the U.S. nuclear force structure:

From the announcement today it is clear that the Administration is planning further reductions in U.S. nuclear forces. At the same time, Russia and China are modernizing and growing their forces and Iran and North Korea's illegal programs continue to develop unchecked. The U.S. cannot be alone in disarming itself of nuclear weapons. Reductions to our nuclear deterrent should only come as a result of proportionate cuts from our adversaries as well. Further, deeper nuclear cuts will actually undermine the President's stated shift of focus to the Pacific. Our allies across Asia, much like others around the globe, rely on a strong U.S. nuclear deterrent for their security.

Of greatest concern, the review makes no reference to the President's commitment to pursue modernization of the U.S. nuclear deterrent. The President pledged this in order to get ratification of the New START treaty through the Senate. They are a package deal and I will continue to ensure their linkage.

Finally, the Administration has imposed significant cuts on national missile defenses since 2009.  The document offers no reassurance that the Administration has finally reprioritized missile defense plans to put national missile defense first.

In short -- this review leaves both our nation and our allies unsure of the future of our nuclear deterrent, and our ability to counteract attacks from those who seek to do us harm."

. . . And Sen. Joe Lieberman (I-CT) had this to say:

The "two major regional conflict" standard has formed the basis for our defense strategy since the end of the Cold War, and has upheld global security by providing assurance to our allies and warning to our adversaries that the United States would maintain overwhelming capabilities to defend its values and interests around the world. The changes outlined today greatly increase the risk that an adversary would calculate that we would not necessarily devote maximum effort to fighting back against them, while raising questions among our allies about the depth of our commitment to their defense.

The bottom line is this -- we cannot shortchange the defense of our security and freedom. No matter how these changes are explained, the fact is that the defense strategy is being altered mainly for budgetary reasons, not because we have arrived at a new strategic calculation that we are actually safer. Congress must take a serious look at our defense strategy and budget in the upcoming session, and I look forward to working with my colleagues in the Senate to ensure that we uphold our Constitutional responsibility to provide for the security of our nation and its people.

Obama: Defense budget will grow over next 10 years, but at slower pace than before.

Defense Secretary Leon Panetta's plan to unveil details of his department's fiscal year 2013 budget request tomorrow is nothing new, according to Wall Street analysis firm Credit Suisse.

In a research note released this morning, Credit Suisse analysts state: "Panetta is expected to borrow a page from his predecessor's book & offer advance details about the FY13-17 budget, a month before its scheduled unveiling in early February. This announcement mirrors a similar move last year from then-Sec. Gates, who rallied defense markets with the early info."

More:

*      Why Now? Like 2011, we expect the DefSec to highlight strategic objectives for DOD, including major program curtailments and cuts (this time dictated by the recent Roles & Means review, which is an adjunct exercise to the 2010 Quadrennial Defense Review that was precipitated by August’s Budget Control Act). But, unlike last year, this announcement is largely expected, precisely because these cuts have been well-telegraphed by the BCA.

*      Last Yr. Stocks Rallied on the News: Sec. Gates catalyzed a defense rally in early Jan when his detailed budget preview removed uncertainty until the release on 2/14/11. In this period, defense outperformed the S&P by ~7.5%.

*      This Year Is Different; We Expect the Current Rally to Fizzle: Last year's January defense rally followed two months of relative underperformance by a total of 8% as the market fretted about program uncertainty. This year, the rally appears to have started earlier, with the same defense names up 4.5% during November and December. Thus, we think bullish investors have already been paid on this theme and see the rally dissipating in coming days.

*      Share Downside Possible: Unlike last yr, which addressed GFY12's budget, these cuts are expected to address the full 5-yr planning period (GFY13-17), and account for just more than half ($260B) of the $450B in prescribed 10-year cuts from the BCA. Thus, the magnitude and permanence of decisions may appear more significant. Further, this FY13-17 plan will not embed the potential sequester, which could more than double the known cuts, and increase downside for investors.

*      Procurement Most Exposed, Particularly Army: While we believe continued reductions in force structure (personnel) will account for some of the spending reduction, these are likely back-end weighted during the 5-yr period, especially with ongoing war activity. This leaves Readiness (O&M) and Procurement as the nearest targets, and we expect DoD to focus on the latter, with greatest exposure to ground vehicle and other Army weapons, potentially impacting GD, BAE.LON, OSK, NAV, HRS and XLS.

*      See Further F-35 Restructuring: While USAF & Navy should fare better, we do see further reductions to five-year F-35 procurement plan, perhaps by as much as 20%, which could impact LMT & NOC.

(UPDATE 2:50 p.m.: DOD officials tell InsideDefense.com that budget details won't be revealed until nect month.)

Pentagon Press Secretary George Little today issued a statement regarding published reports that Iran may impede the transit of U.S. naval ships operating in the Persian Gulf region:

The deployment of U.S. military assets in the Persian Gulf region will continue as it has for decades.

These are regularly scheduled movements in accordance with our longstanding commitments to the security and stability of the region and in support of ongoing operations.

These carrier strike group deployments are necessary to maintain the continuity and operational support to ongoing missions in the U.S. Central Command area of responsibility.

The U.S. Navy operates under international maritime conventions to maintain a constant state of high vigilance in order to ensure the continued, safe flow of maritime traffic in waterways critical to global commerce.

Our transits of the Strait of Hormuz continue to be in compliance with international law, which guarantees our vessels the right of transit passage. We are committed to protecting maritime freedoms that are the basis for global prosperity; this is one of the main reasons our military forces operate in the region.

Little also stressed that no one in the U.S. government is seeking a confrontation with Iran over the Strait of Hormuz.

The Government Accountability Office has denied a protest filed by Hawker Beechcraft alleging that the Air Force violated procurement law by excluding the company from a contract competition that would procure 20 light attack aircraft for Afghanistan.

The protest -- and the final decision -- come down in large part to timing and a mailing address:

The Air Force argues that HBDC’s protest should be dismissed because the certified return receipt demonstrates that HBDC received notice of its exclusion from the competition on November 4, and because HBDC did not timely request a debriefing or file a timely protest. HBDC maintains that the timeliness of its debriefing request and protest should be measured from November 15, as opposed to November 4, since the Air Force sent the notice of exclusion to an allegedly “incorrect address.”

More specifically, HBDC asserts that the Air Force erred in sending the notice to HBDC’s physical government business address, rather than to HBDC’s designated mailing address, and due to this error the notice cannot be considered received by HBDC until the time the notice reached HBDC’s contracts manager on November 15. HBDC argues that its separate mailing address was identified on Standard Form (SF) 33 of its most recent proposal revision of September 14, and is accurately listed in HBDC’s Central Contracting Registry (CCR) Database profile, along with its physical government business address.

HBDC also argues that the Defense FAR Supplement (DFARS) and its associated Procedure, Guidance, and Information (PGI), require defense agencies to “use the CCR database as the primary source of contractor information for contract award and administration,” and “shall use the CCR database as the authoritative source” for certain information, including a contractor’s mailing address. DFARS PGI 204.1103. Finally, HBDC notes that the Air Force sent correspondence to HBDC’s “correct” mailing address earlier in the competition.

We fundamentally disagree with HBDC’s premise that the Air Force directed the notice of exclusion to an “incorrect” address. The Air Force notice correctly indicated--i.e., there were no typographical errors--an address HBDC provided to the Air Force throughout the competition--i.e., in its initial proposal, in its revised proposal, on the cover letter of its revised proposal signed by its contracts manager, and in the signature line of email correspondence sent by its contracts manager. AM, Tab 1, at 2; Tab 2, at 1, 2; Tab 5 at 2, 3. It is this address which HBDC now claims to be “incorrect” for the purpose of receiving the agency’s exclusion letter.

To the extent HBDC listed a different address on the SF 33 of its September 14 revised proposal submission, this address was not identified as a “mailing address” or HBDC’s “correct” address, and the record reflects that in various other places in this submission, HBDC identified its address as the address used by the agency to provide this notice.[1] HBDC Response, Tab 3, at 1. We also note that the DFAS PGI provisions that HBDC relies on for establishing its “correct” mailing address do not apply to agency communications during the course of a procurement--by their terms they apply to contract award and contract administration matters. The use of a firm’s CCR information has never been established as a requirement when providing adverse action notices.

More importantly, our timeliness rules do not turn on whether an agency has sent information to a particular designated address; rather, we look to whether the relevant information was in fact received by the offeror. In this regard, our Office has previously held that actual notification to a company’s designated point of contact is not required to constitute notice under our Bid Protest Regulations, where notice is otherwise received by the firm. For example, in Jarrell-Ash Div., Fisher Scientific Co.--Reconsideration, we held that notice of rejection of a proposal was effective on the date it was received at the company’s sales office address, even where the sales office address was not designated in the firm’s proposal, and was not the address of the individuals who prepared the proposal. Jarrell-Ash Div., Fisher Scientific Co.--Reconsideration, B-209236.3, Dec. 21, 1982, 82-2 CPD ¶ 562 at 3.

Here, it is beyond dispute that the Air Force sent the notice of exclusion, via certified mail, to HBDC’s designated contracts manager at an address set forth on numerous proposal documents submitted by HBDC--including a revised proposal cover letter signed by the contracts manager--and that receipt of the notice on November 4 is confirmed by an HBDC employee’s signature on the certified mail return receipt.

Accordingly, there is no basis for HBDC to claim that the Air Force caused the delay here. That it took HBDC 11 days to route the notice of exclusion to the appropriate person does not toll the filing deadline imposed by our regulations, or the statutory deadline to request a required debriefing.[2]

In this regard, Our Bid Protest Regulations contain strict rules for the timely submission of protests. Under these rules, a protest based on alleged improprieties in a solicitation must be filed prior to bid opening or the time established for receipt of proposals, 4 C.F.R. § 21.2(a)(1) (2010), and all other protests must be filed no later than 10 calendar days after the protester knew, or should have known, of the basis for protest, whichever is earlier. 4 C.F.R. § 21.2(a)(2). Where a protester timely requests a required debriefing,a protest filed within 10 days of the debriefing will be considered timely with respect to bases known before or as a result of the debriefing. Id. An offeror excluded from further consideration prior to contract award may request a preaward debriefing, but must submit a written request to the contracting officer within three days after receipt of the agency’s notice of exclusion. Federal Acquisition Regulation (FAR) § 15.505(a)(1). An offeror that fails to submit its request to the contracting officer within three days after receiving notice of exclusion is not entitled to either a preaward, or post-award, debriefing.[3] FAR § 15.505(a)(3).

Accordingly, HBDC was required to request a debriefing within three days of its receipt of the Air Force notice on November 4, or, absent a debriefing, was required to file its protest no later than 10 days after that date.[4] Where HBDC did not timely request a debriefing, and failed to file its protest until 17 days after it was notified that its proposal had been excluded from the competitive range, the protest is untimely and must be dismissed.

The Pentagon recently issued a new instruction laying out its supply chain materiel management policy. According to the Dec. 14 memo:

a. DoD materiel management shall operate as a high-performing and agile supply chain responsive to customer requirements during peacetime and war while balancing risk and total cost. The DoD supply chain shall provide best-value materiel and services in support of rapid power projection and operational sustainment of U.S. forces as required by the National Military Strategy. Potential disruptions within and outside the DoD supply chain shall be identified, monitored, and assessed in order to mitigate risk to supply chain operations. Life-cycle management controls shall be applied to guard against counterfeit materiel in the DoD supply chain. Energy efficient products or services shall have preference in all procurements, except those products or services procured for combat or combat-related missions.

b. Resourcing for all elements of the DoD supply chain shall be optimized through collaboration between support providers and customers. DoD investment shall be sufficient throughout the life cycle of new or existing weapons systems, equipment, and major end items to respond to warfighter needs. Performance and cost evaluations of supply chain operations and inventory shall be conducted periodically with the objective of ensuring that assets are available for use or reuse in the DoD supply chain to satisfy customer requirements.

c. Accountability, control, and DoD-wide visibility of materiel shall be maintained throughout the DoD supply chain, with the required level of physical protection and identification of the materiel at minimal cost. However, the highest levels of accountability, control, visibility, protection, and identification shall apply to the stewardship of controlled inventory items (CII) including nuclear weapons-related materiel (NWRM) commensurate with the risk of materiel release. All materiel recurrently used, bought, stocked, or distributed, including NWRM, shall be cataloged with an accountable record.

Analysts at Wall Street firm Credit Suisse issued their 2012 outlook for the aerospace and defense sector. In it, they predict that commercial aerospace will outperform defense for the fourth consecutive year. Specifically on the defense sector, they write:

Defense Likely to be Dead Money:  While we do not believe that the failure of the Super Committee to reach an agreement will actually result in sequestration, we think Congress will use 2012 as a debating year. Consequently, we see the potential for much of the defense sector to be dead money in 2012, before underperforming from 2013 as cuts in the defense budget begin to come through. We view a falling defense budget as bad for defense prime margins as well as revenues, and consequently remain bearish on defense. We also note that 2012 is an election year. When looking at the previous 5 election years, it is found that the defense sector underperformed the market most in 1996, when a Democrat President was seeking re-election. This is similar to today, but today there is a less healthy economy, making it an even more bearish outlook for defense.