The Insider

The Pentagon yesterday announced a potential C-27J aircraft sale to Australia worth nearly $1 billion, a package that would include 10 fixed-wing cargo planes plus logistics support.

The Defense Security Cooperation Agency on Dec. 16 notified lawmakers of the potential foreign military sale for the aircraft and associated equipment, to include Rolls Royce engines, electronic warfare self-protection suites, radar, radios and mission planning systems, according to a Dec. 19 statement.

“The proposed sale will allow the Australian Defense Force (ADF) to improve its capability to meet current and future air mobility needs and humanitarian operations and disaster relief efforts in Southeast Asia,” the DSCA notice states. “The ADF retired its fleet of 14 DHC-4 Caribou aircraft in 2009 and will soon retire 12 C-130H aircraft. The proposed sale of C-27J’s will provide the capability needed to meet operational needs and emerging requirement. Australia will have no difficulty absorbing the C-27J and support into its armed forces.”

The U.S. Air Force plans to buy 38 C-27Js, which have been flown on missions in Afghanistan.

The prime contractor for the Australia deal, which DOD estimates will be worth as much as $950 million, would be L-3 Integrated Systems Group, Waco, TX. The aircraft is built by Alenia North America.

There are "strong indications" that a North Korean missile test that preceded this weekend's announcement of the death of North Korean dictator Kim Jong Il was "preplanned" and not tied the dictator's death, a senior defense official told reporters today. The official declined to say whether the Pentagon anticipates North Korea will conduct more tests in the coming days.

Defense Secretary Leon Panetta, at home in California following a recent trip abroad, spoke this morning via phone for 15 minutes with the South Korean defense minister about the death of Kim Jong Il. Panetta conveyed "the strong commitment of the United States to peninsular stability and to our alliance," said Pentagon Press Secretary George Little, adding, "He made it clear that the United States stands with the Republic of Korea in this time of uncertainty."

Little said both men "agreed that it was critical to remain prudent with respect to all matters related to our security posture there, and pledged to keep one another informed in the coming days."

Wall Street analysis firm Credit Suisse isn't too bullish about the fiscal year 2012 defense appropriations conference agreement, which lawmakers hammered out last night as part of an omnibus spending bill. According to a just-released Credit Suisse research note:

*      Army Most Impacted Given OCO Reliance, but "Network" Capabilities Protected: The Army received $9B in RDT&E (-10% vs. request), $22B in Procurement (-12% vs. request), and $76B in O&M funding (-4% vs. request). Clear winners were communications and electronics, tactical wheeled vehicles, and support equipment. We believe part of the procurement cuts were as a result of the JTRS Manpack delay (GD/COL/BAE), JTRS GMR cancellation (BA), WIN-T delay (GD), and EMARSS cancellation (BA), all of which were previously known.

[UPDATE Dec. 21: Credit Suisse just issued an updated version of its research note, changing the EMARSS language to read: ". . . and EMARSS (BA) procurement funding which was zeroed out from the FY'12 request."]

*      Navy Seems to Weather the Storm Given Program Diversification; at least for the Short-Term:  The USN received $18B in RDT&E (-1% vs. request), $46B in Procurement (-4% vs. request), $46B in USN O&M (-1% vs. request), and $9B in USMC O&M (-2% vs. request). The winner in our view is shipbuilding which was fully funded (HII, GD). We believe cuts to aircraft procurement are partially a result of the presidential helicopter (VXX) manufactured by LMT, flat-lining of F-35 (LMT), and cuts to the weapons account appear to include AMRAAM and Standard Missile (both RTN).

*      Air Force Encounters the Least Turbulence Due to Size of Investment Accounts: The USAF appears to have the greatest resilience of the major services because of the sheer size of investment accounts, plus the ability of its large RDT&E account to absorb punishment to protect the critical procurement account. The service received $27B in RDT&E (-4% vs. request), $41B in Procurement (-2% vs. request), and $46B in O&M (-2% vs. request). In our view, the winner was the aircraft procurement account, with modest cuts to KC-46A tanker program (BA), F-22 upgrades (LMT), and the HH-60 recap (UTX). We believe the reduction in aircraft procurement is also partially attributable to the slowing of F-35 CTOL (LMT).

*      Our View: While the budget offers some modest short-term upside in RDT&E & procurement, the reality is the [Budget Control Act] is being enforced and DoD funding is being flat-lined. This leaves minimal opportunity for substantive growth unless one defense contractor can take work from another.

House Armed Services Committee Chairman Buck McKeon (R-CA) and other GOP colleagues today held a press conference to promote H.R. 3662, which they have named the "Down Payment To Protect National Security Act." The bill would delay sequestration by one year while also slashing the federal workforce by 10 percent over a decade, McKeon said, noting Defense Department civilians would not be exempt.

The workforce cuts would save $127 billion, enabling the Pentagon to avoid $55 billion in cuts while also sparing non-defense discretionary accounts from $55 billion in cuts and gleaning $17 billion for deficit reduction, according to McKeon. No Democrats have signed up to back the bill, he said, noting this is unlikely to happen given the president's threat to veto legislation that stops sequestration without slashing the federal deficit by $1.2 trillion.

The administration maintains that Congress "cannot simply turn off the sequester mechanism, but instead must pass deficit reduction at least equal to the $1.2 trillion it was charged to pass under the Budget Control Act," Defense Secretary Leon Panetta noted last month.

Sen. John McCain (R-AZ) today cited the coming 50th anniversary of Eisenhower's farewell address, the Jan. 17, 1961 speech warning against the “acquisition of unwarranted influence . . . by the military-industrial complex,” in delivering a Senate floor speech on the many ways the former president's admonition has not been heeded.

The “military-industrial complex has become much worse than President Eisenhower originally envisioned:  it's evolved to capture Congress,” the ranking member of the Senate Armed Services Committee said. “So, the phenomenon should now rightly be called, the 'military-industrial-congressional' complex.”

The Arizona lawmaker outlined parts of this network of influence -- spanning the executive and legislative branches and encompassing the defense industry -- and said it props up unnecessary defense spending. McCain, a longtime critic of funding set aside in spending bills by lawmakers for projects in their home districts, called such earmarks “the currency of corruption.”

The movement of high-ranking Defense Department personnel to defense firms and vice versa is “another manifestation” of the military-industrial-congressional complex, McCain said, before turning his attention to how the Pentagon buys its largest weapon systems -- a $1.7 trillion portfolio.

To be clear, the military-industrial-congressional complex does not cause programs to fail.  But, it does help create poorly conceived programs -- programs that are so fundamentally unsound that they are doomed to be poorly executed.  And, it does help keep them alive -- long after they should have been ended or restructured. . . .

With the federal budget deficit having hit $1.3 trillion for the 2011 budget year and facing the fact that the defense budget will likely not grow to any significant extent in the near-term, we in Congress must be mindful of how the military-industrial-congressional complex can negatively affect decisions to buy and keep major weapon systems.

McCain discussed efforts under way to improve defense acquisitions, then enumerated programs with procurement issues that have led to rising costs: the F-35 Joint Strike Fighter, the Expeditionary Fighting Vehicle, the V-22 Osprey, the Space-Based Infrared System High, the Advanced Extremely High Frequency satellite, the Evolved Expendable Launch Vehicle, the Future Combat System, the Littoral Combat Ship, the F-22 Raptor and the DDG-100 Zumwalt Class Destroyer.

With his allocated speaking time running expiring, McCain skipped over many of the conclusions about how to improve procurement so the Senate could proceed to debating the fiscal year 2012 defense authorization bill. But the full version of his prepared remarks contains a lot more:

So, going forward, what can be done to prevent the havoc the military-industrial-congressional complex can wreak on how we buy major weapon systems?  Well, little can be done to disrupt the inherent biases of those who are the major forces in the military-industrial-congressional complex to maximize their own particular interests.  But, we can help the Department of Defense reform itself by developing a weapons procurement process that directly responds to the root causes of failure by, for example, starting programs on a solid foundation of knowledge with realistic cost and schedule estimates and budgeting to those estimates; locking in sufficiently defined requirements early; managing the cost, schedule and performance trade-space effectively to ensure that needed capability is procured within a fixed, reasonably short period of time; insisting on early and continued systems engineering; leveraging mature technologies and manufacturing processes; not procuring weapon systems that promise generational leaps in capability in a single bound; and definitely not doing so under cost-plus contracts.

We must also ensure transparency and accountability throughout, and use competition to encourage industry to produce desired outcomes and better incentivize the acquisition workforce to do more with less.  We should also embrace initiatives geared at making the government as skilled and knowledgeable a buyer as Industry is a seller.  With the right leadership, such approaches may help overcome the negative, pernicious effects of the military-industrial-congressional complex on how we buy major weapon systems.  And, given how tightly woven the military-industrial-congressional complex is into the fabric of our society and economy, this is all we can really hope for.

Only after implementing such an approach over a period of time and under the right leadership can one hope to see the most elusive of all behavioral improvements—enduring cultural change.  But, if achieved—and it most certainly can be—cultural change would be a powerful panacea to the “unwarranted influence” of the military-industrial-congressional complex in the defense procurement process.

House Armed Services Committee Chairman Buck McKeon today introduced a bill that would "pay for the first year of sequestration cuts without doing serious harm to America's military," according to a just-released panel statement. "The bill holds to the spirit of the Budget Control Act  (BCA) and leaves total sequestration caps in place. The bill is co-sponsored by leading Republican members of the defense committees," the statement adds. The legislation is H.R. 3662, the "Down Payment To Protect National Security Act." The committee further states:

Last month's failure of the supercommittee to find $1.2 trillion dollars in savings over ten years triggered equivalent cuts in discretionary spending. America's military funding will be cut by $500 billion, compounded on the $465 billion already cut this year.

In addressing the perilous cuts facing the military, McKeon said, "America's military commanders have warned us that these cuts will cripple our ability to defend the nation.  After cutting almost $500 billion from defense, we are clearing a lot of waste, fat, and even muscle out of the military.  Going into sequestration cuts us to the bone.  It forces us to break faith with the men and women who have been at war for a decade now. We can and should have a national conversation about our role in the world and how our military is configured. That conversation should come before we cut the budget, not after."

The Down Payment To Protect National Security Act imposes a reduction of federal workforce by 10% through attrition and applies the savings to pay for one year of sequestration, for defense and non-defense categories.  A 10% reduction will be achieved over 10 years by only hiring one federal bureaucrat for every three who retire.

Unlike other sectors of the government, the Department of Defense must plan for personnel costs, weapons systems, and other operational needs years before they are needed.  Decisions that will impact the FY 13 budget are being made now.  Many of those decisions, like canceling procurement projects, separating troops, and closing facilities, are irrevocable.

"The coming political year is likely to be marked with gamesmanship and brinksmanship.  My bill gives Congress a shot at statesmanship.  Over half of the deficit reduction efforts to date have come out of the military," McKeon said.  "The troops simply don’t have any more to give. It is time we address our debt crisis sensibly, by literally shrinking the size of government.  At the same time, we will meet our commitment to saving $1.2 trillion over ten years.  That should be enough to persuade the Commander in Chief to put politics aside and protect our troops."

By The Numbers:

Defense Cuts Since 2011

·         2011 Gates Efficiencies: $178 Billion

·         BCA Tier 1 Cuts: over $465 Billion

·         Sequestration Cuts: Over $500 Billion

·         Sequestration Cuts for FY 13: $55 Billion

Down Payment On National Security Act

·         Savings Through 10% Attrition: $127 Billion

·         Available Funding for Defense: $55 Billion

·         Available Funding for Non-Defense Discretionary: $55 Billion

·         Available funding for Deficit Reduction: $17 Billion

Lawmakers conferencing the fiscal year 2012 defense authorization bill have decided to maintain a 2007 energy law provision that bans federal purchases of carbon-intensive alternative fuels, rejecting an attempt by the House to repeal the ban as it applies to the Defense Department.

The conferees' rejection of the House measure to block DOD compliance with section 526 of the energy law is referenced in the House-Senate conference report for the fiscal year 2012 defense authorization bill, released last night by the House Armed Services Committee. The House "recedes" in its attempt to exempt DOD from the section 526 alternative fuel procurement requirement, the conferees say in their final report.

Section 526 bars federal agencies from purchasing alternative fuels with higher greenhouse gas (GHG) emissions than conventional fuel. DOD is currently studying the lifecycle GHG emissions of fuels it purchases containing Canadian tar sands, in light of section 526 requirements.

But industry and other critics have sought to repeal the provision, charging it hampers demand for nonconventional fuels like tar sands, oil shale and coal-to-liquid fuels. Supplies of these fuels, especially Canadian tar sands, are expected to increase given two pipelines already approved by the State Department in recent years, and the possible approval of the controversial Keystone pipeline.

"Failure to repeal Section 526 will increase the nation's dependence on imported oil, while jeopardizing thousands of American jobs that depend on the continued flow of Canadian oil," the American Petroleum Institute (API) said in a press release earlier this year.

But earlier this year, former military officials publicly criticized the 526 repeal proposal, saying it would impede the military's move toward clean energy and maintain the military's reliance on oil and gas.

Rep. Adam Smith (D-WA), ranking Democrat on the House Armed Services Committee, opposed repeal during House floor debate last May on the defense bill. Section 526 bars "tax dollars from being used to purchase fuels that have a higher pollution emission than conventional fuels," Smith said. "As the largest federal agency, exempting DOD from 526 is a step backward in this effort."

The House sought to revoke section 526, as it applies to DOD, when it passed the defense bill in May. But the provision was rejected by the Senate Armed Services Committee earlier this year, with a committee spokesperson saying the panel lacked jurisdiction over the issue.

The conference report now goes to the House and Senate for votes on its final passage.