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Companies Continue Fights for U.S. Military Health Care Contracts

The United States’ Department of Defense spends a great deal of money on health care. They are responsible for not only the active duty members but also their dependents, retirees as well as National Guardsmen and Reservists. The fighting since 9/11 has seen the expansion of the size of the military. Many personnel have families. There has also been an increase in the number of wounded and those needing long term car. The sustained fighting and activity also caused more retirees. Combined these pressures have required that total spending dramatically increase. In 2010 it was almost $50 billion or roughly 8 percent of the defense budget.

This has been recognized by leadership such as departing Secretary of Defense Robert Gates and some moves have been proposed to reduce spending or slow the rate of growth. If changes are not made then more-and-more of available funding will go for personnel related matters leaving less for investment in new weapons and technology. At the same time the growth has made this an attractive area for large U.S. health insurance companies and they are currently fighting over the contracts to manage the health care program.

The basic program used to do this is called TRICARE. It is like a large HMO that requires the military participants to pay a small upfront fee and then co-pays for visits and services. Because the military is so large and geographically diverse the Department of Defense centrally manages the program and divides the U.S. into regions with a contract for each. There are also omnibus contracts for overseas and dental care. The contracts average values of $4-5 billion a year.

In 2009 the Department went ahead and awarded the next set of five year contracts for the different regions. These were bid on by familiar insurance companies such as Aetna (AET), Humana (HUM) and UnitedHealth. In the late summer the winners were announced and often the incumbent did not retain the contract. Immediately several protests were filed by the losers.

Incredibly two of these protests remain unsettled today almost two years later. That indicates the importance of these contracts to the providers. In a time when the entire health care market in the U.S. is about to see radical change TRICARE does offer some stability at least for the next several years and may provide a decent source of revenues and income for these companies to offset future changes in the civilian market.

UnitedHealthCare is pursuing protests for the South and West contracts. The South has now gone through two source selection cycles with UnitedHealth winning the first one over Humana who protested which led to a new competition. This was awarded to Humana in March and that was protested by UnitedHealth. The Government Accountability Office (GAO) upheld the award and UnitedHealth has now sued in Federal Court which is the final step in the protest process. UnitedHealth believes that Humana in order to minimize costs has reduced the proposed payments to providers to such an extent that few if any will accept TRICARE patients leading to poorer choice for military members. The GAO did not sustain that argument.

UnitedHealth and Humana have also been fighting over the West contract. Here UnitedHealth was the incumbent and Humana won the new contract. That protest has also led to a decision to have a new contest that is yet to occur.

The size of the TRICARE management contracts and their value has caused those companies involved in them to try to win and keep them. Despite pressure by the Defense Department to reduce costs they are expected to remain sizable for a variety of reasons. They offer some stability as the U.S. moves to reform the civilian market. It can be expected that these protests will continue for the next few months as the contract awards are worked through.

Article first published as Companies Continue Fights for U.S. Military Health Care Contracts on Technorati.

Northrop Grumman’s Shipbuilding Spinoff Proceeds Smoothly

The first major shake up in the U.S. defense industry since the implementation of the reforms by Secretary of Defense Robert Gates completed last Thursday as Northrop Grumman (NOC) spun off its shipbuilding arm to its shareholders. One of the biggest defense contractors in the world the company had announced last year that they were looking at leaving the business of building warships primarily for the U.S. Navy due to contraction in that service’s plans and expected budget reductions in the future.

As soon as the transfer of the assets to the new company, Huntington Ingalls Industries (HII), was complete the U.S. Navy followed up with the announcement of an order for the tenth San Antonio class amphibious assault ship, the U.S.S. John P. Murtha. The $1.5 billion ship is named for the former Congressman from Pennsylvania and Marine Corps veteran. Huntington has also inherited four other LPD-17 class ships already under construction at their Pascagoula, MS and Avondale, LA yards.

Prior to the decision to spinoff the business Nortrop had announced plans that they would consolidate their capabilities which would lead to the closing of the Avondale facility. This is still on track to be done by 2013 but the new company says there are opportunities to keep it open if viable work can be found for the shipyard. As well as the two Gulf Coast yards Huntington Ingalls now also operates Newport News shipbuilding which constructs aircraft carriers.

The decision by Northrop has led to rumors that the remaining company now separated from its services arm, TASC, and no longer building ships might be planning on merging with one of the other large defense contractors such as Boeing (BA), Lockheed Martin (LMT), General Dynamics (GD) or Raytheon (RTN). Moves like that were not uncommon in the Nineties when last the defense budget declined precipitously. This time around, though, the Pentagon has made it clear that it does not want to reduce industrial base capabilities and may not allow such mergers.

Huntington Ingalls must compete with primarily General Dynamics for a small shipbuilding budget for cruisers, destroyers and larger amphibious ships. The Navy is building at least twenty Littoral Combat Ships (LCS) over the next several years but these are smaller combatants made in smaller yards owned by Austal America and Marinette Marine. The U.S. if it wants to preserve industrial base must award enough ships to keep both companies going and their yards open.

Photo from surfaceforces’ flickr photostream.

Administration Continues to Propose Increases in TRICARE Premiums

TRICARE is the major health insurance program for the U.S. military, their dependents and retirees. It was created in the Nineties as a follow on to the CHAMPUS program primarily due to the end of the Cold War and the BRAC process. This led to the closing of hundreds of installations across the country making it harder for military retirees especially to gain access to health care. TRICARE is similar to an HMO in that it allows members to utilize private health care providers and facilities. The way it is set up requires a small premium each year.

As the U.S. military has grown over the past decade which includes numbers of dependents and retirees health care has become a major cost to the Defense Department. In 2012 it will cost over $50 billion or about eight percent of the total proposed budget. In the last decade the cost of military health care has increased from about $20 billion to a projected $64 billion in 2015 in unadjusted dollars.

In a move to try and counter these increases Secretary of Defense Robert Gates has proposed charging more for the premiums by as much as 300 percent. These moves have not been included in the defense budget as Congress has eliminated the increases. In 2012 the proposal is a much more modest $2.50 to $5.00 a month and this may have a better chance of approval.

The size of TRICARE is illustrated by the on-going struggle between Humana (HUM) and UnitedHealth Group (UNC) over the Southern region management contract. The two companies have protested the awards to each other of this potentially $20 billion contract.

Personnel costs as a whole have increased dramatically over the last two decades and this is eating up the Defense top line budget authority. Gates has already proposed the simplest way to lower these costs by eliminating Soldiers and Marines but this is also being fought by Congress as it makes little sense to reduce the size of the military when it is still engaged in Iraq and Afghanistan.

If defense spending will stay flat or start to be reduced to keep a decent amount of money for development and production of weapons health care costs need to have their growth limited. At the same time the nation and Government must pay for the care of its active duty forces and retirees as failure to do so would negatively impact recruiting, retention and the effectiveness of the U.S. military. Transferring some of the costs to the users may be a simple solution in the short term but it does set a precedent where larger and more harsh increases to premiums could be added by a future administration and Congress which then could lead to lack of access and care for military personnel.

As with all aspects of cutting Federal spending this won’t be easy but it is clear that something needs to be done due to the current deficits and budgetary pressures.

Humana Retains TRICARE Contract After Lengthy Protest

One of the largest and fastest growing costs that faces the U.S. Department of Defense is medical care. It must not only provide care for its current active duty members but also their families and also retirees. Due to a combination of overall health inflation, that most members have families and the large number of troops receiving injuries and wounds this part of the defense budget is eating up more and more funds to the point where Secretary of Defense Robert Gates has proposed raising premiums and co-pays.

The primary tool used to manage this health care program is called TRICARE. It is similar to a HMO and relies on contracts with different health insurance companies. The nation is divided into regions and a contract is awarded for each one. Due to the size of the program the contracts are in a range of several billion dollars a year.

Two years ago the Department awarded a series of new contracts to manage the different regions. One of these was to United Health Group (UNH) for the Southern Region but the losing incumbent, Humana (UUM), protested and it was sustained. DoD let Humana bridge while it figured out whether to have a new contest or address the protest some other way.

Last week it was decided to award Humana the full five year contract for the region. This contract could be worth up to $23 billion if all options are exercised and is a major coup for the company. At the time of the protest it looked like it would be out of the TRICARE business completely and would have to make up the lost revenue some other way. Now they are comfortably ensconced until 2016 which will give them some breathing room as DoD addresses its health costs.

There is no doubt that the military must look at its total personnel costs. They are the biggest part of the budget and if there is no growth in available defense dollars as expected then to free up money for investment in hardware and research these costs will have to be reduced. One of the easiest ways is to cut the number of active duty forces. In the 2012 budget Secretary Gates has done this with planned reductions to the size of the Army and Marine Corps who have grown the most since 2001. Of course at a time when troops are engaged still in Iraq and Afghanistan it will be hard for Congress to agree to this.

Another option which he has also proposed is transferring more of the costs of health care to the employee as so many companies have done. This is also unpopular as military members are not the highest paid people and in the past free or low cost health care has been part of their benefits. This while saving some money may cause a quicker increase in pay to make up for the new costs and thus not really saving money.

The U.S. defense budget faces a great deal of pressure to be more efficient. Health care is just one area that may see major changes due to this.

EADS Claims Able to Lower Price on Offer This Time Around

With the submission of their second proposal for the KC-X aerial tanker program EADS (EADS:P) stated that due to production increases they were able to lower the price on their KC-30 tanker aircraft. Chairman of EADS North America, Ralph Crosby, said by about six percent.

EADS and Boeing (BA) are trying for a second time to win the new tanker for the U.S. Air Force that will replace the aging KC-135R aircraft. In 2008 EADS which was teamed with Northrop Grumman (NOC) won the last contest which was overturned on protest by Boeing. The two companies submitted their final proposals last week.

Boeing has not provided such details but has previously stated that their smaller KC-767 aircraft has better fuel efficiency and maintenance costs that will save the Air Force money over the long run.

In recent testimony the Secretary of Defense, Robert Gates, indicated that the award announcement will be made in a few weeks following up on the Air Force’s budget document which indicated prior to April 1st.

2012 Budget Due Today to Congress

Even though the Congress failed to pass a 2011 budget the Obama Administration will submit its 2012 spending plan today. Even that is late as it is supposed to be sent up to the Hill the first Tuesday in February. The President’s plan reportedly includes some budget cuts with a goal of reducing the total deficit by up to $1.1 trillion over ten years. Of course for the first three years of this Administration the annual deficit has been over $1 trillion so this plan barely puts a dent in spending.

Congress generally adopts the President’s plan overall but because the House really is in control of Federal spending it normally makes changes that track more to its priorities then necessarily the executive branch. This year will be Obama’s first with a hostile House and there may be significant changes to his proposed spending. It is expected that the new Republican leadership will cut much more from total annual spending then the President is proposing.

The Defense Budget will actually be larger then last year but the rate of growth will almost be flat. This reflects the winding down of operations in Iraq as well as the new budget realities the U.S. must face. Secretary of Defense Robert Gates had already announced $100 billion in reinvestment opportunities as well as cuts of up to $78 billion.

Part of this was generated by Defense recommending cancellation of the U.S. Marines new amphibious assault vehicle, the Expeditionary Fighting Vehicle (EFV). This program to replace the existing LVTP-7 vehicles used to move troops from ship to shore and then support their operations inland is being managed by General Dynamics (GD) and has had budget and schedule issues. Of course there has already been push back from Congress especially from those states who will lose significant jobs and business when the program ends.

This reduction of one program illustrates the problems both the Administration and Congress will have as they try to balance the Federal budget. Every program that is facing cuts will have some sort of advocate in Congress who will attempt to keep it funded. That is why the President is freezing most spending but that will not be enough to bring the budget back from multi-billion dollar deficits.

The defense budget is the largest part of the discretionary spending and as long as the U.S. is fighting overseas there will be a lot of pressure to keep its size up. At the same time money must be invested into new weapons as well as replacing and recapitalizing those damaged or lost in the last ten years of combat.

There will be no easy choices with the total budget.

Boeing’s FCS Spin-offs Faces Struggles

The U.S. Army’s Future Combat System (FCS) was to be their next family of battlefield vehicles as well as different communication and data link systems supported by unmanned ground and aerial vehicles. It would ultimately replace the current M1/M2 heavy armored team in use since the Eighties. The program was led by a team of Boeing (BA) and SAIC (SAIC).

When the new Obama administration came in in 2008 one of its defense reforms led by Secretary of Defense Robert Gates was to cancel the program. This was due to cost and schedule issues and the fact that the requirements did not reflect the current combat conditions in Iraq and Afghanistan. While the main program was canceled some of its components were continued including Boeing’s Network Integration Kit.

This system is a data link used to connect vehicles within the brigade to aid them in monitoring the tactical situation. One of the key parts of FCS was to use advanced communications and C4ISR systems to improve battlefield knowledge and the Kit was a component of that.

Unfortunately the Defense Department has released results of recent testing of the Kit and it has not performed as well as they hoped. Although to be fair to Boeing and the Project Office the testing is early in the program and finding out issues like this is why testing is done.

The systems tested cost on average close to $1 million a vehicle kit and each brigade is supposed to get 81 of them. The price goal is less then half that. The testing will be part of the consideration of the Pentagon’s Defense Acquisition Board (DAB) as it meets to consider continuing the program.

Boeing is continuing development of the NIK and is currently building systems to equip one brigade. The Army is deciding whether to begin production of the two more sets for another two brigades.

In the current budgetary situation where the Pentagon is being squeezed to reduce funding programs that are having cost, schedule or performance issues may be easy targets to get cut. At the same time as with the EFV there remains requirements for these programs and ending this attempt may just be one step on to starting up another one.

If the NIK is canceled then the Army and Boeing will have little left to show for all of the time, effort and money spend on FCS.

Expeditionary Fighting Vehicle by General Dynamics Illustrate Budget Fights Ahead

Within days after announcing that the the Defense Department would like to terminate the Expeditionary Fighting Vehicle (EFV) development and production contract lawmakers in the areas affected are already fighting back. The EFV program for the U.S. Marine Corps is to make a new vehicle to transport troops from ship-to-shore. The lead contractor is General Dynamics (GD). Secretary of Defense Robert Gates announced terminating the program as part of his latest budget efficiencies last week.

Every time a program like this ends there is a severely negative economic effect to some part of the U.S. where the work is being done. Local Senators and Congressman want to support them to keep jobs in their state and districts and minimize the economic disruption. The EFV is no different in this case from many other defense programs.

The program has been in the works for several years and will replace the Vietnam era LVTP=7 vehicles. These are fully tracked and optimized for moving across the water. On land they are used as armored personnel carriers and support vehicles but that is not their primary mission. The EFV will build a new system with higher speed both in the water and on land as well as better protection. The IED and mine threat in Iraq and Afghanistan has demonstrated a need for better protection for the troops in the vehicle.

Unlike some of the easy decisions made two years ago such as ending the C-17 strategic transport aircraft made by Boeing (BA) where total numbers had been reached the EFV will be a tougher nut to crack. The Marines do have a requirement to move troops from Navy ships to the shore in a hostile environment. They need an advanced system to do this. If the EFV is canceled a new program will have to be started unless the U.S. wants to eliminate that strategic mission. One the Marines have had for most of their history and certainly since World War II. It might make more sense and certainly does to GD and its supporters to complete the existing program despite the cost and schedule growth as in the long run it might be cheaper then starting over.

As the Army faces with the cancellation of the Future Combat System (FCS) of ground vehicles they need a replacement for the M2 Bradley Infantry Fighting Vehicle (IFV) and Stryker Interim Combat Vehicle. So as FCS died they started the new Ground Combat Vehicle (GCV) program. This has already been restructured once as the first set of requirements proved hard to meet with associated weight and cost issues.

Congress ultimately controls the defense budget and if the supporters of the EFV can convince a majority of the House and Senate to keep funding for the system then it will continue. If not it will end and in a few years a new set of requirements will be drafted and a new program started. One the Marine Corps hopes will be cheaper and on track with the initial schedule. History shows though that this will be hard to do and rare if it happens. Defense acquisition and development are complicated processes.

Photo from DVIDSHUB’s flickr photostream.

Gates Announces Cuts and Reinvestments

The Secretary of Defense Robert Gates in what some are considering an attempt to get ahead of Congress announced that the Pentagon will be voluntarily reducing spending. Some of the money is part of the efficiencies he ordered last year while some of it is new reductions to programs and other parts of the military budget.

The goal is not to only cut the total defense budget as part of an attempt to reduce the deficit but also to free up money for higher priorities.

Much of what Gates’ is claiming as savings are those items related to the reductions from last year. Cuts to the contractor workforce and elimination of some DoD offices and personnel are one part as well as the closing of the Joint Forces Command in southern Virginia.

Other new reductions were the elimination of the Marine’s new amphibious transport the Expeditionary Fighting Vehicle (EFV). This General Dynamics (GD) led program was to replace the LVTP-7 currently used to move Marines from ship-to-shore as well as support operations on land. The EFV would have been faster and more capable as well as having a higher protection level. The program suffered from cost and schedule growth making it an easy target.

The Army also saw the end of the SLAMRAAM air defense program which put a Raytheon (RTN) AMRAAM missile on a HUMVEE teamed with fire control and battle management systems. Lockheed Martin’s (LMT) Non Line of Site- Launch Systems was also canceled. This was a rather unique system of remote missile launchers used to provide fire support for ground troops.

One aspect of his announcement that is sure to cause concern is an increase in TRICARE co-pays for some military members and retirees. The idea is to begin trying to reduce total healthcare spending by the Defense Department. TRICARE is the HMO type program that covers most active duty members, their dependents and retirees. The co-pays have seen little increase since start of the program. At a time though when the Veterans Administration and Defense Department have been criticized for not adequately treating the current Iraq and Afghanistan military the increase may prove politically risky.

Another move to save money that also might raise hackles is a decision to begin reducing the size of the Active duty Army and Marine Corps. This comes after several years of growth due to the large commitment to Iraq and Afghanistan. Personnel costs make up a large portion of the budget and this is the most direct way to reduce them. Of course having less troops means that if there is a need for a major operation over the next several years there will be greater pressure on the smaller force as well as Reserves and National Guard. The reason they were growing the current force was to minimize deployments.

Gates is hoping that his ideas will be considered by the new Congress who are looking to reduce spending. That doesn’t mean all of his proposals will be accepted as Congress has the power to restructure defense spending to reflect their views. They might want to keep some of the programs that Gates doesn’t and cancel other ones.

This move is the start of the FY12 and out budget development and many changes and ideas will be presented over the next several months as the process goes on.

Photo from RDECOM’s flickr photostream.

More Reports of Bad News for the Joint Strike Fighter (JSF)

There are now reports that yet another review of the F-35 Joint Strike Fighter (JSF) schedule and cost is going to show more bad news for the advanced fighter and strike aircraft. The briefing to the Secretary of Defense Robert Gates is based on data gather from the current test program.

The program is facing further schedule delays and cost increases as their have arisen issues with the software and some of the aircraft’s engineering. This is not surprising as the whole point of the test and development phase is to find these kind of things and allow them to be fixed before sustained production of the aircraft begins.

Unfortunately these issues may add another five billion dollars and two to three years of development to the program. This will be on top of the restructuring of the program that has already happened over the last two years which increased the development time and increased the total program cost by billions. Criticism of the JSF has increased over that time as well as it becomes more expensive and is taking longer to complete and go into production. Congress threatened to not fund the 2011 production buy in total but ended up reducing it by half.

The United Kingdom as part of its Strategic Defense and Security Review (SDSR) is looking at reducing their commitment to the F-35 and perhaps abandoning the Vertical Take Off and Landing (VTOL) version that is also being procured for the U.S. Marine Corps. Norway and Holland have also discussed delaying the introduction of the aircraft — a delay they may have no choice but to accept now.

The JSF is a very complicated program. These further delays and cost growth will put pressure on the current Defense Department struggling to control spending and make it more efficient. If quantities are reduced or the VTOL version abandoned it will have a significant effect on the remaining parts. The delays in service also increases the length of the “fighter gap” meaning more money will be needed to keep the older aircraft flying or cause customers to look for other solutions.

Lockheed Martin (LMT) the company leading the program will see its bottom line affected even more. They have already lost fee due to the schedule problems and the new fixed price contract structure will mean that delays and cost growth may also impact revenues and earnings.

Further slips to the program are not what the Defense Department and Lockheed need.

Photo from WestendRaider’s flickr photostream.

Is CACI the Future of U.S. Defense Contracting?

The big U.S. defense contractors have been announcing earnings for the most recent quarter this week with mixed results. Boeing (BA) and Lockheed Martin (LMT) reported flat or losses but Boeing was buoyed by commercial programs while Northrop Grumman (NOC) and General Dynamics (GD) saw increases. GD is finally seeing an uptick in their executive jet business which helped and Northrop has been pessimistic for the future due to declining defense budgets exploring a sale of their military shipbuilding assets.

CACI (CACI) on the other hand reported a record quarter. Earnings increased twenty percent compared to the year before to $28.7 million. The company projected that for the full year they will make in the $4.00 range per share with an increase in revenue of $0.5 to $2.0 billion.

CACI unlike the big U.S. defense contractors who build large hardware programs as their core business provides intelligence and information technology services to the Defense Department and other parts of the U.S. government. While the Secretary of Defense Robert Gates has begun initiatives to cut back on service contracts these tend to be in the areas of logistic and technical support to the military rather then IT or intelligence which aids CACI.

Many of the big defense contractors have been moving into these fields through acquisitions. Boeing, Lockheed as well as the British defense giant BAE Systems (BAE: LSE) have recently acquired small or mid-size intelligence contractors to improve their exposure. The U.S. and its Allies continue to invest in unmanned assets for ISR missions that will require substantial expansion of their ability to exploit all of the information being collected. This is where CACI and the other defense contractors see growth.

The U.S. defense budget will most likely decline in real terms in the near future. The ship building and aviation investment are already showing signs of being limited to just a few programs but the Pentagon will still need to develop the new technologies that have come to a forefront during the fighting in Iraq and Afghanistan.

As the Pentagon’s investment in large acquisition programs continues to decline expect to see more focus on these areas of defense support.

MDA Plans Contest for New Radar

In the past the Pentagon has often had contests to develop new weapon systems such as aircraft, helicopters and vehicles. Even the recent F-35 Joint Strike Fighter had two designs submitted by Lockheed Martin (LMT) and Boeing (BA) with the Lockheed proposal being chosen. The same idea was recently used very successfully by the Army to choose the new MRAP-ATV for use in Afghanistan. Oshkosh (OSK), BAE Systems (BAE), Navistar (NAV) and other companies and teams submitted several prototypes for tests with Oshkosh ultimately being successfully selected. Oshkosh has now sold over two billion of the vehicles and related services to the U.S. military.

The use of competitions like this has also been highlighted by Secretary of Defense Robert Gates and others as one of their procurement reforms. It is considered one way to lower costs for a program as it allows a more proven design to be selected earlier in the development stage and also forces companies to compete among each other on price unlike awarding a sole source design and development contract. Now the Missile Defense Agency (MDA) plans to use the same approach to develop a new radar for U.S. Navy ships that will carry out air and missile defense missions.

This new radar will ultimately replace the current AEGIS radar and fire control system used on Navy cruisers and destroyers. The Air and Missle Defense Radar (AMDR) will be made up of two radars: one that operates in the S-band and one that is in the X-band. Many current missile defense radars use the higher frequency X-band to detect and classify targets. The AEGIS is a S-band radar and Navy ships have separate radars for the final part of the missiles flight. The new AMDR will combine the two.

Northrop Grumman (NOC), Raytheon (RTN) and Lockheed have all received contracts worth around $120 million to begin developing a design for the S-Band part of the system along with its controller.

The use of these competitions for radar and fire control systems is rather rare. They have certainly paid off in the past although there have often been criticisms that the aircraft selected was not necessarily the best design and that political pressures have played a role in whose chosen. A recent one by the Army for part of their new Blue Force Tracker (BFT) system had the winning design cost significantly lower then the incumbent’s.

MDA is hoping that this will be true for this program as well. Of the three bids they will all be technically equal but the prices will vary widely aiding them to maximize their dollars available for investment.

U.S. Shipbuilding Industry the First to Consilidate Due to Defense Spending Realities

Northrop Grumman (NOC) has announced that they will close one of their yards in Avondale, LA with the first layoffs planned for early October as well as look at selling their shipbuilding business. This decision is based on the fact that the Navy is not buying enough ships and has led to rumors of a Boeing (BA) and Northrop merger.

With the pressures on the defense budget caused by the fighting in Iraq and Afghanistan for the last nine years as well as the high cost of new ships the number of orders each year has been reduced. On top of that the Obama Administration canceled or restructured planned programs by ending the DDG-1000 and substituting current DDG-51 class ships as well as ending a plan to have two designs produced for the new Littoral Combat Ship (LCS) and have a competition. Northrop says that the Avondale facility will close when it completes the two LPD-17 class amphibious warfare ships being built there.

The Navy is trying to aid the company and keep its industrial base larger by accelerating a new tanker program three years. This will allow Northrop to bid on them and perhaps be able to build them in Avondale. The moving up of the construction will also free up dollars in the out years for the new SSBN program which is expected to eat up most of the ship building dollars.

Even with this announcement there is no guarantee that Northrop will win the work since the ships are based on an existing hull already made by General Dynamics for underway replenishment ships. Northrop is just reacting to the writing on the wall.

The Secretary of Defense, Robert Gates, has just announced a whole set of initiatives to make defense spending more efficient. Spreading work across multiple ship yards just to keep them working is not the way to gain efficiency. It might make sense from an industrial base concern but is not the best way to save the taxpayers money. The Pentagon either has to balance these two demands or accept that their industrial base will begin to wither if their is not enough work to keep it going.

The same may happen to the aviation industry as F-22 and C-17 production is ending leaving just the JSF and the new KC-X tanker as major programs. This might not be enough to support Lockheed Martin (LMT) and Boeing’s capabilities for military aircraft production. Boeing will close their Long Beach, CA plant once the last C-17 rolls off the line and without winning the KC-X won’t have a military aircraft in production. This might make them tempted to merge with another contractor to keep some capability.

The cost of modern weapons may lead to a round of consolidation such as happened in the Nineties as the industry adjusted to the reduced defense dollars after the end of the Cold War. Unfortunately this is capability that will be hard to re-grow if needed putting the U.S. in an interesting position in the future if there is a need for another ramp up in defense spending.

Virginia Begins to Fight for Joint Forces Command

In a recent series of cost saving proposals the Secretary of Defense Robert Gates recommended closing the Joint Forces Command (JFCOM) located in Norfolk, VA. In Gates’ eyes the JFCOM which develops doctrine and training for the U.S. military across services performed duplicative work and employed too many people, especially contractors.

The closing when it does happen will be a severe blow to Virginia’s economy. The JFCOM employs over 5,000 people with high paying jobs that spend money and buy houses in the local area. Now the Congressional delegation from the Commonwealth has begun to fight back.

In both the Senate and House legislators are planning on introducing legislation that will require the DoD to provide detailed reports and analysis as to how they came to the decision. In the House Representative Glenn Nye will introduce the bill and Senator Jim Webb in the Senate.

Even though the legislation will be looked at by Congress it is no guarantee to stop the closing in the near term. It has first to make it through both Houses and then be signed by the President. It also may be attached to another bill such as the defense appropriations or authorization bills which would make it easier to get passed.

Congress could also not fund the closure which would keep the command open. Either way there would be a fight with the Executive Branch over this decision and really the move could only be postponed so long as the Administration kept trying to include it in their plans. Congress can fight a delaying action but without some major change in policy the JFCOM would end up closing.

Acquisition Reform and Budget Machinations Begin to Affect Programs

Updated to change competitor to Austal USA and General Dynamics vice Northrop Grumman in the first contest.

The U.S. Defense Department has been warning that flat or smaller budgets may be on the horizon. At the same time led by Secretary of Defense Robert Gates the Department is working to promote efficiencies in contracting and acquisition. These two factors seem to have start affecting some program decisions.

The U.S. Navy just announced that they are delaying the decision on who has won the new contract to build Littoral Combat Ships (LCS). Two bids were submitted for ten ships by Lockheed Martin (LM) and Austal USA, part of Austal (ASB:AU) of Australia. A decision was supposed to be announced this month but that has been delayed three-to-six months now. The whole LCS acquisition strategy was changed last year when a plan to have General Dynamics (GD) and Lockheed each build large numbers of two completely different designs for the LCS mission was ended after four ships were built. Now there will be this competition and then a further one in 2012 for up to 55 ships. The delay has reportedly been caused by a need for the Navy to have further discussions with the bidders. Then final proposals will be submitted. Some theories about the delay are a need by the Navy to try and make the award protest proof or costs need to be refined to meet reduced future spending. Either way a delay in the award will in the short term affect both bidders as it delays potential revenue and planning for the contract.

The Army announced yesterday that they have put on hold the ongoing competition for a new ground vehicle capable of transporting infantry across battlefields. This program had just received bids from three industry teams. The new GCV program was started due to the cancellation of the Future Combat System (FCS) by the Army in 2009. The Service stated that it may need to change the terms of the proposal after conducting a full review this Spring. That may mean requirements are being changed or cost again is driving a need to change quantities and schedule. It looks like the bidders may have to submit whole new proposals. If this is required the program would be set back several months as it would take time to redo the proposals and the source selection would be extended.

Another program facing scrutiny by Gates and his staff is the U.S. Marines new Expeditionary Fighting Vehicle (EFV). This is a armored vehicle designed to carry troops quickly from Navy amphibious ships to the beach and beyond. It will replace the venerable LVTP-7 system that has been in use since the 1970’s. Over the last decade the EFV has survived other reviews despite is cost and difficult requirements. In terms of big ticket items that are attractive to the budget hawks the EFV is certainly attractive. It has had a long development profile and the total cost of the system is high. The Marines though have a need to replace the large, slow LVTP for several years and the if the EFV was canceled a new program would have to be restarted to meet this mission. It may be that the Pentagon ends up seeing this one through.

There have been many concerns expressed over the last two years that the U.S. budget situation will adversely affect the Department of Defense. Unlike in past budget cycles Gates has remained committed to investing in some modernization programs. His recent plan to free up $100 billion over ten years from efficiencies and service contracts is not to cut the budget but to plow back into these programs. The problem he and the U.S. military face may be that there is only so much money available so only select programs get funded. The F-35 Joint Strike Fighter and KC-X aerial tanker for example will eat up a large amount of these funds. These program decisions may be a reflection of that situation.

Photo from avhell flickr photostream.

Looking for Efficiencies in the Defense Budget

The constant criticism of United States’ defense spending since the Vietnam War has been that it is wasteful and inefficient. This is of course partly true and wrong. War is inherently wasteful and the U.S. way of war only increases that waste. The problem the U.S. has faced is that the spending has seemed wasteful even when there is no war which is the way the U.S. mostly was between 1974 and 2001. The last nine years have shown that in support of their troops and goals the U.S. will spend whatever it feels it takes. This has not only been for advanced weapons but also in terms of pay, benefits and care for military members and their dependents.

Secretary of Defense Robert Gates announced this week several initiatives to reform defense spending to make it more efficient and to free up money for investment in weapon system development and acquisition. Much of this will come from eliminating what he feels is duplicative capability in organizations, personnel and support assets. At the same time he will attempt to wring more money out by eliminating “support contractors”. Those ubiquitous and slightly evil people who work side-by-side with the troops and civil servants who must be providing services that at some time were thought necessary.

Gates not only wants to eliminate a whole four star command, Joint Forces Command, but several dozen other generals and senior executives. He just doesn’t want to reduce the size of the contractor force — by thirty percent over three years — but also the number of civil servants by freezing employment of the OSD staff which he controls.

In theory he should be able to remove this number of people without affecting the capability of the armed forces but until he does it we won’t know the actual effect. Joint Forces Command is responsible for training and developing doctrine to make it easier for the four U.S. military forces to fight together. Perhaps they have improved this but perhaps they have not? Until they are gone the force multiplier they provide through reduced friction (as Clausewitz would say) cannot be understood. The same may be said about the contractors. True there may be a budget analyst or help desk person at Redstone Arsenal (RSA) that don’t affect the ability to put a round on target in Kandahar but the contractor moving a box of ammo onto a ship or aircraft or repairing a radio at the depot certainly do. The ones at RSA may also help get the newest targeting system or ammunition developed, produced and fielded rapidly.

You have to give Gates credit for trying. His cuts to major weapon systems in the last two budgets have done well in Congress. These kind of cuts may be harder. The plans he announced are already receiving push back from Congress, some contractors and the organizations that represent them. There are also those praising the moves as a way to reduce bureaucracy and improve contracting practices and costs.

Virginia especially is complaining as they will be hardest hit with the elimination of Joint Forces Command in Norfolk and the thousands of contracting positions that must go to reach the ten percent goal many who work in Northern Virginia. In the Nineties the “Peace Dividend” led to the reduction of civil servants working at the military depots and support facilities. Many of these jobs have been replaced by contractors, who now presumably will see their jobs cut.

As with all budget moves it will be up to Congress to agree with Gates and push through these reforms. There are good chances as with his cuts to weapon systems he will get some of what he wants. Whether that will save money in the long run is yet to be determined.

Photo from The U.S. Army’s flickr photostream.

Fox News Sunday Interview with Secretary Gates

Fox News Sunday Interview with Secretary Gates
June 21, 2010

CHRIS WALLACE, ANCHOR: But first, amid recent reports of tough going in Afghanistan, the top man of the Pentagon, Secretary of Defense Robert Gates.

Mr. Secretary, welcome back to "Fox News Sunday."

SECRETARY OF DEFENSE ROBERT GATES: Thank you.

WALLACE: You said this week that the narrative in this town about the war in Afghanistan has become too negative. So let's discuss some of the issues that have people worried.

The U.S. commander, General Stanley McChrystal, says that the first operation in Marjah has become a, quote, "bleeding ulcer," and the major offensive in Kandahar has now been delayed, in both cases, largely because the Afghans have been too slow in providing civilian support. Isn't that a concern?

GATES: Sure, it's a concern. But I think that the narrative is perhaps overly negative in part because it's incomplete.

I was just at the NATO defense ministers meeting in Brussels. General McChrystal briefed in detail on the Marjah operation as well as on Kandahar. And the bottom line was progress is being made. It's somewhat slower than anticipated.

The Kandahar operation has actually been under way for a number of weeks, and so what is taking more time is the shaping of the environment before we actually engage with troops and so on. So I think that, you know, it is a — it is a tough pull, and we are suffering significant casualties. We expected that.

We warned everybody that would be the case last winter, that as we went into areas that the Taliban had controlled for two or three years that our casualties would grow, especially this summer.

But I think General McChrystal's message to the defense ministers was he is confident he will be able to demonstrate by December that we not only have the right strategy but that we are making progress.

WALLACE:The key to begin pulling U.S. troops out by next July is to begin to be able to turn operations over to the Afghan army. But here's what Time magazine says about the army, and let's put it up on the screen: "Nine out of 10 Afghan recruits can't read a rifle manual. Commanders routinely steal enlisted men's salaries. Recruits tend to go AWOL after their first leave."

Question: Do you really believe that the Afghan army will be ready to start taking over next July?

GATES:I think that they will be ready to assume primary responsibility for security in certain areas of Afghanistan, certainly by a year from this coming July. We're still looking at 13 months from now.

The reality is the Afghan national army is meeting expectations and above that in terms of recruiting to the larger numbers and toward the goal of 134,000 by this — by this fall. Their attrition and retention rates are both above expectations and above the...

WALLACE: But are those reports about...

GATES:... above the goals.

WALLACE:... about recruits going AWOL, about commanders stealing enlistees' salaries — is that true?

GATES: There are — there are some, and there are instances of that, but there are also significant instances where we are — and a large number of examples where we are partnering with the Afghan army and where those operations are working, and that was what General McChrystal was briefing to the defense ministers.

The percentage of those partnered relationships, of those partnered operations, has gone from somewhere around 40 percent six or eight months ago to about 75 or 80 percent now.

WALLACE: You keep saying that the July 2011 date to begin pulling troops out is a starting point, and that the pace of withdrawals will be based on conditions on the ground.

But let's take a look at what Vice President Biden said recently. "In July of 2011," Biden said, "you're going to see a whole lot of people moving out. Bet on it." Who's speaking for the administration, you or the vice president?

GATES: Well, first of all, that's in a book. I don't recall ever hearing the vice president say that. And whether he said it or not, we clearly understand that in July of 2011 we begin to draw down our forces.

The pace in — with which we draw down and how many we draw down is going to be conditions-based. And there is general agreement that those conditions will be determined by General McChrystal, the NATO senior civilian representative, Ambassador Sedwill, and the Afghan government together in terms of making their recommendations.

WALLACE: So if Vice President Biden is telling the reporter — and there's been no statement by the White House that he didn't say it — there are going to be a whole lot of people moving out next July, you're saying that's not been decided?

GATES: That absolutely has not been decided.

WALLACE: Your feeling is that it all will be decided...

GATES: But I also haven't heard Vice President Biden say that, so I'm not accepting at face value that those — that he said those words.

WALLACE: You know, it's interesting, because one of the reasons that you made such a strong statement up on Capitol Hill and why you're talking to us today — are you worried that the narrative is getting away and that there may be a rush to judgment on Afghanistan?

GATES: I think it's more a sense of frustration. I've been here before three years ago with Iraq. And we were just getting to the point where the surge forces had gone into Iraq. There was a lot of concern. There was a lot of anecdotal information that things weren't going well, casualties were very high, American casualties were very high in Iraq.

And what I'm — what I'm saying is people are losing context. This policy, this strategy, has been in place and working for only about four or five months. We have yet to put yet a third of the surge forces into Afghanistan. The president has said we'll wait until December to evaluate how we're doing.

So I think there's a rush to judgment, frankly, that loses sight of the fact we are still in the middle of getting all of the right components into place and giving us a little time to have this — have this work.

WALLACE:Let's turn to the gulf oil spill. Is there anything more the Pentagon could be doing either to help stop the spill or to prevent those millions of gallons of oil from washing up on the gulf coast?

GATES: Not to my knowledge. We have offered whatever capabilities we have. We don't have the kinds of equipment or particular expertise. I have authorized the mobilization of up to 17,500 National Guard troops in the four states that are — that are most affected.

We have a standing offer. If there's anything people think we can do, we absolutely will do it.

WALLACE: The U.N. Security Council has passed another round of sanctions against Iran. And following up on that, the United States and the European Union have imposed a set of unilateral sanctions.

For all that, honestly, do you see any sign that these sanctions, these efforts, have caused any weakening of the will of the regime in Tehran to develop a nuclear weapon?

GATES: Actually, what we've seen is a change in the nature of the regime in Tehran over the past 18 months or so. You have — you have a much narrower based government in Tehran now. Many of the religious figures are being set aside. As Secretary Clinton has said, they appear to be moving more in the direction of a military dictatorship. Khamenei is leaning on a smaller and smaller group of advisors.

In the meantime, you have an illegitimate election that has divided the country. So I think adding economic pressures on top of that, and particularly targeted economic pressures, has real potential.

WALLACE: Do you think it could weaken the will of the regime in Tehran?

GATES: I think that it could add to the pressures on the regime, that if you add the things we're doing to help our allies in the gulf area improve their defenses, improve their military capabilities, you put that together with sanctions, you put that together with diplomatic pressures and a variety of other things that are going on — and I think — I think you have a reasonable chance of getting the Iranian regime finally to come to their senses and realize their security is probably more endangered by going forward, thereby...

WALLACE: A reasonable chance?

GATES:... stopping them. Yeah, I think so.

WALLACE: Can we contain a nuclear Iran?

GATES:I don't think we're prepared to even talk about containing a nuclear Iran. I think we're — we — our view still is we do not accept the idea of Iran having nuclear weapons. And our policies and our efforts are all aimed at preventing that from happening.

WALLACE: When you say that a — we would not accept a nuclear Iran, does that mean that a military strike either by the U.S. or Israel is preferable to a nuclear Iran?

GATES:I — we obviously leave all options on the table. I think we have some time to continue working this problem.

WALLACE:In the time we have left, let's do a lightning round of quick questions and quick answers. I know you always enjoy this so much, Mr. Secretary.

GATES:The ones that always get you in trouble.

WALLACE:The House and a Senate committee have voted to repeal "don't ask, don't tell" over your objections that the Pentagon review should be completed first. Is a repeal inevitable?

GATES: Well, I think you'd have to ask the members of Congress that. I haven't done any head counts. We are — the president has made his decision.

Our review is about how to implement this and what are the obstacles, what are the problems, what are the challenges, what are the issues. How do we mitigate the negative consequences if we identify negative consequences? What are the questions we have to address? Those are the things this review is all about.

And I feel it's very important for the military to have the opportunity to weigh in, to register their views on these issues, and to give us help on how to do this smart should the legislation pass.

WALLACE: As part of your new drive to try to cut the budget for non- combat operations, has the president agreed to veto any bill that would include continued funding for the C-17 cargo plane or an alternative engine for the Joint Strike Fighter, even if that legislation also included repeal of "don't ask, don't tell?"

GATES: Well, as I told the Senate Appropriations Committee, the defense subcommittee, this week, it would be a very serious mistake to believe that the president would not veto a bill that has the C-17 or the alternative engine in it just because it had other provisions that the president and the administration want.

WALLACE: Have you been given an assurance by the president that he will enforce his feelings, your feelings, about the budget even at the expense of social policy?

GATES: Well, I think the White House has put out a very strong statement in support. I would also just say that I don't go way out on a limb without looking back to make sure nobody's back there with a saw.

WALLACE: So you think that they veto the bill even with repeal of "don't ask, don't tell?"

GATES: I think so.

WALLACE: You set a deadline for Congress to pass a war supplemental bill by Memorial Day. I don't have to tell you that marker has come and gone, and Democrats are still trying to put money for social programs into the supplemental bill.

At what point delay in passing this bill do we begin to hurt the troops?

GATES:Well, first of all, I didn't set a deadline. I wish I could set deadlines for the Congress, but that's just not the way the Constitution is written.

But as I told the Congress this week, this past week, we will have to start doing stupid things after the 4th of July recess in terms of planning for major disruptions if we don't have the supplemental by the 4th of July recess.

We actually begin to have to take really serious negative actions that impact our troops as well as our civilians in mid to — in early to mid August.

WALLACE: Finally, how long are you committed to staying in this job?

GATES: Well, we just said that we'll see.

WALLACE: Well, at one point — the reason I ask is you talked about till the end of the year, till December of 2010. But now you seem to have taken on a new fight over the budget which gets you into 2011.

GATES: Well, we'll just see.

WALLACE: But would you have started this fight if you weren't going to see it through, sir?

GATES: Well, I didn't want to get bored.

WALLACE:Well, there's very little opportunity for that. Mr. Secretary, I want to thank you so much for coming in. It's always a pleasure to talk to you. Please come back, sir.

GATES: Thanks a lot.

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SecDef Steps Up for EADS

The Secretary of Defense Robert Gates made clear that the Defense Department and the Air Force want some competition for the KC-X aerial tanker program. This is going to have to include EADS (EADS:P) against Boeing (BA) due to the requirements of the program. Gates stressed disappointment with those in Congress attempting to prevent U.S. companies working with EADS on their bid.

If there is going to be any competition for the third attempt to buy a replacement for the aging KC-135 aircraft it will have to include EADS. The only other potentially viable contender would be a Russian aircraft either based on the Ilyushin IL-78 Midas system or perhaps on the IL-96 wide body airliner. Having a Russian competitor would make the contest even more difficult then just one with EADS.

OCI Rules Lead Lockheed To Separate Engineering Services Unit

Over the last twenty-five years the SETA support business has become a major component of defense contracting. Scientific, Engineering, Technical and Analytical services work inside military acquisition, testing and other support organizations to aid them in their missions. The decline in the size of the DoD civilian work force and the increasing complexity of weapon acquisition has led to increases in the demand for their services. Often they are former military or civil servants who provide knowledge and skills immediately for the government. Because of this growth area many larger defense contractors either established SETA divisions or acquired companies to get business.

The Obama Administration as part of its reforms led by Secretary of Defense Robert Gates is moving to reduce the SETA contribution to defense work. They are doing this through two ways. First they are increasing the number of government positions by “insourcing” contractor positions to government slots. They are also tightening the Organizational Conflict of Interest (OCI) rules to prevent a company’s SETA personnel having a role in the decision to award its hardware side a contract. While contractors are unable to make decisions for the government they often support contract awards by doing evaluations and analysis of competing bids. Normally a company will “firewall” the two different business units so that conflict cannot occur but the changes over the last two years have required more than just that.

Northrop Grumman (NOC) was the first major defense contractor to react to this situation by selling their SETA unit, TASC. They were concerned because TASC provided support to Air Force satellite procurement offices and those were requiring Northrop to sign documents to prevent OCI that were felt to limit Northrop’s opportunities to bid. TASC was sold to a private equity firm and became a stand alone company.

Now Lockheed Martin (LM) has decided to separate their engineering support division as well. The Enterprise Integration Group (EIG) will be divested as it primarily does system integration and engineering services to the Government. This is a small part of Lockheed’s total business but still it is revenue and the company felt with the new OCI rules that the unit’s growth potential was not there.

SETA contracts were attractive as they only required a company to provide personnel. Often the contractors worked in government offices so the company did not even need to supply facilities or support equipment and services as well. With the two decisions to tighten OCI and reduce the number of contractors overall the business will probably decline in the near future. This means that there will be contraction in the number of companies providing these services and a refocus by the big contractors on making and providing the government hardware.

Photo from moriza’s flickr photostream.

Secretary Of Defense’s War On Spending Ramps Up

Since early this month the Secretary of Defense Robert Gates and other officials have been making speeches about the need to reign in defense spending. This is especially true for money not supporting current fighting in Afghanistan and Iraq. This “war on spending” is either an attempt to redirect funding to what Gates’ believes are higher priorities or laying the ground work for major cuts to the defense budget in the next few years.

Gates’ in a speech to the Navy League stressed that the United States can no longer afford to invest in multi-billion dollar aircraft carriers and their supporting ships. This questions the whole organization and focus of the U.S. Navy. He stressed development and procurement of cheaper solutions to the Navy’s potential missions which included a new emphasis on submarines

Ashton Carter, the Undersecretary of Defense for Acquisition at one of his presentations mad clear that the current Administration did not believe it could afford the second engine for the F-35 Joint Strike Fighter (JSF). In fact he said that the whole program must become affordable to be successful. The second engine has been promoted as risk reduction by Congress in case the main engine made by Pratt & Whitney, a part of United Technologies Corporation (UT) is not ready in time or cannot be made in enough quantities. There are criticisms that the project amounts to pork for General Electric (GE) and Rolls-Royce (RR:LSE) and Gates has tried not to fund it in his 2010 and 2011 budgets.

At the very least the budget will stay flat and if it is reduced these proposals will set up a battle between the Administration, Congress, industry and their supporters as they struggle to find the right mix of investment, weapon systems and deficit spending reductions. These reasons include:

• Continuing budget pressure from operations in Afghanistan and Iraq the Navy and Air Force especially are seeing their budgets reduced. The Army and Marine Corps does the lions share of the work in South West Asia and they need more money. Reducing large ship building and aircraft modernization programs is one easy way to get it.
• Potential cuts to the defense budget. If it is heavily reduced then aircraft carriers and their escorts which are costly to build and run would be a prime area to reduce. The Navy had sixteen in 1988 at the end of the Cold War now they are down to eleven. Losing one aircraft carrier battle group, its associated air wing, personnel and other supporting assets will cut a big chunk out of the Navy’s total budget and is a discrete way to do that.
• F-35 costs have increased dramatically over the last five years as the schedule continues to get later and later. Eliminating the second engine would save $400 to $500 million a year. Last year Congress funded despite the request not to by “finding” money and not using core JSF dollars for it. That solution may be offered again this year but it still ultimately takes money from other priorities in the defense budget.

The U.S. cannot keep on its path of trillion dollar deficits. The largest piece of discretionary funding is the defense budget and while in the recent long term plan produced by the Senate there were no reductions in spending it was a flat budget with no planned growth. The Administration will say that it has to cut defense spending in areas that do not seem to contribute directly to the fight against terrorism. The use of affordability and efficiency will maintain core capabilities while lowering total spending.

What does this all mean to the world of defense contracting? Not anything good to say the least. The big contractors make their money on ships, aircraft and army vehicle systems. Many other companies of all sizes make parts and provide support to these programs. If they start ending or being severely reduced in size then these companies will see major effects to their bottom lines. As in the Nineties when the last significant reduction in defense spending occurred there may be a wave of M&A activity or companies just leaving the defense business.

One of the two major ship builders for the Navy, Bath Iron Works, (BIW), said that they agrees with Gate that ships must be cheaper. Why wouldn’t they? They will need to accommodate the Navy and DoD wishes. Without those contracts the company will have no work. Look for contractors to begin saying their proposals are more affordable and efficient then the competition.

Of course there is already starting to be push back to these comments. Senator Jim Webb (D-VA) who is a former Navy Secretary and Naval Academy graduate has already openly criticized Gates’ statements. Webb has said the Navy needs eleven aircraft carriers and was backed up by the Navy leadership. Virginia is one of the major bases for these ships as well as where they are made and receives a major economic impact from them.

The problem with these types of plans is that affordable contracts often turn out to have problems and end up costing a lot more then planned. In the past this has happened because often the lowest bid may be from a company with less experience and there cost estimate was not as good. That does not mean big companies like Lockheed or Boeing (BA) can’t make the same mistakes but it is hoped that there experience and capabilities minimize the chances.

Affordable and efficient may end up being the synonyms for not enough needed capability.

Joint Strike Fighter Gap Leads To Navy Order For Boeing

The F-35 Joint Strike Fighter (JSF) being developed by Lockheed Martin (LM) is the future of American military aviation. It will replace substantial numbers of F-16, F-18 and AV-8 aircraft currently in use by the Air Force, Navy and Marines. Many of these fighters are now old and need to be retired and the original schedule for the F-35 had it coming into service now to do so.  Due to the problems with the JSF the Navy has decided to go ahead and order more F/A-18 aircraft from Boeing (BA) to fill the extended “fighter gap”.

Like many acquisition programs of its size and scope the JSF has had issues. It is over budget and currently two years behind its latest adjusted schedule. This means that the aircraft won’t be entering service in large numbers until the latter half of the next decade and the aircraft it slated to replace will need to fly longer. The Pentagon will have to spend more money in maintenance and upgrades to keep them capable against an evolving threat.

Earlier this year the Navy had discussed extending the F/A-18 contract with Boeing (BA) to buy more aircraft to fill this potential gap. The new fighters would fill the time waiting for the JSF and allow retirement of older models of the aircraft. This is an expensive plan and would reinforce that the JSF is struggling. The Navy was talking to Congress and Defense leadership about this.

President Obama’s Secretary of Defense, Robert Gates, had built the last two budgets around the JSF. He canceled the F-22 which was the only other advanced fighter in production for the U.S. military and restructured the program to increase early production. All these plans fell apart this year when it was announced that the average cost of the aircraft had doubled when all program costs were included and that further delays to testing and production were expected.

The new contract is for 124 more F/A-18 aircraft on a four year contract. The Navy worked hard to negotiate a reduced price for this, the potentially last, production batch. The total price will be about $5 billion.

This is good news for Boeing who looked like they were going to be out of the military aircraft business for a few years. There F-22 was canceled. Production of the C-17 transport was going to end soon as in the 2011 budget the Pentagon had ordered none. Congress in 2009 and 2010 had added transport aircraft to the budget but the will for next year was lacking. There is potential for winning the new KC-X tanker but that won’t have deliveries until 2011 or later.

The C-17 situation has been made worse by the decision of the workers to go on strike last week. Some are even predicting that because of this strike the program will come to an end. Congress kept the line going to keep workers in Long Beach, CA at the plant employed. Now they are on strike that argument becomes limited.

Boeing got some good news this week. $5 billion in aircraft orders with a potential for billions more to build parts and do depot and maintenance work is nothing to sneeze at. The extension of the line also helps the company bid on overseas sales in the future. JSF problems have led to a big gain for one of Lockheed’s competitors.

The remaining question is whether the Air Force and Marines will follow suit and also buy their own “gap filler” aircraft. This could mean even more orders for Boeing or other U.S. defense contractors.

Today in the Department of Defense, Thursday, May 20, 2010

Today in the Department of Defense, Thursday, May 20, 2010
May 19, 2010

Secretary of Defense Robert M. Gates hosts an honor cordon to welcome The President of Djibouti, His Excellency Ismail Omar Guelleh to the Pentagon today at 8:45 a.m. EDT. The cordon will be held on the steps of the Pentagon River Entrance.

Secretary of Defense Robert Gates hosts an honor cordon to welcome Bahrain's Crown Prince Sheikh Salman Bin Hamad Al-Khalifa to the Pentagon today at 9:45 a.m. EDT. The cordon will be held on the steps of the Pentagon River Entrance.

Secretary of Defense Robert M. Gates and Chairman of the Joint Chiefs of Staff Adm. Mike Mullen will conduct a press briefing at 1:30 p.m. EDT in the DoD Briefing Room, 2E973.

Deputy Secretary of Defense William J. Lynn has no public or media events on his schedule.

Chairman, Joint Chiefs of Staff, Adm. Mike Mullen hosts an honor cordon to welcome General Godfrey Ngwenya, Chief of the South African National Defense Force, to the Pentagon today at 11:00 a.m. EDT. The cordon will be held on the steps of the Pentagon River Entrance.

Under Secretary of Defense Installation and Environment Dorothy Robyn testifies at a hearing of the Senate Energy Committee on S. 2921 at 9:30 a.m. EDT in room 366, Dirksen Senate Office Building.

Director, Sexual Assault Prevention and Response Office, Kaye Whitley and Acting Deputy Under Secretary of Defense for Plans Clarence Johnson testify at a hearing of the House Committee on Veterans Affairs on military sexual trauma issues at 10 a.m. EDT in room 334, Cannon House Office Building.

Deputy Assistant Secretary of Defense for Counternarcotics and Global Threats William F. Wechsler testifies at a hearing of the Senate Committee on Homeland Security and Governmental Affairs on counternarcotics contracts in Latin America at 10:30 a.m. EDT in room 342, Dirksen Senate Office Building.

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Today in the Department of Defense, Wednesday, April 28, 2010

Today in the Department of Defense, Wednesday, April 28, 2010
April 28, 2010

At 10:30 a.m. EDT, the Vice President and Dr. Biden will deliver remarks at the Wounded Warrior Soldier Ride on the South Lawn of the White House. Secretary of Defense Robert Gates and Secretary of Veterans Affairs Eric Shinseki will also attend. This event will be pooled for TV cameras, and open to print, online, radio and still photographers. Soldier Ride is a program of the Wounded Warrior Project that provides rehabilitation opportunities for wounded warriors and raises public awareness of the challenges facing veterans as they recover from life-altering injuries. Riders will proceed from the White House to continue the four-day cycling event, traveling through Washington, DC; Baltimore, Maryland; Andrews Air Force Base; and Annapolis, Maryland.

Deputy Secretary of Defense William J. Lynn has no public or media events on his schedule.

Chairman, Joint Chiefs of Staff, Navy Adm. Mike Mullen will present the Distinguished Military Leadership Award to French Air Force Gen. Stephane Abrial, Supreme Allied Commander Transformation, and to U.S. Marine Corps Gen. James Mattis, Commander of U.S. Joint Forces Command, at the Atlantic Council 2010 Awards Dinner. The dinner will be held at the Ritz Carlton, 1150 22nd Street, NW, at 7 p.m. EDT.

Deputy Under Secretary of Defense for Military Personnel Policy William J. Carr testifies at a hearing of the Senate Armed Services Committee on military compensation and benefits, including special and incentive pays, in review of the Defense Authorization Request for fiscal 2011 and the future years defense program at 10 a.m. EDT in room SR-222, Russell Senate Office Building.

The ribbon-cutting of the North American Aerospace Defense Command's Pentagon corridor exhibit will take place at 12:15 p.m. EDT on the third floor, A-Ring, between Corridors 1 and 10. See press advisory for details.

Director for Strategy, Policy, Programs and Logistics U. S. Transportation Command Air Force Brig. Gen. Michelle D. Johnson; Acting Assistant Secretary of the Air Force for Acquisition David M. Van Buren; Deputy Chief of Staff for Operations, Plans and Requirements Air Force Lt. Gen. Philip M. Breedlove and Director of Strategic Planning, Headquarters U.S. Air Force Brig. Gen. Richard C. Johnston testify at a hearing of the House Armed Services Committee on Air Mobility Programs at 2 p.m. EDT in room 2118, Rayburn House Office Building.

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Remarks By Secretary Gates to the Business Executives for National Security on the U.S. Export Control System

Remarks By Secretary Gates to the Business Executives for National Security on the U.S. Export Control System
April 21, 2010

GEN. MONTGOMERY C. MEIGS (U.S. Army, Ret.; president and CEO, Business Executives for National Security): (In progress) -- called Business Executives for National Security, 400 very patriotic business men and women who do everything they can to try to bring best business practice to the work of the Department of Defense and Homeland Security when asked. And when we're asked, we do the work at no cost to the government.

We're honored this afternoon to welcome Secretary of Defense Robert Gates to speak on a topic that we in BENS, as well as he, have supported as far back as the early '90s: updating and reforming the United States export control system.

Last August, President Obama announced his intention to pursue an export control reform initiative. Because over the last few decades many businesses have struggled with the complexities of the current system, many in the industry welcomed this announcement. While some of us recall failed attempts to reform the export-control process, one important factor is different this time. The secretary himself has emerged as one of the most enthusiastic voices calling for fundamental reform of this important system.

Some of you will be pleased to learn that Secretary Gates' vision includes a common-sense approach that proposes a new, transparent and predictable export-control system, one finally focused on controlling those few critical items and technologies that fundamentally ensure that our forces continue to maintain their technological edge over any likely adversary.

Secretary Gates is keenly aware of the importance of export control to national security as well as, first, how the U.S. might not be controlling the most critical technologies or, conversely, that we may be controlling too much; second, how current controls make cooperation with partners and allies more difficult; and last, how the system may not be supporting our defense industry, an asset upon which national security fundamentally depends.

With that, please let me welcome Secretary Gates to discuss the Administration's plan for reforming our export control system.

Sir?

SEC. GATES: Thank you, General Meigs, for that kind introduction. Also would like to thank my colleague the Undersecretary of State, Ellen Tauscher, for being here for moral support.

And Monty, thank you for your long service to our country, most recently leading the Defense Department's efforts to combat improvised explosive devices. Your efforts over the last few years have saved the lives and limbs of countless men and women in uniform.

My thanks as well to the Business Executives for National Security for hosting this event. In areas like accounting, procurement, privatization, excess base structure, BENS has identified problems and proposed solutions that have saved the taxpayers billions of dollars and made our military a more effective fighting force.

As many of you know, for the better part of three years now I've spoken out at various times about the need to adapt and reform America's national security apparatus better to deal with the realities of the post-Cold War world. Some of those necessary shifts include enhancing America's civilian instruments of national power -- above all, diplomacy and development -- and better integrating them with our military; rebalancing the defense establishment to reflect the lessons learned and capabilities gained from recent conflicts, especially counterinsurgency, stability and reconstruction operations; and most recently, reforming the way we build the capacity of allies and partners to better fight alongside us and secure their own territory.

All of these institutional shifts are to one degree or another aimed at improving the way the United States works with and through other countries to confront shared security challenges. So is the matter I want to discuss today, the need to reform the U.S. government's regulations and procedures for exporting weapons and so-called dual-use equipment and technology.

Earlier this year, the president announced that he would seek to further enhance our national security through substantial changes to our export control regime. He did so with the unanimous support of his entire national security team. This afternoon I'll focus on what I believe are the compelling security arguments for the changes recommended by the president.

I want to state from the outset how critically important it is to have a vigorous, comprehensive export control system that prevents adversaries from getting access to technology or equipment that could be used against us. The problem we face is that the current system, which has not been significantly altered since the end of the Cold War, originated and evolved in a very different era with a very different array of concerns in mind.

As a result, its rules, organizations and processes are not set up to deal effectively with the situations that could do us the most harm in the 21st century: a terrorist group obtaining a critical component for a weapon of mass destruction, or a rogue state seeking advanced missile -- ballistic missile parts. Most importantly, the current arrangement fails at the critical task of preventing harmful exports while facilitating useful ones.

The United States is thought to have one of the most stringent export regimes in the world, but stringent is not the same as effective. A number of lapses in recent years -- from highly sensitive materials being exported, to vital homeland security capabilities being delayed -- have underscored the flaws of the current approach.

Several factors contribute to these kinds of scenarios, which at worst, could lead to the wrong technology falling into the wrong hands. One major culprit is an overly broad definition of what should be subject to export classification and control. The real-world effect is to make it more difficult to focus on those items and technologies that truly need to stay in this country. Frederick the Great's famous maxim that he who defends everything, defends nothing certainly applies to export control.

This problem goes back a long way and was evident well before the collapse of the Soviet Union.

In 1982, when I became deputy director for Intelligence at CIA, my responsibilities included tracking prohibited transfers of U.S. technology. It soon became apparent that the length of the list of controlled technologies outstripped our finite intelligence monitoring capabilities and resources.

It had the effect of undercutting our efforts to control the critical items. We were wasting our time and resources tracking technologies you could buy at Radio Shack.

Today, the government reviews tens of thousands of license applications for export to European Union and NATO countries. In well over 95 percent of these cases, we say yes to the export.

Additionally many parts and components of major pieces of equipment, such as a combat vehicle or aircraft, require their own export licenses. It makes little sense to use the same lengthy process to control the export of every latch, wire and lug nut -- for a piece of equipment like the F-16 -- when we've already approved the export of the entire aircraft.

In short, the time for change is long overdue, if the application of controls on key items and technologies is to have any meaning. We need a system that dispenses with the 95 percent of easy cases and lets us concentrate our resources on the remaining 5 percent.

By doing so, we'll be better able to monitor and enforce controls on technology transfers with real security implications, while helping to speed the provision of equipment to allies and partners who fight alongside us in coalition operations.

A second major obstacle we face is the bureaucratic apparatus that has grown up around export control, a byzantine amalgam of authorities, roles and missions scattered around different parts of the federal government.

In theory, this provides checks and balances, the idea being that security concerns customarily represented by Defense would check economic interests represented by Commerce and balance out domestic and diplomatic and relationship-building equities represented by State.

In reality, this diffusion of authority, where separate export control lists are maintained by different agencies, results in confusion about jurisdiction and approval on the part of companies and government officials alike.

It creates more opportunities for mistakes, enforcement lapses and circumvention strategies such as forum shopping, where exporters with problematic license applications try different agencies looking for the best result.

In one instance, an individual was caught intentionally exporting a controlled item without a license but escaped prosecution by presenting two conflicting determinations from two different government agencies. The item in question was a carbon composite material used in ICBM [intercontinental ballistic missile] nose cones.

As a result of this dispersed arrangement, the U.S. government spends an enormous amount of time and energy on what are essentially process questions, trying to decide which agency has jurisdiction, as opposed to the more important issue of whether a given technology can be safely exported.

These internal squabbles can have real-world consequences. A fight between agencies over jurisdiction, for example, delayed a program to place new screening equipment in U.S. and overseas airports.

Correspondingly many companies face a frustrating situation where an exporter with a single purchase order may have to seek licenses from two separate agencies and could be approved by one, but denied by the other.

Additionally, because it's so difficult to modify or update the control list, a controlled item might never be considered for a lower level of restriction, even if it becomes much less sensitive and important over time.

The system has the effect of discouraging exporters from approaching the process as intended. Multinational companies can move production offshore, eroding our defense industrial base, undermining our control regimes in the process, and not to mention losing American jobs.

Some European satellite manufacturers even market their products as not being subject to U.S. export controls, thus drawing overseas not only potential customers but some of the best scientists and engineers as well.

At the same time, onerous and complicated restrictions too often fail to prevent weapons and technologies from going places they shouldn't. They only incentivize more creative circumvention strategies, on the part of foreign companies as well as countries that do not have our best interests at heart.

Concurrently we have not updated our system to deal with the U.S. military's transition to off-the-shelf procurement. More and more, our military is taking advantage of commercially manufactured items, presenting challenges when determining whether or not a given technology is acceptable for export. There are electronic components used in many third-generation cellular devices that are also important components of sophisticated stealth-defeating radar systems. We need to update our export control system to reflect these realities.

Finally, the current export control regime impedes the effectiveness of our closest military allies, tests their patience and goodwill, and hinders their ability to cooperate with U.S. forces -- and this at a time when we count on allies and partners to fight with us in places like Afghanistan and potentially elsewhere.

Not too long ago, a British C-17 spent hours disabled on the ground in Australia, not because the needed part wasn't available, but because U.S. law required the Australians to seek U.S. permission before doing the repair. These are two of our very strongest allies, for God's sake. Similarly, close, long-standing allies and partners like South Korea have bought U.S. aircraft only to encounter difficulties and delays in getting spare parts, something that weakens our bilateral relationships, our credibility and ultimately American security.

That is one of the reasons why several U.S. Secretaries of Defense, representing multiple administrations of both political parties, have voiced frustration over the export control system. As defense secretaries, we have all, at one time or another, had to sit across the table from defense ministers from important allies or new partners and explain why the U.S. government is unable to follow through expeditiously on its commitments to provide the weapons, equipment and support they've been promised, and paid for. It's not an edifying experience. All the while, other countries that do not suffer from our encumbrances are taking the opportunity to sell weapons, build relationships and improve their strategic position and economic standing.

Some obstacles to having a strategically sound defense trade relationship can be addressed through bilateral agreements with our closest allies and partners. In 2007, the United States signed defense trade cooperation treaties with both the United Kingdom and Australia, treaties that still await ratification by the Senate. Though -- through streamlined export-control arrangements and enhanced security technology measures, these agreements would substantially improve our ability to equip and support U.S., U.K. and Australian forces deploying in combat operations. They contain provisions for allowing the establishment of export-authorized groups of U.S., U.K. and Australian companies. Except for a short list of truly critical equipment and technologies, these trusted companies could largely avoid individual export licenses. And I remain hopeful that the Senate will give advice and consent to both of these treaties prior to the summer recess.

The kinds of common-sense changes contained in the U.K. and Australia treaties are a step in the right direction, at least with these two key allies. But international agreements are still no substitute for the kind of fundamental, systematic reform of export control that this country urgently needs. The fact is, for all of the reasons I described earlier, America's decades-old, bureaucratically labyrinthine system does not serve our 21st-century security needs or our economic interests.

It is clear our current limitations in this area undermine our ability to work with and through partners to confront shared threats and challenges, from terrorism to rogue states to rising powers. Our security interests would be far better served by a more agile, transparent, predictable and efficient regime. Tinkering around -- tinkering around the edges of the current system will not do.

For these reasons and more, in August of last year the president directed a broad-based review of the U.S. export control regime. He has called for reforms that control -- that focus controls on key technologies and items that pose the greatest national-security threat. These include items and technologies relating to global terrorism, proliferation and delivery of systems of weapons of mass destruction and advanced conventional weapons -- in short, a system where higher walls are placed around fewer, more critical items.

Following this directive and informed by a recent National Intelligence Council assessment of the key national-security considerations, I have worked closely with my counterparts at the Departments of State, Commerce, Homeland Security, as well as with the director of National Intelligence and the national security adviser, to develop a blueprint for such a system.

Our plan relies on four key reforms: a single export control list, a single licensing agency, a single enforcement coordination agency and a single information technology system.

First, a single export control list will make it clear to U.S. companies which items require licenses for export and which do not. This single list, combined with a single licensing agency, would allow us to concentrate on controlling those critical technologies and items -- the crown jewels, if you will -- that are the basis for maintaining our military technology advantage, especially technologies and items that no foreign company or government can duplicate.

Items that have no significant military impact or that use widely available technology could be approved for export quickly. We envision a more dynamic tiered control system, where an item or technology would be cascaded from a higher to a lower level of control as its sensitivity decreases.

Second, a single licensing entity, which will have jurisdiction over both munitions and dual-use items and technologies, will streamline the review process and ensure that export decisions are consistent and made on the real capabilities of the technology. This single entity would also reduce exporters' current confusion over where and how to submit export license applications, as well as which technologies and items are likely to be approved.

The Administration is currently preparing options for the agency's location, and I anticipate a presidential decision later this spring.

Third, the coordination of our currently dispersed enforcement resources by one agency will do a great deal to strengthen enforcement, particularly abroad, as well as coordination with the intelligence community.

Those who endanger our troops and compromise and our national security will not be able to hide behind jurisdictional uncertainties or game the system. Violators will be subject to thorough investigation, prosecution and punishment severe enough to deter law-breaking.

Fourth, the single unified information technology infrastructure will reduce the redundancies, incompatibilities and waste of taxpayer money that our current system of multiple databases produces. For example, a single online location and database would receive, process and help screen new license applications and end users.

Of course the question of which end users are eligible to receive our technology is a critical national security concern. An essential component of the reform system is the list of entities -- terrorist organizations, rogue states and others -- that cannot be allowed access to sensitive items. This would deny them technology or force them to acquire it through a more difficult -- through more difficult routes.

In order to facilitate compliance and tracking, we propose to consolidate current lists of banned end users into one single, frequently updated list that will be easy for those performing transfers to consult. Entities can be added at any time if there's reasonable cause to believe they are involved in activities contrary to U.S. national security interests.

These fundamental reforms, if enacted together, will improve America's ability to work with and fight along -- alongside allies and partners by setting clear, transparent standards, standards that will make it possible to share technology more freely, especially items needed and used by all of us to come -- counter common threats.

I'd like to emphasize that the new system will be in full compliance with all of our existing multilateral treaties and obligations. The prospect of more defense trade with the U.S. will incentivize other nations to strengthen their own export regimes.

Given how quickly and how easily goods and information now can flow around the world, export controls are far more effective when they involve multiple partners with shared interests and values.

As happens with any major reform to an entrenched, long-standing system, there will be resistance and criticism. Some people will be concerned that having fewer items subject to the most onerous export restrictions will make it easier for hostile states or groups to obtain weaponry and technology that potentially could be used against us.

No system -- above all, the current one -- is foolproof, but by consolidating more -- most export licensing functions in one agency and creating an enforcement coordination agency, we can focus our energies and our scrutiny on technologies that truly could threaten America's security, making it far less likely that these critical items will fall into the wrong hands.

It is also important to bear in mind that the U.S. government will retain the ability to impose economic sanctions on any foreign country or group, to include prohibiting the export of any equipment, material or technologies that could have military use.

We will turn these principles and proposals into action through a three-phase process that will unfold over the course of the next year. In the first phase, the executive branch will begin the transition toward the single list and single licensing agency, by making significant improvements to the current system. These efforts would include establishing criteria for a tiered control list and standing up an integrated enforcement center.

The second phase will complete the transition to a single IT structure, implement the tiered control list and make substantial progress toward a single licensing system.

These changes, which can be made through executive action, represent substantial progress and momentum toward reform. But they are by themselves insufficient to fully meet the challenge at hand. We need a final, third phase, a thorough overhaul of the current system along the lines I've described today; most notably, the single licensing agency and single enforcement coordination agency.

These fundamental changes will require congressional actions. I greatly appreciated the chance to meet earlier with a number of senior members of Congress this year to discuss this topic. I valued the feedback and the suggestions they provided at the time, and look forward to further dialogue. It's the president's hope that his national security team can continue to work closely with congressional leaders and all of the key committees to turn these proposals into legislation that the president can sign sometime this year.

I know better than most that earlier attempts at reform have foundered in the face of resistance. The proposition that a more focused and streamlined system actually helps our national security can go against conventional wisdom. But for the reasons I've described today, I believe it is the right approach, and it is urgently needed, given the harmful effects of continuing with the existing set of outdated processes, institutions and assumptions.

Indeed, America's ability to engage effectively with the rest of the world and keep our most sensitive technology away from those who would do us harm depend critically on our ability to get this right.

I look forward to working with the Congress and my interagency colleagues to achieve the kind of systematic reform that will benefit both the security and the prosperity of the American people. Thank you.

MODERATOR: The secretary has agreed to take a few questions, so any of you -- here, right down front.

Q Mr. Secretary, first of all, thanks very much for spending this time with us today on this very intensely interesting and also critical topic.

Would you expect that the new export-control approach that you're advocating would have a -- an effect on our ability to limit Iran's race toward nuclear-weapons capability -- specifically, things like the acquisition of high-temperature gas centrifuge components?

SEC. GATES: Well, first of all, the likelihood of the Iranians being able to get any of that stuff from us is somewhere south of zero, but the -- unless someone games the system.

I think what's important here: one of the things that has happened since the collapse of the Soviet Union, and that has a real impact on technology transfer to people we don't want to have technologies, is that the international consensus that stood behind COCOM for decades in dealing with the Soviet Union and preventing the transfer of technologies, or working to prevent the transfer of technologies to the Soviet Union, that consensus has completely collapsed. And my hope, and the hope of my colleagues, is that by reforming our system, making it more transparent, making it simpler and easier to understand, that we can then gain back some of those partners, in terms of working better with us to prevent the export of things like you just described to the Iranians and to others.

Right now, it requires a U.N. Security Council resolution or significant governmental action by an individual government to prevent those transfers. And at the -- at the current time, that's a high-level political decision.

We hope that, through this kind of a process, we can begin the kind of working-level relationships that we had in the COCOM days, where this doesn't take a decision by the president or the prime minister of a country but rather can be done as part of the regular ongoing security cooperation between us. But part of this is to -- is to begin to get some allies back with us on this subject, because we are pretty much alone right now.

MODERATOR: Back here. Please wait for the mike.

Q Thank you. Nigel Sutton from Raytheon. Again, I'd like to echo sentiments earlier, sir. Mr. Secretary, thank you so much for your insightful words.

My question is -- is regarding the disclosure process. It wasn't really mentioned, but I'm assuming -- is it a part of that phased approach that you're going to take, Mr. Secretary? Is that going to be addressed as part of your reform?

SEC. GATES: Yes.

MODERATOR: Right here.

Q Hello, I'm Jennie Stewart from the Canadian embassy and also the chairman of the Foreign Procurement Group. And the international community is just delighted with your announcement and really support it and have been working with your officials to try and provide our perspective.

We're very pleased to hear you say over and over again the importance of working with allies. My question is, do you have any ideas of concrete steps or processes or approaches to do this consultation with allies?

SEC. GATES: Well, I think that the first step for us -- there have been some informal consultations, and those obviously will continue. I think that the next major step for us is to engage in a -- in a major way with the Congress and to begin working with them in terms of not only informing them better of what phases one and two comprise and what the executive branch is doing, but what and -- what we need them to do and why we need them to do it. So I think that before there was -- would be any kind of formal structured consultation with the allies, that the consultation with our Congress has to come first.

MODERATOR: Right over here.

Q Thank you, Mr. Secretary. Rahul Gupta with PRTM. You identified a couple impediments as to the prior approaches to streamline export control. Could you speak to your timelines in the interagency process to make sure that this go around everybody lines up and endorses not only the changes you're recommending, but how those two potential new agencies would be created?

SEC. GATES: Well, that's one of the things we need to -- we need to pursue. And as I mentioned in my remarks, we're developing the options for that that I hope the president will be able to make a decision on this spring.

The impediments are mostly, I would say, for us, entrenched bureaucracies. This is a process that in this administration is being driven from the top down. Let's just say that my building has not overflowed in the past with enthusiasts for this kind of change. I would say that's also true of some other buildings in town.

I feel very strongly about this. I've felt strongly about it for a long time, and fortunately so do my colleagues at senior levels -- at the most senior levels of other agencies, such as Undersecretary Tauscher and Secretary Clinton, Secretary Locke and so on.

And so I think that we are going to be driving this process from the top down. I think that our hope is we can get both phases one and two done over the period of the next number of months, and we would love to be able to get legislation before the end of the year.

MODERATOR: Got one right here.

Q Hi, Catherine Robinson with the National Association of Manufacturers. Thank you so much for your leadership on this initiative. We look forward to working with you as this moves forward.

I just wondered if you could touch upon some of the near-and-medium-term reforms that were discussed by the interagency early on in the review process and whether or not any of those ideas, such as the intercompany transfer, program licensing and some of the other areas would be addressed as we move forward with -- towards a single agency.

SEC. GATES: Well, I'm happy to say that you have just exhausted my knowledge of this subject. And frankly I'm not in a -- I'm not smart enough or well-enough informed to talk about some of the proposals that have been discussed earlier in the review process or in terms of the interagency on some of the specific things like you're talking about.

Sorry.

MODERATOR: There's one right over here.

Q Pamela Abshire, University of Maryland. I serve on a committee for Department of Commerce that's been looking at deemed exports. And I'm wondering if that's one of the biggest -- so again, thank you very much for your leadership in this area that I'm truly hopeful will reinforce U.S. national security and protect our competitiveness.

I'm particularly interested, since deemed exports is one of the main ways in which we differ in our enforcement, although we're considerably more stringent than other nations, what role you see for that continued enforcement of deemed exports in the new streamlined system.

SEC. GATES: Well, I would tell you that at the principals level of discussion of this issue, deemed exports really has not come up except in passing. However, having in my earlier life served on that Commerce-sponsored deemed exports committee as president of Texas A&M, I can tell you that deemed exports, in my view, are a real -- I think a challenge for this country in terms of our ability to attract and keep scientists and engineers from all over the world, to come to our universities and to come to our companies and work.

And frankly, in a university setting, the notion that you could have a graduate student from a foreign country working for an American professor, and that in a university laboratory setting, have that foreign student singled out and denied access to that laboratory, is on a day-to-day basis unworkable.

And so I don't quite know where the Commerce deemed export effort has come out, since I had to leave it prematurely, but as a matter of principle, that's my concern with deemed exports and what the consequences are. I get it that -- you know, we used to have this joke back in the Cold War that the Soviets would send 40-year-old nuclear physicists to study in U.S. universities, and we would send 21-year-old college seniors to study Pushkin in their universities.

So there is an issue here that's real, but we've got to figure out a better way to deal with it.

MODERATOR: We have time for one more question. Right back here.

Q Secretary Gates, it's John Rood from the Raytheon Company. I wanted to ask you two things. One, you're talking about going forward to the Congress with proposals to change the law to enforce -- or implement this new system, which is commendable. But one of the issues that industry has struggled with is the legislative branch's execution of the export control system, at times taking longer the rest of the Byzantine system that you talked about to again approvals from Congress.

Will that be part of the Administration's proposals, reform of the Congress's handling of these things?

And then secondly, will things like the industrial base be considered in the Administration's legislation, the effect of export control decisions on that base?

SEC. GATES: Well, I think from my standpoint, the defense industrial base is one of the reasons for supporting this effort, quite frankly. You know, trying to reform the Defense Department and, on this issue, reform the executive branch really pretty much takes up most of my day. Taking on reform of the Congress is -- (laughter).

My hope is we -- there are some congressional leaders who are supportive of this effort. Chairman Howard Berman of the House Foreign Affairs Committee. I talked to Senator Dodd this morning. So there are a number of people who have expressed interest. And they understand that the congressional piece of it is something they have to take on as well.

But I think let's handle this in a -- let's try and be as realistic as we possibly can. Let's fix the executive branch piece that we can fix first. Let's then get the legislation changed, as second. And then my hope is that as we streamline the process that the executive branch is responsible for, that there will be those in the Congress who can then lead some efforts to streamline the effort up there. But that initiative, as everybody here knows, really has to come out of the legislative branch.

Thank you all very much for being here today.

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Differing Views On The WTO Rulings Effect

The Secretary of Defense, Robert Gates, testified today to Congress that he felt the leaked World Trade Organization (WTO) ruling on the legality of loans and subsidies to EADS by European nations would not have an effect on the KC-X contest. Of course supporters of Boeing will draw a different conclusion saying the ruling means an unfair advantage for EADS that will affect the pricing of the contract proposal.

Of course right now EADS has not committed to making a bid although there are rumors that the Pentagon would consider a delay of up to ninety days to allow the company to put together a proposal either as the prime or with another partner. If EADS does ultimately end up bidding the WTO ruling will certainly play a role in the politics of the issue if not the actual source selection and contract process.

The Lexington Institute published an op-ed today by Loren B. Thompson that made clear in hid interpretation the launch assist loans clearly were illegal. The A330, he wrote, “was developed using practices that would be prohibited today”.

This could mean that the EADS proposal when it is submitted could be adjusted to reflect the financial advantage received by such aid. This would significantly shift the price difference between EADS, Boeing and any other bidder.

If EADS does bid on the contract the WTO dispute will play a role, that is guaranteed.

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