Wall Street Journal
June 16th, 2006
In Military-Spending Boom Expensive Pet Projects Prevail
Defense Firms Reap Rewards As Pentagon's Priorities Run Into Resistance --- Rumsfeld Wins Few Battles
Spending Campaign
The Pentagon has increased outlays on programs largely conceived before Sept. 11, 2001
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Last year, in an effort to save money, the Navy secretary proposed building a new $3 billion destroyer in just one shipyard rather than at facilities in both Mississippi and Maine. He estimated the move could cut $300 million from the cost of each ship.
Congressional reaction was swift. Senators from the two states stalled the official's promotion to deputy defense secretary. One Maine senator used her seat on the Armed Services Committee to help push through legislation that blocked the idea.
Five years after the Sept. 11 attacks changed American military priorities, the U.S. defense machine is still churning out weapons made for old-style, conventional conflicts, even as it needs new tools to battle terrorists and insurgents. One big reason is the sclerotic nature of the procurement process, in which the military, the White House, the defense industry and Congress fight for pet projects that aren't always in synch with strategic priorities. In the case of the destroyers, the senators maintained a weapon whose origins dated to the last decade for the sake of jobs.
Overall, the Pentagon's recent spending has largely reinforced the status quo. Weapons spending has swelled faster than the overall Pentagon budget, soaring 43 percent since in the past five years to $147 billion, with the vast majority of funding going to programs conceived before 9/11. The estimated lifetime cost of the Pentagon's five biggest weapons systems is $550 billion, 89 percent more than the top-five programs were projected to cost in 2001.
That has been a blessing for Lockheed Martin Corp. and its fighter planes; Northrop Grumman Corp. and General Dynamics Corp., which make big warships; and Boeing Co., the lead contractor for a missile-defense shield that dates back to Ronald Reagan. Major defense stocks hit historic highs this year and the industry has outperformed the market since 2001.
But it has done little to change the military. The spike in Pentagon spending doesn't reflect a move to develop "a whole bunch of new systems because the world is changing," says Steven Kosiak, director of budget studies at the Center for Strategic and Budgetary Assessments in Washington, D.C. Instead, the military is "buying pretty much the same things as before. ... They just cost more."
Military budgets have long been shaped by pork and pet projects. The Clinton administration faced similar issues as it tried to adapt a Cold War military to a new era. The problem is particularly acute right now because of the huge increase in defense spending and the Pentagon's new strategic shift to fight terrorism.
The defense industry was on pins and needles when George W. Bush became president. Declining spending in the 1990s had hurt its profits, and the incoming administration seemed intent on cutting big weapons programs geared toward Cold War threats. In particular, Defense Secretary Donald Rumsfeld vowed to transform the military into a smaller, nimbler force.
Since then, Mr. Rumsfeld has managed to scrap just three big military weapons programs out of dozens. Even as Pentagon strategists make a case for training soldiers to fight counterinsurgencies and terrorism, an expensive proposition, funding priorities haven't shifted substantially. Thanks to the entrenched nature of the military procurement process, big weapons systems survive despite skepticism of their relevance and cost.
At the pinnacle of the system is the White House, which has long been able to advance favored projects, such as the missile-defense shield. The decades-old concept involves an array of weapons designed to destroy incoming enemy warheads. In his first federal budget, Mr. Bush accelerated the shield project, which is seen these days as a deterrent to countries such as North Korea, proposing to nearly double annual spending to some $8.3 billion.
Days before the Sept. 11 attacks, senators challenged the increase at a hearing dominated by concern over government finances. Democratic Sen. Dianne Feinstein of California asked Mr. Rumsfeld why missile defense should be a higher priority than guarding against terrorist attacks. He agreed they were "the more likely threats in the period ahead," but said such dangers ranged from terrorism to missiles fired by rogue states. The Senate slashed the funding increase.
The attacks of 9/11, rather than reinforcing a shift in priorities, obliterated opposition to the president. Congress ended up approving $7.8 billion for missile defense, almost as much as Mr. Bush sought. The next year, as war against Iraq loomed, Congress gave Mr. Bush more missile-defense money than he had requested.
"Missile defense has maintained momentum because of the president's political commitment to it and conservative ideological support, rather than its relevance to our current defense needs," says Loren Thompson, a critic of the current defense secretary, who runs the Lexington Institute think tank in Arlington, Va., and consults for defense companies.
With funding between $7.4 billion and $9 billion a year since fiscal 2002, missile defense has been a boon to industry. Boeing oversees the main ground-based missile system in Alaska and California and the development of a laser gun to be carried aboard a modified 747 airliner. Lockheed, Northrop and Raytheon are prime contractors for other related programs.
Despite Mr. Bush's goal of making the system operational by 2004, the shield still isn't permanently up and running. And despite consuming a hefty chunk of the Pentagon's total R&D budget, it isn't equipped, however, to deal with a rising post-9/11 concern: cruise missiles.
Since last September, the program has notched some successful flight tests, the Pentagon says. Congress is poised to give Mr. Bush most, if not all, of his latest budget request: $9.3 billion for fiscal 2007.
The military's muscle in protecting programs has also been evident in recent years. All the services want to replenish aged or depleted arsenals, a need that even the Pentagon's civilian leadership concedes. "Clearly there is a recapitalization problem," says Kenneth Krieg, the Pentagon's top acquisition official. "If I look at what keeps me awake at night, obviously (it is) the average age of the fleet."
That argument has helped the Air Force, the biggest recipient of procurement dollars, maneuver aggressively to protect some of its glamorous fighter jets against attacks on their relevance. In 2001, the average age of the F-15, the nation's top air-superiority warplane, was 17 years, three shy of its expected service life.
The Air Force's priority is now the F-22, made by Lockheed, which was designed to replace the F-15 as the service's top combat plane. The service said it needed 381 of the super-fast, radar-evading fighters, despite their high costs and development snags, to deal with the growing military sophistication of countries such as China and India. Critics questioned their usefulness, arguing that even these incipient world powers don't pose a credible threat to U.S. air power. In 1999, the Air Force beat back California Republican Rep. Jerry Lewis's attempt to kill the program by organizing support from all three service branches.
In Mr. Rumsfeld's Pentagon, fighter jets came under scrutiny as the military lobbied for spending on more immediate priorities, such as ground vehicles and helicopters in Iraq and Afghanistan. Army generals who craved a bigger share of the weapons pie, also questioned the value of short-range fighters, even in a potential conventional conflict with China.
"I'm not really sure how the F-22 fits into either scenario," adds Ivan Eland, a military analyst at the Independent Institute, a research group based in Oakland, Calif.
In response, the Air Force joined forces with Lockheed to make the F-22s more versatile, which also made it more costly. It explored a bomber version and added ground-scanning radar to give the plane a reconnaissance role. By making them adaptable, "we can multiply their value," says Robert Stevens, Lockheed's chairman and chief executive, in an interview last year.
The Air Force even began horse-trading with its own programs to save the F-22, which currently cost $133 million apiece, excluding development costs. For example, Air Force officers offered to forgo hundreds of Joint Strike Fighters -- a $276 billion program to replace Air Force, Navy and Marine plane models with a common airframe.
Although it appeared to lose the fight when the Pentagon, in late 2004, slashed the proposed F-22 fleet to 179 planes, and ordered production to end in 2008, the Air Force didn't surrender. It argued that closing the F-22 line before starting full production of the Joint Strike Fighter would harm national security. Now, the Pentagon's plan is to buy 183 F-22s and extend production to 2010. Those extra two years leave the F-22's fate to the next administration.
As a result of this increased spending, defense contractors are booming. Sales at the top five contractors -- Lockheed, Boeing, Northrop, General Dynamics and Raytheon Co. -- have grown 10 percent a year since 2001, excluding acquisitions, according to Joseph Nadol, an industry analyst at J.P. Morgan. Last year, the big five's operating profits rose 25 percent compared with 2004, to $12.94 billion. The companies generated so much cash they spent $4.26 billion buying back their appreciating stock.
Their clout in the procurement process can be seen through a battle over cargo planes that the Pentagon wants to stop building. The fight shows the defense companies at their most muscular: spending heavily on lobbyists and sprinkling political donations strategically across the congressional map.
In early 2005, Lockheed moved with lightning speed in to reverse a Pentagon proposal to accelerate the demise of the C-130 aircraft, which has been made in Marietta, Ga., since 1954. As word of the move leaked, Lockheed officials coordinated with Georgia's two Republican senators, who enlisted 22 colleagues from both parties to sign a letter of complaint to President Bush. Lockheed spokesmen steered reporters to Sen. Saxby Chambliss of Georgia, a blunt-talking member of the Armed Services Committee who was publicly leading efforts to save the program.
Days after the Pentagon announced the move, Mr. Rumsfeld began backtracking. His stated reason: "new information" that the cost of terminating the contract could exceed the related savings. Three months later, he reinstated the C-130 program. In a written statement, Lockheed pronounced itself "pleased" with the result.
Boeing is in the midst of a similar scramble to stretch the life of its C-17, a mammoth jet that has proven valuable in hauling everything from armored vehicles to relief supplies. Faced with budget pressures, the Pentagon recently moved to begin shutting down the C-17 production line in Long Beach, Calif.
Boeing flooded Capitol Hill with lobbyists and subcontractors. In May, Congress authorized fresh C-17 purchases and the Air Force said it needed eight additional planes. Boeing is shooting for even more.
"We're working that very, very hard," Boeing defense chief Jim Albaugh said at a recent investor conference, referring to extending the programs like the C-17.
On Capitol Hill, new strategic imperatives are often trumped by the realities of daily politics. Congress rarely makes tough weapons choices when jobs are at stake, as the battle over the DDG-1000, a next-generation Navy destroyer, attests.
Formerly known as the DD(X), the destroyer was conceived in the 1990s as a relatively inexpensive, largely automated warship, costing $750 million. The price has since ballooned to $3 billion a ship, three times the cost of current destroyers. In a move to make the destroyer more relevant to post-9/11 threats, the Navy stuffed it with additional features such as more-powerful guns, quieter technology; and advanced radar. The warship is so expensive it threatens the Navy's plan to upgrade its fleet.
"Usually when you are building a new ship class, you put two or three new technologies into the ship class, and we have put nine or 10" in the DDG-1000, says Rear Adm. Barry McCullough, the Navy's director of surface warfare.
When then-Navy Secretary Gordon England made his move to trim costs by building the ship in just one shipyard -- either Northrop's facility in Mississippi or the General Dynamics yard in Maine -- he ran into the buzz saw set up by senators from the two states, including Trent Lott, the powerful Mississippi senator.
After preserving the two-shipyard approach, Maine's Sen. Olympia Snowe toured her state's Bath Iron Works with Mr. England's successor as Navy secretary and declared, "We're all in synch."