Competition in Defense Buying Costly to U.S.

Why has the Defense Department’s weapons buying gone wrong? One big reason is “the attempt to impose competition in a situation where real competition is virtually impossible to achieve,” David Packard told the Senate Armed Services Committee last week.

“One could do as good a job awarding major contracts by throwing darts at the names of qualified bidders,” he said.

What’s Packard talking about? Is the 76-year-old billionaire founder of Hewlett-Packard saying competition is bad? No, he’s saying that the defense contracting is not a private, competitive industry like any other--and recent attempts to treat it like one have contributed to the current fraud and bribery scandal.

Only One Possible Customer

Packard was deputy defense secretary from 1969 to ’71 and served as chairman of a presidential commission on defense contracting two years ago, in the aftermath of earlier furors over $60O toilet seats. Use criminal laws to pursue and punish illegal activity, he says. But recognize that defense is a government industry, and therefore legalistic procedures to force the lowest possible bids are pointless.

Why pointless? Because contractors do government-financed work in government-owned facilities--in locations often dictated more by politics than economics. They work on sophisticated weapons systems for only one possible customer--the U.S. government. And if contractors bid low and face losses, the government one way or another makes up the difference; the Pentagon doesn’t let its large suppliers fail.

Nor should it. What are the major defense contractors, after all--the Lockheeds, Grummans, McDonnell Douglases and the rest--but public utilities?

Sure, they may be shareholder owned like other private companies. But with most of their business--often more than 80%--coming from government contracts, they are in reality national utilities, supplying weapons where other utilities supply electricity or gas.

The differences, however, are crucial: In electricity or gas, the utilities have a monopoly franchise and a Public Utilities Commission allowing them a guaranteed return on investment.

But in defense, Packard is saying, the Pentagon is not acting like a regulator. Rather, it is playing the demanding buyer, as if its suppliers had other customers, or its contracts represented casual labor instead of life or death for its contractors.

Big Companies Favored

In major weapons systems, furthermore, the government is not buying a commercial product but asking for a product to be invented. “I don’t think it’s possible to estimate what it will cost to produce a plane or ship that hasn’t even been developed,” Packard has said.

All work is custom. A $22-million F-18 fighter is not the same as a $22-million MD-80 commercial airliner. The commercial price reflects development costs and sales over many years to many customers. The military price doesn’t include R&D; but does reflect the cost of contract compliance--or paper work.

Paper work has consequences, says Edward Luttwak, author of “The Pentagon and the Art of War” and senior fellow of the Center for Strategic Studies at Georgetown University. It favors big companies that can deal with regulatory complexity, while small business cannot. Thus, lawyers and accountants take precedence over engineers--and weapons occasionally work better on paper than in practice.

So what should be done? Some experts say defense should be nationalized, but others question how that would improve matters. Two years ago Packard’s commission recommended that the government first map out a coherent military strategy--one that ended intra-service rivalry, of course--and then order weapons to fulfill it.

It recommended a two-year defense budget and multiyear procurement contracts to stabilize production--a recognition, in short, of the long-term mutual dependence commitment of suppliers and customer.

Could such a formula work? Maybe it already has, in the Naval missile program, better known as Trident--which was complimented recently by Chairman Les Aspin (D., Wis.) of the House Armed Services Committee.

Trident--Lockheed on missiles, General Dynamics on submarines--has been going since 1956, when it was called Polaris. Important features of the program, Aspin told Congress, were that the missile had a separate command in the Navy that resisted tinkering, and that contractors had continuing responsibility for maintenance and operation.

More than 30 years later, the Trident is just about the nation’s premier weapon. Sometimes, as they say, the system works.