Freeman

ARTICLE

Reducing Regulation of the Defense Industry

FEBRUARY 01, 1992 by MURRAY WEIDENBAUM

Murray Weidenbaum is Director of the Center for the Study of American Business at Washington University in St. Louis. This article is drawn from his new book, Small Wars, Big Defense (Oxford University Press).

When most people think about regulated industries in the United States, they have in mind the local electric or gas utility, whose rates are controlled by the state public service commission. In contrast, the defense industry rarely appears on anyone’s list of regulated sectors of the American economy—but it should. A major cutback in defense spending, which is the outlook for the early 1990s, is the ideal time to focus on this part of American industry and to restore the role of private risk bearing and business initiative.

The reality was best described a few years ago by a senior Pentagon official who asked the heads of two companies—a public utility and a defense contractor—about the government rules that were the framework for managing their respective enterprises. From the utility, the request yielded a few pages that spelled out the state- enforced guidelines. The defense contractor, in contrast, had to comply with over 450 major specifications, directives, and instructions, weighing several hundred pounds. The Federal official concluded, “The reality is that there are infinitely more controls in the so-called free enterprise environment of the major weapons systems contractor than there are in the controlled environment of the public utility.”

The same official described enthusiastically his visit to a large defense contractor (each defense plant is under the jurisdiction of a single military service—Army, Navy, or Air Force): “I was impressed with the complete interrelationship of the Service/contractor organizations. They are virtually colocated. . . . The Service is aware of and, in fact, participates in practically every major contractor decision. Both parties join in weekly management meetings.”

There is no counterpart in the civilian sector to that close, day-to-day intervention of government in private business decision-making. Although the public is not aware of it, clearly, the companies that produce weapons systems and other specialized equipment for the Department of Defense are subject to more detailed government control than any other branch of the American economy.

The most pervasive way in which the military establishment assumes the managerial decision-making functions of its contractors is through procurement legislation and the rules governing the awarding of contracts. Military procurement regulations require private suppliers to accept on a “take-it-or-leave-it” basis dozens and dozens of standard clauses in their contracts, which give the government contracting and surveillance officers unparalleled authority over the internal operations of these companies.

The authority assumed by the government customer includes power to review and veto a host of company decisions: which activities to perform inhouse and which to subcontract, which firms to use as subcontractors, which products to buy domestically rather than to import, what internal financial system to utilize, what minimum as well as average wage rates to pay, and how much overtime work to authorize. Thus, when a business firm enters into a contract to produce a weapon system for the military, it takes on a quasi- public character. This is given implicit recognition by requirements for the firm to conduct itself in many ways as a government agency—to abide by buy-American, equal-employment, depressed-area, prevailing-wage, and similar statutes unrelated to the national security.

Bureaucracy at Its Best

The resultant flow of paperwork is incredible. It requires 260 million hours of labor a year. The military’s specifications for sugar cookies run to 15 pages. It takes 14 pages to cover the requirements for that vital weapon system, the fruitcake (“the presence of vanilla flavoring shall be organoleptically detected”). The reader can imagine the far greater complexity accompanying rules for bidding on ICBMs or nuclear submarines.

Pursuant to all those directives, defense contractors flood the military with responses to their proposals to produce weapons and equipment. The competitors for the C-5A cargo plane wrote a total of 240,000 pages of material. The submissions weighed three-and-a-half tons (representing a significant part of a forest). All that did not prevent major cost overruns.

The wide variety of “socially responsible” actions that the federal government requires of firms doing business with it are costly to the government procurement process. They increase overhead expenses of both private contractors and the Federal procurement offices. Many of the provisions also exert an upward pressure on the direct costs incurred by the government. Special provisions such as the Davis-Bacon Act have increased the cost of public construction projects through government promulgation of wage rates higher than those that would have resulted if the market had been allowed to operate without impediment.

Government policy-makers in the area of military contracting do not consider the cumulative and negative long-term impacts of this detailed oversight on company initiative and entrepreneurship. Viewed as a totality, these restrictions represent very substantial government regulation of industry. This type of government direction of the private sector has been ignored by most scholars of business regulation because the power is not exercised by the traditional independent regulatory agencies (such as the Interstate Commerce Commission). Rather, the authority over private business arises through the unilateral exercise of the government’s monopsonistic (one buyer) market position. There is only one customer to whom defense companies can legally sell aircraft carriers, nuclear submarines, and ICBMs. Even sales of military equipment to friendly foreign nations are handled through Department of Defense officials.

The result of this is also very costly to the taxpayer. Robert Costello, a former undersecretary of defense for procurement, lamented that the Department of Defense wastes 20 to 30 cents of every dollar it spends on acquisition. Private analysts reach the same conclusion when they examine the bureaucratic process by which the armed forces buy tens of billions of dollars of weapons and equipment each year.

Reforming the Process

What can be done to improve the situation? The Pentagon was once described as the place where Franz Kafka meets Alice in Wonderland. In the past, there has been no shortage of piecemeal efforts to reform military spending practices—and they all have failed. Indeed, many have been counterproductive. The Byzantine labyrinth of military decision-making continues undisturbed.

The place to start is a sweeping, zero-based overhaul of the entire military procurement process. The most desirable approach is to eliminate all of the 2,000 pages of existing regulations—and also the 500 pages of standard clauses to be inserted into defense contracts and the 300 pages of standard forms—and to start over. Richard Stubbing of Duke University, who worked on the military budget for many years, states that the status quo can be replaced with 100 pages or less of short, simple regulations.

That means eliminating all the extraneous socio-economic provisions inserted by Congress over the years. These include favoritism to domestic producers of jewel bearings and subsidies to “small disadvantaged business concerns.” By the way, the term “disadvantaged” is defined to cover many categories of people, including citizens whose “origins” are in Japan, China, Korea, India, and Pakistan. (Some of these “disadvantaged” groups report annual incomes significantly above the national average.)

A sweeping reform of the procurement rules would eliminate the bureaucratic activity now involved in determining how small a business must be to qualify for the special procurement benefits. For example, a small firm supplying limestone must have no more than 500 employees, but a small petroleum refinery can have as many as 1,500 on its payroll. It is not easy to identify the contribution to the effectiveness of military procurement made by such provisions.

Similarly, there would be little lost to the strength of the military establishment from dropping the provisions setting aside all or a portion of a government contract for “small businesses located in labor surplus areas.” Gertrude Stein (who wrote, “Rose is a rose is a rose”) would have loved the government’s definition of a laborsurplus area: an area of concentrated unemployment or under-employment or an area of labor surplus. Congress’s own Office of Technology Assessment has noted, “While Congress did not intend the [military acquisition] system to be slow, cumbersome, and inefficient, laws passed to foster goals other than efficient procurement have made it so.”

A “zero-based” approach would also toss out the numerous “micromanagement” (second guessing) efforts imposed by Congressional committees over the years. Congress would have to abstain from such actions as adding 215 study and related requirements to the Department of Defense authorization bill for the fiscal year 1990.

Congressional Meddling

Over the years, Congress has imposed on the Department of Defense an almost endless array of bureaucratic busywork: a required report on spare parts, requirements for the use of pre-qualification procedures, setting the rank and grade for competition advocates, establishing tours of duty for program managers, setting rules for allocating overhead to spare parts, and placing SBA spare parts breakout representatives in major defense acquisition centers.

In its spare time, the Congress has also meddled in such administrative details as directing the use of work measurement standards in certain contracts, requiring the employment of Alaskan and Hawaiian residents in military construction contracts in those states, mandating the organization of procurement policy staffs of military departments at the Secretarial level, restricting the purchase of foreign-made motor vehicles, and establishing a policy on inventory accounting systems.

“Micromanagement” is a kind way of describing the tendency for members of Congress to look over the shoulders of military managers rather than to spend their time on such fundamental responsibilities as balancing the budget. On average, every working day the Department of Defense receives 450 written inquiries and 2,500 telephone inquiries from members of Congress and their staffs plus three requirements for separate reports to Congress, each necessitating on the average over 1,100 man-hours to prepare plus 14 hours of testimony by senior defense officials plus three new audits by the General Accounting Office. That helps to explain why it is so difficult to reduce the Pentagon’s overhead.

Stripping out the awesome array of “safeguards” and intricate review procedures imposed by Congress as well as the Pentagon leadership would surely help reduce cost overruns and time delays on the production of needed weapons and equipment. Procurement programs now proceed at a glacial pace as contractors and government purchasing personnel carry out all of the required reviews and audits. Authority (mainly to say no) is dispersed widely among program managers, contract officers, senior military executives, auditors, and inspectors. Accountability under the status quo is diluted, and all of this is extremely costly.

About 40 line and staff officials have veto power over one or another part of the efforts of each of the military program managers. One review official can insist that the program managers use des-ignated specifications in awarding contracts, while another can impose specific reliability requirements. None of these “second guessers” have any responsibility for the success of the program.

Simplifying the entire military procurement procedure is also the most cost-effective way of responding to the perennial complaints of small firms that are scared away from defense work because of the complexity of the government’s acquisition process.

“Fly Before You Buy”

Comprehensive reform requires dividing military procurement into two broad categories: items that can be purchased readily from the private sector, and weapons acquisition. The great majority of all procurement actions and a substantial, albeit smaller, proportion of the dollar volume of military contracting cover items available in commercial markets. These should be bought directly via sealed bids, without all of the detailed proposal preparations and reviews. The only people who will suffer are the folks who are now paid to write and administer those needless regulations; they will be forced to seek productive work.

For the second category—weapons acquisition—selection should not be made on the basis of a ton of paperwork, but by an older and far more effective method: requiring competing firms to produce prototypes and letting the service personnel who will use the equipment check each alternative out and see for themselves which is the better buy. “Fly before you buy” avoids the repeated shortcomings resulting from rushing weapons systems to premature production before they are really tested.

Reducing the now overwhelming amount of detailed regulation of defense production will save taxpayers substantial amounts of money in many ways, especially by decreasing the vast amount of paperwork. Perhaps of greater long-term impact will be the restoration of the private enterprise orientation of the companies that produce weapons and equipment for the military establishment. That would enable these companies to demonstrate the initiative and innovativeness that make private enterprise so much more effective than government arsenals.

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February 1992

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