Exclusive: Pentagon arms buyer sees spending growth at risk

WASHINGTON Mon Nov 8, 2010 7:07pm EST

WASHINGTON (Reuters) - The Pentagon's top weapons buyer acknowledged to industry last week that politics, the tepid economy and mounting U.S. deficit concerns could impair the department's commitment to real growth in spending.

Defense Undersecretary Ashton Carter acknowledged publicly for the first time last week that political and economic realities "can obviously impact actual funding," said several sources who were not authorized to speak on the record.

But Carter told top industry and defense officials at separate meetings that he's still hopeful cuts in overhead costs could preserve projected one-percent real growth in the overall defense budget over the next five years.

Industry officials have been increasingly skeptical that the Pentagon could keep that promise, and have worried about cuts or cancellations to multi-billion-dollar contracts.

Worries increased last week when mid-term elections saw deficit hawks sweep incumbents from power and swing control of the House of Representatives to Republicans.

Congressional aides, industry executives and analysts say that while Republicans generally favor defense spending, some Tea Party Republicans and fiscal conservatives elected last week could begin to cut weapons programs to trim yawning deficits.

Carter met with industry chief executives for a second dinner last Monday at the nonpartisan Center for Strategic and International Studies (CSIS) think tank, and then with more than 300 defense program officials on Tuesday.

He delivered a similar message to both groups, according to sources briefed on the meetings: Affordability needs to be relentlessly designed into new weapons programs to keep defense spending stable given rising health care and personnel costs.

He said the new approach was already helping cut the cost of a next-generation nuclear-powered submarine, initially slated to cost $8 billion, and would be used on other new programs, including the Air Force's new bomber.

To hammer home the message, Carter on Wednesday issued a detailed 7-page memorandum with specific steps aimed at getting more bang for each dollar spent on weapons and services.

GETTING OUT AHEAD

Executives at top firms like Lockheed Martin Corp (LMT.N), Boeing Co (BA.N), Northrop Grumman Corp (NOC.N), General Dynamics Corp (GD.N) and Raytheon Co (RTN.N) have been working closely with the military in its cost-cutting drive because they hope it will preserve funding for new weapons programs.

Jim McAleese, a Virginia-based defense consultant, said the new memo expanded Carter's affordability guidelines to cover even smaller weapons programs, and showed his determination to highlight good programs -- and fix or cancel bad ones.

"He's in a race to get points on the board before the next Congress comes in late January," McAleese said, noting that the "implementation directive for better buying power" was signed on November 3, the day after the election.

"This had been in the works for some time, but it obviously took on greater urgency with the election," he added.

The memo, first obtained by Inside Defense, a trade publication, instructed the secretaries of the military services to establish affordability targets for weapons programs that would be on a par with performance parameters.

The Pentagon was no longer willing to pay big cost premiums for modest additional technical capabilities, Carter told last Tuesday's meeting. Military commanders setting requirements for new weapons, and systems engineers designing them, both needed to factor in what each plane, tank, or ship would cost.

Any savings could translate into additional quantities, Carter said in Wednesday's memo.

David Berteau, a senior adviser to CSIS, welcomed the Pentagon's greater outreach to industry, but said he worried that the new approach still failed to give companies enough opportunity to suggest ways the military could save money by tweaking requirements before competitions began.

"The missing section is what would connect the affordability piece to the incentive fees," he said. "It's too late by the time you're negotiating the contract."

(Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)

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