U.S. budget cuts complicate Pentagon reform drive

Fri Sep 6, 2013 8:38pm EDT

Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall speaks at the Reuters Aerospace and Defense Summit in Washington, September 4, 2013. REUTERS/Larry Downing

Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall speaks at the Reuters Aerospace and Defense Summit in Washington, September 4, 2013.

Credit: Reuters/Larry Downing

WASHINGTON, Sept 6 - The Pentagon's top weapons buyer acknowledged this week that the budget crisis in Washington is making it hard to execute reforms designed to increase competition and lower costs.

For several years, Frank Kendall has sought to streamline the often arcane Pentagon procurement process, but he said nearly $1 trillion in budget cuts over the next decade have undermined some of those efforts.

The Pentagon has put most new acquisition programs on hold, with officials thinking about cutting back orders for everything from new coastal warships built by Lockheed Martin and Australia's Austal (ASB.AX), to helicopters built by Europe's EADS EAD.PA.

Those programs will be "few and far between" if mandatory budget cuts remain on the books, Kendall told the Reuters Aerospace and Defense Summit.

Industry executives, under pressure from their corporate boards to pare costs and maintain profits, say they have repeatedly invested tens of millions of dollars in development efforts only to have acquisition programs canceled or delayed.

They laud the increased dialogue with top Pentagon officials like Kendall and Deputy Defense Secretary Ashton Carter, but say the lack of clarity about future military budgets makes it hard for them to map out investment and hiring plans.

Kendall, a former executive with Raytheon Co (RTN.N), said he did not favor asking firms to share in the cost of new programs before they were approved, and had made that point to the military services' acquisition chiefs.

"I want industry to have a clear understanding on the real prospects for future business so they can make a smart decision about their investments," Kendall told the Reuters Summit.

He said uncertainty about budget levels was making it difficult for the services to stick to their acquisition plans.

The Army, for instance, was considering a third attempt to replace its Vietnam-era OH-58 Kiowa Warrior helicopters, a program valued at several billion dollars, but has deferred that effort due to budget pressures, Kendall said.

Executives at EADS EAD.PA; Sikorsky Aircraft, a unit of United Technologies (UTX.N); Boeing; and AgustaWestland, a unit of Italy's Finmeccanica SpA (SIFI.MI), among others, had hoped to bid for those orders.

Army officials last week issued a request for information about the Armed Aerial Scout program that revived industry hopes the program would proceed, but Kendall said the Army's budget was tight and he believed the program would likely be deferred.

"If we stay in a sequestered environment, I think new starts like that are going to be few and far between for the next few years," Kendall said.

COMPANIES CURTAIL INVESTMENT AMID UNCERTAINTY

Sean O'Keefe, a former Pentagon comptroller and Navy secretary who now heads the U.S. unit of EADS, told the summit it was difficult for industry to navigate the current budget climate, despite efforts by Kendall and other top Pentagon officials to streamline acquisition procedures.

Contract awards had slowed sharply, and the company had already opted to skip some competitions rather than invest in preparing a bid for a contract that might not ever materialize, he said. EADS invested heavily to develop a variant of its light utility helicopter for the Army helicopter competition, but was uncertain if that competition would proceed, he said.

The company was also still waiting for a contract award from the Department of Homeland Security after submitting a bid in the spring of 2012, he said.

He said the Army's initial framework compared the cost of a new helicopter to the cost of upgrading the old ones. "Today, the definition is, can you afford anything at all?" he said.

Dale Bennett, who heads Lockheed's Mission Systems and Training division, told the summit that changes in the projected procurement amounts would alter the business case for a project.

The Navy, for instance, is considering sharp cutbacks in its plan to buy 52 new Littoral Combat Ships to meet tough budget cut targets, but that could drive future ship prices higher.

Kendall said the current uncertainty made it difficult for companies to invest in technology that could lower manufacturing costs.

Both Lockheed and Austal invested heavily to drive down the cost of the new warships, with an eye to future profits, Kendall said. "Right now if I were in industry I would be hesitant to make major investments until I saw what was going to happen to the budgets and the product lines that I was interested in."

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(Editing by Lisa Shumaker)

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