* Sees possible gradual decline in procurement spending
* Favors fixed-price contracts (Adds details, byline)
By Andrea Shalal-Esa
WASHINGTON, June 10 U.S. defense spending to develop and buy new weapons systems is not expected to drop dramatically in coming years, but a gradual drawdown may occur, the Pentagon's No. 2 acquisition official said on Thursday.
Frank Kendall, principal deputy undersecretary for acquisition and technology, said the Defense Department was keenly focused on reforming its acquisition process and making it more efficient, getting more for the money it spends, increasing oversight and reducing risk on new programs.
Kendall said he did not foresee a major new consolidation in the industry like that of the mid-1990s after the Cold War ended, but said some consolidation was part of the "natural course of events."
Mounting pressure on the defense budget could lead to some gradual decline in weapons research and development and procurement, commonly known as the Pentagon's investment accounts, Kendall told a conference hosted by Swiss bank Credit Suisse and Virginia-based defense consultant Jim McAleese.
"We're going to see possibly some gradual drawdown in the investment accounts," he said. "For the near term, I do not see a dramatic change."
Big defense companies are waiting for clues about the Pentagon's fiscal 2012 budget, which is being drafted now.
Kendall said the Pentagon was using tighter oversight to get a handle on programs, and in some cases could begin the live-or-die reviews mandated under the federal Nunn-McCurdy law ahead of schedule. He said the reviews were useful but needed to occur earlier, before programs were in deep trouble.
The department last week certified to Congress that six big weapons programs whose projected costs had risen by more than 50 percent over initial estimates -- including the Lockheed Martin Corp (LMT.N) F-35 Joint Strike Fighter -- needed to continue for national security reasons.
He said he favors greater use of fixed-price contracts but cautioned they were not a panacea to fix Pentagon procurement problems and needed to be structured properly to succeed.
Kendall said eight program cancellations unveiled by Defense Secretary Robert Gates as part of the fiscal 2010 budget, including the DDG-1000 destroyer and the Army's Future Combat Systems modernization program, targeted developmental programs the department could not afford in the longer term.
As budget planners looked to the future, they realized there was just "too much stuff in the pipeline" and some programs needed to be eliminated, he said.
Kendall said he hoped to avoid similar decisions in the future by ensuring that programs -- and their longer-term costs -- were well thought out and structured before billions of dollars were spent.
Representative Adam Smith, who heads the air/land subcommittee of the House of Representatives Armed Services Committee, said Congress was also focused on addressing what he called "significant challenges" in the Pentagon acquisition reforms.
He said he favored freeing up funding for quick acquisition of specific technologies to aid troops now, but said he remained concerned about bigger programs like the Lockheed F-35, the Air Force's refueling tanker competition, and Army modernization after cancellation of the Future Combat Systems program.
Clearly, the Pentagon can no longer afford "shoot-for-the-moon" weapons programs and must focus on more realistic, quicker and flexible solutions to military needs, he said.
Lawmakers were worried whether the Lockheed F-35 would work as intended, and within its intended timeframe, but Smith acknowledged that any decision now to curtail the size of the program could drive up the cost of each fighter jet, and might jeopardize future sales to international partners.
If the program missed more key schedule milestones, "we've got some very, very hard decisions," he said.
Given all the problems thus far with the F-35, he also questioned the wisdom of the Obama administration's insistence on scrapping a second engine for the F-35 that is being developed by General Electric Co (GE.N) and Britain's Rolls Royce (RR.L) as an alternative to one built by Pratt & Whitney, a unit of United Technologies Corp (UTX.N).
He said Congress and the administration had different views on whether the second engine would save money in the long run, and Congress was reaching out to the White House to step back from its threat to veto the fiscal 2011 defense spending bill if it includes funding for the GE-Rolls Royce engine.
"The debate is, what is the best way to save money," Smith said, noting that he strongly backs Gates' reform efforts, and cancellation of the Boeing Co (BA.N) C-17 transport plane, although he represents Washington state, where Boeing has large manufacturing facilities. (Reporting by Andrea Shalal-Esa; editing by John Wallace)