What the Pentagon's largest-ever contract teaches us about market forces in the defense industry
We are about to enter an era of defense austerity. Two years ago, President Obama famously said the days of giving defense industry a "blank check" are over, and Defense Secretary Robert Gates made good on the pledge. But we're not there yet.
Case in point: The F-35 Joint Strike Fighter, the Defense Department's largest contract ever, is challenging a basic assumption that competition is better, and feasible, in every case.
The F-35 has been plagued with cost overruns, is behind schedule, and the government is pulling out all the stops to find ways to cut the price. General Electric and Rolls Royce have been developing an alternative engine for the fighter, and earlier this month they offered to put up about $100 million of their own money to finish key work on it, as the project has come under criticism.
What's remarkable about this is that the Pentagon doesn't event want a second engine, having already contracted one from Pratt & Whitney. In 2006, the Pentagon decided to stop funding the development of the second engine for the aircraft, citing a spiraling price tag. For the next five years Congress overrode the DOD's wishes and spent billions of dollars on this extra engine anyway.
In a recent op-ed for the Wall Street Journal, the Chairman of the House Armed Services Committee, Rep. Buck McKeon, praised the initiative as a positive step for the process of defense acquisitions, as it reduced the monopoly power of defense firms. With GE-Rolls Royce paying out of pocket, Rep. McKeon argued, Pratt & Whitney would have a competitor for work that will be worth as much as a hundred billion dollars in the coming decades.
There's little doubt that the defense industry could benefit from more competition. The Pentagon has precious little choice when it comes to the costliest weapons programs like warships or fighter jets, and the result is often outrageous project overruns and lost years of stalled development.
It is not at clear, however, that competition makes sense in this case. At a basic level, competition only works when there is demand -- and the Pentagon hasn't wanted a second engine design for years. Billions have already been spent against the wishes of the Department's budgeteers because Congress keeps funding the program. Supporters do cite sensible reasons for doing so, among them avoiding a fleet-wide grounding if a dire problem surfaces.
But affordability issues are so acute now that such a concern is not enough for the Obama administration to fund the engine. The GE-Rolls Royce engine only saves taxpayer dollars barring further setbacks. In March of this year, the Government Accountability Office noted that both engine projects demonstrated systemic, across-the-board cost overruns and failures to meet basic operational requirements. It's not clear why we should assume the General Electric and Rolls Royce engine will not experience similar setbacks and cost overruns, or how those overruns will be minimized through competition between two similarly over-budget projects.
Presumably, having two engine providers fighting it out will result in less costs and more responsive contractors. Though this has been true in the past, there is no guarantee in the F-35's case. In March, the GAO appealed to the Pentagon's experience with engine competition for the F-16 fighter in the 1980s. However, that appeal rests on uncertain assumptions, including the requirement of competition to produce a minimum amount of program savings. Much more importantly, the F-16 and the F-35 are different aircraft -- the former was meant for a narrow mission for the Air Force, while the latter is meant for a much broader range of missions for all branches of the military.