DEFENSE CONVERSION WITHOUT THE FACTS: THE REPORT OF THE INSPECTOR GENERAL ON THE FAILURE OF THE DEPARTMENT OF DEFENSE (Senate - July 15, 1993)

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Mr. McCAIN. Mr. President, we have heard a great deal from the new administration about its concern for defense conversion and for the defense industrial base. We have heard that it is seeking to create a new type of defense industrial base that will rely on dual use technology, and help increase America's competitiveness. I am concerned, however, that several aspects of the administration's rhetoric do not match reality.

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DEFENSE CONVERSION OR GLITTERING GENERALITIES

Several aspects of the administration's proposals to deal with the reshaping of our defense industrial base, and with defense conversion, have already presented serious problems.

In its initial budget plan, as presented in `Vision for America,' the administration dealt in undefined generalities. The administration proposed funding nearly $20 billion worth of programs without distinguishing whether it was carrying on the programs of the Bush administration, expanding existing programs, or creating new ones.

Moreover, much of the proposed funding for defense conversion was actually going into new civil technology programs without any real prospect of converting existing defense firms.

We still live in a world of such glittering generalities. To date, the administration has not specified a single major program to preserve a single major sector of the defense industrial base. It has not identified programs specifically designed to aid industry in defense conversion. It has not complied with any of the bipartisan legislation covering these issues that was passed in the fiscal year 1993 Defense Authorization Act.

TRADING NEW JOBS FOR OLD

This lack of serious planning has been coupled to unrealistic rhetoric about jobs. What the administration fails to comprehend, or chooses to ignore, is that the downsizing of defense will result in substantial job losses of both military and civilian personnel.

Shifting some of the resulting savings to conversion programs can only ameliorate the number of jobs lost. It will not create any new jobs. At best, this is robbing Peter to pay Paul and then pay Paul only 15 cents on the dollar.

There is no way that defense conversion programs can get around the fact that they ultimately trade new jobs for old. When resources are declining, every dollar that is put into a new program is taken away from someone else's salary. Every job that is created or preserved is actually taken away from someone else.

Moreover, the administration conveniently forgets that new programs take time to implement and require new bureaucracies. As a result, any shift in Federal funds inevitably creates at least temporary loss in employment and--almost inevitably--creates new bureaucrats.

THE REPORT OF THE INSPECTOR GENERAL OF THE DEPARTMENT OF DEFENSE ON THE INDUSTRIAL BASE

I have recently received a report from the inspector general of the Defense Department that raises even more serious issues about the new administration's approach to preserving our defense industrial base.

The inspector general drafted this report at my request to examine the reasons that the Department of Defense had failed to comply with legislation that I had developed in the fiscal year 1991 Defense Authorization Act calling for a comprehensive report on the defense industrial base.

This report traces, in considerable detail, the failure of the Department of Defense to develop any effective data base and organization for examining the impact of declining defense budgets on the defense industrial base.

I should stress that some of the blame for this failure is bipartisan. The previous administration failed to see the importance of this issue in time, and failed to organize an effective effort to understand what was happening to our defense production, technology, and development capabilities. In an effort to avoid an industrial policy, it created a situation where it also did not understand enough to be sure that market forces would be adequate, to know how to properly encourage competition, or prepare for those cases where we can only afford a single major supplier.

The problems affecting our defense industrial base have grown far more critical as a result of the massive additional cuts the new administration has proposed in the defense budget. We face sharper and more precipitous cuts in the defense industrial base, and far greater difficulties in preserving critical capabilities in aviation, armor, advanced electronics, intelligence, shipbuilding, and nuclear submarine construction.

This is why I believe that every Member concerned with defense conversion, the defense industrial base, and national security should read the report of the inspector general on the Department's review of the industrial base.

DEFENSE CONVERSION WITHOUT DATA, PLANS, OR MANAGEMENT

It is one thing to argue about different policies and different solutions to a problem. It is another for the administration failure to gather the basic facts involved, and to deliberately argue from ignorance.

Yet, this is precisely what the inspector general's report says the Department of Defense is doing. In his transmittal letter to me, Derek J. Vander Schaff, the deputy inspector general states:

We concluded the lack of a data base on which to build a comprehensive assessment of the defense industrial base has been a recurring problem. * * * The lack of an adequate data base in 1993 continues to impede an effective analysis of the defense industrial base. That obstacle, coupled with the effects of ongoing vacancies in mid and senior level leadership positions within the Department, will make the timely submission of the required reports in 1993 difficult.

We are now in our seventh consecutive year of real cuts in defense spending. We have cut real procurement spending nearly 50 percent since 1985, and yet the inspector general of the Department of Defense has stated that the Department still has no real idea of what is happening to the defense industrial base.

A LACK OF ORGANIZATION AND MANAGEMENT

It is also clear from the inspector general's report that the Department lacks the organization and management to deal with these issues. It has been amazingly slow to comply with the bipartisan legislation passed last year in an effort to develop the information needed, and plans to preserve vital national defense production capabilities.

The inspector general states in the executive summary of his report that:

The 1993 Act requires the formation of an interagency council, chaired by the Secretary of Defense, and including the Secretaries of Energy, Commerce, and Labor. That council is to develop a Capabilities Assessment and Capabilities Plan for the defense industrial base and to submit them annually to the House and Senate Armed Services Committees.

To date, that Council has not been formed, nor have implementing regulations been prescribed (due by January 21,
1993) or has a defense industrial base analysis program (due by April 23, 1993) been established.

In view of the limited coordinated work that has taken place between agencies, departments, and directorates on preparing the 1993 Capabilities Assessment and Capabilities Plan, it is highly unlikely that a report meeting the requirements of the law * * * will be prepared.

* * * Primary factors contributing to the lack of coordinated action and delays include:

The absence of a clear statement of Administration policy on the defense industrial base;

The current lack of mid-level leadership due to vacancies within the agencies and departments involved;

The continued absence of an effective information system that would support an analysis of the overall defense industrial base.

This is not subtle or ambiguous bureaucratic prose. The inspector general of the Department of Defense is saying that the new administration has effectively done nothing to try to understand the changes taking place in the defense industrial base, to understand the problems involved, and to take action to solve them.

The inspector general is saying that the administration has no factual or valid analytic basis for its new programs for defense conversion, and no real means of understanding their effect. He is saying that--in spite of statements by Secretary Aspin and Deputy Secretary Perry that preserving our industrial base would have a high priority--no effective steps have been undertaken to even begin to deal with the issues involved.

THE NEED FOR ACTION, NOT RHETORIC

This situation simply is not acceptable. We may well cut the size of our defense industrial base by another 10 percent over the next 2 years. We cannot abandon the men and women in these industries to a form of industrial Darwinism where no real effort is made to determine our true national security needs.

We cannot afford to risk our national security and technology base in an unplanned build-down. We cannot afford to waste billions of taxpayer dollars on defense conversion programs that are not tied to any concept of defense conversion, to any clear estimate of conversion priorities, or to any measures of effectiveness.

The time is long overdue for the administration and the Defense Department to come to grips with reality, and to substitute planning for rhetoric, and information for ideology. Until it does so, we will match any increasingly hollow force structure with a defense conversion program that is little more than a hollow farce.

Mr. President, I respectfully request that Mr. Vander Schaaf's transmittal letter, and summary excerpts of his report, be entered into the Record at the end of my report.

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The material follows:

Department of Defense,
Arlington, VA, June 24, 1993.

Hon. John McCain,
U.S. Senate,
Washington, DC.

Dear Senator McCain: In reply to your letter of February 9, 1993, we recently completed a review of the Department's reporting on the defense industrial base. The review focused on the quality of the 1991 report, the reasons no report was submitted in 1992 and the steps taken to ensure that future reports are completed on time and meet congressional requirements. A copy of the report on our review is enclosed.

We concluded the lack of a data base on which to build a comprehensive assessment of the defense industrial base has been a recurring problem. While meeting the letter of the law, the 1991 report was limited in scope and depth, primarily as a result of the lack of validated data to support an assessment that would meet congressional expectations. The failure to establish an effective information collection and management system to correct the problem led the Department to seek other means to meet the statutory requirements for the 1992 report. When those efforts also failed, the Department was unable to draft a 1992 report prior to the enactment of the Defense Authorization Act of 1993 and subsequently terminated its efforts to produce a report.

The lack of an adequate data base in 1993 continues to impede an effective analysis of the defense industrial base. That obstacle, coupled with the effects of the ongoing vacancies in the mid and senior level leadership positions within the Department, will make the timely submission of the required reports in 1993 difficult. There are, however, several steps included in the enclosed report for the consideration of the Department, which we believe would facilitate compliance with congressional mandates.

I hope the report will be of assistance to you. If you should have any questions, please contact me or John R. Crane, Office of Congressional Liaison, at (703) 614-0491.

Sincerely,

Derek J. Vander Schaaf,
Deputy Inspector General.

Inspector General, Department of Defense, June 1993

[INSPECTOR GENERAL, DEPARTMENT OF DEFENSE, JUNE 1993]

Review of the Defense Industrial Base

EXECUTIVE SUMMARY

In a letter dated February 9, 1993, Senator John McCain requested that the Inspector General, Department of Defense, examine certain issues related to the preparation of the 1991 and 1992 Department of Defense Reports to the Congress on the defense industrial base. Senator McCain also asked what steps the Department has taken to ensure that future reports will be submitted on time and will meet the requirements of Congress. The Deputy Inspector General subsequently directed a review to assess Department of Defense compliance with the reporting requirements of the 1991 Defense Authorization Act, to determine why no 1992 report was submitted, and to assess measures taken by the Department of Defense to meet the reporting requirements directed by the 1993 Defense Authorization Act.

The review concluded that the requirements contained in the 1991 Defense Authorization Act were clear and well defined. However, the Department did not have a comprehensive information system capable of supporting a detailed analysis of the defense industrial base. As a result, the 1991 Report to the Congress was abridged in scope and depth and of limited use in helping Congressional leaders make informed judgments about the ability of the defense industrial base to meet the national security needs of the United States.

The Department of Defense faced the same obstacle in attempting to prepare the 1992 Report. To compensate for the absence of an adequate data base, the Deputy Secretary of Defense and the Under Secretary of Defense for Acquisition decided that the 1992 report would focus on the process the Department intended to use in monitoring the industrial base. The intent was to develop a methodology based on the techniques used to resolve the major issues that had been identified in connection with the study of the shipbuilding industry already underway. The methodology envisioned would include a hierarchy of questions that could be used not only in the shipbuilding study, but also to evaluate the other defense technology and industrial sectors as well.

However, the shipbuilding study became bogged down in policy issues, such as the respective roles of the Office of the Secretary of Defense and the Military Services in the acquisition process. When those could not be resolved in a timely manner, the core of the 1992 Report was put on hold. When the 1993 Defense Authorization Act was enacted on October 23, 1992, new reporting requirements were established and the section mandating the 1992 Report was repealed. At that point, all efforts to complete and submit the required 1992 Report to the Congress ceased.

The requirements contained in the 1993 Act are much more detailed than those promulgated by the 1991 Act. The 1993 Act requires the formation of an interagency council, chaired by the Secretary of Defense, and including the Secretaries of Energy, Commerce, and Labor. That Council is to develop a Capabilities Assessment and Capabilities Plan for the defense industrial base and to submit them annually to the House and Senate Armed Services Committees. To date, that Council has not been formed, nor have implementing regulations been prescribed (due by January 21, 1993) or a defense industrial base analysis program (due by April 23, 1993) been established. In view of the limited coordinated work that has taken place between agencies, departments and directorates on preparing the 1993 Capabilities Assessment and Capabilities Plan, it is highly unlikely that a report meeting the requirements of the law, even in the preliminary forms authorized for the first submissions, will be prepared by September 30, 1993, (Assessment) and December 1, 1993 (Plan). Primary factors contributing to the lack of coordinated action and delays include:

The absence of a clear statement of Administration policy on the defense industrial base;

The current lack of mid-level leadership due to vacancies within the agencies and departments involved;

The continued absence of an effective information system that would support an analysis of the overall defense industrial base.

Notwithstanding the authorization given to provide the information in a preliminary form, the failure of the Department to provide clear policy guidance, meet any milestones, or prescribe implementing regulations puts in question whether the Department has made a reasonable effort to comply with the provisions of the 1993 Defense Authorization Act.

If the Department of Defense, in conjunction with the other departments, is to meet current statutory reporting requirements, the following actions should be taken:

Identify and promulgate a clear policy (including goals, objectives, and guidelines) with respect to management and reporting on the defense industrial base.

Establish a Primary Action Office for industrial base issues and reporting within the Department of Defense.

Formalize a plan, including identification of milestones and funding, to comply with statutory requirements.

Select, fund, develop, and maintain a comprehensive data base capable of supporting the Department's reporting responsibilities under the 1993 Act.

STATUS OF THE 1993 REPORT

Some day-to-day activity (i.e., work on the shipbuilding study, industrial base questionnaires, and production base planning) is taking place in individual sections and offices of the Department of Defense. However, as of April 20, 1993, we found no evidence of coordinated work among agencies, departments, and directorates to complete the 1993 Report. The lack of an adequate data base within the Department of Defense continues to hamper analysis and reporting on the defense industrial base.

Of greater significance, however, is the fact that no specific and clearly defined statement of the new administration's policy toward management of, and reporting on, the defense industrial base has been officially promulgated within the Department of Defense. The individuals and offices that could, or should, be involved in preparing the reports required by the 1993 Defense Authorization Act stated that some changes in philosophy, policy, and priorities were expected with the change in administration, but that none have been specifically announced nor has continued support for the policies of the previous administration been confirmed. As a result of a February 21, 1992, memorandum from the Deputy Secretary of Defense, the basic directives of the Industrial Preparedness Program (Department of Defense Instructions 4005.1, 4005.3, and 4005.3-M) were cancelled on November 3, 1992. Although at least two drafts have been proposed to replace the cancelled directives, no updated instructions have yet been promulgated to provide new direction to the Industrial Preparedness Program.

Given the dominant role that administration policy played in the 1991 and 1992 reporting process, the lack of a strong policy statement on the defense industrial base by the senior Department of Defense leadership has, at this point, fostered a `wait and see' attitude among those likely to be responsible for drafting the 1993 report. While the law is clear and the requirements well defined, bureaucratic inertia has been allowed to continue. The policies and programs in place prior to the transition period have, in general, continued but the staff has also devoted time to new programs such as the `bottom up review.' Notwithstanding the specific statutory requirements contained in the 1993 Defense Authorization Act, we found senior Department managers have not set clear priorities to reallocate the resources needed to complete the requirements of the 1993 Capabilities Assessment and Plan.

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Lack of direction

The lack of direction and guidance in matters involving analysis and reporting on the defense industrial base has been further aggravated by the number of vacancies that remain at the mid and senior levels of leadership within the Department of Defense. That is particularly apparent where decisions need to be made in adjusting funding and resource allocations to meet the 1993 Congressional reporting requirements. Funding was authorized in the 1993 Defense Authorization Act to support activities, such as the program to analyze the defense industrial base, but no funds were subsequently appropriated. The failure to appropriate funds means that decisions redirecting and reprioritizing resources are required. However, without general policy guidance and policy-level decision makers, those decisions are not being made.

Lack of guidance.

We found further indications of the lack of strong policy guidance in defense industrial base issues. For example, the Department of Defense has not designated a Primary Action Office for the Report or officially identified a single focal point within the Department of Defense for industrial base matters. In commenting on the draft of this report the Principal Deputy Assistant Secretary of Defense (Production and Logistics) stated that the focal point for the sector analyses and the corresponding reports will be the Industrial Engineering Quality Division of the Office of the Assistant Secretary of Defense (Production and Logistics). During our review, however, we found that the assignment of specific responsibilities and areas of concentration were unclear at the working levels.

Council not established

At the interagency level, the National Defense Technology and Industrial Base Council has not been established. As of April 20, only one interagency meeting had been held to begin laying the groundwork for the Council. While some interagency work involving the Department of Defense, National Economic council, Office of Science and Technology Policy, and other agencies has taken place, the vacancies in the Department of Defense and in the other agencies have adversely affected the establishment and utilization of effective channels of interagency coordination.

Non-compliance with 1993 act

The public law enacting the 1993 Defense Authorization Act directed that the Secretary of Defense, within 90 days following enactment of the law, prescribe regulations, including milestones for actions, to ensure the timely and thorough collection of information, completion of assessments, and issuance of plans required by the Act. Although due not later than January 21, 1993, no regulations or instructions have been promulgated and we found none under development during our review. Further, the legislation required the Secretary of Defense, in consultation with the National Defense Technology and Industrial Base Council, to establish a program for analysis of the national technology and industrial base by April 23, 1993. While some efforts have occurred to establish the Council, no program has been established. We believe the date the Act was passed may have affected compliance with the statutory provisions. The short time period between passage of the legislation and the election, coupled with the change in Administration, made the January 21, 1993 (90 day) deadline difficult to meet. Despite the timing, however, the statutory requirements are clearly defined and the Department could have proceeded to collect the data required by the Act.

PART III--OVERALL CONCLUSIONS

The review concluded that the Department of Defense Report on the Defense Industrial Base, submitted to the Congress in November 1991, met the minimum requirement of the law in terms of content. However, the report was of limited value in meeting the Congressional objectives, as defined by Senator McCain in his letter of February 9, 1993, to the Deputy Inspector General. The quality and timeliness of the Report were determined primarily by:

The `free market' philosophy of the Administration with respect to management and analysis of the defense industrial base, and

The lack of a comprehensive data base that would enable effective analysis and reporting.

The Department of Defense efforts to produce a 1992 report were affected by the same factors, plus the Department's plans to use the SEAWOLF study as a key component of the 1992 Report. The inability of the Department of Defense to resolve the policy issues associated with the SEAWOLF program constituted an obstacle that the Department of Defense was unable to overcome prior to the passage of the 1993 Defense Authorization Act with its associated changes in reporting requirements.

For 1993, several important issues may further affect Department of Defense programs and policies for industrial base reporting. The basic philosophy of the new Administration and its approach to defense industrial base matters has yet to be promulgated. The policy issues involved, along with delays already incurred, when coupled with problems in assembling a data base capable of supporting an effective industrial base analysis, combine to make the timely completion of the required Capability Assessment and Capability Plan highly unlikely.

In authorizing the presentation of the information in a preliminary form for the first periodic assessment and the first periodic plan, the Congress has provided the Department a degree of flexibility. The law specifies that the information can be in preliminary form `to the extent that the necessary information cannot reasonably be collected, analyzed, or presented in accordance with section 2505 and 2506, respectively, of Title 10, United States Code, by the dates specified.' We concluded, however, that the Department's actions to date indicate the defense industrial base reporting requirements are a secondary concern. The failure of the Department to provide clear policy guidance, to meet any milestones to date, or to prescribe regulations for the preparation of the report will make it difficult, in our opinion, to establish the `reasonableness' of the Department's efforts to comply with the statutory requirements, even in a preliminary form.

PART IV--RECOMMENDATIONS

If the Department of Defense, in conjunction with the other departments, is to comply with the statutory requirements to complete a 1993 Capabilities Assessment and a Capabilities Plan of the defense industrial base and its ability to support national security objectives, the following actions are recommended:

The Secretary of Defense should promulgate within the Department of Defense a clear statement of the Administration policy with respect to management and reporting on the Defense Industrial Base. That policy statement should include goals, objectives, and guidelines in sufficient detail to support prioritization of plans and resource allocation.

The Secretary of Defense should establish a Primary Action Office for industrial base issues and reporting within the Department of Defense.

The Primary Action Office should develop and disseminate a plan of action, including identification of milestones and funding, to ensure full compliance with Administration policy in meeting the statutory reporting requirements.

The Secretary of Defense, in conjunction with the other departments, should select, fund, develop, and maintain a comprehensive data base capable of supporting defense industrial base management and reporting responsibilities.

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