Mr. Chairman, distinguished members of the subcommittee, thank you for the opportunity to appear before you to discuss issues relating to the Administration's proposed plans for Navy ship recapitalization.
As requested, my testimony will focus on the following issues:
Each of these issues is discussed below.
Rate of ship procurement and size of the Navy
The rate of Navy ship procurement and its relationship to the planned size of the Navy has been a concern in Congress since the mid-1990s. CRS has previously examined the issue in a 1996 report, a 1997 report, and 1997 testimony to this committee. This testimony updates the analysis to take into account the Administration's new FY2000-FY2005 shipbuilding plan.
The 300-ship fleet in general.
Shorter term vs. longer term. As discussed in previous reports and testimony, the challenge in maintaining the size of the Navy will not occur in the shorter run (i.e., between now and about 2010), but in the longer run (i.e., after 2010, and particularly after 2020). As a result of the significant downsizing of the fleet during the 1990s, the Navy today is composed to a large degree of relatively young ships, and a fleet of about 300 ships consequently can be maintained in the shorter run with a relatively low ship procurement rate. After 2010, and particularly after 2020, however, the relatively large numbers of ships procured in the 1970s and 1980s will reach retirement age. If ships are not procured in numbers sufficient to offset these retirements, then total fleet size at that point will drop below 300 ships.
Sufficiency of fewer than 300 ships. As stated in the 1997 report and testimony to Congress, it is not clear whether a Navy of less than 300 ships could perform its stated missions. The issue will depend on how technological developments affect the capabilities of U.S. Navy ships, aircraft, weapons, and other equipment, and on how the international security environment develops over the next quarter-century. In assessing the potential risks of the Navy declining to less than 300 ships after 2010 or 2020, it can be noted that some observers believe that the United States during this period might be confronted with a larger and more modern Chinese navy, or a rejuvenated Russian navy, or significantly improved maritime military capabilities in other countries, such as Iran. The Navy during this period could be called on, as it sometimes is today, to respond to multiple simultaneous or near-simultaneous contingencies of in various kinds in different regions.
Steady-state replacement rate. Assuming a fleet-wide 35-year average service life for Navy ships, maintaining the Navy at the planned size of about 300 ships over the long run would require a long-term (i.e., 35-year) average Navy ship procurement rate -- a steady-state replacement rate -- of about 8.6 ships per year. The Administration's new FY2000-FY2005 shipbuilding plan, if implemented, would procure a total of 47 new-construction Navy ships over 6 years, or an average of about 7.8 ships per year. If maintained over a 35-year period, this average ship procurement rate would result in a fleet of about 274 ships.
The Administration's previous ship procurement program -- the amended FY1998-FY2003 shipbuilding plan -- would have procured a total of 37 ships over 6 years, or an average of about 6.2 ships per year. If maintained over a 35-year period, this average ship procurement rate would result in a fleet of about 216 ships. Thus, the additions that the Administration made to the Navy's shipbuilding program as part of its FY2000-FY2005 Future Years Defense Plan (FYDP) have brought the Navy closer to the steady-state replacement rate for maintaining a 300-ship Navy over the long run. It is also important, however, to consider the mix of ships in the procurement plan.
Mix of ships in plan. In the final two years of its new FY2000-FY2005 plan, the Administration plans to procure an average of 8.5 ships per year, which is almost equal to the steady-state replacement rate. In two respects, however, the mix of ships to be procured in these years can be viewed as a somewhat inexpensive mix.
First, each of the final two years of the plan includes 3 ADC(X) auxiliary dry cargo ships. It is appropriate to procure ADC(X)s in these years, given the advanced ages of the mobile logistics ships that the ADC(X) ships are to replace. But these ships are far less expensive than other types of major Navy ships, and they are being procured at a rate in excess of the steady-state replacement for Navy auxiliaries. The planned 300-ship fleet includes about 52 auxiliary ships of various kinds. If these ships have an average 35-year service life, then the steady-state replacement rate for the auxiliary-ship portion of the 300-ship fleet would be about 1.5 ships per year. In this sense, auxiliary ships can be viewed as temporarily over-represented in the final two years of the FY2000-FY2005 shipbuilding plan relative to the steady-state replacement rate for these kinds of ships.
At the same time, the final two years of the Administration's FY2000-FY2005 ship procurement plan would procure 1 attack submarine per year. As discussed below in the section focusing on submarines, this is less than the procurement rate that will be needed to maintain the planned 50-boat attack submarine force in the long run. In this sense, attack submarines can be viewed as temporarily under-represented in the final two years of the FY2000-FY2005 plan.
Whereas ADC(X)s might cost $300 million to $400 million each, Virginia (SSN-774) class attack submarines cost about $2 billion each. After FY2005, when procurement of the ADC(X) class is complete and the submarine procurement rate is to be increased, achieving an average procurement rate of 8.6 ships per year may require a greater average amount of annual shipbuilding funding than is programmed in the final two years of the FY2000-FY2005 FYDP.
Eliminating ship procurement backlog. If Navy ship procurement falls below 8.6 ships per year for some number of years of a 35-year procurement period, it must rise above 8.6 ships per year in other years of that 35-year period, so as to maintain the required average rate of 8.6 ships over that 35-year period. The rate of Navy ship procurement has been below 8.6 ships per year since FY1993 and is programmed to remain below that rate through FY2004.
If current plans are implemented, a total of 85 ships will be procured during the 13-year period FY1993-FY2005, or an average of about 6.5 ships per year. Procuring ships at the steady-state replacement rate of about 8.6 ships per year for 13 years would result in a total procurement of about 111 ships. Implementing current shipbuilding plans will thus create a cumulative 13-year ship-procurement backlog since FY1993 of 26 ships relative to the steady-state shipbuilding requirement.
This 26-ship "deficit" is not immediately apparent because of the relatively large numbers of ships built in the 1970s and 1980s, when the shipbuilding rate was well above 8.6 ships per year. After 2010, and particularly after 2020, however, when the 1970s- and 1980s-era ships begin to retire, this 26-ship backlog if not by then redressed, will be unmasked, and the size of the fleet will fall below 300 ships.
Eliminating this 26-ship backlog over the remaining 22 years in a 35-year ship procurement period beginning in FY1993 will increase the required procurement rate by about 1.2 ships per year above the steady-state replacement rate. If an average procurement rate of 8.6 ships per year is to be achieved for the entire 35-year period FY1993-FY2027, then for the period FY2006-FY2027 the remaining 22 years after FY2005 a total of 215 ships will need to be procured, or an average of about 9.8 ships per year.
Submarines in particular.
Backlog in submarine procurement. The cumulative ship procurement backlog is particularly acute in nuclear-powered attack submarines (SSNs), and as a result, the challenge of maintaining the planned SSN force of 50 boats over the long run is particularly significant. This issue has been a concern in Congress since the mid-1990s, and has been discussed by CRS in testimony to this committee in 1995 and 1997; in a 1997 CRS presentation to a Defense Science Board task force on the submarine of the future, which issued its report in 1998; and in a 1999 CRS report on attack submarine programs.
As discussed in the 1999 report (updated here to reflect the new FY2000-FY2005 FYDP), during the 16-year period FY1990-FY2005, current plans call for the procurement of a total of 10 SSNs the final Los Angeles (SSN-688) class boat (in FY1990), the second and third Seawolf (SSN-21) class boats (in FY1991 and FY1996), and the first 7 Virginia (SSN-774) class boats (one each in FY1998, FY1999, and FY2001-FY2005). If, during this 16-year period, SSNs were procured at a steady-state replacement rate for a 50-boat SSN force, a total of about 23 to 27 would have been procured 13 to 17 SSNs more than the number in current plans.
Effect on force levels after 2015. Between now and about 2015, this 13- to 17-boat backlog in SSN procurement will be masked by the large numbers of SSNs procured during the 1980s. After about 2015, however, SSNs procured during the 1980s will reach retirement age and begin to leave service, and the FY1990-FY2005 "deficit" in SSN procurement, if not be then redressed, will begin to be unmasked. By the mid-2020s, most of the SSNs procured in the 1980s will no longer be in service, and the size of the SSN force could drop well below 50 boats and remain there until well into the 2030s.
The table below shows the consequences on the size of the SSN force for
the period 2015-2040 of various SSN procurement rates after FY2003, assuming a 30- or
35-year life for existing SSNs. As can be seen in the table, if SSN service life cannot be
extended beyond 30 years, then an average procurement rate of 2 SSNs per year would result
in an SSN force that remains below 50 boats from 2015 through the 2020s. If the SSN rate
is closer to 1 or 1.5 SSNs per year, then force size could drop below 40 or even below 30
boats, and remain below 50 boats from 2015 through the 2030s.
Table 2. Potential size of U.S. SSN force, 2015-2040
(depending on post-FY2003 SSN procurement rate and SSN service life)
Source: Prepared by CRS, June 1997, using Navy data on ages of existing SSNs and assuming a 6-year construction period for new SSNs.
Extending submarine service life. As can also be seen in the table, extending the service lives of existing SSNs to 35 years would delay by five years (to 2031) the date at which the SSN force will reach its minimum size, and increase that minimum size by 5 to 10 boats. In this case, an SSN-procurement rate of 2.0 SSNs per year would be sufficient to maintain an SSN force of more than 50 boats, while a procurement rate of 1.5 SSNs would be sufficient to maintain a force of at least 40 boats.
Extending the lives of all existing SSNs to 35 years, however, may not be feasible or cost effective: some SSNs may not be in good enough material condition to continue operating much beyond age 30, and some might exhaust their nuclear reactor fuel cores a few years prior to age 35, which would likely make an additional nuclear refueling appear not cost-effective.
Submarine procurement rate after the FYDP. To maintain a 50-boat SSN force after 2015, the Navy's submarine community projects a need for procuring SSNs at a rate of 2 boats per year in FY2006 and FY2007, and about 2.67 boats per year for a period of several years starting in FY2008. A procurement rate of 2.67 SSNs per year is more than 3 times the rate (5 SSNs in 6 years, or 0.83 boats per year) planned in the FY2000-FY2005 FYDP. In this sense, the planned SSN procurement rate may be the portion of the shipbuilding plan that falls the furthest short of the rate needed to maintain planned force levels for a given kind of ship within the overall 300-ship fleet. At a rough cost of about $2 billion per submarine, increasing the SSN procurement rate from 0.83 boats per year to about 2.67 boats per year would require an additional $3.7 billion per year in the Navy's shipbuilding budget.
If the world security environment between now and 2015 evolves in a benign direction, then a reduction in the SSN force level after 2015 to less than 50 boats might be acceptable. If the world security environment evolves in a less benign direction, however, then a reduction in the size of the SSN force to less than 50 boats after 2015 could have negative implications for U.S. security. As mentioned earlier, the period after 2015 could feature a significant military challenge from modernized foreign military forces. More particularly, this is the period by which some analysts believe the proliferation of advanced sensors and weapons will make surface ships highly vulnerable to attack, which in turn might argue in favor having a U.S. Navy that included an increased (rather than a reduced) number of SSNs.
Desired vs. fiscally constrained force-level goal. Although this discussion takes the 50-boat force level established in the 1997 Quadrennial Defense Review as its starting point, it can be noted that the Defense Department testified to Congress in 1998 that "CINC requirements for SSN deployments, which include CVBG deployments, national tasking, arctic operations, special forces missions, and independent presence missions would dictate a force of 72 attack submarines. This force level [like the desired force levels for other parts of the Navy] is also unaffordable."
In U.S. military force-structure planning, there is usually a difference between the desired force-level goal and the fiscally constrained force-level goal. Similarly, there is often a difference between the procurement rate needed to maintain the fiscally constrained force-level goal and the procurement rate that can be afforded within actual amounts of available funding. In the case of the SSN force, however, these differences are particularly large: The desired force-level goal of 72 boats is 44 percent higher than the fiscally constrained force-level goal of 50 boats, and the procurement rate of 2.67 boats per year that will be needed starting 3 years beyond the FYDP is more than 200 percent higher than the procurement rate programmed within the FYDP.
Alternative Navy ship-acquisition funding mechanisms
In response to the decline in funding for Navy shipbuilding in recent years, some observers have suggested using (or making greater use of) funding mechanisms other than the traditional full-funding method. Below are brief discussions of full-funding policy and three alternative funding mechanisms -- multiyear procurement (MYP), incremental funding, and long-term lease authority, also known as charter and build.
Full funding policy.
The policy in general. The full funding policy is a budgeting rule that applies to "procurements that are covered within the procurement title of the annual Department of Defense (DoD) appropriation Act. The full funding policy has no application to any other appropriation contained in other titles of the Act."
The policy requires that the entire procurement cost of an item be funded in the year in which the item is procured. Congress imposed the policy on DoD in the 1950s to make the total procurement costs of DoD weapons and equipment more visible and thereby enhance Congress' ability to understand and track these costs. Congress' intent in imposing the policy was to strengthen discipline in DoD budgeting and improve Congress' ability to carry out its oversight of DoD activities.
Prior to the imposition of the full funding policy, DoD weapon procurement was frequently accomplished through incremental funding, under which the funding to procure a given item was provided in increments over a series of years in a pattern reflecting requirements for making progress payments to the contractor. Incremental funding fell out of favor because opponents believed it made total procurement costs more difficult for Congress to track, or created a potential for DoD to start procurement of an item without necessarily stating its total cost up front (or without ensuring that the funding needed to complete it would be available in future DoD budgets), or might permit one Congress to "tie the hands" of one or more future Congresses by providing initial procurement funding for a weapon whose cost would have to be largely paid during one or more future Congresses.
There are two general exceptions to the full funding policy. One permits the use of advance procurement funding for items with long production lead times. The other permits advance procurement funding for economic order quantity (EOQ) procurement in programs that have been approved for multiyear procurement.
Advance procurement funding is used routinely and extensively in the procurement of the Navy's nuclear-powered warships. Due largely to the long production lead times of certain naval nuclear-propulsion components, the funding profile for the procurement of a nuclear-powered warship usually begins with hundreds of millions of dollars in advance procurement funding in a year prior to the year in which the ship is to be procured typically two years prior, but sometimes more. Advance procurement funding for long-production-lead-time items is sometimes used in other DoD procurements, though the amounts of funding provided are usually much smaller than those provided for nuclear-powered warships.
Although the full funding policy applies to all items procured through DoD's procurement title, proposals in recent years for relaxing the application of the policy (or for formally permitting alternative funding methods) have focused on Navy shipbuilding. This is in large part because the relatively high unit procurement cost of certain Navy ships (particularly aircraft carriers) can lead to potentially significant year-to-year perturbations in funding requirements for the Shipbuilding and Conversion, Navy (SCN) appropriation account, particularly during periods (such as the one experienced for the last several years) of relatively low rates of Navy ship procurement.
Recent apparent departures from the policy. In recent years, there have been several instances of apparent departure from the full funding policy in Navy ship procurement. These instances are summarized below:
LHD-6 (FY1993 and FY1994 funding). Going into the conference on the FY1993 defense appropriation bill, the House had recommended fully funding procurement of the Wasp (LHD-1) class amphibious assault ship Bonhomme Richard (LHD-6) a ship the Administration had not requested for procurement at a cost of $1.205 billion, while the Senate recommended $1.050 billion. During the conference, however, competition among competing programs for defense funding resulted in an agreement in which LHD-6 was approved for procurement in FY1993 but only $305 million in FY1993 funding was provided. The conference report on the bill stated:
The $893.8 million needed to complete the funding of the ship (as adjusted) was requested by the Administration in FY1994 and approved by Congress. Thus, about three-quarters of the cost of LHD-6 was provided a year after the year in which the ship was procured.
CVN-76 (FY1994 funding). The Bush Administration planned to procure the Nimitz (CVN-68) class aircraft carrier Ronald Reagan (CVN-76) in FY1995. Consistent with this plan, the Bush Administration requested $832.2 million in advance procurement funding in FY1993 for long-production-lead-time nuclear-propulsion components. No funding was to be requested in FY1994. The remainder of the ship's cost about $3.8 billion was to be provided in FY1995. This was a typical funding profile for procuring a nuclear-powered ship.
Congress approved the Administration's FY1993 advance procurement funding request for CVN-76. In FY1994, no procurement funding was requested, and the defense authorization committees took no action on CVN-76. The defense appropriation subcommittees, however, sought to accelerate some or all of the funding needed to complete the cost of CVN-76 from FY1995 into FY1994. The House subcommittee recommended providing $1 billion in FY1994 funding, but a point of order was sustained against this unauthorized appropriation on the floor of the House. The Senate subcommittee recommended $3.403 billion in FY1994 funding enough to complete the procurement cost of the ship (if procured in FY1994 rather than FY1995). The conference agreement on the FY1994 defense appropriation bill permitted $1.2 billion in FY1994 funding from the National Defense Sealift Fund (NDSF) to be transferred to CVN-76 if such funding was authorized in supplemental authorizing legislation.
As part of its proposed FY1995 defense budget, the Clinton Administration assumed that this supplemental authorization would occur. Accordingly, the Administration for FY1995 proposed to complete funding for CVN-76 with $1.2 billion in FY1994 funding reprogrammed from the NDSF and $2.45 billion in FY1995 funding.
In marking up the FY1995 defense authorization bill, both of the defense authorization committees recommended completing funding of CVN-76 in FY1995. The House Armed Services Committee, however, rejected the proposed transfer of $1.2 billion in FY1994 funding from the NDSF and instead recommended $3.65 billion in FY1995 funding. The conference report on the FY1995 defense authorization bill adopted the Administration's plan by approving the reprogramming of the $1.2 billion in FY1994 NDSF funding and authorizing $2.45 billion in FY1995 funding. The conference report on the FY1995 defense appropriation bill adopted the same approach, except it reduced the FY1995 funding to $2.28 billion. CVN-76 was thus procured with $1.2 billion in reprogrammed funding in FY1994 a year that was not to have included any advance procurement funding under the originally proposed funding profile.
LHD-7 (FY1994 and FY1995 funding). In addition to providing the $893.8 million needed to complete the funding of LHD-6 (see above), the conference report on the FY1994 defense appropriations bill provided $50 million in advance procurement funding for the Wasp (LHD-1) class amphibious assault ship Iwo Jima (LHD-7) a ship the Administration had not requested for procurement. The report stated: "The conferees expect that the Defense Department will fund the balance of the ship in fiscal year 1995 prior to obligating the advance procurement funds." The Administration in its FY1995 defense budget did not request any funding for LHD-7. Congress, however, appropriated another $50 million in advance procurement funding for the ship as part of its action on the FY1995 defense budget.
The Administration's proposed FY1996 defense budget and FY1996-FY2001 FYDP proposed procuring LHD-7 in FY2001. Congress, in its action on the FY1996 budget, accelerated procurement of LHD-7 to FY1996 and provided the remaining $1.3 billion needed to complete the funding for the ship. LHD-7 thus received a total of $100 million in advance procurement funding in the two years (FY1994 and FY1995) prior to the year (FY1996) in which it was procured. Although this funding could be used for advance procurement of materials for LHD-7, it appears to have been intended primarily as a symbolic expression of Congress' continuing interest in procuring the ship in some future year. If so, this is not one of the two purposes for which the full funding policy permits advance procurement funding.
SSN-23 (FY1997 and FY1998 funding). The Jimmy Carter (SSN-23), the third and final Seawolf (SSN-21) class attack submarine, was originally procured in FY1992. Congress' action in 1992 on a rescission proposal by the Bush Administration effectively suspended procurement of SSN-23 and gave the Secretary of the Navy the choice of whether to reinstate procurement of SSN-23. In 1993, as part of its Bottom-Up Review (BUR) of U.S. defense policy and programs, the Clinton Administration decided to reinstate procurement of SSN-23 in FY1995 or FY1996 (it later settled on FY1996). By this point, $382.4 million had already been obligated and expended on SSN-23. A total of $540.2 million in additional funding was made available for obligation to SSN-23 by the 1992 rescission bill as passed by Congress. As a consequence, completing the approximate $2.4 billion cost of SSN-23 would require about $1.5 billion in additional funding.
The Administration requested $1,507.5 million in FY1996 to complete the cost of SSN-23. Congress approved the procurement of SSN-23 in FY1996, but provided only $700 million in procurement funding, leaving about $807.5 million to complete the cost of the ship.
Rather than requesting all $807.5 million or so in FY1997, the Administration requested $699.1 million in FY1997 for SSN-23 and deferred the final $105 million or so needed to complete the cost of the ship (as adjusted) to FY1998. Congress, as part of its action on the FY1996 defense budget, approved $649.1 million (rather than $699.1 million) for SSN-23, leaving about $155 million to complete the cost of the ship.
The Administration requested $153.4 million in FY1998 to complete the cost of SSN-23 (as adjusted); Congress approved this amount. Thus, of the approximately $2.4 billion cost of SSN-23, a total of $802.5 million about one-third of the total cost of the ship was appropriated by Congress in the two years (FY1997 and FY1998) following the year (FY1996) in which SSN-23 was (for a second time) procured.
LPD-18 (FY1998 funding). As part of its proposed FY1998 defense budget and FY1998-FY2003 FYDP, the Administration planned to procure LPD-18, the second San Antonio (LPD-17) class amphibious ship, in FY1999 and did not request any advance procurement funding for the ship in FY1998. Congress, as part of its action on the FY1998 defense budget, provided $100 million in FY1998 advance procurement for the ship. As with LHD-7, this funding appears intended primarily as a symbolic expression of Congress' interest in procuring the ship in a future year (FY1999).
CVN-77 (FY1998 funding). The Administration, as part of its proposed FY1998 defense budget submitted to Congress in February 1997, planned to procure the modified Nimitz (CVN-68) class aircraft carrier CVN-77 in FY2002, with initial advance procurement funding in FY2000. In March 1997, Newport News Shipbuilding, the builder of Nimitz-class carriers, proposed an alternative funding profile, which it called the "Smart Buy" proposal, that would maintain FY2002 as the year of procurement but accelerate the start of advance procurement funding to FY1998 and increase the total amount of advance procurement funding provided through FY2001. The Smart Buy proposal, if fully adopted, would have required $345 million in FY1998 advance procurement funding.
After examining the issue, Congress provided $50 million in FY1998 funding for CVN-77. As with LHD-7, and LPD-18, this sum appeared to be intended primarily as a symbolic expression of Congressional support for eventually procuring CVN-77 in some fashion. Section 122 of the FY1998 defense authorization act authorized procurement of CVN-77.
LHD-8 (FY1999 funding). The conference report on the FY1999 defense budget provided $45 million in advance procurement funding for the Wasp (LHD-1) class amphibious assault ship LHD-8 a ship the Administration had not requested for procurement in its then-current FY1998-FY2003 FYDP. As with LHD-7, LPD-18, and CVN-77, this funding appears primarily intended as a symbolic expression of Congress' interest in procuring the ship in some year after FY1999.
In addition to the instances reviewed above, three additional cases are worth noting. One concerns the Nimitz-class aircraft carrier Harry S. Truman (CVN-75); another concerns the post-Nimitz-class aircraft carrier CVN(X)-78, and the third concerns the acquisition of 19 large, medium-speed, roll-on/roll-off (LMSR) sealift ships for the Military Sealift Command.
CVN-75 (FY1989-FY1992 funding). In its action on the FY1988 defense budget, Congress provided funds to procure the Nimitz-class carriers John C. Stennis (CVN-74) and Harry S. Truman (CVN-75) as a fully funded two-ship buy in FY1988 at a combined procurement cost of $6.325 billion. The Reagan Administration's proposed FY1988 defense budget and FY1988-FY1992 Five-Year Defense Plan had proposed buying CVN-74 and CVN-75 as a two-ship buy but used a different funding profile under which CVN-74 would have been procured in FY1990 and CVN-75 in FY1993. Advance procurement funding for CVN-74 would have begun in FY1988 for CVN-74 and FY1989 for CVN-75. The proposed FY1989-FY1993 funding profile for CVN-75 was as follows: $200 million, $206 million, $696 million, $202 million, and $2,339 million. Thus, in the case of CVN-75, the executive branch had proposed a funding profile for a nuclear-powered ship that included advance procurement funding starting four years in advance of the year in which the ship was to be procured, with portions of funding provided each year for a period of five years ending with the year of procurement. This funding profile does not technically depart from the full-funding policy, but with funding increments provided over a period of five years, it bears some resemblance to an incremental funding profile.
CVN(X)-78 (FY2002-FY2005 funding). In its FY2000-FY2005 ship procurement plan, the Administration plans to request advance procurement funding in FY2002-FY2005 for CVN(X)-78, a post-Nimitz-class nuclear-powered aircraft carrier scheduled for procurement in FY2006. As with CVN-75, while this funding profile does not technically depart from the full-funding policy, it bears some resemblance to an incremental funding profile.
LMSR sealift ships. The 19 large, medium-speed, roll-on/roll-off (LMSR) sealift ships, which were funded in 1990s, were acquired through the National Defense Sealift Fund, which is a part of the defense budget outside the procurement title. As a consequence, DoD was not required to follow the full-funding policy in acquiring these ships. As discussed in a 1996 CRS report, many of these 19 ships received funding from four or five different fiscal years in a pattern resembling incremental funding.
Expanded use of multiyear procurement. Congress in recent years has approved use of multiyear procurement (MYP) arrangements for Arleigh Burke (DDG-51) class Aegis destroyers to be procured in FY1998-FY2001, and for the first four Virginia (SSN-774) class submarines procured in FY1998, FY1999, FY2001, and FY2002. Additional candidates for MYP in Navy ship procurement include some or all of the 10 remaining ships in the 12-ship San Antonio (LPD-17) class, which are to be procured in FY2000-FY2004, and some or all of the 12 ships in the ADC(X) class, which are to be procured in FY2000-FY2005.
The primary advantages of MYP procurement are program stability and the associated cost reductions of long-range production planning. MYP contracts can reduce the unit cost of the item being procured by making possible large-lot purchases of materials and components and by permitting the prime contractor to configure its production facilities and arrange its construction schedule so as to take best advantage of a known production rate extending several years into the future. In the case of the FY1998-FY2001 DDG-51s, for example, the Navy said that MYP made it possible to procure 12 ships for about (or somewhat less than) the price of 11 ships -- a savings of roughly $1 billion. Roughly analogous savings might be possible in the LPD-17 and ADC(X) programs.
A primary disadvantage of MYP is loss of flexibility for government officials in responding to unforeseen developments (strategic, budgetary, or otherwise) that call for making adjustments in planned procurements. Approving MYP for the FY1998-FY2001 DDG-51s and the first four Virginia-class SSNs has reduced the ability of the Administration and Congress to responding to unforeseen events by making substantial adjustments to Navy budgets in FY2000-FY2002. Approving MYP arrangements for LPD-17s, ADC(X)s, or both could add to this loss of flexibility in FY2000-FY2002, extend it to FY2003-FY2005, or both.
Incremental funding. Within Navy ship procurement, the types of ship most frequently mentioned in connection with proposals for a return to incremental funding are aircraft carriers and amphibious assault ships. The high cost of these ships, combined with their once-every-few-years (as opposed to annual or almost- annual) appearance in the ship procurement plan, can cause significant one-year "spikes" in the Navy's shipbuilding plan that can be difficult to accommodate within the Navy's annual funding top line without causing disruption to other Navy programs. These spikes can be particularly significant in the case of aircraft carriers, which now cost between $4.5 billion and $5 billion to procure. As the Navy's funding top line (and, within that top line, the Navy's annual shipbuilding budget) has declined in recent years, this spiking effect, and the challenges it poses for Navy budget planning, have become issues of particular concern.
The principal advantage of incremental funding for carriers or amphibious assault ships is that it would reduce the spiking effect by spreading the procurement costs of these ships over several years and thereby make it easier to procure these ships without causing disruption to other Navy programs. The disadvantages of incremental funding for these ships appear to be the same as those discussed above in explaining Congress' original reasons for imposing the full-funding policy -- the difficulty of tracking the total procurement cost of the item in question, the risk that DoD would start procurement of an item without taking adequate steps to ensure that the funding needed to complete the item would be available in future DoD budgets, and the potential for tying the hands the hands of one or more future Congresses.
Long-term lease authority. Long-term lease authority, also known as charter and build, was proposed in 1997 and 1998 in connection with the ADC(X) program and other future auxiliary ship acquisition programs. Specifically, long-term lease authority was viewed as a way to accelerate the start of ADC(X) procurement from FY2002 (the scheduled start under the Administration's FY1998-FY2003 ship procurement plan) to FY2000. In light of the Administration's decision in its new FY2000-FY2005 FYDP to accelerate the start of ADC(X) procurement to FY2000 and procure the ships with full funding, long-term lease authority is now being considered more in connection with military tankers and maritime prepositioning ships to be acquired several years from now. Long-term lease authority would require changes to existing law, which currently limit the length of leases into which the government can enter.
Primary advantages of long-term lease authority include avoidance of a large up-front payment to procure the ship and a contractual arrangement that permits the shipbuilder to build the ship in a more purely commercial environment, which might reduce the shipbuilder's construction cost.
A primary disadvantage of long-term lease authority is that it commits the government to making a stream of annual lease payments for a period of 20 or more years into the future for a specific ship, which could reduce government flexibility in responding to unforeseen developments that may reduce the need for operating that ship or the importance of operating it relative to other defense-spending priorities.
A key point of debate in Congress and elsewhere over long-term lease authority is whether it is more expensive, less expensive, or about equal in cost to the alternative of procuring the ship with up-front procurement funding. Central to this debate is the use of net-present value (NPV) analysis involving the use of future-year dollars that are discounted beyond the expected rate of inflation to take into account the future real (i.e., after-inflation) investment value of money. NPV analysis is often used to evaluate private- and public-sector investment options involving a stream of payments extending several or many years into the future.
In comparing alternative proposals for acquiring ships using long-term lease authority or up-front procurement funding, the calculated cost of long-term lease authority is much more likely to exceed the cost of using up-front procurement funding if discounted-dollar analysis is not used and the comparison is made on a constant-dollar basis, in which the value of future-year dollars are adjusted only to take into account the expected future rate of inflation. If discounted-dollar analysis is instead used in making the comparison, the calculated costs of the two options are more likely to be similar to one another, with the result of the comparison possibly depending on the exact discount rate used in the NPV analysis.
In assessing the merits of long-term lease authority, Congress may wish to explore the appropriateness of discounted-dollar analysis, as well as the appropriateness of various potential discounting rates.
Alternative funding methods and the total rate of shipbuilding. As a final point, it can be noted that while alternative funding methods may reduce Navy ship procurement costs or otherwise make it easier for the Navy to fund its ship procurement plan within the Navy's overall top line, it is not clear that these mechanisms, even if used in combination, would be enough to permit the Navy to procure ships in future years at rates sufficient to maintain a 300-ship fleet over the longer run. In particular, increasing the submarine procurement rate to something like 2.67 boats per year may require more additional funding than these alternative funding methods can make available.
Consolidation in shipyard ownership
Recent proposals for merging Newport News Shipbuilding (NNS) with Avondale Shipyards or for merging NNS with General Dynamics Corporation have drawn attention in recent weeks to the topic of consolidation of ownership among the 6 private-sector shipyards that build almost all of the Navy's major ships. These shipyards are:
Until 1995, these 6 shipyards were owned by 6 different owners. This situation changed in September 1995, when General Dynamics Corporation, the owner of EB since 1952, purchased BIW from Bath Holding Corporation. It changed again in November 1998, when General Dynamics purchased NASSCO from its employee-owners.
In January 1999, the boards of directors of NNS and Avondale Shipyards announced that they had agreed to combine the two companies to create a new firm known as Newport News Avondale Industries. DoD and the Justice Department have approved the merger. In February 1999, General Dynamics announced that it was making an unsolicited offer to acquire NNS. At NNS's request, the DoD is now reviewing this proposed merger.
Most analysts appear to agree that the General Dynamics-NNS merger proposal is not compatible with the NNS-Avondale merger proposal, since merging a combined NNS-Avondale operation into General Dynamics would put 5 of the Navy's 6 major shipbuilder's under a common owner. It thus appears that ownership of the Navy's 6 major shipbuilder's may be consolidated in coming months from 4 owners to 3, in one of two alternative ways.
Consolidation in the ownership of these 6 yards was not unexpected. Indeed, for some observers, it was, if anything, overdue in light of the considerable consolidation that has been occurring in other sectors of the U.S. defense industry since the early 1990s. In February 1997, John Douglass, then-Assistant Secretary of the Navy (Research, Development and Acquisition) testified that "Many other areas of defense (aircraft, electronics and land systems) have seen a consolidation in order to maintain core capabilities and business viability. Similar trends in shipbuilding are not apparent but will be required."
Consolidation in ownership of the Navy's 6 major shipbuilders raises several potential issues for Congress, including the following:
Each of these is discussed below.
Potential savings from consolidation in shipbuilding facilities. In contrast to consolidation in ownership in other U.S. defense sectors, which has often led to significant consolidation in production facilities, it appears that consolidation in ownership of the 6 major Navy shipyards will lead to less significant consolidation in shipbuilding facilities. In all cases, shipyard officials have stated that shipyards affected by mergers and acquisitions will be kept open rather than shut down.
Keeping all 6 shipyards open will limit the amount of savings that might be realized from consolidation of shipbuilding facilities. These savings, although potentially significant in an absolute sense, may not be as substantial relative to the cost of the Navy's overall shipbuilding effort. As discussed in a 1996 CRS report, the combined fixed overhead costs of these 6 shipyards might be total between $300 million and $600 million per year. Even if 3 of the 6 ships were completely shut down and their fixed overhead costs entirely eliminated, this might save $150 million to $300 million per year -- a significant sum in absolute terms, but still a small percentage (1.6 percent to 3.2 percent) of an annual Navy shipbuilding budget of $9.4 billion (the average figure in the FY2000-FY2005 FYDP).
If all 6 shipyards remain in operation, consolidation in ownership could still lead to some consolidation in certain areas of white-collar employment, such as executives, managers, administrative and centralized support workers of various kinds, and possibly (in the case of a General Dynamics-NNS merger) ship designers and engineers. It may also lead to some streamlining of certain specialized production tools or facilities, particularly if these tools or facilities perform limited amounts of work and the intermediate products made by these tools or facilities can be easily and economically transported from one yard to another. The savings associated with these kinds of consolidations, however, might be only a fraction of the $150-million to $300-million figure above.
Additional savings associated with shipyard ownership consolidation might arise from rephasing work at certain yards, or shifting some work from one yard to another, so as to avoid or minimize fluctuations in the workload at individual yards or take advantage of the ability of one yard to perform certain elements of work at lower cost. Savings might also result from investments that a parent firm might make in the modernization of the production facilities of a yard it has recently acquired. And savings might come from the pooling and sharing of improved management and production strategies, techniques, and processes among all the shipyards owned by a common parent firm.
Potential employment impacts due to consolidation. Employment impacts, like savings due to consolidation in facilities, will be limited if all 6 shipyards remain in operation. As discussed above, the most significant employment impacts might be among certain white-collar areas rather than among blue-collar production workers.
One area of blue-collar employment that might be affected to a more notable degree concerns submarine-production workers at EB and NNS. Submarine production workers at EB, particularly EB's main assembly facility at Groton, CT, are reportedly concerned that a General Dynamics-NNS merger could lead to a shifting of submarine-production work out of EB and to NNS. Conversely, submarine production workers at NNS are reportedly concerned that a General Dynamics-NNS merger could lead to a shifting of submarine-production work out of NNS and to EB. Although General Dynamics has stated that it would keep both EB and NNS in operation following a General Dynamics-NNS merger, it could choose to restructure or streamline its total submarine-production effort in a way that increases or decreases submarine-production work at one site, or leaves it essentially unchanged.
Effect on competition in Navy ship construction, design and technology. As a general rule, many policymakers believe that competition in defense acquisition can generate benefits for the government and taxpayers by restraining acquisition costs, improving product quality, encouraging adherence to scheduled delivery dates, and promoting innovation. In the 1980s and early 1990s, the Navy used competition extensively in ship-acquisition programs, particularly in the awarding of annual contracts for construction of surface combatants and nuclear-powered attack submarines.
Today, competition appears to be less of a priority in Navy ship-acquisition activities. The Navy is currently conducting a competition between two industry teams one led by BIW, the other by Ingalls for the right to develop the design for the Navy's next-generation surface combatant, the DDG-21 land attack destroyer, which is scheduled to begin procurement in FY2004. The Navy has indicated, however, that regardless of who wins the design competition, both BIW and Ingalls will build DDG-51s. The Navy may also conduct a competition to design the ADC(X). For major Navy ship programs now in production, however, there is little active use of competition:
The current limited active use of competition in Navy shipbuilding appears to be a consequence to a large degree of two key factors: As discussed the 1996 CRS report, achieving effective competition in Navy shipbuilding has become more difficult in recent years due to the relatively low rate of Navy shipbuilding since about FY1993 and an apparent unwillingness of policymakers in both the executive and legislative branches to take any steps that might force any of the 6 shipyards out of the Navy shipbuilding business, on which the yards are highly dependent. Together, these two conditions make it difficult for the Navy to create uncertainty about its shipbuilding contract-award decisions a key requirement for generating effective competition in shipbuilding.
Given the limited use of competition in Navy shipbuilding today, the issue for Congress and the Administration appears to be what affect shipyard ownership consolidation might have on preserving the potential for resuming effective competition in Navy shipbuilding in the future, particularly if the Navy shipbuilding rate over the next several years is increased substantially from the relatively low levels of the middle-1990s.
In assessing this issue, one criterion to examine is whether consolidating shipyard ownership would preclude having at least two independently owned builders for each category of major Navy ship (other than aircraft carriers): As discussed in the 1996 CRS report, the 6 shipyards in question can be divided into four overlapping pairs of independently-owned primary competitors, based on the kinds of ships they have built in recent years. These are the two submarine builders (EB and NNS), the two surface combatant builders (BIW and Ingalls), the two amphibious shipbuilders (Ingalls and Avondale), and the two auxiliary and sealift shipbuilders (Avondale and NASSCO). Consolidation to date in shipyard ownership has not brought any of these pairs of builders under common ownership; further consolidation might or might not, depending on the nature of the consolidation.
Another criterion is yard survival and Navy flexibility in awarding contracts. Becoming part of a multi-yard organization might make the financial health and survival of an individual yard less dependent on the Navy making a favorable contract-award decision on a particular shipbuilding program, since that yard's new parent firm might be able to shift other work to the yard in the event of an unfavorable decision. By relaxing somewhat the currently fairly close set of correlations between certain shipbuilding programs and the financial health of certain yards, consolidation might restore some of the Navy's ability to generate uncertainty concerning its shipbuilding contract-award decisions, which in turn could make it easier for the Navy to generate effective competition in ship construction.
More speculatively, shipyard ownership consolidation can create diversified shipbuilding organizations that have recent experience in building a wide array of major Navy ships. This is already the case with the General Dynamics shipyard group, which produces submarines (at EB), surface combatants (at BIW), amphibious ships (when BIW begins to produce LPD-17s), and auxiliary and sealift ships (at NASSCO) every kind of major Navy ship other than aircraft carriers. An NNS-Avondale merger would produce a shipyard group with recent experience in building a similarly wide array of major Navy ships aircraft carriers (at NNS), submarines (also at NNS), amphibious ships (at Avondale), and auxiliary and sealift ships (also at Avondale) every kind of major Navy ship other than surface combatants (which NNS and Avondale have produced in the more distant past).
The formation of diversified shipbuilding organizations with recent experience in building various kinds of major Navy ships creates, in theory at least, the opportunity for the Navy to solicit consolidated bids for the construction of a collection of ships of various classes rather than ships of a single class. For example, the Navy in theory could solicit bids for building various potential combinations of some, most, or all of the major Navy ships of various kinds that are procured in a given fiscal year, and then award contracts to one or more shipbuilding organizations in a way that optimizes the return to the taxpayer across the entire shipbuilding effort, rather than within a program for building a single class.
Bundling together ships of various classes procured in limited annual quantities could enhance the Navy's flexibility in awarding construction contracts, even if Navy shipbuilding rates do not increase much beyond currently planned levels. This enhanced flexibility could in turn further improve the Navy's ability to generate uncertainty among the bidders about its shipbuilding contract-award decisions. Such an acquisition strategy, however, would represent a radical departure from past Navy ship-acquisition practices, and implementing it might require significant legislative or regulatory changes.
A third criterion to examine is the potential effect of shipyard ownership consolidation on competition and innovation in ship design and technology. This criterion may be of increasing importance, since the Navy in recent years has explored a strategy of shifting more of this work out of the Navy's own public-sector ship-design and engineering organizations, and to the private-sector shipyards.
Of the 6 major Navy ships builders, 3 -- EB, Ingalls, and NNS maintain large in-house design and engineering staffs. The staffs at EB and NNS have extensive experience and resources in the design and engineering of submarines and nuclear-powered ships. The other 3 yards -- Avondale, BIW, and NASSCO -- maintain smaller in-house design an engineering staffs. General Dynamics can use the large in-house staff at EB to support ship-design and engineering activities at BIW and NASSCO, and a new ship-design and technology center is being established in Louisiana that will be able to support ship design and engineering activities at Avondale. There are also independently owned naval architectural and engineering firms that can be hired by shipyards to supplement their own in-house or corporate capabilities.
Consolidation to date in shipyard ownership has not brought major in-house shipyard design and engineering staffs under common ownership; further consolidation might or might not, depending on the nature of the consolidation. A reduction in the number of independently owned major in-house shipyard design and engineering staffs could make it more difficult to maintain effective competition in Navy ship design and technology, particularly for specific ship types or in specific technology areas.
Conversely, however, innovations can also be spurred when members of previously separate organizations are brought together under common ownership and as a consequence are permitted to share ideas, "bounce" thoughts off one another, "cross-fertilize" their thinking, and combine separately conceived and isolated concepts into a testable new approach. In this sense, depending on how the parent firms manage the flow of promising ideas and concepts between their constituent yards, shipyard ownership consolidation, by bringing previously separate shipyards under common ownership, may create a larger "critical mass" for generating innovations.
Navy-Coast Guard National Fleet Concept
As discussed in a 1998 CRS report on the Coast Guard's Integrated Deepwater System program -- a major Coast Guard acquisition program to replace the service's aging cutters and aircraft -- the Commandant of the Coast Guard and the Chief of Naval Operations on September 21, 1998 issued a joint policy statement on a new "national fleet" concept under which the Coast Guard and the Navy will seek to coordinate more closely in various areas, including equipment procurement:
The Coast Guard, which is funded primarily through the Department of Transportation (DoT) budget, acknowledges that it faces a significant challenge in securing sufficient acquisition funding for the Integrated Deepwater System program.
Although limited amounts of funding have been provided in the Defense Department budget in certain prior fiscal years to help finance certain Coast Guard programs, the Coast Guard traditionally has been for the most part a peripheral topic of concern of the defense oversight committees in their annual reviews of the Department of Defense budget.
In light of the signing of the joint Navy-Coast Guard policy statement on the national fleet concept, and the challenge the Coast Guard faces in securing funding for the Integrated Deepwater System acquisition effort, as well as other considerations -- the national-defense functions of the Coast Guard, the possibly considerable export potential of cutters and aircraft acquired under this program, and the consequent effect that production of new cutters and aircraft for both Coast Guard and foreign use may have on the U.S. shipbuilding and aircraft industrial base and the cost of ships and aircraft acquired for DoD -- the defense oversight committees and the Congress generally may wish to consider the following issues:
Mr. Chairman, distinguished members of the subcommittee, this concludes my testimony. Thank you again for the opportunity to appear before you to discuss these issues. I will be pleased to respond to any questions you might have.