02 February 2015

Don't Interrupt the Money Flow, Add to It

Déjà vu All Over Again

Front Loading the New AF Bomber

Mark Thompson of Time, IMO one of the best reporters covering the Pentagon,* has written a short but accurate portrait of the kinds of accounting gimmicks the Pentagon uses to make a new weapons program appear to cost less than will ultimately be the case (his report is attached below).  These accounting  gimmicks are particularly important in the early stages of a program’s development.  They are a seamless part of budget gaming strategy known in the Pentagon as a Front Loading.  Mark’s exemplar describes how the Air Force is playing “hide the pea” games with the cost estimates for its new long range strategic stealth bomber.  Front loading the new bomber is in its very early stages, but dollars, jobs, and profits are already flooding out of the Big Green Spending Machine: the FY 2016 budget continues to slip the bomber's nose into budgetary tent by adding another $2 billion in R&D funding to the $2.5 billion spent in the last two years (see page 1-20 of Program Acquisition Costs by Weapon System).

Front loading is the art of downplaying the future consequences of a current decision in order to obtain a premature approval to go forward.  Examples of front loading games include (1) Low balling estimates of future cost (this is the subject of Thomson’s report) to pave the way for a premature decision to enter concurrent engineering and manufacturing development, (2) over-promising future combat effectiveness, (3) over-promising improvements in reliability and  ease of maintenance to justify the inevitability of the higher unit procurement costs of increasingly complex weapons with the claim that the higher procurement costs in the nearer term will be accompanied by significantly lower unit operating costs in the very distant future, etc.  

The goal of the Front Loading power game is to obtain an early approval to proceed forward with large expenditures for developing a new weapons concept before that concept or its consequences are fully thought out.  Once the front loading operation turns on the money faucet, the political engineers in the defense industry and the Pentagon start building a political safety net by quickly spreading dollars, jobs, and profits to as many congressional as possible.  This second phase in the two-pronged assault on the taxpayer, known in the Pentagon as Political Engineering, is aimed at paralyzing decision makers (in the Pentagon, White House, and Congress) by making it too costly politically to cancel the program.  Working together the goal of the front loading and political engineering power games is to make the program "too big to fail" before anyone gets wise to what they have signed up for.

There is nothing new in these  power games or in our appreciation of their destructive long term consequences (see my 1990 pamphlet Defense Power Games & and my 2002 statement to Congress).   The  “too big to fail” F-35 disaster ought to be proof of their effectiveness to readers who doubt the power of these games.

Thompson’s report is a timely warning that the Air Force is busily front loading a new high-cost stealth bomber into the defense budget. If the AF succeeds in building yet another “too big to fail” bomber program, the pressures of cost growth will have enormous ramifications on its future force structure size, weapons aging, and combat readiness — all of which will increase pressure for even larger defense budgets in the future.**  

But the more important message is that the new bomber is a real-time case study in how the Pentagon cynically ensures that the defense budget remains beyond control of the President, the Congress, and the American people.  We know what is going to happen -- will the political decision-making system muster the will to stop it?

Some people may wonder why the Pentagon never learns from past experience.  Thompson’s report is a reminder that that Pentagon and its allies in the defense industry and Congress have learned their lessons very well: They know what works in the Hall of Mirrors that is Versailles on the Potomac.  That is why they do it over and over, with greater subtlety and refinement.  

The Defense Power Games may have little to do with national security, but they have a lot do with the ensuring the security of a comfortable status quo throughout the Military - Industrial - Congressional Complex.   

The strategy, as the American strategist Colonel John Boyd said, is simple: "Don’t interrupt the money flow, add to it."
* Caveat: Mark Thompson is a long time friend.

** The consequences of the front loading and political engineering games are well understood and documented.  For example, my 1996 unclassified report Defense Budget Time Bomb described how the consequences would unfold in the early 21st Century after the AF front loaded F-22 and JSF (F-35) into the modernization program in the early 1990s.  Today’s force structure/aging crises in the AF tacair force structure is the predictable consequence, even though the budget has rose to record levels in the first 15 years of the 21st Century.

How the Pentagon Bombs Budget Estimates to $mithereens
And why skepticism should accompany Monday's proposed 2016 defense budget
Mark Thompson, Time, Feb. 1, 2015
[Re-posted with permission of the author] 
And why skepticism should accompany Monday's proposed 2016 defense budget
President Obama is sending his proposed $585 billion 2016 Pentagon budget to Capitol Hill on Monday. It consists of reams of documents, charts and tables that make it difficult for normal folks to understand. So let’s take a look at a single line item—the Air Force’s new bomber, for which the service is expected to seek about $1.5 billion next year—for insight into why Pentagon numbers don’t always add up.
But the highly-classified warplane already has a well-publicized price.
The cost, the Pentagon has been saying since 2011, is $550 million per bomber. It’s the only price tag attached to the new bomber and, and a result, it’s the one cited when the new plane is discussed.
An artist's conception of what the Air Force's new Long Range Strike 
Bomber might look like - Northrop Grumman

“It’s like $550 million per copy,” Rear Admiral John Kirby, the Pentagon spokesman, said earlier this month. “It’s an estimate based upon multiple reviews of the program and not a single source.”
“Five hundred million dollars per copy sounds like a lot of money, but for the capability that we will be achieving, it actually is considered to be affordable,” Air Force Secretary Deborah Lee James told Bloomberg last summer.
A team of Boeing and Lockheed Martin is competing against Northrop Grumman to build the Air Force’s next crown jewel. Northrop produced the nation’s newest bomber, the B-2, and hinted at its desire to build the Long Range Strike Bomber during Sunday’s Super Bowl, when it aired a 30-second spot in Washington, D.C., and Dayton, Ohio, home of the Air Force’s acquisition corps.
The $550 million figure has been cited so often that those not playing close attention could be forgiven for thinking that it’s the actual cost of the airplane. Kind of like the bottom line on the sticker you see on the window of a new car. But it’s not. Like any bureaucracy dedicated to expansion, the $550 million sum is the lowest figure the Air Force number can say with a straight face.
After repeatedly planting that $550 million flag in the minds of lawmakers and taxpayers, Pentagon officials have sometimes acknowledged that the $550 million represents what is known inside the military as the “APUC,” or average procurement unit cost. What’s important about that figure isn’t what it includes, but what it leaves out.
First of all, the $550 million price tag is based on buying between 80 and 100 of the bombers. Driving the price per plane down to $550 million requires economies of scale that only come over such long production runs. Early aircraft off the assembly line are very expensive, as the radar-eluding B-2 “stealth” bomber made clear. “Cost of Stealth Bombers Soars to $450 Million Each,” the Washington Post reported breathlessly on its front page nearly 30 years ago, in May 1988. Few believed at the time that a bomber could cost so much. But that was for a planned buy of 132 planes. The Air Force ended up buying only 21. The B-2’s ultimate price: $2.1 billion each. [According to Winslow Wheeler, this estimate is in FY91$.  If true, the $2.1 billion/cy price tag would equate to $3.2 biillion/cy in today’s FY 2015 $).
Secondthe $550 million doesn’t include the research and development needed to actually build the plane. Without the R&D, the plane would truly be stealthy—because it wouldn’t exist. Experts inside and outside the Pentagon estimate the new bomber’s development will add between $20 billion and $25 billion to the Pentagon’s projected $55 billion procurement price tag for 100 planes.
Third, the $550 million price is based on the value of a 2010 dollar. That’s 12 years before the first pair of bombers is slated to be delivered. Accounting for inflation since has already driven the cost per plane close to $600 million, and that number will keep rising in the future. Delays in the plane’s production schedule will push it even higher.
Finally, the $550 million estimate doesn’t include anything for the all-but-certain cost overruns a weapons program like this will experience. No one can say how much unanticipated costs will add to the bomber’s ultimate price, but one can declare with certainty that it won’t be zero.
Todd Harrison of the independent Center for Strategic and Budgetary Assessments think tank estimates the bomber program’s true cost—assuming 100 planes and no cost overruns—at $90 billion. That’s $900 million a copy, 64% higher than the Air Force’s official $550 million figure.
“I actually think it’s very important that we buy the bomber,” Harrison says. “I just think we should acknowledge what it is likely to cost.” He also thinks there will be cost overruns, and that fewer than 100 will be bought. That’ll drive the price per plane into the B-2’s billion-dollar stratosphere.
Harrison isn’t the only one with doubts, judging from what some Air Force officials have said while describing the new bomber’s advertised price. Eric Fanning, the Air Force’s #2 civilian, has called the $550 million figure “a pretty firm chalk line.” Chief Air Force weapons buyer William LaPlante describes it a “marker in the sand.”
Whatever. It’s obvious that the Air Force’s $550 million estimate isn’t carved in stone.