Indefensible Defense Industrial Policy

In 1955, the Eisenhower Administration’s Bureau of Budget released a memo that noted,

That was then. Today, the Department of Defense maintains 17 major government-owned, government-operated facilities comprising 80,000 federal employees with annual operating costs in excess of $34 billion. These so-called “military depots” serve to repair, rebuild, overhaul, and remanufacture equipment initially procured from private sector suppliers. The U.S. Government Accountability Office (GAO) has estimated the value of these industrial facilities exceeds $48 billion.

In earlier historical periods, the military services were required to operate their own weapons and ammunition factories due to the lack of private sector capacity for such unique end-use items. However, today, the U.S. military relies almost exclusively upon the private sector to develop and produce weapon systems ranging from main battle tanks and tactical aircraft to sea-launched missiles. However, these same original manufacturers are often prohibited from bidding on maintenance work for their own equipment. Effectively, government-run depots directly compete with the private sector.

So how did we get here? Prior to 1984, neither the U.S. Congress nor the Department of Defense (DOD) established any special contracting preferences with regard to the performance of logistics and sustainment of military equipment. Throughout much of the Cold War and during Korea and Vietnam, weapon systems maintenance was performed no different than any other industrial function within the military services. However, in 1985, Congress inserted statutory restrictions on contracting in order to shield specific installations which housed military depots from future base closure actions.

Beyond undermining fair and open competition, the negative impact of these statutory mandates is considerable. On the most basic level, arbitrary contracting limitations force DOD to manage logistics and sustainment by workload quota rather than efficiently and effectively leveraging the entire industrial base, public and private.

These mandates also have the harmful effect of impeding adoption of technological advances into weapon systems by removing the maintenance of the platform from their designer, developer, and original manufacturer. This is important because maintenance facilitates the upgrade process. Moreover, these directives result in higher operation and maintenance (O&M) costs and disruption of the integrated life cycle model which is essential for high value, low volume weapons system inventory management.

If an industrial base policy can be defined by government’s actions to subsidize and protect an element of the economy from direct competition, then the United States has such a policy for its defense sector. However, in this case, the U.S. defense industrial base policy does not prop up the private sector but rather the government itself. Because of existing statutory mandates, military depots perform commercial functions irrespective of cost or efficiencies.

For example, in fiscal year 2009, U.S. companies were prohibited from competing for $17.6B in DOD logistics and sustainment contracts. Ironically, as stated within a recent Annual Industrial Capabilities Report To Congress from the Defense Secretary’s office,

Unfortunately, in the case of military depot-level maintenance, this couldn’t be further from the truth. Beyond the need to modernize aging platforms and weapon systems, DOD must improve the way it does business. Times have changed since the 1980s. Today, the current statutory and regulatory barriers that exist to protect military depots merely impede technology innovation and drive up costs for DOD. In this era of budget shortfalls and worldwide operational imperatives, continuing such an economically costly and incoherent defense industrial base policy is, in a word, indefensible.