NMD/Pine Gap/Star Wars

$1 Billion Question: Where Has All the Air Force EELV Money Gone?

By John Kelly, Chris Kridler and Kelly Young. 25 August 2002

CAPE CANAVERAL, Fla. -- Taxpayers may never know how Lockheed Martin Corp. and The Boeing Co. spend at least $1 billion in taxpayer money set aside to design, build and launch new rockets the military needs to lift heavier satellites into space.

The companies' spending is not classified to protect national security. Instead, it's one of many financial details about the multibillion dollar Evolved Expendable Launch Vehicles project that are being kept secret to protect the business interests of two of America's biggest defense contractors.

Under a deal struck in 1998, the Defense Department gave the companies $500 million each to aid the development of two rocket systems: Lockheed's Atlas 5 and Boeing's Delta 4. The government used a new style of defense contract in which the Air Force is a "silent partner" with almost no control over contractor spending and decision-making.

The Air Force, the two companies and some industry analysts basically say, "So what?"

They contend taxpayers will save as much as $10 billion on military satellite launches during the next two decades because of this new way of doing business, which all but privatized rocket development work previously done by the military.

Analysts inside and outside the program said that means fewer government-paid personnel and facilities, less money spent navigating the bureaucracy and freedom for two contractors to use their expertise to get better rockets off the ground for less money.

However, government auditors and taxpayer watchdog groups cautioned one side effect of the new way of doing business is far less public disclosure of what the companies and the military are doing with public money.

"Anything that removes financial transparency is not a good deal for the taxpayers," said Eric Miller, a defense industry investigator for the Project On Government Oversight, which has spent two decades investigating deals between the Defense Department and its contractors. "Time and again defense contractors have shown they will sometimes take advantage of these types of situations. When you eliminate that kind of oversight, you've got a potential disaster."

Included in the classified information is financial data necessary for anyone outside the EELV program to find out if the government really will save as much as the Defense Department and the contractors say. Even one of the government's audits, almost always publicly available records, is classified to protect the contractors.

"That's contractor proprietary" became a customary response for Col. Susan Mashiko, head of the Air Force's EELV program, other Defense Department officials and the contractors when asked for financial details and other typically public records in the weeks leading up to Wednesday's inaugural Atlas 5 launch at the Cape.

How much money?

Among the information being kept secret is exactly how much taxpayer money the two companies will get. The Air Force said its investment is only $500 million per company, but government audits contradict that.

In 1998, the General Accounting Office reported the Defense Department's investment might be higher because the deal lets Lockheed and Boeing get additional reimbursements for independent research and development.

Two years later, an auditor with the Defense Department's inspector general testified before Congress that one of the contractors already had collected extra research and development money.

Government and media accounts summarizing the inspector general's report said Lockheed got $103 million. The report is classified because it contains contractor secrets, a spokesman for the inspector general said.

Mashiko said independent research and development reimbursements are "not counted against" the EELV program budget. Such reimbursements are not counted as part of the cost of many big defense programs either. "It's not bookkept that way," she said.

The Air Force will not say if either company received such reimbursements or how much, saying such information is classified to protect the contractors.

The government and its contractors also will not specify how much additional subsidy money the Defense Department might give the firms in next year's budget.

The parties acknowledge additional aid is being considered, saying both companies are struggling because of a dismal market for commercial satellite launch services. Neither Boeing nor Lockheed would admit to asking for money.

"The issue is not one of EELV contractors asking for more money," Boeing officials said in written answers to questions submitted by Florida Today. "The issue is the Air Force has a requirement for assured access to space, which at this time, means having two domestic launch providers. However, the global demand for launch services cannot sustain the number of launch providers in the market."

Unless asked, the Air Force does not cite such costs when touting how good a deal EELV is for taxpayers.

Insight, not oversight

Likewise, the contractors' spending of the tax dollars they get is not public record.

Here at the Cape, there is ample evidence billions of dollars were spent. Boeing and Lockheed said they spent an estimated $250 million and $500 million, respectively, to rebuild two of the country's historic space launch pads, complete with new towers and mission control centers.

This summer, the companies' new rockets were shown off here too. Industry analysts said the first model of such high-tech boosters represent at least $200 million to $500 million more in research, development and construction costs.

In addition to the government investment, the two companies each pledged to spend at least $1 billion of their own money. Asked for a detailed accounting of how the public's contribution was spent, however, the Air Force and the contractors repeatedly said no.

"It was a general investment not accounted for on a line item basis," Boeing said in a written statement. As part of the new defense contract style called an "Other Transaction Agreement," the Air Force is able to attend most meetings and look at contractors' data at every stage of the project. But the military can't override most contractor decisions and can't make the financial data public.

"Due to EELV's unique acquisition strategy and commercial-like contracts, the contractors are not required to file reports showing exactly how they spent any portion of the $500 million," said Lt. Col. James Knauf, chief of launch services on the EELV project.

"Nevertheless, government personnel do have insight through access to the contractors' databases and participation in the contractors' program management meetings. The information from these databases and meetings is competition sensitive, and therefore cannot be released."

In its audits, the General Accounting Office warned the Other Transaction Agreement approach was risky for a billion-dollar project. It's a tool previously reserved for far smaller contracts. The GAO said it posed considerable challenges because it exempted the project from the normal rules for spending tax dollars, limited Defense Department oversight and did not give the military authority to conduct audits, GAO said.

"The use of other transaction instruments for Evolved Expendable Launch Vehicle development will challenge (the Defense Department) in determining how best to protect the government's interests," GAO said.

The Defense Department inspector general also challenged whether there was enough "visibility" into the program's spending in its 1999 review of the EELV program, according to the agency's Congressional testimony.

"The EELV other transaction arrangements included technical safeguards but provided limited insight into the financial aspects of the program," assistant auditor Don Mancuso told Congress in the spring of 2000.

He later added that following the audit, the Air Force "has started getting briefings on the contractor's financial investment in the program, and the contractor has provided the needed access to data. However, we still disagree with the Air Force on the use of inappropriate protective measures that limit visibility into this project."

Officials at the inspector general's office refused to comment on the launch vehicle program, saying it was secret.

The Air Force and the contractors object to any suggestion there is no government oversight.

"There isn't a single piece of data or a single meeting that the Air Force and their reps aren't invited to and probably don't attend either directly or by telecon," said John Karas, Lockheed's vice president for Atlas development. "So there's no difference between insight and oversight that way. It's total access. The only difference is that they're not controlling the meetings."

However, the Air Force acknowledged they do not have authority to order Lockheed or Boeing to make changes unless it directly impacts a military payload or public safety at launch. Air Force staff attend meetings to know what's going on and make suggestions based on the military's decades of experience with rockets.

Government officials have little authority, except in the area of safety, where the Air Force and Federal Aviation Administration do have control over whether the rockets are safe to fly and don't endanger the public. In responding to questions about how the money was spent, the military and contractors said the government's $1 billion investment is relatively small for a major project.

In Brevard County, a billion dollars is almost enough to fund the county schools' budget for two years. But in the space-launch business, the government has spent billions of dollars on projects, from the proposed Freedom space station to several X-planes, in which the spacecraft were never even delivered. With EELV, officials said, two new rockets are ready to go.

"It's unbelievable to most people that nobody is concerned about $500 million," said Miller, the defense watchdog group's investigator who added the Other Transaction Agreement strategy was never intended for big companies to avoid scrutiny on nine- and ten-figure contracts. "We don't think such large contracts should come along without financial oversight. It's a dangerous practice."

'Trust us'

The message from the Air Force, Boeing and Lockheed is, "Trust us." Even program documents say the oversight style "relies heavily on government trust and confidence in contractor performance."

The parties involved said trust is possible because the government and taxpayers are protected by an unforgiving outside force: competition. In addition to making sure the military had access to space, the government subsidized the companies to help them compete with international rockets such as Ariane for commercial jobs.

Forecasters predict fewer satellites will be launched in coming years, meaning customers are not likely to tolerate rocket failure or even minor inefficiency if it drives up the price they pay. The companies' rocket ventures will not survive without successful flights and thrifty management.

"The accountability was high when government was planning on paying most of the bill," said Troy Thrash, program manager for Futron Corp., which analyzes the satellite industry. "Now that the contractors are probably spending about $2 billion each of their own money, I suspect accountability is even higher, though perhaps pointed inward instead of outward."

Analysts said the government and the contractor have a legitimate need to keep some information secret. They said the companies can't publicize cost and other trade secrets where international competitors can see them and then bid against those same companies for commercial launch jobs.

That said, the government's billion-dollar investment requires some balance between too much oversight and disclosure, which could hurt program efficiency, and too little, which could present quality control or spending problems, said John Pike, a defense policy analyst with Virginia-based http://globalsecurity.org.

"The government is different because it put up the front money to pay these companies to develop those vehicles," he said. "It was the government's decision to have two American launch companies rather than one or three. The government is the primary customer for the launch vehicles. Under those circumstances, the taxpayers in principle probably have a greater right to know about the inner workings of the program."


Copyright 2002 FLORIDA TODAY.