Any member of Congress who is determined to cut defense spending soon runs into a problem: The task isn't as easy as it appears at first.
* Reducing strategic forces can't produce large savings. Cancellation of the B-1, M-X, Trident missiles and submarines, B-52 improvements, cruise missiles, and Midgetman would produce only about $3 billion in savings in 1985, since most of the spending for these programs comes in later years.
* Cutting current spending for operations and maintenance or for conventional forces would reduce readiness or force abandonment of security commitments around the world -- steps that are often advocated in the abstract, but rarely translated into actual legislative proposals.
* Reducing military pay is similarly unpopular and difficult to justify for an all-volunteer military drawing from a shrinking pool of potential recruits.
The budget problem is even worse than it appears at any specific time because of the Pentagon's well-documented habit of underestimating funding needs for its programs. Whatever the Pentagon says a program is going to cost, you can be sure that the eventual cost will be higher, adding to future military budgets. The General Accounting Office, for example, has estimated that the current five-year defense budget plan underestimates costs by $173 billion to $324 billion.
As difficult as it may be, however, the military budget situation is not hopeless. There is a proven method of cost control that can be applied to defense procurement -- a method that will not cut the size or number of programs, reduce readiness, complicate the procurement process, or create political trouble in Congress. It is called competition among defense contractors.
About a third of the Pentagon's budget is spent on procurement, but only 6% of the total value of Pentagon contracts is spent in an open, competitive process. Most programs are contracted through the sole-source method or through "competitive negotiation." The latter is actually a misnomer, since there is little competition involved. A sclect group of contractors is invited to bid, and awards are made in a closed process that isn't subject to market pressures or public scrutiny. Too often, because Congress provides full funding for programs, the negotiated price is determined more by government cost estimates and congressional appropriations than by competition among rival suppliers.
On the other hand, the advantages of open, freely competitive bidding through formal advertising are numerous:
* Competition can reduce unit prices.
* It can increase the size of the defense industrial base by bringing new companies into competition for the Pentagon's procurement dollar.
* Companies under competitive pressure are more innovative and cost-conscious than those that are given the safe monopoly status of a sole-source contract.
The case of procurement of 3Omm GAU-8 ammunition, a billion-dollar program, illustrates the benefits of competition. The Air Force needed a type of ammunition that could be fired from antitank cannons aboard fighter planes. It advertised performance specifications for the ammunition, listing criteria for accuracy, reliability, and armor penetration.
One company won the first award through negotiations in 1975, but the Air Force decided to award the production contract through competition in subsequent years. Since 1976, two companies have shared this production under an innovative procedure. Bids are resubmitted each year, and the low bidder gets the lion's share of the contract. The winner's share increases in proportion to the size of the difference between the two bids.
Under this scheme, the two producers, Honeywell Inc. and The Aerojet Ordnance Co., a part of Aerojet General Corp., face constant pressure to innovate and reduce costs. The bidding war has been lively, with the lead changing hands three times since 1976.
The Pentagon gets the benefit of a low price, an adequate reserve of ammunition, and two companies that could boost production to meet wartime needs. The government is paying far less than the unit cost it estimated for this ammunition at the program's inception and has saved about $500 million over the life of the program.
The advantages of competition are borne out in histories of procurements that changed in midstream from a sole-source to a competitive basis. One study of 20 such cases found that bringing competitive pressure to bear on sole-source suppliers reduced prices by more than 50% on average.
While the Pentagon protests that competitive bidding is a stringent and unrealistic procedure, experience shows otherwise. Competition has been used in wartime and peacetime, and on items of varying levels of technological sophistication. The B-47 bomber, for example, was designed by one company and built by three companies that submitted bids for the production contract. Contracts for research and development have also been awarded through competition.
Price, reliability, maintenance costs, and other factors may all be considered and ranked in varying orders of importance in the evaluation of bids. In fact, the Pentagon's objections to increased use of formal advertising for competitive bids seem to be based on a misunderstanding of the ways in which this method of procurement can be used to its advantage.
The most important effect of increased competition would be to upset the cozy relationship between the Pentagon and its suppliers. Incentives would be reversed, and suppliers would compete by cutting costs, not by adding new features that increase costs and profits on solesource contracts. Bureaucrats would be forced to decide exactly what they want before they solicit bids, and they would face resistance from contractors if they tried to change designs after awards were made. Competitive bidding would not prevent design changes and program modifications, but it would require the Pentagon to justify them fully and to advertise them for bid.
The irony in this situation is that the Reagan Administration, conservative on economic and defense issues, resists wholesale competition in defense procurement, a system that would serve its economic, defense, and budgetary goals. The President's conservative friends in Congress have tried to convince him of the value of competitive procurement. Perhaps the prospect of debating a Democratic Presidential candidate who is more critical of defense-cost overruns will succeed where the urgings of conservatives have failed in getting the President to face this serious inconsistency in his defense policy.