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17 Feb 22. Previewing Biden’s FY23 defense budget request: 5 things to expect. With the long saga of the fiscal year 2022 budget looking like it will be finalized in March, eyes now turn to the FY23 defense budget and what it might look like. Between Russian aggression, inflation and a Congress that appears supportive of increasing defense spending, it’s unclear how high the Pentagon’s budget will go. But as Mackenzie Eaglen of AEI notes, there are plenty of signs about what shape the budget might take.
While the White House lags on sending its next federal budget to Congress, there is a fair amount policymakers know already about the forthcoming fiscal year 2023 request. Reports suggest the White House’s passback guidance will set the FY23 national defense budget for the Department of Defense somewhere at or above $770 billion. That might sound high, but it fails to account for the military’s lost purchasing power as a result of record breaking inflation this year and likely next, along with nearly a half year under a spending freeze.
Thanks to public comments, we can also piece together five key points about budget trends under the topline—whenever it officially arrives.
The defense budget will once again tout record levels of investment in Research and Development (R&D) as the priority approach to competition with China. Heidi Shyu, Under Secretary of Defense for Research and Engineering, told reporters in January that she believes the Pentagon’s FY23 research and development budget request would again be historically high. But that will simply trigger déjà vu for Congress and demonstrate a lack of imagination. A budget stuck on cruise control by continuing well-worn paths laid two administrations ago will not please Congress.
Expect a focus on funding almost-ready R&D efforts. Comments from top leaders signal the budget will favor R&D and science and tech programs ready to move into production and procurement as opposed to those further out. Army Secretary Christine Wormuth recently said key modernization programs are being scrutinized for cuts. Those that will survive are prototypes that are affordable and ready to scale. If they’re not primed for this, they are vulnerable in the 2023 budget request.
That was echoed when Air Force Secretary Frank Kendall said recently that there is no shortage of innovation or technology at the Pentagon. The implication, of course, is that there is a shortage of fielded projects, products and weapons. Kendall noted how R&D projects are piling up without a clear path to getting them in the hands of warfighters. But this is a problem Congress has been pushing the Pentagon to address for years. 15 months ago, the House Future of Defense task force report said the Pentagon must identify innovative capabilities and “make substantial investments to procure them at the necessary scale.” Such programs “should then be fast-tracked” instead of failing “to become funded programs of record,” the report stated.
This is a necessary and long overdue effort to bridge the so-called acquisition valley of death; too many programs are languishing in the science experiment-equivalent phase and petering out before they have the chance to bear fruit, at scale. If there is not tangible and substantial progress in moving large numbers of programs into procurement in the FY23 defense budget request, it will have failed to meet the moment.
Try to divest to invest — again. The next Biden budget will also continue the trend, started during the Obama administration, of “divesting” old weapons to “invest” in new technologies of the future. While this sounds smart and novel, the problem is that this strategy lacks nuance.
Too often the approach has unilaterally cut capacity at a time the armed forces are as busy as ever around the globe. And because the process is bottom-line driven, it often sheds innovative legacy programs evolving toward new capabilities. And, let’s be frank: the results usually end up divesting without the money materializing for actually investing. Unfortunately, this trend will be hyper accelerated with raging inflation affecting every defense account and priority.
Further, Congress tends to approve divestment in smaller tranches than the services typically propose, or moves to protect parochial interests in such a way that the cuts become cost neutral. So while the service chiefs are making clear progress in convincing lawmakers to overcome at-times local interests to retire bombers, tankers and drones, the half-loaf approach results in what Kendall calls the “death by a thousand cuts” that has “failed to result in real savings.”
Steal first from readiness to cover unexpected budget holes. The cost of doing regular business is going up across the enterprise thanks to COVID-19, lingering supply chain disruptions, continued labor shortages, and now inflation. The result will be attempts to move money around to cover unplanned cost increases.
Similar to how the Pentagon responded to natural disasters at various bases in recent years, the first billpayer will inevitably be military readiness. That is because the operations and maintenance account has what are called execution-year dollars. These, as senior leaders have noted, are far “more valuable than future-year dollars” when you need to financially triage in a pinch.
But expect impacts across the board; no priority will be spared except military and civilian pay and compensation, although they too will feel poorer immediately, as the generous-looking 4.6% raise ahead in FY23, based on the Bureau of Labor Statistics’ Employment Cost Index, will still not be enough to keep up with inflation. Add to that the expired child tax credit going away and pocketbooks across the military will be worse for wear.
Red hot inflation will also keep a lid on any endstrength growth across the services, and likely cause a slight decline in active-duty numbers. With an overall topline that will very likely not keep up with overall inflation at or above seven percent, the Defense Department will struggle to even meet the 4.6% pay raise for 1.4 million uniformed personnel and roughly 800,000 civilian employees.
Marine Corps leaders are already previewing endstrength cuts to help fund modernization. Calling active duty cuts “the most logical lever to pull, based on the fact [the Corps] had grown so large to the point that [it] was unsustainable,” the rest of the services are about to come to the same difficult realization.
Unfortunately, the Commandant is likely to get fewer Marines but no additional dollars to funnel into technology as he hopes due to inflation. It will cost more money this year than last year to keep a smaller force paid.
Not only will troops’ paychecks take a hit, but their quality-of-life programs will also be squeezed. The Navy, for example, is already shrinking base operations services across the country “due to budgetary constraints.” This affects family priority programs, from gym and swimming pool hours to base libraries, auto hobby shops, landscaping and other custodial services.
Endstrength cuts in light of growing global demands will further add to readiness woes. That is because, as Navy Secretary Carlos del Toro said recently, “the threat doesn’t change much just because inflation is going up.”
The bowwave is still looming. Finally, the Pentagon will continue to grapple with the “Terrible 20’s” challenge of funding strategic and conventional modernization in the same decade without nearly enough funds to do so. Discussing the challenge of trying to fund tri-service modernization from within existing budgets—as opposed to getting additional new money—Air Force leaders have said plainly this approach will crowd out other equally-important investments.
Lt. Gen. Clint Hinote, Air Force Deputy for Strategy, Integration and Requirements, said conversations are ongoing with stakeholders about whether strategic and conventional modernization is “either/or” or “both/and.” He noted there is “no free money” and so “it has to come from somewhere.”
The problem is too big to come from somewhere, so instead, it’s going to have to come from everywhere — including nuclear modernization — with budgets that do not keep pace with inflation.
If the administration continues to underfund national defense by failing to engage with the very real ramifications of record inflation and overdue modernization efforts, it will inevitably force servicemembers to pay the price by stretching them steadily further. Like last year, the White House will pass the future of the US military to Congress. Lawmakers should dust off this year’s playbook and be prepared to force defense spending higher again. (Source: glstrade.com/Breaking Defense.com)
18 Feb 22. Austin Says Current Operations Give Hints of New National Defense Strategy. People interested in the new National Defense Strategy can see some of it in play as the United States and its allies face Russian aggression in Eastern Europe, Secretary of Defense Lloyd J. Austin III said in Warsaw today. Austin said he is proud of the work that has been done on the document, but he is not yet ready to release it. He did give some hints about the strategy and the idea of integrated deterrence that is a driving force behind it.
He spoke during a press conference in Warsaw following meetings with Polish officials. They discussed NATO and bilateral efforts in Eastern Europe.
The National Defense Strategy “will certainly address major threats to our security,” he said. “It’ll also address major threats to the international rules-based order.”
Integrated deterrence is a driving idea for the document. It “will be a key piece of that new strategy,” Austin said. “Integrated deterrence means using all of the capabilities in all warfighting domains: Air, land, sea, space and cyber.”
It also includes using every instrument of national power: diplomatic, economic, judicial and so on.
“But most important, using the capability and capacity that’s resident in our partners and allies,” he said. “So, what you see today, actually playing out is exactly that. You’re seeing us lead with diplomacy. You’ve seen us work very, very carefully with our allies and partners to share information, and to also move very, very quickly and deliberately to help reassure and reinforce wherever required.”
“So, you have seen a preview of that strategy begin to play out here, as we address this most recent crisis,” he continued.
Austin also saw integrated deterrence at work when he visited with U.S. and Polish service members at Powidz Air Base outside of Warsaw. The base is home for U.S. rotational units and has been for some years. The military units of both nations are integrated together and work and train together, Army Lt. Gen. John S. Kolasheski, the commander of U.S. V Corps, said.
“It’s just a wonderful opportunity to work shoulder to shoulder with our allies and partners, focused on building readiness, focusing on building interoperability between our armies and to build collective defense crisis response,” the general said to reporters traveling with Austin.
Austin beamed when he spoke to the assembled troops. He said he told the Polish defense minister that “whenever we place an American soldier somewhere, it demonstrates our resolve. It demonstrates our commitment to our partners. So, I would say that you are our greatest ambassadors. I could not be prouder of you. I want to thank you for your sacrifices, for your commitment and for your professionalism.” (Source: US DoD)
16 Feb 22. Biden to seek more than $770bn in 2023 defense budget, sources say. President Joe Biden is expected to ask Congress for a U.S. defense budget exceeding $770bn for the next fiscal year as the Pentagon seeks to modernize the military, according to three sources familiar with the negotiations, eclipsing the record budget requests by former President Donald Trump.
Ongoing budget talks between Defense Secretary Lloyd Austin and the White House’s Office of Management and Budget (OMB) have coalesced around a proposed defense request of higher than $770 billion for the 2023 fiscal year starting Oct. 1, the sources said. Negotiations are ongoing within the administration and the final amount could change before the budget request is made in the coming months, the sources added.
Two of the sources said that about $773bn was going to be available for the Department of Defense and other needs would go on top of that, potentially pushing a total above $800bn.
The Pentagon referred queries to the OMB, which declined to comment.
The national defense “top line” budget includes the Pentagon’s budget for spending on salaries, tanks and stealthy F-35 jets made by Lockheed Martin Corp (LMT.N) as well as funds for the Department of Energy’s nuclear weapons programs and defense-related activities at other agencies.
The White House last week responded to the Pentagon’s proposed budget request with a figure that was more or less on par with Austin’s request, according to the sources, who spoke on condition of anonymity.
Among the top priorities for this budget are shipbuilding, developing capabilities in space, missile warning and modernizing the nuclear “triad” of ballistic missile submarines, bombers and land-based missiles, one of the sources said.
The budget would benefit the biggest U.S. defense contractors including Lockheed, Northrop Grumman Corp (NOC.N) and General Dynamics Corp . Another of the sources said that the nuclear modernization effort is seen as “must pay” in addition to Pentagon plans to continue to invest in research and development of weaponry to fight any potential future wars against China and Russia. The Pentagon also plans to trim costs by retiring older weaponry like Littoral Combat Ships that are expensive to operate and older planes like the A-10, which the U.S. withdrawal from Afghanistan last year has made less essential because they are vulnerable to more sophisticated enemies. The national defense budget request crafted during Trump’s final year in office was for $752.9 billion. Congress then increased that number by $25bn, ultimately landing at $778bn for fiscal 2022. One of the sources said it is anticipated that Congress would once again increase the president’s national defense budget request, but the 2023 budget cycle is only beginning. Biden’s State of the Union address to Congress, scheduled for March 1, is viewed as the kickoff. (Source: Reuters)
17 Feb 22. DOD bets on small businesses to improve industry competition. Part of the plan includes leaning in on other transaction agreements while increasing oversight of defense industry mergers and acquisitions. A new Pentagon report says there’s not enough competition among defense industry companies and to fix it, it wants to push for more small business partnerships while keeping an eye on mergers and acquisitions. The Office of the Under Secretary of Defense for Acquisition and Sustainment released a report Feb. 15 on the state of competition in the defense industry base, noting that the number of companies has shrunk from 51 to five prime contractors in the past 30 years. For example, satellite suppliers have been halved to just four in that timespan. The report was required under a Biden administration executive order on Promoting Competition in the American Economy. To increase competition and prevent further shrinkage, the Pentagon wants to team with more small businesses by using more flexible buying authorities and preventing consolidation through mergers and what it sees as anti-competitive data rights practices. The report states that DOD wants more oversight of mergers and acquisitions by supporting the Federal Trade Commission and Justice Department antitrust investigations “when a merger threatens DOD interests.” The report landed the same week as defense giant Lockheed scuttled a planned $4.4bn acquisition of component manufacturer Aerojet. The deal was the target of a FTC lawsuit which argued that the acquisition would have hurt competition in the defense aerospace sector by cutting off Lockheed’s rivals from a key supplier. Additionally, the Defense Department also wants to address issues with “vendor lock” and intellectual property and data rights that may hinder competition.
“Certain practices surrounding intellectual property and data rights have been used to limit competition in DOD purchasing and to induce ‘vendor-lock’ and other undesirable results,” the Pentagon report states.
“DOD will implement best practices for identifying its long-term IP needs early in the competitive phases of acquisition programs, ensuring IP is an evaluation factor in competitive awards and a negotiation objective in sole- source awards, and contracting with vendors who are willing to provide the government the IP deliverables and rights it needs.”
But to attract more companies, the Pentagon said it wants to boost outreach to small businesses through flexible buying authorities, such as other transaction agreements and commercial solutions opening.
The Defense Department’s use of OTAs has increased in recent years, doubling from 2019 to 2020 with some of that lift attributed to use for research and development needs for vaccines and therapeutics brought on by the COVID-19 pandemic.
DOD likes those authorities because they can help “foster new relationships and practices” with nontraditional defense companies and for multi-use projects. They also “encourage flexible, quicker, and cheaper project design and execution,” the report states.
But there’s concern about the shrinking small business base, despite increased investment.
A Government Accountability Office report from October 2021 found that while DOD’s contract obligations to small businesses rose from 2011 to 2020 – reaching more than $80bn – fewer businesses participated. Of that increased spending with small companies, DOD found that 83% was for research and development projects and 28% for manufacturing.
“Yet, over the past decade, small businesses in the [defense industry base] shrunk by over 40%,” the department’s report states, and if the trend continues another 15,000 suppliers could vanish in the next decade.
The Pentagon is working on a department-wide small business strategy to boost the small business defense industry base. But the success of it will likely hinge on implementation. The department has a small business strategy from 2019 – which the GAO determined needed a clear implementation and policy plan as well as a formal way to monitor progress. (Source: Defense Systems)
16 Feb 22. DOD Report: Consolidation of Defense Industrial Base Poses Risks to National Security. A report just released by the Defense Department reveals consolidation in the defense industrial base, which poses risks to national security. The report lays out a series of proposed efforts by the department — including keeping a closer watch on mergers among defense contractors — to help mitigate that risk.
The “defense industrial base” refers to the collection of businesses, large and small, that DOD relies upon to provide the materials, equipment and weapons systems needed to defend the nation.
In recent years, the report shows, the number of companies within the defense industrial base has shrunk dramatically. The decrease in participation decreases the diversity of suppliers and at the same time decreases the kind of competition that spurs innovation and lowers prices paid for defense materials by the taxpayer, the report says.
“Since the 1990s, the defense sector has consolidated substantially, transitioning from 51 to 5 aerospace and defense prime contractors,” the report states. “As a result, DOD is increasingly reliant on a small number of contractors for critical defense capabilities.”
Over the last 30 years, the report continues, the number of suppliers for things such as tactical missiles, fixed-wing aircraft, and satellites have all declined dramatically. For instance, 90% of missiles now come from just three sources, the report says.
During a background briefing in advance of the report’s release, senior administration officials discussed measures the department will take to increase competition within a shrinking defense industrial base and why those efforts are important.
“Competition within the is vital to the department because it improves cost and performance and fosters greater innovation for the products and services needed to support national defense,” one official said. “Competition is also an indicator of the necessary industrial capability and capacity to deliver the systems, key technologies, materials, services and products DOD requires to support its mission.”
Within the DOD report are five recommendations for how to increase participation in the existing defense industrial base and spur increased completion there, as well.
“The department’s specific actions will address the systematic challenges to expanding competition and ensuring a sufficient domestic capacity and capability in the priority industrial base sectors while promoting greater competition,” the official said.
First, the department plans to strengthen oversight of mergers between companies within the defense industrial base. The report says when new mergers between existing defense contractors are proposed and the department identifies such mergers as posing a risk to DOD interests, the department will support the Federal Trade Commission and Department of Justice in antitrust investigations and recommendations.
The report highlights the challenges to planning for and securing the intellectual property rights and data needed to promote competition over the long term.
“We’ll … address the challenges to acquiring intellectual property and associated technical data rights to support greater competition throughout a system’s lifecycle,” the official said.
The number of players now in the defense industrial base is insufficient, the report says, and the department would like to see more companies involved competing to support defense priorities.
One way to do that is through the use of acquisition authorities such as “other transaction authority,” as well as commercial solutions openings that will allow the department more flexibility to better operate in the commercial space and make it easier for contractors who haven’t worked with DOD to become involved.
Small businesses also play a big part in DOD’s plans.
“Specifically for the small businesses, I would say that we’ve seen a decline in our small business prime contractors, and we believe that increasing that, reversing that downward trend will help us and help the mission and the warfighter,” the official said.
Finally, the department hopes to increase supply chain resiliency in five areas designated as priorities. These areas include casting and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials, and microelectronics.
For More Information
State of Competition Within the Defense Industrial Base : STATE-OF-COMPETITION-WITHIN-THE-DEFENSE-INDUSTRIAL-BASE.PDF
State of Competition in the Defense Industrial Base: https://www.defense.gov/News/Releases/Release/Article/2934955/state-of-competition-in-the-defense-industrial-base/source/GovDelivery/ (Source: US DoD)
15 Feb 22. State of Competition in the Defense Industrial Base. Today, the Defense Department released the State of Competition in the Defense Industrial Base report, as directed by Executive Order 14036.
“The Department is renewing its efforts to ensure we can meet the challenges now and into the future. A vibrant, competitive and diverse defense industrial base will be critical to our success,” said Deputy Secretary of Defense Dr. Kathleen Hicks. “As DoD works to innovate, bring new technologies into our supplier base, and develop the workforce of the future, American small businesses and our U.S. industrial base must expand not only to improve resiliency, but to ensure we are able to meet the needs of our warfighters for tomorrow’s high-tech challenges.”
The report discusses the current state of competition in the DIB and recommends DoD actions to promote a more diverse and expanded industrial base. The report also outlines actions that DoD is taking to specifically promote competition in its small business vendor base as well as in five priority industrial base sectors, including microelectronics, missiles and munitions, high-capacity batteries, castings and forgings, and critical minerals and materials.
The report made five recommendations:
- Strengthening merger oversight
- Addressing intellectual property limitations
- Increasing new entrants
- Increasing opportunities for small businesses
- Implementing sector-specific supply chain resiliency plans
More on these recommendations and the entire report can be found here. https://media.defense.gov/2022/Feb/15/2002939087/-1/-1/1/STATE-OF-COMPETITION-WITHIN-THE-DEFENSE-INDUSTRIAL-BASE.PDF?source=GovDelivery (Source: US DoD)
15 Feb 22. Pentagon seeks to boost competition in shrinking defense contractor base. The Biden administration released a report on Tuesday detailing recommendations to boost competition in its defense industrial base because rapid consolidation has created a national security risk.
The number of aerospace and defense prime contractors to the Defense Department – a group known as the defense industrial base – has shrunk from 51 to just 5 since the 1990s, the report said. It added that 90% of missiles come from 3 sources.
Having only a small number of sources for defense needs “can pose mission risk and, particularly in cases where the existing dominant supplier or suppliers are influenced by an adversary nation, pose significant national security risks,” the report said.
The document, mandated by a July executive order signed by President Joe Biden, added that a lack of competition also limits incentive for firms to innovate, and results in higher costs to taxpayers.
The paper comes on the heels of U.S. arms maker Lockheed Martin Corp (LMT.N) calling off plans to acquire rocket engine maker Aerojet Rocketdyne Holdings Inc (AJRD.N) for $4.4bn amid opposition from U.S. antitrust enforcers. read more
The document recommends the Pentagon work with antitrust regulators to prevent an excess of mergers, entice newcomers into the marketplace, and stop a handful of firms from withholding key intellectual property.
The report also urges the Defense Department to shore up its supply chain in crucial areas including missiles, batteries, critical materials and microelectronics. (Source: Reuters)
15 Feb 22. Amentum closes $1.9bn acquisition of PAE.
Services contractor Amentum said Tuesday it has closed its $1.9bn acquisition of PAE, marking the contractor’s latest move to subsume its rivals.
Amentum said it paid $1.9bn in cash, including assuming some debt and certain fees.
Amentum was the 23rd-largest defense firm in 2021, according to Defense News’ Top 100 rankings, while PAE was 80th. Both firms are services contractors.
The merger comes as the U.S. government has become increasingly wary of industry consolidation, amid concerns mergers could hurt competition and increase sourcing risk. Lockheed Martin recently abandoned its attempt to acquire Aerojet Rocketdyne after the Federal Trade Commission filed a lawsuit to stop it on antitrust grounds.
But consolidation among services contractors have typically been viewed differently by the government because there are more competitors and the barriers for entry are lower.
In November 2020, Amentum acquired competitor DynCorp International, moving it from 46th on the Top 100 list in 2020 up to 23rd in 2021.
Amentum announced the PAE deal in October, and PAE’s stockholders approved it at a special meeting Feb. 10. Trading on PAE’s stock was suspended before the opening of business Tuesday, and it will be delisted from the Nasdaq stock exchange. (Source: Defense News)
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