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U.S. DoD LAUNCHES AFFORDABILITY PLAN

28 Jun 10. Reuters reported that the U.S. Defense Department unveiled plans aimed at restoring “affordability” to the roughly $400bn it spends each year on goods and services.

Defense Secretary Robert Gates said on Monday that the Pentagon was redoing the way it does business in an attempt to transfer more than $100bn over five years from overhead and other accounts to troops and arms upgrades.

“This process will take time, but I’m confident we’ll succeed,” Gates told reporters at a briefing.

The goal is to make sure that U.S. “warfighting capabilities” grow at roughly three percent annually even if the overall defense budget fails to keep that pace, said Ashton Carter, the Pentagon’s chief weapons buyer.

In a memo to his staff titled “Better Buying Power,” Carter said the trick was to root out unproductive or low-valued overhead and transfer the savings. The memo was subtitled “Mandate for Restoring Affordability and Productivity in Defense Spending.”

Carter met industry executives earlier on Monday amid reports that profits could be crimped through the use of fewer of the types of contracts that companies favor to hedge their risks on big-ticket arms development programs.

The Pentagon’s biggest contractors are Lockheed Martin Corp, Boeing Co and Northrop Grumman Corp., followed by General Dynamics Corp., BAE Systems, Raytheon Co., United Technologies Corp. and L-3 Communications Holdings Inc.

FBR Capital Markets, in a note to clients, said Carter’s briefing to the industry would likely “increase uncertainty, and the risk profile, of the defense industry and we expect it to cause the group to weaken as a result.”

Gates outlined plans on May 8 to shift billions of dollars from what he described as bloated bureaucracies to preserve armed strength and weapons modernization programs overall.

Deputy Defense Secretary William Lynn said on June 4 that the department’s goal was to free $101.9bn in the five years starting in fiscal 2012, two thirds from support programs and overhead.
Shares of defense companies, as measured by the S&P aerospace and defense index .GSPAERO, ended down 1 percent on Monday.

The Obama administration’s core national defense budget request for fiscal 2011, that begins Oct. 1, was $548.9bn, not including war costs in Iraq and Afghanistan, up 1.8 percent from the current year.

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