Should the Defense Department get more mixed up with mergers and acquisitions?

The defense industrial base roster of companies keeps shrinking, and supply chain snags have become constant.

The defense industrial base roster of companies keeps shrinking, and supply chain snags have become constant. Now at least some members of Congress have asked whether the Defense Department should step in more often when DIB companies merger or acquire one other. The Federal Drive with Tom Temin gets more now from Democratic Congressman, John Garamendi, ranking member of the House Armed Services Subcommittee on Readiness.

Interview Transcript: 

Tom Temin Your letter to Secretary Austin was widely reported. What do you feel DoD should do with respect to mergers and acquisitions, which occur, I think, more often than people may realize.

John Garamendi Well, let’s start with competition is absolutely critical in every part of the American economy. Unfortunately, what we’re finding in the defense industry is that competition is all but disappeared. The companies do not compete with each other. The five majors don’t. They basically wind up with no bid, no competitive contracts for multibillion dollar programs. For example, the Sentinel program. I was a no bid, no competition, $130 billion contract. This is absolutely unacceptable. And that’s not the only one. We can go to numerous programs. The acquisition enough munitions to replace those that have been used in Ukraine. Every one of those contracts are no bid contracts. Those are simple. One company or another picking up that particular item and manufacturing it for the military without a bid. This is unacceptable. The good news is that the Biden administration, in other sectors of the economy is saying, wait a minute. The American economic system is based on competition, so we’re not going to support continued consolidation where there is a lessening of competition. They’ve not yet done so in the military industrial complex, although they certainly should. And as near as I can tell, the Department of Defense is part of the administration. And the Department of Defense ought to get on board and take significant steps to stop the continued consolidation of the defense industry.

Tom Temin Is the Defense Department, its acquisition patterns and planning processes, could that be part of the problem? Because if there was a discernible and steady demand signal coming from DoD, then maybe more companies would be prompted to get in on it. But it’s the stop and start nature of many of the programs. Says to companies, well, this is not a business for me anymore.

John Garamendi That’s just not the case. These programs go forever and for decades. The funding may move a little bit one way or the other, but the programs continue. Shipbuilding continues. We have 35 continues. On and on, the major programs are cemented in, and that in itself is a problem. But you’ve also hit on the edge of a very significant problem. It’s virtually impossible for new companies to get into the game. The Beltway Bandits control it. They have a relationship with the Department of Defense, and the Department of Defense does what is the easiest. They go and work with people that they already know, often know that have gone through the revolving door. And so we wind up with this cabal between the Department of Defense and the military companies industrial complex. It’s a cozy relationship, and the billions of billions continue to flow. Small companies can’t get in the door.

Tom Temin Yes, because there has been a series of so-called innovation programs, increased use of other transaction authorities and all of these measures to try to get what they say they want, which is innovative small businesses in drones and autonomy and all of these new initiatives. And yet a tiny fraction of the spending actually goes to those companies. That’s one of the factors you’re looking at.

John Garamendi Oh, absolutely. And there’s a major effort within the Department of Defense now to push this entire effort to bring new companies into the contracting for the military. Hopefully will be more successful than the past. And by my most recent count, there are five different organizations within the Department of Defense to do this, but it is frankly not working, in part because it’s easier to do what you did yesterday. And there is a risk to step outside the norm, and there’s a risk to bring in a new company. For example, the manufacturing of certain armaments is now being done by the major defense contractors who have did it before, and the government is spending millions upon millions to expand the capacity of those companies. Could those millions of millions be used to expand the capacity of new contractors? Of course they could. But that’s a risk. That’s a risk to the people that are within the Department of Defense, the acquisition teams. That they may wind up unsuccessful. The power of the big companies is such that, yeah, they’re going to screw up and they certainly have done that multiple times. But they’re big. And in that bigness there’s protection not only for the company, but also for those who do the contracting within the Department of Defense.

Tom Temin We’re speaking with California Democrat John Garamendi. He’s ranking member of the House Armed Services Subcommittee on Readiness. And your recent letter to get back to that, called on the DoD to do more scrutiny or oversight of mergers and acquisitions. Does it have any authority to do anything about it if they don’t like one, that’s happening anyway?

John Garamendi Of course they do. They don’t. The problem is they don’t act. The most recent mergers, they could have spoken up about the effect that is the lack of competition, the consolidation of some critical parts of the supply chain for the materials that the department or the military needs are now in the hands of one company. The way they should have done it is to work with the other federal agencies, Federal Trade Commission, specifically with the White House. The White House and the Federal Trade Commission have a very clear policy of scrutinizing and often opposing mergers. This is done in the commercial sector, not in the military sector. The Department of Defense knows or should know that the consult obligation is eliminating competition, and in some cases, even eliminating the ability to produce or manufacture certain goods, leaving it to just one company. And that company may decide that the profit on that particular line of work is insufficient and will simply ignore it. Now, that’s not just my dreaming that’s actually happening.

Tom Temin Let me ask you about another related gambit that the DoD has been talking about, and that is building up what it calls the organic industrial base. There are certain things munitions, for example, they have plants that do make the howitzer shells and so on. Is that a way to foster competition or is that a way to, do you think, is it removing the impetus for competition?

John Garamendi Actually it’s both. Clearly, over the last two decades, we’ve allowed the organic base from ship repair to munitions and the like to simply atrophy. And that’s is now creating a major problem for the military. We’ve seen the drawdown of our materials, our depots and supplies as we’ve provide the weapons that Ukraine needs. The result of all of this is that the ability of the system to produce the necessary munitions and other items is insufficient. Now, what’s happening here is the federal government is pumping a vast amount of money into that organic base. All parts of from the repair depots to the manufacturing of munitions, as well as shipyards and the like. We have to do that. Now, the bottom line is the military doesn’t run those places. In almost every case, those facilities are contracted out to, once again, the military industrial complex to do the work at that particular facility. That’s not universal, but that is the general way in which this has worked. So once again, we’re back to a handful of companies that contend for those contracts. There’s another piece of this related but not so direct. And that is the Army Corps of Engineers, who is responsible, has the programs to build everything from dams and levees to facilities, depots, airbases and the like. Once again, Army Corps of Engineers finds it more convenient to go to the good old boys that they’ve dealt with for decades and do a contract, a prime contract with that organization. Now, there are excellent contractors around the country and around the world, American contractors that could easily do that work. They do it on the civilian side, but the Corps of Engineers finds it more convenient, easier and less risky to hire, again, the Beltway bandits. And the Beltway bandits bring into various parts of the country, not local contractors, but their crews from wherever it may be around the world, leaving the local contractors out and leaving the opportunity for those communities to enjoy the benefits of these multimillion dollar construction projects.

Tom Temin And you have raised this issue at this particular time. And here it is, March. And, golly, in a few months, you’re going to have to have a National Defense Authorization Act, once again,  before the end of the year, in theory. Will you put something in the NDAA for 2025 that addresses this particular issue, especially in light of this new report that just came out? Defense resourcing for the future, the PPBE McNamara era process, which is still extant in DoD. Kind of relates to all of this also.

John Garamendi Absolutely. Senator Warren and I are determined to make this an issue. We believe in competition, the American system of economic competition. And we want to see that competition in full bloom in the Department of Defense and in the billions, well, it’s $1 trillion of taxpayer money that flows through the Department of Defense and all of its iterations. So, yes, we’re going to stay with that. Also, it needs to be understood that the major contractors, Boeing, specifically refuse to provide the necessary cost information on their program. So simply tell the Department of Defense, go away. We’re not going to give you the information that is required by law to be given to the Department of Defense about the cost factors, in the major contracts that they have. That is absolutely unacceptable. And just as a matter of course, we need auditors, in the Department of Defense that have the guts to have the capability and the resources, to order these multibillion dollar contracts to make sure that the American government and taxpayers are not being taken down the road.

Tom Temin And just a final question on the DIB issue. You mentioned shipbuilding, of which there is virtually no competition. In fact, for some, I think Coast Guard cutters, they had to go to a European company because there was no capability in the United States. But if you look at something like destroyers, carriers, submarines. What evidence is there at this point in time that there is the capacity in the United States for a competitor to these types of platform manufacturers to even exist, given the capital requirements and the talent requirements? Could we even have a second shipbuilder?

John Garamendi It’s entirely possible, if it was the Department of Defense’s strategy to do so. Right now, the Department of the taxpayers are pumping billions of dollars into improving the shipyards, both the public and the private shipyards. There is a strategy. I’ve been working on this now for nearly a decade. The strategy is to rebuild our maritime industry. The Jones Act, for example, and it’s possible for the military to create a program like the Craft Program, which makes domestic commercial airliners available to the military when needed. And every year, taxpayers who Department of Defense are subsidizing the commercial airlines so that we could have those airplanes available when needed. And we do call upon from time to time. We could do the exact same thing with the maritime industry. Multiple ways we can rebuild our domestic shipbuilding. For example, the United States is a huge exporter of natural gas and a petroleum. If 10 to 15% of that was on American built ships, we would build 30 to 40 commercial ships in the next ten years, thereby building the capacity for the military to have multiple shipbuilders available. Is it possible to do that? Yeah, there ought to be a law. I’ve been proposing that now for seven years that we call it energizing the American shipbuilding industry by simply requiring, as we once did, that those exports of petroleum products beyond American ships used to be 100%. Now it’s zero. And Chinese ships are being built to carry American, natural gas, LNG and petroleum products. No, wrong. We should do it ourselves. I know the petroleum industry is going to whine. Oh, it’s going to cost an extra $0.05 a barrel to do it. Well screw them. This is about the United States having a capacity to build the ships that we need to protect ourselves. Right now, we cannot do it.

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