Defense contractors are scratching their collective head, after a procurement reform commission released some early findings. The Planning, Programming, Budgeting and Execution Commission (PPBE) seemed to sidestep some important questions, according to Federal Drive with Tom Temin guest David Berteau, president and CEO of the Professional Services Council.

Interview Transcript: 

David Berteau Tom, It’s nearly 200 pages in its interim report. And of course, the final report is due next March. The commission had a little delay getting started. It’s a congressionally mandated commission, and so Congress is, at least in part, the audience for this commission’s report. And in the interim report, they have a number of recommendations. But many of the areas that they focus on, they don’t actually make a recommendation. What they state is they are considering recommendations in this area. And the ones that matter the most to contractors are the ones that we focus on.

Tom Temin Right. And a lot of it had to do with, my reading of it is that they just need to be able to have more reprogramming of budget authority and flexibility.

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David Berteau This is a real key. One of the things that the commission notes is how long it takes to put the budget together, get it submitted and then approved by Congress and then executed. So you’re years, two years, three years, four years between the time you have the idea and the time you actually spend the money. Not surprisingly, things changed during those two to four years. And so there’s a need to ask Congress, or there’s a need for the department at least, to change how it plans to spend the money. What Congress has done is they’ve imposed relatively low thresholds, pretty small amounts of dollars in the grand scheme of an $860 billion budget to allow the department to have that flexibility. And they don’t always approve it. And so a lot of times that flexibility isn’t in there. This is critical to companies who are living in the middle of this disconnect between what you thought three or four years ago you would be doing and what you actually have to do now.

Tom Temin On the other hand, if you have wholesale reprogramming, since the planning and budgeting part was all instituted, then in that sense, PPBE doesn’t have that much relevance anymore.

David Berteau Well, that could be true, although I think that the tracking system still allows you to get there. The E part, which is a relatively recent introduction, it used to be the PPBS, the planning programing budgeting system, the E was that it added only 15 years or so ago. And it’s always been joke that it’s the silent E; nobody really pays that much attention to execution once it’s done. I don’t know if the commission makes a comment on that. I don’t recall that they do. But I think that in any budget the execution part is really the part that matters the most. What do you get for the dollars that you spend? So I’d really like to see — and I think our PSC members would like to see — a greater focus on that. I note that other agencies that have much smaller budgets than [the Defense Department], the Department of Homeland Security, for example, has a higher reprogramming threshold than DoD does. I don’t know whether that indicates that their committees have greater confidence in DHS’ ability to execute its programs than the relevant committees do for DoD. I would submit that if that confidence is greater, I’d love to see the basis of it and see it applied to DoD as well.

Tom Temin Yeah, well, that’s a good observation, although it could be simply a matter of age, PPBS or PPBE or whatever it is, dates back to the sixties. And DHS didn’t get established until this century. So maybe just the numbers are all bigger for anything happening in this century versus mid-last century.

David Berteau And Tom, that comment about how long the PPB system has been in place. It was instituted at the beginning of the Kennedy administration by Robert McNamara. And it does have one really powerful attribute that I think sets it apart from much of the rest of the federal government. And that is, it is a fiscally disciplined system that looks out beyond the current year, builds into a five year program, and forces DoD to think more clearly about how it’s going to spend the money today to support the needs years from now. That’s a real strength of the system and I think that needs to be retained.

Tom Temin We’re speaking with David Berteau, president and CEO of the Professional Services Council. And getting back to practical matters in this report, in this latest interim report, there is also a punt, as you put it, of extending the time before funds expire. And if something was worthy of funding, but the funding expires because Congress can’t get its act together. And therefore it’s a new fiscal year or something, that’s a big issue for you.

David Berteau It’s a huge issue. And it’s an issue not only for companies, but it’s an issue for the department itself, the Defense Department. In fact, all appropriations have a period of availability, the amount of time that before the funds expire. It could be one year, it could be two years, three or four or five or longer. Some agencies even have funds that have no expiration date. It’s no year money. But the biggest problem in DoD is the one year money, the operation and maintenance money to go for current operations. Well, if Congress doesn’t actually end up appropriating the funds, and then [the Office of Management and Budget] takes another month after appropriation before they release the funds until March or April, you’ve got one year money that’s really three months money or four months money. It’s ludicrous to have to cram that kind of expenditure into that period of time, even if you’ve been spending some of it up to that point. That really needs to be tackled by the commission and the Congress to give one year money, a full year to be obligated and expended. This is the kind of thing that would make planning and programing and budgeting and execution much more practical.

Tom Temin And notwithstanding that, a lot of the commission’s recommendations are or their final recommendations will be directed toward Congress. The DoD, almost the same day that the interim report came out said, Yeah, we’re going to do all of this. That struck you as a little odd.

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David Berteau It’s unusual to see the department endorse a commission’s recommendations on the day it’s released without further study or review, etc., particularly since many of the recommendations are interim recommendations and could be changed in the final report. But it is noteworthy as an endorsement that the department put out a press release, an odd turn of phrase it said attributable to the Deputy Secretary of Defense, rather than actually quoting the Deputy Secretary of Defense as directing DoD to implement those recommendations over which it already has existing authority. Not clear which those are and what that implementation plan looks like. We’ll be looking at that carefully over the coming days.

Tom Temin And I want to switch gears completely here with you and ask about some merger guidelines of defense contractors that are coming out from the Federal Trade Commission and the Justice Department. And we know this Federal Trade Commission never saw a merger it liked, even if Pa’s bakery buys Mom’s bakery down the block, they probably step in and try to stop that one, even though there’s 20 other bakeries in town. There’s still time to comment on this. And this could have a big impact on a dynamic activity, which is M&A in the defense space.

David Berteau It is a big activity and has been for years in the defense space. Well-documented, the Last Supper from 1993, look to your left and look to your right. One of you three will not be in business five years from now because there’s not enough business to sustain enough companies, so you consolidate. There’s a lot of other reasons for doing that. So this is the Federal Trade Commission and the Justice Department combined to put out the guidelines that they will follow as they examine mergers, acquisitions and decide whether to file a lawsuit. One of the interesting thing, Tom, you and I have talked about this before, is that the administration puts out guidelines that address the broader commercial economy, but they have impact and implications for federal contracting, which is both a subset of and different than the broader commercial economy, different for all the rules that contracts put into place. There’s no attention paid on the specific needs for mergers and acquisitions review in the government contracting space. Why is this important? The basis of these guidelines is a redefinition of competition, which antitrust focuses on maintaining competition. The problem inside the government contracting world is the lack of competition is not because of the companies, it’s because you only have one buyer, which is the federal government. And so to put the commercial competition requirements on a situation where only the DoD is buying or only the other agencies are buying is really not something that these guidelines address. That’s something the PSC on behalf of our members will be addressing fully as we submit our comments in September.

Tom Temin I guess maybe they are. What I think might be in their minds is a bigger issue that has been already reaching the mainstream press. The idea that the defense industrial base is not resilient and really not up to capacity that’s needed to supply in real war time, as we’ve seen. I think one of the newspapers had a story about 155 millimeter Howitzer shells. Well, you don’t see that in daily papers very often, something so arcane. But that seems to be the bellwether commodity that is showing the strain on the dib.

David Berteau You’re absolutely right. And actually, this ties back a little bit to some of the things that the PPB commission talked about. The impact of the uncertainty and the current terms of the congressional budgeting and appropriations process, the long CR’s that you have come into place, the question of whether you even have a government shutdown make it very difficult for a company to kind of project and invest for the long term. And you begin to see the results of that when you get something like the war in Ukraine that puts long term demands on short term supply. None of that is addressed either by the commission itself, although it hits a lot at the CR problems. But they’re mostly on the budgeting side of it, not the producing results side. Now, you see it in these guidelines as well. And of course, we’re coming up against the deadline of the end of this fiscal year. And you tell me, are we going to have a shutdown? Are we going to have a continuing resolution? How long will it last? So how could you plan for long term investment under those kinds of circumstances?

 

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