Office of Strategic Capital hits road bumps on future funding

While some lawmakers and Defense Department officials frequently hold up the Office of Strategic Capital (OSC) as a success story, a disagreement on Capitol Hill appears to have put its funding in question as the office comes under criticism for allegedly allowing conflicts of interest.

The Senate Appropriations Committee’s  fiscal 2024 defense appropriations bill described the office’s funding request as “unexecutable.” Appropriators say that’s because the office, which DoD set up to help fund innovative small businesses, hasn’t had its programs formally authorized by Congress.

According to a committee report accompanying the Senate funding bill, “The committee is concerned that the administration has not formally requested new authorities for OSC that would allow for the requested funds to be executed.”

The White House 2024 budget request included $99 million for the OSC, but appropriators said they want to see a formal request to authorize OSC because that authorization “is essential to understand how government-issued loans and loan guarantees would be implemented, particularly as such actions could require actions by government entities other than the Department of Defense.”

Both the House and Senate versions of the 2024 National Defense Authorization Act (NDAA) included language authorizing the OSC, but neither bill has made it to the President’s desk so far.

“I respect the deliberations of all defense committees with jurisdiction over the Office of Strategic Capital, but Congress must also move at the pace of relevance,” Rep. Rob Wittman (R-Va.), a member of the House Armed Services Committee who supports OSC, told Federal News Network. “Although the Defense Department has not formally requested new authorities for OSC, we know that new authorities are required to execute the office’s intent.”

Although each chamber’s 2024 authorization bills would authorize the new office, the Senate appropriations bill would deny it funding. Instead, the bill would funnel a smaller amount of spending to a separate program that would carry less direct government funding involvement: the Advanced Defense Capabilities Pilot.

In the newsletter “Defense Acquisition,” authors Peter Modigliani and Matt MacGregor wrote that the tone of the appropriations bill “consistent with the rest of the bill, shows hostility to [the Secretary of Defense’s] OSC efforts.”

OSC also drew criticism from Sen. Elizabeth Warren (D-Mass.). In a letter dated July 9 to Heidi Shyu, undersecretary of Defense for research and engineering, Warren expressed concerns that OSC employs consultants who also work as private defense consultants or work for defense investment companies.

“While some experts see this office supporting the development of key national security capacities, others have called it merely ‘good innovation theater.’ I am concerned that this office is already too cozy with private investment firms,” Warren wrote.

OSC opened for business in December 2022 with a mandate of providing loans and loan guarantees to innovative small businesses. The office works with other DoD organizations and private equity firms to “crowd-in” private capital to scale production of new technologies. It works in partnership with the Defense Innovation Unit.

The separate Advanced Defense Capabilities Pilot, also authorized in the Senate NDAA, would have a mandate to fund companies in the defense industrial base and establish public-private partnerships.

“The partnership shall require investment in not less than 10 businesses, with no business representing greater than 20% of total investment and no capability area exceeding 40% of total investment,”  according to the NDAA provision.

“The appropriations bill would authorize funding for the ADCP pilot program at $20 million as an alternative to the OSC funding request,” said  Peter  Modigliani, a vice president at Beacon Global Strategies and a member of the Atlantic Council’s Commission on Defense Innovation Adoption.

“This is just applying similar things that you do with Department of Energy grants and other grants that are out there,” Modigliani told Federal News Network. “It’s how do you get DoD to then align private capital. ”

In contrast, Modigliani said OSC has a different role in helping along innovation.

“OSC is pursuing loans and loan guarantees, similar to most federal agencies, to align private capital to invest in critical technologies vital to national security. It will seek to reduce the amount of defense tech that falls into the Valley of Death awaiting funding by harnessing private capital to accelerate tech development or long-lead items to scale production,” he said.

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