In an effort to impose budget discipline on the government’s long-term contract obligations, the Budget Enforcement Act of 1990 placed a limit on the duration of leasing contracts for military equipment. To enforce that budget discipline, the Office of Management and Budget (OMB) issued a guideline (Circular A-11) that states that for any lease of a period of five years or longer the Department of Defense (DoD) must show to OMB that leasing is more cost effective than purchasing.
If the lease is five years or longer, the entire cost of that lease has to be budgeted in the first year and the Pentagon must receive budget authority for the entire cost of that lease.
The budget enforcement act was designed “to give DoD short-term lease authority to meet short-term transportation or special purpose requirements in peacetime or in times of mobilization,” said Brown. The regulations were basically meant to encourage purchasing rather than leasing, Brown said.
Nevertheless, the Pentagon has been able to circumvent the oversight laws through a loophole, Brown said.
The Navy’s Military Sealift Command, for example, leases ships for 59 months, one month shy of five years, and often enters another contract of 59 months for the same vessel.
“This practice has resulted in DoD engaging in long-term leases of ships to meet long-term military requirements,” Brown wrote in an issue paper earlier this year. “These contracts are a ‘de facto’ purchase, which violate U.S. law (Section 7309 of Title 10) that states that vessels for the Armed Forces shall be built in the United States.”
Last week, during the House Armed Services Committee defense authorization markup, Rep. Jo Ann Davis (R-Va.) added an amendment to limit the leasing of foreign ships to 24 months. The language of this bipartisan amendment, co-written by Rep. Gene Taylor (D-Miss.), needs to be perfected, Davis said at a breakfast with reporters last week.
She said she is working with committee Chairman Duncan Hunter (R-Calif.) to stipulate when the amendment would start in order to leave time for a “five-year funding stream.”
“The leasing practice is costing the United States more money,” she said. “The DoD is fighting us so much on this.”
The effort to curb the Pentagon’s leasing practice started last year when Davis introduced an amendment to the defense authorization bill aimed at reducing the leases to only one year. While the amendment passed on the House floor, it was defeated in conference with the Senate.
This year’s amendment, however, is “a good-faith effort to take a step toward a compromise position,” because it limits the leases to two years instead of one, said a congressional aide familiar with the issue.
With the House scheduled to consider the defense authorization tomorrow, “We are hopeful that the House will maintain its position,” the staff member said.
The effort gained some traction in the Senate on April 20 when Sen. Trent Lott (R-Miss.) sent a letter to the Armed Services Committee asking it to limit the Pentagon’s leasing ability. The letter was signed by 18 senators, including committee members Bill Nelson (D-Fla.) and Susan Collins (R-Maine).
“Many of our Marine positioning ships are leased,” said Navy Cmdr. Greg Glaros, a strategist in the Pentagon’s Office of Transformation. “We cannot afford to buy them in the country.”
The dispute around the long-term leasing intensified with the Pentagon’s decision to lease the so-called high-speed vessel, a car ferry converted into a catamaran by Australian company Incat. The vessel has been serving as a logistics and staging ship and has been in minesweeping missions.
When the military asked the shipbuilding industry if it could build the high-speed vessel to meet operational requirements, Glaros said, the industry’s response was that the services had to order a large quantity of the ships at up to $200 million to guarantee the future of the production line.
“Incat does it for $30 million,” he said.
Without the leasing option, “We are left with no means to move our forces and we are held captive by an industry,” he added. “We are going to lease this craft because we should not be held hostage to these absurdly high prices.” But, he added, “It’s a fault on both sides.”
With the Pentagon being the sole customer to the two shipbuilding companies — Northrop Grumman and General Dynamics — there is not enough work to go around, Glaros said. “The prices are high; we build fewer ships. It’s a death spiral.”
To address some of the endemic problems in shipbuilding, the Office of Transformation is looking at alternate ways to build up the Navy’s fleet. The conclusion of Alternative Fleet Architecture Design, a study done at congressional behest, is that the Navy should invest in a larger number of smaller and cheaper ships, connected by robust communications networks.
For that, the shipbuilding industrial base would also need to start retooling. Smaller shipyards, which presently do little or no work for the Navy, could compete to build the ships, Glaros said.
Meanwhile, the Office of Transformation also is trying to push different practices in shipbuilding, including the use of composite, lightweight materials. The office’s efforts echo the House Armed Services Committee’s decision to allocate $100 million to establish the shipbuilding industrial-base improvement program to infuse U.S. shipyards with new manufacturing technology to increase shipbuilding efficiency.