US: A Mission to Rebuild Reputations

The pledges made by the military and one of its biggest contractors were unusually earnest. The Air Force and Boeing
would be open about their relationships, overhaul their ethics reviews
and tighten their internal controls. And they promised to give
taxpayers the best deals possible.

It was the summer of 2006, and
they were still feeling the effects of one of the biggest government
procurement scandals of recent times.

Boeing had just agreed with the Justice Department
to pay $615 million -- the biggest penalty paid by a defense contractor
-- to settle allegations of misconduct, including assertions that its
chief financial officer had conspired with a senior Air Force official
to win work; and it had lost a contract worth about $20 billion to
lease refueling tanker planes to the Air Force. The service's former
top procurement official and Boeing's former chief financial officer
went to prison. Confidence in the Air Force's procurement system was at
a low. The promises were meant to signal a new beginning.

Now
those promises -- and the public's perception of the Air Force's
ability to spend its money prudently -- are being tested by new
contracting and public relations challenges. The Air Force is about to
award two key contracts worth a total of about $55 billion, and Boeing
is in the running for both deals.

One is a $40 billion plan to
build the refueling tankers, a second run at the deal that was canceled
after former Air Force procurement chief Darleen Druyun admitted to
negotiating for a job with Boeing while representing the Air Force. The
other is a $15 billion contract for search-and-rescue helicopters.
Boeing had won that contract, but it was suspended when two competitors
protested.

The contracts are the two biggest for the Air Force
since the Druyun scandal, and the service has identified them as its
top acquisition priorities and crucial to maintaining its fleets. In
both competitions, Boeing's bids have come under particular scrutiny,
not only because the company's awards were earlier nullified, but
because some of its competitors are again raising protests.

"Boeing
and the Air Force are both certainly coming under the microscope," said
James McAleese, an adviser to government contractors. "The American
people, Congress and the Pentagon have high expectations now that they say they've cleaned up their act."

The Pressure's On

Boeing officials said they were anxious to win because so few big deals are up for grabs these days.

"The
pressure is becoming more intense to win," said Chris Raymond, Boeing's
vice president of business development for integrated defense systems.

"We want to win ethically. We want to win the right way," said Bill Barksdale, a Boeing spokesman for the tanker program.

The
tanker contract will help the Air Force replace its fleet of KC-135
refueling planes, which have been in service for almost 50 years. The
tankers enable U.S. military
planes to refuel in the air, giving them vastly more range than if they
had to land at refueling bases. The Air Force expects to award the
contract in February.

Boeing has proposed building a new tanker from parts of its 767 commercial planes. Boeing is competing with a team of Northrop Grumman and European Aeronautic Defence and Space, parent company of Airbus, Boeing's rival in the commercial aviation market. Their proposed tanker is based on the Airbus A330 passenger jet.

The
Air Force said it was trying to make the tanker competition a model for
acquisitions by having more back and forth between the service and each
bidding team, so they clearly understand what the Air Force sought and
the degree to which their proposals met the requirements.

Ken
Miller, a former top Navy official hired by the secretary of the Air
Force two years ago to improve the transparency of its acquisition
process, said he's had more than 100 meetings in the past year with
congressional leaders to update them on the process. A winner was
expected to be chosen in October, but the Air Force postponed the
decision until early this year.

"We've had a lot of people
interested in the tanker," Miller said. "It's been a perception issue
to deal with. We've been much more cautious and deliberate in
everything we do."

The Air Force has had a bumpier road finding a
new search-and-rescue helicopter. Its acquisition process has come
under scrutiny at three congressional hearings.

It awarded the contract, known as CSAR-X, to Boeing in November 2006. But two competitors -- Lockheed Martin and Sikorsky, a unit of United Technologies -- filed two rounds of protests with the Government Accountability Office,
alleging in one that the Air Force improperly evaluated the costs of
maintaining the helicopters. The GAO sustained the protests both times
-- a rarity, experts say -- and in October the Air Force asked the
teams for new bids on the deal. A winner is expected to be chosen this
summer.

Sue C. Payton, assistant secretary of the Air Force for
acquisition, said the Air Force "could have done better" in the
helicopter acquisition by having more debriefings earlier in the
process to explain to bidders where they stood "relative to their cost
and relative to their strengths and weaknesses." In current
competitions, she said, "we will make sure that we're communicating
exactly why someone loses, so they don't ever get up and walk away from
a table and not know why there weren't selected as the winner."

Under Close Scrutiny

Competitors
and analysts have sharply criticized the Air Force for making what they
say are changes in the requirements to favor Boeing, a claim the Air
Force denies. The Project on Government Oversight, a government
watchdog group, said that by changing a requirement that the helicopter
be judged partly on the basis of how quickly it could be ready to go on
a mission, the Air Force "weakened one of the most important
requirements" of the contract "to allow Boeing to compete."

Miller,
who is special assistant to the secretary of the Air Force for
acquisition governance and transparency, said no changes have been made
to the Air Force's requirements on the helicopter to benefit Boeing.

Observers
say the Air Force is trying to avoid any actions that would prompt
protests on both deals. "They know their relationship with Boeing is
hypersensitive," said Phil Finnegan, a defense analyst at the Teal
Group in Fairfax. "The Air Force is going to do everything to make sure it doesn't look like anything is tilted in the least toward Boeing."

Boeing
says it has made improvements to strengthen the ethics and integrity in
its policies and procedures. It combined three divisions to create the
Office of Internal Governance, which employs 600 people and helps
ensure that all employees get ethics training and that deals are
executed fairly.

The Air Force shifted its selection process from
one person with virtually absolute power, as Druyun had, to decisions
made by the top acquisition official who gets input from advisers.

"We
want to be more transparent, have more communication, more checks and
balances to improve our process and credibility," Miller said.

Another,
smaller contract that arose from the Druyun controversy was settled in
a way that illustrates the Air Force's new approach to procurement.

When
Druyun admitted in 2004 that she favored Boeing in awarding it a deal
worth up to $4 billion, with options, to design, build and install new
electronics kits for Lockheed Martin C-130 cargo planes, Lockheed, L-3 Communications and BAE Systems
protested. The GAO sustained their protests. The Air Force said it
would be too costly to reopen the entire contract, but it agreed to
hold a full and open competition for production and installation of the
kits.

The Air Force is planning to award a sole-source contract
to Boeing to build a small fraction of the 222 kits it needs. Boeing,
two Air Force depots, and two yet-to-be-named commercial competitors
will install those kits on C-130 aircraft to ensure the Boeing design is accurate, according to the service.

It
is a move Boeing's competitors and watchdog groups say shows that the
Air Force is likely to choose Boeing to produce the remaining kits,
even though Boeing is nearly $1 billion over budget and 18 months late
on the design and development part of the deal. An Air Force official
denies the allegations, saying there will be a full and open
competition to build the remaining kits and install them on C-130
aircraft.

New Set of Allegations

On another deal, Sen. John McCain
(R-Ariz.) has also questioned the Air Force's procurement process. He
led the effort to shelve the tanker deal and later praised Boeing's
internal changes and its decision to not write off its $615 million
settlement two years ago, saying it "conveys to me how serious the
company is to truly reforming and starting fresh."

But last fall
McCain asked the Pentagon's inspector general to investigate whether
the Air Force had improper communication with Boeing about a
multibillion-dollar purchase of its C-17 transport planes. The
president didn't support buying more planes in his budget request to
Congress and the Pentagon said it neither needed nor could afford the
planes.

In a December letter, McCain said he had "uncovered
compelling evidence of possible wrongdoing in the Air Force's
interaction with the contractor on the C17 matter." McCain also said
that "in its rank aggressiveness, the evidence I found . . . is not
unlike some of what I observed in the Boeing tanker lease scandal."

Boeing
and the Air Force deny the allegations. Boeing says it decided
independently of any knowledge from the Air Force to keep its C-17 line
open in case the service decides to fund the planes. Rick Sanford, a
Boeing spokesman, said there has "absolutely not" been any ethical
breaches between the service and Boeing.

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