U.S.A.: Defense Contract Reforms Probed

WASHINGTON (Reuters) - Tighter U.S. budgets, recent defense procurement scandals and billing disputes with contractors in Iraq have sparked major questions about 1990s reforms that were meant to make the Pentagon work more like a business, say analysts, defense and industry officials.

These concerns threaten to reverse a decade of acquisition reforms and have already chilled interest among military officials and industry executives in pursuing commercial-type deals, although it remains unclear how far the pendulum will swing back toward older-style contracts.

For now, standard procurement contracts, accompanied by regulations that afford greater oversight, are back in vogue, even if such contracts remain cumbersome.

``What we are hearing routinely from government and industry folks is that the environment has gotten more hostile. There's tremendous fear about even trying anything innovative,'' said Stan Soloway, president of the Professional Services Council and a top Pentagon acquisition reformer in the 1990s.

The Air Force and Army recently agreed under pressure from Sen. John McCain, an Arizona Republican and chairman of the Senate subcommittee that oversees their programs, to revamp two commercial-type agreements as traditional defense contracts.

Last October, Congress killed another business deal that had been seen as ``business-oriented'' and ``innovative,'' a $23.5 billion Air Force deal to lease and buy 100 Boeing Co. ( BA ) tankers, after McCain's investigations uncovered that Darleen Druyun, a former top Air Force official, had inflated the price of the deal as a ``parting gift'' to Boeing.

``The acquisition climate has changed,'' said Tom Jurkowsky, spokesman for top U.S. defense contractor Lockheed Martin Corp. ( LMT ). ``We understand there's a current desire for more transparency and insight into contracts.''

The Air Force last week surprised many with its quick decision to revamp Lockheed's $4.1 billion contract to upgrade the C-130J cargo aircraft from its current commercial terms to a more traditional military contract.

The move came exactly one week after McCain threatened to subpoena Lockheed to provide its pricing data for the program.

``I think the whole Department of Defense has learned the hard way that when McCain wants something, you'd better give it to him pretty soon,'' said Loren Thompson, who heads the Lexington Institute.

``It's ironic. This is an administration that believes in market forces and market sources and yet the whole tenor of the acquisition debate has been to move them away from commercial business models.''

Soloway said a sort of ``perfect storm'' arose to challenge acquisition reforms, but the situation was not solely due to McCain's investigations or even Druyun's wrongdoing.

Budgetary pressures and scrutiny of contractors working in Iraq, such as Halliburton Co.'s ( HAL ) KBR unit, had also contributed to ``a politicization of procurement,'' he said.

A chorus of observers, including military officials and a U.S. attorney, agreed at a hearing of McCain's airland subcommittee last week that it was time to reassess the Pentagon's overall procurement process.

Michael Dominguez, the acting Air Force secretary, last week told a Senate panel it was clear the 1990s reforms, meant to streamline acquisitions, attract non-defense firms and adopt more commercial practices, had gone too far.

Keith Ashdown, vice president of Taxpayers for Common Sense, said McCain had proven that ``tough oversight can be done in a way that's patriotic and pro-military.''

He forecast there would be more congressional hearings and stepped-up oversight of major defense programs, but said it was not clear if lawmakers, with close ties to the defense sector, would support a major overhaul or opt for more cosmetic reforms.

One major impediment, noted Soloway, was that the Pentagon had lost many in-house acquisition officials over the past years and lacked the capacity to step up oversight.

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