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U.S. Taxpayers Stuck With Smelly No-Bid Deal: Celestine Bohlen
Commentary by Celestine Bohlen
March 15 (Bloomberg) -- In Europe governments are crying foul, or more specifically protectionism, now that Boeing Co. has emerged as the sole contender for the Pentagon’s disputed $35 billion contract for a new generation of flying gas stations.
This outcome isn’t passing the smell test in Paris, London, Brussels or Berlin. Two years ago, European Aeronautic Defence & Space Co., with its U.S. partner, Northrop Grumman Corp., won the same aerial refueling tanker contract, only to see it thrown out on technicalities and the bid request rewritten to favor Boeing’s smaller, older, cheaper aircraft.
While the Europeans have good reason to complain about the lack of a level air field, it is the American taxpayers who should be truly outraged by Boeing’s sweetheart deal. After all, they are the ones who are going to have to pay for it.
Northrop said it first, when it withdrew from the latest round of bidding last week, arguing that the Pentagon’s revised specifications had robbed it of "any competitive opportunity.”
This isn’t just an issue for Alabama where EADS’s Airbus division and Northrop were due to build side-by-side facilities in Mobile, employing 1,500 people locally. Indirectly, the joint project was supposed to employ 48,000 people in the U.S., where 60 percent of the content was to originate, and thousands in Europe as well.
Of course, Boeing also made big promises: a study it financed said its program would produce employment for 70,000 Americans. But this isn’t even just about jobs: The Pentagon is prohibited from considering local employment when making its procurement decisions.
Open Markets
It’s about competition -- both within the U.S., and among U.S. allies. Had the U.S. allowed Airbus a major foothold in its domestic defense market, it would have set an example for an open and fair competition in an industry that has traditionally favored local contractors.
However, opening markets isn’t a top priority in Washington these days, not in an environment where U.S. congressmen worry about being seen as supporting foreign companies, even when they create U.S. jobs.
Defense industries have long been the exception to the rules of free trade. Maintaining a domestic defense base is a strategic requirement for any country that wants an independent foreign policy. European countries also protect their own local industries -- think of French support for Dassault Aviation SA’s Rafale jets -- which is why Europeans are more dismayed, than shocked over the Pentagon’s handling of the bids.
Natural Edge
The U.S. enjoys a huge advantage over Europe in the weapons business -- if for no other reason than U.S. demand for military hardware dwarfs all of the 27 countries of the European Union combined.
Total EU defense spending in 2008 was 200 billion euros ($273 billion), less than half the U.S. military budget for that year. Only 21 percent of the EU budget was spent on equipment, research and development, areas which in the U.S. budget received 36 percent of the total. Economies of scale give U.S. contractors a natural edge.
It’s no wonder then, that threats of retaliation by Europe against U.S. defense contractors are met with a shrug in Washington. More serious are warnings that the Pentagon’s rough handling of the EADS bid could have political ramifications -- perhaps when the U.S. asks its allies to contribute more troops in Afghanistan.
Rights Denied
"There’s no point in asking Europeans to contribute to global defense, if they are denied the right to have a defense industry that can work on both sides of the Atlantic,” said Pierre Lellouche, France’s European affairs minister.
If competition is needed anywhere, it is in major defense procurement programs, which are notorious for producing political scandals and cost overruns, sometimes together. The Pentagon’s first $23 billion contract to lease -- not buy -- refueling tankers led to jail terms for a Boeing official and an Air Force acquisition officer on conflict-of-interest charges.
According to an industry rule-of-the-thumb, single-source contracts can result in as much as a 20 percent increase in cost. If Boeing’s bid for the refueling tankers remains uncontested, it will become the largest sole-source contract in recent Pentagon history.
It’s good to hear U.S. Secretary of Defense Robert Gates say he’s going to keep his pencils sharpened when it comes to negotiating the contract with Boeing.
His boss, President Barack Obama, probably had more than that in mind when in March 2009, he ordered a dramatic reduction in the use of no-bid government contracts, saying the days of giving defense contractors a blank check were over.
A lot has changed in one year.
(Celestine Bohlen is a Bloomberg News columnist. The opinions expressed are her own.)
Click on "Send Comment” in the sidebar display to send a letter to the editor.
To contact the writer of this column: Celestine Bohlen in Paris at cbohlen1@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601039&sid=ado.dvKhPNVU
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