A PENTAGON OF Impurity

Once again Washington is mired in a defense procurement scandal, one that appears to involve dozens of Defense Department employees and consultants, at least 20 leading defense contractors and billions of dollars. As the debate takes shape, defenders of the system argue that it “worked”--culprits are under investigation and will presumably be brought to justice.

At the level of criminal investigation, the system does seem to have worked. Yet at a deeper level, the defense acquisition system has failed. Instead of buying the best defense at the best price, without corruption, it has bought a good defense at an incredibly expensive price, with what appears to be considerable cheating at the expense of taxpayers.

There are laws governing acquisition; they appear to have been violated broadly. The question is not whether we are catching lawbreakers; it is why there was so much temptation and opportunity to break the laws in the first place.

The Defense Department invited the lawbreakers to the table by undertaking an excessively rapid expansion of the budget while stripping away its own capacity to administer the buildup and taking an unusually laissez-faire approach to how the money was managed.

By contrast with other peacetime periods, defense budgets of the 1980s were unusually generous: Between 1981 and 1985 the defense budget grew 50% above inflation, faster than for any other major federal program. Moreover, the centerpiece of the buildup was funding for new weaponry--budgets for procurement actually grew 100% after inflation.

Even though the defense budget has been cut 10% in the past four years, actual defense spending remains at a level that is higher, after inflation, than at any time since the end of World War II--higher, even, than all but one year of the Korean War and one of the Vietnam War.

The market for the defense industry is larger than it has ever been. Every year the Pentagon orders $150-billion worth of goods and services from the private sector, ranging from boots and toilet paper to B-1B bombers. The Pentagon, in fact, buys 75% of the goods and services purchased by the entire federal government. Such a market created a great temptation for corruption. Temptation was not enough, however. There needed to be opportunity for corruption as well.

The way the defense buildup was managed created that opportunity. Effective and experienced management, with appropriate accountability starting at the top of the Defense Department, might have staved off the kind of scandal now being revealed, even though the rush of funding made it unlikely. Unfortunately, the opposite approach was taken from the start of the 1980s.

Leadership was the first problem. Although the top ranks of the Defense Department included competent people, they were, for the most part, singularly lacking in acquisition experience. Only one of the top appointees, Richard D. DeLauer, had significant background in defense contracting, while Navy Secretary John F. Lehman Jr. had done some contracting work as a consultant. The others had government, legal or business experience, but not in defense acquisition.

More important was the management approach. At the very start, then-Deputy Secretary of Defense Frank C. Carlucci laid out 32 management initiatives, designed to streamline the process and decentralize acquisition, putting more responsibility in the hands of the military services and the offices in charge of weapons programs within those services. At the same time, the initiatives reduced the number of weapons programs that would be subject to top-level review in the Defense Department and raised the thresholds for reporting on programs to higher levels, meaning fewer weapons programs would be subject to review by higher-ups.

As a result, the central offices in the Pentagon lost the ability to control, review and hold accountable in any systematic way, actions being taken at lower levels.

With diminished accountability, each service went off in its own direction. The Army appears to have muddled along with its existing structure, buying significant amounts of new weaponry, most of it begun during the Carter Administration, but finding it hard to get new programs from the drawing board to the battlefield.

The Air Force kept its structures, expanded its procurement and research budgets rapidly and moved a number of new programs--such as the F-19 fighter and the B-2 bomber--into the category of the “black” budget, where public information is denied on grounds of national security.

The Navy abolished its internal acquisition agency--the Naval Materiel Command--in 1985, expanded its procurement funding and centralized major purchasing decisions in the hands of top-level appointees.

Each service seemed comfortable about telling central Pentagon management pretty much what it wanted to about the status of programs and, in an atmosphere of generous funding, resisted major changes in purchasing plans or procedures suggested from the top.

The results became famous. The toilet seat covers for $640 gave way to stories about reimbursing the costs of kenneling contractors’ animals which, in turn, led to more serious charges and convictions on such practices as falsified time cards and incorrect billing.

Congress, and to some degree the Administration, realized something was wrong. Congress created an independent inspector general office in the Defense Department to audit activity and unearth fraud. It also created a new system of spare-parts management, required that contractors provide warranties on defense items, established greater competition in purchasing, made some contracting costs unallowable and closed, somewhat, the revolving door between industry and the Defense Department. The agenda of legislated changes was big; impact on the acquisition process proved far smaller.

The executive branch listened to (but did not implement many) reforms proposed by the Grace Commission. As criticism of waste grew, the White House created its own Packard Commission; some of its proposals were implemented, many were not. The Pentagon reduced up-front payments made to contractors for work in progress, increased contract competition, required companies to invest more of their own funds in the costs of doing business and obliged them to do more work at “fixed prices” instead of having costs reimbursed.

In a sense, all these changes may have worsened things, making the acquisition system more complicated and even tougher on the contractors, while still generously doling out money and “not minding the store” at top-management level. By 1986, when the current investigation started, Pentagon management operated rather like someone racing a car at 80 m.p.h., pointing it down the highway and then taking his hands off the wheel. Given the combination of big funding (temptation) and no steering (opportunity), a collision was inevitable.

The first steps toward correction, then, do not require new rules. These exist in abundance; new ones, not carefully considered, could be counterproductive.

The needed changes are budgetary and managerial. Deficit reduction has already set limits on future defense budgets; the scandal makes increases even less likely. These newly constrained resources need to be used as a management tool, obliging the services to choose among weapons, rather than to try to have them all, and forcing them to report on those choices to top management for final decision.

A new defense team takes office in 1989. Members must include experienced people committed to recovering the acquisition process--restoring and expanding reporting and accountability mechanisms, insisting on tough auditing and setting a clear ethical tone.

Once the fiscal flow has been channelled and management priorities have been set, the next Administration should turn to changes that may be needed in rules and regulations, especially the incentives for those who work in acquisition.

But reforms in law should come after changes that will significantly narrow the temptation and opportunity for abuse. It is time to start where Pentagon managers should have started in 1981: with careful limits on the budget in amounts the services can handle, and with attention to reporting and accountability at the top, making sure Defense has the information it needs to control the process.