Agran Is Betting Big on the Idea of Peace Profits : City hall: Mayor wants to make Irvine a model for how to shift a defense-oriented economy toward civilian endeavors. His vehicle? A monorail.

Irvine Mayor Larry Agran, never one to take a modest view of the role of local government, is once again plunging into a simmering national political debate. This time, the issue is “economic conversion,” the technocratic-code phrase for beating swords into plowshares.

Agran wants to make Irvine a national model for how a defense-oriented economy can be shifted toward civilian endeavors. And unlike many of the peace groups that have long preached the conversion gospel, Agran has a specific idea of how to do it: He wants to use the city’s $250-million monorail proposal to create a local mass-transportation industry, one that will use the talents of soon-to-be-underworked defense companies.

“It’s clear we’re going to be dealing with a new set of priorities, and this is an excellent place to begin,” Agran said. “We would like to see the design and construction (of the monorail) done locally, and hopefully we will then have learned enough to be a center of excellence in transportation.”

Specifically, Agran suggests that 70% of the contracts for the transport project, whose funding depends on passage of Proposition 116 on June 5, be earmarked for firms in Irvine or the surrounding area. His proposed Irvine Institute for Entrepreneurial Development would also look for ways to nudge local rocket scientists toward environmental cleanup, health care and other worthy enterprises.

Unfortunately, defense contractors have shown a remarkable inability to make large-scale moves into new businesses, and several of the worst failures have involved mass transportation. Many experts say the culture of defense contracts is inimical to civilian production and nearly impossible to change.

Although many U.S. communities have turned abandoned military bases to productive use, and some have even transformed defunct factories, the Irvine proposal is far more ambitious. If the plan succeeds--and it is still in a formative stage--the city will probably be the first government body anywhere to transform its local defense industry.

If the plan fails, Irvine could end up with some very overpriced monorail trains, and not much else.

There is little consensus, in Irvine or nationally, about the need for a policy on economic conversion. A smaller defense budget has long been a key priority for such groups as the National Council for Economic Conversion and Disarmament. But now that such cutbacks are taking place, the debate has shifted to whether government bodies can or should manage the transition to preserve the jobs and expertise of the defense industry.

Some tiny programs already exist. The Pentagon’s Office of Economic Adjustment, with a paltry budget of $3.5 million, provides technical aid and grants to communities trying to adapt to changes in military spending. Robert Rauner, the agency’s director, said about three-quarters of the group’s efforts involve military base closings rather than industry cutbacks.

Washington state has established a similar program to aid defense-dependent communities, though its initial budget is a meager $200,000. Some state governments have aided local communities case by case. But the push for economic conversion legislation at all levels of government is only just beginning.

“Most of these activities are in the very early stages,” said Michael Closson, executive director of the Center for Economic Conversion in Mountain View. The 15-year-old organization, which is a clearinghouse and advocacy group for conversion initiatives, has been “like the Maytag repairman, waiting for the phone to ring” until recently, he said.

Agran is not the only politician who wants to lead the charge. Rep. Ted Weiss (D-New York) is pushing legislation--long advocated by economic conversion supporters--that would require defense contractors to establish labor-management “alternative use” committees for the study of new market possibilities, and would also mandate extensive retraining of defense workers.

On the state level, Assemblyman Sam Farr (D-Carmel) is promoting a package of bills that would require the governor to convene an “economic summit” on conversion, appoint a council to study the issue and establish a service to ease the transfer of military technology to the civilian sector.

Other states are also considering laws that would require at least the study of the conversion issue, but California is especially key because the Pentagon will spend about $55 billion in California this year, according to the Commission on State Finance.

In Los Angeles, Councilwoman Ruth Galanter, with the strong support of the International Assn. of Machinists, is convening a committee to study the prospects for establishing an electric car manufacturing industry in the Southland.

“This will create jobs that were formerly in aerospace,” said Lou Kiefer, a machinists union representative. “There are linkages in the technologies and the skills involved in aerospace and electric cars.”

The Irvine proposal stands out, however, because the monorail money could provide a concrete mechanism for a government-guided effort to shift defense manufacturing facilities to civilian production.

Initially conceived as a demonstration project to show the feasibility of suburban monorails, the system will consist of a four-mile loop through the Irvine Business Center, plus a high-speed link connecting the loop to the new transportation center in the Irvine Spectrum and to the countywide monorail system that has been widely discussed in recent months.

Irvine, seeking to add to its national reputation as an innovator in community planning and environmental protection, has won a commitment for $125 million in matching funds under Proposition 116, a ballot proposal authorizing $1.9 billion in bond money for rail transit projects statewide. Agran expects the city, the county and developers to pony up the initial $125 million necessary to gain access to the bond money.

At a conference he convened on the economic conversion issue in February, Agran first raised the idea of using the monorail as a local industrial policy tool. And in late April, he formally proposed creating a special committee on “economic diversification” that would examine varied tools for softening the impact of defense cutbacks on the Irvine economy.

Irvine, with just one major defense manufacturer--3,000-employee Parker Bertea Aerospace--is actually less dependent on military contracts than such other county cities as Fullerton and Huntington Beach, which have huge defense installations. (Irvine had a relatively skimpy $25 million in prime military contracts last year.)

Moreover, Irvine is home to a thriving computer and high-technology industry as well as substantial real estate, biomedical and pharmaceutical industries. Agran, however, said the comparative strength and diversity of the Irvine economy puts the city in good position to experiment with economic conversion.

The leverage provided by the prospect of $250 million in transit funds is the key to Agran’s economic conversion project, because some local defense industry executives are skeptical of the concept.

“I don’t see that government--whether it’s national, state or local--has much to bring to the party,” said James E. Lowes, group vice president for Parker Bertea. “It’s something industry has to do for themselves.”

Lowes said it is unrealistic to expect a company to build “airplanes today and roads tomorrow.”

Parker Bertea, he added, has a good commercial aviation business and will pursue only ventures that are close to its area of expertise.

In the same vein, Jerry L. Cobb, director of marketing for McDonnell Douglas Space Systems Co. in Huntington Beach, said he would “hate to see a major initiative to try and convert aerospace into plowshares. We’re best off staying with the things we know best.”

That caution is spurred in part by the well-known failure of major conversion efforts by Rohr Industries and Boeing-Vertol. Rohr, seeking new business as Vietnam War spending began to decline in the late 1960s, won contracts to build subway cars and control systems for the Bay Area Rapid Transit District in the San Francisco region and the Washington subway system.

But both systems had huge cost overruns and technical failures, in part because the Rohr technology was overly complex and difficult to manage. Chula Vista-based Rohr exited the subway car business in 1976 after heavy losses and several lawsuits. It now focuses on its civilian aerospace business.

Similarly, Boeing’s Vertol subsidiary near Philadelphia was looking for a way to replace helicopter orders when it decided to enter the streetcar business in the early 1970s. But as Columbia University industrial engineer and economic conversion apostle Seymour Melman details in his 1983 book, “Profits Without Production,” the company’s adaptation of military production methods to a civilian business resulted in sleek, sophisticated cars that were unsuited to the daily grind of a metropolitan transit system.

Many experts inside and outside the defense business agree, in fact, that the priorities of military production--high performance without regard to cost or ease of maintenance--have created an industry culture that almost guarantees failure in commercial markets.

“Military and NASA contractors have a culture in which you think of profit as a function of the costs you incur,” said John E. McDonald, chairman of PDA Engineering in Costa Mesa, which has successfully converted from military contracting to commercial software.

Many government contracts are “cost-plus,” meaning a contractor is paid for his costs plus a certain profit percentage, he noted. Thus the higher the costs, the higher the profit.

“In civilian production, it’s just the opposite--costs and revenues are independent variables,” McDonald continued. On a competitive contract, a company gets a fixed amount of money, and the lower the costs, the higher the profit.

“That form of thinking doesn’t exist in the defense industry,” he said.

McDonald acknowledged that many defense contracts are subject to competitive bidding but said that has made little impact on corporate cultures: “It’s a competition between people who all do business the same way. Pitting Lockheed against Boeing doesn’t change the fundamental problems with aerospace.”

Melman of Columbia emphasized that any conversion effort has to emphasize retraining of both workers and managers. “You can’t just go to one of these firms and say, ‘You have 1,000 people here, so instead of making something for the military, make something for cities.’ You need a complete technical and economic redesign of the company.”

A step toward accomplishing that, he said, would be to adopt the legislation of New York’s Rep. Weiss, requiring alternative use committees. Such labor-management groups, when given full access to the necessary information, will be in a good position to identify the basic changes a firm must make, Melman said.

“The very top-level executives don’t want this,” he added. “But for the lesser administrators, there is no future without competent production. That’s what these committees open up.”

Melman doubts that a city such as Irvine has the capacity to assure such a change. And without it, he said, Irvine will end up with “a solid gold monorail system that doesn’t work. It’s happened before.”

Agran acknowledges that problem, but said: “It’s not my responsibility to hold the hand of corporate executives. They would have to demonstrate to us that they could do it.”

He also seems unconcerned about the possibility that a “local content” requirement might push up the cost of the monorail. “It might cost a few extra dollars on the front end, but what it would generate would pay dividends for generations to come,” he said.

Agran acknowledged that foreign companies--French, Canadian and Japanese firms are considered the leaders in mass transit technology--might still end up as the prime monorail contractors. Indeed, a subsidiary of Bombardier of Canada has already been selected to build the first tiny, developer-financed piece of the Irvine Business Center loop and will probably be responsible for the entire four-mile loop.

But Agran said the 70% rule could assure a transfer of technology to area firms even if the prime contractor is based elsewhere.

Agran is similarly unperturbed by the limited enthusiasm expressed by the local defense industry thus far.

“It hasn’t quite sunk in yet that if Proposition 116 passes, we will have $125 million in state bond funds. No other city in the state will receive that much,” he said. “When the resources become available, local firms will be knocking at the door.”

Irvine Councilwoman Sally Anne Sheridan, who is running for mayor against Agran in the June 5 election, scoffs at his program.

“I’m not sure we need it at the moment,” she said. “The role of government is to support and not to control. And I don’t think there is any specific plan he has mapped out.”

Some companies say they welcome Agran’s proposal. Karl Riessmueller, manager of the Hughes Aircraft’s Microelectronic Circuits Division in Newport Beach, said, “If we could help find technical solutions for the monorail, that would be super.”

Hughes, he added, is trying to move from almost complete dependence on defense contracting to a 50-50 commercial-military split, and welcomes local initiatives.

“It’s always nice to have someone helping and worrying about your problems,” he said.

And Irvine plans to worry about more problems than just the monorail. Agran also talks of the need to develop new products and services for environmental protection and cleanup, water conservation and medical services.

To pursue those objectives, the proposed Institute for Entrepreneurial Development will study conversion issues, make policy recommendations, help find money for new commercial ventures and generally look for ways to help defense firms move toward commercial markets, according to city council aide Margo Bowers.

All agree that the city cannot put itself in the position of telling companies what new markets to pursue. Still, some say the kind of general assistance Irvine envisions can be useful.

“Defense companies are conditioned to think of defense investments, and it’s good to have a group to prod them a little bit,” said Lloyd J. Dumas, professor of economics and political economy at the University of Texas at Dallas. “It’s a useful role for the city to stimulate their thinking, do some rough market studies and get them talking about some of these things.”

If California voters cooperate on Proposition 116 and Agran can overcome skepticism about his ideas, local defense firms may soon be doing a lot more than talking.