Defense Action to Reduce Charges for Foreign Military Training Will Result in Loss of Millions of Dollars

Published by the Government Accountability Office on 1977-02-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          DOCUMENT RESIE
00285 -   A0891451]
Defense Action to Reduce Carges for Foreig, Military Training
 ill Result in Loss of '.ilions of Dollars. FGMSD-77-17;
B-159835. February 23, 1977, Released March 1, 1977. 6 pp. + 7
appendices 14 pp.).
Report to Rep. Clarence D.. Long; by Robert F.   eller, Acting
Comptrcller General.
Issue Area: Accounting and Financial Reporting (2800).
Contact: Financial and General anagement Studies Div.
Budget Fanction:  iscellaneous: Financial anagement and
    Information Systems (1002).
Organization Concerned: Department of the Navy; epartment of
    Defense; Department of the Army; Department of the Air
Congressional Relevance: Rep. Clarence D. Long.
Authority: Foreign Assistance Act of 1961, as amended (22 U.S.C.
    2311). Ars Export Control Act.
          Questions were raised about the Department of Defense's
action to reduce tuition rates for training foreign ilitary
students. The reflction of training charges for foreign ilitary
students will cost the UniteS States over $40 illion in fiscal
year 1977. Findings/Conclusions: Different pricing systems were
established by each of the military services concerning the
extent to which the costs of training foreign military students
should be recovered. If the decision to reduce rates is
rescinded, DOD pricing systems are not necessarily adequate to
recover the full cost f providing training. Defense military
personnel appropriations will finance $13 million of the $40.4
millior in reduced training charges; operations and maintenance
appropriations will finance 8.4 illion; and the remaining $19
million will, in effect, be financed by miscellaneous receipts
of the Treasury. The decision to reduce foreign training charges
was made by former Deputy Secretary of Deterse illia P.
Clements because the sudden and substantial increase in tuition
prices had a drastic impact on foreign countries.
Recommendations: The November 1975 revisie4 to the ricing
guidelines should be rescinded. The guidelines should be changed
to require the ilitary services to (1) allccate base operations
 osts on the basis of missions; (2) include the cost of school
overhead personnel; and (3) use factors which will result in the
full recovery of civilian and military retirement costs and the
cost of civilian health benefits and life insurance. (RRS)
         yso                                          -
         REPORT OF THE

         Defense Action To Reduce
         Charges For Foreign Military
         Training Will Result In The
         Loss Of Millions Of Dollars
         Department of Defense

         On September 28, 1976, the Department of
         Defense reduced training charges for foreign
         military students. GAO estimates that it will
         cost the United States at least $40.4 million
         in fiscal year 1977.
         RecJvery of full cost of providing training to
         foreign students is reauired by law. GAO
         pointed out in a December 14, 1976, report
         to the Congress (FGMS-76-91) that even
         prior to the decision to reduce tuition rates,
         the Defense pricing system was not recovering
         fall costs. GAO recommended in the Decem-
         ber 1976 report that, in addition to rescinding
         the order to reduce tuition rates, the Secre-
         tary of Defense should revise the pricing
         systems so that all applicable costs are recov-
         ered. GAO believes that these recommenda-
         tions are still valid.

          FGIWSD-77-17                                     FE . 23. 1   7 7
                            WASHINGTOIJ. D.C. 2o04I


The Honorable Clarence D. Long
House of Representatives

Dear Mr. Long:

     Your letter of October 19, 1976, raised several questions
on the Department of Defense's action on September 28, 1976,
to reduce tuition rates for training foreign military students.
     Defense gave us infoLmation which shows the effect of the
tuition rate reductions n fiscal year 1977 cost recoveries
for foreign military training. Data for subsequent periods
was not available.

     We analyzed and summ :ized the information and made
limited tests to determine its accuracy. Because only 3 months
of foreign training for fiscal year 1977 had been completed
at the time of review, most of the information received was
based on Defense's latest estimates.

     Following are our answers to the questions contained in
your letter and to other questions raised during conversations
with your office and the offices of the House and Senate Appro-
priations Committees.

Question 1.   How much will the reduction in training charges
              for foreign military students cost the U.S. tax-
              payers and which foreign countries will benefit?


     Tne crst will be about $40.4 million in fiscal year 1977.
The countries that will benefit from the reduction in prices
and the amount of reductions by ech of the military services
furnishing the training are  hown in appendix II.

Question 2.   If the decision to reduce tuition rates is
              rescinded, are Defense pricing systems adequate
              to recover the full cost of providing training?


     For several years Defense permitted each of the military
services to interpret the law as to what extent the ccsts of
training foreign students should e recovered. As a result,
different pricing systems were established by each of the
military services. The Navy's system was designed to recover
the full cost of training foreign students. The Army's system
provided that foreign tuition rates would include only the
estimated additional direct and indirect costs incurred to
train foreign students. The Air Force's system excluded fixed
costs incurred to train students and required that only the
variable cost of training (those costs which vary in direct
proportion to increases and decreases in student load) be
charged foreign students. The Marine Corps provided training
free of charge.

     In response to GAO and congressional concerns, Defense
issued detailed pricing guidance on November 5, 1975, which
resulted in substantial increases in Army and Air Force tui-
tion rates and reductions in Navy tuition rates. As pointed
out in our December 14, 1976, report to the Congress entitled,
"Millions of Dollars of Costs Incurred in Training Foreign
Military Students Have Not Been Recovered," the pricing guid-
ance was a decided improvement but it (1) did not require an
equitable allocation of certain base operating costs to tui-
tion rates and (2) prescribed cost factors for military and
civilian retirement and other costs to be used in computing
the tuition rates which should have been much higher.  With
these revisions, tne system would more nearly recover full

     Concerning the first point above, we did not compute the
loss to the United States resulting from the exclusion of cer-
tain base operations costs because of the time it would have
taken to assemble cost data on all courses. We did, however,
compare fiscal year 1977 tuition rates for selected Navy
courses as computed by the Navy under its previous full cost
pricing system to tuition rates developed by the Navy using
the November guidelines. The Navy's previous prizing system
provided for an equitable allocation of all base operations
costs. As shown in appendix IV, cost reductions for Navy
courses due to the November guidelines were appreciable.

     With regard to the second point, the cost to the United
States of not charging higher rates in fiscal year 1977 is.
at least $9.2 million   (See app. III.)  This amount is in
addition to the $40.4 million in reductions resulting from
the September 28, 1976. guidelines.
Question 3.    Which Defense appropriations will be used to
               finance the reduction in charges for training

     The military personnel appropriations will finance
$13   illicn of the $40.4 million in reduced training charges.
The operations and maintenance appropriations will finance
$8.4 million of the reduction. The remaining $19 million
will, in effect, be financed by a reduction in "Miscellaneous
Receipts" of the Treasury.

     As discussed in our December 14, 1976, report, Defense
regulations require that costs recovered for military retire-
ment pay and depreciation of assets be deposited in Miscella-
neous Receipts.  Under the September 1976 pricing guidelines,
the military services were instructed to exclude the cost of
military retirement pay and to significantly reduce the charge
for depreciation in computing rates, thus reducing amounts to
be credited to Miscellaneous Receipts.
     Appendix V shows a breakout of the $40.4 million in re-
duced charges by firancing appropriation or Miscellaneous
Receipts, and military service.
Question 4.    Who made the decision to reduce training charges
               for foreign military personnel?
     We we-e told by Defense officials that former Deputy
Secretary of Defense, William P. Clements, made the decision.
Question 5. Why was the decision made to reduce foreign
            training charges?
      In letters dated August 12, 1976 (see app. VI), the Deputy
Secretary     f Defense notified the Chairmen of the House and

Senate Committees on Appropriations that he had directed
changes in the November guidelines that would result in a
20- to 30-percent reduction in tuition prices.

     He explained that he took this action because the sudden
and substantial increase in tuition prices had a drastic im-
pact on foreign countries. He said these countries had little
or no time to make adjustments in their budgets for students
already scheduled for training and that, in most cases, this
had required substantial reductions in their input of students.

     The Deputy Secretary said that the November guidelines
failed to recognize the military, political, and economic
benefits to be gained by the United States in training foreign

     To accomplish the reduction, two changes were made to the
November guidelines. The first change eliminated personnel
costs pertaining to leave, holiday, and retirement from the
computation of tuition rates. The second change discontinuteJ
the practice of recouping depreciation on aircraft h?' charging
an hourly use charge and applying a 1 percent rate to course
costs to recoup depreciation -f other assets.  Depreciation
is now recouped by charging   percent of the traini:ng course

     Both committees strongly disagreed with the positions
outlined in the Deputy Secretary's letter.   (See app. VII.)
They advised the Secretary that the November guidelines should
remain in effect; that the Defense budget is not to be used to
partially subsidize the training of foreign students; and that
Defense appropriations will be reduced by amounts equal to
reimbursements lost through failure to make adequate and ap-
propriate charges for services rendered to foreign governments
by Defense.

     Our analysis of student loads in the military services'
training programs neither confirms nor refutes the Deputy
Secretary's contention that there would be a substantial re-
duction in the input of foreign students as a result of in-
creased tuition rates. The Air Force, which receives over
70 percent of the reimbursements for training foreign mili-
tary students, had no measurable change in the number of
foreign students to be trained after carrying out the Novem-
ber 5, 1973, pricing guidelines. The Navy had reductions in
foreign tudent enrollment although te tuition charges were
reduced substantially as a result of the November 1975 guide-
lines. On the other hand, the Army, whose tuition rates


were increased substantially, also had reductions in the
foreign student enrollment.

Question 6.   What effect have the new pricing procedures had
              on cost of training under the military assist-
              ance program?
     Fiscal year 1977 tuition rates for the military assist-
ance program were not computed using the September 1976 pric-
ing guidelines, nor were the tuition rates determined using
Defense's November 1975 pricing criteria. Instead, military
assistance program tuition rates were established using the
old military service pricing systems discussed on page 2 of
this report and in chapter 2 of our December 14, 1976, report
to the Congress. As we noted, the Army used an additive
pricing system; the Air Force charged only the variable cost
of training; and the Navy recovered essentially the full cost
of training.
     Data was not readily available to show the amount by
"hich the fiscal year 1977 military assistance training pro-
gram would be subsidized as a result of the military services
pricing policies. We do believe, however, that the under-
charges are probably substantial.   s we noted in our Decem-
ber 1976 report, under the Army and Air Force pricing systems,
millions of dollars were not being recovered.
      Pricing requ'cements for foreign military sales are
similar to pricing requirements for training under the mili-
tary assistance program. All costs for the training of for-
eign students are to be recovered except the cost of U.S.
military personnel are to be excluded from tuition rates
under the military assistance program in accordance with the
Foreign Assistance Act of 1961 as amended (22 U.S.C. 2311).
We noted that in fiscal year 1975, the Army failed to charge
a'. least $5.8 million in costs to the foreign assistance ap-
propriation because of deficiencies in its pricing system.
     We were told that, effective October 1, 1977 (fiscal
year 1978), military assistance program tuition rates will
be computed using the September pricing guidelines. Defense
officials stated that their fiszal year 1977 budget request
and the amounts appropriated for military assistance were
based on the old tuition rates and that if the military
assistance program tuition rates were increased by using

either the November 1975 or September 1976 guidelines, a
reduction in training would result. Defense officials said
it was decided not to ask the Congress for a supplemental
appropriation to cover the increased costs.

     In our December 1976 report we concluded that although
the November 1975 guidelines greatly improved the pricing of
training courses offered to foreign students, some changes
should be made to the guidelines to insure that the full cost
of training is recovered, as expressly required by the Arms
Export Control Act. We also concluded that Defenso was not
justified in modifying the November guidelines to effect
reductions in tuition rates.

     We recommended that the Secretary of DelenLe rescind the
revision to the November 1975 pricing guidelines and that he
change the guidelines to require the military services to
(1) allocate base operations costs on the basis of missions,
(2) specifically include the cost of school overhead personnel,
and (3) use factors which will result in the full recovery of
civilian and military retirement costs and the cost of civilian
health benefits and life insurance.

     We believe our conclusions and recommendations are still

     As your office asked, we did not request formal written
comments from the Department of Defense but did informally
discuss the contents of this report with Defense officials.
Where appropriate, their comments are included. Also, as
requested by your office, we are sending the report to the
House Committee on Appropriations and to the Senate Committee
on Appropriations, Subcommittee on Defense.

                             Sincerely yours,

                             Comptroller Gerr al
                             of the United tates

APPENDIX I                                                               APPENDIX I

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  COM MITTIL        ON

            1ouu         -                 t
                                 onts ofatrte            Setats

                                   October 19,t 1976
         United States General Accounting Offide

         Elmer B. Staats
         Comptroller General
         United States General Accounting OffiCe
         441 G Street, N.W.
         Washingtc.n, D.C. 20548

         Dear Mr. Steats:

              I nderstand that despite the objections of both the House and
         Senate Appropriations Committee the Department of Defense on Septem-
         ber 28, 1976, directed the military services to significantly redu;e
         the charges paid by foreign governments for military training of
         foreign students. The effect of this understatement of training
         costs is to conceal the true cost of our foreign aid programs, and
         I view it as one more instance of invisible foreign aid.

              I should be interested in having GAO     determine who made the
         decision to cut the training charges, why     and how that decision
         was taken, how much it will cost the U.S.     taxpayers, and who will
         receive the benefits of these substantial     rate reductions.

               I understand that the Financial and General Management Studies
          Division of GAO has been working on the issue of Defense Department
          recovery of full personnel costs related to foreign military sales
          and training. I s'ould appreciate a separate eport on the recent
          training charge reductions.

                                             Warm regards,

                                             CLARENCE D. LONG

 APPENDIX II                                                                                                                                                                                                                    APPENDIA II

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APPENt;X        i--                                                              APPENDIX III


    Description                Air Force          Ars           Navy      CorPs        Total

Military retirement:
    Based on GAO com-
      puted factor             $13,154,643    $2,590,104    $1,994,457    $83,952    $17,823,156
    Based on Defense                                                                             96
       factor                   (8,597,806)   (1,618,815)   (1,312,143)   (55,232)   (11,583,9        )

        Difference               4,556,837        971,289       682,314   26,720       6,239,160

Civilian benefits:
    Based on Civil Serv-
      ice Commission
      factor                     4,373,250          -             -          -         4,373,250
    Included by Defense         (1,371,403)        (aL__        Aa)        _t         (1,371,403)

        D.Jferehce               3,001,847                        -         --            01,847

               rotal           $ 7,558,684    $   971,289   $   682,314   $28,720     $9,241,007

a/Information could not be readily obtained.
APPENDIX IV                                                APPENDIX IV

                         FISCAL YEAR 1977




                          Navy 's full       November       Percentage
     Course title         cost criteria     guidelines       decrease
Aviation environmental
  indoctrination             $    6,142      $     4,687        24
Aviatior '.nstructor
  train ' -.
           g                      3,685            2,812        24
Flight Instructor
  training                        2,457            1,875        24
Primary (basic flight)           40,422           31,611        22
Basic Naval flight
  officer                        40,456           31,565        22
Basic prop (muilti-
  engine)                        11,717           10,097        14
Advanced prop
  (multiengine)                78,728             67,763        14
Basic helicopter               11,717             10,097        14
Primary helicopter             11,439              9,997        13
Basic jet                     12X,227            114,133         6

APPENDIX V                                            APPENDIX V





                  Appropriation         Miscellaneous
 Military    Military   Operatio. and    receipts of
 service     personnel   maintenance    the Treasury      Total
Air Force $ 9,458,296    $7,266,462     $13,842,403     30,567,161
Army        2,294,851        -            2,416,342      4,711,195
Navy        1,258,057     1,161,669       2,594,407      5,014,133
  Corps        37,855         2,569          75,545         115,969
    Total $13,049,059    $8,430f700     $18,928,697     $40,408f456
APENDIX VI                 COPY                  APPENDIX VI
                   Washington, D.C. 20301
                                           AUG 12 1976
Honorable George H. Mahon
Chairman, Committee on Appropriations
House of Representatives
Washington, D.C. 20515
Dear Mr. Cbairman:
The House Committee on Appropriations Report on the Department
of Defense Appropriation Bill, 1976 indicated a concern that
the Air Force was neglecting to charge foreign countries the
full cost of the training including a realistic share of the
trairing base. The Senate Committee on Appropriations con-
curred in this position.
In view of these concerns, the Department of Defense (DoD)
made a review of the pricing policy for charging foreign
countries for training. A revised pricing policy was issued
on November 5, 1975. The revised policy required a charge
to the foreign student of a share of all cost at the training
base, including such costs as salaries of instru:tor and
training staff; supplies and materials; aircraft POL and
maintenance; a share of base overhead; and a charge for the
use of base assets including aircraft.
This revised pricing policy which was made effective January 1,
1976, resulted in substantial increases in most Air Force and
Army courses, for both pilot and technical training. The most
substantial increases were in Army courses where the previous
policy had been to charge essentially out-of-pocket" costs.
You can appreciate that this sudden and substantial increase
in prices had a drastic impact on the foreign countries who
were using our training programs. They had little or no
time to make adjustments in their budgets for students al-
ready scheduled into training. In most cases, this has
required substantial reductions in their input of students.
I have had several discussions with representatives of
foreign governments with reference to the higher prices.
Based on these discussions as well as recommendations
from several U.S. ambassadors, the Chairman, Joint Chiefs
of Staff, and other DoD personnel, I have personally re-
viewed our November 5, 1975, pricing policy. It is my con-
clusion that it goes well beyond the intent of your direc-
tion since it fails to give any recognition to the military

APPENDIX VI                                       APPENDIX VI

and political benefits to be gained by the U.S. from such
training. Such benefits .include improved r     Cal stabiliza-
tion and the lessening of our requirements f   overseas  de-
ployed forces. In addition, training  is frequently  an inte-
gral part of a package arrangement involving the sale of
hardware which in many instances results in reduced costs
for the U.S. when the items are being procured for the DoD.
Therefore, I have directed that two changes which are. dis-
cussed below, be made to our training pricing policy. These
changes will result in a 20-30% reduction in tuition prices
established by the November 1975 policy but still substan-
tially higher than those under or prior policy. Examaples
of the difference between the price of several courses using
both methods are attached. Under this changed policy, we
will establish a fair price and recoup full cost for training
which will not require any subsidy from DoD appropriations
nor adversely impact the training of U.S. students.
The first change involves the pricing of military and
civilian pay. The November 5, 1975, policy requires that
a foreign student bear a straight pro rata share of the cost
of all direct and indirect base personnel who directly or
indirectly support the training program. Salaries are
costed using base pay plus acceleration rates for leave,
retirement, medical, etc. In certain instances, the foreign
student is absorbed into the training program without the
necessity of increasing the base staffing. The U.S. in-
structors and/or other personnel associated with foreign
military training are highly trained assets which we can
use almost immediately in any contingency. The costs of
keeping these personnel in a high state of readiness are
borne by the foreign nations. For example. instructor
pilots will augment our tactical fighter force after minimum
check-out time in the weapon system and aircraft maintenance
personnel will augment mobility forces as our forces surge
prior to mobilization of Reserve Forces. I believe that
our pricing should give some recognition to this fact.
While this could be done by the review of each course to
determine the student staff relationship and making a
judgmental decision on the exact amount of the staff costs
to be charged, it would be an enormous task and could re-
sult in widely varying rates for similar courses. To
insure that all courses are priced on a consistent basis
and to reduce the pricing workload, I plan on a pricing
system that-will give each course an equal basis for charg-
ing the cost of personnel involved in training. The re-
vised.procedure will exclude the acceleration factors for
.eave, holiday and retirement from the computation when
costing direct and indirect base personnel.
APPENDIX VI                                        APPENDIX VI

  The second change involves the use of DoD assets. Our
  present policy provides for the recoupment of depreciation
  on aircraft by the use of an hourly use charge which is
  predicated on the cost of the aircraft and its useful life
  expressed in flying hours. Depreciation for all other as-
  sets used in training is recouped by means of application of
  a rate of 1% to the total course costs. Depreciation on as-
  sets used in foreign military sales, other than training, is
  recouped by application of a rate of 4%. In order to bring
  the training method of recouping depreciation into agreeement
  with the method used on other Foreign Military Sales, the
  hourly use charge and the 1% rate are being deleted from our
  pricing policy and replaced by a 4% rate on the total cost
  of training.
  I plan to issue this revised guidance to be effective
  October 1, 1976, for the FY 1977 program. In view of the
  Committee's continuing interest in our pricing olicy for
  training foreign students, as evidenced in your report on
  the 1977 appropriations, I want to keep you informed of our
  planned actions.

                                   Bill Clements


  GAO Note:    The same letter was sent to Senator John L.
               McClellan, Chairman, Senate Commfttee on Ap-
APPENDIX VI                                             APPENDIX VI

                     Examples of Price Changes
                            (in tousands)
                         5 Nov 1975    Pricing Policy     Proposed
                           Prices        5 Nov 1975       Revision

Air Force
    UPT (GAO note)        $140.0           $214.4          $151.5

       UH-1 Instructor
         Pilot Course        4.4             13.1             9.7
       Improved Hawk
         Mechanic Sys-
         tem Repair          2.9             10.9             7.0
       Ammunition Of-
         ficers Course       1.2              3.1             2.3


       Jet UPT             337.1            301.2            230.1
         Mate Class B        3.5              3.5              2.8

 GAO note:    UPT means undergraduate pilot training.

APPENDIX VII               COPY                   APPENDIX VII

                                     UNITED STATES SENATE
                                 COMMITTEE ON APPROPRIATIONS
                                    WASHINGTON, D.C 20510

                           August 16, 1976

The Honorable William P. Clements, Jr.
Deputy Secretary of Defense
Washington, D.C. 20301

Dear Mr. Secretary:

     Thank you for your letter of August 12, 1976, regarding
a proposed revision in the current prices being charged
foreign customers for training their personnel in the U.S.
training establishment.

     As you know, last year both the Senate and House
Appropriations Committees expressed concern that the Serv-
ices (in particular the Air Force) were neglecting to charge
foreign countries the full cost of this training, including
a realistic share of the training base.

     Last year's conference report on Department of Defense
appropriations (House Report 94-710) strongly emphasized the
need to charge a realistic price to foreign countries for
training, and it included the following statement:

           "The conferees agreed that applicable
      Defense regulations should be revised to require
      that Foreign Military Sales charges for pilot
      training include realistic estimates of the full
      and proportionate cost of training support, base
      operations support, and training organization

     Subsequent to issuance of that report, the Committee
carefully reviewed the new pricing guidance issued by the
PDpartment.  The Committee'< report on FY 1977 Department
of Defense appropriations treated this as an item of special
interest and stated the fllowing:

           "On November 5, 1975, the DOD published new
      pricing guidance for all MS training, including
      pilot training. This guidance provides for the
      recovery of the full and proportionate cost of
      training support, base operations support and
      training organization overhead. The Defense De-
      partment went even further and developed an hourly
      cost rate for each type of aircraft utilized in
           VII                                           APPENDIX VII

                                         were issued
    flight training. These hourly rates
                                      to revise
    on January 15, 1976. DOD intends            pro-
    Instruction 2140.1 to include the guidance
    vided on November 5, 1975, and the new
    hourly use rates.
           "The Committee reviewed the rates being
     charged for pilot training to foreign govern-
     ments under the new guidance, and  and believes
     that the pricing   methodology           the resultant
     rates are responsive to its direction.           in  this
     is to be complimented    for  its   actions
           "To insure that the charges for training
     continue to reflect the full      cost of such
      training for  that portion   of  the student load
      that is FMS, the Committee insists that
      alteration in the present pricing policiesin
      which would cause any significant change
      the charge rates be submitted to the Commit-
      tee for approval prior to implementation.
      This policy is to be applied to all categories
      of FMS training."
                                                              because of
      The Committee might further point out that,
the actions taken by the Committeecareful last year and our strong
                                                    scrutiny to the
feelings on this matter, it gave                 and carefully con-
rates established on November 5, 1975,Upon review, it was
sidered whether they were adequate.                  Committee's di-
determined that DoD had complied with the proper and realis-
rection, and had finally begun to charge
tic rates.
                                                                 on the
       It now appears that, as a result of complaints are too high, DoD
part of our foreign customers that prices to a pricing policy
has decided to make downward adjustments According to your
specifically approved by this Committee.                 reduction in
letter, the changes will result in a 20-30%    by  this   Committee and
 tuition prices specifically approved
                                                    of the direction
deemed to be a reasonalbe interpretation
                                       4 - 4 4 6 and House Report
 contained both in Senate Report.9
                                                           a reduction
       The rationale offered in your letter for
                                                       to the rationale
 in the present pricing policy is identical        by both the Senate
 offered in 1976 and explicitly rejected
                                                   when they reviewed
 and the House Appropriations Committees
                                  Committee       is  somewhat sur-
 these charges. Frankly,     the
                                                     even contemplating
 prised that the Department of Defense is
APPENDIX VII                                    APPENDIX VII

the subsidy of Foreign Military Sales customers when the
Congress long ago explicitly rejected the arguments ad-
vanced in favor of such a subsidy.
     The Committee must advise you that it strongly objects
to the proposed revision in pricing policy. This would
completely upset the careful work accomplished last year
and again this year by both the Senate and House Appropri-
ations Committees and result in providing a free ride"
to many countries under many Foreign Military Sales cases.
Such a free ride is totally unacceptable to the Committee.
      If the Department should implement the policy out-
 lined in your letter, the Committee would have no recourse
 other than to repeat the action taken last year in reduc-
 ing the DoD appropriations by the amount that should be
 collected from FMS sales as a reimbursement.
      Please advise me of actions taken in this matter.
      With kind regards, I am

                                John L. McClellan

APPENDIX VII                COPY                 APPENDIX VII

                Congress of the United States
                   House of Representatives
                 Committee on Appropriations
                    Washington, D.C. 20515
                        August 25, 1976

Honorable William P. Clements, Jr.
Deputy Secretary of Defense
Washington, D.C. 20301
Dear Mr. Secretary:
     This is in response to your let r of August 12, 1976,
in which you conveyed to the Commit.   a decision to sub-
stantially reduce the charges made i.  training foreign
nationals at U.S. defense installations. The  sizable cost
to the United States taxpayer is evidenced by the fact that
over $140 million would be lost in reimbursements from the
few examples contained in your letter.
     It is the considered opinion of the Committee that
the pricing policies which went into effect on November 5,
1975, in response to direction from the Appropriations
Committees cf the House and Senate should remain  in effect.
The Committee has recognized and continues  to recognize  that
the United States receives many military and political   bene-
fits as a result of providing training for foreign  countries.
                 are aware of the fact that  the foreign  na-
However, we also
tions benefit from such training. If they had to undertake
this training on their own it would be either more expensive
for them or the training would not provide the same level
of professionalism.
      If the foreign governments receiving training or other
manpower intensive services from the Department of Defense
are unable to pay the full cost, the required support
should then be sought from the Congress through the Mili-
tary Assistance Program, and the Department of Defense
reimbursed accordingly. The Defense budget is not to be
used to partially subsidize the Military Assistance Pro-
      I must also point out that the sudden and substantial
 increases in prices which you mention in your letterbeen
 not have been necessary had the Air Force and Army
 charging foreign customers at rates comparable to those
 charged by the Navy. The examples contained in your letter
 snow how Navy reimbursement rates were actually reduced
APPENDIX VII                                    APPENDIX VII

as a result of the November 5, 1975, revised pricing
policies. This is a further indication that the Novem-
ber 5 rates are not excessive. I must also point out that
the Committee had in previous years recommended increases
in these charges, but little or nothing was done by the
Air Force and Army. Thus, in the case of Air Force pilot
training it became necessary for the Committee to reduce
the request by an amount equal to one-half the amount the
General Accounting Office determi ed should have been ob-
tained through appropriate charges to foreign governments.
     Your letter points out, and the Committee fully ap-
preciates, that training is frequently an integral part
of a package arrangement involving the sale of hardware
which in many instances results in reduced costs for the
U.S. when the items are also being procured for the De-
partment of Defense. However, if the Department continues
to provide training, logistics, and other manpower re-
lated activities in support of weapons sales at far less
than cost to the U.S. Government, the American taxpayer,
and the U.S. economy is losing the financial benefit from
the hardware sale. As you are aware, GAO has expanded
its review in this overall area of reimbursements to
foreign military sales.
     The Committee does not support your recent decision
on this matter and considers the guidelines in your Novem-
ber 1975 directive to be more in line with our direction.
The Committee intends to closely monitor the estimates for
reimbursable collections contained in the FY 1978 budget
when it is received. It is the Committee's intention to
reduce requests for direct funding by amounts equal to
reimbursements lost through failure to make adequate and
appropriate charges for services rendered by the Department
of Defense to oreign governments.


                             George Mahon