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 Fo,.e. 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 If the decision to reduce rates is rescinded, DOD pricing systems are not necessarily adequate to recover the full cost f providing training.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 Recommendations: The November 1975 revisie4 to the ricing guidelines should be rescinded.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 l.i·". COMPTROLLER GENERAL OF THE UNITED STATES 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 COMPTPOLICR GENERAL OF THE UNITED STATZ5 WASHINGTOIJ. D.C. 2o04I B-159835 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? Response: 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. B-159835 Question 2. If the decision to reduce tuition rates is rescinded, are Defense pricing systems adequate to recover the full cost of providing training? Response: 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 costs. 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. 2 B-1]59835 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 courses? Response: 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? Response: 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? Response: In letters dated August 12, 1976 (see app. VI), the Deputy Secretary f Defense notified the Chairmen of the House and 3 B-159835 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 students. 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 costs. 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 4 B-159835 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? Response: 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 5 B-159835 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 valid. 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 6 APPENDIX I APPENDIX I CLARKNCIC . LONGr4 -UV auI . kDomC.. MAYI WuiAINe D.C. MS 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 CDL:bsb APPENDIX II APPENDIA II (C 0 c4 0m e ca q - w ro %o a ,q m r1 e c4N -4 Ln og uUJ 0%i,. O 4 4 .4,-.. 4 00000000000O.4I o o o o o,o , 0O o ' I o . wu 0 r- 0 oo o 0 fo % a w w %q% 0 0 - -4 0 ft- -4 % o'ft %n Lo in ,(, % n O o n m a r tv w qw %o 0 Uo n m u r C0 0 Ln UnI a -4 0%0%-4. O rV Cn N ~3n " c 0 (¢ 0 o r n C3 ~- O o r O N %O N m4m e0 1'% o% mm 0 r m 0% inf Er N o Ic (4 m - "4 .4 u u 0 ODC aJ n, w uzrI ~ o - 1 I0% M *m - am q. f --. N1- o 0 . I - 01 go Q Z I0 r0 I r 0 ol Ic ti 0 c 0 0 o rE C") m e 0- 'r- ,rC wN I r r ::1 CJ >F 0 0 i o r u-4 e c 0 o 0 I E uc O e I . crAh 3a:1 > eI -0t- W _- I - O 0 en 4 un j n N_ovtrov M o tr I a V1 X- ca I0Oc-4-.m L i, PN r If% C, o ra CPl V 40 C ( - 4 M C) n %a 0 e fn N °0 1 rn - 1 E4 4 I ;> . 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C C D .- 4 - UL/ E- E 4 iY. 0C mQ' mCli 1| SW 4 t 0O Ai JJ O 2 APPENt;X i-- APPENDIX III ESTIMAT%_ CrST TO THE UNITED STATES OF NOT CHARGING FOREIGN GOVERNMENTS HIGHER RATES FOR MILITARY RETIREMEdT AD CIVILIAN BENEFITS RELATED TO FOREIGN TRAINING DURING FISCAL YEAR 1977 DUE TO DEFICIENCIES IN THE NOVEMBER 5, 1975, PRICING GUIDELINES Marine 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 TUITION RATES FOR SELECTED TRAINING COURSES AS COMPUTED BY THE NAVY UNDER TS FULL COST PRICING CRITERIA VERSUS TUITION RATES ESTABLISHED UNDER THE NOVEMBER 5, 1975, PRICING GUIDELINES 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 4 APPENDIX V APPENDIX V ESTIMATED AMOUNT OF REDUCTIONS IN REIMBURSEMENTS BY MILITARY APPROPRIATION OR MISCELLANEOUS RECEIPTS ACCOUNT APPLICABLE TO FOREIGN MILITARY SALES TRAINING TO BE PROVIDED BY DEFENSE DURING FISCAL YEAR 1977 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 Marine 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 THE DEPUTY SECRETARY OF DEFENSE 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 6 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. 7 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. Sincerely, Bill Clements Enclosure GAO Note: The same letter was sent to Senator John L. McClellan, Chairman, Senate Commfttee on Ap- .propriations APPENDIX VI APPENDIX VI Examples of Price Changes (in tousands) Pre 5 Nov 1975 Pricing Policy Proposed Prices 5 Nov 1975 Revision Air Force UPT (GAO note) $140.0 $214.4 $151.5 Army 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 Navy Jet UPT 337.1 301.2 230.1 Electrician Mate Class B 3.5 3.5 2.8 GAO note: UPT means undergraduate pilot training. 9 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 overhead". 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 10 VII APPENDIX VII .PPEIDIX were issued flight training. These hourly rates to revise on January 15, 1976. DOD intends pro- Instruction 2140.1 to include the guidance aircraft 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 DOD rates are responsive to its direction. in this is to be complimented for its actions area. "To insure that the charges for training continue to reflect the full cost of such training for that portion of the student load any 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 94-710. 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 11 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 Sincerely, John L. McClellan Chairman JLM:ljm 12 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- gram. I must also point out that the sudden and substantial would. 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 13 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. Sincerely, George Mahon Chairman 14
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)