oversight

Foreign Military Sales: Efforts to Improve Administration Hampered by Insufficient Information

Published by the Government Accountability Office on 1999-11-22.

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

                  United States General Accounting Office

GAO               Report to the Chairman, Committee on
                  International Relations, House of
                  Representatives


November 1999
                  FOREIGN MILITARY
                  SALES

                  Efforts to Improve
                  Administration
                  Hampered by
                  Insufficient
                  Information




GAO/NSIAD-00-37
Contents



Letter                                                                                    3


Appendixes   Appendix I:   Breakdown of Foreign Military Sales
               Administrative Funding and Organizations                                  28
             Appendix II:   Comments From the Department of Defense                      31


Tables       Table 1: Fiscal Year 1998 Program Management Spending and FMS
               Administrative Budget Spending by Military Service                        10
             Table 2: Projections of Foreign Military Sales Versus Actual Sales
               Realized                                                                  13
             Table 3: Fiscal Year 1998 FMS Administrative Budget Allocation
               and Roles of Primary FMS Organizations                                    29


Figures      Figure 1: Trend in the Value of Foreign Military Sales, Fiscal Years
               1989-1998                                                           7
             Figure 2: Military Services’ FMS Administrative Budgets, 1990-2002    9
             Figure 3: FMS Administrative Account Balance, Fiscal Years 1983-1998 14
             Figure 4: Projected Administrative Account Balance With 2.5-Percent
               Administrative Charge at $7.5 Billion Sales and $10 Billion Sales,
               1999-2007                                                          19
             Figure 5: DOD Organizations That Receive FMS Funding                 30




             Abbreviations

             DOD        Department of Defense
             DSCA       Defense Security Cooperation Agency
             FMS        Foreign Military Sales



             Page 1                                   GAO/NSIAD-00-37 Foreign Military Sales
Page 2   GAO/NSIAD-00-37 Foreign Military Sales
United States General Accounting Office                                                          National Security and
Washington, D.C. 20548                                                                    International Affairs Division



                                    B-283614                                                                               Leter




                                    November 22, 1999

                                    The Honorable Benjamin A. Gilman
                                    Chairman, Committee on International Relations
                                    House of Representatives

                                    Dear Mr. Chairman:

                                    Foreign military sales are an important component of the U.S. security
                                    assistance program and also represent a key Department of Defense
                                    acquisition strategy to help lower the unit costs of weapon systems.1 The
                                    Arms Export Control Act provides a number of ways to price defense
                                    articles and services transferred under the Foreign Military Sales program,
                                    including actual value, replacement value, and full cost, and requires that
                                    the Department of Defense recover, with specified exceptions, the full
                                    estimated cost of administrating such sales.2 As a result of budget pressure
                                    from declining sales and customer complaints about program
                                    inefficiencies, the Defense Security Cooperation Agency, which manages
                                    the program, and the military services have begun a number of reinvention
                                    efforts to improve the management and implementation of the Foreign
                                    Military Sales program.

                                    In response to your concerns, we assessed the Foreign Military Sales
                                    program to determine the changes needed to improve the viability of the
                                    program. Specifically, we evaluated (1) whether the Foreign Military Sales
                                    program has achieved full recovery of its administrative costs, (2) the
                                    Defense Security Cooperation Agency’s basis for making administrative
                                    account adjustments, and (3) the effectiveness of various Foreign Military
                                    Sales reinvention efforts in terms of cost recovery.



Results in Brief                    The Department of Defense does not have sufficient information to
                                    determine the administrative costs associated with the Foreign Military
                                    Sales program. As a result, the Department is unable to use actual cost as a


                                    1
                                     See Defense Trade: DOD Savings From Export Sales Are Difficult to Capture
                                    (GAO/NSIAD-99-191, Sept. 17, 1999).
                                    2
                                     See sections 21 and 22 of the Arms Export Control Act (22 U.S.C. 2761 and 2762).




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basis to determine what charges should be applied to foreign military sales,
and does not know if the percentage charged to the customer on the dollar
value of individual sales is appropriately recovering Foreign Military Sales
program costs. The allocation of administrative funds to activities
responsible for implementing the Foreign Military Sales program is based
on past administrative budget outlays and perceived needs. In addition, the
military services directly charge customers for some administrative tasks
on individual sales. These are referred to as program management charges.
Under existing guidelines, the services have discretion concerning which
administrative activities associated with the Foreign Military Sales program
should be funded through the administrative budget and which should be
directly funded through program management charges.

The Defense Security Cooperation Agency uses estimated sales projections
and the balance of the administrative account to determine whether
program adjustments must be made. Sales projections are judgmental
estimates on the part of the agency’s country desk officers and are adjusted
by the Defense Security Cooperation Agency’s management. When the
administrative account balance fell below zero, the Defense Security
Cooperation Agency increased fees, sought and obtained legislative relief
that allowed program costs to be moved to Department of Defense
appropriations accounts, and reduced administrative budgets provided to
the military services. Conversely, a recent decision to reduce the
administrative fee charged was justified, in part, by the large balance
currently held in the account. Having a positive balance in the
administrative account is important, since a certain level of funding is
needed to carry out work that has already been paid for by customers;
however, too large an account balance may represent a mismatch between
fees and administrative account allocations to those activities
implementing the Foreign Military Sales program.

Reinvention efforts by the Defense Security Cooperation Agency and
military services include some initiatives that could enable Foreign Military
Sales program managers to better identify costs. However, these initiatives
lack a common approach and are managed as independent efforts. As a
result, these initiatives as currently structured are unlikely to provide the
Defense Security Cooperation Agency with complete and consistent
information about the costs of administering foreign military sales, thus
making it difficult for that agency to ensure that the program is fully
recovering required administrative costs, allocating administrative budgets
appropriately, or accurately assessing the impact of other reform
initiatives.



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             We make recommendations in this report for the Department to improve
             program management for foreign military sales by directing that efforts to
             identify costs use a comprehensive and consistent definition of
             administrative tasks, by developing and communicating guidance that
             requires consistent application of program management charges, and by
             identifying alternative program uses for any excess administrative account
             balance.



Background   Under the Foreign Military Sales (FMS) program, the Department of
             Defense (DOD) provides defense items, services, and military training
             through cash and credit sales, grant, lease, or loan from DOD inventories or
             through new procurements under DOD-managed contracts. Individual
             sales transactions between the U.S. government and a foreign government
             range from sales of major items (such as F-18 aircraft with associated
             parts, maintenance, and training) to military clothing or commercial
             vehicles. The value of individual sales—otherwise known as cases—ranges
             from billions of dollars to less than $100.

             The Arms Export Control Act states that FMS sales should include
             appropriate charges for administrative services to recover the full
             estimated costs of administering sales—with some costs, for example,
             fixed base operation costs, specifically excluded—and that such charges
             should be calculated on an average percentage basis.3 However, the law
             does not define the basis for determining if full cost recovery is achieved.
             Currently, the Defense Security Cooperation Agency (DSCA) applies a
             2.5-percent administrative charge on all foreign military sales and a
             3.1-percent logistics support charge on certain spare parts, supply, and
             maintenance items.4 These charges are collected and held in an
             administrative cost clearing account within the FMS Trust Fund. Using this
             account, DSCA manages the FMS program by developing an annual
             administrative budget that allocates funding to the defense agencies for the
             execution of the program.



             3
              The Arms Export Control Act sets the requirement for recovery of FMS costs. Full
             accounting for the cost of federal programs is required by federal financial accounting
             standards.
             4
              In June 1999, DOD reduced the administrative charge from 3 to 2.5 percent. Also, instead of
             the 2.5-percent administrative charge, the FMS program applies a 5-percent administrative
             charge to sales of nonstandard articles and services.




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The FMS Trust Fund, which has an annual balance of approximately
$5.9 billion, is a vehicle for processing foreign country funds required for
FMS payments to U.S. contractors for new procurements and to DOD
components for sales from DOD stock. This trust fund was established to
facilitate purchases of U.S. defense articles and services by foreign
countries. DSCA uses the administrative cost clearing account, with a
current balance of approximately $500 million, to fund its annual FMS
administrative budget, which supports the FMS infrastructure and the
execution of foreign military sales. In fiscal year 1998, the administrative
budget was $350 million. DSCA and the military services distribute this
budget to over 60 DOD organizations to assist in the execution of the FMS
program. Organizations, such as the military services, that conduct sales
receive 64 percent of FMS administrative funding while 36 percent goes
toward centralized administrative activities, such as DSCA and the Defense
Finance and Accounting Service. (See app. I for details on FMS budget
allocations and the organizations that receive FMS administrative funding.)
Besides the administrative charges, the military services charge individual
sales for administrative expenses that are not ordinarily supported by the
administrative budget, such as salaries and expenses associated with
program management efforts on weapon system sales.

In early 1998, press accounts drew attention to problems with the FMS
program by highlighting declining FMS sales and growing customer
dissatisfaction. In recent years, the level of foreign military sales has
generally declined, as shown in figure 1. Competition from other countries’
exports as well as from direct commercial sales from U.S. suppliers to
foreign governments is pressuring the program to perform more efficiently.
Although generally supportive of the FMS program, both foreign customers
and U.S. industry are complaining about the costs and inefficiencies of the
program. The use of cost-based rather than fixed-price contracts and a lack
of transparency in the costs are major irritants. Lack of transparency is
illustrated by the uncertainty regarding what services are paid for through
the administrative charge as compared to direct charges on individual
sales. In May 1998, the Deputy Secretary of Defense called for an effort to
examine ways to streamline the FMS process, stating that there are major
opportunities for re-engineering FMS business practices. DSCA’s Director
explained that savings could be achieved through consolidating activities
that administer sales.




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Figure 1: Trend in the Value of Foreign Military Sales, Fiscal Years 1989-1998




                                            Note: In the early 1990s sales increased as a result of the Persian Gulf War.
                                            Source: DSCA.




Information on Cost of                      In 1997, the DOD Office of the Inspector General reported that DSCA did
                                            not have reliable information on either the full cost of the FMS program or
Administering FMS Is                        the cost of integral tasks that must be performed regardless of the size of
Not Sufficient to                           the sale or service being purchased.5 The Inspector General further
                                            reported that DSCA and the military services did not have sufficient
Determine Cost                              information to determine administrative budget needs to plan for
Recovery                                    unexpected requirements or to evaluate the efficiencies and effectiveness
                                            of the FMS program. According to DSCA budgeting officials, the
                                            administrative budget that is used to pay for the administrative costs of
                                            foreign military sales is developed and allocated based on past
                                            administrative budget outlays, the perceived needs of the military services,
                                            and overall sales projections rather than on the actual costs.


                                            5
                                             Foreign Military Sales Administrative Surcharge Fund, DOD Office of Inspector General,
                                            Report No. 97-227, Sept. 30, 1997. In response to the report, DOD activities commented that
                                            such information was not necessary.




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                              Our analysis of sales from 1989 through 1998 found that sales valued over
                              $100 million (equaling less than 1 percent of all foreign military sales)
                              generated 61 percent of the program’s total dollar value of sales, and sales
                              valued over $14 million (4 percent of FMS sales) generated 82 percent of
                              the dollar value of all sales, but the remaining 96 percent of foreign military
                              sales generated only 18 percent of the dollar value of all sales. Because the
                              administrative charges are applied on a percentage basis to individual
                              sales, administrative revenue collected is a function of the dollar value of
                              individual sales, with larger sales accounting for more of the administrative
                              charges collected than smaller sales. While these smaller sales generate
                              less total revenue, they constitute a sizable portion of the FMS workload. In
                              1987, DOD created a 3.1-percent logistic support charge on certain spare
                              parts, supply, and maintenance items. This charge was intended to increase
                              administrative revenue from logistics support sales and offset the
                              program’s reliance on the largest sales. However, in fiscal year 1998 the
                              logistics support charge equaled only 11 percent of total administrative
                              revenue.


Effect of Budget Reductions   Over the last 5 years, DSCA has reduced budget allocations to the military
on Military Services          services for funding administrative costs associated with foreign military
                              sales in an effort to reflect declining sales and anticipated reductions in
                              administrative revenues. DSCA also reduced budgets to encourage
                              organizations conducting foreign military sales to become more efficient.
                              The agency reduced the military services’ administrative budgets for fiscal
                              year 1995 to reflect defense planning guidance that required a 4 percent
                              reduction in civilian manpower as well as presidential guidance that
                              mandated a 6-percent reduction in overhead costs. Figure 2 shows the
                              individual military services’ actual FMS administrative budgets for fiscal
                              years 1990 through 1999 as well as budget levels set by the DSCA through
                              fiscal year 2002. After adjusting for inflation, Air Force, Army, and Navy
                              administrative budgets have decreased by 18 percent, 23 percent, and
                              28 percent, respectively, since fiscal year 1995; current budget plans call for
                              total reductions of 33 percent, 32 percent, and 38 percent, respectively by
                              2002.




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Figure 2: Military Services’ FMS Administrative Budgets, 1990-2002




                                          Source: DSCA.


                                          While reducing FMS administrative budgets, DSCA directed the military
                                          services to “restructure organizations, processes and work year levels, as
                                          necessary, so that the essential security assistance mission is conducted
                                          within the prescribed funding levels.” Consequently, each military service is
                                          undergoing streamlining efforts to accommodate DSCA budget reductions.
                                          However, even with streamlining initiatives, the military services have
                                          indicated they will not be able to absorb further budget reductions. For
                                          example, the Air Force’s fiscal year 1999 budget plan submitted to DSCA
                                          stated that although the administrative budget estimates were developed
                                          based on projected sales, the number of new sales anticipated indicates
                                          that their workload is not decreasing commensurate with budget
                                          reductions. In the transmittal letter accompanying the plan, the Air Force
                                          cautioned that it would not be able to execute its FMS administrative
                                          program if administrative funding continues to decline. Air Force officials



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                           stated that, under current budgets, they “cannot afford to make a new sale”
                           unless additional funding is provided. Moreover, Navy officials explained
                           that decreases in efficiencies are a result of inadequate funding. According
                           to the Navy, the decreases in administrative budgets are resulting in an
                           increase in the time it takes to process new sales and a decline in the
                           number of sales the Navy is able to close. Slow case closures have been the
                           subject of FMS customer complaints.


Using Program Management   DOD guidance allows the military services to recover certain costs of
Charges                    administering FMS sales by applying program management charges
                           directly to individual sales. These charges are intended for nonroutine
                           levels of management effort needed to administer a sale. Table 1 shows for
                           fiscal year 1998 the extent to which these program management charges
                           were used by each of the services to administer foreign military sales.
                           When program management charges and administrative budgets are
                           combined, 37 percent of the military services’ funding for FMS
                           administrative costs comes from program management charges versus
                           63 percent from the administrative budget.



                           Table 1: Fiscal Year 1998 Program Management Spending and FMS Administrative
                           Budget Spending by Military Service
                           Dollars in millions
                                       Program management            FMS administrative
                                             charges                      budget                         Total
                                            Dollars Percentage          Dollars Percentage           Dollars Percentage
                           Air Force          $63.4             42         $87.4                58   $150.8        100
                           Army                  20.9           21          80.5                79    101.4        100
                           Navy                  47.8           48          52.7                52    100.5        100
                           Total            $132.1              37       $220.6                 63   $352.7        100


                           Source: DSCA and the Departments of the Air Force, Army, and Navy.




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Program Management   The Security Assistance Management Manual permits discretion
Guidance Permits     concerning when program management charges may be used and which
                     administrative tasks should be charged to them.6 According to DSCA and
Discretion
                     military service officials, the manual does not clearly indicate which tasks
                     should be funded through program management charges and which tasks
                     should be funded through the administrative budget. DSCA does not
                     closely monitor the military services’ use of program management charges
                     and has not addressed the need to consistently apply program management
                     charges on all FMS sales. For example, in a Navy sale of Commando
                     helicopter depot-level maintenance valued at $32.8 million, the
                     administrative charge was $897,000 and the sale had a program
                     management charge of $2.1 million. According to this sale’s letter of offer
                     and acceptance, additional program management efforts were required to
                     successfully deliver the material and services ordered. These efforts
                     include program planning, direction, monitoring, control and coordination,
                     and related travel. However, in an Army Tank Automotive and Armaments
                     Command sale of 300 refurbished M60 tanks valued at $204 million, the
                     administrative charge was $5.9 million. This sale had no program
                     management charges. The Army’s case manager explained that the effort to
                     implement this sale was extraordinary, required intensive management,
                     and in hindsight probably should have had a program management charge.
                     Tank Automotive and Armaments Command officials explained that they
                     used their discretion and funded this effort through the administrative
                     budget.

                     The military services differ in their reliance on program management
                     charges. While program management charges represent 48 percent of the
                     Navy’s total administratively related funding, they represent only
                     21 percent of such funding for the Army. At key commands that implement
                     FMS sales, the difference is even more significant. In fiscal year 1998, the
                     Naval Air Systems Command’s program management charges represented
                     71 percent of the command’s total administrative funding as opposed to
                     36 percent at the Army Tank Automotive and Armaments Command. Both
                     of these organizations conduct sales of major weapon systems.

                     These differences may be related, in part, to the differing abilities of
                     commands to determine the actual cost of individual sales. The Naval Air


                     6
                      The Security Assistance Management Manual is maintained by DSCA and establishes
                     policies and procedures required to manage the FMS program and other security assistance
                     programs.




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                          Systems Command has a time and attendance system that is able to capture
                          personnel costs for work on individual foreign military sales. As a result, it
                          is easier for the Command to document program management costs on
                          sales and transfer these costs to the customer. Other commands, such as
                          the Tank Automotive and Armaments Command, do not have the systems
                          in place to capture these costs, and officials there told us that they have
                          only six ongoing sales with program management charges.



Basis for Adjusting the   Since DSCA is not able to manage based on the cost of conducting foreign
                          military sales, the agency estimates future sales and uses the administrative
Administrative Budget     account balance to plan future budgets and adjust administrative charges.
                          DSCA uses the FMS administrative account to fund administrative budgets
                          in order to support the FMS infrastructure, including work required to
                          execute sales and generate new sales. The administrative account balance
                          is maintained through the 2.5-percent administrative charge on all sales and
                          the 3.1-percent logistics support charge on certain items. A positive balance
                          in the administrative account is desired since funding is needed to support
                          work that has already been paid for by the customers.

                          To determine future administrative account balances, DSCA makes sales
                          projections to anticipate future administrative revenues. DSCA’s process
                          for estimating sales projections is based on subjective analysis and
                          discretionary adjustments. Sales projections tend to reflect incremental
                          changes from year to year, even though prior to 1995 wide variations in
                          actual sales occurred. For example, sales from 1989 through 1990 jumped
                          from $8.8 billion to $16.6 billion, from 1992 through 1993 jumped from
                          $13.9 billion to $31.1 billion, and then from 1994 through 1995 declined
                          from $13.3 billion to $9.0 billion. Table 2 contains DSCA’s sales projections
                          and actual sales from 1991 through 1999.




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Table 2: Projections of Foreign Military Sales Versus Actual Sales Realized
Dollars in billions
                                                  Sales projection by fiscal year
Date of
projection            1992    1993    1994     1995      1996    1997    1998    1999      2000    2001        2002    2003     2004
Sept. 1991            $12.0   $11.0
Sept. 1992                     17.0   $12.0   $12.0      $11.0   $11.0   $10.0
Oct. 1993                              11.5    10.0       10.0    10.0     9.0      $9.0
Oct. 1994                                       9.0        9.5    10.5     9.0       8.5   $12.0
Oct. 1995                                                  9.8     9.5     9.0       8.5    12.0   $10.0
Oct. 1996                                                         10.6    10.5      12.4    12.7    11.3      $11.8
Jan. 1998                                                                  8.9       9.3     8.2     8.3        7.3     $7.5
Jan. 1999                                                                           10.8     9.0     8.3        7.3      7.5    $7.5
May 1999                                                                            10.8     9.0    10.0       10.0     10.0    10.0
Actual sales          $13.9   $31.1   $13.3    $9.0      $10.3    $8.8    $8.2


                                              Source: DSCA.


                                              DSCA projects foreign military sales for the current and the next 5 fiscal
                                              years. DSCA country managers or desk officers draft country estimates of
                                              projected sales based on their knowledge and experience as well as
                                              through consultation with other knowledgeable sources. DSCA offers little
                                              guidance or criteria and no systematic tools to its staff concerning how to
                                              develop these estimates. DSCA’s Director and Deputy Director are provided
                                              summaries of country estimates and have wide latitude in adjusting the
                                              estimates. For example, in May 1999, sales projections were revised after
                                              DSCA had requested a decrease in the administrative charge from 3 to
                                              2.5 percent. In January 1999, DSCA had projected sales of $8.3 billion in
                                              fiscal year 2001 to $7.5 billion for fiscal year 2004. Two weeks after DSCA
                                              proposed lowering the administrative charge, the DSCA Comptroller
                                              submitted $10 billion sales projections for the same fiscal years. The
                                              change was based on October 1995 projections, and according to DSCA
                                              managers, the projections did not include any new analysis. The basis for
                                              the upward adjustment, according to DSCA officials, was essentially
                                              judgment. Using the higher sales projections, DSCA estimated higher future
                                              balances for the FMS administrative account, which provided additional
                                              support for the administrative charge reduction.

                                              From 1984 to 1991, when the administrative account consistently had a
                                              negative balance (ranging between $49 million and $389 million as shown


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                                         in fig. 3), DSCA initiated various actions to improve the balance. These
                                         included reducing administrative budget allocations, increasing
                                         administrative charges and moving FMS administrative costs to other DOD
                                         appropriated accounts. More recently, in June 1999, DOD decreased the
                                         administrative charge from 3 to 2.5 percent in part because the balance in
                                         the administrative account had grown to $500 million.



Figure 3: FMS Administrative Account Balance, Fiscal Years 1983-1998




                                         Source: DSCA.




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The following shows the actions taken to adjust the FMS account balance:

• In 1985, the Arms Export Control Act was amended so that the FMS pro
  rata share of fixed base operation costs were eliminated as an expense
  to the FMS administrative account.7 Until then, the program was
  required to pay a pro rata share of fixed base operation costs.
• In 1985, timing of payments was revised to collect 50 percent of the
  administrative charge when a foreign military sale commences and the
  remaining 50 percent when equipment or services are delivered. Prior to
  this time, the entire administrative charge was collected as equipment
  and services were delivered.
• In 1987, military staff years associated with administering the program
  were reduced by 20 percent. This reduction equated to $60 million in
  reduced program costs for the first year implemented.
• In 1987, DOD created the 3.1-percent logistic support charge on certain
  spare parts, supply, and maintenance items. This charge was intended to
  increase administrative revenue from smaller sales and offset the
  program’s reliance on the largest sales. In fiscal year 1998, the logistics
  support charge was about $37 million, or 11 percent of total
  administrative revenue.
• In 1989, the Arms Export Control Act was amended to allow the FMS
  program to avoid paying for certain costs associated with military
  personnel who worked on the FMS program as well as unfunded civilian
  retirement.8 This action was taken in lieu of a proposal to increase the
  FMS administrative charge from 3 to 5 percent. During fiscal year 1990,
  the cost avoidance for the program was about $80 million. Currently,
  DSCA data shows that this cost avoidance for 1999 would also be about
  $80 million.
• In 1999, the FMS administrative charge was reduced from 3 to
  2.5 percent in part because the account balance was perceived as too
  high, and DOD wanted to send a message to its foreign customers that it
  was committed to making the FMS program more effective and efficient.

In addition, although DSCA uses the administrative account balance as a
basis for decisions relating to administrative charges and budgets, agency
officials acknowledge that there is no guidance on what constitutes a
prudent balance for the administrative account. DSCA officials explained


7
P.L. 99-83, Aug. 8, 1985.
8
P.L. 101-165, Nov. 21, 1989.




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                       that a positive account balance is needed to support future work that has
                       already been paid for by customers. Estimating an appropriate account
                       balance is difficult since DSCA does not manage based on cost and is not
                       able to estimate the cost of the work it has committed to. Typically, DSCA
                       has sought to maintain a level of about 1-1/2 times the yearly administrative
                       budget, which is roughly equal to the current account balance of about
                       $500 million.



Reinvention Efforts    DSCA and the military services are conducting various separate
                       reinvention initiatives to improve the management and implementation of
Lack a Common          the FMS program. Generally, these initiatives include activities to reduce
Approach to            budgets, streamline organizations, improve business processes, reduce
                       cycle times, improve the FMS program for the customers, and team with
Administrative Costs   U.S. industry to develop hybrid sales with direct commercial and foreign
                       military program components. As knowledge of program costs is necessary
                       to many of these initiatives, the military services and DSCA each have
                       efforts specifically related to identifying costs. However, the separate
                       efforts take different approaches to address cost issues, have different
                       coverage, and have not been coordinated.

                       DSCA has identified cost recovery as a key issue in its reinvention efforts.
                       In May 1998, DSCA initiated a study to measure the cost of those key tasks
                       funded by the administrative budget at certain military service buying
                       commands, such as the cost of pre-sale, customer support, sale execution,
                       and sale or case closure efforts. The DSCA effort will not capture the total
                       cost of administering the FMS program since it is attempting to capture
                       costs charged to the administrative budget and not administrative costs
                       associated with program management charges.

                       The Air Force has begun an initiative to outsource a large portion of its
                       workload, which it hopes will improve efficiency. It will also add program
                       charges for certain activities that had previously been funded through the
                       administrative budget. The goal of the initiative is to increase
                       responsiveness to foreign customers, decrease the time required to execute
                       and close sales, provide timely sale reconciliation, reduce costs to the
                       customer, and align fees with services. Under the Air Force initiative, all
                       activities required to execute a sale will be considered for outsourcing
                       except inherently governmental functions—such as exercising program
                       decision authority, contracting officer authority, and financial authority
                       requiring funds certification. The intent of the Air Force initiative is to
                       consolidate all personnel and travel costs required for managing the



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                        execution of sales and charge these costs directly on program management
                        lines, whether those costs are incurred by government personnel or
                        contractor personnel. As a result, the Air Force would charge personnel
                        and travel costs previously funded through the administrative budget
                        directly to sales. In an August 1998 memorandum to DSCA, the Air Force
                        outlined its initiative and requested a waiver of the current guidance on
                        program management charges in order to implement the proposal. DSCA
                        did not respond to the Air Force’s request. In March 1999, the Air Force
                        decided to proceed with implementing its initiative despite DSCA’s lack of
                        response. The Air Force acknowledged in a June 1999 memorandum that
                        the overall costs to customers may increase as they identify specific
                        functions and associated costs that could be directly charged to foreign
                        military sales.

                        Navy reinvention efforts call for centralized control of Navy administrative
                        funding and program management funding. The Navy plans to document
                        their costs of administering foreign military sales to ensure it is properly
                        reimbursed for these costs. Although the Navy is not yet able to account for
                        its actual costs in administering foreign military sales, it already pays for
                        nearly half of its total administrative costs using program management
                        charges. The Navy strives to charge all costs that can be associated with a
                        sale directly to that sale. For example, the Naval Air Systems Command has
                        implemented a time and attendance system that allows the Command to
                        account for all personnel costs directly associated with particular sales.

                        The U.S. Army Security Assistance Command has developed a system that
                        breaks down the costs of tasks related to administering sales. The Army
                        plans to allocate its FMS administrative budget according to these tasks.
                        Army officials believe that this will help them justify their administrative
                        budget when DSCA is making budget decisions.


Administrative Charge   The most significant action taken under DOD’s current reengineering
Reduced Without Cost    efforts was the June 1999 decision to reduce the administrative charge
                        from 3 to 2.5 percent. DSCA stated that this decision was based on planned
Information
                        streamlining initiatives, anticipated increases in sales as a result of the
                        Balkan conflict, and a high balance in the FMS administrative account.
                        According to DOD, the reduction was intended to show the customer that
                        they were serious about making the process more efficient.




                        Page 17                                    GAO/NSIAD-00-37 Foreign Military Sales
B-283614




Until mid-May 1999, DSCA’s estimates showed that with a 2.5-percent
administrative charge the administrative account would reach a deficit by
2007 (see fig. 4).9 As noted previously, 2 weeks after DSCA’s proposal to cut
the administrative charge, foreign military sales projections were adjusted,
putting the future account balance on a more positive footing. However,
DSCA estimates continued to show a downward slope in the account
balance. DSCA’s estimate of the administrative account balance using
higher sales estimates did not consider increases in resources needed to
cover the additional administrative costs that would likely be incurred with
additional sales. Increased resources and budgets could result in a steeper
reduction in the administrative account than shown in figure 4.




9
 Defense Trade: Decision to Lower FMS Administrative Fee is Premature
(GAO/NSIAD-99-161R, May 13, 1999).




Page 18                                        GAO/NSIAD-00-37 Foreign Military Sales
                                           B-283614




Figure 4: Projected Administrative Account Balance With 2.5-Percent Administrative Charge at $7.5 Billion Sales and $10 Billion
Sales, 1999-2007




                                           Source: DSCA.




Conclusions                                The Foreign Military Sales program is generally required to recover the full
                                           estimated costs of administering sales. Although expected to operate on a
                                           cost recovery basis, DOD does not have the systems in place to identify the
                                           actual cost of administering foreign military sales. Limited visibility over
                                           costs hampers management of costs and affects DSCA’s ability to set fee
                                           structures and allocate budgets appropriately. It has also resulted in
                                           excessively wide ranges in the administrative account balance. In addition,
                                           FMS program management is hampered by the lack of a consistently
                                           applied definition of those administrative tasks associated with



                                           Page 19                                        GAO/NSIAD-00-37 Foreign Military Sales
                  B-283614




                  implementing sales that should be charged to the overall administrative
                  account and those that should be charged to program management. As a
                  result, DSCA’s attempts to force program efficiencies by reducing the
                  funding it provides to the military services may not be successful. In fact,
                  the services have efforts in place that may be working at odds with DSCA’s
                  efforts. Although each of the services is attempting to better identify its
                  costs in implementing the FMS program through various reform initiatives,
                  the Navy is striving to charge cases directly for all known administrative
                  costs, the Air Force is planning to charge cases for costs once covered by
                  the administrative budget, and the Army is collecting cost data to more
                  strongly justify its existing administrative budget allocation.

                  Lacking an adequate information base on the administrative costs of
                  executing FMS sales, clear and consistently applied guidance on when to
                  use program management funding, and a coordinated approach to reform
                  efforts, the impact of future program management decisions—such as the
                  need to change the fee level or structure, attempts to develop hybrid
                  commercial/government sales, and other DOD initiatives for the program—
                  will not be understood.



Recommendations   To make certain that future program decisions are made on the basis of
                  adequate information, we recommend that the Secretary of Defense direct
                  that current efforts to identify and collect cost information use a
                  comprehensive and consistent definition of administrative tasks.

                  To enhance the value of the administrative budget as a management tool,
                  we recommend that the Secretary of Defense develop and communicate to
                  the military services guidance that requires consistent application of
                  program management charges.

                  To assure that the current FMS administrative account balance is
                  appropriate, we further recommend that the Under Secretary of Defense
                  (Comptroller) assess the amount of funds needed to complete existing
                  sales commitments. If the current administrative account balance exceeds
                  the needed funds, we recommend that the Secretary of Defense identify
                  alternative program uses for these funds.



Agency Comments   In commenting on a draft of this report, DOD concurred with three of our
                  four recommendations. DOD also stated that ongoing reinvention efforts



                  Page 20                                   GAO/NSIAD-00-37 Foreign Military Sales
B-283614




will address the majority of our recommendations. However, DOD’s
comments do not describe how reinvention efforts will address these
recommendations. In certain cases, it is not clear how DOD’s proposed
implementation of our recommendations would resolve the problems
described in this report. In addition, DOD stated that our report
misrepresents important facts included in several areas. DOD also
provided technical comments that we have incorporated as appropriate.
DOD’s comments are included as appendix II.

In terms of cost information, DOD stated that our report overstates the
position that DOD lacks adequate cost information to manage the FMS
program and assure full cost recovery. However, DOD’s comments and
technical remarks focus on cost recovery from a legal perspective. As we
note in the report, the Arms Export Control Act excludes some cost
associated with executing the FMS program from the act’s requirement to
recover administrative costs. However, these excluded costs are associated
with the program and should be recognized and considered in decisions
made about managing the program and in any reengineering or reform
efforts. Federal financial accounting standards state that cost information
is essential to managing federal programs in the areas of budgeting and
control, performance measurement, determination of reimbursements and
setting of fees and prices, program evaluations and economic choice
decisions.10 Further, the standards require agencies to accumulate the full
cost of outputs regardless of funding sources using appropriate costing
methodologies and cost finding techniques. Having sufficient information
on the total costs of executing the FMS program might have alleviated
DOD’s need to seek legislative relief from certain costs, such as military
pay and unfunded civilian retirement benefits, that resulted in shifting the
pay burden from the FMS program and the foreign customer to DOD’s
appropriations accounts and ultimately the taxpayer.

Furthermore, DOD’s comments stated that our report infers a connection
between the lack of cost information, the annual FMS administrative
budgets provided to the military services, and the use of program
management charges. While DOD concurred with our recommendations
related to the lack of cost information and program management guidance,
the Department disagrees with our treatment of these issues. We believe
there is a connection between the lack of cost information, annual FMS


10
 Statement of Federal Financial Accounting Standard, “Managerial Cost Accounting
Concepts and Standards for the Federal Government.” (SFFAS No. 4, July 31, 1995).




Page 21                                        GAO/NSIAD-00-37 Foreign Military Sales
B-283614




administrative budgets, and the use of program management charges. DOD
uses both FMS administrative charges and program management charges
to pay for the cost of executing the FMS program. DOD’s criteria, as stated
in its guidance, identify the level of effort expended in performing
management functions as the primary determiner of whether a function or
activity should be funded by the administrative budget or through program
management charges. DOD allows the military services discretion in
determining what level of effort warrants program management charges.
As a result, either program management charges or the administrative
budget can be used as the source of funding for the same activities by
different military services on different foreign military sales. In an
environment in which the services have that level of discretion along with
insufficient cost information, DOD cannot effectively manage the program
by using the FMS administrative budget.

DOD’s comment noted that our draft report incorrectly describes the
nature of DSCA activities associated with preparing annual sales estimates.
However, DOD did not explain what was incorrect. DOD explained that we
call their process judgmental, stated that country desk officers lack
guidance or criteria in formulating sales estimates, and said that estimates
were adjusted at the discretion of DSCA management. However, DSCA’s
Deputy Director described this process as judgmental in discussions with
us and noted that he substantially changed country desk officers’ sales
estimates. DSCA’s June 1998 sales estimate guidance offers a format for
reporting sales estimates and includes inflation indexes for adjusting
current year dollars, and suggests that factors such as foreign military
financing credit levels and political and economic considerations should be
considered. This guidance does not offer country desk officers a
methodology to be consistently applied for developing sales estimates.
Estimating sales is not an exact science, but DSCA does not have a system
in place for assessing the probability of future sales, as do large
commercial firms that depend on estimates for key business decisions.
Credible estimates are important for DSCA to plan future budget
allocations and to ensure, as DOD points out, that adjustments related to
management decisions do not appear arbitrary.

DOD commented that our report unfairly suggests that DSCA’s only tool for
managing the FMS program is the administrative fund balance. We disagree
with this description of our report and agree that the administrative fund
balance is not the only tool DSCA uses to manage the program. As our
report explains, DSCA uses the administrative budget to allocate resources
to the program and uses the administrative balance as a measure to



Page 22                                   GAO/NSIAD-00-37 Foreign Military Sales
B-283614




determine if change is needed. When DSCA perceives that the balance is
not appropriate, it has taken action to raise or decrease charges, and shift
expenses from the FMS budget to other DOD accounts. An appropriate
administrative balance is an outcome of appropriately aligning costs and
fees. Lacking adequate information on the costs of administering sales, past
efforts to stabilize the administrative account balance have proven
unsuccessful. Moreover, DOD concurred with our recommendation to
assess the funds needed to assure that the administrative account balance
is appropriate.

The Department concurred with our recommendation to make certain that
future program decisions are made on the basis of adequate information by
directing current efforts to identify and collect cost information to use a
comprehensive and consistent definition of administrative tasks. To
implement this recommendation, DOD commented that an ongoing
Institute for Defense Analyses study and detailed Army functional
breakouts would provide information for alternative models. However, the
Institute’s study and the Army’s work are looking only at tasks currently
funded by the FMS administrative budget, and they are not collecting
information on administrative tasks funded by program management and
other administrative charges to the customer. As we point out in this
report, the military services are performing administrative tasks that are
charged to the administrative budget and to the program management
elements of FMS sales. Our recommendation would require the
Department to collect and analyze information on all FMS administrative
tasks, regardless of the funding source. Without this information, the
Department cannot develop a comprehensive understanding of
administrative tasks and related costs or use this information to provide
the basis for management decisions, including decisions on appropriate
budgets and fees that are clearly based on the cost of executing sales.

The Department concurred with our recommendation to enhance the value
of the administrative budget as a management tool by developing and
communicating guidance to the military services on charges for program
management services. The Department indicated it intends to include
guidance in the next revision to DOD regulations.

The Department concurred with our recommendation to assess the amount
of funds needed to complete existing sales commitments to assure an
appropriate level of the administrative account balance by stating that the
Department will determine an appropriate “safety level.” It is not the intent
of our recommendation to set a “safety level” with the sole purpose of



Page 23                                    GAO/NSIAD-00-37 Foreign Military Sales
              B-283614




              avoiding risk. An appropriate balance in the account should result from
              setting fees at a level to cover costs associated with implementing existing
              sales. The account balance should clearly be related to the cost of
              implementing sales and not some predetermined level.

              DOD did not agree with our recommendation to identify alternative
              program uses for excess administrative account funds. DOD points out that
              administrative account balances are not appropriated funds and are only
              available for the purposes for which they were collected under the Arms
              Export Control Act. DOD also points out that Congress imposes annual
              limits on the amount of these funds that DOD may expend. DOD contends
              that it cannot legally implement this recommendation under the current
              law. We disagree. The law does not preclude the Secretary of Defense from
              identifying alternative program uses for excess administrative account
              funds. The Arms Export Control Act permits spending this administrative
              funding for FMS administrative functions. Although annual appropriations
              laws set a ceiling for FMS administrative spending, the Secretary of
              Defense can request a higher ceiling or notify Congress that the ceiling will
              be exceeded, as has been done in the past. In identifying alternative uses,
              we would expect the Secretary to assess, for example, the value of
              spending administrative funds on systems that would ensure proper cost
              accounting. In addition, the military services have stated that they have
              unfunded needs in their administration of the FMS program. For example,
              Navy officials told us that they do not have adequate resources to ensure
              that foreign military sales are closed in an expeditious manner, and that
              delayed case closure is a significant irritant to its customers. If the
              Secretary of Defense chooses to identify program uses outside the
              parameters of the Arms Export Control Act, he can request necessary
              legislative changes to Congress. For example, the Secretary could request
              congressional authority to use FMS administrative funds to reimburse
              military pay associated with security assistance.



Scope and     To evaluate whether the Foreign Military Sales program has achieved full
              recovery of its administrative costs, we interviewed and collected
Methodology   documents from DSCA; the departments of the Army, Navy, and Air Force;
              and U.S. industry representatives. However, we did not validate the
              accuracy of DSCA’s and the services’ cost information. To understand
              outside factors that could affect the condition of the FMS program, we also
              reviewed documents that describe foreign customer dissatisfaction with
              the program and interviewed foreign government representatives. We used
              budget data from the DSCA Comptroller’s Office to analyze total



              Page 24                                    GAO/NSIAD-00-37 Foreign Military Sales
B-283614




administrative budget trends and budget allocations for fiscal year 1998.
We also analyzed trends in military services’ actual and planned
administrative budgets. We studied data about budgets, workload, and
performance metrics for at least one buying command in each military
service that was allocated a substantial portion of the FMS administrative
budget to evaluate the impact of reductions in military services’
administrative budgets. We analyzed the differences between the military
services’ total administrative and program management spending. At the
military service commands visited, we also judgmentally selected about
50 foreign military sales of various types and dollar values to discuss the
workload related to these sales relative to the administrative and program
management funding of sales. We reviewed guidance on identifying
administrative and program management charges as well as DOD Inspector
General reports related to the FMS program.

To determine the basis for key decisions related to the FMS fee structure
and budget management, we analyzed the rationale for and impact of past
program decisions on the FMS administrative account. We also reviewed
DSCA’s process for making sales projections, which is a key component of
estimating future administrative account balances, as well as the model
that DSCA uses to project future administrative account balances. We met
with representatives from two U.S. defense companies to identify how
others develop their foreign military sales projections. We sought to
identify the criteria DSCA uses for determining the appropriate level of the
administrative account balance, but found that no written guidance exists.
We collected documents from and held discussions with officials from
DSCA and the Office of the DOD Comptroller relating to the FMS
administrative account balance, fee structure decisions, budget
management decisions, and sales projections.

To evaluate how various FMS reinvention efforts address cost recovery
issues, we reviewed DSCA’s and each individual military service’s
reinvention initiatives to determine scope, status, and level of coordination
of FMS reinvention efforts. We collected documents from and held
discussions with officials at the DSCA, Under Secretary of Defense
(Comptroller), the Deputy Under Secretary of the Army for International
Affairs, the U.S. Army Security Assistance Command, the U.S. Army Tank
Automotive and Armaments Command, the Navy International Programs
Office, the Naval Air Systems Command, the Deputy Under Secretary of the
Air Force for International Affairs, the Air Force Aeronautic Systems
Center, the Air Force’s F-16 Systems Program Office, the Air Force Security
Assistance Center, the Warner Robbins Air Logistics Center, and the



Page 25                                    GAO/NSIAD-00-37 Foreign Military Sales
B-283614




Security Assistance Directorate of the Defense Finance and Accounting
Service Center.

We conducted our work between October 1998 and August 1999 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to Representative Sam Gejdenson in
his capacity as Ranking Minority Member of the House International
Relations Committee and to Senator Jesse Helms and Senator Joseph
Biden in their capacities as Chairman and Ranking Minority Member,
respectively, of the Senate Foreign Relations Committee. We are also
sending copies to the Honorable William S. Cohen, Secretary of Defense,
and the Honorable Jacob J. Lew, Director, Office of Management and
Budget. We will also make copies available to others on request.

Please contact me on (202) 512-4841 if you or your staff have any questions
concerning this report. Major contributors to this report were Blake
Ainsworth, Raymond H. Denmark, Jr., and Lillian I. Slodkowski.

Sincerely yours,




Katherine V. Schinasi
Associate Director
Defense Acquisitions Issues




Page 26                                   GAO/NSIAD-00-37 Foreign Military Sales
Page 27   GAO/NSIAD-00-37 Foreign Military Sales
Appendix I

Breakdown of Foreign Military Sales                                                         Appendx
                                                                                                  ies




Administrative Funding and Organizations                                                     Appendx
                                                                                                   Ii




              Table 3 shows the fiscal year 1998 budget allocations that the Defense
              Security Cooperation Agency (DSCA) distributed among Department of
              Defense (DOD) organizations. Organizations with the primary
              responsibility of implementing foreign military sales (FMS) received
              64 percent of this allocation, while 36 percent went to centrally managed
              and implemented activities. As shown in figure 5, over 60 organizations
              received FMS funding. While the military services receive FMS funding
              from DSCA, they are responsible for managing this funding and distributing
              it among their subordinate commands.




              Page 28                                  GAO/NSIAD-00-37 Foreign Military Sales
                                              Appendix I
                                              Breakdown of Foreign Military Sales
                                              Administrative Funding and Organizations




Table 3: Fiscal Year 1998 FMS Administrative Budget Allocation and Roles of Primary FMS Organizations
                                FY 1998 Administrative Budget
                                         $350 million
                                         Dollars        Percent of
Organization                        (in millions)          budget Description
Centrally managed and implemented activities
Defense Finance and                      $38.39               11.0 Operates DOD’s centralized FMS billing, collecting, and trust fund
Accounting Service                                                 accounting system.
Defense Security Cooperation               14.87               4.2 Manages the overall FMS program. Acts as the DOD focal point
Agency                                                             for tracking arms transfers, budgetary, legislative, and other
                                                                   security assistance issues.
Defense Security Assistance                15.08               4.3 Contractor development cost of a single, centralized security
Management System                                                  assistance management system.
Defense Information Systems                12.28               3.5 Hosts the FMS legacy system database with which the Defense
Agency                                                             Security Assistance Management System interfaces.
Defense Security Assistance                 8.05               2.3 DSCA organization tasked with developing the single, centralized
Development Center                                                 security assistance management system—the Defense Security
                                                                   Assistance Management System.
Defense Institute of Security               4.69               1.3 Centralized DOD school for security assistance management.
Assistance Management                                              Provides instruction for U.S. government, foreign government, and
                                                                   industry personnel.
Security assistance                        23.75               6.8 DOD elements, regardless of actual title, located in a foreign
organizations—overseas                                             country with assigned responsibilities for carrying out security
                                                                   assistance management.
Management Reserve                         10.65               3.0 Reserve held by DSCA.
Reimbursements                             -1.05             -0.30
American Institute in Taiwan                1.06              0.30 A nonprofit organization established to conduct FMS
                                                                   administrative functions.
Sale implementing activities
Air Force                                  87.39              25.0 The military services and defense agencies are responsible for the
Army                                       80.50              23.0 execution of military assistance programs. For the FMS program,
                                                                   the military service or defense agency is responsible for preparing
Navy                                       52.73              15.1 a Letter of Offer and Acceptance and implementing foreign military
National Security Agency                    0.63               0.2 sales. The implementing agency is responsible for the overall
                                                                   management of actions that will result in delivery of the materials
Defense Logistics Agency                    0.59               0.2 or services set forth in the Letter of Offer and Acceptance that was
National Imagery and                        0.40               0.1 accepted by a foreign country or international organization.
Mapping Agency




                                              Page 29                                           GAO/NSIAD-00-37 Foreign Military Sales
                                       Appendix I
                                       Breakdown of Foreign Military Sales
                                       Administrative Funding and Organizations




Figure 5: DOD Organizations That Receive FMS Funding




                                       Page 30                                    GAO/NSIAD-00-37 Foreign Military Sales
Appendix II

Comments From the Department of Defense                          Appendx
                                                                       iI




              Page 31       GAO/NSIAD-00-37 Foreign Military Sales
                      Appendix II
                      Comments From the Department of Defense




Now on p. 3.


Now on pp. 7-11.




Now on pp. 4,12-13.




Now on p. 3.

See comment 1.




                      Page 32                                   GAO/NSIAD-00-37 Foreign Military Sales
                  Appendix II
                  Comments From the Department of Defense




Now on p. 3.
See comment 2.


Now on p. 3.
See comment 3.




Now on pp. 3-4.

See comment 4.


Now on pp. 3-4.
See comment 5.

Now on p. 4.




Now on p. 4.




Now on p. 5.



Now on p. 5.


Now on p. 5.

See comment 6.




                  Page 33                                   GAO/NSIAD-00-37 Foreign Military Sales
                    Appendix II
                    Comments From the Department of Defense




Now on p. 8.




Now on p. 8.
See comment 7.

Now on p. 12.



Now on p. 15.




Now on pp. 16-17.
See comment 8.




Now on p. 29




                    Page 34                                   GAO/NSIAD-00-37 Foreign Military Sales
                Appendix II
                Comments From the Department of Defense




Now on p. 29.

Now on p. 29.




                Page 35                                   GAO/NSIAD-00-37 Foreign Military Sales
                Appendix II
                Comments From the Department of Defense




Now on p. 20.




Now on p. 20.




Now on p. 20.




                Page 36                                   GAO/NSIAD-00-37 Foreign Military Sales
                Appendix II
                Comments From the Department of Defense




Now on p. 20.




                Page 37                                   GAO/NSIAD-00-37 Foreign Military Sales
               Appendix II
               Comments From the Department of Defense




GAO Comments   The following are our comments on the Department of Defense’s letter
               dated October 25, 1999.

               1. Our report does not state that the Arms Export Control Act requires the
               accumulation of actual full cost for defense articles and services
               transferred under the Foreign Military Sales program. This sentence that
               DOD refers to describes the Arms Export Control Act requirement that the
               United States government not sell items under the FMS program at a loss.
               This sentence also describes that the act generally requires the program to
               recover costs associated with the implementation of the FMS program. We
               have adjusted language in this report to more precisely characterize the
               act, and clearly state that there are exceptions to the requirement of full
               cost recovery.

               2. DOD’s comment is referring to our report’s reference to customer
               complaints concerning program inefficiencies. We do not believe that FMS
               program inefficiencies are only perceived. The Deputy Secretary of
               Defense, in October 1998, stated that “One of the things we’ve noticed is
               that there’s been a definite trend of countries wanting to abandon foreign
               military sales as an approach and going to direct commercial sales as an
               alternative. In large measure, I think that’s being driven by the
               inefficiencies that come with foreign military sales. It’s cumbersome, it’s
               time consuming, it’s heavily rule bound.”

               3. We agree with DOD’s characterization of the law and believe the
               sentence accurately reflects that characterization. Our statement notes that
               we evaluated “whether the foreign military sales program has achieved full
               recovery of its administrative costs” and explains the scope of our review
               by defining the objectives of our audit. These objectives were derived from
               the requester’s initial request letter and in consultation with committee
               staff. Based on the requester’s concern regarding the future viability of the
               program, we examined how the FMS program has recovered its costs,
               including certain costs such as military pay for which the program has
               sought and obtained legislative relief.

               4. Our report did not state that DOD was required to fully recover all actual
               administrative costs. However, the Arms Export Control Act requires the
               FMS program to recover certain costs. Our report faults DOD for not
               having sufficient information to determine whether it is recovering these
               costs. Furthermore, the federal financial accounting standard for cost
               accounting concepts and standards explains that collecting cost



               Page 38                                    GAO/NSIAD-00-37 Foreign Military Sales
                   Appendix II
                   Comments From the Department of Defense




                   information is essential to managing federal government programs in the
                   areas of budgeting and control, performance measurement, determination
                   of reimbursements and setting of fees and prices, program evaluations, and
                   economic choice decisions. These accounting standards require agencies
                   to accumulate the full cost of outputs through appropriate costing
                   methodologies or cost finding techniques. While DOD is not required by
                   law to fully recover cost, identifying the full cost of administering the FMS
                   program is a good business practice identified in federal financial
                   accounting standards.

                   5. We have changed the context of this sentence to add clarity to our
                   message. DOD’s comment noted that we should cite the Arms Export
                   Control Act when stating that the Department lacks sufficient information
                   to determine if it is fully recovering FMS administrative costs. The scope of
                   our work was to assess the future viability of the program and not just to
                   assess DOD’s compliance with the act. Our work demonstrates that DOD
                   does not have sufficient information related to the costs of the FMS
                   program, whether these costs are required to be recovered by the Arms
                   Export Control Act or not.

                   6. We agree with DOD’s characterization of the law that there are
                   exclusions to full cost recovery. As noted on page 3 of this report, “the
                   Arms Export Control Act provides a number of ways to price defense
                   articles and services transferred under the Foreign Military Sales program,
                   including actual value, replacement value, and full cost, and requires that
                   the Department of Defense recover, with specified exceptions, the full
                   estimated cost of administrating such sales.”

                   7. The DOD comment reflects Air Force budget planning levels for fiscal
                   year 1995. Our report uses actual fiscal year 1995 FMS administrative
                   spending by the military services as provided by DSCA budgeting officials.
                   The figures in our report remain accurate as of August 3, 1999.

                   8. We have updated the report to include this new information provided by
                   DOD.




(707426)   Leter   Page 39                                    GAO/NSIAD-00-37 Foreign Military Sales
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