oversight

U.S.-Korea Fighter Coproduction Program

Published by the Government Accountability Office on 1990-04-04.

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

                    United States General     Accounting   Ofi’lce

                    Testimony
GAO

For Release          U.S .-Korea    Fighter      Coproduction        Program
on Delivery
Expected    at
2:oo   EST
Wednesday
April    4, 1990




                    Statement    of
                    Joseph    E. Kelley,     Director
                    Security    and International         Relations        Issues
                    National    Security     and International            Affairs
                    Division


                    Before    the
                    Subcommittee     on Investigations
                    Committee     on Armed Services
                    House of Representatives




GAO/T-NSIAD-90-29

                          o&4/           wD39
Mr.      Chairman,         Members of the                     Subcommittee:


I am pleased              to be here                  today     to discuss             the      results         of our work
on the       U.S .-Korean                   fighter       program.                In August          1989 the           Department
of Defense           (DOD) and the                     Republic         of        Korea      decided          to change          the
name of the           program                from      FX to the            Korean        Fighter         Program--KFP--
to distinguish                 it      from       the     U.S .-Japan              FS-X arrangement.                      The
programs       do,        in        fact,       differ        in a very              important          respect:            Unlike
the      FS-X program                with       Japan,        this      program           does not            involve       the
transfer        of design               or development                  technology.                  Rather,         this       program
involves       the        transfer              of manufacturing                    and assembly               know-how.


You asked          that        we review               the    negotiating              history          and contractors’
marketing          efforts             to date           on this        program           and Korea’s             aerospace
industrial          experience,                  goals,         and plans.                As you know,               on
December       20,        1989,         Korea announced                     its     selection           of     the    F/A-18,              but
the program           has not                been completely                 defined          yet.        As a result,                we
were unable           to fully                analyze         certain             aspects       and make overall
conclusions.1                  However,               I would        like         to address           four     key points.
First,       although               Korea has a military                          need for       these         fighters,             based
on our       review        of        the      negotiating             history,            the    Koreans’            desire          for     a
coproduction              program             has been driven                     by their       industrial
development           goals           and interests.                    These         goals      are      reflected             in
Korea’s       positions               on a number of KFP issues.                                 Second,          over      time,
the      program      concept--               a mix of off-the-shelf                          and kit          purchases             with
phased-in          licensed             production--             will        accommodate              Korea’s         industrial


lThe Air       Force and the Navy did                                industrial   base factors
analyses       and technology transfer                                 risk assessments   on the                          program.
development              goals      to some extent.                       But        until          the     program         is     fully
defined          and Korea          selects          the        items          it    wishes          to assemble             or
produce,             there      is no way to gauge precisely                                    the       extent        to which             its
industrial             goals       might      be satisfied                 by the             program         or what            the
U.S .-Korean             work shares           will          actually               be in the             licensed          production
phase         of the         program.         Third,            DOD has             (1)      inhibited            the      success          of
certain          elements          of the      Korean            negotiating                  position            but      compromised
on others,              (2)    taken       steps      to make certain                         technologies              unavailable
for     Korean          licensed         production,               and (3)            along         with       the Department
of Commerce,                 attempted        to     limit         the     additional                 industrial             benefits
Korea         had expected             to derive             from        the        program.              Finally,          some
important             aspects       of the         program             remained             unclear          at the         time       of
our     review,          and we would              like         to raise             them for             further
consideration.


BACKGROUND


After         late     1986,      when Northrop                  withdrew             the      F-20        from      the
competition,                 two U.S.      airframe              manufacturers--General                              Dynamics           and
McDonnell             Douglas--      competed             for      the     sale           and licensed               production               of
120 F-16             or F/A-l8       aircraft.2                  Before             Korea      selected             the F/A-18
for     the     KFP, a number of official                              meetings              and communications                        had
transpired,             and DOD presented                       a draft             memorandum of understanding
(MOU) to the              Korean        government               in February                  1988.         However,             because
formal         negotiations             did    not        occur        on that             draft,          by mid-1989             DOD no
longer         considered          the draft              valid.           In the            summer of              1989,        the

2Before the F/A-18 was selected,      two U.S. engine manufacturers
were competing  separately  for the sale.      Once Korea selected   the
F/A-18, General Electric   automatically    won the engine competition.
                                                                   2
Secretaries               of Defense              and Commerce met with                     the     Korean         Minister             of
National          Defense          to discuss               KFP issues.             As a result,                 the    two
governments               agreed          that      Korea     would      purchase           12 aircraft                off      the
shelf       and 36 in kits                  and would           produce          72 under         commercial                 license.
Soon after           Korea         selected           the F/A-18,              DOD drafted           a new MOU,
presenting           it     to Korea              in early          February        1990.         Preliminary                 working
level       discussions              have already               been held           to prepare             for     formal
negotiations.


The U.S.          contractors                involved         in the          competition           for      the       KFP have
made a number of presentations                                  to the         Korean       government             and
industry.           During           the         competition,           the     contractors               reached
tentative          understandings                    with     the     Korean        entities         on (1) candidate
items       for    Korean          licensed           production              and   (2)     other         industrial
benefits,          subject           to U.S.          government              approval.           Once Korea                 selected
the F/A-18,           however,              the      Korean      government             and U.S.           contractors
agreed       to wait         until          the      government-to-government                        MOU was signed
before       concluding              the         commercial          program        arrangements.                  Meanwhile,
Korean       industry            has been determining                     which        of the        candidate
aircraft          and engine              parts       they      want     and can afford                   to produce             under
license.


THE FIGHTER PROGRAM IS IMPORTANT TO KOREA'S
AEROSPACE INDUSTRIAL DEVELOPMENT GOALS


The KFP is          intended              to meet Korea's                military         modernization
requirements,              but       it     also      plays      an important             role       in Korea's
aerospace          industrial               development              goals.         According         to DOD, the
intent       of the        program           was to replace               Korea's         aging           fleets        of F-45
                                                                 3
and F-5s.             It     will         be an important               part       of Korea’s             overall           Force
Improvement                Program,             as there       is a growing              need to counter                    the
threat         from North               Korea,          including       MiG-29         aircraft.            The shape of
this       program          is also             founded      to     a great        extent       on Korea’s             desire           to

develop         and expand                its      aerospace         industrial             capabilities.


According          to       information              we obtained              on Korean         planning,            the
fighter         program--           previously             designated           FX--is         part       of a larger,
longer         term     program            involving          the      potential            procurement             of 600 or
more fighters.                    For Korean              planning        purposes,            FX is       the      first         of
three      phases.               The second             phase-- FXX--was               conceived           as a follow-on
codevelopment                effort.               The third         phase --FXXX--was                planned          to be a
Korean         indigenous               fighter.           The first           phase,         or FX, is expected                       to
be completed                by the         late      1990s.          We are        not      certain        how firm           these
plans       are or whether                      Korea     can or will           achieve         these       goals.            Most
observers          we met with                   considered          Korea's          goals     to be unrealistic,
but     they     believed               that       Korea     could      become a significant                        producer            of
aircraft         parts           and components                in the         world      market.


Korea’s         Aircraft            Industry             Experience           to Date


Three      key Korean               companies--            Korean       Air     Lines         (KAL) , Samsung
Aerospace,            and Daewoo --are                    repairing,           overhauling,             assembling,                and
manufacturing                some parts              on a variety              of mostly           U.S.     military              and
commercial            planes,            helicopters,               and engines.               For    example,              KAL
co-assembled               the      F-5 fighter              and the          MD-500 helicopter                  and machines
some F-16 parts                   for      Fokker         of the Netherlands.                      Samsung has
performed          repair,              overhaul,          and some parts                production          on a number
of U.S.           aircraft         engines.                  In addition,              Samsung produced                  some minor
parts       for      the      F/A-18           in     1989 under           a subcontract                 with     McDonnell
Douglas.             Daewoo produces                    some F-16           airframe             parts      for    General
Dynamics           and won a subcontract                            from    Lockheed             on P-7A aircraft
wings.            However,         according                to U.S.        government             officials,             these
companies            have limited                   experience            compared         to the         level       of
manufacture               and production                    line     management            contemplated               under         the
KFP.        To prepare             for         the     program,           Samsung,         the designated                  prime
contractor               on the     fighter,                has invested               heavily       in new facilities.


Korea's Aerospace Industry                                  Development
Committee and the KFP


In May 1985,                 the   Korean            government            established             an Aerospace
Industry           Development             Committee,                chaired           by the      Deputy         Prime
Minister,           with       members from                  the Ministries                of National             Defense,
Trade       and Industry,                 Finance,             and Science              and Technology                as well            as
the     Senior        Secretary            to the President                      for     Economic          Affairs.              This
committee           was established                     to promote            and guide            the     development               of
Korea's         aerospace           industry.                  The committee               has set         requirements                  in
the     Korean        negotiating                   positions            to date        on the      program.               For
example,           the     committee                established            the     negotiating             position           that
the     program          be a direct                 commercial            licensed         production             arrangement
negotiated            between            the        Korean         and U.S.        contractors,                 as opposed           to a
Foreign         Military           Sales            (FMS) coproduction                   program.              According          to
information              we obtained,                 this         was intended            to maximize             the
technology            transfers            and the             Korean       industry’s             control         over       the
program.            The committee                    also      apparently              had an important                role         in
the     final       evaluation             of the            two competing               U.S.      aircraft           and in
                                                                     5
making          recommendations                       to the Korean                   Blue     House        (equivalent              to the
Office          of the              President             and his        staff).              DOD and U.S.            contractor
officials              agreed              that      the Korean             Blue       House makes the                 final
decision          on aircraft                      selections.


Korean Industrial                           Goals Highlighted
in KFP Discussions                           to Date


We have pointed                       out         in prior       reports           and testimonies                   that      licensed
production              or coproduction                       can cost           a purchasing               country          more than
buying       an item                 off     the      shelf      from        the       United      States.            This      is
partly       because                of      the     added costs              of building              the     necessary
infrastructure;                       licensing,              royalty,           and technical                assistance             fees;
and the          limited              quantities              produced,            which        do not        permit         achieving
economies              of scale.


The negotiating                       history             shows that            the     Korean        Ministry          of National
Defense         has been concerned                            that      Korea         produce         sufficient
quantities              of aircraft                   under      license           to     reduce       the     economic
inefficiency                   of     its         manufacturing              capability.               Throughout              the
program’s              history,              Korea         has attempted                to maximize            the      quantity            of
aircraft          it      could             produce          under      license          and minimize              the quantity
of aircraft               it        would          purchase          directly           from     the     United         States        off
the     shelf          and in kit                  form.       Until         the      summer of          1989,        Korea
insisted          on purchasing                       only     3 aircraft               off     the    shelf       and 20
aircraft          in kits                  from     the      United         States       and producing                97 aircraft
under       license             in Korea.




                                                                        6
 Korean      program              officials        also         insisted              that      they        be allowed                 to
 require       the         U.S.      contractors            to “buy             back”         parts         from       Korean
 producers           for     U.S.       Air     Force       or U.S.             Navy aircraft.                       This         is
 usually      called              “directed        buybacks.”                   Again,         the       objective             was to
make the          Korean           production            line         less      inefficient.                    As I will
,discuss      later,             DOD is        against          directed            buybacks             but        agreed         not          to
place       a restrictive                 provision             in the MOU.


 Special      Offset             Requirements


Because       of      the magnitude                of the             program          and its           importance                in
Korea’s       overall              aerospace         industrial                 development                 plans,          the        Korean
government            imposed           special          offset            guidelines            for        the      fighter
competition.                 The term           “offsets”                 is applied            to trade             arrangements
made as conditions                      of     foreign          military              sales.           Essentially,                    these
arrangements                are      intended        to reduce                the      impact          of      foreign         weapon
purchases           on the           buyer’s       balance                of payments,              or      to provide                 the
buyer      with       other          advantages.                Direct          offsets          involve             some form                  of
 licensed         production,                 coproduction,                  or subcontracting                       in the            country
buying       the      weapon system.                     Indirect             offsets,           on the             other      hand,
 involve      arrangements                    in areas          not        directly           related           to the         purchased
system.           For example,                 indirect           offsets             can take           the        form     of
subcontracting,                    purchasing,            or marketing                   civilian              or other            defense
products          and services,                 investing                 in local           industry,              and promoting
tourism       for          the     purchasing            country.


During       the      competition,                Korea’s             written          policy          was to require                       a
minimum of            50 percent               offsets          for        major       purchases               of    foreign

                                                                      7
weapons and systems.                       Since         about          1987,       though,             Korea     had
unofficially             required          only      30 percent                  offsets          for     purchases            from
American        defense          contractors.                For         the KFP, separate                       guidelines
were issued,            raising       the         offset          requirement                to a minimum                of
60 percent.              In addition,              Korean             offset        guidelines                 issued     to the
U.S. contractors                 stated      that          the        licensed         production                share        of the
program --for           which       Korea         pays a fee--would                         not    be credited                to the
offset       commitment.             According              to the              guidelines,              the     bulk     of the
commercial            offsets     --beyond           the     direct              offsets          obtained          through
licensed        production--          would          preferably                  be in the              form     of aerospace
industrial            development           projects,                 as opposed             to    investment             in
hottls,        for     example.


In contrast            to the       Korean         guidelines,                   the   United            States         considers
licensed        production           an offset              in        itself.          If     licensed            production
had been included                 as an offset                   in the          KFP arrangement,                   as of July
1989 the        competing           U.S.     airframe                 contractors             would        have been
offering        more than           the     required              60 percent3.                    As I will             discuss
later,       because       of DOD and Commerce,intervention,                                             these      offers        were
revised        before      Korea      selected              the F/A-18.


U.S. AGENCIES' COORDINATION AND
POSITIONS IN KFP DISCUSSIONS TO DATE


The KFP concept                 has been evolving                      since        about         1984 and has
undergone            a number       of changes.                   Until          May 1989,              DOD had not
coordinated            or consulted               with      Commerce on the                       program.              However,

3The U.S. airframe  contractors had submitted   signed offset
memorandums of agreement to the Korean Ministry     of National                                                                Defense.
                                                                  8
 since      then,      Commerce has played                        a more active                 role      in KFP issues.
 Since early           1987,      the      United          States             and Korea         have held          numerous
 official          discussions,            exchanged              written          communications                on a number
 of program          issues,        and held             preliminary               discussions                on the        MOU.
 Through      these        exchanges            and discussions,                    certain            U.S.     positions
have been formulated                   --in      some aspects                   DOD has resisted                 certain
Korean       negotiating            positions,              while             in others         it     has compromised.
Because the            current       draft         MOO is classified,                       we will            address           it    in
a separate,            classified             briefing.


Changes       in the         KFP Concept


Under the           original        KFP concept,                  120 aircraft              were        to be produced
under       commercial           licenses,           with         Northrop's             F-20        and General
Dynamics'           F-16     in competition                 for         the     sale.       After         Northrop          dropped
out of       the     competition              in late        1986,            McDonnell          Douglas         entered              with
the F/A-18           for     serious          consideration.                      At that        point,         DOD increased
its    involvement             in the         arrangement,                first         by restricting                the    export
licenses       to FMS sales                only.           During         early         1987,        DOD insisted            on an
FMS coproduction                program,           while          the     Koreans         insisted            on straight
commercial           licensed        production,                  thus        creating          a stalemate.                In
mid-1987,           as the      result          of a DOD-directed                       compromise,            both      sides
agreed       to a mix of FMS purchases                             and phased-in                 commercial            licensed
production.             DOD submitted               a draft             MOU to          Korea        in February            1988.
However,       it     was not       until          after      the July              1989 U.S.-Korea                   Security
Consultative            Meeting          that      the      two sides              agreed        to the        number of
aircraft       and kits           to be bought               through              FMS channels.



                                                              9
                                                                                                                                     .
Coordination             With        the     Department           of Commerce


The fiscal            year      1989 defense             authorization                  legislati
DOD to consult                with     the     Secretary           of Commerce on MOU
potential            impact      on the        U.S.      defense          industrial              base.          The
legislation            was approved                 September        29,        1988.          Between       October       1988
and February             1989,        three         U.S .-Korean          meetings             on KFP occurred             prior
to consultation                with         Commerce.           In November               1988,      DOD officials             and
the contractors                presented             F-16    and F/A-18                pricing      data         to Korean
officials.             During         December         1988,       DOD officials                  met in Washington
and discussed                program         issues      with      Korea's             Second Assistant                Minister
for    National         Defense.              In February           1989,         the      Defense         Security
Assistance           Agency,          the     U.S.     Air      Force,          the     U.S.      Navy,      and the       two
U.S.    airframe             contractors             involved       in the             competition           made
additional           presentations                  in Korea.


In the       final      analysis,             however,          DOD has coordinated                       with     Commerce
more in the            KFP discussions                 to date           than     it     had in the              U.S.-Japan
FS-X program.                 As we mentioned                in our        spring          1989 testimony               on the
FS-X    program,l             DOD did         not     coordinate           with         Commerce when
negotiating            the     program.              In that       case,         DOD provided              a briefing          to
Commerce in            late     October         1988 near           the         conclusion          of     the     bilateral
negotiations,                in response            to the        newly     effected             legislative
requirement.




4U.S.-Japan            FS-X Codevelopment                    Program            (GAO/T-NSIAD-89-31,
May    11,    1989).

                                                             10
    DOD briefed             Commerce officials                   on the          KFP in May 1989.                     At      the
    21st      u.s .-Korea           Security         Consultative                Meeting           in July         1989,       the
    Secretary          of Commerce discussed                       the     KFP with            the       Korean       Minister            of
    National         Defense.             Commerce further                 participated                  in subsequent
    meetings         on KFP issues.                  DOD also           coordinated                the     1990 draft              MOU
    with      Commerce,         as well          as State,             and has included                   Commerce on the
    KFP negotiating                 team.        Commerce,             in turn,        staffed             the     initial          draft
    MOU for         review      both       within         Commerce and with                   the        Departments               of
    State,         Energy,      and Labor;              the Office          of      the      U.S.        Trade
    Representative;                 the     President's           Office          of   Science            and Technology
    Policy;         and others.              Further,         DOD and Commerce have signed                                    an
    agreement         on a key KFP negotiating                           position            for     the       United         States.


    U.S.      Positions         Formulated            to Date


    As I mentioned              earlier,            the    MOU has not              been fully              negotiated,                 and
    many specific              arrangements               need to be finalized.                           However,           certain
    U.S.      positions         have       solidified            and been communicated                           to the        Korean
    government.


           Items     Withheld         From and Released                    for      Licensing             to Korea


    In February             1988,     DOD provided               the     Korean        government                a tentative
    list      of    items      on both         aircraft          that     could        not         be produced               in Korea
    and must         be purchased              through       FMS        channels.             This        was called               the
.
    "FMS-Must         List."          The list            included         the      most      sensitive             military
    avionics         on the         two aircraft,            such as the               radar,            electronic            warfare
    equipment,         and intelligence                    and    other          software.               The     engines           had


                                                                 11
not yet           been officially                      addressed            on the         list      we examine
our review.                 Nevertheless,                     DOD officials                told      US that               the
core       where       combustion                occurs--commonly                       called       the         "hot        SE
and other            sensitive                 items     would          not     be released                for        licensed
production.                 However,             we were          also         told      that      Korean             firms         could
competitively                bid         for     subcontracts                  on nonsensitive                    portions               of the
equipment            on the FMS-Must                     List.


This       list      changed            over      time,          and     DOD created               an expanded                    list      to
accompany            the     new draft                 MOU as an annex.                     The annex                 now addresses
the key engine                   components.                   Although           it     is not       viewed               as all
inclusive,            the        list      contains             both        items        to be withheld                     from
licensed           production                  and those          which         may be produced                       under         license
in Korea.             According                 to DOD officials                       involved       in the               program,          the
items       listed          in     the         annex     are      not       negotiable,              and the               release          of
items       not      covered            in the         annex       will         be decided            on a case-by-case

basis.


Both       the early             FMS-Must          List          and     the     expanded            annex            to    the         MOU were
established             largely            to protect              national              security           interests                   and to
control           production              quantities.                  As we pointed                 out         in    a previous
report,5           withholding                  components              from     foreign           production                 certainly

helps       DOD track             the      number         of      end       items        produced           but        does        not

really        control            quantities              of     parts          produced           overseas--or                    for     that
matter        third-country                    sales      of parts.                   We believe            that           withholding




SMilitary  Coproduction:                           U.S. Management                       of Programs                  Worldwide
(GAO/NSIAD-89-117,     Mar.                        1989).
                                                                       12
 components              is a positive                  step     but       not      a substitute                      for      active
 program           oversight             and management.


        Aircraft           to Be Purchased                  Versus          Produced            Under             License


One area            in which             DOD inhibited              the         success        of the                 Korean
negotiating               position              was the mix of aircraft                            to be purchased                          and
produced            under       license.                In mid-1987,               when the            compromise                    was
reached        on the           program           method,         DOD       insisted           on a program                         mix     of
48 aircraft               purchased              from     the     United           States          (off          the         shelf        and in
kits)       and 72 produced                      under      commercial               license           in        Korea.              To     a

certain        extent,             this        negotiating               position           frustrated                   the        Korean
objective            of enhancing                 the     economic              viability             of        its      aircraft
production               line      and retaining                 total       program           control.                      This      is
particularly                true         if    Korea      is unable              to obtain             substantial                     buybacks
or subcontracts                    for        Korean-made           components.                  Nevertheless,                         Korean
industry           could        perform           some manufacturing                        work       as a subcontractor
on the       first         48 aircraft,                  even if          the      planes        are        purchased                  through
FMS from           the     United             States.          Thus,       the      requirement                       that     the        first
48 planes            be purchased                 from     the      United          States         does not                   really
preclude           some Korean                 work     share       in those              aircraft.


    Directed             Buybacks              of Korean-made               Parts


In discussions                  and correspondence,                        DOD      has consistently                           resisted
the Korean            requirement                 for     "directed              buybacks."                 DOD initially
included           a clause          prohibiting                directed            buybacks               in     the        February
1988 version               of      the        government-to-government                          MOU.              Later,             DOD


                                                                  13
instead           agreed      to place             this         restriction               on the          U.S.     contractors'
commercial            munitions            licenses.                  DOD has not                 been able          to secure
formal           Korean     government                  agreement            on the prohibition                      against
directed           buybacks.              I would           like        to add,           though,          that      regardless                of
where       it     is placed,             this          restriction              does not           preclude             Korean          or
other       foreign         contractors                  from      competitively                   bidding         on and winning
U.S.      subcontracts              on the          aircraft.


       Offsets        and the           KFP


DOD and Commerce have                           intervened              in the          commercially               agreed-upon
offset          arrangements              I mentioned                 earlier.             At the          July      1989 Security
Consultative              Meeting          in     Washington,                 the       Secretaries               of Defense              and
Commerce addressed                   the         offsets           issue         with      the      Korean         Minister            of
National           Defense.             Subsequently,                  DOD told            the      Minister             of National
Defense          and the       two U.S.             prime          airframe             contractors               that      it     could
not      support       a sale           involving             excessive                offsets.           The Minister                 of
National          Defense          agreed         to      limit        the       offset          associated              with      the        KFP
to 30 percent              but      did      not         agree        to include             licensed             production              in
the      30-percent           offset.             The airframe                   contractors              revised          their
offset          arrangements             with       Korea          because          of U.S.          government
intervention.                 I would            like       to point             out      that      the     U.S.         government’s
intervention              in this          case          is unprecedented.                        Traditionally,                  DOD has
not      involved         itself         in commercial                   offset          arrangements.                    Further,
the      U.S.     government             has no mechanism                        to monitor            or enforce                the
30-percent           offset        cap because                  the      offset          agreement           is between                the
U.S.      contractor           and the            Korean           government.



                                                                   14
 ASPECTS OF THE PROGRAMTHAT REMAIN UNCLEAR


 In our analysis,                  three         key elements                         of the      KFP remained                  unclear            at
 the time       of our         review.                 First,           DOD, in consultation                             with       Commerce,
has done a thorough                       review          of      items            and technologies                      to be withheld
from      licensed          production,                 but       it        is unclear             to us how DOD can
ensure      that       the    restrictions                      will         be fully            implemented                 through             the
commercial            licensing             process.                   State           and Commerce are                     the     licensing
authorities.                These agencies                      do not                forward     all          license
applications               to DOD for             review.                   Based on our                 prior        work,         in cases
where DOD is consulted,                           it      does not have the                            final         authority             on the
disposition            of    the      licenses.                  Without                some commitments                     from         State
and Commerce that                   all      KFP-related                     licenses            will          be forwarded                to DOD
and that        its     advice            will         be incorporated                         in the          licenses,            it     is
unclear        to us how the                 restrictions                        will      be fully              implemented
through        the process.


Second,        DOD    and U.S.             Navy officials                         have recently                   begun         structuring
a program          management              and oversight                         plan      for    the          KFP.         In our         1989
report      on management                  of    coproduction                         programs,           we recommended                        that
DOD periodically               verify            quantities                      of     items     produced             under             these
programs        and their            disposition                   in the producing                            country.             According
to     information           we have on the                      DOD plan                for     the      KFP, the            U.S.         Navy
will     have personnel                   in Korea              throughout                 the    life          of    the     program,
with     the principal               responsibility                         of        providing           technical               assistance
and support           to     the     Korean            Ministry                  of National              Defense,            Air         Force,
and industry.                The costs             for          these        personnel              will         be assumed by the
Korean      government             under         an FMS case.                           As currently                 planned,             the

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production              validation               function             would         be performed               as a by-product
by these          personnel.                 we recognize                     the     sensitivities                 involved           in
this       matter,           but    to preserve                   the        objectivity           and independence                        in
production              validation,               DOD may wish                   to consider             separating                 this
function,              once production                      is    fully         underway,          and funding                it     from
the administrative                        fees         it     collects           from FMS cases                    generally.               In
this       way,        the    personnel                verifying              production           quantities             would            not

be funded              directly           out     of        a Korean           FMS case.


Finally,          because           the U.S.                contractors’               proposed          offset         projects                 are
not      yet    defined,            and because                   of the         way offset            projects           may get
credited          by the           Korean         government,                  the     technology              transfer             and
economic          effects           of     the     offsets              cannot         be determined.                   Depending                 on
the type          of offset               project,               Korea        might      apply        multipliers                  to the
dollar         value         of    the     project               when reaching               the      credit         value.            For
example,          if      Korea          assigned             a multiplier               of two to             a    $50 million
offset         project,            the     U.S.         contractor               would       receive           an offset             credit
of     $100     million            toward         the        performance               of    its      offset         commitment.
In addition,                 the    offsets             are       to be implemented                    over         a 10-year
period.           As a result,                   the        effects           of the        offsets       will         be unclear
for      some time            to come.




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We did      our work        from       June 1989 through                  March 1990 and obtained
information        on the         negotiating            history          and    the    arrangements
contemplated         for        the    KFP in Washington,                  D.C.,       and    St.    Louis,
Missouri,       from       the    Departments            of Defense             and Commerce,          the     U.S.
Air   Force,      the      U.S.       Navy,    General           Dynamics,         McDonnell         Douglas,        and
General      Electric.            We also          obtained         information          on Korea’s
aerospace       industrial             and future             fighter      aircraft          goals    and
planning.         However,            we did       not   visit          Korea    because       of the       timing
and sensitivity             of    Korea's          aircraft         selection.


Mr. Chairman,            that     concludes           my prepared           remarks.           I would        be
happy to answer             any       questions.




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