Navy wants more flexible ship-buying policies

As he girds for devastating budget cuts planned over the next five years, the Navy’s top officer is imploring Congress to change the way it requires the military to buy its largest and most expensive ships.

Adm. Vernon Clark, chief of naval operations, told lawmakers last week he wants more flexible acquisition policies that would make purchasing aircraft carriers and other ships more economically feasible in an era of tightening federal budgets.

The cornerstone of Clark’s proposal is to allow the Navy to pay for its ships incrementally, spreading payments out over several years. Current Pentagon policy mandates that the service budget billions up front during the first year of ship construction.

The same procurement policy holds true for other military equipment, including airframes, which are purchased in so-called “lots” of several aircraft. Because the price tag on aircraft carriers and other large ships can be several billion dollars — and construction can take four to eight years for a single ship — the Pentagon buys them one at a time.

“Ships are big, expensive and long-term,” said Gordon Adams, the former associate director of national security programs at the White House Office of Management and Budget (OMB).

But funding for big-ticket items is hard to come by in a cash-strapped Pentagon, which late last year spelled out more than $30 billion in cuts to major programs through 2011. To save money, the Defense Department plans to decrease buys of Virginia-class submarines, DD(X) destroyers and LPD-17 ships. Officials also plan to retire one of the Navy’s 12 aircraft carriers next year and are delaying plans for production of a replacement.

“The acquisition mechanisms we possess today will not produce the Navy we are going to need for the 21st century,” Clark, who will retire this summer, wrote in prepared testimony to the Senate Armed Services Seapower Subcommittee.

The debate over incremental funding has come up before but appears to be getting increased acceptance on Capitol Hill as lawmakers with shipbuilding interests in their districts brace for the drastic budget cuts. Sen. James Talent (R-Mo.), chairman of the subcommittee, has expressed some interest in more flexible funding approaches for ships, while Sen. Susan Collins (R-Maine) backs Clark’s plan.

Meanwhile, the shipbuilding industry, led by titans Northrop Grumman and General Dynamics, would also endorse incrementally funding ships if it would help ease the budgetary burden on the Navy.

“Alternative means of financing make sense. There is not [just] one size that fits all,” said Cynthia Brown, president of the American Shipbuilders Association. “When the government orders ships, it costs a lot of money. It makes sense to spread that funding over multiple years rather than try to fit 6 or 7 billion dollars into the Navy budget.”

Robert Work, a maritime analyst at the Center for Strategic and Budgetary Assessments, largely agrees with the Navy and industry. Incremental funding for the Navy’s most expensive ships – aircraft carriers and large amphibious platforms that support vertical-launch aircraft and helicopters — is the only way to stay in the business, he says.

The Navy typically sets aside roughly $10 billion annually for shipbuilding, which includes not only procurement dollars for large and small ships but also expensive mid-life overhauls for large ships, and the upcoming decommissioning of some nuclear-powered carriers.

Work estimates that if incremental funding were used, the Navy could set aside $3.16 billion to cover large ship buys and all other associated costs. That would leave a steady $7 billion annually for the Navy to invest in smaller seacraft.

But Work is cautious to limit incremental funding to only the Navy’s big ships. The service could lose “cost control” if it applied that funding scheme to smaller vessels, he said.

Not everyone is sold on incremental funding. The OMB, for one, has long been opposed to the financing approach because it could give industry the chance to increase costs dramatically in the latter years of production.

Incremental funding is a way to conceal costs, said Adams, who now is the director of the Security Policy Studies Program at George Washington University.

“The temptation if you incrementally fund is to low-ball the entry point, and then the costs go up as you go through the budget years,” he added.

Incremental funding is not without precedent, however. In recent years, Congress has made exceptions for some platforms, including the LSD-8 dock landing ship and the LHA(R) big-deck amphibious ship. And lawmakers have agreed to funding an aircraft carrier over a two-year period.

Stretching procurement dollars over several years would have little direct impact on the industry, which already receives money incrementally as it achieves certain established procurement milestones, Brown said. However, it could help make buying ships more affordable — and, as a result, keep the Navy to its shipbuilding schedule.

Construction delays are all too common and “add costs to that ship and major disruption for a lot of people’s lives,” Brown said. Slipping the schedule for an aircraft carrier, for instance, could result in thousands of layoffs, she added.