Potential Savings Exist in DOD Budget
By Sean Kennedy
Faced with a historic national debt and a projected $2.2 trillion deficit over the next two years, the country’s leadership is currently grappling with ways to reduce spending. One program which politicians from both sides of the aisle agree should be eliminated is the Medium Extended Air Defense System (MEADS). Created in 1995 to replace aging missile defense systems in the U.S., Germany, and Italy, cost overruns, delays, and underperformance have enveloped MEADS in a cloud of doubt.
The proposed cost for the design and development phases of MEADS was $3.4 billion. Although the U.S. has already spent $1.9 billion on the initial design and development phase, the program still requires an additional $2.8 billion just to complete this stage of the project. Because of extensive problems with cost overruns and delays, in February 2011 the U.S. had nixed plans to continue the final development and procurement phases, choosing instead to fund a “proof of concept” through fiscal year (FY) 2013 after which funding for MEADS would cease. This level of commitment intended to allow the partners to harvest technology from the program. The FY 2012 DOD Appropriations Act supplied $390 million for MEADS, $16.6 million below the administration’s request. The FY 2013 DOD budget request included $400.9 million for the program.
There is, of course, no certainty that funding for MEADS will truly cease after FY 2013. When asked by Senator Mark Begich (D-Alaska) at a hearing of the Readiness and Management Support Subcommittee on March 29, 2011, whether he could guarantee that the estimated $804 million would be sufficient to complete the research and design phase of MEADS, Undersecretary of Defense Robert F. Hale stated he could not agree with that assessment.
MEADS’ problems are legion. The program has been plagued with cost overruns of nearly $2 billion and is 10 years behind schedule. While the cost overruns in the MEADS program exceed the 25 percent threshold necessary for a contract to be terminated under the Nunn-McCurdy Amendment, MEADS’ status as an international agreement means it is not subject to Nunn-McCurdy.
A March 9, 2010, Washington Post report quoted an internal U.S. Army memo asserting that the program “will not meet U.S. requirements or address the current and emerging threat without extensive and costly modifications.” In addition, a March 2011 Congressional Budget Office (CBO) report recommended terminating MEADS in favor of “harvesting MEADS technologies and improving the Patriot program it was designed to replace.” The Government Accountability Office’s (GAO) annual report on DOD weapons programs in March 2011 noted problems with MEADS, including that it “is at risk of not meeting several technical performance measures….” In testimony before the House Armed Services Committee on March 2, 2011, Army Secretary John McHugh stated that the program was “underperforming” and expressing doubt that MEADS was anywhere close to completion.
The failure of MEADS to deliver on its promised capabilities leaves the U.S. and its allies in a difficult situation. The Army has long wanted to cancel MEADS, but the Pentagon has been reluctant to scrap it because of the high termination fees associated with unilateral withdrawal from the project. Independent estimates of what the U.S. would have to pay its partners in order to immediately and unilaterally terminate MEADS fall between $800 million and $1 billion, although no official number has been released.
As a result, the U.S. has two options in order to achieve savings. The Pentagon could unilaterally cut funding for the program and lose out on the research already completed and its rights to the program. Alternatively, the DOD could finish the proof of concept phase, hoping that technology materializes with which it can update existing missile defense systems, while negotiating the cessation of MEADS with its partners.
As Germany and Italy appear wedded to funding the proof of concept through FY 2013, the U.S. may not have much choice but to go along with that plan. If the unofficial estimate of unilateral termination costs of between $800 million and $1 billion is accurate, this exceeds the $790.9 million the administration intends to spend over FYs 2012 and 2013. Funding the proof of concept does promise some benefits for the U.S. It would enable the U.S. to harvest technologies that could be used to modernize the Patriot, allowing the U.S. to recoup some of its investment. It would also allow the U.S. the right to procure MEADS units in the future, should it deem this necessary.
The most prudent option would be for the U.S. to negotiate an agreement with its allies to collectively withdraw from the MEADS contract, either before or immediately following the proof of concept period. This would save each country additional expense on a program that is unlikely to come to fruition. At a minimum, the GAO should undertake a study to determine the costs associated with various options, including the precise cost of a unilateral withdrawal from the contract and the termination fees owed to contractors. The U.S. should explore all options before determining the most sensible way to recover as much value as possible from MEADS, an enormously expensive project that has provided only limited value.