Ronald Reagan once said, “The ... inescapable truth is: government does not have all the answers.  In too many instances, government does not solve problems; it subsidizes them.”

That reality is typified by the proposed merger of Boeing’s and Lockheed Martin’s government satellite launch businesses.  The resulting United Launch Alliance (ULA) would obtain launching contracts for the Air Force’s $32 billion Evolved Expendable Launch Vehicle (EELV) program.

The EELV program was designed to incorporate commercial-like practices into procurement.  Contractors invested some of their own money in the development of the rockets because of the potential for commercial profits.  The Air Force provided Boeing and Lockheed more than $500 million each in research and development subsidies and awarded each more than a billion dollars worth of government contracts.  However, as frequently happens with government procurements, the contractors grossly underbid the expense of their launches.  Faced with escalating costs, they ran to the government for a bailout and successfully secured hundreds of millions of dollars in additional assistance.

When markets operate without government intervention, they generally produce better products at lower prices.  In the case of the EELV, however, the Air Force not only provides huge subsidies, but also awarded contracts on a non-competitive basis.  Due to Boeing’s theft of Lockheed’s rocket cost data and the shrinking market for commercial space launches, the Air Force decided in 2005 that it could no longer achieve “minimal competition.”  So instead of assigning launches based on price, the Air Force allocates them on a sole-source basis to “keep both rocket families busy through the end of the decade.”

The EELV is not the only sweetheart deal to benefit Boeing.  The Justice Department recently announced that the company will not be criminally prosecuted for its corporate misconduct.  Boeing must only promise not to steal from other companies or violate federal laws relating to conflicts of interest, bribery and graft for the next two years.  However, Boeing will get a free pass if “the commission of a defined offense [is] by a Boeing employee classified at a level below executive management.”  And if it is by an executive manager, it will not be a violation if “the underlying allegation or conduct is reported by Boeing.” 

The phrase “slap on the wrist” is an understatment for this highly unusual case.  Boeing is almost better off now than if The Department of Defense (DOD) and the Federal Trade Commission (FTC) should reject the merger outright.  If not, any merger should contain safeguards.  ULA stands to gain an unfair advantage in the private launch market.  Boeing and Lockheed benefit from lavish subsidies that are not available to other competitors, and there are currently no provisions on restricting the ULA from competing for non-Air Force work.  The ULA should be prohibited from selling to customers other than the DOD. 

Another problem is that Boeing and Lockheed Martin have been pre-allocated launch services through fiscal year 2011.  Other companies hoping to get into the launch business should have the opportunity to bid for these contracts. 

The best outcome for taxpayers would be the rejection of the ULA merger.  Short of that achievement, the merger should include conditions that protect taxpayers and promote competition.  The DOD and FTC should open EELV contracts to emerging companies and prevent the ULA from gobbling up the private launch market.