Profit, Loss, and Proliferation

Northrop Grumman and Corporate Interests

by Molly Cernicek and Cheryl Rofer

Last week the Washington Post reported that Northrop Grumman withdrew from a $40 billion competition to build aerial refueling tankers for the Air Force. With just two companies bidding on this contract, it leaves Boeing as the heir apparent.

We’ve been thinking about how to lay out the conflicts between corporations and the government, but the players in this little drama have done it for us.

The forfeiting defense contractor on the primary interest of a profit-making corporation (Wes Bush, chief executive of Los Angeles-based Northrop):

"We have a fiduciary responsibility to our shareholders to prudently invest our corporate resources," he said. "Investing further resources to submit a bid would not be acting responsibly."

The Pentagon representative on competitive contracting (Deputy Secretary of Defense William Lynn):

The Pentagon was "disappointed" that Northrop had pulled out of the competition, noting that it "competed well on both price" and other factors. "We strongly believe that the current competition is structured fairly and that both companies could compete effectively."

The forfeiting defense contractor on choosing not to protest the contract (we report, you decide on the sincerity):

"America's servicemen and women have been forced to wait too long for new tankers," he said. "Taking actions that would further delay the introduction of this urgent capability would also not be acting responsibly."

The “contracting and defense expert” who works as a defense industry consultant at the libertarian, free-market Lexington Institute (Loren Thompson):

"If you push a contractor too far, they don't have any incentive to bid because they don't expect to make any money. The lesson is, if you push contractors too far they'll lose interest."

A Congressman whose state will benefit from Boeing getting the contract:

"Northrop made a good decision," said Rep. Norm Dicks (D-Wash.). "We can now go forward."

The Senator from a state where Northrop would have built an assembly plant (Sen. Richard C. Shelby (R-AL)):

The Air Force "had a chance to deliver the most capable tanker possible to our war fighters and blew it." The "so-called competition" was "structured to produce the best outcome for Boeing" and that the Air Force's "refusal to make substantive changes to level the playing field shows that once again politics trumps the needs of our military."

Senator Shelby last month put an unprecedented blanket hold on nearly 70 nominees sent to the Senate by President Obama for confirmation. He was holding those nominations hostage to projects for Alabama, this project included.

There are so many points here, it’s hard to know where to start. A bidding process that brings in just two bidders is anything but competitive. Government contracting to the private sector assumes that there are many competitors vying for each contract, which will lead to better pricing for government projects. In reality, there are only a handful of super-contractors like Boeing and Northrop that have the infrastructure, employees, and strategic alliances to other primary and secondary contractors to take on the government’s biggest projects.

These super-contractors put significant effort into winning a bid, but those efforts go into lobbying and organizing the project to include as many congressional interests as possible rather than into cost savings for the government. With so few competitors in bidding processes, it makes sense for a super-contractor to lower its costs significantly only when it is looking to win a small subcontract from a much smaller government contractor. The big contractors can take on a small subcontract at a loss initially and then will find ways to increase the contract.

News of this $40 billion contract squabble was barely a blip to most of America, including Congress. House Democrats announced Thursday that they would no longer approve earmarks directed to for-profit organizations, whereupon the Republicans upped the ante by announcing that their entire 178-member conference would not seek any earmarks this year, denouncing all of the line-item expenditures as wasteful and corrupting," reports Paul Kane. Earmarks make up about 1 percent of our yearly budget. With a $3,518 trillion budget, this comes out to $35 billion in savings. Possible earmark savings for 307,006,550 Americans (US Census Bureau estimate, July 2009) would be $115 for each American. Almost enough to pay for the new refueling tankers that will cost each American $130.