It’s hard to think about the USAF’s long-running effort to buy new tanker aircraft without facing some stiff headwinds of hot air, but the past few months have been particularly hot and breezy. Norm Dicks, predictably, says that the USAF is biased towards Northrop and Airbus. Dick Shelby, perhaps as predictably, says that the USAF is biased towards Boeing. Northrop and EADS’s people, understandably, are torqued about the disclosure of their pricing. The Boeing camp, naturally, wants the WTO’s recent ruling against Airbus factored in. Patty Murray says that the “subsidies are not only illegal, they are deeply unfair and anti-competitive.” And Jay Inslee thinks that sticking it to the French would be a good way to deal with unemployment in his district. Smoot-Hawley? Anyone? Anyone?*
All of this is probably something that a French friend of mine at EADS a few years ago called boule-sheet. I’m not exactly sure what he meant—pétanque on percale?—but it didn’t sound good. For a moment, I was happy that Ashton Carter, the US under secretary of defense for acquisition, was telling Inslee et alia to stuff it. But then, Northrop and EADS decided that they had had enough already anyway, and sent a letter to that effect. Thus was Air Force Secretary Mike Donley asking, effectively, if everyone could please just calm down.
Note that he wasn’t asking why they couldn’t all just get along. If only deeply anti-competitive were worse than merely illegal, that might be possible. No one can reasonably expect cordiality towards one another from Airbus and Boeing, possibly the most rivalrous pair of nearly duopolistic companies anywhere on Earth.** But quite aside from the ordinary complications of any politically-capitve agency trying to do business with two politically astute companies, this latest tanker RFP has caused serious alarm in at least four respects:
- All 373 criteria will be weighted equally. The USAF is asking for 373 attributes on each proposed aircraft, but all 373 will be evaluated as pass-fail criteria. Northrop Grumman has specifically complained that this considers the sink and toilet water flow rates on the same basis as fuel offload rates. The latter is rather more important, and with in-production aircraft like the 767 and the A330, we pretty much know that the former are adequate to the job. What’s embarrassing for the government is that no procurement professional outside the US federal bureaucracy would contemplate doing things this way. Sit in on any graduate class on procurement management at any of the leading schools in the field—Ohio State, Michigan State, Arizona State, Tennessee, etc.—ask about that approach, and watch the jaws drop around the room. It’s just crazy.
- It’s an eighteen-year fixed price deal. Ashton Carter is further saying that, whatever the case, one of those companies should sign up for an eighteen-year fixed-price contract. This may be what Wes Bush, in that letter to him, termed “contractual and financial burdens on the company that we simply cannot accept.” Indeed, we should ask if anyone can find another example of a similarly durable fixed-price contract—anywhere. It’s almost inconceivable. As a Texan politician asked me some weeks ago, would this contract be denominated in dollars or gold? Or euros, for that matter? Who could be found to take the counterparty risk of an eighteen-year contract denominated in dollars, at least for a bidder much of whose costs are paid in euros? One could darkly assert that this is just another protectionist Obamanista scheme—if Todd Tiahrt weren’t a such protectionist Republican—so instead, we’ll just call it crazy. Again.
- It has to be fair, right? Boeing is fulminating, as usual, about supposedly “illegal subsidies” to Airbus. As Joel Johnson noted in a response in early November to an article from Loren Thompson of the Lexington Institute, there are no illegal subsidies under the World Trade Organization accord—just prohibited, actionable, and allowable subsidies.*** Into which category Airbus’s launch aid falls is yet to be finally adjudicated, and the WTO accord specifically prohibits preemptive action before the entire process has been played out. But no matter: the team at the Pentagon may already be again getting worked up about this red herring. Deputy Defense Secretary Bill Lynn told an investors’ conference in New York City on 3 December how much “we want a fair competition; we want a balanced competition.” Fair and balanced? Deep down, I doubt that Todd Tiahrt, for one, wants anything fair and balanced, even if he does watch a lot of Fox News. That said, as I’ll explain in a later column, fairness is a structurally illusory concept in this instance.
- It’s a winner-take-all deal—for eighteen years. These preceding three issues notwithstanding, the length of the commitment to a single supplier is itself notable. Eighteen years is a long time to sign up with any one company for a commercially analogous product. It’s not a long time to stick with one supplier—as evidenced by relationships like Southwest Airlines’ with Boeing—it’s just a long period for precommitment, even if the products themselves are quite durable.
So it this idea eo ipso daft, or would there be merit under the particular set of conditions in which the USAF, the potential suppliers, and their political supporters find themselves? In my next column, I’ll review the economic theory and evidence behind that question, and apply it to this particular contracty competition.
* Ben Stein is a national treasure, isn’t he?
** About those two companies—I do feel compelled at this point to state categorically that I am working for neither on this issue. This is simply a matter that is apparently not well understood legally or economically by the decision-makers involved, and which thus demands some serious exposition by someone without a vested interest in the outcome or even the process. I should also note that I am not explicitly endorsing the split procurement concept—I am merely arguing that it deserves a more thorough hearing than it appears to have gotten in the Pentagon to date.
*** Note to the public relations and legal departments in Chicago: as Johnson noted in his brief,
A good explanation of the WTO dispute settlement process can be found in a Congressional Research Service article by Jeanne Grimmett, legislative attorney, dated September 8, 2009. She specifically points out that the US, in its Uruguay Round Statement of Administrative Action (H.Doc 103-316), noted that the USTR would use its statutory discretion to implement Section 301 (retaliating against unfair trade practices) of the Trade Act of 1974, in a way that was in conformity with WTO obligations. This would appear to reinforce the notion that the US should not short-circuit the WTO dispute settlement process.