How to Bail Out a Defense Contractor

How can governments effectively rescue faltering firms that are nonetheless essential to their security? I address this question in my latest peer-reviewed article, "How to Bail Out a Defense Contractor: Cases on Securing a Supply Chain in Extremis," Defense Acquisition Research Journal, April 2021, Vol. 28 No. 2, pp. 166-189. Here's the abstract:

    How can governments effectively bail out faltering defense contractors? While the idea may seem politically distasteful, any defense ministry with domestic suppliers may view the problem as supplier management in extremis. Reviewing nine prominent bailouts of defense contractors from the past 50 years, the author draws two conclusions. Providing long-term demand is very likely necessary and sufficient to maintain industry structures. Providing short-term infusions of cash may be necessary to maintain programs, but it is not always sufficient. If legislators and defense officials wish to consider either approach for short-term or long-term objectives, they should also consider the historical lessons of the financial and information asymmetries between government and industry, and the general uncertainty over how technologies will evolve.

The journal is published by Defense Acquisition University, so the work is now in the public domain and freely downloadable.

James Hasik is a senior research fellow in the Center for Government Contracting at George Mason University, and a senior fellow in the Scowcroft Center on Strategy and Security at the Atlantic Council.

 

Comments

[seth weissman]

Interesting article, as I expect from you.

I was surprised that you didn’t mention/consider second order effects. The (often reasonable) expectation of some form of bailout incentivizes risk-taking, which increases the probability that some form of bailout will be required.

There is an alternative to bailout, which is buyout. I’m not in favor of government production in general, but the threat of buyout (in special cases) might both mitigate concerns about the industrial base and counter incentives for industry that might otherwise seek to “gamble for redemption.”

Re: government ownership: I don’t see evidence firms like Fincantieri (50% Italian government owned) are less profitable/efficient than fully private-owned peers. Do you have any insight into that?

[James Hasik]

Seth! Great to hear from you. Thanks for the comment. I will follow up in these pages later.