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  April 2, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

  Pentagon turns to new buying tools 10 times more often

  By: Aaron Mehta WASHINGTON — The amount of funding for defense research awarded through other transaction authorities have increased nearly tenfold in five years, according to a new analysis seen exclusively by Defense News. The report, by data and analytics firm Govini, shows the use of OTAs and small business innovation research contracts has expanded to the point that, in 2019, the two methods accounted for $9.6 billion, or 10 percent of the Defense Department's research, development, test and evaluation spending. OTAs are small contracts awarded to companies of any size, in theory targeted at nontraditional defense contractors, with the purpose of conducting research or prototype efforts on a specific project; they are not subject to Federal Acquisition Regulation rules. SBIR contracts are targeted at small businesses in order to act as seed money for them to conduct research and development efforts; they are subject to the FAR rules. Overall, $34.5 billion have been handed out in the last five years through the two contracting methods, to 6,503 unique vendors. However, more than half the OTA dollars are going to only three consortia. The two contracting methods may be about to jump in importance for the department, in light of the new coronavirus outbreak. Navy acquisition head Hondo Geurts, in a March 24 memo, ordered his workforce to do what they can to keep small companies assigned to naval research programs on track, including specifically calling out the need to protect SBIR efforts. Govini tracked the use of OTA and SBIR contracts over a five-year period, from fiscal 2015 through fiscal 2019. “The Defense Department's surging use of OTAs reflects its strong desire to break free from the stringent acquisition process, better access innovative technologies, and lure new companies to the defense ecosystem who otherwise may not see the federal government as a viable or lucrative potential market,” said Tara Murphy Dougherty, Govini CEO. “Fundamentally, the Department is driven by the imperative to outpace China's military modernization in order to retain a military advantage, and they understand that leveraging emerging technologies and the very best technology available in American industry — not just the Defense Industrial Base — are critical to achieving that goal,” she added. OTA dominance The numbers tell a particularly stark story of how the department is increasing its use of OTA contracts. From 2015-2017, the government awarded $12.5 billion in SBIR contracts, versus $4.9 billion in OTA contracts. But from 2018-2019, the government awarded $5.7 billion in SBIR contracts, while it handed out $11.4 billion in OTA deals — an increase large enough to nearly draw even over the five-year period. That increase in OTA funding also ties into the mission laid out by the National Defense Strategy, which encourages a focus on great power competition with China and Russia. According to Govini, the two biggest OTA investments of RDT&E dollars during this time period were $5 billion for munitions and long-range fires, and $3 billion for space systems. While the dollar totals are becoming closer, overall SBIR recipients continue to dwarf OTAs — 6,213 to 290 during the five-year period. In the number of OTA awards per service, the Army leads the way. (Govini) The Army leads the way with use of the two contract methods ($14.1 billion) during this period, followed by the Air Force ($10.4 billion), defensewide agencies ($6 billion) and the Navy ($4 billion). The two contract types also split their dollars in divergent ways. The top SBIR vendor, Colsa Corporation, received 4 percent of total SBIR awards, and the top ten (which includes Colsa) received less than 20 percent of the overall total. In comparison, the top three OTA vendors are consortia managers that make up more than half of total OTA contracts. Those three are Analytic Services Inc. ($5.429 billion), Advanced Technology International ($1.616 billion) and Consortium Management Group Inc. ($1.238 billion). Traditional defense corporations are taking advantage of OTAs as well. The fourth highest recipient of OTA money is United Launch Alliance, co-owned by Lockheed Martin and Boeing; the sixth highest recipient is Lockheed; the eight highest is Northrop Grumman; and the 10th highest is Boeing. Given that OTAs were designed to reach out to nontraditional defense firms, “it's surprising how many traditional defense contractors benefit from OTA arrangements,” Murphy Dougherty said. “Lockheed Martin, Northrop Grumman, and Boeing were all top OTA vendors over the past five years. This is a good example of how accessing the data can help the Department measure its success in terms of achieving intended outcomes through actions like increased OTA use.” Earlier this month, Ellen Lord, the Defense Department's top acquisition official, was asked at a McAleese & Associates conference about data that shows prime contractors taking advantage of OTA contracts. Lord indicated her office needed to gather more data on the issue before taking a look. “The whole premise of OTAs was to get the nontraditional [vendors] and the smalls there,” Lord responded. “I find it hard to imagine a situation where large primes would predominately use OTAs, but I don't know what I don't know. That wasn't the objective. “Oversight is one of our responsibilities in A&S [the office of acquisition and sustainment] that I take very seriously, so we need to make sure that we don't have unintended results from some of the polices that we implement. We're always trying to improve that.” https://www.defensenews.com/industry/2020/04/01/pentagon-turns-to-new-buying-tools-10-times-more-often/

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  August 17, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

  Budget and pandemic present challenges to Russia’s defense industrial base

  By: Fenella McGerty The two Russian defense companies in this year's Top 100 list — air defense missile systems manufacturer Almaz-Antey and weapons developer Tactical Missiles Corporation JSC — have again fallen in rank. Almaz-Antey has fallen to 17th place from 8th and 15th in 2018 and 2019 respectively. Similarly, Tactical Missiles Corporation JSC has fallen to 35th place from 25th and 32nd in 2018 and 2019 respectively. The falling revenues of the companies this year reflect the difficult market conditions these enterprises are operating in as a result of the impact of COVID-19 on government budgets. Even before the pandemic and the consequent contraction in economic output emerged, the outlook for Russian defense spending was already subdued in light of persistently low oil prices in 2019. Domestic spending was further constrained this year as the oil price fell below $20 per barrel in April, with the projected average price for the year reaching just $40 per barrel. The International Monetary Fund forecasts a 6.6 percent contraction in Russia's real gross domestic product this year as lockdown measures to prevent the spread of COVID-19 subdued domestic and international economic activity, the latter further weakening global energy demand. The 4.1 percent growth projected for 2021 means the Russian economy will only return to pre-pandemic output in 2022. Last month, as part of wider measures to offset the bleaker fiscal setting, the Russian Ministry of Finance proposed a 5 percent reduction in financing for the state armament program over the next three years. Under the new plans, the 20 trillion rouble (U.S. $271 billion), 10-year military appropriations program (known as GPV 2027) that runs to 2027 covering defense procurement, repairs, research and development, and infrastructure investment will be reduced by a total of 225 billion roubles between 2021 and 2023. Wider defense funding could be reduced by as much 323 billion roubles. The previous state armament program (GPV 2020) saw significant increases enacted to defense investment between 2011 and 2016 as the country pursued ambitious modernization targets. As a proportion of GDP, the official Russian defense budget peaked in 2015 at 3.8 percent. If one includes wider defense spending items such as military pensions, social support and housing, total Russia expenditure accounted for as much at 4.8 percent of GDP that year. This period of significant defense investment helped to recover some lost ground from the previous two decades. Progress was remarkable but by no means comprehensive, with strategic nuclear forces and defense aerospace surpassing modernization targets, while maritime and land forces fared less well. Pockets of advanced capability — e.g., air defense, weapons, combat aircraft — evolved alongside less efficient entities that failed to deliver against the ambitions of GPV 2020. Nonetheless, as Russia approached the overarching target of 70 percent “modern” equipment within the armed forces inventory, defense spending increases slowed and the country moved from a period of dramatic capability buildup toward a sustainment phase — a move further presaged by wider economic constraints at the time As such, GPV 2027 is less ambitious than GPV 2020, and annual defense budget allocations have reflected this. Russian defense spending has been stagnant in real terms since 2017, as sanctions impacted government finances, energy revenues remained subdued and modernization ambitions were deemed close to fulfillment. Official projections of the budget for national defense saw slightly stronger growth in 2021 and 2022, although this was proposed in the months before the full economic ramifications of the pandemic were realized. Russian companies therefore face a tighter domestic market — as indeed will most countries in the wake of the pandemic — while the burden of debt has stifled investment in new technologies and R&D. This lack of funds to invest in research has created a further challenge for companies facing increasing political pressure domestically to diversify production efforts toward the civil market. The reported moves to restructure defense industry debt will ease some of the stress on companies and provide some temporary bandwidth with which to focus on investment. However, such moves will further constrain domestic defense spending, as funds to absolve debt will inevitably squeeze investment elsewhere in the budget. Perhaps on the positive side, the further weakening of the rouble against the dollar in 2020 has the potential to provide Russian defense equipment with an added price advantage in global defense markets and to facilitate exports. The comparatively cheaper kit will appeal to countries that find they have less investment funds at their disposal than a year ago. As competition in export markets intensifies and funding tightens, buyers may find they can demand greater industrial participation, partnership and technology transfer in moves to bolster self-sufficiency and resilience. Markets which have previously shown preference for Western equipment may find such capabilities are no longer affordable with Russia's relative willingness to offer favorable exchange rate agreements and flexible financing terms, offering a further advantage in constrained export markets. Fenella McGerty is a senior fellow for defense economics at the International Institute for Strategic Studies. https://www.defensenews.com/opinion/commentary/2020/08/17/budget-and-pandemic-present-challenges-to-russias-defense-industrial-base

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  September 7, 2021 | International, Aerospace

  Top defense leaders kick off new phase for Europe's next-gen fighter

  Top defense leaders from France, Germany and Spain have formalized plans to begin the preliminary development phase for a lead plane under the Future Combat Air System program, committing their governments to spending billions of euros in the coming years.