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Under Secretary of Defense, Dov Zakheim remarks to Defense Writers Group

Presenters: Dov Zakheim, Under Secretary of Defense
December 17, 2003
Q:  As I said on the way up, I feel duty-bound to ask you how much you can tell us about the '05 budget.


            Zakheim:  The ’05 budget.  Well, we're working it.  Obviously, I'm not going to get into details.  You guys go ahead and every once in a while I see PBDs that I purportedly signed, so you're probably keeping the tally at least as well as I am.


            I think that the basic thrust is going to be the same.  This year we really went seriously to a two-year internal budget process.  Actually, we did two things this year.  We really consummated a process that's been going on for a couple of years where PA&E and the comptroller are fully integrated in the process.  I'll get back to that in a minute.  And we've made it a two-year drill.  So, let me start with the two-year drill.


            Essentially, we had a budget last year that we're sticking to in terms of the overall thrust.  What the services were told to do was to come in with what are called PCPs, I think that's a kind of pill also.  In this case, PCPs stand for Program Change Proposals.  So, they come in with changes to the program based on facts of life, based on experience in Iraq, and so on.  Those Program Change Proposals are the heart and soul of what used to be called the Program Review, and what is the Program Review every other year, the full-blown Program Review.  This year we didn't do it that way.


            Then, and this is the PA&E linkage, PA&E takes the lead in that drill of the early fit, but they did it totally in conjunction with us, in part because the Comptroller's office has simply refused to entertain revisits of any program change decision.  In other words, somebody comes up with some issue, some change.  It gets surfaced to the Deputy Secretary.  The Deputy Secretary rules in a Program Decision Memorandum, the PDMs that you're all familiar with, against, say, the service.  It's off the table.  It's not revisited in the budget review.


            At the same time, there were other issues that were clearly not of the magnitude to be reviewed in a program review and simply would be kind of a bad use of everybody's time.  Those were kicked over to the budget review.  There may be execution issues, there may be small dollar issues.  Whatever it might be.


            So that, when the budget review time comes around, the services could put in budget change proposals that, according to the rules, should not reopen any programmatic decision.


            There's a second rule which applies to both parts of the process and has been vigorously enforced, or rigorously, whichever term you want to use.  That is, if you can't identify an offset to the proposal you're making, the proposal's out.


            Q:  By service?


            Zakheim:  By service.  Or, others can make proposals.  You have the Under Secretary can make proposals, the component commanders can come in with proposals.  Identify an offset.  Puts and takes.


            That, of course, has been a problem that has plagued this whole process for decades, beginning with the guidance itself, which never really had any fiscal restrictions to it and was therefore variously interpreted by those who wished to interpret the guidance in a particular way.  It essentially emasculated -- if I can use a masculine term -- the defense guidance in the first place.


            I remember I wrote an article 20 years ago about the silent P in [PGDS].  That part is also being restructured, by the way, and there is a much more meaningful guidance that's being issued, but for the purposes of the program and the budget reviews, we basically said, if you cannot identify a source for the funds that you wish to apply to something else, we're just not going to entertain the proposal.


            Now, the reason we've been able to succeed is the second part of the point I was making regarding the PA&E-Comptroller relationship.  It's actually ironic; when I took the job, PA&E was actually part of my office.  And that had been implemented I guess in the 1990s at some point and was a throw-back to MacNamara's day when Entobin worked for his Comptroller.  So, we're talking 40 years ago.


            Even though PA&E was nominally under me, in practice the two staffs looked at the world very differently, including from different databases.


            When Steve Cambone took over PA&E, because he and I had a long-standing working relationship and personal relationship, we kind of agreed that this wasn't terribly productive, and that even though he was now reporting directly to the Secretary and the Deputy, it was terribly important that we were in sync.  We started to move the two units, the two staffs together, to the point where now, as I say, it's a totally integrated process.  That really does make a difference.


            We don't review budget proposals without PA&E.  PA&E doesn't review program proposals without us.  That allows us to enforce the discipline, first of ensuring that a program issue is not revisited, and secondly in ensuring that a proposal has some kind of offset source to it.


            So, basically, to make a long answer somewhat longer, this year's budget is going to be the second year of a two-year process.  It's going to reflect changes on the margin as opposed to a complete zero-based review, as in the past, and it will maintain the themes that we set last year.


            Q:  Is it going to maintain the top line, do you project?


            Zakheim:  We certainly hope so.  Of course, that is never final until we have our last meetings with OMB.  I think the process with OMB has been a cordial one which, as I understand it, when we used to deal with the Russians, if there was a really problematic process it was frank; if it was a good process it was cordial.  But it's been a good process, okay?  We've interacted with them at all levels.  They have been involved in coordinating on all our PBDs, but more than that, there's been an ongoing dialogue there.


            So, I feel pretty good about the way it's been working.


            Q:  Your answer indicates that, if anything, there would be a downward movement of the bottom line.


            Zakheim:  I don't believe that will happen. Okay?


            Q:  Amy?


            Q:  With regards to the tanker situation.  It's my understanding that [inaudible] there is no official signed or even draft PCP identifying offsets.


            Zakheim:  That's correct.


            Q:  How can the Pentagon expect to be taken seriously if it's not identified how to pay for these massive programs?


            Zakheim:  Well, on the contrary, it seems to me we should be taken seriously because the Secretary of Defense has called in the Inspector General. I think it would be putting the cart before the horse to budget for a program that the Inspector General has to review and that, clearly, until we get his report, that program is very much in suspense.


            Q:  Are you saying that if there were offsets identified previous to the IG being called in, or --


            Zakheim:  No, it never got to that state.


            Q:  Then my question is, again, at that point, previously, there weren't funds fully identified [inaudible] for that?


            Zakheim:  Well, I think at this stage of the game, I just want to see what the IG says.  And the fact that -- I mean, what you're asking me is, gee, the day before the IG study was announced, why didn't we put money in?  But the process being what it is, is a fluid process.  Therefore, we could easily have accommodated that whole program had the IG not been called in.


            Once the IG is called in, the matter became moot, and I think it would be the height of irresponsibility to go ahead and budget for a program at the same time as the Secretary has called in the IG to question what's going on there.


            Q:  Even to do "what if" drills?


            Zakheim:  I'm not in the business of "what if" drills.


            Q:  So, do you predict this to be an '05 cost?  Or is this to be --


            Zakheim:  No, I have nothing from the IG yet.  The IG will report to the Secretary.  Presumably the Secretary will let me and the rest of the leadership know what the outcome of that is and how he's prepared to act and then all of us, given our different jobs, will proceed accordingly.


            Q:  The timing of the IG response, what’s your take?


            Zakheim:  I don't know.  The IG -- Joe Schmitts -- has been pretty efficient at getting quick responses to a lot of these issues, but frankly, he doesn't issue a timetable.  He is very expeditious, and his staff about getting answers, particularly to the kinds of questions of this magnitude.  But I'm not aware of any deadline.


            Q:  Most specifically on Halliburton, what is the state of play now, five days later, in terms of resolution of issues, and for clarity, were they paid the alleged $61 million?


            Zakheim:  It's not alleged.  It's really money.  They were paid it.


            Q:  They were paid.  What's the base of the $61 million?  Is it a million dollars that --


            Zakheim:  It's a little more than that.  Let me walk you through this.


            You're right in rough numbers, there's about $866 million that's been paid.  So, $61 million is actually the only part that's being questioned.


            Q:  Seven percent of $866.  Is that a lot in your world?


            Zakheim:  Well, the issue isn't seven percent.  The issue is $61 million.


            The other fact is that this is a contract that, let me see, it's $8.562 billion in total, of which $1.592 has actually been funded, of which $866 million has actually been paid, of which $61 is being questioned.  Pick your percentage.  [Laughter]


            Q:  Well, that percent overall, the only reason --


            Zakheim:  No, no, no.  My point is if you funded $1.5 billion and you're questioning $61 -- and as we announced earlier, for instance, the dining hall contract, which was I believe $67 million, we caught before it was paid.  So when we look at these task orders, we're looking at a lot more than just $866 million, and there's a lot of audits going on.


            These are very large contracts.  I don't know whether you folks are fully aware of the size of the LOGCAP contract and what it really is.  Maybe I ought to talk a little bit about it.


            Q:  But the oil is the one that’s in question, so…


            Zakheim:  Restoring Iraqi Oil, that's the one where the $61 million is from, but LOGCAP generally is worldwide.  It's been around, I know it was around during the Balkan conflict.  This is actually the third LOGCAP contract.  It's actually called LOGCAP III, and I didn't even know the entire acronym but now I've got it.  Logistics Civilian Augmentation.  The P presumably stands for Program.  Log, Logistics; C, Civilian; A, Augmentation; p, Program. It's sort of like POMCUS.  Anybody who remembers that one I'll give you a star.


            Q:  Prepositioned, Unit Sets, I know that.


            Zakheim:  Anybody else?  Prepositioning of Materiel Configured to Unit Sets.


            Anyway, this is a longstanding thing.  The first one was won actually by KBR.  The second one was won by DynCorp.  The third one was won back by KBR and there were four other bidders, so it was competitive and it's worldwide.  Which means that seeing what they're doing out in Afghanistan, for example.  They're in the Balkans; they're everywhere.  They're also providing support for some of our coalition partners in Iraq.


            Q:  Is all this money apply only to American civil authorities?


            Zakheim:  No, the $8.5 billion is worldwide.  The $1.5 billion is worldwide.  So, $61 million is really a smaller fraction in a sense than your question implies.


            Q:  What's the timing of the resolution of the audit?


            Zakheim:  The latest we've heard is that they've put a team of nearly 25 people on this thing to try to --


            Q:  They the company or --


            Zakheim:  The company.  The company has put together, our auditors have been in contact with them at the highest levels.  And by the way, I leave the auditors alone.  That's what you're supposed to do.  You're not supposed to mess with auditors.  Basically, what I'm telling you is what they told me.


            They have met with the company at very senior levels. The company has put together a tiger team, as they call it, roughly 25 people.  They're trying to resolve this thing in a matter of weeks.  They're hoping January, so maybe January, maybe February.


            The issue isn't just the $61 million.  The issue that they've got a rather antiquated accounting system, and from the Department of Defense they have all my sympathy, since I've got a rather antiquated accounting system.  They're moving very expeditiously to rectify that.  In fact, there was a DCAA study in 2002 that pointed out a whole list of things that needed to be done and just about every one of them; I think there's maybe one left of all the DCAA recommendations that haven't already been implemented. I mean, DCAA is all over this and has been for a while. That's our job and their job.


            Q:  Based on what you've seen to date, is this something, is it evidence of a chronic overcharging, or a systemic overcharge issue?


            Zakheim:  I don't think -- No.  The systemic issue is not overcharging.  The systemic issue as I understand it seems to be the rather antiquated billing system which means that in aggregate, the numbers are right.  But then because we're operating worldwide and because Iraq is so unique in any event, they sometimes have had some difficulty reconciling some of the labor rates with the places where the labor charges were incurred.  So that, in aggregate, according to what the auditors tell me, we're okay.  But then when you slice out the different portions of it, you get some questions.  That, by the way, as I understand it, also was part of the reason why they had this overpricing on the dining hall bid.  It wasn't some kind of deliberate, nefarious thing.  It was simply part of that, some kind of labor rate.  No, in that case actually it was a subcontractor miscalculation which --


            Q:  Gouging and all the --


            Zakheim:  I think gouging and all that is really beside the point, and in fact, even with this oil issue, as you know it has to do more with the subcontractor than anything else. It doesn't look like KBR made any money particularly out of it.  The way it seems to look is if they can't recover their money and if the auditors conclude that they were overpaid -- and that has not been concluded yet, I mean, I have to underscore this.  Until an audit report is final, it's not final.  There is a due process here which is terribly important. They go back to the company, they look at what the company's done, they look at the company's explanations, and then they make a determination.   I used to be a contractor.  These guys on the one hand are all over you all the time, but on the other hand, they're very, very fair. 


            Q:  Complete your sentence.  You said if they can't recover.


            Zakheim:  If they cannot recover and if the auditors determine that there was X dollars of overpricing, then it's the company that's going to be out money.  It's not the taxpayer.


            Q:  You mentioned that PCPs were based on experiences in Iraq.


            Zakheim:  They might have been.


            Q:  I was going to ask you if there was anything particularly striking that was triggering --


            Zakheim:  I think that in general, I can say that there is a clear concern on the part of the department to deal with the active/reserve mix.  You've heard about that.  That clearly was highlighted by what's going on in Iraq.  There's been talk on Capitol Hill of end strength increases.  The Secretary believes, and the Chief of Staff of the Army, that there are a lot of other ways to look at this problem before you actually have to deal with end strength increases.


            Just to give you one example, the Secretary, I believe, testified that we thought we could convert 10,000 or so military slots to some number up to 10,000, maybe less, of civilians.  Well, obviously, if you can free up 10,000 military people, and this was in '04, as I recall. If you can free up 10,000 military people for things other than what they're doing now because civilians could do them, or some number of civilians could do them, not necessarily 10,000, then all of a sudden, you have relieved some of these end strength pressures.  It's no longer the same kind of issue.


            So, if you do that, if you start providing some of the capabilities that now reside almost exclusively in the reserves -- civil affairs or military police -- and you have an active capability.  Again, you're relieving some of the pressures in this case on the reserves, which is ancillary to the end strength issue but connected to it.


            So, clearly, that's something that's come up out of the Iraq experience.  Then there were other things that really were reinforcing the importance of UAVs, the importance of what we call bandwidth.  Those programs, it's not so much that you're making changes but that you're reinforcing the arguments of those who have been pushing those programs.  And transformation generally, I think, you'll see in this budget that we're very much on our transformation track that we laid out last year.  Again, because of Iraq.


            Q:  Is that why OSD is raising the priority of like JUCAVs and space-based radar, and the expense of E-10s and possibly F-22s and JSF?


            Zakheim:  You know I'm not going to talk specifics like that, so I'll leave it at the question mark.


            Q:  Tom Shanker, then Pam, then Jim Wolf.


            Q:  Can you clarify [inaudible] project?  [Inaudible].  The broader question, there was such a big [inaudible] reconstruction money, [inaudible] hasn't been able to accept any of it [inaudible].  What's going on?


            Zakheim:  Well, obviously the best person to answer that is probably Admiral Nash himself or Ruben Jeffrey over at CPA. I think it's a matter of structuring the contract.  There is a bridging contract, as I understand it, that AID anticipates letting in the next week or so, so that, in fact, there will not be a gap in terms of what services and undertaking CPA can provide.


            These are very, very complex issues.  There are a bunch of contracts that are being contemplated for a host of different services.  You also have an environment that's changing.  I believe that when the overall plan was formulated, at the time it was seen as something well in excess of a year, maybe a two-year plan.  Now you have a situation where sovereignty is going to be transferred at the end of June.  One of the major questions is how does that affect the pace and the priorities?  I think they're doing the responsible thing.


            Think of it the other way; it's like counter-history.  Suppose we went ahead, or they went ahead, and let contracts on the initial assumption that this was a two-year effort?  What would you folks be asking me this morning?  You'd say, “How could you possibly have been doing that?  We're now about to transfer sovereignty in six months.  Surely some priority would have changed.”  And you'd be absolutely right to ask that question.  We just asked it first.


            Q:  At the bidders conference [today] they talked about that it was going to be a three-year [inaudible] what you just said?


            Zakheim:  No, not at all.  Yes, they knew.


            Q:  [Inaudible]


            Zakheim:  Well no, but you're implying that what I'm saying is kind of beside the point.  It isn't.  Yes, they knew.  And I didn't recall it was three years, but maybe it was, I won't challenge you on that because I don't recall.  I thought it was two years.  But that doesn't mean there will be some changes.  And you will have that bridging contract.  And I do believe the way this whole thing is being looked at is colored by that.


            Now, is it colored by that in every detail?  Will everything change?  Of course everything's not going to change.  But to argue that there will be no changes I think probably isn't accurate.  Or at least they have to validate there will be no changes.


            Q:  What is the cost of Army reconstitution and [inaudible]?  Is it going to be part of the '05 budget?  And can you talk a little bit about how that $63 billion in the supplemental is going to be spent?


            Q:  That's a second question --


            Zakheim:  It's kind of connected.  I'll let her off the hook.


            We had money in the supplemental for reconstitution, as you recall.  So, we're going to be spending that.  Which really is kind of the answer to your second question.  If you look at the sup, essentially it was operations driven and personnel driven.  Those are the two major accounts - military personnel and operations and maintenance.  That's going to be spent out over '04.  One of the questions I was asked I think before the House Budget Committee was whether we would come in with a supplemental in '04 for '05.  I said no.


            This '04 supplemental is it for '04.  And beyond that, we're nowhere near that yet.  In other words, will there be an '05 supplemental?  I don't know at this stage.  If we have forces in Iraq, I think it's safe to say there will be some request, but when it comes, my understanding is we're certainly not asking for that in '04.


            Q:  Dr. Zakheim?  You noted that you're waiting to hear from the IG about the Boeing tankers.


            Zakheim:  Yeah.


            Q:  But Secretary Roche has now asked the IG to expand its investigation into all the other contracts that Boeing was awarded under Darleen Druyun’s watch.


            Zakheim:  Right.


            Q:  So, I wonder if you think that the Boeing matter – or the tanker matter, that is, should be cut off and that that should be dealt with on its own merits, or whether you think that you prefer to wait until the IG gets back on the larger question?


            Zakheim:  I think it's really up to Joe Schmitts.  He'll decide how he wants to proceed.  As I said earlier, it doesn't make much budget sense to put dollars in for a program that is under investigation.  That's what it is.  That's the tanker one.  Beyond that, I think we're dealing with a rather different circumstance in terms of programs, but in terms of breaking something out from the IG, it's up to the IG to decide how he wishes to proceed.  It's not up to me.


            Q:  Are you concerned that the price may rise and that the production line may have to be shut down if you're not able to move quickly enough to get the program --


            Zakheim:  I think once something goes to the IG, that's paramount.  The IG has to do his work and the staff have to do their work at their pace to their satisfaction.  I don't think anything should impinge on that.


            Q:  Finally, what about handing over the documents that the Congress is seeking on the internal back and forth in the department?


            Zakheim:  I think that's an issue that gets resolved between the people above my pay grade and the General Counsel.


            Q:  Otto, then John Donovan.


            Q:  The Secretary keeps talking about all these thousands of jobs, various [inaudible] somehow he's shifted [inaudible] military can be freed.  Go into the cost analysis --


            Zakheim:  No.  They would not be free.


            Q:  You have to pay them?


            Zakheim:  Absolutely.


            Q:  Okay.  How cost effective -- How much --


            Zakheim:  It depends.


            Q:  -- and what's the difference between the military and the civilian [inaudible]?


            Zakheim:  You're absolutely right.  This is not a cost-free drill, by definition.  If you're taking a military person, say, out of DFAS, the Finance and Accounting Service that works under my office, you have two questions you can ask.  One is, can a civilian already on the DFAS staff take over the work, or can several civilians cover the work that this one military individual is doing?  If the answer is yes, you may not need to hire anybody.  If the answer is no, you've got to go out and hire somebody.


            Next question.  Are you going to hire somebody at the same civilian equivalent rank of the military person who left?  The answer may be yes, it may be no.  It depends, again.


            Once you've done that, you now have a bill for that individual.  Again, it may be higher or lower.  It's a function of rank on both sides, civilian and military.  Now you have to aggregate all those up.  That's why I was very careful when I answered the question originally not to say that we create 10,000 new military billets, in effect, or move 10,000 military people from civilian-type jobs to shooter-type jobs, as it were, that we'll necessarily replace them with 10,000 civilians.  I don't know that.  Nor do I know whether there will be an equivalence in rank.


            Therefore, in terms of the larger question as to whether civilian pay is equivalent to military pay, we know that in aggregate the military is still somewhat behind.  That's why every year we deal with this ECP-Plus, or at least Congress has been giving us the ECP-Plus, some percentage or, at a minimum, the ECP equivalent.  That is because what you're trying to do is to close the gap.  But in this particular instance, it's a function not of general military versus civilian comparisons, it's a function of specific jobs and whether the military person who was functioning in a job that will now be civilianized as you free up the military person, is of an equal or higher rank than the civilian that might be hired.  So, I don't know what the aggregate cost will be.  It's going to vary by service.  It's going to vary by job.  It's going to vary by timing.


            But will there be a cost?  Yes.  Will the cost be in the millions?  Yes.  Will the cost be in the tens of millions?  Absolutely.


            Q:  A lot of these military functions are jobs that people locate into when [inaudible].


            Zakheim:  Right.


            Q:  If you take those jobs away, what do you do to the ship or the ship-shore --


            Zakheim:  That's a fair question.  The services don't seem terribly exercised about it and I expect the reason they're not - and this is my take on them, so you really need to speak to them - is that the whole nature of tooth and tail is really changing fundamentally.  If you have a military person operating a UAV that is operating in Iraq and the military person is stateside, which we can do now, is that tooth or is it tail?  I don't know any more.  What I do know is that the military person is sitting stateside and is not on deployment.


            So, the nature, because of the technological change in the way we're operating, and because of this increasing bandwidth, which allows for these kinds of activities, the nature of front office/back office has changed and the nature of rotations have changed, which means that instead of having a military person come in and act in a clerical role in DFAS, that military person could just as well be operating a UAV.


            Q:  John Donnelly then John Turpac.


            Q:  It's a big year coming up [inaudible] planned deployments [inaudible].  Are they giving you more money in '05 than the $9 billion roughly that they got this fiscal year?  And how are they doing at controlling their costs?  Are they doing particularly well, are they doing particularly poorly?


            Zakheim:  You know, they've got a series of level of effort programs going on across the board.  I haven't heard much in the way of problems with cost control, nor have I heard that GAO has been identifying problems in the way of cost control.  At least I haven't heard that.  It doesn't mean there's nothing going on or there's nothing going on at GAO, but you're asking me and I haven't heard.


            In terms of the budget itself, obviously when you have level of effort kinds of research, you can always put more money in and General Kadish would have good ways to put the money in.  As usual, I know it's always difficult to understand, but yeah, even with a budget that's in the vicinity of $400 billion -- where were we last year - about $380? -- so we're in that ballpark.  We still have constraints.  And General Kadish will not get everything he wants.  Nobody gets everything they want.  He seems to be managing this program quite well.  The best evidence of that is how little debate there has been this year about the program and especially about its management.  I think he's widely recognized to be maybe the best manager the program's ever had.  He seems to have everyone's confidence from the top down in the Administration, and seems to inspire confidence on Capitol Hill.


            So, I don't see that he will get any less money than he got last year.  I can see how he could make a case for more money, and we still have to evaluate whether we're in a position to help him out more than he's already getting.


            Q:  You're sort of late in the budget process.  Are you recommending that they get more than $9 billion?


            Zakheim:  We're looking at his request as we look at every other, and yes, we're fairly late in the budget process, but until it's over, it's not over.


            Q:  I wanted to ask you about F-22, and maybe do a post mortem on the Vice President's idea [inaudible] Air Force buy as many airplanes as they could for the dollars saved [inaudible].  Is that your personal [inaudible]?  Or is [inaudible]?


            Zakheim:  I don't think it was wishful thinking.  I think it made a lot of sense in the programmatic and budgetary viewpoint.  It is not the way the Congress tends to look at programs, there's no question about it.  Congress likes to identify a certain number of planes or ships or tanks or whatever it might be, and so you buy that number.  But from a managerial point of view, Roche made a lot of sense.


            We're looking at how we do it this year, but certainly there was a lot of merit to what he had proposed and what we supported.  So I wouldn't call it a post mortem.  At least not in the true Latin sense.


            Q:  Well, [inaudible] the idea was DOA on the Hill.


            Zakheim:  Well, you know something?  There have been a lot of ideas that have been DOA on the Hill and then every once in awhile they turn up again.  You know how it is.  I worked on the Hill for six years.  There are some things that the Hill pushes that the Administration doesn't want; and the Hill proves ultimately correct.  A good example of that is VSTAL, which for years was resisted by the Administration and pushed by the Hill. And there are some things that the Administration pushes and the Hill tends to have difficultly with, or parts of the Hill, and the Administration proves to be right and maybe the ABM Treaty is a good case for that.  It was very difficult for Hill opponents to argue against it when Mr. Putin was ready to live with it.  That is, walking away from the treaty.


            So, that's what our government's all about.  The separation of powers also means you're going to have separation of opinions.


            Q:  So do you think this [inaudible] again in a different way?


            Zakheim:  It's like everything else.  We're looking at a host of different things and come back to me around the end of January.


            Q:  George and --


            Q:  Given everything else on your plate, Afghanistan and transforming the Army and so forth and so on, do you have any qualms personally that you're taking the Pentagon to the poorhouse through a bunch of Cadillacs?  I'm looking at this latest [inaudible].  You've got $258 million a copy for the F-22; $105 million a copy for the D-22; $59 million for the Army's Comanche helicopter, even though they're shooting down what we've got over there with primitive weapons.  Are you having any second thoughts, reviews?  Hey, we've got to cut some money here?  These damn things are bankrupting us.


            Zakheim:  First of all, as you know very well, we did have a number of cuts.  Crusader didn't exactly wind up being an easy cut.  We had difficulties on the Hill and we did prevail and worked hard to make that happen.  The Army cut at least, I think, 18 programs last year.  We certainly are not saying that nothing will ever be cut again, because that's not so.  You and I have been in this business for a long time and you know that there are things that I recommended cutting years ago that --


            Q:  Yes, I remember some of your recommendations.  They don't quite square with your performance.   [Laughter]


            Zakheim:  But you know, on the other hand, I think some of the work that, as you remember that I did I think has already been overtaken by events as well in the following sense.  One of the studies we used to do, almost on a regular basis, was look at real cost growth in aircraft.  And we found that it was quite amazing that, regardless of how we could microminiaturize, aircraft costs still seemed to correlate with growth in aircraft weight.  It shouldn't have, but it did.


            That is not what has changed those cost growth curves, because by now Norm Augustine's prediction should have been pretty close to correct.  We should have about three aircraft in the Army and a couple more in the Navy and a couple more in the Air Force, a baker's dozen of aircraft throughout our military.  Of course, that hasn't happened.


            Why hasn't it happened?  Partly because there are other ways of dealing with cost concerns.  Partly also because you're off the curve on some things.  UAVs were never on that curve.  To the extent that UAVs are picking up some of the slack, not all of the slack, not even most of the slack, clearly some of the slack for manned aircraft, that changes things.  We're doing some things in space that we used to do with manned aircraft before.


            Communications generally has allowed us to leverage the aircraft we have in a different way.  Ten years ago -- five years ago -- who would have thought that the Navy and Marine Corps would essentially merge their aircraft?  And they have.  And it didn't get as many headlines as perhaps it should have.  It was a major, significant event, because as you recall, the Marine Corps said after Guadalcanal, “We're never going to rely on the Navy again.”  And we've moved full circle.  So, the ability to leverage and disseminate information has allowed us to completely reconfigure the way we think about and the way we field our tactical aircraft.


            I guess what I'm saying is, it's not that we're not driving Cadillacs, it's that we're driving Cadillacs in places where only a Cadillac can go.  And second of all, we can achieve as much with one Cadillac as we may have achieved with a half a dozen some years back. 


            Again, if you look at both Iraq and Afghanistan, which were fought very very differently, the one common denominator was that we leveraged relatively few resources.  The criticism that we constantly have been getting from certain circles is not that we had too much in Iraq, but that we had too little.  So, clearly, we were able to win a war with what is now called too little.  That tells me that -- I don't happen to buy the critics' argument that it was too little, but what it does tell me is that we have become really very, very good at leveraging the resources we've got thanks to new ways of training people, thanks to communications, and quite frankly, thanks to the upgrade of the weapons.


            Years ago, it was always a question of trading off weapons versus platforms.  I think in Iraq we’ve demonstrated that we got a lot more kills -- we were looking at kills per sortie instead of sorties per kill.  That's a big change.


            Q:  Are you saying that it's business as usual for those three programs?


            Zakheim:  Business is never as usual.  I don't think we'd be doing our job if business was usual.


            Q:  You're [inaudible]?


            Zakheim:  I haven't told you what I'm going to do this year.


            Q:  Eric, Tom?


            Zakheim:  Anyway, it's not just me.  It’s the department.


            Q:  [Inaudible]


            Zakheim:  Why don't we just say Part A and Part B -- [Laughter]


            Q:  -- Halliburton answer.


            Zakheim:  Sure.


            Q:  The French came in [inaudible]. 


            Zakheim:  I put it down to that.  I put it down also to the fact that there's clearly been some disconnect between Baghdad and Houston.  But what I have seen so far, what the DCAA leadership, Bill Reed and Mike Thibault have told me, I have no basis whatsoever to see anything nefarious.  That's correct.


            Q:  What I want you to do is, corporate America's littered with examples [inaudible] antiquated [inaudible] the method by which nefarious activities [inaudible].  So how come --


            Zakheim:  How can I say it's not nefarious?  First of all, there's a difference between antiquated and byzantine.  There's a huge difference.  [Laughter]


            Q:  [Inaudible]


            Zakheim:  No. The reason I say there's a difference is that if you have an antiquated system, that simply means that you are slower and prone to mistakes.  In a byzantine system, that means you could be using the most modern technology but you're creating something that's deliberately deceptive.  Okay?  So it's a question of, is it premeditated or not?


            Secondly, if KBR were Byzantine, there would be no reason to update their systems, which they're trying to do and which they hope to do as I said in the next month, couple of months.  Because even if they updated the systems, if they were byzantine it wouldn't make a difference.  They'd be actually better at concealment.


            So, from what our DCAA people see, the issue is not one of concealment; and therefore, as they update, there will be much more visibility and more important to them, much more of an ability to reconcile labor costs with the various charges.


            Again, I have to reemphasize that DCAA did a study in 2002.  They did an audit.  They made a host of recommendations to KBR and there's basically just one left, which is this one.


            Q:  [Inaudible]?


            Zakheim:  Well, the Pentagon is pretty strict, actually, about this, and it's not at all clear to me that when you already are barred from dealing with -- at our level -- when you're barred from dealing with the department for a year and then you can't do business with the department on any issue you've worked on for two years, that is pretty strict.


            One of the difficulties that increasing strictness raises is how do you get good people?  Unless you're going to take people who have absolutely no knowledge of the defense business and put them in charge of all the top defense jobs, at which case you'll all be writing articles about the bunch of ignoramuses running the Defense Department.  If you don't want to have that situation, then you're going to be taking people with expertise.


            Once you're taking people with expertise the next question is, do they have something to go back to?  If they do not, then you're only going to get two kinds of people.   Fabulously wealthy people or people who are ready to retire.  You will not get people who are on the way up, who are comers, in effect, because they will say, “If I go to the Department of Defense, it's going to wreck my career.”  As it is, we don't exactly get the equivalent pay or benefits or lifestyle of people with similar kinds of responsibility.  We rarely see our families.  We rarely take vacations.  We do it because we think it's important and I think that virtually everybody I know that's in a job like this one and has stayed in it for more than a year or two recognizes that he or she is sacrificing for their country.  So, to add restrictions because something went wrong with one individual on top of the restrictions that already exist and that are seen as onerous by many, many people who decide not to go in, I think it's going in the wrong direction.


            Q:  Tom, --


            Q:  One of the questions [inaudible] in October was whether the '05 budget [inaudible] war on terrorism.  Have you made a decision on that?  Or will those costs be covered by [inaudible]?


            Zakheim:  Obviously, we haven't finalized anything.  I can just give you where I'm coming from.  My opinion is just one of many on this.


            My belief is that it is still premature - not only for Iraq, but even for Afghanistan - to build those costs in.  We waited about three years, as I recall, before we did this with the Balkans.  We came into Afghanistan in '92, late '91, '92 [sic].  So maybe next year.  Maybe '06 budget would be the right time.  That's my personal view.  I think it's premature for Afghanistan, but I think it's certainly premature for Iraq.


            Q:  Sandra, you're next.


            Q:  [Inaudible] the services to shift [inaudible] O&M dollars to acquisition [inaudible]?  I heard some talk about [inaudible].  [Inaudible]?


            Zakheim:  I'm not aware of any such direction.  I think one of the sources of pride for us over the last couple of years is the fact that we've been able to kind of fence out, build some kind of Chinese wall between procurement and acquisition on the one hand and O&M on the other.  It used to be that the O&M accounts were, I wouldn't say deliberately underfunded, but systematically underfunded, and then money would flow out of the acquisition account to fund O&M.  We were pretty good last year about fully funding flying hours and steaming hours and tank miles.  I think we're going to be good this year.  I think we've set a pretty high standard and we've met it.


            At the same time, procurement is up to something over $70 billion, which is considerably higher.  Where was it about four years ago, $46 billion give or take in 2000?  So, we've seen a significant jump in procurement without impacting O&M.  Impact is not English.  Without affecting O&M, and vice versa.  I'm not aware of any decision to raid O&M to pay for procurement.


            Q:  Not necessarily raid, but give them more O&M money [inaudible] costs [inaudible].


            Zakheim:  Well, as we go through the budget, we look at what their O&M requirements are.  We'll behave judiciously.  But again, I'm not going to get into details as to where we are today.


            Q:  Jim Mann.


            Q:  [Inaudible].  I was wondering how does [inaudible] to the Europeans, and is there any chance, depending on the outcome of those talks, the criteria for [inaudible]?


            Zakheim:  I think Scott McClellan, when he addressed this question - I guess it was last week, made it pretty clear that the door was not slammed shut on anybody.  There really seems to have been…let me tell you how we looked at it.  We saw the situation where if everything went through AID, the law basically said that it had to be American primes.  We knew everything was not going through AID.  Then the question was, do you want to apply the same restrictions outside, for contracts outside AID as for those that AID was administering?  We could have had a decent argument to say yeah, leave it to U.S. primes.  We could have easily said it's U.S. taxpayer money, give it to U.S. primes.


            The decision was made that first, obviously, if you are rebuilding Iraq, you ought to give Iraqi primes a chance to bid.  Then the decision was made, well, if other young men and women were dying for the coalition, not just American young men and women, or being injured, then their countries ought to have a chance to bid as primes.  Then the question was, what about those who supported the coalition, took some kind of political risk in doing so - because at one point, as I recall, being in support of the coalition was not exactly a political cakewalk - so we included those.


            So, what it was was not a specific contraction, but actually a rather large expansion.  Then the White House, Scott McClellan said, even then the door is not fully closed.  How countries will create circumstances whereby they could become primes, I haven't formulated my own ideas, much less really heard what other people have to say.  There will be a decision made on that.  But I think it is significant that leaving aside the fact that countries can already bid on the trust fund money, they can obviously, if they give money bilaterally, their countries will be primes if they want them to be.  Not only that, the list is so long of those who are potential primes, that the countries that are not primes have a lot more scope to become subcontractors.  People haven't really thought about that.


            You take, I don't know, a French company or a German company – because they're not on the list and everybody's talking about France and Germany.  Well, even if they don't sub for an American company or a British company, there are 62 other countries that have primes they can sub to.  So, the scope for those countries that are not on the list has actually expanded vastly simply because of the countries that are.


            So I don't see this as some great disaster to begin with.  Secondly, as I said, the door is open; but third in terms of the criteria, I don't think we're there yet.


            Q:  It's not another reason for delaying [inaudible]? 


            Zakheim:  No, not necessarily, because I don't think that -- I think there will be further opportunities.


            Q:  Mark Salinger --


            Q:  You talked a little bit about ballistic missile defense and there have been some experts who say that the threat for cruise missiles is growing and a threat particularly if they fall into the hands of terrorists who [inaudible].  Do you see any effort in the '05 budget to maybe give that area more attention?  Maybe do something, put it on the equivalent of ballistic missile defense or have small agency [inaudible]?


            Zakheim:  I won't tell you what's in the budget, but I can tell you what I don't think we'll be doing, since we're not doing it.  I don't see a cruise missile defense agency this year, nor do I see a $9 billion, $7 billion, $8 billion cruise missile program this year.


            I think, in part, it's because of the exact example you just gave.  It's quite one thing for terrorists to get hold of a missile launcher, hijack a launcher and fire it or conspire with some terrorist country to get hold of a launcher and fire it.  It's also quite possible for one of those negative countries to fire those, some of the unfriendly countries to fire missiles.  As they have.  We know about North Korea's launches that got Japanese attention a couple of years ago.


            To seize a ship, to configure it with a cruise missile, to target the missile, to put in the right mapping information, to hit the United States, that's a push.  Is it feasible?  I'm sure Tom Clancy could convince you it was.  But it's not exactly there just yet.  And so, clearly, there's a problem.  I'm not calling it a challenge, I'm calling it a problem.  We are cognizant of the problem.  We are doing some things about it.  But I just don't see us creating a cruise missile defense agency just yet.


            Q:  Greg and then --


            Q:  You were suggesting that the augmentee ship this summer might affect the contracting --


            Zakheim:  It might, yes.  It has to be accounted for.


            Q:  Does that suggest that the $18 billion might be more front-loaded and you might have to spend sooner and faster than you were planning?


            Zakheim:  You could argue both ways.  One could argue that you want to front load it precisely for the reasons you just gave.  You could argue that you want to back load it because you don't want to spend money on projects that will turn out to be less relevant to a new, sovereign Iraq.  You could argue that you don't want to change it all because regardless of who's in charge the programs have a certain dynamic and logic of their own.  You could go any of those three ways.  All I was saying was that you need to go through the process of considering that factor, to either confirm your current plan or modify it in some way.  That's all.


            Q:  Is DoD the one to make that decision or --


            Zakheim:  We're not the only ones.  I mean this is, clearly AID is involved, CPA obviously has the lead.  CPA is the one that really has to have the lead in this.  They will be making the key recommendation.  It is simply a factor that cannot be ignored.  That does not mean nor did I wish it to mean, I didn't want to imply that the original plan necessarily must change.  All I'm saying is that you need to factor it in.  And if you're not going to change the plan you need to justify the absence of the change on the basis of having reviewed this new factor.


            Q:  In the last two weeks the Navy [inaudible] talked about something called effects-based tradeoffs.  What I understand of that is sort of one [inaudible] and the other service doesn't have to [inaudible].  How is that playing out?


            Zakheim:  Well, there clearly is a play-out.  And we've already seen this in the past, by the way.  There are no more Air Force Wild Weasels.  Okay?  The Navy uses the A-6s.  That's effects-based.  The latest buzz term.


            The basic principle is avoid duplication when you can.  That's plain English.


            Again, I think it's an indication of, it really goes back I think to Otto's question. It's an indication of how things have changed.  Or maybe George's.  I forget now.  When you asked me about the growth, the cost growth and how could you keep --  Again, this is another instance where you are now leveraging between or among the services in a way that didn't happen in the past.  And the fact that you get service chiefs even in their own Pentagonese language essentially saying look, we're not going to duplicate, it's a terribly important development and probably shows you the triumph of jointness.


            Q:  We're out of time.  Thank you very much.


            Zakheim:  Thank you.

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