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Defense Acquisition: Decision Nears on Medium Extended Air Defense System

(Letter Report, 06/09/98, GAO/NSIAD-98-145).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) Medium Extended Air Defense System (MEADS) program,
focusing on the: (1) unique capabilities that MEADS will add to U.S. air
and missile defense; (2) development cost of MEADS and its affordability
within the expected ballistic missile defense budget; and (3) impact
that international development will have on MEADS cost and capability.

GAO noted that: (1) if the Army is successful in meeting established
requirements, MEADS will have capabilities that no other planned theater
missile defense system will possess; (2) the system should defeat a wide
range of threats arriving from any direction, be transportable within
theater by small transport aircraft, be mobile enough to travel cross
country or over unimproved roads with the maneuver force, and be
sufficiently lethal to negate weapons of mass destruction; (3) acquiring
MEADS will affect higher priority missile programs or the infrastructure
that supports those programs unless DOD increases the Ballistic Missile
Defense Organization's (BMDO) budget allocation; (4) BMDO forecasted in
March 1998 that it needed about $1.8 billion for fiscal year (FY) 1999
though FY 2007 to pay its portion of MEADS' estimated $3.6-billion
design and development cost; (5) in addition, BMDO will need another
$10.1 billion for FY 2005 through FY 2016 to acquire eight battalions of
equipment; (6) the European partners are expected to contribute about
one-half of the design and development funds; (7) thus, for FY 1999
through FY 2005--the years for which BMDO is now budgeting--the U.S.
cost could be reduced to about $1.4 billion; (8) BMDO has no funds
budgeted for MEADS after FY 1999 and has been reviewing various program
options to find a less expensive acquisition strategy; (9) DOD officials
believe that a joint cooperative effort with U.S. allies is the best
means of acquiring MEADS because it reduces cost, improves political
ties, and builds a more effective coalition force; (10) however, DOD did
not fully assess funding and technology transfer issues before
initiating the international program and may not be able to achieve
these benefits; (11) U.S. and European program participants said that
the United States may be viewed as an unreliable partner if it cannot
fund its portion of the program, which could threaten the U.S.' ability
to participate in future collaborative efforts; (12) even if the United
States remains in the program, it may have difficulty developing a truly
interoperable weapon without sharing valuable technology; (13) the
international structure may also prevent contractors from pursuing the
most cost-effective system solution; (14) contractors are finding it
difficult to use existing technology developed for other systems because
the process for transferring U.S. information to foreign countries is
slow and the United States is reluctant to transfer some critical
technology; and (15) difficulties might have been avoided if security
experts had been included in negotiations of the international
agreement.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-98-145
     TITLE:  Defense Acquisition: Decision Nears on Medium Extended Air 
             Defense System
      DATE:  06/09/98
   SUBJECT:  Advanced weapons systems
             Military coproduction agreements
             Defense budgets
             Cost analysis
             Defense capabilities
             Defense cost control
             Technology transfer
             Air defense systems
             International cooperation
IDENTIFIER:  THAADS
             SDI Theater High Altitude Area Defense System
             C-130 Aircraft
             Medium Extended-Range Air Defense System
             HAWK Missile
             Patriot PAC-3
             Navy Theater Ballistic Missile Defense Program
             Germany
             Italy
             France
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Military Research and
Development Committee on National Security, House of Representatives

June 1998

DEFENSE ACQUISITION - DECISION
NEARS ON MEDIUM EXTENDED AIR
DEFENSE SYSTEM

GAO/NSIAD-98-145

Defense Acquisition

(707241)


Abbreviations
=============================================================== ABBREV

  BMDO - Ballistic Missile Defense Organization
  DOD - Department of Defense
  MEADS - Medium Extended Air Defense System
  PAC-3 - Patriot Advanced Capability 3
  SAM - Surface-to-Air Missile
  THAAD - Theater High Altitude Area Defense

Letter
=============================================================== LETTER


B-278253

June 9, 1998

The Honorable Curt Weldon
Chairman, Subcommittee on Military
 Research and Development
Committee on National Security
House of Representatives

Dear Mr.  Chairman: 

The Department of Defense (DOD) entered into an international
agreement with Germany and Italy to acquire the Medium Extended Air
Defense System (MEADS), a system that would defend maneuver force
assets from theater ballistic and cruise missiles and various manned
and unmanned aircraft.  As you requested, we reviewed the MEADS
program.  Specifically, this report (1) discusses the unique
capabilities that MEADS will add to U.S.  air and missile defense,
(2) evaluates the development cost of MEADS and its affordability
within the expected ballistic missile defense budget, and (3)
assesses the impact that international development will have on MEADS
cost and capability. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In 1989, the Army recognized that it needed to replace some of its
aging air defense systems, including the HAWK missile.  The Army
wanted the HAWK's replacement to be rapidly deployable, capable
against weapons of mass destruction, and able to defeat a wide range
of targets.  The Under Secretary of Defense for Acquisition and
Technology approved concept exploration for a new surface-to-air
missile but stated that the Army needed a draft agreement for allied
participation before system development would be approved. 

The Army was successful in finding U.S.  allies that were interested
in jointly acquiring a new air and missile defense system.  In
February 1994, the United States officially invited Germany to
participate in the system's development and production.  Because of
Germany's desire to make the program a U.S.-European cooperative
initiative, the program was subsequently expanded to include France
and then Italy.  Representatives of the four countries signed a
multilateral statement of intent in February 1995 to collaborate in
the development of a system capable of meeting the requirements of
all four countries.  The effort became known as the MEADS program. 

Before DOD allows a military service to negotiate for the acquisition
of a weapon system in cooperation with another country, DOD generally
requires the program's sponsor to assess the likely impact of the
proposed program by developing a summary statement of intent.  The
statement should include information on the benefits of an
international program to the United States, potential industrial base
impacts, funding availability and requirements, information security
issues, and the technologies that will likely be involved in the
program.  Various officials within the Office of the Secretary of
Defense are responsible for reviewing the statement of intent and
recommending whether an international agreement should be negotiated. 

Because of budget problems, France dropped out of the MEADS program
before the memorandum of understanding was signed in May 1996.  The
other nations proceeded with the project definition and validation
phase.  The countries agreed that, during this phase, the U.S.  cost
share would be 60 percent; Germany, 25 percent; and Italy, 15
percent.  According to the memorandum of understanding, new
agreements would be negotiated before initiating other phases of the
program, cost share percentages could change, and any of the
countries could drop out of the program at the start of any new
program phase. 

MEADS, as envisioned by the Army, is part of the lower tier of a
two-tier umbrella of air and missile defense.  The Theater High
Altitude Area Defense (THAAD) and Navy Theater Wide systems are upper
tier systems that provide protection primarily against theater
ballistic missiles.  Existing and planned lower tier systems, such as
the Patriot Advanced Capability 3 (PAC-3) and Navy Area systems, will
engage shorter range theater ballistic missiles, fixed- and rotary
wing aircraft, unmanned aerial vehicles, and cruise missiles.  The
Ballistic Missile Defense Organization (BMDO) has responsibility for
the MEADS program. 

DOD believes the MEADS program represents a new and innovative
approach to the acquisition process.  If the program is successful,
DOD expects that MEADS will be a model for future collaborative
efforts because it addresses problem areas associated with past
transatlantic cooperative endeavors.  The program reflects the
mission needs of all countries, involves technologies from all
participants, and requires competition between two transatlantic
contractor teams.\1


--------------------
\1 Two transatlantic contractor teams are competing during project
definition and validation to develop a MEADS concept.  In December
1998, DOD will choose one contractor's concept for design and
development. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

If the Army is successful in meeting established requirements, MEADS
will have capabilities that no other planned theater missile defense
system will possess.  The system should defeat a wide range of
threats arriving from any direction, be transportable within theater
by small transport aircraft, be mobile enough to travel cross country
or over unimproved roads with the maneuver force, and be sufficiently
lethal to negate weapons of mass destruction. 

Acquiring MEADS will affect higher priority missile programs or the
infrastructure that supports those programs unless DOD increases
BMDO's budget allocation.  BMDO forecasted in March 1998 that it
needed about $1.8 billion for fiscal years 1999 through 2007 to pay
its portion of MEADS' estimated $3.6 billion design and development
cost.  In addition, BMDO will need another $10.1 billion for fiscal
years 2005 through 2016 to acquire eight battalions of equipment. 
The European partners are expected to contribute about one-half of
the design and development funds.  Thus, for fiscal years 2000
through 2005--the years for which BMDO is now budgeting--the U.S. 
cost could be reduced to about $1.4 billion.  BMDO has no funds
budgeted for MEADS after fiscal
year 1999 and has been reviewing various program options to find a
less expensive acquisition strategy. 

DOD officials believe that a joint cooperative effort with U.S. 
allies is the best means of acquiring MEADS because it reduces cost,
improves political ties, and builds a more effective coalition force. 
However, DOD did not fully assess funding and technology transfer
issues before initiating the international program and may not be
able to achieve these benefits.  U.S.  and European program
participants said that the United States may be viewed as an
unreliable partner if it cannot fund its portion of the program,
which could threaten the U.S.' ability to participate in future
collaborative efforts.  Even if the United States remains in the
program, it may have difficulty developing a truly interoperable
weapon without sharing valuable technology.  The international
structure may also prevent contractors from pursuing the most
cost-effective system solution.  Contractors are finding it difficult
to use existing technology developed for other systems because the
process for transferring U.S.  information to foreign countries is
slow and the United States is reluctant to transfer some critical
technology.  In addition, the execution of the MEADS program is more
difficult because it does not have secure communication systems or
program-specific security instructions.  These difficulties might
have been avoided if security experts had been included in
negotiations of the international agreement. 


   MEADS WILL ADD EXPANDED
   CAPABILITIES FOR AIR AND
   MISSILE DEFENSES
------------------------------------------------------------ Letter :3

MEADS is being designed to add capabilities to the battlefield that
currently fielded and planned air and missile defense systems do not
provide.  It will be more mobile than current systems, counter a
wider range of targets, and intercept incoming missiles from any
direction.  Because of its unique capabilities, warfighting commands
with theater ballistic missile defense missions support MEADS. 

The Army plans to use MEADS to protect important access points on the
battlefield, troop forward area assembly points, and maneuver force
assets (such as refueling points and stores of ammunition) that must
travel with troops as they move toward the enemy.  To move with the
maneuver force, MEADS must transition from defensive operations to a
traveling configuration and return to defensive operations quickly. 
Similar to the maneuver force, MEADS must also be able to travel over
unimproved roads and cross country.  In addition, the Army wants to
be able to move MEADS within theater aboard small transport aircraft,
such as the C-130.  Combatant commanders control the use of C-130s
and can use them to move MEADS as necessary. 

MEADS must be able to defend against a wide range of targets.  It
must counter short-range, high-velocity theater ballistic missiles
carrying conventional explosives or weapons of mass destruction.  The
system is also required to detect and destroy low- or high-altitude
cruise missiles launched from land, sea, or air platforms and
carrying various types of offensive weapons.  MEADS is required to
counter remotely piloted vehicles and unmanned aerial vehicles
carrying observation equipment or weapons and defend against slow,
low-flying rotary wing aircraft and maneuvering fixed-wing aircraft
employed in a variety of missions. 

MEADS is expected to be the only land-based theater missile defense
system designed to defend against targets approaching from any
direction.  The system will counter slow and low-flying cruise
missiles that take advantage of terrain features to mask their
approach and attack from virtually any direction. 


      EXISTING AND PLANNED SYSTEMS
      DO NOT MEET MEADS
      REQUIREMENTS
---------------------------------------------------------- Letter :3.1

No other existing or planned air and missile defense system meets all
of the MEADS requirements.  The Patriot system cannot keep pace with
the maneuver force because it takes too long to assemble and
disassemble for movement, and it cannot travel cross country.  Also,
Patriot was not designed to provide protection from all directions,
and will require more aircraft to reach a theater of operation
because of the system's size.  Even though the Army plans to use
large transport aircraft, such as the C-141, C-17, or C-5, to
transport both Patriot and MEADS to a conflict, MEADS requires fewer
aircraft.  For example, the Army will need 77 C-5 aircraft sorties to
transport 1 Patriot battalion but only 36 sorties to transport 1
MEADS battalion.  In addition, the Patriot can only be transported
within theaters of operation aboard the larger transport aircraft. 

The ability of other systems to meet MEADS requirements is also
limited.  The Navy Area system may not be capable of protecting the
maneuver force because its defended area will be limited by the
distance from which it must stand off shore and the range of its
interceptor.  The THAAD and Navy Theater Wide systems are being
designed to engage primarily medium-range ballistic missiles but
cannot defend against theater ballistic missiles launched from very
short ranges, aircraft, or low-altitude cruise missiles.  Table 1
shows the capabilities of existing and planned air and missile
defense systems in meeting MEADS requirements. 



                                     Table 1
                     
                      Capabilities of Other Air and Missile
                         Defense Systems in Meeting MEADS
                                   Requirements

             Transport    C-130        Move with
             into         transportab  maneuver     360-degree   Diverse target
             theater      le           force        protection   set
-----------  -----------  -----------  -----------  -----------  ---------------
Patriot      Somewhat     Not capable  Not capable  Not capable  Very capable
             capable\a

Navy area    Very         Not capable  Not capable  Very         Very capable
             capable                                capable

Navy         Very         Not capable  Not capable  Very         Not capable
theater      capable                                capable

THAAD        Somewhat     Not capable  Not capable  Not capable  Not capable
             capable \a
--------------------------------------------------------------------------------
\a Both Patriot and THAAD require significantly more aircraft than
MEADS for transport into a theater of operation. 

Combatant commanders whose forces are most vulnerable to theater
ballistic missile attacks identify MEADS as a priority system.  Each
year the Commander in Chief of each unified combatant command lists,
in order of importance, key program shortfalls that adversely affect
the capability of their forces to accomplish assigned duties.  All
commanders with a theater missile defense mission--the U.S.  Central,
European, and Pacific Command--believe that a shortfall exists in
their ability to perform this mission.  Each of these commanders
either lists MEADS as a system needed to correct the shortfall or,
according to command officials, considers MEADS a high priority.\2

A U.S.  Central Command official said that, although the Commander in
Chief considers MEADS a high priority, he does not want to acquire
that system at the expense of other theater missile systems.  The
official said that PAC-3, THAAD, and Navy Area systems are expected
to be fielded sooner than MEADS and that the Commander does not want
those systems delayed. 


--------------------
\2 U.S.  Pacific Command did not list MEADS as a system needed to
overcome the command's shortfall in theater missile defense. 
However, a command official said MEADS was absent from the list
because the Pacific Command did not understand the importance of
MEADS to U.S.  Forces Korea, a subordinate command in the area most
threatened by theater missiles.  The official said that the Pacific
Command's next shortfall list would indicate that the command
attaches a high priority to MEADS acquisition. 


   MEADS PRESENTS FUNDING DILEMMA
------------------------------------------------------------ Letter :4

BMDO will be unable to acquire MEADS without impacting higher
priority missile defense programs\3 unless DOD or the Army provide
additional funds.  BMDO's budget plan does not include funding for
MEADS after fiscal year 1999 because the organization's budget is
dedicated to missile systems that will be available sooner.  Over the
next 6 years, for which BMDO is currently budgeting, the organization
needs $1.4 billion to execute the planned MEADS program.  Because it
has had difficulty funding MEADS, BMDO is considering various program
options to find a less costly acquisition program. 


--------------------
\3 BMDO's funding strategy, as recommended by the Quadrennial Defense
Review, places the highest priority on lower tier missile defense
systems--Patriot PAC-3 and Navy Area--followed by upper tier
systems--THAAD and Navy Theater Wide. 


      ESTIMATE FORECASTS
      $3.6 BILLION DESIGN AND
      DEVELOPMENT COST
---------------------------------------------------------- Letter :4.1

In March 1998, BMDO developed, in cooperation with the Army, a cost
estimate for a MEADS system that would meet Army requirements. 
According to this estimate, the United States expects MEADS total
design and development cost to be about $3.6 billion.  The United
States expects to pay about one-half of this amount, or $1.8 billion. 
In addition, BMDO estimates that the United States needs
approximately $10.1 billion more to procure eight battalions of
system hardware. 

BMDO is interested in the MEADS' design and development cost because
it is developing budget plans for the years when many related
activities are scheduled.  During design and development, engineers
will work out the details of MEADS' design, perform engineering tasks
that are necessary to ensure the producibility of the developmental
system components, fabricate prototype equipment and software, and
test and evaluate the system and the principal items necessary for
its support.  In addition, the contractor will fabricate and install
equipment needed to produce hardware prototypes and develop training
services and equipment. 

BMDO expects the system radars to be the most costly system
components to design and develop.  Army engineers said that they
believe two separate radars--a surveillance and fire control
radar--will be required and that three prototypes of each radar are
needed for adequate test and evaluation.  The fire control radar will
be expensive because it contains thousands of transmit and receive
modules that send and receive messages with the missile and
simultaneously determine the target's location.  Engineers believe
the efficiency of existing transmit and receive modules must be
improved to meet the MEADS hit-to-kill requirement.  The surveillance
radar is expensive because, to fulfil MEADS' mission requirements, it
must accurately detect targets at long ranges.  Figure 1 shows the
percentage of design and development cost attributable to each of the
system's components. 

   Figure 1:  Estimated Cost to
   Design and Develop System
   Components

   (See figure in printed
   edition.)

Source:  Based on BMDO data. 


      EXISTING TECHNOLOGY EXPECTED
      TO REDUCE MEADS COST
---------------------------------------------------------- Letter :4.2

A BMDO official said that the March 1998 cost estimate was reduced
more than $400 million\4

because Army engineers believed that MEADS could benefit from some
technology developed and paid for by other missile programs.  In a
March 1997 cost estimate, BMDO recognized that existing technology
could benefit MEADS and this reduced MEADS cost by about $200
million.  However, contractor personnel believe that actual program
savings from technology leveraging could be more than $400 million. 

The MEADS program would realize the largest cost reductions if
existing radars or missiles could meet MEADS requirements.  The use
of existing components would eliminate design, prototype
manufacturing, and producibility engineering costs.  Army engineers
said that existing missiles, such as PAC-3, might be capable against
the theater ballistic missile threat that MEADS is expected to
counter.  However, the Patriot Project Office has not simulated
PAC-3's performance against MEADS entire ballistic missile threat and
cannot do so without additional funds.  In addition, the Army stated
that PAC-3 may have limitations against the long-term cruise missile
threat. 

Current existing radars do not meet MEADS requirements.  For example,
Army engineers said that the THAAD system ground-based radar cannot
provide protection from all directions and is much too large and
heavy for a mobile system.  The engineers also said that the Marine
Corps TSP 59 radar, being used with the Marine Corps HAWK, takes too
long to move and is much too heavy to be mobile. 


--------------------
\4 BMDO was unable to provide precise computations regarding the
deduction.  However, officials said they reduced MEADS design and
development cost about 10 to 15 percent to arrive at their current
estimated cost. 


      FUNDING MEADS WILL AFFECT
      OTHER PROGRAMS
---------------------------------------------------------- Letter :4.3

BMDO's cost estimate shows that, to acquire and field MEADS as
planned, it needs approximately $11.9 billion over the next 18 years. 
The funds are expected to pay for the U.S.  share of MEADS estimated
research and development cost and the procurement of eight battalions
of equipment.  BMDO needs about $1.4 billion between fiscal years
2000 and 2005 to develop a system that meets all of the Army's
requirements. 

BMDO has spent the last year reviewing program options that could
reduce MEADS cost.  However, as of April 1998, the agency had not
changed its acquisition strategy.  BMDO considered reducing MEADS
requirements so that an existing missile could be used in the system. 
In addition, BMDO considered extending MEADS development schedule,
delaying initial fielding of hardware, or relying on other radars to
detect targets for MEADS.  The organization also considered
developing and fielding the system in two stages or designing a
system that relies on a currently undeveloped tracking network to
detect and engage targets.  Finally, BMDO considered tasking
contractors to develop a system that meets critical requirements for
a limited amount of funds.  The Army's Deputy Program Executive
Officer for Air and Missile Defense said that, if contractor funds
are limited, some MEADS requirements might be eliminated to decrease
the cost of the new system.  However, the official did not know which
requirements might be eligible for elimination.  The official also
said that, if BMDO cannot fund the program as it is currently
planned, the Army favors either fielding MEADS in two stages or
limiting development funds.  MEADS partners are aware that the United
States is considering other options.  According to German and Italian
government officials, they are willing to discuss program changes. 
However, until the Army and BMDO agree on a specific option, DOD
cannot be sure its partners will find that option acceptable. 

BMDO cannot provide the $1.4 billion needed for fiscal years 2000
through 2005 unless DOD (1) increases BMDO's total obligational
authority; (2) stretches out development and production of programs,
such as PAC-3, THAAD, and Navy Area systems; or (3) drastically
reduces BMDO funding earmarked for targets, systems integration and
test, and management.  BMDO's Deputy for Program Operations said that
these program changes are undesirable because they increase program
cost and delay fielding of important assets.  Figure 2 shows that, if
BMDO included MEADS research and development funding in its planned
budget for fiscal years 1999 to 2003, the agency would exceed its
budget authority. 

   Figure 2:  BMDO Fiscal Years
   1999-2003 Research and
   Development Budget and
   Allocated Budget Authority

   (See figure in printed
   edition.)

Note:  NMD is National Missile Defense.  Other includes technology
support, acquisition program reserve, joint tactical missile defense,
family of systems, and small business innovative research. 

Source:  Our analysis of BMDO data. 


   JOINT ACQUISITION PRESENTS
   PROGRAM CHALLENGES
------------------------------------------------------------ Letter :5

The United States, Germany, and Italy are collaborating in the
development and production of MEADS because each needs an improved
air and missile defense system but cannot afford to acquire a system
by itself.  DOD also believes that international cooperation in
weapon systems acquisition can strengthen political ties, create a
more effective coalition force, and increase the self-sufficiency of
allied nations.  However, BMDO did not fully address funding or
technology transfer issues before initiating the international
program and may not be able to achieve these benefits.  In addition,
security problems that might have been avoided if security
specialists had been involved in negotiation of the international
agreement continue to hinder the program's execution. 

Officials in all three countries said that, given their current and
expected defense budgets, MEADS is affordable only if it is acquired
jointly.  Total design and development and production cost reductions
will depend on the acquisition strategy that BMDO and its partners
choose.  In addition to reducing the U.S.' cost to develop MEADS,
combining the production quantities of the three countries will lower
unit production costs and reduce the total U.S.  cost, according to
BMDO documents. 


      DOD DID NOT FULLY ASSESS ALL
      FUNDING ASPECTS OF
      INTERNATIONAL PROGRAM
---------------------------------------------------------- Letter :5.1

DOD generally requires the approval of a summary statement of intent
before the negotiations to acquire a weapon system in cooperation
with another country.  The DOD directive that established BMDO,
however, gives the organization the authority to negotiate agreements
with foreign governments and then obtain approval of those
agreements.  In implementing this authority, BMDO did not finalize
its summary statement of intent until after negotiations to establish
the international program had begun.  In addition, the assessment was
not sent to reviewers at the Office of the Secretary of Defense until
all negotiations were complete and agreement had been reached on the
$108 million, 27-month project definition and validation phase of the
MEADS program. 

The summary statement of intent that BMDO eventually prepared did not
fully address important issues that continue to plague the MEADS
program.  For example, although the multilateral statement of intent
shows that the partners intended to develop and produce MEADS
together, little attention was given to MEADS funding needs
subsequent to project definition and design.  The summary statement
of intent did not address long-term funding needs by fiscal year,
instead, it indicated that funding beyond fiscal year 1999 would be
derived from funds budgeted to develop an advanced theater missile
defense capability.  However, in February 1996--about the same time
that BMDO completed international agreement negotiations--a DOD
review of BMDO's mission reduced the organization's budget and
resulted in the deletion of advanced capability funds earmarked for
MEADS. 

Because BMDO did not fully assess the availability of funding for
MEADS future program phases, the U.S.  political ties with Germany
and Italy could be affected.  Some U.S.  and European officials
suggest that the United States may be viewed as an unreliable partner
if it is unable to fund MEADS.  The officials said that U.S. 
withdrawal from the development effort could affect its ability to
participate in future international programs. 


      U.S.  TECHNOLOGY TRANSFER
      RULES MAY HAMPER PURSUIT OF
      MOST COST-EFFECTIVE
      SOLUTIONS
---------------------------------------------------------- Letter :5.2

BMDO's summary statement of intent did not address technology
transfer issues that continue to trouble the MEADS program.  Although
the statement recognized that classified information developed for
other missile programs would be transferred to the MEADS program, it
did not address whether the programs that owned that information had
concerns about its release.  Also BMDO did not address the impact
that a decision to withhold critical information could have on the
execution of the program. 

The United States has established procedures for releasing sensitive
national security-related information to foreign governments and
companies.  These policies aim to preserve U.S.  military
technological advantages.  Control policies limit the transfer of
advanced design and manufacturing knowledge and information on system
characteristics that could contribute to the development of
countermeasures. 

Technology release policies present special challenges for the MEADS
program because it involves several sensitive technologies critical
to preserving the U.S.  military advantage.  For example, MEADS could
employ electronic counter countermeasures that offset jamming and
intentional interference, signal processing techniques to enhance
accuracy, and advanced surveillance techniques. 

The United States has been reluctant to release information about
these critical technologies into the program and slow in responding
to many release requests.  For example, release approvals have taken
as long as
259 days.  Some requests made at the start of the program are still
awaiting a decision because program offices have been reluctant to
release the information.  This reluctance, as well as the approval
time, reflect the rigorous release-consideration process.  Program
offices in each of the services that own particular technologies
perform a page-by-page review of the requested data to identify
releasable and nonreleasable data.  In some cases, the program
controlling the data will not directly benefit from its release and
will risk giving up data that could expose system vulnerabilities. 

These policies may limit the ability of contractors to leverage the
use of existing missile system technology and pursue the cheapest
technical solution.  MEADS contractors said that, when data is not
released on a timely basis, they are forced to explore alternative
technical approaches or propose development of a component or
subcomponent that may duplicate existing systems. 

In some cases, the United States has approved release of technology
into the program but restricted the information to U.S.  access only. 
This restriction has undermined the functioning of integrated teams
and efforts to strengthen ties among the participating countries. 
German and Italian defense officials and the European contractors
involved in the MEADS program said that, unless they can assess the
U.S.  technology that U.S.  contractors are using, they cannot be
sure that the technology is the best or the cheapest available.  The
European contractors also said that, if this technology must be
improved or adapted for MEADS use, they are asked to accept the U.S. 
estimate of the cost to perform these tasks. 

The reluctance to share technology may also make it difficult to
design and build a MEADS system that can exchange engagement data
with other battlefield systems.  For the international system to be
truly interoperable, DOD may have to provide information that it has
been reluctant to share.\5 If DOD officials decide that this
information is too sensitive to share with MEADS partners, the United
States may have to drop out of the program and develop MEADS alone or
modify its capability. 


--------------------
\5 The details of this information are classified and therefore
cannot be provided in this report. 


      OTHER SECURITY-RELATED
      PROBLEMS HINDER PROGRAM
      IMPLEMENTATION
---------------------------------------------------------- Letter :5.3

The international MEADS program has been plagued by two issues that
Army security officials believe could have been avoided if security
specialists had been involved in negotiation of the international
agreement.  First, the program does not have a secure communications
system.  The absence of secure telephone and facsimile lines has
hindered the program's execution.  Army and contractor officials said
that it takes up to 6 weeks to get classified information to MEADS
contractors in Europe.  Also, unsecured lines increase the
possibility that unauthorized parties can access classified
information. 

Second, the failure of the participants to agree to MEADS-specific
security instructions also increases the potential for unauthorized
use of MEADS data.  Pursuant to 22 U.S.C.  2753(a), no defense
article or service may be sold or leased to another country unless
the recipient agrees not to transfer title to, or possession of, the
goods or services to a third party.  However, Germany and the United
States disagree on the definition of a third party.  One of the
German contractors participating in the MEADS program employs a
British citizen and Germany wishes to give access to MEADS classified
data to this employee.  DOD security officials told us that they do
not believe that the German government could penalize the British
employee if MEADS data was not safeguarded. 

German and Italian contractor officials said that, with the formation
of the European Union, European citizens cross country boundaries
just as U.S.  citizens cross state borders.  The officials said that
if a contractor's ability to hire personnel is limited by the U.S. 
interpretation of a third party, the MEADS program may lose valuable
expertise. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

If MEADS is designed to meet established requirements, it will give
warfighters capabilities that are not present in any existing or
planned air and missile defense systems.  MEADS should be able to
engage a wide range of targets, be easily transported by small
transport aircraft, be capable of moving cross country and over
unimproved roads, and be sufficiently lethal to destroy both
conventional warheads and weapons of mass destruction.  Because of
these unique capabilities, war-fighting commands place a high
priority on the acquisition of MEADS. 

DOD believes that jointly developing and producing MEADS with U.S. 
allies will reduce the U.S.  investment in the weapon system and
strengthen political ties, creating a more effective coalition force
and increasing the allies' ability to defend themselves.  However,
DOD does not know whether it is willing to share information to
create a truly interoperable system, whether an international program
can utilize existing U.S.  missile system technology to its maximum
advantage, how it will fund the U.S.  share of the international
program, or how it can alter the MEADS system or acquisition strategy
to make the program affordable and acceptable to its partners.  In
addition, potential security risks exist because security specialists
were not involved in negotiating the international agreement.  An
international program impacts the political ties between the United
States and its allies, and its outcome impacts DOD's ability to
negotiate future collaborative efforts. 

Because DOD is considering other cooperative programs, the MEADS
experience could provide valuable lessons.  These lessons include
careful consideration of all available program information before
entering into an agreement to jointly develop a weapon system and
assurance that funds will be available for program execution.  In
addition, areas that warrant attention include the (1) technology
that is likely to be released into the program, (2) effect that the
technology's release could have on U.S.  national security, and (3)
impact of a determination to withhold information on both the
execution of the program and U.S.  allies. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

We recommend that the Secretary of Defense take steps to ensure that,
for future international programs, the approval process includes
careful consideration of the availability of long-term program
funding and an in-depth assessment of technology transfer issues.  In
addition, we recommend that the Secretary of Defense include security
experts in all phases of the negotiations of international programs. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

In commenting on a draft of this report, DOD generally concurred with
our recommendations (see app I).  DOD said that it would take steps
to ensure that (1) the approval process for future international
programs includes a careful assessment of long-term funding needs and
technology transfer issues and that (2) security personnel are
included in negotiations of international agreements. 

Regarding the MEADS program, DOD stated that all parties to the
memorandum of understanding understood that long-term funding would
be subject to later determination and availability and that
technology transfer issues were considered to the extent possible
prior to entering into the agreement.  In addition, DOD said that
Army security personnel have been included in all MEADS negotiations. 

We agree that the memorandum of understanding limits the U.S. 
commitment for the MEADS program to funding the project definition
and validation phase of system development.  However, the memorandum
of intent signed by the three countries clearly stated that the
United States, Germany, and Italy intended to continue the program
through production.  DOD regulation 5000.1, dated March 1996, states
that, once a military component initiates an acquisition program,
that component should make the program's stability a top priority. 
The regulation further states that to maximize stability, the
component should develop realistic long-range investment plans and
affordability assessments.  However, DOD approved the MEADS program
without a full assessment of BMDO's ability to fund the system's
development beyond project definition and validation.  With future
funding in doubt, BMDO has spent the last year reviewing program
options that could reduce MEADS cost and enhance the organization's
ability to finance further development efforts.  In a stable program,
this time could have been used to further the program's primary
mission of developing an effective weapon system. 

DOD further commented that technology transfer issues could not be
resolved because of the lack of detailed information on the transfers
that would be requested.  We believe a more detailed assessment, one
that involved key program offices that would be asked to approve the
release of information to the MEADS program, was feasible.  In March
1995, the Army developed a strawman concept of MEADS' predecessor,
the Corps Surface-to-Air Missile (SAM) system.  On the basis of this
concept, the Army said it could reduce Corps SAM's cost by utilizing
technology from existing missile programs, such as PAC-3 and THAAD. 
The Army's belief that MEADS would make extensive use of other
systems' technology indicates that it could reasonably be expected to
require information about those systems.  At the very least, project
offices that were expected to provide technology to the MEADS program
should have been consulted to determine what type of information the
offices would be willing to release to foreign governments.  This
knowledge would have allowed the United States, during negotiations
with its potential partners, to communicate the type of information
that could be transferred.  On the basis of the memorandum of
understanding, which states that successful cooperation depends on
full and prompt exchange of information necessary for carrying out
the project, European officials said that they believed the United
States would freely share relevant technology. 

DOD stated that security experts should support all phases of the
negotiation process, although they may not be able to participate in
the formal negotiations.  In addition, DOD said that Army security
personnel were involved in the creation of the MEADS delegation of
disclosure letter and program security instruction.  We agree that it
may not be possible to include security personnel in the primary
negotiations and recognize that the MEADS participants have
established a tri-national security working group to address specific
security issues.  However, Army security personnel said the
tri-national group's primary function, thus far, has been to resolve
issues that prevent Germany from signing the MEADS program security
instruction.  Army, DOD, and BMDO security specialists said that, so
far, they have not been asked to support the negotiations for the
next phase of MEADS development.  In addition, Army security
personnel said that they were not involved in the creation of MEADS
security documents, such as the program security instruction and the
delegation of disclosure letter, until after the memorandum of
agreement that initially established the MEADS program was signed. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

To assess MEADS contribution to the battlefield and warfighter
support for the system, we compared MEADS requirements with those of
other systems designed to counter theater ballistic and cruise
missile threats.  We also reviewed the integrated priorities lists of
U.S.  Central Command, MacDill Air Force Base, Florida; U.S. 
European Command, Stuttgart, Germany; and U.S.  Forces Korea, Seoul,
South Korea.  When possible, we obtained the Commander in Chief's
written position on theater missile defense in general and MEADS
specifically.  We discussed MEADS required capabilities with
officials at the U.S.  Army Air Defense Artillery School, Fort Bliss,
Texas; Patriot Project Office, Huntsville, Alabama; and Program
Executive Office for Air and Missile Defense, Huntsville, Alabama. 
In addition, we discussed warfighter support for the acquisition of
MEADS with officials of the U.S.  Central Command; U.S.  European
Command; U.S.  Forces Korea; and U.S.  Pacific Command, Camp H.M. 
Smith, Hawaii. 

We reviewed BMDO's fiscal years 1999-2003 budget plan and other
budget documents to determine if the organization had identified
funding for MEADS.  We also examined BMDO's acquisition cost estimate
to determine the system's cost, the effect on cost of using existing
technology, and the cost of design and development tasks.  In
addition, we discussed the budget estimate and BMDO's ability to fund
another major acquisition program with officials in BMDO and the
Office of the Under Secretary of Defense for Acquisition and
Technology, Washington, D.C., and the U.S.  MEADS National Product
Office, Huntsville, Alabama. 

To determine the impact of an international program on MEADS
development, we examined work-sharing, cost-sharing, system
requirements, and technology transfer documents and held discussions
with Ministry of Defense officials in Rome, Italy, and Bonn, Germany;
Army officials in the U.S.  MEADS National Product Office; and
officials in the State Department and various DOD offices,
Washington, D.C.  We also examined documents and met with contractor
officials in Bedford, Massachusetts; Orlando, Florida; Rome; and
Bonn.  In addition, we examined security documents and held
discussions with officials of the Office of the Under Secretary of
Defense for Policy, Washington, D.C.; Intelligence Office of the
Assistant Chief of Staff of the Army, Washington, D.C.; and the Army
Aviation and Missile Command Intelligence and Security Directorate,
Redstone Arsenal, Alabama. 

We performed our review between April 1997 and April 1998 in
accordance with generally accepted government auditing standards. 


----------------------------------------------------------- Letter :10

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services, the
Senate Committee on Appropriations, Subcommittee on Defense, the
House Committee on National Security, and the House Committee on
Appropriations, Subcommittee on National Security; the Secretaries of
Defense and the Army; and the Director of the Ballistic Missile
Defense Organization.  Copies will also be made available to others
on request. 

Please contact me at (202) 512-4841 if you or your staff have any
questions concerning this report.  Major contributors to this report
are Karen Zuckerstein, Barbara Haynes, and Dayna Foster. 

Sincerely yours,

Katherine V.  Schinasi
Associate Director, Defense
 Acquisitions Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)


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