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Apogee Consulting Inc

Russia Resurgent?

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While most eyes are focused on “Red” China as an economic juggernaut and near-peer military force (not to mention its best-of-breed cyber-hacker force), Russia may be a growing threat to the U.S., in terms of the traditional measures of military force.  Consider the following –

  1. Here’s an article from RIANOVOSTI that reports that Russia’s new 2010 military doctrine explicitly anticipates preemptive nuclear strikes.  The article notes that Russia’s former military doctrine was adopted in 2000, and “it outlines the role of the Russian military in ensuring the defense of the country and, if necessary, preparing for and waging war, although it stresses that the Russian military doctrine is strictly defensive.”
  2. A follow-up opinion/analysis piece adds that the new doctrine anticipates the use of nuclear weapons “in local conflicts in case of critical threats to Russia’s national security.”  According to the piece: “A critical threat to Russia’s national security can come from different types of conflicts, including a large-scale war with a block of countries, or a hypothetical territorial conflict with one or several militarily developed countries. … Theoretically, such a conflict is possible with Japan if Japanese politicians seeking to use military force to solve the Kuril problem come to power there.”  The piece notes that Russian wargames held over the past decade “showed that only nuclear weapons would save Russia in case of Western aggression.”  The piece concludes with the following, perhaps somewhat chilling, statement:  “Russia now intends to use its military force when and where necessary, and against any opponent.”
  3. Russia is developing a new stealth fighter to counter the F-35 “Lightning II” Joint Strike Fighter.  Known as the PAK-FA or T-50, the new fighter is causing some consternation amongst those who follow global airpower.  This Australian blog post carries a quote on the T-50 that’s worth considering.  (Remember that Australia is currently pondering whether to purchase F-35s or make do with F/A-18s.)  The quote, from Peter Goon of Airpower Australia, discusses various T-50 photos released by Russia and says:  “This is but one small part of the analysis that goes to show that those who think Sukhoi have a long way to go and many risks to overcome to develop this aircraft to operational status are card bearing members of the ‘don’t know what they don’t know about things they are not equipped to understand’ part of our society.”

  • France has agreed to sell Russia “one or more” Mistral-class Landing Helicopter Dock (LHD) ships, according to many reports, including this article.  These ships are 200 meters long, “capable of carrying 900 troops, 35 helicopters, and 70 land-going vehicles….”  This opinion piece at The Economist notes—

The ship involved, the Mistral, is not just any hunk of steel. It is a 200m long warship, whose job is to land soldiers, helicopters and armored vehicles on foreign shores. It can carry 15 helicopters, 13 tanks or several hundred troops (different reports talk of 750 soldiers, or a 1,000). After one of these hefty ships paid a port visit to St Petersburg, in November 2009, Vladimir Putin said on a visit to Paris: ‘I can assure you that if we purchase this armament, we will use it wherever deemed necessary.’


A recent Washington Post article quotes an anonymous defense official as downplaying the differences between the two countries, saying “We consider Russia a partner and friend in promoting stability and security in the region."  Recent events make us wonder whether such optimism is warranted.



 

Glimpse the (Unclassified) Future in DARPA’s FY 2011 Budget Request

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We were fortunate to find DARPA’s FY 2011 Presidential Budget Request file while searching the DARPA website.  DARPA, of course, is the Department of Defense’s Advanced Research Projects Agency, where the future of U.S. military technology is funded today.  Let’s be clear:  just because DARPA asks for funding is no guarantee the agency will receive it.  That said, looking at the budget request (link here) is a glimpse into the future.

The budget request discusses cognitive computing systems and machine intelligence, network-centric warfare technology and “materials and biological technology.”  It’s science fiction, except that it’s a list of the military research areas of today.  For example, DARPA is requesting $53.8 million for –

… investigating and developing the intersections of biology, information technology and micro/physical systems to exploit important technological advances and leverage fundamental discoveries for the development of new technologies, techniques, and systems of interest to the DoD. This research is critical to the development of rapid responses to engineered biological warfare agents, radically new biomolecular computers, and novel materials for the DoD. Programs in this project will draw upon the information and physical sciences to discover properties of biological systems that cross multiple scales of biological architecture and function, from the molecular and genetic level through cellular, tissue, organ, and whole organism levels. This project will develop the basic research tools in biology that are unique to the application of biological-based solutions to critical Defense problems.

Here’s another project description that caught our eye:  “The program will also create technology to reliably integrate nanoscale and microsystems payloads on insects that will extract power, control locomotion, and also carry DoD relevant sensors.”  Talk about bugging the opposition forces!

Or how about this one?

One focus is on techniques that can efficiently process and ‘understand’ massive data streams. Deeply layered machine learning engines will be created that use a single set of methods in multiple layers (at least three internally) to generate progressively more sophisticated representations of patterns, invariants, and correlations from data inputs. These will have far-reaching military implications with potential applications such as anomaly detection, object recognition, language understanding, information retrieval, pattern recognition, robotic task learning and automatic metadata extraction from video streams, sensor data, and multi-media objects.

Or this one?

The Programmable Matter program will develop a new functional form of matter, constructed from mesoscale particles that assemble into complex 3-Dimensional (3-D) objects upon external command. These objects will exhibit all of the functionality of their conventional counterparts and ultimately have the ability to reverse back to the original components.

In other areas, we learned that DARPA recently “Devised full characterization and manipulation of entangled quantum systems,” and also that NACHOS stands for “Nanoscaled Architecture for Coherent Hyper-Optic Sources.” 

This one might scare you.

The Magneto Hydrodynamic Explosive Munition (MAHEM) program will demonstrate compressed magnetic flux generator (CMFG)-driven magneto hydrodynamically formed metal jets and self-forging penetrators (SFP) with significantly improved performance over explosively formed jets and fragments. Explosively formed jets (EFJ) and SFP are used for precision strike against targets such as armored vehicles and reinforced structures.  MAHEM offers the potential for higher efficiency, greater control, the ability to generate and accurately time multiple jets and fragments from a single charge, and the potential for aimable, multiple warheads with a much higher EFJ velocity, hence increased lethality precision, than conventional EFJ/SFP.

There is more, of course, roughly 500 pages of discussion.  What brought us to the budget request was some research on the ArcLight Program.  This is not the Vietnam-era program that used B-52’s.  Instead, it is an attempt to design and build a long-range hypersonic strike weapon.  The concept uses the Navy’s SM-3 Block II booster stack and a hypersonic glider, and should be “capable of being launched from a Mark 41 Vertical Launch System (VLS) tube.”  In other words, DARPA is researching dropping a 100-200 lb. payload from up to 2,000 miles, at hypersonic speeds.  If one were to speculate that the MAHEM warhead (described above) might be mated to the ArcLight missile that would be a formidable piece of ordnance, indeed.

In this article, Aviation Week not only mentions the ArcLight program, but other projects within the DARPA budget request.  We don’t think AW’s summaries are a cool as the actual DARPA descriptions, though.

Check out the budget request.  See the future of warfare.


 

Fraud is Expensive—But is it Expensive Enough?

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In October, 2009 we wrote about the serious fraud charges facing BAE Systems PLC.  We noted allegations of “bribery and corruption in arms deals in South Africa, Romania, and the Czech Republic dating back to the 1990’s.”  Britain’s Serious Fraud Office (SFO) was seeking an admission of guilt as well as payment of fines ranging from £500 to £1billion (US$1.6 billion to $3.2 billion at the currency conversion rates in effect at the time).  At the same time, the U.S. Department of Justice (DOJ) was conducting an investigation into allegations that the US-subsidiary of BAE Systems “used a U.S. bank to funnel bribes to Saudi Arabian officials.”    We predicted that, “given the current U.S. government stance on contractor integrity and ethical conduct, a sustained finding in this area could prove problematic for the company,” since it derived slightly more than half of its £18.5 billion pounds annual revenue from U.S. operations.

Reports have emerged that on February 5, 2010, BAE Systems settled its case, agreeing to pay the U.S. $400 million to settle charges of making a False Statement and agreeing to pay the SFO £30 million (US$47 million) for improper accounting (“breach of its duty to keep [accurate] accounting records”) in connection with a payment to a former consultant in Tanzania.  The settlement permits BAE Systems to avoid suspension or debarment, and thus to continue to bid on U.S. government contracts.  As such, it is seen as a victory for the company; its stock price rose 1.6% on the day of the announcement.

According to the WSJ article linked above—

[BAE’s CEO] on Friday stressed that the transactions in relation to which the company pleaded guilty all occurred nearly a decade ago and outside the U.S.  U.S. court documents detailed what prosecutors allege was BAE's use of secretive offshore entities and shell companies, and its efforts to conceal where payments were going, in 1999 deals to lease fighter jets to Hungary and the Czech Republic. According to prosecutors, BAE avoided communicating with so-called ‘marketing advisers’ in writing and maintained scant information about its payments. After 2001, prosecutors allege, BAE made payments totalling more than £135 million and an additional $14 million-plus to marketing advisers through one offshore entity, according to the court documents. The U.S. filing also alleges that BAE paid tens of millions of dollars to a Saudi government official and other associates, as well as to intermediaries, as recently as 2002. The payments were made as part of its management of a long-term agreement begun in the 1980s between the U.K. and Saudi Arabia to supply military hardware to the Saudis, U.S. prosecutors say.  ‘Beginning in 1993, BAE [Systems] knowingly and willfully failed to identify commissions paid to third parties for assistance in the solicitation or promotion or otherwise to secure the conclusion of the sale of defense articles, in violation of its legal obligations,’ the court documents filed by Justice Department prosecutors said.

Interestingly, the false statement stemmed not from the payments themselves, but from management’s assertions and certifications regarding its commitment to ethical business conduct.  As the WSJ article reports, “In the court documents, prosecutors allege that BAE promised to institute antibribery programs and filed false documents to the U.S. Defense Department stating it had implemented such programs when none existed.”

According to the Financial Times, “BAE ‘undertook no adequate review’ of any of the services it gave the official, the DoJ said, even when the BAE employee who was handling the matter submitted $5m in invoices. The DoJ said that until early 2002, the company transferred millions more to an account in Switzerland controlled by an intermediary, though the company ‘was aware that there was a high probability’ that the payments would be transferred to the Saudi official.”

We have discussed the Foreign Corrupt Practices Act (FCPA) before.  We have also discussed, in passing, the False Statements Act (18 U.S.C. 1001).  This is an interesting blending of the two statutes.  The U.S. DOJ certainly earned its $400 million settlement.

In the U.K. though, watchdog groups are not as sanguine about the paltry settlement negotiated by the SFO.  This report from the BBC states that the “Campaign Against the Arms Trade” (CAAT) was “shocked and angered” by the settlement, as well as “outraged and angry,” and ‘dismissed the UK fine as a “tiny price” for the lucrative deals the company struck.  The CAAT spokesperson asserted that “Ultimately the charges that we see admitted are administrative charges, not charges of corruption."

This Financial Times article quotes a former African National Congress MP as calling the settlement a “travesty of justice.”  Certainly, US$400 million is no small fine—but does the UK settlement of $47 million represent a mere slap on the wrist?  What do you think?  Members are encouraged to leave their comments below.




 

Proposed Inflation Adjustments to Acquisition Thresholds

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On February 4, 2010 the FAR Councils published a proposed rule that will lead to changes in key acquisition thresholds.  This year’s notice of proposed changes is the second of a series of notices that is mandated by the 2005 National Defense Authorization Act, which linked the thresholds to inflation experienced over a 5-year period.  In other words, the FAR Councils are required to revise/update the thresholds every five years (in years evenly divisible by five).

The proposed changes are linked to changes in the Consumer Price Index (CPI) including a projection through April 2010.  If the final CPI change is different from the projected change, then the final thresholds might be different.  That said, the rule proposed to revise key thresholds as follows—

· Increase the simplified acquisition threshold from $100,000 to $150,000.

· Increase the commercial item test program ceiling from $5,500,000 to $6,500,000.

· Increase the threshold for obtaining cost and pricing data from $650,000 to $700,000.

· Increase the threshold for requiring a (non-construction) prime contractor’s subcontracting plan from $550,000 to $650,000.

· Increase the threshold for requiring a construction prime contractor’s subcontracting plan from $1,000,000 to $1,500,000.

The changes listed above create ripple effects throughout the FAR.  However, readers should note that there are no changes to other statutory requirements.  For example, there are no changes to Cost Accounting Standards (CAS) thresholds.  Nor are there any changes to thresholds applicable to the Davis-Bacon Act, the Service Contract Act, or to any trade agreements.

Many contractors tie their internal policies and procedures to the Federal acquisition thresholds.  Consequently, when thresholds are revised in the FAR, they may want to evaluate the impacts on their internal command media.  We encourage a thorough review of the proposed threshold changes, to assess how internal guidance might be impacted.



 

Too Big to Fail? Airbus and the A400M Transport

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We reported before on Airbus’ problems with its new A400M military transport plane.  It’s the typical development scenario, over budget and behind schedule.  Only this time, Airbus entered into fixed price contracts for its planes, meaning that any cost growth would become a loss unless contracts were renegotiated to provide additional funding.  Adding complexity is the fact that the program has at least seven international participants (such as South Africa) while Airbus, as a subsidiary of EADS, is owned by “core shareholders” the State of France, French conglomerate Lagardère, the Spanish Government, and the German company Daimler. In other words, some of the A440M customers are also the company’s owners!  Another interesting aspect is the various stories about a recent report prepared by PricewaterhouseCoopers (PwC) that said “management had consistently underestimated the costs of the programme” and that the €20 billion ($28 billion) program would be overrun by at least €11 billion, or more than 50 percent of the original budget.  Ouch!

At the heart of the issue is who should pay for the overrun.  Airbus naturally wants to push additional funding needs back to its customers; but those same customers (some of whom are also owners) think that Airbus needs to pay for its own mistakes.  The Financial Times article (link above) reported that “Hervé Morin, French defence minister, said EADS would have to bear a ‘very significant share’ of the cost overruns on a programme.”  The PwC report allegedly said that Airbus could absorb up to €7.6 billion in overruns “without problem” – but that conclusion was rejected by Airbus, as was the entire PwC report, which was characterized as a negotiating ploy.

Meanwhile, the Airbus CEO threatened to cancel the entire program if its European customers didn’t provide more funding.  According to the BBC article in the link,

Ditching the A400M would cost EADS some 5.7bn euros in advance payments - more than double the 2.4bn euros it has already set aside to cover losses it expects to incur from the project. Some analysts believe, therefore, that there is too much at stake for Airbus to cancel the project. ‘Airbus's posturing over the A400M is a tactic to extract more governmental aid to secure funding to ensure that contracts can be met,’ said Saj Ahmad, an independent aerospace analyst. ‘If the A400M is terminated, Airbus faces the prospect of a several-billion-euro compensation bill that would obliterate its cash reserve and decimate its stock value.’ But others believe that the company could axe the plane to avoid further losses. ‘There will come a point where it is better for EADS to simply walk away,’ said Nomura aerospace analyst Jason Adams. Doing so would severely damage Airbus' reputation and boost arch rival Boeing, which has seen the order book for its A400M rival, the C-17, swell.

European customers are reportedly divided on how best to proceed.  The UK and France want to move ahead briskly toward completion, while Germany wants to slow the program down in order to spread the overrun over more years.  Talks are underway now.  According to this report, the airplane’s European customers “are ready to contribute” as much as €3.5 billion towards the program’s cost growth.  But the offer has not (as of this date) accepted the offer, “as it falls short of the €4.4 billion it is asking for.”  In late breaking news, this article reports that the core funding offer is €2.0 billion, with additional tranches of “reimbursable advances” (i.e., loans) in the range of €1.0 to €1.5 billion being offered to Airbus to help close the funding gap.

There is one additional driver that is rarely mentioned.  As this New York Times article notes—

European Aeronautic Defense & Space, the parent company of Airbus, has said it wants to clarify what its share of the more than €7 billion in A400M cost overruns will be so it can book them in its 2009 financial results, rather than carry them over into the first quarter of 2010. EADS’s 2009 accounts are scheduled to be published March 9, and financial market regulations require that they be audited by an outside accounting firm — a process that normally takes about four weeks.

Last week, the international ratings agency Fitch warned that failure to reach an accord, or an agreement to EADS’s disadvantage, could lead it to downgrade the company’s BBB-plus credit rating. Any rating cut would increase the rate of interest EADS would have to pay on future borrowings in the capital markets. Failure to reach a solution in time for the close of EADS’s 2009 accounts ‘makes a downgrade more likely,’ said the person with knowledge of the talks.

While Airbus’ A380 commercial aircraft program is routinely discussed for its past program and supply chain management “challenges,” the A400M military program is emerging as the current “financial albatross” weighing down the company.  While it is easy to see (with hindsight) that early commitment to a fixed-price per aircraft was a huge misstep, we wonder what other “lessons learned” will emerge from this problem-plagued program.


 


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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.