Figure A-3. Comparison of Alternative Indices of Capability (After a Counter Force Exchange) 79-247 O-77- 10 APPENDIX III 1. ADDITIONAL QUESTIONS FOR THE RECORD for JACQUES S. GANSLER This year the Congressional Budget Office produced two Staff Working Papers relating to Foreign Military Sales: "Budgetary Cost Savings to the Department of Defense Resulting from Foreign Military Sales" and "Foreign Military Sales and U.S. Weapons Costs". la. Question: The second of these two studies concluded that the savings produced by Foreign Military Sales are, generally speaking, insubstantial. Do you agree with these conclusions? Answer: Before addressing the specific question asked, I think it prudent to place Foreign Military Sales (FMS) one aspect of the U.S. Government's Security Assistance program, in perspective. We provide defense articles and services to foreign governments and international organizations through FMS in furtherance of U.S. national security and foreign policy interests. The Congress has reserved security assistance policy matters for the Department of State here security assistance means a conglomerate of FIS, grant aid, international military education and training, economic assistance and food for freedom. The Department of Defense mandate deals with the activities related to effecting military aspects of security assistance. Executive Branch decisions as to whether a particular foreign military sale is to be made, and if so in what amount, are based primarily upon an assessment of the total defense and foreign policy interests of the United States as they are seen at the Office of the Secretary of Defense (OSD), State, and National Security Council (NSC) levels and reviewed by Congress. Only those sales are approved which are judged to be in the overall United States interest, measured against these factors. It is important to realize that United States foreign policy is based in part upon a national policy of strong defense. Thus, decisions as to what serves our foreign policy in security assistance areas must by necessity take into account valid U.S. defense interests as well. Within the framework of approved decisions as to what programs this government will undertake, the policy of OSD is to manage these programs within the Department of Defense (DOD) so that overall U.S. Government objectives are met, and to fulfill the Secretary of Defense's assigned statutory responsibilities which are: determination of military requirements, procurement and delivery of defense articles and services, integration of requirements with other DoD programs, training and supervision of end-use. The military aspects of security assistance are inextricably woven into the DoD mission. The Congress expressed its views succinctly in a recent arms sales hearing, when it applauded the "news" that foreign military sales are made to promote U.S. national interests, and not in response to economic pressures from U.S. industry or service interests. Savings which accrue to the U.S. Government as a result of foreign military sales are only a posit secondary economic by-product, and not the purpose of the program. The Congressional Budget Office prepared three reports related to foreign military sales in the spring 1976. The first, developed by the National Security and International Affairs Division, appeared on May 5, 1976. Thi initial study, entitled "Foreign Military Sales and U.S. Weapons Costs", concluded that for selected weapons systems, "the savings from foreign sal are substantial, ranging up to 15% of a weapon's procurement costs in a gi fiscal year and 8% of its total research and development (R&D) costs. Th report's author pointed out that reduced U.S. weapons requirements as a re sult of foreign military sales is a "potentially far more important source of savings". The report discussed, in general terms, sources of savings i DoD weapons costs due to foreign military sales, and pointed out the diffi culty of quantifying actual savings accruing from enhanced regional stabil as a result of FMS. In late May, the first of two reports prepared by the Budget Analysis Divi for the House Armed Services Committee appeared. This report identified 1) Research and development recoupment, ii) Learning curve effects and economies of scale, iii) Overhead reduction, iv) Production line gap (lin stability without termination and start-up costs), and v) "other" as sourc of potential cost savings. Based on a study of 35 major weapons systems, authors found that in a given fiscal year, a foreign military sales progra at a level of $8 billion would generate savings of $560 million for that fiscal year. An increase or decrease in the level of FMS agreements signed would cause a proportionate increase or decrease in the savings generated the fiscal year in question, depending on the mix and timing of the sales. The study commented, in the introduction, that "commercial arms sales have little potential for generating budgetary savings to the Department of Def The second Budget Analysis Division report, "The Effect of Foreign Military Sales on the U.S. Economy", was published on July 23, 1976. This concludin study analyzed certain macroeconomic effects on the U.S. economy of foreign military sales. Within the parameters and assumptions of the study, the authors demonstrated that by fiscal year 1981 a ban on foreign military sal would lead to a "current dollar" lowering of the GNP by approximately $20 billion, (for the years fiscal 1977 81, the GNP would be lowered a total of between 51 and 55 billion dollars). A ban would also lead to a projecte drop in net exports of $7.5 billion by fiscal 1981 (approximately $14 billi for the period fiscal 1977 - 81) -- this would impact on the U.S. balance o payments. Furthermore, the CBO analysis showed that "under a ban on FIS, b fiscal year 1981 the unemployment rate would be approximately 0.3 percentag points higher than otherwise projected." This translates into about 350,00 jobs lost in fiscal 1981 if FMS were terminated. The reports do not describe the savings as being "insubstantial." The bott line of the initial, May 5, 1976, report is a tentative conclusion that if given foreign military sale does not serve U.S. foreign policy, "it seems tial" savings. lb. Question: The first of these two studies contained service estimates of cost savings achieved through FMS for 35 major weapon systems (pages 8-11). Can you confirm and, if necessary, update these figures for each of the 35 major weapon systems now or recently involved in the FMS program and not shown in this report? Answer: A review of the Service submissions to the Congressional Budget Office of estimates of cost savings through Foreign Military Sales of 35 major weapon systems indicates the continuing validity and usefulness of these data. We realize that as estimates these data are not insensitive to time; however, in view of their very recent nature (summer 1976), we see no reason for their not being current. 2. In his 1974 study, Arming America: Harvard Professor J. Ronald Fox wrote: How the U.S. Buys Weapons, "If forcasts for continued decline in the sales volume Comment: I agree with Mr. Fox's statement. Having evidenced the inhibitions of contractor investments in cost reducing capital equipment, we established several initiatives to encourage the reversal of this trend. Our new profit policy, which was implemented this past October, combined with other procurement initiatives now underway should act to help reverse this trend. Additionally, we are studying other longer term initiatives in this area and we will continue to keep the Committee informed. 2a. Question: From your testimony, it would seem that the problem of Answer: We are currently studying the degree of capacity utilization |