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How Elon Musk Exposed Billions in Questionable Pentagon Spending

The entrenched contractor, a joint operation of Boeing and Lockheed Martin called the United Launch Alliance, has conducted 106 space launches all but flawlessly, but the cost for each is more than $350 million, according to the Government Accountability Office. | Getty

How Elon Musk exposed billions in questionable Pentagon spending
Ten years after a joint operation of Boeing and Lockheed Martin was born, the FTC’s direst warnings have come true, along with outcomes even the skeptics did not predict.

Elon Musk’s SpaceX had to sue before it got access to the Pentagon — but now, as it promises to deliver cargo into space at less than half the cost of the military’s favored contractor, it has pulled back the curtain on tens of billions in potentially unnecessary military spending.

The entrenched contractor, a joint operation of Boeing and Lockheed Martin called the United Launch Alliance, has conducted 106 space launches all but flawlessly, but the cost for each is more than $350 million, according to the Government Accountability Office. SpaceX promises launches for less than $100 million.
Yet despite the potentially more cost-effective alternative, taxpayers will be paying the price for ULA’s contracts for years to come, POLITICO has found. Estimates show that, through 2030, the cost of the Pentagon’s launch program will hit $70 billion — one of the most expensive programs within the Defense Department. And even if ULA is never awarded another government contract, it will continue to collect billions of dollars — including an $800 million annual retainer — as it completes launches that were awarded before Musk’s company was allowed to compete. That includes a block buy of 36 launches awarded in 2013.

Meanwhile, ULA is under investigation by the Pentagon for possible corrupt bidding practices and is preparing to lay off 25 percent of its workforce. Its long-term viability is in doubt.

Even the Pentagon’s acquisition chief grants that the creation of ULA — a monopoly criticized by the Federal Trade Commission when it was formed at the government’s behest a decade ago — may have been a mistake.
“With the benefit of hindsight, you could say that,” Frank Kendall, undersecretary of defense for acquisition, technology and logistics, told POLITICO.

ULA’s unique situation has been brought into the spotlight by Musk, the Silicon Valley billionaire who founded Space Exploration Technologies Corp., in part to help humanity colonize Mars. Even after a series of successful launches starting in 2008, SpaceX was shunned by Defense officials loyal to the department’s regular contractors.

After suing in federal court to gain access to the bidding process, SpaceX won its first military contract on April 27. The lawsuit was settled out of court and the terms sealed. In what would have been the first head-to-head competition between the contractors, ULA refused to even participate, perhaps because SpaceX promises it can deliver some of the Pentagon’s payloads to space for less than half of what ULA charges.

“We did what we were asked to do,” ULA’s CEO Tory Bruno said in an interview, pointing to the company’s record of successful launches and schedule certainty. “I think the government has been an excellent steward of their resources and of this mission, and ULA has done everything they have been asked to do.”

The parent companies echo that message.
“[ULA’s] creation combined more than 100 years of launch experience, including Apollo missions, Mars Rovers, and the Kepler telescope,” Boeing and Lockheed said in a joint statement issued to POLITICO. “We are proud of our work with ULA. No other company has achieved 100 percent mission success in delivering critical national security, scientific and commercial satellites safely into their correct orbit every time.”

Scott Pace, director of the Space Policy Institute at George Washington University, said the company has been unfairly characterized and demonized for its costs.
“United Launch Alliance exists because the government wanted it to exist,” Pace said. “It’s doing what it was intended to do.”
“Are there things that one could be critical of ULA for, should they have done this R&D, should they have done that? Should they have been more innovative in this area or that area? You can always do Monday morning quarterbacking about a company you don’t have profit-loss responsibility for,” he added.

But critics see something else in ULA — the way that Pentagon insiders and favored defense contractors structure deals to please all sides, while paying scant attention to costs.

“There’s a sense in a lot of these companies of entitlement, that the government will take care of them,” said William Hartung, director of the Arms and Security Project at the Center for International Policy, who wrote a critical book about Lockheed Martin.

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When ULA was formed, Boeing and Lockheed were not only battling each other for launch contracts, they were also locked in a legal battle over rocket technology. For the Pentagon, the joint-venture was a way to settle the bad blood between its top contractors and make sure that both could remain in the space launch business. For SpaceX, the deal looked bad from the start. But in 2006, SpaceX could not make a very compelling argument — it did not succeed in actually launching something into orbit until 2008, after three failures. The Defense Department wasn’t interested in anything unproven, no matter how promising, and no matter the cost.

Nonetheless, the Federal Trade Commission largely predicted the potential for unsavory outcomes when the ULA joint-venture was first conceived.

“The anticipated result of anticompetitive consolidation would be to reduce the rate of innovation and other non-price benefits and increase the prices that the government, including the Air Force, NASA and other government agencies, would pay for these services,” Michael Moiseyev, then the assistant director of the FTC’s bureau of competition, wrote in a July 2006 letter to the Pentagon.

The Pentagon steamrolled that criticism. “Assured access to space,” as defense officials put it, was a matter of national security.

“DoD informed the Commission that the creation of ULA will advance national security by improving the United States’ ability to access space reliably. Because DoD considers access to space essential to the U.S. military, maximizing the reliability of launch vehicles is of paramount importance to DoD,” the FTC said in an October 2006 statement announcing it would allow the venture to proceed. “After thorough review, DoD concluded that the national security benefits of ULA would exceed the anticompetitive harm caused by the transaction.”

The Evolved Expendable Launch Vehicle program through which ULA is awarded contracts has experienced “significant increases” in cost estimates, according to the Government Accountability Office. ULA argues it has reduced launch costs for the government by $80 million between 2006 and 2013.

ULA completed its first launch on December 14, 2006, bringing a classified payload to space for the National Reconnaissance Office. A news release at the time described ULA’s “commitment to mission assurance.” And that commitment has been demonstrated throughout its existence. Of 106 launches, ULA has never lost a payload.
But the price of mission assurance was high, with no competitive pressure to bring it down.
By 2015, the government was paying an average of $225 million per ULA launch, according to ULA; the Government Accountability Office pegged it at about $360 million per launch, though noted not all of that funding goes to ULA. Since 2006, ULA has received at least $15 billion from the federal government, according to public documents, though the real amount could be much higher. The exact number is difficult to calculate because ULA receives some of its funding through the so-called black budget, the confidential $50 billion-plus budget of the CIA, NSA, National Reconnaissance Office and other agencies.
A spokesperson for ULA declined to comment on the amount of federal money the company had been awarded, calling the information “proprietary.”

The GAO in a 2014 report noted that “minimal insight into contractor cost or pricing data meant DOD may have lacked sufficient knowledge to negotiate fair and reasonable launch prices.”

“We did end up with a monopoly,” Kendall, the undersecretary of defense for acquisition, technology and logistics, told POLITICO.

“As evidence that we were paying too much to ULA,” he said, “as soon as there was even the threat of competition, their costs came down quite a bit. And they were obviously motivated at that point in time. Motivation matters. Financial incentives matter.”

The threat of competition came from SpaceX, which was started in 2002 and which by 2008 was winning business from NASA and commercial companies; now it wanted Air Force business. The Pentagon resisted, and only after SpaceX sued in federal court, alleging anticompetitive bias, did the Air Force certify the company for national security launches in May 2015. (The case was settled out of court and the terms are sealed.)

While SpaceX was fighting to be certified, Musk made clear his frustration with the Pentagon and its favored partner.
“ULA has decided that they’re afraid even of an unfair competition,” Musk told Bloomberg in a 2015 interview. “They don’t want a fair competition. They don’t even want an unfair competition. They want no competition at all.”
“They’re afraid that the huge gravy train that they have exclusive access to is now going to be not as big,” he added. “We’re just talking about taking some portion of that.”

Bruno, ULA’s CEO, has said the company welcomes competition but wants to ensure that ULA’s past performance is taken into account by the Pentagon, and that cost is not the only factor.
Musk’s criticisms took on new meaning last November when ULA declined to bid on what would have been its first head-to-head competition against SpaceX.

Things got worse for ULA and the Pentagon in March when a ULA executive told a group of University of Colorado students, in comments that were recorded and published online, that the Pentagon was frustrated that ULA did not bid.
“They felt they bent over backwards to lean the field in our advantage,” said Brett Tobey, then vice president of engineering at ULA. “We saw it as a cost shootout between us and SpaceX.”

The talk was widely reported, Tobey resigned and Bruno repudiated the remarks. Bruno said there were several reasons ULA declined to bid, with cost being one of them. SpaceX is charging $83 million for the recently awarded Air Force launch — $142 million less than what ULA says its average launch costs, and $81 million less than what the company says it charges for “a lower-end mission.” The Air Force estimated the mission would have cost about $55 million more with ULA.
What has also turned heads is the annual payment ULA receives regardless of whether its services are used, a so-called “capabilities contract.” In his remarks, Tobey referred to that payment — about $800 million per year — as a carrot to “sweeten the deal” for the “shotgun wedding” the Pentagon forced on Boeing and Lockheed.

Sen. John McCain, a vocal critic of ULA, had a tense exchange with Kendall about the matter at a hearing in January.
“Do you know of any other federal arrangement with any other defense corporation where you pay them $800 million a year simply to remain in business?” McCain asked.

“I’m not aware of another one similar to this,” Kendall responded, adding: “We’re phasing out that contract. I don’t foresee us using that type of contract again.”

McCain has described ULA’s behavior as “manipulative extortion” and now thinks ULA never should have been created in the first place.
“Of course,” McCain said in a brief interview when asked if the government’s role in creating ULA was a mistake. “But Congress is guilty in that respect, too.”

McCain asked Defense Secretary Ash Carter to investigate Tobey’s remarks, and soon after, the Pentagon’s inspector general opened an investigation into the possibility that the Pentagon rigged the bidding to favor ULA.

ULA has vigorously defended itself, and continues to tout its service. Bruno has said that record of consistency should count for something in bidding battles against SpaceX, and that the layoffs ULA announced in April are part of a bid to become more competitive. Representatives for SpaceX declined to comment on the record for this article.
One thing ULA has going for it is powerful allies in Congress, particularly from the Alabama and Colorado delegations. ULA is headquartered in Colorado and has assembly operations in Alabama.

Alabama Sen. Richard Shelby, a senior Republican on the Appropriations Committee, has questioned whether competition is really welcome in the launch business.

“I agree that competition typically results in better quality and lower price contracts. But the launch market is not typical,” Shelby said at a 2014 hearing. “While the goal of competition is to lower the cost of access to space — which I think is good — combined with a need to maintain performance and reliability, such as we have today, competition may not actually result in a price reduction for the federal government.”

“How do we define ‘fairness’?” asked Rep. Doug Lamborn (R-Colo.) at a 2015 hearing with executives from SpaceX and ULA about the government’s awarding of space launch contracts.

Shelby has been important in protecting ULA from congressional attempts to limit its ability to acquire the RD-180 engines it uses for most of its launches. The RD-180 is produced in Russia, and some members of Congress, including McCain, decry the use of taxpayer spending to underwrite a geopolitical adversary. SpaceX builds its engines in California.
Shelby continues to defend the original concept of ULA, noting that Boeing and Lockheed were battling each other in court over rocket technology before the merger.

“There was a lot of trouble at one time between Boeing and Lockheed,” Shelby noted in a brief interview.
The congressional gamesmanship was on display again in recent weeks as both ULA and SpaceX lobbied to get favorable amendments attached to the House’s annual National Defense Authorization Act, which sets Pentagon policy.

Many observers reject McCain’s narrative that ULA is a corrupt player. Instead they look sympathetically on the company; it was given a task by the government, with negotiated contracts and congressionally appropriated funds, and executed the missions nearly flawlessly.

“When ULA was formed, the reliability of those rockets, the schedule assurance — that was the real premium for their primary customer, the Department of Defense,” said Phil McAlister, director of commercial spaceflight development at NASA. “They accurately perceived what was important to their customer and they provided that. So I think good on ULA for doing that.”

“The simple cronyism argument I just don’t find convincing,” Pace, of the Space Policy Institute, said.
“It works very carefully,” Sean O’Keefe, a former NASA administrator and former CEO of Airbus, said of companies like ULA. The government is “asking for performance characteristics that are fundamentally different than what the commercial side is looking for.”

ULA’s relationship with the Pentagon was always more about meeting government requirements than trying path-breaking technologies, industry analysts say. The company never took the technological leaps that SpaceX did — the leaps that reduce cost and expand capability — because there was no incentive to, critics say. In April, SpaceX landed a rocket on a drone ship in the ocean, potentially ringing in a new era of space flight with reusable rockets that drastically reduce cost — and which ULA has never tried. Last week, SpaceX accomplished the feat again.

“If you’re ULA — Boeing and Lockheed — is there survival at stake? Is there economic opportunity at stake by staying where you are? Well, no,” said Tim Urban, who writes the popular website Wait But Why and, at Musk’s request and with his substantial cooperation, wrote a series about Musk’s companies.

Urban argued that ULA did not pursue technologies like reusability because there was no reason for them to.
“They’re not evil,” he said. “If you were ULA you wouldn’t do it either. You would sit there and just take your free money that’s coming.”

When the Air Force announced in April that SpaceX had been awarded an $82.7 million contract to launch a satellite in 2018, it marked the first time a company other than Boeing, Lockheed or ULA had won a military launch since the creation of the Evolved Expendable Launch Vehicle program in 1995. The program was created to guarantee assured access to space for the military, and the price tag was never a factor.

The annual “capabilities contact” payments to ULA are slated to end in 2019. But even if ULA is never awarded another military launch, it will continue costly missions until at least 2021, thanks to a 2013 block buy of 36 launches awarded before SpaceX was certified to compete.

Taxpayers created ULA and taxpayers will sustain it in the years ahead. Kendall, the Pentagon acquisitions chief, gave a succinct appraisal of the arrangement.

“My experience with joint-ventures,” he said, “has never been good.”

Source: Politico

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