National Defense:

The Department of Defense Continues To Improperly Subsidize Foreign Military Sales

FGMSD-78-51: Published: Aug 25, 1978. Publicly Released: Aug 25, 1978.

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Foreign military sales (FMS) are transacted under the authority of the International Security Assistance and Arms Export Control Act of 1976. The legislative history of this act indicates that Congress intended that indirect as well as direct costs of goods and services sold to foreign governments should be recovered so that the FMS program would not be subsidized by Department of Defense (DOD) appropriations.

Because of weaknesses in pricing policies and practices, an estimated $69 million of direct and indirect costs for selected sales cases have not been charged to foreign governments. The military services did not charge replacement costs for items sold from certain inventories; costs of normal inventory operating stock losses (an indirect cost) were not allocated to sales of nonstock funds items; and a breakdown in the Air Force's accounting system led to unrecovered costs on items procured for foreign countries. Not charging the right amount for equipment and spare parts is part of the overall problem DOD has experienced in pricing foreign sales.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense should take action to: (1) revise the method for determining and charging replacement cost for items sold to foreign governments from DOD inventories; (2) revise DOD Instruction 2140.1 to require that replacement pricing be used for items sold from the stock fund; and (3) direct the military services to make a reasonable attempt to recover the undercharges in sales from inventories resulting from the failure to charge replacement pricing. The Secretary should also require: (1) the Air Force to institute necessary controls so that foreign governments are billed replacement costs, requisitions for unauthorized items are not honored, and foreign country requisitions that will deplete critical inventory items will not be filled; (2) that supply support arrangements are based on a list of specific items and quantities to be needed during the term of the arrangement; and (3) that Army and Navy internal auditors conduct reviews to determine whether those services have similar problems with supply support arrangements. The Secretary should assign specific responsibility for administering pricing policy and monitoring pricing systems to a new organization or some existing organization that can be sufficiently freed from other work to provide careful surveillance over the pricing function.

    Agency Affected:

 

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