Foreign Military Sales:

Efforts to Improve Administration Hampered by Insufficient Information

NSIAD-00-37: Published: Nov 22, 1999. Publicly Released: Nov 22, 1999.

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Pursuant to a congressional request, GAO assessed the foreign military sales program to determine the changes needed to improve the viability of the program, focusing on: (1) whether the foreign military sales program has achieved full recovery of its administrative costs; (2) the Defense Security Cooperation Agency's (DSCA) basis for making administrative account adjustments; and (3) the effectiveness of various foreign military sales reinvention efforts in terms of cost recovery.

GAO noted that: (1) the Department of Defense (DOD) does not have sufficient information to determine the administrative costs associated with the foreign military sales program; (2) DOD is unable to use actual cost as a basis to determine what charges should be applied to foreign military sales, and does not know if the percentage charged to the customer on individual sale's dollar value is appropriately recovering foreign military sales program costs; (3) the allocation of administrative funds to activities responsible for implementing the foreign military sales program is based on past administrative budget outlays and perceived needs; (4) the military services directly charge customers for some administrative tasks on individual sales; (5) these are referred to as program management charges; (6) under existing guidelines, the services have discretion concerning which administrative activities associated with foreign military sales should be funded through the administrative budget and which should be funded directly through program management charges; (7) DSCA uses estimated sales projections and the balance of the administrative account to determine whether program adjustments must be made; (8) sales projections are judgmental estimates on the part of the agency's country desk officers and are adjusted by DSCA's management; (9) when the administrative account balance fell below zero, DSCA increased fees, sought and obtained legislative relief that allowed program costs to be moved to DOD appropriations accounts, and reduced administrative budgets provided to the military services; (10) conversely, a recent decision to reduce the administrative fee charged was justified, in part, by the large balance held in the account; (11) having a positive balance in the administrative account is important, since a certain level of funding is needed to carry out work that has already been paid for by customers; (12) however, too large an account balance may represent a mismatch between fees and administrative account allocations to those activities implementing the foreign military sales program; (13) reinvention efforts to better identify costs lack a common approach and are managed as independent efforts; and (14) as a result, these initiatives as structured are unlikely to provide DSCA with complete and consistent information about the costs of administering foreign military sales.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Defense Security Cooperation Agency is implementing a performance based budgeting system to ensure that they have sufficient information to make program decisions. This new multi-year process is now being implemented with the fiscal year 2002 budget cycle and links the budget to corporate strategy, planning, and performance measures. As part of this effort, the Agency has also created a performance-based costing infrastructure to support the new budget process. According to the Agency, performance based costing provides them with a detailed costing structure that seamlessly links to the bugets core functions. This infrastructure is intended to align cost and performance measures to corporate strategy.

    Recommendation: To make certain that future program decisions are made on the basis of adequate information, the Secretary of Defense should direct that current efforts to identify and collect cost information use a comprehensive and consistent definition of administrative tasks.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Defense Security Cooperation Agency (DSCA) has implemented efforts to consistently define the use of program management, case management, and administrative budget funds. In July 2001, the issued a matrix that provides specific guidance to be used for the consistent application of funding sources when developing letters of offer and acceptance for the sale of defense equipment and services to foreign countries.

    Recommendation: To enhance the value of the administrative budget as a management tool, the Secretary of Defense should develop and communicate to the military services guidance that requires consistent application of program management charges.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: The Defense Security Cooperation Agency (DSCA) and the DOD comptroller jointly developed the concept for a FMS administrative account "safety level" and developed a formula to calculate this level. They calculated the administrative budget's necessary reserve as $110 million in fiscal year 2000, $18 million in fiscal year 2001, $17 million in fiscal year 2002 and $45 million in fiscal year 2002. DOD did not agree with the second part of this recommendation and believes it undercuts the DSCA director's freedom to determine when to seek alternative uses of funds or an increase the FMS administrative balance. As a result they did not identify alternative uses for funds excess to the safety level.

    Recommendation: To assure that the current foreign military sales administrative account balance is appropriate, the Under Secretary of Defense (Comptroller) should assess the amount of funds needed to complete existing sales commitments. If the administrative account balance exceeds the needed funds, the Secretary of Defense should identify alternative program uses for these funds.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  4. Status: Closed - Implemented

    Comments: The Defense Security Cooperation Agency (DSCA) and the DOD comptroller jointly developed the concept for a FMS administrative account "safety level" and developed a formula to calculate this level. They calculated the administrative budget's necessary reserve as $110 million in fiscal year 2000, $18 million in fiscal year 2001, $17 million in fiscal year 2002 and $45 million in fiscal year 2002. DOD did not agree with the second part of this recommendation and believes it undercuts the DSCA director's freedom to determine when to seek alternative uses of funds or an increase the FMS administrative balance. As a result they did not identify alternative uses for funds excess to the safety level.

    Recommendation: To assure that the current foreign military sales administrative account balance is appropriate, the Under Secretary of Defense (Comptroller) should assess the amount of funds needed to complete existing sales commitments. If the administrative account balance exceeds the needed funds, the Secretary of Defense should identify alternative program uses for these funds.

    Agency Affected: Department of Defense

 

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