Foreign Military Sales:

DOD Should Strengthen Oversight of Its Growing Transportation Account Balances

GAO-19-678: Published: Sep 24, 2019. Publicly Released: Sep 24, 2019.

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U.S. foreign partners buy billions of dollars of defense items and services annually through the U.S. Foreign Military Sales program. To transport the items they buy, buyers pay fees that should roughly equal what the U.S. government pays to transport the goods.

However, the transportation fee account balances have grown by over 1300%. Because there was no guidance on how to determine whether account balances were too high or too low, the fees weren’t adjusted appropriately.

We made 10 recommendations to DOD to improve how it sets fees and manages the transportation accounts, including setting target ranges for account balances.

Defense items and services are sold under the Foreign Military Sales Program.

Military aircraft

Military aircraft

Additional Materials:

Contact:

Jason Bair
(202) 512-6881
BairJ@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

What GAO Found

Fees charged by the Department of Defense (DOD) for the transportation of defense items sold through the Foreign Military Sales (FMS) program are intended to approximate DOD's transportation costs over time. However, GAO found that the FMS transportation accounts accrued a combined balance of $680 million by the end of fiscal year 2018. Much of the growth occurred from the end of fiscal year 2011 through fiscal year 2018, when the account grew by approximately $630 million.

Growth in Transportation Account Balances, Fiscal Years 2007 to 2018

Growth in Transportation Account Balances, Fiscal Years 2007 to 2018

The Defense Security Cooperation Agency (DSCA) has developed limited management oversight guidance for the FMS transportation accounts, which has contributed to the substantial balance growth. DSCA internal guidance requires daily and annual reviews of the accounts to monitor for significant changes in account balances and to ensure the accounts maintain a “healthy” level. However, internal guidance does not define a significant change or “healthy” level, such as a target range for the account balances. This has led to inconsistent reviews and limited oversight of the recent balance growth. DSCA also has no internal guidance on how to perform certain aspects of its annual reviews or what information to include in the resulting reports. As a result, DSCA officials have produced reports with incomplete information, such as on the causes for trends in the account balances, undermining DSCA management's ability to make informed decisions about the accounts.

DSCA's processes for setting the FMS transportation fee do not ensure that aggregate fees approximate aggregate costs. For its transportation fee rate reviews, DSCA sends requests to the military departments for historical cost and fee data that lack specificity, such as on timeframes, sampling methodology, and data sources. As a result, DSCA has analyzed data that are not timely or systematically sampled. In addition, military department officials reported difficulty providing the requested data in part because DSCA's guidance did not specify data sources. Consequently, for the most recent review, Air Force and Navy were unable to find sufficient matching cost and fee data for DSCA to consider them usable. Further, DSCA has established no goals for rate reviews and has no written procedures to follow in performing them. These factors together contributed to recent growth in the FMS transportation account balances and will continue to hinder DSCA's ability to make appropriate rate-setting decisions moving forward.

Why GAO Did This Study

The FMS program is one of the primary ways the U.S. government supports its foreign partners, by annually selling them billions of dollars of items and services. According to DOD, the FMS program is intended to operate on a “no profit, no loss” basis, with purchasers not charged excessive fees and fee revenue covering operating costs. Foreign partners can arrange for their own transportation of FMS items or pay DOD a transportation fee to cover the costs of DOD transporting them. The fees are collected into transportation accounts in the FMS Trust Fund.

House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's management of FMS fees. This report examines (1) the balances of the FMS transportation accounts for fiscal years 2007 through 2018, (2) DSCA's management oversight of the accounts, and (3) DSCA's processes for setting transportation fees. GAO analyzed DOD data and documents, and interviewed DOD officials.

What GAO Recommends

GAO is making 10 recommendations to DOD, including six recommendations to strengthen DSCA's oversight of the transportation accounts—such as by clarifying internal guidance—and four recommendations to improve its transportation fee setting processes. DOD concurred with all of the recommendations and identified actions it plans to take to address them.

For more information, contact Jason Bair at (202) 512-6881 or BairJ@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to establish a percentage threshold for monitoring daily account balance changes. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA clarify internal guidance for daily account reviews by specifying criteria for the level (such as percentage or dollar amount) of change in transportation account balances that would require DSCA to contact DFAS for further examination. (Recommendation 1)

    Agency Affected: Department of Defense

  2. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to create internal guidance for calculating upper and lower bounds and to monitor the accounts against them. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA establish a methodology to calculate a target range, with desired upper and lower bounds, for FMS transportation account balances that could be used to better inform DSCA's account reviews. (Recommendation 2)

    Agency Affected: Department of Defense

  3. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to update internal guidance with specific criteria for measuring the health of the accounts and to perform rigorous analysis of historical account data as part of its annual review process. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA modify the internal guidance for the annual review process to include the specific steps DSCA officials should take in preparing the annual report, including ensuring that they incorporate rigorous analysis into the annual reports. (Recommendation 3)

    Agency Affected: Department of Defense

  4. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to update internal guidance with specific criteria and analysis steps to follow when making determinations about redistributing funds between the FMS trust fund fee accounts. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA develop internal guidance related to the redistribution of funds between the FMS trust fund fee accounts. Such internal guidance could include criteria for when to consider redistributing funds between accounts and for when to return those funds, how to analyze the amount of any redistributions needed, and how to clearly report any redistributions to DSCA management. (Recommendation 4)

    Agency Affected: Department of Defense

  5. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and explained certain steps DSCA has already taken in response. In particular, DSCA has completed an assessment of the health of the main FMS transportation account sufficient to determine that it plans to move the redistributed funds back to the FMS administrative account and DSCA has taken initial steps to move those funds. We will continue to monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA assess whether funds redistributed from the administrative account to the transportation account should be moved back to the FMS administrative account and document this decision. If the Director of DSCA determines that the funds should be moved back to the FMS administrative account, the Director should ensure the movement of funds in accordance with this decision. (Recommendation 5)

    Agency Affected: Department of Defense

  6. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to develop guidance for DFAS to follow when Building Partner Capacity-specific transportation accounts close to ensure any remaining funds are transferred to the miscellaneous receipts of the U.S. Treasury. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA develop internal guidance for the steps that DSCA, in combination with DFAS, should undertake when a Building Partner Capacity-specific transportation account closes to help ensure that any remaining unused funds are transferred to the miscellaneous receipts of the U.S. Treasury in accordance with DOD officials' stated intention to do so. (Recommendation 6)

    Agency Affected: Department of Defense

  7. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and stated that DSCA has discussed with other relevant DOD agencies in a Transportation Working Group how to best address it. In particular, DSCA noted this Working Group has decided that all data for the rate reviews should come from common data systems and be submitted in a uniform manner. Upon determination of the systems to use and processes to follow, DSCA plans to update internal guidance accordingly. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA create specific internal guidance for how and from where data should be obtained to be used for its transportation fee rate reviews and the timeframes the data should cover to ensure DSCA has a systematic sample upon which to base its rate setting decisions. This updated internal guidance should be based on consultations with the military departments, DFAS, and U.S. Transportation Command (TRANSCOM) on which sources of transportation cost and fee data are the most reliable and comparable for use in its FMS transportation fee rate reviews. (Recommendation 7)

    Agency Affected: Department of Defense

  8. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to update internal guidance for FMS transportation fee rate reviews to ensure they are completed every 5 years. We will monitor DSCA's implementation of this aspect of the recommendation, as well as the other aspects related to DSCA providing greater specificity about the processes for obtaining management commitment and for performing the rate reviews.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA develop specific internal guidance to follow when performing transportation fee rate reviews. Such internal guidance could specify when these reviews should occur; a process to obtain management commitment to complete a review before DSCA requests that the military departments compile data for it; and a process for performing the reviews that includes developing clear, documented goals and an appropriate level of analysis to best ensure that DSCA's analysis meets those goals. (Recommendation 8)

    Agency Affected: Department of Defense

  9. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to perform rigorous analysis and to consult with other relevant DOD agencies in the Transportation Working Group about whether the current structure of the FMS transportation fee rate is still valid or should be updated, and to update internal guidance as appropriate. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA conduct a review of the current structure of the FMS transportation fee rate, in consultation with other relevant DOD agencies, to determine if other rate structures could better balance considerations related to administrative burden, equity, efficiency, and revenue adequacy. (Recommendation 9)

    Agency Affected: Department of Defense

  10. Status: Open

    Comments: In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified plans to address it, such as to consult with other relevant DOD agencies in the Transportation Working Group to review this calculation methodology, determine a revised methodology that better aligns with TRANSCOM's transportation routes and contracting costs, and to update internal guidance as appropriate. We will monitor DSCA's implementation of this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA clarify internal guidance for the military departments on how to calculate the estimated actual transportation prices to charge FMS purchasers for certain items, such as by specifying a calculation methodology. This updated internal guidance should be based on consultations with the military departments, TRANSCOM, and any other relevant DOD components on which sources of data and which calculation methodologies would be most accurate. (Recommendation 10)

    Agency Affected: Department of Defense

 

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