Defense Trade:

Decision to Lower FMS Administrative Fee is Premature

NSIAD-99-161R: Published: May 13, 1999. Publicly Released: May 13, 1999.

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Pursuant to a congressional request, GAO reviewed the Defense Security Cooperation Agency's (DSCA) decision to lower the Foreign Military Sales (FMS) program's administrative fee from 3 percent to 2.5 percent, focusing on how the: (1) FMS program recovers its costs, as required by the Arms Export Control Act; and (2) projected sales levels made through the program will affect cost recovery in the future.

GAO noted that: (1) as part of a plan to streamline the FMS process, DSCA has a specific initiative to substantially reduce program operating costs below current levels; (2) although streamlining initiatives have begun, DSCA has not yet identified specific cost-cutting measures or developed plans to implement them, once identified; (3) DSCA does not know the current level of its operating costs; (4) in one of its efforts to identify costs, DSCA has contracted with the Institute for Defense Analyses to measure the cost, workflow, and productivity of the FMS program; (5) the military departments are engaged in their own, separate reengineering efforts, which have not been coordinated with DSCA; (6) DSCA budget projections already include a decline of 12 percent in funding to be available for administering the program between now and fiscal year (FY) 2003 at the 3-percent administrative fee level; (7) DSCA expects FMS sales to exceed projections because FY 1999 sales to date exceeded the sales as of the same period for the last 4 years and higher sales are likely to result in part from the Balkan conflict; (8) although DSCA assumes that any increased sales from the Balkan conflict will benefit the FMS program, this assumption may be incorrect since those additional sales may occur directly between U.S. manufacturers and foreign customers, bypassing the FMS program and resulting in no additional fees for that program; (9) DSCA cites the balance in the administrative cost account as unusually large and estimates that the reduced fee level will, when combined with logistics support changes, continue to keep the balance above $250 million between now and FY 2003; (10) GAO's analysis of historical trends shows that significant or fluctuating sales in any given year and administratively determined cost avoidance initiatives, as well as the lack of requirements-determined basis for DSCA's annual budget allocations affect the balance in the FMS administrative cost account; (11) in recognition of the global environment within which the FMS program must operate, DSCA and the military services have launched wide-ranging evaluations of their structure, their operations, and the resources they need; (12) changes in the administrative fee structure may emerge as a viable recommendation from those evaluations; (13) however, to date there has not been sufficient analysis of either the need for or the impact of such a change; and (14) accordingly, GAO believes that changing the fee structure is premature and may jeopardize the fiscal soundness of the program.

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