The Defense Department Continues To Subsidize the Foreign Military Sales Program by Not Charging for Normal Inventory Losses

In 8 years, Department of Defense (DOD) sales of military items from inventory to foreign countries have risen from $953 million to $13.5 billion. DOD included the following provisions in its standard sales contract: (1) item prices set at their total cost to the government; (2) price increases of 10 percent or more announced in advance to purchasing countries; and (3) agreement by foreign governments to reimburse the United States for costs exceeding estimates in sales agreements. Besides major articles, such as tanks and planes, DOD sells secondary items to foreign governments. These are either stock fund items, low-cost, expendable articles, or nonstock fund items, generally reparable and nonexpendable, which may be purchased by foreign governments through the supply support arrangements by which nations invest in DOD inventories, or other sales agreements. DOD incurs normal inventory losses in secondary item inventories due to damage, deterioration, pilferage, disposal of excess items, and obsolescence. Normal inventory losses in articles stored for purchase are charged against the purchasing country, but surcharges have only been assessed for this purpose on stock fund sales.

As of February 1979, the Army and Navy had made little effort to identify or recover inventory losses and DOD is consequently losing millions of dollars. The Air Force is not yet charging foreign governments for inventory losses, but it identified over $480 million of such losses in fiscal year 1978 and has developed two alternatives for assessing foreign governments for their fair share of these loses: (1) pro-rata charges for each country's share of the total loss; and (2) surcharges placed on items withdrawn from inventory. DOD has consistently failed to recover all costs because of a lack of effort to ensure proper implementation of pricing policies. Nearly 10 years have elapsed since DOD first issued instructions that these costs be recovered, with notable lack of response from the military services. Surcharges and adjustments to undercharges are possible means of recovering the value of lost items, and action must be taken before losses continue to grow. Many foreign governments purchase nonstock fund items through independent sales agreements, although inventory losses from these sales are not legally recoverable and the purchasing nations are the only beneficiaries of the arrangement.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: John F. Simonette Team: General Accounting Office: Financial and General Management Studies Division Phone: (202) 275-1581