Defense Continues To Subsidize Sales of Secondary Items to Foreign Governments Because of Poor Pricing Policies

Gao ID: AFMD-81-105 October 5, 1981

GAO evaluated recent Department of Defense (DOD) actions to improve its financial management of the foreign military sales program and to reduce its budget by eliminating subsidies to the program. GAO focused on the actions taken by DOD to revise and implement the policies, procedures, and accounting systems used to price sales of secondary items to foreign customers. GAO also discussed whether prices billed to foreign customers for secondary items were adequate to replace the items in DOD inventories and thus avoided subsidization of the program.

DOD continues to make large subsidies to the foreign military sales program because prices charged for secondary items sold from DOD inventories are not sufficient to replace the items. Although GAO reported this situation 3 years ago, DOD has not taken adequate corrective actions. The foreign military sales program was subsidized through DOD appropriations by over $8 million at the four inventory control points visited by GAO. Underbillings occurred primarily because compound inflation factors were not applied and the rate of inflation used to estimate the replacement costs was unrealistically low. DOD procedures require only a single year's inflation rate to be added to the inventory price to recover estimated replacement cost. Subsidies are also occurring because foreign customers are not charged an equitable share of normal inventory losses. GAO found that foreign governments who had not established long-term contracts for supply support were participating in and benefiting from the DOD logistics system and, thus, should bear the expenses of inventory storage. The Arms Export Control Act requires that, if items sold from inventory by DOD are intended to be replaced, the prices charged to foreign customers must cover the replacement costs of those items. The DOD establishment of a quality assurance unit to monitor foreign sales pricing should adequately detect and resolve the type of pricing problems described. Collection attempts to recover underbillings should be initiated as soon as undercharges are discovered.


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