Foreign Military Sales

Foreign military sales are an important part of the U.S. security assistance program and also represent a key Defense Department (DOD) acquisition strategy to help lower the unit costs of weapons systems. The Arms Export Control Act provides several ways to price defense goods and services transferred under the Foreign Military Sales Program, including actual value, replacement value, and full cost, and requires that DOD recover the full estimated cost of administering such sales. In response to budget pressure from declining sales and customer complaints about program inefficiencies, the Defense Security Cooperation Agency, which runs the program, and the military services have begun several efforts to improve the management and implementation of the Foreign Military Sales Program. This report evaluates (1) whether the program has fully recovered its administrative costs, (2) the Defense Security Cooperation Agency's 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

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.

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