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PROPOSED SALE OF AIRBORNE WARNING AND
CONTROL SYSTEM AliRCRA~ET ~AWACS) TO NATO
4
HEARING
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL
POLITICAL AND MILITARY AFFAIRS
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
NINETY-FOURTH CONGRESS
SECOND SESSION
MARCH 11, 1976
Printed for the use of the Committee on International Relations
/F
ii S GOVERNMENT PRINTING OFFICE
72-4 3 ` WASHINGTON 1976 / 1
J~D~N 4 197T
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COMMITTEE ON INTERNATIONAL RELATIONS
THOMAS E. MORGAN, Pennsylvania, Chairman
CLEMENT J. ZABLOCKI, Wisconsin
WAYNE L. HAYS, Ohio
L. H. FOUNTAIN, North Carolina
DANTE B. FASCELL, Florida
CHARLES C. DIGGS, Ja., Michigan
ROBERT N. C. NIX, Pennsylvania
DONALD M. FRASER, Minnesota
BENJAMIN S. ROSENTHAL, New York
LEE H. HAMILTON, Indiana
LESTER L. WOLFF, New York
JONATHAN B. BINGHAM, New York
GUS YATRON, Pennsylvania
ROY A. TAYLOR, North Carolina
MICHAEL HARRINGTON, Massachusetts
LEO J. RYAN, California
DONALD W. RIEGLE, JR., Michigan
CARDISS COLLINS, Illinois
STEPHEN J. SOLARZ, New York
HELEN S. MEYNER, New Jersey
DON BONKER, Washington
GERRY E. STUDDS, Massachusetts
WILLIAM S. BROOMFIELD, Michigan
EDWARD J. DERWINSKI, Illinois
PAUL FINDLEY, Illinois
JOHN BUCHANAN, Alabama
J. HERBERT BURKE, Florida
PIERRE S. DO PONT, Delaware
CHARLES W. WHALEN, JR., Ohio
EDWARD G. BIESTER, JR., Pennsylvania
LARRY WINN, JR., Kansas
BENJAMIN ~ GILMAN, New York
TENNYSON GUYER, Ohio
ROBERT J. LAGOMARSINO, California
MARIAN A. CZARNECKI, Chief of Staff
SUBCOMMITTEE ON INTERNATIONAL POLITICAL AND MILITARY AFFAIRS
DANTE B. FASCELL, Florida, Chairman
BENJAMIN S. ROSENTHAL, New York LARRY WINN, Ja., Kansas
ROY A. TAYLOR, North Carolina JOHN BUCHANAN, Alabama
DONALD W. RIEGLE, JR., Michigan
STEPHEN J. SOLARZ, New York
R. MIcHAEL FINLEY, Subcommittee Staff ConsuZtant
JON D. HOLsTINE, Minority Subcommittee Staff Consultant
CAROL A. BARRY, Staff Assistant
(II)
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CONTENTS
WITNESSES
Schroeder, Hon. Patricia, a Representative in Congress from the State of Page
Colorado 1
Downey, Hon. Thomas J., a Representative in Congress from the State of
New York 8
Fish, Lt. Gen. Howard M., Director, Defense Security Assistance Agency,
Department of Defense 24
Forman, Benjamin, Assistant General Counsel for International Affairs,
Office of the Secretary of Defense 29
Russell, Maj. Gen. Kendall, Assistant Deputy Chief of Staff for Research
and Development, Department of the Air Force 35
Eagleton, Hon. Thomas F., a U.S. Senator from the State of MissourL 42
MATERIAL SUBMITTED FOR THE RECORD
Report on H.R. 9861, Department of Defense Appropriations bill, 1976,
House Committee on Appropriations, September 25, 1975, pp. 245-246.. 5
Report on H.R. 6674, authorizing appropriations, fiscal year 1976 and the
period beginning July 1, 1976 and ending September 30, 1976, for military
procurement, research and development (and other purposes), House
Committee on Armed Services, Report No. 94-199, May 10, 1975, p. 1& 7
Library of Congress memorandum to Senator Thomas F. Eagleton 46
APPENDIX
Letter from GAO to Secretary of Defense, dated December 18, 1975 69
Letter from Hon. Patricia Schroeder to Maj. Gen. Ralph Manglione,
dated March 1, 1976 71
Letter from Lt. Gen. Howard M. Fish to Hon. Patricia Schroeder, dated
March 11, 1976 73
Summary of AWACS additional testing, prepared by the House Armed
Services Committee for Hon. Patricia Schroeder, dated November 17,
1975 76
Department of Defense Directives 2140.2 of January 23, 1974 and February
1976 77
cm)
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PROPOSED SALE OF AIRBORNE WARNING AND CON-
TROL SYSTEM AIRCRAFT (AWACS) TO NATO
THURSDAY, MARCH 11, 1976
HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERNATIONAL RELATIONS,
Su~cOM~II~E ON INTERNATIONAL
POLITICAL AND MILITARY AFFAIRS,
TVa8hington, D.C.
The subcommittee met at 2:05 p.m. in room 2247, Rayburn House
Office Building, Hon. Benjamin S. Rosenthal presiding.
Mr. ROSENTHAL. The subcommittee will be in order.
The Subcommittee on International Political and Military Affairs
meets this afternoon to consider the proposed sale to the North Atlantic
Treaty Organization of E-3A AWACS aircraft.
AWACS~the airborne warning and control system-is designed to
provide long-range high- or low-level surveillance of all aircraft under
all conditions in order that United States and aflied forces can be used
to counter any enemy action with maximum effectiveness.
On `February 27, 1976, the executive branch notified the Congress
under provisions of the Foreign Military Sales Act of this proposed
$2.2 billion sale of 32 E-3A aircraft and associated training and spare
parts. Under provisions of the act, Congress has 20 calendar days to
act t~o prevent the sale by adoption of disapproval resolutiolls by both
the House and Senate.
On March 8, 1976, Representatives Patricia Schroeder and
Thomas J. Downey jointly introduced House Concurrent Resolution
576 to disapprove this sale. The resolution was subsequently referred
to the Committee on International Relations.
To testify on the proposed sale, we are pleased to welcome to the
subcommittee both Representative Schroeder and Representative
Downey. Following their testimony, we will hear from witnesses from
the Departments of State and Defense. In addition, we expect to hear
testimony later this afternoon from Senator Thomas Eagleton.
Representatives Schroeder and Downey. please proceed in any order
you think is appropriate.
STATEMENT OP HON. PATRICIA SCHROEDER, A REPRESENTATIVE
IN CONGRESS PROM THE STATE OP COLORADO
Mrs. SCHROEDER. Thank you very much, Mr. Chairman, `and I truly
appreciate your giving us the speedy hearing.
First of all, I would ask unanimous consent to put my written state-
ment in the record.
(1)
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Mr. ROSENTHAL. Without objection, it shall be done.
Mrs. SCHROEDER. There are some inserts I would like to put in there
with it, too.
Mr. Downey and I have divided this topic between us. I am going to
offer the general overview of questions surrounding the proposed
AWACS sale to NATO. Mr. Downey will be discussing legal questions
that have arisen. In this way, we hope not to duplicate each other.
Mr. Chairman, we are here today to ask the House International
Relations Committee to refuse to give its tacit approval at this time to
the proposed sale to NATO of the airborne warning and control sys-
tem~~AWACS. We are asking this for two basic reasons. First, there
is insufficient specific information available about the sale at this time.
Second, there are many serious questions that should be answered
before any approval or disapproval of the sale is registered by Con-
gress. These reasons, as I am sure von recognize, are very different
from the usual ones behind resolutions of disapproval that are intro-
cluced to block a proposed military sale.
The apparent $68 million price tag for each of the planes discussed
in the sale description worries me. The present per plane cost for
research and development and procurement is estimated to run any-
where from $120 million to $180 million. Because of this, the price as
quoted in the administration description of the proposed AWACS sale
would be an artificially low one that would have the American tax-
payer subsidizing the NATO purchase of the AWACS planes. I really
think that this would be most unfair and should receive serious review.
One of the other things that I think should be emphasized is that
the passage of this resolution of disapproval would not prevent the sale
of AWACS planes to NATO. However, it would be saying that the
Department of Defense should not be offering the planes to NATO at
this subsidized price. To start offering some of our most sopl.misticated
weapons systems at this kind of subsidized price would be a real change
in policy; a real new turnaround for this Government.
Now, part of my problem with this whole thing is why the notice
was sent over in such a hurry. Why all of this immediately? Why all
of this coming up so rapidly?
Was it oniy an innocent coincidence that. the notice of the proposed
AWACS sale was sent to Congress on February 27? The Foreign
Military Sales Act as amended last year only gives 20 days to dis-
approve such a sale. Now, that happened to be 9 days before the com-
mittee that both Mr. Downey and I sit on, the Armed Services Com-
mittee, was in the process of marking up the procurement bill for the
armed services in which they were asking for six AWACS aircraft,
each of which would be used for NATO defense.
Now, as far as anyone can tell, not one of the NATO countries has
offered to purchase these planes at this time. They are still studying
the possibility, and these studies won't be done until late spring at
the earliest.
The Appropriations Committee has been studying this issue-and
I put things in the record-they have had some very heavy testimony
about problems encountered by AWACS during production and test-
ing, and some of the problems the Air Force has had with it. Our coin-
mittee has had problems with the AWACS system, and it seems rather
strange that this notification would be coming in here in February
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3
before NATO was prepared to negotiate to attempt to get this through
at these bargain basement prices.
Now, again, I reiterate that we are not asking you to disapprove
this sale for the normal reasons. So often people want a sale disap-
proved because of regional arms race, and they think that is only going
to fan it up; or because they are concerned about military j untas getting
weapons. Those things are irrelevant in this case. We certainly respect
our NATO allies. However, the question here is whether or not the
United States should be offering-in this offhand manner-such so-
phisticated weapons at significantly reduced prices. My concern-and
I may sound very cynical in saying this-is that this all-out effort to
induce NATO interest in the system appears to be a quick justification
of why we have dumped so much money into the program and should
continue to proceed with it. As I say, I really think that this transac-
tion should be disapproved until the Congress, the Armed Services
Committee, the Appropriations Committee, our NATO allies, every-
one has time to finish all their studies of the AWACS plane and its
utility to NATO defenses.
I hope that this puts the proposed sale in perspective. My testimony
lays it out in much more order. Inserts from the House Appropria-
tions Conirnittee report of last year include some very harsh language
accusing the Air Force of "wanton disregard for economy" in its
advocacy and direction of the AWACS program. I am also including
for the record an excerpt from House Report No. 94-199, issued by
the House Armed Services Committee, to accompany the fiscal year
1976 military authorization language.
I would like to put those in along with the November 1975 Defense
and Foreign Affairs Journal 1 which discusses many of the issues sur-
roimding the NATO purchase, and also, I think, will point out to the
committee members why the purchase is still up in the air and why
NATO isn't ready to go through with it.
Mrs. SCHROEDER. So often when you introduce the offer of sale and
ask the Congress to go along with it, you assume the other side has
agreed to the purchase. But this is not the case in this instance.
On February 27, the Defense Department notified Congress of its
intent to offer NATO 32 AWACS planes at $2.2 billion. I submitted
a series of questions on this sale. We received the answers only about
50 minutes before this hearing began. But again, I have also got the
letter here in which they are answering some of the questions, and I
think it is very interesting.
Question No. 9 says: "NATO ownership is anticipated but not re-
solved." So again they haven't pinned this down.
So the real issue is the subsidized price of the sale-and it is a very
heavy subsidy; almost a 40-percent reduction at the price described
in the February 27 notice. And the question is, why are we so anxious
to push the sale so fast; why don't we wait until the deal with NATO
is cut; why don't we demand more specific information about the
sale-and then approve it?
With that, I will turn it over to Mr. Downey.
[Mrs. Schroeder's prepared statement, together with attached ma-
terial, follows:]
1 The document will be retained in subcommittee files.
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PREPARED STATEMENT OF PATRICIA SCHROEDER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO
Mr. Chairman, I am coming before this subcommittee this afternoon to request
your speedy passage of House Concurrent Resolution 576, a resolution of dis-
approval introduced earlier this week by myself and Mr. Downey in an effort
to block the administration's plan to sell 32 Boeing E-3A airborne warning and
control systems (AWACS) to NATO for $2.2 billion.
The per plane price of this sale is approximately $08.75 million, including ini-
tial spare parts and training for people to operate the system. This $08 million
price tag is in stark contrast to the cost to the United States of producing the
planes-almost $120 million apiece. The difference of almost $50 million per
plane would of course be subsidized by the seller-the U.S. Government.
Notification of the Administration's plan to send such a letter of offer to NATO
was filed with Congress on Friday, February 27-13 days ago. Under the cur-
rent provisions of Section 36(b) of the Foreign Military Sales Act, Congress
has only 20 calendar days to block the sale. This leaves us with a very short dead-
line to meet. If this resolution of disapproval is not passed by March 18, one week
from today, this deal will slip through. Should the International Relations
Committee agree that this Administration proposal is unjustifiable, quick action
will be necessary within this time frame. I certainly appreciate the quick at-
tention which this matter has already been given by this Committee.
I should emphasize that this resolution is not intended to prevent the pos-
sibility of a United States sale to NATO of the Airborne Warning and Control
System. The resolution before this Committee would only prevent the Adminis-
tration from offering the AWACS planes to NATO at the terms specified in the
February 27 notice.
The issues which have prompted this resolution of disapproval are not the
usual ones which cause Congress to question a proposed foreign military sale.
The sale of the AWACS planes to NATO would not be contributing to a re-
gional arms race. In fact, the Boeing planes are strictly defensive in nature. The
aircraft are modified Boeing 707's equipped with sophisticated radar systems to
let them keep track of enemy aircraft movements. The AWACS radar plane is
unarmed.
The sale of 32 AWACS planes to NATO would also not be adding to the strength
of a foreign country's military junta-also a frequent concern when we consider
the impact of U.S. military sales policy overseas.
~\That House Concurrent Resolution 576 would do, if passed, is short-circuit
the Administration's attempt to increase NATO interest in this highly contro-
versial systems by offering the exorbitantly priced planes at a significantly
subsidized price.
The issue is this: Should the United States be subsidizing the foreign sale of
sophisticated weapons systems in an effort to convince other countries that a
controversial aircraft system is, in fact, a good deal? I don't think the United
States should. We aren't in the business of offering bargain-basement prices for
major weapons systems that are brandnew. If the system is a good one. then
our NATO allies will undoubtedly decide to purchase it for use in their defense.
If the AWACS system is not a good one-then its production should not have
been continued once the program began to run into problems.
The Administration is very aware that it desperately needs a NATO pur-
chase to prove its contention that the system is a good one, and that it is worth the
billions of dollars that have been poured into it. The February 27 proposal-de-
signed to make this boondoggle attractive to our allies-smacks of desperation
tactics.
In the interest of time, I would like to offer just a few questions for the
International Relations Committee to consider when reviewing this Adminis-
tration proposal.
First, why did the Administration feel so pressed to send Congress their notice
of intent to issue a letter of offer to NATO for sale of the AWACS planes in Feb-
ruary? The NATO decision about whether to purchase the AWACS system is
not due until at least May or June of this year.
Second, can we reasonably and in all honesty assume that the notification of
this proposed transaction-which clearly creates the impression of an imminent
purchase decision-by simple coincidence was transmitted to Congress only nine
days before the members of the House Armed Services Committee sat down for
our final markup of the fiscal year 1977 military authorization bill? The sig-
nificance of my committee's consideration of the fiscal yea.r 1977 bill is this:
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5
Included in the bill submitted by the Administration was a request that $474.7
million of the Air Force procurement funds be earmarked for procurement of
six (6) additional AWACS planes. Congress has already, in previous years,
approved expenditures for 13 AWACS planes that will be available for use in
defense of the continental United States. According to Department of Defense
estimates of the U.S. requirement for the planes to be used for this purpose, this
number should more than fulfill our needs.
So, we can logically infer from the available information that the money being
requested in this year's budget will be used to procure E-3A AWACS planes
for the remaining mission which has so far been identified by the Air Force:
NATO defense. This request has been made in spite of the fact that the NATO
membership, which we have been told will be purchasing the planes for their
use, has yet to decide whether they will, in fact, buy the planes.
The Department of Defense is well aware of the history of Congressional
interest in holding up funding for production of AWACS planes to be used for
NATO defense until the NATO members themselves have made a commitment to
the purchase. To illustrate this Congressional interest in the NATO purchase-
a transaction that has been discussed as imminent for quite some time-I would
like to include in the record excerpts from two House Committee reports. The
first report is that of the House Committee on Armed Services which accom-
panied the FY 1976 military authorization bill; the second is the report issued
last year by the House Committee on Appropriations to accompany the FY 1976
defense appropriations bill.
The Appropriations Committee comments are especially interesting. What
the committee describes is a consistent pattern of evasion, with the Air Force
constantly changing cost estimates and requirements for the AWACS system over
recent years. In fact, the Appropriations Committee in its report accuses the
Air Force of a "wanton disregard for economy" in its handling of the AWACS
program. This background is an important one against which the members of the
International Relations Committee should consider yet another set of facts
supplied by the Department of Defense about the AWACS program.
It is unfortunate that in the minds of many Members who have been trying
to pin the Pentagon down on any aspect of the AWACS program, the credibility
of their statements and estimates has long since been destroyed. I regret to say
that this proposed "sale" is only the latest incident in a pattern of confusion
created to blur the problems of the AWACS program. Because of this history, I
feel very strongly that no request of the Pentagon which concerns this program
should be given only a few days consideration before approvaL I am especially
concerned by the possibility that the Administration has attempted to create
the impression of an imminent NATO sale for the purpose of slipping through this
year's procurement request for the planes. I admit that this is a very cynical
perspective, but it is not a bias that I came to the AWACS program with; it is a
suspicion that has developed over three years of reviewing the program's progress
as a member of the Armed Services Subcommittee on Research and Development.
Jn short, Mr. Chairman, there are simply too many questions which remain
to be resolved about the sale for Congress to quickly approve the Administration
proposal for the transaction. Time case of AWACS is, unfortunately, anything but
routine as I think you will soon discover.
Again, I would like to thank the committee for its speedy action on our
resolution of disapproval and sincerely appreciate the opportunity to appear
before you to discuss the reasons for the introduction of the resolution by Mr.
Downey and myself.
REPORT ON H.R. 9861, DEPARTMENT OF DEFENSE APPROPRIATION BILL, 1976, HOUSE
COMMITTEE ON APPROPRIATIONS, SEPTEMBER 25, 1975, pp. 245-246
* * * * * * *
E-3A AIRBORNE WARNING AND CONTROL sYSTEM AIRCRAYI
The budget includes $415,500,000 for six additional E-3A Airborne Warning
and Control System (AWACS) aircraft, plus $15,000,000 in advance procure-
ment funding for another six aircraft to be budgeted in fiscal year 1977. This
aircraft is not only the most expensive aircraft bought by the Air Force, but
one of the most controversial. There also have been differing opinions on the
results of the AWACS performance during the most recent tests involving Navy
BA-GB electronic warfare aircraft in a "free play" environment. The speculation
72-453-76-2
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on whether or not NATO will buy this aircraft continues, and there are various
opinions as to the optimum number of AWACS required for our own forces.
Congress has previously funded a total of three research and development
aircraft and in fiscal year 1975 six production aircraft were funded. The cur-
rent total program cost is $3,800,000,000, Of which $1,500,000,000 represents re-
search and development effort. The total program would fund 34 aircraft,
including the three research and development vehicles to be modified later as
operational aircraft. NATO is scheduled to make a long leadtime funding decision
by Deceniber 1075, with a production decision scheduled for about July 1976.
During fiscal year 1973 budget hearings, AWACS was justified as a strategic
~ystem for the continental air defense role; The total program then was 42
aircraft, of which 10 aircraft were justified for support of tactical forces when
they deploy. During fiscal year 1974 budget hearings, the Committee was told
that AWACS was moved from the strategic to the general purposes forces cate-
gory, but that the move would have no impact on the program one way or the
other. The total program remained at 42 aircraft. During fiscal year 1975 budget
hearings, Air Force officials advised that the total program was reduced to 34
aircraft as an economy measure; nevertheless it was the judgment of the Joint
Chiefs of Staff that a minimum of 41 unit equipped AWACS are required either
for the tactical or the strategic defense mission. At that time the Committee
learned of the NATO interest in AWACS and the encouragement to `NATO to
buy the aircraft. However, the Air Force planned `to buy 34 aircraft first, which
would `be followed by a NATO production. During fiscal year 1976 budget hear-
ings, the Committee was told that even if NATO purchased a significant quantity
of AWACS aircraft, the U.S. requirement would remain at 34 aircraft.
It would appear from the foregoing that the Air Force is determined to buy
34 AWACS aircraft, regardless of the fact that the missions' priority had been
changed and that NATO may buy aircraft to support the NATO requirement.
This attitude seems to express a wanton disregard for economy. It is apparent
that if the current primary mission of AWACS is to support tactical forces, then
the requirement can be reduced. It is also apparent that if most of the 34 aircraft
are justified to support the NATO mission and NATO is willing to buy aircraft
to support that requirement, then the number of aircraft purchased by the U.S.
can be reduced accordingly. It is far more economical for this Government to
pay 25 to 30 percent of the cost of AWACS aircraft for NATO, than 100 percent
of the cost of 34 aircraft programmed by the Air Force.
The Senate Armed Services Committee, in its report on the fiscal year 1976
Defense authorization bill, questioned the number of AWACS aircraft pro-
grammed. It was that Committee's opinion that a total of 21 to 24 planes should
provide the Air Force with an acceptable quantity of aircraft to operate with
United States forces in their potential areas of direct conflict. The Secretary of
Defense testified this year that the Air Force requires 15 AWACS aircraft to
satisfy non-NATO requirements.
It is the considered judgment of the Committee that since the primary role
of AWACS now is to support the tactical mission, originally described by Air
Force officials as requiring 10 aircraft, and since NATO is seriously considering
buying a nieaningful quantity of aircraft to support the NATO requirement. then
no more than about 10 aircraft can be justified for the United States non-NATO
mission. ~NATO should be encouraged to buy AWACS in order to assume their
fair share in the defense of NATO forces in Europe.
The Committee recommends, therefore, $260,000,000 for two AWACS aircraft
for fiscal year 1976 as a buy-out of the United States requirement. These aircraft
should be added to the six aircraft funded in fiscal year 1976. The two aircraft
this year, plus the six funded last year and the three research and development
aircraft that' will be modified for operational use, will provide a~ total of 11
AWACS to support our own deployed forces.
The above recommendation will provide time for a NATO long leadtime funding
decision in December 1975 and a production' decision next year. The Committee
recommendation will result in a reduction of $155,500,000 and 4 aircraft plus
$15,000,000 in advance procurement funding that will no longer be required, for
a total reductiOn of $170,500,000.
* * ~* * * 1'
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REPORT ON H.R. 6674, AUTHORIZING APPROPRIATIONS, FIscAI~ YEAR 1976 AND THE
PmuoD BEGINNING JULY 1, 176 AND ENDING SEPTEMBER 30, 1976, FOR MILITARY
PROCUREMENT; REs~ARdn AND. DEVELOPMENT [AND OTHER PURPOSES,] HOUSE
COMMITTEE ON ARMED SERvICES,;REPORT No. 94-199, MAY 10, 1975, P. 18
* * * * * * *
AWAU~ (E-3A)
The Department of Defense for FY 1976 and the transition period requested a
total of $520.5 million in the procurement account for AWACS. This program was
discussed at length during the R&D hearings as well as during the full commit-
tee procurement markup. The testing program was criticized and questiOns were
raised as to the sufficiency of the R&D' effort insofar as the program goes.
As a result of the discussion and expressed dissatisfaction of the test program
to date, the Committee voted to reduce the procurement account by fifty percent
and conditionally authorizes $260.25 million for three additional AWAOS sys-
tems. These funds may not be expended until the Air Force continues comprehen-
sive tests to allay the concerns of theCommittee: These concerns, which relate to
AWAOS performance, are classified and are delineated in a letter to the Secre-
tary of Defense dated March 26, 1975. Further, these tests must demonstrate
the ability of the AWAOS system against formidable jamming systems' such as
the IDA-GB's in a realistic free play environment. The Committee requires that
the ~S'ecretary of Defense provide written certification that these tests are viable
and have been accomplished as directed herein.
Committee action on this program was further complicated by the revelation of
a proposal which is being considered within the Department of `Defense to sell to
our NATO Allies' the AWACS aircraft for approximately 50 percent of the cost
to the United States `Air Force. After a thorough airing of this proposal, the
committee directs that the Department of Defense take no action toward the con-
summation of any agreement with any foreign government relative to the sale
of AWAOS until the expiration of 30 days after a full report of the terms and
conditions proposed for such sale have been reported to the Committees on Armed
Sei vices of the Sen'tte and House of Representatives
Mr. ROSENTHAL. Would you want to read for the `recOM the relevant
portions of either the Appropriations Committee report or the Armed
Services Committee report that you `think sheds somd light on this
subject? ` ` `
* Mrs. SCHROEDER. I could do that, or we can simply put them into the
record. Whatever you would prefer to to do.
* However, since the inserts are rather long I think I might just put
them in unless you would prefer to discuss them ut this time.
Mr. ROSENTHAL. I looked at the paragraph on page 18 of the House
Armed Services Committee report that reads asfollows
Conimittee action on thi's program was further complicated by the revelation
of a proposal which is being considered within the Department of Defense to
sell to our NATO allies the AWACS aircraft ,f or approximately 50 percent of the
cost to the United States Air `Force. After a thorough airing of this'proposal the
Committee directs that the Department of Defense take no action toward con-
summation of any agreement with any foreign government relative to the sale
of AWAC'S' until' the `expiration of 30 days aftei~ full report of the terms and
conditions proposed for such sale have been repOrted to the Committee on Armed
Services of the Senate and House of Representatives
Is the action taken by the Department of Defense consistent with
those constraints ~
Mrs. SCHROEDER.' No,~it isn't'. We have not received that 30-day notice
in my committee And I would be happy to say, too that our commit
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8
tee, when marking up the fiscal year 1977 military authorization this
week, decided to hold up the $474.7 million procurement money for the
next six AWACS planes until the terms of the NATO sale were nego-
tiated, and NATO had decided to purchase the planes. The House
Armed Services Committee and the Appropriations Committee have
both felt very strongly about the need to have NATO commit them-
selves to AWACS.
STATEMENT OP HON. THOMAS ~. DOWNEY, A REPRESENTATIVE IN
CONGRESS PROM THE STATE OP NEW YORK
Mr. DOWNEY. If I can explain that point in some detail.
We already have 13 AWACS in our own inventory, production
AWACS, two R. & D. models, which can be converted for domestic
use. So when Pat mentioned the fact our committee had to take action,
we have money in the authorization bill for procuring six additional
AWACS. And the issue in the Armed Services Committee is why
should we produce six more aircraft, six more AWACS in this case, if
they are not for our own use?
So the House Armed Services Committee acted and put in money in
escrow pending the outcome of the sale simply because we don't need
any more AWACS for domestic use. This is clearly a foreign sale.
Mr. ROSENTHAL. The Appropriations Committee report on page 246
says as follows:
It would appear from the foregoing that the Air Force is determined to buy
34 AWACS aircraft regardless of the fact that the mission's priority had been
changed and that NATO may buy aircraft to support the NATO requirement. This
attitude seems to express a wanton disregard for economy.
Is that essentially the point you are making?
Mrs. SCHROEDER. Yes, this is essentially the point I am making.
As I said, the Appropriations Committee and the Armed Services
Committee have really been in tandom on trying to figure out what the
Air Force is doing with the AWACS program. M'y experience with
this program forces me to ask: Why does DOD come running in only 9
days before we mark up our authorization bill with this offer when the
NATO countries have not completed their study and have really not
made an offer to purchase? You really must wonder. It seems like some-
body is shoveling smoke or something.
Mr. DOWNEY. Thank you, Mr. Chairman.
I would like to read my statement. It is short and deals essentially
with the question of cost that Mrs. Schoeder has addressed herself to.
Since they first began funding the program, the Department of De-
fense has played Hamlet with AWACS: DOD has never really made
up its mind about what the plane should be used for or how much it
would cost.
The Defense Department once thought that the plane would be used
to direct air strikes over enemy territory in Europe. Then they realized
that over hostile territory the radar plane would either be jammed or
shot down. So now the plane is to be used over friendly European terri-
tory to coordinate air defense.
The Defense Department also planned to buy, at one time, 42
AWACS at a then-estimated cost of about $63.4 million apiece. But
so far, DOD has spent more than $180 million per plane to put 13
PAGENO="0013"
9
working aircraft in the US. inventory. And the GAO, in its Febru-
ary 27 Report on the Financial Status of Major Acquisitions, an ex-
cerpt of which I am submitting for the record,' has said that the
United States would have to buy another 19 AWACS (at a cost of
$1 billion) to bring the unit price below $110 million per plane.
The Department of Defense says that we should subsidize the sale
to our European allies of a plane which we are now producing pri-
marily for their use. This sense of generosity is not entirely unwar-
ranted since Western Europe's security does in many ways con-
tribute to our own. But there are many ways in which to subsidize
a sale.
One way is to `sell this plane to our European allies at a reasonable
price and offer to defray 25 percent or more of their total expenses
through the normal system of NATO cost-sharing arrangements. I
believe the exact figure is 24.2 percent, depending upon which coun-
tries are becoming involved.
This is hardly an extraordinary proposal; we have been sharing
NATO's expenses for years.
As an alternative, we could decline to pay a proportion of Western
Europe's total costs, but could subsidize the purchase price of the
aircraft to the individual countries who chose to buy it.
However, Mr. Chairman, in this case the Department of Defense
proposes to do both. They want to give away the planes to European
buyers at ridiculously low prices and they want to further subsidize
one-quarter or more of the total cost of the sale. Simply stated, the
plan is at $68.8 million, which i's the price that we are selling the
plane. If you consider 32 planes at $2.2 billion, we are offering them
at a substantially reduced rate to begin with. Then in the normal
course of events, in terms of cost sharing with our European allies,
we normally pick up an additional 24 or 25 percent of the cost. So we
are subsidizing them twice.
DOD wants to sell 32 AWACS to the Europeans for $2.2 billion,
or approximately $68 million per plane, even though the lowest esti-
mate of U.S. cost that I have seen is $104.1 million per copy.
Furthermore, the Defense Department wants NATO to contribute
about $190 million toward AWACS R. & D. expenses in connection
with their purchase of 32 AWACS even though the U.S. Air Force
has paid over $1.4 billion in research and development costs to put
15 AWACS in the U.S. inventory. So we are not recouping very
much of our R. & D. expenses.
According to a GAO letter released December 18, 1975, the Depart-
ment of Defense established in August 1975 a policy of recouping a
pro rata share of R. & D. expenses in foreign military systems such
as AWACS that have been in production 5 years or less. Under
this policy, according to the GAO, the DOD requires that the Secre-
tary of Defense approve any proposed waivers of this recoupment
policy.
Simply stated, it is now the Department of Defense position, ac-
cording to one of their own directives, that when we sell these air-
craft, major weapon systems within the last 5 years, that we recoup
a pro rata share in R. & D. Obviously this is the sort of thing in this
1 The document will be retained In the subcommittee's files.
PAGENO="0014"
10
particular instance we would want to do, considering the fact that
we are producing this aircraft for the Europeans.
Mr. Chairman, if NATO were to purchase 32 aircraft its pro rata
share of H. & D. expenses would be in excess of $950 million. Under
the proposed sale, we would, as I said, recoup about $190 million.
This proposed sale, therefore, runs counter to established Depart-
ment of Defense policy. In addition, I am familiar with no waiver
by the Secretary of Defense in this instance to permit this bargain
sale to be consummated. I submit that this GAO letter, a copy of
which I will furnish to this committee,1 provides additional reasons
why this sale should be disapproved.
Mr. Chairman, I might also add that, as Mrs. Schroeder pointed
out, we managed to get the latest figures approximately 20 minutes
before we came before this committee. One of the things that mem-
bers of the subcommittee should be alerted to-and I am. sure they
have dealt with this in the past-is there are four essential costs one
looks at. There is fly-away cost, which is the cost of the airplane;
there is the procurement cost, which is the cost of the airplane and
the initial spares; there is the program cost, which is the cost of the
airplane, the initial spares and the pro rated H. & D.; and there is the
life-cycle cost of an airplane, which is the initial spares, the R. & D.
pro rated, if it is a unit, and then the cost of operation and mainte-
nance over the course of the lifetime of the particular defense weapon
system.
Nobody has any idea what the life-cycle cost of this airplane is.
Despite the fact that there have been reams of information, hundreds
of questions asked, I have never seen a program cost of the airplane,
although procurement costs seem to abound. We see a lot of fly-away
costs because they happen to be the lowest figure. And I submit not
only is the sale premature but the facts surrounding the sale are so
disjointed, so confused, that rational men, I don't think, can disagree
we do not have all of the information concerning, and to approve
the sale at this point I think would be far from being premature;
I think it would be not in the best interests of this country or our
European allies.
Mr. ROSENTHAL. Without anticipating the position of the Defense
Department, do you see a distinction between subsidizing a plane for
countries in other parts of the world as compared to the NATO
alliance? In other words, the Defense Department spokesman said the
United States would, and I quote, "participate in paying the cost,"
the theory being this is a mutually interested alliance and that we get
some residual benefit out of anything the alliance does.
Mr. DOWNEY. Certainly. And I think that, as I mentioned, there
are `a number `of ways to subsidize `a sale. What we are not sure of at this
point is how we are going to subsidize this one. Are we going to sub-
sidize it twice; in essence, offering t'hem a reduced price for the air-
craft `and then subsidizing them as we do normal NATO expenses,
which is `two bites of the apple~ which is essentially what this sale
contemplates, or let's assume, taking the somewhat mystical missions
that plan has been given over the last 5 years-and I might add that
if one examines carefully its mission over the CONTIS, you might have
1See appendix, p. 69, for copy of Dec. 18, 1975, letter from GAO.
PAGENO="0015"
11
reason to believe that we might want to give NATO allies all our
airplanes since its mission over the Continental United States I find
to be somewhat loosely argued.
In any case, we can subsidize, we can give our NATO allies the planes
for what it cost the American taxpayers and participate to the tune
of 24 percent, or we can bargain on a country-by-country basis with
the countries who are interested in purchasing the airplane. There are
a number o,f different ways to consummate the sale, not necessarily
this one.
Mr. ROSENTHAL. Is there some other manufacturer that has a less
expensive version of this aircraft that would generally fulfill the same
mission?
Mr. DOWNEY. There are two airplanes that fulfill this mission. One
that fulfills the mission for the Navy is called the E-2C, and the De-
partment of Defense has, in the last year, gone over the relative merits
of the E-2C and AWACS. The E-2C costs approximately one-fourth
the cost of the AWACS, accomplishes essentially the same mission.
You would have to purchasemore E-2C's because it is a smaller plane,
it would not have the same number of hours on station. But I think a
very effective argument could be made to the fact that our Israeli
allies are purchasing E-2C's; our Iranian allies are interested in
purchasing E-2C's, and so are our Japanese allies interested in pur-
chasing E-2C's, both because of cost and because of performance
criteria.
Mr. ROSENTHAL. E-2C is manufactured by Grumman?
Mr. D0wNEY. Yes, Mr. Chairman, it is what they call the slow ball,
manufactured by Grumman.
Mrs. SHROEDER. I would like to `point out neither the Grumman E-2C
or the Boeing E-3A are made in Denver, Cob. It is very possible
to be concerned about the AWACS program without having an
apparent interest in the E-2C. I would also point out that the House
Appropriations Committee is in t'he process of finishing a report that
is comparing these two systems very objectively.
Mr. R05ENTI-IAL. They are evaluating both aircraft?
Mrs. SCHROEDER. They are evaluating both aircraft, one-on-one.
Mr. ROSENTHAL. Mrs. Schroeder, does the Armed Services Commit-
tee still expect a full report on the terms of any sale of AWACS 30
days before DOD takes any action on the sale?
Mrs. SCHROEDER. I think we do. There has been absolutely no amend-
ing of the prior language.
Mr. R05ENTI-IAL. Is it your position that the Department has sub-
verted both the intent and specific language of the Armed Services
Committee?
Mrs. SCHROEDER. That is my position. I would also like to point out
that my colleagues on the Armed Services Committee have only re-
cently reasserted their interest in the NATO purchase of AWACS. In
the fiscal year 1977 military procurement `authorization bill, H.R.
12834, the following language accompanies the $474.7 million author-
ized for procurement of six AWACS planes: the $474.4 million an-
t.horized for procurement `of six E-3A Airborne Warning `and Control
System (AWACS) aircraft shall not be expended until a favorable
decision is made by the North Atlantic Treaty Organization allies for
procurement of the system. My committee's interest in the level of
PAGENO="0016"
12
NATO commitment to this sale is very high. However, we have not
received any information-as specified in our report last year-advis-
ing us in advance of the proposed sale we are discussing here today.
Mr. DOWNEr. I think it is particularly persuasive considering that
our committee being somewhat conservatively oriented would cer-
tainly not make this sort of move unless they were very sure that there
was some question as to whether or not the sale should be consum-
mated as quickly as it seems the Department of Defense wants to
consummate.
Mr. ROSENTHAL. It seems unusual to me both the Armed Services
Committee and the Appropriations Committee, who have a long his-
tory of association and interest in the mission of the Department of
Defense, would take such a strong position, and notwithstanding that
the Department of Defense would seem to be making an end run
around both of these very significant committees.
Do you have any explanation for this? Do you think there is an
ulterior motive or anything?
Mr. DOWNEr. I think that if you examine the cost of the AWACS
to this country there is no question but that the Department of Defense
would like to sell some of these airplanes to our NATO allies so we
can begin to defray and lessen obviously the unit program cost of the
airplane, because if we do not sell the airplane to NATO it is going
to cost us $180 million for the planes that we have already produced.
Now, if we sell it to our European allies it will cost us less, so
obviously, there is some concern about selling it.
Mr. ROSENTHAL. They can recoup some of their original cost even if
they dispose of them at a discount?
Mrs. SCHROEDER. A larger total of AWACS planes produced would
cut the per plane R. & D. expenses, unless additional R. & D. were
required to adapt the AWACS F-3A for use in NATO defense.
Mr. ROSENTHAL. Even at a discount?
Mr. DOWNEr. To give you that. If we decided to sell them at the
discount rate that we are offering them we would be able to recoup
$190 million of R. & D. of the $1.4 billion in R. & D. the country has
already sunk into the cost of the airplane. It would be doing this despite
the fact that the European sale constitutes 68 percent of the total
number of AWACS.
So even if we do consummate the sale at that bargain basement price
we bear the lion's share of the R. & D. My contention is if you want to
go ahead and sell AWACS, that is another story, in terms of its mission
requirements. If you want to sell it to our European allies at least let
them pay a prorated R. & D. for the aircraft, let them pay the same
thing that the U.S. Air Force pays. I do not think that is too much
to ask.
Mr. ROSENTHAL. If we do not make the sale we are stuck with the
whole bulk of the R. & D. cost?
Mrs. SCHROEDER It would become a problem of throwing good money
after bad; when do you stop the program? If the Arm~d Services
Committee had moved ahead and allowed production of these six
planes to begin before NATO decides to buy the planes-with no use
for them in the U.S. inventory-then suddenly we end up with six
planes, no domestic requirement and no one to buy them at all.
Mr. DOWNEr. By your theory we could-
PAGENO="0017"
13
Mr. ROSENTHAL. I am merely trying to get all the facts out, it is not
necessarily my position. Go ahead:
Mr. DOWNEY. Under that position there is really nothing to say
that the figure of $68.8 million per plane is sacrosanct. If we wanted to
guarantee a sale, we could maybe offer it to them for $25 million and
recoup even a lesser percentage of R. & D.
The point is recouping such a smaller portion now one wonders what
the impetus for the sale might be, and I think this goes directly to the
question you were asking us before, that the planes are subject to
tremendous cost increases in terms of inflation. The sooner you con-
summate a sale the sooner you make a tender offer for a sale and estab-
lish the figure. That insulates future sales from any additional infla-
tion. If you agree, the foreign NATO allies agree to purchase for $68.8
million, and suddenly it becomes a bit more expensive to produce,
they are still going to get the plane at the price we offered it to them
for absent any increases in inflation.
There are some of the reasons why they want us to move quickly-
inflation being one of them.
Mr. ROSENTHAL. Mr. Winn.
Mr. WINN. Thank you, Mr. Chairman.
Mrs. Schroeder, you said the Armed Services Committee has had
problems with AWACS. What kind of problems are you talking
about?
Mrs. SCHROEDER. Well, the Air Force has changed the plane's official
mission several times. At this point, using the original Air Force
figures given to Congress, we have purchased all that we feel are needed
for the U.S. continental defense purposes. Given this why are they
still in our procurement budget? Normally we procure things that
we intend to keep for our inventory. Obviously, these are for sale,
but the problem has been to find out what the sale terms will be, who
the planes will be sold to and whether or not we should appropriate
the money to procure the planes before their use has been determined.
You hate to buy something that you do not need that might be sold-
and then again might not-or that might have to be sold at a great
discount to induce the buyer's interest. The committee could be very
embarrassed if it appropriates money to produce the planes for NATO
use and then suddenly finds out the planes are not going to be bought by
NATO members.
Mr. DOWNEr. I might add to Mrs. Schroeder's response, some of the
problems that AWACS has had, considering only now its European
mission and not its domestic mission. Originally the plane was sup-
posed to direct sorties over the FEBA, which is the forward battle
area in Europe. When this was originally contemplated there were
tests done to evaluate the AWACS performance.
As you know, it is a 707 with a cone that has very high-powered
radar that looks down and intercepts fighters, vectors our own fighters
against their fighters and does command and control. The problem with
its original mission to direct these sorties were twofold. One, it was
determined that with ground jamming much of the radar would be
rendered useless. The other problem was that during one of the tests,
in which a member of the Armed Services staff participated, he
programed EA-6B, which is a Navy jammer, against the AWACS
and followed in behind this jamming plane, two F-lOG fighters. They
72-453--76-----3
PAGENO="0018"
14
managed to kiss the AWACS, which indicates the fact they would be
able to blow it out of the sky. Part of the problem with the AWACS
was its vulnerability. So not to be denied the AWACS, the Depart-
ment of Defense decided that rather than have it vector fighters or
flying over the forward edge of the battle area, since it had a look-
down capability, they would move it back so there was a change in
mission.
I have seen in briefings by the Air Force, the AWACS located in
West Germany, in Great Britain, and Maine in the United States, and
it always has been somewhat of a mystery to me. exactly where this
plane is going to fly. I think we can now determine that we have 13
of them to the United States which will wait for either the Backfire
bomber, should we ever engage in strategic warfare, or the Bison
bomber, which is a turboprop plane, we will be able to identify these
airplanes when they fly in and shoot them down with this supposedly
Air National Guard F-lOG. That. is what the mission of the AWACS
is in this country. The mission in Europe has changed from the for-
ward edge of the battle area to be removed to just look down and give
our fighters some opportunity to know what is coming at them. Very
questionable. I still believe the airplane is very vulnera.ble.
Mr. WINN. Well, .Mrs.~ Schroeder, is it your position that the Air
Force AWACS should not be approved unless NATO buys AWACS
and; on the other hand, .the Congress should disapprove NATO being
offered AWACS?
Mrs. SCHROEDER. My position is NATO should not be offered
AWACS at this bargain basement sale.'
Mr. WINN. Other than that, you have `no objection to AWACS?
Mrs. SCHROEDER. If NATO, after reviewing its airborne early warn-
ing needs, wants to purchase AWACS, NATO certainly should `be free
to do so. However, I think, they ought to pay the fair price a.nd that
certainly we should not be doubly subsidizing the NATO purchase.
There are too many very sophisticated and complicated issues involv-
ing several congressional. committees in this House for the issue of the
NATO purchase to be indirectly approved in this manner. At this
time we have neither a specific buyer, price, or quantity to review. The
total number of planes invol~ed. in the sale is anything but firmed up.
In fact, one of my staff people balled DOD to ask how the number of
32 planes included in the notification to Congress was arrived at. The
answer was, "We ie'mlly did not know, but we assumed that would be
the outside number.'.' The. details of the proposed transaction are far
too vague for Congress to have to decide whether to approve or dis-
approve the sale at this time.
~That we are saying if you pass this resolution of disapproval, it
would not stop the sale or offer of AWACS to NATO. It holds back
congressional approval of the sale at what appears to. be a bargain
basement price. ` . . . .
Mr. WINN. Would you vote for it if they paid the full price?
Mrs. SCHROEDER. You bet-if they want to pay somewhere between
$120 million and whatever the prorated R. & D. costs are, according
to the existing requirements of the DOD directive, then I think that
is fine. We will be happy to make them for NATO at that price.
Mr. WINN. Would you vote for it?
PAGENO="0019"
15
Mr. IDOWNEY. I believe I would if it were for the prorated R. & D.
cost.
Mr. WINN. I am a little confused on the total price. In Mrs. Schroe-
der's prepared testimony, I believe she hit on this-quoted the figure
of $68 million as the offered price to NATO, but that it cost $120
million.
Mr. Downey a few minutes later says that the $68.8 million offered
price and $104 million. I am a little confused. Which one is right?
Mr. DOWNEY. The fact that you are confused, I think, is indicative
of the confusion that surrounds the sale, because we have spent a
great deal of time attempting to get the figures, and let me try and
justify some of our own confusion.
Everyone can agree that there are 32 planes that we propose to sell
to NATO. The total cost of the aircraft sold to NATO should be $2.2
billion. And if you divide that out, you find that it comes out to be
$68.75 or $68.8 million per copy.
When you attempt to figure out what the cost of the plane is to
the U.S. Air Force, you run into two problems. No. 1, if we do not
consummate the sale, then you have to include the production costs,
R. & D. cost, add that together, divide by the 13 or 15 number, and you
can divide by 13 if you want to just take a look at what operational
AWACS we have. You can divide by 15 if you want to fix up the two
R. & D. models, and then you can come out with two different figures
just to determine what the cost is to the U.S. Air Force. That is one
problem.
If you do that, if you use the figure 13, and divide it into the `imount
of money that we have spent to produce it, and the amount of money
we have spent to develop it, you come up with the figure that it cost
the United States $180 million per plane. That is one figure.
If you figuie that that sale is going to be consumrn'tted at the cost,
then you can come up with a figure of $104 million pei plane, because
that includes the anticipated sale to NATO.
So the fact there is confusion concerning the figures is, I think,
justified by, the fact that there is confusion concerning the sale.
Mrs. SCHROEDER. Your biggest problem, of course, is, how many
planes can you divide the research `tnd dei~ elopment costs `unong ~ And
right now if w e do not procure `my more, it is cle'u~ that the cost ~s
$180 million `u pl'we We both agree th~it the offei is `it $68 75 million
a pl'tne to NATO We both di~ ide the same way exactly The tot'ul
cost per plane would be deteimined by how many pl~nes NATO of
fered to buy. They could offer to buy 10. Then the real cost of the
plane is going to be much different than if they offer to buy 00. That
is why the discrepancy.
Mr. WINN. There is a discrepancy, but have, we not already met
most of the R & D cost, `tnd if we do not sell it to NATO w e `ire stuck
with the subsidy `inyw'iy, are we not ~
Mrs. SCHROEDER. We are not subsidizing anyone if we stop the pro-
duction line because of no need for future planes requested by the
Air Force.
Mr. WINN. I mean, based on what they have already produced and
where we are at this stage of the game.
Mrs. SCHROEDER. No; I think that what we want to do is recoup
some of the R. & D. costs because at $180 million a copy that plane
PAGENO="0020"
16
ends up being the most expensive plane we ever had, and it seems
only fair when you are selling an item commercially you should re-
coup some of the R. & D. costs that have been sunk into the program.
DOD even agrees with that.
Mr. WINN. If we sell it?
Mrs. SCHROEDER. If we sell it. If we do not sell it, there is no need to
make any more of the planes. We should not be spending very precious
tax dollars on items that nobody is going to buy or no one needs.
Mr. WINN. We have already spent the B. & D. money, `have we not?
Mrs. SCHROEDER. Why should we spend more money for the over-
all program just to cut the per plane costs? What's more, we would
be contributing to the NATO purchase at two levels-as buyer and
seller. We are not just talking about one "subsidy."
Mr. WINN. I understand.
Mrs. SCHROEDER. Why should we be spending tax dollars to create
an artificially low price for the plane? Have we become so desperate
for NATO purchase of AWACS even if our allies decide a more
economical airplane might better suit their needs? Other allies such
as Japan and Israel `have expressed interest in cheaper similar planes.
Perhaps the Department of Defense is putting on pressure to increase
foreign interest in A1,VACS so we can get the lower per plane cost of
those AWACS already in our own inventory.
Mr. WINN. The E-2C is not big enough to cover all of Western
Europe, is it?
Mrs. SCHROEDER. The mission would require a larger number of
planes, but that choice should be left to NATO without our sweetening
the pot. However, the Appropriations Committee should be finishing
its own review of the E-2C and E-3A, very shortly. I attempted to get
hold of it but Chairman Mahon felt that the report should not be made
available until that committee has finished reading it. They are just
now in the final stages of finishing it. I think he is correct. I also think,
however, that the report should help to shed some light on an increas-
ingly murky subject.
Again, my point here today is that the proposed sale should not come
steamrolling through here before we have really gotten all of the facts
about it. Otherwise we could sit down here with a lot of egg on our faces
in spite of the many warning signals we have had.
Mr. WINN. You both made statements that you tried hard to get all
of these costs, particularly Mr. Downey. Did you write the Air Force?
Mr. DOWNEY. We wrote the Secretary of Defense a day or two after
we learned about the offer of sale and-
Mr. WINN. And you just got the information back?
Mr. DOWNEY. Yes; which in fairness to the Air Force, it takes them
time and they want to be accurate and sometimes it takes a week or so.
But this is some of the problem. Getting all of the information attend-
ant to the AWACS program has not been that easy. For instance, for
some time there has been a report that compares the AWACS and the
E-2C within the Department of Defense, that I received last week. I
believe it was, and I had been asking for it for about a month and a
half. And I think that had we had that information a little sooner it
might have been important for our NATO allies to have seen that re-
port in terms of deciding which planes they would like to purchase.
Mr. WINN. The E-20 is built by Grumman, is it not?
PAGENO="0021"
17
Mr. DOWNEr. It is built by Grumman.
Mr. WINN. And it is built in New York?
Mr. DOWNEr. The E-2C is built by Grumman. It is built in the Third
Congressional District. The `airborne instrument labs that make, I
believe, some of the displays for the AWAC is built in my district.
Mr. WINN. So you have-
Mr. DOWNEr. I am a net loser and a net gainer, depending upon
which we get. If we decide to build more E-2C's, people are employed,
and if we decide not to build AWACS, people in my district are not
employed. I am concerned. Both are built in and around my district.
Mr. WINN. Your opposition is not based on political judgment as to
the nature of the threat of the system but it is designed, that the system
is designed to meet, or on a technical judgment on capability and vul-
nerability of the system.
Mr. DOWNEr. It is, and I think, Mr. Winn part of the problem is I do
not carry an order pad for Grumman when I go before committees and
I think it is sometimes very difficult to appear to come here in good
faith and say to you this sale is a bad idea because there are too many
subsidies in the AWACS airplane compared to the E-2C, I do not
care who builds the E-2C, I `think if you take a look at the secret
reports your eyebrows will be raised in terms of the fact E-2C does
much of what the AWACS does, much of it better. You need a few
more, but you would be a-
1\~r. WINN. Do you not think the experts in the Air Force have taken
a good look at the E-2C and AWACS and any other plane?
Mr. DOWNEr. Yes; I do, and not to impugn their integrity, I think
when you consider the amount of money that has been sunk into the
AWACS, that they are somewhat reluctant to come forward and say
we made a couple of billion dollar mistake here, we did not take a look
at E-2C quite in the same light we would like to. That is why the De-
partment of Defense, Mr. Parker, who is not beholden necessarily to
the Air Force, did the survey between E-2C and AWACS, `and the
survey is there for you to read, `and `there for technical experts to read
and make their evaluation.
Mr. WINN. Well, Air Force `could well have made a mistake. As I
recall 2 or 3 years ago the Grumman people were notorious for their
mistakes.
Mr. DOWNEr. Yes, sir.
Mr. WINN. We are all human.
Mr DOWNEr. That is right, and rather than to err again in this sale,
that is why we bring the resolution before you.
Mr. WINN. Thank you.
Mr. ROSENTHAL. Mr. Buchanan.
M~r BUCHANAN. Thank you. I know we have a time problem and-
Mr. ROSENTHAL. We will adjourn on the second bell and come back
6 or 8 minutes later.
Mr. BUCHANAN. There seems to be a substantial difference of `opinion
as to the difference in quality of these two aircraft and their capabili-
ties between you and the Air Force or the Department of Defense, as
I understand it. Time will probably catch up with me, Mr. Chair-
man, but I am going to read from a March issue of Government Ex-
ecutive magazine which was placed in my hands.
PAGENO="0022"
18
Mr. ROSENTHAL. Why do we not adjourn and restate the question
later so we do not lose track of the continuity.
[A recess was taken.]
Mr. ROSENTHAL. While we are waiting for Mr. Buchanan we might
continue on.
The letter of offer was for how many airplanes, do you know?
Mrs. SCHROEDER. Thirty-two.
Mr. ROSENTHAL. Was it for 32 or less than 32? The reason it be-
comes relevant is the apportioned cost both for research and develop-
ment then becomes significant.
Mr. DOWNEY. I think that, if I recall, the offer was up to 32-it does
not necessarily have to be 32, it could be less than 32.
Mr. ROSENTHAL. If you do not know what the number is, you do not
know what the proportion is for research and development.
Mr. DOWNEY. If you do not know the number it becomes exceed-
ingly difficult to determine how much it is going to cost and how much
we are apportioning for R. & P.
Mr. ROSENTHAL. The letter of transmittal says 32. It does not say
up to 32.
Mrs. SCHROEDER. It says 32.
Mr. DOWNEY. I stand corrected.
Mr. ROSENTHAL. But, Mr. Greener, who is the public relations per-
son for the Pentagon, sort of unilaterally amended the letter of offer,
because he says it means up to 32. I do not know if you can do that.
Mrs. SCHROEDER. I do not know, and especially since there is no firm
offer for any number, that is why it is impossible to figure out the per-
unit cost included in the proposed sale. The notice says $2.2 billion
total sale value, and that is how we arrived at the per-plane cost of
$G8.75 million. That was the best estimate we could make with the in-
formation `available.
Mr. DOWNEY. It would be an interesting theory in first year con-
tracts at law school to really determine whether this is a legitimate
offer under the Uniform Comrnercia.l Code since it did not specify
amount.
Mr. ROSENTHAL. The point is the letter of offer says 32 aircraft at a
total estimated value of $2.2 billion, and then Mr. Greener apparently
amended that in the press conference on Tuesday, March 2, at
11 :30 a.rn., during the following question and answer:
Question. Well, if they buy 32 then the cost comes to $2.2 billion; is that
correct?
Answer. Not necessarily so.
Question. That is what your announcement says.
Answer. Up to 32 and up to 2.2.
That is an incorrect statement of what the letter of offer says.
Question. But your announcement does not say up to 32.
Answer. Then I am making the statement now.
I do not know if you can do that legally. There is no way of allocat-
ing the apportionment of the R. & P. costs unless you know specifically
how many aircraft. It may be that General Fish can shed some light
on this.
Why do we not yield to Mr. Solarz until Mr. Buchanan returns, if
Mr. Buchanan returns.
Mr. SOLARZ. Thank you, Mr. Chairman. I first wouid like to con-
gratulate our two colleagues for making this presentation this after-
PAGENO="0023"
19
noon. I certainly applaud their concern for economy and I think that
we are very much indebted to them for raising some very serious
questions.
For the purpose of the record, I would like to clarify some of the
economic arguments that have been presented.
We have been given to believe that this plane is being sold at a very
significantly reduced and subsidized price since, according to the gen-
tleman from New York, the lowest cost per copy that he had ever seen
was about $104 million, and the plane is being offered to our NATO
ullies for $68 million.
Now, does this mean, with respect to the sale of each plane, that we
will be paying an additional $34 million of our own to make up the
difference between the $68 million and the $104 million?
Mr. DOWNEY. That is correct, essentially.
* Let me just try and put it in-
Mr. SOLARZ. When you say essentially, what I am trying to get at,
does this mean that the U.S. Treasury is going to have to pay the
manufacturer of this plane $34 million together with the $68 million
that is paid them by NATO?
* Mr. DOWNEY. The way it works, Steve, we have already sunk the
cost to develop the airplane into the airplane. That has already been
authorized and most of it, I do not know most of it, but part of it has
been appropriated.
Now, what we have to understand is that in order to recoup that
* money we would have to charge a higher pro rated share of B. & D.
per plane than we are charging them..
Let me give you an example: If the $1.1 billion and R. & P. cost
were evenly allocated among the 47 AWACS, that would mean that
each AWACS would have to bear $29.27 million of the R. & P. OK.
What that would mean, for this sale, in particular, is, it would increase
the amount of money that the European allies or European allies
would have to pay from $2.2 billion to $2.976 billion, an increase of
about $763 million, if we were to apportion the B. & D. over the 47
aircraft, 32 to NATO and 15 that we have in our own country.
Mr. SOLARZ. Of the $68 million which each plane will cost, I gather
that the standard NATO formula for cost-sharing would require us
to lay out 25 percent, or roughly $17 million per plane?
Mr. DOWNEY. Approximately.
Mr. SOLARZ. And if you then wanted to figure out the total amount
of new obligational expenditures that this sale would cost us, you
would then take the $17 million per plane that we were going to be
selling and multiply that by 38, presumably.
Mr. POWNEY. Thirty-two.
Mr. SOLARZ. Thirty-two, which is the total number of planes that
are being sold.
The total cost would exceed, would it not, the $190 million which
NATO will be paying back to us as their share of the B. & D.
expenses?
* What I am trying to ascertain is, if you look at the net figures
involved, whether the argument is valid that though NATO is reim-
bursing us for a percentage of the R. & P., we nonetheless will not get
our money back. Given our share of the NATO purchase-which is
25 percent of the $68 million for the 32 planes-doesn't our share
PAGENO="0024"
20
of the cost of the 32 planes, even at a subsidized price, exceed the
NATO payback forR. &D.?
Mr. DOWNEY. Right.
Mr. SOLARZ. Consequently, in purely economic terms, one would
have to view this sale as a net loss to the Treasury rather than as a
net plus. That is not to say we should not go ahead with the sale.
Mr. D0wNEY. The reason I am uncomfortable with that, since the
money has already been authorized and will be appropriated, it is
difficult to talk in terms of the taking away from. It is a question
of what we are not getting, if you will. I think that would be not only
the accurate way to view it but I think to phrase it another way would
be misleading.
Mr. SOLARZ. The $190 million which the Defense Department wants
NATO to contribute toward the R. & D. costs would be apportioned on
a per unit basis for each of the planes that they would be securing
as a result of this sale, or is that $190 million lump-sum payment above
and beyond the $68 million per plane?
Mr. DOWNEY. The $190 million is a percentage of the total, approxi-
mately 13 percent of the total U.S. R. & D. costs that have been sunk
in the plane, and that is what our European allies would be paying
for the R. & D. That is the apportioned R. & D. cost.
Mr. SOLARz. Is that on top of the $68 million per plane?
Mr. DOWNEY. That is included.
Mr. SoIARz. That is included in the $68 million?
Mr. DOWNEr. Yes.
Mr. Sor~anz. I thought it would be helpful to straighten that out.
It seems to me that there is a potential inconsistency in your argu-
ment. On the one hand, you come to the committee a.nd you say that
from an economic point of view this represents the kind of subsidy
to our NATO allies which is difficult to justify because the planes are
costing us far more than they are costing NATO. But you say, on the
other hand, if the price is a fair one then you would be both willing to
support it.
* You have also said in terms of the performance of the plane it leaves
a lot to be desired, that there are strong reasons to believe that in the
event we ever need it it would not work effectively. That would seem
to suggest that, even if we got a fair price for the plane, it might not
make sense to go ahead with the sale, particularly in view of the fact
that we would have to contribute 25 percent of the cost. How can you
]ustify our supporting the sale of a plane which you yourself contend
does not work?
Mrs. SCHROEDER. Well, I really think this is a part of the argument
that we should not get into in this type of hearing; since to really com-
pare the two planes accurately, we probably ought to do it in closed
session with a technical expert on hand. I think NATO should make
the decision about the plane's utility for its defense and NATO will
make that decision. I don't think it is our place to come in and tell
NATO, "No; you cairnot have the plane, you have to have this plane,"
I think that is too paternalistic. I am saying that approval of $474.7
million to procure planes whose need has yet to be determined is pre-
mature. The utility of AWACS for NATO defense is undergoing
extensive study by the NATO members.
PAGENO="0025"
21
Many questions about the appropriate airborne early warning air-
craft have been raised, and the decision will not be made by NATO
until late May. NATO's requirements are being thoroughly reviewed.
Mr. SOLARZ. Have you reached any conclusions, based on your study
of this question as a member of the Armed Services Committee?
Mr. DOWNEY. Well, I have, but I do not think they are relevant to
this and I really do not think that is something that should be taken
into account in a 20-day period on whether you approve or disapprove
a sale, and the subsidy issue comes in and IR. & D., all these things.
It seems to me that is what we should be really focusing on and talking
about, which one is best for their scenario. I think they are the ones
that can best determine this.
I think it is important to understand that is a decision that is made
by NATO ministers and by the United States as part of NATO and it
is a decision that they have made that this airplane for their purposes,
meets some mission requirement that they would like to have met.
They would like to know, for instance, since their ground radars can-
not cover every aspect of Europe, especially the forward battle area-
they would like to know more about the airplanes in a hostile environ-
ment that are coming across, the type of jamming that would be oc-
curring, and it is their feeling that some airborne warning and control
system, whether it be the AWACS or E-2C, is something they think
is important. My question to you, one of the issues on the merits, and
I agree with Mrs. Schroeder, this is really not the place for it, is the
whole question of what the AWACS does over the continental United
States.
We talk about what we are spending our money for, what is it de-
fending? It is defending against strategic attack against Soviet bomb-
ers that will arrive 9 hours after Soviet missiles have arrived. Is it
going to defend the country from a tactical air attack, from what
country, for what purpose? I do not think any of these questions have
been answered.
I think, with respect to AWACS over Europe, you could make a
better case. AWACS over the continental United States, you are strain-
ing the credibility of even the most willing.
Mr. SOLARZ. I was about to yield back my time to the gentleman
from Alabama, but I would be happy to yield.
Mr. WINN. Just briefly. My understanding is NATO has been
working on an airborne control system for 3 years and we have been
involved in it. I cannot believe all of these experts in NATO `are going
to sit around and not make these decisions.
Mr. DOWNEY. They will. I mean, assuming they will.
Mr. WINN. I cannot believe we do not know what direction they
want to go if we have been involved in it.
Mr. DOWNEY. If we do-
Mr. WINN. I am going to have to take their decision over yours.
Mr. DOWNEY. Mr. Winn, that is a judgment you have to make. Some
people may know what decision they have made. The Congress of the
United States does not appear to.
Mr. SOLARZ. As of this point you are both saying NATO has not
yet made a final and formal decision that they want this system?
Mrs. SCHROEDER. That is my understanding, they have not come for-
ward and said we want to buy 32 of them at $2.2 billion. We are say-
ing to them we will offer you 32 of them at $2.2 billion.
72-4~3-76------4
PAGENO="0026"
22
Mr. SOLARZ. I must say in my brief experience on this committee, I
cannot recall another situation where we were asked to approve a let-
ter of offer for a sale of military equipment that the intended recipient
of that equipment had not already requested of us. It would appear
to be an example of putting the cart before the horse.
Mrs. SCHROEDER. That in essence is my position. This is not saying
we should not sell NATO AWACS. We are saying, why all this, why
now, and what is it all about at this point?
Mr. ROSENTHAL. I think sometimes we~ get sidetracked. The issue
is both committees, the Armed Services and Appropriations Commit-
tee, have laid down certain mandates and constraints to what should
happen and it is your position, as I understand it, that they are sub-
verting both the intention, the spirit and the direction of the commit-
tee, is that correct?
Mr. DOWNEY. I think that is implied in the committee testimony
that we have placed in the record.
Mrs. SCHROEDER. May I also say we are still going through the DOD
answers to our questions which were received just before the hearing.
Answer No. 11 is very interesting. It says in February 197G NATO
requested that the United States develop an initial letter of offer to be
delivered in May as part of the contract definition process. If a letter
of offer has been requested for May, why are we having to review it
during 20 short days in February before all the facts are in? Espe-
cially with two committees that would like 30 days' notice? If NATO
requested we come forward with something by May there is plenty of
time to notify both committees to go through the proper procedures.
Mr. DOWNEY. If I might respond to one of the points you made. If
in fact our NATO allies have been working for 3 years, and let us
assume for argument sake they have been working for 3 years to try
and decide which airplane to buy, whether AWACS or E-2C, it would
seem to me that we would have gotten some signals long before of the
definite intentions. In fact, there have been rumblings that they are
concerned about the cost of this plane and one of the other things that
was not communicated and is not known is exactly who will build this
airplane. You know we have got arrangements with the British, for
example, to possibly buy some of their Harrier aircraft, which is a
~/STOL airplane, for the Marines for close combat support~ and the
British have been saying, well, you know, we would like to have this
AWACS but it is awfully expensive and there has been a lot of back-
ground negotiations that we are not privy to. But that all baits the
question. The essential question is not whether they worked on it for 3
years or 33 years and whether they want this or the E-2C. All we are
saying is that in order to rush ahead prematurely and approve a sale
with the R. & D. money really does not even match what we are paying,
our Air Force is paying, is a mistake and that is what we want you
to look at and that is the essential question.
Mr. SOLARZ. Supposing it turned out that NATO decided that it did
want the AWACS system and it felt in terms of its strategic and tacti-
cal requirements the AWACS was superior to Hawkeye-but that it
could not afford to purchase the system if in fact we applied the stand-
ard formula. In other words, if the situation is that NATO said to us
that we would like AWACS but we can only afford it at the price con-
PAGENO="0027"
23
tamed in this particular letter of offer, what would be your reaction
at that point?
Mrs. SCHROEDER. I think at that point we should all sit down and
talk about it. But I do not think we are at that point now. We are not
anywhere close to that point and as a result, `have been forced to spec-
ulate on scenarios. We can play the scenario factory all afternoon but
this offer should not be approved or disapproved based on conjectures.
Mr. SOLARZ. If in point of fact there is reason to believe that a higher
price would put AWACS out of their price range-that is purely not
a hypothetical consideration-are you in effect telling us to be harder
bargainers `and get the best deal possible, but in the final analysis, if
NATO wants and, nee'ds the planes, we ought to approve it? Or are
you saying, as a fundamental principle, no matter how much NATO
may want it, unless we apportion the R. & D. costs and establish i~
price which is fair in comparison to our previously existing formulas,
we should not go ahead with it?
Mrs. SCHROEDER. I think I would be saying what we want to be sure
we are not doing its offering them to NATO at a bargain price simply
so that we do not look like we `spent too much money on the weapon
system of limited utility. We would have a bigger pool to divide the
B. & D. cost against and we will not be faced with the $180 million
per plane price tag we now have. We want to make sure we are not
pushing `this sale simply as a face-saving measure in our own weapon
procurement program. When we get to a specific NATO offer on
AWACS, if we get one, then we should be hard bargainers. In any
case it seems silly to `make your lowest offer your first offer.
Second, what do we do about the U.S. position o'f creating an arti-
fically low cost to our NATO allies as both buyer `and seller of the
plane? I think we want to say if we give them a lower price, then what
do we do about our 25 percent contribution as a purchaser? These are
all hard issues we should talk about.
Mr. ROSENTHAL. For the record, the letters that either of you sent to
the Defense Department, or both of you sent to the Defense Depart-
ment, with their reply, ought to be included in the record, and without
objection, shall be included, and the record will be open for any sup-
plementary material you think would be pertinent to the inquiry.1
Thank you bo'th very much for coming. We want some time with our
distinguished friend from the Defense Department, General Fish. You
bring with you your associates to testify in support of the proposed
sale. We are pleased to have you with us. From the Department of
Defense, Lt. Gen. Howard M. Fish, who is accompanied by Maj. Gen.
Kendall Russell. Assistant Depu'ty Chief of Staff for Research and
Development, Department of the Air Force; Mr. Benjamin Forman,
Assistant General Counsel for International Affairs, Office of the
Secretary of Defense; Mr. Theodore S. Wilkinson, Special Assistant
to Director, European and NATO Region, Office of the Assistant
Secretary of Defense (International Security Affairs).
To answer any questions relating to the foreign policy aspects of
the proposed sale we h'ave available from the Department of State,
Mr. Charles C. Flowerree, Director, Office of International Security
Policy, Bureau of Politico-Military Affairs, Department of State;
1 See appendix, p. 71, for letters referred to.
PAGENO="0028"
24
and Mr. Eric Rehfeld, Office of NATO and Atlantic Political and
Military Affairs, Bureau of European Affairs, Department of State.
General Fish, we are very pleased to have you once again before
this subcommittee.
STATEMENT OF LT. GEN. HOWARD M. FISH, DIRECTOR, DEFENSE
SECURITY ASSISTANCE AGENCY
BIOOBAPH~
Lt. Con. Howard M. Fish is the Director, Defense Security Assistance Agency,
and Deputy Assistant Secretary of Defense (International Security Affairs) for
Security Assistance.
General Fish was born in Meirose, Miun., on Aug. 1., 1923, and graduated from
St. Cloud Cathedral High School, St. Cloud, Minn., in June 1941. He entered the
Army Air Forces in 1942 and served as an aerial gunner at Tyndall Field, Fla.
He entered advanced navigator training at Monroe, La., in November 1943, and
received his navigator rating and commission as a second lieutenant in the Army
Air Corps in July 1944.
During World War II, from October 1944, he served as a navigator in the
European Theater of Operations on a B-li aircraft crew with the 419th Bombard-
ment Squadron, 301st Bombardment Group in Italy. He was shot down over
Vienna. Austria, in February 1945, and spent the remainder of the war as a
prisoner of war in Germany.
In November 1945 he attended a student navigator refresher course at Ellington
Field, Tex., and at Fairfield-SuiSun Air Base, Calif. In February 1940 he was
assigned as assistant statistical control officer, Chanute Field, Ill., and in April
1946 he was transferred to Orlando, F1a~, for statistical control indoctrination
training.
General Fish returned to Germany in July 1946, serving first in Berlin at
Tempeihof Air Base, and later in Wiesbaden as a statistical control officer. He
also flew in the Berlin Airlift.
He returned to the United States in July 1949 and trained as a navigator-
bombardier at Mather Air Force Base, Calif. In April 1950 he was assigned to
the 84th Bombardment Squadron at Langley Air Force Base, Va.
During the Korean War, in July 1950, he was transferred to the 162d Tactical
Reconnaissance Squadron, which was immediately sent to Korea where he flew
63 combat missions. General Fish later served as a navigator with the air crew of
the Commanding General, Eighth Army, in Korea. In March 1951 he was assigned
as Chief, Program Analysis Section, 374th Troop Carrier Wing, Far Eastern Air
Forces.
He returned to Langley Air Force Base in June 1951 to train replacement
combat crews for B-26 aircraft units in Korea. Initially, he served as a squadron
navigator in the 4400th Combat Crew Training Group and later as a squadron
executive officer and group director of operations and training.
In January 1954 General Fish attended the Air Command and Staff College,
Maxwell Air Force Base, Ala. He returned to Langley Air Force Base as execu-
tive officer for the 405th Fighter Bomber Wing.
In June 1950 he entered the University of Chicago and graduated in August
1957 with a master's degree in business administration. He became a member
of the business scholarship fraternity, Beta Gamma Sigma.
He was transferred to Europe in October 1957, serving first as Wing Comp-
troller for the 00th Troop Carrier Wing at Dreux Air Base, France, and then as
Coniptroller, 7310th Air Base Wing, Rhein-Main Air Base, Germany.
In July 1900 he. entered the Armed Forces Staff College at Norfolk, Va., and
in January 1961 be was assigned as Director of Data Automation, and later as
Assistant Deputy Chief of Staff, Comptroller, Headquarters Eastern Transport
Air Force, McGuire Air Force Base, N.J.
In August 1903 he entered the Air War College, Maxwell Air Force Base, Ala.,
and while there received a master's degree in international affairs from The
George Washington University. In July 1964 he was assigned as a plans and pro-
grams officer in the Directorate of Plans, Headquarters U.S. Air Force, Wash-
ington, D.C. He was named Assistant for Analysis to the Deputy Director of
Plans for Force Development in December 1967.
In March 1969 be was named Director of Tactical Analysis, Seventh Air Force,
Tan Son Nhut Airfield, Republic of Vietnam.
PAGENO="0029"
25
General Fish returned to Headquarters U.S. Air Force in July 1070 as the
Deputy Director of Doctrine, Concepts and Objectives, Deputy Chief of Staff,
Plans and Operations. He was appointed Deputy Director of the Budget, Office
of the Comptroller, in February 1971 and became Director of the Budget in
October 1973.
In August 174 General Fish became Director, Defense Security Assistance
Agency, and also the Deputy Assistant Secretary of Defense (International Secu~
rity Affairs) for Security Assistance.
His military decorations and awards include the Legion of Merit with one oak
leaf cluster, Distinguished Flying Cross with one oak leaf cluster, Air Medal
with four oak leaf clusters, Air Force Commendation Medal, and the Purple
Heart. He holds a master navigator rating.
General Fish is married to the former Jamie Katherine Tom of Corpus Christi,
Tex. They have one son, Howard 1~Iath.
He was promoted to the grade of lieutenant general effective Oct. 4, 1974, with
date of rank Oct. 3, 1974.
General Fisn. Thank you, Mr. Chairman. I appreciate this oppor-
tunity to appear b~fore you concerning the proposed sale of the air-
borne warning and control systems (AWACS) aircraft to the North
Atlantic Treaty Organization. On February 27, 1976, under the pro-
visions of section 36 (b) of the Foreign Military Sales Act of 1968,
as amended, the Congress was notified of this proposed sale of AWACS
aircraft to NATO.
Utilizing a modified Boeing 707-320B airframe topped by a 30-foot
rotating radoine and redesignated as an E-3A aircraft, AWACS will
employ `a newly developed radar system to detect and track aircraft
flying at high and low altitudes over both land and water. It will
be able to look down and separate targets from the ground clutter
returns which confuse present-day radar. AWACS has two dominant
features: flexibility and mobility. With the hardware elements housed
in a jet aircraft, the survivability of the system in warfare is dramat-
ically increased over a fixed system. In the event of loss of one df the
airborne systems, rapid replacement can take place denying the oppor-
tunity for the intruders to fly undetected. Surveillance volume for both
high and low targets is increased with the elevated radar.
The AWACS capability is urgently needed in NATO Europe. In
the May 1975 meeting with the Defense Planning Committee, NATO
Ministers endorsed the undertaking of a contract definition activity to
establish a basis for subsequent decisions, now projected to begin in
June 1976, on whether NATO should procure an airborne early warn-
ing (AEW) system, based on a variant of the E-3A. They further
endorsed the establishment of a provisional NATO AEW Program
Office to manage the contract definition and potential follow-on phase
lmder the guidance of a steering committee.
At the December 1975 ministerial meeting, the NATO Defense Plan-
ning Committee approved continuation of the contract definition activ-
ities and endorsed preparatory phase activities which are to be funded
by interested nations.
The United Kingdom, the Federal Republic of Germany, and Can-
ada have made tentative offers to share in the early prefinancing costs
for preparatory phase activities comprising research and development
for a NATO version of AWACS and other planning activities. The
United States will also be expected to contribute funds as a partici-
pant in this NATO project. We hope that additional NATO nations
will join in the financing.
PAGENO="0030"
26
A draft statement of understanding on prefinacing by interested
nations is currently being worked out at NATO Headquarters, and,
subject to agreement or any amendments, may be signed as early as
April 1976. This statement of understanding covers preparatory phase
activities leading into `a potential procurement phase anticipated to
begin during calendar year 1977.
I think there are three basic issues that have been raised in front of
the committee. One is why now, why do we notify the committee at
this time? Second, is the price, and third, is NATO interests.
I have and will submit for the record a classified letter that I received
on the 23d of February, directed to me, requesting a letter of offer from
NATO. So we have a formal request for a letter of offer.'
We also have as a result of our negotiations, a plan to have a state-
ment of understanding, signed early in April, which will involve
financing by NATO nations, and if the Congress agrees and approves
and appropriates the money, U.S. participation.
It has been our practice under 36(b), and in appearing before this
subcommittee, to inform the subcommittee as early as possible of these
arrangements so we do not commit the United States to a course of
action of a sale of over $25 million, and this certainly will be over $25
million, without coming to the committee `and informing them. This is
without prejudice to some of the issues raised by the previous
witnesses.
In the letter that I furnished to Mrs. Schroeder was a statement
which you will be able to review, in its entirety, that commits the De-
partment of Defense to completely comply with the 30-day notification
that the Armed Services Committees have requested. But we want to
maintain our credibility with the Congress. We want to comply with
the rules, as we have in previous practice. And I will remind the com-
mittee that last year when we signed the memorandum of understand-
ing on the F-16, although we have still not signed the letter of offer
on the F-16 and we are still negotiating details of it, we came to the
subcommittee and gave advanced notice underneath 36(b) procedures.
There was no intentto in any way steamroller, or rush. We felt an obli-
gation. I had the advice of counsel before I decided whether it was
necessary `at this time. The reading of the law is that we must come
forward and let you know and have the time, the statutory time run
before we could sign the statement of understanding with the NATO
nations.
Mr. ROSENTHAL. Would it not have been better to begin the 30-day
process the Armed Services Committee mandated and at the end of
those 30 days submit the letter of offer?
General FIsH. As I understand the mandate from the Armed Serv-
ices Committee, they wanted the terms-conditions proposed for such a
sale be reported to the Committees of the Armed Services of the Senate
and House of Representatives. We do not know the detailed terms of
the conditions. They are still open to negotiation. There are many dif-
ferent alternatives that can eventuate here. We will bring those for-
ward to the Congress before we consummate a sale.
Mr. ROSENTHAL. But then, it seems tome that this notice under 36(b)
is premature.
"The letter is maintained In the subcommittee files.
PAGENO="0031"
27
General FISH. No, sir; because we have the responsibility to inform
you before we sign the statement of understanding and have $12 to $15
million of NATO money committed which would include United
States, conmñt ourselves to this sale, taking the first step in committmg
ourselves to this sale.
This is our standard practice. This is what we did.
Mr. ROSENTHAL. How many planes are involved in the proposed sale?
General FISIL We do not know, sir, but what we have is a statement
of understanding to negotiate further.
Mr. ROSENTHAL. Then the letter of offer is defective, it seems to me.
It is ambiguous. Maybe Mr. Forman wants to address himself to that.
You do not know how many planes will be sold. That fact supports
Mrs. Schroeder's contention that there is no way of allocating the
H. & D. unless you can divide it by the number of planes.
General FISH. I was going to get to the question of price. Let me
address the first part of your que~tion. I think we have a very good
answer to the question of price and the allocation of the R. & D. costs.
But as to your first question, why the letter of offer. We do not
have a letter of offer. We are notifying the Congress of an intent to
provide a letter of offer, as is our standard procedure. We cannot
provide a letter of offer to a foreign government until we have gone
through the notification proceduDe. It has been my understanding that
the desire of the subcommittee ~nd the Congress is to get the Congress
involved in this on the front end so they know about them so they can
influence the terms and conditions. We are asking for permission to
provide a letter of offer within the scope of 32 aircraft and $2.2
billion.
Mr. ROSENTHAL. The letter of offer that I read says transmittal
76-41, notice of proposed issuance of letter of offer pursuant to sec-
tion 36(b). It says, total estimated value, $2.2 billion. Description of
articles, services offered, `32 E-3A airborne early warning aircraft,
parts, and support equipment It does not say up to 32, it says 32
General FISH. Yes, sir; and we are asking permission to-
Mr. ROSENTHAL. But you propose to sell 1,2, 3, or what?
General FISH. We are asking permission to sell 32. However, the
negotiation, as o'ften'happens in these cases, may come out to be some
lesser number. If we exceed the number `we have to come `back to the
Congress.
Mr. ROSENTHAL. I understand that. The way I read the transcript
of the press conference, Mr. Greener `attempted to amend the letter
of offer, which you `cannot do, by saying it is up to 32. This letter of
offer says 32.
General FISH. There is no letter of offer. The letter of offer does
not exist. There is nothing to be amended. What we have is a notifica-
tion to the Congress of, an intent to prepare a letter `of offer subject
to negotiations, and hopefully some version will be signed.
Mr. ROSENTHAL. I `im'derstand what you `are saying, General, and I
appreciate your presentation. I can only say what it says in English.
It says notice of proposed issuance of letter of offer. When I read
that I would assume that letter of offer would be consistent with this
proposed issuance and will not vary in any way. I do not think frankly,
under law, you have any right to vary t'his upward, downward, and
sideward. I do not think so.
PAGENO="0032"
28
General FISH. That is a different interpretation than what we have
been practicing in many other letters of offer that we have come for-
ward with.
Mr. ROSENTHAL. The other letters of offer I have been familiar with,
you were very precise, you knew what you were going to sell, 16 Hawk
battalions, or whatever they were.
General FISH. The final negotiations may be less.
Mr. ROSENTHAL. It does not say that in here. It does not say subject
to negotiation.
General FISH. No, sir; but I think the testimony and the legislative
record will show that rwe have pointed out in the past that the final
details of these letters of offer are subject to negotiation and that as
long as we are `within the scope that has been cleared with the `Con-
gress, that we proceed. If they significantly exceed the scope then we
have to come back.
Mr. ROSENTHAL. I think your are suggesting that you can unilater-
ally amend the proposed letter of offer. I do not know that you
can do that. I do not know there is any authority with that ambiguity.
I think it is an ambiguity. There are two other pragmatic considera-
tions that you should have. One is this ~taiternent on page 18 of the
Armed Services Committee report that says as follows:.
Oommittee action on this program was further complicated by the revelation
of a proposal which is being considered within the Department of Defense to
sell to our NATO allies the AWACS aircraft `for approximately 50 perceift of the
cost to the TJ.S. Air Force. After a thorough airing of this proposal, the com-
mittee directs that the Department of Defense take no action toward the con-
summation of any agreement with any foreign government relative to the sale
of AWACS until the expiration of 30 days after a full report as to the `terms and
conditions-
and so forth.
In my judgment, no `action means not even sending a letter of offer.
General FISH. You said consummation.
Mr. ROSENTHAL. It says take no action. I would like to have this side
of the case in `a lawsuit. It says take no .action toward the consumma-
tion of any agreement. No action includes sending a letter of offer. I
cannot for the life of me understand why you seem to b'e choosing to
aggravate your principal supporters in the Congress, the Armed Serv-
ices Committee and Appropriations Committee, and it looks to me
like you are trying an end run. It puts our committee, very frankly,
in a very embarrassing situation.
General Fisu. Nothing could `be further from any intent. We are
trying to be completely forthcoming to Congress.
As Mrs. Sc.hroeder ha.s been informed in my letter to her, we fully
intend to comply with that before we sign a letter of offer and send
it to NATO as an offer~ a `signed letter of offer. We will comply with the
will of the Congress. But we have another responsibility, and I will
ask Mr. Forman to elucidate on this, to notify you as far in advance
of our intent to do this even though we will not consummate it without
providing the notification to the Armed Services Committee, before
there can be any participation of it on the U.S. side which would be
an absolute concomitant of the arrangements that we expect to
eventuate. We would have to have it authorized and appropriated by
Congress, including the committees that the former witnesses sit on.
PAGENO="0033"
29
So this will get reviewed but we have a responsibility to the Congress as
a whole and specifically to this committee to inform you of our intent
to proceed.
STATEMENT OF BENIAMIN FORMAN, ASSISTANT GENERAL COUN-
SEL FOR INTERNATIONAL AFFAIRS, OFFICE OF THE SECRETARY
OF DEFENSE
Mr. FORMAN. Well, first, let me address the earlier comments about
the variance or alleged variance from the notification.
Again, as General Fish has said, and as the legislative history will
show, there are many of these letters of offer which either get rejected
or not accepted by the country which requested the letter of offer or the
final, ultimately signed letter of offer does differ from the notification
because some items drop out during a course of either pricing refine-
ments or as a result of a negotiation because the country decides it
does not want them.
As you will recall, about a week or so ago when we were testifying
before this committee on a different resolution for a different country,
it was pointed out that the final price of one of the items which had
previously been reported under section 36(b), was ultimately signed
with some $300 million less than the price which had been reported
officially as the proposed price, because some items dropped out. This is
true across the board.
Mr. ROSENTHAL. I understand that. In simple English, this letter of
offer says 32 aircraft.
Mr. FOREMAN. And General Fish-
Mr. R0SENTI-IAL. Do you have the authority? Is it your legal opinion
that you have the authority under the statutes to amend this
unilaterally?
General FISH. That is not a letter of offer. It is improper to describe
it. It is a notification of an intent to prepar.e a letter of offer.
Mr. ROSENTHAL. I will read it to you again. Maybe I am misreading.
I am not misstating it. I might be misunderstanding it. It says: "Notice
of proposed issuance of letter of offer."
When I read this I assume that the letter of offer that is issued
pursuant to this authority will be consistent with these statements. I
assume that. If I am wrong, you can correct me.
General FISH. Yes, sir, it will be consistent with that. It will not
exceed that scope.
Mr. ROSENTHAL. It does not say that.
General FISH. No, sir.
Mr. SOLARZ. I appreciate the gentleman yielding.
If I understand what the general is saying here, in effect, this is
not a letter of offer as a letter of offer is understood within the terms
of 36(b). In other words, the Congress is not being given 20 days
within which to pass judgment on this document which `has been
sent up to us.
If I understand what you are saying, you are informally notifying
the committee?
General FISH. No, sir.
PAGENO="0034"
30
Mr. SOLARZ. We have under consideration making a letter of offer
to our NATO allies for this equipment and no congressional approval
or disapproval is required at thatpoint?
General FIsH. No, sir, absolutely not. This is precisely and ex-
actly in accord with the legal interpretation of 36(b) notification
requirement, and the reason it is consistent with our past practices,
1 year ago, not quite a year ago, in June, we notified the Congress
of the F-16 and that was because our next action was to sign a
memorandum of understanding with the Europeans to sign a letter
of offer in the future.
Mr. SOLARZ. Your understanding is that from the day that docu-
ment arrived, according to the existing law, we had 20 days within
which to disapprove it, assuming we were against this sale?
General Fisu. Against. If you were presuming you were against
the sale of AWACS to Europe.
Mr. Sor~nz. Up to 32?
General FISH. Thirty-two aircraft, $2.2 billion.
Mr. SOLARZ. Then, we would have to disapprove it now. If at the
end of those 20 days Congress had not voted to disapprove it, then
at that point the administration would have the authority to go
ahead and negotiate an actual sale within the framework of that
document that you sent up to us?
General FISH. Except in this particular case another requirement
has been imposed by the Congress-that before the letters of offer
actually are sent over and consummated we report an additional 30-
day waiting period to the Armed Services Committee of the Senate
and House of Representatives on the exact terms and conditions of
the sale which we will comply with.
Mr. SOLARZ. What would happen at that point if the Armed Serv-
ices Committee decided that even though we had not disapproved
the original letter of offer, they thought the transaction should not
proceed?
General FISH. I would be of the opinion-I will defer to legal
counsel-that there would be no way that it could go forward.
Mr. SOLAI~Z. Pardon?
General FISIT. It could not go forward.
Mr.. S0LARz. On what basis would it be legally terminated?
General FISH. First of all, one particular point is that since the
terms and conditions of the negotiations are clear that it will in-
volve U.S. participation, there is no way you can get funds authorized
and appropriated for this purpose without going through the Armed
Services Committees. So they will have plenty of opportunity to
review this. The concerns are unwarranted. There is no way this
could be end-runned. We are ]ust doing our duty to you to inform you.
Mr. SOLARZ. I will yield back my time.
General FISH. Mr. Forman had a point.
Mr. *S0LARz. I simply want to make the observation that while
there may be subsequent opportunities to review the transaction as
the negotiations proceed, I think this subcommittee still has a re-
sponsibility to make its own judgment on the merits of the trans-
actions. Once the 20 days have run their course, we will have then
lost our opportunity to act on our own initiative.
PAGENO="0035"
31
General Fisn. I would submit the entire Congress will have its
opportunity because the entire Congress will have to vote the funds,
authorize and vote the funds. Point 1.
Second, as I understand, this committee's interest is to whether
there should be a sale or not be a sale, if it furthers our foreign
policy interest to have a sale. We think that the record is abundantly
clear that it does further our foreign policy and defense policy in-
terests to have NATO supplied with this capability. They have re-
quested it. We think it is better for us to do it this way rather than
supply it ourselves unilaterally and at much higher cost, and we
think it greatly improves the effectiveness of the alliance and I think
that is the issue.
Mr. ROSENTHAL. General Fish, that is not the issue. I happen to
agree with you in terms of the military support mission. I think you
are absolutely correct. I think all of us have to follow orderly pro-
cedure whether we like it or not. My own personal view is that this
subcommittee would have to support a resolution of disapproval,
considering the language of the Armed Services Committee. We do
not even have any authority because when it says in here no action
toward the consuiumation of any agreement, that includes sending
this notification. This is action. You cannot wish this away no matter
how you like it. I really do not understand why you sent this, what-
ever you want to call it, this transmittal, prior to any kind of agree-
ment with any country. I mean, the agreement seems to me to be in
almost an embryonic stage.
General FIsH. All of our letters of offer we send up here are in a
stage where we have a lot of negotiations to continue. This is no dif-
ferent than the others. This is not unusual.
Mr. ROSENTHAL. This is the first one I came across where two very
important committees had thrown up a red light. That is what really
bothers me.
General FISH. Sir, that will be fully complied with. I have stated
in my letter the Defensu Dep'irtment position
Mr. ROSENTHAL. My guess is had this resolution of approval gone
to the Armed Services Committee for them tO.be consistent they would
have had to vote for it in support of their own language.
General FISH. No, sir; because we fully intend to before we tender
a letter of offer, a signed letter of offer, with the conditions that we
have worked out in the negotiations with the NATO allies, that it
will go up to the Congiess for approval Let me give you the opposite
case, maybe this will help. It could be ~rgued, and we would fully
expect it to be argued, if we would have entered into an agreement
with NATO on a statement of understanding, not a letter of under-
standing, but for some 15 or so millions of dollars for R. & D. funding
of `iNATO program, still to be negoti'ited `is to the details We would
be criticized for not having notified the Congress under 36(b).
Mr. ROSENTHAL. Not by us you would not be because there would
not be any 36(b) and we would not be here this afternoon. We have a
problem we did not ask for
General FISH. lVe have a responsibility to notify you if the eventual
sale is going to be over $25 million.
Mr. ROSENTHAL. My own personal judgment is, I think you had no
authority to do what you did. I do not know.
PAGENO="0036"
32
Mr. WINN. Well, I do not have a question. I think both of you make
a good point.
In the transmittal the chairman was talking about, it could be
misèonstrued, just to be ridiculous about it, that we could, since it is
still to be negotiated, sell one airplane. We could sell one airplane to
NATO for $2.2 billion because it does not say up to. I am saying I
am being ridiculous about it, but the way this thing is worded, it
says 32 early warning AWACS, training, spare parts and support
equipment.
General FISH. Of course, we go to the act. The act is supposed to
indicate the quantity that we intend to offer and the dollar value, the
estimated dollar value of the sale, and that is what we were comply-
ing with. Of course, I recognize that any argument reduces to a ridicu-
ions as Mr. Winn said, that would be just that ridiculous. We do not
expect that to happen. We expect it to be negotiated out in something
close to that number. That is the best estimate. And that is what the
language of the act says we are supposed to provide you our best
estimate of these things and the very fact it says estimated, I think
implies that what we have-
Mr. WINN. Coming to $2.2 billion.
General FISH. That there is a variance.here.
Mr. WINN. What you are trying to do is live up to section 36(b)?
General FISH. Yes, sir.
Mr. WINN. Informing Congress of anything over $25 million?
General FISH. Yes, sir.
Mr. WINN. Which you have done in the past.
General FISH. Yes, sir. This is not unusual.
Mr. WINN. You never had a directive by two other committees?
General FISH. We had the directive from the I-louse Armed Services
Committee and we have said we fully intend to comply with that
directive and we fully intend to comply with that and we have so
informed the committees. When we know what the terms are, and we
have got the details ironed out, we will, before we send a signed letter
of offer, come to the Armed Services Committee 30 days beforehand
to get their approval. We also know we had to inform this subcom-
mittee before we start this negotiation.
Mr. ROSENTHAL. One of the additional problems with section 36(b)
is it says for each letter of offer to sell under paragraph 1 and 2, the
report shall specify the foreign country or international organiza-
tion to which the defense article is offered, (b) the dollar amount of
the offer to sell under paragraph 1 of the completed sale. It does not
say the estimated amount. It does not say up to.
General FIsH. We will-
Mr. ROSENTHAL. We have a tough legal problem here.
Mr. FORMAN. Mr. Rosenthal, if I heard you correctly, or reading
the statute to say the dollar amount of the completed sale? That is a
contradiction in terms.
Mr. ROSENTHAL. Dollar amount of the offer to sell under paragraph
1 or the completed sale under paragraph 2. But it says the dollar
amount. I would read that to say whatever the~ deal is, that is what
it has to say.
PAGENO="0037"
33
Mr. FORMAN. It is impossible, Mr. Rosenthal, to report to you under
section 36(b) what the dollar amount is of a completed sale when sec-
tion 36(b) prohibits from even issuing a letter of offer to make a sale.
Mr. ROSENTHAL. I understand it is an anticipated sale.
Mr. FORMAN. Yes, sir.
Mr. ROSENTHAL. I understand that. But it does not say in there an
estimated or approximation, it says the dollar amount of the pro-
posed sale. And when I pick this up, particularly in light of Mrs.
Schroeder's interest in the cost thing, I assume we are going to sell
32 at $2.2 billion. Anyhow, it is a problem.
Mr. WINN. I have no further questions.
General FIsH. I would point out that the notification says, respec-
tive purchaser, NATO, total estimated value, $2.2 billion. Description
of articles offered, 32 E-3A airborne early warning training, spare
parts and support equipment, and so on. But we have always said
estimated value. This is not unusual. This is exactly the way we have
done it for 14 months since the requirement has existed and it is again
consistent with the similar case where we are selling to NATO allies
in the case of the F-16.
Mr. ROSENTHAL. You are not complying with the law. The law does
not say estimated value.
General FISH. There is no way we could know precise value be-
cause, as we have testified frequently in front of this subcommittee,
it is subject to further negotiation, as Mr. Forman points out.
Mr. FORMAN. Let me make the further point that you cannot give
an actual, even if you knew an actual, because the law says we can-
not sell except on a basis where we are paid the full cost that we have
to pay our suppliers, and unless we have a firm fixed price with our
suppliers, which is a most unusual way of doing business, there is no
way to know what the flnal cost of anything is that you are selling
until after the delivery and a final settlement of a contract and all
billings.
Mr. ROSENTHAL. You had better get the law changed.
General FISH. We provided to the committee on numerous occa-
sions copies of 1513, which is the letter of offer and acceptance, which
is prescribed in there, and we discussed in front of this committee-
Mr. ROSENTHAL. You have been extraordinarly forthcoming and
overwhelmingly cooperative. It may be that with all those good
points, none of us are in compliance with the law.
Mr. FORMAN. We pointed this out to the committee at the time the
law was enacted. If you will look even further down, you will see the
last item, I think, listed in section 36, I think says date of sale-
which is a total impossibility. And that is why in our report we say
the date reported to the Congress rather than the date of sale.
General FISH. I make the further point that 1513, it says that the
country concerned will pay full cost even if they go up from what
they agreed to. Because we have had occasions where we have had
to go back and get more funds. They undertake to cover what our
costs are which, of course, goes to the basic issue of price that has been
raised by previous witnesses.
I can assure the subcommittee and the Congress, as was testified
in front of the Senate yesterday, these aircraft will be sold at no lower
PAGENO="0038"
34
price than it costs us to buy our own, and because of the 4-percent
recoupment on R. & D. and 2-percent administrative charge, there
is only one thing. They can oniy cost more than it does to purchase
our own.
Mr. ROSENTHAL. OK. Let me read from the committee report that
this committee issued when 36(b) was enacted. It says a letter of
offer is a formal indication that the negotiations have reached a stage
where substantial agreement has been reached with the prospective
purchasers. That is not the case. You should not have sent this letter
of offer up here.
Mr. FORMAN. If that is what the committee rep~rt says, and I don't
recall such a statement, it is inaccurate.
Mr. ROSENTHAL. What is inaccurate?
Mr. Fom~rAN. The committee report.
Mr. ROSENTHAL. How can the committee report be inaccurate?
Mr. FORMAN: Very simple. It is written by people who are fallible
just like everybody else is fallible.
Mr. ROSENTHAL. We have to be bound by our own committee report
until it is amended or changed by the law. I know what you are say-
ing. You are saying that what is in the law is very difficult in real life
to comply with, and you are bending and twisting to try and be well
intended.
Mr. FORMAN. I am not saying that at all. I think there is a funda-
mental misunderstanding, perhaps, when you say when the negoti-
ation has reached a certain stage.
Mr. ROSENTHAL. It says substantial agreement has been reached.
Mr. FORMAN. Well, substantial agreement has been reached to the
extent that the country is interested in asking for a letter of offer.
Mr. ROSENTHAL. That is not what we meant by substantial agree-
ment. Substantial agreement meant as to the deal.
Mr. FORMAN. How can you negotiate and reach substantial agree-
ment when you have no authority under section 36(b) to issue the
letter of offer? Moreover, I cannot find any such statement in the
con~irnittee report.
General FI5IT. As we further testified in front of the full com-
mittee, the question has been raised to me personally, why do you
come forward with this so late and tell us that we cannot really effect
this, without doing serious damage to our relations with another
country or with an international organization, because you have pro-
ceeded so far down that now we are informally at least committed
in an attempt to be forthcoming? The point Mr. Forman raises, I will
introduce for the record a request for letter of offer from NATO.
1~ will also introduce the letter, a classified statement by Admiral
Weinel, with your permission. sir; it was presented to the Senate
yesterday, outlining in detail the need for and to the extent there is
NATO agreement.1
We think there is substantial agreement and that we were obligated
to come forward to the subcommittee and tell them so at this time.
Mr. ROSENTHAL. It would seem to me that number is one of the ab-
Solute elements of substantial agreement. Nobody has a number in
this case.
`Both documents are maintained in the subcommittee files.
PAGENO="0039"
35
STATEMENT OF MA~F. GEN. KENDALL RUSSELL, ASSISTANT
DEPUTY CHIEF 0]? STAFF FOR RESEARCH AND DEVELOPMENT,
DEPARTMENT OP THE AIR FORCE
BI0GRAPH~
Major General Kendall Russell is Director of Development and Acquisition,
Deputy Chief of Staff for Research and Development, Headquarters U.S. Air
Force, Washington, D.C.
General Russell was born on Jan. 25, 1925, at Fort Leavenworth, Kans. He
graduated from St. Albans School, Washington, D.C., in 1942, and entered the
U.S. Military Academy at West Point, N.Y. He graduated from the Academy in
1945 with a bachelor of science degree, his pilot wings and a commission as a
second lieutenant in the Army Air Corps. He has master of science degrees from
Purdue University (nuclear physics) and the George Washington University
(business administration).
He completed transition training and during 1946-47 served in Germany as a
fighter pilot successively with the 366th Fighter Group and the 27th Fighter Group.
In July 1947 he returned to the United States and served as a fighter pilot with
the 522d Fighter Squadron, Kearney Airfield, Nebr. In June 1948 he entered
Purdue University, md., under the Air Force Institute of Technology program,
and graduated in June 1950 with a master of science degree in nuclear physics.
He then was assigned to the Air Research and Development Command, Wright-
Patterson Air Force Base, Ohio, as a nuclear weapons effects officer in the Di-
rectorate of Research. In July 1951 he was transferred with the command to
Baltimore, Md., and served in the same capacity in the Directorate of Nuclear Ap-
plications. In May 1955 he was named Chief, Weapons Effects Section, Directorate
of Development.
General Russell was transferred to the Air Research and Development Com-
mand's Ballistic Missile Division in Inglewood, Calif., in January 1957, and served
in advanced systems planning involved with the evaluation of alternative inter-
continental ballistic missile concepts. From September 1960 to June 1901, he at-
tended the Air Command and Staff College, Maxwell Air Force Base, Ala.
He next was assigned to Headquarters U.S. Air Force, Washington, D.C., as a
space systems staff officer in the office of the Deputy Chief of Staff, Systems and
Logistics and later became Advanced Space Projects Officer in the office of the
Deputy Chief of Staff, Research and Technology (now Research and Develop-
ment). In May 1963 he moved to the Directorate of Development as a space de-
velopment plans officer. During this tour of duty, he was awarded the Legion of
Merit. From August 1965 to September 1966, he was a student at the Industrial
College of the Armed Forces, Washington, D.C. He comple:ted requirements for
a master's degree in `business administration from the George Washington Uni-
versity during this period.
General Russell was assigned to Headquarters Air Force Systems Command,
Andrews Air Force Base, Md., in September 1966, where he became Director,
General Purpose and Airlift Systems Planning, in the office of the Deputy Chief
of Staff, Development Plans.
In July 1968 General Russell assumed duties as Director, Airborne Warning
and Control Systems (AWACS), Headquarters Electronic Systems Division
(ESD), L. G. Hanscom Field, Mass., a post he held for five years. He served
briefly as Vice Commander of ESD and in July 1973 was reassigned to Head-
quarters U.S. Air Force as Director of Development and Acquisition.
`General Russell is married to the former Polly Puckett of Columbus, Miss.
They have four children: Sherard, Kendall, Andrew, and Letitia.
He was promoted to the grade of major general effective June 8, 1973, with
date of rank July 1, 1970.
General RussELr~. Mr. Chairman, implicit in appreciation of our dis-
cussions is a necessity to understand the extreme complexity of people
who have to come into agreement. We are dealing with over a dozen
sovereign nations, each with their own Parliaments, with their own
social and economic problems. We are talking about the largest joint
venture that NATO ever undertook. The only other similar cooperative
program that could be made a rather close analogy would be the under-
taking of the NADGE system-the NADGE system being the firmed
ground air defense command and control system of Europe. That
PAGENO="0040"
36
was jointly funded by NATO in a very complex arrangement which
also required many years of negotiations to establish how the funding
thould be shared and how the participation and production and so
forth, would take place.
Here we are talking about a program, a venture of many larger pro-
portions. Each nation has to have the right to understand what it is
getting into, how much is it going to cost, how much is it going to cost
me, my Nation, what do I get out of it, what are the trades between
numbers of aircraft capability per aircraft, and the only way they
can get valid data is to request it of the producing nation.
We have entered into a contract definition effort with them. On this
endeavor the Congress was informed last May. It is a definition effort
to define the proper configurations.
This is in ~he business world of NATO as compared to the military
world which has already established its firm requirement and its opera-
tional concept. They have defined the job to be done. And as one makes
the trades between configuration and numbers, than there is a process
to define price and sharing, and we are at the front end of that. We are
approaching the first, the end of the year's contract definition effort
which will result in a document which is capable of being a baseline for
negotiations. That will be the initial letter of offer.
General Fish has described the notification to the Congress of our
intention to respond to their request for that letter of offer.
Mr. ROSENTHAL. Thank you very much. Mr. Solarz.
Mr. SOLARZ. Thank you. I, unfortunately, never got up to offer and
acceptance in contracts in law school, since I left after the first 3
months, so I hope you will not mind if I switch from the procedural to
some of the substantive questions.
General Fish, why does NATO need this system? They seem to have
gotten by fairly well since the end of World War II without it. Why
do they need it now?
General Fisii. I will ask General Russell to address that subject.
Let me just say that we did have a very detailed presentation yester-
day in front of the Senate Armed Services Committee, and I would
recommend that as a part of the official record describing the require-
ment. It is basically a. multiplier of our effectiveness over in NATO.
General Russell.
General RUSSELL. Thank you, Mr. Solarz. I appreciate this oppor-
tunity very much. It is germane to review NATO's involvement in the
AWACS program.
As you well appreciate, the invention of radar had a. very profound
effect on how we did things during World War II. For the first time we
could see in the dark, we could see at long range and could see in bad
weather. The one restriction that still remained was the line-of-sight
restriction. Our big surveillance radars had to be mounted on the
ground, and we could not see low fliers. Ever since World War IL
people who design offensive systems have taken to desigiiing low-
altitude attack systems.
You also appreciate that with jet engine technology you take an
enormous penalty to fly at low altitude, both in range, speed, and pay-
load. Nevertheless, we have been willing to pay that penalty, and in the
final analysis that enormous penalty was jus~ taken to underfly radar.
There has been a switch in the equipment the Soviets have beensupply-
ing to the Warsaw Pact in the post-1960 time period. They switched
PAGENO="0041"
37
from defense fighters to offensive strike fighters, Fencers and Floggers.
These are. posing a very severe threat to the European environment
~where distances are particularly short and, therefore, time scale
enormously short.
There is the common knowledge of a pressing need to be able to
gain warning time and to be able to see how a surprise attack might
take place.
The temptation is that one could make a surprise attack out of
maneuvei~s that are held at periodic intervals. If one could watch
those maneuvers, one would lower the opportunities where successful
attack could . be threatened. I think a little~ surprising to me is that
some of the opponents of this AVSTACS system have been of a bent of
mind where we ought to see a stabilization rather than a sharpening
of the confrontation situation. AWACS is a very stabilizing presence.
Mr. SOLARZ. Are you saying that given the equipment currently
available to the Warsaw Pact, and the radar equipment presently
available to NATO, that the pact nations now have in fact the capacity
to launch a surprise attack that would elude our efforts to detect?
General RUSSELL. There are routes through that area where there
would be no radar detection.
The main radars that provide the early warning even for airplanes
at high altitude, many of those heavy radars are on political borders
where as you know, there are great big white domes, and we could not
expect them to last even minutes.
Mr. SOLARZ. So the establishment of this system presumably would
give us the capacity to detect a surprise attack which we do not have
flow?
General RUSSELL. And lower the temptation for anybody to ever
want to select that solution. So for a deterrent value, it is major.
Mr. SOLARZ. Would it still be possible to launch a surprise attack
that even this system would not be able to detect?
General RUSSELL. It would be far more difficult by many orders
of magnitude. This radar is by far the most electronic countermeas-
ure resistant radar we have built. It was one of the major reasons
why NATO focused its attention on this as its solution.
Mr. SOLARZ. Do we have an offensive capacity in terms of an ability
to launch a Surprise first strike comparable to what the Warsaw Pact
countries have?
General RUSSELL. In Europe?
Mr. SOLARZ. In Europe. In other words, you described the Flogger
and the other plane, an offensive fighter that could get in under our
existing radar. Do we have similar equipment that could enable us
to do on the Warsaw Pact countries and the Soviet Union what we are
afraid they might do to us?
General RUSSELL. Of course, that is a political decision and we have
postured ourselves to absorb a first strike.
Mr. SOLARZ. I am not talking about whether we have plans to con-
duct a first strike. I want to know whether we have the capacity to
do it. Do we have comparable equipment which would enable us to
do to them what you say they could do to us?
General RUSSELL. There are many judgments that go into that
equation in types of equipment and how one would employ and I
72-453-'~6----6
PAGENO="0042"
38
would rather defer that to an operational commander to answer tl~e
question.
Mr. Sor~ARz. Do the Warsaw Pact countries have a radar alterna~
tive comparable to the AWACS system that you are recommending
that NATO develop?
General RUSSELL. My answer to that is, no, sir, they have airplanes
tJiat look quite similar, called the Moss. In capability it is like our
early EC-121 aircraft.
Mr. SOLARZ. If we go ahead with AWACS~ we would have a de.-
fensive capacity they did not have?
General RUSSELL. Yes, sirS absolutely.
Mr. SOLARZ. Assuming the need for such a system, were any ether
alternatives considered?
General RUSSELL~ Yes, sir.
Mr. SOLARZ. Indigenous European alternatives or other American
alternatives?
General RUSSELL. Yes, sir. In 1973, in recognition of this evolving
threat, NATO organized a special study team to study solutions to the
problem. The first solution they came to was that this airborne early
warning was the proper approach. The choices being living with the
limitations of ground radar or going to the air. They made the choice
of going to the air. Subsequently, they formed another special study
team to study the various alternatives Of having an airborne early
warning capability. There were three nominees. The Ijnitecl Kingdom
offered a variant of their Nimrod aircraft with a radar yet to be de-
veloped. The United States, in late 1973, offered either of two sys-
te~ns-either a system based on the E-2C or based on E-3A.
Mr. SOLARZ. Which one of those is the Hawkeye?
General RUSSELL. E-2C is the Hawkeye.
Mr. S0LARZ. And E-2C is AWACS?
General RUSSELL. E-3A is A1~\TACS. This study team studied these
three aircraft as they were proposed and as NATO envisioned they
might want to modify them. The decision was that. the U.S. E-3A
was the proper approach to take and that. decision was referred to the
Conference of National Armaments Directors who endorsed that deci-
sion and passed it to the Ministers.
Mr. SOLARZ. Were those decisions arrived at unanimously?
General RUSSELL. Yes. The decision that. AWACS was the proper
approach was a unanimous decision.
Mr. SOLARZ. The British concurred in that, even though they were
offering one of the three alternatives?
General RUSSELL. Yes; that is their approved preferred approach.
Mr. Sor~ARz. You will forgive me if I ask these questions because I
am id atively new to the debate. Looking at some. of the literature that
has come out in our own country a number of people seem to be argu-
ing that while the llawkeye system did not have, the complete capacity
of the AWACS system, it seemed to make more, sense on a. cost-effec-
tiveness basis, because it was far less expensive. Any Hawkeye liinita-
tions vis-a-vis the AWTACS could he. more than compensated for by
purchasing a greater number of I-Iawkeye's than AWACS-which
would from an economic point of,view---leave us better off thai~ if you
went for the more expensive AWTA.CS system.
Could you address yourself to that objection?
PAGENO="0043"
39
General RUSSELL. Yes, sir; NATo made that direct judgment and
came to the conclusion that AWACS was the more cost effective.
Mr. SOLARZ. Who came to that conclusIon?
General RUSSELL. The NATO group.
Mr. ROSENTHAL. Was that military peOI)le or Defense Ministers?
General RUSSELL. It was done in both contexts, sir. The trimilitary
NATO commanders, that is SACETJR, SACLANT, and CINCHAN,
they prepared a requirement for an airlorne early warning system
that could only be satisfied by the AWACS. They also wrote an opera-
tional concept and these two efforts were endorsed by the military
committee of NATO, which is our highest milita ry body. Incjdentally,
that was unanimouS.
Mr. ROSENTHAL. 1Vouid you yield? Just so the record is straight, the
NATO Defense Ministers neither confirmed the requirement for an
early warning and control capability nor agreed to urehase such a
capabihity~ and they delayed their consideration until their spring
ministerial meeting.
General RUSSELL. I was referring to the Military Committee, which
accepted the reqiiiremen.t and acknowledged it as a priority 1 NATO
requirement.
Mr. ROSENTHAL. I think that is correct. So the record is correct, the
Defense Ministers have not approved this et.
General RUSSELL. What the Foreign and iDefense Ministers have
done at the Conference of National Armaments Directors, which re-
ports to the Ministers, accepted that the proper al?prOac/ was a deriva-
tive of the AWACS system. That has been reported to the Ministers in
May 1975.
Mr. ROSENTTIAL. The Defense Ministers?
General RUSSELL. They further acknowledged what the Conference
of National Armaments Directors supplied them in the Fail of 1975
and endorsed interested nations in-
Mr. ROSENTHAL. Have the Defense Ministers approved this ret?
General RUSSELL. I have difficulty with the word approval in that
there is no way that such approval can he done all at once. They have
to go through a step-wise procedure to understand such matters as cost
and shares before they can ever make a final approval. So far they have
endorsed the Military Committee's establishment of a requirement.
Mr. ROSENTHAL. The communique issued by the NATO Defense
Ministers in December 1975 says that they had postponed decision
until, the ministerial meeting in 197(3, which has not yet been held. I do
not know why, hut I am having trouble with English today.
General RUSSELL. Among other things. they endorsed the prepara-
tion of costing and assessment of a~ specific, proposal such as a system
for consideration at their spring 1 97(3 meetinu~ and that is what we
were addressing today, the preparation of this information so that
they can make a judgment.
Mr. SOLAEZ. Your prior testimony was that this committee, which
presiimabl~~ submits a rec.ommendlnti On to the---
General RUSSELL. That is the military side of NATO now and they
have established the requirement, yes~ sir.
Mr. S0LAUz. But in order for NATO to officially request it, what;
has to be done?
PAGENO="0044"
40
General FISH. Let me address that. I said I would submit this for
the record. But I believe that even though it is classified, let me quote
one sentence. On behalf of NATO nations, in accordance with the
guidance from the high level group, NAPO, which is the NATO AEW
program office, requests U.S. Government to provide a letter of offer
for sale of a variant of E-3A aircraft to the NATO nations. There is
more. I will submit for the record.1 We have an official request from
NATO on behalf of.the NATO nations.
Mr. SOLARZ. How did the AWACS system compare in price to the
other two alternatives that were under consideration?
General FISH. I think again, we can get all that for you for the
record.
Let me say that yesterday at the Senate, the Director of Defense
Research and Engineering testified that the recent study that they
accomplished, showed that the E-2C could not do the job required in
NATO Europe. That is his testimony.
There was a recent study, which is classified as to details, that sup-
ports that. It was one that previous witnesses referred to and that is
the way it was characterized by the head of the Defense Research and
Engineering.
Mr. SOLAImZ. From a technical point of view?
General FISH. It cannot do the job.
* Mr. Sor~nz. And the Nimrod system?
General FISI-I. The Nimrod system was not addressed.
General RUSSELL. The Nimrod was considered by the NATO study
group and was not selected.
* Now, I would say that if a NATO AWAOS program did not come
about, I would think that the United Kingdom would pursue their
Nimrod solution. At this time the United Kingdom clearly prefers,
despite their economic problems at home, I might add. and their em-
ployment problems. to join in a joint venture as opposed to going their
own way. If there is no joint venture they will be forced to go their
own way because the military requirement is that pressing.
Mr. SOLARZ. I just have one final question. Assuming the validity
of everything you have said with respect to the method by which this
decision at least tentatively was made by the NATO alliance, it would
appear from a technica.l point of view, of the three alternatives, this
would be the most effective. That leaves, I think, the question of price
to consider. I wonder `if you could address yourself to. first, what I
was understanding was the existing DOD `regulation which requires
the full recoupment of all R. & D. costs associated with a particular
system-which I gather is not the case `here. Second, could you address
yourself to the point our distinguished colleague from New York made
in his testimony that in effect, there is a kind of double subsidy here?
On the one hand, we are going to be selling them the system at about
$68 million per plane despite the fact that when according to his re-
search, the lowest price he has seen is $104 million. Above and beyond
that, whatever the final agreed-upon price was, we will be obligated
to pay 25 percent of it.
Why are we not requiring them to pay the entire R. & D. share of
that purchase and, why do we appear to be selling it at such a. sig-
nificantly lower level than the amount that we have paid on a per plane
basis so far?
The document is maintained in subcommittee files.
PAGENO="0045"
41
General FISH. I would like to. We are not selling it at bargain prices.
We will sell the airplane at full recovery of our production cost plus
an R. & D. surcharge of 4 percent, and I am going to have Mr. Forman
address the regulation-we do not think it was proper to characterize
it earlier.
The difference here is fundamental. The difference is the sunk R. & D.
costs which have been spent, as some of the questioning, I think brought
out earlier. From here on we either can recover some of the IL & D.
or not. The thing is we are building 13 of these airplanes for ourseh~es
so far. The committees have authorized long-lead procurement for six
additional aircraft. And incidentally, they were not specified for
NATO only, they were for our own force, and the costs of those air-
craft are going to be reduced if we sell to NATO, and we will not be
selling these aircraft at less than our costs but rather for production
costs plus R. & D. recoupment of 4 percent and 2 percent for adminis-
trative charge.
I would like to have Mr. Forman address your earlier question as
to policy on B. & D. recoupment charge.
Mr. FORMAN. Mr. Solarz, the previous witness, I believe it was Mr.
Downey, in stating either his understanding of what the regulation
requires or what the GAO had allegedly summarized it to require was~
I believe, an error.
As I recall that testimony, it was to the effect that the imposition
*of a 4-percent surcharge in this case constitutes a waiver or departure
from the general requirement of the regulation for a complete pro rata
share.. In fact, what has happened here is just the reverse. The regula-
tion which is Department of Defense directive 2140.2, states that-I am
reading from section 4(a) of that regulation-"that no nonrecurring
research and development costs applicable to the model under con-
sideration normally will be applied."
Let me emphasize the word "normally" will be applied in an amount
not greater than 4 percent of the total FMS or direct sales price for
a major defense equipment. However, when major defense equipment
items have been in production for less than 5 years the Director of De-
fense Research and Engineering may request that the Director of
Defense Security Assistance Agency obtain a greater recovery of
B. & D. costs for selected items.
In summary, what the directive says is you normally charge 4 per-
cent and on. an exceptional basis the Director of D.D.R. & E. which
is Dr. Currie, may recommend to General Fish that in that particular
case we deviate from the normal and ask for more.
Now, in this case we followed the normal, because of reasons which
have been previously stated on several occasions going back 2 years, to
a number of committees of Congress, that the 4-percent normal is what
should be followed here rather than a deviation.
Let me add in this respect that this requirement for charging R. & D.
is not a statutory requirement. It has never been a statutory require-
ment. This was imposed internally within the Department of Defense
and has been in existence for some 10 or more years. It is an internal
matter, a matter of discretion by us. The pending legislation before
the conference committee right now on security assistance legislation
for fiscal year 1976 does not change that in any respect insofar as con-
PAGENO="0046"
42
cerns the House version. The House version is silent. It would still
impose no requirement for such surcharge at all.
The Senate version in contrast, provides that there should be a pro-
portionate amount recovered but then significantly in the context of
this hearing, goes on to say that the President may reduce or waive
the charge which would otherwise be considered appropriate for par-
ticular sales that would if ma.de~ significantly advance U.S. Govern-
ment interests in NATO standardization.
Mr. ROSENTHAL. General Fish, Senator Eagleton is here. We are
very anxious to hear from him. I wonder if you fellows could stay in
order to respond to further inquiry. If you want to develop anything
further we would be happy to do that at that. time.
We are very pleased you could be with us. We are delighted to have
you.
STATEMENT OF HON. THOMAS F. EAGLETON, A U.S. SENATOR FROM
THE STATE OF MISSOURI
Senator EAGLETON. I thank you for your courtesy and Congressman
Winn, and thank you gentlemen for permitting me this opportunity to
testify.
I welcome this opportunity to testify in support of a concurrent
resolution to disapprove the Air Force's proposed letter of offer to
NATO for 32 airborne warning and control system (AWACS) air-
ciaft at a sale price of $2.2 billion.
As I will explain more fully. it is my belief that this notification-
purportedly submitted in accordance with the reporting requirements
of the Foreign Military Sales Act-represents an extralegal effort to
receive the tacit congressional approval for a sale the. details of which
are unavailable. If this proposed offer goes unchallenged. it is my view
that it will stand as a precedent which could seriously distort the in-
tent of section 36(b) of the Foreign Military Sales Act, a provision of
lr.w intended to offer Congress an opportunity to scrutinize and control,
through a veto process~ arms sales to foreign nations.
T would like at the outset to discuss the accuracy of the section of
this notification entitled "Description of articles or services offered."
Under the category the Defense Department has listed "Thirty-two
E-3A airborne early warning aircraft. training, spare pai'ts and sup-
port equipment."
As this committee has no doubt already determined, there is no prac-
tical basis to assume that NATO will purchase 32 AWACS. In fact,
it remains a highly questionable proposition that NATO will purchase
any of these aircraft. The number 32 was apparently picked out of
the air as the optimum number to sell to NATO * whether or not
the number corresponds to a. realistic, expectation..
The general category "description of articles raises other ques-
tions as well about the individual items the Air Force wishes to sell.
It leads one to ask the most element question, "What. is an AWACS?"
In the broadest terms, there is an answer to that question. A'WACS
is a look-down radar and tracking system. designed to command and
control friendly aircraft in a tactical air environment.
But describing the AWACS which might one day he used by NATO
is a more difficult matter. As a matter of fact, NATO has not yet
PAGENO="0047"
43
decided which of several possible AWACS configurations it will use,
if any.
When AWACS was first justified on the basis of a primary mission
of tactical command and control, it was to be built in what was called
a CORE, or block 1, configuration-a bare-bones structure suitable
for AWACS' former role, strategic air defense of the United States.
In a November 2, 1973, letter to the Secretary of the Air Force, Deputy
Secretary of Defense William Clements recognized the need to make
major changes in the CORE model when he said:
* * * it is evident that a more capable configuration than the CORE is
essential to support general purpose tactical forces.
As a result of Deputy Secretary Clements' directive, a number of
tactical subsystems were proposed, including a self-defense mechanism,
a secure communications system and a maritime surveillance capa-
bility. These systems are still under development today. A December 4,
1974, Defense Department budget memorandum had this to say about
the Air Force's efforts to satisf~y Mr. Clements' directive:
Despite two Deputy Secretary of Defense memorandums which directed that
the Air Force actively pursue a more capable configuration than the CORE *
the service has continued on a program path which will lead to prOduction of
24 of the (first) 31 aircraft with a CORE configuration * *
Last year an independent panel of experts examined charges that
AWACS could be easily and inexpensively defeated by electronic
jamming. The panel, which was paid by the Defense Department, used
great caution in concluding that jamming might be a secondary con-
sideration if certain enhancement features were added to the system to
make it more resistant to jamming. These recommendations have been
studied. They have not yet been costed or programed by the Air Force.
At the time these studies were being conducted, a NATO technical
center was also looking closely at AWACS. In two studies, which were
subsequently reviewed by the General Accounting Office, NATO set
forth its own preliminary set of enhancement features. Assuming that
AWACS would perform the mission set for it by the U.S. Air Force-
an assumption later questioned-NATO demanded a plane which had
increased tracking capacity, a maritime capability and the ability to
interface with the large number of NATO command and control sys-
tems operated in. Europe.
Mr. Chairman, I have reviewed this history to show the committee
that AWACS has many faces, most of which are still on the drawin
board. There is no real AWACS beyoiid the CORE model designe
years ago to defend the United States against a Soviet bomber attack.
As for the plane offered for sale in this notification, it is impossible to
define-it is a myth.
More directly to the point, the proposed buyer here, the North
Atlantic Treaty Organization, has never established a configuration
for the AWAc3S it would buy. More recent, informed speculation is
that the NATO Council might settle on an austere version, adopting
the AWACS radar hut using existing ground-based command and
control computers for tracking. The following quote from the Novem-
ber 1975 edition of the authoritative military journal Defense and
Foreign Affairs, reflects the latest thinking within NATO:
* * * as the operational requirement comes nearer to being written, it is
increasingly likely that the core of NATO commanders are going to reject this
PAGENO="0048"
44
"command post in the sky" aspect. Their airborne warning aircraft, they state,
would be required only to pass track and target information to the ground
environment-and that is where senior decisionmakers will operate the NATO
combat aircraft.
Mr. Chairman, if NATO ultimately decides to take only the
AWACS radar, it is conceivable that the low per-unit price listed in
this notification, approximately $68.7 nTlilhion, would be reasonable.
But until NATO decides on a configuration, Congress cannot make a
judgment as to the accuracy of the price information now provided.
Last year Deputy Secretary Clements approved a budget decision
which stopped any further production of AWACS. No money would
be requested for fiscal 1976 production and, according to that decision
memorandum, "Resumption of AWACS production would be depend-
ent on U.S.-NATO agreements on requirements, configuration and
cost-sharing." Unfortunately, that decision was later reversed.
However, the plain fact is there are today no U.S.-NATO agree-
ments on requirements, configuration, and cost sharing. Despite this
notification, no NATO nation has committed itself to purchase a single
AWACS. That is why this notification is premature and, unless re-
jected, could be subject to serious misinterpretation both in the United
States and in Europe.
Mr. Chairman, the failure of the Defense Department to meet
minimal standards in the description of this proposed offer raises
serious policy questions as to the implementation of the reporting
provisions of the Foreign Military Sales Act. The section of that act
involved here, commonly known after its author as the Nelson amend-
ment, was intended as a mechanism to control arms sales by assuring
prompt and accurate notification of pending sales agreements.
I have heard the argument that this notification was submitted
simply to satisfy Congress' desire to be informed at an early stage.
As is reflected in the Senate-passed amendments to the Foreign Mili-
tary Sales Act, Congress does want to be advised at the takeoff with
respect to foreign arms sales.
Nonetheless, I think it is safe to say that we do not want to receive
official notifications which are amorphous as the one before us. Such
formal notifications, of course, trigger the 20-day veto mechanism
with all the attendant implications attached to whatever action or
lack of action Congress might take. What we should properly demand
are informal prenotifications which do not trigger the legislative
veto process. That is what is contemplated by the amendments to the
Foreign Military Sales Act now in a House-Senate conference.
I think it is also important to recognize that AWACS is in many
ways a very special case. The authorizing committees of Congress
have stated categorically that the prospect of a NATO sale is the most
crucial policy consideration in deciding whether to approve the
AWACS program. The Senate Armed Services Committee, for exam-
ple, in its May 19, 1975, report on the de.fense authorization bill said:
* * * the committee warns that the United States will not be procuring
NATO's share of the AWACS program.
TheHouse Armed Services Committee, concerned that the Depart-
ment Of Defense might try to sell AWACS to our NATO allies for
approximately 50 percent of the cost to the U.S. Air Force, stated as
follows:
PAGENO="0049"
45
* * * the committee directs that the Department of Defense take no action
toward the consummation of any agreement with any foreign government rela-
tive to the sale of AWACS until the expiration of 30 days after a full report of
the terms and conditions proposed for such sale have been reported to the
Committee on Armed Services of the Senate and House of Representatives.
Mr. Chairman, the full and complete report requested by the House
Armed Services Committee was not submitted prior to our receipt of
this notification. In fact, it would be impossible to submit such a report
on the basis of the information now available on this offer.
What is important to understand is that Congress has been inti-
mately involved in overseeing the prospective NATO sale, long
claimed to be imminent. There is, therefore, absolutely no need to
gratuitiously notify Congress under this highly formal legal proce-
dure. The explanation, therefore, that this notification is simply an
effort to comply with Congress' need for prompt information simply
does not wash.
The Pentagon has cited an agreement signed in December 1975
by the NATO Defense Ministers as one basis for this notification. If
the signing of this document did in fact suggest an impending sale,
we must ask why this notification was not submitted even more
promptly. If we accept the Pentagon's reasoning, we must ask, "Why
did almost 21/2 months go by before this notification was submitted ?"
More importantly, we must ask whether the December 1975 docu-
ment does represent a valid basis for a sale notification. That memo-
randum simply notes the views of the NATO military authorities
that an airborne early warning and control capability is required by
NATO. The Defense Ministers agreed only to consider a proposal for
the acquisition and operation of such a system at their spring minis-
terial meeting, nothing more.
As is pointed out in an excellent memorandum on this subject pre-
pared by the Library of Congress:
The NATO Defense Ministers neither confirmed the requirement for an
airborne early warning and control capability nor agreed to purchase such a
capability.
That memorandum points out that even under Defense Department
regulations, letters of offer are supposed to be submitted for final DOD
approval only at a late stage in negotiations "after substantial agree-
ment has been reached."
The Defense Department has asserted that one or two NATO na-
tions may agree to contribute toward long-lead funding of AWACS
in the near future. While I consider this possibility remote, I would
suggest that it would be appropriate to notify Congress at such time
as an agreement of this type is ready to be consummated.
The Air Force has negotiated intensely with NATO over the past
few years. A mountain of information has been exchanged, including
price quotations. It is, therefore, erroneous to claim that these nego-
tiations cannot continue in the absence of a 36(b) report. When any
NATO nation is ready to show us the color of its money, Congress will
anxiously await notification of that fact.
One last important legal point which, in my view, completely in-
validates this notification. Under the category "Prospective Pur-
chaser," the acronym "NATO" is listed. Yet, NATO-the North At-
lantic Treaty Organization-has absolutely no authority to obligate
PAGENO="0050"
46
its member nations, without their agreement, to purchase weapons or
weapons systems.
If a group of NATO nations, but not all member-nations, were to
establish an entity to conclude this purchase, the United States, under
the Foreign Military Sales Act, could not legally deal with that entity.
Such an entity would be classified as an "agent" under the law and the
United States cannot sell arms to an agent representing a foreign
nation or an international organization.
Short of an unprecedented grant of sovereignty to NATO by its
member-states, the only way a sale of AWACS to NATO nations
could be transacted would be through each of the participating na-
tions. A separate memorandum of understanding would have to be
concluded with the individual buyer-nations. This point is also made
in the Library of Congress memorandum to which I have referred.
Mr. Chairman, I ask that this memorandum be made part of the
record of this hearing.
Mr. ROSENTHAL. Without objection, it shall be.
[The document referred to follows:]
LIBRARY OF CONGRESS MEMORANDUM TO SENATOR THOMAS F. EAGLETON
THE LIBRARY OF CONGRESS,
CONGRESSIONAL RESEARCH SERVICE,
Washington, D.C., March 8, 1976.
To Hon. Thomas Eagleton.
Attention Brian Atwood.
From Herbert V. Schandler, Specialist in National Defense.
Via Chief, National Defense Section.
Subject Arms Sales Procedures.
This is in response to your request concerning the procedures of the Depart-
ment of Defense in the sale of defense items, and whether those procedures were
followed in' the offer of `the sale of AWACS to NATO.
Department of Defense (DOD) procedures concerning military sales are de-
tailed in the Foreign Military Sales Act and in DOD directives and instruc-
tions. These procedures have been brought together and interpreted in the DOD
Military Assistance and Sales Manual (portions of which are attached) and in
congressional testimony (also attached).
Generally, requests for arms sales come from the foreign country involved.
"Only in the case of NATO," according to the Director, Defense Security
Assistance Agency (DSAA), "does the Department of Defense participate in
the evolution of foreign military requirements." An essential characteristic of
military sales, according to the Military Assistance and Sales Manual, is that
all sales are negotiated. Both the buyer and the seller must be satisfied before a
transaction can be concluded.
It would appear, in general, that the proffering of a formal Letter of Offer
is at a late stage in these negotiations after substantial agreement has been
reached. The Military Assistance and Sales Manual states that these Letters of
Offer should be `submitted to the Comptroller, DSAA "when it is in such form that
it would'be signed and issued to the purchaser" but for the requirement of DSAA
authorization.
Insofar as the purchase of AWACS by NATO is concerned, the NATO defense
ministers, at their meeting in December, 1975:
* * * noted the views of the NATO Military Authorities that an airborne
early warning and control capability was an urgent military requirement for
NATO. They agreed to consider (in consultation with other Allied countries),
at the Spring Ministerial Meeting of 1976, a proposal for the acquisition and
operation of such a system, with a view to making a decision at that time.
Thus, the NATO defense ministers neither confirmed the requirement for an
airborne early warning and control capability nor agreed to purchase such a
capability. They merely requested financial information on acquisition and oper-
ating costs of such a system, and indicated that a decision on procurement would
be made next May at their spring meeting.
PAGENO="0051"
47
The proposed Letter of Offer to NATO from the Department of the Air Force
on February 27, 1076 for. the purchase of 32 E-3A Airborne Early Warning Air-
craft, training, spare parts, and supporting equipment is one way of providing
to NATO the requested information on acquisition costs of such a system. It is
not the only way of providing such information. Defense Department regulations
are silent, however, as to what point in the negotiations a Letter of Offer should
be processed.
Another question arises, however, as to whether the prospective purchaser-
NATO-is indeed a prospective purchaser within the meaning of DOD regula-
tions. NATO as an entity, and as presently constituted, has no authority to obli-
gate its member nations, without their agreement, to purchase weapons or weap-
ons systems. Thus, the prospective purchaser cannot be NATO as a principal
unless there is an unprecedented grant of sovereignty to NATO from its member
states for this purpose. If the purchase is not to be concluded with member coun-
tries, NATO must establish or identify a legal entity to conclude this purchase.
The purchase would then be a cooperative venture in which each country which
desires to participate must agree as to the extent of its participation and contribu-
tion to the. system. In this case, NATO or the subgroup it esablishes, would be
acting inthe capacity of an agent for its participating member nations. The For-
eign Assistance Act does not address sales to agents, either of nations or of
international organizations.
Thus, it would appear that, without an unprecedented grant of sovereignty to
NATO by certain of its member nations, the AWACS system will, in reality, be
bought and owned by individual nations. A separate Memorandum of Under-
standing (MOU) will have to be concluded, either with the NATO agency or with
the U.S., by each of the participating nations. Recent reports indicate that funds
for AWACS would probably come from the U.S., Canada, Britain, and Germany,
with some of the smaller countries of the Alliance participating in the purchase
of the ground environment equipment. The number of countries to be involved is
not known at the present time. Therefore, separate Letters of Offer to the par-
ticipating nations cannot be .prepared.
In summary, this Letter of Offer to NATO for a weapons system would seem
to be unique for a number of reasons:
1. While conceivable, it is doubtful that NATO is a "prospective purchaser"
within the meaning of DOD regulations and current legislation. More likely, the
member nations of NATO will make individual decisions as to their purchase of
components of this system, and will receive national ownership of these
components.
2. As a member nation of NATO, the U.S. is in the unique position of being the
seller as well as participating in the purchase.
3. If ownership of this system passes to NATO or a NATO agency, a unique
control problem will be involved. Questions such as the manning, stationing and
utilization of this system during peacetime would offer problems not previously
faced by NATO. National ownership of systems which are placed under NATO
operational control would eliminate many of those problems.
Senator EAGLETON. Mr. Chairman, in light of the issues I have raised
today, I think it is fair to say that this notification is highly improper.
While, of course, I have no proof, this report appears to be motivated
by something other than a desire to keep Congress informed. It raises
fundamental questions about the way we, in Congress, want the report-
ing procedures of the Foreign Military Sales Act implemented.
I think it is clear that we do not want to receive worthless informa-
tion about a sale which may never take place. It is equally clear that
Congress would like some prior knowledge of ongoing negotiations-
knowledge we dO possess in the case of AWACS. But we do not want
this veto mechanism triggered until substantial agreement has been
reached as t.o the terms a letter of offer will contain. It will be impos-
sible to make this provision of law work if we do not insist on at least
this measure of commonsense.
PAGENO="0052"
48
AWACS is a controversial system. Its workability has been chal-
lenged by military experts within the General Accounting Office and
the Pentagon, and Congress has kept the program under careful re-
view. We have made NATO's decision to purchase this system the bell-
wether for further production of AWACS beyond those few aircraft
required for U.S. use.
As an author of this disapproval resolution in the Senate, I can state
that its adoption by Congress would ~n no way prejudice whatever
future decisions NATO might make. The Defense Department will
continue to have the right to engage in preliminary negotiations on
this matter, and Congress would reserve the right to consider an actual
sale to individual NATO nations and to authorize the degree to which
the United States will participate in a purchase as a NATO member.
While I remain convinced that NATO will not choose to buy this
system, 1 want to assure this committee that I would not object if a
legitimate sale to NATO nations were to be proposed.
Mr. Chairman, I urge the committee to recommend House approval
of this resolution introduced by my colleagues, Representatives Pat
Schroeder and Tom Downey. I thaiik the subcommittee for giving me
the opportunity to testify here today.
Mr. ROSENTHAL. Senator, thank you very much for a very thought-
ful and incisive statement.
You have followed this program for a number of years. Do you have
any insights as to why this notification was made at this time?
Senator EAGLETON. Well, I would be speculating, Mr. Chairman, but
I think it is a classic exercise in self-aggrandizement.
The Pentagon and the Air Force are trying to enhance the market-
ability of this very beleaguered weapon system that now costs more
than $118 million per copy, the most excessive airplane ever designed
by mortal man. And in order to try to give some hope that this stag-
gering price could be reduced, they are holding out the possibility that
the NATO nations are going to buy 32 of these planes. I do not think
the Pentagon, in their inner recesses of faith, believe this will occur,
but this is their showing that NATO is going to buy some of these fly-
ing turkeys.
Mr. ROSENTHAL. You think this notification is sheer speculation?
Assuming a resolution of disapproval were not voted in the affirma-
tive, could somebody say that that was a tacit approval of the AWACS
program?
Senator EAGLETON. Yes, exactly. The 20 days go by and Congress
takes no action, then Congress is, to use your word, tacitly approving
this situation. We, in essence, tacitly agree that the NATO nations
are going to buy 32 of these. It injects us into the process and makes us
a part of it, wittingly or unwittingly.
Mr. ROSENTHAL. Is it your view that the process we designed to pro-
tect the country and the Congress from these things is being turned
around?
Senator EAGLETON. Yes, sir, I think, as a very clever utilization of
the process by which we want to be notified of a specific sale, a specific
price on a specific delivery date, and we would judge this was a sale
that we thought was in the national security or foreign policy interest
of this country. This is a clever adaptation of that to get Congress
to be a bed partner of the Pentagon on the AWACS system.
PAGENO="0053"
49
Mr. ROSENTHAL. A Good Housekeeping seal of approval.
Senator EAGLETON. Yes.
Mr. ROSENTHAL. I think you have already answered it. But as far
as your own bona fides are concerned, if there were a legitimate sale
to a NATO country of AWACS, would you file a resolution of dis-
approval?
Senator EAGLETON. If it were a legitimate sale, if somehow Luxem-
bourg thought for its national survival it needed 10 AWACS-which
by the way, would cover the whole country, they could not park them
on the runways, they are so big. But if Luxembourg made a specific
offer for hard cash to buy some of these, one could say that it would
be beneficial at least to bring the per unit cost down. I would wait
a long time for any kind of specific offer from any NATO nation
to buy even one.
Mr. ROSENTHAL. Why are you so skeptical about a proposed* sale
to a NATO country?
Senator EAGLETON. Mr. Chairman, the AWACS is this day's ver-
sion of the ABM. Congress went through that one at the behest of
the administration, and we had to design an ABM system for a purpose
we did not then know, and we knew at the time we were deploying it,
it did not work. It had one major shortcoming. It was very easily
blinded. Knock outthe ABM radars and it was gone. This is the same
thing with respect to AWACS. It is easily blinded by jammers. It
depends for its efficacy on radars, and they can be very easily jammed.
GAO did an extensive amount of research on this point, and it was
made part of the record, I know, on the Senate side. I believe it was
likewise inserted on the House side.
AWACS can be easily jammed in peacetime by Warsaw Pact jam-
mers seeking to mask movement within their territory. In time of
war, it is not only easily jammed, but it is about as vulnerable as an
aircraft carrier. And in time of war AWACS would be among the
first planes to go.
Mr. ROSENTHAL. Do you have any knowledge of or feeling of how
any sale along this line might impact on the NATO standardization
program.?
Senator EAGLETON. Well, the NATO standardization program, I
think we have to discuss what we mean by that. The Pentagon seems
to mean that standardization is fine if every other nation in the world
will take American equipment. They would like NATO standardized
to adopt all American designs whether tanks, planes, or what have you.
It is standardization if you will go along with us.
The Germans, who try to view it as more of a two-way Street, as it
rationally should be, have indicated that unless we at least give some
consideration to an offer to buy the Leopard tanks, they are not going
to buy the AWACS. They happen to think they have the best tank
design currently available, and if we are not going to play ball with
them on this, they are not going to play ball on AWACS. Indirectly,
this becomes part of the standardization debate.
Mr. WINN. Thank you, Mr. Chairman.
Senator, we are glad to have you over on our side today.
Senator EAGLETON. Thank you.
PAGENO="0054"
50
Mr. WINN. You made a statement that if they dealt through NATO,
that NATO was an illegal agency for purchasing, as I understand
your comment?
Senator EAGLETON. That is from the Library of Congress memo-
randum.
Mr. WINN. Well, for your edification and ours, too, we are all illegai
then, because there is an organization which you are familiar witl'
called NAMSA. That is an agency, and they have beeii purchasing
for NATO for quite some time.
Senator EAGLETON. Well, I am not going to try to debate with you
Mr. Winn, the specifics of the Library of Congress' legal opinion
It speaks for itself. It is worth what it is worth.
It is no precedent, as you well know. The fact we may have engaged
in some previous illegality that does not give legal sanction to a sub-
sequent illegality. Nonetheless, the distinction the Library has made
is that this is the first weapons system-NATO has never bought
a weapons system.
Mr. WINN. I am sure you wanted to clarify that in your statement.
Senator EAGLETON. If that be illegal, it has. to fall of its own
weight, and I am not going to shed any tears.
Mr. WINN. I am not going to say it was illegal.
Senator EAGLETON. AWACS purchased by NATO, if that is the
purchasing agent, the Library of Congress has serious doubts about its
legal efficacy.
Mr. WINN. I am interested in your statement, Senator, why you
are so sure that NATO or NATO agencies or NAMSA~ or whoever
does the purchasing, will not buy the AWACS system. We have been
working with NATO for 3 years now on AWACS system, an airborne
warning and control system, and now you are saying that they will
not buy it.
Senator EAGLETON. Well, I take it on the same basis as I was con-
vinced `that the ABM system would become instantaneously obsolete
because of its capability being blinded. The same applies with respect
to NATO. They know the deficiencies of this system, and they know
the costs.
Second, if we were talking here about an F-16 or F-IS that was
coming in at, say, $10 million or $12 million, or whatever it might be,
per unit,. then one might make a case that on an experimental test
basis, a nation might buy five, six, seven of these at this cost, `Lnd if
it works out well, fine. If it does not, well, you have not lost all that
much
When you are talking about an airplane that has a very, very
serious vulnerability problem, and. you are talking current unit prices
of $118 million, I just do not see our NATO allies putting up their
hard cash to buy these.
Great Britain for example, is trying' to reduce its defense budget.
Giscard is not a rampant `military, and if he were, they would be
very much interested.
The West Germans have made their case very clear: no A1\TACS
unless we go along with Leopard for standardization. If Italy could
keep a government in long enough, they would be in a position to
instantly reject it `because with their economic situation, they are
not going to buy this white elephant.
PAGENO="0055"
51
I think the pragmatics of it are such that AWACS will remain
the playthings of the generals in the Air Force the way aircraft
carriers are the playthings of admirals in the Navy, and I do not
know what the Army has as its favorite thing. I guess the horse
bridgade.
Mr. WINN. It is our understanding today that there has been a
request from the NATO countries for an offer to purchase.
Senator EAGLETON. Oh, well, this is an enormous thing. One can
always express an interest. That is how you sometimes engender a
favor, a comraderie with someone else, express an interest in his prob-
lem and his merchandise, go around and look over a house for pur-
chase, this is a nice home, I am interested in it, et cetera. You know, a
vague interest is a long way from a firm commitment to buy a system.
Mr. WINN. I realize that, we go through that constantly. But
it is also a starting point for negotiation.
Senator EAGLETON. That is all right, I do not mind that. But what
I do object to is that it triggers the 20-day clause of section 36(b).
If they had sent a letter up saying, "Dear Congressman Rosenthal
and colleagues, we are having some conversations with some of our
NATO allies, some of them express some kind of general interest in
this, we are just telling you this because we think it would be good
to keep you gentlemen on notice." That would be fine. That would be
commendable. But what they have done is to purposely trigger the
20-day period veto mechanism. Once the 20 days go by, then they
have us as the tacit partner in this thing.
Mr. WINN. Well, I understand your philosophy. I do not neces-
sarily agree with it. You make a good point.
Thank you.
Mr. ROSENTHAL. Mr. Solarz.
Mr. SOLARZ. Thank you, Mr. Chairman.
Senator, we heard testimony shortly before you arrived that the
Military Committee of NATO-whateVer that is-studied this
problem and determined that there w~s a need for such a surveillance
system. Then a second committee looked at the alternative systems
that were available and unanimously decided that the AWACS sys-
tem was the one that made the most sense for NATO.
A classified letter was apparently sent requesting us to give a letter
of offer tothem.
Now, how do you square your assessment of the lack of interest
on the part of th~ NATO countries for acquisition of the system with
the testimony we heard indicating that NATO committees have
studied it `u"~ un'tnimouisly decided tbis is wh'Lt they w'int ~
Senator EAGT~TON. I guess existing NATO committees are made
lip of some civilians from the respective countries who are from the
defense ministries, plus the military of the respective countries. I
guess w~ can find a couple of Italian generals~ a couple of French
generals, a couple of Dutch generals, maybe even Prince Bernhardt
himself, that would like to have one of these planes in their inventory.
It is a big plane with a lot of radar equipment. A general feels very
good riding around on one of those.
I think it is an entirely different thing to expect appropriations
committees of the parliaments of these countries to appropriate hard
PAGENO="0056"
52
dollars. The British pound, if we could ever find how low it is going
to sink-I do not know how they can quote a price. I cannot cOnceive
of the circumstances under which those hard-pressed governments
would buy this kind of thing.
Mr. SOLARZ. One final question. If your position is that you would
not oppose a legitimate sale to the NATO countries, then in a sense,
leaving aside the legal problems raised by the Library of Congress
study, I do not see why you would necessarily be opposed to this letter
of offer. If it turns out that we do not disapprove this letter of offer,
and the NATO countries ultimately decide not to buy it, we have lost
nothing. If they decide that they do want AWACS, under those cir-
cumstances, you indicate you would have no opposition. Leaving aside
that technical legal question, I am not sure I understa.nd the thrust
of your argument.
Senator EAGLETON. That is a very good point, leaving aside the
Library of Congress question. If the 20 days run, the Pentagon in their
request to Congress in the Defense budget for this year and ensuing
years will then come up and say, well, as you gentlemen know, because
we have gone through the section 36 (b) procedure, there is a 32-plane
buy for AWACS~ and as you know, with this 32-plane buy, the per
unit cost that used to be $118 million per plane is now $9.98 million.
So we will be hung by our own procedure of letting the 20 days run
by. That is, we will have in essence agreed that there is some efficacy
to the ~32-plane purchase. And I think it will be turned `around and
used as justification for even more AWACS at a lower per unit cost
when I do not t'hink NATO is going to buy one of them. In addition,
we will have endorsed, by our silence, this particular price tag for
AWACS, which is probably too low.
Mr. ROSENTHAL. Thank you very, very much. We `are going to ad-
journ for 6 minutes and give you a `chance to further expound on this
subject, General Fish.
General FISH. Thank you.
Mr. ROSENTHAL. Thank you.
[A short recess was taken.]
Mr. SOLARZ [presiding]. If we can call the hearing back to order.
Congressman Rosenthal was unavoidably detained for reasons `which
I am sure his staff is fully familiar with, and asked me to resume and
conclude the hearings in his absence. When he asked me if I would
be willing, I told him that in light of the fact that this' would be the
first subcommittee meeting which I `chaired, I would not only be de-
lighted but I would always recall it. However, the witnesses need not
be concerned about my abusing my power by detaining them too long.
Enjoying the prerogative of the Chair, I have a few questions I
would like to `ask. I believe our colleague, Congressman Downey, as
a gesture of congressional courtesy, should be given an opportunity
to ask some questions.
General, Senator Eagleton, I thought, raised some serious questions
which I would hope we could get answers to. One in particular struck
me as being especially significant. It had to do with the `point he made
with respect to the fact that we have not yet received, `according to
him, an official request from the NATO countries for a letter of offer;
that the Council of Ministers have not yet approved the purchase of
this plane, even if some of the military committees that have studied
PAGENO="0057"
53
it are in favor of it. There is a big difference between a military judg-
ment that the purchase of the system makes sense and a willingness
on the part of the political structures in the NATO countries to ap-
prove it.
Why do you' have to submit this letter of offer now? Why cannot
negotiations proceed in the absence of an official letter of offer pending
a formal decision on the part of the Council of Ministers, or `whatever
official NATO body is appropriate, to the effect `that they want such
a system? At that point, a letter of offer could be submitted which
we would then have an *opportun~ty to approve or disapprove.
General Fisn. Mr. `Chairman, thank you, especially since this is your
first time I have beau given the opportunity to address you as such.
We do have a request for a letter `of offer, it is classified, it does men-
tion the figure 32 aircraft. I would like to submit it for the record.
It was dated the 23d of February.
The reason that we believe that we needed to come forward and
notify under 36(b) procedures, a notification of a proposed letter of
offer, is because in working with the committee and Congress, this has
been our normal practice. We have always done it this way in the
past and particularly since a part of our procedure here is to have
the NATO participating nations, some of them, put up some money
in April with a statement of understanding.
I will give you the opposite case. Let me say that there were some
other country, say that it was one of the countries in the Middle East'
that wanted to purcha'se some piece of equipment, and it was going `to
cost $2 billion or thereabouts, and we were about to enter into a state-
ment of understanding that involved them putting up significant
moneys, several millions of dollars, $12 or $15 million, carefully under
$25 million, and we were to say to the committee we do not need to
come tell you about that. We would be remiss, and we think we would
be just as remiss to have done it now.
As I have said to you privately earlier, I am willing `to testify
under oath there is no consideration of tactics here, there has never
been any such discussion.
Mr. SOLARZ. General, leaving aside the question of ulterior motives,
there is a distinction I would submit between informal consultations
on the one hand, designed to let the committee and the Congress know
that there is an interest in such a transaction, and a formal notifica-
tion on the other, which triggers the procedures embodied in section
36(b).
General Fisn. I agree, sir. But, you know, there is more than in-
formal hearing. We want to sign up with the NATO countries and
have them put money on the line within the next 30 days.
Mr. Sor~uuz. I would like you to address yourself to the specific
point made by Senator Eagleton that there is an important distinc-
tion between an expression of interest in a particular weapon `system
on the part of the military, on the one hand, and a decision to pur-
chase a system by the political leadership and institutions of the coun-
try, on the other hand.
To what extent does the specific request for a letter of offer which
you have cited in point of fact reflect a political judgment on the part
of the NA'TO countries that they not only want this system militarily,
PAGENO="0058"
54
but that they are prepared to purchase it within the general financial
parameters which you talked about at this hearing today?
General Fisii. Sir, you are very much asking a chicken-and-egg
question. They asked us for incremental costs, and they mentioned the
figure 32. The letter says on behalf of the NATO nations, and we
must come to the Congress. This is not as many of the other cases
that we bring up, 30 percent of the letters of offer that we submit are
never accepted.
Mr. SOIJARZ. What percentage?
General FISH. About 30 percent. So we do not have a final decision
until after we present the letter of offer, negotiate it, and we come
to the Congress before we present the letters of offer.
Mr. SOLARZ. Let me rephrase the question. Supposing we approved
the letter of offer or rather did not disapprove it, according to the
`terms of 36(b), and NATO determined to go ahead with the trans-
action after further negotiations. Who would have to approve the
purchase within NATO? What would have to happen for NATO to
authorize officially the purchase of the system?
General FISH. `Well, it is going to be a very complex negotiation,
as General Russell pointed out. There are a dozen other countries
involved with an ultimate decision. They would have to put together
a group like we have in other arrangements, F-16 consortium, to do
the actual contracting. So I guess my answer to you is that some-
thing that is going to have to be negotiated out.
Would you like to enlarge upon that?
Mr. S0LARz. I want to make sure you reply to the specific question.
~\That I mean to say is this decision that would be made in some~
kind of NATO body or would each of the member states of NATO
have to secure parliamentary approval within their countries of the
decision to go ahead?
General FISH. The latter.
General RtTSSELIJ. Yes, sir, very definitely each nation would have
to make tip its. own mind, then the Ministers will be instructed to
act within the NATO forum as each nation instructs them. So these
processes are going to have to go back and forth.
Certainly, no Minister has the authority to commit his nation to
such an expenditure without his own processes at home, his own
iariiament.
Mr. SOLAIiZ. We would have to assume before this matter were sub-
mitteci to a particular parliament, the government of that country
would have had to have made a decision they wanted AWACS?
General Fisi-i. Yes. In fact, 1 cannot put the figures down in the
unclassified record. but there is one of the countries that `has already
set aside significant moneys for this purpose.
Mr. SOLARZ. Is there any record in the past of situations where the
government of a NATO country submitted to its parliament a request
for approval to purchase a particular weapon system and the par-
liarnent turned them down?
General Frsi-i. I do not know.
General RUSSELL. It is difficult to say because their processes work
quite differently than ours. Most of their parliaments do not deal on a
weapons system basis, their defense budgets are put together in a dif-
ferent manner and each nation `has its own personality.
PAGENO="0059"
55
Mr. SOLARZ. What damage would be done to the ultimate con-
sumation of this transaction if-hypothetically-this letter of offer
were withdrawn pending a more formal and official indication from
higher levels of the NATO countries themselves that they want to go
ahead with this transaction?
General Fisu. We have received it on a very high level, appropriate
level in judgment, and there was testimony in front of the Senate
Armed Services Committee yesterday by people that have been in-
volved in the negotiation that it would be widely interpreted as the
U.S. Congress representing a desire not to sell this weapons system
to Europe under `any terms because that is the waVy it would `be char-
acterized, especially because as pointed out by other witnesses this is
a controversial area and there are people in other governments that
even though there may be a majority of in favor, there `are critics,
too, and it would be very, very damaging to the program.
Mr. SOLARZ. I can understand that point, if the Congress passed
this resolution of disapproval. But `supposing instead of bringing it
to `a vote in the Congress, the administration withdrew the letter of
offer pending further progress in the negotiation?
General FISH. Well, I would have to take counsel on that and see,
and I understand the chairman's question. I think the greatest damage
in that would be the precedent to our own system of notification here.
You know, we have this up here and we are about to sign, if the
Congress does not disapprove, a statement of understanding involving
over $10 million, $12 to $15 million, funding of the NATO program
under a NATO arrangement. So I do not see how we can proceed and
sign that without notification giving Congress a `chance to review.
Mr. SOLARZ. I think you `have notified us.
General FISH. Statutorially-we have to comply with the law.
Mr. SOLARZ. I would point out there is already a precedent `for the
withdrawal of the letter of offer because that is what happened in
the Hawk missile ease, although-
General FISH. Yes, sir, we had not to do anything, not to proceed,
not to accept any money at all. But what you would do if we withdrew
it, then how do we go ahead and , enter into the statement of under-
standing next month? How do we do that? And it is for an eventual
sale of over $25 million.
Mr. SOLARZ. One thing, you do not need 36(b) procedures to approve
an expenditure of less than $25 million.
General Fisi-i. Yes, sir, but-
Mr. SOLARZ. That is the point at which 36(b) `is triggered.
General FISH. `The way we always interpreted it in the past, and I
do not know why we want to make this a special case-if we know t'he
eventual sale is going. to be more than $25 million we bring it up to
you and notify you and we have not done this for the first time, this
is. the way we have operated in the past. We do not want to be in the
position where we get cute and say this is a staten'ient of under-
standing and it is not a letter of offer, even though it is going to lead to
a letter of offer, therefore, we do not have to inform the Congress.
We are doing this for good valid reasons and the people that `testi-
fied on the other side of this issue seemed to have completely ignored
the fact that the Congress is going to get an opportunity to review all
PAGENO="0060"
56
aspects of this sale and the Congress is going to get at least two more
chances to approve or disapprove the sale.
Mr. SOLARZ. I gather it is your confident expectation that when the
Council of Ministers meets in a month or two, they will formally ap-
prove this decision?
General FIsH. Well, better ask General Russell on this. I would like
to state if this is disapproved, or we withdraw it, I think we greatly
reduce the chances.
General RUSS~LL. Thank you.
I cannot imagine the ministers on such a scale effort making up their
minds in a sudden way. I would think the kind of activity that might
go on-they would endorse "in principle" the acquisition of a force
pending nations being able to get their financial arrangements made
and address further details which they would expect to be supplied as
the year went through. They certainly expect not only to participate
in this, they look for a certain amount of industrial opportunities
involved. They have to deal with their own social-economic problems.
I would think it would be a stepping process.
Mr. SOLARZ. At this time I have just one further question and I will
yield to my colleagues. My question has to do with the objections that
have been raised by Senator Eagleton and I think Congressman
Downey and others. They claim that AWACS is a system which par-
ticularly in time of war could be very easily neutralized by the enemy;
that it is susceptible to being jammed; that the planes can easily be
shot out of the air; and that however much the theoretical merit
AWACS may have, given the tremendous costs involved, in time of
war AWACS would actually produce limited benefit because of these
problems. Can you comment?
General FISH. It is grossly inaccurate as to the facts. That is all I
can say. There have been test runs, and I will ask General Russell
to elaborate. It is not flat true.
General RuSSELL. I might add I was program manager of the pro-
gram for quite some time and am eminently familiar with the ca-
pability and limitations of the system. The conversation is a little dif-
ficult in the use of words, and we have to define them a little bit. The
word "jamming" is a difficult word; it implies something working or
not working, and that is not the case. The presence of jamming very
often indicates the hostile intent.
First, I did make the assertion earlier, and I will remake it, this is
the most jam-resistant radar ever built. When one talks about its sus-
ceptibility to jamming, you are talking about a relative situation.
Many radars in the world at high cost have some degree of ECM sus-
ceptibility. Particularly in the airborne environment, AWACS is
orders of magnitude more ECM resistant than any other system that
has been considered. Several have been named here today. That is a
measurable phenomenon. There was an assertion about 106's coming
up close to the AWACS. That particular test involved whether those
106's could be screened and get there without being detected. They
were certainly detected long before they ever got to the AWACS.
That was the nature of the test.
I think I can leave it right there.
General FISH. Dr. Currie yesterday testified that we have laid to
rest those previous concerns that have been ra.ised.
PAGENO="0061"
57
Mr. WINN. Thank you. I think it is very interesting that certain
Members, and I know they firmly believe this, of the House and now
the Senate, who have not been known as the great supporters of our
armed services programs-I cannot speak for Mr. D'owney `because I
do not know anything about his record-I do know about Mrs.
Schroeder and I do know about my friend Tom Eagleton, and he is a
friend. I think the same Members that are up here supporting Resolu-
tion 576, are the same ones that would be the first to criticize you
gentlemen if you come up here for informal consultation and we did
not have the press and we did not have the television and everyone
else to hear what you have told us today. I am glad you told us, and I
am glad we did not have a closed meeting. I think we might have had
a closed meeting had there been enough members here, a quorum here
to close this meeting.
I think this has been a healthy discussion. It is hard for me to figure
out, however, when we have these concurrent resolutions that are be-
coming more and more popular by members of this subcommittee and
by members of the full committee, by Members of Congress, as a
method of blocking what you are trying to do at the request of Con-
gress. You are trying to abide by the rules and the regulations that we
in Congress have put upon you to give us the various notices to go to
36(b) and all of the things, and when you do it you are criticized for
it and they try to block you. I do not understand this way of thinking.
But it is a prevalent popular public thing to do these days, and I do
not envy you gentlemen, but I would say that I have been known to side
with you and I have been known to criticize you, and I will continue
to do so. I will do the same thing with my colleagues when I think
that they are not really trying to serve, and I am sure they are con-
vinced that they are, but in my opinion, they are not really trying to
do anything, they are not trying to help sell this, they are not helping
to defend NATO, they are trying to `block additional spending in the
Armed Services Committee and `by the U.S. Government.
I honestly feel that way.
Let me ask you another question. Suppose the United States agreed
to pay 100 percent of the cost of a NATO-acquired system, would that
still be considered a sale under `the Foreign Military Sales Act?
General FISH. I would say not.
Mr. WINN. Or would it probably be a grant under the Foreign As-
sistance Act because of-
Mr. FORMAN. I would say that would be a grant under the Foreign
Assistance Act.
Mr. WINN. I would tend to `agree with you.
Mr. FORMAN. In this connection, if I may just add to it. During the
earlier testimony much was made of a so-called double subsidy, one
with regard to the R. & D. which has already been addressed, and the
other with regard to the 25-percent share. I do not regard that 25-per-
cent share participation in NATO as a subsidy at all. This is roughly
the share we pay for NATO infrastruoture and international military
headquarters and other similarly funded operations. We pay that be-
cause that is our share `of what we are doing.
If we are NATO infrastructure, for example, `which is paying for
the construction of bases and other installations used at NATO, we
at as a user nation using more than the 25 percent. Similarly, in the
PAGENO="0062"
58
NATO military headquarters we have our people there, and it is only
right we pay our share. We have got a U.S. requirement as part of
NATO, and as somebody who presumably will be flying airplanes over
there, to have these planes there and to be flying them.
Frankly, I do not see the legal difference, for example, between the
AWACS and the F-4's that we have over there now which we fully*
funded and fly all over Europe.
I would love NATO to pay 75 percent or to have to pay 75 percent
of the original acquisition costs of those F-4 planes rather than th~
United States having paid 100 percent. It is the same thing. It is a
NATO cooperative effort, and we are just paying our share of it. I do~
not regard it as a subsidy at all.
Mr. WINN. Whether it is a subsidy or not, it could be considered to
be that way, I suppose. And that is a matter of interpretation. But this~
is not the first time we have subsidized one way or the other the right
of countries to buy, purchase planes, equipment, is it?
General Fisu. Oh, no, sir.
Mr. WINN. Why is this a double subsidy or new method of financ-'
ing?
Mr. FORMAN. As I was talking a moment ago, let us take the NATO'
air defense ground environment system which this is designed to com-
plement and supplement. There again there is a common NATO effort,
a total NATO wide ground environment system to protect our planes,
as well as the other countries, and we are paying our share of them.
General Fisu. We contracted with a NATO entity to do it.
Mr. WINN. The other way around.
Mr. FORMAN. Similarly, there is another system called NICS/MA,
which is the NATO integrated communications s stem. and it has got
a management agency. Again, there it is a NATO-wide communica-
tion system that serves our forces as well as the NATO Forces, and we
pay our fair share. This is not the first time, as you have just said.
Mr. WINN. All right, you talked about Dr. Currie and when he made'
the statement in the Senate the United States would pay up to 25 per-
cent of the NATO cost of acquiring KWACS. Did this amount to a
commitment of DOD fi,mds, or if so, under what authority was the
commitment made?
General Fisu. What Dr. Currie stated, that subject to approval of'
the Congress-
Mr. WINN. That was part of his statement?
General FISH. Yes, sir, we would propose to the Congress, and, sub-
ject to their approval, to pay up to 25 percent. But it very carefully'
had an additional phrase. I do have here a letter that Dr. Currie sent
to ~four committees of the Congress in May 1975 explaining the NATO"
negotiations and their interest, which we are far beyond that now. We
have kept the Congress constantly informed, contrary to some of the
testimony I have heard here today, and I would like to submit this
for the record. It is a classified letter.'
And I would add, sir, if the committee would permit some other
documents, I would like to submit for your consideration, which in-
clude notifications and testin'ionies about the 4 percent R. & D. recoup-
ment which we have informed the Congress.
1 The letter will be retained In subcommittee files.
PAGENO="0063"
59
Mr. SOLARZ. Without objection, we can make those documents part
of the record.'
Mr. WINN. I would like to have those in there because I think there
have been statements made today that insinuate you are not bringing
this information up to Congress, you are not giving it to us, and at the
same time the same voices say here you are giving it to us and do not
*give it to us, it is not right.
You mentioned a little bit there, and I am not aware of Dr. Currie's
full statement and the papers that he has presented to Congress and
the committees, and I was going to ask, because there is a prepared
question here by the staff, that when the United States proposes to
pay part of the NATO cost for acquiring military hardware, should
not the U.S. share be authorized specifically by Congress?
General Fisu. Yes, sir.
Mr. WINN. It is, is it not?
General Fisu. That is the point we have attempted to make here,.
that we are complying with the 36(b) provisions as we understood
we were required to do so. The Congress will get another chance to
review all the terms before they are presented for approval by the
NATO group, by virtue of the operation of the Armed Services Com-
mittee prohibition that we do not proceed without bringing the defini-
tive terms to them and give them 30 days to review them. We will'
meet that.
And then the third opportunity to look at it will be the annual
authorization and appropriation process which will be necessary in
order to consummate `any kind of an arrangement with NATO. Rather
than an end run, like it has been suggested, this is an opportunity to
get the debate, this dialog out in front in the open here for the Con-
gress and the `Congress gets at least two more chances to review it.
Mr. WINN. I am afraid some Members of Congress do not want to'
be confused by the facts.
I just reached over here in front of Mr. Buchanan's place. About
21/2 hours ago he wanted to refer to this magazine, and I do not know
what he was going to refer to, but I was reading the headline here on
AWACS. I never heard of this magazine before. Maybe it is a well
known one. It is called Government Executive and this was the March
issue 1976. It says AWACS: Can it cut out ground clutter on Capitol
Hill? I think that kind of comes to the point I was trying to get at a
little while ago, I think you are running into a bunch of ground clutter'
and my friend Torn Eagleton is referred to here, and I quote the"
magazine:
Already under opposition, led mainly by Senator Tom Eagleton, the program
has suffered a certain amount of stretch out and resultant inflation-borne pro-
gram cost increases. It is always a threat when that happens.
General Fisu. Unquestionably, sir.
Mr. WINN. Every time you stretch out the airplane is going to cost
more, the turkey, as he referred to it.
General Fisu. That is true.
Mr. WINN. According to this article six were funded in the year"
1975, four more in 1976. Are those figures right?
General Fisu. Yes, sir.
~`See appendix, p. 76, for Department of Defense Directive 2140.2.
PAGENO="0064"
60
Mr. WINN. They do not coincide with what we have been hearing
today.
General RUSSELL. There was a little confusion in the figures. Six
appropriated in 1975, four in 1976, and three in prior year research and
development appropriations. So a total of 13 aircraft.
Mr. WINN. That is wthere the 13 comes in?
General RUSSELL. Yes. At one point it sounded like it was 15. It
is really 13.
Mr. WINN. Well, we got into funding a little while ago. Now, when
Senator Eagleton got here he had a different figure and I questioned
the one that Torn and Pat Schroeder presented. They had different
figures. They explained that there was a lot of confusion based on vari-
ous things, and then Senator Eagleton came up with another figure of
$140 million. You started to refer to that and you were just getting
into the testimony, General Fish, before Senator Eagleton was recog-
nized. And if you have `any more, any additional figures that you
would like to present to us, I am prepared to be confused by the facts.
General FIsH. Thank you, sir. Of course, the systems acquisition
report that we submit to the Congress shows that the total program for
34 aircraft, whi'ch is the planning figure `for U.S. forces, would result
in $3,538,500,000. That is total program costs.
It is in what we call then year dollars. That is in the dollars that
would be spent considering inflation for the next 5 years as it turns
out. So what we compare that figure, as has been done by some people
and by some of the witnesses, to a figure in the letter of offer which is
in constant 1976 dollars. So you know immediately that is a grape-
fruits and grapes comparison. You would have to inflate the 1976
dollars `at the $2.2 billion in order to get an accurate comparison.
I have done that and if you take the NATO letter, proposed letter of
offer, the notification that is now in front of us~ for which we have the
estimated cost, it would come out to around $69 million in the simple
arithmetic of 32 divided into the number.
If you put the U.S. purchase of 34 aircraft to a 1976 dollar figure,
and take out the sunk R. & D. costs, because they are gone, it cannot
cost us `any less or any more, that is gone.
Mr. WINN. As I understand Mrs. Schroeder and Torn Downey,
they are trying to retrieve that, recoup that.
General Fisu. Yes, sir. But I want to make both of these compari-
sons on a similar basis. I come out to a figure of $58.27 million per
aircraft for the TJSAF. My point is-
Mr. WINN. Based on 34?
General FISH. Yes, sir, and the NATO buy is based on 32. It is like
we have testified. The NATO aircraft will cost more than our aircraft
to purchase from here on out. The difference is because we will recoup
a part of the R. & D. costs which we will have no opportunity to if
the sale is not made.
So when you do this on a complete apples and apples comparison,
`the relevant figures are approximately 69 million per copy, on the
one hand, and 58 on the other. Those numbers are going to change. It
is one thing for sure at this point. But based on the best data available,
the NATO airplane, numbers will probably change because there will
be further discussions as to the eventual quantity configuration, fund-
ing arrangements, and things of this nature?
PAGENO="0065"
61
Mr. WINN. That is the part of your negotiation?
General FisH. That is right. So I hope that that helps clarify this
point.
Mr. WINN. It does help. It concerns me when anyone insinua'ces,
maybe I read it wrong, that the Department of Defense was misrep-
resenting their figures. It depends on how you look at it. And I am
glad Mrs. Schroeder and Tom made that point and I think that the
information that they had and the figures they could point to and the
way they do is not a misrepresentation either any more than yours.
General FISH. They may not have been aware that we do have that
problem of our systems acquisition reports are expressed in then year
dollars whereas the notification was in the current fiscal year 1976
dollars as far as for the NATO proposed purchase.
Mr. WINN. Well, I think when you supply information to Members
of Congress, at their request in writing, I am not for some staff calling
on the telephone and wants you to tell the figures, in writing like they
said they have done, that that should be pointed out in your answer to
them. I do not know, they said they got it 20 minutes before post-time.
General FISH. The systems acquisition report is a fairly complicated
document, it gives the base year and shows the escalation that is in-
volved, for instance, on the AWACS. Further escalation, average
escalation, rate of 5.3 percent compounded annually.
Mr. WINN. You keep saying it is complicated. I have no doubt. But
these are smart young people that are asking these questions and.they
want to know and if they do not get the answers, no matter how com-
plicated it is, if you do not go out of your way to explain it to them
they are going to consider it might be misrepresentation. I can under-
stand their feeling.
General FIsH. I take your guidance.
Mr. WINN. It is really hard to understand some of the ways you
guys figure.
General FISH. Yes. We regret that and we do attempt and I certainly
appreciate your saying Mr. Winn-and we do attempt to make sure
that the numbers are understood and we will make additional efforts
to do so. It is at the request of the Congress we report the documents
and SAR reports on then year dollars. It is NATO that we present
the request in terms of 1976 dollars.
Mr. WINN. Senator Eagleton talked about the illegal method of
negotiating, that the Department of Defense cannot negotiate with
NATO and, of course, we pointed out NAMSA. He was a little vague
about his answer. He got his information from the Library of Con-
gress, which I do not understand what that has to do with it at all.
It is my understanding there is another agency of NATO that you deal
with in contractual arrangements. Is that true, other than NAMSA ?
Mr. FORMAN. Yes, sir, that is true.
Mr. WINN. We are illegal again.
Mr. FORMAN. Well, I have not seen the Library of Congress paper,
but if accurately quoted, it is astounding to me. The facts are there
are two international treaties concerning NATO: One, which is com-
monly called the military headquarters protocol, and the other, civilian
headquarters treaty. Both of them provide for the establishment of
subsidiary bodies by the NATO Council and for these subsidiary
bodies to have juridical personalities internationally, and pursuant to
PAGENO="0066"
62
-these two treaties the NATO Council has over the years established
-a whole host of subsidiary bodies. NAMSA is one, NADGE/MO is
.another. NADGE/MO is the management office and NICS/MA is
the management office for the NICS system.
Going back to 1960 you had the NATO F-104G project office. The
NATO HAWK office. There are a whole host of them which are
vested with juridical personality by the NATO Council, pursuant
to international treaty which so provides, and regulations have been
adopted by NATO which spell out what the terms are of this juridical
personality and to what extent one of these organizations can speak
in the name of NATO and sign documents for NATO and to what
~extent NATO collectively is financially bound or just the organization
which participates. This varies. But we have been doing business
with NATO in accordance with these treaties for, as I say, some 15
years.
Mr. WINN. I appreciate your clarifying that. I have not had a
chance to read the entire report from the Congressional Research
Service, they are usually objective. This time, if Senator Eagleton
quoted them correctly, and I have not had a chance to see what he
was referring to, I do not think this is one of their outstanding
research jobs.
Thank you.
Mr. SOLARZ. Thank you, Mr. Winn. I think our colleague from New
York has been very patiently waiting the opportunity to ask some
~questions.
Mr. DOWNEY. Believe me it is a pleasure to call you, Mr. Chairman.
I suspect it will be many years before we can call each other those
-things except when more senior Members are missing.
Mr. SOLAIIZ. The gentleman's time has expired. [Laughter.]
Mr. DOWNEY. Thank you.
Mr. Forman, can we agree that if we are selling this airplane with
notice or intent to sell or offer to sell, it is not at the pro rated R-. & P.
-cost of the cost of the program?
Mr. FORMAN. If you mean full pro rated cost, the answer is, yes.
Mr. DOWNEY. We are doing it with that 4 percent plus the 2 percent
-administration fee?
Mr. FORMAN. That is correct.
Mr. DOWNEY. Are you familiar with a memorandum sent to the
Secretary of Defense dated December 18, 1975 from Mr. B. W. Gut-
-mann that answers a number of DOD questions concerning recoup-
ment policy on B. & P. for foreign military sales?
Mr. FORMAN. No~ sir. This is from Mr. Giitmann to-
Mr. DOWNEY. Gutrnann~ R. IV. Gutmann, who is the Procurement
Systems Acquisit.ion.Division Director.
Mr. FORMAN. Of what?
Mr. DOWNEY. Of the General Accounting Office.. It was in response
to some DOD inquiries concerning DOD recoupment.
He says:
DOD Directive 2140.2 provides that under the FMS program and in con-
-tractor sales of major defense items for a military purpose R. & D. recoupment
normally shall not exceed 4 percent of the product sales price. In August of
1975 a policy was established that R. & D. recoupment under the foreign
military soles program should be pro rated-total R. & D. costs incurred by
DOD divided by total projected production. The pro rated basis will apply
PAGENO="0067"
63
to military systems that have been in production 5 years or less. On older systems
the 4 percent charge will continue.
That seems to contradict-
General Fisn. I think I can remove the confusion that exists. The
basic directive provides that the normal rate is 4 percent. It also
provides that under certain circumstances that if the Director of
Defense Research and Engineering requests the Director of the
Defense Security Assistance Agency, which I am, to make it a higher
than the average, than the policy of 4 percent, that I would entertain
that and make a determination of what the proper charge should be.
I think when the GAO came by and discussed it they discussed
it with me. I explained to them at that time that we look at each
case to see if pro rata would be appropriate, but you know it is a
determination at that point.
Additionally, I have the authority delegated from the Secretary
of Defense to waive it to zero and not collect any R. & D. surcharge.
I believe that the GAO did not correctly characterize the thing.
Mr. DOWNEY. Are you characterizing this report? Let me read some
of the other paragraphs which they contradict. What you are telling
the subcommittee, we understand since August 1975 DOD policy
requires that only the Secretary of Defense may approve waivers
of recoupment under the foreign military sales program.
Citing the 4-percent criteria-
We could not establish the reasonableness of the 4 percent rate because of
lack of specific information on its origin or basis. When compared to rates used
by some NATO allies having recoupment programs, the 4 percent rate is low.
For example. Germany and the United Kingdom use 5 and 71/2 percent of the
sales price. We note, that the 4 percent rate was arbitrarily set.
It goes on to say-
Our observations were discussed with DOD officials who agree that some
clarification appeared necessary. We would appreciate being informed of the
results of your consideration of the foregoing matters.
Mr. Chairman, I would submit to you that, not to impugn, certainly,
the integrity of the witnesses who have come here in good faith to
testify in this matter, that there is a great deal of doubt concerning
the amount of recoupment that we should receive. Whether or not
this directive is accurate or whether or not there is some misunder-
standing between yourself and Mr. Gutmann begs the question, the
essential question, that in this particular sale we are producing an air-
plane for NATO use, whether or not this is or is not accurate, that
we should receive pro rata share of R. & D. and recoup, if we can, the
$29 million per plane.
Whether or not this is accurate I think can be debated probably ad
nauseuin, but I think the essential point remains if we are going to
provide this plane to NATO something more than 4 percent in terms
`of pro rated R. & D. should be what this Congress and this country
should demand, and that is the only point I wanted to make, Mr.
Chairman, and Mr. Winn.
One of the things that is interesting about national security-and I
serve on the Armed Services Committee-we always have different
views of what it is. I personally think that the NATO alliance and the
alliance with Israel and Japan are the most important ones we have,
and I want to make sure we maintain them, but I do not think that
maintenance is necessarily predicated on giving NATO countries,
PAGENO="0068"
64
particularly West Germany and Britain, this sort of deal. I think that
is stretching what we want to do in terms of a healthy alliance and
in terms of healthy national security.
General FISH. May I respond to the question on 4 percent? I would
like to point out a couple of things.
First, we have a written directive in force, I have characterized it
properly, we will submit it for the record, it is still in force.
Mr. SOLARZ. Without objection, we will include that in the record.1
General FISI-I. Second, Secretary Schlesinger on February 26, 1975,
testified to the House Appropriations Committee, and I will submit
an extract for the record, where he decided even prior to the period
that Congressman Downey is talking about, August 1975, specifically
as early as February 1975, what we plan to add to the AWACS
procurement cost for 4 percent B. & D. recoupment. So you know, the
Secretary of Defense by his own testimony, had determined that it
would be 4 percent not pro rata and we officially informed the Con-
gress, and I will provide other documentation where we informed the
Congress that prior to and subsequent to August 1975, that we were
charging a 4 percent B. & D. surcharge.
Mr. SOLARZ. Without objection, whatever documentation on that
point the General subsequently submits, can be included in the record.2
Mr. DOWNEY. I would just ask yourself and Mr. Winn if possibly
you would like to respond to this GAO report, because if it is inaccu-
rate I think this committee should know that, and if it is not inaccurate,
I think they would like to know that as well. And if you could respond
in writing swiftly, I think that is important.
General FIsH. Delighted to.
Mr. DOWNEY. According to this, it would seem there is a directive
that requires foreign military sales of later than 5 years-~-
General Fisii. He cites the directive in there, does he? Fine. It is
cited in there. Is the directive cited in there?
Mr. DOWNEY. He cites the directive 2140, I believe that is the direc-
tive, and he says it is a policy that as of August 1975 the-
General FIsH. Does he say what the policy is?
Mr. DOWNEY. Policy has established R. & D. recoupment under for-
eign military sales should be pro rated.
General Fisii. The only directive we have is the one I cited and we
will be glad to submit it and we will be glad to have the opportunity
to respond.
Mr. DOWNEY. If this is inaccurate you should know and if it is
not-
Mr. SOLARZ. If I understand what the General has been saying, it
is his contention that is inaccurate?
General FISH. That is right.
Mr. SOLARZ. I want to thank you gentlemen.
Mr. DOWNEY. I want to thank yoU for allowing one to trespass on
the committee's time.
Mr. SOLARZ. The gentleman may be interested to know we have three
vacancies on our committee and we would be delighted to have a new
member with his potenlial and promise join us.
`See appendix, p. 76 for Department of Defense Directive 2i40.2.
2 The document will be retained in subcommittee files.
PAGENO="0069"
65
Mr. DOWNEY. I want to preserve my seniority on the Armed Services
Committee, which is last.
Mr. Soi~nz. I have just a few concluding questions.
You indicated in your colloquy with Congressman Rosenthal that
many of the letters of offer that have been submitted to the committee
in the past were ultimately concluded for amounts that differed from
those originally indicated in the letter of offer. I would appreciate it
for the record at this point if you could submit to the committee a list
of each foreign military sale since the enactment of 36(b) which coin-
pares the price listed in the letter of offer submitted to the committee
to the price that was ultimately agreed upon in the final negotiations.
General FISH. Sure.
Mr. SOLARZ. I gather your judgment is that in many of those in-
stances there were differences between the two?
General FISH. Yes; and I would want to say it is a policy that has to
be within the scope.
Mr. SOLARZ. Yes; I think it would be useful for us.
General FISH. If the Chair understands, we would not come to the
committee and say we `are selling a squadron of F-5's and then sub-
sequently up that to two squadrons of F-5's. But you know in the price
category we would leave the price go up because the documents we have
submitted to the committee say the price will ultimately be whatever it
cost the U.S. Government.
Mr. Sor~uiz. Yes.
General FISH. And it goes up.
Mr. SOLARZ. I think the committee would be able to make that judg-
ment itself, and with the information it can.
Now, could you tell us whether we have sold any military equip-
ment to NATO in the past as distinguished from individual NATO
countries?
General FISH. Yes, sir, we have.
Mr. Soi~nz. And what kind of equipment has that been?
Mr. FORMAN. Well, spare parts to NAMSA, as Mr. Winn has just
said. We have sold radars, other communication equipment, com-
ponents in the context of NICS/MA. We sold parts for the HAWK
system, as I recall.
Mr. SOLARZ. Who will actually be the purchaser of this AWACS
system? `Will it be NATO itself or will each of the individual countries
that choose to participate be the purchaser?
General FISH. We believe it should be NATO itself. That is some-
thing we still have to negotiate. You cannot preserve, as my statement
points out, benefits of a NATO AWACS to an individual country,
because it will look beyond the borders of a single country. So we
think all should pay. It is our position, it is the administration position
NATO ought to buy this together.
Mr. SOLARZ. So it would be owned by NATO?
General FISH. That is correct.
Mr. So~&nz. Is there any other military equipment in terms of planes
or ground equipment or ships that are owned by NATO?
General FISH. I think a perfect example is the NADGE system be-
cause that is the system that this will supplement, it is similar.
Mr. SOLARZ. What system?
PAGENO="0070"
66
Mr. FORMAN. NATO air defense ground environment system, which
is a complicated system. But a prime example of equipment owned by
a NATO major command as distinguished from NATO as a whole
is NATO comnnmications, it is likewise owned by SHAPE, Supreme
Headquarters.
Mr. SOLARZ. So there is some precedent for an arrangement ?
Mr. FORMAN. Yes, sir.
Mr. SOLARZ. Have the NATO people in their discussions with us on
this transaction indicated that they also envision this as a NATO
purchase as distinguished from an individual country?
General RUSSELL. Mr. Chairman, the reaction of nations individ-
ually, as individual personalities has a twist to it, but there was
created a body called the high level group that functions under the
Conference of National Armament Directors. The high level group
made the decision that the method of purchase ought to be as an FMS
case with the United States.
Mr. SOLARZ. Purchased by NATO?
General RusSELL. Yes, sir.
Mr. SOLARZ. And have they addressed themselves to whether once
the purchase was made, that control would r3main in NATO as dis-
tinguished from each of the countries?
General FISH. Those questions are being addressed and the dialog
continues.
General RUSSELL. Yes; the military side of the house has written
an operational concept where the trimilitary NATO commanders have
made an arrangement of how they would share the assets and delegate
the authority to own the system to one of them.
Mr. FORMAN. I might also add the international law aspect whether
NATO as such or NATO commanders could own military aircraft was
also addressed by the lawyers at NATO. We had a similar question
raised as a legal question of whether an international organization
could own weapons systems such as aircraft, raised a decade or so ago
in the context of what was then called the multilateral force of com-
mitted nuclear armed ships first explored in that connection and then
reexplored in this connection.
Mr. SOLARZ. What was the answer?
Mr. FORMAN. That it coul.d legally be done.
Mr. SOLARZ. Is the opinion available to that effect?
Mr. FORMAN. Yes; it could be made available.
Mr. SOLARZ. I think without objection, that could be included in the
record at this point also.
One of the things which troubles me about this is, if my arithmetic
is correct, assuming we sold them 32 planes at roughly $~8 million
a plane and picked up the 25-percent share which the NATO formula
would obligate us to do, that would cost us roughly $17 million a
plane tinies 32, which, according to my multiplication, comes out to
about $544 million as the U.S. share of this total buy.
Now, that, of éourse, is a substantial amount of money. We would
have to make a judgment when it reached that point about whether we
thought, given the costs involved, this was a purchase which was worth
making. Obviously, if it costs nothing, nobody would object. But you
can buy an awful lot of other things for half a billion dollars. By the
time the sale is ultimately consunimated, it could cost even more.
PAGENO="0071"
67
So my question to you is this: As I understand, this system is en-
visioned in the scenarios for a general war in Europe. Is that the basic
situation, a broad-scale conflict with the Warsaw Pact and the other
nations?
General FIsH. I am going to turn it over to General Russell. It is
designed to prevent a war with the warning that it would provide. It.
would make it very, very difficult for an enemy to attack on a sur-
prise basis, so we like to think of it as preventing a war rather than
fighting one.
Mr. SOLARZ. Excuse me, one point: A nation does not necessarily-
have to feel that in order to go to war it has to have the surprise. There
are a variety of reasons which would impel a country to go to war, of
which the surprise element might be one. But even if they felt they
could not surprise us, that does not mean they might not still decide.
General RUSSELL. Then we have the war-fighting capability. Since
military commanders would rather fight on a surprise basis rather than
on a forecast basis. Now, I blew it out of my mind.
Mr. SOLARZ. I will tell you what troubles me.
General RUSSELL. Could I just say, the point is in order to provide
this capability, we have our own forces there. We are going to have to
provide the capabilities somehow for our own forces, and the question
is, is it going to be more expensive or less expensive if we do it by
ourselves or in conjunction with NATO? What is the total greater
effectiveness of the force if we do it on a basis that we could with all of
the NATO countries or some significant number participating rather
than trying to fight it ourselves?.
Mr. SOLARZ. Let me give you the bottom line of my concern and
maybe you can address yourself to it. That is, my understanding is
that our military doctrine provides that in the event a full-scale war
broke out in Europe, we would, if necessary, resort to the use of nu-
clear weapons. I gather that the conventional imbalance which now
exists between the Warsaw Pact and NATO countrie.s is such that if
a full-scale war did break out, the only way which we could stern the
advance of the Warsaw Pact armies would be through a resort to nu-
clear weapons. In point of fact, the nuclear deterrent is the most effec-
tive military deterrent to a Warsaw Pact invasion of Western Europe.
If in fact that is the case, it is difficult for me t.o envision a scenario
in which these systems would actually be utilized. If the nuclear de-
terrent did not work and the Warsaw Pact invaded anyway, at that
point one of two things would happen. Either we would resort to
nuclear weapons, at which point whether or not we had this system
it would be fundamentally immaterial because the nuclear exchanges
which would initiate from our ICBM's and submarine-based missiles
and continental-based bombers would be sufficient to wipe out the
Soviet Union. They in turn would retaliate against us. Or, if we elect
not to use nuclear weapons in the event a full-scale conflict broke out,
their conventional superiority would enable them to triumph anyway,
the existence of this system notwithstanding.
So I ask quite sincerely whether or not this is not something which
may sound theoretically attractive, which is, given the likely scenarios,
a colossal waste of money?
General Frsn. You are getting into a whole strategic argument that
we have answered in many forums. It is a matter of the military judg-
PAGENO="0072"
68
ment. The bottom line is it is the military judgment of ourselves and
our NATO allies that this capability is sorely needed to give us the
necessary war-fighting capability in a variety of likely scenarios in
NATO. I think that we can satisfy you, sir, in a classified briefing of
what I am saying. I do not want to get into too great a detail in open
session.
Let me ask General Russell if he would like to make some general
comments on this.
General RUSSELL. Yes, sir. First, as to your bottom lines. One of our
roles is to provide options, and very definitely we would not want to
escalate unclear prematurely. I would argue that uncertainty breeds
overreaction as one worries about the situation.
One of the great assets of AWACS is it provides in real times an
appreciation of what is going on in the big picture through and across
borders. We would have a large picture as to what is happening, if
someone is gathering forces on the other side even before hostility.
Mr. SOLARZ. Do our satellites not give us that information now?
General RUSSELL. Satellites do not track aircraft, so you would not
see aircraft.
Mr. SOLARZ. They would track ground deployments. If they were
massing their armies for an attack, that would certainly be revealed.
General RUSSELL. General Fish had the right point, these kinds of
things are capable of being gone into in exhaustive detail. The funda-
mental thing about AWACS is that of providing in real time to the top
political civilians as well as the military authorities what is going on.
Certainly, if you took that Czechoslovakian invasion, we did not know
what was going on for a long time. We knew something was going on,
we did not know what, and I do not know that we would have reacted
any differently, but it certainly must have meant an awful lot to polit-
ical and military leader's appreciation of the activity that was under-
way.
The second point I wanted to make was as to the U.S. use of
AWACS, say, NATO does not buy. Certainly, it is our full intention
to provide our forces this type of coverage. Now, if NATO does buy,
we would prefer to participate in their buy, and we would reduce our
force objective~s by that contribution. So we do not believe we are
talking about a net difference. Our force would be much more valuable
over there as a part of a larger force where you could get economies
of scale and where they are protecting each other's flank than being
an isolated capability in Central Europe. But, certainly, we would not
deny this modern capability to our own forces even if NATO does not
buy.
Mr. SOLARZ. Well, I do not need an AWACS system to know that
dinner is being cooked at home and I better get back or I am going
to be in had shape.
Mr. WINN. We will sell you an AWACS. Thank you for coming
up and snending so much time, and, if you have any ~ther additional
information that you wanted to tell us and did not get a chance to put
it in the record, I would appreciate it if you would supply it through
the committee as soon as possible.
General FISH. Thank you, sir. We will do so, and thank you for
your courtesy.
[Whereupon, at 6 :10 p.m., the subcommittee was adjourned, subject
to the call of the Chair.]
PAGENO="0073"
APPENDIX
LETTER FROM GAO TO SECRETARY OF DEFENSE
U.S. GENERAL ACCOUNTING OFFICE,
PROCUREMENT AND SYSTEMS ACQUISITION DIVISION,
Washington, D.C., December 18, 1975.
E-164912
The 1-Tonorable
The Secretary of Defense
D~&n MR. SECRETARY: The Department of Defense (DOD) is concerned with
two basic types of sales to non-United States Government buyers. The first type
involves sales of military equipment by DOD components under the Foreign
Military Sales (FM 5) program. Instructions covering recoupment of certain
costs applicable to these sales are in DOD Directive 2140.2.
The second type involves sales of military equipment and commercial versions
thereof by United States defense contractors to all foreign and domestic buyers.
Applicable recoupment instructions for contractor sales are in paragraphs 4-109
and 7-104M4 of the Armed Services Procurement Regulation (ASPR). In addi-
tion, DOD Directive 2140.2 covers sales of major military equipment by United
States defense contractors to foreign governments and international organiza-
tions for military use.
In 1973 the Council on International Economic Policy (OIEP) began an
interagency study to determine the desirability of a Government-wide policy on
the recoupment of research and development (R&D) funds. At the completion
of its study, CIEP announced on August 2, 1974, the President's policy decision
that recoupment be sought on Government-owned and financed technologies and
products when these are proposed for sale to non-U.S. Government buyers. This
policy would (1) achieve a return on Government investment and not arbitrarily
limit transfers of technology to foreign nations, (2) entail proportionate (i.e.,
pro rata) cost recovery on product sales, (3) allow a fair market recovery on
technology sales, execution to be predicted on a satisfactory interagency deter-
mination of fair market pricing policy and procedures, and (4) allow reasonable
agency flexibility and discretion in implementation and permit exceptions because
of national security, foreign policy, and overriding public interest.
Subsequently, on April 7, 1975, CIEP issued general guidelines and procedures
for implementing the approved policy. CIEP requested each department and
certain agencies to report by January 31, 1976, on specific steps taken to imple-
ment the R&D recoupment policy and the extent of recoupments achieved.
We made a survey of the recovery of R&D funds by the Department of Defense
from foreign buyers of defense equipment. We noted certain weaknesses in
DOD's recoupment program that we believe should be considered in developing
information requested by CIEP.
The primary problem we observed was the absence of centralized responsi-
bility and focus for the total recoupment program. DOD's written instructions on
the program are primarily devoted to responsibilities and actions to be taken
regarding sales under the FMS program. However, the prescribed procedures
were not as specific for sales by contractors to foreign buyers. As a result, actions
by the various DOD components lacked consistency and sometimes were taken in
the face of uncertainty as to the correct or officially approved procedures and
practices. Factors contributing to this situation include:
1. Both ASPR and the DOD Directive provide information on the application
of DOD's recoupment policy. We noted inconsistencies between the two sets of
instructions as well as instances where the instructions were unclear or subject
to different interpretations. For example, ASPR 7-104.64 provides that R&D
(69)
PAGENO="0074"
70
recoupments collected by a contractor are to be applied as reductions to the
DOD contract or, in the event that the DOD contract has been finally settled,
the contractor will make payments to the Government. On the other hand, the
Directive provides that R&D recoupments collected by contractors and returned
to the Government are to be credited to the most current R&D appropriation
account.
We believe the differences between the two documents should be reconciled and
instructions provided to clearly identify and spell out the handling of each type
of transaction subject to recoupment.
2. DOD Directive 2140.2 provides that under the FMS program and in con-
tractor sales of major defense items for a military purpose R&D recoupment
normally should not exceed 4 percent of the product sales price. In August 1975 a
policy was established that R&D recoupment under the FMS program should
be prorated-total R&D costs incurred by DOD divided by total projected
production. The pro rata basis will apply to military systems that have been in
production 5 years or less. On older systems, the 4-percent charge will continue.
We could not establish the reasonableness of the 4-percent rate because of a
lack of specific information on its origin or basis. When compared to rates used
by some NATO allies having recoupment programs, the 4-percent rate is low.
For example, Germany and the United Kingdom use 5 and 71/2 percent of the
sales price, respectively. We noted some evidence that the 4-percent rate was
arbitrarily set.
3. The authority to issue waivers of recoupment has not been clearly spelled
out in the instructions. According to ASPR 4-109, the Secretary of Defense or
his designee approves waivers on all contractors' foreign sales. DOD Directive
2140.2, however, delegates to the Director, Defense Security Assistance Agency
(DSAA), the authority to approve waivers on contractors' sales of major defense
items to foreign governments for a military purpose, as well as on foreign military
sales by DOD.
In the case of sales by the contractor of the commercial CF-G engine to foreign
airlines, the contractor requested and received a waiver from DSAA. DSAA's
authority to grant the waiver was disputed by the Air Force which cited its
vested contractual rights to recoupment on this type of sale. The waiver was
ultimately withdrawn by DSAA and refused by the Air Force. This incident
indicates that the delegation of authority to grant waivers on sales by con-
tractors has not been clearly understood by all DOD components and contractors.
We understand that since August 1975 DOD policy requires that only the
Secretary of Defense approve waivers of recoupment under the FMS program.
4. DOD-wide data on the extent and scope of recoupment activities was found
to be incomplete. There is no apparent requirement for the preparation of data
showing, for all types of recoupment activities, how many recoupments occurred
during a year, how much was recovered, and what was done with the recoveries.
This type of information, in our opinion, would be useful not only for DOD
management purposes, but also to enable the Congress to exercise its oversight
responsibilities.
In summary, we believe you will want to consider strengthening DOD's R&D
recoupment program first by centralizing responsibility for it. In addition, it may
be desirable to establish a single body of uniform instructions for consistent
application by all components, clearly setting forth (1) the types of transac-
tions subject to recoupment and the uses for which recoupment can be allocated,
(2) the rates or other bases for fixing the level of recoupments, (3) the authority
to grant waivers to the basic recoupment policy, and (4) a requirement for estab-
lishing and maintaining records on DOD's total recoupment activity.
Our observations were discussed with DOD officials who agreed that some
clarification appeared necessary. We would appreciate being informed of the
results of your consideration of the foregoing matters.
Although this report does not contain specific recommendations. we are send-
ing copies for information purposes to the House and Senate Committees on
Appropriations, Armed Services, and Government Operations and to the Office
of Management and Budget.
Sincerely yours,
R. W. GUTMANN, Director.
PAGENO="0075"
LETTER FROM HoN. PATRICIA SCHROEDER TO MAJ. GEN. RALPH
MANGLIONE
CONGRESS OF THE UNITED STATES,
Houss OF REPRESENTATIVES,
Washington, D.C., March 1, 1976.
Maj. Gen. RALPH MANGLIONE,
Director, Legislative Liaison,
Office of the Becretary of the Air Force,
Washington, D.C.
DEAR GENERAL MANGLIONE: I would appreciate the following information on
the proposed sale to NATO, valued at $2.2 billion, of 32 E-3A Airborne Early
Warning Aircraft, training, spare parts and support equipment. Notice of the
proposed transaction was delivered to Congress on February 27, 1976 (trans-
mittal no. 76-41).
I should note that this inquiry has already been discussed by phone with Capt.
Bill Magill of your staff. However, I thought that my submitting the inquiry in
writing would be useful for your records.
(1) Of the $2.2 billion transaction proposed, what would the individual costs
be for-
(a) aircraft procurement;
(b) training;
(c) spare parts; and
(d) support equipment.
(2) What are the proposed terms of payment for the NATO transaction?
(a) How large a downpayment from NATO would be required at the time
the order is placed for the E-3A purchase?
(b) If no payment would be required at the time the order is placed, what
type of commitment to purchase would be required by th~ United States
before the order for additional aircraft to fulfill the NATO purchase re-
quirements is placed with the contractor?
(3) How will the cost of the E-3A (Airborne Warning and Control System)
purchase be shared among all of the NATO members?
(4) What portion of the initial capital outlay for the E-3A purchase will be
provided by the United States?
(5) Of the amount specified in No. 4, how much would the United States be pro-
viding in anticipation of replayment from other NATO members at a future
date?
(6) What is the proposed delivery schedule for E-3As to be purchased by
NATO?
(a) When would the first E-3A be required for NATO use in its defense
planning?
(b) When would completion of the delivery schedule of E-3As to be
purchased by NATO be required?
(7) Since previous Air Force estimates have indicated that 20 airborne early
warning aircraft would be needed for NATO defense, how was the proposed 34-
aircraft transaction arrived at?
(a) Does the Air Force have any indication that NATO is seriously con-
templating an early warning aircraft requirement greater than 20 E-3As?
(b) If so, what?
(8) Will all of the 34 E-3A aircraft proposed for purchase by NATO be owned
jointly by the member nations of NATO?
(9) If joint ownership of the 34 E-3As is not planned, how many of the
E-3As to be used for NATO defense will remain under United States owner-
ship?
(10) What is the nature of the present NATO commitment to purchase the
Boeing E-3A Airborne Warning and Control Systems? What concrete assur-
ances of NATO intent to purchase the aircraft have been received?
(11) If concrete assurance of NATO intent to purchase the E-3A has been
received, when did that happen?
(71)
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72
Thank you for your attention to this matter. I look forward to receiving the
Information I have requested in the next few days. As you know, Congress only
has 20 days to consider the merits of any such large sales proposed under the
Foreign Mifitary Sales Act provisions.
With kind regards.
Sincerely,
PATRICIA SCHROEDER, Congresswornafl~
PAGENO="0077"
LETTER FRoM LT. GEN. HOWARD M. FISH TO HON. PATRICIA SCHROEDER
OFFICE OF THE DIRECTOR DEFENSE SECURITY ASSISTANCE AGENCY,
DEPUTY ASSISTANT SECRETARY (SECURITY ASSISTANCE), OASD/ISA,
Washington, D.C., March 11, 1976.
In reply refer to: 1-2368/76
Ron. PATRICIA SCHROEDER,
House of Representatives,
Washington, D.C.
DEAR CONGRESSWOMAN SCHROEDER: This is in reply to your 1 March 1976 let-
ter to Major General Maglione concerning the proposed sale of AWACS aircraft
to NATO which has been referred to me for answer.
Price and Availability Data and a Letter of Offer and Acceptance are cur-
rently being prepared for the Foreign Military Sale of the E-3A Airborne Warn-
ing and Control System (AWACS) to NATO. Detailed budgetary estimates will
not be available until the contractor response to the request for proposal is re-
ceived and validated by the E-3A System Program Office. Support command in-
puts must also be obtained and a financial analysis completed before definitized
answers to your questions are possible.
It should be emphasized that the $2.2 billion figure for 32 aircraft was simply
an estimate based on an initial contractor definition study and has not been
verified by the Foreign Military Sales pricing process.
The following are our best available answers at this time to your specific ques-
tions. For the most part these too are preliminary estimates until the Price and
Availability data are available and NATO decisions on the procurement/opera-
tional employment have been consummated.
Question 1. Approximate breakout of individual costs:
[Constant fiscal year 1976 dollars In millions]
(a) Aircraft flyaway $1, 600
Training 50
Spare parts ~3O
Support equipment and data 130
(b) Other (NATO peculiar R.D.T. & E 190
Total 2, 200
Question 2. Terms of payment for the NATO transaction have not been ad-
dressed to this date. The U.S. has proposed that 25% of the NATO Airborne Early
Warning program (which will include aircraft, ground interface costs, and an-
nual operating costs) would be funded by the U.S. Payment schedules must be
developed in accordance with Foreign Military Sales procedures so as not to in-
volve financing of the NATO program by the U.S. Government (with the excep-
tion of U.S. participation as a member of NATO). It is envisioned that the U.S.
share of funds for the NATO program would be provided to NATO and ulti-
mately be returned to the U.S. Government as a part of the total NATO input
in accordance with the payment schedule.
(a) NATO funding, to include any long lead funding, would have to be avail-
able in accordance with a financial schedule which has not as yet been com-
pleted. Payments would be in accordance with established procedures. In essence,
the terms of payment will provide that money be available to pay bills as they
are submitted to the U.S. Government.
(73)
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74
(b) Long lead funds would probably be required at time of contract sig-
nature. Funds will include termination costs.
Question 3. Fund sharing arrangements have not as yet been determined. Sev-
eral methods are being discussed among nations, and this issue will be resolved
as part of the procurement decision process expected to begin this summer.
Questions 4 and 5. This will in part be determined by the number of nations
participating in the Airborne System Procurement, which will make up the bulk
of the program's initial investment costs. The ultimate U.S. share of this effort,
as a member of NATO, could vary from about one-fourth to. one-third, depend-
ing on other nations' actual commitments.
No arrangements have yet been made with regard to capital outlays, Auy
prefinancing cOsts will be subsumed in the program's overall procurement co~t~,
so that preinancing nations are proportionately reimbursed by reductions in
their share of the costs.
Question 6. Delivery schedules of one per month and one every other month
are currently being examined. In view of the 35-month AWACS production cycle,
delivery of the first NATO aircraft is anticipated in early 1980, dependent upon
the program-start decision. From that point, a 32-aircraft purchase wouhi be
completed from 32 to 64 months later, depending on the production rate selected.
Question 7. The NATO request is for data on 20-32 aircraft. A 34 aircraft trans-
action with NATO is not anticipated.
(a) Yes
(b) NATO has requested the development of a Letter of Offer based upon a
range of 20-32 aircraft.
Question 8. Ownership of the aircraft is still an open issue. It is anticipated
that tIme aircraft will be owned by NATO and under the operational command
of one of the major NATO commanders.
Question 9. NATO ownership is anticipated but not resolved.
Question 10. NATO's commitment to a NATO AWACS program has been evolv-
ing steadily during the last few years. In 1972, NATO nations accepted the
recommendations of the international Tn-Service Group on Air Defense that
an Airborne Early Warning (AEW) capability was an essential element for
solution of NATO's critical deficiencies in the detection and tracking of low
level airborne targets. Subsequent NATO groups under the Conference of National
Armaments Directors determined that a derivative of the U.S. E-3A was the
preferred solution, and that a cooperative NATO program was the preferred
means of acquiring this capability for the Alliance. In May 1975, both Defense
and Foreign Ministers of NATO approved a Contract Definition phase for NATO
AEW, and establishment of a provisional, internationallymanned, program office
to manage it. Concurrently, the three Major NATO Commanders, (SACETJR,
SACLANT and CINCHAN) developed a combined statement of requirements
and operational concepts for a land-based AEW system, followed by Military
Committee endorsement of a NATO AEW force as an "urgent priority one" re-
quirement. In December 1975, Defense Ministers acknowledged the Military
Committee7s views, approved continuation of Contract Definition activities, and
endorsed a Preparatory Phase of pacing and sustaining activities (to be funded
by interested nations) that would further preserve NATO's options for subse-
quent procurement. A draft Statement of Understanding on prefinancing by
interested nations is currently being worked out at NATO Headquarters, and,
subject to.agreement or any amendments, may be signed as early as April 1976.
This Statement of Understanding covers Preparatory Phase activities leading
into a potential procurement phase anticipated to begin during CY 1977.
Question 11. In February 1976, NATO formally requested the U~S. to develop
an initial Letter of Offer, to be delivered in May, as part of .the Contract Defini-
tion process~ Initial NATO decisions on procurement could be made asearly as
June 1976, 1eading~ to firm decisions as early as December 1q76. During this
phased. decision process, the major issues of configuration, force size, and national
participation and cost shares will need to be resolved. Clearly, this process is
lengthy, but we must recognize that for many sovereign NATO nations to agree
on a program that is unprecedented in its scope is a complex process. Nevertheless,
we believe that the NATO nations appreciate the severity of the military defi-
ciencies that AWACS uniquely alleviates.
Previous notifications to Congress have provided interim progress reports on
our participation in the potential NATO AWACS program's preparatory activi-
ties. In a 7 May 1975 letter to the Chairman of the Armed Services and Appro-
priations Committees, Dr. Currie, Director of Defense Research and Engineering,
summarized NATO's actions and plans with regard to AWACS; and on 18 Decem-
PAGENO="0079"
75
her 1975, I notified the staffs of the House Committee on International Relations
and the Senate Committeee on Foreign Relations that a Letter of Offer fer 20-32
AWACS for NATO was being prepared and that formal notification to the
Congress concerning this potential Foreign Military Sale would be forthcoming.
This notification was provided on 27 February 1970, as a routine procedure.
Although the current Foreign Military Sales Act specifies 20 days for Cong~es-
sional action, in the case of AWACS the House Armed Services Committee
directed in its FY 1976 Report that the Department of Defense "take no action
toward the consummation of any agreement with any foreign government .
until the expiration of 30 days after a full report of the terms and conditions
proposed for such sale have been reported to the Committees on Armed Services
of the Senate and House of Representatives." These terms and conditions will be
contained in the Air Force's Letter of Offer which is not scheduled to be delivered
to NATO before May 1976. Congress will be provided a full report regarding the
terms and conditions of this Letter of Offer and will also be informed of signifi-
cant changes as they occur.
I appreciate your interest in the potential AWACS sale to NATO, and would
like to assure you that you will have every opportunity to consider fully the
merits and terms of this transaction.
Sincerely,
H. M. FISH,
I~ieutenan t General, (JfiS'AF, Director.
PAGENO="0080"
SUMMARY or AWACS ADDITIONAL TESTING, PREPARED BY HOUSE
ARMED SERVICES CoMMIrrEE STAFF, IN RESPONSE TO THE REQUEST OF
HON. PAThIGIA SCHROEDER, NOVEMBER 17, 1975
The AWACS Systems Integration Demonstration (SID) flight test program
was considered by the Department of Defense to have been completed in
December 1974. A review of the test plans and results, however, by the Committee
generated a number of concerns relating to the viability of these tests. Conse-
quently, Chairman Price informed the Secretary of Defense in a letter dated
March 26, 1975 of the Committee's concerns relating to the ability of AWACS to
carry out its intended mission. Following extensive hearings, the Committee was
convinced that the AWACS test program was not comprehensive and directed
that additional tests be conducted. The tests were to: provide data that demon-
strated AWACS capability against close formation and maneuvering targets;
provide data that demonstrated the capability of AWACS against self-screening
and escort jammers; provide data that verified the AWACS tracking algorithms;
as well as other tests.
The Air Force in response to the Chairman's letter conducted additional tests
during May of this year. As a result of these tests, DoD confirmed the following
AWACS limitations:
(a) precise determination of target altitude;
(b) range resolution of jamming targets under certain conditions;
(c) automatic accurate tracking data of targets under certain conditions;
and
(a) the prevention of enemy detection and location of AWACS when the
AWACS radar is transmitting.
While DoD has confirmed these limitations, they believe that they can be
overcome through various revisions or techniques. As an example, they contend
that the automatic accurate tracking limitation can be overcome by operator
intervention as well as through revisions in the present AWACS software package.
The Director of Defense Research and Engineering has reviewed the results
of these tests and has provided his comments to the Committee. In addition, the
GAO has made an assessment of tests and has documented their comments.
The views of the DoD and the GAO are not in full agreement with regard to the
AWACS capabilities/limitations and their impact upon the final outcome of an
air battle.
The GAO, for example, does not believe that the automatic, accurate, tracking
problem can be overcome simply by operator intervention. They believe that the
NATO scenario will consist of hundreds of sorties per hour and that operator
intervention is not practical or possible in such a dense environment. The GAO in
their analysis of the May tests believes that the AWACS susceptibility to jamming
presents a more serious limitation of AWACS than the DoD assessment. Finally,
the GAO questions the DoD contention that AWACS is survivable because it can
operate in a passive mode, because it can maneuver at jet speeds and because
it can provide the position of would~be attackers to friendly interceptors and
missile systems. GAO contends that AWACS operating in a passive mode is of
little, if any, utility. They further contend that it is difficult, at best, to provide
the position of would-be attackers to friendly interceptors in the absence of
data that provides altitude, size of raid, etc.
The above summarizes the major differences between the GAO and DoD
assessment of AWACS capabilities/limitatiOnS. While there are other disagree-
ments, they all relate to the discrepancies delineated above.
(76)
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DEPARTMENT OF DEFENSE DIREcTIVES 2140.2 OF JANUARY 23, 1974 AND
FEBRUARY 1976
No. 2140.2, JANUARY 23, 1974
Subject: Recovery of Nonrecurring Costs Applicable to Foreign Military Sales
(FMS).
Refs:
(a) DoD Instruction 2140.1, "Pricing of Sales of Defense Articles and Defense
Services to Foreign Countries and International Organizations," January 29,
1970.
(b) Armed Services Procurement Regulation (ASPR) as authorized by DoD
Directive 4105.30, March 15, 1959.
(c) DoD Directive 2140.2, "Recovery of Nonrecurring Costs Applicable to For-
eign Sales," March 15, 1967 (hereby cancelled).
(d) Foreign Military Sales Act (1968), 22 U.S.C. 2751 if.
I. Proposes and applicability
A. This Directive establishes pricing policies, criteria, and procedures for use
by Department of Defense Components (Military Department and Defense
Agencies) and by United States defense contractors selling equipment developed
with DoD appropriations/funds directly to a foreign goverment or international
organization (hereinafter referred to as a foreign government or customer) for
recovery of:
1. Nonrecurring research and development costs for major defense equip-
ments with an investment of $50 million or more in research, development,
test, and evaluation;
2. Nonrecurring production costs for major defense equipments with a
production investment, both nonrecurring and recurring, of $200 million or
more;
3. Nonrecurring production costs for non-major defense equipments with
a production investment both non-recurring and recurring, estimated to be
$5 million or more but less than $200 million; and
4. DoD support costs for Government-provided material, services and
transportation not included in the prime contract price.
B. The provisions of this Directive will not be applied retroactively to foreign
military sales contracts involving defense equipments as defined in paragraph
IA. for which : (1) a fixed price has been agreed upon, or (2) a firm offer, includ-
ing price quotation, has been made by a DoD Component, or directly by a United
States defense contractor prior to the effective date of this publication. (See
paragraph VIII. below.)
C. Reference (c) is hereby cancelled.
IL Objective
* The objective of this Directive is to insure that a purchasing foreign govern-
ment pays a fair share of nonsecurring costs not otherwise recovered by the
Departmentof Defense from the customer.
III. Definitions
A. Foreign Military Sales (FMS) means a sale of defense articles and services
to foreign governments under authority of the Foreign Military Sales Act,
reference (d).
B. Direct Sale means a direct sale by a United States contractor of equipment,
material, and/or services developed with DoD appropriation/funds to a foreign
government for military uses. Excludes sales from a U.S. defense contractor to
a U.S. or foreign private firm as a commercial non-FMS sale.
C. Major Defense Equipment means a defense equipment or weapons system
having a total research and development investment for hardware of $50 million
or more, or a total estimated production cost, both recurring and nonrecurring, of
$200 million or more. Additionally, when a major component of such a defense
(77)
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78
equipment is sold separately under EMS the provisions herein applicable to
Major Defense Equipment shall apply.
D. Non-major Defense Equipment means a defense equipment or weapon sys-
tem, other than a major defense equipment, with a production cost of $5 million
or more and less than $200 million.
E. Nonrecurring costs include:
1. Research, development, test and evaluation costs for the equipment model
under consideration is referred to throughout this Directive, as "research and
development" to avoid confusion with production test and evaluation performed
using production funding. This includes costs of any engineering change proposal
(ECP) initiated prior to date of acceptance by the customer of the Letter of
Offer and Acceptance, DD Form 1513.
2. Production costs are limited to those incurred after the implementation
data in the DD Form 1513 for the production run from which delivery to the EMS
customers is anticipated. These costs include those for the improvement of the
safety, reliability, delivery schedule or operational effectiveness of the model and
are allocated to all units of the current production run for DoD and EMS. Such
costs are incurred for real property, industrial plant equipment, special tooling,
special test equipment, production engineering, preproduction costs including in-
struction/training and start-up, pilot model production, and production test!
evaluation, except as otherwise provided in ASPR 13-406, reference (b).
~3. EMS production costs incurred at the request of or for the benefit of the
customer.
IV. Policy
Each DoD Component and United States Defense contractor submitting a sales
offer to a foreign government will include in the offering price an amount for
nonrecurring costs, except as provided in Sections V.A. and VI.
A. Nonrecurring research and development (R&D) costs applicable to the
model under consideration normally will be applied in an amount not greater
than four percent of the total EMS or Direct Sale price for a major defense
equipment. However, when major defense equipment items have been in pro-
duction for less than five years, the Director, Defense Research and Engineering
(DDR&E) may request that the Director, Defense Security Assistance Agency
(DSAA) obtain a greater recovery of R&D costs for selected items. Such higher
charge will be calculated on a pro rata basis of applying identifiable R&D costs
for the model under consideration to the total anticipated production, past and
projected, for DoD and EMS. Sales and production projections should be in ac-
cordance with those stated in the applicable Selected Acquisition Report (SAR),
if available and if the total quantity to `be procured is shown.
B. A pro rata share of nonrecurring production costs will be applied as defined
in paragraph III.E.2. to the EMS contract or order. Such costs may be applied
on a percentage basis to recover the equitable portion applicable to the sale.
C. The full amount of nonrecurring EMS production costs, as defined in para-
graph III.E.3., will be applied to the current production run for each EMS or
Direct Sale.
D. In determining whether the cost of a DoD weapons system meets the
threshold to qualify as a "Major Defense Equipment" as defined in paragraph
III.D., the costs incurred to date for the life of the weapons system will be ac-
cumulated including those for related prior, current and planned models and
sub-systems. However, the nonrecurring research and development to be applied
to the sale under consideration will be only for the model of the weapons system
being offered for sale and will be computed in accordance with paragraph IV.A.
E. For coproduction agreements, a nonrecurring costs surcharge should be
assessed unless: (1) the model of the weapons system to be coproduced has been
in production for 10 years or more, and/or (2) the model of the weapons system
to be produced has been superseded for Department of Defense production re-
quirement by a more advanced model. In the above exception, consideration may
be given to the assessment of a royalty charge appropriate circumstances.
V. Procednres
A. Each DoD Component and United States defense contractor negotiating
the sale of a major defense equipment to a foreign government will include non-
recurring research and development costs in the price as follows:
1. Components will review their programs of research and development for the
past ten years and calculate a unit charge for identifiable costs applicable to
major defense equipment. In this calculation, the Components are authorized to
PAGENO="0083"
79
use estimates where it appears that more precise data will not justify the addi-
tional work involved. This nonrecurring R&D cost data will be submitted to the
Director, Defense Security Assistance Agency (DSAA) with a request for a deter-
inination of the amount to be applied to the pending FMS case. DSAA will deter-
mine this amount. If this amount is otherwise available or has been previously
approved by DSAA, separate submissions are not required.
2. When a United States defense contractor negotiates a Direct Sale of a major
defense equipment to a foreign government he will obtain the amount of nonre-
curring R&D charges to be applied from the DoD Component sponsoring the
major defense equipment. If this amount is otherwise available or has been previ-
ously approved by DSAA, separate submissions are not required. The DoD Com-
ponent will advise the contractor of the amount to be charged based on previous
guidance from DSAA as indicated in paragraph V.A.1. or request and obtain
cost from DSAA.
B. Each DoD Component and United States defense contractor negotiating the
sale of a major or non-major defense equipment to a foreign government will
include the following nonrecurring production costs in the price:
1. A pro rata share of nonrecurring production costs for the current produc-
tion run as defined in paragraph III.E.2. These costs will not be applied retroac-
tively but to those incurred after signing the DD Form 1513. Costs may be applied
on a percentage basis to recover the equitable portion applicable to the sale. On
non-major defense equipment sales, the percentage may he based on experience
to eliminate unproductive accounting provided that the factors are equitable.
2. The full amount of FMS production costs as defined in paragraph Ill.E.3.
incurred for the benefit of the customer. However, when a subsequent purchaser
requests the same specialized features which resulted in added nonrecurring pro-
duction costs, as stated in paragraph III.E.3., a pro rata share of these costs may
he paid by the subsequent purchaser with a credit granted to the original pur-
chasers. No more than one credit a year will be granted to the original pur-
chaser. Credits will not be granted after the model sold is no longer offered for
sale, when three years have elapsed since customer acceptance of the DD Form
1513, or delivery of the last unit of equipment on the sale subject to credit
allowance.
C. Each DoD Component will include:
1. A clause in all future contracts falling within the provisions of paragraphs
1II.C. and hID, that will require a United States defense contractor selling
defense equipment directly to a foreign government to collect the nonrecurring
R&D costs specified in paragraph IV. A. and the nonrecurring production costs
specified in paragraph IV.B. for the account of the United States Government.
2. An additional clause in such contracts, requiring the United States defense
contractor to inform foreign governments purchasing directly from the contractor
that any United States Government furnished goods, services and transportation
required for fulfillment of the contractor's sales contract (i.e., the U.S. Govern-
ment support costs as stated in reference (a)) can be provided only by means of
an FMS ease executed by the sponsoring DoD Component and the foreign govern-
ment. At the option of the foreign government, it may designate the contractor
to act as its agent in executing the DD Form 1513 in the name of the foreign
government, and/or to receive possession, or performance, of the goods, services,
and transportation.
D. Upon receipt of payment for nonrecurring costs from the foreign govern-
ment for an FMS case or from a contractor for a Direct Sale, the DoD Compo-
nent will credit such funds to the most current applicable appropriation. For
example, funds collected for R&D costs on an FMS sale should be deposited to
the account current for research and development appropriation and for non-
recuri-ing production costs to the account current for procurement/production.
DoD Components will maintain sufficient records in order to provide, upon re-
quest, the amounts of nonrecurring charges by contracts awarded, amount col-
lected for each FMS case, and amount deposited to the credit of each defense
appropriation.
E. The Assistant Secretary of Defense (Comptroller), (ASD (C)), will provide
liaison with other U.S. Government agencies to determine the portion of the
charge of nonrecurring costs allocable to the other agency to cover their portion
of the nonrecurring costs. When the proper distribution to such agency cannot
be determined, payment will be made into Miscellaneous Receipts, United States
Treasury.
PAGENO="0084"
80
VI. Deviation8
A. The head of a DoD Component, a foreign government or a defense contractor
(vice president or higher) may request a waiver of the nonrecurring costs sur-
charge for a Foreign Military Sale (FMS) or a Direct Sale, as defined in sub-
paragraphs lilA. and B. respectively, when he considers such action to be in
the best interest of the United States (1) to satisfy a demonstrable right of the
manufacturer of the purchaser or (2) to obtain advantage to the Department of
Defense. Requests for such deviations will contain a summary statement of the
facts, benefits expected and justification thereof.
B. For a Direct Sale by a contractor, when the market environment suggests
waiver of the R&D charge in whole or in part, consultations will be held by the
DoD Component involved with the producer to determine an equitable sharing
between the DoD and the producer of the necessary price reduction-such sharing
on the part of the DoD affecting the extent of the waiver, and on the part of the
producer affecting the extent of reduction of his pricing elements other than
production costs. Such consultation will be carried out by the Director, DSAA,
who will also approve the agreed sharing formula.
C. If approval is granted for any request for deviation it will be stated in
writing by the Director for Acting Director, Defense Security Assistance Agency
(DSAA). This authority will not be redelegated. When it is estimated that a
deviation of $100,000 or more for nonrecurring R&D costs is involved, DSAA will
request the concurrence of the Director, Defense Research and Engineering. For
a deviation of $100,000 or more for nonrecurring production costs, DDSA will
request the concurrence of the Assistant Secretary of Defense (Installation and
Logistics). Recommendations for approval or disapproval of these requests for
deviations will be processed expeditiously, and within seven days after receipt of
the request. A copy of each approved deviation will be forwarded to the Assist-
ant Secretary of Defense (Comptroller).
D. A foreign government or Defense contractor submitting a request for a
deviation to the Director, DSAA, will provide an information copy to the cog-
nizant contracting officer and foreign military sales office of the sponsoring DoD
Component. In acting on the request of a foreign government or defense contrac-
tor, the Director, DSAA, will provide information copies to the sponsoring DoD
Component, who will advise the cognizant contracting officer.
VII. Responsibilities
The Assistant Secretary of Defense (International Security Affairs),
(ASD(ISA)), shall monitor the application of this Directive, and exercise con-
trol over the program to insure effective compliance and balaiice-of-payment
programs.
VIII. Effective data and implementation
A This Directive is effective for all offers made on 01 aftei 60 dsys follow ing
publication of this Directive.
B. Within 120 days, the head of each DoD Component shall submit to the
ASD (C) two sets of implementing procedures.
W. P. CLEMENTS. Jr..
Deputy Secretary of Defense.
No. 2140.2, FEBRUARY 1978.
ASD(C)
Subject: Recoupment of Nonrecurring Costs on Sales of USG PrOducts and
Technology.
Refs.:
(a) DoD Instruction 2140.1. "Pricing of Sales of Defense Articles and Defense
Services to Foreign Countries and International Organizations," January 20,
1970.
(b) Armed Services Procurement Regulation (ASPR) as authorized by DoD Di-
rective 4105.30, March 15, 1959.
(e) Dod Directive 2140.2, "Recovery of nonrecurring Costs Applicable to Foreign
(VMS)." January 23, 1974 (hereby cancelled).
(d) Foreign Military Sales Act (1908), 22 U.S.C. 2751ff.
I. Purpose and applicability
A. This Directive establishes a policy designed, to achieve a return on govern-
ment investment, and not to arbitrarily limit transfers of technology to foreign
nations or domestic organizations; to entail proportionate (i.e., pro-rate) cost
PAGENO="0085"
81
recovery on product sales; to allow a fair market recovery on technology sales;
and to allow reasonable DoD flexibility and discretion in implementation, and
permit exceptions because of national security, foreign policy, and overriding
public interest.
B. This Directive establishes pricing policies, criteria, and procedures for use
by Department of Defense components (Military Departments and Defense
agencies and by United States Defense contractors selling products and tech-
nology developed with DoD appropriations/funds directly to a foreign govern-
ment, international organization, foreign commercial firm, or domestic organiza-
tion (hereinafter referred to as a customer) for recoupment of:
1. Nonrecurring research, development, test, and evaluation costs with an in-
vestment of $25 million or more for products and technology.
2. Nonrecurring production costs for products with a defense production in-
vestment of $100 million or more. Recoupment costs will also be assessed on sub-
sequent nonrecurring costs of $5 million or more.
3. Support costs for government-provided materiel, services and transportation
not included in the contract price.
C. This Directive also applies to special research and/or nonrecurring pro-
duction costs over $5 million as defined in III.F.3.
D. The provisions of this Directive will not be applied retroactively to sales
contracts involving products or technology in cases when a recoupment clause
was not included in the contract between the DoD and the contractor.
II. Objective
The objective of this Directive is to insure that a purchasing customer pays a
fair share of the DoD investment costs in the products or technology not other-
wise recovered by the DoD from the customer.
111. Definitions
A. Sale and Purchase include, in the case of technology, license and licensee
respectively, except where otherwise inappropriate in the context.
B. Government Sales means a sale of articles and services to customers by any
DoD Components under authority of appropriate Legislative Acts. This includes
Foreign Military Sales (FMS) as defined in paragraph F below.
C. Direct Sale means a direct commercial sale by a Defense contractor of
products, technology, materiel, and/or services developed with DoD appropria-
tions/funds to a customer for his use.
D. Domestic Organization means any U.S. nongovernmental organization or
private commercial firm.
l~. Technology. The application of scientific and technical knowledge to some
practical end.
F. Investrnewi Costs incZuZe:
1. Research, development, test and evaluation costs for the product or tech-
nology under consideration. This includes costs of any engineering change pro-
posal initiated prior to date of the contract with the customer.
2. Nonrecurring production costs are those incurred for the production run from
which delivery to the customers is anticipated. These costs include those for the
improvement of the safety, reliability, delivery schedule or operational effective-
ness of the model and are allocated to all units of the current production run.
Such costs are incurred for real property, industrial plant equipment, special
tooling, special test equipment, production engineering, preproduction costs in-
cluding instruction/training and start-up, pilot model production, and production
test/evaluation, except as otherwise provided.
3. Special Reearch and Development and Production costs are those incurred
at the request of or for the benefit of the customer which will be wholly absorbed
by the customer.
G. Pro rata means the proportionate share of costs according to number of
products in a production run and percent of similarity of the product.
H. Pro rata recovery is designed to recover for the Defense Department its in-
vestment in the development of the product being sold.
I. Fair Market Price is the negotiated (or estimated) price which is acceptable
to both the buyer(s) and the seller(s). It infers a monetary return based on
demand and the potential market for the ultimate product produced from the
technology.
J. Fair Market Pricing Recovery is designed to recover the fair market value
of the technology being sold irrespective of the Government's investment in th~
development of that technology.
PAGENO="0086"
82
K. Foreign Military Sales (FMS) means a sale of defense articles and services
to foreign governments under authority of the Foreign Military Sales Act,
Reference (d).
L. Model is the generic term applied to a basic item and all modifications to
that item.
IV. Policy
Each DoD Component (or Defense contractor in a direct sale) submitting a
sales offer to a customer will include in the offering price an amount for recoup-
ment of DoD investment costs except as provided in Section VI.
A. Research and Development (R&D) costs normally will be applied as a pro
rata share of the total R&D costs applicable to the product. R&D costs recoup-
ment will be calculated on a pro rata basis of applying identifiable R&D costs for
the model or portion under consideration to the total anticipated production, past
and projected.
B. A pro rata share of nonrecurring production costs will be applied to the
contract or order. Such costs may be applied on a proportionate basis to recover
the equitable portion applicable to the. sale. OASD (I&L) will be the final au-
thority on production cost issues.
C. The full amount of nonrecurring special production costs will be applied to
the current production run for each sale. However, a pro rata share of these costs
may be recovered pursuant to paragraph V.d.2.
D. In the case of technology sales the amount of recoupment will be predicated
upon the fair market price.
B. In determining the amount of DoD recoupment, consideration will also be
given to non-monetary returns which are advantageous to national security,
foreign policy, and the public interest.
V. Procedures
A. Procedures will be implemented in a nondiscriminatory manner.
B. DoD R&D contracts will include an obligation upon the contractor to pay
specified amounts to the DoD upon the contractor's direct sale of products or
technology developed under the contract.
C. Each DoD Component and United States Defense contractor negotiating the
sale of products and technology will include research and development costs in
the price as follows:
1. Components, at the time a sale is evident, will calculate a unit charge for
identifiable costs applicable to the products and technology. In this calculation,
the Components are authorized to use estimates where it appears that more pre-
cise data will not justify the additional work involved. However, the. Components
should be prepared to demonstrate that they have adopted a reasonable approach.
The R&D cost data will be submitted to the DDR&E with a request for approval
of the amount to be applied to the pending case. In the case of Foreign Military
Sales (F1VfS), the approval request will be coordinated with the DSAA. Agree-
ments already negotiated will not be affected by the implementation of the policy
in this document. If this amount is otherwise available or has been previously
approved, separate submissions are not required..
2. When a United States Defense contractor negotiates a direct sale of a prod-
uct or technology to a customer, be will obtain the amount of R&D charges to
be applied from the Component sponsoring the technology or product. If this
amount is otherwise available or has been previously approved byDDR&E, sepa-
rate submissions are not required. The Component will advise the contractor
of the amount to he charged.
3. In determining the recoupment cost of a product. the costs incurred to date
for the life of the product will, be accumulated including those for related prior,
current and planned models and subsystems. However, the research and develop-
ment cost to be applied to the sale under consideration will be only for the model
of the product being offered for sale and will be computed in accordance with
paragraph IV.A.
4. For co-production agreements, a nonrecurring costs surcharge should be as~
sessed unless: (1.) the model of the system to he co-produced has been in produc-
tion for 10 years or more, and/or (2) the model of the system to be produced has
been superseded by a more advanced .model. In the above exception, consideration
may be given to the assessment Of a royalty charge under appropriate
circumstances. . . . . - -
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D. Each DoD Component and US defense contractor negotiating the sale of a
product to a customer will include the following nonrecurring production costs
in the price.
1. A pro rata share of nonrecurring production costs for the current production
run. Costs may be applied on a percentage basis to recover the equitable portion
applicable to the sale. On equipment sales, the percentage may be based on experi-
ence to eliminate unproductive accounting provided that the factors are equitable.
Production engineering costs and test and evaluation costs performed with pro-
duction funding should be prorated in the same manner as R&D costs.
Co-production agreements with foreign nations or foreign contractors should
provide for appropriate recovery of US nonrecurring costs.
2. The full amount of Foreign Military Sales (FMS) R&D and special produc-
tion costs. incurred for the benefit of the customer will be recovered. However,
when a subsequent purchaser requests the same specialized features which re-
sulted in the added nonrecurring R&D and product costs, a pro rata share of these
costs may be paid by the subsequent purchaser with a credit granted to the origi-
nal purchaser. Credits will not be granted after the model sold is no longer offered
for sale or when five years have elapsed since customer acceptance of DD form
1513. No nonrecurring recoupment charge will be made to the US Government if
it adopts the features for its own use or provides equipment containing such fea-
tures to another country funded by the US Government. under the Grant Aid
Program.
E. Each DoD Component negotiating the sale of technology to a customer will
recover the fair market price of such technology.
F. The cognizant Component will include:
1. A clause in all future contracts falling within the provisions of this docu-
ment that will require a US defense contractor selling products and technology
directly to a foreign government,, international organization, foreign commercial
firm, or domestic organization to collect the DoD recoupment costs for the DoD
component. In joint DoD/direct sales, the contractor normally will be required
to collect the nonrecurring costs associated with the direct sale portion of the
customer's purchase.
2. An additional clause in such contracts, requiring the Defense contractor to
inform customers purchasing directly from the contractor that any defense fur-
nished goods, services and transportation required for fulfillment of the contrac-
tor's sales contract (i.e., the DoD support costs) can be provided only by means
of a Foreign Military Sales case executed by the sponsoring Component and the
customer. At the option of the foreign government, it may designate the contrac-
tor to act as its agent in executing a purchase agreement. In the name of the cus-
tomer and/or to receive possession, or performance, or the goods, services, and
transportation.
G. Upon the receipt of payment of recoupment costs from the customer for a
DoD case or from a contractor for a direct sale, the cognizant Component will
credit such funds to the most current applicable appropriation. For example,
funds collected for R&D costs on a DoD sale should be deposited to the account
current for research and development appreciation. Nonrecurring production costs
incurred prior to the production for customer delivery and `which `are applicable
to the total production will be credited `to the current procurement account. `Com-
ponents will maintain sufficient records in order to provide, quarterly, the amounts
of recoupment charges `by contracts awarded, amounts collected for each DoD
case, and amount deposited to the credit of each Component appropriation. This
information will be forwarded to OSD Comptroller annually 60 days following
the close of the fiscal year.
H. Components will maintain liaison to dotermine the portion of the charge of
recoupment costs allocable to each Component so that they can arrange for dis-
tribution of `their portion of any recovered nonrecurring costs. When the proper
distribution to such Component cannot be determined, an allocation will be made
by the Office `of the Assistant `Secretary of Defense (`Comptroller).
I. The Assistant Secretary of Defense (Comptroller), (ASD (C)), will provide
liaison with other US Government agencies to determine the poviion of the
charge of nonrecurring costs allocable to the other agency to cover their portion
of the nonrecurring costs. In unique cases where DoD resolution is unlikely an
interagency group, under the President's Council for International Economic
Policy (CIEP), will review the case. For example, the State Department must be
PAGENO="0088"
84
involved in any reviewing mechanism dealing with foreign sales, contracts, or
transfers tinit could involve foreign policy issues, munitions or export control
procedures, significant amounts of recoupment or cases where quid pro quos
could be obtained from the foreign purchaser's government. The GIEP inter-
agency group would make recommendation to the Presi'deta for final decision.
VI. Deviations
A. The head of a DoD Component, `a foreign government or a defense con-
tractor (vice president `or higher) may request a ~aiver of the nonrecurring costs
surcharge for a Government sale or a Direct Sale, as defined in subparagraphS
111.B. and C. resp~ctively, when he considers such action to be in the best in-
terest of the United States (1) to satisfy a demonstable right of the manufacturer
of the purchaser or (2) to obtain advantage to the Department of Defense. Re-
quests for such deviations will contain a summary statement of the facts, bene-
fits expected and ju~tificatiofl thereof, and sent to the Director of Defense Se-
curity Assistance Agency for all FMS and direct foreign ~a1es and to the Assist-
ant Secretary of Defense, I&L for domestic organizations.
B. For a direct sale by a contractor, when the market environment suggests
waiver of the R&D charge in whole or in part, consultations will be held by the
DoD Component involved `with the producer to determine an equitable sharing
bOtween the DoD and the producer of the necessary pri'ce reduction-Such sharing
on the part of the DoD affecting the extent of the waiver, and on the part of the
producer affecting the extent of reduction of his pricing elements other than pro-
duction costs.
C. If approval is granted for any request for deviation, it will be stated in
writing by the Director, Defense Research and Engineering (DDR&E) for do-
mestic R&D costs, the Director DSAA for R&D associated with FMS, and the
Assistant Secretary of Defense for In~ta1lation and Logistics (ASD, I&L) for
all production costs. This authority will not be delegated. When it is estimated
that a deviati'on of $100,000 or more for nonrecurring R&D costs of FMS is in-
volved, DSAA will request the concurrence of DDR&E. Recommendations for
approval or disapproval of these requests for deviations will be processed ex-
peditiously, and within seven days after receipt of the request. A `copy of each
approved deviatIon will be forwarded to the Assistant Secretary of Defense
(Comptroller).
D. A foreign government, domestic organization or Defense contractor sub-
mitting a request for deviation to the Director, DSAA, or Assistant Secretary of
Defense, I&L will provide an information copy to the cognizant contracting officer
and military sales office of the sponsoring DoD Component. In acting on the re-
quest of a foreign government, `domestic organization or defense contractor, the
Director, DSAA, or ASD, I&L will provide information copies to the sponsoring
DoD Component, who `will advise the cognizant contracting officer.
VII. Responsibilities
fThe Assistant Secretary of Defense (International Security Affairs), (ASD
(ISA)), shall monitor the application ~f this Directive, and exercise control over
the program to insure effective compliance with the balance-of-payment programs
in the case of `Foreign Military Sales.
VIII. Effective data `and implementation
A. This Directive is `effective for nil offers made on or after 60 day~ following
publication ~f this Directive.
B. Within 120 days, the head of each DoD Component shall submit to the
ASD (C) two sets of implementing procedures.
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