Wednesday, December 5, 2012

Sunk cost effect and the politics of large military projects

The Times has a nice story that captures the troubles facing the F-35 Joint Strike Fighter plane, being developed for the Pentagon by Lockheed Martin since late 2001. The article describes growing frustration in Pentagon about perceived delaying tactics of the contractor and persistent technological flaws, including limited range. The plane, which was thought to become the Chevrolet of the skies, was to have 70-80% common parts and be used by all the three wings of the military.

In its 12th year of development, the badly delayed stealth technology based fighter jet which is supposed to replace the workhorse F-16, is already the most expensive military weapons system in history. With full production not expected till atleast 2019, the plane is estimated to cost the Pentagon a whopping $396 bn if the Pentagon sticks to its original plans to build 2443 jets by late 2030s. That would be four times as much as any other weapons system and with operational maintenance it is estimated to cost another $1.1 trillion. The cost of one plane has doubled from $69 million in 2001 to $137 now.

The program was pushed through in a hurry, despite widespread cautionary advise, in the aftermath of the September 2001 attacks. Now, with the rising costs and inordinate delays, questions are naturally being raised about the program. The Times points to two interesting reasons why the size of the program may have created a dynamics that makes it virtually impossible to limit, leave alone junk, the program. It writes
Todd Harrison, an analyst at the Center for Strategic and Budgetary Assessments, a research group in Washington, said Pentagon officials had little choice but to push ahead, especially after already spending $65 billion on the fighter. “It is simultaneously too big to fail and too big to succeed,” he said. “The bottom line here is that they’ve crammed too much into the program. They were asking one fighter to do three different jobs, and they basically ended up with three different fighters.”
Further, the production of the fighter plane was rushed through in 2007 even before flight tests had begun, forcing a leading Pentagon official to describe this as an "acquisition malpractice". Further, the military's own scientific experts were kept away from the development process, giving Lockheed a freehand with the technology development. As subsequent events have shown, the technological flaws have proven difficult to fix. The Times reports about the politics behind this move,

The willingness to “roll the dice” reflected the peculiar incentives at the Pentagon, where rushing into production creates jobs and locks in political support, even if it allows programs to drift into trouble. Lockheed and its suppliers on the F-35 employ 35,000 workers, with some in nearly every Congressional district.
The Pentagon clearly faces a big challenge with the management of the project. It now realizes that even if the contractor reneges on future deadlines, as is most likely to happen, it can do precious little to force them to comply. The sunk cost effect, whereby billions have already been spent, will deter the Pentagon from limiting the scope of the program. Both parties also realize that starting a new weapons system program now will take decades and unrealistic, especially given that the existing fighters are close to being grounded. Both parties also realize that given the large numbers of jobs created in its development, any effort to prune it down will raise strong political opposition. Further, cutting high-profile military programs will always raise the bogey of compromising national security. In any case, the biggest winner is Lockheed Martin, which has found an excellent opportunity to bleed the American tax payer for atleast the next three decades.  
The Times article is not clear on who is to blame for this misadventure, nor does it try to explore the motivations behind these apparently questionable decisions. It is naive to expect that these decisions were taken purely with good intentions and in the haste to get the new fighter jet flying. Such stories are commonplace in weapons market, especially in many developing countries. However, in all these places, the shadow of corruption and rent-seeking would loom large with all such deals. It will be surprising if the same were not true with F-35 fighter jet.    

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