From my first days of flying fighter jets to the time I spent slinging billions of dollars around the Pentagon in defense acquisitions, I’ve tried to understand how defense modernization spending is best accomplished.
The national security objectives and implications on our freedom are clear and the resources significant. By any personal measure the amounts of money are beyond comprehension. Even Bill Gates and Warren Buffet would choke on an investment decision of $300 billion, the rough price tag for the F-35 Joint Strike Fighter. Yet the Pentagon doesn’t flinch at such astronomical investments and purposely creates programs like the F-35 that are “too big to fail.”
Perhaps it’s time to think about defense spending in investment terms. I’m not a Wall Street wizard but during my over 20 years in Air Force acquisition, the fundamentals of investing came to mind, yet never seemed to manifest themselves in our acquisition strategies. Granted, making money is not the objective of Pentagon spending. Instead, the Pentagon seeks increased combat power or dominance over current and potential enemies. So while there are no clear financial measures of merit, judgments on capability and capacity can be made.
As with investing, strong consideration must be given to factors such as timing, term, balance, diversification, and flexibility to shape and respond to the dynamic and all too often unpredictable world. Crafting America’s defense portfolio is complex and artful when done well. And given the Pentagon’s responsibilities, it’s reasonable to expect a long-term, diversified investment strategy with relatively low volatility and risk. We also want a certain amount of liquidity to respond to unforeseen crises and the continued flexibility to accommodate new technology or preempt emerging threats.
Put another way, we don’t want to rob future CEOs of the discretion they need for success. In one of its own guidelines, the Pentagon recognizes that its investments “must be as agile, flexible and adaptable as the forces it fields in battle around the world,” as they seek a “framework for effective investment decision-making, enabling the Department’s senior leadership to guide investments to maximize the impact to the Warfighter.”
Considering that the F-35 program is the Pentagon’s largest “investment” ever, one can’t help but wonder, “What are they thinking?” As if a long-term monopoly supplier for all fighter aircraft isn’t enough, the Pentagon now wants to turn a fast buck by necking down to a monopoly supplier for the project’s most expensive component, the high-thrust F135 jet engine made by Pratt & Whitney. Some even argue that the president should veto any bill that includes funding for the F136 alternative engine program, now in the final stages of development by the General Electric/Rolls Royce team.
A more vexing question is whether the dual sources for these high thrust engines, which provide a clear strategic advantage over current and projected threats, are no longer worth keeping. For over three decades, America’s two fighter engine producers provided top performance and, more importantly, affordable reliability that enabled our pilots to train, fight and win.
The Pentagon’s past investments in Pratt & Whitney and GE are the equivalent of blue chip investments and they have yielded high earnings and consistent returns. But like any investment strategy, failure to diversify can be disastrous, even among the blue chips. Just ask the former owners of GM preferred stock.
From an investment perspective, perhaps the more relevant question for the Pentagon is, “Are they thinking?” Would a prudent investor put all his money into one source of a strategic class of products? Is defense modernization spending so unique that it can freely violate even the most basic investment principles? Artful investing in defense spending can provide near-term performance, earned opportunity, and competitive leverage, as well as long-term strategic balance. It’s a new way of thinking that Congress, the Pentagon and the White House should adopt.
Robert Newton is a retired Air Force fighter pilot and Defense Department acquisition officer.
