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US: Defense Industry Frets about High Iraq Spending


by Bill RigbyReuters
February 6th, 2006

NEW YORK - A surprising group of protesters is starting to voice concerns about the high level of spending on the U.S. occupation of Iraq: the defense industry.

While many companies benefit from supplying vehicles and guns to U.S. troops in Iraq, some defense firms and industry experts are concerned that money spent on Iraq is taking away from more lucrative, longer-term multibillion-dollar programs.

The result is some confusion over the Pentagon's strategy, and fears that the United States will end up with a "hollow force" if it doesn't fulfill its modernization plans.

"We're spending $6 billion to $7 billion a month in Iraq -- that's not efficient spending of defense money," said Frank Lanza, chief executive of defense company L-3 Communications Holdings Inc., in an interview last week.

Other defense contractors are thinking the same thing, even if they are not saying it in public, a leading defense analyst added.

The United States needs to scale down involvement in Iraq and pare back its uniformed forces to keep the large, so-called "transformational" programs on track, according to L-3's Lanza, founder of the Pentagon's ninth-largest supplier.

"We are in transformation -- we can't afford all the platforms we started," he said. "So two things have to happen: Iraqi (U.S. troop level) has to come down, and the U.S. uniformed military is going to be reduced by about 100,000."

That would mean a cut of about 7 percent for the active U.S. uniformed force of about 1.4 million. There are 138,000 U.S. troops in Iraq.

If high Iraq costs persist, large programs like the Army's Future Combat Systems modernization plan, led by Boeing Co., and Lockheed Martin Corp.'s state-of-the-art Joint Strike Fighter jet, are likely to be scaled back or stretched out, industry analysts said.

'HOLLOW FORCE'

The Pentagon has created some insecurity among contractors, who are now worried that programs could be cut at any moment, according to some industry experts.

"No one was told that there was a choice between Iraq and recapitalizing the nation's military," said Richard Aboulafia, an analyst at Teal Group, which advises defense and aerospace companies.

"Basically, we're going to either have a hollow force or a truncated force structure -- the message here is that we couldn't really afford Iraq and our current military," said Aboulafia. "If Boeing and Lockheed Martin aren't thinking like that in public, they are in private."

Lockheed, the U.S. No. 1 defense contractor, declined to comment on the issue.

Boeing, the No. 2 defense contractor by value of Pentagon programs, admitted that Iraq is part of recent pressure that will affect its work.

"We've been saying for 20 months now that budget pressure and shifting priorities within the Pentagon would cause a moderating of defense budgets -- and that would affect our programs," a Boeing spokesman said.

Despite such concern, most big defense programs have been largely unscathed by budget pressures so far. The 2007 defense budget, unveiled on Monday, hit the top end of industry forecasts and did not contain any unexpected cancellations.

President Bush on Monday proposed a record $439.3 billion defense budget for 2007, a 4.8 percent boost over the current fiscal year.

Future Combat Systems was allocated $3.7 billion, with a further $3.6 billion set aside to replace worn-out helicopters. However, a multibillion-dollar satellite contract, called the Transformational Satellite Communications System, was delayed a year, and a plan for a second engine for the Joint Strike Fighter was scrapped.

SEPARATE BILL FOR IRAQ

The Bush administration has signaled that the wars in Iraq and Afghanistan would continue to be funded through supplemental budget requests, rather than the main budget.

But some warn that the administration will soon have to choose between Iraq and modernization programs.

"They did not seem to make the cash-crunch decision in the '07 budget and there was clearly not a specific list of things that should be stopped right now in the Quadrennial Defense Review," said Michael Goldberg at consultant Bain & Co., referring to the Pentagon's four-yearly study on U.S. defense strategy, which was released on Friday. "So I think the can got kicked a little bit down the road, so to speak."

The White House said last week it would ask for a further $120 billion in new emergency funds for Iraq and Afghanistan. That comes on top of $320 billion allocated for the two wars so far. The nonpartisan Congressional Research Service reckons that the war and occupation of Iraq has accounted for $251 billion of that.

That cost -- along with broader budget pressure -- is already causing ripples among contractors who are anticipating a slowdown on new programs, said Goldberg.

"Every contractor I work with is saying they expect very few new starts," he said: "The number of long-term, transformational programs expected to be launched in the next few years is very few."





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