[Congressional Record Volume 140, Number 126 (Monday, September 12, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: September 12, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
 RECOUPMENT OF NONRECURRING COSTS ON GOVERNMENT-TO-GOVERNMENT FOREIGN 
                             MILITARY SALES

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                       Monday, September 12, 1994

  Mr. HAMILTON. Mr. Speaker, as a matter of policy since the 1960's the 
Department of Defense collected recoupment fees for nonrecurring costs 
[NC] for research, development, testing and production on all U.S. 
government-to-government and direct commercial military sales of major 
defense equipment. At that time, there were no legal requirements 
mandating that such fees be collected. But it was a matter of policy 
governing all U.S. military sales.
  In 1976, Congress amended the Arms Export Control Act to include a 
legal requirement for NC recoupment on all U.S. government-to-
government foreign military sales. The Department of Defense complied 
with that requirement and continued to collect NC fees on direct 
commercial sales as well. In other words, U.S. policy on NC recoupment 
of military sales remained the same.
  That policy changed June 1992, when President Bush decided to seek 
the elimination of all NC recoupment--both legal and regulatory--
requirements. By January 1993, all nonstatutory NC requirements had 
been eliminated, creating a two-tier policy on U.S. foreign military 
sales.
  Under this structure, the Department of Defense continued to collect 
NC fees on government-to-government sales of major defense equipment 
but not on direct commercial sales of such equipment.
  The administration has decided to seek the elimination of statutory 
requirement for NC recoupment and government-to-government sales 
through the repeal of section 21(e)(1)(B) of the Arms Export Control 
Act.
  I wrote to the Secretary of State on June 20 regarding the 
administration's legislative request. On August 2 I received a reply 
from the Department of State.
  The text of the correspondence follows:
                                         House of Representatives,


                                 Committee on Foreign Affairs,

                                    Washington, DC, June 20, 1994.
     Hon. Warren Christopher,
     Secretary of State, Department of State, Washington, DC.
       Dear Mr. Secretary: I write to seek clarification of the 
     administration's request to seek repeal of section 
     21(e)(1)(B) of the Arms Export Control Act, which requires 
     the Department of Defense to collect pro rata fees to recoup 
     nonrecurring research and development costs on all 
     government-to-government foreign military sales.
       Since the 1960s, these fees were collected as a matter of 
     policy on both government-to-government sales and direct 
     commercial sales of major U.S. defense equipment. In 1992, 
     President Bush reversed the policy of collecting these fees 
     on commercial arms sales in an effort to support the U.S. 
     arms industry. The repeal of section 21(e)(1)(B) would 
     complete the reversal of this long-standing U.S. policy.
       I would appreciate your response to the following 
     questions:
       1. Why is this proposed repeal in the U.S. national 
     interest?
       What are the implications of repeal for the overall conduct 
     of U.S. conventional arms sales policies?
       2. Would such a repeal constitute a government subsidy for 
     arms sales? If so:
       Who would be the beneficiary of such a subsidy; and
       What would be the value of such a subsidy, and over what 
     period of time?
       What would be the cost to the U.S. government?
       3. Does the current non-recoupment of non-recurring costs 
     on commercial arms sales constitute a government subsidy for 
     those sales? If so:
       Who is the beneficiary of this subsidy?
       What is the value of this subsidy on an annual basis?
       What is the cost to the U.S. government?
       4. I appreciate the concern expressed about two different 
     U.S. policies on the cost recoupment of non-recurring costs:
       What consideration have you given to reversing President 
     Bush's 1992 policy decision on commercial arms sales?
       Why is it not in the U.S. national interest to reinstate 
     the collection of fees on direct commercial sales and thereby 
     restore the equal treatment of government-to-government and 
     commercial arms sales?
       I appreciate your prompt attention to this matter, and I 
     look forward to your early reply.
       With best regards,
           Sincerely,
                                                  Lee H. Hamilton,
                                                         Chairman.
                                  ____



                                     U.S. Department of State,

                                   Washington, DC, August 2, 1994.
     Hon. Lee H. Hamilton,
     Chairman, Committee on Foreign Affairs, House of 
         Representatives.
       Dear Mr. Chairman: This responds to your letter of June 
     20th seeking clarification of the Administration's request to 
     repeal section 21(e)(1)(B) of the Arms Export Control Act, 
     which requires the Department of Defense (DoD) to recoup a 
     proportionate share of its nonrecurring costs for research, 
     development, and production (NC) on government-to-government 
     Foreign Military sales (FMS) of items classified as major 
     defense equipment (MDE).
       As you correctly noted in your letter, the DoD began to 
     recoup NC, as a matter of policy, on both FMS and direct 
     commercial sales (DCS) in the 1960s. Only with the enactment 
     of the Arms Export Control Act in 1976 did one element of 
     that recoupment policy--pertaining to recoupment on FMS of 
     MDE--become a matter of law. In 1992, the Bush 
     Administration, to assist a U.S. defense industry hard-
     pressed by the new realities of declining defense budgets at 
     home and increasing competition abroad, eliminated all non-
     statutory recoupment requirements and announced its intention 
     to seek legislation to repeal the sole statutory requirement 
     for FMS of MDE. The Clinton Administration endorsed this 
     policy and submitted the requisite legislation in August 
     1993.
       The proposed repeal is in the U.S. national interest. By 
     restoring a common recoupment policy for FMS and DCS, repeal 
     will eliminate a substantial cost penalty for FMS (five 
     percent on average; up to 25 percent in some cases) to the 
     benefit of the U.S. Government, U.S. industry, and our 
     friends and allies.
       The government-to-government FMS channel enables DoD to 
     support friends and allies' purchases of equipment standard 
     or otherwise interoperable with that of our own forces, which 
     is important to our coalition defense strategy. Government-
     to-government sales foster close and productive military-to-
     military relations, important in peacetime as well as in time 
     of conflict. They also enable DoD to combine foreign 
     purchases with its own to achieve procurement efficiencies 
     that benefit all parties. FMS can provide the U.S. Government 
     with greater oversight and control over arms transfers, 
     when appropriate. The government-to-government channel 
     traditionally has provided U.S. industry with the majority 
     of its foreign defense sales. Industry strongly supports 
     repeal and the return to a policy that does not 
     discriminate between commercial and government-to-
     government sales.
       FMS benefits friends and allies by enabling them to utilize 
     the DoD acquisition system to handle their U.S. defense 
     procurements. This is particularly important to the many 
     countries that lack the means to effectively manage complex 
     procurements on their own. It is not to our advantage to 
     require these countries, to incur a price penalty in addition 
     to administrative charges to utilize FMS in the service of 
     our mutual security interests.
       This is not to say that FMS always is the most appropriate 
     channel for foreign sales. Direct commercial sales offer 
     their own advantages, particularly greater flexibility, and 
     can be more responsive to certain requirements of friends and 
     allies. However, FMS does offer its own set of distinct 
     advantages, and the United States benefits most by giving 
     friends and allies the choice of channels without applying 
     nonrecurring cost charges to either. It is difficult to see 
     any reason to handle recoupment differently in these 
     channels.
       The proposed repeal would have no impact on U.S. 
     conventional arms transfer policies or the careful and 
     completely separate interatgency arms sales review process. 
     Repeal will simply enhance the ability of U.S. firms to 
     compete for foreign sales that the U.S. Government is 
     prepared to approve. Repeal would not feed arms 
     proliferation; it will, however, help U.S. defense industry 
     complete with non-U.S. suppliers for meeting legitimate 
     foreign defense requirements.
       The proposed repeal would not constitute a government 
     subsidy for arms sales. Nonrecurring costs represent DoD's 
     sunk investment in developing and producing systems for its 
     own forces. Since weapons systems are designed to meet the 
     needs of U.S. forces and not solely for export, DoD incurs, 
     these costs regardless of whether there are any foreign 
     sales. The United States benefits from these sales in terms 
     of their contributions to our own national security 
     objectives and to the U.S. industrial base, including in some 
     cases lower DoD procurement costs.
       If effective for sales made after 30 September 1994, repeal 
     would reduce receipts to the U.S. Government through FY99 by 
     an estimated $172M, with the budget impact beginning in 
     FY97. Over time, however, we can expect a loss of receipts 
     even in the absence of repeal, as countries initiating new 
     procurements shift to DCS or foreign suppliers to avoid 
     the FMS recoupment charge.
       Early last year, in the context of its review of the 
     proposed Federal Register notice of the previous 
     Administration's elimination of all non-statutory recoupment 
     requirements, reimposition of non-recurring cost recoupment 
     on DCS was considered. The Administration determined that 
     elimination of the recoupment requirement was fully 
     consistent with President Clinton's economic agenda, 
     particularly its interest in assisting the U.S. defense 
     industry to adjust to declining DoD budgets.
       U.S. interests are best served by restoring a common 
     recoupment policy for FMS and DCS through repeal of the FMS 
     recoupment requirement. We hope you will support repeal.
       I hope we have been responsive to your inquiry. Please 
     contact us if we may be of assistance in any way.
           Sincerely,
                                                 Wendy R. Sherman,
     Assistant Secretary.

                          ____________________