In 1995, a number of bills were introduced that could affect the recovery of nonrecurring costs on military sales. The Defense Security Assistance Agency (DSAA) must approve all charges. DSAA estimated in February 1995 that collections during fiscal years 1995-99 could amount to $845 million. Some collections would continue based on deliveries to be made on current contracts. Waivers Constitute a Major Loss of Revenue

DOD waived $273 million in nonrecurring costs to NATO members and Japan in fiscal year 1994, about $92 million more than DOD collected in nonrecurring cost charges in the same year. First, we calculated the charges on four categories of weapons—projectiles, missiles, aircraft, and aircraft engines. The flat rate charges of 3 and 5 percent generally resulted in lower total charges for each category of weapon systems—in the aircraft category, the charge was considerably less at 3 percent—than the total pro rata charges. Flat rate charges of 8 and 10 percent in most cases resulted in comparable or considerably higher total charges than the current pro rata charges for the four categories of weapon systems. Thus, for a given flat rate of 3, 5, 8, or 10 percent, the difference between the flat rates and pro rata charges varies widely. In 1986, DOD opted to retain the pro rata calculation and stated that the Arms Export Control Act would need to be revised to permit the use of a flat rate fee. Opposing Views on Cost Recovery

Supporters and opponents of recovery of nonrecurring costs differ on its benefits and drawbacks. Some supporters believe that, from an economic standpoint, the United States should recover all its costs and not subsidize the weapons industry by forgoing recovery of a portion of its research and development investments. DOD officials stated that they believe the elimination of the recovery charge would not negatively affect national security interests and the elimination of the recovery charge would, overall, be beneficial to the United States. We pointed out that, among other things, (1) the United States has been the world’s leading defense exporter since 1990, with almost 50 percent of the global market; (2) based on orders placed but not yet filled, U.S. industry will likely remain strong in the world market, at least for the short term; and (3) the U.S. government already provides substantial financial and other support to the U.S. defense exporters. DOD indicated that (1) the Department fully supported the administration’s proposal to repeal the statutory requirement to recover nonrecurring costs on foreign military sales of major defense equipment, (2) a consistent policy for foreign military and direct commercial sales is essential, and (3) the current imbalance between the two types of sales should be eliminated. It should be pointed out that our review was not to assess the legislative proposals, but rather to focus primarily on the financial effects of using a flat rate instead of the current pro rata fees. Pro Rata and Flat Rate Charges

Table I.1: Pro Rata and Flat Rate Charges on Projectiles Nonrecurring pro rata charge (percent of acquisition cost)
Table I.2: Pro Rata and Flat Rate Charges on Missiles Nonrecurring pro rata charge (percent of acquisition cost)
Table I.3: Pro Rata and Flat Rate Charges on Aircraft Nonrecurring pro rata charge (percent of acquisition cost) (Table notes on next page)
Without two J-85 engines.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on military exports, focusing on: (1) the government's recovery of nonrecurring research and development costs on sales of major defense equipment; (2) the effect of charging a flat or standard rate rather than the current pro rata fee; and (3) views from supporters and opponents on the recovery of these costs.

What GAO Found

GAO found that: (1) the Department of Defense recovered $181 million in nonrecurring costs on foreign military sales in fiscal year (FY) 1994 and estimated, based on historical trends, that collections could amount to $845 million between FY 1995 and 1999; (2) the Defense Security Assistance Agency waived almost $273 million in nonrecurring cost charges on sales to North Atlantic Treaty Organization countries and Japan in FY 1994; (3) the total value of waivers for FY 1991 through 1994 amounted to $773 million; (4) if the charge for nonrecurring costs is repealed, some collections would continue for a few more years as the charges are recovered on deliveries associated with prior years' sales; (5) if the legislative requirement to collect nonrecurring cost charges is not repealed, one alternative to the current pro rata charge is a flat rate charge, which would be easy to calculate and would not need to be periodically updated, as is the case in calculating a pro rata charge; (6) the effect of a flat rate varies depending on the way it is applied, in some cases the amount the U.S. government would collect on each unit sold would be less than the pro rate charge, in others it would be considerably more; (7) the total charges for each of four categories of 68 weapons systems (projectiles, missiles, aircraft, and aircraft engines) were generally lower than the current pro rata charges when using three and five percent flat rates but were comparable or higher for the most part when using eight and ten percent flat rates; (8) the differences between the pro rata charges and the flat rate charges for each of the 68 weapons systems varied widely for the same four flat rates and, for example, were considerably higher for some aircraft but lower for some missiles; (9) the average of the current pro rata charge on the acquisition cost of the 68 weapons systems was 5.18 percent; (10) supporters and opponents of recovery of nonrecurring costs differ on its benefits and drawbacks; (11) supporters, including some arms control advocates, believe that the charges serve national security interests by keeping weapons systems out of unstable regions of the world and the weapons industry should not be subsidized at taxpayers' expense; (12) opponents believe the charges adversely affect U.S. industry's competitiveness in the world market and could affect the U.S. economy in the long run; and (13) the United States has been the world's leading defense exporter since 1990, and based on orders received but not yet filled, the United States is likely to retain its first place position in the world market for at least the short term.