DoD research spending took brunt of sequestration cuts

Defense Department spending on research and development has suffered historic declines during the budget drawdown that’s been in progress since 2009, falling much more sharply than the rest of DoD contracts, and reversing the usual pattern in which the military has tended to guard its R&D funding so it has systems ready-to-procure the next time it goes to war.

The insights came last week via one of the deep dives the Center for Strategic and International Studies regularly conducts into federal procurement data. The center found dollars spent on R&D contracts fell by 53 percent between 2009 and 2015 even while overall contract spending declined by only 35 percent.

Put in terms of its share of a shrinking pie, R&D makes up just 8 percent of Defense contracts now, compared to 11 percent five years ago.

Researchers said the spending cuts had created a significant “trough” in funding for future weapons systems, something top Pentagon officials had warned about in 2013, when the sharpest R&D declines started to take place because of the Budget Control Act.

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“This was a matter of some dispute as we went into sequestration — was this going to happen? Well, the data shows it happened,” said Andrew Hunter, the director of CSIS’ Defense Industrial Initiatives group, and who previously served as chief of staff to the Pentagon’s undersecretary for acquisition, technology and logistics. “And when you consider that R&D was not something that was heavily paid for by war funding, it really is almost entirely a function of sequestration and the Budget Control Act.”

The new figures indicate that DoD officials have been somewhat successful in at least protecting the department’s investments in very early-stage R&D — the basic and applied research that might lead to scientific breakthroughs that eventually make their way into weapons systems. Those “seed corn” accounts fell only about as much as the rest of DoD’s contract obligations.

But spending on the two budget categories, known as Advanced Technology Development and System Development and Demonstration — the funds that pay for later-stage R&D — dropped by 65 percent and 72 percent, respectively.

“This is what’s created this six-year trough in the weapon system pipeline, because it’s those later stages of R&D that fund something to go through low-rate initial production and into full-rate production, and that’s what’s missing,” Hunter said. “The major dynamic, if you go into the numbers, is that we had the big programs of the 2000s either terminate or graduate into production, and nothing came in behind them to replace them in the R&D pipeline.”

Among the military services, the cuts were most acute in the Army. The dropoff is partially explained by the slow death of Future Combat Systems, which spent about $4 billion in late-stage research funds in the late 2000s before the Pentagon canceled the program in 2009.

But in real-dollar terms, the Army is now spending less, in inflation-adjusted-dollars, on research and development than it did during the “procurement holiday” of the 1990s. And its overall contract obligations for R&D are down 60 percent compared to 2009.

“And the historic ratio in the Army between R&D and procurement has shifted,” Hunter said. “That’s to say that in previous drawdowns, what the Army has tended to do is cut procurement drastically, preserve R&D, and then when the money comes back, buy new systems. This drawdown is unique in modern memory in that R&D has actually taken an even larger share of the reduction than procurement. When the money comes back, assuming it does, what will there be to buy? They probably would be buying the same stuff they had before, because there’s just not much out there that’s new. Unless, of course, there’s a happy scenario that says commercial industry will just develop amazing things that we can buy and we don’t have to do R&D anymore.”

One reason for skepticism on that front is that the “big five” Defense contractors that tend to deliver most of the military’s big systems — Lockheed Martin, Boeing, Raytheon, Northrop Grumman and General Dynamics — have seen a drastic decline in market share for DoD research dollars of any color. Those firms, collectively, got 57 percent of DoD’s R&D contract funding in 2009 compared to 33 percent in 2015.

But it’s also possible to read those figures as a success story for DoD’s small business programs, said Jesse Ellman, an associate fellow at CSIS.

Overall, small businesses got 17 percent of research contracts in 2015 compared to just 10 percent in 2009 — although the overall pie was much bigger back then.

“So it isn’t that they’re actually increasing the dollars that they’re getting, but the fact that in a really tough market the relative minnows in the R&D marketplace are holding onto their piece of the pie and they’re actually holding their own as the big five players are losing share in a declining market is something notable,” Ellman said. “It might be considered a victory for small business policies that they aren’t being shoved out of a market that’s fallen by half.”

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