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Adelaide defence contractors in US "small business" scam probe

by Richard Tonkin

Several Adelaide-based US Defence Corporations are disguising themselves as small businesses to "loophole" US Legislation, according to a US Survey.

In the chase for Australian Defence contracts, some of the same companies have subsidiaries mirroring the questionable US practices.

Defense Industry Daily reported yesterday that that the US District Court for the Northern District of California has ordered the US Small Business Administration (USSBA) to release to the American Small Business League (ASBL) a draft report on the awarding of government contracts.


The SBA report describes how large companies are improperly winning contracts in the Federal government's $60-plus billion small business contracting program.

The Small Business Act of 1953 directs that at least 23% of federal government prime contracts go to small business, but a host of abuses and loopholes have allowed large companies to pick up contracts in this category.

The SBA released an edited version of the report on December 28, 2004, acknowledging that small business contracts had gone to such "small businesses" as Raytheon Co., BAE Systems, Northrop Grumann Corp., Carlyle Group, Electronic Data Systems Corp., Booz Allen Hamilton Inc., Hewlett-Packard Co., and Buhrmann NV.

Raytheon, BAE, Northrop Grunman and Carlyle are involved in South Australian based Missile Shield and Unmanned Air Vehicle Projects. Both BAE and EDS have major headquarters in Adelaide.

The situation is mirrored in Australia. Here Australian (often wholly US owned) subsidiaries masquerade as Australian contributors to the Joint Strike Fighter program.

In 2002 Letters of Intent regarding the JSF program were sent to such small Australian companies as Boeing Australia, Halliburton ACT, CSC Nowra, DSTO Melbourne, Raytheon Australia Adelaide and Sydney, Tenix Adelaide and Melbourne, and Thales Sydney and Brisbane.

Trade Minister Ian MacFarlane said at the time that:

"These Australian companies are now on a prestigious short-list. This project has been thrown open on an international scale, suppliers are being sourced on a best-value basis, it’s a level global playing field on which Australian companies are swinging for home runs,"

"The letters signal the proponents’ confidence in Australian companies to successfully nail down significant contracts. They’ve been invited to bid for work worth up to US $400 million following two scoping studies by Lockheed Martin. This is an auspicious first step."

Raytheon is also serving as the system-to-system integrator in the Missile Shield warship construction soon to commence in Adelaide, while Thales has recently earned a guernsey in assisting General Dynamics in the Battlespace Communications revamp.

Practices under question in the US include acquisition of small firms to use as applicants, misrepresentation of employee figures, and large companies passing of subsidiaries or divisions as an small business.

If such a situation is regarded as criminal activity in the US (in 1953 punishable by fines up to US$500,000, or up to 10 years imprisonment, or both) surely the ethicality of the "Australian" contract situation needs to be immediately examined.

Then it will be a good time to look at "Australian small businesses" such as Halliburton participating in Australian international aid activities... but that's another story.

Or is it?

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... they keep getting bigger

Defence contractors just keep getting bigger because they're fed so well. Bundled contracts that can only be swallowed by very large corporations are a meal ticket alone, and they gobble up every successful small firm in sight and never seem satiated.

Earlier merger and acquisition activity within the global defence industry was due to how competitive it becomes as the pie shrinks. According to the International Institute for Strategic Studies (The Military Balance), following its peak in 1987, world military spending (on R&D, equipment procurement, maintenance and military personnel) fell by about a third in real terms between 1989 and 1996, from around US$1,300bn to US$800bn. 

This PwC Global report The Defence Industry in the 21st Century (.pdf) shows how much consolidation took place during that earlier period (page 13) and the forces in play driving it (page 17).

Today the military spending pie actually seems to be getting bigger all the time and yet the industry consolidation continues.  According to the PwC Global report there has been a significant rise in defence spending which "may well prove short-lived, except, perhaps, in the US."

So we find that the consolidation continues, and it's the US corporate giants most enjoying the feast. Late last year Michael Flaherty and Bill Rigby reporting for Reuters  wrote that industry titans like Lockheed Martin Corp. and Northrop Grumman Corp. may look to buy growth from lower-tier companies "as growth in U.S. defense spending slows". I reckon the giants will look to swallow smaller players even if the Bush Administration continued cranking up defence spending. It's in their nature to do so and they needn't worry about going hungry. According to a Jane's article published last Friday (sorry subscription req'd) a US Department of Defense memo has revealed most major US weapons programmes will escape budget cuts this year.

When the big eat the small ...

Interesting stuff Richard. Have you come across these examples?

The Centre for Public Integrity highlighted the issue of big business in Defense Industries swallowing small businesses and all their contracts  back in 2004 with a look at  giant Titan Corporation and its acquisition of SenCom Corp.  Titan bought SenCom for US$35 million in 2000 and picked up $176 million worth of US Dept of Defense contracts designated for small businesses.  

The Centre also found that another giant company L-3 Communications received $5.15 billion in contracts during 1998-2003, and 11 percent–or $582 million–of its total contracts were designated for small businesses. More than $219 million of those contracts come from the management and technical services company EER Systems, which L-3 Communications acquired in 2001 to become part of its Government Services division.

And guess what ...  today Titan Corporation "has become part of the L-3 Communications family, to be known as L-3 Titan Group."  A steal at about $2 billion.

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