Corporate Pork: the Lease v. Buy Decision
Via bgreer comes this Washington Post story:
For the past three years, the Air Force has described its $30 billion proposal to convert passenger planes into military refueling tankers and lease them from Boeing Co. as an efficient way to obtain aircraft the military urgently needs. But a very different account of the deal is shown in an August 2002 internal e-mail exchange among four senior Pentagon officials. “We all know that this is a bailout for Boeing,” Ronald G. Garant, an official of the Pentagon comptroller’s office, said in a message to two others in his office and then-Deputy Undersecretary of Defense Wayne A. Schroeder. “Why don’t we just bite the bullet,” he asked, and handle the acquisition like the procurement of a 1970s-era aircraft – by squeezing the manufacturer to provide a better tanker at a decent cost? “We didn’t need those aircraft either, but we didn’t screw the taxpayer in the process,” Garant added, referring to widespread sentiment at the Pentagon that the proposed lease of Boeing 767s would cost too much for a plane with serious shortcomings.
Is leasing more efficient than purchasing? I guess that depends on how much the annual lease payment is relative to the market price for the old aircraft that was converted into a refueling tanker. Of course, the most efficient thing would have been to avoid paying Boeing anything for equipment that was apparently not needed.
Update: The financing of this lease deal has an Enron-like special purpose entity flavor to it:
The tanker deal isn’t like most projects, in which the military buys what it needs. It is structured as a lease because the Pentagon didn’t have enough money to buy both new tankers and expensive new fighter planes. Boeing, for its part, didn’t want to lease the planes directly to the Air Force – that would have put too much debt on its books. So the company and the Air Force plan to set up a “special purpose entity” to serve as middleman in the transaction. It will collect money from outside investors, use the funds to buy the planes, and then rent the tankers to the Air Force. The result: Boeing gets to book the sale it wants and the Air Force gets its lease. Such complicated financing was alien to Air Force officials. Boeing’s documents make clear that in crafting the financing plan, the Air Force played student to its contractor. “The USAF clearly does not understand financing and has asked for our help to educate them (in layman’s terms),” wrote Robert Gordon, the vice president of Boeing Capital Corp., in an E-mail message in December 2001. Indeed, Gordon noted, an Air Force general “made a special comment to thank Boeing for all its work over the past months to try and help this leasing proposal make sense” to the government. Investigators with the Commerce Committee, however, are not as awestruck. They are examining the financial vehicle that’s the linchpin of the deal. “It’s an Enron-like entity,” says McCain. For one thing, U.S. News finds, there is a built-in conflict of interest in the arrangement because, documents indicate, it gives Boeing oversight of its own deal. Boeing and the Air Force have sold the deal to Congress as a way to save money, but lease terms mean it’s impossible to say today how much the government will pay tomorrow.
So we elect an MBA President and this is how the government does business?