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[H.A.S.C. No. 109–51]









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MARCH 30, 2006




ROSCOE G. BARTLETT, Maryland, Chairman
ROB SIMMONS, Connecticut
JO ANN DAVIS, Virginia
CURT WELDON, Pennsylvania
JIM SAXTON, New Jersey
KEN CALVERT, California

GENE TAYLOR, Mississippi
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DAN BOREN, Oklahoma

Harry Cartland, Professional Staff Member
Doug Lane, Professional Staff Member
Heath Bope, Professional Staff Member
Bill Natter, Professional Staff Member
Andrew Hunter, Professional Staff Member
Claire E. Dunne, Staff Assistant




    Thursday March 30, 2006, Fiscal Year 2007 National Defense Authorization Act—Department of the Navy's Shipbuilding Acquisition Strategy


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    Thursday, March 30, 2006




    Bartlett, Hon. Roscoe G., a Representative from Maryland, Chairman, Projection Forces Subcommittee

    Taylor, Hon. Gene, a Representative from Mississippi, Ranking Member, Projection Forces Subcommittee


    Etter, Dr. Delores M., Assistant Secretary of the Navy (Research, Development and Acquisition); Vice Adm. Lewis W. Crenshaw, Jr., Deputy Chief of Naval Operations for Resources, Requirements and Assessments, U.S. Navy; Lt. Gen. James N. Mattis, Deputy Commandant for Combat Development and Integration, U.S. Marine Corps; Rear Adm. Charles Samuel Hamilton II, Program Executive Officer for Ships, U.S. Navy; Rear Adm. David Architzel, Program Executive Officer for Aircraft Carriers, U.S. Navy; and Rear Adm. William Hunter Hilarides, Program Executive Officer for Submarines, U.S. Navy

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    Francis, Paul L., Director for Acquisition and Sourcing Management, Government Accountability Office

    Gilmore, Dr. J. Michael, Assistant Director, Congressional Budget Office

    Labs, Dr. Eric J., Principal Analyst, Congressional Budget Office

    O'Rourke, Ronald, Specialist in National Defense, Congressional Research Service

    Work, Robert O., Senior Analyst, Center for Strategic and Budgetary Assessments

[The Prepared Statements can be viewed in the hard copy.]

Etter, Dr. Delores M., joint with Vice Adm. Lewis W. Crenshaw, Jr., Lt. Gen. James N. Mattis, Rear Adm. David Architzel, Rear Adm. Charles Samuel Hamilton II, and Rear Adm. William Hunter Hilarides

Francis, Paul L.

Gilmore, Dr. J. Michael, joint with Dr. Eric J. Labs

O'Rourke, Ronald
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Work, Robert O.

[There were no Documents submitted.]

[The Questions and Answers can be viewed in the hard copy.]

Mr. Bartlett
Ms. Bordallo
Mr. Taylor


House of Representatives,
Committee on Armed Services,
Projection Forces Subcommittee,
Washington, DC, Thursday, March 30, 2006.

    The subcommittee met, pursuant to call, at 4 p.m. in room 2212, Rayburn House Office Building, Hon. Roscoe G. Bartlett (chairman of the subcommittee) presiding.

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    Mr. BARTLETT. Our subcommittee will come to order. Today we will receive testimony from senior Navy officials and other subject matter experts on the U.S. Navy shipbuilding acquisition strategy and how it supports the Navy's long-range fleet force structure.

    The hearing will focus on the Navy's current and future acquisition strategy and the associated budget required to pursue that strategy.

    The challenges confronting our Nation and our Navy today require a delicate balance of design, resource and infrastructure. We are committed to ensuring that the Navy and Marine Corps receive the necessary resources to maintain sufficient force structure to meet current and future operational requirements.

    In order to sustain our vital shipbuilding industrial base, certain questions must be addressed when examining the annual long-range shipbuilding plan, the newest iteration of the future years defense plan and the fiscal year 2007 budget request for shipbuilding programs.

    For fiscal year 2007, the Navy's shipbuilding budget request is 10.6 billion. This represents a 1.9 billion increase over last year's budget request. Still, the Navy estimates that executing the 313 ship plan would require spending approximately 14.4 billion annually for new ship construction programs.

    Considering the current spending levels in shipbuilding Procurement accounts are insufficient, even to maintain today's fleet of 283 ships, where will the Navy find the resources to build and sustain the 313-ship Navy that the CNO has determined necessary to meet tomorrow's challenges?
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    Moreover, the Congressional Budget Office (CBO) projects that the same new ship construction programs in the Navy's proposed 313-ship fleet would require an average annual budget of 19.4 billion.

    With conversions and nuclear refuelings for carriers and submarines included, that estimate rises to 20.5 billion, roughly twice the current shipbuilding budget.

    How does the Navy account for this major discrepancy between Navy and CBO estimates to execute your 313 ship plan? Furthermore, the fiscal year 2007 budget request includes seven new construction ships, a major increase above the four ships requested in fiscal year 2006.

    However, even this apparent good news is misleading as the Navy intends to procure three of the ships through incremental funding, which means that much of the cost is deferred to later years. How will the Department protect the flexibility of future acquisition executives to meet emerging needs if it continues to expand incremental funding acquisition strategies?

    To address these and other important questions, we have two panels today. The first panel consists of witnesses from the Department of the Navy. The second panel includes outside subject matter experts. For the first panel, we are pleased to welcome the Honorable Delores Etter, Assistant Secretary of the Navy for Research, Development and Acquisition; Vice Admiral Lewis Crenshaw, Jr., Deputy Chief of Naval Operations for Resources, Requirements and Assessments; Lieutenant General James Mattis, Commanding General for the Marine Corps Combat Development Command and Deputy Commandant for Combat Development; Rear Admiral Charlie Hamilton, Program Executive Officer for Ships; Rear Admiral David, oh my, I don't want to mispronounce the name, somebody pronounce it for me. We will get it right for the record.
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    Admiral ARCHITZEL. David Architzel, sir.

    Mr. BARTLETT. Program Executive Officer for Carriers; and Rear Admiral William Hilarides, Program Executive Officer For Submarines.

    Before we hear from our witnesses, I yield to my good friend and ranking member of the subcommittee, Congressman Gene Taylor from Mississippi, for any remarks he might wish to make. Mr. Taylor.


    Mr. TAYLOR. Thank you, Mr. Chairman. I want to thank your distinguished panel. I very much appreciate you being here.

    Just so you know, the chairman and I just had the really great privilege of traveling with Ms. Bordallo, and seeing some yards in Japan, Korea and China.

    And, as someone who comes from shipbuilding country, I was taken aback by the level of sophistication of those yards.

    And as someone who really thinks it is vital for our Nation to maintain the shipbuilding base, I know that something has got to give. They are our only customer—I am sorry. They are our only supplier. We are their only customer.
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    And I would hope at some point during your testimony, and I realize this is a little different from what you have prepared, I was hoping that there could be some recommendations coming from this panel as to what you could live with, as far as investments that our Nation ought to be making in those yards considering that they are, indeed, our only supplier, we are their only customer, to think that somehow some commercial work is going to fall from the sky when it hadn't in the past 15 years, when it hasn't, I think is a stretch.

    And keeping in mind I am told that Electric Boat did about 60 percent of the equipment there is government furnished, somewhere between 40 and 60, what can we do in these other instances to make these yards more efficient so they can be there in the future, more efficient now and be there in the future for when we are going to need them for other contingencies.

    But again, Mr. Chairman, I am looking forward to hearing this distinguished group and thank you all for being here.

    Mr. BARTLETT. Thank you very much, and thank for your reference to our trip. It was really a very eye-opening trip. We visited the largest yard in the world in South Korea. And we hope we have an opportunity to talk to you in more detail about that.

    Without objection, all of your prepared statements will be included in the hearing record.

    Dr. Etter, the floor is yours.
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    Dr. ETTER. Mr. Chairman, Congressman Taylor, distinguished Members of the subcommittee, it is a pleasure to appear before the Projection Forces Subcommittee to discuss the Department of the Navy's ship construction programs and the fiscal year 2007 budget request. I would like to thank you for your personal support and the committee's great support for all Navy and Marine Corps programs.

    I am joined this morning, this afternoon, by committee Members, and also colleagues from the Navy and the Marine Corps. They are with me today on behalf of the Department of the Navy.

    As you know, there has been considerable activity within shipbuilding over the last year, and in fiscal year 2007, we will see the Navy's previous research and development (R&D) efforts begin to bear fruit. There is a variety of platforms and capabilities that will transform our fleet over the future years defense plan (FYDP) as we procure 51 new ships. To support that plan, we must align the industrial base for long-term force development, through split funding, advanced procurement and cost savings initiatives.
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    The Navy continues to analyze operational requirements, ship designs and costs, acquisition plans, tools, and industrial base capability to further improve its shipbuilding plan.

    I would like to highlight the ships we propose procuring in fiscal year 2007. The top of the list is DD(X), which is the centerpiece of the surface combatant family of ships that will deliver a broad range of capabilities.

    Since the award of the design agent contract in April 2002, the program has conducted extensive land based and at-sea testing of the ten critical engineering development models, and as a result, is on track to mature these systems in time for ship installation.

    This level of technological maturity was a key factor in the Office of the Secretary of Defense (OSD's) granting Milestone B approval in November 2005.

    As you are aware, the Navy is proposing a dual lead ship acquisition strategy. The Navy is confident that this approach will motivate cooperative and collaborative completion of detail design, control costs on the lead ships and allow a broader set of options for future acquisition strategy decisions.

    Our fiscal year 2007 budget includes the first funding increment for the two DD(X)s.

    The ship that I believe will prove transformational in terms of how we research, develop and acquire capability is the Littoral Combat Ship (LCS). This asset will bring much to the table in support of the uncertain security environment we operate in today and in the future.
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    LCS will be different from any war ship that has been built for the U.S. Navy. Its modular design, built to open systems architecture standards, will provide flexibility and a means to rapidly reconfigure mission modules and payloads. The program provides the best balance of risk, affordability and speed of construction. Our fiscal year 2007 budget includes funding for two LCS ships.

    Our fiscal year 2007 budget also includes funding for the 9th Virginia class submarine. This boat will be the fourth boat in the five boat multi year procurement.

    The multi year contracting approach provides the Navy with savings of $80 million per boat.

    The Navy has proposed the first increment of split funding for the first LHA replacement ship in fiscal year 2007. This ship is optimized to accommodate the future aviation combat element which includes Joint Strike Fighter and MV–22 aircraft.

    The Navy is also proposing procuring the 10th Lewis and Clark class auxiliary dry cargo and ammunition ship in T–AKE fiscal year 2007. The first nine ships are under contract and the lead ship will deliver this spring.

    These ships will replace aging combat storage and ammunition shuttle ships.

    Before closing, I would like to share with you a few of my thoughts on acquisition program volatility, a term that I am using to articulate the complex set of challenges that lead to cost, schedule, and performance issues for acquisition programs.
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    Volatility, as defined by tending to very often or widely, is fueled by five main factors in our acquisition programs.

    Program complexity, requirements fluctuation, budget instability, schedule demands, and contractor and program manager optimism.

    These are the factors that are most likely to generate cost and schedule overruns and performance issues.

    I am actively working with my acquisition team to take specific actions to reduce acquisition program volatility. I look forward to working with Congress to mitigate the acquisition program volatility during this and future fiscal years.

    Mr. Chairman, I am grateful to the committee for the opportunity to discuss how the Department is working hard to change its approach to acquisition, requirements, and the delivery of the immense capability our shipbuilding programs bring to the Nation. These ships, submarines and carriers are critical to the success of our missions in the Global War on Terror and to protect our country from the many threats it faces.

    Congressional support of the shipbuilding program is essential to these capabilities.

    Thank you for your consideration. We will look forward to the questions that you may have.
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    [The joint prepared statement of Dr. Etter, Admiral Crenshaw, General Mattis, Admiral Architzel, Admiral Hamilton and Admiral Hilarides can be viewed in the hard copy.]

    Mr. BARTLETT. Thank you very much for your testimony, I want to thank all of you for your service to your country.

    Are there other members of the panel that would like to make an additional statement?

    As my custom is, I will ask the last questions, not the first questions in the panel.

    I will turn now to my ranking member, Mr. Taylor, for his questions.

    Mr. TAYLOR. Following your excellent lead, I am going to yield to Mr. Langevin.

    Mr. LANGEVIN. Well, thank both gentlemen for yielding to me.

    Mr. Chairman, thank you for holding this hearing today. It is a very important issue. And I want to thank our panel for being here, and Secretary, for your testimony.

    If I could, I want to turn to DD(X). And I want to ask, the Navy has testified that the DD(X) is the single largest investment it has ever made in technology for a ship. And its estimated procurement costs are significantly higher than those of any previous combatant.
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    This committee has worked hard to ensure its efficient cost controls, and the Navy has said that competition is one of the business practices that it is using to reach these costs caps.

    Now the Navy has split construction between two shipyards.

    But what I want to ask, what steps are the Navy—is the Navy taking or has taken to keep the cost of the electronics and the weapons systems competitive?

    Dr. ETTER. Well, I thank you for the opportunity to talk about DD(X) because this really is a very key ship in the future fleet. We have done a number of things to control costs. I will mention a couple, and then I will ask Admiral Hamilton to talk more about this.

    We have put a lot of R&D dollars into this. We identified ten specific capabilities that we thought were extremely important capabilities for the ship, but did have risk, and so we have spent a couple of years doing the risk reduction work on those. And we have found that to be very helpful.

    We now feel that the technical maturity level of these various technologies are to the point that we are comfortable with putting them into the ship.

    We also are looking very closely and at requirements. When we went through the milestone process last November, one of the things that we did in a lot of discussions that went on within the building was remove some capabilities from the ship in order to try and control price costs.
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    So this is one of the things we will continue to do as we continue the design and construction as is look for points and ways in which we can keep the cost under control because that is clearly extremely important to do for this ship.

    And Admiral Hamilton, would you like to add?

    Admiral HAMILTON. Congressman, thanks for your question and it is a pleasure to be back with the committee. As you know, we have applied competitive force here in DD(X) in a variety of ways.

    In 2002 for the phase three contract award, we held a competition. And in that competition, selected a design agent and a common systems integrator as a subset of that team. In that competition, Raytheon became the common systems integrator over a fairly healthy combat systems integration group, which ultimately included Lockheed Martin as a subset of that team.

    The competition for the 2002 time frame brought significant cost control to the combat system in electronics piece. As we executed the ten engineering development models (EDMs) in risk mitigation to go with that, we gained significant cost insight into those EDMs and gained confidence then in our independent cost estimate for the ship, for the lead ship and the follow ship.

    As Admiral Mike Mullens became CNO in July of 2005, he invited us to look at the requirements on the ship, see if there was anything that we could do to reduce that requirement without fundamentally washing away the warfighting capabilities the DD(X) so magnificently brings to the table.
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    In the course of that conversation, we identified $265 million worth of recurring and nonrecurring systems that could be taken from the ship. And we are still in the process of identifying additional systems to go with that.

    In the phase 4 execution of our contract, for our $700 million combat systems mission systems set, we have over 35 percent of that electronics currently in competition.

    Mr. LANGEVIN. Thank you, Admiral. You have touched on the cost associated with the ship, the cost cap. Just let me ask this question. Congress obviously has established its cost cap $2.3 billion for the fifth ship of the DD(X) class.

    What progress—can you elaborate further on what progress the Navy is making driving down costs to meet that goal and what confidence level do you have in achieving that by the fifth ship?

    Admiral HAMILTON. As we have taken that $265 million out of lead ship, it has an attendant follow ship cost reduction implication.

    And as I have trended through ship five, we are going to achieve our $2.3 billion cost cap that you gave us in language in this last degree. I am confident of that.

    Mr. LANGEVIN. My time has expired. But thank you Admiral, I have some other questions, that I will save for the second round. If not, I will submit for the record and thank you for your testimony.
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    Mr. BARTLETT. Thank you very much. We recognize our witnesses in the order of their seniority at gavel fall and for those who come after gavel fall in their order of appearance on the panel. So that makes Ms. Bordallo the next questioner.

    Ms. BORDALLO. Thank you, Mr. Chairman. I have never been in a senior situation. But, if you think it is seniority, then fine. Thank you very much.

    I want to thank Chairman Bartlett and Mr. Taylor especially, for coming to visit Guam, along with the shipyards in China, Korea and Japan. And, Guam, as you clearly know, is a location from which our Nation truly projects forces.

    Today, we are focusing on shipbuilding and Navy acquisition, and certainly we are very proud of our Naval base on Guam, and we all recognize Guam's tremendous strategic value because of its location.

    Further, given the threats in East Asia, we know that Naval and Air Force would play the most significant role in any large scale conflict. Engagement in large scale ground combat is simply too costly and requires a larger ground force than we can commit to. So that means we must pay special attention to ensuring that we have the right kind and the right numbers of naval forces to deter aggression in the Pacific, and if necessary, to fight and win in the region. Secretary Etter and Vice Admiral Crenshaw I believe this question is for either of you.

    I would like to better understand the balance we are establishing between new surface ships and our subsurface fleet. It seems to me that the stealth, versatility and the range of attack submarines make them the vessel of choice for meeting future warfare needs. Subs can deliver virtually any sort of payload and can deliver troops into combat. And as I said, they can do all of this with stealth. Yet we are sinking billions of dollars into new surface ships originally designed to meet Cold War era missions.
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    Why aren't we shifting more resources away from ships that meet old missions to submarines that best meet present day and future missions? The cost of the DD(X) looks to be somewhere over $3 billion—I don't know about that figure—so we can buy about one and a half Virginia class submarines for every one DD(X) destroyer. So can you discuss procuring three Virginia class submarines buys us a greater capability than buying two DD(X) destroyers.

    Admiral CRENSHAW. I think I will take a stab at that. Thank you, ma'am, for that question. When we look at the warfighting balance that we establish as we look across the spectrum, we try to maximize our asymmetric advantages, things that we do better than anybody. And certainly, I think there is no question that we are the masters of the undersea domain. We have fantastic platforms. And they are very capable. Both of our attack submarines that we have and also our, the ones that we are now converting into SSGN capability, which also gives us a tremendous land attack capability that is very, very stealthy as well.

    But, unfortunately, they can't do it all.

    And as we face 21st century threats, we are very mindful that we have to have a balance of sea shield to protect our aircraft carriers and protect our bases, and protect our Marines and joint partners in our sea bases as we go forward.

    And so, the reason why we need some of these other platforms are to combat those 21st century threats, the fifth-generation fighters that are coming out of China and other areas are very, very formidable, and we require very sophisticated air defense umbrella to go with our ships to provide that type of sea shield. The DD(X) does that.
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    Typically we talk about DD(X) in terms of gunfire support and we sometimes forget that this is a very formidable anti-air platform unmatched in the world and capable of going against those very sophisticated fighters who are going after our sea bases and our expeditionary bases and our ships at sea.

    So I would argue that while we may have had destroyers in the Cold War to fight, we also need destroyers in the 21st century types of wars we are going to fight to provide that sophisticated air defense.

    I mentioned the fire support that the DD(X) will provide, as well as our DDGs, to support our forcible entry operations ashore. And certainly while we can provide some of that from under the sea and in the form of Tomahawks we also need to have that very responsive on-call fire, particularly at peak points in the battle as we go ashore to support our joint partners, particularly the Marines as they go ashore.

    I would also mention that our, the way that we fight the undersea battle against those that are bringing submarines against us are not only from our excellent subsurface assets but also our surface assets are very capable in the undersea warfare arena as well as our aircraft.

    So it is a balance. There is no doubt that the submarines bring us great capability, and we try to strike that right balance to provide the type of sea shield that the entire force needs.

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    Ms. BORDALLO. Quick follow up if I could, Mr. Chairman. It seems to me that China and the United States are really going in opposite directions. We learned when Mr. Bartlett, Mr. Taylor and myself, when we were visiting the shipyards, that they are really building a number of submarines. I think, I am not too sure, but it was my understanding that they outnumber ours.

    And I just wonder why the—can you explain to me how the shipbuilding strategy that the Navy has laid out addresses the growing threats in east Asia, and why you feel our strategy is sufficient to meet our needs of deterrence?

    Admiral CRENSHAW. Well, once again, a balance of capabilities, particularly as you look out into the future with the capabilities that we are buying in our multi-mission aircraft (MMA) aircraft, as well as the LCS, anti-submarine warfare (ASW) capability that we are building into that ship, to be able to go against those types of threats that we are going to be facing.

    One of the things that while we need to remember that many of the submarines the Chinese are building are more of the coastal diesel type that, and it is their homeland that they are going to defend and not have to go too far to defend, we have to come a long way.

    The tyranny of distance in the Pacific theater, as you know, is one that can be a war winner or a war breaker. And that is one of the motivations that you see us beginning to talk about shifting the balance of our forces over there to begin to counter some of the tyranny of distance and to have the speed of response that we need to be able to answer that threat.
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    And of course, Guam is playing a key role of that as the home port to some of our attack submarines and we appreciate your support there.

    Ms. BORDALLO. Admiral, we would like to have more since the distance is so close.

    Admiral CRENSHAW. Yes, ma'am. It is a question of capacity that we need to talk to my colleagues here.

    Ms. BORDALLO. Good. Thank you very much. Thank you.

    Mr. BARTLETT. Thank you very much. Mrs. Drake.

    Mrs. DRAKE. Thank you, Mr. Chairman. And I would also like to thank all of you for being here. I think this is a hugely important topic. And I know we are all glad to have the 313 ship plan from Admiral Mullens, and to feel like we have a plan for the future and a goal.

    I hope this is the best number and not a number that people thought might have been practical. Because one of the things that our committee is extremely concerned about is that our decisions be based on threat and the needs of our military and not on the budget.

    So it takes me to the question I always ask, how—I mean, the plan that we have that from fiscal year 2007 through 2011, the proposal is to build 51 new ships, which I think would be a wonderful thing for stability in our industry, to protect our workforce, for predictability, to keep costs down if we are building that number of ships. But that means 10.2 ships a year.
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    And from what I have looked at in the past, how realistic do we think that is that we will actually be able to accomplish building ten ships a year?

    Dr. ETTER. Well, I think——

    Mrs. DRAKE. It sounds good on paper, but can we really do it?

    Dr. ETTER. If you look at the plan, you will notice that it is a variety of different types of ships. And I think that is why we will be successful in doing this.

    A number of these are, for example, the littoral combat ships. And these are ships that are two years to build, so we feel very comfortable about our ability to do that. So as you look out across the facade, we have planned this very carefully.

    And you are exactly right that it does take a lot of planning to put this together. So we feel like we have a plan that in terms of both our capacity in the shipyards and in terms of the budget that we have proposed is sufficient to do this.

    Mrs. DRAKE. And you would agree with me, though, that if there were to be a slowdown in this plan, the tremendous impact that has in our shipbuilding industry, with their workforce, and their business plans as well and ultimately to us as a taxpayer, but because our ships cost more when that takes place.

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    Dr. ETTER. I think that is true. We are assuming the current capacity. And so if there were changes in capacity, that would affect things.

    But this plan is based on what we see as the next five years. And we have taken into account the shipyards that are coming back in the Gulfport area. So we believe this is a very viable plan.

    Admiral Crenshaw, did you want to add anything to this?

    Admiral CRENSHAW. Yes, ma'am. I don't want to eat into too much of your time here, but trying to pay these bills is something I look at not only from the shipbuilding perspective, but the entire budget perspective. And sort of the two-minute version here or shorter is that when I look at the challenges facing us, I think it is very doable.

    But it depends on, in my view, four things. Number one is that we can continue to control our manpower costs and keep those from eating in, because as manpower costs grow, that would eat into my ability to procure things.

    So as you can see, in past budgets and in this budget we are paying a lot of attention to making sure that we are managing those costs very carefully.

    The second piece of this is that I control my readiness costs, my maintenance costs. Some of those things I have control over. Some of those things I don't, like fuel costs.

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    But we have instituted a variety of business practices within the industrial side of the Navy, if you will, to make sure we are getting the best value for our dollar.

    And plenty of examples of that where we are trying to be very efficient businesswise in the bat shop to keep those maintenance costs level.

    The third thing is we do need to take the investments that we had been making in R&D and ensure that we now cash in on those investments and buy the new things we need to buy.

    And finally, the fourth thing is controlling the costs of the things that we buy. And we do that two ways, controlling our appetite in terms of the capabilities that we need, what we need, not what we want, and taking a balanced approach. The last time I appeared before the committee, I had a short discussion with the chairman on risk. And we take that into account.

    But we also have to be stable in our requirements because one of the things I think we have done in the past is we have changed the numbers every year. And that is very, very hard for our industrial partners to then have a plan to follow.

    And so Admiral Mullens has committed to being stable with requirement, not trying to change the numbers so we can keep the numbers the same.

    Every time I move a ship from one year to the next to ''free up money,'' it ends up costing me more money in the next year. So I have got to stop doing that. And we are committed to doing that, and managing those four things.
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    Mrs. DRAKE. But can you tell me why we, when we purchase a carrier, we procure that over two years instead of over four when it takes us eight years to build a ship?

    And the second question, just to throw it at you quickly is, I think there is a difference in projections. The numbers I am looking at there is about a $5 billion difference between the Navy estimate and the CBO. So I don't know how to explain that.

    Admiral CRENSHAW. In the cost of the carrier or the overall average?

    Mrs. DRAKE. Overall average.

    Admiral CRENSHAW. If I could, my partner here is Admiral Architzel, can explain the carrier phase. The difference in the averages that, I think, the CBO has done and ours, it is interesting, I think in the near years we are very close across the FYDP to have it being about in agreement. It is in the outyears, I think the big difference you see is some of the assumptions that were made in how we are going to be able to recapitalize our SSBN force out in the mid 20's, and some assumptions that were made from the CBO versus some assumptions we made. They assumed a more expensive type ship.

    It is still far out there for us to really understand exactly what we need to do in buildout in that area.

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    The other difference also is in recapitalizing our DDG fleet. And one of the things we have to be mindful of is although they are relatively new now, when you build a 30-year shipbuilding plan, we need to consider how we recapitalize those. And so you will see another significant part of the difference is the assumptions we made in recapitalizing in the outyears. I think we are pretty close in the near years to what that number is, and we have got to continue to work that.

    As far as the price of the carriers, I will just say that I don't get an increase in my top line whenever a carrier is due. There is generally a significant spike spreading it out over those two years, plus there is more advanced procurement in there that allows me to be able to manage my funds more reasonably so that I can continue to buy a range of ships and not just have to focus on building, eating up all my account on one. Arch.

    Admiral ARCHITZEL. Admiral David Architzel. First of all, thank you very much for the opportunity. I have never had this opportunity before in my lifetime and I want to say it is a great honor to be here.

    To go on with what Admiral Crenshaw said, clearly with the carrier cost, the idea of split funding over the years, two years has been the case, both in refueling overhauls, new carrier construction allows us to buy other things than just carriers in the year that spikes occurs.

    There certainly could be things though look at in terms of acquisition strategies in the future that could be looked at. That is not something I, at present, according with the present plan and 313 ship plan we have in place. We are planning on 2-year funding for CVN–78, CVN–79 and CVN–80 over the 3 years when they come in 08, 1216, it would be 8, 9, 12 and 13 and 16 and 17.
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    In terms of the cost of the carrier, which comes up, we have, at present, the lead ship, which will come in in the terms of dollar costs, about $8 billion for the construction of the lead ship.

    There is also a nonrecurring costs that comes in up about $5.5 billion, which is broken down about between about 3.3 billion in R&D, which we have not expended R&D in a carrier since 1965 before the Nimitz class. This is to bring the Nimitz class forward to today and the other part of that nonrecurring cost is 2.2 billion in design to take the critical technologies we have put into the ship and bring them into the lead ship.

    To equate this ship in terms of costs of previous carriers, you would find if we equate it in same dollars as fiscal year 2005 dollars, that the lead ships come in around 7.3 billion in fiscal year 2005 dollars, as compared to bringing the 77, would be about 6.9 billion in fiscal year 2005 dollars, and a follow-on ship to 78 will actually come down to 300 million in the same fiscal year 2005 dollars.

    So pretty much stable cost to the carrier overall, but then as you go out and it escalates costs and as you go forward, you see increases. So often, as Admiral Crenshaw said, when you move a carrier in a year, you may have some $2 billion available for other things. But you will pay anywhere from $500 to $600 million in escalation costs by the movement of that ship a year.

    Mrs. DRAKE. Thank you. I yield back, Mr. Chairman.

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    Mr. BARTLETT. Thank you very much.

    Mr. Taylor.

    Mr. TAYLOR. Thank you, Mr. Chairman. And, is it Arch?

    Admiral ARCHITZEL. Yes, sir.

    Mr. TAYLOR. Admiral, no one has ever said that they enjoyed coming before this committee, kind of reminds me of animal house, when they hit the pledge and he says thank you, sir, may I have another.

    Admiral ARCHITZEL. I may say that tomorrow, sir.

    Mr. TAYLOR. Thank you for being here.

    Going back to my initial question—and I am obviously pleased to see that the goal is being set of a larger fleet, and a game plan is being put down, that the funding has been increased, although I think the chairman has excellent observations. You still have only at about what you need to sustain a fleet or a shipbuilding plan of that sort. You are probably only asking for half the funds that you need.

    But I want to go back to my observations in these yards, and what really jumped out at me in particular, I am going to guess that a laborer in that Chinese yard makes about one-fifth of what a laborer would make in Newport News or Ingalls or Bath. And yet the cutting of the steel, is done much more efficiently than I know at Avondale or Ingalls.
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    They are our only supplier. We are their only customer.

    What is it that the Navy is going to do—and the Marines, to an extent, to tell these guys you got to get more efficient? Because I really, you know, I have seen that they have come from nowhere. Same thing with the Hyundai yard, I think, is less than 30 years old. So they come from being a nonexistent entity to the biggest builder of commercial ships in less than 30 years.

    What are we doing to get better? Because, whether it is you, your predecessor, or your successor, always saying the price of ships is too high.

    I would think that is something that could change, you know, price of steel is not going to go down. Price of labor is not going to go down. So one way you try to—and price of the weapons systems probably won't go down. So the one variable is to get more efficient.

    So what is it that is being done on the part of the Navy? What proposals do you have to encourage the yards to get more efficient and what proposals are you going to throw at us? Because at the end of the day it means nothing if we don't pay for it.

    On the flip side, any initiative that comes from us if it is not signed off by you is looked at as pork barrel spending.

    Dr. ETTER. I think there are some positive things we are doing. And I would like to ask our Program Executive Officer (PEO) for Submarines to talk about the things that we are doing in the submarine area.
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    Admiral HILARIDES. Thank you ma'am.

    Sir, I appreciate the question.

    In the Virginia class, as we went for the second multi year, we recognized that shipyards need to invest today in those sort of facilities that make them look modern that are modern and allow them to bring their costs down and operate more efficiently.

    We don't put money in the budgets for those ships for productive sort of investments. And inside the larger corporations, the return on invested capital is pretty low for a shipbuilder.

    So what we did is we created a special incentive where a business case is put forward by the shipbuilder, says here is a way for me to change my building to make it more efficient to build the ship, and we pay half of his invested capital at the beginning from that incentive pool.

    He tells us where we are going to see the savings and how we will measure it. And we watch those savings accrue. If they accrue, once they are achieved we pay the second half of the incentive, and in fact, his capital investment is paid off by the government, and it is paid for with savings out of the construction funds for the ship.

    If he misses his targets on the savings, then he has to pay us the incentive back. That has worked very well. We have used about 40 million of that on the Virginia class. And we believe we have achieved about $300 million in cost reduction across the rest of the ships in the class. And we are helping the ship builders achieve the kind of efficiencies you are talking about.
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    I believe that PEO carriers and PEO ships are both looking at that and incorporating it into their contracts as well. It seems to me that is one of the principal things we can do to help them get that internal capital investment they need from the larger corporation, is we need to incentivize them to make that investment.

    Mr. TAYLOR. Madam Secretary, what if anything on the surface side have you done toward that goal?

    Dr. ETTER. We do have programs there, and I would ask Admiral Hamilton to address those.

    Admiral HAMILTON. We have a group called the First Marine International (FMI), who has done a benchmarking study of shipbuilding yards across the United States and across the globe over a period of several decades.

    FMI has recently provided a benchmarking study that shows significant increases in U.S. yard capacity relative to 1999, the last benchmark taken.

    FMI has provided each of our yards with a prioritized list of things that they could do from a facilities standpoint to increase their efficiency and productivity. I have had the opportunity to read those lists as a subset of looking at the entirety of shipbuilding, and work with the PEOs of the companies involved.

    In our contracts, we have incentivized some of the production efficiencies. And you have seen that play out in the land level facility at Bath Iron Works, for example, or over the last several years where they have driven production manhours out of DDGs, about 200,000 manhours a ship, based on increased automation and increased use of the land level facilities rather than the constraining ways of the past.
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    FMI has also been helping the gulf yards recently, I think, through the opportunities that unfortunately accrue based on the damage from Katrina and Rita.

    And in the reconstitution of the yards, following those two horrible storms, which wreaked such havoc on the gulf coast, there is an opportunity, a silver lining inside this black cloud to invest in the right things, in Pascagoula, in Avondale, in Gulfport, to make the yards in that sector more efficient as well.

    FMI has given us that laundry list and is helping the yards down there work their way through that as well.

    Mr. TAYLOR. If I may, Mr. Chairman.

    Specifically, because I am aware that the corporate headquarters has come to you looking for some help.

    From a distance, it looks to me like the corporate headquarters is asking for more things that contribute to the bottomline of their quarterly report than to the long-term viability of that yard. Now, again, this is from a distance.

    But I would think if they were coming to you asking for machines that either are more accurate, faster, less labor intensive, that someone who has had the goal of being a competitor in making ships for a long time, that is what they would be asking for.

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    So my question is to what extent are they asking for those things, and to what extent are they just asking things that make the next quarterly report look good?

    Admiral HAMILTON. Congressman, in my view, the industrial base has a dual responsibility to become productive and efficient for the American taxpayer, and also to satisfy their shareholders. And that is a complex balance that often requires a complex strategy.

    Certainly in the gulf yards, as we work through shipbuilding contracts that have——

    Mr. TAYLOR. If I may, Admiral, they are asking for a handout.

    At the end of the day—this is an unusual circumstance caused by a horrible thing. But to a certain extent, it is a handout. It is above and beyond what they normally would have gotten, which I think puts our Nation in a position to tie some strings to that.

    So my question is, what strings, if any, are we attaching, so at the end of the day, those are better shipyards? These are my constituents. I want them to be busy.

    Admiral HAMILTON. Yes, sir, as we are working through supplemental 3 and supplemental 4 for Katrina recovery, we have been very active in crafting, with our friends on the Hill, the legislation which would permit us the flexibility to increase investment in facilities in the yards which will help relieve pressure on the shareholders' side of the share line in contracts. So if they become more efficient, the shareholders have less risk and we both win in that scenario.
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    Mr. TAYLOR. Okay, I have obviously put you on the spot. I didn't mean to give you a hard time. But I would like some specific recommendations that the Navy is making to those two yards that are asking for a handout, justifiably in the wake of something very bad that happened, but what are we doing so at the end of the day, those yards are more competitive, do a better job of making ships with the Navy and the Marine Corps than they would have a year ago, and in a better position to be working for you five to ten years from now?

    Admiral HAMILTON. Yes, sir.

    Mr. TAYLOR. Lieutenant General Mattis, very quickly, a couple of questions dealing with the Marine squadrons that are going to be set up, I am going to submit them for the record. You were kind enough to give us a couple days of your time last spring when you saw home port Pascagoula, all I would ask as you are considering sites for those units, I detest waste. It burns me up that a brand new base is going to be closed down. It burns me up that housing that has hardly been used is going to be shut down. Barracks that have hardly been used.

    If the Navy is going to stand up this unit, and if it involves in any way new construction anywhere, I would sure ask that the Marine Corps take a look at that area which has the Escatawpa River, the Pascagoula River, the Pearl River, the Mobile Bay, the Barrier Islands, I would think it would be very good riverine training environment, and installations that have already been paid for by the taxpayers. And I sure hope you would keep them in mind as you are looking for a home for these units.

    General MATTIS. We will, Mr. Taylor. We will take the question for the record. We will work with Navy together in order to give you an answer.
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    Mr. BARTLETT. General Mattis, are you comfortable that the shipbuilding plans support the expeditionary warfare requirements for your people? Is there enough amphibs, for instance?

    General MATTIS. Mr. Chairman, let me say that as we look at the era we are entering, we think very few people initially—initially next 5, 10, maybe 15 years, can take us on at 15,000 feet in the air or on the high seas. If someone tries to, they will become a fugitive and the U.S. Navy, the greatest Navy in the world, is going to kill them. It is that simple.

    As we look at the kind of enemy we are up against, we believe the landing forces, field marines, naval forces have an increasing role. The Marine Corps has a need for 30 operationally available amphibs, that means ready to sail at any time.

    You noticed the numbers are going from 34 to 31 to 30 in the plan. CNO has given his word that he will have those 30 operationally available amphibs. Now we don't have historical data that says we can maintain the ships at that level of readiness. The Navy has not got some radically new ideas about how to maintain ships. So we take them at their word on that. I would tell you that we don't want to be dominant in the Naval forces and irrelevant, where we face an enemy ashore that we are unable to go after because we have reduced our capability to land SEALs and Marines and go after them at the very time we can use the U.S. Navy's dominance in the high seas, basically as maneuver space. We need ten operationally available big deck. And we would be gravely concerned at less than ten LPD–17s, that great ship made down in Mr. Taylor's district.
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    This has to do with the number of vehicles we can carry, the amount of ammunition we can carry. And we think that—we salute the Navy's effort, Admiral Mullens' effort to try and kind of stabilize this and come up with a plan. He is asking for our input on it. We are giving him that input. I meet with him tomorrow morning at 7 o'clock. And I think we are going to work out a way to make certain the Navy is relevant for the Global War on Terror (GWOT) that we are fighting that brings this elite Marine Corps that you have funded over the years against the enemy.

    Mr. BARTLETT. All of the these plans for the future recognize some level of risk.

    Of the four usually cited risk levels, red line, high risk, moderate risk, and low risk, with the number of ships that are planned for the future and with your anticipation as to their availability, what do you think, risk level we are assuming for your expeditionary forces?

    General MATTIS. Sir, when we are in a fight and we talk about risk, we want to know who takes what risk and for how long. That is how we define that risk.

    We believe that we would be, for a major combat operation, where we need to land two expeditionary brigades as an assault echelon, that as we look at it overall in terms of what aviation support we would have, Naval surface fire support from the Arleigh Burke and the DD(X) and the amphibs that we would probably be in the vicinity of moderate risk, playing off one against the other. And in these fiscally constrained times, although I understand that we should simply be bringing the requirement to you, we also have to dance with the tune that we are playing and marry the times we are in and not goldplate anything, make certain we are keeping our demands on the Navy requirement to the absolute minimum.
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    With the addition of the MPF(F) maritime preposition force of the future, we will have the operational shock absorber to rapidly reinforce the assault echelon. But what we are missing in the assault echelon, we believe we will be able to transfer from the sea base and go after the enemy and sustain our effort against them.

    I would say it is moderate, sir.

    Mr. BARTLETT. Each of those risk levels is a continuum. In that moderate zone, are you closer to low or to high?

    General MATTIS. Mr. Chairman, now you know why Marines drink alcohol.

    Sir, I believe if you take, for example, we take fliers, and you take, if we have to land any of the number of persons, probably one we have not planned on, but history has taught us we will do, if you look at the number of hours we have before we get our artillery ashore, the Navy's efforts with the Arleigh Burke and with the DD(X) will give us the naval surface fire we believe we need in conjunction with air fires until we can get our artillery ashore and get it up.

    During some hours, it would trend toward higher risk. Overall, I would say it is at moderate risk and trending down as the DD(X) capability comes on line.

    In terms of lift, again, with less than ten LPDs this beautiful fighting amphib, we would be at significant risk with less than——
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    Mr. BARTLETT. Significant means near high.

    General MATTIS. Yes, sir.

    Mr. BARTLETT. We are not adding a fifth risk level.

    General MATTIS. However, with MPPF(F) coming on as a rapid augmentation the reinforcement—again, there are so many moving parts, sir, you have to look at a specific time and for how long we have that risk. I don't want to raise an alarm signal that can't be prudently given to you and announce it.

    Mr. BARTLETT. Understand. Can you tell us, for the record, what we need to do so that you are at mid range moderate and not trending toward high for some of these circumstances? Could you do that for the record?

    General MATTIS. Yes, sir.

    Mr. BARTLETT. What we would need to give you so you can do that.

    I had asked three questions in my opening remarks. I am not sure you answered them, so I will ask them again to see if we can get an answer for the record.

    For fiscal year 2007 Navy shipbuilding budget request is 10.6 billon. This represents a nearly $2 billion increase over last year's budget, still the Navy estimates that executing the 313 ship plan would require spending about 14.4 billion annually for new ship construction programs.
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    Considering the current funding levels for shipbuilding procurement accounts are insufficient, even to maintain today's fleet of 283, where will the Navy find the resources to build and sustain 313-ship Navy, the CNO has determined is necessary to meet tomorrow's challenges?

    Dr. ETTER. I believe this is a requirements type question, so I am going to pass this to Admiral Crenshaw.

    Admiral CRENSHAW. Touchdown. Mr. Chairman, back to my comments about some of the things I am going to need to do, the four things I need to do.

    If I look at the budget as we projected it right now, the money is there to be able to purchase these ships and meet those time lines.

    Mr. BARTLETT. What are you not going to do if we don't raise the top line? Because the money is not there, unless we raise the top line, unless you take it from something else. So what will you not do if you are going to get the money to build these ships?

    Admiral CRENSHAW. Well, once again, I think the challenge I have is to maintain the buying power of the budget as we see it right now. We do that by doing the things that you talked about, maintaining, getting our efficiencies in the shipyards, in controlling our requirements on the ships and making sure that we have a clear understanding of what the costs are.
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    So what I will do is essentially use costs as sort of an independent variable as I look at these costs of the ships as they come in, we will be working with the acquisition community to decide where we need to make some capability trades in some of these areas. I will also be looking at what I need to do in my manpower accounts too, if there is pressure that starts, to get put on there.

    I think that in my operations and maintenance accounts, there are some areas there that as we look at some of the shore infrastructure and some of the things that we are doing there, I think that there is some places there where we need to become more efficient, and we will find some dollars there.

    I think the big challenge, though, is make sure that we get the best buying power for what we already have. And I think we can do it as long as we can control those costs, keep our manpower under control, keep the operation and maintenance costs under control.

    Mr. BARTLETT. When the Congressional Budget Office looked at your plans, they said that required annual budget of approximately $19.4 billion. When you add conversions and nuclear refuelings to this, it comes to 20.5 billion, which is just about twice where we are now.

    How are we going to do that? How do you account for this big discrepancy between what the Navy says it is going to cost and CBO says—they don't have all that bad a record, sir, of estimating what things are going to cost.

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    Admiral CRENSHAW. No, sir. In fact, I meet with them. We discuss pricing issues regularly on how we do. And as I mentioned I think and certainly in the FYDP we are very close to what we think the costs are going to be, some of these assumptions in the outyears.

    So we are just going to—I have put in some things in the Department to monitor the costs and requirements, things we haven't had in place before working with both the acquisition community and the requirements community and working very closely with our fleets and also with our joint partners. So we will, in some things, become more reliable on joint partners for things we have to do, and we will have to make sure we control those costs.

    Mr. BARTLETT. Admiral, do you think that your probability of achieving these shipbuilding goals, that the funds will be available is closer on the red line or high risk?

    Admiral CRENSHAW. I would say we are in the middle.

    Mr. BARTLETT. Between red line and high risk?

    Admiral CRENSHAW. Between red and high.

    Mr. BARTLETT. That is a good, honest assessment. This is not a level we are comfortable with, and we are going to help you to see if we can do something about that.

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    Last year on the 19th of July, it was a Tuesday at 3:30, the only one at the table who was there was Admiral Hamilton, and there were four people there, Kenneth Krieg, Admiral Clark, John Young and Admiral Hamilton were there; and at the end of the hearing, we asked them to take a blank piece of paper. The hearing was entitled DD(X) Next-Generation Multi-Mission Service Combatant Ship.

    At the end of the hearing, we asked you to take a blank piece of paper and, without cribbing from your neighbor, to write on it what you thought was a price too high for the DD(X) to afford, and all four of you very honestly wrote down a number that you thought was too high to afford.

    We had a second panel at that hearing. As it turned out, they couldn't testify until the next day because votes had run us late; but they already had prepared testimony, and in their prepared testimony every one of them said that the ship was going to cost more money than every one of you said was too high to afford.

    Now the question I am asking you all is, why shouldn't we take you at your word? You told us last year, these four people—Krieg, Admiral Clark, John Young and Admiral Hamilton—all four gave a number, a cost for the ship which they said was too high to afford. And all of the experts that testified later—whose track records we have checked, by the way; they are almost never high in what they think it will cost, often low rather than high—and each one of them said the ship would cost more money than you said was the number too high to afford.

    Why shouldn't we take you at your word that the DD(X) is going to be too costly to afford? That is what you told us on the 19th of last July.
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    Admiral HAMILTON. Mr. Chairman, my recollection of that very excellent hearing was that we gave you a number of what we thought that ship would cost if it were too much, and then we said and testified that day, and will testify again today, that the cost we are seeing for the lead ship and the follow ship, including fifth, with the cost cap that we now have in language, is below those numbers we said was too high.

    So we are on track within——

    Mr. BARTLETT. That is your testimony?

    Admiral HAMILTON. And on track to meet the fifth ship cost cap that you have given us in language.

    So we are feeling really good about that.

    Mr. BARTLETT. We will go back to see what the actual wording was of your answer. My recollection was that each of you gave a very honest answer, what you thought, that if the ship cost that much, we shouldn't buy it. The next panel all came in with numbers that were higher than that.

    And so we will look at your testimony today, your testimony then. But I really trust you, and if you said the ship was too expensive to afford, I think we ought to take you at your word. We will look at the present data.

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    Do other Members of the subcommittee have questions before we thank this panel?

    Mr. LANGEVIN. I have one, if I could, and it is a follow-on to the question that you were asking, that we addressed yesterday. But earlier this week this subcommittee held a hearing about the Navy future submarine force structure, and every member present that day voiced concern about insufficient construction schedules for the Virginia-class and long-term impacts on our submarine fleet.

    At that hearing Chairman Bartlett asked that the target force structure of 48 submarines represented a moderate-risk level as compared with the 1999 Joint Staff study, which recommended no fewer than 55 attack submarines and was based on a lower acceptable risk level. I believe, however, between 2020 and 2034 the submarine fleet drops significantly below the Navy's target level of 48, reaching as few as 40 between 2028 and 2029.

    If a fleet of 48 submarines entails moderate risk, how can we even consider reducing that level, especially given the investment of other nations in their naval fleets and undersea vessels?

    Admiral CRENSHAW. Thank you, sir. I think the 48 number, when you look at when we came up with that number, we took a variety of studies that had been done over the years. Some had more and some had less. Some of these studies are very sensitive to some of the assumptions you make, but looking at the spectrum of those studies and running the warfighting analysis, we found that 48—and I believe Admiral Mullen referred to it as a ''sweet spot,'' but I would say it was a spot where the studies converged on a couple of things.
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    I think when you look at the warfighting risk when you talk about the submarines and the 48 number, we look at how—what is our ability to meet our worldwide presence demand, which is 10 submarines, and how do we do that and what are the components of that. That comes up in two areas: number one, in the warfighting component as we look at the various war plans, and number two, sort of the steady-state Intelligence, Surveillance and Reconnaissance (ISR) requirements we have.

    So there is no doubt that as we go down from the 48, before we begin to come back up, we will begin to accept more risk in some areas. And as we looked at it, the risk is in the demand for the ISR piece and not as much in the warfighting. So our ability to service all of those ISR demands as we go down becomes more and more at risk. It is a question of availability of the submarines.

    One of the things that we have invested a lot in in the engineering of the Virginia-class submarine is the ability for us not to have to refuel it so that it is available more often than our 688-class submarines, and I believe the numbers that Admiral Mullen quoted me were about—the 688-class was in maintenance and unavailable around 40 percent of the time; I believe we expect the Virginia at somewhere between 10 and 20 percent to be unavailable. So we get better availability because of some of the investments we have made there.

    We have also mitigated some of that risk by changing the home-porting slightly of the numbers that we have on the East Coast versus the West Coast. That gets at our speed and the distance issue we need to get at.

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    So we have increased the odds when we run these models thousands and thousands of times. They give us the probabilities that you may be able to meet a particular level at any given time. So changing the balance of the fleet brings those odds up.

    Mr. LANGEVIN. Admiral, yesterday I believe Admiral Munns testified to the fact that right now our current submarine fleet is only able to meet about 60 percent of the mission request of combatant commanders at this time. Now, if we are only fulfilling 60 percent of the requests right now and that level drops down to 40 in 2028 and 2029, what does that do to our national security?

    Admiral CRENSHAW. To get the answer you deserve, probably I need to get you in a closed forum, but I think it would be sufficient to say here that one of the things that we do is receive requests from all the combatant commanders. Those requests are adjudicated by the Chairman with the assistance of the Joint Staff in working with us to figure out which ones need to be met, which ones are critical to be met, and then they apportion those out.

    One of the things that generally we look at is what other platforms are available and some of the things that the combatant commanders' requests can be provided by a variety of platforms, not only a submarine. So some of that is mitigated by assigning some of those requirements to other platforms.

    I think that is all I should probably say here, sir.

    Mr. BARTLETT. Thank you very much for your question. I think it was quite clear to us at that submarine hearing that the projected procurement schedule is determined a great deal more by the anticipated available funds than it was by the threat. And whereas the Navy had indicated that they really needed 62 subs and were going to be down to something like 40, the 62 subs was at low-risk.
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    Where are we when we are down to as low as 40 subs? I would submit that although the 313-ship Navy is a laudable goal, as Admiral Crenshaw indicated, the probability of us getting there is somewhere between red line and high-risk. So I think we are pretty much in the same place with our surface ships as we are with the submarines, that you all would have brought us a very different proposal if you had anticipated more money would be available; you are doing the very best you can with the money that you think will be there in the future.

    As you know, our committee is developing a parallel to the Quadrennial Defense Review, where we did not start out looking—we assumed enough money would be there to protect our Nation, and so we are going to take a look at what it would take at low risk to protect our Nation and see how this squares with Quadrennial Defense Review and where we go from there.

    Do other Members have questions?

    Mrs. Drake.

    Mrs. DRAKE. I think a lot of what the Chairman just said answers my last question, and that is, you want to build 313 ships and we want you to build them. Sometimes it sounds kind of adversarial, but I think we are all on the same side.

    The question is what the Chairman just said, how much does it cost to build those ships and how do we contain the cost of those so we feel there isn't misuse of funds or we are not overpaying for ships or whatever?
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    But the real question in my mind is, why don't we do incremental funding and determine what the cost of a shipbuilding plan for us is and spread that out over many more years rather than two years for an aircraft carrier? Because I think the determination about what level of risk you are willing to accept is really what level of risk is this Congress willing to accept.

    I think that is the real question, Mr. Chairman.

    Mr. BARTLETT. For the short term, incremental funding will certainly help us to get more ships. But if you look down the road, at the end of the day you really won't have more ships because there will be a tomorrow. If you are borrowing from tomorrow for today, you will be able to procure less tomorrow, I think is the answer to your question.

    It depends on what the threat is and when it is going to be is whether you want to travel this route or not. Money is money and there is not more of it because you used some of it up front.

    Mrs. DRAKE. That is the reason for the long-term plan, so you have a goal and you know what you are spending and why.

    Mr. BARTLETT. You have to spend more over the long-range plan. Incremental funding won't help unless there is more money in the system; am I correct?

    I see the panel nodding their heads.
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    Admiral CRENSHAW. Mr. Chairman, you are very correct, in fact, very astute to note that there is a misconception that incremental funding somehow allows us to buy more ships. What it does is, it allows us to be more stable and I think stability allows us to buy more ships because we are able to get better value, work with our partners here in acquisition to get block buys and do the smart business things that we can do. And that is certainly correct, sir.

    Mr. BARTLETT. You only get more if, in fact, that provides more efficiency.

    Admiral CRENSHAW. Got to be efficient and be stable in the requirement.

    Mrs. DRAKE. Doesn't it also affect the cost of the ship because of that stability for the industry?

    Dr. ETTER. The more stable the industry is, the more competition you have and the better we are able to negotiate for multiyear kinds of contracts and multiship contracts.

    So I think we have a lot of possibilities there, and one of the reasons that we are really pleased to have this 300-ship plan is that it really does allow us to have a plan for the future, which allows the shipyards to understand what our intent is and then to really look to that as they shape their workforce and their plans for the future.
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    I think it is very good for all of us. I think it is always, the further out you look, the more risk to a plan, but we feel very confident—as we look at the near-year plan, we feel very confident.

    We are spending lots of time looking at the various metrics that help us measure how we are doing on the ships that we propose to build in the next year, and of course, these are things that a year from now you are going to be able to see where we are. So it is not something that you won't be able to measure, but we feel confident with the ships we are proposing for 2007 that we do have adequate dollars in the budget for those.

    Mr. BARTLETT. Isn't it true we would have to be quite good at providing more efficiency with incremental funding to get, at the end of the day, one more ship out of this improved efficiency? I think that is probably a true statement. What you are likely to save there is hardly going to add up to another ship over the long haul.

    Dr. ETTER. It certainly does save us dollars. I think you are right, if you want to save a whole ship, that is significant.

    Mr. BARTLETT. Incremental funding is useful for leveling, and we do that to the extent that we can get the appropriators to go along with us.

    Dr. ETTER. Of course, it is extremely—before, for DD(X), we believe in order to have the competition for this one that we have to have the dual-ship strategy which allows us to start two in the same year; and that is a very important part in trying to control the cost, as Admiral Hamilton mentioned.
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    Mr. TAYLOR. Your target commissioning date for the first DD(X)?

    Admiral HAMILTON. 2012, sir.

    Mr. TAYLOR. What is the level of probability that is going to happen, 90 percent?

    Admiral HAMILTON. I would give it 93, 94 percent.

    Mr. TAYLOR. By sheer coincidence, I ended up sitting next to one of the design engineers about a year ago. He expressed frustration that the Navy kept moving the goalpost. One of the reason for the delay in the program was, the Navy would always think of one more change, one more new idea, all of them well intended, but all of them certainly kept moving the delivery date out into the future and running the cost up.

    If you had to say that ship is going to be commissioned in 2012, what percentage of that total design has the Navy signed off on to date?

    Admiral HAMILTON. We had a critical design review—the best critical design review I have ever been at, by the way—last September just preceding the Milestone B approval by Secretary Krieg. The technical warrant holders who provide the certification of our safety of design signed it off with no reservation, which is another remarkable achievement.

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    As we have gone through the cost reduction initiatives here, summer and fall, we have not fundamentally touched that critical design package in any meaningful way. We have taken some things out for space and weight, but we haven't fooled with the design package.

    Mr. TAYLOR. Again, going back to percentages, if I am lucky enough to still be alive and in this job sometime in 2012 when that commissioning takes place, how much does your design today look like the finished ship in 2012?

    Admiral HAMILTON. Ninety percent.

    Mr. BARTLETT. Thank you very much.

    Let me assess very quickly, because we are running out of time, a question that we—well, we will save that for the record.

    Let me ask your permission to give you questions for the record, if I may, because we may for our oversight responsibility need to get some information that is not in your testimony and not elicited by the questions.

    Dr. ETTER. Mr. Chairman, can I make one clarification? I would like to go back to the question that Congressman Taylor brought up about how we might help with the capital improvements in the shipyards in Gulfport, and we took that for the record and we will be glad to get back to you on that.

    But I would also like to clarify one of the things about the supplemental dollars that are currently in Supplemental 4; and the dollars that were approved for the Navy to use in Supplemental 3 and the dollars we are requesting in Supplemental 4, all of those dollars, it is $2.7 billion, those are for expenses that are the Navy's responsibility to pay. So this is for ship repair, it is for damage to ships that were there during the hurricane, it is to cover equipment that had been brought in to be put on the ships that was damaged. And so the Supplemental 3 and 4 dollars are a separate thing from the legislation that you were talking about that was contractor requested.
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    So I just wanted to make sure we have that as two separate issues. Thank you.

    Mr. BARTLETT. Thank you very much. I want to thank the panel very much for your testimony. Thank you for your service to your country. We will excuse you now and empanel our second group.

    I would like to welcome our second panel of witnesses: Mr. Paul Francis, Director of Acquisition and Sourcing Management from the Government Accountability Office; Mr. Ron O'Rourke, Specialist in National Defense at the Congressional Research Service; Dr. J. Michael Gilmore, Assistant Director of the National Security Division from the Congressional Budget Office; Dr. Eric Labs, Principal Analyst of the National Security Division from the Congressional Budget Office; and Mr. Robert Work, Senior Analyst for the Center for Strategic and Budgetary Assessments.

    We look forward to your testimony.

    Let us begin with Mr. Francis. The floor is yours.


    Mr. FRANCIS. Thank you, Mr. Chairman, Members of the subcommittee. I am pleased to be here to talk about the Navy's long-term shipbuilding plan. I will summarize my remarks and ask my statements——
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    Mr. BARTLETT. Without objection, all of your prepared testimony will be part of the permanent record and thank you for summarizing.

    Mr. FRANCIS. Thank you, Mr. Chairman.

    Today I would like to discuss multiple objectives that the Navy's long-range plan proposes to meet; second, the challenges that must be met to execute the plan; and third, ways the Navy can improve its ability to execute individual programs within the plan.

    Up front I want to recognize the value of the Navy's having prepared the plan. I look at it as a vehicle for discussing strategic shipbuilding issues before embarking on individual programs. This is much preferable to pursuing individual programs without a strategic direction in mind.

    My first point is to acknowledge the tension inherent among the different objectives of the plan, which include multiple missions, reduced manning, adequate presence, and a stable industrial base.

    One tension, for example, is that making demanding mission requirements on a particular ship can result in more costly ships that cannot be built in numbers desired for shipyard workload. The requirements to reduce manning can actually increase automation and sophistication, which can translate into higher ship acquisition costs.

    These tensions indicate the potential tradeoffs that will likely be needed in the plan. The key is to anticipate and make the tradeoffs early in the context of the overall shipbuilding strategic strategy. If the Navy starts more programs than it can finish, it may be forced to make tradeoffs in the future that it would not find acceptable today.
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    Second, the main challenge in executing the plan is keeping the supply and demand for funds in a rational balance that does not unduly sacrifice one objective to meet another. The Navy plan projects a supply of shipbuilding funds that will nearly double from 8.7 billion to 17.2 billion by 2011, and this will stay at high levels for several years to follow.

    The context for realizing this type of increase is rather daunting. Federal discretionary funds which include weapons system investments will continue to be squeezed by demographic trends over time. Other services are expected to significantly increase their investment budgets, as well, over the same period of time.

    Department of Defense (DOD) investment accounts have grown significantly over the past five years, and the future year defense budget anticipates procurement to increase another one-third over the next five years. DOD has already doubled its commitment to major weapons system investments in the long term from 700 billion to 1.4 trillion. So even with these increases, it has been hard for the Department to keep up with the demand for the current weapons systems.

    The bottom line is, under these circumstances I think it is hard to forecast large sustainable increases in shipbuilding, and this is not necessarily within the Navy's control. The Navy does, however, have the ability to control the demand for shipbuilding funds; yet this is a significant challenge itself. Cost has been particularly high for first-of-class ships, on the order of 25 to 30 percent our figures show.

    The shipbuilding plan calls for nine new ship classes to be built in the next ten years, compared with only four in the last ten. Cost growth has been a source of self-inflicted instability, and the plan will not be executable if past experience continues into the future.
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    I might just take a moment here to talk a little bit about DD(X). We have reviewed DD(X) for the past few years, and I have had the opportunity to look at a number of programs, and I happen to think DD(X) is a pretty well-managed program; but I think we are now at the beginning of the execution challenge for that ship.

    I think the engineering development models were a good approach to reducing technical risk, but we have got two or three that have not been finished, like the dual-band radar and the integrated deckhouse. So we will be mitigating those technical risks at the same time we are going through detailed design. There is not much schedule room in the detail design and construction phase for DD(X).

    Now, we have to deliver two ship sets of mission equipment instead of one for the dual-lead-ship strategy. Given all that, the Navy's confidence level in its current estimate is about 45 percent.

    I just want to offer that as DD(X) is not quite over the hump yet. I think there is quite a bit of challenge left in the program.

    My third point is there are several things the Navy can do to make its programs more executable. To control cost growth, it is important the Navy ensure programs have sufficiently high levels of knowledge before making programmatic, budgetary or contractual commitments.

    I have got a few more details in my written statement, so I won't go into ideas right now, but there are a number of practices we think the Navy can follow to make programs more executable.
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    I think, to maximize the amount of funds the Navy can devote within its budget to shipbuilding, it must continue to find ways to lower total ownership cost by reducing manning requirements and to improve operation availability of ships through means such as rotational crewing.

    A couple of closing thoughts on the issue of stability, which is one of the goals of the shipbuilding plan: As we make decisions on shipbuilding, we also have to keep in mind the government's overall interests. This involves preserving its ability to make decisions not only within the shipbuilding context, but within the larger DOD and Federal context. Stability at the Federal level is desirable, but can't be guaranteed.

    I realize this subcommittee has a genuine interest in ensuring the sufficiency of the shipbuilding investment, but at the same time, we must be careful not to make multiple investments and commitments to new programs that we might not be able to finish or that would preclude other choices the government may have to make. I say this without prejudice to shipbuilding as the same is true for future combat systems, tactical aircraft, missile defense and satellite programs. We must aim for stability, but be prepared to deal with instability.

    Mr. Chairman, that concludes my remarks, and I would be glad to answer any questions.

    Mr. BARTLETT. Thank you very much for your testimony.

    [The prepared statement of Mr. Francis can be viewed in the hard copy.]
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    Mr. BARTLETT. Mr. O'Rourke.


    Mr. O'ROURKE. Chairman Bartlett, Congressman Taylor, Congresswoman Drake, it is a pleasure to be here today. The Navy's five-year plan includes about ten ships per year, as it was noted earlier, but a lot of those are relatively inexpensive LCSs. In tracking out the LCSs, the plan includes 5.6 larger ships per year. That is less than what would be needed to maintain, over the long run, the number of larger ships called for in the 313-ship plan.

    The Navy's 30-year plan does not contain enough ships to fully support all elements of the 313-ship fleet consistently over the long run. Deficiencies relative to the 313-ship goal include one LPD, four cruise missile submarines, 8 attack submarines and about 26 cruiser and destroyers.

    The Navy says the 313 goal is a requirement for 2020 and that the requirement can change after that. Consequently, if the requirement goes down after 2020, something that looks like a shortfall after 2020 might turn out not to be a shortfall, but it is also that the requirement might go up after 2020, which would make the shortfall even worse. The Navy doesn't know which way the requirement might change after 2020, so this argument doesn't get the Navy off the hook. All we can do is take the 313 number and use it as the best guidepost that is currently available.
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    The Navy has noted the four things that it needs to do to execute the 30-year shipbuilding plan. If one or more of those four things don't happen and the Navy doesn't have complete control over them, then the Navy won't be able to procure all the ships in the 30-year plan. Remember that plan already doesn't have enough ships in it to fully support all elements of the 313-ship fleet consistently over the long run.

    Each of those four items poses a challenge for the Navy, and my sense is that the odds of all four of these things coming to pass are rather low.

    The committee two days ago held a hearing on the projected shortfall in attack submarines. Further down the road there is an even bigger projected shortfall in cruisers and destroyers. In light of the shortfall, the Navy at some point might restructure its cruiser-destroyer procurement by adding them to the plan or reducing the cruiser-destroyer goal from 88 to something less, or taking actions to reduce the average unit procurement cost of projected cruisers and destroyers. Regarding the last possibility, one option would be an 11,000-ton cruiser-destroyer that would be about 25 percent smaller than the DD(X), but still about 1,800 tons larger that the DDG–51.

    LCS procurement costs as presented in the budget are about 33 percent higher this year than a year ago. The Navy has explained that this isn't because the actual hands-on construction costs of the LCS have changed, but rather because last year's LCS budget presentation mistakenly excluded some costs that should have been included, such as Navy program management costs and inflation. This explanation raises potential oversight questions for Congress relating to the reliability of Navy budget submissions. Those questions are shown on pages 13 and 14 of my statement.
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    Regarding submarines, there are at least four options for supporting the submarine design and engineering base. One of these is to bring forward the start of the SSBN design effort to fiscal year 2007. This option shows promise for being able to sustain a critical mass of submarine designers for a number of years.

    Mrs. Drake asked about incremental funding. The proposals in the budget for incrementally funding certain ships, if approved, would add to precedents that had been accumulating since the early 1990's for incrementally funding selected Navy ships. The need to split-fund; CVN–78 is financially tied to the decision to split-fund the first two DD(X)s. If the first two DD(X)s can be fully funded in fiscal year 2007, then CVN–78 can be fully funded in fiscal year 2008.

    Accelerating the ninth LPD from fiscal year 2008 back to fiscal year 2007 is an item on the Navy's unfunded requirements list. One option for doing this, particularly if fiscal year 2007 funding is limited, would be to accelerate the ships' procurement to fiscal year 2007 and split-fund it in 2007 and 2008.

    Last, there are also options for using block-buy contracts to help reduce the cost of Navy ships. Block-buy contracts could be suitable for CVN–78 and 79, the first five DD(X)s, the LCSs, the first three LHA(R)s and some auxiliary and sealift ships. Block-buy contracts could reduce the cost of ships being procured by a few percent. Although that might not seem like a lot, in the case of the two aircraft carriers, for example, that could translate into hundreds of millions of dollars in savings.

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    Mr. Chairman, this concludes my statement, and I will be happy to respond to any questions the subcommittee might have.

    Mr. BARTLETT. Thank you very much.

    [The prepared statement of Mr. O'Rourke can be viewed in the hard copy.]

    Mr. BARTLETT. Dr. Gilmore.


    Dr. GILMORE. Mr. Chairman, Congressman Taylor, my colleague, Eric Labs, and I appreciate the opportunity to appear before you today to discuss the potential cost of the Navy's new 313-ship long-range shipbuilding plan. Our ongoing analysis of that plan and of the Navy shipbuilding in general indicate the following:

    The Navy's new shipbuilding plan projects average annual costs for the 2007 through 2011 future years defense program of about 14.9 billion in 2007 dollars. All of the figures that Eric and I are going to be throwing at you today are going to be in constant 2007 dollars; that is about 27 percent higher in real terms in the funding the Navy has received in the past 6 years, an average of about 11.6 billion.

    As has been noted several times in the discussions in the earlier panels, CBO's estimates are higher for the period through 2011. We are about 10 percent higher than the Navy's, implying annual average cost through 2011 about 40 percent greater than those in the past 6 years. And then in the outyears the difference does get larger. Through 2035, CBO estimates the Navy shipbuilding plan will cost about 20.5 billion annually or about 70 percent more than the amounts that have been provided for the past 6 years for shipbuilding. Thus, our estimates are higher, and the reasonable question would be, why is that.
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    In estimating costs of the Navy's new shipbuilding plan, CBO used both Navy data on actual cost for ships now under construction, and many of the ships that are going to be built through 2011 are now under construction, so that is part of the reason that the difference through 2011 is smaller and historical relationships between the cost and weight of ships. To apply those relationships to ships to be built in the far term, for which the Navy has yet to develop even a notional design, CBO needed to make assumptions about the size and capabilities of those future ships, and Dr. Labs will discuss those, and hopefully that will explain why our costs are higher in the outyears.

    In contrast, senior Navy leaders have stated in order to pay for all the ships in their plan, the Navy would need to meet strict cost goals for major ship types, including ships that are currently under construction. Those goals would require the Navy to reduce the cost of ships now under construction and, in other cases, allow little or no growth in the costs of prospective new ships relative to the costs that they would replace. That would be pretty much unprecedented if it occurred.

    For ships that would be built in the far term, the Navy derived its cost targets by fixing the proportion of the constrained shipbuilding budget that could be devoted to a particular category of ships. So the Navy derived cost targets for those future ships where the bigger differences between our estimate and the Navy's are by assuming there will be no real growth in the shipbuilding program, allocating shares for particular types of ships of that constrained budget, adding up the total amount of dollars that would be available for the different kinds of jobs, dividing by the number of ships they would be buying; and that is the cost goal that they say they would have to hit in order to afford their program.
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    Therefore, those cost goals for future ships are not based on a specific design, size or set of capabilities for those ships.

    Dr. Labs will provide some additional detail.


    Dr. LABS. Thank you, Mr. Chairman, Congressman Taylor. I appreciate the opportunity to be here today to discuss CBO's analysis of the Navy's new shipbuilding plan. I will spend just a few minutes elaborating on some of the details that underpin points that Dr. Gilmore mentioned.

    The Navy estimates that the new construction alone for its new shipbuilding plan would cost an average of 14.4 billion a year in 2007 dollars over the next 30 years. CBO estimates that the new construction alone would cost 19.4 billion, as stated here.

    It should be further added that the Navy's procurement plan for buying new ships committed in its long-term report does not sustain the Navy's requirement for a fleet of 313 ships. Specifically, the plan does not maintain at least 48 attack submarines between 2020 and 2033; the four SSGNs that are part of the 313-ship requirement are not replaced when they retire in the 2020's; the requirement for 62 guided missiles is not met in 2028 as the Arleigh Burke-class DDGs retire and are not replaced at the same rate, and the plan does not include a tenth LPD–17 in the near term or replacement for the LHD in the MPF squadron in the far term.
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    Including all of these ships would require an average of 21.6 billion a year in new construction alone through 2035 and an average of 23.8 billion per year including nuclear refuelings, LCS mission packages and service combatant modernization.

    With respect to specific ship programs, CBO, as Dr. Gilmore stated, relied mostly on historical relationships between cost and weight. CBO estimated the lead ships for the DD(X) destroyer program would cost 4.7 billion each, while the average cost for seven ships would be about 3.6 billion each.

    I would like to take a moment here and make an observation. Admiral Hamilton was stating that he was confident that Navy could meet its 2.3 billion cost cap and cost target for the fifth DD(X). The Navy stated during the time of the DD(X) hearing last summer that a DDG–51 today, built at a rate of one per year, would cost 1.8 billion. If that were escalated to the same year as the fifth DD(X), 2011, that would cost 2.1 billion. That means the Navy is saying that in the case of DD(X) you will have a 10 percent increase in cost, 2.1 versus 2.3, but a 63 percent increase in weight. That underpins the skepticism that CBO has had in some of the Navy's cost estimates and why we look at these historical cost and weight relationships.

    The Navy's plan to reduce the Arleigh Burke-class destroyer beginning in 2022 is a major component of this analysis. CBO assumes that the ships would displace 11,000 tons, full load, larger than the Arleigh Burke, but smaller than the DD(X), and cost an average of 2.2 billion each. The Navy's cost target is an average of 1.9 billion each in 2007 dollars.

    CBO assumed the future CG(X) cruiser that the Navy will begin purchasing in 2011 would use the DD(X) hull consistent with what the Navy states today, and that has had about the same displacement as the DD(X). The average cost for 19 ships would be 3.3 billion, CBO estimates, compared to the Navy's cost goal of 2.7 billion apiece. Consistent with the Navy's 2007 budget submission, CBO assumed the average cost for the sea frame portion of the littoral combat ship would be about 300 million each and two mission modules at about 70 million each would be purchased for every LCS.
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    For submarines, CBO assumed the Navy would not be able to reduce the cost of the Virginia-class submarine or the following class slated to start in 2020; and in fact, the real growth that naval shipbuilding has been experiencing would cause the price for attack submarines to increase an average about 3.0 billion apiece, compared to the Navy's goal of 2.1 billion apiece.

    The replacement for the Ohio-class ballistic missile submarine is one of the most uncertain parts of this analysis. The Navy plans to begin buying those vessels in 2022. CBO assumed those would be about twice the size of a Virginia-class submarine, or about 4,000 tons smaller than an Ohio-class submarine. It would carry 16 ballistic missiles rather than the 24 carried by the Ohio-class. Based on historical cost and weight relationships and accounting for the real growth in the shipbuilding industry, CBO estimated that the average cost of those ships would be about 6 billion each, compared to the Navy's goal of 3 billion each.

    For the CVN–21-class aircraft carrier, CBO relied on the Navy's estimate for the first two CVN–21s because using historical cost and weight relationships would have produced an estimate that was less than the Navy's for the first two ships of that class. For the remaining ships, CBO used the Navy's estimate for the first two CVN–21s but excluding the nonrecurring detail design and adjusting for the real growth in the naval shipbuilding industry. The result is an average cost of about 9.6 billion for each aircraft carrier, which is virtually the same as the Navy's cost goal of an average of 9.4 billion per carrier in 2007 dollars.

    Finally, with respect to amphibious ships, CBO estimates the average cost for amphibious ships is 2.3 billion apiece, compared to the Navy's cost goal of 1.4 billion each.
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    Thank you, Mr. Chairman. I will be happy to answer any questions you may have.

    Mr. BARTLETT. Thank you both for very good testimony.

    [The joint prepared statement of Dr. Gilmore and Dr. Labs can be viewed in the hard copy.]

    Mr. BARTLETT. Mr. Work.


    Mr. WORK. Mr. Chairman, Congressman Taylor, thank you for the opportunity to return to talk about the 313-ship Navy. I really don't have much to add in terms of the detailed analysis of my panel members so I would like to limit my prepared remarks for talking about the shape of the plan itself and what I refer to as its executability.

    I believe the requirement for the Navy's 313 ships is sound within the constraints they were working toward, which essentially was trying to meet the demand signal for the GWOT and plan for two MCOs, major combat operations, in 2020. If you take a look at the 313-ship fleet, it looks remarkably like the 1997 QDR. In fact, in every single one of the major categories they are off by maybe one or two, essentially a 300-ship Navy. So after almost a decade of debate and studies, essentially the fleets are remarkably the same. That reflects the continuity of the two major theater war (MTW) planning scenarios.
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    The most striking difference between the two plans though, sir, and gentlemen, is that it is dramatically more expensive for the surface combatant part of the fleet. If you compare the 1997 300-ship Navy with this 313-ship Navy, the costs of the surface combatant fleet are astounding, the increases.

    Even if—regardless of whether there is any cost increase, the Navy's numbers themselves, they are just about ready to spend 20 billion on the LCS program counting the modules, 71 million to build 26 DD(X)s and CG(X)s, and then 111 billion, using their cost figures, to recapitalize the DDG fleet in the 20's. These are very big costs. This plan, I would characterize it as a plan made primarily by surface warriors for surface warriors. Of course, since the end of the Cold War, the surface combatant community has been in ascendence, so when you see that, the impact on the plan basically explains its outlines.

    Essentially what the Navy does is build cheap ships very quick up front, and then stops building them all. Stopped building auxiliaries, stopped building medium-size amphibs, stopped building big deck amphibs, stopped building LCSs for periods between 7 and 16 years, depending on what it is. They don't need to start to rely on the Ticonderoga-class cruisers until 2021, but because of the huge cost of the CG(X) and DD(X), they are starting to build them now, almost over 10 years in advance. That means that the requirement will actually go over the 88 ships by 2019 or 2020 before they moderate and come down.

    The result is this roller coaster going up to 329 ships in 2019 and then the bottom drops out of the plan over the long term, and you only have 293 ships by the Navy's plan in 2031, which is only 11 more than they have today.
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    So is the plan executable. In my judgment, it is very unlikely. I want the Navy to succeed, but they plan for zero top line growth and make five key assumptions:

    R&D goes flat and stays flat. If we are in the midst of a competition with China, it is very difficult for me to understand how it would remain flat over a 30-year period.

    Operations and Maintenance (O&M) costs will go down and remain flat. There is only $78 million for the modernization program of the DDGs in there. That is 62 ships, and that only funds modest improvements. To keep the ships to the end of their 35-year service life, that is going to have to go up. So it is hard for me to see O&M costs remaining flat.

    Personnel costs remain flat. I think the Navy has an extremely good plan, but it is really out of their hands. There are a lot of other outside influences that may impact.

    Each one of the stretch goals for their ships has to be met simultaneous; as said, ten new classes.

    And the lever essentially is going to be in the aviation procurement account. They are going to freeze the shipbuilding account and try to take the lever out of aviation.

    Now, the likelihood of all five of those assumptions happening simultaneously, I think, approaches zero. But let us assume that they do. I don't see how this committee in the next decade would say how does this preserve the industrial base and design base for potential competition with China. We have no real new ships in design except for the CG(X), and it is a derivation of the DD(X). We have talked about the impact on the submarine design base.
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    So this is a plan that doesn't preserve the design base, and that is very worrisome to me. The Navy defines stability as coming up to a number and sticking to the number. If we don't build many classes of ships for almost a decade, it is hard to understand how GD and the other shipbuilders, Northrop Grumman, will be able to maintain their workforce in that tough period.

    So, from a competitive strategy standpoint, I want this plan to succeed, but it is very difficult for me to foresee how it would.

    Also, the fleet appears very imbalanced. The questions you directed to General Mattis, the fleet lift capacity for Marines is the only component of the battle fleet that has dropped since 1997. There was a requirement to lift 5.5 Marine brigades in the 1997 QDR, and now it is down to four. It is on the very edge, I would say, turning to the red line.

    Moreover, the plan for MPF future ships is very, very in the early stages and untested, and they are going after that instead of proving amphibious capabilities like the LPD–17, which, in my mind, is the finest amphibious ship in the world.

    There are all sorts of alternative competitive approaches that would make this plan more executable, but I will leave that for any questions that the panel may have. I have covered them in my detailed testimony.

    Thank you very much. I welcome your questions.

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    Mr. BARTLETT. Thank you very much for your testimony.

    [The prepared statement of Mr. Work can be viewed in the hard copy.]

    Mr. BARTLETT. Let me now turn to my colleague, Mr. Taylor, for his questions and comments.

    Mr. TAYLOR. Gentlemen, I appreciate what you have to say. I think you have shot a lot of holes in the Navy's testimony. I am not really pleased to hear that.

    Why do you think what you have to say is so different from that what the Navy had to say just a few minutes ago? Are they telling us what they want us to hear?

    Mr. WORK. Sir, in my prior life as a Marine, I spent a lot of time in the Pentagon and spent a lot of time trying to figure out how these long-term planning things go. My answer to that whenever anybody asks, sir, is that the system is designed to be optimistic.

    You cannot be pessimistic in the environment of planning because there is always a danger that if you give up capability or money, that it will just go to another service. So, generally, all of the planning is based on optimistic assumptions and pretty optimistic fiscal forecasting. Generally what happens is that over time fiscal reality or other things set in and the plans constantly have to change.

    I think the requirement that the Navy has come up with is extremely defendable in the analysis that underpins it, based the criteria they were asked to build toward are very, very important, but I believe that most of their assumptions, and they tell us, they are very forthright, they are very optimistic on their assumption.
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    Mr. FRANCIS. Mr. Taylor, I don't have the detailed analysis to offer on the individual ships, but I can make two points. One is on the demand for money. I think that gets to, we have seen a fair amount of cost growth on lead ships, and for the plan to execute, you have to assume virtually no cost growth, and we haven't seen that.

    I was somewhat unpleasantly surprised by even something like the littoral combat ship, which was relatively low tech, to be experiencing cost problems now. That in my mind raises questions: Are we going to bring in a DD(X) and a CVN on budget?

    The other thing is the supply for funds which again I will say affects more than the Navy. I happen to know the Army, to buy future combat systems, is expecting its procurement budget to go from 11 billion now to 20 billion in 2011. That is the same period of time the Navy is expecting its big spike in shipbuilding.

    So I think the other element is beyond the Navy's control, which is, is the money going to be there even if they can execute their individual programs.

    I would cite those as two differences, in our view.

    Mr. TAYLOR. Mr. Gilmore, you look like you want to say something.

    Dr. GILMORE. I would be repetitive of what the other panel members have already said. There is a real incentive to be optimistic, particularly in the outyears, in the way the Pentagon plans. That is what the Navy is doing, I think, and that is what the other services do as well.
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    Mr. TAYLOR. Let me ask you guys, since you belong to the accounting end and the decision-making end, going back to what I said about—which I don't say happily, Chinese yards that have labor one-fifth the cost of labor in Mississippi and Louisiana, more efficient machinery for cutting steel, Korean yards that have labor about the same price, are apparently a decade ahead of us in technology, in my estimation.

    Why isn't the Navy holding their supplier base to a higher degree of accountability when it comes to finding these efficiencies?

    Mr. O'ROURKE. I can venture an answer to part of that question.

    I think what I heard you saying was, why aren't they holding the base more accountable. A lot of the suppliers are sole sources, so what leverage does the Navy have over them?

    Mr. TAYLOR. If I may, Mr. O'Rourke, I will tell you what the leverage is. I can name one of the other body who is a candidate for President, who has publicly said he would just as soon buy his ships overseas. We have competitors who are building very good ships. His vote counts; the last I counted, the average Senator is significantly more influential than the average Congressman. That is a strong incentive to get better.

    Mr. O'ROURKE. If the suppliers think that is a credible threat.

    Mr. TAYLOR. The second thing is, who is looking past the end of their nose, quite frankly. Those guys that I saw in China and Japan and Korea are looking past the end of their noses. They have a goal. They want to be good at this 5 years from now, wanted to be great at it when they broke ground 30 years from now.
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    Again, we can do lots of talking, put money in the budget, and at the end of the day, we don't get involved in the day-to-day negotiations for contracts. That really has to come from within the Navy, within the administration.

    Mr. O'ROURKE. I am only saying that the tools that the Navy has at its disposal for gaining bargaining leverage over the suppliers in near negotiations with the suppliers is limited. They can't threaten to take ships away because we are down to like ones and zeros in the shipbuilding account. They can't threaten to give the business to another guy, because a lot of them are sole sources and a lot of those sole sources are in somewhat fragile condition already, some of them might already be in a situation where they might be close to a decision and say, heck, I don't want to be in the business any more.

    So my point was only to say that I think I understand what you are getting at in your question.

    I also sympathize with the Navy because I don't think they have too many levers they can use when they go into those negotiations because of the situation we have gotten into.

    Mr. TAYLOR. What I don't hear too much is, if you guys won't do it right, we will get back in business. In my 16 years, I don't think I ever heard that being said, company X, you are making more money in national missile defense. If you don't want to do this, tell us now.

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    Mr. O'ROURKE. I agree. The public sector got out of this shipbuilding business in the early seventies. And if the supplier base felt that that was a credible threat that the government would get back into the shipbuilding business, then it would be a source of bargaining leverage. But the supplier base would have to feel that that was a credible threat and not simply an idea that was thrown out.

    Mr. WORK. Sir, one of the impacts, the possible unintended impacts of moving to the LCS—which I think is an exciting program and will introduce modularity and open architecture and all of those things—is that those are going to be going to built at Tier II yards. So the big yards, really, when you look at this plan, it really isn't any improvement. And I like to talk in terms of what I call average shipbuilding equipment, which I define as the average cost of the basic SSN attack submarine in production, basic major surface combatant in production, and the basic medium amphib in production, which are the three primary ships built in the big yards.

    And it seems to me what has happened is the cost of the surface combatant has gone up and has thrown the whole thing out of balance. So it keeps you from going to two submarines per year. It makes you stop building big-deck amphibs, and that has a huge impact on the yards. So they have no incentive to make it better because they are looking next decade and they are saying, wow, I am not going to build any medium-size amphibs for eight years, maybe ten.

    Mr. TAYLOR. If I may—and listen, I like your points. I think it is your job to come here and tell us maybe things aren't as rosy as what the admirals just told us and generals just told us.

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    To any of your knowledge in the years that you cumulatively, that you guys have dealt with this, has anyone in a position of authority from within this administration or a previous administration ever said, you guys got to get better; we are willing to work with you, we are willing to help you with the cost, but you guys got to get better, and meant it?

    Mr. O'ROURKE. The one example I can think of in recent years that has come close to that was the study on alternative fleet architectures by the Office of Force Transformation by Admiral Cebrowski's people, because he had a few phrases in there about opening shipbuilding up to international competition.

    And that is the closest that I have seen anybody in an executive branch agency or policymaking agency raise that idea in a government report.

    Mr. TAYLOR. Okay. Thank you. Thank you, Mr. Chairman, I didn't mean to monopolize.

    Mr. BARTLETT. That is fine. Mrs. Bordallo.

    Ms. BORDALLO. Thank you, Mr. Chairman. I had some questions of the previous panel, that I am sorry I had to leave for a few minutes, I had a meeting. But let me ask this question. I believe we need to get to building two Virginia class submarines a year, sooner rather than later. And the current target date of 2012 doesn't meet the need when you look at our operational demands in the future.

    So I am interested to hear from our Congressional Budget Office witnesses and from Mr. Francis of the GAO whether you believe the U.S. industry can create efficiencies in production that would enable us to produce two subs per year prior to 2012 at the 2 billion per sub price tag? What are the biggest obstacles in doing this sooner, in your view?
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    Dr. GILMORE. I don't believe that efficiencies are going to reduce substantially the costs of the submarine relative to where they are at. History doesn't indicate that that is going to happen.

    I can also remember, and I used to work in the Pentagon, that for about the last ten years, we were always going to be building two Virginia class attack submarines a year at the end—towards the end of whatever future year's defense program was in play any particular time. And when the next year came along, that date slipped.

    And now I think we are at a point where they say they will go to two a year in 2012; is that correct?

    Dr. LABS. 2012.

    Dr. GILMORE. So that is consistent with this history at slipping the date at which the Navy would be able to afford the submarine. So what that indicates to me is the primary problem is budget constraint.

    You know, efficiencies have always been sought. And in response to your earlier question, I can remember discussions when there were reviews of programs, shipbuilding programs in other programs, major defense acquisition programs, there were always explanations of incentives that were being provided in order for the producers, the shipbuilders, or whoever else to be more efficient. And certainly I would agree that those efficiencies have brought about savings.
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    However, they have not got us into—in any particular program, they have not had the effect of enabling us to buy two ships for the price of one or anything close it to.

    So, budget constraints.

    Mr. O'ROURKE. If I could add something very quickly to that from a slightly different perspective. I agree that the principal impediment is money. If we had the money, we would have done this a lot sooner.

    Now, the other part of your question was, are there efficiencies that can be achieved prior to 2012? And my answer is yes. The Navy's goal is to take about $400 million out of the cost of each submarine to go from 2.4 to 2.0 with funds in 05 dollars. So when we see—in real budgets these numbers will all be inflated; but to keep it in 05 dollars, that's the goal.

    Moving from one ship per year to two ships per year will get you almost one-half of that reduction in my view. In other words, it will save somewhere between 100 and $200 million simply by the rate effect, going from one to two, and absorbing your fixed overhead costs at the yard better.

    The remaining half of that improvement, the other $200 million, the Navy is going to try and get through design changes. And those design changes are not going to be ready for some time. So you would have to wait until the other half of those savings were ready to kick in.
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    And the Navy is saying that those design changes won't be ready to be implemented until boats that are procured in the fiscal year 12 time frame. But you can get upwards of one-half that reduction in cost by going to fiscal year 09 simply because of the rate effect of going from one to two, and by putting these ships under a multiyear contract like the ones that we are already building, but making more aggressive use under that multiyear contract of the economic order quantity, or EOQ authority, that is permitted in a multiyear contract.

    The Navy is using the EOQ authority right now under multi-year procurement (MYP). But you can make greater use of it. And that extra piece, along with the rate effect, will get you one-half of that decrease. So can they get to 2.0 in 09? I don't think so. They can get halfway there.

    And as I said at the hearing two days ago, for every year that you accelerate the start of two per year procurement, the submarine force will bottom out one boat higher.

    If we start at two per year in fiscal year 12, it bottoms out at 40.

    If we start at 1 year earlier, it bottoms out at 41.

    If we start at 3 years earlier, in fiscal year 09, it bottoms out at 43, which is a little closer to that 48 number that you are trying to hold to. And the span of time that you fall below the 48 is reduced from 14 years to about 8.

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    Ms. BORDALLO. Yes.

    Dr. LABS. In our analysis, when the rate does go to two a year, we assume it does have a modest rate effect of about ten percent, which is consistent with what Mr. O'Rourke said. So that, in the near term, would be the primary way they can achieve some degree of efficiency by spreading that fixed overhead between two submarines rather than one.

    Mr. WORK. Ma'am, if I could put one caution in, this is the first time in 50 years that we haven't had an active submarine in design. And the British just went through a very gut-wrenching thing with their submarine program where—the Astute—once they stopped the submarines for a while, and when they tried to build it, they had to come to the United States to help them out.

    So even though I believe going to 40 against a requirement of 48 is troubling, if we were to spend any money between now and 2012, I would recommend that you start a submarine design effort which would maintain our design base so that if we get into a competition with China and it really starts to heat up, we would be able to ramp up.

    So the design—and this was a conclusion, ma'am, that the British made after they looked at what happened in the Astute. They said, given industrial capacity and design base, they would have in hindsight—would have kept their money in the design base.

    Mr. FRANCIS. Ma'am, I would like to add I do think there would be some savings in amortizing the overhead over a larger number of ships. And there is probably some efficiencies to be saved if we are not barging components back and forth to the different shipyards. But I think at that point, you get back to what Mr. Taylor was bringing up. I think we are relatively limited in terms of the efficiency of the yard itself, in terms of how it fabricates and so forth. That is a longer-term investment.
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    Ms. BORDALLO. Well, I guess, gentlemen, the three of us here, Chairman Bartlett and Congressman Taylor and myself, just came from these awesome shipyards, you know, one of the biggest in the world in Korea; and we saw the way they operate and all the automation they have. And I mean, I guess we are just a little excited here and we want to know that our country is keeping up with some of the building. Their inventories are awesome. They are building, I don't know, Mr. Bartlett asked those questions, you know, so many submarines and so many this and so many that. I don't know whether it was maybe exaggerated, but they said it. And by the looks of the plant and the employees and the work that was going on, I believe that they meant what they said.

    So that is one of the reasons that I think we are, you know, wondering just how—and I am looking forward to touring a U.S. Shipyard. I have never really toured extensively a U.S. shipyard. So I am looking forward to that. But thank you very much for your answers.

    Mr. BARTLETT. Thank you very much. I appreciate you mentioning the shipyards in Asia that we visited. The largest one in the world in Korea, Hyundai Heavy Industries, was really quite impressive. If I remember the numbers, they said they had 12,000 people. I think that is less people than we have at Newport News. In Newport News, we repair some ships and we build a half of a submarine and a fifth of a carrier a year.

    In their yard, they build these big rigs for drilling out in deep water, the oil rigs. They build military ships. They build 70 container ships a year. They launch one about every 5 days if that is all they are doing is building container ships, but at least one a week on a yearly basis. They are building these other things. They build all their engines in-house with those people, some of them as big as a house. I could comfortably live in some of those engines, they were three stories high.
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    And, you know, there is just a big, big discrepancy here between what they get out of their workforce and what we get out of our workforce. And Mr. Taylor, I think, was particularly impressed in the Japanese yard and the Korean yard; we did not feel one grinder. He felt a little more at home when we got to China. They had some grinders in China.

    The Navy has argued that split funding and incremental funding of ships will only save money over time if they lead to greater program stability.

    Does the historical record of Navy shipbuilding indicate that this is the case? In other words, was the Navy shipbuilding program more stable in the period before the government adopted the full funding policy?

    Mr. O'ROURKE. I have a report on this, so what you are doing in asking the question is getting to the history of the full funding policy which was imposed by Congress on DOD back in the late 1950's. And it was done for a number of reasons, policy reasons, that Congress felt were important to the budgeting process.

    Back then, before the institution of the full funding policy, it was common practice to fund ships and other things through incremental funding. And that was seen as disadvantageous to good budgeting practices, but also possibly disadvantageous to the stability of the programs itself, because it left those programs vulnerable to Congress not approving that next pot of money in the next year and the year after that. And if Congress didn't approve that next pot or cut it back, you could have instability that way. So there are pluses and minuses to this situation.
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    In terms of how incremental funding can contribute to the stability of Navy shipbuilding or produce savings in Navy shipbuilding, my view is that it centers mostly on avoiding disruptions in programs that would occur if you had to accommodate a budget spike associated with fully funding a very expensive ship in a single year, a ship like an aircraft carrier or a large-deck amphibious ship. If that was going to produce a spike in that one year that the Navy would have a hard time accommodating, they would have to push other programs to the right and left of it to get it out of the way. That could produce a disruption in the production schedules of those other programs.

    By split funding or incremental funding that very expensive ship and smoothing the cost out, you can possibly avoid the need to move those other things to the right or the left. That would preserve the continuity of the production schedules for those other programs and avoid the cost increases that would have resulted if you had pushed them out of the way. And if you want to count those avoided cost increases as savings, then that in my view is the principal way that incremental funding can create savings.

    It is not going to turn one ship into two. It is not going to turn six ships into ten. But maybe over the course of 3 or 4 years' worth of shipbuilding, it might be enough to turn 19 ships into 20, for example. Particularly if the disruption is on a larger program that would add a few hundred million dollars of cost to that ship, that few hundred million dollars of avoided cost increases could now go toward an auxiliary ship or an LCS or what have you.

    But that in my view is the mechanism that is at work, or can be at work, under which incremental funding can produce savings or what you might regard as savings, and thereby, at the margin, increase the number of ships. It is not a huge change, but it is a change at the margin.
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    Mr. BARTLETT. Do you think that our current incremental funding those, for these really large platforms, is adequate for achieving that goal?

    Mr. O'ROURKE. That gets a little bit to what Representative Drake was asking earlier: Why don't we fund them over four years instead of over two years? The full funding policy would require us to fund it in a single year. So by going to split funding, we are already bending the rule.

    And we have been bending the rule and using incremental funding——

    Mr. BARTLETT. You are arguing that we ought to bend the rules to achieve maximum efficiency, so I am asking are we adequately doing that?

    Mr. O'ROURKE. We have in this budget proposal a use of split funding for every instance where you might think it could produce a benefit, the ships that you might want to use split funding or some other form of incremental funding on to produce this kind of benefit or the very expensive ships that are procured typically once every few years. And the ships that best meet that definition are aircraft carriers and amphibious assault ships. And the budget that is before us proposes to use split funding for the carrier and for the amphibious assault ship.

    It also proposes to use split funding for the first two destroyers, which does not really quite fit the definition in the same way. But they are doing it to set up an even start date for those first two DD(X)s, so you might want to consider that like a one-time exception.
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    Mr. BARTLETT. Thank you very much.

    We are very cognizant of the challenge to our design base, and I want to ask the panel: If we were to design a small diesel sub that Taiwan would buy, to what extent would that preserve the essential elements of our design base? We have to do something with them. As you point out, they can't just sit. They will vegetate. They will go away. To what extent could we maintain a vital design base if we decide to design and build these little diesel subs that Taiwan wants?

    Mr. O'ROURKE. Just very quickly, first of all, you have to determine who is going to design it. If it is going to be designed by people other than Electric Boat, then you are not really doing anything.

    Mr. BARTLETT. Suppose Electric Boat does it?

    Mr. O'ROURKE. If you are going to do it at Electric Boat, that project could help preserve a lot, but not all, of the skills associated with designing nuclear-powered submarines. In particular, it is not going to sustain the skills associated with the nuclear part of the submarine design effort. But it will sustain many of the other skill groups, at least for a time.

    And the other option I think that people may want to investigate, which I mentioned in my opening statement, is bringing forward into the fiscal year 2007 time frame the start of design work on the next SSBN. That is a nuclear-powered submarine. And that is going to preserve all of the skill groups at a fairly substantial level for a number of years.
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    Mr. WORK. Another option, sir, would be to possibly design or ask for two more SSGNs. The first four were C–4 plumbed Tridents, and now it would be design work required if you did a SSGN conversion for another couple SSGNs. That would maintain some design work.

    And then you could possibly start, pull up the SSNX or, using Tango Bravo type technologies, start a design effort. And then I fully endorse what Ron is saying. Another option would be possibly in conjunction where the British ship, that would work out, pulling up the SSBN. So there are ways to tackle this problem without going to diesels.

    I am not certain whether the diesels would preserve the specific skills for nuclear submarines that would be needed. I just am not sure on that.

    Mr. BARTLETT. But it would preserve a meaningful percentage. We would have to do something to preserve the nuclear component of it.

    Mr. O'Rourke has already given us the answer to this question, and that is, what do you think the risk is that—the probability is that the Navy is going to meet their plan with the assets that are going to be available to them? Mr. Work has said that is pretty close to the red line. And I was wondering if the others agree that it is pretty close to a red-line risk.

    Do you think they are going to get there, 313 ships, with the budget they are talking about? Let's just go down the—let's start with Mr. Francis and go down the line.
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    Mr. FRANCIS. Mr. Chairman I would say they would be very close to the red line for two reasons. One is I think it is a long shot to realize those types of increases in the budget they need.

    And again, if we look at historical experiences, the ships are taking—they cost more than what we estimate. So I think those two factors, I think there is a high probability of a mismatch between the demands and supply.

    Mr. BARTLETT. Mr. O'Rourke.

    Mr. O'ROURKE. I view it, in your terminology, high risk. As I said in my opening comments, they need to do four things to make the plan work. And I think the odds of all four of those things coming to pass are rather low, in part because they don't have complete control over those four——

    Mr. BARTLETT. I think you said they were near zero, which would be red line, wouldn't it?

    Mr. O'ROURKE. He said near zero. I said rather low. I will still stick with rather low. But I want to emphasize part of the reason I see it that way is because the Navy doesn't have complete control over those four things. Some of these things are going to be controlled in part by outside parties.

    Mr. BARTLETT. Dr. Gilmore.
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    Dr. GILMORE. I will simply say no, they are not going to be able to execute their plan within the resources.

    Mr. BARTLETT. So you are red line.

    Dr. GILMORE. Yes.

    Dr. LABS. I would agree with everything that is said here, Mr. Chairman. It is possibly conceivable that if they buy enough LCSs in the near term they might hit a version of 313 somewhere in the 2000.

    Mr. BARTLETT. If they buy enough LCSs they can get there?

    Dr. LABS. Right. On a temporary basis. But come 2020 when the cost goals meet the actual reality of building ships, you will fall below that again.

    Mr. BARTLETT. The next question might be a little more difficult to answer. It may be out of your lane actually, but give it a try.

    Mr. FRANCIS. Will you start on the other end of the table on that one?

    Mr. BARTLETT. Recognizing that there is probably close to a red line, probably, that they are going to meet their procurement goals, what is the level of risk that this will provide to our Navy in meeting the challenges of these two regional—major regional contingencies and a couple of other scraps simultaneously? At what risk level would you put that? Between low and red line?
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    Mr. WORK. Because there are some alternatives, there are hedges, sir, that are available, I would say that there is moderate risk.

    Mr. BARTLETT. Moderate risk.

    Mr. WORK. For example, if the DD(X) and CG(X) turn out to be far more expensive than the Navy anticipates, we have 84 Aegis verticle launch system (VLS) combatants that are bought and paid for that will be extremely young, and when the last one hits the fleet in 2011 the average fleet will only be 13 years with a 35-year projected service live, and modernization to those 84 ships, those 84 ships will already be the finest battle line in the world by a wide, wide margin, and improvements to those 84 would allow the Navy to readdress and we could redesign another large ship.

    The submarines, I think, is approaching red line simply because of the design. If we don't do something about the design, I believe that that could be very, very bad.

    And on the amphibious shipping side, a lot depends on whether to bet on the MPF—which General Mattis talked about—plays out. And that one I think is risky. I think that one is high risk.

    Mr. BARTLETT. Dr. Labs.

    Dr. LABS. Mr. Chairman, doing that kind of an assessment requires making a lot of assumptions on where you think, for example, the Chinese Navy modernization and expansion might take place over the next 20 years.
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    But even a relatively, perhaps conservative view of that, given sort of what the implications of the Navy's long-range plan in the 2020 time frame when you hit 40 submarines or less, if we don't get to two by 2012 certainly puts it into a—I am not sure exactly what risk category I put it in, but it would not be low.

    Mr. BARTLETT. Dr. Gilmore.

    Dr. GILMORE. I would simply point out if the Navy proceeds in the way the Navy has in the past and the other services do, which is to basically stick with the major elements of this plan and buy them in lesser numbers because the costs turn out to be higher than we had hoped for and the budgets don't turn out to be as high as they had hoped for, then we could go to a fleet that is smaller than the one we have today, which a number of people pointed out is rather small. And in that case there would be a number of risks.

    And one thing you would want to consider is what is the value of the forward presence we would be able to provide with that smaller fleet, because it will be reduced, as well as what that would mean for warfighting. And it may sound, I guess, a little bit counterintuitive, but for warfighting the risk might be a little bit less, depending upon what kind of ships you had to forgo with comparison with forward presence reductions that would occur. So it wouldn't be a pretty situation.

    Mr. O'ROURKE. I view the 313-ship fleet as a moderate risk fleet. If they fall short and they get a smaller fleet, then I think you are moving in the direction of higher risk.
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    And I think there are certain elements of the 313-ship plan that might be fairly close to the high-risk zone already. And so if those elements of the 313-ship plan in particular fall short, then those elements of the fleet could be in particular danger of moving into the high-risk category.

    Mr. BARTLETT. Thank you.

    Mr. Francis.

    Mr. FRANCIS. Mr. Chairman, I think if the Navy can't execute the plan, you look at changing the plan.

    So, for example, you could cheat and get 313 by having 313 LCSs, which means you are not necessarily in the best shape to defeat the threat.

    We also know there are things that are being done in ASW that is not platform centric, so these numbers—there are other ways to meet the threat. So I come back to I think the value of having a plan like this is saying if it looks like we are going to have execution problems, you can change the plan. And I think there are alternatives available that says that can keep you out of high risk, even if you can't get all the ships you want to get out of this plan.

    Mr. BARTLETT. Thank you. We have got a list here of the panel that was convened on Wednesday, July 20, just the day after we were supposed to be—the afternoon when the four Navy people up there gave us their estimate, their number of what would be too expensive for the DD(X) to afford. The list was exactly the same as today's list of panelists, and you were at the table in exactly the same configuration.
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    I think that those of you who gave a number for the DD(X), what it was going to cost, every one of you had a higher number than the number the Navy said, which would be too expensive to afford.

    Now my question is, do you think that the Navy has gotten enough better in this intervening ten months that you would change that estimate?

    Dr. GILMORE. No. We wouldn't. Our estimate, which was probably the highest one here——

    Mr. BARTLETT. I am disposed to trust the wisdom of the Navy and to take them at their word that this ship is going to cost too much to afford. And they gave us numbers. All four of them wrote down a number that was lower than any of the numbers that you gave us. You have a pretty good track record, rarely estimating high, and I got a ''no'' from Dr. Gilmore. Do I get the same ''no'' from Mr. Francis, Mr. O'Rourke?

    Mr. O'Rourke.

    Mr. O'ROURKE. What I would say is the following. I trust the Navy when they say they have taken some costs out of the ship. They have taken about 265 million out of the cost of the lead ship. And they testified a couple weeks ago they have taken 214 million out of the recurring costs of all the follow ships. And I trust them when they say they have taken that cost out.

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    Now, at the same time, they have not reduced the cost of the ships as shown in the budget. So they now have more wiggle room on the cost of that ship than they did a year ago.

    That said, I still think there is a good chance the ships will wind up costing more than what they are budgeted to cost in the budget, even with that extra wiggle room.

    Dr. GILMORE. I would like to add one thing. Our estimates are based on historical experience. And what has happened historically, well, costs have gone up, adjustments have been made, content has been taken out of the program, capabilities have been taken out of ships, requirements have been revised, efficiencies have been sought.

    So what we see playing out here, in my view anyway, is history. And it is completely consistent with history. And so that is why we see no reason to change our estimates because they are based on exactly the same kind of experience: costs growing, adjustments being made.

    So until we see something that sharply diverges from historical experience, we wouldn't change our estimate. We would say, yes, that is a good thing, that mitigates growth that otherwise might not have occurred. But there are more problems that are going to be encountered, and our history will play out and we would stick with our estimates.

    Dr. LABS. Mr. Chairman, I would just reiterate some of the observation I made in my oral statement, which is that the Navy panelists stated they were confident they could meet that cost cap for the fifth ship at 2.3 billion and which would be in 2011 dollars. If you used the Navy's own numbers for what they said a new DDG–51 would cost, it would cost $2.1 billion in 2011 dollars. And the difference between light-ship displacement between the two is 63 percent. I find it difficult to believe that in the fifth ship you are going to get a 63 percent increase in weight, but for only 10 percent additional costs.
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    Mr. WORK. And, sir, I can remember the way I answer this question to people who ask this all the time, is that when the DD(X) program was announced, if you remember, sir, the Navy announced that the cost of the ship would be 1.4 to $1.6 billion. Now, my two friends and colleagues, Eric and Ron, I was at a seminar and they said, no, it is probably going to be over $2 billion. They were off by a little, but they said $2 billion, we think. And they said, no, you are wrong. We are going to build it by modules. We are going to electrify the ship. It is bigger, pipe runs everything straight.

    Well, now the Navy says the first ship is 3.3 billion. And my two esteemed colleagues are saying based on what you have told us now, we went over. So given the history of the Navy estimates and my colleagues, I would go with my colleagues.

    Mr. BARTLETT. Thank you very much. Mr. Francis.

    Mr. FRANCIS. Mr. Chairman, I believe last year I said that the Navy's estimate, which was at 3.3 billion, I felt was an intelligent estimate. But as I mentioned earlier, I think it is at a 45 percent confidence level. So even though there has been some trade-offs made, I believe my position would be the same.

    I view the Navy's cost estimate as the floor, and the cost estimates of my colleagues as maybe the ceiling. So I expected the true cost of the ship to be something above the 3.3. I think if you go to an 80 percent confidence level, the ship goes to about 3.6 billion.

    Mr. BARTLETT. I have one last question. And it is kind of a philosophical one, and you may want to respond for the record. I know that Mr. O'Rourke has suggested several times that instead of the DD(X), we might be thinking about a smaller ship which would reduce costs and permit us to build more ships.
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    Today's ships have enormous capabilities compared to former ships. And our ships are not only getting more capable, they are getting larger, which means they are getting even more—more capable. And I am wondering—very few of these ships will have all of their capabilities used in any one engagement, because they are so capable and have so many capabilities.

    To what extent ought the Navy to be looking at the possibility of smaller ships with less but perhaps adequate capabilities, that would—because at the end of the day, numbers do have some relevance that would permit them to achieve more ships that might not be as good, as totally capable as the present ships they are conceiving, but maybe good enough, and maybe better when you are considering that you would have more?

    Mr. FRANCIS. Mr. Chairman, I think the Navy does have to look at those things. We come back to the DD(X) example, and I think a few years ago, the initial outlook for that was about a billion dollars a copy and we are going to build 32 ships.

    Over time, we got, I think, more intense about the mission. Each ship became more capable. And we ended up with seven ships very capable. I think to maintain that balance between mission, industrial base, presence and manning, we have to look at maybe asking less of each ship so you can make some of your other goals. Otherwise we are going to optimize, I think, for very low quantity of very capable ships, which is not going to be a good balance for an entire fleet.

    Mr. O'ROURKE. It goes back to what I said in my opening remarks. There is a basic tension right now between the requirement in the 313-ship plan for maintaining a force of 88 cruisers and destroyers, and the ships that the cruisers and destroyers—we actually have planned for procurement because there just aren't enough of them to maintain 88 over the long run.
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    And so to me that raises the possibility that at least one of the following three things will happen—possibility that at least one of these things will happen.

    That they are either going to put more of these DD(X)s, CG(X)s, DDG(X)s back into the budget, which would leave less money available for other things, or they are going to take the 88 requirement number and reduce it, or they will explore possibilities for reducing the average cost of their projected cruisers and destroyers, which could involve going to smaller ships.

    So I think at least one of those things may happen. Because if you don't, you will not resolve the tension between the 88-ship goal and the fact that there are fewer than 88 ships in the plan on a 35-year basis, a lot fewer.

    Mr. BARTLETT. Thank you. Dr. Gilmore.

    Dr. GILMORE. Well, I mean it is sort of an issue of a high-low mix. It is the approach the Air Force has taken for years. They have had a large number of relatively less expensive planes, like the F–16, and a smaller number of F–15s, and they are doing the same thing which they hope—with the F–22 and the Joint Strike Fighter.

    So I think that, you know, the Navy is actually trying to pursue that kind of an approach by buying a combatant ship. But if you accept the Navy's assumptions on budget constraints, they haven't gone far enough. So they are going to have to find a way to buy cheaper ships, and that means smaller and less capable ships if they are going to be substantially——
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    Dr. LABS. I would basically echo what Dr. Gilmore says. The plan, the 313-ship plan does have substantial shortfalls in a number of categories, not the least of which are surface combatants. And it seems to me that given the constraints that they are going to be under and the actual levers that the Navy can control, as Mr. O'Rourke has stated, there are some of these things on cost that—the assumptions that are planned—that they may not have that much control over. One of the things that they do have a reasonable amount of control over is the design and capability of the ships that will compose the plan.

    Mr. BARTLETT. Mr. Work.

    Mr. WORK. I believe that I think it is inevitable that the Navy will go toward a more—a less expensive large surface combatant. And I believe when you have 84 ships as capable as we have bought and paid for, that buys you a lot of time in this competition, and that the model may be the LCS where you have a modular hull that you may not put so much stealth in, but it is designed for producibility. So that we can build three or four per year, and have it be able to take a CG combat system or a DDG combat system, and therefore I think you would be able to move toward that. And it would also allow the design base, again, to start a new one.

    So I think it is inevitable, simply because when the average cost of your cruisers and destroyers are approaching $3 billion, you just simply can't afford them over the long run.

    Mr. BARTLETT. I want to thank the witnesses very much for very excellent testimony and dialogue in the question and answer.
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    I want to thank you for your testimony and for your service to your country. And we stand in adjournment.

    [Whereupon, at 6:40 p.m., the subcommittee was adjourned.]