'Corporate Welfare for Weapons Makers: The Hidden Costs of Spending on Defense and Foreign Aid' by Willian D. Hartung

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ty in using this facility to help ease some of

loans. Although that arrangement would no

the financial and tax flow burdens of enlarg-

doubt make the fund more attractive to

ing NATO."15 In reality, the impact of DELG

potential borrowers, it would also increase

has been modest. In its first two years in oper-

the risk of default on those loans. If countries

ation, DELG guaranteed one loan of about

with risky credit ratings are allowed access to

$17 million (subsidy value) to support a sale

guaranteed loans without risking their own

by the U.S.-based AAI Corporation of

funds, a flood of questionable loans could

unmanned aerial vehicles to Romania. Under

come back to haunt U.S. taxpayers.

DELG's original authorizing legislation, the

At a recent meeting with the Defense

costs of operating the program were sup-

Policy Advisory Committee on Trade (a panel

posed to be financed by fees charged to client

of weapons industry executives that provides

countries that were using the fund's services,

confidential advice to the secretary of defense

not by general tax revenues. But the original

and the U.S. trade representative on defense

$500,000 that Congress appropriated to start

export policy), Secretary of Defense William

the fund has been exhausted. Absent an

Cohen indicated that he would try to accom-

unlikely rush of new loans for arms exports

modate the industry's demand that DELG be

"fixed" instead of terminated.17 Such a move

under the program, the only way to keep

DELG running is by providing an infusion of

to loosen the criteria for providing loans for

taxpayer funds to cover administration and

arms exports could end up costing U.S. tax-

staff costs.16

payers billions of dollars.

The DELG fund has been used sparingly

Covering Bad Loans--Bailing Out Arms

Companies and Their Clients. Since 1991 U.S.

because skeptics like former senator Dale

taxpayers have been forced to pick up the tab

Bumpers of Arkansas and Sen. Paul Sarbanes

for roughly $10 billion in loans for arms sales

(D-Md.) inserted a requirement that coun-

and military technology that have been either

tries using the program would have to pay

forgiven for political reasons or written off

the "exposure fees" on DELG loans. The cal-

for financial reasons. That sum represents a

culations of exposure fees, which help pro-

significant hidden cost of the government's

vide a reserve against future defaults or delays

loan programs for arms sales. The most cost-

in loan payments, were based on the credit-

ly episode occurred when the Bush adminis-

worthiness of the client nation. Most of the

tration forgave $7 billion in outstanding

eligible countries chose not to pay the poten-

Foreign Military Sales (FMS) loans to Egypt

tially significant exposure fees up front,

to reward Cairo for providing political sup-

which is why the program is in its current

Taxpayers end up

port to the U.S.-led coalition that fought the

predicament.

1991 Persian Gulf War. Other major write-

In early 1999, on the basis of the pro-

paying twice:

offs included roughly $2 billion in govern-

gram's performance and a critical review by

once for forgone

ment-guaranteed loans that were provided to

the General Accounting Office (GAO), Under

Iraq to buy technologies related to arms pro-

Secretary of Defense Jacques Gansler decided

proceeds from

duction prior to the Gulf conflict and $7 mil-

to terminate the DELG program. Represen-

the sale to foreign

lion each for bad loans to the West African

tatives of the arms export lobby, including

nations of the

nations of Niger and Senegal.18

the director of the Aerospace Industries

Association and officials of several major

To address the chronic problems associat-

still-useful equip-

exporting firms, objected strongly and

ed with loans for arms exports--in which pol-

ment and a sec-

argued that it would be better to "fix" the

itics often trumps sound economic analy-

ond time for the

program than to eliminate it. The "fix" that

sis--Congress voted last year to close down

the industry had in mind would allow gov-

the Pentagon's FMF loan program and offer

purchase of even

ernments that use DELG loan guarantees to

all future FMF assistance only in the form of

costlier replace-

pay their exposure fees out of the money they

grants.19 The FMF decision, the troubles in

the DELG program, the stockpiling of large-

receive from their U.S.-government-guaranteed

ment items.