WASHINGTON -- The nation's two largest defense contractors are in such weak financial health that the Defense Department had to ease off a recent demand that they return $1.35 billion in excess payments for the canceled Navy A-12 Stealth attack plane, senior defense officials said yesterday.
"They didn't have the cash; in order to pay, they'd have to sell off assets of the aerospace industry," Eleanor R. Spector, the Pentagon procurement director, told the House Armed Services investigations subcommittee.
Mrs. Spector and other officials insisted that the Pentagon was not bailing out the contractors -- McDonnell Douglas Corp. and General Dynamics Corp. -- as a result of Defense Secretary Dick Cheney's decision Jan. 7 to cancel the $57 billion aircraft project.
Mr. Cheney had ordered an end to all work on the A-12, which was intended to be the Navy's radar-eluding replacement for carrier-based A-6 warplanes. He cited the program's multibillion-dollar cost overruns and schedule delays and accused the two aircraft manufacturers of being in default of a $4.8 billion development contract.
The Pentagon's decision Feb. 5 to defer repayment of money owed to the Navy "is not precedent-setting, nor does it have any broader implications for the way the department conducts its business with the defense industry," Mrs. Spector said.
The firms also were granted a deferral because they were supplying the U.S. military during the Persian Gulf war, Mrs. Spector said.
Members of the panel remained skeptical over whether defense officials had done a thorough review of the contractors' ability to pay back $1.35 billion, which the Pentagon's own auditors found was paid by the Navy for substantially uncompleted work. Lawmakers also railed against the entire A-12 project, which they contended was mismanaged from the start.
Their anger was fueled by Mrs. Spector's disclosure that she was given only one day to evaluate the competing bids for the A-12 contractin January 1988. The lawmakers, pointing to an early sign of trouble, said officials failed to question why McDonnell Douglas and General Dynamics could submit winning bids that were more than $1 billion below the competition.
The agreement between the firms and the Navy to delay the repayment of $1.35 billion until December 1992 -- at the earliest -- was signed Feb. 5, the same day the Navy sent a written request for the money and then promptly received a request for a deferral. The quick action was calculated to minimize damage to the firms in the credit markets, GAO officials testified.
"This agreement is only three pages," said an astonished Representative Dennis M. Hertel, D-Mich. "It's simpler than buying a house.
"This is effectively a loan of $1.35 billion," said Representative Nicholas Mavroules, D-Mass., the subcommittee chairman.