Acquisition ReformProject Team Report

July 2008Ministry of Defense, Japan

Background 1

Project team meetings 2

Countermeasure to problems regarding commercial import 3

Life-cycle cost management 4

Cost reduction goal 5

Incentive contract 6

Promotion of outsourcing 7

Measures related to Foreign Military Sales 7

Acquisition based on joint operation 8

Evaluation of research & development program 9

Central and local procurement 10

Internal division of labor in equipment selection 11

Contents

１

Background

Chaired by Minister for DefenseTwo interim reports（July 2004, March 2005）

Establish Acquisition Reform Promotion Project Team (Oct. 2007)

With those change, need for further promotion

of Acquisition Reform

* More sophisticated and complex equipment increase unit price. * Increasingly severe fiscal conditions and rising unit price decrease volume of procurement; further increase unit price, cause vicious circle of rising cost.

⇒Need for cost reduction.

* More transparency and impartiality is needed.

* Contract based on negotiation and classified information

⇒Need for accountability.

Sept 2003 Comprehensive Acquisition Reform Committee was organized.

Problems regarding import;Padding with forged foreign manufacturer’s quotation, etc.

Project Team Meetings

The Project Team held ten meetings for agenda given below.

1st meeting 18 Oct 2007 Minister’s Directive for promotion of Acquisition Reform2nd meeting 26 Nov Issues about trading companies in commercial import3rd meeting 13 Dec Goal for cost reduction (1)

Life-cycle cost management4th meeting 19 Dec Goal for cost reduction (2)

Immediate measures for problems about commercial import Review of Aircraft Selection process

5th meeting 26 Dec R&D related issues6th meeting 18 Jan 2008 Incentive contract

Third party audit for local procurement7th meeting 30 Jan Measures for problems related to problems in Import

Further Improvement of Foreign Military Sales8th meeting 15 Feb Promotion of outsourcing

New evaluation process for R&D 9th meeting 10 Mar Strengthening life-cycle cost management

Review of central and local procurementAcquisition based on joint operationInternal division of labor in equipment selection

10th meeting 28 Mar Discussion on Report draftPublication of the Report

２

Countermeasure to Problems regarding Commercial Import

３

* New special contract clause regarding submission of the original quotation and/or invoice issued by foreign manufacturers and direct inquiry to foreign manufacturers（FY 2008）

* Increase of Equipment Procurement and Construction Office （EPCO） import liaisons in the United States （from 3 personnel to 10）（FY 2008）

Strengthening Cost Survey Function

* Create environment accessible for foreign manufacturers（guidance in English, briefing to foreign manufacturers, etc.）

* Study and compare various contracting method including one with partial outsourcing （FY 2008）

Direct Contact with Foreign Manufacturers

* Establish section which comprehensively handles commercial import cases in EPCO（FY 2009）

* Employ professionals and experts from outside （Certified Public Accountant, ex-trading company employees、etc.）

Reorganization of EPCO

* Double penalty for padding from FY 2008Severer Penalty for padding

４

Life Cycle Cost Management

* LCC(Life Cycle Cost) : Defense equipment cost for all through the life cycle from concept phase to disposal phase

* LCC management has been done partly for some defense equipment.

Current Situation

Disposal

Actual LCC

ProductionConceptio Disposal

Estimated LCC

Operation＆Support

Development

Production

DisposalDisposal Disposal Disposal Disposal Disposal

Operation Production

Production

ProductionProduction

Production

Conception

Development

Conception

Development

Conception

Development

Conception

Development

Conception

DevelopmentDevelopment

Production

Conception

Production

Conception

Development

LCC estimate in each phase

The end of FY: 2007 LCC management procedure and common calculation method JFY 2008: Trial LCC ManagementJFY 2009～: LCC Management

* Estimate LCC at the beginning of development and production

* Annual LCC report to the Minister of Defense

* Intra-organizational coordinating framework (ref. Integrated Project Team / IPT)

* Establish cost management section in EPCO （FY 2009）

Measures to be taken

Operation＆Support

Operation＆Support

Operation＆Support Operation

＆SupportOperation＆Support

Operation＆Support

Operation＆Support

The first comprehensive reduction goal;15 % cost reduction over 5 years from this FY to FY 2011

Cost Reduction Goal

○Scope;Equipment-related projects through life-cycle covering R&D, procurement, and operation and maintenance1.8 trillion yen for FY 2007

○Measures; Various efforts to make each project more cost-effectiveCOTS, Blanket procurement, Review of maintenance method, etc.

Framework

５

○Numerical Goal; compared to FY 20069 %; at FY 2009 (the end of current Mid-term Defense Program)

15 %; by FY 2011

※ The amount of cost reduction＝Cost without measures－Cost with measures※※ Cost reduction rate＝Cost reduction amount / Cost without measures

* New Incentive Contract will be studied and introduced in FY 2008.* Include other reduction efforts those related to investment, management, etc. （not limiting technical proposal）* Add flexibility in reward distribution rate between government and private sector （eg. different rates for each fiscal year）* Other changes to be studied

６

Incentive Contract

New Incentive Contract

* Established in FY2002 to further motivate companies to reduce cost associated with defense equipment* In case of cost reduction by new technical proposal, the company can accept half of the reduction amount for 5 years. Still only two cases

Current system

Promotion of Outsourcing

Continue efforts centering on acquiring cost information

Foreign Military Sales （FMS）; U.S. Government provides equipment to the eligible countries based on Arms Export Control Act. To deal with problems such as insufficient cost information;⇒Some actions have been taken ; Adopting Accelerated Case Closure Procedures （ASSP）, opening Interest Bearing Account（IBA）, acquiring cost breakdown information, etc.

７

Non-traditional method for outsourcing will be more actively explored. （eg. PFI: Private Finance Initiative）

* Defense Ministry had done outsourcing to the extent not hindering Self-Defense Forces （SDF）mission.* Scope is being extended in line with across-the-government reform to cut labor cost.

Future Course of Action

Current Situation

Measures related to Foreign Military Sales (FMS)Current Situation

Future Course of Action

Under the concept of joint operation, the following measures have been taken across different services.

* Adjust specifications between equipment* Common equipment* Integration of each JSDF’s command systems and other information systems

Acquisition based on Joint OperationCurrent Measures

* Defense buildup based on joint operationPromote defense buildup tailored to Joint Operation in areas such as rescue, medic, transport, surveillance

* New framework for coordination Establish framework of relevant personnel including those from 4 Staff Offices of SDF for comprehensive discussion and coordination

* R&D based on Joint OperationEvaluation of R&D from the viewpoint of joint operation; R&D for vehicles and guided missiles that share components and parts across services

* Procurement and logistics management based on joint operationSystems to share inventory and specification information across services

Measures to Be Taken

８

Evaluation of R&D ProgramNew Evaluation System on R&DNew Evaluation System on R&D

* Evaluate R&D project from the viewpoint of Acquisition Reform (project objectives, applied technologies, cost, schedule, etc.)* Modify project according to evaluation* Evaluation reflected in defense buildup process

Advantage; Cost sharing, Risk reduction, Scale meritDisadvantage; Difficulties in coordinating requirement and work/task sharing

Risks associated with change in the other country’s plan

* Further cooperation with the United States （New R&D projects, Engineer exchange, etc.）* Promotion of R&D cooperation with countries other than the United States in dual-use technology area（Cooperative test, Exchange of personnel and Information, etc.)

Measures to Explore Possibility of International R&D Cooperation

Promotion of Technical Exchanges

Problems on legacy R&D evaluation;Insufficient evaluation in terms of managing development of production costs, late sharing of information evaluation within MoD including political appointees⇒Higher level evaluation of projects at the earlier stage of budget process⇒Establish Technology Evaluation Committee by Parliamentary Secretary for Defense in FY 2008

９

１０

Central and Local Procurement

Minister’s approval for negotiated contract with high valueThe approval of Minister of Defense required for high value negotiated contract (Currently, the minister’s approval is obliged only to central procurement.) (FY 2008)

Audit by third-party organizationExpand the scope of audit by Tender Audit Committee in each Local Defense Bureau to monitor equipment procurement (Currently, the Committee’s scope is limited to construction.) （FY 2008）

Measures for more transparency in Local Procurement

Central Procurement: procurement by EPCOLocal Procurement: procurement by other agents of Defense Ministry, such as SDF units

１１

Internal Division of Labor in Equipment Selection

* Different job allocation between Defense Policy Bureau and Finance/Equipment Bureau, depending on the types or procurement methods of equipment

* Need to improve transparency in decision making on selection of equipment

* Exhaustive decision making process due to examination in details

* Regarding next rescue helicopter or other appropriate equipment;

Explore more transparent and effective procedure in selection of equipment

Trial job allocation:Bureau of Defense Policy in charge of capability/requirementBureau of Finance and Equipment in charge of equipment selection

Establish trans-organizational working team

* Review of Aircraft Selection Process

Current Issues

Interim Action