September 22 OUSD Conference Call Notes

OSD A&S:

Special guest appearance from David Glaccum Defense Finance Corporation VP for U.S. Operations. SkyWater Technology ribbon cutting ceremony last week lead by DASD Jeb Nadaner. Focus at SkyWater was on facility expansion funded by DoD specific to electronic requirements. Al Shaffer discussion last week featuring author of China Rx: Exposing the Risks of America's Dependence on China for Medicine focused on U.S. pharma dependency. National strategy for tech (CET) was released by the White House last week and OSD will provide us that document later today. Small business webinar this afternoon lead by OSD small business team at 3pm.

Hon Ellen Lord is the Chairwoman and DASD MIBP is the executive secretary. Last year, they reviewed 16 different sectors and developed an action plan. Group formed to do an aggregated assessment of the industrial base, health of the DIB and what should be done. Congress sought the list of OSD A&S priorities specific to the DIB. Interagency and complete DoD community involved. First meeting in Nov 2019 decided that the meetings would be monthly and then COVID hit. IBC focus completely changed from fragility in the DIB and what DoD should fund, to COVID and $1B infusion from CARES Act to support the DIB in first wave of the pandemic. Meetings were initially daily and then weekly. Focused significant energy on the aviation sector which was hit hard by the pandemic. Issues mostly come from military departments and other members of the DoD community. However, industry could and still can suggest topics using the MIBP portal. Whenever a DoD investment decision was made the IBC ensured they in DoD did due diligence in that decision—market assessment; fragility; do they have a business plan that makes sense; legal disclosures needed; foreign investments; cyber compliance; risk as it pertains to a DoD infusion; working with the Treasury Department on confirming fragility and importance of an industry with respect to other CARES Act loan authorities. Today, the focus is on how to get back to the original strategic DIB intent with sector focused reviews--aviation, ship building, and new capability sector micro-electronics. Some special areas to return to as well including rare earth and RAD (nuclear) hardened parts. So trying to get back to the original work of one year ago and associated 13806 focus areas, supply risk assessments, foreign reliance including investments and suppliers, how to bring things back to domestic production, prioritizing issues like need for additional DPA Title 3 funds thru Congressional appropriations or a supplement to an existing appropriation. Currently the IBC meets once a week and Kevin or Al Shaffer (PDUSD A&S) routinely lead vice Ellen Lord at the moment. MIBP is the work horse behind the IBC. Any decision made in the IBC is posted publicly to ensure transparency. IBC does not tip their hand pre- contract award of course.

Question: Sustainment question. Majority of contracts followed are managed out of DLA. Not only focus on the material but special skills.

Development Finance Corporation appearance. Director of DPA Title 3 program in OSD A&S did an introduction. DFC David Glaccum spoke. Executive order (EO) assigned the lead to DFC for DPA Title 3 loans for the DIB. Overview of DFC authorities, programs and objectives as an Agency. All international focused interventions. Five months ago approached with respect to DPA Title 3 loan program execution. Within two weeks of the EO, they stood up the domestic loan program in partnership with DoD as DPA Title 3 lead. For the past five months since the EO, they have managed a host of issues. PPE and testing initial focus and now recovery focus for those companies at risk. Also pivoting to supply chain resiliency and on shoring, health supply chains, innovative care, pharma, life sciences, etc.— See www.dfc.gov/dpa for all details and full list of focus areas. Key priorities now are priority medicines, PPE, rare earth, micro- electronics. Since June 1 they have received over 100 applications and are currently working about a dozen proposals in partnership with the Administration thru an interagency decision and review process. Once screened fully, they move to full underwriting. 9 deals in underwriting and first credit committee meeting under this program met yesterday; next credit committee meeting tomorrow--so they are now getting to full underwriting phase. Final review is conducted by Ellen Lord; if she approves it goes to DFC CEO for signature. They do not compete with private capital groups, and they are not proving aid or grants. These are loans with required statutory compliance. No maximum on loan value--$48M-$1.1B is the range of values in play for final decision now. Interest rates are based on economic assumptions released by the Whitehouse and Treasury Department--rates now ranging 3-6%. Some fees but routine and normal. Maximum maturity is 25 years, but DFC is structing all loans with an 8-12 year maturity while providing some flexibility to go a little beyond the approved maturity date and there are balloon payments at the end in most cases. Same critical industry business planning and plans, market research, etc., as with any commercial loan are required. They do have a few start-ups under consideration, but with very experienced, proven and credible leaders and staff in the start-up executive structure. Will not go more than 80% in loan value thus some equity is needed and/or other credible investors to reach 100%. Only pursue priority investments where metrics demonstrate credible business strategy.

Question: Is there Chinese investment in DFC DPA programs? There are adversarial investor criteria in partnership with the Administration. There are approved foreign investors. As for China investors they have worked through assessments to ensure compliance with Administration objectives. But not a clear “no” on this question of Chinese investment. Discussion morphed into a focus on reshoring U.S. critical capacity vice relying on China. Not exactly the question asked, but where we ended up.

DLA:

COVID obligations are $2.2B, with 22,150 contract actions completed to date; surgical gown acquisition effort for DHS stockpile program being executed with DLA closely watching contractor performance. 468 re-useable gowns delivered and over 300 disposable gowns delivered to date thus contract performance is on track as awarded thus far. Purchase adjustments update to the large cancelation of requests for bids that caused concern with the DIB earlier this summer. DLA sent out a number of purchase requirements recently due to new FY funding under the CR and associated new authorities within the CR. Over 40,000 PRs issued since late September and industry has complained about the volume of bid activity. DLA admits that they should have spread these PRs out over time. DLA has responded to industry complaints by adjusting the PRs, expanding some solicitation times, etc., to smooth out the flood of PRs. DLA is working over the next couple of weeks with various suppliers impacted by COVID to verify their current operational status.

DCMA:

Non COVID impacts: west coast wild fires have no impact at the moment; no hurricane impacts at the moment or expected this week. There are no DIB COVID closures at this time; starting to see some layoffs and COVID related absenteeism, but no closures. There is growing concern with respect to rising COVID impacts especially in the aviation sector.

DPC:

Total DoD COVID obligations are $18.9B to date; last week DPC released four separate guidance memos -- three specific to Sec 3610 (minor updates to FAQs and other minor edits to previous contractor guidance). Fourth memo was in response to a recent IRS ruling relative to industry ability to process donated leave -- ruling states that this is an allowable cost under a DoD contract and how to seek an adjustment from DoD.

Question Session:

Extension of Sec 3610 are there any funds? No real change in status, same challenge of no additional appropriated funds provided, DoD has made about $45M in reimbursements thru existing program funds to date under contracts where you would expect some additional funds or contingency built in, but in other contracts that don’t have that contingency built in is where OSD and others aren’t able to reimburse companies at the moment.

Has OSD asked the DIB to identify foreign influence in their supply chains? OSD DPC is working with the industrial policy office on potential DFARS language that would get at this issue. Very early in the debate and potential rule drafting. Congress also considering some FOCI language as well and OSD DPC is watching closely what Congress may publish.

About the authors

Keith Webster

Keith Webster, president of the U.S. Chamber of Commerce’s Defense and Aerospace Council, guides the focus of the council to strengthen the U.S. defense and aerospace industries by influencing domestic and international policy on behalf of its members.

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