AFCEA Defense Acquisition Modernization Symposium

Transcription

1 5 August 2014 AFCEA Defense Acquisition Modernization Symposium Workshop B Sequestration: What Was the Impact and How Do We Recover the Industrial Base Brett Lambert, Executive in Residence Washington D.C Wilson Boulevard, Suite 500 Arlington, VA

2 RSAdvisors Analysis At RSAdvisors we work three different cases to discuss the US budget FY15 Administration Case President s current budget Mostly a document that can be used to infer administration priorities Very optimistic to actually unrealistic FY15 BCA Case RSAdvisors analysis that incorporates the president s FY15 budget but imposes the limits of the Budget Control Act (i.e. a modified version of sequestration) Deliberate trade analysis that utilizes our proprietary approach and subject matter experts Realistic and effective as a planning document the closest case to our expected future FY14 RSAdvisors Base Case Independent RSAdvisors analysis that heavily adjusts the president s FY14 budget Extensive process with significant line item, trade off reviews Conservative, likely represents the overall floor for future budgets We are currently creating the FY15 RSAdvisors Base Case but expect it to result in an overall budget that would be closest to the FY15 BCA Case 2

3 Budget Summary & Forecast It should be noted that the President s Budget request is notoriously unreliable as a market forecasting tool Historical President s Budget FYDP Projection vs. Actual Defense Budget (Budget Authority) (Constant FY14, $B) $900 $800 $700 $600 $500 $400 $ Sources: US Budget, PA&E (CAPE) analysis, RSAdvisors analysis Annual FYDP Forecast Actual Defense Budget 3

4 RSAdvisors Analysis Our Base Case is an effort to distill political, economic, and fiscal realities into a conservative, high confidence, likely outlook for Federal budgets What is the RSAdvisors Base Case? Ten-year view of macro trends shaping national security and civil priorities and resulting funding Ability to model impact across agencies / services, budget accounts, and programs / line items Top-down analysis Bottom-up analysis Synthesis and conclusions Review macroeconomic factors and political developments (e.g. GDP growth, tax revenues, net interest, mandatory spending) with senior advisors, former top government officials Estimate DoD vs. civil discretionary spending balance Review of DoD-specific programs and strategic goals (e.g. end-strength, forcestructure, technological requirements) Evaluate likely winners and losers Determine spending patterns due to operational needs vs. fiscal realities Leverage the two contributing analyses to create robust, long-term forecast Generate forecasts for various Federal departments, military services, and market segments Sources: RSAdvisors research & analysis 4

5 RSAdvisors Analysis We are currently updating our RSAdvisors Base Case forecast using the same process that in 2008 predicted FY13/14 budgets within 1% of actuals Before it Started, We Accurately Predicted the Downcycle $1,000 $900 $800 Five Year Forecast (summer 2008) Unexpected Afghan Surge The ability to accurately forecast the future environment relies on: Disciplined methodologies Historical pattern analysis Constant FY14 $B $700 $600 $500 $400 $300 $200 $100 $ All-source insights about customer Judgment and experience These factors enable our team to generate accurate quantitative and qualitative strategic insights In 2008 we were within $5B of actual 5 years out and called for prioritization of the Navy, high end strike, space control and major end strength reductions Actual Budget Authority RSAdvisors Base Case Projection (Weighted Average of Five Probability Adjusted Competing Scenarios) Sources: DoD budget materials, OMB, CSBA, Capital Alpha, RSAdvisors analysis 5

6 The Environment The Macro Environment 1. 1 Macroeconomics: U.S. economy continues to muddle along through mid decade at low growth rates (our lost decade ), same with Europe. Followed by a modest upturn combined with an increase in inflation and interest rates. Asia remains a bright spot but Chinese economy worth watching 2. 2 Politics: US and European politics remain stalled with a series of mini-deals and no significant breakthrough on fundamental fiscal issues until the economic challenge of the boomer generations retiring becomes more evident in the late teens House Senate 6

7 RSAdvisors Analysis DoD is undergoing structural transformations in an era of reduced funding Strategy Future threats: Pacific pivot vs. war on terror Focus on high-end (Cold War like) vs. low-end (counterinsurgency) Force structure changes and active / reserve balance Technology: smaller more modern and capable over a larger force with older equipment Strategic Choices & Management Review (2013), Quadrennial Defense Review (2014) Budgetary Rapid decline of OCO funding Pension and Tricare obligations crowding out investment Some stakeholders in favor of permanent sequester cuts Increasing cost of cutting-edge technology (e.g. space, cyber, SOF/I, ISR, air superiority) Growth of operations vs. investment accounts (e.g., healthcare, manpower costs) Ability to use unspent money from previous years (use of $5bn during the sequester to avoid furloughs) Organizational Institutional reform of DoD s back office, reducing overhead, civilian personnel, etc. Base Realignment and Closure (BRAC) is necessary, but Congress is perennially reluctant Pensions and compensation are difficult to adjust, very large civilian workforce Fewer units can be kept at full readiness, yet ground troops can be activated quickly Better Buying Power 1.0 / 2.0 / 3.0? focused on improving acquisition processes Source: RSAdvisors research & analysis 7

8 RSAdvisors Analysis Because of these issues, the Administration s budget is unlikely; we believe a budget close to the overall BCA caps will be more likely DoD Budget Authority & Requests Since Beginning of Downturn (2/10) $700 Total Funding (Base + OCO, then-year $B) $650 $600 $550 $500 $450 FY11-13 Actual Funding OG&SI FY15 Admin Case FY15 BCA Case $400 FY 2011A FY 2012A FY 2013A FY 2014E FY 2015F FY 2016F FY 2017F FY2018F FY2019F Notes: 1 Budget Control Act Sources: DoD budget materials, CSBA, RSAdvisors analysis FY 2011 Request (2/10) FY 2012 Request (2/11) FY 2013 Request (2/12) FY 2014 Request (4/13) FY 2015 Request (3/14) 1 BCA (4/13) OG&SI 8

9 Preliminary Addressable Market Analysis DoD buys hardware through the investment accounts (procurement, RDT&E) and contracts services through O&M OCO Other 2 RDT&E Procurement $581 $575 $85 $79 RSAdvisors BCA 1 Case - DoD Discretionary Budget by Account $63 $64 $63 $92 $90 $93 (Including OCO Funding) (BA, Current $B) FY14-19 CAGR -0.8% $540 $537 $545 $40 $25 $20 $62 $63 $557 $20 $64 $99 $106 $110 FY14-19 CAGR -25% 0.4% 3.6% O&M $193 $199 $200 $208 $213 $ % MilPers $136 $135 $134 $133 $132 $ % FY14 FY15 FY16 FY17 FY18 FY19 Notes: 1 DoD BCA Caps include OCO funding that is not counted against the cap 2 Other includes MILCON, Family Housing etc. Sources: OMB, CBO, FY15 PBR, Joint Committee on Sequestration, RSAdvisors analysis 9

10 Budget Summary & Forecast On a positive note, past trends suggest the defense market is about halfway through the downturn $800 Total US Defense Spending (Budget Authority) (Constant FY14 $B) Budget Authority (constant FY14 $B) $700 $600 $500 $400 $300 $200 Eisenhower Nixon Reagan Bush 1 (HW) Bush 2 (W) Clinton Obama?? Average historical funding ceiling Average historical funding floor $100 Korean Vietnam Reagan Peace End of Wars in Iraq/ War War Build-Up Dividend History Afghanistan $0 FY50 FY55 FY60 FY65 FY70 FY75 FY80 FY85 FY90 FY95 FY00 FY05 FY10 FY15 FY20 Sources: FY15 PBR, DoD Budget materials, Capital Alpha, RSAdvisors analysis 10

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