A congressionally-sponsored program begun four years ago to boost sales of
U.S. military equipment overseas has been on the verge of being canceled for
lack of funds. Recently, however, Pentagon officials have been working to keep
The program is called the Defense Exports Loan Guarantee (DELG) and was created
as part of the fiscal 1996 authorization bill for the Defense Department. The
goal was to allow foreign customers to purchase U.S. military products via private
loans that would be guaranteed by DELG. Proponents of DELG said the program
was needed because the U.S. Export-Import Bank-which served as the model for
DELG-cannot by law provide financing for defense sales.
Unlike purchases made under the Foreign Military Sales program, DELG transactions
are commercial in nature and do not involve the U.S. government as a middleman.
But nearly four years after its inception, DELG has lost much of its support
within the Pentagon and on Capitol Hill, because it has not generated the amount
of sales that its proponents had envisioned. DELG, by law, cannot be subsidized
by public funds for its day-to-day operations, so it only can survive if it
generates enough fees from transactions. The fees include administrative expenses
paid by the customer and so-called exposure fees, which can range from 10 percent
to 20 percent of the value of the sale. The exposure fees are kept by the U.S.
Treasury and are intended to cover losses if the customer defaults.
The Defense Department was directed by Congress to manage the DELG program,
but the Pentagon outsourced the work to a contractor to avoid any appearance
that the program was being run at taxpayer expense. Currently, the contractor
in charge of administering DELG is GRC International, located in Tysons Corner,
Government and industry sources contacted by National Defense agreed that it
would appear odd for the Pentagon to not support this program at a time when
senior defense officials are advocating the need to boost U.S. defense exports.
But there is one significant problem for DELG: The funding needed to administer
the program is running out, because there have not been enough transaction fees
generated. Industry sources said the management of DELG costs about a million
dollars a year. A representative from GRC said that the company was not authorized
to provide cost information. The GRC source, however, said that the process
of earning fees under DELG is quite time-consuming, because it involves bureaucratic
dealings in foreign countries, which are seeking to buy equipment. The U.S.
government, meanwhile, is responsible for issuing the seller an export license
for the equipment before it can be sold. No transactions can be finalized or
fees paid until the export license is approved.
"In the short term, we may run into financial difficulty," said the
GRC representative. "It takes a long time for a program like this to get
some legs." For that reason, the source said that it is likely that, for
the program to survive, the Pentagon will have to work with Congress to provide
One key DELG supporter at the Pentagon is David Oliver, the principal deputy
undersecretary of defense for acquisition and technology. Recently, he stressed
that DELG is not in jeopardy. "We support the Defense Loan Guarantee program,
and consider it a useful tool in promoting interoperability with our regional
allies. We intend to work with Congress to continue this program," said
"I'd like to get it moving as soon as possible," he told National
Defense during a recent acquisition reform conference in Washington, D.C. Prompt
action is needed, he said, because there are "deals with allies we want
to get done right away."
According to John W. Douglass, president of the Aerospace Industries Association
(AIA), a lobbying group in Washington, D.C., DELG transactions currently awaiting
approval would generate $50 million in fees for the U.S. government. He estimated
that DELG needs between $1 million to $2 million to keep its operations running.
"There seems to be an increase in the level of support for DELG at high
levels within the Pentagon," said Jonathan Etherton, assistant vice president
for legislative affairs at AIA. The key question, he said, is whether there
is "enough will" to keep DELG going.
One Pentagon official who oversees DELG said the program remains in operation.
"It will continue to be in operation," he added. As to whether the
program can go on without any infusion of public funds, he said he could not
answer that. Such a decision would have to be made at more senior levels of
Defense Department leadership, with congressional support.
Meanwhile, industry executives seeking to make export sales through DELG are
hoping the Pentagon and Congress soon will make a long-term decision on DELG.
They also believe defense officials should make an effort to understand the
benefits DELG offers to U.S. industry and, indirectly, to the Defense Department.
So far, the only U.S. firm that has completed a full transaction using the
DELG program is AAI Corporation, headquartered in Hunt Valley, Md. The firm
makes training systems and unmanned aircraft, called UAVs.
In 1997, AAI sold $20 million worth of UAV systems and simulators to Romania.
The loan was financed through DELG.
"Romania had attempted to build its own UAVs, but failed. They approached
us, as well as an Israeli and a French company," said Paul J. Michaud,
AAI's vice president and chief financial officer. In an interview, Michaud explained
why he believes there is more to DELG than just helping U.S. firms make money.
He believes it is a good deal for the U.S. government as well. To get the $20
million DELG financing, for example, Romania paid a $4 million exposure fee
to the U.S. Treasury and is paying several million dollars in interest to a
U.S. bank, in addition to other administrative fees. The exposure fee is paid
to cover potential losses.
Romania, Michaud said, wants to buy U.S. defense equipment because it wants
to build long-term military ties with the United States. Currently, the Romanian
government is considering purchasing more UAVs, he said. "Romania sees
this as a way to get into NATO ... Romania is one of those countries that have
not had long-term ties to the United States. But these countries want relationships
with U.S. companies. They want U.S. technology.
"Romania could not have afforded a $20 million outlay in one year,"
Michaud said. "But they can afford it over five years." He noted that
DELG cannot finance exposure fees. That had to be arranged through a Romanian
bank. "It's between the buyer and the seller to figure out how to get that
done," said Michaud. "In my case, I found a bank in Romania that financed
the exposure fees."
If Romania defaulted on the loan, the money to cover the loss would come from
the exposure fees.
Asked if he thought Romania could have obtained the $20 million outside of
DELG, Michaud shook his head. "That's impossible. There isn't a single
U.S. bank that would lend Romania $20 million. I couldn't find one."
The Pentagon and Congress "ought to be patient" and allow for time
for DELG to develop into a successful program, said Michaud. There has been
some frustration among supporters of DELG, he acknowledged, because the program
did not result in immediate, big-ticket sales. "They haven't been bombarded
by deals. They won't be bombarded by deals. But they have to realize that foreign
transactions take a long time to develop," Michaud said.
There are three deals currently awaiting approval. AAI has two pending applications.
One is a contract with Romania for four tactical UAV systems, said Michaud.
"Without DELG financing, there will be no deal."
Both applications were sent last December with a $25,000 payment, which is
required as proof of the company's commitment to the transaction. But, at press
time, neither of the two checks sent by AAI had been cashed by the DELG office.
Michaud said he received a phone call in late December from a DELG official
who warned him the program may be discontinued.
The GRC official in charge of processing DELG applications explained the reason
for the delay was not related to the status of DELG, but rather to the fact
that the export licenses for the equipment had not yet been approved by the
The other pending DELG application is from Harris Corporation RF Communications
Division, based in Rochester, N.Y. The company applied for DELG financing also
as a result of a deal with Romania. Marilyn Locke, Harris' senior manager for
finance, said the sale involves radio communications equipment valued at less
than $10 million.
Like AAI, Harris submitted an application with a $25,000 payment to DELG but
has not heard back from DELG officials. "Our customer is really excited
about this deal," said Locke. She noted that Romania's top government officials
have contacted the Defense Department seeking support for the sale.
Locke believes the reason DELG has become a cumbersome operation has to do with
its management. "DELG was modeled after the Ex-Im bank, but does not have
the infrastructure to manage the program the way Ex-Im does," she said.
The Defense Department, Locke added, does not have the financial expertise needed
to operate a program such as DELG.
While DELG's future remains uncertain, one thing is clear: It has not generated
much interest from industry. If DELG is such a good deal for all parties involved,
as Michaud asserted, why hasn't the program been deluged with applications?
The reasons are varied, he said. First and foremost, he blames industry "for
not appreciating what DELG can do. Not recognizing the opportunities."
In addition, those who initially created DELG thought it would attract purchasers
of multi-billion weapon systems. But, Michaud noted, the program is better suited
for small transactions, which in the defense arena would be in the $20 million
or less range.
Locke agreed. She noted that DELG restricts financing to many countries that
are in the market for equipment such as communications and security systems
to protect national borders or beef up military forces. "We see a great
future for DELG," she said. But she is discouraged by the fact that Latin
American countries and some Eastern European nations, for example, are excluded
from DELG financing. Some of these countries, she said, currently are looking
to buy technology from Harris but don't have access to the commercial financing
that wealthier countries do.
When countries seek to buy a large weapon system, Michaud said, they request
it in their national budgets. Or they will find another way to finance it, such
as issuing government bonds, which is less expensive than DELG and offers longer
terms. DELG loans can be extended for up to 10 years. But a government could
issue 20-year bonds and get lower interest rates.
"Congress and the Pentagon thought they were going to have big deals.
"In my opinion, the countries that will use DELG will not be the NATO
countries but emerging nations such as Romania, Bulgaria, Poland or the Czech
Republic. "They don't have the budget to meet their domestic needs, let
alone their military needs." But Michaud believes that, if AAI had not
sold the UAVs to Romania, that nation would have purchased the equipment from
France or Israel.
DELG has been in trouble largely because government and industry officials
are not aware of its potential benefits, said Michaud. "This is really
a program of minimal cost to the government. It doesn't require a large staff.
It is a very large cash generator for the U.S. government." In addition
to receiving exposure fees, the government also profits from DELG because, when
defense contractors sell equipment overseas, they can lower the overhead costs
of their other contracts with the Pentagon, he explained. "By law, I have
to give any cost-reduction benefits back to the U.S. government ... If I can
get a foreign transaction, products sold to the U.S. government cost less."
Nonetheless, Michaud speculated that, if the Defense Department, rather than
the U.S. Treasury, were allowed to keep the DELG loan fees, it would have more
of an incentive to promote DELG. "If it's not an immediate win-win, it's
harder to justify, unless it is directed from the top."