ON THE Free for All page today, Navy Secretary John Lehman takes issue with our recent criticism of the Navy's decision to lease rather than buy some of its ships. That practice, we said, removes important procurement decisions from congressional control, disguises the true cost of the defense buildup and results in higher costs to taxpayers.
Secretary Lehman argues that there is nothing improper about the lease-charter arrangements because the Navy is not, in fact, acquiring the ships but only contracting for services. This is the sort of distinction that the Internal Revenue Service-- which will be reviewing the tax breaks that make the deal attractive to the private shipowners--has tended to view with a jaundiced eye.
The ships will be built or converted for exclusive use as "floating warehouses" to support the Mideast Rapid Deployment Force. In order to circumvent IRS limits on direct leasing to the government, the shipowners will then lease them to an intermediary, who will operate the ships under charter to the Navy. Unlike normal owners, the leasers will run no risk because they will be guaranteed either a lease for the useful life of the ship--with full adjustments for interest costs--or the full remaining value of the ship if the lease is terminated. And in case the IRS eventually decides this is not a bona-fide lease but rather a conditional agreement to purchase, the Navy will reimburse the contractor for the value of the tax breaks that would be lost.
But, says Secretary Lehman, even if the tax breaks and profits to the builder and charterer are counted, the Navy is still getting a good deal. For this conclusion, he relies on consultant studies that use dubious assumptions. Congressional tax experts now estimate that the leasing deal will cost the taxpayer perhaps 15 to 20 percent more than if the ships were purchased directly.
Both the armed services and appropriations committees were aware of the cargo ship leases before they were signed. But they expressed concern about whether the deal really made sense. Rep. Dan Daniels complained at an oversight hearing last September that the Navy had already let bids for the leases and built up so much pressure from the potential contractors that the committees felt obliged to go along.
The leased cargo ships are, no doubt, an important addition to the nation's defense. But the decision to buy them should not have been buried in the operations and maintenance budget. It should have been made along with all other major procurement decisions, with the full cost shown in the defense budget.