Sunk Costs

Why, after $24 billion in upgrades, the Coast Guard still deploys a fleet of rustbuckets.

In August, a Coast Guard cutter called Dallas set sail from Crete for the Black Sea. The brief but violent conflict between Russia and Georgia had just ended, and the Pentagon was rushing humanitarian aid to its Georgian allies. The cutter, which is usually based in Charleston, South Carolina, was laden with thirty-four tons of medicine, blankets, and diapers, and had been ordered to transport them to the Georgian port of Poti. As Dallas, a 378-foot white vessel with a blocky superstructure, neared the Georgian coast, a heavily armed Russian frigate pulled up to “see what we had on our deck,” in the words of Robert Wagner, the ships serious, square-jawed captain. At the last minute, the order came from the highest levels of the Pentagon for Dallas to change course. Instead of docking in Poti, which had recently been occupied by Russian troops, she headed to Batumi, which was still in Georgian hands.

Almost triggering an international incident with Russia was not, however, the most dangerous event in Dallass journey. That came months earlier. Dallas is pretty old for a cuttershe was launched in 1967, and has been very busy in the intervening four decades. She fired her gun against targets in Vietnam, scoured the ocean for debris from the space shuttle Challenger in 1986, and helped round up tens of thousands of migrants during mass exoduses from Haiti and Cuba during the 1990s. In 2003, Dallas even supported the invasion of Iraq by blockading the Suez Canal against fleeing Iraqi vessels.

However, the cutters advanced age and eventful lifestyle had taken its toll. Before she left for Georgia, she had suffered from boiler failures and the breakdown of the system that makes fresh water for the crew. Repairs are tricky, because there are usually no parts readily available for such a geriatric ship, and the factories that once manufactured them closed down long ago. (Cutter crews have been known to call maritime museums in search of replacements.) “These ships are old, and it takes a lot to keep them going,” Wagner told me. With her patched-up water plant and boiler, Dallas crossed the ocean in June, bound first for Africa, then Crete. En route, fires broke out in the engine room on at least two occasions. Of all the threats that sailors face, fires are potentially the most lethal; an engine-room fire can strand a ship at sea or, if the blaze spreads, even sink the vessel. Dallas was lucky. Her crew quickly smothered the flames with fire extinguishers.

In the Navy, fires would be grounds for formal investigation and dismissal, but in the Coast Guard, breakdowns, equipment failures, and minor calamities are more or less a way of life for cutter captainsenough so that Wagner joked about the incident when I asked him about it. The Coast Guards equipment is some of the oldest in the entire U.S. military, and the third oldest of any coast guard in the world, surpassed only by the Philippines and Mexico. Whats more, thanks to the Bush administrations effort to mobilize as many agencies as possible in the “war on terror,” the Coast Guards dilapidated ships are being deployed on increasingly ambitious overseas missions. Thats why Dallas was sent to Georgia, and also why it had previously spent two months in West Africa, so U.S. soldiers could help train local military groups.

Captain Wagner should not have had to take Dallas on such a perilous voyage. More than a decade ago, the Coast Guard came up with a plan, called Deepwater, to replace aging vessels like Dallas with new cutters, at a reasonable cost to taxpayers. But in the feverish aftermath of 9/11, with the Bush administration eager to turn all government departments into outposts of the war on terror, the humble Coast Guard attempted a far more ambitious transformationa $24 billion scheme to transform its boats into an integrated fleet boasting heavy weaponry and futuristic communications systems. When the agency leapt at the opportunity to get its hands on an expanded budget and high-tech ships, however, it failed to put in place the necessary tools to make sure that such massive contracts would actually deliver what the government ordered. The result has been six years of incompetence and alleged fraud by private contractors and billions of squandered taxpayer money, much of it wasted on flawed boats that have since been scrapped. The Coast Guard, meanwhile, is still attempting to play a growing military role with ships that are old, unreliable, and a hazard to their crews.

The Coast Guard was founded in 1790 to intercept ships and make sure the captains paid taxes on their goods. Over time the Coast Guards missions evolved, and 200 years later, it was used to “protect life and property at sea, enforce federal laws and treaties, preserve marine natural resources and promote national security interests.” Despite this last tenet, the service really only ventured abroad during special missions, national emergencies, or major wars. During World War II, for example, the Coast Guard helped crew Navy vessels, because the Navy was building ships faster than it could train new sailors. Twenty-five years later, the Coast Guard deployed to Vietnam to help the Navy with an unfamiliar task: patrolling that countrys dangerous rivers. In recent decades, the Coast Guard has remained close to American shores, focusing on law enforcement and safety, and occasionally intercepting drug smugglers in the Caribbean.

By the 1990s, the services thirty-some large cutters were, on average, nearly three decades old and starting to deteriorate. The situation worried senior Coasties, who fretted in a 1995 report that the agencys major assets were “rapidly approaching the end of their service lives.”

So the Coast Guard developed Deepwater, which called for replacing all of the services major ships, aircraft, and electronics with an integrated fleet that shared common technology and communications systems. It would cost around $17 billion over the next twenty yearsthe most ambitious procurement scheme the Coast Guard had ever undertaken. In early 2001, the GAO issued warnings about the agencys ability to raise the money and manage the contract. And indeed, garnering funds proved difficult. A relatively small agency under the umbrella of the Department of Transportation at the time, the Coast Guard didnt have anything like the clout to compete with the Army, Navy, and other big service branches for national security dollars that, in the deficit-conscious late 1990s, were not flowing copiously to begin with.

Then came the events of September 11, and the Coast Guard saw its chance. On June 1, 2002, President George W. Bush delivered the now-famous commencement address at West Point, in which he laid out his doctrine of preventive war. Promising to “take the battle to the enemy,” the president called for “modernizing domestic agencies” so that they would be “prepared to act, and act quickly, against danger.”

Suddenly, the Coast Guards dreams of a refurbished fleet seemed aligned with the Bush administrations grand vision of government in the age of terrorism. The Coast Guard brass seized the moment. They pushed hard to be moved out of the backwater Department of Transportation and into the newly created Department of Homeland Security. The transfer elevated the Coast Guard from its predominant safety and law enforcement function to an “international maritime security” role aimed at “prevent[ing] attacks in the U.S. maritime domain,” as Admiral Thomas Collins, then the services top officer, put it.

The new counterterrorism mission put the Guard in a better position to lobby for fundsits budget nearly doubled, and it added thousands of new employees. A maritime security policy signed by the president required that the Coast Guard and Navy have similar technologies and be prepared to fight wars together, which justified requests for heavier weapons, military-grade communications systems, and larger ships that could accompany the Navy on overseas deployments. So the Coast Guard decided to make Deepwater, already an elaborate undertaking, even more elaborate. It would buy more capable ships and refurbish and rearm hundreds of existing aircraft and vessels. It would convert its existing forty-nine 110-foot boats into 123-foot patrol boats with sophisticated new radios; and it would purchase eight 418-foot “National Security Cutters”as large and as heavily armed as Navy frigates and easily the most powerful ships the Coast Guard had ever had. All the new ships and planes would communicate via sophisticated encrypted satellite radios that could plug into the broader Pentagon command-and-control network.

Of course, these new toys came with a price tag: $24 billion over twenty-five years, nearly $7 billion more than the original Deepwater projections. The Bush administrations ambitious plan for the Coast Guard had set this respected but modest agency on an uncharted course. Whether the service could meet its grandiose new goals would depend on how the Deepwater plan was executedand here, too, the Coast Guard was dazzled by another set of innovative but untested ideas.

Deepwaters problems began long before the first keel of a revamped ship ever touched the water, when the Coast Guard made a critical decision about how it would expand.

In bureaucratic parlance, the process of buying new equipment is known as “acquisitions”: the vital practice of marrying cash with requirements and shepherding complex contracts from blueprint to production to delivery. In the 1990s, however, budget cuts resulted in a 50 percent decrease in acquisitions staffs throughout the military, including the Coast Guard, as the Clinton administration moved to streamline government and reduce defense spending in the aftermath of the Cold War. After 9/11, government spending on weapons systems practically doubled overnight. But because it takes years or even decades to train senior managers, acquisitions personnel remained at 1990s levels, swamped with a deluge of contracts. By the time Deepwater got the green light in 2002, the Coast Guard found itself with double the budget but no dedicated acquisitions office at alljust a few procurement professionals scattered throughout its headquarters.

This may sound like a rather dull set of developments among an obscure tribe of bureaucrats. But acquisitions professionals are the gatekeepers who make sure that taxpayers money is spent wisely and efficiently, and that the government gets what it pays for. Over the next seven years, the Coast Guard would provide a spectacular object lesson in the waste that can result from inadequate oversight of the governments private partners.

Lacking the right people to manage the Deepwater deal, the Coast Guard eagerly embraced a scheme called a “Lead Systems Integrator”a fancy term for an arrangement in which private industry teams not only design and build the governments equipment, but also oversee all the contracting. Teams can even award government-funded contracts to themselves. At the time, LSIs were very much in vogue among government management types, as the latter sought new ways to reduce bureaucracy and make use of the private sector. Still, the hazards of such a set-up were obvious. Jim Atkinson, one of a handful of Coast Guard engineers cleared by the National Security Agency to inspect complex communications systems like those used in Deepwater, said: “It is the equivalent of putting a very juicy steak in front of a very hungry dog, and expecting the steak to still be there the next day.”

Apart from the attraction of handing over the hard work of managing a complicated contract to someone else, there was another reason that the LSI arrangement may have appealed to the Coast Guard. One of the great irritations of working for a small bureaucracy is that your modest appropriations requests are nearly always dwarfed by the Pentagons insatiable demands for state-of-the art weaponry with which to defend the nation. Perhaps the only entities with comparable lobbying muscle are the big defense contractors, which spend millions of dollars sweet-talking lawmakers each year. If the Coast Guard could make a deal with influential contractors, they stood a far better chance of securing a continuing flow of cash for Deepwater.

So the Coast Guard turned to an “innovative” partnership of Lockheed Martin and Northrop Grumman, who formed a consortium for the purposes of the job. (Over the next four years the two companies spent around $50 million lobbying for weapons systems, including Deepwater.) In 2001, the General Accountability Office warned the Coast Guard that this arrangement was “risky”the Coast Guard didnt have enough managers to supervise the contract, which contained too few provisions to ensure oversight and competition. Plus, the GAO pointed out, the private partners werent required merely to replace individual cutters, but also to produce an integrated set of ships and aircraft connected by a single, complex communications system. If something went wrong, it would be almost impossible to change contractors midstream.

But the Coast Guard brass forged ahead. In 2002, they awarded the Lockheed-Northrop consortium a contract to dole out the subcontracts necessary to design and build all of Deepwaters ships, aircraft, and electronics, at a total cost of around $17 billion over twenty years. Unsurprisingly, Northrop assigned most of Deepwaters shipbuilding to Northrop shipyards, while Lockheed determined that it was the best available provider for the electronics. Under the terms of the contract, the private consortium, not the Coast Guard, would have full technical authority over all the Deepwater design and construction decisions. The service expected to state its wishes, write a check, and then wait for fancy new equipment to show up at its docks. Exactly how their private partners went about designing and building all that equipment was a question the Coast Guard leadership didnt bother to ask.

The first major piece of equipment to be produced under Deepwater was the 123-foot patrol boats, which would be used for short-range patrols, especially in the Caribbean, where drug smugglers and boats of refugees are a perennial problem.

The plan sounded elegantly simple: take eight of the Coast Guards 110-foot-long patrol boats, which had been built between 1986 and 1992, add a thirteen-foot hull extension, supervised by Northrop, to each one, and cram that extra space with a brand-new electronics system connected to a satellite network, courtesy of Lockheed. For $88 million, the Coast Guard would get new-ish boats with the capabilities of brand-new boats.

However, when a Lockheed engineer named Michael DeKort was assigned to work on the boats in mid-2003, he discovered some alarming shortcomings. Over the next two and a half years, he wrote a series of e-mails and memos to his bosses, warning them that the security camera system didnt provide a full view of the ship, the cables were not sufficiently fire resistant, and the external electronics couldnt withstand rough seas or weather conditions. When nobody would approve fixes to these problems, he submitted claims through Lockheeds ethics program, which also went nowhere. He was removed from the Deepwater program in 2004. After that, he tipped off the inspector general at the Department of Homeland Security and posted a video detailing his concerns on YouTube. Lockheed responded by eliminating his position. The DHS inspector general investigated DeKorts criticisms and confirmed most of them, concluding that the findings raised “many concerns about Coast Guards program and technical oversight” of its private partners. That year, Senator Ernest Hollings, the ranking Democrat on the subcommittee that oversees the Coast Guard, asked the GAO to investigate the management of the Deepwater contract. The GAO found that its concerns from 2001 had not been addressed, and again chided the Coast Guard for its “hands-off” attitude.

But there was worse to come. The first 123-foot vessel to have its hull refurbished by Northrop, Matagorda, made its maiden voyage in 2004. While fleeing Hurricane Ivan in September of that year, her hull buckled, causing a six-inch fissure on the main deck. The boats propeller shaft was also misaligned. An engineering team patched up Matagorda, but just a few months later a sister ship, Nunivak, experienced similar problems. The Coast Guard inspected all eight of the 123s and discovered that they were in danger of coming apart.

In April 2007, Admiral Thad Allen, the new Coast Guard commandant, announced that the service would decommission the eight patrol boats without replacing them. He also promised to take legal action to recover the $100 million the service had paid Lockheed and Northrop. (This action is currently on hold, pending a Department of Justice investigation of the contract.)

Allen promised a major overhaul of the Coast Guard bureaucracy to improve its ability to manage its contracts. But, he admitted, this would be “an ongoing challenge,” owing to a shortage of experienced managers. In the meantime, the service would rely on paid experts from various independent, not-for-profit consulting bodies. In reality, according to Lockheed spokesman Troy Scully, Lockheed and Northrop continued to perform pretty much the same contracting role on most aspects of Deepwater.

Deepwaters crown jewel was the eight planned National Security Cuttersships capable of sailing thousands of miles from land in the worst weather, and conducting missions ranging from drug interdiction to full-scale warfare. Northrop would build the hull, Lockheed would handle the electronics, and the first example, Bertholf, would be handed over to the Coast Guard in late 2007.

In December 2002, before production had even begun, Coast Guard technical experts warned their superiors that there were serious problems with Northrops proposed design. The experts had found that the ships would be plagued by “fatigue cracks” well before the thirty years of service life specified in the contract. In September 2003, the experts again wrote to management, saying that the design problems could “lead to significant program delays and cost overruns or even catastrophic hull girder collapse.” They continued: “[We] have done all we can over the past fourteen months to work collaboratively with [the private contractors] to resolve these problems, but our input has been ignored.” The next year, an independent Navy audit confirmed the experts fears. The Coast Guards assistant commandant recommended that construction be delayed in order to fix the design, but in 2004 the Coast Guard authorized production on the ships over its experts objections.

By the time construction began, the price tag on the National Security Cutters had already increased from around $300 million to more than $400 million each, thanks to extra features added to the design to fulfill the Coast Guards counterterrorism mission. In 2005, Hurricane Katrina damaged the shipyard in Pascagoula, Mississippi, where Bertholf was being built, delaying her completion by several months and tacking millions more onto the price. Bertholf would now cost more than $640 million.

Finally, in 2006, the Coast Guard conceded that its own experts had been right about the problems with the ships design. In January 2007, the Department of Homeland Securitys inspector general released a scathing report exposing the repeated efforts by the Coast Guards technical experts to warn their bosses about the flaws in the boats design. The report concluded: “The [National Security Cutters] design and performance deficiencies are fundamentally the result of the Coast Guards failure to exercise technical oversight over the design and construction of its Deepwater assets.” Democratic members of Congress had expressed concerns about Deepwater before, but now they had the majority in both the House and the Senate and the evidence to push for major changes.

In a February hearing, Democratic Senator Maria Cantwell, the chair of the subcommittee that overseas the Coast Guard, called Deepwater “the fleecing of the taxpayer with ships that dont float” and a “failed experiment.” Admiral Allen admitted that “we have been running some parts of the Coast Guard like a small business when we are a Fortune 500 company.”

But the recriminations came too late for Bertholf. The ships original acceptance date arrived at the end of 2007, but Bertholf did not. The Coast Guard admitted that the handover would have to be bumped back to February 2008. February came and went, and the Coast Guard said that it needed more time due to lingering problems with the ships electronics. Laura Williams, a Coast Guard spokesperson, said that the industry team was just being “proactive” in dealing with potential problems with the ship before delivering it. And the Coast Guard defended the electronics, pointing to the results of a key inspection of Bertholf in April by Navy officers, which certified that all of Bertholfs major systems worked to spec. However, an anonymous tipster contacted DeKort to tell him that the Coast Guard had removed the malfunctioning electronics equipment prior to the Navy inspectors arrival; Atkinson, the electronics expert, corroborated this after receiving another tip explaining that Bertholfs crew had been using a totally unsuitable Army-style handheld radio to communicate with the network in place of the allegedly flawed Lockheed-designed systems. Bertholf was eventually delivered in May, but the Coast Guard may be forced to bring the ship into dry dock to repair the structural problems, at an undetermined cost.

On March 6, Admiral Allen appeared again before Cantwells subcommittee to defend the program. At the hearing, Cantwell demanded to know how the Coast Guard was going to do better. Allen assured Cantwell that the agency had “turned a corner” in managing Deepwaterand, indeed, the GAO has found improvements. But even now, no one knows what the total price of the eight National Security Cutters will be. Not counting the previous overruns, cost increases could add hundreds of millions of dollars to the tab.

With delays and costs mounting on new ships, the Coast Guard must keep its existing ships in working condition for years longer than planned. This daunting task falls to the Coast Guard Yard, a tiny government shipyard near Baltimore in southern Maryland. I toured the 109-year-old facility with yard commander Steve Duca in late 2006. Several patrol boats had been hoisted up on lifts so that workers could reach the bottoms of their hulls. In the belly of one vessel, Duca pointed out dime-size holes and lengths of plating held together only by rust. I saw another cutter, Spencer, a spring chicken at just twenty-four years old. The blocky, 270-foot ship was dirty, damp, and smelled like mildewed carpet. The aim for Spencer was simply to clean her up enough to make life aboard a little less unbearable for her fifty or so crew members.

Thanks to Deepwater, the boatyard is responsible for performing triage on boats that the Coast Guard admitted were too old five years ago. With the National Security Cutters delayed and the 123s scrapped altogether, major maintenance problems on existing ships have spiked. In a 2005 letter to the Office of Management and Budget, Senators Joe Lieberman and Susan Collins described a disturbing pattern of lost patrol hours and twenty-three hull cracks in a single yearconcluding that “Cutters and aircraft failures are occurring at an increasing rate affecting not only the Coast Guards efficiency, but also putting crew members in danger in the field.” In February this year a cutter named RushDallass sister shipsuffered a two-foot crack in her hull and had to abandon a search-and-rescue mission off Alaska.

In fact, the boatyards operations have become so critical that it is now competing with Deepwater for funds. “Every dollar spent here on legacy stuff on the cutter side is a dollar you take away from the new cutters,” Duca explained. But the “legacy stuff” has to be maintained precisely because new cutters have not appeared. In 2006, for instance, maintenance of old boats ate up 25 percent, or $240 million, of Deepwaters funding.

The ultimate result of Deepwaters travails is that a well-respected agencythe only one, in fact, to perform admirably during Hurricane Katrinais now finding it increasingly difficult to carry out its core mission. Even before Deepwater sprung leaks, the Coast Guard was struggling to be both an overseas counterterror force and a domestic safety and law enforcement agency. “Were not doing as many inspections as we were, were not doing as much drug interdiction,” Vice Admiral James Hull, Atlantic Area commander, told USA Today in 2002. “Fisheries patrols are down a little bit. So were stressed.” And between the decommissioning of eight patrol boats and the advanced age of the remaining forty, the Coast Guard says it has an approximately 10 percent shortfall in the total number of hours its patrol fleet can spend on missions. In other words, theres an increased chance that, when an accident occurs off our coasts or terrorists attack our ports, the Coast Guard wont be able to respond.

Deepwaters extravagant failure has at last prompted some needed changes. Barack Obama has called for a renewed focus on old-fashioned acquisitions management. Maria Cantwell successfully pushed for legislation to add more experienced contract managers to the Coast Guard workforce, to require teams of shipbuilding experts to oversee production on new cutters, and to ban the formation of any more Lead System Integrator deals after 2010. (The remaining major LSIs oversee contracts worth a combined half-trillion dollars, nearly all of which are late and over budget.) And the Coast Guard formally canceled its own LSI, meaning that it now technically has control of the Deepwater contracts, although it is still relying on major support from consultants.

Still, the saga is far from over for the Coast Guard. This spring, Homeland Security Secretary Michael Chertoff went to Congress to present DHSs budget requests for 2009, which included some $9 billion for the Coast Guard, a modern record. His plea for more funding revealed just how far ambitions for the Coast Guard have fallen. Seven years ago, Coast Guard officials were consumed with futuristic visions of a “layered defense,” a “dynamic system of assets that are mission-focused, modular, [and] network-centric,” and “the worlds best multi-mission Coast Guard.” Now all Chertoff wants is boats that float. “I think we owe it to the Coast Guards men and women who go out and take their lives in their hands,” he said, “to occasionally replace their equipment with something that is modern, up-to-date, and isnt going to burst a seam.”

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