U.S. Defence R&D Spending: An Analysis of the Impacts

U.S. Defence R&D Spending: An Analysis of the Impacts Rapporteur s report for the EURAB Working Group ERA Scope and Vision Andrew D. James January 2004 Contact details: Andrew James PREST, University of Manchester Oxford Road Manchester M13 9PL, UK Tel: +44 161 275 5860 Email: Andrew.James@man.ac.uk 1

U.S. Defence R&D Spending: An Analysis of the Impacts Executive Summary This study is set against the background of the dramatic increases in the U.S. budget for defence and security related R&D announced in recent years. This has rightly prompted renewed concerns within Europe about the potential implications of such spending for the relative position of European defence and commercial industries and the European science base in transatlantic competition and cooperation. In addition, there is an increasing recognition that the large and growing gap between U.S. and European spending on defence and security related R&D has implications for European aspirations in a number of policy areas including the desire to increase R&D spending to 3 percent of GDP and Europe s aspirations towards the European Security and Defence Policy (ESDP) within the Common Foreign and Security Policy (CFSP). The defence (and homeland security) mission is the principle driver of increases in the U.S. defence R&D budget. These increases are the product of a very different strategic outlook and threat perception on the part of the United States when compared to Europe as well as a very different view of the role of technology in future war fighting and peace keeping missions (the so-called transformation of the military). R&D related to homeland security and anti-terrorism is of growing importance within U.S. defence R&D spending. Differences in the organisation of defence R&D mean that the synergies between defence and civil research in the United States are far ahead of the situation in Europe. There are further U.S. efforts to promote the synergies that emerge from dual technologies whilst defence-related research has historically been excluded from the European Union Framework Programme. Differences in the mode of funding between the U.S. and much of Europe place European defence contractors at a disadvantage in international competition and cooperation. In the U.S., government typically funds the full cost of development and reimburses contractors for cost of private R&D work. In Europe, co-funding of R&D is more typical. There are examples of spin-offs from defence R&D but the focus on such spin-off products or technologies masks the reality of a more rich and complex defence-civil relationship in U.S. Not only are there spin-offs from defence R&D but defence R&D spending impacts on the university science base and training of graduate scientists and engineers. Defence R&D can create new markets and reduce business risks through early acquisition of new technology by technically sophisticated users. Defence R&D can also be an important source of early-stage seed funding for U.S. technology companies. Such effects are likely to grow as dual technologies become increasingly important and the U.S. seeks to leverage technologies from nontraditional (civil) sources. 2

Contents 1. Introduction...4 2. U.S. defence R&D implications for Europe...5 3. Principles driving defence and homeland security research policies in the U.S...8 4. U.S. defence and homeland security R&D spending and trends...10 5. The organisation of DOD RDT&E activities...15 6. Defense Advanced Research Projects Agency (DARPA)...23 7. New rules and practices concerning the relationship between defence and the commercial sector...28 8. Homeland Security R&D...31 9. Benefits of defence and homeland security R&D spending for commercial sectors and the US science base...34 10. Issues of concern to the U.S. S&T policy community...38 11. Comparing the situation in the U.S. and European Union...39 12. Conclusions...39 3

U.S. DEFENCE R&D SPENDING AN ANALYSIS OF THE IMPACTS 1. Introduction In June 2003, Andrew James (a Research Fellow at PREST, University of Manchester, UK) was appointed as an external expert and Rapporteur on defence issues for the EURAB Working Group ERA Scope and Vision. The Rapporteur was asked to prepare a report on USA Defence Spending on Civil RTD and Test and Experiment, an Analysis of the Impacts. This document represents the final report. The objective of the study as defined in the Terms of Reference was to examine the impact of U.S. defence budget spending on research with civil applications on the competitiveness of U.S. research and companies. In particular, the focus of the study was to provide an assessment of: The main principles driving research and innovation policies in the U.S.; The organisation of the research sectors in the U.S., specifically Department of Defense (DOD) and Department of Energy (DoE) agencies and civil departments, and their rules for funding and financing; The evolution of the DOD RDT&E budget and trends for the next decade; New rules and practices concerning the relationship between defence and the commercial sector; Support for commercial sectors, in particular through the identification of examples of defence research spin-offs. The study is set against the background of the dramatic increases in the U.S. budget for defence-related R&D announced in recent years. This has rightly prompted renewed concerns within Europe about the potential implications of such spending for the relative position of European defence and commercial industries and the European science base in transatlantic competition and cooperation. In addition, there is an increasing recognition that the large and growing gap between U.S. and European spending on defence-related R&D has implications for European aspirations in a number of policy areas. A significant part of the large and growing gap in R&D investment between the E.U. and U.S. is accounted for by the difference in spending on defence and security related R&D. The growing defence R&D spending gap between Europe and the U.S. has consequences for the survival of a European defence industrial base and Europe s aspirations towards the European Security and Defence Policy (ESDP). At the same time, the Draft Constitution and other initiatives have restarted debate about common defence (and defence research) in Europe. Europe can learn from the policy initiatives and experience of the United States in these domains. The study is based on the collation and analysis of published secondary material (official reports and academic analyses) and material from key websites (U.S. government departments, agencies and think tanks). In support of the study, face-toface interviews were conducted in the United States with officials from the Department of Defense, DARPA and the Department of Homeland Security, analysts from the Congressional Research Service, think tanks and industry associations. The 4

interviews were conducted in Washington DC in July 2003 and were followed-up by telephone interviews in some cases. 1 2. U.S. defence R&D implications for Europe 2.1 U.S. spending is at record levels The U.S. budget for FY 2004 includes a record-breaking $71 billion for defence and homeland security R&D. This represents 55 percent of the Federal R&D portfolio in FY 2004, up 7.2 percent from the FY 2003 level. 2 Department of Defense (DOD) support for R&D has increased dramatically in recent years and now exceeds Cold War levels after falling significantly following the end of the Cold War. Department of Energy (DOE) defence R&D is also increasing and there are substantial increases in spending on homeland security research both in the newly established Department of Homeland security and elsewhere. 2.2 A large part of the U.S.-European R&D gap is accounted for by defence and ICT industries The large and growing gap in R&D investment between the European Union and the United States is a matter of concern to policy makers and the European Union has pledged to increase European R&D spending to 3 percent of GDP. 3 Together with the effect of the Information and Communications Technology (ICT) sector, a significant proportion of the gap between the European Union and the United States is accounted for by the difference in spending on defence and security related R&D. 4 Figure 1 (U.S.-European comparisons of civil-defence GERD, 2001) illustrates the contribution of defence R&D to U.S. gross expenditure on R&D when compared to the European Union and the three European countries with the largest defence budgets. Only the United Kingdom spends a comparable proportion of GDP on defence R&D. Overall, European defence R&D spending represents barely one-fifth of that spent by the U.S. and most of that European spending is divided and fragmented in nationally focused programmes. 5 1 I would like to acknowledge the contribution of all those people interviewed during the course of this study. In particular, I would like to thank Kei Kozumi of the American Association for the Advancement of Science for sharing with me his analyses of the U.S. defence R&D budget. 2 "FY 2004 Federal R&D climbs to record high of $127 billion; defense and homeland security up, other programs share in modest gains" American Association for the Advancement of Science, Washington DC downloaded from http://www.aaas.org/spp/rd/fy04.htm on 12 January 2004. Note that the AAAS figure for defence R&D comprises the Department of Defense and defence programmes in the Departments of Energy and Homeland Security. The figure does not include the budget for bioterrorism R&D in the national Institutes of Health. This is the commonly used definition of U.S. defence R&D spending and will be used in this report. 3 More Research for Europe Towards 3% of GDP, Commission of the European Communities, COM(2002) 499 final, Brussels, 11 September 2002 4 More Research for Europe, p.7. 5 Figures are for 2001. Source: The Military Balance 2001-2002, The International Institute for Strategic Studies, London (2001). 5

2.3 The growing gap may have implications for the relative competitiveness of European commercial industries and the science base There have always been concerns in Europe that U.S. defence R&D may well have consequences for the competitiveness of commercial industries and the European science base. A recent Commission Communication notes: Defence-related research plays a major role in innovation in the U.S.; it benefits the whole of industry, including Figure 1: U.S.-European comparisons of civil-defence GERD (2001) 3 GERD as % of GDP 2.5 2 1.5 1 0.5 Defence Civil 0 U.S. European Union Germany France United Kingdom (Source: OECD Main Science and Technology Indicators 2003-1) the civilian sector. The Communication notes that technologies funded by defence research include: the internet; the Windows icon pointer interface; the RISC microprocessor (used in mobile telephones); and GPS (Global Positioning System). 6 There may also be important consequences for the European science base because as this report will go on to note federal funding of defence R&D plays an important role in supporting university research in several disciplines. 2.4 The growing gap has implications for the European defence industrial and technological base and the ESDP Strong arguments have been put forward that this growing defence R&D spending gap between Europe and the U.S. also has serious consequences for the survival of a European defence industrial base and Europe s aspirations towards the European Security and Defence Policy (ESDP). 7 The transatlantic spending gap is placing huge 6 European Defence Industrial and Market Issues Towards an EU Defence Equipment Policy, Commission of the European Communities, COM (2003) 113 final (March 2003). 7 European Defence Industrial and Market Issues, p.12. 6

constraints on the European defence industry in its efforts to remain competitive in key markets and it should be stressed that this is not only a matter of funding levels but the rules for funding. It is common for European governments to expect defence contractors to fund at least part of the development costs of programmes from their own resources. This is not the case for U.S. contractors where the U.S. government typically funds the whole cost of development and reimburses contractors for the cost of private R&D work. The great imbalance between the U.S. and Europe also makes transatlantic cooperation more difficult and has implications for the ESDP. The report of the European Commission sponsored STAR 21 Strategic Aerospace Review for the 21 st Century states the problem in blunt terms: If Europe is to be credible in foreign and security policy, it requires appropriate European defence capabilities Military systems need 15 to 20 years from technology assessment to operational deployment. In areas where no significant R&D programmes are undertaken, Europe will have no choice but to give up operational capability in these fields or depend on non- European providers. 8 2.5 European plans for defence and security research efforts may be able learn lessons from the U.S. experience The Draft European Constitution and other initiatives have restarted the debate about common defence (and defence research) in Europe. 9 National governments have expressed their support for a new relationship between defence and civil research in the E.U. The Brussels European Council in March 2003 invited an analysis of: the role of defence R&T procurement in the context of the overall R&T activities in the Union, including the possible creation by the Council of an inter-governmental defence capabilities development and acquisition agency 10 This followed the Commission Communication on European Defence Industrial and Market Issues that had proposed an initiative to promote cooperation on advanced research in the field of global security and suggested that in the longer term - the E.U. should consider the creation of a European DARPA. 11 Under the Italian Presidency in the second half of 2003, there was considerable progress towards the Thessalonki European Council s objective of creating, in the course of 2004, an intergovernmental agency in the field of defence capabilities development, research, acquisition and armaments. 12 Such ideas were also highlighted in the Commission Communication, Investing in Research an Action Plan for Europe. 13 Since then the Commission has made progress with a preparatory action on EU defence security research and expects to launch the first Call for Proposals in 2004. The objective of 8 STAR 21 Strategic Aerospace Review for the 21 st Century, July 2002, DG Enterprise (Brussels). 9 For an overview of recent developments in European armaments cooperation and moves towards a European armaments, research and military capabilities agency, see Andrew D. James, European armaments cooperation: lessons for a future European armaments agency, The International Spectator, 4, 2003. 10 Council of the European Union, Presidency Conclusions, Brussels European Council 20 and 21 March 2003, para.35,p.15. 11 European Defence Industrial and Market Issues 12 Council of the European Union, Presidency Conclusions, Thessaloniki European Council (19 and 20 June 2003). 13 Investing in Research an Action Plan for Europe, Commission of the European Communities, COM (2003) 226 final/2 (4 June 2003.), p. 15. 7

the three year pilot phase is to lay the ground for a full security research programme in 2007. These European plans for defence and security research efforts may be able learn lessons from the U.S. experience. In organisational terms, the strong synergies that appear to exist between defence and civilian research and government defence R&D agencies, industry and universities are of particular interest. European policy makers have contrasted this with the situation in Europe where there is a fairly strict divide between civil and military research (not least in the case of the European Union s Framework Programme for Research and Technology which excludes research for explicitly defence-related objectives). 14 Equally, as Europe begins the detailed planning of new defence and security research efforts there may be things to learn from U.S. programmes and their modes of funding and financing. 3. Principles driving defence and homeland security research policies in the U.S. Before turning to the details of U.S. defence and homeland security R&D funding, its organisation and impact on U.S. industry and the science base, it is important to begin by understanding the factors that are driving the increase in U.S. spending. 3.1 Defence mission the main driver of increased U.S. defence R&D The most important point to emphasis here is that it is the defence and homeland security mission that is the main driver of increased defence R&D spending. In its first term, the Clinton administration sought to use dual-use funding to enhance U.S. industrial competitiveness. The Technology Reinvestment Project (TRP) passed by Congress in 1992 was the largest and most high profile of these programmes. The TRP was seen by the DOD as a way of integrating its military technology base with that of the commercial sector through support for the development and exploitation of dual-use technology. However, from 1995, the Republican controlled Congress began to roll-back dual-use programmes because of concerns that they were diverting scarce DOD R&D resources away from their primary mission of national defence. Congress abolished the TRP as part of the FY 1996 budget process and replaced it with the more modestly funded and more explicitly defence-orientated Defense Dual Use Technology Initiative. Under the Bush Administration, it is the needs of the defence mission that are the principle drivers of U.S. defence R&D priorities rather than any effort to enhance U.S. commercial industrial competitiveness per se. 3.2 National and homeland security drivers The events of September 11th 2001, the War on Terrorism and the anthrax attacks in the U.S. have caused a shift of R&D spending towards defence and a significant increase in federal spending on homeland security. The political and policy impact of 9/11 has been massive and the dominant mood in the U.S. at the moment is that the country needs to do (and spend) whatever it takes to defeat international terrorism. Indeed, it is worth noting that for several years running now Congress has boosted the DOD s R&D programmes well above the already record-setting Administration request for DOD RDT&E. 14 European Defence Industrial and Market Issues, p.12. 8

3.3 DOD RDT&E policy Irrespective of the events of September 11 th 2001, however, the incoming Bush Administration was already committed to an increase in defence RDT&E spending. This was driven by a view within the defence policy community that past reductions in defence R&D spending had severely depressed U.S. military-technological innovation when the premium on innovation has never been higher. 15 There was particular concern about the decline in DOD funding of basic research, applied research and advanced technology development (what is called the S&T program ) and a Defense Science Board Task Force recommended that the DOD and Congress should allocate 3 percent of the total DOD budget for the S&T program. The incoming Bush Administration signalled its support for the 3% target in its Quadrennial Defense Review (QDR). 16 3.4 Military Transformation The QDR also signalled the Bush Administration s commitment to what it calls transformation. Sustaining full-spectrum dominance through technological superiority has long been at the heart of U.S. military thinking but the objective of military transformation is a radical reorganization and transformation of its military resources and capabilities. The picture is of a U.S. military that leverages information superiority to dominate the full spectrum of military operations, from low intensity conflict to major theatre wars. The QDR focused on dominant military capabilities that would be reinforced by a transformation in doctrine and technology and able to operate on a global basis. The QDR also makes clear that U.S. technological dominance is at the core of transformation and a robust research and development effort is imperative to achieving the Department s transformation objectives. 17 3.5 Broader economic and competitiveness concerns There is little doubt that political and industrial special interests have some influence over parts of the U.S. defence R&D budget process. In particular, there are concerns that the U.S. aerospace industry is losing its competitive edge over Europe. In 2001 the U.S. Congress mandated the establishment of a Commission on the Future of the United States Aerospace Industry and its 2002 Final Report declared that: The United States must maintain its pre-eminence in aerospace research and innovation to be the global aerospace leader in the 21 st century and called for proactive government policies and sustained public investments in long-term research and RDT&E infrastructure 18 Various Congressional initiatives have followed and the U.S. Aerospace Industry Association has engaged in a vigorous lobbying campaign to increase government R&D. 15 Final Report of the Defense Science Board Task Force on Globalization and Security, U.S. Department of Defense (Washington DC, 1999). 16 Quadrennial Defense Review Report, Department of Defense, September 30, 2001 (Washington DC). 17 Quadrennial Defense Review Report, p.41. 18 Final Report of the Commission on the Future of the United States Aerospace Industry 9

4. U.S. defence and homeland security R&D spending and trends 4.1 The dominant position of U.S. defence and homeland security R&D spending Any analysis of U.S. government spending on defence R&D must begin by emphasising its dominant position in U.S. federal R&D funding. Defence R&D accounts for 55 percent of all U.S. federal funding of R&D. In FY 2004, there will be record defence R&D investments and the bulk of federal R&D spending increases are going to DOD, DHS and National Institutes of Health whilst all other R&D funding agencies will collectively see R&D funding remain flat next year (with modest increases in some agencies being offset by cuts in others). 19 After defence, the next largest functional category of R&D spending is health (see Figure 2: Major functional categories of R&D). Figure 2: Major Functional Categories of R&D (FY 2004 President s Budget) Major Functional Categories of R&D FY 2004 President's Budget Environment 2% Agriculture 1% General Science All Other 6% 3% Energy 1% Space 8% Health 24% = Defense 55% * - includes natural resources R&D Source: AAAS, based on OMB and agency budget data. MARCH '03 REVISED 2003 AAAS 4.2 Department of Defense The DOD is the largest R&D funding agency comprising a little over 50 percent of all federal R&D funds. The objective of DOD RDT&E spending is to support the DOD s defence mission. In FY04, total research and development (R&D) at DOD will rise to $66 billion an increase of 12.4 percent or $7.3 billion over FY03. FY04 represents the highest real spending on DOD R&D in history. 19 Federal R&D investments in homeland security: prospect for FY 2004, Kei Koizumi, American Association for the Advancement of Science, presentation to the ICATHS Conference, September 26, 2003 downloaded from http://www.aaas.org/spp/rd/ 10

To understand the DOD RDT&E budget, we must begin by recognising the fundamental division between the DOD s Science and Technology base activities (budget categories 6.1 to 6.3 ) and the systems acquisitions programmes that follow (budget categories 6.4 to 6.7 ). Technology base activities explore the potential of new technologies and extend the capabilities of existing ones. Although they are conducted in support of the DOD s defence mission they are not necessarily expected to lead to specific weapons systems. The more research-orientated S&T activities account for little more than 15 percent of total DOD RDT&E spending. The vast majority of RDT&E spending is on downstream systems acquisition activities (development, production engineering and so forth). These systems acquisitions programmes are intended to meet specific military needs. Thus, the DOD has Figure 3: Total R&D by Agency: FY 2004 Proposed Total R&D by Agency: FY 2004 Proposed Budget Authority in billions of dollars NSF 3% DOE 7% USDA All Other 2% 5% NASA 9% DOD 51% HHS (NIH) 23% Source: AAAS, based on OMB R&D Budget Data and agency estimates responsibility for the entire spectrum of science and technology from basic research to development and deployment of weapons systems to the armed forces. An analysis of DOD RDT&E activities shows that they are heavily skewed towards development rather than research. This is in contrast to research-orientated models like the National Institutes of Health (NIH) or National Science Foundation (NSF). 20 This emphasis on development is reflected in the composition of the RDT&E budget. Thus, development, testing and evaluation of weapons systems represents by far the largest share of the RDT&E budget almost 85 percent. The Science and Technology programme accounts for a little over 15 percent. (See Figure 4: Composition of the DOD RDT&E budget). 20 New DHS receives final R&D portfolio of $1.05 billion, funding for Project Bioshield, AAAS R&D Funding Update, September 24, 2003, American Association for the Advancement of Science (Washington DC) downloaded from http://www.aaas.org/spp/rd/ 11

The increases in the RDT&E budget in recent years have also been heavily skewed towards weapons development activities. In the FY 2004, nearly all ($6.0 billion) of the enormous $7.3 billion DOD R&D increase will go to weapons development activities. Advanced Component Development ( 6.4 ), Systems Development and Demonstration ( 6.5 ) and Operational Systems Development ( 6.7 ) will all increase by more than $1 billion each. These categories cover advanced development work, mostly performed by industrial firms on specific weapons systems. Most of the increase in the 6.5 budget is accounted for by the $4.3 billion appropriation (up from $3.4 billion in FY2003) for the Joint Striker Fighter, a next generation fighter aircraft in development for the U.S. Air Force and Navy and certain European countries. Figure 4: Composition of DoD RDT&E budget (FY 2004 President s budget) Development, testing & evaluation of weapons systems represents largest proportion of DoD RDT&E budget 6.7 Operational Systems Development ($19.5 bn.) 6.6 RDT&E Management Support ($3.0 bn.) 6.5 System Development & Demonstration ($15.9 bn.) 6.4 Advanced Component Development & Prototypes ($13.2 bn.) Science & technology 6.1 + 6.2 + 6.3 = $10.2 bn. (16% of RDT&E) 6.3 Advanced Technology Development ($5.2 bn.) 6.2 Applied Research ($3.7 bn.) 6.1 Basic Research ($1.3 bn.) Funding of Science and Technology (S&T) will increase by $1.3 billion or 12.0 percent to a record $12.6 billion in FY 2004 following the decision of the Congress to reverse the Administration s proposed cut of nearly $1 billion. S&T groups together Basic Research ( 6.1 ), Applied Research ( 6.2 ) and Advanced Technology Development ( 6.3 ). The increase in S&T spending is primarily because of large increases for technology development ( 6.3 ). The 6.3 programmes are to increase by 23.3 percent to $6.1 billion, including a 55 percent increase in Air Force technology projects. In contrast, DOD Basic Research funding ( 6.1 ) will fall by $1.3 billion or 0.9 percent to $1.4 billion. Applied Research ( 6.2 ) will increase by 3.6 percent to $4.4 billion. In contrast, the Administration requested cuts of 8 percent and 14 percent respectively. 21 21 DOD receives record R&D portfolio, $12.6 billion for S&T programs, AAAS R&D Funding Update, September 29, 2003, American Association for the Advancement of Science, Washington DC downloaded from http://www.aaas.org/spp/rd/ 12

4.3 Department of Energy The Department of Energy (DOE) is also an important funding agency for defence R&D. The DOE s principle mission is to enhance U.S. national security. Responsibility for that mission is shared between four principal programme lines: National Defense Programs; the energy program; environmental program; and, science program. The National Defense Programs of the DOE have four overriding priorities: the integrity and safety of the U.S. nuclear weapon stockpile; promoting international nuclear safety; advancing nuclear non-proliferation; and, the provision of nuclear power plants for the U.S. Navy. 22 Congress has agreed to provide $8.8 billion for R&D in the Department of Energy in FY2004 of which $4.2 billion is for the DOE s defence R&D activities. This represents a $282 million or 7.3 percent increase in defence R&D. On the defence side, most of the DOE s R&D is funded by the National Nuclear Security Administration (NNSA) which funds the maintenance of the U.S. nuclear weapon stockpile through science-based research, mainly in its core Weapons Activities account. R&D in Weapons Activities has grown substantially in recent years from $2.4 billion in FY 2001 to $3.2 billion in FY 2004. These activities include $726 million for Advanced Simulation and Computing to develop the next generation of computer processing technologies in a bid to better model nuclear explosions and $517 million for Inertial Confinement Fusion R&D. Controversially, the budget also includes some funding for the Bush Administration s proposal to initiate research on a new generation of nuclear weapons, including the Robust Earth Penetrator bunker buster bomb. 23 4.4 Department of Homeland Security The Department of Homeland Security was established in March 2003 to prevent terrorist attacks within the United States; reduce the vulnerability of the United States to terrorism; and minimise the damage, and assist in the recovery, from terrorist attacks that do occur within the United States. 24 The new Department will be one of the major funding sources of R&D in FY 2004 with the DHS R&D portfolio totalling $1.05 billion (up 57 percent over FY 2003 25 ).The DHS Directorate of Science & Technology is to receive $874 million in FY 2004, up $353 million or 67.8 percent over the FY 2003 funding level. One reason for this enormous increase in funding is that the S&T Directorate is building many of its capabilities from scratch. The Directorate is having to create new R&D capabilities in several areas. Unlike many other federal agencies that fund R&D, which are responsible for research but not responsible for bringing technology-based products to market or deployment, DHS will have responsibility for the entire spectrum of science and technology from basic research to development and deployment of new technologies in the hands of DHS employees and state and local agencies. Thus, its R&D portfolio will at least initially be heavily skewed towards development. In this respect, the DHS portfolio will be very similar to that of the DOD, which is also heavily orientated toward 22 http://www.energy.gov/engine/content.do?bt_code=aboutdoe 23 DOD receives record R&D portfolio, $12.6 billion for S&T programs. 24 Homeland Security Act of 2002 H.R. 5005-8 25 The DHS R&D portfolio brings together existing Department of Defense, Energy and Agriculture programmes with an estimated budget of $521 million in FY2003. 13

development over research, rather than research-orientated models like the National Institutes of Health (NIH) or National Science Foundation (NSF). 26 4.5 National Institutes of Health and other homeland security R&D The DHS will be the focal point for homeland security related R&D in the federal government. However, the majority of federal homeland security R&D will actually remain outside the DHS. Thus, bioterrorism R&D programmes currently within the National Institutes of Health (NIH) will remain there instead of transferring to the DHS and the same will be the case with counterterrorism R&D programmes conducted by other departments such as Environmental Protection Agency (EPA), DOD and DOE. Altogether, homeland security R&D is funded by more than a dozen different federal government departments. The Bush Administration is seeking a total of $3.4 billion for homeland security R&D in FY 2004. The National Institutes of Health (NIH) would provide nearly half the total federal investment with the NIH bioterrorism R&D portfolio for FY 2004 would be $1.6 billion in the President s budget request, mostly in the National Institute of Allergy and Infectious Diseases (NIAID). NIH has supported bioterrorism R&D for many years but its research portfolio became a high priority after the Autumn 2001 postal anthrax attacks. In FY 2003, around $1 billion went to research activities aimed at developing biomedical tools to detect, prevent and treat infection by biological agents. A further $700 million went to R&D facilities funding for the construction of intramural and extramural biosafety laboratories. In FY 2004, the entire $1.7 billion would go to biomedical research, both in the NIH s own laboratories and through extramural research grants. 4.6 Prospects for future defence and homeland security R&D spending Politically, support for defence and homeland security R&D spending remains strong as evidenced by the decision of the Congress to agree budgets that were above that requested by the Bush Administration. The on-going war in Iraq, the War on Terrorism and heightened threat perceptions in the United States all suggest that R&D spending will continue to rise. Against this there are other factors that may curb future increases. The U.S. is heading for record budget deficits. In FY 2004, the budget deficit could exceed $600 billion and the big question is whether there is limit to how much the U.S. is willing to borrow. A continuing and expensive deployment in Iraq is placing pressure on the DOD s budget and may lead in the medium term to the diversion of resources from R&D to Operations & Maintenance. The Bush Administration has proposed a major expansion of entitlement spending (Medicare drug benefits). All may act to curb defence R&D spending. 27 26 New DHS receives final R&D portfolio of $1.05 billion, funding for Project Bioshield,. 27 Federal funding for R&D in Fiscal Year 2004, Kei Koizumi, American Association for the Advancement of Science, presentation to the BERAC Meeting, November 13, 2003 downloaded from http://www.aaas.org/spp/rd/present.htm 14

5. The organisation of DOD RDT&E activities The dominance of DOD RDT&E activities in terms of its share of all U.S. defence and homeland security related R&D means that it is the obvious focus for a closer look at organisational issues, programmes and funding rules. 5.1 Responsibility for RDT&E activities DOD Science and Technology activities are largely managed, budgeted and performed separately from systems acquisitions programmes. Both the individual services (Army, Air Force, and Navy) and the defence-wide agencies, primarily the Defense Advanced Research Projects Agency (DARPA) and the Missile Defense Agency, manage S&T programmes. Each Service organises its research differently, and each Service has its own central research office that oversees its basic research activities (the Army Research Office, the Office of Naval Research, the Air Force Office of Scientific Research). The management of systems acquisition programmes is also devolved to System Program Offices within the individual Military Services who fund and have responsibility for the design, development, and production of military systems. Ultimately, the RDT&E process is overseen and to some extent coordinated by the Office of the Secretary of Defense through the Under Secretary of Defense for Acquisition, Technology, and Logistics. 5.2 Who performs DOD RDT&E? The Department of Defense uses both in-house and external capabilities to meet its RDT&E needs. Table 1 (DOD RDT&E performers) identifies the main performers of RDT&E and their shares of the RDT&E budget. Defence research laboratories and national laboratories A little under one-quarter of all RDT&E is performed by Federal government laboratories. They conduct over 30 percent of the Science & Technology programme and over one-fifth of systems development work. Each service organises itself differently, but each has its own research laboratories; research, development and engineering centers (RDEC); test and evaluation (T&E) centres and proving grounds; and multi-functional entities such as "warfare centers". In general, these laboratories are actively managed at the Service level, rather than at the level of the Office the Secretary of Defense (OSD), with OSD performing a policy oversight role. 28 In addition, some DOD RDT&E is undertaken at DoE national laboratories such as Los Alamos and Sandia and NASA facilities such as the Jet Propulsion Laboratory. The laboratory system of DOD (together with that of DOE and NASA) is by far the largest in the federal government, accounting for at least 20 percent of the entire federal research and development (R&D) budget, and spending over 80 percent of the funds allocated government-wide to federal laboratories.. 29 28 Status of Federal Laboratory Reforms, The Report of the Executive Office of the President Working Group on the Implementation of Presidential Decision Directive PDD/NSTC-5 Guidelines for Federal Laboratory Reform, March 1997. 29 Status of Federal Laboratory Reforms 15

Table 1: DOD RDT&E performers Category TOTAL Federal Labs Performers Universities/ Industry Colleges FFRDCs Nonprofits Other Basic "6.1" 100.0% 22.9% 9.3% 64.7% 0.5% 2.0% 0.6% Applied "6.2" 100.0% 37.8% 43.2% 12.8% 3.4% 2.5% 0.2% Tech. Development "6.3" 100.0% 27.4% 59.8% 6.2% 3.7% 2.5% 0.5% S&T 100.0% 30.5% 43.8% 19.9% 3.0% 2.4% 0.4% Systems Dev. ("6.4 -"6.7") 100.0% 21.7% 75.0% 0.9% 2.1% 0.2% 0.2% TOTAL 100.0% 24.1% 66.4% 6.1% 2.3% 0.8% 0.3% Note: Preliminary data for FY2001. Source: Federal Funds for Research and Development Fiscal Years 2000-2002, 2002, National Science Foundation. Preliminary obligations for FY 2001. Data are incomplete (classified programs and support costs not included). Other = State and local governments, and foreign performers. Figures provided by Kei Kozumi, AAAS. Universities Universities play an important role in DOD RDT&E activities and especially in the provision of basic research. Universities undertake almost 65 percent of DOD basic research and also receive substantial funding for applied defense research and advanced technology development. Nearly 350 universities and colleges conduct DOD-funded research. 30 The ten universities receiving the largest amounts from the DOD are ranked in Table 2 (The top 10 universities receiving DOD science and engineering funds). Leading universities such as Johns Hopkins, Georgia Institute of Technology and MIT all receive substantial funding from DOD with Johns Hopkins receiving more than $340 million in FY 2001. Table 2: The top 10 universities receiving DOD science and engineering funds 31 Institution & ranking Funding (dollars in thousands) 1. Johns Hopkins University 341,181 2. Penn State University University Park 102,457 3. University of Texas Austin 84,596 4. University of Southern California 64,894 5. Georgia Institute of Technology 60,398 6. MIT 57,286 7. University of Washington 35,407 8. University of California Los Angeles 34,383 9. University of Southern Florida 33,821 10.University of Michigan 32,532 30 Source: Association of American Universities, www.aau.edu/sheets/defensetp.pdf 31 Table is derived from Table B-12 in Federal Science and Engineering Support to Universities, Colleges and Nonprofit Institutions: Fiscal Year 2001, National Science Foundation (Arlington, VA). 16

Federally Funded Research and Development Centers (FFRDCs) and University Affiliated Research Centers (UARCs) FFRDCs assist the U.S. government with scientific research and analysis, systems development, and systems acquisition, working as strategic partners with their sponsoring government agencies. All FFRDCs are sponsored by a government agency but to ensure objectivity and technical excellence, FFRDCs are organised as independent, not-for-profit entities. The DOD-sponsored FFRDCs were established at the height of the Cold War to meet specific DOD needs e.g. to provide operations research and analyses support for the Services (Project RAND), the Office of the Secretary of Defense and the Joint Chiefs of Staff (Institute of Defense Analyses) or to provide scientific and engineering support involving launch, space and ground support systems (Lincoln Laboratory, MITRE and the Aerospace Corporation). Since then, however, alternative sources of technical advice have emerged (not least in industry) and there has been a growing concern that the DOD often assigns to the FFRDCs on a sole-source, non-competitive basis work that could be done by others, either in the government or private sector. Consequently, there has been growing pressure on the DOD to put such work out to competition and the FFRDCs have increasingly sought other sources of funding beyond the DOD. 32 Today, FFRDCs account for a little under 2.5 percent of RDT&E spending. Industry By far the largest proportion of RDT&E activity is undertaken by industry. Industry performs over two-thirds (66.4 percent) of all RDT&E and 75 percent of systems development work. In addition, industry performs nearly 45 percent of Science & Technology especially in the categories of applied research (43.2 percent) and technical development (59.8 percent). The largest share of this funding goes to the large U.S. defence contractors such as Lockheed Martin, Boeing and Northrop Grumman with Lockheed Martin alone receiving over $5.3 billion in RDT&E funding in FY 2002 alone (see Table 3: DOD Top 10 companies receiving RDT&E awards). Although these traditional defence contractors continue to receive by far the largest share of RDT&E funding there are as this report will go on to note growing efforts by the DOD to engage non-traditional (civil) companies in defence RDT&E. 5.3 What are the main DOD RDT&E programmes? Table 4 (The twenty largest RDT&E programmes) lists the largest RDT&E programmes. This emphasises the point that was made earlier, namely that RDT&E funding is dominated by weapons system development programmes. Thus, the President s budget request for FY 2004 included more than $4 billion for Systems Development and Demonstration ( 6.5 ) funding for the Joint Strike Fighter programme. Over $3.6 billion was requested for the Ballistic Missile Defense Midcourse Segment alone with further funding for other parts of the Missile Defense programme. The only two S&T programme items in the top 20 are for Applied Research programmes ( 6.2 ) under DARPA s Materials and Electronics programme (nearly $440 million) and Computing Systems and Communications Technology programme (over $400 million). 32 Report of the Defense Science Board Task Force on Federally Funded Research and development Centers (FFRDC) and University Affiliated Research Centers (EARC) Independent Advisory Task Force, January 1997, Office of the Under Secretary of Defense for Acquisiton and Technology (Washington DC). 17

Table 3: DOD Top 10 companies receiving RDT&E awards 33 Company (and rank) RDT&E ($ bn.) 1. Lockheed Martin 5.33 2. Boeing 4.31 3. Northrop Grumman 1.40 4. United Technologies 1.23 5. Raytheon 1.03 6. Boeing Sikorsky Comanche team 0.66 7. General Dynamics 0.60 8. TRW 0.54 9. Science Applications International 0.48 10. The Aerospace Corporation 0.47 Table 4: The twenty largest RDT&E programmes 34 PE Name Organisation name Budget category 2004 budget request ($ mn) Ballistic Missile Defense Midcourse Defense Segment Missile Defense Agency 04 3613.266 Joint Strike Fighter (JSF) Air Force Budgtd by DOD 05 2194.087 Joint Strike Fighter (JSF) Navy Budgeted by DOD 05 2171.736 Armored Systems Modernization (ASM)-SDD Army Budgeted by DOD 05 1701.331 Comanche Army Budgeted by DOD 05 1079.257 SC-21 Total Ship System Engineering Navy Budgeted by DOD 05 1037.987 Ballistic Missile Defense Terminal Defense Segment Missile Defense Agency 04 810.440 Advanced EHF MILSATCOM (SPACE) Air Force Budgtd by DOD 04 778.078 Ballistic Missile Defense Boost Defense Segment Missile Defense Agency 04 626.264 F-22 Air Force Budgtd by DOD 05 620.740 Space Based Infrared System (SBIRS) High EMD Air Force Budgtd by DOD 05 617.229 Ballistic Missile Defense Test & Targets Missile Defense Agency 04 611.522 Ballistic Missile Defense Systems Core Missile Defense Agency 04 483.996 Information Systems Security Program National Security Agency 07 476.657 Materials and Electronics Technology DARPA 02 465.544 V-22A Navy Budgeted by DOD 05 441.142 Advanced Wideband System (AWS) Air Force Budgtd by DOD 04 439.277 Ballistic Missile Defense Sensors Missile Defense Agency 04 438.242 Advanced Program Evaluation Air Force Budgtd by DOD 07 425.486 Computing Systems and Communications Technology DARPA 02 404.859 33 Source: 100 Companies Receiving the Largest Dollar Volume of Prime Contract Awards Fiscal Year 2002, Department of Defense (Washington DC). 34 Source: Department of Defense budget document R2. 18

A discussion of all the principle RDT&E programmes is beyond the scope of this study. Instead, it might be more useful to identify several programmes that are of particular interest because they illustrate some of the modalities of support for the science base, dual use technologies and defence contrctors. The funding rules for these programmes are described in Appendix 1 (Examples of DOD RDT&E programmes and their funding rules) on pages 41-43. The University Research Initiatives (URI) programme funds competitively awarded basic research grants to universities. Funding for URI will rise 22 percent to $286 million in FY2004, with much of the increase going to Congressionally designated, performer-specific projects ( earmarks ).- 35 The University Research Initiative (URI) is a program funded out of the Office of the Director of Research, in the Office of the Director of Defense Research and Engineering (ODDR&E). It is jointly executed by the Army Research Office (ARO), Office of Naval Research (ONR) and Air Force Office of Scientific Research (AFOSR). A group chaired by the ODDR&E and including the senior managers of the ARO, ONR, and AFOSR oversees the joint execution of the program. The URI consists of several component programs including: the Multidisciplinary University Research Initiative (MURI), which provides funding for research groups from different disciplines working for a common objective the Defense University Research Instrumentation Program (DURIP), which provides funding for badly needed, relatively expensive instrumentation for scientific and engineering research of special interest to the DOD the National Defense Science and Engineering Graduate Fellowships, which support outstanding students to undertake graduate research in areas of strong interest to DOD, and the Defense Experimental Program to Stimulate Competitive Research (DEPSCoR), which funds research in States under represented in Federal research support. 36 The Defense Research Sciences (DRS) program funds basic research in DOD laboratories and universities. U.S. Air Force describes the objective of its Defense Research Sciences program as follows: to maintain technological superiority in the scientific areas relevant to Air Force needs; to prevent technological surprise to our nation and create it for our adversaries; to maintain a strong research infrastructure composed of Air Force laboratories, industry, and universities; and to complement the national research effort. The DRS program will receive $893 million in FY2004 DOD's SBIR and STTR Programs The Small Business Innovation Research (SBIR) Program was created by Congress in 1982 to help small businesses more actively participate in federal R&D. All Federal agencies with an annual extramural R&D budget exceeding $100M are required to 35 DOD receives record R&D portfolio, $12.6 billion for S&T programs. 36 http://www.acq.osd.mil/ddre/research/getinvolved.html 19

participate in the SBIR Program. 37 SBIR is the largest source of early-stage technology financing in the U.S. Total Federal SBIR/STTR funding in FY 2003 was $1.6 billion. The DOD accounts for nearly half of the total SBIR/STTR program and it is expected that its funding will exceed $1 billion in FY 2004. The DOD SBIR program, funds early-stage R&D at small technology companies and is designed to stimulate technological innovation; increase private sector commercialization of federal R&D; increase small business participation in federally funded R&D; and, foster participation by minority and disadvantaged firms in technological innovation. Evaluations of the SBIR have been positive. The House of Representatives Committee on Small Business commented that: "The SBIR program, during its ten years of existence, has established itself as one of the most effective technology programs in the federal government" and the National Academy of Sciences has said: "We believe this program has significant merit...in providing a bridge across which companies can move from start-up to commercialisation". A 1997 DOD study found that SBIR Phase 2 awards yielded average product sales of $760,000. In general, sales to other than DOD and military prime contractors have accounted for almost exactly half of all sales by Phase 2 awardees. Despite this, the programme does have its weaknesses. Successes, since the program started in 1984, have been relatively concentrated with the top 1.5% of SBIR projects accounting for more than 50% of Phase 3 sales. In addition, the overall duration of the phases and evaluations has biased the program towards far-from-market development (a general criticism of doing business with the government). Thus, those who have won the greatest number of awards have tended to be strong in R&D but have the least attractive commercialisation records with average post-phase 2 sales of about $300,000. 38 A complementary programme called STTR (Small Business Technology Transfer Research) has been developed to fund co-operative programmes between small businesses and research institutions (universities, federally-funded R&D centres or non-profit research institutions). The DOD STTR program, funded at approximately $45 million in FY 2003, was established by Congress in 1992. STTR is similar in structure to SBIR but funds cooperative R&D projects involving a small business and a research institution (i.e., university, federally-funded R&D centre, or nonprofit research institution). STTR seeks to reduce the risk and expense of serious R&D that is often beyond the means of a small company. STTR creates, for the first time, a vehicle for moving ideas from research institutions to markets via small firms, with the aim of serving both military and commercial markets. Independent Research & Development (IR&D) program Independent Research & Development (IR&D) is R&D initiated and conducted by defence contractors independent of DOD control and without direct DOD funding. 37 These agencies currently include: Department of Agriculture; Department of Commerce; Department of Department of Defense (Office of the Secretary of Defense, Army, Navy, Air Force, DARPA, Missile Defense Agency, and Special Operations Command); Department of Education; Department of Energy; Department of Health and Human Services; Department of Transportation; Environmental Protection Agency; National Aeronautics and Space Administration; National Science Foundation. 38 Andrew D. James, Hugh Cameron and Philip Gummett, Transfer and Civil Use of Defence-Related Technologies and Diversification of Defence-Related SMEs, Final Report to the European Commission, PREST, University of Manchester, July 1998. 20