There was a story last week about the unaccountable accounting on the Air Force's Evolved Expendable Launch Vehicle (EELV) program. This is a program in which the government provided funding to Boeing and Lockheed Martin, the manufacturers of the Delta, and Atlas and Titan launch vehicles, respectively, to help them both improve the performance and reliability of the systems, and to reduce their cost. The catch is that these are ostensibly commercial systems, so this is in effect a taxpayer subsidy of what should be in theory private enterprise.

There is an argument to be made for this: the competition for these vehicles (Europe's Ariane, the Russian Zenit and Proton launchers, and the Chinese Long March) are all government subsidized, and if we don't help our industry, they'll go out of business won't be able to compete, and the Air Force and NASA will have to launch their payloads on foreign launchers, an unacceptable outcome. In addition, by doing so, the taxpayer will ultimately save money through reduced costs for the launch of future government payloads, and additional tax revenue from a reinvigorated commercial launch industry.

Leaving aside the validity of that argument, it turns out that in order to protect proprietary data of the two corporations, the Air Force is not disclosing how the money was spent, or even exactly how much it was. The idea of the program was to inject funds into the commercial rocket makers, without the wastefulness, schedule constraints, and inefficiency of traditional government oversight. It seems to have worked well, except for the fact that we don't know exactly where the money went.

Go read the article and decide for yourself whether this was a good idea--as far as I'm concerned, it's a topic for another day. What I want to focus on is this:

[Colonel] Mashiko said independent research and development reimbursements are "not counted against" the EELV program budget. Such reimbursements are not counted as part of the cost of many big defense programs either. "It's not bookkept that way," she said.

"Independent research and development," better known in the industry as IR&D. This, in my opinion, is a program badly in need of reform. While I don't necessarily object to subsidization of a truly-critical industry to defend against foreign competition, I do object to a program that raises the barriers to entry for domestic competition, and this is what IR&D effectively does.

IR&D (and its cousin, Bid and Proposal, or B&P) is money that the government gives to aerospace contractors as reimbursement for their expenses in either doing the basic research that they need to do in order to be responsive to projected government program needs, or to bid on government contracts. It's not contract income per se, which requires that specific things be done per the contract. It's what's called discretionary funds, which means that the company can spend it in any way they see fit to maintain a posture to bid and win whatever government contracts they choose to bid on. It is reimbursed by being factored in as a percentage of the rate that the companies charge for their services on contracts, just like overhead, or their award fee.

And therein lies the rub. Like the old saying that you have to have money to make money, you have to have government contracts to win government contracts, at least big ones.

If you're a startup company, with a lot of engineering talent, and great ideas, too bad. You're not eligible for IR&D, because it's provided as a percentage of contract revenue. So in order to go after government work, you have to spend your investors' money, in competition against an entrenched competitor who can use the taxpayers' money, for the effort of reseaching and proposing. And if, like most of us, you're a taxpayer, you face the irony of having to compete against someone who is using resources taken from you, against you. It's as though the NFL draft were run to give the top picks to the top teams, instead of to the bottom ones.

It gets worse. It turns out that they're allowed to use IR&D to pursue commercial activities as well, to a certain degree. That means that even if you decide to say, to heck with the government market, and just do a commercial activity, you're still competing with the government contractors, using your own money (less the amount that you had to pay in taxes to support their bids), while they get their money from the taxpayers.

If you wanted to come up with a system to discourage new entrants into aerospace, it would be hard to come up with a better one. Yet new blood is exactly what the industry needs, particularly since the overconsolidation in the 1990s, in which the several space companies that existed in the 1980s have been narrowed down to essentially two--Boeing and Lockheed Martin (not counting the United Space Alliance, which is the offspring of a shotgun marriage between the two, with NASA holding the twelve gauge, thus joining the two major companies at the hip through it).

Reform of the space industry, and progress and innovation, are going to require some kind of restructuring of how we do IR&D. One possibility might be to set aside a pot of money for new entrants. There are a number of possibilities as to how it would be disbursed, but veteran space entrepreneur Len Cormier has an interesting idea he calls Individual Research and Development.

Let him describe how it would work:

...qualified individuals would receive limited IR&D drawing rights sometime during their lifetimes. As an initial, experimental pilot project, various proposed space launch companies with proposed vehicles that promise to lower the costs of access to space would be able to designate a limited number of engineers, technicians, manufacturing personnel, and other individuals who could further the viability of the proposed launch vehicle. Since the designated individuals would be expending their limited IR&D rights, the designated individuals would likely provide a meaningful peer review from the bottom up. Successful commercial programs would reimburse the IR&D program, thus providing a means for reinstating individual IR&D drawing rights.

Such an idea or variation on it, might level the playing field, and reinvigorate an American space industry that is, in many ways, moribund.

Interesting. I rarely look at the finance side of the business (even though my wife is/was a finance weenie) and I didn't realized IRAD money works that way.

On the other hand...the government gives IRAD money to contractors who have a demonstrated ability to use that money to good end. Not that they always do, mind you, but they can. If you can come up with some equitable way to restructure government funding of industry without opening a new hole to throw cash into (with little or no return) then you've really done something.

I believe universities get some government funding for research work that they do. Is the problem that there's no similar mechanism for new, budding business? Or a transition from academic work to a business product?