updated 4/9/2004 6:47:03 PM ET 2004-04-09T22:47:03

The Pentagon should not move forward on a $23.5 billion plan to acquire 100 air refueling tankers from Boeing Co. until significant changes are made to the deal, the Pentagon's inspector general said Friday.

In a highly critical report, Inspector General Joseph Schmitz said procedural and financial problems with the deal could cause the government to spend up to $4.5 billion more than necessary. The Air Force used inappropriate procurement strategy to justify the deal, which does not meet best business practices, the report said.

Once the changes are made, however, there is no compelling reason not to complete the deal, the report said.

It outlines three options, including delaying the entire project until an analysis of alternatives is completed -- which could force officials to reopen the project to new bids.

In the best option for Boeing, the report advises the Pentagon to alter more than a dozen aspects of the deal before moving forward with the existing plan to lease 20 767 tankers and purchase 80 planes.

Another option calls for the Pentagon to make the changes and acquire the tankers, and then initiate an analysis of alternatives for any remaining planes.

Boeing immediately issued a statement defending the tanker deal.

"The bottom line is that the IG found no reason not to proceed with the tanker deal _ and that's good," said Jim Albaugh, president and CEO of Boeing Integrated Defense Systems.

"From the outset, Boeing and the Air Force have remained committed to providing the war fighter with the world's most capable tanker aircraft as quickly as possible, and at a fair and reasonable price for the taxpayer," Albaugh said.

Lt. Col. Jennifer L. Cassidy, an Air Force spokeswoman, said the report demonstrates "fundamental differences in interpretation" between the audit team's experts and Air Force acquisition and legal experts.

"Although this was an admittedly complex and novel proposal to lease commercial aircraft modified to serve as tanker aircraft, the audit team found no compelling reason to not proceed with the leasing arrangement," Cassidy said.

The Air Force believes that language enacted by Congress in 2002 supports the lease program, and that its terms provide sufficient protection for taxpayers, Cassidy said.

The inspector general has been looking into the deal since last year, after questions arose about ethical issues surrounding the way Boeing pursued the multibillion-dollar contract.

The Defense Department has said the Air Force can't proceed with the contract _ which has been suspended pending an investigation _ until the inspector general's review and related reviews by the Pentagon general counsel, the Defense Science Board and the Industrial College of the Armed Forces are completed.

The reviews are expected to continue at least through May.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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