Interview transcript:
Terry Gerton You are now leading a center focused on the industrial base. So I want to start by asking you to define that in terms of the government and how it’s being impacted by the shutdown.
Jerry McGinn I joined CSIS a couple months ago to stand up this Center for the Industrial Base. And the industrial base are those companies, and there are also organic facilities, that support how the government and industry work together to achieve government goals, either national security or other areas.
Terry Gerton So when I think about it from my defense perspective, I think about defense depots and arsenals and ammunition plants. But from the government contractor space, are we talking primes like Boeing and Northrop Grumman? What else is in there?
Jerry McGinn Yeah, so you’re absolutely right. So on the organic side, you have these arsenals and depots that are government owned, but a lot of times they’re contractor operated. So there’s contractors there as well. On the government contractor side, the vast majority of the industrial base is government contractors. And those are, they run the gamut from the bigger companies, the prime contractors, like you mentioned, some of the publicly traded companies, but there are 100 plus big primes that are either U.S., some of them are non-U.S. headquartered, like BAE Systems and so on, but they have significant U.S. presence. And then there are a lot of mid-sized, lower-tier suppliers that do defense or non-defense, a mix of things. There are subcontractors or prime contractors. And then, but the vast majority of our industrial base are small businesses. And those are mom and pop shops, those are bigger firms that have been doing small business for the, there could be in certain categories like minority-owned businesses or women-owned small businesses. So it’s really kind of a rich complex and number of companies that support how the government and industry work together.
Terry Gerton So when the government enters a shutdown, as it is currently, whether it’s a full government shutdown, a partial government shutdown, walk us through how that impact rolls through the industrial base. Maybe start with what happens to existing contracts.
Jerry McGinn So for existing contracts, it’s a question of whether or not there is money that’s already been appropriated. Because what can’t go forward in the shutdown is there’s no appropriation, so you can’t obligate money that has not been appropriated by Congress. But for contracts, a lot of contracts are done over multiple years, there’s two year money or even more than that at times. And so the money has already been appropriated and you can essentially continue to operate on that contract if the money’s been appropriated and the government wants to keep operating. Now, the government can, in a lot of — and this has happened with a lot cases today — if the government workers leave and you were on an office support contract, for instance, you may get a stop work order because there’s no one to actually direct your work. And so you may have a funded contract, but you may be told to cease work because there’s no government that’s able to support you. But then there are lots of companies that also have, that have funding contracts that the government says, we want you to keep working on this. We’ll connect with you when we get back.
Terry Gerton So if you’re building fighter jets, for example, on a multi-year contract, you keep building fighter jets, and the supply chain that supports that continues to operate.
Jerry McGinn That’s correct, that’s correct. So you’re able to keep working on those, and some of these are exempted programs or exempted areas where the government workers will stay there and the military will always stay there, those that have military, because the military are not impacted by the shutdown.
Terry Gerton So my fighter jet example is a government-peculiar product, but there are lots of companies who make dual-use items, so something that might be used in a doctor’s office in a commercial hospital, a private hospital, and in a military hospital, for example. If you have a dual-use technology, what impact then does the stop work order or the termination of new awards have on those kinds of businesses?
Jerry McGinn Well, the principle still applies in terms of, if you have an existing contract with funds and you’re able to keep performing on it, but if it’s something that, let’s say they’re a order out of a GSA catalog, a Government Services Administration catalog, the government’s not going to be making new orders right now, or very discreet kind of exceptions for excepted services or excepted programs. But in general, so you’re not going to be getting new orders, your pipeline of revenue and so on may be impacted, depending on the nature of how much government business is involved.
Terry Gerton I’m speaking with Jerry McGinn. He’s the director of the Center for the Industrial Base at the Center for Strategic and International Studies. Jerry, you mentioned at the top the role that small businesses play in the nation’s industrial base. They seem particularly vulnerable in cases of government shutdowns. Walk us through the risks that they face and how that might have longer-term ripple effects.
Jerry McGinn Yeah, now, the small businesses are the companies that are obviously going to have less numbers of contracts. Sometimes they just have one big contract with one agency, or on one base, and so these small businesses are obviously more impacted by when their contracts are impacted, so. And small business generally have a lot more services. They provide services as opposed to products. There are the mom and pop shops that build parts and so on, but there’s a lot that do services, and services are more likely to be impacted, because if the government agency shuts down, a lot of the office support contracts are designated for small businesses. So if those are given stop work orders, those companies are directly impacted. They’re not getting paid for the amount of time they worked. And therefore, their pay, where that could impact their payroll much more quickly than a big big company. So it can have a significant impact for them and it could cause folks to leave, could cause them, in the worst case for the company, to have to furlough people and to eventually kind of go out of business.
Terry Gerton Well, more Americans work for small businesses than work for large businesses. So when we think about that impact, that small businesses have less fiscal flexibility to withstand a shutdown, to withstand not getting paid on time, the impact is going to be felt much more quickly by their employees and their local economies, right?
Jerry McGinn Absolutely, absolutely. Yeah, the impact is going to be felt there first before the big companies that have obviously have a lot more ability to withstand this kind of lack of cash flow.
Terry Gerton The other piece that’s key in the small business space is the SBIR program. Is it being sustained during the shutdown? If it is, if it lapses, what’s the impact?
Jerry McGinn Yeah, well see, it’s a double whammy for the SBIR program, Small Business Innovation Research, because that program actually requires reauthorization every two to four to six years. And that company, that SBIR expired on September 30th. So even if the government shutdown ends, that program has not been reauthorized. So you can’t do any new awards, even if there is money. And it’s, so there’s real questions as to what happens with SBIR and that’s got to be reauthorized as soon as possible, because even with money, you can’t do any new awards, you can’t do any that’s phase one, phase two or even phase three, you could potentially do depending on if the government shutdown stops because that’s on not SBIR money, but it’s going to have a significant impact. That’s $6 billion a year across the federal government of that innovation money, so that’s going to impact small businesses and government agencies significantly.
Terry Gerton A lot of the conversation thus far in this shutdown has been about federal employees and their pay or back pay, military members, service members and their pay. But there’s not a lot of talk about the impact on the contractor workforce and the impact of the contracted industrial base, as we’ve just been talking about. Where do you think those pain points will start to arise and get entered into the conversation around how long this shutdown will go on?
Jerry McGinn Yeah. And I think it’ll, like everyone’s been talking about how the first paycheck that the federal government workers missed and the military missed, which they’re trying to find other workarounds to do, it’s when those kinds of things for companies start impacting, where small businesses have to start laying off folks more on a permanent basis as opposed to being furloughed like the government. It may come to the point where small businesses are saying, well, listen, I can’t keep you working for it, and may have to furlough that person indefinitely and with no promise of re-employment. So you’ll start to feel that in local communities around the country. And then some companies, bigger companies will stop hiring. They’re saying, we’re not going to hire interns or we’re not going to hire new hires from graduates from college. The longer this goes on, it creates a stasis where you don’t have kind of the normal flow of business and normal flow of government industry interaction. And that just sort of starts to break down, and the companies, they’ll have to start taking that on to themselves by furloughing workforce beyond, parallel to the government where they just have to cut loose folks and not hire.
Terry Gerton And recovery from that kind of stasis can take a long time.
Jerry McGinn Correct. Yeah, everything will lag because people, companies, they can’t turn on a dime, just like the federal government can’t either. And people make plans. They may want to hire five or six people and have them all set. But because of the shutdown, two of those or three of those people may just move on to other kind of industries. Or likewise, folks that have been with the company for 20 years could say, enough of this, I’m going to move on. And therefore, so, even if the government restarts their, they could, the company is left with a smaller workforce or impacted workforce that is not able to just essentially restart where they were. So, and that’ll impact what they do for the government, whether it’s services or products. And so, yeah, this is not where you can stop and start on a dime.
Terry Gerton So what advice do you have for policymakers as they’re navigating the shutdown to understand and deal with these kinds of impacts to the industrial base?
Jerry McGinn Yeah, so I think with the industrial base is, you need to, as the government officials that are there, if they can pay existing, the ones that are on contract, it looks like at least the Department of Defense, that contracting officers and contractor payment is still going to happen. So companies that have existing contracts, if they’re able to receive, continue to do the work for the government, and then receive payment. That’s going to help a lot. And the quicker that it for those companies that are negatively impacted, the government can, quickly as possible, restart using paying contracts and getting companies back to work. That will kind of mitigate some of the most extreme impacts.
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