Summary

Because of the vast size of the Russian weapons complex and difficulties in assessing and quantifying military production capacity, GAO was unable to confirm that the Defense Department's (DOD) program to convert defense industries in the former Soviet Union into commercial enterprises has had any impact on eliminating or reducing weapons of mass destruction. At the time of GAO's review, DOD had undertaken 20 conversion projects and the Defense Enterprise Fund had agreed to undertake four projects. This report also discusses the (1) status of defense conversion projects and funding and (2) conformance of the Defense Enterprise Fund's management practices to its grant agreement and the Fund's operating expenses.

GAO noted that: (1) given the vast size of the former Soviet Union's weapons complex and the numerous variables involved in trying to assess and quantify military production capacity, including unknown factors such as possible modernization or consolidations at other locations, GAO was unable to confirm that the defense conversion projects GAO reviewed had any direct impact on eliminating or reducing weapons of mass destruction or other military production capacity in the former Soviet Union; (2) nonetheless, of the 24 projects GAO reviewed, 20 had indigenous partners that DOD identified as firms that had been engaged in producing weapons of mass destruction, and one project involved converting resources that were still engaged in producing weapons of mass destruction; (3) GAO's analysis also showed that at least 11 projects had directly used buildings formerly engaged in activities related to weapons of mass destruction, and at least 8 projects had employed former workers from weapons of mass destruction-related activities at the newly established enterprises; (4) according to DOD officials, the defense conversion projects are providing assistance to firms that have large numbers of underutilized and often unpaid employees; (5) DOD officials hope that the projects will become commercially viable and that the indigenous parent firms will invest additional resources that might have otherwise been used for producing weapons of mass destruction or other military hardware; (6) five of the 24 defense conversion projects were no longer operating at the time of GAO's review; (7) the remaining 19 projects have made varying degrees of progress in setting up commercial businesses, but eight of the projects had not begun production; (8) four of the projects that had reached production were moving forward, and for one of these projects the U.S. partner bought the Russian partner's share of the joint venture; (9) three of the four housing projects are nearly complete but have not established commercial enterprises; (10) two of the housing projects were construction projects and were not intended to generate ongoing businesses; (11) as of March 1997, DOD had notified Congress that it planned to spend a total of $179.7 million on defense conversion projects and had disbursed $143 million, including $51.7 million granted to the Defense Enterprise Fund (DEF); and (12) the DEF has complied with many elements of the grant agreement with the Defense Special Weapons Agency (DSWA), but it has not finalized some key grant requirements, and DSWA has not enforced compliance.