‘I don’t know how this happened’: A $3B secret program undermining Biden’s tech policy

The Commerce Department was expecting to hand out new federal money to high-tech research. Congress sent it to a secretive natsec program instead.

A backroom Washington deal brokered two years ago is undercutting a key part of President Joe Biden’s policy to grow the national high-tech manufacturing base — pushing more than $3 billion into a secretive national-security project promoted by chipmaker Intel.

In recent weeks, Biden and Senate Majority Leader Chuck Schumer have been taking victory laps for the 2022 CHIPS and Science Act, a law intended to create jobs and fund innovation in a key global industry. It has already launched a series of grants, incentives and research proposals to help America regain its cutting-edge status in global semiconductor manufacturing.

But quietly, in a March spending bill, appropriators in Congress shifted $3.5 billion that the Commerce Department was hoping to use for those grants and pushed it into a separate Pentagon program called Secure Enclave, which is not mentioned in the original law.

The diversion of money from a flagship Biden initiative is a case study in how fragile Washington’s monumental spending programs can be in practice. Biden’s legacy is bound up in the fate of more than $1 trillion in government spending and tax incentives aimed at transforming the economy — but even money appropriated for a strategic national goal can wind up being rerouted for narrow or opaque purposes.

Several members of Congress involved in the CHIPS law say they were taken by surprise to see the money shifted to Secure Enclave, a classified project to build chips in a special facility for defense and intelligence needs, and they worry it will hurt the law’s other policy goals.

“There should be no Secure Enclave in the CHIPS program," said Rep. Zoe Lofgren (D-Calif.), ranking member of the House Science Committee, “and any secure program that might be necessary should be funded by the Department of Defense … not from CHIPS funding that should be focused on revitalizing our domestic chip capacity.”

Critics say the shift in CHIPS money undermines an important policy by moving funds from a competitive public selection process meant to boost a domestic industry to an untried and classified project likely to benefit only one company.

“I don’t know how this happened, but it should not have,” said Charles Wessner, an expert on global innovation policy at the Center for Strategic and International Studies.

No company has been named yet to execute the project, but interviews reveal that chipmaking giant Intel lobbied for its creation, and is still considered the frontrunner for the money.

An Intel spokesperson referred to CEO Pat Gelsinger’s previous remarks that the company is “in conversations” about the project, but declined to comment further.

The $3.5 billion hole also amplifies a larger concern about the landmark CHIPS Act shared by many of its original supporters — that a taxpayer-funded law meant to boost America’s skills and know-how in a key industry could be turning into a spigot for large corporate players, at the expense of the rest of the ecosystem it was intended to support.

The project has already forced changes to the administration’s plans for its CHIPS grant program. After the spending bill passed, the Commerce Department canceled a planned round of grants and blamed congressional appropriators for sending the money elsewhere.

Now at least two companies are reconsidering their plans to build semiconductor research centers that depended on that grant money, including one project touted by Vice President Kamala Harris.

A quiet deal to fund an old idea

POLITICO spoke with more than 30 people, including four former officials and congressional staffers for both Republicans and Democrats, to trace the origins of the Secure Enclave and how it claimed $3.5 billion of CHIPS Act money. Most were granted anonymity to share non-public details. The White House declined to discuss the project.

Secure Enclave is a national security initiative to make and package microchips in a special facility for defense and intelligence applications, including classified projects, according to several people familiar with the project. A defense industry expert described it as one proposed solution to a much older, known problem: the Pentagon’s struggle with sourcing trustworthy high-end microchips.

The term never appeared in legislation before March, but the idea of a Secure Enclave goes back years. It was a pet project of the intelligence community, which heavily promoted the concept, according to former officials and several congressional staffers. U.S intelligence agencies contracted with Intel to sketch out an earlier version of a secure facility and provide rough cost estimates in a 2018 report.

Even before the CHIPS Act passed, Intel and the intelligence community repeatedly pitched DOD officials about the need for the Secure Enclave, two former Defense officials said. The company has also met with lawmakers, at their request, to discuss the project.

An industry person familiar with the Secure Enclave project said the idea was pushed by a single U.S. company. Others called Intel the logical recipient, saying they are unaware of any intention to award the money competitively and have not heard another company name suggested. The Commerce Department said no decisions have been made.

Some members of the congressional intelligence committees defended the program as necessary on principle, although there are no public details about what specific security requirements it exists to solve.

“I have long supported efforts to fund Secure Enclave,” Rep. Jim Himes of Connecticut, the ranking Democrat on the House Intelligence Committee, said in an email. “Throughout my years on the Committee, I have consistently heard from defense and intelligence professionals that they need access to state-of-the-art microelectronics.”

A spokesperson for Senate Intelligence Chair Mark Warner (D-Va.) said he “believes Secure Enclave is critical to our national security and that it should be fully funded.” Sen. Marco Rubio (R-Fla.), the committee’s ranking member, and House Intelligence Chair Mike Turner (R-Ohio) did not respond to requests to explain the project backstory and their involvement.

A key figure in presenting the idea of Secure Enclave to the Biden White House was Avril Haines, the director of national intelligence, said two former officials. (The Office of the Director of National Intelligence declined to comment on Haines’ involvement.) The project was priced at an estimated $3.5 billion — a figure that Senate appropriations staff said the intelligence community, DOD and a company arrived at after extensive review. An appropriations staffer said the company could not be named, as those details are classified.

The White House, Defense and Commerce departments would not describe the project or its history on the record.

The big question: Who should pay?

The secretive nature of the Secure Enclave kept negotiations over its funding veiled. But sometime in 2022, during negotiations for the multibillion-dollar CHIPS bill, it emerged as a bargaining chip in the process to get the expensive plan through Congress.

As the Senate was trying to pass CHIPS, and there appeared to be too many Republican holdouts, lawmakers cut a deal that the Secure Enclave would be part of the bill to get defense hawks on board, according to a person familiar with the negotiations.

“There was some horse-trading that was at the leadership level, but it was primarily driven by the appropriators, and my understanding was to garner more votes,” said Rep. Michael McCaul (R-Texas), a co-author of the CHIPS Act.

While the Pentagon would have been the natural source of funding, critics say DOD and intelligence agencies were reluctant to pay for Secure Enclave from their budgets. The CHIPS bill offered an opening, with an entire new source of taxpayer dollars on the table.

Wessner, at the Center for Strategic and International Studies, said cutting nearly 10 percent of CHIPS subsidies to fund Secure Enclave “seemed unwarranted.”

“If you really want to have this separate facility,” he said, “you can fund that through the Defense Department's massive budget.”

After interagency deliberations, according to Hill aides, congressional appropriators heard from the National Security Council that an agreement had been reached inside the Biden administration: Secure Enclave would be constructed with CHIPS Act funds from the Commerce Department, and the Pentagon could still be on the line for future operations.

Senate appropriations staff said the agreement was brokered by the National Security Council and formal, but not codified because it concerned classified projects. Lawmakers were informed on a need-to-know basis.

Commerce Secretary Gina Raimondo objected to her department footing the bill, telling Biden she had other priorities to fund through CHIPS, according to a former official and two people familiar with the matter.

Last fall, the Commerce Department appealed to the NSC to change the arrangement — prompting defense appropriators to step in, Senate appropriations staff said. A second person familiar with the negotiations said that in 2022, Commerce had agreed to support only the concept of the Secure Enclave, but not to fund the full project cost.

In a previously unreported Jan. 11 letter, the four key defense spending chiefs in Congress — Senate Appropriations Defense Subcommittee Chair Jon Tester (D-Mont.), ranking member Susan Collins (R-Maine), House Appropriations Defense Subcommittee Chair Ken Calvert (R-Calif.) and ranking member Betty McCollum (D-Minn.) — wrote a sharp reminder to Biden that the CHIPS Act had a “national security cornerstone,” one that Secure Enclave was meant to fulfill.

“It has come to our attention that the Department of Commerce may be wavering in its obligation to address national security requirements within CHIPS,” they wrote. “Let us be clear: funding for the Secure Enclave was included within the $52.7 billion provided for the CHIPS Act of 2022, and the Executive Branch needs to follow through to execute the funding as intended.”

None of the signatories agreed to speak to POLITICO on the record.

Raimondo called multiple lawmakers, including McCaul, with concerns. She told Schumer that if appropriators funneled CHIPS funds to Secure Enclave in their spending package, grants for projects like those in New York could be at risk, the first person familiar with the negotiations said. The threat did not pan out; Schumer and Biden celebrated Micron’s $6.1 billion award in Syracuse last month.

The pushback set off a frantic back-and-forth of internal discussions leading up to the government spending deadline. Appropriators heard from senior administration officials, who were internally negotiating, that the Pentagon might be asked to pay for the total. At another point, the White House directed the Defense Department and ODNI to cover $2.5 billion, with Commerce funding $1 billion, a plan Bloomberg first reported and congressional aides confirmed. Senate leadership, appropriators and the White House settled the issue and made the final decision to return to the earlier arrangement, a Senate aide said.

A Schumer spokesperson said he supported the final funding decision. “Given the incredible high demand for projects across CHIPS, Leader Schumer was eager to transition some of the funding, which won’t be required for years, to meet the needs of the secure enclave,” Schumer spokesperson Allison Biasotti said in a statement, adding that he views both the project and building out the domestic chip industry as important to national security.

The White House, Defense and Commerce departments declined to comment on their exchanges. Commerce also declined to answer questions about Secure Enclave’s purpose, plans for the funding and determining a recipient, who would be eligible, what parts of the supply chain it would cover, and whether the department is talking to any companies.

Surprise — and canceled plans

The deal to fund the Secure Enclave out of CHIPS surprised lawmakers — including those who wrote portions of the law and sit on committees that will oversee its implementation, several congressional staffers said.

“This was more of a deal that the appropriators cut,” said McCaul. He knew the law would have a “classified component,” but not the price tag: “I was not aware of this $3 billion.”

Some members said they knew of the project, but not of the details of its funding, until days before Congress released its spending bills.

Lofgren said she objected when she realized Secure Enclave would be included in the bills.

“I was told my objections would not prevail, and that unless those ‘accommodations’ were made to how the Secure Enclave language was written, even greater cuts would result,” she said. “I hope the Congress strikes the whole, terrible provision in the FY25 appropriations process.”

Lawmakers not only disagreed over who should fund the project, but some had been asking throughout the negotiations whether lower-cost solutions could address the same problem. They pointed to a longtime Pentagon program known as Trusted Foundry, where inspectors certify certain commercial plants to prevent tampering with hardware provided to the military.

In October, Commerce Chair Maria Cantwell (D-Wash.) had asked Raimondo, as the main implementer of the CHIPS Act, to not pursue Secure Enclave, alongside Senate Armed Services Chair Jack Reed (D-R.I.) and ranking member Roger Wicker (R-Miss.).

“We are concerned that the [Department of Commerce] is considering sole sourcing an award to one company to build a secure enclave at a cost that is far greater than the Trusted Supplier approach,” the senators wrote. “Doing so would limit funding for other projects that would create a diversified domestic supplier base of semiconductors critical to the defense industrial base.”

But those committees were not party to the appropriators’ deal, and their appeal ended up fruitless.

Already, two prominent projects appear to be bearing the cost of the redirected CHIPS funding. In March, the Commerce Department halted a planned round of CHIPS grants for commercial R&D. A spokesperson blamed the reversal on overwhelming demand as well as Congress diverting funding to the Secure Enclave.

SkyWater Technology told POLITICO it released an option on land in Indiana that would have hosted a new $1.8 billion semiconductor manufacturing and research facility, expected to create 750 jobs. A company spokesperson said the decision was “related” to Commerce’s CHIPS office suspending the commercial R&D funding round.

“We were disappointed because we thought there might have been an opportunity for us,” said Mark Lundstrom, chief semiconductor officer for Purdue University, where the SkyWater facility was slated to be built.

Applied Materials, the world’s second-biggest chipmaking equipment supplier, may also scale back or cancel plans for a new $4 billion semiconductor research hub in Silicon Valley. The center, envisioned to be the world’s largest of its kind when completed, would have applied for the competition and is now “at risk,” an industry source told POLITICO.

Meanwhile, the Secure Enclave project continues. Starting in June, and every three months after, Commerce, DOD and ODNI are required to brief congressional leadership and oversight committees on its progress, according to the appropriations text.

Throughout the backroom drama and the funding arguments, the likely target recipient hasn’t changed. Asked this month whether the project is being carried out to benefit any particular company, McCaul said: “I know the company … Intel.”

Despite its initial funding objections, the Commerce Department has now lined up behind the idea. A spokesperson said Secure Enclave fits within the stated broader purpose of the CHIPS Act: “to invest in projects that will advance our economic and national security.”

“Secure Enclave is a program that is a priority for the administration, priority for the Department of Commerce,” CHIPS Program Office Director Mike Schmidt said. “As we're rounding out an overall portfolio, we have to be conscious of availability of funds, so that just becomes a piece of the puzzle that we fit in, and we're going to be able to do that.”

There’s still lingering tension over the project in Washington. At a congressional hearing Wednesday, Lofgren questioned Laurie Locascio, director of the National Institute of Standards and Technology, about the canceled round of research grants. Locascio acknowledged that the CHIPS office had to reallocate those funds into Secure Enclave, calling it a “very, very tough decision.”

“We did have to back off … the R&D facilities,” she said. “It’s hard because that was something we were very excited about doing. The companies were very excited about working with us on that. And R&D is really the future, right? That's what we're talking about here.”

So far, Congress hasn’t found a way to recover the funding to support the original priorities of the CHIPS Act. Late last month, Cantwell introduced a bill that would direct $3 billion in revenue from spectrum auctions toward CHIPS semiconductor manufacturing subsidies, with her spokesperson saying the lawmaker was “working to restore critical DOC chips” funding “that was redirected to DOD.” Her bill was last scheduled for markup May 16 but postponed due to scheduling conflicts.

Brendan Bordelon, Mohar Chatterjee and Steven Overly contributed to this report.