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Defense Procurement Circular No. 63. In the Circular the long standing Department of Defense policy that contractors will furnish all facilities required for the performance of Government contracts was made more stringent by specifically stating that facilities will not be provided for expansion, modernization, replacement or other purposes except for use in Government-owned, contractor-operated plants operated on a cost plus fixed fee basis and for mobilization production of items being procured in accordance with approved mobilization plans. In all other cases, Government-owned facilities are also not provided unless the contractor expresses in writing his unwillingness or financial inability to acquire the necessary facilities with his resources, or he explains in writing that time will not permit him to make the necessary arrangements to obtain timely delivery of such facilities to meet defense requirements even though he is willing and financially able to acquire the facilities.

2. On 30 March 1968, a directive was issued discontinuing the furnishing of equipment having a unit cost of less than $1,000. Under these more stringent policies, over 29 million dollars in proposed equipment purchases were deleted from the FY 1969 Defense budget. New procurement approvals are being limited to critical Vietnam-related production facilities with little or no peacetime application. Even here, we have been able to satisfy a significant portion of such requirements by utilization of idle production equipment.

3. A revision to the Armed Services Procurement Regulations (7-705.22) was published in April of 1968, requiring that appropriate contract adjustments and price reductions be made where cost of production have been reduced as a result of replacement or modernization of equipment made at Government expense.

4. Working with the Office of Emergency Preparedness, the Defense Department instituted new procedures requiring advance approval for the use of Government-owned equipment on commercial work. Increased rental rates have also been promulgated.

5. Contractors are now required to establish and maintain an approved management system covering Government equipment, including adequate property records. We tested, in 19 plants, various techniques of recording the day to day utilization of such equipment. The principle question we are seeking to answer is whether utilization records should be maintained on all pieces of equipment regardless of value, or only on selected high value items.

6. A wall to wall inventory of our Industrial Plant Equipment in the possession of contractors was completed in December 1968.

7. Regulations were published on 10 June 1968, which set forth the conditions under which commercial use of DoD-owned equipment may be authorized. When unauthorized use is found, the contractor is liable for the full monthly rental fee for the equipment for each month in which unauthorized use occurred.

Mr. ROBINSON. And what steps have been taken to tighten the criteria for eligibility of contractors which appear to be, frankly, very loose here. You are now, evidently, under the rules, accepting certifications by the executive corporate official about his unwillingness to buy equipment or his financial inability or time factor.

General STANWIX-HAY. Even this, sir, is a tightening over what used to be, as I am sure you recognize. That is quite new that you have there.

Mr. ROBINSON. I think it is still loose, sir.

Would you also include your suggestions and your recommendations. for further tightening?

General STANWIX-HAY. Are you asking for mine, sir, or the Defense Department's?

Mr. SMITH. I think involved here, too, is the basic question that you may have to clear with the Secretary of Defense as to whether or not the Department agrees with the view I think is expressed here at the table that the objective in setting this formula is not just to recoup money for the Government, but to consider how it fits into our whole free enterprise economy. That may be a question you will have to get cleared in advance to actually taking action. But pending these further

consultations, and so forth, I think that we can prepare for another hearing.

I thank you, General, and members of your staff.

General STANWIX-HAY. It has been our pleasure, sir.

Mr. HUNGATE. Mr. Chairman, could I ask just one question which occurred to me at the close here?

Mr. SMITH. Certainly.

Mr. HUNGATE. These Government-owned ammunition facilities, plants of this kind, what branch would be charged with supervision of the construction and maintenance of those?

General STANWIX-HAY. They are under the control of the Army and the Navy primarily, sir. The Air Force has very little Governmentowned facilities.

Mr. HUNGATE. Within the Army, what branch?

General STANWIX-HAY. It is under Army Materiel Command. It used to be the Ordnance Corps.

Mr. HUNGATE. The Gateway Ammunition Plant at St. Louis, whose supervision is that?

General STANWIX-HAY. That is the Munitions Command, sir, under the Army Materiel Command.

Mr. HUNGATE. The Corps of Engineers has nothing to do with it? General STANWIX-HAY. They did nothing but build the facilities. Mr. HUNGATE. They were in charge of construction of the facilities? General STANWIX-HAY. Yes, sir.

Mr. HUNGATE. Do they have charge of the role of supervision and maintenance?

General STANWIX- HAY. No, sir; that is a contractor task, sir. Chrysler has that contract.

Mr. HUNGATE. There is one at Weldon Springs, a chemical warfare unit or some such thing, atomic reactors or a uranium treatment plant. Who would supervise that process?

General STANWIX-HAY. If it is what you are saying, that would be the Atomic Energy Commission. But Weldon Springs, if you recall, sir, there was a facility being built there for the manufacture of herbicide, a defoliant, and the requirements were such that it was necessary for the Government to go into building a facility, since we were taking everything the industry could provide, all of it. It was one of the few times we did that. We needed more. Then because of a lack of requirement, a decreasing requirement, it was found of more advantage to the Government not to continue that plant, sir, and that plant was discontinued.

Mr. HUNGATE. I believe there was an arrangement, was there not, to decontaminate some of the area where the testing had been done? General STANWIX-HAY. I do not know about that, sir.

Mr. HUNGATE. There would be no figures on the cost of decontamination, the cost of decontaminating the area?

General STANWIX-HAY. There probably would be none per se, sir, unless I could find out what the Corps of Engineers had to do to prepare the land in order to build the plant which I was asking them to build. If it would be helpful, I would be glad to research it and


Mr. HUNGATE. I would be very interested in those figures. Thank you very much.

General STANWIX-HAY. Certainly. Thank you, Mr. Hungate. (The information follows:)

Army records show an expenditure of $2.8 million for decontamination at Weldon Springs.

Mr. SMITH. I just want to say that while we are considering this perpetual problem of rental fees, you did bring up something important, and that is surplus disposal. Primarily, that is the Government Operations Committee, but some aspect, I think, does get into small business, and we want to go into that, too.

General STANWIX-HAY. We will be glad to, sir.

(Whereupon, at 12:10 p.m., June 4, 1969, the subcommittee recessed, to reconvene subject to the call of the Chair.)





Washington, D.C.

The subcommittee met, pursuant to recess, at 10:05 a.m. in room 2359, Rayburn House Office Building, Hon. Neal Smith (chairman of the subcommittee) presiding.

Present: Representative Smith.

Also present: T. J. Oden, subcommittee counsel; Henry Robinson, counsel; Fred Wertheimer, minority counsel; and Myrtle R. Foutch, clerk.

Mr. SMITH. The meeting will come to order.

Today the Subcommittee on Special Small Business Problems of the House Select Committee on Small Business concludes its examination of several problems presently being encountered by the small tool, die, and precision machining businessmen.

In May of this year representatives of the tool and die industry described to the subcommittee the problems they are experiencing in their relationships with the automotive industry and the Federal Government.

In June the subcommittee received testimony from the automotive manufacturers and the Department of Defense.

Certain questions were raised during those hearings by members of this subcommittee regarding the Department of Defense policy of leasing Government-owned machine tools to large prime contractors, and it became apparent that any meaningful examination of this policy must include a thorough review of the role played by the Office of Emergency Preparedness. OEP is entrusted with the responsibility of establishing rental rates for commercial work performed on this Government-owned equipment, and is also the agency designated to authorize commercial work in excess of 25 percent. The Department of Defense has authority to authorize such commercial work where the total use is less than 25 percent.

We were told in June by DOD that as of March 31, 1969, a total of 73,937 Government-owned machine tools, having a combined acquisition value of approximately $1.5 billion, were located in the facilities of Government contractors. The 25 largest DOD prime contractors presently have in their possession 34,047 machine tools with a total acquisition value of $667 million.

The subcommittee, in its investigation of this practice by the Department of Defense, will examine the rationale behind the leasing of this equipment, the use of this equipment by prime contractors for

non-Government commercial work, the rates charged by the Government for commercial use, the formula used in determining Government rates, the percentage of commercial work allowed by the Government, and the effect this leasing policy has on the tool and die industry.

So that is the purpose of this hearing at this time, and we have with us this morning General Stanwix-Hay, Mr. Carr, and Mr. Sanderson.

Do you have any other personnel with you?

General STANWIX-HAY. No, sir.

Mr. SMITH. At this time, General, proceed as you deem proper.

General STANWIX-HAY. Well, Mr. Chairman, Mr. Sanderson, of course, is from the Office of Emergency Preparedness, from the Executive Office. He was not with us last time, as you recall, sir. Since it is their responsibility to speak of rates and the process of rates and the setting of rates, he was asked to come to this particular meeting. We made our statement last time at the hearings. Mr. Sanderson has a small statement which he would like to make, with your permission, sir.

Mr. SMITH. Very well.


Mr. SANDERSON. Mr. Chairman, it is a privilege to appear before your committee to present information on the responsibilities and policies of the Office of Emergency Preparedness relating to the leasing of Government-owned production equipment.

I will first provide some historical background on how we became involved in the establishment of uniform leasing rates. In October 1953, the Office of Defense Mobilization, a predecessor agency to the existing OEP, issued a Defense Mobilization Order, DMO VII-4, which provided basic policy guidance on Government-owned production equipment to all executive branch agencies.

In general these related to the retention and storage of such equipment as part of the Nation's mobilization base. The order, however, also specified that production equipment in the possession of Government agencies would be leased for nondefense production only if plans for such leasing had been approved by the Office of Defense Mobiliza


In 1955, the Joint Committee on Defense Production reviewed the Government's machine tool programs and found, among other things, that the leasing rates used by the various Government agencies were not uniform. The committee in its Fifth Annual Report, January 25, 1956, recommended that action be taken by the Department of Defense, Department of Commerce, General Services Administration, and Office of Defense Mobilization to establish ". . . a uniform leasing policy

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