which is fair and commercially competitive to defense contractors, toolbuilders, and the Government, to be made effective throughout the armed services and other Government-leasing agencies." To carry out this recommendation, the director of the Office of Defense Mobilization on February 7, 1956, established an "InterAgency Task Group on Uniform Equipment Leasing Practices." This was chaired by ODM with members representing the Department of Defense, the Department of Commerce, the Atomic Energy Commission, and General Services Administration and the Small Business Administration. The recommendations of this group relating to uniform rental rates were approved by the director of ODM, and issued on June 19, 1957, in amendment No. 2 to Defense Mobilization Order VII-4. The rates varied depending on the age of the equipment and applied to the acquisition cost of the equipment. For items from new to 2 years in age the rate was 134 percent per month; for items over 2 years and up to 6 years old, the rate was 112 percent; for items over 6 years and up to 10 years old the rate was 1 percent, and for items over 10 years old the rate was three-fourths of 1 percent. The task group also developed leasing guidelines on such matters as purchase and renewal options, maintenance, installation charges, et cetera, and some general policy statements. Among the latter was the statement that "Government agencies providing Governmentowned production equipment to private contractors shall insure that no contractors are afforded a favored competitive position thereby." These guidelines and policies were issued in change No. 3 to Defense Mobilization Order VII-4 on October 1, 1957. In neither of these amendments was the term "nondefense leasing" defined. However, both of the press releases announcing the amendments contained definitions of defense leasing. For example, the release on amendment 3 stated that "To qualify as defense leasing at least 75 percent of the use of the equipment must be on military prime or subcontracts." All leasing that did not qualify as defense leasing required prior approval by the Office of Defense Mobilization. A revised Defense Mobilization Order VII-4 was issued on March 10, 1958. This merely consolidated all amendments into one complete document with no changes in policy. The Office of Defense Mobilization, at that time, in general, approved nondefense leasing if certain conditions existed. They were: First, if the company had a defense contract and had been unable to obtain a follow-on contract, or if the contract had been terminated for the convenience of the Government, nondefense use would be permitted until the company could make arrangements for replacing the Government-owned equipment. Second, if the Government-owned equipment had been integrated into a production line owned by the company which was normally used on commercial work, nondefense use would be authorized. This situation might arise if a piece of special equipment necessary to meet the higher tolerances needed on military items was required. Third, if a substantial saving would accrue through overhead costsharing and receipt of rental payments by the Government and, Fourth, when it was in the interest of the Government to keep the equipment in a high state of operational readiness through regular usage. This applied primarily to the heavy press program. In March 1963, the Director, Office of Emergency Planning, initiated a project to consolidate into one document all orders relating to production equipment. The Department of Defense; Department of Commerce; Department of Health, Education, and Welfare; the General Services Administration; Small Business Administration: National Aeronautics and Space Administration; and the Atomic Energy Commission cooperated in this effort. The new order, Defense Mobilization Order 8555.1 was issued on November 13, 1963. This retained the 1957 rental rates without change and made only minor changes in policy. In the latter part of 1966 informal discussions were held by ŎEP with representatives of the Office of the Assistant Secretary of Defense (Installations and Logistics) on the desirability of reviewing the policies and rental rates. In 1967 a project to accomplish this was initiated. The Departments of Defense and Commerce, the General Services Administration, Small Business Administration, National Aeronautics and Space Administration, and the Atomic Energy Commission participated in this project. As a result of this project, a complete revision of the defense mobilization order was issued. It established higher rental rates and clarified the method for determining the extent of nondefense use. The new rental rates, which are being used at present are: Three percent monthly for equipment up to 2 years old. Two percent monthly for equipment over 2 and up to 3 years old. One and one-half percent monthly for equipment over 3 and up to 6 years old. One percent monthly for equipment over 6 and up to 10 years old, and Three-fourth percent monthly for equipment over 10 years old. These rental rates were established through two methods. First, we obtained from several machine tool companies which lease their machine tools details on their leasing plans. A comparison of these with the then existing Government rates indicated that for relatively new equipment the Government rates were, in general, below the commercial rates. The second method used analyses prepared by the Logistics Management Institute for the Department of Defense. These were based on evaluating the costs to a company of owning the equipment, Internal Revenue Service guideline group lifes for various types of equipment, depreciation costs on the double-declining-balance method and returns on investment based on a 25-percent return on average book value, before taxes, were used in computing these costs The results of these two methods are shown on the attachments to the statement that has been provided to you. Also, shown on these tables are the old 1957 Government rental rates and those now in effect. Although these rates were issued in July 1968, we believe that some leasing companies may have subsequently increased their rates to reflect inflationary pressures and the current high interest charges on borrowed funds. We, therefore, are obtaining up-to-date information on their programs and will compare them to the Government rates in the near future. The responses received to date indicate that our rates are still comparable. Approval for commercial use of Government-owned production equipment is at present split between the Office of Emergency Preparedness and the department or agency in possession of the equip ment. All such use which is 25 percent, or less, of the total available time that the equipment is available for use in the contractor's plant is considered "incidental" use. The available time is based on the contractor's normal work week schedule as represented by scheduled productive shift hours. In this case, the department or agency in possession of the equipment may authorize commercial use of the equipment. I might add here, of course, that they must have statutory authority to do so. All commercial usage in excess of 25 percent must be authorized by the Director, Office of Emergency Preparedness. As a result of discussions with the Office of the Assistant Secretary of Defense, the Business and Defense Services Administration and the Small Business Administration, we initiated early in 1969 a program to phase out all commercial use in excess of 25 percent. This is being accomplished by setting a time limit, generally 1 year, during which such use will be authorized. This permits the contractor sufficient time to arrange for replacement of the Government-owned equipment. Currently, we have circulated to interested departments and agencies a proposed revision of the Defense Mobilization Order which will formally establish this termination program. At present, bills have been introduced into both the Senate and the House that would permit the Department of Defense to negotiate sales of excess production equipment to contractors currently using the equipment. If enacted, this authority would permit us to speed up our program for terminating commercial use in excess of 25 percent. This completes my statement, Mr. Chairman. (The attachments follow:) GOVERNMENT RENTAL RATES FOR NONDEFENSE USE OF PRODUCTION EQUIPMENT AND COMMERCIAL RATES FOR LEASING OF PRODUCTION EQUIPMENT (CUMULATIVE PERCENTAGES BASED ON ACQUISITION COST) Company A: 18-year lease with right to terminate or purchase at end of 3d year or any year thereafter. Company B: 1 6-year lease, 1.86 percent per month, renewal after 6 years at 2 percent per year. 2 8-year lease, 1.52 percent per month, renewal after 8 years at 2 percent per year. Purchase option at end of base lease term. 7-percent investment credit passed on to lessee. Company C: Same notes as for company A, but payment terms not specified. Company D: 7-year lease; may be terminated at end of 3d year or any year thereafter; purchase option may be included or excluded; if included may be exercised at end of 1st year or any year thereafter. All rentals paid quarterly in advance-1st payment due prior to shipment. 7 After 7 years lease may be renewed on year-to-year basis with annual rental same as for 7th year. 7-percent investment credit passed on to lessee. Company E: Rental payable in advance; security deposit required; 8-year lease. Rental and security deposits not required from acceptable credit risks and lease payments begin 30 days after date of shipment. 7-percent investment credit passed on to lessee. Company F: 17-year lease with right to terminate or purchase at end of any year thereafter. 2 7-year lease with right to terminate or purchase at end of 2d year or end of any year thereafter. 3 7-year lease with right to terminate or purchase at end of 1st year or end of any year thereafter. Quarterly, or semiannual rental payments. With or without option to purchase. Company G: 6-year lease-noncancelable. 10-percent security deposit required. Returnable at end of lease. Rentals payable quarterly in advance. With or without purchase option. COMPARISON OF MONTHLY LEASING RATES-GOVERNMENT VERSUS LEASES BY MACHINE TOOL BUILDERS COST OF GOVERNMENT RENTAL RATES VS. COST OF OWNING EQUIPMENT BASED ON 12-YEAR LIFE IRS GUIDELINE GROUP AND DOUBLE DECLINING BALANCE DEPRECIATION PLUS 25 PERCENT RETURN ON AVERAGE BOOK VALUE, BEFORE TAXES DMO 8555.1A-OEP POLICY GUIDANCE ON GOVERNMENT-OWNED PRODUCTION EQUIPMENT 1. Purpose. This order establishes policies on Government-owned production equipment, including machine tools, which policies are necessary to maintain a highly effective and immediately available machine tool and equipment reserve for the emergency preparedness program of the U.S. Government. 2. Cancellation. This order supersedes Defense Mobilization Order 8555.1, November 13, 1963, as amended (28 F.R. 12581 and 29 F.R. 12646). 3. Scope and applicability. The policies and provisions of this order apply to all Federal Departments and Agencies having production equipment emergency preparedness functions assigned by Executive orders. They relate to the classes of Government-owned production equipment listed in Appendix A of this order. Such exceptions as from time to time may be necessary to the policy outlined herein shall be made only with prior approval of the Office of Emergency Planning. 4. Definitions. a. "Production equipment," as used herein, includes all items of equipment having an acquisition cost of $1,000 or more that fall within the categories of machinery and equipment listed in Appendix A of this order. b. "Idle production equipment," as used herein, means all items of production equipment for which no use is contemplated or planned within 90 days. Idle equipment does not include production equipment in package form, in standby lines, or in active base packages, unless or until it has been withdrawn therefrom and has no contemplated use for a 90-day period. c. "Packaged form," as used herein, means Government-owned production equipment assigned to a specific program, contractor, and plant in either an in-use, idle, or partially idle status and which equipment as an entirety, or when combined with equipment owned by the contractor, is capable of producing at a specific level, a particular military or defense-supporting item or items at that plant, by that contractor, as defense requirements may necessitate. d. "Standby line," as used herein means a complete set of installed Government-owned equipment, in an idle status, maintained intact in reserve condition and which, when activated, is capable of producing at a specific level of output. e. "Active base package,” as used herein means production equipment located in an active production facility when such equipment has been retained to provide production acceleration capability in the event of emergency, or to be used following a changeover to a new modified production item. f. "Package," as used herein means those complements of production equipment held in packaged form, standby lines, and active base packages, as defined above. 5. Maintenance of the mobilization base—a. Policy-(1) Department of De |