for leasing is not clear to me, and I wish you would clarify this for me. You give as illustrations the leasings by various companies for long terms ranging from 6 years to 8 years.

Mr. SANDERSON. Yes, sir.

Mr. ROBINSON. Doesn't the prime get a machine tool for a much shorter time than 6 or 8 years, from the Government?

Mr. SANDERSON. Well that, of course, the general could answer. I gather as long as he needs it for the particular contract. But you will

note

Mr. ROBINSON. Excuse me. Can I have the answer to that first, General?

General STANWIX-HAY. The answer to the question is the length of contract for which it is being used, sir.

Mr. ROBINSON. Well, isn't it generally shorter than 8 years?

General STANWIX-HAY. It is generally shorter than 8 years for the initial contract; yes, sir.

Mr. ROBINSON. Is it sometimes a very short term like 1 year?

General STANWIX-HAY. Very doubtful, sir, in machine tools. It usually would be a minimum of 2 years and any time over that on a single

contract.

Mr. ROBINSON. Right.

General STANWIX-HAY. Normally, I figure leadtime is 18 months to 2 years as a very minimum on a contract.

Mr. ROBINSON. Two years would you say, generally?

General STANWIX-HAY. No, I didn't say it would be 2 years. I said the minimum time would be 2 years.

Mr. ROBINSON. What is the general-what does it generally run? General STANWIX-HAY. It depends on the length of the contract. The length of the contract on the F-4 aircraft might well be 7 years. Mr. ROBINSON. Is that the exception?

General STANWIX-HAY. I beg your pardon?

Mr. ROBINSON. Is that the exception, or is that the rule, 7 years. General STANWIX-HAY. Well, none of these things are exceptions, sir, and very few of them are the rule.

Mr. ROBINSON. What would you say is generally the term?

General STANWIX-HAY. I would have to give you-I do not have these figures, the average length of time that a piece of equipment says in a plant, and certainly, sir, I do not keep statistics that way.

Mr. ROBINSON. Well, could you provide the committee with some statistics as to the preponderant term of those items of production machinery which are leased for 2 years and those for 3 years and those for 4 years?

General STANWIX-HAY. Would you like to take it, sir, in that broad general way, or would you like to take it by industry?

Mr. ROBINSON. Well, I would take your answer, sir, if you would give it to me.

General STANWIX-HAY. All right. Then what I would suggest that you do in order that we are speaking of origins at all times, that I give you a predominant length in the aircraft industry, and we will just take the budget categories and give it to you in that group.

Mr. ROBINSON. What would you say is the predominant term in the aircraft industry?

General STANWIX-HAY. I would say it is indefinite, sir.

Mr. ROBINSON. What would it be in other industries where you have shorter duration requirements?

General STANWIX-HAY. It could be-in replenishment spares for a screw machine, for example, it might only be the length of a contract, and it could be a period of 8 months if a man wants to start making them at that time.

Mr. ROBINSON. Now, if a prime contractor wanted the machinery for 2 months, he could get it, could he not?

General STANWIX-HAY. Not necessarily, sir. He could not get it at all just by simply stating that he wanted it.

Mr. ROBINSON. Well, he is the one who makes the determination of what he needs and when he needs it and how much for how long he needs it; is that not so?

General STANWIX-HAY. Not completely, sir. He expresses his desires and it is worked out as to

Mr. ROBINSON. And if the contracting officer feels that his desires are reasonable

General STANWIX-HAY. Reasonable, yes, sir.

Mr. ROBINSON (continuing). Then that would be the agreement? General STANWIX-HAY. Yes, sir.

Mr. ROBINSON. And that could be for 2 months?

General STANWIX-HAY. Very definitely, sir.

Mr. SANDERSON. Returning, sir, to the commercial plants, I would call your attention to the notes on this first table that shows that these companies, although they have 8-year leases, they also have leases whereby person leasing the equipment has the right to terminate after the first, second, or third year, depending on the clause, so he may only have it for 1 year.

Mr. ROBINSON. But on termination he will be paying a short rate, will he not?

Mr. SANDERSON. That is right, sir.

Mr. ROBINSON. And that would be a very high rate, would it not? Mr. SANDERSON. No. It depends on the rate-if you look at company A there, if he takes the option for 1 year, it is plan No. 3, it will cost him 35 percent against 25 percent for the first year.

Mr. ROBINSON. Well, aren't these leasing rates?

Mr. SANDERSON. He pays a higher rate.

Mr. ROBINSON. Aren't these leasing agreements worked out generally on a kind of financing arrangement or financing basis where the lessor would profit from this transaction, based upon the term of the lease and all of the risks of idle time would be assumed by the lessee, is that not correct?

Mr. SANDERSON. That is correct, sir.

Mr. ROBINSON. And actually, the useful life of this equipment, I think I heard the general say, is generally around 16 years.

General STANWIX-HAY. No, sir. What I said was that the average age of our inventory in the Defense Department was 16 years today. Mr. ROBINSON. I see. Well, what would you say is the average useful life of the equipment we are talking about in this illustration, in the company illustrations?

General STANWIX-HAY. I would say 20 to 25 years, sir, is the normal length of time for this type of equipment.

Mr. ROBINSON. And for the tax purposes with the double declining

rate, that machinery could be written off inside of 8 years or 6 years, could it not? General STANWIX-HAY. Depending upon how he does it, sir, 8 years would be no problem.

Mr. ROBINSON. Well, these are the guidelines that would be used in determining the Government rates; didn't you use the Internal Revenue Service guideline?

Mr. SANDERSON. That is right, sir. I have another table here. The third attachment shows a comparison based on the cost of owning the equipment, based on a 12-year life and the IRS guideline group and the double declining balance depreciation rate.

Since that time I have made another table which I can furnish to the committee which compares them for 8-year life, 10- and 12-year life, both on a 25- and a 20-percent return basis. I have copies of that table if you would care to look at it

Mr. ROBINSON. All right.

Mr. SANDERSON. Which is a little more complete than the one you have.

Mr. ROBINSON. Well, could you prepare a comparison for the committee's examination of something less than 8 years or 6 years, as you have here?

Mr. SANDERSON. We can do that, sir, if you wish.

Mr. ROBINSON. Can you make a 2-month rental comparison?

Mr. SANDERSON. We could. We will do so.

pe

Mr. ROBINSON. The point I want to make is this: It appears to me that when a company, a lessee obtains this equipment on an 8-year contract with a privilege of buying it at any time after a certain riod, or within a period of canceling upon paying a short rate, that lessee assumes the risk that that piece of equipment is going to stay in his plant whether it is working or whether it is idle. He assumes that risk of idle time.

Whereas the lessee of Government-owned machine tools does not have to assume such a risk when, in fact, he say I need it for 2 months and then take it out.

Is that not correct, sir? Does that sound reasonable?

General STANWIX-HAY. The thought is reasonable; yes, sir.

Mr. ROBINSON. All right. For that reason I think it would be helpful if we did get some comparisons here on these short terms rather than 6- and 8-year comparisons.

Mr. SANDERSON. We will do it.

Mr. ROBINSON. Do you agree, sir?

Mr. SANDERSON. We will do so. We will submit that.

Mr. ROBINSON. All right.

I have no further questions, Mr. Chairman.

Mr. SMITH. Do you have another question?

Mr. ODEN. Following what Mr. Robinson has just asked, I believe that Mr. Sanderson has stated that OEP is phasing out all commercial work over 25 percent?

Mr. SANDERSON. Right, sir.

Mr. ODEN. And that you, General, at the present time, are critically examining all commercial work under 25 percent?

General STANWIX-HAY. That is correct, sir.

Mr. ODEN. Thank you.

Mr. SMITH. General, I do not see any need to prolong the hearings any longer. I think I might say this, that we appreciate you and Mr. Sanderson and Mr. Carr coming here. And, of course, we could not possibly have gotten as much information in an hour and 15 minutes had it not been for the preliminary meetings you had with staff and others.

As I understand it now, you are going to hold private talks with the machine tool and die industry, to secure a better understanding of their problems and possible solutions.

General STANWIX-HAY. Yes, sir.

Mr. SMITH. That there is a possible change in policy in the making relating to securing spare parts.

General STANWIX-HAY. Yes, sir.

Mr. SMITH. And that you have in the making a change of policy and that within the next few months, and perhaps few weeks, you will establish a new program to terminate commercial leasing of Government-owned equipment.

And with these things in mind, I think that the hearings have helped to furnish some better understanding between the industry and Government and others that are involved. And at this point I do not see any need to continue the hearings further, but we will when these policies have been enunciated, when the Federal Register publishes the orders, keep in touch with this.

And if there is need for further hearings, we will call a new set of hearings, probably early next year.

General STANWIX-HAY. Thank you, Mr. Chairman. They have been very helpful to us, sir.

Mr. SMITH. Thank you very much.

Mr. SANDERSON. In that connection, sir, we will furnish copies of our new directive, when it comes out, in January.

Mr. SMITH. Yes. Thank you very much.

Before adjourning the meeting, we will insert, if there is no objection, in the beginning the full statement, and we will include in the subcommittee's files that information which was requested by counsel. The meeting is now adjourned.

General STANWIX-HAY. Thank you, Mr. Chairman.

Mr. SMITH. Thank you.

(Thereupon, at 11:15 a.m., the hearing in the above-entitled matter was adjourned, subject to the call of the Chair.)