PAGENO="0001" 89th Congress 2d Session GOVERNMENT DEPOS1TOI~~ PROPERTY OF RUTGERS, TUE STATE UNIVERSITY COLLEGE OF SOUTH JERSEY LIBRARY CAMDEN, N.J. JOINT COMMITTEE PRINT OF THE SUBCOMMITTEE ON FEDERAL PROCUREMENT AND REGULATION OF THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES w MAY 1966 I I ECONOMIC IMPACT OF FEDERAL PROCUREMENT-1966 REPORT Printed fo~r the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1966 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington D.C., 20402 - Price 15~ ()(Q~ ~Lft5L/0 I ~ PAGENO="0002" I JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.) WRIGHT PATMAN, Texas, Chairman PAUL H. DOUGLAS, Illinois, Vice Chairman HOUSE OF REPRESENTATIVES SENATE RICHARD BOLLING, Missouri JOHN SPARKMAN, Alabama HALE BOGGS, Louisiana I. W. FULBRIGHT, Arkansas HENRY S. REUSS, Wisconsin WILLIAM PROXMIRE, Wisconsin MARTHA W. GRIFFITHS, Michigan HERMAN E. TALMADGE, Georgia THOMAS B. CURTIS, Missouri JACOB K. JAVITS, New York WILLIAM B. WIDNALL, New Jersey JACK MILLER, Iowa ROBERT F. ELLS WORTH, Kansas LEN B. JORDAN, Idaho JAMES W. KNOWLES, Executive Director JOhN R. STARf, Depuiy Director MARIAN T. TRACY, Financial Clerk HAMILTON D. GEWEIIR, Administrative Clerk Wn,u~sv H. MOORE NELSON D. MCCLUNG ECONOMISTS GEORGE R. IDEN DONALD A. WEBSTER (Minority) SUBCOMMITTEE ON FEDERAL PROCUREMENT AND REGULATION PAUL H. DOUGLAS, Illinois, Chairman WRIGHT PATMAN, Texas MARTHA W. GRIFFITHS, Michigan THOMAS B. CURTIS, Missouri WILLIAM B. WIDNALL, New Jersey RAY WARD, Economic Consultant b JOHN SPARKMAN, Alabama WILLIAM PROXMIRE, Wisconsin LEN B. JORDAN, Idaho II PAGENO="0003" LETTERS OF TRANSMITTAL MAY 27, 1966. To the Members of the Joint Economic Committee: Transmitted herewith for your consideration and use, and for the use of other Members of Congress, the business community, and others, is a report entitled, "Economic Impact of Federal Procurement- 1966" by the Subcommittee on Federal Procurement and Regulation. Sincerely, WRIGHT PATMAN, Chairman, Joint Economic Committee. MAY 25, 1966. Hon. WRIGHT PATMAN, Chairman, Joint Economic Committee, U.S. Congress, Washington, D.C. DEAR MR. CHAIRMAN : Attached is a progress report entitled, "Eco-. nomic Impact of Federal Procurement-1966" approved unanimously by the Subcommittee on Federal Procurement and Regulation. Federal property activities, including procurement, aggregate at least 10 percent of the value of the gross nationaPproduct and exert a great force on the national economy. It is, therefore, most important that they are conducted with prudence and efficiency. So the sub- committee has concentrated its efforts the past few years on the elimi- nation of waste which historically has been so widespread thus rob- bing both essential military and civilian programs while needlessly augmenting the budget and the national debt. Our hearings and this report as in former years do not deal with strictly military sub- jects such as strength and organization of forces, major weapons sys- tems, theater operations, etc. We are giving great emphasis in this report to the need for better management and utilization of the billions of dollars worth of supplies in Government warehouses. Many of these items are perishable in varying degrees. This is a good time to ~ keep out of the market and to "use these items up, wear them out and make them do". An objective appraisal willreveal that giant strides have been made in the past few years in developing an economical ~ and efficient Fed- eral supply system as contemplated by the Congress in 1949.' . I also point out that for nearly two ~ decades congressional com- mittees, individual members, study groups, the two Hoover Commis- sions, and many others have advocated that the Secretary of Defense take strong action to bring about efficient management in the sprawl- ing defense complex, particularly in the common supply and services areas, secure more competitive bidding as intended by law, utilize more fully the billions of dollars worth of deteriorating inventories `Federal Property and Administrative Services Act of 1949, as amended, 40 U.S.C. 471, sec. 2. `U PAGENO="0004" Iv LETTERS OF TRAN~MIrpAL I and release unneeded real properties valued at billions of dollars thus building rather than eroding the tax base. On December 30, 1960, I wrote to Secretary-Designate McNamara urging that a number of actions be taken along these lines.2 He has gone to work with courage, unparalleled ability and tenacity, and has made tremendous progress in improving both the organization and management of the Defense Establishment. In so doing, cost reduc- tions of several billions of dollars annually have been achieved by adopting, among others, many of the suggestions of this subcom- mittee.3 In the process of determined action, toes have been trod upon, oxen gored, and hostility encountered which is inevitable. Errors may have been committed and certainly much remains to be done in carving more fat and waste as this report reveals but I urge everyone to view our suggestions and recommendations against the background of the scope of the job and the unprecedented accomplish- ments. We must not undermine either the greatly improved structure or its chief architect nor on the other hand reinx our efforts toward further progress. The subcommittee is indebted to all the witnesses and contributors to our hearings and especially to Comptroller General Staats and his staff for three excellent reports prepared at our request.4 The results from these alone will improve the supply processes `and save millions of dollars. Faithfully yours, PAUL H. DOUGLAS, Uhairman,, Subcommittee on Federal Procurement and Regulation. 2 For full text see Report, July 1963, PP. 39-40. `See Secretary McNamara's testimony ~1Iearings, 1966 pp.4; 6-17. See also pp. 80, 110; 144-145. 4 App. 4, p. 240; App. 5, p. 273; App. 6, p. 289. PAGENO="0005" CONTENTS Letters of transmittal Introduction Tables: 1. 2. 3. Page III 1 Grand total-Obligations by object class, by fiscal years Worldwide trends in Federal real property holdings, 1955-65 Expenditures for Department of Defense (DOD) military functions as percentage of gross national product, fiscal years ~ 4. DOD property holdings as of June 30, fiscal years 1955-65 5. Proceeds from disposal sales of surplus personal property by the military departments, fiscal years 1958-65 6. Costs of disposal sales of surplus property by the military departments, fiscal years 1958-65 Findings and recommendations I. Development of a national supply system Findings Recommendation II. Adequacy of contractor inventory control Findings Recommendations III. Utilization of personal property inventories ~ ~ IV. Special program for management of short-shelf-life ~ ~ Recommendations V. Procurement of commercial-industrial type products ~ ~ VI. Procurement and regulation under the "Buy-American" Act ~ ~ VII. Competitive and negotiated procurement ~ Recommendations VIII. Real property ~ ~ ~ Ix. Sales of surplus property and use of receipts_________________ ~ ~ General analysis of other common activities Recruiting________________________________________~___________ Construction activities Printing and ~ Automatic data processing (ADP) Appendix: Development of a national supply system Defense Supply Agency (DSA) and General Services Administration (GSA) ~ Progress in civilian agencies_____________________________________ V 2 2 3 3 3 4 5 5 5 5 5 5 6 7 7 7 7 7 8 8 8 9 9 9 10 10 10 11 11 11 12 12 12 12 13 13 13 13 14 15 15 15 I PAGENO="0006" PAGENO="0007" ECONOMIC IMPACT OF FEDERAL PROCUREMENT INTRODUCTION The Subcommittee on Federal Procurement and Regulation has given continuity of attention to certain subjects in its reports,' hear- ings,2 and staff investigations ~ in order to bring about better under- standing of their scope, diversity, and impact upon our economy. We have also tried to reduce the gross waste which has so long char- acterized their operations. The subjects covered in this report are therefore of a followup nature. ~ For purposes of orientation, some statistics on the size of Federal procurement and related activities are provided: 1 Report, October 1960: "Economic Aspects of Military Procurement and Supply," report of the Sub- committee on Defense Procurement to the Joint Economic Committee, Congress of the United States, 86th Cong., 2d sess. (Hereinafter called "Report, October 1960.") Report, July 1963: "Impact of Military Supply and Service Activities on the Economy," report of the Subcommittee on Defense Procurement to the Joint Economic Committee, Congress of the United States, 88th Cong., 1st sess., July 1963. (Hereinafter called "Report, July 1963.") Report, September 1964: ` `Economic Impact of Federal Supply and Service Activities," report of the Subcommittee on Defense Procurement to the Joint Economic Committee, Congress of the United States, 88th Cong., 2d sess. (Hereinafter called "Report, September 1964.") Report, July 1965: "Economic Impact of Federal Procurement," report of the Subcommittee on Federal Procurement and Regulation ofthe Joint Economic Committee, Congress ofthe United States, 89th Cong., 1st seas. (Hereinafter called "Report, July 1965.") 2 Hearings, 1960: "Impact of Defense Procurement," hearings before the Subcommittee on Defense Pro- curement of the Joint Economic Committee, Congress of the United States, 86th Cong., 2d sess., Jan. 28, 29, and 30, 1960. (Hereinafter called "Hearings, 1960.") Hearings, 1961: "Progress Made by the Department of Defense in Reducing the Impact of Military Procurement on the Economy," hearing before the Subcommittee on Defense Procurement of the Joint Economic Committee, Congress of the United States, 87th Cong., 1st sess., June 12, 1961. (Hereinafter called "Hearings, 1961.") Hearings, 1963: "Impact of Military Supply and Service Activities on the Economy"~ hearings before the Subcommittee on Defense Procurement of the Joint Economic Committee, Congress of the United States, 88th Cong., 1st sess., Mar. 28, 29, and Apr. 1, 1963. (Hereinafter called "Hearings, 1963.") Hearings, 1964: "Impact of Military and Related Civilian Supply and Service Activities on the Econo- my," hearings before the Subcommittee on Defense Procurement of the Joint Economic Committee, Congress of the United States, 88th Cong., 2d sess., Apr. 16 and 21, 1964. (Hereinafter called "Hearings 1964.") Hearines, 1965: "Economic Impact of Federal Procurement," hearings before the Subcommittee on Federal Procurement and Regulation of the Joint Economic Committee, Congress of the United States, 89th Cong., 1st sess., Apr. 27, 28, and 29, 1965. (Hereinafter called "Hearings, 1965.") Hearings, 1966: "Economic Impact of Federal Procurement," hearings before the Subcommittee on Fed- eral Procurement and Regulation of the Joint Economic Committee, Congress of the United States, 89th Cong., 2d sess., Jan. 24, and Mar. 23 and 24, 1966. (Hereinafter called, "Hearings, 1966.") 3 Staff study, 1960: "Background Material on Economic Aspects of Military Procurement and Supply," materials prepared for the Subcommittee on Defense Procurement of the Joint Economic Coimnittee, Congress of the United States, 86th Cong., 2d sess., February 1960. (Hereinafter called "Staff Materials, 1960.") Staff study, 1963: "Background Material on Economic Aspects of Military Procurement and Supply ," materials prepared for the Subcommittee on Defense Procurement of the Joint Economic Committee, Congress of the United States, 88th Cong., 1st sess., March 1963. (Hereinafter called "Staff Materials, 1963.") Staff study, 1964: "Background Material on Economic Aspects of Military Procurement and Supply- 1964," materials prepared for the Subcommittee on Defense Procurement of the Joint Economic Committee, Congress of the United States, 88th Cong., 2d sess., April 1964. (Hereinafter called "Staff Materials, 1964.") Staff study, 1965: "Background Materials on Economic Impact of Federal Procurement," prepared for the Subcommittee on Federal Procurement and Regulation of the Joint Economic Committee, Congress of the United States, 89th Cong., 1st sass., April 1965. (Hereinafter called "Staff Materials, 1965.") Staff study, 1966: "Background Material on Economic Impact of Federal Procurement-1966," materials prepared for the Subcommittee on Federal Procurement and Regulation of the Joint Economic Corn - mittee, Congress of the United States, 89th Cong., 2d sess., March 1966. (Hereinafter called "Staff Ma- terials, 1966.") 1 PAGENO="0008" 0 REPORT : ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 1.-Grand total-Obligations by object class, by fiscal years [In millions of dallarsj Trust funds . 1964 actual 1965 estimated 1966 estimated 1964 actual 1965 estimated 1966 estimated Contractual services and supplies 21 Travel and 47, 216 49, 253 187 1, 211 1, 515 transportation of per- sons 22 Transportation of things 23 Rent, communications, and utili- ties . 24 1,295 2, 947 1,884 1,353 2, 932 1,974 1,388 2, 889 2,295 11 9 43 12 17 ~ 12 19 45 Printing and reproduction 25 Other services Services of other agencies 269 19, 317 1, 112 276 20, 102 1, 212 287 20, 018 1, 192 4 72~ 20 4 803 23 4 1, ~ 26 Payments to specified ac- counts 26 Supplies and materials Acquisition ofcapital assets 31 Equipment 32 Lands and structures 33 Investments and loans Grand total 345 20, 046 21, 022 421 695 8 8 8 29, 240 29, 114 28, 303 299 364 is, 851 4, 123 9, 266 14, 164 * 4, 483 10, 467 13, 3i7 4~ 198 788 399 102 1, 311 1, 708 617 760 193 221 76, 456 78, 367 10, 77, 490 400 1, 898 501 724 2, 522 3,223 Percent Description 1 Staff materials, 1966, p. 3. Administrative budget 1955 1965 0 !J.-Worldwjde trends in Federal real property holdings, 1955-65 1 COST IN BILLIONS Civilian agency holdings Defense holdings Total Inside United States Foreign and outlying areas Total $13.7 24.3 38.0 32. 5 5. 5 38.0 ACRES IN MILLIONS 58 84 75 84 20 75 Amount $21.7 44.7 $8.0 ~ 20.4 66.4 59. 8 6.6 27.3 66.4 Li 28.4 Civilian agency holdings Defense holdings Total Inside United I ~- ~ 3L 2 736. 3 30. 0 14. 0 2 753 766.3 (1. 2) (4) 12.8 2 Foreign and outlying areas Total 41J7 9 345. 6 765. 8 5 357.9 88 7 . (345. 1) 12.8 (100) 2 2 I Thid., p.6. PAGENO="0009" Co Co Co ~ U: ~C ~Co Co~ ~ Co Co Co Co ~ Co ~ Co Co Co Co Co Co Co Co Co Co Co-i Co~ ~Co ~Co Co Co Co Co I I CO CO CO CO CO CO CO CO CO CO CO CO CO CO CO ~ CC CC CC CO CO CC CC CC ~-` ~ CC C-' CC CC CC CC CC Co CO CO CC CC CC CC CC C) CC CC CC CC ~ CCC) ~I CC - ~ CD ~ C~ 1 C' ~CC ~ 0 ~: ~g ~ ~ ~& ~ ~ P ~E: ~ CD~ ~ ~ ~ ~ ~ CD ~ ~ ~ ~ 0 ~ C) C-' `~C CC CCC, ~ ~_`~O?~-' CO ~ ~ ~CCC C~ ~ ~ C-' CCC CC ~C?~C)~~C CO CC CO -~ ~ ~ CO CO ___ CO CC CC ~ CC ~ CC CO )~ C-' ~CC~CO CC CC~ CC -1 CC ~ CC CO ~C)CCCC Co CC CO Co CO C) )~ C' E 0 L~i C) 0 0 0 0 a CO CCC) .4CC CC CC CO CO CC ~ C-' C-' PAGENO="0010" 4 REPORT : ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 1fljj~~, p.40. [In milhions} 1959 6.-Cost~ of disposal sales of surplus property by the military departments, fiscal years 1958~651 Costs of disposal sales of surplus property Cost for demilitarization Costs for preparation and selling ~* Percent of sales costs to gross pro- ceeds Fiscal year- Total ~irossproceeas 1964 1958 1960 1961 1962 1963 1965 $24. 0 18. 5 $20. 5 37. 8 ~ $26. 6 51. 8 $19. 1 65. 5 $9. 1 69. 0 $9. 5 62. 6 $12. 7 64. 6 $13. 2 65. 1 42. 5 183. 0 58. 3 212. 0 78. 4 194. 0 84. 6 167. 0 78. 1 135. 0 72. 1 90. 0 77. 3 103. 0 78.3 108. 0 23. 0 27. 5 40. 4 50. 6 58. 0 75. 2 75. 0 72.5 The subcommittee's recent hearings ~ were convincing that progress is being made in many ways in the development of a more economical and efficient Federal supply system within the military and civilian branches and between them. A spirit of cooperation exists between the DOD and GSA. Functions and classes of supply items are being reviewed to determine which should be administered by military and which by civilian agencies in the best interests of the Government. Secretary McNamara and Administrator Knott have given their support to this program.5 Despite the undoubted progress that has been achieved during the past few years, it should be kept in mind that much remains to be accomplished as evidenced by some 80 General Accounting Office (GAO) reports issued in 1965 on these general subjects ~ including the 3 special reports prepared at the subcommittee's request.7 Some problem areas are highlighted in the following report of which several ~ are interagency in nature, thus demanding top executive agency support and action if large-scale improvements are forthcoming as expected by the President. 4 Hearings, 1966, pp. 7; 110-144; 180. 5 Ibid pp. 42, 111. 6 Staff Materials, 1966, pp. 59-123. 7 Hearings, 1966, appendixes 4, 5, and 6. PAGENO="0011" FINDINGS AND RECOMMENDATIONS 1. DEVELOPMENT OF A NATIONAL SUPPLY SYSTEM Findings. The subcommittee's report last year 8 stated that, "the prospect for an economical and efficient supply and general services system as intended by Congress for the Federal Government has never been so bright" and recommended the resolution of certain long- pending interagency problems and a report of actions taken thereon at the 1966 hearings. The testimony of witnesses from the DOD, GSA, and Bureau of the Budget (BOB) ~ shows that significant actions have been taken which will help correct the deficiencies. Administrator Knott's testi- mony summarizes the principal actions taken during the year. (App. 1, p. 15.) This is `consistent with the President's program to- (a) Achieve maximum effectiveness in the conduct of day-to- day operations of the Government; (b) To seek in every feasible way to reduce the cost of carrying out governmental programs ; and ( c) To conduct the affairs of the Government on an orderly basis.1° A reduction in unnecessary demand stemming from duplicative systems is also of prime importance at the present time in curbing inflationary pressures. Recommendation. This basic program of eliminating overlap and duplication in the numerous supply and service systems of the Gov- ernment should continue agency by agency as staff time is available for the necessary surveys; As stated later in this report (see pp. 6-8), the national supply system requires adequate inventory controls in order to obtain full utiliza- tion of existing stocks including short-shelf-life items. II. ADEQUACY OF CONTRACTOR INVENTORY CONTROL Findings. As a result of subcommittee hearings ~ in 1965 the GAO was requested to make a survey of the adequacy of controls over Government-owned inventory in the possession of defense con- tractors and report its findings by March 1966." The entire report is printed in the hearings 12 may be highlighted by a few points: 1. Five classes of Government property are involved, with these reported values in 1965: (a) Material $2,167,000,000 ~ (b) Special tooling 1, 778, 000, 000 - ~c) Special test equipment (1) (d)iii-i~ary~property 194,000,000 (e) Facilities_ - 2, 961, 000, 000 Total 7, 100, 000, 000 1 Cost Included in (b). 8 Report, July 1965, p. 3. `Hearings, 1966, pp. 70; 111-114; 183. "Ibid, p. 208. 11 Report, 1965, p. 11. "H~~Ing~, 1966, app. 4, pp. 240-249. I 5 PAGENO="0012" 6 REPORT : ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 2. It is the policy of the DOD to have its contractors maintain the official records of Government-owned property in their possession. 3. A Goveimment property administrator is designated for each contract involving Government property. 4. Government-owned property is located at some 5,000 plants operated by contractors. About 50 of these in 1965 were engaged in the manufacture of major weapons systems with the Army, Navy, or Air Force responsible for property administration. 5. The newly formed Defense Contract Administration Serv- ices (DOAS) of the Defense Supply Agency (DSA) is responsible for control of property at plants not involving major weapons systems procurement. ~ 6. The GAO report is persuasive in its findings which are confirmed by three surveys by DOAS staff since the issuance of the subcommittee's last report,'3 that~: (a) There is need to improve the qua1i~y of survefflance over the multibiffion-dollar contractor controlled inventory of Government properties to protect the public interest. For example, records do not adequately show the extent of use of Government equipment on non defense work or the need for contractor retention of costly Government equip- ment in many cases. (b) There is need to review the policy as to contractor's ~ liability for Government property which is lost, damaged, or destroyed since now under certain contracts no liability attaches unless it can be established that the loss was caused by willful misconduct or lack of good faith.'4 Recommendations. The subcommittee concurs in the recommenda- tion of the GAO 15 "that the DOD undertake a thorough study to determine ~ ~ ~ the most effective and economical method of obtain- ing adequate control over Government-owned property in the possession of Defense contractors." ~ It should be added that Assistant ~ Secretary of Defense ignatius testified "that he was glad that the subcommittee had asked the GAO to make this report" and that it would be carefully studied and acted upon.16 This is a problem of major importance. There are several biffion dollars' worth. of Government property involved and there is sufficient urgency that the subcommittee further recommends that the GAO cooperate with the DOD in the development of an adequate contractor inventory accounting system, approve the system when found to be adequate and report thereon to the subcommittee in March 1967. A thorough review should also be made of any misuse or unau- thorized use of Government property in the hands of contractors w'id proper settlement made as soon as possible. ~ it is also recommended that the newly organized Defense Co~± tract Administration Services (DOAS) 17 which has a1ready~inade an im- pressive record should have its responsibiitieg extended to other types of contracts as soon as may be practicable. it is planned to review this subject at considerable depth at our next hearings. " IbId., pp. 249-272. `~Ibid., pp. 245-248. ~~1'k', ~: 248. "Thid., app. 8, p. 305. PAGENO="0013" REPORT: ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 7 III. UTILIZATION OF PERSONAL PROPERTY INVENTORIES Findings. The subcommittee's 1965 report stated: "There is a potential for much greater Government utili- zation of inventories from which surplus declarations have averaged $5,833 billion for fiscal years 1958-64." 18 Considerable improvement was made in fiscal 1965 with the DOD reporting an increase in utilization of assets from $1.287 billion in 1964 to $1.450 bfflion in 1965. During the same period, disposals of personal property dropped from $5.399 bfflion to $4.769 bfflion.'9 GSA reported transfers for utilization of personal property during the same period of $677 million.20 The subcommittee also recommended in 1965 21 that greater use be made of the Defense Logistics Supply Center (DLSC) at Battle Creek, Mich., facilities for screening Federal agency requirements against supply systems inventories which in the DOD alone amounted to $37 billion as Qf June 30, 1965. (See p. 3.) The subcommittee recommended that the DOD, ~ GSA, and BOB institute a program to insure a greater matching of agency require- ments against existing Government stocks. Witnesses at the recent hearings, while approving the idea, indicated that more computer capacity is needed at DLSC to do the job and that such equipment is being installed.22 Recommendation. The subcommittee therefore reiterates its rec- ommendation and will, during hearings in 1967, review the amount of utilization of existing stocks, the scope of excess and surplus declara- tions of personal property and of short-shelf-life items in particular. (See below.) IV. SPECIAL PROGRAM FOR MANAGEMENT OF SHORT-SHELF-LIFE ITEMS Findings. Our hearings over several years' time showed that the Governmen.t was sustaining losses amounting to millions of dollars attributable to deficient supply management practices involving items with a short-shelf-life such as paints, lacquers, varnishes, photo- graphic materials, medical supplies, rubber goods, chemicals, etc.~ While most of the stocks are in DOD inventories, others have been found in the GSA and the Public Health Service (P115) of the De- partment of Health, Education, and Welfare (DREW). Of current concern is $8 million worth of medical supplies acquired for national emergency purposes and held by P115. The subcommittee was noti- fled by the Secretary of DREW in 1965 24 that he was aware of the problem and was working with other agencies and industry to rotate and make use of these short-life stocks. Testimony in 1966 25 brought forth these points: 1. In October 1965 an interagency committee chaired by GSA, was formed to explore ways and means to utilize the P115 medical stockpile items. DOD and Veterans' Administration (VA) have taken about $5 million worth. 18 Report, 1965, p. 3. `~Hearings, 1966, p. 12. 2°~id., p. 119. 21 Report, 1965, pp. 3-4. ~` Hearings, 1966, p. 101-102. ~ Report, 1965, p.4. `4H~ngs, 1965, pp. 123-124. "Heari.ngs, 1966, pp. 81, 103, and 115. PAGENO="0014" 8 REPORT: ECONOMIC IMPACT OF FEDERAL PROCUREMENT-19 66 2. PHS has destroyed $19 iiiillion worth the past year. 3. About $8 mfflion additional will become worthless if not used in 18 months. A legal problem is involved in that the $8 million worth of materials are technically "needed" and so may not be declared as "excess" and transferred to other Federal agencies or donated to State and local institutions though their life will be exhausted before they can be used. ~ ` Bills have now been introduced to correct this deficiency.26 The PIllS medical supplies are but a fraction of the $703 million short-shelf-life items which have been identified by a DSA/GSA study group.27 Recommendation. All the $703 million of short-shelf-life stocks should be examined for use. This is an interagency problem whose solution involves top management in the executive branch. First, any legal impediments should be removed so this property may be used in the Federal Establishment and if not needed or usable there within its lifespan it should be made available for use in schools, . hospitals, or other eleemosynary institutions. The subcommittee will expect detailed information next year on the utilization, transfer, donation, sale, destruction, or other disposi- tion of the medical~ supply stocks and short-shelf-life items generally. The subcommittee is concerned that the weaknesses now revealed `in the management of short-shelf-life items may be indicative of in- adequacies in the management of stores inventories costing many bfflions of dollars. Further recommendation. The GAO has indicated that it intends to continue a review of the adequacy of inventory controls in the DOD as a priority matter.28 The subcommittee requests that some classes of short-shelf-life should also be reviewed as a test of the adequacy of inventory controls generally and that a report be made on the subject at its hearings next year. V. PROCUREMENT OF COMMERCIAL-INDUSTRIAL TYPE PRODUCTS Findings. President Johnson on March 3, 1966, issued a memoran- dum to the heads of departments and agencies entitled "Government Procurement Guidelines".29 It directed the Director of the Bureau of the Budget to issue detailed guidelines for the determination as to when the `Government should provide products and services for its own use under the general policy of reliance upon private enterprise. BOB circular No. A-76, dated March 3, 1966, was issued by Director Schultze to implement the President's directive.30 The subcommittee has recommended for several years that more aggressive action be taken in eliminating nonessential existing Govern- ment commercial-industrial type activities and arresting the initiation of new ones, so is pleased that this step ~ has finally been taken, which is bipartisan in nature in amending and presumably strengthening prior action taken during the Eisenhower administration.3' Inasmuch as the BOB guidelines ~ are very detailed and require review, interpretation, implementation and testing by the de- partments and agencies, it will be some time before their impact is 26 See S. 3328 (Senator Proxmire) and H.R. 15210 (Representative Griffiths), 89th Cong., 28. sess. 27 Hearings, 1965, p. 379 et seq. 28 Hearings, 1966, p. 165. 28Heas.i~tgs, 1966, app. 1, p. 208. 3°Ibid., app. 1, p. 203. 31 Ibid., app. 1, pp. 208-212. PAGENO="0015" REPORT: ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 9 discernible. It is noted that no specific agency has been designated by the President as the place where complainants may present their cases for consideration or appeal so it is presumed that the BOB will exercise this function. The subcommittee is of the belief that the BOB, backed by this new directive from the President thus augmenting its broad authority over the budgetary,legislative, organization, and management functions of the executive branch, should make effective progress in the future. While ~ the subcommittee has pressed for a more aggressive policy in leaving to the private sector those activities which are nongovern-. mental in nature, it also stresses the point that the Government must not by delegation, contract, default, or otherwise, permit the proper functions of Government to be exercised by the private sector. Also in the disposition of properties heretofore used in the production of commercial products or services, it is always necessary that a fair return be obtained to the Government. Recommendation. No specific recommendation is made at this time pending the implementation of the new program, but the subject will be reviewed at the next hearing. VI. PROCUREMENT AND REGULATION UNDER THE BUY AMERICAN ACT Findings. ID the formulation of an integrated national supply system (see p. 5) a high degree of cooperation has developed between the Department of Defense and the General Services Administration. A memorandum of agreement was executed in January 1964 by the parties.32 Secretary McNamara has stated his position before the sub- committee on several occasions that he favors having GSA procure civilian-type items for the DOD and GSA is performing well in this capacity. In 1964, after lengthy discussions, the function of procurement of handtools generally was transferred from the DOD to GSA with apparent success. It now appears that this part of the national program may be in jeopardy owing to the lack of uniformity in the application of differentials under the Buy American Act. Briefly, the act provides that American products or products manufactured from materials substantially produced in the United States will be procured for public use by Federal agencies unless the department or establish- ment head determines that to do so would be inconsistent with public interest or the cost would be unreasonable. Since the act does not specifically define "reasonable cost," the agency heads in the past have applied varying cost differentials when foreign items were considered for procurement. In 1954 Executive Order 10582 was issued to bring about uniformity in the application of the Buy American Act.33 However, the balance-of-payments problem has now caused a lack of uniformity to develop in the application of the Buy American Act with the result that the DOD permits a 50-percent differential in favor of American products (handtools) while GSA is allowed to use only a 6-percent differential.34 The result is that foreign bidders, mostly Japanese, are obtaining awards from GSA with its 6-percent differential that would not be possible if the procurements were made by DOD. 32 Staff materials, 1965, p. 217. 33 Hearings, 1966, app. 2, p. 217. ~4Ibid., p. 138. PAGENO="0016" 10 REPORT: ECONOMIC IMPACT OF FEDERAL PROCUREMENT-19 66 So an American producer gets the award on the identical items if Agency A does the buying and loses it if Agency B is the purchaser for the same program in the United States. Obviously, if this lack of a policy continues, the American handtool industry will lose more and more business and eventually strive to have the procurement function returned to the military agencies which utilize the 5O~percent differential.35 GSA Administrator Knott made it clear in his testimony that there is no misunderstanding between GSA and DOD on the subject but, "the policy decision rests with the~ Bureau." So the Bureau was asked specifically: "Does the Bureau of the Budget support the current practice of executive agencies applying different differentials under the Buy American Act when purchasing (a) the same item, or, (b) the same class of items?" The Bureau replied: "As a temporary measure, the Bureau of the Budget has supported the existing practice among civilian agencies and the Department of Defense. We believe the existing dif- ferences between the practices followed by the Department of Defense and the civilian agencies should be eliminated when problems of trade negotiations and balance of payments are less critical. We believe a change at this time would not be advisable but will be pleased to support appropriate actions toward a more uniform policy as soon as these problems are relieved." 36 This response does not meet the issue. The testimony given to the subcommittee was to the effect that DOD was using a 50-percent differential to help the balance-of-payments problem by awarding business to American producers at an added cost through~ fiscal 1965 of $67.5 million. To the extent that GSA takes a different course and makes awards to foreign producers, the DOD Balance of Payments program is undermined as ~ is any existing trade agreement. Recommendation. The subcommittee strongly recommends that the Bureau of the Budget take steps to apply uniform differentials under the Buy American Act for the same items regardless of which Federal agency does the buying for the Government. Of value also would be a high level executive study to determine a reasonable cost for a dollar's reduction in the balance-of-payments. VII. COMPETITIVE AND NEGOTIATED PROCUREMENT Findings. The subcommittee has consistently urged that ad- vertised bidding procedures be used to a greater extent in making Government procurements in order to secure the benefits which long and often sad experience has shown derive therefrom as stated by the Comptroller General of the United States in 34 C. G. 551: "The courts and accounting officers of the Government have frequently and consistently held that section 3709, Revised Statutes, was designed to give all persons equal right to compete for Government business, to secure to the Government the benefits which flow from competition, "Hearings, 1966, app. 2, pp. 214-232. 38 Hearings, 1966, app. 11, p. 408. PAGENO="0017" REPORT ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 11 to prevent unjust favoritism by representatives of the Government in making purchases . for public account, and to prevent collusion and fraud in procuring supplies or lettmg contracts." ~ Small business concerns also secure a greater amount of business under advertised bidding.38 While DOD-wide competitive bidding increased significantly from 32.9 to 43.4 percent, and advertised bidding from 12 to 17.6 percent. from 1961-1965, the DSA, which procures 1.3 million common-type items of the 3.8 million items for defense agencies, reports that for the first 5 months of fiscal 1966, 92.9 percent of total awards were subject to competition and 33.6 percent by advertised bidding. This attests primarily to the greater standardization in the items procured by DSA. In further contrast, the GSA which procures as a general rule highly standardized items for both military and civilian agencies reports that 77 percent of all its total procurements are made by advertised bidding.39 Recommendations. It is recommended that the program of item standardization which requires adequate specifications and drawings be pursued as vigorously as possible expecially during the present period when the economy is running at such a high level of capacity. Related to this is the program of obtaining competitive bids for common type parts or components which are used in the cdnstruction of complex end items such as ships, aircraft, missiles, tanks, etc. This so-called breakout program recognizes the fact that common or standard parts may be procured competitively as they are subject to detailed specification which is not so for the end item. . VIII. REAL PROPERTY MANAGEMENT Findings. The DOD and GSA continued to achieve success in fiscal 1965 in generating and disposing surplus real property. Secre- tary McNamara summarized the results in the DOD from 1961 to 1965 as follows. Civil airports Schools and universities Parks, recreation. community development Private industry for production Tndividuals.and small companies Federally owned reserved lands Other Federal agencies 23 98 78 37 171 6 57 13 34 32 18 39 3 25 6,478 11,617 39,486 12,647 55,472 627,785 36,336 1 Hearings 1966, p. 32. New use Number of locations States Acres Administrator Knott of GSA stated that "the investment in prop- erties donated for education, health, airports, historic monuments, wildlife conservation, and parks and recreation during the 10-year period ending June 30, 1965, totaled $577 million. He also advised that in the past 4 years, sales by GSA of 92 industrial facilities fur- 3' Report, October1960, pp. XII; 23-25, app. 3, p. 93-95. Report, July 1963, pp. 2-4. Report, September 1964, pp. 5-6. Report, July 1965, p. 11. 38 Hearings, 1966 p. 135. "Ibid., p. 133. Military property released 1961-65 1 PAGENO="0018" 12 REPORT: ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 nished employment for more than 56,000 employees with an annual payroll of over $390 million.4° These are heartening showings of progress. The subcommittee points out, however, that the value of the Government's real property holdings has continued to rise year by year to a total of $66.4 bfflion ( see p. 2) ~ as new programs are begun and values increase. Also, that two recent GAO reports focus attention on the fact that very valuable Government land is retained by military agencies and kept in low priority use.41 Recommen,datjGns. There is a continuing need to screen the Govern- ment's real property holdings to determine if they are being put to the best and highest use from the national point of view. Since the holding agencies may not be entirely objective in the matter and have the sole authority to make the declarations of excess, it is recommended that a high level economic policy committee be assigned the task of reviewing agency real property holdings and making recommendations to the President as to their continued retention and highest use. TX. SALES OF SURPLUS PROPERTY AND USE OF RECEIPTS Findings. The subcommittee requested the GAO to make a study and report on the cost of sales of surplus property and disposition of receipts.42 A synopsis of the report as ~ stated by Comptroller General Staats is (a) that some of the sales proceeds were improperly used to reimburse expenses not directly related to disposal operations and (b) that there is need to improve the accounting system and cost control for disposal operations in the DSA. Recommendation. Since the DOD did not have sufficient time to study fully the GAO report before the hearings and is currently reviewing the ~program, the subcommittee will not make any recom- mendations until this has been done. The observation is made, however, that it is fiscally unsound to permit agencies to create their appropriations by the use of receipts from the sale of surplus property. This not only bypasses the normal budget-appropriation process but as the GAO pointed out in the in- stant case, the agency was tempted. to misuse extra receipts for other than authorized purposes. The need for operating funds may also lead to unwarranted sales. The subcommittee notes a similar situation with regard to the GSA's utilization of receipts from the sale of automotive equipment and the use of the proceeds to finance procurement of vehicles for the motor pools.43 Thousands of vehicles are sold annually without being made available ~ to other agencies or to the Nation's education and health institutions which need and could use many of them if made available under the Donable ~urp1us Property Act.44 4°Ibid., p. 132. 41 Thid., app. 7, pp. 302-304. 42-Thid., app. 5, pp. 273-288. ~ Hearings, 1965, pp. 190-192. Hearings, 1966, pp. 412-413. 4~ Federal Property and Administrative Services Act of 1949, as amended, 40 U.S.C. 471, sec. 203(j). PAGENO="0019" RECRUITING CONSTRUCTION ACTIVITIES PRINTING AND BINDING ACTIVITIES GENERAL ANALYSIS OF OTHER COMMON The review and integration of common supply and service activities incident to the development of a national supply system (see p. 5) is producing beneficial results. Likewise, Secretary McNamara has done an outstanding~ job in identifying, analyzing, and in some instances integrating common. supply and service activities in the Department of Defense pursuant to the McCormack-Curtis amendment of 1958 to the National Security Act. He has established the Defense Supply Agency which is doing a noteworthy job with annual savings of $59 million and with a reduction of 8,500 people.46 The Defense Communications Agency, the Defense Intelligence Agency, the Military Traffic Man.- agement and Terminal Service, the Defense Contract Administration Service, and the Contract Audit Service have also been established The Comptroller General testified that the GAO is making a survey of the individual recruiting organizations and facilities of the four military services and has made a preliminary report to the DOD. It is anticipated that the final report will be available in a few months.47 The GAO is also making a study of civilian agency construction activities and will report to Congress on its findings. This is a merito-. rious project since many agencies are engaged in these activities each with its staff,. facilities, and equipment. The common printing and binding function as recommended in last year's report 48 deserves special attention in view of the fact that plans have been underway to build a new Government Printing Office (GPO) building at a reported cost of $46 million on excess Government land valued at $3.5 to $4 mfflion.49 At this time and for years there has been considerable duplication in the supply functions as between the GPO and GSA which have not been resolved as a step in de- veloping the national supply system.~° Nor has the full potential of the large and diversified private printing industry been utilized in fulfillment of the President's policy (see p. 8). It seems obvious that job loads should be determined before more nontaxable facilities are constructed. ~` Hearings, 1966 p. 36. See also Staff Materials, 1966, app. 2, p.42 for a progress report on DSA. ~ Hearings, 1966, p. 81. ~`Ibid., p. 1C4. ~` Report, 1965, p.7. 49Hearings, 1966, app. 11, p. 414. `OThid., pp. 413-414. 13 PAGENO="0020" 14 REPORT: ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 AUTOMATIC DATA PROCESSING (ADP) Witnesses from the GSA and BOB indicated that progress is being made in bringing better management to the procurement and use of automatic data processing equipment which has an annual cost of $3 bfflion to the Government. However, a detailed review wifi not be undertaken by the subcommittee until the GAO makes a study which it announced on November 25, 1965, to the heads of executive departments and agencies.5' This is a high priority study which should aid in bringing the ever-growing APP problem under better management and control. It is expected that the GAO will recom- mend any changes in the Brooks-Douglas Act (Public Law 89-306) which may be required. "Ibid., p.163. PAGENO="0021" APPENDIX DEVELOPMENT OF A NATIONAL SUPPLY SYSTEM PROGRESS IN CIVILIAN AGENCIES. 1 (Excerpted from statement and testimony of Administrator Lawson B. 52 DEFENSE SUPPLY AGENCY/GENERAL SERVICES ADMINISTRATION AGREEMENT "Last year we reported to the subcommittee that an agreement be- tween GSA and DOD governing supply management relationships had been signed in late 1964. The agreement envisions the fitting together of supply management capabilities of DSA and GSA to form a coordinated national supply system for the Federal Government. "This wifi provide the Federal Government with an efficient and economical system for the procurement and supply of personal prop- erty and will eliminate avoidable duplication. For example, there are presently some 1,100 items stocked both by GSA and DSA. We be- lieve that little, if any, of this duplication will continue to exist under this dual management when the joint studies now underway are completed. . "During the past year, DSA and GSA have proceeded toward pro- gressive implementation of this agreement. The DSA/FSS Material Management Review Committee (MMRC), established last year, completed its examination of 152 Federal supply classification (FSC) classes now managed by DSA to determine those which should con- tinue to be managed by DSA and those which should be transferred to GSA. Fifty-three of these FSC classes studied were assigned to GSA and 99 remained with DSA. The 53 classes assigned to GSA wifi be transferred late this year. "Integration of civilian agencies into the national supply system. Basic plans have been developed and actions taken to mtegrate the supply systems of several civilian agencies into the national supply system. The subcommittee was specffically interested in four agencies and selected commodity classes. "We have made good progress in these areas: " 1 . Analysis of cost and resource data on electronic, fuel and cloth- ing and textiles indicates that it is feasible~ for DOD to support civil agencies for these items. We are now ascertaining what Government- wide savings would result from assignment of Government-wide supply support for these items to DOD. "Chairman DOUGLAS. You are wffling to give up ~ jurisdiction on these items? "Mr. KNOTT. Yes, sir; again, where they have the major capability, the major interest, it wifi avoid duplication and effect savings for the Government overall, then I think we should go in that direction. 52 Hearings, 1966, pp. 111-114. 15 PAGENO="0022" 16 REPORT: ECONOMIC IMPACT OF FEDERAL PROCtJREMENT~1966 "Chairman DOUGLAS. You are to be commended. A most unusual type of Government official to surrender jurisdiction and cede power. "Representative CURTIS. But this is reciprocity, is it not? "Mr. KNOTT. Yes; it should work both ways. {Laughter.] "But you notice in the items we studied between GSA and DSA in a more narrow field that actually more items stayed with DSA than the ones that came to GSA, but it should be on the basis of the item itself rather than the numbers. "2. Further analysis of medical and nonperishable subsistence items is needed to identify the savings potential before a decision can be made on the assignment of these items. An indepth study is now underway to determine whether economies can be achieved through DSA supply support of these items to the Veterans' Administration and the Public Health Service. "3. Since we have already established that economies will accrue through arrangements for the Veterans' Administration and the Public Health Service to utilize Defense Supply Agency facilities in fuffilling their requirements for perishable subsistence, such arrange- ments are now being made on an installation-by-installation basis. "4. A joint GSA/VA review has been made of all other items now managed by VA to determine those which should be supplied by GSA and those which should be retained by VA. "5. Following a recently completed item-by-item review, agreement has been reached with the Post Office Department whereby GSA will provide direct support to major post offices on all items which the* review established should be managed by GSA. This does not include items identified as peculiar to Post Office Department programs, such as lockboxes and mailbags, which will continue to be managed by the Post Office. "Mr. KNOTT. The Post Office Department wifi r~edistribute to the smaller post offices the relatively few GSA-managed items used by them. GSA is currently performing all procurement, contract admin- istration, and quality control for all Post Office Department motor vehicle requirements. "6. GSA regional depots are now supplying stores stock items di- rectly to the Federal Aviation Agency. Such items are no longer stocked at the Federal Aviation Oklahoma City Depot. As you know, this is their largest depot facility. "Also, DSA presently supplies FAA electronic tube stock replenish- ment requirements nnd it is planned to extend this arrangement to other electronic items available from DSA. "7. DSA is now the principal direct supply source for National Aeronautics and Space Administration facilities for all electronic items available from DSA. NASA does not maintain redistribution facilities of its own. "In addition, we have been working, and wifi continue to work, with other civil agencies looking toward further implementation of the national supply system, including utilization of more effective requi- sitioning practices. For example: "1. An agreement is being finalized whereby the Maritime Admmis- tration of the Department of Commerce will obtain ships' parts, navi- gational aids, and other technical item support directly from the Defense Supply Agency. I PAGENO="0023" REPORT ECONOMIC IMPACT OF FEDERAL PROCUREMENT-i 966 17 "2. Cooperative joint efforts between GSA and the Office of Eco- nomic Opportunity since its creation have been successful in avoid- ing the establishiment of a duplicate supply system in OEO. Under these arrangements: "(a) The Job Corps uses certain excess or long-supply military clothing and textiles and other items of equipment and supply, and DSA supports the Corps for other recurring clothing requirements. "(b) Where it is economical to do so, Job Corps centers obtain both perishable and nonperishable subsistence support either from DSA or local military installations. "Chairman DOUGLAS., I have inspected some of the Job Corps camps. What you say is true, dungarees furnished from GSA, boots, blankets, excellent. "Mr. KNOTT. OEO, for a new agency, comes nearer utilizing the full spectrum of services that GSA has to offer than any agency that I know of in Government. "Chairman DOUGLAS. What we on the Hill are somewhat distrustful of are the empire builders. An agency wants to get everything under ~ its wing. If each agency does this, you get great duplication. "Mr. KNOTT. Right. They have been wffling and ready to use ex- cess property, rehabilitated property, excess installations. They have been willing to use our services, in fact, have called upon us for rehabilitation of their buildings. "All of our services, in one way or another, have been contributing to their use. "(c) GSA is now furnishing or arranging to furnish complete sup- ply support for all OEO programs, including the preparation of specifications, procurement and storage and distribution of training materials and other program-type items. "in each instance, our negotiations with the civil agencies are guided by a single principle: Complete and effective supply support for Federal agencies at the lowest cost to the Government as a whole. Each arrangement we have concluded or have underway is designed to avoid duplication of effort in the management, procurement, stor- age, and distribution of the Government's supply needs. "Since the last hearings, we have been working on additional aspects of the short-shelf-life problem." 0 PAGENO="0024"