Mr. SMITH. Well, then, under what conditions could you not declare something surplus?

General STANWIX-HAY. You said, sir, if it was a peculiar item to the Defense Department. Normally speaking, Mr. Smith, if it is a peculiar item to the Defense Department, the machinery on which that is built will have been furnished by the Defense Department.

Now, this is not true in all cases, and particularly is it not true today when we say to a contractor this might be peculiar but you furnish the capital equipment that is going to build it. This was not done in the past and we furnished that equipment, and if we are going to need it in the future, it is very difficult for me to declare that piece of equipment as surplus unless a contractor some place in the country will say to me, I will furnish that peculiar piece of equipment to you. At which time, Mr. Smith, then I can declare this piece surplus.

Mr. SMITH. I can understand how this would apply to a machine that was built specifically and particularly to build a certain item, but it would not apply, would it, to machines that are used commercially which have some versatility?

General STANWIX-HAY. No, sir. It would not probably be a unique item coming off of that to the Defense Department.

Mr. SMITH. So that all of those machines, then, could be sold through the surplus route?

General STANWIX-HAY. This is like a screw machine and hand lathes; yes, sir, these items.

You see, I have to go back to your question because the items coming off of them are not peculiar to the Defense Department. They are common items.

Mr. SMITH. The product that they are producing would be peculiar but you could contract for it from someone else.

General STANWIX-HAY. Any time I can get it from a contract source from some place else and those machines, those specific machines are not necessary

Mr. SMITH. But your inventory, I think, indicates you do have a lot of these kinds of machines that are commercial machines and not peculiar.

General STANWIX-HAY. Yes; I do. And any contract that is examined on those machines through the contracting officer's records will show that there is a savings to the Government to utilize that equipment as long as you have that equipment.

Mr. SMITH. Then it is not being declared surplus because you have concluded that there is a savings to the Government in not declaring

it surplus.

sir.

General STANWIX-HAY. The contracting officer has so declared it,

Mr. SMITH. In other words, you have concluded that you could not contract as cheaply as you could do it yourself.

General STANWIX-HAY. That is correct, sir.

There is another side to this, Mr. Smith, and the side is, sir, what does it cost me to run the inventory? What does it cost me to maintain the equipment? What does it cost me to run the inventory control that is on that equipment? But on the contract

Mr. SMITH. Of course, a lot of people in private industry would try to tell you that there is never a case that they cannot furnish it

cheaper than you could do it yourself. So how do you arrive at the conclusion that you can?

General STANWIX-HAY. That I can?

Mr. SMITH. Yes.

General STANWIX-HAY. Well, sir, this is one of the difficulties in Defense Department contracting because, in Defense Department contracting, each supply contract stands by itself. And it has a value placed upon it. Company A says they will furnish me this equipment for this much money by using Government equipment. They will furnish it, the same piece of equipment for this much money, which is a higher sum, by not using Government equipment, which on that particular contract lets the contracting officer say I am saving the Government this much money by furnishing the piece of equipment.

What we, in the production end, of the Defense Department are attempting to say is that is perfectly true on that particular contract. But in another element of the pockets of Defense Department money there is a cost toward maintaining that piece of equipment. There is a cost toward supply management of that piece of equipment which is not allocable, you see, to that contract price.

Mr. SMITH. Of course, they have to figure cost of the money, too. General STANWIX-HAY. That is correct.

Mr. SMITH. And cost of the use of the money might be different for them than it is for you.

General STANWIX-HAY. Yes, sir.

Mr. ODEN. This still seems to be a problem, and I feel the subcommittee is unclear on the difference between negotiating the sale of this equipment and somebody declaring it surplus.

You stated that if it is not a unique piece of equipment and it is not a very unique product and if the contractor is simply using a normal lathe or drill that you could declare this surplus and sell it. Why would you need the legislative authority to negotiate these sales when you could simply take this large inventory of typical machinery and sell it on competitive bid through GSA.

General STANWIX-HAY. Declare it surplus, sir?

Mr. ODEN. Yes.

General STANWIX-HAY. I would have to go back to my original answer, Mr. Oden.

This equipment, as it is bought, cannot be declared surplus to the Defense Department as surplus equipment no longer needed, because in each case in this equipment there can be shown that it is being used by the contractor and saves a cost to the Defense Department.

Mr. SMITH. The real key to why many machines are not eligible for disposal under the surplus route seems to be that you can save money by using this equipment.

General STANWIX-HAY. Yes, sir.

Mr. SMITH. And if you were to sell something surplus and turn around the next month and buy the same article again-because under a new contract you are finding that the bid goes

General STANWIX-HAY. It goes into overhead, sir.

Mr. SMITH. Then you would be criticized for that, too.

General STANWIX-HAY. Yes, sir.

Mr. SMITH. In other words, you furnish equipment because you can

save money by doing it.

General STANWIX-HAY. Oh, very definitely, sir; as long as we have this inventory. As long as we have it, it is advantageous to the Government to use it on a particular contract because of this saving, and it is upon that saving that the contracting officer will justify it in most

cases.

Mr. SMITH. Of the equipment that you have in inventory, do you have a rough idea as to how much cannot be declared surplus because it fits into category A compared to category B?

General STANWIX-HAY. Could we furnish this, Dick? It can be broken down.

Mr. CARR. It has not been developed.

General STANWIX-HAY. It has not been broken down.

Mr. SMITH. Are you developing this kind of information?

Mr. CARR. We would not develop such information until we had the sales authority. It would be a rather extensive examination, would be expensive, because we would have to examine piece by piece, contractor by contractor.

Mr. SMITH. Let's put it another way. Offhand, is it a very substantial portion that cannot be disposed of through the surplus route because it is a savings to the Government to keep it?

If

Mr. CARR. Yes, sir.

Mr. SMITH. Do you have an idea, rough idea as to what percentage? Mr. CARR. I have no idea of the value, but may I add another point: you have a manufacturer, such as an aircraft manufacturer, there are only so many aircraft manufacturers that can produce that kind of product. And while that product is being produced, we have no capability to declare that equipment surplus to our needs.

What we have been saying is that it is surplus to our need to own it, but we must have it in order to get the defense production. And there are only so many manufacturers of aircraft. That piece of equipment we cannot declare surplus, as long as the contracts are continuing to be performed. And while those contracts are being performed, that equipment would remain there.

We would like to be able to sell that equipment, because otherwise it would continue there indefinitely, in those contractors' plants, and that is an example. May I supply for the record a Secretary of Defense letter dated October 10, 1969, to the chairman of the House Armed Services Committee detailing our need for the legislation? Mr. SMITH. Without objection, it will be received. (The letter referred to follows:)

Hon. L. MENDEL RIVERS,

Chairman, Armed Services Committee,

U.S. House of Representatives, Washington, D.C.

OCTOBER 1, 1969.

DEAR MR. CHAIRMAN: Your Committee has before it for consideration a Bill, H.R. 12414 "To amend Chapter 137, Title 10, United States Code, to limit, and to provide for more effective control over, the use of Government production equipment by private contractors under contracts entered into by the Department of Defense and certain other agencies, and for other purposes." The Department of Defense Acting General Counsel furnished you a detailed commentary on this Bill by letter of September 5. In addition, I would like to give you my personal views in regard to this Bill, and the reasons why at least certain of its provisions are urgently needed.

The Bill has two broad purposes. The first is to impose statutory limitations and controls over the furnishing of Government-owned production equipment to contractors. The second is to authorize negotiated sales of such equipment in the possession of contractors.

The first portion of the Bill is less restrictive than are the current Department of Defense internal policies and procedures. Although I have no objection to such statutory controls, they are not considered to be necessary.

The second portion of the Bill, pertaining to the negotiated sales of Government-owned production equipment in possession of contractors, is, I strongly feel, necessary not only in the interest of improved Government management, but beneficial to the business community and the taxpayers as well.

For many reasons with which I know you are familiar, it has been necessary in the past, starting with World War II, to furnish Government-owned equipment to contractors in order to obtain necessary production of Defense materiel. Conditions in the industrial community now have changed to such a degree that it is not only unnecessary, but highly undesirable in most instances to perpetuate contractor use of this Government-owned equipment. If we are to promote the action of a free enterprise system and avoid the further encroachment of Government control and direction where such is unwarranted, the elimination or drastic reduction of Government ownership of capital equipment used by Defense contractors is essential.

Inasmuch as the Government-owned capital equipment in contractors' plants is for the most part in current use, its disposal by declaration as excess is infeasible. Such action would seriously disrupt current military production unless the using contractor happened to be the successful bidder for the equipment. Authority to negotiate the sale to the using contractor at fair and reasonable value would, I am convinced, enable us to significantly reduce our inventory of equipment without jeopardy to current military production. H.R. 12414 would provide this authority.

The major benefits to be obtained from such sales would be:

1. elimination of the competitive pricing advantage by contractors using Government-owned equipment without the necessity for providing that capital investment. This would enhance parity among competitive firms without the need for applying artificial equalization factors such as rental formulae. 2. the equipment sold would become part of the state and local tax base since it then would be privately owned, whereas under Government ownership it is free from such taxes in most States. This addition to the private corporate tax burden would further tend to equalize competition with firms already using their own equipment.

3. we would drastically reduce the large Government administrative costs involved in ownership, management, control, surveillance, maintenance, transportation, storage and eventual disposal of the equipment.

4. transfer of the risks of ownership to private contractors would result in increased discipline in contractor management, and requisite modernization of equipment as privately owned property (contractors have no real incentive to discard and replace Government-owned equipment that has become inefficient, whereas Corporate-owned assets must be modernized to remain competitive).

5. the above tendencies toward increased competition between contractors will be beneficial to Department of Defense procurement costs. (There are those who will say that Defense procurement costs will be increased by not making such production capacity available. It is my belief that a truly competitive environment will rapidly reduce any significant increase to procurement costs. It is my belief, further, that any procurement cost increase will be more than offset by the reductions in administrative, management, maintenance, etc. mentioned in 3 above.)

6. the need for Government expenditures to modernize Government-owned assets is eliminated.

7. the proceeds of such negotiated sales will be returned to the United States Treasury, and we believe provide greater return than would advertised bid sales.

I wish to assure you that not only would these authorized negotiated sales of equipment be carefully reviewed and controlled, but also that fair and impartial third party appraisals of fair market value would assure a proper return to the Government. Furthermore, an adequate National Security Clause would be used where appropriate, similar to that now used in connection with negotiated sales of real property. If the Congress feels it necessary, I would agree that this be made a statutory requirement.

For the above reasons, Mr. Chairman, I urge early and favorable consideration of HR 12414.

Sincerely,

32-579 0-69-20

M. R. LAIRD.

Mr. ODEN. This seems to be the critical problem. Everyone recognizes that the Department of Defense is going to have to maintain a certain stockpile of this equipment, particularly for unique machinery, and it appears that the crux of the whole matter is what effect does it have on competition when the Department of Defense places this equipment in a contractor's plant. And I believe you stated today that you are strengthening your procedures regarding the criteria for receiving this equipment.

General STANWIX-HAY. Yes. Absolutely, sir.

Mr. ODEN. And the great fear of course, is that if you place this equipment in a contractor's plant and sectors of the private economy were capable of doing this same job at the same cost, or maybe even at a lesser cost, then it is actually skewing the economic process and the competitive process.

General STANWIX-HAY. Mr. Oden, this is-well, insofar as Mr. Carr's directorate is concerned is perhaps the biggest number of hours a day that I spent in my entire materiel job, because we think this is a matter of extreme importance. It has to do with the entire mobilization plan. But for the information of the committee-and I think you would be interested in this-we are not attempting to do this by ourselves, sir.

I have recognized that it takes industry and Defense working together on this. And we have a meeting which is coming up with the machine tool producers, the builders association which is deeply involved in this surplus work and this sales work.

We have a series of meetings with these people to discuss what the impact is of our efforts in this area.

There is another industry association, machine tool dealers association, with whom we have formed a working committee of the heads of their association, and I am a member, an invited member, as I am of the machine builders association. The machine builders association is having their meeting in Dallas, Tex., the week after next, and I am going to be at this meeting to discuss these very things that we are discussing here. The tool and die industry, I hope, very frankly— and to be frank with you, sir; we have not met with the machine tool and die industry because of these hearings at the present time, because I wanted to get these hearings over with. I wanted to see what actual problem areas we had that could be worked out with them.

But I can assure you that as soon as these hearings are over and we have an idea of what the problems are, my next series of meetings will be with the machine tool and die industry so that they and the Defense Department can get into a talking arangements as we have with the others. The only other association is the distributors association, and we have initiated talks with them to find out what their problems will be on any impacts that come from these efforts that we are in in the Defense Department.

I think Defense and industry is talking in this area, sir, and as long as people are talking together and working together I believe that we can work a solution out.

Mr. ODEN. Thank you.

Mr. ROBINSON. Thank you, Mr. Chairman.

Mr. Sanderson, your comparison in the attachment to your prepared statement of Government rental rates with commercial rental rates