oversight

Coordinated Consideration Needed of Buy-National Procurement Program Policies

Published by the Government Accountability Office on 1971-12-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

        f
        I
        I
        I -




    .



&




F
                                                                                                                                            i


                              COMPTROLLER        GENERAL     of        THE     UNfTED      STATES
                                               WASHINGTON.        DC         XL%8




                                                                                                                                            I




             B-162222




             To the      President       of the Senate and the                                                                            1 ,
        15
             Speaker       of the     House    of Representatives

                     This is our report     on coordinated                                 consideration         needed
             of buy-national    procurement     program                                 policies     by the     Office  of       . ._
             Management      and Budget.

                        Ourreview   was made pursuant     to the Budget                                       and Ac-
             counting    Act,   1921 (31 U.S.C.  53), and the Accounting                                         and Au-
             diting   Act of 1950 (31 U.S.C.    67).
                                                                                                                                                I
                     Copies  of this report     are being     sent to the Secretaries
             of State, the Treasury,     the Interior,      Defense,    and Commerce;
                                                                                                                                 -        -..
             the Joint Economic      Committee;        the Commission       on Govern-                                                          I
             ment Procurement;       the Council       of Economic    Advisers;     and                                                         I
             the General    Services   Administration.                                                                       .       .-
                                                                                                                                                I




.                                                                       Comptroller                 General
                                                                        of the United               States

    .




                                            50 TH ANNWERSARY                        7’?21 c 1971.
                                                                                                                       _ I.
                                                      COORDINATED CCNSIDERATION PIEEDED OF BUY-
                                                      NATIOIJAL PROCUREMENT PROGRAM POLICIES
                                                    I Office   of Management and Budget  B-162222                $1
                                                  r'

DIGEST
__-----




      In calendar      year 1970 the Nation's         balance-of-payments         deficit   on the
     -official    settlement     basis   exceeded     $10 billion.         The U.S. Government     is
      pursuing    several    courses   of action      designed      to alleviate     the factors   con-
      tributing     to the unfavorable       balance.

      This General        Accounting         Office     (GAO) report        discusses       one course   of action--
      Federal     procurement         policies       under the Buy American            Act and the Balance-
      %%yments          Program,       jointly       referred      to in this      report      as the buy-national
      procurement       program.         This program         requlates       Federal     procurement     in situa-
      tions   where suppliers             offering      domest;'c     products     and services       are competing
      with suppliers         offering        foreign      products      and services.


FIflXNGS     AND CONCLUSIONS

      Policies   and procedures    implementing       the buy-national        procurement      program
      generally   permit   Federal   agencies    to pay up to 50 percent            pore for domestic
      products   over comparable     foreign    products,      to protect     domestic    interests    and
      to improve    the U.S. balance-of-payments          position.       (See p. 5.)

      Need     or reports      on
      ba lance-of-payrzent          ber,e fi ts

      Although      the buy-national         procurement   program     has been in existence      for a
      number of       years,  information        has not been accumulated       to evaluate    the ef-
      fects    of   the program      on the balance      of payments      or to determine    what it
      has cost      to obtain     balance-of-payments        benefits.      (See pp. 12 and 2s.)

      CJO questions        whether    it is in the national       interest     to pay premiums    of
      millions     of dollars      annually   to retain   procurement      dollars   in the United
      States,     without      some form of reporting     system to determine        whether   balance-
      of-payments       benefits    are being   achieved.      (See p. 27.)                                               ;

   = A case involving          several     civil   agency procurements           and a single       Depart-
      ment of Defense         {DOD) procurement        showed that       additional     costs     had been
      incurred without         balance-of-payments         benefits      because     of different       pro-
    . curement policies         under the buy-national            program.       (See pp. 12 to 15.)

             DOD saved an estimated        $12.8 million            in balance    of payments    by buy-
             ing domestic   sandbags     at a premium            of $7.7 million,     60 percent    more
             than the estimated      cost of foreign             procurement.      At the same




Tear Sheet
     time civil     aqencies       purchased     foreign-made       products   at    a cost       of
     $12.9 million.

     The civil      procurements       offset    the   balance-of-payments          benefits       achieved
     by DOD.

With a more coordinated            buy-national    procurement     program,      other         alternatives
would have been available             to the executive     branch.      Coordination            might      have
resulted  in:

  --Domestic     procurements   by civil          agencies      and foreign procurement     by DOD.
     (The same balance-of-payments               benfit    would have accrued     at a savings
     of $4 million.)

   --Domestic       procurements       by civil    agencies     in addition     to DOD's domestic
      procurement.          (An additional      balance-of-payments         benefit  would have
      accrued     at a premium       of $3.7 million        which was well within       the guide-
      lines   established.)

  --Limited     resources      might     have been reallocated          to other Federal    programs
      aimed at expanding         exports     which reportedly        are more cost effective       in
      obtaining    balance-of-payments           benefits.




Federal  agencies     are not required       to determine    the value     of foreign      and
domestic  components     in end products       and whether     the additional       cost that                 may
be paid for a domestic       end product      will   result  in an appropriate         benefit                to
the U.S. balance-of-payments        position.         (See p. 16.)

Federal     agencies     should    consider     the value of American          and foreign  components
in the end product,           to guarantee      that     premium prices     are paid only when
demonstrable       balance-of-payments          benefits       will result.      (See pp. 28 and 29.)

     DOD approved      an Air Force procurement       from a domestic               firm    for $2.3 mil-
      lion more than the price        offered   by a foreign    supplier.                 Due to the
     foreign     components    in the product,    however,   only $1.4              mfilion     in balance-
     of-payments      benefits   were achieved.      (See p. 77.)

     Using a guideline    that a $2 advantage       in the U.S. balance-of-payments
     position  is necessary     for each $1 in additional      cost,   a premium    price
     of only $700,000    was justified.       DOD was aware of the effect       of the
     foreign  componency    on the balance-of-payments      benefits     but did not                           '
     have enough time to readvertise        the procurement    to obtain     componency
     data from bidders.      (See pp. 17 and 18.)

CompZex<ties call        for   high-ZeveZ       ;~ordinution

The buy-national        program   is compiex.    Its complexity          is further      compounded
by the program's        effect   on major domestic       and international         program    policies,
such as the level         of Federal   spending,   efforts     to curb inflation,          protect-ion



                                                  2
                      of domestic   industry           and employment,    and U.S. foreign                    economic      and trade
         I            objectives,   including            negotiations  aimed at gaining                    access to      fcreign    gove!‘rI-
         I                                            (See pp. 22 to 27.)
         t            ment procurements.
         I
         I            GAO recognizes         that most of these considerations           are not subject         to precise
         t            measurement--that           subjective     judgments   by management      might vie11 outweigh        the
         I            basic    buy-national         determinants     of cost versus   benefits.       Decisions     must
         I
         I            consider     that     changes      in any program    may result  in divergent       effects    on
         P            other    programs.         (See pp. 29 and 30.)


              RECOM?dENDATIOYS
                            OR SUGGESTIOIX

                      GAO recommends           that   the   Director,       Office      of    Management       and Budget:

                           --initiate      a reporting       system    to assist     in evaluating              the effective-
                               ness of buy-national          procurement     program    policies             in terms of balance-
                               of-payments     benefits      and additional       costs  incurred              and

                           --determine     the feasibility           of requiring            that   componency    information          be
                              obtained    and considered          on procurements              that  involve   buy-national           pro-
                              gram policies.       (See p.        33.)

                      The creation      by President     Nixon of a new, high-level     Council    on Inter-
                      national     Economic   Policy   early   in this year recognizes      the need for co-
                      ordinating     economic    and trade    policies with overall    national    objectives.

         ,            GAO recommends    also that    the Director,                   Office    of Management    and Budget,
          I           in his role   as the overseer      of executive                    agency programs     and policies,
          I           assess the indicated     costs    and benefits                  under the buy-national        procure-
         I
          I           ment program   against   the
          I
          I                --potential     adverse    impact      of    buy-national           policies      on other   U.S. foreign
         I
         i                    economic   and trade      objectives         formulated          by the      Council   on Interna-
         t
                              tional   Economic    Policy      and
         I
         I
                           --potential     for greater     benefits     in assisting      the domestic      economy and the
    _/
                              U.S. balance-of-payments         position    by reallocating        budgetary     resources
         i                     to other  programs     which reportedly      are more cost effective            and con-
         t                     sistent  with traditional       U.S. efforts       toward    freer  and fairer      world
         I
         I                     trade.   (See p. 33.)
         1
         I

4        i
         i    AGEKY ACTIOh'S AND Ui!X?ESOLTrED
                                            ISSUES
   t
   1                  Of the 10 agencies       whose comments :qere requested,             only DOD disagreed           with
- I                   GAO's proposal     for a reporting       system.     DOD stated        that     the 50-percent        pre-
   I
   I                  mium for domestic       procurement     discouraged      foreign     bids and that        therefore
   t                  only estimates     were available.         GAO believes,        however,      that  estimates       would
   I                  be useful    in evaluating      the efficacy      of buy-national         policies.       (See p. 30.)
   t
   I
   I                  The Office        of     Management     and Budget        generally    agreed         with    the   proposal  and
   I
   I                  is currently           studying     the feasibility          of a reporting           system.       GAO was informed
   I
   t          Tear Sheet
   I                                                                           3
   t
  I
    by an official       of the Office        of Management       and Budget       that   it would be the
    logical   organization         to carry     ou+c, or to coordinate        an   assessment     of the pro-
    gram and other       alternatives       with information         provided      by other   agencies.
    A high priority        should     be assigned      to developing       such    a system.      (See
    p. 31.)

    Of 10 agencies         commenting      on a draft  of this    report,      only DOD and the Office
    of Management        and Budget did not agree w-ith the objective                  of obtaining     and
    evaluating        componency     information.     The remaining       agencies,      although    basi-
    cally     agreeing    with     GAO's position,    expressed     concern      that undeterminable
    amounts      of administrative         costs might be incurred        before     the benefits     to be
    realized      were known.        (See p. 31.)

    GAO agrees    that   the feasibility          of adopting       a more stringent        componency
    policy  should     be fully   evaluated         before   it   is adopted.       (See    p. 31.)


it%TTERS
       FORCONSIDER4TION
                      BY THECONGRESS

    This report,     showing      the need for coordinated        consideration            of buy-national
    procurement    policies,        is being sent to the Congress          because         of the effect
    that   the buy-national         procurement    policies   have on a variety             of important
    domestic    and international          program  policies.
                                       Contents                                 ..L-

                                                                         Page

             DIGEST                                                        1

l
             CWTER

                    1   INTRODUCTION                                      5
                            Balance-of-Payments   Program                 5
                            Buy American Act                              8
        _I                  Scope of review                              10

                2       NEED FOR METHODOF EVALUATING EFFECTIVENESS
                        OF BUY-NATIONAL PROCUREMENTPOLICIES
    I


                                                                         12
                3       NEED TO DETERMINE FEASIBILITY OF REQUIRING
                        AN EVALUATION OF COMPOhENCY                      16
                            Guidance does not provide for an effec-
                               tive evaluation  of componency            16
                            Procurement practices     of Federal civil
                               agencies could benefit    Balance-of-
                              Payments Program                           18
                            AID procurement policies                     20
                4       PROGRAMCOMPLEXITIES                              22
                           Federal spending                              22
                           Inflationary    pressures                     23
                           Protection    of domestic   industry   and
                              employment                                 23
                           Foreign economic policy                       24
                           Foreign trade                                 26
                           Balance of payments                           26
                           Other considerations                          27
               5        CONCLUSIONS, AGENCYCOMMENTSAND GAO EVAL-
                        UATION I AND RECOMMENDATIONS                     23
             APPENDIX

               I        U.S. balance of payments and Federal Govern-
                          ment procurement  statistics for the period
                          1960 through i970                              35
APPENDIX                                                                      Page

   II      Principal      officials     responsible   for adminis-
              tration     of activities      discussed in this
              report                                                           36

                                ABBREVIATIONS

AID        Agency for      International          Development

DOD        Department      of Defense

GAO        General      Accounting     Office

               DEFINITIONS AS USED IN THIS REPORT

Benefits          elimination        or prevention      of an outflow     of U.S.
                  dollars

costs             budgetary     outlays     for    products     or services

Coordination     establishment     of policy by one agency based
                 upon overview of all issues, facts,      and alter-
                 natives   regarding   a Government-wide  program.
    COMPTROLLERGENERAL'S                            COORDINATED CONSIDERATION NEEDED OF BUY-
    REPORTTO THE CONGRESS                           NATIONAL PROCUREMENT PROGRAM POLICIES
                                                    Office  of Management and Budget  B-162222


    DIGEST --
    _---

- wry THE REVIEW WAS?ilDE

         In calendar        year 1970 the Nation's         balance-of-payments         deficit    on the
         official      settlement     basis   exceeded     $10 billion.         The U.S. Government      is
         pursuing      several    courses   of action      designed      to alleviate     the factors    con-
.        tributing      to the unfavorable        balance.

         This General       Accounting          Office      (GAO) report       discusses       one course   of action--
         Federal     procurement         policies       under the Buy American            Act and the Balance-
         of-Payments       Program,       jointly       referred      to in this      report      as the buy-national
         procurement       program.         This program         regulates       Federal     procurement    in situa-
         tions   where suppliers            offering       domestic      products     and services       are competing
         with suppliers         offering        foreign      products      and services.


    FINDINGS AND COKLUSIONS

         Policies   and procedures    implementing       the buy-national        procurement      program
         generally   permit   Federal   agencies    to pay up to 50 percent            more for domestic
         products   over comparable     foreign    products,      to protect     domestic    interests    and
         to improve    the U.S. balance-of-payments          position.       (See p. 5.)                                   _.

         Need for      reports    on
         balance-of      -paynent    benefi;. ts

         Although      the buy-national         procurement   program     has been in existence      for a                      :.
         number of       years,  information        has not been accumulated       to evaluate    the ef-
         fects    of   the program      on the balance      of payments      or to determine    what it
         has cost      to obtain     balance-of-payments        benefits.      (See pp. 12 and 28.)                       _ -

         GAD questions       whether     it is in the national       interest      to pay premiums    of
         millions     of dollars      annually   to retain   procurement       dollars   in the United
         States,     without      some form of reporting     system      to determine    whether   balance-
         of-payments       benefits    are being   achieved.      (See p. 27.)

         A case involving         several      civil  agency procurements           and a single     Depart-
         ment of Defense         (DOD) procurement        showed that       additional     costs had been
         incurred  without        balance-of-payments         benefits      because     of different     pro-
         curement  policies        under the buy-national            program.       (See pp. 12 to 15.)                    _I-7-6

                DOD saved an estimated       $12.8 million             in balance    of payments    by buy-
                ing domestic   sandbags    at a premium             of $7.7 million,     60 percent    more
                than the estimated     cost of foreign              prccurement.      At the same




                                                              1
      time civil     agencies      purchased     foreign-made       products   at     a cost      of
      $12.9 million.

     The civil      procurements       offset    the   balance-of-payments          benefits       achieved
     by DOD.

With a more coordinated            buy-national    procurement     program,      other         alternatives
would have been available             to the executive     branch.      Coordination            might      have
resulted  in:

   --Domestic     procurements   by civil         agencies     and foreign  procurement     by DOD.
      (The same balance-of-payments              benfit    would have accrued     at a savings
      of $4 million.)

   --Domestic      procurements        by civil    agencies     in addition     to DOD's domestic
      procurement.          (An additional      balance-of-payments         benefit  would have
      accrued     at a premium of $3.7 million              which was well within       the guide-
      lines   established.)

   --Limited    resources      might have been reallocated              to other Federal    programs
      aimed at expanding         exports which reportedly            are more cost effective       in
      obtaining    balance-of-payments       benefits.

Value of foreign and
domestic components rLot considered

Federal  agencies     are not required      to determine   the value of foreign     and
domestic  components     in end products       and whether   the additional   cost that                       may
be paid for a domestic       end product      will  result in an appropriate    benefit                       to
the U.S. balance-of-payments        position.       (See p. 16.)

Federal     agencies     should    consider     the value    of American    and foreign components
in the end product,           to guarantee      that premium prices      are paid only when
demonstrable       balance-of-payments          benefits   will  result.     (See pp. 28 and 29.)

     DOD approved      an Air Force procurement       from a domestic               firm    for $2.3 mil-
     lion    more than the price      offered   by a foreign    supplier.                 Due to the
     foreign     components    in the product,    however,   only $1.4              million     in balance-
     of-payments      benefits   were achieved.      (See p. 17.)

     Using a guideline     that    a $2 advantage    in the U.S. balance-of-payments
     position  -is necessary     for each $1 in additional       cost,   a premium price
     of only $700,000     was justified.        DOD was aware of the effect        of the
     foreign  coinponency    on the baiance-of-payments       benefits     but did not
     have enough time to readvertise          the procurement    to obtain     componency
     data from bidders.        (See pp. 17 and 18.)

CompZexities      caZ2 for      high-ZeveZ      coordination

The buy-national        program   is complex.    Its complexity          is further      compounded
by the program's        effect   on major domestic       and international         program    policies,
such as the level         of Federal   spending,   efforts     to curb inflation,          protection



                                                  2
        of domestic   industry         and employment,          and U.S. foreign             econom ic and trade
        objectives,   including         negotiations         aimed at gaining              access to foreign    govern-
        ment procurements.            (See pp. 22 to         27.)

        GAO recognizes        that most of these considerations              are not subject         to precise
        measurement--that          subjective       judgments    by management      might well     outweigh     the
        basic    buy-national       determinants.of         cost versus   benefits.       Decisions      must
        consider     that changes        !'n any program       may result  in divergent       effects     on
.                                 (See pp. 29 and 30.)
        other    programs.


    RECOMMENDATIONS
                 OR SUGGESTIONS

        GAO recommends         that   the   Director,       Office      of    Management          and Budget:

           --initiate      a reporting       system    to'assist       in evaluating                 the effective-
               ness of buy-national          procurement       program    policies               in terms of balance-
               of-payments     benefits      and additional         costs  incurred                and

           --determine      the feasibility          of requiring            that     componency    information      be
              obtained    and considered          on procurements              that    involve   buy-national       pro-
              gram policies.       (See p.        33.)                                      -*                                    _.
        The creation     by President     Nixon of a new, high-level     Council    on Inter-                                     .-
        national    Economic   Policy   early   in this year recognizes      the need for co-
        ordinating    economic    and trade    policies with overall    national    objectives.

        GAO recommends    also that    the Director,                 Office   of Management    and Budget,
        in his role   as the overseer      of executive                 agency programs     and policies,
        assess the indicated     costs    and benefits                under the buy-national       procure-
        ment program   against   the

           --potential     adverse    impact    of      buy-national            policies     on other   U.S. foreign
              economic   and trade     objectives          formulated           by the     Council   on Interna-
              tional   Economic    Policy     and

           --potential    for greater      benefits     in assisting       the domestic      economy and the                       _
              U.S. balance-of-payments         position     by reallocating        budgetary     resources
              to other   programs     which reportedly       are more cost effective            and con-
              sistent  with traditional        U.S. efforts       toward     freer  and fairer      world
              trade.    (See p. 33.)


    AGENCYACTIONS AND UNRESOLVEDISSUES

        Of the 10 agencies       whose comments were requested,              only DOD disagreed           with                _    .
        GAO's proposal     for a reporting        system.    DOD stated        that    the SO-percent         pre-
        mium for domestic       procurement     discouraged      foreign     bids and that        therefore
        only estimates     were available.         GAO believes,        however,     that   estimates       would
        be useful    in evaluating      the efficacy      of buy-national         policies.       (See p. 30.)

        The Office      of     Management     and Budset       generally   agreed           with    the    proposal  and
        is currently         studying     the feasibility         of a reporting            system.        GAO was informed


                                                               3
                                                           ”                                                    i

                                                                                                                i
     by an official       of the Office        of Management      and Budget       that   it would be the
     logical   organization         to carry     out or to coordinate         an   assessment    of the pro-
     gram and other       alternatives       with information        provided      by other   agencies.
     A high priority        should     be assigned     to developing       such    a system.      (See
     p. 31.)

     Of 10 agencies         comment'l"ng     on a draft  of this    report,      only DOD and the Office
     of Management        and Budget did not agree with           the objective          of obtaining     and
     evaluating        componency      information.     The remaining       agencies,      although    basi-
     cally     agreeing    with     GAO's position,     expressed     concern      that undeterminable
     amounts      of administrative          costs might be incurred        before     the benefits     to be
     realized      were known.         (See p. 31.)                                                                 t
                                                                                                                    I-I
     GAO agrees    that   the feasibility         of adopting       a more stringent       componency
     policy  should     be fu'lly  evaluated        before   it   is adopted.      (See    p. 31.)


M4TTERS FOR CONSIDERATION         BY THE CONGRESS
                                                                                                                    t
     This report,     showing       the need for coordinated        consideration         of buy-national
     procurement     policies,        is being sent to the Congress          because      of the effect
     that   the buy-national          procurement    policies   have on a variety           of important
     domestic     and international          program  policies.




                                                       4
                                    CHAPTER   1                                          __ ..-L ._

                                                                                      -_     _.
                                 INTRODUCTION                                      _._
                                                                                     ___
                                                                                       ^ I LtLr,

L          The BUY American Act and the Balance-of-Payments         Pro-             -                         :-
    grams which favor the purchase of domestic products over
    foreign    products,     are referred   to collectively in this re-                        _. _.
.   port   as the buy-national       procurement program.   This program
    applies,    in part, to Government purchases in which suppliers
1   offering    domestic products are competing with suppliers        of-
    fering   foreign     products.
,
           The buy-national     policies   provide for adding a specified
    percentage to the bid amount of a supplier             offering    a foreign
    product or service when it is competing with a bid from a
    supplier   offering    a domestic product or service.            These pol-
    icies are intended to provide domestic employment, protect                            .    I r-.t.

    American business from foreign         competition,     provide for a                ,_
                                                                                                  1.
                                                                                                           -.
                                                                                                                                 _I

    defense mobilization       base , protect   national    security    inter-                        . -
                                                                                                        -.

    ests, balance the effect        of buy-at-home restrictions         of               -..               _..
                                                                                                           I            c



    other nations,      and improve the U.S. balance-of-payments                                  ,                         ..



    position.     A discussion    of the policies       and procedures     im-           _-

                                                                                                  .-
                                                                                                       ;

                                                                                                                   ..
                                                                                                                            -         /

                                                                                                                                      I



    plemented under the Balance-of-Payments            Program and the Buy                       -I
                                                                                                                        -             I
                                                                                                                                      I




    American Act is presented below.

    BALANCE-OF-PAYMENTSPROGRAM

          Foreign confidence      in the dollar     is believed     to depend
    on the U.S, balance-of-payments        position    and the strength
    of the U.S. economy.       Since the U.S, dollar        is the inter-
    national   trade and reserve currency,        an adequate supply of                          -.            7        i-
                                                                                                                        _



    gold is deemed necessary to maintain confidence              in the value
    of the dollar.1      To protect    the U.S. supply of gold from
    being depleted,    it is desirable     for the United States to
    maintain   a favorable   balance of payments--inflow          of foreign
    exchange greater     than outflow of U.S. dollars.


    1
     Foreign confidence    in the monetary strength  was tied also
     to the ability   of the United States to redeem foreign-held
     dollars for gold.     The redemption of dollars  for gold, how-
     ever, was temporarily    suspended by the President   on Au-
     gust 15, 1971.

                                          5
          The rapid expansion of foreign        economies and their
    increased export of goods to the United States since the
    mid-195O"s have contributed        to an unfavorable   balance-of-
    payments position.       For these and other reasons,      the Govern-
    ment has taken various measures to improve its balance-of-
    payments position.       U.S. balance-of-payments     and Federal
    procurement   statistics     for the period 1960 through 1970 are
    provided as appendix 1.

d           The Department of Defense, because of its substantial
    overseas expenses, plays an important     role in seeking im-
    provements in the balance-of-payments     position  through a
    variety    of special measures,   Gne of the measures authorized
    the payment of higher prices for domestic products for use
    abroad and was adopted in line with Presidentiai       directives.

            To give preference      to domestic products,         DOD established
    a 50-percent     domestic-preference        rate,   which permitted       the
    procurement     of domestic goods and services           for use abroad
    at a price up to 50 percent above bids submitted                 for foreign
    goods and services. 1 DOD's position              is that although the
    50-percent     domestic-preference       rate has reduced DOD expendi-
    tures abroad, it does not play a major role in curbing U.S.
    balance-of-payments       outflows.      DOD advised us that there
    were numerous lim,itations        which restricted       DOD's procurement
    from foreign     sources,    including    national     security    set-asides
    for small business and statutory            requirements      for ship con-
    struction.      DOD, however, was unable to provide us with ac-
    tual statistics      on foreign     procurement     and their    effect     on
    the balance of payments,,

           In an effort   to further    improve the U.S. baiance-of-
    payments position,      the Office   of Management and Budget rec-
    ommended that all Federal agencies follow            the DOD practice
    of buying domestic goods and services          for use abroad at
    prices up to 50 p ercent above bids submitted           for foreign
    goods and services.        The 50-percent  criterion     was administra-
    tively   established   by the executive    branch.      All Fderal
    agencies,    except the Agency for International          Development


    1
     When approved     by the Secretary  of Defense or his designee,
      the preference    rate of 50 percent can be exceeded.


                                           6
(AID), have adopted this procurement              policy       regarding           Fed-
eral procurement for use abroad.

       Insofar    as AID is concerned, until            1959 the foreign
aid program allowed free-world             procurement      (certain   countries
excluded) with loans provided by AID.                 In 1959, in response
to a Presidential        directive     regarding    steps to be taken to
improve the U.S.        balance-of-payments        position,     AID adopted
a policy of tied procurement.              The tied-procurement        policy
requires     that AID-financed        procurements     be made from speci-
fied countries,,      which include the United States and certain
developing countries.            The AID policy restricts          the value
of components from nonspecified             countries     in an end-item to
a specified      percentage of the sales price of the product,
On direct     procurements       for AID, only 10 percent of the sales
price of the product may consist              of components provided by
nonspecified      countries      but, on procurements made by other
countries     with AID loans, the rate is 50 percent.                 The 1961
Foreign Assistance        Act made the AID tied-procurement             policy
a statutory      requirement,




                                                                     .. ..


                                                           .                 ..’
     BUY AMERICAN ACT

            The Buy American Act (41 U.S.C. lOa-d) of arch             3, 1933,
     as amended, provides that,         in the  procurement   of  goods   and
     supplies,   Federal.agencies       acquire domestic products unless
     (1) they are for use outside the United States,             (2) they
     are not available      in sufficient     quantities  and of satisfac-
     tory quality,      (3) the head of the procuring       agency deter-
     mines that their purchase would be inconsistent             with the
 .   public interest,      or (4) the head of the procuring         agency
     determines    their cost to be unreasonable.

3-          Executive     Order No. 10582, issued in December 1954,
     prescribes     uniform policies    for making certain    determina-
     tions required by the Buy American Act.           The Executive order
     defines a domestic product as an end product consisting             of
     domestic components which exceed 50 percent of the cost of
     all the components included in the end product.            The poli-
     cies provide also that an unreasonable          domestic price be
     determined as one exceeding the delivered          cost of foreign
     products    (including    duty) by 6 percent.1     The Executive or-
     der provides exceptions        to 6-percent  rule by permitting              ,
     agency heads to apply higher rates when they determine that
     such is not unreasonable or is not inconsistent           with the
     public interest.

            In August 1962 DOD initiated     a review to consider the
     effect   of the 6-percent   rule on the balance of payments.
     The purpose of the DOD review was to consider the merits of
     procuring    a greater mount of domestic,       rather than foreign,
     products for use in the United States,        in view of the
     balance-of-payments    benefits   and the impact on Federal spend-
     ing.    Subsequently DOD adopted a 50-percent        domestic-
     preference    rate in accordance with the exception       provision

     1
      As an alternative      to the 6-percent  rule,  the Executive     or-
      der provides that an unreasonable       domestic price be deter-
      mined as one exceeding the offered       price of materials     of
      foreign  origin,    exclusive  of duty, and all costs incurred
      after arrival     in the United States by 10 percent.       Further-
      more, on the basis of the Executive       order, administrative
      policies   have allowed the use of an additional      6 percent
      when domestic procurement involves       small business and areas
      of substantial     unemployment.
                                         8
of Executive Order No. 10582 which permits agency heads to
apply higher rates when they determine that such are in the
public interest.
                                           @pgj- DocU;fiEpjT /\VA/~jIqjtE                  I
       DOD's adoption of the 5kpercent         rates under the Buy                         I
American Act, which is limited        to the procurement of goods                 --
and supplies for use in the United States, made the DOD
policy consistent    with its Balance-of-Payments          Program.
This program involves     goods and services used outside the
United States and also provides for a 50-percent             preference
rate for domestic products.        DOD formally     adopted the use
of the 50-percent    domestic-preference       rate under the Buy                         I
American Act in the %rch 1964 revision            to the Armed Ser-                       ,
                                                                                          ;
vices Procurement Regulation.         Under the regulation       DOD is                   II
permitted   to use the 6-percent      ratecwhich    includes duty)
used by the civil    agencies or the 50-percent         rate (which
does not include duty),     whichever gives the greater prefer-                        _
ence to domestic products.1

       DOD's adoption of the 50-percent  rate resulted    in non-
uniform rates'   being used by DOD and the civil    agencies
under the Buy American Act.    In 1963 the Cabinet Committee
on Balance of Payments agreed with the nonuniform policies
because it believed that an increase in the civil      agencies'
rate could damage forthcoming   trade negotiations,    whereas
the abandonment of DOD's rate could imply complacency re-
garding balance of payments.

       At the time of our review, the percentages   to be added
to bids of suppliers   who would offer foreign   goods were as              .      +1
follows:


1
    Duty is a tax levied by the U.S. Government on certain        im-           -.‘:..-
    portedgoods.     The amount of duty varies with the goods and
    could be significant,     Therefore the 6-percent  provision,
    plus duty, in certain    cases could offer greater preference
    for domestic products than application     of the 50-percent
    premium.




                                     9
                                                         Percentage
                                                           added to
                                                           bids of
                                                      suppliers      who
                                                      offer    foreign
                                                           products
                                                                   Civil
                                                    Defense       agencies
                                                    agencies      (note a)

           For use in the United States                50b            6
           For use outside the United States           50            50

    aExcept AiD.
    b
        Defense agencies are permitted    to use a 6-percent  rate,
        including duty, or the 50-percent    rate, excluding  duty,
        whichever gives the greater preference     to the domestic
        products.

    SCOPEOF REVIEW

           Our review was directed         toward an evaluation      of the
    policies     and procedures used by Federal agencies in imple-
    menting the Buy American Act and the U.S. Balance-of-
    Payments Program.        We have not attemp,ted to evaluate other
    procurement policies,         such as the Berry amendment, k&ich
    favor the purchase of domestically             produced products with
    public funds.       As a part of our evaluation,         we attempted     to
.   determine the rationale         underlying     the various domestic-
    preference     price rates currently        being used and the relation-
    ship between budgetary costs and balance-of-payments                bene-
    fits   resulting     from procurements      made under buy-national
    policies.      We examined background documentation,           relevant
    studies made by Federal agencies,            interagency   correspondence,
    congressional      testimony,and     procurement regulations.        We ex-
    amined also into selected procurement transactions                of var-
    ious Federal agencies.

            In addition,   we interviewed  officials      of various Fed-
    eral    agencies both at the headquarters        level in the Washing-
    ton,    D.C., metropolitan    area and at selected regionaloffices
in the eastern part of the United States.   The principal
Federal agencies involved in our review were as follows:

      Washington,    D.C., metropolitan area:                                              -. , _
          Office of Management and Budget                                            _^ _-._“.-_--
     2
          General Services Administration     (Federal                Supply
   f         Service)

         Defense    Supply Agency                                                        ,         ..

          Department     of Defense

          Warment        of COIIltnerce
                                              BEST~~~~~~~~~AVAILABLE _^ cL....
         Department      of the Interior        (Bureau of Reclamation)                      :1.,-i

     Regional offices:
          Defense Industrial        Supply Center,           Philadelphia,               IIr.'li
            Pennsylvania                                                          ..L -. -...

         Defense Personnel         Support     Center,       Philadelphia,
           Pennsylvania

         Aeronautical Systems Division,                Air    Force Systems                  I__
                                                                                             x.,T;
           Command, Dayton, Ohio                                                          ..:
                                                                                      . -_ ,.(-I ;
                                                                                           .

          Tennessee Valley       Authority,      Chattanooga,         Tennessee               --,

         Veterans      Administration,        Hines,     Illinois                                  f _.
                                                                                                     .
 -... -   -- .   -- ..-- - . .-. _-- --._--_-----_---   --.   -          ----




                                          NEED FOR METHODOF EVALUATING

                 -EFFECTIVENESS OF BUY-NATIONAL PROCUREMENTPOLICIES
                To manage any program effectively,  management must have
          some method for objectively   evaluating program results.
          Without such a method management cannot adequately     direct
_)        program activities   to ensure that the program objectives
          are being accomplished.

                Although the buy-national      procurement program has been
          in existence    for a number of years, a valid system of as-
          sessing results     for use as a basis for planning andredirect-
          ing activities     has not been developed.     Thus Federal managers
          are without    any valid means for determining      what has been
          achieved as a result     of the policies    and procedures of the
          buy-national    procurement program.      They do not even know how
          much Federal procurement is affected        by this program.

                Federal procurement in fiscal       year 1970 exceeded
          $47 billion.    The total    Federal procurement for fiscal      years
          1960 through 1970 is provided as appendix I.          The extent,
          however, to which buy-national       procurement program consider-
          ations were involved in this procurement was not documented.
          Responsible officials     familiar  with this program have esti-
          mated that, at the most, $1 billion        annually in Federal pro-
          curement involves buy-national       program considerations,     but
          no one has accurate    information    on the actual amount.

                 If the estimate   of $1 billion     is reasonably accurate,
          ft is a small percentage of total        procurement but nonethe-
          less a significant     amount of money, Despite the substantial
          amount of money that appears to be involved,           we found that
          Federal. managers did not know, nor could they determine,
          either   the extent to which existing        procurement policies
          and procedures were resulting        in balance-of-payments     bene-
          fits or the extent to which additional           costs were being in-
          curred because of the absence of a reporting            system.

               Since we could not find any sotirce of information    on
          the amount of purchases made under either  the Balance-of-
          Payments Program or the Buy American Act, we were unable

                                                        12
.   .___




           to make any assessment of how much extra was spent each
           year to secure balance-of-payments        benefits      or how much in
           the way of balance-of-payments      benefits      was obtained for
           these additional    costs.    From a limited      sample of procure-
           ments made, however,     we  were able  to   illustrate     the incon-
           sistent   effects that the existing     buy-national       policies     and
           procedures had had on the balance of payments and on Fed-                              :
           era1 spending.    GAO recognizes    that the examples used in                 -'I    .,L
                                                                                                  :
           this section are somewhat dated.        This was due to the ab-
           sence of a reporting     system and we were unable to find ex-                         i
                                                                                                  f
           amples of more recent procurements        at the locations        visited.             f
                   In one such case the Deputy Secretary        of Defense ap-
           proved a justification       for procurement of domestic sandbags
           at an estimated      price of $20.5 million,     although similar
           foreign    sandbags could have been purchased at a price esti-
           mated by DOD at $12.8 million.         The procurement justifica-
           tion cited balance of payments as the basis for the procure-
           ment of a domestic product.         DOD authorized     the purchase of
           domestic sandbags1 at an additional         cost of $7.7 million,
           about 60 ercent more than the estimated            cost of foreign
           sandbags,   5  to achieve a balance-of-payments        benefit     of
           $12.8 million.       In this example we assumed that,          if foreign
           bids were requested and received,        they would come from re-                   _ ‘
           sponsible     sources and their   bids would approximate         the DOD              i
                                                                                                 !
           estimate.

                   Our test of civil    agencies'    procurements     showed that
           similar    balance-of-payments     benefits    available    to them at
           considerably     less cost had not been obtained.           Civil  agen-
           cies, for example, purchased foreign           products at a cost of
           $12.9 million      for use in the United States,         even though

           1Subsequent         to the award of this contract,         the Congress ap-    ,    :II
               proved   legislation       prohibiting   foreign   procurement of syn-            k
               thetic   fabric    similar     to the fabric    use for these sandbags.           1
           2
               In this example we assumed that the foreign    product would
               not contain any domestic component and that the domestic
               product would not contain any foreign  component.     This in-
               formation  was not available during our review.



                                                                                                /
                                               13
.I-I_-   _-__.._.   -~.    L-.-L--L-    ----II_---------.I-.-.-           _-_   .-    _-   --




         similar   products    could have been purchased from domestic
         suppliers    at a cost of $16.6 million.       This was done because
         civil   agencies'    premium payments generally    are restricted
         to 6 percent for domestic products for use in the United
         States.    The purchase prices,     additional   costs, and balance-
         of-payments    benefits    involved in these defense and civil
         procurements      are summarized in the following      schedule.

                                                                                      Civil
                                                                        DOD          agencies

                                                                          (millions)
    .
          Price           of domestic products                         $20.5          $16.6
          Price           of foreign  products                          12.8           12.9

         Premium price paid for domestic products                        7.7
         Savings by purchasing   foreign products                                           3.7
         &lance-of-payments    benefits                                 12.8                -
         Balance of payments lost                                                          12.8a

          aWhen information  was available,     we adjusted the balance-of-
           payments benefits  obtainable     to recognize the effect  of
           domestic costs in foreign     products and foreign  costs in do-
           mestic products.
                The above illustration  covers Federal procurements    to-
         taling   about $33.4 million  ($12.9 million  for foreign  prod-
         ucts by civil   agencies plus an estimated   $20.5 million  for
         domestic products by DOD).

                The net effect       of the actual procurements       was that the
         balance-of-payments         benefits    achieved by DQD's using the
         50-percent     criterion     were offset     by the civil  agencies'
         procurements      of foreign     products using the 6-percent        crite-
         rion.    The extent to which shnilar           comparable situations
         may have occurred is not known due to the absence of a re-
         porting    syste;o, but we are of the opinion that such situa-
         tions probably occur regularly            under existing   ground rules.
         The extent to which this type of information,              if accumulated,
         might affect      existing     policies   under the buy-national      pro-
         curement program also is not known. Nevertheless                we believe
         that information         of this type would assist materially         in
         evaluating     the effectiveness        of buy-national   procurement

                                                                  14
                                   _   _-   __._--   _.-   __.__   i.,__-.     __;r.   -L-.-l.   ~.   --I    ---I   .-   -   -




    policies   in terms of balance-of-payments                               benefits                       and ad-
    ditional   costs incurred.

           This case demonstrates      the need for coordinated    con-
    sideration     of the buy-national     procurement program policies.
    For example, if- a coordinated        40-percent  policy had been
    established,     the above procurements      would have been reversed
    ($16.6 million      would have been spent for domestic products
.   in civil     agencies and an estimated      $12.8 million for foreign
    products in defense agencies) and the same balance-of
    payments impact would have been achieved at a cost savings
    of about $4 million.

           Another possible      benefit    from a more coordinated        pro-
    curement policy would have been that,             in addition    to the
    DOD domestic procurement,         civil    agencies  would    have  procured
    domestic products at a cost of $16.6 million               for an added
    cost of $3.7 million       or about 28.7 percent more than the
    actual foreign     procurements.        This would have benefited
    the nation's     balance-of-payments        by an additional      $12.8 mil-
    lion.     The procurement would have been well within              the
    guidelines    established     by the Cabinet Committee on Balance-
    of-Payments which permit the payment of an additional                  dol-
    lar in cost for each $2 advantage in balance-of-payments
    benefits.

            k addition,  the above example raises the issue of
    whether there is more than a question of consistent            applica-
    tion of coordinated     premium rates in achieving        the cost and
    benefit   objectives   of the buy-national      procurement program.
    For example, there are other Federal programs aimed at ex-
    panding exports which reportedly         are more cost effective
    and might have resulted       in obtaining   greater balance-of-
    payments benefits    than the $25.7 million        for the $11.4 mil-
    lion in additional     costs.

           We recognize    that there are a variety     of major domestic
    and international      program considerations    directly   affected
    by the buy-national       procurement program.     These considera-
    tions,   which are more fully      discussed in chapter 4, are not
    subject to precise measurement but should be considered              by
    the executive     branch in a coordinated     assessment of the buy-
    national    procurement program.
                      NEED TO DETERMINE FEASIBILITY

               OF REQUIRING AN EVALUATION OF COMPONENCY

           Procurement regulations      do not require        Federal agencies
    to determine the value of foreign           and domestic components in
.   end products and whether the additional             cost for a domestic
    end product,    considering    the  value    of both    foreign    and do-
    mestic components, will result         in an appropriate        balance-of-
.   payments benefit.      Therefore premium prices may be paid by
    the Government for domestic end products without                obtaining
    an appropriate    balance-of-payments        benefit.      We believe that
    a determination     should be made of the feasibility            of requir-
    ing Federal agencies to evaluate componency contained in end
    products and of requiring        appropriate    balance-of-payments
    benefits    when premium prices are paid for domestic products.

    GUIDANCE DOES NOT PROVIDE FOR AN
    EFFECTIVE EVALUATION OF COMPONENCY

          It  has been a long-standing      policy for procurement of-
    fices to evaluate bid prices to obtain balance-of-payments
    benefits.    This policy coincides      with the efforts     of the
    Federal Government to improve the U.S. balance-of-payments
    position.    Procurement regulations       require   bidders on Fed-
    eral supply contracts    to certify     that they are offering       ei-
    ther a domestic or a foreign product.           A product is consid-
    ered foreign    if the cost of the foreign materials         included
    in the product constitutes      50 percent or more of the total
    cost of the material.      If a foreign product is offered,          the
    procurement office    is perBitted    to buy a domestic product at
    a higher price.

            Neither the Federal procurement regulations         nor the
    Armed Services Procurement Regulation         requires   procurement
    offices     to obtain the cost of foreign     and domestic materials
    in end products.       Furthermore, no procurement regulations
    provide a standard of what an appropriate          balance-of-
    ments benefit      is.  In 1964, however, the Cabinet Committee
    on Balance of Payments interpreted       that at least a $2 advan-
    tage in the balance-of-payments      position     of the United
    States was considered necessary for each $1 in additional
      cost    resulting   from the acceptance       of a higher        domestic                 . i-
      bid.

          ' In a prior GAO report       (B-152980, January 19661, we
    stated that the Department of the Air Force, at the direc-
  I tion    of DOD, had awarded a contract           to a domestic firm for
    a communications       system at a price $2.3 million             higher than
    the price offered       by a foreign      firm.     The contract      was
  * awarded to the domestic firm for balance-of-payments                     bene-
    fits.     The contract     award was made under defense policies
    that did not require         the bidders'      estimated   costs of domes-
.   tic and foreign      components to be obtained and taken into ac-
    count in evaluating        the merits of the alternative             bids.    If
    the Air Force had been required             to obtain information          on the
.   value of the foreign         components, it would have been able to
    determine    the actual balance-of-payments             benefits     and to
    make an informed decision         regarding      the desirability        of pay-
    ing a premium price for a domestic product.

            An evaluation     of the foreign   components in the bids
      would have revealed      that the additional   price of $2.3 mil-
      lion for the domestic product would have achieved only a
      $1.4 million    benefit    in balance of payments.    Information on
      the bid prices and the value of the foreign         components is
      presented    in the following     table.                                              .   -.:-:-
                                                                                                   - i.


                                                                           Foreign
                                                                Bid       component
                                                               price        cost

                                                                   (millions)

      Domestic firm                                            $9.5          $3.2
      Foreign firm                                              7.2           4.6

             Difference   in cost                              $2.3               -     _

             Difference   in foreign    component    cost                    $1.4

           Applying the interpretation      of the Cabinet Cormnittee on
     Dalance of Payments that at least a $2 advantage in the
     balance-of-payments   position    of the United States was consid-
     ered necessary for each $1 in additional       cost resulting   from
     acceptance of a higher domestic bid, the $1.4 million         benefit


                                            17
    in balance of payments would have justified               only   a $700,000
    premium rather than the $2.3 million   paid.

          DOD advised us that it recognized that the bid by the
    domestic firm involved       some foteign     components, that the bid
    by the foreign    firm involved some domestic components, and
    that the real balance-of-payments          savings would be less than
    $7.2 million.     DOD claims, however, that time did not permit
    a readvertisement      of the procurement to elicit        this type of
    data from the bidders.        Irrespective      of the basis that DOD
c   may have used to award the contract           to the domestic firm,
    this example clearly       demonstrates    the additional     costs that
.   can be incurred     without   obtaining    an appropriate     balance-of-
    payments benefit.

            In-response       to the prior GAO report,        DOD stated that a
    revised evaluation          technique had been adopted to give more
    appropriate       recognition      to the costs of foreign        components
    included in domestic bids.              DOD also expressed the belief
    that the revised evaluation             technique    should be applied in
    only those unusual cases in which accurate data on foreign
    and domestic components would be reasonably                 available   and in
    which the size of the procurement transaction                 would warrant
    the extra administrative            work involved.      DOD procurement     reg-
    ulations      subsequently      were revised to provide that informa-
    tion on the value of components be obtained from the domestic
    bidder on procurements           in excess of $250,000 when it was an-
    ticipated      that the low domestic bid would involve relatively
    substantial       foreign    expenditures      or that the low foreign      bid
    will    involve relatively         substantial    domestic expenditures.

            GAO examined into the implementation           of DOD's revised
    procurement procedure and found that criteria              had not been
    established        for determining    when the revised procedure
    should be used.           A request for use o f the revised procedure
    must be approved by the head of the agency or his designee
    in advance of solicitation           of bids, to permit the solicita-
    tion to describe the evaluation            procedure that will be used.
    It appears that use of the revised procedure is dependent
    upon the judgment and experience            of procuring   officials      and
    their     willingness      to submit the necessary request.          There-
    fore the obtaining           of componency information     is inhibited;
    this seemed to be the case since we could not locate bid
    solicitations         which called for componency information          at lo-
    cations visited.
pROcUREmZ?T PRACTICES OF
FEDERAL CIVIL AGENCIES
COULD BENEFIT BALANCE-OF-PAYMENTSPROGRAM

       During our review we found that the civil         agencies of
the Federal Government could contribute          to a greater c:~:~=~.:
to the Balance-of-Payments      Program by determining       the -5 t:-.
of foreign    components included in bid prices.               esx.~: p c
                                                                For


the Bureau of Reclamation,      Department of the Interior,         :c--
ceived six bids in 1968 for the construction          of the seco::d
section of the Fort Thompson-Grand Island 345-kilovolt              ~r.r,:.:~-
mission line of the Missouri River Basin Project.             l-k? t'n'3
lowest bidders were domestic firms which offered do=estir-.,
products.     As shown below, company X's bid of $6,067, j78 ‘ir.-
volved foreign    components totaling      $1,737,062 and cornpair.:;
Y's bid of $6,245,221 involved       foreign    components totaii::G
$230,267.

                                                            Foreign
                                                 Bid       component
                                                price        cost

      Company Y                             $6,245,221    $      230,267
      company x                              6,067,578        1,737,062

           Difference     in cost           $   177,643

           Difference     in foreign
           components     cost                            $1,506,795

       The policy   and procedure of the Bureau of Reclamation
require    that componency information       be included in the eva?z-
ation of bids to determine whether to classify             bids as dozer--
tic or foreign.      Componency information       is obtained by El-2
Bureau on all contracts      over $250,000 when a potential          eppiz-
cation of the Buy American Act's provisions           exists.     L'd2r
Bureau procedures,     however, the Balance-of-Payments          Progr~
is not a consideration.        Bureau officials     advised us that
necessary componency information       was obtained without Su?.d'Je
administrative    burden.    Under the Bureau's internal         procure-
ment regulations,     consideration   was given to the value of c&
foreign    components in each bid, and, in this case, 6 perter.:
was added to the total      value of each bidder's       foreign co?:O-
nents in evaluating     the bids.    The evaluation      disclosed    cbA=


                                       19
_---       _~---.~




                     Company X was the low bidder after the &percent             differential
                     was added to the cost of the foreign  components,           and a con-
                     tract was awarded on May 3, 1968.

                           On the basis of the above information,payment           of a
                     higher price would'have produced a substantial           balance-of-
                     payments benefit     and would have exceeded the criterion         that
                     at least a $2 advantage in balance of payments should be ob-
                     tained for each $1 in additional       cost.   In this case the pay-
                     ment of an additional     price of $177,643 would have resulted
       .             in a balance-of-payments      benefit  of $1,506,795,     or, for each
                     $1 additional    cost, a balance-of-payments     benefit     of $8.50
                     would have been obtained.
                         PROCUREMENT POLICIES

                           AID is exempt from certain       provisions   of the Buy Ameri-
                     can Act.    As discussed in chapter 1, however, AID has estab-
                     lished certain    procurement policies      intended to benefit    the
                     U.S. balance-of-payments     position.      AID's procurement poli-
                     cies require   that componency information        be obtained and
                     evaluated   on all AID-funded procurements.         It appears to us
                     that the AID method of componency evaluation           may be a simpler
                     method and may be more easily administered          than the compo-
                     nency rules adopted under the Buy American Act.

                             In 1959 AID adopted a tied-procurement      policy which ba-
                     sically    requires that direct   procurement for AID, or procure-
                     ment by other countries     with AID loans, be restricted       primar-
                     ily to the United States and to certain        less developed-coun-
                     tries.     After adoption of this policy,     AID was faced with the
                     problem of componency.      AID initially    considered    the Buy
                     American Act's componency policy as established           by Executive
                     order and found it to be too complex.

                            The policy adopted by Executive order under the Buy
                     American Act and under the Armed Services Procurement Regu-
                     lation   requires  comparison of the cost of the foreign           com-
                     ponents with the cost of all components in the end-item.
                     The cost includes transportation;        overhead and profit;        and,
                     in the case of foreign      components, duty.       AID officials     in-
                      formed us that the AID policy required         merely that a deter-
                     mination    be made that the cost of components from nonspeci-
                     fied countries    was less than a certain       percentage     of the
                      sales prices.    On direct   procurement    for AID, components

                                                          20
from nonspecified    countries  are limited    to 10 percent of the
sales prices,    and, on procurements    by other countries   with
AID loans, the cost of components from nonspecified         countries
is restricted    to 50 percent.

        AID officials     informed us also that AID required              all
bidders to certify        the cost of components from nonspecified
countries       included in their end products.             Also, prior to
shipment, the contractors           are required     to specify the im-
ported components from unauthorized               source countries      con-
tained in the end products.              AID relies    on the bidder's        cer-
tif icates and spot-check         verifications.         Under the AID pol-
icy bidders are subject to criminal               penalties     for false
certifications.         AID officials       claim that obtaining       the com-
ponency information         has not been difficult.          .




                                                                        .   3



                                                          .   :

                                                                                    ’            .

                                                                                            ..
                                                                                .       -
                                                                                                                        .
                                                                                .           .



                                                                    .                                ’             ‘_




                                            . . a :                                                        ,
                                                                                ”                . ;:          .
                                              -       .                                          .   . .
                                                                  ’ .                                 :-
                                                                                                                            .’
                              -~   -I-   ----        -   ----a--          ---




         .-       -.. I                                                         .



                                   ~CHAPTER4

                          PROGRAMCOMPLEXITIES

       The issues involved        in the buy-national      procurement
program are extremely complex.             Numerous valid arguments
have b.een advanced by leading businessmen,              economists,       leg-
islators,    and top officials        of the executive     branch in sup-
port of, in opposition         to, and for modification         of, buy-
national    procurement policies.          The complexity      of the pro-
gram is further        compounded by a variety      of other major do-
mestic    and 'international      program policies     directly     affected
by the policies        under the buy-national      program.       Further-
more many of these programs are's0 interrelated                 that a pol-
icy change in one program may have divergent               effects      on
other important        programs.     Some of the principal        policy con-
siderations      affected    by the buy-national      program policies
are discussed below.

FEDERAL SPBWING

       Since the policy under the buy-national           program is to
grant preference   to domestic products in Federal procure-
merit, in certain  instances     the Government pays higher prices
for its purchases than the private           purchaser pays.       There-
fore the buy-national     program policy       is contrary     to one of
the general principles      of Federal procurement,         that all Gov-
ernment contracts    for property    and services       should be
awarded to the lowest responsible          bidder.    Over the years
various attempts have been made to estimate the additional
cost of operating    the Government as a result          of the applica-
tion of the buy-national      procurement program.          Such esti-
mates, however,   are   extremely   difficult      to make,    since com-
plete and precise data is not available.

       In hearings before the Subcommittee on International                                 d


Exchange and Payments of the Joint Economic Committee in                                        I   j



January 1969, DOD estimated that the additional        budgetary                        :




cost associated    with its balance-of-payments   procurement                       .               1



program in fiscal     year 1968 was about $100 million.      It
should be noted that the estimate was subject to rough cal-
culation   and was no more than an educated guess.       Further-
more it is impossible     to state exactly what percentage of


                                                22
                     Federal procurement is affected  by the buy-national   program,
                     since there is no way of knowing   what foreign  bids would be
                     received if there were no program.

                     INFLATIOHARY PRESSURES
            .a

                            Another consideration    involving      the buy-national     pro-
    I                gram is whether inflationary       pressures are accentuated         to
        *            the extent    that we fail   to take advantage of the leveling
                     influence    of lower cost foreign     goods.      Several Federal agen-
                     cies have noted that the discipline          of foreign    competition
c
                     is a valuable tool in promoting the adjustment             of the U.S.
    2
                     economy to-Jard a more efficient       distribution      of economic re-
*   i
                     sources.
    i
                            For example, the Tennessee Valley Authority        experienced
                     lower domestic prices as a result       of foreign   competition     in
                     the procurement of steam-turbine       generators.    After   foreign
                     competition    was introduced,    the domestic price,    based on the
                     cost per kilowatt,      was reduced nearly 50 percent.      The Atomic
                     Energy Commission noted that, prior to 1957, it was buying
                     gallium from a single domestic source at a cost of $2.50 to
                      $3.50 a gram.     By 1960, subsequent to the introduction        of
                     foreign   competition,    the domestic price had decreased to
                      $1.04 a gram.

                            By protecting   the higher prices of domestic suppliers
                     in Federal procurement,     the Government may be contributing
                     to general pressures for higher prices.        If the domestic
                     preference    on Government contracts   were increased,  U.S.
                     bidders that generally     bid low and receive awards could SUC-
                     cessfully    submit higher bids which would contribute    to in-
                     flationary    forces.                                           \

                     PROTECTION OF DOMESTIC INDUSTRY
                                                                                 ..
                     AND EHPLOY-MENT
        *
                           One of the primary objectives    of the buy-national     pro-
                 .   gram is to protect   domestic industry   from foreign    competi-
                     tion.   Although there is no doubt that the program can aid
                     domestic industry   and can stimulate   domestic tunployment,
                     the relationship   between the program and employment is not a
                     simple one, The program is rather inflexible        in that it
                     provides support when the Government is purchasing but fails

                                                        23
to provide support when the Government either         is not pur-
chasing or is not purchasing from those domestic industries
or areas in need of support.          Moreover, in some cases, pro-
tection  of one industry     may lead to boycott of another by
foreign  customers.in    retaliation.

FOREIGN ECONOMIC POLICY

       The buy-national   program has a direct      effect   on the
foreign   economic policy since it affects       the ability    of for-
eign producers to compete in selling        to the Federal Govern-
ment.    Therefore   the Government's actions on procurements
under the buy-national     procurement program, in which foreign
bids are lower than domestic bids, can have a significant
impact on U.S. foreign relations.        According to documenta-
tion made available     to us by the Office of Management and
Budget, these transactions      have been followed      closely   by
foreign   governments and industry    for clues they may offer
to future U.S. foreign     economic policy.

       Since the 6-percent      differential   was established    by
Executive order3 there have been few foreign           complaints    as
long as the differential        has been followed.     After DOD        -
adopted its 3Lpercent        differential,    however, Common Market
countries   and the United Kingdom expressed concern, in a
series of protests     to the State Department,       over the rejec-
tion of low foreign      bids.

       The Federal Republic of Germany noted its multimillion-
dollar   trade deficit with the United States and stated the
belief   that it had contributed    significantly     toward allevi-
ating the U.S. balance-of-payments        deficit   by the prepayment
of debts and by trade liberalization.           The Federal Republic
stated also that it was becoming embarrassingly           difficult  to
explain the Buy American Act's restrictions          on the sale of
German goods in the U.S. market.

      In another instance the Japanese Govorrment canceled
an order for coal from West Virginia   after the United States
Government rejected   a Japanese steel bid by applying the
SO-percent domestic differential.

      In 1966 representatives   of various countries   belonging
to the Organization    for Economic Cooperation   and Development

                                   24 ::
+

        met to mutually eliminate all discriminatory  procurement ac-
        tions against products of other members. The United States
        could not agree, and the other nations threatened to retal-
        iate.  The CommonMarket countries proceeded to work out
        their own agreement, and, when the agreement was offered as
    I   a model for action and was declined by the U.S. Government,
        the United States was criticized  severely again.
              During recent international   discussions and negotiations
        involving tariffs  and trade, foreign representatives   ex-
        pressed their countries' concern over the buy-national pro-
        curement program policies.     The importance of the buy-
        national program to some countries is evidenced by the fact
        that some countries consider the buy-national program as an
        element of the U,S. foreign economic policy.
    FOREIGN TRADE

           The U.S. foreign 'trade-policy      is -to expand interna-
    tional   trade on amultilateral       basis by reciprocal     redtic-
    tions of all types of trade restrictions.            The buy-national
    program, however, is one of the barriers           to freer world
    trade in that it favors the procurement of domestic products
    over foreign products,      even though the price of the foreign
    product may be significantly       lower.        :
h
            Federal agencies noted-in       studies of the U.S. foreign
    procurement policies         that procurement restrictions    on for-
    eign goods seriously        undermined U.S. leadership     in world
    trade.      The U.S: Government has been in the inconsistent
    position     of discriminating     against foreign    goods in its
    own purchasing activities         while urging an expansion and
    liberalization      of international     trade on a nondiscriminatory
    basis.

           In the November 1949 Presidential        message on world-
    trade policies,   President   Nixon stated that the policy of.
    freer world trade was in our national         interest,      The Presi-
    dent stated also that the need to restore           our trade surplus
    heightened the need for further      movement toward freer trade
    and required us to persuade other nations to lower barriers
    which deny us fair access to their markets.             The President
    stated further   that the time had come for a serious and
    sustained effort    to reduce nontariff     barriers     to trade and
    that their elimination     was vital    to our efforts     to increase
    U.S. exports.

           In the President's      Second Annual Review of United
    States Foreign Policy,        dated February 25, 1971, and in the
    Presidential      address on economic policy,     dated August 15,
    1971, the policies       of freer world trade and reciprocal    re-
    ductions     of trade barriers     were restated.

    BALANCE OF PAYMENTS

          One of the prime concerns of the Federal Government is
    the present unfavorable       U.S. balance-of-payments    position.
    The buy-national    procurement program is one of a variety         of
    measures taken by the Federal Government to improve the U.S.
    balance-of-payments     position.    According to officials      of


                                       26
    .




        several agencies, only       a small fraction   of total  Federal
        procurement is actually        subject to buy-national   preferences.
        Statistical   information      on procurement and balance-of-
        payments savings under       the buy-national   program, however,
        was not available.

               The buy-national   program has been'vigorously   debated
        by Federal agencies.      Several agencies have opposed the use
.       of the program for balance-of-payments       purposes because of
        the relatively     small savings that are outweighed by addi-
        tional   budgetary costs, because of the damage inflicted      on
        the posture of U.S. commercial policy internationally,        and
        because of the disruptive      effects on normal competitive
        forces and bidding procedures within      the United States,

               Other agencies have favored continuation       of the pro-
        gram because any reversal      of the current   policy would be
        interpreted     as a weakening of our determination     to improve
        our balance-of-payments      position,   In addition,   these agen-
        cies felt    that there was a need for consistency      in procure-
        ment policies     for use inside and outside the United States
        and that the program provided a basis for leverage in in-
        ternational    negotiations   on Federal procurement practices.

        OTHER CONSIDERATIONS

                In addition    to the policy considerations        discussed
        above, other domestic and international            policy consideration
        are affected      by the buy-national     procurement program.        These
        other considerations        include Federal revenues (income tax
        and import duties),       stimulus   of foreign    competition    to the
        efficiency     of domestic manufacturers       and to technological
        advances and quality        improvements,    access to needed raw
        materials,     and mutual security     and national      security  pro-
        grams.

                The complexity     of the various      domestic and international
        programs has resulted         in a need for high-level      coordination.     -
.       President    Nixon has recently        established    a new, high-level
        Council on International           Economic Policy in recognition       of
        the need for coordinating           economic and trade policies      with
        overall    national    objectives.




                                             27
                CONCLUSIONS, AGENCY COMMENTSAND

               GAO EVALUATION,AND RE~~CM~~ATIONS

CONCLUSIONS

       During our review we observed that,   although the buy-
national    procurement program had been in existence   for a
number of years, information    was not being accumulated to
evaluate the effects    of the program on balance of payments
or to determine what it cost to obtain balance-of-payments
benefits.

       We believe that it is not in the national     interest  to
pay premiums of millions     of dollars  annually to retain   pro-
curement dollars    in the United States, without    some form of
reporting    system to determine whether balance-of-payments
benefits   are being achieved.

       We observed also that Federal agencies were not required
to determine the value of foreign      and domestic components in
end products and whether the additional      cost that might be
paid for a domestic product would result      in an appropriate
benefit   to the U.S. balance-of-payments    position.

       We believe that requiring    contracting    officers   to ob-
tain and evaluate componency in the light         of the Buy .American
Act and balance-of-payments      considerations    is a realistic
objective,

       There appears to be no merit in rejecting        sow bids on
foreign   products for balance of payments which are otherwise
acceptable,    unless it reasonably can be shown that there is
a balance-of-payments       advantage to the United States suffi-
cient to warrant the additional        price paid through accep-
tance of a higher domestic bid,         Therefore  it seems reason-
able that, when Federal agencies are willing         to pay a higher
price to domestic suppliers        to achieve a balance-of-payments
benefit,    special efforts    should be taken to ensure that
higher prices are paid only when there are demonstrable
balance-of-payments     advantages.


                                  28
                 To obtain such assurance,     we believe that information
          regarding   the value of domestic and foreign      components in-
          cluded in the end products being offered        should be obtained
          and considered   in evaluating    bids.   This practice  would en-
          able the procuring    agency to determine the actual balance-
        1 of-payments benefits    of alternative    bids and would make pos-
          sible an informed decision regarding        the payment of a higher
        r price.
                Although we believe that the principle          of obtaining    and
          evaluating      componency is sound, appropriate      data to evaluate
          the feasibility       of such a program is not available.        Since
          agencies are not required         to accumulate statistical     data un-
          der the buy-national       procurement program, they have not ac-
          cumulated information       on componency.      It seems to us that
          the initial      step will be to evaluate     the feasibility    of such
          a program by determining        the magnitude of the componency
          problem.

                 If information   indicates  that componency is a signifi-
          cant consideration    under the buy-national    procurement pro-
          gram, a determination     will be necessary as to whether the
          additional    burden involved in administering     such a program
          will be worth the benefits.       In this regard consideration
          should be given to the AID policy of evaluating        componency,
          a simpler method than the policy established        by Executive
          order under the Buy American Act,

                 We recognize that the buy-national       program is complex
          and that its complexity        is further  compounded by the pro-
          gram's effects     on major domestic and international       program
          policies,    such as the level of Federal spending, efforts          to
          curb inflation,     protection    of domestic industry   and employ-
          ment, and U.S. foreign        economic and trade objectives,     in-
          cluding negotiations       aimed at gaining greater    access to for-
          eign government procurements.
.
    ;
                We recognize also that most of these considerations            are
          not subject to precise measurement and that subjective            judg-
          ments by management may well      outweigh the basic buy-national
          determinants     of cost versus benefits.    Decisions   therefore
          must consider the changes in any program which may result             in
          divergent    effects  on other programs.   Decisions    should con-
          sider also the potential      for greater benefits    in assisting

                                             29
    domestic industry   and the U.S. balance-of-payments   position
    by reallocation   of budgetary resources to other existing
    programs which reportedly     are most cost effective.

    AGENCY COMMENTSAND GAO EVALUATI-ON
                                                                                       t
           In our draft report we suggested that the Director,'                  Of-    ;
    fice of Management and Budget, develop a reporting                    system
    that would provide pertinent              information    to assist    in the       -
    evaluation      of the effectiveness          of buy-national     procurement
    policies    in terms of balance-of-payments              benefits    and addi-
.   tional    costs incurred.         Copies of our draft report were sent
    to 10 agencies.1          Only DOD disagreed with our suggestion.
    DOD stated that,         since its 5Q-percent premium differential
    discouraged      foreign     bids, pertinent        data did not exist to be
    reported;     therefore,       a reporting     system would be useless.
    Their reply stated,          in part, that:

            'With respect to procurement for use overseas,                 it
            should be noted that,        in general,     DOD purchases
            of U.S. items are normally made when the estimated
            cost of U.S. supplies and services,             including
            transportation,        does not exceed the estimated          cost
            of foreign      supplies and services by more than              .--
         . 50 percent,        In these case, [sic]       actual foreign
           bids also are not received."
                                                              .+ . I .
           DOD recognized       that its data relating         to these programs
    was not precise but that sufficient              data had been available
    to permit the necessary evaluation            and policy       decisions    to
    merit continuation         of DOD's present balance-of-payments
    policies.

          We believe that the data presently used by DOD could be
    included in a reporting  system and could be evaluated with

    1.                                                                                      I
    'The agencies which received and commented on &r draft re-                          _
     port were the Departments of Commerce, Defense, the Interior,'
     State, and the Treasury;   the Council of Economic Advisers;
     the General Services Administration;   the Office of Manage-
     ment and Budget; the Office of the Special Representative
     for Trade Negotiations;   and the Tennessee Valley Authority.


                                         -30
     data from all Government agencies.     This should enable man-
     agement to make informed decisions    on the buy-national      pro-
     curement policies  on a Government-wide    basis.  Even though
     DOD data would be estimated,   it would be preferable     to no
     information  as is now the case.                             ..
 3
‘          In commenting on the establishment of a reporting            sys-
     tern, the Office of Management and Budget stated that:

           'We agree that more information     would be desir-
           able and, in fact,   are currently    studying the
           feasibility  of a reporting   system.     The precise
           design of a system is not yet clear,       however,
           given the problems of determining      specifically
           what it should measure; what level of detail         is
           appropriate;  whether it should provide for rou-
           tine or exception reporting;     whether certain
           kinds of data are even available;      etc."
                                                                   .
             In our draft we suggested also that Federal procurement
     officials    obtain componency information     and evaluate the
     foreign    and domestic components contained in end-items as a
     part of their review and evaluation       process on all procure-
     ments in excess of $250,000.

           Of the 10 agencies that commented on this suggestion,
     only DOD and the Office of Management and Budget did not
     agree with the objective     of obtaining    and evaluating  com-
     ponency,    Although reservations    similar   to those expressed
     by DOD and the Office of Management and Budget were cited
     by several of the other agencies,       these agencies basically
     agreed with our position,

            The agencies were concerned primari-ly       with the feasibil-
     ity of incurring     an undeterminable   amount of additional       ad-
     ministrative    costs to obtain and evaluate componency infor-
     mation and to monitor contractor       performance,     without   know-
     ing the benefits     that could be realized.      We agree with the
     agencies'    concerns and believe that the feasibility          of adopt-
     ing a more stringent      componency policy    should be fully     eval-
     uated.

           DOD expressed concern that the existing  uniform
     Government-wide   policy established by the Buy American           Act
and by Executive    order, which has given notice to the busi-
ness community of the world of U.S. policy,            should not be
changed on a transaction-by-transaction          basis.    We believe
that any change that is appropriate          to meet the objectives
of the United States should be made, whether it requires
changes to existing     legislation     or to policies    implemented                                            ;
under that legislation.



                                                    c

                                                                 ,.
                                                                              :.


                                                                                                 -.


                                          . .                             -
                                                                              .‘.
                                      \                     I.    .                         .i


                                                :                     .             .
                                                                                                           1..




                                                        ,        *:

                                                                                                      ,.




                                                                                        .        c




                                 32
L




RECOMMENDATIONS

     We recommend that         the Director,      Office   of Management
and Budget

      --initiate      a-reporting        system to assist    in evaluating
          the effectiveness       of    buy-national    procurement program
          policies    in terms of       balance-of-payments     benefits
          and additional      cost     incurred    and

      --determine    the feasibility   of requiring     that compo-
         nency information    be obtained and considered      on pro-
         curements that involve buy-national        program policies.

       The creation  by President     Nixon of a new, high-level
Council on International       Economic Policy eariy this year
recognizes    the need for coordinating       economic and trade pol-
icies with overall    national    objectives.     We recommend also
that the Director,    Office of Management and Budget, in his
role as the overseer of executive         agency programs and poli-
cies, assess the indicated       cost and benefits    under buy-
national   procurement program against other alternatives.

         The indicated    cost and benefits        under buy-national
procurement program should be assessed against the potential
adverse impact of buy-national           policies     on other U.S. for-
eign economic and trade objectives              formulated     by the Council
on International       Economic Policy.         The indicated     benefits
should be assessed also against the potential                  for greater
benefits     in assisting     the domestic economy and the U.S.
balance-of-payments        position    by reallocating        budgetary re-
sources to other programs which reportedly                 are more cost
effective      and consistent     with traditional       U.S. efforts      to-
ward freer and fairer         world trade.       We were informed by an
official     of the Office of AManagement and Budget that it
would be the logical        organization      to carry out or to coordi-
nate an assessment of the program and other alternatives
with information       provided by other agencies.




                                        33
                                                .*

                         U.S. BALANCE OF PAYMEh~SAND

                   FEDERAL GOVERNMENTPROCUREMENTSTATISTICS

                      FOR THE PERIOD 1960 THROUGH1970

                     Balance    of payments                             Federal
                                   Official                           Government
        Calendar    Liquidity     settlement                         procurement
          year       balance        balance          Fiscal   year     (billions)

                          (billions)
.
l
          1960        43.9             S-3.4              1960          $25.7
          i961         -2.4             -1.3              1961           27.8
          1962         -2.2             -2.7              1962           32.6
          1963         -2.7             -2.0              1963           34.1
          1964         -2.8             -1.6              1964          .35.0
          1965         -1.3             -1.3              1965           34.9
          1966         -1.4                .3             1966           46.0
          1967         -3.5             -3.4              1967           52.1
          1968            .2             1.6              1968           51.1
          1969         -7.0               2.7             1969           54.2
          1970         -4.7            -10.7              1970           47.5




    t




                                           35

                                                                          -.~- ---.--   __ -. .__ _
                APPENDIX II

                                      PRINCIPAL OFFICIALS

                       RESPONSIBLE FOR ADMINISTRATION OF ACTIVITIES




                                                             Tenure of office
                                                             From            &
            .                   OFFICE OF MANAGEMENTAND BUDGET
            *
            a             (Bureau of the Budget prior to July 1970)

                DIRECTOR:
                    George P. Shultz                  July      1970    Present
                    Robert P. Mayo                    Jan.      1969    June 1970
                    Charles J. Zwick                  Jan.      1968    Jan.      1969
                    Charles E. Schultze               Jan.      1966    Jan.      1968


                              OFFICE OF THE SPECIAL REPRESENTATIVE
                                     FOR TRADE NEGOTIATIONS

                SPECIAL REPRESENTATIVE.FOR TRADE NEGOTIATIONS:
                    Carl 3. Gilbert                 bib   1969          Present
                   William M. Roth                  Feb.  1967          Jan.    1969
                    Christian  A. Herter           Jan.   1966          Dec. 1966

,

    I

        \
                                      DEPARTMENTOF STATE

                SECRETARYOF STATE:
                   William P. Rogers                 Jan.       1969    Present
                   Dean Rusk                         Jan.       1966   Jan.       1969

                                  DEPARTMENTOF THE TREASURY

                SECmTARY OF THE TREASURY:
                   John B. Connally                  Feb.      1971    Present
                   David M. Kennedy                  Jan.       1969   Feb.    1971
                   Joseph W. Barr                    Dec.       1968   Jan.    1969
                   Henry H, Fowler                   Jan.       1966   Dec. 1968



                                               35