Comments Relating to Reauthorization of the Defense Production Act

Published by the Government Accountability Office on 1990-03-01.

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

                    United States General Accounting Office    / 4 a ? 38


                     Comments Relating   to Reauthorization           of
For Release          The Defense Production   Act
on Delivery
Expected at
9:30 a.m. EST
March 1, 1990

                     Statement     of
                     Paul F. Math, Director,        Research,      Development,
                       Acquisition,       and Procurement      Issues
                     National    Security    and International        Affairs
                     Before the
                     Committee on Banking,        Housing,    and Urban Affairs
                     United States Senate

GAO/T-NSIAD-90-10                                                   GAO Form 160 (12/2’0

    Mr.    Chairman      and Members of           the   Committee:

    We appreciate    this opportunity   to appear before     the                Committee
    today to discuss     Senate bill  S. 1379 to reauthorize                    and amend 'the
    Defense Production     Act of 1950.

    In recent       years the United          States     has moved to a more
    interdependent          approach      in procuring       parts and components         for its
    major weapon systems.              Today, many nations           have increased       their
    participation         in the development            and production     of these systems.
    It is apparent          that U.S. national           security    is increasingly        tied
    to the strength           of the nation's         economy and the ability          of
    industry      to compete, particularly               in areas where technological
    leadership       is important.           We agree with the emphasis that S. 1379
    places on a healthy            industrial        and technological      base.     The
    health     of the industrial            and technological        base contrib,utes        to
    the technological           superiority        of our defense equipment          - a
    cornerstone        of our defense         national     strategy.

    In general,     we agree with the thrust    of several  provisions     in
    S. 1379 that seek to modernize        the Defense Production     Act of 1950
    by providing     or authorizing   mechanisms or tools   to enhance the
    competitiveness     of defense  industries.

    We support        provisions     that    seek       to:

    --    foster    development      of     technologies   and advanced processes      by
          providing     protection        from the antitrust    provisions  inhibiting
          joint    undertakings;

    --    encourage  contractors    to invest    in modern production                systems
          and equipment    that increase   productivity    and reduce               costs;

    --    improve the integration            of     national    security   and national
          edonomic policy;    and
--   ensure a realistic   assessment of the demands placed                      on
     industry by national   defense plans.

We have some observations            for your consideration   regarding
provisions      that (1) require        the President  to submit an annual
report     to the Congress on the impact of offsets          on defense
preparedness,       competitiveness,       trade and employment:   and (2)
establish     a revolving      fund for purposes such as purchase
commitment programs.

Finally,      we would like to emphasize that effective
implementation       of the Defense Production      Act requires    systematic
information      gathering   and analysis    to accurately    assess the
health     of our defense industrial      and technology    base at all
levels,      and ensure that critical     items and capabilities      are
available.       We believe   that the Congress should consider         the need
for obtaining       adequate information     on selected   key industries
that support      major weapon systems.


Industry     Consortia

S. 1379 would extend protection                from antitrust        provisions     to
apply to participants           in sanctioned        industry      consortia.      Such
consortia     are arrangements         among entities         for the purpose of
jointly    undertaking       a specific      program of basic research,
research     and development,         production,       marketing,      or any
combination      thereof,     relating     to industrial         resources     or critical
technologies       found to be essential           to the preservation          or
enhancement of the industrial              or technology         base of the United
States supporting         the national      defense.


Consortia    participants     which may include     potential         competitors
and universities       would be allowed   to collaborate            on technologies
for which significant        resources  or interdisciplinary             research   are
considered     essential.

One example of government-industry          consortia'is   the Semiconductor
Manufacturing   Technology   Institute       (SEMATECH). It was formed to
provide   the U.S. semiconductor       industry    the domestic capability
for world leadership     in manufacturing.

SEMATECH has been proposed as a model for other consortia.                      In
this regard,      we agree with the Congressional          Budget Office,       which
noted in its September 1987 report,             The Benefits    and Risks of
Federal     Funding for SEMATECH, that it is appropriate              for
government      to assist  a particular      firm or industry      if such
intervention      can be justified      on the basis of providing         public
benefits     that go beyond the benefits         provided    to the affected

We believe      that the proposed antitrust              related    changes improve
DOD's ability        to increase     the efficiency,          competitiveness,     and
responsiveness         of the defense industrial            base by allowing     pooling
of resources       to effectively       resolve      production    problems.     These
benefits     are achieved      through      the use of cooperative          or
consolidated       use of the skills,          technological      resources    and
expertise     of for-profit       business       concerns,     not for profit
entities,     and educational        institutions.

Establishing       consortia   in support   of national  defense provides
public    benefits     that go beyond those provided     to the affected
firms;    consortia      can be one of the mechanisms to facilitate       the
transfer     of high technology     research   among all industries,
civilian     and defense.

DOD's current    efforts    to prepare       a national      strategy    to pursue
important  technologies       should also enhance the effectiveness                of
these kinds of activity.           A planned strategy          that will    set
priorities    among different        technologies,      define     areas that need
to be funded,    those in need of control,            as well as areas that
need to be fostered,       could provide        the guidance       necessary    to
focus the government's        efforts.

Investment     in Advanced Manufacturing
Technology     and Processes

We have consistently             supported     the concept in S. 1379 of
modifying     profit      policies       to encourage contractors         to invest   in
advanced manufacturing             technology,     production       equipment   and
manufacturing        processes       to improve the efficiency           and
competitiveness          of the defense industrial            base.     For instance,    we
have supported         increased       rates of profit      to encourage
competitiveness          through     investments     to modernize production
systems and equipment.
  * . .I
Assessing   Industrial
Responsiveness     Capabilities

S. 1379 provides         for the periodic       assessment of defense
industry's     capabilities        to carry out defense plans.
We support     efforts      to assess industry's        capabilities        to respond
to defense needs.           Essential    to these industry         performance
assessments      is DOD's ability        to prepare     realistic      industrial
plans.     Accurate      information     including     data on lower level          tiers
of supply is necessary           to achieve realistic         plans.      DOD is
currently    revising       the industrial      preparedness       planning     approach
to assess defense industrial             capabilities      to meet demands.           A DOD
working group is discussing,    among other things,      how the services
should approach this integrated    industrial  capabilities
asseskment not only to address surge and mobilization          issues  but
also those international    issues           that =nay affect      competitiveness
at all levels  of the industrial             base.      This integrated      assessment
approach  is a step in the right             direction.

Integration     of National
Security    Policy  and
National    Economic Policy

S. 1379 supports        greater      integration        of national    economic
policies      and national      security      policies.      We support     such
efforts     which should improve the U.S. ability                   to maintain     a
healthy     and competitive        industrial       base.     For example,      this could
help to negotiate        and achieve the best terms possible                  for
international      agreements.

We not only support DOD's inclusion                in policy    making
discussions      of broad economic issues that have an impact on the
defense     industrial    base but also support          increasing     the role of
Commerce in assessing          the impact of international           defense
programs,      such as military       coproduction     efforts,     on the overall
U.S. industrial        competitiveness.

For instance,       in our review of the FS-X program1 we noted that
during    preliminary     FS-X discussions,       DOD separated    trade and
economic issues from national          security     issues and did not
coordinate      with or pursue the views of Commerce.            In our FS-X
review,    we supported     agency efforts      to establish    procedures    to
ensure coordination        and consultation       in analyzing   the benefits
and disadvantages       of future   programs.

lGAO&SIAD-90-77BR;          U.S.   Japan   Codevelopment:         Review    of   the   FS-X

Annual    Report    on Impact     of Offsets

The Defense Production           Act requires   the President    to submit to
certain     Committees of the House and Senate a detailed            annual
report     on the impact of offsets         on defense preparedness,
industrial      competitiveness,       employment,    and trade of the United
States.      OMB chairs     a coordinating     committee    composed of selected
federal     organizations,       which prepares    the report.

The Act currently          provides      a formal mechanism for reflecting              in
the report,      differences        or dissenting         views among the agencies on
the interagency         committee.         That is, the Defense Production            Act
requires     that the annual report               provide    a summary of the findings
and conclusions         and include        differing      views of the agencies       that
participated        in the interagency            study.     However, OMB officials
said that (1) including             differing        views in the report     requires      a
separate     study,     (2) no such studies             had been prepared,     and (3) as
a result,     dissenting       views have not been included             in the offsets

Under S. 1379, the Department              of Commerce would have the
responsibility         of preparing     the report    and submitting       it    to the
Congress.        In so doing,     Commerce must consult        with the
Secretaries        of Defense,    the Treasury,     and State,       and the    United
States Trade Representative.               Each report    would be based        on
interagency        studies   concerning      the cumulative    effects     of   offset
agreements       on domestic     defense productive       capability     and    the
domestic      defense technology        base.

S. 1379 would provide    that alternative     findings    or
recommendations    may be included    in the report     if the Secretary                  of
Commerce has been given,     during preparation      of the report,    an
indep&ndent   study or analysis    on which such views are based.
We believe     that S. 1379’s proposed amendments to section                    309 of
Defense Production       Act should be changed to better               provide     for
the disclosure      of significant         dissenting      agency views.      That is,
agencies    who participated       or consulted         in the development       of the
report   should not be required            to perform additional        studies      or
analyses    to have their      significant        dissenting     views included        in
the report.       In the past,     such views have not been provided                 and
agency differences       regarding      study methodologies          and assumptions
that may na;e significantly            affected      the report’s     conclusions
have not been included.

Shortly,      we will   release     a report      on our evaluation        of the 1988
Offsets     in Military      Exports    report.      Our report      includes
information       on the interagency        process used for preparing              the
offsets     report    and, as discussed         above, the need for the Defense
Production      Act to better      provide      for disclosure       of significant
dissenting      agency views in the report.              Our report       also states
that the methodology          used to prepare        sections     of the report
allowed     an assessment of the overall             impact of offsets         on certain
industries.        However, such an aggregated             analysis     did not allow
the identification         of the impact on particular              suppliers    or
segments more narrowly          defined.

The Defense     Production      Act   Fund

Although     we support   the need to enhance the title             III programs,
we have several      observations     regarding       the Defense Production          Act
Fund.     For example,    the national       stockpile    planning      approach is
being modernized       to meet the current        and future     military     needs.
Stockpile     managers are concerned that acquiring              the initial      $200
million    from the national      stockpile      could have a detrimental
impact on their      program.     Another     concern is the potential
obsolescence     of stockpiled     material.        S. 1379, provides        authority
to sgockpile     not only critical       commodities,      but also components
and subassemblies      in sufficient     quantities     to meet mobilization
needs.     Rapid technology      developments     could make such goods
obsolete.     On numerous occasions,        we have expressed      concern
regarding    excess items which the government            has purchased    and
stored only to discover        that they are no longer useful.           Thus,
managers of any program of this nature must be very selective                  in
the components that are included.             In order for managers to be
selective,    accurate   information     on defense needs regarding
components of manufacturing          for which we are foreign       dependent    is


We believe        the Committee may want to consider            a few other matters
for inclusion          in the Defense Production           Act. A tool basic to
our Nation's         ability       to accurately     assess the health  of our
defense      industrial         and technology     base and ensure that critical
capabilities         are accessible        is adequate information     on selected
defense      industries         that support     major weapon systems,    including
critical       subtier       industries.

In recent years,      a number of studies         have surfaced     an increasing
concern about a growing dependence on foreign                sources for
materials     and components for our weapon systems.              Although
evidence    of DOD's foreign       dependence for critical        items in
certain   weapon systems exists,          it is not possible      to measure the
overall   impact or extent       of dependence because DOD has no
reliable    system to identify       foreign     dependence in parts,
components,     and technologies       essential     to defense production.

DOD's current        ad hoc approach to defense industrial           base data
collection      and analysis      can only provide    information     on general
industry     sectors    and foreign    dependencies     through   special
studies.      We believe     this ad hoc approach is inefficient          and of
limit'ed   effectiveness       for several   reasons.      First,  it provides

    only limited        visibility         into foreign       dependencies         at lower
    subcontracting         levels,       even though,       according        to DOD, these
    levels     are a major source of technology                    development        in the United
    States and where we face a significant                       decline       in industrial
    competitiveness.             Second, the ad hoc approach does not
    facilitate      the identification             of acquisition          strategies        that
    could put DOD in a proactive                  position     to know which domestic
    sources need to be maintained                  for particular          items and know to
    most prudently         exercise        its authority       to award contracts
    noncompetitively           when necessary         to maintain        domestic production
    sources.      Third,       the ad hoc approach does not shorten                       DOD's
    decisionmaking         process for acquiring              weapon systems,           subsystems,
    and components by facilitating                  market research            as a more
    systematic      approach would.            Systematically          obtaining        information
    would improve DOD's ability                 to identify        potential      sources for
    important     items and technologies.                  DOD officials         stated      that
    reliance     on ad hoc data collection                 using varying         methodologies,
    puts DOD in a reactive              role and limits          its ability        to identify
    trends     in critical         industrial      sectors.

    In general,       we believe       that an improved approach to defense
    industrial      base data collection           and coordination       especially      at
    the subcontractor          levels     of production     is necessary      for DOD to
    properly     plan and be in a position             to take appropriate         action
    regarding     the industrial          base including      the economic,      trade,    and
    technology      security      implications      of procuring     items and
    components of major weapon systems from foreign                     sources.       An
    improved approach to data collection                 and coordination        would also
    enhance DOD's ability            to make prudent      decisions     about the
    National     Defense Stockpile          and offset    agreements with foreign
    countries     that may adversely           impact the defense       industrial       base.
    Our report      Industrial       Base:     Adequacy of Official        Information       on
    the U.S. Defense Industrial               Base, (GAO/NSIAD-90-48)         addresses
    this    issue in detail.

                _.   9

M r. Chairman,     this concludes my statement.
                                              ,.   Attached  are the
responses to the questions        you specifically requested  that we
address.    I will     be happy to respond to any additional    questions
you or the other members of the Committee may have.

\    .

    ATTACHMENT                                                                                        ATTACHMENT


    The committee     requested       that      we address           the    following                three

    Question     1:    Do you believe            that      current         systems            for     gathering
                       and assessing            data      on the      extent        of        foreign
                       dependencies           among prime            contractors               and
                       subcontractors            of defense           materials               are     adequate?
                      What changes            in our       current         assessment                policies
                       and practices            would      you recommend,                if         any?

    GAO Response:     No, DOD has no reliable                   system         to    identify                foreign
                       dependencies           in parts,        components,               and
                       technologies           essential        to defense            production.
                       Some efforts           underway       are      intended           to
                       systematically            collect       and analyze               industrial              base
                       data,      including       the      extent      of    foreign

                      These efforts             have been slow              in developing,                    and
                       we believe        that     more emphasis              and resources
                       should      be given       to put       in place         a fully
                      operational            integrated        system.          There           may also            be
                    a need to clarify                       DOD's authority                  to obtain           data
                    from contractors                    and subcontractors                      that       is
                    critical           to accurately                 assess         the defense
                    industrial            base         capabilities.

Question   2:       Do you have concerns                          that     foreign           companies           might
                    become the            sole         source        of    certain           equipment           or
                *   technologies               vital         to our        national           security?

GA3 Response:       Yes,       we do.          While         recognizing             that       the U.S.
                    defense         industrial               base exists             within          the    context
                    of     an increasingly                   globalized             economy          in which
                    nations         are      interdependent                   and expectations                   to
                    rely       exclusively              on U.S.           production            capability              are
                    not     realistic,            the        continuing             availability                of
                    necessary            items         and technology                is      crucial        to
                    national           defense          needs.

                    Although,            we must accept                   foreign         sources          as a way
                    of obtaining,                in some instances,                       the    best       product
                    at     the    best       price,          it    is     important           that     we monitor
                    this       trend      closely.                Currently          there       is no
                    systematic            or     integrated               method       for      assessing
                    import        dependency                for    items       and technology
                    critical           to national                security.            Moreover,            the
                    military           services             do not        have an integrated                     system

                 to assess           the    ability         of      the defense              industry         to
                 supply       its      needs      for      future        conflict         situations.

Question   3:    Do you believe              the        federal        government             should         make
                 greater       efforts           to     foster       their        development            of
                 domestic-based              defense-related                   technologies
                 either       directly,           through           funding        programs,            or
                 indirectly           through           encouraging            joint      industry
                 cooperation            or compulsory                licensing          of     foreign

GAO Response :   Yes,      we believe            that     the       federal        government
                 should       make efforts               to keep key defense-related
                 manufacturing              and development                   in the United
                 States.         This       requires             identification               of key
                 defense-related                 industries            and technologies                  and
                 accurate           information           to assess            their     health          to
                 decide       which        are    in most need of government

Question   4:    Do you believe              that        current        mechanisms             to
                 facilitate           the    transfer             of high         technology
                 defense       research           into      benefiting             civilian         related
                 technologies              are adequate?                What policy             changes,
                 if   any,     would        you recommend?

GAO response:   Although        we have not performed                 evaluations            on this
                issue,     and cannot              comment on whether              current
                mechanisms         are adequate,               we understand         that     there
                are some initiatives                   underway.          For example,         an
                industry        consortium            is being      formed        to share
                unclassified            military        research      developed         by the
                Air    Force.       In addition,               the Office         of Technology
                Assessment         is    in the        early     stages      of    a study     which
                will     address        this       issue.