Hon. ABRAHAM J. MULTER, ASSISTANT SECRETARY OF DEFENSE, INSTALLATIONS AND LOGISTICS, Chairman, Subcommittee No. 2 on Small Business and Government Procurement, Select Committee on Small Business, House of Representatives, Washington, D.C. DEAR MR. MULTER: Reference is made to your letter of September 21, 1964, transmitting a copy of a statement submitted to your subcommittee by Mr. N. K. Zelazo, president, Astronautics Corp. of America. The attached material has been prepared in response to this statement. We appreciate the opportunity of commenting on this subject. Sincerely, THOMAS D. MORRIS, Assistant Secretary of Defense, Installations and Logistics. DEPARTMENT OF DEFENSE FACT SHEET ON STATEMENT OF MR. N. K. ZELAZO Mr. Zelazo made the following recommendations: "1. That the interpretation of 'economic production runs' be liberalized to encourage procurements by small business concerns. "2. That 1-706.6 (a)(iii) of ASPR be revised to eliminate the prohibition of a partial set-aside where two concerns, one large and one small are involved." To provide the committee with information on these subjects selected parts of ASPR are quoted. ASPR 1-706.6 provides as follows: "(a) Subject to any applicable preference for labor surplus area set-asides as provided in 1-803(a)(ii), a portion of a procurement, not including construction, shall be set aside for exclusive small business participation (see 1-706.1) where: "(i) The procurement is not appropriate for total set-aside pursuant to 1-706.5; "(ii) The procurement is severable into two or more economic production runs or reasonable lots (see 1-804.1 (a) (2) (i)−(r); and "(iii) One or more small business concerns are expected to have the technical competency and productive capacity to furnish a severable portion of the procurement at a reasonable price, except that a partial setaside shall not be made if there is a reasonable expectation that only two concerns (one large and one small) with technical competency and productive capacity will respond with bids or proposals; when the contracting officer is uncertain whether the latter situation exists, he may make advance written inquiries to all known sources to determine the number of interested concerns." ASPR 1-804.1(a) (2) (i) and (v) provides as follows: "In determining whether a proposed procurement is susceptible to division into two or more economic production runs or reasonable lots, consideration should be given to the following factors and any others deemed appropriate; "(i) Price and procurement history of the item; "(i) Open industry capacity; "(iii) Startup cost including special tooling requirements; "(iv) Delivery schedule; and "(v) Nature of item and quantity being procured." As is apparent contracting officers in considering the appropriateness of a partial small business set-aside must determine whether the quantity of any proposed procurement will make two or more economic production runs. An important factor, of course, is whether the price would be reasonable if the Government purchased one-half of the quantity from each of two producers. This judgment must be made after consideration of all of the above factors. The Department does not have statistical data showing the extent of partial small business set-asides; however, experiences support the presumption that the improvements made during the last 5 years in all set-asides are equally applicable to partial set-asides. The following chart indicates the progress made in the use of all set-asides during the past 5 years. This shows an increase from $700 million in fiscal year 1960 to $1,435 million in fiscal year 1964. Thus the committee may be assured that the military departments and the DSA are giving every consideration to making both partial and total set-asides for all requirements. It is felt that these efforts and the current Defense regulations governing set-asides are fully responsive to the requirements of the Small Business Act. Under these circumstances the Department does not agree with Mr. Zelazo's recommendation that the interpretation of "economic production runs" as used in partial set-asides should be modified. With respect to recommendation No. 2, partial small business set-asides are not authorized where only two concerns are expected to compete (one large and one small) because under these circumstances there is no assurance of adequate competition. It is felt that the incentive to compete on the part of the small firm is lost where that firm is virtually assured of one-half of the award by matching the low bid of the only other firm competing (providing the small firm's bid is within 120 percent of the low bid). Conversely, where there are only two bidders, one large and one small, the large firm can neither bid on nor expect an award for the total quantity regardless of how low a price it bids (providing again that the small firm is within 120 percent of the low bid). Under these circumstances it is felt that the current ASPR_1–706.6(a) (iii) should not be modified. GOVERNMENT SMALL BUSINESS PROCUREMENT PRACTICES AND PROGRAMS SMALL BUSINESS ADMINISTRATION WEDNESDAY, AUGUST 12, 1964 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE No. 2 ON GOVERNMENT PROCUREMENT Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m. in room 1302, Longworth House Office Building, Hon. Abraham J. Multer (chairman of the subcommittee) presiding. Present: Representatives Multer (chairman), Roosevelt, Smith of California, and Robison. Also present: Henry A. Robinson, subcommittee counsel; Myrtle Ruth Foutch, clerk; John J. Williams, minority counsel; and Eugene W. Loehl, assistant minority counsel. Mr. MULTER. The committee will please be in order. This subcommittee, after conducting extensive public hearings over a period of almost 1 year, now comes to the third and concluding phase of its inquiry into Government's small business procurement programs. As the record will indicate, we took testimony last November in the initial phase of these hearings from the military departments and from the major civilian procurement agencies, regarding their small business practices in the procurement of their defense and civilian requirements. În the second phase, covering private industry, we heard the testimony, complaints, and views of those persons most directly affected by these Government procurement programs, namely, the small businessmen in both defense and civilian industries. We included, in that phase of the hearings, testimony from major prime contractors regarding their subcontracting procedures to bring small business into the defense effort. The various Government agencies involved in industries' complaints were afforded an opportunity to comment, and their statements will be made a part of the record. At this time, I wish to express my own appreciation and that of the committee to the witnesses on behalf of the Government agencies and to industries' spokesmen who came to Washington from various parts of the country to testify in these hearings. We also extend our appre ciation to the many Government officials, businessmen, trade associ ations, and their staffs who accumulated voluminous information, statistical data, and views for the record of these hearings in response to the committee's invitations and requests. We also wish to give due credit to the majority and minority staff members of this committee, and especially the subcommittee staff, for their efforts and intelligent application to the task at hand. It is this comprehensive record which the subcommittee invited the Small Business Administration to review, comment upon, and evaluate. The Congress has mandated this agency to aid, counsel, assist, and protect small business. It is appropriate that the subcommittee now calls upon the Small Business Administration to testify as the concluding witness. The subcommittee looks forward to the testimony of the Small Business Administration in these hearings and hopes to benefit by this agency's experience in reaching appropriate conclusions and in determining whether Government small business procurement programs are doing the job intended by the Congress. The record of these hearings will be kept open until August 26 to afford industry further opportunity to document and submit their procurement problems and recommendations for the committee's consideration. Mr. MULTER. Mr. Maness, we are very happy to have you here with us this morning. We look upon you as an expert in Government procurement. You may introduce your associates that you have with you this morning and then proceed with your statement. (The subcommittee's July 30 letter of invitation to SBA follows:) Hon. EUGENE P. FOLEY. Administrator, Small Business Administration, JULY 30, 1964. DEAR MR. FOLEY: In connection with public hearings scheduled by Subcommittee No. 2 of the House Select Committee on Small Business, to review Government small business procurement programs and practices, your agency is invited to testify before the subcommittee on August 12, 1964, at 10 a.m., at the House Office Building, Washington, D.C., room number to be announced later. As you may know, these hearings started last November when testimony was taken from military departments and major civilian agencies. Private industry testified on June 23 and July 29. In view of the responsibility which is imposed on your agency to aid, counsel, assist, and protect small business, the subcommittee invites your agency, as the concluding witness, to review, comment upon, and evaluate the testimony of the Government agencies and private industry in these hearings. The subcommittee will also appreciate such appropriate recommendations as your agency may care to make. For this purpose, we have provided copies of the printed record and statements of witnesses. Copies of additional statements which will be offered for the record will be forwarded to you as received. If it will inconvenience you to personally attend at the designated time, the subcommittee will be glad to hear the member of your agency charged with responsibility for the implementation of your procurement program. It will be appreciated if you would furnish the subcommittee, in advance of the hearing date, 12 copies of the statement to be presented. Sincerely, ABRAHAM J. MULTER, Chairman, Subcommittee No. 2 on Small Business and Government Procurement. TESTIMONY OF IRVING MANESS, DEPUTY ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION; ACCOMPANIED BY RALPH TURNER, ASSISTANT DEPUTY ADMINISTRATOR; AND EUGENE DAVIDSON, ASSISTANT GENERAL COUNSEL, SMALL BUSINESS ADMINISTRATION Mr. MANESS. Thank you, Mr. Chairman. Mr. Chairman, Congressman Smith, I would like to introduce an my left my Assistant Deputy Administrator for Procurement Assistance, Mr. Ralph Turner, and on my right, Mr. Eugene Davidson, who is the Assistant General Counsel of the SBA in charge of legal matters in the procurement area. Mr. Chairman, the Administrator of the Small Business Administration, the Honorable Eugene P. Foley, has asked me to express to you and to the members of this committee his regret that previous commitments prevent him from testifying at these hearings concerning Government small business procurement practices and programs. He has extended to me the privilege of presenting the views of SBA on the subject. I welcome this opportunity. As you know, Mr. Chairman, I was for many years prior to 1961 counsel for this subcommittee. In that capacity I participated in many hearings conducted by the subcommittee. The work was interesting and challenging. Since 1961 I have been on the other side of the bench. Now I am on the receiving end. I have found the work at SBA both demanding and challenging. There is no end to the problems of small business, particularly in the Government procurement area. However, and I hope I do not sound immodest when I say that, since my taking office as SBA's Deputy Administrator for Procurement Assistance, much progress has been made in alleviating some of the conditions which adversely affect small business. Allow me, Mr. Chairman, to state at the outset that the SBA is fully cognizant as well as appreciative of the efforts and the desire of the chairman and members of this committee to stimulate and assure the economic well-being of our Nation's small business community. I should, therefore, like to assure this committee that its active role in the monitorship of this Administration's small business program has been, and continues to be, an important factor in the success of our performance, and an encouragement to both the individual and collective effort of SBA's personnel at all levels. Before discussing some of the problems of small concerns, as seen by the SBA, permit me to review our accomplishments during this past year. Fiscal year 1964 was, on the whole, a successful year. The attached report, which I, respectfully, suggest be made part of the record, covers in detail the operations and successes of SBA in the field of assistance to small business in Government procurement. Mr. MULTER. Without objection, the report will be made a part of the record at the end of your testimony. Mr. MANESS. I would like to indicate to the chairman and the members of the committee that the procurement statement now made |