Mr. DAVIA. It does not, no. Senator ROTH. Why haven't you or whoever has been in your position before, taken action? Again, that is not a question of number of personnel It is a question of the auditing function not performing its responsibility? Mr. DAVIA. Mr. Clinkscales, may be more knowledgeable than I in that area. Our records indicate that recommendations to that effect were made in 1974, and before that, and one of the replies that came back was that it would be too costly. If I might add here, one of the controls Senator ROTH. What would be too costly? Mr. DAVIA. The corrective procedure. Let me emphasize that- Senator ROTH. I would like to see the recommendations as well. Mr. DAVIA. To appreciate the significance of cost-the controls on credit cards that Mr. Alto describes-the initial cost is a half a million dollars going in. We comtemplate spending a half million for controls. You have to consider the benefit derived from these controls. Senator ROTH. Let me ask you this question in a different area. There was a newspaper article that suggests that the GSA auditors did not calculate yearly increase in the price of chemicals and minerals that were being sold. Is that correct? Mr. DAVIA. GSA auditors? Senator ROтн. Let me read it: The General Services Administration has entered into a contract to sell surplus minerals and chemicals to select companies at less than half the going prices resulting in potential losses to taxpayers of more than a hundred million dollars. GSA auditors have found *** and further on, talking about the selling price, *** auditors report that GSA in arriving at that formiula, failed to consider that the chemicals and minerals have recently increased in value in each year. The said formula adopted by GSA was based on projections supplied by the two companies purchasing the lithium hydroxide. Now is this a practice of not considering market prices? Mr. DAVIA. First, let me say the source of those articles are our audit reports. We are developing that material. Senator ROTH. What action was taken as a result of that finding? Mr. DAVIA. The lithium finding is right now up for a final decision. Back approximately in October of the last calendar year, we noted the fact that our people were getting very close to negotiating a contract to dispose of the lithium inventory. We at that time, issued a memorandum to our Deputy Administrator suggesting that the sale not be taken any further until we could gather additional information. He took steps to stop the sale or stop any finality of it. Senator ROTH. Are market prices hard to secure in this kind of situation? Mr. DAVIA. Not at all. It is a matter of supply and demand. A nominal amount released into the market, for example, from a prior sale, let's say a million pounds in the case of lithium, brought something like $1 to $1.10 a pound. If you release 80 million pounds into the market, the supply is substantially effected and the price changes drastically. What the contemplated contracts proposed was a negotiated sale istration would sell the stock, or at least a sizable proportion, over the next 10 years releasing so much a year. There are other contract provisions, too. It is very complex, but I would be glad to go into it. Senator ROTH. Well, two or three things concern me in this area. Is it the practice of GSA to not go out after competitive bid when they sell surplus products? Mr. DAVIA. Once again, in the lithium area, we have a problem. For example, it was offered in testimony that this very same thing occurred on lithium hydroxide 4 or 5 years ago, where the auditors complained that the products were being offered $40 million less than fair market value. At that time, the Department of Justice objected to the sale because there appeared to be antitrust problems, because the bulk of it was being offered to only two purchasers. That I think was the primary thing which blocked the sale at that time. Since then, arrangements have been made to apparently solve the antitrust aspect, but in the case of something like lithium hydroxide, there is not a wide market. It is not like selling automobiles. There are a limited number of people who use this. Senator ROTH. It is more than one, though? Mr. DAVIA. Two big producers, probably two or three other smaller producers who use the product for grease and things of that sort, but we don't have a large market for it. Senator ROTH. Are there any basic procedures established for the GSA when they make this kind of sale? As an auditor, what do you use as your criteria as to whether or not a sale is made in the best interests of the Government? Is it a subjective judgment or what are your bases? Mr. DAVIA. Let me explain what we did in bringing our report to the point that it is now. We found that the proposed sale was about to go through last November and when we had it blocked by the Deputy Administrator, we did research on our own because we had a problem convincing our stockpile disposal people that there was merit to what we were suggesting. We contacted authorities in the Department of Interior, we contacted authorities in the Department of Defense with regard to the Nation's potential need for lithium in the future. We contacted the Department of Commerce with regard to what would be a suitable quantity for release into the market so as not to disrupt anything, and from these various authorities, we concluded two things-No. 1, that it was not in the Government's interest to dispose of the entire inventory at this time. To preclude market disruption and/or maintain the price, Commerce recommended that we release no more than 1 million pounds a year, competitively offered. Two, we are beginning now to conclude that lithium is a very unique product. In its metal state, it is the lightest metal found in nature. The Department of Defense is finding in current engineering studies that lithium in alloy with aluminum makes for a better product for aircraft structures. Defense has told us that the Nation's needs in the next decade and a half to two decades will more than require everything we have in our inventory. Our point is why sacrifice it at this time if Senator ROTH. I don't want to prolong this, but I guess the basic problem I have in my mind is whether you have any standard operating procedures to dispose of it? Mr. DAVIA. In subject areas like this, our basic standard procedure. calls for using good judgment. I think what is required is an adequate market analysis. Senator ROTH. These is one thing that comes clear. Good judgment in agencies appears to leave something to be desired. Mr. DAVIA. That is our procedure, sir. Senator ROTH. My last question, Mr. Chairman, maybe you asked that, I am not sure, when I came in whether you did or not. Recently the Secretary of HEW in a very courageous statement, said there had been a waste of something like $6 billion. Do you have any such figures for GSA? Mr. DAVIA. Waste did you say? Senator ROтн. Yes. Mr. DAVIA. The fraud is in their welfare programs. Senator ROTH. What percentage of the dollars spent by GSA do you think is misspent? Mr. DAVIA. That was a figure that Mr. Alto offered. What we are trying to do is to gage the potential for fraud in GSA. In estimating the $66 million a year fraud figure we gave in testimony, we looked at the 11 appropriations which provide the $4.7 or $5 billion to GSA, and I categorized them by the general classes of money involved. In other words, the salaries and wage money for example. I feel that GSA has a good disciplined payroll accounting system, and I see a very low potential for fraud in that-minor fraud perhaps. I estimated, and it is a judgment matter, of fraud potential of perhaps one-tenth of 1 percent. However, our biggest potential fraud area as offered in my testimony earlier, are those moneys which GSA has for procurement across the country-of supplies, building services, construction, what have you. To do the job, it is necessary to put the money out into the hands of many people who, although statistically low in numbers, are in some cases less than honest. With regard to those moneys, I forget now just how much money is involved, but it is $3 to $3 billion. I estimated, particularly in view of the current circumstances, that the fraud potential there was probably 2 percent of the aggregate. Two percent of that aggregate gives us a possible potential fraud of $58 million a year. In the stockpile area, we have peaks and valleys of sales, so what I did was I estimated for 10 years, what negotiated sales of stockpile materials might be, divided by 10, and came up with the potential fraud average of $5 million a year, to give us a total possible potential fraud, based on the method I just described, of $66 million. Obviously, we have no way of knowing. What I am doing is evaluating the risks in these categories and coming up with $66 million. Senator ROTH. That's all I have. Senator CHILES. Gentlemen, I want to thank you again for your appearance, and Mr. Alto, I want to wish you good luck and God speed. We will look forward to seeing you around Labor Day, and if you and Jay Solomon can get GSA cleaned up, we will certainly per I look forward to your testimony again. Mr. ALTO. Thank you, Senator. Senator CHILES. We will adjourn our hearings until 10 a.m. tomorrow morning in this room. Tomorrow we intend to look at what was going on in the middle and upper levels of GSA, and to look into areas of possible waste and inefficiency. [Whereupon, at 12:36 p.m., the hearing was recessed, to reconvene on Friday, June 23, 1978.] |