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the Fouke Co., and its predecessor, the Funsten Bros., of St. Louis, since 1913 when it began selling raw fur sealskins in the United States. Throughout that long period Government-company relationships have been entirely harmonious. In fact in 1939 when an effort was made to institute competitive bidding the company, according to our records, was entirely cooperative. It is quite possible that out of this research program may come discoveries which will be of great assistance to the Fouke Co. as well as other fur processors."
Secretary Lewis was also quoted in said release as follows:
"Today, as it has since 1913, the Government must depend upon a single firm in St. Louis for the processing of its entire supply of sealskins and we are fortunate that its rare skills and processes are available in this country. Before it was established the Government had to ship its sealskins to London for processing."
The foregoing statements from the Acting Secretary of the Department respecting the Government's harmonious relationships with the company over the entire period from 1913 through 1955 should put to rest any implication of unsatisfactory relations with the company up to and including the year 1955. This is also an answer to the assertion under 3 above. For the period subsequent to 1955 it should be sufficient to say that not one complaint of the company's performance under the contract was made to it by the Department until the cancellation of the contract and that many commendatory statements of the company's work were received during this period from various representatives of the Department.
The company believes that its answers set forth in this memorandum to the assertions of the Department in its so-called background statement constitute a complete refutation of the assertions against the company.
Two additional observations seem warranted: (a) If the assertions made in the statement were true, the Government would have been derelict in the discharge of its duties not to have advised the company of its failings as they occurred instead of after the cancellation of the contract; (b) a question, constantly recurring to the officials of the company (and still unanswered), is why, in view of the harmonious relations which existed over all of the long years the company acted as agent for the Government, the Government should suddenly, on November 29, 1961, announce that the contract would be terminated. That this relationship was harmonious through August 1955 is attested by the Government through Acting Secretary of the Interior Orme Lewis' news release dated August 28, 1955 (pp. 26-27 hereof) in which he said, referring to the transactions between the Government and the company since 1913 "Throughout that long period Government-company relationships have been entirely harmonious.' That such relationships were likewise harmonious subsequent to August 1955 is attested by the fact that prior to November 29, 1961, no criticism of the company's performance of its contract or of its conduct was made by the Government, and during this period frequent commendation of the company was expressed by officials of the Department.
STATEMENT BY THE DEPARTMENT OF THE INTERIOR ON THE TERMINATION OF THE CONTRACT WITH THE FOUKE FUR CO.
BACKGROUND OF FEDERAL GOVERNMENT'S RESPONSIBILITY
The U.S. Government assumed responsibility for the management of the Alaska fur seal herd on the Pribilof Islands, Alaska, pursuant to an international treaty signed in 1911 between the United States, Canada, Japan, and Russia. The stated purpose of the treaty is to take effective measures toward achieving the maximum sustainable productivity of the fur seal resources of the North Pacific Ocean so that the fur seal populations can be brought to and maintained at levels which will provide the maximum sustained harvest, with due regard to the productivity of other living marine resources of the area. The efforts of the four countries, in both management and research, are coordinated through the North Pacific Fur Seal Commission, which was established under the terms of the treaty.
Under a scientific management program conducted by the Federal Government since the treaty was signed the fur seal herd has increased from an estimated 125,000 animals to some 11⁄2 million at the present time. There is an annual harvest of sealskins to the extent permissible under sound principles of conservation.
The Congress has placed responsibility for the herd's administration in the Department of the Interior. Two basic considerations control the program: First, the preservation of the herd as a great natural resource of the people of the United States; and, second, sound management of the resource so that it contributes to the preservation and management costs.
DEVELOPMENT OF SEALSKIN PROCESSING IN THE UNITED STATES
In 1913 it was determined that an effort should be made to establish a sealskin processing industry in the United States rather than ship the skins to England for processing and import the finished skins to the United States. Arrangements were made with the Funsten Bros. & Co., St. Louis, Mo., for processing and sale of Government-owned sealskins. The Funsten Co. went bankrupt in 1920 following a severe depression in the fur market.
CONTRACT WITH FOUKE FUR CO.
The Federal Government urged the president of the bankrupt company to reorganize the sealskin processing work. As a result, the Fouke Fur Co. was established, and the Government executed a 10-year contract with it in 1921 for processing and sale of sealskins. The contract was renewed in 1931 and 1939. The contract was last renewed on March 21, 1947, and has continued in force since with some amendments.
The present contract provides among other things, that the company will perform the following services in connection with the processing and sale of Alaska fur sealskins:
1. The preparation and preservation of raw skins.
2. The preparation of the skins for public sale by tanning and dyeing processes. 3. The promotion of the retail Alaska fur sealskin market through advertising media, demonstration, and personal contacts.
4. The disposal of the skins on behalf of the Government by public auction. The effect of the contract over the years has been to strengthen and confirm the position of the company as the sole source of supply and thus to stifle competition.
Over the years the company realized substantial profits from the generous participation in the proceeds of the sale of sealskins granted by the Government. At the same time the Federal Government benefited from the company's excellent work and the high quality fur product marketed.
INCEPTION OF GOVERNMENT'S DISSATISFACTION WITH CONTRACT
Since 1953 the Federal Government has been having increasing difficulties with the company under the contract and other matters pertaining to the Alaska fur seal resource.
In 1953 the company demanded a greater participation in the proceeds from the sale of finished sealskins. There was lack of agreement among responsible Government officials as to whether or not an increase could be justified. The Department of the Interior engaged the services of a reputable banker to study the company's earnings and to make recommendations regarding the requested increase.
The consultant advised that the earnings of the company have been extremely good during the active period of the contract and criticized the Department for failure to revise the contract in the light of the excessive high return. It was recommended that no increase be granted the company for the following reasons: 1. Company expenses could be materially reduced.
2. The current rate of return constituted an excessively high rate of return on net worth.
3. The 1953 rate of return was adequate, even if the first two considerations were disregarded.
The company continued to press for more participation in the proceeds of the sealskin sales and maintained that expansion and modernization of its facilities had to be undertaken to meet estimated production levels and to insure continued quality performance.
The Government gave some consideration at that time to a termination of the contract and to making arrangements for an alternate source of processing and selling of sealskins. Because the company had a virtual monopoly on the handling of the sealskins, however, it was determined that it would not be practical
to find another processor without some disruption to the program and this the Government wished to avoid if possible.
A decision was made to amend the contract and grant the company an increase in earnings. At the same time the Fish and Wildlife Service was instructed to initiate a research project designed to improve sealskin processing methods and to develop specifications for use in the solicitation of bids for processing Government-owned sealskins.
On the basis of being assured of more net income, the company expanded and improved its facilities in St. Louis. Now, less than 6 years later, the company represents the expanded and improved facilities as antiquated and inadequate.
OTHER ELEMENTS OF DISSATISFACTION WITH CONTRACT
On more than one occasion the company has cited the lack of more sealskins as a source of economic concern to the future financial status of the company. The number of sealskins to be harvested annually and the uncertainties regarding the number to be taken are subject to a special provision in the contract as follows:
"It is mutually understood by the parties hereto that the protection, utilization, and administration of the fur-seal herd of the North Pacific Ocean by the Secretary of the Interior shall be carried out in accordance with the provisions of the act of February 26, 1944 (58 Stat. 100); that proper utilization of the fur-seal herd can only be such utilization as is 'not inconsistent with the preservation of the fur seals of the North Pacific Ocean'; *** that consistent with sound principles of conservation, but subject to many factors not within the control of man, the skins of approximately 80,000 three-year-old males are proposed to be taken each year for commercial purposes; * *" [Emphasis supplied.]
The Government has harvested each year the maximum number of sealskins determined by qualified experts of the Government to be available under sound principles of conservation. The company has neither urged nor suggested disregard of these conservation principles, but its references to the quantity harvested demonstrates an attitude inconsistent with the agreed upon conditions specified in the contract.
In 1956 it became necessary to harvest female sealskins to achieve maximum sustained yield of the fur-seal herd. The Department looked to the company for assistance in developing processing techniques which would achieve economic uses of the resource. Due to lack of progress by the company in processing female sealskins the problem is still unresolved, and the Government has had to look to other sources for aid in the solution of the problem.
Further dissatisfaction developed when the company demanded guaranteed net earnings for processing female sealskins before there had been a demonstration of any appreciable progress. The position of the company in this matter is not consistent with its responsibility as contemplated by the contract, especially in view of the substantial earnings realized under the contract for processing male sealskins.
The company's posture with other aspects of handling the female sealskins is inconsistent with certain basic tenets of a contract between a firm and the Federal Government. The company sought authority to dispose of inferior processed female sealskins under competitive bidding procedure with a right to reject bids and to withhold from the public the successful bidder's name. Policy of the Federal Government in contract matters requires that the public have access to information pertaining to the contract.
The Government was instrumental in the establishment of the Fouke Fur Co. The Government has been generous in permitting the company to enjoy earnings which have enabled it to prosper. As late as 1953, 73 percent of the company's business resulted from its contract with the Federal Government. Today more than 50 percent of the company's business is derived from the same contract.
COMPANY'S POLICY TOWARD GOVERNMENT HAS CHANGED
Until recently it has been the practice for both parties to the contract to consult on matters pertaining to the contract, and this has made possible mutual agreement on these matters.
Without approval the company located facilities for processing female sealskins at Greenville, S.C. This action on the part of the company reflected a total disregard by the company of the Government's interest. This action was
also indicative of the increasing tendency of the company to take actions without consulting the Government or reaching agreement with it as had been the practice for so many years.
CONTRACT NEGOTIATED AND NOT COMPETITIVE
In general, it is the policy of the U.S. Government to contract with the person or concern offering, through sealed bids opened publicly, to meet the Government's specifications and to provide the supplies or services at the lowest cost. Section 3709 of the Revised Statutes of the United States permits departure from this requirement in certain specified circumstances or on the basis of other statutory authority.
The contract with the Fouke Fur Co. is a negotiated contract and is, therefore, a departure from the policy described. As a negotiated contract, it must conform to the general requirements prescribed for such a contract. These factors have been developed by the General Services Administration and are applicable to all executive departments and agencies of the Federal Government. Factors which must be taken into account include:
1. Comparison of prices quoted and consideration of other prices for the same or similar property or services, with due regard to production costs, including extra pay shift, multishift and overtime costs, and any other factor relating to the price, such as profits, cost of transportation, and cash discounts.
2. Comparison of the business reputation, capacity, and responsibility of the respective persons or firms who submit offers.
3. Consideration of the quality of the property or services offered, including the same or similar property or services previously furnished, with due regard to conformance with specification requirements.
4. Consideration of delivery requirements.
5. Discriminating use of price and cost analyses.
6. Investigation of price aspects of any important subcontract.
7. Individual bargaining, by mail or by conference.
8. Consideration of cost sharing.
9. Effective utilization in general of the most desirable type of contract.
10. Consideration of the size of the business concern.
11. Consideration as to whether the prospective supplier requires expansion or conversion of plant facilities.
12. Consideration as to whether the prospective supplier is located in a surplus or scarce labor area.
13. Consideration as to whether the prospective supplier will have an adequate supply of qualified labor.
14. Consideration of the extent of subcontracting.
15. Consideration of the existing and potential workload of the prospective supplier.
16. Consideration of broadening the industrial base by the development of additional suppliers.
17. Consideration of whether the contractor requires Government-furnished property, machine tools, or facilities.
Many of these factors are involved in the contract with the Fouke Fur Co. It is incumbent, therefore, upon the Department of the Interior to insure that they are observed in that contract.
CONTRACT SUBJECT TO EXAMINATION BY GENERAL ACCOUNTING OFFICE
In addition, the contract and the operations thereunder are subject to examination by the General Accounting Office, an agency of the legislative branch of the Federal Government and generally referred to as the "Watchdog of the Treasury." A recent examination by the GAO of the company's operations resulted in a request upon the Secretary of the Interior to review the financial return to the company due to the impressive profit record and to consider whether an adjustment should be made.
COMPANY PLANS MOVE WITHOUT DISCUSSION WITH GOVERNMENT
In a letter dated October 24, 1961, the company advised the Department of the Interior that its operations in St. Louis would be moved to Greenville, S.C. This decision was made by the company without attempting to learn whether the Federal Government, representing the people of the United States, would be adversely affected by the move. This action, like that on location of processing
operations for female sealskins, constituted a further indication to the Department that the company does not take into consideration the public interest in the discharge of its contractual responsibilities.
GOVERNMENT'S ANNOUNCEMENT TO TERMINATE CONTRACT
The Government requested officials of the company to meet in Washington on November 29, 1961, to discuss the decision to relocate its plant. At this meeting, the company cited two grounds for the relocation decision. One was the antiquated buildings in St. Louis. The other was a projection by the company of a downward trend in earnings on the assumption that there would be no increase in the number of sealskins harvested and that future sale prices would decline. The Department rejected both arguments. The company could not successfully demonstrate that the facilities as expanded and improved following an approved increase in earnings in 1955 suddenly became antiquated. Because the harvest of sealskins in 1961 was the second largest since the contract with the company has been in existence, it was not possible to accept the projections of the company regarding the future financial status of the company. Prices of sealskins have always fluctuated, and to project future sale prices downward is of doubtful validity.
In summary, the action of the Government to terminate the contract was necessitated by noncompliance by the company with the factors which must be present in negotiated Federal contracts. This noncompliance includes:
1. The income received by the company is excessive as found by a reputable banker in 1953 and as indicated by the Comptroller General in a recent examination of the company's operations under the contract.
2. Failure on the part of the company to demonstrate acceptable progress in processing and marketing female sealskins.
3. Views of the company regarding the number of sealskins harvested.
4. Proposals of the company to conceal from the public pertinent data regarding sale of female sealskins.
5. Action of the company in locating the female processing operations at a site for which approval was not given.
6. Decision of the company to relocate its complete operations without discussion with the Department and without regard to the public interest involved.
PROPOSAL TO LOCATE IN SOUTH CAROLINA NOT CONSIDERED
Termination of the contract was based on the foregoing considerations. The fact that Greenville, S.C., was the site of the proposed relocation had nothing whatsoever to do with the action. Had the company been located in Greenville during existence of the contract and proposed to relocate elsewhere under the same circumstances as led to the termination, the decision of the Government would have been the same.
Correspondence between the Department of the Interior and various fur-processing companies who responded to the Department's March 31, 1965, invitation for research and development proposals
U.S. DEPARTMENT OF THE INTERIOR,
FISH AND WILDLIFE SERVICE,
Mr. FRED W. MEIJER,,
Van Daal and Meijer N.V.,
DEAR MR. MEIJER: Senator Ernest Gruening, of Alaska, has made available for our inspection six sealskins which you provided him. Two of these are