tract can be written with an industrial supplier. If either party is unwilling to undertake such a commitment, it is clear evidence that not enough is known to procure for force structure.

When this situation occurs and the particular system is considered of importance to national defense, then a program should be formulated for gaining the necessary knowledge through research and development or prototyping contracts.

Such efforts should use whatever contracting form is most efficient to provide all parties with the knowledge and confidence to enter into a firm contract for force structure hardware. Proceeding on a major system acquisition program with the hope of gaining knowledge along the way has proved to be a very costly approach.

It is now practical to expect such commitments of both Government and industry because of this country's current acceptance of the need to provide for national defense on a long-term, continuing basis. This was not always so. Throughout most of our history, defense was provided in response to a national emergency without question and without regard to cost. When the crisis passed, our defense forces and the defense industry were cut back rapidly.

Such an environment did not permit sound planning by Government or industry, and industry was not held to the same standards of sound planning, performance, financial strength, and efficiency that were expected of other businesses.

Now, however, the environment is quite different. After the experience of the Berlin blockade, the invasion of South Korea, and the advent of the intercontinental ballistic missile, it is clearly imprudent to wait for a crisis before building up our defense capability. Today we include defense as a basic element of our national planning and provide for it together with economic and social progress— not one instead of the other. This new relationship calls for us to meet all of our national objectives together while maintaining the integrity of the national budget as a whole. Thus it provides a means for long-term stability in defense procurement within defense budgets that are reasonably predictable. Where once we mobilized for defense, we now budget for it, and there is a profound difference between

the two.

Unfortunately, the significance of this change and the accompanying opportunity to improve effectiveness in the budgetary and procurement process have been largely overlooked. With budgetary stability and the opportunity for long-range planning, the military services can better foresee their long-term requirements.

Hence contractors can plan in advance for the kind of plant and equipment that will be needed to do the job and can finance that plant and equipment out of their own resources. Companies will be willing to undertake these risks in force structure contracts since, with binding commitments, they can have confidence in the potential return on the investments they may choose to make.

To demonstrate the point let me cite Northrop's experience on both military and commercial programs. In 1957 Northrop undertook the T-38 supersonic military trainer development with the force structure production under a fixed-price-type contract. All 1.189 T-38 aircraft were delivered on time, within contract cost and met or exceeded promised performance.

The F-5A fighter development and production program was under the same kind of fixed-price contracting. As a result we were able to undertake the necessary planning, engineering, and investment in plant and equipment through which we reduced the price of the F-5A by 15 percent over a 6-year period in the face of a 25-percent inflation factor in the same period.

In 1970 Northrop's F-5E won the international fighter competition in which firm and binding fixed-price-type contracts were negotiated with all competitors prior to source selection. To date, some 2,000 F-5's in 27 versions have been delivered to 22 countries, including four coproduction programs. All have been on schedule, within contract cost and have met the reliability, maintainability, and performance standards established by the users. In the hands of the users the F-5's have achieved outstanding records in operability, military effectiveness, and safety.

All of these elements came together because we had a firm plan at the outset based upon realistic objectives and binding contracts. This enabled a potentially difficult program, which included coproduction and deliveries to many foreign users, to meet all of its commitments. On the commercial side, we received from The Boeing Co., a contract to engineer and build the main fuselage of the 747 airliner. Our initial 747 order was for 200 fuselages with a contract value of over $600 million. We invested over $60 million-10 percent of the contract value-in new plant and equipment. As a result, the total cost of the 200-fuselage order was considerably less than it would have been had we not made that expenditure.

Today our costs in that plant are less than 1 man-hour per pound of airframe produced, which is lower than for any other aircraft that preceded it. I can assure you that, if we had been dependent on governmental facilities under those circumstances, we would have had to force that production into an existing plant with existing equipment and it would have been more expensive.

A key element in the success of these programs was that the program requirements and contractual terms were firmly pinned down before work was begun. The original planning was sufficiently thorough that constant changes were unnecessary. Then we were able to make an investment in high productivity facilities since we could determine what our return on investment was going to be. This is the way to harness the private sector to meet national defense objectives.

Under this approach, the procurement system must select companies on the basis of their experience, capabilty, technical and management strength and financial ability to stand behind their commitments.

In this regard, there has been a tendency in defense procurements to consider all major defense companies as though they were pretty much alike. This is a fundamentally unsound way of approaching a procurement evaluation. Bankers, investors, and employees, among others, have no trouble recognizing distinctions between companies. Government, in the discharge of its responsibilities for weapon system procurement, should be no less discriminating.

There are distinctions and it is important that they be recognized. The purpose of source selection is to understand the differences between contractors as well as their proposals. In fact, on major procure

ments the critical factor is to make sound judgments regarding the differences between contractors, their background, experience, and capability to stand behind their commitments, because the outcome of the program will be largely determined by these factors.

Once a commitment is made, then industry has to be held to those commitments. To do otherwise is to undermine the validity of the entire budgetary process.

A question has been raised about productivity and capacity in the defense industrial base. Productivity is a product of the private sector that actually performs the work. It is achieved through the efforts of innovative and experienced people operating modern and efficient plants and equipment. As such, it is one of the elements that the Government must buy from the private sector.

It is important to recognize the differences between the ways Government and industry approach decisions on investing in plant and equipment. When the Defense Department invests in equipment, it generally makes its decision only on the basis of a particular program.

In industry, the decision to invest is made on the basis of all the programs a company has which would benefit from the equipment. By forcing industry to make its own investments, the Defense Department would realize the advantages of wider application of more productive equipment for which the capital investment might be hard to justify on a single contract or program.

It must be kept in mind that it is price to the Government, not some particular elements of cost, that counts. Cost elements are inputs. Efforts to create incentives by allowing cost recovery for certain elements of cost will tend to increase those costs, while the price the Government pays may be unchanged or even increased. Contractor incentives should be based on quality, schedule, and price.

If programs were awarded solely on this basis, then inefficient plants and equipment would soon be phased out by industry itself. The industrial capacity is made up of all types of plants and equipment, much of it inefficient. What is important to the United States is not the capacity of the industry but its capability. And that is best measured by quality, schedule, and price, not by the mere existence of equipment and plant

space.

The question is asked about what to do with the present Government. defense plants and equipment. It should be put up for sale. If it is efficient, industry will buy it. If it is not, it should be dismantled as an unnecessary burden on defense production.

Whatever type of threat is envisioned a long war like the Vietnam conflict or a brief, intense struggle like the Mideast war-efficient producers will be indispensable if our forces are to get the quantities of defense equipment and supplies they need within the budget available. Surge capacity to meet emergencies is best achieved by multiple shift operations of an efficiently operating facility, not reactivation of an old and inefficient plant.

The disciplined and businesslike approach that I have described can control overruns, waste of defense funds, and the resulting loss in force effectiveness. But bringing this type of business discipline to the procurement system will not be easy. It is in the nature of institutions to avoid commitment. Bureaucrats tend to want to retain direction

of a project by keeping its requirements incompletely defined and subject to change. Many companies prefer to go along with them since loose arrangements present less business risk than a well-defined commitment. Only strong and uncompromising direction from the top will change this situation.

Some businessmen and investors have tended to regard defense business as risky. Properly disciplined, it represents a potentially stable marketplace, with no greater risks than many other industries experience. Defense business can and ought to be attractive to large and small companies. It is the inconsistencies and arbitrariness of the defense procurement process that make it risky.

But when it is understood that the Government stands behind its commitments and insists that industry do the same, a profound change will occur in the attitude toward defense procurement. When defense procurement is conducted according to sound business practices, the business and financial community will not be hesitant to make longterm investments.

The Nation's industrial base will recognize that serving the country's defense requirements is sound business. Boards of directors will become vitally concerned with such matters as technical risk and the resulting effect on performance, schedule, and cost commitments. Their decisions on modernizing plant and equipment will now be driven by the need to compete in terms of productivity, combined with the real discipline of having to deliver under the terms of the contract. It will be clear that they are making binding commitments in which the future of the corporation is at stake.

In international arms sales, assuring the contractual responsibility of the manufacturer is doubly important. It is necessary to avoid risks to the American taxpayer and also to avoid harming our relationship with those friendly countries that are depending upon us for their defense system.

In his arms export policy statement, the President has correctly recognized that arms advocacy is not a proper role for Government. Foreign governments should not be influenced by our Government to buy or accept a particular ship or aircraft because that particular ship or aircraft program would be benefited. Too often in the past the United States has exported its overrun programs rather than programs that might better serve the security interests of the recipient country and hence the security interests of the United States.

Military exports demand strong policy control by the Government to assure that a potential sale serves the broad foreign policy and security interests of the United States and not merely some secondary or short-term advantage.

In those cases where it is determined to be in our national interest to permit another country to purchase a category of weapon systems here, then the policy should be strictly and evenhandedly implemented. The foreign government should be allowed to choose among various appropriate systems produced by individual manufacturers.

It has clearly been the intent of Congress that financial responsibility for contractual arrangements regarding foreign military sales should be borne by the exporter and not by the Government. While the foreign military sales system of the Department of Defense may

be utilized as an administrator of contracts between foreign purchasers and industry, the Government should not be placed in the role of a negotiator of the business arrangements.

When the Government enters into such negotiations, the business agreements it makes with foreign governments take on the character of de facto treaties superseding the body of international commercial law. Such action can impose unnecessary obligations on the American Government and the taxpayers and can harm the very international relationships they were intended to strengthen.

The interests of the purchasing nation and the United States should be protected under United States and international law, not by any financial or other commitment made by the U.S. Government.

Procurement decisions, therefore, should be made by the foreign government from among various competitive alternatives on the basis of technical quality, management experience and the ability and willingness of the company to make financial commitments and stand behind them. A manufacturer that is unable to stand behind financial commitments inherent in its proposal should not be granted an export license.

Adherence to the sound business practices which have served our private sector so effectively over the years can strengthen the defense industry, increase the effectiveness of our forces and eliminate the waste of past procurement practices.

The alternative to this course of action is to face the reality that it is the taxpayer, not the private sector, that is taking the risk for production commitments. We will have lost a real opportunity for the private sector to make a major contribution to the budgetary integrity and security of our country. Thank you, Mr. Chairman.

[Prepared statement of Mr. Thomas V. Jones follows:]

PREPARED STATEMENT OF THOMAS V. JONES

Mr. Chairman and Members of the Committee: I appreciate this opportunity to present my views on defense procurement policies and the condition of the industrial base.

I have provided the Committee with a more complete statement which I would like to summarize for you this morning.

The next decade is going to place a very great burden and responsibility on the Congress, our armed forces, and on the defense industry to insure that we have maximum defense capability within the available budget, on a long term and continuing basis. If this is to be accomplished, it is absolutely essential that we have budgetary integrity and a sound, disciplined system of defense procurement. When this occurs, I believe that the private sector will be able to bring all of its strengths to bear and major improvements will result.

Clearly the defense procurement system is not working as well for our nation as it should.

The problems are complex and their solution must be dealt with against a backdrop of competing claims on the nation's resources. But one thing is clear: for weapons systems planned for inclusion in the force structure, solutions will require more accurate planning, more accurate prediction of budgetary requirements, and more clear-cut assignment of the responsibility for implementation, with all participants in the process held accountable for the results. This means we must focus on integrity in planning, in budgeting, and in implementation.

The defense budget process now requires that the Defense Department in seeking funds from Congress prepare a complete plan covering total costs for weapon systems going into force structure. Nevertheless, the fundamental problem remains that even though a plan has been made and agreed upon, there is still a record of cost overruns, reprogrammings, and changes that have a