STATEMENT OF SENATOR HOWARD M. METZENBAUM BEFORE THE JOINT COMMITTEE ON DEFENSE PRODUCTION, SEPTEMBER, 30, 1977 Mr. METZENBAUM. Mr. Chairman, it is always a pleasure to appear before your committee. Since you entered the Senate you have been a leader in the fight against waste in defense spending. I am sure that these hearings will contribute a great deal to that effort. I am only sorry that the concern which this committee has so often demonstrated apparently is still not shared by the top levels of the Pentagon. I recently had an exchange of letters with Secretary of Defense Brown. that I will be glad to provide for the record. The letters focused on some of the problems of the defense procurement process. Dr. Brown's response indicated that the Secretary of Defense, or at least his immediate staff, does not consider Pentagon waste to be a major problem. I am particularly pleased to be here today because these hearings focus on a problem which, as a former businessman, I have been concerned about for a long time: the need for more competition in the defense industry. It is clear that the defense industry is a monopolistic one. If we look, for example, at a list of the companies receiving the largest amounts of Department of Defense procurement dollars during the 1970's, we can see that a few top contractors have dominated the industry. Eight of the top ten Department of Defense contractors for 1970 were still in the top 10 last year. Between 1970 and 1976, these top 10 received about one-third of all Department of Defense procurement dollars. A comparison of 1976's top 25 defense firms with those of 1970 shows that 19 companies have remained on top throughout the 1970's. Moreover, the top 25 firms have received almost 50 percent of all Department of Defense procurement dollars since 1970. This domination of defense procurement dollars by a few companies is especially alarming because the economic performance of these companies has been shockingly bad. Cost overruns have continued to soar in the 1970's, reaching $53 billion-not including inflation-according to the latest Department of Defense figures. There are a number of reasons for this monopoly structure, but I believe the main cause is that the Defense Department does not use enough competitive bidding. I have had some success in business, Mr. Chairman, and I know that when you are awarding a contract the way to generate competition and efficiency is to ask interested contractors for sealed bids. Then select the contractor who offers the lowest price, and hold him to the price quoted. As you well know, Mr. Chairman, this rarely occurs at the Defense Department. Only 8 percent of Department of Defense dollars a shocking low percentage-are given out through sealed bidding. Somewhat more is awarded through "competitive negotiated contracts," but fully 70 percent of Defense dollars were given out without any kind of price competition in 1976. Since the Department of Defense, the defense industry's only consumer, does not demand competition, it is no wonder that the same 25 companies get most of the procurement dollars every year. It is also not suprising that they continue to operate inefficiently. The crucial question, of course is: How do we begin to break out of this system? How can we change the monopolistic structure of the defense industry, in order ot use competition to generate efficiency? We can begin by heeding the words of Thomas V. Jones, the chairman of the board and chief executive officer of the Northrop Corp. Mr. Jones recently commented: There is no reason why the defense industry cannot be as efficient as any other sector of the economy. The Government, the Congress, the public, the investment community, and the defense industry must get rid of the notion that defense companies are somehow different--that they cannot be confined within the same standards of competitive performance by which we measure the rest of our market economy. The most important thing we can do to rid ourselves of the notion that defense companies are not suited to competition is to drastically decrease the number of contracts which are given out without sealed bids. The Defense Department, of course, should take the initiative, but, since Dr. Brown does not seem interested in increasing competition, perhaps the Congress must act. I have been preparing a bill which I believe gets at this problem. As the law now stands, the Department of Defense is required to use competitive sealed bidding, but there are 16 exemptions to this requirement which the Pentagon uses 92 percent of the time. My bill would formally eliminate these exemptions, requiring instead that the Secretary of Defense approve each exemption and submit regular reports on these exemptions to Congress. In addition, whenever a sole source contract was awarded, my legislation would require a GAO audit of the contractor selected, in order to determine whether a sole source contract was truly justified. Congress would then be able to cancel the contract if it were found that competition could have been used. Finally, my bill would require that "follow-on" contracts be awarded competitively. I plan to introduce this bill soon because I believe it would give Congress the information and powers it needs to increase the amount of competition in defense procurement. I might add that I find it particularly aggravating that the top echelon of the Defense Department has resisted competition for so long. Good business sense would indicate that increasing competition leads to more efficiency and lower prices. Moreover, this has been confirmed by every objective study which has been done on this matter. The classic work on defense procurement, "Arming America" by J. R. Fox, published in 1974, estimated that price competition caused cost decreases of 25 percent. A 1973 study prepared for the Joint Economic Committee found that switching from sole source procurement to competitive procurement generated average savings of 51.9 percent. And, a recent study in the "Anti-Trust Law and Economic Review" also found that price competition has led to average price decreases of 25 percent. If more Defense Department contracts were awarded through the use of price competition, well-managed, efficient firms would prosper, because lower costs mean higher profits. If the firms which have dominated the defense industry because they did not have to compete were forced to enter the marketplace, they would lose out to firms which had been working in a competitive environment. These new firms would begin to win contracts and the monopoly would be loosened. In closing, Mr. Chairman, I would just like to add that I find it very ironic that those of us who criticize the way our defense dollars are spent are sometimes called "radical" or "un-American." The most radical thing we are saying is also the most typically American: "Let the free enterprise system work." In response to your invitation of September 2, 1977, I have taken the liberty of preparing a brief statement Although I believe most of the information contained Again, please accept my best wishes for successful and constructive hearings. As the Joint Committee goes out of existence in the near future, I want to compliment you and your staff on the excellent work you have done in behalf of our national defense posture. encl Very truly yours, techble Thou Richard D. DeLauer SYSTEMS AND ENERGY TRW INC. ONE SPACE PARK REDONDO BEACH, CALIFORNIA 90278 STATEMENT OF DR. RICHARD D. DE LAUER EXECUTIVE VICE PRESIDENT, TRW SYSTEMS AND ENERGY TO THE JOINT COMMITTEE ON DEFENSE PRODUCTION SEPTEMBER 29, 1977 During the 1976 Summer Study of the Defense Science Board, a Task Force under my Chairmanship conducted a study of Industrial Readiness Plans and Programs. The Final Report, which is classified Secret, was issued on 15 November 1976. An Unclassified Executive Summary was prepared in April 1977, a copy of which is appended to this statement as Attachment 1. The Task Force considered the question posed by the Joint Committee on Defense Production in its 1975 Annual Report: "Is the United States economically prepared to meet a military emergency?" In particular, we attempted to answer the last of the ten questions into which this basic question was broken down: "Are current readiness plans and programs keyed to realistic threat estimates and scenarios or do they merely reflect lessons learned from World War II and the Korean War?" We determined that this question was perhaps not actually referring so much to the "lessons learned" as to whether our current readiness plans and programs are merely a reflection of an assumption that we expect to "fight World War II and the Korean War over again" in the event of a future conflict. In this context, it was the conclusion of the Task Force that our present readiness plans are keyed to a particular threat model with a good degree of preciseness. While these plans appear to be scenario-sensitive to a very high degree, we found that they are reasonably complete. The real shortcomings were found to be in the funds to implement these plans. The funding of readiness programs is generally insufficient to carry out the plans which have been developed to respond to the threat estimates and scenarios which have been issued as basic defense guidance. It should be noted that evaluation of the realism of the specified threat estimates and the dominant scenarios lay outside the charter of this Task Force. We took these estimates and the dominant scenarios |