I was down in Texas last month and I was informed by our inspector down at Houston that he had received a request to assist the Army, who was making a city by city survey of the south, including Texas, for suppliers for their tank programs, and they are actually going through the field like census people looking for plants which are capable of manufacturing highly specialized items.

Additionally, I would like to read a paper which has just been handed

to me.

Pratt & Whitney division of the United Aircraft Corp. will pay $250,000,000 this year for products from subcontractors and suppliers. This is double the amount of such purchases since the Korean War began. Ninety percent of the 5,295 companies under Pratt & Whitney's subcontracting list are classified as small business, with less than 500 employees each. These firms are located in 34 States with 2,268 of them in New England.

Mr. KOEHLER. I would like to add one thing to what you said, and I think your remarks are very appropriate. There is another side to this coin, and that is the expansion of production facilities. That leads us into the field of certificates of necessity.

I myself screen every certificate of necessity that comes through the Navy Department and, if we have existing capacity-and by that I mean existing capacity, in either large or small firms-then we should not approve certificates of necessity. We have been working along that line very carefully in order to see to it that the broadening of the base of industrial suppliers is carried on, because it is to our selfish interest to have as many sources of supply as possible which avoid concentration.

So I think that is the capital side of the procurement picture that Admiral Noble spoke about.

Representative BURTON. Your certificate of necessity carries the privilege of accelerated amortization?

Mr. KOEHLER. That is correct.

Representative BURTON. Is that certificate of necessity for increasing facilities necessary to increase their facilities or may they increase their capacity without such a certificate of necessity so long as they do not accelerate their depreciation amortization?

Mr. KOEHLER. Any corporation, I would assume, has the right to spend its own money to increase its capacity, but I am speaking specifically of the certificates of necessity under section 124 of the Revenue Act which provides for the spending of their own money, and for the amortization of the cost by means of a tax deduction over a 5-year period.

Admiral NOBLE. I would like to speak on that for just a second, in connection with private industry expanding its own capacity without a certificate of necessity. Unless it is given a priority, which normally would go with a certificate of necessity, unless it was given such a priority by the National Production Authority or the Defense Production Administration, I do not believe at the present time it would be able to put up a building, because it would not be able to get building material or machine tools or equipment without getting a priority.

Representative BURTON. The privilege of building goes automatically with the certificate, I take it then?

Mr. KIMBALL. That is correct.

Mr. KOEHLER. Yes.

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Representative BURTON. But without a certificate of necessity they would have to have the priority?

Admiral NOBLE. They would have a struggle. I would like to refer that question to Mr. Watts.

Mr. WATTS. The granting of the certificate of necessity does not necessarily guarantee them material. We expect the manufacturer, if he is not under the DO system and is now operating to get his own materials through the normal channels-when we get into the CMP he may be able to get the materials if his program is included in the controlled-materials plan. However, the point that Admiral Noble makes is correct with respect to the man who does not have a certificate of necessity. He will have a very difficult time getting authorization for the materials unless it has been screened by the services to determine that it is a necessary expansion.

Representative BURTON. We recognize that your jurisdiction is limited where you have given a time contract, but there are, I judge, ways in which you may encourage the broader distribution of these subcontracts and the use of that method of making their production. Admiral NOBLE. Yes. We have an example here in the instance of a Bureau of Ships contract clause which provides:

In presently entering into a contract we may require subcontracting to a certain extent, and we put language in the contract

Representative BURTON. You have that privilege?

Admiral NOBLE. Yes, sir. We actually have the language for it. Would you care to have that as a matter of record?

Representative BURTON. The fact is what I am interested in.
Admiral NOBLE (reading):

Effective immediately, all requests for proposals looking to a fixed-price type of contract or amendment thereto, including maximum price, flexible price, or incentive types, should include the following language: "You represent that, if awarded this contract, you will place with organizations not affiliated with you, subcontracts and purchase orders under this contract aggregating X dollars, which is X percent of your estimated cost of performing this contract, and that you estimate that at least X percent of said dollar amount will comprise such subcontract and purchase orders with small business concerns (herein considered to be any concern which, including its affiliates, employs in the aggregate fewer than 500 employees)."

Representative EVINS. Any further questions, Mr. Burton?
Representative BURTON. Not at this time.

Representative EVINS. Congressman Multer.

Representative MULTER. Continuing on that same subject which Mr. Burton has been inquiring about, I think our investigations show that Pratt & Whitney is one of those companies that has a very firm policy of using existing facilities of subcontractors rather than increasing their own facilities. I am sorry to say that we did not see much other evidence of that during the course of our investigations, and I think something should be done so as to get other contractors to do that same thing and follow that same policy. The clause you read a moment ago is all right so far as it goes, but I think you ought to go a little further. I think you ought to require these prime contractors to indicate to you what portions of the contract they will have to subcontract, because they do not have the facilities available. I think you should require them further to undertake that they will not acquire those facilities when there are equal facilities available from subcontractors.

Mr. KIMBALL. We discourage them putting more facilities in when they can get the work done on subcontracts.

Representative MULTER. I think the discouragement should take the form of a clause in the contract rather than just telling them they ought not to increase their facilities. In many instances we found that subcontractors were told, "You can have this order, but 6 months from now there will be no more orders like this because we are increasing our facilities." They can increase their facilities without getting certificates of necessity and taking advantage of the tax amortization provision which goes along with the certificate of necessity.

It is quite true that in order to put up a new building they may have to go to NPA and get a certificate of approval in order to do that, but, in most instances, unless there is someone who is going in there to NPA and saying that these facilities are available through subcontracts, the mere fact that they go in and say that they have this defense contract and need these additional facilities, means that they will get DO's from NPA.

Admiral NOBLE. Mr. Congressman, we accept the validity of your position. We think it is quite sound. We have another angle to our responsibility, though, which we cannot lose sight of. In the placement of contracts we do analyze the facilities of the prime contractor. We consult with him as to what is proper for him to put out to subcontractors and what he should make himself. Additionally, in our responsibility, we recognize the need for being able to expand existing facilities and production quickly, as quickly as possible, in case we get into an all-out war, and we have a broad program, of which this is a component part, and we do pay attention to this part. But we have a broad program in the interest of getting the material we need when we need it and not stockpiling now, but only coming up to a level, and then have a guaranteed productive capacity available so in case we do get into a shooting war, we can quickly commence manufacturing of our needs.

So we have to analyze all those factors and we do, as I pointed out previously, take into consideration the position you have enunciated. Mr. KOEHLER. I would like to add one thing in affirmation of what you have said. It really makes the problem much more acute. Ít was mentioned in Admiral Noble's statement, and it is something that many people forget, that the military dollars which are available in this period of limited mobilization are far less than what we spent in World War II-as an example, the peak dollar procurement spent for the military in World War II, if my memory serves me correctly, was around $94 billion on an annual rate. If you take into consideration the decrease in purchasing power of the dollar, I would say our spending at the present rate is possibly 20 percent of that rate, and clearly the problem becomes much more acute when you do not have the dollars to go around.

I do say we are making very sincere efforts in a wholly selfish way, because we realize, particularly if we have to go to all-out war, the value of increasing our productive capacity, and a large part of that is essentially small business.

Representative MULTER. What we are very much concerned about is that we do not doubt the sincerity of the efforts of you and your associates in the various services-what we are concerned about in

this period, however, is that, when we are only spending 20 percent of what we will probably be spending next year or what we will be spending when we reach that peak of all-out effort, in permitting big business to expand its facilities, we are going to push out of business or drive out of business the fellow who has facilities now. That means

we are not going to expand, while one company has been permitted to expand and another man who has had the facilities is out of business and you have lost those facilities. That is what we must try to stop. An expansion now in one field which also eliminates part of the facilities in the same field does not give us expansion.

I am glad to hear you gentlemen say you are considering that in your analysis and appraisal of the situation.

Now, I note that on page 6 of the admiral's statement you say you sometimes require large prime contractors to subcontract. I think if that is used in connection with this same topic we are talking about, that they be required to subcontract to small business rather than expand their facilities, that that program then will speed along and give us the assurance that we will eliminate the possibility that does exist of losing small-business facilities.

You mention on page 3 that--this is Mr. Koehler's statement—the law does permit you to-you call it subsidy and that is what it might be to a certain extent-make payments to small business in excess of what the large contractor or the big-business man may be able to do the job for.

Mr. KOEHLER. On a negotiated basis.

Representative MULTER. On the negotiated basis?

Mr. KOEHLER. That is correct.

Representative MULTER. Doesn't that also apply on the bid basis where you bid for, we will say, a million items and you get bids for several different quantities, so there will be 400,000 of the items which will go to one bidder and the other will be for a million items? Aren't you then permitted to break that up into awards even though there will be a difference in price; that is, one award for 100,000 items may be for $1 and another for 300,000 may be for 90 cents? Aren't you permitted to do that on the bid basis?

Mr. KOEHLER. Let me break it down into two essentials. On a competitive bid basis where we are dealing in large lots, let me give the Brockton Shoe case, which is the famous Navy case. There we had a requirement for 700,000 pairs of shoes. There were several bidders which could have supplied the complete requirement. Exercising the authority we had under the Armed Services Procurement Act, we decided to take a portion of that procurement and break it into smaller lots which small business could complete. Two small shoe companies in New England were awarded contracts even though slightly lower bids were received from large companies. We submitted that question to the Comptroller General, believing that under the Armed Services Procurement Act we had authority to grant price differentials in that way to small business, and the Comptroller General ruled "No," we could not do that; that, if we were on a competitive-bid basis, we had to award the contract to the lowest responsible bidder.

Representative MULTER. I think maybe we ought to send for the Comptroller General and have him explain his order.

Mr. KOEHLER. Now, I would like to go beyond that. When we get away from the formal advertisement for bids of award, of which I have been talking, and get into the negotiated field, then, from the standpoint of statutory authority, it is our position that we do have authority to grant price differentials for whatever reason we may wish to pay. We have limited ourselves to granting price differentials only in those cases where we will broaden the industrial base of suppliers.

Representative MULTER. But is that being limited to negotiated contracts, not to competitive bidders?

Mr. KOEHLER. Solely.

Representative MULTER. Why can't we apply that to competitive bidding?

Mr. KOEHLER. Because the Comptroller General has ruled that under the Armed Services Procurement Act of 1947 we do not have such authority. It is the Brockton Shoe case. We will be glad to make that citation available to you.

Representative EVINS. That was prior to the emergency, was it not, those negotiations?

Mr. KOEHLER. Yes; but that would have no effect on this ruling because we are dealing solely with competitive bid. The emergency authorizes us to procure everything on a negotiated basis.

I would like to speak to that point. When Secretary Marshall's directive came out, which, as a matter of fact, was prepared by the members of the Munitions Board, of which I am one, we put a provision in there that small business would continue to play an important part in our procurement program. I went back to the Navy and issued a directive which stated that with respect to items which small business could be expected to supply, I am referring to off-the-shelf items, that we would stick to the formal advertisement method as much as possible for price reasons and otherwise. I think that was a sound decision, gentlemen.

Representative MULTER. Do you think that in order that we can have this same practice applied to competitive bidding, we must change the law?

Mr. KOEHLER. Yes, sir.

Mr. KIMBALL. Practically, sir, in your negotiated bids, you get a price from maybe half a dozen people and then you can negotiate them down to the low price if you can have a chance to discuss their problem with them. In a bid basis it is an open and shut case and you do not have a chance to negotiate with them.

Representative MULTER. That is quite true where you can break up a contract into smaller parts, even though the Government spends a little more money, as in the Brockton case. If part of it goes to small business, we could keep those men operating. In my opinion, it was important to keep those small men operating together with the big fellow by breaking the contract up.

Mr. KIMBALL. That is what we are trying to do in broadening our base.

Representative MULTER. If we need a change in the law to accomplish that, I think we should do that.

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When you get to staple items, the general public cannot be made to understand why you must negotiate on that, why you cannot issue a specification and get all the bids in. From your angle, I think you