tional needs as evidenced in part by our growing developmental and demonstration-plant contract services to the Federal Water Pollution Control Agency, OSW and others.

Here is a chronological summary of the initiation, progress and status of these development efforts:

(1) In 1961 and 1962, we anticipated ultimate fall off in the needs for rocket propellant research and development, and started to explore several possibilities for alternate uses of our capabilities. We noted the embroyonic research efforts on reverse osmosis (RO) water purification techniques by Prof. Reed at the University of Florida, and subsequently by Prof. Loeb at UCLA.

While success of the early efforts was limited, they pointed to the possibility that cellulose acetate RO membranes could be developed for economical water purification processes which could help solve growing problems of water pollution and fresh water shortages. There were many unknowns and uncertainties in the situation. However, as a result of extensive rocket propellant R&D, Aerojet had some of the most advanced polymer and physical chemistry staff and facilities, along with other supporting scientific disciplines well related to the problem. Also, we had some ideas. We therefore undertook a series of companyR&D investigations at our Azusa facility where many of the key capabilities existed.

(2) The underlying objectives of these investigations were to develop further understanding of the theory, performance, materials and methods of constructing the reverse osmosis membranes-and to create, test and demonstrate equipment configurations for different potential applications.

(3) Early contract development efforts included a small investigation of an emergency desalination cell for personnel life support for Army and other uses. While further AGC service has not yet been requested, the Army is proceeding from the AGC effort to generate new RO water supply equipment. Also, there was an early attempt to apply the process to Navy needs for reprocessing photographic wash water. The technology was primitive, initial development efforts were not entirely successful, and there was only limited acceptance of the new techniques. They did, however, provide knowledge and experience useful to both us and to others interested in the processes.

(4) As the technology was advanced, largely through IR&D, to the point of more clearly demonstrating the attractive potential offered by RO processes, there was increased Government interest. In particular, the groups in the Department of Interior concerned with water resources and reclamation contracted for R&D investigation, and for test and demonstration units ranging up to 50,000 gallons per day in order to explore applicability of this process to different water purification and pollution problems in various parts of the country. Also, we have investigated for the Department of Health, Education and Welfare the applicability of our membrane technology to the artificial kidney-chronic uremia program.

(5) Aproximately 21⁄2 years ago, the needs and the technologies for RO and other water processing techniques had reached a stage which warranted our establishing these and similar activities in a distinct new Environmental Systems Division headquartered in El Monte. RO developmental services and demonstration equipment being provided under contract to the Department of Interior and others have reached an annual level of approximately $1,727,000. (This is % of the work of the division; other activities include air and water pollution control, and waste disposal systems.) One of the main current RO contract objectives is the development and use of new tubular membrane techniques, in a portable 250,000 gallon per day demonstration plant for OSW use in gathering design, operating and cost data for plants of multi-million gallon per day capacity.

(6) Accomplishments in improving membrane life and efficiency, and in demonstrating improved concepts for equipment, insure future use of RO techniques for large scale brackish water treatment facilities for desert and other areas where the available water is of poor quality-as well as for overcrowded areas where pollution control and water reclamation are important considerations. Other applications with much ultimate promise include portable water purification units, biomedical processing and the concentration of edible liquids.

While the company's internal R&D was one of the initial and essential ingredients of this entrepreneural effort, the progress and the total abalities to serve customers, derive from a combination of experience, technologies and qualified staff available throughout the company. Examples include the sophisticated chemistry techniques and engineering and test facilities and experience gained in a variety of other IR&D and contract efforts over many years.

We should also note that there is a growing number of competing private sources and techniques for water purification. Many of them were stimulated and aided in part, at least, through the progress evidenced in our efforts.

In addition to the stimulus of demonstrated technical feasibility and market interest, the transfer of knowledge to customers and competitors is promoted in many other ways. Examples are through contract R&D reports, through background or residual technology and rights needed by customers to fully enjoy the results of procured services, through professional meetings and papers, and through many less formal but none-the-less vital channels.

We view these multiple communication and development activities as part of the normal and healthy competitive efforts of private industry and technology to continually generate new and improved products and services to better meet changing needs of the country.

The enclosed chart and back up data on IR&D expenditures in relation to subsequent sales helps indicate the time delay in realizing the benefits from IR&D. Also, the enclosed partial list of key staff contributing to the RO work, and bringing previous background from other areas in the company, gives a little broader view of the capabilities coming from prior companywide R&D experience, and benefiting the current RO contract work. The additional expertise acquired by these individuals is one of the more valuable assets resulting from the reverse osmosis R&D activities.

In an effort to relate this back to areas discussed with Mr. Staats, you and others in Washington, here are a few general observations.

Of obvious importance to the company, to its customers, and to the country as a whole, is the need for private industry to maintain its ability to respond efficiently to changing national requirements and priorities-be they defense or non-defense. To meet this responsibility the following considerations are particularly important:

(a) The customers making up the bulk of defense/space business in the sixties were expected to carry their equitable share of the costs of the company's independent R&D including that activity reasonably needed in the efforts to realign company resources to meet changes in customer and market requirements. (b) Similarly, the cost of services to customers being served today should in some way cover an equitable portion of the costs of reasonable on-going IR&D— recognizing this IR&D must look beyond the current contracts and product lines in order to help the company meet the responsibility to realign its resources and services as necessary.

(c) It is both impractical and improper to use the "benefits-to-contract" criteria underlying AEC policy and pending S-3003 to ascertain costs or benefits accruing to each customer from the contractor's IR&D activity.

Admittedly, the above do not address questions of insuring cost reasonableness in the increasingly rare situations where a company's contract mix or competitive cost considerations might not provide adequate internal cost restraints.

In brief, in cost determination relationships between Government and industry, cost questions pertaining to a contractor's in-house R&D and other internal technical functions of his business (as well as concomitant questions of proprietary rights), should be addressed in terms of the responsibilities and related requirements of the contractor to provide continued efficient services-and not in terms of the scope of currently procured contract services, or in terms of the particular missions and interests of the procuring agency.

I trust this is in some way informative and useful to you and others concerned with the 12 year efforts to resolve IR&D cost questions-and that you will let us know if more information is desired.

Sincerely,

W. A. CASLER,

Assistant Director, Independent Research & Development. ec: Mr. D. Ruggiero and Mr. W. Sanchez, GAO, Los Angeles, Calif.; Dr. A. Laufer and Dr. R. Marcus, ONR, Pasadena, Calif.

GENERAL ACCOUNTING OFFICE,

To: Associate Director, DD-H. H. Rubin.

Los Angeles Regional Office,
February 20, 1970.

From: Regional Manager, Los Angeles-H. L. Krieger.
Subject: Development of reverse osmosis water purification systems under IR&D.
As requested we met with Mr. W. A. Casler, Assistant Director, IR&D, Aerojet-
General Corporation, El Monte, California, to obtain background data relative to
the above subject.

Aerojet commenced IR&D work on reverse osmosis water purification systems in 1961 incurring costs of about $26,000 on this project for the year. IR&D effort continued through 1968 which was the last year the company incurred IR&D costs for the project. Total IR&D costs incurred by the company on this project from 1961 to 1968 totaled about $1,759,000. Cost sharing agreements between DOD/NASA and the company allowed for 85 percent of the $1,759,000 to be allocated to DOD/NASA business. The company has not incurred any further IR&D costs for this project after 1968. The company started to realize sales income from this project in 1962. Sales income realized through 1969 totaled about $6,980,000 with sales income for 1970 estimated to total about $1,727,000. These sales have been for feasibility studies and pilot plant operations.

The work performed by the company in its solid propellant work under the various DOD programs of the late 1950's and early 1960's resulted in the development of its in-house capability to undertake IR&D effort on this type of project when the level of solid propellant sales began to decline.

Mr. Casler, as agreed, is furnishing you with a prepared statement which will provide background data relative to the origin, development, and current status of the project. He also stated that he would furnish you with a list of the specific contracts received by the company for its water purification systems together with a chart depicting IR&D costs and sales income for the project. He informed us that approximately 26 contracts were involved. The sales figures shown above represent the amounts used for financial reporting purposes and might not necessarily agree with the total dollar value of the contracts Mr. Casler will furnish to you.

Future business which Aerojet is striving to obtain is as follows:

1. Water purification units for off-shore oil rigs.

2. Water purification units for emergency use by the U.S. Army.

3. Construction and operation of a mobile 250,000 gallon daily capacity plant for the Office of Saline Water.

Attached are two letters written by Mr. Casler to Senator George Murphy and Dr. R. J. Marcus, Department of the Navy, Office of Naval Research, Pasadena, California. These two letters set forth certain information concerning IR&D work resulting in contracts and/or advanced capabilities and concepts useful to DOD. Of these, Mr. Casler stated that the Air Cushion Vehicles for High Speed Marine Transport have resulted in the largest single contract award to datea $15 million contract from the joint Navy/Maritime Commission for the development of a 100 ton, 80-100 knot ocean transport vehicle. Also, the letter to Dr. Marcus shows that armor development and production contracts related directly or otherwise to earlier IR&D efforts, include contracts totaling about $9,800,000 for such items as 5,000 armored helicopters and other aircraft seats, engine and personnel compartment armor for 12 Navy boats, and 3,200 sets of body armor. The amount of IR&D costs incurred by the company for the Air Cushion Vehicles and Armor projects was not ascertained as time did not permit.

We are also enclosing copies of three brochures describing the company's reverse osmosis water purification system. Two of the brochures were issued in 1966 and are so identified, while the remaining brochure is currently used by the company in its sales promotion activity.

For your information, we are enclosing the 1969 Annual Report of the company which contains a reference on page 12 to the Environmental Systems Division where the current work on the reverse osmosis water purification systems is being performed.

Mr. Casler points out in his prepared statement that other companies, competitors in particular, also eventually benefit from that IR&D work performed which results in further contractual effort as a result of technical data included in reports furnished as contract products to the agencies involved. An example is the 1968 Saline Water Conversion Report prepared by the Department of Interior. We have requested Mr. R. L. Ĥart, Civil Divisions-Interior Audit Group, to furnish you with a copy of the report. You will note that starting on page 99, reverse osmosis is discussed including the results of work performed by

various companies including Aerojet starting on page 110. This document contains further reference to Aerojet's work on reverse osmosis systems on pages 348-351 under the caption Pilot-plant Development.

During our visit to Aerojet we held discussions with Mr. Casler, Dr. Cantor, Assistant Project Director, and Mr. E. R. Watson, Project Engineer. We also visited the laboratory facility where the membrane material used in the system is manfuactured as well as the shop operation where the Membrane-lined Porous Tubes, described in the current brochure, are manufactured.

In addition, we had an opportunity to discuss the IR&D area with resident DCAA staff members. They had not taken exception in their work to the IR&D costs incurred for the reverse osmosis system nor any other specific project IR&D costs insofar as could be readily determined. Primarily, DCAA questions over the years have evolved around classification of costs between Bidding and Proposal versus IR&D, and product improvement costs being incorrectly charged to IR&D. We were advised by the DCAA staff members that the company-wide IR&D expenditures have been about $8 or $9 million annually. The current year, with planned IR&D expenditure at a level of about $6 million, is the lowest in recent years. We were also advised that between 96-98 percent of Aerojet business is from the Government.

We trust the information furnished together with the material being furnished to you by Mr. Casler will provide you with sufficient data on this matter for the upcoming hearings. If we can be of any further assistance let us know.

DISCUSSION OF EXAMPLES

Senator PROXMIRE. Let me talk about a few of the examples.

One U.S. major defense contractor prepared an analysis and commentary on a proposal prepared by a private nonprofit European organization called Eurospace. Eurospace was set up to promote space activities in Europe. The American contractor charged the cost of commenting on this proposal by a private European group to bid on proposal expense and allocated them to the U.S. Government contracts.

One company incurred I.R. & D. costs of $8.3 million in 1968 and 1969 to develop commercial programs in underwater exploration systems for oil and for a comprehensive information handling system for use in hospitals, both entirely unrelated to its defense contracts.

In this case the Government accounted for 98 percent of the company's sales. In 1969 the Government agreed to pick up $14.8 million in total I.R. & D. costs including these items and others without any sharing requirement on the part of the company.

These are clearly examples of entirely commercially oriented programs for which the Government picks up the tab.

I would think that other commercial and nondefense offshore petroleum mining companies would be outraged that the Government should pick up the commercial research costs of their competitors.

In 1969 one contractor spent $86,000 to study control problems related to the electric power industry. The project clearly was largely beneficial to the contractor's future business with private utility companies although some minor, and very general benefit might accrue to the Government.

The funds went to provide tutorial training for the compay's personnel in power systems and to monitor and review the progress of the division's personnel as computer programs were developed. The Government paid for this obvious commercial work.