Senator MCINTYRE. I just want to say, too, this morning that if my questions have seemed to be a little hostile to your position, it is only because I was taught that the advocacy system is the best way to try and bring out the facts which we are after. With that

Senator BROOKE. Mr. Chairman

Senator MCINTYRE (continuing). I will be happy to yield to Senator Brooke.

Senator BROOKE (continuing). I just want to say, Senator Proxmire, as I said earlier, that it was a very constructive statement, and certainly as the committee has demonstrated, it is economy conscious, and I think the chairman is and members of the committee, by virtue of what has been by this committee relative to the last Defense budget which was presented to us.

Senator PROXMIRE. Especially this subcommittee headed by Senator McIntyre.

Senator BROOKE. That is exactly what I am referring to, Chairman McIntyre of this subcommittee, and actually I am sure we are not in disagreement. We are not against research and development. I understand you just want to be sure that it is done as economically as possible, that we get better research at less cost, and that is what we are all trying to do, so any of the questions that I have asked and that the chairman has asked are to bring out just what your views were on this particular subject. I think you have been helpful.

Senator PROXMIRE. I appreciate that very, very much, Senator Brooke, and I want to say that I think this subcommittee spoke more loudly with its action last year, than anything any of the rest of us may have said on the floor or anywhere else, to provide an economical and efficient defense operation, as well as a strong one.

Senator MCINTYRE. Senator Murphy?

Senator MURPHY. I would like to ask one question. If as the hearings proceed might there be a possibility that Senator Proxmire could come back before the committee, if the chairman finds it necessary? Senator MCINTYRE. If the Senator woud like to do this. Senator PROXMIRE. I would be very happy to.

Senator MCINTYRE. As already indicated, we have heard from DOD that they are very much opposed to Senator Proxmire's bill and to making I.R. & D. a line item. If Senator Proxmire wishes to challenge their statements after they have testified, he should be given a chance to do so.

Senator MURPHY. This is a very complicated field and there is not any question but what progress can and should be made in it. It is my concern that in our enthusiasm to achieve the goals that we are looking for, that we do not do damage in some areas that we might regret later on, and so that we keep it in balance. It think the only way we can do it on the committee, so the committee can be advocates, at long last, when the bill goes to the floor, is to have a chance to fully discuss it, fully digest it, and pry into it in great depths, because it is a complicated business, and I would hope that we will not have to run at it.

I thank the Senator very much for his interest in this. I think he has done a great service by bringing this about.

Senator PROXMIRE. Thank you.

DOLLAR VALUE OF I.R. & D. RESULTS

Senator MCINTYRE. Senator Proxmire, I cannot let you go just yet. Mr. Fine, our counsel, for the subcommittee, would like to ask one question for the record.

Mr. FINE. Sir, in connection with the measurement of benefits that would be derived from I.R. & D., and recognizing that it does not lend itself to a quantitative measurement, wouldn't you agree that it is somewhat characteristic of the same problem in contracted research and development or contracted basic research, where we cannot really measure results in terms of a value that may be related to total costs incurred?

Senator PROXMIRE. Well, my answer is there are two elements here. One is whether it is measurable, and the other is whether it is related, and I think that the related element is very important, too.

If it is neither measurable nor there is any way you can demonstrate that it is related, then it seems to me that you can make a very strong argument that it should not be paid for by the Defense Department but by the National Science Foundation. I am not sure that I understand that that is responsive to your question, but you concentrated on the measurement and I think that is not alone.

Mr. FINE. There seemed to be significant emphasis placed on the point that there is difficulty in obtaining sufficient examples of results of I.R. & D.

Senator PROXMIRE. Right.

Mr. FINE. And as a result the question arises of measuring the value of I.R. & D. against the dollars expended?

Senator PROXMIRE. Yes.

Mr. FINE. In my own narrow experience, the capability for measurement of research is a task that defies accomplishment. In terms of the results in a technical sense, I found it rather difficult to relate the discovery of a microminiaturized circuit, for example, to a value that could be related to the total defense dollars that are expended on electronic equipment which use this component. So, even in connection with quantity as well as quality, I had difficulty in understanding a basis for measurement in terms of dollars expended. I just wondered if you would comment on that?

Senator PROXMIRE. I think that is an excellent point, and it is one of the great difficulties we have, no matter how we handle this, but I think the worst way to handle it is by simply providing some kind of a formula and no determination whether this has been done for a Government purpose or not. It would seem that will always be a problem, that we would be better served if we used another system than the one we use now, and I do not see any evidence of any kind that this is really paying off for us.

Mr. FINE. Thank you.

Senator MCINTYRE. Thank you very much, Senator Proxmire, for a very helpful statement. Thank you for giving us so much of your time here this morning.

Senator PROXMIRE. I have enjoyed it very much. Thank you.

STATEMENT OF HON. ALAN CRANSTON, U.S. SENATOR FROM CALIFORNIA

Senator MCINTYRE. Our next witness is the distinguished Senator from California, Senator Cranston.

We are happy to welcome you here this morning. Your distinguished senior colleague is a member of this subcommittee, and you may proceed, Senator Cranston, in any way that you desire to present your testimony to this subcommittee.

Senator CRANSTON. Thank you very much, Mr. Chairman.

I want to thank Senator McIntyre and the committee for giving me this opportunity to testify about the very imporant matter of defense expenditures specifically about expenditures for independent research and development.

NEEDED IMPROVEMENTS

My experience as controller of the State of California gave me particular insight into the importance and the intricacies of the task of controlling public expenditures for the greatest possible benefit and least waste. My interest in making optimum use of public funds is one of the reasons, but not the only reason, that has led me to take a careful look at the independent research and development program of the Department of Defense.

I have concluded that in an era of rapid technological innovation, the independent research and development program is the most economical long-run program for guarantying the security of the United States. There are, however, substantial improvements that could be made.

Independent research and development is one component of "independent technical effort." Independent technical effort consists of: 1. Independent research and development: commonly called I.R. & D.;

2. Bid and proposal costs; and

3. Other technical effort.

Both critics and supporters of independent technical effort agree that it is difficult, and sometimes impossible, to distinguish the various component costs from one another. But this lack of definition does not make independent technical effort any less essential; it means only that some legitimate expenses are difficult to categorize. Anyone who has heard accountants argue about where and how to account for certain legitimate business expenses will sympathize with this problem.

COMPONENT COSTS

I would like to take a few minutes to define each of the component costs as best as I can.

1. I.R. & D. is defined by the Armed Services procurement regulation as "that research and development which is not sponsored by a contract, grant, or other arangement." The regulation certainly perfects the technique of circular definition, but it provides little clarification.

I.R. & D., it appears, consists of research and development undertaken by a contractor to increase his technical knowledge and capability to develop new products. Unlike conventional research and development projects, which are initiated and supervised by a buyer, I.R. & D. is initiated and primarily controlled by a contractor.

I.R. & D. maximizes the number of technological ideas pursued because no prior governmental approval is necessary before a specific research project is undertaken. The presumption is that technical progress will be fastest and most efficient when competitors are free to develop efficient and productive I.R. & D. programs.

2. Bid and proposal expenses cover the cost of submitting contract bids and contract proposals to the Government. These expenses are recoverable when contracts are not awarded, or when proposals are not accepted. It is important that they be allowed to encourage competition. Companies will be deterred from submitting bids or proposals unless they are compensated for their efforts.

3. Other Technical Effort is the most nebulous component of all. It is similar to I.R. & D. But it deals with technology that is more well defined.

The component costs of independent technical effort should be viewed as part of a single process, that of meeting defense needs in an era of rapidly developing technology.

I agree with the sugestion of the Comptroller General that no attempt be made to discriminate among the component costs in determining which of these costs the Government should allow. Such discrimination leads only to confusion and needless administrative burdens.

Currently each component cost is treated differently, I.R. & D. singled out for the most supervision, requires advance submission of brochures; technical evaluation of planned programs; advance agreements on the amount of Government reimbursement; and cost-sharing between the Government and the contractor.

Since many I.R. & D. costs legitimately can be considered as other components of independent technical effort, contractors often avoid listing these costs under I.R. & D. to escape these restrictions and redtape. Similarly, if an expense is disallowed as I.R. & D. there is a temptation to claim it as bid and proposal or other technical effort.

Much of the criticism of I.R. & D. arises from such practices, but current regulations encourage those practices. The Comptroller General's suggestion that independent technical effort be considered a single entity appears to solve the problem.

Contractors would be compensated for legitimate independent technical effort under a single set of policies and procedures. The contractor would be spared the burden of conforming to different standards and the Government would be spared needless and unproductive administrative complexity.

It is often alleged that the Government does not exert sufficient control over independent technical effort. But this allegation does not stand up to serious examination.

During the last session of Congress, the Senate demonstrated its control over I.R. & D. After considerable discussion of Senator Proxmire's amendment to the Military Appropriations Act we voted to reduce the Government's expenditure for I.R. & D. by 7 percent.

The Comptroller General has suggested that the Department of Defense make I.R. & D. a line item in its budget so Congress would be better able to limit Government participation.

Though I am an advocate of the most careful congressional monitoring of defense spending, I seriously question whether this proposal is either feasible or desirable. How can overhead be made a line item?

It would be extremely difficult, if not impossible, for the DOD to arrive at an exact figure for such costs in advance. Moreover how can DOD make a yearly line item out of expenses that have such a long gestation period?

We all want better control over independent research and development expenditures. But those expenditures should not be subject to short term political and budgetary constraints which may impair our technological superiority in the defense field.

CONGRESSIONAL CONTROLS

Next is the question of control over independent technical effort after the Congress has passed a defense budget. It is not correct to assume that further controls are not exerted.

First, even with negotiated contracts, independent technical effort is controlled by competition. The payoff for a corporation engaged in defense contracting is the award of research and development and production contracts. Independent technical effort is only a means to that end. The company with the most efficient and productive independent technical effort program will normally get the most lucrative. R. & D. and production contracts. Therefore a firm has an incentive to use independent technical effort funds for research in which the Government may be interested.

Second, the Government has various means of exerting direct control over independent technical effort. Advance agreements, cost-sharing, brochures, and technical evaluations are elaborate efforts to monitor I.R. & D. expenditures.

These controls have recently been criticized, and the criticism highlights an important question:

If Government controls are deficient or ineffective, should they be revised or abandoned altogether, in favor of giving more control to competitive forces?

I suspect that some controls should be improved and others abandoned.

DECISION ON CONTROL RETENTION

For example, advance agreements, if they are truly agreed upon in advance, benefit both the Government and the contractor. They benefit the contractor by enabling him to plan his programs more efficiently they benefit the Government by allowing it to plan its expenditures and to conform to budgetary constraints. They would be more beneficial if expanded to cover all independent technical effort costs-not only I.R. & D.

On the other hand, the brochures which corporations presently must submit describing their independent technical effort programs do little but collect dust on Pentagon shelves.