the United States was for the procurement of a very large amount of 105-mm. howitzer ammunition at $48 a round, which was later found to have been an exorbitant price since in the following year similar ammunition was contracted for under regular OSP procedures at $30 a round, which was further reduced by improved productivity in fiscal 1954 to $21 a round.

Again, shortly before the Italian elections in 1953 the decision was made for political and economic reasons that $150 million of OSP contracts would be placed in Italy. The specific items and firms were to be selected by the procurement officers of the three services so that they could apply normal procurement procedures to the maximum extent possible in carrying out this mission.

Extensive criticism was leveled at certain of these contracts on the score that the bidder was able to receive the award only because of alleged subsidization by the Italian Government, which in turn was financed to a considerable extent by the United States Government. For instance, the document entitled "Foreign-Aid Program in Europe," published by the Senate Appropriations Committee in July 1953, reveals the following details of this arrangement (p. 25):

There is considerable conflict between the simple procurement objectives of Defense and MSA's efforts to bolster the economies of, and to extend dollar aid to, the individual countries. Only recently an invitation to bid for certain ammunition was offered to industrialists in the various countries of Europe, and the lower bidder was unquestionably a British manufacturer. For tactical reasons, MSA wanted to place this order in Italy, and eventually made an arrangement with an Italian industrialist to take the order because, even though he could not do it at the contract price, he was subsidized by the Italian Government for the differential. In the end the United States paid for this higher price, because while the Italian Government subsidized the manufacturer, we in turn subsidized the Italian Government. This transaction with the Italian industrialist is known to every manufacturer in Western Europe and has resulted in a great deal of ill will. Quite naturally, industrialists do not like to submit tenders and, having made the lowest bid, have the order taken away from them and given to someone else because that becomes politically expedient.

Subsequently, political and economic pressures, both from the United States side and from the NATO countries themselves, have influenced in varying but considerable degree the placing of OSP contracts. In Washington there is consultation between the interested agencies. For example, during consideration of the fiscal 1954 program, the Department of Defense requested and obtained from FOA recommendations as to the amounts of OSP contracts which might advantageously be placed in each country for economic reasons.

In the field, the Defense Representative in Paris has the responsibility of balancing the political and economic aspects of OSP against its purely military aspects and of making appropriate recommendations, either informally to the respective local procurement officers or to the Department of Defense. He in turn receives recommenda

tions from the country teams and from the local country governments. Another instance of directed procurement occurred in the spring of 1954 when, although a reputable Spanish firm was the lowest bidder for certain 80-mm. mortar ammunition, a Yugoslav firm was given the contract under strong protest from the disappointed Spanish firm. This decision was reportedly made, among other considerations, because the ammunition was destined for delivery to Yugoslavia.

Although it appears to have been customary for many such decisions to be made on an informal basis by representatives of the Department of Defense in the field, the decision to place this OSP contract in Yugoslavia was made in the Department of Defense and the directive to the field on this matter was signed by the Assistant Secretary of Defense (ISA).

These and other exceptions have come to represent a large proportion of the total program and have been based primarily on other than military reasons. As a result, a great deal of confusion and delay has resulted, in addition to widespread ill-will caused by the failure to have a larger proportion of the contracts placed with the lowest bidder in competitive public bidding.

No Formal Advertising for Bids

Department of Defense Directive No. 2125.1 dated January 8, 1955, states in paragraph III.D. that all OSP contracts will be placed by negotiated procurement. Officials in the Department of Defense have stated that the essential feature of this type of procurement is the lack of formal advertising rather than the lack of competitive bidding. They further state that formal competitive bidding could not be employed for about two-thirds of the entire $2.6 billion placed in OSP contracts to date, since they were either directed for placement in specific countries (principally France, Italy, and the United Kingdom), or were for items produced by a "sole source," or were placed on a government-to-government basis. Officials in charge of the program state that the remaining one-third of the OSP contracts in the amount of approximately $0.8 billion have been placed through a limited type of competitive bidding on the part of a number of firms selected on the basis of the procurement officer's assurance that they could perform satisfactorily.

However, criticisms have been expressed that inviting only a few selected firms to bid is a far cry from public competitive bidding. It is further claimed that this has caused a great deal of ill-will toward the United States and has held up progress toward an expansion of free enterprise, an increase of productivity, and the other economic objectives of OSP.

United States Army

About 60 percent of all OSP contracts have been let by procurement officers of the United States Army. Ordnance items, particularly ammunition, account for the vast bulk of these contracts. Over 95 percent of all OSP contracts placed by the United States Army have been in Europe, most of the remaining in Japan, and a very small amount in Formosa.

The Army Ordnance Procurement Center in Europe, which is located near Mannhein in Germany and has branch offices in each of the European countries, has placed the bulk of the Army's OSP contracts. The chiefs of these branch offices are responsible only to USAREUR Headquarters and are not members of the respective country teams, but they have in practice coordinated their procurement activities with the country teams, obtaining general advice and assistance in addition to the necessary security clearances for proposed contractors.

The following table reflects the cumulative volume of the United States Army's operations under OSP:

Cumulative Volume of United States Army's OSP Operations

NOTE. In this and in other charts to follow, the last column (expenditures) frequently exceeds the preceding column (acceptances). This is due to progress payments on partial completions. However, even though there is no "acceptance" in such cases, the item paid for becomes property of the United States Government.

Source: Special compilation prepared by the Comptroller in the Office of the Assistant Secretary of Defense (ISA).

As an illustration of some of the problems involved in the placing of OSP contracts by the United States Army, the following summary is given concerning the procurement of Centurion tanks in the United Kingdom through two contracts totaling $107.4 million. Six hundred eighteen Centurion tanks were ordered during fiscal 1953 and 170 more during 1954. The dollar value of each tank is approximately $136,000, of which $126,000 represents the cost of the tank itself and the remaining $10,000 represents the cost of the trailer and spare parts with which each tank is equipped.

When the first of these two contracts was being considered, it reportedly received strong opposition from military technicians in every

echelon of the Department of the Army, on the score that tank production lines in the United States were then slowing down because the initial and reserve United States requirements for M-47 tanks to be committed in Korea had been met, and that it would be preferable to place MDAP tank orders with American factories to keep domestic production lines going in case of recurring emergencies. The United States Army's technical experts felt that this consideration was much more important than developing an industrial mobilization base for tanks in Europe. However, after these technical and military points of view had reportedly been discussed on all levels with the Department of State and the Mutual Security Administration against the background of the pertinent political and economic factors, the Department of Defense gave instructions to place the contract for Centurion tanks in the United Kingdom.

All of the Centurion tanks ordered under the two existing contracts are earmarked for delivery to Denmark and the Netherlands. Five hundred and fifty-eight of these tanks had actually been delivered as of October 1, 1954. The other NATO countries receive M-47 tanks under MDAP, which are produced in the United States of the same model as those presently assigned to United States armored units in Korea.

United States Navy

The United States Navy has a moderate OSP program, having placed only about 18 percent of all contracts let under OSP to date. Most of its activity has been in Europe, with very small amounts being placed in Japan and Formosa. The following table reflects the volume of the United States Navy's operations under OSP:

Source: Special compilation prepared by the Comptroller in the Office of the Assistant Secretary of Defense (ISA).

There is one significant difference in OSP operations of the United States Navy from those of the other two services, namely, that its field

operations are directly supervised by the Bureau of Ships at Washington. This Bureau maintains branch offices at Rome, Lisbon, Madrid, London, and Copenhagen. Bureau representatives maintain close contact with these field offices. Emphasis is placed on letting contracts in the country which is to receive the vessel under MDAP.

During the hearings before the House Appropriations Subcommittee on the Mutual Security Act of 1954, a great deal of attention was given to the opposition of the United States shipbuilding industry to awarding such contracts abroad instead of to American shipyards. General Stewart, at that time Director of the Office of Military Assistance in the Department of Defense, had the following to say on this subject (p. 78-80 of the transcript):

The State Department passed this problem to us and we had quite a meeting, at which representatives of the yards, owners, and representatives of labor appeared in a day-long meeting with us, and they put up an excellent case, in showing that the building of these ships abroad was depriving American workmen of labor.

As a result of that meeting, we recommended, on my level, that almost exactly 50 percent of what we had intended to buy abroad in ships in 1954 be purchased in the United States. My memory on that is that it involved the sum of $27 million, and that recommendation was approved, and ships at that value which we intended originally to buy in Europe are now being bought in the United States.

The reason we did not bring the rest of the procurement in ships home here was because of the peculiar nature of the ships which made it highly desirable that they be built at the place they were going to be used.

I state that to show you that in accordance with the policy of the Secretary of Defense the effect upon American industry will be considered.

United States Air Force

The United States Air Force also has a moderate OSP program, having placed not more than 22 percent of all OSP contracts, the bulk of them in Europe and small amounts in Japan and the Philippines. The following table reflects the cumulative volume of the United States Air Force's operations under OSP:

Cumulative Volume of United States Air Force's OSP Operations

Source: Special compilation prepared by the Comptroller in the Office of the Assistant Secretary of Defense (ISA).