[Senate Hearing 106-342]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 106-342


 
                     YEAR 2000 GLOBAL CORPORATIONS:
                     WILL THE BUG BITE BIG BUSINESS

=======================================================================

                                HEARING

                               before the

                        SPECIAL COMMITTEE ON THE
                      YEAR 2000 TECHNOLOGY PROBLEM
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

             Y2K IMPLICATIONS AND PROBLEMS INTERNATIONALLY

                               __________

                             JULY 22, 1999

                               __________

                  Printed for the use of the Committee


                                


 Available via the World Wide Web: http://www.access.gpo.gov/congress/senate


                      U.S. GOVERNMENT PRINTING OFFICE
 62-344 CC                   WASHINGTON : 2000
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402



                        SPECIAL COMMITTEE ON THE
                      YEAR 2000 TECHNOLOGY PROBLEM

         [Created by S. Res. 208, 105th Cong., 2d Sess. (1998)]

                   ROBERT F. BENNETT, Utah, Chairman

JON KYL, Arizona                     CHRISTOPHER J. DODD, Connecticut,
GORDON SMITH, Oregon                   Vice Chairman
SUSAN M. COLLINS, Maine              JOHN EDWARDS, North Carolina
TED STEVENS, Alaska, Ex Officio      DANIEL PATRICK MOYNIHAN, New York
                                     ROBERT C. BYRD, West Virginia, Ex 
                                     Officio

                    Robert Cresanti, Staff Director
              T.M. (Wilke) Green, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                                 ------                                

                     STATEMENT BY COMMITTEE MEMBERS

Robert F. Bennett, a U.S. Senator from Utah, Chairman, Special 
  Committee on the Year 2000 Technology Problem..................     1
Christopher J. Dodd, a U.S. Senator from Connecticut, Vice 
  Chairman, Special Committee on the Year 2000 Technology Problem     5
Gordon Smith, a U.S. Senator from Oregon.........................     3

                    CHRONOLOGICAL ORDER OF WITNESSES

Jacquelyn L. Williams-Bridgers, Inspector General of the 
  Department of State and the Broadcasting Board of Governors....     8
Ron Balls, Chairman of International Telecommunications Union 
  Year 2000 Task Force...........................................    19
Gary Beach, Publisher, CIO Magazine..............................    25
George Surdu, Director of Technical Services, Ford Motor Company.    31
Kevin Click, Director Worldwide Y2K Corporate Compliance Efforts, 
  Philip Morris Companies, Inc...................................    35
Patrick M. Roberts, Senior Vice President for Business and 
  Information Services, Ahold USA, Inc...........................    36
Charles Krichbaum, Director, Year 2000 Project Office, Praxair, 
  Inc............................................................    39
Kevin Haukebo, Y2K Program Manager, Procter & Gamble.............    41

              ALPHABETICAL LISTING AND MATERIAL SUBMITTED

Balls, Ron:
    Statement....................................................    19
    Prepared statement...........................................    49
    Responses to questions submitted by Chairman Bennett.........    69
Beach, Gary:
    Statement....................................................    25
    Prepared statement...........................................    71
    Responses to questions submitted by Chairman Bennett.........    84
Bennett, Hon. Robert F.:
    Opening statement............................................     1
    Prepared statement...........................................    86
Click, Kevin D.:
    Statement....................................................    35
    Prepared statement...........................................    99
    Responses to questions submitted by Chairman Bennett.........   104
Dodd, Hon. Christopher J.:
    Statement....................................................     5
    Prepared statement...........................................   106
Haukebo, Kevin:
    Statement....................................................    41
    Prepared statement...........................................   107
    Responses to questions submitted by Chairman Bennett.........   110
Krichbaum, Charles:
    Statement....................................................    39
    Prepared statement...........................................   112
    Responses to questions submitted by Chairman Bennett.........   114
Lugar, Hon. Richard G.: Statement................................     4
Roberts, Patrick M.:
    Statement....................................................    36
    Prepared statement...........................................   115
Smith, Hon. Gordon:
    Statement....................................................     3
    Prepared statement...........................................   120
Surdu, George:
    Statement....................................................    31
    Prepared statement...........................................   121
    Responses to questions submitted by Chairman Bennett.........   122
Williams-Bridgers, Jacquelyn L.:
    Statement....................................................     8
    Prepared statement...........................................    87
    Responses to questions submitted by Chairman Bennett.........    98

Note: Responses to questions submitted by Chairman Bennett to 
  Patrick M. Roberts were not received at the time the hearing 
  was published.

              ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

General Motors Year 2000 Statement...............................   124



     YEAR 2000 GLOBAL CORPORATIONS: WILL THE BUG BITE BIG BUSINESS

                              ----------                              


                        THURSDAY, JULY 22, 1999

                               U.S. Senate,
                 Special Committee on the Year 2000
                                        Technology Problem,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SD-192, Dirksen Senate Office Building, Hon. Robert F. 
Bennett, chairman of the committee, presiding.
    Present. Senators Bennett, Smith, Stevens, and Dodd.

  OPENING STATEMENT OF HON. ROBERT F. BENNETT, A U.S. SENATOR 
    FROM UTAH, CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000 
                       TECHNOLOGY PROBLEM

    Chairman Bennett. The committee will come to order.
    We welcome you all to today's hearing, which deals with Y2K 
implications and problems internationally. We are going to hear 
not only from the State Department but also from global 
corporations, many of whom have a better understanding of what 
is going on in some of these countries than any one else.
    The corporations that have provided us with witnesses today 
will play an instrumental role in sustaining America's economic 
strength and they have helped create a level of prosperity that 
is unrivaled in American history. The success of these 
companies is vital for our nation's continued economic growth 
on the world stage and we turn to them to ensure that adequate 
preparations are underway for the year 2000 technology problem.
    The fates of the companies are linked in some fashion to 
the ever-changing state of international affairs and locating a 
business or a subsidiary abroad means becoming vulnerable to 
potential political, economic and infrastructure disruptions in 
another country. I know that firsthand from having owned and 
operated businesses overseas and having been caught in the 
currency devaluation problems that occur there, that are 
unfamiliar to those that stay entirely within America's 
borders.
    Just as Y2K poses challenges to in our own country, 
companies overseas may be at risk of electric or 
telecommunications failures or to the snapping of critical 
distribution and supply chains that cross international 
borders. For these companies preparing for Y2K is a task that 
involves not only American know-how but also the efforts of 
overseas governments, subsidiaries, partners, vendors, 
suppliers and facility managers.
    Now, the growth of global corporations has accelerated over 
the last three decades. In 1970, just before the advent of the 
microchip some 7,000 global corporations existed and today that 
number is 38,000. It is no coincidence that the number of 
global corporations has increased with the corporate 
community's increased use of high-tech information business 
systems. You can get information and money across national 
borders now with a keystroke at literally the speed of light.
    Global corporations have always comprised an important 
thread in the complex web of global economic interdependence 
between nations. In many cases, American companies act as 
economic and cultural emissaries, expanding free trade and 
opening markets and spreading democratic values, bringing 
higher standards of living for working people across the globe.
    The Information Age presents global corporations with 
unprecedented opportunities to build new international 
partnerships that are beneficial for the United States and its 
economic partners but the same high-tech systems that benefit 
many companies also contain inherent weaknesses. Instantaneous 
communications and just-in-time inventory, manufacturing and 
transportation systems are all vulnerable to the Y2K problem.
    Assessments of the Y2K preparedness of the international 
community are numerous and they vary greatly, demonstrating the 
wide range of uncertainty that exists globally. For instance, 
the Global 2000 Coordinating Group, which is comprised of the 
various members of the global financial community, who have 
joined forces in an effort to address the Year 2000 challenge 
have developed the assessment that is contained in the chart 
that we see. And those who have seen earlier charts will see 
that the number of countries that used to be all red are now 
fortunately green and yellow and there are a few places that 
used to be green that are now yellow that gives you some 
concern.
    I am interested that the United States, which used to be 
considered all green, now has three yellow areas in it. I do 
not know quite what has caused that but that demonstrates the 
fluctuating nature of this one group's area of evaluation. 
There is only one country there that is red all the way across 
and those of you who cannot see it and squint, I will save you 
the responsibility of trying to get up close to the chart, that 
is Russia. China used to be given the same all red evaluation 
but in the latest update they have changed China to a 
combination of amber and green.
    Well, because of the uncertainties of these evaluations, 
major shareholders in the global economy must assess their 
options and establish realistic and practiced Y2K contingency 
and business continuity plans. In many cases, those continuity 
plans are as important as anything else. The clock says 162 
days, 13 hours, 49 minutes and 31 seconds. So, that ticks off 
at every hearing we have and demonstrates there is much work to 
do.
    I am sorry that I cannot stay for the entire hearing but 
Senator Smith, who has the responsibility within the committee 
for examining the state of readiness in the business community, 
is going to serve as the chairman and I am very grateful to him 
for his willingness to do that and the expertise that he brings 
as a businessman to understanding all of this.
    The companies that are represented here today have 
exemplary Y2K programs. They have established themselves as 
leaders in this field and the committee is grateful to the 
witnesses and to their companies in their willingness to 
address the problem.
    We had one company that we were expecting to hear from. 
Unfortunately they have had scheduling problems and will be 
unable to testify in person. That is McDonald's. People perhaps 
do not realize the degree to which McDonald's operates 
internationally. They have 24,500 restaurants in 115 countries. 
And they were unable to get a witness at a proper level to 
appear before us today but they have offered to testify at a 
future date and we look forward to receiving their testimony, 
as well.
    With that, I am happy to turn the gavel and the hearing 
over to Senator Smith who will conduct today's hearing.
    [The prepared statement of Chairman Bennett can be found in 
the appendix.]
    Thank you.

 STATEMENT OF SENATOR GORDON SMITH, A U.S. SENATOR FROM OREGON

    Senator Smith [presiding.] Thank you, Mr. Chairman.
    Good morning to all of you and I welcome you as well to 
today's hearing on the Year 2000 challenges facing our global 
corporations.
    As one who has engaged in international commerce I do 
understand the impact that our international economy has on our 
national boundaries. Today very few countries are economically 
self-sufficient without the presence of global corporations. 
Global corporations are among the world's biggest economic 
institutions. A rough estimate suggests that the 300 largest 
global corporations own and control at least one-quarter of the 
entire world's productive assets.
    Global corporations' total annual sales are comparable to 
or greater than the yearly gross domestic product of most 
countries. Though based predominantly in Western Europe, North 
America, and Japan, global corporations' operations span the 
globe. Global corporations face many of the same issues as 
domestic companies, such as maximizing profits, meeting 
customer demands and adapting to technological change.
    Global corporations must also stay current with trends and 
events in the various countries where they operate. All nations 
are tied into a global economic interdependence. International 
trade consists of a broad array of commercial interests and 
relationships that involve most products and service sectors.
    These, in turn, rely on a global web of critical services. 
Disruptions in the relationship among suppliers and customers 
abroad can seriously affect the well-being of individual 
companies, specific industry sectors, and international 
economies, as well.
    As our committee has examined in the past, many important 
components of the international trade system are highly 
computerized, interdependent and very sensitive to the Y2K-
date-related changes. The most important components of the 
infrastructure are energy production and distribution 
facilities, transportation modes, communication channels, and 
financial networks. Breakdowns in any part of the trade support 
structure could slow or halt shipments of key components needed 
to keep factories working, hospitals functioning, food in a 
continuous supply and people employed.
    As of today there are only 162 days remaining until January 
1, 2000, as the chairman has noted. With this in mind, I want 
to stress the impeachable of ensuring the participation of 
executives at all levels of business and government in planning 
for such an event. This problem will not simply go away. Each 
of us must do our part to make certain that the Y2K problem is 
adequately addressed.
    As we work together I'm sure that we will develop a greater 
understanding of this problem and forge effective solutions. It 
is our cooperation which will bring us together and allow us to 
reach our final goal. I would like to welcome all of the 
witnesses who are before us today.
    We are particularly pleased to have representatives from 
Fortune 100 companies who are household names to all of us. 
Your willingness to step forward in this forum to testify on 
this critical issue affecting your business and the global 
economy is very commendable and we thank you for that.
    I am very pleased to be joined by Senator Richard Lugar 
from Indiana and the vice chairman of this committee, Senator 
Dodd of Connecticut.
    Senator Dodd, I have just given an opening statement. 
Senator Bennett has before he departed.
    Vice Chairman Dodd. Well, I will just take a minute or so, 
if I can. Thank you very much. Have you already had an opening 
statement?
    Senator Lugar. No.
    Vice Chairman Dodd. Why do you not go ahead. No, no, please 
do, and then I will collect myself here. I just walked in the 
door. I apologize.
    [The prepared statement of Senator Smith can be found in 
the appendix.]

  STATEMENT OF SENATOR RICHARD G. LUGAR, A U.S. SENATOR FROM 
                            INDIANA

    Senator Lugar. Well, let me just express appreciation to 
Chairman Bennett and to you, Chairman Smith and to Vice 
Chairman Dodd. As I have read the testimony it appears once 
again that the hearing is timely, that the groups that are 
coming before us today are extremely important in the solution 
but, that as is often the case, many are aware of the problem 
and do not want to alarm either their clients, their customers, 
their government or elsewhere. The fact is that all of us are 
still groping with uncertainty and hoping that the proper 
connections are made. But certainly the consequences for the 
assets, the sales, the jobs that are involved today are very, 
very substantial and much, because of the nature of this 
hearing, is not dependent upon things that we do in this 
country alone.
    And, so, at least the profile of the hearing to indicate 
the importance of this to the American Government as well as to 
American corporations and their multinational aspects is 
extremely important. Now, we always learn a great deal from the 
hearings, but I am hopeful that the focal point of the hearing 
will simply be once again to raise the fact that this is 
important.
    What we found in the hearing of the committee last week at 
another end of the spectrum with State and local governments is 
that many local governments have not yet begun to prepare. Many 
of our constituents of those local governments are not 
convinced that there is a problem. That will not be the case in 
the hearing today but it is a fact that people have varying 
degrees of seeing that this is a problem, enormous ranges of 
expenditures, which may indicate how seriously they think the 
problem is being met or that they should meet it, and at some 
point there will be a reckoning.
    I made the point last week as a former mayor and local 
government official my guess is a good number of mayors are 
going to be surrounded by their constituents and they will be 
unhappy, because at the local level people take systemic 
failure very poorly, and hold somebody responsible. My guess is 
that will occur with major United States corporations that as 
sales fall off, as people cannot be found, as the distributions 
that are unforetold occur, that this will have ramifications 
for people and responsibility as well as for jobs.
    So, I appreciate very much being a part of the hearing and 
your calling, Mr. Chairman.
    Senator Smith. Thank you very much, Senator Lugar.

  STATEMENT OF HON. CHRISTOPHER J. DODD, A U.S. SENATOR FROM 
CONNECTICUT, VICE CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000 
                       TECHNOLOGY PROBLEM

    Vice Chairman Dodd. Thank you very much, Mr. Chairman.
    In the last couple of days I have spent a lot of time with 
my colleague from Indiana. We appeared yesterday before the 
Senate Foreign Relations Committee talking about reforms of the 
sanctions regimes, unilateral sanctions and the like, and the 
deleterious effect that the sanctions regime can have on the 
United States and on businesses, industries, particularly the 
agricultural sector of our society, which I know both of my 
colleagues, the chairman here this morning, Senator Smith, who 
and Senator Lugar have a particularly high awareness of and are 
sensitive to. In a sense those are situations where by our 
decisions we create dislocation. Because we impose sanctions, 
sometimes for good reason, but not fully appreciated in 
understanding the implications and ramifications.
    What we are talking about here, in a sense, is an accident 
that I suppose could have been avoided had people thought about 
more intensely about 10 years ago and that is this Y2K bug 
issue. But in a sense, failure to address the question could 
have the similar kind of repercussions internationally.
    As Senator Lugar has pointed out, we had a very good 
hearing last week talking about the impact of the Y2K issue at 
the local level, the small cities and towns, large cities in 
this country and elsewhere, where the effects of a failure will 
be most directly and immediately felt by people across the 
country. If their 911 number does not work, the water system 
does not work, the sewage system does not work, the traffic 
lights do not work, that is where you are going to feel it 
right away.
    To an extent, this morning we are going in the other end of 
the spectrum from a small town in Indiana, Oregon or 
Connecticut, to a large corporation that does business all over 
the world. And to that extent, I think this is a very 
worthwhile hearing and I am very interested in hearing what our 
witnesses have to say because of the responsibility, as Senator 
Lugar has just pointed out and I am sure Senator Smith did as 
well, of these large companies with incredible capital 
hardware, real estate, cash, to expand and maintain a presence 
in multiple nations all across the globe, have a heightened 
degree of responsibility of addressing this issue.
    There is a significant potential, obviously, for cascading 
failures. When you talk about the larger the entity is, a large 
utility, obviously, can have a profound effect. Well, certainly 
in a global corporation that can be the case as well.
    Imagine, if you would, a multi-million dollar holding 
company that manages the supervisory operations of multiple 
business entities around the world. Think of the ramifications 
if a business like this falls victim to an internal problem 
which from the top down creates a spiraling deluge of secondary 
problems. The cumulative effect would be overwhelming and that 
is precisely why we decided to hold this hearing this morning.
    We are interested in learning where Y2K problems may be 
manifested and to what extent these corporations have 
inoculated themselves against Y2K malfunctions. The 
corporations are among the world's biggest economic 
institutions. A rough estimate suggests that 300, the 300 
largest global corporations own or control at least one-quarter 
of the entire world's productive assets. It is a stunning 
statistic, 300 of the largest global corporations.
    Though based predominantly in Western Europe, North America 
and Japan, global corporations span the entire earth and 
account for sales revenues that are comparable to or greater 
than the GDP of more than 50 percent of the world's nations.
    Last year revenues derived from goods and services sold 
outside the United States by the top 100 multinationals 
increased by 5 percent to $958 billion, while overall revenues 
totaled $2.5 trillion.
    Today few, if any, countries are economically self-
sufficient. Everyone is shipping parts to everyone else. 
Microprocessors built in Arizona or California are shipped to 
Hong Kong for installation in a computer system that manages 
point-of-purchase operations in a manufacturing company in 
Buenos Aires.
    The ever decreasing costs of communications, combined with 
an ease of transportation has encouraged global corporations to 
conduct business with organizations in other countries as 
easily as one farmer traded his produce for goods in town at 
the beginning of this century.
    Each of the largest global corporations utilizes thousands 
of critical suppliers, many of whom are located 
internationally. As a result, the global corporation must 
ascertain the Y2K compliant status of each of its critical 
suppliers to ensure that day-to-day operations are maintained. 
This can be a daunting task and I am sure it has been, as we 
will hear.
    The interconnectivity of any business that utilizes 
computer systems, whether internally or via many relationships 
that are maintained among business entities, is where the real 
risk lies. Interdependencies exist on so many levels that it is 
almost impossible to tell where or when problems in one area 
could surface in another.
    Global corporations, because of the international 
relationships they must maintain, are expressly threatened by a 
date-related computer malfunction. The very nature of these 
organizations, with their myriad interdependencies among 
suppliers, shipping organizations, ports, financial 
institutions, manufacturers, leaves them particularly 
vulnerable, in my view, relative to smaller enterprises which 
maintain few business relationships.
    In addition, the international trading system, with its 
complex web of distributors, customers and transportation 
links, is supported by a critical infrastructure of products 
and services. The most important components of the 
infrastructure are energy production and distribution, 
facilities, transportation modes, communications channels, and 
banking institutions. These sectors are highly computerized and 
interdependent as well and are particularly sensitive to dates 
for the smooth exchange of goods and services.
    These characteristics render them especially susceptible to 
Y2K-related problems. Breakdowns in any part of the trade 
support structure could slow or halt shipments of key 
components needed to keep factories and industries working, 
hospitals functioning, food in continuous supply and people 
employed.
    So, Mr. Chairman, again, this is a very worthwhile hearing 
this morning. I am very, very interested in hearing where our 
larger corporations think we are. Tomorrow I will be 
participating, along with Senator Stevens and Senator Byrd, at 
a conference in West Virginia, an intraparliamentary meeting 
with our counterparts in Great Britain for 2 days. And I have 
been asked, in fact, to lead a panel on the Y2K issue and, so, 
I will be very interested in hearing this morning what people 
have to say to share with a critical ally of ours and a major 
partner in the G-8 where they think things are. And, obviously, 
the information you share with me this morning could be 
valuable.
    I am particularly pleased to recognize Mr. Krichbaum of 
Connecticut, my constituent, who is here with us who is the 
Director of the Year 2000 Project for Praxair, Incorporated, in 
Danbury, Connecticut, which is the largest producer of 
industrial gases and maintains a market presence in more than 
40 countries. And I am pleased to have him before the committee 
on a later panel.
    Thank you, Mr. Chairman.
    [The prepared statement of Vice Chairman Dodd can be found 
in the appendix.]
    Senator Smith. Thank you very much, Senator Dodd.
    Our first panel will consist of Ms. Jacquelyn Williams-
Bridgers. . She has been before us before and her testimony was 
very valuable then and so much so, we have asked her to come 
back and speak to this particular aspect of the Y2K problem.
    Welcome.

STATEMENT OF JACQUELYN L. WILLIAMS-BRIDGERS, INSPECTOR GENERAL 
   OF THE DEPARTMENT OF STATE, AND THE BROADCASTING BOARD OF 
                           GOVERNORS

    Ms. Williams-Bridgers. Thank you very much, Senator Smith, 
Senator Lugar, Senator Dodd. I thank you again for the 
opportunity to come before this committee on global readiness 
for millennium change. International trade, with its 
interdependent web of suppliers, distributors, service 
providers, and customers, relies on an efficient interface of 
infrastructure components such as financial organizations, 
telecommunications networks, transportation systems and energy 
supplies, just as Senator Dodd has articulated. Any disruptions 
in this infrastructure and connections between suppliers and 
customers will affect the vitality of the international trade 
system, as well as national and regional economies around the 
globe.
    At the March 5 hearing of this committee on international 
Y2K issues, I provided an overview of global Y2K readiness. My 
message to the committee at that time was decidedly mixed. 
Industrialized nations were well ahead of the developing world, 
however, some were at risk of having Y2K-related failures 
because they got a late start at the national leadership levels 
and because they were heavily reliant on computer technology in 
key sectors.
    Developing countries were generally lagging behind and were 
struggling to find the technical and financial resources to 
attend to Y2K problems. Former Eastern bloc countries were late 
in getting started as well and were generally unable to 
articulate to us where they stood in terms of Y2K remediation.
    Today, with less than 6 months to go before the date 
change, my message is still quite mixed but much more 
optimistic. Approximately one-half of the 161 countries 
assessed have a medium or high risk of having Y2K-related 
failures in their telecommunications, energy and transportation 
sectors. Industrialized countries are generally at low risk of 
having Y2K infrastructure failures, particularly in the finance 
sector.
    Approximately two-thirds of the countries in the developing 
world have a medium or high risk of experiencing Y2K-related 
failures in the telecommunications, transportation and/or 
energy sectors. Similarly, key sectors in countries that 
comprise the newly independent states and the former Eastern 
Bloc countries have a relatively high probability of Y2K 
failure.
    These assessments suggest that the risk of disruption will 
likely extend to the international trade arena, where a 
prolonged breakdown in any part of the supply chain would have 
a serious impact on the U.S. and world economies. In light of 
all of this, the challenge now facing the United States is to 
encourage and facilitate contingency planning by individual 
countries, by regional partnerships, and through international 
organizations, such as the U.N.
    The State Department has implemented measures to assess Y2K 
readiness of all countries where the U.S. has a diplomatic 
presence. Efforts are underway to ensure that such information 
will be disseminated to Americans traveling, working and 
residing abroad. Nearly all embassies have completed their host 
country assessments and developed contingency plans for embassy 
operations and delivery of American citizen services.
    Next month, the Department plans to notify host country 
governments of our concerns about Y2K problems in-country and 
in September, the Department plans to begin issuing Y2K 
notifications to the American public. Over the past 2 months, 
my office has continued our direct engagement with host country 
government representatives and private sector representatives 
in-country on international Y2K issues. We have also analyzed 
161 host country infrastructure assessments submitted by our 
embassies.
    I brought along today certain charts to demonstrate where 
we have determined that there may be varying risks of computer 
systems failure in five key infrastructure sectors that will 
affect international trade, as well as all other aspects of 
life. Our analysis reflects the status of 39 industrialized 
nations, 24 countries in the former Eastern bloc and the newly 
independent States, and 98 countries in the developing world.
    [The charts referred to can be found in the appendix.]
    Ms. Williams-Bridgers. Please direct your attention to 
chart one. In our charts blue indicates the number of countries 
that have a low-risk of failure for a particular sector; yellow 
indicates a medium risk and red is high-risk. So, in our charts 
the blue is the good area, that is where you want to be.
    Worldwide the finance sector is at a lower risk of Y2K 
failure than telecommunications, transportation, energy and 
water. About two-thirds of the 161 countries assessed have a 
low-risk of failure in their finance and waste-water sectors. 
The finance sector is particularly vulnerable because of its 
reliance on energy and telecommunications sectors where, in 
more countries than not, there is a medium-or-high-risk of 
failure.
    Chart two shows industrialized countries. They generally 
have a low risk of Y2K-related failures, particularly in the 
finance sector. About one-third of these countries were 
reported to be at medium risk of failure in the transportation 
sector with nearly as many countries facing a comparable risk 
of failure in their energy and water sectors.
    The U.S. Department of Commerce identifies Japan as the 
largest supplier of U.S. professional and technical, scientific 
equipment and machine tools, and the third largest export 
market for U.S. goods. Although Japanese officials have 
acknowledged to us that they are confident to us that all 
critical sectors will be Y2K compliant by the end of the year, 
they are concerned that their late start may hamper their 
ability to thoroughly address the Y2K problem. However, we were 
quite gratified to find that the Japanese had been working 
quietly toward compliance to a much greater extent than had 
been reported in the popular press, and that they were 
providing more information in English.
    Korea is the home of one of the world's busiest airports 
and, thus, a critical link in the international trading system. 
With the exceptions of banking and telecommunications, the 
public and private sectors in Korea got off to a very late 
start in addressing Y2K. Although both the government and the 
private sector organizations are reporting remarkable progress 
in remediating and testing their systems, we are concerned that 
their late start and the economic recession may hinder their 
ability to do a thorough job of testing and remediation.
    Taiwan is one of the world's largest suppliers of 
information technology and telecommunications equipment. 
Taiwanese authorities and large business enterprises have made 
a great deal of progress in addressing Y2K. During our visit to 
Taipei we were told that key parts of the infrastructure 
appeared to be in compliance or close to it. However, Y2K 
readiness of small-and-medium-sized companies in Taiwan as well 
as small medical facilities remains a big question for us.
    In chart three, we are showing that there is a much higher 
risk of Y2K-related failures in developing countries. Over one-
half of developing countries have a medium or high risk of Y2K-
related failure in telecommunications, transportation, and/or 
energy sectors. However, a relatively low level of 
computerization in key sectors of the developing world may 
reduce the risk of prolonged infrastructure failure, given that 
these countries will probably revert to manual operations.
    Some issues facing the developing countries: India reports 
that Y2K readiness in the last 6 months has made substantial 
progress, especially in banking, finance, civil aviation, and 
telecommunications. But nowhere is the Y2K process complete in 
India, and contingency planning has barely begun.
    In Vietnam, there is a very low-level of computer use and a 
relatively low threat of Y2K failure. It was difficult to 
obtain information from Vietnam as the government keeps the 
information very close.
    Our last chart shows the least amount of blue. We found 
that more than one-half of the 24 countries including Russia 
and the former Eastern Bloc, face a significant risk of Y2K 
failure in almost every sector. In Russia, the nuclear sector 
reports that all safety systems are Y2K compliant and 
provisions are being made to ensure that backup power will be 
available. Plant computer systems may have undiagnosed problems 
that could force a shutdown of their nuclear reactors. But we 
expect safety systems may work as needed.
    The picture I presented here suggests that the global 
economy is likely to experience some Y2K failures in every 
sector, every country, every region. As such, Y2K-related 
disruptions in the international flow of goods and services are 
likely to be affected but no one knows exactly when, where and 
to what extent such disruptions will occur.
    A leadership role by the Department of State to facilitate 
contingency planning is much needed. A lot of work is underway 
around the world developing contingency plans for continued 
functioning of governments, of infrastructures, of businesses, 
and supporting organizations within individual countries. 
However, little is being done to consider the potential supply 
chain disruptions around the globe and how they should be 
handled.
    With assistance from other Federal agencies, the Department 
of State may be able to leverage the efforts of international 
organizations that already have active Y2K outreach programs by 
promoting a global approach to Y2K contingency planning.
    At this stage, it would be prudent and realistic to 
recognize that Y2K-related failures are inevitable both here 
and abroad. As such, the efforts of the Department of State and 
other international organizations will be instrumental in 
minimizing the impact that Y2K may have on the global 
community.
    This concludes my short statement.
    Thank you very much for allowing me the extra time. I would 
be pleased to answer any questions that you or members of the 
committee may have.
    [The prepared statement of Ms. Williams-Bridgers can be 
found in the appendix.]
    Senator Smith. Thank you very much. We are very pleased to 
be joined by Chairman Stevens and Senator Stevens, if you have 
any opening comments or----
    Senator Stevens. No. I have got a bill on the floor, I just 
dropped by to see how things were going.
    Thank you very much, Mr. Chairman.
    Senator Smith. Very good.
    You mentioned that Vietnam is not being forthcoming with 
information. Are there other countries that are just not taking 
this seriously or not participating or do not take seriously 
the outreach we are trying to provide to other countries?
    Ms. Williams-Bridgers. I think there are more countries 
asking for outreach than we would be able to realistically 
extend in terms of technical assistance, financial assistance, 
and the like. I think increasingly national governments are 
recognizing the need to pay attention at a national level, in a 
very organized fashion to address Y2K.
    Once you get below the national levels of government, and 
move into local and regional sectors, I think that is where we 
need to begin focusing our attention to ensure that 
organizations operating at the local and regional level are 
paying adequate amounts of attention.
    Senator Smith. You testify as to the readiness of ports and 
shipping interests. And I wonder if you can speak to the Panama 
Canal and what is being done there to facilitate Y2K readiness?
    Ms. Williams-Bridgers. Sure.
    When we visited the Panama Canal in September 1998, we were 
told by Panama Canal officials that they would probably shut 
down the canal in anticipation of potential Y2K-related systems 
failure by ships passing through until officials received 
certifications from the ships that they were Y2K compliant. 
This will reduce the chance that ship in the lock would disrupt 
the flow of the other ships.
    However, in April of this year, the canal officials we are 
told advised that they had issued a message to all shipping 
agents, operators and owners notifying them that prior to their 
entry into the canal they must submit documentation as to their 
Y2K compliance. Therefore, the canal officials will have some 
assurance that there will not be a disruption of the flow of 
traffic through the canal.
    Senator Smith. Senator Dodd?
    Vice Chairman Dodd. Thank you.
    Thank you very much.
    A couple of things. One, I noticed that China is not on the 
list here, and nor is it on the Gartner Group list and when you 
take China and India, Malaysia, you start getting about three-
quarters of the world's population and if you look at--I am 
sorry, China is on the Gartner Group, I apologize. Well, it is 
not on yours, though. Can you share with us what your 
assessment on China?
    Ms. Williams-Bridgers. Our team has not been to China yet 
and that is why at this point in time we did not include China 
in our testimony. We anticipate going to China in the near 
future. Our trip was delayed by recent political events with 
China; however, we anticipate going within the next 2 months. 
Our embassies have begun collecting assessments but our 
methodology has been to look at the embassy assessments of host 
country government readiness and also to have conversations 
directly with host country governments and business 
representatives so that we can get a more comprehensive sense 
of the readiness of the country.
    Vice Chairman Dodd. China--I missed it--but it is number 37 
on that issue. You, obviously, cannot see it from where you 
are. But shows that they have a color-coded system of showing 
green if you are in good shape, amber or yellow is a call that 
indicates that improvement needed and the adequacy of current 
public information and so forth. It is not bad but it is still 
short with 162 days to go. Red shows you have got some real 
problems. Black indicates we do not have any information. So, 
China is all yellow and red. It has got one sector in red, the 
energy sector.
    Under your charts, well, under this chart, as well, 
sticking with the Gartner Group for a minute, they have got 
Malaysia is in pretty bad shape, according to the Gartner Group 
as they look at it. And you go down the list here. Some of them 
are worse. Russia, of course, is in very bad shape as they 
indicate it and show it on their list.
    One of the issues that gets raised a lot is the independent 
review. To what extent did your assessment rely on government 
officials sort of reporting this or did you rely on any outside 
assessment of these assessments being made?
    My experience, having been in several of these countries, 
is that there is very little independent review. They are 
drawing conclusions from people within their own departments, 
and no one wants to pass along bad information so you get a 
pretty good report at the top and no outside group comes in and 
makes an assessment.
    What did you find?
    Ms. Williams-Bridgers. Your conclusions are aligned with 
our findings. Our site visits generally included where we have 
visited countries we have not only met with host country 
government officials, but we have also met with business 
representatives. We have read open source materials. We have 
read the media. As a standard practice we have met with 
American Chambers of Commerce there and here before we leave. 
So, we try and get as much information from as many different 
sources as possible.
    Senator Dodd, I would like to make another point about the 
differences in the risk assessments of Gartner Group, Global 
2000 and my office. Our assessments are a little more 
optimistic than both Gartner Group and Global 2000. However, I 
think what we are saying is quite consistent, simply stating 
that we cannot rest on our laurels now.
    If you were to use a rating system of pass-fail instead of 
a rating system of medium or high risk, your systems are either 
compliant and they will be functioning after January 1 and you 
pass or they are not compliant. If you have no assurance 
through testing, or through completion of all the remediation 
phases, then you have to work with a level of uncertainty.
    I think that both Global 2000 and the Gartner Group would 
agree that it is prudent, and appropriate for us to focus our 
attention on contingency planning in those areas where we 
anticipate that Y2K testing and remediation will not be 
completed in a timely fashion to give us the types of 
assurances that businesses will be able to continue, that 
governments will be able to continue to function and that life-
support systems will continue to operate after January 1.
    Vice Chairman Dodd. Did you use any outside consultancies 
in your assessments or was it all done internally?
    Ms. Williams-Bridgers. All of our host country government 
assessments were done with internal staff.
    Vice Chairman Dodd. Two more quick questions, if I can.
    One has to do with the European Union. In Europe, there is 
no, as I understand it--you correct me if I am wrong--but based 
on my conversations in Europe on Y2K is it is done country-by-
country.
    Vice Chairman Dodd. The European Union, itself, has not 
taken on the responsibility of trying to have some sort of a 
Union approach to the Y2K issue. So, it is being left to each 
country to do its own remediation and contingency planning and 
the like. And, yet, obviously, there is a lot of 
interdependency there.
    What is your assessment of that?
    Ms. Williams-Bridgers. I am not familiar with efforts by 
the European Union specifically but what we have seen is not as 
much regional cooperation, not as much of the international 
cooperation as we think is necessary in order to provide 
assurances that the interdependencies that you refer to are 
adequately addressed.
    That is why we are calling for the Department of State to 
work with international organizations that have already engaged 
on a regional basis across national boundaries to facilitate 
that type of discussion.
    Vice Chairman Dodd. Has there been any regional assessment 
in Europe that you know of? I know each country is looking at 
it, but I mean has there been anyone that has looked at this 
and said that despite France's assessment that it is in very 
good shape, the Gartner Group has it in good shape, for 
instance, that the utility structure, the grids and not every 
country is in the same, even by its own assessment, in the same 
shape, that from a regional perspective among the highly, at 
least the most highly industrialized countries is a problem, do 
you know?
    Ms. Williams-Bridgers. I do not know if there has been a 
regional assessment conducted by the European Union. I do know 
that within certain professional organizations, such as the 
International Maritime Organizations, which have memberships 
that represent owners and operators, that represent 
underwriters for hull insurance companies that provide 
institute for hulls and machinery, and for insurers of cargo 
and cargo containers that are in ports and terminals and the 
like, that they have done those type of international 
assessments but I am not certain of the European Union.
    Vice Chairman Dodd. Last, I just am curious. In the less-
developed countries one of the States, someone said about 
Russia--I do not have this quite right--but that you should not 
worry too much because it was never a question of them being, 
having reached a level of sophistication and, so, the Y2K issue 
is less of a problem. Now, I think that is somewhat facetious 
because, obviously, they were.
    But as soon as you start talking in Africa, for instance, I 
saw a stunning statistic yesterday. The city of New York has 7 
to 8 million people, and it consumes more energy on an annual 
basis than the 780 million people do in all of the continent of 
Africa in a year.
    To what extent does the lack of development in these 
countries, in the underdeveloped countries, pose less of a 
problem, to the extent they are still using pre-computer 
methods for moving goods and services and the like.
    Ms. Williams-Bridgers. Certainly in those countries which 
are less dependent or have only recently become acquainted with 
the use of computers their risk of Y2K-related failures is much 
less because they can easily revert back to manual operations.
    However, in Africa, our concern there is that 76 percent of 
the sectors are facing a medium-to-high-risk of Y2K-related 
failures. Seventy-six percent of the energy sector and all 
other sectors depend on energy. There is a huge humanitarian 
concern, also, for aviation and for those interfaces that the 
American traveling public or anyone else traveling through 
Africa, South Africa, Johannesburg, is a major hub for air 
traffic, then we have concerns about their inability or the 
status of their compliance for Y2K.
    Vice Chairman Dodd. Very good.
    Thank you, Mr. Chairman.
    Senator Smith. Thank you.
    Senator Lugar?
    Senator Lugar. Thank you very much, Chairman Smith.
    Ms. Bridgers, in your statement you discuss on page 11 our 
Y2K assessment suggests that the global community is likely to 
experience some Y2K-related failures in every sector, country 
and region. That is an awesome statement on the face of it. 
Every, single sector, country and region, some degree of 
failure.
    So, the logical point then is, as you mentioned, work is 
underway around the world developing contingency plans to 
ensure continued functioning of governments, quite apart from 
businesses and so forth.
    It just simply strikes me that--and I do not doubt that 
there are lots of contingency planners doing this--but there 
are several levels of this. For example, with our own 
government maintaining some type of communications with our 
embassies or with our people that is not for certain. That, at 
least, is a very specific way in which the State Department can 
try to work out these levels, backups, physically how people 
move and see each other if they cannot communicate 
electronically or telephonically.
    But the reason I raise the question in this way is that it 
appears, at least to you and I think this is a correct 
assessment, looking at it from the standpoint of the U.S. 
Government, that these failures are going to be legion. You can 
have charts that you are sort of halfway getting there or 
mostly getting there or not getting there at all but, 
nevertheless, it either works or it does not.
    Ms. Williams-Bridgers. That is correct.
    Senator Lugar. And the point it seems to me that we 
discovered when we were talking about Russia earlier on was let 
us say that as the Russians were protesting 6 months ago but 
are not saying so now, that they did not have that many 
computers, and now they have discovered that they have quite a 
number.
    And if the grid system supplying power to the businesses 
fails in parts of Russia it is not the same as failing in New 
England. The New England failure probably can be covered by 
technicians, others who come in. So, that the pause might be 
several hours or hopefully not several days. But at least it is 
within the reckoning of sort of a closing circle of people who 
are available.
    But do we have any idea, just physically, how any of these 
systems get fixed in other countries? Take Russia, for example, 
it is not at all clear that there are a lot of technicians or 
other people who understand the power grid system of Russia 
sort of floating around from one province to the next. In other 
words, there could very well be weeks of gap for people and 
untold suffering under those situations.
    And it seems to me from the State Department standpoint 
this is the kind of analysis that needs to be made because it 
will, obviously, affect the people who are involved in a 
humanitarian way. But it is likely to affect much more than 
that in terms of our foreign policy and what is going on in 
those countries, the kinds of pressures on their governments 
from people who are not being served or who are in enormous 
distress or if there are CNN pleas for help now, they will be 
manifest, every 15 minutes, another emergency that Americans 
will be called upon to meet, American engineers flying over to 
try to fix somebody's grid system.
    In other words, I would not say that there is a casualness 
about this planning but it seems to me far more relaxed than I 
would have anticipated, given the predictions you are making, 
that in every country, every sector, every system there is 
going to be failure.
    Now, granted we cannot pick and choose in advance which 
ones and sort of get ready for those but there may, if this is 
proportional, be so many that our contingency plan, at least on 
the United States level, will have to involve a lot of travel, 
a lot of people, a lot of technicians----
    Ms. Williams-Bridgers. Yes.
    Senator Lugar [continuing]. As we fix up our own situation, 
so, that our own Government can be supported and our own 
businesses can be supported.
    Ms. Williams-Bridgers. Yes.
    Senator Lugar. And absent that, extraordinary tragedies.
    Ms. Williams-Bridgers. Yes.
    Senator Lugar. Now, clue me in as to where the planners 
are? How big of a plan is this? And how much of it will be made 
available? I mean what kind of safety net assurance is there of 
what is going on?
    Ms. Williams-Bridgers. Thank you, Senator Lugar.
    I would be glad to try to respond to your many concerns. I 
think our overall assessments based on our work to date reflect 
the magnitude of the problem, the complexity of the problem, 
the lack of knowledge that we had about the computer systems, 
the interfaces, our interdependencies within country, between 
countries and within regions of the world.
    I think the approach that the Department of State has taken 
to try and educate ourselves about this very complex network of 
computer systems has been a very reasonable approach. It has 
been a very well-thought out approach.
    Let me begin by talking a little bit about what the 
Department has done. They began by asking their embassies in a 
very well-laid out, methodical survey, to assess host country 
government preparedness in every sector that we have discussed 
today and all aspects of operation within-country. This was a 
massive data collection effort.
    Quite honestly, our diplomats overseas are not technicians. 
They do not and should not be expected to have the technical 
expertise to render these kinds of assessments. However, these 
are judgment calls that not only our embassies are making based 
on the information that they are collecting but, quite 
honestly, they are judgment calls of host country government 
officials about where they stood at points in time over the 
past year.
    Once all that information was collected, it was then 
combined that with information that we had collected, from 
other sources, and other government agencies that had conducted 
similar data collection efforts. We are now in the process of 
compiling a massive data base that the intelligence community 
is analyzing for us.
    I think that the efforts that the department now has 
underway to build a response capability and information 
collection system where information will be coming in from our 
embassies as the clock rolls over will be the true test for the 
U.S. Government. Having agencies and all representatives of the 
departments' bureaus centrally located to collect that 
information on a 24-hour basis from our embassies addressing 
questions such as: Where do you stand now? Is the water 
running? Are the lights on? Is electrical energy being 
supplied?
    The embassies between now and the end of the end of the 
year are developing and implementing contingency plans that 
they soon will be testing. Everyone will know how to react 
should there be any failure or catastrophic failure over 
several of the sectors.
    With regard to Russia, I think we are learning much more 
about Russia and the electrical power plants in Russia, and the 
nuclear power plants that supply the electrical power grid. The 
Department of Energy, as I understand, has just recently 
surveyed the four different types of nuclear power plants in 
Russia and is getting much more specific information about how 
they operate.
    The Department of Energy has been engaged in a very focused 
initiative, as you may know, with Russia and the Ukraine and 
Eastern European bloc nations to educate them, provide 
technical assistance, and to bring them back here to the United 
States so that they can see how we are going about developing 
our contingency plans in our nuclear power plants.
    I think this is an example of very good cooperation that is 
greatly needed around the world and in different sectors.
    Senator Lugar. Well, just to test this out a little bit 
more. You mentioned you can do things manually. In other words, 
the computer fails and you can use pen and pencil. You can 
carry your papers down the hallway instead of doing e-mail. So, 
there are ways, I suppose as rudimentary as they are, that 
bureaucracies can continue.
    But then you isolate this into the power grids, into 
telecommunications?
    Ms. Williams-Bridgers. That is correct.
    Senator Lugar. In other words, these are things beyond the 
capability of the person physically to manipulate.
    Ms. Williams-Bridgers. That is correct.
    Senator Lugar. Or to go and see somebody, it is systematic 
failure.
    Ms. Williams-Bridgers. We are quite concerned about 
disruption of generation and transmission of electrical power 
in Russia, specifically. The Department of Energy, based on its 
assessments, believes that there are adequate backup systems 
right now for generation of electricity in the nuclear power 
plants. However, if the monitoring and processing systems for 
the nuclear power plants fails for more than several hours, and 
if the excess electrical power generating capacity fails then 
we are facing safety concerns. We are facing failures that are 
going to be very, very difficult to deal with.
    So, you are quite right, in some sectors we cannot simply 
flip back to manual operations but what is most important for 
us to do now is to plan for contingencies, to plan for systems 
failures, and how to define we respond to a crisis situation 
should it occur?
    Senator Lugar. Mr. Chairman, let me just make one more 
point.
    Senator Smith. Sure.
    Senator Lugar. My understanding is that essentially the DOE 
has focused on safety as opposed to operations. There is a big 
difference. You know, we really cannot resolve that here today 
but we have been concerned really about blow-ups----
    Ms. Williams-Bridgers. Yes.
    Senator Lugar [continuing]. About a horrible situation, as 
opposed to the mundane but very essential things, in terms of 
individual people in Russia or elsewhere. And I am not certain 
we are going to get beyond that in terms of the contingency 
plan.
    Now, I may be wrong, but that is why I raise this openly. 
It seems to me we may be giving an impression that is too 
optimistic. Safety is one thing so that we do not have a 
nuclear event.
    Ms. Williams-Bridgers. Yes.
    Senator Lugar. But operation is something else, getting the 
thing running, so it heats houses.
    Thank you.
    Ms. Williams-Bridgers. Thank you.
    Senator Smith. Thank you, Senator Lugar.
    I believe I heard when this committee first began holding 
hearings that the Russians generally were viewing Y2K as an 
American plot to get them to buy more Western or U.S. 
equipment. From your testimony today that clearly has changed 
and that they are working aggressively to remediate as best 
they can. Is that accurate?
    Ms. Williams-Bridgers. From our indications and 
conversations with Department of Energy officials, the Russians 
have expressed clear interest in getting technical assistance 
and participating in workshops that Department of Energy has 
initiated and in visiting here to the United States to view how 
we conduct our contingency planning.
    Senator Smith. Good to hear it.
    One final question. Do you know when the State Department 
plans to release country-specific information related to Y2K?
    Ms. Williams-Bridgers. Our embassies are in the process now 
of finalizing all of the information that they are collecting 
from embassies and by next month our embassies have been 
instructed to meet with host country governments to inform them 
of concerns that we have about their host country's status of 
Y2K readiness. In September the department plans to issue 
country-specific information in the form of travel advisories 
for all Americans.
    Senator Smith. I assume that they are anxious to receive 
that evaluation and given the strength of the American economy 
that report is going to be received by them, acted upon, I 
would assume be important to them.
    Ms. Williams-Bridgers. By the host country governments?
    Senator Smith. Yes.
    Ms. Williams-Bridgers. There have been ongoing discussions 
between embassy officials and host country governments. Some 
embassies have initiated what we consider to be best practices 
of working collaboratively with other embassies, by holding 
forums, and informing the American community there, informing 
American businesses, including small and medium-sized 
enterprises. We are most concerned that the Department provides 
the American public with information on host country Y2K 
readiness and on contingency plans that other businesses or 
international organizations are making to address their 
problems.
    There has been an ongoing dialog with host country 
governments for some months now.
    Senator Smith. I think it will undoubtedly have a powerful 
impact and a beneficial one because I think what drives foreign 
corporations is the same thing that drives U.S. corporations, 
that is the interest in serving customers, producing products, 
providing services to the end that they can make a profit.
    Ms. Williams-Bridgers. Yes.
    Senator Smith. They do not make a profit if they do not fix 
this problem.
    We thank you very much for your second appearance to this 
committee. It has been very helpful and Ms. Williams-Bridgers., 
we are grateful to you.
    Ms. Williams-Bridgers. Thank you very much for having me.
    Senator Smith. We now invite our second panel to come 
forward.
    We have Mr. Ron Balls, an Associate Deputy Assistant for 
International Affairs of the International Telecommunications 
Union, an international organization that coordinates global 
telecommunications networks and services.
    Following Mr. Balls, will be Mr. Gary Beach, publisher of 
CIO Magazine, the leading publication for chief information 
officers.
    Mr. Balls, we welcome you.

    STATEMENT OF RON BALLS, YEAR 2000 TASK FORCE CHAIRMAN, 
             INTERNATIONAL TELECOMMUNICATION UNION

    Mr. Balls. Thank you, sir.
    Before I commence my testimony, can I make three 
observations?
    First, I am not the Associate Deputy Assistant for 
International Affairs of the ITU. The first time I have ever 
seen that is when I saw this piece of paper this morning. My 
day job is making sure that the British Telecom's network is 
Year 2000 ready. The ITU work is in addition to that, sir.
    Second, reference earlier on to the European Union, the 
European Union is coordinating matters. If somebody gives me a 
business card later on I can give them the contact point. It is 
Sandra Callagan in DG-3.
    My third point, sir, is that being English, as is obvious 
from my accent, and not being familiar with your procedures, I 
guess the lights on the top table are timing devices. 
[Laughter.]
    Senator Smith. Let me apologize----
    We usually ignore them so if you do, too, that would be all 
right. [Laughter.]
    Mr. Balls. I was going to say that as it is the first time 
you have had ITU representation here and as the traveling time 
for me to be here is about 18 hours, 5 minutes seems scant 
time, so, I will probably go through my testimony.
    Good morning, gentlemen. On behalf of myself and all of my 
colleagues on the ITU Year 2000 Task Force, I thank you for 
this opportunity to address the U.S. Senate Special Committee 
on the Year 2000 technology problem.
    You already have the written statement and I will try and 
build on that and provide some additional information where 
relevant. Let me advise you initially that the task force is 
made up of people from telecommunications companies worldwide, 
who are freely giving their time to this issue.
    These people invariably have demanding Year 2000 positions 
with their own companies but recognize the need for action on a 
global basis. They have support from their own companies both 
in terms of the time taken and also financial support for task 
force activities. They also do a lot of work in their own time. 
My visit to Washington to attend this session is not supported 
financially by the ITU but by my own company. There is one 
full-time ITU professional involved who has a primary concern 
for the underdeveloped nations.
    Members of the task force, drawn from many of the largest 
telecommunications operators and also vendors and other 
organizations are confident that no major disruption to 
telecommunications will occur as a result of the Year 2000 
issue in the developed part of the world.
    The international carriers are well advanced with their 
Year 2000 programs. Many have completed their equipment 
upgrades and now are in the business continuity planning stage. 
Where difficulties remain, they are largely confined to the 
less developed economies and have been working hard in these 
regions to advise and assist the operators to achieve as much 
as possible in the time remaining.
    Covering the background. The task force was set up in March 
1998 following pressure on the ITU from a number of major 
operators, including BT, Telia and INTELSAT and in brief it is 
to raise the awareness of the Year 2000 and related issues; 
related issues being the GPS rollover, the risk dates of 9-9-
1999, 10-10-2000, et cetera, amongst Telecom's operators, to 
understand the compliance position of Telecom's operators and 
to promote the sharing of knowledge, best practices, advice and 
support.
    The ethos of our work is one of leaving behind all 
competitive aspects and recognizing that the only competitor in 
this context is time, itself, and operating on the basis of 
awareness, sharing, cooperation, and information flow. The 
information flow being achieved through the website, mailings, 
documentation, meetings and workshops.
    The task force has grown to a mixed functional and 
geographic grouping as illustrated at attachment B in the 
submission. The geographic groups being formed to provide local 
support.
    To illustrate the global involvement of the task force, let 
me advise you of where the Chairs and Vice Chairs come from. 
The Task Force is chaired by BT, its Vice Chair is Telia/
Sweden. The Information Management Group is chaired by 
INMARSAT, its Vice Chair is Telstra from Australia. The Inter-
Carrier Testing Group is Chaired by BT, its Vice Chair is Cable 
& Wireless. Contingency Planning now Chaired by Telia, 
previously by Media 1 Labs, with involvement from British 
Columbia Telecom, BT, Telia and INMARSAT.
    The Development Group Chaired by the ITU, the Vice Chair, 
South Africa. The Early Warning Group Chaired by GT and 
Ameritech combined, with support from Telstra and Telecom/New 
Zealand. The North American grouping is run by the U.S. Telco 
Forum led by GTE and the Canadian Telecom Forum led by Stentor. 
The Pacific Partners Group by Telstra, the Arab Nations by 
Jordan Telecom and Egypt Telecom.
    Let me now cover some aspects for outreach. The Task Force 
is operated in the spirit of cooperation and with a recognition 
of the mutual benefit to be gained by the pooling of resources 
and expertise in the face of this challenge. High levels of 
cooperation, both across countries and between competing 
operators in the same country, have been achieved to a level 
probably unprecedented before.
    We have approached the issue through a combination of 
measures that I will outline and you will see from Attachment A 
to the submission that many meetings have taken place and 
additionally a considerable number of audio conferences.
    Covering some of the activities, initially the compliance 
questionnaire. We prepared a Year 2000 compliance questionnaire 
issued in April 1998 to all ITU members. To date, the Task 
Force has received over 530 responses, from 150 countries, 
representing more than 450 operators and carriers. An extract 
of what is currently on the public side of the website is at 
Attachment E.
    On a simplistic basis of counting a country, if the 
dominant operator or grouping of operators responded, then 
response rates to date are Africa, 58 percent; America as a 
continent, 76 percent; Asia Pacific, 63 percent; Austra-Asia, 
100 percent--well, that's easy, because there are only two 
countries--the Arab Nations, 73 percent; Europe, 80 percent; 
overall a figure of 70 percent.
    The summary results of the questionnaire are available on 
the public section of the website, while the full questionnaire 
results are available through the site's Closed User Group. The 
Closed User Group access is only available to Telecoms, 
Operators/Carriers, who have completed the questionnaire and, 
so, it is an incentive for them to be involved with the group.
    An electronic update facility has been provided to enable 
operators to update their information. This is the only source 
of data that we are aware of which provides a summary of the 
overall Year 2000 position of Telecom Operators which is in the 
public domain: That is, available to all who have access to the 
World Wide Web, be they operators or customers.
    As such, this is referenced extensively by operators, 
customer groups, and Year 2000 sector bodies. Recognizing this, 
over the final 5 months there will be a further drive to update 
the information.
    We have conducted regional workshops in different parts of 
the world with the support of industry and other organizations 
with an interest in assistance to developing countries, notably 
the World Bank infoDev Program. The objectives of the workshops 
are to generate awareness about implications of the problem, 
initiate and strengthen information sharing between operators 
with established programs and developing countries, promote and 
strengthen effective supplier relations, and provide 
information on standards, tools, techniques, et cetera.
    In addition, a number of workshops that focus on specific 
issues have taken place, including contingency planning and 
business continuity. The participants in the workshops have 
come from administrations, operating agencies, major vendors, 
international and regional satellite organizations and the 
World Bank.
    The workshops address a wide range of issues which are 
central to the discussion of the Year 2000 program including 
testing, quality assurance, management of supplies relations, 
and contingency planning.
    The vendor representative presentations have commented on 
the status of their own compliance of products, and their 
capacity to meet operators' needs. Workshop dates, locations, 
numbers of attendees are in Attachment D of the document.
    At the workshops, operators have generally provided an 
update of their expected completion dates. In a number of 
instances this differs from their questionnaire. We use that 
information to assist wherever we can. Regional subgroups have 
been established to concentrate on specific areas of the world, 
including the Arab countries, the African countries which are 
French-speaking, the African countries which are English-
speaking, Latin America and Asia Pacific.
    All of these sub-and-regional groups have held meetings and 
are pursuing their own activities via, some by electronic 
communication and the results of their work are regularly 
posted on the ITU website. In addition, the activities of the 
Year 2000 Task Force have been published and promoted through 
web pages, through regular articles in the ITU's magazine, ITU 
News, which has a wide distribution.
    We have prepared a comprehensive Year 2000 Guide. This 
provides Telecom's operators with a high-level overview of the 
process of dealing with the Year 2000 issue. This has been 
widely distributed to ITU member States, Sector Members, 
National Year 2000 Coordinators, as well as international and 
regional bodies. The Guide is available on the website in four 
languages: English, French, Spanish and Russian. The Guide 
supplements the other activities that we have been taking.
    The ITU's work covers all segments of telecommunications, 
representing operators and suppliers. Experts give generously 
of their time and expertise in participating in these. 
Significant, highly valued, in-kind contributions have been 
received from the Government of Australia, BT, Bell South 
International, Cable & Wireless, Deutsche Telecom, INMARSAT, 
INTELSAT, South Africa Telecom and Telia, and the 
Administrations of South Africa, Morocco, Egypt, Australia, 
Brazil, the Russian Federation, Poland and Jordan. Also, we 
have extensive help from telecom organizations such as ASETA, 
APT and RCC.
    The financial contributions received from a number of 
operators and vendor organizations are placed in a separate 
project account and the contributory sponsors are provided with 
periodic progress reports.
    We have cooperated with the International Year 2000 
Coordination Committee, led by Bruce McConnell. We have given 
presentations at both United Nations' meetings, 11th of 
December 1998, and 21 and 23 of June 1999. We have hosted a 
meeting in Geneva, the 3-4 of May of International Sector 
Coordinators, including international civil aviation 
organizations, international air transport, international 
maritime, international energy agency, Global 2000, Joint Year 
2000 Council, and the World Bank.
    We liaise regularly with other bodies. I sit on the 
External Consultative Committee to the Joint Year 2000 Council 
and we provide input on telecommunications. We maintain a very 
close linkage with Global 2000 Group and I provide an input to 
their chart there that you have displayed.
    You must recognize that their chart there is based on 
information in the public domain. That is a very germane point 
in that two of the countries shown as red in the telecom sector 
of that chart have already tested internationally. The question 
is they have not put that information into the public domain. 
That is the difference.
    We also liaise quite extensively with customer groupings, 
including the European Virtual Private Network Users Group and 
the International Telecoms Users Group and the SIA in the U.S. 
We provided expert support to a number of different countries 
and we will be providing more in the future.
    Turning to the impact of the Year 2000 on 
Telecommunications. As I said earlier, it is unlikely that 
there will be material disruption to the Telecoms Network in 
terms of core connectivity in the developed nations. There is 
very little date information passed across the interfaces in 
real time.
    Major operators have undertaken extensive tests, many using 
the five-layer model, with the final layer being inter-carrier 
or international testing. To clarify the five layers, let me 
just run through them. The first of these is vendor testing. 
Any component, we expect the vendors to test it before they 
deliver it to an operator. We then expect the operator to do 
testing at both a component level and at an end-to-end level; 
so, they will test a switch and then they will test it in terms 
of a voice call.
    The third layer is inter-operator within a country. So, 
typically administrations within the U.S. will test with each 
other. The fourth layer, which depends on the network 
structure, is testing with carriers. So, it is relevant in the 
U.S. where you have the likes of MCI World Com, Sprint, AT&T. 
It is not relevant in most European countries.
    The fifth layer is the inter-carrier international testing. 
This has been a primary focus of the work of the ITU. A 
considerable number of operators have been involved in this 
activity carrying out a comprehensive range of tests. The broad 
strategy is to ensure that tests are carried out involving each 
type of international gateway switch and with as much global 
reach as is possible within the time and that facilities will 
permit.
    We have identified 21 different international gateway 
switches from eight different vendors and are working our way 
through these as logistics permit. We have already covered the 
major ones. There are three from Lucent, four from Ericsson, 
one from Nokia, three from Siemens, four from Nortel, one from 
NEC, three from Alacatel, and one from Marconi. The major usage 
switches have been tested and no Year 2000 anomalies found.
    The detail in Attachment C is a condensed version of the 
testing that has taken place so far, and not referred to but 
operators who have been tested include KDD from Japan, and PLDT 
from the Philippines.
    Our future plans, as well as those listed in the 
attachment, also include Angola--yes, I did say, Angola--
Indonesia, New Zealand, Russia, the ComStar operator in Russia, 
Belgium, Macao, Shanghai, and Brunei, and the list continues to 
grow.
    Having said all that there may still be difficulties in 
connecting calls to some operators and there may be some 
consequential effects due to traffic being diverted via other 
routes. However, the Task Force remains with the view that 
major players and their major trading partners are not likely 
to see a significant disruption to service as a direct result 
of the Year-2K. But we do have a concern for all the developing 
nations.
    An impact which does require some attention is the 
possibilities of congestion at the time of the century date 
change with increased level of calls and customers checking for 
dial tone.
    The status of the preparedness by region is shown in the 
written statement, and I will not go through that.
    We have, obviously, given attention to contingency planning 
and business continuity. And following the awareness phase, a 
major element of the work program has related to this. The 
subgroup concerned with this has prepared material covering the 
strategy, business processes, impact analysis, templates, a 
generic business process for Telecoms operators, glossaries of 
terms, and slide packs within company presentations and these 
are all on the website.
    Worked examples for business continuity will also be placed 
on the website later this week and a publication, similar to 
the Guide I referred to before, is being prepared.
    Activity training programs are planned in different parts 
of the world and an initial session on business continuity was 
held in Jordan on the 20th-to-22nd of April 1999. A second 
workshop was planned for the CIS region in Siberia, the 13th-
to-15th of July at the invitation of the Russian 
Administration. We have postponed this because we do not have 
the relevant attendance there. We want operators there, not 
ministry officials or government officials.
    The main objectives of that program are to provide 
operators with the background and methodology on how to develop 
contingency and business continuity plans and demonstrate these 
through practical workshops designed specifically for this 
purpose, to provide a forum for discussion between operators 
and major suppliers, and facilitate information exchange on the 
compliance status.
    Where appropriate, the training program will also cover 
testing with the objective of sharing information experience 
about conducting tests at component, cluster and service levels 
and inter-carrier testings.
    Further guidance on issues of traffic routings are planned 
to be placed on the website next month. We have also looked at 
early warning. The Asia Pacific Region is the key to the early 
warning system being established, using a follow-the-sun 
approach to the transition period.
    Between New Zealand and Thailand there is a 6-to-8 hour 
window of time within which 90 percent of all switch types and 
90 percent of all transmission equipment will be in operation. 
This region, therefore, represents a microcosm of global 
telecommunications within the 6-hour window and will provide 
the rest of the world with valuable data on any difficulties 
that might emerge.
    The Early Warning Group has plans in place to monitor the 
position through each of the 24 time zones adopting a positive 
reporting approach 30 minutes after midnight within each time 
zone and at noon on the 1st working day within time zones.
    The information will be held on a data base at the National 
Coordination Center in the U.S. and participating operators 
will have input to this and access to information.
    Let me conclude by covering outstanding issues. The 
workshops have been successful in the objective of information 
exchange in the programs in various countries. The presence of 
supplies has provided a good opportunity for both parties to 
discuss problems associated with out equipment and systems.
    The workshops have established that an awareness of the 
problem is rising. Several countries have national planning 
mechanisms in place. Even in the absence of national programs 
Telecoms operators have begun addressing the issue though it's 
a matter of concern that the lack of national planning might 
aggravate interdependency problems.
    In some developing countries progress is typically 
constrained by factors including lack of commitment at the 
highest level in the organization, sound project management, 
shortage of skills at various levels, lack of facilities such 
as a testing environment, lack of funds and low supplier 
response.
    In view of the likely demands for assistance over the next 
few months, the ITU has requested operators with established 
programs to provide expert resources for short periods to be 
deployed in the development countries. While it is difficult to 
accurately estimate the likely demands that may arise in the 
future, it is inevitable that this will be a growing demand and 
some of this will be assistance in next year to resolve the 
difficulties which go over the century date change.
    The growing list of countries requiring assistance could 
become a bottleneck with the expertise not being available to 
us. The ITU is seeking more support from those countries and 
operators that are more advanced and have well-established 
programs in place. Specifically, we need expertise on business 
continuity planning, particularly fluent French speakers and 
fluent Russian speakers.
    Gentlemen, thank you, for listening to me, and I will 
endeavor to answer any questions that you might have.
    [The prepared statement of Mr. Balls can be found in the 
appendix.]
    Senator Smith. Thank you very much, Mr. Balls, and we do 
appreciate your traveling as far as you have to be here to 
present us with this perspective. Briefly, you indicated this 
chart we are relying upon is based on public information. I 
think your implication is that there is a lot being done that 
isn't public and the picture is brighter than that would 
suggest.
    Mr. Balls. Absolutely.
    Senator Smith. Thank you.
    Mr. Balls. Global 2000 would be the first people to admit 
that because their criteria is, is it in the public domain?
    Senator Smith. Very good.
    Senator Lugar, do you have a question?
    Senator Lugar. No, I do not.
    Senator Smith. Senator Bennett?
    Chairman Bennett. No. I apologize that I was not able to be 
here for the entire panel. Mr. Beach, I have read your 
testimony and, of course, I heard a good portion of Mr. Balls. 
So, I have no further questions.
    Senator Smith. Mr. Beach, we welcome you and invite your 
testimony now.

        STATEMENT BY GARY BEACH, PUBLISHER, CIO MAGAZINE

    Mr. Beach. Thank you, Mr. Chairman.
    Before I start, I would like to comment on something that 
Senator Lugar mentioned at the end of Ms. Bridgers' testimony, 
which I think was very well put. And he was asking about, what 
I heard, the need for international help in possibly developing 
countries helping those who needed the help. And there is a 
digital Peace Corps, so to speak.
    It is called the International Y2K Cooperation Center and 
it is a joint effort by the World Bank and the U.N. I am part 
of that steering committee. And I am hoping that members of the 
press here might see me after because we need some help in 
terms of mentioning this around the world. We have identified 
40 countries so far who have asked for help and have volunteers 
that we are mixing and matching.
    My name is Gary Beach and I am the publisher of CIO 
Magazine. Our readers work in major corporations, primarily 
Fortune 1,000, Federal State and local governments. We are 
located near Boston. We had nothing at all to do with, of 
course, Boston being one of the two cities being compliant with 
Y2K. Mayor Minnea has a smile on his face.
    In June of this year, the reason I am here, is that a 
public interest coalition of CIO Magazine, Dr. Ed Yardeni's Y2K 
Center and the Information Systems and Audit and Control 
Association [ISACA], conducted a Y2K experts poll. The poll 
interviewed experts in an effort to help engage the public and 
their policy officials assess the Year-2K readiness of 
organizations around the world.
    I am hoping, Senator Lugar, you were asking earlier about 
we are groping with this uncertainty, that some of the data 
here today will address that.
    The poll was conducted in June via the Web and e-mail 
invitation from the three members to recipients asking only 
those who are professionally and actively involved in Y2K 
projects to respond. The responses basically came from three 
groups. A third of them were CIO's, a third of them were 
business managers, and a third were financial individuals. We 
received 892 responses and at a 95 percent competence level, 
the data in that survey, which you all have has a plus or minus 
sample error of about 3 percent.
    The majority of responses were from large, U.S.-based 
companies, 55 percent, and 45 percent represented firms from 
outside the United States. It is interesting to note that 61 
percent had a 1,000 or more employees. So, these are large 
companies.
    Now, the poll is really a snapshot of Y2K readiness among 
large, global firms, with an incredible number, 1,300 trading 
partners. We have heard about the supply chain earlier today. 
This data represents about 1,300 trading partners connected in 
a worldwide electronic domino system.
    Now, I would like to present the major findings of the 
survey which is in the full testimony. In our first chart here, 
we asked respondents when they expected to finish all phases of 
their projects, including testing. Responses indicated that 
while the project was moving along it is not completed and 80 
percent reported they were more then three-quarters complete. 
However, 33 percent admitted that they were behind schedule 
and, in addition, and it is here on the chart, 8 percent, or 
almost 1-in-10, said they will not complete their Y2K work by 
December 31 of this year.
    And I would also like to emphasize that 52 percent who 
claim that they are going to finish by September 30 of this 
year and the 16 percent who say they are going to do it by 
December 31, I believe Vice Chairman Dodd last week, in terms 
of talking about the cities that expected to complete their 
work in the fourth quarter, calling it a fantasy world. I think 
any large company completing work in the last quarter is being 
unrealistic.
    So, I mention, of course, remembering these are not small, 
medium-sized companies, these are large global firms. And 
nowhere have I seen data until this poll that quantifies the 
percentage of large firms that admit they are not going to be 
make this turn of the century deadline, which just 
tangentially, I think--and Ms. Bridgers focused on this--as we 
approach Y2K, I think for a while we thought we could fix this 
situation. We are well beyond that. And the work of this 
committee has highlighted this situation very, very well.
    And I would just emphasize, once again, the aspects of 
contingency planning. We have to, as a country, as a world, 
move to contingency planning now.
    So, that leads to our second slide here that we have in 
terms of contingency plans are lacking. We asked this group 
their status of contingency plans. And 49 percent have a plan 
and 50 percent have no formal plan. One are still thinking 
about it, I assume.
    However, the thing that I found interesting is if you had a 
contingency plan in place now, 60 percent of those companies 
have already implemented it. They have seen the urgency of Y2K.
    The next slide is on vulnerability in the supply chain. We 
asked firms about their supply chain readiness. We found 12 
percent--you have heard this before in the committee--but we 
found 12 percent of large companies were verifying their 
business partners' readiness by conducting onsite visits. That 
is good. And 48 percent of the respondents--we were talking 
about this earlier with Ms. Bridgers and asking how the, what 
is the verification of the status of different countries and 
this is just tying into that--but, 48 percent of our 
respondents in this survey are just sending out questionnaires 
followed by a telephone call.
    And 20 percent send out questionnaires with no telephone 
follow-up and 13 percent are simply having informal 
conversations with their partners about the state of the 
readiness. And I submit, Mr. Chairman, that Y2K readiness is 
not a topic to be relegated to informal conversations.
    In fact, my face-to-face conversations--I spend a lot of 
time with CIOS--and my face-to-face conversations with these 
men and women, you ask them how are you doing with Y2K and they 
will look you in the eye and say, we are doing the best we can, 
and knock wood, I think we will be OK. You ask them about their 
supply chain partners, and their eyes go down, and they pray to 
some extent.
    And I think three reasons are for that in terms of their 
readiness. No. 1, they do not have the time--remember 12 
percent are actually visiting sites--they do not have the time 
to go out and visit 1,300 trading partners. That costs an 
expense and third the logistics of verifying those partners is 
immense.
    Too many of these businesses at this very critical 
juncture, 162 days to the Year 2000, are relying on trust and 
trust that may or may not be well founded. Globally speaking, 
supply chain readiness poses its own set of problems. We talked 
about this earlier where a lot of the businesses you are about 
to hear from might have some leverage with partners in their 
supply chain that are here in the United States but they go 
outside they have less leverage with PTT's in other countries 
and what have you. So, in many cases, they are the only 
alternatives for telecommunications service and electrical 
service.
    So, the next slide is on mission critical software. The 
supply chain, which is heavily interconnected, may seriously be 
impacted by incomplete or no-delivery of Y2K compliant mission 
critical software. I found it amazing that 35 percent of these 
large firms said they are still waiting, 162 days away from 
Y2K, they are still waiting for Y2K compliant versions of 
mission critical software from third party vendors. And I will 
not bore the committee with what happens if you get version 
five and you are back at version three, and you plug this in 
and it may not work.
    We also asked respondents if any of their mission-critical 
systems were expected to fail or malfunction. And you hear lots 
of testimony. This is the data point that really impressed me. 
We found--using a word, I think, Senator Smith, you, mentioned 
earlier--daunting. The daunting statistic from this survey for 
me was these large firms expect 3 percent of their mission-
critical systems or applications to fail because of Y2K, 3 
percent.
    Moreover, 3 percent said that they expect major problems in 
telecommunications service and 2 percent say they expect major 
problems in electrical service.
    So, as we come back to the call to action. We heard from 
Ms. Bridgers, she pointed out the contingency planning. I would 
strongly encourage this committee to encourage all businesses 
in America that by September 30 of this year they have a 
contingency plan in place. Possibly the committee could set up 
a frequently asked-question section on your website. You might 
already have done to do this and this information could be 
shared on-line.
    Chairman Bennett mentioned, in opening the hearing today, 
talking about sustaining America's economic strength. I will 
leave you with a positive thought on Y2K. And I hope my other 
ones were not negative. This is data, which by the way, we are 
repeating in September. So, we will deltas on all this data.
    That akin to what the oil crisis did for fuel-efficient 
cars. We all suffered pain in the mid-1970's, but out of it we 
came out with more fuel-efficient cars. What Y2K may do in 
terms of sustaining America's economic strengths, 
industrialized countries and companies that you are about to 
hear from have done a technology inventory of legacy systems, 
legacy applications and they have cleaned house. They have 
brought in new software, new hardware, and this will, I think, 
be one of the other legacies of Y2K.
    And I am sorry I went over but, thank you so much for your 
time here today.
    [The prepared statement of Mr. Beach can be found in the 
appendix.]
    Senator Smith. Thank you very much, Mr. Beach.
    You have called on this committee to provide guidance on 
development contingency plans and we hope you and everyone else 
listening to this hearing are aware of the excellent guidance 
available on-line at the GAO website. That is WWW.GAO.gov.
    Senator Lugar, do you have a question for either of our 
witnesses?
    Senator Lugar. Let me just comment. I thought the final 
comment you made, Mr. Beach, was very significant, that we are 
looking, obviously, in this committee at the downside of this, 
which is catastrophic for some businesses, for some countries 
and what have you. But the other aspect of it, the clean up 
that you are mentioning probably is significant. It may already 
be manifest in some of the operations of American multinational 
corporations now.
    I am just impressed in a way the rich got richer and the 
poor got poorer, those who are well informed, well managed 
really have sort of an on-the-ball attitude probably are going 
to progress beyond their competitors who never understood 
exactly what hit them in his.
    Now, usually when that happens, sadly enough, the losers 
come to the Government, here, and want relief and that happens 
all across-the-board in American life. But I suspect, you know, 
this is worth watching and probably you will be in your 
magazine and elsewhere because the upgrading of our systems and 
the new knowledge that CEOs as well as technicians have of this 
is significant.
    And probably a real boost for us if we somehow get through 
the first of January.
     Mr. Beach. If I could just comment, Senator Lugar. I had 
the opportunity to visit Bangalor, India, at the end of May. We 
are starting a magazine there. And it is also cuts to what 
Chairman Bennett was saying in terms of sustaining America's 
economic growth that developing countries--Senator Dodd talked 
about how a third of the world lives in China, India and I 
forgot the third country he mentioned--those countries do not 
have the legacy problems that our country has.
    So, we have got to get it right. We really have to focus on 
upgrading our systems once we get beyond the Year 2000 as 
quickly as we can to sustain our country's economic growth in 
this dot-com economy.
    Senator Lugar. That is a very good point because World War 
II demolished the economies of many nations but they did not 
have the legacy left over. It was gone. And, so, that the 
infrastructure boost that happened there made a big difference 
in many cases.
    We are fated to have a lot of hardware left over that may 
not be very good but it is an encouraging point. And I just 
simply wanted to mention that. There are incentives for people 
to do this in addition to trying to forestall a dire emergency.
    Senator Smith. Senator Bennett?
    Chairman Bennett. Thank you very much to both members of 
the panel.
    One quick question to you, Mr. Beach. We have had Dr. 
Yardeni testify both before the subcommittee of the banking 
committee that got this all started with Senator Dodd and me. 
And then we have had him testify before this committee. He is 
perhaps best known for his percentage prediction with respect 
to a worldwide recession.
    You are a partner of his in producing this report. Can we 
ask you the question: What does he now think the chances are of 
a worldwide recession?
    Mr. Beach. I think that is a fair question, Mr. Chairman. I 
was with Dr. Yardeni in New York last month when we released 
the results of the survey and that question was asked to him 
from the audience. He has backed off on the--I think the 
specific percentage was 70 percent probability of a worldwide 
recession.
    Chairman Bennett. Yes. At one point it was as high as 70.
    Mr. Beach. He has backed off on that. The area that he is 
somewhat concerned about now is the possible disruptions in 
inventory buildup as we lead to December 31, where firms--and 
you will hear from these firms in several moments--may be 
stockpiling goods and services. We found some evidence of that, 
and it is in the report. I will not go through it now. And, so, 
he is expressing some concern that there could be some 
disruptions in a smooth economic flow. But I clearly believe, 
and I cannot speak for Dr. Yardeni, that he has backed off on 
the 70 percent probability of a global recession.
    Chairman Bennett. Well, all of us have had the experience 
of having our own words quoted back to us. I have constituents 
who are very upset that I am no longer as alarmed as I was 18 
to 24 months ago. And when I say we are going to be in fairly 
good shape, they say, no, we are not, listen to what you said. 
And they quote my own speeches and say I am misinformed now. 
[Laughter.]
    And I say, well, we just did better in the last 18 to 24 
months than I thought we were going to, and I assume that both 
of you have that sense, that we have accomplished more than 
maybe we thought we were going to be able to when we first 
began to get fairly serious about this.
    Is that a fair summary of both your positions?
    Mr. Balls. I think that is a fair summary and I think what 
has also happened over the last 6 months or so is--particularly 
in this telecom sector--is that a lot of the activity that has 
been going on has been coming into the public domain. I mean 
certainly that is my view of South America, where we knew very 
little about it. But, you know, having been there twice now, 
and having talked to the people and persuaded to put 
information in the public domain, they are now responding to 
it.
    And I, very often, now when talking to operators will show 
them newspaper articles which say typically, Telecom Egypt is 
not very good. And they say, that is not true. I say, I know it 
is not true. Tell the world it is not true, give them the 
information. It is putting things into the public domain.
    Chairman Bennett. Thank you.
    Senator Smith. Senator Bennett, your comment reminds me of 
a prayer my mother used to remind us of as children that, Bless 
me today, oh, Lord, that my words may be soft and gentle for 
tomorrow I may have to eat them. [Laughter.]
    We thank you both, gentlemen, for your testimony and your 
participation. We are delighted to invite up now our third 
panel. This panel consists of Mr. George Surdu, the Director of 
Technical Services for Ford Motor Company, whose brands include 
Volvo, Mazda, Jaguar, Mercury, Astin-Martin and Hertz.
    Also on this panel is Mr. Patrick Roberts, who is the 
Senior Vice President for Business Information Services for 
Ahold, USA, an international food retailer operating more than 
3,700 markets and specialty stores worldwide including Giant 
Food in the Washington, D.C., area.
    Next is Mr. Kevin Click, Director of Worldwide Y2K 
Corporate Compliance Efforts for Philip Morris Companies, the 
largest producer and marketer of consumer goods. Its principal 
operating companies include Kraft Foods and Miller Brewing 
Company producing brand names like Maxwell House, Oreos, Kool 
Aid, Kraft Macaroni and Cheese.
    Next is Mr. Kevin Haukebo, who is Y2K Program Manager for 
Procter & Gamble, the worldwide operations in 72 countries, 
manufacturing popular products like Crest, Pringles, Tide, 
Pampers and Cover Girl makeup.
    And, finally, Mr. Charles Krichbaum, who is the Director, 
for the Year 2000 Project for Praxair, which produces and 
supplies industrial gases.
    So, we will start with Mr. Surdu and we welcome you all and 
we invite your testimony now.

STATEMENT OF GEORGE SURDU, DIRECTOR OF TECHNICAL SERVICES, FORD 
                         MOTOR COMPANY

    Mr. Surdu. Thank you and good morning.
    Before I begin I need to say that Senator Dodd was spot on 
in terms of the enormity of this program. When I began this 
program back in 1996 with Ford Motor Company I had black hair, 
so, we have gone through a little bit.
    I want to formally thank, of course, Chairman Bennett, 
Senator Lugar, Senator Smith and the entire committee for 
allowing Ford Motor Company to provide an update on our 
program. Needless to say we are very proud of the comprehensive 
program that we began.
    As Senator Smith has indicated, I am the Director of 
Technical Services and have been the Global Year 2000 program 
manager for Ford Motor Company since the inception of the 
program in 1996. And I need to emphasize that the program has 
been global from the very beginning so, the things that I will 
tell you--and I would like to give you some fairly detailed 
statistics on where we are in the program--but these are global 
statistics. Once I complete the formal statement I certainly 
would be happy to answer any questions.
    In 1996, Ford Motor Company initiated a formal program to 
address the Year 2000 challenge. A senior-level steering 
committee was established, co-sponsored by our Chief Financial 
Officer, our Vice President of what is called Quality in 
Process Leadership and our Chief Information Officer. A formal 
Global Year 2000 Program Office was established under my 
leadership and a very robust program management process was 
created to guide compliance actions across all the impact 
areas.
    One of the interesting things that we did at Ford Motor 
Company which have been mirrored in a number of other areas 
including with our suppliers, through the Automotive Industry 
Action Group, is the way that we have looked at the company's 
business and we looked at it at some unique technology lines. 
The impact areas include computer business systems, our 
technical infrastructure which is all of our data centers, our 
wide-area networks, our local are networks, all the way down to 
and including all of our desktops, our plant floor equipment, 
our product development test equipment, our suppliers, of 
course, our dealers, our affiliates, end-user computing, our 
building infrastructure and our vehicle components.
    In addition, as we have worked our way through the program 
we have continued to monitor the compliance actions of other 
impact areas such as all of our transportation carriers, 
medical equipment suppliers and customs offices around the 
world.
    The sophistication of our program has been recognized by 
the Information Technology Association of America with a 
certification that indicates Ford's program meets the challenge 
of best practices, the Y2K best practices standards.
    We very early on established stretch objectives on all 
these impact areas with the majority of work to be completed by 
mid-year this year and fundamentally we are there. We had an 
objective to have all of our critical systems compliant which 
means that we had them remediated, tested, put back in 
production by the end of 1998 and we met that objective. As of 
June of this year, in terms of all of our systems 98 percent of 
our critical systems, because we added some during this 
calendar year, are compliant. We have got a handful that we are 
finishing up during the shut-down period. And 97 percent of all 
business systems have been remediated, tested and are back in 
service.
    In addition, two focus areas this year, as we have 
completed all of our remediation work, has been around the area 
of what we call enterprise-wide testing. Actually plugging in 
all of our systems and making sure that all the touch points 
are working properly and contingency planning.
    Again, I think many of the things you heard this morning 
Ford Motor Company has been doing very aggressively.
    The enterprise testing will be completed by this September. 
We are very far along that way. Again, we are using some of our 
shut-down periods to complete some of that work. For plant 
floor equipment we have implemented a process to assess 
equipment and machinery in more than 167 manufacturing assembly 
plants and parts warehouse facilities around the globe.
    Presently 99 percent of all of the plant floor equipment 
has now been validated that it is compliant. And again, we are 
doing some cleanup work during the shut-down period, during the 
months of July and early August.
    In conjunction with the Automotive Industry Action Group of 
America and other industry trade associations around the globe, 
like the VDA in Europe, Ford has been participating in a global 
supplier readiness program for production and critical non-
production suppliers.
    As of this report today about 80 percent of our suppliers 
responding are deemed ready. We have a very comprehensive 
process to validate that including onsite assessments and 
audits that validate the validity of the responses and 100 
percent of our supply base are indicating readiness by year-
end. About 10 percent have not responded and additional actions 
are underway to validate the status of both these suppliers and 
those that go beyond September of this year. So, we have a 
magic date no further than September.
    Actually, to be honest with you, we have chinned our 
suppliers, dealers and affiliates to the same aggressive Year 
2000 program we have internally which really takes us back to 
June of this year.
    A similar program has been established for all of our 
affiliates as I said, and as of month-end, June month-end, 89 
percent are ready, with 100 percent slated to be ready by 
December. Compliance status for some of the other impact areas 
include 80 percent of all of our critical product development 
test equipment, 97 percent of all of our end-user computing. 
So, we have actually gone down not only to the desktop but to 
all the applications running on the desktop, all the access 
data bases, the Excel Spreadsheets, all of that have been 
looked at very, very closely.
    And 96 percent of all of our technical infrastructure is 
now compliant and we have monitored very closely much of what 
you heard today in terms of where the telecommunications 
industry is and where our particular equipment is. We have done 
a significant amount of testing in that area. Next, 83 percent 
of all our end-dealership systems are compliant and 97 percent 
of all our physical properties and infrastructures are 
compliant. Finally, 100 percent of all of our vehicle 
components are compliant both past and present.
    As stated in the most recent SEC filing, which we issued 
about a week ago, Ford estimates that we will be spending about 
$403 million to complete this initiative so we clearly have not 
taken it very lightly from the very beginning. That is up from 
$375 million. We have added Volvo to our program, of course, we 
have made substantial progress, obviously, as we approached our 
key dates of June of this year.
    I think last year at the end of December, we were at about 
$155 million; we are now up to almost $300 million in spending. 
This total spending, of course, will be incurred over a 3-year 
period. It started about mid-1997 and will take us through mid-
2000. And I say that because we are still going to keep our 
resources in place through certainly the February timeframe, 
February 28, 29, because in our testing we have tested, we 
actually have 12 distinct tests, periods that carry us through 
until we feel we are totally compliant. This outlay that I 
indicated amounts to about 10 percent of our total information 
technology budget.
    We, of course, are very confident as to our readiness as 
well as the readiness of our affiliates, dealers, and 
suppliers, so we may be a bit more positive than some of what 
you have heard this morning. However, it is clear that the 
interdependence of the entire supply chain does represent the 
greatest risk to us.
    In particular, an extended infrastructure failure, that is 
gas, electric or water, would make it difficult for us to 
operate our manufacturing operations. Accordingly, during the 
fourth quarter of last year we did begin a very extensive 
business contingency planning process for all of our critical 
business processes. Most of these plans are now complete and 
validation of these contingency plans will be completed in 
September. Obviously, we are monitoring very, very closely much 
of what you have heard today, the Gartner Group studies. We are 
obviously looking at the U.S. Government to provide additional 
input. We are validating that input in each of the countries 
that we do business with our own people and, of course, 
developing plans around that.
    In addition, we have created a Global Response Center--in 
fact, we launched it July 1--to be used as an information 
clearinghouse for the most current status available as we enter 
the new millennium. And critical systems are being processed 
through an independent verification and validation process as a 
final check for readiness. So, although, we have validated all 
of our critical systems, assured their compliance, put them 
back in production, we are going through an independent IV&V 
process here during the middle of the year to make sure that we 
have not missed anything, we have not interjected anything as 
we have moved the business forward during calendar year 1999.
    Finally, a very small number of our employees are being 
notified now to serve as onsite or on-call support over the 
holiday period to coordinate a response to any unexpected 
glitches that may be experienced by Ford or those who rely on 
Ford's consumer products and services.
    I will tell you as one point of information that we are 
very encouraged with our supply base and the work that we have 
done with them and their work. We are now transmitting 
electronically a Year 2000 transactions to them. In fact, 
during January of this year, in our parts and service 
organization, we began submitting what we call 10-10 
transactions, that is 10-month/10-week forecasts which included 
zero-zero in the transactions. We had very, very few issues. 
They were resolved very quickly.
    And we are now sending electronic Year 2000 related 
transactions to all of our production and critical 
nonproduction suppliers around the world and have not, at this 
point, identified any incidents. So, we are very, very 
encouraged at this point of the progress that we have made and 
our partners have made.
    So, this concludes my prepared statement. I would like to 
again thank the committee for the time that you have afforded 
Ford Motor Company to present its program and, of course, I 
would be happy to respond to any questions.
    [The prepared statement of Mr. Surdu can be found in the 
appendix.]
    Senator Smith. Thank you very much, Mr. Surdu.
    I assume with all the resources that you have expended you 
have actually found problems and you have corrected them?
    Mr. Surdu. Clearly. Clearly.
    Senator Smith. And had you not done that, if others are not 
doing this, they will encounter significant difficulties.
    Mr. Surdu. Yes. I mean this is--clearly we are very 
positive on the status and the program but also we are very 
focused that this program and this issue is real. We needed to 
do this and, in fact, we have found problems in all the impact 
areas.
    Senator Smith. Why do we not go with the testimony and we 
will go next to you, Mr. Click.

 STATEMENT OF KEVIN CLICK, DIRECTOR OF WORLDWIDE Y2K CORPORATE 
       COMPLIANCE EFFORTS, PHILIP MORRIS COMPANIES, INC.

    Mr. Click. Mr. Chairman, and members of the committee, good 
morning. My name is Kevin Click and I am Director of Corporate 
Audit and head of Worldwide Year 2000 Corporate Compliance 
Effort at Philip Morris Companies, Inc.
    In this capacity I am responsible for overseeing and 
coordinating all compliance activities relating to the Year 
2000. This includes briefing senior Philip Morris management as 
well as the audit committee of the Board of Directors regarding 
our Y2K compliance status. My formal submission for the hearing 
record describe the Y2K readiness programs underway within our 
company.
    We have a high level of confidence in our preparations and 
our internal business and factory systems are now over 97 
percent compliant. However, as the committee is well aware, a 
key concern for most American multinational corporations is the 
readiness of our international business partners, including 
customers, vendors and utility providers, and governmental 
entities.
    We interact with over 70,000 business partners around the 
world, 6,000 of which are considered highly critical to the 
success of our businesses. I, therefore, would like to 
highlight three initiatives that we have taken to ensure the 
continuity of our supply chain and the day-to-day operations of 
our international affiliates.
    Specifically, our business partner programs, our 
contingency planning efforts, and our transition management 
programs. As we contacted our business partners to assess their 
readiness, we quickly realized that the first priority was 
education and assistance. In parts of the world many of our 
partners had not even heard of the Y2K problem until we briefed 
them. We, therefore, initiated an extensive series of awareness 
programs for our business partners as well as the communities 
in which we operate.
    The awareness program in our tobacco business in Central 
and Eastern Europe typifies our efforts around the world. We 
organized, sponsored or participated in education programs 
throughout this region including activities in Kazakhstan, 
Poland, Russia, Turkey, the Ukraine, and the Czech Republic, 
among others. We worked with the U.S. Department of Commerce, 
the American Chamber of Commerce, local trade organizations and 
other groups to sponsor and support Y2K conferences and 
seminars.
    We also produced awareness materials in nearly every 
language in the region, and we worked directly with our most 
important business partners to help ensure they understood the 
Y2K issue and how to resolve it.
    Going forward, we will continue to work with and monitor 
our business partners throughout the world.
    In spite of our wide-ranging education and assistance 
initiatives, we still consider over 600 critical international 
business partners to be at high risk or likely to suffer Y2K-
related failures. We, therefore, developed comprehensive 
contingency plans, both preemptive and reactive, to address 
possible disruptions.
    The three key concepts behind our contingency planning 
program are straightforward. To address risks in our upstream 
supply chain we are increasing our onsite inventories of raw 
materials throughout the world, particularly for those items 
that are sourced from higher-risk countries.
    To address risks to our manufacturing processes, including 
utility failures, we are increasing our inventories of finished 
goods and have contracted for backup power generation 
equipment.
    To address risks in our downstream distribution systems, we 
are shipping finished products as close as possible to the 
final consumer, including clearing the products through ports 
and customs facilities. While the costs of these measures are 
substantial, we believe them necessary to protect the 
continuity of our businesses.
    Finally, due to the sheer volume, complexity and 
interdependent nature of our systems, manufacturing processes 
and business partners, errors and interruptions could occur 
which were neither anticipated nor planned for. While we 
believe that dramatic problems would be rare, the cumulative 
effect of numerous individual issues could be disruptive.
    Therefore, we are implementing transition management 
programs in each of our businesses to handle the expected 
short-lived increase in problems. Each transition management 
team will include help-desk operations, a transitional response 
team, and event response teams which will incorporate and 
supplement our existing problem resolution organizations and 
processes.
    In summary, we believe there will be problems and 
disruptions due to the Y2K issue, particularly with our 
international business partners. However, we believe our 
comprehensive business partner, contingency planning and 
transition management initiatives will help guide us through 
the Year 2000 change-over with as few disruptions as possible.
    Thank you for your attention and I will be happy to respond 
to any questions you may have.
    [The prepared statement of Mr. Click can be found in the 
appendix.]
    Chairman Bennett [presiding.] Thank you very much.
    Mr. Roberts.

  STATEMENT OF PATRICK M. ROBERTS, SENIOR VICE PRESIDENT FOR 
       BUSINESS AND INFORMATION SERVICES, AHOLD USA, INC.

    Mr. Roberts. Good morning.
    Chairman Bennett, and members of the committee, I am 
pleased to speak to you today regarding the issues facing 
global corporations with respect to foreign suppliers and 
operations related to their Year 2000 preparedness.
    Royal Ahold is a rapidly expanding international parent 
company of retail supermarkets, health care stores, and hyper-
markets in Europe, Asia, the United States and Latin America. 
Ahold USA, a subsidiary of Royal Ahold, is headquartered in 
Atlanta, Georgia, and is the fourth-largest grocer in the 
United States.
    We operate approximately 1,000 stores operating under the 
brand names of Stop-and-Shop, Giant, Tops, and BI-LO. Mu 
statements today address Ahold's Year 2000 initiatives and our 
preparedness as a subsidiary of Royal Ahold.
    Ahold is taking the Year 2000 problem seriously and has 
aggressively addressed all identified technology and business 
issues. Total project spending will be in excess of $50 
million. Ahold began its Year 2000 efforts in 1996 and in 1997 
and 1998 our focus primarily was on technology. This year our 
focus is on business continuity planning and event management 
planning.
    Up until the event, December 31, 1999, we will continue to 
perform software testing both internally and, whenever 
possible, with critical external partners. On those items over 
which we have direct control, we are confident that our early 
start will result in little to no impact in our operations.
    Ahold supports an autonomous operating company model, both 
foreign and domestic. Our dependence on foreign companies is 
focused in our supply chain with re-sellable products. Overall 
we have classified the risk of a disruption in our 
international supply chain as a low probability of occurring, 
but a high potential impact if there was a disruption.
    We are addressing this exposure through our Year 2000 
supply chain methodology. Less than 5 percent of our sales are 
from products we directly source from international companies. 
At the same time, however, we estimate that 25 percent of our 
sales has some kind of international content. Based on our 
research and in-depth discussion with almost 250 of our top 
critical suppliers, our findings have led us to rate the 
potential for disruptions in our business from international 
sources as low.
    A great deal of our international product supplies have 
significant inventory in the United States that provide us a 
buffer, for example, spices, sugar, rice, specialty grocery 
items. Our most critical suppliers are large corporations and, 
on the whole, are taking Year 2000 seriously and are applying 
the resources required to correct the problem within their 
companies including in-depth interrogations of their 
international suppliers.
    Also, they are developing contingency plans to minimize 
exposure from failures in foreign operations. As an example, 
through ongoing communications with one of our large suppliers 
in the produce category, we have determined that it owns its 
farms in foreign countries, is complete with its critical 
technology correction projects, owns a majority of the 
transportation chain, has visited the primary ports to assess 
potential risks, has met with U.S. Customs to assess potential 
concerns and is using this information to actively create 
contingency plans.
    Some categories of products require special consideration. 
Coffee and tea are purchased through commodity brokers. They 
usually have 180-day supply of inventory in the supply chain. 
We have labeled this as sufficient. General merchandise has an 
acquisition lead time of several months duration. The majority 
of this seasonal and holiday merchandise is in our distribution 
centers weeks prior to the need.
    Perhaps our largest area of vulnerability is with 
pharmaceuticals. From our research more than 70 percent of the 
drugs sold have some foreign content. For most, there is no 
good alternative supplier. Many of these products are necessary 
to the continued good health of our customers. This is the area 
over which we have the least control and potentially the 
highest risk.
    Red Cross and FEMA recommends that people prepare for Year 
2000 as one would for a severe weather situation. This appears 
to be an adequate preparation strategy.
    Ahold will not be able to eliminate international exposure 
entirely. Based on our analysis of our top critical suppliers 
we have a high confidence rating in the Year 2000 preparedness. 
We will continue our dialogs with our major suppliers and 
refinement of our contingency plans throughout the end of the 
year.
    Ahold is actively developing contingency plans to address 
potential disruptions. We are conducting exercises to test 
these plans. One strategy that has been developed relative to 
international suppliers is to utilize our parent company, Royal 
Ahold, with its global supply chain and local presence in most 
major markets to assist in restoring any disruption.
    Another major initiative in this area is the creation of 
the event management plan. This will address how we will 
monitor and react to Year 2000-related disruptions. The plan 
encompasses not only our technology operations but day-to-day 
operations of our stores, warehouses and administrative 
facilities.
    Communications are critical to successfully reducing the 
potential risk of the Year 2000 disruption. We have five 
primary audiences for which we have active Year 2000 
communications plans: Our stores, the food retail industry, our 
suppliers, the local communities we serve, and our customers. 
We have a sizable team that is dedicated to communicating with 
our suppliers. The Food Marketing Institute has done an 
excellent job assisting us with local community relations and 
facilitating cooperation across our industry.
    A most encouraging part of our conversations with our major 
suppliers has been their openness and candor regarding their 
Y2K readiness programs, including the strategies that they are 
pursuing in their business contingency plans. We have seen a 
significant increase in requests for participation in community 
events. As a result, publications are being distributed to our 
customers to let them know we will be here on January 1st and 
beyond.
    In summary, Ahold anticipates minimal disruption caused by 
our direct and indirect dependence on foreign suppliers. We 
have expended significant effort in developing business 
continuity plans to minimize our risks. There has been and will 
continue to be open and frequent communications with our 
suppliers to address all new issues.
    We believe there are real and tangible benefits to Ahold 
USA in being a subsidiary of a truly global company with strong 
business relationships with multiple major product suppliers in 
diverse locations. At the same time, we would say that there is 
some risk of Year 2000 disruption within the grocery industry. 
We do believe some foreign countries and companies have not 
sufficiently the Year 2000 problem and our strategy is to find 
alternate product sources to minimize our dependence on 
partners.
    And, finally, we are aware that Congress is working 
diligently to ensure our infrastructure will be ready for the 
event. We would ask that Congress look at providing further 
assistance in areas that Ahold has identified that may have a 
potential impact to the health and safety of all U.S. citizens.
    Additionally, we request your support in ensuring the 
readiness of our Federal programs administered at the State 
level, specifically the electronic benefits transfer program 
that affects our citizens who may not be able to plan ahead for 
any temporary disruptions.
    Thank you.
    [The prepared statement of Mr. Roberts can be found in the 
appendix.]
    Chairman Bennett. Thank you very much.
    Mr. Krichbaum.

  STATEMENT OF CHARLES KRICHBAUM, DIRECTOR, YEAR 2000 PROJECT 
                     OFFICE, PRAXAIR, INC.

    Mr. Krichbaum. Good morning, Chairman Bennett.
    My name is Charlie Krichbaum and I am the Director of the 
Year 2000 Global Project Office for Praxair.
    Praxair is one of the largest industrial gas suppliers 
worldwide with 1998 sales of $4.8 billion. Our products, 
services and technologies bring productivity and environmental 
benefits to a wide range of industries, including aerospace, 
food and beverage, electronics, steel, chemicals and others. 
Thank you for inviting me to speak on behalf of Praxair this 
morning.
    The goal of Praxair's Year 2000 project is to prepare our 
plants and systems around the world to continue to run safely 
and smoothly through the Year 2000 and beyond so that we can 
serve our customers, protect our employees, and the communities 
in which we operate.
    To provide a sense of our global operations, Praxair 
operates in 43 countries and over 40 percent of our sales come 
from outside of North America. These sales from outside of 
North America come primarily from South America, Europe and 
Asia. While many global businesses rely on imported goods and 
services, this is not a significant issue for Praxair. We 
produce our products locally in the countries where we operate. 
Therefore, the impact of critical infrastructure failures is an 
integral part of our overall planning process for Praxair.
    Praxair began working on the Year 2000 issue in 1996, and 
formed a global project office in early 1998 to accelerate our 
progress. The project office reports directly to Praxair's 
Chairman, Bill Lichtenberger and is accountable to coordinate a 
matrix of global teams to ensure effective management of 
resources.
    Under the leadership of the global project office, Praxair 
implemented a worldwide Year 2000 readiness program that 
focused on Praxair's systems, equipment, facilities and 
products.
    The program included six key process steps which were 
awareness, inventory and assessment, renovation, validation, 
implementation and most important, business contingency 
planning.
    Praxair, like other companies, may be affected by the Year 
2000 problem of its suppliers. The nature of our business is 
such that the most critical suppliers for Praxair around the 
world are those that supply electricity, natural gas and water. 
To minimize disruption of these services we have taken a number 
of important steps:
    Suppliers of critical equipment, systems and services 
around the world, including those that supply electricity and 
natural gas, have been identified and surveyed for their 
readiness. Results of these surveys provide important input 
into our readiness planning.
    By working with our suppliers, we have been able to jointly 
identify and resolve many potential Year 2000 problems.
    We continue to refine how we will best communicate with 
suppliers over the millennium transition weekend, should any 
Year 2000 failures occur.
    To date, we have assessed and are in communication with 
approximately 900 utilities and 4,300 other suppliers 
worldwide.
    We also have an active, ongoing communication effort aimed 
at responding to customer inquiries and gathering information 
that we need for our own planning process. This ongoing 
communication with both our suppliers and customers is critical 
to the success of our planning process.
    It should be noted that in the United States these efforts 
have been accelerated and facilitated by the passage of the 
Year 2000 Information and Readiness Disclosure Act, which 
became law last October. It has allowed for the rapid 
dissemination and receipt of important information under an 
umbrella of good faith. We, at Praxair, very much appreciate 
the efforts that resulted in this important legislation that 
has allowed industry to exchange information that is useful for 
correction of the Year 2000 problem.
    To minimize disruption to our critical operations, internal 
systems and the ability to produce and supply product to our 
customers, all of our business units have developed contingency 
plans and business continuity plans. Our contingency plans 
provide detailed operating instructions to local personnel in 
the event a failure occurs. These plans are generally site-
specific and include local considerations related to utilities, 
telephone services, security and fire alarm systems.
    Our business continuity plans focus on mitigating potential 
failures across and entire business unit and develop business 
strategies to maximize safety, delivery of product to customers 
and efficient operations.
    In summary, Praxair has essentially completed the 
renovation and testing of its business processes, plant 
operations and computer systems critical to safety and the 
company's business.
    We do not expect catastrophic collapse of global 
infrastructures or sustained outages. We do, however, 
anticipate that we will likely experience temporary 
interruptions of electric power or other utility supplies to 
one or more of Praxair production facilities due to a Year 2000 
failure of a utility supplier.
    Throughout the remainder of the year we will continue to 
complete, schedule work, test our contingency plans, and 
business continuity plans. In addition, we plan to man a 
central command center over the transition weekend.
    We believe that these activities will provide another level 
of readiness preparation should any external or unknown problem 
arise for Praxair.
    Thank you very much and I will be happy to answer any 
questions.
    [The prepared statement of Mr. Krichbaum can be found in 
the appendix.]
    Chairman Bennett. Thank you.
    We will now hear from Mr. Haukebo.

  STATEMENT OF KEVIN HAUKEBO, Y2K PROGRAM MANAGER, PROCTER & 
                             GAMBLE

    Mr. Haukebo. Mr. Chairman, I want to thank you for this 
opportunity to share with you Procter & Gamble's preparation 
for the Year 2000. We appreciate your leadership that this 
committee has shown in identifying problems and solutions. 
Specifically you asked that I address the impact of Y2K on our 
global supply chain and our ability to maintain operations 
abroad. I will highlight my testimony and ask that the 
remainder be inserted in the record.
    Chairman Bennett. Yes. All of the statements in their 
entirety will be part of the record.
    Mr. Haukebo. We have been working hard over the last 3 
years to minimize the risks of potential Y2K disruptions to our 
business. This work has included an internal review that I 
would like to touch on briefly and an external review that 
covers our global supply chain. Our initial efforts focused on 
identifying and correcting critical information and embedded 
technologies. We inventoried and prioritized these systems and 
technologies based on how critical they are to our business.
    For example, our facilities services group has checked over 
10,000 systems in nearly 300 locations. Our information 
technology organization has completed work on over 7,000 
applications and nearly 200,000 pieces of technical 
infrastructure and our product supply organization has finished 
work on over 100,000 internal components at 150 sites and 
analyzed over 10,000 suppliers.
    This in-depth knowledge of our internal readiness is 
instrumental in formulating our approach with external 
partners. We have undergone considerable efforts to contact our 
external business partners to ensure that current business 
operations are maintained through the millennium transition. 
These external partners include suppliers, customers and 
service providers. We initiated this process to build our 
confidence in their ability to ensure the ongoing health of 
their business.
    Our objective is to manage risks related to Y2K with our 
external partners while maintaining the integrity of our supply 
chain so that our consumers have access to our products.
    Clearly there is no simple or automatic formula for 
determining business criticality and risk of partners. We have 
developed a criticality risk grid which is being displayed to 
help us categorize our partners and determine the appropriate 
follow-up steps. For example, we conduct face-to-face meetings 
with critical suppliers worldwide.
    Based on our work to date, we are not expecting any major 
disruptions to our supply chain. We either have confidence in 
our partners or have developed work-around plans that are ready 
to execute with more than 99 percent of our external partners.
    We realize that there will be outages beyond our control. 
The impact will vary from country-to-country. We have developed 
business continuity plans which assume something will go wrong.
    But the objective here is to protect our critical business 
processes from disruption or failure before, during and after 
the Year 2000. These processes are supply chain, cash-flow, 
communications, and site utilities. Specifically you asked for 
our perspective as a multinational company on the status of the 
infrastructure for critical utilities abroad.
    Our initial assessments started with the Gartner Group 
information on utility risks. Much of that was shared with this 
committee. Local Procter & Gamble country contacts then follow-
up with the utility providers in each of their local locations. 
We solicit information using an in-depth questionnaire, 
personal phone calls, face-to-face interviews, where possible, 
to confirm this information.
    We are posting figure 2 which gives us our assessment which 
confirms the Gartner data about where we are with 
infrastructure status by country.
    We have also completed utility risk assessments at each of 
our manufacturing, office and data center sites worldwide. This 
includes completing internal remediation efforts and staffing 
plans for critical periods. In addition, we have developed 
contingency plans to deal with potential electric, gas, water 
and sewer outages.
    We have also examined the impact of Y2K on 
telecommunications. We have assessed the risk of voice and data 
disruption where we do business due to the Y2K transition. In 
general, we consider parts of Eastern Europe, Asia, Latin 
America and the Middle East to be of medium-to-high risk.
    We have tested various telecommunication options, such as 
satellite phones for high-risk sites, and other satellite 
alternative for data transmission. In addition, we have been 
working with the International Y2K Alliance of Multinational 
Companies to deal with regulatory issues impacting 
telecommunications. The U.S. Department of State has been very 
supportive and we appreciate the State Department's help.
    In summary, we are working hard to ensure that the brands 
our consumers know and trust are going to be there when they 
need them. While we do not expect any major disruptions to our 
business, we are preparing contingency plans to address outages 
beyond our control.
    We believe that preparedness of Procter & Gamble and our 
people will help us meet the challenge of Y2K.
    I want to thank you again for this opportunity and I will 
be happy to answer any of your questions.
    [The prepared statement of Mr. Haukebo can be found in the 
appendix.]
    Chairman Bennett. Thank you.
    We are grateful to every member of the panel and one of the 
reasons we put you on at the last and as a single panel is that 
you got to hear everything that came before and, so, we can ask 
you, do you have any comment, contradiction, confirmation, 
whatever, on anything that has been said either by the State 
Department, by the second panel or amongst yourselves.
    Does anyone have a burning desire to speak up and say, wait 
a minute, I really disagree with that or you should pay real 
attention to that because that one was right on. You get to be 
the cleanup hitters that can comment on what you have heard.
    That is the only reward for going last. Sorry to have made 
you sit through the whole morning.
    Mr. Surdu. Senator?
    Chairman Bennett. Yes?
    Mr. Surdu. Senator Bennett, I might just say that all the 
analysis that we have seen and we have heard and we continue to 
follow very closely relative to the international preparedness 
continues to be very consistent. I mean we have validated to 
the best of our ability within countries, as I said, that we do 
business in. In some cases, however, and I think it should be 
my opinion understood that individual plans relative to the 
identified readiness by country, obviously, will differ from 
company to company based on their business implications.
    As an example, the only area that we are looking at 
slightly differently, and I would share this with the 
committee, is China in this case. I know China has been 
generally moved up in terms of their preparedness.
    One area that we are looking into right now is in the area 
of customs. China is one of the few countries where the customs 
process is slightly different in that the paperwork and the 
equipment go together. And there are some differences when you 
think about that if, in fact, they have some problems from a 
customs office standpoint, how do you get the shipment out of 
China?
    So, as we are looking through our contingency plans as we 
get closer to the new millennium, obviously, we are watching 
very closely. Our plans will get modified from time-to-time but 
certainly the China customs office area is one that we are 
looking at very closely right now.
    Chairman Bennett. On this committee we have looked at U.S. 
Customs as well.
    Mr. Surdu. Right.
    Chairman Bennett. Because it would be great if we get 
everything coming in and then suddenly it stopped at our 
borders because our computers do not work.
    Mr. Click?
    Mr. Click. I would agree. Essentially I have not seen too 
many contradictions in what has been presented today and what 
our understanding is on a global basis. I would like to comment 
on one of the comments on the gentleman from CIO Magazine, who 
was discussing when programs will be completed. And, in fact, I 
think that my colleague from Ford mentioned it as well.
    Our plan will run well into the Year 2000, not the 
remediation part of the program but essentially monitoring our 
business partners up through and into, well into the next year. 
So, we will not disband our team until the March timeframe.
    Chairman Bennett. Hmm-hmm.
    Any other? Yes, Mr. Krichbaum.
    Mr. Krichbaum. Yes. I would like to comment.
    I think that one of the things that we have found and 
everyone has talked a little about is continuity planning and 
contingency planning. By working very closely with our 
customers and our suppliers, we can understand both what our 
customers' contingency plans are and what our suppliers' 
contingency plans are.
    It helps to understand what each company is doing in the 
whole supply chain and by sharing that information, we can make 
a stronger linkage. I would pass that along as a learning for 
all of us.
    Thank you.
    Chairman Bennett. You are here as the examples of those who 
are doing it right. And every assessment that we have made out 
of this committee, particularly the consultants, we have sent 
abroad who have worked with the State Department, they come 
back and say the big organizations are probably in pretty good 
shape. And your testimony would underscore that. There is a new 
acronym in town called the SME's, or the small-and-medium-sized 
enterprises. And inevitably that is the area where we get some 
difficulty.
    Now, you have done your analysis of your suppliers. Some of 
you have indicated that your suppliers are not SME's. They are 
all big companies. But do you have a sense from your inventory 
of where the SME's will be in some of these countries, 
particularly--and this is an unfair question, but we live with 
unfair questions around here all the time--those SME's that are 
not being prodded by having a very large partner, like Ford or 
Philip Morris or Procter & Gamble, to look down their throat 
and say, if you do not get in shape we are going to go some 
place else. You have very big hammers with which you can 
enforce your questions.
    Do you have any sense of foreign SME's in the context that 
I have described here? Any of you?
    Mr. Surdu. I will say that per se we do not. If you take a 
look at the size of our supply base--and I agree with you, we 
do have an opportunity to share our practices and get them 
engaged maybe easier than others--but regardless of size, I 
think, you know, we have been focusing attention on the total 
supply base, irrespective of their size, and they have all been 
making very, very good progress.
    We are concerned about, you know, your definition of the 
SMEs, and those, I personally worry about those that are now, 
with 6 months to go less than 6 months to go, are beginning to 
talk about Year 2000 readiness or preparedness actions.
    Chairman Bennett. Yes.
    Mr. Surdu. To that extent, what we have attempted to do for 
some time now is to share where we are with our consumers, 
whether it is via letters through our dealer body, whether it 
is our web page to share information on where we are at and 
what is going on, in hopes that that will help them get engaged 
as quickly as they need to get engaged to be there.
    So, I do not per se have any sense, although I do worry 
when I hear about small-and-medium-sized businesses, I worry 
for them, because at the end of the day it will not only impact 
them, it will impact the economy and all of us at large.
    Chairman Bennett. Mr. Click?
    Mr. Click. We have some experience in that. In our view of 
our business partners in lesser developed countries such as 
parts of Central and South America and parts of South East 
Asia, the level of computer proliferation has not passed down 
to the smaller-to-medium-sized companies as much as in the more 
developed Western Europe and North American areas.
    So, we would be more concerned in the more developed 
countries such as Japan or Korea, more developed Asian 
countries and more developed countries in Europe or even Russia 
where the medium-sized companies may not have gotten the 
message yet.
    Chairman Bennett. Yes?
    Mr. Haukebo. The other comment I would add is that I think 
as we are going out and I have heard this from several, you 
know, we evaluate how our supply chain is going. And when we 
talk to them we want to talk to them about how are they 
evaluating their suppliers? And I think we are getting a ripple 
effect here where we may be some of the first ones who are out 
there talking to people about this and starting to spread the 
news and warn people about this. We are now seeing the 
subsequent people going out and also doing that to affect their 
supply chains.
    Chairman Bennett. Have you done anything, any of you, or 
are you aware of any effort generally to inform your own 
employees as to where they stand?
    Mr. Surdu. The answer is, yes. I mean we have shared the 
entire program, our status and issues around the Year 2000 with 
our employee base. And obviously as we get closer to the 
millennium we will continue to provide them updates in terms of 
what we know of relative to the general economy international. 
In fact, one of the things that, obviously, we are looking at, 
we understand, obviously, that the government will be providing 
an update shortly in terms of, by country, in terms of 
transportation recommendations and so forth around the 
millennium. That is going to be important to us and that is 
information we will share to our employees as we move forward.
    Mr. Click. We have done quite a bit on this and we have a 
couple of perspectives on it. First, we recognize that our 
employees might be concerned about the growing millennium hype 
and how that might impact them personally.
    For example, if an employee is concerned about their home 
and what is going on with their family, they are going to be 
less concerned about issues at Philip Morris.
    Chairman Bennett. Sure.
    Mr. Click. So, we have initiated a series of internal 
awareness programs through pamphlets, newsletters, articles in 
the company paper, websites, and management presentations to 
give them the type of information they might find useful in 
helping prepare themselves personally for the change over in 
the millennium.
    Second, as we change over, our employees are really our 
first line of defense against any issues that might come up 
whether it is a specific machine that might be malfunctioning 
or the relationship with a business partner or a particular 
internal system they are using. So, we are trying to prepare 
them to be our eyes and ears as we go forward to understand 
what is happening, who to contact, and how to get the 
appropriate corrective actions underway.
    Chairman Bennett. Mr. Roberts?
    Mr. Roberts. We also have a program for awareness within 
our associates. We have been doing that for the past 3 years. 
We prepared a bulletin also for our customers similar to this 
for our associates, to understand where they should be 
planning, how they should be planning for the event. The other 
thing within our company, we have about 1,300 associates poised 
for the months of December and January to be on-board, be on-
call, without leave, to be prepared to handle the disruptions 
if they may come to our customers.
    Chairman Bennett. I think we are going to see more people 
working this holiday weekend than any other in recent history.
    There have been press stories over the weekend about so-
called trap doors left behind by programmers for the purpose of 
accessing their programs and they will say this is done for 
maintenance, future modifications, but there is the fear that 
these might be used in an unethical way either to siphon off 
money or to produce mischief later on.
    Are any of you aware of any efforts to try to monitor that? 
I can understand a perfectly legitimate reason for a trap door. 
But I can also understand the risk that is there. When you are 
dealing with Y2K everybody wants to turn a risk into a 
conspiracy theory and tell us that the world is coming to an 
end. So, do any of you have any comments about that particular 
news story?
    Mr. Surdu. Senator Bennett, I would just tell you what we 
have done at Ford and it is probably fairly consistent in many 
other parts, many other companies. When we remediate code there 
is a before and an after. And there is a very straightforward 
software electronic technique for reporting that which has 
changed. And part of our whole remediation process is to review 
all the changes before they go into production and to sign-off 
on all of those changes.
    So, having someone put something in the code means that 
somewhere you have broken down in the process. But what we have 
done in our process is we validate all the changes before they 
go into production.
    Senator Smith. Mr. Click?
    Mr. Click. Similar to Philip Morris, we are concerned about 
this possibility. It is not just a Y2K possibility. We have 
used external contractors to assist us in our systems 
development efforts for many years. So, to address this 
problem, first, we restrict external contractors to specific 
areas of our test and development computers. Their user IDs and 
passwords are set to expire when their contracts expire. And 
similar to Ford, before any programs that they developed are 
moved back into our production computers, they undergo a 
rigorous quality assurance test by Philip Morris employees.
    So, no system is completely fool-proof but we believe we 
have put prudent controls in place to address the issue.
    Mr. Roberts. I would like to elaborate just a moment on 
what the gentleman from CIO Magazine said. This is an 
opportunity we have within this Year 2000 remediation effort to 
really clean house. We have had the opportunity to examine 
every line of code, every system process in this whole 
remediation effort and we feel, I think, more confident today 
than we ever have that we understand what our base is, its 
secure and it is ready for the transition.
    Chairman Bennett. One final question.
    The thought has occurred to me as I have gone through this 
whole Y2K experience that if the society could be as disrupted 
as it possibly could be as a result of what is basically an 
accidental failure of the computer, nobody planned this. There, 
again, are some conspiracy theorists who would disagree with 
that. But nobody planned this.
    How vulnerable are we to deliberate attacks at some point 
in the future? I have spent some time with the Defense 
Department and they tell me these attacks are literally going 
on every day. People are attempting to break into the Defense 
Department computers either hackers who are doing it just to 
prove that they can; or stalkers or crackers, depending on 
which term you want to use, who are doing it for malevolent 
purposes either for terrorist purposes or some other 
motivation.
    How secure--I think the Defense Department can handle 
itself. I think the Defense Department can defend itself. But 
if I were someone who wished the American economy ill, after I 
had tried to get into the Defense Department a few times and 
failed, I would decide, well, if I cannot take down Hill Air 
Force Base, I will take down Dearborn. I will cause widespread 
destruction and disruption by going after corporate systems.
    What have you done in this process, back to your comment, 
Mr. Roberts--and referring to the CIO Magazine comment about we 
are upgrading and we feel strongly--what have you done on 
security and preparing yourself against a stalker that would 
come at you and, say, for purely malevolent purposes, I want to 
get into your system and one place or another shut you down and 
cause serious disruptions?
    Mr. Roberts. I think that the vulnerability is getting more 
and more with the literacy of the general public becoming more 
and more computer literate. That challenges corporations such 
as ours to take extraordinary measures on security. We build, 
in the common buzz words of firewalls and security, barriers to 
have access into our systems and our computers. I do not 
believe that any of us have the security that the Defense 
Department has but I believe that it is a high priority in most 
of our large corporations.
    To the extent that we can detect, certainly detect, to 
prevent may be an additional challenge, but in detecting it 
allows you to do measures to prevent.
    Chairman Bennett. OK.
    Mr. Krichbaum?
    Mr. Krichbaum. Mr. Chairman, I think that all of us are 
trying to increase the security efforts that we have out there 
and increase the firewalls. One of the things that we plan to 
do specifically during the transition weekend, or roll-over, is 
to isolate our systems to make sure that, during that period of 
time when there are many press articles about the potential of 
hackers and other people, we do not in any way get 
contamination in the system. However, we are periodically 
posting year 2000 readiness disclosure information to our web 
site (www.praxair.com) and we plan to continue updating the 
site through the millennium date change.
    Of course, that is only one period of time and eventually 
you have to put systems back online. But it does allow you to 
make sure that during that window you have secured the systems.
    So, we pursue that at this point.
    Chairman Bennett. Thank you very much.
    I appreciate your testimony and it has been very helpful.
    [The prepared statement of General Motors can be found in 
the appendix.]
    Chairman Bennett. The committee stands adjourned.
    [Whereupon, at 12:34 p.m., the committee was adjourned.]
                            A P P E N D I X

                                ------                                


              ALPHABETICAL LISTING AND MATERIAL SUBMITTED

                                 ______
                                 

                    Prepared Statement of Ron Balls

                              *DISCLAIMER*

    The material in this document is provided for information purposes 
only. The views expressed are not necessarily those of the ITU nor any 
of its members.

    Neither the ITU, nor any of its members, assumes any responsibility 
for the accuracy or completeness of this information and shall not be 
liable for any damages arising from its use.

    1. Introduction
    The International Telecommunications Union (ITU) Year 2000 Task 
Force welcomes the opportunity to address the United States Senate 
Special Committee on the Year 2000 Technology Problem, and to detail 
the measures that the ITU has taken to prepare the telecommunications 
industry for the Year 2000 transition.
    Members of the Task Force, which are drawn from many of the largest 
telecommunications operators and suppliers, are confident that no major 
disruption to telecommunications will occur as a result of the Year 
2000 issue. The international carriers are well advanced with their Y2K 
programs. Many have completed their equipment upgrades and are now in 
the business continuity planning stage. Where difficulties remain, they 
are largely confined to the less developed economies, and the ITU has 
been working hard in these regions to advise and assist these operators 
to achieve as much as possible in the time remaining.
    2. Background
    Following representation from a number of major telecommunications 
operators, the ITU-T Study Group 2 established a Year 2000 Task Force 
in March 1998. The Task Force had the objective of raising awareness of 
Year 2000 and associated issues with telecommunication operators, 
providing practical advice and support, and ensuring cross-
fertilization of Year 2000 best practices amongst the operators.
    The World Telecommunication Development Conference (Valletta, 
1998), placed the matter on the agenda of the ITU - Telecommunication 
Development Bureau (BDT) as an issue to be addressed on an urgent 
basis.
    Subsequently the Plenipotentiary Conference of the International 
Telecommunication Union held in Minneapolis in late 1998 (PP-98), 
adopted a Resolution COM 105, proposed by the USA, entitled ``Urgent 
need for prompt action to address the Year 2000 problem''. Through this 
resolution, the Plenipotentiary Conference resolved to give every 
possible encouragement and support to the efforts of operators and 
carriers around the world to address the problem and called upon 
operators to take the necessary steps to prevent system failures.
    3. ITU Approach to Outreach
    The ITU Year 2000 activities have been carried out in close and 
active collaboration between different branches of the ITU. This has 
ensured a balance between the needs and interests of the developed and 
developing countries in terms of Y2K preparedness.
    In addition, the Task Force has operated in a spirit of co-
operation and with a recognition of the mutual benefit to be gained by 
the pooling of resources and expertise in the face of this challenge. 
It is therefore not a surprise, to those who know the background and 
history of the ITU, that the Year 2000 Task Force has achieved high 
levels of co-operation, both across countries and between competing 
operators in the same country, to a level probably unprecedented 
outside the telecommunications industry.
    The Task Force was formed within the existing structure of the ITU-
T Study Group 2, which exists to provide a forum for standards 
definition and exchange of information to facilitate transfer of 
telephone calls between the various operators and administrators. It 
has sought to involve as many industry representatives as possible in 
the work of the Group, both from telecommunications operators and from 
hardware and software suppliers. It has relied also on members' hard 
work and dedication to the goal of beating the Y2K bug, while ensuring 
others are as well prepared as possible.
    3.1    Task Force Terms of Reference
    The Terms of Reference of the Year 2000 Task Force are to:
      raise Year 2000 awareness among all telecommunication 
administrators and operators
      provide practical advice, support and information
      establish the compliance position of all carriers and 
operators and influence compliance where possible
      promote sharing of information within the 
telecommunication community and with other customers
      promote cross-fertilization of Year 2000 best practices 
among the membership
      provide support and encouragement to developing countries 
on Year 2000 compliance readiness.
    The Year 2000 Task Force has approached its task through a 
combination of measures. Regular meetings and audio-conferences have 
been held between members of the Task Force and of its various sub-
groups.
    See Attachment A.
    These groups cover the following areas:
      inter-carrier testing
      business continuity planning
      information management
      early warning
      developing countries.
    See Attachment B
    3.2    Compliance Questionnaire
    The Year 2000 Task Force prepared a Y2K compliance questionnaire, 
which was issued in April 1998 to all ITU members. To date, the Task 
Force has received over 530 responses from 150 countries, representing 
more than 300 Operators/Carriers.
    Further details are at Attachment E including a copy of the summary 
in the public domain on the web site.
    The responses have assisted the Task Force in identifying problem 
areas to target for action.
    The summary results of the questionnaire are available on the 
public section of the ITU website, while the full questionnaire results 
are available through the site's closed user group. The Closed User 
Group access is only available to Telecoms Operators/Carriers and then 
only to those who have completed and returned a questionnaire.
    An electronic update facility has been provided to enable operators 
to update their information.
    This is the only source of data, that we are aware of, which 
provides a summary of the overall Year 2000 position of Telecom 
Operators which is in the public domain (available to all who have 
access to the world wide web). As such this is referenced extensively 
by Operators, many customer groups and Year 2000 sector bodies.
    3.3    Regional Sub-Groups
    Regional sub-groups have also been established to concentrate on 
specific areas of the world:
      Arab countries
      African countries (French speaking)
      African countries (English speaking)
      North America
      Latin America
      Asia Pacific.
    All of the sub- and regional groups have held meetings and are 
pursuing their own activities, some via electronic communication. The 
results of their work are regularly posted on the ITU Y2K website 
(www.itu.int/y2k), after review and approval by the Information 
Management subgroup. The ITU Year 2000 website has links to websites of 
other organizations and companies, including operators, financial 
institutions, vendors and regional bodies, providing Year 200 related 
information, including compliance programs, test results and best 
practice advice, etc.
    In addition, the activities of the Year 2000 Task Force have been 
publicized and promoted through the web pages and through regular 
articles in the ITU's magazine, the ITU News, which is distributed to 
all ITU members world-wide.
    3.4    Year 2000 Guide for Telecommunication Operators
    Through active collaboration between experts, a comprehensive Year 
2000 Guide has been prepared. The Guide provides telecommunication 
operators with a high-level overview of the process of dealing with the 
Year 2000 phenomenon. The Guide has been widely distributed, under the 
signature of the ITU Secretary-General, to all ITU Member States, 
sector members, National Y2K Co-ordinators as well as to other 
international and regional bodies and standards organizations.
    The Guide is available on the ITU's website in four languages 
(English, French, Spanish and Russian).
    The Guide supplements other activities of the Year 2000 Task Force 
and the technical assistance activities undertaken. It provides all 
telecoms administration, particularly those in developing countries, 
with timely practical advice on how to prepare their telecommunication 
infrastructure for the millennium change.
    3.5    Partnership and Collaboration
    The ITU's Year 2000 work covers all segments of the 
telecommunication industry, representing both operators and suppliers. 
Experts gave generously of their time and expertise by participating in 
the workshops and subsequently providing advice.
    Significant and highly valued in-kind contributions have been 
received from the Government of Australia, British Telecommunications, 
Bell South International, Cable & Wireless, Deutsche Telekom, INMARSAT, 
INTELSAT, South Africa Telkom and Telia. The Administrations of South 
Africa, Morocco, Egypt, Australia, Brazil, and Russian Federation, 
Poland and Jordan have provided support and facilities for the 
organization of workshops.
    The project benefits from extensive collaboration with 
international organizations such as the World Bank, UNDP and regional 
telecommunication organizations such as ASETA and APT and RCC.
    Financial contributions have been received from a number of 
Operators, Vendors and other Organizations. These contributions are 
placed in a separate project account and the contributory sponsors are 
provided with periodic progress reports.
    The Task Force has maintained close contact and co-operation with 
other organizations dealing with the Y2K compliance problem. These 
include the infoDev program of the World Bank, the OECD and the 
European Union. Where appropriate, website links have been established 
between these organizations and the ITU website and vice versa.
    3.6    International Year 2000 Co-operation
    The Task Force has fully supported the United Nations initiative 
relating to the National Coordinators and to this end has
          a) given presentations at both United Nations meetings
                                    11 December 1998
                  and
                                    21-23 June 1999)
          b) hosted a meeting (in Geneva in 3rd to 4th May 1999) of 
        International Sector Coordinators from:
                                  International Civil Aviation 
                                Organization (ICAO)
                                  International Air Transport Agency 
                                (IATA)
                                  International Maritime Organization 
                                (IMO)
                                  International Energy Agency (IEA)
                                  Unipede/Eurelectric
                                  Global 2000 (Private Financial 
                                Institutions) Joint Year 2000 Council 
                                (Public Financial Institutions, 
                                Regulators, Security Commissions etc.)
                                  World Bank
    3.6    Other Groups
    Joint Year 2000 Council
          The Chairman of the Task Force sits on the External 
        Consultative Committee to the Joint Year 2000 Council to 
        provide input on Telecommunication Year 2000 status to this 
        Public Sector Finance Group.
    Global 2000
          Similarly a close relationship is maintained with the Global 
        2000 group to provide a linkage with the private financial 
        sector.
    EUVA/INTUG
          Regular presentations are given to Telecommunications User 
        Groups and sector bodies including the European Virtual Private 
        Network Users Group (EUVA), International Telecommunications 
        User Group (INTUG) and the Securities and Investment 
        Association (SIA) etc.
    3.7    Expert Support
    Requests for expert inputs in launching and managing Year 2000 
programs have been received from several administrations and many of 
these have been met.
    It is likely that more requests will be received in the near 
future.
    A delegation of the experts from the Year 2000 Task Force will be 
visiting two major areas of the world for consultation and discussions 
with operators and administrators on aspects of testing and business 
continuity planning. The visits are planned for August-September 1999.
    4. Impact of Year 2000 on International Telecommunications
    It is unlikely that there will be material disruption to the 
telecommunications network in terms of call connectivity. There is very 
little date information passed across the interfaces in real time. 
Major Operators have undertaken extensive tests, many using the five 
layer model with the final layer being Inter-Carrier (International 
Testing)
    A primary focus of the work of the ITU Year 2000 Task Force has 
been on inter-carrier testing. A considerable number of operators have 
been involved in this activity, carrying out a comprehensive range of 
tests.
    The broad strategy is to ensure that tests are carried out 
involving each type of International Gateway Switch and with as much 
global reach as is possible in the time and that logistics will permit.
    To date tests have successfully been completed involving the 
following Gateways:



    Futher detail is at Attachment C.
    There may still, however, be difficulties in connecting a call to 
some Operators, and there may be some consequential effects due to 
traffic being diverted via other routes. However, the Task Force 
remains of the view that major players and their major trading partners 
are not likely to see significant disruption to service as a direct 
result of Y2K.
    An impact which does require some attention is the possibility of 
congestion at the time of the Century Date Change with an increased 
level of calls and customers checking for dial tone.
    5. Status of Preparedness (by region)
    5.1    Raising awareness
    A primary goal to ensure the achievement of the following 
components throughout the various regions of the world:
      Raise awareness of potential problems and potential 
solutions among developing countries and disseminate information 
required for establishing and managing Year 2000 programs at national 
and sectoral levels;
      Provide platforms for the exchange of information amongst 
operators in the developing countries with operators with established 
Year 2000 programs and suppliers;
      Provide expert support to countries requesting assistance 
in launching and managing their Year 2000 programs;
      Conduct assessments/studies highlighting the needs of 
developing countries; and
      Collaborate with other organizations, viz., infoDev 
Program of the World Bank, the United Nations Development Program, and 
Regional Telecommunication Organizations (viz., APT, ASETA, RCC etc.).
    5.2    Information Dissemination
    Absence of awareness is an obstacle that must be overcome in order 
to enable operators and governments to initiate action to address the 
problems associated with the year 2000 risks. To tackle lack of 
awareness at government level the ITU has pursued the ``awareness 
raising'' component by sending communications to Member States and 
sector members and organizing a series of workshops in different 
regions.
    By raising awareness and providing a forum for the exchange of 
information, the goal is to prevent at least major system failures 
related to the Year 2000 problem. In July 1998 a communication was sent 
to all administrations and sector members relating to the Year 2000 
problem including the tool kit developed by the Task Force together 
with the ITU Year 2000 self-assessment questionnaire.
    5.3    Regional Workshops
    Workshops have been organized in different parts of the world with 
the support of industry and other organizations with an interest in 
assistance to developing countries, notably the World Bank infoDev 
program.
    The objectives of the workshops are to:
      generate awareness about the implications of the Y2K 
problem
      initiate and strengthen information sharing between 
operators with established programs and developing countries
      promote and strengthen effective supplier relations; and
      provide information, standards, tools and techniques in 
evolving strategies and developing action plans to manage successful 
compliance programs, including contingency plans.
    In addition, a number of workshops focusing on specific issues, 
such as contingency planning and business continuity have taken place.
    The participants in the workshops have come from administrations 
and operating agencies, major vendors and international and regional 
satellite organizations and the World Bank. The workshops addressed a 
range of issues which are essential to a successful Year 2000 
compliance program such as testing, quality assurance, management of 
supplier relations and contingency planning. The supplier panels 
featured presentations on the status of compliance of products, the 
capacity to meet the needs of operators and their own contingency 
plans.
    Workshops dates, locations and number of attendees are in 
Attachment D.
    The workshops enabled the identification of countries that need 
further assistance as well as the future information needs of 
developing countries. The participants in the workshops decided to 
constitute themselves as Regional Working Parties on the ITU Year 2000 
Task Force in order to maintain a flow of information. While enlarging 
the scope of participation in the Task Force, this structure 
facilitates a continuous sharing of experience and creates a continuing 
forum in which to discuss mutual issues and problems and develop common 
solutions.
    Operator views on their expected completion dates for Year 2000 
readiness, as advised at the recent workshops are at Attachment xx (In 
a number of instances this is an update on the questionnaire responses)
    5.5    ITU/World Bank Report on situation in Sub-Saharan Africa
    As part of the activities highlighting the needs and specific 
situation of developing countries, the ITU and the World Bank's 
Information for Development (infoDev) Program commissioned a study 
covering 46 African countries of sub-Saharan Africa entitled ``Impact 
of the millennium bug on telecommunications in sub-Saharan Africa''. 
The study estimated the monetary and other resource requirements to 
upgrade or replace network elements, operating systems, management 
systems, telex and mobile networks, in order to achieve Y2K compliance.
    The objective of the study was to answer the question as to the 
resource requirements of the Year 2000 compliance program in 
telecommunication with a view to raising funds on an emergency basis 
for the Year 2000 remediation in the telecommunications sector in sub-
Saharan Africa. This study is being considered by the World Bank and 
other agencies with a view to raising the resources required for 
maintaining the most critical elements of the telecommunication 
infrastructure in the region.
    5.6    Asia Pacific
    The Asia Pacific region has been particularly active in addressing 
the Y2K problem, with regional initiatives led by Telstra Corporation 
of Australia. A fortnightly mailing list was established to advise the 
responsible managers throughout the operators and suppliers in the 
region of IT Y2K taskforce activities. All Task Force documents were 
distributed to more than 25 carriers in the region.
    In addition, Telstra has taken a lead role in inter-carrier testing 
in the region, both domestically and internationally. Since the 
regional workshop held in March 1999 in Queensland, Australia, there 
has been a surge of interest and participation in the tests. The key 
issue has been the availability of captive environments, with live 
switches proposed to be used in some cases. Suppliers have also been 
keen to participate in these. Within Australia, Telstra Corporation is 
working co-operatively with competitors through the Australian 
Communications Industry Forum (ACIF) to manage business and community 
expectations via a focus on inter-carrier service continuity, including 
cross-network testing and contingency planning.
    There has also been considerable activity on testing carried out in 
Japan, Korea, Philippines and Singapore amongst others.
    5.7    Arab States
    The ITU Arab Region Y2K Task Force was set up in December 1998 and 
its most recent meeting was held in Amman, Jordan, in the period 20-22 
April 1999. The meeting was organized jointly by the ITU Regional 
Office in Cairo and the Jordan Telecommunications Company.
    Delegates representing 13 Arab States participated in this meeting, 
namely: Algeria, Egypt, Jordan, Libya, Mauritania, Morocco, Oman, 
Palestine, Saudi Arabia, Sudan, Syria, United Arab Emirates, and Yemen. 
Representatives from the ITU Task Force, international carriers, 
operators, and suppliers were present including Arabsat, British 
Telecom, BCTEL (Canada), World Space, Iridium, Alcatel, and Siemens.
    Each delegation from the operators in the Arab region who were 
present, as well as the carriers, presented very briefly the status of 
their Year 2000 programs. The picture that emerges from the region is 
optimistic. Most operators are on course for completing the compliance 
programs, now turning to deploy contingency plans, and a few major ones 
are likely to participate in inter-carrier testing with other operators 
in the region and further afield. A few least developed countries are 
still in need of expert advice and input.
    5.8    South and Central America
    The workshop in Foz-do-Iguacu hosted by Brazil in March 1999 did 
much to clarify the position in the Region. There is a high level of 
activity, with active participation in inter-carrier testing and some 
innovative approaches to testing. However, there are still some gaps in 
information pertaining to some countries. The active involvement of 
CITEL in the Task Force, it is hoped, will contribute to both increased 
participation and information sharing in the region.
    5.9    Central and Eastern Europe
    The workshop in Moscow for the CIS Region and the Baltic States, 
and the one in Warsaw for Central Eastern Europe, represented the first 
major contact between the operators and administrations in the region 
and the Task Force. Most operators in the region suggest that their 
compliance programs would be completed towards the end of the year.
    At the workshops there has been valuable discussion between the 
Testing experts on the Task Force and the operators and there were 
several expressions of interest in participating in inter-carrier 
testing. However, some concerns still remain and relate in particular 
to equipment which is no longer supported by manufacturers because they 
have ceased to trade. The Task Force plans to further build on the 
contacts established with a workshop on contingency planning, and 
possibly by visiting a few countries in the region.
    5.10    North America
    The North American Telcos have provided extensive support to the 
work of the Task Force with leadership being provided by GTE. Other 
involved groups are the major Long Distance Carriers, the US Telco 
Forum (and some of its individual members), the Canadian Telco Forum 
(and individual members) and others.
    5.11    Western Europe
    Western European Operators have carried out inter-carrier testing 
involving a number of Companies and have provided extensive support to 
the Task Force.
    6. Contingency Planning/Business Continuity
    Following the awareness phase, a major element of the work 
programme has related to Business Continuity Planning. The subgroup 
working on this has prepared material covering the following subjects 
and these have been loaded onto the website:
            Strategy
            Business Processes
            Impact Analysis
            Templates
            Generic Business Processes for Telecommunications 
        Operators
            Glossary
            Slide Packs (for within company presentations)
    Worked examples will be placed on the web site shortly and a 
publication similar the Guide (referred to earlier) is being prepared.
    Activity training programmes are planned in different parts of the 
world and the initial session was held in Amman, Jordan on 20-22 April 
1999. A second workshop was planned for the CIS Region (Irkutsk, 13-15 
July 1999) at the invitation of the Russian Administration however this 
has been postponed to later this year to ensure relevant attendance. 
Training programs are also planned for the Africa Region in 
collaboration with the UNDP and the Asia-Pacific Region.
    The main objectives of the programme are to:
            Provide operators with the background and 
        methodology on how to develop contingency and business 
        continuity plans, and demonstrate these through practical 
        workshops designed specifically for this purpose; and
            Provide a forum for discussion between the 
        operators and major suppliers and facilitate information 
        exchange on the compliance status of products and systems and 
        contingency plans.
    Where appropriate the training programme will also cover testing 
with the objective to:
            Share information and exchange experiences about 
        conducting tests at component, cluster and service levels; and 
        inter-carrier testing within a region and other regions
    Existing processes, using the Universal Restoration Manual, 
augmented as needed, will be used for handling any international 
congestion or terminal difficulties.
    Early Warning
    The Asia Pacific region is key to the ``Early Warning'' system 
being established, using a ``Follow the Sun'' approach to the 
transition period. Between New Zealand and Thailand there is a 6 to 8 
hour window of time, within which 90% of all switch types and 90% of 
all transmission equipment will be in operation. This region therefore 
represents a microcosm of global telecommunications within a 6 hour 
window, and will provide the rest of the world with valuable data on 
any difficulties that may emerge.
    The Early Warning sub group has plans in place to monitor the 
position through each of the 24 time zones adopting a positive 
reporting approach (30 minutes after midnight and at noon on the first 
working day) with information being held on a database at the National 
Co-Ordination Center in the USA. Participating Operators will input to 
this and have access to the information.
    7. Outstanding Issues
    The workshops have been successful in the objective exchange of 
information on the programs of various countries. The presence of 
suppliers provided a good opportunity for both parties to discuss 
problems associated with their equipment and systems. The workshops 
have established that awareness of the problem is rising. Several 
countries have national planning mechanisms in place. Even in the 
absence of national programs, telecommunication operators have begun 
addressing the issue, though it is a matter of concern that lack of 
national planning may aggravate interdependency problems. In many 
developing countries progress is typically constrained by factors such 
as:
            Lack of commitment at highest levels of the 
        organization;
            Sound project management;
            Shortage of skills at various levels;
            Lack of facilities such as testing environment;
            Lack of funds; and
            Low supplier response.
    In view of the likely demand for assistance over the next few 
months, ITU has requested operators with established programs to 
provide expert resources for short periods to be deployed in developing 
countries.
    While it is difficult to accurately estimate likely requirements 
that may arise in the future it is inevitable that this will be a 
growing demand and some of this will be for assistance next year to 
resolve any difficulties emerging. The growing list of countries 
requiring assistance and the limited resources of expertise available 
may become a bottleneck. The ITU is seeking more support from those 
countries and operators that are more advanced and have well-
established programs in place.





























      
                               __________

            Responses of Ron Balls to Questions Submitted by

                            Chairman Bennett

    Question 1. In your testimony, you alluded to but did not discuss 
infrastructure problems (power, transportation, etc.) in developing 
countries. To what extent will ITU members have back-up capabilities in 
the event that host nation infrastructures fail?
    Answer. Most Telecommunication Operators have power supply back 
ups. In the event of power failure batteries take over for the 
extremely short period that it takes for the oil fueled generators to 
kick in. The quantity of oil supplied will depend on the site and 
assessment of risk etc., and could be in the range of a few days to 30 
or so. Some sites in lesser developed countries, more used to power 
outages, will have more than one generator at key locations.
    Question 2. Determining the Y2K readiness of technical equipment 
produced by manufacturers that are no longer in business is a problem 
the Committee has discussed in other venues. Can you estimate how much 
of this non-supportable equipment is currently operating and the 
possible impact on the telecommunications network?
    Answer. Very little with the International Gateway switches. For 
local switches and applications it is difficult to assess but thought 
to be relatively low.
    Question 3. Business continuity and contingency planning is 
particularly important for all public utilities and particularly 
telecommunications. To what extent will telecommunications companies 
have back-up infrastructure capabilities in the event of power and 
transportation failures?
    Answer. See 1 above.
    Question 4. Discussions on ``Early Warning'' systems assume the 6-
hour follow-the-sun window between New Zealand and Thailand will 
provide invaluable warning data. Will you please briefly describe to 
the Committee just how the specifics of any Y2K problem will be 
propagated at the technical level so all countries can learn and take 
advantage of Y2K failure discoveries?
    Answer. We have set up a database whereby those Telecommunications 
Operators who have `signed up'' to the scheme will have the facility 
(password protected) to enter data and receive (read data). The scheme 
is restricted to telecomm Operators and Carriers. It will be up to each 
individual Operator or Carrier to communicate on a wider basis to both 
their own customers and infrastructure providers in the particular 
country.
    Question 5. The global economy is heavily dependent on 
telecommunications due to electronic commerce. How do you suggest that 
global companies prepare for alternative methods of communication if 
portions of the telecommunications network fail?
    Answer. Each individual needs to discuss the specifics of this with 
their service provider as this will vary from company to company and 
from country to country (e.g. some will permit VSAT whereas others may 
not). You will find that most global companies (multi-national 
Corporations already have this in hand within their own business 
continuity plans.
    Question 6. The dates for completion of testing reported in the 
survey responses attached to your statement are questionable to the 
Committee. If one goes down page after page of the survey responses, 
the preponderance of dates for being tested occur on or before the data 
of this hearing, July 22, 1999. For instance, 68% of the Western 
European companies that responded said they would be tested by now. 
Corresponding numbers for other regions are: Africa--55%, Asia/
Australia--66%, Eastern Europe--50%, and the Americas--54%. Have these 
companies really made this much progress? Is the ITU doing anything to 
independently verify data it is receiving in its surveys on Y2K 
readiness?
    Answer. If you look at the web site you will see a considerable 
number of updates since the date of the hearing. We have made 
considerable efforts in this direction following our last meeting (ITU 
Year 2000 Task Force) in August held in Toronto.
    Progress is checked at workshops that are held in specific parts of 
the world, visits to specific countries (recently India, Pakistan and 
China) and support missions (predominantly Africa).
    The Task Force is made up of volunteers from Telco's giving their 
time--we do not have finance available to engage independent auditors.
    Question 7. You've stated that the picture that emerges from the 
Arab States is ``optimistic.'' Yet in the survey response, there was no 
data from these states. Are these states not cooperating in the ITU's 
surveys, and if so, can you tell us why? Also, how do you reach the 
assessment that there is reason for optimism?
    Answer. You have not looked at the data closely enough. Careful 
inspection will show many Arab States in the summary but not under a 
specific `Arab' heading (see under Africa and Asia). We have, however, 
changed the web site and now have a specific North African/Middle East 
Section.
    Optimism--by talking to the Year 2000 Programme Managers and by 
inspection of their plans/program at the workshops we have held.
    Question 8. The chart from the Global 2000 group that was referred 
to in the opening statements was not as optimistic in the 49 countries 
covered as your statement. For instance, only 17 of the 49 countries in 
the table were rated as having adequate information and satisfactory 
progress. That's only 34% of the countries listed in the chart. Your 
statement is much more optimistic. Could you explain the reason for the 
difference in these points of view?
    Answer. Yes, as I stated in the meeting the Global 2000 chart has 
two prime criteria.
    a) Progress
    b) Information in the public domain
    Not all Operators (regrettably) have given sufficient attention to 
public disclosure.
    If you look at the latest Global 2000 chart (V8.2) you will see a 
different picture (more optimistic).
    Question 9. Coordination of contingency plans across country 
boundaries is an important action to avoid global chaos. For instance, 
the International Civil Aviation Organization (ICAO) is coordinating 
regional Air Traffic Control contingency plans. Is the ITU or any other 
body that you know of taking actions to coordinate country to country 
contingency plans so that one country's contingency plan will not hurt 
the telecommunications operations of another country or countries?
    Answer. You cannot equate Telco contingency plans with that of air 
transport, the physical transfer and the means of transmission are 
different. Contingency plans are locally based and will not impinge on 
another country.
    The ITU Year 2000 Task Force has published guidance related to re-
routing of International traffic to mitigate against possible 
congestion. This is in addition to the Universal Restoration Manual 
that is used and the normal communication (conference Bridge) between 
the Network Management Operators Centres of the major telecomm 
operators.
                               __________

                    Prepared Statement of Gary Beach

    My name is Gary Beach and I am publisher of CIO magazine, the 
leading publication for chief information officers (CIOs) and other 
senior executives who use information technology (IT) to improve their 
business. CIO magazine provides current information and case studies on 
the effective use of technology. Our readers work in major 
corporations, primarily Fortune 1000, and in federal, state and local 
government agencies.
    My Year 2000 expertise includes daily dialogues with business and 
technology executives as publisher of CIO magazine, and my work on the 
Steering Committee of YES Corps, an international network of voluntary 
Y2K experts supported by the International Y2K Cooperation Center, the 
United Nations and the World Bank. The subject of my testimony is 
``Global Corporations and Their Exposure to Y2K.''
    In June of this year, a public-interest coalition of CIO magazine; 
Dr. Ed Yardeni's Y2K Center, a public service of the chief economist of 
Deutsche Bank Securities; and Information Systems Audit and Control 
Association (ISACA), a recognized global leader in information 
technology governance, control and assurance, conducted a Y2K Experts 
Poll. The coalition polled Y2K experts in an effort to help the public 
and their policy officials assess the Year 2000 readiness of 
organizations around the world. The survey addressed Y2K corporate 
issues of readiness, confidence, third-party failures, contingency 
planning, legal issues, economic impact and the personal at-home 
actions of executives close to the Y2K remediation process.
    The poll was conducted via the Web. An e-mail invitation from the 
three coalition members asked recipients to participate only if they 
were professionally and actively involved in Y2K projects. Respondents 
linked to an electronic polling form in the e-mail solicitation. CIO 
magazine invited CIOs and other high-level executives from its 
subscriber list to participate; ISACA invited its worldwide members. 
The titles of respondents included accountant/auditor, chief executive 
officer, president, chief financial officer, chief technology officer, 
information technology consultant, management consultant, Y2K projects 
consultant, and manager, director, or vice president of information 
technology or information systems. The online poll closed June 16 with 
a final, qualified sample size of 892 respondents, a very respectable 
sample with a plus or minus error of 3.3 percent.
    The majority or 55 percent of respondents were from large, U.S.-
based corporations. Forty-five percent represented firms outside the 
United States. Sixty-one percent of respondents reported their firm 
employed more than 1,000 employees. The majority of poll participants 
were from the financial sector (26 percent), followed by manufacturing 
(17 percent), government (9 percent), and healthcare (5 percent). 
Respondents were roughly split three ways among IT executives, finance 
executives and corporate management.
    The Y2K Experts Poll is a snapshot of Y2K readiness among large 
global firms with an average of 1,300 partners or suppliers connected 
in a worldwide, electronic domino chain.
    Now, I would like to present the major findings from the Y2K 
Experts Poll that are particularly relevant to this hearing. For your 
edification, complete findings of the poll are included with this 
testimony.
    In the survey, we asked respondents when they expected to finish 
all phases of their Y2K projects, including testing. Their responses 
indicate 1999 Y2K project completion is moving along, but not 
completed. Eighty percent reported they were more than three-quarters 
finished. However, 33 percent admitted they were behind schedule. In 
addition, 8 percent, or almost one in ten, said they will not complete 
their Y2K work until the Year 2000 or beyond.
    Keep in mind these are huge, global firms with significant fiscal 
and human resources to focus on Y2K. I am concerned that many companies 
are behind schedule with only six months left until the immovable 
deadline. If a significant number of large, global companies are 
lagging, what does that say for small businesses here and abroad? Small 
companies simply do not have the same level of manpower and resources 
as big companies.
    Nowhere have I seen data, until this poll, that quantifies the 
percentage of large firms that admit they are not going to make the 
turn-of-the-century deadline. The fact remains, no one knows what will 
happen if organizations are not ready for the millennium. What this 
data does show us is that some large, global companies already know 
their computerized systems will not be ready in time. The consequences 
could range from minor inconveniences like a disruption in utility 
service to widespread economic, social and political upheaval. Given 
the range of outcomes, businesses should obviously make every effort to 
prepare for the Year 2000.
    Respondents were also asked to characterize their organizations' 
contingency planning. The poll found 49 percent of companies had a 
contingency plan and 50 percent did not have one or were still in the 
process of creating one. Of the respondents with a contingency plan, 60 
percent said they were already implementing it. Contingency plans could 
include training employees how to perform tasks manually versus via 
computer. The poll also found contingency planning by this group of Y2K 
experts did not include significant stockpiling of business materials, 
supplies or products. Thirty-four percent of companies said they were 
not stockpiling; 19 percent of companies said they were preparing to 
have two to seven days of extra inventory on hand. Translation: more 
than likely, any economic disruptions will be triggered by fear, not by 
additional inventory stockpiling.
    We also asked firms about their supply chain, specifically how they 
were assessing their vendors' Y2K preparedness as well as what 
percentage of their vendors were not Y2k ready at the time of the poll. 
We found 12 percent of large companies were verifying their business 
partners' Y2K readiness by conducting on-site visits. Forty-eight 
percent of respondents had sent out questionnaires followed by 
telephone calls. 20 percent had sent out questionnaires with no 
telephone follow up, and 13 percent were having informal conversations 
with their partners about the state of their readiness. Mr. Chairman, 
Y2K readiness is not a topic to be relegated to the level of informal 
conversations.
    In my face-to-face personal conversations with CIOs, many tell me 
they think they will be ready. But, when I ask about their partners, 
their eyes drift toward the floor and they say they don't know. They 
cannot verify their trading partners' readiness. I am concerned that 
large corporations are not taking the danger of supplier failure 
seriously enough. Why not? Three reasons come to mind: 1) time, there 
is not enough of it to verify the Y2K readiness of the supply chain, 2) 
expense, corporations are extended fiscally simply getting their own 
house in order and 3) logistics, how can they possibly manage the 
complexities of verifying the Y2K readiness of 1,300 other companies? 
Too many businesses appear to be relying heavily on trust. Companies 
are more rigorous when it comes to preparing routine legal contracts. 
In this case, we are talking about the potential for serious 
repercussions.
    Globally speaking, supply chain readiness poses its own set of 
problems. While American multinational corporations may be able to 
exert leverage with domestic trading partners, they may have much less 
leverage with some of their critical supply-chain partners overseas, 
namely government-owned telecommunications and electrical utilities in 
foreign countries. Often national governments operate these services 
and there are few, if any, alternate commercial providers.
    The supply chain, which is heavily interconnected, may seriously be 
affected by incomplete or no delivery of Y2K-compliant mission-critical 
software. Thirty-five percent of large firms said they have not 
received Y2K-compliant versions of mission-critical software programs 
from third-party vendors.
    We asked respondents if any of their mission-critical systems were 
expected to fail or malfunction as a result of Y2K. One of the most 
daunting statistics from our survey was that these large firms expected 
3 percent of their mission-critical systems to fail or malfunction. 
Again, we are talking about mission-critical systems. Some large 
companies, providing anything from utilities to consumer products, may 
not be able to provide people with the necessities they rely on like 
food, water and electricity. Furthermore, 3 percent of respondents said 
they expect major problems in their telecommunications service; and 2 
percent said they expect major problems with their electrical service. 
So there will be problems, not widespread, but major problems 
nonetheless.
    It is clear that not every company is going to make the January 1, 
2000 deadline. There is good reason to believe that mission-critical 
software is not going to be delivered in time. I'd like to leave this 
committee with the following call to action. By September 30, 1999, 
organizations should be compelled to have a contingency plan in place. 
To help them accomplish this goal, the Senate Special Committee on the 
Y2K Technology Problem could provide answers to frequently asked 
questions about ``How To'' develop a contingency plan. This information 
must be made available online.
    CIO magazine, ISACA and Dr. Ed Yardeni's Y2K Center will be 
conducting a second Y2K Experts Poll in September. At that time, it 
will be interesting to note the percentage of contingency plans 
companies have created and put into place as well as whether the 
mission-critical software delivery numbers change.
    Thank you for the opportunity to share my testimony and the data 
from the Y2K Experts Poll with you.





























      
                               __________

           Responses of Gary Beach to Questions Submitted by

                            Chairman Bennett

    Note: A substantial portion of Gary Beach's testimony before the 
Committee was based on the first Y2K Experts Poll (6/99). Since the 
hearing, CIO Communications, Dr. Ed Yardeni's Y2K Center and ISACA have 
conducted a second poll (9/99). Wherever possible, we used the most 
recent data to help answer the questions.
    Question 1. Your survey of 982 Y2K experts indicated that 35% of 
large firms do not have compliant software to implement 
interconnectivity in their supply chain. Where does the fault lie for 
this critical weakness and who is going to fix it? How are they able to 
complete necessary Y2K testing without compliant third party software 
and will there be time available to complete testing once compliant 
software is attained?
    Answer. In my opinion, the responsibility for not having a Y2K 
ready supply chain lies mainly with the user corporation which was 
probably late to realize the seriousness of the situation. For 
manufacturers of Y2K compliant software whose products may be late to 
market, the culpability lies in poor development processes or to a 
lesser extent the inability to hire information technology (IT) workers 
to actually build the software.
    As for who will fix the weak link, it will likely have to be a 
combination of the organization experiencing or identifying any Y2K 
fallout with support from their external IT suppliers and/or 
consultants.
    The longer a user corporation waits to install and then test Y2K 
remediation software, the greater the risk. Why? A piece of software 
may fix problem ``A'' but create problem ``B''. As time draws closer to 
the 12/31/99 rollover, there is just not enough time, money or human 
resources to address the digital domino scenario for those who are 
behind the eight ball. If an organization doesn't receive the necessary 
Y2K compliant third party software, there is no hope of completing Y2K 
testing on time.
    Question 2. Your poll is not reassuring for business operations 
continuity. How do you see contingency planning, your principle 
recommendation, filling in the continuity gap left by Y2K failures in 
the five months remaining?
    Answer. The Y2K Experts Poll is a snapshot of Y2K readiness among 
global, large firms with an average of 1,360 suppliers. For this kind 
of corporation, there is little hope of entirely avoiding Y2K mishaps. 
Contingency planning must include first and foremost, prioritizing 
firms and processes in the supply and manufacturing chains that are 
essential to the continuation of the firm. Contingency steps must then 
be planned to allow a firm to continue the delivery of goods or 
services if a Y2K problem strikes. Therefore, the most essential step 
of contingency planning is the isolation of the processes and the 
partners absolutely necessary for the business to survive.
    Question 3. The Committee has been told that contingency planning 
requires in depth employee training to be effective in business 
continuity. Did your poll delve into the specifics of how Y2K 
contingency plans will be implemented?
    Answer. No, the poll didn't delve into that area. But, in addition 
to creating contingency plans for their employees, smart corporations 
are also working with employees of critical partners and employees of 
critical customers to help ensure that important employees in the 
supply chain are ready to handle any disruptions in business as usual.
    A separate research initiative, conducted by our sister company IDC 
Research, presents an overview of contingency plans. The IDC report, 
Y2K Compliance and the Impact on ICT Spending: An Analysis by Company 
Size and Industry (Azzara, 8/99), supports the fact that most companies 
had some form of contingency plan in place, be that in the form of 
written procedures, designated SWAT teams, proactivity with partners, 
or a combination of these plans. Multiple plans were implemented 
primarily in companies that fall into the mid- to large-sizes. IDC 
(Azzara, 8/99) also identified strategy use by industry. We are able to 
see from this research that:
          Over 50% of each of the following industries have implemented 
        Written Procedures as part of a contingency plan: Banking 
        Depositories, Insurance Companies, Discrete Manufacturing, 
        Healthcare Services, and Utilities;
          Over 50% of each of the following industries have implemented 
        Designated SWAT Teams as part of a contingency plan: Banking 
        Depositories, Communications, Transportation, and Utilities;
          Less than 50% of each of the following industries have 
        implemented Proactivity with Parnters as part of a contingency 
        plan: Financial Services, Communications, Wholesalers, 
        Retailers, and Other Services.
    A chart showing these facts is included with this document.
    Question 4. You noted that 60% of corporations with contingency 
plans are already implementing them. Would you please briefly 
characterize what that really means and what they are in response to?
    Answer. The main contingency activity underway is making certain 
that a firm has enough materials and supplies to continue 
manufacturing/delivering goods or services and having enough finished 
goods in inventory to sell if a supply chain partner has a serious Y2K 
problem.
    Another activity smart companies are undertaking is training their 
workers how to perform their duties the old fashioned way (i.e., 
manually). For example, airlines ought to school their reservations 
staffs on how to manually write out tickets in case computers 
malfunction, and retailers/restaurants ought to show their workers how 
to manually write up sales via old fashioned credit card charge slips, 
etc. in case of telecom or computer glitches.
    Question 5. Do the 8% of firms that indicate they will not be Y2K 
compliant by the year 2000 fall into identifiable categories of 
companies that can have a critical business impact on our economy?
    Answer. Technology limitations do not allow us to drill down and 
answer this question. Additionally, we suspect the sample bases would 
not be large enough to project reliable results.
    Question 6. Would you discuss your Y2K concerns about foreign-
government-owned telecommunication monopolies that support global 
businesses? We have an ITU representative, Mr. Ron Balls, here that 
perhaps can provide some answers during his testimony.
    Answer. The concern is this: while these government-owned telecoms 
are now fully aware of the potential problem of Y2K on their countries, 
because of their monopolistic positions, many realized the seriousness 
of Y2K too late and are now in the unfortunate position of playing 
catch up without resources or time to complete the necessary work.
    Question 7. Your poll indicated that 33% of respondents admitted 
they were behind schedule. This is very significant and gives one pause 
as they look at self-reported scheduled completion dates. Would you 
briefly address to what degree they are behind schedule? What are the 
primary root causes of the schedule slippages? Do those that reported 
being behind schedule fall into any particular categories?
    Answer. Nearly one in three firms continues to be behind in Y2K 
preparation, remediation and testing. Sixteen percent are 1-4 weeks 
behind, 8% are 5-8 weeks behind and 6% are more than 8 weeks behind (9/
99) Y2K Experts Poll. Root causes of this situation clearly, in my 
mind, lay with poor management execution and the fact that some firms 
underestimated the time necessary for testing. Y2K is and always has 
been a management challenge, not an excessively difficult technical 
challenge. Some firms may be behind because they are waiting for the 
delivery of Y2K compliant software.  .  .and some because they are 
unable to hire enough workers to remediate the software code. But the 
major reason is this: some businesses did not properly plan their work.
    Again, technology limitations do not allow us to drill down and 
answer your question about whether the firms who are behind schedule 
fall into particular categories. Additionally, we suspect the sample 
bases would not be large enough to project reliable results.
    Question 8. You testified that, more than likely, any economic 
disruptions would be triggered by fear and not by additional inventory 
stockpiling. Given that the greatest number of respondents were from 
the financial sector, how likely is it that this is representative of 
other industries?
    Answer. Since it is widely believed that the financial sector is 
one of the best prepared industries, the Y2K Experts Poll results are 
more optimistic than they might be otherwise.
    According to our polling partner and noted economist forecaster, 
Dr. Ed Yardeni, his primary concern is neither stockpiling nor fear but 
rather possible disruptions in computer systems that run just in time 
manufacturing which could lead to a recession.
    Question 9. Did your poll look into the critical dates that 
corporations are preparing for other than the change from December 31, 
1999 to January 2000? For example, how many are looking at and 
preparing for possible problems on 9/9/99 or February 29, 2000 to March 
1, 2000?
    Answer. No.
                               __________

            Prepared Statement of Chairman Robert F. Bennett

    Good morning and welcome to today's hearing. The global 
corporations that have provided us with witnesses today play an 
instrumental role in sustaining America's economic strength, and have 
helped create a level of prosperity nearly unrivaled in American 
history. The success of these companies is vital for our nation's 
continued economic growth on the world stage, and we want to ensure 
that adequate preparations are underway for the Year 2000 technology 
problem.
    The fates of these companies are linked in some fashion to the 
ever-changing state of international affairs. Locating a business or 
subsidiary abroad means becoming vulnerable to potential political, 
economic and infrastructure disruptions in another country. Just as Y2K 
poses challenges in our own country, companies overseas may be at risk 
of electric and telecommunications failures, and to the snapping of 
critical distribution and supply chains that cross international 
borders. For these companies, preparing for Y2K is a task that involves 
not only American know-how, but also the efforts of overseas 
governments, subsidiaries, partners, vendors, suppliers and facility 
managers.
    The growth of global corporations has accelerated over the past 
three decades. In 1970, just before the advent of the microchip, some 
7,000 parent global corporations existed. Today, that number has soared 
to 38,000. It is no coincidence that the number of global corporations 
has increased with the corporate community's widespread use of high-
tech, information-age business systems.
    Global corporations have always comprised an important thread in 
the complex web of global economic interdependence between nations. In 
many cases, American companies act as economic and cultural emissaries, 
expanding free trade and opening markets, spreading democratic values, 
and bringing higher standards of living for working people across the 
globe.
    The information age presents global corporations with unprecedented 
opportunities to build new, international relationships that are 
beneficial for the United States and its economic partners. But the 
same high-tech systems that benefit many companies also contain 
inherent weaknesses. Instantaneous communications; and just-in-time 
inventory, manufacturing and transportation systems are all vulnerable 
to the Y2K problem.
    Assessments of the Y2K preparedness of the international community 
are numerous and vary greatly, demonstrating the range of uncertainty 
that exists globally. Because of these uncertainties, major 
shareholders in the global economy must assess their options and 
establish realistic and practiced Y2K contingency and business 
continuity plans. With only 162 days remaining in 1999, there is still 
much work to do.
    I look forward to hearing the testimony from our witnesses. The 
companies represented here today have developed exemplary Y2K programs 
and established themselves as leaders. The Committee is grateful for 
the commitment that you and your companies have made to publicly 
address this worldwide problem. I must also note that McDonald's Corp., 
which has more than 24,500 restaurants in 115 countries, was unable to 
honor an invitation to testify at this hearing, but has offered to 
testify at a future date. This committee looks forward to adding their 
testimony to this important public record. Thank you.
                               __________

          Prepared Statement of Jacquelyn L. Williams-Bridgers

    Mr. Chairman and Members of the Committee:
    Thank you for the opportunity to testify before your committee on 
Year 2000 (Y2K) global readiness and international trade. The Y2K 
problem is one of the most challenging project management and systems 
conversion efforts ever faced by the world community. As you know, the 
Department's challenge in addressing Y2K extends well beyond its 
Washington headquarters, because failure of systems in countries 
hosting U.S. Government organizations and U.S. businesses has the 
potential to disrupt this country's ability to carry out its foreign 
affairs agenda and protect U.S. interests abroad in the year 2000. In 
the context of this hearing, those interests include the conduct of 
international trade, which is threatened by potential Y2K-related 
failures in key infrastructure sectors, such as telecommunications, 
transportation, and energy.
    SUMMARY
    At your March 1999 hearing on international Y2K issues, I provided 
an overview of global Y2K readiness based on host country assessments 
developed by U.S. embassies and on our own visits to 25 sites in 20 
countries. My testimony discussed Y2K readiness in terms of the varying 
levels of progress the different countries had made in assessing and 
fixing their systems-and the message was decidedly mixed:
      Industrialized countries were well ahead of the 
developing world; however, some of those locations were at risk of 
having Y2K-related failures because they were late in establishing Y2K 
leadership at the national level, and because they were heavily reliant 
on computer technology in key sectors;
      Developing countries generally were lagging behind and 
were struggling to find the financial and technical resources needed to 
resolve their Y2K problems; and
      Former Eastern bloc countries were late in getting 
started and were generally unable to provide detailed information on 
their Y2K programs.
    Over the past 4 months my office has continued to be actively 
engaged with the Department of State and our embassies and consulates 
overseas to assist them in meeting the millennium challenge. Of 
particular interest to your Committee, my office has also continued to 
assess Y2K readiness in the international arena. For this hearing on 
Y2K and international trade issues, we are providing our assessment--
based on information from our embassies, from our own visits, and other 
sources--of the risk that Y2K might cause failures in key sectors in 
countries around the globe. With less than 6 months to go before the 
date change, the message again is mixed:
      Approximately half of the 161 countries assessed are 
reported to be at medium to high risk of having Y2K-related failures in 
their telecommunications, energy, and/or transportation sectors. The 
situation is noticeably better in the finance and water/wastewater 
sectors, where around two-thirds of the world's countries are reported 
to have a low probability of experiencing Y2K-related failures;
      Industrialized countries were generally found to be at 
low risk of having Y2K-related infrastructure failures, particularly in 
the finance sector. Still, nearly a third of these countries (11 out of 
39) were reported to be at medium risk of failure in the transportation 
sector, and almost one-fourth (9 out of 39) were reported to be at a 
medium or high risk of failure in the telecommunications, energy or 
water sectors;
      Anywhere from 52 to 68 developing countries out of 98 
were assessed as having a medium or high risk of Y2K-related failure in 
the telecommunications, transportation, and/or energy sectors. Still, 
the relatively low level of computerization in key sectors of the 
developing world may reduce the risk of prolonged infrastructure 
failures; and
      Finally, and similar to the developing world, key sectors 
in the Newly Independent States and other former Eastern bloc nations, 
are a concern because of the relatively high probability of Y2K-related 
failures.
    These assessments suggest that the global community is likely to 
experience varying degrees of Y2K-related failures in every sector, in 
every region, and at every economic level. As such, the risk of 
disruption will likely extend to the international trade arena, where a 
breakdown in any part of the global supply chain would have a serious 
impact on the U.S. and world economies. In light of all this, the 
challenge now facing the United States is to encourage and facilitate 
contingency planning by individual countries, their regional partners, 
and by international organizations such as the United Nations.

             Department of State International Y2K Efforts

    The Department of State has long recognized that the potential for 
Y2K vulnerability is not restricted to its domestic operations and has 
implemented measures to assess the Y2K readiness of all countries where 
the United States has a diplomatic presence. These measures include the 
following:
      In November and December 1998, the Department's embassies 
and consulates used a standard survey to collect information on the 
effectiveness of host countries' Y2K programs, vulnerability to short-
term economic and social turmoil, reliance on technology in key 
infrastructure sectors, and the status of Y2K correctional activities. 
The information from this survey, as well as from other sources, such 
as the World Bank, United States Information Agency, and this office as 
well, was analyzed by staff under the direction of the National 
Intelligence Council.
      On January 29, 1999, the Department issued a worldwide 
public announcement on the Y2K problem to inform U.S. citizens of the 
potential for problems throughout the world because of the millennium 
``bug.'' The notice cited specific areas of concern, including 
transportation systems, financial institutions, and medical care, as 
activities that may be disrupted by Y2K-related failures. Further, this 
announcement goes on to warn that all U.S. citizens planning to be 
abroad in late 1999 or early 2000 should be aware of the potential for 
problems and stay informed about Y2K preparedness in the locations 
where they will be traveling.
      In February 1999, the Department provided all of its 
embassies and consulates with a Contingency Planning Toolkit. The posts 
were instructed to use the toolkit to assess the probability that Y2K-
related failures might occur in key infrastructure sectors, including 
finance, telecommunications, transportation, energy, and water/
wastewater treatment. Based on this assessment, posts were to develop 
contingency plans and identify the resources (generators, radios, etc.) 
needed to handle Y2K-related emergencies. As of the end of June 1999, 
nearly all of the Department's posts had completed their host country 
infrastructure assessments and developed draft contingency plans.
      In June 1999, the Department provided additional 
instructions to its embassies and consulates on how they should 
approach host governments concerning Y2K issues. Posts were asked to 
discuss with the host government its assessment of Y2K readiness in the 
country; gain a deeper understanding from the local authorities about 
what remedial actions and/or contingency plans are contemplated; and 
inform the host government that the Department has a responsibility to 
notify American citizens if it is aware of credible and specific 
threats to their safety and security, including Y2K problems in 
critical sectors. The Department hopes that approaching all countries 
now with this information will spur them to either correct the problems 
or to take remedial actions, such as contingency planning.
    In mid-August of this year, the Department plans to notify select 
host country governments of its concerns about Y2K-related problems 
that could affect American citizens living or traveling in those 
countries. The Bureau of Consular Affairs will bring these concerns to 
the attention of the traveling public in September, when it issues 
Consular Information Sheets concerning Y2K.

                    OIG Year 2000 Oversight Efforts

    International Y2K Efforts: Host Country Preparedness
    My office has continued its activities in international Y2K issues 
through our efforts to engage host country representatives and promote 
information sharing and cooperation. We analyzed Y2K Host Country 
Infrastructure assessments submitted over the past 2 months by U.S. 
embassies in 161 countries: 98 in the developing world, 24 from former 
Eastern bloc countries and the Newly Independent States, and 39 from 
industrialized countries.
    OIG has continued to meet with host country Y2K program managers; 
representatives from key infrastructure sectors, such as utilities, 
telecommunications, and transportation; and with private sector 
officials to discuss their respective Y2K programs and to share 
information. A summary of OIG international Y2K site visits is provided 
in Table 1.
    The information we collected about host country readiness provides 
general insight into a host country's efforts to reduce the impact that 
Y2K-related failures might have. This information represents the 
situation at a particular point in time. OIG visits began in September 
1998, and the situation in some of those locations may have changed 
since then.



    OIG has provided information summaries on each of these countries 
to appropriate Department staff, the President's Year 2000 Conversion 
Council, the United States Information Agency, congressional 
committees, and to other foreign affairs organizations.
    Results of OIG International Y2K Risk Assessments
    Based on our work in the countries cited above and on our 
assessment of other information provided by the Department, a number of 
themes have emerged relating to the potential impact the Y2K problem 
may have in the global arena. Our work has resulted in the following 
findings:
    Significant Risk of Y2K-Related Infrastructure Failures Worldwide
    With less than 6 months to go before the Y2K date change, 
approximately half of the world's countries are reported to be at 
medium to high risk of having Y2K-related failures in their 
telecommunications, energy, and/or transportation sectors. As shown in 
Table 2 below, the situation is noticeably better in the finance and 
water/wastewater sectors, where about two-thirds of the world's 
countries are reported to have a low probability of experiencing Y2K-
related failures. The financial arena is considered to be at low risk 
from Y2K in most countries; however, worldwide, the finance sector is 
vulnerable because of its reliance on other, more risky sectors, 
including energy and telecommunications.



    See Chart 1 in the appendix for a visual depiction of this table.
    Low Risk of Y2K-Related Failures in Most Industrialized Countries
    Industrialized countries were generally found to be at low risk of 
having Y2K-related infrastructure failures, particularly in the finance 
sector. As Table 3 shows, however, nearly a third of these countries 
were reported to be at medium risk of failure in the transportation 
sector, and almost one-fourth were reported to be at a medium risk of 
failure in the telecommunications, energy, or water sectors. Because 
industrialized countries are highly dependent on computer technology in 
every sector, the potential impact of Y2K-related problems is much 
higher than in the developing world. Some examples of problems or 
issues found in our evaluation of industrialized countries' Y2K 
readiness are as follows:
      During our visit to Malaysia, we learned that the 
banking, electricity, and transportation sectors were generally in the 
advanced stages of remediation (fixing or replacing a system) and 
testing. Further, the government and business sectors are developing 
organizational, sector, and national contingency plans as part of their 
Y2K preparations. There is some concern about the Malaysian 
telecommunications sector, which was about 79 percent through the 
remediation stage as of May 1999, because of a lack of detailed 
information.
      During our visit to Seoul, we learned that except for 
banking and telecommunications, the public and private sectors of Korea 
got off to a late start in addressing Y2K issues. Now, both the 
government and private sector organizations are reporting remarkable 
progress in remediating and testing their systems. However, we are 
concerned that the late start and the economic recession (which has 
also affected other Asian countries) means they may not be able to 
complete all necessary work and do a thorough job of remediation and 
testing.
      Taiwanese authorities and large business enterprises have 
made a great deal of progress in addressing Y2K issues. During our 
visit to Taipei, we were told that key parts of the infrastructure 
appear to be in compliance or close to it, and the government is 
preparing its contingency plans for water, transportation, and power. 
For example, the Central Bank and the Bank of Taiwan were tested and 
certified by the Ministry of Finance in April 1999. However, the Y2K 
readiness of small and medium enterprises as well as small medical 
facilities remains a big question.
      A June 1999 embassy assessment of one European country, 
which will be hosting many large-scale millennium events that will be 
attended by thousands of Americans, expressed skepticism about the 
country's telecommunications sector because of a lack of information. 
The assessment further noted that water and wastewater efforts were 
inconsistent, health care preparations were inadequate, but finance was 
in good shape.
      The Y2K readiness of ports and the ships entering those 
ports continues to be a worldwide concern. For its part, the French 
Ministry of Transportation has indicated it does not support closure of 
French ports on December 31, 1999. It suggests that ships moored in 
French harbors do not attempt to maneuver on December 31, 1999. Ports 
and the French Navy will have emergency tugboats on red alert on 
December 31, 1999 should a ship come ashore.
      At a roundtable discussion in one Middle Eastern country, 
businessmen expressed concern about the country's preparedness for Y2K 
and the potential effect on business. In addition to potential problems 
with utilities (water and power supply) and telecommunications, the 
business leaders were concerned about medical services, food 
distribution, and the aviation system. One report suggests that water 
may be the weakest link in Y2K preparedness in the region. A Y2K expert 
in a major city in this country advised that the city only has a 1-day 
supply of water and noted that staff responsible for the desalinization 
plants decided to turn the computers back to the year 1995, ``until 
they can figure out how to fix the problem.''
      Contrary to the bad press concerning Japan's Y2K 
readiness, during our visit to Japan in May of this year, we concluded 
that Japanese ministries and companies had been working quietly toward 
compliance, but until recently little information on their progress was 
available in English. The Japanese acknowledge they got off to a late 
start in addressing Y2K, and this may hamper their ability to 
thoroughly address the problem before the end of the year.



    See Chart 2 in the appendix for a visual depiction of this table.
    Higher Risk of Y2K-Related Failure in Developing Countries
    Anywhere from 52 to 68 developing countries out of 98 were assessed 
as having a medium or high risk of Y2K-related failure in the 
telecommunications, transportation, and/or energy sectors, as shown in 
Table 4. Although the financial sector was rated as a low risk in about 
60 percent of these countries, its ability to continue functioning is 
questionable because of its heavy reliance on other sectors, such as 
telecommunications and energy, which are more likely to have Y2K-
related problems. The relatively low level of computerization in key 
sectors of the developing world may reduce the risk of prolonged 
infrastructure failures. Examples of some specific problems or issues 
facing developing countries are as follows:
      There is reported progress in India's Y2K readiness in 
the last 6 months, especially in the critical sectors of banking and 
finance, civil aviation, and telecommunications. But nowhere is the Y2K 
process complete, and contingency planning has barely begun. Most 
worrisome is the potential vulnerability of the 70 percent of the 
electrical power sector controlled by the State Electricity Boards, 
large parts of which only now are beginning basic inventories and 
assessments. However, the power companies we contacted during our visit 
reported no Y2K issues in generating, transmitting, and distributing 
electricity.
      There is now cautious optimism concerning Y2K readiness 
in China, compared to the situation a few months ago. China's Y2K 
representative and other speakers at a Y2K conference in Beijing in May 
expressed confidence in China's electric grid, but also expressed 
concerns about the effect of Y2K on railroad freight, medical devices, 
and embedded chips. Following the conference, a Y2K article in the May 
25, 1999, People's Daily decried widespread public ignorance and apathy 
about Y2K in China. The journalist estimated that 70 percent of the 
large- and medium-sized manufacturers in China do not take Y2K 
seriously. The author also noted that China may be vulnerable because 
of its use of many obsolete computers and pirated software. In 
addition, the computer systems people sometimes do not know just what 
is on their system. For its part, the Chinese government is conducting 
a Y2K triage, focusing limited resources on critical public utilities 
(water, electricity, public health, and transportation) as the top 
priority and then on key industrial sectors. The Chinese authorities 
expect some Y2K problems but nothing that will put people's lives in 
danger or cripple the economy.
      In Vietnam, because there is a low level of computer 
usage, there is a relatively low threat of Y2K-related failures. 
Vietnam's economy is largely agrarian and based on cash, rather than 
electronic transactions. Further, it was difficult obtaining 
information about Vietnam's Y2K readiness because the government 
tightly controls the information and Y2K issues are not widely 
publicized. The government keeps certain things like maps, drawings, 
electrical diagrams, and financial figures a state secret. We did learn 
that one dam that provides about 80 percent of the electricity to 
Vietnam uses Russian equipment that probably has embedded chips whose 
Y2K readiness is questionable.
      On June 1, 1999, the Ethiopian National Y2K Committee 
advised that Ethiopia has completed its Y2K assessment, and remediation 
is still underway. The cost of Y2K remediation is estimated at $18.7 
million. The air transport, electricity, and water sectors all appear 
to be compliant, but the telecommunications sector is lagging. Some 
sectors are testing now testing their systems for Y2K compliancy, but 
little attention has yet been given to contingency planning.



    See Chart 3 in the appendix for a visual depiction of this table.
    Significant Risk of Y2K-Related Failures in Former Eastern Bloc 
Countries
    Finally, and similar to the developing world, key sectors in the 
countries that were part of the Eastern bloc including countries that 
were part of the former Soviet Union have a relatively high probability 
of Y2K-related failures. Specifically, as shown in Table 5, 14 of the 
24 countries in this category were assessed as being at medium or high 
risk of Y2K-related failure in the telecommunications sector, 15 at 
medium or high risk in the transportation sector, and 17 as being at 
medium or high risk in the energy sector. Nearly all of the Eastern 
bloc countries evaluated are at least partially dependent on computers 
for such key sectors as finance, telecommunications, utilities, and 
transportation. Some examples of problems faced by countries in this 
category are:
      On June 17, 1999, Russian President Boris Yeltsin signed 
a Presidential decree that declares that the Y2K problem is one of the 
utmost urgency and assigns responsibilities to government 
administrators at all levels. The Duma and Federation Council followed 
suit with a new law that provides that owners and operators of computer 
equipment and systems are to be held accountable for assuring Y2K 
compliance. The nuclear sector reports that all safety systems are Y2K 
compliant, and provisions are being made to ensure that back-up power 
will be available. Plant operations computers may have undiagnosed 
problems that could force a shutdown, but we expect safety systems will 
work as needed. There is, however, excess generating capacity within 
the electrical grid, which would allow for continued provision of power 
to high-priority customers even in the event all nuclear power plants 
shut down. On the other hand, we still have some unanswered questions 
with respect to the telecommunications sector, and are endeavoring to 
learn more about possible impacts. The Department of Energy, the 
International Atomic Energy Agency, the International Science and 
Technology Center, and the International Energy Agency are all engaged, 
with U.S. support, in assisting Y2K remediation in Russia, the first 
three specifically in nuclear power plants.
      Although until recently the electricity supply has been 
relatively stable in Poland, there is rising concern that the country 
will experience limited problems due to power generation failures. 
Primarily, such power losses will be localized failures, easily or 
quickly remedied. In addition, telecommunications may be a problem. If 
the local telephone system fails, greater emphasis will be placed on 
the use of cellular phones, already prevalent in Poland. This increased 
use could cause an overload on the bandwidth, thereby resulting in its 
failure also.
      One Balkan country's Y2K efforts were reported as 
disorganized and underfunded, but with some positives. While the 
telecommunications, air transportation, and financial sectors are 
largely compliant, or likely will be by year-end, other sectors, 
including water purification, rail transportation, and the all 
important energy sector appear to be lagging far behind.
      The government of one former Eastern bloc country has 
assured the U.S. embassy that there will not be serious interruptions 
in critical sectors, including energy, transportation, water, and 
emergency services. The country has established a new Y2K strategy with 
a new Y2K commissioner; however, the program provides no deadlines and 
no new money, raising questions about the government's assurances about 
Y2K readiness.
      The official in charge of another Eastern bloc country's 
Y2K readiness program told embassy staff that it had the know-how to 
correct its Y2K problem, but lacked the financial means to implement 
the changes.



    See Chart 4 in the appendix for a visual depiction of this table.
    Need for Y2K Contingency Planning on a Global Scale
    Y2K-related disruptions in the international flow of goods and 
services are likely, but no one knows exactly where, when, and to what 
extent such disruptions will occur. Because disruptions could seriously 
impact the world's economies, including our own, the Department of 
State needs to take the lead on behalf of our government in 
facilitating global contingency planning.
    In 1998, world trade totaled over $5 trillion, and the United 
States accounted for nearly 13 percent of that total. The global 
trading system consists of a complex network of suppliers, 
distributors, service providers, and customers. An infrastructure of 
energy supplies, transportation systems, telecommunications networks, 
and financial organizations support this system. Disruptions in this 
infrastructure, and the relationships among suppliers and customers, 
will negatively affect individuals, firms, industries, governments, and 
national and regional economies around the world.
    As I discussed earlier in this statement, our Y2K assessments 
suggest that the global community is likely to experience some Y2K-
related failures in every sector, country, and region. The 
international economy is vulnerable because Y2K-related failures in the 
supply chains of one country or region might disrupt the ability of 
other countries to keep their factories working, transportation systems 
running, food supplied, and people employed. Work is underway around 
the world developing contingency plans to ensure continued functioning 
of governments, infrastructures, businesses, and supporting 
organizations within individual countries, but little is being done to 
consider potential supply chain disruptions originating in other 
countries and how they should be handled.
    The Department can take the lead for the U.S. Government in 
facilitating global Y2K contingency planning. With assistance from 
other Federal agencies such as the departments of Commerce, Energy, and 
Transportation and the Federal Emergency Management Agency, the 
Department needs to work with international government, industry, and 
consumer organizations to ensure that global contingency plans are 
prepared for key infrastructure and industry sectors. To do this, the 
Department can be most effective by leveraging the efforts of 
international organizations such as the United Nations, the Asia-
Pacific Economic Cooperation, and other entities that have active Y2K 
outreach programs. In addition, this effort should include applying 
lessons learned from recent disasters (i.e., the December 1998 ice 
storm in Williamsburg, Virginia and the 1996 Kobe earthquake) in such 
sectors as transportation, power, and telecommunications. Further, 
there must be special emphasis on contingency planning for small and 
medium enterprises of 500 or fewer employees that represent 
approximately 98 percent of the supply chains in most countries.
    By promoting a global approach to Y2K contingency planning, the 
Department of State, on behalf of the U.S. Government, can help 
strengthen the ability of all countries to deal with potential 
disruptions in international trade.
    OIG work within the Department of State
    OIG is also playing a significant role in assisting the Department 
to meet the millennium challenge facing their respective information 
technology infrastructures, including computer software, hardware, and 
embedded devices. The Department has recognized that it is vulnerable 
to the Y2K problem, and over the past 2 years has taken steps to 
remediate its systems and infrastructure to prevent disruptions to its 
critical business processes.
    The Department has established a Year 2000 Program Management 
Office (Y2K PMO), which is responsible for the overall management of 
the Y2K program within the Department. The Y2K PMO is responsible for 
tracking and reporting on the progress being made by the bureaus in 
remediating systems, providing technical advice and assistance, issuing 
contingency planning guidance, and certifying systems for Y2K 
compliancy. As of May 14, 1999, the Department reported that it had 
tested, validated, and implemented 100 percent of its mission-critical 
systems.
    My office has assisted in establishing a process through which the 
Department can certify the Y2K compliancy of its mission-critical 
systems, by writing detailed guidelines that each bureau must use in 
developing application certification packages for submission to the Y2K 
PMO. The three-tiered process which resulted is, we understand, one of 
the most rigorous in the Federal Government. It provides the 
Department's senior management with assurance that every feasible 
effort has been made to prevent Y2K-related failures on January 1, 
2000.
    First, using the certification guidelines, the bureaus that 
remediate mission-critical and other critical applications conduct 
tests to verify Y2K compliance of each system. For the second step in 
this process, the complete Application Certification Packages, which 
include the test plans and test results, are independently reviewed by 
the Y2K PMO team specifically contracted for this purpose. In the final 
step, through an agreement with the Under Secretary of State for 
Management, OIG is reviewing the adequacy of all certification packages 
for mission critical systems before they are provided to the Y2K 
certification panel and approved by the Department's Chief Information 
Officer. This approach assures that all applications undergo strict 
independent verification and validation standards to prepare for Year 
2000. Thus far, the OIG has evaluated and provided comments to the 
Department on 17 mission-critical application certification packages, 
and 13 of those have been officially certified.
    Finally, in March 1999, the Department initiated planning to 
conduct end-to-end testing of its core business functions. The purpose 
of end-to-end testing is to ensure that the Department can maintain its 
core business functions on and beyond the rollover to the Year 2000. 
The Department's end-to-end test checks the critical transaction flows 
through the organization across the major business functions, 
applications, and vendor products that support these transactions. 
Toward that end, the Department has organized its end-to-end testing 
around five different clusters, each of which combines a number of 
related business functions. For example, the Business Management 
Cluster includes such processes as personnel actions, financial 
management, and logistics. The other four clusters are Passports and 
Global Consular Systems, Command and Control Communications, E-mail, 
and Security and retesting as needed. The Department plans to have 
completed all end-to-end testing of its five business clusters by 
September 30, 1999.
    In summary, Mr. Chairman, with less than 6 months to go before the 
Y2K date change, the global picture that is slowly emerging is cause 
for concern. Our assessments suggest that the global community is 
likely to experience varying degrees of Y2K-related failures in every 
sector, in every region, and at every economic level. In some 
countries, these failures could be a mere annoyance, such as a 
malfunctioning credit card terminal, while in others there is a clear 
risk that electricity, telecommunications, and other key systems will 
fail, perhaps creating economic havoc and social unrest. As such, the 
risk of disruption will likely extend to the international trade arena, 
where a breakdown in any part of the supply chain would have a serious 
impact on the U.S. and world economies.
    At this stage, it would be prudent to recognize that Y2K-related 
failures are inevitable, both here and abroad. As such, the efforts by 
this Department and other international organizations will be 
instrumental in minimizing the impact that Y2K may have on the global 
community.
    This concludes my statement. I would be pleased to answer any 
questions you may have.





      
                               __________

 Responses of Jacquelyn L. Williams-Bridgers to Questions Submitted by

                            Chairman Bennett

    Question 1. To what extent is the State Department involved in 
assisting the Y2K business continuity plans of U.S. global companies in 
foreign countries, and what is your appraisal of their successful 
outcome?
    Answer. The State Department provides information on host country 
Y2K preparedness and key sector infrastructure to Americans traveling 
and residing abroad. The Department obtains such information through a 
variety of contacts--both public and private--that provide information 
on services such as electricity, telecommunications, water, etc. The 
State Department also meets and shares information with American 
Chambers of Commerce chapters overseas. Other Federal agencies such as 
the Departments of Commerce and Transportation also develop information 
on the host country, which is shared with American companies and 
citizens. The responsibility for developing business continuity plans 
is that of the global companies.
    The successful outcome is dependent on the accuracy of the 
information obtained and the plans developed where information is not 
certain. Those companies that are able to respond to infrastructure 
failures in different ways will most likely be less impacted. Those 
companies that ``place all their eggs in one basket'' and that do not 
have alternative tested plans will suffer more negative consequences.
    As I have testified, there will be problems throughout the world; 
how we handle those problems will determine if Y2K is an annoyance or a 
catastrophe.
    Question 2. Since the global economy is Y2K dependent, does the 
State Department have a roving Y2K team to assist other countries in 
preventing or mitigating Y2K failures?
    Answer. The State Department does not have a roving Y2K team. The 
Department of Commerce has been providing seminars worldwide on how 
small and medium-sized enterprises can address Y2K issues in their 
sphere of influence. The Agency for International Development has been 
reviewing systems for infrastructure building that they have funded.
    The Departments of Energy and Defense have been working with 
personnel in key areas such as Russia to resolve Y2K technical 
problems. Additional areas are under discussion.
    Question 3. You testify that the Y2K readiness of ports and ships 
entering those ports continues to be a worldwide concern. Related to 
the readiness of ports, and critical to us trade, is the Panama Canal. 
Has the State Department done any review of the Y2K readiness of the 
Panama Canal, including its plans for the century date change?
    Answer. OIG has been told that the Department of Defense has the 
lead on the Panama Canal.
    However, the Panama Canal Commission's web site states ``The Panama 
Canal is working on this serious problem at many levels and is 
preparing all our internal systems and operations to be fully ready for 
the transition to the next millennium. To further reduce risks, we are 
contacting our customers to assess how well prepared they are to 
operate during critical Y2K periods.'' It further states ``To avoid 
potential problems with Canal transits, the Panama Canal is studying 
which special operational procedures will have to be implemented on the 
Y2K critical dates. Vessels may be required to demonstrate Y2K 
compliance in order to transit on those dates.''
    Question 4. You have testified about the regions of the world that 
are most at risk of Y2K failure. Have you determined whether there will 
be a significant economic impact on the United States from Y2K failures 
in these regions, or whether any significant impact on the United 
States would be humanitarian in nature?
    Answer. Any long-term Y2K-related failures will have an economic 
impact on the United States. However, the initial impact of any Y2K-
related failures will most likely be humanitarian if there are 
widespread breakdowns in the energy sector--especially in Russia and 
the former Eastern bloc countries.
    Question 5. Please describe your expectation of significant 
unresolved Y2K problems, of whatever nature, in Europe, Asia, Latin 
America, and Africa.
    Answer. There are two major areas in all four regions that remain 
unresolved, and are likely to pose some difficulties as a result of the 
Y2K computer problem. First, globally the health care arena got off to 
a late start and until this year there was little information available 
on Y2K compliance of medical devices. That problem has since been 
resolved, and there are now numerous web sites that provide Y2K 
information on medical devices. In much of the developing world, health 
care remains decidedly low-tech and should not be significantly 
affected by Y2K.
    Another area with unresolved Y2K computer problems includes the 
small and medium-sized enterprises (SMEs). Again, small businesses were 
generally last to become aware of potential problems, and last to begin 
any kind of remediation.
    Further, we found that during our visits to countries hard hit by 
the recession (Brazil, Korea, etc) that many of these enterprises were 
barely surviving financially and thus lacked resources to fix or 
replace their systems. The biggest concern about SMEs is the fact that 
they play a major role in the world's economy, and as a result, Y2K-
related disruptions have the potential to have a major impact on the 
global supply chain.
    Question 6. Do you know when the State Department plans to release 
country-specific information related to Y2K? When will they issue 
advisories related to Y2K, if such advisories will be issued at all.
    Answer. On September 14, 1999, the Department issued revised 
consular information sheets for 196 countries and territories, which 
included country-specific Y2K information.
    On October 13, in my statement for the hearing record, I explained 
the concerns that we have about the adequacy of the consular 
information sheets. Specifically, we felt that some of the consular 
information sheets provided vague information on Y2K, or conflicted 
with information from other sources. As a result of criticisms made by 
my office, GAO, and the press, the Department has asked each post to 
submit proposed language for any updates (positive or negative) to the 
Y2K consular information sheets. The Department has requested that all 
post provide interim status reports, indicating no need for change at 
this time, by no later than November 15th, and again on December 15th. 
On October 29, 1999, the Department issued Travel Warnings for the 
following four countries: Russia, Ukraine, Moldova, and Belarus due to 
potential Y2K-related disruptions.
    Question 7. Your statements on the likelihood of Y2K failures 
across the world are disturbing. I can see how the presence of the 
State Department in so many countries facilitates access to information 
on the local infrastructure, but I did not hear you say how you reached 
the conclusions that you did in your statement. Would you take a few 
minutes and describe for the committee what approach you took to reach 
your conclusions? How do you distinguish between high, medium, and low 
risk, for instance?
    Answer. Our conclusions were based on our analysis of information 
obtained from a number of sources. We reviewed host country 
infrastructure assessments from embassies in 161 countries. In 
developing their contingency plans, embassies were required to assess 
the relative risk (low, medium, or high) that Y2K-related failures 
might occur in key sectors, including among others communications, 
energy, and transportation. These assessments were provided to the Y2K 
project management officer, where they were entered into a data base. 
We compared the embassy assessments with information from the Global 
2000 assessment, and from open sources, such as web sites, other 
government agency reports, etc. Finally, we incorporated into our 
analysis information obtained during our visits to overseas sites. On 
those visits, we collected information on Y2K readiness through 
discussions with representatives from key sectors, including the host 
government, private sector businesses, utility companies, banking, and 
associations (such as the American Chamber of Commerce).
    Question 8. You very often mentioned concern about 
telecommunications in the 161 countries you reported on. As we will 
hear later, the International Telecommunications Union (ITU) has a more 
optimistic picture of global telecommunications than you do. Can you 
explain why your understanding of the telecommunications situation is 
more pessimistic than theirs? Is your data on telecommunications from a 
different source?
    Answer. The reason for the International Telecommunications Union's 
optimism is not clear to my office. Our information collected on 
telecommunications readiness generally comes from our embassies and 
from our direct discussions with telecommunications companies, and 
other private sector representatives in those countries. Even in this 
country most telecommunications companies remain guardedly optimistic, 
and are loathe to declare that they are Y2K compliant--there are just 
too many things that can still go wrong, particularly with embedded 
chips.
                               __________

                   Prepared Statement of Kevin Click

    Introduction
    Mr. Chairman and members of the Committee, I am Kevin Click, 
Director of Corporate Audit and Head of Worldwide Year 2000 Corporate 
Compliance Efforts for Philip Morris Companies Inc.
    Philip Morris Companies Inc. (PM) is the world's largest 
manufacturer and marketer of consumer packaged goods. In 1998, our 
major tobacco, food and beer businesses generated $74 billion in 
operating revenues. With over 144,000 employees around the world, the 
company has staff in virtually every market, who have expertise in 
local business practices, cultures and languages. Our portfolio of 
premium brands includes 73 brands that each exceeded $100 million in 
1998 sales, and 12 that topped $1 billion. The company's extensive 
global network of manufacturing facilities and distribution channels 
ensures rapid response to shifting consumer demand about the world.
    As a truly global organization, worldwide preparations for the year 
2000 (Y2K) computer problem are of vital importance to the continued 
success of our company. As a corporation, we have committed $550 
million to the Y2K compliance and remediation efforts and an additional 
$150 million to replace certain systems, hardware, and equipment. We 
currently estimate we will spend an additional $85 million executing 
preemptive contingency plans. At the height of our remediation efforts, 
over 1,200 PM employees and outside contractors were working on Y2K 
projects around the world, and have committed approximately 2,500 man-
years of professional time to addressing the issue.
    Our senior management fully understands the magnitude and 
importance of the problems we face, and has made the successful 
resolution of the Y2K issue a business priority. The senior management 
team has been actively involved in the oversight process, and receives 
regular progress updates from the management of each operating company. 
Furthermore, our operating company presidents periodically present 
their organization's Y2K project status to PM's Chief Operating 
Officer. In addition, the Audit Committee of the Board of Directors is 
periodically briefed on the company's Y2K compliance status.
    Global Program Overview
    The scope of our worldwide Y2K program is enormous. PM subsidiaries 
and affiliates conduct business in over 180 different markets. We 
operate 220 factories in 50 countries and manage hundreds of office 
buildings, warehouses and distribution centers around the world. Our 
businesses are supported by thousands of computer applications, tens of 
thousands of personal computers, and hundreds of thousands of automated 
control devices within our production and distribution facilities. 
Given the complexity, scope and importance of the project, we 
instituted a cross functional year 2000 program organization in early 
1996 to leverage our knowledge and scale and help monitor the progress 
of our 120 Y2K project teams deployed throughout the world.
    We are pleased to report to the Committee that after several years 
of intensive work, we have substantially completed the worldwide 
remediation and testing of our internal business applications, factory 
controls systems and buildings and facilities. However, as the 
Committee is well aware, successfully resolving internal compliance 
issues does not guarantee a successful transition through the 
millennium crossover. As with most multinational companies, we have 
highly interdependent relationships with tens of thousands of business 
partners, including customers, vendors and utility providers, and 
governmental entities. Many of our critical business partners are 
located in countries where the Y2K issue has not received the same 
level of attention as in the U.S. Therefore, we continue to focus on 
the status of our key business partners and the contingency plans 
needed to address possible disruptions in our supply chain.
    Global Program Details
    Jim Kinney, Senior Vice-President of Information System, Kraft 
Foods, Inc., testified before the Committee on March 2, 1999, regarding 
the Y2K program at our North American food business. Due to our 
centralized coordination efforts, the Kraft project mirrors the efforts 
under way at all our major business units. Therefore, I will not 
redescribe our Y2K program in detail, and will instead focus 
specifically on the concerns raised by the Committee's July 1, 1999 
letter to our CEO, Mr. Geoffrey Bible. However, we would like to report 
the overall status of PM's Y2K remediation efforts. As of June 1999, 
our worldwide portfolio of information systems and factory systems were 
over 97% compliant, a result of the hard work and dedication of our 
employees around the globe. The remaining work primarily relates to 
noncritical systems and should be complete by September 1999. At this 
point, we are confident in our ability to manage all internal 
compliance issues with few disruptions to our businesses.
    Looking forward, our key concerns remain largely outside our direct 
control: the Y2K remediation progress, or more precisely the potential 
lack thereof, at our more than 70,000 business partners around the 
world, particularly in certain international markets. To address these 
concerns, in 1997 we launched an initiative involving management at all 
levels of our organization, to identify, assess, educate, assist and 
monitor our business partners' Y2K remediation progress. Early on, the 
more we learned about the Y2K status at some of our critical business 
partners, the more concerned we became. Since then, we have witnessed 
significant progress in many areas. However, we still believe that some 
of our critical partners will not be ready for the millennium change. 
WE have therefore developed comprehensive, detailed contingency plans, 
both preemptive and reactive, to address possible disruptions in our 
supply chain. Finally, we are in the process of developing detailed 
transition management plans to guide our businesses through the century 
changeover and beyond.
    Business Partner Program
    The first step in our business partner program was to identify and 
prioritize all business partners. This effort required management 
participation from all functional areas in every affiliate. Of the 
70,000 business partners identified, over 6,000 are considered highly 
critical to the success of our business.
    To begin to assess the potential risk to our businesses, our 
partners were initially contacted via letters or questionnaires; 
however, the response to these initial inquiries was less than optimal. 
Therefore, we began the second phase of our assessment, focusing on our 
more critical partners. This phase involved telephone interviews, and 
where appropriate, on-site visits to help ascertain business partner 
Y2K status. Many times, we were the first company contacting them 
regarding Y2K. In some cases, particularly internationally, this was 
the first time they had even heard about Y2K.
    Based on our initial assessments and feedback, it was evident we 
would need to take action to ensure the continuity of our supply chain. 
In most cases, the first step was to educate. For example, in Turkey, 
teams consisting of local information systems and sales personnel 
called on our 110 distributors throughout the country. The teams 
presented Y2K awareness information and helped the distributors test 
critical components of their internal systems. We provided each 
distributor with additional local language information on how to become 
Y2K compliant. This process has been repeated throughout the world, 
with awareness pamphlets created in languages ranging from Italian to 
Polish.
    We have also worked with a variety of organizations around the 
globe, providing expert speakers to help raise awareness of the Y2K 
issue. From local chamber of commerce meetings in Neucha, Switzerland 
to U.S. Commerce Department-sponsored events in Russia and Korea, we 
have demonstrated our commitment to helping raise global awareness.
    In spite of our best efforts, we currently consider approximately 
700 of our more than 6,000 highly critical business partners to be 
higher risk, or likely to suffer Y2K related failures. The majority, 
approximately 600, are international partners. On a percentage basis, 
the numbers may seem low: only 1% of our business partners appear to be 
higher risk. Nonetheless, based on our current understanding, we 
believe we will suffer some disruptions in our supply chain due to Y2K 
failures at our business partners' facilities.
    The actual impact of these disruptions is difficult to predict. The 
company currently believes that the most reasonably likely worst case 
scenario entails some localized Y2K disruptions that may affect 
individual facilities or operations for short periods of time rather 
than long-term, systemic problems. The possible consequence of these 
disruptions include temporary plant closings; delays in the delivery of 
products; delays in the receipt of supplies; invoice and collection 
delays and errors; and inventory and supply obsolescence. Depending on 
the number and severity of Y2K-related disruptions, it is possible that 
the business and results of operations of the company could be 
materially adversely affected. We will therefore continue to monitor 
the Y2K status of our business partners well into the year 2000.
    Contingency Plans
    If we expect disruptions in our supply-chain, we clearly need to be 
prepared. Therefore, the business partner assessment initiative 
described previously becomes a driver for our contingency planning 
process. Each operating company and affiliate has reviewed their 
business and supply chain model and the production and sales plans for 
the first quarter of the year 2000. Detailed contingency plans have 
been defined based on the assessed risk of each component in the supply 
chain, with the following major objectives:
          1. Maintain employee safety;
          2. Maintain the safety and quality of our products;
          3. Prevent disruptions of our employee payroll and benefit 
        programs;
          4. Preserve our customer service;
          5. Safeguard our physical assets; and
          6. Manage overall contingency costs in association with 
        remediation spending.
    One of the most basic contingencies involves stockpiling additional 
levels of raw materials and finished goods. For example, in Europe we 
are increasing our inventory of coffee and cocoa beans by an additional 
three weeks. In our Asian tobacco businesses, we will be adding one 
month of incremental finished goods safety stock throughout the region. 
In some cases, we are moving additional finished products through the 
supply chain, staging inventory as close to the final consumer as 
possible. In other instances, documented work-around procedures have 
been developed. For example, in many Latin American countries we have 
agreed to deliver standard weekly orders to customers in the event the 
order-taking process breaks down.
    Our North American businesses are not heavily reliant on foreign 
suppliers. However, one major exposure is imported coffee beans. To 
address this issue, Kraft Foods plans to hold an additional two to four 
weeks supply of coffee beans on shore in the fourth quarter of this 
year.
    Interruptions in utility services are also a concern. In January, 
pipes in some of our Northern Hemisphere plants would begin freezing 
within hours of losing power. We have therefore contracted back-up 
power generators, where necessary, to ensure the continuity of basic 
infrastructure and safety and security systems. In addition, in certain 
countries we have secured satellite phones to ensure basic 
communications are possible. Of course, extended outages of basic 
utility services would be extremely disruptive, not only to businesses, 
but to the communities where we live and work as well.
    In spite of our best planning, we will undoubtedly face unforeseen 
obstacles. Fortunately, PM, like many other multinational corporations 
operating throughout the world, has considerable experience in dealing 
with unplanned business interruptions. Regrettably, economic crises, 
banking system meltdowns, utility failures, supply-chain interruptions 
and social unrest are not uncommon occurrences in many parts of the 
world. Our seasoned executives are experienced in dealing with 
adversity. In the event of unforeseen disruptions, we believe our 
management team will be able to react quickly to minimize the adverse 
impact on our businesses.
    The comfort provided by these contingency measures has a price. The 
incremental costs of the preemptive measures currently planned are 
estimated at $85 million. This estimate is subject to change based on 
developments in our business partner assessment and monitoring program. 
Also, year-end increases in inventories and trade receivables will 
result in incremental cash outflows of approximately $600 million, 
which will be reversed in early 2000.
    Transition Management
    We are currently preparing for the final phase of our Y2K program: 
transition management. Transition management governs the recovery from 
errors and interruptions that may occur shortly before and after the 
transition to the year 2000.
    PM already has many procedures in place to handle business 
disruptions of all types. However, we recognize that the year 2000 
transition period is unique in the potential volume and concentration 
of problems occurring during a relatively short time period, and the 
potential effect on locations worldwide, rather than a single 
installation. Transition management focuses on handling this expected 
short-lived increase in problems, supplementing rather than replacing 
existing practices.
    Our transition phase will occur between October 1, 1999, and March 
31, 2000. We expect an increase in support requirements and supply-
chain interruptions affecting the flow of goods and services, although 
no one can predict with certainty how and when problems will occur. In 
our opinion, spectacular problems are apt to be rare. More likely, we 
will see a host of small problems that are individually surmountable, 
but whose cumulative effect could be disruptive.
    Our transition management organizations exist at multiple levels. 
Each of these organizations has five principle functional areas: a 
transition response center; help desk operations; event response teams; 
legal support; and a Special Situations group. This command and control 
structure is designed to capture, direct and track responses to all 
problems through to resolution. Many functions already in place for 
other purposes within the operating companies and their sub-
organizations form the foundation of the year 2000 transition 
management team.
    Preparing business operations for the transition period is a 
complicated undertaking that depends greatly on the characteristics of 
the particular business area. Some general preparatory actions include 
freezing production changes, shifting or deferring activities, 
adjusting plant holiday shutdowns and vacation schedules, and creating 
back-ups and contact lists. In each situation, executives are aware 
they must balance the risk and potential impact of year 2000 issues 
against business opportunities.
    Transition management teams are also preparing employees for the 
anticipated impact of the year 2000 on their jobs. Employees must 
assume responsibility for monitoring the software, hardware, equipment 
and third parties that are integral to their job functions since they 
are in the best position to recognize behavioral anomalies and problems 
with quality or performance. Employees who may receive telephone calls 
and queries about year 2000 issues or PM's' performance during the 
transition period must know how to handle those queries to ensure a 
proper and consistent response. All employees will need preparation to 
overcome and defuse millennium hype so they have a realistic sense of 
what could go wrong and what to look for during the transition period.
    Another important aspect of transition planning is communication. 
We are developing communication plans for the transition period 
covering both the method in which communications will be conveyed 
(radio, cell phone, fax etc.) and the content of the communication.
    To ensure that our transition management plan is feasible and all 
components work smoothly when the transition period arrives, we have 
scheduled a rehearsal for September 1999 across all operating 
companies.
    Project Management and Progress Monitoring
    At PM, the primary responsibility for planning, prioritizing, 
funding and executing the year 2000 program rests with our operating 
companies. Mr. Kenney's March 2 testimony provided an excellent example 
of the type of efforts we have under way in all our operating 
companies. However, in recognition of the global and interdependent 
nature of the year 2000 issue, in March 1996 we established a cross-
functional year 2000 program organization to oversee and coordinate our 
Y2K programs worldwide. This organization is also responsible for 
complying with external disclosure requirements.
    To monitor the progress of our program on a company-wide basis, we 
implemented a quarterly reporting process for all our 120 project 
organizations around the world. For our 35 largest businesses, we track 
progress monthly. This monitoring is in addition to weekly and monthly 
progress reporting at the local project and operating company level. In 
addition, our Corporate Audit Department began performing independent 
assessments of Y2K readiness in 1996. The auditors coordinated two 
worldwide Y2K self-assessments for all affiliates and have performed 
independent Y2K reviews at all major affiliates. Also, Y2K status is 
now reviewed during all Corporate Audits, with over 200 performed last 
year. In 1998, we engaged PricewaterhouseCoopers (PWC), our external 
auditors, to provide an independent review our Y2K efforts. Since then, 
PWC has supplemented our own Corporate Audit group in auditing 
compliance progress.
    More recently, we implemented a Y2K ``health check'' program to 
supplement the existing monitoring, reporting and auditing program. 
This initiative provides an additional measure of affiliate progress, 
particularly for our smaller to mid sized affiliates, which may not 
have received the same level of attention as the larger units. Teams of 
independent, senior level Y2K experts from throughout the company spend 
one or two days at the affiliate under review, providing on-the-spot 
recommendations and helping identify affiliates that may benefit from 
additional resources.
    Our progress monitoring system has been critical to the success of 
our overall Y2K program. It has enabled us to ensure sufficient 
resources are allocated to this program and to identify and resolve 
issues in a timely manner.
    Conclusion
    As we enter the final phase of our Y2K preparations, we are 
confident in the measures we have taken to address our internal systems 
and processes. However, we remain concerned about the level of our 
business partners' preparations, and believe we will suffer some 
interruptions in our supply chain, primarily in our international 
markets. The actual impact of these disruptions is difficult to 
predict. The company currently believes that the most reasonably likely 
worst case scenario entails some localized Y2K disruptions that may 
affect individual facilities or operations for short periods of time 
rather than long-term, systemic problems. The possible consequences 
include temporary plant closings, delays in the delivery of products, 
delays in the receipt of supplies, invoice and collection delays and 
errors, and inventory and supply obsolescence. Depending on the number 
and severity of Y2K-related disruptions, it is possible that the 
business and results of operations of the company could be materially 
adversely affected. However, we believe our internal preparations, and 
the contingency measures and transition management approach outlined 
previously should reduce the risk and potential disruptions to our 
businesses.
    That concludes my testimony, and I would be happy to answer any 
questions you may have.
    *  *  *  *  *
    Philip Morris Companies Inc. is a holding company whose principle 
wholly-owned subsidiaries are Philip Morris Incorporated (Philip Morris 
U.S.A.), Philip Morris International Inc., Kraft Foods, Inc. 
(comprising Kraft Foods North America and Kraft Foods International), 
Miller Brewing Company, and Philip Morris Capital Corporation. ``PM'', 
``we'', ``us'' and ``our'' refer, as appropriate in the context, to 
Philip Morris Companies Inc. or one or more of its subsidiaries.
                               __________

         Responses of Kevin D. Click to Questions Submitted by

                            Chairman Bennett

    Question 1. In your written testimony, you state that you currently 
consider approximately 700 or more of your more than 6,000 highly 
critical business partners to be higher risk, or likely to suffer Y2K 
related failures, and that about 600 of these are international 
partners. Are these business partners widely dispersed throughout the 
world, or do they fall in any particular regional patterns?
    Answer. Since our testimony to the Committee in July, we have 
continued to work with and monitor our business partners, and many of 
our critical partners have made good progress in addressing the Y2K 
issue. As of September 1999, we consider approximately 250 critical 
partners to be of higher risk. While these higher risk partners are 
spread throughout the world, we see three primary categories of risk:
      Large suppliers and customers in developing countries 
(e.g. parts of Central and South America, parts of Southeast Asia, and 
parts of the former Soviet Union)
      Medium to large suppliers and customers in more developed 
countries (e.g. more developed Asian countries, parts of Europe)
      Certain governmental entities and infrastructure 
providers in Asia, Latin America, parts of Europe, and Russia (e.g. 
utilities, customs clearance agencies, ports, government tobacco 
monopolies, etc.)
    Question 2. In cases where critical international business partners 
are at risk from Y2K failures due to their own internal processes, is 
Philip Morris considering terminating business relationships in favor 
of business partners with less Y2K risk?
    Answer. First, we have already begun to diversify our supplier base 
so that we have qualified alternatives in place should a given partner 
suffer disruptions. Therefore, we would, and in fact have already, 
changed some business partner relationships due to concerns over Y2K 
preparations.
    Second, changing major suppliers or distributors is a costly and 
disruptive process. In many cases, we have long standing relationships 
with these partners, and we would prefer to maintain these 
relationships. Therefore, we have continued working with our business 
partners to help ensure they understand what they need to do to become 
compliant.
    Finally, there are certain business partners for which there are no 
alternatives, such as the U.S. Customs service. If there are Y2K 
problems at these partners, we will simply have to work through any 
resulting disruptions.
    Question 3. You testify that your firm is initiating some limited 
stockpiling of additional levels of raw materials and finished goods. 
Are you taking these steps due to concerns about the Y2K status of 
certain business partners or due to concerns about such things as 
transportation or other infrastructure?
    Answer. Many of the business partners we consider to be of higher 
risk are transportation and infrastructure. Therefore, when evaluating 
a given supply chain, either upstream or downstream, we consider the 
risk of the weakest link in the entire chain. For example, our upstream 
supply chain might include overseas suppliers, ports and customs 
agencies at both ends, and all transportation companies used in-
between. Stockpiling additional raw materials and finished goods is one 
of the most expedient methods for addressing failures or interruptions 
along any point of the chain.
    Question 4. Your testimony indicates that Philip Morris has 
identified almost $800 million in direct expenses and another $600 
million in stockpiling as the cost of Y2K preparedness. Will you please 
give the Committee some examples of the kind of Y2K business partner 
failures that you fear? Are you concerned that corporate stockpiling 
will create shortages of key items? Is there any industry effort to 
coordinate corporate contingency plans, which might include stockpile 
issues to reduce the possibility of creating a problem?
    Answer. Potential business partner disruptions can be categorized 
into three primary groups. The first would be risks in our upstream 
supply chain, including disruptions at suppliers, transportation 
companies, ports and customs services. The second would be breakdowns 
that impact our internal ability to produce products, such as 
disruptions in utility services. The third would be risks to our 
downstream distribution systems, including our distributors, wholesales 
and/or retailers, and again including transportation companies, ports 
and customs agencies. Our current assessment of higher risk partners 
includes entities along all points of our supply chain.
    Businesses around the world have become more efficient, resulting 
in reduced excess manufacturing capacity available to address short-
term surges in demand. We have therefore been working with our business 
partners for some time to coordinate inventory needs, production 
schedules and delivery dates. We believe this will help reduce the 
possibility of shortages due to stockpiling. However, we are unaware of 
any industry-wide efforts to coordinate corporate contingency plans.
    Question 5. Would you please discuss some of the Y2K problems that 
you expect after January 1, 2000, and how they could affect your 
business?
    Answer. The first, most immediate risk we see is with external 
infrastructure failures, such as interruptions to utility services. If 
these types of failures occur, they are most likely to occur during the 
century roll over. Our contingency plans address these issues, and are 
designed to help ensure employee safety and to protect our assets. 
These types of failures could necessitate facility closures, and could 
result in temporary production outages.
    A second risk we see is with systems that continue to process, but 
provide incorrect data. If a system stops processing, the problem 
becomes obvious and resources can be dispatched to fix it. Processing 
errors that do not stop the system might not be obvious at first. For 
example, a first-in, first-out (FIFO) inventory system in a warehouse 
may incorrectly assume products produced in the year 2000 were produced 
in the year 1990. The system, on a first in, first out basis, might 
therefore ship the newest product first. The older product, produced in 
1999, might never be shipped, and could become obsolete.
    We have implemented awareness programs to help employees understand 
the types of issues they could face, and are encouraging them to be 
particularly diligent in the initial days and weeks following the 
transition. In the end, we believe that Y2K problems could entail some 
localized disruptions that may affect individual facilities or 
operations for short periods of time rather than long-term, systemic 
problems.
    Question 6. Transition management, recovery from Y2K errors and 
interruptions, makes sense as a concept. Have you actually conducted 
and model exercises in failures like power or telecommunication systems 
and, if so, what did you learn?
    Answer. Actually, we have several real life experiences to draw on 
which have supplemented the simulations we are conducting. For example, 
the recent severe ice storms in the Northeast provided several valuable 
learnings. The analysis of these real life case studies, in conjunction 
with our contingency and transition management rehearsal program, has 
helped identify several best practices:
    First, it is important to have clear plans in place, including a 
defined chain of command for decision making. Second, it is important 
to ensure that the appropriate supplies and materials are on hand in 
the event they are needed. For example, printed lists of contact phone 
numbers, fuel for back-up generators and spare batteries for 
flashlights should be kept on hand, and periodically checked for 
freshness. Finally, everything improves with practice. Like a fire 
drill, it is important to periodically rehearse the plan to ensure 
everyone knows his or her responsibilities, and reconfirm that the plan 
is still valid.
    Question 7. The Transition Management rehearsal you are planning in 
September across all operating companies sounds very practical. Could 
you give the Committee some insight into how this will be accomplished 
and what you expect to learn?
    Answer. The transition management rehearsal, which we held in 
September, had two major objectives:
    First, we rehearsed the roles and responsibilities of the first 
level transition management teams. Teams were given a Y2K scenario to 
respond to. This tested our ability to react, highlighted gaps in 
existing contingency plans, helped clarify roles and responsibilities, 
and helped confirm that our response teams have the appropriate tolls 
to address the problems.
    Second, we rehearsed our chain of command reporting process. Our 
senior management will be very interested in any issues that may arise 
as we crossover into 2000. We have implemented a reporting mechanism 
that will provide an overview of the company's status, allowing 
management to allocate resources to the highest priority problem areas.
    Overall, the rehearsal program has been very successful, and has 
served as a valuable learning exercise.
    Question 8. Global companies equate to global economies making Y2K 
a global economic as well as global technical problem. Do you have 
suggestions as to how the United States can help other countries in the 
remaining five months before the Year 2000 and thereby limit the 
economic impact on ourselves?
    Answer. First, we would like to applaud the efforts of this 
Committee in raising awareness and keeping pressure on industry and the 
federal government to address the Y2K issue. This type of leadership is 
invaluable.
    Second, we encourage the Committee to support additional efforts by 
the State Department, Commerce Department and others in continuing to 
raise Y2K awareness overseas, particularly with governmental entities 
and utility providers. The efforts to-date along this line have been 
very helpful in encouraging our international business partners to 
address their Y2K issues.
    Finally, as we enter the final weeks of preparation, we believe 
these international organizations should be encouraged to focus on 
contingency and transition management plans to help reduce the impact 
of any interruptions that do occur. In addition, the U.S. government 
may want to consider the type of assistance or support that could be 
provided in the event other countries suffer serious infrastructure 
failures.
                               __________

        Prepared Statement of Vice Chairman Christopher J. Dodd

    Thank you, Mr. Chairman. This is the second time we have held a 
hearing on international Y2K issues. In an earlier hearing, we also 
reviewed the ramifications of Y2K in international shipping and the 
international export of oil. Today, we will focus on global 
corporations that have achieved market presence in multiple nations.
    Global, internationally recognized businesses are generally the 
most healthy, most prosperous, farthest-reaching businesses. They are 
survivors. They understand what is required to maintain a strong 
position in the global economy and they thrive by remaining 
competitive.
    However, global companies, which posses the requisite capital 
hardware, real estate, and cash to expand into and maintain a market 
presence within multiple nations, also have a greater responsibility 
because of the numbers of people they affect. There is significant 
potential for cascading failures in global corporations which have 
interdependent parts that span multiple borders. Imagine a multi-
billion-dollar holding company that manages the supervisory operations 
of multiple business entities around the world. Think of the 
ramifications if a business like this falls victim to an internal 
problem which, from the top down, creates a spiraling deluge of 
secondary problems. The cumulative effect could be overwhelming and 
that is precisely why we decided to hold this hearing. We are 
interested in learning where Y2K problems may be manifested, and to 
what extent these corporations have inoculated themselves against 
potential Y2K malfunctions.
    Mr. Chairman, these corporations are among the world's biggest 
economic institutions. A rough estimate suggests that the 300 largest 
global corporations own or control at least one-quarter of the entire 
world's productive assets. Though based predominantly in Western 
Europe, North America, and Japan, global corporations span the globe 
and account for sales revenues that are comparable to or greater than 
the GDP of most countries. Last year revenues derived from goods and 
services sold outside the U.S. by the 100 top multinationals increased 
5%, to $958 billion, while overall revenues totaled $2.5 trillion.
    Today few, if any, countries are economically self-sufficient. 
Everyone is shipping parts to everyone else. Microprocessors built in 
Arizona or California are shipped to Hong Kong for installation in a 
computer system that manages point of purchase operations in a 
manufacturing company in Buenos Aires. The ever-decreasing cost of 
communications, combined with the ease of transportation, has 
encouraged global corporations to conduct business with organizations 
in other countries as easily as one farmer traded his produce for goods 
in town at the beginning of this century.
    Each of the largest global corporations utilizes thousands of 
critical suppliers, many of whom are located internationally. As a 
result, a global corporation must ascertain the Y2K-compliant status of 
each of its critical suppliers to ensure that day-to-day operations are 
maintained. This can be a daunting task. The interconnectivity of any 
business that utilizes computer systems, whether internally or via the 
many relationships that are maintained among business entities, is 
where the real risk lies. Interdependencies exist on so many levels 
that it is impossible to tell where or when problems in one area could 
surface in another. Global corporations, because of the international 
relationships they must maintain, are expressly threatened by a date-
related computer malfunction. The very nature of these organizations 
with the myriad interdependencies among suppliers, shipping 
organizations, ports, financial institutions, and manufacturers, leaves 
them particularly vulnerable relative to smaller enterprises which 
maintain few business relationships.
    In addition, the international trading system, with its complex web 
of distributors, customers, and transportation links, is supported by a 
critical infrastructure of products and services. The most important 
components of the infrastructure are energy production and distribution 
facilities, transportation modes, communications channels, and banking 
institutions. These sectors are highly computerized and interdependent 
and are particularly sensitive to dates for the smooth exchange of 
goods and services. These characteristics render them especially 
susceptible to Y2K-related problems. Breakdowns in any part of the 
trade support structure could slow or halt shipments of key components 
needed to keep factories working, hospitals functioning, food in 
continuous supply, and people employed.
    We look forward to hearing from our witnesses today. I am 
especially pleased to welcome Mr. Charles Krichbaum from my home State 
of Connecticut. Mr. Krichbaum is the Director of the Year 2000 Project 
for Praxair Incorporated located in Danbury, Connecticut, which is the 
largest producer of industrial gases and maintains a market presence in 
more than 40 countries. I am looking forward to his testimony. Thank 
you Mr. Chairman.
                               __________

                  Prepared Statement of Kevin Haukebo

    Mr. Chairman, Members of the Committee, I thank you for this 
opportunity to speak to you about steps Procter & Gamble is taking to 
prepare for the Year 2000. Specifically, you asked that I address the 
impact of Y2K on our global supply chain and our ability to maintain 
our day-to-day operations abroad given the status of critical 
infrastructures in those countries where we operate.
    As background, we began preparing for Y2K more than three years 
ago, and I have managed our central project office since the beginning. 
Our goal is to minimize the risk of potential disruptions to our 
business operations and to make sure the brands our consumers know and 
trust are there for them when needed. This has entailed two major areas 
of work: a reliability review of our internal systems and an analysis 
of our external business partners.
    Internal Systems
    Our initial project efforts focused on identifying and correcting 
critical information and embedded system technologies. This included 
financial, human resource, order, shipping and billing information 
systems as well as systems and technologies used by our manufacturing, 
building maintenance, safety, environmental quality, quality assurance 
and research and development organizations. We inventoried and 
prioritized these systems and technologies based on how critical they 
are to our business. Specifically, our:
      Research & Development organization has verified over 
3,000 pieces of laboratory equipment and systems;
      Facilities Services group has checked over 10,000 systems 
in nearly 300 locations;
      Information Technology organization has completed work on 
over 7,000 applications and nearly 200,000 pieces of technical 
infrastructure; and
      Product Supply organization has finished work on over 
100,000 internal components at nearly 150 sites and analyzed over 
10,000 suppliers. This in-depth knowledge of our internal readiness was 
instrumental in formulating and executing our approach with external 
partners.
    External Partners
    We have undergone considerable efforts to contact our external 
business partners, including suppliers, customers and service providers 
to ensure that current business operations are maintained through the 
millennium transition. We initiated this process to build our 
confidence level in the ability of our external partners to ensure the 
ongoing health of their business, which includes taking the appropriate 
steps to avoid Y2K disruptions. We have approached this mutual 
challenge in a way that builds upon our business relationship. Our 
objective is to manage risks related to Y2K with our external partners, 
while maintaining the integrity of our supply chain so that our 
consumers have access to our products.
    Our current best approach for assessing external partner readiness 
includes a four-step process:
    1. Develop an inventory of our external partners;
    2. Understand the business criticality to Procter & Gamble and the 
risk of disruption or failure of each external partner;
    3. Assess our key external partners to determine their Y2K 
readiness; and
    4. Develop appropriate action plans based on the outcome of the 
third step.
    To initiate this process, we sent a letter to our external partners 
requesting supply assurance throughout the Y2K transition period. We 
also inserted language into contracts with suppliers stipulating their 
ability to deliver our needs throughout the period. This first step 
helped underscore the priority Procter & Gamble has placed on 
minimizing the impact of Y2K on our supply chain.
    Second, we weighed the magnitude of the impact external business 
partners could have on Procter & Gamble based on the importance of the 
service or product they provide and the likelihood they would 
experience a disruption or failure. We also referred to the Gartner 
Group country-by-country data in evaluating risk, and our on-site 
visits confirmed the Gartner findings that we understand were 
previously shared with this committee. Clearly, there is no simple, 
automatic formula for determining business criticality and risk. In the 
end, a value judgment has to be made by those working closest to the 
external partner. We use common factors to guide our thinking. Our 
Business Criticality/Risk Assessment Grid helps us assign High (Red), 
Moderate (Yellow), Low (Green) ratings to our partners. External 
Partners who represent the least risk fall into the green shaded area, 
and partners with the greatest risk fall into the red areas. Red, of 
course, is where we focus most of our effort (see Figure 1).
    Next, we assessed external partner readiness with varying degrees 
of follow-up based on where the partner fits in our grid. We conducted 
face-to-face meetings with critical suppliers worldwide. These meetings 
were held at our suppliers' facilities with people from their 
organizations that are knowledgeable about Y2K. If our purchasing 
manager who conducted the meeting needed additional support or was 
unsatisfied with the meeting, he or she would take one of our Y2K 
experts from Information Technology or Manufacturing to the next 
meeting with the supplier. If we were still not satisfied, we would put 
``work around'' plans in place. These could consist of buffer 
inventory, alternate suppliers or a change in product or package 
formulation. We used this four-step process with over 4,400 centrally 
managed, critical suppliers worldwide and more than 6,600 suppliers, 
vendors and agencies that are important at the local site level.
    Based on our work to date, we are not expecting any major 
disruptions to our supply chain. We either have confidence in or ``work 
around'' plans that are ready to be executed with more than 99 percent 
of our key central suppliers worldwide.
    Business Continuity Planning
    We realize there will be outages beyond our control and the impact 
of Y2K will vary country by country. We have developed business 
continuity plans, which assume something will go wrong. The objective 
here is to protect our critical business processes from disruption or 
failure before, during and after the Year 2000. These business 
processes are: make, pack, sell and ship our products; maintain cash 
flow; maintain communications; and ensure our site utilities are 
operational.
    Every function and every region within the company was included in 
creating the overall business continuity plan, as there are a variety 
of situations to address, and as risks differ by business and by 
country. Our plan assesses internal and external risk factors to 
prepare each site in the event of business disruptions and/or failures.
    We have examined nine risk areas globally and have developed 
contingency plans to address:
    1. Inventories and Customer Demand
    2. Impact on New Initiatives and Promotions
    3. External Partner Readiness
    4. Utilities/Infrastructure
    5. Cash on Hand/Payroll Policy
    6. Fraud Awareness
    7. Credit Policies
    8. Contingency and Staffing Plans
    9. Year 2000 Communication Center
    Specifically, you asked for our perspective as a multi-national 
company on the status of the infrastructure for critical utilities 
abroad. Our initial assessment was structured around the Gartner Group 
Report on risks, by country, of Y2K-related infrastructure failures. 
Our work continues to be supported by the Gartner Group assessments and 
industry progress reports. Based on this industry data, our global 
utility planning team investigated utility service providers worldwide 
to determine the risk of a utility interruption and developed a 
standard approach to begin contingency and business continuity planning 
on a regional basis (see Figure 2). Local P&G country contacts have 
contacted utility providers in each of their locations to understand 
the work they have done to prepare for Y2K and to determine if their 
service would be uninterrupted during this time frame. We solicited 
information using an in-depth questionnaire, personal phone calls and 
face-to-face interviews where possible to confirm information. In 
recent months, we're seeing more information flow from utility 
providers in various countries where we operate. However, utility 
providers in countries identified ``at-risk'' by the Gartner Group have 
been reluctant to respond to our inquiries.
    We have also completed utility risk assessments at each of our 
manufacturing, office and data center sites worldwide. This includes 
completing internal remediation and staffing plans for critical 
periods. In addition, we have developed contingency plans to deal with 
potential gas, electric, water, telecommunications and sewer outages.
    Also, we have examined the impact of Y2K on telecommunications. We 
have assessed the risk of voice and data disruption where we do 
business due to the Y2K transition. In general, we consider parts of 
Eastern Europe, Asia, Latin America and the Middle East to be of medium 
to high risk. We have tested various telecommunications options such as 
satellite phones for high risk sites and other satellite alternatives 
for data transmission.
    We are concerned by regulatory and licensing issues in Asia and 
Latin America, where some countries limit the use of certain equipment. 
INMARSAT satellite and VSAT may not be available for use in all 
countries. We are selecting contingency options based on the 
information we have available on these countries.
    We have been working with the International Y2K Alliance to deal 
with telecommunications and regulatory issues. Procter & Gamble is a 
member of this committee along with other multi-national corporations 
such as American Express, Ford Motor Company, IBM and Chase Manhattan. 
The Y2K Alliance has been working these industry issues with the U.S. 
Department of State. In recent works, the State Department has 
organized meetings with the embassies of specific countries between 
local public telephone companies and Y2K Alliance. We appreciate the 
support of the State Department in helping us address these issues and 
believe these meetings are a positive step in the right direction.
    Moving Forward
    Moving forward, we plan to maintain our Y2K readiness between now 
and January 1, 2000, by assessing all new hardware, software and 
suppliers. We are also continuing Y2K testing with customers as they 
move to the Y2K standard EDI (Electronic Data Interchange) 
transactions. Work also continues on our Business Continuity Plan 
(BCP), which is being managed geographically. Regional BCP teams have 
created transition plans and have deployed our current best approaches 
to local markets and organizations. These local resources are also 
developing contingency and staffing plans.
    In summary, we are working hard to ensure the brands our consumers 
know and trust are there when they need them. While we do not expect 
any major disruptions to our business, we are preparing contingency 
plans to address outages beyond our control. We believe the 
preparedness of Procter & Gamble and our people will help us meet the 
Y2K challenge.



                               __________

          Responses of Kevin Haukebo to Questions Submitted by

                            Chairman Bennett

    Question 1. You testify that you sent a letter to your external 
partners requesting supply assurance throughout the Y2K transition 
period. Did this letter take the form of a survey or some other form? 
What kind of response did you receive? What types of follow-up have you 
done for those suppliers most critical to Procter & Gamble?
    Answer. We have undergone considerable efforts to maintain the 
integrity of our supply chain so that our consumers have access to our 
products. It may be helpful to briefly outline the process we followed 
with our critical suppliers. We:
      sent letters to suppliers asking if they were prepared 
for Y2K and whether they were able to assure supply during the Y2K 
period;
      inserted language into our contacts with suppliers 
warranting their ability to continue to supply Procter & Gamble during 
this period;
      Gamble during this period;
      conducted face-to-face meetings with suppliers to discuss 
their preparations in depth; and
      included P&G technical Y2K experts in subsequent face-to-
face discussions where needed.
      In cases where we were not satisfied, we created ``work 
around'' plans to mitigate potential outages.
    The letters we sent to our suppliers did not take the form of a 
survey. We asked for assurance that they would be OK. We received 
varying responses, but most of our suppliers assured us that they would 
be all right. In addition, we asked our suppliers specific questions in 
face-to-face meetings to penetrate the quality of their response and to 
help them prepare where necessary. In specific cases, P&G Manufacturing 
or Information Technology technical experts participated to ensure a 
thorough understanding supplier plans.
    This process continued until we were confident in the supplier's 
readiness, or we had put a ``work around'' plan in place. These plans 
could consist of buffer inventory, alternate suppliers or a change in 
product or package formulation. Additionally, we conducted ongoing 
discussions with suppliers concerning any updates or changes on their 
Y2K status/progress as part of our normal business discussions.
    Question 2 and 3. You testify that utility providers in countries 
identified ``at-risk'' by the Gartner Group have been reluctant to 
respond to your inquiries. How do you intend to obtain more 
information? If unable to get satisfactory responses/information, what 
types of contingency plans/continuity of operations plans will you 
consider? What are your contingency plans to deal with potential gas, 
electric, water, telecommunications and sewer outages in various at-
risk countries where Procter & Gamble does business?
    Answer. We have continued to work with country and local utility 
providers through face-to-face meetings to better understand their 
readiness plans and ability to provide service. We have also received 
some help from utility consortiums and regulatory groups in gaining 
information. In some countries where suppliers, such as utility 
providers, have been somewhat reluctant to provide information, we have 
remained tenacious at asking for that information. In many cases this 
has provided us with responses. Another technique we have used is to 
take a look at similar utilities in other regions where we did get 
responses. This benchmarking can give us some indication of the 
likelihood of problems at a non-responding supplier's operation.
    Contingency plans depend greatly on the potential risk. When we 
believe the outage will be very temporary, we have EAP's (Emergency 
Alternate Procedures) in place to deal with these minor outages. This 
could include giving priority to the most important parts of our 
operation in cases of power or utility reduction versus total loss or 
shifting production to another facility. In a minority of cases, we 
have gone so far as to rely on generators to run parts of the 
operation. Steps like increasing our stocks of finished product and 
pre-loading customers with finished product have also been used.
    Our telecommunications contingency plans are based on a combination 
of criticality and risk assessment at the global, regional, and site 
level. Comprehensive remediation work for over two years on the 
infrastructure has made it Y2K compliant. The major risk factors for 
telecommunications are the external components of carriers and the 
power sector.
    The majority of the high priority data links in the infrastructure 
already have built in back-up methods, such as redundancy and diverse 
paths. Additional voice and data contingency plans are being 
implemented in critical areas where there is a potential risk for Y2K 
disruption and no existing back up methods. Satellite phones (Inmarsat 
terminals) are being utilized for voice contingency. These will be 
implemented in the Y2K Command Centers, along with most high priority 
sites. There are various contingencies being utilized for data back-up. 
These include introducing diverse carriers and methods, such as ISDN 
back-up or remote LAN access. Satellite data links via either V-SAT or 
the Inmarsat-B terminals are being implemented in certain high risk, 
high priority sites.
    Question 4. The Committee has thought that a result of analyzing 
suppliers and business partners would result in a ``flight to 
quality''. You testified that Procter & Gamble has assessed over 10,000 
critical suppliers and partners using a four-step process. What types 
of actions are being taken to consolidate, reduce, or find alternate 
suppliers for those that are high-risk and high-criticality?
    Answer. The types of actions we are taking to assure supply when we 
are not confident are building additional inventory to minimize the 
impact of supplier outages, developing alternate suppliers and moving 
more volume to already existing suppliers. Work around plans refer to 
inventory and supplier adjustments.
    Question 5. After assessing more than 99% of your over 10,000 
critical suppliers worldwide, Procter & Gamble is not expecting any 
major disruptions to its supply chain. Would you please briefly give an 
example of the type of ``work around'' you referred to in your 
statement that is ready to be executed? Would you describe any 
disruptions that are expected which don't cross the threshold of major 
disruption but may have a noticeable impact?
    Answer. Anticipated disruptions that we do not consider to be major 
would be a malfunctioning employee badge reader that causes us to 
manually check employee identification when they enter P&G facilities 
or having to switch from a core supplier for a material that's widely 
available from other sources.
                               __________

                Prepared Statement of Charles Krichbaum

    Chairman Bennett, vice chairman Dodd and members of the committee:
    My name is Charlie Krichbaum, and I am Director, Year 2000 Global 
Project Office for Praxair. Praxair is the largest industrial gases 
company in North and South America, and one of the largest worldwide, 
with 1998 sales of $4.8 billion. The company produces, sells and 
distributes atmospheric and process gases, and high-performance surface 
coatings. Praxair products, services and technology bring productivity 
and environmental benefits to a wide variety of industries, including 
aerospace, food and beverage, healthcare, electronics, steel, chemicals 
and refining, metal fabrication, water treatment, glass and others.
    Thank you for inviting me to speak on behalf of Praxair, Inc.
    The goal of Praxair's year 2000 project is to prepare our plants 
and systems so that our customers, employees, and the communities in 
which we operate are not affected, and business operations around the 
world continue to run smoothly and safely through January 1, 2000 and 
beyond.
    To provide a sense of our global operations Praxair operates in 43 
countries, with 43% of our sales from outside North America.
    While many international businesses rely on imported goods and 
services, this is not a significant issue for Praxair. We produce our 
products locally in the countries where we operate. Therefore, 
maintaining our day-to-day operations around the world, including 
minimizing any impact from critical infrastructure failures abroad, is 
an integral part of our overall planning process for year 2000 
readiness.
    Readiness
    At Praxair, year 2000 readiness means that neither performance nor 
functionality is affected by dates before, during or after 2000. In 
particular:
            No value for current date will cause interruption 
        in operations;
            Date-based functionality must behave consistently 
        for dates before, during and after 2000;
            In all interfaces and data storage, the century in 
        any date must be specified either explicitly or by unambiguous 
        algorithms or inferencing rules;
            2000 must be recognized as a leap year.
    Year 2000 Global Project Office
    Praxair began working on year 2000 issues in 1996 and formed a Year 
2000 Global Project Office in early 1998 to accelerate our progress. 
The structure of Praxair's Year 2000 Global Project Office reflects the 
broad-based impact this issue has on Praxair's business. The Project 
Office reports directly to Praxair's CEO, Bill Lichtenberger, and 
coordinates a matrix of global teams, representing both business units 
and functional areas to ensure effective management of resources. The 
leadership of the Project Officer and the strength of combining 
business teams with functional and business units speeds our progress 
and optimizes our efforts.
    The Global Project Office consists of a project manager and 13 
global functional team leaders representing: applications technology; 
communications; finance; energy/other utilities; facilities; human 
resources; information technology; operations/production; procurement; 
product sales and services equipment; law; research and development; 
and safety and environmental services. In addition, the Global Project 
Office includes team members representing eight Praxair businesses and 
affiliates in North America, South America, Europe and Asia who have 
accountability for year 2000 activities.
    Readiness Process
    Praxair's year 2000 readiness effort is organized into several 
stages:
            Promote awareness of the year 2000 issue among 
        employees;
            Inventory and Assess the impact of the year 2000 
        issue on Praxair systems and equipment, set priorities for 
        renovation and develop plans worldwide for year 2000 readiness;
            Renovate Praxair's safety and mission critical 
        systems; We are taking a global approach to renovations and 
        developing standardized solutions for systems around the world. 
        This approach ensures that high quality, consistent, and cost 
        effective solutions are identified on a global basis.
            Verify that renovated systems are year 2000 ready 
        through testing;
            Implement tested renovations; and
            Develop business continuity and contingency plans 
        in the event of interruption of Praxair systems.
    Since the formation of the Year 2000 Global Project Office in March 
1998 here's an indication of what the 1,500 Praxair employees involved 
around the world have accomplished in 460 days:
            50,000 items assessed
            17,000 renovations made
            6,000 customer inquiry responses
            4,300 suppliers assessed
            900 utilities assessed
    Suppliers
    Praxair, like other companies, may be affected by the year 2000 
problems of its suppliers by the interruption of supply of critical raw 
materials or utilities. The nature of our business is such that the 
most critical suppliers for Praxair around the world are those that 
supply electric power, natural gas, and water. To minimize disruption 
to these services and to other critical suppliers, we have taken a 
number of important steps:
            Suppliers of critical equipment, systems and 
        services around the world, including suppliers of energy 
        sources such as electricity and natural gas, have been 
        identified and surveyed for their year 2000 readiness. Results 
        of the surveys provide important input for our readiness 
        planning process.
            By working with our suppliers, we have been able to 
        jointly identify and resolve many potential year 2000 problems.
            We have implemented policies and strategies that 
        require items that we purchase to be year 2000 compliant.
            We have also taken steps to ensure that documents 
        like contracts, purchase orders, requests for quotes, etc. 
        contain our year 2000 compliance language.
            We are refining plans as to how to best contact 
        suppliers over the millennium transition weekend, should any 
        year 2000 failures occur.
    Our communication with our suppliers is ongoing to monitor their 
readiness status to ensure we are aware of any changes that may occur. 
To date, we have assessed and are in communication with approximately 
900 utilities and 4,300 other suppliers worldwide.
    Customers
    As a supplier to our customers, we may be also be faced with 
failures resulting from year 2000 problems experienced by our customers 
in the form of interrupted or reduced demand for Praxair's products due 
to interruptions in the customer's own manufacturing processes. We are 
identifying critical customers for readiness assessment, and are asking 
questions similar to the following:
            Will customers be ready to use our products and 
        services?
            Will customers that provide utilities to our 
        operations by ready?
            Will customers be able to pay us on time?
    Changes in our customers' operations may impact Praxair and we are 
encouraging on-going communications to minimize impact on our customers 
and on our own operations.
    Impact of Legislation
    On going communication with both our suppliers and our customers is 
critical to the success of the year 2000 planning process. We have an 
active and on-going communication effort aimed at responding to 
customer inquiries, and gathering information that we need for our own 
planning. It should be noted that these efforts have been accelerated 
and facilitated by the passage of the Year 2000 Information and 
Readiness Disclosure Act (15 USC 1 Note, P.L. 105-271, 112 Stat.) which 
became law last October. It has allowed for the rapid dissemination and 
receipt of important information under an umbrella of good faith. We at 
Praxair very much appreciate the efforts that resulted in this 
important legislation that has allowed industry to exchange information 
that is useful for correction of the Y2K problem.
    Contingency and Continuity Plans
    We have instituted a two phased approach to help ensure that we can 
continue to serve our customers around the world through January 1, 
2000 and into the new millennium. Each business unit is developing 
contingency plans and continuity plans aimed at minimizing disruptions 
to our critical operations, internal systems and ability to supply 
product to our customers.
    Contingency plans provides detailed operating instructions to local 
personnel in the event a failure occurs related to plants, facilities, 
operating systems and critical suppliers. It includes the item 
impacted, the failure scenario, a risk analysis, plans to mitigate the 
risk, resource scenarios and key contact lists. These plans are 
generally site specific and include local considerations related to 
utilities, telephone services, security and fire alarm systems, and the 
like. Each local plant has plans in place to allow continued operations 
should telecommunications interruptions occur.
    Continuity plans focus on mitigating potential failure across an 
entire business unit, and develops business strategies to maximize 
safety, delivery of product to customers and efficient operations.
    These plans are expected to sustain the business in the event of a 
year 2000 failure, adequately address safety considerations and comply 
with the guidelines provided by the Praxair Project Office.
    We will continue to review and `fine tune' these plans based on an 
ongoing assessment our readiness and that of our suppliers. Rehearsals 
of key components are scheduled during the third quarter of this year.
    Readiness Status
    Praxair has essentially completed the renovation and testing of 
business processes, plant operations and computer systems critical to 
safety and the company's business. All of Praxair's businesses around 
the world have submitted Year 2000 Readiness Statements to chairman 
Bill Lichtenberger, meeting our mid-1999 readiness target. In addition, 
our corporate internal audit group will be conducting spot audits of 
various Praxair facilities around the world to help assure meeting our 
readiness goal.
    As part of our readiness preparations, we will have a Global 
Information Center, essentially a ``command center'', that will be 
active throughout the millennium transition weekend. The center will 
collect, manage and disseminate critical information, and provide 
support, technical solutions and allocation of resources through the 
transition period. Needless to say, we are continuing to refine our 
plans for this effort as new information comes to our attention.
    We do not expect catastrophic collapse of global infrastructures or 
sustained outages. We do, however, anticipate that we will likely 
experience temporary interruptions of electric power or other utility 
supplies to one or more of Praxair's production plants due to failure 
of the utility supplier to be year 2000 ready. The magnitude of impact 
will, of course, depend on the number and nature of the interruptions 
that might occur.
    Throughout the remainder of the year we will be completing 
scheduled work and testing our contingency and business continuity 
plans, which will include testing of the ``command center''. In the 
fall, we plan to conduct a global ``rehearsal'' of our contingency 
plans. We believe these activities will provide another level of 
readiness preparation should any external or unknown year 2000 problem 
arise.
    For more information, visit our web site at www.praxair.com, call 
1-800-Praxair or e-mail your inquiry to [email protected].
                               __________

        Responses of Charlie Krichbaum to Questions Submitted by

                            Chairman Bennett

    Question 1. The Committee looked into the impact of Y2K on the 
chemical industry earlier this year by requesting a study by the US 
Chemical Safety Board and holding a field hearing on the issue. One 
major area of concern is the paucity of information about the many 
small- to medium-sized enterprises in the industry. While small- to 
medium-sized firms are a general concern in all sectors when it comes 
to Y2K readiness, the consequence of an accident associated with these 
companies is disproportionately greater in the area of chemicals and 
gases. What is your assessment of the small firms that are either your 
suppliers or customers? What percentage fall into the high risk, high 
consequences category? Are they taking the Y2K bug seriously? Do they 
have the resources to fix the problem and/or develop workarounds? Is 
there more that Federal, state or local governments could do to 
heighten awareness and promote readiness by these companies?
    Answer. Due to the nature of our business, our most critical 
suppliers are those that supply electric power, natural gas and water--
not typically small firms. Our suppliers, regardless of size, who 
provide critical equipment, systems and services around the world, 
including electricity, natural gas and water, have been identified and 
surveyed for their year 2000 readiness. While we have not segregated 
our suppliers by size, we have not observed a discernable difference in 
the level of cooperation based on size. We have assessed and are in 
communications with approximately 900 utilities and 4,300 other 
suppliers worldwide.
    We have responded to inquiries from and have an ongoing dialog with 
more than 6,000 of our customers, both large and small. We have not 
observed any material differences in our customers' diligence in year 
2000 readiness efforts based on their size.
    Question 2. You mentioned the Praxair operates in 43 countries 
around the world, which is certainly a respectable cross-section of the 
world's nations. Have your assessments of local infrastructures caused 
you to be more concerned about certain regions more than others? Are 
you finding it necessary to develop regional contingency plans as 
opposed to national plans; for instance, if there is a regional failure 
of infrastructure such as transportation services or electric power?
    Answer. We anticipate that disruptions are more likely to occur in 
the less developed countries in which we operate. However, contingency 
plans at the local level are in place throughout Praxair that provide 
detailed operating instructions to local personnel in the event a 
failure occurs related to plants, facilities, operating systems and 
critical suppliers. These plans are generally site specific and include 
local considerations related to utilities, telephone services, security 
and fire alarm systems, and the like. Each local plant has plans in 
place with respect to continued operations should telecommunications 
interruptions occur.
    Question 3. With your operations in 43 nations around the globe, 
are you finding differences in your employees' sense of importance of 
being ready for Y2K? Has Praxair found that it needs to tailor its Y2K 
message to regional sensitivities and sensibilities?
    Answer. All of Praxair's businesses around the world are actively 
participating on our year 2000 readiness planning process. Because we 
operate around the world, we accommodate regional and local differences 
as a normal part of our daily business operations, and year 2000 
planning is no different.
    We have been publicizing our year 2000 activities in our internal 
global publications (print and electronic) for the last two years and 
believe Praxair employees worldwide have a common basic understanding 
and awareness of the issue.
    Question 4. Have there been any cases where Praxair has found that 
its assessment of the local infrastructure runs counter to the local 
government's assessment of the situations? If so, please explain.
    Answer. Praxair's assessments of local infrastructures are 
generally in line with external assessments. While we do not expect 
catastrophic collapse of infrastructures or sustained outages, we do 
anticipate that we will experience temporary interruptions of electric 
power or other utility supplies to one or more of our production plants 
due to failure of the utility supplier to be year 2000 ready. We expect 
that these disruptions are more likely to occur in the less developed 
countries in which we operate.
    Question 5. You mentioned that Praxair is planning a corporate 
Global Information Center. This Committee is finding that many 
industries and individual corporations are planning something along 
this line. The Federal Government is planning an International 
Coordination Center with similar thoughts in mind. Do you see some 
benefit in coordinating all these activities? Would Praxair share with 
others what it is observing either inside or outside its plants and 
facilities around the globe as the millennium date change progresses?
    Answer. We are periodically posting year 2000 readiness disclosure 
information to our web site (www.praxair.com) and we plan to continue 
updating the site through the millennium date change. Other 
organizations may be planning similar use of the Internet, which will 
likely provide an efficient and cost effective method for sharing 
information.
                               __________

                Prepared Statement of Patrick M. Roberts

    Chairman Bennett and Members of the Senate Special Committee on the 
Year 2000 Technology Problem, I am pleased to speak to you today 
regarding the issues facing global corporations with respect to foreign 
suppliers and operations related to their Y2K preparedness.
    Background
    Royal Ahold is the rapidly expanding international parent company 
of retail supermarkets, health care stores, and hypermarkets in Europe, 
the USA, Asia and Latin America. We employ some 280,000 associates 
around the world in more than 3700 stores. Last year, our sales 
exceeded $31 billion USD and we serve more than 20 million customers 
weekly.
    Ahold USA, a subsidiary of Royal Ahold, is headquartered in 
Atlanta, Georgia, and is the 4th largest grocer in the US. The company 
has grown aggressively over the past 5 years through internal 
expansions and also by acquisition. Last year's USA sales of over $20 
billion, came from the approximately 1000 stores operating under the 
brand names of Stop & Shop in New England, Giant-Landover in the 
Washington/Baltimore metropolitan area, Giant-Carlisle in Pennsylvania, 
Tops in northwestern New York, and BI-LO in the Carolinas. In March, 
Ahold announced its intention to acquire Pathmark stores in the New 
York metropolitan area.
    My statements today address Ahold's Year 2000 initiatives and our 
preparedness as a subsidiary of Royal Ahold.
    Ahold Year 2000 Initiative
    Ahold is taking the Year 2000 problem seriously and has 
aggressively addressed all identified technology and business issues. 
Total project spending will be in excess of $50 million. Ahold began 
its Year 2000 efforts in 1996 with a set of technology projects to 
consolidate and replace a majority of our legacy systems. In 1997 and 
1998, our focus primarily was on technology. We formed an enterprise-
wide project office to oversee the assessment, remediation, and re-
deployment of our mission critical systems. We initiated contingency 
planning. This year, our focus is on Business Continuity Planning and 
Event Management planning. Up until The Event, we will continue to 
perform software testing both internally and, whenever possible, with 
critical external vendors. On those items over which we have direct 
control, we are confident that our early start and hard work will 
result in little to no impact in our operations.
    Ahold Dependence on Foreign Entities and Operations
    Ahold supports an autonomous operating company model, both foreign 
and domestic. To support this model we have established synergy groups 
which address our product supply chain and parts of our business that 
do not directly touch the customer; ie. the back office operations in 
the stores.
    Our dependence on foreign companies is focused in our supply chain 
with re-sellable products. Overall, we have classified the risk of a 
disruption in our international supply chain as a low probability of 
occurring, a high potential impact if there was a disruption, and a 
moderate ability to proactively address. We are addressing this 
exposure through our Year 2000 Supply Chain methodology, as follows:
    1. Inventory and Assessment of our Suppliers
    2. Due Diligence regarding Supplier Readiness
    3. Communication and Awareness and
    4. Contingency Planning
    We have prioritized our supply chain based on the potential impact 
to Ahold's business and the criticality of products they supply in the 
event of an emergency. Less than 5% of sales are from products we 
directly source from international companies. At the same time, 
however, we estimate that 25% of sales volume has some kind of 
international component. Categories of items with high levels of 
international sourcing include:
      Spices, sugar, rice, specialty grocery
      Produce; ie. bananas and soft fruits
      Coffee, tea
      General Merchandise, Promotional Products
      Pharmacy
    Based on our research and in-depth discussions with almost 250 of 
our top-critical suppliers, our findings have led us to rate the 
potential for disruptions in our business from international sources as 
low:
      A great deal of international product has significant 
inventory in the US that provide us a buffer; ie. spices, sugar, rice 
and specialty grocery items. Our most critical suppliers are large 
corporations that, on the whole, are taking Year 2000 seriously and are 
applying the resources required to correct the problem within their 
companies, including in-depth interrogations of their international 
suppliers. Also, they are developing contingency plans to minimize 
exposure from failures in foreign operations.
      Through ongoing communications with one of our large 
suppliers in the produce category, we have determined that it:
    1. owns its farms in foreign countries,
    2. is complete with its critical technology correction projects,
    3. owns a majority of the transportation chain,
    4. has visited the primary ports to assess potential risks,
    5. has met with US Customs to assess potential concerns, and
    6. is using this information to actively create contingency plans.
    In the soft fruits category, our winter crop comes from Chile; ie. 
grapes, nectarines, peaches, etc. While we plan to have a variety of 
soft produce in our stores, sales in this area are generally very low 
during this time frame due to the increase in prices from imports.
      Coffee and tea are purchased through commodity futures. 
What this means to the consumer is that the inventory supply chain 
would last several months after The Event. Commodity suppliers usually 
have 90-180 days of inventory in the supply chain.
      General Merchandise and Promotional items have a natural 
window of several months duration. The majority of the seasonal and 
holiday merchandise, up to Valentines Day, is in the distribution 
centers several weeks prior to Christmas.
      Perhaps our largest area of vulnerability is with 
pharmaceuticals. From our research, more than 70% of drugs sold have 
some foreign component. For most, there is no good alternate supplier. 
Many of these products are necessary to the continued good health of 
our customers and our country's citizens. This is the area over which 
we have the least control, and potentially, the highest risk. Red Cross 
and FEMA recommendations that people prepare for Y2K as one would for a 
severe weather situation, appears to be an adequate preparation 
strategy.
    Because these suppliers are third parties, and therefore, not in 
our direct control, Ahold never will be able to eliminate international 
exposure entirely. Based on our analysis of our top-critical suppliers, 
we have a ``high'' confidence rating in their Y2K preparedness. We will 
continue our dialogs with our major suppliers and refinement of our 
contingency plans through the end of the year.
    Year 2000 Merchandising Plans
    In regards to merchandising products, New Year's 2000 has two 
meanings for Ahold.
    1. Ensuring that we can provide customers with necessary products 
before, during and after the turn of the century.
    2. Providing the food, products and services in response to 
preparing for the party of the century.
    Specific to Year 2000, Ahold does anticipate increased demand for 
emergency types of items during the last four months of the year and is 
preparing to meet this demand. New Year's is traditionally a peak time 
in the grocery business. Ahold is anticipating demand for this New 
Year's to be much greater than we have seen before. We are not 
increasing inventories for re-sellable products as a Y2K contingency 
except in a few cases; however, we will closely monitor product usage 
and increase our orders if necessary.
    We believe the greatest unknown in predicting demand is the media. 
If the media promotes sensible actions and reactions to events, we 
believe there will be no shortage of products. If the media negatively 
publicizes year 2000 disruptions, regardless of their severity, Ahold 
will likely encounter product shortages as a reaction to, not as a 
result of the Year 2000 disruption.
    Business Continuity Planning
    Ahold is actively developing contingency plans to address potential 
disruptions. We have broken our business into 24 classes, or areas, in 
which plans are being created. In addition, we have identified more 
than 100 processes that our individual business units are addressing at 
a local level. We are planning to conduct exercises to test these 
plans.
    One contingency that has been explored relative to international 
suppliers is to utilize our parent company, Royal Ahold, with its 
global supply chain and local presence in most major markets to assist 
in restoring any disruption.
    Another major initiative in this area is the creation of the Event 
Management plan. This addresses how we will prepare for, monitor and 
react to Year 2000 related disruptions. The plan will encompass not 
only the technology operations, but day-to-day operations of our 
stores, warehouses and administrative facilities.
    Communications
    Communications are critical to successfully reducing the potential 
risk of Year 2000 disruption. We have 5 primary audiences for which our 
Project Office has active Year 2000 communications plans:
      Ahold internal
      Food/Retail Industry
      Suppliers
      Local communities
      Customers
    We have a sizable team that is dedicated to communicating with our 
suppliers. They assess each company's Year 2000 efforts; educate the 
supplier on areas in which we deem they need assistance; and follow-up 
with those that are given ``low'' and ``moderate'' confidence ratings.
    The Food Marketing Institute has done an excellent job assisting us 
with Local community relations and facilitating cooperation across our 
industry. I applaud their efforts. A most encouraging part of our 
conversations with our major suppliers has been their openness and 
candor regarding their Y2K readiness programs, including their ``deep 
dives'' into their supply chains and the strategies they are pursuing 
in their business contingency plans. We have seen a significant 
increase in requests for participation in community events. Although we 
respond to most of these, the volume has kept us from attending all of 
them. Publications are being distributed to our customers to let them 
know we will be here on January 1st and beyond.
    Summary
    Ahold anticipates minimal disruption caused by our direct and 
indirect dependence on foreign suppliers. We have expended significant 
effort in developing business continuity plans to minimize our risks. 
There has been and will continue to be open and frequent communications 
with our suppliers to address all new issues.
    We believe there are real and tangible benefits to Ahold USA in 
being a subsidiary of a truly global company with strong business 
relationships with multiple major product suppliers in diverse 
locations.
    At the same time, we would say that there is real risk of Year 2000 
disruption within the grocery industry and across other industries 
relative to Year 2000 readiness. We do believe some foreign countries 
and companies have not sufficiently addressed the Year 2000. Our 
strategy is to find alternate product sources to minimize our 
dependence on these countries.
    We are aware that Congress is working diligently to ensure our 
infrastructure will be ready for The Event. We would ask that Congress 
look at providing further assistance in areas that Ahold has identified 
that may have a potential impact to the health and safety of all US 
citizens, namely, responsible reporting by the media. Additionally, we 
request your support in ensuring the readiness of our federal programs 
administered at the state level; specifically the Electronic Benefits 
Transfer (EBT) program that affects our citizens who may not be able to 
plan ahead for any temporary business disruptions.
    I am happy to answer any questions you may have.

    
    
    
    
    
    
    
    
      
                               __________

               Prepared Statement of Senator Gordon Smith

    Good morning and welcome to today's hearing on the Year 2000 
challenges facing our global corporations.
    As a former businessman, I understand the impact that our 
international economy has on our national boundaries. Today, very few 
countries are economically self-sufficient without the presence of 
global corporations.
    Global corporations are among the world's biggest economic 
institutions. A rough estimate suggests that the 300 largest global 
corporations own and control at least one-quarter of the entire world's 
productive assets. Global corporations' total annual sales are 
comparable to or greater than the yearly gross domestic product of most 
countries. Though based predominantly in Western Europe, North America, 
and Japan, global corporations' operations span the globe.
    Global corporations face many of the same issues as domestic 
companies, such as maximizing profits, meeting customer demands, and 
adapting to technological change. Global corporations must also stay 
current with trends and events in the various countries where they 
operate.
    All nations are tied into a global economic interdependence. 
International trade consists of a broad array of commercial interests 
and relationships that involve most products and service sectors. 
These, in turn, rely on a global web of critical services.
    Disruptions in the relationships among suppliers and customers 
abroad can seriously affect the well-being of individual companies, 
specific industry sectors, and even international economies.
    As our committee has examined in the past, many important 
components of the international trade system are highly computerized, 
interdependent, and very sensitive to the Y2K date-related changes. The 
most important components of the infrastructure are energy production 
and distribution facilities, transportation modes, communication 
channels, and financial networks.
    Breakdowns in any part of the trade support structure could slow or 
halt shipments of key components needed to keep factories working, 
hospitals functioning, food in continuous supply, and people employed.
    As of today, there are only 162 days remaining until January 1, 
2000.
    With this in mind, I want to stress the importance of ensuring the 
participation of executives at all levels of business and government in 
planning for such an event.
    This problem will not simply go away. Each of us must do our part 
to make certain that the Y2K problem in adequately addressed.
    As we work together, I am sure that we will develop a greater 
understanding of this problem and forge effective solutions. It is our 
cooperation which will bring us together and allow us to reach our 
final goal.
    I would like to welcome all the witnesses who are before us today. 
We are particularly pleased to have representatives from Fortune 100 
companies who are household names. Your willingness to step forward in 
this forum to testify on this critical issue affecting your business 
and the global economy is commendable.
                               __________

                   Prepared Statement of George Surdu

    Good morning. I first would like to thank the Senate Committee on 
the Year 2000 for affording Ford Motor Company the opportunity to 
provide us an update on our Year 2000 Program. My name is George Surdu, 
and I am the Director of Technical Services, and Ford Motor Company's 
Year 2000 Global Program Manager. I have been the Year 2000 Global 
Program Manager since the inception of the Company's formal program in 
1996.
    In 1996, Ford Motor Company initiated a formal program to address 
the Year 2000 challenge. A senior level steering committee was 
established, co-sponsored by our Chief Financial Officer, our vice 
President of Quality and Process Leadership and our Chief Information 
Officer. A global Year 2000 Central Program Office was created under my 
leadership, and a robust program management process was created to 
guide compliance actions across all potential impact areas. Areas 
identified include: Business Computer Systems; Technical 
Infrastructure; Plantfloor Equipment; Product Development Test 
Equipment; Suppliers, Dealers and Affiliates; End-User Computing; 
Building Infrastructure; and Vehicle Components. In addition, we have 
continued to monitor the compliance actions of other impact areas such 
as our transportation carriers, medical equipment suppliers and customs 
offices. The sophistication of Ford's Y2K program was recognized by the 
Information Technology Association of America with a certification that 
Ford's program meets its challenging Y2K ``best practices'' standards.
    Stretch compliance objectives were established for all impact 
areas, with the majority of work to be completed by mid-year 1999. 
Summer shut-down periods are being used to complete remediation work. 
As of June month-end, 98% of critical business systems and 97% of all 
business systems have been remediation, tested and back in service. In 
addition, an enterprise test plan for all key business processes has 
been developed, with completion scheduled for September.
    For plant floor equipment, Ford has implemented a process to assess 
equipment and machinery in its 167 manufacturing and assembly plants 
and parts warehouse facilities. Presently, 99% of all plant floor 
equipment is compliant.
    In conjunction with the Automotive Industry Action Group in North 
America, and other industry trade associations such as the VDA in 
Europe, Ford has been participating in a global supplier readiness 
program for production and critical non-production suppliers. As of 
this report, about 80% of suppliers responding are deemed ready, with 
100% to be ready by year-end. About 10% have not responded; additional 
actions are underway to validate status of these suppliers and others 
that do not anticipate readiness by September. A similar program has 
been established for Ford's affiliates. As of June month-end, 89% are 
ready, with 100% slated to be ready by December 1999.
    Compliance status for the other impact areas include: 87% of all 
critical Product Development Test Equipment; 97% of End-user Computing; 
96% of our Technical Infrastructure; 83% of in-dealership systems; and 
97% of all physical properties and infrastructures. Finally, 100% of 
the components in our vehicles are compliant.
    As stated in our most recent SEC filing, Ford estimates its total 
Y2K spending to be about $403 million, incurred over a three-year 
period that commenced mid-1997 and will end mid-2000. This outlay 
constitutes about 10% of our total annual information technology 
budget.
    Ford Motor Company is confident as to its readiness, as well as 
that of its affiliates, dealers and suppliers. However, the 
interdependence of the entire supply chain does represent the greatest 
risk to Ford. In particular, an extended infrastructure failure, that 
is electric, gas and water, would make it difficult to operate 
manufacturing operations. Accordingly, during the fourth quarter of 
1998, we began the development of business contingency plans for all of 
our critical business processes. Most of these plans are now complete. 
Validation of all contingency plans will be completed in September. In 
addition, Ford has created a Global Y2K Response Center to be used as 
an information clearinghouse for the most current status available as 
we enter the new millennium, and critical systems are being processed 
through an Independent Verification and Validation Program as a final 
check for readiness. Finally, a number of employees are being notified 
now to serve as on-site or on-call support over the holiday period to 
coordinate a response to any unexpected glitches that may be 
experienced by Ford or those who rely on Ford's consumer products and 
services.
    This concludes my prepared statement. I would again like to thank 
the Senate Committee for this time to provide an update on Ford's Year 
2000 Program. I would now be happy to respond to any questions you may 
have.
                               __________

          Responses of George Surdu to Questions Submitted by

                            Chairman Bennett

    Question 1. You testified that an ``enterprise test plan'' for all 
key business processes has been developed, with completion scheduled 
for September. Would you provide additional details about this plan? Do 
you plan to do a full end-to-end test of all your systems?
    Answer. The Ford Motor Company's enterprise test strategy has 
focused on testing all cross organizational and external interfaces for 
all critical business landscapes. This strategy was chosen rather than 
``end-to-end'' testing for several reasons, including the magnitude of 
the Company's enterprise portfolio (2400 systems with 340 million lines 
of code), regional complexities (North and South America, Europe, and 
Asia Pacific) and the completion of all critical inter-organizational 
integration testing by 1Q1999.
    Critical landscapes, or key business processes were identified in 
all major regions of the Company, and include: Order to delivery, 
Material supply to assembly, Material supply to Manufacturing, 
Regulatory reporting and cash flow, and Service part order fulfillment. 
The enterprise test strategy focused on testing all of the cross 
organizational and external interfaces that were identified within each 
of these landscapes. Over 50 landscapes, 700 interfaces, across 16 
countries were successfully tested by October 1999.
    Question 2. You testified that Ford had been participating in a 
global supplier readiness program for production and critical non-
production suppliers. Can you explain how this program operates, and 
precisely what Ford's participation has been?
    Answer. Ford, along with other major OEMs is an active 
participation in two automotive industry groups, the Automotive 
Industry Action Group (AIAG) and the Verband der Automobilindustrie 
(VDA). Both of these groups have Year 2000 task forces where OEMs come 
together to communicate in a consistent manner with our common supply 
base. In the AIAG Year 2000 Task Force, a number of initiatives have 
been underway for the sole purpose of making our suppliers aware and 
ready for the rollover. Significant ones include: 1) Training courses 
such as program management for Year 2000 and contingency planning were 
developed and made available to our global supply base. 2) A Web based 
Self Assessment Questionnaire has been deployed so that suppliers can 
report their Year 2000 readiness status monthly to their OEMs. 3) A 
remediation assistance program, developed to assist and audit 
suppliers' Year 2000 programs has been underway since 1998. 4) A follow 
on program to give suppliers assistance in creating contingency plans 
is running through the 4th Qtr 1999. These initiatives were shared with 
the VDA in Europe, and implemented there, as appropriate.
    The scope of the initiatives includes all the regions of the world 
where Ford has key suppliers. Ford's participation has been hands-on, 
taking a leadership role in developing and guiding the program, as well 
as providing resources and funding.
    Question 3. You testified that, as of now, about 80% of suppliers 
responding are deemed ready, with 100% to be ready by year-end, and 
that, for Ford's affiliates, 89% are ready, with 100% to be ready by 
December 1999. Isn't December cutting it a little close to expect these 
suppliers to be ready? How will you be monitoring their progress? If 
their progress doesn't track toward compliance on schedule by the end 
of the year, what are your contingency plans?
    Answer. To update the Senate, our suppliers report 97% are complete 
now, still forecasting 100% to be ready by year end. The majority of 
suppliers reported being ready by June 1999. The remaining suppliers 
have been dealing with recently uncovered issues, or less significant 
applications/hardware, not critical to production. Further, these 
suppliers report a high percentage (>90%) of work complete, closing in 
on 100% complete.
    Ford set a target for our suppliers to be ready, the same as our 
internal target, which is June 1999. For those that have strayed beyond 
that target, actions have been taken to determine what areas of their 
work is not complete, its impact to Ford and their ability to work 
around the issue. Once this information is known, Ford is in a better 
position to determine what contingency actions are appropriate. 
Progress has been monitored through the AIAG Self Assessment Website, 
where suppliers are requested to update their status monthly. In 
addition Ford mails the status and Ford's expectations to the 
supplier's executive management, advising them of any concerns we have, 
making them aware of Year 2000 risks and relaying best practices for a 
prudent business person to use. Throughout the data collection period, 
suppliers have consistently indicated they will be ready before January 
2000. Therefore we believe the most effective contingency strategy is 
to share best practices so they can make themselves ready.
    Despite the optimistic forecast, Ford has advised suppliers to 
develop contingency plans to handle whatever might happen. Where there 
is a high probability of risk or high impact to Ford, Ford is requiring 
suppliers to build a few days of finished goods as protection.
    Question 4. Do you have any plans to curtail or terminate 
relationships with critical suppliers who are not on track to be Y2K 
compliant by the end of the year? Are you confident that Ford can 
continue to produce cars and trucks if some of your critical suppliers 
are not ready?
    Answer. Ford monitors all aspects of supplier performance, as well 
as Year 2000 readiness. We have no indicators at this time that would 
warrant changes in relationships for Year 2000 reasons. The Self 
Assessments from the suppliers state they are ready and we have 
expectations of the suppliers to ship on time. Regarding Ford's 
confidence in continuing production if a critical supplier is not 
ready: Ford faces similar supply issues of varying magnitude on a daily 
basis. These issues are caused by many different conditions, such as: 
natural disasters, bad weather, power outages, equipment failures, 
human error. A Year 2000 problem will manifest itself in similar ways, 
so Ford and its suppliers are experienced in dealing with these types 
of problems.
    Question 5. Can you describe Ford's contingency plans worldwide in 
the event of failures in critical infrastructures, such as utilities? 
What is your assessment of the international transportation sector?
    Answer. Ford will deploy its existing contingency plans for 
infrastructure failures. Key areas such as North America, Western 
Europe and South America have very reliable infrastructure support, and 
are forecasted as green. The risk and probability there does not 
warrant extraordinary back-up measures, since any outages are likely to 
be brief and minor. Transportation is forecasted as green for the air, 
rail, ocean and truck services that Ford engages. Ford has been in 
contact with logistics providers as our eyes and ears around the globe. 
Their regional assessments for key areas have been optimistic.
    Question 6. In your testimony you mentioned that you would be 
setting up a Global Y2K Response Center. Will this center communicate 
with other large Y2K response centers in similar companies or with the 
Federal Y2K Information Coordination Center?
    Answer. The Global Y2K Response Center was launched on July 1st of 
this year. The center is an information clearinghouse for the most 
current Y2K status available as we enter the new millennium within 
Ford. We have agreements from selected partner companies to share Y2K 
information around the rollover period. We currently plan to 
communicate with the Federal Y2K ICC and are awaiting their published 
procedures.
                               __________

              ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

                                ------                                


                  Prepared Statement of General Motors

                           Executive Summary

    GM anticipates no problems with past, current, or future model 
vehicles, and no significant disruption of GM's business as a result of 
the Year 2000 problem.
    GM's passenger vehicles, with their growing use of sophisticated 
electronics, were among the company's earliest priorities for analysis 
of potential Y2K-related problems. GM vehicles have long been equipped 
with microprocessors which today, depending on the vehicle, are used 
for powertrain management, automatic climate control, anti-lock braking 
systems, traction control, stability enhancement, driver information 
centers, supplemental inflatable restraint systems, head-up display, 
real-time damping, navigation systems, seat, steering column and mirror 
memory positioning, remote keyless entry, entertainment systems, 
interior and exterior lighting systems, entry control, cellular 
communications and anti-theft systems.
    GM has analyzed the microprocessors in its current and planned 
models. Additionally, the company has checked the microprocessors in 
past models dating back to when we first started installing ``date 
processing-capable'' microchips in our cars and trucks. GM found most 
of these electronic systems have no date-related functionality and, 
therefore, pose no Year 2000-related problems. Those few systems that 
have date-related functionality were found to be Year 2000 ready.
    GM is executing a comprehensive global plan to make GM Y2K ready. 
Milestones of the plan include the following:
      The plan's major process steps include inventory, 
assessment, remediation, system testing, implementation, readiness 
testing, and contingency planning.
      GM is working to maintain uninterrupted electronic 
communications with its dealers, suppliers and other companies with 
whom it does business.
      Comprehensive Global Supplier Y2K Readiness is a vital 
part of the program.
      Remediation of systems is substantially completed.
      Testing will occur throughout 1999 to confirm GM's Year 
2000 readiness.
      Contingency plans are being developed and put in place.
    The details of the plan are attached.

                         GM's Year 2000 Program

    Many computerized systems and microprocessors that are embedded in 
a variety of products either made or used by GM have the potential for 
operational problems if they lack the ability to handle the transition 
to the Year 2000. Because this issue has the potential to cause 
disruption of GM's business operations, GM has developed a 
comprehensive worldwide program to identify and remediate potential 
Year 2000 problems in its business information systems and other 
systems embedded in its engineering and manufacturing operations. 
Additionally, GM has initiated communications and site assessments with 
its suppliers, its dealers and other third parties in order to assess 
and reduce the risk that GM's operations could be adversely affected by 
the failure of these third parties to adequately address the Year 2000 
issue.
    One of GM's first priorities was the analysis of microprocessors 
used in GM passenger cars and trucks. This review included all current 
and planned models as well as the electronics in older cars and trucks 
produced during the period of approximately the last 15 years. GM began 
installing microchips capable of processing date information 
approximately 15 years ago. Most of the processors reviewed have no 
date-related functionality, and accordingly have no Year 2000 issues. 
Of the vehicles with processors that perform date-related functions, 
none have any Year 2000 issues.
    GM's Year 2000 program teams are responsible for remediating all of 
GM's information technology and embedded systems. Information 
technology principally consists of business information systems (such 
as mainframe and other shared computers and associated business 
application software) and infrastructure (such as personal computers, 
operating systems, networks and devices like switches and routers). 
Embedded systems include microprocessors used in factory automation and 
in systems such as elevators, security and facility management. GM's 
Year 2000 program includes assessment and remediation services provided 
by Electronic Data Systems Corporation (EDS) pursuant to a Master 
Service Agreement with GM.
    The Year 2000 program is being implemented in seven phases, some of 
which were and are being conducted concurrently:
    Inventory--identification and validation of an inventory of all 
systems that could be affected by the Year 2000 issue. The inventory 
phase commenced in earnest in 1996 and is substantially complete. GM 
has identified approximately 6,100 business information systems and 
about 1.4 million infrastructure items and embedded systems.
    Assessment--initial testing, code scanning, and supplier contacts 
to determine whether remediation is needed and developing a remediation 
plan, if applicable. The assessment of business information systems is 
substantially complete and included a determination that about one 
quarter of such systems should be regarded as ``critical'' based on 
criteria such as the potential for business disruption. The assessment 
of infrastructure items and embedded systems was substantially 
completed by the end of 1998.
    Remediation--design and execution of a remediation plan, followed 
by testing for adherence to the design. GM has substantially completed 
the remediation of its critical and non-critical systems. A small 
number of systems will be remediated or replaced in 1999. 
Inconsequential systems have been and will continue to be removed from 
GM's Year 2000 inventory and will not be remediated. GM believes that 
it will meet its targets for Year 2000 readiness.
    System Test--testing of remediated items to ensure that they 
function normally after being replaced in their original operating 
environment. This phase is closely related to the remediation phase and 
follows essentially the same schedule.
    Implementation--return of items to normal operation after 
satisfactory performance in system testing. This phase follows 
essentially the same schedule as remediation and system testing.
    Readiness Testing--planning for and testing of integrated systems 
in a Year 2000 ready environment, including ongoing auditing and 
follow-up. Readiness testing is currently under way. This phase 
commenced during the fourth quarter of 1998 and is expected to be the 
major focus of the Year 2000 program throughout 1999.
    Contingency Planning--development and execution of plans that 
narrow the focus on specific areas of significant concern and 
concentrate resources to address them. GM currently believes that the 
most reasonably likely worst case scenario is that there will be some 
localized disruptions of systems that will affect individual business 
processes, facilities or suppliers for a short time rather than 
systemic or long-term problems affecting its business operations as a 
whole. GM contingency planning continues to identify systems or other 
aspects of GM's business or that of its suppliers that it believes 
would be most likely to experience Year 2000 problems. GM contingency 
planning also addresses those business operations in which a localized 
disruption could have the potential for causing a wider problem by 
interrupting the flow of products, materials or data to other 
operations. Because there is uncertainty as to which activities may be 
affected and the exact nature of the problems that may arise, GM's 
contingency planning will focus on minimizing the scope and duration of 
any disruptions by having sufficient personnel, inventory and other 
resources in place to permit a flexible, real-time response to specific 
problems as they may arise at individual locations around the world. 
Some of the actions that GM may consider include the deployment of 
emergency response teams on a regional or local basis and the 
development of plans for the allocation, stockpiling or resourcing of 
components and materials that may be critical to our continued 
production. Specific contingency plans and resources for permitting the 
necessary flexibility of response are currently being developed and put 
into place.
    GM's communication with its suppliers is a focused element of the 
assessment and remediation phases described above. GM is a leading 
participant in an industry trade association, the Automotive Industry 
Action Group, which has distributed Year 2000 compliance questionnaires 
as well as numerous awareness and assistance mailings to about half of 
the 90,000 supplier sites that service GM throughout the world. 
Responses to these questionnaires, which were generally sent to GM's 
principal suppliers, have been received from about half of the supplier 
sites to which they were sent. Many of the non-responding suppliers are 
communicating directly with GM on an informal basis. Additionally, GM 
has initiated its own review and assistance program for suppliers 
considered to be critical to GM's operations, including more than 3,900 
on-site assessments to date, and Y2K program management workshops for 
over 2,500 supplier companies. These assessment efforts have been 
substantially completed with respect to the critical supplier sites. 
Based on its assessment activity to date, GM believes that a 
substantial majority of its suppliers are making acceptable progress 
toward Year 2000 readiness. Additionally, GM has established a program 
to provide further assistance to suppliers that desire more input or 
that are believed to be at high risk of noncompliance as a result of 
the foregoing assessment efforts. This supplier assistance program 
currently includes providing remediation consultants to work with 
suppliers on developing, implementing, and/or accelerating their own 
Y2K readiness efforts.
    With specific regard to the ``off-shore'' component of the critical 
GM suppliers mentioned above, our readiness activities are being 
managed by a global Y2K supplier readiness organization with regional 
offices and personnel in Mexico City, Mexico; Ruesselsheim, Germany; 
Sao Paulo, Brazil; Melbourne, Australia; and Singapore, in addition to 
our supplier program headquarters in Detroit, MI.
    Of the critical supplier sites being tracked globally in 54 
countries for specific risk management action, approximately 35% are 
outside of North America. Of the 3,900 on-site supplier and utility 
assessments conducted in 44 countries, 55% have been outside of North 
America. Of the high-risk suppliers identified in the assessment phase 
and being provided direct remediation assistance, 77% are outside of 
North America.
    GM's contingency planning efforts described above are also expected 
to address any critical suppliers that GM identifies as being at high 
risk of encountering Year 2000 problems. Further, in regard to our 
``off-shore'' focus, we are placing a high priority on contingency 
planning, Y2K command centers in the U.S. and around the globe, and 
additional in-depth risk management for those countries and global 
regions which as a result of the above risk management actions show a 
high concentration of failure-likely suppliers or utility sites.
    GM also has a program to work with its independent dealers on their 
Year 2000 readiness. This program includes distributing materials that 
assist dealers in designing and executing their own assessment and 
remediation efforts. GM has also included Year 2000 compliance criteria 
as part of its established program for certifying that third-party 
business information systems properly interface with other systems 
provided to dealers by GM.
    GM's direct Year 2000 program cost is being expensed as incurred 
with the exception of capitalizable replacement hardware and, beginning 
in 1999, internal-use software. Total incremental spending by GM is not 
expected to be material to the Corporation's operations, liquidity or 
capital resources.
    In addition to the work for which GM has direct financial 
responsibility, EDS is providing Year 2000-related services to GM, as 
required under a Master Service Agreement. These services are being 
provided by EDS as part of normal fixed price services and other on-
going payments to EDS.
    GM's current forecast is that its total direct expenditures plus 
the value of services performed by EDS attributable to GM's Year 2000 
program will be between $540 million and $600 million. This amount 
includes the following:
      An estimated $350 million to $410 million in direct GM 
expenditures. This estimate includes a $60 million payment from GM to 
EDS at the end of the first quarter of 2000 if systems remediated by 
EDS do not cause a significant business disruption that results in 
material financial loss to GM; and
      An estimated $190 million representing EDS' expenditures 
attributable to GM Year 2000 program.
    GM's total Year 2000 costs noted above do not include information 
technology projects that have been accelerated due to Year 2000, which 
are estimated to be approximately $20 million,
    In view of the foregoing, GM does not currently anticipate that it 
will experience a significant disruption of its business as a result of 
the Year 2000 issue. However, there is still uncertainty about the 
broader scope of the Year 2000 issue as it may affect GM and third 
parties that are critical to GM's operations. For example, lack of 
readiness by electrical and water utilities, financial institutions, 
government agencies or other providers of general infrastructure could, 
in some geographic areas, pose significant impediments to GM's ability 
to carry on its normal operations in the areas or areas so affected.
    Statements made herein about the implementation of various phases 
of GM's Year 2000 program, the costs expected to be associated with 
that program and the results that GM expects to achieve constitute 
forward-looking information. As noted above, there are many 
uncertainties involved in the Year 2000 issue, including the extent to 
which GM will be able to successfully remediate systems and adequately 
provide for contingencies that may arise, as well as the broader scope 
of the Year 2000 issue as it may affect third parties that are not 
controlled by GM. Accordingly, the costs and results of GM's Year 2000 
program and the extent of any impact on GM's operations could vary 
materially from those stated herein.
    Note: The expenditures and other figures contained in this document 
represent GM's latest estimates following the May, 1999, spin-off of 
Delphi Automotive. Additional information of GM's Y2K readiness is 
available at (www.gm.com) and (www.gmacfs.com).
                               __________

                                  
