[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]


 
                 H.R. 1280--THE DEFENSE PRODUCTION ACT

                        REAUTHORIZATION OF 2003

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 19, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-13




88-233              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice         JULIA CARSON, Indiana
    Chairman                         BRAD SHERMAN, California
RON PAUL, Texas                      GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio                BARBARA LEE, California
JIM RYUN, Kansas                     JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSELLA, New York               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey             
TIM MURPHY, Pennsylvania             BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director

               Subcommittee on Domestic and International
                 Monetary Policy, Trade and Technology

                   PETER T. KING, New York, Chairman

JUDY BIGGERT, Illinois, Vice Chair   CAROLYN B. MALONEY, New York
JAMES A. LEACH, Iowa                 BERNARD SANDERS, Vermont
MICHAEL N. CASTLE, Delaware          MELVIN L. WATT, North Carolina
RON PAUL, Texas                      MAXINE WATERS, California
DONALD A. MANZULLO, Illinois         BARBARA LEE, California
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
JOHN B. SHADEGG, Arizona             BRAD SHERMAN, California
MARK R. KENNEDY, Minnesota           DARLENE HOOLEY, Oregon
TOM FEENEY, Florida                  LUIS V. GUTIERREZ, Illinois
JEB HENSARLING, Texas                NYDIA M. VELAZQUEZ, New York
TIM MURPHY, Pennsylvania             JOE BACA, California
J. GRESHAM BARRETT, South Carolina   RAHM EMANUEL, Illinois
KATHERINE HARRIS, Florida



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 19, 2003...............................................     1
Appendix
    March 19, 2003...............................................    25

                               WITNESSES
                       Wednesday, March 19, 2003

Bhatia, Hon. Karan K., Deputy Under Secretary for Industry and 
  Security, Department of Commerce...............................     7
Patrick, Hon. Suzanne D., Deputy Under Secretary of Defense for 
  Industrial Policy, Department of Homeland Security.............     5
Paulison, Hon. R. David, Director of the Preparedness Division 
  Emergency and Response Directorate, Department of Homeland 
  Security.......................................................     9
Sega, Hon. Ronald M., Director, Defense Research and Engineering, 
  Department of Defense..........................................     3

                                APPENDIX

Prepared statements:
    Emanuel, Hon. Rahm...........................................    26
    Bhatia, Hon. Karan K.........................................    27
    Patrick, Hon. Suzanne D......................................    33
    Paulison, Hon. R. David......................................    38
    Sega, Hon. Ronald M..........................................    42


                 H.R. 1280--THE DEFENSE PRODUCTION ACT

                        REAUTHORIZATION OF 2003

                              ----------                              


                       Wednesday, March 19, 2003

             U.S. House of Representatives,
         Subcommittee on Domestic and International
              Monetary Policy, Trade and Technology
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:00 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Peter T. King 
[chairman of the subcommittee] presiding.
    Present: Representatives King, Biggert, Leach, Paul, 
Manzullo, Kennedy, Feeney, Hensarling, Murphy, Barrett, Harris, 
Maloney, Watt, Waters, Lee, Sherman, Baca and Emanuel.
    Chairman King. [Presiding.] The subcommittee will come to 
order.
    First, let me thank the ranking member, Mrs. Maloney for 
her cooperation putting this hearing together, Vice Chair, Mrs. 
Biggert for her assistance and the witnesses that will be 
testifying here today.
    As the U.S. faces continued threats from terrorism as well 
as the prospect of a conflict overseas, the subcommittee 
convenes today to consider reauthorization of one of the most 
important pieces of legislation in the Administration's 
national security arsenal, the Defense Production Act of 1950. 
As you know, and as our witnesses will describe, the Act, known 
as the DPA, used economic tools to ensure adequate and timely 
delivery of materials needed for national security or in cases 
of national emergency.
    The legislation before us today, H.R. 1280, contains the 
Administration's request for a multi-year reauthorization of 
this legislation, along with a trio of mostly technical 
amendments. Original co-sponsors of the bill when I introduced 
it were the ranking member, Mrs. Maloney, a long-time supporter 
of the DPA, as well as the full committee chairman, Mr. Oxley.
    I would like to commend the administration for its request 
for a multi-year reauthorization. They requested five years. 
And by agreement with the minority, we today will amend that to 
four years. I think this is an appropriate period for 
reauthorization, both to ensure that it will not expire when it 
is most needed, as it did temporarily during the Gulf War and 
just a year and a half ago after the September 11 attacks. But 
also so that Congress can study the need for modernization of 
the act outside of the reauthorization framework.
    I also want to again commend my ranking member for working 
with me on this reauthorization in such an expedited, 
nonpartisan basis.
    Besides the four year reauthorization, the bill before us 
seeks to lift the program cap in DPA Title 3 for a single 
project involving radiation-hardened electronics, clarifies the 
President's authority to assess the adequacy of the defense 
industrial base and seeks to make permanent the section of the 
act that provides that no person should be held liable for 
damages or penalties through any act or failure to act 
resulting directly or indirectly from compliance with the rule, 
regulation or order issued pursuant to the DPA.
    We have a strong panel of witnesses here today to cover the 
intricacies of this act. Suzanne D. Patrick, Deputy Under 
Secretary of defense for industrial policy, Dr. Ronald M. Sega, 
director of Defense Research and Engineering at the Defense 
Department, Karan K. Bhatia, deputy Under Secretary for 
industry and security at the Department of Commerce and R. 
David Paulison, Director of the Preparedness Division, 
Department of Homeland Security.
    I look forward to their testimony and I recognize the 
ranking member, the gentlelady from New York, Mrs. Maloney, for 
opening remarks. I would also note that it is the 
subcommittee's strong preference today to have members submit 
any opening statements they may have, besides of course, for 
the ranking member.
    Mrs. Maloney?
    Mrs. Maloney of New York. Thank you so much. And I would 
like to thank the gentleman, the Chairman, from the great State 
of New York for conducting this hearing and this markup.
    Today, the subcommittee meets to consider the 
reauthorization of the Defense Production Act, a critically 
important tool that facilitates the government's ability to 
respond to emergencies and protect the defense industrial base. 
Eighteen months ago, when my city of New York was attacked, the 
Nation responded as one with aid. Today, while individuals may 
have divergent rules about war, we are united in hope for the 
well being of our troops and the innocents in the Gulf.
    In the future, our Nation may again have to respond to an 
earthquake in California, Florida hurricane, or random 
terrorist strike. In all these cases, it is critical that the 
President is empowered to invoke the Defense Production Act. In 
recent years, the Act has been used by the Armed Forces in the 
first Gulf War, Bosnia, Kuwait and in the present conflict. 
During peacetime, it has been used to fortify U.S. Embassies.
    The use of the Act is not a political issue in the sense of 
whether or not the U.S. should use force. The importance of the 
act is to make sure our soldiers have the equipment they need 
to safely perform their mission once committed. We consider 
this bill today because the act expires in the end of the 
fiscal year and failure to reauthorize could have serious 
consequences given current world events.
    The primary sections of the bill are Title I, authorizing 
the President to require priority performance of contracts or 
commit materials to promote national defense. Recently this 
authority was used to assist the newly formed Transportation 
Security Administration to deliver explosive detection devices 
for checked baggage to over 400 airports across America.
    Title III provides the President tools to ensure the 
viability of U.S. industries essential to national security. 
This authority has been used to maintain domestic production in 
industries dominated by foreign companies where markets are too 
small to otherwise sustain an upstart company.
    Title VII contains unrelated provisions, including anti-
trust protection for companies cooperating with the government 
under a DPA contract. The requirement that Commerce report to 
Congress on trade offsets. And the Exon-Florio language 
prohibiting foreign investment in U.S. companies that could 
determine national security.
    I am pleased to cosponsor this legislation and I appreciate 
the majority accepting my request to shorten the five-year 
authorization the administration requested. While I support the 
bill, there is no doubt this is an extremely powerful tool. 
Given that we have yet to measure the impact of the new 
Department of Homeland Security on the DPA and that a five-year 
extension would put expiration in the middle of the highly-
charged political climate of late 2008, I suggested a three-
year extension but am satisfied with the middle ground of four.
    I thank the Chairman and I yield back the balance of my 
time.
    Chairman King. If there are no other opening statements, we 
will go to our witnesses.
    And the first witness I would call upon would be the 
Honorable Ronald M. Sega, Director, Defense Research and 
Engineering for the Department of Defense.

 STATEMENT OF HON. RONALD M. SEGA, DIRECTOR, DEFENSE RESEARCH 
             AND ENGINEERING, DEPARTMENT OF DEFENSE

    Mr. Sega. Good afternoon, Mr. Chairman and members of the 
committee. I appreciate the opportunity to share with you the 
Department of Defense views regarding the Defense Production 
Act and the role it plays in helping to obtain goods and 
services needed to promote the national defense. With your 
permission, I would like to summarize the testimony I have 
submitted for the record.
    Although enacted originally in 1950, the Act provides 
statutory authorities still relevant and necessary for the 
Nations defense in the 21st century. The DPA provides the 
department with tools required to maintain a strong base, 
responsive to the needs of our Armed Forces. I want to express 
the department's support for reauthorizing the act through 
September 30, 2008.
    The key component of the DPA is Title III, which will be 
the focus of my testimony. The deputy Under Secretary of 
defense for industrial policy, Ms. Suzanne Patrick will follow 
a discussion with Title I and briefly touch on some key 
components of Title VII.
    Title III provides the President unique authorities that 
are being used to establish, expand, and maintain essential 
domestic industrial capacity needed to field advanced systems 
for today and the future.
    The primary objective of the Title III program is to work 
with U.S. industry to establish viable production capacities 
for items essential to our national security. The Title III 
Program also is being used to transition emerging technologies.
    A success story, I believe, is a good way to highlight the 
benefits of the program. Gallium arsenide is a semiconducting 
material used in the fabrication of advanced electronic 
devices. At the outset of a gallium arsenide Title III project, 
the long-term viability of the U.S. gallium arsenide wafer 
supply was in doubt. With the help of Title III, the U.S. 
producers made a dramatic turnabout.
    By 2000 these contractors accounted for sixty-five percent 
of wafer sales worldwide. Their combined sales of gallium 
arsenide wafers grew by nearly four hundred percent. In 
addition, the wafer prices dropped by approximately thirty five 
percent. The reduction in wafer prices and improvement in wafer 
quality resulted in significant reductions in defense costs for 
critical electronics.
    The DOD is initiating two new projects this year. One of 
these projects will be establishing the production capacity of 
Yttrium Barium Copper Oxide superconducting wire.
    Projects initiated in fiscal year 2002 include a project 
for radiation hardened microelectronics. The project 
illustrates the key role for Title III that it plays in 
providing our Armed Forces with the technologies they need to 
be successful on the battlefield. We were in danger of losing 
our last remaining suppliers of these critical components 
needed for strategic missile and space systems.
    Because of the small number of components that the 
Department buys and limited commercial demand, our current 
suppliers were unable to generate sufficient revenues to 
purchase the production equipment needed to produce radiation 
hardened microelectronics at feature size needed to meet future 
defense requirements. Title III is helping these companies, 
through equipment purchases and modernization, to remain viable 
suppliers, capable of supporting future defense requirements. 
Without Title III, it is likely we would have lost this 
critical production capability.
    Most provisions of the Defense Production Act are not 
permanent law and must be renewed periodically by Congress. We 
are requesting a reauthorization of the authorities contained 
in the Defense Production Act until September 30, 2008. In 
addition, we are requesting to increase the statutory 
authorization limit contained in Section 303 to $200 million to 
correct the industrial research shortfall for the radiation 
hardened electronics project.
    The DPA requires the Department to obtain specific 
authorization for any Title III project that exceeds $50 
million. The expected cost of the radiation hardened electronic 
project is $167 million. However, we are asking for authority 
up to $200 million in the event of unexpected cost increases 
for the project.
    In conclusion, the DOD needs the Defense Production Act. It 
contains authorities that exist nowhere else. Current world 
events make these authorities more important than ever. The DPA 
is a proven mechanism. Its array of authorities has helped us 
meet the challenges of the last fifty years. By judiciously 
applying its authorities to challenges facing us today, the DPA 
will see us to a more secure future.
    I hope that I have conveyed to you the significant role the 
Defense Production Act plays in ensuring our Nation's defense. 
The Department fully supports the bill before the committee to 
reauthorize the DPA.
    Thank you for the opportunity to discuss the Defense 
Production Act.
    [The prepared statement of Hon. Ronald M. Sega can be found 
on page 42 in the appendix.]
    Chairman King. Thank you, Dr. Sega.
    And in answer to your question, you did make us well aware. 
And I appreciate your testimony and also the brevity of the 
testimony. We got it all in. Thank you.
    Now the Chair recognizes the Honorable Suzanne D. Patrick, 
Deputy Under Secretary of Defense for Industrial Policy.

STATEMENT OF HON. SUZANNE D. PATRICK, DEPUTY UNDER SECRETARY OF 
      DEFENSE FOR INDUSTRIAL POLICY, DEPARTMENT OF DEFENSE

    Ms. Patrick. Good afternoon, Mr. Chairman and members of 
the committee. I appreciate this opportunity to share with you 
the Department of Defense views regarding the Defense 
Production Act. As Dr. Sega has indicated, this act provides 
statutory authorities that are vital for DOD, both in times of 
contingency or conflict, as well as during peace, in helping to 
obtain the goods and services needed to promote the national 
defense.
    With your permission, I would like to summarize the 
testimony I have submitted for the record.
    Dr. Sega talked about Title III. My testimony today focuses 
on Title I of the Defense Production Act and I want to briefly 
mention Title VII of the Act, which is also very important to 
the Department of Defense. As you know, Defense Production Act 
Titles II, IV and VI have been repealed.
    I particularly want to describe to you why Title I 
authority is so important to us and how we are using it today.
    Title I, which addresses priorities and allocations, 
provides the President the authority to require preferential 
performance on contracts and orders as necessary or appropriate 
to promote the national defense. These authorities are 
important in peacetime. They are vital in the event of 
conflict.
    During peacetime, Title I priorities are important in 
setting priorities among defense programs that are competing 
for scarce resources and industrial production of parts and 
assemblies. These priorities are implemented through the 
Defense Priorities and Allocations System, DPAS, and applied by 
contract clauses. The clauses are like insurance, present in 
all defense systems contracts, subcontracts and orders, but 
actually executed only when absolutely necessary.
    In peacetime, delayed industrial supplies increase costs of 
weapons systems and affect our readiness. DPAS serves as an 
important tool to prioritize deliveries and to minimize cost 
and schedule delays for the department's orders.
    Forty-one percent of our 120 DPAS cases since 1995 
supported peacetime requirements. Such support has included 
prioritizing deliveries of components for weapons systems, to 
minimize delayed deliveries and readiness impact, rating the 
State Department's embassy security protection upgrade program 
worldwide, and rating selected friendly national defense 
contracts with U.S. suppliers that promote U.S. national 
defense.
    Sixty-nine percent of the overall 120 cases since 1995 have 
supported U.S. and coalition needs during conflicts in Bosnia, 
Kosovo, Operation Enduring Freedom and the global war on 
terrorism.
    During times of conflict, DPAS is vital, indeed 
indispensable. DPAS gives the Department of Defense the 
necessary power and flexibility to address critical war fighter 
needs involving the industrial base in an effective and 
expeditious way. The role of DPAS to increase interoperability 
and to assist our allies is also very important.
    Recent DOD and Department of Commerce actions to use DPAS 
authorities to support Operation Enduring Freedom and the 
global war on terrorism have included components for precision 
guided munitions, global positioning system receivers and 
navigational processors, unmanned aerial vehicle sensors and 
man pack and search and rescue radios.
    Two specific cases illustrate the absolutely necessary 
power that DPAS provides. Predator UAVs armed with Hellfire 
missiles were used for the first time in Afghanistan. They 
include an upgraded sensor package, the Multi-Spectral 
Targeting System. The contractor's original delivery date for 
three systems was this month, March 2003.
    Using DPAS, we jumped this order to the head of the 
production queue and the contractor was able to deliver three 
systems in December 2001, 18 months earlier than originally 
promised. We all are aware of the dramatic impact unmanned 
Predators had in waging war in Afghanistan. Since that time, we 
have used DPAS to accelerate forty additional Multi-Spectral 
Targeting Systems.
    Also in support of Operation Enduring Freedom, the U.K. 
Ministry of Defense needed ARC 210 satellite communications 
equipment to ensure secure satellite communication capabilities 
among U.S. and U.K. aircraft operating in and around 
Afghanistan. The U.K. requirements were critical to our overall 
war fighting effort. DPAS was used again to give the U.K. order 
an industrial priority rating and it was moved ahead of some 
U.S. orders that were not for deployed or deploying forces. The 
U.K. received the equipment six months in advance of the 
initial delivery date quoted by the manufacturer permitting 
vital secure communication among allied forces in theater.
    I would like to conclude my remarks on Title I of the DPA 
by noting that it is our war fighters who are the real DPAS 
beneficiaries. Limiting our authority to apply these provisions 
to our contracts, whether by allowing the basic authorities to 
lapse, or by enacting an amendment limiting our ability to 
direct deliveries from any and all U.S. contractors when 
required to meet critical national defense requirements has the 
potential to put their lives at risk.
    Turning now to Title VII, I want to briefly express support 
for these authorities, also very important to the Department of 
Defense. Title VII contains miscellaneous provisions, including 
enforcement mechanisms, which help protect the national 
security. For example, section 707 provides that no person 
shall be held liable for damages or penalties for any act 
resulting from compliance with rules, regulations or orders 
issued under the Defense Production Act.
    This provision is necessary to protect suppliers from 
breach of contract claims when commercial contracts are 
displaced in the interest of national security. This provision 
should be permanently authorized in order to protect 
contractors during periods when the Defense Production Act has 
lapsed, as has happened temporarily.
    As an example, the Civil Reserve Air Fleet, CRAF, was 
activated in February, 2003 for the second time in its 50-year 
history. Upon activation, 47 passenger aircraft were brought 
under the exclusive control of the Department of Defense until 
released. Both scheduled carriers and charter carriers may have 
to invoke section 707 to defend against breach of contract 
actions involving their commercial business.
    During Operation Desert Shield/Desert Storm when CRAF was 
activated previously, the Defense Production Act expired, 
leaving carriers with no legal protection to defend against 
breach of commercial contracts. The 102nd Congress 
retroactively extended it. But DOD believes that section 707 
should be permanently authorized in order to remove this kind 
of uncertainty.
    Section 721 represents another example of important Title 
VII authorities. Section 721 allows the President to suspend or 
prohibit a foreign acquisition of a U.S. firm when that 
transaction would present a credible threat to the national 
security of the United States and allows us to propose remedies 
that eliminate that threat that are not available under other 
statutes. This authority is increasingly important in today's 
globalized industrial environment.
    In closing, I would like to reaffirm that DPA authorities 
are a critical tool in the Department of Defense's arsenal. It 
would be very difficult for the department to meet its national 
security responsibilities without this tool. Since it was 
originally enacted in 1950, we have used the Defense Production 
Act authorities to promote our national security time and 
again, particularly during times of conflict.
    Given the challenges we face today and the uncertain 
duration of our global war on terrorism, we support 
reauthorization of the Defense Production Act through September 
30, 2008. This would help to remove the uncertainty associated 
with short duration authorizations.
    Thank you very much.
    [The prepared statement of Hon. Suzanne D. Patrick can be 
found on page 33 in the appendix.]
    Chairman King. Thank you, Ms. Patrick, we appreciate your 
testimony.
    And now we will hear from Karan K. Bhatia, Deputy Under 
Secretary for Industry and Security from the Department of 
Commerce.
    Mr. Bhatia?

 STATEMENT OF HON. KARAN K. BHATIA, DEPUTY UNDER SECRETARY FOR 
         INDUSTRY AND SECURITY, DEPARTMENT OF COMMERCE

    Mr. Bhatia. Thank you very much, Mr. Chairman.
    I appreciate the opportunity to testify before you today on 
the reauthorization of the Defense Production Act. Let me start 
by conveying Under Secretary Juster's apologies for not being 
able to attend today's hearing. He had a long-standing prior 
commitment that required him to be out of the country.
    The Commerce Department fully supports extension of the 
DPA. We do so because in our experience, the Defense Production 
Act has been a critically important tool in enabling the 
government to work effectively with industry to meet 
contemporary challenges to our security.
    I have prepared a written statement, which, with your 
indulgence, I ask be entered into the record.
    Chairman King. Without objection.
    Mr. Bhatia. My written statement discusses in detail the 
various ways in which the Department of Commerce is involved in 
the exercise of DPA authorities and provides some relevant 
examples. In the interest of brevity, I will not duplicate that 
testimony here. But I would like to briefly identify several 
authorities under the act that facilitate key Commerce 
Department activities.
    First, under Title I of the DPA, the department administers 
the Defense Priorities and Allocations System, the DPAS. As Ms. 
Patrick explained, DPAS seeks to ensure the timely availability 
of products, materials and services that are needed to meet 
national defense and emergency preparedness requirements with 
minimal interference to the conduct of normal business 
activity.
    It does this by creating a system of priority ratings that 
can be attached to procurement contracts by agencies to which 
the Commerce Department has delegated ratings authority, 
including the Departments of Defense and Energy. DPAS also 
provides an operating structure to support a timely and 
comprehensive response by U.S. industry in the event of a major 
national emergency.
    Now, in addition to DPAS, the DPA also provides authority 
to the Commerce Department to collect data, perform analysis 
and prepare reports on critical defense industrial base issues. 
It requires the submission to Congress of annual reports 
analyzing the practice of offsets in defense trade. It is also 
the source of authority for the reports that Commerce prepares 
each year, commonly at the request of Congress or the Armed 
Forces, analyzing the health and viability of various sectors 
of the defense industrial base.
    I would like to pause in this context to note the Commerce 
Department's support for the minor, but we believe important, 
amendment in the bill that would clarify that the President's 
investigative authorities under the DPA include the authority 
to obtain information necessary to produce such studies.
    Finally, the DPA authorizes review of the national security 
implications of foreign acquisitions of U.S. companies, and if 
necessary, the prohibition of acquisitions when there is 
credible evidence that the foreign interest may take action to 
impair U.S. national security. The Commerce Department is one 
of the federal agencies that participates in the analysis of 
such transactions.
    Now, 21 months ago when this subcommittee last convened a 
hearing to consider reauthorization of the DPA, none of us 
could have then predicted the security challenges that the U.S. 
would soon encounter at home and abroad, nor the important role 
that DPA authorities would play in meeting those challenges. 
But they have played precisely such a role.
    Pursuant to DPA authorities, the DPAS system has worked to 
secure the delivery of a number of items ranging from guidance 
system components for smart bomb munitions to search and rescue 
radios for both U.S. and allied forces in Operation Enduring 
Freedom.
    Here at home, DPA has helped facilitate a number of post-
September 11 initiatives to secure the homeland. DPAS support 
has been provided to the FBI to upgrade its communications and 
data processing capabilities, and to the Transportation 
Security Administration to achieve the timely delivery of 
explosive detection systems equipment for use at commercial 
airports. And we are currently working with the Department of 
Homeland Security to review a request to provide DPAS support 
for the Customs Service's Automated Commercial Environments 
port security system.
    DPA authority has facilitated the completion of a number of 
in-depth studies of the defense industry, including most 
recently a comprehensive analysis of the impact of offsets on 
defense trade over a six-year period. A report that has been 
well received by Congress and industry.
    Finally, and in light of current events, perhaps most 
critically, DPA authority is providing support today for U.S. 
and allied nation forces currently deployed in the Middle East. 
We have worked closely with contractors and suppliers to 
achieve timely delivery of important supplies and materials to 
those forces.
    In short, thanks to this committee's work in reauthorizing 
the DPA two years ago, we have had in place critically 
important statutory authority that has enabled the federal 
government to meet the new and diverse threats to our security. 
As it has over the past 50 years, the statute has again 
demonstrated its utility and its value. We strongly support its 
reauthorization.
    Thank you.
    [The prepared statement of Hon. Karan K. Bhatia can be 
found on page 27 in the appendix.]
    Chairman King. Thank you, Mr. Bhatia, we appreciate your 
testimony.
    And now we will hear from R. David Paulison, Director of 
Preparedness Division, Emergency Response Directorate in the 
Department of Homeland Security.
    Mr. Paulison?

     STATEMENT OF HON. R. DAVID PAULISON, DIRECTOR OF THE 
  PREPAREDNESS DIVISION, EMERGENCY AND RESPONSE DIRECTORATE, 
                DEPARTMENT OF HOMELAND SECURITY

    Mr. Paulison. Thank you, Mr. Chairman and members of the 
subcommittee. On behalf of Under Secretary Michael Brown, I 
appreciate the opportunity to appear before you today. I have 
submitted my written testimony and appreciate it being added 
for the record. And I would like to just give a very brief 
overview of our comments and try not to duplicate what has 
already been said.
    The Department of Homeland Security does support a 5-year 
reauthorization of the Defense Production Act. We feel that 
this will allow us to continue our preparedness for 
catastrophic incidents and also allow us time to explore ways 
to modernize the Defense Production Act.
    If we fail to reauthorize this act, there is no alternative 
or comparable authority for the Defense Production Act for 
priorities and allocations for civil emergencies. And we are 
talking about natural or man made disasters in this country.
    The Defense Production Act authorities are critical to 
supporting the Department of Homeland Security's objectives and 
missions. We have recently used the Defense Production Act in 
several incidents and some were pointed out by Mrs. Maloney. 
And that is particularly the use of priorities and allocation 
authority to support TSA for acquiring explosive detection 
devices for over 400 airports.
    We have assisted the FBI in updating their critical 
information systems. And we are currently working with the 
Bureau of Customs to use the Department of Homeland Security's 
priority and allocations to buy equipment to track 
containerized shipping arriving on our borders. An example of 
this is a tracking of over 9,000 tractor trailer trucks across 
our borders at Laredo, Texas each day in this country. And that 
is just one city.
    The Department of Homeland Security can use the Defense 
Protection Act in catastrophic natural disasters and I think 
that is very important. I was the chief of Miami-Dade County 
when Hurricane Andrew swept through the southern portion of our 
county.
    We had 90,000 homes destroyed and 250,000 homeless people. 
If that hurricane had landed just 10 miles further north and 
had moved a little slower, the catastrophic results that we saw 
would have been multiplied many times over. This act gives us 
the tools to effectively respond to these types of disasters.
    A major earthquake along the New Madrid fault could cause 
major loss of life and significant destruction of the 
infrastructure. Other examples in the use of this Act is 
personal protection equipment used for weapons of mass 
destruction for our first responders, vital communications 
equipment and other information technology support for advanced 
research projects.
    We are currently preparing a priorities and allocations 
manual that parallels the DOD system, which we will use 
throughout the Department of Homeland Security.
    And lastly, the Secretary of Homeland Security is prepared 
to carry out his responsibilities under Executive Order 12919, 
particularly in regard to coordination and program guidance of 
this act.
    Thank you.
    [The prepared statement of Hon. R. David Paulison can be 
found on page 38 in the appendix.]
    Chairman King. Thank you, Mr. Paulison.
    I just have several questions. One, I will ask the entire 
panel on this, as you know, the administration originally 
requested a five-year reauthorization of the DPA. But in 
agreement with the ranking member and the other minority 
members, we intend to--I intend to offer an amendment today to 
make that a four-year extension. Do any of you have any 
comments on that? Do any of you have any objection to the 
amendment bringing it from five years to four years?
    Mr. Sega. From the Department of Defense, we would--we 
prefer five years as we see the DPA authorities as needed on a 
continuing basis now and into the future. We would prefer five.
    Chairman King. Anybody else have any comment?
    Mr. Paulison. Like I said earlier, the Department of 
Homeland Security also prefers five years.
    Mr. Bhatia. Let me add the Commerce Department's voice as 
well. We, too, would prefer a five-year authorization. We 
consider this an extremely important statute. In our view the 
longer the reauthorization, the better.
    Chairman King. Thank you.
    Ms. Patrick. And I think the other thing is that given the 
fact that we have seen the adverse impact at times when this 
has lapsed. I think it is very important that we, especially 
given world conditions today, that we have as long a 
reauthorization as we possibly can just to make sure that we 
can deal as effectively with contingencies in the future as we 
have in the past.
    Chairman King. Okay. Thank you for your comments.
    Also, and I see that the gentlelady from California is 
here. And I realize she will be offering an amendment later on, 
which she will be speaking on. But basically, if I can 
paraphrase her amendment, and she is--again, I am not speaking 
for her. But it is going to, as I understand it, preclude any 
contracting with a company that employed or had as a board 
member any--certain specified senior U.S. government officials. 
I would like to ask if you would comment on that to the extent 
that would impact on your departments as far as implementing 
the DPA.
    Ms. Patrick. I would like to take this opportunity to 
reiterate some of the comments that I had in my oral statement. 
It is very important to remember that these requests come to us 
based almost exclusively on war fighting requirements. These 
are for the warfighter to get something in a timely fashion 
that they need desperately to prosecute an operation or to 
prevent loss of lives in the battlefield. And as a consequence 
of that, it would really gut the utility of this Act to us if 
we in any way had to circumscribe its effectiveness relative to 
the companies to which we could apply it.
    The other thing that I would like to point is that this Act 
comes in--the DPAS provisions come into force when we have an 
existing contract that has been duly rated so the provisions of 
DPAS supply. And it is only when those two provisions are met 
that DPAS comes into effect at all for us to decide as to 
whether we had to reallocate production on a production line to 
serve the interest of a warfighter.
    So from our perspective, it is absolutely essential that we 
be allowed to provide the warfighter equipment regardless of 
contractor or source in a time of great need. And it would be 
really discriminatory against the warfighter to limit the 
production--or the provision of war fighting equipment to them 
based on other concerns that do not have to do with the urgent 
need, but have to do with other concerns.
    So I hope that is clear.
    Chairman King. It is clear to me. Thank you, Ms. Patrick.
    Anybody else have any comment on that?
    Mr. Paulison. We do not know the full impact of the 
amendment. But we are concerned that it will make the Act 
ineffective should we experience a catastrophic incident in 
this country, whether it is man made or natural. And so we do 
have concerns over it.
    Chairman King. Thank you.
    Mr. Bhatia. I would echo the comments made by the other 
witnesses on this. I would also add that, although we have only 
had a chance to preliminarily review it, it would appear that 
the amendment would effectively carve out a category of 
companies from the requirements of the DPA, including 
requirements that they be subject to the investigative and 
report features of the DPA. Obviously, for those reports and 
investigations that we do to be complete and to be accurate, we 
would want responses from all companies out there, including 
this category of companies that would potentially be carved out 
if the amendment were adopted.
    Chairman King. Mrs. Maloney?
    Mrs. Maloney of New York. Thank you, Mr. Chairman and I 
thank all the panelists.
    First, I would like to ask Dr. Paulison, can you explain 
for the committee what the impact of FEMA coming under the 
Department of Homeland Security will be in practice? Many 
people say it is just moving boxes around and it is not going 
to really have that big an impact. But how will the DPA be used 
in practice now when reacting to--will you react to a disaster 
any way differently than prior to the creation of this new 
Homeland Security Department?
    And also, you mentioned in your statement that you would be 
paying attention to the ports. And as you know, New York City 
is one of the biggest ports in the country. I represent New 
York City, a very highly populated area. And can you tell the 
subcommittee how the DPA might be used in this area? If you 
could elaborate further on in port protection.
    Mr. Paulison. Thank you for the question. The first answer 
is, by moving FEMA into the Department of Homeland Security it 
gives us a tremendous amount of resources that we did not have 
before. FEMA's response has been primarily natural disasters. 
We have responded to some man made disasters, but primarily 
natural.
    By moving into the Department of Homeland Security, it 
gives us the ability to tap into the terrorism part--terrorism 
protection part of the federal government we did not 
necessarily have before. So we are excited about the move. We 
think it is the right move. And we already see a lot of good 
things happening as far as keeping this country prepared, and 
also responding to the disasters.
    The second part--I come from a big port city, also, of 
Miami. We have a difficult time sometimes tracking what comes 
into the country and what are in these containerized cargos. 
The DPA will allow us to work with Borders and Transportation 
Security to make sure that we can track each of these cargo 
containers as they come in. We know what is in the cargo 
containers and we know where they are going.
    It is going to be a tremendous opportunity for us to 
enhance the tracking systems we already have. If we did not 
have this authority, we may not have the ability to move 
quickly enough. As we know, we have a significant crisis on our 
hands at this point. And we need to be able to move very 
quickly to put a tracking mechanism in place to find out--make 
sure we understand what is in these containers--containerized 
cargos as they come into the country and how we can track them 
once they come in.
    Mrs. Maloney of New York. Thank you.
    Secretary Bhatia, in your testimony you mentioned that the 
DPA requires Commerce to report to Congress on the issue of 
defense trade offsets. And I am wondering, is this a two-way 
street. Could you provide an example of a recent offset sought 
by a foreign country?
    Mr. Bhatia. Ranking Member Maloney, the report that we 
provided contains a summary of different offsets that get 
reported to us. I am happy to get back to you with some 
specific examples if you want. I believe even the most recent 
sale of F-16 fighters to Poland has an offsets package as part 
of that. But I would be happy to provide some specific details 
afterwards if you would like.
    Mrs. Maloney of New York. Well, does the United States ever 
seek offsets for goods bought from foreign countries?
    Mr. Bhatia. The policy of the United States is to not 
participate in the formation of offsets and offset policies. 
We, the Commerce Department, have been devoting our resources 
principally monitoring the practice of offsets, the effect that 
it is having. It obviously is, to some extent, a trade 
distorting practice and it is one that concerns us. And we have 
sought to address it both in bilateral and multilateral fora 
with our allies.
    Mrs. Maloney of New York. Is there a potential that foreign 
countries seeking offsets could lead to jobs moving overseas 
when they otherwise would have stayed in the United States? 
Have you studied that?
    Mr. Bhatia. Yes, the most recent report does address that 
issue and it is obviously a concern with respect to offsets. 
The analysis contained in the report concludes that on balance 
when you look at the gains in U.S. jobs and to the U.S. economy 
as a result of offset packages being offered and thus contracts 
being won, the net is, by a fairly significant margin, a 
benefit to the U.S. economy and U.S. jobs rather than the loss 
of jobs.
    Mrs. Maloney of New York. And as you know, the DPA contains 
the Exon-Florio language that authorizes the President to block 
foreign control of a U.S. business if the foreign business 
might take action that threatens to impair the national 
security. Can you please provide an example of how this 
authority has been used?
    Mr. Bhatia. The authority is exercised through the 
Committee on Foreign Investment in the United States which has 
been created, I believe, by executive order. It is an 
interagency committee under the chairmanship of the Treasury 
Department that will look at filings made by foreign parties 
seeking to acquire effectively controlling interests in certain 
U.S. companies.
    I believe that the regulations the Treasury Department has 
put out, require that information about specific transactions 
and investigations be provided confidentially to the committee. 
I would be more than happy to do that in a confidential forum.
    Mrs. Maloney of New York. I would appreciate that.
    And Ms. Patrick, finally, and my time is up, how would the 
DPA be used in the rebuilding of Iraq?
    Ms. Patrick. The Defense Production Act and DPAS 
specifically is very much used on a case-by-case basis. And 
so--and I would like to also reiterate the point I made in my 
remarks, which is that we generally use DPAS authority for 
things that benefit the warfighter.
    I think that the rebuilding of Iraq is something in the 
future. We--certainly in this administration, we have not tread 
that ground yet. And so as a consequence, we would have to see 
what sorts of requests under the DPAS and DPA authority came to 
us in conjunction with the rebuilding of Iraq. And I would not 
want to guess in advance how those authorities might be used.
    Although I would like to reiterate again, as I have 
previously, that they are typically used to benefit our 
warfighters and under existing contracts where the ordering or 
allocation of defense hardware has to be changed in a matter to 
meet urgent national security requirements.
    Chairman King. Ms. Biggert?
    Mr. Paul?
    Mr. Paul. Thank you, Mr. Chairman.
    I was wondering if any member of the panel could cite the 
article of the Constitution that gives the Congress the 
authority to grant this amount of authority to the executive 
branch.
    Okay. There's no answer. Maybe I will ask my colleagues. 
This next question is directed toward Secretary Patrick and it 
is dealing with Article I of the DPA. Part of Article I 
prohibits the President from exercising his priorities without 
first making a report to the Congress; and I understand that 
this administration has used this authorization. Has it always 
sent these reports to the Congress before making use of this 
authority?
    Ms. Patrick. The authority under DPAS, as I understand it, 
actually is delegated quite deeply into the Defense Department. 
And just so I might explain how it works. It, to my knowledge--
it does not require any sort of additional request of Congress 
because, of course, the issue here is urgent national security 
requirements with a warfighter out at the pointed end of the 
spear needing something desperately; Kevlar shields, additional 
JDAMs, additional radios.
    And so, as a consequence, that authority is delegated to me 
in the cases where only U.S. requirements and only U.S. 
production facilities are in question. In the case where it is 
a foreign requirement or where foreign production facilities 
are involved, my boss, the Under Secretary of Defense for 
Acquisition, Technology and Logistics, Mr. Aldridge, signs off 
on those DPAS requests.
    But the Act does not specifically require us to come back 
to Congress each time we use DPAS in order to expedite 
something from the warfighters.
    Mr. Paul. Well, I think that would stand to, I guess, a 
debate because some people could read it otherwise that nothing 
could be done because it prohibits you doing anything unless 
these findings are presented to the Congress. It seems like 
these indirect methods would not suffice.
    But on another subject as well, just on this principle of 
delegating this amount of authority, which to me is a 
tremendous amount of authority, because literally we are giving 
the administration power to draft an economy and dictate to 
economy, which can be very damaging, because it came out of the 
fact that nationalizing the steel industries by Truman was 
considered not the best way to go about things. But this is 
accomplishing the same thing and stands on the books as 
potentially very dangerous for the gravitation of power in the 
executive branch.
    But it is also based on the assumption that the allocation 
of resources is best done by authoritarian procedures. We 
believe in the market. And when there is a shortage, the best 
allocation of scarce resources is through the market. And yet, 
as soon as we come up with a crisis, we resort to authoritarian 
methods which have questionable constitutional grounds for it. 
So I just have a lot of trouble understanding why there is such 
determination for all this power to be given to the executive 
branch, not only for an extension of two years, make sure it is 
for five years.
    I mean, where is our confidence in the market place.
    Ms. Patrick. I think you will probably find few members of 
the administration who are such fervid and fervent advocates of 
the market economy as some of the senior members of the 
leadership in the Defense Department. And I would certainly 
count myself among them.
    I think that the way to best understand the DPAS 
authorization is that it is used for highly extraordinary 
circumstances. It is intended to fine-tune the priority of 
production line assets. It is not in any way comparable or to 
be discussed in the same vein, I think, with nationalization of 
a major industry. These are very minor course adjustments that 
we do very judiciously, very prudently, once again, in order to 
make sure that the warfighter has what he or she needs when 
they are engaged in combat on our behalf.
    Chairman King. Ms. Waters?
    Ms. Waters. Thank you very much, Mr. Chairman.
    Let me start out by saying that I share Mr. Paul's 
concerns. This is awesome authority. And I understand that 
there has already been some planning at the White House or the 
Pentagon about use of this authority not in the way that it is 
being described here today, but in relationship to contracts to 
rebuild roads, bridges and other facilities in Iraq following 
the war. Do you know anything about that?
    Ms. Patrick. Ma'am, I do not know anything about that other 
than what you have told me and what I have learned about such 
initiatives during the course of the day today preparing for 
this hearing. I can also assure you that we do not have any 
such request that has come to us under DPAS authority. And so 
the scenario that you are painting for us today is certainly 
new to me.
    But also, as I said previously, we review very judiciously 
and carefully these requests under DPAS for relevance to the 
warfighter, for urgency in prosecution of a conflict and we do 
consider them on a case-by-case basis. That's very much at the 
center of this kind of judicious consideration.
    Ms. Waters. May I ask, has Halliburton been involved--
Kellogg, Brown and Root or Halliburton been involved in any of 
the planning for the use of this authority should they--should 
you need it? Have you been involved with any planning sessions 
with representatives of Kellogg, Brown and Root or Halliburton?
    Ms. Patrick. I certainly have not. And just to further 
elaborate on how the process works, these kinds of requests 
come to us either, as I said earlier, from the warfighters 
themselves, from the combatant commanders, from members of the 
joint staff who see that they need something that they do not 
have sufficient quantities of or where the sequencing on a 
production line is not adequate; or, in some cases, from 
companies who have contracts for critical war fighting 
equipment who, as part of the functioning of the defense 
industrial base, advise us that they have a problem in 
executing a number of contracts that they are doing for us 
simultaneously.
    And that they from time-to-time have advised us when there 
is a problem in executing a contract that they view important 
to the warfighter because another item of equipment is on the 
production line preceding this critical item.
    Ms. Waters. Who would make the final decision about the 
authority to use this authority? Who would make the final 
decision--if you have a request, as you would say, from someone 
out in the field and there was a need to spend $50 million to 
do something that you say falls within the category of this 
authority, who would make the final decision on that?
    Ms. Patrick. Let me answer the question in two ways. First 
of all, in the case where it involves a request from a U.S. 
entity and impacts a U.S. production line or a U.S. company, 
U.S. on the both sides, I sign off on those documents myself. 
In the cases where it involves a foreign company or an ally 
asking us for that help, the Under Secretary of Defense for 
Acquisition, Technology and Logistics, my boss, signs off on 
that. So these are delegated appropriately in the department so 
that the people who have the subject matter expertise can 
actually adjudicate the issues of concern.
    Let me answer another point that I think was embedded in 
your question, which is that the DPAS authority is not a 
contracting authority per se. In most instances, as a matter of 
fact, it is revenue neutral to the companies in that the 
companies are not provided additional revenues as a result of 
the DPAS authority. They are just directed to change the order 
in which they provide equipment to us based on the authority.
    Now under some circumstances, if we have to surge 
production dramatically and we decide that we do not have time 
to renegotiate a contract, and I think that's a big exception 
because we can negotiate contracts quite nimbly to meet 
warfighter demand. But if all that were the case, then in turn, 
if the company decided that they needed to be reimbursed for 
providing things on an accelerated schedule because, for 
instance, the had to put on additional shifts, they had to 
procure materials at rates that were not as competitive.
    Ms. Waters. If I may--I understand that.
    Ms. Patrick. Okay.
    Ms. Waters. However, you are not representing that. This 
authority does not include the ability to increase the original 
order if it is an emergency. For example, if you have 
negotiated a contract and it is a need to speed up the 
production of an item and to expand the items because there is 
an additional need, that authority is embedded in this also. Is 
that right?
    Ms. Patrick. Any sort of financial provisions having to do 
with the impact of DPAS would generally be negotiated as part 
of a contract modification or change to the contract. DPAS does 
not automatically provide funding at the kinds of levels you 
were talking about. I mean, it is just a reordering and fine-
tuning of a production line.
    Ms. Waters. Well, what would happen if----
    Chairman King. Gentlelady's time has expired. Just ask the 
question and that's it.
    Ms. Waters. I beg your pardon?
    Chairman King. I said your time is expired, but you can ask 
the one final question.
    Ms. Waters. What would happen--explain what would happen 
and how it would happen if in the exercising of this authority 
for any reason, there also was a need for additional dollars to 
be spent on a particular item? What would happen? How would it 
happen? And whose authority would that be?
    Ms. Patrick. Right. As I said, that would be a contracting 
action where the contracting officer would have to negotiate a 
change order to that contract to accommodate the increase in 
costs then that your scenario would include.
    The renegotiation of the change order or the change in the 
price of the contract would not be automatic as a result of 
invoking DPAS. That would be subject to a separate negotiation. 
DPAS would allow the change in priority. But then whatever the 
financial arrangements were that would follow would have to be 
negotiated in a change order to that contract. In other words, 
a contract negotiation activity.
    Chairman King. Mr. Manzullo?
    Mr. Manzullo. Do you get involved, when you invoke the DPA, 
with any Berry amendment waivers?
    Ms. Patrick. You know, in the measure that DPAS, once 
again, is typically pursuant to an existing contract in place, 
the existing contract in place would have adjudicated the Berry 
Amendment issue. So that typically is not part of it because it 
is relative to an already existing contract.
    Mr. Manzullo. Okay. I ask this because President Clinton's 
Executive Order 12919, I am reading from a CRS report, states 
``The domestic, industrial and technological base is the 
foundation for national defense preparedness. The authorities 
provided in the Act'', and that's your Act, ``shall be used to 
strengthen this base and to ensure it is capable of responding 
to all threats to the national security of the United States.''
    And what we are seeing now, in fact, the Small Business 
Committee, of which I am the Chairman, is having a hearing on 
March 26 as to why the Department of Defense is allowing the 
purchase of titanium from Russia for Pratt and Whitney engines 
on military aircraft at a time when the titanium industry in 
this country is in dire straits.
    There are literally tens of thousands of jobs, 
manufacturing jobs, that are being wiped out because of this 
waiver of the Berry amendment. But I would think that since 
President Clinton charged you in this executive order to make 
sure that the industrial and technology base are the foundation 
for national defense that you would look into the fact that we 
still have a strong domestic titanium manufacturing sector. 
Wouldn't that be correct?
    Ms. Patrick. We monitor the issues with regard to specialty 
metals of all kinds very carefully. But given that that's a 
fairly complex issue, let me take your question for the record 
and look into that in some detail and get back to you.
    Mr. Manzullo. Did anybody else want to comment on that?
    I have a question on offsets because it is related to the 
same thing. Lockheed Martin just entered into a $25 billion 
agreement to sell F-16s to Poland in exchange for Poland 
getting $16 billion worth of business from Lockheed Martin.
    I would submit to you that Poland will take away thousands, 
if not tens of thousands of manufacturing jobs in the United 
States because of the offset and continue to use offshore 
production to go into our fighting machines to come to just 
under the 51 percent buy American requirement for the 
Department of Defense, with the exception of the Berry 
amendment.
    Do you think that based upon President Clinton's executive 
order that you should be taking a look at the long-term effect 
of these offsets because Poland is really itching to get into 
the market of tool and die and machining and manufacturing.
    I ask that question because the largest city in my 
district, Rockford, Illinois, has a 25 percent industrial base. 
And in 1981 it led the Nation in unemployment at 24.9 percent. 
And so we see a very dangerous trend to which the United States 
is a party. Would anybody like to comment on the offsets?
    Mr. Bhatia. Congressman, as I mentioned before, offsets is 
one of the subjects on which, under the DPA, we report to 
Congress. We do look at them comprehensively, relying on the 
authorities under the DPA to get the relevant information from 
companies. And, as our most recent offset report concludes, 
there is an increase in offset activity. We are also concerned 
there is an increase in the importance of offsets in being a 
determining factor in foreign government decisions about what 
contracts should be----
    Mr. Bhatia. ----granted.
    Mr. Manzullo. Well, then do you weigh that against the 
executive order? I mean, your job is to maintain a strategic 
and industrial base in the United States.
    Mr. Bhatia. The ideal situation, as I mentioned before, is 
that there would not be any offsets. They are, however, a 
factor in international defense trade. There is no getting 
around that. And the analysis that was done in the report, and 
I think it is a very strong analysis, suggests that the net 
result to the United States economy and to the labor force is a 
net positive.
    Mr. Manzullo. At what point does it become not a net 
resource? After the loss of how many U.S. manufacturing jobs?
    Mr. Bhatia. Again, there is no question that to the extent 
that some of these offset packages require that certain 
functions be performed offshore that they do result----
    Mr. Manzullo. Certain manufacturing functions. Jobs are 
lost. So, where is there a net gain in the cities like mine 
that had the manufacturing base?
    Mr. Bhatia. The report, again, will explain, Congressman, 
how all told over the period of 1993 to 1999, there has been a 
net gain from offsets, from the increased sales that would 
otherwise not have been made absent offset packages, of roughly 
36,000 jobs.
    Mr. Manzullo. Well, I lost 10,000 jobs in the past two 
years just in my district and so has the speaker. There has 
been a loss of two million industrial jobs in the past three 
years here in the United States. Do you look at industry 
sectors----
    Chairman King. Time has expired.
    Mr. Manzullo. I am sorry.
    Mr. Bhatia. Could I clarify for the record? I think I 
misspoke when I said jobs. I am sorry. Export sales facilitated 
by offsets maintained 38,400 work years annually.
    Mr. Manzullo. No, I understand that. But what that does not 
show is the hollowing out of the industrial base when the 
export base includes foreign materials being put into items 
that are assembled and sold under the American name that are 
shown as net U.S. exports.
    Do I have time for one more question?
    Chairman King. Yes, one more question.
    Mr. Manzullo. My question is, when you approve these 
offsets, which you have to----
    Mr. Bhatia. No. Perhaps there is a misunderstanding. We do 
not approve offsets at all. We simply, under the DPA, monitor 
the existence of offsets.
    Mr. Manzullo. You do not pass upon them at all?
    Mr. Bhatia. No, sir.
    Mr. Manzullo. When you monitor them, do you get involved in 
various sectors of industry? Do you call the manufacturers of a 
like material and see how their business is going?
    Mr. Bhatia. There is a requirement that offset packages be 
reported to us. They get reported to us and then we 
subsequently investigate the impact of the offset package.
    Mr. Manzullo. Okay. If we could meet sometime later on, I 
would appreciate a follow up on it.
    Chairman King. The gentleman's time has expired.
    Ms. Lee?
    Ms. Lee. Thank you, Mr. Chairman.
    Just learning--as one who is just learning about the 
Defense Production Act, it appears and sounds like to me that 
there is quite a bit of money being made by some companies.
    I want to--there's not. Someone is shaking their head.
    But let me just ask--it may not be a lot of money. It may 
be--some money is being made under this authority. So in using 
the authority of the Defense Production Act, I want to ask you 
how do the laws regarding the minority business owned 
community, the purchasing laws and the minority contracting 
laws apply and how do they work as it relates to the DPA's 
authority?
    Ms. Patrick. I think that it is a bit of a misconstruction 
of how the Defense--how the DPAS works to characterize it as a 
moneymaking opportunity for companies. Once again, you know, it 
really is--it does not--DPAS does not represent authority to 
negotiate new contracts, to buy new things, to serve the 
warfighter with new items. It is merely a way to reorder the 
sequencing and the priorities, the priority of allocation of 
defense equipment.
    Ms. Lee. But in doing that, companies do not make 
additional profits?
    Ms. Patrick. In fact, in many, many cases, it is revenue 
neutral to the companies. It is not--it does not provide 
additional monies. There may be some circumstances were we to 
use DPAS, as I said, to dramatically surge production, which we 
generally would prefer to renegotiate contracts. In those 
cases, then, a separate negotiation action would start with the 
original contractor.
    This would not be a new RFP that would put out new 
business. This is a very confined authority, really, to operate 
under existing contracts, on existing production lines and 
using the existing relationships between the government and 
that particular contractor that was negotiated probably, you 
know, years ahead of the time that DPAS comes into instance. It 
is not new contracts.
    Ms. Lee. Okay. Well, I would like to--and if this is public 
information or information that we can receive, I would like to 
ask if we could request at least a list or a breakdown of those 
companies and what actually have the numbers been in terms of 
the sales. And I would like to see what the minority and women-
owned business involvement in that.
    Ms. Patrick. Just one moment, please.
    I think the other thing is--I was hoping that our annual 
report on the industrial base capabilities might have had 
something on DPAS because we have a lot of charts that are very 
helpful in this regard that would have shown you over the last 
12 months when we invoked DPAS and what the impact was; what 
the equipment was; who the contractor was and----
    Ms. Lee. And how much the contract was and----
    Ms. Patrick. How much the original contract was and the 
whether or not it was----
    Ms. Lee. Versus under DPAS?
    Ms. Patrick. That's right.
    Ms. Lee. Okay.
    Ms. Patrick. But the other thing to keep in mind is it 
really is an insurance policy that's in all contracts. So it 
certainly is not only in some contracts. So all of our 
contracts with minority or women-owned businesses would also 
have a DPAS clause in them. It is an insurance policy that's 
put into all defense contracts. But it is only invoked very 
rarely. As I said in my remarks, since 1995, we have invoked 
DPAS only 120 times.
    Ms. Lee. Well, out of the 120 times, is there a way to find 
out the involvement of the 120 times how many minority and 
women-owned companies were part of that involvement?
    Ms. Patrick. We certainly could. They would be the 
contracts where, frankly, coincidentally, you know, those 
particular DPAS actions involved minority and women-owned 
companies. It is a very broad spectrum of companies that get 
involved. Some who are very small, the names of which you might 
not know because they are components.
    But you know, we have very good records on whenever we have 
invoked DPAS because it is very important to us and it is an 
authority that we take very seriously. So perhaps what would be 
very helpful to the committee is if we take the slice, perhaps, 
over the last year and show you those DPAS initiative so that 
you can see what they were; see what the equipment was; who the 
companies were; whether they were revenue-neutral or not.
    Ms. Lee. I would like to see that myself. But I would also 
like to see within that context, the breakdown of the minority 
and women-owned firms in that listing.
    Ms. Patrick. Yes, well, we will annotate them as to whether 
they are minority or women-owned firms.
    Ms. Lee. Yes. Thank you very much.
    Ms. Patrick. We will be happy to provide that.
    Chairman King. Thank you.
    Mr. Murphy?
    He has left.
    Mr. Barrett?
    No?
    Mr. Feeney?
    Ms. Harris?
    Mr. Hensarling?
    Okay.
    Okay, I am going to thank the witnesses for their 
testimony. Ordinarily, this is a very routine reauthorization. 
Obviously, today being on the eve of hostilities, it takes on 
an added impact. I want to thank you for your testimony. I want 
to thank you----
    Mrs. Maloney of New York. Mr. Chairman, can I ask a point 
of clarification?
    Chairman King. Sure, absolutely.
    Ranking Member?
    Mrs. Maloney of New York. I really would like to go back to 
really the questioning of my colleagues. And I would like it to 
clarify--it is my understanding that DPA relates to 
prioritizing existing contracts only. In other words, you 
cannot initiate a new contract. But what happens if you hear 
from the field that they need new walkie-talkies immediately?
    Ms. Patrick. That's a separate contracting action. That 
would not come under DPAS. That would be a contract that would 
be negotiated on an urgent, priority basis through the commands 
that are cognizant for the kinds of equipment that's being 
queried.
    Mrs. Maloney of New York. Now, another question that Ms. 
Waters raised was the question whether this DPA was going to be 
used for the rebuilding of Iraq? And you stated earlier that it 
was responded to the requests from the warfighter themselves. 
Well, obviously, rebuilding is not a war fight. So I would like 
to be clarified whether DPA will be used just in a war, which 
is obviously an emergency? Or will it also be used in the 
rebuilding?
    Ms. Patrick. Well, I was certainly responding based on what 
the DOD DPAS authority is, which is generally quite strictly 
related to war fighting and the warfighter. But other 
departments can exercise their DPAS-type authority for things 
like rebuilding, which might conceivably come under the 
authority of USAID. But it probably would not be a DOD DPAS 
action. You are absolutely correct in making the distinction.
    Mrs. Maloney of New York. So it could be used in that way. 
And thank you very much.
    Mr. Sega. If I could clarify, in the Title III portion, 
which are where my responsibilities are, we do have some 
contracting activities to help with what Mr. Paul had 
mentioned--Congressman Paul had mentioned earlier, in terms of 
areas where the private sector is not producing through 
commercial demand products that we need. And one prime example 
is the radiation hardened microelectronics facilities.
    And so in that case we are running to the point where we 
could not provide the Department of Defense with the RAD hard 
components for space and missile systems. At that point we did 
enter into Title III activities to provide the equipment and 
also looking at advanced processors to provide a segment of 
technology that does not have an analog into the commercial 
sector for the RAD hard parts.
    So there is some contracting activity. And in that case, it 
is consistent with standard acquisition regulations.
    Mrs. Maloney of New York. If I could ask another 
clarification. You testified that often when you use DPA, the 
private firms do not make a profit, that you, quote, modify 
their contracts, extend their contracts, procure more of what 
is needed. But usually in private commerce, many people want to 
do business with the United States government because they do 
make a profit. And they are entitled to a profit.
    So when you say if they modify and prolong their contract, 
they are not making a profit, I just--I would like a 
clarification. I think most companies have to make a profit in 
order to be in business.
    Ms. Patrick. Let me clarify that. If I said that companies 
working for the government on government contracts do not make 
a contract, that certainly was not--that was not the intention 
of what I said.
    Mrs. Maloney of New York. You said for the extension of the 
contract. You said it often was revenue neutral. I think you 
used that word.
    Ms. Patrick. Right, it is revenue neutral in terms of any 
additional profits because of the invocation of DPAS itself.
    Mrs. Maloney of New York. Okay. Revenue neutral, in other 
words, they cannot make more than the contract that they got 
with the government in the first place.
    Ms. Patrick. Correct, I mean, they are within the 
confines----
    Mrs. Maloney of New York. So you are expanding--I see, I 
understand.
    Ms. Patrick. That's right. They are within the confines of 
the original contract. And if they--if there is some additional 
profit that the contractor would demand, because, as I said, 
they have to have additional workers brought in, or they cannot 
negotiate their materials for as competitive a rate because----
    Mrs. Maloney of New York. Okay, I understand. Revenue 
neutral within the context of the original contract.
    Ms. Patrick. That's right. That's exactly right.
    Mrs. Maloney of New York. Well, New York,--I was reading 
the Wall Street Journal yesterday and already the English were 
complaining that they were not on the list of the contractors 
to rebuild Iraq. This was a report in the press. And so I share 
the sentiment that I believe Ms. Waters was trying to raise. I 
am totally supportive of DPA. DPA helped us in New York during 
our emergency and bringing in supplies that we needed.
    But the rebuilding is not an emergency. And in my opinion, 
I do not believe DPA should be extended to the rebuilding of a 
country. When it is supposed to be a democracy and a peaceful 
experiment, then we should bring in the good contracting 
provisions that many of us have worked on and that have been 
part of the history of our country.
    Ms. Patrick. Well, we really appreciate your concerns. And 
you know, we really do work DPAS and other prioritization 
programs very judiciously. As an example, for instance, all 
contracts have ratings for priorities, DO or DX. And we 
actually have turned down many of our colleagues' requests that 
their programs have DX ratings, which would be more urgent than 
DO just for reasons of priority when it was not urgent.
    So you know, there have been a number of instances, not in 
DPAS, but in other similar authorities that my office and I 
have where we have actually said no. So we will take aboard 
what you have said and we will continue to do this as prudently 
and judiciously as we possibly can but having in mind the 
warfighter at the end. And they are really most important to 
all of us now.
    Mrs. Maloney of New York. Right, thank you.
    Mr. Manzullo. Mr. Chairman?
    Chairman King. Yes.
    Mr. Manzullo. Would you mind if I asked one further 
question?
    Chairman King. It is always an experience to listen to your 
questions, Mr. Manzullo.
    Mr. Manzullo. I appreciate that. Thank you.
    I, on Section III--I guess, Mr. Sega, this would be yours. 
This calls for the purchase of $200 million worth of radiation-
hardened electronics. Is that correct?
    Mr. Sega. Not quite. The radiation hardened electronics 
capital expansion, the CAPEX project, is one that in fiscal 
2004, the President's budget is $65.1 million. And that is 
primarily to establish two lines for RAD hard production. So 
that's the capital equipment pieces.
    Mr. Manzullo. You mean, for domestic production?
    Mr. Sega. Domestic production, yes, by two companies. So 
that we will have a supplier for those needed parts. The total 
from fiscal year 2002, 2003 and 2004 would add up to $167 
million. We believe that would be the figure and that we would 
not anticipate cost growth. We are asking for the authorization 
of $200 million for the flexibility in the event of cost 
growth. We do not anticipate it.
    Mr. Manzullo. This is for the purpose of establishing a 
U.S. manufacturing base for these radiation-hardened 
electronics. Is that what you are saying?
    Mr. Sega. That's correct.
    Mr. Manzullo. Okay. Thank you.
    Chairman King. I want to again thank you and also for 
extending your time without any profit and for putting in the 
extra time. So again, I thank you for your testimony. It was 
very significant. Again, in the past, this was often a routine 
hearing. But in your view of the importance of the events 
around us, it took on an added dimension and you certainly 
measured up to that. So thank you very much.
    Now, without objection, the record of today's hearing will 
remain open for 30 days to receive additional material and 
supplementary written responses from witnesses to any question 
posed by a member of the panel. This includes member statements 
and questions as well.
    The hearing portion of the subcommittee's activities is 
adjourned. And the chair would ask the members if they could 
stick around for a few minutes as we briefly recess to set up 
for the markup.
    [Whereupon, at 3:30 p.m., the subcommittee was adjourned.]


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