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



                                                   S. Hrg. 102-000 deg.

 FEDERAL PROCUREMENT POLICY: IS THE FEDERAL GOVERNMENT FAILING CERTAIN 
                          INDUSTRIAL SECTORS?

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

                                HEARING

                               before the

      SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT & GOVERNMENT PROGRAMS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, JULY 22, 2003

                               __________

                           Serial No. 108-28

                               __________

         Printed for the use of the Committee on Small Business


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


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Lee, Deidre, Department of Defense...............................     3
Falvey, Jody, Department of the Treasury.........................     5
Sivananthan, Dr. Siva, EPIR Technologies.........................    12
Jones, William, Cummins-Allison Corporation......................    13
Tonelson, Alan, U.S. Business and Industry Council Educational 
  Foundation.....................................................    16
Palatiello, John M., Management Association for Private 
  Photogrammetric Surveyors......................................    18

                                Appendix

Opening statements:
    Akin, Hon. W. Todd...........................................    27
Prepared statements:
    Lee, Deidre..................................................    30
    Falvey, Jody.................................................    40
    Sivananthan, Siva............................................    45
    Jones, Bill..................................................    49
    Tonelson, Alan...............................................    53
    Palatiello, John.............................................    60

 
 FEDERAL PROCUREMENT POLICY: IS THE FEDERAL GOVERNMENT FAILING CERTAIN 
                          INDUSTRIAL SECTORS?

                              ----------                              


                         TUESDAY, JULY 22, 2003

                  House of Representatives,
        Subcommittee on Workforce, Empowerment,and 
                               Government Programs,
                                Committee on Small Business
                                                   Washington, D.C.

    The Subcommittee met, pursuant to call, at 10:12 a.m. in 
Room 2360, Rayburn House Office Building, Hon. Todd Akin 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Akin, Bradley, Udall and Manzullo.
    Chairman Akin. I call the hearing to order. We are going to 
try and proceed expeditiously. We have two different panels, 
and I have an opening statement, so I figure I will get started 
with the opening statement and move things along. I believe the 
Minority Member is going to be here in just a matter of a 
minute or two.
    This is a hearing on the federal procurement policy, and 
the question is is the U.S. Government failing certain 
industrial sectors. Speaking at a technology conference last 
week in California, former Secretary of State Dr. Henry 
Kissinger expressed his belief that our nation needs to address 
the increasing outsourcing of economic activity from the United 
States to other countries.
    Kissinger went on to assert: ``If outsourcing continues to 
strip the U.S. of its industrial base and the act of getting 
out or developing its own technology, then we require a careful 
thought on national policy.'' It is concerns like these that 
bring us here today.
    There appears to be a growing trend of federal procurements 
going overseas. We are seeing an increase in number of federal 
solicitations, one by companies based outside of the United 
States. I am not speaking of solicitations for items that are 
rare or exclusive to a particular country of origin, but rather 
items that we are able to produce here at home.
    For example, the Transportation Security Agency recently 
awarded a contract for the purpose of 9,600 firearms to be used 
by U.S. airline pilots to a German arms manufacturer. While I 
am not a gun expert, I do know that some of the finest firearms 
in the world are manufactured in the United States. Springfield 
Armory, one of the oldest and finest firearms manufacturers in 
the world, is less than 300 miles from my home in St. Louis.
    While I am not privy to the details of the purchase, I 
would question the need to entertain foreign bids for a product 
of high quality and outstanding reputation that is manufactured 
right here in the United States.
    The federal government is our nation's single biggest 
consumer, and there are times when it is necessary for this 
government to procure products and services from foreign 
sources. However, the Congress, as a representative voice of 
the American people, has set forth certain policies that 
mandate the purchase of products and services from American 
small businesses and industry. The question is whether or not 
these policies are being pursued.
    With us today we have a representative sampling of American 
small business and industry. In addition, I have invited the 
Department of Defense and the Department of Treasury 
representing federal procurement to join us as we examine this 
question. I have also invited the White House Office of 
Management and Budget to join us. Unfortunately, despite our 
best efforts to accommodate their schedule, OMB representatives 
were unable to attend.
    The OMB sets forth procurement policy for all federal 
agencies and departments, and it is important we examine 
whether or not OMB is establishing the best possible policies 
in this regard. I look forward to the testimony of our industry 
and government witnesses in regard to this question as well.
    I know all the witnesses have prepared written statements 
for the record. They will be entered into the record without 
objection. In their opening statements to this Committee, 
however, I would ask the witnesses to summarize their written 
testimony and provide only the highlights of that written 
testimony in light of our limited time this morning.
    Thank you all for attending. I will just take a check 
whether we are ready to proceed. I think it would be 
appropriate maybe to have the Minority Member make a statement 
when he arrives. Would that be acceptable? Okay. Let us go 
ahead and do that.
    In the use of time then, I would like to introduce our 
first panel. Let us see. Okay. Panel 1, Department of Defense, 
and that would be Ms. Dierdre Lee, and you are the director of 
the Defense Procurement and Acquisition Policy. Is that 
correct?
    Ms. Lee. Yes, sir.
    Chairman Akin. Okay. I really appreciate your coming this 
morning, and we would appreciate to hear. I think one of the 
things that happens is sometimes at these Committee hearings we 
get so wrapped up in a lot of the details, and everybody has 
their statement and everything. Maybe we forget that the whole 
point of why we are here is just to take a look at a question 
or a problem.
    The question is I think there is really a tension between 
two things. Your overall Department of Defense is given a job 
to defend our nation, and they are given a limited amount of 
money to do that, so they are trying to figure out how to get 
the most bang for the buck. That is sort of their overall, 
common sense marching orders.
    At the same time we are saying we do want to try to protect 
our manufacturing base, which is not the primary job of the 
Department of Defense, and so there is kind of a tension as to 
if I can get black berets made in China, and I do not mean to 
pick on something that particularly maybe solicits a lot of 
opinion, but if you can get them at 10 cents versus $10 you 
think well, I can save a lot of money and buy some more tanks 
or whatever it happens to be.
    That is the tension. I think that is what we want to look 
at today. If you would just give us your perspective on that, 
Dierdre, and thank you so much for coming this morning.

  STATEMENT OF DIERDRE LEE, DIRECTOR, DEFENSE PROCUREMENT AND 
           ACQUISITION POLICY, DEPARTMENT OF DEFENSE

    Ms. Lee. Yes, sir. Mr. Chairman, Members of the 
Subcommittee, good morning. I am Dierdre Lee, Director of 
Defense Procurement and Acquisition Policy. I am here today to 
discuss the efforts of the Department of Defense to assist 
small businesses with unique technologies to participate in DOD 
procurement opportunities. I will also discuss the Department's 
procurement policy, especially as it pertains to the use of 
small business and foreign suppliers.
    Small business is a vital part of the defense base, and we 
remain committed to insuring their viability by offering DOD 
programs that support small business development and 
sustainability. Eighty-two percent of the Department of Defense 
prime contractors are small businesses, which demonstrates the 
importance of small business to this Department.
    Small business prime contractors performing on DOD 
contracts increased to 33,936 in fiscal year 2002, compared to 
just over 24,000 in 2001. DOD accounted for an unprecedented 
$59 billion in small business in fiscal year 2002. DOD dollars 
going to small disadvantaged businesses, women-owned small 
businesses, service disabled and veteran-owned small businesses 
and HUBZones increased at the prime and subcontract level in 
fiscal year 2002 and achieved record highs.
    My written testimony provides numerous examples of programs 
within the Department that facilitate opportunities for small 
business. Among them are the COSI program, which is designed to 
introduce commercial technology projects into legacy systems, 
thereby reducing ops costs and support costs. It is basically 
now Mr. Hunter's challenge program.
    Title III of the Defense Production Act. The Title III 
program provides incentives to establish or expand production 
capability for items critical to the national defense when 
companies are unwilling or unable to make such investments on 
their own.
    The foreign cooperative test program is another way DOD 
assists small businesses to become DOD participants. The 
program taps into mature foreign technologies and after 
successful testing of these technologies forges partnerships 
with U.S. suppliers through marketing and production license. 
Though not reserved exclusively for small businesses, small 
businesses have successfully competed, won and performed on 
advanced concept technology demonstration programs.
    Programs designed to demonstrate the military utility of 
new technologies while giving more fighters hands-on experience 
to develop concepts for operational deployment. The Department 
spends approximately $25 million each year on its mentor 
protege program where large businesses furnish technical and 
business assistance to small businesses so that they can 
develop as DOD prime contractors or subcontractors.
    The Department also issues biannual solicitations for both 
the small business innovation research program and the small 
business technology transfer program. These programs fund over 
$800 million each year in early stage R&D projects at small 
technology companies, projects that serve the DOD need and have 
commercial applications. It is through programs such as these 
that the DOD helps niche companies and taps into cutting edge 
technology critical to DOD.
    Of course, DOD's procurement policy is extremely important 
with regard to small business and the industrial base. The over 
arching federal procurement policy is to provide a fair 
opportunity for all interested and qualified companies to 
compete for government requirements.
    As I said previously, small business is a critical 
component of the defense industrial base. Under our procurement 
policies, there is a requirement for procurements to be set 
aside or reserved exclusively for small businesses. Only small 
businesses that have a place of business located in the United 
States can compete for these requirements.
    Now let me turn briefly to international sourcing. As you 
are aware, the Buy America Act provides a framework for 
government procurement of domestic and foreign products. With 
limited exceptions, the BAA restricts the purchase of supplies 
and construction materials that are not domestic. When DOD 
receives an offer of a product that does not meet the BAA 
definition of a domestic end product it is considered a foreign 
product, and an evaluation premium of 50 percent is applied to 
the offeror of the foreign product unless the BAA has been 
waived under some exceptions permitted by law.
    Trade agreements result in waiving the BAA for some foreign 
sources and construction materials from certain countries. The 
Agreement on Government Procurement, the Trade Agreements Act 
and NAFTA all impact how we handle our foreign procurements. 
DOD has also waived BAA for countries for which we have a 
reciprocal memorandum of understanding. These memorandums 
promote standardization and interoperability of defense 
equipment with our allies and friendly governments.
    Under the exceptions to the BAA, trade agreements and MOUs, 
foreign firms may compete for DOD contracts. To the extent we 
provide foreign firms opportunity to sell in the U.S., we 
retain the leverage to insist on reciprocity for U.S. firms, 
including small businesses seeking opportunities to export.
    Our exports have exceeded our imports in the defense 
industry, and currently the balance of trade is significantly 
in the U.S. favor. Defense sales by U.S. companies are two and 
a half to three times our exports.
    Mr. Chairman, as you know, Defense is a complicated 
business. We need and want maximum participation by our U.S. 
small businesses.
    Chairman Akin. Dierdre, are you wrapping up now?
    Ms. Lee. Yes, sir. The Department is fully committed to 
fostering the use of small business opportunity as prime 
contractors, subcontractors and vendors.
    [Ms. Lee's statement may be found in the appendix.]
    Chairman Akin. Thank you very much. I appreciate your 
testimony. You raise some interesting questions, too.
    My good friend, Mr. Udall, is here. Just for the record, 
would you like to have your comments submitted, or would you 
like to make a statement?
    Mr. Udall. Let me just say, Mr. Chairman, first let me 
thank you for doing this hearing. I think it is very important. 
I would like to put my statement into the record. I apologize 
to the witnesses for being late.
    Let me just say that small business getting a bigger share 
of the federal procurement pie is very important to me in my 
district in New Mexico and I know to this Subcommittee. We have 
the Chairman of the full Committee here, and he at various 
times I think in the full Committee has expressed an interest 
in this, so I hope that we can continue to work on that.
    With that, I yield back to you and look forward to hearing 
from the next witness.
    Chairman Akin. Thank you very much, Tom, and I think next 
we will go to our second witness here. That is Jody Falvey, 
Department of the Treasury, and you are the Director of the 
Office of Small Business Development.
    Ms. Falvey. Yes, sir.
    Chairman Akin. We would appreciate hearing your thoughts on 
the subject as well. Proceed.

 STATEMENT OF JODY FALVEY, DIRECTOR, OFFICE OF SMALL BUSINESS 
            DEVELOPMENT, DEPARTMENT OF THE TREASURY

    Ms. Falvey. Chairman Akin and Members of the Subcommittee, 
I am pleased to appear before you today to discuss the Treasury 
Department's small business procurement program.
    Treasury's Office of Small Business Development supports 
the Small Business Act by stating in our business standard 
operating procedures that it is the policy of the Treasury 
Department to provide maximum practicable opportunities in our 
acquisitions to small business, whether it be small 
disadvantaged business, women-owned small businesses, veteran-
owned small business and service disabled veteran-owned or 
HUBZone small business concerns.
    The OSBD assists, counsels and advises small businesses on 
all types of procurements for contracting with Treasury. 
Additionally, the OSBD works closely with each Treasury bureau 
to implement the Department's small business procurement 
assistance program. Each bureau has an appointed small business 
specialist located within the procurement office to coordinate 
that program.
    Treasury focuses its efforts in four major areas. That is 
information dissemination, whether it be via the internet or 
hard copy publications, our outreach programs, training or our 
mentor protege program. Additionally, the OSBD, in conjunction 
with the bureaus, works closely with the SBA to establish our 
procurement goals on a fiscal year basis. The accomplishments 
are provided from the Federal Procurement Data System to the 
SBA, which prepares a report for Congress and the President.
    Treasury has a rigorous small business outreach program, 
and for several years we have hosted monthly, no cost, vendor 
outreach sessions. VOS we call them. We have hosted 12 events 
thus far for fiscal 2003, and these events are prearranged 15 
minute appointments between small business owners and 
representatives from Treasury's bureaus or Treasury's prime 
contractors and their representatives. On a four point 
adjective scale of good, fair, poor or excellent, 99.8 percent 
of all small business participants rated the sessions as good 
or excellent.
    Treasury is taking the following actions on an ongoing 
basis to maximize the small business opportunities to market 
their business to Treasury. In outreach, we host special 
events, whether they are several disabled veteran-owned small 
business events during November in recognition of Veterans Day 
or a women-owned small business event in March in honor of 
Women's History Month.
    We meet periodically with trade associations to discuss and 
exchange information on success stories or ideas, et cetera. We 
continue to promote the participation in Treasury's mentor 
protege program. We continue to promote the participation in 
Treasury's subcontracting program by making subcontracting 
plans part of the evaluation criteria on major projects.
    We actively seek the various small business categories 
through the GSA federal supply schedules by looking at the GSA 
website and the Federal Procurement Data System internal 
database. We promote the use of all available databases for 
market research and inclusion or consideration.
    During the fourth quarter FY 2002, the Federal Procurement 
Data Center revealed that even though Treasury was ranked 
number 10 in the dollars spent government wide, our percentage 
of dollars spent reflects the commitment to small business. 
Treasury ranks number one in the percentage for SDB or women-
owned small business goals with a 12.22 percent and 6.12 
percent respectively.
    We are number two in 8(a) and veteran-owned and service 
disabled veteran-owned small business goals at 6.44 and .94 and 
.40 respectively. We did exceed our government wide small 
business goal with 27.66 percent. We are ranked number five for 
the HUBZone goal at 1.21 percent, but we feel strongly that 
over time our outreach program and the strategy for HUBZone or 
service disabled veteran-owned small businesses will provide 
more opportunities and subsequent contracts and subcontracts.
    We attribute our small business success to a number of 
critical factors. These include senior management support, 
commitment, a team approach, outreach, information 
dissemination, training and our mentor protege program. We 
recognize that we are a part of a larger network that makes up 
the small business community, and our illustration of the 
teamwork is having SBA's PCR located in residence at the 
Treasury office. The PCR's office is located adjacent to our 
office. By organizational design, this arrangement promotes the 
teamwork and a genuine partnership, which promotes a successful 
program.
    This concludes may prepared remarks, and I would be pleased 
to answer any questions you have.
    [Ms. Falvey's statement may be found in the appendix.]
    Chairman Akin. Thank you very much for your testimony.
    I think procedure-wise we can go to some questions. One, 
this just to try and keep the schedule going of where we are 
going this morning with the hearing.
    Dierdre, my understanding is you had some other 
appointments and things. After this panel is done, you need to 
move along. Was that my understanding?
    Ms. Lee. Yes, sir.
    Chairman Akin. Jody, what is your status? I think there 
were a few people from the business community here that might 
have some questions, but it might involve your staying an extra 
20 or 30 minutes. Is that doable, or did you have something you 
had to get to right away?
    Ms. Falvey. Yes, sir.
    Chairman Akin. Is that workable? Okay. Thank you. I think 
perhaps some of our other witnesses might be, and sometimes it 
is helpful to go back and forth and say well, here is how we 
see it, et cetera, et cetera.
    Okay. I guess I get the shot at the first question here. I 
guess the first thing, Dierdre, is you really gave an 
impressive set of numbers. You said basically we have improved 
the number of these small business types of purchasing 
arrangements basically by a factor of 50 percent more than we 
had the year before or like a one-third increase or something. 
Does that just reflect the increase in Defense spending?
    Ms. Lee. Yes, sir. Those are Department of Defense's 
statistics.
    Chairman Akin. Right. But we spent a lot more money in 
Defense, did we not, in 2001-2002? I mean, have we not----.
    Ms. Lee. Yes. The base has increased.
    Chairman Akin. Yes. So also the number of small business 
contracts has increased, but is one just a reflection of the 
other, or percentage-wise are we actually doing better in terms 
of numbers given the size of the base? Do you see what I am 
saying?
    Ms. Lee. Given the size of the base, the percentages have 
increased as well.
    Chairman Akin. Okay.
    Ms. Lee. We still have more to do.
    Chairman Akin. Thank you very much. I guess I am being 
called to go vote somewhere, so we are going to turn the 
meeting over to someone else for the time being.
    Who wants to chair it? Mr. Bradley, do you want to take the 
chair? Thank you.
    Mr. Bradley. [Presiding] Questions of the panel by Mr. 
Udall?
    Mr. Udall. Dierdre, my understanding is that the Department 
of Defense has a five percent women-owned business goal. Is 
that correct?
    Ms. Lee. Yes, sir.
    Mr. Udall. And you are really only at two percent now?
    Ms. Lee. In 2002, it is 4.1.
    Mr. Udall. In 2002, it is 4.1. In 2001, I guess it was two 
percent?
    Ms. Lee. Three percent. In 2000, 2.6.
    Mr. Udall. Okay. The number we have on 2002 is 2.67. That 
is from the Federal Procurement Data System.
    Ms. Lee. These are our numbers, and there is an explanation 
for the numbers which gets very specific on the base. What we 
do take out is work that, for example, goes to JWAD or that is 
not available for small business, so we do adjust the baseline.
    Mr. Udall. So tell me what the difference is in the numbers 
here, your numbers and the difference.
    Ms. Lee. Our number would be based by any contract being 
performed overseas, FMSLs and any contract that is we say not 
available, for example, that goes to the handicapped or the 
disabled and is, therefore, not available for a small business.
    Mr. Udall. My understanding is these numbers I just gave 
you from 2001, these are the official federal government 
numbers.
    Ms. Lee. Those are from the Federal Procurement Data 
System.
    Mr. Udall. Yes.
    Ms. Lee. Correct.
    Mr. Udall. Yes. In 2001, you had two percent, and in 2002 
you had 2.67. Can you tell me why you are having such a hard 
time at achieving the five percent goal?
    Ms. Lee. On women?
    Mr. Udall. Yes.
    Ms. Lee. Yes, sir. Government wide, we have no set aside 
program for women. What we do is we have a goal, which is 
great, but we then put it out, and women have to compete and 
win, and they do in an increasing number, but we do not have 
the ability, the authority government wide at the Department of 
Defense or any of the other government agencies that I am aware 
of, to do what we call a women-owned business set aside where 
you would set the work aside for only women.
    There is legislation. There is work going on with SBA, and 
we are waiting for their policy to tell us a possible optional 
set aside provision, but we do not at this time have that 
regulation.
    Mr. Udall. We had a piece of legislation that dealt with 
women-owned businesses and trying to move their ability in the 
workplace on federal procurement. Do you think that would be 
helpful to do something along that line to move these numbers 
up?
    If you notice a tone of frustration, in New Mexico, which 
is a poor state, we are having dramatic, dramatic increases in 
women-owned businesses, minority-owned businesses. The growth 
is superlative, so I do not understand why you are not able to 
do it here at the federal level in the Department of Defense.
    Ms. Lee. Sir, I am not familiar with your programs and your 
set aside programs specifically in the states. Some states do 
have set aside programs.
    As I said, we do not have that for women. We do have the 
authority to set aside for 8(a) or for HUBZones. The Department 
of Defense does not have the authority to even do SDB set 
asides because we reach our goal every five years, and, 
therefore, we cannot use that set aside provision. We do not 
have set asides for women, service disabled vets, another large 
category of other interested constituencies.
    My opinion is, and I have concern and I know I have spent a 
lot of time with Mr. Manzullo on this. Right now our small 
business procedures are very complicated. What I would like to 
do is see us simplify them. Women are competing. They are 
winning. They are doing a good job. Having additional set 
asides will further complicate the system.
    Mr. Udall. So you are saying that the complications are in 
part the women-owned businesses making it through your process, 
and you would like to simplify that process?
    Ms. Lee. Yes, sir. I would like to simplify that process 
for everyone.
    Mr. Udall. How soon are you going to do that?
    Ms. Lee. We are working together on that, everything from 
additional certifications, additional limitations, specific 
requirements of content of the material of the product they 
provide, specific certifications. All those kind of things one 
by one we are trying to simplify the government procurement 
process.
    Mr. Udall. Thank you for your responses.
    Mr. Bradley. Thank you, Mr. Udall.
    The Chair now recognizes Mr. Manzullo.
    Mr. Manzullo. Thank you. I just have a couple of questions.
    Dierdre, first of all, I would like to meet with you ASAP 
on some simplifications because we are in the process of 
marking up the Small Business Administration reauthorization 
bill and always value immensely your input.
    Ms. Lee. Thank you.
    Mr. Manzullo. The second question is on page 9 of your 
testimony, it is the first full paragraph. Do you have that 
there?
    Ms. Lee. Yes, I do.
    Mr. Manzullo. Where it says ``Foreign firms...'' Do you see 
that?
    Ms. Lee. Yes.
    Mr. Manzullo. ``Foreign firms may also participate as subs 
in DOD procurements. It is DOD's goal to acquire the product, 
service or technology that would best support our military 
forces and protect our national defense. Therefore, in general 
it is DOD policy not to interfere with the prime contractor for 
selection of its subs because prime contractors have overall 
responsibility for producing and delivering the contracted 
items.'' The last sentence: ``It is also the prime contractor's 
responsibility to insure that the products being delivered meet 
the requirements of the Buy America Act.''
    What oversight do you do and what documents do you require 
of the primes and the subs to show compliance with the Buy 
America Act?
    Ms. Lee. Certainly that depends on the product or the 
service. We do have Defense Contract Management Agency, and 
most people are familiar with them, actually in the plant, 
physically in the plant of many of our large contractors. They 
in fact would review not only that contractor's procurement 
system, but their sourcing, their subcontracting procedures, 
and so they would do an in-plant review on those activities.
    Mr. Manzullo. But is that done on every contract?
    Ms. Lee. Not on every contract because we do not have 
people in plant at every plant. It would depend on the size and 
the criticality of the program and how we have deployed our 
DCMA folks.
    Mr. Manzullo. Okay, because that is obviously where we are 
having a serious--in fact, we are going to have a hearing 
probably why the Department of Transportation TSC awarded a 
contract to a German firm on the 9,600 guns.
    Dierdre, what we have here is we have a destruction of the 
American manufacturing base. Let me get very specific. Northrop 
Grumman is a sub of Lockheed Martin on the joint strike force 
fighter, and they are still bound by the Buy America Act.
    Northrop Grumman said that Ingersoll Milling in Rockford 
could not make the quality machine necessary to do precision 
drilling for holes on the F-35. They were unaware of the fact 
that the prime contractor, Lockheed Martin, had a separate 
contract with Ingersoll Milling in Rockford for virtually the 
same machine for a different application on the F-35.
    Northrop Grumman instead awarded the contract to a Spanish 
firm that is not a member of the consortium to build the F-35, 
which helped bankrupt Ingersoll Milling. Ingersoll Milling is 
one of only two companies--was one of only two companies--that 
make sophisticated machines to wrap stealth material on wings 
for military aircraft that accommodate a six axis head. They 
are gone now. They were almost sold to the Chinese firm.
    What I see in your testimony, I know you have a big job in 
there. The hearings that we held with Suzanne Patrick three 
weeks ago indicate the Pentagon has no policy to keep an 
inventory of critical industries. That is compounded by the 
fact that there is no oversight as to the awarding of these 
contracts by the prime and the subs in order to keep those 
critical industries stabilized.
    I guess maybe it is more of a statement than a question on 
it, but it goes to we are going to be having hearings 
throughout the end of this year and next year bringing in every 
single department in the United States to find out how they are 
complying with the Buy America Act because based upon the 
information we have the Pentagon is not going to say because of 
lack of oversight and because of mentality that it is cheaper 
to buy things overseas so, therefore, why buy American.
    My question to you, and it is something that we can discuss 
later, but you might want to put it in writing, is how can you 
protect critical defense industries when you have no oversight 
as to the awarding of the contracts before they are awarded, 
which could result in a critical industry going under such as 
what happened with Ingersoll?
    You could take a stab at it now, but if you want to put it 
in writing? Okay.
    Ms. Lee. I would be happy to answer that in writing, but I 
will also say, as I know Ms. Patrick covered with you, we do 
have a system to monitor our industrial base. She does in fact, 
and we prepare to the Congress and submit reports on not only 
what activities we have done internationally, but also how we 
monitor our industrial base, specific studies, things that we 
look at and identify critical areas.
    As my testimony also states, on things that are critical or 
security minded we also in many cases restrict them to domestic 
preference as well, so we do have a monitoring generally of the 
system. Perhaps in that particular case not every single 
manufacturer, but as the industrial base capability as a whole 
we do look at.
    Mr. Manzullo. Okay. I want to dispute with you on that 
because I also brought up the fact of Nashville Manufacturing 
in Tiffin, Ohio, is the last manufacturer of cold-forming 
machines. They went under. Without a manufacturer of cold-
forming machines, you have nobody to manufacture machines that 
make bullets.
    I do not see evidence of that inventory. My understanding 
of the testimony from Suzanne Patrick was that there is no 
inventory. I asked her that question. Nobody keeps a list of 
critical industries. In other words, you can go back and see 
who is left in the cold-forming business, who is left in the 
business of making machines for the application of stealth 
technology material.
    If you would like to take a stab at that in writing that is 
fine.
    Ms. Lee. Okay.
    Mr. Manzullo. More importantly at least for now is as we 
are doing that SBA bill and the reauthorization, if you could 
take today or maybe tomorrow and talk to Mr. Eskel and give us 
some hints that you think could expedite and make easier the 
small business set asides that perhaps might find itself into 
the Small Business reauthorization.
    Ms. Lee. I would be happy to.
    Mr. Manzullo. Thank you. Appreciate that.
    Mr. Bradley. Thank you very much. I just have a couple of 
quick questions.
    In your testimony, Ms. Lee, you referenced the Title III 
loan program. Could you tell the Committee when was the last 
time and to what extent your department actually gave out those 
Title III loans and to whom?
    Ms. Lee. Sir, I do not have the specific information. I 
would be happy to get it for the record. What I tried to do was 
illustrate a couple of areas where small business had excelled 
in that particular program, but I would be happy to get you the 
amounts and the dates of the last awards.
    Mr. Bradley. And my second question. Do you believe that 
small business in this country would benefit from a greater 
requirement to purchase more American made goods? This is a 
general thematic question, but just to get your reaction on 
that.
    Ms. Lee. Buy American certainly is one of those things that 
sounds good to all of us. I submit to you all there is probably 
not anyone in this room wearing total U.S. made products at 
this moment.
    We live in a global economy, and I am concerned that we go 
to the extent where we make 100 percent U.S. domestic product 
and in that process actually harm our small businesses. We have 
had experiences where small businesses are global too, the 
total source of their raw materials. If we put on them 
additional tracking information or require them to produce on 
U.S. made machine tools--we now know the U.S. machine tool 
manufacturers do not have 100 percent U.S. made machine tools.
    If we put these requirements on them, I am very concerned 
about the capital that they would have to expend and the 
reporting that they would have to have just to participate in 
defense procurement, thereby complicating it further.
    Mr. Bradley. Thank you very much for your answers.
    Seeing no further questions, I will dismiss the panel and 
call the second panel
    [Panel excused.]
    Mr. Manzullo. My understanding, Ms. Falvey, is you are 
going to be sitting with the second panel so that we can ask 
you questions. Is that correct?
    Ms. Falvey. Yes, sir.
    Mr. Manzullo. Thank you.
    Mr. Bradley. Good morning, everyone, and thank you again, 
Ms. Falvey, for staying with this panel.
    With us this morning we have Dr. Sivananthan, who is the 
president of EPIR, Ltd. The second member testifying this 
morning is Mr. Bill Jones, who is the chair of Cummins-Allison 
Corporation; Alan Tonelson, a research fellow from USBIC; and, 
lastly, John Palatiello, who is the president of MAPPS.
    Before I recognize Dr. Sivananthan, I would just say that 
Congressman Akin, who normally would chair this panel, has been 
called away for a markup in the Science Committee, and he has 
asked me to pinch hit for him.
    Dr. Sivananthan?

   STATEMENT OF DR. SIVALINGAM SIVANANTHAN, PRESIDENT, EPIR 
                           TECHNOLOGY

    Mr. Sivananthan. Mr. Chairman and Members of the Committee, 
my name is Siva Sivananthan. I would like to begin by thanking 
you for the opportunity to testify at this hearing.
    I am the president of a small business, EPIR Technology, 
located in Bolingbrook, Illinois, and am also the distinguished 
professor and director of the microphysics lab at the 
University of Illinois at Chicago. I helped pioneer the 
synthesis of now dominant high-end infrared detecting and night 
vision semiconductor material, mercury cadmium telluride, which 
we will refer to as MCT. MCT is used to build detector arrays 
that can image objects under conditions having literally no 
visible illumination and through obscurance such as fog and 
dust.
    Our armed forces are indisputably the strongest in the 
world. One of the principal advantages that we enjoy is that we 
own the night. Today, I hope to show you that this superiority 
is threatened by our increasing dependence on foreign sources, 
especially for infrared materials and substrates.
    Our high-end night-fighting capability is based on the use 
of MCT infrared detectors. The future of this technology will 
depend on MCT material made by molecular beam epitaxy, which I 
will refer to as MBE. The concerns that I have and I will 
describe are not because of the lack of funding, but rather 
lack of focused funding.
    Indeed, our government has provided substantial funding 
over the past decades to several large domestic companies 
specializing in infrared detection technology. We have their 
products to thank for our current supremacy. However, only a 
very small level of funding has gone to small businesses, 
universities and defense laboratories working in this field.
    Universities, which are frequently the breeding ground for 
the fundamental understanding and advancement of the science 
and technology, the manpower of industry and the ideas that 
build small business have especially suffered from the lack of 
consistent funding. Small business, a major source for new 
ideas and products with enhanced capability and reduced cost, 
have suffered the most.
    The funding disparity has led to the U.S. MCT MBE research 
and development base shrinking to one small business and one 
university. Their demise has contributed to a decrease in the 
number of large companies which need suppliers, research and 
manpower.
    I believe that this has led to an increased reliance on 
foreign manufacturers and to a significant lack of innovation, 
almost to a halt, to improve quality and reduce their prices. 
It is not in the economic interest of the large companies to 
manufacture all components. Outsourcing to foreign suppliers 
has led to the situation that today there is not a single 
supplier for the substrate for MBE or MCT devices in the United 
States. Moreover, there are no domestic sources of MBE 
reactors. Everyone must buy substrate from Japan and put that 
in a reactor made in France.
    In addition, we find ourselves in a situation that we need 
to go also to find trained scientists. Meanwhile, foreign 
governments and organizations have been playing catch up. Very 
recently they have made heavy research and development 
investments to close the technology gap in MCT. China, India 
and France are a few.
    The eroding U.S. industrial base's lack of innovation 
developed by small business and universities, combined with 
growing foreign efforts, are clearly a recipe for the loss of 
our supremacy and increased reliance on foreign suppliers.
    I think we could still solve this problem soon if we 
provide long-term funding to the small businesses and forming 
consortiums based on small business, universities, a research 
lab and night vision lab and preserve long-term funding to the 
universities.
    The funding level reallocation may involve $5 million to 
$10 million, but the payoff is large, saving brave soldiers. It 
will allow us to see a longer instance and detect and identify 
before others can detect us. Reducing the cost will allow us to 
provide the high-end night-vision technology to our special 
forces because the price is going to come down.
    Your hearing is an important step in that process. Thank 
you for inviting me, and I am ready for your questions. Thank 
you.
    [Dr. Sivananthan's statement may be found in the appendix.]
    Mr. Bradley. Thank you very much.
    I would now recognize Mr. William Jones, chairman of 
Cummins-Allison Corporation.

     STATEMENT OF WILLIAM JONES, CHAIRMAN, CUMMINS-ALLISON 
                          CORPORATION

    Mr. Jones. Good morning. My name is William Jones, and I 
serve as chairman of Cummins-Allison Corporation. Cummins-
Allison is a privately held manufacturing company based in the 
Chicago area.
    In addition to my responsibilities with Cummins, I was 
recently elected the chairman of the United States Business and 
Industrial Council. Cummins is also a corporate member of the 
National Association of Manufacturers, and I sit on a number of 
NAM committees.
    The key product line manufactured by Cummins today is 
equipment to scan, sort, denominate and authenticate U.S. 
currency, as well as other currencies of the world. To 
illustrate the sophistication of counterfeit notes that Cummins 
can identify, I would provide you with two samples. One of the 
notes is real. One is counterfeit.
    Twenty years ago, five U.S. manufacturing firms accounted 
for 90 percent of all U.S. requirements relative to the 
processing of currency. This included equipment utilized at the 
Federal Reserve down to small desktop machines used at 
commercial banks, vendors and others. This very vibrant U.S. 
industry also exported significant amounts of equipment around 
the world.
    Today, all but one of these U.S. manufacturers has been 
eliminated. During this same time frame, all of the European 
and Japanese firms have survived and increased their market 
presence in the United States to about 70 percent. U.S. 
manufacturers, which now is solely Cummins, is down to 30 
percent. Furthermore, the large majority of U.S. export 
business has been lost.
    Most of the U.S. manufacturing facilities and U.S. based 
R&D has been discontinued and shuttered during these last 20 
years. This is because there has not been a level playing 
field. Foreign governments consider the handling of currency a 
national security issue and, therefore, favor their domestic 
industry.
    Our foreign competitors have used this to their advantage 
to develop a full product line and dominate various market 
niches. This has enabled them to dump products in the United 
States at prices well below their total cost. This drove the 
U.S. industry out of business.
    In contrast to the national security concerns of foreign 
governments, the United States government does not appear to 
have a coordinated strategy for sustaining the domestic 
industry to handle the integrity of U.S. currency. For example, 
during the last three years, various congressmen and senators 
have written to the Treasury policy people on behalf of 
Cummins. The Treasury responds that they are not concerned 
about the state of our industry.
    Another irony is what I learned when I was on vacation last 
week. In preparation for the hearing, I understand the Treasury 
contacted our foreign competitors to help prepare the 
presentation before Congress. We, Cummins, would have been 
delighted to discuss the issues with the Treasury had they 
contacted us directly. As a result, assumptions about the 
domestic industry may or may not be correct.
    An example of foreign governments favoring their domestic 
industry is the position of the Japanese Government. The 
Japanese Central Bank is required by law to purchase Japanese 
products from Japanese controlled industry. Consequently, the 
European and American manufacturers have zero market share in 
Japan.
    Europe is another case in point. The European Central Bank 
began to meet with the European manufacturers approximately 
five years before the euro was ever released. A number of these 
European manufacturers were also given contracts to print and 
produce the euro currency, giving them the ability to influence 
the design of this new currency.
    Cummins attempted to gain entry to this exclusive club, and 
the Bureau of Engraving and Printing attempted to help us, but 
on numerous occasions we were denied access. As a result of 
Cummins' exclusion from these meetings, we obtained absolutely 
no business for handling the new euro. Absolutely none. 
Therefore, we lost hundreds of millions of dollars in business. 
China is a similar story.
    A U.S. domestic industry is imperative to the integrity of 
the U.S. currency. To illustrate, in the early 1990s the lowest 
cost currency scanner able to authenticate currency sold for 
$25,000. After Cummins spent five years and many millions of 
dollars, we introduced a new technology scanner that sold for 
$2,500. This lower cost technology enables banks to move 
currency scanning to the front line in their branches where 
deposits are accepted and, therefore, they are more readily 
able to identify the customer that submits counterfeits.
    There is no question that an enemy will attempt to 
counterfeit currency. Al-Qaeda, in combination with a rogue 
government, could easily proffer excellent counterfeit U.S. 
currency, and I think the samples illustrate this. The use of 
our equipment by banks overseas gives these banks assurances 
that they can accept U.S. currency and quickly identify 
counterfeits at a low cost.
    Without Cummins as a domestic producer, this low-cost 
technology would never have been produced. In fact, numerous 
foreign banks have told us very bluntly that they would not 
continue to accept large U.S. currency deposits at their 
foreign locations if the Cummins machine were not available to 
identify the sophisticated counterfeits.
    Furthermore, we are in the process of developing more 
sophisticated technology for the next generation that would 
enable the Fed and commercial banks to more easily track the 
flow of currency, especially as it changes hands between 
parties that are adversarial to the United States.
    Without government intervention to level the playing field, 
the U.S. domestic industry will never offer a full product line 
and may choose to withdraw completely from this market. I am 
confident that if the U.S. Government intervenes, Cummins would 
not only survive, but, more important, other American 
manufacturers would enter back into this industry.
    While there are problems with various government agencies, 
I do want to say that the Bureau of Engraving and Printing does 
an outstanding job within their limited area of responsibility 
and has been most supportive of the domestic industry.
    I would like to thank the Congress for their inquiry.
    [Mr. Jones' statement may be found in the appendix.]
    Mr. Bradley. Thank you very much. We are all curious as to 
which of these notes is the real one. The way I identified it, 
it would appear that someone has folded this one in his pocket.
    Mr. Jones. The one with the Federal Reserve Bank B2 is the 
counterfeit.
    Mr. Bradley. B2. The folded one is the counterfeit. Fooled 
me.
    Mr. Jones. That was caught on one of our low-cost machines 
overseas. The problem is the banks overseas, they get a deposit 
of $15,000 or $20,000. They have to have a quick and rapid way. 
Imagine going through that and trying to find it. They tell us 
it is extremely effective in finding these very sophisticated 
counterfeits.
    Mr. Bradley. Your example is wonderful.
    Mr. Jones. A picture is worth a thousand words, 
Congressman.
    Mr. Bradley. Unless you are in a congressional hearing, so 
you are exempted.
    Questions, Mr. Udall?
    Mr. Udall. Are we finished with the panel?
    Mr. Bradley. I am very sorry.
    Mr. Udall. I will hold off until we finish.
    Mr. Bradley. I got so lost in the counterfeiting.
    Mr. Udall. It was his comment about prosecuting. I think 
that rattled you, Mr. Bradley.
    Mr. Bradley. Mr. Tonelson, please?

   STATEMENT OF ALAN TONELSON, RESEARCH FELLOW, EDUCATIONAL 
         FOUNDATION, U.S. BUSINESS AND INDUSTRY COUNCIL

    Mr. Tonelson. Thank you very much, and good morning, 
Congressman Bradley, Congressman Udall and Congressman 
Manzullo. I would like to thank you on behalf of the U.S. 
Business and Industry Council and its Educational Foundation 
for the opportunity to testify this morning. I am Alan 
Tonelson. I am a Research Fellow at USBIC's Educational 
Foundation.
    Our subject today is of great concern to the member 
companies of our council, which themselves are predominantly 
small and medium sized manufacturers. Since 1933, the Council 
has championed the cause of strengthening the domestic 
technology and manufacturing bases, and we are very gratified 
by the Subcommittee's focus on this critical issue.
    It is also an extremely timely issue as the U.S. 
manufacturing sector as a whole, including small and large 
companies, is experiencing a downturn of historic proportions. 
I underline that word historic. It is also critical to 
understand that much of the blame for these problems lies with 
a series of ill-conceived and failed trade policies that our 
government has been following now for several decades.
    Now, there is no question that improving federal 
procurement practices is terribly important, but it is no 
substitute for a top to bottom overhaul of again these decades 
of failed trade policies, including NAFTA, including joining 
the World Trade Organization on highly disadvantageous terms 
and granting permanent normal trade relations to a thoroughly 
protectionist China.
    The main effect, at least for the purposes of this hearing, 
of these trade and globalization policies has been to encourage 
many U.S. multinational companies to migrate overseas, to 
transfer production overseas and in fact to supply the U.S. 
markets from overseas. When the multinationals migrate 
overseas, they take much of their supply chain with them, and 
that is where small and medium sized companies get whacked. 
That has been a major effect of these failed trade policies.
    In fact, some of the most urgent changes needed in federal 
procurement policy are probably inconsistent with our World 
Trade Organization obligations. In this vein, it is critical 
for Congress and the Administration to recognize that the World 
Trade Organization is not a quasi-judicial body in which all 
parties can be reasonably assured of a fair hearing before a 
quintessential political body in which a strongly protectionist 
majority seeks and usually secures major advantages over open 
market countries like the U.S.
    It is vitally important for U.S. policymakers to stand up 
for U.S. economic interests more effectively, even when the 
World Trade Organization's protectionist majority does not like 
it, and this includes negotiating real and monitored and 
verifiable agreements to open foreign procurement markets 
rather than accepting empty promises.
    My testimony identifies various ways to tighten up our own 
federal procurement laws to provide more opportunities for 
highly competitive, fair trading American companies, but first 
I would like to call the Subcommittee's attention to three 
important points.
    First, we need to know more about the impact of federal 
procurement policies on small companies and particularly as 
they belong to the subcontracting and the supply chains of 
large companies. Anecdotes are obviously informative, but they 
are not enough. Government wide reporting requirements on 
foreign procurement levels are an essential first step.
    Second, Congress has to be very careful about granting 
waiver authority. Flexibility is needed; there is no question 
about that, but it must not turn into a license to basically 
penalize fair trading U.S. companies. I am particularly worried 
at this point about the tendency of this Administration to show 
signs anyway of lapsing into some Cold War style trade 
policies, sacrificing concrete, tangible American economic 
interests for often dubious diplomatic objectives.
    Third, U.S. content provisions must be carefully monitored 
as well. Manufacturing must be defined with great precision or 
the stated purpose of various Buy America laws and regulations 
will be subverted by screwdriver assembly operations that add 
little value to the U.S. economy.
    Many of these ideas are included in the specific 
recommendations at the end of my statement, but one feature of 
some of the other ideas deserves special consideration. 
Enterprises from countries that are persistent violators of 
U.S. and international trade laws should not be rewarded by 
federal procurement policy.
    These predatory trading companies should be identified and 
barred from federal contracting until they have established a 
long and credible record of good behavior, and certification of 
such good behavior cannot be left to the Office of the U.S. 
Trade Representative, which demonstrably lacks the inclination 
to ruffle feathers among our trading partners. After all, its 
highest priority is negotiating new trade agreements with these 
same trading partners, whether they are enforceable and 
verifiable or not.
    In addition, a broad drag net should be thrown out here. 
Including the innocent with those guilty of predatory trade 
practices would go a long way toward creating powerful 
constituencies in problematic foreign countries for abolishing 
those procedures and actually opening foreign markets. These 
are hardball tactics, but in trade diplomacy that is often the 
best way to get things done. The great, deepening crisis in our 
manufacturing sector means that business as usual is no longer 
acceptable.
    I thank you very much for your attention and welcome the 
opportunity to answer any questions you might pose.
    [Mr. Tonelson's statement may be found in the appendix.]
    Mr. Bradley. Thank you very much, Mr. Tonelson.
    Now we will recognize John Palatiello, who is the last 
panelist.

 STATEMENT OF JOHN PALATIELLO, EXECUTIVE DIRECTOR, MANAGEMENT 
   ASSOCIATION FOR PRIVATE PHOTOGRAMMETRIC SURVEYORS (MAPPS)

    Mr. Palatiello. Thank you, Mr. Chairman, Members of the 
Subcommittee. I am John Palatiello. I am executive director of 
MAPPS, a national association of more than 170 companies 
engaged in mapping and related geographic information services. 
A great many of our member firms are small businesses under the 
SBA size standard.
    Our members make maps from aerial photographs and satellite 
images. They are used for everything from facilities planning 
to highway engineering, from doing truck routing and bus 
routing to property tax assessment. Our geographic information 
system databases are even used by our first responders and E-
911 response.
    We are very concerned about the trend towards production 
work in the mapping and geographic information fields going to 
foreign competitors. I would like to highlight a few of the 
points in my testimony and some of the concerns that we have.
    We very strongly favored NAFTA because in the pre-NAFTA 
days trade in aerial photography particular with Canada was a 
one-way street. Canadian firms could do business in the United 
States, but there were barriers that prohibited U.S. firms from 
doing work in Canada.
    Under NAFTA, the situation has only gotten worse. It is 
definitely a one-way street, particularly with regard to 
government procurement. Canadian firms are using the advantage 
of the exchange rate between the U.S. and Canadian dollars to 
underbid U.S. companies.
    There are programs in the Department of Agriculture where a 
majority of the work for aerial photography for crop monitoring 
and forecasting is now done by Canadian operators because the 
U.S. firms simply cannot be competitive with regard to the 
exchange rate between our two currencies. Furthermore, there 
are barriers erected by the Canadian Government that preclude 
U.S. companies from doing work in Canada, so it is quite a one-
way street for us.
    The Buy America Act has been mentioned earlier in the 
hearing. That applies to products and not services by and 
large, so there is no protection for those of us in service 
professions and service industries under the Buy America Act.
    One of the things that is being done in federal procurement 
that I think is working to the disadvantage of small business 
and domestic service firms is a loophole that has been 
discovered in the Service Contract Act. The Service Contract 
Act, and I do not mean to be controversial here, but the best 
way to describe it is it is the Davis-Bacon Act for services.
    The Davis-Bacon Act says you pay prevailing wages on 
construction contracts. The Service Contract Act says you will 
pay the prevailing wage rate on service contracts. What is 
happening is the law applies to services, and I will quote from 
the law, ``the principal purpose of which is to furnish 
services in the United States.''
    Well, if Company A is going to perform in the United 
States, it is subject to the Act. If Company B is going to send 
the work offshore either themselves as an offshore provider or 
through a subcontractor, they are not subject to the Act. 
Therefore, they can do work and pay wages of 10 cents on a 
dollar, and in fact that is exactly what is going on today.
    There is a double whammy that we are very concerned about, 
and that is Federal Prison Industries. Federal Prison 
Industries is expanding into services, and one of the areas 
they look for is well, we will go into services that are going 
offshore. That way we are not adversely affecting U.S. 
companies and U.S. workers.
    Well, as soon as they identify a service that is going 
offshore, Prison Industries jumps in, so we get subjected with 
the double whammy of low-cost labor competition from foreign 
offshore vendors, as well as low-cost, low-wage compensation 
from Prison Industries. We do not feel that that is a very 
tenable situation to be in.
    Our concern is that historically once an activity goes 
offshore, when you have domestic capability and it goes 
offshore it is very, very rare that it is ever repatriated. It 
very rarely ever comes back home, and we are deeply concerned.
    I mentioned before some of the things that mapping and 
aerial photography and satellite imagery is used for, the 
applications of the work that our members do. We are talking 
about the critical infrastructure of the United States. We were 
concerned about this issue before September 11. We are far more 
concerned now.
    The maps, the drawings, the blueprints of America's 
critical infrastructure is now going offshore where there is no 
knowledge as to what the motives or backgrounds or objectives 
of the people who have access to that data might have with 
regard to the United States.
    What can we do? First of all, we would urge the Committee, 
and this has been mentioned previously by other witnesses, to 
focus more attention on subcontracts. There is very little data 
available from federal agencies. There is very little oversight 
on the part of federal agencies with regard to subcontracting.
    We always talk about the number and percentage of federal 
dollars that go in prime contracts to small business, but I 
think there is a whole other arena out there that we ought to 
pay greater attention to with regard to a database and tracking 
and monitoring what is happening with regard to subcontract 
work.
    The same thing is true with regard to grants. The federal 
government spends a lot of money to state government, and then 
if state government turns around and contracts federal 
procurement does not apply so you do not have Buy America, you 
do not necessarily have Service Contract Act requirements. A 
lot of the protections that this Committee has built into 
federal procurement goes by the wayside when the dollars go to 
the states.
    Just anecdotically, let me close with an example of 
something that we are working with the Committee staff. 
National Oceanic and Atmospheric Administration did a contract 
for navigational charting. One of the firms that was awarded 
the contract not only was found later to be a large business 
that won the contract under a set aside, and NOAA has not 
thrown them out of the procurement, but that firm is also a 
front, and that work is going offshore. Again, it is a double 
whammy to the domestic small business.
    Thank you for inviting me. I would be glad to answer any 
questions. I appreciate the Committee's attention to this 
important issue.
    [Mr. Palatiello's may be found in the appendix.]
    Mr. Bradley. Thank you very much, all members of the panel.
    I will first recognize Mr. Udall for questions.
    Mr. Udall. Thank you, Mr. Chairman.
    Jody, I would like to ask about the HUBZone program at the 
Department of the Treasury. Apparently you had an increase in 
your procurement budget from $249 [sic] billion in 2001 to over 
$3 billion in 2002. My question goes to the number of 
contracts, HUBZone contracts that you had.
    Treasury had 233 contracts with HUBZone companies in 2001. 
In 2002, Treasury had 199 contracts. Can you tell this 
Committee why there was a decrease in the number of contracts 
with HUBZone companies?
    Ms. Falvey. No, sir. I do not have the specifics to the 
contracts that were awarded to the HUBZone during the year you 
are mentioning, fiscal year 2002, but I would be happy to 
provide that information.
    Mr. Udall. Thank you. I would very much appreciate that.
    Mr. Tonelson, I wanted to ask you about this trade policy 
issue that you brought up. Specifically you mentioned that we 
need to open foreign procurement markets and that that would be 
a way where we could grow business here.
    Can you tell us? I mean, are these markets closed now? What 
should we do to open them? Should we include provisions in all 
of our trade legislation that comes through? This week or very 
soon we are going to deal with the Singapore and Chile trade 
agreements. Should we have specific agreements in those that 
require them to open up these procurement markets of their 
governments?
    Mr. Tonelson. The main reason that I mentioned the need for 
trade agreements that effectively open foreign procurement 
markets is that many of the waivers and exemptions to Buy 
America legislation as in fact was mentioned by Ms. Lee on the 
first panel result from trade agreements in which reciprocity 
has been promised.
    We open up our U.S. Government procuring market to this or 
that foreign country that we signed this or that trade 
agreement with, and they in turn open up their markets to U.S. 
producers. There is very little evidence that indicates that 
true reciprocity has been achieved.
    The one study of this that I am aware of focused on the 
Tokyo Round agreement of the GATT, which was signed at the very 
end--well, right around 1980. Great promises were made by U.S. 
trade officials at that time that liberalization of foreign 
government procurement was going to result in a tremendous 
increase in U.S. exports. It never, ever happened. In fact, 
there was a GAO report published a few years later that showed 
absolutely nothing had happened. The increases in U.S. exports 
to those markets were infinitesimal.
    It is not only a matter of including clearly worded 
provisions in these trade agreements. It is a matter of 
actually monitoring the trade agreements and enforcing them. 
This is one of many areas in which U.S. trade policy has fallen 
far short, and the main reason is it is more fun to negotiate 
new trade agreements--you get better media, there are more 
photo ops--than in the hard, day-to-day work of monitoring and 
enforcing and eventually ruffling feathers if you find that 
promises are not being kept, and we have to take enforcement 
concerns much more seriously.
    Mr. Udall. Are we putting the resources into monitoring and 
enforcement we should, or are they backing off?
    Mr. Tonelson. I read an item last week--I have not 
researched it as thoroughly as I need to yet--that the request 
for monitoring resources has gone up, but if you look at the 
U.S. Trade Representative's annual report on foreign trade 
barriers you see just how widespread, how numerous they are.
    It is very difficult to think that either USTR or the U.S. 
International Trade Commission or the Commerce Department's 
International Trade Administration and, after all, those two 
latter agencies have primary responsibility for carrying out 
and enforcing U.S. trade laws. It is very difficult to 
understand how these relatively small bureaucracies can 
possibly cope with a world in which I would submit that 
violation of world trade laws like antidumping, like 
intellectual property theft, like subsidization, has become a 
way of doing business. They have become the norm, not the 
exception.
    Mr. Bradley. Mr. Jones, did you wish to add something 
briefly?
    Mr. Jones. Yes, a specific example around his question. In 
our industry, for example, even after ascension into the WTO, 
China retains a 40 percent tariff and excise taxes on our 
product line. They explained to us it is because it is a 
national security issue. They want to develop their own 
industry.
    The Chinese Government also intervened on a tender we were 
offering for 10,000 machines to the commercial banks in China. 
We went to the USTR, and they said this is unfair treatment, 
but, getting back to what Alan said, they say we have limited 
resources, and while it is inequitable it is not a task we can 
take on right now.
    That is unfortunate, but that is what happens. We are a 
$100 million a year business. We compete with companies that 
are $1 billion in sales. It is very difficult for our 
government to advocate. They can take care of the Boeings and 
Motorolas of the world, but when you get into the mid-size 
manufacturers, and we are probably 40 percent of total 
production. There is an inability, at least in our experience. 
Well-intentioned civil servants, but they just cannot take it 
on. They do not have the resources.
    Mr. Bradley. Mr. Manzullo?
    Mr. Manzullo. Thank you.
    Ms. Falvey, I do not know if you would be the right person 
from Treasury that would be able to answer the question, but if 
not I am sure you would tell us that and help us to get further 
information.
    I am very much distressed over the fact that with regard to 
the validating or verification of currency that the Europeans 
and that the Chinese consider this to be a matter of national 
security and, therefore, exempt from the international trade 
agreements, and yet the U.S. Treasury invites foreign 
competitors to the United States to compete with the few 
manufacturers that are left.
    I guess my question to you, if you could answer it, would 
be do you consider the verification of U.S. currency to be an 
issue of national security? If you are not the right person, 
just tell us, but take a stab at it if you want.
    Ms. Falvey. As far as national security, I am not the right 
person to answer that question.
    Mr. Manzullo. Sure. I understand. Who would that person be?
    Ms. Falvey. I could defer to Mr. Tom Ferguson, the director 
of the Bureau of Engraving and Printing, that is here today.
    Mr. Manzullo. Is he present in the room?
    Ms. Falvey. Yes, he is.
    Mr. Manzullo. Is he here? Where is he? Mr. Chairman, would 
you mind if he came up and answered that question?
    Mr. Bradley. No. Please.
    Mr. Manzullo. Maybe somebody can get an extra chair in 
there. There we are.
    Mr. Ferguson. I do not know if I want to be that permanent 
up here.
    Mr. Manzullo. If you could give your name and position for 
the record?
    Mr. Ferguson. It is Tom Ferguson. I am the director of the 
Bureau of Engraving and Printing.
    Mr. Manzullo. Okay. Would you want to take a stab at that 
answer?
    Mr. Ferguson. Yes, sir. We consider the security and 
authentication of U.S. currency a national security issue. 
There are several classified security systems embedded in 
United States currency. Those systems are in fact U.S. 
manufactured. The detectors that are used to verify those 
things at the Federal Reserve Systems are in fact U.S. 
manufactured.
    The equipment that those are mounted on are manufactured in 
the United States by a foreign parent company, but the security 
systems themselves that are used to authenticate currency at 
the government level are U.S. manufactured by a U.S. firm.
    Mr. Manzullo. What about in banks?
    Mr. Ferguson. That is a commercial activity that we allow 
the banks to buy from whomever they want to. It is not 
something that the government dictates. It does not require 
that.
    Mr. Manzullo. So you do not consider it a matter of 
national security that banks in the United States have the 
equipment in order to----.
    Mr. Ferguson. We and the Secret Service do not officially 
endorse any machine authentication systems.
    We provide a number of security devices that are in the 
currency for people to use. We provide training for commercial 
banks. They make an independent business decision on what type 
of equipment to use. That is something that the government----.
    Mr. Manzullo. Do you invite foreign competitors?
    Mr. Ferguson. Do we invite foreign competitors?
    Mr. Manzullo. At Treasury when you are looking at new 
equipment. Are you just talking about equipment that is used in 
Washington?
    Mr. Ferguson. This would be used throughout the country at 
all Federal Reserve banks, 37 banks and branches.
    Mr. Manzullo. And you are saying that is 100 percent 
manufactured at all 37?
    Mr. Ferguson. No. What I said, sir, is that the security 
systems that are in the currency, the classified, high-level 
authentication systems that are embedded in the currency, and 
the detectors that are used to detect that at the Federal 
Reserve banks are U.S.
    Mr. Manzullo. Mr. Jones, do you have a rejoinder to that? 
If you could pull a mike close?
    Mr. Jones. I have slightly different information from the 
engineers that used to work for the U.S. manufacturer that made 
machines for the central banks, and that was REI, followed by 
CSI.
    These engineers told me that what happened to meet the Buy 
America clause when they went to the GND, the German machines--
if you are not familiar with those, they sell them around the 
world to central banks, and from what I know, and I can say 
this emphatically, their research and development in the 
development of their products and their technologies are done 
in Europe.
    What they did is it is a little bit like making wine in 
France and bringing it over here and putting it in a bottle and 
putting a label on it and saying it is made in the United 
States. I do not think that is the case.
    Let me finish, Tom.
    It is true that the Federal Reserve does contract for 
separate sensors that they put on this machine that the German 
manufacturer would not have knowledge of. One of them, for 
instance, is Kodak. I understand one of those divisions was 
also recently sold to a European manufacturer, so I do not know 
who has control of the knowledge of that now.
    Clearly, a large majority of the content of that machine is 
foreign produced, and the engineering involved in developing a 
transport, whatever sensors you put on it, is now controlled by 
the Europeans.
    A long time ago, back in the 1960s, the German Government 
made a decision. The United States and the British were 
printing currency for the Germans, as well as providing the 
equipment to process it. They decided on a national security 
basis that that was not a good thing, so they gave GND a 
contract to print half of the deutsche marks.
    I can tell you that if the United States Government enabled 
me to print half of the U.S. dollars, I could be a player in 
the central banks of the world, but I would never enter that 
market under the current circumstances because there is no way 
for me to compete.
    Mr. Manzullo. Let us get a rejoinder from Mr. Ferguson.
    Mr. Ferguson. Yes. Just as I said, all the detectors, the 
security systems, are U.S.
    Mr. Manzullo. What does that mean? If this is the machine, 
this represents the machine----
    Mr. Ferguson. Yes, sir.
    Mr. Manzullo [continuing]. That is in the 37 banks across 
the country, how much of this machine is manufactured in the 
United States?
    Mr. Ferguson. You would have to ask the Federal Reserve. 
They are the ones that buy it.
    Mr. Manzullo. Okay.
    Mr. Ferguson. The part that I am involved with is we 
purchase and design and install and put into the currency 
authentication systems.
    Mr. Manzullo. Do you mean a code?
    Mr. Ferguson. Codes, inks, materials, a variety of 
different things that are there so when they go through those 
machines there are detectors that are installed that will 
verify that it is in fact an authentic note.
    Mr. Manzullo. That is where your expertise is----
    Mr. Ferguson. Yes, sir.
    Mr. Manzullo [continuing]. Developing the code?
    Mr. Ferguson. My expertise is in producing that currency 
note to make it as secure as possible.
    Mr. Manzullo. Okay. Then in terms of testing that, the 
machines that will verify what is in that code.
    Mr. Ferguson. Right.
    Mr. Manzullo. Those machines are made where?
    Mr. Ferguson. The detectors that will verify that code are 
made in the United States.
    Mr. Manzullo. One hundred percent?
    Mr. Ferguson. Yes. Well, to the best of my knowledge, yes. 
I cannot get into some of the diodes.
    Mr. Manzullo. Mr. Jones, you are disagreeing on that?
    Mr. Jones. I disagree with that. I have a disadvantage, and 
the Treasury does not really speak to us about these issues, 
though we have asked for meetings on numerous occasions.
    From the information I have from people that were in the 
United States, particularly U.S. engineers, they would disagree 
with that.
    Mr. Manzullo. All right. What question is it that you want 
to pose to Treasury that you want them to answer in writing?
    Mr. Jones. Well, some of these issues are delicate and 
sensitive, first of all. Second, I see representatives of 
foreign competitors here in the room.
    Mr. Manzullo. That is all right, because I understand 
Treasury called them as soon as they got the call from our 
office so that they would be alerted of this hearing.
    Mr. Jones. It is a sensitive issue.
    Mr. Manzullo. Of course it is sensitive. What question do 
you want to have Treasury answer in a letter as to the source 
of these?
    Mr. Jones. If they have any policy to monitor--it is just 
like with Defense--the critical core industries in the United 
States that might help with the national security interest of 
currency.
    There are different levels. There is what the Federal 
Reserve requires, but there is also what is used at the first 
line. As I told you earlier, we developed some very low-cost, 
very effective technology to find currency.
    Mr. Manzullo. My question here is, Mr. Ferguson, you helped 
develop codes so that----.
    Mr. Jones. One question I might have is are they interested 
in trying to develop a level playing field so that the U.S. 
industry----.
    Mr. Manzullo. No. I understand that. My question here is 
who is making these machines, and why are all the foreign 
competitors in this room? That is the gut level. The reason you 
are here is the fact that you are a domestic industry being--
--.
    Mr. Jones. I am the only one left.
    Mr. Manzullo. You are the only one left in the United 
States.
    Mr. Jones. You could have a hearing on Treasury issues, and 
I would be the only one on the panel.
    Mr. Manzullo. If I may indulge, what contract is it that 
you got bumped by Treasury? Did they bump you?
    Mr. Jones. I did not get bumped by Treasury. We do not make 
a product in that category----
    Mr. Manzullo. Okay.
    Mr. Jones [continuing]. Because we recognize if we entered 
it we would not be successful. Think about it.
    Mr. Manzullo. Then what is the other category, the one that 
you sell to the banks?
    Mr. Jones. Sell to banks.
    Mr. Manzullo. So there is no domestic manufacturer? Is that 
what you are telling me?
    Mr. Jones. Not at the level of central banks. Not anymore.
    Mr. Manzullo. What is the level that you are talking about, 
Mr. Ferguson? Somehow there is a disconnect going on here.
    Mr. Ferguson. The machines I am talking about are simply 
for the government. To the best of my knowledge, we have never 
had a bid for any product that we manufacture from Mr. Jones.
    Mr. Manzullo. Okay. This would be the machines that are 
used here in Washington?
    Mr. Jones. In the Federal Reserve banks.
    Mr. Manzullo. The 37 Federal Reserve banks?
    Mr. Jones. The commercial banks clear their currency 
through the Federal Reserve.
    Mr. Manzullo. Correct.
    Mr. Jones. When they clear it, they get rid of old currency 
that is soiled and no longer----.
    Mr. Manzullo. Who has the machines, the individual banks or 
the Federal Reserve?
    Mr. Jones. The Federal Reserve banks.
    Mr. Manzullo. Okay.
    Mr. Jones. That is the highest level. Large commercial 
banks have currency processing machines as well.
    For instance, we entered that market two years ago, and the 
European manufacturers immediately reduced their prices in 
North America only by 50 percent. I have pricing studies to 
support that.
    Mr. Manzullo. Okay. Mr. Jones, what I am interested in 
finding out here is that you are saying that there are 
unresolved or unanswered questions from Treasury, and I am 
giving the opportunity to--let me put it this way.
    Mr. Jones. Yes, I do have a question for Treasury. Given 
the inequitable and unlevel playing field at the central bank 
level, is Treasury interested in looking at the procurement 
process and changes that may be needed to encourage U.S. 
manufacturers to bid?
    In 2001, we wrote to the Federal Reserve and declined to 
bid, explaining to them about the problems in the industry.
    Mr. Manzullo. But he is not here representing the Federal 
Reserve.
    Mr. Jones. No, he is not, but----
    Mr. Manzullo. Okay.
    Mr. Jones [continuing]. That is the machine he is talking 
about.
    Mr. Manzullo. Is that correct, Mr. Ferguson?
    Mr. Ferguson. I am talking specifically about the portion 
of the machine that authenticates currency, not the machine 
itself.
    Mr. Manzullo. That portion of the machine that 
authenticates the currency?
    Mr. Ferguson. Yes.
    Mr. Manzullo. But the machine could be foreign made?
    Mr. Ferguson. Yes, it could be.
    Mr. Manzullo. So does that mean that the technology on 
authentication is given to a foreign country?
    Mr. Ferguson. No. It is a black box system, sir.
    Mr. Manzullo. Explain that.
    Mr. Ferguson. It is a detector that an input goes in and 
output comes out, but the mechanism itself is embedded in the 
detector, and it is not available to anyone without destroying 
it.
    Mr. Manzullo. Let me ask you a question. If we submit to 
you a list of questions that will be more intelligible than the 
questions I am asking you now, would you be willing to answer 
those?
    Mr. Ferguson. Yes, sir. Hopefully, the answers will be more 
intelligible than what I have given you so far.
    Mr. Manzullo. I appreciate that.
    Thank you, Mr. Chairman.
    Mr. Bradley. Thank you, Mr. Manzullo.
    I have no questions at this point, and we have been called 
for a vote. Mr. Manzullo, is it your intention to resume this 
hearing with further questions afterwards?
    Mr. Manzullo. I have no further questions. We can just 
adjourn.
    Mr. Bradley. Then in that case this hearing is adjourned. 
Thank you.
    [Whereupon, at 11:37 a.m. the Subcommittee was adjourned.]

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