DMS files, lot W–1444, “Procurement, Offshore, 1954”
No. 292
Foreign Operations Administration Record
of Action1
[MISC/RA–34]
Interdepartmental Meeting on FY 1954 OSP Program, Chart Room, Executive Office Building, April 2, 1954—1:30 p.m.
Attendees:
- FOA
- Mr. Stassen
- Dr. FitzGerald
- Mr. Ohly
- Mr. Arth
- Mr. Sharpe
-
Defense
- Mr. Kyes
- Mr. Voorhees
- Mr. Duval
- Gen. Stewart
- Adm. Davis
- Col. Anding
-
State
- Mr. Merchant
- Mr. Nolting
- Mr. Moore
purpose of the meeting
To discuss various aspects of the FY 1954 OSP program, including: (1) status of FY 1954 OSP operations; (2) desirability of postponing placement of long-lead contracts and carrying over funds for OSP into FY 1955; (3) new price policy; (4) intergovernmental memoranda of understanding; (5) OSP of naval vessels in FY 1954; (6) Communism and OSP; and (7) use of $37.5 million carry-over for Italian aircraft production.
[Page 608]1. Status of FY 1954 OSP Operations
Mr. Voorhees said that the situation with respect to placing contracts is not too satisfactory; but against our statement to NATO that OSP would approximate $1.5 billion in FY 1954 he offered these items:
- $250 million placed at the end of FY 1953 which could really be considered part of the 1954 program
- 85 million for UK aircraft
- 85 million for artillery etc. for France
- 47 million in the facilities equipment program
- 50 million in the special weapons program
- 225 million diverted from this program for Indochina
- 780 million remaining OSP
He explained that within the $780 million are the programs for all-weather fighters: Javelins or F–86K’s. Of the remaining $730 million we are proceeding to contract for $400 million.
Mr. Stassen asked for a report of progress on the $400 million contracting. Mr. Voorhees reported that (1) the Bureau of Ships team will leave on April 6 to place ship contracts and the rest of the Navy procurement will be handled by the Navy Procurement Office in London; (2) contracts are being made with the British for $112 million in Plan K and the contracting officers are working on the rest of the Air Force program; (3) the Army now has the pricing directive and authority to proceed on all its program except $250 million for ammunition.
It is planned to place contracts for $250 million Army ammunition, $62 million Navy ammunition, and about $30 million of other items with plants that already have OSP contracts and where it is desirable to keep the production base open as long as possible, but where it is not necessary in production terms to reorder until after June 30, 1954. About $312 million of the $330 million in the follow-on contract category is for ammunition.
Mr. Stassen asked how much ammunition is in the $400 million; Mr. Voorhees replied only about $13 million.
2. Desirability of Postponing Placement of Long-lead Contracts and Carrying Over Funds for OSP into FY 1955
Mr. Stassen asked if the procurement officers do not have a follow-on order directive for the $312 million ammunition. Mr. Voorhees said they have the program; they have solicited and received bids; but they have been directed to devote their first efforts toward placing contracts where earlier deliveries would result.
[Page 609]Mr. Kyes said there are two considerations in the ammunition contracts: (1) It has been the practice to pile follow-on orders on top of orders, with a resulting loss of control of our funds. Both domestically and abroad we are trying to keep from placing follow-on orders until the proper time because in that way we will gain more flexibility, will not be fictitiously committing funds which are not going to result in production, and the tendency for costs to go down may give us the advantage of lower prices. (2) There may be cases where it would be better, from the point of view of the whole production base, to bring a new facility into the program rather than to place follow-on orders with plants already holding contracts. Defense is trying to assess the European production base, to decide on what basis we could keep it hot for a reasonable period, and to determine the needs for a reasonable mobilization base for ammunition production.
Mr. Stassen said the delay in placing follow-on orders presents these difficulties: (1) We will probably lose that $300 million if it is not committed by June 30. (2) There is danger of falling far short of what Secretaries Wilson and Dulles told NATO there would be in OSP business this fiscal year; and this has serious security, cohesion, and political ramifications. (3) We will not introduce the element of stability and confidence into the European economy that would be possible with follow-on orders projected far into the future.
Mr. Stassen said that from the standpoint of security policy and having in mind the President’s statement that he wants an ammunition production base established in Europe, it seems worth examining the policy of laying the money on the line now to the best producers, in sufficient quantity that they could keep a hot line going to June 30, 1957.
Mr. Kyes said that he felt Congress would react favorably to our taking the position that in order to keep control of our funds we are not going to place contracts until necessary. He added that Secretary Wilson is opposed to the placement of orders at this time, and is not worried about the commitment to NATO because a number of conditions have changed since April 1953—for example, EDC has not gone through.
Mr. Voorhees said that we would indicate the plants which would presumably get the follow-on orders and say that we would place the orders far enough in advance for them to continue uninterrupted production. They would be assured of continuity.
Mr. Merchant said Mr. Kyes’ arguments seemed compelling and he felt that in the long run we would be better off with Congress if we could show justifiable and sound procurement practices. However he expressed concern about the delay in placing the $300 million [Page 610] follow-on orders. Since Secretary Dulles feels we should proceed on the assumption that EDC will go into effect, it would be unfortunate if this procedure were construed as a shift in policy or as a threatening action. He said he was not entirely satisfied with all the items Mr. Voorhees listed within the $1.5 billion because there appeared to be some double counting involved.
Mr. Merchant pointed out that the dollars involved mean much more than just contracts to individual plants in that if the governments can look forward to certain amounts of dollars coming into their balance of payments from this source there will be an added element of stability and security in their economy and an influence on their whole thinking.
Mr. Stassen suggested that Congressional leaders may hold the view that it would be better to commit these funds than to ask that they be reappropriated. Since our OSP program for FY 1955 will be much smaller, if we lose these funds at the end of FY 1954 we would not have established the production base desired by the President.
Action: To prepare a paper on the issues and alternative policies for a presentation to the President for decision. (Mr. Ohly)2
Mr. Voorhees said that if it is decided to place follow-on contracts they should contain a clause to the effect that no expenses would be incurred in connection with the contract before a specified date, which would be a date x months before the present contract expires.
3. New Price Policy
Mr. Stassen asked if Defense expected any difficulties in placing contracts for the $400 million by June 30. Mr. Voorhees said he could not tell what the impact of the pricing policy would be. The big problem involves Army ammunition. We have a list of 1953 US prices on comparable items but the prices are not commercial prices since our ammunition is produced, in varying degrees, in government-owned ordnance plants.
Mr. Stassen said that, in view of the President’s desire to have a complete ammunition base in Europe, he assumed that if certain ammunition were higher in production cost our price policy could be waived. Mr. Kyes agreed and added that if there is no comparable US commercial price, the requirement in the directive would not apply. In other words, the new price directive should result in no delays; even the exceptional cases that must be referred to Washington can be cleared in twenty-four hours.
[Page 611]4. Intergovernmental Memoranda of Understanding
Mr. Voorhees said these memoranda have been completed with the UK and France. The Belgium memorandum will probably be ratified in June. Negotiations on the others (except Portugal, which will not give us the agreement) are proceeding satisfactorily. He said that if the negotiating team encounters serious difficulties they will take up the problems with the Political Division in USRO.
5. OSP of Naval Vessels in FY 1954
Mr. Voorhees said there was a decision on April 2 to take $18 million out of the Navy’s OSP program, for US construction of AMS’s because the magnetic signature of US ships is more favorable, and for other reasons.
Mr. Stassen suggested that if there are some ships in the FY 1955 OSP program that could be accelerated we might pick them up this year with the $2 billion unobligated balance.
6. Communism and OSP
Mr. Voorhees reported that we will place no OSP contracts in Italy without the approval of the Ambassador.
7. Use of $37.5 million Carry-over for Italian Aircraft Production
Mr. Kyes said he believed we should wait until May 15 to decide on the use of this carry-over item. Mr. Stassen said FOA thought it would be advisable to have a team study the possible alternatives before May 15 so that on that date we would be better prepared to make decisions.
Mr. Kyes said that Defense feels the all-weather fighters are such a high priority that the only alternative use for the $37.5 million should be for all-weather fighters from another source.
8. Other Problems
General Stewart said the Air Force has recommended that to meet the cost of sending technicians and B–26 squadrons to Indochina we cancel some French Mysteres. When questioned by Mr. Stassen, he estimated that there will be a little less than $2 billion unobligated funds at the end of FY 1954.
Mr. Stassen said his approach would be to cut out those programmed items which cannot be obligated by the end of the fiscal year and use those amounts for the expanded Indochina program. The French Mystere production would not fall in that category.
Gen. Stewart said that under present regulations and procedures Defense cannot program unless it has money to program. Mr. Kyes explained that Defense cannot obligate for contracts unless the money is in hand; otherwise, we might find it necessary for the individual [Page 612] services to take the money out of their own funds to the detriment of the US military forces. Mr. Stassen said he did not see how that situation could develop since Defense now has about $8 billion unspent and will have $2 billion unobligated by the end of the fiscal year. Of course, there would be involved a revision of the program at the end of the fiscal year.
Mr. Stassen asked if any items that were eliminated from the proposed 1955 program could be contracted for in the next three months against the $2 billion unobligated funds.
Gen. Stewart said that the main reason the funds will not be obligated is that the money was not received until January. Further, the contracting officers encounter difficulties when the program is not firm but changes because of shifts in emphasis. There are certain items, involving considerable sums of money in toto, such as hand tools, spare parts, and items that are requisitioned against stock. We must have money to cover them but they are not items that can be contracted for.
Mr. Stassen suggested there might be some items in the over-all program that might be reconsidered—such as shifting from an aircraft that is moving toward obsolescence to a more future type.
Action: General Stewart said he would ask the Air Force to look into this matter.
The meeting adjourned at 2:55 p.m.