Defense Production Act: Agencies Lack Policies and Guidance for Use of Key Authorities
Published: 2008-06-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress enacted the Defense Production Act of 1950 (DPA) to ensure the availability of industrial resources to meet defense needs. Amendments to the Act allow its use for energy supply, emergency preparedness, and critical infrastructure protection and require agencies to report on foreign offsets, which are incentives to foreign governments to purchase U.S. goods and services. Only Titles I, III, and VII remain in effect. In the National Defense Authorization Act for Fiscal Year 2008, Congress directed GAO to review recent agency efforts to implement the DPA. This report (1) examines the extent to which agencies use DPA authorities and (2) assesses agencies' response to reporting requirements on the economic impact of foreign offsets. GAO's work is based on a review of policies and guidance for the use of DPA authorities, instances in which agencies have exercised the authorities, and the analysis used in required reports on foreign offsets.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) routinely exercises the DPA Title I priorities and allocations authority, which allows rated contracts and orders to be delivered before others, to ensure the availability of defense resources. However, civilian agencies have generally not used the Title I authority and most differ from DOD in deciding when to apply it. For example, DOD places ratings on most of its contracts before critical defense items are needed. In contrast, agencies such as the Department of Homeland Security (DHS) generally request ratings after delivery needs are identified, potentially delaying critical items during emergencies. Also, agencies responsible for responding to domestic emergencies and procuring resources in the areas of food and agriculture, health resources, and civil transportation, lack policies and guidance that could facilitate execution of the Title I authority and delivery of items needed in an emergency. While the Departments of Agriculture (USDA) and Health and Human Services are developing regulations to establish a framework for considering priority ratings, the Department of Transportation (DOT) has not yet begun to do so. Other DPA authorities have been used exclusively by DOD or have not been triggered by recent events. For example, DOD has generally been the sole user of the Title III authority for expansion of production capabilities, while events that would activate some Title VII authorities--such as the National Defense Executive Reserve and voluntary agreements--have not occurred. Agencies have taken steps towards fulfilling their offset reporting requirements to Congress, but data collected by the Department of Commerce limits the analysis of the economic effect of offsets. Commerce officials noted that a more detailed analysis could be provided if they requested more specific product data from prime contractors. Also, a DOD-chaired interagency team--required to report on its consultations with foreign nations on limiting the adverse effects of offsets--has reached consensus with other nations that adverse effects exist, but not yet on best practices to address them. Actions by the National Commission on Offsets have similarly been limited in the assessment of economic effects.

section_title: Letter
paragraphs: During the Korean War, Congress enacted the Defense Production Act of  1950 (DPA) to ensure the availability of industrial resources to meet the  needs of the Department of Defense (DOD). Over time, DPA has been  amended to include energy supply, emergency preparedness, and critical  infrastructure protection and restoration activities, thereby allowing  civilian agencies to rapidly respond to crises such as natural disasters and  terrorist attacks. Only Titles I, III, and VII of the DPA remain in effect.  These titles allow the President to require preferential performance on  government contracts with private companies, provide financial incentives  to increase production capabilities for critical security needs, and collect  information related to domestic industrial base issues.
As the nation confronts new threats and rising security challenges, it is  critical that agencies are able to quickly obtain the necessary resources to  respond. In fiscal year 2008, Congress directed GAO to review recent use  of the DPA in the areas of defense, energy, domestic emergency and  disaster response and recovery, and critical infrastructure, as well as to  review issues related to the economic impact of foreign offsets— incentives provided to foreign governments to purchase U.S. military  goods and services. In response, we (1) examined the extent to which  agencies use DPA authorities and (2) assessed agencies’ response to  reporting requirements on the economic impact of foreign offsets.
To conduct our work, we analyzed applicable agency regulations, policies,  and guidance for the use of DPA authorities and reviewed documentation  on circumstances in which selected agencies have exercised the  authorities since DPA was last reauthorized to respond to defense, energy,  domestic security, disaster response and critical infrastructure protection  and restoration requirements. We also reviewed DPA reporting  requirements and the resulting reports. Finally, we spoke with officials  from DOD and the Departments of Agriculture (USDA), Commerce  (Commerce), Energy (DOE), Health and Human Services (HHS),  Homeland Security (DHS), and Transportation (DOT), as relevant to our  objectives. We conducted this performance audit from January 2008  through June 2008 in accordance with generally accepted government  auditing standards. These standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives. For more on our  scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: The DPA is intended to facilitate the supply and timely delivery of  products, materials, and services to military and civilian agencies in times  of peace as well as in times of war. Since it was enacted in 1950, DPA has  been amended to broaden its definition beyond military application.  Congress has expanded DPA’s coverage to include crises resulting from  natural disasters or “man-caused events” not amounting to an armed  attack on the United States. The definition of “national defense” in the Act  has been amended to include emergency preparedness activities  conducted pursuant to Title VI of the Robert T. Stafford Disaster Relief  and Emergency Assistance Act (Stafford Act) and critical infrastructure  protection and restoration. In 2003, the DPA was reauthorized through  September 30, 2008.
Currently, only Titles I, III, and VII are in effect:    Title I authorizes the President to require priority performance on  contracts or orders and allocate materials, services, and facilities as  necessary or appropriate to promote the national defense or to  maximize domestic energy supplies for national defense needs. The  authority allows priority-rated contracts or orders to take preference  over any other unrated contract or order if a contractor cannot meet all  required delivery dates. The authority is delegated among various  agencies, including DOD, USDA, and Commerce, with respect to  different types of resources such as water, food and agriculture, and  industrial resources. Currently, Commerce administers the only  priorities and allocations system that is actively used—the Defense  Priorities and Allocations System (DPAS)—which is used for industrial  resources. Commerce has delegated its authority to use priority ratings  for industrial resources to DOD, DOE, and DHS in support of approved  national defense, energy, and homeland security programs.
Title III allows agencies to provide a variety of financial incentives to  domestic firms to invest in production capabilities to ensure that the  domestic industrial and technological base is capable of meeting the  critical national security needs of the United States. It may be used  when domestic sources are required and firms cannot, or will not, act  on their own to meet a national defense production need. Title III  financial incentives are designed to reduce the risks for domestic  suppliers associated with the capitalization and investments required to  establish, expand, or preserve production capabilities. Executive Order  12,919 authorized the authority to implement Title III actions to the  Secretary of Defense and the heads of other federal agencies and  designates the Secretary of Defense as the DPA Fund Manager. DOD’s  Office of Technology Transition provides top-level management,  direction, and oversight of the DPA Title III program. The Air Force  serves as the Executive Agent for DOD’s Title III program, and  maintains a program office to execute the authority under the guidance  of the Office of the Secretary of Defense.
Title VII provides for a range of authorities, which include giving  private firms that participate in voluntary agreements for preparedness  programs, defenses from aspects of the antitrust laws and protecting  contractors who honor priority-rated contracts from lawsuits brought  by other customers. Title VII allows for establishing a National Defense  Executive Reserve (NDER) composed of recognized experts from the  private sector and government, which could be activated in the event of  an emergency. Title VII also provides for investigative authority to  collect information on the U.S. industrial base, which has been used by  Commerce to conduct surveys and prepare reports at the request of the  armed services, Congress, and industry.
DPA also requires the President to report annually to Congress on the  effect of offsets—a range of incentives or conditions provided to foreign  governments to purchase U.S. military goods and services—on U.S.  defense preparedness, industrial competitiveness, employment, and trade.  Additionally, DPA requires Commerce to prepare a report to the Congress  on the cumulative effects of offsets on defense trade, with a focus on the  U.S. defense subcontractor base.
Defense offsets include coproduction arrangements and subcontracting,  technology transfers, in-country procurements, marketing and financial  assistance, and joint ventures. Foreign governments use offsets to reduce  the financial effect of their defense purchases, obtain valuable technology  and manufacturing know-how, support domestic employment, create or  expand their defense industries, and make the use of their national funds  for foreign purchases more politically palatable. Views on defense offsets  range from beliefs that they are both positive and an unavoidable part of  doing business overseas to beliefs that they negatively affect the U.S.  industrial base. U.S. prime contractors have indicated that if they did not  offer offsets, export sales would be reduced and the positive effects of  those exports on the U.S. economy and defense industrial base would be  lost. Critics charge that negative aspects of offset transactions limit or  negate the economic and industrial benefits claimed to be associated with  defense export sales.
The effect of offsets on the U.S. economy has been a concern for many  years, and Congress has on numerous occasions required some federal  agencies to take steps to define and address offset issues. DPA, as  amended, provided for an interagency team to consult with foreign nations  on limiting the adverse effects of offsets in defense procurement—without  damaging the U.S. economy or defense preparedness—and provide an  annual report on their consultations and meetings. Other steps have been  taken to address offsets outside of the DPA, including establishing a  national commission to report on the extent and nature of offsets.
section_title: DOD Is the Primary User of DPA Authorities, but Civilian Agency Use Has Been Limited
paragraphs: DOD is the primary user of the DPA, but other agencies can use Title I  priorities and allocations authority for emergency support functions.  Agencies other than DOD generally do not apply the authority and would  do so after an issue affecting delivery needs had been identified, which  could add delays to the delivery of critical products during emergencies.  We found a lack of developed policies or guidance also may limit agencies’  ability to use the authority in emergencies. Other authorities in the DPA  have had limited use. Specifically, Title III authority to expand production  capabilities for industrial resources or critical technology essential to the  national defense has been used almost exclusively for defense needs, and  circumstances have not required use of some Title VII authorities, such as  the National Defense Executive Reserve or voluntary agreements.
subsections: section_title: Agencies’ Timely Use of Title I Authorities Could Be Limited in Emergencies
paragraphs: While other agencies have used or have considered using Title I’s priorities  and allocations authority, DOD has been the primary user. DOD places  priority ratings as a proactive measure on almost all of its contracts for  industrial resources, which number approximately 300,000 annually, to  facilitate timely execution of the authority. The Title I authority allows  rated contracts or orders to take preference over any other unrated  contract or order if a contractor cannot meet all required delivery dates.  DOD has used the authority in recent years to prioritize the delivery of  material for body armor for the Army and Marine Corps and to ensure that  the military’s Counter-Improvised Explosive Device systems and the Mine  Resistant Ambush Protected Vehicle program receive high industrial  priority. DOD employs this approach to ensure that its use of the priorities  and allocations authority is self-executing, which it reports should mitigate  the risk of not having critical items to meet defense requirements. The U.S.  Army Corps of Engineers (USACE), which executes the authority for  water resources, also uses this approach to procure water through  advance contracts for emergency response purposes, according to a  USACE official.
In contrast, officials from other agencies indicated that they would decide  to place priority ratings on contracts or modifications on a case-by-case  basis after a triggering event had identified an issue affecting delivery.  DHS reported that it has authorized or endorsed to the Department of  Commerce the use of priority ratings 15 times since 2003, which includes  endorsing other federal agencies’ use of priority ratings in support of  homeland security programs. DHS makes endorsements with respect to  programs, not specific contracts. Over half of these have been in support  of critical infrastructure protection and restoration requirements. For  example, a railroad company used a priority-rated contract to procure  switch equipment and generators to help restore rail service in the Gulf  Coast region following Hurricane Katrina. DHS also endorsed the use of a  priority rating for a Department of State continuity of operations facility  for which Commerce authorized a priority rating for a contract to procure  a generator to provide emergency power. However, DHS officials told us  that, unlike DOD, its contracts, including those placed for emergency  preparedness purposes, do not automatically receive priority ratings.
DOE, HHS, USDA, and DOT have had little or no experience using Title I  priorities and allocations authority. The National Nuclear Security  Administration, a separately organized agency within DOE, has applied  priority ratings to contracts primarily in support of defense and atomic  energy programs. Aside from these purposes, DOE has not encountered a  need requiring the use of its priority and allocations authority for energy  resources in the past several years. However, DOE also reported that it has  considered using the authority in response to a number of emergency  preparedness and disaster response cases, such as the restoration of  refinery services affected by fire and flooding in 2007. Upon consideration,  DOE determined that use of the authority was not necessary. DOT has not  used the Title I authority since the DPA was reauthorized in 2003, but has  used it in the past for airport security and in support of DOD during the  Gulf War. Appendix II describes DOT’s current and past use. While HHS  and USDA officials said that they have not encountered circumstances to  date that would require the use of priority rated orders, HHS officials  anticipated that they could use the authority to place priority ratings on  contracts prior to an emergency for a selected number of health resources  needed in an emergency, such as masks, respirators, and antibiotics. In  contrast, USDA and DOT officials indicated that they would place a rating  on a contract once it was determined that the private sector could not  otherwise respond to a need.
Most of the agencies we reviewed play a key role in an emergency—under  the National Response Framework—to execute contracts to procure  needed goods and services in areas such as transportation, human  services, and energy. We have previously recommended that DHS provide  guidance on advance procurement practices and procedures for those  federal agencies with roles and responsibilities under the National  Response Plan. Our prior work identified a number of emergency  response practices in the public and private sectors that provide insight  into how the federal government can better manage its disaster-related  procurements, including developing knowledge of contractor capabilities  and prices, establishing vendor relationships prior to the disaster, and  establishing a scalable operations plan to adjust the level of capacity to  match the response with the need. DHS and Commerce officials  recognized that while the priorities and allocations authority cannot be  used for procurement of items that are commonly available in sufficient  quantities, emergency situations can quickly affect the availability of  items. Further, priority ratings can be placed on procurement documents  that provide for items as needed but would not be considered rated until a  specific delivery date was identified and received by the supplier.  However, agencies have generally not considered placing priority ratings  on contracts for critical emergency response items before an emergency  occurs and, instead, would wait until there is an issue that affects delivery  of needed goods and services.
Agency officials acknowledged that there is a need to have policies and  guidance in order to implement the Title I priorities and allocations  authority, but the degree to which agencies have accomplished this varies.  Currently, the Defense Priorities and Allocations System (DPAS) is the  only active system for implementing the authority in operation, used  primarily by Commerce, DOD, DOE, and DHS for industrial resources.  Commerce has established a regulation governing DPAS, and DOD and  DOE have internal policies and procedures for using the authority. DHS is  in the process of establishing policies and procedures to fully implement  its priorities and allocations authority. Despite these efforts, gaps remain.  Currently, there is no system for using the priorities and allocations  authority for food and agriculture, health, and civil transportation  resources. USDA and HHS officials told us they are in the process of  developing regulations for using Title I for food and agriculture and health  resources, respectively, modeled on DPAS. DOT officials acknowledged  that they do not have an established system for using the authority for civil  transportation needs, but have internal protocols in place to contact  Commerce and DHS should the need arise. DOT officials said they have  not yet begun the process to develop regulations for a priorities and  allocations system. Table 1 provides a summary of the status of agencies’  priorities and allocations policies and guidance.
DOD, DHS, and DOE have supplemented their policies and guidance with  training and outreach efforts to increase awareness of the authority and its  potential applications. DOD has developed online training on the use of its  priorities and allocations authority, and DHS is currently developing a Web  site and a training program for its personnel and other groups such as  contractors and state and local government personnel. DOE is updating its  energy emergency support function operations manual with references to  the authority, and has incorporated information on use of the authority in  its emergency responder training.
Given the status of available policies and guidance for certain resources,  additional time could be required to react to emergency situations as  agencies determine the proper procedures for using the authority. In  addition, agencies may have to rely on less-efficient means for using the  authority. For example, a DOD official stated that the Defense Logistics  Agency has been working with HHS to establish a Memorandum of  Understanding to use priority ratings to procure auto-injector medical  devices for the military, as DOD’s priorities and allocations authority does  not apply to health resources. Further, DOT lacks a system for exercising  the authority for civil transportation that could help facilitate more timely  delivery of critical items and services and could avoid additional steps to  identify the appropriate processes each time an emergency situation  arises.
section_title: Other DPA Authorities Have Been Used Primarily for Defense Needs as Events Have Not Triggered Their Use in Other Areas
paragraphs: DOD has generally been the exclusive user of Title III’s authority to  stimulate investment and expand production capabilities and is currently  the only agency with a program office prepared to readily use the  authority. DOD has used the authority, for example, to modernize and  preserve two domestic manufacturing sources for next-generation  radiation-hardened microelectronics for space and missile systems and to  reestablish a domestic production source for high-purity beryllium metal  that was lost when the sole domestic production facility was shut down. It  is also being used to establish a domestic source for lithium ion battery  production and to expand production of lightweight, transparent armor for  the military. Appendix III includes examples of DOD’s use of the Title III  authority. DOE officials stated that they have worked with the DOD Title  III Program Office on cooperative projects. For example, they noted that  they actively managed a project to supply high temperature  superconductors. Additionally, DOE and National Aeronautics and Space  Administration (NASA) have contributed money in support of DOD- managed projects. Other agencies have considered using the authority for  non-defense needs but pursued other alternatives. For example, DHS had  committed funds toward a potential project on biological agents, but  pulled back planned funding because DHS was pursuing an alternative  project. Similarly, HHS considered using Title III authority to expand  production of vaccines, but no project resulted. USDA officials stated that,  based on the availability of suppliers for items they typically purchase,  they did not see a need to use Title III.
DOD officials noted that statutory limitations on the use of Title III  authority present challenges to efficient use of the authority. For example,  the requirement that Congress be notified of new projects via the annual  budget cycle creates a waiting period of up to one year before new  projects can be initiated and can hinder use of the authority to meet  rapidly evolving defense industrial base needs. To address this and other  challenges, DOD has proposed amendments to DPA. These include  allowing for notification to Congress of new projects in writing throughout  the year rather than through the budget cycle, as well as reducing the  required waiting period for awarding contracts from 60 to 30 days and  increasing the statutory limitation on actions under Title III from  $50,000,000 to $200,000,000 before specific authorization in law is  required. According to officials, past Title III projects were primarily  initiated and funded through DOD based on the needs of particular  programs or through information received from industries. However, as  shown in figure 1, a growing number of projects have been funded through  Congressionally directed projects.
Some civilian agency officials identified other limitations in initiating new  projects under Title III, such as a lack of institutional willingness to use  the authority and available funds. For example, DOE officials stated that it  would be difficult to defend, fund, and manage a project from a  departmental standpoint. However, they added that DOE’s involvement in  current projects suggests that Title III may be used to enhance production  capabilities for industrial resources needed for energy production and  distribution.
The Title VII authority to collect information on the U.S. industrial base  has been used by Commerce almost exclusively to address capabilities of  industries supplying DOD. Because DOD has a diverse supplier base, these  assessments have covered a range of industries from biotechnology to  textiles and apparel. While Commerce officials recognized that the DPA’s  definition of national defense has been expanded to include emergency  preparedness and the protection of critical infrastructure, they stated that  an assessment at the request of agencies other than DOD would require  additional resources based on current and projected workloads.
In general, agencies have policies and guidance on using Title VII’s other  authorities but have never had to employ them in an actual event. The  Federal Emergency Management Agency (FEMA), under DHS, has interim  guidance and is preparing a new regulation on forming and activating  NDER units—reserves composed of government and industry experts—in  the event of an emergency, yet has not activated its NDER and is currently  assessing the need for it. While DOE and DOT no longer have active  NDER units, which were associated with Cold War threats, a DOE official  stated that the department is interested in continuing to work with DHS to  restore its unit while DOT officials expressed similar interest in re- establishing an NDER should a justifiable reason be established under  existing crisis management programs and authorities.
DOT officials stated that it is positioned to use Title VII’s authority to  develop voluntary agreements and plans of action for preparedness  programs and expansion of production capacity and supply that make  defenses from antitrust laws available to participating industry  representatives. DOT currently has voluntary agreements with commercial  tanker and maritime shipping industries to rapidly mobilize resources in  support of defense needs, but noted that events have not triggered the  activation of the established plans of action. DHS reported that because of  the time needed to use this authority it could take 21 to 50 days to  establish a voluntary agreement following a disaster, affecting the  usefulness of the authority in an emergency. HHS officials told us that  another statute provides similar authority that the agency could implement  more quickly for certain health-related purposes.
section_title: Efforts to Assess Foreign Offsets Have Been Limited
paragraphs: Agencies have taken steps towards fulfilling their offset reporting  requirements, but the information in these reports does not provide a basis  for fully evaluating the effect of offsets on the U.S. economy or take steps  to address them. In its annual reports to Congress, Commerce provides  useful summaries of offsets issues, but the type of data collected from  prime contractors limits their analysis. Efforts from an interagency team  chaired by DOD to consult with other countries on limiting harmful effects  of offsets have resulted in a consensus with other nations that negative  effects exist, but not yet on best practices to address them. Other related  efforts to report on offsets have yet to be completed and are limited in  their assessments of economic effects.
subsections: section_title: A Lack of Specific Industry Data has Limited the Analysis of Economic Effects of Offsets
paragraphs: The DPA requires Commerce to provide an annual report to Congress on  the impacts of offsets on the defense preparedness, industrial  competitiveness, employment, and trade of the United States.  Commerce’s annual reports provide a summary of total offset agreement  and transaction activity entered into between U.S. defense contractors and  foreign governments in connection with U.S. defense related exports.  Commerce’s efforts to quantify the employment effects of offsets are  based on limited data. For example, the employment analysis relies on  aggregated defense aerospace data, which do not include other defense  sectors nor delineate between subsectors of the aerospace industry.  Further, the most recent annual report on offsets noted that its analysis  does not include the potential effects of nearly $1 billion of technology  transfer, training, and overseas investment offset transactions,  representing nearly 24 percent of average annual offset transactions.
The 2003 DPA reauthorization also requires Commerce to report on the  impact of offsets on domestic prime contractors and, to the extent  practicable, the first three lower tier subcontractors. These reports are to  address domestic employment, including any job losses on an annual  basis. The August 2004 report, produced in response to the 2003 DPA  reauthorization, provided useful data on the scope of offset agreements  and transactions during the preceding 5-year period, but data collected in  surveys of prime and subcontractors limited the analysis on employment  effects. To assess the effect of offsets on domestic employment,  Commerce surveyed prime contractors and three tiers of subcontractors.  While Commerce acknowledged that it could have requested  documentation for all of the nearly 700 weapon systems and components  contracts for the 5-year period (1998 through 2002), documentation was  requested for only two weapon systems from each of the 13 U.S. prime  contractors. Commerce cited sensitivity to not burdening contractors and  a desire to be responsive to reporting time frames as a cause. The analysis  was further limited by a less than 40 percent response rate to the survey of  the three tiers of subcontractors. Moreover, this survey used subjective  measurements by asking for subcontractors’ perceptions of the influence  of offsets on employment, asking respondents to rank offsets among a  variety of factors as they related to increases or decreases in U.S.  employment.
We have previously stated that, in evaluating offsets and identifying their  effects on the U.S. economy as a whole, it is difficult to isolate the effects  of offsets from the numerous other factors affecting specific industry  sectors. Despite such difficulties, Commerce officials stated that they  could request more specific product data from prime contractors that  would allow for more detailed analysis of the effect of offsets on the U.S.  economy. Under DPA, the Secretary of Commerce is given authority to  promulgate regulations to collect offset data from U.S. defense firms  entering into contracts for the sale of defense articles or services to  foreign countries or firms that are subject to offset agreements exceeding  $5 million in value. The Secretary of Commerce designated this authority  to the Bureau of Industry and Security (BIS), which published its first  offset regulations in 1994. The regulations, which have never been  updated, require companies to annually report information such as a name  or description of the weapon system; defense item or service subject to  the offset agreement; the name of the country of the purchasing entity; the  approximate value of export sale subject to offset; and the total dollar  value of the offset agreement. The regulations also require prime  contractors to report on the broad industry category, based on outdated  four-digit Standard Industry Classification (SIC) codes, in which offset  transactions are fulfilled. Currently, 84 percent of the value of export  contracts involving offsets submitted by prime contractors are for the  aerospace industry and there is no delineation among subsectors of the  aerospace industry.
According to Commerce officials, their analysis of the economic effect of  offsets could be improved by requesting more detailed sector and product  information based on updated six-digit North American Industry  Classification System (NAICS) codes from prime contractors. As the  NAICS has replaced the SIC, such improvements would allow Commerce  to provide greater insight into the effects of offsets on specific subsectors  of the economy and would more closely match employment data already  used in their analysis. BIS is currently conducting a review of the data and  methodology used to assemble their annual reports on offsets. BIS  officials have stated that they will review additional sources of data from  sources such the Bureau of Labor Statistics and Commerce’s Bureau of  Economic Analysis. Commerce officials anticipate the outcome of this  review to be represented in their next annual report. However, changes to  the regulation would not affect data collection for the next annual report.
section_title: Other Efforts to Report on Offsets Have Been Limited
paragraphs: In the 2003 DPA reauthorization, Congress created an interagency team to  consult with foreign nations on limiting the adverse effects of offsets in  defense procurement—without damaging the U.S. economy, defense  industrial base, defense production, or defense preparedness—and  prepare an annual report detailing the results of their foreign  consultations. In February 2007, the interagency team—chaired by DOD,  as designated by the President—issued its third and final report, which  identified concerns shared by the United States and foreign nations about  the adverse effects of offsets. This report, developed in consultation with  representatives from U.S. government agencies, U.S. industry, and foreign  nations, provided findings, recommendations, and strategies for limiting  these adverse effects. The interagency working group went on to engage in  bilateral dialogue with Australia in May 2007 and multilateral dialogue  with six other countries in November 2007 and reached consensus to  pursue the possibility of developing a statement of best practices for  limiting the adverse effects of offsets. However, participants identified  challenges including a lack of agreement on terminology and differences  in views between national defense sectors and government agencies.  While the interagency working group established a goal of producing a  preliminary statement by the latter half of 2008, participating nations  noted in the report that it will be difficult and time-consuming to do so.
Additionally, the Defense Offsets Disclosure Act of 1999 established a  national commission, requiring the President to submit a report to  Congress addressing all aspects of the use of offsets in international  defense trade within a year of its establishment. The commission, whose  members included representatives from government, business, labor, and  academia, produced an interim report in 2001 that described the extent  and nature of defense-related offsets in both defense and commercial  trade. It also described a variety of effects of offsets on the U.S. defense  supplier base. For example, the commission reported that while offsets  may facilitate defense export sales—which can help maintain the  economic viability of certain U.S. firms—offsets can also supplant a  significant amount of work and jobs that would go to U.S. firms if export  sales occurred without offsets. The commission also reported that U.S.  technology transfers through offsets often improved foreign firms’  competitiveness, but rarely resulted in technology transfer back to the  United States. The commission was to provide a final report with areas for  additional study including the effects of indirect and commercial offsets,  the effects of offsets on industries other than aerospace as well as  concrete policy recommendations. Due to the 2001 change in the  presidential administrations, which resulted in vacancies in the five  executive branch positions on the commission, the final report and  recommendations were never produced and no further activity by the  commission occurred.
section_title: Conclusion
paragraphs: Since the DPA was last reauthorized in 2003, there has been little use of its  authorities for areas other than defense. Lessons learned from  catastrophic events have emphasized the importance of ensuring that  needed capabilities and contracts for key items are in place in advance of  a disaster. Without an established system for considering and acting on  requests to use priorities and allocations authority, additional time could  be required to react to emergency situations as agencies determine the  proper procedures for using the authority. Placing priority ratings on  contracts only after a delivery problem has arisen could also limit  agencies’ ability to make timely use of the authority in an emergency.
Agencies’ efforts could be strengthened by placing priority ratings on  contracts for critical emergency response items before an event occurs.
DPA also requires Commerce to report on the potential impact of offsets  on the U.S. economy, which has been a concern for many years. The lack  of usable data in the Department of Commerce’s reports limits the  government’s ability to gain knowledge on the economic effects of offsets  and to take steps to address them.
section_title: Recommendations for Executive Action
paragraphs: To ensure that the full range of Defense Production Act authorities can be  used in an effective and timely manner, we recommend the Secretaries of  Agriculture, Health and Human Services, and Transportation, in  consultation with the Department of Commerce, develop and implement a  system for using the priorities and allocations authority for food and  agriculture resources, health resources, and civil transportation  respectively.
To maximize effective use of the priorities and allocations authority, we  recommend the Secretaries of Agriculture, Energy, Health and Human  Services, Homeland Security, and Transportation consider, in advance of  an emergency, approving programs and placing priority ratings on  contracts for items that are likely to be needed in an emergency.
To position the Department of Commerce to respond to offset reporting  requirements, we recommend the Secretary of Commerce update  regulations to, for example, request more specific industry information  from prime contractors that would improve the assessment of the  economic effects of offsets.
section_title: Agency Comments
paragraphs: We provided a draft of this report to USDA, Commerce, DOD, DOE, HHS,  DHS, and DOT for comment. In official comments, USDA generally  concurred with our findings and recommendations. Other agencies did not  officially comment on our recommendations, but provided technical  comments that were incorporated as appropriate.
In its technical comments HHS noted that it is beginning to develop a  regulation to establish a framework for considering requests for priority  ratings. In line with GAO’s recommendations, the regulation would allow  for priority ratings for health resources to be approved in advance of an  emergency situation.
DOT noted in its technical comments that, based on its review of the draft,  it will develop regulations for a priorities and allocations system.
We are sending copies of this report to the Secretaries of Agriculture,  Commerce, Defense, Energy, Health and Human Services, Homeland  Security, and Transportation.  We will also make copies available to others  upon request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
Please contact me at (202) 512-4841 or calvaresibarra@gao.gov if you have  any questions regarding this report.  Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report were John Neumann,  Assistant Director; Marie Ahearn; Julie Hadley; Lauren Heft; Kevin Heinz;  Marcus Lloyd Oliver; and Karen Sloan.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the extent to which agencies use the authorities in the  Defense Production Act of 1950 (DPA), we reviewed the current  legislation and recent amendments. In defining our scope we referred to  Section 889 of the National Defense Authorization Act for Fiscal Year 2008  and focused on use of authorities since the 2003 reauthorization to  respond to defense, energy, domestic security, disaster response, and  critical infrastructure protection and restoration requirements. We  reviewed and analyzed applicable regulations, policies, and guidance from  seven agencies that have been delegated authority to use the DPA by  Executive Order or federal regulation or have exercised the authorities.  These agencies included the Departments of Agriculture (USDA),  Commerce, Defense (DOD), Energy (DOE), Health and Human Services  (HHS), Homeland Security (DHS), and Transportation (DOT). At each of  these agencies, we met with officials to discuss agency-specific DPA  policies and guidance, recent use and implementation of the authorities,  and challenges related to the authorities. Where available, we collected  and reviewed documentation on circumstances in which agencies have  used the DPA.
In examining use of the Title I priorities and allocations authority, we met  with several agencies to discuss experiences, policies, and guidance. We  met with officials from the Department of Commerce, Bureau of Industry  and Security, to examine and discuss the delegation of the authority as  well as the regulations that guide several agencies’ use. We also met with  officials from the U.S. Army, Navy, and Air Force and DOD’s Office of the  Deputy Under Secretary of Defense (Industrial Policy) to review DOD’s  policies for use of the authority and specific policies at each service. These  discussions addressed specific application of the authority as well as  challenges in implementation. Further meetings were held with other  agencies regarding experiences, policies, and guidance related to use of  the Title I authority for specific types of items including,    USDA, Farm Service Agency, to discuss food and agriculture resources;    U.S. Army Corps of Engineers, to discuss water resources;    DOE, Office of Electricity Delivery and Energy Reliability, to discuss    HHS, Biomedical Advanced Research and Development Authority and  Office of the Assistant Secretary for Preparedness and Response, to  discuss health resources; and    DOT, Office of Intelligence, Security and Emergency Response to  discuss civil transportation.
In reviewing the use of the Title I authority by DHS, we reviewed  documents from the Federal Emergency Management Agency (FEMA)  including reports on its use of the authority, a consolidated report to  Congress on use by it and other agencies, and endorsement and approval  documents related to specific uses of the authority.
Additional discussions were held with officials at each of the seven  agencies on experiences and awareness of DPA authorities in Titles III and  VII. We specifically met with the Air Force DPA Title III Program Office to  obtain documents related to the management of the program and discuss  efforts to coordinate with other agencies. We reviewed documents related  to authorities in Title VII, including the National Defense Executive  Reserve and voluntary agreements and discussed both with each agency.  Specific voluntary agreements were discussed with the Maritime  Administration. We also reviewed industrial capability assessments from  the Department of Commerce, for which the Department of Commerce  uses the Title VII authority to collect information.
To identify the efforts of U.S. government agencies in assessing the  economic effect of foreign offsets, we reviewed the DPA and other  statutes to determine specific reporting requirements. To determine the  extent to which the Department of Commerce has assessed the economic  effects of offsets, we analyzed their annual offset reports since 2005 as  well as a 2004 special report on the impact of offsets on the U.S.  subcontractor base. We also spoke with officials from the Commerce  Department’s Bureau of Industry and Security to identify the methodology  used in assessing the economic effect of offsets as well as additional  efforts that could allow for a more detailed analysis in the future. To  determine DOD’s response to the offsets reporting requirements contained  in the DPA, which provides for an interagency team to consult with foreign  nations on limiting the harmful effects of offsets in defense procurement,  we reviewed and analyzed the interagency team’s annual reports since  2004. We also contacted DOD’s Office of International Cooperation to  discuss experiences and challenges associated with the interagency team  and to determine their future plans with respect to foreign consultations.  Finally, we reviewed prior GAO reports to identify challenges associated  with assessing the economic effect of offsets.
We conducted this performance audit from January 2008 to June 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objective.
section_title: Appendix II: Priorities and Allocations Authority under Title I of the Defense Production Act
paragraphs: Title I of the Defense Production Act of 1950, as amended, authorizes the  President to require priority performance on contracts or orders and to  allocate materials, services, and facilities to promote the national defense.  Executive Order No. 12,919, as amended, delegates the President’s  priorities and allocations authority for various resources to the following  agency heads:    Secretary of Agriculture: food and agriculture resources    Secretary of Energy: all forms of energy    Secretary of Health and Human Services: health resources    Secretary of Transportation: all forms of civil transportation    Secretary of Defense: water resources    Secretary of Commerce: all other materials, services, and facilities,  including construction materials, known as industrial resources.
The Department of Commerce (Commerce) administers the only priorities  and allocations system that is actively used—the Defense Priorities and  Allocations System (DPAS)—which is used for industrial resources.  Commerce has delegated authority to use priority ratings on contracts for  industrial resources to the Departments of Defense (DOD), Energy (DOE),  and Homeland Security (DHS) for use in support of approved national  defense, energy, and homeland security programs. Under the DPAS,  agencies can assign a “DO” or a “DX” priority rating to orders.  DO ratings  are used for items critical to national defense, while a DX rating denotes  the highest national defense urgency. Priority rated orders have  preference over all unrated orders as needed to meet required delivery  dates, and among rated orders, DX-rated orders have preference over DO- rated orders.
subsections: section_title: Recent Use of Priorities and Allocations Authority by Federal Agencies: Department of Commerce
paragraphs: While Commerce has delegated the ability to use DPAS authority to four  agencies, it may also provide Special Priorities Assistance to authorize  other government agencies, foreign governments, owners and operators of  critical infrastructure, or companies to place priority ratings on contracts  on a case-by-case basis, or to resolve any problems that may arise in the  use of priorities and allocations authority. Commerce reported that since  late 2003, it has taken approximately 180 actions to provide Special  Priorities Assistance, primarily to support foreign government  requirements related to DOD-approved programs.
section_title: Department of Defense
paragraphs: With some exceptions, all DOD contracts for industrial resources receive a  priority rating under DPAS, which amounts to approximately 300,000  contracts annually that receive priority ratings. For example, DOD has  used its authority in the past several years to prioritize the delivery of  ballistic material used in body armor for the Army and Marine Corps. In  addition, DOD has worked to manage DOD-wide demand for armor plate  steel and helped steel firms manage schedules in order to prevent armor  plate shortages resulting from a surge in production on the Mine Resistant  Ambush Protected (MRAP) Vehicle Program. The U.S. Army Corps of  Engineers, which executes DOD’s priorities and allocations authority for  water resources, also uses rated orders to procure water in advance of or  during emergency events.
section_title: Department of Homeland Security
paragraphs: Since 2003, DHS reported that it has authorized or endorsed to the  Department of Commerce the use of priority ratings for 15 programs,  which includes approval of other federal agencies’ use of priority ratings:  restoration of rail service in the Gulf Coast region after Hurricane  Katrina;    construction of an FBI facility in Northern Virginia;    construction of the Department of Justice’s Terrorist Screening Center;    procurement of perimeter security equipment for a major airport and    upgrades to cargo seaport security;    procurement of encrypted radio equipment for use in U.S. Park Police    acquisition of generator transfer switches and transformers for state    upgrade of State Department domestic facility security;    procurement of a generator for the State Department’s Continuity of  Operations facility;    construction of an emergency Federal Support Center;    procurement of equipment for a FEMA emergency facility;    DHS procurement of encrypted emergency communications equipment    procurement of FBI night vision equipment;    FEMA’s Communications Support Infrastructure Program; and    The Geostationary Operational Environmental Satellite, R-Series  Program of the National Oceanic and Atmospheric Administration.
section_title: Department of Energy
paragraphs: DOE reported that it has used priority ratings primarily on contracts and  orders supporting atomic energy or defense. Outside of this use, DOE has  not encountered emergency conditions requiring the use of priorities and  allocations authority to reduce interruptions in energy supplies since 2003.
section_title: U.S. Department of Agriculture
paragraphs: USDA officials reported that they have not made use of priorities and  allocations authority, and that use of the authority would be needed only  in very catastrophic circumstances. USDA is in the process of developing  regulations to implement an Agriculture Priorities and Allocations System  to support use of priority ratings to maintain agricultural operations  during a national emergency. A memorandum of understanding relating to  foods that have industrial uses and the domestic distribution of farm  equipment, sets the priorities and allocations jurisdiction and  responsibilities of USDA and Department of Commerce for defense  mobilization in the event of a national security emergency.
section_title: Department of Health and Human Services:
paragraphs: HHS officials reported that they have not encountered circumstances  requiring use of the authority, but have identified some health resources  for which HHS could potentially use the authority in the future. HHS is  currently developing a priorities and allocations system regulation for  health resources, modeled on DPAS.
section_title: Department of Transportation
paragraphs: DOT officials reported that they have not routinely used priorities and  allocations authority for civil transportation needs, explaining that the  market has traditionally responded to civil transportation requirements  without the need for priority-rated orders. For example, DOT reported that  it consulted with Commerce and DHS on the possible use of DPAS  authority during planning following the I-35W bridge collapse in  Minnesota, but found there was no resource shortage that would have  required using the authority.
In 2002, DOT obtained a priority rating to support the procurement of  approximately 1,800 Explosives Detection Systems (EDS) machines for  use in U.S. airports. According to DOT officials, this rating was necessary  for the Transportation Security Administration (TSA), then part of DOT, to  meet a statutory obligation to install a specified number of EDS machines  in U.S. airports by December 31, 2002. In addition, DOT has worked with  DOD to secure priority ratings under DOD’s authority. During the first Gulf  War, the FAA, working through DOD, sought use of DPAS to support  activation of the Civil Reserve Air Fleet. This request was made after the  Air Mobility Command determined that air carriers could provide more  resources if they could get priority for parts. Additionally, a DOD priority  rating was used to expedite one carrier’s airframe modifications to enable  it to transport pallets used by DOD.
section_title: Appendix III: Title III Authority for Expansion of Production Capabilities for Critical Security Needs
paragraphs: Title III of the Defense Production Act of 1950 (DPA), as amended, allows  agencies to provide financial incentives to domestic firms to invest in  production capabilities to ensure that the domestic industrial and  technological base is capable of meeting the critical national security  needs of the United States. It is used when domestic sources are required  and firms cannot, or will not, act on their own to meet a national defense  production need. Title III financial incentives are designed to reduce the  risks for domestic suppliers associated with the capitalization and  investments required to establish, expand, or preserve production  capabilities. The candidate projects are evaluated in terms of four criteria:  1.  The industrial resource or critical technology item is essential to the  2.  Without the Title III authority, United States industry cannot  reasonably be expected to provide the capability for the needed  industrial resource or critical technology item in a timely manner;  3.  Title III incentives are the most cost-effective, expedient, and practical  alternative methods for meeting the need involved; and  4.  The combination of the U.S. national defense demand and foreseeable  nondefense demand for the industrial resource or critical technology  item is not less than the output of domestic industrial capability, as  determined by the President, including the output to be established  with the Title III incentives.
As shown in Table 2, Title III has been used to promote a variety of  technologies with dedicated funds ranging from $88,000 to approximately  $164 million.