Category: Contractor Misconduct

A RAND Corporation report written in 2005 but withheld until this week paints an unflattering portrait of U.S. government planning for postwar Iraq. The Army, which commissioned the report, reportedly kept it under wraps to avoid antagonizing then-Defense Secretary Donald Rumsfeld.

The 273-page document also looks at the role of contractors in the initial period after the U.S. invasion (through June 2004), but for some reason it is much gentler in its treatment of the private-sector participants in the disastrous reconstruction effort. The report notes the slow progress in restoring Iraq’s oil industry and its output of electricity, but the contractors in charge of those efforts—KBR for oil and Bechtel for power, with additional work on electricity commissioned from Washington Group International, Fluor and Perini—are not directly blamed. Instead, the Coalition Provisional Authority and U.S. Agency for International Development come out looking bad, and delays are attributed to the poor security situation.

There is, however, one company that RAND does not handle with kid gloves—Bechtel, in connection with a school building contract. Military commanders, the report says, “complained that school reconstruction under the Bechtel contract was proceeding too slowly, that work was sometimes substandard, and that subcontractors were overpaid” (p.227).

RAND can perhaps be excused for largely missing the boat about contractor screw-ups in Iraq, given that the main revelations came to light after the study was drafted. It was right after RAND completed its research that Stuart W. Bowen Jr. (photo), the special inspector general for Iraq reconstruction, issued the first in a series of scathing audits about both the contractors and the agencies that were supposed to be overseeing their work.

The RAND report reinforces what we know about the shortcomings in the U.S. government’s handling of postwar Iraq, but it will take another account to tell the whole story of the role of contractors in that debacle.

The Washington Post article this week on the poor performance of the private debt collectors working for the Internal Revenue Service is a classic story of wrong-headed federal outsourcing. The paper reported that the companies, set loose in 2006 to collect $1 billion owed to Uncle Sam by deadbeat taxpayers, “have rounded up only $49 million, little more than half of what it has cost the IRS to implement the program. The debt collectors have pocketed commissions of up to 24 percent.”

What makes the story more galling is that the contractors were handed the work on a silver platter. By the early 2000s, the IRS was being underfunded to the point that it had to ignore many scofflaws. Rather than allowing the agency to hire more employees, who typically bring in much more than they cost, the Bush Administration and the Republican-controlled Congress gave in to long-standing lobbying (and ample campaign contributions) by the private debt collection industry to get a piece of the action. The private collectors were to be given the “low-hanging fruit”—taxpayers who had not disputed their debt but were slow in paying. Nonetheless, there were widespread misgivings about giving private parties access to personal financial information and having them represent the government in an activity so prone to abuse.

The initial companies chosen by the IRS in 2006 to participate in the program included one firm that had a particularly questionable track record: Linebarger Goggan Blair & Sampson LLP, an Austin-Texas based law firm that became a leading figure in outsourced debt collection for government agencies around the country. The Houston Chronicle once wrote (10/13/2002) that the firm was frequently criticized for its “political rainmaking and hardball collection tactics.” In 2004 a former name partner in the firm was convicted in a bribery case involving payments to city councilmen in San Antonio to secure a debt collection contract. Around the same time, the Linebarger firm privately settled a lawsuit in which a competitor alleged it had engaged in bribery and bid rigging in various locations. A collection contract awarded to the firm by New Orleans was reported to have been the subject of an FBI investigation.

The IRS removed the Linebarger firm from its private debt collection program last year without explanation. That left two contractors: CBE Group of Waterloo, Iowa and Pioneer Credit Recovery of Arcade, New York. Both companies have been sued multiple times over aggressive tactics in their efforts on behalf of clients other than the IRS.

Pioneer is a unit of SLM Corporation, otherwise known as Sallie Mae, which started out as a government-sponsored enterprise but was subsequently privatized and started trading on the New York Stock Exchange. It was to have been taken private in a leveraged buyout last year but the deal collapsed. The company, which has been suffering heavy losses, is being investigated by New York Attorney General Andrew Cuomo.

Leave it to the Bush Administration: Not only does it contract out functions that by all rights should be done by public employees, it makes highly dubious choices in selecting the companies to carry out the work. So it should come as no surprise when we end up with the worst outcome, which in this case means abuse of taxpayers and poor financial results. Ah, the magic of private enterprise.

From what I can tell, almost no one in the media is paying attention to the fact, reported yesterday by the Dirt Diggers Digest, that inventory and distribution activities at Hill Air Force Base in Utah, where nuclear missile parts were mistakenly shipped to Taiwan in 2006, are under the control of a contractor—EG&G Technical Services. The one exception I could find is Matthew LaPlante of the Salt Lake Tribune, whose article today notes he was unable to get responses from officials at the company, at Hill AFB or at the Defense Logistics Agency (DLA), which was made to appear the responsible party when the Pentagon revealed the snafu earlier this week.

It’s not as if there is nothing to report. The Taiwan screw-up appears to be part of a pattern of inventory problems at various contractor-operated DLA distribution depots. In November 2006, the Defense Department Inspector General issued an audit report finding that at the depots overall:

Government and contractor personnel did not properly perform physical inventory counts during the execution of statistical sampling plans to measure dollar value and supply record accuracy; the Distribution Standard System contained inaccurate inventory information for individual storage locations; depot personnel did not complete research of inventory discrepancies in a timely manner, retain adequate supporting documentation, or use the proper error codes to identify underlying causes; and accountable officers did not perform consistent or adequate quality checks of completed inventory counts.

What also makes this story interesting is the identity of EG&G’s parent company—URS Corporation. URS is a $5 billion company that “serves” the federal government, not only through EG&G but also with its engineering services. Those latter activities expanded last year when URS took over one of its rivals, Washington Group International. Both URS and Washington Group have participated in the dismal reconstruction effort in Iraq.

The award of the Iraq contract to URS was particularly controversial, given that the company was controlled at the time by Richard Blum, husband of U.S. Senator Dianne Feinstein of California. Feinstein came under fire last year from critics who charged her with conflict of interest for sitting on a military appropriations subcommittee while her husband had financial interests in URS as well as in Perini Corp., another Pentagon contractor. In April 2007 anti-war activists protested outside the San Francisco home of Feinstein and Blum to highlight the issue. Blum ended his relationship with URS in 2005.

When the Pentagon admitted yesterday that high-tech electrical fuses for Minuteman nuclear warheads were mistakenly shipped to Taiwan from Hill Air Force Base in Utah in 2005 2006, military officials gave the impression that the Defense Logistics Agency was responsible for the snafu. What the Pentagon did not bother to mention is that three four years earlier, management of distribution activities at Hill was placed in the hands of a private contractor—EG&G Technical Services. The contract was awarded after the company was deemed to have won an A-76 public-private competition for the work. Shortly after the contract award, EG&G was acquired by URS Corporation, which later consolidated EG&G’s operations with its Lear Siegler Services operation.

In June 2002 the Defense Logistics Agency put out a press release that reads in part:

DLA Affirms Distribution Depot A-76 Competition Result

Fort Belvoir, Va. — The Defense Logistics Agency announced today the final decision on the public-private competition for performance of distribution operations at Defense Distribution Depot Hill, Utah (DDHU).

On April 5, 2002 a tentative decision was announced selecting EG&G Technical Services Inc., headquartered in Manassas, Va. to perform the distribution operations at the depot.

The DLA Administrative Appeal Authority received and considered appeals of the tentative cost comparison decision from the DDHU employees, AFGE Local 1592, and EG&G Technical Services, Inc.

A few weeks earlier, after a tentative decision to award the contract to EG&G had been made, the company issued its own release, which specifically referred to Minuteman missiles:

EG&G Technical Services, Inc. Selected To Perform Distribution Operations Contract At Utah’s Hill Defense Distribution Depot

MANASSAS, VA — April 16, 2002 — EG&G Technical Services, Inc., Installations and Logistics Division, is pleased to announce it has been tentatively selected by the U.S. Defense Logistics Agency (DLA) to provide storage and distribution services at Defense Distribution Depot Hill, Utah (DDHU).

Under the proposed contract, EG&G will provide parts and materials storage and distribution services to support the U.S. Air Force, Hill Air Force Base, Ogden Air Logistics Center and other military customers. Specifically, EG&G will store and distribute parts and materials for F-16 “Fighting Falcon” and C-130 Hercules aircraft; Minuteman and Peacekeeper missiles; the Emergency Rocket Communication System and other general maintenance functions.

EG&G previously has won three similar contracts at DLA Depots at San Antonio, Texas; Warner Robins, Georgia; and Barstow, California. As at the other locations, EG&G anticipates that virtually all employees at the Utah depot would come from the existing Department of Defense workforce and the local community.

Lex Allen, Vice President and General Manager of EG&G Installations and Logistics Division, said, “We are very excited about being selected for the Hill Depot award. It represents another key step in fulfilling our strategic vision to be the premier provider of logistics support to the Defense Logistics Agency. We are eager to work with the current Government employees at Hill and our plans include offering them jobs first – the workforce at Hill Depot is known for its work ethic and commitment to customer satisfaction. We have demonstrated success at other depot operations in offering employment to all existing employees who were interested in joining EG&G.”

Following a routine contract process, expectations are that the DLA will finalize the contract award sometime in June.

Like the passport scandal of last week, this may turn out to be another case of contractor mismanagement.

It’s bad enough that employees of a military contractor, Stanley Inc., were taking unauthorized looks at the passport records of presidential candidates. Now it turns out that the other company involved, The Analysis Corp. (TAC), is a contractor for intelligence agencies and is a subsidiary of a larger foreign-based security company that has been involved in Iraq.

Many of today’s news stories depict TAC as just another contractor, though the Wall Street Journal notes that its CEO John Brennan is the former head of the National Counterterrorism Center. TAC, the Journal adds, has done work on the State Department’s terrorist watch list.

What the Journal does not mention is that TAC, based in McLean, VA, was acquired in 2003 by SFA Inc., whose website says: “We support national security initiatives across the world by leveraging our deep domain and analytical expertise in security and defense to rapidly develop and transition technologies and systems into operational solutions.” Among its specialties is “counter-terrorism and intelligence.”

Last year, SFA was acquired by Global Strategies Group (known as GLOBAL), a British-owned “international provider of security and risk mitigation strategies.” Among other things, GLOBAL is one of the controversial private security contractors operating in Iraq. Its main activity there has been to provide security for Baghdad International Airport. In 2005 it showed its commitment to that mission by shutting down the airport for a period of time to pressure the Iraqi government in a billing dispute. Last year, the U.S. branch of Global Strategies named as its president John Hillen, who had just left his post as Assistant Secretary of State for Political-Military Affairs–the same State Department involved in the passport affair.

What’s next—will it turn out that Blackwater is also involved?

My hunch from last night was correct: Stanley Inc. (also known by the name of its subsidiary Stanley Associates) is one of the employers of contract workers who improperly viewed the passport file of Sen. Barack Obama. It now seems that the files of Senators McCain and Clinton were violated as well, so perhaps the speculation about political skulduggery is unfounded.

Yet that still leaves a host of questions related to the growing reliance of the State Department and other federal agencies on contractors such as Stanley, which until today was far from a household name. Yet it’s been around for more than three decades, making its money—like the scores of other Beltway Bandits that populate the office buildings of the Washington, DC area—from the federal spigot.

Stanley started as a maritime consultant and now provides “information technology services and solutions.” In its most recent 10-K filing, Stanley reported getting 65% of its revenue from the Pentagon and 35% from more than three dozen civilian agencies, most notably the State Department.

Stanley used to be a pretty small operator, but over the past decade it has grown at the remarkable rate of 33% a year, reaching more than $400 million. Although the company is publicly traded, it is majority-owned by officers, directors and employees (the latter through an employee stock ownership plan).

While the passport contract is the one in the news, Stanley is largely a military contractor. It brags that some 53% of its 2,700 employees have Secret or Top Secret security clearances. CEO Philip Nolan is ex-Navy, and his board includes retired generals from the Army and the Marine Corps. Stanley doesn’t produce weapons—it provides the systems engineering, operational logistics and other services that keep the high-tech war machine running.

In the 10-K filing, where it is addressing investors rather than the public, the company is blunt about why it expects continuing growth: “increased spending on national defense, intelligence and homeland security” and “increased federal government reliance on outsourcing.” In other words, its business strategy is fundamentally based on the continuation of the “War on Terror” and the steady hollowing out of the federal workforce.

The company goes on to list the specific risk factors that might affect the value of its shares. Here’s one of particular interest (see pp.20-21):

Security breaches in sensitive government systems could result in the loss of customers and negative publicity.

Many of the systems we develop, integrate and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for federal government customers. We could incur losses from such a security breach that could exceed the policy limits under our professional liability insurance program. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could materially reduce our revenues.

It will be interesting to see if the passport scandal has this negative effect, or if the federal government protects Stanley from its operational shortcomings.

Note: It’s just been reported that another company–Analysis Corporation–is also involved in the passport scandal. More on them later.