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Disaster Profiteering: The Flood of Crony Contracting Following Hurricane Katrina
After Hurricane Katrina came ashore, President Bush promised relief for those in the Gulf region affected by the storm. But the relief he has been most generous in delivering has been to contractors.
That at least is the view of a growing number of government watchdogs and congressional critics, who say a series of exemptions to competitive bidding and other procurement requirements adopted by the Federal Emergency Management Agency (FEMA) and the Army Corps of Engineers has effectively turned the Gulf region reconstruction and cleanup contracts into a feeding frenzy for “disaster profiteers” — a network of crony contractors for whom the $200 billion cleanup and reconstruction promises to be a significant windfall.
They say FEMA’s no-bid and limited-bid contracts are of such magnitude that they will give prime contractors an advantage that will last far beyond the initial emergency phase, and put local contractors at a distinct disadvantage.
By the end of September, there were ominous signs that the same pattern of “fundamentally flawed contracting strategies” described by congressional investigators as the cause of the epidemic of waste and corruption witnessed in Iraq was beginning to repeat itself in Louisiana and Mississippi. Many of the same companies involved in Iraq — Fluor, Bechtel, CH2M Hill and Halliburton — are now poised to clean up at home.
And some in Congress seem only too willing to provide them a helping hand. In late September, for example, Senator Mel Martinez, R-Florida, reserved a room on Capitol Hill for a “Katrina Reconstruction Summit” co-sponsored by Halliburton.
Contracting Out Contracting Out
“You are likely to see the equivalent of war profiteering — disaster profiteering,” says Danielle Brian, director of the Project on Government Oversight, which is monitoring the contracts.
But the contractors say the critics are off base. Randal Perkins, the founder of Florida-based Ashbritt, which has received one of the largest cleanup contracts for debris removal in Mississippi, says no one from his company attended Martinez’s summit. While he and his wife have donated $10,000 to Martinez’s Senate campaign fund since 2000, he says anyone who knows how the disaster contracting game works knows that the contracts are secured long before the storms hit shore and have nothing to do with lobbying on the Hill or campaign contributions.
“We have more pre-positioned contracts than any other company in the country because we are the best in the business,” Perkins says. “I’d ask the people who are complaining — where they were five years ago when these contracts were bid nationally?”
Ashbritt’s contract was, in fact, awarded through a competitive process involving 22 bidders.
Yet government watchdogs maintain that there’s much more to the game than pure merit-based competition. Companies like Ashbritt are able to anticipate potentially lucrative opportunities because they have hired former FEMA and Corps officials who can guide them through the process.
Ashbritt has come a long way since 1992, when it received its first subcontract from Brown & Root (a Halliburton subsidiary) after Hurricane Andrew. The company also employs top lobbyists, including former Representative James A. Hayes, D-Louisiana, and Mississippi Governor Haley Barbour’s former firm, Barbour Griffith and Rogers, which helped Ashbritt get work after the 2004 Florida hurricanes.
Perkins says it would be “naive” to expect businesses to restrain themselves from hiring lobbyists who can help them navigate the maze of bureaucracy in Washington.
“We hired [former Army Corps of Engineers Director] Mike Parker to work with us on this Corps project. … We’re dealing with contracting specialists. We’re dealing with both the civilian and military sides of the Corps. We’re dealing with the Defense Contract Audit Agency, small and minority business specialists. There are a lot of legal and protocol issues that we have to deal with. So I went out and found the best person available. … We play by the rules, and if you stay above-board, those are the parameters. If it’s okay for state and local governments to hire lobbyists in Washington, why isn’t it okay for private industry?”
Yet small business groups complain that the pre-existing contracts put companies like Ashbritt at a distinct advantage over local businesses hardest hit by the hurricane, many of whom are eager to get a piece of the action. The Army Corps of Engineers reported receiving over 6,300 phone calls within two weeks after Katrina landed, many from local and regional contractors who have complained that their calls were ignored. The Corps responded that its web site clearly directs inquiries to the prime contractors, but many local businesses had their Internet access knocked out by the storm and say the prime contractors have been slow to return their calls.
Small business owners also say that by turning the contracting process over to prime contractors like Ashbritt, the Corps and FEMA have effectively privatized the enforcement of Federal Acquisition Regulations and disaster relief laws such as the Stafford Act, which require contracting officials to prioritize local businesses and give 5 percent of contracts to minority-owned businesses. As a result, they have not been surprised by early reports which suggest that over 90 percent of the $2 billion in initial contracts was awarded to companies based outside of the three primary affected states, and that minority businesses received just 1.5 percent of the first $1.6 billion.
Many local businesses have turned to their elected officials for help. At a congressional hearing in early November, Representative Charles Pickering, R-Mississippi, complained about the lack of contracting work going to local companies in his state, noting only 5.6 percent of Army Corps contracts for work in Mississippi — where Ashbritt is the prime contractor — had gone to Mississippi companies.
“When you have a hurricane of that magnitude that devastates the coastal community of two states, it’s very difficult at the inception to get local contractors going,” Perkins responds. “We’ve got a recovery operation that we have to mobilize 24 hours before the storm comes to shore. So at first you have to use contractors from outside the region. Then, as the recovery moves forward, you start supplementing contractors from other areas with local and statewide contractors.”
“We now have three offices open in the impacted area where we talk to subcontractors,” Perkins adds. “And we’ve gone out of our way to help smaller subcontractors by waiving some of the more stringent [Army Corps] insurance requirements by taking out umbrella policies that smaller contractors can use who can’t afford to meet the requirements. I maintain that we’ve done a good job putting money back into Mississippi contractors.”
There is little disagreement, even among FEMA’s supporters, that the agency is still reeling from public criticism of its response to Katrina and additional responsibilities created by Hurricanes Rita and Wilma, and in its present form is virtually incapable of managing and overseeing contracts expected to cost $200 billion.
Although apologists say FEMA cannot be expected to maintain the kind of large bureaucracy necessary to handle a sudden emergency on a full-time basis, the agency is supposed to be prepared for disasters, and intense hurricanes are likely to occur on a regular basis for the foreseeable future, thanks to the combination of naturally occurring 25-year cycles for hurricanes and the human-made problem of global warming. Complicating matters is FEMA’s shift in priorities from disaster relief to counterterrorism in recent years, and the gutting of the agency’s acquisition workforce under the guise of “acquisition reform” — an attempt to streamline federal procurement processes that affected most federal contracting bureaucracies in the 1990s.
As a result, FEMA has farmed out much of the procurement management process to companies like Acquisition Solutions and is using existing contracting vehicles negotiated by other agencies.
Where some see this as a formula for flexibility, others see the lack of a strong coordinating authority in the government as a formula for chaos, waste and fraud.
Just weeks after Katrina hit, congressional watchdogs began to question FEMA’s decision to pay Carnival Cruise Lines up to $236 million to house 7,000 people in three cruise liners, especially when the government of Greece was ready to provide two ships for free. A Senate Federal Financial Management Subcommittee’s investigation into the six-month contract found that taxpayers will end up paying four times the amount, per person, that vacation cruise passengers would pay, although Carnival’s overhead costs are far lower than during normal cruises.
“Finding out after the fact that we’re spending taxpayer money on no-bid contracts and sweetheart deals for cruise lines is no way to run a recovery effort,” Senator Tom Coburn, R-Oklahoma, complained. Coburn and Senator Barack Obama, D-Illinois, have pressed Homeland Security Secretary Michael Chertoff for an explanation and introduced a bill that would create a Chief Financial Officer (CFO) to oversee all expenditures associated with the Hurricane Katrina relief and reconstruction effort.
“It should be remembered that the federal government sought us out,” Terry Thornton, a Carnival vice president says. Although “the urgency of the situation demanded fast action,” Thornton says the contracts were competitively bid, and that the Military Sealift Command, a branch of the Navy, asked 75 vessel owners to submit bids.
Setting Aside the Set-Aside Rules
Apart from rushing into questionable contracts during the immediate emergency, critics say the Bush administration also used the initial emergency as cover for a series of waivers and exemptions from federal contracting regulations that have made it much more difficult for those whose businesses and jobs were blown away to get in on the action.
One of the first such waivers was a directive that lifted the limit for small federal credit card purchases requiring cost comparisons from $2,500 to $250,000, and raised the threshold for subcontracts having to meet competitive bidding requirements to $10 million.
“This new exception raises serious concerns that the same problems that dogged U.S. contracting in Iraq — failures in competition, failures in transparency, and failures in integrity — will arise in the hurricane relief effort,” Christopher Yukins, associate professor of government contracting law at George Washington University Law School concluded at one of the first congressional hearings on the reconstruction.
The directive was rescinded and the $2,500 cap restored in early October.
Another waiver that was immediately criticized as unnecessary and unfair to workers was a Department of Labor decision to waive requirements established under the Davis-Bacon Act, a New Deal-era law that requires contractors to pay their employees a regional prevailing wage for similar work and provide payroll reports to federal overseers.
“Absent a wage floor and reporting, the door is open to fraud of various kinds,” says James Hale, vice president and regional manager of the Laborers International Union. “One can’t determine if a contractor is utilizing ghost employees.”
The policy was finally reversed in late October, but only after moderate Republicans in the House of Representatives began to pressure the White House and a subcontractor hired by Halliburton was caught using 100 undocumented immigrants to replace union electricians working on a Louisiana Navy base.
“It is a downright shame that any contractor would use this tragedy as an opportunity to line his pockets by breaking the law and hiring a low-skilled, low-wage and undocumented work force,” Senator Mary Landrieu, D-Louisiana, suggested. “The federal government must ensure that every company, no matter how big, follows the law and provides Gulf Coast residents with the jobs they deserve.” Although Halliburton denies any connection, critics note that company subcontractors are also using low-wage workers from outside the region to cut the costs of its troop-support work in Iraq. Retired U.S. Navy Admiral David Nash, the former head of the U.S. Program Management Office in Baghdad, was hired to head up the government contracting group of BE&K — the Halliburton subcontractor caught using undocumented workers.
Although these may be simply coincidental connections, many in Congress are concerned that the epidemic of fraud and other abuses witnessed in Iraq could be repeated at home. Nineteen members of the congressional Progressive Caucus have demanded that the Bush administration suspend Halliburton from any Katrina-related contracts based upon unresolved criminal investigations related to its prior work in Iraq.
“The aftermath of Hurricane Katrina demonstrated the tragic consequences of having an administration where cronyism trumps competence,” says Caucus co-chair Rep. Barbara Lee, D-California. “The fact that the President would cut wages for impacted workers, while handing out millions in no-bid contracts to well connected firms is a perfect snapshot to this administration’s priorities.”
Although the Bush administration has not responded to the Caucus’s call to suspend Halliburton, the administration’s defenders maintain that criticism of Halliburton is partisan-driven and stems from the company’s association with Vice President Dick Cheney, the former CEO of Halliburton.
Yet there are other factors to consider, including the Army Corps’ unusually cozy relationship with the company. Right before Katrina hit, the Corps demoted its top civilian contracting expert, Bunnatine Greenhouse, who testified to Congress that “the abuse related to contracts awarded to Halliburton represents the most blatant and improper contract abuse I have ever witnessed during the course of my professional career.”
Meanwhile, the administration’s chief of procurement policy, David Safavian, was himself indicted in September while he was working on the Katrina contracts, for obstructing an ongoing investigation into the activities of disgraced Republican lobbyist Jack Abramoff.
At a time when scandals, indictments and charges of cronyism are beginning to pile up on the Bush White House’s doorstep, it is perhaps no surprise that the administration would avoid establishing tough suspension and debarment standards that might punish their cronies.
Other companies with dubious backgrounds, besides Halliburton, have benefited from the administration’s policy. Consider Circle B Enterprises, which received a $287.5 million FEMA contract to supply temporary housing. The company’s president, Jackie G. Williams, formerly ran a Georgia company called Sweetwater Homes Inc. that residents say constructed shoddy houses. Sweetwater went out of business in 2001. When Williams applied for a building license from the state again in 2003, the state refused to grant it until he fixed old warranty claims. FEMA officials defend Circle B Enterprises based on work it did in Florida after the 2004 hurricanes.
Another apparently shady beneficiary of lax standards for contractors is Texas-based Goldstar EMS, which was hired as a subcontractor by Henderson Consulting, through whom it provided 45 ambulances at $800 a day. Goldstar was raided by the FBI in association with a Medicaid fraud investigation earlier this year.
FEMA officials say they use the General Services Administration’s suspension and debarment list to screen companies applying for all federal contracts, as well as FEMA’s own database. But these background checks are rarely comprehensive enough to include disputes with the IRS or other parts of the government, and fail to block contractors that are still under criminal investigation for problems experienced in Iraq, including Halliburton.
In an effort to demand greater accountability and transparency, Senator Frank Lautenberg, D-New Jersey, has proposed that the government establish a database of all contractors’ compliance histories. The Senate passed a similar proposal in a 2006 defense appropriations bill.
In addition to placing inspectors on the ground and improving cross-agency coordination, critics say that federal contracting agencies need to improve the transparency of the process and not leave that up to the contractors, especially when it comes to revealing the identities of subcontractors and the terms under which they are carrying out the actual work.
“We’re not restricted [from posting subcontracts],” Ashbritt’s Perkins says. “We submit all our contracting data to the Army Corps on a weekly basis and that’s all available from them if they so choose.”
The layering of contracts in Iraq was a major impediment to auditors and investigators attempting to protect taxpayers from fraud. And as the Halliburton case suggests, the lack of transparency in subcontracting, combined with the various procurement waivers, has also made it more difficult to assess how much the impacted communities have benefited, and what abuses have occurred.
“No one knows what the state of subcontracting in the region is,” says James Hale of the Laborers’ International Union.
“The vast majority of workers are being paid below a livable wage. However, no one seems to know what contractors are being reimbursed for labor costs. On cost-plus contracts, subcontractor reimbursement rates are whatever the prime [contractor] determines and actual rates of pay are unknown. In fixed-bid [contracts], actual reimbursement rates are unknown and subcontractor rates are both unknown and subject to great fluctuation. There is simply no ability to ascertain or monitor the contractor/subcontractor relationships. This is an open invitation for exploitation, fraud and abuse.”
Betting on the Weather
As global warming intensifies, the damage from future hurricanes will increase. And with federal agencies increasingly relying upon private contractors to manage the fallout, the new disaster profiteers will face unprecedented opportunities.
“Our company will look at government forecasts on this kind of spending,” says Randy Perkins, whose company has been transformed from an obscure Florida subcontractor after Hurricane Andrew into one of the major players in the emerging disaster industry.
After beating out the competition, like so many contractors, Ashbritt’s ability to maintain its advantage in the future will continue to depend upon its ability to anticipate opportunities and develop a cozy relationship with the Army Corps of Engineers and other government bureaucracies.
“We look at opportunities that are 12, 14 months away with various agencies. We’ll look and search and try to find something that best suits our capabilities. There’s nothing wrong with us asking to meet with an agency beforehand. It happens every day in Washington.”
Charlie Cray, a contributing writer to Multinational Monitor, is director of the Center for Corporate Policy and co-author of The People’s Business: Controlling Corporations and Restoring Democracy (Berrett-Kohler).