PRESIDENT BILL CLINTON has vowed to increase U.S. aid to the former Soviet bloc in an effort to boost the new democracies and stabilize their shaky economies. That translates into more money and power for the Agency for International Development (AID), the agency that dispenses most U.S. economic assistance abroad.
But AID's ventures into Eastern Europe and the former Soviet Union to date - more than $1 billion have been doled out since the fall of the Berlin Wall in 1989 - generate little confidence that the agency is prepared to handle a larger mandate. In too many cases, the real winners in AID's foray into the region have been the multinational corporations, law firms and accounting firms that have quickly grabbed a piece of the new post-Communist pork.
Documents obtained under Freedom of Information Act requests, as well as interviews with AID staffers, outside investigators, contractors and foreign officials, provide evidence of widespread waste, poor accountability, ethical lapses, and other management problems likely to plague the new administration. Specifically:
Who benefits?
Troubles are not new at AID. In recent years, the agency has been criticized for everything from exporting American jobs to misuse of funds. AID's push into Eastern Europe and the former Soviet Union offered a chance for the agency to rise above previous problems and make a new start.
And many AID projects to the former Communist bloc have been successful, at least on their own terms. The project launched to assist the newly independent states with privatizations, for example, has in a short time drawn high marks from officials of foreign governments and helped ease the transition to market economies.
But other projects have seemed more like aid to U.S. companies than aid to emerging democracies.
For example, when the governments of the former Soviet Union last year asked the United States for emergency medical supplies to protect its children from disease, AID was quick to respond. Bypassing the usual bureaucratic maze, AID awarded a $3.2 million contract for measles vaccines to the New Jersey-based Merck & Co.
Sounds impressive. But for the same money, UNICEF, which has handled similar AID contracts in recent years, could have inoculated between four and five times as many children, according to C. Ross Anthony, an AID official.
Merck's interest, says one senator, is easy to explain.
"Many drug companies are trying to get their foot in the door in what will be very lucrative markets for their products," says Sen. David Pryor, D-Arkansas, who chairs the Governmental Affairs subcommittee that oversees government contracts.
"The obvious question here is why AID awarded the contract to Merck when it appears that UNICEF could have provided the vaccine at lower cost," Pryor says.
Similar questions can be asked about a lot of contracts, grants and other projects involving AID's work in Eastern Europe and, to a lesser extent, in the former Soviet Union.
"These AID contracts raise the very real question of whether our assistance programs in Eastern Europe and Russia are designed to help these countries move forward on a more self-reliant path or if, in fact, our goal is to push forth U.S. investment," says Douglas Hellinger, managing director of the Development Gap, a Washington, D.C.-based group that advocates a grassroots approach to multilateral aid.
"This is where so much of our money is going, and it demonstates whose interests aid is currently serving," adds Hellinger, who has been advising the administration task force on AID and other foreign-aid programs.
Blueprint for aid
In 1989, with communism collapsing, Congress adopted the Support for East European Democracy Act, known as SEED, which has since authorized $1.04 billion, through fiscal year 1993, for AID and other federal agencies to develop a range of programs to help stabilize the new governments.
In an atmosphere filled with a sense of excitement and mission, many AID officials took steps that would be considered improper during normal times. Cash was transported to East European AID projects in suitcases. Contractors such as Coopers & Lybrand were delegated authority to dole out U.S. grants themselves, with little official oversight. Officials, though still instructed to send contracts out for bid whenever possible, were no longer required to do so in every case.
Operating under new-found autonomy, granted by a Congress eager for quick results, many of AID's contract officers tried to save time by notifying only a few prospective bidders or by choosing one firm without having any competition at all. Sometimes AID officials had little choice: Congress had already designated specific companies, non-profit groups or universities to receive grants by earmarking the appropriations.
Those not blessed with earmarks were sometimes able to tap other political connections.
Among the winners in the no-bid stakes was the American Bar Association (ABA), which has received grants worth more than $5 million to draft laws - and to help its members make lucrative contacts. The ABA secured its first $400,000 contract before the competing - and less visible - Federal Bar Association could even land a meeting with an AID officer.
Another group apparently on an inside track was the Hudson Institute, now home to former Vice President Dan Quayle, which won a $256,838 grant to study privatization in the Baltics. And AID gave a $6.857 million contract to Partners in Economic Reform, a non-profit group set up by a group of coal companies with some labor support.
The coal partners, which work with the AFL-CIO, are working to provide technical assistance in the former Soviet Union. They will also "facilitate the transformation of the centrally planned and controlled coal-mining industry ... of the Russian Republic."
In other words, they will have a chance to scout mining prospects for Peabody Coal, the CSX Corp. and the other consortium members. A more modest proposal by a Washington-based public-interest law group that wanted to train citizens' groups to deal with health hazards in the mines was rejected.
Everybody wanted a piece of the pie. After a round of competitive bidding, Healthcare Enterprise International Inc., a Rockville, Maryland consulting firm, formed a consortium which got a $17 million contract to transfer the "expertise and skills of the U.S. health industry." In another competition, the Sawyer Miller Group , a Washington, D.C. public-relations outfit, won $6.2 million to publicize the virtues of capitalism to the Russians. The University of Nebraska-Lincoln, got $1.58 million to provide management training in the Yugoslavian Republics. Then-administrator Ronald Roskens was president of the University of Nebraska system before joining the agency.
The Citizens Network for Foreign Affairs, a group of agricultural companies whose directors include former Agriculture Secretary John Block and former Defense Secretary Frank Carlucci, received a $44 million grant to restructure the food systems of the former Soviet Union. The network includes 25 companies and trade groups, among them RJR-Nabisco, ConAgra and the National Food Processors Association. Each member will apply to a network administrator for grants from the $44 million pool to train workers. At the same time, they will have new opportunities to expedite their overseas expansion.
Accounting firms also formed consortia with law firms, investment banks, and others to compete for one of the biggest pots: the $150 million allotted for privatization.
"What has happened is you have every consultant in town and every PVO [private voluntary organization] in town lobbying to get the money disbursed among themselves," says one senior AID official who asks not to be identified.
Why pay less?
In the rush to boost the emerging democracies, AID officials often bypass standard operating procedures and wind up overpaying as a result. Throughout the region, AID is actually paying contractors to do work that other companies or non-profit groups were already doing on their own, with no federal money, or at a much cheaper rate per project.
Take the export of legal advice. AID records obtained under the Freedom of Information Act show that the agency is underwriting more than a dozen law firms to advise the former Soviet Union and Eastern European governments. These firms are also on the lookout for overseas business.
Their fees range from $2,200 per day for a senior partner at Latham & Watkins, which got AID officials to approve a special waiver of the normal salary ceiling, to the $700 a day per person for some of the less fortunate firms.
While these firms are racking up the fees, the Federal Bar Association, a voluntary bar group of lawyers who practice at federal agencies, offers virtually identical services through its Democratic Development Initiative. The difference: its lawyers work for free.
"I have no question, we have people ready, willing, and able to go and commit themselves," says Brian Murphy, a staff attorney at the Administrative Conference of the United States and chair of the association's Eastern Europe project. The Federal Bar Association's project has received only about $10,000 worth of State Department funds.
"These are people doing this pro bono. They would need only their airfare offset and living expenses," Murphy says.
Obviously, even volunteer lawyers may not have entirely altruistic motives. Many belong to firms that have launched practices in Eastern Europe or hope to leverage the contacts made through pro bono work to do so. But at least their trolling expeditions come at less cost to U.S. taxpayers.
Capitalism without competition
A report by AID's inspector general (IG) released in late March underscores the fact that AID has not followed its own guidelines for grants and cooperative agreements in Central and Eastern Europe in several key areas, thus increasing costs.
After focusing from May through December 1992 on nine projects in Eastern Europe, the IG concluded that AID had sought competitive proposals for only two - even though such competition was required in all nine.
Justification was offered for waiving the competition, but in three cases the IG found the justification inadequate. As a result, the cost to taxpayers was increased to $17.5 million, the report says.
In one instance, AID justified waiving competition for its $20.6 million agreement with the International Executive Service Corps (IESC) by claiming that it had "predominant capability." The non-profit group sends retired executives to work as overseas volunteers.
But officials offered no evidence to the inspector general of that superior capability and, in fact, had decided to give the group the money even before reading its proposal. The reason? Congress had earmarked it for assistance and, an AID auditor noted in the report, "IESC enjoyed excellent relationships with both the Congress and State Department." This rationale troubled the IG.
An earlier IG report said that the IESC's financial accounting system was unacceptable and that the group could not justify expenses totaling $40 million.
The AID bureaucracy is not the only entity responsible for impeding the competition process; Congress has contributed its share to the problem as well.
When the Center for Clean Air Policy (CCAP), a non-profit energy research group affiliated with major public utilities and municipal governments, sought a $1 million grant to train overseas officials on energy issues, AID was lukewarm. The agency had just awarded a similar project to the Research Triangle Institute, after an open competition.
But CCAP had some friends in high places, among them then-Sen. Robert Kasten, R-Wisconsin, and Sen. Mark Hatfield, R-Oregon, both of whom had staffers meet with AID officials to press CCAP's case. The senators, working with Sen. Patrick Leahy, D- Vermont, wrote language in the Senate report recommending that AID fund the project, and agency officials found that impossible to resist.
"We were squeezed politically," says one AID environmental contract officer.
Why did CCAP win such support? One clue might be the CCAP's first adviser posted to Prague, David Yaden. Yaden, who met Hatfield while working for a Washington state legislator, had kept in touch with the senator in his subsequent job as a lobbyist for Nerco, an Oregon energy and minerals company. On one occasion, Yaden organized a fundraising dinner for the senator.
While Yaden sought help from Hatfield, CCAP chairman Anthony Earl, a former Democratic governor of Wisconsin, approached Kasten, who agreed to speak up, according to CCAP Executive Director Edward Helme.
"I wouldn't say we pressured them," says Helme. "We were new to the game of how AID makes contracts, and they said Congress sends us signals about what they like, so we went to Congress." As for the issue of duplication, Helme says, "We thought of it first."
Conflicting signals
It is an open secret by now that many law firms and other consultants view their AID-backed work for foreign governments in the old Soviet bloc as a lure to private clients with an interest in the region.
For example, Cleveland's Squire, Sanders & Dempsey recently began an AID contract in Bulgaria to perform pre-privatization legal audits for eight Bulgarian companies. After this assignment is completed, the firm hopes to represent commercial clients buying into the projects.
"That's the idea," says Mark Cusick, the London partner who heads the international practice. "It introduces us to Bulgaria, to privatization officials, and it introduces us to eight specific companies."
That scenario took some getting used to in at least one country.
"Initially, the Czech government did not want us representing Western interests while we were acting as advisers to them," says Henry Lavine, a senior managing partner in Squire, Sanders' Washington, D.C. outpost.
"Then the ground rules changed," Lavine continues. "It was because they found if they closed law firms from acting on behalf of Western interests, they were really inhibiting their investment program, because the Western law firms were very often a source of interested investors."
In other words, Lavine's firm, while advising the Czechs on creating the regulatory structure for an industry, can also round up its clients to buy in. So, Lavine says, everyone wins.
Lavine says that his firm avoids conflicts by not representing both the Czech government on the sale of a particular business and a company bidding on it at the same time.
In Poland, Los Angeles' Latham & Watkins has an AID contract to help the Polish government negotiate power project proposals and develop a framework on competitive power generation.
At the same time, the law firm also represents the National Independent Energy Producers. Some of their members are eyeing the region, says Tobyn Anderson, director of government and public affairs. Other clients are the National Association of Energy Service Companies, and the Intercontinental Energy Co.
John Sachs, the Latham & Watkins partner who runs the project in Poland, says that the firm has no conflict because it is not representing any energy companies while it is advising the government. Although he acknowledges that the firm may end up representing energy companies in Poland, Sachs says, it plans to do so in a way that will avoid conflicts.
But critics call this scenario a classic conflict of interest. "Instead of exporting democracy, it sounds like we're exporting hypocrisy," says Dan Guttman, author of The Shadow Government, a 1976 examination of the government's use of contractors. Guttman, a partner at the law firm Spiegel & McDiarmid, has done pro bono work for the Czech Republic on energy issues.
"By definition, experts often get their expertise by working several sides of an issue," says Guttman. "The problem is that it appears there is little or no official oversight, and no evident disclosure [of conflicts] to the host country, much less to the American public."
Another energy lawyer, who asks not to be identified, agrees.
"I would love to be in a situation where I'm the rule-writer, and then when I'm finished writing the rules, to represent utilities who will have to follow them," he says. The rule-writer "might know unique features that some of his clients have and can try to write rules that make those features more attractive."
Indeed, when informed that U.S. law firms are working for private clients in the same region AID is paying them to advise government ministries, one high-level official in AID's Bureau for Europe looked surprised.
"I think you're onto something," he offered in an interview.
A few weeks later, David Merrill, acting assistant administrator of AID's Bureau for Europe, responded to a query on this issue in a written statement.
"We have clauses in our contracts that have the effect of prohibiting such conflicts," Merrill stated. "In addition to that, law firms have their own standards and codes of ethics under their respective bars. We tell the law firms that they're supposed to avoid such conflicts and they do the policing. If there's a conflict we don't know about, we'd be happy to look at it."
But Sen. David Pryor says that philosophy is not sufficient.
"AID does not require its contractors to disclose its clients," Pryor says. "This is unacceptable. ... The truth is that AID does not check to see who else its contractors work for. The truth is that the taxpayers are paying for contractors who are working both sides of the street."
Combining government projects with work for private interests is also likely at the three accounting firms that lead consortia working on the $150 million privatization project in Eastern Europe.
The accounting firms - Deloitte & Touche, Coopers & Lybrand, and KPMG Peat Marwick - each lead a team of law firms, investment banks, and other companies that bid to land AID contracts to carry out such individual projects as drafting legislation, auditing factories and locating investors.
Although all three teams were involved at the start, Deloitte & Touche got a jump on the competition by working pro bono to help the countries figure out what they wanted the consortia to do for them. Then, Deloitte & Touche recommended itself to perform the work, and the host countries - Poland, Hungary, and Czechoslovakia - were happy to oblige by asking AID to assign the tasks to Deloitte & Touche.
Among the lucrative assignments AID gave Deloitte & Touche: $236,550 for "ad hoc privatization and economic advice to the Slovak deputy premier's office;" $451,000 to help the Republic of Estonia develop a privatization strategy; and $4.6 million to advise the Czech Republic on 2,500 privatizations.
At the same time, Deloitte & Touche has been working with U.S. and European clients who are buying into the privatized companies.
But Robin McPhail, a principal in Deloitte & Touche, says that when conflicts of interest come up in a particular case, the company discloses it and steps aside.
"You can't determine it in advance," says McPhail, who is based in Washington, D.C. "It's no different than in the United States. We could be advising the U.S. Defense Department on an issue, and there could be a client on the other side. It's not any different from any other client situation."
Other contractors disagree. "While we're under AID contract, we're prohibited [by firm policy] from pursuing any commercial interests," says David Wolcott, who advises the Polish government on an AID contract for RCG/Hagler, Bailly Inc., an Arlington, Virginia energy consulting company.
"Obviously our advice would be suspect," says Wolcott, whose firm's AID assignments included advising East European governments on energy regulation and related privatizations. "I couldn't imagine going there and advising the government and the next day going to the government and saying, �Now I'm speaking on my own.' It would undermine my credibility. Our advice would be worthless."
A spokesman for Coopers & Lybrand discounts the potential for conflict, explaining that all commercial work is handled by a British branch of their company. KPMG Peat Marwick declined to comment.
At least one consulting firm with an AID contract tripped over a client right away. Last summer, under an AID contract, Booz Allen & Hamilton began reviewing applications from telecommunications companies for the Development Cost Support Fund, a new $6 million AID grant program for small- to-medium-sized U.S. businesses that would not otherwise have the resources to market themselves overseas.
It didn't take long for Booz Allen's role as grant reviewer to bump into its considerable client list. In an internal report, obtained through the Freedom of Information Act, the fund administrator noted that the very first telecommunications application reviewed for the new AID fund was submitted by U.S. West - a Booz Allen client. To its credit, Booz Allen noted the conflict immediately and recused itself from reviewing the proposal.
Edward Mattix, a U.S. West spokesman based in London, says he does not remember if he heard about the fund from Booz Allen or another source. Charles Givans, a principal at Booz Allen, says his firm did not inform U.S. West about the project.
Still, the fact that the first applicant in the program was the main reviewer's client is, at minimum, an odd coincidence.
As it turned out, U.S. West still prevailed. The grant reviewer that filled in for Booz Allen approved a $208,000 grant to the huge Denver-based company, which already was active in Hungary and was among the first U.S. businesses to move into Russia and Czechoslovakia.
That experience made U.S. West an unusual winner in a program designed to promote smaller companies that would not otherwise move into the region.
Robert Navin, director of AID's Capital Development Initiative, who oversees the fund administered by the Booz Allen project, says exceptions to the size constraints are permitted if an applicant is deemed particularly worthy, which evidently applied to U.S. West. (Exceptions are also permitted to the salary caps that usually apply to AID contractors: Booz Allen won a waiver and earned more.)
Hazardous export?
To some critics, the most troubling aspect of AID's contracting practices is the agency's willingness to boost companies that have patterns of serious problems with much of their other work for the U.S. government.
Waste Management Inc. (WMI) and the Westinghouse Hanford Corp., for example, have each received two weeks of valuable time from an AID contractor charged with helping to promote small and medium-sized U.S. business in Eastern Europe.
The AID contractor, Sanders International Inc., a Washington, D.C.-based consulting firm, spent about 80 hours on AID's tab, guiding WMI and Westinghouse through the morass of Eastern European bureaucracies and trying to find projects for them. Both are now considering environmental cleanup work in the region.
In 1991, WMI paid $8.1 million in fines to settle Environmental Protection Agency charges concerning the company's handling of government work at several Superfund hazardous-waste sites; that followed $5.4 million in settlements in 1990. Last year, a WMI subsidiary, Chemical Waste Management Inc., pleaded guilty to six felony counts and agreed to pay $11.6 million in penalties for mishandling government-funded cleanup work at a Superfund dump site.
In March, the state of Washington fined the Westinghouse Hanford Co., along with the U.S. Department of Energy, $100,000 for the violation of hazardous-waste regulations.
"They've had trouble for years," says Jerry Gilliland, a spokesman for the Washington State Department of Ecology, which levied the fines. In a statement describing the violations, the department noted that one factor that led to the fine was the length of time that Westinghouse knew about the violations. "Ecology inspectors found internal Westinghouse audit reports identifying the problem repeatedly since 1989," the department noted in a statement released when the fines were announced.
Robert Pollard, senior nuclear safety engineer with the Union of Concerned Scientists, thinks that Westinghouse is a bad choice for overseas export. "If you look at Westinghouse's record in Hanford, one would think that somebody in the U.S. government would be smart enough to know that this is not a good, shining example to send overseas," says Pollard.
Sen. Pryor also questions the wisdom and propriety of AID's assistance to WMI and Westinghouse. "This raises a concern that I have had for years," Pryor says. "If a company has violated some law, owes some taxes, has been debarred or suspended, or there is some other relevant information concerning that company, then this should be known to the federal government before the company receives anything from the government."
But Steven Swanson, Sanders International's founder, says that he doesn't discriminate against companies with mixed track records when, under his AID contract, he tries to find overseas investments for U.S. companies. "I'm not certain that the fines that people have had or their [negative] experience necessarily translates into what's going on over there," Swanson says. "We feel an obligation to help everyone equally." As for the issue of why he helped such large companies that have the resources to conduct their own groundwork, Swanson says that, until now, he has had time to help everyone who has asked.
Jan Miller, an AID assistant general counsel, agrees that, unless a business is officially barred from being a U.S. contractor, AID shouldn't unilaterally decide they are not worthy recipients. "Unless they are actually declared suspended, they continue to be eligible," Miller says. "We don't pretend to be experts in energy. We cut across every sector."
An uncertain future
In May 1993, J. Brian Atwood was confirmed as President Clinton's choice to take over the agency. Atwood, who was president of the National Democratic Institute, a government-funded agency that supports democracy abroad, declined to be interviewed.
But Atwood is overseeing what may be a major restructuring of AID in the wake of a Clinton task-force report on AID's work worldwide. One result could be a shift away from heavy reliance on contracts with U.S. corporations and other entities, which played a central role in the program during the 12 years of Republican administration. Instead, explains one adviser to the task force, AID and other agencies would take "a bottoms-up approach, looking to build on what is already there on the ground and can be accomplished by local populations."
But even if Atwood is serious about undertaking a major overhaul, critics question Atwood's ability to revamp such an entrenched bureaucracy. They say it won't be easy to loosen the grip that private interests seem to have on the agency. "That's the tradition," says one longtime AID official. "The question is, does the Clinton crowd have the guts to break it?"