Windfalls of War: Pentagon's No-Bid Contracts Triple in 10 Years of War

Monday, August 29, 2011 by iWatchNews.org
Taxpayer is the loser when Pentagon doesn't require competition among contractors. "The lack of competition is a scandal," says one expert.
by Sharon Weinberger

 

As U.S. military deaths and injuries from roadside bombs escalated after the invasion of Iraq, the Pentagon rushed to find solutions.

 Competition is normally the cornerstone of better prices and better products, but the urgency of dealing with improvised explosive devices, or IEDs, has been cited to justify a number of sole-source contracts to companies promising quick solutions over a decade of war.

One such company was Tucson-based Applied Energetics , which markets a futuristic weapon that shoots beams of lightning to detonate roadside bombs. The company won over $50 million in military contracts for their lightning weapon, all without full and open competition, even though there was another company marketing similar technology. Despite test failures, the company, in part thanks to congressional support, continued to get funding.

In August, the Marine Corps, which was on the verge of awarding the company yet another sole-source contract for the lightning weapon, cancelled the latest $3 million deal after the commander of the unit in Afghanistan decided it didn’t meet their needs.

In the meantime, a competitor, called Xtreme Alternative Defense Systems , an Indiana-based firm with its own lightning-based counter-bomb technology, says it’s had good results with only a fraction of the federal funding that Applied Energetics has received—$1.5 million. The company is preparing to test its technology at a military range. “We did our own development based on state grants” and federal funds, says Pete Bitar, the head of the company. “I cashed out my 401(k).”

The bomb fighting contract is a small example of a problem that’s been exacerbated by 10 years of war: awarding contracts without competition. While the Pentagon says its overall level of competition has remained steady over the past 10 years, publicly available data shows that Defense Department dollars flowing into non-competitive contracts have almost tripled since the terrorist attacks of 9/11. According to analysis by the Center for Public Integrity’s iWatch News, the data shows that the value of Pentagon contracts awarded without competition topped $140 billion in 2010, up from $50 billion in 2001.

And despite repeated pledges to reform the process, non-competitive contracts are a hard habit to break. According to federal data, the Pentagon’s competed contracts, based on dollar figures, fell to 55 percent in the first two quarters of 2011, a number lower than any point in the last 10 years since the terrorist attacks of 9/11.

There are a number of legal loopholes that allow the Defense Department, as well as other federal agencies, to avoid competition and to select a single company to provide the desired goods and services. In some cases, there may be only one legitimate supplier of needed goods, or the government can argue that it has “an unusual and compelling urgency,” and that holding a competition would have a detrimental impact on government operations or national security.

But those exceptions have become increasingly abused, according to numerous studies. In fact, an analysis of over a dozen government reports and investigations, and interviews with eight former government officials and experts, found a number of concerns about DOD competition practices — attributable in large part to the past 10 years of war. Those include:

• The use of large umbrella contracts to purchase goods and services that could be competed individually, thus resulting in lower price;
• Justifying sole source contracts by citing an “urgent and compelling need,” when in fact the urgency stemmed from the agency’s lack of planning for requirements that have been known for years.
• Extending large contracts as a “bridge,” rather than re-competing them.
• An overall failure to utilize competition in cases that could result in cost savings and better performance.

These alarming trends have not gone unnoticed. Sole-source and other noncompetitive contracting practices at the Pentagon have been the subject of numerous investigations by the Government Accountability Office, the Defense Department’s Inspector General, and the Commission on Wartime Contracting, among other government watchdogs.

The consequence, according to those investigative agencies and commissions: wasted dollars, lower quality goods and services, and in some cases, outright fraud.

Reports of limited and no-bid contracting, particularly in Iraq and Afghanistan, captured headlines in the early days of the Coalition Provisional Authority in Iraq, when companies like Custer Battles, later convicted of fraud , were given sole-source security contracts for security and reconstruction, including one worth $16.5 million to provide security at Baghdad International Airport. Among the accusations eventually levied against the company, which had no prior track record, was that it charged grossly inflated prices, in part by using fictitious companies to “lease” equipment to the government.

In his 2008 presidential campaign, candidate Barack Obama railed against such contracts, accusing them of wasting taxpayer dollars, and promised to rein in such spending.

In 2009, President Obama followed up those campaign promises with a memo directing a broad overhaul of government contracting, including limits to sole-source and non-competitive contracting. “Excessive reliance by executive agencies on sole-source contracts (or contracts with a limited number of sources) and cost-reimbursement contracts creates a risk that taxpayer funds will be spent on contracts that are wasteful, inefficient, subject to misuse, or otherwise not well designed to serve the needs of the Federal Government or the interests of the American taxpayer,” the president wrote in the 2009 memorandum , citing reports by multiple government agencies. Moving back to full and open competition, the memo continued, could save the government billions of dollars. But in two-and-half years, the Obama administration has made no progress in competing military contracts.

Even the Pentagon’s senior leadership has acknowledged the problem: a 2010 memo by Undersecretary Ashton Carter, the Pentagon’s senior procurement official, called for greater competition, along the lines of the earlier Obama memo, and promised the Pentagon would make its contracting process more open to competitive bidding. “Maximize the use of multiple-source, continuously competitive contracts,” a briefing accompanying the memo states.

However,  campaign pledges and memos have made little headway in combating the problem. “The lack of competition in the Defense Department is a scandal,” said Charles Tiefer , a professor at the University of Baltimore School of Law and a member of the congressionally mandated Commission on Wartime Contracting in Iraq and Afghanistan.

The ultimate question is whether non-competitive contracts are due to trends beyond the Pentagon’s control, such as the lack of qualified competitors and the urgency of wartime contracting, or whether they are the result of poor policies and procedures. The Pentagon maintains that its competition rates are lower because of the nature of the things it buys: large weapons and major systems that then have large follow-on contracts that must, by their nature, go to the original supplier. “These high-dollar non-competitive procurements significantly impact the Department's overall level of competition to produce the 61.7 percent competition rate for FY2010,” says Cheryl Irwin, a Pentagon spokeswoman.

The GAO, in multiple decisions, has said that “failure to plan” for a procurement that results in an urgent need does not constitute a basis for a sole source competition, and has, on a number of occasions, sided with protesting companies that argue the only urgency was an agency’s failure to conduct a timely competitive procurement.

One report commissioned by the Pentagon’s Office of Industrial Policy and conducted by the federally-funded Institute for Defense Analyses appears to suggest it’s a systemic problem. “We found that the use of short-term contracts and modifications to fill the gap in services between the end of one contract and the beginning of the next is a significant source of sole source contracts,” the report concluded.

The study, which looked specifically at contracts for services, found that there wasn’t a lack of qualified companies; rather, nearly a quarter of the sole-source awards were justified based on “bridge contracts” that extended existing contracts without competition. “For sole source contracts there does appear to be a problem, not with the industrial base or with competition, but with DOD practices and policies,” the report concluded.

Noncompetitive, sole-source contracts are by no means unique to the Pentagon. Other agencies have been accused of giving short shrift to competition, such as the Federal Emergency Management Agency, which awarded over half of its immediate post-Hurricane Katrina contracts without full competition, according to one congressional report. But based on total dollars, the Pentagon, according to publicly available data analyzed by iWatch News , lags behind all other major departments in competitive contracting. The Pentagon's competition rate of about 61 percent places it will below other agencies. The State Department in 2010 competed almost 75 percent of its contract dollars, the Department of Homeland Security competed almost 77 percent, and the Energy Department competed 94 percent.

Nevertheless, sole source contracts, ranging from training to equipment, continue to be handed out on a near daily basis, often with little explanation beyond a stated “urgent requirement.” On July 18 of this year, DRS Technical Services of Herndon, Va., received a contract worth nearly $20 million for training and mentoring Afghan police.It was the only  bid solicited for the contract, according to the Pentagon.
 
A spokesperson for Army Contracting Command said the sole source contract, which was actually for fielding communications equipment to Afghan police, was due to an “urgent requirement that necessitated an award to the incumbent DRS pending competition.” That same contract was also the subject of a 2009 DOD Inspector General investigation, which criticized the contractor’s and the Army’s inventory controls.

Criminalizing Competition

Posted by Kevin Carson on Aug 17, 2011 - C4SS
Free culture activist Nina Paley, in a recent cartoon, parodies the philosophy behind “intellectual property.”

EUNICE:  “Copying a song instead of buying a copy is stealing!”
MIMI: “Doing  for yourself what you could pay someone else to do is stealing!”
BOTH:  “Competition is theft!”

Unfortunately, Nina was preempted by reductio creep: The tendency of real world irrationality to outpace our ability to make fun of it.

In 2005, the French bus company TSE sued a group of cleaning women who’d previously taken the bus to work, arguing that carpooling was unregulated competition that deprived the bus company of revenue. Although that that specific case was thrown out, the principle it illustrates — a legal guarantee of rents from a monopoly on the right to do something — is at the heart of capitalism (as opposed to the free market).

Throughout history, propertied classes have relied primarily on artificial scarcities of material resources to extract a surplus from labor.  With the help of state-enforced artificial property rights, a ruling class can control great concentrations of land and capital. These monopolies prevent competition from driving down the price of capital and land to their natural values. Thus the means of production are artificially scarce and expensive, and labor is forced to pay tribute for access to them.

Today, however, the imploding cost of production means that concentrated ownership of land and capital is becoming less and less effective as a means of rent extraction. The desktop revolution has reduced the cost of setting up a “publishing house” or “music studio” a hundredfold. Micromanufacturing with open source desktop CNC tools will soon do likewise to the cost of a factory. Intensive raised-bed horticulture grows many times more food per acre than mechanized agribusiness. In fact most “farming” is a real estate investment in which the government pays rent for the “farmer” to hold land out of use!

In this age of abundance, when the falling cost of machinery and exploding efficiencies of extracting value from inputs threaten to make control of physical resources worthless as a source of rent, rents accrue mainly to “property rights” like the right to do certain things, or criminalizing competition from more efficient ways of doing things.

Under old-style capitalism, rents were extracted by using artificial property rights to restrict access to physical opportunities for production. Now that the cheapening of physical means of production has made this strategy untenable, the ruling classes must instead charge rents on the right to produce with one’s own physical resources.

In today’s global economy, profits from old-style subsidies and artificial scarcities of physical resources haven’t exactly disappeared. Foreign aid and World Bank loans still provide subsidized infrastructure for offshored production. Third World landed oligarchies still nullify traditional peasant property rights and steal land for cash crop production in collusion with subsidized Western agribusiness interests. Thanks to compliant local governments, and the use of World Bank debt slavery to pressure the noncompliant — not to mention legacy titles from outright theft in colonial days — extractive industries make enormous profits mining and logging on ill-gotten land. Half of Big Pharma’s R&D is taxpayer funded, and billions of dollars of high-tech R&D is subsidized with refundable tax credits.

But most profits come from immaterial property in the right to make or do a certain thing. Because of patents it’s illegal to make a physically identical knockoff of an iPhone and sell it for a fraction of the price without all the embedded rents on artificial property. Copyright makes a CD of Word cost $200 instead of ten bucks like an Open Office CD. ”Intellectual property,” exactly like your grandfather’s tariff, is just a restriction on who has the right to sell a thing in a particular market. IP performs the same protectionist role for transnational corporations that tariffs once performed for national industrial corporations.

The majority of TNCs’ profits are from royalties or licensing fees. The most profitable industries in the global economy are those with business models based on IP: Pharma, biotech, entertainment, software. Patents give Western corporations a lockdown on the latest generation of production technology, effectively relegating Third World countries to supplying cheap raw materials and sweatshop labor. Trademark and patent laws enable corporate headquarters to outsource actual production to job shops in China or Vietnam, while charging a 1000% markup in retail outlets.

Intellectual protectionism apologists tell us ignoring patent and copyright monopolies is theft.  It’s not. It’s legitimate free market competition. “Intellectual property” is theft.

AT&T from it's Break-up in 1984-2006, not including its merger with T-Mobile in 2011

Click on the image for a larger version

(I wish I could get an updated version with the T-Mobile merger included.-jef)

Rich Use Government To Cut Competition

The Rich Continue To Use Government To Cut Out Their Competition
05-05-2010
David Kramer

One of the scams that the rich use the government for in order to stop less wealthy people from getting richer is to promote the lie that, since venture capital is “riskier” than investing in public securities on the NYSE (another lie), individuals with less than a certain minimum net worth should not be allowed to invest in these “riskier” VC investments. Bankster puppet Sen. Chris Dodd (D-CT) has inserted into the upcoming financial “reform” bill a clause that would more than double the minimum net worth of a potential venture capital investor from $1 million to $2.5 million, or require an annual salary of $450,000 for the past two years to the current annual salary requirement of $200,000 [the article mistakenly says it is $250,000] for the past two years. (Here is a link to the current minimum net worth regulations.)

Putting aside the libertarian principle that my money is my property and, therefore–just like the property of my body–it is up to me to decide what I want to do with it as far as my personal subjective risk is concerned, an important issue here is that this new rule forcibly prevents people from investing in an area that not only can bring them much higher returns than publicly-traded stocks, but it cuts down the supply of investment funds for smaller, innovative new firms which generally find it much more difficult to raise funds compared to an established big corporation–because the start-up firms’ products have not yet proven themselves in the marketplace. The bill insert also requires that a start-up firm wait up to four months to get permission from the Bankster-controlled SEC to accept the investment funds. And, get this:

“…this proposed bill also seeks to change the rules for a federal pre-emption []sic] for state regulation. Under the proposed bill, start-ups would be subject to state regulations from the 50 different states. Right now, start-ups & investors are not subject to 50 different state regulators. This would likely lead to more cost & risk for the start-up.” [emphasis mine]

Yes, this is just what our depressed economy needs now–even less businesses to employ people and provide new products to improve our lives.

National Broadband Plan & Competition

The NBP and ISP competition: this fight's just beginning
By Nate Anderson

For a plan that puts "competition" as its number one goal, the National Broadband Plan is remarkably light on policies that will produce much of it in the wireline space. Talk of competition is everywhere, but all suggestions are remarkably general or terribly banal: "more data collection" and "future policy reviews" are everywhere. Suggestions about how such reviews should turn out is lacking.

But the reviews will still be held, and at some point the consensus-building NBP will devolve into ugly battles of wholesale access, special access (middle-mile connections), and ISP disclosure. The FCC commissioners know it, and they're already gearing up for the fights ahead.

All five commissioners issued statements when the Plan appeared, and everyone took on the issue of competition.

"We should be very concerned about the competitive state of broadband service," warned Mignon Clyburn. "We need to keep our eye on the ball here because evidence in the Plan suggests that by 2012 only 15 percent of households will have the 'luxury' of two providers offering the highest speeds of broadband service (up to 50Mbps). Seventy-five percent of households will have only one provider offering the highest speed. And the remainder of households will not have the highest speeds offered to them at all."

Clyburn made clear she is willing to take bold action, saying that "the Commission must stand ready to act where competition is lacking and be willing to use all available tools to protect consumers and to inject meaningful competition into the marketplace."

The longest-serving commissioner, Michael Copps, went directly after the lack of competition-creating policies in the Plan. "Lack of competition could conceivably require us to take actions going beyond what is generally discussed here," he said.

"I daresay that I don’t need to remind many people here that competition is not, to my mind, the defining hallmark of America’s current telecommunications sector. But it is at the core of our enabling statute. In competition, and elsewhere, should we find that we lack the tools we need to conduct effective public interest oversight of the evolving broadband network, we may have to invoke other available authorities already invested in the Commission—or, should we lack some authority that we need, we may have to request it."

The two Republican commissioners see the implicit threats of more government action here, and both rallied to beat it back. Robert McDowell praised the current deregulatory environment for promoting the robust competition we have today.

"As a direct result of adopting policies that ensured the ’Net would be regulated only with a light touch, the Internet environment is growing and evolving faster than any individual, company or government can measure...." he wrote. "As the Commission and Congress move to consider the ideas offered up by the Office of Broadband Initiative, we should make sure that we first and foremost do no harm."

"Broadband competition is healthy and vibrant," added Meredith Baker. "Under a light-touch targeted regulatory regime in both the Clinton and Bush Administrations, we have gone from a narrowband dial-up world to a multi-platform broadband world by crafting a regulatory framework that promotes facilities-based competition in lieu of prescriptive government requirements."

In other words, the US has moved towards a cable/telco duopoly ("facilities-based competition") and away from line-sharing rules ("prescriptive government requirements").

Let's get ready to rumble

The NBP reminds us that, within a few years, cable will be the only high-speed choice for most Americans unless the telcos start investing in fiber to replace their aging copper networks. Even now, in a well-off Chicago suburb, I have a single ISP choice if I want anything over 6Mbps.

Promoting competition might not require a return to line-sharing mandates—but it certainly requires something. If heavily taxed and highly regulated France can get a complete triple play package of phone, TV, and Internet for €30 a month, these claims about robust US competition look... less than robust.

So the big fights are coming. Baker asks for a "consensus-based broadband policy," but given the ground commissioners are already staking out, that seems difficult if not impossible once the important proceedings begin in earnest. The NBP punted on the toughest questions, perhaps in an effort to give its Plan the consensus that Baker wants, but they will be answered someday.

As for the FCC Chair, Julius Genachowski, he did not take up the line adopted by his Democratic colleagues. In praising the Plan, he noted that it is "idealistic, but not ideological. From my time in the private sector, I have personal appreciation for its focus on the vital role of private investment and competition; and on providing real solutions to real problems."

Genachowski has been good about making the FCC a collegial place once again, seeking common ground whenever possible and operating in a more transparent fashion. But, when the "comprehensive review of wholesale competition rules" begins, that approach may be tested to the breaking point.

Insurers Set To Raise Prices, Walk Away From Consumers

Insurers Set To Raise Prices, Walk Away From Consumers
03- 5-10 02:02 PM

The market concentration for health insurance is so monopolized in some areas that insurance companies are willing to raise prices and lose customers in an effort to improve their bottom line, a leading insurance broker told Wall Street analysts on Wednesday.

In a conference call organized by Goldman Sachs Global Investment Research, Steve Lewis, a highly regarded broker at the world's third largest insurance broker, Willis, painted a picture of the health insurance market in which employers seem likely to be priced out of coverage.

Noting that "price competition" between insurers was "down from a year ago," Lewis relayed that "incumbent carriers seem more willing than ever to walk away from existing business."

The phenomenon of insurers pricing their policies beyond where consumers can afford it seems to be already taking place. Last month Anthem Blue Cross told customers it would hike their health insurance premiums by as much as 39 percent (with the expectation that some would drop coverage altogether). In December, the Huffington Post reported that Aetna was planning on losing more than 600,000 customers by raising prices on their consumers in 2010.

Insurers are able to do this in part because the markets in which they operate have no adequate competition, suggests Lewis. The broker noted that "the smaller client segment" was "increasingly frustrated" with the renewal of their coverage and was "evaluating potential self-funding with stop loss protection" instead. Lewis added that employers in many markets knew "that they're not going to be able to trade down pricing very significantly" (i.e. find cheaper coverage) and, as such, would likely only change plans or become self-insured if there was a "fairly significant" disruption in service.

"As I mentioned at the outset, it was without a doubt the most challenging renewal cycle in my 20 years of this business with employers really struggling with how and what was going to drive their decision, combined with the lack of aggressive and competitive pricing in the marketplace," Lewis said.

The remarks are as clear an indication as any that while the health insurance industry suffered greatly from the recession it remains remarkably well positioned to recoup those profits going forward -- principally because companies can raise prices without worrying about the market hit it will take.

The Democratic-authored health care package would eliminate the anti-trust exemption that health insurers enjoy, require insurers to spend a high percentage of their funds on medical costs and create a commission that would oversee unexpected hikes in premiums. And yet, Lewis says that the clients he represents (employers who purchase health care coverage) have largely soured on the reform process even if they are favorable towards the overall goals.

"I think most people would acknowledge that there's a need for health care reform, employers continue to be very frustrated," he said. "But I would also say that many of them still view the legislation and the partisanship coming out of Washington as possibly the medicine worse than the disease. So, many employer groups that we're talking to feel like it would be a shame to lose an opportunity to do something with respect to health care reform. But many are starting to feel like maybe nothing is better than something in this current environment."

A call to Lewis for additional comment was not immediately returned. Below is the full transcript of his remarks.