Unprecedented Challenges: The Complex Task of Coordinating Contracts Amid the Chaos and the Rebuilding of Iraq

UNPRECEDENTED CHALLENGES: THE COMPLEX TASK OF COORDINATING CONTRACTS AMID THE CHAOS AND THE REBUILDING OF IRAQ HEARINGS BEFORE THE COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS SECOND SESSION MARCH 11, JUNE 15, AND JULY 22, 2004 Serial No. 108–213 Printed for the use of the Committee on Government Reform ( Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00001 Fmt 6011 Sfmt 5011 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00002 Fmt 6011 Sfmt 5011 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 UNPRECEDENTED CHALLENGES: THE COMPLEX TASK OF COORDINATING CONTRACTS AMID THE CHAOS AND THE REBUILDING OF IRAQ VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00003 Fmt 6019 Sfmt 6019 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00004 Fmt 6019 Sfmt 6019 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 UNPRECEDENTED CHALLENGES: THE COMPLEX TASK OF COORDINATING CONTRACTS AMID THE CHAOS AND THE REBUILDING OF IRAQ HEARINGS BEFORE THE COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS SECOND SESSION MARCH 11, JUNE 15, AND JULY 22, 2004 Serial No. 108–213 Printed for the use of the Committee on Government Reform ( Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 96–407 PDF 2004 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 5011 Sfmt 5011 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana CHRISTOPHER SHAYS, Connecticut ILEANA ROS-LEHTINEN, Florida JOHN M. MCHUGH, New York JOHN L. MICA, Florida MARK E. SOUDER, Indiana STEVEN C. LATOURETTE, Ohio DOUG OSE, California RON LEWIS, Kentucky JO ANN DAVIS, Virginia TODD RUSSELL PLATTS, Pennsylvania CHRIS CANNON, Utah ADAM H. PUTNAM, Florida EDWARD L. SCHROCK, Virginia JOHN J. DUNCAN, JR., Tennessee NATHAN DEAL, Georgia CANDICE S. MILLER, Michigan TIM MURPHY, Pennsylvania MICHAEL R. TURNER, Ohio JOHN R. CARTER, Texas MARSHA BLACKBURN, Tennessee PATRICK J. TIBERI, Ohio KATHERINE HARRIS, Florida TOM DAVIS, Virginia, Chairman HENRY A. WAXMAN, California TOM LANTOS, California MAJOR R. OWENS, New York EDOLPHUS TOWNS, New York PAUL E. KANJORSKI, Pennsylvania CAROLYN B. MALONEY, New York ELIJAH E. CUMMINGS, Maryland DENNIS J. KUCINICH, Ohio DANNY K. DAVIS, Illinois JOHN F. TIERNEY, Massachusetts WM. LACY CLAY, Missouri DIANE E. WATSON, California STEPHEN F. LYNCH, Massachusetts CHRIS VAN HOLLEN, Maryland LINDA T. SANCHEZ, California C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland ELEANOR HOLMES NORTON, District of Columbia JIM COOPER, Tennessee BETTY MCCOLLUM, Minnesota ——— BERNARD SANDERS, Vermont (Independent) MELISSA WOJCIAK, Staff Director DAVID MARIN, Deputy Staff Director/Communications Director ROB BORDEN, Parliamentarian TERESA AUSTIN, Chief Clerk PHIL BARNETT, Minority Chief of Staff/Chief Counsel (II) VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 C O N T E N T S Page Hearing held on: March 11, 2004 .......................................................................................... 1 June 15, 2004 ............................................................................................. 177 July 22, 2004 ............................................................................................. 313 Statement of: Kelman, Steven, Weatherhead professor of public management, Harvard University, John F. Kennedy School of Government ................................. 570 Lanzilotta, Lawrence, Principle Deputy and Acting Under Secretary of Defense (Comptroller), U.S. Department of Defense; Deidre Lee, Direc- tor, Defense Procurement and Acquisition Policy, U.S. Department of Defense; Tina Ballard, Deputy Assistant Secretary of the Army (policy and procurement), U.S. Department of Defense; General Paul Kern, Commanding General, U.S. Army Materiel Command; Brigadier Gen- eral Robert Crear, Commander, Southwestern Division, U.S. Army Corps of Engineers; and William H. Reed, Director, Defense Contract Audit Agency, U.S. Department of Defense ................................................ 235 Neffgen, Alfred, chief operation officer, KBR government operations, Americas Region; William Walter, director of government compliance, KBR government operations; Charles ‘‘Stoney’’ Cox, vice president and past Restore Iraqi Oil [RIO] Project director, KBR government oper- ations; and Keith Richard, regional project manager, Theater Transpor- tation Mission, LOGCAP III, KBR government operations ...................... 507 Strock, Major General Carl A., Director of Civil Works, U.S. Army Corps of Engineers, U.S. Department of Defense; General Paul J. Kern, Com- manding General, U.S. Army Materiel Command, U.S. Department of Defense; Major General Wade H. McManus, Jr., Commanding Gen- eral, U.S. Army Field Support Command, U.S. Department of Defense; Tina Ballard, Deputy Assistant Secretary of the Army (policy and pro- curement), U.S. Department of Defense; Lewis Lucke, Deputy Assistant Administrator, U.S. Agency for International Development; Dov S. Zakheim, Under Secretary of Defense (Comptroller) and Chief Finan- cial Officer, U.S. Department of Defense; William H. Reed, Director, Defense Contract Audit Agency, U.S. Department of Defense; and Rear Admiral David Nash, USN (ret.), Director, Iraq Program Management Office, Coalition Provisional Authority ....................................................... 25 Walker, David M., Comptroller General of the United States, accom- panied by William T. Woods, Director, Acquisition and Sourcing Man- agement, U.S. General Accounting Office, and Neal P. Curtin, Director, Defense Capabilities and Management, U.S. General Accounting Office 197 Warren, James, former truck driver, KBR; David Wilson, former truck driver, KBR; and Marie deYoung, former logistics specialist, KBR ......... 364 Letters, statements, etc., submitted for the record by: Ballard, Tina, Deputy Assistant Secretary of the Army (policy and pro- curement), U.S. Department of Defense, prepared statements of........... 56, 261 Blackburn, Hon. Marsha, a Representative in Congress from the State of Tennessee: Copy of subcontract ................................................................................... 399 Resume of Ms. deYoung ............................................................................ 393 Burton, Hon. Dan, a Representative in Congress from the State of Indi- ana, prepared statement of .......................................................................... 585 Clay, Hon. Wm. Lacy, a Representative in Congress from the State of Missouri, prepared statement of .................................................................. 141 Crear, Brigadier General Robert, Commander, Southwestern Division, U.S. Army Corps of Engineers, prepared statement of ............................. 274 (III) VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 5904 Sfmt 5904 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 IV Page Letters, statements, etc., submitted for the record by—Continued Davis, Chairman Tom, a Representative in Congress from the State of Virginia: Memo from Ms. deYoung to Mr. Lesar .................................................... 498 Prepared statements of ..................................................................... 5, 181, 321 Washington Post article dated July 20, 2004 ......................................... 316 Davis, Hon. Jo Ann, a Representative in Congress from the State of Virginia, prepared statement of ................................................................... 146 deYoung, Marie, former logistics specialist, KBR, prepared statement of ..................................................................................................................... 375 Harris, Hon. Katherine, a Representative in Congress from the State of Florida, prepared statement of ................................................................ 308 Kelman, Steven, Weatherhead professor of public management, Harvard University, John F. Kennedy School of Government, prepared state- ment of ........................................................................................................... 573 Kern, General Paul J., Commanding General, U.S. Army Materiel Com- mand, U.S. Department of Defense, prepared statements of .................. 42, 267 Lanzilotta, Lawrence, Principle Deputy and Acting Under Secretary of Defense (Comptroller), U.S. Department of Defense: Memo dated June 7, 2004 ......................................................................... 237 Prepared statement of ............................................................................... 240 Lee, Deidre, Director, Defense Procurement and Acquisition Policy, U.S. Department of Defense, prepared statement of ......................................... 255 Lucke, Lewis, Deputy Assistant Administrator, U.S. Agency for Inter- national Development, prepared statement of ........................................... 64 Maloney, Hon. Carolyn B., a Representative in Congress from the State of New York, prepared statement of ........................................................... 139 Nash, Rear Admiral David, USN (ret.), Director, Iraq Program Manage- ment Office, Coalition Provisional Authority, prepared statement of ...... 83 Neffgen, Alfred, chief operation officer, KBR government operations, Americas Region, prepared statement of .................................................... 511 Reed, William H., Director, Defense Contract Audity Agency, prepared statement of ................................................................................................... 248 Ros-Lehtinen, Hon. Ileana, a Representative in Congress from the State of Florida, prepared statement of ................................................................ 148 Ruppersberger, Hon. C.A. Dutch, a Representative in Congress from the State of Maryland, prepared statement of .................................................. 311 Strock, Major General Carl A., Director of Civil Works, U.S. Army Corps of Engineers, U.S. Department of Defense, prepared statement of .......... 29 Walker, David M., Comptroller General of the United States, prepared statement of ................................................................................................... 200 Warren, James, former truck driver, KBR, prepared statement of ............. 366 Waxman, Hon. Henry A., a Representative in Congress from the State of California: Copies of audits ......................................................................................... 410 Memorandum dated March 10, 2004 ....................................................... 10 Minority views ........................................................................................... 329 Prepared statements of ................................................................... 20, 189, 347 Wilson, David, former truck driver, KBR, prepared statement of ............... 370 Zakheim, Dov S., Under Secretary of Defense (Comptroller) and Chief Financial Officer, U.S. Department of Defense, prepared statement of ... 75 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00008 Fmt 5904 Sfmt 5904 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 THE COMPLEX TASK OF COORDINATING CON- TRACTS AMID CHAOS: THE CHALLENGES OF REBUILDING A BROKEN IRAQ THURSDAY, MARCH 11, 2004 HOUSE OF REPRESENTATIVES, COMMITTEE ON GOVERNMENT REFORM, Washington, DC. The committee met, pursuant to notice, at 2 p.m., in room 2154, Rayburn House Office Building, Hon. Tom Davis (chairman of the committee) presiding. Present: Representatives Tom Davis, Burton, Ros-Lehtinen, McHugh, Mica, LaTourette, Ose, Jo Ann Davis, Platts, Turner, Carter, Tiberi, Waxman, Lantos, Kanjorski, Maloney, Tierney, Clay, Watson, Lynch, Van Hollen, Ruppersberger and Norton. Staff present: Melissa Wojciak, staff director; David Marin, dep- uty staff director, director of communications; Keith Ausbrook, chief counsel; Ellen Brown, legislative director and senior policy counsel; David Young, counsel; Robert Borden, counsel/parliamen- tarian; Drew Crockett, deputy director of communications; John Cuaderes, senior professional staff member; Edward Kidd, profes- sional staff member; Ken Feng, investigator/GAO detailee; Teresa Austin, chief clerk; Brien Beattie, deputy clerk; Allyson Blandford, office manager; Phil Barnett, minority staff director; Kristin Amerling, minority deputy chief counsel; Karen Lightfoot, minority communications director/senior policy advisor; Anna Laitin, minor- ity communications and policy assistant; Jeff Baran and David Rapallo, minority counsels; Mark Stephenson, minority professional staff member; Earley Green, minority chief clerk; Jean Gosa, mi- nority assistant clerk; Cecelia Morton, minority office manager; and Naomi Seiler, minority staff assistant. Chairman TOM DAVIS. Good afternoon. We are going to go through two opening statements before we get to our witnesses, so take your time getting to your seats, the witnesses. A quorum being present, the committee will come to order. We meet today to look into the complex task of coordinating con- tracts amid the chaos and challenges of rebuilding Iraq. Even before the conclusion of major military actions, there were plans for a major effort to rebuild Iraq’s infrastructure and govern- ment. Emergency supplemental appropriations bills for both fiscal year 2003 and fiscal year 2004 have provided more than $20 billion to rebuild postwar Iraq. Many Federal departments and agencies have already awarded or soon will award contracts for the sustainment and reconstruction efforts. (1) VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 2 The rebuilding of Iraq is a monumental task. Saddam Hussein spent decades frittering away his nation’s vast wealth on himself and his Baath party cronies, while little to nothing was spent to meet the urgent needs of the Iraqi people. Decades of neglect and inaction have turned this once great nation into a country where the majority of people live in poverty and despair. However, with Saddam’s ouster, we are witnessing a rebirth of Iraq. Freedom and liberation have brought a new sense of urgency to the Iraqi people. They understand what is at stake; and we, as part of the coalition of the willing, must do our part to sustain free- dom by rebuilding their nation. Twenty days ago, I, along with other members of this committee, returned from Iraq where we witnessed the enormity of the recon- struction effort. This was my second trip, and in the 6 months since my last visit to the region I saw significant progress in our recon- struction efforts. The task at hand is enormous. It will be years before we are able to get Iraq running on its own. Yet each day Iraqis are getting a better life, thanks to the dedicated American soldiers and civilians working there. Our reconstruction efforts are being completed under even life-threatening conditions. Our military is nothing short of superb. Besides ensuring the safety of the country, they have become master builders and diplomats. The use of funds from the Commanders Emergency Relief Program paves the way for local and regional stabilization by allowing for small rebuilding projects that have an immediate impact on the local population. For example, we recently met with General Odierno, Commander of the 4th Infantry Division, who told us how he used his CERP funds to build a water treatment facility in Tikrit and a sewage treatment facility in Baji. In many ways, the Commanders Emer- gency Relief Program is meeting the immediate needs until our larger construction projects are completed. The positive offshoots of the Iraqi rebuilding effort are beginning to take shape. Entrepreneurialism is sprouting; and unemploy- ment, which was once a major problem, is coming under control. Our efforts are paying off. Reconstruction, together with an interim constitution, locally elected leaders and a functioning, better- trained security force all add up to a stable and more peaceful Iraq. Today we meet to specifically discuss the complexity of coordinat- ing our rebuilding of Iraq, primarily as it pertains to the larger construction projects and sustainment efforts. Currently, there are many U.S. Government agencies working to improve conditions in Iraq. For example, the Department of Defense, including the U.S. Army of Corps of Engineers and the U.S. Agency for International Development, are both working to rebuild Iraq. Both DOD and USAID have their own procurement shop, their own management team, and their own audit mechanisms. The committee is inter- ested in the efforts made by each agency to manage and coordinate acquisition activities to ensure that taxpayer money is spent both effectively and efficiently. In addition, enormous amounts of money have already or are about to be expended in the efforts to rebuild Iraq. We need to make sure that acquisition rules are being followed. Congress has spent years streamlining complex government rules and regula- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 3 tions to make it easier for businesses to sell to the Federal Govern- ment, but did so in a way that carefully balances affordability, ac- countability, and accessibility to make sure taxpayer dollars are protected. It’s our job to make sure that these things are happening in Iraq. We hope to learn today how our acquisition system and the pro- fessionals who run it have responded to the challenges raised in Iraq. No one doubts that the circumstances are extremely difficult. I’ve seen the chaos on the ground there. The security situation is tenuous at best. Our servicemen and women are being killed and wounded. A number of contractor employees have also been killed and wounded. Large-scale procurements are complex and difficult to under- stand in and of themselves. When it comes to procurement, if you’re not confused, you’re not paying attention. Add in the urgency and inherent dangers of contracting in a war zone, and the challenge of acquiring urgently needed goods and services becomes quite daunting. Through this hearing we hope to separate fact from fiction, truth from rhetoric, and in turn help make sure we are coordinating contract processes in Iraq in a way that ensures success and safety. Fortunately, our acquisition laws have been carefully crafted by Congress to provide enough flexibility for the government to quick- ly get the goods and services it needs in emergency situations. There are provisions in the acquisition laws that allow for carefully circumscribed exceptions to our standard for full and open competi- tion to provide for a more limited, less time-consuming award of contracts for urgently needed supplies and services. I frankly can- not think of a situation that would better fit within these flexibili- ties than what we faced on the ground when we came into Iraq. Sometimes we just don’t have time to take our time. I find it ironic that those who are complaining that the govern- ment doesn’t have sufficient people on the ground to oversee and administer the current contracts in Iraq would foster contracting strategies that would increase substantially the need for contract administration. For every complex problem, there is a simple solu- tion that doesn’t work. I recognize that there have been mistakes. The contract oversight process is not always pretty, and the decisions made under the pressures of combat are not as always as lucid as those made under less-threatening conditions. I commend my ranking member and others who have raised some important questions pertaining to the reconstruction process. Today I hope we can differentiate between real issues worthy of se- rious inquiry and those with little or no basis in fact that are raised solely to create a whiff of scandal. There are some who have disagreements with contractors over- payments, and it should come as no surprise to anybody who’s fa- miliar with the administration of complex contracts in difficult cir- cumstances. These difficulties should be viewed within the context of the wartime environment in Iraq. Many of the disputes that have been made public show that the contract oversight process is indeed working. This hearing is part and parcel of a functioning oversight process. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 4 Make no mistake, I have no patience for fraud or abuse. I expect that any such instances that are proven will result in harsh pun- ishment for the perpetrators. I also expect that, as the conditions on the ground improve, the next generation of contracts will be awarded and administered in accordance with our standard acqui- sition procedures. Emergency procedures are for emergencies only. This is a monumental task, and there is no room for error. Nor is there room for partisan sniping aimed merely at undermining the overall reconstruction efforts. We are interested in the truth, not rhetorical calisthenics. We are interested in helping coordinate the many important contracts in place today or planned for the fu- ture. In short, we are interested in moving forward with a contract- ing framework that benefits our reconstruction goals. We are not interested in simply repeating disingenuous sound bites. Now, pursuant to committee rule 14, following the witnesses’ opening statements, the ranking minority member and I shall each control 20 minutes in order to permit some important but complex lines of questioning and allow adequate time for full responses. Fol- lowing the 40-minute questions, we will continue under the 5- minute rule. Mr. Waxman and I have agreed that we don’t expect any votes today at this point. He has asked—requested of us that a number of documents be released from this committee. I understand that DOD has gone on their own volition and that these documents have been released. We are also joining with him in a request for more documenta- tion from the Department of Defense reiterating an earlier request for some of these documents, and we join him in this. If when we get the responses back, they are not adequate, we will then address what further avenues we may wish to pursue. In the interests of time and given the 20-minute block agreement I have made with Mr. Waxman, we are limiting opening state- ments to the ranking member and myself. But statements will be included in the record, and you will have 10 calendar days to do so. I also want to thank all of our witnesses for appearing before the committee, and I look forward to their testimony. I also want to recognize a new member of the committee, the gentleman from Ohio, Mr. Tiberi. We have had a couple of vacancies on this com- mittee, and we are very happy to have him here. We understand he is going to be here for the entire hearing, and we appreciate it. Thank you. At this time, I will yield for Mr. Waxman’s opening statement. [The prepared statement of Chairman Tom Davis follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 5 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 6 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 7 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 8 Mr. WAXMAN. Thank you very much, Mr. Chairman. I want to thank you for holding this hearing today. The subject we are going to consider, contracting in Iraq, ur- gently needs congressional oversight. It is an issue that has crucial implications for the success of our efforts in Iraq and for U.S. tax- payers. Usually I keep my remarks short at committee hearings, but today I am going to speak at some length in this opening state- ment. I have been investigating contracting in Iraq for many months and I believe few of my colleagues understand just how big a mess this administration has created. I want to explain to the members of this committee and the public what is going wrong and why. The problem starts with the procurement strategy that the ad- ministration is using in Iraq. It is profoundly flawed. I have a chart that I want to display. It is over there. The chart shows two numbers, the first, 2,300; 2,300 is the num- ber of discrete reconstruction projects that the coalition provisional authority is planning to do in Iraq. The second, zero, is the number of projects that will be subject to competitive bidding. Instead of promoting competition, the administration is giving contractors monopolies over huge sectors of the reconstruction ef- fort. One company, Halliburton, gets all work related to oil recon- struction in southern Iraq. Another company, Parsons, gets all work related to oil reconstruction in northern Iraq. And they never have to bid against each other for any specific project. The adminis- tration has a procurement strategy that intentionally shields con- tractors from competition. Think about this: For nearly a year both Halliburton and Bechtel have had enormous operations in Iraq. Both companies can do vir- tually the same work. But never once have they had to compete against each other for a specific project. This is a great deal for Bechtel and Halliburton, but it is an absolutely horrendous deal for the taxpayers. These problems are compounded by the fact that many of the contracts that are being issued are cost-plus contracts. Under a cost-plus contract, the more the contractor bills, the more money the contractor makes. That is why cost-plus contracts are notori- ously prone to abuse. In the absence of competition to discipline the process and to hold down prices, the taxpayer has to rely on contracting officers working for the Defense Department to keep prices reasonable. These officials are supposed to scrutinize the proposals submitted by Halliburton and other contractors and reject those that are load- ed up with unnecessary expenses. But they are inexperienced and overworked. Representative John Dingell and I asked GAO to investigate what kind of job the Defense Department is doing managing the largest contract in Iraq, Halliburton’s LOGCAP contract. The con- tract alone is worth over $4 billion to Halliburton. GAO told us that the Army Central Command in Kuwait has not made cost control a priority. GAO found that the Army does not have the expertise or the personnel in Kuwait needed to ensure that taxpayers are not being overcharged. According to the General Accounting Office, inexperienced reservists are being sent to Ku- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 9 wait and given key oversight responsibilities. A 2-week training course on contract management is the only preparation they re- ceive. GAO told us that in one instance the Army approved a LOGCAP contract worth $587 million to Halliburton in just 10 minutes. The documentation for this mammoth contract was just six pages long. In essence, this administration’s approach to contractors like Halli- burton is ‘‘trust but don’t verify.’’ Auditors like the Defense Contract Audit Agency and criminal in- vestigators with the Inspector General and the Justice Department can try to catch waste, fraud and abuse after it occurs, but there are few mechanisms in place to prevent overcharges from occurring in the first place. We are now learning that the administration’s approach is an enormous mistake. This week, the committee received two recent audits of Halli- burton by DCAA. At the appropriate time—well, I won’t need to move to have the committee release these documents publicly be- cause I understand that we have all agreed and the DCAA has agreed to make these documents public, so they will be available. These audits are a scathing indictment of Halliburton. According to DCAA, Halliburton’s cost accounting system has, ‘‘significant deficiencies’’ and the company has repeatedly violated Federal acquisition regulations. Well, anybody who has followed this issue has heard Halliburton say over and over again that any violations or overcharges are isolated occurrences. This is what it said when it was revealed that Halliburton sought fees for millions of meals it never served, and it is what Halliburton said when it disclosed that company procurement officials participated in a $6 million kickback scheme, and this is also what Halliburton said to the DCAA. When the audit agency gave Halliburton a chance to respond to its preliminary findings, Halliburton wrote, ‘‘this issue is not a sig- nificant estimating system deficiency as stated in the DCAA re- ports. Rather, this was a unique situation.’’ The problem with Halliburton’s response is that it is not true. According to the DCAA, ‘‘The estimating deficiency is not a one- time occurrence. It is systemic.’’ Now here is a stunning fact that is revealed in the DCAA audit documents. The DCAA brought these systemic problems to the at- tention of the Army Corps of Engineers on January 13. Three days later, on January 16, the Army Corps gave Halliburton another $1.2 billion contract. It was as if the decisionmakers simply didn’t care. Yesterday, I sent my colleagues a briefing memorandum that went through some of these issues in detail, and I’d like to ask unanimous consent that it be made part of the hearing record. Chairman TOM DAVIS. Hearing no objection, I would note that there are parts of the briefing memorandum that we take issue with on the factual side, Mr. Waxman. We will get to that in our questions, but with that understanding, without objection, it will be entered into the record. [The information referred to follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 10 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 11 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 12 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 13 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 14 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 15 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 16 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 17 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 18 Mr. WAXMAN. It is not just the government auditors who are complaining about Halliburton’s practices. Halliburton’s own inter- nal auditors have said that the company procedures are, ‘‘anti- quated’’ and that it has, ‘‘weak internal controls.’’ Last month, my staff was contacted by two former Halliburton procurement officers. They described company practices that sys- tematically overcharge the taxpayer on hundreds of routine req- uisitions every day. When they tried to protest, they were ignored. They said that the company’s motto was ‘‘Don’t worry about price. It’s cost-plus.’’ Well, it’s very hard to get details from the administration about the specific amounts Halliburton is charging for particular projects. The White House, Secretary of Defense, and the USAID all have an aversion to any form of oversight. When Representative Dingell and I wrote letters raising significant issues, they were almost al- ways ignored. But we have been able to penetrate one particular contract, Halliburton’s contract to import fuel from Kuwait into Iraq; and what we have learned is that Halliburton and its obscure subcontractor, Altanmia, have been gouging the taxpayer. I have another chart, and I want to show this to everyone here. Halliburton imports gasoline from Kuwait into Iraq for Iraqis to use. The Defense Energy Support Center imports gasoline from Ku- wait into Iraq for the military to use. The chart simply compares the prices the government pays with those that Halliburton pays. The differences are astounding. Gasoline in the Middle East is a commodity. Everyone should be able to get it at essentially the same price, but Halliburton is pay- ing over 20 cents more per gallon than the Energy Support Center just to purchase the fuel. Both Halliburton and the Energy Support Center have to transport the fuel through dangerous conditions into Iraq, both entities are using private contractors to handle the transportation, and both entities receive, military protection for convoys. But it costs the Energy Support Center just 36 cents per gallon compared to $1.21 for Halliburton, and then Halliburton adds on a markup for itself of 24 cents per gallon and another cat- egory called ‘‘other’’ charge of 2 cents per gallon. The end result is that it costs the taxpayer twice as much when Halliburton imports the fuel as it would cost the government to do it. Representative Dingell and I first raised this issue on October 15. Since then, all I have been hearing from the Army Corps of En- gineers, which is the agency responsible for the fuel contract, is a string of denials and platitudes. As recently as February 1, the Corps spokesman said, ‘‘We have our own internal audit process, and we haven’t turned up any serious wrongdoing or major prob- lems.’’ When you get to the bottom of this, that is the real problem. The policymakers in this administration don’t seem to care about the pattern of waste, fraud and abuse that is coming to light. Fifty years ago, the CEO of General Motors said, what is good for the country is good for General Motors and what is good for General Motors is good for America. Well, I have a message to this administration: What is good for Halliburton is not always good for America. Iraq is a dangerous country. All of us in Congress want to do whatever is necessary to make sure our troops have the VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 19 equipment and protection they need, and Americans are a generous people. They are willing to spend billions to help Iraqis rebuild their nation and establish democracy. But gouging and profiteering is heinous and should never be tolerated. I firmly believe that Congress has an important oversight roll to play in ensuring the wise expenditure of taxpayers’ dollars. Part of the problems that we are experiencing can be attributed to the lack of vigorous congressional oversight. But I’m encouraged by the re- cent steps that Chairman Davis has taken. He has joined me in re- questing the DCAA audit documents. He scheduled this hearing, and he has promised to hold another hearing hopefully by the end of April. This is not easy for him to do, and I am sure it will alien- ate many in the administration, but I commend him for the steps that he is taking, even as I will be pressing him to take more. In closing, let me say that I look forward to today’s hearing and the opportunity to hear from and question the distinguished wit- nesses before us. Thank you, Mr. Chairman. [The prepared statement of Hon. Henry A. Waxman follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 20 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 21 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 22 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 23 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 24 Chairman TOM DAVIS. Thank you very much, Mr. Waxman. We have our panel today. We have Major General Carl Strock, who is the Director of Civil Works, Army Corps of Engineers; Gen- eral Paul Kern, Commanding General, U.S. Army Materiel Com- mand, Department of Defense; Major General Wade McManus, Commanding General of the U.S. Army Field Support Command; Ms. Tina Ballard, the Deputy Assistant Secretary of the Army for Policy and Procurement, U.S. Department of Defense; Lewis Lucke, Deputy Assistant Administrator, USAID; Honorable Dov Zakheim, the Under Secretary of Defense, Comptroller, and Chief Financial Officer, Department of Defense. We have Mr. William Reed, the Di- rector of the Defense Contract Audit Agency [DCAA]; and Rear Ad- miral David Nash, the director of Iraq Program Management Of- fice, Coalition Provisional Authority. It is our committee’s policy that all witnesses be sworn before you testify. So if you would rise with me. [Witnesses sworn.] Chairman TOM DAVIS. I think I went over with everybody that we try to keep a 5-minute rule. Mr. Waxman and I didn’t observe it. So we understand. Your total statement will be in the record. Obviously, there are a lot of allegations and things going out there. We want to give you adequate time to make your statements. We have a distinguished panel that I think for most of you are career military or civil servants, served under administrations of both parties. We appreciate your taking the time to be here. I am going to start with General Strock and work our way down. General STROCK. Thank you, Mr. Chairman. Chairman TOM DAVIS. I also need to recognize that Dr. Zakheim will be retiring on April 15. I want to extend my gratitude for your many years of service to our country and best wishes as you move forward and thank you for being with us today. Mr. ZAKHEIM. Thank you, Mr. Chairman. Chairman TOM DAVIS. The others will be here for our next hear- ing, but this may be our last bite at you. Dr. Zakheim do you want to start off. Mr. ZAKHEIM. I think if you would like to go in that order, just in terms of the flow, of how this is all seen in terms of oversight, then probably starting with General Strock is the right way to go. I will be talking specifically about contract performance oversight, and to start there is almost like starting a story in the middle. So with your permission I think we will start at—— Chairman TOM DAVIS. We will then thank you. Again General Strock, thank you for being with us. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 25 STATEMENTS OF MAJOR GENERAL CARL A. STROCK, DIREC- TOR OF CIVIL WORKS, U.S. ARMY CORPS OF ENGINEERS, U.S. DEPARTMENT OF DEFENSE; GENERAL PAUL J. KERN, COM- MANDING GENERAL, U.S. ARMY MATERIEL COMMAND, U.S. DEPARTMENT OF DEFENSE; MAJOR GENERAL WADE H. McMANUS, JR., COMMANDING GENERAL, U.S. ARMY FIELD SUPPORT COMMAND, U.S. DEPARTMENT OF DEFENSE; TINA BALLARD, DEPUTY ASSISTANT SECRETARY OF THE ARMY (POLICY AND PROCUREMENT), U.S. DEPARTMENT OF DE- FENSE; LEWIS LUCKE, DEPUTY ASSISTANT ADMINISTRATOR, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT; DOV S. ZAKHEIM, UNDER SECRETARY OF DEFENSE (COMPTROL- LER) AND CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF DEFENSE; WILLIAM H. REED, DIRECTOR, DEFENSE CON- TRACT AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE; AND REAR ADMIRAL DAVID NASH, USN (RET.), DIRECTOR, IRAQ PROGRAM MANAGEMENT OFFICE, COALITION PROVISIONAL AUTHORITY General STROCK. Mr. Chairman and members of the committee, thank you for allowing us to testify today. It really is an honor to be here to tell you a bit about what we faced in Iraq. As you mentioned, I am the Director of Civil Works for the U.S. Army Corps of Engineers, but from March to September I served with ORHA and later CPA in a number of capacities, culminating as the Deputy Director for Infrastructure in the CPA. What I would like to do today is give you a limited description of the oper- ating environment that was faced by coalition military forces and civil authorities as we went into Baghdad. Sir, ORHA was established in January 2003—that’s the Office of Reconstruction and Humanitarian Assistance—and we deployed to Kuwait on March 15, 2003. ORHA consisted of three pillars: recon- struction, led by the U.S. Agency for International Development [USAID]; civil administration, led by the Department of Defense; humanitarian assistance, led by the Department of State; and three regional coordinators for north, central and south Iraq head- ed by two retired general officers and one former Ambassador. The priority of effort for ORHA initially was the planning for an expected humanitarian crisis. Significant effort went into planning for food, water, shelter and medical support. The reconstruction focus was to repair damaged infrastructure to prewar conditions. We understood that the future of Iraq relied on the integrity of the infrastructure, so careful efforts were made to use precision weap- ons to minimize impacts on infrastructure. The ground forces were also sensitive to the need to limit damage to infrastructure. The U.S. Agency for International Development was given a $680 mil- lion effort to apply to all sectors of infrastructure, and oil was han- dled separately through a contract under a task force to restore Iraqi oil from the Corps of Engineers that reported directly to coali- tion forces land component commander. The third element of ORHA was civil administration, and that was aimed at the reestablishment of government functions in the liberated country. This consisted of senior advisors for each of the 23 ministries in teams from one to five. We expected that the lead- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 26 ership would flee but that ministry work force and facilities would be intact on our arrival. Lieutenant General Gardner and his leadership really con- centrated on creation of a guiding coalition for the future of Iraq. The first elements deployed to the port of Umm Qasr in late March, shortly after the commencement of the hostilities, and the main body began deployment to Baghdad in mid-April. When we arrived, we found a country roughly the size of California in terms of population and geography where virtually every element of gov- ernment did not exist. There was relatively little damage due to combat operations, with the exception of the communications infrastructure which was deliberately targeted. We anticipated some looting but not as sig- nificant as it turned out to be. It was extremely difficult for our forces to control, and it was especially bad in government facilities. We also anticipated some level of sabotage, but again this exceeded our expectations, not as much as expected in the oil infrastructure, where very few fires were set, but much more in other elements of infrastructure. Virtually every public building was burned, with its records, its equipment and supplies all destroyed. The most challenging aspect we found in the infrastructure was really not about the damage caused by the war and its aftermath but by 30 years of neglect under the Saddam regime. We found an infrastructure that was fragile and antiquated, that was really on its last legs. It was only to the credit of the Iraqi public servants that this infrastructure worked at all, largely as we understand it through threat that they produce for the country. Saddam also used basic services and infrastructure to reward those who favored him and to punish those who did not. In the electricity sector, there was no generation of electricity when it arrived in Baghdad, a tremendous challenge. There was no water treatment. There was no sewage flowing. All the irrigation in the country had ceased. Fuel supplies were far more limited than we anticipated. The hospitals were in darkness and closed down. Schools were not operating. The work force will be expected to take advantage of. As expected, the key leaders were absent. They either fled or had been removed from debaathification. But the remaining civil serv- ants we found were competent, committed and courageous. How- ever, they really lacked a sense of initiative that is so important in a self-performing government and virtually had to be told to do everything that was necessary. They also lacked facilities, tools, and equipment and supplies and money to get their job done. Finally, the security situation that all of us faced was a tremen- dous challenge for everyone. I might add that ORHA, those civil servants who went in with General Gardner, faced exactly the same living conditions as the Iraqis—no food, no fuel, no power, no transportation, everything the same. Sir, when we got on the ground we first established a regional presence through our regional coordinators to include Baghdad. We relied very heavily on the military forces in the early stages. Their civil affairs and line units really carried the weight of the recon- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 27 struction and establishment of government, utilizing seized and in- vested assets and their own capabilities. General McKiernan, who commanded the Combined Forces Land Component Command, recognized the need early on to get elec- tricity flowing in the country, so he convened a task force called ‘‘fajr,’’ which is first light in Arabic. It’s a multidisciplinary task force led by Brigadier Steve Hawkins that went into Baghdad right behind the military forces with a priority to establish electricity, to first furnish it to hospitals, then water supply, then sewage treat- ment, and finally to domestic needs of the Iraqi people. We also found a flooding situation on our hands, as all the res- ervoirs had been abandoned and they were operated at free flow. Working with the Iraqi public servants we were able to find, we brought the rivers under control, and we started up the power plants and began to establish the electrical grid and began to treat water and get hospitals back on line. Eventually Task Force Fajr expanded their scope to a national level. Another task force that was established was Task Force Restore Iraqi Hope—Iraqi Oil. On February 13, the Army was designated as executive agent for restoration of oil infrastructure, and that au- thority was passed on to the U.S. Army Corps of Engineers, which further delegated authority to Brigadier General Bob Creer from the Southwestern Division to pull together a task force and accom- plish that mission. The immediate mission was to fight anticipated fires and to safe- ly shut down the oil fields in Kirkuk and Rumaila and then to bring the refineries, pipelines and export facilities back into oper- ation. We used LOGCAP to reposition the firefighting forces that we needed for the immediate aftermath of the fighting, and after careful analysis decided to go to sole source with Kellogg, Brown and Root services to accomplish, the reconstruction of the oil infra- structure. There was far less sabotage than expected. We quickly brought the fires under control with the assistance of the Kuwaitis and, working with the Iraqi Oil Ministry, have made remarkable progress. We are now at prewar oil production levels of 2.5 million barrels per day. We are exporting 1.5 million barrels per day and refining about 500,000 barrels per day for domestic consumption. The expected earnings are $1.5 to $2 billion a month; and so far, to date, we have returned $8 billion to the DFI for use by the Iraqi people. Task force RIO also picked up an additional responsibility to pro- vide domestic fuel for all the people of Iraq. This is not just gaso- line. It included diesel, kerosene and LPG, which they used for cooking and heating. Sir, our final task was Task Force Restore Iraqi Electricity. In August, General Abizaid was very concerned about the progress of reconstruction. He was concerned that we were losing the consent of the Iraqi people, and frequently you heard from these people that this is the Nation that put a man on the moon but we can’t get the lights on in Baghdad. Out of frustration, General Abizaid convened a conference in which he wanted to look at what we were doing with the electricity, the oil and refined fuel and the security situation that cared for all that infrastructure. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 28 One of the outcomes of that conference was the need for a FEMA-like capability similar to our domestic disaster response where teams of experts with flexible contracting tools and the nec- essary resources to fix problems as they encountered them could flow into Iraq. We deployed this task force within 2 weeks. We pulled General Steve Hawkins back, not to the fight and put him ashore, and since that time we’ve contributed in many ways to the restoration of electricity working under the leadership of USAID and the CPA. We accomplished the first mission of 4,400 megawatts of produc- tivity in October, and we are well on the way to achieving the 6,000 megawatt target by May. The task force really focused on temporary generation, distribution controls and logistics, while USAID focused on the longer-term aspects of electrical generation and distribution. To do this, we employed four competitively bid projects much like the IDIQs used by LOGCAP and Task Force RIO, and so far our efforts have been tremendously successful. My written includes far more detail, but I again appreciate the opportunity to lay out for you the situation we faced and some of the mechanisms we employed to address. Chairman TOM DAVIS. Thank you very much. As I noted before, your entire statements are in the record; and questions will be based on the entire statement. [The prepared statement of General Strock follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 29 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 30 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 31 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 32 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 33 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 34 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 35 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 36 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 37 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 38 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 39 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 40 Chairman TOM DAVIS. General Kern, thanks for being with us. General KERN. Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity today to speak to you about the Army’s Logistics Civilian Augmentation Program, re- ferred to as LOGCAP by the members and in our current testi- mony. My command, the Army Materiel Command’s mission is to sup- port our warfighters, and that includes all of our services as well as Ambassador Bremer’s CPA, the Polish Multinational Division and other organizations in this theater. I have just returned from talking to members of the CJTF Com- mand, General Sanchez in our area, and I would report that it’s re- markable that it’s been less than a year since the conditions which General Strock just described have been turned into a country which has been restoring itself into an economy and we hope to a democracy. We work each day to improve our support in the thea- ter, and the observations that we have made show great success in that area as well as the areas that we need to improve. Part of the purpose of my visit there was to find those areas we need to im- prove so that we get direct feedback from our customers in their requests. LOGCAP provides to us the vital support for our forces in peace and in war. It gives us today the ability of an entire division of sol- diers that can be returned to the fighting force and support through LOGCAP contracting. It provides us agility, flexibility, and fulfills critical, time-sensitive needs, and that is the critical part of a contingency-type contract where time is essential. It provides the means for our warfighters and our Nation to execute national secu- rity missions. These contracts are around the world, not just in Iraq, and they provide us extensive capability in each area we use them. When our forces go in as General Strock has described, they carry with them everything that they have for life support. The food, the water, the tents and the laundry they hope will not be far behind. LOGCAP has provided us the capability to change their condi- tions in which the soldiers and the support structure lives, from lying on the ground and eating MREs to one to being able to have shelter, sleep on cots, and have hot food prepared. If they wanted to shower when they arrived in Iraq last year, they used a bucket of water. Today, they have facilities to shower in. If they wanted a clean uniform, they used the same bucket of water; and today they have laundries that they can use. As many of the soldiers have reported to us, LOGCAP has changed the way that they can live and survive in that theater. Today force provider has provided transportable shelters, it has provided dining facilities, it has provided maintenance facilities, it manages large pieces of our general support for parts, and it is pro- viding a new quality of life in the country. The stories are similar throughout. There are 61 base camps and today 79 dining facilities, which are supporting more than 180,000 soldiers. It is time critical, and so it is a contingency type contract which allows us to go in based on requirements and work through a process of definitizing the contract requirements and coming to an equitable adjustment. Frequently in these austere places, sup- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 41 port is not what we would expect, and our contingencies allow us to both plan for that early and then react as requirements develop. Again, timing is critical and key in all of these. The contractors also—and I would like to correct my written statement, since three additional contractors were killed just yes- terday, has resulted today in eight killed from any accident and two killed in accidents. So they are exposed to the same dangers that our soldiers and others in Ambassador Bremer’s organization are exposed. We don’t know precisely where we are going to be in our security arrangements, and this has given us the flexibility to respond. We also believe in fiscal responsibility. So our process, which I will ask General McManus to describe in some more detail, allows for that fiscal responsibility. It is a process of defining require- ments, making sure that they fit within the scope of our contract- ing efforts and then following up with audits and defense contract management administrative contracting officers to ensure that ev- erything is done in accordance to our Federal acquisition regula- tions. The point is, we do plan and we do followup and we are fiscally and legally responsible for the actions that we do take. I believe that LOGCAP and our soldiers are doing a remarkable job. We aren’t perfect. It is a war zone, and we are correcting the mistakes as we find them. I believe you will find that we have cor- rected more than we have found by the basis of just eliminating and working together both with our supporting requirements and our audit agencies. The soldiers have done a remarkable job, and they have been supported by the LOGCAP contract admirably. We look forward to your questions and I appreciate the oppor- tunity on our behalf to testify. Chairman TOM DAVIS. Thank you very much. [The prepared statement of General Kern follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 42 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 43 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 44 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 45 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 46 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 47 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 48 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 49 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 50 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 51 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 52 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 53 Chairman TOM DAVIS. Can we go now to Ms. Ballard. Ms. BALLARD. Mr. Chairman and distinguished members of the committee, thank you for this opportunity to report to you on the U.S. Army’s role in contracting in Iraq. It is my privilege to represent—— Chairman TOM DAVIS. Could you pull the mic just a little closer there? Ms. BALLARD. Is that better, sir? Chairman TOM DAVIS. It’s better. Ms. BALLARD. It is my privilege to represent the Army leadership and the military and civilian members of the Army’s contracting work force who are at the forefront in the reconstruction and res- toration of Iraq’s infrastructure. We are very proud of these dedi- cated men and women because of their extraordinary efforts to help create a stable and successful Iraq, especially in light of the dan- gers they face every day. This is a time of tremendous change, and we are most grateful for the committee’ wisdom, guidance and strong support. Over the last year, our Army has met the demands of the global war on ter- rorism with more than 330,000 troops deployed around the world in more than 120 countries. They are doing what our country needs them to do in Bosnia, Kosovo, in the Sinai, in Korea, in Afghani- stan and in Iraq. The U.S. Army—well-trained, well-led and well- equipped—is an important part of our globally engaged joint force. Our Army was instrumental in the defeat of Saddam Hussein and the subsequent liberation of more than 46 million people from op- pression and despair. Our Army remains a central and critical par- ticipant in Operation Iraqi Freedom. On May 21, 2003, the Deputy Secretary of Defense designated the Secretary of the Army as the Executive Agent for the Office of Reconstruction and Humanitarian Assistance, later to become the Coalition Provisional Authority [CPA], in Iraq. On January 14, 2004, the Deputy Secretary of Defense further assigned responsibil- ity for Acquisition and Program Management Support for CPA to the Secretary of the Army. The Army is the lead service, helping Iraqi people build a stable and democratic society. Our job is enormous, but we continue to make progress in an ex- tremely difficult situation. I would like to reiterate the widespread neglect of basic services that Deputy Secretary of Defense Paul Wolfowitz reported to the Senate Foreign Relations Committee on May 22, 2003. He said: Before the war, large numbers of Iraq’s children under 5 years old suffered from malnutrition. Only 60 percent of the Iraqi people had access to safe drinking water. Ten of Basrah’s 21 potable water treatment facilities were not functional. Seventy percent of Iraq’s sewage treatment plants needed repair. According to UNICEF reports, some 500,000 metric tons of raw or partially treated sewage was dumped into the Tigris or Euphrates rivers, which are Iraq’s main source of water. Eighty percent of Iraq’s 25,000 schools were in poor condition. In some cases, as many as 180 students occupied one classroom—with an average of one book per six students—while at the same time every one of the first 100 or so schools we in- spected in southern Iraq had been used as military command posts and arms stor- age sites. Iraq’s electrical power system operated at half its capacity. Iraq’s agriculture production had dropped significantly. Iraq’s oil infrastructure was neglected.’’ VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 54 It will take time to reverse these desperate conditions, but we are making steady progress. The Army, as Executive Agent, is providing contracting and pro- gram management support both in Iraq and in the United States. We are charged with procuring all nonconstruction items and serv- ices to meet the humanitarian needs—the basic needs—of the Iraqi people as well as the economic reconstruction and repair of Iraq’s infrastructure. To date, in total, more than 1,500 contracts valued at more than $9.7 billion have been awarded. Of that total, more than 1,300 contracts totaling $1.3 billion have been awarded by our contracting office in Iraq. These contracts were awarded for the re- pair and renovation of schools, banks, railway stations, clinics, mosques, a human rights building, a teacher training institute, a women’s rights building, and water treatment plants. These con- tracts were awarded to provide police and firefighters with uni- forms and equipment, hospitals with badly needed supplies, elec- trical power system equipment, rescue equipment and buses. In ad- dition, our contract awards are helping to build playgrounds, youth centers, emergency housing, roads, sewers and irrigation systems. Again, of the overall total of more than $9.7 billion, contracts awarded within the United States total $2.5 billion for more than 200 contracts that are restoring Iraqi oil, shutting down and re- pairing oil wells, firefighting, explosive ordinance demolition, re- storing Iraqi electricity, radio installation throughout Iraq, laptops, and emergency medical personnel in each of Iraq’s 18 governates. Led by Admiral David Nash, U.S. Navy retired, the Program Management Office for rebuilding Iraq is located in Baghdad with a support office located in the Pentagon. As the requirement focal point for all Iraq reconstruction contracting, the PMO is respon- sible for oversight and implementation of the $18.4 billion appro- priated by the U.S. Congress to support the reconstruction of Iraq’s infrastructure. The construction sectors are oil, electricity, public works and water, security and justice, transportation and commu- nications, buildings, education and health. Over $12.6 billion will be spent toward actual construction over the next few years, and $5.8 billion will be spent on nonconstruc- tion. Some of the funds will go toward democracy, which is not cov- ered by supplies. Computers are needed to monitor and control electrical and water systems; vehicles are needed to transport ma- terials or to support system maintenance; uniforms and supplies are needed to support the police and civil defense corps; and sup- plies are needed to support schools. On January 6, 2004, the Army released seven design/build con- struction solicitations. Proposals were received in February and are under evaluation for project awards in March of this year. These seven solicitations will result in 10 contracts in support of elec- trical, public works and water, water resources, transportation, communication, security projects and buildings. Contracts will be awarded using best value valuation methodology based on tech- nical, management, past performance and cost factors. Our contracting personnel on the ground in Iraq are courageous, dedicated volunteers. Since June 2003, when our first person ar- rived, we have been operating in Iraq. We now have a total of 28 individuals. They are multi-service and civilian: 3 Army, 4 Navy, VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 55 1 Marine, 11 Air Force and 9 civilians working in small, jam- packed work spaces. They are doing a phenomenal job under very tough and dangerous conditions. Let me illustrate my point. Army Colonel Elias George Nimmer, a Medical Service Corps Officer and a member of the acquisition work force assigned to the Office of Assistant Secretary of the Army for Acquisition, Logistics and Technology was deployed in late June 2003, as part of a team supporting CPA’s work with Iraq’s Ministry of Health. In the early morning of October 26, 2003, a barrage of rockets hit the al-Rashid Hotel where he was staying, and a rocket impacted directly inside his room. Colonel Nimmer was hit with shrapnel in the spine and unable to move. Following three surgeries, he is doing remarkably well and recently returned to duty within the Office of the Assistant Secretary of the Army. Currently, the General Accounting Office, in response to requests from Congress, is reviewing Iraqi essential services contracts to perform that the Army has followed proper procedures. We are working closely with the GAO auditors to ensure that they have all the information necessary to complete their work. I have a deep and growing appreciation for the courage, com- petence, dedication and efforts of our contracting personnel. Thanks to their hard work and extreme dedication, the U.S. Army leads the way in providing contracting support to CPA and to the people of Iraq. The work has been—and will continue to be—per- formed in accordance with proper procedures by military and civil- ian volunteers who are concerned and committed to accomplishing their work under the toughest and most austere conditions. We are proud of our role in helping to create and rebuild a stable and suc- cessful Iraq. Our accomplishments are helping the citizens of Iraq move toward governing themselves and sustaining, operating and maintaining their own infrastructure which, in turn, will help our soldiers, sailors, airmen and Marines to return home sooner. Thank you, Mr. Chairman. Chairman TOM DAVIS. Thank you. [The prepared statement of Ms. Ballard follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 56 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 57 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 58 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 59 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 60 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 61 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 62 Chairman TOM DAVIS. Let’s move to Mr. Lucke. Again, your total statement is in the record, so try to keep it within 5 minutes. General McManus is here for questions, and Mr. Reed is here for questions. That is why they are sitting up there, but they don’t have to give opening statements. Thanks. Mr. LUCKE. Mr. Chairman and distinguished members of the committee, I welcome the opportunity to testify on the U.S. Agency for International Development’s participation in Iraq reconstruc- tion. USAID began contingency planning for possible humanitarian and reconstruction efforts in post-conflict Iraq in late 2002. As part of this process, we mobilized significant resources and technical ex- pertise to support both potential humanitarian as well as recon- struction requirements. I arrived in the region in November 2002, moved to Baghdad in April 2003, and remained as USAID mission director until last month. Working with CPA to improve the lives of Iraqis, USAID is work- ing throughout Iraq to restore critical infrastructure, support the delivery of health care and education services, expand economic op- portunity and improve governance. With a staff of some 160 ex-pa- triots and Iraqis, we are managing some $3.8 billion in projects to date. The USAID contractors and grantees now number some 800 ex-patriots, 3,000 Iraqis with a presence in every province of Iraq. Starting from zero, we’re now fully mobilized and producing re- sults, and we have moved fast. Our infrastructure contract alone has obligated over $1 billion in power, water and other work since the contract was awarded in March of last year. In coordination first with ORHA and then CPA, USAID was tasked with managing some $2.1 billion of the first April 2003 supplemental appropria- tion. We have many partners in Iraq within CPA: the Corps of Engi- neers for infrastructure supervision, the U.S. Army for the power sector, and the State Department in various sectors, especially gov- ernance. Our role in post-conflict Iraq has been twofold: first, to avoid a humanitarian crisis, which didn’t happen; and, second, to lay the foundation for long-term reconstruction, where we are well on the way to helping CPA accomplish this goal. Our specific accomplishments in Iraq are significant. In infrastructure, we have repaired and are repairing power sys- tems, the port of Umm Qasr water and sanitation systems, air- ports, telecommunications facilities, schools, health clinics, railways and irrigation systems. In social services, we’ve immunized millions of children, strengthened the health care system, printed and distributed mil- lions of new textbooks, distributed school and student kits to mil- lions of students, and trained teachers. In the area of economic opportunity, we have implemented key reforms in economic governance related to the regulatory environ- ment, banking, taxation, replacement of the old currency, and begun work in the key agriculture sector. In governance, we have helped establish local councils through- out Iraq, awarded rapid response grants to provide essential local services, begun civic education programs, helped reestablish func- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 63 tioning government ministries, established hundreds of community associations, and we’re helping CPA lay the groundwork for a democratic and sovereign Iraq. We have accomplished this work under the initial 2003 supple- ment by awarding nine contracts for port administration, airport administration, logistic support, infrastructure repair, architecture and engineering services for infrastructure, health, education, eco- nomic recovery and reform and agriculture. Additionally, we have significant grants to five U.S. NGO’s for community development throughout Iraq, grants to the World Health Organization, UNICEF and UNESCO for health, water sanitation and replacement of math and science books respectively, and grants to five U.S. universities to partner with Iraqi univer- sities. Under the second Iraq supplemental, USAID was the first agen- cy to make an award in support of the continuing efforts in Iraq with a $1.8 billion infrastructure contract utilizing full and open competition. It’s anticipated that this contract will primarily pro- vide additional work in the power and water sectors. Although proud of our efforts in Iraq, our work takes place in the context of considerable security and logistical challenges associated with standing up the largest U.S. reconstruction program since the Marshall plan. USAID has remained as open and transparent as possible in our procurement process. We have made serious efforts to make available virtually every procurement document we legally can on our Web site. Steven Schooner of the George Washington University Law School recently wrote at a Government Contracts Year in Review conference that USAID, ‘‘has endeavored, for the most part success- fully, to provide information related to its contracting activities on its Web page.’’ He goes on to say, ‘‘I believe that USAID has set a new standard for transparency and public procurement.’’ We will continue to expand our efforts to meet the very high standards that we have set for ourselves. We are also doing every- thing we can to ensure that the taxpayers receive value for their dollar, that includes posting U.S. direct-hire staff to Iraq, including to three regional offices to oversee these contracts, as well as hiring senior contracting officials to help administer these awards. We are co-located in Baghdad with the USAID Inspector Gen- eral’s Office and receive audit support from the Defense Contract Audit Agency to ensure funds are spent appropriately and are ac- counted for. And we take this accountability responsibility seri- ously. USAID is determined to successfully help CPA lay the foundation for governmental and economic transformation in Iraq. We are suc- cessfully managing an enormous sum of public funds to an ambi- tious but focused reconstruction program, and we are prepared to continue this effort for the duration of the construction period. Thank you, Mr. Chairman. [The prepared statement of Mr. Lucke follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 64 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 65 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 66 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 67 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 68 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 69 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 70 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 71 Chairman TOM DAVIS. Thank you very much. Dr. Zakheim, thank you. Mr. ZAKHEIM. Thank you, Mr. Chairman, Representative Wax- man, members of the committee. I want to focus on Department of Defense oversight of contracts related to military operations and reconstruction in Iraq. With me on my left is Mr. Bill Reed, who has been serving as Director of DCAA, the Contract Audit Agency, for 16 years and is a respected professional in his field. DOD considers the oversight of contracts an essential respon- sibility. We have a number of strong organizations, policies and regulations to fulfill this responsibility. Our task is not only to identify contract issues, but also to prevent future occurrences of problems we identify, recover any excess charges and take appro- priate action against any contractor wrongdoing. As the Under Secretary of Defense Comptroller and also the De- partment’s Chief Financial Officer, I am responsible for ensuring the adequate financial management of funds spent on the recon- struction of Iraq. My involvement in DOD contract performance oversight comes primarily from my office’s responsibility for the Defense Contract Audit Agency. Bill Reed reports to me. DCAA’s mission is provide all contract audit and financial advi- sory services related to DOD acquisition of goods and services. Other DOD organizations that are not within my office, such as the Defense Contract Management Agency and the DOD Inspector General, also play important oversight roles in terms of manag- ing—of watching contracts—and work closely with DCAA. My col- league, the Under Secretary of Defense for Acquisition, is respon- sible for the contract policies to help ensure the Department ob- tains the best value when acquiring equipment and services and also is responsible for oversight of the Defense Contract Manage- ment Agency. The Army and DCAA are strategic partners in the oversight of contracts through performance. The Army, as the executive agent for all Department reconstruction requirements in Iraq, is respon- sible for contract and program management activities there. DCAA, which is co-located with Army personnel in Baghdad, evaluates all contractor proposals and reviews all billing paperwork for primes and subcontractors. My office’s financial management activities in Iraq began at the end of major combat operations there. I created and had in place by late April 2003 a 20 member forward cell that included rep- resentatives not only from DCAA but also from the DOD Inspector General, from the Office of Management and Budget, from the De- fense Contract Management Agency, from the Joint Staff, from USAID and from the General Accounting Office. This team and its supporting rear cell at the Pentagon were especially critical to get- ting the Coalition Provisional Authority fully operational and capa- ble of undertaking its enormous reconstruction tasks. DOD contract performance oversight is now being supported by DCAA’s Iraq branch office under Branch Manager Dan Altemus. The office now has 25 auditors. I met all 25 of them when I was in Iraq 2 weeks ago, the office it will increase to 31 auditors by the end of May. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 72 Complementing this in-country support, DCAA has auditors that also provide contract oversight at stateside locations that have major contracts in Iraq. Let me talk briefly about some of our findings and actions. DOD oversight of contract performance in Iraq has uncovered a number of problems. A resulting action has ranged from recommending changes in processes to rejection of unsupported proposal costs to reductions in billed costs for potentially unreasonable expenditures, to referral of our findings to the DOD Inspector General for pos- sible legal action against the contractor. Contractor performance in Iraq has not been perfect, but it has not been terrible. Iraq presents a difficult security environment for contractors, as you have heard. A number have already been killed, many wounded. Many contractors that have not had problems in performing their domestic DOD contracts are having difficulties in adjusting to the unique environment in Iraq and to their own firm’s influx of new business. We believe that contractor financial and internal control prob- lems will resolve themselves. In the meantime, we will take what- ever actions are necessary to protect the government’s financial in- terest. DOD has enforced and will continue to enforce the highest standards for contracts in Iraq and anywhere else. Halliburton, mainly through its Kellogg, Brown and Root subsidiary, is the larg- est contractor operating in Iraq with contract ceilings that ap- proach $18 billion. We are not surprised that the largest contractor has the bulk of the contract problems we found. KBR has been responsive to the reported contract findings and has agreed to work on improving its contract performance. Con- tract problems reported to date generally have been caused by con- tractor deficiencies, not by problems with contract policies or the DOD organizations managing these contracts. The process works. Still, to mitigate only process problems, the Department has taken action to ensure that its contract processes are integrated, ef- fective and efficient. Especially significant has been the creation of the CPA’s Program Management Office, led by Admiral Dave Nash who is here. I should also mention, new CPA Inspector General. My statement for the record provides details on DOD oversight of Iraq contracts and the major issues we have identified. I will only highlight a very few of them orally. Estimating practices: DCAA has identified significant deficiencies in KBR’s estimating practices relating to the award of subcontract costs. Earlier this year, after consultation with the contracting offi- cer, DCAA returned two major task order proposals worth more than $3 billion to KBR because they were inadequate for the pur- poses of negotiating a fair and reasonable price. KBR later resubmitted one of the task orders for $700 million less than the original proposal. Even this resubmitted proposal was later withdrawn by KBR due to continuing pricing issues. It was DCAA that found that $700 million problem. These issues included proposal subcontract costs that were significantly different from previously negotiated actual subcontract amounts and KBR’s use of proposal estimates instead of more than $290 million of ac- tual costs already incurred. Both issues were disclosed during the DCAA audit. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 73 On January 13, 2004, DCAA notified the appropriate government contracting officials that KBR’s subcontracting estimating process and procedures were considered inadequate and recommended that DCAA be advised before the negotiation of any future contract awards. KBR’s deficiency in estimating some contracts was the cat- alyst of DCAA’s review of potential gasoline overpricing under the Restore Iraqi Oil [RIO], contract. The review found significant issues related to KBR’s pricing and award of subcontract costs. It disclosed potential overpricing on gasoline of $61 million through September 2003. During DCAA’s review, the auditors came across other information that led them to make a referral to the DOD Inspector General, which recently launched an investigation of this potential overpricing of gasoline. KBR and dining facilities subcontract costs: DCAA has identified inadequate support for billed dining facilities costs. In DCAA’s opinion, the billed number of meals appears to exceed significantly the actual meals served. DCAA and KBR have agreed on the withholding of $176.5 mil- lion, of which it voluntarily withheld $140.7 million from future bil- lings while KBR prepares a response to issues reported by DCAA. Then there is the violation of the ‘‘Anti-kickback’’ Act. KBR itself has voluntarily disclosed a possible violation of the ‘‘Anti-kickback’’ Act by two of its employees. KBR has already reimbursed the gov- ernment for the estimated impact of $6.3 million. DCAA has re- quested supporting data from KBR to validate that sum. DCAA has helped identify contracting issues that stem from the fact that major contracts in Iraq have been slow to get definitized, and by definitized, I mean to get a definite contract price negotiated. DCAA found that KBR was not observing the 85 percent limit in the reimbursement vouchers it submitted for its undefinitized LOGCAP task orders. In late February, DCAA told KBR that it should apply that 85 percent limit to its vouchers, in other words, not charging the additional 15 percent. The Army’s contracting offi- cer has received KBR’s response to the DCAA recommendation and is currently evaluating it. There are other contract issues that go beyond KBR, and it is im- portant to mention a few of these. Titan Corp.: Recent DCAA audits disclosed deficiencies in Titan’s labor distribution system, which records costs to Titan employees. DCAA also found that Titan lacked procedures for adequate track- ing of hours worked by foreign national consultants. Based on these findings, the Defense Contract Management Agency contract- ing officer implemented a 10 percent withhold on all of Titan’s labor and consulting costs until all identified deficiencies are cor- rected and bills to the government are based on adequate internal controls. Restore Iraqi Electricity: In January and February of this year, DCAA auditors evaluated proposal costs exceeding $900 million from the three prime contractors for the RIE program, Fluor Fed- eral systems, Perini Corp. and Washington Group International. As a result of these proposal reviews, DCAA reported to the Army Corps of Engineers that all three contractors had substantial sub- contract pricing issues. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 74 DCAA will continue to perform oversight of the subcontract esti- mating and billed costs. It will work closely with the prime contrac- tors and the Corps of Engineers to ensure that future subcontract estimates are adequate. In addition, it will evaluate each voucher submitted by the prime contractors to ensure that contract costs, including subcontract costs, are properly billed and paid. In closing, I first want to underscore the context in which all of this is taking place. You have heard the details of how the country of Iraq has been completely transformed in less than a year. After the war, we have opened hospitals; we have opened medical clinics; we have restored Iraqi oil to prewar levels; courts are back in oper- ation and are probably functioning a bit better than the previous 30 years; a new currency in circulation; 170 newspapers are being published; students sit in rehabilitated classrooms with new text- books whose contents probably are true for the first time in many years; and a Governing Council that ratified a Bill of Rights. That is the context in which we have all operated. Beyond that, I want to underscore that we in the Department of Defense are ab- solutely committed to an integrated, well-managed process in Iraq. We will not tolerate the billing of costs that are not properly docu- mented and supported. If internal controlled systems are deficient, we will continue to use protections, such as contract withholdings, to safeguard the people’s interests. And we will provide whatever personnel and budget resources are needed to enforce integrity in DOD contracts. My comptroller organization will continue to work with other or- ganizations within and outside the Department to assist those or- ganizations and to share our findings. From the beginning, DCAA and my office have coordinated closely not only with the DOD In- spector General but with the General Accounting Office and now with the CPA Inspector General, since its creation. We have regularly provided these organizations with information on our activities. And this has included DCAA detailed briefings to the GAO on June 23 and November 7 of last year. And this past January 7, DCAA Director Bill Reed and I personally briefed David Walker, the Comptroller General and Gene Reardon, the Deputy Inspector General of DOD, on DCAA’s contract audit support of Iraq reconstruction. DCAA and my office are the primary source of information on Iraq oversight for both the GAO and the DOD Inspector General. I repeat, we are the primary source. GAO and the DOD IG have been supportive of our work in Iraq and have allowed DCAA to continue its programmed audits without attempting to duplicate their work. In sum, I believe the Department’s contract oversight has been vigilant, and we will ensure that it continues to be vigilant. I look forward to addressing any questions or comments you have on this matter. [The prepared statement of Mr. Zakheim follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 75 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 76 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 77 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00085 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 78 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 79 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 80 Chairman TOM DAVIS. Thank you very much. Admiral Nash, clean up here. Admiral NASH. Thank you and good afternoon, Mr. Chairman and members of the committee. I will submit my written remarks for the record and I would like to summarize them very quickly. I really appreciate this oppor- tunity to offer a field perspective on the reconstruction in Iraq based on my 8 months of experience there. It is an honor to appear before you and to bring the information that I have. The Program Management Office is a living example, in my opin- ion, of how a total can be greater than the sum of its parts. I am proud to represent that team today that is dedicated. Speaking in the broadest of terms, the Public Management Office is responsible for managing and executing the U.S.-funded reconstruction of Iraq’s infrastructure and essential services. As the Office’s Director, I report to the Coalition Provisional Authority’s Administrator, Am- bassador Bremer. I also report to Acting Secretary of the Army— Brownlee—for Acquisition and Program Management Support. Our goals are simple: To properly execute the supplemental work; to build the capacity for Iraq to do large program manage- ment for their own future; to build the capacity of Iraq construction and construction support industry; and finally and most important, is to win the peace in Iraq. Most of you have seen the statistics about electricity and water and telephone and other infrastructure elements in Iraq. Having lived in Iraq for 8 months, I can attest to the severity of these chal- lenges. As you know, Saddam Hussein’s government paid little at- tention to maintaining the country’s infrastructure. Before the war, the electrical grid left more than one-third of the Iraqi citizenry without power; 40 percent of their citizens lacked access to safe, re- liable water supplies, with only 6 percent of the population linked to a sewage treatment system, and telephones limited to only a handful of homes. In summary, facilities and services across the country ran until they were broken and then abandoned. Rebuilding the Iraqi infrastructure is a key part of the overall strategy to assist Iraq in becoming a free and democratic country. You all did your part by providing the $18.4 billion to help rebuild Iraq. The $12.6 billion will be focused on construction and approxi- mately $5.8 billion on nonconstruction. Our emphasis is creating security through stability that will ultimately accelerate the pace at which Iraqi sovereignty will lead to all of our troops returning home permanently. Lieutenant General Sanchez and I agree wholeheartedly on this principle, and we are committed to working together. Moreover, we are firmly committed to the concept that time is of the essence, and we must work as fast as possible to rebuild Iraq infrastructure. And to ensure accountability for the funds allocated under fiscal year 2004 supplemental appropriations bill for the reconstruction of Iraq, a coordinated body was necessary. The Coalition Provisional Authority and Ambassador Bremer cre- ated the Program Management Office designed to direct, coordinate and oversee the contracting organizations for this endeavor. U.S. Government organizations and agencies, such as USAID and the VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 81 Army Corps of Engineers, will serve as executive agents in con- tracting on our behalf. We established an approach and reconstruction efforts that fol- low four basic tenets: First, financial and contractual authority will follow a clear chain of responsibility; second, program management will follow an innovative and highly leveraged approach that relies heavily on the private-sector participation; third, contracting the work will follow a strategy of full and open competition and comply with the Federal acquisition regulations in the supplemental bill; and finally, we will have maximum transparency in everything we do. Our approach leverages the private sector for construction and program management support while maintaining a layer of govern- ment oversight protecting the American taxpayer. This concept of operations is inherently agile and allows us to evaluate and adjust each stage based on performance. The result is the greatest value at the least cost. The assistance you have provided in response to the President’s emergency supplemental request is vast and speaks well for the generosity of the American people. It will lay a solid foundation for the future in Iraq. As we move forward, we are organized for success and have the people, technology and processes to do the job. We are at work today on the following: The supplemental funds for reconstruction are being committed in accordance with the 5 January 2007 report to Congress. Each contract contains explicit incentives for hiring Iraqi citizens. And finally, we are emphasizing transparency of op- erations by using off-the-shelf management information systems for real-time reporting, visible on the Program Management Office Web site. I said earlier that our actions were open, competitive and trans- parent. To assure that they remain so, the following auditors, in- cluding others, will oversee and review our work: The Defense Con- tracting Auditing Agency has already joined us. The Coalition Pro- visional Inspector General has already stood up, and I have already spoken to the General Accounting Office and the Comptroller Gen- eral. Continuing audits, in my experience, are a normal part of the ac- quisition cycle and not only serve the classic functions of prevent- ing waste, fraud and abuse but also will serve as a running tutorial for the Iraqi Government and business community. I am confident that we have made a solid start to the task ahead. However, no effort of this size or scope has ever been flawless. We will work hard to continually evaluate ourselves, improve and ask the auditors to help us do so. Mr. Chairman on June 30, a sovereign Iraqi Government as- sumes power. However, the mission to rebuild the infrastructure of Iraq will continue. Rebuilding power plants, water treatment facili- ties, telecommunications facilities, schools, security facilities, public buildings, this all will take time. In my 8 months in Iraq, I have met hundreds of Iraqis. Their message has been consistent. They want nothing more than what we enjoy here, reliable electricity, clean water, functioning sewage systems, an educational infrastruc- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 82 ture and better health care. Beyond that, they expect the United States will make good on its promises, and we shall. Thank you very much. [The prepared statement of Admiral Nash follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 83 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 84 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 85 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00093 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 86 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 87 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 88 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 89 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 90 Chairman TOM DAVIS. Thank you all very much. Let me start the questioning. This really goes to everybody on here. I am going to ask a three part question, but I want to get this on the record, and everybody is under oath. Have you or any- one in your office ever discussed with the Vice President or with his office the award of a contract for Iraqi reconstruction prior to any contract being awarded? General STROCK. No, I have not. General KERN. No, sir, I have not. General MCMANUS. No, sir, I have not. Ms. BALLARD. No, sir, I have not. Mr. LUCKE. No, sir, I have not. Mr. ZAKHEIM. No, sir, I have not. Mr. REED. No, sir, I have not. Admiral NASH. No, sir, I have not. Chairman TOM DAVIS. Did the fact that the Vice President was a former officer, CEO, of Halliburton influence the selection of Hal- liburton and KBR in any way? General STROCK. No, sir, it did not. General KERN. No, sir, it did not. General MCMANUS. No, sir, it did not. Ms. BALLARD. No, sir, it did not. Mr. LUCKE. We have no contractual arrangement with Halli- burton. Mr. ZAKHEIM. We oversee, but I have no knowledge of any of this. Mr. REED. No, I have no knowledge. Admiral NASH. No, sir, I have not. Chairman TOM DAVIS. Have you or anyone in your office been pressured by any political appointee or high official in the adminis- tration to make an award to a particular firm or go easy on any contractor in carrying out contract oversight activities? General STROCK. Not to my knowledge. General KERN. No, sir, not in my office. General MCMANUS. No, sir, not in my command. Ms. BALLARD. No, sir. Mr. LUCKE. No, sir, not to my knowledge. Mr. ZAKHEIM. No, sir. Mr. REED. No. Admiral NASH. No. Chairman TOM DAVIS. Thank you. An issue was raised, given the conditions on the ground in Iraq, do you think it would have been practical to have used multiple award task order contracts for sustainment or reconstruction serv- ices? There was a chart put up by the ranking member on a number of discrete projects and the number of discrete projects subject to competition. Is there any chance you would have been able to con- duct competition for any of these task orders? Let me start with you, General McManus. Admiral Nash, you now are current. Maybe as the situation changes, could we do a better job? General MCMANUS. It is important to note that the LOGCAP contract provides us a flexibility and agility to respond to unknown VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 91 requirements over unknown timelines in uncertain conditions. As we began to prosecute this campaign—and remember, we were op- erating in Iraq as well as Afghanistan and Kuwait with forces em- ployed to include bringing in the additional support for ORHA and CPA, the Iraqi Survey Group, and now the multinational division— the timelines against which we execute the warfighter’s require- ments or the customer’s requirements are often very, very tight. In the course of normal competition, we wouldn’t be nowhere near where we are today in terms of life support, distribution logis- tics support, if we had to do that. Time really becomes the biggest enemy, sir. Chairman TOM DAVIS. I understand that, but LOGCAP is given to one company. General MCMANUS. That is correct. Chairman TOM DAVIS. So, basically, when you go out to them, nobody can say, ‘‘I can do it cheaper or better,’’ on any number of tasks, isn’t that right? General MCMANUS. That is correct. It’s also important to note that LOGCAP, as a former program, we have been using as an in- stitution for a decade. This is competition in which we select com- petitively a contractor to support contingency operations. Chairman TOM DAVIS. Admiral Nash, did you want to add any- thing to do that? Admiral NASH. When you use multiple award contracts, it re- quires that you have a lot of contractors mobilized onsite. It works very well in the United States where you have lots of contractors. But when you don’t have lots of contractors, then you end up with the additional costs of mobilizing many. As we get many con- tractors mobilized in Iraq in the future, it will be something we will look at, because we will be looking for ways to become more efficient. Chairman TOM DAVIS. Since the contractors had to be there, there was no—there wasn’t a lot of people knocking on the door to send people over? Admiral NASH. No, sir, to my knowledge. Chairman TOM DAVIS. Mr. Lucke, do you have any comments? Mr. LUCKE. We began planning in November 2002, and we were able to use limited competition for eight of our nine grants. The one that we did not use limited competition on was for personnel, and that was a sole source that we absolutely needed in order to have personnel present in order to implement the programs. Chairman TOM DAVIS. Let me ask Mr. Reed, you are head of the Defense Contract Audit Agency. How many years have you been in the business of looking at government contracts? Mr. REED. Thirty-nine years. Chairman TOM DAVIS. You served under a lot of different admin- istrations and seen—you have seen a lot of contracts go awry dur- ing that time? Mr. REED. Yes. Chairman TOM DAVIS. The ranking member made a comment that cost-plus contracts are notoriously open for abuse. Let me ask about the reliance on cost-plus contracts in this particular cir- cumstance. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 92 Obviously, there are some cases where there are better vehicles than others. As you look at this from your perspective having to audit these, were there better ways to do this, or was this the most efficient way to accomplish the mission? Mr. REED. The selection of the contract type is usually a bal- ancing of risk between the government and the contractor. Firm- fixed contracts shift most of the risk to the contractor. Obviously, cost reimbursement is more of a balanced risk. There’s no question that, when you are dealing with a contin- gency operation, that it will be very difficult to get any contractor to bid firm-fixed price for the scope of some of these efforts, which the requirements are very fluid, quite frankly. So I believe that the contracting vehicle selection is appropriate in my judgment. Chairman TOM DAVIS. And when you talk about cost-plus, there is an award fee with that, too, that goes to your ability to manage the contracts and bring costs down? Mr. REED. That is correct, and that is a classic vehicle used by contracting officials to ensure contract performance. Chairman TOM DAVIS. You have seen, obviously, a lot of cost-plus contracts in your time. In this situation, there have been allega- tions that one of the contractors, Halliburton in particular, would send in invoices for meals that weren’t served. Is this a common practice, when you’re not sure what logistics are going to be and what is our catch to catch this and make sure there are corrections made as this goes through the process? Mr. REED. DCAA certainly is not an expert in restaurant serv- ices, but just from a common sense standpoint and what we have been advising to the contracting officer that we would expect to see, just common sense, is a reimbursement based on actual meals served plus a small margin for unexpected surplus based on some pattern of history. So, you know, if the average is 3,000 meals a day, 1 day only 2,900 show up and we have a small margin for the contractor to be covered because he estimated based on history to serve 3,000 meals. Chairman TOM DAVIS. So it is not uncommon for them to come in with an invoice for more or less than they actually served, based on historical—— Mr. REED. That should be a condition of the contract. The con- tract should spell that out. And DCAA will audit to whatever the terms of the contract are. Chairman TOM DAVIS. Do you have any comments on that? General MCMANUS. No, sir. Chairman TOM DAVIS. Ms. Ballard. Ms. BALLARD. No, sir. Chairman TOM DAVIS. As I understand it, the allegation here is that there were meals not served, and there were billings coming in. But ordinarily, on an audit, it would be reconciled? Mr. ZAKHEIM. That is exactly right. Chairman TOM DAVIS. The process is set up that it would not be uncommon for someone to come in slightly over or under and on audit, you pick those up and reconcile? Mr. ZAKHEIM. Exactly. Chairman TOM DAVIS. That is not necessarily evidence of fraud, that’s just the way it works in the normal scheme of things? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 93 Mr. REED. That’s right. Chairman TOM DAVIS. Why is any gasoline being imported from Kuwait under Halliburton’s IO contract? Why are they such high prices? Ms. Ballard, can you explain that to us, because you have the chart that was up there and the chart leaps out at you? Ms. BALLARD. Mr. Chairman, first, the oil is being imported from Kuwait because of safety issues for our soldiers. Initially, when we began to import oil from Kuwait, it was a few days after the hos- tilities had ceased in Iraq. There were lines miles long, two to three cars wide. This gave openings to riots, to civil unrest, which cre- ated threats to our soldiers. The crowds became cover upon which the insurgents could use it to attack our soldiers. So our first and primary objective was to obtain fuel so we could disburse crowds and eliminate the civil unrest. Strategically, we need to be able to obtain fuel from the north and south. If a border is shut down in the north and we are only receiving north fuel, then we have returned to the situation where we have created opportunities for civil unrest and threats to our soldiers. And third, sir, in obtaining fuel from Kuwait, Jordan and Tur- key, we are just making the requirements for fuel in the region, and it is a principal requirement to maintain fuel supplies in the region. Chairman TOM DAVIS. Who within the Defense Department would decide what that reasonable price for fuel would be on that? Tina, do you know why $1.32 might be normal in some cases and $2.64 would be normal under other circumstances? General STROCK. Sir, if I could take that on, sir. Again Carl Strock from the Army Corps of Engineers. This is a very complex question to resolve and answer. The prices you see here have a lot of variables in them. As Ms. Ballard men- tioned, at the time that we entered into our first contract for deliv- ery of fuel, it was early May, and, sir, I was in Baghdad the day that a U.S. soldier from the 3rd Infantry Division was assassinated in a gasoline line trying to keep order. We were told to get fuel moving now. Sir, we worked with our contractor to do that. The contractor se- cured three prices on May 4th and, on May 5th, made an award to the lowest price. That price was as reflected on the board here. Sir, that price has three components, one is the cost of the fuel. The other is transportation and other costs associated with that. The transportation costs were $1.2 a gallon. They are significantly different from the lower one because the distance was three times further Camp Cedar versus Baghdad. So the distance, considerably longer. And the turnaround time on that distance is considerably longer as well. About a 2-day turnaround to Camp Cedar is 6 to 10 days to get in and out of Baghdad. Chairman TOM DAVIS. So this is really not apples to apples? General STROCK. No, sir, it is not. There is a time span here as well. The contract on the top was awarded on May 5th. The other was awarded later in August. Our contractor, when we approached him, said, ‘‘Give me time. I can negotiate a better price.’’ We said, ‘‘There is no time. Do the best you can, and this is it.’’ VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 94 The additional costs there, sir, the 24 sentences of other costs, has to do with the capability of Iraqi infrastructure to download the fuel we delivered. Iraq does not routinely import fuel. They move fuel around the country by pipelines, and the storage places take fuel from the tanks to trucks. They are not set up to take fuel from trucks to tanks. We had to create those conditions through our contractor, and there was a cost associated with that, sir. So the 24 cents has to do with those kinds of expenses and difficulties. And finally, sir, the 2 percent represents, as I am told, the mark- up from the contractor for the management of this contract. It is the normal cost of doing business. I would also like to add, sir, that the cost of fuel from Turkey has averaged $1.20 to $1.30 per gallon. We import about two-thirds of the fuel from Turkey and about one-third from Kuwait, and we do that for the reasons Ms. Ballard has cited. We need to keep it flowing from two different directions. We could not use Turkey exclusively because, for example, at one point, when we were negotiating with the Kuwaitis, the border of Turkey was closed for 4 days, and the fuel was shut off. So the uncertain- ties of the situation required that. And further, the Turkish drivers would not take fuel into Baghdad, but the Kuwaiti drivers were willing to do so. Today, sir, we are paying 39 cents less per gallon than we did with that first task order, as we have negotiated with the supplier, who has agreed to work a spot market price for our fuel, still accel- erated because we buy on spot market. We have not been willing and able to enter into contracts longer than 30 days duration. I can’t speak to the DESC contract and how that’s structured, but I know ours was deemed to be fair and reasonable. Chairman TOM DAVIS. What was the justification for selling this gas inside Iraq for 4 to 15 cents a gallon in some cases? General STROCK. We worked on that with the Iraqi Ministry of Oil and State Oil Marketing Organization. They have a responsibil- ity for the provision of domestic fuel to their people. They were con- cerned about the level of strategic reserves and they were also will- ing to do what it took to get fuel to the pump. They chose not to transfer the cost of this fuel to the Iraqi people because of the im- pact it would have had on the economy in Iraq. I would also like to point out that it doesn’t really matter where this money comes from. We must use it in a responsible way. But of the $1.4 plus billion we spent on the importation of fuel, 95 per- cent of that money has been from the development fund for Iraq and only about 5 percent, or $72 million, has come from U.S. tax- payers. Chairman TOM DAVIS. Most of this was in dinars and was from the Development Fund? General STROCK. Yes. It is from the $8 billion worth of revenue from the oil market as well as the $1 billion that the U.N. put in. Again, I want to emphasize, that is not a reason to not demand the lowest possible price, but—— Mr. OSE. Would the gentleman yield? One point that gets lost here, over the past decade or 15 years, the average price of gasoline in Iraq has been around 8 cents a gal- lon. So to go into Iraq and all of a sudden start charging a dollar VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 95 a gallon, you are going to have massive disruptions. And I think that is the point that General Strock is trying to make. General STROCK. This applied to all types of fuel. LPG and ker- osene, they use for cooking and heating. If we had charged the ac- tual cost that we paid—— Chairman TOM DAVIS. There would have been a riot in Iraq and reconstruction would have been over before it started. I appre- ciate—who first raised the issue of the potential overpricing by Halliburton under this task order? Was it DCAA, the contracting people? Mr. ZAKHEIM. DCAA raised it first. Bill will give you some de- tails on that. Mr. REED. We were doing our normal activities, in terms of au- diting these various task orders. This was one of the larger task orders, and we were doing a review of how KBR was administering its subcontracts for fuel and found that they were very deficient in documenting the basis of the awards. Much of the information you just heard from General Strock, unfortunately, was not docu- mented by KBR in their subcontract files. Chairman TOM DAVIS. No reason to believe it was inaccurate, just undocumented? Mr. REED. Just undocumented, and the haste was their reason, people were turning over and they were just a little sloppy. Chairman TOM DAVIS. OK. I think that puts it into perspective. Mr. Ose. Mr. OSE. Mr. Chairman, could we get the DESC to buy gasoline and ship it to California? I don’t know who has this information. I am looking at a piece of paper, background information, U.S. sup- port for Iraq reconstruction efforts, that lists the appropriation ex- penditures together with five separate contracts that were awarded as of January 2004. Do you have this paper down there, any of you? It came in this packet that I got. Chairman TOM DAVIS. I think that was for committee members. Mr. OSE. There are five contracts listed at the bottom of that. There is one to USAID, three to the Corps and another to AID. One is $1.8 billion to Bechtel, $1.6 billion to KBR, another $1.2 to KBR and another billion for Bechtel and $800 million to Parsons. And then above—I think they need this form down in front of them. Chairman TOM DAVIS. Mr. Waxman raised an issue in his open- ing testimony about the northern part being—going to Parsons in the RIO contract exclusively and the southern part of the country going to Halliburton, and that we don’t bid tasks off between the two of them. Would that make any sense? Ms. BALLARD. Mr. Chairman, when the acquisition strategy was developed for the Restore Iraqi Oil solicitation, we found that Iraq’s existing infrastructure had a northern and a southern oil company. Based on this, the procurement specialist determined that to best integrate with the existing Iraq infrastructure we should also have contractors in the north and the south. There were also some tech- nicalities with regard to the different type of fuels that were gen- erated in the north and the south. Sir, the issue of multiple awards, IDIQ contracts, has been raised. The Federal Acquisition Regulations specifies that—when we are not to use that type of contract. The circumstances specified VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 96 in the regulation exist here. For example, we must determine that the benefits of structuring the contract as we did outweigh the ben- efits of competing the contract as Congressman Waxman has sug- gested. Those circumstances do exist, because our objective is to then transfer these capabilities to the northern and southern Iraqis. To maintain stability in the region, we structured our con- tracts to match the infrastructure that existed in Iraq when we ar- rived. Chairman TOM DAVIS. I think that puts all of this in a much dif- ferent perspective than we have heard. But my time is up, and I now yield 20 minutes to Mr. Waxman. Mr. WAXMAN. Thank you, Mr. Chairman. Earlier Chairman Davis asked each of you whether anybody was under political pressure to award contracts to particular compa- nies, and you all answered no. He also asked whether you are aware of any political pressure on administration officials, and again, you all answered no. I want to draw your attention to a December 15 Wall Street Journal article. The article refers to two letters by an Army Corps contracting officer, Mary Robertson. Ms. Robertson indicated that she was under political pressure to direct Halliburton to negotiate exclusively with Altanmia, an obscure and inexperienced Kuwaiti firm. Ms. Robertson wrote, ‘‘Since the U.S. Government is paying for these services, I will not succumb to the political pressures from the Government of Kuwait or the U.S. embassy to go against my integrity and pay a higher price for fuel than necessary.’’ She wrote that to her superiors, but then Halliburton went ahead and con- tracted with Altanmia. She is not the only one who claims political pressure. Thomas Crum, a senior Halliburton official, stated, ‘‘The concern that the embassy had was expressed clearly, and it was the same as the Government of Kuwait, that we weren’t buying enough gasoline from Kuwait.’’ How do you respond to these two statements from U.S. Government employees that they were under political pres- sure? Mr. ZAKHEIM. In the first place, Congressman, half of what you are discussing is the Government of Kuwait, not the Government of the United States. Mr. WAXMAN. I am discussing the U.S. embassy, and they work for us. Mr. ZAKHEIM. Well, yes, but that is a different agency and so at least—— Mr. WAXMAN. Let me ask General Strock because this woman works for him. Were you aware—and maybe she even contacted you—that she was under pressure from someone to tell—to have Halliburton con- tract with Altanmia, and she urged them not to because she didn’t feel she could give in to that political pressure and charge the high- er price as a result? General STROCK. Sir, at the risk of sounding evasive, she did not work for me. I work for the CPA, and I was on loan to CPA, and I happened to be an Army Corps of Engineers officer there. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 97 She worked for Brigadier General Robert Crear in the Task Force RIO, and I am not aware of anything surrounding that alle- gation, sir. Mr. WAXMAN. I see. We are going to have another hearing, and maybe we can get to the bottom of that. But I would indicate that maybe none of you are aware of political pressure, but there were two people working for the government that did feel they were under political pressure. Mr. Reed, I want to ask you about the audit that was done, what is known as the Flash Report. So I want to get some questions an- swered about it. This Flash Report found significant deficiencies in Halliburton’s cost estimating practices, is that correct? Mr. REED. That’s correct. Mr. WAXMAN. Can you explain what these deficiencies were? Mr. REED. Well, the largest deficiency was the inadequate sup- port for their subcontract estimates. They simply were not follow- ing what we considered reasonable business procedures to solicit bids, evaluate bids and justify the fair and reasonable price of the subcontracts being awarded. At least we couldn’t tell that was being done by the documentation in their files. That was certainly very significant. Generally, there was—I would characterize the general deficiency as a real problem supplying current, accurate and complete data in support of all of their proposed costs, not just subcontract esti- mates, but subcontracts were by far the most material part of the proposal. Mr. WAXMAN. The Flash Report also found that Halliburton re- peatedly violated the Federal Acquisition Regulations. Is that right? Mr. REED. There is a guideline in the Federal Acquisition Regu- lations prescribing what the contractor should submit in its pro- posal to support its proposed costs. They failed to follow those guidelines, particularly in the case of subcontracts. Mr. WAXMAN. The report found that Halliburton even violated its own cost estimating manual. Is that right? Mr. REED. That’s correct. Their own manual very closely followed the FAR guidelines. Mr. WAXMAN. In a statement yesterday, Halliburton claimed they had no opportunity to respond to your findings. They said, ‘‘We have not been given a chance to respond to accusations before they were released publicly.’’ Did Halliburton have an opportunity to re- view DCAA’s Flash Report before it was issued? Mr. REED. Yes, sir. Our standard practice is to provide a draft report to the contractor for written comments. In this case, we did that; written comments were received. In fact, they are attached to our Flash Report. Mr. WAXMAN. You even mention in your report that they had a chance to review it, and they responded? Mr. REED. That’s correct. Mr. WAXMAN. Let’s turn to one of Halliburton’s responses to your audit. You said DCAA found significant deficiencies in Halli- burton’s estimating system. Did Halliburton agree that these defi- ciencies were significant? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 98 Mr. REED. While agreeing to the deficiencies, they argued that they were not significant. Mr. WAXMAN. And what did DCAA think about Halliburton’s claims that these deficiencies were insignificant? Mr. REED. We disagreed and stated that to the contracting officer in our report. Mr. WAXMAN. You thought there were serious problems, and DCAA explicitly concluded the estimating deficiency was not a one- time occurrence, but it was systemic? Mr. REED. That’s correct. Mr. WAXMAN. These cost estimate proposals are very important. Once approved, the cost proposals are the basis for Halliburton’s fees, aren’t they? Mr. REED. There are many factors that go into the fee setting, but certainly cost is a consideration in setting the fee. Mr. WAXMAN. DCAA found that Halliburton submitted a $2.7 bil- lion proposal that, ‘‘did not contain current, accurate and complete data regarding subcontractor costs.’’ Is that correct? Mr. REED. That’s correct. Mr. WAXMAN. If Halliburton’s estimate is too high and is accept- ed, then Halliburton gets profits for work it has never completed. Is that right? Mr. REED. That’s a possibility. Mr. WAXMAN. GAO told us that there were enormous discrep- ancies between the first proposal that Halliburton submitted in Oc- tober and the second proposal that Halliburton submitted in De- cember after DCAA rejected their first proposal. According to GAO, the first proposal was $700 million higher than the second pro- posal. Is that correct? Mr. REED. That’s correct. And actually, it was DCAA who identi- fied that and briefed it to the GAO. Mr. WAXMAN. Now, is this normal to have that kind of $700 mil- lion deficiency? Mr. REED. Certainly the materiality of that issue is not normal, no, sir. Mr. WAXMAN. In fact, I understand there still has not been a final proposal submitted. GAO told us that DCAA continued to have doubts about the validity of the second proposal, and as a re- sult, Halliburton withdrew this proposal also. Is that correct? Mr. REED. Yes, sir. That is correct. The company is taking these rejections very seriously. I have had the highest level of commit- ments from the company officials that they are going to get these problems solved, and they are hesitant to submit additional propos- als until they can submit current, accurate and complete data. We are urging them to do so expeditiously. Mr. WAXMAN. On January 13, DCAA sent its December audit to the Army Corps and other Defense agencies overseeing major Hal- liburton contracts. The January 13 cover memo from DCAA high- lighted the serious nature of the audit findings and concluded with the final explicit warning to the Corps and others, ‘‘We recommend that you contact us to ascertain the status of Halliburton’s estimat- ing system prior to entering into future negotiations.’’ Nonetheless, 3 days later, the Corps issued a new $1.2 billion contract to Halliburton. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 99 Mr. Reed, your January 13 memo asked the Corps to contact you before it entered into any further contracts with Halliburton. Do you have a recollection of anyone from the Corps contacting you about this matter before it signed the new contract with Halli- burton? Mr. REED. No, sir, I have no knowledge of being contacted. Mr. WAXMAN. Were you surprised when you learned that Halli- burton just received this contract worth $1.2 billion? Mr. REED. I wouldn’t say I was surprised, sir. There are cir- cumstances where contracting officers do have other ways of evalu- ating price and cost data. We are giving them our advice so we can explain to them what we saw as the risk in the contractor’s propos- als. If they had read our report and considered those risks and con- sidered as well other data they may have had, I can’t say that they did not have a sufficient basis to award the contract. Mr. WAXMAN. But they never talked to you about it? Mr. REED. No, they did not. Mr. WAXMAN. General Strock, Mr. Reed says the Army Corps never contacted DCAA about its audit findings before giving Halli- burton another $1.2 billion contract. Do you have any information to contradict this? General STROCK. No, sir, I do not. I know the contracting officer did have the DCAA January 13 memo in his hands when he made this and considered it and documented the reasons for his decision. Mr. WAXMAN. Why didn’t the Corps followup with DCAA? General STROCK. I can’t answer that. I was not in the process. Mr. WAXMAN. I can’t understand how the Corps can operate this way. The government auditors have just found enormous problems with Halliburton’s performance, and these are just ignored. We are talking about a contract that will cost the taxpayers $1.2 billion, yet it doesn’t seem like the Corps even bothered to contact the DCAA before issuing the contract. General Strock, your Web site says when the Corps was deciding who to award this contract to, one of the key factors was past per- formance. Other key factors were Halliburton’s management ap- proach and its contract administration plan. I want to ask you how you could possibly have found there were no problems with Halliburton’s past performance or its management approach or its contract administration plan. The DCAA audit in its warning said that the company can’t accurately predict its costs. It also found significant deficiencies and systemic problems. That is not a good sign of past performance or good contract management, is it? General STROCK. I can’t comment on the basis for the decision. I do know the contracting officer had that information available to him. And generally, the position is, we make decisions based on substantiated claims, not purely on allegations. Mr. WAXMAN. At the briefing with my staff, we asked you to be able to answer these questions. Are you able to answer them? You don’t have the contracting officer here. Did you contact the con- tracting officer, anticipating that you were going to be asked these questions? General STROCK. I did speak with the contracting officer about whether or not they had possession of the 13 January memoran- dum and whether they considered that in their decision, and that VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00107 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 100 was the answer I got. It was considered and reviewed and found to be an appropriate outcome. Mr. WAXMAN. And that satisfied you? General STROCK. Yes, sir. Mr. WAXMAN. At the time the new contract was awarded, Rep- resentative Dingell and I had been bringing information to the Corps for months that showed Halliburton was charging twice as much for gasoline as it should. DCAA validated these concerns in December. I don’t know how these overcharges figured into the as- sessment of Halliburton’s past performance. The day before the contract was awarded, Halliburton, in fact, told the Defense Department that its procurement officers had been involved in a $6 million kickback scheme. Do you know if this was factored into the evaluation of Halliburton’s past performance? General STROCK. No, sir, I do not. Mr. WAXMAN. Well, does anybody know that? Mr. ZAKHEIM. I can’t speak to the evaluation. What I can say, however, is that, in fact, it was Halliburton that informed us of this, and therefore, we are taking appropriate action as a result. So they came forward. It certainly doesn’t seem to me to be to the detriment of KBR that they reported on their own people. Mr. WAXMAN. Well, let’s look at this thing. They report to you that their own employees were getting kickbacks of $6 million. Your own audit people were telling you that there were systemic problems with Halliburton’s handling of this whole business. You have this whole system of problems with Halliburton in the past, and so the next day, they are given a $1.2 billion contract, and the claim is they are given a $1.2 billion contract because they had good past performance. How could they reach that conclusion? Mr. ZAKHEIM. Congressman, in the first place, Halliburton iden- tified two people out of I believe 19,000 that are working for KBR right now around the world. So I hardly think that means that the other 18,998 are in the same boat. They found the people them- selves. They reported that. As General Strock said, certainly, I don’t have visibility into how the Army Corps of Engineers makes a decision. But clearly, the fact that they identified these people, and we have taken appro- priate action doesn’t seem to me like being to their detriment. Mr. WAXMAN. We had the $6 million in kickbacks. We also heard about millions of dollars in meals that were being charged, but had not been served. We had an obscure Kuwaiti subcontractor given the gasoline contract. And one of the Army Corps Officials thought that was beyond her integrity to have that done. We had a system- atic deficiency in accounting practices. They are under investigation by the Pentagon Inspector General, and we now also know they are under investigation by the Justice Department. Now those investigations by the Justice Department and the Inspector General and the State Department Inspector General, that is not just for overcharging the government. These are criminal investigations. That means there is something really wrong, fraud or criminal action not just Halliburton overcharging. Mr. ZAKHEIM. Not necessarily. Let me take your points one by one. In terms of the meals, as Bill Reed has already indicated, VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00108 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 101 there is a disagreement. KBR is within its rights to make its case, and that is still being evaluated. Isn’t that right, Bill? Mr. REED. That’s correct. Mr. ZAKHEIM. The issue and the outcome have not been settled. As for the officer, I told you earlier, I wasn’t personally familiar with the so-called pressure. However, once we did become familiar with her letter, that was part of the reason that we referred this whole oil—$61 million—to the Inspector General. So we were the ones who referred it in part on the basis of something that we didn’t have visibility into. Finally, in terms of your talking about investigations, of course, an investigation is simply that. It doesn’t necessarily mean that someone is guilty. Very often—the Inspector General of DOD has told me this on several occasions—an investigation is undertaken just to clear someone’s name. It is not at all clear that just because an investigation has been undertaken those people are guilty. Mr. WAXMAN. Let me ask you a question because you just raised an interesting thought in my mind. A minute ago I asked you if you knew about that letter from Mary Robertson, and you said you didn’t know about it. And then you testified, on the basis of that letter, that you referred it to the Justice Department Criminal Di- vision. Mr. ZAKHEIM. I understood your question—perhaps I misunder- stood you, Congressman—I understood your question to be whether I was aware of the pressures outlined in that letter, and I was not. Was I aware of letter? Yes, of course. Mr. WAXMAN. Chairman Davis asked you if you were aware of any charges of political pressure by anybody involved in this con- tracting issue. And here we have a letter that you have seen from someone working for the Army Corps of Engineers saying that it would violate her integrity to pay more than necessary and she is under political pressure but she doesn’t want to give into it. Mr. ZAKHEIM. I understood the question of whether I was aware of political pressure. The letter does not necessarily convey to me that there was pressure. There was an allegation of pressure, and it was referred to the Inspector General to see whether the allega- tion is valid or not. Mr. WAXMAN. I know that before anybody is convicted of a crime, it has to be proved beyond a reasonable doubt. But I don’t think it should be the job of this administration to give Halliburton the benefit of the doubt in every case when they have a long record of charging for millions of meals that they didn’t deliver, overpaying for gasoline they were bringing in, systemic deficiencies in their cost estimating system and your own auditors telling us there are big problems with the way they are handling their contracts in Iraq. I just want to ask one very clear question. When there are crimi- nal charges being investigated, doesn’t that indicate to you that it is not just an instance of poor judgment? Mr. ZAKHEIM. Again, I can’t speak to an investigation. On the other hand, what I can speak to is what I have seen in Iraq since I have been out there twice, most recently 2 weeks ago. I did see services provided, and I did see clean toilets, and I did eat decent VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00109 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 102 food, and I didn’t hear complaints from anyone about how they were being supported. It seems to me, in the larger context of what is going on with a massive tax that is taxing one of the larger companies in this country, it seems to me—and I have said this on the record before, that they are not doing a great job, but they are not doing a ter- rible job. Mr. WAXMAN. Well, you have pointed out that they are already at the budget ceiling of $18 billion, which is more than we realized they were getting in Iraq. That is a lot of money for you to have a clean toilet and a good meal in Iraq and for them to do the job they need to do. They need to do the job they are paid to do. We need you and them to protect the taxpayers in this country from overpaying. And we are worried whether we are getting that kind of service from people in this administration. Mr. ZAKHEIM. Congressman, we are the ones that have found the discrepancies. We are the ones that referred them to the Inspector General. We have 25 auditors risking their lives out there. We are carrying out our responsibility. Mr. WAXMAN. But you are the ones who are also ignoring all the evidence including the report from your own audit team that the taxpayers are overpaying and that Halliburton is contracting with subcontractors and paying those subcontractors more than they should be paying. Mr. ZAKHEIM. On the contrary, Congressman. With respect, I have to differ. If, indeed, it is proved that there is overcharging taking place, that money will be restored. That has already hap- pened in several cases. In those cases where there is a dispute, it has to be resolved. But any money that is identified as having been overpaid is indeed being restored. Mr. WAXMAN. Do you think it was appropriate to issue the $1.2 billion contract without the Corps talking to DCAA when they sent an audit saying, ‘‘Please talk to us first?’’ Mr. ZAKHEIM. I believe General Strock answered that. Chairman TOM DAVIS. Let me make a comment. How many criminal investigations are being undertaken now by the IG’s of- fice? Any idea. Mr. ZAKHEIM. I don’t know if they’re all criminal. There are four investigations all told. Chairman TOM DAVIS. Well, I mean ongoing. Mr. REED. For the whole Federal Government? Chairman TOM DAVIS. For the whole Federal Government, right. Mr. ZAKHEIM. I have no idea. We’d have to get you that for the record. Chairman TOM DAVIS. But it’s a lot, isn’t it? Mr. ZAKHEIM. It’s more than four. Chairman TOM DAVIS. It’s more than a dozen, isn’t it? Mr. ZAKHEIM. I will have to get that for you for the record. Chairman TOM DAVIS. Absolutely. How many IGs are there? Mr. ZAKHEIM. Quite a few. We’ll get you that for the record. Chairman TOM DAVIS. Exactly. I mean all of us who have been in government contracts know that whenever you see anything sus- picious—Mr. Reed, isn’t that right, that you would refer to this? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 103 Mr. REED. Yes. DCAA has made up to hundreds of referrals a year. Chairman TOM DAVIS. Thank you. That’s what I’m trying to es- tablish here. This isn’t so out of bounds, particularly when the con- tractor himself comes to you and says, we think we have allega- tions with some of our employees. And they want to use that and blacklist them? We went through this. We had votes in the House on this issue before about blacklisting contractors over some allegation or some investigation before there’s an adjudication, and this House voted opposite where Mr. Waxman is on that. Mr. WAXMAN. Would the gentleman yield? Chairman TOM DAVIS. I’d be happy to. Mr. WAXMAN. The House and the Senate faced supplemental bills and one the Senate had a provision saying there ought to be crimi- nal penalties for war profiteering. The conference met and took that provision out. Chairman TOM DAVIS. That may be, but that wasn’t the vote I’m talking about, the blacklisting regulations that were promulgated by the previous administration. And we’ve had votes on this and what—— Mr. WAXMAN. No one is calling for a blacklist. What we’re calling for is scrutiny—— Chairman TOM DAVIS. Reclaiming my time, I—— Mr. WAXMAN. Are you on your time? Chairman TOM DAVIS. I’m on my time. All I’m trying to say, Mr. Waxman, is—and I understand you are raising some important points here as we go through, but that’s not a mark of past performance when an employer comes forward and says, look, we may have a problem with some employees, we may have a problem with the government that’s trying to extort and make us go to one contractor, and they come forward to the govern- ment and disclose this. They shouldn’t be punished for it. This is what you want contractors to do when they have problems like that. Am I right on that, Mr. Reed? Isn’t that how you want a contrac- tor to act? Mr. REED. That’s true. The DOD Inspector General has promoted this voluntary disclosure program for that very purpose, to encour- age company management to take responsibility for enforcing its own internal controls. Chairman TOM DAVIS. Let me ask you this. Documentation in a war zone is sometimes a little more difficult to undertake, isn’t it, than if you’re sitting back in an office somewhere? Is that fair it to say? Mr. REED. That would certainly be my expectation. You would not necessarily see the same type of documentation you would in an environment in the States. Chairman TOM DAVIS. And is Halliburton—since you let them know the standard of documentation you’re now expecting in a war zone, are they shaping up, are they coming forward with better documentation? Mr. REED. I wouldn’t want to comment on this point. That’s still a work in process. But they—— VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 104 Chairman TOM DAVIS. OK. They don’t get paid unless they pro- vide the documentation; isn’t that correct? Mr. REED. Well, we obviously in certain cases feel we have enough basis to suspend costs, which we have done in the case of the—the dining facilities. The company, though, has, I think, shown the right response in terms of stating to us what actions they are planning to take; and we’re going to make sure they take those actions in a timely way. Chairman TOM DAVIS. Let me just get back—the reason you have a cost-plus fee, an award fee, fixed fee, whatever in some cases is— who fronts the cost in a contract of that type? Mr. REED. Contractor—I may defer to Ms. Ballard. Chairman TOM DAVIS. Ms. Ballard, doesn’t the contractor front the costs? Ms. BALLARD. Yes, he does. Chairman TOM DAVIS. So in this case, the contractor, whoever it is—Bechtel, Halliburton, whoever—fronts the costs and then they submit reimbursements from what they have already upfronted; is that correct? Ms. BALLARD. That is correct. And if the costs that they submit are not fair and reasonable, allowable or allocable, we do not pay those costs to the contractor. Chairman TOM DAVIS. Theoretically, they end up costing them money if they don’t clear DCAA in their scrutiny and they don’t clear your shop; is that fair to say? Ms. BALLARD. Yes, that is correct. Chairman TOM DAVIS. And so there’s no taxpayer money in- vested up front. It comes in the reimbursements and that’s when the auditors come in; is that correct? Ms. BALLARD. That is correct. Chairman TOM DAVIS. What a deal. It seems to me, under those circumstances, that’s a pretty good vehicle for the government. We’re not having the taxpayers upfront money, putting money at risk, until we see the audits and it’s cleared. And it’s not uncom- mon, from my 20 years of experience in government contracting, to see contractors come forward with costs and have them thrown right back at you from alert, trained auditors that are used to this and you argue about it from there. Is that your experience? Ms. BALLARD. That is correct and that does happen. Chairman TOM DAVIS. I just want to put all of this in an appro- priate framework for this. This is a war zone and things go on. I think Mr. Waxman has raised some important points. One thing he’s talked about is the contracting officer that decided not to notify DCAA before they went ahead. I mean, we’d like to talk to that officer, like to have that officer come before the committee, but to find out what they weighed. And, General Strock, if you could make that available to us. Mr. WAXMAN. Just a correction. It’s my understanding that Ms. Robertson did contact the contracting officer, her superiors, and urged them not to go forward and be pressured into the sub- contract with Altanmia. Chairman TOM DAVIS. Let’s find out. I think we need to get—and that can be a subject; we just need to find out what went into this. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00112 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 105 Obviously, whenever you have allegations of the type that are coming forward here, favoritism or something, given this, then we want to get to the bottom of it and see. I don’t see that it’s hap- pened, but we still have some threads we have to follow through on. I think it’s pretty clear from your testimony that there’s no obvi- ous evidence of this. From what I understand from Mr. Waxman’s questions, the political pressure was on using a company in Ku- wait, and I don’t know under what circumstances they would have told us—the embassy or anybody else would have said, we have to use a certain oil company in Kuwait. But am I wrong? Aren’t the Kuwaitis doing their own investigation on that? Mr. ZAKHEIM. You’re absolutely right. The Kuwaitis are inves- tigating, and that just shows that there is a concern both here and there. I mean, we are investigating. There is a concern. Chairman TOM DAVIS. Not to cast aspersions, but isn’t corruption not uncommon in that part of the world? Mr. ZAKHEIM. I don’t want to cast aspersions, Mr. Chairman. Mr. MCHUGH. Mr. Chairman, would you yield to a question from me? Chairman TOM DAVIS. I’d be happy to. Mr. MCHUGH. I get a little confused sometimes in my old age, but wasn’t your question to the panel that Mr. Waxman has re- ferred to, did they receive any political pressure from the adminis- tration to award the contract to Halliburton? Chairman TOM DAVIS. That’s correct. Mr. MCHUGH. Now, did Halliburton, where this lady was em- ployed, receive pressure to award it to a Kuwaiti firm, correct? Chairman TOM DAVIS. That’s correct. I didn’t ask that question. Mr. MCHUGH. I thought so and—— Mr. ZAKHEIM. To be clear, the contract officer was working for the government, but our answer was, that we were not aware of political pressure. She has made an allegation, and that is part of an overall referral to the inspector general precisely to get to the bottom of this. Mr. MCHUGH. She was working with Halliburton, but Halli- burton already had the contract was the point. It was not so the administration was trying to enrich—— Mr. ZAKHEIM. No. Absolutely not. That’s correct, Mr. McHugh. Mr. MCHUGH. But that was the suggestion that was made. Chairman TOM DAVIS. That’s fine. Mr. Waxman, you have 5 min- utes. Mrs. Maloney, you’re recognized for 5 minutes. Thanks for bear- ing with us. Mrs. MALONEY. Thank you, Chairman Davis and Ranking Mem- ber Waxman. I just want to state that I’ve been fortunate enough to visit Iraq twice with Chairman Davis, in August and in February, and to meet with the troops and review the contracts; and the troops are really doing a remarkable job under very severe conditions, and we are thankful for their service and to your service. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00113 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 106 I would like to go back to Ms. Ballard, when you testified earlier that when a decision is made to give a monopoly contract, a sole- source contract, you make a determination. Was a determination made in the case of the sole-source monop- oly contracts in Iraq? Was that procedure followed in the letting of those contracts. Ms. BALLARD. Congresswoman, I need to be sure I understand your question. Are you speaking of the sole-source award to Halli- burton, or are you speaking of the Parsons award in the north and the KBR award in the south? Mrs. MALONEY. I’m speaking to all three. You said that when you make a decision to let a no-bid, sole- source contract, you make a determination that is appropriate to do that as opposed to having a competitive bid. That was part of your testimony that was part of the procedures that if you don’t have a competitive bid, you make a determination that it’s impor- tant for whatever reason, an emergency or whatever, to follow the other course; and my question was, was that determination made in all three contracts? Ms. BALLARD. In the case of the Restore Iraqi Oil contract, a de- termination was made under the Competition in the Contracting Act that unacceptable delays existed and therefore a sole-source award was appropriate. Mrs. MALONEY. Could we have an example or could we have a copy of the written determination, all three cases? Ms. BALLARD. The LOGCAP contract is the one sole source and, yes, ma’am, there is a determination that we can make available. In the case of the Parsons award in the north and the KBR award in the south, those were not sole-source contracts. Those contracts were competed and, in fact, there were six offerers who competed for those awards. Mrs. MALONEY. And I would like to see a copy of the determina- tion and the types that you provided with a no-bid contract. Admiral Nash, when we were in Iraq—— Chairman TOM DAVIS. There’s no problem with supplying that is there? Ms. BALLARD. No. Chairman TOM DAVIS. I just wanted to get that on the record. I just wanted make sure there’s no problem with supplying that. They said there’s not. Mrs. MALONEY. And we had this conversation when we were in Iraq, and I asked and I believe the chairman also asked why we were not allowing Halliburton and Bechtel to compete for specific projects. At one point, you said we had to let these contracts be- cause you had to get the people over there. Now they’re both over there. Why couldn’t we let these two com- panies compete? Would that not save taxpayer dollars? Mr. NASH. Some of the contracts under which they’re working are not full and open, so therefore I can’t use them in some cases. In fact, KBR, Halliburton is the contractor for the oil in the south. It was full and open competition; and they will in fact be doing the work down there. We will look at the opportunity, whether we can do some com- petition, but the goal is to be able to implement this work effi- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00114 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 107 ciently and effectively. So I guess the answer is, we can and we can’t for those contracts that are not correctly—were not done in a way that the supplemental laid out. We won’t be able to use them. So we’ll take a look at that. Mrs. MALONEY. I think that could save taxpayers’ money. And General Strock, didn’t the Army Corps recently award a con- struction contract for the Central Command to 10 different compa- nies? General STROCK. Yes, ma’am, we did, out of our Transatlantic Center in Winchester, VA. Mrs. MALONEY. So, Admiral Nash, why did the administration choose to deviate from this practice? Admiral NASH. I’m sorry. I don’t understand. We are using some of those 10 contracts right now to do work in Iraq with the supple- mental money, because they were full and open competition. Mrs. MALONEY. And now that Parsons and Halliburton have mo- nopolies in the south and in the north, what’s wrong with having these two groups compete, as opposed to cost-plus contracts in which there is really no incentive to save taxpayers’ money? Admiral NASH. Well, if I may, all of these contracts have mecha- nisms so that we have tasks and those tasks are negotiated. So it’s not the true cost-plus that they just send us a bill after they’re done and we pay whatever it is. If I understand your question, why can they not compete for all of the oil work, whether they are working the north or the south— and that’s what I said we would take a look at now that we have those in place—it depends on what the contract—what the contract clause is saying. And I will take a look at that, ma’am. Mrs. MALONEY. When I arrived in Iraq on the very first—we ac- tually were in Kuwait. The headline in the Kuwaiti paper was that Altanmia was being investigated by the Kuwaiti Government, by a unanimous vote of their parliament, over allegations that Altanmia was making profits of over $800,000 a day; and that’s extremely troubling. Chairman TOM DAVIS. The gentlelady’s time has expired. Mrs. MALONEY. I just want to say, if I could, Mr. Chairman, that I truly I do believe that the American taxpayer owes a great deal of debt to Mr. Waxman and yourself for your diligent overview of taxpayers’ money in these contracts. Chairman TOM DAVIS. Thank you very much. This isn’t our last hearing, but we appreciate that. The gentleman from New York. Mr. MCHUGH. Thank you, Mr. Chairman. I’m getting confused again. I’ve been on the Armed Services Committee for 12 years. I serve as the chairman of the Total Force Subcommittee. I thought I understood LOGCAP. I heard the gentlelady from New York say ‘‘sole-source,’’ ‘‘exclusive,’’ ‘‘no-bid,’’ and other such colorful adjectives, ‘‘contracts.’’ Isn’t the purpose and hasn’t the purpose of LOGCAP always been to, after a competitive process, which happened here, and after the winner is announced, which was Halliburton in this case, you make use of those in extreme sit- uations just as we did when I visited Haiti with General Sullivan, just as they did when I was with the Chief of Staff of the Army VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00115 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 108 when I was in Bosnia, just as I did when I visited a K–2 in Uzbekistan, or the twice I’ve been to Iraq, or 10 days ago when I was in Afghanistan for 2 days. Am I correct on that or am I really badly confused? General MCMANUS. You’re correct, sir. General KERN. Congressman, if I can elaborate on the LOGCAP contract, we’re on LOGCAP 3 right now, which gives you an indica- tion that this isn’t the first time in this—as mentioned earlier, we’ve been doing this for 10 years and it has been competitively awarded. Mr. MCHUGH. Let me ask you that because you raised a point. This one was competitively awarded. I seem to recall about the time I went to Bosnia in 1997, there was a competitive award proc- ess run. DynCorp won that under the previous administration. The previous administration rejected that competition and thereafter awarded a true sole-source contract to Halliburton. Is my memory correct there? General KERN. DynCorp had the previous LOGCAP contract; that is correct. It was competed in 2001. Mr. MCHUGH. It was competed later, but in Bosnia, Halliburton was kept on the ground; is that not correct? General KERN. This is another confusing issue. There was a sustainment contract awarded in Europe for Bosnia. That was com- peted separately. That was different than the—— Mr. MCHUGH. And who—— General KERN. LOGCAP contract that we’re talking about. Mr. MCHUGH. Who held that? General KERN. DynCorp held it previously, but the pieces of it were then recompeted. Mr. MCHUGH. And who held it for Bosnia? General KERN. I will have to make sure—— General MCMANUS. Congressman, I think this is important be- cause LOGCAP won—that was a 5-year contract 1992 to 1996, Corps managed. Brown & Root Services won that competition then. There were four other companies that competed. During the period of time of that contract, we supported oper- ations in southwest Asia, in Somalia and we began to work in the Balkans. That’s an important thought because I’m going to come back to that in a second. Then on the LOGCAP, which you were talking about, the second iteration, LOGCAP 2, was the period 1997 to 2001. That again was competitively awarded, then to DynCorp; and there were three other defense contractors in that competition during this time pe- riod between the operations. And this is what we try to do: We go into an area with a contingency contract, when the requirements are unknown here, duration, and this gives us the flexibility and agility to deal with those changing requirements in the battle space. After about 2 to 3 years, with experience in the Balkans, you, sir, then made the decision to compete for sustainment purposes the continuation of that mission in the Balkans, which is separate from LOGCAP today, sir. Does that—— VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00116 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 109 Mr. MCHUGH. It does, but the point remains the same. There was a unique treatment in the Balkans that I suspect, if it were done today under the current administration, would somehow be characterized as special treatment because Halliburton was already there and obviously participated to advantage in that contract. General MCMANUS. Yes, sir. Mr. MCHUGH. And that’s the answer I could have gotten 3 min- utes ago. I appreciate it. But that is the key point. Now let me ask you another question. The cost-plus contract today, it’s a 1 to 3 percent; is that correct? What was it under the previous administration. General MCMANUS. Sir, let me—let me go back to LOGCAP 2, sir, if I may. Under LOGCAP 2—— Mr. MCHUGH. I enjoy our travels. General MCMANUS [continuing]. Lessons learned off of the—each time we do this because you cannot compare each contingency we support. They’re unique in their own right. Mr. MCHUGH. General, I’m not asking you to justify it. I’d just like you to answer what the cap is today. General MCMANUS. It’s 3 percent. It’s a 1 percent base fee, 2 per- cent award fee, which they compete for, that we’ve not gotten to yet. It was 8 percent in LOGCAP 2, so we drew—— Mr. MCHUGH. Eight percent. So if you’re concerned about the percentage, then actually Halliburton is receiving less under this administration than they did under the previous. And by the way, I think those charges, if anybody would make them, are ludicrous. I supported that initiative back then and I support it now, and in all those places, I’ve seen good work being done by men and women in uniform I couldn’t be more proud of. And that doesn’t suggest that Dov Zakheim and others don’t have a lot of work to do on any contract, they do, but we have been there trying to work these out to the benefit of the American peo- ple. Somehow to suggest that an embassy who conveys the issues with the country, that they work to any corporate interest of Amer- ica that is in that corporation is somehow criminal, then I’ll tell you what we ought to do is go back, get Ben Franklin and every- body to Secretary Albright because they’d all be in jail. So I just think we ought to understand what the realities are today. These are not clear-cut issues whether you’re dishing out meals or cleaning toilets, as—having clean toilets, as the ranking member said. This is incredibly difficult work, and you folks have difficult work, and I feel confident that at the end of the day you’re going to make sure the taxpayers get what they deserve while we’re taking care of our men and women in uniform. Thank you, Mr. Chairman. Chairman TOM DAVIS. Thank you. The gentleman’s time has ex- pired. The gentleman from Massachusetts, Mr. Tierney. Mr. TIERNEY. Thank you. Recently two former Halliburton employees who worked for Halliburton’s LOGCAP procurement office in Kuwait came forward with, I think, some disturbing information about a culture of over- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00117 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 110 charging. According to these whistleblowers, Halliburton officials frequently told employees that high prices charged by vendors were not a problem because the U.S. Government would reimburse Halliburton’s cost and then pay Halliburton an additional fee. They referred to an informal Halliburton motto, ‘‘Don’t worry about the price, it’s cost-plus.’’ Examining the situation from a different angle, the GAO is re- porting the same indifference to cost. Dr. Zakheim, if these accounts are accurate, would you agree with me that this is a completely unacceptable attitude? Mr. ZAKHEIM. If they’re accurate. And what we have done is taken this account and treated it as a hotline referral; and as you know, a hotline referral goes to the inspector general precisely to investigate this. One other point that I think is very important to make: We know that the courts have continually held that you cannot deny a con- tractor award on the basis of allegations. An investigation looks into allegations. You’ve got two guys here—— Mr. TIERNEY. I don’t want to interrupt you, but I don’t think I said anything about denying contracts. I was simply asking you a question. Let me followup, because I understand that Mr. Reed imme- diately sent it over to the inspector general on a hotline referral, but what troubles me is, the inspector general is apparently doing nothing to followup on this. The minority staff contacted one of the whistleblowers yester- day—his name is Henry Bunting—and he said that no one from the inspector general’s office has contacted him. Mr. Zakheim, how do you explain this? The allegations of the whistleblowers are serious; you’ve admitted that. Where is the fol- lowup? Mr. ZAKHEIM. There will certainly be followup. They’re very me- thodical. Their approach, as I understand it, and obviously I’m not working with the inspector general’s office, but as I understand it, they are very careful, they assemble their facts, they interview peo- ple. I guarantee those two gentlemen are going to be interviewed. Mr. TIERNEY. Well, both Mr. Dingell and Mr. Waxman sent a let- ter explaining all of this in significant detail over a month ago— over a month ago. The whistleblowers also say that Halliburton employees delib- erately keep purchase orders below $2,500 so they can avoid the re- quirement to solicit more than one quote, in other words, to avoid having vendors compete to supply the company with goods. They say that Halliburton’s supervisors encouraged them to use a list of preferred Kuwaiti vendors even though many of these firms were unreliable or charged outrageous prices. Now, this letter is over a month ago and we’ve seen nothing come back. Mr. Bunting testified before the Senate Democratic Policy Com- mittee last month. The same day, or virtually the same day, GAO investigators contacted the minority staff to ask for more informa- tion on how to contact Mr. Bunting and the other whistleblower. That’s what I would think an investigator would do if they were serious about this, but no one from the inspector general’s office has ever contacted Mr. Waxman or his staff to learn how to get in VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00118 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 111 touch with these whistleblowers, and apparently no one has con- tacted Mr. Bunting despite the fact that they were put on notice over a month ago. Mr. REED. Mr. Congressman, could I tell you one additional thing that is being done? I’m not sure where it stands with the IG, but in addition to the regular conduct that might have been suspected from the letters, we took it as an issue, as well, of normal contract- ing for DCAA to followup on this. So I have sent that letter to my audit office in Iraq. We have been looking—working with the Defense Contract Management Agency, that is responsible for administering the contracts and for approving these $2,500 awards. They have to sign off on every sin- gle one of them. So we have brought these very serious allegations to their attention, and we are working together with DCMA to see if we can validate and correct these situations. Mr. TIERNEY. I appreciate that, Mr. Reed. And I appreciate, Mr. Reed, your immediate referral to the inspector general’s office. I think that was the appropriate action to take, and I think you should be commended for that. Will you be getting back in touch with the attorney—the inspec- tor general to find out why this lapse has occurred or what’s going on? Mr. REED. We do normally receive periodic updates from hotline referrals. And, yes, sir, we will do that. Mr. TIERNEY. I thank you for that. I yield back. Mr. LATOURETTE [presiding]. I’m going to recognize myself for 5 minutes. I didn’t have the opportunity to go with the chairman on his trip, but I did have the chance to be in Iraq in January with the Trans- portation and Infrastructure Committee to look at civil works projects. And before I ask a couple of questions, I want to just relay a story. There was a young lieutenant from Toledo, OH, who talked to me about the 2,000 civil works projects that had gone on in Iraq, and some of them have been mentioned—redoing schools, Operation Chalkboard, reopening hospitals, making sure hospitals were up and running, giving people running water that had never had run- ning water in their life. I think the chairman in his opening state- ment talked about a wastewater treatment plan by General Odierno in the Sunni Triangle. And I made the observation to the lieutenant, I said, you know, lieutenant, I watch a lot of television, as I think we all do in my job; and I can tell you, back home when we do something swell, we as politicians have a band and a ribbon, and we all cut it with scissors, and we take the scissors home or the shovel home after the groundbreaking. How come I’ve never seen any of this on television? Why have you never had a cere- mony? And the lieutenant said, we’ve had a ceremony for every one of those successfully completed civil works projects. I said, how come you think I’m not watching it back on tele- vision? He said, Congressman, we watch a lot of CNN and Fox here, be- cause we’ve got it in Baghdad, and we’ve never seen it on television either; and our feeling is that the broadcast media waits by the VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 112 scanner for one of our buddies to be injured and you’ll see that on the news at night, but you’ll not see our successes. So when you go home, it would be nice if you could tell people about the suc- cesses. So I’m keeping my promise today to the lieutenant from Toledo. You are doing an amazing amount of work in Iraq, and you know, I saw a guy on TV when I was there and he said, under Sad- dam Hussein I had electricity 24 hours a day and now I only have it 16 hours a day. And I asked the lieutenant, why is that? He said, because he’s from Tikrit. Everybody in Tikrit had elec- tricity 24 hours a day, but the guy in the next town had it zero hours a day, and so through our redundancy efforts, we’re going to make sure that everybody’s treated the same and everybody has it 16 hours a day. Now to my question. When the ranking member, Mr. Waxman, was making his opening remarks—and if I misquote him, I apolo- gize and I’ll be certain to yield to him—but talking about contrac- tors’ officers, and I think he said that reservists are going over and are being given a 2-week crash course in contract management, words to that effect. And, Ms. Ballard, I heard you talk about the contract officers that are in station. Is there a 2-week sort of correspondence crash course on how to administer these contracts? Are these contracts being administered by people on the ground in Iraq by profes- sionals or the Keystone Kops? Ms. BALLARD. Congressman, I have no knowledge of 2-week training crash courses to go over and be contracting officers in the- ater. In my experience, the reservists who come to work for us are usually put in positions where they have experience from their commercial occupations or from their military service. On the ground, our professionals come from the Defense Contract Manage- ment Agency, an agency I’m proud to have worked for, and I can say clearly that they do have professionals on the ground that ad- minister these contracts and provide oversight to us. Mr. LATOURETTE. Thank you very much. And Admiral—— General KERN. Congressman, could I add—I think I’d like to clarify—— Mr. LATOURETTE. Sure. General KERN. There is a Reserve unit called the LOGCAP Sup- port Unit, which I believe is what Congressman Waxman was re- ferring to. It was the first time we had employed that unit, starting with operations primarily in Afghanistan, when we began the buildup of the LOGCAP work. That organization is comprised, how- ever, of the professionals that was referred to, of DCMA auditors as well. I just met with them in Baghdad. They are on their second iteration of it. It’s a multiservice, multicomponent unit composed of professionals. The professional PCOs are part of General McManus’s office that oversees the contract. The ACOs, the admin- istrative contracting officers, in theater, are professionals as part of DCMA. I’d let McManus describe it in more detail. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00120 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 113 General MCMANUS. Sir, the LOGCAP Support Unit concept is a new edition, based again on lessons learned, because as we have to leverage this capability, we have to train our folks. We provide these planners to go into the theater, out to the base camps, to the units, if you will, 4th division, to the brigades and so forth. So as requirements are generated, these are the folks who work together to create the scopes of work. And so prior to their deployment, this is a case of having a new organization. We wanted to bring them up as currently as we could, because this is a case of forming, organizing and deploying, and have the support and get your skills at the same time. So this was an attempt to bring it up to speed. This is a new organization, new capability we’re trying now to build for future operations, because it’s making a huge difference for us as we work the requirements through this whole process from—from origin through completion. Mr. LATOURETTE. Well, General—either general—let me ask you this: Do you have confidence that these men and women know what they’re doing? Are they watching the American taxpayers’ buck on these contracts? General KERN. Yes, they are. And we have taken that from the previous lessons provided by GAO and others on how to improve the process. And that’s why this unit exists today and that’s why the training that we are using with them. The task order process we are using also breaks it down into further detail, and it is a complex process, to ensure that we have oversight of the entire op- eration. Mr. LATOURETTE. Thank you very much. I believe the gentleman from Massachusetts is recognized, Mr. Lynch, 5 minutes. Mr. LYNCH. Thank you, Mr. Chairman. I want to thank Chairman Davis and also Ranking Member Wax- man for their good work in putting this together. I also want to thank the members of the panel for coming before us and helping us in our inquiry. I also had a chance to go into Iraq. I was actually part of the first delegation to go into Baghdad after the invasion. And I’ve got about 20 years in construction management, managing contracts. And a couple of things I know about no-bid and cost-plus con- tracts. No. 1, since there is no or very little competition, it’s basi- cally a guarantee for whatever contractor is anointed. The second thing, on a cost-plus contract, the profits are guaranteed and there really are no restraints on how much a project will cost. There are no internal restraints on the part of the contractor. So I think Mr. Zakheim would agree that the auditing function here, and Mr. Reed would agree, the auditing function is extremely important, be- cause the more the company spends or the contractor spends, the more they’re going to make on their percentage. So the auditing function is extremely important. Is that correct, Mr. Zakheim? Mr. ZAKHEIM. Absolutely, sir. I agree. Mr. LYNCH. In this case we have an auditing function where our—the DCAA wrote a recommendation to the Army Corps of En- gineers and said—and I’m going to pull it right from the letter. It said, ‘‘They have identified systemic problems with Halliburton’s VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00121 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 114 accounting, and it urged ‘‘the DOD not to award further contracts to Halliburton without talking to the DCAA about Halliburton’s ac- counting problems.’’ And the problem that I have is, this is the way the system is supposed to work, that the auditor is supposed to oversee what’s going on and that the contracting authority is supposed to listen. But that didn’t happen here. That didn’t happen here, and another $1.2 billion went out to Halliburton and, in other cases, Brown & Root. Despite some prob- lems that have been found in their operation, they continue to work without any correction or any restraints at this point. General Kern, I’d like to bring your attention to a couple of re- ports regarding several Halliburton employees who were caught taking kickbacks. They took them from a Kuwaiti company in ex- change for steering contracts of that company; and as I understand it, Halliburton caught the officials engaged in these activities and reported them to the Defense Department; is that correct? General KERN. That’s correct, Congressman. Mr. LYNCH. Last week, General, your staff met with our commit- tee staff in preparing for this hearing and our staff asked for the identity of those two individuals. Your staff at that time reported that they didn’t have the information then, but they’d get back to the committee with the information. Unfortunately, we have been waiting and that has not happened, to my knowledge. Is that forthcoming or—— General KERN. I was away last week, Mr. Congressman, so I don’t know—have the precise answer. I promise you, I will get back to you, and if there is no legal reason why I cannot provide that, it will be provided. Mr. LYNCH. I’ve got to tell you, I’m one of the Democrats who ac- tually supported the action in Iraq, and I supported the money for our troops and for reconstruction, and I’ve got to tell you, I’m con- cerned right now. I’m concerned. I’m not somebody who has criti- cized the military or been reluctant to support you, but I’ve got to tell you, it’s our responsibility, all of us, to protect the American taxpayer. General KERN. I agree with your concern. Mr. LYNCH. I’m concerned. General KERN. And we are—I will promise you, and I have spo- ken a number of times with my command counsel about this spe- cific incident, and it is going to be thoroughly investigated; and we will bring those concerns to the forefront for you. Mr. LYNCH. Well, more than concerns brought to the forefront. I’d like to have an opportunity to talk to those individuals and find out how senior are those individuals who accepted the bribes from this Kuwaiti company. Do we have at least an indication of how senior those Halliburton officials are? General KERN. I do not have any indication of that. I know that it was brought forward. I know that it is under investigation, and I know that they have provided us compensation for what they be- lieve was the amount of the bribe that was taken. But that is what we are going to ensure is investigated thoroughly. Mr. LYNCH. I will conclude, Mr. Chairman. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00122 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 115 I keep hearing this: that the price is overcharged and then the penalty is to give the money back that we caught you stealing. That’s just not going to get it. That’s just not adequate. General KERN. Congressman, we agree with you 100 percent and that is, in fact, what is happening, that we are—— Mr. LYNCH. There’ve got to be more serious consequences than just, oh, we caught you stealing, give the money back. This is mil- lions and millions of dollars of the taxpayers’ money, and we have to have a better standard than that. And I’m just going to conclude with these remarks. I don’t understand how you couldn’t know the rank and the iden- tity of these officials. These officials were at the very top of the pro- curement ladder. These people were handing out millions of dollars in taxpayers’ money in the form of contracts. We know who these people are. That’s why I say, my confidence has been shaken on this point, and we ought to put a lot of sun- light on this process, find out who these people were, find out how many contracts they oversaw, find out who the Kuwaiti contractors were that were bribing them. And are those subcontractors who provided the bribes doing other contract work in the country as well? We need some accountability here. That’s all I’m asking. Chairman TOM DAVIS [presiding]. The gentleman’s time has ex- pired. But just to clarify, it was the—Halliburton came forward and said, we suspect bribery. Right? You wouldn’t have known about it had they not come forward and said, We think there are employ- ees—am I correct on that? General KERN. I would hope that our audit would have picked it up, as well. Chairman TOM DAVIS. Eventually, maybe. General KERN. Yes. Chairman TOM DAVIS. OK. The gentleman from California is rec- ognized for 5 minutes. Mr. OSE. Thank you, Mr. Chairman. General Strock, your stars are confirmed by the Senate, are they not? Mr. STROCK. Yes, they are. Mr. OSE. General Kern, the same? Your stars are confirmed by the Senate? General KERN. That’s correct, sir. Mr. OSE. General McManus. General MCMANUS. Sir, that’s correct. Mr. OSE. Ms. Ballard, are you subject to Senate confirmation? Ms. BALLARD. No. Mr. OSE. Are you a political appointee? Ms. BALLARD. No, I am not. Mr. OSE. You’re a civilian—— Ms. BALLARD. A career civil servant. Mr. OSE. OK. Long-term? Ms. BALLARD. Twenty-nine years. Mr. OSE. You’re almost permanent then, aren’t you? Mr. Lucke. Mr. LUCKE. I’m a career foreign service officer, not subject to Senate approval. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00123 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 116 Mr. OSE. Dr Zakheim. Mr. ZAKHEIM. I was confirmed by the Senate. Mr. OSE. OK. Mr. Reed. Mr. REED. I’m a career civil servant. Admiral NASH. I’m a private citizen back on duty here. Mr. OSE. As an admiral, you were confirmed by the Senate were you not? Admiral NASH. That’s true. Mr. OSE. All right. I’ve always enjoyed sandcastles here. Let me just—I want to make sure I’ve got this correct here. Halliburton, it’s been alleged, has some nefarious scheme going to pick the pocket of taxpayers. Now, if I understand, what you all have done is, they have submitted something for $2.7 billion, some contract here; you told them, well, it doesn’t quite meet our expec- tations. So they came back at $2 billion, saving the taxpayers $700 million. But that wasn’t satisfactory either. Now, as I understand it, you’ve got to be nominated—who nomi- nated you General Strock, to be a general? Mr. STROCK. Sir, the President nominated me. Mr. OSE. The President—— Mr. STROCK. Of the United States. Mr. OSE. President Bush? Mr. STROCK. I’m sorry, President Clinton. Mr. OSE. President Clinton nominated you to be a Brigadier? How about a Major—for your second star, did you go to President Bush? Mr. STROCK. President Bush, yes, sir. Mr. OSE. General Kern, your fourth star was from President Bush? General KERN. That’s correct, sir. Mr. OSE. General McManus. General MCMANUS. Yes, sir. My second star was President Bush. I’ve been a general officer about 6 years now. Mr. OSE. All right. Let’s see. Dr. Zakheim, you were nominated by the Bush-Cheney adminis- tration and confirmed by the Senate? Mr. ZAKHEIM. Yes, sir. Mr. OSE. Admiral Nash, your stripes? Admiral NASH. President Clinton did both of my stars. Mr. OSE. So let me make sure I’ve got this right. The people— the Bush-Cheney administration, who nominated some or all of you for your stars or for your positions, under the sandcastle scenario, is doing all this heavy lifting for Halliburton, but then all you peo- ple are sitting there telling Halliburton they can’t have the con- tracts that they otherwise are submitting? You’re saying the con- tracts aren’t specific enough or they aren’t clean enough or they don’t meet our requirements under FAR. Now, the sandcastle I’m trying to understand, as described by certain members on the other side, exactly how does Halliburton benefit when you guys return their contracts to them, when you say their contracts aren’t good enough? General Kern, you’re the four-star here. Tell me how that works. I’m missing some picture here. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00124 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 117 General KERN. Congressman, we take an oath to obey the laws of the President of the United States in orders from him and from the Constitution of the United States, and we are responsible to the American public to make sure that all of those things happen. So as our commander in chief, we follow the law and the orders of our administration, and we ensure that all the regulations that have come forth, such as the Federal Acquisition Regulation, pro- vided by this Congress, and oversight are also met. So we will continue to make sure that both the taxpayers’ money is well spent and the security of our Nation is met. Mr. OSE. General, I have actually gotten great comfort from the testimony here. It’s the sandcastle allegations I’m trying to ad- dress. Dr. Zakheim, you’re a political appointee. You ought to be looking out for, under the scenario of the sandcastles, the interests of a cer- tain individual, but your department is sending the contracts back for further review. You’re costing these people money. I mean, ex- actly what are you up to? Mr. ZAKHEIM. Well, my understanding is, I support the President of the United States and the American people by looking after the taxpayers’ dollar, and the only pressure that I’m aware of is the pressure that I put on poor Bill Reed here to keep going after any- body or anything that’s untoward or might rip off the taxpayer. Mr. OSE. Which brings me to my point. Now, Mr. Reed, there have been allegations that things weren’t forwarded to the IG or that the IG is supposed to report to you on their activities. If I understand correctly, any illegal behavior that you suspected, you have, in fact, forwarded to the IG; is that cor- rect? Mr. REED. Yes, sir, that’s correct. Mr. OSE. Now once it’s forwarded to the IG, is it within your do- main to prosecute? Mr. REED. No, sir. Mr. OSE. That’s somebody else’s job? Mr. REED. That’s correct, sir. Mr. OSE. Does the IG report to you? Mr. REED. No, sir. Mr. OSE. So the IG is supposed to pick up the burden at that point and carry on? Mr. REED. That is correct, sir. Mr. OSE. Are you aware of a contract that’s been introduced or that the Corps entered into for recent—— Chairman TOM DAVIS. The gentleman’s time has expired. Mr. Ruppersberger. Mr. RUPPERSBERGER. Yes, thank you. First thing, there’s a lot of testimony about Halliburton and other issues which are very important and need to be addressed. I’m more concerned about where we’re going now and in the future, because our men and women are at risk. We have other people there. We’re trying to rehabilitate a country, and I think it’s very important that we take the lessons learned and go forward. Now, I’m very concerned about—and I’m going to review a case right now, a contract, and I’m going to ask your comments on that, VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00125 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 118 because I’m concerned about this contract because it affects what is happening now and in the future. Let me get into this issue. Major General Charles H. Swannack, Commander of the Army’s 82nd Airborne Division, criticized the failure of U.S. Coalition Provisional Authority in Iraq to deliver equipment needed by newly formed Iraqi security forces. And by the way, I was just in Iraq a couple of weeks ago. You know that part of the insurgents’ plan is not only going after our men and women, but after the men and women in Iraq, especially security, that are working with their country. So it’s a very impor- tant issue. Now, Swannack said his division has successfully trained more than 10,000 Iraqis to be police security and border guards in the volatile regions stretching from Falluja to the Syrian border, but he said the forces lack the equipment needed to fight insurgents, which I assume was ammunition and guns and things of that na- ture, to protect the vast Iraqi border. Swannack voiced frustration because lack of equipment had hampered Iraqi efforts to secure the region. Now, the equipment was to be delivered under a controversial $327 million contract that the Pentagon canceled last week, a month—that could delay the process for months. That concerns me. These people are at risk right now. The contract had been awarded to a small Virginia firm with no history of arms dealing, and it is alleged that the company Nour, N-o-u-r, USA—and the President is A. Huda Farouki, F-a-r-o-u-k- i, has close ties with Chalabi, a member of the Iraqi Governing Council and a close ally of some Pentagon officials. Again, that’s al- leged and I’m not asking you to comment on that. The contract was canceled after protests by competing companies that found Nour had claimed to be partners with high-profile com- panies, an individual who said in interviews they had no links to the firm. Now, this was a quote that was made by the General, ‘‘Not only are the security forces bravely leading the fight against terrorists; they are in some cases insisting on doing it alone.’’ And I know that those of us who were over there saw the will of those Iraqi individuals who want to take control their own country. And the only way we can get our men and women out of that country is to get them to secure their own country, build the infrastructure that is necessary. But, anyhow, they are in some cases insisting on not doing it alone, not depending on coalition forces. Swannack said this: ‘‘if we had the equipment for these brave young men, we would be much further along.’’ That concerns me. Pentagon officials blaming—this is alleged—irregularities in the contracting process for the cancellation and saying they were rush- ing to finalize a new contract, but they predicted it would take 60 to 90 days before a new supplier was selected. That concerns me. And that is an issue we need to look at, we need to evaluate it so that it doesn’t happen. Here’s what I would like: First thing, how was that contract put out to begin with, No. 1? How was the contract given to this com- pany that really had no expertise? Who was involved with that? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00126 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 119 Where—and I’d like to ask, really—I guess, Mr. Zakheim, you’re getting a lot of the heat today, but I’d like to ask, who was respon- sible for this type of contract? The men and women of Iraq are relying on us, our leadership, to provide them the resources that are necessary. Not only was this contract a bad contract, but we’ve got 60 to 90 days where we have a general saying that these Iraqi individuals—I mean, these Iraqi security people cannot do their job. That’s what I’m concerned about. We are going to deal with the Halliburton issues and all that; that will be around, and investigations will be done. But what about the future? That’s very serious. And the other issue I want to ask, because I’m concerned—my time is going to be up and I want to lay it out. I think the Iraqi Governing Council—I’d like to know how much money is given to them, if at all, that allows them to negotiate contracts using Amer- ican dollars? I think that’s an important issue. Using American dol- lars, how much influence do they have? Are they given any author- ity to contract with anyone with our American dollars? I also supported the $87 billion because I believe we have to fin- ish what we started. Whether you are for or against the war, we’re there and we have men and women that are doing a good job there; and it’s a hard job and we understand that. So if you could address those issues—I think we need to have les- sons learned, but let’s deal with these kinds of situations. When you are affecting the security of these Iraqi security people and our men and women, that’s serious. Mr. ZAKHEIM. Congressman, let me address the question about what about the future. I think one of my colleagues can talk to you a little bit about the Nour contract, and I’m sure Admiral Nash can talk about how the Iraqis properly get involved in the contracting process. Regarding the future, we are as concerned, as you rightly are, that we can’t just wait around for the process to play itself out. And frankly, we’re caught here because, on the one hand, we want to have the proper procedures, the proper competition, all the things we’ve been hearing about, in order to protect the American taxpayer; and that takes time. On the other hand, you’ve got com- manders in the field and our young men and women who are being shot at, and we’ve got to help them out immediately, and we have to keep finding that delicate balance. In this case, the one you raised, we are looking at alternative sources of financing, possibly out of the Development Fund for Iraq, that might help acquire some of this material, since the DFI, as it’s called, is purely for the Iraqi people and this is for Iraqi security forces; and that, of course, we could implement much more quickly. So we are indeed trying to do exactly what concerns you. Let me turn to my colleagues—— Mr. RUPPERSBERGER. But my question was, how did this occur? How was that—— Chairman TOM DAVIS. We’re way over the time. I want to give him a chance to answer. I want to get—— Mr. RUPPERSBERGER. And don’t forget the Chalabi issue, too. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00127 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 120 Ms. BALLARD. Congressman, I’d like to say, first, that we have awarded over 1,300 contracts in Iraq, valued at $1.3 billion, of which approximately 1 percent is appropriated dollars. The com- petition rate on those actions is 99 percent, and 65 percent of the awards have gone to Iraqi businesses as primes. And we’ve gen- erated over 21,000 jobs. We’ve done this with currently 28 person- nel on the ground in Iraq facing significant challenges in austere circumstances. By way of comparison, in 2002, the Robert Morris Center had roughly $2 billion in contracting actions and 305 people who worked those actions. The contracting process, we strive every day for greater excel- lence in that process. Clearly, our staff in Iraq, faced with chal- lenges in austere circumstances, is making significant contributions to the rebuilding of Iraq. In those circumstances, with 1,300 contracts awarded, we have found the circumstance where offerers did identify concerns. The contracting process worked as it should; those circumstances were evaluated. We determined that action needed to be taken, and we took action. And the GAO, satisfied with our course of action, dis- missed the protest. In response to your question with regard to what we will do to support the soldiers, as Dr. Zakheim has indicated—— Mr. RUPPERSBERGER. Let me stop you here because you’re not answering my question. Mr. Chairman, I’m trying to get them to answer the question about the Nour contract. Chairman TOM DAVIS. I know. I know. And we’ve got time. We’ve got to move on. Let me try to get it in the rebuttal at the end. We’ve got 20 minutes aside at the end—— Mr. RUPPERSBERGER. I’ve got to take off. So if somebody could follow through with that. It’s just the Nour contract and Chalabi. Chairman TOM DAVIS. OK. Thank you very much. The gentleman from Texas. Mr. CARTER. Thank you, Mr. Chairman. I just got back here a little while ago from going over there with the chairman, and I want to say that I think that I saw miraculous things happening in Iraq, and I was very impressed with everything that I saw. And there’s no better group of fighting men and women on the face of the Earth than the ones I got to talk with and have supper with, and I’m very proud to be associated with them. I’ve been hearing a lot of stuff here, and my background makes me listen for the magic words. And I hear words like so and so— it has been found that so and so ‘‘took a bribe.’’ It has been found that such and such, so and so—I’m asking—my first question is, are there any actual people who are supposed to be finders of fact who actually found that this happened, or—it sounds more like this should be said: Someone has alleged that these things are taking place. Is that a better use of the description than a finding? It may be as clear as it could be, but nobody has actually made a finding that would say that bad behavior has taken place. There were allegations that have taken place. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00128 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 121 Mr. ZAKHEIM. I think in the main that’s absolutely correct, and we’ve tried to stress that, that even an investigation is simply to look into what really went on. It’s an investigation of allegations; you’re absolutely right. With respect to the so-called ‘‘kickbacks,’’ that was presented to us by KBR and even that’s being investigated, so—— Mr. CARTER. And it rightfully should be investigated before any- body is punished. I have never seen anybody in prison because somebody alleged that somebody did something. We generally went out and found out—had a finder of fact make a finding that they actually did that, like a jury or a judge or whatever procedures there may be in the Federal Government. Mr. ZAKHEIM. Due process is part of our process. Mr. CARTER. All of these things that we’ve heard about here today, including a question that was raised just a few minutes ago about an allegation that someone said that you’re supposed to— don’t worry about the cost because it’s a cost-plus contract. That’s being looked into is that correct? Mr. ZAKHEIM. That’s correct, sir. Mr. CARTER. And, in fact, all the other allegations that have been raised here today, all those are turned over to the proper authori- ties to be investigated? Mr. ZAKHEIM. Absolutely. Mr. CARTER. And is anyone at the table here in charge of those investigations? Mr. ZAKHEIM. In some cases, yes. When we’re doing audit inves- tigations, Bill Reed here does that. The inspector general is not at this table, but he certainly takes over those, as well. Mr. CARTER. Right. But those then, as to the audit investigation, which there is someone at this table responsible for, would you say that’s being sandbagged or is that a current investigation being carried on as we speak? Mr. REED. The audit process is alive and well and being pursued vigorously with the support of all the contracting officers involved in these contracts. Mr. CARTER. So we’re doing the job—you are the only ones that can speak for this investigation, and we’re doing the job that we’re supposed to do. We’re currently looking into the allegations that re- late to the audit investigation. Mr. REED. All of the contract audit issues are being pursued ag- gressively. Mr. CARTER. So we’re doing the job on that? Mr. REED. Yes, sir. Mr. CARTER. We’ve turned the others over to the proper authori- ties to be looked into. Does anyone have knowledge that these proper authorities are not looking into these allegations? Mr. ZAKHEIM. No. Mr. CARTER. So does everybody agree that, as far as you know, they are currently investigating these things on a reasonable time- table to investigate these kinds of allegations? Mr. ZAKHEIM. That’s correct. Mr. CARTER. That’s kind of what I assumed was right, but the sounds that were going around here didn’t make it sound that way. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00129 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 122 Mr. Ruppersberger’s contract question that he was talking about, that’s a concern to me, too, because I was over there. I met those troops, and I was told the same thing, as soon as we get these guys geared up like we are, these guys are going to get out in the field and they’re going to do a good job. So I also agree with Mr. Ruppersberger that we need to get those people supplied. And the kind of contract—and I don’t know the particulars of that contract, but when we start talking about the first initial con- tracts that are involved over there in Iraq, basically the military says we have a theater, a dangerous theater, that has a lot of con- tingencies that we can’t predict exactly what those contingencies are; and that’s why we go through this type of contracting process, which we’re calling a cost-plus contract. And if I’m wrong, correct me, because I sure can be. Is that right. General MCMANUS. Sir, for contingency planning purposes we have a LOGCAP contract in region for those unknowns as they evolve. Mr. CARTER. Right. And this is one of those unknowns that have evolved. So what can we do to make this an emergency situation to get these supplies to these troops that we’ve been training over there? Mr. ZAKHEIM. Well, as I said, Congressman, we are looking at al- ternative sources of funding so that we can get the money more quickly, because the contracting process takes what it takes, and it’s got to be done properly or else we will be answering questions as to why it was not done properly. But there are alternative sources and we are looking carefully at that to get the money so that we can get the equipment to those Iraqis. Because you’re absolutely right; they’re being shot at every bit as much as our people, if not more. Mr. CARTER. I guess what I’m saying is, this wouldn’t be a real smart idea to just let this out for bid for the next 6 months to try to figure out who gets the highest bid. We’ve got an emergency. We’ve got to deal with it. Mr. ZAKHEIM. And we’re going to move on that. General KERN. Congress, I met with General Sanchez on that specifically this week on how we’re going to get through that. We are going to move out. Mr. CARTER. Thank you. Chairman TOM DAVIS. Thank you. Ms. Watson is recognized for 5 minutes. Ms. WATSON. Thank you so much, Mr. Chairman, for this hear- ing. I guess I will address this to Major General Strock, and just say yes or no. The Army Corps of Engineers awarded an initial no-bid contract to restore and operate Iraqi’s infrastructure currently val- ued at $2.44 billion to Halliburton and its subsidiary, Kellogg Brown and Root. General STROCK. The capacity of that contract was $7 billion, but that’s correct. Ms. WATSON. And almost $1.4 billion has been obligated for fuel importation into Iraq? General STROCK. Yes, ma’am. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 123 Ms. WATSON. More recently, the Corps split the oil work into two competitive contracts, one for the north and one for the south. And the Corps awarded Halliburton the new $1.2 billion contract to op- erate Iraq’s oil industry in the southern half of the country? General STROCK. Yes, ma’am. Ms. WATSON. The Army Materiel Command has obligated over $4 billion for logistic support in Iraq under Halliburton’s logistical civilian augmentation program? General KERN. Yes, ma’am. Ms. WATSON. And then I am very supportive of what all of you in the military and those assigned to build the infrastructure of Iraq and continue whatever we have to do militarilywise in Iraq. I did not support the war, but I support our troops, and I support our obligation. I am concerned about reports that we are hearing, and we heard them from Halliburton, which got the contract, that there were kickbacks, and as I understand, and I want someone out there to correct me, that the persons involved must have been at the high- est level because they were in control of millions of dollars, maybe billions of dollars of government procurement. And so I would re- quest that with all due speed that we weed out these wrongdoers. My job is to protect my constituency and their tax money, billions of dollars that are being spent 10,000 miles away, and we have in- frastructure problems right here. I am going to ask you with all due diligence to weed out—I don’t care if it is 2 or 18,000. We need to know. Apparently goes way up high, because the decisionmakers make decisions over millions to billions of dollars. And so to do the job in Iraq, it is costly. We understand that, and we support you. But I do not support the wrongdoers, I am sus- picious because why Halliburton, no-bid contract, before we knew the people were on the ground, and you can trace an association to someone high up in the administration. Just the appearance of impropriety should not exist, but it happened, and we need to move on. But I would like the overseers, whoever is responsible, to imme- diately get back to us what steps are being taken, because it makes all of us look bad. And those who have the oversight and the audit- ing and so on, you look like you are not doing your job and you are not being responsible. So let’s dig them up and identify them if they exist, and let’s clean them up, and let’s see that every dollar of taxpayers’ money is used effectively and efficiently and in the best interest of Amer- ica and Iraq. Thank you, and I yield back the rest of my time. Mr. ZAKHEIM. I make one exception to one part of your state- ment, the part about the auditors, about not really being on top of it. Ms. WATSON. Let me tell you what I meant. I want with all due speed for all of those—the buck stops here. I don’t know who has the final oversight and who is going to do this investigation. It has not been cleared or clarified in what I have heard, so whoever is responsible. I am not blaming one person or the other. Dig out the wrongdoers, bring them to justice, and let’s move on. Mr. ZAKHEIM. We certainly could agree on that. Chairman TOM DAVIS. Mr. Van Hollen, 5 minutes. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00131 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 124 Mr. VAN HOLLEN. Thank you, Mr. Chairman. And I want to thank all the witnesses for being here as well. I want to thank the chairman of the committee for leading the bipartisan delegation to Iraq recently, and I was pleased to join him on that trip. And, Admiral Nash, it was great to meet you there. And I want to thank you for doing hard work under very challenging cir- cumstances. And we all agree, as we talked about today, that at the same time we want to make sure we protect the American tax- payer. And I want to delve into some issues that Congressman Waxman raised, because he has raised some very important issues, and I want to focus specifically starting with DCAA and, Mr. Reed, the contract where you concluded that there were about $61 million on potential unaccounted for charges. And I understand that DCAA did that around December 11 of last year; is that right? Mr. REED. If you are addressing the fuel issue on the restructur- ing? Mr. VAN HOLLEN. The KBR fuel contract, $61 million. Mr. REED. Yes. Mr. VAN HOLLEN. And you recommended at that time that the contractor disallow those $61 million in costs; isn’t that right? Mr. REED. No, sir. What we did was we issued a draft report to the company to get their response to what we believed was some poorly documented costs that they were billing to us. At the time, based on some data that we had, we felt that the impact could be as high as $61 million, and we asked them to justify that cost. Mr. VAN HOLLEN. You are saying they should justify that cost; is that right? Mr. REED. That’s correct. Mr. VAN HOLLEN. And you were going to recommend to the con- tracting officer that they justify that cost; is that right? Mr. REED. We were going to receive the company’s response, evaluate it, and if they satisfied us, we would make no rec- ommendation. If they did not satisfy us, we would recommend the cost be disallowed immediately. Mr. VAN HOLLEN. Eight days after that, the Army Corps then filed a waiver, which essentially exempted KBR from providing that supporting documentation; is that right? Mr. REED. That’s right. Mr. VAN HOLLEN. In your experience, have you ever heard of a waiver being granted in that way especially after auditors at DCAA had found overcharges and were in the process of reviewing the charges? Mr. REED. Let me clarify my previous answer. What we were looking for was for Kellogg Brown and Root to show us how they determined that was a fair and reasonable price. That may or may not have called for the submission of cost or pricing data, which the waiver was granted for. Certainly there were facts or indicators that if indeed we were locked in with a sole-source supplier, that we should get cost and pricing data. That was one of the points that had not been pinned down as to whether we were locked in with a sole-source supplier, although there were certainly indica- tions. I will let the Corps of Engineers address the waiver. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00132 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 125 Mr. VAN HOLLEN. Let me ask you, are you satisfied as of today that $61 million should not be disallowed, that the American tax- payer has been treated fairly? Mr. REED. No, I am not satisfied, and there is an investigation underway by the IG. And once their work is done, it is turned back to us, we will continue our audit work. Mr. VAN HOLLEN. Let me turn to the Corps, General Strock. It seems to me that if we wanted to get to the bottom of this, we would tell KBR, look, you’re charging this amount of money. It is your subcontractor. You should be providing the supporting docu- mentation. Why did we grant them a waiver. General STROCK. A couple of factors. First of all, the chief of en- gineers as head of the contracting agencies is granted that waiver, and he was presented with the facts at the time he made the deci- sion he thought was appropriate. The issue here is the cost and pricing data. We are informed that under Kuwaiti law, the sub- contractors are not required to provide cost and pricing data, and we requested that, and that is the answer that we got, that the law disallows that. Mr. VAN HOLLEN. Let me followup on that because, at least in my question, which is that we have independently tried to evaluate whether or not that is true, that amount equated to law, and Con- gressional Research Service, an independent agency here, has reached a different conclusion, and I am wondering if you could supply this committee, since the Army Corps reached that conclu- sion, with the specific provisions of Kuwaiti law that say they are prohibited—this subcontractor is prohibited. Have you seen that documentation yourself? General STROCK. I have not seen the documentation. I have seen records of some of the conversations that went on from which we reached that conclusion. Mr. VAN HOLLEN. If you could provide us with—because that was the primary rationale in disallowing this, and it seems to me it was reached very quickly. I understand Halliburton requested 1 day, and this waiver was granted the next. And I think that as impor- tant an issue as that, that the committee receive the legal support that was behind this decision. If that turns out not to be the case, that it is not barred by Kuwaiti law, would you review the waiver and ask KBR to provide the information? General STROCK. Yes, sir. Mr. WAXMAN. Will the gentleman yield to me? The point is that we have asked for this information from the State Department and the Kuwaiti Embassy, and they have not been able to tell us about any Kuwaiti law that requires the con- tract to have been given out only to this one sole-source subcontrac- tor. Chairman TOM DAVIS. That is part of the criminal allegation. He has gone to the Congressional Research Service, and they can’t find this in the law, and obviously we would like to get to the bottom of this. And I am sure it is going to be part of the criminal inves- tigation as well, but anything you can get us on that will be help- ful. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00133 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 126 General STROCK. May I clarify, this was not a sole-source sub- contract? The contractor got three quotes for the fuel, and this con- tractor was selected as the low bidder on that. Chairman TOM DAVIS. I would hate to have seen the high bidder on that. Mr. Kanjorski. Thank you for your patience. Mr. KANJORSKI. Thank you, Mr. Chairman. I am going to direct questions that may not be directly applicable to what the purpose of the hearing is, but over the last several months, I have had returnees from the Iraqi war, both National Guardsmen and Reservists, called me and asked to have meetings with me, and some of them were very disturbing. One sergeant came in and related that his Reserve unit was not capable of get- ting the boots that fit them, and for a period of 7 or 8 months while in Iraq never got the proper equipment, and he was firmly con- vinced that there is a prejudice between the real Army and the Re- serve and National Guard forces that are over there in terms of getting material there like boots. Having walked in the Army in my past life, boots are pretty im- portant. And it would seem to me—I am all for, you know, building some of their waterworks over there, but can you find out why we can’t give boots and shoes to the soldiers that are in combat zones? And when you are doing that, I have at least 3 or 4 mothers and fathers who have contacted me over the last 9 months that they are literally buying protective vests for their sons and daughters that are in a combat zone because they are not available by the military. And these kids are getting shot at, injured, and in some instances killed because they lack this basic protective device. And it seems to me that somebody has to step up to the plate and ask some of the questions what’s wrong. And finally, you are awarding all these contracts over there, and I understand we have Humvees that were never anticipated to be used in insurgencies. Why it was not anticipated that they may be used in insurgency situations is beyond me, but they lack armor. Can’t you guys award a contract real fast to Halliburton for a cou- ple of billion dollars to put half-inch armor on the bottom of these things so we don’t have any more legs, arms or heads blown off? Don’t come back and tell us, well, we awarded a contract, we are going to bring these things back, and 18 months from now we are going to have armed Hummers. We have people over there, and they are dying, and most of them will tell you that these explosive devices that are being placed along the road, they are dying not be- cause they couldn’t be protected; because the vehicles they are driv- ing aren’t properly armored. And I am sure we could find some un- employed welders and people in Ohio, Michigan and Pennsylvania, and I can get you a lot of them and perfectly willing to go over and do this work. Now, last, and probably you can’t answer this, a disturbing news report about a month ago was talking about the extraordinary suc- cess that we are having with training policemen in the Iraqi serv- ices to provide security once we leave. And the whole story was about the fact that there were 600 recruits hired under contract of approximately $150 million to train over a period of 5 or 6 months, these recruits, half of which resigned within 3 weeks of showing VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00134 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 127 up. So they anticipated the graduating class would consist of about 300 police officers being trained by contract by the United States. And if you take the $150 million, I came to the conclusion that is $500,000 per police officer. Now, you know, I got news for you. We have some police acad- emies in Ohio, Pennsylvania and Michigan, and we have all kinds of aircraft going back and forth. If it costs us half a million dollars in Iraq to train a police officer, somebody is wacky. And if this con- tract is by Halliburton or by Bechtel, somebody ought to have the good sense to say half of a million dollars is ridiculous. We don’t spend that amount to train a police officer in the United States, and there is no damn reason in the world we should throw tax- payers’ money away to train them in Iraq. Can anybody tell me whether there is any factual basis for those types of costs in training security and police officers in Iraq? Mr. ZAKHEIM. You asked four questions. I will try to handle the first three, and Mr. Lucke will try to address your fourth. On the boots issue, I have heard this before. I believe it is being taken care of, but I will get you an answer for the record because I don’t know the exact specifics. You asked about the body armor. We expect to have basically 175,000 kits in theater by the end of this month, that is to say March 2004, which will fully support the CENTCOM requirements. So it is not 18 months, it’s this month. On the up-armored Humvees, we are ramping up production. Current production is about 138 a month. We will ramp it up by more than 50 percent. Mr. KANJORSKI. Where are you doing this? Here? Mr. ZAKHEIM. Yes. Mr. KANJORSKI. Welding isn’t a tough thing. General KERN. Could I answer that? Two points. One, every sol- dier today in Iraq has body armor. That was done by the end of January. The CENTCOM number goes beyond Iraq. It includes the people who are in Kuwait who would be transiting, and that is the number. So we have addressed that. General Schoomaker took that on as a personal issue. The Acting Secretary of the Army Mr. Brownlee took that on as a personal issue. And we reported to them every single day on the outfitting of those soldiers, boots, BCUs and the protective gear, and that has been done. Mr. KANJORSKI. I hope it has been done, and if it has been done, congratulations. But, you know, what bothers us, where was the planning, where was the anticipation that there should have been enough body armor, there should be enough boots, there should be armored Humvees over there? Where was the planning behind this operation? There wasn’t any? Nobody thought about this? General KERN. The original planning gave the body armor to those soldiers who would be in direct contact, infantry armor, artil- lery soldiers. The secondary planning which went beyond that is everybody in theater, including our civilians who are working in the theater right now, and there is where we fell short in the origi- nal planning. The other point on the Humvees, in addition to what Mr. Zakheim reported to you, we are producing armor kits in every depot. And I can’t promise you that the one I have is producing it VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00135 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 128 in Pennsylvania, but it is doing it in Sierra, out in California. We are doing it in Alabama. Armored kits—in addition to the new pro- duction Humvees, in addition to the Humvees, those kits are also being put on the family of medium tactical vehicles and the heavy equipment transport. So that is being done as quickly as we can from all sources we can, and we have gone to find those welders and sources of steel to make sure that does happen. We have taken that very seriously. We are not going to wait for the production. Chairman TOM DAVIS. OK. Thank you very much. We were 3 minutes over. What I am going to do is move to summary at this point. Mr. Waxman is going to get up to 20 minutes for any addi- tional questions, and I will summarize from there. And he can yield to any Members over there who still have questions under his time. Anybody feel they need to take a break right now? I guess other- wise we will try to go ahead and get it done. Mr. WAXMAN. I want to find out more about Altanmia. General Strock, you said that you agreed with the statement by Halliburton that this was an open and competitive process whereby they chose Altanmia as the subcontractor to provide the gasoline. Is that a fair statement of what your views are? General STROCK. I have been informed that KBR solicited for quotes to three suppliers, and Altanmia was the lowest quote re- ceived. Mr. WAXMAN. Well, the Army Corps sent to us on January 6 their justification for this claim that it was fair and reasonable, but in that justification it said Halliburton did not issue a public solici- tation or a public request for quotations for the purchase of gaso- line. Halliburton did not seek out all qualified bidders. Instead, Halliburton hand-picked three companies and telephoned them in- formally on May 4 to obtain quotes for the purchase of gasoline. And then on that same day, after they made these three calls, they chose Altanmia and requested the Corps’ approval, which it re- ceived. Is that an inaccurate statement? General STROCK. I think that’s accurate, sir. We received three quotes and selected the smallest. I don’t know the details. But I want to reiterate, the conditions at the time were long gas lines in Baghdad. Soldiers were getting attacked guarding those gas lines, and the contractor was told on May 3rd that they were to begin de- livering fuel, and they did it in a very short and compressed period of time. Mr. WAXMAN. According to your documents, Halliburton had three companies that they contacted. One was Altanmia, KAFCO and Monmar. The Defense Energy Support Center, which has been doing fuel purchases and transports in the Gulf for over 50 years, said they had no knowledge of doing business with any of these three companies. The Defense Energy Support Center also told us that it does do business with several other companies in Kuwait, including TriStar, Mubarak and LeNouvelle. But your records do not show that Halliburton called any of these companies. Do you know whether Halliburton even contacted the Defense Energy Sup- port Center to find out who they would recommend in the region? General STROCK. No, sir, I don’t know. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00136 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 129 Mr. WAXMAN. With a contract of this magnitude, a company’s past performance and experience is clearly one of the most signifi- cant factors in the selection. What experience did Altanmia have in purchasing and transporting fuel? General STROCK. I can’t comment. I don’t know. Mr. WAXMAN. If Altanmia had no prior experience, as we under- stand the case to be, how would they know even to call them for a price quote? Does someone at Halliburton know someone at Altanmia? Do you know anything about that connection? General STROCK. No, sir, I don’t. Mr. WAXMAN. Halliburton claims it was unable to locate any company in Kuwait that currently does fuel purchasing and trans- port for the U.S. Government, yet Halliburton was somehow able to find this other company, Altanmia, which had no experience and awarded a multimillion-dollar contract in less than 1 day. Does this process raise any eyebrows for you, General? General STROCK. Certainly, sir, suggested that way, yes. May I just say, subsequent to that original award, the Kuwaiti Petroleum Co. refused to allow us to deal with anybody but Altanmia. And also the DESC traditionally deals directly with the Kuwait Petro- leum Co., as I understand, and as the Kuwaitis prefer, so it was somewhat unusual that they would deal with a contractor, in this case KBR. So they prefer that the KBR not deal directly with the Kuwaiti Petroleum Co., but rather with the subcontractor. Mr. WAXMAN. Do you know who owns Altanmia? General STROCK. No, sir, I do not. Mr. WAXMAN. Does anybody here know information about that? The record will indicate that no one responded. I have heard multiple allegations that the brother of the Kuwaiti Oil Minister had some sort of financial interest in the company. Do you know whether that is true? General STROCK. No, sir. Mr. WAXMAN. Anybody else know whether it is true? Do you think it is important to know whether the Kuwaiti Oil Minister or his family had an interest in this company? Does anybody in the panel think it was important to know whether the Kuwaiti Oil Minister or his family had an interest in this company? Mr. ZAKHEIM. I don’t know if that would be the kind of question somebody would immediately ask. Certainly it wasn’t the kind of thing that sprang to my mind when I looked at all this and passed it on and worked with Bill Reed on it, whether there was some family connection or something. Mr. WAXMAN. I raised this issue in a letter dated January 15 to National Security Advisor Condoleezza Rice. I wrote that several sources had told us that Talal al-Sabah, the brother of the Kuwaiti Oil Minister, had financial ties to Altanmia. I wrote further that although this off-the-books arrangement appears to be undocu- mented, the sources claim that Mr. Al-Sabah is acting as a consult- ant for the company or as a hidden partner. I also said that some sources said that other members of the Kuwaiti royal family had ties to Altanmia. In response to my letter, Ms. Rice said this would be investigated by the Defense Department. General Strock, what steps have you taken to investigate these allegations since then? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00137 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 130 And, Mr. Zakheim, what steps have you taken? Mr. ZAKHEIM. This is all part of the inspector general’s investiga- tion of this entire matter. Mr. WAXMAN. General Strock, do you know about any steps? General STROCK. I am not sure if my command has taken any either except, as Dr. Zakheim said, to refer it to the investigator. Mr. WAXMAN. Another mystery has been why the Army Corps keeps saying Halliburton’s gasoline prices are fair and reasonable in light of all the evidence to the contrary. On October 18, your spokesman Scott Saunders said that Halliburton was, ‘‘getting the best price possible.’’ Let me take one stark example. We know the Defense Energy Support Center buys gasoline from Kuwait for 96 cents a gallon. Is it just the gasoline and not the transportation? And according to your office, Halliburton charges the U.S. Government $1.17 per gallon. To be clear, we are talking about the same Kuwaiti source. Yet Halliburton charges 21 cents more per gallon to buy the fuel. Explain to me why Halliburton prices are fair and reasonable in light of this large differential. Why isn’t this an overcharge for the purchase of this commodity? General STROCK. The support center purchases directly from the Kuwait Petroleum Co. We purchase from Altanmia, not the Kuwait Petroleum Co. I also understand that as our contractor suggested, they could get a better price if we could have a longer-term con- tract and more time to negotiate. The exigency of the situation pro- hibited that. It is my understanding that Altanmia buys on the spot market instead of buying futures in the fuel, and therefore that fuel is more expensive. Mr. WAXMAN. Do you know whether the energy support center buys on the spot market or has a long-term contract? General STROCK. I don’t know. They buy directly from the Ku- wait Petroleum Co., as I understand it. Mr. WAXMAN. I am somewhat taken aback with the entire ration- ale for finding Halliburton’s prices reasonable; hinges on the sham 1-day telephone competition in which Halliburton excluded more experienced companies from the bidding. General, let me—— Chairman TOM DAVIS. Could I ask the gentleman to yield? Mr. WAXMAN. Not yet. Chairman TOM DAVIS. I will wait. Mr. WAXMAN. I am just trying to make sure I can get through these questions. Let me ask you to think of yourself not as a con- tract manager, but as a taxpayer for the moment. Doesn’t there come a point where you have to say the U.S. taxpayer should not be forced to pay Halliburton far more than the U.S. Government pays for exactly the same product? Did you ever reach that point? General STROCK. I am sorry. If you would repeat that, sir. Mr. WAXMAN. Are you troubled that Halliburton pays more for the gasoline that the government in the energy support center is paying for the same gasoline in Kuwait? Chairman TOM DAVIS. Let me ask a question. Mr. Reed, you are looking at that, aren’t you? Doesn’t DCAA look at the price they paid, and if you determine it is unreasonable, then you disallow, and they end up eating it? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00138 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 131 Mr. REED. We were in the process of looking at this very issue and question when other matters came to our attention that re- sulted in us referring the whole matter to the DOD IG for inves- tigation. Mr. WAXMAN. Mr. Reed, weren’t you prevented from looking at this issue of Altanmia’s prices because of the waiver? Mr. REED. No, I don’t think that is the way I would state it. We never got to that point because other matters came to our atten- tion, and we referred it for investigation. Mr. WAXMAN. Let’s step back for a minute. Halliburton says they are going to use Altanmia, and they did a bidding process, but it seemed like a sham bidding process. Now they are with Altanmia and overpaying compared to what others are paying for the same gasoline. And we would want the Defense Department to be exam- ining this more carefully. But suddenly the Corps came in with this waiver that Mr. Van Hollen asked about, and the reason—there was a reason from the requirement to get the data from Altanmia about why they are charging these higher prices—was that Kuwaiti law required it. So we don’t know that information because some- one said Kuwaiti law required that they not give this information. Now we have checked it out, and Mr. Van Hollen indicated that we can’t find any evidence of Kuwaiti law that says you can’t look at that point. I think we need a clarification of it, and I expect for the record we will find out what do you think—where you got the idea that Kuwaiti law prevents this information from being sup- plied. Since we’re paying the bills, why do we have to go along with Kuwaiti law that says we have to pay whatever they charge and we can’t explore why they are overcharging? Now, it appears that the underlying premise for the waiver is false. You may not agree to that, but I believe it is a false state- ment. The other premise that we had was that the Army Corps sug- gested that Altanmia was the only company the Kuwaiti Govern- ment would allow Halliburton to use to buy gasoline and transport it to Iraq. In addition, an Army Corps whistleblower claimed she was being pressured to negotiate future fuel contracts exclusively with Altanmia. Now, this morning’s Wall Street Journal reports that the Kuwaitis sent a letter to Halliburton and to the Army Corps on January 25, 2004, recommending that you drop Altanmia and buy the gasoline directly from the Kuwait Petroleum Co. Yet it appears that the U.S. Government has continued to pay inflated prices for gasoline to Halliburton and Altanmia even though we didn’t have to. Why wasn’t Altanmia dropped in January as the Kuwaitis rec- ommended, General Strock? General STROCK. Sir, we awarded a task order on that same con- tract on March 2nd. We received a copy of that letter dated Janu- ary 26 on March 4th, 2 days later. When we received that letter, we immediately suspended deliveries of fuel under that contract. However, when the fuel supplies dropped in Iraq in 2 days, we pur- chased under that instrument an additional 7 days, which will ex- pire 2 days from now. So we were forced by the situation we faced to go to the only source we have to provide this fuel for the Iraqi people. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00139 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 132 Mr. WAXMAN. The journal reports the letter was sent by DHL to the Army Corps officials at Camp Doha. And the letter was faxed to Halliburton on the same day, so that would have been January 25, 2004. And there is a time-stamped receipt. Have you gone back over your files to determine when you, in fact, received the letter? General STROCK. I believe that has been done. And indirectly, I have heard that the letter was addressed to a contracting officer who had departed the command and therefore was not acted on by the people who followed. And it was only after it was brought to our attention on March 4th that we acted on it. It was also based upon the way in which it came to us and questioned the legitimacy of that letter. We confirmed just yesterday that, in fact, it was a legitimate letter, and we will comply with it, sir. Mr. WAXMAN. So because the letter got in somebody else’s hands, we have spent how many millions of dollars extra for this gasoline that might have been saved if we had gone to the Kuwaiti Petro- leum Co.? What was the figure? $300 million because someone at Doha wasn’t working there anymore for the Army Corps? Is that your explanation? General STROCK. No, sir, I would not necessarily reach that con- clusion. Mr. WAXMAN. What is the current status of the Altanmia con- tract? Are we still paying them inflated prices as of today? And are we taking any steps to recoup the $300 million paid to Altanmia? General STROCK. I can’t answer the second part. We are still pay- ing under that contract because of the circumstances in Kuwait. That delivery order we have out will expire 2 days from now. There is no other source. Mr. WAXMAN. What bothers me about the gasoline contract is that again and again what the administration and Halliburton have said turns out to be wrong. The Corps and Halliburton told us the prices were fair because there was full and open competi- tion. We now know there wasn’t real competition. The contract was issued in 1 day, and none of the established companies in fuel transport got a chance even to bid. Halliburton told us that the reason the energy support center prices were so low is they used military transport vehicles, whereas Halliburton had to use private contractors. We now know this is wrong. The energy support center used private contractors just like Halliburton. They just used much cheaper ones. We were told that the reason it was necessary to give Halli- burton a waiver from providing cost and pricing data was that the Kuwaiti law prohibited Altanmia from providing this data. We now know, and you helped establish that you believed it, too, that this was false. We were told that the reason that Halliburton had to use Altanmia was that the Kuwaitis would not allow anyone else to have the contract. We now know that’s not true. I see a pattern here that I don’t like. I have not said it is a cover- up, but it troubles me that the administration and Halliburton keep putting out false and misleading information. The whole affair does not smell right. We clearly need a full investigation. Do you agree with that? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00140 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 133 General STROCK. Sir, I agree we need a complete investigation. I don’t agree with everything you have said, no, sir. Mr. WAXMAN. Who do you think ought to do that investigation? You think there ought to be an investigation. Who ought to do it? General STROCK. I think it is in the hands of the IG at this time, and I understand the Justice Department has also been called in. Mr. WAXMAN. I would like to yield to Mr. Van Hollen 2 minutes. Mr. VAN HOLLEN. I just have a brief followup on the whole issue of granting the waiver, because as I understand it, the Corps has the discretion whether or not to grant the waiver. I have a very simple question, because we have been talking about the need to save the taxpayer money, and my question is, how did granting that waiver help protect the American taxpayer? General STROCK. We followed an established process which does protect the American taxpayer. The situation in Iraq at the time when the chief engineer signed that waiver was felt to be urgent and compelling, that it had to be done, and this was the only source available. And again, I don’t want to understate the impor- tance of this decision, but the moneys applied to this contract are Iraqi moneys from the DFI, not American taxpayer money. And I understand that does not matter here, but this is not American taxpayer dollars. Mr. VAN HOLLEN. Did the KBR say they would no longer be pro- viding these services unless you granted the waiver? General STROCK. I don’t know the answer to that. Mr. VAN HOLLEN. Why should the burden fall on the American taxpayer as opposed to KBR with respect to the decision of the Ku- waiti Government? I think it is clear there is a question about whether Kuwaiti law requires that they not disclose this informa- tion. I think it is clear that that may not be the case. Why should the burden fall on the American taxpayer as opposed to KBR as the prime contractor of what Kuwaiti law says? General STROCK. I don’t think this burden is falling on the Amer- ican taxpayer. And second, as we indicated here, our process is to audit all of these proposals we get from the contractor. That has been initially done as irregularities have come forward. That will continue to be investigated. So in the end, I have confidence that the system will work as designed. Mr. VAN HOLLEN. I agree we should continue to audit. That is why I am puzzled by the fact that you provided the waiver, because the waiver essentially said to KBR, did it not, that you don’t have to provide the underlying documentation? General STROCK. They did receive a waiver on cost and pricing data, which is permitted in the FAR, yes, sir. Mr. REED. Notwithstanding the waiver, we would still expect KBR to justify how they determined the price to be fair and reason- able. Notwithstanding they didn’t give us cost to pricing data, we would expect some other supporting data to establish the fairness of that price. Mr. WAXMAN. I would yield 5 minutes to Mr. Lantos. But before I do, we didn’t get to some questions on Bechtel, and perhaps if you will join us to get some of the answers to some of the questions we wanted to ask USAID about Bechtel. Chairman TOM DAVIS. And we will leave the record open. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00141 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 134 We will recognize the gentleman. Mr. WAXMAN. Records and documents. We want both. Chairman TOM DAVIS. Gentleman from California. Mr. LANTOS. Thank you very much, Mr. Chairman. Let me first express my respect and admiration for all of our military working and fighting in Iraq. I had the privilege of visiting the Baghdad area and up in Mosul, and my respect and admiration is unbounded. I would like to change the subject, if I may, to an entirely new area. Under Saddam Hussein one of the many restraints and re- strictions of that despicable police state was on the rights of work- ers to organize and to be represented. I would be grateful if any of you, ladies and gentlemen, would tell me what we are doing with our contractors to ensure that in this new world, we are attempting to make sure workers’ rights are respected and then enforced. Mr. ZAKHEIM. Congressman, we will look into that. As you know, there are a number of programs that we are working in conjunction with our partners at AID and State that fall under the rubric of governance that have to do with everything from the rule of law to setting up courts and so on, and we will get you an answer for the record on that specific question. Mr. LANTOS. I hope you can do better than that because you have been operating there now for over a year, and I would be deeply disturbed if my question would be the first time the question of labor rights emerged in the context of spending billions and billions of American taxpayers’ dollars employing Iraqi employees. You wanted to say something. Mr. LUCKE. I can tell you that we are very concerned about the rights of citizens and the participation—the fuller participation of Iraqi citizens in their own governance. We have been involved—we have been financing a $167 million local governance contract. Mr. LANTOS. I am not asking about governance. I am asking about workers’ rights. One of the most objectionable aspects of a police state is that it does not accept the concept of workers’ rights. Stalin did not accept it. Hitler didn’t accept it. And Saddam Hus- sein did not accept it. He did not want to see the emergence of independent and viable labor unions that would represent an alter- native source of power and influence in society. Now we are attempting to bring about a metamorphosis of Iraqi society, which is a generational undertaking. You folks have been in charge of this now for about a year. Has the issue of labor rights, the right to unionize, the right to protect workers, been part of your discussion? Has it been part of your contracting with var- ious contractors? When you deal with Bechtel or you deal with any of the others, do you discuss workers’ rights? Do you discuss the right of Iraqi workers to unionize? Mr. LUCKE. Workers’ rights does not fall under any of the USAID contracts for now. Mr. LANTOS. Under whom does it fall, since you are the one who signs the contract that gives the money to the contractors? Who else should deal with this? Mr. LUCKE. There are many implementers of programs. My agen- cy works only with appropriated dollars on contracts. CPA is an or- ganization that works with ministries for the Provisional Govern- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00142 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 135 ment of Iraq. There is a Ministry of Labor, and I am quite sure that CPA, if they were represented here, could tell you about some of those programs that may be implemented with other funds, with funds or seized assets. There are no programs that I know of that are being implemented with appropriated funds, and not through AID. Mr. LANTOS. But your testimony is, that the funds—what is the amount of funds under your control? Mr. LUCKE. We have about $3.8 billion that we will eventually— have been promised now under the first supplemental and the sec- ond supplemental together. Mr. ZAKHEIM. Congressman, I am going to turn over to Admiral Dave Nash, who heads the CPA Program Management Office. But before I do, there is another aspect that goes beyond contracting, and that is we now have the new administrative law, the TAL it is called, and that does provide for basic human rights. And that is the first step to what you are discussing, but I would like to have Admiral Nash talk about it. Admiral NASH. There is a Ministry of Labor, and there is a sen- ior advisor to the Ministry of Labor, and we will get some informa- tion back to you. But I understand your question to be what are we doing about the contracts that we are letting. And I think the answer is, I will have to get back to you on that. They are being let just like the contracts are in this country, because all the con- tracts, at least the ones I am responsible for, are being awarded under the Federal acquisition regulation. Mr. LANTOS. Our labor laws do not apply in Iraq. Admiral NASH. That’s correct. Mr. LANTOS. So it is the responsibility of CPA to see to it that Iraqi labor is protected. Admiral NASH. And I will carry that message back, sir. Chairman TOM DAVIS. Mr. Lantos, thank you for being patient. Mr. Waxman, thank you very much. And we obviously have a lot of concerns as we take a look at the amount of expenditure. I want to thank this panel. A lot of tough questions, some within your purview, some without the purview, but I think it shows the seriousness we have in Congress about overseeing contracting there. When you went over there, it was a mess. In fact, you have 150,000 troops you have to house and feed and worry about tele- phone calls, transporting them across a difficult country, making a lot of snap decisions. There are mistakes that get made. I feel a lit- tle more confident as we go up and find them. In many cases the contractors under these cost plus contracts front the money up front and then come back for reimbursements. That makes me feel a little better about it. And, Mr. Reed, this is the first time I have had you before this committee, but having had contacts with the DCAA in my previous life, it is a pretty good organization. And if anything, we want you to take away from this, we want you to continue to do your job. We don’t want any favoritism, and we are going to hold you ac- countable. We are going to be coming back on this. You have a very difficult task. When you said in your opening comments—when you spelled VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00143 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 136 out the task for America in Iraq and getting that mission accom- plished, you are doing the job. And along the way, you have to rely on contractors to do a lot of things, and by and large we have done a good job, but there are things that slip through. The whole Ku- waiti oil incident is something that if we don’t watch contractors very closely, obviously if we could do this over again, this is some- thing they should have come to you right away, and it would have been done differently. As we move forward, I think the warning is we need to be even more careful. And we want to work with Mr. Waxman to get to the bottom of exactly what happened there. And I know the Kuwaiti Government has their ongoing investigation. My understanding is in that part of the world, that nobody can get the cost and pricing data from any Middle Eastern country. I don’t know if there is a law. I don’t know if they strong-arm us, but we are going to make an effort to try do to it. And if there is any way to do it, we would like to get it, because it looks to me just on its face that something went wrong here. And I don’t know if Halliburton might have been the victim, but that would mean the American taxpayers would be the victims, and Iraqi citizens at the same point who are shoulder- ing much of that burden. It is a tough job, and I think as I have been over there on a cou- ple of occasions now, see the job many of our contractors are doing. We didn’t talk about some of the contractors that haven’t gone too well besides one. It happens the Vice President was a past presi- dent of one company, and the focus has been on that, but every company doing business over there has their own concerns and their own problems, and some contracts have been terminated. Our focus doesn’t need to be on everybody. We know it is a tough job, but we are looking and watching you. And we are going to come back and do followup hearings and inves- tigations in May, and we wish you to continue to do the job. But if anything, we want you to err on the side of being tough and making sure that we are getting our dollars’ worth on this. And as the situation gets a little bit more manageable, we expect, I think, as Mr. Waxman and others have talked about, a little more com- petition as we get into these, on some of the task orders and every- thing else, looking at some of the contracting vehicles. I think it is a little too early to make any definite determination on charging practices on the part of any company because they are all under investigation. And I have been in this business a long time, and what you hear and what may look on the surface, after it goes back and forth, hopefully this can be resolved, but it looks like we want you to stay tough. I guess that is our message to you as we move forward. I don’t think I have any other questions at this point from our side, but we will have some followup requests for documents, and we may get some other written questions back and forth. And al- though Mr. Waxman and I don’t agree on every aspect of this, I think every member of this committee wants to make sure that as we move forward, we learn from what has happened before. We proceed to get more efficient about the way that we contract, and we want to work together to that, and you are a critical part of VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00144 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 137 that. I thank you for the job you are doing, and I want to reiterate this. You are doing a great job over there. Mr. WAXMAN. Mr. Chairman. Mr. ZAKHEIM. Mr. Chairman, may I make one comment? And I think it is important so there be no misunderstanding. We are tough and, we do ask the tough questions, and you have seen that today. But there are an awful lot of dedicated contractor people, not just Halliburton and their 19,000, but all the contractors who are risking their lives as we speak, and we shouldn’t minimize this. And, yes, we will get to the bottom of these issues, but we should be at the same time we look at it as being cognizant of the fact that these people are dedicated, that they are not deliberately trying to rip anybody off, least of all their fellow Americans, and they are sticking their necks out while we are sitting here. Chairman TOM DAVIS. We met some of the contractors over there as well and talked to them. It is a tough breed of cat. They uproot themselves from their family and their children to go over there to help the war effort. And let’s not lose sight that the vast, vast ma- jority of not just our people in uniform, but our civil servants and our contractors are there to accomplish a mission. But things still go wrong under those circumstances, and that is when we get in- volved and you get involved. I am confident that working together that we can try to resolve some of these issues. Mr. WAXMAN. I want to thank the members of this panel as well. We are doing our job when we have this kind of a hearing to try to raise these questions and get some answers. And I don’t know that we got all the answers. I know we didn’t get all the answers. We got only some. I think there needs to be a thorough investiga- tion. And I look forward to working with the chairman in getting the answers we need. But I must tell you this. When we are asking our young men and women to put their lives on the line in Iraq, I don’t want to see anybody enrich themselves unfairly. This is a situation where our country’s interest is at stake, and lives are at stake, and we ought to make sure that the taxpayers are being protected and someone along the line is not just getting rich and profiteering in this war while our young people are dying every single day. Thank you very much. Chairman TOM DAVIS. I would just note that in terms of profit- eering, this is just my perception coming off this, there might have been some decisions that could have been made differently down- stream, but in the Kuwait situation, if there was a bribery there, no company was profiteering. You might have had an individual or two that has gone astray, might have paid too much for gas, but there was no profiteering on that. These were costs that were passed on. But as Mr. Waxman said, obviously, we all have an in- terest in making sure that doesn’t happen. The vast majority of contractors are there for the right reasons. I commend you for the job you are doing for this country, and we thank you for being here today. This hearing is adjourned. [Whereupon, at 5:50 p.m., the committee was adjourned.] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00145 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 138 [The prepared statements of Hon. Carolyn B. Maloney, Hon. Wm. Lacy Clay, Hon. Jo Ann Davis, Hon. Ileana Ros-Lehtinen and addi- tional information submitted for the hearing record follow:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00146 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 139 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00147 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 140 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00148 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 141 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00149 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 142 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00150 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 143 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00151 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 144 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00152 Fmt 6633 Sfmt 6633 D:\DOCS\96407.TXT 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The committee met, pursuant to notice, at 11:20 a.m., in room 2154, Rayburn House Office Building, Hon. Tom Davis of Virginia (chairman of the committee) presiding. Present: Representatives Tom Davis of Virginia, Shays, Mica, Souder, LaTourette, Ose, Lewis, Ms. Davis of Virginia, Platts, Can- non, Schrock, Duncan, Deal, Miller, Murphy, Turner, Carter, Blackburn, Tiberi, Harris, Waxman, Maloney, Cummings, Kucinich, Mr. Davis of Illinois, Tierney, Clay, Lynch, Van Hollen, Sanchez, Ruppersberger, Norton, Cooper, and McCollum. Staff present: David Marin, deputy staff director/communications director; Keith Ausbrook, chief counsel; Ellen Brown, legislative di- rector and senior policy counsel; Robert Borden, counsel/parliamen- tarian; Rob White, press secretary; Drew Crockett, deputy director of communications; John Cuaderes, senior professional staff mem- ber; John Brosnan, GAO detailee; Teresa Austin, chief clerk; Brien Beattie, deputy clerk; Robin Butler, financial administrator; Allyson Blandford, office manager; Corinne Zaccagnini, chief infor- mation officer; Leneal Scott, computer systems manager; Phil Barnett, minority staff director/chief counsel; Kristin Amerling, mi- nority deputy chief counsel; Karen Lightfoot, minority senior policy advisor & communications director; Anna Laitin, minority commu- nications & policy assistant; David Rapallo, Alexandria Teitz, and Jeff Baran, minority counsels; Mark Stephenson, Nancy Scola, and Adam Bordes, minority professional staff members; Cecelia Morton, minority office manager; Teresa Coufal, minority assistant clerk; Christopher Davis, minority investigator; Theresa Foote, minority special assistant; and James Temple and Lawrence Atkinson, mi- nority interns. Chairman TOM DAVIS. Good morning. I appreciate everyone’s in- dulgence. The ranking member and myself have been trying to make this move as smoothly as we can for Members. The committee will come to order. We meet here today to look into the challenges surrounding the complex task of coordinating and executing contracts amid the chaos of rebuilding Iraq. (177) VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00185 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 178 Even before the conclusion of major military actions, there were plans for a massive effort to rebuild Iraq’s infrastructure and gov- ernment. Those responsible knew this endeavor would require an enormous amount of contractor support. Anticipating the worst, and recognizing the need for quick and decisive action, agency pro- curement professional properly invoked the carefully circumscribed statutory flexibilities designed to quickly provide urgently needed goods and services. I am referring here to contracts that were let just prior to or soon after the conclusion of major military action. The urgency and dif- ficult circumstances surrounding the anticipated scenarios justified the use of limited competition or, in a few cases, single source awards. Although I am an advocate for full and open competition, Congress, in anticipation of war and other emergency scenarios, provided our procurement professionals with these flexibilities to deal with emergencies just like we had in Iraq. The rebuilding of Iraq is a very monumental task. Saddam Hus- sein spent decades frittering away his nation’s vast wealth on him- self and his Baath party cronies, while little or nothing was spent to meet the urgent needs of the Iraqi people. Decades of neglect and inaction turned this once great nation into one where the ma- jority of people live in poverty and despair. However, with Saddam’s ouster, we are witnessing a rebirth of Iraq. Freedom and liberation have brought a new sense of urgency to the Iraqi people; they understand what is at stake and we need to do our part to sustain freedom by rebuilding their nation. The task at hand is mammoth; it will be years before we are able to truly get Iraq running on its own. Yet, as each day passes, Iraqis are getting a better life thanks to the dedicated American soldiers and civilians working there. Our reconstruction efforts are well under way, even under life-threatening conditions. Currently, there are many U.S. Government agencies working to improve conditions in Iraq. For example, the Department of De- fense, the U.S. Army Corps of Engineers, and the U.S. Agency for International Development are all working to rebuild Iraq. There is no question that each of these entities is working in an ex- tremely challenging environment. And although every day brings progress, we all recognize there are still major obstacles facing our military, government civilians and contractors. There are serious security concerns as well, and the simple ne- cessities of life like water and electricity are only sporadically available in many areas. So it is no surprise that our normal acqui- sition support and oversight resources are sorely stretched. The committee is interested in the efforts made to manage, oversee, and coordinate acquisition activities to ensure that taxpayer money is being spent as effectively and efficiently as possible in this difficult wartime atmosphere. In addition to our ongoing work, the General Accounting Office has also been reviewing these efforts. A report on the challenges faced in awarding the contracts has just been issued. Another GAO report on the performance challenges faced by sustainment efforts is in the works. Huge amounts of money have already been or are about to be ex- pended in our reconstruction efforts. We need to make sure that ac- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00186 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 179 quisition rules and the integrity of the processes are being followed. Congress has spent years streamlining complex government rules and regulations to make it easier for businesses to sell to the Fed- eral Government, but did so in a way that carefully balances af- fordability, accountability, and accessibility to make sure taxpayer dollars are protected. It is our job, this committee’s job, to make sure that is happening in Iraq. We hope to learn today how our acquisition system and the pro- fessionals who run it have responded to the challenges faced in Iraq. No one doubts that the circumstances are exceptionally dif- ficult. I have seen the chaos on the ground there. The security situ- ation is tenuous at best. On a daily basis, our military, civilians and contractors come under hostile fire. Our service men and women are being killed and wounded. A great number of contractor employees have also been killed, captured, or wounded. It is a major understatement to say that this is a difficult place to conduct business, but we are doing just that and we are slowly accomplish- ing our goals. Government contracting is difficult even under normal cir- cumstances. Add in the urgency and the inherent dangers of a war zone and the challenge of acquiring urgently needed goods and services, and it becomes quite daunting. Through this hearing we hope to continue to separate fact from fiction, truth from rhetoric and, in turn, help make sure we are coordinating contract proc- esses in Iraq in a way that ensures success and safety. I recognize that there have been mistakes. That is why we are holding hearings. That is why we are requesting documents and getting briefed on a daily basis. The contracting process is not al- ways pretty, and decisions made under the pressure of combat are not always as lucid as those made under less threatening condi- tions. Nevertheless, the vast majority of the new contract awards were done properly. While there were some difficulties, particularly in the issuance of task orders under existing contracts, it is my un- derstanding that while the procedures used may have been flawed in some cases, the awards themselves could clearly have been ac- complished under other authorities. Not surprisingly, it also seems that the management and oversight of contract performance re- mains a thorny challenge due to the evolving needs on the ground, staffing difficulties, and an intimidating security environment. Many of the disputes that have been made public show that the contract oversight process is working. We need to let the give and take of contract oversight and management work. Make no mis- take, overcharges cannot and will not be tolerated, and contractors need to establish systems and processes that protect the Govern- ment from waste and that maximize the reach of pressure taxpayer dollars. But we need to keep in mind the enormity of the effort in- volved and that it is being executed in a wartime environment where lives are at stake. This hearing is part and parcel of our functioning oversight process. As chairman of the committee, I would like to move beyond the politics, honestly explore the challenges the military and contrac- tors face, and figure out how to overcome them. I am not new to politics; I understand why others feel the need to say the word Hal- liburton as often as humanly possible, but we have more than just VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00187 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 180 one contractor in Iraq and lives are on the line. I would hope that our friends on the other side would agree and begin to move this debate in a more constructive direction, away from really what I would consider partisan politics that really serve the interest of a few. For the record, we have spent months working together with the minority on these issues. We have set up joint witness interviews with DOD personnel; we have submitted joint document requests; we have had joint GAO briefings and my staff has participated in joint whistleblower interviews; and we are trying to conduct these in good, constructive, bipartisan faith with our friends. On Sunday, Mr. Waxman sent a letter to the Vice President that included, in my judgment, unwarranted insinuations about im- proper contact between the Vice President’s office and DOD con- tracting officials, something I am sure we will talk about today, al- legedly based on a briefing by DOD officials. Just so we are clear, it was my staff, majority staff that set up and attended the brief- ing, and those who came over from DOD stated clearly that they had not experienced inappropriate influence from the Vice Presi- dent or anyone in that office. We had no idea that the majority would send their own letter when we had been working together on these issues. It wasn’t shared with us before it was released to the press, and we don’t share that politically charged interpretation of what was said at the briefing. There are witnesses here today that can elaborate on that issue. I completely understand what is going on here in the political context, but I find it distasteful from our role as an oversight com- mittee to choose oversight by press release or by leaking draft re- ports and confidential briefings. This is a strategy that, as the ma- jority, we will not pursue and, if we ever become the minority, I hope as long as I am the ranking member, would not pursue. All you have to do is look back at the wide-ranging complex bi- partisan oversight this committee has conducted over the past year and a half to understand why they have had to make, I think, some rather extreme statements to make their point that we don’t think stands up for scrutiny, and we are not going to participate in that circus. We are going to continue to conduct responsible oversight, and I hope this hearing will serve as another step in that direction. I said this back in March at our last hearing on this issue, and it is worth repeating: I have no patience for fraud or abuse. I expect that any such instances that are proven will result in harsh pun- ishment for the perpetrators. Since our last hearing, many of the limited competition contracts have been replaced by ones awarded through full and open competition. Emergency procedures are for emergencies only. When initial decisions were made, time was not our ally, but fortunately we anticipated this and were able to react in such a manner that assisted the war effort rather than hinder- ing it. Our soldiers have benefited from this and lives have been spared because of this, and we need to keep that in mind as we conduct the oversight we are charged with conducting. [The prepared statement of Chairman Tom Davis follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00188 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 181 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00189 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 182 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00190 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 183 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00191 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 184 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00192 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 185 Chairman TOM DAVIS. Mr. Waxman, your opening statement? Mr. WAXMAN. Thank you, Mr. Chairman. In early March, this committee held its first hearing on Iraq con- tracts. I spoke at length at that hearing about the fundamental flaws in the administration’s procurement strategy and the enor- mous waste of taxpayer dollars that was occurring in Iraq. Today, more than 3 months later, none of these fundamental problems have been addressed. We know more today than we did 3 months ago about how the administration has mismanaged the contracts to reconstruct Iraq, and what we have learned shows that the prob- lems are even worse than we thought. The focus of today’s hearing is the two largest Iraq contracts. One contract, called LOGCAP, was awarded to provide the military with logistical support, such as housing and dining facilities. The other contract, called RIO, was awarded to import fuel and restore Iraq’s oilfields. Both of these contracts went to one well-connected company, Halliburton. In total, Halliburton has been awarded a phenomenal sum of money, over $7 billion, under these two con- tracts. In the course of our investigation into the Halliburton contracts, we have tried to look at the contracts from three different perspec- tives. One is the boots on the grounds perspective of the employees who work for the company; one is the flyover perspective of Penta- gon auditors who scrutinize Halliburton’s books to ensure that the taxpayer is not being overcharged; and one is the 50,000 foot per- spective of the General Accounting Office, which has examined whether the Federal Government has the necessary safeguards in place to prevent waste, fraud, and abuse. All three perspectives come to the same conclusion: Halliburton is gouging the taxpayer, and the Bush administration doesn’t seem to care. Yesterday I released the statements of five former employees of Halliburton. These individuals describe a company that acts like it is spending someone else’s money, which is just what Halliburton is doing. Under the company’s cost-plus contract, the more tax- payer money Halliburton spends, the more profit it makes. The ex- amples of waste, fraud, and abuse provided by the former Halli- burton employees are stunning. One former logistics specialist told us that Halliburton charged taxpayers $10,000 a day to house its employees in the five-star Kempinski Hotel in Kuwait. The same employees could have stayed in air conditioned tents like those used by our troops for less than $600 a day. A former convoy commander told us that Halliburton removed the spare tires from its brand new $85,000 trucks, and if one of the trucks got a spare tire, Halliburton would abandon or torch the truck. Can you imagine that? Halliburton’s approach to fixing a flat tire is to buy a new truck. Another truck driver, James Warren, tried to do something about the waste and theft he observed. He called Randy Harl, the president and CEO of KBR, the Halliburton subsidiary operating in Iraq. Instead of investigating Mr. Warren’s allegation, KBR fired him. The Pentagon auditors at the Defense Contract Audit Agency ob- served the same kind of problems that the whistleblowers report. In an audit that was completed last month, but withheld from Con- gress, DCAA found multiple deficiencies in Halliburton’s billing VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00193 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 186 practices. In one example, DCAA found that Halliburton submitted ‘‘billings to the government for as much as three times the meals they actually served.’’ Well, last year, Representative John Dingell and I requested that the General Accounting Office review Halliburton’s LOGCAP con- tract. Today we will hear GAO’s testimony about the results of the investigation. GAO found widespread problems, including inad- equate planning, little concern for costs, and poor contract manage- ment. Here is one example GAO told us about. Prior to the Iraq war, the military had a contract with a Kuwaiti company called Tamimi to provide meals to the U.S. troops in Kuwait. Before the war started, the Bush administration turned the contract over to Halliburton with the specific instructions that Halliburton sub- contract with Tamimi to continue feeding the troops. According to GAO, a cost-conscious procurement official finally terminated the Halliburton contract this spring and they returned the contract to Tamimi. Well, when they finally got rid of Halliburton acting as a middleman, they cut the cost by over 40 percent. What purpose did Halliburton serve except to increase the cost that we were paying for the same meals being served by the same subcontractor who was doing it for 40 percent less? Our own investigation has exposed other examples of astound- ingly bad contract management. In the March hearing, I objected to the Bush administration giving the job of overseeing the recon- struction contracts to private contractors. When I investigated fur- ther, I learned that the companies hired to oversee the private con- tractors had significant conflicts of interest. Parsons, for example, was hired to oversee its business partner, Fluor, while CH2M HILL was hired to oversee its business partner, Washington Group Inter- national. When you are hired to oversee your business partner, there is a good reason to believe that you may not want to be as vigorous in making sure that your business partner doesn’t over- spend the money. Well, these decisions have real consequences. Our troops have died in Iraq because they lack body armor and reinforced Humvees. We can’t afford to throw away money on Halliburton when we don’t have enough funds to adequately equip and protect our soldiers. Now, GAO will tell us today that the Bush administration did not have contingency plans in place for feeding and housing the troops. But the administration did have detailed contingency plans for running Iraq’s oilfields. In fact, Halliburton was given the se- cret contract in November 2002 to develop these plans. Now, here is the message that sends about this administration’s priorities: protecting Iraq’s oil came before protecting our own troops. Many people have wanted to know what role the Vice President has played in all of this. For months he has denied any knowledge about Halliburton’s contracts. He said, on television, and I want to quote him directly, this was on Meet the Press last September, ‘‘Since I left Halliburton to become George Bush’s Vice President, I have severed all my ties with the company, and as Vice President I have absolutely no knowledge of, in any way, shape, or form, con- tracts let by the Corps of Engineers or anybody else. I deliberately stayed away from any information on that.’’ VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00194 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 187 The administration has also consistently maintained that Halli- burton was selected for the Iraqi contracts by career procurement officers. But we now know that simply was not true. Halliburton was selected for the oil contracts by political appointees in the Bush administration, not by procurement officials, and the Vice President’s chief of staff, Scooter Libby, was personally briefed on the contracts before they were issued. We don’t know the full extent of the Vice President’s involvement in the Halliburton contracts. All we know for sure is that what the Vice President has said so far is false. Now, that has come, in part, from a briefing that both the minor- ity and majority staffs participated in. It was not a confidential briefing, and that briefing gave information that contradicted the statements that Vice President Cheney, and this administration have been making over and over again, and it contradicts sworn testimony given to this committee in March, when we held our last hearing. Americans cannot rely on the Bush administration to fix the con- tracting problems in Iraq. This administration is notorious for re- fusing to acknowledge mistakes or to hold officials accountable. In fact, as the Vice President’s comments demonstrate, it is even hard to trust the administration to provide honest and full information. So it is really up to the Congress to look after the interest of the troops and the taxpayers, and the question I have is whether we are up to this challenge. Chairman Davis has taken some commendable steps. We have had a conversation as a result of the letter that we sent him, and he has now agreed that we will hold a hearing in July to bring in the whistleblowers identified by the minority before the committee. We will discuss exactly who will participate in that hearing and that will be something that we will discuss together. He has also agreed that Halliburton’s CEO, David Lesar, and KBR’s CEO, Randy Harl, will receive formal written invitations to testify before the committee. I think Halliburton ought to testify before this com- mittee. If they think that some of this information is inaccurate, they ought to be here to say so under oath and to be questioned about it. Chairman Davis and I have discussed our concern about some other essential steps that I think we need to take. Three months ago, Chairman Davis and I wrote to Defense Secretary Rumsfeld and USAID Administrator Natsios to seek documents relating to the Halliburton and Bechtel contracts in Iraq. The administration failed to provide most of these documents. In fact, even when the administration finally did respond to portions of the request, it withheld key documents. I think we need to protect our rights to the documents and subpoena them, if necessary, so that we in this committee get those documents. We cannot conduct effective oversight by consent. The test of what we investigate should be what we need to do in order to fulfill our oversight responsibilities, not what the administration agrees to let us see. If we are going to do our jobs, we need to be far more assertive than we have been so far. George Will said something very wise in a recent column. He wrote, ‘‘Failures are multiplying because of choices for which no VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00195 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 188 one seems to be accountable.’’ Although asking tough questions can be politically inconvenient, we will be doing the President no favor if we refuse to fulfill our Constitutional oversight responsibilities. Oversight can be painful at times, especially if you look at this whole issue from a partisan perspective. But it is an essential part of our system of checks and balances. I look forward to the hearing today. I look forward to the hearing we will have in July, and I hope that it marks the beginning, not the end, of our committee’s work on Iraq contract oversight. Thank you very much, Mr. Chairman, for this chance to make the opening statement. [The prepared statement of Hon. Henry A. Waxman follows:] VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00196 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 189 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00197 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 190 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00198 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 191 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00199 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 192 VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00200 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 193 Chairman TOM DAVIS. Thank you, Mr. Waxman. I think that we have Members here expecting you to put some motions. I am going to allow members to submit opening statements for the record, and during your 5 minutes of questions, if you prefer to use that time for statements, we will do that; otherwise, we will dispense with additional opening statements. And I understand you have some motions. Mr. WAXMAN. Well, Mr. Chairman, before I do that, I want to welcome Representative Betty McCollum, who joins us today as the newest member of the Government Reform Committee. Throughout her career as a teacher, a city council member, and a member of the Minnesota House of Representatives, she has championed issues that are important to her constituents and to all Americans, and she has worked to ensure excellence in education, environ- mental protection, and health care access for all. And I am pleased she is joining us on this committee as a member of the Government Reform Committee, and she brings a wealth of experience and ex- pertise to this committee, and I know all of us look forward to working with her. Chairman TOM DAVIS. Well, thank you, Mr. Chairman. Let me just say for the majority we are happy to have her here and look forward to working with her. Mr. Waxman. Mr. WAXMAN. Mr. Chairman, I think that we need to subpoena documents in order to get those documents submitted to our com- mittee. You and I have had a conversation prior to this meeting about these documents. Some of these documents involve matters that you and I have both requested from the administration, and with regard to those documents, we have requested them; some have been given to us, but not all of them. And I think it is appro- priate to demand them and to subpoena them if we can’t get them voluntarily. And I would like to yield to you. Chairman TOM DAVIS. Thank you, Mr. Waxman. We still don’t have a number of documents that we requested on March 26th. Some documents, which the minority was able to obtain anyway, I might add, actually post-dated March 26th and weren’t included in that request. But what we don’t have is the DOD cost estimate for Task Order 59; DOD reports on the Bechtel construction con- tract; determination to award a single, rather than multiple, award contract for oil infrastructure contract; various documents relating to the KBR contract for imported gasoline; and the aid reports on the Bechtel construction contract. By all right, the committee should have these. What I will say today is I would like to give the Department until June 30th to get those documents before us. If there is a secu- rity reason why they can’t do that, or logistical reason, we would like them to come up and at least give us the courtesy of meeting with Mr. Waxman and myself to see why these documents shouldn’t be forthcoming. And if we don’t hear by that time, it would be my intent, I think, to move ahead with subpoenas, but we want to give them an opportunity to move ahead with that or to at least give us a reason why they shouldn’t, which they haven’t to date. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00201 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 194 Mr. WAXMAN. Well, Mr. Chairman, I want to put a list of some of these items in the record. We don’t need to go through them now. You and I both requested the documents. You are suggesting that we give them until June 30th, and if they don’t respond, either by coming forward and telling us why they can’t respond or giving us the documents as we have requested, you will go forward with subpoenas, which you can issue on your own, without even conven- ing a meeting of the committee, is that correct? Chairman TOM DAVIS. That is correct. Mr. WAXMAN. Well, under those circumstances, I don’t see it nec- essary to offer a motion for the committee to vote on; I accept that is a reasonable course to fllow. Chairman TOM DAVIS. Let me just say to our friends at the De- partment that we need these documents. We are entitled to them under law, and we ought to have them, and it has been a joint bi- partisan request. And there were other documents, I might add, that Mr. Waxman wanted to add to this that we did not join him with that weren’t in this list, but these were jointly agreed to. Mr. WAXMAN. I have another motion for a subpoena that involves some other matters, if we can have them reported. Chairman TOM DAVIS. Will the clerk designate? Ms. AUSTIN. Which one would you be referring to? Mr. WAXMAN. This is the one that involves the Vice President. Ms. AUSTIN. Motion to subpoena Secretary of Defense Donald Rumsfeld for documents relating to DOD contacts with the Vice President’s Office of the White House. Under House Rule 11(2)(k)(6), I move the committee issue a subpoena to a witness, Secretary of Defense Donald H. Rumsfeld, to appear before the Committee on Government Reform on July 6, 2004, to produce cer- tain documents relating to contracting and the rebuilding of Iraq. Mr. WAXMAN. Mr. Chairman, I ask unanimous consent that the motion be agreed to and considered as read. Chairman TOM DAVIS. Without objection, so ordered and consid- ered as read. Mr. Waxman. Mr. WAXMAN. Well, Mr. Chairman and my colleagues, we have the right to move for subpoenas to get this information, and there are documents that we are requesting that we think you would, on reflection, agree that we ought to have. But in our conversation be- fore this hearing, you expressed to us you haven’t had a chance to review all of our requests to see whether you would support them. And rather than put this to a vote, if you will afford us the oppor- tunity to discuss these requests and join us jointly in requesting the information, where you feel it is appropriate, and not only make the request, but back it up with a subpoena if the request is not agreed to in an appropriate amount of time, I would find that an acceptable way for us to proceed together in comity on this second group. Chairman TOM DAVIS. Well, Mr. Waxman, I always think we work better together as a bipartisan unit on these issues and try to take at least the partisan sting out of these. In addition to that, we have some disagreements on the documents, but in discussing this beforehand, I think there are some areas where we can agree VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00202 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 195 to move forward, and I would be happy to work with you in that regard, as we have in the past. Mr. WAXMAN. Mr. Chairman, I think what you have suggested to us in good faith is helpful and constructive for us to proceed with together, and rather than put the committee to a vote that might well be partisan, and I so much don’t want this to be partisan be- cause it is our committee’s responsibility on a bipartisan basis to do the investigation that is appropriate I will ask unanimous con- sent to withdraw my motion for a subpoena. We will discuss fur- ther the items. I want to make a case to you on each of the items and hope that I can get you to agree to jointly request them and back it up with a subpoena if the request is not honored. Chairman TOM DAVIS. I thank the gentleman. If there is no ob- jection, the request will be withdrawn. Mr. WAXMAN. I have a third motion, and without offering that motion officially and withdrawing it, I do want to indicate to you that I would like to handle it in the same way we have handled the second one. It involves further request for Halliburton docu- ments, and we would like to discuss them with you further, see if we can join together in a request for those documents, with the un- derstanding that if we do request them jointly, and after an appro- priate time if they are not forthcoming, that we will go to sub- poena. Chairman TOM DAVIS. I look forward to working with the gen- tleman on his request. Mr. WAXMAN. Thank you. Chairman TOM DAVIS. We have not had an opportunity to review all of these at this point, and we have some reservations about some of the things that have come up, but there are others I think we can find some area of closure, so I look forward to working with the gentleman. Mr. WAXMAN. Well, I thank you very much, Mr. Chairman. I think that is the appropriate way for us to proceed, and I look for- ward to working with you. I want to make the case to you on each and every one of these, and hope I can get you to agree. That is all I can do, is make the case, and if you don’t agree, you don’t agree. Chairman TOM DAVIS. We have the same opportunity on your witnesses, so we have a lot of things to talk about. I appreciate it. Mr. WAXMAN. I appreciate it, and I do want to have you acknowl- edge that we are going to go ahead and have a meeting in July. Chairman TOM DAVIS. That is correct, we will have a July hear- ing. Mr. WAXMAN. Where we will have an opportunity for whistle- blower testimony. Chairman TOM DAVIS. Of course. As I had indicated in previous hearings, we will. Mr. OSE. Mr. Chairman. Chairman TOM DAVIS. Yes. Gentleman from California. Mr. OSE. I have heard a lot of talk focused on a particular com- pany, however, this contracting officer from our March 11th hear- ing was far larger than just one company. Am I to understand from your discussion that we are limiting our inquiries to one company? VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00203 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 196 Chairman TOM DAVIS. Not at all. Not at all. In fact, some of the inquiries and the documents we have requested do relate to other companies. Mr. WAXMAN. If the gentleman would permit to yield to me, one of the documents we have requested involves Bechtel, which is the second largest contractor. We haven’t received that information. It is impeding our investigation. But we are not just focused on Halli- burton. Chairman TOM DAVIS. There are others as well. If the gentleman has any suggestions, as I know he does, we would be happy to look at those as we. Mr. OSE. Well, I am still waiting on answers to the questions we submitted through you and Mr. Waxman. Chairman TOM DAVIS. From DOD. Well, we can add that to our request. Mr. OSE. I would appreciate that. Chairman TOM DAVIS. Thank you. Is there any other discussion? Mr. WAXMAN. We also had questions from our side. I remember Mr. Lynch asked some questions and had a promise he would get the information. So I hope we will get that as well. Chairman TOM DAVIS. Well, why don’t we make sure that staff includes that in our discussion, Mr. Waxman, as we move ahead and get it sent to the Department of Defense? As I said before, Members will have 5 legislative days to submit opening statements. We move forward to our first panel now. We are pleased to have the Honorable David M. Walker. This means no votes, to committee members. You are certainly encouraged to stay here for the testimony and questions, but you won’t be needed for a vote. Thank you, Mr. Waxman. The Honorable David M. Walker, Comptroller General of the United States, accompanied by Mr. William T. Woods, Director, Ac- quisition and Sourcing Management, U.S. General Accounting Of- fice, and Mr. Neal Curtin, the Director of Defense Capabilities and Management, U.S. General Accounting Office. As you know, it is our policy that we swear all witnesses. Mr. OSE. Mr. Chairman, if I may. Chairman TOM DAVIS. Yes, gentleman from California. Mr. OSE. I noticed in the context of your conversation with Mr. Waxman that you were issuing invitations to the July hearing to the president of a couple of companies. Are those same invitations going to the leadership of the other companies who are engaged in contracting? Chairman TOM DAVIS. Well, there are literally hundreds, if not thousands, of companies. Mr. OSE. Well, I am particularly interested in the companies Parini, UBS, and Washington Group. Chairman TOM DAVIS. Well, if the gentleman would work with us on that, we will see if we can accommodate his request. Would the gentleman agree to work with us on that? Mr. OSE. I would be happy to work with you. Chairman TOM DAVIS. All right, thank you. VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00204 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 197 [Witnesses sworn.] Chairman TOM DAVIS. Mr. Walker, thanks for being with us and thanks for the good staff work you continue to do to shed some light on these issues. The issue of a report I know is sometimes subject to various interpretations, but we look to you here for guid- ance on these matters, and thanks for being with us. STATEMENTS OF DAVID M. WALKER, COMPTROLLER GEN- ERAL OF THE UNITED STATES, ACCOMPANIED BY WILLIAM T. WOODS, DIRECTOR, ACQUISITION AND SOURCING MAN- AGEMENT, U.S. GENERAL ACCOUNTING OFFICE, AND NEAL P. CURTIN, DIRECTOR, DEFENSE CAPABILITIES AND MAN- AGEMENT, U.S. GENERAL ACCOUNTING OFFICE Mr. WALKER. Thank you, Mr. Chairman, Ranking Minority Mem- ber Waxman, other members of the committee. It is a pleasure to be back before you here to discuss various GAO activities dealing with operations and rebuilding efforts in Iraq. I would like to summarize my statement. I believe all of you have been provided with the entire statement for the record, and hope- fully all of you have also been provided a copy of the report that was released yesterday entitled, ‘‘Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management Challenges.’’ My tes- timony will address a summary of this report, as well as our work to date on various logistical support contracts on a global basis in- volving all four services. Before I discuss our findings, I would like to briefly touch upon the scope of these two efforts. First, given the widespread congres- sional interest in ensuring that Iraq reconstruction efforts are awarded properly and administered effectively, we initiated this re- view under my authority, meaning the review that I am referring to here, the report that was issued yesterday. Specifically, we judgmentally selected 25 fiscal year 2003 contract actions. These 25 contract actions represented about 97 percent of the nearly $3.7 bil- lion that have been obligated for Iraqi reconstruction through Sep- tember 30, 2003. We are currently working on looking at 2004 con- tracting activity. With regard to our work on the military’s use of global logistic support contracts, this work was initiated at the request of Rank- ing Minority Member Waxman of this committee and the ranking minority member of the Energy and Commerce Committee, Mr. Dingell. It is one of a series of studies we have done on the mili- tary’s use of private contractor support deployed forces on a global basis. Importantly, we looked at this on a global basis; we look at it for all the services, and we did not target any particular region or any particular company. With regard of the award of fiscal 2003 Iraqi reconstruction con- tracts, we found that agencies generally complied with applicable laws and regulations governing competition when using sole-source or limited competition approaches to award new contracts. How- ever, they did not always do so when issuing task orders under ex- isting contracts. In several instances we found that contracting offi- cers issued task orders for work that was not within the scope of the underlying contracts. The out-of-scope work under these orders should have been awarded using competitive procedures or, be- VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00205 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 198 cause of the circumstances involved, supported by justification for other than full and open competition in accordance with applicable legal requirements. In this regard, given the needs relating to and the challenges associated with the Iraqi reconstruction efforts, such justifications are likely possible, but needed to be made and docu- mented in order to comply with the law and to protect taxpayer in- terest. We made several recommendations to the Secretary of the Army and the Secretary of the Defense with regard to the lessons learned in this report, and I am pleased to say that DOD has generally con- curred with our recommendations and plans to take actions based on our recommendations. With regard to DOD’s use of global logistic support contracts, we found mixed results in each of four critical areas that we reviewed, namely, planning, oversight, efficiency, and personnel matters. For example, we found that some DOD customers planned quite well for the use of contracts, following service institutions and including the contractor early in planning. Conversely, we found the use of the LOGCAP contract in Kuwait and Iraq was not adequately planned, nor was it planned in accordance with applicable Army guidance. We also found that while oversight processes were in place and functioning well in some places, there were several areas needing improvement, such as reaching an agreement on terms, specifica- tions, and prices of services to be delivered. This is especially criti- cal in connection with cost-based contracts. We also found that while some military commands actively looked for ways to save money, others exhibited little concern for cost considerations. Finally, shortages in personnel trained in contract management and oversight is also an issue of critical importance that needs to be addressed. Our report will make a number of recommendations when it is issued later this summer in this regard. In summary, Mr. Chairman, Ranking Member Waxman, and members of the committee, the United States, along with its coali- tion partners and various international organizations and donors, has undertaken an enormously complex, costly, and challenging ef- fort to rebuild Iraq in an unstable security environment. At the early stage of these efforts, agency procurement officials were con- fronted with little advance warning on which to plan and execute competitive procurement actions. An urgent need existed to begin reconstruction efforts quickly, and the uncertainty as the mag- nitude in terms of the work required was evident. Their actions in large part reflected proper use of the flexibilities provided under existing procurement laws and regulations to award new contracts using other than full and open competitive procedures. However, with respect to several task orders issued under existing contracts, some agency officials overstepped the lati- tude provided by competition laws by ordering work outside the scope of the underlying contracts. This work should have been sep- arately competed or, alternatively, justified and approved at the re- quired official level for performance by an existing contractor. Im- portantly, given the war in Iraq, the urgent need for reconstruction efforts, and the latitude allowed by the competition law, these task VerDate 11-MAY-2000 10:37 Nov 17, 2004 Jkt 000000 PO 00000 Frm 00206 Fmt 6601 Sfmt 6601 D:\DOCS\96407.TXT HGOVREF1 PsN: HGOVREF1 199 orders reasonably could have been supported by justifications for other than full and open competition. Logistic support contracts have developed into a useful tool for the military services to quickly obtain needed support for troops de- ployed to trouble spots around the world. Because of the nature of these contracts, however, that is, a cost-based contract arrange- ment, they require adequate planning and definitions of related re- quirements, as well as significant ongoing and active oversight by a variety of parties in order to make sure that they are meeting the needs of the forces in the most economic, efficient, and effective way possible under the circumstances. While the military services are using how to use these contracts well, in many cases the services are still not achieving the most cost-effective performance and are not adequately learning and ap- plying the lessons of previous deployments. Because of the mili- tary’s continuing and growing alliance on these contract vehicles, it is important that improvements be made in the planning and execution of these arrangements, and that related oversight be strengthened. I might note, Mr. Chairman, finally, that DOD contract manage- ment […display truncated here — the full text is in the download file]