September 19, 2006

Dorgan, Wyden, Waxman, Dingell Call to End Outsourcing of Oversight for Iraq Reconstruction

Pentagon hires contractors to watch contractors at cost of $130 million

Washington, DC - U.S. Senators Byron Dorgan (D-N.D.) and Ron Wyden (D-Ore.) and U.S. Representatives Henry A. Waxman (D-Calif.) and John Dingell (D-Mich.) today called on the Pentagon to stop outsourcing the oversight of large Iraq reconstruction contracts to private companies. They said the arrangement is rife with potential conflicts of interest and opens the door to significant additional waste of taxpayer dollars in Iraq. In a joint report issued by the House Government Affairs Committee and the Senate Democratic Policy Committee, the Members of Congress detailed nearly $130 million in spending on reconstruction oversight contracts for seven private contractors. A letter from the four lawmakers to Defense Secretary Donald Rumsfeld today objects to the Pentagon's oversight structure and points out numerous conflicts of interest among the contracted companies. It also makes the Secretary aware of amendments they intend to offer to the upcoming Department of Defense authorization bill that would require the Pentagon to resume direct oversight of its reconstruction contracts in Iraq within 90 days. "I've heard of cutting out the middle man to get more bang for your buck, but adding more middle men and millions of dollars of cost is a dubious strategy whether you are running a business or a government," said Wyden. "Oversight of these contracts should rest with an impartial advocate for the taxpayer - not with these companies." "We're talking about the expenditure of billions of taxpayer dollars, in a system in which we already know waste and fraud exist," said Senator Byron Dorgan. "How does the Administration want to oversee the expenditures of those funds? They want to hire private contractors to oversee other private contractors, including contractors with interlocking financial interests and arrangements with each other and who have their own reconstruction contracts in Iraq. We need to tighten oversight of how tax dollars are spent, not farm it out, and certainly not farm it out this way." "Whether by design or incompetence the Administration is failing in its responsibility to oversee the reconstruction effort and to protect the taxpayer from waste, fraud, and abuse," said Rep. Waxman. "The Administration should not be outsourcing this essential government function." "Our latest investigation focuses on a particularly dangerous contracting practice: putting the management of Iraqi reconstruction contracts in the hands of other contractors," said Congressman John D. Dingell, Ranking Member of the Committee on Energy and Commerce. "We are not charging wrongdoing, but we are saying this situation sets the stage for wrongdoing to flourish because of the close relationships between the contractors." The joint report, which can be found online at and at, details the conflicts of interest among contractors including Parsons, Fluor, and CH2M Hill. It also reports the fee structure of the contracts and sheds light on the potential for waste, fraud and abuse. The letter to the Secretary of Defense reiterates concerns about the contractors "being asked to carry out essential government oversight functions, including defining and prioritizing project requirements and actually overseeing the work of construction contractors." The full text of the letter, which immediately follows this release, also requests the Defense Department's support of proposed amendments to the Defense authorization bill that would end the outsourcing of oversight. The proposed amendments to the Department of Defense Authorization bill, similar versions of which will be introduced in both the House and Senate, seek to force the Pentagon to resume responsibility for oversight of Iraq reconstruction contracts. Specifically, the amendments will require the Defense Department to terminate within 90 days the seven oversight contracts awarded earlier this year and assume responsibility for all Iraq reconstruction contract oversight. The Senate amendment will also prohibit the Defense Department from contracting out any future oversight activities in Iraq to non-governmental entities. Senators Wyden and Dorgan expect to file their amendment this week. Representatives Waxman and Dingell submitted their amendment to the Rules Committee for its consideration Monday. The text of the Senators' letter follows: The Honorable Donald H. Rumsfeld Secretary of Defense The Pentagon Washington DC, 20301 Dear Secretary Rumsfeld: We are writing to object to the Administration's decision to outsource its oversight of Iraq reconstruction contracts. By its decision, the Administration has abdicated its responsibility to ensure that U.S. taxpayers' dollars are spent wisely. In effect, the Administration is allowing the major contractors in Iraq to police themselves. To date, the Administration has awarded billions of dollars to a small group of private contractors for reconstruction projects in Iraq. Already, in numerous instances, well-documented by the Department of Defense Inspector General, these contracts have been plagued by fraud, waste, and abuse. In view of this, the Pentagon should have redoubled its own oversight efforts. Instead, on March 10, 2004, the Coalition Provisional Authority (CPA) announced that it was outsourcing the oversight of these contracts - by awarding $129 million worth of new "management" contracts to the same reconstruction work in Iraq. These contractors are being asked to carry out essential government oversight functions, including defining and prioritizing project requirements and actually overseeing the work of construction contractors. It is not appropriate for contractors to exercise these functions - particularly in view of significant conflicts of interest among these companies. A prime example involves Parsons, a major construction firm. On March 10, the company's joint venture with CH2M Hill was awarded a $28.5 million contract to oversee the expenditure of $1.7 billion in taxpayer funds by four other contractors charged with restoring and improving Iraq's public works and water sector. The four other contractors are Fluor, Washington Group International, AMEC, and Black & Veatch. A separate Parsons joint venture with Parsons-Brinckerhoff was awarded a $43 million contract to oversee $1.5 billion in electricity reconstruction work to be completed by Fluor, Washington Group International, AMEC, and Perini. Even if it made sense for one major contractor to oversee another - which it does not - Parsons could not act as an independent watchdog with respect to Fluor's water or electricity work, because of the close business ties between the two companies. Most notably, Fluor and Parsons are 50-50 partners in a $2.6 billion joint venture to develop oil fields in Kazakhstan. This project dwarfs the value of Parson's share of its oversight contracts in Iraq. How can anyone expect Parsons to be an aggressive overseer of a company with which it is a partner in a major joint venture? Indeed, actions that Parsons takes under the two oversight contracts could directly affect its own reconstruction contracts. Parsons is teamed with Bechtel on USAID's Iraq Infrastructure II contract. This contract, which has a value of $1.8 billion, covers a range of sectors, including power generation, electrical grids, and municipal water and sewage systems. The prioritization and scheduling of work under the CPA contracts could affect the value and type of water and electricity work available for Parsons to do under the USAID contract. Parsons also has an $800 million contract for the restoration of the oil infrastructure in northern Iraq, which could also be affected by how it exercises its oversight powers. Another instance of a conflict of interest involves Parson's partner on the contract to oversee the public works and water projects, CH2M Hill, a global engineering and construction firm. CH2M Hill has ongoing domestic contractual relationships with Washington Group International, Fluor, and AMEC - three of the firms that it and Parsons are supposed to oversee. For example, CH2M Hill and Washington Group International are "integrated partners" on a $314 million Department of Energy contract in the United States. Yet another instance of a conflict of interest involves Parsons Brinckerhoff, which is now supposed to oversee Fluor's electrical work in conjunction with Parsons Corp. In January of this year, Robert Prieto, the former chairman of Parsons Brinckerhoff became senior vice president of Fluor. Such crossover in management is common among major contractors - and an obvious reason why it makes no sense to have these companies overseeing each other. We understand that it can sometimes be necessary for government contractors to have business relationships with each other. But in this case, these companies have been given the specific responsibility to provide "oversight" of their business partners. Arthur Andersen's disastrous relationship with Enron illustrates what can go wrong when a supposedly independent company has multiple business relationships with the companies it is overseeing. To make matters worse, we have learned that the CPA has made the value of each "oversight" contract dependent on high "scores" based largely on an assessment of the contractor's performance. So, for example, if Parsons is "overseeing" Fluor, there is a financial incentive for Parsons to make Fluor's performance appear as rosy as possible. The bottom line is that this kind of oversight system cannot work - and that the Pentagon should not abdicate its oversight responsibilities over multi-billion dollar contracts. This week, we will be offering amendments to the Defense authorization bills in the Senate and House of Representatives, which would require that these contracts be terminated, and that the Pentagon carry out its own oversight responsibilities. We have enclosed a staff report that provides more detail about these conflicts of interest. We hope that you will review this letter and report carefully and will reconsider the wisdom of these contracting decisions. We also urge you to support our contracting amendments. Sincerely, Byron Dorgan U.S. Senator Ron Wyden U.S. Senator Henry Waxman U.S. Rep. John Dingell U.S. Rep.