Originating agency: Department of Defense Inspector General (DoD IG)
Document date: March 15, 2011
Every Friday, POGO will strive to make one document available that we or others have obtained through the Freedom of Information Act (FOIA), especially documents that have not previously been posted online. Some of these documents will be more important than others, some may only be of historical interest— although relevance is in the eye of the beholder. POGO is doing this to highlight the importance of open government and FOIA throughout the year.
By NEIL GORDON
Last March, the Department of Defense Inspector General (DoD IG) released an audit of contracts for the delivery of fuel to U.S. troops in Iraq. Only a summary of the report's findings has been made available to the public. Yesterday, POGO received the full report (with redactions). DoD IG's website still promises that the report will be made publicly available "at a later date."
The DoD IG conducted the audit in response to concerns former House Oversight and Government Reform Committee Chairman Rep. Henry Waxman (D-CA) had about the competitiveness and prices paid under fuel supply contracts awarded to the International Oil Trading Company (IOTC). In October 2008, Waxman wrote to Secretary of Defense Robert Gates that IOTC “appears to have engaged in a reprehensible form of war profiteering” and may have overcharged the government as much as $180 million to deliver fuel to troops in Iraq.
The report found that Defense Logistics Agency (DLA) contracting officers did not perform an adequate proposal analysis for three of four contracts worth about $2.7 billion, had limited data to support $1.1 billion in costs, and failed to ensure fuel prices were fair and reasonable. As a result, DoD IG calculated that the government paid IOTC about $160 to $204 million (6 to 7 percent) more for fuel than it should have. Moreover, the report notes that congressional investigators found that IOTC’s profits on the contracts may have been 14 percent. By contrast, the previous fuel supply contractor, KBR, which was also fiercely criticized for its fuel prices, received a maximum profit of 7 percent.
One of the reasons DLA failed to adequately ensure that prices and costs were fair and reasonable was that it had wrongly determined that fuel delivery was a commercial item, or a service sold to the general public in significant quantities. Under a commercial item contract, contractors are not required to submit cost or pricing data to the government because, in theory, competitive market forces keep prices reasonable. As DoD IG noted, “there is no commercial market place for the delivery of a billion plus gallons of fuel into a war zone.”
The report also found that KBR was allowed to perform the inherently governmental function of accepting $860 million of fuel delivered by IOTC. According to DoD IG, a contractor may be used to receive shipments of government-owned fuel but may not be used to accept title to fuel on behalf of the government: “[F]uel is a high-risk commodity, analogous to cash, requiring stringent control procedures.” No government employees had validated the accuracy of KBR’s invoices, but DoD IG determined that the government received virtually all of the fuel it paid for.
The Boca Raton-based IOTC and its owner, Harry Sargeant, have been on the hot seat in recent years. A RICO lawsuit filed in October 2008 by a competitor, Supreme Fuels Trading, alleged IOTC bribed Jordanian officials to win the exclusive right to transport fuel across Jordan into Iraq. (The DoD IG report notes that another reason DLA failed to ensure fair and reasonable prices and costs was that it assumed the contracts were awarded competitively, even though IOTC had, through ways not discussed in the report, effectively eliminated competition. “Although numerous companies submitted proposals for the [fuel supply contracts],” the report states, “IOTC was the only company capable of satisfying the responsibility requirements included in the various solicitations issued for these contracts.”
In May 2011, the court ruled in favor of Supreme Fuels and awarded it $5 million. In addition, a former business partner of Sargeant’s who was supposedly instrumental in helping IOTC win the fuel transport contracts claimed in a lawsuit that he was swindled out of a share of the profits. In July, a Palm Beach County jury awarded him $28.8 million in damages.
Even though this DoD IG report confirms some of Congressman Waxman’s allegations, it does not directly accuse IOTC of war profiteering. Instead, this report reminds us, once again, that the government often bears much of the blame for contracting fraud, waste, and abuse.
Neil Gordon is a POGO Investigator.