A view of Hawaii's "procurement mess" sounds an awful lot like Guam's

I begin this post with the reminder that Guam and Hawaii have adopted the ABA Model Procurement as the framework for their respective procurement regimes. It's also useful remembering that a central purpose of this blog is to point out some almost universal issues of procurement, so none of us take this too personally.

Seriously, yes. Personally, no.

State procurement squanders cash and delays services By Dennis Hollier

One expert with strong views on Hawaii’s procurement mess is Terry Thomason, education chair of the Hawaii Procurement Institute, and an attorney specializing in public contracts at the law firm of Alston Hunt Floyd & Ing.

Thomason divides Hawaii’s procurement troubles into three categories.

There are a few “bad eggs,” he acknowledges, officials like the state’s former chief elections officer who operate in bad faith.

The second kind of procurement problem, and more common, Thomason says, is like the airport official, “kind of a slow thinker – they don’t know how to do it correctly, so they give out periodic payments. But 99 percent of these are honest mistakes.”

However, according to Thomason, the greatest cost to taxpayers is the third category: the state’s piecemeal approach to contracting. "For instance, you will see DOE projects for schools that include individual contracts for roofing, plumbing, painting, etc. Often, these requirements are at the same school or schools in the same area. All of those contracts were competed separately through the entire solicitation process."

What’s more, Hawaii’s slow, incremental approach to procurement may cost the state federal money. The state’s procurement system simply can’t get contracts out the door quickly enough.

There’s no sign, though, that the state is prepared to make changes.

To begin with, the understaffed State Procurement Office (SPO), which should be the center for innovation and reform, has a very narrow definition of procurement.

State procurement officer Aaron Fujioka likes to point out that procurement technically takes place in a very short window, usually 30 to 90 days. Strictly speaking, he says, procurement is simply the process of announcing an invitation for bids or a request for proposals, the steps used to select among bidders, and the rules for identifying winning bids.

For instance, he says, the beginning of the process – writing accurate and unambiguous requests for proposals – is outside the scope of procurement. That’s planning. Likewise, making sure contractors fulfill their obligations in a timely manner is not procurement. That’s project management.

Many experts believe the SPO should take a more expansive view of procurement. State auditor Marion Higa argues that, because of the principles involved – creating a level playing field for contractors and getting good value for the taxpayers’ dollars – procurement should extend down to the departments and agencies writing RFPs.

“He (Fujioka) is correct in that it’s not within his jurisdiction, per se; but as SPO, shouldn’t he also be promoting that the key here is how you spec out your acquisition?”

Others point out that the SPO has not done a good job conveying the importance of procurement laws to state employees.

State Rep. Blake Oshiro (also an attorney at Alston Hunt Floyd & Ing) notes that government officials continually complain that the process is difficult and cumbersome. “You have to wonder if they know what the Procurement Code is supposed to accomplish,” he says. “Fairness, openness, competition. My guess is they don’t.”

The result is widespread contempt for the norms of government procurement.

The irony is that Hawaii’s procurement law, patterned after the American Bar Association’s model code adopted by 27 states, is flexible and more than adequate.

What’s lacking is the leadership to enforce existing rules and develop new approaches. Instead, the state seems to be moving the other way.

Last year, the Legislature passed laws that limit the ability of companies to protest contract awards – a key check on procurement misbehavior.

Perhaps worse, insiders say, the SPO is circulating draft legislation designed to “simplify and streamline” the procurement process by eliminating basic safeguards, like requiring pre-bid conferences and cost analyses.

Yet, at its roots, procurement law is simply about ensuring a fair playing field and getting good value for the taxpayers’ dollar. In fact, as Terry Thomason puts it, “A dynamic procurement system is the very measure of good government.”

Mr Hollier includes in his article Seven Steps to Better Procurement, which he attributes to Danielle Conway. professor of Law at the University of Hawaii, and Director of the Hawaii Procurement Institute. Again, these appear universal.

1. Develop a fulltime, professional procurement staff in all departments: For most staff, state procurement is now an added responsibility to their usual duties.

2. Make salaries of procurement professionals competitive with private industry: You get what you pay for.

3. Recentralize supervision of procurement in the State Procurement Office: Decentralizing, which was meant to expedite the process, resulted in waste and fraud.

4. Remove exemptions from state procurement code: Far from promoting autonomy, granting exemptions from the code to certain agencies exposes them to litigation, waste and fraud.

5. Encourage, rather than discourage, reasonable protests of contract awards: A lively, expeditious protest system is our most effective way to check misconduct and inefficiency in the solicitation process.

6. Educate, educate, educate: And not only about Hawaii procurement laws, but about innovative procurement practices in the federal government and elsewhere. Remain open to novel or mainstream procurement innovations.

7. Invest time and resources in acquisition planning: Up-front planning will make for a smooth process during the formation and administration of a contract.

I might reiterate that Number 6 is what this blog is all about.

I also want to reiterate what I previously posted about the Policy in Favor of Planning, in contradistinction to Mr. Fujioka's blinkered approach -- read it here.
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Procurement controversies -- Illinois, USA

Inspector General: Chicago's minority contracting program "beset by fraud"

For 25 years, City Hall has poured billions of dollars into affirmative action contracts for minority and women-owned business enterprises, or MWBE’s.

But many of those dollars have eventually ended up in the hands of non-minority businesses, according to a scathing Inspector General audit released today.

The report says the MWBE program is an administrative mess “beset by fraud,” and highlights the yawning gap between what the mayor says MWBE’s get versus what they really get.

The IG cites two main culprits: front companies and pass-throughs. Front companies claim to be MWBE’s but are really owned and operated by non-minority males. Pass-throughs, meanwhile, are when an MWBE gets a contract but then sub-contracts part or all of the work to a non-MWBE.

Front companies and pass-through are not exactly sophisticated racketeering operations. But they have defrauded the city of millions thanks to a MWBE program with “broad and pervasive deficiencies” and no credible mechanism to monitor contract payments, the report says.

Prosecutors: Garbage contract rigged

Federal prosecutors laid out for a judge how they think a politically connected firm rigged a $1.7 million contract.

Prosecutors say more than $434,000 of the contract was supposed to be paid to a woman-owned trucking firm and a minority-owned cleaning company. But the woman-owned business was paid only $15,000 and the cleaning company was never told that Urban Services had been the winning bidder and it received nothing, prosecutors allege.

UI audit shows holes in the hull of state’s flagship school

Released May 13 by Illinois Auditor General William Holland, the 392-page routine audit found 47 issues among UI schools at Chicago, Urbana-Champaign and Springfield. They include inadequate control of procurement cards, undocumented payroll and fringe benefits for school employees and inaccurate accounting procedures.

“In discussing these conditions with university personnel, they stated that the errors were the result of oversight and employees and their supervisors being unfamiliar with university policy,” Holland wrote in the audit. “Failure to properly review and approve procurement card transactions could result in erroneous or fraudulent transactions being recorded in the general ledger system.”

University officials acknowledged that “erroneous charges can and do occur” under current procedure, but added “… the university employs careful oversight and review to ensure these errors are minimal, and it takes immediate action when errors are discovered.”

Irish small businesses note large cost of procurement

Firms Seek Stronger Public Procurement Policy

The survey highlighted that 41% of small firms sold goods or services to the public sector in Ireland and 6% sold goods or services to public sectors abroad. Of the 41% of companies who sell goods to the public sector, 53% rated the process of selling to the public sector as either “poor” or “very poor”.

“One of the main concerns highlighted by small firms is the bureaucracy associated with current public procurement procedures. Tender documents can be lengthy with unnecessary information being sought. Tenders often require extensive financial and technical information which SMEs cannot always fulfil, as they may not have the in-house expertise and as a result the costs of preparing a submission are excessive,” added McNally.

“30% of firms selling into the public sector rate the process as ‘good’. These companies tend to have a strong track record of dealing with the public procurement process, however, a challenge for many of these firms is the length of time it takes for invoices to be paid from the public sector.”

Of Gooses and Ganders

There's an old saying in culinary circles, "What's good for the goose is good for the gander". But maybe not so in the case of Hawaii's procurement administration.

The University of Hawaii houses the Hawaii Procurement Institute, in conjunction with the Hawaii State Procurement Office. The Procurement Institute describes its role and purpose this way:

The Institute operates as a "think-tank" for the development and analysis of state and local procurement policies, laws, and regulations. The Institute is a model for the United States and its Commonwealths and Territories to follow. The Institute offers conferences, programs, and courses geared to government officials, public and private legal practitioners, and students interested in keeping current in the practice and policies of government procurement. The Hawai‘i Procurement Institute is ready and willing to train public and private procurement personnel from all of these sectors about effective and appropriate procurement policies and contracting.

So, what does this model of procurement knowledge do when the procurement going gets tough? It opts out.

UH’s procurement privilege could release $337M

The University of Hawaii system will be exempt from following the state’s public procurement code, which it has largely blamed for its backlog of deferred maintenance and capital improvement projects, under a new law that takes effect July 1.

University officials say the exemption, effective for two years, will help the 10-campus system operate more efficiently and with greater flexibility in awarding contracts for goods and services, including construction work.

House Bill 347, which Gov. Linda Lingle signed into law May 6 as Act 82, allows the statewide public university system to come up with its own procurement process “in lieu of” the state procurement code.

The university system has pointed to the existing code, which requires larger contracts to be awarded through a competitive sealed bidding process, for tying up projects and increasing costs as a result.

Read more: UH’s procurement privilege could release $337M - Pacific Business News (Honolulu)

The online cite above is a good synopsis of the whole story that appears in the Pacific Business News, May 21, 2010 (Vol. 48, No. 12). The hardcopy offers more detail:

This was the sixth consecutive year that UH asked lawmakers for the exemption.

"Under this new law, the university is charged with creating a two-year pilot program to streamline the procurement process and provide us with greater flexibility", said UH system spokeswoman Jeanne Belding.

The state's procurement code stipulates how government agencies spend and receive money for contracted work for every type of purchase. For example, contracts valued at $50,000 or ore are required to go through a competitive sealed bidding process, while professional services must be procured through a process that requires the agency to develop a list of qualified individuals who then must go through a selection committee to negotiate a contract.

UH have objected to the process, saying it has increased its own administrative costs as well as costs for vendors that would do business with UH.

The State Procurement Office testified against the measure, saying that exempting UH would "not be in the best interest of government, the business community and the general public."

"The code establishes a time-tested, fair and reliable set of rules and processes for the award of contracts," said Aaron Fujioka, administrator of the State Procurement Office.

"The code should not be viewed as an obstacle to a purchasing agency's mission, but rather as the single source of public procurement policy to be applied equally and uniformly. If individual agencies are exempted and allowed to develop their own individual processes, it becomes problematic and confusing to vendors, contractors and service providers that must comply with a variety of different processes and standards.

"Fairness, open competition, a level playing field and government disclosure and transparency in the procurement and contracting process are vital to good government."

"The idea behind a uniform procurement code was that different government agencies do business a little differntly, and that can make it hard for outside businesses to know what the rules are," said Tim Lyons, president of the Subcontractors Association of Hawaii. "You need to know the rules before you put in a bid, and it's awfully hard to determine the rules, many of which have cost implications, if we're not all on the same page."

"What good is the code if only some agencies have to follow it?" he asked.

"If rule changes are needed, we should be looking at the code directly," Lyons stated. "I can't imagine that UH is encountering problems that all other government agencies aren't. They're not special."

The American Council of Engineering Companies of Hawaii also opposes the exemption for UH.

"We are, of course, generally in favor of measures that fast-track infrastructure spending. However, we remain strongly opposed to a wholesale exemption ... in the name of expedience," said National Director Janice Marsters.

"While the university may discuss a few cases involving procurement difficulties, they procure thousands of contracts each year under the current requirements, and a few difficult cases do not warrant a complete exemption."

Now here's where things get a bit interesting. Even the University of Hawaii's own Procurement Institute is on record as saying "exempting agencies from the Code will be unnecessary and, in the long run, potentially problematic for the administration."

COMMENT: Make no mistake: The nuts and bolts of procurement is hard stuff. But it should begin and end with the law, not "special" exceptions. If exceptions are necessary because, despite best efforts, the nuts won't fit the bolts, alter the whole system to improve the system as a whole, consistent with the common fundamental purposes and policies of public contracting.

Making exceptions only undermines the integrity of and confidence in the system as a whole.

I just can't get over the feeling (admittedly without knowledge of the facts of this situation) that the central issue in cases like this is a breakdown in management, particularly management planning, which is number one of the four classic pillars of management: planning, organizing, leading, controlling.

Hawaii is an ABA Model Code jurisdiction, as is Guam. One of the core policies of the code is the "Policy in Favor of Planned Procurement". Most other policies deal with competition, transparency, accountability, fairness and the like. The planning policy focuses on the nuts and bolts.

Planning policy doesn't get much practical emphasis in the Code. But that should not be the benchmark of its core importance. Although not an especially "legal" subject, it must receive at least equal importance from management, whose business and supposed expertise is to manage.

No matter how fair, transparent and accountable a system is, it is worthless if it is not effective. All of those objectives must be met, and it is a red herring to bleat on about fair, transparent and accountable if the agency is not willing to tackle and overcome the planning objectives which any good management system must have.

What's good for the goose must be good for the gander.

Distinguishing procurement systems from procurement participants

This is a case of blaming the stage rather than the actors, in this lead in to a story from The Bahamas.

'Never going to be perfect'

The Government's public procurement system is not "ever going to be perfect", a former Chamber of Commerce president told Tribune Business yesterday, arguing that the Bahamas' relatively small size and interwoven family/political relationships made it impossible to "eliminate the foolishness that goes on".

Responding to the proposed public procurement reforms, which could save the Government up to 30 per cent (close to $130 million) on its existing $400 million annual contracts budget, Dionisio D'Aguilar said that while he was wary about introducing more bureaucracy into public sector contract processes, efforts to eliminate corruption and political influences had to be made.

The two greatest problems, Mr D'Aguilar said, were "the corruption of persons in the Government having [family/personal] relationships with the [bidding] parties, and the political relationships, where the politicians influence who the Government does business with.

"Both are equally as bad, and you've got to think of a system that eliminates both."

Reforms outlines by consultants Peter Trepte and Jorge Claro at an April 26-28 conference in Nassau, in the shape of regulations, are designed to comply with the Bahamas' obligations under the Economic Partnership Agreement (EPA) and the World Trade Organisation (WTO), and introduce "international best practices" into the Bahamas.

While the award of many contracts would still be decentralised, with Procurement Units and Tenders Committees much in evidence, the consultants have recommended the creation of a Public Procurement Department, headed by a Chief Procurement Officer, which would engage in centralised procurement for goods and services used across government departments.

The recommendations also involve the creation of a Public Procurement Board, which will be formed from members appointed by the private sector and Ministry of Finance, to oversee all government procurement.

And, unlike the current structure, an Independent Procurement Review Tribunal will be created to "determine all appeals, matters and disputes" relating to government contracts that come under its jurisdiction. This will provide a formal avenue of appeal to disgruntled bidders that currently does not exist.

"There's many factors that go into the awarding of bids other than cost. If you go for the best cost, you do not necessarily get the best bid. I have people that provide services for me at Superwash that are reliable. You develop a relationship with someone in government, you deliver for them and, hopefully, deliver for the people, but it is not necessarily the best price.

"At the end of the day, you want to work with people who deliver good results. You've got to measure cost against the ability of the provider to deliver. That's the hard thing, and you will not get it right all the time. The Government is dealing with people who give the best quote, but are unable to deliver."

COMMENT: Most modern procurement regimes, and Guam's in particular, require an independent inquiry into the responsibility of bidders. They require that the bid be responsive but also that the bidder be responsible. Responsibility in this instance requires both demonstrable capability and reliability to perform.

In competitive sealed bidding, price is the third, independently critical component of an award decision. Even in negotiated contracts, responsibility is key to evaluation of qualifications, but price must independently be determined to be fair and reasonable, regardless of qualification and responsiveness.

While it is unfortunate to blame the system on the actors, it is indeed the case that a fair, transparent and accountable procurement system requires a trained, impartial and professional cadre of procurement staff. There's no point having the most advance fighter jet in the world if you put a bus driver in to pilot it.

What I do sympathize with is the chagrin felt about the inevitability of procurement controversy, even when there is no dishonesty or malfeasance. There will never be a protest-free procurement system, because there will always be disagreement over facts, disputed interpretations and actions. Procurement should not be judged by the numbers or facts or inconvenience of protests, however. Anymore than societies should be judged by the numbers of civil court actions, traffic court cases and family law actions. Society has learned to build a dispute resolution process into its social organization to deal with the human nature of its members. It is too much to expect humans will ever be free of contest and controversy, especially where, as in government contracting, so much money, political influence and other special interests are involved. That is why no procurement system will ever be complete without an effective, accessible, fair and impartial review component.

Slovinia and Czech Republic consider procurement reform

Slovenia to Get Public Procurement Agency

PM Intent on Reforming Slovenia by the End of Term

"We'll reform regulatory mechanisms, which will move under the central government's wing and will be independent of the government."

Prime Minister Borut Pahor expects the government will make big savings through sweeping reform of public procurement. We'll combine all expert services in a central body."

The US Dept. of State, Background Note: Slovenia

The public procurement process, although compliant with most EU regulations and international treaties, remains opaque and riddled with favoritism and corruption.

Tender reform gets support in Prague

An expert group of politicians, business and NGO leaders have released final proposals for cleaning up the public tender process in the Czech Republic.

The collaboration of more than 20 organizations, called the Platform for Transparent Public Procurement (PTPP), has been led by the American Chamber of Commerce in order to create a more fair business environment in public-private partnerships by increasing transparency and efficiency.

Executive Director Weston Stacey has been a longtime outspoken critic of corruption and has put the biggest share of responsibility on the political parties.

After a show of support from all parliamentary parties on the report, a new tender law is expected to be approved after the elections, a momentary victory for the American Chamber's effort.

Of the 39 proposed changes, the two most important elements, according to the PTPP, are a civil-service law that protects government employees from being fired for being "disobedient" after elections and a law that would require full disclosure of owners of companies that are bidding in a public tender.

The PTPP is moving forward with a second document to address the other side of fair business practices: the Code of Conduct for companies that engage in both public procurement and public contracts.

COMMENT: The Guam Procurement Act contains Ethical Standards that are particularly applicable to those who do business with the government. Additionally, the Guam Chamber of Commerce has its own Code of Ethics that promote honest and fair competition, which I had a significant hand in drafting over 20 years ago.

Hitting the pause button on procurerment

As with most wrongs, the sooner they are righted the less damage is done. When the procurement process seems to be going wrong, most procurement regimes have a "pause button", to maintain the status quo while the alleged wrongdoing is examined.

Under Guam law, based on the ABA Model Procurement Code, once a protest is filed, there is an automatic "stay" which stops the procurement process in its tracks. The stay is, in legal effect and parlance, the equivalent of an injunction.

Under US Federal law, the stay is not automatic but is available upon application. The significant difference between Guam law and Federal law is that, under Guam law, the stay only enjoins the procurement process. Once an awarded contract is made, the automatic stay is unavailable (although there is some possibility of obtaining an injunction of the contract under a common civil injunction action, outside of the procurement law and process)..

Federal law, however, enjoins not only the procurement process but contract performance as well.

The global law firm, Morrison Foerster has published a Client Alert about the way the United Kingdom handles the "pause button". The UK law is intended to follow, and implement, European Union law on the subject. The authors, Alistair Maughan and Masayuki Negishi, explain:

Under the public procurement remedies regime, a public contract procurement process must be suspended if an aggrieved bidder brings a legal challenge; and the contracting authority will have to apply for a Court order to lift this automatic suspension. The test which the Courts will apply in determining such an application will be no different from the test that the Courts have traditionally applied in assessing applications for interim injunctions made by aggrieved bidders under the old regime.

Whilst the tables appears to have been turned in bidders’ favour by the new remedies regime, bidders still need to make sure that their complaints have a sound legal foundation in order to derive a meaningful benefit from the new automatic suspension remedy.

In the context of public procurement challenges, applications for interim injunctions were typically brought by an aggrieved bidder who was disqualified at an early stage in the procurement process before the final award, and sought to suspend the on-going public procurement process pending a full trial.

Under the “old” remedies regime, an interim injunction was seen as the only really meaningful remedy (albeit a difficult one to obtain) available to an aggrieved bidder, due largely to the fact that, once the contracting authority and the winning bidder had concluded the contract or framework agreement in question, the Court could only award damages if a claimant managed to establish a breach of the procurement rules.

Under the new regime, the position has changed considerably, and not only is the set-aside of an illegally awarded contract available as a potential remedy, but also, where an aggrieved bidder challenges a contracting authority’s decision by formally initiating legal proceedings, a contracting authority is now legally obliged to suspend its procurement process.

This automatic suspension of the procurement process essentially turns the tables around by requiring the contracting authority facing the legal challenge to make an application for an interim order to lift the automatic suspension, if it wishes to continue the procurement.

The Client Alert provides instructive review of recent case law applying these principles, including the tests and standards which are applicable to obtaining, and keeping, the "pause button" on.

It might be noted, also, that MoFo (as the firm is "affectionately" known in legal circles) provides very good practical advice on procurement matters, and other legal issues, such as this
Legal Updates & News Bulletin.

For another discussion of the EU suspension process (at least the UK version), see "
When and how to challenge public procurement contracts" by Wragge & Co. LLC, solicitors.

NY State debates certain social preferences

New York Spending Policies

The New York State Office of General Services (OGS) plays a central role in the spending of your tax dollars. Its Commissioner, John Egan, says in the simplest of terms OGS does a lot of the shopping for the state.

"We buy milk, we buy fuel oil, we buy automobiles," said Egan, in describing the hundreds of commodities and services OGS contracts for on behalf of the state and state supported agencies like school districts and local governments who can then avail themselves of the ability to purchase items off the contracts negotiated by OGS.

In her role as a Deputy Commissioner, Carla Rasmussen Chiaro oversees the purchase of up to $5.5 billion in goods and services annually and is responsible for ensuring that taxpayers get the best bang for their buck.

"We competitively bid all of our contracts, and they're awarded to the lowest bidder that comes in," said Chiaro, who says the key to savings is to "look for all opportunities for aggregating purchases."

Within the New York State Finance Law there is a clause mandating that state agencies buy from so called "preferred source vendors".

They are recognized under the law as being agencies with the purpose of advancing special social and economic goals.

These include not-for-profit industries which employ the blind and disabled and which sell everything from toner cartridges to American flags, and "Corcraft", an industries program run by the New York State Department of Correctional Services where prisoners make everything from textiles to office furniture.

The law also states that purchases from these preferred source vendors are exempt from statutory competitive procurement requirements.

Asked how closely her staff watches the market place to ensure that preferred vendors in particular -to whom state agencies need to give first priority for purchases- are charging a fair price, Chiaro said, "We review every application and any increase in costs associated they have to run by us also, so it's a significant amount of work for the procurement staff to review the applications. ...and we don't approve them if we don't feel they are competitive."

OGS has oversight of the prices charged by all preferred source vendors except for the largest one of all, Corcraft, where prices are set solely by the Department of Corrections.

When it was pointed out to Hurt that state procurement guidelines seem to indicate that taxpayer supported state agencies have no choice but to buy from Corcraft (a complaint most recently made by the State Education Department), Hurt said that's not entirely true.

"They can buy it from us, but if our products don't fit form, functionality, and utility those agencies can go anywhere they like to purchase those items."

Further, Hurt insists that price can be included as a factor of "form functionality and utility" as defined under the law.

Asked if he felt the law needed to be changed, Egan replied, "No, there's a good reason to do it. You know, a lot of us are frustrated social workers. There's a cost to doing some of these programs, and there's a cost to doing preferred sources. But there's a greater cost to not doing them."

Holding procurement officials personally responsible

Court says Fairbanks businessmen can sue in bidding dispute

Two Fairbanks businessmen won the right to sue four state employees who botched the bidding process on a $60 million state contract — reportedly one of the biggest state contracts for lease space in Fairbanks’ history.

The Alaska Supreme Court on Friday unanimously decided that state procurement officials have only partial immunity from lawsuits. The state had sought absolute immunity. The decision allows Bachner’s and Bowers’ case against the workers to proceed in Fairbanks Superior Court.

The state high court found that “this is not a situation where unfettered discretion is crucial to the best interests of the public,” the opinion stated.

The decision essentially means that if a procurement official acts maliciously, the state employee can be held accountable. But Chief Justice Walter L. Carpeneti, who authored the opinion, wrote that partial or qualified immunity still provides officials with “substantial protection from liability.”

The chief justice wrote that absolute immunity generally is reserved for high-level government officials.

Justice Dana Fabe agreed with the court’s opinion but wrote a separate, concurring opinion.

Fabe pointed out that a provision in the procurement code known as the “exclusive remedy provision” might bar bidders from suing procurement officials for carrying out their duties even where bad faith is alleged.

Lawyers for the state of Alaska had argued that anything less than absolute immunity would encourage losing bidders to sue procurement officials.

“Procurement officials should not be allowed to substitute their own personal criteria for the published criteria,” said attorney Michael Kramer, who argued on behalf of the businessmen. “The ultimate goal in this case is that there be accountability and fairness in the procurement process. Those who want to do business with the state ought to be able to rely on a consistent set of rules that applies to everyone equally.”

An administrative hearing officer agreed, found “grave deficiencies” in the procurement process and awarded Bowers and Bachner bid preparation costs.

They appealed, asking for the bids to be re-scored or re-opened.

The request to re-do the bidding was denied, but a Fairbanks Superior Court judge decided the state procurement officials only have partial immunity from lawsuits and certain allegations, if true, “would fall outside the scope of that immunity.”

The case, JAMES WEED et al. vs BACHNER COMPANY INC., and BOWERS INVESTMENT COMPANY, Alaska Supreme Court Opinion No. 6475 - May 14, 2010, can be read here. The Introduction to the Opinion states:

The sole question in this case is whether state procurement officials are entitled to absolute immunity or qualified immunity for common law claims arising from the bid evaluation process. In this case, a disappointed bidder sued the procurement officials individually after the administrative hearing officer in the bid protest proceeding found serious improprieties in the bid evaluation process. The officials moved for dismissal on the ground that they were absolutely immune. The superior court held that they were protected instead by only qualified immunity, which applies only to actions taken in good faith. Because the complaint alleged bad faith, the court further held that most of the causes of action could go forward. We accepted the officials’ petition for review. Applying our three-factor test, we conclude that the officials are entitled only to qualified immunity, and therefore affirm the decision of the superior court.

Does being too wrong make it right?

As noted in a recent post, KBR is under investigation for possible procurement fraud conducted by its agents. The article in this post brings us up to date on the intriguing on-going story.

KBR to Get No-Bid Army Work as U.S. Alleges Kickbacks (Update1)

KBR Inc. was selected for a no-bid contract worth as much as $568 million through 2011 for military support services in Iraq, the Army said.

The lawsuit is the second government action this year against KBR. The U.S. sued the company on April 1, alleging that it used private armed security guards in Iraq between 2003 and 2006 in violation of its Army contract and then improperly billed for their services.

The Army announced its decision yesterday only hours after the Justice Department said it will pursue a lawsuit accusing the Houston-based company of taking kickbacks from two subcontractors on Iraq-related work. The Army also awarded the work to KBR over objections from members of Congress, who have pushed the Pentagon to seek bids for further logistics contracts.

he no-bid work order is unusual because the Army, at the insistence of Congress, has since April 2008 put all logistics orders to bid, pitting KBR against Falls Church, Virginia-based DynCorp International Inc. and Irving, Texas-based Fluor Corp.

The Army didn’t put this work out for bids because U.S. commanders in Iraq advised against it, saying that enlisting a new company would be too disruptive as the U.S withdraws, Army program director Lee Thompson said in an interview before the Justice Department action was announced.

The Army, in its statement yesterday, said putting to bid an order for 18 months’ work and making the transition to a new contractor would cost at least $77 million. The KBR work order will be awarded by Aug. 31, said Mike Hutchison, deputy director of Army logistics contracting.

COMMENT: I would note that this is somewhat akin to the situation a protesting bidder finds herself in when, proven correct in contesting an improper bid, the unlawful contract is nevertheless "ratified" in favor of the illegally awarded contractor. This has happened in an earlier mentioned Guam situation, as well as a case only reported today arising from the Guam Superior Court involving dueling telecommunications companies.

In this particular case, though, you have to wonder how inured the Army has become to "collateral damage"? At some unclear point, the convenience of the government (sometimes styled "the government's best interest", or "national security") must give way to the protection of the integrity of the procurement system, if the procurement system is to continue with even a facade of maintaining the high moral ground.

The paradox of preference

Safeguards needed as ‘buy local’ gains traction (South Africa)

Patel’s idea is to use government procurement to promote demand for locally produced goods and services, as well as to improve the quality of such goods and services.

Such an office could add yet further impetus to an increasingly serious attempt to build local industry (and to create decent jobs) around public procurement.

Now, in the context of a country where the yearly Budget stands at over R900-billion, and where there are a host of State-owned enterprises spending serious money on investment projects (over and above their yearly stay-in-business expenditure), this focus on procurement makes sense. That is also why it is, arguably, being perceived as the lowest-hanging fruit within the second industrial policy action plan, or Ipap2.

However, it also has to be acknowledged that ‘buy local’ campaigns have a tendency to be associated with some serious negative con- sequences, such as increasing levels of corruption; creating the conditions for fronting; and increased pricing as localisation crowds out economic principles.

In a context of the nationalist chauvinism hinted at recently by the likes of the Black Management Forum, which had the impudence to suggest a review of the Constitution owing to the fact that some “noble” provisions had “unintended consequences”, the potential for such negative outcomes is real and has to be recognised from the outset.

Recent international experiences of local-content drives, particularly out of Brazil, are also somewhat encouraging.

Nevertheless, we have to be alive to both the threats and opportunities of any big local content push and attempt to build in safeguards to ensure that these are contained.

Contractor disqualified to tender

Aetna disqualified from defense health contract UPDATE 3-

Health insurer Aetna Inc (AET.N) said on Wednesday it has been disqualified from a multibillion-dollar contract to provide services under a U.S. Defense Department health care plan.

The contract, covering the northern region of the department's TRICARE program, was awarded to the current provider, Health Net Inc (HNT.N), which argued that Aetna had an unfair advantage because it had hired a TRICARE insider.

The $2.8 billion contract includes five one-year renewal options for a total potential value of nearly $17 billion.

"We believe we acted appropriately throughout the procurement process and that no nonpublic information was ever used in preparing the bid," Susan Peters, president of Aetna's government health plans, said in a statement.

COMMENT: Under Guam Procurement Law (and this is speaking generally), it is a breach of ethical standards for a present or former (1 year) government employee to act as an agent for a bidder. It is not clear that such action would be a violation of the employer/bidder, although it is a violation to induce an employee to breach ethical standards. Remedies assessable against the non-employee could include termination of any transaction as well as suspension or debarment.

US Federal funds procurement oversight

With Guam on the precipice of receiving more build up money from the Federal Government than it has seen in its post-WWII history, I want to sound a word of caution. That word is "strings". There is no free lunch.

Indeed, as one legal associate, with long exposure to situations similar to Guam's, told me, "with all this money coming in, some one will most likely go to jail before this is all over".

Many of the funds are already flowing to the island for roads, utilities and port improvements. These have come primarily in the form of grants. Grant money is typically subject to procurement deployment in accordance with local law. But it comes with Federal oversight strings attached.

If you want to look at the extent of overall US government spending on grants and such, go to http://www.usaspending.gov/ and http://www.fedspending.org/
.
One place to begin an understanding of this oversight is the Guide to Grant Oversight and Best
Practices for Combating Grant Fraud promulgated by the within the US Department of Justice.

The National Procurement Fraud Task Force is alive and kicking, as indicated by the following two recent press releases:

U.S. Intervenes in Suit Against KBR and Panalpina Alleging Kickbacks Under the False Claims Act

The Justice Department has intervened in a whistleblower lawsuit against Kellogg Brown & Root (KBR), Panalpina Inc. and others that alleges that employees of two freight forwarders doing business with the companies provided unlawful kickbacks to KBR transportation department employees. KBR is the prime contractor under the Logistics Civil Augmentation Program (LOGCAP III) contract for logistical support of U.S. military operations in Iraq. The whistleblowers also allege overbilling by a KBR subcontractor in the Balkans, Wesco, under a military contract.

The government will seek damages and penalties under the False Claims Act and common law, as well as penalties under the Anti-Kickback Act.

The lawsuit was filed in U.S. District Court for the Eastern District of Texas under the qui tam or whistleblower provisions of the False Claims Act by David Vavra and Jerry Hyatt who have been active in the air cargo business–the industry relevant to the case. Under the qui tam or whistleblower provisions of the False Claims Act, a private citizen, known as a "relator," can sue on behalf of the United States. If the suit is successful, the relator may share in the recovery.

"Defense contractors cannot take advantage of the ongoing war effort by accepting unlawful kickbacks," said Tony West, Assistant Attorney General of the Civil Division of the Department of Justice. "We are committed to maintaining the integrity of the Department of Defense's procurement process."

Former U.S. Army Colonel Pleads Guilty to Accepting Illegal Gratuities Related to Contracting in Support of Iraq War

A retired colonel in the U.S. Army pleaded guilty today to accepting thousands of dollars in gratuities from a contractor during his deployment to Iraq as a contracting officer’s representative, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division.

According to the court document, Col. Davis served in 2004 as the senior member of the source selection board responsible for the award of a contract valued at nearly $12 million to build and operate several Department of Defense warehouses around Iraq. In the period during and after the solicitation of the warehouse contract, Davis accepted two airplane tickets and $50,000 in cash from the contractor who submitted the successful bid for the contract.

Davis faces up to two years in prison and a fine of $250,000 per charged count. In addition, Davis agreed to pay $62,500 in restitution to the United States.

"Today’s guilty plea by a retired colonel in the U.S. Army is a powerful reminder that fraud can corrupt even those we think of as incorruptible," said Assistant Attorney General Lanny A. Breuer.

"Cleaning up contract fraud in Southwest Asia, to include bribery and gratuities, is the highest priority for DCIS. While we applaud this result today, it also sets forth a good example of conduct that cannot - and will not - be tolerated," said James Burch, Deputy Inspector General for Investigations, DCIS.

The case is being investigated by the Army Criminal Investigations Division, the Defense Criminal Investigative Service, the FBI, the Internal Revenue Service, the Special Inspector General for Iraq Reconstruction (SIGIR), U.S. Immigration and Customs Enforcement at the Department of Homeland Security, and members of the National Procurement Fraud Task Force and the International Contract Corruption Task Force (ICCTF).

Many other instances of actions taken by the DOJ to stamp out procurement abuse can be found in the "Briefing Room" tab on the DOJ's Office of Public Affairs website, the most recent link being here.

Should Chicago be bidding bonding?

Chicago CFO Taking Orders From Daley Increases Taxpayers’ Costs

Gene Saffold, Chicago's CFO, is sticking with the city’s more than two-decade tradition of shunning open bidding for Chicago’s long-term debt, selling $2 billion in bonds through private negotiations with banks.

Arranging competitive auctions instead would save taxpayers millions of dollars, according to internal documents and a review of bond sales by the country’s third-largest municipality.

Eighty-five percent of the $378 billion of long-term municipal bond deals in the U.S. last year were negotiated privately, according to data compiled by Bloomberg. Breaking Chicago from that habit proved challenging for one of Saffold’s predecessors.

Saffold defended the use of negotiated sales in a Dec. 4 interview in Bloomberg’s Chicago bureau. “We’ve gotten effective pricing, especially if you look at us compared to other state and local governments,” he said.

One of the city’s own advisers found otherwise. Six weeks after the interview, Kristina Eng of the New York office of A.C. Advisory Inc. sent a memo to Chicago’s finance department. It showed how $500 million of a Jan. 11 bond sale yielded more than half a percentage point more than a comparable Pennsylvania issue sold competitively. The Pennsylvania issue may have won a better spread in part because its bonds matured six years earlier than Chicago’s and had a rating one level higher from two of three credit evaluators, Eng wrote.

Efforts to introduce competition fail because the city and its aldermen want to reward those who support public officials and politically connected charities, said a former investment banker in Chicago.

“I’m a proponent of negotiated sales,” Saffold said. “Cost isn’t the sole objective.”

The Chicago-based Government Finance Officers Association recommends competitive sales for bonds rated A or better, including those backed by secure revenue sources with structures that don’t require extensive explanation to buyers. Negotiated sales are best suited for those rated below A or with unusual features, according to the association.

Some states require a portion of municipal bonds to be competitively bid. Illinois law sets a minimum of 25 percent for most of its bonds, said Kelly Kraft, a spokeswoman for the governor’s Office of Management and Budget.

Cities and states that negotiate don’t borrow at the lowest cost for taxpayers in the $2.8 trillion U.S. municipal bond market, said Craig Brown, an assistant professor of finance at City University of New York who has surveyed research in his study of borrowing costs.

Research findings put the difference at 17 to 48 basis points, according to a 2008 article in the Municipal Finance Journal by Mark D. Robbins, associate professor, and William Simonsen, professor, at the University of Connecticut.

“Finance officers are persuaded they can match wits with the underwriters they work with and negotiate a better sale than competitive bids can provide,” Robbins said in an interview. The city officials are “just trying to get a transaction done. Cost is less of a consideration.”

A negotiated deal restricts a city’s ability to force underwriters to offer the lowest interest rates or show taxpayers it got the best price, said Ralph Martire, executive director for the Center for Tax and Budget Accountability, a non-partisan group in Chicago.

“There is no way it could be in the public’s interest to do a no-bid deal on a bond,” Martire said. “There is no way you can win.”

Procurement controversies -- Port of Longview, Oregon, USA

Port of Longview security camera contract raises red flags

Port of Longview commissioners ignored the advice of their staff and a consultant when it hired a local company for a $120,000 security contract, raising questions about whether it gave preferential treatment because the company employs the adult son of port commissioner Darold Dietz.

With Dietz abstaining from the vote, the other two commissioners on Feb. 25 awarded the federally funded contract to Longview-based Cascade Networks to install wireless security cameras.

In doing so, commissioners Dan Buell and Bob Bagaason put aside the advice of port staff and a consultant hired to review contract proposals, according to a Daily News investigation. The staff and consultant had ranked EZ Wireless of Portland as the top bidder because the company had more experience and submitted a more detailed proposal than Cascade Networks.


"As much as I'd like to go local, I get the feeling, as before, that EZ has the better product for the port," Buell said.

Bagaason disagreed. He said he preferred Cascade's camera brand, Sony, over EZ, which chose a company called Axis. Also, Cascade's cameras showed clearer pictures than EZ's did when both companies gave presentations to commissioners, he said.

"We have to zero in on something, and I'm zeroing in on video," said Bagaason, who also sat through several meetings with the consultants and staff members about the project.

Bagaason, who swayed Buell to support Cascade, said in an interview Saturday that favoritism was not an issue. Cascade simply demonstrated superior cameras during its presentations to commissioners, he said.

Rasplicka said both Sony and Axis are national, respected brands, and the difference between their cameras is small.

Quimby, the federal grant expert, said commissioners were within their rights to select either EZ or Cascade.

Buell agrees that Cascade is capable of doing the job, which is why he changed his vote in favor of Cascade. However, he has reservations about going against the recommendations of staff and consultants because they're the experts. He said he felt he had no choice but to switch his February vote because he didn't think Bagaason would back down in his support of Cascade.

Dietz had recused himself during a port meeting because of his conflict of interest at the advice of port attorney Randolph, who had learned of Dietz's potential conflict early this year. Under federal guidelines, public officials must avoid even the appearance of a conflict of interest for awarding grants, Randolph said. The state standard is more lax, requiring public officials to recuse themselves from votes where they could see a financial gain, Randolph said.

Dietz was right to recuse himself from the vote, but he probably should have disclosed his potential conflict sooner, Tim Ford, the state attorney general's open government ombudsman, said in an interview with The Daily News.

"At the time (Cascade) made the bid, then there's the potential for the conflict," Ford said.

"This isn't right. This isn't a Latin American country," said Fred Ziari, EZ company president, last week when contacted by The Daily News.

For the Port of Longview, the security cameras are a much-needed enhancement to its 24-hour security force. In 2007, the port received $90,000 for the cameras from the U.S. Department of Homeland Security, which had established a port security program in the wake of the 9/11 terrorists attacks in 2001.

In 2008, the port began advertising for a wireless provider, and a four-member staff committee interviewed four finalists, which included EZ and Cascade Networks. The committee recommended hiring EZ Wireless in July 2009.

On Sept. 10, however, Port Executive Director Ken O'Hollaren asked commissioners to restart the application process. The port had been operating under familiar state contracting guidelines, but staff was unfamiliar with the more complex and stricter requirements of spending federal money, according to a letter to the port from Janet Quimby, a Vashon consultant and grant compliance expert.

The port had failed to adequately publicize the project, which limited the job to its own roster of contractors, Quimby wrote in the letter to port attorney Frank Randolph. One local vendor — whom Quimby did not identify - was allowed to submit an incomplete proposal and become a finalist, she said.

The port faces a May 31 deadline to spend the federal grant money.

Ratifying illegal contract

It was earlier reported in these "pages" that a procurement controversy on Guam resulted in an Attorney General's opinion to the effect that the government (Port Authority of Guam) had entered into a procurement contract in violation of law.

This post concerns the continuing saga of the events surrounding that controversy, as reported in one article and another Editorial in the Pacific Daily News:

Law ratifies port deal, AG says

A $350,000 port outreach project was procured illegally, according to the attorney general's office, but the island's chief procurement officer recently gave it her approval, citing a procurement law that allows illegal procurements to be ratified after the fact if doing so is "in the best interests of the Territory."

The port board yesterday evening voted to agree with that decision, affirming that the work had been accepted by the port and that the contractor didn't act fraudulently or in bad faith.

According to the law cited by Acfalle in her April 23 memo, illegal government contracts can be ratified and affirmed after the fact if the person awarded the contract "has not acted fraudulently or in bad faith."

"Since (Guam procurement law) provides for remedies after an award where there was no bad faith or fraud committed by either side and affirming the contract would be in the best interest of the Territory. I have affirmed and ratified this purchase order," she wrote in her memo.

In her memo, Acfalle said the vendor had completed the work to the port's satisfaction.

Shame: Government's failure at accountability lets down people of Guam (Editorial)

The Port Authority of Guam's board affirmed there was no fraud or bad faith in a port outreach project that the Office of the Attorney General called illegal. The board's action simply sweeps the issue under the rug.

This is just another part of a continuing process to try to make the controversy surrounding the outreach contract go away and to refuse to hold anyone accountable for what they did wrong.

Exploiting a technicality or loophole doesn't make a wrong right.

COMMENT: I'd like to make a couple of points.

First, on the notion that "the vendor had completed the work to the port's satisfaction". As I recently commented in a post about a New Orleans procurement controversy,

"It seems the oft-used retort to allegations of improper procurement is that the contractor did a damned fine job, so what's the problem? The problem is that the ends are not meant to justify the means. Both must be justified, independently."

If the ends always justified the means, there would be no law and no order.

Second, this "ratification" is interesting both for what it does as well as what it doesn't do. And I'm pretty confident the CPO did not desire either of these things.

What it does do is constitute an admission of "guilt"; that the contract was made in violation of law. Such a ratification can only be made after a determination of a violation of law. By ratifying the contract, the CPO, contrary to all her prior assertions, admits the violation. (5 GCA § 5452.)

What it does not do is actually extricate the government from the illegal contract. That is because no such ratification can be made except in the context of a procurement protest. Ratification is a remedy that flows from a protest decision or decision on appeal of a protest decision. (5 GCA § 5450.) No formal protest or decision occurred. The "ratification", therefore, is ineffective as legal absolution in this case.

The only finding of violation of law came in the form of an Attorney General review and opinion, at the request of the Lt. Governor. As the Official Comment to § 5450 explains, ratification "does not apply to, say, a review by the Attorney General, who determines, in the course of his normal review, that the proposed action would be in violation of law if it were to be made."

If the CPO could avoid all controversies by simply "ratifying" a contract rather than deal with it by protest, the whole review system would come to naught.

Finally, the CPO's mantra was that there was no fraud or bad faith. That is entirely beside the point. Under the ratification law, an illegal contract can be ratified even if the person who got the contract did act fraudulently or in bad faith.

This event is an excellent illustration of the lack of real "remedy" in the procurement law.

Even if a protester is determined to be right and the contract is proven to be illegal, and even if the person who got the contract did so fraudulently, the contract can still be "ratified", leaving neither the protester nor the public in a better-off position.

There will never be accountability until the legislature steps in to demand it with very carefully constructed law. Personally, I would favor such a law, in broad principle, as part of an expert review of the Guam procurement laws and regulations by a broadly represented and knowledgeable Procurement Advisory Council.