Supreme Owner Made a Billionaire Feeding U.S. War Machine
Chemical warfare and car bombings are just a few of the hazards working in war-torn countries such as Iraq and Syria. For Supreme Group BV, it’s the cost of doing business. The perilous business, where contractors dodge bullets fired by the Taliban and explosives set by insurgents, has made the company’s majority owner, Stephen Orenstein, a billionaire. Since the start of the war in Afghanistan in 2001, Supreme’s revenue has increased more than 50-fold to $5.5 billion in 2011.
The company’s largest contract -- an exclusive deal to distribute food to U.S. military personnel in Afghanistan -- has been riddled with lawsuits and accusations, including the Department of Defense’s assertion that Supreme overcharged it by $757 million. The U.S. military food contract has paid it $9.1 billion to date, according to data compiled by the DLA.
Orenstein disputes the U.S. overpaid for Supreme’s services. The company said it’s owed an additional $1.8 billion. “The Pentagon used the word overcharging and it’s not justified,” said Orenstein. “We agreed on preliminary rates. They decided to unilaterally apply new rates based on the costs as they see them, and tried to recoup the difference between the two.”
“By keeping the money flowing to Supreme through noncompetitive contract extensions, the Defense Department unwisely and unnecessarily put U.S. taxpayers on the hook”, said U.S. Representative John Tierney, the ranking Democratic member on the House Government Reform & Oversight Subcommittee on National Security, in a statement to Bloomberg News.
Accusations of Supreme overcharging the DLA first surfaced in a March 2011 audit report by then-Pentagon Inspector General Gordon Heddell. According to the report, the DLA overpaid Supreme $124.3 million for transportation and corrugated-packing boxes. In addition, Pentagon personnel had no assurance that billings for another $103 million in boxes were accurate or “even chargeable to the contract,” the report said. The company was also paid about $455 million for airlifting fresh fruits and vegetables from storage areas in the U.A.E. to Afghanistan, without the DLA ensuring the prices were “fair and reasonable,” according to the audit. Supreme was further said to be overpaid $98.4 million from 2005 to 2008 for transportation costs, in part because reimbursement rates “were significantly higher than the rates needed to reimburse the vendor for costs and associated profits,” the report said.
“The discrepancy in the amount Supreme and DLA claim to be owed is based on a contract modification regarding delivery to additional customer locations,” DLA spokeswoman Mimi said in an e-mail. “DLA and Supreme utilized different methodologies to calculate the appropriate price for transportation to these additional locations.”
I won't go into it in any detail, because I'm not qualified to do so, but there are many instances in federal contracting, including the making of contract changes and the awarding of non-competitive contracts, when the government is limited to making payments that are described, if not well defined, by the term "fair and reasonable". See generally FAR Subpart 15.4 and Selling To The Government: What 'Fair And Reasonable Pricing' Means,
by Steve Charles, for a beginner's guide to the topic.
The takeaway in this post's context is that the determination of the fair and reasonable price is ultimately the government's, but the government must follow procedural and substantive rules to make that determination; it is thus a contestable determination. And Supreme is well staffed to bring it on. As the article states,
Orenstein confirmed that he and his family control 75 percent of the company. His partner, Michael Gans, holds the rest with his wife. Their first contract provided logistics services to the United Nations peacekeeping operation in Mozambique in 1993. “My strength has always been the execution and procurement, and Michael’s strength is in writing,” said Orenstein. Gans, who is a citizen of Luxembourg and lives in Baech, Switzerland, received a bachelor’s degree in political science from Vassar College in Poughkeepsie, New York, and a law degree from George Washington University in Washington.
GW is the home of the US' foremost procurement law education program.
There is another aspect to this article that I want to bring out:
According to its latest annual report, the company had earnings before interest, taxes, depreciation and amortization of $953 million in 2011 on revenue of $5.5 billion. According to its annual reports, Supreme had net income margins that ranged from 15 percent to 23 percent between 2008 and 2011.
“That’s a fairly large profit margin when it comes to federal government contracts,” said Scott Amey, general counsel for the Washington-based Project on Government Oversight. “Most contractors claim that their profit margins are zero to 5 percent.”
Orenstein confirmed that Supreme’s food distribution fee to the U.S. military in 2010 was “in the range of 18 to 21 percent” and could go as high as 50 percent, according to a transcript of testimony he gave in a 2010 lawsuit. He also testified that it was “very common that the percentage of total revenue, the service fee percentage, exceeded 75 percent,” when the distribution of food and other supplies flown into Afghanistan by airplanes and helicopters accelerated in 2006.
Including almost $1 billion in dividends he has collected since 2008, Orenstein has a fortune valued at least $1.1 billion, according to the Bloomberg Billionaires Index.
Normally, the higher the risk, the greater return that is demanded from market players. Conversely, the lower the risk, the lower the expectation of profits. Regular peacetime government contracting attracts contractors, especially in economically tight times, because governments are more likely to pay than stressed private buyers. The certainty of payment reduces the risk of buyer default, and profits are generally lower.
But in times of war or disaster, operational risks tend to increase, which increases costs, and the expectation of profits. Even "fair and reasonable" costs may have an inelastic element that justifies higher contract payment, and profit margins. Canny contractors become attracted to war and disaster margins, and can make a motza.
Without vouching for the accuracy of the data, there is a provocative view of the amount of money spent on goods vs services in the US government in the recent fiscal year, compared to the numbers of contracts awarded to spend the money. It is posted on/at The Federal Government Spent Hundreds of Billions on Contractors in 2013 [INFOGRAPHICS].
I'll take that at face value for this post.
With 3 out of every 4 awards being made going to goods, we are only spending 1 out of every 3 dollars on goods. Conversely, 1 out of 4 awards spent on services consumes 2 out of 3 dollars spent. This is consistent with the trend of recent decades, from a "things" requisitioning system to a "people" hiring system. During this time, we have found that the more objectively simple means of acquiring things just does not work as well as the subjectively complicated means to hire people skills. And the means of hiring people skills through the procurement system is made all the more competitively adversarial by the big money at stake in people skill contracts.
In the early days of US government contracting, the US made a lot of the things it needed, and did so quite effectively. Indeed, the phrase "good enough for government work" was coined in that time to refer to the gold standard of the product. But investment in manufacture of things, as the private sector knows too well, is fickle, and a government, lumbered with political influence, is not limber enough to move with times and new needs and ways and means of meeting those needs. So, the government gradually moved to outsourcing the manufacture of (most) things.
The same would not be true of hiring people skills if the civil service system, which creates jobs for life, were more facile. Bringing people skills inside would avoid a lot of the procurement headaches associated with the acquisition of services.
Scotland. Local preference and training.
Scottish procurement reform bill sent to Parliament
Changes to public procurement rules in Scotland that will make it easier for small businesses to bid for public contracts have moved closer, as a reform bill goes to Parliament. The Procurement Reform Bill sets out how European legislation will be interpreted and put into practice in Scotland.
First minister Alex Salmond said the bill would generate new training and employment opportunities. The Bill will require public bodies to consider how procurement activity can improve the economic, social and environmental wellbeing of local communities.
“Our Bill here in Scotland will give Parliament the opportunity to go further than Wales, by taking the power to regulate how companies are selected to bid and how their suitability should be assessed,” he said. “These regulations will address blacklisting, working within the framework of EU law.”
Namibia. Centralization and effective review.
Namibia introduces legislation as part of procurement reform
The country seeks to streamline large public sector procurement, help SMEs and reduce loopholes.
Namibian procurement reform edges closer
The Public Procurement Bill would create a Central Procurement Board to centralise the management of high-value contracts across the public sector, while a review panel would give aggrieved bidders a route for redress without having to go to the courts.
Minister of finance Saara Kuugongelwa-Amadhila said as she tabled the bill: “The intention is to provide for the speedy resolution of such complaints, which will minimise the frequency of bidders’ recourse to court actions.”
The bill also seeks to stimulate economic growth by giving preference to local businesses and socially disadvantaged groups, according to the state-owned New Era newspaper.
The new law also repeals the Tender Board Act of 1996, which is described as “no longer sufficient or adequate to achieve the country’s developmental objectives”.
Unlike the tender board, which dealt with almost all public sector contracts, the new board would only deal with contracts over a certain threshold value, with lower value contracts dealt with by the public body concerned.
Singapore. Integrity enhanced.
Trust in public service crucial to success of govt policies: PM Lee
Singapore Prime Minister Lee Hsien Loong has emphasised that a major determinant of success in implementing government policies that improve the lives of people is trust in the government, and in particular, the public service. He said it is important that Singaporeans trust that the government understands their needs, is committed to the people, and will remain a steward of the public good.
He said: "Ultimately, integrity is not about systems and processes but values. The government must have a culture that doesn't tolerate any wrongdoing or dishonesty and the public officers must have the right values -- service, integrity, excellence -- and each officer and the service as a whole must take pride in being clean, incorrupt. "This is your command responsibility, you cannot devolve it to your subordinates, you cannot leave it to your procurement or financial officers. You are the boss, you are in charge."
Mr Lee also stressed that critical to maintaining public trust is upholding the highest standards of integrity -- something which has been painstakingly built up over many years. Mr Lee said because there is integrity, businesses can compete fairly instead of relying on improper influence. And because there is integrity, public officers can be given the discretion to exercise judgement when managing multi-million dollar projects.
The Prime Minister emphasised that one reason why Singapore has been able to maintain a clean system is that it pays public servants properly in line with the quality of the officers and the value of their contributions. He stressed that this policy will continue. In return he said, Singapore insists on the high standards of performance and integrity, and if an officer is discovered to have been dishonest, he will be punished to the full extent of the law.
Mr Lee said this principle will be maintained even when it may be embarrassing to the government. Mr Lee acknowledged that the past year has seen a string of high-profile cases involving public officers, including some senior ones in sex for favours scandals, procurement lapses and fraud cases.
He said beyond these individual cases, the public service must strengthen its systems to uphold reputation for integrity and incorruptibility, and dispel any doubts that standards have fallen. Head of Civil Service, Peter Ong, said Mr Lee's presence at the annual seminar was a clear demonstration of the type of leadership he is encouraging public sector leaders to show - that is to lead by example and model the right values for staff.
Singapore officials to declare casino trips after graft scandal
Singapore civil servants must declare casino visits starting Tuesday, authorities said, months after a senior anti-graft official was charged with embezzling state money to fund his gambling habit. Civil servants must declare within seven days if they have visited the city-state's two casinos more than four times a month, or if they purchase an annual pass that allows unlimited access, the government's Public Service Division (PSD) said.
Government officials in certain positions where "misconduct will have significant reputational risk to the Public Service" must declare every visit within seven days, it said in a statement. Singapore pays its civil servants some of the highest government salaries globally in what it says is a deterrent to corruption.
Civil servants involved in gaming enforcement as well as others who represent the government in business dealings with the two casino operators will remain barred from visiting the casinos unless in an official capacity.
The agency said it was also bringing in compulsory job rotations and block leave for some officials holding positions that "are more susceptible to being suborned and exploited if the incumbent were to remain in the same job for too long". "Officers are expected to maintain the highest standards of personal conduct and integrity, and their actions must not bring the Public Service into disrepute or call into question its impartiality," PSD said.
The move follows a string of high-profile corruption cases in the city-state, including one involving Edwin Yeo Seow Hiang, an assistant director at the Corrupt Practices Investigation Bureau (CPIB), the country's graft-busting agency. Large-scale graft cases remain rare in Singapore, a thriving business hub and financial centre, and the government has jealously guarded its reputation as among the least corrupt in the world.
New Zealand. Uniformity.
New government procurement rules come into effect
The new rules replace 44 different pieces of legislation, Cabinet directives and miscellaneous guidance released by a multitude of government agencies over many years. The emphasis will shift from who can deliver the lowest upfront costs to who can deliver the best value for money and other direct financial benefits over the life of a contract.
“By... making the tendering process consistent across the public service, we expect to make our procurement business more accessible to smaller local firms who previously may have been discouraged by the process,” Economic Development Minister Stephen Joyce said in April when announcing the changes.
The new procurement rules will apply to all Public Service departments, the New Zealand Police and the Defence Force. Other State Sector agencies and the broader Public Service will also be encouraged to adopt them.
Mom told me not to put all my eggs in one basket.
Contractor’s U.S. Ties Tough to Break After Vetting Lapse
USIS has won at least $588 million under U.S. government contracts set to expire within a year, according to data compiled by Bloomberg. USIS has at least 40 federal contracts for work related to investigations, 14 of which are scheduled to expire by Oct. 1, 2014, according to federal procurement data compiled by Bloomberg. The company performs background checks and other investigative work for the Federal Bureau of Investigation, U.S. Immigration and Customs Enforcement and the Department of Agriculture, among other agencies.
The agreements include a lucrative deal with the U.S. Office of Personnel Management, which is responsible for most federal background checks. While the expiring contracts might provide agencies with opportunities to begin dropping USIS, replacing the government’s top provider of background checks might lead to more chaos in an already overburdened system.
“USIS provides the heart, the limbs and the guts of the operation for the Office of Personnel Management,” said Tiefer, now a law professor at the University of Baltimore.
The number of people with security clearances ballooned to about 5 million last year, and contract investigators have struggled to keep up with the demand for background checks, according to security specialists.
The government increasingly has relied on USIS for that vetting. Dumping a firm like USIS, a unit of Falls Church, Virginia-based Altegrity Inc. that has more than a half-billion dollars in federal contracts running out in a year, could create as many problems as it solves. It might shift a backlog of cases to two other companies, which could lead to more vetting lapses.
Shifting the load to competitors such as Arlington, Virginia-based CACI International Inc. (CACI) or KeyPoint Government Solutions Inc. -- a unit of Veritas Capital, a New York-based private-equity firm -- might worsen the situation, Tiefer said.
“There are not a lot of players in this field,” Brian Friel, a Bloomberg Industries analyst, said. “The government doesn’t have a lot of options.”
USIS’s prominence as a background-check contractor is due to its origin as the Federal Investigations Division of Office of Personnel Management. The unit, originally known as U.S. Investigations Services Inc., was privatized in 1996 as part of then-Vice President Al Gore’s effort to “reinvent” government by reducing the size of the civil service, according to a 2011 report by the Congressional Research Service.
Contracting out security reviews was designed to save the government money and offer new work for about 700 investigators no longer needed because of a declining clearance workload as the Cold War ended. Instead, demand for security clearances surged after the Sept. 11, 2001, terrorist attacks.
USIS was given a non-competitive, three-year contract for investigative work with the personnel office and granted free access to federal computer databases that weren’t available to other firms.
Since 2006, at least 20 investigators have pleaded guilty or have been convicted of falsifying background-check reports for the personnel office, according to the agency’s office of the inspector general.
Ten of those were contractors. Eight of them worked for USIS.
Surely there must be some way to generate more competition with the industry behemoths? Not all of America's innovation is limited to the IT industry, is it? There is a cost to contracting with too-big-to-flail, and it includes creating complacency as well as dependency. And myopia.
Noting that USIS was at one time a government agency, I am reminded of the many instances mentioned in James Nagle's A History of Government Contracting which illustrates the many times when American government has instigated industrial innovation, including the industrial revolution. He reminds us that "good enough for government work" was not originally the pejorative it now is, but indicated the gold standard of workmanship.
For another exposition of that proposition, see 'The Entrepreneurial State': Apple Didn't Build Your iPhone; Your Taxes Did, by Mariana Mazzucato, with some excerpts as follows.
Throughout history, strategic government expenditures have played a key role in spurring economic growth. private finance is too risk-averse -- afraid -- to engage with industries characterized by high technological and market risk. The fear explains why we have seen venture capital entering, in industry after industry, only decades after the initial high risk has been absorbed by government.
Mission-oriented public investment put men on the moon, and later, lead to the invention and commercialization of the Internet, which in turn has stimulated growth in many sectors of the economy. Indeed, as I describe in the longest chapter of my book, the U.S. government has been a leading player in funding not only the Internet but all the other technologies -- GPS, touchscreen display, and the new Siri voice-activated personal assistant -- that make the iPhone, for example, a miracle of American technology.
Casting the public sector as the villain and business as savior has relieved the private sector from any obligation to increase its own commitment to the innovation process. There simply are not enough large businesses today playing the role that Xerox PARC (the Palo Alto Research Center) and AT&T (Bell Labs) played in the past.
Today's big companies, like Cisco and Pfizer, spend almost as much on share-repurchase schemes (which enrich those who own stock) as they spend on research. Interestingly, the big "repurchasers" (the biggest being in oil and pharma) often justify such buybacks with the claim that there are no other "opportunities" for their investments. But really? No opportunities in health for pharma these days? Nothing for oil companies to invest in? What about safe and clean renewable energy?
When building innovation "eco-systems," then, it is important to make sure the role of business is symbiotic, not parasitic. That means, if we want to rebalance the economy, we need to rebalance the story we tell about who the innovators really are. Interestingly, it was the venture capital lobby in the mid-1970s that pushed for the capital gains tax to fall by 50 percent (from 40 percent in 1976 to 20 percent in the mid '80s). It has been falling ever since, based on the narrative that only thus will the entrepreneurial "risk-takers' do their thing and enrich us all.
But that narrative is false. The entrepreneurial state has funded the radical innovation behind much if not most of modern economic growth. Denying government today the resources to do its thing endangers us all.
2nd SC contract provides more monitoring for less
The State paid $12 million to the credit bureau Experian through a no-bid contract that Gov. Nikki Haley negotiated after state officials learned of a cyber-theft last October. That service, dubbed Protect My ID, provided daily monitoring of the three credit bureaus for newly opened credit accounts.
Budget and Control Board director Marcia Adams said Monday the state intends to award Texas-based CSIdentity Corp. the next contract. The contract calls for the state to pay up to $8.5 million, depending on how many people sign up over the next year and when.
Taxpayers affected by last fall's massive hacking at South Carolina's Department of Revenue should get more identity theft protection services at a lower cost to the state under the new contract for state-paid monitoring. But the service provides more extensive surveillance to catch other ways stolen identities are used, including payday loans, sex offender registries and online chat rooms where cyber-thieves sell and buy information. Addresses will be monitored to catch the possibility of mail being fraudulently redirected, while court documents will be tracked in case criminals use an enrollee's stolen ID when they're arrested. The tracing of Social Security numbers should alert enrollees to someone creating a false address or alias using their information.
Legislators were critical of the no-bid contract and its limited credit notifications. They approved extending services and designated $10 million in the 2013-14 budget toward a second year, but they required the state to seek more consumer protection services through the procurement process. "Gov. Haley's main goal has always been to provide the very best in protection and monitoring at the least possible cost and that is exactly what the state will be getting with CSID," said Haley spokesman Doug Mayer.
Read more here: http://www.star-telegram.com/2013/09/23/5187494/2nd-sc-contract-provides-more.html?rh=1#storylink=cpy
I always thought that, in principle, transparency was a central tenet of US procurement. But, obviously, only in a controlled and restricted sort of way.
PSC calls for 'fundamental' procurement reforms
The Professional Services Council is lobbying members of Congress and administration officials for “fundamental” acquisition reforms across government. Officials for the trade group, which represents government services contractors, said it’s too early to say how the bid protest process might be reformed, but industry leader joined in the chorus of complaints long echoed by government officials.
One idea floated by PSC would call on the government to release information to contractors that otherwise only would be disclosed during the discovery process of a bid protest or lawsuit. That way, contractors, armed with better quality post-contract information, might realize they have little to protest.
“It’s not until they get through that discovery process that they find out the information they’d need [to decide] if there’s really enough worth protesting,” PSC CEO Stan Soloway said.
One of these days, maybe, the protest process won't just be a game of Battleship.
Battleship (also Battleships or Sea Battle) is a guessing game for two players. Before play begins, each player secretly arranges their ships on their primary grid.
After the ships have been positioned, the game proceeds in a series of rounds. In each round, each player takes a turn to announce a target square in the opponent's grid which is to be shot at. The opponent announces whether or not the square is occupied by a ship, and if it is a "hit" they mark this on their own primary grid. The attacking player notes the hit or miss on their own "tracking" grid, in order to build up a picture of the opponent's fleet.
When all of the squares of a ship have been hit, the ship is sunk, and the ship's owner announces this (e.g. "You sunk my battleship!"). If all of a player's ships have been sunk, the game is over and their opponent wins.
This post keys off the following article from Wales, involving changes in the UK procurement rules for professional legal services.
UK Government's big change to legal plans after protest by lawyers
The UK Government has scrapped plans to award legal aid contracts to the lowest bidders after protest from lawyers who warned high street firms could go bust.
Justice Secretary Chris Grayling announced there would be a set number of contracts for duty work – such as that picked up in police stations – and these would be assessed on the quality and capacity of firms bidding for them. Under the original proposals, price would have been a key factor. There will be an unlimited number of contracts available for own client work, providing minimum quality requirements are met.
The Government stated that “providers delivering services in Wales would be required to ensure that services are accessible to, and understandable by, clients whose language of choice is Welsh”.
Andrew Thomas QC, who has practised across North Wales, welcomed the changes. He said: “The Government had proposed handing the work to big national companies looking to provide a cut-price service. “The intention was to take away the public’s right to choose a lawyer they know and trust, forcing them to accept the provider which had bid the lowest. Quality of service would have gone out the window.
The ABA Model Code provides a variety of "methods of source selection", that is to say, procurement mechanisms. In each, price plays, of course, a key relevant role, but in different ways. There is the common "competitive sealed bid" process whereby bids are assessed against objective criteria and specifications, and the contract goes to the lowest submitted price, without negotiation. It is, in essence, a plain vanilla auction.
The 1979 version of the ABA Model Code contained two different "proposal" methods, one called a competitive sealed proposal (let's call it the RFCP method: request for competitive sealed proposals) and the other a proposal for professional services (let's say RFP: request for proposals). The pricing mechanism differs. In the RFCP method, price is given a particular points weighting in the RFCP solicitation, and is negotiated along with other elements of the solicitation but is not re-weighted, with the best ultimate points winner getting the nod.
In the RFP method, price is not initially considered or even disclosed. Given the classically described in-elasticity of professional service of economics models, price is not a factor in the first instance of choosing the best service available. In the first instance, the quality of the service required relative to the outcome needed is the only consideration. Offerors are ranked in terms of deemed "best offer" of service, from best to least. At that point, the critical price factor comes in to play. The first best offeror is chosen to engage in negotiation for a fair and reasonable compensation. If a fair and reasonable price is agreed upon, the award goes to that offeror. If fair and reasonable price is not obtained from the first best, negotiations begin anew for compensation with the next best offeror.
What draws this story to my attention is the need to have a mechanism for obtaining professional services where quality of service is the foremost first objective. The story illustrates the desirability of a source selection method that places primacy of the professional service factor over price.
The ABA has jettisoned the separate old RFP system, subsuming it within the RFCP method, which requires a careful understanding and use of the weighting process by the procurement officer. It is a decision that is rarely if ever second-guessed, so can lead to less than ideal results, if not abuse.
Guam, which has adopted most of the ABA MC model, curiously kept the RFP method but years ago, soon after adoption, jettisoned the RFCP method, most likely because it is not easily an objectively verifiable selection process and easily subjected to abuse. I would think there is room in the quiver for both arrows, each more useful than the other in particular instances.
