What Ted Stevens, Bolivian cocaine and Halliburton have in common

Or, how the Alaskan Inupiat Eskimos got a no-bid contract in South America from the U.S. government.

By Michael Scherer

Published June 19, 2007 11:35AM (EDT)

Deep in the jungles of the upper Amazon, in a land rife with coca plantations and drug runners, roughly 1,500 Bolivian soldiers and police camp out each night at U.S. taxpayer expense. They are offered three meals and a snack each day as part of a $31 million State Department effort to stop the cocaine trade at its source.

Until this spring, the troops were fed by a local Bolivian company, contracted to the United States through a competitive process for $3.34 per soldier per day. But in March, the same contract was awarded -- without competition -- to an Alaskan Inupiat Eskimo firm, Olgoonik Management Services, which is headquartered 180 miles north of the Arctic Circle. The new cost is $5.16 per soldier per day, an increase of 54 percent, or about $1 million more each year.

Given the State Department's $32 billion budget, an additional $1 million for food hardly ranks as a major scandal. But this tangled tale of how an Alaskan tribal company ended up in a South American tropical forest sheds an illuminating spotlight on the often-secretive world of federal contracting, an area of government rife with abuse and poor oversight. It is a story that involves Bolivian police, Balkan nationals, a no-bid contract, a senator whose office has been contacted by the FBI, emergency military rations and a helping hand from the biggest private contractor in Iraq -- a recently spun-off division of Halliburton, the Fortune 200 company once run by Vice President Dick Cheney. It is also a story that squarely addresses one of the principal concerns of lawmakers looking to reform federal contracting: the ability of Alaska native companies to get no-bid government contracts of any value. During the Bush administration those contracts have grown fivefold and now probably top $1 billion.

The so-called Alaska Native Corporation privilege came into effect in 1986 at the urging of Republican Sen. Ted Stevens of Alaska, the powerful former chairman of the Appropriations Committee, who recently announced that he has been asked for documents in a widening FBI investigation of political corruption in his home state. Stevens pushed through a law that exempted Alaska native companies from many of the limitations that apply to other federal minority-preference programs. Unlike other small minority businesses, Alaskan firms can get "small business" preferences even if they are owned by multibillion-dollar parent companies and employ no native Alaskans. One government contracting official recently told congressional investigators that the program amounted to an "open checkbook" given that there are no limits on the size of the awards.

"It always costs more money," another former Bush administration contracting official told Salon, noting the lack of competition. But the official held out little hope of reining in the program, given the power of Alaska's congressional delegation. "Senator Stevens still has a stranglehold on this stuff," the official said.

In the meantime, the Alaska native program has been exploding. In 1996, Stevens pushed through changes in the program that made the application process easier, and by 1999 Alaskan tribes had figured out how to take advantage. According to the Government Accountability Office, the value of no-bid contracts to Alaska native companies has grown from $180 million in 2000 to $876 million in 2004, the most recent year for which data is available. Native tribes now regularly win competitive and no-bid contracts across government, supporting bases for the Army, doing security upgrades for the State Department, supporting technology for NASA, and operating detention facilities for the Department of Homeland Security. After the invasion of Iraq, a representative of one Alaska native tribe boasted to the Los Angeles Times of working closely with Stevens to ensure that it would be able to get a piece of the reconstruction pie through no-bid contracts.

Critics have long complained that this exemption invites abuse by ignoring the most basic taxpayer protection in contracting: an open marketplace. "Their preference has been transformed into a huge procurement loophole," announced Rep. Henry Waxman, D-Calif., who chairs the House Oversight Committee, in a recent think-tank speech. The exemption has also been exploited by multibillion-dollar companies, like Halliburton's former subsidiary KBR, which partner with the native tribes to win lucrative business. As Waxman put it, "Much of the work has been done by non-native companies working as subcontractors."

In a GAO report last year, investigators uncovered various problems with the Alaska native contracting program, including lax oversight, confusion over the rules, and uncertain monitoring of costs. Investigators reported that contracting officers often use the Alaska native sole-source contracts simply because they are "easy and expedient." In one case at the State Department, an Alaskan firm received a sole-source construction award even though its first proposal came in at nearly twice as much as the government's initial cost estimate. In another case, non-native executives at an Alaskan firm personally pocketed 44 percent of profits from their contracts, apparently evading the goal of the program, which is to help impoverished tribal members in Alaska. State Department officials also told investigators that they suspected an unidentified Alaska native company was working as a "front" for a large non-native business.

The Olgoonik Corp. is a relatively recent entry into the federal contracting game. It is a village-owned firm based in Wainwright, a tiny community on Alaska's remote northern Arctic Ocean coast. It listed 412 shareholders in 2003, many of whom are subsistence hunters of seal, walrus, caribou and whale. For most of its history, the company's main function has been operating the local general store, the gas station, a restaurant and the town hotel, as well as maintaining local sewer services and doing other nearby construction, according to a recent report for the U.S. Interior Department. But in 1999, the corporation established several for-profit subsidiaries, which have since won hundreds of millions of dollars in federal contracts around the world. In several of these projects, Olgoonik has partnered with KBR, which was a subsidiary of Halliburton until it was spun off in April 2007. One Olgoonik subsidiary, Kuk Construction, has long maintained a partnership with KBR worth at least $125 million to provide construction services to three Alaskan Army bases. The same subsidiary has a $145 million contract with the State Department to do security upgrades with KBR at foreign embassies. A court filing in 2006 revealed that KBR had been the proposed subcontractor in a 2004 effort by Olgoonik Management Services to provide operations and maintenance support for the Army in Fort Carson, Colo.

Like much in government contracting, the full story of how Olgoonik arrived in Bolivia remains shrouded in secrecy. The first public notice of the contract came in April, when the State Department announced that it was awarding the five-year, $14.6 million deal to Olgoonik for serving food to coca eradicators in Bolivia. In the award, the government announced that "cost or pricing data" for the contract was "not obtained," and the cost had been set through a "negotiated proposal."

State Department spokeswoman Susan Pittman said there is nothing improper about the price for Olgoonik's Bolivia work, which she said was awarded on the recommendation of the U.S. Embassy in La Paz. She insisted that comparing the cost of the no-bid Olgoonik contract to its much cheaper predecessor was akin to "comparing apples to oranges." "You are comparing two different contracts," she explained. "The quality may be changing. The quantity of the portions may be changing." The State Department is proud to support minority contractors under federal preference programs, she added. "When we determine that there are firms eligible to do the work and the costs are reasonable, we are obliged to do that."

Richard Reierson, Olgoonik Management's chief executive officer, declined to describe improvements in food quality or volume, though he did confirm the contract cost. In a May e-mail to Salon, he expressed pride in the company's work and denied that KBR was involved in the Bolivian effort. "KBR has no involvement or responsibility with this contract in Bolivia," he wrote. Similarly, Heather Browne, a spokeswoman for the former Halliburton subsidiary, explained in a mid-May e-mail that KBR "is not part of any Department of State contracts in Bolivia."

These initial explanations did not tell the whole story. In January, Pete Diegel, a KBR official, traveled to Bolivia with two Olgoonik officials, Reierson and Steve Cofer, according to a first-person account of the visit. They met with embassy officials and the Bolivian company that was then feeding the coca eradication troops -- La Casa Mayor Military Contracting. "Pete Diegel said, 'We have the expertise,'" remembers Jorge del Carpio, the Bolivian company's operations manager. "He even told us that KBR was feeding 100,000 troops all over the world." As the main logistics supplier for the U.S. Army, KBR maintains a multibillion-dollar business at military bases all over the world.

After initially denying being any "part" of the contract, KBR's Browne admitted that the company "provided assistance to Olgoonik" under a mentor program organized through the Small Business Administration. "KBR provides this assistance at no cost," she wrote in a follow-up e-mail. "KBR does not stand to profit and did not participate in [the] preparation of the proposal, award or execution of the Olgoonik contract in Bolivia."

Nonetheless, when Olgoonik took over the contract in April, the Alaskan company hired three former Halliburton employees, including men from the Balkans who had recently been working in Europe. The new hires did not last long in Bolivia. About a month after their arrival, they were greeted by Bolivian police at their office and escorted away. Though the State Department confirmed this incident, neither Olgoonik nor the State Department has given a reason for their abrupt departures from the work site.

Once the contract was awarded, according to del Carpio, Olgoonik purchased some of the old equipment from the LCMMC and hired much of its old workforce. The Alaskan company also began renting a central processing facility from the Bolivian company. Nonetheless, the transition was rocky. On April 11, a local Bolivian newspaper called Extra ran a story headlined "No Dan De Comer A Los Erradicadores" (Food Not Given to Eradicators). The story reported that for the first days of April, freshly prepared meals had not been delivered to the 12 camps where the coca eradicators live. The workers subsisted instead on military Meals Ready to Eat rations, resulting, according to the news story, in the medical evacuation of some eradicators from their camps. The State Department's Pittman confirmed the use of military rations, though she denied that any eradicators were evacuated. She said the State Department does not blame Olgoonik for the problems, since proper paperwork had not arrived to let the company begin work.

Del Carpio says his company first won the coca eradicator food contract in 2000, after an international competition that included dozens of firms. LCMMC won the contract again in 2003, after another open competition. When the coca eradication force was reduced from 3,000 to about 1,500 in 2004, the company renegotiated prices a third time. "You would not believe how hard we had to negotiate these prices," del Carpio said. "We had to show our expenses. It was a very hard process."

He said he remains baffled about how the State Department negotiated the $5.16 price. If LCMMC had been allowed to bid, del Carpio said it could have upgraded equipment and still earned a profit by charging about $4 per soldier per day. Over the five-year course of the contract, that could have saved U.S. taxpayers about $3.2 million. The savings might have been even greater if the contract had been opened for other companies to bid. But without an open competition, the best price for U.S. taxpayers remains unknown.

But that isn't the way things are done these days. In May, the House passed a bill that would limit the size of the awards that Alaska native contracts can get without competition, but there is no indication that the Senate will act on similar legislation anytime soon. Alaska's congressional delegation, including Sen. Stevens, is likely to fight any such effort. At a hearing last year, Alaska Rep. Don Young, a Republican, strongly argued against any attempt to end the Alaska Native preference, even suggesting that those who raise questions about the program have dishonorable motives. "I am here to tell you," he told the committee, "that the efforts to find fault and criticize Alaska Native Corporations participating in the Small Business Administration's SBA Section 8(a) programs, frankly, I think, is a thinly disguised attack on Native Alaskan people and the corporations precisely because a few of them enjoy great success."

Michael Scherer

Michael Scherer is Salon's Washington correspondent. Read his other articles here.

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Bolivia Dick Cheney Ted Stevens