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IRAQ RECONSTRUCTION: AN OVERVIEW

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 15, 2007

Serial No. 110–27

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

——— ———

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on February 15, 2007 ....................................................................... 1

Statement of:

Walker, David M., Comptroller General of the United States, Government

Accountability Office; Stuart W. Bowen, Jr., Special Inspector General

for Iraq Reconstruction; and William H. Reed, Director, Defense Contract Audit Agency ........................................................................................ 35

Bowen, Stuart W., Jr. ............................................................................... 75

Reed, William H. ....................................................................................... 69

Walker, David M. ...................................................................................... 35

Letters, statements, etc., submitted for the record by:

Bowen, Stuart W., Jr., Special Inspector General for Iraq Reconstruction,

prepared statement of ................................................................................... 79

Clay, Hon. Wm. Lacy, a Representative in Congress from the State of

Missouri, prepared statement of .................................................................. 130

Davis, Hon. Tom, a Representative in Congress from the State of Virginia:

Prepared statement of ............................................................................... 29

Staff memorandum .................................................................................... 23

Reed, William H., Director, Defense Contract Audit Agency, prepared

statement of ................................................................................................... 71

Walker, David M., Comptroller General of the United States, Government

Accountability Office ..................................................................................... 38

Waxman, Hon. Henry A., a Representative in Congress from the State

of California:

Prepared statement of ............................................................................... 16

Prepared statement of Kiki Skagen Munshi ........................................... 11

Staff memorandum .................................................................................... 3

(1)

IRAQ RECONSTRUCTION: AN OVERVIEW

THURSDAY, FEBRUARY 15, 2007

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room 2154,

Rayburn House Office Building, Hon. Henry A. Waxman (chairman

of the committee) presiding.

Present: Representatives Waxman, Maloney, Kucinich, Davis of

Illinois, Tierney, Clay, Lynch, Higgins, Yarmuth, Braley, Norton,

Van Hollen, Hodes, Murphy, Sarbanes, Welch, Davis of Virginia,

Souder, Duncan, Issa, and Sali.

Staff present: Phil Schiliro, chief of staff; Phil Barnett, staff director and chief counsel; Karen Lightfoot, communications director

and senior policy advisor; David Rapallo, chief investigative counsel; Theo Chuang, deputy chief investigative counsel; Suzanne

Renaud, counsel; Molly Gulland, assistant communications director; Christopher Davis, professional staff member; Earley Green,

chief clerk; Teresa Coufal, deputy clerk; Caren Auchman, press assistant; Leneal Scott, information officer; David Marin, minority

staff director; Larry Halloran, minority deputy staff director; Jennifer Safavian, minority chief counsel for oversight and investigations; Keith Ausbrook, minority chief counsel; John Brosnan, minority senior procurement counsel; Steve Castor, minority counsel;

Edward Kidd, minority professional staff member; Nick Palarino,

minority senior investigator and policy advisor; and Benjamin

Chance, minority clerk.

Chairman WAXMAN. The meeting of the committee will please

come to order.

Last week, our committee focused on the $12 billion in cash that

was sent by our Government into Iraq. We learned that no one

knows what really happened to that money or even whether it

ended up in the hands of terrorists. All we know is that the cash

is gone and billions were wasted.

Today we get more bad news. The Director of the Defense Contract Audit Agency is going to testify that there are more than $10

billion in questioned and unsupported costs relating to Iraq reconstruction and troop support contracts.

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This estimate is three times higher than the $3.5 billion in questionable charges that the Government Accountability Office warned

us about last year. And, in this new report, $2.7 billion in suspect

billings are attributed to just one contractor: Halliburton. My staff

has prepared a memorandum on this subject, and, if there is no objection, I will enter it into the record.

[The information referred to follows:]

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Chairman WAXMAN. Even worse, the actual amount of waste is

likely even higher. The Defense Contract Audit Agency arrived at

its $10 billion estimate after reviewing only $57 billion of Iraq contract spending. But American taxpayers have already spent over

$350 billion for the war in Iraq. There is $300 billion still to audit.

The total amount of waste, fraud, and abuse could be astronomical.

Let’s add it up. Last week’s $12 billion in cash and today’s $10

billion in questionable charges combines for $22 billion. And there

is still the potential for tens of billions more in waste. It is no wonder that taxpayers all across our country are fed up and demanding

that we bring real oversight to the ‘‘anything goes’’ world of Iraq

reconstruction.

Stuart Bowen, the Special Inspector General for Iraq Reconstruction, will tell us about a particularly egregious example of wasteful

spending. It involves the State Department’s contract with

DynCorp to train and equip the Iraqi police.

The Defense Contract Audit Agency has not yet reviewed this

contract. But the Inspector General found that taxpayer dollars

were wasted on an Olympic sized pool that was not authorized

under the contract.

The audit was critical of not just the company; it was critical of

the Government for failing to conduct any semblance of proper

oversight. In this case, the contracting officer did not even have a

file—he literally didn’t have a file—for this $600 million contract.

And the Government could not demonstrate that it had actually received tens of millions of dollars in critical equipment, including armored vehicles, body armor, and weapons.

This is the equipment that is supposed to be going to the Iraqis

so they can take up the fight and allow our U.S. service members

to come home. Yet virtually nonexistence government oversight has

put the entire effort at risk.

This is an intolerable mess. It is important that we hold people

accountable for it, and just as important, that we prevent these

outrages from happening again.

President Bush is planning on sending 21,000 more American

soldiers into Iraq. He is also proposing that we spend almost $200

billion more on the Iraqi war effort and an additional $1.2 billion

for economic assistance to Iraq. He wants to spend over $800 million of that amount on a ‘‘civilian surge’’ that will increase the

number of Provincial Reconstruction Teams. These are the teams

that are supposed to work with local Iraqis to develop democratic

institutions and procedures.

I don’t have the first-hand knowledge of these Provincial Reconstruction Teams. But Kiki Munshi does. Until last week, she was

a team leader. She has concluded that the civilian surge won’t

work. She tells us the teams have been drastically underfunded,

have an ill-defined mission, and have huge staffing shortfalls.

She believes injecting more teams into Baghdad will result in a

bureaucratic nightmare. And what’s worse, she says that when

members of these teams were consulted about the President’s proposal in the fall, they raised exactly these objections, but were ignored.

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Mrs. Munshi could not be here today, but I would like to make

her full written statement part of the official hearing record. And,

without objection, that will be the order.

[The information referred to follows:]

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Chairman WAXMAN. As she says, ‘‘none of the objections or recommendations coming from the field about the ’civilian surge’ appears to have reached Washington.’’

I want to assure Ms. Munshi that we hear her, and I want to

assure the American people that we aren’t going to let a handful

of corporations walk away with enormous windfalls while thousands of American soldiers are sacrificing everything to defend this

country.

I want to thank our witnesses for superb work in bringing accountability to the Iraq reconstruction efforts and I look forward to

their testimony.

[The prepared statement of Chairman Henry A. Waxman follows:]

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Chairman WAXMAN. But before we hear from them, I want to call

on Mr. Davis, our ranking Republican Member.

Mr. DAVIS OF VIRGINIA. Thank you, Mr. Chairman. Let me also

note I would like to put a supplemental memorandum into the

record that our staff has drafted on the minority side.

Chairman WAXMAN. Without objection, that will be the order.

[The information referred to follows:]

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Mr. DAVIS OF VIRGINIA. We meet for the second time in as many

weeks to look into the complex range of issues arising from extensive contracting activities in Iraq.

Mr. Chairman, I am of course pleased the committee is continuing this line of oversight that we began 3 years ago. But between

last week’s hearing and today’s, I am afraid we may be peering into

the wrong end of the telescope, looking first at very specific complaints about security contractors and then taking this much

broader survey of troubled acquisitions in Iraq. That is backward

and it risks spending the committee’s time and credibility chasing

transient or dated issues while systematic problems go without

thorough scrutiny. I look forward to working with you in setting a

more coherent agenda.

Today we will hear from the three major oversight organizations

tracking Federal procurements in Iraq. They have all testified here

before, and they bring important perspectives informed by a substantial body of audit and review work. The picture painted by

these witnesses is never pretty, nor will their testimony necessarily

tell the complete story of an evolving, dynamic, and sometimes

dangerous process. But this much is clear: poor security, an arcane,

ill-suited management structure, and frequent management

changes have produced a succession of troubled acquisitions. We

need to know what has gotten better, what is being fixed, and,

more importantly, what is still broken. And we need to refine our

understanding of the difference between interim findings that may

make this complex process look bad and the real implications of the

‘‘definitized’’ costs ultimately paid by the Government.

Without question, many reconstruction projects have fallen far

short of expectations, and we have yet to completely resolve serious

problems in contract management and oversight in deployment locations. The underlying causes: the lack of sufficiently focused,

high-level leadership, mismatches between requirements and resources, and an inadequate number of trained acquisition and oversight personnel. While these challenges are not unique in Iraq, a

highly unstable environment and consequent security problems

have greatly exacerbated the impact of resulting cost, performance,

and oversight issues.

These failures have plagued acquisition efforts in the battle

space from the beginning. Some of those initial challenges have

been mitigated; many have not. A lack of planning and poor staff

training caused many of the early reconstruction contracts to be

awarded using other than full and open competition. Recent GAO

reports show the vast majority of more recent contract awards have

been made on a competitive basis. But GAO findings also point out

that we still do not have data on the total number of contract employees or the full range of services they provide. That is a troubling blind spot in the effort to assess overall contract management

and oversight in Iraq.

And recent reports by the Special Inspector General for Iraq

point to inattentive management and oversight systems that still

allow large contracts to careen out of control, wasting millions of

dollars and buying far less than agreed. At times, between sloppy

records, sloppier performance, and AWOL contract monitoring, we

can’t even be sure we got anything at all for the huge amounts

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spent. SIGIR audit findings on construction contracts for a State

Department residential camp and the Baghdad Police College describe ongoing, large-scale, and systematic vulnerabilities to waste

and abuse in those critical, costly reconstruction programs.

True, the Inspector General also concludes that 80 percent of the

Iraq reconstruction projects have been completed properly, on time,

and within budget. But there is a great deal of money committed

and still in the contract pipelines, and we need to be sure those

projects are not on the same oversight audit-pilot that steered over

contracts into a fiscal ditch in Iraq.

Many audits from the agencies represented here today have

spent considerable time working in Iraq, and we value the experience and perspective our witnesses will provide on the important

issues raised by the reconstruction contracts there. Much is at

stake in terms of U.S. tax dollars and in terms of effectively helping the Iraqi people rebuild the basic infrastructure of their nation.

We look forward to their testimony and to a frank, constructive discussion.

Thank you.

[The prepared statement of Hon. Tom Davis follows:]

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Chairman WAXMAN. Thank you, Mr. Davis.

The Chair, without objection, will hold the record open for 1

week to receive an opening statement by any of the members of the

committee.

Mr. ISSA. Mr. Chairman.

Chairman WAXMAN. But I would like to call on——

Mr. ISSA. Mr. Chairman.

Chairman WAXMAN. If the gentleman would permit, I would like

to finish my sentence.

But the Chair would like to now call on Members who wish to

make opening statements for 2 minutes, and will now look to Mr.

Tierney.

Do you have an opening statement you wish to make?

Mr. TIERNEY. Mr. Chairman, I will put my remarks on the record

if I have any, thank you. I would like to get to the witnesses.

Chairman WAXMAN. OK.

Mr. Lynch.

Mr. LYNCH. Thank you, Mr. Chairman. There are a couple of

points I would like the panelists to focus on.

I do want to thank the gentlemen for the great work, and we appreciate your helping the committee with its work.

Mr. Chairman, just last week the Department of Justice announced that we had three more indictments—three former Army

officers and also two U.S. civilians—for their role in a scheme to

defraud the Coalition Provisional Authority in the South Central

Region in Al Hilla in Iraq. Specifically, the indictments alleged that

the defendants, which includes, troubling, the former comptroller

and the former second-in-command at CPA South Central, who

funneled over $8.6 million in rigged reconstruction contracts to

American businessman Philip Bloom in exchange for $1 million in

cash plus an SUV, some jewelry, computers, airline tickets, liquor,

and other items.

These most recent indictments involving our reconstruction contracts in Iraq again beg the question whether the Defense Department is doing enough and, in fact, going back and reviewing all

contracts that have been touched by these individuals and could

have been compromised by these individuals who have been indicted or convicted for fraud or other violations of Federal law in

relation to the contracts.

We have been asking this for a while. About 6 months ago I

asked the Defense Department panelists the same question since

June 2005. Then we had indictments of Jeffrey Mazon, a former

Halliburton procurement manager, and Ali Hijazi, the managing

partner of La Nouvelle, a general trading and contracting company.

They had a kickback scheme through which a Kuwaiti firm, La

Nouvelle, billed the U.S. taxpayer for more than $5.5 million for

work that should have cost only about $680,000.

Regrettably, the committee and the chairman have been very

helpful on this, but we have received only vague assurances from

Mr. Reed of DCAA and from the Department’s Acting Inspector

General, Mr. Kimball, that such a review is in fact taking place.

Mr. Chairman, that is what I want to focus on, whether we are

going back and reviewing. When we find fraud, abuse, corruption,

bribes, are we going back, after conviction, after the indictments,

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and reviewing the contracts that these folks have been involved in?

Because I fear that it is a pattern of abuse and not just an individual instance.

Mr. Chairman, I want to thank you for your great work on this,

and the ranking member, and I look forward to today’s hearing for

a discussion of all these compromised contracts. Thank you. I yield

back.

Chairman WAXMAN. Thank you, Mr. Lynch.

Mr. Issa, do you wish to make an opening statement?

Mr. ISSA. Yes, I do.

Chairman WAXMAN. The gentleman is recognized.

Mr. ISSA. Thank you, Mr. Chairman. Mr. Chairman, I thank you

for holding this hearing. I think it is critical. Although I believe

that under the previous chairmanship we certainly had a record of

asking questions, as the war on terror and particularly the war in

Iraq continues, it becomes more and more evident that we have to

differentiate the inefficiencies of war and the ineptness that sometimes occurs on the battlefield from true fraud and abuse.

I look forward to finding the fraud and abuse, but in the spirit

of bipartisanism, I think it is also important that we, as a committee, recognize that war is wasteful, that, in fact, we, the American

people, are thoroughly disappointed in the ineffectiveness of bringing a lasting piece to Iraq much more than we are the inefficiency

of war. And I hope today that this hearing and our ongoing search

not be misunderstood for telling our civilian and military personnel

in combat that they shouldn’t take risk. Taking risk, which sometimes leads to waste, is much better than having a perfect paper

trail and bad outcome.

Having said that, one of the main reasons that this committee’s

work is resonating with the American people is in fact that we are

not satisfied with the results that are occurring in Iraq. The ongoing Sectarian violence is very frustrating.

So I trust that we will send the right message, which is we will

not tolerate dishonesty, fraud, or true abuses, but we do, as a committee and as a Congress, want people to continue to take the risk

and the innovative investments that should lead to a lasting peace

of Iraq, and that is why this committee has oversight, while at the

same time the Appropriations Committee has been generous in

continuing to grant the funding necessary for you all to do your job

in a dangerous part of the world.

With that, I yield back.

Chairman WAXMAN. Thank you, Mr. Issa.

Mr. Braley, opening statement?

Mr. BRALEY. Thank you, Mr. Chairman and Ranking Member

Davis, for hosting this hearing.

Last week’s hearings on the policies and spending practices of

the Coalition Provisional Authority was valuable in revealing some

of the disastrous and wasteful mistakes that have been made that

have contributed to the ongoing bloodshed, chaos, instability, and

costs in Iraq. The point of the hearing was not to point fingers or

to place blame but, rather, to learn from past errors so that we can

improve our policies and make real progress in Iraq reconstruction,

a critical element of stabilizing the country and bringing our troops

home.

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President Bush admitted, in his January 10th address to the Nation, in which he announced his plans to escalate the war in Iraq,

that numerous mistakes had been made. He said that the current

situation in Iraq is unacceptable and that it is clear that we need

to change our strategy there. I agree. He also said that a successful

strategy goes beyond military operations. Ordinary Iraqi citizens

must see that military operations are accompanied by visible improvements in their neighborhoods and communities. I also agree

with that statement.

In light of the increasing violence in Iraq, and considering that

the President is requesting billions of additional dollars from U.S.

taxpayers to rebuild the country, it is critical that we eliminate the

waste, fraud, and abuse that have been so prevalent in Iraq in the

past 4 years. It is our duty to ensure that the current and future

policies of the U.S. Government in Iraq keeps our troops safe,

spends the tax money of American citizens responsibly, and makes

real progress toward stabilizing and rebuilding the country so that

our troops can come home.

As he also outlined in his January 10th address to the Nation,

President Bush recently appointed a reconstruction coordinator in

Iraq, with the purpose of ensuring better results for economic assistance being spent there. I hope that the new coordinator, Timothy Carney, will take the information and insights provided last

week and at today’s hearings to heart. And I look forward to the

testimony of our witnesses today and hope that this hearing will

help us progress forward with more effective, responsible, and

transparent reconstruction efforts.

Thank you.

Chairman WAXMAN. Thank you, Mr. Braley.

Mr. Souder. Mr. Duncan, are you next? OK.

Mr. DUNCAN. Well, thank you, Mr. Chairman, and thank you for

calling this very important hearing.

I have always been very proud that my party, the Republican

party, has been the most fiscally conservative party throughout its

history for this country, and certainly no fiscally conservative person should feel any obligation to defend some of the lavish, wasteful, ridiculous, even scandalous, contracts that we have heard

about in Iraq. This war has not been conducted in a fiscally conservative way, and we need to look into this.

Fiscal conservatives should be the ones most horrified by some

of these things that we have heard about, and I know that

DynCorp and some of these other corporations are so big and powerful and well-connected that probably nothing will ever be done to

them, but if any of these things are true, then they should be prohibited from getting future government contracts, at least for some

period of time.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you very much for your statement.

Mr. Sarbanes.

Mr. SARBANES. Thank you, Mr. Chairman. Once again I want to

congratulate you for holding these hearings. The amount of waste,

fraud, and lack of accountability in the Iraq reconstruction and contracting processes is truly outrageous and inexcusable.

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It is my understanding that the witnesses will testify today that $10 billion in questioned and unsupported contractor costs have

now been identified in the Iraq reconstruction process, a truly

shocking figure. The tragedy is that this amount of money could

have gone to do so much good. Think, for example, what we could

have done with this to rebuild after Hurricane Katrina.

Maybe most discouraging, this administration seems to regard

this problem as minor or inconsequential. According to the Defense

Contract Audit Agency, the Defense Department has been

uncharacteristically and suspiciously lax in recouping and withholding payment when contractor costs are called into question.

One is left to wonder what is really going on here.

There is no legitimate excuse for this lack of accountability. This

is either an example of overwhelming incompetence or a willingness to look the other way because of personal or political relationships. In any case, the results are unacceptable.

There is only one element of this tragedy that I can be sure of:

those who presided over the situation, the political managers of

this war, failed our soldiers in harm’s way and they failed the

American people.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Sarbanes.

Mr. Souder. No statement? Then we go to Mr. Welch.

Mr. WELCH. I would just as soon hear the witnesses, Mr. Chair.

I am fine, thank you.

Chairman WAXMAN. Mr. Yarmouth.

Mr. YARMOUTH. I have no opening statement, Mr. Chairman. I

welcome the panel and look forward to their testimony.

Chairman WAXMAN. Mr. Higgins.

Mr. HIGGINS. Thank you, Mr. Chairman, just briefly. Again, I

thank you for your leadership and your diligence on this issue. Demanding accountability and transparency is our obligation, consistent with our oversight responsibility. You continue to bring to this

panel issues and individuals that hopefully will help us demand

that kind of transparency and accountability, particularly in a very,

very difficult period in our American history relative to this war,

relative to the costs associated with it, and relative to the abuse

and corruption in the spending of American taxpayer dollars. So

again I thank you and I look forward to hearing the statements of

the panel. Thank you.

Chairman WAXMAN. Thank you, Mr. Higgins.

Mr. Kucinich.

Mr. KUCINICH. Thank you very much, Mr. Chairman.

The issue of Iraq reconstruction is central to the hopes that so

many of us in Congress have: to bring the war to a conclusion.

There are a number of plans out there to stop the war, and they

recognize that a solid reconstruction program is vital to enable the

Iraqi people not only to rebuild their country, but to provide jobs

for the Iraqi people. This committee is going to be hearing from

Government auditors who have been tasked with the understanding of the state of contracting in Iraq.

The gross mismanagement of prior contracting efforts in Iraq

leave Congress no choice but to be skeptical of current and future

contracting efforts. And this hearing is timely with the recent AdVerDate 11-MAY-2000 15:10 Jan 14, 2008 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\38578.TXT HGOVREF1 PsN: HGOVREF1
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ministrative request for an additional $1.2 billion in U.S. taxpayer

funds for Iraq reconstruction efforts in fiscal year 2008.

This committee, Government auditors, and media accounts have

highlighted failure after failure of contractor efforts to reconstruct

Iraq’s basic infrastructure. Unfortunately, the administration has

given low priority to reconstruction contracts and has failed to ensure these funds actually improve the situation in Iraq.

Mr. Chairman, we spent $50 billion to reconstruct Iraq, but few

Iraqis have seen their quality of life improve. It is absolutely essential that we find a way to create a viable reconstruction program

as a means of taking Iraq to a condition of stabilization and peace.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Kucinich.

I want to now introduce our panel. We are honored to have with

us our Nation’s top three auditors for Iraq reconstruction. David

Walker is the Comptroller General of the United States. He will

tell the committee about recent audits issued by the Government

Accountability Office. GAO has uncovered many critical problems

in the reconstruction efforts and with the Government’s oversight

of contractors.

Stuart Bowen is a Special Inspector General for Iraq Reconstruction. Mr. Bowen’s work on Iraq reconstruction efforts has allowed

those of us in Washington to hear firsthand accounts of how reconstruction efforts are going on in the ground.

And, finally, William Reed, who is the Director of the Defense

Contract Audit Agency, will provide the committee with an update

on his office’s ongoing audits of spending on Iraq reconstruction

and troop surge support costs. Mr. Reed’s office has issued more

than 1,800 audits relating to work in Iraq, and we are privileged

to have him with us today.

It is our policy to swear in all witnesses that appear before the

committee, so I would like to ask you to rise, if you would, and

raise your right hands.

[Witnesses sworn.]

Chairman WAXMAN. The record will note that each of the witnesses answered in the affirmative.

And what I would like to ask each of you to do, your prepared

statements will be in the record in full. If you would summarize

your statements or make your oral presentation to us in around 5

minutes.

Mr. Walker, let’s begin with you.

STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, GOVERNMENT ACCOUNTABILITY OFFICE; STUART W. BOWEN, JR., SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION; AND WILLIAM

H. REED, DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY

STATEMENT OF DAVID M. WALKER

Mr. WALKER. Thank you, Chairman Waxman, Ranking Member

Davis, other members of the committee. I am pleased to be back

before you this week to talk about various issues relating to our

Nation’s efforts to stabilize and rebuild Iraq.

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Prudence with taxpayer funds and our Nation’s large and growing long-range fiscal challenges demand that the Defense Department maximize its return on the billions of dollars it has invested

in Iraq-related reconstruction projects and support contracts. Further strengthening Iraq’s fragile government institutions, which

thus far have failed to adequately deter corruption, stimulate employment, and deliver essential services, is critical to establishing

a peaceful, stable, and secure Iraq.

DOD has relied extensively on contractors to undertake major reconstruction projects and provide a broad range of support services.

But these efforts have not always achieved their desired outcomes,

nor have they achieved such outcomes on an economical and efficient manner. The challenges encountered in Iraq are emblematic

of a range of systemic and longstanding challenges faced by the Department of Defense. But these systemic problems are exacerbated

and accentuated when you are dealing with contingency operations

in a conflict zone. In this regard, we have identified DOD contract

management to be high-risk because of its vulnerability to fraud,

waste, abuse, and mismanagement. We did this 15 years ago and

we have continued to report related problems.

In a report issued in July 2006, we concluded that the awards

to contractors were large and growing, that DOD will continue to

be vulnerable to contracting fraud, waste, and abuse of taxpayer

dollars unless it ends up dealing with a number of recurring and

systemic challenges. While DOD has acknowledged its

vulnerabilities and taken some actions to address them, many of

the initiatives are still in their early stages and it is too soon to

tell what impact they may have.

The Iraq situation is more complicated, as the United States

must rely on the Iraqi government to play a larger role, which will

require capacity not yet present. As we previously reported, amid

signs of progress, the coalition faces numerous political, economic,

and security challenges in rebuilding Iraq. In addition, the continued violence increases the risk that the United States will not be

able to complete remaining reconstruction projects as planned. The

violence also threatens the Iraqi government’s ability to provide essential services to the Iraqi people.

The challenges faced by the Department of Defense on its reconstruction and support contracts in many cases reflect these longstanding and systemic challenges that DOD has had in connection

with contracting activities. Such shortcomings result from various

factors, including poorly defined or changing requirements; the use

of poor business arrangements in inadequate contracting provisions; the absence of senior leadership and guidance; and an insufficient number of trained contracting, acquisition, and other personnel to mange, assess, and oversee contractor performance. In

turn, these shortcomings manifest themselves in higher costs to

taxpayers, schedule delays, unmet objectives, and other undesirable

outcomes.

U.S. reconstruction efforts in Iraq continue to be hampered by a

security situation that deteriorated in 2006. Although the number

of trained and equipped Iraqi security forces has increased from

about 174,000 in July 2005 to about 323,000 in December 2006,

and more Iraqi Army units have taken the lead for

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counterinsurgency operations, attacks on coalition and Iraqi security forces and civilians have increased. Consequently, U.S. forces

have continued to conduct combat operations in urban areas, especially Baghdad.

Aggregate numbers of trained and equipped forces do not provide

information on the capabilities and needs of these individual Iraqi

units. Rather, this information is found in the unit level transitional readiness assessments. We have been attempting—we meaning GAO—since January 2006 in order to obtain access to this information. We have not been successful to date. It is absolutely essential, if the Congress wants to make informed decisions on authorization, appropriations, and in connection with oversight matters, that we get this information. We are talking about billions of

dollars and thousands of American lives at stake.

In summary, there are a number of conditions that exist in Iraq

that have led to and will continue to lead to increased risk of fraud,

waste, and abuse of U.S. taxpayer funds. DOD’s extensive reliance

on contractors to undertake reconstruction projects and to provide

a broad range of support services to deployed forces requires that

they address a range of systemic and longstanding challenges in an

aggressive, consistent, and effective manner. This reliance raises

broader questions as to whether DOD has become too dependent on

contractors to provide essential services without clearly identifying

the appropriate roles and responsibilities, having adequate contracting terms, and employing appropriate oversight and accountability mechanisms.

Continuing reconstruction progress will require overall improvement in the security situation in Iraq. To do so, Iraqi security

forces and provisional governments must be in a position to take

responsibility for the security of their nation. At this time, their capacity to do so is questionable. Furthermore, the United States and

the international community will need to support the Iraqi government’s efforts to enhance its capacity to govern effectively and efficiently if it is to make a positive difference in the daily lives of the

Iraqi people.

Thank you, Mr. Chairman, Ranking Member Davis. I am happy

to hear from my colleagues now.

[The prepared statement of Mr. Walker follows:]

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Chairman WAXMAN. Thank you, Mr. Walker. We will have questions of you after all the others have completed their testimony.

Mr. Reed.

STATEMENT OF WILLIAM H. REED

Mr. REED. Good morning, Mr. Chairman and members of the

committee.

The Defense Contract Audit Agency has been an integral part of

the oversight and management controls instituted by DOD to ensure integrity and regulatory compliance by contractors performing

services in Iraq. DCAA’s services include audits and professional

advice to acquisition officials on accounting and financial matters

to assist them in the negotiation, award, administration, and settlement of contracts. Decisionmaking authority on DCAA recommendations resides with contracting officers within the procurement organizations who work closely with DCAA throughout the

contracting process.

Since April 2003, DCAA has worked with all the U.S. procurement organizations supporting Iraq reconstruction to establish the

resources and planning information needed to carry out required

audits of contract costs as they are incurred and billed. These organizations include the Joint Contracting Command, the Army

Sustainment Command, the U.S. Army Corps of Engineers, DCMA

in Iraq and Kuwait, USAID, and the State Department. This coordination has enabled DCAA to maintain an inventory of Iraq-related auditable contracts.

Based on the inventory of auditable contracts as of September

30, 2006, DCAA is responsible for auditing contracts at 93 contractors. These contractors hold more than 175 prime contracts with

contract ceiling amounts of $51.8 billion, of which $38.5 billion had

been funded at the end of fiscal year 2006. DCAA audits of costreimbursable contracts represent a continuous effort from evaluation of proposed prices to final closeout and payment. Initial audits

of contractor business system internal controls and preliminary

testing of contract costs are carried out to provide a basis for provisional approval of contractor interim payments and early detection

of deficiencies. Comprehensive contract cost audits are performed

annually throughout the life of the contract and are used by the

contracting activity to adjust provisionally approved interim payments and ultimately to negotiate final payment to the contractor.

To carry out these audit requirements, DCAA did open an Iraq

Branch Office in May 2003 and implemented planning and coordination procedures to effectively integrate audit work between that

office and more than 50 DCAA CONUS Audit Offices with cognizance of companies performing contracts in Iraq.

Through fiscal year 2006, DCAA has issued more than 1,800 reports on Iraq-related contracts. We estimate issuing another 600

reports in fiscal year 2007. DCAA oversight of contracts in Iraq has

found a number of problems. Our resulting action has ranged from

recommending changes in business processes, to reduction of proposed or billed cost, to referral of our findings to the Inspector General for investigation and possible legal action.

The most frequent problems disclosed during our audits of business systems involve timekeeping procedures, cash management

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procedures, management of subcontracts, and documentation of

costs on proposals. The majority of these problems have already

been resolved or are actively being worked by contractors and contracting officers. Where appropriate, reductions to billed costs have

been taken to avoid potential inaccurate payments until process deficiencies are corrected.

Through fiscal year 2006, DCAA has recommended reductions in proposed and billed contract costs of $4.9 billion. Where appropriate, DCAA has taken action to reduce contractor billed costs for

disputed amounts pending a contracting officer decision. In addition, as has been noted, DCAA has identified $5.1 billion of estimated costs where the contractor did not provide sufficient information to explain the basis for the estimated amounts. These unsupported costs were usually resolved through contractor submission of additional supporting information at the time of contract

price negotiation.

In closing, I want to underscore that DCAA has worked closely

with all acquisition organizations to ensure an integrated, wellmanaged contract audit process in Iraq. We have had a continuous

presence in Iraq and the Middle East Theatre of Operations since

May 2003, staffing our office entirely with civilian volunteers. To

date, more than 180 DCAA auditors have served tours and, fortunately, none have been injured or killed. The challenges in applying business practices and auditing in Iraq are daunting and have

required our auditors to be flexible, while insisting that the Department will not tolerate the billing of costs that do not comply with

contract terms or are not appropriately documented and supported.

DCAA has been and will continue to be vigilant about contract

audit oversight and protecting the taxpayers’ interests.

Thank you, Mr. Chairman. I look forward to your questions.

[The prepared statement of Mr. Reed follows:]

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Chairman WAXMAN. Thank you very much, Mr. Reed.

Mr. Bowen.

STATEMENT OF STUART W. BOWEN, JR.

Mr. BOWEN. Thank you. Good morning and thank you, Chairman

Waxman, Ranking Member Davis, and members of the committee

for this opportunity to address the committee again on my office’s

oversight efforts of the U.S. reconstruction effort in Iraq.

I leave tomorrow on my 15th trip to Iraq. I have spent just over

a year of the last three overseeing the efforts of my staff that is

deployed there. Right now I have 50 auditors, inspectors, and investigators working out of the Green Zone. They travel across Iraq

visiting sites, investigating cases, and auditing programs.

Our 12th report was released 2 weeks ago, 12th quarterly report,

and it is a watershed report because it carries an important message, that is, the end of the Iraq Relief and Reconstruction Fund

is here, and the burden of sustaining the recovery and relief of

Iraq, financial burden, must shift to the government of Iraq at this

point, and that means the Iraqi government must execute and fund

a coherent reconstruction plan, and cannot leave its money in the

treasury, as it did at the end of last year, leaving about $10 billion

that should have been spent on reconstruction.

The baton has passed. That is the message that I took to Secretary Rice and Deputy Secretary England, Secretary Gates when

I met with them on the implications of our report. Also, in the last

week, I met with General Petraeus and yesterday with Ambassador

Ryan Crocker, who is just leaving for Iraq, and with both of them

I know that we will continue the good working relationship that I

have had with the embassy and with MNFI to date.

Also, yesterday I met with the Department of Justice, with Assistant Attorney General Alice Fisher, on the 20 cases that we have

pending there, and I am pleased to report that the coordinated

interagency effort to effectuate aggressive investigative work in

Iraq is getting better. It is improving. It has improved over the last

year, and I am very confident, over the coming year, that we will

see more progress in that area.

And, Mr. Lynch, with respect to the question you raised, we have

followed up on those issues. Philip Bloom, who was the primary

driver behind the criminal scheme that occurred in Hilla 3 years

ago, will be sentenced tomorrow, following three other persons who

have already been sentenced and are going to prison. We have nine

persons that have been indicted or convicted to date, and more to

come.

We did a followup audit on exactly the issue you asked, and our

recommendation was that the Government needed to hire a contractor or needed to pursue exactly this issue: what happened in

the other regions. And they hired a contractor to followup on those

issues, and the contractor, based on our most recent review, did not

receive clear direction and they did not receive proper oversight,

and so that followup is yet to be completed, but I am going to push

it moving forward. And when I get back to Iraq, I am going to take

on this issue, and we will meet with you when you get over there

and discuss progress on that.

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With my statement, I have submitted seven of our audits and inspections as examples of our work over the last 21⁄2 years, as well

as our quarterly report, and also I want to draw attention to an

important issue that Ranking Member Davis raised, and that is the

lessons learned that need to be drawn from our collective work, the

collective work of those providing oversight.

And we have produced two lessons learned report that are effectuating change within the government system through both legislative and regulatory amendment, one in human capital management. It came out a year ago. It has been an issue from the start;

it is still a challenge today, but less so, certainly burdened CPA,

as we heard last week. Contracting came out last August, and a

series of recommendations has helped move real-time lessons

learned, the application of real-time lessons learned in Iraq forward

through the Joint Contracting Command in Iraq. I work closely

with the commander there each trip, and things are better today

than they have been certainly in the history of Iraq reconstruction.

Finally, our lessons learned report on program and project management will be out in a little over a month, and it will tell the

executory story of how programs were implemented and projects

completed.

Briefly, I want to touch on the audits I have submitted as examples, just to exemplify what SIGIR is looking at and how we try

to carry out what I call real-time auditing, which means working

with management to effectuate changes when we uncover problems, and that has to be the way it works in Iraq because of the

limited timeframe, and I go back there to push that same philosophy forward tomorrow.

The contract award fee process, an issue that came up during my

June trip in 2005, and I discovered that the award fee process had

no criteria and no documentation, it had no direction that it should

have had pursuant to government regulations. But this is an example of how change happened immediately. As soon as that was uncovered, within a week, criteria were developed. The JCCI began

to develop a new program, and within a month, before the audit

came out, the problem had been fixed. The problem, though, was

that award fees were being given, handed out based on weak criteria, limited oversight, and really in violation of the core principle

of an award fee, that is, you award superior work, good work,

something that exceeds expectations. That is going on today; it

wasn’t when we found this problem.

The primary health care clinic issue is probably the program that

has been the biggest large-scale disappointment since it was an

ambitious attempt to bring health care out to the rural areas, to

build 150 centers across Iraq for $250 million. Two years later,

$186 million had been spent and six were complete. The Corps of

Engineers, to its credit, brought to our attention problems with

Parsons, the contractor. We began to work immediately with the

Ambassador Khalilzad to develop solutions to that. The execution

of those solutions is still very gradual. A hundred twenty-one of

those clinics are still under construction. We visited some of them

in our inspections process, and they have shown to be substandard,

as our reports reveal.

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Third, last June we released a report on definitization. It is an

abstract auditor term, but it means getting a hold of costs when

you start out on a cost-plus contract that doesn’t have defined requirements. And the definitization requirement is essential to ensure that in a cost-plus program, which we have in Iraq, that eventually the government gets control of how much these projects are

going to cost. And as our audit revealed, the definitization requirement was not followed in Iraq by the Department of Defense. We

looked at 194 task orders valued at $3.4 billion that should have

been definitized and warrant—the definitization requirement requires 180 days after work begins you have to define what costs

are. The Department of the Army recognized that was an issue.

The General Counsel issued an opinion saying the definitization

should be followed, so it is moving forward, but it had not been before we began to look at it.

Fourth, the Basra Children’s Hospital, a USAID project that suffered from lack of oversight. The message there is you have to have

more transparency. It fell behind, it was over budget, but that information didn’t get up to levels that it needed to be. When it finally did, we recommended that Ambassador Khalilzad create a

core group to manage this; he has. He moved management to the

Corps of Engineers. It is moving forward, but rather than being

done as it should have been a year ago, the hospital won’t be finished for 6 to 12 months.

Administrative task orders was an issue that came to my attention when I was visiting with PCO, Project Contracting Office, and

its predecessor, Project Management Office, during the

reprogrammings, and I was concerned about overhead for contractors that weren’t doing work. So we delved into that and discovered

that the need to control overhead costs wasn’t managed well in

Iraq.

Finally, in our latest quarterly we have the report that the chairman referred to in his opening remarks about the police liaison officer camp that was going to be built at Adnan Palace, which is in

the Green Zone, and was canceled. However, tens of millions of dollars was expended in buying the trailers anyway because of the

lack of oversight of that project, including unauthorized work that

was executed and equipment that, in the course of our audit, we

were not able to account for.

The inspection I have submitted is of the Baghdad Police College.

It has been a problematic project; an important project, the largest

police college in the world, the locus for training police in Baghdad,

the most difficult place in the world, and it simply has not met expectations. I just heard today from my staff over there that the

Corps of Engineers is executing new contracts to fix what has been

difficult to fix to date and the Iraqis have not accepted the project,

though it was due to be turned over last month.

In closing, let me put this all in perspective. First of all, fraud.

Fraud has not been a significant component of the U.S. experience

in Iraq. Where we found it has been egregious, we continue to pursue it. I have a coordinated effort that I referred to, but it has not

been a significant component of the U.S. experience. Waste is another issue, and I am working on with General Walker and Mr.

Reed and others to identify that in clearer terms, and we are purVerDate 11-MAY-2000 15:10 Jan 14, 2008 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 C:\DOCS\38578.TXT HGOVREF1 PsN: HGOVREF1
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suing that and the Congress has directed my office to perform a forensic audit that will give you the hard data on that once it is completed. And, finally, we will complete a comprehensive lessons

learned program in the course of this year, and from that effectuate

what I expect will be positive change that will improve not only the

continuing reconstruction of Iraq, but planning for any future efforts.

Mr. Chairman, thank you for this opportunity.

[The prepared statement of Mr. Bowen follows:]

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Chairman WAXMAN. Thank you very much, Mr. Bowen.

Let me start with Mr. Reed. In your testimony today you highlighted some of DCAA’s major findings related to Iraq, and I would

like to ask you about some of these. First, you said in your testimony that DCAA has identified $4.9 billion in questioned costs and $5.1 billion in unsupported costs.

When I added these figures together, I end up with a total of more

than $10 billion in questioned and supported costs. That is correct,

isn’t it?

Mr. REED. That is correct.

Chairman WAXMAN. OK. Now, that is an astonishing figure. Last fall, GAO reported to us that the number was $3.5 billion in questioned and unsupported costs. Now, just a few months later, the

overcharges and unsubstantiated bills are nearly three times larger. Let me ask about each category of suspect charges.

When you identify costs as questioned, your audits, with their experience and expertise, believe these costs ultimately should not be

paid to the contractor. In fact, that is your recommendation to the

contracting officer, isn’t that right?

Mr. REED. That is correct.

Chairman WAXMAN. And unsupported——

Mr. REED. If I could point out, however——

Chairman WAXMAN. Sure.

Mr. REED [continuing]. In regards to the $4.9 billion, it is important to note that a large part of this questioned costs occurs during

the pricing of the contracts, rather than the payments. And where

we make recommendations during the pricing of the contracts, the

contracting officer’s job is to consider our recommendations in negotiating the price. So, hopefully, we achieve reductions in the prices

before we incur these costs.

Chairman WAXMAN. And unsupported costs are those with insufficient documentation from the contractor to justify the charges,

isn’t that correct?

Mr. REED. That is correct. And that area also deals with, in most

cases, estimated cost, rather than billed cost.

Chairman WAXMAN. The total amount of dollars that you exam- ined, I believe, was $57 billion, is that correct?

Mr. REED. Yes, sir.

Chairman WAXMAN. So that means that you are raising questions about 18 percent of the dollars you have reviewed. Put another way, about one out of every $6 that your office examined was

either questioned or unsupported. That is a phenomenal amount of

potential waste, fraud, and abuse.

Mr. Reed, your office has been doing yeoman’s work. You have

issued more than 1,800 audits relating to Iraq contracts, I believe,

but have looked at only a fraction of the spending in Iraq. And according to the Congressional Budget Office, we spent over $350 billion on the Iraq war. Do you know how much of the $350 billion

has gone to private contractors?

Mr. REED. No, I don’t. I can tell you that in terms of what DCA is responsible for auditing, $51.8 billion has gone to private contractors.

Chairman WAXMAN. Mr. Bowen, you have looked at some contracts that Mr. Reed hasn’t looked at. The DynCorp contract with

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the State Department is one example, and you found egregious examples of misspending, like building Olympic swimming pools, that

Mr. Reed didn’t seem to know about, at least hasn’t reported on.

Also, even when Mr. Reed may not see a problem based on his review of the billings, your inspectors who are visiting the actual

sites may see enormous waste or substantial construction. This

means that you are finding examples of poor performance or wasteful spending that even Mr. Reed doesn’t know about, is that correct?

Mr. BOWEN. My mission, as assigned by the Congress, is to oversee the Iraq Relief and Reconstruction Fund, and we work in conjunction with DCAA, interact with them at least quarterly through

the Iraq Inspector General’s Counsel, and, indeed, on the contract

you are referring to, we will continue to work together in getting

to the bottom of where that money went. We have identified a series of issues, as you have pointed out, and we will followup on

that. More importantly, what that audit tells me to do is to follow

the rest of DynCorp’s contracting in Iraq, and that we have an

audit plan to do exactly that.

Chairman WAXMAN. Now, let me ask each of you this question.

Mr. Reed has identified $10 billion in questioned and unsupported

costs. Do any of you think that the total amount of potential wasteful spending in Iraq is $10 billion or, when the final audits are

done, will the amount of waste, fraud, abuse, and other types of unreasonable or unsupported spending be much higher?

Mr. Bowen.

Mr. BOWEN. I am not ready to put a number on this. Our series

of audits——

Chairman WAXMAN. Well, higher or not?

Mr. BOWEN. Well, the forensic audit is going to get to the bottom

of that, on the $21 billion of the Iraq Relief and Reconstruction

Fund, but there are about $38 billion if you broadly define relief

and reconstruction at work here, and that covers the Iraq Security

Forces Fund, the Iraq Relief and Reconstruction Fund, the Commander’s Emergency Response Program, the Economic Support

Fund——

Chairman WAXMAN. When you look at it all, is it going to be more than $10 billion?

Mr. BOWEN. I can’t put a number on it right now, but there will

be serious waste, significant waste that we will continue to identify

and eventually come to a number.

Chairman WAXMAN. I wasn’t asking you for a number. Do you

think it is going to be more than $10 billion?

Mr. BOWEN. I try to confine myself to what I know and can reasonably analyze, and I am not ready to answer that affirmatively.

Chairman WAXMAN. Mr. Reed, do you think it is going to be more

than $10 billion?

Mr. REED. Well, certainly, we have 600 audits planned in fiscal

year 2007, and many of this contracts will extend beyond fiscal

year 2007, so we have many years of contract costs yet to audit.

However, the types of findings that we have cannot always be characterized as fraud and waste. Many of our adjustments are the routine part of administering contracts, negotiating prices, administering contracts for allowable costs. And while certainly some do fall

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into that category—and I don’t want to diminish the importance—

that is, to the Department—to catch that and deal with it, but certainly DCAA costs questioned will continue as we continue our audits.

Chairman WAXMAN. Mr. Walker, is $10 billion going to be exceeded?

Mr. WALKER. Mr. Chairman, it is impossible to be able to answer

that question without doing a statistically valid sample or having

some basis to do it. There is little question that there are billions

of dollars involved. How many, we can’t tell you.

I think there are two issues that are important for you to know.

First, the first thing you have to do is define what waste is. On

page 6 of my testimony is a joint definition that we came up with

and has been agreed to by SIGIR, the DOD IG, as well as Department of State IG, so that is the first thing we have to do. We have

the definition; there it is. We are all doing related work.

And, second, the reason for the difference between DCAA’s estimate and ours, primarily two things: one, they had a longer period

of time and, No. 2, we only looked at final audits, we didn’t look

at pending audits. So those are the two primary reasons for the difference between our three point some billion dollar number and

their $10 billion number.

Chairman WAXMAN. That is understandable, but that means you

haven’t looked at all that Mr. Reed has looked at, and Mr. Reed

hasn’t looked at all the things that Mr. Bowen has looked at. But

even if we just take it at about $12 billion or $10 billion, it is an

enormous sum of money. And my staff has researched what we

might have gotten for these amounts, and they determined that an

up-armored Humvee vehicle costs about $150,000 each. So for $22

billion we could have purchased more than 146,000 Humvees. That

is about one Humvee for every U.S. service member in Iraq.

The contractors in Iraq may be pocketing billions, we don’t know

how much, but the troops don’t have the equipment they need, and

the taxpayer is, in my view, getting gauged.

Mr. WALKER. In fairness, Mr. Chairman, there is no doubt there

is a tremendous amount of waste, but it is also important to note

that just because there has been a determination that there is not

enough evidence yet doesn’t mean that is waste. There is a tremendous problem in government in not having adequate controls, not

having proper documentation, not definitizing requirements

enough, etc., but that doesn’t necessarily mean that it is waste.

Chairman WAXMAN. OK, well, I appreciate that. We will look at

some of the specific examples later in the hearing. But I now want

to recognize Mr. Davis.

Mr. DAVIS OF VIRGINIA. Let me try to clarify some issues here.

Mr. Reed, there has been some concern raised about the ratio between the costs you flagged as questioned—I have seen a number

of estimates as high as $10 billion—and the quantum of those costs

that the contracting agencies have finally disallowed. Are you with

me?

In general, are you comfortable with the settlements made by the

agencies with the contractors on these costs?

Mr. REED. The relationship between us and the contracting officer is one of advisor, and we fully respect and acknowledge their

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authority to consider our recommendation along with other advisors that they have. I respect their important job and I am satisfied

they are fairly considering our recommendations.

Mr. DAVIS OF VIRGINIA. Are there any particular instances, for

example, the large settlement between KBR and the Corps of Engineers under KBR’s Rio contract, that troubles you?

Mr. REED. No. I think the process worked, as it is defined, in

terms of the responsibilities of DCAA versus that of the contracting

officer and the Corps of Engineers. They rightly considered other

evidence other than the audit reports and considered extenuating

circumstances that might have affected the contractor’s actions, uncontrollable circumstances, and they arrived at a——

Mr. DAVIS OF VIRGINIA. In a war zone, that is fairly frequent, too,

sometimes.

Mr. REED. Yes. And in that particular case it occurred during the

first 9 months after the cessation of hostilities, and it was a very—

obviously a very tense situation in that period.

Mr. DAVIS OF VIRGINIA. And unsubstantiated costs versus an unsupported cost. An unsupported cost—my wife keeps our books and

she wants me to account for everything. So if I go to the dry cleaners, I pick up the dry cleaning, I come back and I don’t have a receipt and I pay in cash, that would be an unsupported cost, is that

the equivalent?

Mr. REED. Yes.

Mr. DAVIS OF VIRGINIA. It doesn’t mean I wasted it, it just means

at this point I don’t have the backup documentation.

Mr. REED. That is correct.

Mr. DAVIS OF VIRGINIA. Is that a perspective of what an unsupported cost is?

Mr. REED. Yes, it is.

Mr. DAVIS OF VIRGINIA. And in a war zone, these kind of

things—sometimes you get the higher unsupported costs than you

might get, for example, if you are sitting down out in Fairfax, trying to move papers, is that fair?

Mr. REED. Yes, it is. And I would also point out, once again, that

many of these unsupported costs are not actually incurred costs,

they are based on estimates to establish a price for the contract.

Mr. DAVIS OF VIRGINIA. Correct. You made that point.

Mr. REED. So at that point we hope to negotiate a fair and reasonable price based on solid evidence.

Mr. DAVIS OF VIRGINIA. OK. I hear all sorts of things thrown

around, like overcharges, unreasonable costs, suspect costs, to describe this $10 billion figure. What does that figure represent, are

they really overcharges?

Mr. REED. No. These are—DCAA’s activities take place during

the administration of contracts. And certainly when you are dealing with price proposals and you are questioning costs or

unsupporting costs in a price proposal, what you are talking about

is how to negotiate a fair and reasonable price. Ultimately, the contractor will—after he is awarded the contract at the price, submits

bills. These bills are audited by DCAA, and at that point we are

looking at actual incurred costs, and these are differences of interpretation, in many cases, over regulations and in terms of what is

compliant with the policies of the Department.

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Mr. DAVIS OF VIRGINIA. For example, if you didn’t have some deficit there between your costs and the final costs, you really

wouldn’t be doing your job, would you?

Mr. REED. That is correct.

Mr. DAVIS OF VIRGINIA. I want to make sure I am clear about

the relationship between DCAA auditors and the contractor officers. The DCAA auditors act as professional advisors to the contracting officers on cost, pricing, and other related matters, correct?

Mr. REED. That is correct.

Mr. DAVIS OF VIRGINIA. The contracting officer is then free to

take the advice or not take the advice. For example, if DCAA may

find that there is an overcharge of, say, $1 million, the contracting

officer can then agree with that amount or not based on his or her

judgment, correct?

Mr. REED. That is correct.

Mr. DAVIS OF VIRGINIA. The contracting officer then has to initiate any action against the contractor, isn’t that how it works?

Mr. REED. Yes.

Mr. DAVIS OF VIRGINIA. OK. Has there ever been any pressure

on DCAA from any source in the administration to take it easy on

anybody, but particularly KBR, Parsons, or any other Iraq contractors, that you are aware of?

Mr. REED. Absolutely not.

Mr. DAVIS OF VIRGINIA. Have most of the contractors that you

have audited in connection with the Iraq reconstruction and support efforts been cooperative?

Mr. REED. Yes.

Mr. DAVIS OF VIRGINIA. Any particular firms present any special

problems?

Mr. REED. Well, certainly, KBR, being the largest by far in terms

of the dollar amounts of contracts we are auditing, have been the

focus of a lot of our attention, and in that regard, the numbers of

audit reports and the issues would reflect that. I think companies,

they have had their problems, all companies that we have audited

in Iraq have had their problems in cooperation from the standpoint

of having good business systems and records in field circumstances,

and KBR has certainly had their share of problems.

Mr. DAVIS OF VIRGINIA. And you hold them to a high standard,

right, at least from a going-in perspective? You don’t cut them a

lot of slack, do you, because they are in a war zone and they don’t

have the systems up?

Mr. REED. We start from the same standards, but then we do try

to be flexible and recognize that there are circumstances where the

records might not be in perfect condition, given on the back of envelopes and things like that. So we try to be flexible in that regard,

but we are not flexible in regards to having to have the evidence

to support the cost ultimately.

Mr. DAVIS OF VIRGINIA. Contract definitization is very important.

Wasn’t the lack—definitization. Wasn’t the lack of definitization on

many of these large contracts and task orders the root cause of

many of the cost problems that occurred?

Mr. REED. Well, it certainly was a factor. I wouldn’t want to say

it was the largest factor, but it was a factor. And I would like to

point out that, in that regard, we also raised concerns about the

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slow definitization process, particularly on the LOGCAP contract.

In fact, I testified about that in one of my earlier appearances before your committee. And, in fact, we brought that to the attention

of the Army contracting officials, and I think we were largely responsible for working out a good schedule for them to catch up with

the definitization on the LOGCAP contract, and now they are in

much better shape than they were during the period——

Mr. DAVIS OF VIRGINIA. But that is a key issue, getting that

nailed down, right?

Mr. REED. Absolutely.

Mr. DAVIS OF VIRGINIA. How many fraud referrals has DCAA

made in connection with the Iraq contracting effort?

Mr. REED. To my knowledge, five.

Mr. DAVIS OF VIRGINIA. Do you think the fact that many of the

costs that your auditors had questioned had already been actually

incurred by contractors by the time the contracting officer was

called upon to settle the charges was a significant factor in the low

sustain rate of your audit findings?

Mr. REED. Yes, certainly, the Corps of Engineers has made that

clear in some of the documentation of the results of their negotiation on the Rio contract, in particular, that there is a feeling that

once the cost is incurred, it is much more difficult to challenge it.

I, quite frankly, do not agree with that. I believe that the provisions of the contract are very clear that the costs must be determined allowable by the contracting officer. It doesn’t matter if they

have been incurred or not incurred.

Mr. DAVIS OF VIRGINIA. Let me just say to all three of you, you

have great reputations, at least with our office, in terms of calling

balls and strikes, being fair, and we take what you say very, very

seriously up here. But I think the perspective is also important as

we measure this.

General Walker, let me just ask you. You and a number of witnesses and members have noted that DOD does not know the number of subcontractors or the number of contract employees in Iraq

providing services, particularly security services. It is pretty clear

that, from a military operation standpoint, that it makes sense to

know how many folks are there carrying guns or that need to be

protected. I am less clear how valuable that information is from an

acquisition management standpoint. When the services are performed under large primes, we pay the prime to provide the service

specified and we hold the firm responsible for that performance.

How important is it to know whether the actual performance is

provided by a 1st-tier or a 15th-tier subcontractor, as long as the

price is reasonable, the services are performed in accordance with

the contract? Aren’t we, in effect, paying the prime contractor to

manage the subcontracts and responsible for the overall performance?

Mr. WALKER. Several comments. First, we are using contractors

in new and unprecedented ways in Iraq, and I think there is a

need, separate from this hearing, probably, to have a discussion

about the systemic and generic contracting problems, including

what is appropriate to use contractors and not. But, second, no,

there can be problems——

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Mr. DAVIS OF VIRGINIA. Before you go there, General Walker, I

want you to finish——

Mr. WALKER. Surely. I will answer your question.

Mr. DAVIS OF VIRGINIA. I think that is one of the problems, and

we have had trouble getting Federal employees to come over there.

Mr. WALKER. We have.

Mr. DAVIS OF VIRGINIA. And that is one of the reasons, isn’t it,

that we have had to use the contractors, and it has created a problem?

Mr. WALKER. Well, there are several reasons. No. 1, we don’t

have adequate in-strength; No. 2, we are having trouble getting

people to come over. I mean, we can go through that at a separate

time, but let me answer your question specifically.

There can be problems when you don’t know who the contractors

are and what the contractor terms are, even in your scenario. For

example, we found that tens of millions of dollars of costs were incurred by the taxpayers in circumstances where contractors who

were receiving a per diem allowance for subsistence were using the

facilities and the food facilities that were being provided and,

therefore, that is waste. I mean, that is clear waste, OK? And that

was tens of millions of dollars. And so because we didn’t know who

the contractors were, because they didn’t know what the contracting arrangements were for costs, that is one example of where you

can have waste.

Mr. DAVIS OF VIRGINIA. Mr. Waxman, I think that is fine.

I would just ask Mr. Bowen a very quick question on the definitized contracts. Is that one of the biggest problems, is

definitization?

Mr. BOWEN. Absolutely. Yes, sir.

Mr. DAVIS OF VIRGINIA. I mean, it really boils down, at the end

of the day, in a lot of this, to getting those large contracts——

Mr. BOWEN. If you are going to use cost-plus contracts,

definitization has to happen at some point. There is a time line or

a percentage complete milestone upon which occurring

definitization should follow, and that was wrongly interpreted in

Iraq. It is now being corrected, but waste occurred as a result.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Tierney.

Mr TIERNEY. Thank you, Mr. Chairman.

Thank you, gentlemen, for your testimony and your help here

this morning.

Mr. Walker, I am assuming that firms like KBR and Parsons get

the contracts in the first place because they purport to have the

kind of experience in these types of situations, is that right?

Mr. WALKER. That is correct.

Mr. TIERNEY. So, Mr. Reed, you had about $10 billion in questioned or unsupported costs on the reconstruction on that, and you

recommended that a certain amount of that money be withheld

until those issues were resolved, is that correct?

Mr. REED. Yes, that is correct.

Mr. TIERNEY. Now, you provided to the committee sort of a historical sustention rate that looked to me to be about 50 percent to

75 percent most of the time, is that correct also?

Mr. REED. Yes.

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Mr. TIERNEY. But in this instance it looks like the Department

agreed with you only about somewhere between 25 percent and 37

percent of the time. Can you explain that difference?

Mr. REED. Well, I think the difference would go to the fact that

we are dealing with a contingency contracting situation. Many of

the awards are made under unusual and compelling authorities

and, therefore, I think the contracting officers, in dealing with settling some of these very significant issues, one of which has been

mentioned already, the Rio contract and the price of fuel, and the

other was dining facilities, which were two very big issues that the

contracting officer settled. In both settlements I think the contracting officer gave considerable weight to the obstacles and difficulties

the contractors were facing because of contingent circumstances.

Mr. TIERNEY. So we have firms that say they want these contracts because supposedly they know how to deal with these situations, and then they get relaxation from the Department because

supposedly they ran up against exactly what they were hired as experts to deal with. I find that still a little problematic when you

look at the difference between 75 percent of sustention and 37 percent. But my understanding also is that when you look at this situation or you examine and you audit, you take into account the fact

that there are wartime complications, don’t you?

Mr. REED. Yes, we did. In fact——

Mr. TIERNEY. In fact, Halliburton, on the oil thing, didn’t you

give them a grace period to account for the fact that they were in

a wartime emergency, even though they purported to be an expert

able to deal with that?

Mr. REED. Yes, we did give them a grace period.

Mr. TIERNEY. And, in fact, you didn’t recommend withholding

any charges for several months on Halliburton while they were

making an adjustment to that environment, is that correct?

Mr. REED. That is correct.

Mr. TIERNEY. At some point you finally said enough is enough

and you made your recommendations, and your recommendations

were a sustention rate significantly higher than 25 percent to 37

percent, correct?

Mr. REED. Correct.

Mr. TIERNEY. Now, some have suggested that we may, the Pentagon may have become too reliant on contractors in general, and,

Mr. Walker, you had some good testimony the other day about that

issue, and I think it should have the attention of all of us. When

that happens, when we rely so heavily on contractors, doesn’t that

in fact give them the leverage in these situations so if they go to

the contracting officer, they have real leverage; they can just refuse

to perform if somebody doesn’t work out and pay them higher than

the recommended sustention rate, they could lave the military with

no alternatives. Is that a concern, Mr. Walker?

Mr. WALKER. Well, it can change the leverage. But we also don’t

have enough people who have the right kind of skills and knowledge to be able to oversee the contracting arrangements, even if the

leverage is not changed.

Mr. TIERNEY. Mr. Bowen, do you find that is a legitimate concern

as well?

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Mr. WALKER. Absolutely. A simple axiom is elicited by our collective oversight, and that is if you don’t have the right people on the

scene and both government and contractor looking at programs and

projects, then you are going to end up with programs that fall off

the rails like the primary health care clinic program or projects

that don’t meet expectations like the Baghdad Police College.

Mr. TIERNEY. Did you want to add something, Mr. Walker?

Mr. WALKER. Real quickly. I think it is important to reinforce

there are systemic problems that are longstanding with the Department of Defense. They are exacerbated and accentuated when you

have a contingency operation, which Katrina and Iraq were both

contingency operations, and a conflict zone, which Iraq is a conflict

zone. So it is important we are focusing on Iraq, but this is the tip

of an iceberg that we have to focus on.

Mr. TIERNEY. I heard you clearly on that, and I believe that it

is something we should look at.

Mr. Bowen, let me just finish with you. You reviewed the Al

Fatah pipeline situation, am I right?

Mr. BOWEN. Yes, sir.

Mr. TIERNEY. That was along the Tigris River and Halliburton,

in that instance. was asked to restore a crucial set of pipelines by

digging across and under a river.

Mr. BOWEN. That is right.

Mr. TIERNEY. What you found, I understand, is that they were

just told by their expert that was impossible to do.

Mr. BOWEN. That is right.

Mr. TIERNEY. And, yet, they went ahead and spent $76 million

digging what turns out to be a ditch to nowhere.

Mr. BOWEN. Yes. Eventually they followed what the consultant

said to do after expending tens of millions of dollars fruitlessly.

Mr. TIERNEY. And I guess that probably is one certain highlight,

that kind of insanity, about the dangers of contracting too much

out and having too few government people to monitor and oversee

that.

And all of you gentlemen, I thank you for your testimony.

Mr. Walker, I think we should have a number of other hearings

on that issue.

Thank you, I yield back, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Tierney.

Mr. Souder.

Mr. SOUDER. I thank the chairman. I chuckle every time I hear

longstanding problem in the Department of Defense that actually

started with Robert Morris and the American Revolution and the

question of financing and whether—because there is nothing more

disgusting than fraudulent war profiteering when people are dying,

and I think we all agree with that.

I have—first off, I want to say I appreciate the caution all of you

showed under questioning about what numbers might be. I want

to insert for the record—because one of the things Mr. Bowen has

done is corrected his initial estimate to what actually the actual potential auditing from October 2006 to January 2007, how much

they actually saved in the process. Because until you actually followup even in your own projections and do a detailed audit process,

you don’t know for sure what these dollars are. And you can grab

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a headline with the huge number, but until we play the whole

thing through, we don’t know what we are dealing with. In fact,

that seems to me one of the main things you are saying today, and

I basically have several questions here, because is it or could more

be done in the initial contract that when you are bidding for the

contract you have to have more auditing and sufficient auditors

and sufficient people doing the paper trail in the bid for the contract? It just seems like a basic cost of doing business. We are having to deal with this in FEMA as well, when we appropriated some

of the Katrina money and added all those additional auditors. It

seems like that ought to be an up-front cost with the dollars. Is it

something—for example, if you are late on delivering a contract,

there are huge penalties. Do we have and should there be penalties

for failure to have adequate auditing and failure to keep the paperwork that could be added to contracts, much like we would do for

being late in a contract?

A second question is do we have the ability and do you sense

that a lot of this problem isn’t actually with the contractors, it is

with the subcontractors? In the only case—I shouldn’t say the only

case, but the primary case, in one of my trips to Iraq, it was right

in the middle of some of the Parsons hospital questions, you just

can’t be anything but appalled. But what was absolutely clear in

that case was that we had a whole layer of subcontractors, and the

American contractor is in many cases really just a broker. So we

had an American person to broker, and then we got into their subsystem, and you have to buy off this group, you have to buy off this

group, you have to buy off this group. By that time there is not any

money left to build a hospital, so you get a substandard hospital;

and the few that we have are falling down. And the question is do

we have a system to figure out how to track the subcontractors?

The fraud here isn’t necessarily at the American level, it is how,

in a war zone and in an unstable environment, do we track subcontractors.

The third question I have is do you think the biggest problem

here is lack of security? Because it seems to me that one of the

problems is that money was thrown at a variety of things, possibly,

I don’t know, but possibly even extra housing and swimming pools

and all that, because nobody wanted to go or they were getting shot

at and it was hard to recruit. In the subcontracting, one of the

things we heard from the Army Corps was that it was really hard;

the subcontractors show up, they kill somebody from their family

or they shoot somebody there, they disappear, they are pouring the

foundation, they don’t use the normal time they would let to have

cement dry for fear of getting shot at, they start putting up a beam

and decide they are not going to finish the project because somebody is getting shot at. How much of this problem is actually related to security?

Mr. WALKER. I will start.

First, it is a shared responsibility between the government and

the contractors at the prime and sublevel for the problems that we

have. It is clearly a shared responsibility.

Second, you talked about a number of different things that need

to be looked at, but some of the things you talked about represented management responsibilities, some of the things you

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talked about represented oversight responsibilities, and some of the

things you talked about represented audit roles; and I think we can

talk about that separately, I think they are different.

You have to have the right incentives, transparency and accountability mechanisms for the system to work. We don’t have that

right now.

And, last, yes, security is the big problem. There was a presumption that we were going to have a permissive security environment

and, therefore, it was going to be easy to engage in this reconstruction. We also assumed that the Iraqis were going to have an ability

to maintain it after we did it. Thirty-three percent, on average, of

contracting costs for reconstruction were going for overhead; 10

percent plus for security. That is obviously not what was expected

when we originally planned on this and when Congress appropriated the funds.

Mr. REED. You mentioned several areas. I guess your comment

about the need for having up-front audits before contracts are

awarded, in regards to that area, I think that I agree with you totally; that is the prudent business approach. In this situation, the

unusual and compelling circumstances made that somewhat problematic in terms of awarding what is called letter contracts, the authority to proceed, before the actual price of the contract was negotiated, which is referred to in that case as definitization, the problem we were talking about a moment ago. And so certainly I think

it wasn’t a case of the auditors not being available, it was a case

of the speed of which contractors had to be authorized to proceed.

As that became less of an issue, DCAA was involved in most of the

larger pricing actions that led to cost reimbursable contracts.

The issue of subcontractors, this has been a tough area for us in

auditing particularly KBR, because we expect the prime contractor,

KBR, to take responsibility for administering its subcontractors.

And so we were looking to them to tell us whether they have negotiated fair and reasonable prices with their subcontractors, whether

they are monitoring their performance adequately to ensure they

are delivering what the subcontract requires them to. KBR has not

always met our expectations in regards to demonstrating the reasonableness of some of the prices. In fact, that was in the restore

Iraqi oil that we talked a moment ago, was one of the big issues,

is their procurement files did not contain sufficient documentation

to show us how they determined what was a fair and reasonable

price in the case of one particular subcontractor. That continues to

be a problem with the continuing subcontracts.

We really expect KBR to be auditing its subcontracts, if they are

awarded on a cost-reimbursable basis, and we are pressing them

very hard to live up to their responsibilities in that regard and to

share with us the results.

Chairman WAXMAN. Thank you, Mr. Souder.

We now go to Mr. Lynch.

Mr. LYNCH. Thank you, Mr. Chairman.

Just to followup, Mr. Bowen. I talked about earlier the Bloom

case, where we actually got a conviction, and I recommended that

we look at all of the other contracts that Mr. Bloom and the other

people who were indicted and convicted had been involved in. It is

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my understanding, in response to that, you usaid that you had

made that recommendation to the Pentagon as well, is that correct?

Mr. BOWEN. Yes, sir.

Mr. LYNCH. And that they had in fact hired a contractor?

Mr. BOWEN. Actually made it to the Joint Area Support Group,

a DOD entity that is in charge of administrative management of

the embassy.

Mr. LYNCH. OK, so who is doing the actual investigation of those

individuals who have already been convicted and the other contracts?

Mr. BOWEN. Well, the followup—this was a development fund for

Iraq investigation that arose out of development fund for Iraq audits, and so we make recommendations on our audits, and one of

them was to followup on the other regions, just what you said. And

the person responsible for following up on those DFI recommendations was the Joint Area Support Group in Iraq, and they hired a

contractor to followup on that recommendation, check the other regions, but our review, which was completed this last quarter, following up on a recommendation concluded that they did not carry

out the recommendation properly, so we are going to followup ourselves.

Mr. LYNCH. It is just getting worse. They had a failure of a contractor, so what do we do? We hire another contractor, who doesn’t

do their job. You know what I mean? Actually, the chairman and

I have a bill that we are going to have to put on the floor at some

point, which requires the Defense Department to take that up as

well.

Mr. Walker, I believe you have something to add?

Mr. WALKER. I think it is important to note that the DFI Fund

is Iraqi money, not U.S. money. At the same point in time, we had

a fiduciary responsibility to be prudent with regard to the use of

that money. There are different pools of money, and we have different audit authorities depending upon which money is involved.

Mr. LYNCH. Right. I am sorry, Mr. Reed, go ahead.

Mr. REED. I think, without getting into details, it is a reasonable

assumption that investigations are continuing in regards to these

individuals and their association in other contracts. We are supporting investigations, and I am not at liberty to say much more

about that.

Also, I would point out that in terms of the La Nouvelle situation, you mentioned specifically and Mr. Mazon, we are demanding

that KBR provide cost information on all subcontracts that he was

associated with awarding. We are interested in whether those

prices were fair and whether excessive profits were made on those

subcontracts, and we are in the process of getting that information

right now.

Mr. LYNCH. OK. I appreciate that, but it has been a while at La

Nouvelle. Those folks were convicted quite a while ago, and we are

still trying to get information from Halliburton?

Mr. REED. Certainly, our first priority was to make sure we recovered the kickback amounts and the penalties associated with

the actual plea that was made, and we have been auditing the estimates of that amount and supporting the settlement in that regard. As we were doing that, we began to move into the secondary

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issues, and we are trying to—we obviously have to be careful we

do not step on the toes of any investigators who may be proceeding

down the same trails unbeknownst to my auditors.

Mr. LYNCH. Well, don’t be too shy. Don’t worry about stepping on

some toes. If we can get to this corruption and the bribery and all

that, that is very important.

Mr. Bowen.

Mr. BOWEN. Mr. Lynch, if I may offer one other point. Last

Wednesday we unsealed indictments on five other individuals that

were the results of followup investigations with regard to the

Bloom and Stein conspiracy in Hilla, and more are in the works.

So there is followup with respect to them, but we also need to be

sure we check the other CPA regions to see whether those comptroller offices operated properly.

Mr. LYNCH. I appreciate that. The point I am trying to make

here is that there are some core responsibilities of government on

oversight, and I just do not want to have those government responsibilities that are so central to our oversight function here to be

contracted out. That is where we got in this problem in the first

place. And I understand we are short on staff, but there has to be

another way to do this.

The central question I had, Mr. Bowen, last week we had the

Army in, and they testified that they had no idea—even though it

was an open, competitive bidding process, they had no idea that

Blackwater was being paid for security work under LOGCAP, even

though it was an open, competitive bidding process. They testified

several months ago that there was no contract. Last week—you

were at the earlier panel—they testified that, yes, in fact, that had

gone on. And the problem is the tiering of all of these contracts.

You have a general contractor, you have a subcontractor, you have

a sub-subcontractor, and a sub-sub-subcontractor.

I noticed in your report, Mr. Bowen, on page 8, we have an example of this problem. The State Department awarded DynCorp a

contract to build a residential camp for Iraqi police. DynCorp then

subcontracted the work to a company called Corporate Bank. Corporate Bank then subcontracted the work to an Italian company

called Cogim SpA.

Now, I want to ask you about this because it is down in your report. On page 8 of your report you say that DynCorp was awarded

a subcontract to build this for $55 million. Now, they subcontracted

to Corporate Bank to build it for $55 million on August 15, 2004.

That is according to your report. Two weeks later, on September

1, 2004, that corporation, Corporate Bank, subcontracted it out to

this Italian company, Cogim SpA, for $47.1 million, to do the exact

same scope of work.

Now, in that 2-week time period it appears that Corporate Bank made, I don’t know, about $8 million. I just want to understand.

Is that right?

Mr. BOWEN. I think you are alluding to a point Mr. Souder made

as well, and that is visibility into how a prime subcontracts work

and how that work is subcontracted down can result in dilution of

financial effort and, as a result, lack of oversight. There is—the

system that we operate under is a quality assurance program operated by the government, which expects that the contractor executes

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a quality control program over his subcontractors. And when the

lack of visibility by the operational overseer, the government doing

the QA program results in loss of visibility and cost controls.

Mr. LYNCH. I guess the central point of my question is this:

Could you determine any value added by Corporate Bank in the 2-

weeks they had the general contract? They made $8 million by resubcontracting out the work to the Italian company.

Mr. BOWEN. No, we didn’t, and I think the lesson learned is we

need to carefully study the design-build prime contracting process

that was used in Iraq, how subcontracting happened, and

definitization needs to operate within the cost-plus contract environment to control costs. And we heard repeatedly today that was

not executed effectively, has not been executed effectively.

Mr. LYNCH. Thank you, Mr. Chairman. I yield back.

Chairman WAXMAN. Thank you, Mr. Lynch.

Mr. Braley.

Mr. BRALEY. Thank you, Mr .Chairman.

Mr. Walker, Mr. Reed, Mr. Bowen, thank you for your time here

today.

Mr. Walker, I appreciated your comment about the fact that no

matter how dire the circumstances are we are talking about here

today, they really represent just the tip of the iceberg and the real

problem that we are facing in Iraq and accountability.

And, Mr. Bowen, I appreciated your comment about the watershed report that you issued in January. As you know from the last

time we were together, I read that report and I was deeply disturbed by some of the forward-looking conclusions that you reached

about the status of our situation in Iraq with future reconstruction

efforts, so I thank you for your time.

I would like to shift the focus and talk about swimming pools.

I was very proud to be president of the Blackhawk Area Swim

Team, where we had four teenage boys set three age-group swimming records in an Olympic swimming pool in Cedar Falls, IA, that

no longer exists because of aging and deteriorating conditions. And

one of the disturbing things about your report was that DynCorp’s

contract with the State Department revealed unauthorized work

being performed under the contract, specifically the building of an

Olympic sized swimming pool and luxury trailers without authorization from the State Department, is that correct?

Mr. BOWEN. That is correct.

Mr. BRALEY. And I understand we have some pictures that were

not included in your report. Maybe we can put those up on the

screen while I ask you a question.

This first photograph that we are looking at appears to depict a

pool that is in pretty poor conditions. As I understand it, DynCorp

had the pool built but then it collapsed, is that correct?

Mr. BOWEN. That is right.

Mr. BRALEY. And this pool was built in 2004 and then was subsequently rebuilt.

Mr. BOWEN. That is right.

Mr. BRALEY. So let’s put the picture of the pool up as it appears

today. Is that it?

Mr. BOWEN. Yes, sir.

Mr. BRALEY. It looks like a pretty impressive facility.

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Mr. BOWEN. Yes, sir.

Mr. BRALEY. There are many swim clubs in this country who

have limitations of being able to swim only in a 25-yard or 25-

meter pool, and that looks like one that would be available for competition level swimming.

Mr. BOWEN. Yes, sir.

Mr. BRALEY. Now, do we know who paid for the pool to be rebuilt

a second time?

Mr. BOWEN. No, we don’t. That is something we are following up

on through our investigative work.

Mr. BRALEY. So it could have been someone else, but as I understand from the communications with your staff, this could have

been built again by DynCorp, is that correct?

Mr. BOWEN. That is possible. That is a possibility, and we will

get that answer for you in short order.

Mr. BRALEY. But, theoretically, U.S. taxpayers could have paid

for this pool twice.

Mr. BOWEN. We will find out the answer to that question, yes,

sir.

Mr. BRALEY. And do you know whose idea it was to build this

swimming pool?

Mr. BOWEN. This was unauthorized work directed by the Iraqi

Ministry of Interior. Apparently, from the course of our audit, it

was approved by the senior advisor to the Ministry of Interior for

the Coalition Provisional Authority.

Mr. BRALEY. Did DynCorp have authorization from the State Department when they performed the work?

Mr. BOWEN. No, they did not. The system that we have set up

depends on an effective contracting officer’s representative exerting

oversight of how the money is spent under a contract. That did not

happen in this case and, indeed, it has been a problem with respect

to the State Department’s INL Office oversight of DynCorp. The result, one of the salutary results of our audit is that contracting officer’s representative has been replaced.

Mr. BRALEY. Can you tell the committee who the person was at

the CPA who gave that authorization?

Mr. BOWEN. I think you should go to the INL Department for

who that person is.

Mr. BRALEY. At our hearing last week on the $12 billion in cash

that the CPA failed to properly account for, Ambassador Bremer

and others made the argument that we shouldn’t worry because it

was just Iraqi money, and I disagreed with that argument at the

time. Nevertheless, today we are talking about U.S. taxpayer

money, and these same CPA officials seem to be just as careless

with taxpayer money as they were with Iraqi money.

I hope, Mr. Chairman, that the committee will pursue this question with the State Department and push DynCorp to return all

these millions of dollars, as the Inspector General recommended in

his audit report.

One of the other questions that I am concerned about are quality

of life issues. One of the things we rarely talk about is the direct

impact that these decisions have on the people in Iraq who are supposed to be benefiting from these dollars, and I am deeply disturbed about our continuing failure to meet the basic needs in the

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reconstruction in particular with the provision of electricity. Amazingly, although we have spent nearly $3 billion in U.S. taxpayer

money to restore electricity in Iraq, the production levels in 2006

were actually below pre-war levels.

Mr. Walker, can we put that in everyday terms? In Baghdad,

how many hours per day does the average family have electrical

power?

Mr. WALKER. Six.

Mr. BRALEY. And the GAO report indicates that the power supply that they have remains unreliable. Do people know when the

power is going on or off, or does it just happen randomly?

Mr. WALKER. There is not a pre-announced, pre-planned schedule. And part of the problem here is because of the terrorism. I

mean, there is an effort to try to sabotage the distribution of electricity even after it is generated from the generating plant.

Mr. BRALEY. Does that have an impact upon the approach that

we take in dealing with Iraqi people on a very fundamental daily

basis in terms of their trust for the services that we are providing?

Mr. WALKER. Well, first, the responsibility to provide services, I

would argue, rests with the Iraqi government. The Iraqi government is responsible for providing, electricity, clean water, and the

basic essentials that every citizen cares about. We are trying to

help them do that, but ultimately they are responsible and accountable. And the failure to be able to do that reliably and effectively

obviously undercuts the Iraqi citizens’ confidence in (a) their government and (b) the effectiveness of the Coalition to be able to generate results.

Mr. BRALEY. Well, what impact does it have on the hearts and

minds of the Iraqi people when their own government has billions

of dollars that are supposed to be devoted to these reconstruction

efforts and it remains unspent?

Mr. WALKER. I am not sure if they know that. I am not sure how

much the Iraqi people know about what is or isn’t being done with

regard to their funds. I can’t comment on that. Part of the reason

they haven’t spent the funds is they don’t have the capacity with

regard to the systems, the controls. They have bickering, believe it

or not, between various departments and agencies. Some departments and agencies are controlled by Shi’a, some are controlled by

other factions. And the bottom line is the citizens want the outcomes, they want to see the results, and they are not seeing them

yet.

Chairman WAXMAN. Mr. Braley, your time has expired.

Mr. BRALEY. Thank you.

Chairman WAXMAN. I presume they may not know whether the

government has the funds and not using it, but they know they

don’t have the electricity.

Mr. WALKER. Right. And, in fact, I think it is important to note

that we are trying to work with our counterparts, the Board of Supreme Audit, to try to help build their capacity to be able to do

their job. And as was mentioned before with regard to the DFI

funds, while they are not U.S. money, we had a fiduciary responsibility, and both Stuart Bowen and I have been trying to help

make sure that the records are turned over to the Board of Supreme Audit of Iraq so that they can audit what happened with

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that money. I mean, $9 billion to $12 billion is a lot of money.

There needs to be accountability over that.

Chairman WAXMAN. Thank you, Mr. Walker.

Mr. Sarbanes, you are next.

Mr. SARBANES. Thank you, Mr. Chairman.

I wanted to go back and talk again a little bit more about the

sustention rate and this notion of costs that get incurred before the

contract has been definitized, as I guess it is called. If I am understanding what you have testified to, the chances that you can incur

a lot of costs before definitization of a contract are improved in circumstances where contracts need to be let very quickly, where people brought on in ‘‘emergency circumstances,’’ is that right?

Mr. REED. Well, I think the risk that——

Mr. SARBANES. The risk, OK.

Mr. REED [continuing]. From my viewpoint, is that there is no

cost control before a contract is definitized. In other words——

Mr. SARBANES. So if I am an enterprising contractor and I know

how the system works, it might be in my interest to get in on a

situation where a no bid contract or the fast letting of a contract

was occurring, because then I know that I can load up a lot of costs

during this period where things are being incurred but nothing has

yet been definitized, right?

Mr. REED. That is certainly a risk.

Mr. SARBANES. OK. And were the circumstances under which

Halliburton and KBR and some of these other contractors came onboard were ones where things were happening quickly, contracts

were being let in an expeditious—to use the sort of best connotation of it—way? There were circumstances like that, right? I mean,

that is essentially what was happening here.

Mr. REED. Yes.

Mr. SARBANES. Do you want to respond?

Mr. WALKER. Mr. Sarbanes, I think it is important to note that

when you are dealing with contingency operations—and I would respectfully suggest that Iraq is a military contingency operation;

Katrina was a domestic contingency operation—the government

must do a better job of planning in advance, engaging in advance

contracting activities that you can draw on on a task order basis,

rather than being in the situation where you have to negotiate

things quickly, in a crisis circumstance. These problems are exacerbated under cost-plus contracts, which creates perverse incentives

for people to define the scope broadly, to incur more costs for obvious reasons.

Mr. SARBANES. And I agree the government needs to do that, and

I am looking at it from a contractor’s standpoint in terms of if you

are unscrupulous as the contractor, wanting to sort of take as

much advantage of the situation as you could, you could seize upon

these contingency situations and push hard for whatever rules and

checks the government was trying to put in place to be relaxed a

little bit because there are cost opportunities available to you.

But let me switch gears real quick. The process by which the

auditors make a recommendation to the contract officer regarding

questioned or unsupported costs, for example, what is that exactly?

Is there a meeting convened and who is at that meeting?

Mr. REED. No, we issue——

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Mr. SARBANES. How does that work?

Mr. REED. We issue a written audit report.

Mr. SARBANES. OK.

Mr. REED. Which explains what we audited, what we looked at,

and what our conclusions were, and our recommendations.

Mr. SARBANES. OK. Is there ever a face-to-face exchange around

the recommendation? And, if so, what is that?

Mr. REED. Yes, there is continuous communication.

Mr. SARBANES. OK.

Mr. REED. Especially in more significant issues. We give the contracting officer an early alert that we are having a major issue developing. We certainly talk to them before we issue the audit report, and often we attend a negotiations side-by-side with them.

Mr. SARBANES. OK. So who is in the room for that kind of a

meeting, that ‘‘negotiation?’’ So the contracting officer is there and

their staff, members of your staff are there, having made the recommendation. Is the contractor there as well?

Mr. REED. It is usually a pre-meeting of the government people

only to go over the strategy that the government side is going to

take in whatever negotiation is going to take place, and then the

contractor is brought in. In addition to the auditors, there may be

government engineers, there may be contracting officer technical

representatives who observe the physical work. It could be whatever the contracting officer feels he needs to support him in the negotiation.

Mr. SARBANES. OK, I have run out of time, but just real quick.

Then, in terms of the contracting officer making a decision on what

to accept, in a typical case, what kind of timeframe is involved

there, I mean, from the time you bring your recommendation forward to the time the decision is made on which costs to allow or

not allow?

Mr. REED. Well, there is considerable variation.

Mr. SARBANES. OK.

Mr. REED. It could range from within hours to months.

Mr. SARBANES. OK.

Mr. REED. Depending on the complexity of the nature of the

issue.

Mr. SARBANES. All right.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Sarbanes.

Mr. Welch.

Mr. WELCH. Thank you, Mr. Chairman.

Mr. Bowen, in your audit of DynCorp’s work for the State Department, it is pretty troubling. I am still not clear on exactly what

the taxpayers got out, but let me ask you a few questions about

some figures.

First, the total amount at issue was $189 million, is that right?

Mr. BOWEN. That is right. This is a task order under a very large

contract, but this task order covered that amount.

Mr. WELCH. OK. And you did not examine all of the costs, but

you did examine quite a bit, and there is $51.6 million for the residential camp at Adnan Palace, right?

Mr. BOWEN. That is right.

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Mr. WELCH. And there is no such thing as a residential camp at

this moment at Adnan Palace?

Mr. BOWEN. That is right, and there won’t be.

Mr. WELCH. So all the trailers that we bought for the Iraqi police

are sitting unused in storage somewhere in Baghdad?

Mr. BOWEN. At the Baghdad International Airport.

Mr. WELCH. And do we have to pay rent to store them there?

Mr. BOWEN. Yes. Yes, sir.

Mr. WALKER. I might note we have a lot of trailers in Hope, AR

related to Katrina. Systemic problem.

Mr. WELCH. Well, it sounds like FEMA was in charge of this.

And I noticed on page 10 of your report that the State Department, when it realized it wasn’t going to use these trailers, they

actually considered donating them to the Hurricane Katrina victims, is that right?

Mr. BOWEN. Yes, sir.

Mr. WELCH. Do you know if they were planning on bringing the

folks in New Orleans to Baghdad or the trailers from Baghdad to

New Orleans?

Mr. BOWEN. Well, I think the solution that is on the table now

is to use them for the new embassy compound.

Mr. WELCH. I mean, is this true, they literally have $51 million,

trailers that are empty with people who are homeless? That is the

story?

Mr. BOWEN. The story is we purchased trailers that we didn’t

use, and haven’t used yet.

Mr. WELCH. Who can we congratulate for this good work?

Mr. BOWEN. Well, what it has done is motivate me to look at the

rest of the DynCorp contract.

Mr. WELCH. Well, thank you. Who is DynCorp?

Mr. BOWEN. It is a Falls Church company, a very large defense

contractor. They had the LOGCAP contract previous to KBR.

Mr. WELCH. Let me ask you about another DynCorp contract. On page 2 of your audit you say that $36.4 million was spent on weapons and equipment, including armored vehicles, body armor, communications equipment. But in your report, on page 17, because of

poor record keeping, nobody can verify whether we got anything

that we paid for.

Mr. BOWEN. That is right.

Mr. WELCH. Did your auditors try to locate the equipment that

was purchased for this $36 million?

Mr. BOWEN. We are following up on that, but our job was to look

at how the equipment was managed, and it was managed in a way

that provided no assurances of accountability.

Mr. WELCH. There were some questions earlier on suggesting

that because it is a wartime situation, you can’t keep records. I

mean, is that really true? I don’t get that. If you are dealing with

corporations on these big purchases, $36 million, it goes to equipment that is of vital importance to the security of the troops. What

is the problem, what possible justification can there be to not have

a system, even in Baghdad, that allows the taxpayer to know that

the equipment they paid to get to the troops was delivered?

Mr. BOWEN. Well, there is no doubt that operating, managing

these contracts in a wartime environment is very challenging, but

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the cost of doing that is also built into the contract itself, or is anticipated to be so, and simply because we are operating in a wartime environment further does not dispense with the need for accountability.

Mr. WELCH. I really don’t get that. I mean, this equipment, it is

not like it is flown over in C–141s and just parachuted randomly

to various locations, wherever it happens to land, it goes into the

Green Zone or some secure location, right?

Mr. BOWEN. That is right.

Mr. WELCH. So the people who are dealing with the receipt of

this equipment are in physically safe locations, right?

Mr. BOWEN. Reasonably.

Mr. WELCH. So what happens to the equipment after it goes out

into the field is one thing, which may be difficult to understand

and to account for, but its actual receipt in the country, that it arrived, that—why, in a war zone, is it any more difficult when, in

fact, where the equipment arrives is a very secure location?

Mr. BOWEN. Well, your question cuts to a core lesson learned

that needs to be learned and applied in Iraq and beyond, and that

is in contingency relief and reconstruction and operations, there

must be systems developed, trained, and ready to go that can ensure reasonable accountability of the taxpayers’ money in the contingency operation.

Mr. WELCH. Let me just ask one last question. In your report

there was an indication that a contracting officer didn’t even keep

a file for a $25 million contract. Is that right?

Mr. BOWEN. That is right.

Mr. WELCH. Literally, I mean, is there any justification, any justification for not keeping a copy of a contract for that amount of

money?

Mr. BOWEN. No, there isn’t.

Mr. WELCH. Thank you.

Mr. WALKER. Mr. Chairman, can I quickly touch on something

here? Thank you.

Chairman WAXMAN. Mr. Walker.

Mr. WALKER. Let me tell you why we continue to have these

problems on a recurring basis; not just Iraq, but Department of Defense and other major departments. There is no accountability. The

appropriations that are granted are not adjusted based upon these

continued problems; organizations that are responsible for managing and overseeing these contracts are not held accountable. Contractors are not adequately held accountable; and the individuals

involved and who were responsible are not held accountable.

Mr. WELCH. And what could we do——

Mr. WALKER. Why change?

Mr. WELCH. What could we do to hold them accountable?

Mr. WALKER. Well——

Mr. WELCH. What three things could we do?

Mr. WALKER. Well, one of the things you have to do is you have

to deal with the systemic problems that I provided for the record

as a followup to last week’s hearing, and I hope to have a chance

to testify on this.

Second, you need to hold both contractors and government employees accountable when things don’t go right. There has to be

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consequences. People ought to be rewarded for doing a good job, absolutely. And I think it is fair to say most contractors do a good

job, and a vast majority of Federal employees do a good job. They

ought to be recognized and rewarded. But when things don’t go

right, there have to be consequences. And if there aren’t consequences, you are not going to get changed behavior. The government is no different than the private sector in that regard.

Chairman WAXMAN. Mr. Welch’s time is up, but, Mr. Bowen, let

me, just on this question of DynCorp, is this the first time we have

had an issue with DynCorp?

Mr. BOWEN. No, it is not. It is our first comprehensive audit by

my office, and, as I said, we are initiating a series of reviews.

And as to what can we do, Mr. Welch, I would also suggest the

debarment and suspension process is a meaningful method of accountability that could be utilized more effectively.

Chairman WAXMAN. Thank you, Mr. Welch, but let me just point

out that in December 2005 report on INL asset verification that

was conducted in July August 2005 reviewed DynCorp’s inventory

control and the report concluded INL cannot determine if the Bureau received what it paid for. I think this might be related to Bosnia. Are you familiar with that, Mr. Bowen?

Mr. BOWEN. Yes, that is right. That was an INL review. INL has

identified internally problems with DynCorp. Indeed, they identified problems with this contracting office’s representative, as our

report points out, in Bosnia. And let me point out also that this

was a joint review with the Department of State Inspector General’s Office, so we will continue to pursue reviews with them of

these issues.

Chairman WAXMAN. Mr. Walker’s point is what are the consequences of these things, and that is something we need to look

at.

Next on the list is Mr. Higgins.

Mr. HIGGINS. Thank you, Mr. Chairman. I just want to try to get

to the gut of this thing.

The essential services for any functioning society are electricity,

water, health care, education. None of that seems to be improving

very much in Iraq. Some, but not all of that, obviously, is the responsibility of the government and who’s contracting with the contractors to do a lot of this work.

Mr. Bowen, you had indicated that this is the 12th quarterly report, there are 50 auditors and investigators on the ground in Iraq,

and that the financial burden of Iraqi reconstruction is shifting to

the Iraqis. Now, from what I see, is a government in Iraq that

lacks legitimacy in the very eyes of the governed because it can’t

provide these essential services, and if we have $50 billion—$30

billion of which was U.S. money, American money; $20 billion of

which is Iraqi money—and we are not seeing measurable progress

toward restoration of essential services and also oil production, it

seems hardly confidence-inspiring that the responsibility is now

shifting to, based on anybody’s observation, an honest assessment

of the legitimacy of the Iraqi government, it is not confidence-inspiring. Your thoughts?

Mr. BOWEN. Well, one other essential element to a working society’s infrastructure is rule of law, and I think the lack of security

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in Baghdad and elsewhere across Iraq has prevented success of

what was planned, an effective relief and reconstruction operation.

The other thing, let me point out, is that the U.S. investment

was meant to get the Iraqis started going forward. The infrastructure was seriously deteriorated through decades of neglect, and The

World Bank’s estimate was $56 billion. In fact, that was low. I

would say the cost to restore that infrastructure is at least $100

billion, given what we found.

But trying to do a relief and reconstruction operation before stabilization is achieved is difficult at best. That is certainly a lesson

in Iraq.

Mr. HIGGINS. And that is the point, I mean, stability hasn’t been

achieved, and there is obviously a lot of waste and abuse of very

significant money, and this Congress is being asked to authorize

more money for an effort that everybody, I believe, concludes is an

abject failure. And I think it speaks to the oversight responsibility

of Congress. I mean, you indicated that there is a real-time audit

method being used.

Mr. BOWEN. That is right.

Mr. HIGGINS. After the conclusion of this 12th quarterly report,

is there any signs of progress this situation is changing? I think

that is a very important question relative to confidence or lack of

confidence that this Congress has in the administration’s ability to

effectively administer this.

Mr. BOWEN. And the answer is yes, we have made progress. The

taxpayers and the Iraqis have received a lot of successful projects

as a result of the $21 billion investment, notwithstanding the problems that we have identified. Polio has been eradicated; 5,000

schools have been built or refurbished; there has been progress in

the education sector, in roads and transportation, communications.

But the key is developing a sustainable, coherent infrastructure

strategy that brings the country together, at the same time bringing an effective and coherent rule of law strategy to bear in Baghdad and beyond, and that has been a continuing challenge. The investment targets, though, I think are the right ones to choose. The

Provincial Reconstruction Team effort is the most important capacity-building endeavor in Iraq nationwide, and especially in Baghdad. The Commander’s Emergency Response Program, we have

looked at it a couple times; it is about maneuver units executing

quick turnaround projects and, in an unstable environment, that is

the right place to spend the money. The Community Action Program run by USAID has made a lot of difference at the very grassroots level. But progress has been mixed.

Mr. HIGGINS. Woefully inadequate. What about internal structures to enhance the issue of accountability and transparency moving forward?

Mr. BOWEN. Well, that has been a story of gradual progress,

partly driven by the presence of oversight on the ground in Iraq,

both DCAA, GAO, SIGIR, auditors uncovering issues that need to

get fixed. That is what I mean by real-time auditing, definitization,

award fees, the hospital program, the management of property. It

is about executing our job that incrementally brings improvement

in the overall management and it is about working with manageVerDate 11-MAY-2000 15:10 Jan 14, 2008 Jkt 000000 PO 00000 Frm 00123 Fmt 6633 Sfmt 6633 C:\DOCS\38578.TXT HGOVREF1 PsN: HGOVREF1
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ment to get it done as we find problems, rather than to wait for

reports to come out.

Mr. HIGGINS. So you think it is a good thing that we are at this

watershed period where the Iraqi reconstruction is shifting from

U.S. influence to an almost exclusive Iraqi influence?

Mr. BOWEN. Well, regardless of whether it is good or not, it is

the current reality. It is going to drive decisionmaking moving forward, and the burden has shifted. The truth is $38 billion invested

the last 4 years. That is a significant taxpayer investment in Iraq

at every level. That period is past, and the Iraqis cannot leave $12

billion in their treasury again this year.

Chairman WAXMAN. Thank you, Mr. Higgins.

Mr. Yarmuth.

Mr. YARMUTH. Thank you, Mr. Chairman.

Mr. Walker, you have talked about systemic problems which

have made it more difficult for you to do the job which we have

asked you to do, which is to look out for the taxpayers’ money, so

I want to focus a little bit maybe on an area that we haven’t talked

about, which is the level of cooperation you have received from

other government entities.

Last year, Congress was told that the Defense Department Inspector General had nobody on the ground in Iraq, which was astounding considering the amount of money that we are spending

there. I understand that has been rectified and they have at least

a few people there. It is also my understanding that you would like

to have people on the ground in Iraq as well, and have made a request of the State Department for space, is that correct?

Mr. WALKER. We have space. I mean, we have already agreed

with SIGIR that we are going to co-locate with SIGIR. What we

have a request to the State Department, which they are incredibly

slow in responding to, is formal approval for us to be able to have

people in Iraq for longer periods of time. Right now they approve

us to be in for 2 week periods of time and that is it, and we are

asking for 3 to 6 months, for people to be there for 3 three to 6

months, and then we can project supplemental people in and out

for 2 week periods as a supplement to, not a substitute for, a few

people that would have a continuing presence.

Mr. YARMUTH. What is the rationale that they have used to try

to restrict you in that type of way?

Mr. WALKER. I am not——

Mr. YARMUTH. They haven’t used the not supporting our troops

line?

Mr. WALKER. Well, no, the issue is that—separation of powers?

That is what their—well, they need to read the Constitution. There

is a lot of people that aren’t very good at understanding what the

Constitution is. I mean, we are there to help the Congress exercise

its appropriations, oversight, and authorization responsibilities.

They are just incredibly slow. I mean, the State Department is a

big bureaucracy. Not everybody is for oversight; not everybody is

for transparency; not everybody is for accountability. And it is time

that they acted on this. And I am going to call Secretary Rice on

Monday if they don’t give us an answer before this. This has just

been going on too long.

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The other thing we need, quite frankly, is the Congress is not

supporting our agency enough. It does not give us adequate funds.

I am going to have to ask for a supplemental in order for us to be

able to get our people over there and pay for it. We generate $105

return for every $1 invested on us. Second place in the world is 10

to 1, and we are getting starved, and we hear about tens of—we

have heard here about billions of dollars of waste. I mean, what is

the priority here?

Mr. YARMUTH. Mr. Chairman, I suggest we might want to have

someone from State Department respond to these issues as well.

Let me ask you about the Defense Department, turn to them for

a second. It is my understanding that you have been studying the

readiness and effectiveness of the Iraq security forces. Is that correct as well?

Mr. BOWEN. Yes, we have issued two audit reports last quarter

on that issue, and I know GAO is looking at is, as is the Department of Defense Inspector General.

Mr. WALKER. We are, and that is a critical point. I appreciate

your asking it. That comes back to the transitional readiness assessment reports that we have been seeking access to.

Just so the members understand what that is, we have U.S.

troops embedded with Iraqi troops, and those troops are responsible for doing detailed assessments as to leadership, equipment,

training, and other factors to try to assess the true readiness of

Iraqi troops. This is done for U.S. troops, and we have had access

to that information on a recurring basis for many years. It is classified information, but we have people with all the necessary clearances. And while we have received some briefing from the Defense

Department, we have not received the detailed records. It is essential we get those.

You are being asked to give several billion more dollars. You are

being asked to support an increase in troop deployments. You are

being asked to provide additional funds for a variety of things to

support the standing up of the Iraqi security forces, which will help

us get out quicker. You need this information in order to be able

to assess whether or not it is making a difference, and we are the

agent to get it for you.

Mr. YARMUTH. Again, has this been—the rationale for this, is

this another separation of powers allegation?

Mr. WALKER. No. Believe it or not, I was really surprised to find

out that, evidently, nobody in the Pentagon has actually seen this

detailed information, that it has just been in the area of responsibility; it has been within Iraq and CENTCOM and the Multinational Force, MNFI. But my understanding is the Pentagon is

just now getting some of this data, didn’t even have it itself. People

are concerned it is very ‘‘sensitive information.’’ Well, it is classified, that is true, and that makes it sensitive, but that doesn’t

mean that the Congress doesn’t need it and we don’t have a right

to it. I mean, we do have a right to it, and you need it and so do

we.

Mr. YARMUTH. Thank you, Mr. Walker.

Mr. Chairman, I am sure we will want to insist that we get better cooperation from those two Departments.

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Chairman WAXMAN. Yes, absolutely. I agree wholeheartedly, and

we will followup on that.

Mrs. Maloney.

Mrs. MALONEY. Thank you, Mr. Chairman, for having this hearing, and I really want to thank GAO for providing us with nonpartisan accurate information. It is very vital for us to practice our

oversight responsibilities and I, for one, will be supporting your request for additional funding so that you can give us the information to make good policy decisions.

One of the reports that came out, which, in my sense, is government is the best, it was a bipartisan report with Congressman

Hamilton and Baker, and in their report they said the situation in

Iraq is grave and deteriorating. And one of their recommendations—their recommendations really called for a reversal of the policy that we are following now. They said we should start withdrawing troops, not sending in more troops.

My brother is a former Vietnam veteran, Mr. Chairman, and he

called me last night and he said that in Vietnam they kept sending

more and more troops, and all they saw was more and more death,

and it didn’t work out, and he urged me to vote against increasing

the troops there.

But one of the key proposals in the Hamilton-Baker report was

No. 21, that the United States should tell the Iraqis that the failure to meet their own milestones will only accelerate American

withdrawal or result in a reduction of American support. So they

are calling on us to really put their feet to the fire and tell the

Iraqis very plainly, if they don’t stand up and do their own work,

then we are going to be leaving.

The last constituent that I went to see, Mr. Chairman, at Walter

Reed, it was a graduate of West Point, our finest and brightest; he

was all shot up. I asked him how did it happen; he said, I wasn’t

on the front line, I was in charge of garbage removal. I mean, you

could have knocked me over. I said, garbage removal? And he said,

I knew I was in trouble when all my Iraqi colleagues started moving away from me, and then they came out and shot me.

And I don’t understand this policy where our troops are in a civil

war. As one of them said, we are shooting and we don’t know who

we are shooting at. We don’t know if they are an enemy or a friend;

we don’t know. We are in the middle of a civil war, and I question

why American troops are being used for garbage detail in Baghdad.

So I, for one, feel that it is time for us to be standing down and

letting the Iraqi people take care of their problems. The longer we

stay, they run away from their responsibilities.

Now, the reports that we have been getting—and I want to mention one from a former PRT leader, a Provincial Reconstruction

Team, and this was a report where she said that the—she is talking about the civilian surge, not the troop surge, but that the civilian surge is not working. She says—and it is her words—that these

teams, these reconstruction teams have not been successful to date,

and she feels they are ill-defined mission and they will not be successful. And her comments are in opposition to this policy.

But I have to come back. Mr. Walker, you mentioned that you

were underfunded, and my constituents, I can’t walk down the

street without someone asking me about the $12 billion that was

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flown over of Iraqi money, and of which $8.8 billion is unaccounted

for. That is the official term. Unaccounted for means missing, gone.

And I know that it has been looked at, but I can’t get it out of my

mind and my constituents can’t get it out of their mind that if we

had been better stewards of the Iraqi money and the reconstruction, then we wouldn’t be spending our American money on the

Iraqi reconstruction.

And I want to ask Mr. Bowen, Mr. Reed, Mr. Walker, if you have any insight on what happened to that $8.8 billion? And you say we

should be more accountable. Can you help us in figuring out how

to be more accountable on that $8.8 billion that dissolved into ether

or whatever? And I just am very frustrated. If you could give us

some stronger markers for the administration.

They say there are weapons of mass destruction. We can’t find

the weapons of mass destruction. They say give us a surge. We give

them a surge, it doesn’t work. We have given them four increases

in troops and it hasn’t worked. Can you think of any guidelines or

oversight that might get the Department of Defense to have standards by which they will agree that, after a certain amount of misleading and failure, that they will begin to step down and ask the

Iraqis to step up and take responsibility for their own country?

Anyway, Mr. Walker.

Mr. WALKER. I will start. First, as you know, I had a son who

was a Marine Corps officer who fought in Iraq, so I have not only

been working on this in my responsibility as Comptroller General

and GAO’s responsibility, I obviously have an interest given that

I have a son that fought over there, although he is out now.

Second, we did do a lot of work in support of the Iraqi Study

Group. I was one of the first witnesses before the Iraqi Study

Group. We gave them all of our reports and made access to all of

our people there.

Third, one of the things that we have recommended a long time

ago to both the executive branch and the Congress is that you need

to have more metrics and milestones both for what the United

States is supposed to do and trying to accomplish and what the

Iraqis are supposed to do and trying to accomplish. If you don’t

have appropriate metrics and milestones, and if you don’t have

adequate transparency over those metrics and milestones, you don’t

have any idea whether you are making progress or not and you

can’t make informed decisions.

Part of that is why you need the TRAs, but it needs to go not

just with regard to Iraqi security forces, it has to deal with some

of the other issues that have been talked about here, electricity,

water, a variety of other factors, oil production, for example. So

there need to be more metrics and milestones and you need to be

able to have somebody like GAO and others in the accountability

community to assess the reliability of the information that you are

being provided. The old trust but verify approach.

Chairman WAXMAN. Thank you.

Mr. Bowen.

Mr. BOWEN. As we addressed last week and the CPA did not follow either its mandate required under the U.N. Security Council

Resolution 1483 or its own rules in managing the Development

Fund for Iraq and, thus, the Iraqi Ministries distributed that

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money, used that money, spent that money without any accountability back to CPA as to how it was used. The Board of Supreme

Audit continues to look at that issue.

I have worked with GAO to provide the documents to the president of the Board of Supreme Audit so he can complete his audit.

The audits that were completed by other entities employed by the

U.N. looking at this issue found a lack of controls within the Ministries and, thus, no accountability. And, finally, the Commission

on Public Integrity, the law enforcement arm in Iraq, ironically,

created by the CPA, has hundreds of fraud cases ongoing with respect to what happened to that money.

So it is not a good story as our audit reported almost 2 years ago.

Chairman WAXMAN. Mr. Reed, do you want to respond?

Mr. REED. I defer to Mr. Walker and Mr. Bowen and the god

work they are doing in this area. It doesn’t fall, of course, as a contract audit issue, but as a private citizen, I share your concerns

equally.

Mr. WALKER. If I may real quick, Mr. Waxman. As you know, and hopefully your constituents do, the $9 billion, roughly, is Iraqi

money, but that doesn’t mean we shouldn’t be concerned about it.

We had a fiduciary responsibility with regard to that money, and

that should be taken very seriously. We are, in part, going to be

viewed as being responsible and accountable as to whether or not

those funds were used properly and for appropriate purposes and

with positive outcomes irrespective of whose money it was.

Now we need to make sure that the legitimate institutions of the

Iraqi government, namely, the Board of Supreme Audit, has access

and cooperation in order to conduct their audits of what happened

with that money. And I and Stuart Bowen are trying to make sure

that happens, but there are varying degrees of cooperation that are

occurring there.

I found out recently, for example, that my counterpart, his home

was entered into by our Army; all of the weapons were confiscated;

no explanation, no apology. His predecessor was assassinated. The

job is a pretty tough job. Not everybody is for transparency and accountability. Fortunately, in this country, people debate about it

rather than resort to violence.

Chairman WAXMAN. Thank you, Mrs. Maloney.

Mr. Bowen, just before I call on Mr. Clay, a clarification. Last

week, when you were here with Ambassador Bremer, it seemed to

me that both of you agreed there was no fraud. But now you are

telling us that there is a fraud investigation by the Iraqis.

Mr. BOWEN. Right.

Chairman WAXMAN. So there was—there certainly appears to

have been fraud by the Iraqis in the use of that cash, is that correct?

Mr. BOWEN. Right. What I said was that our audit made no findings of any fraud with respect to the disbursement of that audit.

What I have said today is that the CPI commissioner reports to me,

when I go visit with him, that he has ongoing cases with respect

to allegations of fraud, allegations of fraud—and I think I said that

last week as well—on the use of that money.

Chairman WAXMAN. CPI?

Mr. BOWEN. Commission of Public Integrity. It is the Iraqi FBI.

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Chairman WAXMAN. OK. Thank you.

Mr. Clay.

Mr. CLAY. Thank you, Mr. Chairman, and thank you for this series of hearings on Iraq.

In his speech last month announcing his new strategy for Iraq,

President Bush asked Congress for an additional $1.2 billion in

economic aid to Iraq. That is a lot to ask of American taxpayers

who have already spent $30 billion on Iraq reconstruction. The

President also said that, as part of this plan, the Iraqis have promised to spend $10 billion of their own money. But when we examine

previous Iraqi commitments, we find a troubling pattern.

Mr. Walker, according to a recent GAO report, the Iraqi government budgeted about $6 billion for reconstruction projects for 2006,

but as of August 2006 it had spent only $877 million of that

amount. That is only 14 percent of what they promised to spend,

isn’t it?

Mr. WALKER. You are correct that they have not spent near what

their budget allows. And I think one of the things that Congress

needs to think about when it is considering this appropriations request is whether or not you ought to have a matching concept, our

funds will flow when their funds flow. We do that between Federal

and State support circumstances and, of course, employers do that

for pensions with regard to 401K. We need to think about that concept and to what extent that concept might apply here.

Mr. CLAY. So like dollar for dollar, then, is what you are talking

about.

Mr. WALKER. Not necessarily dollar for dollar. If they committed

to do $10 billion, for example, and we have committed $1 billion

too. That is 12 percent. Maybe when their funds flow, our funds

will flow. It is just a concept to think about.

Mr. CLAY. Let me also ask you about the GAO report that also

found that the Oil Ministry had spent less than 1 percent of its

capital budget in 2006, is that correct?

Mr. WALKER. It is a very low percentage. I am not sure that it

is less than 1 percent, but it is very low. That sounds about right.

Mr. CLAY. OK, thank you.

Mr. Bowen, at our hearing last week you informed us that at the

end of last year there was about $12 billion left in the Iraqi treasury unspent.

Mr. BOWEN. That is right.

Mr. CLAY. Is that accurate?

Mr. BOWEN. That is the number that I was told. Two days ago

the Iraqi Minister of Finance himself acknowledged at least $9 billion that should have been spent on reconstruction and relief activities in Iraq was unspent and left in the treasury last year.

Mr. CLAY. What reason did they give you for not spending?

Mr. BOWEN. No reason is given, but we have an audit in our latest quarterly report that addresses ministry capacity development,

a very significant issue in Iraq in that there are a variety of reasons I have heard, and one is the difficulty of the contracting system in Iraq. The regulatory process is byzantine, the fear on the

part of Iraqi bureaucrats to sign anything because of potential

prosecution. But I think that probably the overarching issue is the

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lack of a consensus upon a strategic plan on the Iraqi side for a

relief and reconstruction program for the country.

Mr. CLAY. Now, the fact that the Iraqis have failed to spend this

money raises a question whether the Iraqi government is trying to

fund the reconstruction. I am concerned that the Iraqi government

may be waiting for the United States to spend American taxpayer

dollars so that it doesn’t have to spend Iraqi money on reconstruction of its own country. Do you get that sense?

Mr. BOWEN. That is an issue of political will and it is a plausible

conclusion.

Mr. CLAY. And so, in your work in Iraq, you have seen signs that

the government does not want to spend its money and they are

waiting on American taxpayer dollars to flow.

Mr. BOWEN. Well, as my latest report points out, the Iraq Relief

and Reconstruction Fund is coming to an end, it is the end of the

earth now, and that means, by simply definition, the Iraqis are

going to have to sustain, going forward, the financial burden of the

recovery of their country.

Mr. CLAY. Thank you for that.

And, Mr. Walker, do you have a similar impression, that the

Iraqis may be waiting for the United States to spend their money

before they spend any of the Iraqis?

Mr. WALKER. They clearly have a number of capacity challenges

which prevents them from spending the money; they don’t have an

overall plan. And, frankly, I mean, obviously, if somebody else is

willing to spend money and you don’t have to spend yours, then

that has behavioral impacts.

I might note that according to my very capable staff, almost 30

percent of DOD’s reconstruction projects won’t be completed until

late 2008. So while we have made substantial progress, there is

still work to be done.

Mr. CLAY. And just to close, Mr. Walker, I sense a level of frustration on your part at this entire ordeal of the Iraq reconstruction,

and maybe I am reading it wrong, but I certainly sense it.

Mr. WALKER. My frustration is broader than that. I mean, the

Defense Department is No. 1 in the world in fighting and winning

armed conflicts, but they have 15 of 27 high-risk areas and there

are billions of dollars wasted every year. Billions.

Mr. CLAY. Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Clay.

Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Mr. Chairman.

Let me thank all the witnesses for their testimony today.

Mr. Walker, I had some questions regarding the State Department’s diplomatic security operations and the contracts they let

under that, and I don’t know to what extent GAO has done recent

work in this area. I know you have looked at it in the past, but

there is the Worldwide Personal Protective Services Program and

there are a number of firms that have contracts under that overall

umbrella, including DynCorp, Triple Canopy, and Blackwater.

And there were some press reports back over the last summer

that suggested that some audits had found some major discrepancies in terms of the amounts of moneys paid for and not being

able to track the costs that those were allocated to. I don’t know

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how familiar you may be with those, and I wondered if you

could——

Mr. WALKER. I am happy to try to go back and find out what we

have done and provide something for the record. I am not familiar

to be able to talk about it now. I will tell you that we are using

contractors in new and unprecedented ways, including with regard

to security arrangements. I mean, if one goes—and I am sure you

have been, I have been a couple of times—to Iraq and in the Green

Zone, you see a lot of private contractors basically responsible for

security, including around where we currently have our Ambassador, which is not normally what you would see when you go to

a U.S. embassy elsewhere in the world.

Mr. VAN HOLLEN. Right. That used to be a function carried out

by the Marines or other U.S. official members of the armed forces.

Mr. WALKER. Well, but obviously our presence is much larger

there; we have a lot of contractors, we have troops there. But let’s

just say that there has been a blurring of the roles and responsibilities, and part of that is because we don’t have enough in-strength,

we don’t have enough boots on the ground to do some of the things

that need to get done.

Mr. VAN HOLLEN. Does GAO have an estimate of how many socalled private soldiers are over there, people who are not members

of the armed services but have responsibilities for security?

Mr. WALKER. We don’t, and, frankly, that is one of the problems,

is that nobody is really responsible and accountable for maintaining some type of control over how many contractors we have, what

are they doing, what are the contracting arrangements, etc.

Mr. VAN HOLLEN. OK. I am going to ask you to look into there

were some press reports about a contract that was let under the

Worldwide Personal Protective Services contract of the State Department, one to Blackwater, where they were, under the original

contract, to be paid about $229 million over 5 years. And yet, as

of June 30th last year, according to a highly redacted audit statement that we have, they were actually paid an additional $100 million under that contract, and I am interested in what the additional $100 million was spent on. And if you can comment on that

now, great; otherwise, we will make sure you get this information.

Mr. WALKER. I will try to get some more details, but it is my understanding that contractors do provide security for our Ambassador and certain other State Department personnel in Iraq.

Mr. VAN HOLLEN. No, as you say, I have been there too and, you

are right, when you get escorted from the airport and others, you

often have private security.

Mr. WALKER. Right.

Mr. VAN HOLLEN. And it is an overall policy question as to what

extent we should rely on those individuals.

Mr. WALKER. I agree.

Mr. VAN HOLLEN. And then there is the separate question, of

course, when you do provide these contracts to provide for private

security, whether or not the taxpayer is getting what it paid for,

whether there are problems with the contract.

Mr. WALKER. Value for money, right.

Mr. VAN HOLLEN. So there is a particular contract here that I

would ask you to take a look at going forward.

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Mr. WALKER. I will go back and find out what we have done and

will touch base with you. We also want to coordinate our efforts to

make sure there is not duplication of effort as to what might be

being done by other members of the accountability community, but

we will get back to you, Mr. Van Hollen.

Mr. VAN HOLLEN. OK. I don’t know if either of the other witnesses want to testify. This is within the State Department, as I

said, the Worldwide Personnel Protective Services.

Mr. WALKER. Well, we would want to talk to the State Department IG, for example, to find out what, if anything, the State Department IG has done on this.

Mr. VAN HOLLEN. OK.

Mr. REED. We have done work at DynCorp on some of their protective service contracts, not the one, unfortunately, that Mr.

Bowen addressed earlier, but some of the earlier ones we have been

doing contract audits.

Mr. VAN HOLLEN. OK. Thank you.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you very much, Mr. Van Hollen.

I want to thank the three of you.

Did you have anything further, Mr. Lynch?

Mr. LYNCH. May I, Mr. Chairman? I just have one quick question.

Chairman WAXMAN. The gentleman is recognized for one quick

question. [Laughter.]

Mr. LYNCH. Thank you, Mr. Chairman.

I know I have spoken to Mr. Bowen before on this. I have enough

experience in the construction industry to be dangerous, and I

know that in the private sector in this country we use a tool called

critical path management, where you actually have a construction

diagram, a blueprint, if you will, of a project and it is all laid out

what function has to go next, pouring concrete, erecting steel, and

it has the whole project laid out in a blueprint so that anybody

walking onto that job to do oversight, to find out whether the

project is on schedule or over budget can basically look at that document and find out whether or not the project is on schedule and

on budget.

Do they use anything like that in any of these—and this is a

question that is certainly open to Mr. Walker and Mr. Reed. Do you

use any tools like that are required of these defense contractors

and folks that are actually building these projects for us? Because,

for us in the private sector in this country, it offers an objective assessment of where the projects are at, and it is a great cost-containment tool. In my trips—I have been over there five times—I

haven’t been able to locate any documents that would help me

make that type of assessment, and I just didn’t know if you had

access to those types of tools; critical path management, it basically

lays out an accountability tool that you can track the projects on

a case-by-case basis at a specific moment in time.

Mr. REED. We have not seen that in our review of quality assurance programs. The quality assurance burden is broader and it requires the government to ensure that the contractor has a quality

control program. That is where that tool would come into use if it

were there. But as we have heard today, the levels of subcontractVerDate 11-MAY-2000 15:10 Jan 14, 2008 Jkt 000000 PO 00000 Frm 00132 Fmt 6633 Sfmt 6633 C:\DOCS\38578.TXT HGOVREF1 PsN: HGOVREF1
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ing sometimes step down two or three steps beyond the prime, and

that leads to a weakening of oversight, an attenuation of insight,

and has cost some waste.

Mr. LYNCH. OK.

Thank you, Mr. Chairman. I yield back.

Chairman WAXMAN. Thank you. Good question, Mr. Lynch.

I want to thank the three of you. You have been very helpful and

I appreciate your testimony and look forward to continuing hearing

from you and learning from you as to what accountability we are

getting for the money that is being spent. Thank you.

That concludes our business. The meeting stands adjourned.

[Whereupon, at 12:37 p.m., the committee was adjourned.]

[The prepared statement of Hon. Wm. Lacy Clay follows:]

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