Officials fear contracting abuses in wake of Hurricane Katrina

Four weeks after Hurricane Katrina thrashed the Gulf Coast and a thousand miles from where the storm hit, dozens of lobbyists, contractors and consultants huddled at an industry conference trying to get a piece of the largest federal disaster assistance program in U.S. history.

In the hurricane's immediate aftermath, federal agencies gave several large companies work through no-bid contracts or contracts with limited competition, including the Bechtel Corp., the Fluor Corp., The Shaw Group, and CH2M Hill. Halliburton subsidiary Kellogg, Brown & Root was awarded work under a pre-existing contract that had previously been competitively bid. Now an army of companies is lining up to get its share of the $60 billion already allocated for recovery and reconstruction operations and the tens of billions more expected to be appropriated in the coming weeks.

"Trust me, there's going to be plenty for everybody down there," retired Marine Col. Edward Badolato, executive vice president of homeland security for The Shaw Group, told participants at the Katrina Reconstruction Summit on Monday. Equity International, KBR and consulting firm McKenna Long & Aldridge organized the conference.

The Homeland Security Department, however, is ill-prepared and understaffed to oversee these contracting efforts, some conference participants said. Indeed, the $60 billion already appropriated for recovery is more than the department's annual budget.

Some also expressed concern that local businesses and workers in the affected regions will be shut out of the work because they do not have powerful lobbyists in Washington, do not understand the rules of federal contracting and are displaced around the country.

"I think what you can expect in the days to come ... is that the press, Congress, the public and the investigative agencies will be focusing more and more of their attention on fraud," said Joshua Hochberg, former chief of the Justice Department's fraud section and now a consultant with McKenna Long & Aldridge.

"The fear is that Katrina will become a perfect storm for fraud," Hochberg said. "The fear is that huge dollars, the chaotic conditions, the emergency situation and the suspension of rules will be, in effect, a second perfect storm ... The line between profiteering and doing good deeds in emergency situations can be very thin."

Congress will be looking for accountability in contracts, said G. William Hoagland, senior budget adviser for Senate Majority Leader Bill Frist, R-Tenn. "There is a great deal of nervousness with the people that I work for over the level of dollars being provided, as rapidly and as quickly as they are being provided, that we do not increase the level of waste [and] inefficiency," he said.

Hoagland declined to comment on whether Halliburton should be given work while it is under investigation for overcharging in Iraq. "As a citizen, I'm always concerned and I would assume that other people are too," he said. "I hope that we're avoiding as many of these non-bid contracts as possible."

Local businesses are at a disadvantage in the rush for Katrina contracts, speakers said. New Orleans city officials do not have lobbyists in Washington and do not know how to connect to the federal contracting process, said the Rev. Jesse Jackson in a keynote address. Many contracts are being awarded by the Federal Emergency Management Agency.

"FEMA itself must have some commitment to democratic principles and democratic reconstruction," Jackson said. "The victims of the hurricane should have priority [in] supplying that which must be procured."

The federal government will award the vast majority of reconstruction contracts and will do so under federal regulations, said Michael Kavanaugh, a lawyer with McKenna Long & Aldridge who specializes in government contracting.

Companies that already have been given contacts are under "intense pressure" from federal agencies to subcontract to local businesses, he said. But local businesses may not understand federal contracting regulations, which means they could be walking into a minefield of legal complications, he said.

The Stafford Act allows the federal government to reimburse local businesses for legal services, Kavanaugh said, but it is not clear if the government will provide that kind of help in the Gulf Coast.

"Another big problem that government contractors, as well as commercial contractors, are going to have is determining under their contracts who in the government has the authority to direct them to do the work," Kavanaugh added. "You've heard stories in the news and here today about contractors who have sprung into action without any contracts at all. They have just simply been told by a FEMA representative or someone else that a need exists, go do it."

DHS and FEMA also have a shortage of contracting officers and personnel, Kavanaugh said, meaning that there will be people in the field who may not be totally familiar with federal requirements. "Contractors have to be extraordinarily careful in who they take direction from . . . [and should put] everything in writing," he recommended.

But FEMA only has allocated about $16 billion of the $60 billion in emergency funding, Hoagland said, adding that "nobody knows" how much more will be needed because damage assessments are not complete. Some have predicted that up to $200 billion more will be needed, but Hoagland said the amount could be as low as $100 billion.

Frist is going to direct committee heads this week to scrub their budgets to try and find offsets to pay for reconstruction efforts, Hoagland said.

"I have no idea what the committees will come up with, if they will come up with anything," he said. "I'm not opposed to offsets. I think we should try to find the offsets for this. In principle, it's right, but when you get down to specifics, it gets a little bit more difficult."

Further supplemental funding could be delayed, based on how slowly FEMA is currently spending money, Hoagland said, adding that there's a "slight possibility" that Congress will use the DHS 2006 appropriations bill as a vehicle for the supplemental. The bill (H.R. 2360) is in conference.