Subcontracting Substandard Services: Military Contracts in Iraq Still Controversial

U.S. wars in Afghanistan and Iraq have been plagued by private military contractors that have performed poorly or failed miserably in fulfilling their contracts. Some overstated their capabilities or were badly managed and under-skilled, while others committed outright fraud.

Past investigations concentrated on major contractors such as Halliburton and Kellogg, Brown and Root (KBR), but recently the smaller companies — such as Najlaa — to which these giants subcontract have drawn fire.

"The government has limited visibility into subcontractor affairs and limited ability to influence their actions," said former U.S. Congressman Christopher Shays at a July 2010 hearing of the Commission on Wartime Contracting. "This fact presents a challenge to transparency and accountability for the use of taxpayers' dollars. Poorly conceived, poorly structured, poorly conducted, and poorly monitored subcontracting can lead to poor choices in security measures and damage to U.S. foreign policy objectives, among other problems."

The United States, however, has become so dependent on contractors who do the laundry, feed the troops, and build and run facilities that it would be difficult if not impossible for the military to continue without them.

Najlaa's Contracts

Najlaa is part of the extensive web of subcontractors supplying the goods and services that sustain U.S. war efforts, and the Kuwait-based company's failures and problems fit a common pattern. One of several firms that make up Baisey-owned Eastern Solutions Group, Najlaa has several subcontracts with KBR, which has provided more than $35 billion in base maintenance services to the U.S. military in war zones including Iraq and Afghanistan under the Logistics Civil Augmentation Program (LOGCAP).

Both Najlaa and KBR are mired in scandal and legal troubles: Texas-based KBR — which was owned by Halliburton of Houston until 2007â�� has been in the news regularly for almost a decade because of multiple allegations of over-charging and shoddy service.

Najlaa hit the news recently when the Project on Government Oversight revealed that the company appears to have suffered no repercussions for its role in luring hundreds of South Asian workers to Iraq with promises of lucrative jobs, only to turn around and warehouse at least 1,000 of them in dismal living conditions without work�or pay�for several months.

A KBR special inspection dated November 11, 2008, provides details of problems at the warehouse where the workers were housed, including: poor food and bathroom sanitation; too few showers; cramped living space; lack of a food service operation resulting too little food, poor sanitation, and no dedicated dining hall.

But dig down into the details of the scandal and a much more complex set of problems emerges. A CorpWatch study of a trove of company documents reprises a familiar scenario in which the prime contractor blames the subcontractor, which predictably claims that fault for most of the problems lies with the prime.

Subcontractors at War

The subcontract with KBR that put Najlaa in the spotlight was its deal to build and operate 32 dining facilities (also known as DFACs) at various military camps in Iraq. The sheer volume of contracts so overwhelmed Najlaa that it turned to sub-subcontractors, according to documents seen by CorpWatch. To meet its obligations, Najlaa hired Aram Media, a registered Iraqi company, to build a housing camp for Najlaa workers.

Under its agreement with Najlaa, Aram would manage construction and pay a host of small suppliers including Aim Group for labor, RaAli for blast walls, Pagasus for electrical items, and Meland for toilets. In return Najlaa would pay Aram for all costs plus a guaranteed management fee. Aram Group executive director, Samir Sabbagh, says that he negotiated a 30 percent management fee in September 2008 to build the campsite for the workers.

Over the next several weeks, Aram Group claims that it built the camp according to specifications, and was in constant communication with Najlaa, updating it on progress and responding to all requirements and changes. However, Najlaa, failed to pay Aram Group for the work done, according to Sabbagh.

By March 2009 Najlaa owed Aram Group more than $1 million. Initially Najlaa sent placating messages to Aram: "Najlaa Catering does in fact appreciate your patience and assure you of our intention of resolving the issues at hand regarding the outstanding balance owed to you."

A month later, Najlaa CEO Bill Baisey flew to Baghdad for joint-venture negotiations with a different company. He made no attempt to meet with Aram. The next day he wrote: "[W]e have no intentions to deny you or your company any money owed to you provided we agree on the final amount. I have just finished building a new camp similar to what you have done, and the cost is not even 1/10 of what you are asking."

On April 24, 2009, Sabbagh pleaded with Baisey to settle his debts. Baisey sent another soothing message to one of Samir's colleagues: "I will never accept any thing wrong to happen to you, Samir or your business. I will be back in Kuwait on Monday or Tuesday and shall coordinate with you and Samir on the meeting. All I want is for us to agree on the final numbers and that is it."

Sabbagh pursued Baisey in person and via email. On May 31, 2009, Baisey again promised to pay and blamed KBR: "Of course we intend to pay you. �We were suppose to receive payment only few days after you left our office. ...Unfortunately we didn't due to an error committed by our customer [KBR] that was the cause for the delay. We followed the matter up and they solved the issue and promised us a payment this week."

Sabbagh took matters to a higher authority. He called James Edwards of KBR who handled the Najlaa account. Edwards confirmed that KBR had been paying Najlaa on a regular basis. Then on October 28, Sabbagh reached even higher, asking Army Brigadier General Kurt J. Stein, deputy chief of staff for sustainment of the Multi-National Force-Iraq, who was in charge of the Iraqi-Based Industrial Zone initiative, to help raise the issue with KBR. Stein replied the same day: "Thanks. I will push this to Guy Labou from KBR for his assistance. More to follow." But nothing happened.

Arrest Warrants

Baisey is also in trouble over other claims that he failed to pay his bills. On October 27, 2009, the Iraqi government issued two warrants. The first was issued on behalf of Sabah Ali who heads Myland Co., a company that leases cars to the Victory Base Complex, the sprawling U.S. military base just outside Baghdad International Airport. Sabah says he sold Baisey trucks around September 2008, but wasn't paid for them, such as this truck in the Najlaa compound at the Victory Complex and this one.

The second warrant authorizes seizing five cars that Najlaa bought from Myland.

Yet another warrant apparently issued for Baisey's arrest by the Iraqis is for allegedly defrauding a different Iraqi contractor. The charge is made under Article 456 of the Iraqi Penal Code which covers "acquisition of property through fraud."

From the perspective of U.S. taxpayers, the alleged chain of events is this: Najlaa invoiced KBR for "mobilization costs" but there were no actual costs since Najlaa failed to pay Aram Media for the work it did. And then, when KBR, in turn, invoiced the Pentagon for those same costs, it was asking for reimbursement for costs that it had not incurred.

Bill Baisey did not reply to multiple email requests from CorpWatch for a response to the allegations. The person who answered his mobile phone simply responded: "Wrong number."

KBR did provide a short email response to CorpWatch's request for comments on its own work as well as on its relationship with Najlaa. "KBR is very proud of the work it has done in Iraq to support our troops," wrote Sheryl Gibbs, manager of media relations. "KBR has a stringent code of business conduct which it actively enforces, and it cooperates fully with all governmental investigations."

KBR "paid Najlaa any sums to which it was entitled for the performance of food services" added Gibbs. But she acknowledged that in some instances Najlaa "was unable to mobilize sufficiently to begin performance at some sites and KBR appropriately terminated those subcontracts with Najlaa."

Gibbs took exception to the other allegations which she characterized as "filled with inaccuracies and false implications" and "broad unfounded and unsupported statements."

Passing the Buck

Allegations of waste and fraud by private military contractors have been a consistent feature of the U.S. wars in Iraq and Afghanistan. KBR knows the pattern only too well: In 2003 and 2004 multiple subcontractors fought KBR for non-payment of bills while the Texas company blamed the subs for cost-overruns. The shifting of accountability, veteran observers say, lies at the heart of many of the problems in U.S. military contracting.

In this new case, since both companies subcontract, KBR to Najlaa, and Najlaa to other mostly local companies, the blame game is further complicated. Charles Smith, a former Army contract manager who ran the LOGCAP program from 2000 to 2004, told CorpWatch he is not surprised by the new allegations. "Because firms operate as subcontractors, there is no recourse to suspension or debarment," Smith said. "Not much has changed; the government hasn't come up with solutions. I'm not aware of any movement to get better oversight of subcontractors in any of the contracting reform proposals."

Recommendations for reform have been made a number of times in the last few years. One of the best known was the 2007 "Special Commission on Army Acquisition and Program Management in Expeditionary Operations" better known as the Gansler Commission after its chairman, former Undersecretary of Defense for Acquisition, Technology and Logistics Dr. Jacques Gansler. Back then, there was little question that the standard Pentagon contracting system was inadequate for dealing with the needs of what the military dubs "expeditionary or contingency contracting."

Almost four years after the Gansler Commission presented its findings, it seems that little has changed and the fundamental problem remains: Who within the complex web of contractors and sub-contracts is held responsible, and how is that responsibility monitored and enforced?

"The buck is being passed around here," Charles Tiefer, another member of the Commission on Wartime Contracting, said at the July 2010 hearing on sub-contracting. "And that is, the [inspector general] sends it to somebody else, the criminal people say it's not ours, and the program manager says it's not ours."