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Hearing of the Readiness Subcommittee of the House Armed Services Committee

By:
Date:
Location: Washington, DC


Federal News Service June 24, 2004 Thursday

HEADLINE: HEARING OF THE READINESS SUBCOMMITTEE OF THE HOUSE ARMED SERVICES COMMITTEE

SUBJECT: CONTRACTOR SUPPORT IN THE DEFENSE DEPARTMENT

CHAIRED BY: REP. JOEL HEFLEY (R-CO)

WITNESSES: MICHAEL WYNNE, PRINCIPAL DEPUTY UNDERSECRETARY FOR ACQUISITION AND TECHNOLOGY, DEPARTMENT OF DEFENSE; JOHN YOUNG, JR., ASSISTANT SECRETARY FOR RESEARCH, DEVELOPMENT AND ACQUISITION, U.S. NAVY; MARBIN SANBUR, ASSISTANT SECRETARY FOR ACQUISITION, U.S. AIR FORCE; TINA BALLARD, DEPUTY ASSISTANT SECRETARY FOR POLICY AND PROCUREMENT, U.S. ARMY

BODY:

BREAK IN TRANSCRIPT

REP. JOHN LARSON (D-CT): Thank you, Chairman Hefley. And thank the panelists for your service to the country and your testimony before the panel here today.

I have just a brief statement and then four questions that are a concern of mine as it relates to oversight and the awarding of contracts. Mr. Wynne, it's my understanding that the U.S. Army Corps of Engineers has primary responsibility for the entire reconstruction of the effort in Iraq, which, of course, is likely to result in billions of dollars of contracts with hundreds of thousands of Iraqis and foreign nationals under the employ of United States-funded contractors.

Furthermore, it's my understanding that the Army Corps is contemplating sole-sourcing insurance contracts under what they call a two-year pilot program. I am very concerned that such an effort would severely distort the insurance marketplace, resulting in the other insurance companies now in the marketplace leaving that marketplace.

Additionally, using the term pilot program, I believe, misrepresents the huge scope the Army Corps effort at the risk of liability in having one insurer manage potentially thousands of claims in a very volatile area. I also understand that the pilot program would not only cover contracts in Iraq but would also cover all Army Corps contracts worldwide.

My colleague in the Senate, the senior senator from my home state, Senator Dodd, along with four other senators and over 107 representatives, have requested a study by the GAO on insurance issues in Iraq. I also understand that the CPA inspector general is conducting its own study of insurance coverage for contract employees in Iraq.

My four questions are as follows. Wouldn't the DOD want the benefit of reviewing the GAO and the CPA's findings in consultation with Department of Labor, the insurance industry, insurance brokers and other interested parties before proceeding with a formal RFP for centrally-managed defense-based insurance programs?

Second question. I understand that DOD intends to move forward and sole-source contract all DBA for DOD employees in Iraq. The question is, why would the DOD move forward and award a sole-source provider for this insurance before the Congress, the Department of Labor, which administers the defense-based (Act ? ) insurance program, and the DOD have had an opportunity to review the GAO findings?

Thirdly, perhaps I've missed the conclusive study that DOD has conducted to determine that sole-source and defense-based-Act insurance for all contractors in Iraq is the right thing to do for the U.S. government, the American taxpayers. And what other alternatives has the DOD explored to address the perceived problems with insurance for its contractors there before going to a sole-source contract?

And finally, does DOD understand the long-term risks to the government in going with the sole-source award for a complex insurance line with a long-tail exposure? I'm told 90 percent of the claims do not develop for at least seven years. If you could respond.

MR. WYNNE: First of all, I have a very limited knowledge of the specifics of the pilot program that's being done. However, we get e- mails like you all say that you get e-mails. And one of the things that we've found anecdotally is sometimes a 10 times' difference in premium paid between what USAID contractors pay under their contracts and what they have to pay under our contracts.

This is extraordinarily daunting to the small business community, who wants to come in and play but doesn't have a significant enough pool to leverage the insurance contractors. So we are, in fact, leaning towards that way. But I can ask the folks who are doing the pilot program to specifically respond to your question, and we'll take that one for the record.

REP. LARSON: Well, I guess my first question is, will they-I mean, is DOD going to proceed with this before the GAO report and before the CPA's recommendations come back?

MR. WYNNE: I don't see any reason that we should not proceed with the pilot program. It's not a sole-source award, as you said. It's a competitive award done by tens or hundreds of insurance companies, because they all do reinsurance.

You were correct in your assessment that a single provider might process the claims, but the claims will be no less daunting than any automotive insurance company in the United States, which, by the way, takes care of a tremendous number of claimants. And so I don't see how this distorts the insurance policy to conduct a premium or a small pilot within the Army to find out whether or not-and supply information, by the way-to a GAO study.

That having been said, we are concerned about anything that might distort the market, and so we run a pilot program to determine whether it does or not. I don't think there's-right now, before the GAO study is done, there's no intention to extend this cross-Army. This is a pilot program that will run for two years.

The USAID-the folks at Labor, in fact, are endorsing the USAID approach to securing insurance, and well they should, if you will. And, in fact, we're looking at that in a cooperative basis, not in a confrontational basis. But, that having been said, sir, I will try to make sure that we get a more complete answer from the people who are, in fact, promoting the pilot program.

REP. LARSON: Who is promoting the pilot program?

MR. WYNNE: I believe it's being done through the U.S. Corps of Engineers.

REP. LARSON: So the U.S. Corps of Engineers is promoting this program, even though Congress has gone out and-four senators and 107 members have signed on to get information before they proceed with the pilot. Is that correct?

MR. WYNNE: Again, we see no reason to stop a pilot program. That's where we really, from an innovative contracting posture, that's where we really get solid information as to whether to expand it or whether, in fact, as you would like to do, restrict it.

REP. LARSON: Even if it means risking skewing the whole marketplace?

MR. WYNNE: Again, I don't believe that the pilot program will have any impact on this huge insurance market that we have. Besides that, there is, I think, sufficient competitors out there that are willing to, if you will, (take and?) to perform. I think there is some fear that they will lose their leverage over a small pool of small business people, and perhaps their premiums will go down. But I see that benefiting the American taxpayer.

REP. LARSON: Thank you, sir. And I thank the chairman.

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