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Amid Scandal, Navy Secretary Announces Contracting Overhaul Contracting Overhaul Is Promised for Navy
(about 5 hours later)
WASHINGTON — As allegations of overbilling in the Navy’s ship supply network expand, Navy Secretary Ray Mabus on Friday acknowledged gaps in the Navy’s oversight and announced plans to revamp its contracting practices. WASHINGTON — Navy Secretary Ray Mabus on Friday acknowledged gaps in the Navy’s oversight of the companies that provide supplies for the nation’s warships across the world and announced wide-ranging plans to revamp contracting practices that experts say have made it far too easy for businesses to defraud the service out of tens of millions of dollars.
Mr. Mabus said he had ordered a team of fleet and contracting officials to scrutinize the deficiencies in how it awards the contracts and come up with changes to make the Navy less vulnerable to fraud. In his first news conference after a string of revelations about bribery, overbilling and other questionable practices by the Navy’s largest ship-supply contractors, Mr. Mabus said he had ordered a team of fleet and contracting officials to scrutinize the deficiencies in how the service awards those contracts and propose changes to make the Navy less vulnerable to fraud.
Mr. Mabus’s comments, his first in public about the scandal, came after the owner of the Navy’s main ship supply company in the Pacific, Leonard Glenn Francis, was arrested in September on charges that he bribed Navy officials to help him overcharge the Navy. “Any time you’ve got this kind of money, there are going to be people trying to steal, people trying to defraud the government,” Mr. Mabus told reporters at the Pentagon.
The service also suspended Inchcape Shipping Services last month from winning new contracts amid a civil fraud investigation at the Justice Department into allegations that it also overbilled the Navy for work in the Middle East and Africa. The serial problems with the ship-supply, or husbanding, companies have turned into one of the Navy’s most embarrassing scandals in years. The issue burst into public view in September when the owner of the Navy’s main ship supply company in the Pacific, Leonard Glenn Francis, was arrested on charges that he bribed Navy officials to help him overcharge.
And this week, the Navy’s largest ship supply firm, Multinational Logistic Services, which provides port services in Africa, the Mediterranean, Central America and the Pacific, placed one of its senior executives on leave while looking into questions about how he handed contracts at his former employer, Inchcape. Last month, the service suspended one of its main supply firms in the Middle East and Africa, Inchcape Shipping Services, from winning new contracts because of a civil fraud investigation by the Justice Department into allegations that the company repeatedly overbilled the Navy.
“I do think there were gaps in the contracting,” Mr. Mabus told reporters at the Pentagon. And this week the Navy’s largest ship supply firm, Multinational Logistic Services, which has received $346 million for port services in Africa, the Mediterranean, Central America and the Pacific, placed one of its senior executives on leave while looking into his handling of contracts at his former employer, Inchcape.
The secretary said the Navy was collecting more data about what provisions and equipment should cost in overseas ports and was working to set up a more centralized system for dealing with the suppliers. Without that kind of system, firms that provide port services — including replenishing supplies, removing waste and providing port security — are easily able to charge inflated prices for certain vital items or services, causing contract costs to skyrocket, experts say. Mr. Mabus listed several actions he had ordered to prevent and weed out fraud in the ship-supply industry. Those included collecting data about what provisions and equipment should cost at foreign ports, so the Navy will be able to fix the costs of more items in contracts. He also said the Navy was setting up a more centralized system for dealing with suppliers and would provide more support to commanding officers overseas.
Mr. Mabus, who has also ordered audits of all the supply contracts, credited the Navy’s efforts to ferret out corruption for bringing the bribery scandal involving Mr. Francis’s company to light. “Without the Navy and Navy’s actions, there would almost certainly be no story today,” Mr. Mabus said. “We’ve got to have a more centralized, more standard procedure so that we don’t put commanding officers, supply officers on ships in the position of having to make these decisions on the fly,” he said.
He said there would be more disclosures about Mr. Francis’s company, but did not elaborate. “I certainly don’t think we’ve seen the end of it,” he said. Mr. Mabus added that he plans to create a special Navy board, headed by a four-star admiral, to review cases of people tied to Mr. Francis’ company, Glenn Defense Marine Asia, even if they are not prosecuted, to ensure that they “will be held appropriately accountable.”
Three Navy officials have been arrested on charges of accepting cash, trips or prostitutes from Mr. Francis in exchange for helping him inflate his charges for fuel, food and other supplies. Four other Navy officials, including two admirals, were suspended while their ties to Mr. Francis are under investigation. Though the case against Mr. Francis has included accusations of cash bribes and prostitutes, some major questions about the ship-supply industry have involved far more prosaic schemes. Chief among them, many experts say, involve what are known as fixed and nonfixed price items, an issue that Mr. Mabus mentioned on Friday.
Mr. Mabus also said he would create a special Navy board, headed by a four-star admiral, to review cases of people tied to Mr. Francis, even if they are not prosecuted, to ensure that they “will be held appropriately accountable.” The Navy usually awards regional contracts to the company that bids the lowest on a series of items — everything from tugboat services to trash removal — that are assigned fixed prices. But once a contract is in motion, if a supplier says that, for instance, a crane with a fixed rental price is not available, the supply officer on board has little choice but to pay a higher — or nonfixed — price for other equipment. So even if an original bid is low, costs can quickly escalate.
Investigators said that Mr. Francis routinely lowballed rivals to win contracts, sometimes with bids that were so low that the Navy should have questioned whether they were realistic. The Navy usually awards regional contracts to the company that bids lowest on a series of fixed-price items, things like tugboat services and pier-side trash removal. Both MLS and Mr. Francis’ company made bids that contracting experts and rivals said were unrealistically low — and that ending up costing the Navy more.
But if a supply company says that, say, a crane with a fixed rental price is not available, the supply officer on board has little choice but to pay a higher price for other equipment. Costs can quickly escalate as a result. Mr. Mabus said that nonfixed price items should account for 1 percent of a contract because ships tend to need the same things as they go from port to port. But a 2007 Navy study noted that nonfixed price items made up about 53 percent of the cost of an Inchcape contract in the Middle East in 2006 and helped cause that part of the contract to double.
Mr. Mabus said the Navy would improve oversight of contracts by fixing the cost of more items in the contracts, addressing a fundamental problem that was brought up six years ago in a study sponsored by the Navy itself. The study, which seemed to presage the current scandal, noted an unexpected doubling in the costs under Inchcape’s ship servicing contract in the Middle East in 2006, as well as charges that suggested “suspect billing practice.” Contract documents also show that the Navy had difficulty estimating the cost of some of the awards won by MLS, possibly because of the firm’s charges of nonfixed items.
Mr. Mabus said the Navy had installed devices to measure the waste removed from a ship to head off disputes with contractors who had charged too much for that. He said the Navy also intended to ease the pressure on the ship supply officers by centralizing more of the ordering and bill-paying in contract offices onshore. For example, the Navy in 2010 had pegged the total cost of the firm’s contract in Panama at $7.8 million, according to contract documents. By May 2013, the cost had ballooned to $24.3 million because of what is said to be a lack of data.
Mr. Mabus, who has ordered audits of all the supply contracts, praised Navy officials for bringing the bribery scandal involving Mr. Francis’ company to light. Noting that the charges had made the Navy look bad, he said, "I would rather get bad headlines than let bad people get away."
But while the Navy eventually did open an investigation of Glenn Marine in May 2010, questions remain about whether it missed earlier red flags. People close to the investigation say that Navy contracting officers did little in 2006 and 2007 when United States-based employees of Inchcape, a competitor, complained that Mr. Francis, as well as MLS, were winning contracts with untenable bids.
Mr. Mabus also provided some new details about how the Naval Criminal Investigative Service had planted bogus information in its files to trick one of its own investigators, who had been keeping Mr. Francis informed during each step of the inquiry.
There will be more disclosures in the case involving Mr. Francis, he said, though he could not discuss details. Mr. Francis has pleaded not guilty.
People close to the investigation said the prosecutors had confiscated Mr. Francis’ laptop, and authorities in Singapore had raided his office.
In defending the Navy’s efforts to prevent overbilling, Mr. Mabus noted that after contract officials complained about contractors frequently overcharging for waste removal, the service installed flow meters on ships to verify contractors’ claims.
"I think we’ve done a lot, but I think we’ve still got a good bit more to do,” Mr. Mabus said.

Christopher Drew reported from Washington, and Danielle Ivory from New York.