Blog

How Puerto Rico can avoid another white elephant like the Whitefish contract

8 Nov 2017

By Carey Kluttz

The fallout from Puerto Rico’s $300 million power contract with a small Montana firm has continued, with reports that the FBI has opened a preliminary inquiry into the controversial deal. The news comes after the contract to rebuild the island’s crippled energy grid was canceled on Sunday over concerns about why it was awarded to a two-year-old company, with only two full-time employees and seemingly little experience.

Puerto Rico will have to pay $20.8 million for work already done by Whitefish Energy Holdings and reimburse the company for the cost of returning helicopters, vehicles and other equipment to the US, said Ricardo Ramos of Puerto Rico’s power authority. Meanwhile, efforts to restore power may have been set back by 10 to 12 weeks. Whitefish has reportedly requested security for crews still working on the island after rocks and bottles were thrown at them by frustrated residents, who believed the contract was awarded corruptly and are appalled that many of them still don’t have power six weeks after Hurricane Maria struck.

When calling for the power authority to cancel the contract, Puerto Rico’s governor emphasized that no wrongdoing had been uncovered, but that the controversy had become a “distraction” from restoration efforts.

The saga lays bare the risks associated with rebuilding after disasters when huge sums of money are being spent and there’s an urgency to get the work started. It also raises questions about whether this was a one-off decision or if there are larger problems with the contracting and awarding processes at the Puerto Rico Electric Power Authority (PREPA). One can only hope this scandal will lead to greater scrutiny of Puerto Rico’s other post-disaster contracts (as is already happening over the Cobra deal).

Open contracting could have helped to avoid this shambles so far. More importantly, it can still help to ensure the remaining emergency funds in Puerto Rico are well spent and make some progress toward restoring the public’s trust.

The aim of open contracting is to make as much information about contracting available to as many people as possible, in a way that is most useful to them through better joined-up data and through better user-driven oversight. There is strong evidence to suggest that increased disclosure of contracting information (from all stages of the contracting process) and greater involvement of communities (citizens, journalists, and businesspeople, for example) makes public contracting more competitive and fair, and improves contract performance – such as, in this case, restoring power following a natural disaster.

So how would more open contracting have helped?

First, and perhaps most importantly, is with overseeing the award of the contract itself. Neither Puerto Rico nor the US Government’s Federal Emergency Management Agency (FEMA) has criticized the actual work Whitefish has been doing per se. Rather, most of the controversy has been around the contract’s award.  

There was no formal bidding process to evaluate offers from multiple companies, resulting in what is known as no-bid or sole-source contracting. As many critics have noted, it is strange that a company without a “real workforce, no experience in comparable government projects, and a job that is, by itself, about 300 times the firm’s reported revenue” should be chosen to rebuild Puerto Rico’s electrical infrastructure, particularly without serious consideration of other potential competitors. Several sources claim that Whitefish was given the job because they did not require a down payment from PREPA, which filed for bankruptcy in July.

While sole-source contracting is not necessarily a problem in and of itself, it can be a red flag of potential conflicts of interest, corruption or collusion. Open contracting recommends clear legislation that outlines the circumstances under which this approach is acceptable, and encourages award criteria to be specified for all contracts.

Second, it took a surprisingly long time for the full details of the contract to emerge. Whitefish began working for PREPA on September 26 (and before that, Puerto Rico had reportedly put out a call for such services ahead of the storm, in August.) But it wasn’t until October 20 that the first media report about the contract was published. And it was only late last week that scrutiny of the circumstances around the award and its terms began in earnest, when various US authorities, including the Federal Emergency Management Agency, expressed concerns and a journalist leaked what he claimed was the actual contract. By Sunday afternoon, the deal was off, as millions of Puerto Ricans settled in for yet another long evening in darkness.

Open contracting makes it easy to build a clear profile of a contract, which can be viewed by anyone, because it relies on a user-friendly structure for organizing and sharing information, called the Open Contracting Data Standard. Details about budgets, bid proposals, bidder information, contracts and invoices are arranged in a machine-readable format according to this open data schema. And each contract has a unique ID code so that it can be tracked from the planning phase through to its implementation. Because this data is public, it helps to ensure companies winning public contracts can actually deliver on them and gives a range of suppliers a better chance to make their best offer, so that government authorities get the best deal rather than rushing into an agreement that could run into unexpected delays, additional costs, or in the Puerto Rico case, be cancelled, because of poor planning.

Third, another potential cause for concern is the terms of the contract itself. News reports and social media posts have pointed to hugely inflated costs for subcontractors, who, given the two full-time employees at Whitefish, will make up the vast majority of the labor force. Day rates listed in the contract are up to ten times the average (even higher for subcontractors), and prices for equipment, as well as for per diems and flights for employees, are similarly exaggerated.

If the public or potential competitors had sufficient access to information about the contract early on, they could have voiced these concerns before the ink was dry. In Paraguay, suspicious contracts have been canceled after journalists used open contracting data to detect exorbitantly high prices for routine items purchased by government authorities. These investigations also played a major role in public protests that led to the ousting of the education minister and prompted the government to adopt new policies to combat overpricing.

In the Puerto Rico case, many have pointed to the fact that the Whitefish contract prohibits government entities at either territory or federal level from auditing how the company is spending its money. Scott Amey of the Project on Government Oversight explains that this is not an abnormal clause for government contracts, and yet, it is nonetheless concerning (perhaps because it is so routine.)

The Open Contracting Data Standard, which was designed and developed by a community of contracting and open data experts, contains guidance on what information should be published. This includes information on line items and unit prices, ideally based on internationally recognized codelists. Such standardization allows for comparisons across countries or contexts, which is useful for identifying potential overpricing, as well as determining value for money on a contract.

Finally, the Whitefish deal also raises questions over preferential treatment, which can be further linked to concerns around who the “real,” so-called “beneficial” owners of the company are. One strange twist in the case involves the company’s apparent ties to the Trump administration. Whitefish has its headquarters in a small town in Montana, which is also the hometown of the current US Secretary of the Interior, Ryan Zinke. While he has denied any involvement in the Puerto Rico contract, Zinke does personally know Whitefish’s CEO, and the Department of Homeland Security’s review of the contract will explicitly include an investigation into “the presence of inappropriate relationships.”  What’s more, a private equity firm that finances Whitefish is run by a major donor to Trump’s presidential campaign (also reported here.)

Contracts aside, there is still an entire island of Americans without power and without clean water, more than a month after the hurricane passed over Puerto Rico. Cancelling the Whitefish contract and moving to mutual aid from other states may be the best decision but, nonetheless, work had already begun under the Montana firm’s supervision so time is of the essence to find someone to complete the job.

The Whitefish contract was the biggest to be awarded so far in the recovery effort. There’s too much at stake to risk making the same mistake twice. It’s not too late to start using open contracting in Puerto Rico to ensure that every dollar spent on rebuilding counts and that crucial services reach every citizen.