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10-23-2005, 09:14 AM
Pentagon purchases: Millions in markups

By Lauren Markoe and Seth Borenstein

WASHINGTON The Pentagon paid $20 each for plastic ice-cube trays that once cost 85 cents. A supplier was paid more than $81 each for coffee makers that for years were purchased from the manufacturer for $29.

That's because instead of receiving competitive bids or buying directly from manufacturers as it once did, the Pentagon now uses middlemen who set prices. It's the equivalent of shopping for weekly groceries at a convenience store.

And the practice is costing taxpayers 20 percent more than the old system, an investigation found.

The higher prices are the result of a Defense Department purchasing program called prime vendor, which favors a handful of firms. The program, run by the Defense Logistics Agency (DLA), is based on a military procurement strategy to speed delivery of supplies such as bananas and bolts to troops in the field.

Military bases still have the option of seeking competitive bids, but the Pentagon encourages them to use the prime-vendor system. At the DLA's main purchasing center in Philadelphia, prime-vendor sales increased from $2.3 billion in 2002 to $7.4 billion in the fiscal year that ended Sept. 30.

The Defense Department touts the program as one of its "best practices" and credits it with timely deliveries that have eliminated the need for expensive inventories and warehousing. For purchases under the food prime-vendor program alone, the DLA claimed a savings of $250 million in five years.

But those savings would have happened even without turning to the prime-vendor program, competing suppliers say. Most suppliers for years have offered goods on an as-needed basis so that the military doesn't need to store them in costly warehouses.

Comparison shopping


Ice-cube trays: In August 2003, prime vendor Lankford Sysco charged $20.23 each for two; in July 2002, nonprime vendor Appliance Parts Distributors charged 85 cents each for 171 of the same trays.

Coffee makers: In 1999, before the prime-vendor program, West Bend charged $28.96, or $33 when adjusted for inflation; in March 2003, Lankford Sysco charged $81.24.

Charcoal grills: In August 2002, a nonprime vendor charged $145 for each unit; last January, Gill Marketing, largest of the prime vendors, charged $290.

Knight Ridder Newspapers
Knight Ridder chose to examine only one aspect of military purchasing: food equipment. Yet, the prime-vendor program is being used increasingly for everything the Pentagon buys.

"There is nothing prime about the program. In fact, it's very expensive," said Keith Ashdown, vice president of the Washington-based nonprofit Taxpayers for Common Sense. "They have reduced competition, and now we're seeing them pay higher prices."

In response, the DLA warned that comparing prime-vendor and nonprime-vendor prices as Knight Ridder did is "extremely difficult" because shipping, installation and special modifications to items may result in higher charges.

Although DLA officials refused to be interviewed, they did answer questions by e-mail.

The DLA said price comparisons "do not take into account the large investment, infrastructure and manpower savings the government realizes from its prime-vendor program." Others say these are savings that would be realized in any event, if the government bought from suppliers, prime or nonprime, willing to deliver just in time.

In thousands of purchases of food-service-equipment items, massive markups were found. The case of a special 7-foot refrigerator-freezer for airplanes illustrates the problem.

MGR Equipment of Inwood, N.Y., which makes the unit, charged the DLA $17,267 in 2003 for each one. That's the price that MGR President Gerald Ross said he charges everyone.

In September 2004, prime vendor Lankford Sysco Food Services sold the government nine MGR refrigerators for $32,642.50 each an 89 percent markup. The government paid $138,445 extra, when all prices were adjusted for inflation into 2005 dollars.

"We'd like to see the government get the best pricing, but we get the same amount regardless of whether we sell to [a prime vendor] or whatever," Ross said. "The government is aware of this. They're aware they're paying a premium for going through prime vendors."

Lankford Sysco didn't respond to three phone calls.

One manufacturer who previously sold directly to the government but now sells to the prime vendors said the system doesn't make sense.

"I resent it as a taxpayer," said the firm's chief executive, who spoke on the condition of anonymity for fear of losing business. "Before we'd sell it to [the Defense Department] at a hell of a lot less money. I don't make that money on it. Dietary (one of the prime vendors) is making money hands over fist. ... It makes no sense."

A second manufacturing CEO, who also asked not to be identified for the same fear of losing what little business is left, called it "three-card Monte economics."

Another government agency, the General Services Administration (GSA), has a purchasing system that the military can use. And it's cheaper.

Jones and Eagle Marketing of Houston, a vendor not in the prime system, compared the DLA's prime-vendor prices with how much the GSA pays for the same food-service equipment. The DLA's prime-vendor prices were 39 percent higher.

The Virginia-based DLA is the largest of the military's combat-support departments. The agency "supplies almost every consumable item America's military services need to operate," according to its brochure. That amounted to $31 billion in sales in the budget year that ended Sept. 30. At the DLA's lead supply center, in Philadelphia, nearly 60 percent of sales were through the prime-vendor program.

Knight Ridder conducted a computer-database analysis of prices charged by a small segment of prime vendors and how much the DLA paid for the same items from companies outside the program. The database comprised 122 food-equipment items purchased by the DLA between 1996 and 2005. In all, 2.37 million pieces of equipment were involved, costing a total of $37 million.

Prices were tracked using a database run by Bidlink, an Ohio company that monitors government purchases.

The average prime-vendor price when adjusted for inflation was higher for 102 of the 122 items. Even with this small sample of purchases, Knight Ridder found the government spent $1.2 million more than it needed to by using the prime-vendor system.

Rep. James Clyburn, D-S.C., called for an investigation of the program.

"Can Congress do anything? Yes. Will Congress do anything? No," he said.

Tom Schatz, president of the Washington-based nonprofit Citizens Against Government Waste, said: "It's supposed to save money, and it's well-intentioned but doesn't do what it's supposed to. People figure out how to take advantage of it."