Wednesday, August 9, 2000

Pennsylvania Auditor General slams Kvaerner Philadelphia deal
"Imagine living rent-free in a $675,000 house, driving a BMW 740iL at no cost, flying your family back and forth to Europe at state expense, and getting taxpayers to fund your $50,000 basement renovation. Throw in millions of state dollars for personal luxury items such as artwork, patio furniture, a grand piano, and a $2,000 swingset for your kids, and you're living the life of a top Kvaerner executive at the former Philadelphia Naval Shipyard." That's how a press release from Pennsylvania's state Auditor General, Robert P. Casey, Jr., announces the news that his audit department has concluded a performance audit of the Kvaerner shipyard deal negotiated by Governor Tom Ridge and overseen by Ridge appointees.

Governor Ridge is a Republican. Auditor General Casey, the son of former two-term governor, is a Democrat. and faces reelection this year. Casey's brother, Pat Casey,will again be challenging Republican Donald Sherwood for the House seat in Pennsylvania's 10th District. This was the closest race in the country in 1998 (Sherwood won by 515 votes). This may explain why Casey's announcement of the audit findings sounds more like a political statement than a sober report of the facts.

"I had great hopes for this project and the thousands of good, family- sustaining jobs that were promised,'' said Casey who, as a member of the Delaware River Port Authority, voted to authorize the expenditure of DRPA funds for the Kvaerner project.

"I am still hopeful that ships will be built and more jobs will be created. However, our audit raises serious concerns about the Ridge administration's failure to negotiate a deal that was in the best interest of Pennsylvania workers and taxpayers, and its failure to provide vigilant oversight of this project.''

"At its most basic level," says a release from Casey's department, "Kvaerner's sweetheart deal -- involving nearly half a billion dollars in government largesse -- allows the company to earn fees in the short term for building a new shipyard at taxpayer expense, and then either abandon the project and escape responsibility for operating the shipyard and building ships, or operate the shipyard and fulfill its contractual obligations before eventually purchasing the shipyard for just one dollar."

The release says the "Philadelphia Shipyard Development Corporation (PSDC) is the non-profit entity responsible for disbursing public funds to Kvaerner and monitoring its performance. A majority of its five members, including its current chairperson, Secretary of Community and Economic Development Samuel McCullough, are appointees of Gov. Ridge. In its official response to Casey's audit, PSDC never disputed Casey's explanation of the true terms of this deal or its extraordinary commitment of public funds. In fact, PSDC urged Casey's auditors to remove the discussion of the contract terms from the audit report and keep this information from Pennsylvania taxpayers. PSDC also questioned Casey's authority to analyze the Kvaerner contract documents, and the Governor's lawyers refused to provide 'due diligence' documents that would indicate whether the Ridge administration made any effort to ensure that public funds were being committed to a project that had a reasonable likelihood of success in the first place.

"Pennsylvania taxpayers have a right to know-in excruciating detail -- how their hard-earned money has been `invested' in this project,'' Casey says. "The Ridge administration gets deeply offended by scrutiny; it wants no oversight, no examination of its work. What's really offensive, almost scary, is that administration officials argued that taxpayers shouldn't see this information.''

Casey explained that the findings of his performance audit are based on what the contract documents actually require, not what the Commonwealth and the other governmental parties hope will someday occur. The basic financing structure of the Kvaerner deal, according to Casey, is this:

Kvaerner has not been required to make any financial contribution to the cost of constructing the shipyard, other than paying for possible cost overruns.

Pennsylvania taxpayers committed more money (38%) to the project than any other party.

The Commonwealth and the other governmental parties committed over 2-1/2 times more money to the construction and improvement of the shipyard than Kvaerner is ever required to pay.

Virtually all of the public funds committed to the project were grants, as opposed to loans, which Kvaerner has no obligation to repay, regardless of if it ever builds a ship in Philadelphia.

The December 1997 Master Agreement between the governmental parties (the Commonwealth, the City of Philadelphia, and other public entities) and Kvaerner provided $429 million of public funds -- including $227 million from Pennsylvania taxpayers alone -- to Kvaerner for the construction of the shipyard, employee salaries and benefits, and employee training.

Casey's audit found that the Master Agreement imposed ambiguous obligations on Kvaerner and deferred the required performance of most of its obligations for several years, if ever. More significantly, it granted Kvaerner the right to abandon the project and escape responsibility for operating the shipyard and building ships, after having earned fees for constructing the yard at taxpayer expense. "The Master Agreement created both the incentive and the economic rationale for Kvaerner to enter into this project irrespective of its ability to sustain shipbuilding operations in Philadelphia or of the long-term economic viability of the project,'' Casey said.

Casey's statement charges that a July 1999 Amendment to the Master Agreement -- signed three months after Kvaerner announced it was leaving the shipbuilding industry -- "compounded the flaws in the Master Agreement by granting Kvaerner the right to abandon the project even earlier and by further deferring the required performance of Kvaerner's obligations. In fact, Casey's analysis determined that the Amendment's new 'protections' for taxpayers are illusory and actually weakened the protections provided by the Master Agreement."

"The Amendment bailed Kvaerner out of paying for construction cost overruns by increasing the initial construction budget by over $62 million and shifting most of the burden of the additional costs onto the taxpayers of Pennsylvania,'' Casey said.

The report charges that the risks borne by the public in the original contract documents were compounded by problems that began to arise during the first year of the contract. "Many of these problems did not become known to PSDC and the governmental parties until late 1998 due to PSDC's complete failure throughout most of the year to adequately monitor Kvaerner's performance of its contractual obligations and the progress of the shipyard,'' Casey said.

The auditor general says that by late 1998, the project was three months behind schedule and facing construction cost overruns of $80 million. PSDC's own consultant expressed concerns that the promised 'state-of-the-art' shipyard was in jeopardy. In a December 1998 memo, the consultant warned, "...Kvaerner and its staff are having a difficult time managing and controlling this project... We cannot stress enough the sense of urgency to formulate a new game plan! Kvaerner is proceeding with major reductions in the project that will have a negative impact on this facility and negate the availability of one of the best shipbuilding facilities in the world.''

PSDC claimed to know nothing about this memo and questioned how Casey's auditors obtained it. In fact, it came right from PSDC's own files! "We're deeply troubled by PSDC's lack of awareness of this critical document, the contents of its own files, and most important, its own consultant's analysis,'' Casey said. "This demonstrates a profound failure to adequately monitor Kvaerner and the project, and an arrogant disregard for taxpayers and shipyard workers.''

Casey's performance audit also found that PSDC failed to:

  • monitor Kvaerner's efforts to maximize the involvement of regional suppliers in the construction of the shipyard from the outset of th Master Agreement in December 1997;
  • monitor Kvaerner's activities in awarding $39 million in equipment contracts to foreign companies, including the contracts for several steel cranes bought from Portugal;
  • meet as required to plan outreach sessions to involve regional suppliers in the construction of the shipyard;
  • hold required weekly progress meetings with Kvaerner until August 1998;
  • receive and review the required monthly progress reports from Kvaerner until November 1998; and
  • document any of its inspections of the shipyard facility.

According to Casey's audit, Kvaerner failed to maximize the involvement of regional suppliers in the construction of the shipyard. In fact, Pennsylvania companies received less than half of the construction contract dollars awarded as of October 1999, less than two percent of the equipment contract dollars as of November 1999, and none of the information technology contract dollars as of July 1999.

"PSDC recently announced that Kvaerner had awarded shipbuilding contracts to two Pennsylvania companies,'' Casey said. "These awards were announced after PSDC received our draft audit report criticizing Kvaerner's outreach to regional suppliers and PSDC's monitoring of such outreach.''

"Furthermore, neither contract relates to the construction of the shipyard, reflecting our fundamental difference of opinion with the Ridge administration that Kvaerner should have made efforts to award those contracts to Pennsylvania companies,'' Casey said. "Now that construction is almost complete, we hope that more Pennsylvania companies are awarded shipbuilding contracts.''

Casey's audit also found that PSDC and the governmental parties violated the Steel Products Procurement Act by neither requiring the use of domestic steel in the Master Agreement nor waiving such a requirement. Kvaerner also failed to meet the goals set by the Master Agreement for the use of minority- owned businesses and the employment of minority and female workers.

During the period audited, says Casey's department, PSDC gave nearly $2 million in taxpayer funds to Kvaerner for certain categories of expenses for top executives. Among the items bought with these funds, which Casey assailed as "shameful,'' were $16,500 in sofas; $7,700 in tables; patio furniture for $8,400; a $6,000 grand piano; $5,800 in window treatments; artwork for $4,800; and a $2,000 swingset.

PSDC claims that it is now going back and auditing these disbursements to determine which expenses should not have been paid with monies advanced by taxpayers. It remains unclear which of these expenses the Ridge administration will attempt to recover, or actually succeed in recovering. Moreover, even if some monies are ultimately recovered, Casey explained that this advance payment system will still have resulted in the loss of state funds by providing "no-interest, taxpayer-funded loans'' to the Kvaerner executives. PSDC said that it has adopted Casey's recommendation to fix this process and `"is now paying Kvaerner for only actual and reasonable expatriate expenses supported by appropriate documentation.''

 

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