Marion Higa, state auditor, has unleashed her staff on the Office of Space Industry. Its findings were released in January, along with the findings of a more general audit of the contracting programs of other programs of the Department of Business, Economic Development, and Tourism.
Higa’s two summary conclusions with regard to the Office of Space Industry received a good deal of publicity in the daily press and broadcast media around the state: “1. The Office of Space Industry’s pursuit of a space launch facility was slapdash, resulting in costly mis-steps. 2. Like other DBEDT offices, OSI did not clearly justify its contracts or specify the scope of services. These weaknesses added to the cost of contracting. In addition, contracts were awarded in a questionable manner and have achieved few demonstrable benefits.”
Most people will not have the chance to read Higa’s report first-hand. Because of that, and because of our own past coverage of the activities of the Office of Space Industry, the following report contains lengthy verbatim quotations from the auditor’s report.
Deja Vu
In [url=/members_archives/archives1993.php]July 1993[/url] (Scroll down for the July listing), Environment Hawai`i reported extensively on problems in the administration of contracts by the OSI. Similarly, the auditor’s report is highly critical of the contract between OSI and Hawai’i’s “space czar,” Thomas B. Hayward.
Inasmuch as Hayward participated in the committee that selected the special advisory to the governor for space, “he had an unfair advantage over the other candidates,” the audit says. “We believe that the selection process was suspect because Hayward had an unfair advantage over the other candidates. He was familiar with the criteria for selection and privy to the thinking of the selection committee. In addition, he continued to evaluate candidates after he himself became a candidate. Once Hayward expressed interest in the position, he should have been removed from the selection committee.”
In addition, the audit says, the scope of services for Hayward’s contract was unclear, as was that of another consultant, Ruder/Finn, hired by the OSI to undertake work in Washington. “The scope of services for Hayward’s contract merely listed some general functions… Such vague services as ‘provide advisory information’ and ‘formulate policy recommendations and procedures’ made it impossible to monitor the contract or determine whether Hayward had been effective.
“Similarly, the scope of services for the East Coast consultant, Ruder/Finn, allowed considerable latitude… The scope of services allowed the consultant to ‘devote not less than 25 percent of his time over the course of this contract to performing the services required herein.’ Based on the scope of services, it was difficult to determine what the consultant was required to do and whether consultant had fulfilled the contract.”
Another point made by the auditor (and by Environment Hawai`i) concerns OSI’s failure to question expenses submitted for reimbursement by Hayward. “OSI made little effort to contain costs,” the audit says. “For example, Hayward’s contract paid an annual base fee of $125,000 a year. To that was added a yearly expense account not to exceed $36,000 a year for promotions, missions, and the servicing of business clients and potential clients, including meals and refreshments. We believe that entertainment expenses are a questionable use of tax dollars. The state reimbursed Hayward for such questionable entertainment expenses as $704 for food, wine, liquor, three parking valets, two waitresses, and a caterer at a reception at his residence.”
What the audit does not mention is that Hayward was also reimbursed for travel expenses over and above the $36,000 annual expense account. From 1989 to 1993, Hayward was paid some $30,000 in travel related expenses — not counting the many dozens of inter-island Aloha coupons given him by DBEDT, which were never posted to his account.
According to the audit, “the two contracts [Hayward’s and Ruder/Finn’s] resulted in little or no benefit to state taxpayers… Over a four-year period, the state paid Hayward approximately $600,000. Today, five years later, no foundation for a spaceport or space-related activities is evident and public sentiment for such activity appears unfavorable.”
‘No Master Plan’
The Office of Space Industry’s administration of contracts for a master plan and environmental impact statement comes under heavy fire as well. From the outset, the audit states, “instead of developing a strategic plan, OSI immediately began implementation steps for establishing a commercial launch facility.” In fact, one of the earliest acts of OSI, the auditor notes, was to contract with the mainland firm CH2M Hill, to prepare a master plan and environmental impact statement for a launch facility at Palima Point or Kahilipali Point.
To critics of the spaceport plan, one of the more puzzling aspects of the development of the EIS and master plan was the sudden termination of the contract between OSI and CH2M Hill. The audit devotes nearly four pages to discussing the troubled and, ultimately, unsuccessful efforts of OSI to obtain “an adequate EIS,” in the auditor’s words.
CH2M Hill was dismissed when OSI did not agree with the financial feasibility model the consultant had prepared in 1990. “OSI’s new assumptions resulted in costs that were significantly lower and more competitive than those in the CH2M Hill model,” the audit found.
“In addition to problems with the financial feasibility model,” the audit reports, “OSI began to realize that a master plan could not be completed without an EIS. OSI decided to use information from CH2M Hill’s conceptual master plan to produce a conceptual plan of its own. In November 1990, OSI assigned the EIS portion of the contract to another contractor, MCM Planning. CH2M Hill was paid a total of $972,000 for its work…. Currently the state still has no master plan, and OSI has paid $972,000 for a financial feasibility model that it later found to be unacceptable.”
‘Muddled EIS Administration’
After “assigning” the EIS contract to MCM, which had been a subcontractor to CH2M Hill, OSI, the auditor says, was “left … open to demands from the new contractor for additional costs. The vague scope of services led to dissension about the end product and delays.”
At the very outset of the “assignment” of the contract, the Department of Accounting and General Services found fault. DAGS, the audit states, “found the assignment to be unacceptable. It said that the assignment effectively terminated the CH2M Hill contract and lapsed the remaining funds. DBEDT then awarded a new contract for $1,100,000 to MCM Planning. The contract was awarded in April 1991 and backdated to be effective November 1990. MCM agreed to complete a draft EIS by March 1992 and a final EIS by August 1992.
“Instead of submitting a draft EIS, in March 1992, MCM requested an additional $287,000. MCM complained that it had ‘inherited’ the project without a chance to price the anticipated subconsultant work or to solicit bids to determine whether the EIS could be completed within the contract amount of $1.1 million. MCM said that it had agreed to accept the project based on the understanding that OSI would be flexible and would readily consider MCM’s requests for additional funds.
“MCM also started a work slow-down and refused to provide OSI with any reports generated by its subcontractors…. Concerned about the delay in completing a draft EIS, OSI agreed to a supplemental contract giving MCM an additional $300,000. In a December meeting, OSI reached agreement with MCM that the draft EIS would be provided no later than May 1, 1993, more than a year later than the original contract deadlines. MCM finally submitted a draft in August 1993.”
‘No State/Federal EIS’
The EIS that finally was submitted by MCM and, eventually, accepted by Governor John Waihe`e, does not satisfy federal requirements. The audit addresses this deficiency:
“OSI decided to prepare a joint state and federal EIS because commercial launch facilities must be licensed by the federal government and require a federal EIS. Today, after expending $1.5 million, the state has a draft state-only EIS that is of limited value… The lack of specificity in the contract about the type of EIS to be produced caused OSI to have continuing problems with MCM.”
The contract with MCM, the audit reports, “stated that preparation of the EIS should be closely coordinated with the [federal Office of Commercial Space Transportation] to ensure that National Environmental Policy Act guidelines are followed. But the contract did not specifically require MCM to prepare both a state and federal EIS. Just prior to May 1993, MCM told OSI that it would not be preparing a federal EIS since there was no ‘trigger’ for a federal EIS.”
The OCST, on the other hand, “warned OSI strongly against filing a draft state EIS rather than a joint EIS, stating that it would be more harmful than beneficial. OCST said that this would be contrary to federal policy and would result in two public comment periods that could generate public antagonism. OCST also said the state action would result in a high probability of a lawsuit by the U.S. Department of the Interior because, without considering alternatives in detail, the state EIS focused on Palima Point, which was adjacent to a federal park.”
According to the audit, the decision to accept the state-only EIS was that of Mufi Hannemann, then director of DBEDT. “The executive director of OSI and the attorney general’s office both recommended to the director of DBEDT that OSI continue with the joint EIS. The OSI director cited numerous advantages… The only disadvantages were threats and possible media coverage of statements from MCM and a more quickly produced state EIS. Nevertheless, DBEDT decided on the state-only EIS. In July 1993, the DBEDT deputy director informed OCST that a state EIS would be filed because of local considerations and issued that required a timely release of the EIS.
“In turn, OCST restated its position that filing a state EIS would be more harmful than beneficial… In addition, OCST cautioned the state that it should take no action that would have an adverse environmental impact or limit the choice of reasonable alternatives. Furthermore, OCST said the state should not enter into a contract for the preparation of a joint federal/state EIS without consultation and written approval from OCST.
“Despite the warning from OCST, OSI not only continued with the state-only EIS, it also entered into a contract, effective May 1, 1994, with MCM Planning for completion of a final state EIS….
“DBEDT’s poor planning and contracting practices resulted in few benefits from the $2.5 million that was spent for the master plan and EIS. A contract for a master plan had to be redone into a conceptual plan and project description. A contract for a state/federal EIS became a state-only EIS. And should an actual project eventually come under consideration, a project-specific state/federal EIS will still have to be done along with a new master plan.”
DBEDT’s Reply
The auditor provided DBEDT with an opportunity to respond to the points raised in the audit. Of the 78 pages in the audit report, 10 are given over to DBEDT’s reply, submitted over the signature of then-DBEDT Director Jeanne K. Schultz — with five of those 10 pages dealing with the Office of Space Industry. Here are some of the points raised by DBEDT in OSI’s defense:
First, OSI “has expended $7.9 million on space-related projects” through the end of 1994, as opposed to the $8.7 million figure cited by the auditor. On the matter of the inadequate master plan and EIS, DBEDT says: “Although not able to completely address all issues, the State’s Conceptual Plan and EIS provide useful information to a potential developer, and give policy makers guidance as to the feasibility of moving forward with the proposed spaceport.”
CH2M Hill, DBEDT says, saw its contract terminated because its “aerospace subcontractor had gone out of business and was no longer available to them.” After MCM took over the EIS contract, it had to request “more money ($300K) than originally negotiated in order to cover several technical issues. This financial shortfall caused additional delays until it was resolved. This request for additional funds by MCM was necessary in order to gain an adequate understanding of the total environmental impact. In the end, however, MCM delivered a quality product to DBEDT — a thorough and straightforward EIS which discloses the environmental impacts of the proposed spaceport. The state Department of Health, after reviewing portions of this document pertaining to their area of expertise, commented that ‘this is the finest health risk assessment to ever be received by the Department of Health’s Hazard Evaluation Office.'”
Revisionist History
In DBEDT’s reply to the auditor’s criticism of the contract between OSI and Ruder/Finn, DBEDT wrongly characterizes it as a contract with “Mr. Richard [sic] Spreyer.” “Mr. Spreyer was hired as an independent contractor. At no time was he employed as a representative of Ruder/Finn.”
That’s not true. For several years, starting in 1987, Frederick Spreyer held a contract with DBEDT to be DBEDT’s man in Washington. (For example, the list of contracts provided in the audit shows he received $90,920, starting in 1989, to serve as “Washington D.C. Office Head.”) After the state closed its Washington office in 1991, Spreyer went to work for Ruder-Finn where, he told Environment Hawai`i in 1993, “I continued to work [for the state] through Ruder-Finn.”
DBEDT’s request to Governor Waihe`e for approval of the Ruder-Finn contract bears out Spreyer’s account, while giving the lie to DBEDT’s. In a memo to Waihe`e dated April 29, 1991, then-DBEDT Director Murray Towill lists the “specific tasks” to be performed by Spreyer. He goes on to say: “In order to maintain its momentum in Washington, the department desires to retain the services of Mr. Spreyer through Ruder Finn, Inc., a New York-based public relations firm.”
— Patricia Tummons
Volume 5, Number 8 February 1995
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