Audit: Federal agency failed in oversight of port expansion

A new federal audit reveals the bungling of Anchorage's troubled port project goes back to its very roots when a Native corporation subsidiary that the port derided as a "shell corporation" landed the original $211 million contract.

In addition, the Port of Anchorage intentionally underestimated project costs to wrangle support, auditors reported.

And an obscure federal agency that was supposed to manage the port expansion failed to do its job, not even verifying the cost figures for a project eventually estimated to cost more than $1 billion, the audit by the U.S. Department of Transportation inspector general says. The U.S. Maritime Administration couldn't even reconcile its own numbers, the audit released this week said.

The audit is the most recent examination of the troubled port expansion. Problems in constructing the new dock became apparent as early as 2008 and defects in the design were documented in a 2012 federally commissioned study by engineering firm CH2M Hill.

The new audit examines the role of the Maritime Administration, known as MARAD, and concludes that the agency lacked contracting procedures essential for managing complex, expensive and vital port projects, and still has weaknesses. The audit also faulted it for problems with port projects in Hawaii and Guam.

MARAD says it has improved and "no longer operates in this manner."

The agency had never managed a port project before it signed an agreement in March 2003 with then-Mayor George Wuerch to oversee Anchorage's big port redo, which would become a fiasco.


"Effective program management, oversight, and contracting are critical to the success of this endeavor," the audit concluded. "However, challenges in these areas contributed to significant setbacks at the Port of Anchorage project -- including construction problems, schedule delays, and cost growth."

Between 2003 and 2011, the project's cost grew 4½ times, from $211 million to $1 billion, and the completion date slipped eight years, the audit said.

"According to MARAD officials, the Port estimated the project costs and deliberately underreported them to ensure that funding for the project would be approved," the audit said.

MARAD admitted to auditors the problem was that it "abdicated programmatic and technical control to local port officials." But current and past city leaders have said they thought MARAD was mostly in charge. MARAD says its role was to control the money, since much of it came from federal earmarks.

"I remember there was a super rush job to get this MARAD deal done, literally the week before I was sworn in" as mayor, U.S. Sen. Mark Begich said Thursday evening. Begich served as mayor from July 2003 to January 2009, critical years for the port project, and the city agreement with MARAD was tweaked in late June 2003.

Begich said he pushed for the DOT audit of the port project and was just beginning to review it. As mayor, he said he thought the port's cost estimates were too low, though they kept rising over the years. In early 2008 he upped the figure to $700 million. He said he also insisted the project be developed in phases, in case the money ran out or there was a problem in the design.

"We put more scrutiny to this project," Begich said.

Mayor Dan Sullivan, who came into office in 2009 after the port overhaul was well underway, said Thursday evening the study supports the city's position that "there was a lack of good management on the project."

Construction on the Anchorage port essentially halted after the 2009 construction season and the project remains stalled while the Sullivan administration evaluates how best to complete a scaled-back new dock. More than $300 million, including federal earmarks and state and local dollars, has already been spent and some of that work must be torn out.

With all the federal money gone, MARAD at this point has no direct role in overseeing the port project.

Auditors found that MARAD violated the intent of the Small Business Administration's "8(a)" program, named for a section of law that is supposed to provide government work to disadvantaged groups "by steering the first Port of Anchorage contract to the Port's preferred firm." That was the construction manager, Integrated Concepts & Research Corp., or ICRC, which didn't meet some of the 8(a) program requirements for no-bid, sole-source contracts, the audit said.

In February 2003, ICRC suggested awarding the contract instead to its sister company, Koniag Services Inc., which could get a sole-source contract of that size. The contract then could be transferred so the two could work on it together, ICRC said, according to the audit.

Both were subsidiaries of Koniag Inc., an Alaska Native corporation. Federal law allows Alaska Native corporations meeting certain conditions to secure even very large federal contracts without competition, unlike other 8(a) contractors.

MARAD contracted with Koniag Services Inc., a company averaging just six employees, according to a 2003 MARAD memo, for the initial $211 million port contract in May 2003.

Three months later, the port "wrote MARAD to express its dissatisfaction with KSI and question KSI's leadership," the audit said. The port called Koniag Services a "shell corporation" and urged the contract be moved to ICRC. The transfer happened in February 2004.

Before awarding contracts for the Anchorage port replacement, as well as the projects in Guam and Hawaii, MARAD failed to develop required "independent government cost estimates" or verify the ports' own cost figures, the audit said. The independent, detailed estimates show "what a reasonable person should pay to obtain the best value for a product or service."

MARAD officials initially told auditors that it had done an independent estimate for a second Anchorage contract with ICRC, but later said that ICRC actually prepared it.


MARAD intended for ICRC to create a secure, Internet-based system to track progress, provide status reports and flag issues early on. But the system wasn't fully funded and was never completed, the audit said.

Without such a management information system, MARAD struggled to provide auditors with basic information, the audit said. When auditors tried to learn about funds spent on the Anchorage port project, MARAD provided reports with discrepancies that it couldn't reconcile.

Early on, the port pushed for an unconventional design instead of a traditional dock on pilings. The port director at the time, former one-term Gov. Bill Sheffield, wanted to use a patented design concept called Open Cell Sheet Pile. In that design, sheets of steel are placed into U-shaped cells to form a new dock face, then backfilled with gravel to create new land behind them. But steel sheets bent and twisted when crews tried to drive them into the Cook Inlet seafloor with massive hammers.

MARAD allowed use of that proprietary technology without justification, the audit found. Only one company, PND Engineers Inc., which owns the patents, bid on the design work. It then designed what city officials now say is a flawed new dock.

In its study, CH2M Hill found that even if it were built correctly, the new dock would be at risk of failure in a major earthquake.

The city is suing some of the contractors over the port project. They are defending their work.

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Lisa Demer

Lisa Demer was a longtime reporter for the Anchorage Daily News and Alaska Dispatch News. Among her many assignments, she spent three years based in Bethel as the newspaper's western Alaska correspondent. She left the ADN in 2018.