eSN Exclusive: E-rate contract draws fire

A five-year, $28 million contract awarded to Science Applications International Corp. (SAIC) to manage the information systems used to administer the federal E-rate has some E-rate service providers crying foul. Because SAIC also is a service provider under the program, critics say the deal represents a huge conflict of interest and could give SAIC a competitive advantage in bidding for other E-rate-related business.

The Universal Service Administrative Company (USAC), the independent, not-for-profit corporation that administers the $2.25 billion-a-year E-rate, says it has put safeguards into place to prevent such abuse. But some E-rate service providers say these safeguards are not enough, and they accuse USAC of applying a double standard: one for the way it conducts its own business, and another, much more stringent standard for E-rate applicants.

"People should be incensed by this," said one service provider representative who wished to remain nameless, fearing possible retribution by USAC officials. "What’s good for the goose is good for the gander. If a service provider did this, [USAC] wouldn’t ever allow it."

The E-rate subsidizes up to 90 percent of the cost of telecommunications services for eligible schools and libraries. Schools and libraries file an initial Form 470 application indicating the types of services they are requesting, and companies then submit bids for these services. Once an applicant chooses a service provider and signs a contract, it must submit a second form, Form 471, requesting E-rate funding. If this application is approved, USAC issues the funds to the service provider, which passes the money on to the applicant in the form of a discount or reimbursement.

SAIC, which earned nearly $9 billion in revenue in the last fiscal year, is a leading provider of technologies and systems integration for the Defense Department and other government agencies. It also has received nearly $54 million in E-rate funding since 2002 for services provided to E-rate applicants, including more than $51 million to supply internal connections (network upgrades) for the Los Angeles Unified School District.

Critics note that, as the information systems administrator for the program, SAIC will have unfettered access to electronic information about all E-rate applicants and other service providers–inside information that could help the company land even more E-rate business with schools.

SAIC will not be able to see the bids submitted for E-rate services during the application filing window, because service providers send their bids directly to applicants. However, as the systems administrator for the E-rate, the company will have access to electronically stored information on the winning bids once applicants file their Item 21 attachments, which explain the services to be provided and the cost of those services in great detail. In theory, the company could use this information to submit a lower bid for the same services the next time an applicant requests these services through the E-rate program.

SAIC declined repeated requests for an interview.

Eric Iverson, director of external relations for USAC, said the corporation anticipated such concerns when it awarded the contract to SAIC in February but was confident that SAIC has taken appropriate steps to deflect them.

"We’ve looked very carefully at the possible conflicts of interest and have put in place some specific measures" to prevent abuse, Iverson said. He noted that all SAIC employees who are working on the systems administration project have signed non-disclosure forms that legally prevent them from discussing any of the information related to their work. This would prevent them from sharing information with their SAIC colleagues who submit bids for E-rate projects, Iverson said.

When asked what the consequences would be for violating this non-disclosure agreement, Iverson responded: "Breaches of confidentiality would be a breach of the contract … Such breaches would make the contractor and/or employee subject to legal action."

When asked how USAC would be able to detect such a breach in confidentiality, the corporation’s spokesman said: "We have several avenues, including self-reporting by the contractor and internal USAC controls. In addition, a whistleblower may also alert us."

Some service providers say these measures aren’t enough to prevent possible abuse.

eSchool News interviewed several service provider representatives for this story. Nearly all of them declined to go on record with their concerns, because they did not want to jeopardize their own E-rate business.

One service provider representative who was willing to voice his objection was Scott Smyth, chairman of the board of directors for the E-Rate Service Providers Association and an executive with network systems provider Trillion.

"If it’s true that USAC believes putting in place a ‘non-disclosure agreement’ fixes the matter, we are astonished," Smyth said. "From what we have heard so far, this would appear to be a serious conflict of interest, and USAC’s decision to award its E-rate IT services contract to an E-rate service provider may have tainted the competitive-bidding process."

SAIC’s systems administration work for USAC and its federal E-rate program actually began a few years ago, serving as a subcontractor for the previous contract holder, New Jersey-based Solix Inc.

After taking in about $4 million in E-rate funding per year from its work as a service provider for the Los Angeles Unified School District from 2002 to 2006, SAIC last year was approved for some $29 million in E-rate business with the district, according to USAC records.

James Alther, chief technology director for the nearly 700,000-student district, said SAIC had not bid on the district’s school modernization projects in prior years. "Last year was [SAIC’s] first year bidding on these types of projects," he said, explaining the spike.

Iverson said USAC was aware of SAIC’s work as a systems administrator for the E-rate before winning the contract to provide these services outright. He said USAC’s contract with Solix contained the same non-disclosure provisions, which also extended to Solix’s subcontractors–meaning they would have applied to SAIC during this time as well.

Some observers have questioned why USAC wouldn’t just bar SAIC from being an E-rate service provider as long as the company acts as the program’s systems administrator. Iverson said USAC didn’t think that step was necessary.

"As a part of the full and open competition conducted late last year, USAC required bidders to submit detailed information regarding whether any actual, apparent, and/or potential conflicts of interest existed and, if so, to provide a plan mitigating such conflicts," he explained. "USAC’s contract with SAIC contains a comprehensive mitigation plan to address any actual, apparent, and/or potential conflicts of interest."

Critics of SAIC’s dual role as both systems administrator and E-rate service provider say it’s especially troubling in light of the intense scrutiny that E-rate applicants and service providers now must undergo as part of the Program Integrity Assurance (PIA) review process.

Responding to concerns about instances of E-rate waste, fraud, and abuse, USAC and its Schools and Libraries Division have implemented a number of measures in the last few years to protect the integrity of the program. But some applicants and service providers say the corporation has, at times, carried these efforts to the extreme.

Participants in a recent E-rate focus group organized by eSchool News and E-rate consulting firm Funds For Learning LLC reported having to jump through a number of hoops to assure reviewers they were not trying to defraud the program. One participant said she was asked the same question from PIA staff three different times, and when she noted this to the reviewer she reportedly was told, "We wanted to see if we would get the same answer."

In a high-profile example of how USAC typically leaves nothing to chance, earlier this month the Navajo Nation lost its internet access when service provider OnSat Network Communications pulled the plug. OnSat said it had not received $2.1 million in E-rate funds needed to pay a subcontractor for satellite time. USAC was withholding the funding because a tribal audit raised questions about how the tribe had requested bids for its internet contract. (See "Navajo communities remain without web access.")

Given the many steps USAC has taken to rid the E-rate of waste, fraud, and abuse, it’s surprising the corporation would award a contract of its own that raises even the slightest question of impropriety, critics say.

"There’s a lot of talk about the ‘appearance’ of impropriety [as a reason for denying E-rate funding]," the anonymous source concluded. "If this doesn’t give the appearance of impropriety, I don’t know what does."


Universal Service Administrative Company

Science Applications International Corporation

E-Rate Service Providers Association

Solix Inc.

Dennis Pierce

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