Navy’s Costly Oil Tanker Effort Runs Aground : Defense: Senate to probe a fiasco involving allegations of mismanagement and $450 million spent on two unfinished ships.

Along the James River in southern Virginia, the Navy has quietly dropped the anchors on two of its newest oil tankers, still unfinished and slowly rusting away.

After spending more than $450 million, the entire budget for the two ships, the Navy abandoned the effort--a contracting failure that has no modern day equal even among the many defense programs that have been canceled in the aftermath of the Cold War.

The program, named after the late West Coast industrialist Henry J. Kaiser, was marred by extraordinary mismanagement and improprieties both in the Navy and in the shipbuilding industry, according to Pentagon and Senate investigations.

Yet not a single defense official has been disciplined or reprimanded in the case. The Navy even lost an $18-million lawsuit, in which New York Yankees owner George Steinbrenner charged that his Tampa Shipbuilding Co. was shortchanged in the program.

Sen. William V. Roth (R-Del.), chairman of the powerful Senate Governmental Affairs Committee, will open a hearing Tuesday into the tanker fiasco, marking the first major oversight investigation by the new Republican leaders in Congress into the issue of wasting taxpayer money.

“It is pretty hard to get much worse than this,” Roth said. “We have to introduce the concept of accountability to the federal government. To spend $450 million and have no ships, somebody’s career ought to feel agony.”

Although long assumed to be boosters for defense and big business, the Republicans are vowing to be tough watchdogs in big government spending programs--even if it means engaging in the invariably complex and ugly battles that such investigations require.

Waste in the federal procurement system still looms as a serious problem that has long defied solution. Ironically, the failures with the Navy tankers are attributable in large measure to a prior round of flawed Pentagon reforms in the mid-1980s.

In an effort to promote competition and shore up the shipbuilding industry, the Navy awarded contracts for the oilers to two relatively small and inexperienced shipyards instead of the contractor that routinely built tankers on schedule and within budget.

Instead of preserving competition, the Pentagon’s idea resulted in the shutdown of both smaller shipyards--Tampa Shipbuilding and Pennsylvania Shipbuilding. Navy officials declined to be interviewed.

The hearing on the tankers, a program known as the Kaiser-class TAO 187 oiler, will be a litmus test of how well Roth can execute the difficult task of exposing and curbing such federal procurement waste--a problem that dates back to the Civil War.

Roth is likely to shun the Democratic approach to fixing such problems, which has invariably meant more government oversight and more regulation. To Republicans, such solutions are ideological poison.

The fresh approach that Roth wants would expose federal bureaucrats to greater career risks and rewards--a system granting generous financial bonuses for good performance and quick demotions for bungling important jobs such as the Navy tanker.

Roth, chairman of both the full Senate committee and the permanent subcommittee on investigations, has assembled a staff of 11 investigators and attorneys that includes a former federal prosecutor and a former assistant defense secretary.

Roth has issued subpoenas against a handful of shipyard executives, including Steinbrenner and Penn Ship Chairman Thomas C. Weller. Steinbrenner has sought to avoid appearing before the committee, asserting that he is ill and even missed the Yankees opening day game, according to sources who asked not to be identified.

Steinbrenner, a Yankees spokesman and two of Steinbrenner’s attorneys declined to comment.

Although Navy officials will testify this week, the key decisions in the oiler program were made by such retired officials as former Navy Secretary William Garrett and former Assistant Navy Secretary Everett Pyatt. Neither could be reached for comment.

What the Senators will hear this week is a tortured tale of never-ending cost increases on a relatively simple program that never should have ended up in front of a congressional investigating committee.

While colossal failures are not new in weapons programs, the cancellation of a big contract after spending the entire budget is unique in modern times, according to Roth’s staff. The two uncompleted ships ended up costing roughly the same as four tankers and consumed a major chunk of the entire Kaiser program budget.

The saga began in 1985, when the Navy issued a contract to build two of the Kaiser-class oilers to Penn Ship. The contract provided $222 million for the first two ships and an option for two additional ships.

Penn Ship’s bid was far below other competitors. An internal Navy analysis found that Penn Ship’s bid was seriously understated and that the firm was heavily in debt, but the Navy went forward with the contract, according to an investigation by the Defense Inspector General.

The rationale for picking Penn Ship was formally laid out in a document known as a pre-award survey, but the Navy said that it could not locate it, according to the Inspector General’s report. By 1988, Penn Ship was seriously behind schedule and costs were rising quickly. Exactly what went wrong is hotly disputed.

Penn Ship attorneys assert that the Navy failed to live up to promises that the program would be managed like a commercial contract. Instead of the five government inspectors that Penn Ship had been expecting, the Navy assigned 30 inspectors who seriously disrupted construction, said Thomas M. Dyer, Penn Ship’s attorney.

“They argued about every billing,” Dyer said. “It was an adversarial relationship between Penn and the Navy that choked off the cash flow.”

Penn Ship has retained Washington attorney Robert S. Bennett, who is also defending President Clinton in the sexual harassment case brought by Paula Corbin Jones.

“It would be grossly unfair to attribute any losses to the government as the result of Penn Ship’s actions,” Bennett said in a phone interview, adding that the Inspector General’s report contains errors of fact and judgment.

Amid growing delays, the Navy in 1988 transferred construction of the third and fourth ships to Avondale Shipyards in Mississippi, which was successfully producing other Kaiser tankers. Eventually, Avondale built the two ships for $226 million.

At the same time, the Navy agreed to increase Penn Ship’s contract for the first two ships to $331 million. But Penn Ship was still struggling and by August, 1989, the Navy terminated the contract for default, which essentially blamed the company for the mess. As part of the settlement with the Navy, Penn Ship signed over ownership of a $19-million floating dry dock.

The Navy then sought out bids to complete the two ships. In one of the most bizarre twists in the program, the Navy elected to award a $49-million contract to Steinbrenner’s yard for completion of the ships, even though Avondale submitted a bid that was $6 million lower.

In a report, the Inspector General also questioned why the contract was issued to a “financially unstable company” that has not earned a profit for several years. The Navy was under considerable political pressure from Congress, however, to award Steinbrenner the contract, according to government sources close to the program.

In early 1990, the Navy towed the two ships to Tampa and the program quickly encountered new problems. “The Navy jumped from one frying pan into another,” Roth said.

The Tampa contract was increased several times and Steinbrenner successfully lobbied Congress for a special $45-million appropriation in the fall of 1992, which included a provision for an immediate $12.2-million payment to Tampa.

By August, 1993, Tampa had received $102 million--more than twice the original contract amount. The Navy terminated the contract for default and blamed Tampa for the cost increases. But Steinbrenner won an $18-million judgment in federal court, asserting the Navy caused the problems. Steinbrenner sold the assets of Tampa Shipbuilding earlier this month.

Meanwhile, the Navy has mothballed the ships on the James River in Norfolk. A defense official, who asked not be identified by name, said that by the time Tampa’s contract was canceled, the Cold War was over and the need for the ships had vanished. The official acknowledged the Navy made bad judgments, but they occurred long ago and Congress shares some of the blame.

Roth admits he does not know who is fully to blame for the failures, but vows to cut through the many layers of Pentagon bureaucracy to get an answer.

When Roth confronts Navy and shipyard officials this week, his approach is not expected to resemble that of Rep. John Dingell, the Michigan Democrat who refined the art of publicly humiliating bureaucrats and corporate chieftains for cost overruns, technical problems and fraud.

“I don’t think you are going to see the Republicans get the head of a major corporation in there and rake them up and down,” said Lawrence Korb, a senior fellow at the Brookings Institution and a former Pentagon official. “Dingell went too far because he would come after people personally.”

But Roth is hoping that the tanker hearings will be the opening of a lengthy oversight agenda that will infuse new life into the Senate Governmental Affairs Committee, the panel that won acclaim for investigating the Mafia in the early 1960s.

“You wonder who is running the ship,” Roth said. “Apparently, no one.”