Middle East

Jostling in the rebuilding queue
By David Isenberg

An important part of the second phase of the war in Iraq is now moving into full gear; namely, the battle for reconstruction and redevelopment contracts. And the early stages of this battle could become a political hot potato for the Bush administration, given that it already appears to be enmeshed in charges of political cronyism and insider connections; a sort of Enron in Babylon, one might say.
As just about everyone knows, the postwar reconstruction in Iraq is going to be the largest and most ambitious effort since the Marshall Plan in Europe after World War II. The United Nations Development Program has estimated the reconstruction cost at US$30 billion in the first three years. Others have projected the figure as high as $100 billion.

The current contract controversy began before the fighting started, when the US Agency for International Development (USAID) sent a detailed "request for proposals" to a handful of companies for construction work that that could total up to $600 million over 21 months. The construction contract is one of eight solicitations for work in postwar Iraq. USAID contract documents detail some of the future work to be done:

  • Repair up to 100 hospitals, 6,000 schools and 45 urban water systems.
  • Fix up to 10 electrical generating plants and 110 substations.
  • Get the railroad running again.
  • Reconstruct 100 bridges and 600 miles of irrigation and drainage canals.

    Agency officials said that they were prohibited by law from identifying the invited firms, but The Wall Street Journal said they included Kellogg, Brown & Root, a Halliburton subsidiary; Bechtel Group Inc; Parsons Corp; Louis Berger Group and Fluor Corp, two companies that have joined together for this effort, and Washington Group International.

    The Center for Responsive Politics, an organization that tracks political donations, said that the companies and individuals associated with them had have made $3.5 million in contributions from 1999 to 2000, with two-thirds going to Republicans.

    The Leuthold Group, a research firm in Minneapolis, put together a list of companies it thinks will benefit from contracts to rebuild Iraq.

    In March, the leading contenders were US companies like Bechtel, Fluor, Halliburton and the Washington Group. Others could include Schlumberger Ltd, Baker Hughes, Nabors Industries, Globalsantafe Corp, Chicago Bridge & Iron, Superior Energy, Core Laboratories, RPC, Perini Corp and Boots & Coots International Well.

    As expected, US firms are leading the pack. On April 12, the New York Times reported that the US Army Corps of Engineers confidentially awarded a one-year contract worth up to $100 million on April 1 to the Perini Corporation, which had revenues of barely $1 billion last year. The agency released a brief statement about the award on April 4, but Perini did not receive clearance to issue its own statement about the significant chunk of business until April 8. By then, its stock had climbed more than 40 percent.

    Or consider Kellogg Brown & Root, where Dick Cheney had connections before he was selected by George W Bush as his running mate. According to an April 8 letter by the Corps of Engineers Director Lieutenant-General Robert Flowers, who was responding to an inquiry by Representative Henry Waxman (Democrat-California), Kellogg was directed to develop contingency plans for repairing and continuing operations of the Iraqi oil infrastructure under its existing Logistics Civil Augmentation Program (LOGCAP) contract with the Army. Central Command identified the requirements for contingency planning, including planning for extinguishing oil well fires and assessing damage to oil facilities in the immediate aftermath of hostilities. The requirement was within the scope of the LOGCAP contact, and Kellogg performed the planning under a task order issued under the LOGCAP contract. To invite other contractors to compete to perform a highly classified requirement that Kellogg was already under a competitively awarded contract to perform would have been a wasteful duplication of effort. It would also have delayed Central Command's war planning in order to obtain security clearances for potential competitors as well as to conduct the additional competition.

    According to Fortune Magazine, the LOGCAP pays Halliburton through what's called a cost-plus arrangement, meaning that Kellogg is guaranteed to recover its expenses, plus receive a set profit, provided the contract terms are met. To date, Kellogg has received $830 million from the program.

    Because the Iraqi oil fields did not suffer the devastation that some had feared, it now seems that Kellog's contract will not realize its maximum ceiling cost of $7 billion during the course of its two-year contract. But detailed contract information released by the Corps of Engineers shows that Halliburton, through Kellogg, stands to profit to the tune of 7 percent of the value of the contract, or as much as $490 million over its two-year duration.

    It should be noted that Iraqi contracts could not come at a better time for Halliburton, whose business had been dogged by a host of troubles - from a slowdown in domestic oil production to nightmare asbestos litigation. Last year, revenues declined 6 percent, to $12.6 billion, and the company reported a net loss of $984 million.

    What particularly incenses many critics is that Halliburton is still paying annual compensation to its former chief executive officer from 1995 to 2000, Dick Cheney. Cheney received stock and stock options in Halliburton valued at $33 million when he stepped down in 2000 to run for office, this after just five years heading the company. He continues to receive $180,000 a year from Halliburton in deferred compensation.

    Cheney's management of Halliburton left two major legacies. One was the company's $ 7.7 billion acquisition of rival Dresser Industries in 1998. The deal wound up saddling Halliburton with massive asbestos liability from a Dresser subsidiary that had once used the carcinogen to make bricks and pipe coatings. The other is an investigation by the Securities and Exchange Commission into accounting irregularities. The agency wants to know whether the company improperly booked revenues from customers that were disputing construction cost overruns.

    In a response to Flower's letter, Waxman noted that it "does not specify the scope of the work that can be done under the contract. Instead, your letter seems to indicate that the contract to repair and continue operations of Iraq's oil infrastructure can encompass services necessary to support the mission in the near term, which is a potentially broad and open-ended directive. It may be the case that the administration had valid reasons for granting a sole-source contract for emergency work during armed hostilities. It is harder to understand, however, what the rationale would be for a sole-source contract that has a multi-year duration and a multi-billion dollar price tag. Yet this appears to be the type of contract that was awarded to Kellogg Brown & Root."

    A bit more blatant is a bill in the US Senate, sponsored by a Senator from California, which mandates that when Iraq's mobile telecom services are rebuilt, they should not use the global GSM platform - a standard which even the Pentagon supports - that Iraq and the rest of the Asian world have been using, but instead use a less-popular technology called code division multiple access (CDMA). Orders for CDMA will result in royalties accruing to Qualcomm, which just happens to be located in southern California.

    The most sought-after contract will be awarded by the USAID and will cover the initial work to rebuild Iraq's roads, water and power systems, schools and hospitals. Bidding was restricted to five American companies for the same official reasons that Kellogg won its contract without any competition: the need for speed and for security clearances. But government contract experts say that those needs have been exaggerated and that they may be violations of international trade agreements as well as federal rules.

    None of this is doing much to generate goodwill for the United States. As an article in the US news magazine New Republic, itself a strong supporter of the invasion of Iraq, noted, "The perception that the United States invaded Iraq so Halliburton can begin pumping oil for Exxon is shockingly widespread and is a major part of the reason the Bush administration had so much difficulty winning world public opinion for its Iraq campaign."

    Meanwhile DynCorp, a major US military contractor, has won a multi-million-dollar contract to police post-Saddam Iraq. DynCorp, which has donated more than $157,000 to the Republican Party, began recruiting for a private police force in Iraq last week on behalf of the US State Department.

    Over at the State Department, as a New York Times editorial noted, the Agency for International Development has limited bidding to a short list composed mainly of government contracting insiders. These include the Bechtel Group, on whose board sits George Schultz, a former secretary of state under Ronald Reagan, and the Fluor Corporation, whose recently retired chief executive is being considered by the Pentagon to run Iraq's oil industry.

    Companies excluded from bidding for these contracts are justifiably upset, including those based in the UK, a staunch supporter of Washington's unpopular preventive war in Iraq. Under World Trade Organization (WTO) rules, procurement contracts are supposed to be open to all bidders, domestic and foreign.

    British companies have some advantages, though, as the US is inclined to favor contractors from coalition countries. In fact, in a little-noticed amendment to the Bush's administration's war budget request, Representative Mark Kennedy (Minnesota, republican) tacked on a clause that stops money being spent through companies incorporated in France, Germany or Syria.

    In fact, European companies offer much valuable experience in rebuilding in war zones in general and in Iraq in particular. As an article in Newsweek pointed out, hundreds of European firms have gone to war zones all over the world, and even to the US. The British construction firm AMEC helped rebuild energy-supply lines in Bosnia and Kosovo, and worked on the Pentagon and the World Trade Center site after September 11. From France, Alcatel rebuilt phone networks in Kosovo and Technip-Coflexip has partnered with both Halliburton and Bechtel on energy projects in the Middle East. Siemens of Germany is currently rebuilding Afghanistan's decrepit fixed-line phone system, and clearly has the experience to do the same in Baghdad.

    Many European firms have done recent work in Iraq under the United Nations' oil for food program. More than 50 British firms have experience in Iraq. French construction firms such as Bouyges nabbed scores of Iraqi building contracts through the 1970s and 1980s. Alcatel and Siemens helped build Iraqi power and communications grids, some of which are built to European standards.

    Members of Congress plan to introduce legislation and to use the General Accounting Office to bring the contracting process governing the awards of $2.4 billion of reconstruction projects out in the open.

    The European Commission has stated that it would scrutinize the way US authorities award reconstruction deals in Iraq. The commission is to monitor deals to see if Washington breaches international trade rules on government contracts to see if they fall short of WTO rules on government procurement.

    (©2003 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
    Apr 17, 2003

    British want a bigger slice of the cake (Apr 8, '03)

    There's no business like war business (Apr 4, '03)

    Robbing Peter to pay Paul (Mar 28, '03)

    The lucrative business of rebuilding Iraq (Mar 26, '03)


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