A controversial contract

Published : Sep 12, 2003 00:00 IST

CONTROVERSY continues to dog the George W. Bush administration's ties with corporations running the cogs in the war machine in Iraq. The contracts related to "reconstruction" in Iraq have generally come under a cloud because of allegations that several of the companies that have bagged them have close connections to members of the Bush administration. In particular, one oil industry-related contract, awarded to the subsidiary of Halliburton, one of the biggest oil service companies in the world, has attracted attention. United States Vice-President Richard B. Cheney was the Chief Executive Officer (CEO) of Halliburton from 1995 to 2000. On the eve of the war on Iraq, in March 2003, the Bush administration awarded the contract to Brown and Root Services (BRS), a division of Kellogg, Brown and Root (KBR), the engineering and construction arm of Halliburton. KBR is also a major contractor for the Pentagon.

Given the fact that the U.S. was in the process of invading Iraq, the Department of Defence itself issued the contract through the U.S. Army Corps of Engineers (USACE). It awarded the $37.5 million Indefinite Delivery Indefinite Quantity (IDIQ) contract on "cost plus fixed fee basis" to BRS. However, according to the Defence department, by May 6, five orders, amounting to a total value of $76.8 million, had already been placed with KBR. The contract was mainly for fighting fires in oil installations and fields in Iraq.

Later, as the contract attracted controversy, the department claimed that the deal was only a "bridge" contract, issued by the U.S. Central Command without inviting competitive bidding. It also pointed out that the contract was issued because KBR held the U.S. Army's Logistics Civil Augmentation Contract (LOGCAP), a scheme that enables private companies to play a bigger part in the U.S. war industry. Significantly, KBR is the exclusive supplier of logistics to the U.S. Army and Navy around the world. It moves food and fuel, supplies food services, and is also a construction contractor for the U.S. Army and Navy. In fact, in July, The New York Times reported that KBR recently won a $300 million contract to build "permanent facilities" at Guantanamo Bay, using labour from India and the Philippines.

In the face of mounting criticism from not only Halliburton's rivals but also the U.S. Congress that the bidding process was not transparent, the USACE announced on June 26 fresh bids for two IDIQ contracts - one for the North Oil Company and the other for the South Oil Company. The USACE said that the contracts will "replace the non-competitive contract for emergency services" that were issued to KBR on a cost-plus basis. The contract covers a range of operations in the oil industry: extinguishing fires, assessments of oil installations, procurement and import of fuel products, apart from managing several other tasks related to Iraqi oil installations. In effect, the winning bidder will have the responsibility of bringing Iraqi oil infrastructure back in operation. The contract has tenure of 24 months, with three one-year options for extensions. The USACE also notified bidders that the contract would have a minimum value of $500,000 and a maximum value of $500 million. It set August 14 as the deadline for prospective bidders and said that the winning bidder will be announced on October 15.

However, critics were not impressed by the USACE's efforts to reopen the bidding process because KBR already had its foot in Iraq, which gave it considerable advantage over rival companies. Moreover, there is apprehension that because of its privileged access to oilfields, terminals, pipelines and other facilities in Iraq, KBR would be in an unchallengeable position vis-a-vis other bidders. Halliburton's rivals have alleged that because the USACE and KBR are already working together in Iraq, there could be a potential conflict of interest in the former's evaluation of the bids. In fact, rival engineering and construction companies such as Parsons, Fluor and Schlumberger expressed their apprehensions when they participated in a "prospective bidders conference" organised by the USACE on July 14 in Dallas. There have also been reports that Halliburton has a clear idea of the work that needs to be done in Iraq's oil industry. Hence its understanding of the work, in financial and physical terms, gives it an undue advantage over rivals.

By virtue of being a military contractor, KBR enjoyed the advantage of going into Iraq with the troops, ostensibly in the guise of protecting Iraqi oil installations and keeping them safe for the Iraqi people. Thus, by virtue of being a defence contractor, it is now in a position to work on lucrative oil-related contracts, effectively smothering rivals. Recent evidence, from a report released on July 24 titled "Restoration of Iraqi Oil Infrastructure: Final Work Plan", has interesting details about how and why KBR gained the upper hand. The report resulted from a meeting held at the Iraqi Cultural Centre in Baghdad from July 6 to 9 in which representatives of the Iraqi Oil Ministry, the Coalition Provisional Authority (CPA), the USACE's task force "Restore Iraqi Oil" and KBR participated. Reflecting the status of a report issued in occupied Iraq, it was "approved" by Phillip Carroll, Senior Oil Adviser to the Iraqi Oil Ministry. Significantly, Carroll is a former CEO of the giant oil company, Shell, and Fluor Intercontinental (from 1998 to 2002), another prime contractor involved in the reconstruction of Iraq.

The detailed report provides an idea of the magnitude of the task of restoring Iraq's oil infrastructure. It also provides a detailed time-frame for restoration of oil facilities. It is evident that KBR's access to the "inside track" ensures that it is streets ahead of any competition to restore these facilities.

The oil industry restoration programme involves 220 projects, divided into three phases, totally costing $1,144 million. Phase I, which would end in December 2003, is expected to be the most substantial part of the programme in money terms. It is projected that $716 million - accounting for 63 per cent of the entire amount - will be spent before December 31, 2003. Spending in Phase II, which ends in March 2004, will account for another 22 per cent of the programme, leaving only $176 million for Phase III, which will end on September 30, 2004.

Rival companies have alleged that it would be difficult for them to address these target dates because, unlike KBR, they do not have any idea of the magnitude of the task at hand. Moreover, they have pointed out that they will have very little time after the contracts are awarded in October. The bulk of the procurement for the project is to be done by KBR. Project construction expenditure, amounting to $320 million, is to be undertaken solely by KBR. The report reveals that the Iraqi Oil Ministry has very little control over procurements for the project. Although Carroll enjoys complete authority over the Ministry, by virtue of being the representative of the CPA, it is obvious that even the Oil Ministry, with its truncated powers, will have no control over how KBR spends money on the project.

Halliburton has certainly benefited from the war. Its financial performance in the second quarter ending June 2003 enabled it to make a profit of $26 million, compared to a loss of $498 million that it suffered during the same period in 2002. The company has also said that its revenues from operations in Iraq were $324 million in the second quarter of 2003, accounting for 9 per cent of its total revenue of $3.6 million during the period.

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