Halliburton: The Master Builder

Reported by Christopher Allbritton/Baghdad, Andrew Lee Butters/Kuwait City and Baghdad, Tom Dusevic/Sydney, Hassan Fattah/Amman, Andrew Purvis/Ankara, Cathy Booth Thomas/Dallas, and Adam Zagorin/Washington

Abdul Halim crossed his arms and listened skeptically to a few more American promises. The construction executive was sitting in a harshly lit room in the Baghdad Convention Center last Wednesday with a few dozen other unhappy Iraqi business-people. The 41 men and two women, representing telecom, engineering and construction firms from all over the city, had come to find out why the fruits of Iraq’s reconstruction have so far eluded them. Two months ago, Halim says, he approached Kellogg Brown & Root (KBR), a unit of the Houston company Halliburton, hoping that his construction and engineering firm, Gulf Bank, could be part of the massive effort to rehabilitate Iraq’s oil industry. He couldn’t even get his call returned. “We are angry,” he says. “They always say the priority is Iraqi companies, but as a matter of fact, in the land of the truth, that is not the case.”

“I’m sympathetic to the challenges you all face,” Stephen Orr, an adviser to the Iraqi Business Center, told the assembled group last week. The Coalition Provisional Authority and the Iraqi Ministry of Trade organize the weekly meeting for Iraqi companies hoping to find work as subcontractors to firms such as Halliburton, the biggest contractor in Iraq. “Our goal is to help you make contact with the prime contractors,” Orr said. Halim, like the others, sat stone-faced and unconvinced. Orr tried to be encouraging but gave few answers for what a growing number of disaffected Iraqis say is a system designed to shut them out of their own country’s economic recovery.

The reconstruction of Iraq, that grand effort of goodwill intended to win over the hearts and minds of Iraq’s citizens, is America’s other war, and it is not going quite according to plan. You could say that Halliburton, which holds an exclusive deal to support U.S. soldiers and by far the largest share of contracts for rebuilding Iraq’s crippled infrastructure, is command central in the battle to rebuild the country. But the firm has become a lightning rod for criticism of the U.S. presence in Iraq. Thanks in part to Vice President Dick Cheney’s five-year tenure as the company’s CEO, Halliburton’s contract with the U.S. government has been unable to escape the whiff of cronyism — even though Cheney says he has no connection to the company today other than the $178,437 he received last year, one of five annual deferred-compensation payments (see box). The firm is a constant target of violence and the subject of persistent rumors of corruption. As the June 30 handover to an Iraqi government approaches, Iraq’s citizens are beginning to question why American companies like Halliburton are still running the show. Halliburton’s role in Iraq is much more than just chief cook and bottle washer for the troops. In fact, the success of the whole U.S. enterprise in Iraq depends in many ways on how well Halliburton does its job.

It’s a big one. Work in Iraq is parceled out among a handful of companies, but Halliburton has by far the largest share–$17 billion from the U.S. and British governments, several times as much as its closest competitor, Bechtel. Halliburton and the other large contractors work on a cost-plus basis — the cost of its work (negotiated in advance) plus a defined profit of up to 3%. The entire 2004 budget for the Coalition Provisional Authority is $13 billion and pays for about 2,300 much smaller reconstruction projects, separate from Halliburton’s, none of which are subject to competitive bidding rules. Halliburton’s initial no-bid contract to restore Iraq’s oil supply came under intense criticism last year from Democratic lawmakers, but it did have to submit a bid for the second phase of the work, which it won in January.

Officials at the company bristle at the suggestion that Halliburton has had an easy ride in Iraq. Thirty-five of its employees have been killed there so far, and work on some projects has been stalled for months because of repeated insurgent attacks. Despite all this, Halliburton pushed Iraq’s oil production back to prewar levels of 2 million bbl. a day in December, three months ahead of schedule, and delivered 1.8 billion liters of fuel via 700 trucks on the road daily in Iraq and Kuwait.

Yet Halliburton faces continuing accusations of overcharging and poor management. In May, the Army decided to suspend (for the second time) $159.5 million it owed KBR for running 64 dining halls across Iraq — the latest in a series of disputed bills and erroneous cost estimates. Representative Henry Waxman, a senior Democratic member of the House Government Reform Committee, says military contractors in Iraq don’t have enough competition or oversight to keep them honest. “This is a great deal for Halliburton and Bechtel, but it’s an absolutely horrendous arrangement for the taxpayer,” says Waxman, who calls it “a recipe for waste, fraud and abuse.” The bad news has been worrying enough that the credit-rating agency Standard & Poor’s said last week it would keep a close eye on Halliburton.

Why would a company like Halliburton, which, after all, runs a successful oil-field-services business far removed from Iraq, agree to stay there? Profits. Iraq contracts have added $5.7 billion to Halliburton’s revenues since January 2003, accounting for almost all the company’s growth at a time when it was struggling with $4 billion in asbestos claims. The fact is, war is one of Halliburton’s specialties. The firm’s comprehensive troop-support contract, called LOGCAP, and its southern Iraq oil-field-rehabilitation contract, known as Restore Iraqi Oil (RIO), require Halliburton to supply whatever the military needs, determined by a constantly shifting set of priorities.

Halliburton’s CEO, Dave Lesar, points out that “there are very few companies in the world that could or would adapt this quickly while, at the same time, [financing] an operation of this magnitude.” He’s right: only two other U.S. companies, DynCorp and Raytheon, bid for this kind of massive logistical responsibility in the last bidding round. Under the terms of its LOGCAP contract, KBR had less than three weeks to provide 27 dining facilities throughout Iraq for 120,000 troops.

Halliburton argues that in any project this large, there are bound to be problems. No one expected how quickly the troop levels would grow, and Halliburton was not prepared for the enormous size of the job — and the added accounting burden. “Our control system was not ready for the surge of activity,” Lesar admits, saying the company has since beefed up its auditing. The criticism may sting, says Lesar, an accountant by training, but he takes it as a given in the business of war. Brown & Root, which merged with Halliburton in 1962, has provided support services in every American war since World War II.

But lack of oversight and transparency have created the opportunity for corruption. Businesspeople working in Iraq, Kuwait and Jordan (two major sources of supplies for Iraq), allege that Halliburton’s unchecked power to choose contractors and send the bill to the military opens the door to kickbacks. Halliburton says it employs 54 auditors to monitor all its transactions.

“We do not tolerate this kind of behavior by anyone at any level in any Halliburton company,” insists spokeswoman Cathy Gist. It’s hard to find facts among the rumors. No one wants to talk, because there’s too much business to be lost. Earlier this year Halliburton acknowledged that it had found $6 million in overbilling on its catering contracts, and it is investigating whether one or two of its former employees took kickbacks.

Robert McVicker, CEO of Morris Corp., a catering company based in Brisbane, Australia, spent nine months in Iraq last year, and he says he knew from other contractors who had been approached in Iraq that catering contracts could be secured by making payments to intermediaries. McVicker notes that Morris never paid kickbacks but says these middlemen typically asked for 3% to 4% of sales. His company was approached, he says, but not by Halliburton employees. “Many people in Iraq had their hand out,” he says. “The corruption was in places where you would never expect it to be. What disturbed me is that Westerners began taking that concept beyond the simple paper-bag deal, asking for a percentage of your sales.” The Morris contract with KBR was terminated and is under dispute by the two companies. Halliburton declined to comment.

A prominent businessman in Jordan says gatekeepers for Halliburton contracts would demand up to 10% at the point of signing and then offer guaranteed returns. “I had people coming to me and saying ‘Just choose the margin you want, and you’ll get it,’” he says. A Halliburton spokeswoman said the company had not heard this complaint but would investigate it. “Management has never instructed our employees to do this,” she said. “If that happened, it would be against our policy.”

Halliburton employs intermediary companies to provide electronic equipment and other goods in order to fill its orders quickly, and one such arrangement has already run into trouble. KBR used Altanmia Commercial Marketing, a Kuwaiti firm with ties to the country’s ruling family, rather than the Kuwaiti national oil company, to fill some of its initial fuel orders. That deal is now the subject of an investigation by the Kuwaiti government and is also being looked into by the Pentagon, which says Altanmia’s markup — about $1 per gal.–resulted in a $61 million overcharge. Halliburton says it used Altanmia only for fuel orders that had to be filled quickly, and then only with the approval of the U.S. military. Altanmia did not respond to a request for comment. Rex Wempen, co-founder of the U.S. Chamber of Commerce in Iraq, sees a political motive in the U.S. order. “It was part of the Kuwaitis’ diplomatic price for supporting the war,” he says.

Whistle-blowers say inefficiency is encouraged by the nature of Halliburton’s cost-plus contract, which ensures that the company will be repaid for expenses. Henry Bunting, 59, a former Army staff sergeant in Vietnam, handled procurement contracts for Halliburton from a base in Kuwait. He says he was actively discouraged from bidding. “We were not looking for the best price,” Bunting told TIME. “The supervisors said time and again, ‘Don’t worry about the price. Halliburton will get reimbursed.’” Disgusted, Bunting quit and went home last summer. He testified before Congress in February on Iraqi contract practices. A Halliburton spokeswoman denied overcharging by the company and said there is no record that Bunt-ing called the firm’s hotline to register his concerns.

While the Pentagon and Halliburton say there is no widespread kickback problem, the company has begun to change the way it awards contracts. At the outset, during the first few months of the occupation, KBR “didn’t put in place any measures for detecting kickbacks,” says a lawyer in Baghdad who represents contractors working in Iraq. Now, he says, KBR looks more closely at its suppliers and Department of Defense criminal investigators are actively investigating any allegations of misconduct.

That may not be enough to quiet the widespread sentiment in Baghdad, among ordinary Iraqis, that the reconstruction process has become another murky theater of corruption. Muhanad Nassiri, an architect, said his firm has bid on a dozen contracts, including one for a security system for the Iraqi National Museum, but has never been successful. “All the tenders are terminated early, and all the tenders are given to the same companies,” another Iraqi businessman says. “If you look at the awards list, you will find many of the same names.” KBR has acknowledged that it uses the same vendors repeatedly but argues that it often values reliability over other factors. “We don’t always give the award to the lowest bidder,” says a KBR representative in Baghdad.

Many Iraqi businesspeople argue that the entire system of awarding subcontracts is flawed. In a country where cell-phone networks are rudimentary and Internet access is a luxury, all potential Iraqi subcontractors must register their interest on the Web. Requests for proposals are commonly issued less than two weeks before they are due, and site visits are frequently not allowed, making it difficult to estimate costs accurately.

Since last summer, KBR has held weekly meetings in Baghdad at which it unveils its latest contracting offers. The sessions have grown more and more heated. Anthony Zinni, former head of the U.S. Central Command (Centcom) and a retired Marine Corps general, is critical of the Bush Administration’s Iraq policy and traces Iraqis’ growing bitterness to one simple issue: jobs. “Why aren’t Iraqis driving trucks for their own reconstruction and redevelopment?” he asks.

Halliburton says it does employ Iraqis–6,000 of them — as subcontractors in Iraq. But Iraqis say they are frozen out of the most lucrative subcontracting work and are particularly angered that the projects are going to companies in neighboring Arab countries, such as Saudi Arabia, Jordan, Kuwait and Egypt. “Iraqi companies are getting small contracts, like a few schools or a building renovation,” says Halim, the construction executive. “But other Arabic countries are getting the bigger ones.” KBR in Baghdad has no record of Halim’s firm and says it is awarding about 90% of its subcontracting work to Iraqi-owned companies.

For some Iraqis, the prevailing sense that the reconstruction process isn’t bringing enough benefits is as big a concern as security. Stories of corruption and opaque practices are overshadowing the real accomplishments scored by Halliburton and other companies in some aspects of the reconstruction. “To be fair, they did a good job,” says Thamir Abbas Ghadhban, an adviser to Iraqi Oil Minister Ibrahim Bahr al-Ulum. “They got us electrical generators and parts for the Garmat Ali water-purification plant in Basra.”

For better or worse, Halliburton’s fate is tied up with the U.S. military. “We’ll scale back when they scale back,” says Lesar. “You have to realize this is a Pentagon-driven decision.” Despite its criticisms of Halliburton, the Pentagon is standing by the company. “There are a number of contractors, including Halliburton, that are doing great work supporting our troops under combat conditions,” says Lieut. Colonel Joe Yaswell, a Pentagon spokesman.

Lesar expects Halliburton to be in on Iraq’s future oil business even after the U.S. military is gone, as his company now has Iraq expertise. But while the oil fields may need Halliburton, Iraq’s business community may not be so sure. To the Iraqis, Halliburton and the military are virtually synonymous — they are simply “the Americans.” Given the meager trickle-down effect, the complaints of unfairness and overcharging, the Iraqis may remember Halliburton not as a savior but as a profiteer. Just ask Abdul Halim and the others gathered last week, hoping to win some work. They are still waiting for their chance.

Time Magazine