Monday, March 14, 2005

Knaves, Brigands, Reavers 

Today's Article That Everyone Else Has Already Linked To comes from Michael Shnayerson of Vanity Fair. "The Spoils of War" limns the process by which Halliburton subsidiary KBR (formerly Kellogg Brown & Root) landed $12 billion in exclusive, often non-competitive contracts for services in Iraq; many of those contracts were awarded in violation of standard military bidding procedure, despite the company's history of mismanagement, reckless spending, and outright fraud. The whistleblower at the center of the story, Army Corps of Engineers compliance officer Bunnatine Greenhouse, was demoted after two years spent questioning one sweetheart deal after another. Not that it matters, but she also happens to be Elvin Hayes's sister:
"The meeting was in the Pentagon—one of those really secure rooms," Greenhouse recalls. The date was February 26, 2003, three weeks before the Iraq invasion. The Army Corps's Lieutenant General Carl A. Strock was there; Greenhouse says he was the one who would lead the campaign to ax her 20 months later. There, too, were representatives from Defense, State, USAID and others, several dozen in all. A major item on the agenda was deciding which outside contractor would get the multi-billion-dollar job of putting out the oil-well fires that Saddam Hussein's troops would presumably set once the invasion began, and then getting the wells operating again. The project was to be known as RIO, for Restore Iraqi Oil.

Several U.S. companies had the know-how. Texas-based GSM Consulting, for one, had done such work in the wake of the Gulf War. Yet the assumption in the room was that KBR had the job—an assumption underscored by the extraordinary presence of KBR representatives at the high-level government meeting. "They came in late—it was a snow day," Greenhouse recalls. "I was just flabbergasted."

Greenhouse knew that the previous fall KBR had been paid $1.9 million to draft a contingency plan for how RIO should unfold. But that was reason enough not to let KBR do RIO. It was strict protocol in the procurement business that the contractor who drew up the contingency plan for a job should not be allowed to bid on the job itself: he'd know the exact budget and other details that would give him an unfair advantage. Yet here was KBR sliding into the job without an eyebrow raised—precisely because, as the participants at the meeting agreed, it was the only company that met the criteria outlined in its own contingency plan! To Greenhouse's greater shock, the senior officers and the KBR representatives around the table spoke of a sole-source, non-compete contract that could last five years. In the first of many detailed responses to Vanity Fair, KBR notes that the Government Accountability Office (G.A.O.) concluded that the RIO contract was "properly awarded." But the G.A.O. also concluded that the $1.9 million contingency plan on which RIO was based was improperly awarded.

Worst of all, the contract would be "cost-plus": KBR would just submit bills for whatever it spent, and the government would reimburse it, adding fees of between 2 and 7 percent as KBR's profit. It didn't take a genius to see that the more money KBR spent, the more profit it would make. KBR says that its award fee of up to 5 percent on RIO is based in large part on its ability to control costs. But the G.A.O. has concluded that KBR let costs spiral out of control . . . .

To KBR, the contract was potentially worth $7 billion—just the start of its business from the war in Iraq.

There were signs, though no proof, that Vice President Cheney, or someone in his office, had played a part in tipping RIO to KBR. Certainly, his office had been informed of the decision to award the RIO contingency plan to KBR. Michael Mobbs, a political appointee who reported to Undersecretary of Defense for Policy Doug Feith, acknowledged to Congressman Waxman's staff that he had relayed the news that KBR would prepare the RIO plan to various White House officials in an October 2002 meeting. One of those officials was I. Lewis "Scooter" Libby, Cheney's chief of staff. (A Cheney spokesman, Kevin Kellems, subsequently told The Washington Post that Libby had kept Cheney out of the loop about the decision to use KBR for the plan.) And Time would unearth an Army Corps e-mail stating that the contingency plan had been "coordinated" with the vice president's office. As The Wall Street Journal reported, Halliburton executives then met directly with Cheney's staff. KBR, for its part, says the vice president had nothing to do with any of its Iraq contracts.

It was at the LOGCAP office that [KBR logistics specialist Marie] deYoung saw how well KBR managers in Kuwait were living. They stayed in expensive waterfront hotels in Kuwait City and its environs at more than $100 a night per room. They availed themselves of hotel laundry service, even while KBR was paying outrageous prices to a subcontractor for laundry. And when they left their hotels, they didn't carpool or take buses. They'd requisitioned expensive-brand S.U.V.'s for themselves. DeYoung did some number crunching and came up with the figure of $73 million a year. That, she concluded, was what KBR was spending for its top managers in Kuwait City to live so well. More accurately, that was what U.S. taxpayers were paying—not including the extra 2-to-3-percent profit that came with the cost-plus system. (KBR says only a few managers are in off-base housing and that those in hotel rooms are routinely doubled up. DeYoung says the only people who stayed two to a room were men with girlfriends, "often the lesser paid Balkans girls.")

What were the KBR managers actually doing there? Not overseeing construction projects, or kicking the tires of convoy trucks they'd brought in to supply the troops, or looking at blueprints for new army bases in Iraq. According to deYoung, they weren't doing any of that. They were sitting in their hotel rooms, or out on their waterfront balconies, giving the nod to subcontractors to do all the work. (KBR says it "self performs" some jobs and subcontracts others.) Once a subcontractor was hired, the KBR team had no idea whether goods or services were delivered, deYoung asserts. The team just paid whatever invoices the subcontractors submitted, and hoped for the best. (KBR calls this a "ridiculous claim" and says that all goods and services must be verified before invoices are paid. DeYoung says that's simply not true, and e-mails a blizzard of documents from her time in Kuwait to support her case.)

But there's another way to look at KBR's work in Iraq. Without it, the company would be in truly bad shape. In fact, the Iraq work accounts for nearly all of KBR's growth at a time when it has staggered under $4.2 billion in asbestos claims—thanks in large part to Halliburton's former C.E.O. Dick Cheney.

Back in 1998, Cheney decided to merge Halliburton with Dresser Industries, a Texas-based energy company. Unfortunately, he failed to do his homework on Dresser: a mountain of lawsuits over asbestos-contamination claims were about to be filed against it. KBR, formed from the merger, bore the brunt of those. By late 2003, Dresser was forced into bankruptcy and began organizing a court-ordered settlement plan. KBR incurred huge liabilities—handily offset by those contracts in Iraq.

Now that painful ordeal is over: in December a federal judge approved Dresser's $4.2 billion asbestos settlement. That means the company can come out of bankruptcy, and analysts seem to agree on what will happen, as a result, in the next months.

Halliburton will sell KBR.
UPDATE (3/15): From Paige Rockwell of Salon's War Room:
Congressional Democrats released records Monday from the Defense Contract Audit Agency's investigation of Halliburton, revealing that the company overcharged $108 million for one of 10 services the company performed as part of its Restore Iraqi Oil contract. U.S. Representatives Henry Waxman, D-Calif., and John Dingell, D-Mich., also submitted an open letter to President Bush, calling for the release of audit reports on the remaining nine contract tasks, and asking the Bush administration how it plans to recover the funds from Halliburton . . . .

But unless Congress can get its hands on the other reports, it'll be hard to hold Halliburton accountable. And it's not just American taxpayers who should get a refund -- $1.64 billion of Halliburton's total $2.5 billion tab have come out of Iraqi oil proceeds held in the Development Fund for Iraq. Repayment of overages to the development fund could come in handy for the fledgling democracy, plagued as it is by security problems and a lack of funds to cover basic infrastructure and electricity.

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