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Halliburton: The Bush/Iraq Scandal that Wasn’t

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July 9, 2003, 9:30 a.m.

Halliburton: The Bush/Iraq Scandal that Wasn’t

The president’s critics come up empty.

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n March 24, Halliburton, the giant energy-services company once headed by Vice President Dick Cheney, announced that a subsidiary, Kellogg Brown & Root, had signed a contract with the Army Corps of Engineers to put out oil fires in Iraq, as well as to evaluate and repair the Iraqi oil infrastructure. The announcement set off an angry reaction in some circles on Capitol Hill. On March 26, California Democratic representative Henry Waxman wrote a letter to the Corps demanding to know why the contract was signed "without any competition or even notice to Congress." On April 8, Waxman, joined by Democratic representative John Dingell, requested a General Accounting Office investigation, writing that "ties" between Cheney and Halliburton "have raised concerns about whether the company has received favorable treatment from the administration." On April 10, Waxman wrote the Corps again, demanding more information. More Waxman letters followed on April 16, May 6, and June 6.

Liberal voices in the press followed Waxman's lead. Writing in the Washington Post, columnist Michael Kinsley called the Halliburton contract "nation-building, Republican-style, with huge contracts awarded in secret to politically connected companies." The New York Times editorialized that the contract "looks like naked favoritism" and "undermines the Bush administration's portrayal of the war as a campaign for disarmament and democracy, not lucre."

One element missing from all the criticism was a serious examination of what the Halliburton contract actually involved and how it came to be signed. For example, was it really reached without competition, as Waxman charged? As it turns out, the evidence that is publicly available (some of it remains classified) suggests that Waxman's accusations are misleading at best and flat wrong at worst. It appears not only that there was not "naked favoritism" at work in the Halliburton contract, but that the Corps of Engineers, and the Bush administration, acted reasonably and properly in awarding the contract — no matter what Waxman says.

THE FIRES THIS TIME?

Waxman has made three basic accusations about the Halliburton deal. The first is that it was signed without appropriate competition. The second is that it called for Halliburton to be paid under an arrangement that — Waxman says — often results in overcharges to the government. The third objection is that it is a questionable use of federal money because of what Waxman calls Halliburton's "troubling" performance record.

First the competition issue. Last year, as administration officials made plans for war in Iraq, they were greatly concerned that Saddam Hussein would set fire to his country's oil fields, just as retreating Iraqi troops had done in Kuwait at the end of the first Gulf War. That, military planners knew, would result in a huge economic and environmental disaster. "The model we were looking at was what the Iraqis had done in Kuwait at the end of the Gulf War," says Lt. Col. Eugene Pawlik, a spokesman for the Army Corps of Engineers. "We had to consider the possibility that the Iraqis would set that many or more wells on fire in Iraq and what it would take for us to throw a maximum response at a maximum destruction scenario."

Last November, the Corps assigned Kellogg Brown & Root (KBR), which has been a wholly owned subsidiary of Halliburton since the 1960s, to do a classified study of potential damage and repairs in the Iraqi oil fields. Contrary to Waxman's assertion, the work was done under a competitively awarded contract system known as the U.S. Army Logistics Civil Augmentation Program, or LOGCAP. The LOGCAP system came about because of the military's need to perform complex jobs — peacekeeping in Bosnia, intervention in Haiti — on sometimes very short notice. In such situations, American troops require lots of logistical support; camps have to be built, utilities have to be supplied, food has to be cooked. By the early 1990s, as the size of the active-duty force shrank, the Pentagon began to "outsource" much of that work, that is, pay civilian contractors to do it rather than tie up soldiers with non-essential tasks. Instead of going through a months-long competitive-bidding process for each job, the military came up with LOGCAP.

LOGCAP is, in effect, a multi-year supercontract. In it, the Army makes a deal with a single contractor, in this case Halliburton, to perform a wide range of unspecified services during emergency situations in the future. The last competition for LOGCAP came in 2001, when Halliburton won the contract over several other bidders. Thus, when the oil-field study was needed, Corps officials say, Halliburton was the natural place to turn. "To invite other contractors to compete to perform a highly classified requirement that Kellogg Brown & Root was already under a competitively awarded contract to perform would have been a wasteful duplication of effort," Corps commander Lt. Gen. Robert Flowers wrote to Waxman in April.

In February 2003, with the study done, the Corps of Engineers decided to issue a contract to actually execute the plan that KBR had drawn up for dealing with problems in the Iraqi oil fields. At the end of that month, Army headquarters authorized the Corps to issue a sole-source contract to KBR. (The assignment seemed logical for another reason: Halliburton/KBR put out 350 oil-well fires in Kuwait after the first Gulf War.) "Only KBR, the contractor that developed the complex, classified contingency plans, could commence implementing them on extremely short notice," Flowers wrote Waxman. "The timing was driven by Central Command's operational requirement to have support available in advance of possibly imminent hostilities." Flowers added that the contract was always intended as a temporary "bridge" to a more permanent contract that would be offered for competitive bidding.

The next question was how large the contract should be. That was a difficult problem, because no one knew how big the problem would be. Would all the fields burn? Would none of them? Just a few? The Army assumed a worst-case scenario and decided the contract would be worth any amount between $0 and $7 billion (a common contracting practice known as ID/IQ, which stands for indefinite delivery/indefinite quantity). The $7 billion cap was thought to be sufficient to handle any emergency.

When the Army told Waxman that, he immediately began calling the KBR deal a $7 billion contract. "We are told it was a short-term contract for very little money, then it turned out it was a $7 billion contract," he said on National Public Radio in early May. What Waxman did not say was that he had been told a month earlier that the contract would not be worth anywhere near the cap amount. Because most of the anticipated disasters did not take place, the Army has asked KBR to do much less work than the original worst-case scenario envisioned, and the contract has therefore been worth far less than it might have been. "We will come nowhere close to the $7 billion figure," says Lt. Col. Pawlik. As of mid June, Pawlik says, the task orders issued to Kellogg Brown & Root totaled about $214 million. It's estimated that, in the end, costs will probably amount to around $600 million. While that is not pocket change, it's also not $7 billion — contrary, again, to Waxman's assertion.

Army officials also suggest that critics consider what might have happened had the Iraqi situation worked out differently. Suppose the wells had been torched and the Army, following Waxman's advice, had begun a long, complicated competitive-bidding process to find a company to put out the fires. "I don't think people would have been satisfied for the wells to have been burning while we were going through standard contract practices," says Pawlik. "I think we would have been getting a lot of questions about why did we pursue that course of action."

HALLIBURTON — THE CLINTON CONTRACTOR

Waxman's second objection concerns the way the company will be paid for its services. The LOGCAP payment method, known as a cost-plus-award, calls for KBR to be paid its costs plus a profit of 1 percent. According to the General Accounting Office, KBR could also earn "an incentive fee of up to nine percent of the cost estimate, based on the contractor's performance in a number of areas, including cost control." In one of his letters to the Corps of Engineers, Waxman says that the cost-plus-award system is "generally discouraged in the executive branch because it provides the contractor with an incentive to increase its profits by increasing the costs to the taxpayer." But in fact, the cost-plus-award method is an extremely common arrangement throughout the defense-contracting industry; one can leaf through the pages of Defense Daily and see many hundreds of contracts handled on the same basis. Given such widespread use, it is hard to conclude that the cost-plus-award method somehow makes the Halliburton contract a sweetheart deal for a politically favored company. (Nor is the contract unusually generous; the LOGCAP's range of a 1 percent to 9 percent fee is in line with standard government/industry practice.)

[Editor's note — Since this article was published in National Review magazine, Halliburton has said that while the LOGCAP that was in effect from 1992 until 1997 called for a one-to-nine percent profit range, the LOGCAP in effect now calls for significantly less, a one-to-three percent profit margin.]

Finally, Waxman objects to what he calls Halliburton's "troubling" performance record, suggesting that Halliburton would not have gotten the contract had Vice President Cheney not once headed the company. But Waxman's charges — and their echoes in outraged editorials — overlook Halliburton's extensive history of defense work for earlier administrations. Indeed, far from having a "troubling" past, one could argue that Halliburton was a favorite contractor of the Clinton Pentagon.

The first LOGCAP was awarded in 1992, as the first Bush administration (including then-Secretary of Defense Cheney) was leaving office. Four companies competed, and the winner was Brown & Root, as it was known at the time (Halliburton changed the name to Kellogg Brown & Root after an acquisition in 1998). The multi-year contract was in effect during much of the Clinton administration. During those years, Brown & Root did extensive work for the Army under the LOGCAP contract in Haiti, Somalia, and Bosnia; contract workers built base camps and provided troops with electrical power, food, and other necessities.

In 1997, when LOGCAP was again put up for bid, Halliburton/Brown & Root lost the competition to another contractor, Dyncorp. But the Clinton Defense Department, rather than switch from Halliburton to Dyncorp, elected to award a separate, sole-source contract to Halliburton/Brown & Root to continue its work in the Balkans. According to a later GAO study, the Army made the choice because 1) Brown & Root had already acquired extensive knowledge of how to work in the area; 2) the company "had demonstrated the ability to support the operation"; and 3) changing contractors would have been costly. The Army's sole-source Bosnia contract with Brown & Root lasted until 1999. At that time, the Clinton Defense Department conducted full-scale competitive bidding for a new contract. The winner was . . . Halliburton/Brown & Root. The company continued its work in Bosnia uninterrupted.

That work received favorable notices throughout the Clinton administration. For example, Vice President Al Gore's National Performance Review mentioned Halliburton's performance in its Report on Reinventing the Department of Defense, issued in September 1996. In a section titled "Outsourcing of Logistics Allows Combat Troops to Stick to Basics," Gore's reinventing-government team favorably mentioned LOGCAP, the cost-plus-award system, and Brown & Root, which the report said provided "basic life support services — food, water, sanitation, shelter, and laundry; and the full realm of logistics services — transportation, electrical, hazardous materials collection and disposal, fuel delivery, airfield and seaport operations, and road maintenance."

In 2001, after the Bush administration came into office, the giant LOGCAP contract expired again and another competition was held. Once again, Halliburton won the contract, and it was under that arrangement that the Iraqi-oilfield analysis was done. As the record shows, Halliburton won big government contracts under the Clinton administration, and it won big government contracts under the Bush administration. The only difference between the two is that Henry Waxman is making allegations of favoritism in the Bush administration, while he appeared untroubled by the issue during the Clinton years.

INVESTIGATE, INVESTIGATE, INVESTIGATE

That is not to say that there have not been problems with Halliburton's work — under both administrations. For example, Waxman cites a case last year in which the company paid a $2 million fine to resolve fraud allegations stemming from its work on a California military base. He also suggests that Halliburton/KBR overcharged the military throughout the Bosnia mission.

In the California case, the company clearly engaged in wrongdoing. But the scope of the problem, when considered in light of the enormous amount of work Halliburton/KBR does for the government and the fact that the issues have been resolved, does not seem a reason to cut Halliburton off from future work. As far as Bosnia is concerned, while critics correctly point out that the company's payment far exceeded original estimates, they fail to mention that a 1997 General Accounting Office report placed the blame mostly on the Army, and not Halliburton/KBR. "Our review shows that the difference in the Army's estimates was largely driven by changes in operational requirements once the forces arrived in Bosnia," the GAO wrote. "Specifically, the Commander in Chief of U.S. Army, Europe, decided to increase the number of base camps from 14 large camps to 34 smaller ones and to accelerate the schedule for upgrading troop housing." Halliburton/KBR was paid more because the Army wanted more.

Now the company is doing major work in Iraq. And while Halliburton's record is generally good, it seems clear that projects of such enormous scope and cost warrant constant scrutiny from government accountants. Because of that, Waxman's request for a GAO investigation of the Iraqi oil contracts seems entirely reasonable. So reasonable, in fact, that by the time he made the request, the GAO had already decided to study the issue. The study will be part of a long line of GAO investigations of military matters. For example, from 1991 to 1993, the GAO published 75 reports on all aspects of Operation Desert Shield and Operation Desert Storm. It would not be unreasonable to expect as many from Operation Iraqi Freedom.

The problem, from Henry Waxman's perspective, is that the investigation will likely show that both the government and Halliburton/KBR acted properly. Such a conclusion won't help Waxman's ongoing campaign to suggest that there is something inherently corrupt in the relationship between the Bush administration and Halliburton. Nor is the New York Times likely to editorialize about it. But if the president's critics really want the truth, they'll have to accept the results of the investigations they have demanded.

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