War Profiteers
WAR PROFITEERS
PO Box 19405, Washington, DC 20036
1.202.387.8030 V. 1.202.234.5176 Fax
Email:
[email protected]
Ten Worst War Profiteers of 2004
Introduction
At the beginning of the Iraq war, Andrew Natsios, head of the U.S. Agency for International Development (AID), proclaimed that the reconstruction of Iraq would look like a modern-day Marshall Plan. But a year and a half later, fierce resistance to the occupation, combined with bureaucratic ineptitude and corporate corruption threaten to undermine the Bush administration's grand designs.
In mid-July, U.S. officials admitted that fewer than 140 of the 2,300 reconstruction projects funded by the U.S. were underway. Although AID says "dirt has been turned" on 1,167 projects including schools and hospitals, with at least 70 new ones starting each week, it's unlikely to change the big picture very much. The kidnapping and execution of contract personnel and the ongoing sabotage of key projects -- power plants, electricity lines and oil pipelines -- have slowed work in many areas of the country to a crawl, jacking up the cost of security, insurance and other ancillary expenditures, which in most cases amount to half of the contractors' budgets.
By August, Ambassador John Negroponte was ready to announce that more than $3 billion of $18 billion in U.S. aid earmarked by Congress for engineering and reconstruction work would be used for security and counterinsurgency operations.
The announcement was tacit recognition that a kind of vicious cycle was at work that threatened to wreck the whole project. Exactly how much the resistance has gained from the festering resentments caused by the stalled reconstruction process is difficult to say, but the aggravation caused by the lack of electricity and other basic services is certain to be blamed on the CPA and the contractors, and could result in further support for the resistance. An increase in attacks on construction sites - more than one a day according to the Army - indicates that they are a clear target of the resistance.
The increase in security personnel has so far not been enough to turn this dynamic around. In late December, Contrack International, the lead partner on a $320 million transportation systems contract, announced that it was withdrawing from Iraq because of "prohibitive" security costs.
Meanwhile, many in Congress have been roiled by reports that just 7 percent of the $18 billion originally allocated for reconstruction had been spent. This particular story set off fireworks this fall among Republican leaders, including Senator Richard Lugar, R-Indiana, who blasted the Bush administration as "incompetent" for failing to devote adequate on-the-ground personnel to contract administration, management, and oversight.
"It's beyond pitiful, it's beyond embarrassing, it's now in the zone of dangerous," added Chuck Hagel, R-Nebraska.
Searching for Root Causes
The Professional Services Council, a trade association representing some of the Iraq contractors, says much of the blame can attributed to the distance between the procurement planners sitting in Washington and contractors in the field.
From the perspective of the byzantine world of contract insiders, it looks like they may have a point. The lack of accountability, reports the Project on Government Oversight in a recent report, can be attributed to the gutting of acquisition workforce and oversight personnel, mandated by Congress starting in the mid-1990s, at a time when the Pentagon began to hand out large open-ended (Indefinite-Delivery/Indefinite-Quantity) contracts to well-connected firms including Bechtel and Halliburton. The result has been the creation of layer upon layer of subcontracts, with little transparency and reduced government oversight.
Recent revelations suggest that the Pentagon's handoff to Halliburton may have also allowed individual employees to demand kickbacks from potential subcontractors. Congressman Waxman's office dropped a new "H-bomb" in November, when it announced that it had received 400 pages of internal State Department documents which suggest that Halliburton officials were "on the take" and "solicit[ing] bribes openly" from potential subcontractors.
Although the company did not respond directly to Waxman's assertions, in a quarterly SEC filing the company said the Pentagon's Inspector General "may investigate" two employees who "may have solicited and/or accepted payments from these third-party subcontractors while they were employed by us."
Ironically, the contracting agencies' response has been to outsource much of the oversight process itself. While the CPA's audit staff was cut by nearly half during 2004, for example, US AID and other agencies began hiring contractors to oversee other contractors with whom, in some cases, they already had ongoing contractual relationships, according to this report released by Henry Waxman, D-California, and Senate Democrats.
The big, no-bid contracts not only made it difficult for other U.S. firms to get in on the action, but also resulted in complaints from the administration's closest Iraqi allies. Last February, Rend Rahim Francke, the U.S.-appointed Iraq Governing Council's representative in Washington, openly criticized the CPA for passing over Iraqi firms when awarding billions of dollars in reconstruction contracts. Iraqi firms, she said, could easily have done the work more cheaply and quickly.
She might have added that Iraqi firms employ more Iraqis -- who otherwise might be inclined to join the resistance. In December, AID claimed at least 100,000 Iraqis were currently employed in U.S.-funded reconstruction projects -- a fraction of the number of Iraqis who have become unemployed as a result of the war.
New economic rules imposed by the CPA have allowed Iraqi suspicions to fester even further. Critics say the CPA's Orders were clearly designed to benefit foreign investors more than the Iraqi people, and constitute a virtual blueprint for economic colonialism.
CPA Order 39, for example, set out a plan to essentially privatize Iraq's 200 state-owned industries. The order allows for "national treatment" of foreign investors (i.e. no preferences for local bidders and investors), who can also own 100 percent of any privatized business with unrestricted, tax-free remittance (i.e. repatriation) of all profits.
A leaked memo written by British attorney general Lord Goldsmith acknowledges that the CPA may have outstepped its own legitimate authority in issuing the orders, warning Prime Minister Tony Blair that "major structural economic reforms would not be authorized by international law."
At this point the legality of the orders is probably moot. With so much instability, it's not as if foreign investors have been beating down the doors. The country is so unstable that most of the pitches to foreign investors have taken place outside the country, in places like London, Jordan and suburban Virginia. To little avail.
Even before the security situation had deteriorated enough to stall the reconstruction, strong opposition to the privatization of state-owned businesses emerged, especially from workers at many state-owned factories. It's thus no accident that the only Hussein-era law that the CPA saw fit to enforce was one that restricted union organizing.
A legal quagmire.
In October, a new twist was added to the confusion surrounding the reconstruction contracts (are they wasting our money or not spending it fast enough?): According to an independent audit conducted by KPMG for the multilateral International Advisory and Monitoring Board (established under UN Security Council Resolution 1483 to oversee the occupational authority), the CPA paid $12 billion to the contractors out of the Development Fund of Iraq (DFI). Nearly $1.5 billion was paid to one contractor -- Halliburton.
I.e., instead of using the money earmarked by Congress for the reconstruction, it appears that the CPA used Iraq's oil revenues to pay off U.S. contractors - money that Colin Powell said before the war was the "Iraqi people's" money, and therefore would not be touched by "coalition" leaders.
It's a story that was largely ignored while Congress beat up on the UN and Kofi Annan for corruption associated with the oil-for-food program before the war.
"If we are going to look at how Iraq's oil proceeds have been managed, we have an obligation to examine not only the actions of the U.N., but also our own actions," Congressman Henry Waxman, D-California, suggested in October, referring to the attacks in Congress on the UN's handling of the oil-for-food program. "This money belongs to the Iraqi people. It is not a slush fund."
The CPA's quasi-governmental status is also being criticized for providing contractors with a means of shielding themselves from accountability or prosecution for fraud. As CorpWatch's Dave Phinney recently reported, lawyers for Custer Battles, a company accused of fraudulent billing practices, claim that the fact they were paid out of the DFI by the CPA means that the company cannot be sued under the U.S. False Claims Act -- a law traditionally used to go after corrupt contractors. The Bush administration has issued contradictory assessments of the CPA's status suggesting it has no clear position as to whether it considers the CPA to be a federal agency or not. See, for example, see this memo by the Congressional Research Service.
Major Major Major Major Screwups
When it comes to corruption, Halliburton may be just the tip of the iceberg. According the CPA's latest report, we are now witnessing an epidemic of corruption: 38 potential criminal cases associated with the Iraq contracts are still under investigation, while 75 had been closed or referred to other investigative agencies. The Defense Criminal Investigative Service had 16 open cases as of the beginning of October.
Meanwhile, a bipartisan coalition led by Senators Durbin (D-IL) and Craig (R-ID) have introduced a resolution that would establish a special committee to investigate the awarding and carrying out of contracts in Iraq and the war on terrorism. The committee would be modeled after Harry Truman's famous WWII committee on war profiteering. (For more information see Contract Watch).
The next time there is a major debate in Congress will likely be sometime after Iraq's scheduled elections (if they occur), when the Bush administration is expected to ask for another $100 billion.
