Remaking Iraq

oughly100 guests packed into the narrow amphitheater at the Philippines Embassy on a stormy June night in Washington. The investors, financiers and entrepreneurs had come to gather intelligence about one of the biggest deals in town and in the world-the reconstruction of Iraq.

As the guests took their seats, the air conditioner broke down. The Philippines ambassador, who hosted the event so he could promote his nation's supply of construction laborers, apologized for the sticky conditions. A once-exiled Iraqi businessman didn't seem to mind. "Baghdad is hotter," he said.

Rebuilding Baghdad and the rest of Iraq is indeed a hot business opportunity. In the wake of the U.S. invasion, the American government will spend billions of dollars restoring the country's electricity, repairing its roads and airports and tapping its oil reserves, the second-largest in the world, which have remained underdeveloped for years.

But the small group of U.S. government officials and corporate executives heading the Iraq project is trying something unprecedented. To complete one of the most ambitious government undertakings in 50 years, the Bush administration is handing almost all responsibility for rebuilding the country and revitalizing its economy to a select group of corporations. These companies will be proxies for the federal government in the first 21st century postwar reconstruction. The architects of the plan define success not just as repairing Iraq, but in transforming it into an economic engine of the Middle East. The companies that make it happen will reap the benefits for years to come.

The planners have a start-up fund. Paul Bremer, who leads the U.S. occupation force in Baghdad, controls nearly $7 billion in various funds, Ray DuBois, a Defense Department undersecretary, told the crowd. DuBois is a member of the Pentagon's senior Iraq policy group, to which Bremer reports. Bremer's account consists of appropriations, frozen Iraqi assets and U.S. currency found squirreled away inside the walls of Saddam Hussein's palaces. The U.S. Agency for International Development, which by June had awarded eight postwar contracts, has another $1.7 billion to spend. That's about half AID's normal annual appropriation, Timothy Beans, AID's procurement director, explained. But, ideally, Iraqis would supply the balance of the rebuilding funds from their national birthright, an estimated 112.5 billion barrels of oil reserves.

Although the U.S. government has funds to start work in Iraq, it has neither the wherewithal nor the desire to complete it. So, the administration has brought in two corporations deeply familiar with nation building to take the lead: construction giant Bechtel, which engineered the Hoover Dam, Washington, D.C.'s subway system and most of modern Saudi Arabia; and Kellogg, Brown & Root, a lucrative division of Halliburton, the largest oil pumping firm on the planet.

Those who have visited Iraq, battered after a decade of economic sanctions and now war, say it needs to be built, not rebuilt. Bechtel and KBR were tapped because few firms in the world can do that job on a moment's notice, Beans said. Bechtel will repair airports, roads, bridges, schools and hospitals and turn on the electricity. The company already has opened Iraq's major port to heavy shipping. KBR will get the oil industry back on its feet, and now is transporting gasoline to pumping stations across the country.

Bechtel and KBR also will award all the subcontracts-and there will be many. Bechtel estimates that other companies will do 90 percent of its rebuilding work. Both firms also will hire local laborers. And they will oversee employees and subcontractors to ensure their work is up to snuff. The government's oversight is limited. AID only has four contracting officers in Iraq.

If anyone in the audience wants a piece of work in Iraq, Beans said, he should call Bechtel. If anyone wants a stake in the Iraqi economy, DuBois said, he should "face facts" and start building or burnishing relationships with the U.S. government's prime contractors.

A KBR executive in attendance had little to add, but he presented a slide show. The first slide showed an opulent palace juxtaposed with a photo of a ramshackle stone house. Next was a regal throne room paired with a snapshot of a sickly Iraqi child. This inequity, the executive explained, is what KBR will correct, by revitalizing Iraq's oil industry for Iraq's people. The military, he said, will not be involved in this effort.

Bechtel and KBR believe economic development by industry, more than government aid or the threat of sanctions, influences policy and improves the life of a nation. This pragmatic philosophy has guided them to the farthest, and sometimes darkest, corners of the earth in pursuit of business. To explore the way these companies work is to divine Iraq's future.

GLOBE STRIDERS

The villagers had been expecting the soldiers. In the forests of Burma, they had hacked their way through thickets to make way for the Yadana gas pipeline being laid by Western corporations. Soldiers ordered the village chief to provide food, shelter and, most importantly, laborers. Villagers were pressed into service. Those who refused were beaten, tortured or killed.

Burmese citizens who claimed they were forced into the labor brigades in the 1990s told this story to representatives of the watchdog group EarthRights International, which filed a lawsuit against the project's leaders in federal court in 1996 alleging human rights abuses. Though never named in that suit, Halliburton was involved in the Yadana project.

A Halliburton joint venture laid an undersea portion of the pipeline, the company has acknowledged. The company maintains it complied with U.S. policy toward Burma, whose government the Clinton and second Bush administrations have condemned for its repression of a popular democracy movement. Firms involved in the project have said they were unaware people were forced to work on it. But a U.S. judge found in 2000 that corporations had known for years the project relied on forced labor, and "that the joint venturers benefited from the practice." He threw out the case, however, finding no evidence of wrongdoing by the firms. The case has been appealed.

The Yadana pipeline story broke as former Halliburton chief executive officer, Dick Cheney, was running for vice president in 2000. It dogged him during the campaign's final days. On Oct. 27, 2000, Cheney addressed Halliburton's role in the pipeline project during an interview with CNN's Larry King. He acknowledged the joint venture's work, and he recognized that Burma was ruled by a military junta. But Cheney defended the company's engagement. "The Halliburton operation is in more that 120 countries, and you have to operate in some very difficult places and oftentimes in countries that are governed in a manner that's not consistent with our principals here in the United States," he said. "But the world's not made up only of democracies."

Halliburton and Bechtel hunt for business wherever opportunity leads. Rep. Henry Waxman, D-Calif., Halliburton's leading foe in Congress, notes that the company paid a $3.8 million fine in 1995 for violating U.S. trade sanctions against Libya through one of its foreign subsidiaries. In June, CNN reported that Halliburton subsidiaries keep offices in Iran, named by President Bush in his 2002 State of the Union address as a member of the "axis of evil," along with North Korea and Iraq.

In the early1980s, Bechtel executives launched a push to build a pipeline from Iraq to Jordan. Reagan administration officials lobbied U.S. financiers on the company's behalf at the same time the State Department was condemning Iraq for using chemical weapons in its war with Iran. The company also has become a target of human rights and environmental groups that have accused Bechtel of a variety of abuses and have vilified the corporation as a war profiteer.

But controversy hasn't adversely affected Bechtel or Halliburton. Revenues have remained strong-about $12 billion for each company last year-and both have excelled at winning government contracts.

In fiscal 2002, Bechtel made $3.6 billion, and Halliburton $688 million, from government contracts, federal data shows. Bechtel was the government's eighth-largest contractor, and Halliburton ranked 36th. The government's data covers direct contracts worth $25,000 or more.

Halliburton's federal income swelled from 1995 to 2000, under Cheney's leadership. The firm brought in $2.3 billion in government work in that time, almost double its contract income during the previous five years, according to a 2000 study by the Center for Public Integrity, an investigative group in Washington. Most of Halliburton's work for Uncle Sam comes through KBR under a contract to support the Army.

Most of Bechtel's federal business comes from the Energy Department, for which it manages the disposal of chemical and nuclear waste. For the Defense Department, Bechtel has dismantled nuclear missile silos in Ukraine under a disarmament program with Russia.

Loans, guarantees and insurance for foreign projects through the U.S. Export-Import Bank also have been essential to both companies. A presidentially appointed board leads the bank, which has supplied financing for work done by U.S. firms abroad, including billions for Bechtel and Halliburton projects. Export credit agencies (ECAs)-government-operated institutions such as the Ex-Im Bank-are the largest source of official financing for developing countries, says Aron Goldzimer, an ECA expert with Environmental Defense, a nonprofit organization based in New York. And according to the World Bank, ECAs are also developing countries' largest creditors, holding more debt than either the World Bank or the International Monetary Fund.

Over the years, Bechtel and Halliburton have benefited from federal agencies' efforts to secure Ex-Im financing for their work. State Department officials lobbied the bank to finance the Iraq pipeline in the early 1980s. And in 1998, according to State Department cables, officials at the U.S. embassy in Angola worked feverishly to remove "barriers" to a $68 million loan package connected to one of Halliburton's oil projects. When the story became fodder for Cheney's political opponents in October 2000, a State Department official told the Associated Press that assistance on behalf of U.S. corporations is commonplace. "You can call any company that is a global business, and they will tell you this," he said.

It is precisely the extent of their global business that makes Halliburton and Bechtel attractive contractors for projects such as remaking Iraq. They consistently work in some of the most remote and dangerous places on earth, says Laton McCartney, the author of Friends in High Places, a comprehensive history of Bechtel's rise to prominence (Ballantine, 1989). That vast ambition is reflected in their corporate logos. Bechtel's is an image of the Earth with the company's name written across it. And Brown & Root Services, the Halliburton subsidiary that preceded KBR, centered the letter "B" on a map of the world.

Many people argue that the government assistance that helped Halliburton and Bechtel accrue their globe-spanning experience is the product of a revolving door between the firms and government. It is true that former federal officials have taken jobs at Halliburton and Bechtel at nearly every level of the companies. Critics say this creates a quid pro quo between public and private sector. But true influence is exercised far more subtly.

For example, in the early 1980s, Steve Bechtel Jr., then chairman of his family's company, socialized with high-level government officials at an annual retreat at the exclusive Bohemian Grove resort in Northern California. Author McCartney describes the camp as a playground for adults, where after a few days of unwinding among equals, political and business elites developed camaraderie. At the Grove, guests stayed in one of 127 different lodges, McCartney writes. Mandalay, the most prestigious, played home to titans such as Bechtel, Henry Kissinger, George Shultz, former CIA director John McCone, and former IBM chairman Thomas Watson. The easy familiarity born of these gatherings cemented friendships, McCartney explains. John Ehrlichman, a former aide to President Nixon and guest of the Grove, told McCartney, "Once you've spent three days with someone in an informal situation you have a relationship-a relationship that opens doors and makes it easier to pick up the phone." This "Mandalay effect," more than the revolving door or strong-arm lobbying, helps companies such as Bechtel and Halliburton influence policy.

Such influence helped KBR win its recent oil services contract in Iraq, argues Charles Lewis, the executive director of the Center for Public Integrity and a former investigative journalist with CBS' 60 Minutes. "No one is suggesting that Dick Cheney ordered that contract," Lewis said in June on National Public Radio's Fresh Air. "He doesn't have to do anything. Everyone in the Pentagon knows that Halliburton is Dick Cheney's company."

But performance, not just potential, prestige and personal connections, plays just as great a role in determining which companies win big government contracts. Everyone at the Pentagon knows Halliburton is Dick Cheney's company, but equally crucial to the company's success is the fact that troops in the field know the initials KBR.

WINNING HEARTS

When Air Force Maj. Mike Medrano stepped onto the U.S. Army base in Kandahar, Afghanistan, in October 2002, he thought he'd gone to hell. The camp was a disaster. The showers produced only trickles, usually cold. Young soldiers, trained to fight, not to clean house, neglected to properly empty the latrines, and the stench of human waste was overpowering. The entire camp was coated with grime "like moon dust," says Medrano. As the wind picked up, the dust enveloped the camp in a fog and set its inhabitants coughing uncontrollably. "It was just a miserable place," Medrano says. That is, until Kellogg, Brown & Root showed up.

The company was the Army's sole supplier of troop support services in the war zone under an exclusive contract it had won in 1992 designed to keep soldiers fighting, not cleaning up camps.

Medrano was dispatched to Kandahar to audit KBR's performance. He said that when the firm descended on the base just days after his arrival, its employees went to work immediately. They covered the ground in gravel to hold down the dust. They installed new water pumps and heaters for the showers and put in better, cleaner latrines. And to the delight of the troops, KBR took over laundry services-with half the number of soldiers the Army was using-returning soldiers' clothes clean and folded. Before KBR, when uniforms came back at all, they often were still dirty.

Troops grew to love their newly arrived helpers, Medrano says. If something broke, they'd spy a contractor employee, say, "That's a Brown & Root guy," and rope him into the job on the spot, he says.

The Army support contract LOGCAP, (the Logistics Civil Augmentation Program), has endeared Halliburton to the military. Employees of its subsidiaries have cooked sizzling steaks for troops and brought ice cream to soldiers on sweltering summer days. They've even baked birthday cakes for the homesick. Under LOGCAP, the company has deployed workers to 10 countries on four continents in 11 years. According to the Army and the General Accounting Office, KBR and its predecessor Brown & Root (the firm changed names after a 1997 merger), earned more than $3 billion under the contract in the past decade.

Halliburton should be well-suited for work under LOGCAP. It owns the firm that designed the contract. In 1991, then-Defense Secretary Dick Cheney wanted a way to reduce the dependence on troops for basic logistics. Brown & Root was hired to come up with an idea, and LOGCAP was its proposal.

Defense contract auditors say Halliburton companies' performance always has been exceptional. Military commanders consistently praise the firms' efficiency. For instance, in 1992, Brown & Root deployed in Somalia 24 hours behind U.S. troops, setting up operations so quickly that within a few months the company was the biggest employer in the country. The firm supplied fueling stations, storage and even translators.

COST PLUS

But the contractor's eagerness to exceed requirements can become a liability. In 2000, the General Accounting Office investigated Brown & Root's work supporting thousands of troops in the Balkans during the 1990s. GAO found the Army had let costs get out of hand, prompting some lawmakers and corporate watchdog groups to question whether the company's outstanding performance is driven by the desire to boost profits.

From 1992 to 1995, LOGCAP's first three years, Brown & Root's revenues remained low, just breaking $200 million. That all changed in 1995 when the company deployed with U.S. troops to Bosnia.

Costs on the Bosnia contract spiraled. Military planners had told Congress they expected to spend $200 million under LOGCAP in the first year. But they spent twice that amount, says David Young, the deputy director of the Defense Contract Management Agency's international district, which monitors LOGCAP orders. At first glance, the escalation in costs could be attributed to the changing needs of the battlefield, which Brown & Root had always been happy to address. "It was just the growth in requirements from what was originally planned to what the commander on the ground decided he wanted once the forces got there," Young says.

But GAO found that Brown & Root and then KBR overcharged the Army for basic materials. Auditors have scolded the Army for losing control of its contractor. In a September 2000 report (NSIAD-00-225), GAO reviewed the Balkans work, which by then had extended to Kosovo, and found that "the Army should have done more to control costs." Poor oversight by the military had let Halliburton's firms sell the Army unneeded services, GAO concluded.

Army officials "frequently have simply accepted the level of services the contractor provided without questioning whether they could be provided more efficiently or less frequently and at lower cost," GAO investigators reported. "We found a widespread view…that [military personnel] had little control over the contractor's actions once it was authorized to perform tasks." For example, the Army let Brown & Root provide full backup electricity for all U.S. facilities in Kosovo, even though only hospitals, command centers and other critical facilities required that level of protection.

Under LOGCAP, a company is reimbursed for everything it spends and then receives a percentage of those expenses as a reward. For Halliburton's firms, the award has ranged from 1 percent to 9 percent. Critics of such "cost-plus" contracts say they encourage contractors to provide more services than necessary, or to buy overpriced goods, in order to fatten profits. In 1997, GAO revealed that Brown & Root had charged the Army almost $90 per sheet for plywood bought in the United States for only $14. The company had raised the price by transporting the wood to the Balkans by air and sea. An Army commander told GAO he "was shocked" when he learned the contractor was flying in wood from the United States.

Halliburton companies' performance on other military contracts also has drawn fire. In February 2002, KBR settled a federal lawsuit alleging that Brown & Root had improperly billed the government for services provided at Fort Ord, Calif., years earlier. Halliburton paid the government $2 million, admitted no wrongdoing and said it still expected to be a major contractor.

Defense auditor Young says the GAO's Balkans report stung the Army and Halliburton. Now, more stringent auditing requirements have been put in place to keep costs down, he says.

Nevertheless, costs under LOGCAP for the Iraq war have burgeoned. In mid-June, the Army reported that KBR had received more than $800 million in troop support orders. The Iraq job has cost the most money in the shortest time of any mission in LOGCAP's history. And President Bush has said U.S. troops are in Iraq for a long stay.

LOGCAP also opened the door for KBR to earn billions more dollars under its new Iraq oil contract. During preparations for the Iraq war, the Army instructed KBR, as its contingency services provider, to craft a plan for extinguishing oil fires and reviving the Iraqi oil industry when fighting stopped. That plan was picked up by the Army Corps of Engineers, which then awarded KBR the contract to do the work it had proposed. The contract's potential value is $7 billion, though the administration plans eventually to award oil contracts to other companies.

Iraq holds inestimable potential for Halliburton, Bechtel and their subsidiaries. Some estimates have put the cost of building and rebuilding infrastructure and services at $60 billion. But this isn't the first time the two companies have had a chance to profit from work in Iraq. Both worked in the country for decades before Saddam Hussein's invasion of Kuwait made it off-limits to U.S. firms. Now, 13 years after doing business with Iraq became anathema, Bechtel and Halliburton are returning.

BACK TO BAGHDAD

In December 1983, Donald Rumsfeld, then serving as a Middle East envoy for President Reagan, sat down for a meeting with Saddam Hussein. The pair talked for an hour and a half in Baghdad, covering a range of issues, including Iraq's war with Iran and a proposal by a U.S. company to build a pipeline from Iraq to the port of Aqaba in Jordan. Hussein had been interested in the project for some time, wanting to keep up with oil exports by his enemy, Iran. But he had recently dropped the idea, fearing that Israel might bomb the line before it was built.

Rumsfeld had discussed this security problem in an earlier meeting with Hussein's deputy prime minister, Tariq Aziz, and broached "some of the kinds of arrangements that might be necessary and desirable to increase the security" of the pipeline, according to a State Department cable sent to Washington after their conference.

Upon hearing this news, and having learned that a U.S. construction company had floated a proposal, Hussein's interest was rekindled. "Now that U.S. companies and the [U.S. government] were interested, Iraq would reexamine [the project]," Rumsfeld's group cabled to Washington.

Bechtel's attempt to open up the Iraqi oil market entered a new phase with that meeting. Nearly two years of negotiations ensued among Iraqi and Jordanian officials, Bechtel executives and senior State Department officials. Their exchanges are documented in a series of declassified cables, compiled in March by researchers with the Sustainable Energy & Economy Network, an environmental advocacy group in Washington.

The Reagan administration pressed the Iraqis to accept the pipeline proposal and lobbied the U.S. Export-Import Bank to finance it. Senior State Department officials argued that the pipeline was vital to U.S. political and economic interests. "[Export-Import Bank] financing would signal our belief in the future viability of the Iraqi economy and secure a U.S. foothold in a potentially large export market," Richard Murphy, then the assistant secretary for Near Eastern Affairs, wrote to then-Undersecretary of State Lawrence Eagleburger. Even when negations turned sour, after State publicly condemned Iraq for using chemical weapons against Iranian troops, the department cabled Rumsfeld that the door hadn't closed on the deal, and that administration officials had tried to impress this upon their Iraqi counterparts.

In the end, the project collapsed. Iraq and Jordan said the ultimate proposal didn't meet their expectations. Bechtel lost a piece of business that by one estimate would have been worth $2 billion. Four years later, the Gulf War would end all of Bechtel's Iraq operations.

In 1998, a number of officials involved in the pipeline negotiations co-signed a letter to President Clinton, urging him to overthrow Hussein because, they argued, by using chemical weapons he had shown himself to be a threat to regional stability. Members of the Pentagon's new Iraq policy group, as well as Rumsfeld, also signed the letter, which asked the president to use frozen Iraqi assets to fund an insurrection in Iraq.

Today, with its return to Iraq, Bechtel has come full circle. So has Halliburton, after having left following the Gulf War and the imposition of U.S. sanctions. The company maintained a presence there through two French subsidiaries from 1998 to 2001, which reportedly had more than $73 million in oil service contracts with Hussein's government under the U.N. oil for food program. But the two divisions were among Halliburton's weakest and were divested so the company could focus on its core business of developing oil fields, as it now is doing in Iraq.

After years of trying to establish a foothold in Iraq, the companies now might be better positioned than ever. With the Hussein regime dismantled and U.S. oversight limited, the Iraqi officials with whom the companies establish relationships today could be overseeing the oil and infrastructure for years to come. In that sense, Bechtel and Halliburton exert powerful influence over the future Iraqi bureaucracy.

But restoration of services in Iraq has gotten off to a dangerously slow start, and resentment is mounting. Researchers with the International Crisis Group, a nonprofit organization that promotes conflict resolution, visited Iraq in June and found that the occupation force had restored few basic services. "[Iraqi] anger is palpable," the group wrote in its June report, "Baghdad: A Race Against the Clock."

Restoring electricity and basic infrastructures is Bechtel's responsibility, under its construction contract. But Young, the Defense contracting officer, who visited Baghdad in June, said that at that time, only a quarter of the city was safe enough for contractors to work in. In the remaining three-quarters, looters roamed relatively freely as did guerrilla fighters who have ambushed and killed U.S. soldiers. Under such hostile conditions, the government's experiment in delegating reconstruction to the private sector barely has gotten off the ground.

The record so far in Iraq stands in sharp contrast to its closest analog, the reconstruction of Kuwait after the first Gulf War. That endeavor was handled very differently.

Ibrahim Al-Shaheen, a former government minister who led the Kuwaiti-U.S. rebuilding team, says his group pulled together teams of public administration experts who competed contracts for supplies, such as public works, medical and communications equipment, from various companies. "It was organized, and it did not take much time," he says. One month before the war to expel Iraq from Kuwait began, the groups had awarded more than 200 reconstruction contracts. By contrast, as of July, the United States had awarded nine in Iraq.

Al-Shaheen's group also tapped the Army Corps of Engineers, instead of a corporation, to lead construction efforts. Kuwait "felt more at ease in dealing with another government organization, which also has rules and regulations about its conduct," he says.

"Those reasons may not seem important now, but at the time were so, and proved to be the right decision to take ....All parties involved appreciated the fairness and honesty in the dealings."

Even in a peaceful Kuwait, the rebuilding plan took two years to implement, Al-Shaheen says. If the remaking of Iraq takes that long just to begin, Halliburton's KBR and Bechtel appear willing to wait. They anticipate even longer engagements might develop. Some planners estimate rebuilding Iraq could take as long as 20 years, so Bechtel, Halliburton and other firms seeking business there know the future holds more money, says Defense contract monitor Young. "The money we're talking about now is just the tip of the iceberg."

That money will come from the sale of Iraq's vast, under-exploited oil reserves. But for now, oil is flowing at a relative trickle, causing some in Iraq and Washington to fret that the money to pay for future projects won't come soon enough. Bremer's $7 billion can't cover all the repairs Iraq needs.

So in the spring, Halliburton and Bechtel began pushing a plan to have the Export-Import Bank provide additional financing for construction projects in return for a share of Iraq's future oil revenues. The bank would mortgage Iraq's resources before a government has been established, leading some to question whether the plan is even legal. The proposal also would saddle Iraq with even more debt when the country already owes foreign creditors an estimated $127 billion.

When the oil flows, the Bush administration will decide which of Iraq's lenders gets the first crack at revenues. In May, the president signed an executive order that keeps Iraq's creditors from claiming any of Iraq's oil or other parties' interests in it without U.S. government approval. The president said the potential claims "constitute an unusual and extraordinary threat to the national security and foreign policy of the United States."

Beyond protected oil revenues, billions more in construction money probably will come from nongovernmental organizations, the United Nations and private investment groups, some of which have been setting up in the past few months.

As Iraq's remakers eagerly await the influx of more money and the expansion of the safe areas in which they can work, U.S. officials watch anxiously to see whether and how their grand experiment will pan out. At a Bechtel conference for potential subcontractors in Washington in May, AID's procurement director, Tim Beans, told the crowd what AID and the rest of the U.S. government wanted from the nation-building firms: "We will expect them to do big things over there to make all of us look good."