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Halliburton (last updated October 6, 2004)
Fahrenheit 9/11 suggests that there is something improper in the Bush administration's relationship with the Halliburton company, which previously was led by Vice President Dick Cheney and which saw higher revenues in 2003 because of its work in Iraq. However, there is no evidence that Cheney used improper influence to get Halliburton the two contracts that underlay most of its work in Iraq.
Halliburton's role in Iraq largely stems from its construction and service group Kellogg, Brown & Root (KBR), which is the preeminent civilian contractor for the U.S. military around the world and especially in Iraq. KBR has two roles in Iraq: First, it is handling the logistical support needs of many troops under a major contract that it first won in the 1990s and again won in 2001 against other bidders. Second, it is handling the reconstruction of part of Iraq's oil industry and initially won a major contract to do such work without facing competition, the contract probably referred to by the elderly women seen in Fahrenheit 9/11. Together, this brings in a large amount of money into Halliburton; according to its annual report for 2003, Halliburton increased revenues by about $4 billion from 2002 in large part due to Iraq.
According to its annual report, Halliburton derived 15 percent of its total revenue in 2003 from Iraq, on a geographical basis based on the location of services provided and products sold, compared to a negligible amount in prior years. On a customer basis, Halliburton received about 26 percent of its revenues from the United States government in 2003, compared to less than 10 percent in prior years.
While Halliburton is deriving much revenue from Iraq, it is also spending a lot of money there. According to reports filed with the SEC, Halliburton brought in $6.9 billion in revenue from Iraq from the third quarter of 2003 through the second quarter of 2004, but counted only $0.133 billion in income.
Questions have surrounded Halliburton's role in Iraq, in part due to alleged financial improprieties that ultimately comprise only a small fraction of the U.S. military's payments for the company's services. Questions also focus on the company's ties to Cheney, who was CEO of Halliburton in the late 1990s. Cheney has continued to receive some deferred compensation from Halliburton while vice president, but his compensation reportedly is not tied to Halliburton's business success.
Role as Major Contractor; Contract Awarded without Competition
Halliburton was well-positioned to benefit from the Iraq war because its subsidiary KBR was already the holder of a major contract to plan contingency options for the Army, the Logistics Civil Augmentation Program, or LogCAP. Under this contract, Halliburton is required to deploy and deliver troop support quickly.
Brown & Root, the predecessor to Kellogg Brown & Root, won the first LogCAP contract in 1992 (beating three other bidders) and planned troop support work for the military for the next five years in Somalia, Haiti and the Balkans. Under the LogCAP contract, Brown & Root got reimbursed for its reasonable and permitted costs in fulfilling the work of its contract. It was then paid an "award" on top of those costs, which is at least 1 or 2 percent and can go up to 9 percent based on the contractor's performance in areas such as controlling costs.
Brown & Root lost the second LogCAP contract to another company but continued some work in the Balkans under a carve-out.
KBR won the third LogCAP contract in December 2001 (beating two other bidders). By this time, former Halliburton CEO Dick Cheney was Vice President of the United States.
It was because of the LogCAP contract that Halliburton and KBR were positioned to get a major Iraq contract without facing full competition, the Restore Iraq Oil contract. Under the contract, KBR is to assess and extinguish oil well fires in Iraq and to evaluate and repair Iraq's oil infrastructure; KBR did similar work in Kuwait in 1991 following the Gulf War. This contract is worth more than a billion dollars, is the single largest Iraq reconstruction contract in FY 2003, and is probably the contract referred to by the elderly women seen in Fahrenheit 9/11.
In November 2002, the Army Field Support Command asked KBR to develop a contingency plan for rebuilding Iraq's oil infrastructure. The AFSC did not put this $1.9 million work up for bid but gave it to KBR as something within the scope of the LogCAP contract.
On March 24, 2003, just a week into the war in Iraq, KBR announced that it had been awarded a contract from the U.S. Army Corps of Engineers to implement the contingency plan that it had developed. According to a Halliburton press release (on-line here), KBR "was selected for this award based on the fact that KBR is the only contractor that could commence implementing the complex contingency plan on extremely short notice."
Some have questioned how Halliburton got this contract without facing competition.
The General Accounting Office concluded in a March 2004 report that the Army Corps of Engineers' decision to award the contract without using full and open competition was justified and complied with appropriate legal standards because the Department of Defense believed KBR was the only contractor that could implement the plan given the classified nature of the efforts and the imminent need for such efforts. Federal agencies generally must award contracts on full and open competition, but do have the authority to make exceptions in some circumstances.
However, the GAO did criticize an earlier step in the process. According to its report, the planning work was not within the scope of the LogCAP contract (presumably because it related to oil infrastructure and not troop support) and thus should not have been given to KBR as a "task order" relating to LogCAP. The GAO concluded that the Army Field Support Command should have either opened the planning work to competition or prepared a written justification explaining why open competition was not appropriate.
In any event, in January 2004, KBR did win a competitive process to continue its oil-related work in southern Iraq in January 2004, beating six other bidders, and did not win an award for the work in northern Iraq. The Army Corps of Engineers said that the two awards "complete the pre-war acquisition plan to replace the non-competitive contract with full and open competitive contracts."
Halliburton officials cited the January 2004 award as a way of defending the March 2003 award. "Of course, we believe the award of this contract validates the decision of the Army Corps of Engineers last year. We were chosen because we were the best qualified with a proven track record of the ability to perform," Halliburton head Dave Lesar said in a statement (on-line here).
Questions about Overcharging
Halliburton has also been accused of overcharging the U.S. government in some instances. In December 2003, Defense Department officials said that Halliburton may have overcharged the military by $61 million in fuel costs fuel costs and about $67 million in dining hall services. Such amounts combined represent about 5 percent of the $2.4 billion in revenues that Halliburton reported coming from Iraq in 2003.
The fuel price controversy stems from Halliburton's practice of importing fuel from Kuwait. Halliburton has defended its fuel practices and has noted that the Army Corps of Engineers has backed up the costs. "The facts show KBR delivered fuel to Iraq at the best value, the best price and the best terms," Halliburton spokeswoman Wendy Hall said in a February 24, 2004 statement (on-line here).
The meal cost dispute centers around whether KBR charges the military based on a set level of troops that could use a dining facility or on the actual number of troops that used the dining facility at each meal, a 19.4 percent difference that military auditors say is worth $159.5 million. Military auditors reportedly recommended in May 2004 that the military not pay the difference, but Halliburton has defended its meal charges and said it is "disappointed" in the military auditors' recommendation (statement on-line here).
Stepping back from the immediate disputes, the General Accounting Office reported in a July 2004 report that the armed services need to exercise more oversight of contractors such as KBR. Among other things, the GAO noted that military auditors in the Defense Contract Audit Agency now are responsible for larger contracts covering a wider geographical area, even though that agency has had staffing cut by 55 percent in the last 11 years.
Sources: Halliburton is on-line here and its annual reports are available via the company website and through the Securities and Exchange Commission. The Department of Defense's December 14, 2001 announcement that KBR had won the third LogCAP contract is on-line here. The Army Corps of Engineers' January 16, 2004 statement announcing the award to KBR for the future work on the oil infrastructure is on-line here. General Accounting Office, DOD's extensive use of logistics support contracts requires strengthened oversight (GAO-04-854) (July 2004).
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