Bid-Rigging Without Borders

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From an AP account that ran in the Washington Times:

Ten penalized firms get contracts in Iraq

By Matt Kelley
ASSOCIATED PRESS

Ten companies with billions of dollars in U.S. contracts for Iraq reconstruction have paid more than $300 million in penalties since 2000 to resolve claims of bid-rigging, fraud, delivery of faulty military parts and environmental damage.

The United States is paying more than $780 million to one British firm that was convicted of fraud on three federal construction projects and banned from U.S. government work during 2002, according to an Associated Press review of government documents….

The two largest government contractors in Iraq, Bechtel Corp. and Halliburton Co., have paid several penalties in the past three years.

Halliburton paid $2 million in 2002 to settle charges it inflated costs on a maintenance contract at now-closed Fort Ord in California. Vice President Dick Cheney's former company did not admit wrongdoing.

Halliburton took in $3.6 billion last year from contracts to serve U.S. troops and rebuild the oil industry in Iraq.

Halliburton executives say the company is getting about $1 billion a month for Iraq work this year….

Some things to think about all this: First is that of course private companies are necessary in post-war Iraq. Who else is going to rebuild the country, upgrade infrastructure, etc, after all? Second is that of course there is going to be huge amounts of graft, rip-offs, bribes, you name it whenever such godawful sums of money are being thrown around; indeed, such behavior is going to be amped up by public-private nature of the contracts, since government in general doesn't have the same cost-cutting incentives built into it that private-sector initiatives do. Third is that of course this is hardly a new situation in Iraq (or elsewhere), as the U.N.'s abysmal Saddam-era "oil-for-fraud program" ably showed.

There are ways to minimize, if not completely eliminate the probability of corruption, many of which are discussed regularly by the wonks Reason Public Policy Institute, the sister organization of Reason magazine.

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  1. The Army and Navy supervise private contractors all the time and they are damn good at it, even if they sometimes retire, then go to work with the contractor.
    During the Vietnam war. lots of Riggins and Hoot money went to democrats. You do public work, you pay off both parties, or else you get Microsofted or Martha Stewarted.
    Work where you can not give firm requirementa up front is always subject to renegotiation. Years ago, I submitted a quote on a Lockheed government project that was turned back because I had listed a principle salary of $32 per hour. I was told I could not charge more than $15. I refigured the job using metric hours and got it.
    Incidently, for those who want to get in on that easy reconstruction money, look at that picture of something hanging from a bridge before you decide.

  2. Joe L, the number of construction jobs subbed out stateside, in peacetime, tells me that additional military construction capacity will not be “unused.”

    While not every construction team in Iraq is taking fire at the same time, each and every one of them could start taking fire at any minute. The already travel in convoys guarded by military and private security paid for by you and me. Did you see the attack on the oil terminal coming?

    While maintaining construction capabilities necessary to do the entire Iraq job would probably be overkill, those capacities should be much larger than they are now. I suggest large enough to do 100% of the peacetime work, with private contractors brought in to take up the extra work during a spike. Ideally, private contractors would replace military contractors on stateside and other safe projects, freeing up the military personnel to be sent overseas.

    Nobody’s addressed by point that military construction people are also soldiers, who can better defend themselves (freeing up combat units to carry out other duties), and can be used from more traditional military operations when needed.

  3. Joe,
    I just think the reality of the work in Iraq is that it really isn’t wise or efficient for the government to maintain that kind of capacity. Take power generation for example. IRK, the US Army fields ONE “Prime Power Battalion” the bulk of which is Reserve. The Army doesn’t need that much capacity to generate and distribute power in commercial quantities. This battalion might be useful for the CPA and the occupation forces, but it is FAR TOO SMALL to make a dent in the repair and rehabilitation of the Iraqi powergrid.

    In fact it would take many, many Prime Power battalions to do this. And though reserve units are cheaper than active units, they do cost money. So, should the Army be required to maintain a large number of units, in this case Prime Power units, that might be used once or twice in 20 years? Instead, isn’t it better to maintain the combat, and support forces necessary to achieve a military mission and then sub-contract the rehabilitation work out to the private corporations?

    You are correct, these private corporations require some protection, however the 3rd Infantry, or the 4th Infantry or the 1st Marine Division is in Iraq any way. They can provide protection, their specialty, whilst freeing up defense dollars for more useful, militarily, projects rather than excess construction capacity. I just think it makes more sense to focus on the military’s “core competence” creation of violence on the battlefield, than to expend time and effort on capabilities that are not that core competence and which may be redundant, in a world that contains Haliburton or Slumberger. Any number of folks can be found to run high tension lines, but only a few can be found willing to tote the rifle to guard those lines. I feel that the taxpayers money is better spent by DoD, in peacetime, in providing the gun-toters, rather than the linemen. And yes, I know that the vast majority of troops are Combat Support or Combat Service Support troops, not Combat Troops.

  4. Shannon Love,

    When some companies (like Halliburton KBR) exist in a permanent symbiotic relationship with the permanent warfare state, it’s not really accurate to say the government is subbing out contracts “as needed.” The corporations are so dependent on government contracts as their main source of business that the government has to guarantee their existence. That’s why you see so many military contractors bailed out with federal money. Military contractors are, in effect, regulated utilities with a politically guaranteed level of profit.

  5. Kevin Carson,

    Your viewpoint is common one but not one supported by the actual finances of the companies involved. Neither company is analogous to a defense contractor. Defense contractors usually create small runs of highly specialized military technology (like military Sonars). They usually have little or no ability to create products for the civilian market.

    Neither Halliburton nor KBH are critically dependent on their military contracts. In fact, the Iraq war will probably be a wash in the long run for both as the effects of the war cost them business in other regions.

  6. “I just think the reality of the work in Iraq is that it really isn’t wise or efficient for the government to maintain that kind of capacity.”

    I think the reality is that giving a company a $300 million constructin contract will get a politician more compaign money than increasing the Seabees’ budget by the same amount.

    Though you raise an interesting point about specialty units like the Power Battalion. While their skills can only be applied sporatically, there are private contractors laying down pavement, building bridges, and shoring up riverbanks. Surely construction battalions with these skills wouldn’t remain idle.

  7. Much of this is specialty work…

  8. But much is construction of buildings, roadwork, tarmacs, water & sewer, demolition (the slow, boring kind, not the kaboom kind), and other such tasks.

  9. Bechtel, Halliburton and KBR did not actually go over with hoardes of carpenters, equipment operators, etc. They are subbing out the actual work to local contractors or hiring local tradesmen. This of course is a potential source of even more graft and corruption but actually gets the locals involved in the reconstruction.

    Some of the work is also going to Kuwaiti and Jordanian firms.

  10. Outsiders do not understand construction. People who expect a paycheck every Friday cannot understand people who pour that last load of concrete, then look for another job, as a way of life.
    Load up the Seabees with patriotic folk willing to work for 2000 a month, but let them see civilians making 5 for the same effort and how long will the good ones last, and what kind of assholes would ask the good ones to make the sacrifice?
    Anyoe all dewey eyed about the big bucks in Iraq, there are a few vacencies since the previous jobholders were hanging from a bridge.
    Any company that can out perform Haliburten is welcome to submit a bid. Anybody out there in blogland know how to rehab an oilwell under fire? Put in your bid and kiss your wife byebye. Don’t forget your insurance premium.

  11. Thanks for giving me another side, Shannon.

  12. Walter Wallis: “Any company that can out perform Haliburten is welcome to submit a bid.”

    For example (if you choose to believe her): a particular Bagdhad blogger, Riverbend, wrote last August of her cousin who is a structural engineer. His firm was solicited for a bid to repair/reconstruct one of the bridges in the south part of Baghdad. Their bid: $300,000. They lost out to an American firm. That bid: $50,000,000.

    And recall who had to repair and rebuild all that infrastructure after the first Gulf War — and with a lot less money and resources.

  13. “…of course private companies are necessary in post-war Iraq. Who else is going to rebuild the country, upgrade infrastructure, etc, after all?’

    Does the word “Seabees” ring any bells? Army Corps of Engineers? To claim that Halliburton would engage in fraud less than uniformed military is absurd.

  14. joe,

    I don’t think Nick’s trying to imply that private companies are less inclined to corruption than the military, rather just pointing out that private companies are necessary. The Corps of Engineers and Seabees are damned good at what they do, but I highly doubt they have the necessary resources to do what needs to be done in Iraq.

  15. Of course, just because just because the government fined a company doesn’t mean that the company actually did anything wrong. A good rule of thumb is that about half of all fines are leveed for technical violations such as improper documentation. The rules and laws in many government contracting situations are so maddeningly complex that even the most conscious company can expect to get fined at some point.

    Government entities task with oversight and regulation have an institutional incentive to see violations everywhere and businesses often find it quicker and cheaper just to settle without a fight. Unfortunately, this just feeds the beast.

  16. Naval Construction Battalions and the Corps of Engineers are NOT capable of rebuilding Iraq. A tremendous amount of work needs to be done and these organizations have now where near the capacity to meet the need. Plus, I once read on-line an excellent discussion of private versus public infrastructure development. The gist was that the military was likely to hold a LOT of formations and do things “by the numbers”. Private contractors, get paid by the hour, with over-time for time over 8 hours per day, over-time for hours over 40 (in addition to time over 8), and over-time for time over 60 hours (in addition to the two previous amounts of overtime). As a result if a labourer making $10 an hour works 12 hours per day, 6 days a week, by the end of the week the labourer is making 10*1.5*1.5*1.5=$33.75 per hour. The result was that the private contractors got the jobs done a WHOLE lot faster than the military. And note this is written by a fan OF the military, a man all of whose friends either have or do serve. You want lots of concrete poured, houses built, roads resurfaced, and infrastructure provided, turn to the private contractors. If I want an airfield built, under enemy fire or in the first two weeks of the campaign, I’d call the Seabees, but otherwise call Haliburton and Slumberger.

  17. I wonder how much money these companies have donated to the RNC and the Bush/Cheney campaigns. Apparently Halliburton’s lobbying efforts have fallen off (why would they need a lobbyist now anyway), but what of Bechtel and the rest? The taint of war profiteering could really sting this administration if the Dems can find a way to use the issue.

  18. Heh heh, so far, rebuilding Iraq is behind schedule and over budget. So are there any real incentives for Halliburton, et al., to get the work done on schedule and on budget? I can think of over a billion incentives not too.

  19. Joe,

    “To claim that Halliburton would engage in fraud less than uniformed military is absurd.”

    Depends on your definition of fraud. Scourging every last resource for ones own unit is a long standing military tradition. It often results in behavior that would be viewed as unethical or illegal if pursued in the private sector.

    The real question is one of total cost even including “corruption.” Soldiers are extremely expensive. A soldier must be trained and cared for in peace time as well as in war. Each soldier represents a future liability for the government in form of medical care and pensions. To have a military organization capable of handling the current job in Iraq we would have had to start building it at least five years prior to the war. All that time it would have had no peacetime function. All that is extremely expensive. This is the major reason why much of the militaries logistic and construction is currently assigned to the reserves.

    Wars and reconstruction are highly episodic events. It makes better financial sense to hire private firms as needed than to maintain permanent government organizations that will set idle most of the time.

  20. “The Corps of Engineers and Seabees are damned good at what they do, but I highly doubt they have the necessary resources to do what needs to be done in Iraq.”

    That’s because a decision was made to give those resources to private companies, rather than doing it in-house. Redirect the funds in the contracts to the Construction Battalions and Army Corps.

    The cost estimates provided don’t include the cost of security for the contractors. This is exactly what happened on the Pacific islands in WW2 – private contractors got killed and run off. so the military did it itself, with battalions that could do construction when they weren’t getting shot at, and fight off attackers when they were. Hell, we need more troops in Iraq anyway, so stopping payment on Halliburton’s checks and sending the Seabees is a twofer.

    When the going gets tough, military construction units get the job done, and private contractors bug out. Either the construction jobs need to get done, even under fire, or they don’t. If they don’t, we shouldn’t do them. If they do, we need a force that will get the job done.

  21. “Wars and reconstruction are highly episodic events. It makes better financial sense to hire private firms as needed than to maintain permanent government organizations that will set idle most of the time.”

    The Army Corps subs out construction projects all the time. That tells me that there is a room for more permanent military builders even in peacetime than we are currently maintaining. The reason for this decision is the theory that private companies can get the job done cheaper. Stateside peacetime dam projects, maybe. But factoring in security costs and lost time in a hot area, absolutely not.

  22. Joe,
    Not all Iraqi construction is done “under fire” for the simple fact that most of Iraq is not taking fire. Also, reconstruction is a vast program that is extremely sporadic in requirement. We have “rebuilt” three nations (Japan, Iraq, Germany) and built extensive infrastructure Vietnam, Kuwayt, etc. over the last 50 years. It makes NO sense to maintain a capacity, within the US government, for a massive undertaking that can not be forecast.

    The beauty of Haliburton et. al. is that they are large and global. there is ALWAYS some large project(s) in the works somewhere, so the planet provides these companies the market and the incentive to provide these capabilities. This is inherently cheaper and more efficient than relying on the US government to OCCASIONALLY undertake such a massive effort.

    This is not some anarcho-capitalist attack on the naval Construction folks, it’s just simply acknowledging that there is a limit to the what they can do and to the wisdom of maintaining a large and largely UNUSED capacity for construction within the force structure.

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