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US: The $87 billion money pit

It's the boldest reconstruction project since the Marshall Plan. And we cannot afford to fail. But where are the billions really going?

by Rod Nordland and Michael HirshNewsweek
October 27th, 2003

Helmut Doll waits. And waits. Doll, the German site manager for Babcock Power, a subcontractor of Siemens, is hoping for the arrival of Bechtel engineers at the Daura power plant, Baghdad's largest. U.S. construction giant Bechtel has the prime contract, now worth about $1 billion, for restoring Iraq's infrastructure. That includes Daura, which should supply one third of the city's generating capacity but today, six months into the U.S. occupation, is producing only 10 percent. "Nobody is working on the turbine," explains Doll. "Bechtel only came and took photos. We can't judge Bechtel's work progress because they're not here." Questioned, Bechtel spokesman Howard Menaker says Iraq's power has to be viewed as "a holistic system"-generation doesn't have to come from a particular plant-and in recent weeks Bechtel has sent engineers to the site. He also blames the delay on more stringent-or finicky, depending on your point of view-American standards. Menaker said the Daura turbine is "covered with friable asbestos and is right now a hazardous work site." The company says it has just completed "a protocol for asbestos abatement."

Still, it's not easy determining why the biggest power plant in Iraq's largest city seems to be such a low priority. Baghdad is still beset by blackouts, and so much of America's success or failure depends on power: the economy can't recover with-out it. The next logical place to ask is the U.S. Agency for International Development, which gave Bechtel the contract last April. Questioned by Newsweek about Daura, USAID chief Andrew Natsios referred to a priority list drawn up by a coordinating committee under the Coalition Provisional Authority-the chief occupying power-and said he didn't know where Daura was on it. His aide said the CPA would know. No, Natsios said, he thought Bechtel would know. But Bechtel's Menaker responded: "We perform the work tasked to us by USAID. We don't make decisions on priorities. USAID and CPA make those decisions." Some CPA officials concede privately that the problem stems from the lack of preparation before the war. "It always comes back to the same thing: no plan," says one CPA staffer.

No doubt, reconstructing postwar Iraq is a brutally hard and hazardous task. Sabotage already has destroyed some 700 power-transmission towers. But George W. Bush, who has staked his nation's credibility-and perhaps his presidency-on success in Iraq, has no choice but to set things right. And Daura offers a small window into problems that have become all too typical of America's postwar morass in Iraq, a Newsweek investigation shows. Iraqis like to point out that after the 1991 war, Saddam restored the badly destroyed electric grid in only three months. Some six months after Bush declared an end to major hostilities, a much more ambitious and costly American effort has yet to get to that point. It is only in recent weeks that the Coalition amped up to the power-generation level that Saddam achieved last March-4,400 megawatts for the country (though it's since dropped back). True, Saddam didn't have a guerrilla war to contend with, and his power infrastructure was in much better shape than the Americans found it. But he also had far fewer resources.

Six months ago the administration decided to cut corners on normal bidding procedures and hand over large contracts to defense contractors like Bechtel and Halliburton on a limited-bid or no-bid basis. It bypassed the Iraqis and didn't worry much about accountability to Congress. The plan was for "blitzkrieg" reconstruction. But by sacrificing accountability for speed, America is not achieving either very well right now. For months no one has seemed to be fully in charge of postwar planning. There has been so little transparency that even at the White House "it was almost -impossible to get a sense of what was happening" on the power problem, says one official privy to the discussions.

Numerous allegations of overspending, favoritism and corruption have surfaced. Halliburton, a major defense contractor once run by Vice President Dick Cheney, has been accused of gouging prices on imported fuel-charging $1.59 a gallon while the Iraqis "get up to speed," when the Iraqi national oil company says it can now buy it at no more than 98 cents a gallon. (The difference is about $300 million.) Cronies of Iraqi exile leader Ahmad Chalabi, Newsweek has learned, were recently awarded a large chunk of a major contract for mobile telecommunications networks.

All this has called into question the Bush administration's larger agenda: inspiring gratitude and admiration in the hearts of Iraqis and other Arabs, creating a model for a troubled region. Perhaps the biggest irony for the man in overall command, Defense Secretary Donald Rumsfeld, is that he has long warned of the pitfalls of "nation-building." "A large foreign presence," Rumsfeld has said in criticizing previous U.N.-led efforts, means "economies remain unreformed, distorted and dependent." Now the beleaguered Pentagon chief may be creating for himself-with U.S. companies, not the United Nations-the fate he wanted to avoid. Even many Iraqis who are grateful for liberation say they hate being a U.S. protectorate. Three months after Bush declared "Bring 'em on," attacks on Americans have increased from 20 to 25 or 30 a day, according to Gen. Ricardo Sanchez, the U.S. military commander for Iraq. And American taxpayers are footing most of the bill for this ill will, despite some $13 billion pledged at a U.N. donors' conference last week. The tally just through 2004, including what was spent to wage the war, will likely be at least $130 billion.

U.S. officials protest, as always, that they're getting bad press. Natsios insists electricity regeneration is on schedule. "This is the fastest and most massive reconstruction effort that has been run by any government in the last 50 years," says Natsios, one of the most respected development specialists in Washington. "It's faster than the Marshall Plan." Yet even Sanchez conceded last week that his biggest concern was "the pace at which we are making progress: we need to accelerate it." In recent weeks the CPA and USAID have declared that contracts will be competitively bid now. And, stung by congressional criticism, CPA chief L. Paul Bremer and Natsios recently installed new accountability controls. Still, world bodies such as the United Nations want more transparency.

Will that mean the effort gets bogged down even further, stymied by turf fights and bean counters? Newsweek's investigation indicates that there may be just as many problems ahead, raising serious questions about the vast amounts of money Bush has demanded for Iraq with little tolerance for debate.

Disorganization and turf battles

The Bush administration's favorite statistic from Iraq is the 1,595 schools it has just finished rehabilitating. This is, after all, the human face of occupation-freshly painted walls, American know-how and generosity, all wrapped up in smiling, adorable faces. And though that number is still less than a fifth of Iraq's 10,000 schools, it seems like amazingly fast work. The problem: many of the "rehabilitated" schools don't look ready for the morning bell. Newsweek visited five schools in Baghdad's Camp Sara neighborhood, all of which were among those listed as rebuilt, all by different Iraqi contractors working for Bechtel. None had enough textbooks, desks or blackboards. Most had refuse everywhere, nonfunctioning toilets and desks made for two kids that were accommodating four. Even Ahmed Majid Jassim, a pro-U.S. headmaster who says that "Americans have made a great effort," comments, "I've seen rebuilt schools, and this isn't one of them."

It's not quite as bad as the suspiciously sandy U.S. concrete that caused schools in South Vietnam to collapse in the 1960s, generating support for the Viet Cong. But the good-will project is also not creating quite as much pro-American enthusiasm as the Bushies would like. What's the problem? A lack of accountability, it seems. One Iraqi construction engineer who worked on school projects says it's not that Iraqi firms are corrupt and incompetent. To meet the U.S. deadline for fast refurbishment, the occupation authority set a short time frame, then Bechtel hired contractors, who in turn hired subcontractors and even sub-subcontractors. But few U.S. officials seemed to follow up with oversight. As one USAID official admits, "Saddam had better accountability" in his economic affairs, as brutal as he was, than the CPA does. Bechtel proudly points out that 102 of its 140 USAID contracts were subbed to Iraqi firms. But many of these sub-subcontractors cut corners as they tried to meet Bechtel's very short deadline. "The original tender for our school called for air conditioners in every classroom," said an Iraqi engineer named Marwan. Once the subcontractor got it, it was an air cooler. "Once we got it, it was a ceiling fan for $11 apiece." At the Al Qaqa primary school, headmistress Haibat Abdul Hussein said the Iraqi contractor walked off the job shortly after starting, leaving the school a mess of construction debris and incomplete work. "I can't deal with this anymore; I don't even know what happened. All I know is they said the Americans told them to stop working," she said. She planned to organize a demonstration in front of the school in protest.

Similar confusion may have exacerbated the power crisis. As one USAID official describes it, it's "a chicken-and-egg problem." The power stations need natural gas and (to a lesser degree) oil to run, but the oil refineries and wells need power to operate. Still, there seems to have been less than full coordination between Bechtel, which is responsible for electricity, and Halliburton, which has an open-ended contract to secure fuel: Halliburton says it has not been asked to supply fuel for restarting the refineries. Disputes between U.N.- and U.S.-authorized companies also obstruct progress. At the key port of Umm Qasr, Bechtel and its subcontractors left in frustration when a Turkish company-previously contracted through the United Nations-suddenly appeared, claiming it had rights to the job. Though the port is operating, needed dredging and wreck salvage have been held up while the dispute is resolved.

A British Christian aid group last week accused the CPA of not accounting for $4 billion of the $5 billion it has spent, most of which came from Iraqi oil proceeds. The lack of transparency is not surprising: the CPA and United Nations took six months to agree on an international monitoring board called for under U.N. Resolution 1483. "There's certainly the suspicion that what the Iraqi oil is being used for right now is not to the benefit of the Iraqi people but to the benefit of American corporations," says one of the aid group's spokesmen, John Davison. "This is quite controversial, considering that many people around the world have been saying that 'it's all about the oil.' So you would have -thought that this would be treated with a great deal of care."

Meanwhile a turf fight between USAID and the CPA has led Bremer to insist that the CPA take over the dispensing of some rebuilding contracts (though Natsios says he's been reassured that the new CPA office "is not meant to replace USAID"). That may not solve anything: contractors in Iraq complain that the CPA's staff consists largely of political appointees who don't understand the process. "CPA is run by a bunch of political hacks and incompetents who have no idea what they're doing," said a project manager for a firm working on a major USAID contract. "Every time we turn around there's a new order coming from CPA, 'Do it this way-no, do it that way instead.' It's just unbelievable." Privately, some CPA officials admit the staff is less than the best the United States has to offer. Right now, "we're not talking A-team, even B-team. We're talking C-team," says one official with the CPA. The Bush administration denies that any major changes are afoot, but all these problems have prompted a new reckoning back in Washington: Douglas Feith, Rumsfeld's policy chief and a key official involved in postwar planning, is no longer sitting in on reconstruction meetings, Newsweek has learned, and the White House has wrested oversight from the Pentagon.

Reconstructing under fire

What's life like for an American businessman or contractor in Iraq? If you're from Halliburton's Kellogg Brown & Root, you're installed in the prized Green Zone, Baghdad's Beverly Hills. That's the four-square-mile patch of downtown where the CPA is headquartered under heavy U.S. military guard. Bechtel is there as well, holed up in Uday Hussein's former villa on the Tigris. But smaller companies or those that arrived too late to scoop up prime real estate-that's wherever the U.S. military is-are dug into one of the many hotels around town under heavy guard. You'll know you're approaching one when you see tall concrete barriers, known as blast walls, and chicanes, which are obstacle courses designed to create traffic jams. If you're berthed in either the Palestine or the Sheraton hotels, the only ones guarded by American troops 24/7, you'll have to make a two-mile detour through extremely heavy traffic to get around the blocked-off streets to the lone access point. First your car will pass through a series of concrete barriers guaranteed to make sure you crawl at five miles an hour. Then you'll see the now closed riverside boulevard, Abu Nawass Street, and you'll be staring down the cannon of an M1A1 Abrams tank leveled at chest height. From there, no matter how important you are, you'll walk with your bags to the first American checkpoint. It's next to the sidewalk, where there's a double row of concrete blast walls and huge wire-meshed sandbags; they form a sort of tunnel without a roof, 100 yards long, with machine guns covering it. There you'll be searched under the supervision of American soldiers, who are so tired of the drill they often deputize street kids to pat you down, while an Iraqi policeman looks in your bag. Your mobile phones will be disassembled, other electronics taken apart, bags opened on the ground. At the end of this process you'll find yourself in one of these two former government-run hotels, with grim and dirty rooms, and dangerously bad food, and few amenities other than the tanks outside.

After checking in, your first stop should be the U.S. Consulate at the Iraqi Convention Center, just inside the Green Zone. To enter, you have to walk down a narrow pathway for about 100 yards between two double rolls of concertina wire, so close together you have to be careful not to snag your safari shirt. This is designed to keep Iraqis in a straight line, and possibly also to prevent a frontal assault on the first American Army position. Then you'll pass through three Army posts and be searched twice. If you're meeting with anyone important inside, you'll be searched yet again and have your belongings sniffed by dogs.

Even all those precautions won't make you completely safe. On Sunday, at least five rockets were fired into the side of the 14-story Al-Rashid Hotel, where American officials stay. Some rooms took direct hits, killing at least one and wounding 15. The 400-room hotel was evacuated. Among the Americans fleeing was Deputy Secretary of Defense Paul Wolfowitz, in town on a four-day review of reconstruction efforts. No wonder meetings with Iraqi subcontractors must take place outside the Green Zone, and in person: only foreigners as yet have mobile phones provided by an early MCI contract. And as religiously as tourists might consult their guidebooks, contractors are expected to peruse the CPA Operational Threat Update, which has useful pieces of advice, such as how to drive in a convoy ("avoid having more than one vehicle in the kill zone at a time"). Most of Baghdad is zoned "red," or dangerous.

Such is the life of a U.S. contractor in Iraq, and one reason U.S. taxpayers are forking over top dollar to have them there. Despite the allegations about expensive fuel imports that have made headlines recently, there may be little outright price gouging. Much of what companies are charging is for hazardous duty (at major engineering companies, that means 45 percent extra, taking engineers up to nearly $900 for a 10-hour day). Air freight is expensive because of the high insurance premiums. Land freight has to contend with highway robbery on a massive scale; no major highway can be considered safe. And while so far no American contractors have been attacked except when they were traveling with a military convoy, they're hardly considered off-limits by opposition guerrillas and terrorists. While some foreign businessmen go out without escorts, most do not; normally they'll travel with a PSD (personal security detail) of at least two and sometimes more expatriate armed guards. PSDs are staffed with "operatives" who normally bill $1,200 a day for their services. The security problem hampers accountability as well: USAID's own inspector general refuses to send its auditors to "a combat zone," as spokesman Rob Perkins describes Iraq.

Iraqis have their own hurdles. Baghdad has a weekly job fair for companies that want to make tender bids, but Iraqis who attend find enormously long lines, and little to repay the effort. "This is ridiculous," said Hesham Barbary, an American-Egyptian who is the representative for H & K Ltd., a large Egyptian company, as he waited at one such Kellogg Brown & Root tender meeting. "The time it took to get in this place was longer than the meeting. All of the tenders they're offering are things you can walk into any shop and buy," like paper clips.

The bottom line is that danger sows distrust. The new Iraqi minister of telecommunications, Haider Jawad al-Ibadi, told Newsweek that his technicians, who are desperately trying to repair the Iraqi telephone system, keep getting detained by the U.S. military. Soldiers, he says, recently came and arrested his own bodyguards without explanation. He said this sort of harassment is repeated at all levels of society every day, "and there's no one you can go to complain to. If this continues as it is, this can end in disaster. The Americans are losing their integrity in Iraqi eyes."

Waste, fraud and abuse

American companies are barred by law from paying bribes or taking kickbacks abroad. But Iraq is still largely a lawless place. And one company director for a British firm doing business in Baghdad says that makes all the difference. "I've never seen corruption like this by expatriate businessmen. It's like a feeding frenzy," he says. One prominent Iraqi businessman said he was told he'd have to raise his bid by $750,000 to get a major contract, so long as he kicked back that amount to the contractor's rep. The businessman refused to identify the contractor, but did say, "No Iraqi would ask for a bribe that big." Newsweek witnessed such behavior directly: An Iraqi-Anglo joint venture did a relatively small job in the magazine's Baghdad bureau. When a final price had been agreed, the company's Iraqi manager said, "Shall we add a commission of 10 percent?" Commission? "Well, you would keep that of course," he said. In other words, a kickback. When Newsweek declined, he said, "You're the first one who didn't want a commission."

Numerous allegations of wastage and overcharging have also surfaced. Halliburton, a chief U.S. contractor under intense scrutiny for its ties to Cheney, has been accused of gouging prices on imported fuel-charging $1.59 a gallon to import nearly 200 million gallons of gasoline. SOMO, the Iraqi national oil company, indicated it can buy the same fuel at no more than 98 cents a gallon. "Why they don't have the Iraqis bring it in rather than have Halliburton charge high prices for it, I don't know," says a Democratic official on the Government Reform Committee, which first raised the issue. Wendy Hall, a Halliburton spokeswoman, said that Halliburton's KBR subsidiary had to settle for higher prices because it could negotiate only on a 30-day basis. But oil economist Phil Verleger said that constraint should amount to only a penny or so per gallon difference for fuel. Hall said the company "can't identify our suppliers for security reasons."

Behnam Polis, the Iraqi minister of Transportation, told Newsweek that another American contractor, Stevedoring Services of America, was overcharging in its administration of Umm Qasr. "They're unloading cargo at $12 a ton. That's a lot. Ports in Dubai and Kuwait do it for $3 a ton," he said. "A lot of ships are not coming because it costs too much." Polis said he thinks part of the problem is that the company's contract runs until the end of the year, and it is guaranteed the money no matter how much work it does. That's nonsense, responds SSA spokesman Bob Waters: yes, SSA originally set high cargo tariffs to make the port "self-sustaining." But now, he says, Polis's own ministry is responsible-and hasn't changed the prices.

It is true that Polis and other Iraqis are gaining power over contracts. But the push to hand over things to the new Iraqi Governing Council and its ministries is creating problems of its own. The Iraqi telecom minister, Haider Jawad al-Ibadi, told Newsweek that a lucrative contract to run mobile communications in Iraq's south was given to a consortium that includes Djila, a company run by Mudhar Shawkat and his son Ali. Shawkat is the top aide to Governing Council member Ahmad Chalabi in the Iraqi National Congress, a former opposition group. A senior source with the Iraqi National Congress said: "If we or anyone else can help our companies land a contract, why not?"

How to make it work better

Tamara Dagestani is an Iraqi dissident who has become as fierce a critic of the Americans as she once was of Saddam. Like many Iraqis, she's angry at what she sees as American arrogance and cultural insensitivity. What really raises Dagestani's hackles, though, is the lack of jobs for Iraqi workers, especially skilled ones. Despite L. Paul Bremer's new push to get contractors to hire Iraqis-"We realized that if they're not working for us, they're shooting at us," one administration official said-the Iraqi Governing Council estimates unemployment is still as high as 75 percent. "After the first gulf war, there was no access for foreign workers, no access to spare parts, but bridges were rebuilt, telephone and electricity restored. Quicker than Kuwait rebuilt," Dagestani says. "I feel very sad this is not being accomplished now. We've got the talent, the ability, the brains-give the people the jobs and they'll do it."





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