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US: Builders Look at Iraq Project as Open Door

Amid criticism about the secret process, companies bid for a $600-million

contract hoping for much bigger deals to come.


by David Streitfeld, Nancy Cleeland and Mark FinemanThe New York Times
March 31st, 2003

Contractors naturally think big.

Bechtel Group Inc. is working on a $1.7-billion aluminum smelter in Bahrain. Parsons Corp. is building a city for 200,000 in the Arabian desert. Fluor Corp. has a $1.3-billion agreement to develop oil fields in Kazakhstan.

For these behemoths, a $600-million deal is hardly worth breaking a sweat over. Yet when the U.S. Agency for International Development asked the three California companies whether they wanted to bid on a project on the other side of the world, all of them jumped at the chance to write proposals on a tight deadline.

The reason: No one wanted to miss out on the chance to be the first to rebuild Iraq. As the corporate giants well know, the $600 million is merely the initial installment of what promises to be a much bigger sum.

"A $600-million contract could easily turn into a couple of billion," said Charles Tiefer, a former deputy general counsel of the House of Representatives. "Pretty soon, it would be real money."

The contract, moreover, is "cost-plus-fee." The contractor will be reimbursed for its bills by the government, plus a set profit.

"Every sane contractor regards cost-plus-fee contracts as bonanzas," said Tiefer, a professor of government contract law at the University of Baltimore. "They can't lose, since they're guaranteed their costs."

There also are intangible reasons a contractor would want to get this first contract, which will be awarded this week. The first contractors on the ground will have the best access to facilities, interpreters and transportation -- crucial things for operating in postwar Iraq.

"Once you're there, if you've done well, that does give you a leg up," said Allan Burman, a consultant and former administrator of the Office of Federal Procurement Policy.

The bidding has been beset by controversy since its existence was revealed three weeks ago.

Foreign companies and their governments were incensed that they weren't allowed to bid. Procurement experts wondered whether USAID, which is used to giving

relatively small grants, would be overwhelmed by administering billions in contracts. Critics said the bidding was cloaked in unusual secrecy -- something they found

particularly worrisome given the strong ties of some of the bidders to the Republican Party and the Bush administration.

"The usual standard is full and open competition," said Steven Schooner, co-director of the government procurement law program at George Washington University.

"When the government operates in secret, people assume it has something to hide."

USAID administrator Andrew S. Natsios testified before Congress last week that secrecy was necessary because bidders had to look at "top secret" documents.

*The Project

The list of things that USAID expects the construction contractors to do is detailed and comprehensive, a significant part of an effort by the United States to win the

endorsement of 24 million Iraqis by giving them a new and improved country. Among them:

* Reconstruct, repair, rehabilitate and upgrade more than 2,000 miles of roads, 100 bridges and 600 miles of irrigation or drainage canals.

* Rehabilitate one "referral" hospital in each major city and up to 100 general hospitals throughout the country.

* Repair 6,000 school buildings.

* Get the railway system rolling again.

* Repair and maintain five airports and the port of Umm al Qasr.

* Repair 45 urban water systems while establishing environmentally sound solid waste disposal.

* Rehabilitate 10 electrical generating plants and as many as 110 substations.

The scale of the work astonishes experts who have examined the plans.

"We are embarking on a very aggressive effort, both figuratively and literally, at nation-building far, far bigger than anything we have seen since the Marshall Plan,"

said Steven Kelman, a professor of public management at Harvard's John F. Kennedy School of Government.

The Marshall Plan, which gave aid over four years to 16 European countries devastated by World War II, cost about $97 billion in current dollars. Much of the money was used to buy such commodities as feed, fertilizer and fuel from U.S. suppliers.

USAID clearly recognizes that there is a gap between its pocketbook and its goal of creating "the fundamental structures" for democracy and economic growth in Iraq.

"Six hundred million dollars is not going to rebuild the infrastructure of that country," Natsios acknowledged last week.

Under the war budget request President Bush sent to Congress last week, USAID would receive $2.4 billion for humanitarian and reconstruction aid.

Aside from the construction project, the agency has been soliciting bids on restoring Iraq's public health service, administering its airports, printing textbooks and training teachers.

George Washington's Schooner estimated that the final bill for resurrecting and improving the Iraqi infrastructure would be roughly equivalent to the operating budget of a state with a comparable population: Texas, with 22 million people, has a budget of $57 billion.

"The sky's the limit," Schooner said.

Unlike Europe after World War II, Iraq has an immediately salable asset: oil. Yet how much the oil fields may be used to help cover the cost of USAID's 18-month blueprint for reconstruction is one of the big unknowns.

"What do you think the entire package is going to be? Do you have an idea?" Rep. Roger F. Wicker (R-Miss.) asked Deputy Defense Secretary Paul Wolfowitz during one of last week's many hearings on the price of the war and its aftermath.

"We really don't," replied Wolfowitz, who earlier had estimated the total cost for "transition" from war to peace in Iraq at $12 billion. But he added, "We're not dealing with Afghanistan, [which] is a permanent ward of the international community. We're dealing with a country that can really finance its own reconstruction relatively soon."

The companies that were invited to bid for the $600-million construction pact say they don't want to comment until the deal is done.

Besides San Francisco-based Bechtel, Aliso Viejo-based Fluor and Pasadena-based Parsons, they include Washington Group International Inc. of Boise, Idaho, and Louis Berger Inc. of East Orange, N.J. Houston oil services giant Halliburton Co. was also invited to bid but is not among the finalists.

Fluor's stock has risen 15% since the news broke that it had been asked to bid, although a Bear Stearns analyst estimated that a $500-million contract would add only about 5 cents a share to its earnings. Fluor posted net income of $164 million, or $2.06 a share, in 2002.

Investors may have been enthused by the promise of any work during a global slump in large construction projects. The burst of construction of power plants and communications facilities that started two years ago has slowed.

"If you look at some of the other markets for construction, there's not a lot out there that's really good," said Joel Levington, a debt analyst at Standard & Poor's.

Moreover, memories might linger about Bechtel's good fortune after the 1991 Persian Gulf War. The company billed Kuwait Oil Co. $2.5 billion for putting out 647 oil-well fires, cleaning up spills and restoring production facilities. Privately held Bechtel does not divulge its profit, but it reportedly was handsome.

This time around, contrary to all impressions, the potential for making money may be even greater.

The reason lies in the nature of the contracts. Because of the danger of cost overruns, large construction projects tend to be done for fixed prices. But even though rebuilding Iraq may be one of the largest conceivable projects, no contractor would have agreed to do it for a fixed price before the war was over and the extent of the damage was known.

As a result, the USAID agreement is cost-plus-fee.

*

No Foreign Firms

Not surprisingly, the construction contract looked inviting to foreign firms. But none were allowed to bid because of USAID's security requirements. Complaints have been particularly loud from coalition partner Britain.

"In my organization of 350 U.K. major consultancies and construction firms, 84 have expressed a wish to go work in Iraq -- and 50 have been there before," said Colin

Adams, chief executive of the British Consultants and Construction Bureau. Given Britain's support for the war, he said, his members felt they should at least be considered for subcontractor work.

"There's a feeling that not only is there some moral justice that we ought to be able to bid, but also common sense," Adams said.

If the contract is creating some ill will overseas, it has also brought a spotlight onto the U.S. companies. Commentators have been quick to note that some of the invited bidders have close government connections and have been generous campaign donors. The focus has been particularly intense on Bechtel and on Halliburton, whose former chief executive is Vice President Dick Cheney.

Halliburton's Brown & Root Services won an Army Corps of Engineers contract to put out oil-well fires and handle other emergencies on March 9 -- two weeks before the war began.

Halliburton never had to bid on that contract. It grew out of a classified study the company had done on putting out oil-well fires for the Army Materiel Command under a 10-year Army logistics contract that Brown & Root won in December 2001, according to Corps of Engineers spokesman Lt. Col. Gene Pawlik.

"What made the most sense was to use the same company that had done the contingency study," Pawlik said. "The contract that's in place right now is a limited-duration, limited-scope emergency services contract."

Late Friday, a USAID official confirmed a Newsweek report that Halliburton was not among the two finalists for the construction contract.

Meanwhile, Bechtel's headquarters in San Francisco has been the scene of repeated demonstrations for 12 days. Dozens of protesters were arrested trying to block the entrance.

"The demonstrators are saying that companies in the running for the reconstruction contract are somehow profiting off the war," said Bechtel spokesman Jonathan Marshall.

"I would say on the contrary that any program to rebuild schools and hospitals and roads and other civilian infrastructure is fundamentally humanitarian in nature," he said. "We would be proud to do that work."

At least a few companies decided not to bid on USAID work. Jacobs Engineering Group Inc. in Pasadena was invited to compete for the construction contract, but said the project didn't fit with its business model.

A Washington educational association that declined to be named -- one of a handful of nonprofits invited to bid on health, education and governance contracts -- similarly declined to participate. It said the timeline for rehabbing Iraq's schools and textbooks was "overly ambitious."

DPK Consulting, a San Francisco firm that helps developing and "transitional" countries implement anticorruption and rule-of-law programs, turned down an opportunity to bid on a governance contract.

For one thing, it had enough work already. For another, it was worried about whether its involvement would be poorly perceived in Islamic countries where it already had projects.

But there was also a moral component.

"We didn't want to appear to be endorsing the war," DPK co-founder Bill Davis said.





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