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Iraq: Pentagon Freezes Funds Amid Corruption Probes

by Stephen J. GlainBoston Globe
December 30th, 2003

WASHINGTON -- The Pentagon has frozen new funds approved for Iraqi reconstruction amid growing allegations of corruption and cronyism associated with the rebuilding process.

Companies eager for a stake in the $18.6 billion in fresh postwar funds that Congress approved in November have been told not to expect requests for proposals from the Defense Department, the first step in the kind of ambitious redevelopment slated for the war-torn country. The freeze will almost certainly mean the United States will not issue new contracts until well after the initial Feb. 1 target date.

"We're on hold and we'll be on hold until we hear differently," Admiral David Nash, the director of the Pentagon's Iraq Program Management Office, yesterday told the Engineering News-Record, a construction trade journal. He gave no further details.

The Pentagon also announced last week it would postpone until early January a conference for companies interested in rebuilding Iraq, according to Robyn Powell of the National Defense Industrial Association, which coordinates meetings between industry and the military.

"I don't know why the conference has been canceled again," Powell told Reuters.

The Pentagon's decision to delay Iraqi reconstruction is another setback for a process already hobbled by political insecurity and, increasingly, concerns over corruption and misconduct. The success of the US-led bid to remake Iraq politically depends largely on efforts to reverse the country's chronic unemployment by repairing it economically. But lawmakers in Washington and businesspeople in Iraq say the bidding process lacks transparency and favors a growing class of monopolists and oligarchs that could overwhelm the country's infant regulatory framework.

"Everyone is focusing on the capture of Saddam Hussein," said Laith Kubba, a former Iraqi dissident who divides his time between Washington, London, and Iraq. "But with Saddam gone the most important thing is the country's political and economic transformation, and that is being held hostage by vested interests."

Bids for 26 contracts were to be submitted by Jan. 5. But that date has been postponed indefinitely.

Meanwhile, the Pentagon announced Dec. 18 that it would investigate a controversial contract for an Iraqi cellphone grid, the second such probe into Iraq-related reconstruction.

For weeks, Iraqi businesspeople and officials had been calling for an investigation into the three telephone contracts worth hundreds of millions of dollars that the US-led coalition awarded in October to three Arab consortia. Work on the networks, considered crucial to the rebuilding of Iraq, should have been well underway by now and service set to be up and running by spring. Construction has not yet begun.

The cellphone probe followed by one week a Pentagon investigation into whether Brown & Root Services overcharged by $61 million for fuel it brought into Iraq from Kuwait. Brown & Root, a subsidiary of Halliburton Co., the oil giant Vice President Dick Cheney once chaired, is doing a variety of petroleum-related work in Iraq under a no-bid contract the government issued in March. The company has denied any wrongdoing.

The investigations highlight the need, according to lawmakers and businesspeople, for a credible watchdog authority to keep an eye on how money for reconstruction, dominated by Halliburton and engineering giant Bechtel Group, is spent.

The Washington office of the Coalition Provisional Authority, the US-led organization in charge of the Iraqi occupation, did not return calls for comment.

Since it was ruled under the Ottoman Empire more than a century ago, the Iraqi economy has been dominated by a dozen or so merchant families. These clans, active in everything from farming to finance, survived the Hussein regime with their fortunes more or less intact. With Iraqi business still desperate for cash, the big merchant families are bankrolling smaller companies bidding for rebuilding work in exchange for a share of profits.

"All of this is going on under the surface," attorney Timothy Mills, who was active in the rehabilitation of former east bloc economies, said in congressional testimony last month after returning from Iraq. "We don't see it and the US government doesn't see it. All they see is the price."

The US government and the International Finance Corp., the lending arm of the World Bank, say they have made available hundreds of millions of dollars for small to mid-sized businesses in Iraq. In addition to new sources of capital, Iraqi businesspeople say they want enhanced oversight and regulation over the subcontracting process to prevent larger players from tilting the awards in their favor.

"Otherwise, the next round of bidding is going to be more corrupt than the first," said an Iraqi consultant to US telecommunications companies with offices in Baghdad and Washington. "The clans have always done this, but now it's a hundred times worse."

Stephen J. Glain can be reached at glain@globe.com.





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